WD-40 Company — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2019. Amounts are in U.S. dollars; financial statement figures below are in millions unless noted.
Business context
WD-40 markets maintenance products and homecare and cleaning products globally. It reports the Americas, EMEA, and Asia-Pacific segments. Maintenance products represented $184.8 million of the first-half sales; homecare and cleaning products represented $17.8 million.
Financial results and changes versus prior year
- Q2 sales: $101.3 million, essentially flat versus $101.3 million. Operating income was $19.7 million, up 2%; net income was $15.9 million, up 7%; diluted EPS was $1.14 versus $1.05.
- First-half sales: $202.6 million, up 1.9% from $198.9 million. Operating income was $36.1 million, down 1%; net income was $29.2 million, up 6%; diluted EPS was $2.09 versus $1.95.
- Margins: Q2 gross margin was 55.4% versus 55.1%; operating margin was approximately 19.5% versus 19.1%. First-half gross margin was 55.3%, unchanged; operating margin was approximately 17.8% versus 18.4%.
- Segment sales, first half: Americas $91.7 million, up 1%; EMEA $79.7 million, up 7%; Asia-Pacific $31.2 million, down 6%. EMEA growth was $8.1 million, or 11%, on a constant-currency basis; foreign exchange reduced reported consolidated sales by $4.4 million.
- Cash flow: First-half operating cash flow was $17.2 million versus $21.2 million. Capital expenditures were $5.0 million; investing cash outflow was $4.9 million. Financing cash outflow was $28.5 million, including $16.0 million in dividends and $12.1 million in share repurchases. Cash declined $17.3 million to $31.6 million.
- Balance sheet and debt: At February 28, cash and cash equivalents were $31.6 million, short-term investments $0.2 million, current assets $159.3 million, and current liabilities $77.1 million. Total borrowings were $89.3 million, including $25.9 million current and $63.4 million long-term. The company reported compliance with debt covenants.
- Shareholder returns: The company repurchased 70,684 shares for $12.1 million in the first half under its $75 million buyback authorization. A $0.61-per-share dividend was declared after quarter-end, payable April 30, 2019.
Outlook, commentary, risks, and unusual items
- Management described liquidity as strong and said operating cash, existing cash, and access to its revolving credit facility were expected to fund operating needs, capital expenditures, repurchases, dividends, and other business requirements. The credit facility matures January 22, 2024; its commitment was scheduled to decline to $100 million after March 22, 2019.
- Management expects fiscal 2019 advertising and sales-promotion expense of 5.5%–6.0% of net sales. Its longer-term 55/30/25 model targets gross margin of at least 55%, cost of doing business of 30%, and EBITDA above 25% of sales; these are long-term targets, not specific near-term earnings guidance.
- Management attributed first-half sales growth to maintenance products and EMEA, while homecare and cleaning sales declined 4%, citing lost distribution, competition, category declines, reduced offerings, and promotional-order volatility. WD-40 Specialist sales rose 10% to $16.5 million in the first half, though management cautioned that timing and distribution-building may cause volatility.
- Input costs—particularly petroleum-based specialty chemicals and aerosol cans—pressured first-half gross margin by 1.6 percentage points; price increases, mix, and other favorable factors offset this impact. Management noted that commodity-cost effects may lag and future crude-oil impacts are uncertain. Foreign exchange also affected reported sales and earnings.
- Q2 other income included approximately $0.5 million of net foreign-exchange gains, compared with losses in the prior-year quarter. The lower first-half effective tax rate, 18.2% versus 21.1%, reflected the Tax Act and its lower full-year statutory rate for FY2019.
- The company adopted ASC 606 on September 1, 2018; the $0.3 million opening retained-earnings adjustment was not material. The company expects lease accounting adoption on September 1, 2019 to materially affect the balance sheet, but had not quantified the impact.
- In Malaysian litigation, the company denied conspiracy allegations and intends to defend itself. Management said an unfavorable outcome was not probable, but damages were reasonably possible; it could not estimate a loss or range. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether EMEA growth and WD-40 Specialist momentum continue, and whether Asia-Pacific weakness and declining homecare and cleaning sales persist.
- How foreign exchange and petroleum-based chemical and aerosol-can costs affect sales, margins, and earnings in subsequent quarters.
- Operating cash conversion and working-capital trends, particularly inventory growth, alongside ongoing dividends and share repurchases.
- Debt-facility availability, currency-denominated borrowings, and covenant compliance as the credit commitment changes.
- Developments in the Malaysian litigation and the eventual quantified balance-sheet effect of adopting the lease standard.