WD-40 Company — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2018. Financial statements are unaudited. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless otherwise noted.
Business context
WD-40 markets maintenance products and homecare and cleaning products globally, reporting through Americas, EMEA, and Asia-Pacific segments. Maintenance products, including WD-40 Multi-Use and Specialist, are the primary business. The filing describes growth initiatives focused on expanding the core product, building Specialist, broadening the product base, developing talent, and operational excellence.
Key financial results
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $101.3 million | $96.5 million | $198.9 million | $185.8 million |
| Gross profit | $55.8 million | $54.5 million | $110.0 million | $105.5 million |
| Gross margin | 55.1% | 56.4% | 55.3% | 56.8% |
| Operating income | $19.4 million | $18.9 million | $36.5 million | $35.4 million |
| Net income | $14.8 million | $12.4 million | $27.4 million | $24.1 million |
| Diluted EPS | $1.05 | $0.87 | $1.95 | $1.69 |
| Operating cash flow | Not separately stated | Not separately stated | $21.2 million | $16.4 million |
Q2 sales rose 5% year over year; six-month sales rose 7%. Maintenance product sales grew 8% for the first half, while homecare and cleaning sales fell 2%. Q2 operating margin was approximately 19.1%, versus 19.5% a year earlier. Six-month net income growth benefited substantially from a lower effective tax rate.
Material changes and financial position
- Regional sales: First-half Americas sales increased 4%, EMEA increased 12%, and Asia-Pacific increased 5%. Foreign exchange contributed $5.7 million of the $13.1 million consolidated sales increase; on a constant-currency basis, sales growth was $7.4 million.
- Specialist: WD-40 Specialist sales were $14.9 million for the first half, up 33%. Management cautioned that results may fluctuate with promotions, distribution expansion, and other product-line development factors.
- Margin pressure: First-half gross margin fell 1.5 percentage points. Management cited higher petroleum-based chemical and aerosol-can costs, warehousing and inbound freight, product mix, and other costs; price increases partly offset these pressures.
- Liquidity: At February 28, cash and cash equivalents were $36.5 million and short-term investments were $86.9 million, totaling $123.4 million. Management said $121.3 million was held outside the U.S. in foreign currencies and expected liquidity to cover operating and capital needs for at least 12 months.
- Debt: Total borrowings were $167.2 million, compared with $154.0 million at August 31, 2017. This included $147.2 million outstanding on the revolving facility and $20.0 million of Series A senior notes bearing 3.39%, with maturity in 2032. The credit facility commitment is $175 million and matures May 13, 2020. The company reported compliance with debt covenants.
- Investment and capital returns: First-half operating cash flow was $21.2 million; investing cash use was $9.4 million, including $9.2 million of property and equipment purchases. Financing cash use was $14.2 million, including $14.5 million of dividends and $11.4 million of share repurchases, partly offset by borrowing proceeds. The company purchased a Milton Keynes, England office property and anticipated further buildout costs.
- Working capital: Receivables increased to $73.3 million from $64.3 million and inventory to $40.0 million from $35.3 million compared with August 31, 2017.
Outlook, commentary, risks, and unusual items
- No consolidated revenue or earnings forecast is provided. Management expects fiscal 2018 effective tax expense of 22%–23%, subject to revision of provisional Tax Act calculations.
- Management’s long-term 55/30/25 model targets gross margin above 55%, cost of doing business at 30% of sales, and EBITDA above 25% of sales. First-half reported measures were 55% gross margin, 35% cost of doing business, and 20% EBITDA margin. These are management targets, not near-term guidance.
- Fiscal 2018 global advertising and sales-promotion expense is expected to be near 6% of sales. The filing also identifies volatile petroleum-related input costs, foreign exchange, promotional and order timing, and soft or declining homecare product demand as factors affecting results.
- Tax Act: The company recorded provisional $6.9 million benefit from remeasuring deferred taxes after the federal rate reduction, nearly offset by a $6.8 million estimated toll tax on unremitted foreign earnings. Most of the toll-tax amount is payable over eight years. These estimates may change materially during the measurement period.
- Management expects to lose the Qualified Production Deduction benefit in FY2019 and anticipates benefits from the Foreign Derived Intangible Income provision; it continues to assess other tax-law effects.
- The company settled a trademark dispute by acquiring EZ REACH trademark rights for $0.2 million. It reported no current litigation expected to have a material adverse impact, no outstanding special manufacturer commitments, and no off-balance-sheet arrangements. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- The board declared a $0.54-per-share dividend on March 20, 2018, payable April 30, 2018. The $75 million repurchase authorization runs through August 31, 2018; $42.5 million had been used through February 28, 2018.
Most important facts for investors to verify
- Whether provisional Tax Act estimates, including the toll tax and future effective tax rate, are revised as the company completes its analysis.
- Whether rising petroleum-based input, freight, and warehousing costs continue to pressure gross margin, and whether pricing offsets them.
- How much reported sales growth reflects sustainable underlying demand versus foreign exchange, promotions, distribution expansion, and order timing—particularly in EMEA and Specialist.
- Whether declining homecare and cleaning product demand stabilizes, and whether maintenance-product growth can continue.
- Debt levels, refinancing and covenant compliance, and the use of substantial foreign-held cash alongside dividends, repurchases, and U.K. property spending.
- Receivables and inventory growth relative to sales, and the sustainability of operating cash flow.