WD-40 Company — Form 10-Q Summary
Reporting period: Quarter ended May 31, 2014; results below compare the three and nine months ended May 31, 2014 with the corresponding 2013 periods. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
WD-40 markets multi-purpose and specialty maintenance products, including WD-40 and 3-IN-ONE, as well as homecare and cleaning brands. It reports geographically across the Americas, EMEA, and Asia-Pacific. Effective September 1, 2013, India was moved from Asia-Pacific to EMEA for segment reporting.
Financial performance and liquidity
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $95.7; up 3% | $285.4; up 4% |
| Gross profit / margin | $49.1 / 51.4% (51.3% prior year) | $147.4 / 51.6% (50.8% prior year) |
| Operating income | $15.1; up 1% | $47.1; up 4% |
| Net income | $10.4; up 1% | $32.2; up 2% |
| Diluted EPS | $0.69, versus $0.66 | $2.10, versus $2.01 |
For the nine months, multi-purpose maintenance sales rose 6% to $252.6 million, while homecare and cleaning sales fell 8% to $32.8 million. Segment sales were Americas $134.4 million (+1%), EMEA $111.3 million (+10%), and Asia-Pacific $39.7 million (-2%). EMEA growth included a favorable $4.0 million currency effect; on a constant-currency basis, EMEA sales increased 6%. Overall foreign exchange added $1.6 million to nine-month sales; management said its impact on nine-month net income was not material.
Cash from operations was $22.1 million for the nine months, down from $36.2 million, primarily reflecting working-capital changes, including payment of prior-year bonuses and higher receivables. Investing used $9.4 million and financing used $23.5 million. Cash declined $8.5 million to $44.9 million. Short-term investments were $45.4 million, and the revolving facility balance was $83.0 million, up from $63.0 million at August 31, 2013. The facility has a $125 million commitment and matures January 7, 2018; the company reported covenant compliance. It reported $336.2 million in total assets and $133.7 million in current liabilities at May 31, 2014.
During the nine months, WD-40 paid $15.1 million in dividends and spent $30.5 million on treasury-stock purchases. Its $60 million buyback authorization runs through August 31, 2015; $33.2 million had been spent under the plan through May 31, 2014. A $0.34-per-share dividend was declared after quarter-end, payable July 31, 2014.
Material changes and management commentary
- Quarterly sales growth was led by EMEA (+12%) and Asia-Pacific (+10%), while Americas sales fell 5%, mainly due to lower multi-purpose product sales in the U.S. and Canada. Management cited promotional timing, Canadian distribution changes, and severe weather.
- For the nine months, EMEA was the strongest segment; Americas was nearly flat and Asia-Pacific declined. WD-40 Specialist expansion and growth of core WD-40 products supported sales in several markets. China’s economic slowdown and manufacturing activity were cited as headwinds.
- Gross margin improved year over year, supported by price increases, lower promotional discounts, and lower net petroleum-based material and aerosol-can costs. Mix, warehousing and inbound freight, and currency effects partly offset these benefits; management cautioned that petroleum-related input costs remain volatile.
- Nine-month SG&A rose 7% to $80.2 million, with higher employee costs, professional services and legal fees, travel, freight, and currency effects. Advertising and sales promotion expense was $18.1 million; including promotional costs deducted from sales, total investment was $30.0 million.
- Management’s long-term 50/30/20 targets are gross margin of at least 50%, cost of doing business no more than 30%, and EBITDA at least 20% of sales. Nine-month results were approximately 52%, 34%, and 18%, respectively. Fiscal 2014 advertising and sales-promotion investment was expected to be 6%–7% of sales.
- Management said cash, operating cash flow, and available credit should fund operating and capital needs for at least the next 12 months. It intends to indefinitely reinvest certain foreign earnings; repatriation could result in significant additional tax expense.
Risks, contingencies, and unusual items
- IQ Products Company litigation includes claims for economic damages exceeding $40 million, fees, and punitive damages. The parties’ claims are subject to arbitration, scheduled for August 2014; WD-40 said it could not estimate a possible loss or range.
- A proposed California class action alleges that WD-40 recorded a customer call without consent. The company denies wrongdoing and could not estimate a possible loss or range.
- WD-40 recorded a $1.1 million non-cash impairment of the 2000 Flushes trade name in fiscal 2013. Management reported no new impairment indicators in this quarter, but further impairment could arise if forecasts or business conditions weaken. Homecare and cleaning brands continue to face declining sales, lost distribution, competition, and category declines.
- The company had $9.2 million notional value of foreign-currency forward contracts outstanding, maturing June–October 2014. It also identified currency, input-cost, customer promotion and order timing, and litigation as sources of variability.
- WD-40 reported no material change in its previously disclosed risk factors, no off-balance-sheet arrangements, effective disclosure controls, and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether EMEA sales momentum and WD-40 Specialist distribution gains continue, and whether Americas and Asia-Pacific performance improves.
- Whether homecare and cleaning sales declines or changed forecasts create further impairment risk, particularly for Carpet Fresh, Spot Shot, and 2000 Flushes.
- Cash conversion and working-capital trends, including receivables, inventory, accrued payroll, and continued share repurchases and dividends.
- Revolver usage, covenant headroom, and the effect of debt-funded buybacks on liquidity and interest expense.
- Developments and potential exposure in the IQ Products arbitration and California call-recording case; the filing provides no clear estimated loss.
- Effects of currency movements and petroleum-based material, aerosol-can, freight, and promotional costs on sales and gross margin.