WD-40 pany(US:WDFC)2022-10-24 19:32Part I Business The company operates globally, selling maintenance and homecare products across two main groups with a focus on strategic growth initiatives - The company's sales are derived from two main product groups: maintenance products sold globally, and homecare and cleaning products sold primarily in North America, the U.K., and Australia20 - WD-40's strategic initiatives focus on: (i) building a business for the future (ESG focus), (ii) attracting and developing employees (tribe members), (iii) operational excellence, (iv) growing WD-40 Multi-Use Product, (v) growing the WD-40 Specialist product line, and (vi) expanding portfolio opportunities21 - As of the report date, the company employed 583 people ('tribe members') across 15 countries, with women comprising 46% of the global workforce and a 93% employee engagement level in 20222425 - The company outsources its finished goods manufacturing to third-party manufacturers in numerous countries, including the U.S., U.K., China, and Mexico, while producing its core concentrate in-house and with contractors43 Risk Factors The company faces significant risks from global economic conditions, supply chain disruptions, cost volatility, and cybersecurity threats - Adverse global economic conditions, including inflation and supply chain disruptions, have increased costs and may continue to unfavorably impact gross margin and operating results5354 - The company relies on a limited number of third-party contract manufacturers and suppliers, exposing it to risks of production disruption, capacity constraints, and increased costs6465 - Approximately 66% of net sales in FY2022 were outside the U.S., exposing the company to foreign currency risk, geopolitical instability, and complex international regulations6768 - The ongoing implementation of a new information system presents risks of operational interruption and significant incremental costs if difficulties are encountered74 - Dependence on a limited number of large chain store customers creates risk, as changes in their strategies could harm sales96 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None117 Properties The company owns facilities in California and the UK and leases various office, R&D, and sales spaces across its global operating segments - The company owns an office in San Diego, CA, and an office and plant facility in Milton Keynes, UK118119 - Leased properties include a research and development facility in New Jersey and various offices in Canada, Mexico, Germany, France, Italy, Spain, Portugal, the Netherlands, Australia, China, and Malaysia118119120 Legal Proceedings Information regarding legal proceedings is incorporated by reference from the notes to the consolidated financial statements - The required information is incorporated by reference from Note 12 of the financial statements121 Mine Safety Disclosures This item is not applicable to the company - Not applicable122 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ, with a history of paying dividends and a share repurchase plan effective through August 2023 - The company's common stock is traded on the NASDAQ Global Select Market under the symbol WDFC125 - In December 2021, the Board of Directors increased the regular quarterly cash dividend by 8% from $0.72 to $0.78 per share126 - A new share buy-back plan was approved on October 12, 2021, authorizing the repurchase of up to $75.0 million of outstanding shares through August 31, 2023129 Management's Discussion and Analysis of Financial Condition and Results of Operations FY2022 net sales grew 6% to $518.8 million, but gross margin fell sharply due to cost inflation, and operating cash flow decreased significantly Highlights and Significant Developments FY2022 saw 6% net sales growth despite unfavorable currency impacts, with gross margin declining significantly due to supply chain and inflation pressures FY 2022 Financial Highlights vs. FY 2021 | Metric | FY 2022 | FY 2021 | Change | |:--- |:--- |:--- |:--- | | Net Sales | $518.8 million | $488.1 million | +6% | | Gross Margin | 49.1% | 54.0% | -4.9 p.p. | | Net Income | $67.3 million | $70.2 million | -4% | | Diluted EPS | $4.90 | $5.09 | -4% | - The company suspended sales to Russia and Belarus in March 2022, which represented approximately 3% of consolidated net sales in fiscal year 2021143 - Global supply chain issues and inflation led to increased costs and negatively impacted gross margin, prompting price increases across all markets137139 Results of Operations FY2022 net sales grew 6% to $518.8 million, driven by the Americas and Asia-Pacific, while gross margin fell 490 basis points due to higher costs Net Sales by Segment (FY2022 vs. FY2021) | Segment | FY 2022 Sales | FY 2021 Sales | % Change | Constant Currency % Change | |:--- |:--- |:--- |:--- |:--- | | Americas | $240.2 million | $214.6 million | +12% | +12% | | EMEA | $204.7 million | $208.3 million | -2% | +2% | | Asia-Pacific | $73.9 million | $65.3 million | +13% | +14% | | Total | $518.8 million | $488.1 million | +6% | +8% | Gross Margin Change Drivers (bps) | Driver | Impact (bps) | |:--- |:--- | | Sales Price Increases | +390 | | Higher Specialty Chemical Costs | (430) | | Higher Aerosol Can Costs | (180) | | Higher Warehousing/Freight Costs | (110) | | Higher Filling Fees | (100) | | Foreign Currency Exchange Rates (EMEA) | (50) | | Total Change | (490) | - SG&A expenses decreased by 5% to $138.7 million, mainly due to an $11.5 million reduction in employee-related costs from lower incentive compensation accruals159160 Liquidity and Capital Resources Operating cash flow decreased significantly to $2.6 million from $84.7 million, primarily due to a strategic increase in inventory levels Cash Flow Summary (in thousands) | Cash Flow Activity | FY 2022 | FY 2021 | |:--- |:--- |:--- | | Net cash provided by operating activities | $2,604 | $84,714 | | Net cash used in investing activities | ($7,691) | ($14,460) | | Net cash used in financing activities | ($38,011) | ($40,749) | - The $82.1 million decrease in operating cash flow was primarily driven by a significant, deliberate increase in inventory to manage supply chain volatility186 - As of August 31, 2022, the company had $37.8 million in cash and cash equivalents and was in compliance with all material debt covenants183 Critical Accounting Policies and Estimates The company's most critical accounting policies involve significant management judgment for revenue recognition and income tax accounting - Revenue recognition requires significant estimates for variable consideration; a 10% change in sales incentive accruals would impact net sales by approximately $1.0 million201 - Accounting for income taxes is critical due to the judgment required in establishing deferred tax assets/liabilities and provisions for uncertain tax positions202 Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency, commodity prices tied to oil, and interest rates on its credit facility - The company is exposed to foreign currency translation risk and uses forward contracts to limit exposure on some non-functional currency balances207208 - Commodity price risk is significant, as oil price volatility directly impacts specialty chemical and aerosol can costs, a risk the company does not currently hedge209 - Interest rate risk exists on the $150.0 million revolving credit facility, of which $77.9 million was outstanding as of August 31, 2022210 Financial Statements and Supplementary Data This section contains the audited consolidated financial statements, which received an unqualified opinion with a critical audit matter noted - The consolidated financial statements and the Report of Independent Registered Public Accounting Firm are included in Item 15 of the report211 - PricewaterhouseCoopers LLP issued unqualified opinions on the consolidated financial statements and the company's internal control over financial reporting as of August 31, 2022243 - A critical audit matter was identified concerning rebate accruals due to the significant management judgment involved in their estimation249250 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting principles, practices, or financial disclosure - None214 Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of August 31, 2022215 - Management concluded that its internal control over financial reporting was effective as of August 31, 2022, based on the COSO 2013 framework216 - No material changes to the company's internal control over financial reporting occurred during the fourth quarter of fiscal year 2022219 Part III Directors, Executive Officers, Compensation, Security Ownership, and Accountant Fees This section incorporates information by reference from the Proxy Statement regarding governance, compensation, and security ownership - Information for Items 10, 11, 13, and 14 is incorporated by reference from the company's Proxy Statement224226229 Equity Compensation Plan Information as of August 31, 2022 | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (c) | |:--- |:--- |:--- |:--- | | Equity compensation plans approved by security holders | 136,937 | $ - | 384,859 | | Equity compensation plans not approved by security holders | n/a | n/a | n/a | | Total | 136,937 | $ - | 384,859 | Part IV Exhibits, Financial Statement Schedules This section lists all documents filed with the Form 10-K, including financial statements, notes, and various corporate exhibits - This item contains the list of financial statements, schedules, and exhibits filed with the report231 - Key exhibits listed include corporate governance documents, compensation plans, and major debt agreements231232233 Form 10-K Summary This item is not applicable to the company's filing - Not applicable234