WD-40 Company — Q3 FY2012 Form 10-Q
Reporting period: Three and nine months ended May 31, 2012; unaudited. WD-40 is a global consumer-products company selling multi-purpose maintenance products and homecare and cleaning products. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q3 FY2012 | Nine months FY2012 |
|---|---|---|
| Net sales | $87.0; up 2% year over year | $257.9; up 5% |
| Gross profit / gross margin | $43.1 / 49.5%, versus 49.3% | $126.6 / 49.1%, versus 50.6% |
| Operating income | $13.1; up 11% | $38.1; down 2% |
| Net income | $9.1; up 13% | $26.5; up 1% |
| Diluted EPS | $0.57, versus $0.47 | $1.64, versus $1.53 |
| Operating cash flow | Not separately presented for the quarter | $26.4, versus $21.6 |
For the nine months, multi-purpose maintenance sales rose 6% to $215.9 million and homecare and cleaning sales rose 3% to $42.0 million. By region, Americas sales were up 6% to $130.6 million, Europe down 3% to $88.2 million, and Asia-Pacific up 24% to $39.1 million. Foreign exchange had no material impact on consolidated nine-month sales or net income, though it benefited Asia-Pacific sales.
At May 31, cash and cash equivalents were $71.7 million, current assets $161.6 million, and current liabilities $87.6 million. Inventory was $25.7 million, up from $17.6 million at August 31, 2011. The company had $45.0 million outstanding on its $75.0 million unsecured revolver, due June 2014, and reported compliance with its covenants, including a $40.0 million minimum trailing-12-month EBITDA requirement. It had paid off the remaining $10.7 million term loan in October 2011. Nine-month capital expenditures were $3.0 million; dividends paid were $13.6 million, and treasury stock purchases were $30.9 million.
Changes versus prior comparable periods
- Quarterly sales growth was modest, while net income and diluted EPS increased faster, supported in part by lower operating expenses and a lower effective tax rate.
- Nine-month gross margin fell 1.5 percentage points to 49.1%; operating income declined despite 5% sales growth. Cost of products sold rose 8%, faster than sales.
- Nine-month sales growth was led by Asia-Pacific and the Americas; Europe declined amid weak economic conditions and competition in direct markets.
- Operating cash flow improved by $4.8 million year over year. Cash increased by $15.3 million over the nine months, while foreign-exchange effects reduced cash by $2.5 million.
- Weighted-average diluted shares fell year over year, reflecting share repurchases; 277,367 shares were repurchased for $12.3 million under the new $50 million authorization through May 31.
Outlook, commentary, risks, and unusual items
- Management expects the North American supply-chain redesign to improve customer service and lower network costs when complete, but said transition costs may continue and inventory may remain above historical levels or fluctuate.
- Management cited continued volatility in petroleum-based material costs, which may affect future product costs and margins. For the nine months, petroleum-based materials and aerosol cans reduced gross margin by 1.8 percentage points; supply-chain restructuring reduced it by 0.5 points. Price increases provided a 2.3-point offset.
- WD-40 Specialist launches in the U.S., Canada, and selected European markets were reported to have initial sales above forecast. The company expected FY2012 advertising and sales-promotion investment of 7%–8% of net sales. Its long-term “50/30/20” targets are gross margin of at least 50%, cost of doing business no more than 30%, and EBITDA of at least 20% of sales; nine-month results were 49%, 33%, and 16%, respectively.
- The company said cash, operating cash flow, and revolver availability should fund operating and capital needs for at least the next 12 months. Of cash on hand, $54.0 million was held abroad and intended for indefinite reinvestment; repatriation could result in additional tax expense.
- IQ Products Company sued on May 31, 2012 in connection with the termination of a contract-manufacturing relationship, alleging indemnification obligations, retaliation, and economic losses exceeding $40 million, plus fees and punitive damages. WD-40 called the case without merit and estimated possible loss as immaterial to its financial statements as a whole.
- A $0.29-per-share dividend was declared June 19, 2012, payable July 31 to shareholders of record July 16. The company reported no material changes in risk factors and no material changes in internal control over financial reporting.
Key facts for investors to verify
- Whether gross-margin pressure from input costs, promotional allowances, product mix, and supply-chain transition persists, and whether anticipated supply-chain savings are realized.
- Whether elevated inventory converts into sales and cash without additional discounting or obsolescence.
- Progress in Europe and the sustainability of Asia-Pacific growth, including the effects of economic conditions, distributor-order timing, promotions, and currency movements.
- Revolver usage, covenant headroom, and the company’s ability to fund repurchases and dividends while maintaining liquidity.
- Developments in the IQ Products litigation and any change to the company’s stated immaterial loss estimate.
- Tax audit outcomes, uncertain tax positions, and potential tax costs if foreign earnings are repatriated.