Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide the reader of the Company’s financial statements with a narrative from the perspective of management on the Company’s financial condition, results of operations, liquidity and certain other factors that may affect future results. This MD&A includes the following sections: Overview, Highlights, Results of Operations, Liquidity and Capital Resources, Stock-based Compensation, Critical Accounting Policies, Recent Accounting Pronouncements,Transactions with Related Parties and Forward-Looking Statments. MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s consolidated financial statements and the related notes included in Item 15 of this report.
Overview
WD-40 Company is a global consumer products company dedicated to building brand equities that are first or second choice in their respective categories. We market two multi-purpose maintenance products, WD-40 and 3-IN-ONE Oil, and eight homecare and cleaning products, X-14 hard surface cleaners and automatic toilet bowl cleaners, 2000 Flushes automatic toilet bowl cleaners, Carpet Fresh and No Vac rug and room deodorizers, Spot Shot aerosol and liquid carpet stain removers, 1001 carpet and household cleaners and rug and room deodorizers and Lava and Solvol heavy-duty hand cleaners. Multi-purpose maintenance products are sold worldwide in markets such as North, Central and South America, Asia, Australia and the Pacific Rim, Europe, the Middle East and Africa. Homecare and cleaning products are sold primarily in North America, the U.K., Australia and the Pacific Rim. The Company sells its products primarily through mass retail and home center stores, warehouse club stores, grocery stores, hardware stores, automotive parts outlets and industrial distributors and suppliers.
We plan to continue to leverage and build the brand fortress of our Company by developing and acquiring brands that deliver a unique high value to end users and that can be distributed across multiple trade channels in one or more areas of the world.
Highlights
- Consolidated net sales increased 3% due to increases in Europe and Asia-Pacific of 15% and 23%, respectively, partially offset by a decrease of 5% in the Americas for the current fiscal year compared to the prior fiscal year.
- Changes in foreign currency exchange rates for the current fiscal year compared to the prior fiscal year had a favorable impact on our net sales and net income. The current fiscal year results translated at last fiscal year’s exchange rates would have produced sales of $311.5 million and net income of $26.8 million. Thus, the impact of the change in foreign currency exchange rates year over year positively affected net sales and net income by $5.6 million and $0.8 million, respectively.
- Sales of multi-purpose maintenance products increased 9%, while sales of homecare and cleaning products decreased by 11% for the current fiscal year compared to the prior fiscal year. The increase in multi-purpose maintenance products for the current fiscal year was driven by growth and penetration in Europe and Asia-Pacific.
- The categories in which our homecare and cleaning products are sold are very competitive by nature. For fiscal year 2008, sales of our homecare and cleaning products in the Americas and Europe were down 14% and 5%, respectively, versus the prior fiscal year as a result of lost or decreased distribution, category declines and temporary manufacturing disruptions. The temporary manufacturing disruptions in the U.S., which occurred during the first half of the current fiscal year 2008, resulted in lost sales of approximately $1.0 million. The decreases in the Americas and Europe were partially offset by an increase in sales of homecare and cleaning products in Asia-Pacific of 18% for fiscal year 2008 compared to the prior fiscal year.
- Sales in China increased 66% for fiscal year 2008 compared to the prior fiscal year as the region benefited from the development of direct sales activity, which began during fiscal year 2007. Historically, the Company’s sales in China were through third-party marketing distributors. We plan to continue to increase our direct sales presence in China.
- A significant challenge for the Company continues to be the rising costs of components and raw materials. In recent years, we have incurred continuing cost increases. To combat the rise in costs, we have implemented price increases on certain products during each of the last three fiscal years, and we plan to implement further price increases throughout the world during fiscal year 2009. In addition to price increases, we continue to address the rising costs through innovation and margin enhancement strategies.
- Selling, general and administrative expenses increased 7% during fiscal year 2008 compared to the prior fiscal year primarily due to increased employee-related costs, outbound freight costs, the impact of foreign currency exchange rate changes, professional services costs and other miscellaneous costs.
- During the fourth quarter of fiscal year 2008, the Company recorded an impairment charge of $1.3 million related to its X-14 indefinite-lived intangible asset. The impairment charge was triggered by the decline in future forecasted sales levels of the X-14 brand resulting from management’s fourth quarter strategic decision to withdraw a number of products from the grocery trade channel.
- During fiscal year 2008, we acquired 528,800 shares of our common stock for a total cost of $17.7 million to complete a share buy-back plan that was approved by the Company’s Board of Directors in March 2007.
Results of Operations
Fiscal Year Ended August 31, 2008 Compared to Fiscal Year Ended August 31, 2007
The following table summarizes operating data for our consolidated operations for the fiscal years ended August 31, 2008 and 2007 (in thousands, except percentages and per share amounts):
| Fiscal Year Ended August 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Change from Prior Year |
|||||||||||||||
| 2008 | 2007 | Dollars | Percent | ||||||||||||
| Net sales: Multi-purpose maintenance products |
$ | 235,898 | $ | 216,300 | $ | 19,598 | 9 | % | |||||||
| Homecare and cleaning products | 81,220 | 91,516 | (10,296 | ) | (11 | )% | |||||||||
| Total net sales | 317,118 | 307,816 | 9,302 | 3 | % | ||||||||||
| Cost of products sold | 168,848 | 158,954 | 9,894 | 6 | % | ||||||||||
| Gross profit | 148,270 | 148,862 | (592 | ) | (0 | )% | |||||||||
| Operating expenses | 105,574 | 99,846 | 5,728 | 6 | % | ||||||||||
| Income from operations | $ | 42,696 | $ | 49,016 | $ | (6,320 | ) | (13 | )% | ||||||
| Net income | $ | 27,622 | $ | 31,534 | $ | (3,912 | ) | (12 | )% | ||||||
| Earnings per common share – diluted | $ | 1.64 | $ | 1.83 | $ | (0.19 | ) | (10 | )% | ||||||
Sales Results by Segment
The following table summarizes net sales by segment for the fiscal years ended August 31, 2008 and 2007 (in thousands, except percentages):
| Fiscal Year Ended August 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Change from Prior Year | |||||||||||||||
| 2008 | 2007 | Dollars | Percent | ||||||||||||
| Americas | $ | 176,885 | $ | 187,146 | $ | (10,261 | ) | (5 | )% | ||||||
| Europe | 110,504 | 96,485 | 14,019 | 15 | % | ||||||||||
| Asia-Pacific | 29,729 | 24,185 | 5,544 | 23 | % | ||||||||||
| $ | 317,118 | $ | 307,816 | $ | 9,302 | 3 | % | ||||||||
Americas
The following table summarizes net sales by product line for the Americas segment for the fiscal years ended August 31, 2008 and 2007 (in thousands, except percentages):
| Fiscal Year Ended August 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Change from Prior Year | |||||||||||||||
| 2008 | 2007 | Dollars | Percent | ||||||||||||
| Multi-purpose maintenance products | $ | 111,368 | $ | 111,077 | $ | 291 | 0 | % | |||||||
| Homecare and cleaning products | 65,517 | 76,069 | (10,552 | ) | (14 | )% | |||||||||
| $ | 176,885 | $ | 187,146 | $ | (10,261 | ) | (5 | )% | |||||||
| % of consolidated net sales | 56 | % | 61 | % | |||||||||||
Changes in foreign currency exchange rates for the fiscal year ended August 31, 2008 compared to the prior fiscal year positively impacted sales in the region. Sales for the fiscal year ended August 31, 2008 translated at exchange rates for the prior fiscal year would have produced sales of $175.4 million in this region. Thus, the impact of the change in foreign currency exchange rates year over year positively affected sales for the fiscal year ended August 31, 2008 by approximately $1.5 million, or 0.9%.
Sales of multi-purpose maintenance products in the Americas were essentially flat for the fiscal year ended August 31, 2008 compared to the prior fiscal year due partially to decreased WD-40 sales in the U.S., where sales declined 3%. WD-40 sales in the U.S. declined as customers reduced inventory levels and in-store promotional activities in response to the slowing U.S. economy. In addition, due to supply constraints related to the distribution of the WD-40 Smart Straw, promotional activities associated with the Company’s conversion to the Smart Straw format scheduled for late fiscal year 2008 were delayed until fiscal year 2009. The decrease in WD-40 sales in the U.S. was offset by increased WD-40 sales in Latin America and Canada of 19% and 6%, respectively. Growth in Latin America was primarily due to new distribution and increased promotional activity, while growth in Canada was due to increased promotional activity during the fiscal year ended August 31, 2008 compared to the prior fiscal year.
Sales of homecare and cleaning products in the Americas for the fiscal year ended August 31, 2008 were down $10.6 million, or 14%, compared to the prior fiscal year due primarily to declines in the U.S. where sales decreased across all homecare and cleaning product brands. These declines were the result of several factors, including decreased distribution, declining categories, the effect of competitive factors and temporary manufacturing disruptions, the latter of which resulted in lost sales of over $1.0 million.