WD-40 Company — Q2 FY2013 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2013. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Comparisons are with the corresponding prior-year periods.
Business context and results
WD-40 is a global consumer-products company selling multi-purpose maintenance products and homecare and cleaning products. Its geographic segments are Americas, Europe and Asia-Pacific. WD-40 Specialist continued to expand internationally; initial WD-40 Bike sales were immaterial and expected to remain so in its first launch year.
| Metric | Q2 FY2013 | Q2 FY2012 | First half FY2013 | First half FY2012 |
|---|---|---|---|---|
| Net sales | $86.7 | $86.0 | $182.0 | $170.9 |
| Gross profit / margin | $44.1 / 50.9% | $42.1 / 49.0% | $91.9 / 50.5% | $83.5 / 48.8% |
| Operating income | $14.4 | $14.7 | $30.3 | $25.0 |
| Net income | $10.5 | $10.6 | $21.4 | $17.4 |
| Diluted EPS | $0.66 | $0.65 | $1.35 | $1.07 |
First-half operating cash flow was $22.3 million, versus $15.2 million. Investing used $31.3 million, largely reflecting $30.2 million of short-term investment purchases; financing used $13.9 million, including $9.4 million of dividends and $12.4 million of treasury-stock purchases. Cash and cash equivalents were $45.6 million at February 28, down from $69.7 million at August 31, 2012; short-term investments were $29.8 million, up from $1.0 million. The company reported current assets of $178.9 million and current liabilities of $100.4 million.
Revolver borrowings were $50.0 million, classified as current. The credit facility was amended in January 2013: commitment increased from $75 million to $125 million, maturity extended to January 7, 2018, and certain fees and the LIBOR margin decreased. WD-40 reported compliance with covenants, including a $40 million minimum trailing-twelve-month EBITDA requirement. Shareholders’ equity was $184.5 million.
Material changes and drivers
- First-half sales grew 6%; multi-purpose maintenance sales rose 11% to $157.2 million, while homecare and cleaning sales fell 14% to $24.8 million. In Q2, total sales rose 1%, as maintenance-product growth was offset by a 23% decline in homecare and cleaning.
- First-half sales increased 16% in Europe and 10% in Asia-Pacific, while Americas sales declined 1%. Q2 Americas sales fell 13%, Europe rose 16% and Asia-Pacific rose 18%. Europe’s Q2 growth was 13% on a constant-currency basis.
- First-half gross margin improved 1.7 percentage points. Management cited price increases, lower customer discounts, lower Asia-Pacific manufacturing costs and net savings from the North American supply-chain redesign; foreign exchange and raw-material costs partly offset these benefits.
- First-half SG&A increased 11% to $49.3 million, primarily due to higher employee-related costs, travel and foreign exchange. Advertising and sales promotion expense declined 11% to $11.3 million. Q2 operating income and net income edged down despite higher sales and gross margin, as operating expenses rose.
- First-half diluted EPS rose 26%, supported by higher net income and fewer weighted-average shares. The company repurchased 252,958 shares during the half; cumulative purchases under the $50 million plan were 715,859 shares costing $33.7 million.
Outlook, risks and unusual items
- No numerical consolidated sales or earnings guidance was provided. Management expects fiscal 2013 advertising and sales-promotion investment of 7%–8% of net sales and anticipated higher bonus-performance achievement than in the prior year.
- The North American supply-chain redesign was nearing completion. Management expected full integration in late FY2013 to improve service and reduce overall supply-chain costs; the transition had increased inventory and incurred additional costs, though net manufacturing savings had begun.
- The board authorized management in March 2013 to evaluate strategic alternatives for Americas homecare and cleaning brands, citing lost distribution, reduced offerings, competition, category declines and variable customer orders. The review was preliminary; no decision had been made.
- Management said European economic conditions had shown signs of stabilization but their persistence was uncertain. Petroleum-based material costs were expected to remain volatile; cost changes may affect reported product costs after a production and inventory-cycle lag. Foreign-exchange movements also affected margins and cash balances.
- IQ Products Company litigation seeks, among other relief, damages alleged to exceed $40 million and concerns termination of a contract-manufacturing relationship and alleged product-safety issues. WD-40 disputes the claims, intends to defend the case, and estimated the possible loss as immaterial to its consolidated financial statements. The related inventory purchase obligation was $3.2 million at February 28, 2013.
- Unrecognized tax benefits were $1.1 million, of which $0.8 million would affect the effective tax rate if recognized; up to $0.3 million could be affected by examinations or statute expirations in the next twelve months. The company reported no goodwill impairment after its annual qualitative assessment.
- The board declared a $0.31-per-share dividend on March 19, payable April 30, 2013. Management stated that cash, the credit facility and expected operating cash flows should fund projected needs for at least twelve months. It intended to indefinitely reinvest certain foreign earnings; repatriation could result in additional tax expense.
Most important facts for investors to verify
- Whether multi-purpose product growth and strength in Europe and Asia-Pacific can offset continued weakness in Americas homecare and cleaning products.
- Whether Q2 operating-expense growth, especially employee costs and bonuses, moderates and how it affects margins and the company’s 50/30/20 long-term targets. First-half gross margin was about 51%, cost of doing business 33% and EBITDA margin 18%, versus stated targets of at least 50%, no more than 30% and at least 20%, respectively.
- Execution and realized savings from the supply-chain redesign, including inventory levels and the remaining IQ Products inventory obligation.
- Developments in the IQ Products litigation, the basis for management’s immaterial-loss estimate, and any implications of the alleged safety issues.
- Use of cash and borrowing capacity for dividends and repurchases, covenant headroom, and the potential tax consequences of repatriating foreign earnings.