Amortization of Intangible Asset Expense
Amortization of intangible asset expense was $532,000 in fiscal year 2006, compared to $552,000 in fiscal year 2005. The amortization relates to the non-contractual customer relationships intangible asset acquired in the 1001 acquisition, which was completed in April 2004. This intangible asset is being amortized over its estimated eight-year life.
Income from Operations
Income from operations was $46.0 million, or 16.0% of sales in fiscal year 2006, compared to $47.4 million, or 18.0% of sales in fiscal year 2005. The decrease in income from operations as a percentage of sales was due to the items discussed above.
Interest Expense, net
Interest expense, net was $3.5 million compared to $5.1 million for the fiscal years ended August 31, 2006 and 2005, respectively. The change in interest expense, net was primarily due to reduced principal balance on long-term borrowings resulting from a $10 million principal payment made in May 2005 and a $10.7 million principal payment made in October 2005.
Other Income, net
Other income, net was $339,000 in fiscal year 2006, compared to $578,000 in fiscal year 2005, a decrease of $239,000, which was due to reduced foreign currency exchange gains. Other income, net also includes rental income from VML Company, L.L.C. The Company owns and rents a warehouse facility to VML in Memphis, Tennessee. VML serves as the Company’s contract manufacturer for certain household products and acts as a warehouse distributor for other product lines of the Company.
Provision for Income Taxes
The provision for income taxes was 34.41% of income before income taxes for fiscal 2006, a decrease from 35.15% in fiscal year 2005. The decrease in tax rate was due to the benefits of I.R.C. Section 199 related to qualified production activities provided by the American Jobs Creation Act of 2004, as well as foreign tax credits and the tax benefit of municipal bond interest. These tax benefits were partially offset by the impact of reduced low income housing credits, the growth of worldwide income and non-deductible stock-based compensation expense related to stock options granted to some non-U.S. taxpayers.
Net Income
Net income was $28.1 million, or $1.66 per common share on a fully diluted basis for the fiscal year ended August 31, 2006, compared to $27.8 million, or $1.65 per common share for the fiscal year ended August 31, 2005. The change in foreign currency exchange rates year over year had a negative impact of $0.2 million on fiscal year 2006 net income.
Segment Results
Following is a discussion of sales by region for the fiscal years ended August 31, 2006 and 2005.
Americas
| Net Sales | Fiscal Year Ended August 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2006 | 2005 | $ Change | % Change | |||||||||||
| Lubricants | $ | 102,732 | $ | 99,259 | $ | 3,473 | 3 | %& | |||||||
| Household products | 78,553 | 71,276 | 7,277 | 10 | % | ||||||||||
| Hand cleaners | 5,484 | 5,571 | (87 | ) | (2 | )% | |||||||||
| Sub-total | $ | 186,769 | $ | 176,106 | $ | 10,663 | 6 | % | |||||||
| % of consolidated | 65% | 67% | |||||||||||||
Changes in foreign currency exchange rates compared to fiscal year 2005 positively impacted the growth of sales. The fiscal year 2006 results translated at fiscal year 2005 exchange rates would have produced sales of $185.8 million in this region. Thus, the impact of the change in foreign currency exchange rates year over year positively affected sales in fiscal year 2006 by approximately $1.0 million.
The increase in lubricant sales in the Americas during fiscal year 2006 compared to fiscal year 2005 was the result of WD-40 sales growth in Canada and Latin America as sales increased by 12% and 23%, respectively. Growth in Canada was due to the launch of the WD-40 Smart Straw and the WD-40 No-Mess Pen. The WD-40 Smart Straw and the WD-40 No-Mess Pen were introduced in the third and fourth quarters of fiscal year 2005, respectively. Growth in Latin America was primarily due to increased promotional activity and new distribution. Price increases implemented during the fiscal year 2005 third quarter on certain products, as well as additional price increases implemented during the fiscal year 2006 third quarter, also contributed to the sales growth in the Americas in fiscal year 2006. In the U.S., WD-40 sales increased 1%, as sales growth from the launch of the WD-40 Smart Straw and price increases were largely offset by decreased sales as a result of a large promotion in fiscal year 2005 not repeated in fiscal year 2006.
Despite the significant competition within the household brands category, the Company’s household products were still able to achieve sales growth. Household product sales in fiscal year 2006 were up by $7.3 million, or 10%, compared to fiscal year 2005 due primarily to increases in the U.S. Sales in the U.S. increased by $6.8 million, or 10%. The increases in household product sales resulted from a variety of reasons, including increased promotional activity, increased distribution and new products that were introduced throughout fiscal year 2005.
Spot Shot sales increased 11% in the U.S. during fiscal year 2006 as compared to fiscal year 2005 due to increased promotional activities with key customers and sales from new products, Spot Shot Pro and Spot Shot with a trigger format. Additionally, during most of fiscal year 2005, Spot Shot experienced decreased sales as a result of a key U.S. customer temporarily replacing Spot Shot with competitor products as it performed competitor sales testing. Although Spot Shot was successful and maintained distribution, these tests caused sales to be lower in fiscal year 2005.
In recent years, retailers have reduced shelf space for traditional rug and room deodorizers for reallocation to other air care products. As a result, the rug and room deodorizer category as a whole has declined in the mass retail and grocery trade channels. Despite the declines in the rug and room deodorizer category, Carpet Fresh was able to achieve sales growth in the U.S. of 11% in fiscal year 2006 versus fiscal year 2005 due to increased promotional activities and expanded distribution, which included new trade channels.
U.S. sales of the X-14 hard surface cleaners increased 32% in fiscal year 2006 versus fiscal year 2005 due primarily to increased promotional activities, growth in non-grocery trade channels and the full year benefit from the launch of two new innovative products. During the fourth quarter of fiscal year 2004 and first quarter of fiscal year 2005, the Company introduced two new products, X-14 Orange Aerosol and X-14 Oxy Citrus.