WD-40 Company — Q1 FY2022 Form 10-Q
Reporting period: Three months ended November 30, 2021, compared with the three months ended November 30, 2020. WD-40 sells maintenance products and homecare and cleaning products through three geographic segments: Americas, EMEA, and Asia-Pacific.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $134.7 million | $124.6 million | +8% reported; +5% constant currency |
| Gross profit / gross margin | $68.5 million / 50.8% | $70.2 million / 56.4% | Gross profit -3%; margin -560 bps |
| Operating income | $24.1 million | $28.4 million | -15% |
| Net income | $18.6 million | $23.6 million | -21% |
| Diluted EPS | $1.34 | $1.72 | -$0.38 |
| Operating cash flow | -$0.9 million | $23.9 million | -$24.9 million |
Maintenance-product sales rose 10% to $126.0 million, while homecare and cleaning product sales fell 15% to $8.7 million. By segment, sales increased 4% in the Americas, 5% in EMEA, and 34% in Asia-Pacific. Foreign exchange contributed $3.4 million to reported sales growth and $0.6 million to net income versus the prior-year quarter.
Gross margin fell mainly because of higher specialty chemical costs, freight, warehousing and distribution costs, contract manufacturer filling fees, and unfavorable foreign exchange in EMEA. Price increases provided a partial offset. SG&A increased 7% to $38.4 million; advertising and sales promotion expense was $5.6 million. Management’s long-term 55/30/25 framework targets gross margin of at least 55%, cost of doing business of 30% of sales, and EBITDA above 25% of sales. In the quarter, gross margin was 51%, cost of doing business 32%, and EBITDA margin 19% (the latter two are non-GAAP measures).
Liquidity, debt, and capital allocation
Cash and cash equivalents were $59.5 million at November 30, 2021, down from $86.0 million at August 31, 2021. Total borrowings were $113.5 million, including $44.7 million drawn on the revolving facility and $68.8 million in senior notes; $0.8 million was classified as short-term. The revolving facility provides up to $150 million and matures September 30, 2025. The company reported compliance with its debt covenants.
Operating cash use reflected working-capital investment, particularly a $13.1 million increase in inventory, and lower accrued payroll and related expenses. Investing cash use was $2.4 million, principally capital expenditures. Financing cash use was $21.9 million, including $9.9 million in dividends and $7.4 million of share repurchases. A new plan authorizes up to $75 million of repurchases through August 31, 2023; $7.4 million had been used by quarter-end. Subsequent to quarter-end, the board approved an 8% dividend increase, to $0.78 per share.
Outlook, risks, and contingencies
The filing does not provide specific fiscal-year sales or earnings guidance. Management said pandemic-related supply constraints, inflation, higher raw-material and freight costs, and aerosol production capacity limitations were affecting costs and product availability, particularly in the Americas. The company was working with existing manufacturers and onboarding additional suppliers, which may entail higher costs. Management also noted uncertainty around pandemic conditions and whether elevated renovation and maintenance demand will persist.
A plaintiff in Indonesia appealed after a court dismissed a damages claim seeking more than $25 million; related trademark proceedings also remained on appeal. The company denied the allegations and stated that an unfavorable outcome was remote. No other probable losses were reported, and management said reasonably possible claims were not expected to materially affect financial condition, results, or cash flows. The filing reported no material changes to the risk factors in the prior Form 10-K.
Important facts for investors to verify
- Whether pricing actions can offset continued input-cost, freight, and supply-chain pressures, and how gross margin trends in subsequent quarters.
- Whether supply capacity and product availability improve, especially for U.S. aerosols and WD-40 Specialist products.
- Whether inventory growth converts to sales and operating cash flow, given the quarter’s negative operating cash flow.
- How repurchases, dividends, and borrowing affect liquidity and covenant headroom.
- Developments in the Indonesian litigation and trademark appeals.