WD-40 Company — Q3 FY2013 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended May 31, 2013, compared with the corresponding prior-year periods. WD-40 sells multi-purpose maintenance products and homecare and cleaning products through geographic segments: Americas, Europe, and Asia-Pacific.
Financial performance
Amounts below are in millions of dollars, except per-share data and margins.
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $93.1 | $87.0 | $275.1 | $257.9 |
| Gross profit / margin | $47.8 / 51.3% | $43.1 / 49.5% | $139.6 / 50.8% | $126.6 / 49.1% |
| Operating income | $15.0 | $13.1 | $45.3 | $38.1 |
| Net income | $10.3 | $9.1 | $31.7 | $26.5 |
| Diluted EPS | $0.66 | $0.57 | $2.01 | $1.64 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $36.2 | $26.4 |
- Q3 sales increased 7%; operating income rose 14% and net income rose 12%. For the nine-month period, sales increased 7%, operating income 19%, and net income 19%.
- Q3 multi-purpose maintenance sales grew 12% to $82.2 million, while homecare and cleaning sales fell 18% to $11.0 million. For nine months, the respective changes were +11% and -15%.
- Nine-month segment sales rose 2% in Americas, 13% in Europe, and 7% in Asia-Pacific. Europe’s Q3 sales rose 8%, but segment operating income declined 7%, largely on higher operating expenses and bonus costs.
- Gross-margin improvement reflected pricing, lower customer discounts, supply-chain savings, and other factors; higher raw-material costs and product mix partly offset the gains. SG&A increased 11% year to date, principally from employee-related costs, including higher bonuses.
Financial position and liquidity
- At May 31, 2013, cash and cash equivalents were $52.3 million and short-term investments were $35.2 million. The revolving credit facility had $63.0 million outstanding against a $125.0 million commitment, leaving $62.0 million of nominal capacity before other facility usage. The filing classifies the borrowings as current.
- Total assets were $320.5 million; current assets were $188.0 million and current liabilities $111.8 million. Shareholders’ equity was $181.4 million.
- Nine-month operating cash flow of $36.2 million was offset by $37.3 million of investing outflows, mainly purchases of short-term investments, and $14.7 million of financing outflows, including dividends and share repurchases. Cash declined $17.4 million to $52.3 million.
- The company reported compliance with its debt covenants, including a minimum trailing-twelve-month EBITDA requirement of $40 million. The credit agreement was amended to extend maturity to January 2018 and increase the commitment to $125 million.
Outlook, risks, contingencies, and unusual items
- No specific consolidated sales or earnings guidance was provided. Management’s long-term 50/30/20 targets are gross margin of at least 50%, cost of doing business at or below 30% of sales, and EBITDA at or above 20% of sales. Nine-month results were 50.8%, approximately 33%, and 18%, respectively. FY2013 advertising and sales-promotion spending was expected to be 6.5%–7.5% of sales.
- Management expected the North American supply-chain redesign to be fully integrated by the end of FY2013, with anticipated cost savings and improved service; inventory was expected to remain above historical levels. It had begun realizing manufacturing-cost savings.
- Management was evaluating strategic alternatives for Americas homecare and cleaning brands amid persistent sales declines attributed to lost distribution, reduced offerings, competition, category declines, and variable promotional orders. No decision had been made. The 2000 Flushes intangible asset had a $9.3 million carrying value; its remaining useful life was shortened from 14 years and 10 months to 7 years. Testing found no impairment for the reviewed trade names, but 2000 Flushes’ undiscounted cash flows were not substantially above carrying value, leaving impairment risk if forecasts or market conditions worsen.
- The IQ Products Company lawsuit seeks alleged damages exceeding $40 million, plus fees and punitive damages, in a dispute related to contract manufacturing, termination, and safety concerns. WD-40 denies the claims, intends to defend the case, and estimated the possible loss as immaterial to its consolidated financial statements. The company also had a $1.9 million inventory purchase obligation related to the terminated supplier.
- Management said $33.0 million of cash was held abroad and foreign earnings were intended to be indefinitely reinvested; repatriation could trigger additional tax expense. Petroleum-based input costs and foreign-exchange movements were identified as sources of future volatility. The filing reported no material change in previously disclosed risk factors and stated disclosure controls were effective.
- The existing $50 million repurchase authorization had been used for $43.5 million of purchases through May 31. A new $60 million authorization, effective August 1, 2013 through August 31, 2015, was approved after quarter-end. A $0.31-per-share dividend was also declared after quarter-end.
Most important facts for investors to verify
- Whether growth in core maintenance products continues and whether weakness in homecare and cleaning brands prompts a sale, disposal, or further impairment.
- Whether reported gross-margin gains and supply-chain savings persist after accounting for volatile input costs, freight, promotional timing, and currency effects.
- Whether bonus-related operating costs and the higher inventory position affect cash generation and full-year performance.
- Developments in the IQ Products litigation, related supplier obligations, and the company’s stated loss assessment.
- Use of the expanded credit facility and new repurchase authorization, and the effect of overseas cash reinvestment on domestic liquidity and potential taxes.