WD-40 Company — FY2016 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended August 31, 2016; the filing also reports unaudited fourth-quarter results. WD-40 markets maintenance and homecare/cleaning products in more than 176 countries. Maintenance products generated the large majority of sales. All amounts below are U.S. dollars.
Key financial results
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $380.7 million | $378.2 million | +1% |
| Gross profit / gross margin | $214.4 million / 56.3% | $200.2 million / 52.9% | Profit +7%; margin +3.4 percentage points |
| Operating income | $71.3 million | $65.4 million | +9% |
| Net income | $52.6 million | $44.8 million | +17% |
| Diluted EPS | $3.64 | $3.04 | +20% |
| Operating cash flow | $60.6 million | $55.1 million | +$5.5 million |
| Cash and short-term investments at year-end | $108.5 million | $102.5 million | +$6.0 million |
| Revolving credit balance at year-end | $122.0 million | $108.0 million | +$14.0 million |
FY2016 fourth-quarter sales were $97.2 million, net income $14.2 million, and diluted EPS $0.99. The effective tax rate was 27.7%, down from 29.0%, primarily reflecting a greater share of earnings from lower-tax foreign operations.
Material changes versus FY2015
- Foreign exchange reduced reported sales by $15.2 million. At constant currency, sales increased 5% rather than the reported 1%; currency also reduced net income by $2.8 million.
- Maintenance product sales rose 2% to $340.0 million; homecare and cleaning sales fell 9% to $40.7 million. WD-40 Specialist sales increased 14% to $21.5 million.
- Americas sales grew 2%, EMEA sales declined 1%, and Asia-Pacific sales were essentially flat. On a constant-currency basis, management reported growth in each segment.
- Gross margin benefited chiefly from lower petroleum-based chemical and aerosol-can costs (+2.4 percentage points), along with product mix, pricing, and currency effects. Management cautioned that the crude-oil-related benefit may not continue at the same level.
- Operating expenses increased 6% to $143.0 million, including higher employee-related costs and freight. The company repurchased $32.1 million of shares during FY2016 and paid $23.7 million in dividends.
Liquidity, debt, and capital allocation
At August 31, 2016, cash and cash equivalents were $50.9 million and short-term investments were $57.6 million. The company had $122.0 million outstanding under its $175.0 million revolving credit facility, due to mature in May 2020; it reported compliance with covenants and no restriction on the remaining facility availability. Management said existing liquidity and expected operating cash flows should cover projected needs for at least 12 months. Financing cash outflows included $32.1 million of share repurchases and $23.7 million of dividends.
Outlook, commentary, risks, and unusual items
- Management’s long-term “55/30/25” model targets gross margin of 55%, cost of doing business of 30% of sales, and EBITDA of 25% of sales. FY2016 results were approximately 56%, 36%, and 21%, respectively; these are long-term targets, not specific FY2017 earnings guidance.
- Global advertising and sales-promotion expense for FY2017 was expected to be close to 6% of net sales. The company expected to borrow an additional $20–$25 million on its facility in FY2017, with estimated interest of approximately $0.6 million on those borrowings.
- Key exposures include foreign-exchange movements and Brexit-related sterling volatility; volatile raw-material and freight costs; dependence on select suppliers and contract manufacturers; competition, customer distribution and promotional changes; regulatory and product-quality requirements; and execution of growth initiatives. About 58% of FY2016 sales were outside the U.S.
- The company planned a one-time FY2017 repatriation of $8.2 million of Australian and Chinese earnings. It continued to treat $113.4 million of other foreign earnings, mostly in the U.K., as indefinitely reinvested; estimated unrecognized U.S. tax liability on that amount was approximately $8.8 million.
- After year-end, WD-40 completed the purchase of a new San Diego headquarters for $10.7 million, funded through the revolving facility, and expected approximately $4.5 million of additional buildout and equipment costs.
- In a contract-manufacturing dispute, an arbitration award confirmed by a Texas court granted WD-40 $1.5 million in attorney fees and costs; the opposing party appealed in September 2016. The award had not been recorded in the FY2016 financial statements.
- Foreign-currency translation reduced other comprehensive income by $18.6 million in FY2016. The annual goodwill impairment assessment found no impairment; homecare brand sales declines and related intangible asset values remain worth monitoring.
Important facts for investors to verify
- Whether underlying sales growth and WD-40 Specialist expansion persist after adjusting for currency and promotional timing.
- Whether elevated gross margins can be sustained if raw-material costs rise or currency effects reverse.
- Cash generation, working-capital needs, planned FY2017 borrowing, and compliance with debt covenants as repurchases, dividends, and headquarters costs continue.
- Effects of sterling and other currency movements, including Brexit developments, on sales, earnings, cash, and foreign-held investments.
- Future sales, distribution, and impairment assumptions for declining homecare and cleaning brands.
- Outcome of the appeal in the IQ Products dispute and the accounting treatment of any recovery.