WD-40 pany(WDFC) - 2019 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements for the three and six months ended February 28, 2019, detailing balance sheets, operations, cash flows, and accounting policies Note 10. Revenue Recognition Company adopted ASC 606 on September 1, 2018, reducing opening retained earnings by $0.3 million and changing revenue recognition timing for certain customers - Adopted ASC 606 on September 1, 2018, resulting in a $0.3 million reduction to opening retained earnings[59] - Under ASC 606, the timing of revenue recognition is determined when control transfers to the customer, which for some customers is now at the point of shipment rather than delivery[61] Note 14. Business Segments and Foreign Operations Operates in Americas, EMEA, and Asia-Pacific segments, with Americas contributing $91.7 million in net sales for the six months ended February 28, 2019, largely from maintenance products Net Sales by Segment (Six Months Ended Feb 28, 2019) | Segment | Net Sales (in thousands) | Income from Operations (in thousands) | | :--- | :--- | :--- | | Americas | $91,688 | $21,294 | | EMEA | $79,711 | $19,005 | | Asia-Pacific | $31,218 | $8,884 | Net Sales by Product Group (Six Months Ended Feb 28) | Product Group | 2019 (in thousands) | 2018 (in thousands) | | :--- | :--- | :--- | | Maintenance products | $184,838 | $180,349 | | Homecare and cleaning products | $17,779 | $18,504 | Condensed Consolidated Statements of Operations Highlights (Three Months Ended Feb 28) | Metric | 2019 (in thousands) | 2018 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Net Sales | $101,335 | $101,256 | +0.1% | | Gross Profit | $56,158 | $55,758 | +0.7% | | Income from Operations | $19,715 | $19,368 | +1.8% | | Net Income | $15,906 | $14,818 | +7.3% | | Diluted EPS | $1.14 | $1.05 | +8.6% | Condensed Consolidated Statements of Operations Highlights (Six Months Ended Feb 28) | Metric | 2019 (in thousands) | 2018 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Net Sales | $202,617 | $198,853 | +1.9% | | Gross Profit | $111,989 | $109,955 | +1.8% | | Income from Operations | $36,116 | $36,504 | -1.1% | | Net Income | $29,185 | $27,448 | +6.3% | | Diluted EPS | $2.09 | $1.95 | +7.2% | Condensed Consolidated Balance Sheet Highlights | Metric | Feb 28, 2019 (in thousands) | Aug 31, 2018 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $31,596 | $48,866 | | Total current assets | $159,345 | $167,983 | | Total assets | $310,275 | $317,059 | | Total current liabilities | $77,075 | $85,903 | | Total liabilities | $154,390 | $161,570 | | Total shareholders' equity | $155,885 | $155,489 | - For the six months ended February 28, 2019, net cash provided by operating activities was $17.2 million, a decrease from $21.2 million in the prior year period[19] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance for the three and six months ended February 28, 2019, with consolidated net sales up 2% to $202.6 million and net income up 6% to $29.2 million, benefiting from a lower tax rate Results of Operations - Three Months Ended February 28, 2019 Q2 FY2019 net sales were flat at $101.3 million, with EMEA growth offsetting declines elsewhere; gross margin improved to 55.4%, and net income rose 7% to $15.9 million due to lower interest and FX gains Net Sales by Segment (Three Months Ended Feb 28) | Segment | 2019 (in thousands) | 2018 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Americas | $43,897 | $44,967 | (2)% | | EMEA | $40,966 | $39,632 | 3% | | Asia-Pacific | $16,472 | $16,657 | (1)% | - Gross margin increased to 55.4% from 55.1% YoY, positively impacted by sales price increases (1.2 percentage points) but partially offset by higher costs of petroleum-based specialty chemicals and aerosol cans (1.2 percentage points)[132][133][134] - Net income was favorably impacted by a $0.8 million swing in 'Other income (expense), net', primarily due to foreign currency exchange gains in Q2 2019 versus losses in Q2 2018[150] Results of Operations - Six Months Ended February 28, 2019 H1 FY2019 net sales grew 2% to $202.6 million, driven by EMEA; gross margin was flat at 55.3%; operating income decreased 1%, but net income grew 6% to $29.2 million due to a lower effective tax rate of 18.2% Net Sales by Segment (Six Months Ended Feb 28) | Segment | 2019 (in thousands) | 2018 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Americas | $91,688 | $91,130 | 1% | | EMEA | $79,711 | $74,660 | 7% | | Asia-Pacific | $31,218 | $33,063 | (6)% | - Gross margin remained constant at 55.3%. Favorable impacts from price increases (+1.2 p.p.) were offset by unfavorable changes in costs of petroleum-based specialty chemicals and aerosol cans (-1.6 p.p.)[167][168][169] - The effective income tax rate decreased to 18.2% from 21.1% in the prior year period, primarily due to the full-year effect of the Tax Act, which lowered the federal statutory rate to 21% for fiscal 2019 from a blended 25.7% in fiscal 2018[185] Liquidity and Capital Resources Company maintains strong liquidity from cash, operations, and a $100.0 million credit facility; net cash from operations decreased to $17.2 million; $20.0 million repatriated from U.K. subsidiary for debt repayment - Net cash provided by operating activities decreased to $17.2 million for the six months ended Feb 28, 2019, from $21.2 million in the prior year, mainly due to changes in working capital, including planned inventory increases[192][198] - The company repatriated $20.0 million from its U.K. subsidiary in Q1 2019 to repay short-term debt. In Q2, it repatriated additional funds to pay its $44.0 million U.S. Dollar long-term balance, replacing it with draws in Euros and Pound Sterling at its U.K. subsidiary[194] - As of February 28, 2019, the company had $31.8 million in cash, cash equivalents, and short-term investments, and was in full compliance with all debt covenants[195][196] - For the six months ended Feb 28, 2019, consolidated net sales increased by $3.8 million. On a constant currency basis, net sales would have increased by $8.2 million, indicating an unfavorable foreign exchange impact of $4.4 million[116] - Consolidated net income for the six-month period increased by $1.7 million to $29.2 million, favorably impacted by the U.S. "Tax Cuts and Jobs Act" which resulted in a lower effective income tax rate[116] - The company repurchased 70,684 shares for a total cost of $12.1 million during the six months ended Feb 28, 2019, under its $75.0 million share buy-back plan[116] Item 3. Quantitative and Qualitative Disclosures About Market Risk Incorporates by reference market risk disclosures from the FY2018 Form 10-K, reporting no material changes - The company's disclosures about market risk are incorporated by reference from its fiscal year 2018 Form 10-K, with no material changes reported[213] Item 4. Controls and Procedures CEO and CFO concluded disclosure controls were effective as of February 28, 2019, with internal control enhancements made for ASC 606 implementation - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report[214] - Enhancements were made to internal controls over financial reporting effective September 1, 2018, due to the implementation of the new revenue guidance under ASC 606[215] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is involved in the 'Malay Litigation,' a civil proceeding initiated by a former distributor alleging conspiracy, which the company is vigorously defending - The company is a defendant in the 'Malay Litigation,' where a former distributor alleges conspiracy. The company believes an unfavorable outcome is not probable but a loss is reasonably possible, though it cannot estimate the range of loss[83][85][86] Item 1A. Risk Factors No material changes to risk factors were reported from those disclosed in the company's FY2018 Form 10-K - There have been no material changes in risk factors from those disclosed in the company's most recent Form 10-K[219] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details share repurchase activities, with 29,500 shares repurchased during the three months ended February 28, 2019, under a $75.0 million plan Share Repurchases (Three Months Ended Feb 28, 2019) | Period | Total Shares Purchased (Shares) | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | Dec 2018 | 8,000 | $176.38 | | Jan 2019 | 12,000 | $175.21 | | Feb 2019 | 9,500 | $177.27 | | Total | 29,500 | $176.19 | - For the six-month period from September 1, 2018, to February 28, 2019, the company repurchased a total of 70,684 shares for $12.1 million under its $75.0 million plan[220] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including corporate governance documents, agreement amendments, CEO/CFO certifications, and XBRL data files - Key exhibits filed include the Seventh Amendment to the Credit Agreement with Bank of America, N.A., and certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[223]