WD-40 pany(WDFC) - 2023 Q4 - Annual Report

Part I Business WD-40 Company is a global marketing organization focused on maintenance and homecare products, driven by a 'four-by-four' growth strategy and outsourced manufacturing - The company's sales are divided into two main product groups: maintenance products (sold worldwide) and homecare/cleaning products (sold primarily in North America, U.K., and Australia)[25] - WD-40's growth strategy is centered on a 'four-by-four' framework, which includes four 'Must-Win Battles' to increase maintenance product sales and four 'Strategic Enablers' focused on operational excellence[26][27][32] - The company employs 613 people across 17 countries, with a global distribution of its workforce: 36% in the Americas, 42% in EMEA, 14% in Asia-Pacific, and 8% corporate[29] - Manufacturing of finished goods is outsourced to third-party manufacturers in various countries, while the company produces the concentrate for its WD-40 products at its own facilities and through contract manufacturers[41][42] Products This section details the company's product portfolio, distinguishing between primary growth-driving maintenance products and harvest-focused homecare/cleaning brands - Maintenance Products: This group includes the signature WD-40® Multi-Use Product, the WD-40 Specialist® line for professional use, 3-IN-ONE® multi-purpose oils, and the GT85® bike maintenance line[35][36][37][38] - Homecare and Cleaning Products: This portfolio includes brands such as 2000 Flushes®, Spot Shot®, Carpet Fresh®, 1001®, Lava®/Solvol®, and X-14® These are considered 'harvest brands' with reduced marketing investment as the company focuses on maintenance products[28][39] Manufacturing and Raw Materials The company outsources finished goods manufacturing to third parties globally and faces input cost inflation due to reliance on limited raw material suppliers - The company outsources its finished goods manufacturing to third-party contractors in the U.S., Mexico, Brazil, U.K., Italy, China, and other countries[41] - WD-40 relies on a limited number of suppliers for raw materials, packaging, and components, including single-source suppliers Key components like specialty chemicals and aerosol cans are subject to market price fluctuations[44] - The company has been experiencing input cost inflation and has implemented price increases and cost-saving initiatives to mitigate these pressures[44] Risk Factors The company faces risks from adverse economic conditions, supply chain disruptions, raw material cost volatility, foreign currency fluctuations, cybersecurity threats, and intense competition - Economic Conditions: Adverse global economic conditions, inflation, and reduced consumer spending could decrease demand for the company's products[53][54][55] - Supply Chain & Costs: Reliance on a limited base of third-party manufacturers and suppliers creates risks of disruption Volatility in the cost of raw materials (like specialty chemicals and aerosol cans), transportation, and other inputs could harm financial results[61][67][68] - Global Operations & Currency Risk: With approximately 61% of sales outside the U.S. in FY2023, the company is exposed to political instability, trade restrictions, and foreign currency exchange rate risks 46% of revenues were generated in currencies other than the U.S. Dollar[63][64] - Brand Reputation & Competition: Erosion of the success and reputation of leading brands, particularly the WD-40 Brand, could negatively impact the business The company faces intense competition from similar and alternative products, some from larger companies with greater financial resources[58][90][92] - Cybersecurity & IT Systems: Malfunctions, implementation issues with new ERP systems, or cyberattacks on critical information systems could disrupt business operations[69][70][71] - Customer Dependence: A large percentage of net sales comes from a limited number of large retail customers The loss of, or a reduction in orders from, a significant customer could materially affect the business[94] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[112] Properties The company owns its corporate office in San Diego and a UK facility, while leasing various other global office, R&D, and warehouse spaces - Americas: Owns an office in San Diego, CA Leases offices in Miami, FL; Pine Brook, NJ; Toronto, Canada; and Monterrey, Mexico[113] - EMEA: Owns an office and plant in Milton Keynes, UK Leases branch offices in Germany, France, Italy, Spain, Portugal, and the Netherlands[114] - Asia-Pacific: Leases office space in Australia, China, and Malaysia[115] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 12 — Commitments and Contingencies in the consolidated financial statements - The required information is incorporated by reference from Note 12 of the financial statements[116] Mine Safety Disclosures This item is not applicable to the company - Not applicable[117] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, with a recent dividend increase and a new $50.0 million share repurchase plan effective September 2023 - Common stock is traded on the NASDAQ Global Select Market under the symbol WDFC[120] - The quarterly cash dividend was increased by 6% from $0.78 to $0.83 per share on December 13, 2022[121] - A new share repurchase plan authorizing up to $50.0 million in share buy-backs became effective on September 1, 2023, and will run through August 31, 2025[124] Selected Financial Data This section is reserved as the requirement for selected financial data under Item 301 of Regulation S-K has been eliminated - This item is reserved pursuant to SEC amendments[125] Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2023, consolidated net sales grew 4% to $537.3 million due to price increases, improving gross margin to 51.0%, but net income decreased 2% to $66.0 million due to higher operating expenses Financial Performance Overview | Financial Metric | FY 2023 | FY 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total Net Sales | $537.3M | $518.8M | +4% | | Gross Profit | $274.2M | $254.8M | +8% | | Gross Margin | 51.0% | 49.1% | +190 bps | | Income from Operations | $89.7M | $87.3M | +3% | | Net Income | $66.0M | $67.3M | -2% | | Diluted EPS | $4.83 | $4.90 | -1% | - Net sales growth of 4% was driven by price increases (+$81.9 million), partially offset by lower sales volume (-$45.8 million) and unfavorable foreign currency exchange rates (-$17.7 million)[131] - The company suspended sales to Russia and Belarus in March 2022, which continues to unfavorably impact business Prior to the suspension, these markets represented 3-4% of consolidated net sales[136] Results of Operations In FY2023, Americas sales grew 11% due to price increases, EMEA sales fell 7% from currency and Russia suspension, and Asia-Pacific sales rose 8% due to eased lockdowns and promotions Segment Net Sales | Segment | FY 2023 Net Sales | FY 2022 Net Sales | Change (%) | | :--- | :--- | :--- | :--- | | Americas | $266.8M | $240.2M | +11% | | EMEA | $190.8M | $204.7M | -7% | | Asia-Pacific | $79.7M | $73.9M | +8% | - Americas: Sales increased 11% due to price increases (+$40.1 million) that offset volume declines (-$14.4 million) U.S. sales grew 17%, while Latin America sales decreased 8%[140][141][142] - EMEA: Sales decreased 7% (but increased 1% in constant currency) The decline was driven by unfavorable currency (-$14.9 million), suspension of sales to Russia (-$8.3 million), and volume declines in other markets (-$27.0 million), which were partially offset by price increases (+$36.3 million)[144][146][148] - Asia-Pacific: Sales grew 8% (13% in constant currency), driven by higher volumes in China and Asia distributor markets following the easing of COVID-19 lockdowns, along with price increases[150][151][152] - Gross margin increased by 190 bps, primarily due to a 720 bps favorable impact from sales price increases, which was significantly offset by higher costs for aerosol cans (-290 bps) and specialty chemicals (-260 bps)[155] - SG&A expenses increased 12% to $154.7 million, mainly due to higher employee-related costs (+$13.0 million), increased travel and meeting expenses (+$4.2 million), and higher professional services fees (+$3.4 million)[156][157] Liquidity and Capital Resources Operating cash flow significantly increased to $98.4 million in FY2023 due to inventory changes, while financing cash flow rose to $85.0 million from credit facility repayments, maintaining a strong financial position Cash Flow Activity | Cash Flow Activity (in millions) | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $98.4 | $2.6 | | Net cash used in investing activities | ($6.2) | ($7.7) | | Net cash used in financing activities | ($85.0) | ($38.0) | - The substantial increase in operating cash flow was primarily due to a $72.6 million favorable impact from changes in inventory levels, as inventory decreased in FY2023 compared to a significant build-up in FY2022[186] - As of August 31, 2023, total borrowings were $120.5 million, consisting of $52.9 million from the revolving credit facility and $67.6 million in fixed-rate senior notes[182][338] - A new $50.0 million share repurchase plan became effective on September 1, 2023, authorized through August 31, 2025[184] Critical Accounting Policies and Estimates The company's critical accounting policies, Revenue Recognition and Accounting for Income Taxes, involve significant management judgment and estimates, particularly for variable consideration and tax positions - Revenue Recognition: Sales are recognized when control transfers to the customer The transaction price is recorded net of estimated variable consideration (rebates, discounts, returns) A 10% difference in the accrual estimate for sales incentives at year-end would have impacted net sales by approximately $1.3 million[199][201] - Accounting for Income Taxes: This policy requires significant judgment in determining the effective tax rate, establishing valuation allowances for deferred tax assets, and accounting for uncertain tax positions[202] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations, commodity price volatility impacting specialty chemicals, and interest rate changes on its variable-rate revolving credit facility - Foreign Currency Risk: The company is exposed to translation risk as all international subsidiaries operate in functional currencies other than the U.S. Dollar It uses forward contracts to hedge some non-functional currency asset balances[206][207][208] - Commodity Price Risk: Volatility in oil prices directly impacts the cost of specialty chemicals, which can negatively affect gross margins The company does not currently hedge crude oil price volatility[209] - Interest Rate Risk: The primary exposure is from the variable interest rate on the $150.0 million revolving credit facility, which had a $52.9 million balance at year-end A one percentage point increase in variable rates would have reduced pretax earnings by approximately $0.5 million in FY2023[210] Financial Statements and Supplementary Data This section indicates that the company's consolidated financial statements and the Report of Independent Registered Public Accounting Firm are included in Item 15 of the report - The consolidated financial statements for the fiscal years ended August 31, 2023 and 2022, and the independent auditor's report are included in Item 15[211] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[213] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of August 31, 2023, a conclusion audited by PricewaterhouseCoopers LLP - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of August 31, 2023[214] - Management concluded that internal control over financial reporting was effective as of August 31, 2023, based on the COSO 2013 framework[215] - The independent registered public accounting firm, PricewaterhouseCoopers LLP, audited and confirmed the effectiveness of the company's internal control over financial reporting[217] Other Information This section discloses information regarding the termination of a Rule 10b5-1 trading arrangement for one of the company's directors or officers - On June 14, 2023, Patricia Q Olsem's Rule 10b5-1 trading arrangement terminated pursuant to its terms[219] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company reports no applicable information for this item - None[220] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting - Information is incorporated by reference from the Proxy Statement for the annual meeting on December 12, 2023[223] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's Proxy Statement - Information is incorporated by reference from various sections of the Proxy Statement, including 'Compensation Discussion and Analysis' and 'Executive Compensation'[225] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the Proxy Statement, with 172,878 securities remaining available for future issuance under equity compensation plans - Information on security ownership is incorporated by reference from the Proxy Statement[226] Equity Compensation Plan Information | Plan Category | Securities to be issued upon exercise (a) | Securities remaining available for future issuance (c) | | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 137,829 | 172,878 | Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's Proxy Statement - Information is incorporated by reference from the Proxy Statement under the headings 'Director Independence' and 'Audit Committee – Related Party Transactions Review and Oversight'[227] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's Proxy Statement - Information is incorporated by reference from the Proxy Statement under the heading 'Ratification of Appointment of Independent Registered Public Accounting Firm'[228] Part IV Exhibits, Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report, including consolidated financial statements, auditor's report, and various exhibits - This item contains the list of financial statements, schedules, and exhibits filed with the Form 10-K[230] Form 10-K Summary This item is not applicable - Not applicable[233]