Please refer to the discussion under “Segment Results” included later in this section for further detailed results by segment. Changes in foreign currency exchange rates compared to fiscal year 2005 negatively impacted the growth of the Company’s sales. Fiscal year 2006 results translated at fiscal year 2005 exchange rates would have produced sales of $289.0 million, thus, the impact of the change in foreign currency exchange rates year over year negatively affected fiscal year 2006 sales by $2.1 million, or 1%.
| Net Sales by Product Line | Fiscal Year Ended August 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2006 | 2005 | $ Change | % Change | |||||||||||
| Lubricants | $ | 190,468 | $ | 174,084 | $ | 16,384 | 9 | % | |||||||
| Household products | 89,822 | 82,237 | 7,585 | 9 | % | ||||||||||
| Hand cleaners | 6,626 | 6.906 | (280 | ) | (4 | )% | |||||||||
| Total net sales | $ | 286,916 | $ | 263,227 | $ | 23,689 | 9 | % | |||||||
By product line, sales of lubricants include WD-40 and 3-IN-ONE; sales of household products include Carpet Fresh, No Vac, X-14, 2000 Flushes, Spot Shot and 1001; and hand cleaner sales include Lava and Solvol.
Gross Profit
Gross profit was $138.4 million, or 48.2% of sales in fiscal year 2006, compared to $129.4 million, or 49.2% of sales in fiscal year 2005. The decrease in the gross margin percentage was primarily attributable to the increase in cost of products sold. The increase in cost of products negatively affected gross margins in all of the Company’s regions. This increase was primarily due to the significant rise in costs for components and raw materials, including aerosol cans and petroleum-based products. Gross margin percentage was also negatively impacted during fiscal year 2006 as the Company incurred costs associated with impaired, slow-moving and reworked inventory. As a result, the Company focused on reducing excess inventory of certain products and offered significant discounts, which reduced the gross margin percentage. The discounts and costs associated with the impaired, slow-moving and reworked inventory negatively impacted the gross margin percentage by 0.4% in fiscal year 2006. The increase in cost of products sold and the costs associated with impaired, slow-moving and reworked inventory were partially offset by a decrease in advertising, promotional and other discounts, which positively impacted gross margin percentage by 0.3%. This decrease resulted from both timing and reductions in certain traditional advertising and promotional activities that had experienced declines in consumer response. Advertising, promotional and other discounts, which are recorded as a reduction to sales, include coupon redemptions, consideration and allowances given to retailers for space in their stores, consideration and allowances given to obtain favorable display positions in retailers’ stores, co-operative advertising and promotional activity, volume discounts and other one-time or ongoing incentives. The timing of these activities, as well as shifts in product mix, may cause fluctuations in gross margin percentage from period to period.
As the result of the continued trend of rising costs, the Company implemented price increases on certain products. The Company began to experience rising costs during the fourth quarter of fiscal year 2004 and has continued to experience further cost increases. To reduce the impact of these cost increases, the Company implemented price increases on certain products during the third quarter of fiscal year 2005. However, costs of components, raw materials and finished goods continued to rise since the third quarter of fiscal year 2005. As a result, the Company implemented additional price increases during the third quarter of fiscal year 2006. The increase in pricing of certain products worldwide added approximately 1.6% to gross margin percentage in fiscal year 2006 compared to fiscal year 2005.
Note that the Company’s gross margins may not be comparable to those of other reporting entities, since some entities 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 distribution to our customers from our contract packagers, and include these costs in selling, general and administrative expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) increased to $71.8 million in fiscal year 2006, up from $63.5 million in fiscal year 2005 and, as a percentage of sales, increased to 25.0% in fiscal year 2006 from 24.1% in fiscal year 2005. The increase in SG&A was largely attributable to increases in bonus expense, employee-related costs, stock-based compensation expense due to the adoption of a new accounting pronouncement, research and development costs, freight costs and professional services. Bonus expense increased $2.8 million versus fiscal year 2005, as many regions did not achieve profit and other performance expectations in fiscal year 2005, which resulted in a lower fiscal year 2005 bonus expense. Employee-related costs, which include salaries, profit sharing and other fringe benefits, increased $1.9 million versus fiscal year 2005 as a result of annual compensation increases and additional staffing. Beginning in fiscal year 2006, the Company adopted SFAS No. 123R, “Share-Based Payment,” which requires the expensing of stock options. The adoption of this new accounting pronouncement resulted in a $1.8 million incremental increase in compensation expense during fiscal year 2006. Research and development costs increased $1.3 million due to increased new product development activity. Freight costs increased $0.6 million due to sales growth and increased fuel surcharges. The $0.7 million increase in professional services costs related to information technology, marketing, legal and tax-related consulting.
Also contributing to the increase in SG&A was $1.2 million of increased miscellaneous expenses such as depreciation and amortization, overhead expenses, insurance expenses, travel expenses and meeting expenses. These increases were partially offset by $1.0 million of decreased bad debt expense primarily related to recoveries of bad debt, including a preference claim, $0.4 million of decreased sales commissions and $0.1 million of decreased investor relations costs, as well as $0.5 million of foreign currency translation impact. Fiscal year 2006 SG&A expenses translated at fiscal year 2005 exchange rates would have produced total SG&A expenses of $72.3 million.
The Company continued its research and development investment in support of its focus on innovation. Research and development costs were $3.8 million in fiscal year 2006 compared to $2.5 million in fiscal year 2005. The Company’s new-product development team, known as Team Tomorrow, 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 the Company’s current and prospective outsource suppliers.
Advertising and Sales Promotion Expenses
Advertising and sales promotion expenses increased to $20.1 million in fiscal year 2006, up from $17.9 million in fiscal year 2005 and, as a percentage of sales, increased to 7.0% in fiscal year 2006 from 6.8% in fiscal year 2005. In fiscal year 2005, marketing investment was concentrated in the first quarter. However, marketing investment in the U.S. was reduced during the remainder of fiscal year 2005 as the Company reevaluated the market dynamics and its strategies to determine which programs would be the most effective. In fiscal year 2006, the Company began to increase marketing investment in the second quarter and continued during the remainder of fiscal year 2006, as the Company aligned its advertising and sales promotion activities with the distribution of its current and new products.
As a percentage of sales, advertising and sales promotion expenses may fluctuate period to period based upon the type of marketing activities employed by the Company, as the costs of certain promotional activities are required to be recorded as reductions to sales, and others remain in advertising and sales promotion expenses. In fiscal year 2006, the total promotional costs recorded as reductions to sales were $15.6 million versus $18.8 million in fiscal year 2005. Therefore, the Company’s total investment in advertising and sales promotion activities totaled $35.7 million in fiscal year 2006 versus $36.7 million in fiscal year 2005.