# DEAR STOCKHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NASDAQ_WDFC_2017/NASDAQ_WDFC_2017.mmd` · pages 11-17_

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DEAR STOCKHOLDERS,

We generated net sales of \(380.5 million for the fiscal year, flat over the previous fiscal year. However, if you were to take both translation and transaction exposure into consideration, changes in foreign currency exchange rates reduced our total net sales by about \)6 million in fiscal year 2017. This means that if we removed all currency-related impacts, net sales would have increased of nearly 2 percent over the previous fiscal year.

Our net income for fiscal 2017 was \(52.9 million, an increase of 1 percent from the prior fiscal year. This allowed us to deliver diluted earnings per share ("EPS") of \)3.72, compared to $3.64 in the prior fiscal year, a record for the company.

It's interesting to note that included in fiscal year 2016 bottom-line results was a non-operating item related to foreign currency exchange gains that increased EPS by approximately $0.12. If we were to remove this non-operating item from last year's results, year-over-year EPS growth would have been much stronger than our results reflect.

## OUR 55/30/25 BUSINESS MODEL

We continue to make progress on our 55/30/25 business model. The model targets a gross margin of 55 percent of net sales, a cost of doing business of 30 percent of net sales, and an EBITDA of 25 percent of net sales. In fiscal 2017, we maintained gross margin at 56 percent. Although our gross margin remained constant year-over-year, it was negatively impacted by net changes in the costs of petroleum-based specialty chemicals. These unfavorable impacts were almost completely offset by favorable changes in foreign currency exchange rates which impacted our EMEA segment. We cannot control global market dynamics, but we will continue to be deliberate in managing the rest of our business so that we can maintain gross margin at a level close to our 55 percent target over the long-term.
Our cost of doing business was 35 percent of net sales, down from 36 percent last year. This decrease was driven by lower employee costs, which decreased primarily due to lower employee earned incentive compensation accruals. Partially offsetting these costs was our increased investment in operational excellence. We continue to make investments in research and development, brand protection, regulatory compliance and quality assurance. As we look at the cost of doing business over the long term, we believe that 30 percent is an appropriate long-term target.

Finally, our last measure, EBITDA, was 22 percent of net sales, compared to 21 percent last year.

## PLAYBOOK FOR CREATING VALUE

We continue to maintain a strong balance sheet while generating significant cash and solid stockholder returns. Our capital allocation strategy both supports our long-term growth objectives and allows us to perform at the high end of our peer group in returning capital to stockholders.

At the end of fiscal year 2017, our balance sheet was strong, with \(117.2 million in cash and short-term investments, and \)21 million available on our \(175 million line of credit. We utilized our revolving credit facility this year to fund the purchase, build out and equipping of our new San Diego office at a total cost of about \)18 million which is an investment that we are truly making in the future of our tribe.

During the fiscal year we repurchased approximately 290 thousand shares of our stock at a total cost of approximately $31 million. In the second quarter of fiscal year 2017, our Board of Directors declared a 17 percent increase in our regular quarterly dividend which marked the seventh consecutive year that we have increased our dividend.

In total, we delivered a return on invested capital to stockholders of 32 percent in fiscal year 2017.

We look forward to continuing to increase the value of the Company for all of our stakeholders in the year ahead.

![](images/11_1.jpg)

Jay W. Rembolt

Vice President, Finance, Treasurer and Chief Financial Officer