WD 40 CO annual report, FY2020

WD-40 Company — Form 10-K Summary

Reporting period: Fiscal year ended August 31, 2020. This is an annual filing; it also reports unaudited fourth-quarter results. Unless stated otherwise, amounts are U.S. dollars.

Business context

WD-40 markets maintenance products and homecare and cleaning products in more than 176 countries and territories. Its flagship WD-40 Multi-Use Product accounts for a significant majority of sales. The company reports three geographic segments: Americas, EMEA, and Asia-Pacific.

Financial performance and liquidity

MetricFY2020FY2019
Net sales$408.5 million$423.4 million
Gross profit / gross margin$223.0 million / 54.6%$232.3 million / 54.9%
Operating income$77.2 million$82.4 million
Net income$60.7 million$55.9 million
Diluted EPS$4.40$4.02
Operating cash flow$72.7 million$62.9 million
Capital expenditures$19.3 million$13.3 million

Cash and cash equivalents were $56.5 million at year-end. Borrowings totaled $113.9 million, including $95.9 million drawn on the revolving credit facility and $18.0 million of Series A notes. The company reported compliance with debt covenants. It had $150 million of revolving capacity under the credit agreement at year-end.

Dividends paid were $36.0 million, or $2.62 per share. The quarterly dividend was raised from $0.61 to $0.67 per share in December 2019. The company repurchased 92,583 shares for $16.8 million during FY2020, then suspended repurchases in April to preserve cash; the plan expired August 31, 2020.

Material changes versus the prior year

  • Sales declined 4% reported and 2% at constant currency. Maintenance product sales fell 4%, while homecare and cleaning sales increased 6%.
  • Americas sales rose 3% and EMEA sales fell 3%; Asia-Pacific sales dropped 25%, principally reflecting pandemic-related market disruption in China and distributor markets.
  • Operating income declined 6%. Gross margin slipped 0.3 percentage points; higher warehousing and freight costs and unfavorable mix were partly offset by lower petroleum-based input costs and price increases.
  • Net income rose 9%, but the comparison benefited from FY2019’s $8.7 million uncertain-tax-position charge related to the Tax Act toll tax. The effective tax rate was 19.6% in FY2020 versus 30.8% in FY2019.
  • Fourth-quarter FY2020 sales were $111.6 million and net income was $19.7 million, compared with $106.7 million and $8.6 million, respectively, in Q4 FY2019. The prior-year quarter included the tax charge noted above.
  • Operating cash flow increased by $9.8 million. Year-end cash rose to $56.5 million from $27.2 million, while total borrowings increased from $81.4 million to $113.9 million.

Outlook, management commentary, risks, and unusual items

  • Management said COVID-19 disrupted retail access, distributor markets, and industrial-channel demand. Stronger sales in some direct markets, e-commerce, and homecare products partly offset declines elsewhere. The duration and future financial effects remained uncertain; no quantified FY2021 sales or earnings guidance is provided.
  • Management could not estimate FY2021 advertising and sales-promotion spending given pandemic uncertainty. It described higher pandemic-driven demand for certain homecare products as having an uncertain duration.
  • Key exposures include foreign currency movements, volatile petroleum-based chemical and aerosol-can costs, dependence on contract manufacturers and limited suppliers, customer concentration in large retail channels, competition, regulation, and possible product-quality or liability claims.
  • In September 2020, after year-end, WD-40 issued $52 million of senior notes—$26 million at 2.5% due 2027 and $26 million at 2.69% due 2030—and used proceeds to repay $50 million of revolving borrowings. The credit facility maturity was extended to September 30, 2025, and its maximum leverage covenant was raised from 3.0:1 to 3.5:1.
  • No goodwill or definite-lived intangible-asset impairment was recorded. The company reported no pending claims it expected to result in a probable loss and no reasonably possible claim expected to materially affect results. Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified.

Important facts for investors to verify

  • Whether sales and margins recover as COVID-related restrictions and channel disruptions ease, particularly in Asia-Pacific and distributor markets.
  • Whether pandemic-related increases in homecare demand persist, and how e-commerce and direct-market growth develop.
  • Current borrowing balances, interest costs, covenant headroom, and the impact of the September 2020 refinancing.
  • The sustainability of FY2020 net income growth given the prior-year tax charge and the 19.6% FY2020 effective tax rate; also monitor the $9.4 million year-end gross reserve for uncertain tax positions.
  • Whether cost inflation, foreign exchange, freight, product mix, and promotional spending materially affect gross margins and cash generation.