WD-40 Company — Form 10-Q Summary
Reporting period: Fiscal first quarter ended November 30, 2013; unaudited results compared with the three months ended November 30, 2012. WD-40 sells maintenance products and homecare and cleaning products globally.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $95.5 million | $95.3 million | Up $0.3 million; approximately flat |
| Gross profit / margin | $49.7 million / 52.0% | $47.7 million / 50.1% | Margin up 1.9 percentage points |
| Operating income | $16.8 million | $15.9 million | Up 6% |
| Net income | $11.5 million | $10.9 million | Up 5% |
| Diluted EPS | $0.74 | $0.69 | Up 7% |
| Operating cash flow | $6.7 million | $15.6 million | Down $8.9 million |
Multi-purpose maintenance sales rose 3% to $84.0 million; homecare and cleaning sales fell 15% to $11.6 million. By segment, Americas sales declined 3% to $44.1 million, EMEA rose 3% to $36.5 million, and Asia-Pacific rose 4% to $15.0 million. Management estimated that currency movements reduced consolidated sales by $0.9 million; on a constant-currency basis, sales increased $1.2 million.
Gross-margin improvement reflected price increases, lower promotional discounts, favorable material costs, currency effects and supply-chain savings, partly offset by product mix and higher costs for some homecare products. SG&A rose 5% to $26.7 million, primarily on employee-related, travel and professional-services costs. Advertising and sales promotion expense was $5.6 million; including customer promotional discounts recorded against sales, total promotional investment was $9.2 million.
Cash, debt and liquidity
- At November 30, cash and cash equivalents were $51.4 million and short-term investments were $40.7 million. Current assets were $194.3 million and current liabilities were $112.4 million.
- Revolver borrowings were $63.0 million, classified as current. The unsecured facility has a $125.0 million commitment and matures January 7, 2018. The company reported compliance with its covenants, including a $40.0 million minimum trailing-twelve-month EBITDA requirement.
- Operating cash flow fell to $6.7 million, mainly due to changes in accrued payroll and related expenses, receivables, and accounts payable and accrued liabilities. Investing cash use was $2.4 million, including $1.3 million of short-term investment purchases and $1.2 million of capital expenditures. Financing cash use was $8.1 million, including $4.8 million of dividends and $5.3 million of treasury-share purchases.
- Management said cash, the credit facility and anticipated operating cash flows should be sufficient for operating and capital needs for at least the next 12 months. Of cash, $35.8 million was held outside the U.S. and was intended to remain indefinitely reinvested; repatriation could result in additional tax expense.
Material changes and management outlook
- Sales growth was driven by multi-purpose maintenance products, while homecare and cleaning sales continued to weaken. In the U.S., Carpet Fresh sales fell 52%, Spot Shot fell 18%, and 2000 Flushes fell 6%. Management cited lost distribution, reduced offerings, competition, category declines, and customer order and promotion variability.
- Management continued to assess strategic alternatives for certain homecare and cleaning brands but had made no decision to change their plans. It reported no new impairment indicators in the quarter; a $1.1 million noncash impairment of the 2000 Flushes trade name had been recorded in fiscal 2013. Further impairment could arise if forecasts or business conditions worsen.
- The company’s long-term 50/30/20 targets are gross margin of at least 50%, cost of doing business at or below 30% of sales, and EBITDA at or above 20% of sales. This quarter it reported 52%, 33%, and 19%, respectively. These are management targets, not specific fiscal-year earnings guidance.
- Fiscal 2014 advertising and sales promotion expense was expected to be 6.5%–7.5% of net sales. Management highlighted continued product innovation and WD-40 brand expansion; it did not provide specific revenue or EPS guidance in the provided filing text.
- The board declared a 10% increase in the quarterly dividend, from $0.31 to $0.34 per share, payable January 31, 2014. The company repurchased 77,983 shares in the quarter at an average $67.48 per share under a $60 million authorization.
Risks, contingencies and other items
- IQ Products Company sued over the termination of a contract-manufacturing relationship, seeking more than $40 million in alleged economic damages, plus fees and punitive damages. WD-40 said it believes the case is without merit; management did not consider a loss probable and could not reasonably estimate a possible loss range.
- Foreign exchange movements affect reported sales, cash balances and earnings. The company had $9.5 million notional value of foreign-currency forward contracts outstanding, maturing December 2013 through March 2014; the contracts were not designated as accounting hedges.
- Management cited volatility in petroleum-based input costs, customer promotional patterns, competition and distribution, and potential changes in global economic conditions. It reported no material change in risk factors from its prior Form 10-K.
- Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether multi-purpose product growth can offset continued declines in homecare and cleaning brands, particularly in the Americas.
- Whether improved gross margin is sustainable given input-cost, foreign-exchange, product-mix and promotional variability.
- The causes and persistence of lower operating cash flow, including bonus payments and working-capital timing.
- Revolver covenant headroom, refinancing or repayment plans, and the implications of cash held overseas.
- Developments in the IQ Products litigation and management’s future impairment assessments for homecare and cleaning intangible assets.
- Execution of the share-repurchase plan and the company’s ability to sustain dividends while funding investment and other capital needs.