WD-40 Company (WDFC) — Q3 FY2020 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2020; comparisons are with the corresponding 2019 periods. WD-40 markets maintenance and homecare/cleaning products globally through its Americas, EMEA, and Asia-Pacific segments.
Financial results and liquidity
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Net sales | $98.2 million; down 14% from $114.0 million | $296.9 million; down 6% from $316.6 million |
| Gross profit / margin | $53.1 million / 54.0%, versus $62.1 million / 54.5% | $160.2 million / 54.0%, versus $174.1 million / 55.0% |
| Operating income | $19.8 million, down 15% | $52.7 million, down 11% |
| Net income | $14.5 million, down 20% | $41.0 million, down 13% |
| Diluted EPS | $1.06, versus $1.30 | $2.98, versus $3.39 |
- Maintenance-product sales fell 16% in Q3 and 7% for the nine-month period. Homecare and cleaning sales rose 10% in Q3 and 3% year to date.
- For the nine months, operating cash flow was $40.8 million, compared with $36.3 million. Capital expenditures were $17.4 million, versus $8.7 million; dividends paid were $26.8 million.
- At May 31, cash and equivalents were $88.6 million. Total borrowings were $165.4 million, comprising $70.8 million current and $94.6 million long-term. The company reported $147.4 million drawn on its revolving facility, of which $77.4 million was classified long-term and $70.0 million short-term.
- The revolving credit commitment was increased to $150 million, maturing March 16, 2025. The company reported compliance with debt covenants. It had drawn $80 million in March as a precaution amid pandemic-related market uncertainty.
Material changes and management commentary
- Management said COVID-19 materially affected results through May 31. Store closures and restrictions, disrupted distribution and transportation, and timing of customer orders weighed on sales. Online-channel gains and increased demand for homecare and cleaning products partly offset declines in some markets.
- Q3 segment sales declined 5% in the Americas, 27% in EMEA, and 5% in Asia-Pacific. EMEA was the largest contributor to the quarterly decline. For the nine months, sales fell 1% in the Americas, 9% in EMEA, and 17% in Asia-Pacific.
- Gross margin was pressured by higher warehousing and inbound freight costs, promotional discounts, product mix, and aerosol-can costs. Lower petroleum-based specialty-chemical costs and EMEA price increases provided partial offsets. Management noted crude-oil price changes may affect costs with a lag.
- Lower travel, meeting, freight, and advertising/promotion expenses reduced operating expenses; management linked some reductions to pandemic restrictions and lower sales. Nine-month SG&A declined 5%, while SG&A as a share of sales increased to 30.5% from 30.1%.
- The company temporarily suspended share repurchases on April 8 to preserve cash. It repurchased 92,583 shares for $16.8 million during the nine months before suspension.
- A $0.67-per-share dividend was declared June 16, payable July 31, 2020. The company’s dividend covenant limits distributions relative to recent net income.
Outlook, risks, and unusual items
- No quantified near-term revenue or earnings guidance was provided. Management said the duration and financial effects of COVID-19, including any second wave, future restrictions, supply-chain disruption, and the persistence of elevated homecare demand, could not be estimated and could be material.
- Management’s long-term “55/30/25” model targets gross margin of at least 55%, cost of doing business of 30% of sales, and EBITDA above 25% of sales. These are long-term performance targets, not near-term guidance. Nine-month results were 54%, 35%, and 20%, respectively; cost of doing business and EBITDA are non-GAAP measures.
- Risks include weakening consumer or industrial demand, retailer and distributor disruption, supplier difficulties, customer credit deterioration, foreign-exchange movements, and volatile freight and input costs. EMEA sales also face currency translation exposure.
- Management reported no impairment of goodwill or definite-lived intangible assets and no pending claim it believed would probably cause a loss or reasonably possible material adverse impact. Litigation and tax examinations remain ordinary-course contingencies.
- Adoption of lease accounting on September 1, 2019 added $9.0 million of assets and $9.2 million of liabilities, with no material impact on earnings or cash flow. The company also disclosed an $8.7 million prior-year noncash tax charge add-back permitted solely for calculation of the dividend covenant.
Important facts for investors to verify
- Whether sales and margins recover as retail restrictions ease, and whether pandemic-related homecare demand persists.
- Whether the EMEA and Asia-Pacific sales declines, freight and warehousing pressures, and currency effects continue.
- Revolver balances, refinancing classification, covenant headroom, and the company’s ability to sustain dividends while repurchases are suspended.
- Execution and sales effects of the new direct-sales model in Mexico, alongside the timing and returns from elevated capital expenditures.