WD-40 Company — Q1 FY2013 Form 10-Q
Reporting period: Three months ended November 30, 2012; comparisons are with the three months ended November 30, 2011 unless stated otherwise. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context
WD-40 is a global consumer-products company. Its multi-purpose maintenance portfolio includes WD-40, 3-IN-ONE and BLUE WORKS; it also sells homecare and cleaning products. WD-40 Specialist expansion contributed to maintenance-product sales. WD-40 Bike began its U.S. launch during the quarter, with initial sales described as immaterial and expected to remain so in its initial year.
Financial performance and liquidity
| Metric | Q1 FY2013 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $95.3 | $84.9 | +12% |
| Gross profit / margin | $47.7 / 50.1% | $41.3 / 48.7% | Margin +1.4 percentage points |
| Operating income | $15.9 | $10.3 | +54% |
| Net income | $10.9 | $6.8 | +61% |
| Diluted EPS | $0.69 | $0.42 | +64% |
| Operating cash flow | $15.6 | $12.8 | +$2.8 |
- Sales by product line: multi-purpose maintenance products rose 15% to $81.7 million; homecare and cleaning products declined 4% to $13.5 million.
- Sales by region: Americas $45.4 million (+12%), Europe $35.2 million (+17%), and Asia-Pacific $14.7 million (+3%). Segment operating income was $4.6 million, $8.5 million, and $2.8 million, respectively; Asia-Pacific operating income declined 8%.
- Gross-margin gains reflected pricing, lower customer discounts, lower Asia-Pacific manufacturing costs and supply-chain savings, partly offset by foreign exchange, petroleum-based materials, aerosol cans and other input costs. SG&A increased 12% to $25.3 million; advertising and sales-promotion expense fell 22% to $6.1 million, largely due to timing and lower promotional activity.
- At November 30, cash and cash equivalents were $52.4 million, short-term investments $21.9 million, and revolving-credit borrowings $45.0 million. Cash was $69.7 million at August 31, 2012; the quarter’s $17.3 million cash decline included $20.9 million of short-term investment purchases and $8.1 million of treasury-stock purchases.
- Total assets were $307.1 million and current liabilities $94.5 million. The company reported compliance with its debt covenants, including the $40 million trailing-twelve-month minimum EBITDA requirement. Operating cash flow exceeded the prior-year quarter.
Material changes and capital allocation
- Growth was led by maintenance products and Europe. The Americas’ homecare and cleaning sales fell 10%, primarily amid lost distribution, reduced promotions and category declines; Asia sales were flat, with growth in distributor markets offset by lower China sales.
- Quarter-end share repurchases totaled 171,269 shares for $8.1 million. Under the $50 million buyback plan, cumulative purchases through November 30 were 634,170 shares costing $29.3 million.
- The board subsequently raised the quarterly dividend 7%, from $0.29 to $0.31 per share, payable January 31, 2013.
- On January 7, 2013, after quarter-end, the company amended its credit facility: commitment increased from $75 million to as much as $125 million, maturity extended to January 7, 2018, and certain fees and the LIBOR margin decreased. The company said other material terms remained unchanged.
Outlook, risks and unusual items
- Management expected fiscal 2013 global advertising and sales-promotion investment to be 7%–8% of net sales. It expected the North American supply-chain redesign to be fully integrated in late FY2013, bringing long-term cost savings and improved service, but noted transition costs and higher, potentially fluctuating inventory along the way.
- Management described liquidity as strong and expected cash, operating cash flows and credit availability to cover requirements for at least the next 12 months. It intends to keep certain foreign earnings indefinitely reinvested; repatriation could incur additional tax.
- Risks highlighted include volatile petroleum-based and other input costs, foreign-exchange movements, uncertain European conditions, slower Chinese growth, customer promotions and ordering patterns, competition and lost distribution in homecare products, and supply-chain transition execution. Management said risk factors were not materially changed from the FY2012 Form 10-K.
- IQ Products Company sued over the termination of its contract-manufacturing relationship, seeking more than $40 million plus fees and punitive damages and asserting indemnification and related claims. WD-40 called the case without merit, intends to defend it, and estimated the possible loss as immaterial to its consolidated financial statements. The company also had a $3.6 million inventory-purchase obligation related to the termination.
- Foreign currency translation produced a $1.0 million positive other-comprehensive-income adjustment, versus a $3.7 million loss in the prior-year quarter. Management reported no impairment indicators for goodwill or definite-lived intangible assets.
Key facts for investors to verify
- Whether maintenance-product growth and Europe’s sales rebound persist, and whether homecare distribution and sales stabilize.
- Whether gross-margin improvement is sustainable as input costs and foreign-exchange rates change, and whether supply-chain savings exceed transition costs.
- How cash, short-term investments, the $45 million drawn balance and the amended $125 million facility evolve alongside repurchases and dividends.
- Developments in the IQ Products litigation and the associated inventory commitment; the filing’s loss estimate is management’s assessment, not a resolution of the claim.
- Whether the company meets its stated advertising-spending outlook and advances the supply-chain redesign on the expected timetable.