WD-40 Company — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, three months ended November 30, 2014. Amounts below are in U.S. dollars; financial statement amounts are unaudited. WD-40 markets multi-purpose maintenance and homecare/cleaning products globally.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $96.4 million | $95.5 million | Up 1% |
| Gross profit / margin | $49.7 million / 51.6% | $49.7 million / 52.0% | Margin down 0.4 percentage points |
| Operating income | $15.6 million | $16.8 million | Down 7% |
| Net income | $10.8 million | $11.5 million | Down 6% |
| Diluted EPS | $0.73 | $0.74 | Down $0.01 |
| Operating cash flow | $9.4 million | $6.7 million | Up $2.7 million |
| Cash and cash equivalents | $46.4 million | $57.8 million at Aug. 31, 2014 | Down $11.4 million |
| Short-term investments | $42.6 million | $45.1 million at Aug. 31, 2014 | Down $2.4 million |
| Revolving credit facility borrowings | $98.0 million | $98.0 million at Aug. 31, 2014 | No change |
Cash flow from investing was negative $5.3 million, including $3.7 million paid for the GT85 acquisition and $1.6 million for property and equipment. Financing cash flow was negative $13.7 million, including $9.9 million of share repurchases and $5.0 million of dividends. The company reported total assets of $331.3 million and current liabilities of $145.3 million at quarter-end.
Material changes versus the prior-year quarter
- Sales increased $0.8 million; currency translation added $0.6 million, so sales growth was $0.3 million on a constant-currency basis.
- Multi-purpose maintenance sales rose 1% to $84.9 million; homecare and cleaning sales fell 1% to $11.4 million.
- By segment, Americas sales rose 2%, EMEA sales fell 5% (7% lower on a constant-currency basis), and Asia-Pacific sales rose 14%.
- EMEA operating income fell 29% to $6.4 million, reflecting lower sales, weaker gross margin and higher operating expenses. Asia-Pacific operating income increased 10%; Americas operating income was nearly unchanged.
- Operating expenses rose 4%, including higher SG&A, advertising and amortization. Net income declined despite nearly flat gross profit.
- Foreign currency translation produced a $6.3 million other comprehensive loss, compared with $4.6 million of translation income in the prior-year quarter.
Liquidity, debt and capital allocation
The company had $89.1 million of cash, cash equivalents and short-term investments, alongside $98.0 million of revolving borrowings. The unsecured facility has a $125.0 million commitment and matures January 7, 2018; the company reported covenant compliance and said it expected sufficient liquidity for at least the next 12 months. Its minimum covenant requires trailing-12-month consolidated EBITDA of $40.0 million. Approximately $33.7 million of cash was held outside the United States and management intends to indefinitely reinvest foreign earnings.
The company repurchased 143,842 shares during the quarter at an average $68.55 per share. The existing $60.0 million authorization had $4.7 million remaining at November 30, 2014; a subsequent $75.0 million authorization becomes effective after the existing plan is exhausted. On December 9, 2014, the board declared a 12% quarterly dividend increase, from $0.34 to $0.38 per share.
Outlook, management commentary and risks
- Management described the financial condition and liquidity as strong and stated that available cash, the credit facility and expected operating cash flows should meet operating and capital needs for at least 12 months.
- Fiscal 2015 advertising and sales-promotion expense is expected to be 6%–7% of net sales. The company’s longer-term 50/30/20 framework targets gross margin above 50%, cost of doing business at or below 30%, and EBITDA above 20% of sales; Q1 results were 52%, 34% and 18%, respectively.
- Management cited currency movements, promotional spending and customer discounts, sales mix, competition, distribution changes, and volatile petroleum-based input costs as factors affecting performance. EMEA sales and margins were particularly exposed to the weaker euro and U.S. dollar against sterling; political instability in Russia and Ukraine also weighed on distributor-market sales.
- In September 2014, the company acquired the U.K. GT85 business for $4.1 million, including $3.7 million paid at closing and a remaining amount payable after nine months subject to unresolved claims. The acquisition added $1.3 million of goodwill and $2.8 million of definite-lived intangible assets.
- Pending matters include a California putative class action alleging recording of telephone calls without consent and an arbitration with former contract manufacturer IQ Products Company. WD-40 disputes the allegations; it could not estimate a possible loss or range for the call-recording case. The arbitration was scheduled to conclude in January 2015.
- No material change to previously disclosed risk factors was reported. Management said there were no goodwill or definite-lived intangible impairment indicators during the quarter. The company reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether EMEA sales and operating profitability stabilize, and how much future results are affected by foreign exchange rates.
- Whether promotional activity, product mix and input-cost movements sustain or further pressure gross margin.
- Available liquidity after dividends, repurchases and acquisitions, including compliance with the $40 million trailing EBITDA covenant.
- The outcome and potential financial exposure of the IQ Products arbitration and the telephone-recording litigation.
- Whether the GT85 acquisition contributes as expected and whether homecare/cleaning brand sales and related intangible values remain supportable.