WD-40 Company — Form 10-Q Summary
Reporting period: Fiscal first quarter, three months ended November 30, 2016; comparisons are with the three months ended November 30, 2015. Amounts are in U.S. dollars unless otherwise stated. WD-40 markets maintenance and homecare/cleaning products globally.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $89.2 million | $92.5 million | Down 4% |
| Gross profit | $51.0 million | $51.4 million | Down 1% |
| Gross margin | 57.2% | 55.6% | Up 1.6 percentage points |
| Operating income | $16.5 million | $17.1 million | Down 4% |
| Net income | $11.8 million | $12.1 million | Down 3% |
| Diluted EPS | $0.82 | $0.83 | Down $0.01 |
| Operating cash flow | $13.5 million | $14.6 million | Down $1.1 million |
Foreign exchange reduced reported sales by $5.9 million and net income by $1.1 million year over year. At constant currency, sales would have increased $2.6 million and net income $0.8 million. Advertising and sales promotion expense was $4.8 million, down 15%; SG&A rose 4% to $29.0 million. The effective tax rate was 28.3%, versus 28.5%.
Cash, debt and liquidity
- Cash and cash equivalents were $33.5 million; short-term investments were $67.3 million, totaling $100.8 million. Cash plus short-term investments were $108.5 million at August 31, 2016.
- Revolving-credit-facility borrowings totaled $134.4 million, of which $12.4 million was classified as short-term and $122.0 million as long-term. The facility has a $175 million commitment and matures May 13, 2020. The company reported compliance with debt covenants.
- Investing cash outflow was $23.9 million, including $11.6 million of property and equipment purchases and net purchases of short-term investments. Capital spending included the purchase of a new San Diego headquarters; additional build-out costs were expected before the planned late-FY2017 move.
- Financing cash outflow was $5.2 million, including $12.2 million of share repurchases and $6.0 million of dividends, partly offset by facility borrowings.
- Management said existing cash, facility availability and expected operating cash flows should meet operating and capital needs for at least 12 months. It noted that $96.8 million of cash and investments was held in Europe, Australia and China and intended to remain indefinitely reinvested abroad.
Material changes and operating drivers
- Americas sales fell 4% to $42.8 million; EMEA fell 6% to $30.3 million as reported, while constant-currency EMEA sales rose 13%; Asia-Pacific increased 1% to $16.2 million.
- Maintenance-product sales declined 4% to $79.2 million, while homecare and cleaning sales declined 2% to $10.1 million. WD-40 Specialist sales were $5.8 million, up 36%.
- Gross-margin improvement reflected product mix and currency effects, partly offset by higher warehousing and freight costs and customer discounts. Management cautioned that raw-material costs and foreign exchange may affect future margins.
- Higher employee-related costs, including accelerated stock-compensation expense for certain awards, and increased travel, product-development and freight costs contributed to higher SG&A. R&D spending was $2.1 million, compared with $1.8 million.
- Non-GAAP EBITDA was $18.4 million, or 21% of sales, versus $18.8 million, or 20%. Cost of doing business was 37% of sales versus 35%; the company’s long-term model targets gross margin above 55%, cost of doing business at or below 30%, and EBITDA above 25%.
Outlook, risks and unusual items
- Management expected FY2017 global advertising and sales-promotion expense to be near 6% of net sales. The filing provides no specific consolidated revenue or earnings forecast.
- Management identified growth priorities including expanding WD-40 multi-use sales, growing WD-40 Specialist, broadening products and revenue, and operational excellence. Specialist sales may vary with promotions and distribution development.
- Key exposures include currency fluctuations, petroleum-based chemical and aerosol-can costs, customer order timing and promotional activity, and declining or flat sales and lost distribution for some homecare brands. Management also cited uncertainty in Mexico’s business climate and weaker distributor-market sales in Russia.
- The board approved a 17% increase in the quarterly dividend, from $0.42 to $0.49 per share, payable January 31, 2017. The company repurchased 112,701 shares for $12.2 million during the quarter under a $75 million authorization running through August 31, 2018.
- The IRS notified the company of a planned audit for the tax year ended August 31, 2015; state and local audits for fiscal 2013–2015 were also ongoing. Up to $0.2 million of unrecognized tax benefits could be affected by examinations or statutes of limitation within 12 months. Management reported no current litigation expected to have a material adverse impact and no material changes to previously disclosed risk factors.
- Foreign-currency translation loss was $6.1 million, compared with $2.7 million in the prior-year quarter. No goodwill or definite-lived intangible-asset impairment was recorded.
Investor facts to verify
- Whether constant-currency sales growth persists, particularly in EMEA, and how exchange rates affect reported results and margins.
- Progress in WD-40 Specialist distribution and growth, and the sales trajectory of homecare and cleaning products.
- Gross-margin sustainability given currency movements, raw-material costs, freight, and promotional spending.
- Cash generation and capital requirements for the headquarters build-out, alongside debt levels, repurchases and the higher dividend.
- Results and potential consequences of the tax audits, and any changes in the company’s ability to use overseas cash or comply with credit covenants.