WD-40 Company — Q1 FY2023 Form 10-Q
Reporting period: Three months ended November 30, 2022; comparisons are with the three months ended November 30, 2021. WD-40 Company sells maintenance products and homecare and cleaning products globally through three geographic segments.
Financial performance
| Metric | Q1 FY2023 | Prior year |
|---|---|---|
| Net sales | $124.9 million | $134.7 million |
| Gross profit / gross margin | $64.3 million / 51.4% | $68.5 million / 50.8% |
| Operating expenses | $45.6 million | $44.4 million |
| Operating income | $18.7 million | $24.1 million |
| Net income | $14.0 million | $18.6 million |
| Diluted EPS | $1.02 | $1.34 |
| Cash provided by (used in) operations | $10.4 million | $(0.9) million |
Sales declined 7% year over year. Price increases added approximately $26.3 million, offset by an approximately $26.6 million decline from volume; foreign exchange reduced reported sales by $9.5 million. At constant currency, sales declined less than 1%. Gross margin improved 60 basis points, primarily from pricing, but remained below the company’s 55% long-term target. SG&A rose 4% to $40.0 million, including higher travel, employee and professional-services costs; SG&A was 32.0% of sales versus 28.5%. Non-GAAP EBITDA was $20.7 million, or 17% of sales, versus $25.7 million, or 19%.
Segments and material changes
- Americas: Sales increased 3% to $58.0 million; operating income rose 6% to $12.8 million. U.S. maintenance-product sales benefited from improved supply availability and pricing, partly offset by lower volumes and distributor-order timing in Latin America.
- EMEA: Sales fell 29% to $40.8 million and operating income fell 56% to $6.3 million. The decline reflected weaker volumes, the suspension of sales to Russia, and an $8.0 million unfavorable currency impact on sales.
- Asia-Pacific: Sales increased 25% to $26.1 million and operating income rose 32% to $9.6 million, supported by higher maintenance-product sales, promotions and pricing; currency reduced sales by $1.4 million.
Consolidated net income decreased 25%; management estimates currency reduced net income by $1.2 million, and says constant-currency net income declined 18%. Higher input and distribution costs continued to pressure margins, although pricing increases more than offset these costs at the consolidated gross-margin level.
Cash, debt and capital allocation
- Cash and cash equivalents were $36.9 million at November 30, 2022. Total borrowings were $150.4 million: $82.4 million under the revolving credit facility and $68.0 million in senior notes. The company reported compliance with debt covenants.
- Operating cash flow was $10.4 million; investing cash outflow was $1.3 million and financing cash outflow was $12.3 million. Cash declined $1.0 million during the quarter.
- Inventory increased to $119.1 million from $104.1 million at August 31, 2022. The company cited deliberate inventory actions amid supply constraints and longer supplier lead times.
- The company repurchased 22,420 shares for $4.1 million during the quarter; $41.8 million remained available under its $75 million repurchase authorization through August 31, 2023. A subsequent quarterly dividend increase of 6%, from $0.78 to $0.83 per share, was declared December 13, 2022.
Outlook, risks and unusual items
The filing provides no specific full-year financial guidance. Management expects to implement further price increases in certain regions during the remainder of FY2023, while noting that pricing can weigh on near-term volumes. The company’s long-term targets are gross margin of at least 55%, cost of doing business of 30% of sales, and EBITDA of at least 25% of sales; current results remain below these targets.
Management highlighted uncertainty from inflation, raw-material and freight costs, supply-chain and aerosol-capacity constraints, changing demand, COVID-19 effects, foreign-exchange movements, and the conflict in Ukraine. Sales to Russia and Belarus remained suspended; together, those markets previously represented approximately 3%–4% of consolidated sales. The company reported no pending claims it believed would result in a probable loss and no material changes to previously disclosed risk factors.
The effective tax rate was 20.9%, versus 19.8%. The period included $0.7 million of tax shortfalls from stock-award settlements and an approximately $0.7 million one-time tax benefit related to donating its former headquarters building. Interest expense increased to $1.2 million, primarily due to higher borrowing balances and rates.
Important facts for investors to verify
- Whether sales-volume trends and customer demand improve as recent and planned price increases take effect.
- Whether supply constraints, input inflation and elevated inventory levels continue to affect margins, cash flow and product availability.
- How EMEA sales and profitability develop amid currency volatility, weaker demand and the continuing suspension of Russia and Belarus sales.
- Debt levels, borrowing costs, covenant compliance, and the pace of share repurchases relative to cash generation.
- Progress toward the company’s long-term margin and EBITDA targets; these are targets, not reported-period results or formal near-term guidance.