WD-40 Company — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended February 29, 2020; comparisons are with the corresponding prior-year periods. WD-40 markets maintenance and homecare/cleaning products globally.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $100.0m | $101.3m | $198.6m | $202.6m |
| Gross profit / margin | $53.6m / 53.6% | $56.2m / 55.4% | $107.1m / 53.9% | $112.0m / 55.3% |
| Operating income | $18.2m | $19.7m | $32.9m | $36.1m |
| Net income | $14.3m | $15.9m | $26.5m | $29.2m |
| Diluted EPS | $1.04 | $1.14 | $1.92 | $2.09 |
- Quarterly sales declined 1%; six-month sales fell 2%. Six-month sales were down $2.1m on a constant-currency basis; currency translation reduced reported sales by $1.9m.
- Six-month gross margin contracted 1.4 percentage points. Management cited unfavorable product/customer mix and miscellaneous costs, higher warehousing and inbound freight, and aerosol-can costs. EMEA price increases and lower petroleum-based chemical costs partly offset these pressures.
- Six-month operating cash flow was $23.4m, up from $17.2m. Capital expenditures were $10.7m, versus $5.0m; the increase primarily reflected the U.K. office project and manufacturing investments. Ending cash was $30.5m.
- Debt at February 29 was $102.8m: $41.7m short-term and $61.1m long-term. The company was compliant with debt covenants at period-end. It repurchased $9.7m of shares and paid $17.6m in dividends during the six months.
- Six-month non-GAAP EBITDA was $36.7m, or 18% of sales, compared with $40.8m, or 20%, a year earlier. The company’s long-term model targets gross margin of at least 55%, cost of doing business of 30% of sales, and EBITDA above 25% of sales.
Material changes and business drivers
- Asia-Pacific sales fell 23% for the six months, including a 52% decline in China. The company attributed the China decline to COVID-19-related supply-chain, transportation and demand disruptions, including delayed post-Chinese New Year shipments. Asia-Pacific operating income declined 29%.
- Americas and EMEA six-month sales each increased 2%. Americas maintenance-product growth was partly offset by weaker homecare and cleaning products; EMEA growth was stronger on a constant-currency basis than reported.
- WD-40 Specialist sales were $17.3m for the six months, up $0.8m. Management cautioned that timing of promotions and distribution development can make sales volatile.
- Lower incentive compensation and advertising/promotion spending reduced operating expenses, but did not offset the effects of lower sales and gross margin. Other expense also worsened year over year, mainly reflecting foreign-exchange losses versus gains in the prior-year period.
Outlook, risks and unusual items
- The company provided no clear quantified full-year sales or earnings forecast. It said it could not estimate COVID-19’s financial impact; effects could be material in the remainder of FY2020 and in later affected periods. Management noted that first-half impacts were material in Asia-Pacific, while Americas and EMEA were not significantly affected during that half.
- After quarter-end, the company increased its revolving credit commitment from $100m to $150m and extended facility maturity to March 2025. During the week of March 23, it drew an additional $80m, bringing line borrowings to approximately $149m, nearly the full facility. Management said the draw was precautionary amid market uncertainty and that it had no presently anticipated need for the extra liquidity.
- A $0.67-per-share dividend was declared after quarter-end, payable April 30, 2020. The filing describes dividend and share-repurchase restrictions under debt agreements; in April, lenders agreed to a specified $8.7m non-cash tax charge add-back solely for the dividend-covenant calculation.
- Legal claims and contingencies were not expected by management to have a material adverse effect. The annual goodwill impairment test found reporting-unit fair values significantly above carrying values; no impairment was recorded.
- Adoption of lease accounting on September 1, 2019 added approximately $9.0m of assets and $9.2m of liabilities, without material income-statement or cash-flow impact.
Important facts for investors to verify
- Subsequent COVID-19 effects on China and broader sales, supply chains, margins and full-year results, which management said could be material.
- Current borrowing, liquidity and covenant headroom after the post-quarter-end draw brought revolving borrowings to approximately $149m of the $150m commitment.
- Whether sales and margins recover, especially in Asia-Pacific, and whether freight, product mix and input-cost pressures persist.
- Progress toward the company’s long-term 55/30/25 performance targets and the sustainability of dividends and repurchases under debt covenants.