WD-40 Company (WDFC) — Q3 FY2019 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2019. WD-40 markets maintenance and homecare/cleaning products globally through the Americas, EMEA and Asia-Pacific segments. Amounts are in U.S. dollars unless noted.
Financial results and liquidity
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Net sales | $114.0 million | $107.0 million | $316.6 million | $305.9 million |
| Gross profit / margin | $62.1 million / 54.5% | $58.7 million / 54.8% | $174.1 million / 55.0% | $168.6 million / 55.1% |
| Operating income | $23.2 million | $22.3 million | $59.3 million | $58.8 million |
| Net income | $18.1 million | $16.1 million | $47.3 million | $43.6 million |
| Diluted EPS | $1.30 | $1.15 | $3.39 | $3.10 |
| Operating cash flow | Not separately presented | Not separately presented | $36.3 million | $41.6 million |
Q3 sales rose 7% and net income 12%; nine-month sales rose 4%, net income 9%, and diluted EPS 9%. Nine-month gross margin edged down to 55.0%. For the quarter, the effective tax rate fell to 19.8% from 24.3%; for nine months it was 18.8% versus 22.3%, primarily reflecting the Tax Act and the net benefit of GILTI/FDII, partly offset by loss of the domestic production activities deduction.
At May 31, cash and cash equivalents were $35.7 million, with no short-term investments. Total borrowings were $96.1 million ($34.9 million short-term and $61.2 million long-term), versus $86.4 million at August 31, 2018. The company reported compliance with debt covenants. Its revolving facility commitment is $100 million and matures January 22, 2024. Total liabilities were $159.9 million and shareholders’ equity $153.4 million.
Nine-month investing cash outflow was $8.2 million, including $8.7 million of property and equipment purchases. Financing cash outflow was $38.8 million, including $24.5 million of dividends and $22.4 million of treasury-stock purchases, partly offset by revolving-credit borrowings. Cash declined $13.1 million to $35.7 million.
Changes and operating drivers
- For nine months, constant-currency sales growth was $18.7 million, compared with reported growth of $10.7 million; currency translation reduced sales by $8.0 million. EMEA led reported segment growth, up 9% for nine months (14% constant currency). Americas and Asia-Pacific sales were nearly flat year over year for the nine-month period.
- WD-40 Specialist sales were $25.6 million for nine months, up 10%. Management cited expanded distribution and promotions. Maintenance products drove most consolidated sales; Americas homecare/cleaning sales declined 13% for nine months, with weakness in 2000 Flushes and Spot Shot.
- Gross margin faced higher aerosol-can and petroleum-based chemical costs, unfavorable mix and other costs. Pricing actions largely offset these pressures over nine months. In Q3, gross margin also faced unfavorable mix and costs, partly offset by pricing, lower distribution costs and currency effects.
- Nine-month SG&A rose 4%, and advertising and sales promotion expense rose 10%; advertising and promotion expense was 5.5% of sales. Operating income increased only 1%, as higher operating costs tempered sales growth.
Outlook, risks and unusual items
- The filing does not provide a specific full-year revenue or earnings forecast. Management expects FY2019 global advertising and sales-promotion spending of 5.5%–6.0% of net sales. Its long-term operating model targets gross margin of at least 55%, cost of doing business of 30% of sales and EBITDA above 25% of sales; reported nine-month results were 55%, 35% and 21%, respectively.
- Management described liquidity as strong and believes operating cash flow and available credit will fund operating needs, capital expenditures, dividends, repurchases and growth activities. It noted that significant sales declines or expense increases could threaten covenant compliance, though it considered noncompliance unlikely over the next 12 months.
- After quarter-end, finalized U.S. Treasury regulations conflicted with the company’s interpretation of the Tax Act’s one-time toll tax on unremitted foreign earnings. The company was assessing its position; a change could increase income-tax expense by an estimated $5 million–$7 million.
- In Malaysian litigation, the company denies claims of conspiracy and intends to defend itself. Management said an unfavorable outcome was not probable but damages were reasonably possible; it could not estimate a loss or range.
- The company expects adoption of the lease standard on September 1, 2019 to materially affect its balance sheet and disclosures; its impact on earnings and cash flows was still under assessment. Revenue-standard adoption had no material financial-statement impact. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether the tax-authority regulations change WD-40’s toll-tax position and trigger the potential $5 million–$7 million tax expense.
- Whether input-cost, sales-mix and currency pressures affect margins, particularly in EMEA and the Americas.
- Whether maintenance-product growth, including WD-40 Specialist, continues and whether Americas homecare/cleaning weakness persists.
- Debt levels, revolving-credit usage and covenant headroom alongside continued dividends and share repurchases.
- Developments in the Malaysian litigation and the eventual balance-sheet effect of lease-standard adoption.