WD-40 Company — FY2014 Form 10-K
Reporting period: Fiscal year ended August 31, 2014. The filing is an annual report; fourth-quarter figures are included as unaudited quarterly data. WD-40 sells maintenance and homecare products in 188 countries, with sales primarily from WD-40 and 3-IN-ONE maintenance products.
Financial results
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $383.0 million | $368.5 million | +4% |
| Gross profit / margin | $198.9 million / 51.9% | $189.2 million / 51.3% | Margin +0.6 percentage points |
| Operating income | $63.7 million | $56.6 million | +13% |
| Net income | $43.7 million | $39.8 million | +10% |
| Diluted EPS | $2.87 | $2.54 | +13% |
| Operating cash flow | $38.7 million | $51.6 million | Down $12.8 million |
Net sales growth included a favorable $5.3 million foreign-exchange impact; constant-currency sales growth was $9.2 million. Multi-purpose maintenance sales rose 5% to $337.8 million, while homecare and cleaning sales fell 5% to $45.2 million. EMEA sales increased 10% to $151.4 million; Americas sales were essentially flat at $180.8 million, as were Asia-Pacific sales at $50.8 million.
Fourth quarter: Sales were $97.6 million versus $93.5 million a year earlier; net income was $11.5 million versus $8.1 million; diluted EPS was $0.77 versus $0.53.
Margins, liquidity and capital allocation
- Gross margin improvement reflected price increases, lower promotional discounts and favorable input costs, partly offset by mix, freight and currency effects. Petroleum-based material costs remain volatile.
- Cash and cash equivalents were $57.8 million and short-term investments were $45.1 million at year-end. The company had $98.0 million drawn on its $125.0 million revolving facility, classified as current, and reported compliance with its covenants, including a $40.0 million minimum trailing-twelve-month EBITDA requirement.
- Management said cash, the credit facility and anticipated operating cash flows were sufficient for projected requirements for at least 12 months. It expected to borrow an additional $12–15 million in FY2015.
- FY2014 investing cash outflow was $10.5 million; financing cash outflow was $25.8 million. The company repurchased $42.8 million of shares and paid $20.2 million in dividends. The quarterly dividend was raised 10% to $0.34 per share.
- Long-term obligations, as defined in selected financial data, were $26.4 million; this includes long-term deferred taxes and other liabilities, not just debt.
Changes, outlook and risks
- Growth was led by maintenance products, particularly EMEA; the homecare and cleaning portfolio continued to contract, with declining distribution, fewer product offerings and competitive pressure cited as factors. Management described these brands as harvest brands and had reduced investment in them.
- FY2014 operating income improved across all three segments. Gross margin rose to 51.9%; SG&A was $108.6 million, or 28.3% of sales, and advertising and sales promotion expense was $23.9 million, or 6.2% of sales.
- Management targeted advertising and sales promotion investment of 6.0%–7.0% of FY2015 sales. No specific FY2015 sales or earnings guidance is provided in the filing. Longer-term internal targets are gross margin of at least 50%, cost of doing business at or below 30% of sales, and EBITDA of at least 20% of sales; FY2014 results were 52%, 34% and 18%, respectively.
- Key risks include reliance on limited suppliers and contract manufacturers, petroleum and aerosol-can cost volatility, customer concentration and shelf-space competition, international and currency exposure, and execution of product innovation and growth initiatives. International sales represented about 62% of consolidated sales.
- Two notable legal matters remained unresolved: a putative California class action concerning recorded calls and arbitration with former contract manufacturer IQ Products Company. The company said it could not estimate possible losses for either matter. It also carried $1.7 million of inventory-related purchase obligations associated with the IQ Products relationship.
- FY2013 included a non-cash $1.1 million impairment charge for the 2000 Flushes trade name; no intangible-asset impairment was recorded in FY2014. The company reported no goodwill impairment.
- The company had $106.4 million of foreign earnings designated indefinitely reinvested; it estimated an approximately $11.0 million net tax liability if those earnings were repatriated. The FY2014 effective tax rate was 30.5%.
Important facts for investors to verify
- Whether EMEA growth and improved gross margin can continue, especially as currency and raw-material costs change.
- Whether weakening homecare and cleaning brands may require further impairment or strategic action.
- Debt usage, interest-rate exposure, covenant headroom and the planned FY2015 additional borrowing, alongside ongoing repurchases and dividends.
- Developments and potential financial exposure in the IQ Products arbitration and California call-recording litigation.
- The effect of any change in the indefinite-reinvestment decision or tax treatment of foreign earnings.
- The filing reports effective disclosure controls and internal control over financial reporting; PwC issued an unqualified audit opinion on the financial statements and controls.