WD-40 Company — Q1 FY2020 Form 10-Q
Reporting period: Three months ended November 30, 2019; compared with the three months ended November 30, 2018. WD-40 sells maintenance and homecare and cleaning products globally through its Americas, EMEA and Asia-Pacific segments.
Financial performance
| Metric | Q1 FY2020 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $98.6 million | $101.3 million | Down 3% |
| Gross profit / margin | $53.5 million / 54.3% | $55.8 million / 55.1% | Profit down $2.3 million; margin down 0.8 percentage points |
| Operating income | $14.7 million | $16.4 million | Down 10% |
| Net income | $12.2 million | $13.3 million | Down 8% |
| Diluted EPS | $0.88 | $0.95 | Down $0.07 |
| Cash from operations | $15.2 million | $9.0 million | Up $6.2 million |
| Cash and cash equivalents | $28.7 million | $27.2 million at August 31, 2019 | Up $1.4 million |
Operating expenses were $38.8 million, down 1%; SG&A was nearly flat at $32.6 million, while advertising and sales promotion expense declined 6% to $5.6 million. The company’s non-GAAP cost of doing business was 38% of sales versus 37%; non-GAAP EBITDA margin was 17% versus 18%. These are company-defined measures, not GAAP metrics.
Cash flow and investment: Investing cash outflow was $5.8 million, including $6.0 million of property and equipment purchases, principally for the completed UK office renovation and fit-out. Financing cash outflow was $8.5 million, including $8.4 million of dividends, $5.0 million of share repurchases and debt repayments, partly offset by revolving-credit borrowings.
Debt and liquidity: Total borrowings were $90.2 million, comprising $29.1 million short-term and $61.2 million long-term; cash was $28.7 million. The company reported $58.6 million outstanding on the revolving credit facility, classified $43.6 million as long-term and $15.0 million as short-term, plus $13.3 million of net autoborrowings and $18.4 million of Series A Notes. The unsecured facility has a $100 million commitment and matures January 22, 2024. WD-40 reported compliance with its debt covenants at quarter-end.
Changes versus the prior-year quarter
- Foreign exchange reduced reported sales by $2.2 million; at constant currency, sales declined about $0.5 million. Currency reduced net income by an estimated $0.5 million; at constant currency, net income declined about $0.6 million.
- Americas sales fell 2% to $46.7 million; EMEA sales rose 1% to $39.2 million, or 6% at constant currency; Asia-Pacific sales fell 15% to $12.6 million, or 13% at constant currency.
- Maintenance-product sales declined 3% to $89.7 million; homecare and cleaning sales increased 1% to $8.9 million. Asia-Pacific weakness reflected customer-order timing, particularly in distributor markets, and slower China market conditions. Americas WD-40 Specialist sales were affected by a prior-year holiday gift-pack promotion that did not recur.
- Gross margin was pressured by sales mix, higher warehousing and inbound freight costs, customer discounts and aerosol-can costs. EMEA price increases and lower petroleum-based specialty chemical costs partly offset these pressures.
Outlook, risks and notable items
- No specific consolidated sales or earnings forecast is provided in the filing. Management expects fiscal 2020 global advertising and sales promotion expense to be 5.5%–6.0% of net sales. Its long-term 55/30/25 model targets gross margin at or above 55%, cost of doing business at 30% of sales and EBITDA above 25% of sales; these are long-term targets, not current-period guidance.
- Management described liquidity as strong and said operating cash flow and access to the credit facility should support operations, capital spending, repurchases, dividends and other needs. It stated covenant noncompliance over the next 12 months was unlikely absent a significant sales decline and/or expense increase.
- Risks highlighted in results include foreign-exchange movements, volatile customer-order timing in Asia, product mix and freight/warehousing costs, and pressure on some homecare brands from lost distribution, competition and category declines. The company reported no material change to previously disclosed risk factors.
- Effective September 1, 2019, adoption of ASC 842 added $9.0 million of lease right-of-use assets and $9.2 million of liabilities; management said there was no material impact on earnings or cash flows. Operating lease liabilities were $8.8 million at November 30.
- The effective tax rate declined to 14.7% from 17.6%, due partly to excess tax benefits on equity-award settlements and a nonrecurring benefit from releasing unrecognized-tax-benefit liabilities.
- The board subsequently approved a 10% increase in the quarterly dividend, from $0.61 to $0.67 per share, payable January 31, 2020. The company repurchased 26,800 shares for $5.0 million during the quarter. No pending claims were identified as likely to have a material adverse effect.
Important facts for investors to verify
- Whether Asia-Pacific sales recover after the order-timing and China-related weakness, and whether EMEA constant-currency growth continues.
- Whether gross margin improves as mix, discounting, freight and warehousing pressures change.
- How cash generation, revolving-credit and autoborrow balances, and covenant compliance evolve alongside dividends and share repurchases.
- Whether management updates its advertising-spend outlook or provides further sales and earnings guidance; this filing does not provide a specific consolidated forecast.