WD-40 Company — Form 10-Q Summary
Business context and reporting period. WD-40 Company markets maintenance and homecare and cleaning products globally, including WD-40 and WD-40 Specialist. This unaudited filing covers the fiscal third quarter and nine months ended May 31, 2017; comparisons are with the corresponding 2016 periods. Unless stated otherwise, figures below are in millions of U.S. dollars.
Financial results and liquidity
| Metric | Three months ended May 31, 2017 | Nine months ended May 31, 2017 |
|---|---|---|
| Net sales | $98.2; up 2% | $283.9; up 0.2% |
| Gross profit / gross margin | $54.3 / 55.3%, versus $54.8 / 56.8% | $159.8 / 56.3%, versus $158.6 / 55.9% |
| Operating income | $20.6; up 10% | $56.0; up 4% |
| Net income | $14.4; up 14% | $38.6; up 0.4% |
| Diluted EPS | $1.02, versus $0.88 | $2.71, versus $2.65 |
- Quarterly sales growth came from EMEA (+4%) and Asia-Pacific (+8%), partly offset by the Americas (-2%). For the nine months, Asia-Pacific sales grew 7%, Americas declined 2%, and EMEA was nearly flat in reported dollars.
- Maintenance-product sales rose 3% for the quarter and 1% year to date; homecare and cleaning sales declined 6% and 7%, respectively. WD-40 Specialist sales reached $18.5 million for the nine months, up 21%.
- Operating cash flow was $31.7 million for nine months, down from $44.2 million. Capital spending was $15.4 million, including costs for the new San Diego headquarters; investing cash outflow was $37.3 million. Cash declined $18.7 million to $32.2 million.
- At May 31, cash and short-term investments totaled $111.6 million. Current assets were $216.3 million and current liabilities $70.2 million. Revolver borrowings were $154.0 million ($20.0 million current and $134.0 million long-term), against a $175 million facility maturing May 2020. The company reported compliance with covenants.
- Shareholders received $19.9 million in dividends during the nine months; the company repurchased 244,973 shares for $26.2 million under its $75 million authorization. A further $0.49-per-share dividend was declared for payment July 31, 2017.
Changes, outlook and management commentary
- Currency movements materially obscured underlying growth: they reduced reported nine-month sales by $17.1 million and net income by $3.1 million, according to management. On a constant-currency basis, sales would have increased $17.5 million and net income $3.3 million.
- Quarterly gross margin fell 1.5 percentage points, mainly due to higher petroleum-based specialty chemical and aerosol-can costs, mix, customer discounts and freight. For the nine months, gross margin improved 0.4 percentage points, helped by currency and EMEA pricing, partly offset by input costs and mix. Management noted raw-material cost effects may lag by a quarter or more and remain uncertain.
- Management’s long-term 55/30/25 model targets gross margin above 55%, cost of doing business at or below 30% of sales, and EBITDA above 25% of sales. Nine-month results were approximately 56%, 35% and 22%, respectively; the latter two measures are non-GAAP. Management said these are long-term targets, not near-term guidance.
- Management expected fiscal 2017 advertising and sales promotion expense to be below 6.0% of sales, and the full-year income tax rate to be close to 30%. The new headquarters transition was expected late in fiscal 2017. The filing provides no clear numerical full-year sales or earnings forecast.
- Liquidity was described as sufficient for projected operating and capital requirements for at least 12 months. Management said substantial deterioration in sales or a significant expense increase would be needed to threaten covenant compliance. About $106.1 million of cash and short-term investments was held outside the U.S.; the company intends to indefinitely reinvest cumulative unremitted foreign earnings, and repatriation could trigger additional tax expense.
Risks, contingencies and unusual items
- FirstPower Group sued WD-40 and other defendants over alleged trademark infringement and related claims involving the WD-40 EZ-REACH Flexible Straw product, seeking damages and injunctive relief. WD-40 disputes the claims and intends to defend them; a loss was considered reasonably possible, but the company could not estimate a loss or range.
- Foreign-exchange exposure affects reported results, foreign-held cash and costs; petroleum-related input prices are volatile. The company had $24.5 million notional of foreign-currency forwards maturing in July 2017; reported unrealized and realized gains or losses were not significant or material.
- Nine-month tax expense included an immaterial out-of-period correction related to prior-period unrealized currency losses. The company was also undergoing state and international tax audits and estimated up to $0.3 million of unrecognized tax benefits could be affected within 12 months.
- Cash flow was reduced by working-capital movements, particularly lower accrued payroll and incentive compensation balances. Capital spending increased with the headquarters purchase and buildout; $14.2 million of capital in progress related to the new office and land.
- The company reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether sales momentum and WD-40 Specialist growth continue, especially given weaker Americas results and declining homecare and cleaning sales.
- Whether input-cost inflation, product mix, promotional spending and currency movements affect future gross margins and reported earnings.
- Cash generation and working-capital trends, the completion and cost of the headquarters project, and the company’s ability to manage $154.0 million of revolver debt while funding dividends and repurchases.
- Developments and potential financial or operational effects of the EZ-REACH litigation, which has no estimable loss range.
- Tax-audit outcomes, the consequences of retaining foreign earnings abroad, and the actual full-year tax rate and advertising spend versus management’s stated expectations.