WD-40 Company — Q1 FY2018 Form 10-Q
Reporting period: Three months ended November 30, 2017; comparisons are with the three months ended November 30, 2016. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions where appropriate. WD-40 sells maintenance and homecare/cleaning products globally.
Key financial results
| Metric | Q1 FY2018 | Prior year | Change |
|---|---|---|---|
| Net sales | $97.6m | $89.2m | +9% |
| Gross profit / gross margin | $54.2m / 55.5% | $51.0m / 57.2% | Profit +6%; margin down 1.7 percentage points |
| Operating income | $17.1m | $16.5m | +4% |
| Net income | $12.6m | $11.8m | +7% |
| Diluted EPS | $0.90 | $0.82 | +10% |
| Operating cash flow | $12.6m | $15.6m | Down $3.1m |
Maintenance product sales rose 11% to $88.0m; homecare and cleaning sales fell 5% to $9.6m. WD-40 Specialist sales were $7.5m, up 29%. By region, sales increased 8% in the Americas to $46.2m, 16% in EMEA to $35.0m, and 2% in Asia-Pacific to $16.4m. Management said foreign exchange added $1.4m to consolidated sales; on a constant-currency basis sales increased $6.9m.
Operating cash flow was $12.6m; investing activities used $1.2m, including $1.0m of property and equipment purchases. Financing activities used $2.3m, including $6.9m of dividends and $3.9m of share repurchases, offset in part by debt issuance. Cash and cash equivalents ended at $46.9m, with $82.6m of short-term investments.
Total borrowings were $164.0m at quarter-end: $144.0m under the revolving credit facility and $20.0m in Series A senior notes. The notes bear 3.39% interest and mature in 2032. The company reported compliance with debt covenants. Total current liabilities were $60.3m and total current assets were $235.5m. Cash and short-term investments totaled $129.5m, of which $117.2m was held outside the U.S.
Material changes and drivers
- Gross margin declined primarily due to higher petroleum-based specialty chemical and aerosol-can costs, unfavorable mix and increased warehousing and inbound freight costs. Management noted raw material cost effects may lag by a quarter or more and crude oil volatility makes future impacts uncertain.
- SG&A rose 8% to $31.2m, mainly from employee-related costs, freight, office overhead, professional services and foreign exchange. Advertising and sales promotion expense increased 6% to $5.1m; including customer discounts recorded against sales, total promotional investment was $10.5m versus $8.8m.
- Net income benefited from a $0.8m excess tax benefit on stock-based award settlements following adoption of ASU 2016-09. The quarter’s effective tax rate was 23.7%, versus 28.3% a year earlier; management said this accounting change may make quarterly tax rates more variable.
- Q1 operating cash flow fell despite higher earnings, principally reflecting working-capital timing and less favorable receivables movements than in the prior-year quarter. Investing outflows were substantially lower than last year, when the company purchased its San Diego office building and added short-term investments.
Outlook, risks and unusual items
- Management described liquidity as strong and expected cash, operating cash flows and available credit to cover operating and capital needs for at least the next 12 months. It identified no specific consolidated sales or earnings forecast in this filing.
- The company targets, over the long term, gross margin above 55%, cost of doing business at 30% of sales and EBITDA above 25% of sales. Q1 results were approximately 56%, 36% and 20%, respectively; cost of doing business and EBITDA are non-GAAP measures.
- Management expected FY2018 advertising and sales promotion investment to be near 6% of net sales. It anticipated a favorable FY2018 effective-tax-rate impact from the Tax Cuts and Jobs Act, but had not completed its analysis; expected favorable deferred-tax remeasurement effects were expected to be substantially offset by the one-time toll tax on foreign earnings.
- On December 12, 2017, the board approved a 10% increase in the quarterly dividend, from $0.49 to $0.54 per share, payable January 31, 2018. This occurred after the reporting period.
- A confidential settlement of a trademark dispute provided for the company to acquire EZ REACH trademark rights for $0.2m; the company said the transaction was not material. Management reported no current litigation it believed could materially harm the business. Routine supplier purchase commitments were described as generally immaterial, and no separate innovation/supply-chain purchase commitments were outstanding.
- Key exposures include raw-material and freight costs, foreign-exchange movements, promotional and customer-order timing, and weaker or flat homecare/cleaning product sales associated with lost distribution, competition and category declines. EMEA’s reported growth included favorable currency translation; Asia-Pacific sales were flat on a constant-currency basis.
Important facts for investors to verify
- Whether maintenance-product growth and WD-40 Specialist distribution gains continue, and whether homecare/cleaning declines persist.
- Whether gross-margin pressure from petroleum-based inputs, aerosol cans, freight and sales mix eases or intensifies.
- How much FY2018 earnings and the effective tax rate are affected by the stock-award tax benefit and the Tax Cuts and Jobs Act, including deferred-tax remeasurement and the toll tax.
- Debt balances, refinancing needs, covenant headroom and use of the $175m revolving facility; reported covenant compliance was as of November 30, 2017.
- Whether operating cash flow converts earnings consistently, given working-capital timing and substantial cash and investments held overseas.
- Whether the announced $0.54 quarterly dividend and ongoing repurchases remain supported by cash generation, capital needs and debt covenants.