WD-40 pany(WDFC) - 2022 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION This section presents the unaudited financial statements, management's analysis, market risk, and internal controls for the quarter Item 1. Financial Statements (Unaudited) Unaudited Q1 FY2022 financials report 8% net sales growth, but net income decreased 21% to $18.6 million, with negative operating cash flow Condensed Consolidated Balance Sheets The balance sheet reflects a decrease in total assets and cash, offset by an increase in inventories Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Nov 30, 2021 | Aug 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $421,439 | $430,203 | ($8,764) | | Cash and cash equivalents | $59,519 | $85,961 | ($26,442) | | Inventories | $67,875 | $55,752 | $12,123 | | Total Liabilities | $223,041 | $229,821 | ($6,780) | | Long-term borrowings | $112,729 | $114,940 | ($2,211) | | Total Shareholders' Equity | $198,398 | $200,382 | ($1,984) | Condensed Consolidated Statements of Operations The statement of operations shows an 8% increase in net sales but a 21% decrease in net income and diluted EPS Statement of Operations Summary (in thousands, except per share amounts) | Metric | Q1 FY2022 (ended Nov 30, 2021) | Q1 FY2021 (ended Nov 30, 2020) | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $134,746 | $124,559 | 8.2% | | Gross Profit | $68,470 | $70,246 | -2.5% | | Gross Margin | 50.8% | 56.4% | -5.6 pts | | Income from Operations | $24,060 | $28,392 | -15.3% | | Net Income | $18,555 | $23,623 | -21.4% | | Diluted EPS | $1.34 | $1.72 | -22.1% | Condensed Consolidated Statements of Cash Flows Cash flow from operations turned negative, primarily due to inventory build-up and increased financing activities Cash Flow Summary (in thousands) | Activity | Three Months Ended Nov 30, 2021 | Three Months Ended Nov 30, 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($947) | $23,921 | | Net cash used in investing activities | ($2,362) | ($3,670) | | Net cash used in financing activities | ($21,937) | ($11,089) | | Net (decrease) increase in cash | ($26,442) | $9,382 | - The significant decrease in operating cash flow was primarily due to a $13.1 million increase in inventories and a $7.3 million decrease in accrued payroll and related expenses[22] - The increase in cash used for financing activities was driven by $7.4 million in treasury stock purchases, which did not occur in the prior-year period[22] Notes to Condensed Consolidated Financial Statements Key notes detail revenue composition, share repurchase, income taxes, segment performance, and a subsequent dividend increase - Revenue: Total net sales grew 8% YoY. Maintenance products sales increased 10% to $126.0 million, while Homecare and cleaning products (HCCP) sales decreased 15% to $8.7 million[56] - Share Repurchase: A new plan authorized $75.0 million in repurchases through August 31, 2023, with 32,000 shares repurchased for $7.4 million in November 2021[54] - Income Taxes: The effective tax rate for the quarter was 19.8%, up from 15.7% in the prior-year period, due to increased nondeductible compensation expenses[71] - Segments: Sales grew across all geographic segments (Americas +4%, EMEA +5%, Asia-Pacific +34%), but operating income fell in Americas (-18%) and EMEA (-20%), while increasing significantly in Asia-Pacific (+44%)[75] - Subsequent Event: The Board approved an 8% increase in the quarterly cash dividend, from $0.72 to $0.78 per share, on December 13, 2021[77] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 8% net sales growth, but profitability declined due to supply chain issues and inflation, leading to a 21% net income decrease Overview The overview highlights 8% net sales growth, significant gross margin decline, and a 21% net income drop, impacted by supply chain issues and inflation - Consolidated net sales increased by 8% to $134.7 million; on a constant currency basis, sales would have increased by 5%[90] - Gross margin decreased significantly to 50.8% from 56.4% in the prior year, primarily due to increased costs from global supply chain challenges and inflation[90] - Consolidated net income fell 21% to $18.6 million, and diluted EPS was $1.34, down from $1.72 in the prior year period[90] - The COVID-19 pandemic caused mixed effects, increasing demand but also leading to significant supply chain disruptions, material shortages, and increased costs[88][91] Results of Operations Results of operations show varied sales growth across segments, led by Asia-Pacific, and a significant gross margin decline due to rising costs Net Sales by Segment (in thousands) | Segment | Q1 FY2022 | Q1 FY2021 | % Change | | :--- | :--- | :--- | :--- | | Americas | $56,288 | $54,188 | 4% | | EMEA | $57,555 | $54,749 | 5% | | Asia-Pacific | $20,903 | $15,622 | 34% | | Total | $134,746 | $124,559 | 8% | - Americas: Sales grew 4%, driven by a 41% increase in Latin America due to price increase pull-forward and momentum in Mexico, partially offset by a 1% sales decrease in the U.S. caused by supply chain constraints impacting product availability[100] - EMEA: Sales grew 5% (1% in constant currency), led by distributor markets, which increased 9%, particularly in Poland, Russia, and India[104][105] - Asia-Pacific: Sales surged 34% (31% in constant currency), driven by a 69% increase in China due to promotions and price increase pull-forward and a 36% increase in Asia distributor markets as COVID-19 lockdown measures eased[107] - Gross margin fell by 560 basis points, primarily due to higher costs of specialty chemicals (-390 bps), increased warehousing and freight costs (-140 bps), and higher filling fees (-70 bps), partially offset by sales price increases (+120 bps)[109][112] Performance Measures and Non-GAAP Reconciliations This section presents the company's performance against its 55/30/25 business model targets, showing results below long-term goals 55/30/25 Business Model Performance | Performance Measure | Q1 FY2022 Result | Q1 FY2021 Result | Long-Term Target | | :--- | :--- | :--- | :--- | | Gross Margin (GAAP) | 51% | 56% | ≥ 55% | | Cost of Doing Business (Non-GAAP) | 32% | 32% | 30% | | EBITDA % of Net Sales (Non-GAAP) | 19% | 24% | > 25% | - The company's performance for the quarter was below its long-term targets for Gross Margin and EBITDA, reflecting significant cost pressures[131][132] Liquidity and Capital Resources The company maintains strong liquidity and capital resources, supported by cash and credit, despite negative operating cash flow and a new share buy-back plan - The company's financial condition and liquidity remain strong, with principal sources being cash on hand, cash from operations, and an available revolving credit facility[135][136] - Net cash used in operations was $0.9 million, a significant decrease from $23.9 million provided in the prior year, primarily due to a deliberate increase in inventory to manage supply chain challenges[135][141] - As of November 30, 2021, the company was in compliance with all debt covenants, including a consolidated leverage ratio and an interest coverage ratio[137][52] - A new share buy-back plan was approved on October 12, 2021, authorizing the acquisition of up to $75.0 million in shares through August 31, 2023[139] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section incorporates market risk disclosures from the Annual Report on Form 10-K, confirming no material changes during the quarter - The company refers to its most recent Form 10-K for disclosures regarding market risk, indicating no material changes during the quarter[158] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period[159] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[160] PART II — OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered sales of equity securities, and a list of exhibits Item 1. Legal Proceedings Legal proceedings information is incorporated by reference, noting the dismissal of the Jakarta Litigation claim with an appeal pending - The report incorporates information on legal proceedings by reference to Note 11 of the financial statements[162] - The Jakarta Litigation claim for over $25.0 million against the company was dismissed, though an appeal is pending, with an unfavorable outcome deemed remote[63][65] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K were identified during the quarter - The company states that there have been no material changes in its risk factors from those disclosed in its Annual Report on Form 10-K for the fiscal year ended August 31, 2021[163] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds A new share buy-back plan authorized $75.0 million in repurchases, with 32,000 shares bought for $7.4 million in November 2021 Share Repurchases in Q1 FY2022 | Period | Total Shares Purchased | Average Price Paid Per Share | Total Cost (approx.) | Max Value Remaining Under Plan | | :--- | :--- | :--- | :--- | :--- | | Nov 1 - Nov 30, 2021 | 32,000 | $230.79 | $7.4 million | $67,614,176 | Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, a Libor Transition Agreement, and financial statements in iXBRL format - The exhibits filed with the report include corporate governance documents, a Libor Transition Agreement, certifications required by the Sarbanes-Oxley Act, and the financial statements in iXBRL format[167]