WD-40 Company — Q1 FY2016 Form 10-Q
Reporting period: Three months ended November 30, 2015; unaudited. Comparative period is the three months ended November 30, 2014. Dollar amounts below are in millions unless stated otherwise.
Business context
WD-40 markets maintenance products and homecare and cleaning products globally under brands including WD-40, 3-IN-ONE, GT85, Carpet Fresh and Spot Shot. Its reportable segments are Americas, EMEA, and Asia-Pacific.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $92.5 | $96.4 | Down 4% |
| Gross profit / margin | $51.4 / 55.6% | $49.7 / 51.6% | Margin up 4.0 percentage points |
| Operating income | $17.1 | $15.6 | Up 10% |
| Net income | $12.1 | $10.8 | Up 12% |
| Diluted EPS | $0.83 | $0.73 | Up 14% |
| Operating cash flow | $14.6 | $9.4 | Up $5.2 |
- Gross margin benefited from lower petroleum-based chemical and aerosol-can costs, pricing, freight and warehousing costs, lower customer discounts, and product/market mix. Management attributed 2.6 percentage points of improvement to lower input costs. Foreign exchange reduced margin by 0.2 percentage points.
- Operating expenses were $34.3 million, broadly flat year over year. SG&A rose 2% to $27.8 million, while advertising and sales-promotion expense declined 4% to $5.7 million. Total advertising and promotional investment, including customer discounts recorded against sales, was $9.4 million versus $10.1 million.
- Cash and cash equivalents were $65.1 million and short-term investments $47.7 million at November 30, 2015, totaling $112.7 million. Cash from operations was partly offset by $8.1 million of treasury-stock purchases, $5.5 million of dividends paid, and $1.2 million of adverse currency effects on cash.
- Revolving-credit-facility debt was $118.0 million, classified as long-term; the facility commitment is $175 million and matures May 13, 2020. The company borrowed $10 million during the quarter and reported compliance with covenants. The covenants cap leverage at 3:1 and require interest coverage of at least 3:1.
- Inventory was $35.6 million, up from $32.1 million at August 31, 2015. Total assets were $349.9 million and shareholders’ equity was $153.8 million.
Material changes and operating drivers
- Reported sales fell $3.8 million, but currency translation accounted for an adverse $3.7 million; on a constant-currency basis, sales declined about $0.1 million. EMEA was most affected by currency translation.
- Sales by segment were Americas $44.4 million (down 1%), EMEA $32.1 million (down 7%), and Asia-Pacific $16.0 million (down 6%). On a constant-currency basis, Americas sales were flat, EMEA declined 1%, and Asia-Pacific increased 1%.
- Maintenance-product sales declined 3% to $82.2 million; homecare and cleaning sales declined 10% to $10.3 million. WD-40 Specialist sales were $4.3 million, up 2%. Management noted that Specialist sales may vary with promotional timing and distribution expansion.
- EMEA distributor-market sales fell 17%, including an approximately 35% decline in Russia amid unstable Eastern European market conditions. In the Americas, U.S. maintenance-product sales increased, while homecare products continued to face distribution losses, competition, category declines, and volatile customer orders and promotions.
- Net income also benefited from a lower effective tax rate, 28.5% versus 30.6%, including a one-time benefit from releasing liabilities for unrecognized tax benefits after statutes expired. Currency translation reduced net income by an estimated $0.5 million; management said constant-currency net income would have risen $1.8 million.
Outlook, risks, and unusual items
- Management’s long-term operating framework changed to “55/30/25”: targets of 55% gross margin, 30% cost of doing business as a percentage of sales, and 25% EBITDA margin. Q1 results were 56%, 35%, and 20%, respectively; these are management performance measures, not a specific earnings forecast.
- Fiscal 2016 global advertising and sales-promotion expense is expected to be 6%–7% of net sales. The filing does not provide specific full-year revenue or earnings guidance.
- Management expects existing cash, operating cash flow, and credit availability to cover projected operating and capital needs for at least 12 months. It said covenant compliance is expected to continue absent a significant sales decline or expense increase.
- Management intends to indefinitely reinvest foreign earnings; $98.1 million of cash and short-term investments was held in Europe, Australia, and China. Repatriation could trigger additional tax expense.
- The board approved an 11% increase in the quarterly dividend, from $0.38 to $0.42 per share, on December 8, 2015. The increased dividend was payable January 29, 2016.
- In the IQ Products dispute, arbitrators rejected the claimant’s claims and ordered it to pay WD-40 $1.5 million in attorney fees and costs. WD-40 sought court confirmation of the award. A separate IQPC action against DOT and PHMSA alleges deficiencies in the agency’s product-safety review; WD-40 is not a party. The company said it did not expect these matters to materially harm its financial condition or results.
- Foreign-exchange exposure, volatile commodity costs, product demand and customer promotions remain relevant risks. The company reported no material change in previously disclosed risk factors and no material weakness or significant change in internal control over financial reporting.
Investor verification priorities
- Check whether sales trends improve on a constant-currency basis, particularly in EMEA and Russia, and whether reported growth remains dependent on exchange rates.
- Assess the durability of gross-margin gains as input costs and promotional spending change, and track progress toward the company’s 55/30/25 targets.
- Monitor the balance between cash, foreign-held funds, credit-facility borrowings, share repurchases, and dividend commitments; verify covenant headroom and refinancing assumptions.
- Track homecare and cleaning brand performance and the carrying value of related intangible assets; management cited ongoing category and distribution pressures.
- Confirm collection and court confirmation of the $1.5 million arbitration award, and follow developments in the related product-safety litigation.