WD-40 Company — Q2 FY2015 Form 10-Q
Reporting period: Fiscal quarter and six months ended February 28, 2015. Unaudited consolidated results; amounts below are in millions of dollars unless stated otherwise. WD-40 markets multi-purpose maintenance products and homecare and cleaning products globally.
Financial performance
| Metric | Three months ended Feb. 28, 2015 | Year-over-year | Six months ended Feb. 28, 2015 | Year-over-year |
|---|---|---|---|---|
| Net sales | $97.3 | +3% | $193.7 | +2% |
| Gross profit | $51.2 | +6% | $100.9 | +3% |
| Gross margin | 52.6% | 51.6% prior year | 52.1% | 51.8% prior year |
| Operating income | $17.6 | +16% | $33.2 | +4% |
| Net income | $11.3 | +10% | $22.1 | +1% |
| Diluted EPS | $0.76 | $0.67 prior year | $1.49 | $1.41 prior year |
First-half sales rose $4.0 million despite a $2.6 million adverse currency effect; management said sales would have grown $6.6 million at prior-year exchange rates. First-half diluted EPS growth also benefited from a 4% reduction in weighted-average diluted shares.
Cash flow, balance sheet and capital
- First-half operating cash flow was $13.5 million, down from $14.3 million. Higher receivables and changes in payroll-related accruals were among the cited working-capital factors.
- Cash and cash equivalents were $43.7 million at February 28, 2015, down from $57.8 million at August 31, 2014; short-term investments were $42.1 million. Cash declined by $14.1 million over the six months, including a $2.4 million adverse currency translation effect.
- Revolving credit borrowings were $103.0 million, versus $98.0 million at fiscal year-end. The $125 million facility matures January 2018; the company reported covenant compliance and no letters of credit outstanding.
- First-half financing included $14.6 million of treasury-stock purchases and $10.6 million of dividends paid. The prior $60 million repurchase authorization was exhausted; the company planned to begin using its new $75 million authorization in Q3 FY2015.
- Current assets were $203.4 million and current liabilities $151.6 million at quarter-end. Total assets were $337.7 million and shareholders’ equity $160.6 million.
Material changes and management commentary
- Asia-Pacific was the strongest growth region: first-half sales increased 20% to $30.9 million, led by distributor-market growth and increased distribution in China. Americas sales were essentially flat at $89.5 million; EMEA sales declined 2% to $73.3 million, but increased 1% on a constant-currency basis.
- First-half multi-purpose maintenance product sales grew 2%; homecare and cleaning sales grew 1%. Management cited reduced distribution, product offerings, competition, category declines and uneven customer orders as continuing challenges for many homecare and cleaning products.
- Lower petroleum-based specialty chemical and aerosol-can costs supported margins. Unfavorable product/market mix and currency partly offset the benefit. Management cautioned that raw-material cost changes may affect reported product costs after a lag and crude oil costs remain volatile.
- Other expense rose to $1.4 million in Q2, principally due to foreign-currency losses, including Euro/Pound Sterling fluctuations. For the first half, currency movements had an adverse $0.4 million impact on net income, according to management.
- The company’s “50/30/20” long-term targets are gross margin above 50%, cost of doing business at or below 30% of sales, and EBITDA above 20% of sales. First-half reported measures were approximately 52%, 34% and 18%, respectively.
- Management said liquidity and expected operating cash flows should cover requirements for at least 12 months. It expects foreign earnings held overseas to remain indefinitely reinvested; repatriation could result in additional tax expense. Advertising and sales promotion spending for FY2015 was expected at 6%–7% of net sales.
Risks, contingencies and unusual items
- Management expected the Russia/Ukraine political situation to continue negatively affecting EMEA distributor-market sales for at least the remainder of FY2015. Currency movements also affect reported sales, margins, earnings and cash balances.
- The IQ Products Company dispute remained unresolved. Arbitration hearings concluded in January 2015, with a decision anticipated in May or June; WD-40 said it could not estimate possible loss or a range of loss. PHMSA informed IQ Products that its investigation found no evidence of regulatory noncompliance or an imminent public safety hazard posed by WD-40 products.
- In a separate phone-recording case, plaintiff David Wolf requested dismissal with prejudice on April 6, 2015; termination remained subject to court entry of the dismissal.
- The company acquired the U.K. GT85 business in September 2014 for $4.1 million, including $3.7 million paid at completion; the acquisition added $1.3 million of goodwill. Its annual goodwill impairment test found no impairment.
Key facts for investors to verify
- Whether Asia-Pacific growth persists and whether EMEA currency and geopolitical headwinds continue.
- Whether improved gross margin is sustained as raw-material costs, product mix and promotional spending change.
- Cash conversion and receivables, alongside the use of borrowing to fund repurchases, dividends and operations.
- The outcome of the IQ Products arbitration and court entry of the Wolf dismissal.
- Progress under the new $75 million repurchase authorization and the effect of continued share repurchases on leverage and per-share results.