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” and “the Company” 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, 2023, which was filed with the Securities and Exchange Commission (“SEC”) on October 23, 2023. 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,” “project,” “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; changes in the political conditions or relations between the United States and other nations; the impacts from inflationary trends and supply chain constraints; changes in interest rates; 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, 2023, and in Part II—Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q. Overview The Company WD-40 Company based in San Diego, California, is a global marketing organization dedicated to creating positive lasting memories by developing and selling products that solve problems in workshops, factories and homes around the world. We own a wide range of well-known brands that include maintenance products and homecare and cleaning products: WD-40® Multi-Use Product, WD-40 Specialist®, 3-IN-ONE®, GT85®, X-14®, 2000 Flushes®, Carpet Fresh®, no vac®, Spot Shot®, 1001®, Lava® and Solvol®. 18 Table of Contents 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, India, 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 three months ended November 30, 2023: • Consolidated net sales increased $15.5 million, or 12%, compared to the corresponding period of the prior fiscal year. Increases in sales volume favorably impacted net sales by approximately $7.6 million from period to period. Increases in the average selling price of our products positively impacted net sales by approximately $4.1 million from period to period, primarily due to sales price increases implemented in certain regions during the prior fiscal year. 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 a favorable impact of $3.8 million on consolidated net sales for the first three months of fiscal year 2024. On a constant currency basis, net sales would have increased by $11.7 million, or 9%, from period to period. This favorable impact from changes in foreign currency exchange rates mainly came from our EIMEA segment, which accounted for 35% of our consolidated sales for the three months ended November 30, 2023. • Gross profit as a percentage of net sales increased to 53.8% compared to 51.4% for the corresponding period of the prior fiscal year. • Consolidated net income increased $3.5 million, or 25%, compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates from period to period had a favorable impact of $0.6 million on consolidated net income for the first quarter of fiscal year 2024. Thus, on a constant currency basis, net income would have increased $2.9 million, or 21%, from period to period. • Diluted earnings per common share were $1.28 versus $1.02 in the prior fiscal year period. 19 Table of Contents Results of Operations Three Months Ended November 30, 2023 Compared to Three Months Ended November 30, 2022 Operating Items The following table summarizes operating data for our consolidated operations (in thousands, except percentages and per share amounts): Three Months Ended November 30, 2023 2022 Change from Prior Year Dollars Percent Net sales: WD-40 Multi-Use Product $ 107,677 $ 94,587 $ 13,090 14 % WD-40 Specialist 16,842 15,406 1,436 9 % Other maintenance products 7,626 6,319 1,307 21 % Total maintenance products 132,145 116,312 15,833 14 % HCCP (1) 8,271 8,581 (310) (4) % Total net sales 140,416 124,893 15,523 12 % Cost of products sold 64,863 60,638 4,225 7 % Gross profit 75,553 64,255 11,298 18 % Operating expenses 51,369 45,576 5,793 13 % Income from operations $ 24,184 $ 18,679 $ 5,505 29 % Net income $ 17,482 $ 13,997 $ 3,485 25 % EPS – diluted $ 1.28 $ 1.02 $ 0.26 25 % (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 November 30, 2023 2022 Change from Prior Year Dollars Percent Americas $ 64,075 $ 58,014 $ 6,061 10 % EIMEA 48,754 40,772 7,982 20 % Asia-Pacific 27,587 26,107 1,480 6 % Total $ 140,416 $ 124,893 $ 15,523 12 % 20 Table of Contents 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 November 30, 2023 2022 Change from Prior Year Dollars Percent WD-40 Multi-Use Product $ 48,511 $ 43,157 $ 5,354 12 % WD-40 Specialist 7,108 6,825 283 4 % Other maintenance products 4,126 3,589 537 15 % Total maintenance products 59,745 53,571 6,174 12 % HCCP 4,330 4,443 (113) (3) % Total net sales $ 64,075 $ 58,014 $ 6,061 10 % % of consolidated net sales 45 % 46 % CC Net sales – non-GAAP (1) $ 63,349 $ 58,014 $ 5,335 9 % Currency impact on current period – non-GAAP $ 726 (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 Increase in average selling price (1) $ 1.8 Increase in sales volume (1) 3.6 Currency impact on current period – non-GAAP 0.7 Increase in net sales $ 6.1 (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 – November 30, 2023 Compared to November 30, 2022 Net sales in the Americas segment increased due to the following: • WD-40 Multi-Use Product sales increased $5.4 million, or 12%, primarily due to increases in the U.S. and Latin America of $2.5 million and $2.4 million, or 8% and 29%, respectively. The increase in the U.S. was due to higher volume as a result of successful promotional programs. In Latin America, sales in the first quarter of fiscal year 2024 were favorably impacted by higher volumes as the result of timing of customer orders. This favorable impact was due to reduced demand in the comparative period as a result of customers that purchased higher levels of our product at the end of fiscal year 2022 in anticipation of price increases. In addition, sales in Canada were favorably impacted by higher sales of premiumized products and successful promotional programs. • WD-40 Specialist sales slightly increased across most regions in the Americas. • Other maintenance product sales increased due to a $0.5 million, or 15%, increase in 3-IN-ONE sales, primarily due to successful promotional programs in Mexico and Canada. • Homecare and cleaning product sales remained relatively consistent period over period. • For the three months ended November 30, 2023, 75% of sales came from the U.S., and 25% of sales came from Canada and Latin America combined compared to the three months ended November 30, 2022 when 78% of sales came from the U.S., and 22% of sales came from Canada and Latin America. 21 Table of Contents EIMEA Sales The following table summarizes net sales by product line for the EIMEA segment, which includes Europe, India, the Middle East and Africa (in thousands, except percentages): Three Months Ended November 30, 2023 2022 Change from Prior Year Dollars Percent WD-40 Multi-Use Product $ 37,044 $ 30,178 $ 6,866 23 % WD-40 Specialist 6,666 6,011 655 11 % Other maintenance products 3,062 2,540 522 21 % Total maintenance products 46,772 38,729 8,043 21 % HCCP 1,982 2,043 (61) (3) % Total net sales $ 48,754 $ 40,772 $ 7,982 20 % % of consolidated net sales 35 % 33 % CC Net sales – non-GAAP (1) $ 45,139 $ 40,772 $ 4,367 11 % Currency impact on current period – non-GAAP $ 3,615 (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 EIMEA segment (in millions): Change from Prior Year First Quarter Increase in average selling price (1) $ 0.7 Increase in sales volume (1) 3.7 Currency impact on current period – non-GAAP 3.6 Increase in net sales $ 8.0 (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 Germany, Austria, Denmark, Switzerland, Belgium and the Netherlands). The regions in the EIMEA segment where we sell through local distributors include the Middle East, Africa, India, Eastern and Northern Europe. EIMEA Sales – Three Months Ended – November 30, 2023 Compared to November 30, 2022 Net sales increased in the EIMEA segment primarily due to the following: • WD-40 Multi-Use Product sales increased $6.9 million, or 23%, primarily due to higher sales volume and the impact of price increases implemented in the fourth quarter of fiscal year 2022 and first quarter of fiscal year 2023. This resulted in reduced demand in the comparative period as customers adjusted to those price increases. In addition, sales were favorably impacted by changes in foreign currency exchanges rates. Sales increased most significantly in the Germanics region, France, the Middle East, and Iberia, which were up $2.8 million, $1.9 million, $1.6 million, and $1.3 million, respectively. These increases were partially offset by decreased sales in India of $0.9 million from period to period. • WD-40 Specialist and other maintenance product sales increased $0.7 million, or 11%, and $0.5 million, or 21%, respectively, primarily due to the combined impact of higher sales volume and the favorable impact of price increases. France, in particular, saw an increase in sales of $0.7 million in these categories from period to period. 22 Table of Contents • Homecare and cleaning product sales remained relatively consistent period over period. • Net sales were favorably impacted $3.6 million across our various brands as a result of favorable changes in foreign currency exchange rates. On a constant currency basis, sales in EIMEA would have increased 11%. 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 November 30, Change from Prior Year 2023 2022 Dollars Percent WD-40 Multi-Use Product $ 22,122 $ 21,252 $ 870 4 % WD-40 Specialist 3,068 2,570 498 19 % Other maintenance products 438 190 248 131 % Total maintenance products 25,628 24,012 1,616 7 % HCCP 1,959 2,095 (136) (6) % Total net sales $ 27,587 $ 26,107 $ 1,480 6 % % of consolidated net sales 20 % 21 % CC Net sales – non-GAAP (1) $ 27,986 $ 26,107 $ 1,879 7 % Currency impact on current period – non-GAAP $ (399) (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 Increase in average selling price (1) $ 1.6 Increase in sales volume (1) 0.3 Currency impact on current period – non-GAAP (0.4) Increase in net sales $ 1.5 (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 – November 30, 2023 Compared to November 30, 2022 Net sales in the Asia-Pacific segment increased primarily due to the following: • WD-40 Multi-Use Product sales increased $0.9 million, or 4%. Sales in China increased $0.5 million, or 8%, due to successful promotional programs and marketing activities which resulted in increased sales volume. In addition, timing of customer orders favorably impacted sales in China, which was slightly offset by unfavorable changes in foreign currency exchange rates. Sales of WD-40 Multi-Use Product in the Asia distributor markets also increased $0.5 million, or 4%, primarily due to price increases in these markets from period to period and successful promotional programs in certain regions. • WD-40 Specialist sales increased $0.5 million, or 19%, primarily due to successful promotional programs and marketing activities in China that increased sales volume. • Other maintenance product sales increased due to a $0.2 million, or 131%, increase in 3-IN-ONE sales, primarily due to increased sales in Australia as a result of the timing of customer orders and successful promotional programs. 23 Table of Contents • Homecare and cleaning product sales did not change by a significant amount period over period. Gross Profit The following general information is important when assessing fluctuations in our gross margin: • 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 EIMEA 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 EIMEA segment from period to period; and • Our gross profit and gross margin may not be comparable to those of other consumer product companies, since some of these companies include all costs related to distribution of their products in cost of products sold, whereas we exclude the portion associated with amounts paid to third parties for shipment to our customers from our distribution centers and contract manufacturers and include these costs in selling, general and administrative expenses. These costs totaled $4.1 million and $4.2 million for the three months ended November 30, 2023 and 2022, respectively. The following table summarizes gross margin and gross profit (in thousands, except percentages): Three Months Ended November 30, 2023 2022 Change from Prior Year Gross profit $ 75,553 $ 64,255 $ 11,298 Gross margin 53.8 % 51.4 % 240 bps (1) (1) Basis points (“bps”) change in gross margin. Gross Margin – Three Months Ended – November 30, 2023 Compared to November 30, 2022 Gross margin increased 240 bps primarily due to the following favorable impacts, partially offset by unfavorable impacts: Favorable/(Unfavorable) Explanations 150 bps Lower warehousing, distribution and freight costs, primarily in the Americas segment. 130 bps Favorable sales mix and other miscellaneous mix impacts. 120 bps Increases in average selling prices. 60 bps Lower costs of specialty chemicals used in the formulation of our products. (80) bps Higher costs of aerosol cans. (70) bps Increases in miscellaneous other input costs. (40) bps Higher filling fees paid to our third-party contract manufacturers, primarily in the Americas segment. 24 Table of Contents Selling, General and Administrative (“SG&A”) Expenses Three Months Ended November 30, 2023 2022 Change from Prior Year (in thousands) Dollars Percent SG&A expenses $ 44,135 $ 39,984 $ 4,151 10 % % of net sales 31.4 % 32.0 % SG&A Expenses – Three Months Ended – November 30, 2023 Compared to November 30, 2022 The increase in SG&A expenses was primarily due to increases in employee-related costs of $1.8 million due to higher headcount, annual compensation increases and higher incentive compensation accruals, partially offset by lower stock-based compensation expense. Travel and meeting expense also increased SG&A by $0.9 million due to a higher level of activity to support our strategic framework, particularly in the EIMEA segment. In addition, professional services fees increased $0.5 million primarily due to increased legal expenses from period to period. In addition, changes in foreign currency exchange rates increased SG&A expenses by $1.1 million from period to period. These increases to SG&A expenses were partially offset by a decrease in freight expense of $0.3 million from period to period. We continued our research and development investment, the majority of which is associated with our maintenance products, including efforts focused on sustainability as well as our focus on innovation and renovation of our products. Research and development costs were $1.9 million and $1.3 million for the three months ended November 30, 2023 and 2022, respectively. The increase from period to period was partially due to a higher level of research and development activity associated with our sustainability initiatives. Our research and development team engages in consumer research, environmental and sustainability initiatives, product development, 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 November 30, Change from Prior Year (in thousands) 2023 2022 Dollars Percent A&P expenses $ 6,983 $ 5,339 $ 1,644 31 % % of net sales 5.0 % 4.3 % A&P Expenses – Three Months Ended – November 30, 2023 Compared to November 30, 2022 The increase in A&P expenses was primarily due to a higher level of promotional programs and marketing support, particularly in the Americas 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 were $7.8 million and $6.5 million, or 5.5% and 5.2% of net sales, for the three months ended November 30, 2023 and 2022, respectively. Therefore, our total investment in A&P activities was $14.8 million and $11.8 million or 10.5% and 9.5% of net sales, for the three months ended November 30, 2023 and 2022, respectively. 25 Table of Contents Income from Operations by Segment The following table summarizes income from operations by segment (in thousands, except percentages): Three Months Ended November 30, 2023 2022 Change from Prior Year Dollars Percent Americas $ 14,196 $ 12,772 $ 1,424 11 % EIMEA 9,515 6,283 3,232 51 % Asia-Pacific 11,025 9,617 1,408 15 % Unallocated corporate (10,552) (9,993) (559) (6) % Total $ 24,184 $ 18,679 $ 5,505 29 % Americas Americas Operating Income – Three Months Ended – November 30, 2023 Compared to November 30, 2022 Income from operations for the Americas increased to $14.2 million, up $1.4 million, or 11%, due to a $6.1 million increase in sales partially offset by higher operating expenses. Gross margin for the Americas segment remained constant at 50.7%. Operating expenses increased $1.6 million due to higher A&P investments and higher employee-related costs, including annual compensation increases and a higher level of fringe benefits. In addition, operating expenses increased due to a higher level of travel and meeting expense. Operating income as a percentage of net sales increased from 22.0% to 22.2% period over period. EIMEA EIMEA Operating Income – Three Months Ended – November 30, 2023 Compared to November 30, 2022 Income from operations for the EIMEA segment increased to $9.5 million, up $3.2 million, or 51%, primarily due to a $8.0 million increase in sales and a higher gross margin, which was partially offset by higher operating expenses. Gross margin for the EIMEA segment increased from 50.6% to 54.9% primarily due to price increases that were implemented in the fourth quarter of fiscal year 2022 and first quarter of fiscal year 2023, as well as decreased costs of petroleum-based specialty chemicals and lower warehousing, distribution and freight costs. These favorable impacts to gross margin were partially offset by increases in the costs of aerosol cans and filling fees at our third-party manufacturers. Operating expenses increased $2.9 million primarily due to higher employee-related costs from increased headcount as well as annual compensation increases and higher incentive compensation. In addition, travel and meeting expenses increased. Operating income as a percentage of net sales increased from 15.4% to 19.5% period over period. Asia-Pacific Asia-Pacific Operating Income – Three Months Ended – November 30, 2023 Compared to November 30, 2022 Income from operations for the Asia-Pacific segment increased to $11.0 million, up $1.4 million, or 15%, primarily due to a $1.5 million increase in sales and a higher gross margin, partially offset by an increase in operating expenses. Gross margin for the Asia-Pacific segment increased from 54.4% to 59.2% primarily due to the favorable impact of price increases that were implemented during the last twelve months and decreased costs of petroleum-based specialty chemicals, partially offset by higher miscellaneous costs from period to period. Operating expenses increased $0.7 million from period to period primarily due to higher A&P expenses. Operating income as a percentage of net sales increased from 36.8% to 40.0% period over period. 26 Table of Contents Non-Operating Items The following table summarizes non-operating income and expenses for our consolidated operations (in thousands): Three Months Ended November 30, 2023 2022 Change Interest income $ 74 $ 44 $ 30 Interest expense $ 1,146 $ 1,169 $ (23) Other (expense) income, net $ (40) $ 150 $ (190) Provision for income taxes $ 5,590 $ 3,707 $ 1,883 Interest Expense Interest expense remained relatively consistent period over period. Other Income (Expense), Net Other income (expense) was not significant during the three months ended November 30, 2023 and 2022. Provision for Income Taxes The provision for income taxes was 24.2% and 20.9% of income before income taxes for the three months ended November 30, 2023 and 2022, respectively. Descriptions of impacts on our effective income tax rate are incorporated by reference to Part I-Item 1, “Notes to Condensed Consolidated Financial States” Note 13 – Income Taxes included in this report. Net Income Net income increased 25% to $17.5 million, or $1.28 per common share on a fully diluted basis, for the three months ended November 30, 2023 compared to $14.0 million, or $1.02 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 a favorable impact of $0.6 million on consolidated net income for the three months ended November 30, 2023. Thus, on a constant currency basis, net income would have increased $2.9 million, or 21%, 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 (“Adjusted 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, amortization of implementation costs associated with cloud computing arrangements (“cloud computing amortization”) and depreciation in operating departments. Adjusted EBITDA is defined as net income before interest, income taxes, depreciation, amortization of definite-lived intangible assets, and cloud computing amortization. Beginning in fiscal year 2024, cloud computing amortization is included in our of cost of doing business and Adjusted EBITDA calculations. We are in the process of implementing a new cloud-based enterprise resource planning system, which we will begin to amortize once the system is placed into service. Implementation of such systems is related to initiatives associated with our strategic framework intended to achieve greater operational efficiencies. Cloud computing amortization is recognized in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations. We target our gross margin to be 55% of net sales, our cost of doing business to be 30% of net sales, and our Adjusted EBITDA to be 25% of net sales. Results for these performance measures may vary from period to period depending on various factors, including economic conditions such as the inflationary environment we have experienced in the last several fiscal years, and our level of investment in activities for the future such as those related to quality assurance, regulatory compliance, information technology, sustainability, and intellectual property protection in order to safeguard our WD-40 brand. Our targets for gross margin and these other performance measures are long-term in nature and we expect to make progress towards them over time. 27 Table of Contents The following table summarizes the results of these performance measures: Three Months Ended November 30, 2023 2022 Gross margin – GAAP 54 % 51 % Cost of doing business as a percentage of net sales – non-GAAP 36 % 36 % Adjusted EBITDA as a percentage of net sales – non-GAAP (1) 19 % 17 % (1) Percentages may not aggregate to Adjusted 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 Adjusted 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 November 30, 2023 2022 Total operating expenses – GAAP $ 51,369 $ 45,576 Amortization (1) (308) (253) Depreciation (in operating departments) (1,049) (965) Cost of doing business $ 50,012 $ 44,358 Net sales $ 140,416 $ 124,893 Cost of doing business as a percentage of net sales – non-GAAP 36 % 36 % (1) Includes amortization of definite-lived intangible assets and cloud computing amortization. Adjusted EBITDA (in thousands, except percentages) Three Months Ended November 30, 2023 2022 Net income – GAAP $ 17,482 $ 13,997 Provision for income taxes 5,590 3,707 Interest income (74) (44) Interest expense 1,146 1,169 Amortization (1) 308 253 Depreciation 2,010 1,643 Adjusted EBITDA $ 26,462 $ 20,725 Net sales $ 140,416 $ 124,893 Adjusted EBITDA as a percentage of net sales – non-GAAP 19 % 17 % (1) Includes amortization of definite-lived intangible assets and cloud computing amortization. Liquidity and Capital Resources Overview Our financial condition and liquidity remain strong. Although there continues to be uncertainty related to adverse global economic conditions, volatility in financial markets, the current inflationary environment and their impacts on our future 28 Table of Contents results, we believe our efficient business model positions us to manage our business through such situations. 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, N.A. 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 8 – 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 EIMEA segment. Euro and Pound Sterling denominated draws 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 November 30, 2023, $19.8 million of this facility was classified as long-term and was entirely denominated in Euros. $23.6 million was classified as short-term and was denominated in U.S. Dollars and Pounds Sterling. In the United States, we held $67.2 million in fixed rate long-term borrowings as of November 30, 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 three months of fiscal year 2024. There were no other letters of credit outstanding or restrictions on the amount available on our line of credit or notes. Per the terms of both the Note Agreement and the Credit Agreement, our consolidated leverage ratio cannot be greater than three and a half to one and our consolidated interest coverage ratio cannot be less than three to one. See Note 8 – Debt for additional information on these financial covenants. At November 30, 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 November 30, 2023, we had a total of $50.3 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 June 19, 2023, the Board approved the 2023 Repurchase Plan. Under the 2023 Repurchase Plan, which became effective on September 1, 2023, we are authorized to acquire up to $50.0 million of our outstanding shares through August 31, 2025, of which $47.6 million remains available for the repurchase of shares of common stock as of November 30, 2023. Cash Flows The following table summarizes our cash flows by category for the periods presented (in thousands): Three Months Ended November 30, 2023 2022 Change Net cash provided by operating activities $ 26,916 $ 10,437 $ 16,479 Net cash used in investing activities (671) (1,300) 629 Net cash used in financing activities (24,502) (12,342) (12,160) Effect of exchange rate changes on cash and cash equivalents 431 2,244 (1,813) Net increase (decrease) in cash and cash equivalents $ 2,174 $ (961) $ 3,135 Operating Activities Net cash provided by operating activities increased $16.5 million to $26.9 million for the three months ended November 30, 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 three months ended November 30, 2023 was net income of $17.5 million, which increased approximately $3.5 million from period to period. 29 Table of Contents Changes in our working capital, which increased net cash provided by operating activities, were primarily attributable to a decrease in inventory during the first quarter of fiscal year 2024 compared to a significant increase in inventory in the corresponding period of the prior fiscal year, which resulted in a $18.7 million favorable impact period over period to our cash provided by operating activities. In the corresponding period of the prior fiscal year, we had continued to build our inventory levels of certain raw materials, components and finished goods due to challenges within supply chain that we experienced after the COVID-19 pandemic. We have since been able to increase the capacity and flexibility of our supply chain which has enabled us to reduce our inventory levels since they peaked during the first quarter of 2023. Investing Activities Net cash used in investing activities decreased $0.6 million to $0.7 million for the three months ended November 30, 2023, primarily due to a lower level of manufacturing-related capital expenditures within the U.S. and the U.K. from period to period. Financing Activities Net cash used in financing activities increased $12.2 million to $24.5 million for the three months ended November 30, 2023. This change was primarily due to net repayments on our revolving credit facility of $9.7 million during the first three months of the fiscal year, compared to net proceeds of $3.4 million in the corresponding period of the prior fiscal year. Increases in dividends paid to our stockholders also increased cash used in financing activities by $0.7 million. Offsetting these increases in cash outflows from period to period was a decrease in treasury stock purchases of $1.7 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 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 $0.4 million for the three months ended November 30, 2023 as compared to an increase in cash of $2.2 million for the three months ended November 30, 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 that 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 the finished products themselves until shipment to our third-party distribution centers or customers in accordance with agreed upon shipment terms. Although we have contractual minimum purchase obligations with certain contract manufacturers, such obligations are immaterial or 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 November 30, 2023, no such commitments were outstanding. Share Repurchase Plans The information required by this item is incorporated by reference to Part I—Item 1, “Notes to Condensed Consolidated Financial Statements” Note 9 — Share Repurchase Plan included in this report. 30 Table of Contents Dividends On December 12, 2023, the Company’s Board approved a 6% increase in the regular quarterly cash dividend, increasing it from $0.83 per share to $0.88 per share. The $0.88 per share dividend declared on December 12, 2023 is payable on January 31, 2024 to stockholders of record on January 19, 2024. Critical Accounting Policies and Estimates Our discussion and analysis of our operating results and financial condition is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted 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 and accounting for income taxes. Estimates in each of these areas are based on historical experience and various judgments and assumptions that we believe are appropriate. Actual results may materially differ 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, 2023, which was filed with the SEC on October 23, 2023. 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, 2023, which was filed with the SEC on October 23, 2023.