WD-40 Company — Q3 FY2023 Form 10-Q
Reporting period: Quarter ended May 31, 2023; year-to-date figures cover the nine months ended May 31, 2023. WD-40 Company markets maintenance and homecare products globally through the Americas, EMEA, and Asia-Pacific segments.
Key financial metrics
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $141.7 million | $123.7 million | $396.8 million | $388.4 million |
| Gross margin | 50.6% | 47.7% | 50.9% | 49.7% |
| Operating income | $25.7 million | $19.0 million | $66.5 million | $67.8 million |
| Net income | $18.9 million | $14.5 million | $49.4 million | $52.5 million |
| Diluted EPS | $1.38 | $1.07 | $3.62 | $3.82 |
| Operating cash flow | Not separately stated | Not separately stated | $55.6 million | $7.7 million |
- Q3 sales rose 15%; maintenance products increased 15%, while homecare and cleaning products (HCCP) rose 3%. Year-to-date sales increased 2%; maintenance products rose 2% and HCCP was approximately flat.
- Q3 operating income increased 35% and net income increased 30%. For the nine months, operating income declined 2% and net income declined 6%.
- Q3 gross margin improved 290 basis points; year-to-date margin improved 120 basis points. Pricing helped offset higher aerosol-can, specialty-chemical and contract-manufacturer filling costs.
- Year-to-date operating cash flow increased by $47.9 million year over year, primarily reflecting inventory reductions versus substantial inventory investment in the prior-year period. Inventory was $95.3 million at May 31, down from $104.1 million at August 31, 2022.
- Cash and equivalents were $38.4 million. Total borrowings were $136.1 million, comprising $27.3 million short-term and $108.9 million long-term. The company reported compliance with debt covenants and a $150 million revolving credit commitment maturing September 30, 2025.
Material changes and segment performance
- Q3 sales growth reflected price increases and improved product availability, including recovery from prior-year Shanghai lockdown-related supply disruption. Year-to-date price increases contributed an estimated $71.5 million to sales, partly offset by a $44.2 million volume decline and an $18.9 million unfavorable currency impact. On a constant-currency basis, year-to-date sales increased 7%.
- Year-to-date Americas sales rose 11% and Asia-Pacific sales rose 17%; EMEA sales fell 13% as reported, or 3% on a constant-currency basis. EMEA was affected by currency, lower volumes and the suspension of sales to Russia and Belarus.
- Q3 sales increased in all three segments: Americas 16%, EMEA 6%, and Asia-Pacific 42%. Asia-Pacific growth benefited in part from comparison with the prior-year Shanghai lockdown disruption.
- Year-to-date interest expense increased to $4.3 million from $1.9 million, primarily due to higher interest rates and revolving-credit balances. The effective tax rate rose to 21.5% from 20.2%; a one-time tax-deductible donation of the former headquarters building partly offset unfavorable tax effects.
Outlook, risks and unusual items
- The filing provides no specific sales or earnings forecast. Management describes gross margin of at least 55%, cost of doing business of 30% of sales, and EBITDA of at least 25% of sales as long-term targets; reported year-to-date measures were 50.9%, 33%, and 18%, respectively.
- Management says pricing actions and supply-chain improvements are helping, but the duration and effects of inflation, supply constraints, consumer demand changes, and commodity-cost volatility remain uncertain. Price increases may weigh on volumes as customers adjust.
- Russia and Belarus sales remain suspended; before suspension, the markets represented approximately 3%–4% of consolidated sales. Sales to Ukraine resumed in Q1 FY2023.
- The company declared a $0.83-per-share dividend payable July 31, 2023. A new $50 million share-repurchase authorization takes effect September 1, 2023, through August 31, 2025. The existing $75 million plan was authorized through August 31, 2023.
- Management reported no pending claims it believed would result in a probable loss and no material change in disclosed risk factors. It cautions that estimates and interim results may differ from actual or full-year results.
Important facts for investors to verify
- Whether pricing can continue to offset input-cost inflation without further material volume declines.
- Whether EMEA sales and operating performance stabilize, including the effects of currency, market demand, and Russia-related restrictions.
- Whether the strong year-to-date operating cash flow is sustainable after inventory normalization and other working-capital movements.
- Debt levels, borrowing costs, covenant headroom, and the cash impact of dividends and future repurchases.
- Progress toward the company’s long-term 55/30/25 performance targets and the timing and cost of its new enterprise resource planning system implementation.