WD-40 Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended May 31, 2021; comparisons are with the corresponding 2020 periods. Amounts below are in millions of dollars unless stated otherwise.
Business context
WD-40 sells maintenance products worldwide and homecare and cleaning products primarily in North America, the U.K. and Australia. It reports three geographic segments: Americas, EMEA, and Asia-Pacific. Management attributed strong maintenance-product demand to renovation and maintenance activity, improved conditions in many markets, and e-commerce growth.
Financial performance
| Metric | Quarter ended May 31, 2021 | Quarter ended May 31, 2020 | Nine months ended May 31, 2021 | Nine months ended May 31, 2020 |
|---|---|---|---|---|
| Net sales | $136.4 (+39%) | $98.2 | $372.9 (+26%) | $296.9 |
| Gross profit | $72.5 | $53.1 | $204.7 | $160.2 |
| Gross margin | 53.1% | 54.0% | 54.9% | 54.0% |
| Operating income | $27.3 (+38%) | $19.8 | $76.4 (+45%) | $52.7 |
| Net income | $21.0 (+45%) | $14.5 | $61.8 (+51%) | $41.0 |
| Diluted EPS | $1.52 | $1.06 | $4.48 | $2.98 |
| Operating cash flow | Not presented by quarter in the supplied filing text | $64.0 | $40.8 |
Quarterly maintenance-product sales rose 45%, while homecare and cleaning sales fell 13%. For the nine-month period, maintenance sales increased 28% and homecare and cleaning sales increased 1%. Nine-month sales growth was 21% on a constant-currency basis; favorable foreign exchange contributed $13.2 million to reported growth. Foreign exchange contributed $2.9 million to nine-month net-income growth.
Quarterly gross margin declined 0.9 percentage points, primarily due to higher third-party manufacturing costs, changing sales mix, and other costs; these effects were partly offset by lower certain promotional and distribution costs and price increases. Nine-month gross margin improved 0.9 points, helped by lower petroleum-based chemical and aerosol-can costs and price increases, partly offset by higher manufacturing, warehousing, and freight costs. Management noted recent increases in crude oil and supply-chain costs could pressure near-term gross margin.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $80.4 at May 31, 2021, versus $56.5 at August 31, 2020. Current assets were $240.9 and current liabilities $79.1.
- Total borrowings were $117.3, including $48.1 under the revolving facility and $69.2 in senior notes; $0.8 was classified as short-term. The $150 million revolving facility matures September 30, 2025. The company reported compliance with all debt covenants.
- Nine-month operating cash flow was $64.0; investing cash outflow was $10.4, including $10.8 of property and equipment purchases. Financing cash outflow was $30.6, including $28.3 of dividends. The prior-year period included substantial revolving-credit borrowing, so financing cash flows differed significantly.
- Share repurchases remained suspended; none occurred in the first nine months of fiscal 2021. A $0.72-per-share dividend was declared June 15, 2021, payable July 30.
Management outlook, risks, and unusual items
- No quantified near-term revenue or earnings guidance is provided in the supplied filing text. Management describes its 55/30/25 model as long-term targets: gross margin at or above 55%, cost of doing business at 30% of sales, and EBITDA above 25% of sales. Nine-month results were 55% gross margin, 33% cost of doing business, and 22% EBITDA margin; these are company-defined measures and non-GAAP where indicated.
- COVID-19-related supply constraints included limited aerosol-production capacity, raw-material shortages, and freight competition. These have periodically limited the company’s ability to meet demand, especially in the Americas. Management expects some related costs to weigh on near-term gross margin and says future demand may moderate if pandemic-era renovation activity declines.
- Quarterly EMEA sales increased 80% (63% constant currency), contributing substantially to growth. Americas quarterly sales rose 20%; Asia-Pacific rose 14% (5% constant currency). Segment results remain exposed to currency movements and uneven market recoveries.
- A Jakarta trademark lawsuit seeks more than $25 million in damages and a public apology. The company denies the claims and says an unfavorable outcome is not probable, but it cannot estimate a possible loss or range.
- The nine-month effective tax rate declined to 17.7% from 19.1%, mainly due to international tax benefits and an Investment Tax Credit benefit in fiscal 2021. Management reported no material changes in risk factors, and disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether maintenance-product demand and elevated EMEA sales persist as pandemic restrictions and consumer behavior change.
- Whether aerosol capacity, raw-material availability, freight costs, and higher input prices constrain shipments or further reduce gross margin.
- The contribution of currency translation to future sales and earnings, particularly in EMEA.
- Developments in the Jakarta litigation, including any change in the company’s assessment or ability to estimate exposure.
- Cash conversion and working-capital needs: receivables and inventories increased as sales rose, while debt, dividends, and capital spending continue to affect liquidity.