WD-40 Company — Q1 FY2019 10-Q
Reporting period: Three months ended November 30, 2018; comparisons are with the three months ended November 30, 2017 unless stated otherwise. WD-40 sells maintenance and homecare/cleaning products globally through the Americas, EMEA and Asia-Pacific segments. Amounts below are in U.S. dollars.
Financial performance and liquidity
- Revenue: $101.3 million, up 4% from $97.6 million. Foreign exchange reduced sales by $1.1 million; management reported constant-currency growth of $4.8 million.
- Product and regional trends: Maintenance-product sales rose 5% to $92.5 million; homecare and cleaning sales fell 8% to $8.8 million. Americas sales increased 4% to $47.8 million, EMEA increased 11% to $38.7 million, and Asia-Pacific declined 10% to $14.7 million.
- Profit and margins: Gross profit was $55.8 million, up 3%; gross margin was 55.1%, versus 55.5%. Operating income declined 4% to $16.4 million. Net income rose 5% to $13.3 million, and diluted EPS increased to $0.95 from $0.90. The effective tax rate fell to 17.6% from 23.7%, primarily reflecting the lower U.S. corporate tax rate under the Tax Act.
- Expenses: Operating expenses increased 6% to $39.4 million. SG&A rose 5% to $32.7 million, while advertising and sales promotion expense increased 17% to $6.0 million.
- Cash flow: Operating cash flow was $9.0 million, down from $12.6 million. Investing used $1.2 million and financing used $24.1 million. Cash declined $17.3 million during the quarter to $31.6 million.
- Balance sheet and debt: At November 30, cash and short-term investments totaled $31.8 million; current assets were $146.2 million and current liabilities $66.9 million. Total borrowings were $79.1 million, down from $86.4 million at August 31, 2018. The company reported compliance with debt covenants and access to a $175 million revolving credit facility maturing May 2020.
- Capital returns: WD-40 repurchased 41,184 shares for $6.9 million during the quarter and paid $7.5 million in dividends. After quarter-end, the board approved a 13% increase in the quarterly dividend, from $0.54 to $0.61 per share.
Material changes and management commentary
- Maintenance sales growth was led by WD-40 Multi-Use Product and Specialist; Specialist sales rose 13% to $8.4 million. Management cautioned that Specialist sales may vary with promotions and distribution buildout.
- Asia-Pacific sales and operating income weakened, partly due to order timing in distributor markets and Australia. Homecare and cleaning sales continued to face lost distribution, reduced product offerings, competition, category declines and volatile promotional orders.
- Gross margin faced a 2.0-percentage-point headwind from higher petroleum-based specialty chemical and aerosol-can costs. Price increases contributed a 1.2-point offset; management noted that raw-material cost changes may affect results with a lag and future impacts are uncertain.
- Management described liquidity as strong and expects operating cash generation and credit-facility access to fund operating needs, capital expenditures, dividends, repurchases and other activities. It did not provide specific full-year revenue or earnings guidance. Its 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; Q1 results were 55%, 37% and 18%, respectively. Fiscal 2019 advertising and sales-promotion investment was expected to be near 6% of sales.
Risks, contingencies and unusual items
- A Malaysian distributor-related lawsuit names WD-40 as a defendant. The company denies the allegations, considers an unfavorable outcome not probable but damages reasonably possible, and cannot estimate a possible loss or range.
- Foreign exchange affected reported sales and cash; the company had $24.9 million of forward contracts outstanding at quarter-end, maturing in December 2018.
- WD-40 adopted ASC 606 on September 1, 2018, recording a $0.3 million reduction to opening retained earnings; management said the impact on current-quarter financial statements was not material.
- The company expects to adopt the lease standard on September 1, 2019 and expects a material balance-sheet and disclosure impact, not yet quantified. Its effect on earnings and cash flows was still under assessment.
- The $75 million share-repurchase authorization runs through August 31, 2020. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether maintenance-product growth offsets continued weakness in homecare and cleaning and the Asia-Pacific region.
- Whether commodity costs, pricing and promotional spending sustain gross margin and the company’s long-term operating targets.
- Cash conversion, working-capital movements, borrowing levels and continued compliance with credit covenants as repurchases and dividends continue.
- Developments in the Malaysian litigation and any eventual estimate of potential exposure.
- The quantified balance-sheet effects of lease-standard adoption and any changes to the company’s outlook or capital-return plans.