WD-40 Company — Q3 FY2015 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2015. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted. WD-40 sells multipurpose maintenance products and homecare and cleaning products globally.
Key financial results
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $92.5 | $95.7 | $286.2 | $285.4 |
| Gross profit | $49.3 | $49.1 | $150.2 | $147.4 |
| Gross margin | 53.3% | 51.4% | 52.5% | 51.6% |
| Operating income | $16.4 | $15.1 | $49.6 | $47.1 |
| Net income | $11.0 | $10.4 | $33.1 | $32.2 |
| Diluted EPS | $0.75 | $0.69 | $2.24 | $2.10 |
- Quarterly sales declined 3%, while operating income rose 8% and net income rose 5%. Nine-month sales were nearly flat, while operating income increased 5% and net income increased 3%.
- Nine-month gross margin improved 0.9 percentage points. Management attributed the improvement primarily to lower petroleum-based chemical and aerosol-can costs, price increases, and lower warehousing and inbound freight costs; higher customer discounts and foreign exchange partly offset these benefits.
- Cash from operations was $35.3 million for the nine months, up from $22.1 million. Investing used $13.9 million and financing used $29.7 million. Cash and equivalents ended at $46.9 million, down $10.9 million from fiscal year-end; short-term investments were $48.3 million.
- At May 31, current assets were $200.4 million and current liabilities were $45.7 million. Revolver debt was $108.0 million, classified as long-term. The amended unsecured facility provides up to $150 million through May 13, 2020; no letters of credit or other restrictions on availability were reported. The company was in covenant compliance.
Material changes and operating drivers
- Quarterly Americas sales increased 10% to $49.7 million, driven by multipurpose products, distribution gains and promotions. EMEA sales fell 17% to $30.3 million, and Asia-Pacific sales fell 11% to $12.4 million. EMEA and Asia-Pacific declines included unfavorable currency effects.
- For the nine months, Americas sales rose 4% and Asia-Pacific rose 9%, while EMEA fell 7%. Reported consolidated sales increased $0.8 million; currency reduced sales by $6.7 million, so management reported $7.5 million of growth on a constant-currency basis.
- EMEA weakness reflected euro translation and lower demand in Russia and Ukraine amid political and economic instability. In Q3, the company recorded no sales in Ukraine and sales in Russia only in the quarter’s final month.
- A defective aerosol-can component affected one product size in Asian distributor markets. WD-40 recorded about $0.9 million in sales allowances and wrote off product and related costs. Management described the issue as isolated and said it did not expect future-period sales to be affected.
- The company acquired the U.K. GT85 business for $4.1 million in September 2014, including $3.7 million paid at closing; the remaining amount is payable subject to the acquisition agreement’s claim provisions. The acquisition added approximately $1.3 million of goodwill and $2.8 million of definite-lived intangible assets.
Outlook, management commentary, risks and unusual items
- No specific full-year sales or earnings forecast is provided. Management said it expects fiscal 2015 advertising and sales-promotion expense to be 6%–7% of sales. Its long-term “50/30/20” objectives are gross margin above 50%, cost of doing business at or below 30% of sales, and EBITDA above 20%; nine-month results were 52%, 34%, and 18%, respectively.
- Management said available cash, the revolver and expected operating cash flows should fund operating and capital needs for at least the next 12 months, and that covenant failure was unlikely absent a significant sales decline or expense increase. $35.4 million of cash was held outside the U.S. and intended to be indefinitely reinvested; repatriation could result in additional tax expense.
- Foreign-exchange volatility remains significant: nine-month currency movements reduced sales by $6.7 million and net income by $0.8 million, according to management. Crude-oil and related input-cost volatility, promotional spending, customer order timing, and homecare-product competition or lost distribution are also risks.
- The May 2015 arbitration decision rejected all claims by IQ Products Company. WD-40 consequently reversed a previously recorded $1.7 million inventory obligation and related liability. A separate California class-action suit was dismissed with prejudice in April 2015. The filing reports other ordinary-course claims, including product-liability matters.
- The board declared a $0.38-per-share dividend payable July 31, 2015. The company repurchased 136,396 shares for $11.3 million in Q3 under its new $75 million buyback authorization, which runs through August 31, 2016.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales momentum and margins hold after adjusting for currency, particularly in EMEA and Asia-Pacific, and whether Russia/Ukraine demand recovers.
- Whether the aerosol-can quality issue is fully resolved and whether any further returns, costs, or customer impacts arise.
- How the $108 million revolver balance, share repurchases, dividends, and cash held overseas affect liquidity and capital allocation.
- Whether the GT85 acquisition delivers the intended product-category growth and whether any claim affects the deferred purchase consideration.
- Whether higher gross margins can be sustained while management addresses cost of doing business above its 30% target and EBITDA below its 20% target.