WD-40 Company — Q3 FY2016 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2016. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Comparisons are with the prior-year periods.
Business context and financial performance
WD-40 markets maintenance products, including WD-40 multi-use and Specialist, and homecare and cleaning products worldwide. Its reporting segments are Americas, EMEA, and Asia-Pacific.
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net sales | $96.4 | $92.5 | $283.5 | $286.2 |
| Gross profit | $54.8 | $49.3 | $158.6 | $150.2 |
| Gross margin | 56.8% | 53.3% | 55.9% | 52.5% |
| Operating income | $18.7 | $16.4 | $53.7 | $49.6 |
| Net income | $12.7 | $11.0 | $38.4 | $33.1 |
| Diluted EPS | $0.88 | $0.75 | $2.65 | $2.24 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $44.2 | $35.3 |
Q3 sales grew 4%, led by maintenance products (+6%); homecare and cleaning sales fell 10%. For the first nine months, sales declined 1% as reported, but management estimated they would have increased $6.8 million on a constant-currency basis. Maintenance products were essentially flat for the nine months; homecare and cleaning products declined 9%.
Cash and cash equivalents were $47.4 million and short-term investments were $62.7 million at May 31, 2016. Current assets were $218.5 million versus current liabilities of $54.5 million. Revolving-credit borrowings were $118.0 million, classified as long-term; the $175 million facility matures May 13, 2020. The company reported covenant compliance and no autoborrow balance. Cash plus short-term investments exceeded reported facility borrowings by approximately $7.9 million, before considering location and availability of funds.
For the nine months, investing activities used $19.5 million, including net purchases of short-term investments; financing activities used $29.9 million, including $24.7 million of treasury-stock purchases and $17.6 million of dividends paid. Cash declined $6.5 million to $47.4 million. Nine-month dividends declared were $1.22 per share.
Material changes and drivers
- Q3 gross margin rose 3.5 percentage points year over year; nine-month gross margin increased 3.4 points. Management cited lower petroleum-based chemical and aerosol-can costs, reduced customer discounts, pricing, and—in EMEA—currency and product mix. Lower crude-oil costs benefited Q3, but oil prices had risen more than 60% since the quarter began.
- Nine-month operating income increased 8% and net income increased 16%, despite lower reported sales. Net income growth included a favorable year-over-year change in other income/expense, primarily from foreign-exchange gains versus losses in the prior-year period. Lower effective tax rates also contributed: 28.2% for the nine months versus 30.1%.
- Foreign exchange reduced nine-month sales by an estimated $9.5 million and net income by $1.5 million. EMEA accounted for $6.2 million of the sales headwind. Currency also affected reported cash and accumulated other comprehensive income.
- Nine-month SG&A rose 5% to $85.8 million, mainly from higher employee-related costs and freight, partly offset by favorable currency translation. Q3 SG&A increased 10%, with higher employee, freight, travel, and meeting costs.
- Americas nine-month sales were nearly flat; EMEA sales fell 3% as reported but rose 3% at constant currency; Asia-Pacific sales fell 1% as reported but rose 5% at constant currency. Q3 sales increased in all three segments.
Outlook, risks, and contingencies
- Management said liquidity and financial condition remained strong and expected available cash, investments, operating cash flow, and the credit facility to meet operating and capital needs for at least the next 12 months. It said failure to meet debt covenants would require a significant sales decline and/or expense increase.
- The company’s long-term “55/30/25” targets are gross margin of 55%, cost of doing business of 30% of sales, and EBITDA of 25% of sales. Nine-month results were approximately 56%, 35%, and 21%, respectively. These are long-term performance targets, not a specific full-year earnings forecast. Management expected FY2016 advertising and sales-promotion expense to be close to 6% of sales.
- WD-40 Specialist sales were $15.3 million for the nine months, up 10%; management described the line as a long-term growth opportunity but noted that sales may fluctuate with promotions and distribution expansion. The company continued to identify maintenance-product growth, geographic expansion, innovation, and talent development as strategic priorities.
- The June 23, 2016 Brexit vote occurred after the reporting date. The filing warns that continuing currency volatility and a significantly weaker Pound Sterling could adversely affect results; the company also cited international political, economic, regulatory, tax, and compliance risks.
- Homecare and cleaning products faced lost distribution, reduced offerings, competition, category declines, and variable customer orders and promotions. Management said these products continued to generate positive cash flows, but reported ongoing flat or declining sales.
- The company reported ordinary-course claims and litigation. In the IQ Products matter, arbitrators rejected IQPC’s claims and awarded WD-40 $1.5 million for attorney fees and costs; the company had sought court confirmation. IQPC separately sued DOT and PHMSA, not WD-40, over the regulator’s investigation. WD-40 said it did not believe these matters would have a material negative financial impact. The filing also notes ordinary-course product-liability matters.
- After quarter-end, the board declared a $0.42-per-share dividend payable July 29, 2016, and approved a new share-repurchase authorization of up to $75 million for September 1, 2016 through August 31, 2018. The existing $75 million plan was authorized through August 31, 2016.
Important facts for investors to verify
- Whether margin gains from lower input costs persist, given management’s warning that the oil-cost benefit was unlikely to repeat at the same level in Q4.
- Reported versus constant-currency sales and earnings trends, especially EMEA exposure to Pound Sterling, euro, and U.S. dollar movements after Brexit.
- Progress in maintenance-product and Specialist growth, alongside continued weakness in homecare and cleaning products and distributor-market volatility.
- Debt covenant headroom, refinancing practices, and the implications of substantial foreign-held cash: $104.4 million of $110.1 million in cash and short-term investments was held abroad, with foreign earnings intended to remain reinvested.
- Execution and funding of the new repurchase plan and dividend, and the court’s disposition of the $1.5 million arbitration award.