WD-40 Company: Q3 Fiscal 2010 Summary (Period Ended May 31, 2010)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended May 31, 2010, and the nine months ended May 31, 2010. WD-40 Company is a global consumer products firm focused on multi-purpose maintenance products (WD-40, 3-IN-ONE, and the newly launched BLUE WORKS) and homecare/cleaning products. The company operates in three geographic segments: Americas, Europe, and Asia-Pacific.
Key Financial Metrics
| Metric | Three Months Ended May 31, 2010 | Nine Months Ended May 31, 2010 |
|---|---|---|
| Net Sales | $82.6 million | $240.8 million |
| Gross Profit | $42.3 million (51.2% margin) | $124.4 million (51.7% margin) |
| Net Income | $9.1 million | $29.2 million |
| Diluted EPS | $0.54 | $1.74 |
| Operating Cash Flow (9mo) | $38.8 million | |
| Cash and Equivalents | $59.1 million (as of May 31, 2010) | |
| Total Debt | $21.4 million ($10.7M current, $10.7M long-term) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 20% ($13.7M) for the quarter and 12% ($26.6M) for the nine months compared to the prior year. Growth was driven by multi-purpose maintenance products, which rose 29% (quarter) and 17% (nine months).
- Profitability: Net income surged 32% for the quarter and 56% for the nine months. Gross margins expanded due to lower petroleum costs, sourcing changes, and price increases, partially offset by higher aerosol can costs.
- Segment Performance:
- Americas: Sales up 13% (quarter) and 8% (nine months), driven by U.S. volume growth.
- Europe: Sales up 25% (quarter) and 16% (nine months), aided by favorable currency and Smart Straw product growth.
- Asia-Pacific: Sales up 50% (quarter) and 24% (nine months), driven by promotional activities and currency effects.
- Homecare Decline: Sales of homecare and cleaning products decreased 10% (quarter) and 4% (nine months) due to strategic refocusing on maintenance products and lost distribution.
Outlook, Risks, and Contingencies
- Guidance: Management expects global advertising and sales promotion expenses for fiscal year 2010 to range between 6.5% and 7.5% of net sales.
- Legal Proceedings:
- Andrea Burns v. WD-40 Company: A class action filed June 18, 2010, alleging misrepresentation regarding the safety of 2000 Flushes toilet cleaners. The company states exposure cannot be estimated, but a material adverse effect is possible if class certification is granted.
- Benzene Lawsuits: Ongoing litigation alleging benzene exposure causes cancer. The company denies the presence of benzene and expects insurance to cover costs, though defense costs could be material if lawsuit volume increases.
- Dividends: A cash dividend of $0.25 per share was declared on June 22, 2010, payable July 30, 2010.
- Share Repurchase: No shares were purchased under the $15 million buyback plan authorized in December 2009 during this period.
Investor Verification Checklist
- Verify the impact of foreign currency exchange rates on reported sales growth, as constant currency growth was lower than reported growth in Europe and Asia-Pacific.
- Monitor the status of the Andrea Burns class action lawsuit regarding 2000 Flushes products for potential material liability.
- Assess the sustainability of gross margin expansion given the noted increase in aerosol can (tin plate) costs.
- Confirm the trajectory of homecare product sales decline as the company continues to shift resources to maintenance products.
- Review the $10.7 million annual debt principal payment due in October 2011 against current cash reserves.