Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide the reader of our financial
statements with a narrative from the perspective of management on our financial
condition, results of operations, liquidity and certain other factors that may
affect future results. This MD&A includes the following sections: Overview,
Highlights, Results of Operations, Performance Measures and Non-GAAP
Reconciliations, Liquidity and Capital Resources, Critical Accounting Policies,
and Recently Issued Accounting Standards. The MD&A is provided as a supplement
to, and should be read in conjunction with, our audited consolidated financial
statements and the related notes included in Item 15 of this report.
In order to show the impact of changes in foreign currency exchange rates on our
results of operations, we have included constant currency disclosures, where
necessary, in the Overview and Results of Operations sections which follow.
Constant currency disclosures represent the translation of our current fiscal
year revenues and expenses from the functional currencies of our subsidiaries to
U.S. Dollars using the exchange rates in effect for the corresponding period of
the prior fiscal year. We use results on a constant currency basis as one of the
measures to understand our operating results and evaluate our performance in
comparison to prior periods. Results on a constant currency basis are not in
accordance with accounting principles generally accepted in the United States of
America ("non-GAAP") and should be considered in addition to, not as a
substitute for, results prepared in accordance with GAAP.
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Overview
The Company
WD-40 Company ("the Company"), based in San Diego, California, is a global
marketing organization dedicated to creating positive lasting memories by
developing and selling products that solve problems in workshops, factories and
homes around the world. We market a wide range of maintenance products and
homecare and cleaning products under the following well-known brands: WD-40,
3-IN-ONE, GT85, X-14, 2000 Flushes, Carpet Fresh, no vac, Spot Shot, 1001, Lava
and Solvol. Currently included in the WD-40 brand are the WD-40 Multi-Use
Product and the WD-40 Specialist and WD-40 BIKE product lines.
Our products are sold in various locations around the world. Maintenance
products are sold worldwide in markets throughout North, Central and South
America, Asia, Australia, Europe, the Middle East and Africa. Homecare and
cleaning products are sold primarily in North America, the United Kingdom
("U.K.") and Australia. We sell our products primarily through warehouse club
stores, hardware stores, automotive parts outlets, industrial distributors and
suppliers, mass retail and home center stores, value retailers, grocery stores,
online retailers, farm supply, sport retailers, and independent bike dealers.
Highlights
The following summarizes the financial and operational highlights for our
business during the fiscal year ended August 31, 2021:
?Consolidated net sales increased $79.6 million, or 19%, for fiscal year 2021
compared to the prior fiscal year. Changes in foreign currency exchange rates
had a favorable impact of $19.7 million on consolidated net sales for fiscal
year 2021. Thus, on a constant currency basis, net sales would have increased by
$59.9 million, or 15%, for fiscal year 2021 compared to the prior fiscal year.
This favorable impact from changes in foreign currency exchange rates mainly
came from our EMEA segment, which accounted for 43% of our consolidated sales
for the fiscal year ended August 31, 2021.
?Gross profit as a percentage of net sales decreased to 54.0% for fiscal year
2021 compared to 54.6% for the prior fiscal year.
?Consolidated net income increased $9.5 million, or 16%, for fiscal year 2021
compared to the prior fiscal year. Changes in foreign currency exchange rates
had a favorable impact of $3.7 million on consolidated net income for fiscal
year 2021. Thus, on a constant currency basis, net income would have increased
by $5.8 million, or 10%, for fiscal year 2021 compared to the prior fiscal year.
?Although consolidated results for the fiscal year ended August 31, 2021 were
significantly improved from the last fiscal year due to a variety of factors,
the Company's operations and business continue to be impacted by the COVID-19
pandemic. See the Impact of COVID-19 on Our Business section which follows for
details
?Diluted earnings per common share for fiscal year 2021 were $5.09 versus $4.40
in the prior fiscal year.
Our strategic initiatives and the areas where we will continue to focus our
time, talent and resources in future periods include: (i) building a business
for the future; (ii) attracting, developing and engaging outstanding tribe
members; (iii) striving for operational excellence; (iv) growing WD-40 Multi-Use
Product; (v) growing WD-40 Specialist product line; and (vi) expanding and
supporting portfolio opportunities that help us grow.
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Impact of COVID-19 on Our Business
In the prior fiscal year 2020, our financial results and operations were
negatively impacted for many of our markets by the COVID-19 pandemic,
particularly in the third and fourth quarters, during the early stages of the
pandemic which began in early calendar year 2020. We have since been able to
reduce the adverse impacts of the COVID-19 pandemic on our business due to the
strength of our brands, our increased focus on e-commerce, the global expansion
in the distribution of our products, a continued focus on our strategic
initiatives, our strong culture and the dedication of our employees. As a result
of these activities and the shift in consumer spending patterns towards products
such as ours during the pandemic, we have experienced increased sales period
over period in most of our markets during fiscal year 2021. Sales during this
period increased 19%, or 15% on a constant currency basis, when compared to the
prior fiscal year primarily due to a higher level of renovation and maintenance
activities by end-users during the pandemic, recoveries in many markets due to
improvements in public health and safety related to the pandemic, and increased
distribution and sales within the e-commerce channel.
We are continuing to actively manage and monitor supply chain and transportation
disruptions and constraints that have arisen periodically within all three of
our business segments, but particularly in the Americas, during the COVID-19
pandemic. Some of the challenges that we have experienced include general
aerosol production capacity constraints and competition for such capacity by
other companies who utilize the same third-party manufacturers for their aerosol
production, as well as significant competition for freight resources and
increased raw material and other input costs that have resulted due to these
constraints. In addition, supply chains at many companies globally are being
strained due to shortages of certain materials and this is impacting the ability
of our third-party manufacturers to procure certain of the raw materials needed
to manufacture our products. These challenges have periodically resulted in us
not being able to meet the high level of demand for our products by customers
and end-users in certain markets, most significantly those markets in our
Americas segment where demand for aerosols has significantly outpaced the
available production capacity in the region. We have been actively working on
various initiatives in partnership with our third-party manufacturers in order
to increase the capacity and flexibility of our supply chain to meet strong
end-user demand. Although we are not able to estimate the degree of the impact
or the costs associated with potential future disruptions within our supply
chain and distribution networks, we believe that the changes we continue to
implement as a result of the pandemic will have a positive lasting impact on our
ability to better manage any future disruptions. However, some of the additional
costs resulting from these recent constraints in our supply chain and
distribution network are expected to unfavorably impact our cost of goods sold
and lower our gross margin in the near-term.
Although several vaccines and treatments are authorized for use against
COVID-19, these vaccines and treatments are being produced, distributed and
accepted at varying rates globally. Therefore, uncertainty continues to exist
regarding the severity and duration of this rapidly evolving pandemic and it
remains difficult for us to estimate the extent to which the COVID-19 pandemic
will impact our financial results and operations in future periods. Also, as
social distancing requirements resulting from the COVID-19 pandemic continue to
lessen in future periods, it is uncertain how this will impact the high levels
of renovation and maintenance activities by end-users in recent periods, which
contributed to our strong sales in fiscal year 2021. If such activities decrease
in future periods, this could adversely impact our financial results.
We have continued to follow a variety of measures to promote the safety and
security of our employees, support the communities in which we operate and
ensure the availability and functioning of our critical infrastructure. These
measures include allowing for or requiring remote working arrangements for
employees in some regions and the imposition of travel restrictions. These
policies and initiatives will continue to impact how we operate for as long as
they are in effect and our safe, phased office reentry plans for employees will
vary by region based on the evolving situation within those regions.
See our risk factors disclosed in Part I-Item 1A, "Risk Factors," for
information on risks associated with pandemics in general and COVID-19
specifically.
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Results of Operations
Fiscal Year Ended August 31, 2021 Compared to Fiscal Year Ended August 31, 2020
Operating Items
The following table summarizes operating data for our consolidated operations
(in thousands, except percentages and per share amounts):
Fiscal Year Ended August 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Net sales:
Maintenance products $ 448,817 $ 369,444 $ 79,373 21%
Homecare and cleaning products 39,292 39,054 238 1%
Total net sales 488,109 408,498 79,611 19%
Cost of products sold 224,370 185,481 38,889 21%
Gross profit 263,739 223,017 40,722 18%
Operating expenses 174,898 145,797 29,101 20%
Income from operations $ 88,841 $ 77,220 $ 11,621 15%
Net income $ 70,229 $ 60,710 $ 9,519 16%
Earnings per common share - diluted $ 5.09 $ 4.40 $ 0.69 16%
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except
percentages):
Fiscal Year Ended August 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Americas $ 214,601 $ 200,493 $ 14,108 7%
EMEA 208,252 156,241 52,011 33%
Asia-Pacific 65,256 51,764 13,492 26%
Total $ 488,109 $ 408,498 $ 79,611 19%
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Americas
The following table summarizes net sales by product line for the Americas
segment (in thousands, except percentages):
Fiscal Year Ended August 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 194,295 $ 178,739 $ 15,556 9%
Homecare and cleaning products 20,306 21,754 (1,448) (7)%
Total
$ 214,601 $ 200,493 $ 14,108 7%
% of consolidated net sales 44% 49%
Sales in the Americas segment, which includes the U.S., Canada and Latin
America, increased to $214.6 million, up $14.1 million, or 7%, for the fiscal
year ended August 31, 2021 compared to the prior fiscal year. Changes in foreign
currency exchange rates had a favorable impact on sales for the Americas segment
from period to period. Sales for the fiscal year ended August 31, 2021
translated at the exchange rates in effect for the prior fiscal year would have
been $213.6 million in the Americas segment. Thus, on a constant currency basis,
sales would have increased by $13.1 million, slightly below 7%, for the fiscal
year ended August 31, 2021 compared to the prior fiscal year.
Sales of maintenance products in the Americas segment increased $15.6 million,
or 9%, for the fiscal year ended August 31, 2021 compared to the prior fiscal
year. This sales increase was mainly driven by increased sales of maintenance
products in Latin America, which were up $11.4 million, or 51%, from period to
period. Sales in Latin America increased primarily due to the transition to the
direct marketing model in Mexico. Early in the third quarter of fiscal year
2020, we shifted away from a distribution model for Mexico where we sold
products through a large wholesale customer who then supplied various retail
customers, to one where we sell direct to these retail customers. This resulted
in increased sales in Latin America during fiscal year 2021 compared to the
prior fiscal year. In addition, increased demand for our products as a result of
a higher level of renovation and maintenance activities exhibited by our
end-users during the COVID-19 pandemic resulted in increased sales of
maintenance products in Latin America. Sales were also higher in Canada and the
United States and were up $2.2 million, or 20%, and $2.0 million, or 1%,
respectively, due to increases in renovation and maintenance activities
exhibited by our end-users in both regions. Although the U.S. experienced
significant challenges meeting customer and end user demand in certain markets
in fiscal year 2021 due to supply chain constraints related to competition for
aerosol production capacity and distribution resources, it experienced some
improvement in its supply chain in the second half of fiscal year 2021. This
resulted in increased sales of maintenance products year over year driven by
sales of WD-40 Multi-Use Product, which were up $6.2 million, or 5%. However, as
a result of these supply chain challenges, sales of our WD-40 Specialist and
3-In-One products decreased $2.7 million, or 17%, and $1.7 million, or 19%,
respectively, in the United States from period to period.
Sales of homecare and cleaning products in the Americas segment decreased $1.4
million, or 7%, for the fiscal year ended August 31, 2021 compared to the prior
fiscal year. This sales decrease was driven primarily by a decrease in sales of
Lava, X-14 and Spot Shot brand products in the U.S., which were down $1.0
million or 33%, $0.7 million or 41%, and $0.5 million or 7%, respectively, from
period to period. These decreases were partially offset by increased sales of
the 2000 Flushes brand products, which were up $1.1M or 15%, from period to
period. We experienced a significant increase in sales of most of our homecare
and cleaning products during the second half of fiscal year 2020 due to
increased demand for such products as a result of the COVID-19 pandemic. During
the second half of fiscal year 2021, we have seen demand for certain of these
homecare and cleaning products return to more normal levels due to improvements
in public health and safety restrictions related to the pandemic in many regions
within the Americas. In addition, sales levels for our homecare and cleaning
products in the Americas were also negatively impacted during the fiscal year
ended August 31, 2021 by the challenges in our Americas supply chain and the
discontinuation of certain products within these brands. While each of our
homecare and cleaning products have continued to generate positive cash flows,
we had experienced decreased or flat sales for many of these products in recent
fiscal years prior to the start of the COVID-19 pandemic.
For the Americas segment, 77% of sales came from the U.S., and 23% of sales came
from Canada and Latin America combined for the fiscal year ended August 31,
2021 compared to the prior fiscal year when 82% of sales came from the U.S., and
18% of sales came from Canada and Latin America combined.
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EMEA
The following table summarizes net sales by product line for the EMEA segment
(in thousands, except percentages):
Fiscal Year Ended August 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 198,309 $ 146,540 $ 51,769 35%
Homecare and cleaning products 9,943 9,701 242 2%
Total (1)
$ 208,252 $ 156,241 $ 52,011 33%
% of consolidated net sales 43% 38%
(1)While our reporting currency is the U.S. Dollar, the functional currency of
our U.K. subsidiary, the entity in which the EMEA results are generated, is
Pound Sterling. Although the functional currency of this subsidiary is Pound
Sterling, approximately 50% of its sales are generated in Euro and 15-20%
are generated in U.S. Dollar. As a result, the Pound Sterling sales and
earnings for the EMEA segment can be negatively or positively impacted from
period to period upon translation from these currencies depending on whether the
Euro and U.S. Dollar are weakening or strengthening against the Pound Sterling.
Sales in the EMEA segment, which includes Europe, the Middle East, Africa and
India, increased to $208.3 million, up $52.0 million, or 33%, for the fiscal
year ended August 31, 2021 compared to the prior fiscal year. Changes in foreign
currency exchange rates had a favorable impact on sales for the EMEA segment
from period to period. Sales for the fiscal year ended August 31, 2021
translated at the exchange rates in effect for the prior fiscal year would have
been $193.1 million in the EMEA segment. Thus, on a constant currency basis,
sales would have increased by $36.9 million, or 24%, for the fiscal year ended
August 31, 2021 compared to the prior fiscal year.
The countries in Europe where we sell through a direct sales force include the
U.K., Italy, France, Iberia (which includes Spain and Portugal) and the
Germanics sales region (which includes Germany, Austria, Denmark, Switzerland,
Belgium and the Netherlands). Sales in the direct markets increased to $142.2
million, up $32.1 million, or 29%, for the fiscal year ended August 31, 2021
compared to the prior fiscal year primarily due to increased sales of WD-40
Multi-Use Product, WD-40 Specialist and WD-40 Bike of $21.1 million or 28%, $5.3
million or 42% and $1.9 million or 70%, respectively, throughout all of the
direct markets. Additionally, sales of 3-In-One increased $2.7 million or 31%
during the period. These increases in sales were primarily due to increased
demand for our products as a result of a higher level of renovation and
maintenance activities exhibited by our end-users during the COVID-19 pandemic
and the success of promotional programs that were conducted during the second
half of fiscal year 2021 to meet the high level of demand. This increased demand
and consumption of our products resulted in increased sales, particularly within
the e-commerce channel. In addition, sales levels were much higher in fiscal
year 2021 compared to the prior period due to comparatively severe lockdowns
measures that occurred during the prior fiscal year, particularly during the
third quarter, which limited many retailers' ability to participate in
promotional activities and sell high volumes of certain products. Sales from
direct markets accounted for 68% of the EMEA segment's sales for the fiscal year
ended August 31, 2021 compared to 70% of the EMEA segment's sales for the prior
fiscal year.
The regions in the EMEA segment where we sell through local distributors include
the Middle East, Africa, India, Eastern and Northern Europe. Sales in the
distributor markets increased $19.9 million, or 43%, for the fiscal year ended
August 31, 2021 compared to the corresponding period of the prior fiscal year,
primarily due to increased sales of the WD-40 Multi-Use Product in Eastern
Europe, Northern Europe, the Middle East and India, which were up $5.9 million,
$5.8 million, $4.1 million and $3.4 million, respectively. This increase in
sales from period to period was primarily due to recoveries experienced during
fiscal year 2021 in distributor markets that previously experienced more severe
lockdowns during the second half of fiscal year 2020 due to the COVID-19
pandemic. During fiscal year 2021, many of these regions experienced improved
economic conditions as a result of reductions in COVID-19 related restrictions.
This allowed our marketing distributors to participate in more of our
promotional activities and to adjust to more normal levels of inventory for our
product, which resulted in increased sales to meet the higher level of demand
caused by increases in renovation and maintenance activities by end-users during
the pandemic. The distributor markets accounted for 32% of the EMEA segment's
total sales for the fiscal year ended August 31, 2021, compared to 30% for the
prior fiscal year.
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Asia-Pacific
The following table summarizes net sales by product line for the Asia-Pacific
segment (in thousands, except percentages):
Fiscal Year Ended August 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 56,213 $ 44,166 $ 12,047 27%
Homecare and cleaning products 9,043 7,598 1,445 19%
Total
$ 65,256 $ 51,764 $ 13,492 26%
% of consolidated net sales 13% 13%
Sales in the Asia-Pacific segment, which includes Australia, China and other
countries in the Asia region, increased to $65.3 million, up $13.5 million, or
26%, for the fiscal year ended August 31, 2021 compared to the prior fiscal
year. Changes in foreign currency exchange rates had a favorable impact on sales
for the Asia-Pacific segment from period to period. Sales for the fiscal year
ended August 31, 2021 translated at the exchange rates in effect for the prior
fiscal year would have been $61.7 million in the Asia-Pacific segment. Thus, on
a constant currency basis, sales would have increased by $9.9 million, or 19%,
for the fiscal year ended August 31, 2021 compared to the prior fiscal year.
Sales in Asia, which represented 67% of the total sales in the Asia-Pacific
segment, increased $9.7 million, or 29%, for the fiscal year ended August 31,
2021 compared to the prior fiscal year. Sales in the Asia distributor markets
increased $5.6 million, or 28%, for the fiscal year ended August 31, 2021
compared to the corresponding period of the prior fiscal year. These increased
sales were primarily due to the easing of COVID-19 lockdown measures in many of
the Asia markets during fiscal year 2021 compared to late in fiscal year 2020.
These reduced lockdown measures have positively impacted economic conditions and
resulted in increased demand and higher sales in many regions period over
period, particularly in the Philippines, South Korea, Indonesia, Malaysia and
Hong Kong, during fiscal year 2021. Sales in China increased $4.1 million, or
31%, primarily due to improved market conditions as a result of the reduction of
COVID-19 lockdown measures compared to the prior fiscal year when the COVID-19
outbreak resulted in significant governmental restrictions on movement and
commerce. Changes in foreign currency exchange rates had a $1.3 million
favorable impact on sales in China. On a constant currency basis, sales would
have increased by $2.8 million, or 21%, from period to period.
Sales in Australia increased $3.8 million, or 21%, for the fiscal year ended
August 31, 2021 compared to the prior fiscal year due to higher sales of
maintenance products, which were up $2.4 million, or 23%, from period to period
primarily due to a higher level of renovation and maintenance activities
undertaken by our end-users during the COVID-19 pandemic which resulted in
increased sales. In addition, sales of homecare and cleaning products, which
were up $1.4 million, or 19%, also increased as a result of higher demand
resulting from the COVID-19 pandemic. Changes in foreign currency exchange rates
had a favorable impact on Australian sales. On a constant currency basis, sales
would have increased by $1.5 million, or 8%, from period to period.
Gross Profit
Gross profit increased to $263.7 million for the fiscal year ended August 31,
2021 compared to $223.0 million for the prior fiscal year. As a percentage of
net sales, gross profit decreased to 54.0% for the fiscal year ended August 31,
2021 compared to 54.6% for the prior fiscal year.
Gross margin was unfavorably impacted by 0.9 percentage points due to increases
in manufacturing costs and higher miscellaneous costs from period to period. The
increased manufacturing costs were primarily driven by higher labor and overhead
costs at our third-party manufacturers caused by global supply chain constraints
as a result of the COVID-19 pandemic. These pandemic-related challenges began to
significantly impact gross margin, particularly in the Americas segment,
starting in the second quarter of fiscal year 2021 and continued throughout the
remainder of the fiscal year. No such challenges existed in the corresponding
periods of the prior fiscal year. Gross margin was also negatively impacted by
0.4 percentage points from period to period due to higher warehousing and
in-bound freight costs, primarily in the Americas and EMEA segments. Changes in
foreign currency exchange rates from period to period in the EMEA segment
negatively impacted by 0.3 percentage points. Gross margin was also negatively
impacted by 0.1 percentage points from period to period due to increases to
advertising, promotional, and other discounts that we give to our customers in
all three segments. In general, the timing of advertising, promotional and other
discounts may cause fluctuations in gross margin from period to period. The
costs associated with certain promotional activities are recorded as a reduction
to sales while others are recorded as advertising and sales promotion expenses.
Advertising, promotional and other discounts that are given to our customers are
recorded as a reduction to sales, whereas advertising and
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sales promotional costs associated with promotional activities that we pay to
third parties are recorded as advertising and sales promotion expenses.
These unfavorable impacts to gross margin were partially offset by 0.5
percentage points due to favorable changes in the costs of aerosol cans in the
EMEA and Americas segments. Gross margin was also positively impacted by 0.4
percentage points from period to period due to favorable changes in the costs of
petroleum-based specialty chemicals, primarily in the Americas and Asia-Pacific
segments. There is often a delay of one quarter or more before changes in raw
material costs impact the cost of products sold due to production and inventory
life cycles. Although the average cost of crude oil and aerosol cans that flowed
through our costs of goods sold was lower during fiscal year 2021 compared to
the prior fiscal year, such costs increased towards the back half of our fiscal
year and began to negatively impact our gross margin, particularly starting in
the fourth quarter. The recent increases in the price of crude oil and aerosol
cans that we are seeing in the market are expected to unfavorably impact our
cost of goods sold for as long as these costs remain at these higher levels. We
have implemented sales price increases in all three segments from period to
period and this positively impacted gross margin by 0.2 percentage points from
period to period.
Note that our gross profit and gross margin may not be comparable to those of
other consumer product companies, since some of these companies include all
costs related to distribution of their products in cost of products sold,
whereas we exclude the portion associated with amounts paid to third parties for
shipment to our customers from our distribution centers and contract
manufacturers and include these costs in selling, general and administrative
expenses. These costs totaled $16.5 million and $12.9 million for the fiscal
years ended August 31, 2021 and 2020, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the fiscal year ended
August 31, 2021 increased $23.5 million to $145.5 million from $122.0 million
for the prior fiscal year. As a percentage of net sales, SG&A expenses slightly
decreased to 29.8% for the fiscal year ended August 31, 2021 from 29.9% for the
prior fiscal year. The increase in SG&A expenses from period to period was due
to a variety of factors, but most significantly due to increased
employee-related costs of $16.1 million due to increased incentive compensation
accruals and higher stock-based compensation associated with performance share
units from period to period resulting from significantly stronger financial
results from period to period. Changes in foreign currency exchange rates from
period to period increased SG&A expenses by $4.8 million. Increases in freight
costs associated with higher sales levels as well as carrier price increases due
to constraints and limited capacity in the global distribution networks from
period to period also increased SG&A expenses by $2.9 million. In addition,
professional services fees increased $2.8 million due to the ongoing
implementation of our new information system, increased cloud-based software
usage and license fees. Other miscellaneous expenses also increased $0.5 million
from period to period. These increases to SG&A expenses were offset by a
decrease in travel and meeting expenses of $3.6 million from period to period.
Travel and meeting expenses decreased primarily due to continued initiatives to
reduce the transmission of COVID-19, including the imposition of business travel
restrictions for all employees and the cancellation of all large meetings, such
as regional sales meetings and global leadership meetings, in support of social
distancing requirements.
We continued our research and development investment, the majority of which is
associated with our maintenance products, in support of our focus on innovation
and renovation of our products. Research and development costs for the fiscal
years ended August 31, 2021 and 2020 were $5.6 million and $6.0 million,
respectively. Our research and development team engages in consumer research,
product development, current product improvement and testing activities. This
team leverages its development capabilities by partnering with a network of
outside resources including our current and prospective suppliers. The level and
types of expenses incurred within research and development can vary from period
to period depending upon the types of activities being performed.
Advertising and Sales Promotion Expenses
Advertising and sales promotion expenses for the fiscal year ended August 31,
2021 increased $6.4 million to $28.0 million from $21.6 million for the prior
fiscal year. As a percentage of net sales, these expenses were 5.7% and 5.3% for
the fiscal years ended August 31, 2021 and 2020, respectively. Changes in
foreign currency exchange rates had an unfavorable impact of $1.3 million on
advertising and sales promotion expenses from period to period. Advertising and
sales promotion expenses for the fiscal year ended August 31, 2021 translated at
the exchange rates in effect for the prior fiscal year would have been $26.7
million. The increase in advertising and sales promotion expenses was due to a
higher level of promotional programs and marketing support in all three segments
as a result of increased consumer demand and higher sales from period to period.
This higher level of advertising and sales promotion expense was also due to
significant increases in spending during the fourth quarter of fiscal year 2021
compared to the corresponding period of our prior fiscal year to support our
strategic initiatives and to invest in growth markets. These increases were
partially offset by the decrease of physical marketing and sampling activities
from period to period, such as the cancellations of trade shows, due to the
continued indirect effects of the COVID-19 pandemic during fiscal year 2021.
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As a percentage of net sales, advertising and sales promotion expenses may
fluctuate period to period based upon the type of marketing activities we employ
and the period in which the costs are incurred. Total promotional costs recorded
as a reduction to sales were $24.8 million and $18.9 million for the fiscal
years ended August 31, 2020 and 2019, respectively. Therefore, our total
investment in advertising and sales promotion activities totaled $52.8 million
and $42.1 million for the fiscal years ended August 31, 2021 and 2020,
respectively.
Amortization of Definite-lived Intangible Assets Expense
Amortization of our definite-lived intangible assets decreased $0.8 million to
$1.4 million for the fiscal years ended August 31, 2021, compared to $2.2
million for the prior fiscal year. This decrease from period to period was
primarily due to decreased amortization associated with the 2000 Flushes trade
name, which became fully amortized during the third quarter of fiscal year 2020.
Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands,
except percentages):
Fiscal Year Ended August 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Americas $ 51,591 $ 51,089 $ 502 1%
EMEA 53,003 37,620 15,383 41%
Asia-Pacific 19,121 14,982 4,139 28%
Unallocated corporate (1) (34,874) (26,471) (8,403) 32%
Total
$ 88,841 $ 77,220 $ 11,621 15%
(1)Unallocated corporate expenses are general corporate overhead expenses not
directly attributable to any one of the business segments. These expenses are
reported separate from our identified segments and are included in Selling,
General and Administrative expenses on our consolidated statements of
operations.
Americas
Income from operations for the Americas segment increased to $51.6 million,
up $0.5 million, or 1%, for the fiscal year ended August 31, 2021 compared to
the prior fiscal year, primarily due to a $14.1 million increase in sales,
significantly offset by higher operating expenses and a lower gross margin. As a
percentage of net sales, gross profit for the Americas segment decreased from
53.2% to 52.0% period over period primarily due to higher third-party
manufacturing costs and increased warehousing, distribution and freight costs as
a result of supply chain constraints due to the direct and indirect effects of
the COVID-19 pandemic. These unfavorable impacts to gross margin were partially
offset by the combined favorable impacts of lower costs of petroleum-based
specialty chemicals and aerosol cans from period to period. Although the average
cost of crude oil and aerosol cans that flowed through costs of goods sold was
lower during fiscal year 2021 compared to the prior fiscal year in the Americas
segment, such costs increased towards the back half of our fiscal year and began
to negatively impact gross margin, particularly starting in the fourth quarter.
The increased sales were accompanied by a $4.5 million increase in total
operating expenses period over period, primarily due to higher accruals for
incentive compensation and stock-based compensation, as well as higher outbound
freight costs due to increased sales and higher freight costs in the market from
period to period. In addition, increased advertising and sales promotion
expenses impacted operating expenses from period to period. These increases in
operating expenses were partially offset by lower travel and meeting expenses
due to initiatives adopted by the Company during the third quarter of fiscal
year 2020 that remained in place throughout fiscal year 2021 to reduce the
transmission of COVID-19. In addition, operating expenses were favorably
impacted by decreased amortization associated with the 2000 Flushes trade name,
which became fully amortized during the third quarter of fiscal year 2020.
Operating income as a percentage of net sales decreased from 25.5% to 24.0%
period over period.
EMEA
Income from operations for the EMEA segment increased to
$53.0 million, up $15.4 million, or 41%, for the fiscal year ended August 31,
2021 compared to the prior fiscal year, primarily due a $52.0 million increase
in sales, partially offset by higher operating expenses and a lower gross
margin. As a percentage of net sales, gross profit for the EMEA segment
decreased from 56.4% to 55.6% period over period primarily due to unfavorable
changes in third-party manufacturing costs and unfavorable
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changes in foreign currency exchange rates, as well as increases in warehousing,
distribution and freight costs from period to period. These unfavorable impacts
to gross margin were partially offset by the favorable impacts of decreased
costs of aerosol cans, as well as sales price increases from period to period.
Although the average cost of aerosol cans that flowed through our costs of goods
sold was lower during fiscal year 2021 compared to the prior fiscal year in the
EMEA segment, such costs increased towards the back half of our fiscal year and
began to negatively impact gross margin, particularly starting in the fourth
quarter. The increased sales were accompanied by a $12.2 million increase in
total operating expenses period over period, primarily due to higher accruals
for incentive compensation and stock-based compensation, as well as increased
advertising and sales promotion expenses and increased outbound freight costs
due to higher sales from period to period. These increases in operating expenses
were partially offset by lower travel and meeting expenses due to initiatives
adopted by the Company during the third quarter of fiscal year 2020 that
remained in place throughout fiscal year 2021 to reduce the transmission of
COVID-19. Operating income as a percentage of net sales increased from 24.1% to
25.5% period over period.
Asia-Pacific
Income from operations for the Asia-Pacific segment increased to $19.1 million,
up $4.1 million, or 28%, for the fiscal year ended August 31, 2021 compared to
the prior fiscal year, primarily due to a $13.5 million increase in sales and a
higher gross margin, which were partially offset by higher operating expenses.
As a percentage of net sales, gross profit for the Asia-Pacific segment
increased from 54.5% to 55.8% period over period primarily due to favorable
changes in both sales mix and market mix and lower costs of petroleum-based
specialty chemicals that flowed through our costs of goods sold during fiscal
year 2021. Although the average cost of crude oil that flowed through our costs
of goods sold was lower during fiscal year 2021 compared to the prior fiscal
year in the Asia-Pacific segment, such costs have increased towards the back
half of our fiscal year and began to negatively impact gross margin,
particularly starting in the fourth quarter. These favorable impacts to gross
margin during fiscal year 2021 were slightly offset by the unfavorable impact of
increased costs of aerosol cans from period to period. The increased sales were
accompanied by a $4.0 million increase in total operating expenses period over
period, primarily due to higher accruals for incentive compensation and other
employee costs, as well as a higher level of advertising and sales promotion
expenses from period to period. Operating income as a percentage of net sales
increased from 28.9% to 29.3% period over period.
Non-Operating Items
The following table summarizes non-operating income and expenses for our
consolidated operations (in thousands):
Fiscal Year Ended August 31,
2021 2020 Change
Interest income $ 81 $ 93 $ (12)
Interest expense $ 2,395 $ 2,439 $ (44)
Other income (expense), net $ (28) $ 641 $ (669)
Provision for income taxes $ 16,270 $ 14,805 $ 1,465
Interest Income
Interest income was not significant for both the fiscal years ended August 31,
2021 and 2020.
Interest Expense
Interest expense remained relatively constant at $2.4 million for both the
fiscal years ended August 31, 2021 and 2020.
Other Income (Expense), Net
Other income (expense), net was not significant for the fiscal year ended 2021
compared to $0.6 million in other income for the corresponding period of the
prior fiscal year. This change from period to period was primarily due to net
foreign currency gains during fiscal year 2020 as a result of fluctuations in
the foreign currency exchange rates for both the U.S. Dollar and the Euro
against the Pound Sterling.
Provision for Income Taxes
The provision for income taxes was 18.8% of income before income taxes for the
fiscal year ended August 31, 2021 compared to 19.6% for the prior fiscal year.
The decrease in the effective income tax rate from period to period was
primarily due to an increase in excess tax benefits from settlements of
stock-based equity awards, as well as increased benefits from earnings from
foreign operations.
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Net Income
Net income was $70.2 million, or $5.09 per common share on a fully diluted
basis, for fiscal year 2021 compared to $60.7 million, or $4.40 per common share
on a fully diluted basis, for the prior fiscal year. Changes in foreign currency
exchange rates year over year had a favorable impact of $3.7 million on net
income for fiscal year 2021. Thus, on a constant currency basis, net income for
fiscal year 2021 would have been $66.5 million.
Results of Operations
Fiscal Year Ended August 31, 2020 Compared to Fiscal Year Ended August 31, 2019
For discussion related to changes in financial condition and the results of
operations for fiscal year 2020 compared to fiscal year 2019, refer to Part II -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations included in our Annual Report on Form 10-K for the fiscal year
ended August 31, 2020, which was filed with the SEC on October 21, 2020.
Performance Measures and Non-GAAP Reconciliations
In managing our business operations and assessing our financial performance, we
supplement the information provided by our financial statements with certain
non-GAAP performance measures. These performance measures are part of our
current 55/30/25 business model, which includes gross margin, cost of doing
business, and earnings before interest, income taxes, depreciation and
amortization ("EBITDA"), the latter two of which are non-GAAP performance
measures. Cost of doing business is defined as total operating expenses less
amortization of definite-lived intangible assets, impairment charges related to
intangible assets and depreciation in operating departments, and EBITDA is
defined as net income (loss) before interest, income taxes, depreciation and
amortization. We target our gross margin to be at or above 55% of net sales, our
cost of doing business to be at 30% of net sales, and our EBITDA to be above 25%
of net sales. Results for these performance measures may vary from period to
period depending on various factors, including economic conditions and our level
of investment in activities for the future such as those related to quality
assurance, regulatory compliance, and intellectual property protection in order
to safeguard our WD-40 brand. The targets for these performance measures are
long-term in nature, particularly those for cost of doing business and EBITDA,
and we expect to make progress towards achieving them over time as our revenues
increase.
The following table summarizes the results of these performance measures:
Fiscal Year Ended August 31,
2021 2020 2019
Gross margin - GAAP 54% 55% 55%
Cost of doing business as a percentage of
net sales - non-GAAP 35% 34% 34%
EBITDA as a percentage of net sales -
non-GAAP (1) 20% 21% 21%
(1)Percentages may not aggregate to EBITDA percentage due to rounding and
because amounts recorded in other income (expense), net on our consolidated
statement of operations are not included as an adjustment to earnings in the
EBITDA calculation.
We use the performance measures above to establish financial goals and to gain
an understanding of our comparative performance from period to period. We
believe that these measures provide our shareholders with additional insights
into the Company's results of operations and how we run our business. The
non-GAAP financial measures are supplemental in nature and should not be
considered in isolation or as alternatives to net income, income from operations
or other financial information prepared in accordance with GAAP as indicators of
the Company's performance or operations. The use of any non-GAAP measure may
produce results that vary from the GAAP measure and may not be comparable to a
similarly defined non-GAAP measure used by other companies. Reconciliations of
these non-GAAP financial measures to our financial statements as prepared in
accordance with GAAP are as follows:
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Cost of Doing Business (in thousands, except percentages):
Fiscal Year Ended August 31,
2021 2020 2019
Total operating expenses - GAAP $ 174,898 $ 145,797 $ 149,958
Amortization of definite-lived intangible
assets (1,449) (2,211) (2,706)
Depreciation (in operating departments) (4,311) (4,095) (3,829)
Cost of doing business - non-GAAP $ 169,138 $ 139,491 $ 143,423
Net sales
$ 488,109 $ 408,498 $ 423,350
Cost of doing business as a percentage of
net sales - non-GAAP 35% 34% 34%
EBITDA (in thousands, except percentages):
Fiscal Year Ended August 31,
2021 2020 2019
Net income - GAAP $ 70,229 $ 60,710 $ 55,908
Provision for income taxes 16,270 14,805 24,862
Interest income (81) (93) (155)
Interest expense 2,395 2,439 2,541
Amortization of definite-lived
intangible assets 1,449 2,211 2,706
Depreciation 5,570 5,490 4,886
EBITDA $ 95,832 $ 85,562 $ 90,748
Net sales $ 488,109 $ 408,498 $ 423,350
EBITDA as a percentage of net sales - non-GAAP 20% 21% 21%
Liquidity and Capital Resources
Overview
Our financial condition and liquidity remain strong. Net cash provided by
operations was $84.7 million for fiscal year 2021 compared to $72.7 million for
fiscal year 2020. Although there continues to be a certain level of uncertainty
related to the impact of the current COVID-19 pandemic on our future results, we
believe our efficient business model and the steps that we have taken leave us
positioned to manage our business through this crisis as it continues to unfold.
We continue to manage all aspects of our business including, but not limited to,
monitoring the financial health of our customers, suppliers and other
third-party relationships, implementing gross margin enhancement strategies and
developing new opportunities for growth
Our principal sources of liquidity are our existing cash and cash equivalents,
as well as cash generated from operations and cash currently available from our
existing unsecured Credit Agreement with Bank of America. We use proceeds of the
revolving credit facility primarily for our general working capital needs. The
Company also holds borrowings under a Note Purchase and Private Shelf Agreement.
See Note 8 - Debt for additional information on these agreements. Included in
Note 8 - Debt is information on the Credit Agreement that we amended with Bank
of America on September 30, 2020, and a third amendment to the Note Agreement.
In the first quarter of fiscal year 2021 we refinanced existing draws under our
Credit Agreement in the United States through the issuance of new notes under
the Note Agreement in the amount of $52.0 million.
We have historically maintained a balance of outstanding draws on our line of
credit in U.S. Dollars in the Americas segment, as well as in Euros and Pound
Sterling in the EMEA segment. Euro and Pound Sterling denominated draws will
fluctuate in U.S. Dollars from period to period due to changes in foreign
currency exchange rates. During the first quarter of fiscal year 2021, we repaid
$50.0 million of our U.S. borrowings outstanding under our line of credit using
$52.0 million in proceeds that we received on September 30, 2020 from the
issuance and sale of the Series B and C Notes which mature in November 2027 and
2030, respectively. Our remaining outstanding balance under our line of credit
is denominated completely in Euros and Pound Sterling as of August 31, 2021. We
regularly convert many of our draws on our line of credit to new draws with new
maturity dates and interest rates. We have the ability to refinance any draws
under the line of credit with successive short-term borrowings through the
September 30, 2025 maturity date of the Credit Agreement. Outstanding draws for
which we have both the ability and intent to refinance with successive
short-term borrowings for a period of at least twelve months are classified as
long-term. As of
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August 31, 2021, we had a $46.5 million balance of outstanding draws on the
revolving credit facility, all of which was classified as long-term. In
addition, we paid $0.8 million in principal payments on our Series A Notes
during fiscal year 2021, which had an outstanding balance of $17.2 million as of
August 31, 2021. There were no other letters of credit outstanding or
restrictions on the amount available on our line of credit or notes. Per the
terms of both the Note Agreement and the Credit Agreement, our consolidated
leverage ratio cannot be greater than three and a half to one and our
consolidated interest coverage ratio cannot be less than three to one. See Note
8 - Debt for additional information on these financial covenants. At August 31,
2021, we were in compliance with all debt covenants. We continue to monitor our
compliance with all debt covenants and, at the present time, we believe that the
likelihood of being unable to satisfy these covenants is remote.
We believe that our future cash from domestic and international operations,
together with our access to funds available under our unsecured revolving credit
facility, will provide adequate resources to fund both short-term and long-term
operating requirements, capital expenditures, dividend payments, acquisitions,
new business development activities and share repurchases. On April 8, 2020, we
suspended repurchases under our most recent share buy-back plan, which
subsequently expired on August 31, 2020, in order to preserve cash while we
continued to monitor the long-term impacts of the COVID-19 pandemic. Subsequent
to the end of fiscal year 2021 on October 12, 2021, our Board of Directors
approved a new share buy-back plan. Under the plan, which will become effective
on November 1, 2021, we are authorized to acquire up to $75.0 million of our
outstanding shares through August 31, 2023. At August 31, 2021, we had a total
of $86.0 million in cash and cash equivalents. We do not foresee any ongoing
issues with repaying our borrowings and we closely monitor the use of this
credit facility.
Cash Flows
The following table summarizes our cash flows by category for the periods
presented (in thousands):
Fiscal Year Ended August 31,
2021 2020 2019
Net cash provided by operating activities $ 84,714 $ 72,664 $ 62,851
Net cash provided by (used in) investing
activities
(14,460) (18,945) (12,680)
Net cash used in financing activities (40,750) (26,709) (69,009)
Effect of exchange rate changes on cash and
cash equivalents (5) 2,219 (2,795)
Net increase (decrease) in cash and cash
equivalents $ 29,499 $ 29,229 $ (21,633)
Operating Activities
Net cash provided by operating activities increased $12.0 million to $84.7
million for fiscal year 2021 from $72.7 million for fiscal year 2020. Cash flows
from operating activities depend heavily on operating performance and changes in
working capital. Our primary source of operating cash flows for fiscal year
ended August 31, 2021 was net income of $70.2 million, which increased $9.5
million from period to period. In addition, differences in adjustments to
reconcile net income to cash increased net cash provided by operating activities
by $1.9 million primarily due to increases in stock-based compensation from
period to period which were partially offset by various other adjustments.
Although the changes in our working capital did not have a significant impact on
net cash provided by operating activities in total, there were various increases
and decreases of items within working capital from period to period. Changes in
working capital that decreased cash were primarily attributable to increases to
inventory and increases in trade and other accounts receivable as a result of
significantly increased sales from period to period and increases in other
assets, driven by the ongoing implementation of our new information system.
These changes in working capital were almost completely offset by increases in
accounts payable in the Americas and EMEA segments due to higher levels of
production and the timing of payments to vendors from period to period as well
as increases in accrued payroll and related expenses during fiscal year 2021
primarily due to significantly higher accruals for incentive compensation from
period to period.
Investing Activities
Net cash used in investing activities decreased $4.4 million to $14.5 million
for fiscal year 2021 compared to $18.9 million for fiscal year 2020, primarily
due to decreased capital expenditures. Capital expenditures decreased by $4.2
million primarily due to the renovations and equipping of the Company's office
building in Milton Keynes, England that were completed in the first quarter of
fiscal year 2020 and a lower level of manufacturing-related capital expenditures
within the U.K. and the United States from period to period. Capital
expenditures during fiscal year 2021 were primarily related to manufacturing
equipment which is currently under construction and will be located at our
third-party manufacturers in the United States and the United Kingdom once
completed.
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Financing Activities
Net cash used in financing activities increased $14.1 million to $40.8 million
for fiscal year 2021 from $26.7 million for fiscal year 2020. This change was
primarily due to $80.0 million in net proceeds that we drew under our line of
credit in March 2020 in response to the COVID-19 pandemic with no comparable
event occurring in fiscal year 2021. In the first quarter of fiscal year 2021,
we repaid $50.0 million of such borrowings outstanding under our line of credit
using $52.0 million in proceeds that we received from the issuance and sale of
senior notes during the quarter. This net borrowing activity resulted in a $2.0
million cash inflow during the period compared to $29.6 million in net proceeds
on our line of credit in the prior fiscal year. In addition, increases in
dividends paid to our shareholders of $2.2 million and increases in shares
withheld to cover taxes on conversion of equity rewards of $1.0 million,
resulted in higher cash outflows from period to period. Offsetting these
increases in cash outflows was a decrease in treasury stock repurchases due to
the suspension of such repurchases beginning in the third quarter of fiscal year
2020, which resulted in a decrease in cash outflows of $16.8 million from period
to period.
Effect of Exchange Rate Changes
All of our foreign subsidiaries currently operate in currencies other than the
U.S. Dollar and a significant portion of our consolidated cash balance is
denominated in these foreign functional currencies, particularly at our U.K.
subsidiary which operates in Pound Sterling. As a result, our cash and cash
equivalents balances are subject to the effects of the fluctuations in these
functional currencies against the U.S. Dollar at the end of each reporting
period. The net effect of exchange rate changes on cash and cash equivalents,
when expressed in U.S. Dollar terms was not significant in fiscal year 2021,
while such changes resulted in an increase in cash of $2.2 million in fiscal
year 2020 and a decrease in cash of $2.8 million for fiscal year 2019. These
changes were primarily due to fluctuations in various foreign currency exchange
rates from period to period, but the majority is related to the fluctuations in
the Pound Sterling against the U.S. Dollar.
Cash Flows
Fiscal Year Ended August 31, 2020 Compared to Fiscal Year Ended August 31, 2019
For discussion related to changes in the consolidated statements of cash flows
for fiscal year 2020 compared to fiscal year 2019, refer to Part II - Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the fiscal year ended
August 31, 2020, which was filed with the SEC on October 21, 2020.
Share Repurchase Plans
The information required by this item is incorporated by reference to Part
IV-Item 15, "Exhibits, Financial Statement Schedules" Note 9 - Share Repurchase
Plans, included in this report.
Dividends
We have historically paid regular quarterly cash dividends on our common stock.
In March 2021, the Board of Directors declared a 7% increase in the regular
quarterly cash dividend, increasing it from $0.67 per share to $0.72 per share.
On October 4, 2021, our Board of Directors declared a cash dividend of $0.72 per
share payable on October 29, 2021 to shareholders of record on October 15, 2021.
Our ability to pay dividends could be affected by future business performance,
liquidity, capital needs, alternative investment opportunities and loan
covenants.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of
Regulation S-K.
Contractual Obligations
We hold borrowings under our Note Purchase and Private Shelf Agreement with
fixed repayment requirements and under a Revolving Credit Facility that has
variable underlying interest rates. For additional details on these borrowings,
including ability and intent assessment on our credit facility agreement with
Bank of America, refer to the information set forth in Part IV-Item 15,
"Exhibits, Financial Statement Schedules", Note 8 - Debt.
Additionally, we have ongoing relationships with various third-party suppliers
(contract manufacturers) that manufacture our products and third-party
distribution centers which warehouse and ship our products to customers. The
contract manufacturers maintain title and control of certain raw materials and
components, materials utilized in finished products, and of the finished
products themselves until shipment to our customers or third-party distribution
centers in accordance with agreed upon shipment terms. Although we have
definitive minimum purchase obligations in the contract terms with certain of
our contract
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manufacturers, when such obligations have been included, they have either been
immaterial or the minimum amounts have been such that they are well below the
volume of goods that we have historically purchased. In addition, in the
ordinary course of business, we communicate supply needs to our contract
manufacturers based on orders and short-term projections, ranging from two to
six months. We are committed to purchase the products produced by the contract
manufacturers based on the projections provided. Upon the termination of
contracts with contract manufacturers, we obtain certain inventory control
rights and are obligated to work with the contract manufacturer to sell through
all product held by or manufactured by the contract manufacturer on our behalf
during the termination notification period. If any inventory remains at the
contract manufacturer at the termination date, we are obligated to purchase such
inventory which may include raw materials, components and finished goods. The
amounts for inventory purchased under termination commitments have been
immaterial.
In addition to the commitments to purchase products from contract manufacturers
described above, we may also enter into commitments with other manufacturers to
purchase finished goods and components to support innovation initiatives and/or
supply chain initiatives. As of August 31, 2021, no such commitments were
outstanding.
At August 31, 2021, the liability recorded for uncertain tax positions,
excluding associated interest and penalties, was approximately $9.3 million. For
additional details on our uncertain tax positions, refer to the information set
forth in Part IV-Item 15, "Exhibits, Financial Statement Schedules" Note 13 -
Income Taxes. We have estimated that up to $0.3 million of unrecognized tax
benefits related to income tax positions may be affected by the resolution of
tax examinations or expiring statutes of limitation within the next twelve
months.
Critical Accounting Policies
Our results of operations and financial condition, as reflected in our
consolidated financial statements, have been prepared in accordance with
accounting principles generally accepted in the United States of America.
Preparation of financial statements requires us to make estimates and
assumptions affecting the reported amounts of assets, liabilities, revenues and
expenses and the disclosures of contingent assets and liabilities. We use
historical experience and other relevant factors when developing estimates and
assumptions and these estimates and assumptions are continually evaluated. Note
2 to our consolidated financial statements included in Item 15 of this report
includes a discussion of our significant accounting policies. The accounting
policies discussed below are the ones we consider to be most critical to an
understanding of our consolidated financial statements because their application
places the most significant demands on our judgment. Our financial results may
have varied from those reported had different assumptions been used or other
conditions prevailed.
Revenue Recognition
Sales are recognized as revenue at a point in time upon transferring control of
the product to the customer. This typically occurs when products are shipped or
delivered, depending on when risks of loss and title have passed to the customer
per the terms of the contract. For certain of our sales we must make judgments
and certain assumptions in order to determine when delivery has occurred.
Through an analysis of end-of-period shipments for these particular sales, we
determine an average time of transit of product to our customers, and this is
used to estimate the time of delivery and whether revenue should be recognized
during the current reporting period for such shipments. Differences in judgments
or estimates related to the lengthening or shortening of the estimated delivery
time used could result in material differences in the timing of revenue
recognition.
Sales are recorded net of allowances for damaged goods and other sales returns,
sales incentives, trade promotions and cash discounts. We apply a five-step
approach in determining the amount and timing of revenue to be recognized which
includes the following: (1) identifying the contract with a customer, (2)
identifying the performance obligations in the contract, (3) determining the
transaction price, (4) allocating the transaction price to the performance
obligations in the contract and (5) recognizing revenue when the performance
obligation is satisfied
In determining the transaction price, management evaluates whether the price is
subject to refund or adjustment related to variable consideration to determine
the net consideration to which we expect to be entitled. We record estimates of
variable consideration, which primarily includes rebates/other discounts
(cooperative marketing programs, volume-based discounts, shelf price reductions
and allowances for shelf space, charges from customers for services they
provided to us related to the sale and penalties/fines charged to us by our
customers for failing to adhere to contractual obligations), coupon offers, cash
discount allowances, and sales returns, as a reduction of sales in the
consolidated statements of operations. These estimates are based on the expected
value method considering all reasonably available information, including current
and past trade promotion spending patterns, status of trade promotion activities
and the interpretation of historical spending trends by customer and category,
customer agreements and/or currently known factors that arise in the normal
course of business. We review our assumptions and adjust these estimates
accordingly on a quarterly basis. Our consolidated financial statements could be
materially impacted if the actual promotion rates are different from the
estimated rates. If our accrual estimates for sales incentives at August 31,
2021 were to differ by 10%, the impact on net sales would be approximately $1.0
million.
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Accounting for Income Taxes
Current income tax expense is the amount of income taxes expected to be payable
for the current year. A deferred income tax liability or asset is established
for the expected future tax consequences resulting from the differences in
financial reporting and tax bases of assets and liabilities. Based on changes in
the related tax law as well as forecasted results, a valuation allowance is
provided if it is more likely than not that some or all of the deferred tax
assets will not be realized. In addition to valuation allowances, we provide for
uncertain tax positions when such tax positions do not meet the recognition
thresholds or measurement standards prescribed by the authoritative guidance on
income taxes. Amounts for uncertain tax positions are adjusted in periods when
new information becomes available or when positions are effectively settled. We
recognize accrued interest and penalties related to uncertain tax positions as a
component of income tax expense.
We are required to make assertions on whether our foreign subsidiaries will
invest their undistributed earnings indefinitely and these assertions are based
on the capital needs of the foreign subsidiaries. Generally, unremitted earnings
of our foreign subsidiaries are not considered to be indefinitely reinvested.
However, there are exceptions regarding our newly formed subsidiary in Mexico as
well as specific statutory remittance restrictions imposed on our China
subsidiary. Costs associated with repatriating unremitted foreign earnings,
including U.S. state income taxes and foreign withholding taxes, are immaterial
to our consolidated financial statements. For additional information on income
tax matters, see Part IV-Item 15, "Exhibits, Financial Statement Schedules" Note
13 - Income Taxes, included in this report.
Impairment of Definite-Lived Intangible Assets
We assess for potential impairments to our long-lived assets when there is
evidence that events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable and/or its estimated remaining useful
life may no longer be appropriate. Any required impairment loss would be
measured as the amount by which the asset's carrying amount exceeds its fair
value, which is the amount at which the asset could be bought or sold in a
current transaction between willing market participants and would be recorded as
a reduction in the carrying amount of the related asset and a charge to results
of operations. An impairment loss would be recognized when the sum of the
expected future undiscounted net cash flows is less than the carrying amount of
the asset.
There were no indicators of potential impairment identified as a result of our
review of events and circumstances related to our existing definite-lived
intangible assets for the periods ended August 31, 2021, 2020 or 2019. In
addition to our quarterly evaluation of events and circumstances to assess
whether definite-lived intangible assets have been impaired, we also
periodically perform quantitative analyses to support these conclusions and
determine the sensitivity of such estimates. The majority of our $7.2 million in
definite-lived intangible assets as of August 31, 2021 are related to certain
brands of our homecare and cleaning products. Although sales of certain of these
products have declined in recent periods, according to our most recent analysis
performed during fiscal year 2021, sales declines would have to significantly
exceed these products' recent historical trends in order to trigger an
impairment, which we do not currently anticipate in future periods. Our review
of events and circumstances included consideration of the ongoing COVID-19
pandemic.
Recently Issued Accounting Standards
Information on Recently Issued Accounting Standards that could potentially
impact our consolidated financial statements and related disclosures is
incorporated by reference to Part IV-Item 15, "Exhibits, Financial Statement
Schedules" Note 2 - Basis of Presentation and Summary of Significant Accounting
Policies, included in this report.
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