WD-40 Company — FY2012 Form 10-K
Reporting period: Fiscal year ended August 31, 2012. The filing also provides unaudited quarterly results, including fourth-quarter sales of $84.9 million, net income of $9.0 million and diluted EPS of $0.56. Unless stated otherwise, amounts below are for the full fiscal year and are compared with FY2011.
Business context
WD-40 is a global consumer products company selling multi-purpose maintenance products and homecare and cleaning products. Its geographic segments are the Americas, Europe and Asia-Pacific. Approximately 58% of FY2012 sales were outside the United States. The company relies on third-party manufacturers and sells through retailers, distributors and industrial channels.
Key financial results
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Net sales | $342.8 million | $336.4 million | Up 2% |
| Gross profit | $168.5 million | $168.1 million | Up $0.4 million |
| Gross margin | 49.2% | 50.0% | Down 0.8 percentage points |
| Operating income | $51.7 million | $54.1 million | Down 4% |
| Net income | $35.5 million | $36.4 million | Down 3% |
| Diluted EPS | $2.20 | $2.14 | Up 3% |
| Cash from operations | $34.2 million | $30.0 million | Up $4.2 million |
Multi-purpose maintenance product sales increased 3% to $286.5 million; homecare and cleaning sales declined 2% to $56.3 million. By segment, Americas sales rose 4% to $177.4 million, Europe fell 7% to $116.9 million, and Asia-Pacific rose 18% to $48.5 million. Europe operating income declined 16%; Asia-Pacific operating income increased 30%.
Gross margin was pressured by petroleum-based materials and aerosol-can costs, the North American supply-chain transition, other input and manufacturing costs, sales mix, and foreign exchange. Pricing actions contributed 2.2 percentage points of gross-margin benefit, partly offsetting those pressures. The company’s internal 50/30/20 targets are gross margin of at least 50%, cost of doing business no more than 30% of sales, and EBITDA at least 20% of sales; FY2012 results were 49%, 33% and 16%, respectively.
Cash, debt and capital allocation
At August 31, 2012, cash and cash equivalents were $69.7 million, total assets were $300.9 million, and the company had $45.0 million outstanding under its $75.0 million revolving credit facility. The prior $10.7 million term-loan balance was repaid in October 2011. The revolver is classified as current; the company reported compliance with its covenants, including a minimum trailing-twelve-month EBITDA requirement of $40.0 million. Cash less revolver borrowings was approximately $24.7 million.
Operating cash flow was $34.2 million; investing activities used $3.1 million and financing activities used $16.1 million. Inventory rose to $29.8 million from $17.6 million, reflecting supply-chain transition purchases and inventory associated with the terminated IQ Products manufacturing relationship. The company paid $18.2 million in dividends and repurchased $39.8 million of stock during FY2012. Its quarterly dividend was increased from $0.27 to $0.29 per share; $28.8 million remained authorized under the current $50 million buyback plan at year-end.
Of the year-end cash balance, $54.3 million was held in foreign currencies. Management intends to indefinitely reinvest foreign earnings; repatriation could trigger additional taxes. The company stated that cash, operating cash flows and the revolver were expected to fund requirements for at least the next 12 months.
Outlook, risks and unusual items
- No specific revenue, earnings or EPS guidance is provided. Management expected FY2013 advertising and sales-promotion investment of 7%–8% of net sales.
- The North American supply-chain redesign was expected to be fully integrated in late FY2013, with anticipated cost savings and improved customer service. Transition costs had reduced FY2012 gross margin by 0.6 percentage points; management cautioned that additional costs and inventory fluctuations could continue during implementation.
- Management expected to borrow an additional $15 million–$20 million under the revolver in FY2013. Petroleum-based input costs remained volatile, and European economic weakness, competition, customer distribution decisions and foreign-exchange movements were identified as significant uncertainties.
- WD-40 Specialist launches in the U.S., Canada and selected European markets had initially exceeded forecast sales. WD-40 Bike products were planned for U.S. launch in the first quarter of FY2013.
- IQ Products Company sued WD-40 over the termination of a contract-manufacturing relationship, alleging indemnification, retaliation and other claims and seeking more than $40 million in economic damages, plus fees and punitive damages. WD-40 said it considered the case without merit and estimated possible loss as immaterial to its consolidated financial statements. The company also recorded $3.6 million of inventory it was obligated to purchase following the termination.
- The company reported no goodwill impairment following its FY2012 qualitative assessment. The Memphis warehouse sale generated a pre-tax loss of approximately $0.1 million in FY2012.
Important facts for investors to verify
- Whether FY2013 pricing, input-cost trends and product mix stabilize gross margin, which fell below management’s 50% target.
- Progress, remaining transition costs, inventory requirements and realized savings from the North American supply-chain redesign.
- Whether Europe’s sales and operating-income declines persist, and whether Asia-Pacific growth—particularly in China—continues amid slower economic activity.
- Use of the revolver, covenant headroom, expected FY2013 borrowing and the sustainability of dividends and share repurchases.
- Developments in the IQ Products litigation, the related inventory commitment and any change to WD-40’s stated loss assessment.
- Potential tax cost if foreign earnings are repatriated, and exposure to currency, supplier concentration, raw-material volatility and major-customer distribution changes.