WD-40 pany(WDFC) - 2020 Q4 - Annual Report

PART I Business WD-40 Company is a global marketing organization focused on maintenance and homecare products, with core growth driven by its flagship WD-40 Multi-Use Product - Sales are primarily from maintenance products sold globally and homecare/cleaning products mainly in North America, the U.K., and Australia[19] - Strategic initiatives focus on maximizing WD-40 Multi-Use Product sales through geographic expansion and growing the WD-40 Specialist line[20] - The WD-40 Multi-Use Product is the flagship, accounting for the majority of sales and driving principal growth[21][25] - Finished product manufacturing is outsourced globally, while the company formulates and produces the WD-40 concentrate internally[36] Employee Distribution as of August 31, 2020 | Location | Number of Employees | | :--- | :--- | | Total Worldwide | 522 | | U.S. Parent Corporation | 198 | | U.K. Subsidiary | 224 | | China Subsidiary | 58 | | Australia Subsidiary | 20 | | Canada Subsidiary | 15 | | Malaysia Subsidiary | 7 | Risk Factors The company faces risks from global economic conditions, foreign currency fluctuations, supply chain reliance, raw material price volatility, and intellectual property protection - Global economic conditions, including the COVID-19 pandemic, pose significant risks to consumer spending and supply chains[49][50] - 60% of FY2020 net sales were international, exposing the company to foreign currency exchange rate risks, with 44% of revenues in non-USD currencies[52][55] - Reliance on a limited number of third-party contract manufacturers and sole source suppliers creates business disruption risks[61] - Costs for petroleum-based specialty chemicals and aerosol cans are subject to significant price volatility, impacting gross margins[65] - The company relies on trade secret protection for the WD-40 Multi-Use Product formulation; loss of secrecy could adversely affect financial condition[75] - Implementation of a new information system for U.S., Canada, Australia, and Malaysia offices poses risks of operational and financial reporting interruptions[83][84] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - No unresolved staff comments are reported[107] Properties The company owns offices in San Diego and Milton Keynes, while leasing various other regional offices globally - The company owns its main office in San Diego, California and an office building in Milton Keynes, United Kingdom[108][109] - Leased properties include offices across the Americas, EMEA, and Asia-Pacific regions[108][109][110] Legal Proceedings Details on legal proceedings are incorporated by reference from Note 13 of the consolidated financial statements - Details on legal proceedings are referenced in Note 13 — Commitments and Contingencies[112] Mine Safety Disclosures This item is not applicable to the company's operations - This item is not applicable[113] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities WD-40 Company's common stock trades on NASDAQ, with a history of increased dividends and a suspended share buy-back plan - The company's common stock trades on the NASDAQ Global Select Market under symbol WDFC[123] - Quarterly cash dividend increased by 10% to $0.67 per share in December 2019[124] - The company repurchased 92,583 shares for $16.8 million in FY2020, but suspended its buy-back plan due to COVID-19, which expired August 31, 2020[126][127] Selected Financial Data The company presents five years of selected financial data, showing FY2020 net sales of $408.5 million and net income of $60.7 million Selected Financial Data (in thousands, except per share amounts) | | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $408,498 | $423,350 | $408,518 | $380,506 | $380,670 | | Gross profit | $223,017 | $232,340 | $225,263 | $213,885 | $214,369 | | Income from operations | $77,220 | $82,382 | $78,604 | $75,909 | $71,348 | | Net income | $60,710 | $55,908 | $65,215 | $52,930 | $52,628 | | Diluted EPS | $4.40 | $4.02 | $4.64 | $3.72 | $3.64 | | Dividends per share | $2.62 | $2.37 | $2.11 | $1.89 | $1.64 | | Total assets | $362,637 | $302,662 | $317,059 | $369,717 | $339,668 | | Long-term obligations | $142,208 | $82,597 | $75,667 | $154,907 | $140,579 | Management's Discussion and Analysis of Financial Condition and Results of Operations FY2020 consolidated net sales decreased 4% to $408.5 million due to COVID-19, while net income rose 9% to $60.7 million due to a prior year tax charge FY 2020 Financial Highlights vs. FY 2019 | Metric | FY 2020 | FY 2019 | Change | Change (Constant Currency) | | :--- | :--- | :--- | :--- | :--- | | Consolidated Net Sales | $408.5M | $423.4M | -4% | -2% | | Gross Margin | 54.6% | 54.9% | -0.3 p.p. | N/A | | Consolidated Net Income | $60.7M | $55.9M | +9% | +12% | | Diluted EPS | $4.40 | $4.02 | +9% | N/A | - The COVID-19 pandemic negatively impacted FY2020 results, causing disruptions, though direct and e-commerce sales partially offset declines[136] - The company's 55/30/25 business model targets were not fully met in FY2020, with 55% gross margin, 34% cost of doing business, and 21% EBITDA[180][181] Results of Operations (FY 2020 vs. FY 2019) FY2020 net sales decreased 4% to $408.5 million due to COVID-19 impacts on EMEA and Asia-Pacific, while net income increased 9% Net Sales by Segment (FY 2020 vs. FY 2019) | Segment | FY 2020 Sales | FY 2019 Sales | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Americas | $200,493 | $193,972 | +$6,521 | +3% | | EMEA | $156,241 | $160,615 | -$4,374 | -3% | | Asia-Pacific | $51,764 | $68,763 | -$16,999 | -25% | | Total | $408,498 | $423,350 | -$14,852 | -4% | - Americas sales grew 3% (4% in constant currency), driven by strong WD-40 Multi-Use Product and homecare product demand[144][145][146] - EMEA sales decreased 3% (1% in constant currency), with direct markets growing 2% but distributor markets falling 13% due to COVID-19 lockdowns[150][151][152] - Asia-Pacific sales declined 25% (23% in constant currency), significantly impacted by pandemic-related closures in distributor markets and China[154][155](index=155&type=chunk] - Gross margin decreased from 54.9% to 54.6% due to higher freight costs and unfavorable sales mix, partially offset by lower chemical costs and price increases[157][158][160] - The effective tax rate decreased to 19.6% in FY2020 from 30.8% in FY2019, primarily due to an $8.7 million uncertain tax position in FY2019[176] Liquidity and Capital Resources The company maintains strong liquidity, with net cash from operations increasing to $72.7 million and an expanded $150 million revolving credit facility Summary of Cash Flows (in thousands) | Activity | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $72,664 | $62,851 | $64,822 | | Net cash used in investing activities | ($18,945) | ($12,680) | $71,207 | | Net cash used in financing activities | ($26,709) | ($69,009) | ($121,409) | | Net increase (decrease) in cash | $29,229 | ($21,633) | $11,784 | - Net cash from operations increased by $9.8 million, driven by higher net income and favorable working capital changes[190] - The revolving credit commitment was increased from $100.0 million to $150.0 million through an amended Credit Agreement[185] - The company drew $80.0 million on its credit line in March 2020 as a COVID-19 precaution, later repaying $55.0 million[186][350] Contractual Obligations as of August 31, 2020 (in thousands) | Obligation | Total | < 1 year | 2-3 years | 4-5 years | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Leases | $9,402 | $2,073 | $2,867 | $2,041 | $2,421 | | Borrowings | $113,898 | $800 | $1,600 | $97,498 | $14,000 | | Minimum purchase obligations | $17,008 | $4,494 | $7,740 | $4,774 | - | | Total | $140,308 | $7,367 | $12,207 | $104,313 | $16,421 | Critical Accounting Policies Critical accounting policies involve significant management judgment in revenue recognition, income taxes, and impairment assessment of intangible assets - Revenue recognition requires significant estimates for variable consideration; a 10% change in accrual estimates would impact net sales by approximately $0.9 million[204][207] - Accounting for income taxes involves judgment concerning deferred tax assets/liabilities, valuation allowances, and uncertain tax positions[208] - Definite-lived intangible assets are assessed for impairment when triggering events occur, with no impairments identified in fiscal years 2018, 2019, or 2020[210][211] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks including foreign currency fluctuations, commodity price volatility, and interest rate changes on its credit facility - Foreign currency risk exists as international subsidiaries operate in non-USD functional currencies; the U.K. subsidiary uses forward contracts for hedging[214][215][216] - Commodity price risk is significant due to reliance on petroleum-based specialty chemicals and aerosol cans, with no current hedging in place[217] - Interest rate risk arises from the $150.0 million revolving credit facility, with rates based on Prime and LIBOR, and the company monitors LIBOR phase-out[218] Financial Statements and Supplementary Data This section presents consolidated financial statements and unaudited quarterly data for FY2020 and FY2019, showing quarterly fluctuations Unaudited Quarterly Financial Data (in thousands, except per share data) | Fiscal Year 2020 | 1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | | :--- | :--- | :--- | :--- | :--- | | Net sales | $98,556 | $100,049 | $98,247 | $111,646 | | Gross profit | $53,543 | $53,602 | $53,050 | $62,822 | | Net Income | $12,194 | $14,327 | $14,524 | $19,665 | | Diluted EPS | $0.88 | $1.04 | $1.06 | $1.42 | | Fiscal Year 2019 | 1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | | Net sales | $101,282 | $101,335 | $113,989 | $106,744 | | Gross profit | $55,831 | $56,158 | $62,083 | $58,268 | | Net Income | $13,279 | $15,906 | $18,139 | $8,584 | | Diluted EPS | $0.95 | $1.14 | $1.30 | $0.63 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - No changes in or disagreements with accountants are reported[222] Controls and Procedures Management and auditors concluded that disclosure controls and internal control over financial reporting were effective as of August 31, 2020 - The CEO and CFO concluded that disclosure controls and procedures were effective as of August 31, 2020[223] - Management concluded internal control over financial reporting was effective as of August 31, 2020, based on the COSO 2013 framework[224] - Internal control enhancements were made related to the adoption of new lease guidance under ASC 842[228] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement - Information is incorporated by reference from the company's Proxy Statement[231] Executive Compensation Information regarding executive compensation is incorporated by reference from the Proxy Statement - Information is incorporated by reference from the company's Proxy Statement[232] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference, detailing outstanding equity awards and available securities for future issuance Equity Compensation Plan Information as of August 31, 2020 | Plan category | Number of securities to be issued upon exercise (a) | Weighted-average exercise price (b) | Number of securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 148,186 | $ - | 627,742 | | Equity compensation plans not approved by security holders | n/a | n/a | n/a | | Total | 148,186 | $ - | 627,742 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the Proxy Statement - Information is incorporated by reference from the company's Proxy Statement[234] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the Proxy Statement - Information is incorporated by reference from the company's Proxy Statement[234] PART IV Exhibits, Financial Statement Schedules This section includes consolidated financial statements, the auditor's unqualified opinion, and identifies 'Rebates - Cooperative Marketing Program Accruals' as a critical audit matter - PricewaterhouseCoopers LLP issued unqualified opinions on consolidated financial statements and internal control over financial reporting as of August 31, 2020[247][248] - Auditors identified 'Rebates - Cooperative Marketing Program Accruals' as a Critical Audit Matter due to significant management judgment and audit effort required for estimation[256][257][258] - The report lists numerous exhibits, including articles of incorporation, material contracts, and executive compensation plans[236][237] Form 10-K Summary This item is not applicable - This item is not applicable[239]