What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-01-09 compared with 2022-07-07 · 207 added, 288 removed, 221 unchanged (69% of the section changed)

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The following information is provided as a supplement to, and should be read in conjunction with, the unaudited condensed consolidated financial statements and notes thereto included in Part I ― Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2022, which was filed with the Securities and Exchange Commission (“SEC”) on October 24, 2022.

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 generally accepted accounting principles 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.

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 U.S.

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.

Forward-Looking Statements

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We undertake no obligation to revise or update any forward-looking statements.

Actual events or results may differ materially from those projected in forward-looking statements due to various factors, including, but not limited to, those identified in Part I ― Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2021, and in our Quarterly Reports on Form 10-Q, which may be updated from time to time.

Actual events or results may differ materially from those projected in forward-looking statements due to various factors, including, but not limited to, those identified in Part I ― Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2022, and in Part II — Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q.

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 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®, 2000 Flushes®, no vac®, 1001®, Spot Shot®, Lava®, Solvol®, X-14® and Carpet Fresh®.

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

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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We sell our products primarily through warehouse club stores, hardware stores, automotive parts outlets, industrial distributors and suppliers, mass retail and home center stores, value retailers, grocery stores, online retailers, farm supply, sport retailers, and independent bike dealers.

The following summarizes the financial and operational highlights for our business during the nine months ended May 31, 2022:

 Consolidated net sales increased $15.5 million, or 4%, for the nine months ended May 31, 2022 compared to the corresponding period of the prior fiscal year.

Changes in foreign currency exchange rates had an unfavorable impact of $1.6 million on consolidated net sales for the nine months ended May 31, 2022 compared to the corresponding period of the prior fiscal year.

Thus, on a constant currency basis, net sales would have increased by $17.1 million, or 5%, from period to period.

This unfavorable impact from changes in foreign currency exchange rates mainly came from our EMEA segment, which accounted for 42% of our consolidated sales for the nine months ended May 31, 2022.

 Gross profit as a percentage of net sales decreased to 49.7% for the nine months ended May 31, 2022 compared to 54.9% for the corresponding period of 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.

The following summarizes the financial and operational highlights for our business during the three months ended November 30, 2022:

 Consolidated net sales decreased $9.8 million, or 7%, compared to the corresponding period of the prior fiscal year.

Increases in the average selling price of our products positively impacted net sales by approximately $26.3 million from period to period, primarily due to sales price increases implemented across all segments over the last twelve months.

These favorable impacts were more than offset by decreases in sales volume, which unfavorably impacted net sales by approximately $26.6 million from period to period.

Changes to net sales attributable to volumes and average selling price of our products are impacted by differences in sales mix related to products, markets and distribution channels from period to period.

In addition, changes in foreign currency exchange rates from period to period had an unfavorable impact of $9.5 million on consolidated net sales for the first quarter of fiscal year 2023.

On a constant currency basis, net sales would have decreased less than 1% from period to period.

This unfavorable impact from changes in foreign currency exchange rates mainly came from our EMEA segment, which accounted for 33% of our consolidated sales for the three months ended November 30, 2022.

 Gross profit as a percentage of net sales increased to 51.4% compared to 50.8% for the corresponding period of the prior fiscal year primarily due to the positive impacts of price increases implemented over the last twelve months, offset by ongoing global supply chain challenges, including the increased cost of raw materials and constraints that began during the 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 the Company is taking in response to these challenges.

 Consolidated net income decreased $9.3 million, or 15%, for the nine months ended May 31, 2022 compared to the corresponding period of the prior fiscal year.

Changes in foreign currency exchange rates did not have a significant impact on consolidated net income for the nine months ended May 31, 2022 compared to the corresponding period of the prior fiscal year.

 Diluted earnings per common share for the nine months ended May 31, 2022 were $3.82 versus $4.48 in the prior fiscal year period.

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

 Consolidated net income decreased $4.6 million, or 25%, compared to the corresponding period of the prior fiscal year.

Changes in foreign currency exchange rates from period to period had an unfavorable impact of $1.2 million on consolidated net income for the first quarter of fiscal year 2023.

Thus, on a constant currency basis, net income would have decreased $3.3 million, or 18%, from period to period.

 Diluted earnings per common share were $1.02 versus $1.34 in the prior fiscal year period.

Our strategic initiatives and the areas where we will continue to focus our time, talent and resources in future periods include:

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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 and such restrictions most recently impacted our Asia-Pacific segment when COVID-19 lockdowns were in place in China during most of our third quarter.

These negative sales impacts since the start of the pandemic had often been offset by increased demand for our products as a result of the shift in consumer spending patterns due to increased renovation and maintenance activities compared to periods before the pandemic.

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 has worsened during the first nine months of 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 utilize the same 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

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 supply chain constraints and transportation disruptions that have arisen periodically.

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, particularly in the second and third quarters of this fiscal year for our 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.

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 continue to sporadically impact various regions, particularly in certain countries within our Asia-Pacific segment.

Fluctuations in global economic conditions may impact end-user demand for our products in certain regions at varying times and are difficult to predict.

These changes in demand may significantly impact our financial results from period to period .

In addition, 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.

This inflationary environment started to negatively impact our gross margin and financial results in fiscal year 2021 and these trends have continued to increase our cost of goods sold since that time.

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

These challenges have periodically resulted in us not being able to meet demand for our products by customers and end-users in certain markets at various times.

We have continued to actively manage periodic supply chain constraints and transportation disruptions and implement various initiatives with our existing third-party manufacturers as well as 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, components and finished goods, given the current challenges within supply chain and increased lead times required by suppliers.

As a result of these initiatives, we experienced increases in the capacity and flexibility of our supply chain throughout fiscal year 2022 and this has improved further as we have started our fiscal year 2023, particularly in the Americas segment.

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 higher inventory levels being maintained, 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 continue to be implemented across all of our markets and geographies.

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 or are scheduled to implement in the fourth quarter.

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, as well as the current inflationary environment, remain uncertain and it is difficult for us to estimate the extent to which these conditions will impact our financial results and operations in future periods.

It is also uncertain how changes in the pandemic or inflationary conditions will impact the increased levels of renovation and maintenance activities that we have seen by end-users in various periods since the start of the pandemic.

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 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,” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2021 , which was filed with the SEC on October 22, 2021 for information on risks associated with pandemics in general and COVID-19 specifically.

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 the unfavorable impact of increased costs to our gross margin, price increases have been implemented across all of our markets and geographies in fiscal year 2022 and in the first fiscal quarter of 2023 and we intend to implement further price increases in certain regions for the remainder of fiscal year 2023.

Although we are seeing the favorable impacts of these price increases, sales volumes are often 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.

See our risk factors disclosed in Part I―Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2022, which was filed with the SEC on October 24, 2022 for further information on risks associated with pandemics, including COVID-19.

The Impact of Russian Military Action in Ukraine

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and other countries immediately imposed various economic sanctions against Russia.

These geopolitical tensions continued during our third quarter and it is uncertain when conditions will improve or whether additional governmental sanctions will be enacted in future periods.

These geopolitical tensions continued throughout the first quarter of fiscal year 2023 and this event has continued to impact global economies, particularly in Europe.

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 has and will continue to have an unfavorable impact on our sales as long as that suspension continues.

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.

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 were temporarily unable to sell our products in Ukraine due to the disruption in the country, but sales to Ukraine resumed in the first quarter of fiscal year 2023.

Prior to the suspension of sales in Russia and Belarus, our net sales to these two regions were approximately 3% to 4% of consolidated net sales, the majority of which is related to Russia.

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

Additionally, the only activities we conduct in these regions are sales through local marketing distributors.

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.

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 exis t.

Results of Operations

Three and Nine Months Ended May 31, 2022 Compared to Three and Nine Months Ended May 31, 2021

Three Months Ended November 30, 2022 Compared to Three Months Ended November 30, 2021

Operating Items

The following table summarizes operating data for our consolidated operations ( in thousands, except percentages and per share amounts):

Three Months Ended May 31,

Nine Months Ended May 31,

Three Months Ended November 30,

Maintenance products

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The following table summarizes net sales by segment (in thousands, except percentages):

Three Months Ended May 31,

Nine Months Ended May 31,

Three Months Ended November 30,

Americas Sales

The following table summarizes net sales by product line for the Americas segment, which includes the U.S., Canada and Latin America (in thousands, except percentages):

Three Months Ended May 31,

Nine Months Ended May 31,

Three Months Ended November 30,

Maintenance products

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CC Net sales – non-GAAP (1)

Currency impact on current period – non-GAAP

(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 – Three Months Ended – May 31, 2022 Compared to May 31, 2021

Increases in the average selling price of our products positively impacted net sales by approximately $13.6 million in the Americas segment, primarily due to sales price increases implemented over the last twelve months.

These favorable impacts were offset by a decrease in sales volume which unfavorably impacted net sales by approximately $11.7 million from period to period.

Changes to net sales attributable to volumes and the average selling price of our products are impacted by differences in sales mix related to products, markets and distribution channels from period to period.

Americas Sales – Three Months Ended – November 30, 2022 Compared to November 30, 2021

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

 United States (“U.S.”) sales remained relatively constant at $42.9 million, primarily due to increased sales of WD-40 Specialist, which was almost completely offset by decreased sales of WD-40 Multi-Use Product.

WD-40 Specialist products are sourced at certain third-party manufacturers that were significantly impacted by global supply chain constraints in the comparative period.

 United States (“U.S.”) sales increased $5.6 million, or 15%, primarily due to increased sales of WD-40 Specialist, WD-40 Multi-Use Product and 3-IN-ONE products.

WD-40 Specialist products are sourced at certain third-party manufacturers that were impacted significantly by global supply chain constraints in the prior period.

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 from period to period.

WD-40 Specialist sales increased by $2.8 million, or 78%, primarily due to these improvements, as well as price increases implemented during the last twelve months.

Although WD-40 Multi-Use Product sales also benefited from price increases and improved supply chain capacity from period to period, sales decreased by $3.0 million, or 8%, primarily due to the timing of customer orders and a temporarily lower level of promotional programs after certain sales price increases that occurred in the third quarter of fiscal year 2022.

 Latin America sales increased $0.9 million, or 10%, primarily due to the continued momentum from the shift in the Mexico market from a distributor model to the direct model that we made in late fiscal year 2020.

This shift favorably impacted sales period over period as a result of new distribution and the continued growth of the base business.

In addition, sales were favorably impacted by sales price increases that went into effect in November 2021.

These increases were partially offset by decreased sales of 3-IN-ONE products due to supply chain constraints.

 Canada sales increased $0.9 million, or 23%, primarily due to increased promotional activities and a higher level of demand in the industrial channel in Western Canada as a result of increased activity levels of end-users in the oil industry.

Sales were also positively impacted by sales price increases that went into effect in April 2022.

Net sales of HCCP brands in the Americas decreased primarily 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 HCCP 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 slightly decreased sales for many of these products in recent periods.

For the three months ended May 31, 2022, 75% of sales came from the U.S., and 25% of sales came from Canada and Latin America combined compared to the distribution for the three months ended May 31, 2021 when 77% of sales came from the U.S., and 23% of sales came from Canada and Latin America.

Americas Sales – Nine Months Ended – May 31, 2022 Compared to May 31, 2021

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

sales increased $7.2 million, or 7%, due to increased sales of WD-40 Specialist and WD-40 Multi-Use Product of $4.7 million, or 43%, and $3.2 million, or 4%, respectively.

These increases for both products were primarily due to price increases that went into effect in during the last twelve months and supply chain improvements which resulted in increased product availability, particularly for WD-40 Specialist, as discussed above in the section for the three months ended May 31, 2022 .

These increases were slightly offset by lower 3-IN-ONE sales of $0.7 million, or 13%, due to decreased product availability as a result of the supply chain constraints we have experienced at our third-party manufacturers who produce this product.

 Latin America sales increased $6.4 million, or 24% , primarily due to higher sales throughout many markets in the region, including in our direct market in Mexico.

In addition, sales were favorably impacted by price increases, increased product availability, successful promotional programs and the continued momentum in our direct market in Mexico, as discussed above in the section for the three months ended May 31, 2022.

 Canada sales increased $0.8 million, or 8%, 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 also had a favorable impact on sales.

Net sales of HCCP in the Americas decreased due to the following:

 Challenges in our Americas supply chain negatively impacted net sales for these products, as discussed above in the section for the three months ended May 31, 2022.

For the nine months ended May 31, 2022, 73% of sales came from the U.S., and 27% of sales came from Canada and Latin America combined, compared to the distribution for the nine months ended May 31, 2021 when 76% of sales came from the U.S., and 24% of sales came from Canada and Latin America.

WD-40 Specialist sales increased by $2.9 million, or 85%, primarily due to these improvements that resulted in increased sales volume, as well as price increases implemented during the last twelve months.

WD-40 Multi-Use Product sales increased by $1.6 million, or 5%, primarily due to price increases from period to period, as well as our improved supply chain capacity.

Although these price increases and improved supply chain capacity positively impacted sales of WD-40 Multi-Use Product, the overall impact was significantly offset by a lower level of customer orders and promotional programs as customers adjust to the price increases, which resulted in decreased sales volume.

3-IN-ONE product sales increased by $1.1 million, or 71%, primarily due to improved supply chain capacity and price increases from period to period.

 Latin America sales decreased $4.1 million, or 31%, primarily due to the timing of marketing distributor orders from period to period.

Sales were unfavorably impacted due to marketing distributors purchasing a higher level of our product in advance of a price increase that went into effect in late fiscal year 2022, which lowered purchases from these customers during the first quarter of fiscal year 2023.

Conversely, sales in the first quarter of fiscal year 2022 were favorably impacted due to significant purchase activity in advance of an earlier price increase that went into effect in November 2021.

 Canada sales remained relatively consistent period over period primarily due to the favorable impact of price increases which were mostly offset by unfavorable changes in foreign currency exchanges rates and weaker economic conditions that resulted in lower levels of demand.

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

 The favorable impact of price increases and the improvement in the capacity and flexibility of our supply chain, which were partially offset by lower demand for certain brands from period to period.

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

For the three months ended November 30, 2022, 78% of sales came from the U.S., and 22% of sales came from Canada and Latin America combined compared to the distribution for the three months ended November 30, 2021 when 70% of sales came from the U.S., and 30% of sales came from Canada and Latin America.

The following table summarizes net sales by product line for the EMEA segment, which includes Europe, the Middle East, Africa and India (in thousands, except percentages):

Three Months Ended May 31,

Nine Months Ended May 31,

Three Months Ended November 30,

Maintenance products

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CC Net sales – non-GAAP (2)

(1) While the Company’s reporting currency is the U.S.

Currency impact on current period – non-GAAP

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

Dollar, the functional currency of our U.K.

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.

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(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 .

Increases in the average selling price of our products positively impacted net sales by approximately $9.5 million in the EMEA segment, primarily due to sales price increases implemented over the last twelve months.

These favorable impacts were more than offset by decreases in sales volume, which unfavorably impacted net sales by approximately $18.3 million from period to period.

Of this $18.3 million impact attributable to volume declines, $5.0 million relates to our suspension of sales in Russia discussed below.

In addition, changes in foreign currency exchange rates had an unfavorable impact of $8.0 million on net sales for the first quarter of fiscal year 2023.

The countries and regions 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 Austria, Denmark, Switzerland, Belgium and the Netherlands).

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

EMEA Sales – Three Months Ended – May 31, 2022 Compared to May 31, 2021

EMEA Sales – Three Months Ended – November 30, 2022 Compared to November 30, 2021

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

Direct Markets – EMEA (70% of net sales QTD FY2023 vs 63% QTD FY2022)

 Direct market sales decreased $5.3 million, or 13%, primarily due to decreased sales of maintenance products in the United Kingdom, France and Iberia of $2.2 million, $2.0 million and $0.5 million, respectively.

 These decreases were primarily due to reduced demand compared to the prior period, as renovation and maintenance activities exhibited by our end-users during the COVID-19 pandemic resulted in particularly strong demand in the third quarter of fiscal year 2021 in certain regions of EMEA .

 Although price increases implemented over the last 12 months positively impacted sales from period to period, timing of customer orders and promotional programs as customers adjust to price increases had an unfavorable impact on sales from period to period.

 Sales in our direct markets were unfavorably impacted by $1.8 million due to the weakening of the Pound Sterling, the functional currency of our U.K.

 Sales in our direct markets decreased $7.7 million, or 21%, primarily due to unfavorable changes in foreign currency exchanges rates of $5.7 million as a result of the weakening of the Pound Sterling, the functional currency of our U.K.

subsidiary, against the U.S.

Distributor Markets – EMEA (29% of net sales QTD FY2022 vs 31% QTD FY2021)

 Distributor market sales decreased $3.8 million, or 21%, primarily due to decreased sales of maintenance products in Russia, Poland, and Turkey, which were down $3.6 million, $0.9 million and $0.7 million, respectively.

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

 Direct market sales also decreased due to lower levels of customer orders of maintenance products in France, Iberia, Germany, Italy and the United Kingdom, partially offset by the favorable impact of price increases from period to period.

 In most direct markets, these volume decreases were due to reduced demand compared to the prior period, driven by weaker market and economic conditions as well as a lower level of customer orders and promotional programs as customers adjust to these price increases implemented in late fiscal year 2022 and first quarter of fiscal year 2023.

Marketing Distributors – EMEA (30% of net sales QTD FY2023 vs 37% QTD FY2022)

 Distributor market sales decreased $9.1 million, or 43%, 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.

 Sales in Russia decreased $5.0 million from period to period 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.

 These decreases were partially offset by sales increases in Saudi Arabia of $1.4 million, primarily due to strong demand and increased distribution in the region.

In addition, sales were favorably impacted in various other distributor markets due to price increases we have implemented over the last twelve months.

However, some of the positive impacts of these price increases were offset due to changes in the timing of customer orders from our distributors as customers adjust to price increases .

EMEA Sales – Nine Months Ended – May 31, 2022 Compared to May 31, 2021

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

Direct Markets – EMEA (66% of net sales YTD FY2022 vs 67% YTD FY2021)

 Direct markets decreased $2.2 million, or 2%, primarily due to decreased sales in the U.K of $5.0 million, or 17%, offset by increases in our other EMEA direct markets, when combined, of $2.8 million, or 4%.

 Decreased sales in the U.K.

direct market were primarily due to a lower level of demand in the U.K.

during the third quarter of fiscal year 2022, as discussed above in the section for the three months ended May 31, 2022.

The decreased sales from period to period were also due to the lower level of promotional programs that were conducted during the first half of fiscal year 2022.

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

 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 the first half of fiscal year 2022.

These favorable impacts were partially offset by unfavorable impacts during the third quarter, as discussed above in the section for the three months ended May 31, 2022 .

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

 In addition, sales in our distributor markets were unfavorably impacted by $2.3 million due to the weakening of the Pound Sterling, the functional currency of our U.K.

subsidiary, against the U.S.

In addition, sales in our direct markets were unfavorably impacted by the weakening of the Euro against the Pound Sterling from period to period for sales generated in our Euro-based direct markets.

Distributor Markets – EMEA (34% of net sales YTD FY2022 vs 33% YTD FY2021)

 Distributor market sales were relatively constant, primarily due to increased sales of the WD-40 Multi-Use Product in Northern Europe, India, and the Middle East of $1.4 million, $0.9 million and $0.4 million, respectively, which were almost completely offset by decreased sales to Russia of $2.2 million.

 Sales were positively impacted in the distributor markets due to new distribution, price increases, and distributors purchasing product in advance such price increases during the first half of fiscal year 2022.

These favorable impacts were partially offset by unfavorable impacts as discussed above in the section for the three months ended May 31, 2022 , particularly those related to decreased sales in Russia due to the ongoing impacts of the Russian military action in Ukraine .

However, this unfavorable impact to sales in distributor markets was partially offset by the favorable impacts of certain sales denominated in currencies other than the Pound Sterling, which strengthened against the Pound Sterling from period to period.

 Sales in distributor markets also decreased due to lower sales volumes of maintenance products in most distributor markets, particularly Poland and India, which were down $1.1 million and $1.0 million, respectively.

 The decreases in distributor market sales were partially offset by price increases implemented over the last twelve months.

Asia-Pacific Sales

The following table summarizes net sales by product line for the Asia-Pacific segment, which includes Australia, China and other countries in the Asia region (in thousands, except percentages):

Three Months Ended May 31,

Nine Months Ended May 31,

Three Months Ended November 30,

Maintenance products

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CC Net sales – non-GAAP (1)

Currency impact on current period – non-GAAP

Asia-Pacific Sales – Three Months Ended – May 31, 2022 Compared to May 31, 2021

Net sales in the Asia-Pacific segment decreased primarily due to the following:

 Asia distributor markets sales decreased $4.1 million, or 56%, primarily due to lower sales of WD-40 Multi-Use Product as a result of supply chain disruptions caused by the COVID-19 pandemic.

Products for our Asia distributor markets are sourced from a third-party manufacturer located in Shanghai, China.

In late March 2022, Shanghai instituted severe lockdown measures as a result of a surge in COVID-19 cases in the country.

This lockdown remained in effect for the remainder of the third quarter and resulted in our third-party packager and logistics partners in Shanghai being unable to manufacture or distribute products for our Asia distributor market in April and May.

 China sales decreased $1.1 million, or 25%, also due to the lockdown in Shanghai during the quarter that severely limited the production of our products by our third-party manufacturer located in the region from late March 2022 through the end of the third quarter.

In addition, this lockdown and the severe restrictions placed on various regions in China during the third quarter of fiscal year 2022 negatively impacted logistics networks in the country.

 Australia sales increased $0.2 million, or 4%, 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 $0.7 million, or 12%.

Asia-Pacific Sales – Nine Months Ended – May 31, 2022 Compared to May 31, 2021

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

 Sales in China increased $3.3 million, or 26%, 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 the various unfavorable impacts discussed above in the section for the three months ended May 31, 2022.

 Sales in the Asia distributor markets increased $2.1 million, or 11%, primarily due to the success of promotional programs and the easing of COVID-19 lockdown measures during the first half of the fiscal year, which resulted in increased demand and higher sales in most countries.

These increases were partially offset by the various unfavorable impacts discussed above in the section for the three months ended May 31, 2022.

 Australia sales increased $0.3 million, or 2%, primarily due to the items discussed above in the section for the three months ended May 31, 2022.

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

Increases in the average selling price of our products positively impacted net sales by approximately $3.1 million in the Asia-Pacific segment, primarily due to sales price increases implemented over the last twelve months.

In addition, an increase in sales volume favorably impacted net sales by approximately $3.5 million from period to period.

Changes in foreign currency exchange rates had an unfavorable impact of $1.4 million on net sales for the first quarter of fiscal year 2023.

Asia-Pacific Sales – Three Months Ended – November 30, 2022 Compared to November 30, 2021

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

 Asia distributor markets sales increased $3.8 million, or 41%, primarily due to higher sales of WD-40 Multi-Use Product as a result of successful promotional programs and the continued easing of COVID-19 lockdown measures, which resulted in increased demand and higher sales in most countries in the region.

In addition, net sales increased due to the favorable impact of price increases from period to period, as well as customers purchasing product in advance of anticipated additional price increases.

 China sales increased $1.3 million, or 22%, due to the success of promotional programs in the first quarter of fiscal year 2023.

Sales were also favorably impacted by the timing of shipments related to customer orders placed in late fiscal year 2022 resulting from a successful promotional program in that fiscal year;

certain products related to these orders were not shipped until early fiscal year 2023.

In addition, net sales increased due to the favorable impacts of price increases.

These favorable impacts were partially offset by unfavorable changes in foreign currency exchange rates.

On a constant currency basis, sales in China would have increased $2.0 million, or 34%.

 Australia sales remained consistent from period to period, as the favorable impact of price increases was almost completely offset by the unfavorable impact of changes in foreign currency exchange rates and decreased sales levels of homecare and cleaning products.

On a constant currency basis, sales in Australia would have increased $0.7 million, or 12%.

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 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;

 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.

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 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 $4.7 million and $4.9 million for the three months ended May 31, 2022 and 2021, respectively, and $14.2 million and $12.5 million for the nine months ended May 31, 2022 and 2021, respectively.

These costs totaled $4.2 million and $4.8 million for the three months ended November 30, 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):

Three Months Ended May 31,

Nine Months Ended May 31,

Three Months Ended November 30,

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

Gross Margin - Three Months Ended – May 31, 2022 Compared to May 31, 2021

Gross margin decreased 540 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.

Gross Margin - Three Months Ended – November 30, 2022 Compared to November 30, 2021

Gross margin increased 60 bps primarily due to the following favorable impacts, partially offset by unfavorable impacts:

Favorable/(Unfavorable)

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

Changes in foreign currency exchange rates in the EMEA segment.

Favorable sales mix and other miscellaneous mix impacts

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.

Higher miscellaneous costs associated with inventory, unfavorable sales market mix, and higher other miscellaneous input costs.

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

Gross Margin - Nine Months Ended – May 31, 2022 Compared to May 31, 2021

Gross margin decreased 520 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.

Increases in miscellaneous other input costs.

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

Higher costs of aerosol cans.

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

Three Months Ended May 31,

Nine Months Ended May 31,

Three Months Ended November 30,

(in thousands)

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% of net sales

SG&A Expenses – Three Months Ended – May 31, 2022 Compared to May 31, 2021

The decrease in SG&A expenses was primarily due to lower employee-related costs, which decreased by $5.5 million due to lower incentive compensation accruals of $6.7 million, which were slightly offset by higher salary and other employee costs of $1.2 million primarily due to increased headcount and annual compensation increases.

The lower incentive compensation accruals are based on our most current forecast for fiscal year 2022 and we are projecting a lower level of achievement than the prior year for such compensation.

Changes in foreign currency exchange rates from period to period also resulted in a decrease of $0.9 million in SG&A expenses.

These decreases were partially offset by increases in travel and meeting expense of $1.6 million due to the reduction in travel restrictions related to COVID-19, resulting in a higher level of travel and meetings by employees, as well as higher miscellaneous costs of $0.3 million.

SG&A Expenses – Nine Months Ended – May 31, 2022 Compared to May 31, 2021

The decrease in SG&A expenses from period to period was primarily due lower employee-related costs, which decreased $7.0 million due to lower incentive compensation accruals of $10.7 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 $0.4 million in SG&A expenses.

These decreases to SG&A expense were partially offset by to higher travel and meeting expense, which increased $2.6 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 $1.8 million due to higher sales levels as well as carrier price increases associated with supply chain constraints and limited capacity in the global distribution networks.

Miscellaneous costs also increased $0.3 million from period to period.

Note that 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 were $1.4 million and $1.3 million for the three months ended May 31, 2022 and 2021, respectively, and $4.0 million and $4.2 million for the nine months ended May 31, 2022 and 2021, respectively.

SG&A Expenses – Three Months Ended – November 30, 2022 Compared to November 30, 2021

The increase in SG&A expenses was primarily due to increases in travel and meeting expense of $2.1 million due to the reduction in travel restrictions related to COVID-19 from period to period, resulting in a higher level of travel and meetings by employees.

In addition, employee-related costs increased by $1.0 million due increased headcount and annual compensation increases, which was partially offset by lower incentive compensation accruals.

In addition, professional services fees increased $0.8 million in support of our strategic initiatives in the Americas and EMEA segments, as well as the ongoing implementation of our new information system and 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 partially offset by changes in foreign currency exchange rates from period to period resulting in a decrease of $2.8 million in SG&A expenses.

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 were $1.3 million for both the three months ended November 30, 2022 and 2021.

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.

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 (“A&P”) Expenses

Three Months Ended May 31,

Nine Months Ended May 31,

Three Months Ended November 30,

(in thousands)

% of net sales

A&P Expenses – Three Months Ended – May 31, 2022 Compared to May 31, 2021

A&P Expenses – Three Months Ended – November 30, 2022 Compared to November 30, 2021

Although A&P expenses decreased from period to period, A&P expenses as a percentage of net sales remained relatively constant.

The decrease in A&P expenses was primarily due to a lower level of promotional programs and marketing support as a result of lower sales from period to period.

Changes in foreign currency exchange rates did not have a significant impact on A&P expenses period over period.

The decrease in A&P expenses was primarily due to favorable changes in foreign currency exchange currency from period to period of $0.5 million primarily in the EMEA segment.

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 was $7.5 million and $6.7 million for three months ended May 31, 2022 and 2021, respectively.

Therefore, our total investment in A&P activities totaled $13.5 million and $13.4 million for the three months ended May 31, 2022 and 2021, respectively.

A&P Expenses – Nine Months Ended – May 31, 2022 Compared to May 31, 2021

A&P expenses decreased primarily due to a lower level of promotional programs and marketing support in the Americas segment which were partially offset by a higher level of such activities in the EMEA segment.

Changes in foreign currency exchange rates did not have a significant impact on A&P expenses period over period.

Total promotional costs recorded as a reduction to sales was $20.8 million and $18.4 million for nine months ended May 31, 2022 and 2021, respectively.

Therefore, our total investment in A&P activities totaled $38.0 million and $36.1 million for the nine months ended May 31, 2022 and 2021, respectively.

Total promotional costs recorded as a reduction to sales was $6.5 million and $6.9 million for three months ended November 30, 2022 and 2021, respectively.

Therefore, our total investment in A&P activities totaled $11.8 million and $12.5 million for the three months ended November 30, 2022 and 2021, respectively.

Income from Operations by Segment

The following table summarizes income from operations by segment (in thousands, except percentages):

Three Months Ended May 31,

Nine Months Ended May 31,

Three Months Ended November 30,

Unallocated corporate

Americas Operating Income – Three Months Ended – May 31, 2022 Compared to May 31, 2021

Income from operations for the Americas decreased to $13.4 million, down $2.2 million, or 14%, due to a lower gross margin, partially offset by a $1.4 million increase in sales and lower operating expenses.

Gross margin for the Americas segment decreased from 51.2% to 45.8% primarily due to increases in the costs of petroleum-based specialty chemicals and higher warehousing, distribution and freight costs.

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

These unfavorable impacts to gross margin were partially offset by the favorable impacts of price increases that were implemented during the first nine months of fiscal year 2022.

Operating expenses decreased period over period primarily due to lower accrued incentive compensation, partially offset by increased headcount and salaries, as well as higher travel and meeting expenses.

Operating income as a percentage of net sales decreased from 26.0% to 21.7% period over period .

Americas Operating Income – Nine Months Ended – May 31, 2022 Compared to May 31, 2021

Income from operations for the Americas decreased to $36.6 million, down $4.0 million, or 10%, primarily due to a lower gross margin, partially offset by a $11.9 million increase in sales.

Gross margin for the Americas segment decreased from 52.9% to 47.0% primarily due to increases in the costs of petroleum-based specialty chemicals.

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.

Gross margin was also unfavorably impacted by unfavorable changes in sales mix and increases in the discounts that we provide to our customers .

These unfavorable impacts to gross margin were partially offset by the favorable impacts of price increases that were implemented during the first nine months of fiscal year 2022.

Operating expenses remained relatively constant period over period.

Although operating expenses increased due to higher outbound freight costs as a result of increased sales and higher freight rates, increased headcount and salaries, and higher travel and meeting expenses, these increases were almost entirely offset by lower accrued incentive compensation and lower A&P expenses.

Operating income as a percentage of net sales decreased from 25.3% to 21.2% period over period .

EMEA Operating Income – Three Months Ended – May 31, 2022 Compared to May 31, 2021

Americas Operating Income – Three Months Ended – November 30, 2022 Compared to November 30, 2021

Income from operations for the Americas increased to $12.8 million, up $0.8 million, or 6%, due to a $1.7 million increase in sales and a higher gross margin, partially offset by higher operating expenses.

Gross margin for the Americas segment increased from 48.7% to 50.7% primarily due to the favorable impact of price increases over the last twelve months, offset by increases in the costs of petroleum-based specialty chemicals, aerosol cans and filling fees at our third-party manufacturers due to inflationary impacts.

In addition, higher warehousing, distribution and freight costs unfavorably impacted gross margin.

The increase in operating expenses from period to period was primarily due to higher travel and meeting expense, as well as higher salary and other employee costs, offset by lower incentive compensation accruals.

Operating income as a percentage of net sales increased from 21.3% to 22.0% period over perio d .

EMEA Operating Income – Three Months Ended – November 30, 2022 Compared to November 30, 2021

Income from operations for the EMEA segment decreased to $6.3 million, down $7.9 million, or 56%, primarily due to a $16.8 million decrease in sales and lower gross margin, partially offset by a decrease in operating expenses.

Gross margin for the EMEA segment decreased from 54.4% to 49.0% primarily due to the combined unfavorable impacts of increased costs of petroleum-based specialty chemicals and aerosol cans.

In addition, gross margin was also unfavorably impacted by 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 $2.5 million primarily due to lower accrued incentive compensation, partially offset by higher travel and meeting expenses during the period.

Operating income as a percentage of net sales decreased from 26.1% to 20.5% period over period .

EMEA Operating Income – Nine Months Ended – May 31, 2022 Compared to May 31, 2021

Income from operations for the EMEA segment decreased to $38.1 million, down $9.1 million, or 19%, primarily due to a lower gross margin and a $2.1 million decrease in sales, partially offset by a decrease in operating expenses.

Gross margin for the EMEA segment decreased from 56.5% to 50.9% primarily due to the combined unfavorable impacts of increased costs of petroleum-based specialty chemicals and aerosol cans.

In addition, gross margin was also unfavorably impacted by 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, as well as decreases to advertising, promotional, and other discounts given to our customers from period to period.

Operating expenses decreased $1.0 million primarily due to lower accrued incentive compensation, partially offset by increased headcount and salaries, higher travel and meeting expenses, higher A&P expenses and higher outbound freight costs .

Operating income as a percentage of net sales decreased from 28.9% to 23.6% period over period .

Asia-Pacific Operating Income – Three Months Ended – May 31, 2022 Compared to May 31, 2021

Income from operations for the Asia-Pacific segment decreased to $3.1 million, down $2.1 million, or 41%, primarily due to a $5.0 million decrease in sales and a lower gross margin, partially offset by a decrease in operating expenses.

Gross margin for the Asia-Pacific segment decreased from 55.3% to 51.8% primarily due to the combined unfavorable impacts of increases to the cost of petroleum-based specialty chemicals and aerosol cans as well as increases in advertising, promotional and other discounts given to our customers .

These unfavorable impacts to gross margin were partially offset by price increases that were implemented during the first nine months of fiscal year 2022 .

Operating expenses decreased $1.1 million from period to period primarily due lower A&P expenses and lower miscellaneous expenses.

Gross margin for the EMEA segment decreased from 51.5% to 50.6% primarily due to the combined unfavorable impacts of fluctuations in foreign currency exchange rates and the increased costs of aerosol cans and petroleum-based specialty chemicals.

In addition, gross margin was also unfavorably impacted by increases in discounts provided to our customers, as well as increased warehousing, distribution and freight costs, due to supply chain constraints and inflationary impacts.

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

Operating expenses decreased $1.1 million primarily due to lower A&P expenses, and lower accrued incentive compensation, as well as lower freight costs as a result of lower sales volumes.

Operating income as a percentage of net sales decreased from 24.7% to 15.4% period over period .

Asia-Pacific Operating Income – Nine Months Ended – May 31, 2022 Compared to May 31, 2021

Income from operations for the Asia-Pacific segment increased to $18.3 million, up $2.8 million, or 18%, primarily due to a $5.8 million increase in sales and decreased operating expenses, partially offset by a lower gross margin.

Gross margin for the Asia-Pacific segment decreased from 56.3% to 54.4% primarily due to combined unfavorable impacts of increases to the cost of petroleum-based specialty chemicals and aerosol cans, as well as increases in advertising, promotional and other discounts given to our customers .

These unfavorable impacts to gross margin were partially offset by price increases that were implemented during the first nine months of fiscal year 2022 .

Operating expenses decreased $0.6 million from period to period primarily due to lower accrued incentive compensation and lower miscellaneous expenses from period to period .

Asia-Pacific Operating Income – Three Months Ended – November 30, 2022 Compared to November 30, 2021

Income from operations for the Asia-Pacific segment increased to $9.6 million, up $2.3 million, or 32%, primarily due to a $5.2 million increase in sales, partially offset by an increase in operating expenses.

Gross margin for the Asia-Pacific segment decreased slightly from 54.5% to 54.4% primarily due to the unfavorable impacts of increases to the cost of petroleum-based specialty chemicals and fluctuations in foreign currency exchange rates .

These unfavorable impacts to gross margin were almost completely offset by price increases that were implemented during the last twelve months .

Operating expenses increased $0.5 million from period to period primarily due to higher A&P expenses and higher miscellaneous expenses.

Operating income as a percentage of net sales increased from 34.9% to 36.8% period over period.

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The following table summarizes non-operating income and expenses for our consolidated operations (in thousands):

Three Months Ended May 31,

Nine Months Ended May 31,

Three Months Ended November 30,

Interest income

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Interest Income

Interest income was not significant during the three and nine months ended May 31, 2022 and 2021.

Interest income was not significant during the three months ended November 30, 2022 and 2021.

Interest Expense

Interest expense was relatively constant during the three and nine months ended May 31, 2022 and 2021 .

Interest expense increased $0.5 million for the three months ended November 30, 2022 compared to the corresponding period of the prior fiscal year primarily due to higher aggregate outstanding balances on our revolving credit agreement from period over period and changes in interest rates.

Other Income (Expense), Net

Other income (expense), net was not significant during the three and nine months ended May 31, 2022 and 2021 .

Other income (expense), net changed by $0.6 million for the nine months ended May 31, 2022 compared to the corresponding period of the prior fiscal year primarily due to fluctuations in the foreign currency exchange rates for both the U.S.

Other income (expense), net was not significant during the three months ended November 30, 2022 and 2021 .

Other income (expense), net changed by $0.5 million for the three months ended November 30, 2022 compared to the corresponding period of the prior fiscal year primarily due to fluctuations in the foreign currency exchange rates for both the U.S.

Dollar and the Euro against the Pound Sterling.

Provision for Income Taxes

The provision for income taxes was 20.9% and 21.9% of income before income taxes for the three months ended May 31, 2022 and 2021, respectively.

The decrease in the effective income tax rate from period to period was primarily due changes in the expected timing and amounts of executive compensation in future periods which impacts deductible expenses.

The provision for income taxes was 20.2% and 17.7% of income before income taxes for the nine months ended May 31, 2022 and 2021, respectively.

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

Net income was $14.5 million, or $1.07 per common share on a fully diluted basis, for the three months ended May 31, 2022 compared to $21.0 million, or $1.52 per common share on a fully diluted basis, for the corresponding period of the prior fiscal year.

Changes in foreign currency exchange rates had an unfavorable impact of $0.6 million on consolidated net income for the three months ended May 31, 2022 compared to the corresponding period of the prior fiscal year.

The provision for income taxes was 20.9% and 19.8% of income before income taxes for the three months ended November 30, 2022 and 2021, respectively.

The increase in the effective income tax rate from period to period was primarily due to tax shortfalls from the settlements of stock-based equity awards, partially offset by a one-time tax-deductible charitable donation.

The Company recorded tax shortfalls related to settlements of stock-based equity awards of $0.7 million during the first quarter of fiscal year 2023 compared to insignificant tax benefits related to these types of settlements in the first quarter of fiscal year 2022, resulting in a 5.1% unfavorable impact on the Company’s effective tax rate from period to period.

Partially offsetting this unfavorable impact was a one-time tax benefit associated with the Company’s donation of its former corporate headquarters building to a local San Diego community foundation that occurred in the first quarter of fiscal year 2023, resulting in a 4.2% favorable impact on the Company’s effective tax rate.

The building, net of its tax basis, is estimated to result in a charitable donation of $3.5 million and an approximate tax benefit of $0.7 million.

Net income was $14.0 million, or $1.02 per common share on a fully diluted basis, for the three months ended November 30, 2022 compared to $18.6 million, or $1.34 per common share on a fully diluted basis, for the corresponding period of the prior fiscal year.

Changes in foreign currency exchange rates from period to period had an unfavorable impact of $1.3 million on consolidated net income for the first quarter of fiscal year 2023.

Thus, on a constant currency basis, net income would have decreased $3.3 million, or 18%, from period to period.

Net income was $52.5 million, or $3.82 per common share on a fully diluted basis, for the nine months ended May 31, 2022 compared to $61.8 million, or $4.48 per common share on a fully diluted basis, for the corresponding period of the prior fiscal year.

Performance Measures and Non-GAAP Reconciliations

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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.

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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 for the periods presented:

Three Months Ended May 31,

Nine Months Ended May 31,

The following table summarizes the results of these performance measures:

Three Months Ended November 30,

Gross margin – GAAP

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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 stockholders 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.

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Cost of Doing Business (in thousands, except percentages)

Three Months Ended May 31,

Nine Months Ended May 31,

Three Months Ended November 30,

Total operating expenses – GAAP

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EBITDA (in thousands, except percentages)

Three Months Ended May 31,

Nine Months Ended May 31,

Three Months Ended November 30,

Net income – GAAP

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Our financial condition and liquidity remain strong.

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 this crisis as it continues to unfold.

Although there continues to be uncertainty related to the ongoing and anticipated impact of the COVID-19 pandemic and inflationary environment 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.

We use proceeds of the revolving credit facility

primarily for our general working capital needs.

We also hold borrowings under the Note Agreement.

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We have the ability to refinance any draws under the line of credit with successive short-term borrowings through the September 30, 2025 maturity date of the Credit Agreement.

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

As of May 31, 2022, $42.6 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 $15.6 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 May 31, 2022, consisting of senior notes under our Note Agreement.

We paid $0.8 million in principal payments on our Series A Notes during the first nine months of fiscal year 2022.

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.

As of November 30, 2022, $40.7 million of the outstanding balance under our line of credit resides in the EMEA segment and is denominated in Euros and Pounds Sterling and classified long-term, whereas $41.7 million is denominated in U.S.

Dollars and classified as short-term.

In the United States, we held $68.0 million in fixed rate long-term borrowings as of November 30, 2022, consisting of senior notes under our Note Agreement.

We paid $0.4 million in principal payments on our Series A Notes during the first three months of fiscal year 2023.

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

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See Note 7 – Debt for additional information on these financial covenants.

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

At November 30, 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 May 31, 2022, we had a total of $40.8 million in cash and cash equivalents.

At November 30, 2022, we had a total of $36.9 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.

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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 its outstanding shares through August 31, 2023, of which $52.6 million remains available for the repurchase of common shares at May 31, 2022.

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 $41.8 million remains available for the repurchase of shares of common stock as of November 30, 2022.

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

Nine Months Ended May 31,

Net cash provided by operating activities

Three Months Ended November 30,

Net cash provided by (used in) operating activities

Net cash used in investing activities

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Effect of exchange rate changes on cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Net decrease in cash and cash equivalents

Operating Activities

Net cash provided by operating activities decreased $56.3 million to $7.7 million for the nine months ended May 31, 2022.

Net cash provided by operating activities was $10.4 million for the three months ended November 30, 2022 compared to net cash used in operating activities of $0.9 million for the prior period resulting in a net change of $11.4 million .

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

Our primary source of operating cash flows for the nine months ended May 31, 2022 was net income of $52.5 million, which decreased approximately $9.3 million from period to period.

Although the changes in adjustments to reconcile net income to cash did not have a significant impact on net cash provided by operating activities in total, decreases in stock-based compensation due to a lower level of expense associated with performance-based awards were almost completely offset by various other adjustments, primarily an increase in depreciation expense.

Change in our working capital, which decreased net cash provided by operating activities was primarily attributable 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.

These changes in working capital that decreased net cash provided by operating activities were partially offset by lower increases in trade accounts receivable balances during the first nine months of fiscal year 2022 compared to the corresponding period of the prior fiscal year primarily due to lower sales during the third quarter of fiscal year 2022.

Our primary source of operating cash flows for the three months ended November 30, 2022 was net income of $14.0 million, which decreased approximately $4.6 million from period to period.

Changes in our working capital, which increased net cash provided by operating activities was primarily attributable to decreases in trade accounts receivable balances during the first three months of the fiscal year compared to increases in trade accounts receivable during the first three months of the prior fiscal year.

This was primarily due to a decrease in sales from

period to period.

In addition, net cash provided by operating activities increased due to lower earned incentive payouts in the first quarter of fiscal year 2023 compared to the same period of the prior fiscal year as well as decreases in other current assets from period to period primarily due to a lower income tax receivable balance, as well as lower deposits and miscellaneous prepaid expenses.

These changes were partially offset by decreases in accounts payable and accrued liabilities balances during the first three months of the fiscal year compared to increases in accounts payable and accrued liabilities during the first three months of the prior fiscal year.

Investing Activities

Net cash used in investing activities decreased $3.6 million to $6.7 million for the nine months ended May 31, 2022, primarily due to a lower level of manufacturing-related capital expenditures within the United States and the United Kingdom from period to period.

Capital expenditures during fiscal years 2021 and 2022 were primarily related to manufacturing equipment,

some of which is still 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 $1.1 million to $1.3 million for the three months ended November 30, 2022, primarily due to a lower level of manufacturing-related capital expenditures within the United States and the United Kingdom from period to period.

Financing Activities

Net cash used by financing activities increased $12.6 million to $43.3 million for the nine months ended May 31, 2022.

This change was primarily due to the resumption of treasury stock purchases in November 2021, resulting in increased treasury stock purchases of $22.4 million.

In addition, increases in dividends paid to our shareholders of $3.0 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 from period to period were proceeds provided by the Company’s autoborrow agreement of $15.6 million during the first nine months of the fiscal year, whereas no draws were made on our autoborrow agreement in the corresponding period of the prior fiscal year.

In the first nine months of 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 during the quarter.

This net borrowing activity resulted in a $2.0 million cash inflow during the first nine months of fiscal year 2021 compared to the $15.6 million in net proceeds from our revolving credit facility during the first nine months of fiscal year 2022.

Net cash used in financing activities decreased $9.6 million to $12.3 million for the three months ended November 30, 2022.

This change was primarily due to decreases in shares withheld to cover taxes on conversion of equity rewards of $3.6 million primarily due to lower settlements of stock-based equity awards from period to period.

Additionally, cash used in financing activities was decreased by proceeds provided by our autoborrow agreement of $3.4 million during the first three months of the fiscal year, whereas no draws were made on our autoborrow agreement in the corresponding period of the prior fiscal year.

In addition, treasury stock purchases decreased by $3.3 million.

Offsetting these decreases in cash outflows from period to period were increases in dividends paid to our stockholders of $0.7 million.

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 a decrease in cash of $2.8 million for the nine months ended May 31, 2022 as compared to an increase in cash of $0.9 million for the nine months ended May 31, 2021.

Dollar terms, was an increase in cash of $2.2 million for the three months ended November 30, 2022 as compared to a decrease in cash of $1.2 million for the three months ended November 30, 2021.

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.

Off-Balance Sheet Arrangements

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

Commercial Commitments

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In addition to the commitments to purchase products from contract manufacturers described above, we may also enter into commitments with other manufacturers to purchase finished goods and components to support innovation initiatives and/or supply chain initiatives.

As of May 31, 2022, no such commitments were outstanding .

As of November 30, 2022, no such commitments were outstanding .

Share Repurchase Plan

The information required by this item is incorporated by reference to Part I—Item 1, “Notes to Condensed Consolidated Financial Statements” Note 8 — Share Repurchase Plan, included in this report .

On June 21, 2022, the Company’s Board of Directors declared a cash dividend of $0.78 per share payable on July 29, 2022 to shareholders of record on July 15 , 2022 .

Critical Accounting Policies

On December 13, 2022, the Company’s Board approved a 6% increase in the regular quarterly cash dividend, increasing it from $0.78 per share to $0.83 per share.

The $0.83 per share dividend declared on December 13, 2022 is payable on January 31, 2023 to stockholders of record on January 13 , 2023 .

Critical Accounting Policies and Estimates

Our discussion and analysis of our operating results and financial condition is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America.

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Estimates in each of these areas are based on historical experience and various judgments and assumptions that we believe are appropriate.

Actual results may differ from these estimates.

There have been no material changes in our critical accounting policies from those disclosed in Part II―Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 2 to our consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2021, which was filed with the SEC on October 22, 2021.

Actual results may differ materially from these estimates.

There have been no material changes in our critical accounting policies and estimates from those disclosed in Part II―Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 2 to our consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2022, which was filed with the SEC on October 24, 2022.

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-Q

Item 2. Management’s Discussion and Analysis