WD-40 Company — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended February 29, 2016; comparisons are with the corresponding periods of fiscal 2015. Amounts below are in U.S. dollars.
Business context
WD-40 markets maintenance products, including WD-40 Multi-Use and Specialist, and homecare and cleaning products globally. It reports three geographic segments: Americas, EMEA, and Asia-Pacific.
Financial performance
| Metric | Q2 FY2016 | Six months FY2016 |
|---|---|---|
| Net sales | $94.6 million, down 3% | $187.1 million, down 3% |
| Gross profit / margin | $52.4 million / 55.4% (52.6% prior year) | $103.8 million / 55.5% (52.1% prior year) |
| Operating income | $17.9 million, up 2% | $35.1 million, up 5% |
| Net income | $13.7 million, up 21% | $25.7 million, up 16% |
| Diluted EPS | $0.94, versus $0.76 | $1.77, versus $1.49 |
| Operating cash flow | Not separately provided | $10.3 million, versus $13.5 million |
Sales fell $6.6 million year over year in the first half, but currency translation accounted for an unfavorable $6.7 million; on a constant-currency basis, sales increased $0.1 million. Net income was also reduced by currency effects (management estimates a $1.2 million first-half impact), while other income benefited from foreign-exchange gains versus losses in the prior-year period. Lower petroleum-based chemical and aerosol-can costs, pricing, and favorable mix lifted first-half gross margin; higher employee costs increased SG&A.
Liquidity, debt and capital allocation
At February 29, 2016, cash and cash equivalents were $42.3 million and short-term investments were $51.2 million, totaling $93.5 million. The company had $122.5 million drawn on its $175 million revolving facility ($118.0 million long-term and $4.5 million short-term) and reported compliance with its covenants. Management said liquidity and expected operating cash flows should cover requirements for at least the next 12 months. $90.5 million of cash and short-term investments was held abroad and designated for indefinite reinvestment.
First-half cash flow also reflected working-capital investment: receivables and inventory rose. The company spent $15.1 million on treasury-stock purchases and paid $11.6 million in dividends during the first half. A subsequent $0.42-per-share dividend was declared for payment April 29, 2016.
Changes, outlook and risks
- Regional sales declined in EMEA (8%) and Asia-Pacific (5%) for the first half, while Americas sales rose 1%. EMEA weakness included lower distributor-market sales, particularly Russia; currency movements also weighed on reported sales.
- WD-40 Specialist sales were $9.6 million for the first half, up 11%. Management described the product line as a long-term growth opportunity, while noting sales may vary with promotions and distribution expansion.
- The company adopted a long-term “55/30/25” performance target: gross margin of 55%, cost of doing business of 30% of sales, and EBITDA of 25% of sales. First-half reported measures were 56%, 35%, and 21%, respectively. Fiscal 2016 advertising and sales-promotion investment was expected to be 6.0%–6.5% of sales. No specific revenue or earnings forecast was provided.
- Management cited volatility in foreign exchange rates and crude-oil-related input costs, uncertain conditions in Russia and Western Canada, and continued competitive and distribution pressure on homecare products. The company reported no material changes to previously disclosed risk factors.
- In the IQ Products dispute, arbitrators rejected the claimant’s claims and awarded WD-40 $1.5 million in attorney fees and costs; WD-40 sought court confirmation. A separate action against the DOT and PHMSA does not name WD-40 as a party. Management did not believe these matters were reasonably likely to materially harm results or financial condition.
Important facts for investors to verify
- Whether underlying sales trends improve, particularly in EMEA, distributor markets, and homecare and cleaning products; reported sales were affected by currency and timing of customer orders.
- Whether lower input costs and favorable mix sustain gross margins, and how volatile commodity prices and promotional spending affect future results.
- Cash conversion and working-capital needs, given lower operating cash flow and increases in receivables and inventory.
- Debt levels, covenant headroom, and the company’s reliance on domestic cash generation while substantial funds remain overseas.
- Execution of the Specialist growth strategy, share repurchases under the plan authorized through August 31, 2016, and the outcome of the IQPC-related proceedings.