WD-40 Company — FY2018 Form 10-K
Reporting period: Fiscal year ended August 31, 2018. The filing also reports unaudited fourth-quarter results. WD-40 sells maintenance and homecare and cleaning products in more than 176 countries; its flagship WD-40 Multi-Use Product accounts for the significant majority of sales.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $408.5 million | $380.5 million | +7% (about +5% constant currency) |
| Gross profit / margin | $225.3 million / 55.1% | $213.9 million / 56.2% | Profit +5%; margin down 1.1 points |
| Operating income | $78.6 million | $75.9 million | +4% |
| Net income | $65.2 million | $52.9 million | +23% |
| Diluted EPS | $4.64 | $3.72 | +25% |
| Operating cash flow | $64.8 million | $55.6 million | +$9.2 million |
| Cash and short-term investments | $49.1 million | $117.2 million | Down, primarily reflecting investment maturities and debt repayment |
| Total borrowings | $86.4 million | $154.0 million | Down $67.6 million |
FY2018 fourth-quarter net sales were $102.6 million versus $96.6 million a year earlier; net income was $21.6 million versus $14.4 million, and diluted EPS was $1.54 versus $1.01. The quarter’s income benefited from a $7.1 million provisional tax benefit related to the Tax Cuts and Jobs Act.
Maintenance product sales rose 9% to $372.4 million; homecare and cleaning sales fell 5% to $36.1 million. By segment, sales rose 4% in the Americas, 10% in EMEA and 10% in Asia-Pacific. EMEA’s reported growth was substantially currency-driven: constant-currency growth was 4%.
Cash flow from investing was $71.2 million, largely reflecting net maturities of short-term investments. Cash used in financing was $121.4 million, including $87.2 million of net revolver repayments, $29.6 million of dividends and $22.6 million of share repurchases, partly offset by $20.0 million of senior-note proceeds. The current ratio was approximately 2.0, based on reported current assets of $168.0 million and current liabilities of $85.9 million.
Material changes and notable items
- Net income growth materially exceeded operating-income growth, in part because the effective tax rate fell to 13.3% from 29.1%. The Tax Act produced a net $7.1 million provisional tax benefit, including a $6.8 million deferred-tax remeasurement benefit and a $0.3 million toll-tax benefit. Management said these amounts could change as tax guidance and analysis develop.
- Gross margin declined as petroleum-based chemicals and aerosol cans, warehousing and inbound freight, and customer discounts weighed on results. Price increases partly offset these pressures. Management noted that the crude-oil cost impact is uncertain.
- WD-40 Specialist sales increased 22% to $31.4 million. Management identified it as a long-term growth opportunity but cautioned that sales may fluctuate with promotions and distribution gains.
- Homecare and cleaning sales continued to weaken, particularly in the Americas, amid lost distribution, reduced product offerings, competition, category declines and variable promotional orders.
- The Company repatriated $79.6 million from its U.K. subsidiary and used the funds toward $80.0 million of revolver repayments. At year-end, borrowings included $64.0 million under the revolving facility, $2.8 million of autoborrowings and $19.6 million of senior notes.
- A favorable legal judgment yielded $1.5 million, recorded as a reduction in SG&A expense in the fourth quarter. Separately, WD-40 faces Malaysian litigation; management considered an unfavorable outcome not probable but damages reasonably possible, and could not estimate a loss range.
Outlook, risks and other disclosures
- No specific revenue or earnings guidance is provided. Management expects FY2019 advertising and sales-promotion expense of 5.5%–6.0% of net sales, and said it did not expect additional credit-facility borrowing in FY2019 based on its projections. It intended to repay $20.0 million of short-term revolver borrowings within twelve months.
- The Company’s long-term 55/30/25 model targets gross margin above 55%, cost of doing business at 30% of sales and EBITDA above 25% of sales. FY2018 results were approximately 55%, 34% and 21%, respectively; cost of doing business and EBITDA are non-GAAP measures.
- Key risks include foreign-currency exposure (about 62% of sales outside the U.S.), Brexit-related uncertainty, volatile petroleum and packaging costs, dependence on a limited supplier base, competition and retailer distribution decisions, regulatory requirements, product quality and liability, and execution of growth initiatives. The Company does not hedge translation risk or crude-oil price risk.
- Debt agreements require leverage no greater than 3:1 and interest coverage of at least 3:1; the Company reported compliance at year-end. The $175 million revolving facility matures in May 2020. Management stated liquidity was strong and expected operating cash and available credit to fund business needs, dividends, capital expenditures and repurchases.
- The Board raised the quarterly dividend 10% to $0.54 per share in December 2017. A new $75 million share-buyback authorization took effect September 1, 2018 and runs through August 31, 2020.
- Management expected adoption of the new revenue-recognition standard in FY2019 to cause a slight timing change for certain customers, but not a significant change in consolidated net sales. The filing reports effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor facts to verify
- How final Tax Act accounting and the provisional toll-tax estimate affect normalized earnings and the effective tax rate.
- Whether maintenance-product growth, especially WD-40 Specialist, can persist while homecare sales decline and promotional activity varies.
- Whether pricing and other actions can offset commodity, freight and foreign-exchange pressures on gross margin.
- Debt repayment, refinancing and covenant headroom, alongside the Company’s dividend and repurchase plans.
- Developments in the Malaysian litigation, for which the filing provides no estimable potential loss range.