WD-40 Company — FY2013 Form 10-K Summary
Reporting period: Fiscal year ended August 31, 2013. The filing is an annual report, not a standalone quarterly filing; quarterly figures below identify the fourth quarter where relevant. WD-40 is a global consumer-products company whose sales are led by multi-purpose maintenance products, including WD-40.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $368.5 million | $342.8 million | +8% |
| Gross profit / margin | $189.2 million / 51.3% | $168.5 million / 49.2% | Margin +2.1 percentage points |
| Operating income | $56.6 million | $51.7 million | +9% |
| Net income | $39.8 million | $35.5 million | +12% |
| Diluted EPS | $2.54 | $2.20 | +15% |
| Operating cash flow | $51.6 million | $34.2 million | +$17.3 million |
- Sales growth was concentrated in multi-purpose maintenance products, up 12% to $320.9 million. Homecare and cleaning products fell 15% to $47.7 million.
- By segment, Americas sales rose 2% to $180.5 million, EMEA rose 16% to $136.0 million, and Asia-Pacific rose 7% to $52.0 million. Foreign exchange reduced consolidated sales by $2.0 million; constant-currency growth was reported at approximately 8%.
- Gross-margin improvement reflected price increases, lower customer discounts, supply-chain savings and lower petroleum-material costs. SG&A rose 17% to $104.4 million, largely because of higher employee costs and bonus accruals. Advertising and sales-promotion expense was $24.8 million, down 3%.
- Cash and cash equivalents were $53.4 million and short-term investments were $37.5 million at year-end. The company had $63.0 million drawn on its $125 million revolving facility, classified as current. It reported compliance with the facility’s covenants, including a $40 million trailing-12-month EBITDA minimum.
- Investing cash outflow was $39.5 million, largely reflecting purchases of short-term investments; financing cash outflow was $26.8 million, including $31.4 million of share repurchases and $19.0 million of dividends. Capital expenditures were $2.9 million.
- Current assets were $192.1 million and current liabilities were $117.6 million. The company said liquidity and anticipated operating cash flows were sufficient for projected requirements over at least the next 12 months.
Fourth-quarter context
FY2013 fourth-quarter net sales were $93.5 million versus $84.9 million in the prior-year quarter. Net income was $8.1 million versus $9.0 million, and diluted EPS was $0.53 versus $0.56. The quarter included a $1.1 million non-cash, pre-tax impairment charge for the 2000 Flushes trade name.
Material changes and management commentary
- The North American supply-chain redesign was completed at fiscal year-end. Management reported manufacturing-cost savings and improved customer service, while noting that inventory remained above historical levels and the transition had incurred additional costs.
- Management began evaluating strategic alternatives for certain homecare and cleaning brands; it had made no decisions by the filing date. Sales declines in these brands were attributed to lost distribution, fewer product offerings, competition, category declines and customer-order volatility.
- WD-40 Specialist continued to expand internationally. WD-40 Bike launched in the U.S.; initial sales were immaterial and were expected to remain so in the near term. Blue Works sales were being phased out in most locations after failing to become material.
- Management’s long-term “50/30/20” targets are gross margin of at least 50%, cost of doing business no more than 30% of sales, and EBITDA of at least 20% of sales. FY2013 results were approximately 51%, 35% and 17%, respectively.
Outlook, risks and contingencies
- No consolidated sales or earnings guidance is provided. Management expected FY2014 global advertising and sales-promotion investment to be 6.5%–7.5% of sales and projected $12–$17 million of additional revolver borrowings in FY2014.
- Key risks include volatile petroleum-based input, aerosol-can and transportation costs; reliance on a limited number of suppliers and contract manufacturers; competitive pressure and shelf-space access; dependence on major customers; international economic, currency and regulatory exposure; and execution risks in product innovation and strategic initiatives.
- Approximately 61% of FY2013 sales were outside the U.S. The company used foreign-currency forwards for certain exposures but did not hedge translation risk. It reported $84.7 million of undistributed foreign earnings as indefinitely reinvested; repatriation could trigger additional taxes.
- The company recorded a $1.1 million impairment of the 2000 Flushes trade name, reducing its fair value to $7.9 million. Management stated that changing forecasts could require further impairment testing or charges. No goodwill impairment was recorded.
- IQ Products Company sued WD-40 over termination of a contract-manufacturing relationship, alleging indemnification obligations and other claims and seeking damages exceeding $40 million, plus fees and punitive damages. WD-40 said it believed the case lacked merit, would defend it, did not consider a loss probable, and could not reasonably estimate a possible loss range. The company also had $1.8 million of inventory it was obligated to purchase from IQ Products.
- The company stated that disclosure controls and internal control over financial reporting were effective as of August 31, 2013; its independent auditor reported effective internal control and issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether growth in core maintenance products can continue to offset declining homecare and cleaning sales, and what strategic decisions are made about those brands.
- Whether improved gross margin is sustainable as raw-material costs, pricing, promotions and supply-chain expenses change.
- Whether inventory levels and working capital normalize following the supply-chain redesign, and how the company uses its cash, short-term investments and revolving credit facility.
- Updates on the IQ Products litigation, related inventory obligations and any change in management’s assessment of potential loss.
- Future impairment assessments for homecare and cleaning trade names, particularly 2000 Flushes, and the assumptions underlying those valuations.
- Potential effects of foreign-exchange movements, foreign cash deployment or repatriation, and compliance with debt covenants and dividend commitments.