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, 2024, which was filed with the Securities and Exchange Commission (“SEC”) on October 21, 2024. 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: expected benefits from the acquisition or divestiture transaction; acquired business not performing as expected; assuming unexpected risks, liabilities and obligations of the acquired business; disruption to the parties’ business as a result of the announcement and acquisition or divestiture transaction; integration of acquired business and operations into the Company; the Company's ability to successfully complete any planned divestiture; expected timing of the closing for the divestiture; expected proceeds from the divestiture; the intended use of proceeds by the Company from the divestiture transaction; impact of the divestiture transaction on the Company's stock price or EPS; 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, 2024, 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®. 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. During the first quarter of fiscal year 2025 we classified our homecare and cleaning product businesses in the Americas and EIMEA segments to held for sale. We sell our products primarily through hardware stores, automotive parts outlets, industrial distributors and suppliers, mass retail and home center stores, value retailers, grocery stores, online retailers, warehouse club stores, farm supply, sport retailers, and independent bike dealers. 19 Table of Contents Highlights The following summarizes the financial and operational highlights for our business during the three months ended November 30, 2024: • Consolidated net sales increased $13.1 million or 9%, to $153.5 million compared to the corresponding period of the prior fiscal year. Increases in sales volume favorably impacted net sales by approximately $10.4 million from period to period. Increases in the average selling price of our products positively impacted net sales by approximately $1.2 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. Consolidated net sales was also favorably impacted by changes in foreign currency exchange rates which was estimated to be $1.5 million from period to period. • Gross profit as a percentage of net sales increased to 54.8% compared to 53.8% for the corresponding period of the prior fiscal year. • Consolidated net income increased $1.4 million, or 8%, compared to the corresponding period of the prior fiscal year. • Diluted earnings per common share were $1.39 versus $1.28 in the prior fiscal year period. • During the first quarter of fiscal year 2025 we reclassified our homecare and cleaning product businesses in the Americas and EIMEA segments to held for sale. • We returned approximately $15.6 million to our stockholders in the first quarter of fiscal 2025 through share repurchases and dividends. Results of Operations Three Months Ended November 30, 2024 Compared to Three Months Ended November 30, 2023 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, 2024 2023 Change from Prior Year Dollars Percent Net sales: WD-40 Multi-Use Product $ 118,547 $ 107,677 $ 10,870 10 % WD-40 Specialist 19,172 16,842 2,330 14 % Other maintenance products 7,788 7,626 162 2 % Total maintenance products 145,507 132,145 13,362 10 % HCCP (1) 7,988 8,271 (283) (3) % Total net sales 153,495 140,416 13,079 9 % Cost of products sold 69,408 64,863 4,545 7 % Gross profit 84,087 75,553 8,534 11 % Operating expenses 58,965 51,369 7,596 15 % Income from operations $ 25,122 $ 24,184 $ 938 4 % Net income $ 18,925 $ 17,482 $ 1,443 8 % EPS – diluted $ 1.39 $ 1.28 $ 0.11 9 % Shares used in diluted EPS 13,573 13,584 (11) 0 % (1) Homecare and cleaning products (“HCCP”) 20 Table of Contents Net Sales by Segment The following table summarizes net sales by segment (in thousands, except percentages): Three Months Ended November 30, 2024 2023 Change from Prior Year Dollars Percent Americas $ 69,436 $ 64,075 $ 5,361 8 % EIMEA 57,483 48,754 8,729 18 % Asia-Pacific 26,576 27,587 (1,011) (4) % Total $ 153,495 $ 140,416 $ 13,079 9 % 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, 2024 2023 Change from Prior Year Dollars Percent WD-40 Multi-Use Product $ 52,901 $ 48,511 $ 4,390 9 % WD-40 Specialist 8,233 7,108 1,125 16 % Other maintenance products 4,274 4,126 148 4 % Total maintenance products 65,408 59,745 5,663 9 % HCCP 4,028 4,330 (302) (7) % Total net sales $ 69,436 $ 64,075 $ 5,361 8 % % of consolidated net sales 45 % 45 % 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) $ 0.2 Increase in sales volume (1) 6.3 Currency impact on current period (1.1) Increase in net sales $ 5.4 (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, 2024 Compared to November 30, 2023 Net sales in the Americas segment increased from period to period, highlighted by the following: • WD-40 Multi-Use Product sales increased $4.4 million, or 9%, primarily due to increases in U.S. and Latin America of $2.4 million and $2.3 million, or 7% and 21%, respectively. The increase in the U.S. was primarily due to higher sales volume as a result of successful promotional programs. Sales in Latin America were favorably impacted by increased sales in Brazil which benefited from a shift from an indirect distribution model to a direct model in the third quarter of fiscal year 2024. This shift favorably impacted sales in Brazil by $3.1 million for the three months ended November 30, 2024. This increase in Latin America was partially offset by lower sales in Mexico due to decreased volumes and the timing of customer orders, as well as unfavorable changes in foreign currency exchange rates. 21 Table of Contents • WD-40 Specialist sales increased $1.1 million, or 16%, primarily due to new distribution and successful promotional programs in the United States. • Other maintenance product sales remained relatively constant from period to period. • Homecare and cleaning product sales decreased $0.3 million, or 7%, primarily due to reduced sales volume in the U.S. as a result of a lower level of advertising and promotional activities associated with these brands, as we focus on increasing sales of maintenance products in support of our four-by-four strategic framework. • For the three months ended November 30, 2024, 73% of sales came from the U.S., and 27% of sales came from Canada and Latin America combined compared to the three months ended November 30, 2023 when 75% of sales came from the U.S., and 25% of sales came from Canada and Latin America. 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, 2024 2023 Change from Prior Year Dollars Percent WD-40 Multi-Use Product $ 44,866 $ 37,044 $ 7,822 21 % WD-40 Specialist 7,817 6,666 1,151 17 % Other maintenance products 3,194 3,062 132 4 % Total maintenance products 55,877 46,772 9,105 19 % HCCP 1,606 1,982 (376) (19) % Total net sales $ 57,483 $ 48,754 $ 8,729 18 % % of consolidated net sales 38 % 35 % 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) $ 0.5 Increase in sales volume (1) 6.2 Currency impact on current period 2.0 Increase in net sales $ 8.7 (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) DACH (which includes Germany, Austria and Switzerland) and Benelux (which includes Belgium, the Netherlands and Luxembourg). 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, 2024 Compared to November 30, 2023 Net sales increased in the EIMEA segment from period to period, highlighted by the following: • WD-40 Multi-Use Product sales increased $7.8 million, or 21%, primarily due to higher sales volume across almost all regions. Sales increased most significantly in India, France, the Benelux regions and Iberia, which were up $1.9 million, $1.0 million, $0.9 million and $0.9 million, respectively, from period to period. Sales in India increased due to increased distribution and timing of customer orders. Most regions in EIMEA have experienced 22 Table of Contents continued recovery of sales volumes since price increases we implemented in late fiscal year 2022 and early fiscal year 2023. While most of this volume recovery was experienced in fiscal year 2024 after customers adjusted to those price increases, this volume recovery has continued into fiscal year 2025 and resulted in higher sales levels. • WD-40 Specialist sales increased $1.2 million, or 17%, primarily due to higher sales volume as a result of increased distribution and stronger levels of demand most significantly in Iberia, U.K. and Italy which were each up $0.5 million, $0.3 million, and $0.3 million, respectively. • Other maintenance product sales remained relatively constant from period to period. • Homecare and cleaning product sales decreased $0.4 million, or 19%, primarily due to reduced demand in the U.K. as a result of a lower level of advertising and promotional activities associated with these brands, as we focus on increasing sales of maintenance products in support of our four-by-four strategic framework. 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 2024 2023 Dollars Percent WD-40 Multi-Use Product $ 20,780 $ 22,122 $ (1,342) (6) % WD-40 Specialist 3,122 $ 3,068 $ 54 2 % Other maintenance products 320 $ 438 $ (118) (27) % Total maintenance products 24,222 $ 25,628 $ (1,406) (5) % HCCP 2,354 1,959 395 20 % Total net sales $ 26,576 $ 27,587 $ (1,011) (4) % % of consolidated net sales 17 % 20 % 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) $ 0.5 Decrease in sales volume (1) (2.1) Currency impact on current period 0.6 Increase in net sales $ (1.0) (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. Asia-Pacific Sales – Three Months Ended – November 30, 2024 Compared to November 30, 2023 Net sales in the Asia-Pacific segment decreased from period to period, highlighted by the following: • WD-40 Multi-Use Product sales decreased $1.3 million, or 6%, primarily due to decreases in our Asia distributor markets of $2.6 million partially offset by increases in China of $1.0 million. Asia distributor markets experienced a decrease in sales volume due to timing of customer orders placed by many of our marketing distributor customers, particularly in Indonesia, South Korea, and Philippines. Many of these marketing distributors were carrying high levels of inventory after participating in successful promotional programs in fiscal year 2024 and reduced the volume of orders during the first quarter of fiscal year 2025 to adjust to more normal levels of inventory for our product. Sales in China increased due to increased sales volume from successful promotional programs and marketing activities. 23 Table of Contents • WD-40 Specialist sales remained relatively constant from period to period. • Homecare and cleaning product sales increased $0.4 million, or 20%. The increase was due to higher sales volume in Australia attributable to increased support of these products from successful promotional activities and improved packaging. Our homecare and cleaning businesses in the Asia-Pacific segment are not held for sale. • Net sales were favorably impacted $0.6 million across our various brands as a result of changes in foreign currency exchange rates. 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 cost of our products sold are generated in the Pound Sterling and Euro. The strengthening or weakening of the Pound Sterling and Euro against U.S. Dollar may result in foreign currency related changes to the gross margin percentage in the EIMEA segment from period to period. • 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 $4.6 million and $4.1 million for the three months ended November 30, 2024 and 2023, respectively. The following table summarizes gross margin and gross profit (in thousands, except percentages): Three Months Ended November 30, 2024 2023 Change from Prior Year Gross profit $ 84,087 $ 75,553 $ 8,534 Gross margin 54.8 % 53.8 % 100 bps (1) (1) Basis points (“bps”) change in gross margin. Gross Margin – Three Months Ended – November 30, 2024 Compared to November 30, 2023 Gross margin increased 100 bps primarily due to the following favorable impacts, partially offset by unfavorable impacts: Favorable/(Unfavorable) Explanations 140 bps Favorable sales mix and other miscellaneous mix impacts 60 bps Lower costs of specialty chemicals used in the formulation of our products (100) bps Higher warehousing, distribution and freight costs, primarily in the Americas segment During the first quarter of fiscal year 2025 we reclassified our homecare and cleaning product businesses in the Americas and EIMEA segments to held for sale. Gross margin excluding these products was 55.4% during the three months ended November 30, 2024. 24 Table of Contents Selling, General and Administrative (“SG&A”) Expenses Three Months Ended November 30, 2024 2023 Change from Prior Year (in thousands) Dollars Percent SG&A expenses $ 50,525 $ 44,135 $ 6,390 14 % % of net sales 32.9 % 31.4 % SG&A Expenses – Three Months Ended – November 30, 2024 Compared to November 30, 2023 The increase in SG&A expenses was primarily due to increases in employee-related costs of $2.2 million due to higher accrued incentive compensation, annual compensation increases and higher headcount. This was partially offset by lower stock based compensation expense due to changes in the vesting provisions for the acceleration of expense for certain equity awards granted during the first quarter of fiscal year 2025. Professional services fees increased $1.6 million in support of our strategic initiatives in the Americas and EIMEA segments, primarily due to higher costs associated with computer related software licenses and solutions, including increased cloud computing amortization of $0.4 million. In addition, provision for credit losses increased by $1.0 million, and freight expense increased by $0.5 million primarily due to the combined impacts of higher sales and increased costs. We continued our research and development investment, the majority of which is associated with our maintenance products. Our research and development team engages in innovation and renovation of our products, consumer research, environmental and sustainability initiatives, new product development, 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. Research and development costs were $1.9 million for both the three months ended November 30, 2024 and 2023. Advertising and Sales Promotion (“A&P”) Expenses Three Months Ended November 30, Change from Prior Year (in thousands) 2024 2023 Dollars Percent A&P expenses $ 8,393 $ 6,983 $ 1,410 20 % % of net sales 5.5 % 5.0 % A&P Expenses – Three M onths Ended – November 30, 2024 Compared to November 30, 2023 The increase in A&P expenses was primarily due to a higher level of promotional programs and marketing support, particularly in EIMEA and the Americas segments. 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 $8.8 million and $7.8 million, or 5.7% and 5.5% for the three months ended November 30, 2024 and 2023, respectively. Therefore, our total expenditure on A&P activities was $17.2 and $14.8 million or 11.2% and 10.5% of net sales for the three months ended November 30, 2024 and 2023, 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, 2024 2023 Change from Prior Year Dollars Percent Americas $ 12,652 $ 14,196 $ (1,544) (11) % EIMEA 13,681 9,515 4,166 44 % Asia-Pacific 10,180 11,025 (845) (8) % Unallocated corporate (1) (11,391) (10,552) (839) (8) % Total $ 25,122 $ 24,184 $ 938 4 % (1) Unallocated corporate expenses are general corporate overhead expenses not directly attributable to any one of the business segments. These expenses are reported separate from our identified segments and are included in Selling, General and Administrative expenses on our consolidated statements of operations. Americas Americas Operating Income – Three Months Ended – November 30, 2024 Compared to November 30, 2023 Income from operations for the Americas decreased to $12.7 million, down $1.5 million, or 11%, due to higher operating expenses partially offset by increased sales. Gross margin for the Americas segment stayed relatively constant decreasing slightly from 50.7% to 50.4% from period to period while sales increased $2.6 million. Operating expenses increased $4.1 million primarily due to higher employee-related costs as a result of increased headcount and annual compensation increases as well as an increase in provision for credit losses from period to period. Operating income as a percentage of net sales decreased from 22.2% to 18.2% period over period. EIMEA EIMEA Operating Income – Three Months Ended – November 30, 2024 Compared to November 30, 2023 Income from operations for the EIMEA segment increased to $13.7 million, up $4.2 million, or 44%, primarily due to a $8.7 million increase in sales and a higher gross margin, partially offset by higher operating expenses. Gross margin for the EIMEA segment increased from 54.9% to 57.8% primarily due to the favorable impact of decreases in the costs of aerosol cans and changes in sales mix and market mix from period to period. Operating expenses increased $2.3 million primarily due to higher employee-related costs as a result of higher accrued incentive compensation, annual compensation increases and increased headcount. In addition, operating expenses increased due to higher A&P and freight expenses. Operating income as a percentage of net sales increased from 19.5% to 23.8% period over period. Asia-Pacific Asia-Pacific Operating Income – Three Months Ended – November 30, 2024 Compared to November 30, 2023 Income from operations for the Asia-Pacific segment decreased to $10.2 million, down $0.8 million, or 8%, primarily due to a $1.0 million decrease in sales partially offset by a higher gross margin. Gross margin for the Asia-Pacific segment increased from 59.2% to 59.6% primarily due to the favorable impact of changes in sales mix and market mix from period to period. Operating income as a percentage of net sales decreased from 40.0% to 38.3% period over period. Unallocated Corporate Unallocated Corporate Expenses – Three Months Ended – November 30, 2024 Compared to November 30, 2023 Unallocated Corporate expenses increased to $11.4 million, up $0.8 million, or 8%, as a result higher costs associated with cloud-based software solutions and the amortization of costs associated with the implementation of the ERP system in the United States. 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, 2024 2023 Change Interest income $ 148 $ 74 $ 74 Interest expense $ 873 $ 1,146 $ (273) Other expense, net $ (141) $ (40) $ (101) Provision for income taxes $ 5,331 $ 5,590 $ (259) Provision for Income Taxes The provision for income taxes was 22.0% and 24.2% of income before income taxes for the three months ended November 30, 2024 and 2023, respectively. Descriptions of impacts on our effective income tax rate are incorporated by reference to Part I—Item 1, “Notes to Condensed Consolidated Financial Statements” Note 13 – Income Taxes included in this report. Net Income Net income increased 8% to $18.9 million, or $1.39 per common share on a fully diluted basis, for the three months ended November 30, 2024 compared to $17.5 million, or $1.28 per common share on a fully diluted basis, for the three months ended November 30, 2023. Changes in foreign currency exchange rates from period to period had an estimated favorable impact of $0.5 million on consolidated net income for the first quarter of fiscal year 2025. 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. We have placed a new cloud-based enterprise resource planning system into service in the U.S., which we began to amortize in the second quarter of fiscal year 2024. Implementation of such systems is related to initiatives associated with our strategic framework to help us achieve greater operational efficiencies. Cloud computing amortization is recognized in selling, general and administrative expenses in our 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. Given the anticipated divestiture of certain trade names of our homecare and cleaning products, progression on certain aspects of our business model may be challenged if the divestiture occurs. However, we intend to focus our resources and investments from the potential sale of those brands on growing our higher growth and higher gross margin core business. 27 Table of Contents The following table summarizes the results of these performance measures: Three Months Ended November 30, 2024 2023 Gross margin – GAAP 55 % 54 % Cost of doing business as a percentage of net sales – non-GAAP 37 % 36 % Adjusted EBITDA as a percentage of net sales – non-GAAP (1) 18 % 19 % (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, 2024 2023 Total operating expenses – GAAP $ 58,965 $ 51,369 Amortization (1) (464) (308) Depreciation (in operating departments) (957) (1,049) Cost of doing business $ 57,544 $ 50,012 Net sales $ 153,495 $ 140,416 Cost of doing business as a percentage of net sales – non-GAAP 37 % 36 % (1) Includes amortization of definite-lived intangible assets and cloud computing amortization. Adjusted EBITDA (in thousands, except percentages) Three Months Ended November 30, 2024 2023 Net income – GAAP $ 18,925 $ 17,482 Provision for income taxes 5,331 5,590 Interest income (148) (74) Interest expense 873 1,146 Amortization (1) 464 308 Depreciation 2,028 2,010 Adjusted EBITDA $ 27,473 $ 26,462 Net sales $ 153,495 $ 140,416 Adjusted EBITDA as a percentage of net sales – non-GAAP 18 % 19 % (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 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 April 30, 2029 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, 2024, $19.0 million of this facility was classified as long-term and was entirely denominated in Euros. $22.6 million was classified as short-term and was entirely denominated in U.S. Dollars. In the United States, we held $66.4 million in fixed rate long-term borrowings as of November 30, 2024, 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 2025. 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, 2024, 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, 2024, we had a total of $54.9 million in cash and cash equivalents. We do not foresee any ongoing issues with repaying our borrowings and we closely monitor the use of this credit facility. 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 $38.3 million remains available for the repurchase of shares of common stock as of November 30, 2024. Cash Flows The following table summarizes our cash flows by category for the periods presented (in thousands): Three Months Ended November 30, 2024 2023 Change Net cash provided by operating activities $ 14,930 $ 26,916 $ (11,986) Net cash used in investing activities (567) (671) 104 Net cash used in financing activities (4,097) (24,502) 20,405 Effect of exchange rate changes on cash and cash equivalents (2,051) 431 (2,482) Net increase in cash and cash equivalents $ 8,215 $ 2,174 $ 6,041 Operating Activities Net cash provided by operating activities decreased $12.0 million to $14.9 million for the three months ended November 30, 2024. 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, 2024 was net income of $18.9 million, which increased approximately $1.4 million from period to period. Changes in adjustments to reconcile net income to cash decreased net cash provided by operating activities by $0.9 million, primarily due to a decreases in stock based 29 Table of Contents compensation and impairments of inventories partially offset by an increase in provision for credit losses during the first three months of the current fiscal year. Changes in working capital decreased net cash provided by operating activities by $12.5 million for the three months ended November 30, 2024 primarily due to changes in inventory balances. Changes in inventory balances decreased net cash provided by operating activities by $6.7 million. The prior fiscal year comparison period had higher inventory levels built up from previous fiscal years and therefore fewer inventory purchases were made in the prior fiscal year. In addition, net cash provided by operating activities decreased by $4.0 million primarily due to higher earned incentive payouts in the first quarter of fiscal year 2025 compared to the same period of the prior fiscal year. Investing Activities Net cash used in investing activities remained relatively consistent from period to period. Financing Activities Net cash used in financing activities increased $20.4 million to $4.1 million for the three months ended November 30, 2024. This change was primarily due to net proceeds of $14.8 million on our revolving credit facility during the first three months of the fiscal year, compared to net repayments of $9.7 million in the corresponding period of the prior fiscal year. In addition, cash used in financing activities increased due to a $2.2 million increase in shares withheld to cover taxes on conversion of equity awards, as well as a $1.2 million increase in treasury stock repurchases. 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. 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 a decrease in cash of $2.1 million for the three months ended November 30, 2024 as compared to an increase in cash of $0.4 million for the three months ended November 30, 2023. 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 Euro and 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, 2024, 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 11, 2024, the Company’s Board approved a 7% increase in the regular quarterly cash dividend, increasing it from $0.88 per share to $0.94 per share. The $0.94 per share dividend declared on December 11, 2024 is payable on January 31, 2025 to stockholders of record at the close of business on January 17, 2025. Critical Accounting 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 estimates are those that involve subjective or complex judgments. 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 estimates from those disclosed in Part II—Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” to our consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2024, which was filed with the SEC on October 21, 2024. Recently Issued Accounting Standards Information on Recently Issued Accounting Standards that could potentially impact our consolidated financial statements and related disclosures is incorporated by reference to Part I—Item 1, “Notes to Condensed Consolidated Financial Statements” Note 2 – Basis of Presentation and Summary of Significant Accounting Policies, included in this report. 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, 2024, which was filed with the SEC on October 21, 2024.