WD-40 pany(WDFC) - 2021 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited financial statements for Q1 and H1 FY2021 show significant growth in assets, sales, net income, and operating cash flow Condensed Consolidated Balance Sheets Total assets increased to $406.0 million, with corresponding rises in liabilities and shareholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Feb 28, 2021 | Aug 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $221,836 | $185,154 | | Total Assets | $405,987 | $362,637 | | Total Current Liabilities | $71,883 | $60,116 | | Total Liabilities | $218,407 | $202,324 | | Total Shareholders' Equity | $187,580 | $160,313 | Condensed Consolidated Statements of Operations Net sales and net income significantly increased for both the three and six-month periods ended February 28, 2021 Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Feb 28/29, 2021 | Three Months Ended Feb 28/29, 2020 | Six Months Ended Feb 28/29, 2021 | Six Months Ended Feb 28/29, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $111,905 | $100,049 | $236,464 | $198,605 | | Gross Profit | $62,007 | $53,602 | $132,253 | $107,145 | | Income from Operations | $20,655 | $18,185 | $49,047 | $32,889 | | Net Income | $17,191 | $14,327 | $40,814 | $26,521 | | Diluted EPS | $1.24 | $1.04 | $2.96 | $1.92 | Condensed Consolidated Statements of Cash Flows Operating cash flow significantly increased, while investing cash outflow decreased and financing cash outflow rose due to debt and dividends Cash Flow Summary (in thousands) | Activity | Six Months Ended Feb 28, 2021 | Six Months Ended Feb 29, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $42,510 | $23,382 | | Net cash used in investing activities | ($7,366) | ($10,483) | | Net cash used in financing activities | ($20,311) | ($9,816) | | Net increase in cash and cash equivalents | $15,919 | $3,270 | Notes to Condensed Consolidated Financial Statements Notes detail business segments, debt compliance, revenue recognition, and a subsequent dividend increase - The company performed its annual goodwill impairment test on December 1, 2020, concluding no impairment existed[44] - As of February 28, 2021, the company was in compliance with all debt covenants under its Note Agreement and Credit Agreement[62] - The company suspended its share repurchase plan on April 8, 2020, to preserve cash amid the COVID-19 pandemic, making no repurchases in the first six months of fiscal 2021[64] - On March 16, 2021, the Board of Directors approved a 7% increase in the regular quarterly cash dividend from $0.67 to $0.72 per share[97] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Strong H1 FY2021 performance, driven by pandemic-related demand and e-commerce, was tempered by supply chain disruptions, while liquidity remains strong - For the six months ended Feb 28, 2021, consolidated net sales increased by $37.9 million, or $32.4 million on a constant currency basis[109] - The company is experiencing supply chain and transportation disruptions, including capacity constraints at third-party manufacturers, compounded by severe winter storms in the U.S. during Q2 2021, preventing it from meeting high demand in certain markets[111] - The company's 55/30/25 business model targets a gross margin at or above 55%, cost of doing business at 30%, and EBITDA above 25% of net sales, achieving a 56% gross margin and 22% EBITDA margin for the six months ended Feb 28, 2021[194][195] Results of Operations - Three Months Ended February 28, 2021 Q2 FY2021 net sales grew 12% to $111.9 million, driven by EMEA and Asia-Pacific, despite Americas' decline due to supply chain issues Net Sales by Segment (Q2 FY2021 vs Q2 FY2020, in thousands) | Segment | Q2 2021 | Q2 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Americas | $46,157 | $46,842 | ($685) | (1)% | | EMEA | $49,813 | $41,753 | $8,060 | 19% | | Asia-Pacific | $15,935 | $11,454 | $4,481 | 39% | | Total | $111,905 | $100,049 | $11,856 | 12% | - Sales of maintenance products in the Americas decreased by 3% in Q2, driven by an 11% decline in the U.S. due to supply chain constraints and disruptions from the COVID-19 pandemic and severe winter storms[121] - Asia-Pacific sales grew 39% (32% constant currency), largely due to a 227% increase in China as it recovered from initial COVID-19 outbreak disruptions in the prior-year quarter[130][131] - Gross margin increased to 55.4% from 53.6% year-over-year, primarily due to favorable costs of petroleum-based specialty chemicals (+1.6 p.p.) and aerosol cans (+0.5 p.p.), partially offset by higher warehousing and freight costs (-0.6 p.p.)[133][134][135][136] Results of Operations - Six Months Ended February 28, 2021 H1 FY2021 net sales increased 19% to $236.5 million across all segments, leading to significant growth in income from operations and net income Net Sales by Segment (H1 FY2021 vs H1 FY2020, in thousands) | Segment | H1 2021 | H1 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Americas | $100,344 | $93,578 | $6,766 | 7% | | EMEA | $104,563 | $80,998 | $23,565 | 29% | | Asia-Pacific | $31,557 | $24,029 | $7,528 | 31% | | Total | $236,464 | $198,605 | $37,859 | 19% | - EMEA sales grew 29% (23% constant currency), driven by a 26% increase in direct markets and a 35% increase in distributor markets, reflecting recovery from prior lockdowns and strong demand[164][165][166] - Gross margin for the six-month period increased by 2.0 percentage points due to favorable petroleum-based specialty chemical costs and 0.8 percentage points from lower aerosol can costs[171][173] - SG&A expenses increased by $9.0 million, primarily due to higher employee-related incentive costs ($8.9 million), but decreased as a percentage of sales from 31.5% to 30.2%[176] Liquidity and Capital Resources The company maintains strong liquidity, with increased operating cash flow, debt refinancing, and a dividend increase, while the share repurchase plan remains suspended - Net cash provided by operating activities increased by $19.1 million to $42.5 million for the six months ended Feb 28, 2021, mainly due to a $14.3 million increase in net income[199][205] - In Q1 FY2021, the company refinanced $50.0 million of its revolving credit facility draws by issuing $52.0 million in new Series B and C Notes, extending debt maturities to 2027 and 2030[200][202] - The share buy-back plan, suspended in April 2020, expired on August 31, 2020, with no repurchases made to preserve cash[203] - Subsequent to the quarter end, on March 16, 2021, the Board approved a 7% increase in the quarterly cash dividend to $0.72 per share[215] Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk disclosures are incorporated by reference from the company's 2020 Annual Report on Form 10-K - Information regarding quantitative and qualitative disclosures about market risk is incorporated by reference from the company's 2020 Form 10-K[220] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of February 28, 2021, with no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of February 28, 2021[221][222] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[223] PART II — OTHER INFORMATION Item 1. Legal Proceedings No pending legal proceedings or unasserted claims are expected to materially impact the company's financial condition or results - As of February 28, 2021, the company believes no pending or unasserted claims will have a materially adverse impact on its financial condition or results[83][225] Item 1A. Risk Factors No material changes to risk factors were reported from the 2020 Annual Report on Form 10-K - No material changes in risk factors were reported from those disclosed in the Annual Report on Form 10-K for the fiscal year ended August 31, 2020[226] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The share buy-back plan was suspended and expired, with no repurchases made in H1 FY2021 to preserve cash - The company's share buy-back plan was suspended in April 2020 and expired in August 2020, with no repurchases made during the first six months of fiscal 2021[227] Item 6. Exhibits Exhibits include corporate governance documents, credit and note agreement amendments, and executive certifications - The exhibits filed include amendments to the Credit Agreement and Note Purchase Agreement, as well as CEO and CFO certifications required under the Sarbanes-Oxley Act[229]