WD-40 Company: Q2 2011 Financial Summary
Business Context and Reporting Period
This summary covers the WD-40 Company's Form 10-Q for the quarterly and six-month periods ended February 28, 2011. The Company is a global consumer products firm marketing multi-purpose maintenance brands (WD-40, 3-IN-ONE, Blue Works) and homecare/cleaning brands (2000 Flushes, Spot Shot, 1001). Operations are segmented into Americas, Europe, and Asia-Pacific.
Key Financial Metrics
| Metric | Three Months Ended Feb 28, 2011 | Six Months Ended Feb 28, 2011 |
|---|---|---|
| Net Sales | $79.2 million | $160.1 million |
| Gross Profit | $41.0 million (51.8% margin) | $82.3 million (51.4% margin) |
| Net Income | $9.1 million | $18.2 million |
| Diluted EPS | $0.53 | $1.06 |
| Cash and Equivalents | $67.5 million (as of Feb 28, 2011) | |
| Long-Term Debt | $0 (Current portion: $10.7 million) | |
| Operating Cash Flow (6mo) | $8.0 million |
Material Changes vs. Prior Period
- Revenue: Consolidated net sales decreased 2% ($1.3M) for the quarter but increased 1% ($1.9M) for the six-month period compared to the prior year.
- Profitability: Net income declined 15% for the quarter and 9% for the six-month period. Operating income dropped 17% for the quarter and 13% for the six-month period.
- Segment Performance:
- Americas: Sales declined 14% (quarter) and 12% (six months) due to lost distribution and lower replenishment orders for WD-40 products in the U.S., and a 30% drop in Spot Shot sales.
- Europe: Sales increased 11% (quarter) and 12% (six months), driven by growth in the WD-40 Smart Straw product and industrial channel focus.
- Asia-Pacific: Sales surged 22% (quarter) and 40% (six months) due to improved economic conditions and promotional activities.
- Margins: Gross margin decreased slightly (51.8% vs 52.4% for the quarter) due to higher costs for petroleum-based materials and aerosol cans, partially offset by price increases and lower promotional discounts.
Outlook, Risks, and Unusual Items
- Accounting Change: Effective February 28, 2011, the Company reclassified three trade names (2000 Flushes, Spot Shot, and 1001) from indefinite-lived to definite-lived intangible assets. This change will result in approximately $0.4 million in quarterly amortization expense starting March 1, 2011.
- Share Repurchases: The Board approved an increase to the share buy-back plan on April 4, 2011, raising the authorization to $60.0 million (from $25.0 million) and extending the expiration to April 4, 2013. The Company repurchased 243,500 shares for $9.6 million during the quarter.
- Dividends: A quarterly dividend of $0.27 per share was declared, payable April 29, 2011.
- Risks:
- Customer Concentration: Wal-Mart accounts for approximately 8% of consolidated net sales.
- Raw Materials: Continued pressure on petroleum-based material and aerosol can costs is expected to negatively impact future margins.
- Legal Proceedings: The Company is defending against "Benzene Lawsuits" and a false patent marking claim (Promote Innovation, LLC). Management believes exposure to material loss is remote.
Investor Verification Checklist
- Verify the impact of the new amortization expense ($1.6M annually) on future earnings per share.
- Monitor the recovery of U.S. distribution and promotional activity levels for WD-40 and Spot Shot products.
- Track raw material cost trends (petroleum and aerosol cans) against the ability to pass price increases to consumers.
- Review the status of the "Benzene Lawsuits" and the false patent marking litigation for any changes in management's assessment of material loss.
- Confirm the execution of the expanded $60.0 million share repurchase program.