WD-40 Company — Q2 FY2017 Form 10-Q
Period: Three and six months ended February 28, 2017; comparisons are with the corresponding prior-year periods. Amounts below are in U.S. dollars unless noted.
Business context
WD-40 markets maintenance products and homecare and cleaning products globally. Its reporting segments are Americas, EMEA, and Asia-Pacific. Maintenance products are the primary business; the WD-40 Specialist line is a stated growth initiative.
Financial performance
| Metric | Q2 FY2017 | Six months FY2017 |
|---|---|---|
| Net sales | $96.5 million, up 2% | $185.8 million, down 1% |
| Gross profit / margin | $54.5 million / 56.4% (prior year 55.4%) | $105.5 million / 56.8% (prior year 55.5%) |
| Operating income | $18.9 million, up 5% | $35.4 million, up 1% |
| Net income | $12.4 million, down 10% | $24.1 million, down 6% |
| Diluted EPS | $0.87 (prior year $0.94) | $1.69 (prior year $1.77) |
| Operating cash flow | Not reported separately for the quarter | $13.7 million (prior year $10.3 million) |
Six-month sales were $12.4 million lower due to currency translation; on a constant-currency basis, sales would have increased $11.1 million. Currency movements also reduced six-month net income by $2.4 million; on a constant-currency basis, net income would have increased $0.8 million. Q2 net income was pressured by lower foreign-exchange gains than a year earlier and a higher effective tax rate.
Q2 sales rose in Asia-Pacific (14%) and EMEA (2%) but fell slightly in the Americas (1%). For the first six months, Asia-Pacific grew 7%, while Americas and EMEA declined 2% each. Maintenance-product sales were essentially flat year over year for the six months; homecare and cleaning sales fell 7%. WD-40 Specialist sales were $11.2 million for the six months, up 17%.
Cash, debt, and liquidity
At February 28, 2017, cash and cash equivalents were $33.6 million and short-term investments were $67.7 million, totaling $101.3 million. Total revolving-credit borrowings were $148.2 million ($14.2 million current and $134.0 million long-term), up from $122.0 million at August 31, 2016. The $175.0 million facility matures in May 2020; the company reported covenant compliance and expected sufficient liquidity for at least 12 months.
Six-month investing cash outflow was $25.3 million, including $12.9 million of property and equipment purchases and net purchases of short-term investments. Financing cash outflow was $4.2 million, including $18.7 million of share repurchases and $13.0 million of dividends, partly offset by revolving-credit borrowings. Cash declined $17.3 million over the period. The company repurchased 174,337 shares under its $75 million buyback authorization.
Outlook, commentary, and risks
- Management expected the FY2017 effective tax rate to be close to 30%; global advertising and sales-promotion expense was expected to be below 6% of net sales. The filing does not provide specific full-year sales or earnings guidance.
- Management’s long-term 55/30/25 model targets gross margin above 55%, cost of doing business at or below 30% of sales, and EBITDA above 25% of sales. These are long-term targets, not a period-specific forecast; reported six-month measures were approximately 57%, 36%, and 21%, respectively.
- Management cited foreign-exchange movements, petroleum-based input costs, sales mix, and freight and warehousing costs as factors affecting margins. It noted uncertainty about future crude-oil-related cost impacts.
- A trademark-infringement lawsuit concerning the WD-40 EZ-REACH product was filed in February 2017. The company disputes the claims and intends to defend them; a loss is reasonably possible, but the company could not estimate a loss or range. Management believed any loss would not materially affect financial condition or results.
- The company was undergoing U.S. federal and state/international tax audits. Up to $0.3 million of unrecognized tax benefits could be affected by audit resolutions or expiring statutes within 12 months.
- Headquarters construction improvements had a maximum contract price of $4.2 million, with completion scheduled by July 14, 2017. The company expected to transition to the new headquarters late in FY2017.
Important facts for investors to verify
- Whether constant-currency growth, particularly in EMEA, translates into sustained reported sales and earnings growth.
- Whether higher gross margins can be maintained as currency effects, product mix, and petroleum-based input costs change.
- Debt levels, covenant headroom, and the use of borrowing to fund repurchases, dividends, and capital spending.
- Developments and potential financial exposure in the EZ-REACH trademark litigation, for which the company gave no loss estimate.
- Execution and final costs of the headquarters project, and the outcome of tax audits and adoption of new accounting standards.