WD 40 CO 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations As used in this report, the terms “we,” “our,” and “us” refer to WD-40 Company and its wholly-owned subsidiaries, unless the context suggests otherwise. Amounts and percentages in tables and discussions may not total due to rounding. 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, 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. 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. GAAP. 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. GAAP. Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. This report contains forward-looking statements, which reflect our current views with respect to future events and financial performance. These forward-looking statements are generally identified with words such as “believe,” “expect,” “intend,” “plan,” “could,” “may,” “aim,” “anticipate,” “target,” “estimate” and similar expressions. These forward-looking statements include, but are not limited to, discussions about future financial and operating results, including: growth expectations for maintenance products; expected levels of promotional and advertising spending; anticipated input costs for manufacturing and the costs associated with distribution of our products; plans for and success of product innovation, the impact of new product introductions on the growth of sales; anticipated results from product line extension sales; expected tax rates and the impact of tax legislation and regulatory action; the length and severity of the current COVID-19 pandemic and its impact on the global economy and our financial results; changes in the political conditions or relations between the United States and other nations, the impacts from inflationary trends and supply chain constraints; and forecasted foreign currency exchange rates and commodity prices. 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, 2022, and in Part II — Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q. Overview The Company 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 20 products: WD-40® Multi-Use Product, WD-40 Specialist®, 3-IN-ONE®, GT85®, X-14®, 2000 Flushes®, Carpet Fresh®, no vac®, Spot Shot®, 1001®, Lava® and Solvol®. Our products are sold in various locations around the world. Maintenance products are sold worldwide in markets throughout North, Central and South America, Asia, Australia, Europe, the Middle East and Africa. Homecare and cleaning products are sold primarily in North America, the United Kingdom (“U.K.”) and Australia. 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. Highlights The following summarizes the financial and operational highlights for our business during the six months ended February 28, 2023:  Consolidated net sales decreased $9.6 million, or 4%, 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 $50.2 million from period to period, primarily due to sales price increases implemented across all segments over the last twelve months. These favorable impacts were significantly offset by decreases in sales volume, which unfavorably impacted net sales by approximately $44.7 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 $15.1 million on consolidated net sales for the first half of fiscal year 2023. On a constant currency basis, net sales would have increased by $5.4 million, or 2%, from period to period. This unfavorable impact from changes in foreign currency exchange rates mainly came from our EMEA segment, which accounted for 34% of our consolidated sales for the six months ended February 28, 2023.  Gross profit as a percentage of net sales increased to 51.1% compared to 50.6% 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 Global Supply Chain Constraints and Inflation on Our Business section which follows for details, including actions the Company continues to take in response to these challenges.  Consolidated net income decreased $7.5 million, or 20%, 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 $2.2 million on consolidated net income for the first half of fiscal year 2023. Thus, on a constant currency basis, net income would have decreased $5.3 million, or 14%, from period to period.  Diluted earnings per common share were $2.23 versus $2.75 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: (i) building a business for the future; (ii) attracting, developing and engaging outstanding tribe members; (iii) striving for operational excellence; (iv) growing WD-40 Multi-Use Product; (v) growing WD-40 Specialist product line; and (vi) expanding and supporting portfolio opportunities that help us grow . Significant Developments Impact of Global Supply Chain Constraints and Inflation on Our Business Our financial results and operations continue to be impacted by certain macroeconomic factors that began during our fiscal year 2020, specifically the COVID-19 pandemic. The pandemic impacted global economies, the rate of inflation, supply chains, distribution networks and consumer behavior around the world. We have experienced both favorable and unfavorable impacts to our financial results and our operations as a result of the direct and indirect effects of the COVID-19 pandemic. For example, sales have been negatively impacted at varying times in the regions in which we operate due to health and safety 21 restrictions required by local governmental authorities. Such restrictions have sporadically impacted various regions, particularly in certain countries within our Asia-Pacific segment. Fluctuations in global economic conditions continue to impact end-user demand for our products in certain regions at varying times and are difficult to predict. These changes in demand, including those resulting from shifts in consumer spending patterns as a result of inflation, 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 during the first half of 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 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 half of fiscal year 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 these conditions and their 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 these risks. The Impact of Russian Military Action in Ukraine On February 24, 2022, Russian forces launched significant military action against Ukraine, which has resulted in conflict and disruption in the region. In response to this action taken by Russia, the U.S. and other countries immediately imposed various economic sanctions against Russia. These geopolitical tensions continued throughout the first half 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 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 located in these affected regions. Additionally, the only activities we conducted in these regions prior to the suspension of sales were through local marketing distributors. Write-offs of previously existing accounts receivable from those marketing distributors affected by the crisis have not been significant to date and are not expected to become significant in future periods. As a result of this conflict, commodity markets remain subject to heightened levels of uncertainty, especially as they relate to the price of crude oil, which increased significantly in the immediate aftermath of the sanctions against Russia. Increases 22 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 Six Months Ended February 28, 2023 Compared to Three and Six Months Ended February 28, 2022 Operating Items The following table summarizes operating data for our consolidated operations ( in thousands, except percentages and per share amounts): Three Months Ended February 28, Six Months Ended February 28, Change from ‎ Prior Year Change from ‎ Prior Year 2023 2022 Dollars Percent 2023 2022 Dollars Percent Net sales: Maintenance products $ 122,104 $ 121,901 $ 203 - $ 238,416 $ 247,931 $ (9,515) (4)% HCCP (1) 8,089 8,085 4 - 16,670 16,801 (131) (1)% Total net sales 130,193 129,986 207 - 255,086 264,732 (9,646) (4)% Cost of products sold 64,115 64,468 (353) (1)% 124,753 130,744 (5,991) (5)% Gross profit 66,078 65,518 560 1% 130,333 133,988 (3,655) (3)% Operating expenses 43,925 40,775 3,150 8% 89,501 85,185 4,316 5% Income from operations $ 22,153 $ 24,743 $ (2,590) (10)% $ 40,832 $ 48,803 $ (7,971) (16)% Net income $ 16,526 $ 19,508 $ (2,982) (15)% $ 30,523 $ 38,063 $ (7,540) (20)% EPS – diluted $ 1.21 $ 1.41 $ (0.20) (14)% $ 2.23 $ 2.75 $ (0.52) (19)% Shares used in diluted EPS 13,608 13,704 (96) (1)% 13,608 13,804 (196) (1)% (1) Homecare and cleaning products (“HCCP”) Net Sales by Segment The following table summarizes net sales by segment (in thousands, except percentages): Three Months Ended February 28, Six Months Ended February 28, Change from ‎ Prior Year Change from ‎ Prior Year 2023 2022 Dollars Percent 2023 2022 Dollars Percent Americas $ 62,890 $ 54,497 $ 8,393 15% $ 120,904 $ 110,785 $ 10,119 9% EMEA 46,809 54,063 (7,254) (13)% 87,581 111,618 (24,037) (22)% Asia-Pacific 20,494 21,426 (932) (4)% 46,601 42,329 4,272 10% Total $ 130,193 $ 129,986 $ 207 - $ 255,086 $ 264,732 $ (9,646) (4)% ‎ 23 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 February 28, Six Months Ended February 28, Change from ‎ Prior Year Change from ‎ Prior Year 2023 2022 Dollars Percent 2023 2022 Dollars Percent Maintenance products $ 59,126 $ 50,409 $ 8,717 17% $ 112,697 $ 102,393 $ 10,304 10% HCCP 3,764 4,088 (324) (8)% 8,207 8,392 (185) (2)% Total $ 62,890 $ 54,497 $ 8,393 15% $ 120,904 $ 110,785 $ 10,119 9% % of consolidated net sales 48% 42% 48% 42% CC Net sales – non-GAAP (1) $ 62,708 $ 54,497 $ 8,211 15% $ 120,886 $ 110,785 $ 10,101 9% Currency impact on current period – non-GAAP $ 182 $ 18 (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. The following table summarizes management’s estimates of effects on net sales of changes in price, volume and foreign currency exchange rate impacts for the Americas segment (in millions): Change from Prior Year First Quarter Second Quarter Year to Date Increase in average selling price (1) $ 13.6 $ 12.0 $ 25.6 Decrease in sales volume (1) (11.7) (3.8) (15.5) Currency impact on current period – non-GAAP (0.2) 0.2 - Increase in net sales $ 1.7 $ 8.4 $ 10.1 (1) Management’s estimates of changes in 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 – February 28, 2023 Compared to February 28, 2022 Net sales of maintenance products in the Americas segment increased due to the following (by region):  United States (“U.S.”) sales increased $8.0 million, or 22%. WD-40 Multi-Use Product sales increased by $6.3 million, or 21%, primarily due to price increases and improved supply chain capacity from period to period, which was partially offset by lower demand which resulted in decreased sales volume. 3-IN-ONE 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 maintenance products, including 3-IN-ONE, improved the availability of these products from period to period. 3-IN-ONE product sales increased by $1.0 million, or 69%, primarily due to these improvements that resulted in increased sales volume, as well as price increases from period to period. WD-40 Specialist sales increased by $0.7 million, or 12%, primarily due to price increases implemented during the last twelve months, partially offset by lower demand which resulted in decreased sales volumes.  Canada sales increased $0.5 million, or 12%, due to the favorable impact of price increases which was partially offset by unfavorable changes in foreign currency exchange rates and weaker economic conditions that resulted in lower levels of demand and decreased sales volume.  Latin America sales increased $0.3 million, or 3%, primarily due to higher sales in our direct market in Mexico as a result of increased distribution, successful promotional programs and price increases, as well as the favorable impact of changes in foreign currency exchange rates. These favorable impacts were significantly offset by decreased sales 24 volumes to marketing distributors due to weaker economic conditions in certain regions that resulted in lower levels of demand. Net sales of homecare and cleaning products in the Americas decreased primarily due to the following:  The unfavorable impact of lower demand for certain brands was partially offset by price increases and the improvement in the capacity and flexibility of our supply chain 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 February 28, 2023, 76% of sales came from the U.S., and 24% of sales came from Canada and Latin America combined compared to the distribution for the three months ended February 28, 2022 when 74% of sales came from the U.S., and 26% of sales came from Canada and Latin America. Americas Sales – Six Months Ended – February 28, 2023 Compared to February 28, 2022 Net sales of maintenance products in the Americas segment increased due to the following (by region):  U.S. sales increased $13.5 million, or 19%. WD-40 Multi-Use Product sales increased by $7.9 million, or 13%, primarily due to price increases from period to period, as well as our improved supply chain capacity. These positive effects were partially offset by a lower level of customer orders and promotional programs as customers adjust to the price increases, which resulted in decreased sales volume. WD-40 Specialist and 3-IN-ONE 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 and 3-IN-ONE, improved the availability of these products from period to period. WD-40 Specialist and 3-IN-ONE sales increased by $3.6 million, or 39%, and $2.1 million, or 70%, respectively, primarily due to these improvements that resulted in increased sales volume, as well as price increases implemented during the last twelve months.  Latin America sales decreased $3.8 million, or 16%, 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 half of fiscal year 2023. Conversely, sales in the first half 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. In addition, sales were unfavorably impacted due to weaker economic conditions in certain marketing distributor regions, partially offset by sales increases in our direct market in Mexico, as discussed above in the section for the three months ended February 28, 2023.  Canada sales increased $0.6 million, or 10%, due to the same factors discussed above in the section for the three months ended February 28, 2023. Net sales of homecare and cleaning products in the Americas decreased primarily as discussed above in the section for the three months ended February 28, 2023. For the six months ended February 28, 2023, 77% of sales came from the U.S., and 23% of sales came from Canada and Latin America combined compared to the distribution for the six months ended February 28, 2022 when 72% of sales came from the U.S., and 28% of sales came from Canada and Latin America. ‎ 25 EMEA Sales 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 February 28, Six Months Ended February 28, Change from ‎ Prior Year Change from ‎ Prior Year 2023 2022 Dollars Percent 2023 2022 Dollars Percent Maintenance products $ 44,351 $ 52,093 $ (7,742) (15)% $ 83,080 $ 107,536 $ (24,456) (23)% HCCP 2,458 1,970 488 25% 4,501 4,082 419 10% Total $ 46,809 $ 54,063 $ (7,254) (13)% $ 87,581 $ 111,618 $ (24,037) (22)% % of consolidated net sales 36% 42% 34% 42% CC Net sales – non-GAAP (1) $ 51,663 $ 54,063 $ (2,400) (4)% $ 100,450 $ 111,618 $ (11,168) (10)% Currency impact on current period – non-GAAP $ (4,854) $ (12,869) (1) Current fiscal year constant currency net sales translated at the foreign currency exchange rates in effect for the corresponding period of the prior fiscal year , compared to prior period actual net sales . The following table summarizes management’s estimates of effects on net sales of changes in price, volume and foreign currency exchange rate impacts for the EMEA segment (in millions): Change from Prior Year First Quarter Second Quarter Year to Date Increase in average selling price (1) $ 9.5 $ 11.1 $ 20.6 Decrease in sales volume (1) – Russian markets (5.0) (3.3) (8.3) Decrease in sales volume (1) – All other markets (13.2) (10.2) (23.4) Currency impact on current period – non-GAAP (8.0) (4.9) (12.9) Decrease in net sales $ (16.7) $ (7.3) $ (24.0) (1) Management’s estimates of changes in 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. 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 – February 28, 2023 Compared to February 28, 2022 Net sales decreased in the EMEA segment primarily due to the following (by market and region): Direct Markets – EMEA (74% of net sales QTD FY2023 vs 65% QTD FY2022)  Sales in our direct markets decreased $0.7 million, or 2%, primarily due to sales volume decreases and unfavorable changes in foreign currency exchange rates of $3.6 million as a result of the weakening of the Pound Sterling, the functional currency of our U.K. subsidiary, against the U.S. Dollar. The unfavorable impacts were significantly offset by price increases across all direct markets and a sales volume increase in the United Kingdom direct market, partially due to a higher level of promotional programs.  Most direct markets experienced sales volume decreases 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 the first half of fiscal year 2023. ‎ 26 Marketing Distributors – EMEA (26% of net sales QTD FY2023 vs 35% QTD FY2022)  Distributor market sales decreased $6.6 million, or 35%, 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 $3.3 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.  In addition, sales in our distributor markets were unfavorably impacted by $1.2 million due to the weakening of the Pound Sterling, the functional currency of our U.K. subsidiary, against the U.S. Dollar. 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 India and Turkey, which were down $1.3 million and $1.0 million, respectively.  The decreases in distributor market sales were partially offset by price increases implemented over the last twelve months. EMEA Sales – Six Months Ended – February 28, 2023 Compared to February 28, 2022 Net sales decreased in the EMEA segment primarily due to the following (by market and region): Direct Markets – EMEA (72% of net sales YTD FY2023 vs 64% YTD FY2022)  Sales in our direct markets decreased $8.4 million, or 12%, primarily due to unfavorable changes in foreign currency exchange rates of $9.3 million as a result of the weakening of the Pound Sterling, the functional currency of our U.K. subsidiary, against the U.S. Dollar.  In addition, decreases in sales volume unfavorably impacted sales period to period. In most direct markets, these volume decreases were due to reduced demand compared to the prior period, due to the same factors discussed above in the section for the three months ended February 28, 2023.  The unfavorable impacts were significantly offset by price increases across all direct markets. Marketing Distributors – EMEA (28% of net sales YTD FY2023 vs 36% YTD FY2022)  Distributor market sales decreased $15.7 million, or 39%, in EMEA.  Sales in Russia decreased $8.3 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.  In addition, sales in our distributor markets were unfavorably impacted by $3.6 million due to the weakening of the Pound Sterling, the functional currency of our U.K. subsidiary, against the U.S. Dollar. 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 India, Poland and the Czech Republic, which were down $2.3 million, $1.5 million and $1.3 million, respectively.  The decreases in distributor market sales were partially offset by price increases implemented over the last twelve months. ‎ 27 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 February 28, Six Months Ended February 28, Change from ‎ Prior Year Change from ‎ Prior Year 2023 2022 Dollars Percent 2023 2022 Dollars Percent Maintenance products $ 18,627 $ 19,399 $ (772) (4)% $ 42,639 $ 38,002 $ 4,637 12% HCCP 1,867 2,027 (160) (8)% 3,962 4,327 (365) (8)% Total $ 20,494 $ 21,426 $ (932) (4)% $ 46,601 $ 42,329 $ 4,272 10% % of consolidated net sales 16% 16% 18% 16% CC Net sales – non-GAAP (1) $ 21,282 $ 21,426 $ (144) (1)% $ 48,751 $ 42,329 $ 6,422 15% Currency impact on current period – non-GAAP $ (788) $ (2,150) (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 . The following table summarizes management’s estimates of effects on net sales of changes in price, volume and foreign currency exchange rate impacts for the Asia-Pacific segment (in millions): Change from Prior Year First Quarter Second Quarter Year to Date Increase in average selling price (1) $ 3.1 $ 0.9 $ 4.0 Increase (decrease) in sales volume (1) 3.5 (1.0) 2.5 Currency impact on current period – non-GAAP (1.4) (0.8) (2.2) Increase (decrease) in net sales $ 5.2 $ (0.9) $ 4.3 (1) Management’s estimates of changes in 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. Asia-Pacific Sales – Three Months Ended – February 28, 2023 Compared to February 28, 2022 Net sales in the Asia-Pacific segment decreased primarily due to the following (by market and region):  Asia distributor markets sales decreased $1.1 million, or 11%, primarily due to lower sales of WD-40 Multi-Use Product driven by weaker market and economic conditions and distributors that had purchased product in advance of price increases implemented in December 2022, both of which lowered sales volumes in the second quarter of fiscal year 2023, particularly in Taiwan, Korea, Thailand and Malaysia. These unfavorable impacts were partially offset by the favorable impacts of price increases.  China sales were relatively constant 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. On a constant currency basis, sales in China would have increased $0.5 million, or 7%.  Australia sales increased 0.3 million, or 6%, primarily due to the favorable impact of price increases and successful promotional programs, which were partially offset by the unfavorable impact of changes in foreign currency exchange rates and decreased sales levels of homecare and cleaning products due to lower demand and decreased sales volume. On a constant currency basis, sales in Australia would have increased $0.5 million, or 10%. ‎ 28 Asia-Pacific Sales – Six Months Ended – February 28, 2023 Compared to February 28, 2022 Net sales in the Asia-Pacific segment increased primarily due to the following (by market and region):  Asia distributor markets sales increased $2.7 million, or 14%, primarily due to higher sales of WD-40 Multi-Use Product as a result of successful promotional programs, the easing of COVID-19 lockdown measures, price increases implemented over the last twelve months and customers that purchased product in advance of additional price implemented in December 2022, all of which resulted in increased demand and higher sales volumes in most countries in the region early in fiscal year 2023. These favorable impacts experienced in early fiscal year 2023 were partially offset by declines in sales during the second quarter of fiscal year 2023, as discussed above in the section for the three months ended February 28, 2023.  China sales increased $1.2 million, or 10%, due to the success of promotional programs in the first half of fiscal year 2023 and price increases over the last twelve months. 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. 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 $2.5 million, or 20%.  Australia sales increased $0.3 million, or 3% primarily due to higher sales of WD-40 Multi-Use Product as a result of price increases and successful promotional programs. This favorable result was significantly offset by the unfavorable impact of changes in foreign currency exchange rates and decreased sales levels of homecare and cleaning products due to lower demand and decreased sales volume. On a constant currency basis, sales in Australia would have increased $1.2 million, or 11%. Gross Profit 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 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. Such delays increase with higher production and inventory levels;  In general, the timing of advertising, promotional and other discounts may cause fluctuations in gross margin from period to period. Advertising, promotional and other discounts that are given to our customers are recorded as a reduction to sales, whereas advertising and sales promotional costs associated with promotional activities that we pay to third parties are recorded as advertising and sales promotion expenses;  In the EMEA segment, the majority of our cost of goods sold is denominated in Pound Sterling whereas sales are generated in Pound Sterling, Euro and the U.S. Dollar. The strengthening or weakening of the Euro and U.S. Dollar against the Pound Sterling may result in foreign currency related changes to the gross margin percentage in the EMEA segment from period to period; and  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 $4.2 million and $4.7 million for the three months ended February 28, 2023 and 2022, respectively, and $8.4 million and $9.5 million for the six months ended February 28, 2023 and 2022, respectively.  For further information pertaining to recent trends and economic conditions affecting gross margin, please see the section titled “Significant Developments” . 29 The following table summarizes gross margin and gross profit (in thousands, except percentages): Three Months Ended February 28, Six Months Ended February 28, 2023 2022 Change from ‎ Prior Year 2023 2022 Change from ‎ Prior Year Gross profit $ 66,078 $ 65,518 $ 560 $ 130,333 $ 133,988 $ (3,655) Gross margin 50.8% 50.4% 40 bps (1) 51.1% 50.6% 50 bps (1) (1) Basis points (“bps”) change in gross margin. Gross Margin – Three Months Ended – February 28, 2023 Compared to February 28, 2022 Gross margin increased 40 bps primarily due to the following favorable impacts, significantly offset by unfavorable impacts: Favorable/(Unfavorable) Explanations 910 bps Sales price increases implemented in all three segments at varying times during the last twelve months. 90 bps Changes in foreign currency exchange rates in the EMEA segment. (410) bps Higher costs of specialty chemicals used in the formulation of our products. (400) bps Higher costs of aerosol cans. (90) bps Higher filling fees paid to our third-party contract manufacturers, primarily in the Americas segment. Gross Margin – Six Months Ended – February 28, 2023 Compared to February 28, 2022 Gross margin increased 50 bps primarily due to the following favorable impacts, significantly offset by unfavorable impacts: Favorable/(Unfavorable) Explanations 880 bps Sales price increases implemented in all three segments at varying times during the last twelve months. 100 bps Changes in foreign currency exchange rates in the EMEA segment. (390) bps Higher costs of aerosol cans. (380) bps Higher costs of specialty chemicals used in the formulation of our products. (90) bps Higher filling fees paid to our third-party contract manufacturers, primarily in the Americas segment. (60) bps Increases in miscellaneous other input costs. Selling, General and Administrative (“SG&A”) Expenses Three Months Ended February 28, Six Months Ended February 28, Change from ‎ Prior Year Change from ‎ Prior Year (in thousands) 2023 2022 Dollars Percent 2023 2022 Dollars Percent SG&A expenses $ 37,690 $ 34,819 $ 2,871 8% $ 77,674 $ 73,242 $ 4,432 6% % of net sales 28.9% 26.8% 30.5% 27.7% SG&A Expenses – Three Months Ended – February 28, 2023 Compared to February 28, 2022 The increase in SG&A expenses was primarily due to increases in employee-related costs of $2.6 million due to increased headcount and annual compensation increases, slightly offset by lower incentive compensation accruals. In addition, travel and meeting expense increased SG&A expense by $0.9 million due to the reduction in travel restrictions related to COVID- 30 19 from period to period, resulting in a higher level of travel and meetings by employees. In addition, professional services fees increased $0.9 million in support of our strategic initiatives in the Americas and EMEA segments, including the ongoing implementation of our new information system and increased cloud-based software usage and license fees. Other miscellaneous expenses also increased $0.4 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 $1.5 million in SG&A expenses. SG&A Expenses – Six Months Ended – February 28, 2023 Compared to February 28, 2022 The increase in SG&A expenses was partially due to increases in employee-related costs of $3.5 million due to increased headcount and annual compensation increases, partially offset by lower incentive compensation accruals. Travel and meeting expense also increased SG&A by $3.0 million due to the reduction in travel restrictions, as discussed above in the section for the three months ended February 28, 2023. In addition, professional services fees increased $1.7 million in support of our strategic initiatives in the Americas and EMEA segments, also discussed above in the section for the three months ended February 28, 2023 . Sales commissions increased $0.5 million primarily due to higher sales in the Americas segment. 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 $4.2 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 $1.2 million and $1.3 million for the three months ended February 28, 2023 and 2022, respectively, and $2.5 million and $2.6 million for the six months ended February 28, 2023 and 2022, respectively. Our research and development team engages in consumer research, product development, current product improvements and testing activities. This team leverages its development capabilities by collaborating with a network of outside resources including our current and prospective third-party contract manufacturers. The level and types of expenses incurred within research and development can vary from period to period depending upon the types of activities being performed. Advertising and Sales Promotion (“A&P”) Expenses Three Months Ended February 28, Six Months Ended February 28, Change from ‎ Prior Year Change from ‎ Prior Year (in thousands) 2023 2022 Dollars Percent 2023 2022 Dollars Percent A&P expenses $ 5,985 $ 5,596 $ 389 7% $ 11,324 $ 11,220 $ 104 1% % of net sales 4.6% 4.3% 4.4% 4.2% A&P Expenses – Three Months Ended – February 28, 2023 Compared to February 28, 2022 The increase in A&P expenses was primarily due to a higher level of promotional programs and marketing support in the Americas segment, partially offset by favorable changes in foreign currency exchange currency from period to period of $0.3 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 $7.1 million and $6.4 million for the three months ended February 28, 2023 and 2022, respectively. Therefore, our total investment in A&P activities totaled $13.1 million and $12.0 million for the three months ended February 28, 2023 and 2022, respectively. A&P Expenses – Six Months Ended – February 28, 2023 Compared to February 28, 2022 A&P expenses remained relatively constant from period to period. Increases in A&P expenses, primarily due to a higher level of promotional programs and marketing support in the Americas segment, were mostly offset by favorable changes in foreign currency exchange currency from period to period of $0.8 million primarily in the EMEA segment. 31 Total promotional costs recorded as a reduction to sales was $13.6 million and $13.3 million for the six months ended February 28, 2023 and 2022, respectively. Therefore, our total investment in A&P activities totaled $24.9 million and $24.5 million for the six months ended February 28, 2023 and 2022, respectively. Income from Operations by Segment The following table summarizes income from operations by segment (in thousands, except percentages): Three Months Ended February 28, Six Months Ended February 28, Change from ‎ Prior Year Change from ‎ Prior Year 2023 2022 Dollars Percent 2023 2022 Dollars Percent Americas $ 13,712 $ 11,217 $ 2,495 22% $ 26,484 $ 23,234 $ 3,250 14% EMEA 10,383 13,715 (3,332) (24)% 16,666 27,928 (11,262) (40)% Asia-Pacific 7,023 7,925 (902) (11)% 16,640 15,227 1,413 9% Unallocated corporate (8,965) (8,114) (851) (10)% (18,958) (17,586) (1,372) (8)% Total $ 22,153 $ 24,743 $ (2,590) (10)% $ 40,832 $ 48,803 $ (7,971) (16)% Americas Americas Operating Income – Three Months Ended – February 28, 2023 Compared to February 28, 2022 Income from operations for the Americas increased to $13.7 million, up $2.5 million, or 22%, due to an $8.4 million increase in sales and a higher gross margin, partially offset by higher operating expenses. Gross margin for the Americas segment increased from 46.7% to 48.1% 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. The increase in operating expenses from period to period was primarily due to higher employee-related costs due to increased headcount, as well as higher A&P expenses. Operating income as a percentage of net sales increased from 20.6% to 21.8% period over perio d . Americas Operating Income – Six Months Ended – February 28, 2023 Compared to February 28, 2022 Income from operations for the Americas increased to $26.5 million, up $3.3 million, or 14%, due to a $10.1 million increase in sales and a higher gross margin, partially offset by higher operating expenses. Gross margin for the Americas segment increased from 47.7% to 49.4% 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. The increase in operating expenses from period to period was primarily due to higher employee-related costs as a result of increased headcount, as well as increases to travel and meeting expense and A&P expenses. Operating income as a percentage of net sales increased from 21.0% to 21.9% period over perio d . EMEA EMEA Operating Income – Three Months Ended – February 28, 2023 Compared to February 28, 2022 Income from operations for the EMEA segment decreased to $10.4 million, down $3.3 million, or 24%, primarily due to a $7.3 million decrease in sales, partially offset by a higher gross margin and a slight decrease in operating expenses. Gross margin for the EMEA segment increased from 52.0% to 52.3% primarily due to the favorable impact of price increases over the last twelve months, partially offset by the increased costs of aerosol cans and petroleum-based specialty chemicals . Operating expenses decreased $0.3 million primarily due to lower A&P expenses, lower accrued incentive compensation and lower freight costs as a result of lower sales volumes. These favorable impacts to operating expenses were significantly offset by increased headcount and salaries, as well as higher travel and meeting expense. Operating income as a percentage of net sales decreased from 25.4% to 22.2% period over period . 32 EMEA Operating Income – Six Months Ended – February 28, 2023 Compared to February 28, 2022 Income from operations for the EMEA segment decreased to $16.7 million, down $11.3 million, or 40%, primarily due to a $24.0 million decrease in sales and lower gross margin, which were slightly offset by a decrease in operating expenses. Gross margin for the EMEA segment decreased from 51.8% to 51.5% primarily due to the combined unfavorable impacts of 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. These unfavorable impacts to gross margin were significantly offset by price increases that were implemented over the last twelve months . Operating expenses decreased $1.4 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. These favorable impacts to operating expenses were partially offset by higher travel and meeting expense, as well as increased headcount and salaries. Operating income as a percentage of net sales decreased from 25.0% to 19.0% period over period . Asia-Pacific Asia-Pacific Operating Income – Three Months Ended – February 28, 2023 Compared to February 28, 2022 Income from operations for the Asia-Pacific segment decreased to $7.0 million, down $0.9 million, or 11%, primarily due to a $0.9 million decrease in sales and a lower gross margin. Gross margin for the Asia-Pacific segment decreased from 55.9% to 55.3% primarily due to the unfavorable impacts of increases to the cost of petroleum-based specialty chemicals and aerosol cans. These unfavorable impacts to gross margin were significantly offset by price increases that were implemented during the last twelve months . Operating income as a percentage of net sales decreased from 37.0% to 34.3% period over period. Asia-Pacific Operating Income – Six Months Ended – February 28, 2023 Compared to February 28, 2022 Income from operations for the Asia-Pacific segment increased to $16.6 million, up $1.4 million, or 9%, primarily due to a $4.3 million increase in sales, partially offset by a lower gross margin and an increase in operating expenses. Gross margin for the Asia-Pacific segment decreased from 55.2% to 54.8% primarily due to the unfavorable impacts of increases to the cost of petroleum-based specialty chemicals and aerosol cans . These unfavorable impacts to gross margin were significantly offset by price increases that were implemented during the last twelve months . Operating expenses increased $0.8 million from period to period primarily due to higher A&P expenses, higher freight costs due to an increase in sales volumes and increased travel and meeting expenses. Operating income as a percentage of net sales decreased from 36.0% to 35.7% period over period. Non-Operating Items The following table summarizes non-operating income and expenses for our consolidated operations (in thousands): Three Months Ended February 28, Six Months Ended February 28, 2023 2022 Change 2023 2022 Change Interest income $ 51 $ 21 $ 30 $ 95 $ 46 $ 49 Interest expense $ 1,502 $ 613 $ 889 $ 2,671 $ 1,233 $ 1,438 Other income (expense), net $ 165 $ 252 $ (87) $ 315 $ (77) $ 392 Provision for income taxes $ 4,341 $ 4,895 $ (554) $ 8,048 $ 9,476 $ (1,428) Interest Income Interest income was not significant during the three and six months ended February 28, 2023 and 2022. Interest Expense Interest expense increased $0.9 million and $1.4 million for the three and six months ended February 28, 2023, respectively, compared to the corresponding periods of the prior fiscal year primarily due to higher interest rates and higher aggregate outstanding balances on our revolving credit agreement from period over period. 33 Other Income (Expense), Net Other income (expense), net remained relatively constant for the three months ended February 28, 2023 compared to the corresponding period of the prior fiscal year. Other income (expense), net changed by $0.4 million for the six months ended February 28, 2023 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 20.8% and 20.1% of income before income taxes for the three months ended February 28, 2023 and 2022, respectively. The increase in the effective tax rate was primarily due to higher tax rates in certain foreign jurisdictions from period to period, as well as higher interest expense related to existing uncertain tax positions. The unfavorable impacts to the effective tax rate was partially offset by a decrease in the portion of performance-based compensation that is non-deductible from period to period. The provision for income taxes was 20.9% and 19.9% of income before income taxes for the six months ended February 28, 2023 and 2022, 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. We recorded tax shortfalls related to settlements of stock-based equity awards of $0.7 million during the first six months of fiscal year 2023 compared to $0.2 million in tax benefits related to these types of settlements in the first six months of fiscal year 2022, resulting in a 2.4% unfavorable impact on our effective tax rate from period to period. Partially offsetting this unfavorable impact was a one-time tax benefit associated with our donation of our former corporate headquarters building to a local San Diego community foundation that occurred in the first quarter of fiscal year 2023, resulting in a 1.9% favorable impact on our 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 Net income was $16.5 million, or $1.21 per common share on a fully diluted basis, for the three months ended February 28, 2023 compared to $19.5 million, a decrease of 15%, or $1.41 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 $0.9 million on consolidated net income for the second quarter of fiscal year 2023. Thus, on a constant currency basis, net income would have decreased $2.0 million, or 10%, from period to period. Net income was $30.5 million, or $2.23 per common share on a fully diluted basis, for the six months ended February 28, 2023 compared to $38.1 million, a decrease of 20%, or $2.75 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 $2.2 million on consolidated net income for the six months ended February 28, 2023. Thus, on a constant currency basis, net income would have decreased $5.3 million, or 14%, from period to period. Performance Measures and Non-GAAP Reconciliations In managing our business operations and assessing our financial performance, we supplement the information provided by our financial statements with certain non-GAAP performance measures. 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 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. Our financial results and operations continue to be impacted by increased global supply chain constraints and an inflationary environment, both of which have significantly lowered our gross margin percentage over the last twelve months and moved us well below our target of 55%. Although we have been implementing strategic sales price increases across all segments at varying times in response to increased costs, it will take time before the 34 full impact of these sales price increases are reflected in our reported results. In addition, it is difficult to determine how long these supply chain and inflationary conditions will exist and if they will worsen or improve over time. However, the targets for gross margin and these other performance measures are long-term in nature and we expect to make progress towards achieving them over time. For more detailed information pertaining to recent trends and economic conditions and the actions we are taking to respond to them, please see the section titled “Significant Developments”. The following table summarizes the results of these performance measures: Three Months Ended February 28, Six Months Ended February 28, 2023 2022 2023 2022 Gross margin – GAAP 51% 50% 51% 51% Cost of doing business as a percentage of net sales – non-GAAP 33% 30% 34% 31% EBITDA as a percentage of net sales – non-GAAP (1) 19% 21% 18% 20% (1) Percentages may not aggregate to EBITDA percentage due to rounding and because amounts recorded in other income (expense), net on our consolidated statement of operations are not included as an adjustment to earnings in the EBITDA calculation. 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 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. Reconciliations of these non-GAAP financial measures to our financial statements as prepared in accordance with GAAP are as follows: Cost of Doing Business (in thousands, except percentages) Three Months Ended February 28, Six Months Ended February 28, 2023 2022 2023 2022 Total operating expenses – GAAP $ 43,925 $ 40,775 $ 89,501 $ 85,185 Amortization of definite-lived intangible assets (250) (360) (503) (723) Depreciation (in operating departments) (1,034) (1,112) (1,999) (2,210) Cost of doing business $ 42,641 $ 39,303 $ 86,999 $ 82,252 Net sales $ 130,193 $ 129,986 $ 255,086 $ 264,732 Cost of doing business as a percentage of net sales – non-GAAP 33% 30% 34% 31% 35 EBITDA (in thousands, except percentages) Three Months Ended February 28, Six Months Ended February 28, 2023 2022 2023 2022 Net income – GAAP $ 16,526 $ 19,508 $ 30,523 $ 38,063 Provision for income taxes 4,341 4,895 8,048 9,476 Interest income (51) (21) (95) (46) Interest expense 1,502 613 2,671 1,233 Amortization of definite-lived intangible assets 250 360 503 723 Depreciation 1,718 1,736 3,361 3,359 EBITDA $ 24,286 $ 27,091 $ 45,011 $ 52,808 Net sales $ 130,193 $ 129,986 $ 255,086 $ 264,732 EBITDA as a percentage of net sales – non-GAAP 19% 21% 18% 20% Liquidity and Capital Resources Overview Our financial condition and liquidity remain strong. 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 also hold borrowings under the Note Agreement. See Note 7 – Debt for additional information on these agreements. We have historically held a balance of outstanding draws on our line of credit in either U.S. Dollars in the Americas segment, or in Euros and Pounds Sterling in the EMEA segment. Euro and Pound Sterling denominated draws will fluctuate in U.S. Dollars from period to period due to changes in foreign currency exchange rates. We regularly convert many of our draws on our line of credit to new draws with new maturity dates and interest rates. 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 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 February 28, 2023, $41.1 million of the outstanding balance under our line of credit resides in the EMEA segment and is denominated in Euros and Pounds Sterling and is classified as long-term, whereas $46.7 million is denominated in U.S. Dollars and is classified as short-term. In the United States, we held $68.0 million in fixed rate long-term borrowings as of February 28, 2023, consisting of senior notes under our Note Agreement. We paid $0.4 million in principal payments on our Series A Notes during the first half 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. Per the terms of both the Note Agreement and the Credit Agreement, our consolidated leverage ratio cannot be greater than three and a half to one and our consolidated interest coverage ratio cannot be less than three to one. See Note 7 – Debt for additional information on these financial covenants. At February 28, 2023, 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 February 28, 2023, we had a total of $38.0 million in cash and cash equivalents. We do not foresee any ongoing issues with repaying our borrowings and we closely monitor the use of this credit facility. We believe that our future cash from domestic and international operations, together with our access to funds available under our unsecured revolving credit facility, will provide adequate resources to fund short-term and long-term operating requirements, capital expenditures, dividend payments, acquisitions, new business development activities and share repurchases. On October 12, 2021, our Board of Directors approved a new share repurchase plan. Under the plan, which 36 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 $40.2 million remains available for the repurchase of shares of common stock as of February 28, 2023. Cash Flows The following table summarizes our cash flows by category for the periods presented (in thousands): Six Months Ended February 28, 2023 2022 Change Net cash provided by operating activities $ 20,947 $ 4,083 $ 16,864 Net cash used in investing activities (3,281) (3,571) 290 Net cash used in financing activities (20,294) (42,267) 21,973 Effect of exchange rate changes on cash and cash equivalents 2,777 (884) 3,661 Net increase (decrease) in cash and cash equivalents $ 149 $ (42,639) $ 42,788 Operating Activities Net cash provided by operating activities increased $16.9 million to $20.9 million for the six months ended February 28, 2023. Cash flows from operating activities depend heavily on operating performance and changes in working capital. Our primary source of operating cash flows for the six months ended February 28, 2023 was net income of $30.5 million, which decreased approximately $7.5 million from period to period. Changes in our working capital, which increased net cash provided by operating activities, were primarily attributable to a lower increase in inventory during the first half of fiscal year 2023 compared to the corresponding period of the prior fiscal year which represents a decrease in the use of cash. In the prior fiscal year, we took deliberate actions to increase inventory levels of certain raw materials, components and finished goods due to challenges within supply chain and increased lead times required by suppliers. This building of our inventory continued throughout fiscal year 2022 into the first quarter of fiscal year 2023 and we have experienced increases in the capacity and flexibility of our supply chain as a direct result of these actions. Although our inventory levels remain at balances that are higher than historical levels, inventory decreased during the three months ended February 28, 2023. In addition, net cash provided by operating activities increased due to lower earned incentive payouts in the first half of fiscal year 2023 compared to the corresponding period of the prior fiscal year. These changes were partially offset by decreases in accounts payable and accrued liabilities balances during the first half of the fiscal year compared to the corresponding period of the prior fiscal year. Investing Activities Net cash used in investing activities decreased $0.3 million to $3.3 million for the six months ended February 28, 2023, 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 in financing activities decreased $22.0 million to $20.3 million for the six months ended February 28, 2023. This change was primarily due to decreases in treasury stock purchases of $12.5 million from period to period. Additionally, cash used in financing activities decreased due to higher proceeds provided by our line of credit agreement of $7.1 million. Decreases in shares withheld to cover taxes on conversion of equity rewards also reduced cash used in financing activities by $3.7 million, as a result of lower settlements of stock-based equity awards from period to period. Offsetting these decreases in cash outflows from period to period were increases in dividends paid to our stockholders of $1.3 million. Effect of Exchange Rate Changes All of our foreign subsidiaries currently operate in currencies other than the U.S. Dollar and a significant portion of our consolidated cash balance is denominated in these foreign functional currencies, particularly at our U.K. subsidiary, which 37 operates in Pound Sterling. As a result, our cash and cash equivalents balances are subject to the effects of the fluctuations in these functional currencies against the U.S. Dollar at the end of each reporting period. The net effect of exchange rate changes on cash and cash equivalents, when expressed in U.S. Dollar terms, was an increase in cash of $2.8 million for the six months ended February 28, 2023 as compared to a decrease in cash of $0.9 million for the six months ended February 28, 2022. 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. Dollar. Commercial Commitments We have ongoing relationships with various third-party suppliers (contract manufacturers) that manufacture our products and third-party distribution centers which warehouse and ship our products to customers. The contract manufacturers maintain title and control of certain raw materials and components, materials utilized in finished products, and of the finished products themselves until shipment to our customers or third-party distribution centers in accordance with agreed upon shipment terms. Although we have definitive minimum purchase obligations in the contract terms with certain of our contract manufacturers, when such obligations have been included, they have either been immaterial or the minimum amounts have been such that they are well below the volume of goods that we have historically purchased. In addition, in the ordinary course of business, we communicate supply needs to our contract manufacturers based on orders and short-term projections, ranging from two to six months. We are committed to purchase the products produced by the contract manufacturers based on the projections provided. Upon the termination of contracts with contract manufacturers, we obtain certain inventory control rights and are obligated to work with the contract manufacturer to sell through all product held by or manufactured by the contract manufacturer on our behalf during the termination notification period. If any inventory remains at the contract manufacturer at the termination date, we are obligated to purchase such inventory, which may include raw materials, components and finished goods . The amounts for inventory purchased under termination commitments have been immaterial. 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 February 28, 2023, 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 . Dividends On March 21, 2023, the Company’s Board declared a cash dividend of $0.83 per share payable on April 28, 2023 to stockholders of record on April 14, 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. Critical accounting policies are those that involve subjective or complex judgments, often as a result of the need to make estimates. The following areas all require the use of judgments and estimates: revenue recognition, accounting for income taxes and impairment of definite-lived intangible assets. 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 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. 38 Recently Issued Accounting Standards There have been no recently issued accounting standards that will have a material impact on our consolidated financial statements and related disclosures. Item 3. Quantitative and Qualitative Disclosures About Market Risk The information required by this item is incorporated by reference to Part II — Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” 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.