WD-40 Company — Q2 FY2014 10-Q
Business context and period. Global consumer-products company selling multi-purpose maintenance products (including WD-40) and homecare and cleaning products. The quarter and six-month period ended February 28, 2014; comparisons are with the corresponding FY2013 periods. Amounts below are in millions, except per-share data.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $94.2, up 9% | $189.7, up 4% |
| Gross profit / margin | $48.6 / 51.6% (50.9%) | $98.2 / 51.8% (50.5%) |
| Operating income | $15.3, up 6% | $32.0, up 6% |
| Net income | $10.3, down 1% | $21.8, up 2% |
| Diluted EPS | $0.67 ($0.66 prior year) | $1.41 ($1.35 prior year) |
| Operating cash flow | Not separately provided | $14.3 ($22.3 prior year) |
For the six months, multi-purpose maintenance sales rose 7% to $167.8 million, while homecare and cleaning sales fell 11% to $21.9 million. By region, Americas sales increased 4% and EMEA increased 9%; Asia-Pacific declined 8%. EMEA growth reflected stronger maintenance-product sales, while Asia-Pacific weakness included distributor orders that the company said it expected to ship in Q3.
Liquidity, debt and capital allocation
- At February 28, cash and cash equivalents were $41.0 million and short-term investments were $45.0 million. Revolver borrowings were $73.0 million under a $125.0 million facility; the company reported covenant compliance and no outstanding letters of credit.
- Six-month operating cash flow was $14.3 million. Cash used in investing was $8.3 million and cash used in financing was $20.2 million; cash declined $12.5 million to $41.0 million.
- Operating cash flow fell $8.0 million year over year, mainly reflecting working-capital movements, including payment of prior-year bonuses and higher receivables.
- The company repurchased 363,117 shares for $24.9 million under its $60 million buyback authorization. Six-month dividends paid were $10.0 million; a further $0.34-per-share dividend was declared after quarter-end.
- $35.2 million of cash was held overseas and designated indefinitely reinvested; repatriation could result in significant additional tax expense.
Changes, outlook and risks
- Gross margin improved year over year, supported by pricing, lower net petroleum-based material and aerosol-can costs, and lower promotional discounts for the six-month period. Management cautioned that petroleum-based costs remain volatile and may affect future product costs.
- Operating expenses grew faster than sales: six-month SG&A rose 8%, driven principally by employee costs, professional services and travel. Management’s 50/30/20 long-term targets are gross margin at least 50%, cost of doing business no more than 30%, and EBITDA at least 20% of sales; reported six-month measures were 52%, 34% and 18%, respectively.
- Management expected FY2014 advertising and sales promotion expense to be 6.5%–7.5% of net sales. The filing gives no specific consolidated revenue or earnings forecast. Management stated that cash, the credit facility and expected operating cash flows should meet requirements for at least the next 12 months.
- Homecare and cleaning products continued to face declining sales, lost distribution, reduced offerings, competition, category declines and customer-order volatility. The company was evaluating strategic alternatives for certain brands but had made no decision. The 2000 Flushes trade name had a $1.1 million impairment in FY2013; no new impairment was recorded in this quarter.
- Two significant legal matters remain unresolved. A class-action complaint alleges unlawful recording of customer calls; possible loss is not estimable. A former contract manufacturer seeks, among other relief, damages alleged to exceed $40 million; the dispute was referred to arbitration scheduled for August 2014, and possible loss is not estimable.
- The company acquired a Belgian customer list for $1.8 million to support direct sales and will amortize it over five years. Goodwill testing in Q2 found no impairment. Management reported no material changes to previously disclosed risk factors.
Investor verification points
- Whether the delayed Asia-Pacific distributor orders were shipped in Q3 as expected, and whether regional sales trends continued.
- Progress in reversing homecare and cleaning sales declines, and whether further impairment or strategic decisions followed.
- Developments and potential financial exposure in the call-recording and former-manufacturer disputes.
- Working-capital and cash-flow trends, foreign-held cash and tax implications of any repatriation.
- Revolver utilization, covenant headroom, and the pace of buybacks and dividends relative to liquidity needs.