WD-40 Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2018. Unaudited consolidated results; financial amounts below are in U.S. dollars. WD-40 sells maintenance and homecare/cleaning products globally.
Financial performance
| Metric | Three months ended May 31, 2018 | Year-over-year change | Nine months ended May 31, 2018 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $107.0 million | Up 9% | $305.9 million | Up 8% |
| Gross profit / margin | $58.7 million / 54.8% | Up 8%; margin down 0.5 percentage point | $168.6 million / 55.1% | Up 6%; margin down 1.2 points |
| Operating income | $22.3 million | Up 8% | $58.8 million | Up 5% |
| Net income | $16.1 million | Up 12% | $43.6 million | Up 13% |
| Diluted EPS | $1.15 | Up 13% | $3.10 | Up 14% |
Quarterly sales growth was led by maintenance products, up 11%; homecare and cleaning sales declined 12%. For the nine months, maintenance sales rose 9%, while homecare and cleaning declined 5%. EMEA was the largest growth contributor. Foreign exchange added $10.1 million to nine-month sales; on a constant-currency basis sales increased $11.8 million, or about 4%.
Gross margin pressure reflected higher petroleum-based chemical and aerosol-can costs, freight and warehousing costs, customer discounts, and foreign exchange. Price increases and favorable mix partly offset those headwinds. Interest expense rose to $3.0 million for the nine months, from $1.8 million, reflecting higher rates, higher revolving borrowings, and the Series A notes. The nine-month effective tax rate fell to 22.3% from 30.0%, primarily due to the Tax Act and stock-award tax benefits.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $41.6 million, versus $34.8 million a year earlier. Capital expenditures were $10.7 million.
- Cash and cash equivalents were $123.3 million at May 31; short-term investments were $0.2 million. Cash plus short-term investments totaled $123.6 million.
- Total borrowings were $168.1 million: $85.3 million current and $82.8 million long-term. The debt included revolving credit borrowings and $19.6 million of Series A notes outstanding.
- Management planned to repatriate $80 million from its U.K. subsidiary in the fourth quarter and use it to repay certain revolving-credit draws. The company classified $80 million of credit-facility borrowings as short-term in anticipation of repayment; $64 million was classified as long-term based on intent and ability to refinance.
- The company reported compliance with debt covenants and said available cash, its $175 million revolving facility, and expected operating cash flows should meet projected needs for at least 12 months. The facility matures May 13, 2020.
- Financing uses included $22.0 million of dividends and $17.8 million of share repurchases during the nine months. The board declared a further $0.54-per-share dividend payable July 31, 2018, and approved a new $75 million repurchase authorization for September 2018 through August 2020.
Investing cash flow was positive $73.6 million, largely because of $84.1 million in net maturities of short-term investments, including a U.K. investment that matured in April and was not reinvested; it should not be read as recurring operating cash generation.
Material changes and management commentary
- Reported nine-month growth benefited from currency translation; EMEA sales rose 13% reported but 5% on a constant-currency basis. WD-40 Specialist sales increased 26% to $23.4 million for the nine months, though management cautioned that timing of promotions and distribution can make results volatile.
- Americas maintenance growth reflected promotions, customer orders ahead of price increases, and higher EZ-REACH sales. Homecare/cleaning products faced lost distribution, reduced offerings, competition, category declines, and volatile promotional orders.
- Asia-Pacific operating income declined 5% for the nine months despite higher sales, due to margin pressure and higher operating expenses. Russia sales were affected by regional instability and distributor order timing; some Asian markets were affected by transitions to new distributors.
- 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. Nine-month results were 55% gross margin, 34% cost of doing business, and 21% EBITDA margin. These are long-term performance targets, not specific fiscal-year guidance.
- Management expected fiscal 2018 advertising and sales promotion spending near 6% of net sales and projected a full-year effective tax rate of 22%–23%, subject to revisions to provisional Tax Act estimates.
Risks, contingencies and unusual items
- The Tax Act produced provisional, largely offsetting discrete items: a $6.9 million deferred-tax benefit and a $6.8 million estimated toll-tax expense. The company stated that estimates could change, possibly materially, during the measurement period. It recorded $6.3 million of the toll tax in long-term liabilities and income taxes payable.
- Management noted uncertainty around future gross-margin effects from volatile crude oil and input costs. Currency exposure also affects reported sales, earnings, cash balances, and margins; $19.0 million notional of foreign-currency forwards matured in June 2018.
- No current litigation was identified by management as likely to have a material adverse effect. Separately, following a June 11, 2018 Supreme Court denial of review, a judgment requires IQ Products Company to pay WD-40 approximately $1.5 million, secured by a surety bond. The amount was not recorded at May 31 because management said it was not then realizable.
- The company acquired EZ-REACH trademark rights for $0.2 million under a settlement agreement; the filing said the financial impact was not material.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its latest Form 10-K.
Most important facts for investors to verify
- Whether the planned $80 million repatriation occurred and how much revolving debt it repaid.
- Whether gross-margin pressure from input costs, freight, discounts, and currency continues, and whether price increases offset it.
- Whether the projected 22%–23% fiscal 2018 tax rate holds as Tax Act estimates are finalized.
- Whether WD-40 Specialist growth persists and declining homecare/cleaning sales stabilize.
- Whether the approximately $1.5 million IQ Products judgment is collected and recognized in a subsequent period.