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Item 7. Management’s Discussion and Analysis

2022-10-24 compared with 2021-10-22 · 236 added, 224 removed, 206 unchanged (69% of the section changed)

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This MD&A includes the following sections:

Overview, Highlights, Results of Operations, Performance Measures and Non-GAAP Reconciliations, Liquidity and Capital Resources, Critical Accounting Policies, and Recently Issued Accounting Standards.

Overview, Highlights, Results of Operations, Performance Measures and Non-GAAP Reconciliations, Liquidity and Capital Resources, Critical Accounting Policies and Estimates, and Recently Issued Accounting Standards.

The MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and the related notes included in Item 15 of this report.

Use of Non-GAAP Constant Currency

In order to show the impact of changes in foreign currency exchange rates on our results of operations, we have included constant currency disclosures, where necessary, in the Overview and Results of Operations sections which follow.

Constant currency disclosures represent the translation of our current fiscal year revenues and expenses from the functional currencies of our subsidiaries to U.S.

Constant currency disclosures represent the translation of our current fiscal year revenues, expenses and net income from the functional currencies of our subsidiaries to U.S.

Dollars using the exchange rates in effect for the corresponding period of the prior fiscal year.

We use results on a constant currency basis as one of the measures to understand our operating results and evaluate our performance in comparison to prior periods.

Results on a constant currency basis are not in accordance with accounting principles generally accepted in the United States of America (“non-GAAP”) and should be considered in addition to, not as a substitute for, results prepared in accordance with GAAP.

WD-40 Company (“the Company”), based in San Diego, California, is a global marketing organization dedicated to creating positive lasting memories by developing and selling products that solve problems in workshops, factories and homes around the world.

We market a wide range of maintenance products and homecare and cleaning products under the following well-known brands:

WD-40, 3-IN-ONE, GT85, X-14, 2000 Flushes, Carpet Fresh, no vac, Spot Shot, 1001, Lava and Solvol.

Currently included in the WD-40 brand are the WD-40 Multi-Use Product and the WD-40 Specialist and WD-40 BIKE product lines.

We use results on a constant currency basis as one of the measures to understand our operating results and evaluate our performance in comparison to prior periods in order to enhance the visibility of the underlying business trends, excluding the impact of translation arising from foreign currency exchange rate fluctuations.

Management believes this non-GAAP financial measure provides investors with additional financial information that should be considered when assessing our underlying business performance and trends.

However, reference to constant currency basis should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S.

WD-40 Company, based in San Diego, California, is a global marketing organization dedicated to creating positive lasting memories by developing and selling products that solve problems in workshops, factories and homes around the world.

We own a wide range of well-known brands that include maintenance products and homecare and cleaning products:

WD-40 Multi-Use Product, WD-40 Specialist, 3-IN-ONE, GT85, X-14, 2000 Flushes, Carpet Fresh, no vac, Spot Shot, 1001, Lava and Solvol.

Our products are sold in various locations around the world.

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 Consolidated net sales increased $30.7 million, or 6%, for fiscal year 2022 compared to the prior fiscal year.

Changes in foreign currency exchange rates had a favorable impact of $19.7 million on consolidated net sales for fiscal year 2021.

Changes in foreign currency exchange rates had an unfavorable impact of $8.3 million on consolidated net sales for fiscal year 2022.

Thus, on a constant currency basis, net sales would have increased by $39.0 million, or 8%, for fiscal year 2022 compared to the prior fiscal year.

This favorable impact from changes in foreign currency exchange rates mainly came from our EMEA segment , which accounted for 43% of our consolidated sales for the fiscal year ended August 31, 2021.

 Gross profit as a percentage of net sales decreased to 54.0% for fiscal year 2021 compared to 54.6% for the prior fiscal year.

 Consolidated net income increased $9.5 million, or 16%, for fiscal year 2021 compared to the prior fiscal year.

Changes in foreign currency exchange rates had a favorable impact of $3.7 million on consolidated net income for fiscal year 2021.

Thus, on a constant currency basis, net income would have increased by $5.8 million, or 10%, for fiscal year 2021 compared to the prior fiscal year.

 Although consolidated results for the fiscal year ended August 31, 2021 were significantly improved from the last fiscal year due to a variety of factors, the Company’s operations and business continue to be impacted by the COVID-19 pandemic.

See the Impact of COVID-19 on Our Business section which follows for details

This unfavorable impact from changes in foreign currency exchange rates mainly came from our EMEA segment , which accounted for 39% of our consolidated sales for the fiscal year ended August 31, 2022.

 Gross profit as a percentage of net sales decreased to 49.1% for fiscal year 2022 compared to 54.0% for the prior fiscal year, primarily due to ongoing global supply chain challenges, including the increased cost of raw materials and constraints related to the ongoing COVID-19 pandemic.

These ongoing challenges have resulted in increased inflation rates globally.

See the Impact of COVID-19 on Our Business section which follows for details, including actions we are taking in response to these challenges.

 Consolidated net income decreased $2.9 million, or 4%, for fiscal year 2022 compared to the prior fiscal year.

Changes in foreign currency exchange rates had an unfavorable impact of $0.8 million on consolidated net income for fiscal year 2022.

Thus, on a constant currency basis, net income would have decreased by $2.1 million, or 3%, for fiscal year 2022 compared to the prior fiscal year.

 Diluted earnings per common share for fiscal year 2022 were $4.90 versus $5.09 in the prior fiscal year.

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and (vi) expanding and supporting portfolio opportunities that help us grow .

Significant Developments

Impact of COVID-19 on Our Business

In the prior fiscal year 2020, our financial results and operations were negatively impacted for many of our markets by the COVID-19 pandemic, particularly in the third and fourth quarters, during the early stages of the pandemic which began in early calendar year 2020.

We have since been able to reduce the adverse impacts of the COVID-19 pandemic on our business due to the strength of our brands, our increased focus on e-commerce, the global expansion in the distribution of our products, a continued focus on our strategic initiatives, our strong culture and the dedication of our employees .

As a result of these activities and the shift in consumer spending patterns towards products such as ours during the pandemic, we have experienced increased sales period over period in most of our markets during fiscal year 2021.

Sales during this period increased 19%, or 15% on a constant currency basis, when compared to the prior fiscal year primarily due to a higher level of renovation and maintenance activities by end-users during the pandemic, recoveries in many markets due to improvements in public health and safety related to the pandemic, and increased distribution and sales within the e-commerce channel.

We are continuing to actively manage and monitor supply chain and transportation disruptions and constraints that have arisen periodically within all three of our business segments, but particularly in the Americas, during the COVID-19 pandemic.

Some of the challenges that we have experienced include general aerosol production capacity constraints and competition for such capacity by other companies who utilize the same third-party manufacturers for their aerosol production, as well as significant competition for freight resources and increased raw material and other input costs that have resulted due to these constraints.

In addition, supply chains at many companies globally are being strained due to shortages of certain materials and this is impacting the ability of our third-party manufacturers to procure certain of the raw materials needed to manufacture our products.

These challenges have periodically resulted in us not being able to meet the high level of demand for our products by customers and end-users in certain markets, most significantly those markets in our Americas segment where demand for aerosols has significantly outpaced the available production capacity in the region .

We have been actively working on various initiatives in partnership with our third-party manufacturers in order to increase the capacity and flexibility of our supply chain to meet strong end-user demand.

Although we are not able to estimate the degree of the impact or the costs associated with potential future disruptions within our supply chain and distribution networks, we believe that the changes we continue to implement as a result of the pandemic will have a positive lasting impact on our ability to better manage any future disruptions.

However, some of the additional costs resulting from these recent constraints in our supply chain and distribution network are expected to unfavorably impact our cost of goods sold and lower our gross margin in the near-term.

Although several vaccines and treatments are authorized for use against COVID-19, these vaccines and treatments are being produced, distributed and accepted at varying rates globally.

Therefore, uncertainty continues to exist regarding the severity and duration of this rapidly evolving pandemic and it remains difficult for us to estimate the extent to which the COVID-19 pandemic will impact our financial results and operations in future periods.

Also, as social distancing requirements resulting from the COVID-19 pandemic continue to lessen in future periods, it is uncertain how this will impact the high levels of renovation and maintenance activities by end-users in recent periods, which contributed to our strong sales in fiscal year 2021.

If such activities decrease in future periods, this could adversely impact our financial results.

We have continued to follow a variety of measures to promote the safety and security of our employees, support the communities in which we operate and ensure the availability and functioning of our critical infrastructure.

These measures include allowing for or requiring remote working arrangements for employees in some regions and the imposition of travel restrictions.

These policies and initiatives will continue to impact how we operate for as long as they are in effect and our safe, phased office reentry plans for employees will vary by region based on the evolving situation within those regions .

See our risk factors disclosed in Part I―Item 1A, “Risk Factors,” for information on risks associated with pandemics in general and COVID-19 specifically.

Our financial results and operations continue to be impacted by the COVID-19 pandemic that began during our fiscal year 2020.

The ongoing COVID-19 pandemic has impacted global economies, the rate of inflation, supply chains, distribution networks and consumer behavior around the world.

We have experienced both favorable and unfavorable impacts to our financial results and our operations as a result of the direct and indirect effects of the COVID-19 pandemic.

For example, sales have been negatively impacted at varying times in the regions in which we operate due to health and safety restrictions required by local governmental authorities;

such restrictions most recently impacted our Asia-Pacific segment when COVID-19 lockdowns were in place in China sporadically during the second half of fiscal year 2022.

These negative sales impacts since the start of the pandemic have been offset in certain periods by increased demand for our products, particularly in fiscal year 2021, as a result of the shift in consumer spending patterns due to increased renovation and maintenance activities.

However, global supply chain issues have resulted in increased raw material costs and other input costs, higher competition for freight resources, and labor constraints within manufacturing and distribution networks.

These increased costs started to negatively impact our gross margin and financial results in fiscal year 2021.

This inflationary environment worsened during fiscal year 2022 resulting in lower gross margins compared to the corresponding periods of the prior fiscal year.

Some of the increasing supply chain challenges that we have experienced include general aerosol production capacity constraints and competition for such capacity by other companies who also utilize third-party manufacturers for their aerosol production.

Supply chains at many companies globally are being strained due to shortages of certain materials and this is impacting the ability of our third-party manufacturers to procure certain raw materials needed to manufacture our products.

These challenges have periodically resulted in us not being able to meet the high level of demand for our products by customers and end-users in certain markets, most significantly those markets in our Americas segment where demand for aerosols has periodically outpaced the available production capacity in the region.

We are continuing to actively manage periodic supply chain constraints and transportation disruptions.

We have been actively working on various initiatives with our existing third-party manufacturers and we are also identifying and onboarding new third-party manufacturers, particularly in the Americas and EMEA segments.

In addition, we have taken actions to increase inventory levels of certain raw materials and finished goods, given the current challenges within supply chain and increased lead times required by suppliers.

As a result of these initiatives, we have begun to see increases in the capacity and flexibility of our supply chain throughout fiscal year 2022, particularly in the Americas segment.

When we onboard new third-party manufacturers, it comes with inherent risks and in the current economic environment, it also potentially comes with higher costs.

Although we are not able to estimate the costs or impacts associated with potential future supply chain disruptions, we believe that the changes we continue to implement as a result of the pandemic will have a positive lasting impact on our ability to better manage any future disruptions.

However, some of the additional costs resulting from these recent supply chain constraints , including costs resulting from maintenance of higher inventory levels, as well as the inflationary environment that is impacting our raw material costs, are expected to unfavorably impact our cost of goods sold for as long as such conditions exist.

To offset these unfavorable impacts to gross margin, significant price increases have been implemented across all of our markets and geographies in fiscal year 2022 and further price increases may be implemented in certain regions in fiscal year 2023.

Although we are beginning to see the favorable impacts of these price increases, it will take additional time before the full impact of these price increases is reflected in our reported results, especially those in some of our largest markets which we implemented late in the third quarter and in the fourth quarter of fiscal year 2022.

However, it is possible that sales volumes may be impacted unfavorably in the short term as customers and end users adjust to increased sales prices.

The severity and duration of the COVID-19 pandemic and its effects on our supply chain, changes in end-user demand and the current inflationary environment remain uncertain and it is not possible to estimate the extent to which these conditions will impact our financial results and operations in future periods.

We have continued to follow a variety of measures to promote the safety and security of our employees during the pandemic, support the communities in which we operate and ensure the availability and functioning of our critical infrastructure.

These measures have included allowing for or requiring remote working arrangements for employees in some regions and the imposition of various travel restrictions.

In addition, we continue to develop and monitor plans to support a safe working environment for our employees in the various office locations in which we operate around the world.

These plans vary by region based on the evolving situations within those regions.

In connection with these plans, we have put in place our “Work from Where” philosophy to support work-life integration, and enable management and employees to align on where work is completed.

See our risk factors disclosed in Part I―Item 1A, “Risk Factors,” for further information on risks associated with pandemics, including COVID-19.

The Impact of Russian Military Action in Ukraine

On February 24, 2022, Russian forces launched significant military action against Ukraine, which has resulted in conflict and disruption in the region.

In response to this action taken by Russia, the U.S.

and other countries immediately imposed various economic sanctions against Russia.

These geopolitical tensions continued throughout the remainder of the fiscal year and it is uncertain when conditions will improve or whether additional governmental sanctions will be enacted in future periods.

The direct and indirect impacts of this evolving situation and its effect on global economies in future periods are difficult to predict.

We suspended selling our products to markets in Russia and Belarus beginning in March 2022, which had an unfavorable impact on our sales.

In addition, we are currently unable to sell our products in Ukraine due to the disruption in the country.

Our net sales to the regions that are directly impacted were approximately 3% of consolidated net sales for fiscal year 2021 and approximately 4% of consolidated net sales for the first half of fiscal year 2022, prior to the suspension of sales in these regions.

As a result of this event that impacted the second half of our fiscal year, sales in these regions decreased 38% for the fiscal year ended August 31, 2022 compared to the prior fiscal year.

We do not have facilities, third-party manufacturing partners, employees or inventory in these affected regions.

Additionally, the only activities we conducted in these regions prior to the suspension of sales were through local marketing distributors.

Write-offs of previously existing accounts receivable from those marketing distributors affected by the crisis have not been significant to date and are not expected to become significant in future periods.

As a result of this conflict, commodity markets remain subject to heightened levels of uncertainty, especially as they relate to the price of crude oil, which increased significantly in the immediate aftermath of the sanctions against Russia.

Increases in crude oil prices unfavorably impact the cost of our products, as well as the cost of the transportation and distribution of our products.

The length and severity of the recent increases in the price of crude oil are highly unpredictable and may unfavorably impact our cost of goods sold for as long as these conditions exist.

Results of Operations

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Fiscal Year Ended August 31,

Americas Sales

The following table summarizes net sales by product line for the Americas segment (in thousands, except percentages):

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% of consolidated net sales

Sales in the Americas segment, which includes the U.S., Canada and Latin America, increased to $214.6 million, up $14.1 million, or 7%, for the fiscal year ended August 31, 2021 compared to the prior fiscal year.

Changes in foreign currency exchange rates had a favorable impact on sales for the Americas segment from period to period.

Sales for the fiscal year ended August 31, 2021 translated at the exchange rates in effect for the prior fiscal year would have been $213.6 million in the Americas segment.

Thus, on a constant currency basis, sales would have increased by $13.1 million, slightly below 7%, for the fiscal year ended August 31, 2021 compared to the prior fiscal year.

Sales of maintenance products in the Americas segment increased $15.6 million, or 9%, for the fiscal year ended August 31, 2021 compared to the prior fiscal year .

This sales increase was mainly driven by increased sales of maintenance products in Latin America, which were up $11.4 million, or 51%, from period to period.

Sales in Latin America increased primarily due to the transition to the direct marketing model in Mexico.

Early in the third quarter of fiscal year 2020, we shifted away from a distribution model for Mexico where we sold products through a large wholesale customer who then supplied various retail customers, to one where we sell direct to these retail customers.

This resulted in increased sales in Latin America during fiscal year 2021 compared to the prior fiscal year.

In addition, increased demand for our products as a result of a higher level of renovation and maintenance activities exhibited by our end-users during the COVID-19 pandemic resulted in increased sales of maintenance products in Latin America.

Sales were also higher in Canada and the United States and were up $2.2 million, or 20%, and $2.0 million, or 1%, respectively, due to increases in renovation and maintenance activities exhibited by our end-users in both regions.

Although the U.S.

experienced significant challenges meeting customer and end user demand in certain markets in fiscal year 2021 due to supply chain constraints related to competition for aerosol production capacity and distribution resources, it experienced some improvement in its supply chain in the second half of fiscal year 2021.

This resulted in increased sales of maintenance products year over year driven by sales of WD-40 Multi-Use Product, which were up $6.2 million, or 5% .

However, as a result of these supply chain challenges, sales of our WD-40 Specialist and 3-In-One products decreased $2.7 million, or 17%, and $1.7 million, or 19%, respectively, in the United States from period to period.

Sales of homecare and cleaning products in the Americas segment decreased $1.4 million, or 7%, for the fiscal year ended August 31, 2021 compared to the prior fiscal year.

This sales decrease was driven primarily by a decrease in sales of Lava, X-14 and Spot Shot brand products in the U.S., which were down $1.0 million or 33%, $0.7 million or 41%, and $0.5 million or 7%, respectively, from period to period.

These decreases were partially offset by increased sales of the 2000 Flushes brand products, which were up $1.1M or 15%, from period to period.

We experienced a significant increase in sales of most of our homecare and cleaning products during the second half of fiscal year 2020 due to increased demand for such products as a result of the COVID-19 pandemic.

During the second half of fiscal year 2021, we have seen demand for certain of these homecare and cleaning products return to more normal levels due to improvements in public health and safety restrictions related to the pandemic in many regions within the Americas.

In addition, sales levels for our homecare and cleaning products in the Americas were also negatively impacted during the fiscal year ended August 31, 2021 by the challenges in our Americas supply chain and the discontinuation of certain products within these brands.

While each of our homecare and cleaning products have continued to generate positive cash flows, we had experienced decreased or flat sales for many of these products in recent fiscal years prior to the start of the COVID-19 pandemic.

CC Net sales - non-GAAP (1)

(1) Current fiscal year constant currency (“CC”) net sales translated at the foreign currency exchange rates in effect for the corresponding period of the prior fiscal year, compared to prior period actual net sales

Americas Sales – Fiscal Year Ended – August 31, 2022 Compared to August 31, 2021

Net sales of maintenance products in the Americas segment increased due primarily to the following:

sales increased $15.3 million, or 10%, due to increased sales of WD-40 Multi-Use Product and WD-40 Specialist of $7.1 million, or 6%, and $7.7 million, or 51%, respectively.

The increase for WD-40 Multi-Use Product was primarily due to price increases that went into effect during the last twelve months and supply chain improvements we made during fiscal year 2022 which resulted in increased product availability.

These increases were offset by lower demand, partially due to unusually high levels of renovation and maintenance activities exhibited by our end-users during the prior fiscal year 2021 in earlier stages of the COVID-19 pandemic.

WD-40 Specialist sales increased primarily due to significantly higher product availability.

WD-40 Specialist products are sourced at certain third-party manufacturers that were significantly impacted by global supply chain constraints in fiscal year 2021.

However, adjustments we have made in our supply chain to increase the production capacity of our most significant products, including WD-40 Specialist, improved the availability of these products throughout fiscal year 2022.

In addition, WD-40 Specialist also benefited from price increases we implemented over the last 12 months.

 Latin America sales increased $11.8 million, or 35% , primarily due to higher sales throughout many markets in the region, including in our direct market in Mexico.

Sales were favorably impacted by price increases, increased product availability, successful promotional programs, and the continued momentum of achieving new distribution in our direct market in Mexico.

In addition, sales were favorably impacted in the fourth quarter of fiscal year 2022 due to marketing distributors purchasing product in advance of additional price increases which were implemented late in fiscal year 2022.

 Canada sales increased $2.1 million, or 16%, primarily due to demand in the industrial channel in Western Canada as a result of increased activity levels of end-users in the oil industry.

In addition, price increases we implemented over the last twelve months, increased promotional activities and new distribution also had a favorable impact on sales.

Net sales of homecare and cleaning products in the Americas decreased due to the following:

 Challenges in our Americas supply chain, primarily in the U.S., resulted in decreased product availability and lower net sales for most homecare and cleaning product brands.

While we have been actively working to increase the capacity and flexibility of our supply chain in recent periods, the adjustments we have made to date have been more heavily focused on our most significant products, primarily our maintenance products.

 While each of our homecare and cleaning products have continued to generate positive cash flows, we have experienced flat or decreased sales for many of these products in recent periods.

For the Americas segment, 74% of sales came from the U.S., and 26% of sales came from Canada and Latin America combined for the fiscal year ended August 31, 2022 compared to the prior fiscal year when 77% of sales came from the U.S., and 23% of sales came from Canada and Latin America combined .

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% of consolidated net sales

CC Net sales - non-GAAP (2)

(1) While our reporting currency is the U.S.

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subsidiary, the entity in which the EMEA results are generated, is Pound Sterling.

Although the functional currency of this subsidiary is Pound Sterling, approximately 50% of its sales are generated in Euro and 15-20% are generated in U.S.

Although the functional currency of this subsidiary is Pound Sterling, approximately 50% of its sales are generated in Euro and approximately 15% are generated in U.S.

As a result, the Pound Sterling sales and earnings for the EMEA segment can be negatively or positively impacted from period to period upon translation from these currencies depending on whether the Euro and U.S.

Dollar are weakening or strengthening against the Pound Sterling .

Sales in the EMEA segment, which includes Europe, the Middle East, Africa and India, increased to $208.3 million, up $52.0 million, or 33%, for the fiscal year ended August 31, 2021 compared to the prior fiscal year.

Changes in foreign currency exchange rates had a favorable impact on sales for the EMEA segment from period to period.

Sales for the fiscal year ended August 31, 2021 translated at the exchange rates in effect for the prior fiscal year would have been $193.1 million in the EMEA segment.

Thus, on a constant currency basis, sales would have increased by $36.9 million, or 24%, for the fiscal year ended August 31, 2021 compared to the prior fiscal year.

The countries in Europe where we sell through a direct sales force include the U.K., Italy, France, Iberia (which includes Spain and Portugal) and the Germanics sales region (which includes Germany, Austria, Denmark, Switzerland, Belgium and the Netherlands).

Sales in the direct markets increased to $142.2 million, up $32.1 million, or 29%, for the fiscal year ended August 31, 2021 compared to the prior fiscal year primarily due to increased sales of WD-40 Multi-Use Product, WD-40 Specialist and WD-40 Bike of $21.1 million or 28%, $5.3 million or 42% and $1.9 million or 70%, respectively, throughout all of the direct markets.

Additionally, sales of 3-In-One increased $2.7 million or 31% during the period.

These increases in sales were primarily due to increased demand for our products as a result of a higher level of renovation and maintenance activities exhibited by our end-users during the COVID-19 pandemic and the success of promotional programs that were conducted during the second half of fiscal year 2021 to meet the high level of demand.

This increased demand and consumption of our products resulted in increased sales, particularly within the e-commerce channel.

In addition, sales levels were much higher in fiscal year 2021 compared to the prior period due to comparatively severe lockdowns measures that occurred during the prior fiscal year, particularly during the third quarter, which limited many retailers’ ability to participate in promotional activities and sell high volumes of certain products.

Sales from direct markets accounted for 68% of the EMEA segment’s sales for the fiscal year ended August 31, 2021 compared to 70% of the EMEA segment’s sales for the prior fiscal year.

The regions in the EMEA segment where we sell through local distributors include the Middle East, Africa, India, Eastern and Northern Europe.

Sales in the distributor markets increased $19.9 million, or 43%, for the fiscal year ended August 31, 2021 compared to the corresponding period of the prior fiscal year, primarily due to increased sales of the WD-40 Multi-Use Product in Eastern Europe, Northern Europe, the Middle East and India, which were up $5.9 million, $5.8 million, $4.1 million and $3.4 million, respectively.

This increase in sales from period to period was primarily due to recoveries experienced during fiscal year 2021 in distributor markets that previously experienced more severe lockdowns during the second half of fiscal year 2020 due to the COVID-19 pandemic.

During fiscal year 2021, many of these regions experienced improved economic conditions as a result of reductions in COVID-19 related restrictions.

This allowed our marketing distributors to participate in more of our promotional activities and to adjust to more normal levels of inventory for our product, which resulted in increased sales to meet the higher level of demand caused by increases in renovation and maintenance activities by end-users during the pandemic.

The distributor markets accounted for 32% of the EMEA segment’s total sales for the fiscal year ended August 31, 2021, compared to 30% for the prior fiscal year.

(2) Current fiscal year constant currency net sales translated at the foreign currency exchange rates in effect for the corresponding period of the prior fiscal year, compared to prior period actual net sales.

EMEA Sales – Fiscal Year Ended – August 31, 2022 Compared to August 31, 2021

Net sales decreased in the EMEA segment due to the following drivers:

Direct Markets – EMEA (67% of net sales YTD FY2022 vs 68% YTD FY2021)

 Direct markets decreased $4.5 million, or 3%, primarily due to decreased sales in the U.K of $8.4 million, or 21%, offset by increases in our other EMEA direct markets, when combined, of $3.9 million, or 4%.

Sales in our direct markets were unfavorably impacted by the weakening of the Pound Sterling, the functional currency of our U.K subsidiary, against the U.S.

On a constant currency basis, sales would have increased $1.0 million in our direct markets in fiscal year 2022 as compared to the prior fiscal year.

 Decreased sales in the U.K.

direct market were primarily due to a lower level of demand , as renovation, maintenance and homecare and cleaning activities exhibited by our end-users in the U.K.

during the COVID-19 pandemic resulted in particularly strong demand in fiscal year 2021.

In addition, sales were unfavorably impacted by changes in foreign currency exchange rates.

These decreases were partially offset by price increases we have implemented over the last twelve months.

Although these price increases positively impacted sales, the overall impact was partially offset by a lower level of customer orders and promotional programs as customers adjust to these price increases.

 Sales in EMEA direct markets, excluding the U.K., increased from period to period primarily due to new distribution and sales price increases, as well as successful promotional programs that occurred during fiscal year 2022.

These favorable impacts were partially offset by lower demand and reduced renovation and maintenance activities exhibited by our end-users, as discussed above, as well as unfavorable impacts due to changes in foreign currency exchange rates.

Distributor Markets – EMEA (33% of net sales YTD FY2022 vs 32% YTD FY2021)

 Sales increased $0.9 million, or 1%, in EMEA markets wherein we utilize a marketing distributor model (“distributor markets”), in which products are sold to marketing distributors who in turn sell to wholesalers and retailers.

The increase was primarily due to increased sales in India, the Middle East, Poland and the Czech Republic of $2.5 million, $1.5 million, $1.0 million, and $0.9 million, respectively.

The increases in the distributor market sales were significantly offset by decreased sales in Russia and Turkey of $4.8 million and $0.9 million, respectively.

The sales decrease in Russia was primarily due to the ongoing effects of the Russian military action in Ukraine.

See The Impact of Russian Military Action in Ukraine described in the “ Significant Developments ” section above for further information regarding the suspension of our sales to Russian markets.

 Sales were positively impacted in the distributor markets due to strong demand, new distribution and price increases we have implemented over the last twelve months .

Asia-Pacific Sales

The following table summarizes net sales by product line for the Asia-Pacific segment (in thousands, except percentages):

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% of consolidated net sales

Sales in the Asia-Pacific segment, which includes Australia, China and other countries in the Asia region, increased to $65.3 million, up $13.5 million, or 26%, for the fiscal year ended August 31, 2021 compared to the prior fiscal year .

Changes in foreign currency exchange rates had a favorable impact on sales for the Asia-Pacific segment from period to period.

Sales for the fiscal year ended August 31, 2021 translated at the exchange rates in effect for the prior fiscal year would have been $61.7 million in the Asia-Pacific segment.

Thus, on a constant currency basis, sales would have increased by $9.9 million, or 19%, for the fiscal year ended August 31, 2021 compared to the prior fiscal year.

Sales in Asia, which represented 67% of the total sales in the Asia-Pacific segment, increased $9.7 million, or 29%, for the fiscal year ended August 31, 2021 compared to the prior fiscal year.

Sales in the Asia distributor markets increased $5.6 million, or 28%, for the fiscal year ended August 31, 2021 compared to the corresponding period of the prior fiscal year.

These increased sales were primarily due to the easing of COVID-19 lockdown measures in many of the Asia markets during fiscal year 2021 compared to late in fiscal year 2020.

These reduced lockdown measures have positively impacted economic conditions and resulted in increased demand and higher sales in many regions period over period, particularly in the Philippines, South Korea, Indonesia, Malaysia and Hong Kong, during fiscal year 2021 .

Sales in China increased $4.1 million, or 31%, primarily due to improved market conditions as a result of the reduction of COVID-19 lockdown measures compared to the prior fiscal year when the COVID-19 outbreak resulted in significant governmental restrictions on movement and commerce.

Changes in foreign currency exchange rates had a $1.3 million favorable impact on sales in China.

On a constant currency basis, sales would have increased by $2.8 million, or 21%, from period to period.

Sales in Australia increased $3.8 million, or 21%, for the fiscal year ended August 31, 2021 compared to the prior fiscal year due to higher sales of maintenance products, which were up $2.4 million, or 23%, from period to period primarily due to a higher level of renovation and maintenance activities undertaken by our end-users during the COVID-19 pandemic which resulted in increased sales.

In addition, sales of homecare and cleaning products, which were up $1.4 million, or 19%, also increased as a result of higher demand resulting from the COVID-19 pandemic.

Changes in foreign currency exchange rates had a favorable impact on Australian sales.

On a constant currency basis, sales would have increased by $1.5 million, or 8%, from period to period.

Gross profit increased to $263.7 million for the fiscal year ended August 31, 2021 compared to $223.0 million for the prior fiscal year.

As a percentage of net sales, gross profit decreased to 54.0% for the fiscal year ended August 31, 2021 compared to 54.6% for the prior fiscal year.

Gross margin was unfavorably impacted by 0.9 percentage points due to increases in manufacturing costs and higher miscellaneous costs from period to period.

The increased manufacturing costs were primarily driven by higher labor and overhead costs at our third-party manufacturers caused by global supply chain constraints as a result of the COVID-19 pandemic.

These pandemic-related challenges began to significantly impact gross margin, particularly in the Americas segment, starting in the second quarter of fiscal year 2021 and continued throughout the remainder of the fiscal year.

No such challenges existed in the corresponding periods of the prior fiscal year.

Gross margin was also negatively impacted by 0.4 percentage points from period to period due to higher warehousing and in-bound freight costs, primarily in the Americas and EMEA segments.

Changes in foreign currency exchange rates from period to period in the EMEA segment negatively impacted by 0.3 percentage points.

Gross margin was also negatively impacted by 0.1 percentage points from period to period due to increases to advertising, promotional, and other discounts that we give to our customers in all three segments.

CC Net sales - non-GAAP (1)

(1) Current fiscal year constant currency net sales translated at the foreign currency exchange rates in effect for the corresponding period of the prior fiscal year, compared to prior period actual net sales

Asia-Pacific Sales – Fiscal Year Ended – August 31, 2022 Compared to August 31, 2021

Net sales in the Asia-Pacific segment increased due to the following drivers:

 Sales in the Asia distributor markets increased $5.9 million, or 23%, primarily due to the success of promotional programs and the continued easing of COVID-19 lockdown measures throughout the fiscal year, which resulted in increased demand and higher sales in most countries, as well as the timing of customer orders in response to price increases.

 Sales in China increased $2.3 million, or 13%, primarily due to a higher level of promotional activities during the first half of fiscal year 2022, as well as customers purchasing product in advance of anticipated price increases.

These increases in sales were partially offset by decreased sales due to COVID-19 lockdowns in Shanghai and other cities, primarily in the third quarter, that severely limited the production of our products by our third-party manufacturer located in the region.

In addition, these lockdowns and the severe restrictions placed on various regions in China during certain periods in the second half of fiscal year 2022 negatively impacted logistics networks in the country.

 Australia sales increased $0.5 million, or 2%, primarily due to the ongoing growth of the base business, increased promotional activities and price increases that went into effect in February 2022.

Changes in foreign currency exchange rates had an unfavorable impact on sales in Australia.

On a constant currency basis, sales in Australia would have increased $1.5 million, or 7%.

The following general information regarding the timing and nature of our product costs is important when assessing fluctuations in our gross margin from period to period:

 There is often a delay of one quarter or more before changes in costs of raw materials, such as specialty chemicals used in the formulation of our products, impact cost of products sold due to production and inventory life cycles;

 In general, the timing of advertising, promotional and other discounts may cause fluctuations in gross margin from period to period.

The costs associated with certain promotional activities are recorded as a reduction to sales while others are recorded as advertising and sales promotion expenses.

Advertising, promotional and other discounts that are given to our customers are recorded as a reduction to sales, whereas advertising and

sales promotional costs associated with promotional activities that we pay to third parties are recorded as advertising and sales promotion expenses.

These unfavorable impacts to gross margin were partially offset by 0.5 percentage points due to favorable changes in the costs of aerosol cans in the EMEA and Americas segments.

Gross margin was also positively impacted by 0.4 percentage points from period to period due to favorable changes in the costs of petroleum-based specialty chemicals, primarily in the Americas and Asia-Pacific segments.

There is often a delay of one quarter or more before changes in raw material costs impact the cost of products sold due to production and inventory life cycles.

Although the average cost of crude oil and aerosol cans that flowed through our costs of goods sold was lower during fiscal year 2021 compared to the prior fiscal year, such costs increased towards the back half of our fiscal year and began to negatively impact our gross margin, particularly starting in the fourth quarter .

The recent increases in the price of crude oil and aerosol cans that we are seeing in the market are expected to unfavorably impact our cost of goods sold for as long as these costs remain at these higher levels.

We have implemented sales price increases in all three segments from period to period and this positively impacted gross margin by 0.2 percentage points from period to period.

Note that our gross profit and gross margin may not be comparable to those of other consumer product companies, since some of these companies 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 shipment to our customers from our distribution centers and contract manufacturers and include these costs in selling, general and administrative expenses.

These costs totaled $16.5 million and $12.9 million for the fiscal years ended August 31, 2021 and 2020, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses for the fiscal year ended August 31, 2021 increased $23.5 million to $145.5 million from $122.0 million for the prior fiscal year .

As a percentage of net sales, SG&A expenses slightly decreased to 29.8% for the fiscal year ended August 31, 2021 from 29.9% for the prior fiscal year.

The increase in SG&A expenses from period to period was due to a variety of factors, but most significantly due to increased employee-related costs of $16.1 million due to increased incentive compensation accruals and higher stock-based compensation associated with performance share units from period to period resulting from significantly stronger financial results from period to period.

Changes in foreign currency exchange rates from period to period increased SG&A expenses by $4.8 million.

Increases in freight costs associated with higher sales levels as well as carrier price increases due to constraints and limited capacity in the global distribution networks from period to period also increased SG&A expenses by $2.9 million.

In addition, professional services fees increased $2.8 million due to the ongoing implementation of our new information system, increased cloud-based software usage and license fees.

Other miscellaneous expenses also increased $0.5 million from period to period.

These increases to SG&A expenses were offset by a decrease in travel and meeting expenses of $3.6 million from period to period.

Travel and meeting expenses decreased primarily due to continued initiatives to reduce the transmission of COVID-19, including the imposition of business travel restrictions for all employees and the cancellation of all large meetings, such as regional sales meetings and global leadership meetings, in support of social distancing requirements.

Advertising, promotional and other discounts that are given to our customers are recorded as a reduction to sales, whereas advertising and sales promotional costs associated with promotional activities that we pay to third parties are recorded as advertising and sales promotion expenses;

 In the EMEA segment, the majority of our cost of goods sold is denominated in Pound Sterling whereas sales are generated in Pound Sterling, Euro and the U.S.

The strengthening or weakening of the Euro and U.S.

Dollar against the Pound Sterling may result in foreign currency related changes to the gross margin percentage in the EMEA segment from period to period;

 O ur gross profit and gross margin may not be comparable to those of other consumer product companies, since some of these companies 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 shipment to our customers from our distribution centers and contract manufacturers and include these costs in selling, general and administrative expenses.

These costs totaled $18.6 million and $16.5 million for the fiscal year ended August 31, 2022 and 2021, respectively.

 For further information pertaining to recent trends and economic conditions affecting gross margin, please see the section titled “Significant Developments” .

The following table summarizes gross margin and gross profit (in thousands, except percentages):

Fiscal Year Ended August 31,

(1) Basis points (“bps”) change in gross margin.

Gross Margin – Fiscal Year Ended – August 31, 2022 Compared to August 31, 2021

Gross margin decreased 490 bps primarily due to the following unfavorable impacts, partially offset by favorable impacts:

(Unfavorable)/Favorable

Higher costs of specialty chemicals used in the formulation of our products.

Higher costs of aerosol cans.

Higher warehousing, distribution and freight costs associated with supply chain constraints as a result of the ongoing COVID-19 pandemic, the worsening inflationary environment and initiatives to increase production capacity while these constraints exist.

Higher filling fees paid to our third-party contract manufacturers, primarily in the Americas segment.

Changes in foreign currency exchange rates in the EMEA segment.

Sales price increases implemented in all three segments at varying times during the last 12 months.

Selling, General and Administrative (“SG&A”) Expenses

Fiscal Year Ended August 31,

SG&A expenses

% of net sales

SG&A Expenses – Fiscal Year Ended – August 31, 2022 Compared to August 31, 2021

The decrease in SG&A expenses from period to period was primarily due lower employee-related costs, which decreased $11.5 million due to lower incentive compensation accruals of $15.2 million, which were partially offset by higher salary and other employee costs of $3.7 million primarily due to increased headcount and annual compensation increases.

Changes in foreign currency exchange rates from period to period also resulted in a decrease of $2.0 million in SG&A expenses.

These decreases to SG&A expense were partially offset by higher travel and meeting expense, which increased $3.5 million due to the reduction in travel restrictions related to COVID-19, resulting in a higher level of travel and meetings by employees.

Additionally, freight costs increased $2.5 million primarily due to carrier price increases associated with supply chain constraints and limited capacity in the global distribution networks.

Miscellaneous costs also increased $0.7 million from period to period.

We continued our research and development investment, the majority of which is associated with our maintenance products, in support of our focus on innovation and renovation of our products.

Research and development costs for the fiscal years ended August 31, 2022 and 2021 were $5.1 million and $5.6 million, respectively.

Our research and development team 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 our current and prospective suppliers.

Our research and development team engages in consumer research, product development, current product improvements and testing activities.

This team leverages its development capabilities by collaborating with a network of outside resources including our current and prospective third-party contract manufacturers.

The level and types of expenses incurred within research and development can vary from period to period depending upon the types of activities being performed .

Advertising and Sales Promotion Expenses

Advertising and sales promotion expenses for the fiscal year ended August 31, 2021 increased $6.4 million to $28.0 million from $21.6 million for the prior fiscal year.

As a percentage of net sales, these expenses were 5.7% and 5.3% for the fiscal years ended August 31, 2021 and 2020, respectively.

Changes in foreign currency exchange rates had an unfavorable impact of $1.3 million on advertising and sales promotion expenses from period to period.

Advertising and sales promotion expenses for the fiscal year ended August 31, 2021 translated at the exchange rates in effect for the prior fiscal year would have been $26.7 million.

The increase in advertising and sales promotion expenses was due to a higher level of promotional programs and marketing support in all three segments as a result of increased consumer demand and higher sales from period to period.

This higher level of advertising and sales promotion expense was also due to significant increases in spending during the fourth quarter of fiscal year 2021 compared to the corresponding period of our prior fiscal year to support our strategic initiatives and to invest in growth markets .

These increases were partially offset by the decrease of physical marketing and sampling activities from period to period, such as the cancellations of trade shows, due to the continued indirect effects of the COVID-19 pandemic during fiscal year 2021 .

As a percentage of net sales, advertising and sales promotion expenses may fluctuate period to period based upon the type of marketing activities we employ and the period in which the costs are incurred.

Advertising and Sales Promotion (“A&P”) Expenses

Fiscal Year Ended August 31,

% of net sales

A&P Expenses – Fiscal Year Ended – August 31, 2022 Compared to August 31, 2021

Changes in foreign currency exchange rates had a favorable impact of $0.6 million on advertising and sales promotion expenses from period to period.

On a constant currency basis, A&P expenses would have been relatively constant.

As a percentage of net sales, A&P expenses may fluctuate period to period based upon the type of marketing activities we employ and the period in which the costs are incurred.

Total promotional costs recorded as a reduction to sales were $28.1 million and $24.8 million for the fiscal years ended August 31, 2022 and 2021, respectively.

Therefore, our total investment in advertising and sales promotion activities totaled $52.8 million and $42.1 million for the fiscal years ended August 31, 2021 and 2020, respectively .

Amortization of Definite-lived Intangible Assets Expense

Amortization of our definite-lived intangible assets decreased $0.8 million to $1.4 million for the fiscal years ended August 31, 2021, compared to $2.2 million for the prior fiscal year.

This decrease from period to period was primarily due to decreased amortization associated with the 2000 Flushes trade name, which became fully amortized during the third quarter of fiscal year 2020 .

Therefore, our total investment in A&P activities totaled $55.4 million and $52.8 million for the fiscal years ended August 31, 2022 and 2021, respectively .

Income from Operations by Segment

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These expenses are reported separate from our identified segments and are included in Selling, General and Administrative expenses on our consolidated statements of operations.

Income from operations for the Americas segment increased to $51.6 million, up $0.5 million, or 1%, for the fiscal year ended August 31, 2021 compared to the prior fiscal year, primarily due to a $14.1 million increase in sales, significantly offset by higher operating expenses and a lower gross margin.

As a percentage of net sales, gross profit for the Americas segment decreased from 53.2% to 52.0% period over period primarily due to higher third-party manufacturing costs and increased warehousing, distribution and freight costs as a result of supply chain constraints due to the direct and indirect effects of the COVID-19 pandemic.

These unfavorable impacts to gross margin were partially offset by the combined favorable impacts of lower costs of petroleum-based specialty chemicals and aerosol cans from period to period.

Although the average cost of crude oil and aerosol cans that flowed through costs of goods sold was lower during fiscal year 2021 compared to the prior fiscal year in the Americas segment, such costs increased towards the back half of our fiscal year and began to negatively impact gross margin, particularly starting in the fourth quarter.

The increased sales were accompanied by a $4.5 million increase in total operating expenses period over period, primarily due to higher accruals for incentive compensation and stock-based compensation, as well as higher outbound freight costs due to increased sales and higher freight costs in the market from period to period.

In addition, increased advertising and sales promotion expenses impacted operating expenses from period to period.

These increases in operating expenses were partially offset by lower travel and meeting expenses due to initiatives adopted by the Company during the third quarter of fiscal year 2020 that remained in place throughout fiscal year 2021 to reduce the transmission of COVID-19.

In addition, operating expenses were favorably impacted by decreased amortization associated with the 2000 Flushes trade name, which became fully amortized during the third quarter of fiscal year 2020.

Americas Operating Income – Fiscal Year Ended – August 31, 2022 Compared to August 31, 2021

Income from operations for the Americas increased to $54.2 million, up $2.6 million, or 5%, primarily due to a $25.6 million increase in sales and slightly lower operating expenses, significantly offset by a lower gross margin.

Gross margin for the Americas segment decreased from 52.0% to 47.3% primarily due to increases in the costs of specialty chemicals and aerosol cans.

In addition, gross margin was unfavorably impacted by increased warehousing, distribution and freight costs and higher costs at our third-party manufacturers due to supply chain constraints and inflationary impacts, as well as unfavorable changes in sales mix and higher overhead costs .

These unfavorable impacts to gross margin were partially offset by the favorable impacts of price increases that were implemented during the previous 12 months.

Although operating expenses decreased due to lower accrued incentive compensation, these decreases were almost entirely offset by higher outbound freight costs primarily due to higher freight rates, increased headcount and salaries, and higher travel and meeting expenses.

Operating income as a percentage of net sales decreased from 24.0% to 22.6% period over period.

Income from operations for the EMEA segment increased to $53.0 million, up $15.4 million, or 4 1%, for the fiscal year ended August 31, 2021 compared to the prior fiscal year, primarily due a $52.0 million increase in sales, partially offset by higher operating expenses and a lower gross margin.

As a percentage of net sales, gross profit for the EMEA segment decreased from 56.4% to 55.6% period over period primarily due to unfavorable changes in third-party manufacturing costs and unfavorable

changes in foreign currency exchange rates, as well as increases in warehousing, distribution and freight costs from period to period.

These unfavorable impacts to gross margin were partially offset by the favorable impacts of decreased costs of aerosol cans, as well as sales price increases from period to period.

Although the average cost of aerosol cans that flowed through our costs of goods sold was lower during fiscal year 2021 compared to the prior fiscal year in the EMEA segment, such costs increased towards the back half of our fiscal year and began to negatively impact gross margin, particularly starting in the fourth quarter.

The increased sales were accompanied by a $12.2 million increase in total operating expenses period over period, primarily due to higher accruals for incentive compensation and stock-based compensation, as well as increased advertising and sales promotion expenses and increased outbound freight costs due to higher sales from period to period.

Operating income as a percentage of net sales increased from 24.1% to 25.5% period over period.

Income from operations for the Asia-Pacific segment increased to $19.1 million, up $4.1 million, or 28%, for the fiscal year ended August 31, 2021 compared to the prior fiscal year, primarily due to a $13.5 million increase in sales and a higher gross margin, which were partially offset by higher operating expenses.

As a percentage of net sales, gross profit for the Asia-Pacific segment increased from 54.5% to 55.8% period over period primarily due to favorable changes in both sales mix and market mix and lower costs of petroleum-based specialty chemicals that flowed through our costs of goods sold during fiscal year 2021.

Although the average cost of crude oil that flowed through our costs of goods sold was lower during fiscal year 2021 compared to the prior fiscal year in the Asia-Pacific segment, such costs have increased towards the back half of our fiscal year and began to negatively impact gross margin, particularly starting in the fourth quarter.

These favorable impacts to gross margin during fiscal year 2021 were slightly offset by the unfavorable impact of increased costs of aerosol cans from period to period.

The increased sales were accompanied by a $4.0 million increase in total operating expenses period over period, primarily due to higher accruals for incentive compensation and other employee costs, as well as a higher level of advertising and sales promotion expenses from period to period.

EMEA Operating Income – Fiscal Year Ended – August 31, 2022 Compared to August 31, 2021

Income from operations for the EMEA segment decreased to $42.1 million, down $10.9 million, or 21%, primarily due to a lower gross margin and a $3.6 million decrease in sales, partially offset by a decrease in operating expenses.

Gross margin for the EMEA segment decreased from 55.6% to 49.6% primarily due to increases in the costs of specialty chemicals and aerosol cans.

In addition, gross margin was also unfavorably impacted by fluctuations in exchange rates as well as increased warehousing, distribution and freight costs due to supply chain constraints and inflationary impacts.

These unfavorable impacts to gross margin were partially offset by price increases that were implemented over the last twelve months.

Operating expenses decreased $3.2 million primarily due to lower accrued incentive compensation, partially offset by increased headcount and salaries, higher travel and meeting expenses and higher outbound freight costs .

Operating income as a percentage of net sales decreased from 25.5% to 20.5% period over period.

Asia-Pacific Operating Income – Fiscal Year Ended – August 31, 2022 Compared to August 31, 2021

Income from operations for the Asia-Pacific segment increased to $22.6 million, up $3.5 million, or 18%, primarily due to a $8.6 million increase in sales, partially offset by a lower gross margin.

Gross margin for the Asia-Pacific segment decreased from 55.8% to 53.6% primarily due to combined unfavorable impacts of increases to the cost of specialty chemicals and aerosol cans .

These unfavorable impacts to gross margin were partially offset by price increases that were implemented during the previous 12 months .

Operating income as a percentage of net sales increased from 29.3% to 30.6% period over period.

4 unchanged sentences

Interest expense

Other income (expense), net

Other (expense) income, net

Provision for income taxes

2 unchanged sentences

Interest Expense

Interest expense remained relatively constant at $2.4 million for both the fiscal years ended August 31, 2021 and 2020.

Other Income (Expense), Net

Other income (expense), net was not significant for the fiscal year ended 2021 compared to $0.6 million in other income for the corresponding period of the prior fiscal year .

This change from period to period was primarily due to net foreign currency gains during fiscal year 2020 as a result of fluctuations in the foreign currency exchange rates for both the U.S.

Interest expense increased primarily due to an increased weighted average outstanding balance on our revolving credit facility and higher interest rates related to draws on this credit facility.

Other (Expense) Income, Net

Other (expense) income, net was $0.6 million for the fiscal year ended 2022 and was not significant for the corresponding period of the prior fiscal year .

The $0.6 million change from period to period was primarily due to net foreign currency losses during fiscal year 2022 as a result of fluctuations in the foreign currency exchange rates for both the U.S.

Dollar and the Euro against the Pound Sterling.

1 unchanged sentence

The provision for income taxes was 19.9% of income before income taxes for the fiscal year ended August 31, 2022 compared to 18.8% for the prior fiscal year.

The decrease in the effective income tax rate from period to period was primarily due to an increase in excess tax benefits from settlements of stock-based equity awards, as well as increased benefits from earnings from foreign operations .

The increase in the effective income tax rate from period to period was primarily due to an increase in non-deductible performance-based compensation expense .

Net income was $67.3 million, or $4.90 per common share on a fully diluted basis, for fiscal year 2022 compared to $70.2 million, or $5.09 per common share on a fully diluted basis, for the prior fiscal year.

Changes in foreign currency exchange rates year over year had a favorable impact of $3.7 million on net income for fiscal year 2021.

Changes in foreign currency exchange rates year over year had an unfavorable impact of $0.8 million on net income for fiscal year 2022.

Thus, on a constant currency basis, net income for fiscal year 2022 would have been $68.1 million.

6 unchanged sentences

These performance measures are part of our current 55/30/25 business model, which includes gross margin, cost of doing business, and earnings before interest, income taxes, depreciation and amortization (“EBITDA”), the latter two of which are non-GAAP performance measures.

Cost of doing business is defined as total operating expenses less amortization of definite-lived intangible assets, impairment charges related to intangible assets and depreciation in operating departments, and EBITDA is defined as net income (loss) before interest, income taxes, depreciation and amortization.

We target our gross margin to be at or above 55% of net sales, our cost of doing business to be at 30% of net sales, and our EBITDA to be above 25% of net sales.

Cost of doing business is defined as total operating expenses less amortization of definite-lived intangible assets, impairment charges related to intangible assets and depreciation in operating departments, and EBITDA is defined as net income before interest, income taxes, depreciation and amortization.

We target our gross margin to be at or above 55% of net sales, our cost of doing business to be at 30% of net sales, and our EBITDA to be at or above 25% of net sales.

Results for these performance measures may vary from period to period depending on various factors, including economic conditions and our level of investment in activities for the future such as those related to quality assurance, regulatory compliance, and intellectual property protection in order to safeguard our WD-40 brand.

The targets for these performance measures are long-term in nature, particularly those for cost of doing business and EBITDA, and we expect to make progress towards achieving them over time as our revenues increase.

Our financial results and operations continue to be impacted by increased global supply chain constraints and an inflationary environment, both of which have significantly lowered our gross margin percentage over the last twelve months and moved us well below our target of 55%.

Although we have been implementing strategic sales price increases across all segments at varying times in response to increased costs, it will take time before the full impact of these sales price increases are reflected in our reported results.

In addition, it is difficult to determine how long these supply chain and inflationary conditions will exist and if they will worsen or improve over time.

However, the targets for gross margin and these other performance measures are long-term in nature and we expect to make progress towards achieving them over time.

For more detailed information pertaining to recent trends and economic conditions and the actions we are taking to respond to them, please see the section titled “Significant Developments”.

The following table summarizes the results of these performance measures:

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We use the performance measures above to establish financial goals and to gain an understanding of our comparative performance from period to period.

We believe that these measures provide our shareholders with additional insights into the Company’s results of operations and how we run our business.

The non-GAAP financial measures are supplemental in nature and should not be considered in isolation or as alternatives to net income, income from operations or other financial information prepared in accordance with GAAP as indicators of the Company’s performance or operations.

We believe that these measures provide our shareholders with additional insights into how we run our business.

We believe these measures also provide investors with additional financial information that should be considered when assessing our underlying business performance and trends.

These non-GAAP financial measures are supplemental in nature and should not be considered in isolation or as alternatives to net income, income from operations or other financial information prepared in accordance with GAAP as indicators of our performance or operations.

The use of any non-GAAP measure may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

18 unchanged sentences

Our financial condition and liquidity remain strong.

Net cash provided by operations was $84.7 million for fiscal year 2021 compared to $72.7 million for fiscal year 2020.

Although there continues to be a certain level of uncertainty related to the impact of the current COVID-19 pandemic on our future results, we believe our efficient business model and the steps that we have taken leave us positioned to manage our business through this crisis as it continues to unfold.

We continue to manage all aspects of our business including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies and developing new opportunities for growth

Our principal sources of liquidity are our existing cash and cash equivalents, as well as cash generated from operations and cash currently available from our existing unsecured Credit Agreement with Bank of America.

Although there continues to be uncertainty related to the ongoing and anticipated impact of the current COVID-19 pandemic on our future results, we believe our efficient business model and the steps that we have taken position us to manage our business through the situation as it continues to develop.

We continue to manage all aspects of our business including, but not limited to, monitoring our liquidity, the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies and developing new opportunities for growth

Our principal sources of liquidity are cash generated from operations and cash currently available from our existing unsecured revolving credit facility under the Credit Agreement with Bank of America.

We use proceeds of the revolving credit facility primarily for our general working capital needs.

The Company also holds borrowings under a Note Purchase and Private Shelf Agreement.

We also hold borrowings under the Note Agreement.

See Note 8 – Debt for additional information on these agreements.

Included in Note 8 – Debt is information on the Credit Agreement that we amended with Bank of America on September 30, 2020, and a third amendment to the Note Agreement.

In the first quarter of fiscal year 2021 we refinanced existing draws under our Credit Agreement in the United States through the issuance of new notes under the Note Agreement in the amount of $52.0 million .

We have historically maintained a balance of outstanding draws on our line of credit in U.S.

Dollars in the Americas segment, as well as in Euros and Pound Sterling in the EMEA segment.

We have historically held a balance of outstanding draws on our line of credit in either U.S.

Dollars in the Americas segment or in Euros and Pound Sterling in the EMEA segment.

Euro and Pound Sterling denominated draws will fluctuate in U.S.

Dollars from period to period due to changes in foreign currency exchange rates.

During the first quarter of fiscal year 2021, we repaid $50.0 million of our U.S.

borrowings outstanding under our line of credit using $52.0 million in proceeds that we received on September 30, 2020 from the issuance and sale of the Series B and C Notes which mature in November 2027 and 2030, respectively.

Our remaining outstanding balance under our line of credit is denominated completely in Euros and Pound Sterling as of August 31, 2021.

We regularly convert many of our draws on our line of credit to new draws with new maturity dates and interest rates.

1 unchanged sentence

Outstanding draws for which we have both the ability and intent to refinance with successive short-term borrowings for a period of at least twelve months are classified as long-term.

August 31, 2021, we had a $46.5 million balance of outstanding draws on the revolving credit facility, all of which was classified as long-term.

In addition, we paid $0.8 million in principal payments on our Series A Notes during fiscal year 2021, which had an outstanding balance of $17.2 million as of August 31, 2021.

There were no other letters of credit outstanding or restrictions on the amount available on our line of credit or notes.

As of August 31, 2022, $39.5 million of the outstanding balance under our line of credit resides in the EMEA segment and is denominated in Euros and Pound Sterling and classified long-term, whereas $38.4 million is denominated in U.S.

Dollar and classified as short-term.

In the United States, we held $68.4 million in fixed rate long-term borrowings as of August 31, 2022, consisting of senior notes under our Note Agreement.

We paid $0.8 million in principal payments on our Series A Notes during fiscal year 2022.

There were no other letters of credit outstanding or restrictions on the

amount available on our line of credit or notes.

Per the terms of both the Note Agreement and the Credit Agreement, our consolidated leverage ratio cannot be greater than three and a half to one and our consolidated interest coverage ratio cannot be less than three to one.

See Note 8 – Debt for additional information on these financial covenants.

At August 31, 2021, we were in compliance with all debt covenants.

We continue to monitor our compliance with all debt covenants and, at the present time, we believe that the likelihood of being unable to satisfy these covenants is remote.

We believe that our future cash from domestic and international operations, together with our access to funds available under our unsecured revolving credit facility, will provide adequate resources to fund both short-term and long-term operating requirements, capital expenditures, dividend payments, acquisitions, new business development activities and share repurchases.

On April 8, 2020, we suspended repurchases under our most recent share buy-back plan, which subsequently expired on August 31, 2020, in order to preserve cash while we continued to monitor the long-term impacts of the COVID-19 pandemic.

Subsequent to the end of fiscal year 2021 on October 12, 2021, our Board of Directors approved a new share buy-back plan.

Under the plan, which will become effective on November 1, 2021, we are authorized to acquire up to $75.0 million of our outstanding shares through August 31, 2023.

At August 31, 2022, we were in compliance with all material debt covenants.

We continue to monitor our compliance with all debt covenants and, at the present time, we believe that the likelihood of being unable to satisfy all material covenants is remote.

At August 31, 2022, we had a total of $37.8 million in cash and cash equivalents.

We do not foresee any ongoing issues with repaying our borrowings and we closely monitor the use of this credit facility.

We believe that our future cash from domestic and international operations, together with our access to funds available under our unsecured revolving credit facility, will provide adequate resources to fund short-term and long-term operating requirements, capital expenditures, dividend payments, acquisitions, new business development activities and share repurchases.

On October 12, 2021, our Board of Directors approved a new share repurchase plan.

Under the plan, which became effective on November 1, 2021, we are authorized to acquire up to $75.0 million of our outstanding shares through August 31, 2023, of which $45.8 million remains available for the repurchase of common shares as of August 31, 2022.

The following table summarizes our cash flows by category for the periods presented (in thousands):

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Net cash provided by operating activities

Net cash provided by (used in) investing activities

Net cash used in investing activities

Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Operating Activities

Net cash provided by operating activities increased $12.0 million to $84.7 million for fiscal year 2021 from $72.7 million for fiscal year 2020.

Net cash provided by operating activities decreased $82.1 million to $2.6 million for fiscal year 2022.

Cash flows from operating activities depend heavily on operating performance and changes in working capital.

Our primary source of operating cash flows for fiscal year ended August 31, 2021 was net income of $70.2 million, which increased $9.5 million from period to period.

In addition, differences in adjustments to reconcile net income to cash increased net cash provided by operating activities by $1.9 million primarily due to increases in stock-based compensation from period to period which were partially offset by various other adjustments.

Although the changes in our working capital did not have a significant impact on net cash provided by operating activities in total, there were various increases and decreases of items within working capital from period to period.

Changes in working capital that decreased cash were primarily attributable to increases to inventory and increases in trade and other accounts receivable as a result of significantly increased sales from period to period and increases in other assets, driven by the ongoing implementation of our new information system.

These changes in working capital were almost completely offset by increases in accounts payable in the Americas and EMEA segments due to higher levels of production and the timing of payments to vendors from period to period as well as increases in accrued payroll and related expenses during fiscal year 2021 primarily due to significantly higher accruals for incentive compensation from period to period.

Our primary source of operating cash flows for fiscal year ended August 31, 2022 was net income of $67.3 million, which decreased $2.9 million from period to period.

Changes in our working capital significantly decreased net cash provided by operating activities, primarily due to increases in inventory, most significantly in the Americas segment but also in the EMEA segment.

This increase in inventory was due to actions we took to stock certain raw materials and finished goods to increase the flexibility and capacity within our supply chain, as well as the higher carrying value of inventory due to higher raw material costs and other input costs from period to period.

Net cash provided by operating activities was further decreased due to higher earned incentive payouts in the first quarter of fiscal year 2022 compared to the same period of the prior fiscal year as well as lower level of earned incentive accruals from period to period.

Additionally, net cash provided by operating activities decreased from period to period due to lower increases in accounts payable and accrued liabilities, as well as increases in other assets primarily due to capitalized costs related to the new cloud-based ERP system which we are currently implementing.

Investing Activities

Net cash used in investing activities decreased $4.4 million to $14.5 million for fiscal year 2021 compared to $18.9 million for fiscal year 2020, primarily due to decreased capital expenditures.

Capital expenditures decreased by $4.2 million primarily due to the renovations and equipping of the Company’s office building in Milton Keynes, England that were completed in the first quarter of fiscal year 2020 and a lower level of manufacturing-related capital expenditures within the U.K.

and the United States from period to period.

Capital expenditures during fiscal year 2021 were primarily related to manufacturing equipment which is currently under construction and will be located at our third-party manufacturers in the United States and the United Kingdom once completed .

Net cash used in investing activities decreased $6.8 million to $7.7 million for fiscal year 2022, primarily due to a lower level of manufacturing-related capital expenditures within the United States and the United Kingdom.

Some of this manufacturing equipment is still under construction and will be located at our third-party manufacturers in the United States and the United Kingdom once completed.

Financing Activities

Net cash used in financing activities increased $14.1 million to $40.8 million for fiscal year 2021 from $26.7 million f or fiscal year 2020.

This change was primarily due to $80.0 million in net proceeds that we drew under our line of credit in March 2020 in response to the COVID-19 pandemic with no comparable event occurring in fiscal year 2021.

In the first quarter of fiscal year 2021, we repaid $50.0 million of such borrowings outstanding under our line of credit using $52.0 million in proceeds that we received from the issuance and sale of senior notes during the quarter.

This net borrowing activity resulted in a $2.0 million cash inflow during the period compared to $29.6 million in net proceeds on our line of credit in the prior fiscal year.

Net cash used in financing activities decreased $2.8 million to $38.0 million for fiscal year 2022.

This change was primarily due to the resumption of treasury stock purchases in November 2021, resulting in increased treasury stock purchases of $29.2 million.

In addition, increases in dividends paid to our shareholders of $3.8 million and increases in shares withheld to cover taxes on conversion of equity rewards of $0.8 million resulted in higher cash outflows from period to period.

Offsetting these increases in cash outflows was a decrease in treasury stock repurchases due to the suspension of such repurchases beginning in the third quarter of fiscal year 2020, which resulted in a decrease in cash outflows of $16.8 million from period to period.

These increases in cash outflows from period to period were significantly offset by $36.4 million in higher proceeds provided by the Company’s debt agreements, primarily due to $38.4 million in proceeds from our line of credit in fiscal year 2022.

In fiscal year 2021, we repaid $50.0 million of borrowings outstanding under our line of credit using $52.0 million in proceeds that we received from the issuance and sale of senior notes.

This net borrowing activity resulted in a $2.0 million cash inflow during fiscal year 2021 related to our debt agreements compared to the $38.4 million in net proceeds during fiscal year 2022.

Effect of Exchange Rate Changes

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The net effect of exchange rate changes on cash and cash equivalents, when expressed in U.S.

Dollar terms was not significant in fiscal year 2021, while such changes resulted in an increase in cash of $2.2 million in fiscal year 2020 and a decrease in cash of $2.8 million for fiscal year 2019.

Dollar terms was a decrease in cash of $5.0 million in fiscal year 2022, while such changes were not significant in fiscal year 2021 and resulted in an increase in cash of $2.2 million for fiscal year 2020.

These changes were primarily due to fluctuations in various foreign currency exchange rates from period to period, but the majority is related to the fluctuations in the Pound Sterling against the U.S.

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We have historically paid regular quarterly cash dividends on our common stock.

In March 2021, the Board of Directors declared a 7% increase in the regular quarterly cash dividend, increasing it from $0.67 per share to $0.72 per share.

In December 2021, the Board of Directors declared an 8% increase in the regular quarterly cash dividend, increasing it from $0.72 per share to $0.78 per share.

On October 11, 2022, our Board of Directors declared a cash dividend of $0.78 per share payable on October 31, 2022 to shareholders of record on October 21, 2022.

Our ability to pay dividends could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of Regulation S-K.

Contractual Obligations

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The contract manufacturers maintain title and control of certain raw materials and components, materials utilized in finished products, and of the finished products themselves until shipment to our customers or third-party distribution centers in accordance with agreed upon shipment terms.

Although we have definitive minimum purchase obligations in the contract terms with certain of our contract

manufacturers, when such obligations have been included, they have either been immaterial or the minimum amounts have been such that they are well below the volume of goods that we have historically purchased.

Although we have definitive minimum purchase obligations in the contract terms with certain of our contract manufacturers, when such obligations have been included, they have either been immaterial or the minimum amounts have been such that they are well below the volume of goods that we have historically purchased.

In addition, in the ordinary course of business, we communicate supply needs to our contract manufacturers based on orders and short-term projections, ranging from two to six months.

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For additional details on our uncertain tax positions, refer to the information set forth in Part IV—Item 15, “Exhibits, Financial Statement Schedules” Note 13 – Income Taxes.

We have estimated that up to $0.3 million of unrecognized tax benefits related to income tax positions may be affected by the resolution of tax examinations or expiring statutes of limitation within the next twelve months .

Critical Accounting Policies

We have estimated that up to $0.2 million of

unrecognized tax benefits related to income tax positions may be affected by the resolution of tax examinations or expiring statutes of limitation within the next twelve months .

Critical Accounting Policies and Estimates

Our results of operations and financial condition, as reflected in our consolidated financial statements, have been prepared in accordance with accounting principles generally accepted in the United States of America.

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Generally, unremitted earnings of our foreign subsidiaries are not considered to be indefinitely reinvested.

However, there are exceptions regarding our newly formed subsidiary in Mexico as well as specific statutory remittance restrictions imposed on our China subsidiary.

However, there is an exception regarding specific statutory remittance restrictions imposed on our China subsidiary.

Costs associated with repatriating unremitted foreign earnings, including U.S.

state income taxes and foreign withholding taxes, are immaterial to our consolidated financial statements.

For additional information on income tax matters, see Part IV—Item 15, “Exhibits, Financial Statement Schedules” Note 13 — Income Taxes, included in this report.

Impairment of Definite-Lived Intangible Assets

We assess for potential impairments to our long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and/or its estimated remaining useful life may no longer be appropriate.

Any required impairment loss would be measured as the amount by which the asset’s carrying amount exceeds its fair value, which is the amount at which the asset could be bought or sold in a current transaction between willing market participants and would be recorded as a reduction in the carrying amount of the related asset and a charge to results of operations.

An impairment loss would be recognized when the sum of the expected future undiscounted net cash flows is less than the carrying amount of the asset.

There were no indicators of potential impairment identified as a result of our review of events and circumstances related to our existing definite-lived intangible assets for the periods ended August 31, 2021, 2020 or 2019.

In addition to our quarterly evaluation of events and circumstances to assess whether definite-lived intangible assets have been impaired, we also periodically perform quantitative analyses to support these conclusions and determine the sensitivity of such estimates.

The majority of our $7.2 million in definite-lived intangible assets as of August 31, 2021 are related to certain brands of our homecare and cleaning products.

Although sales of certain of these products have declined in recent periods, according to our most recent analysis performed during fiscal year 2021, sales declines would have to significantly exceed these products’ recent historical trends in order to trigger an impairment, which we do not currently anticipate in future periods.

Our review of events and circumstances included consideration of the ongoing COVID-19 pandemic.

For additional

information on income tax matters, see Part IV—Item 15, “Exhibits, Financial Statement Schedules” Note 13 — Income Taxes, included in this report.

Recently Issued Accounting Standards

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis