WD-40 Company — Form 10-Q Summary
Reporting period: Quarter and six months ended February 29, 2012; comparisons are with the corresponding prior-year periods. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
Business context
WD-40 is a global consumer products company selling multi-purpose maintenance products and homecare and cleaning products. Its WD-40 Specialist line launched in the U.S. in September 2011 and in select European markets in January 2012.
Key financial metrics
| Metric | Three months ended Feb. 29, 2012 | Six months ended Feb. 29, 2012 |
|---|---|---|
| Net sales | $86.0; +9% year over year | $170.9; +7% |
| Gross profit / gross margin | $42.1 / 49.0% (51.8% prior year) | $83.5 / 48.8% (51.4% prior year) |
| Operating income | $14.7; +6% | $25.0; −8% |
| Net income | $10.6; +16% | $17.4; −4% |
| Diluted EPS | $0.65; prior year $0.53 | $1.07; prior year $1.06 |
| Operating cash flow | Not presented separately for the quarter | $15.2; prior year $8.0 |
Six-month diluted EPS was slightly higher despite lower net income, alongside a decline in weighted-average diluted shares. The company’s long-term 50/30/20 performance targets are gross margin at or above 50%, cost of doing business at or below 30% of sales, and EBITDA at or above 20% of sales. Six-month results were 49%, 33%, and 16%, respectively.
At February 29, cash and cash equivalents were $67.7, current assets $163.1, current liabilities $87.5, and shareholders’ equity $186.5. Inventory was $25.9, up from $17.6 at August 31, 2011. The company had $40.0 outstanding on its $75.0 revolving credit facility; the prior $10.7 term-loan balance was repaid in October 2011. It reported compliance with debt covenants. Cash less revolving borrowings was $27.7.
Six-month investing cash outflow was $1.3 and financing cash outflow was $1.1; cash increased $11.3 to $67.7. Financing included $22.7 of treasury-stock purchases and $9.0 of dividends paid.
Material changes and operating drivers
- Six-month sales growth was led by multi-purpose maintenance products, up 8% to $142.2; homecare and cleaning products rose 2% to $28.7. Foreign exchange added $1.2 to consolidated sales; constant-currency sales growth was 6%.
- Six-month segment sales: Americas $86.7, up 12%; Europe $58.1, down 7%; Asia-Pacific $26.1, up 29% (25% on a constant-currency basis). Europe’s weakness reflected adverse economic conditions and customer-order timing; Asia-Pacific growth included strong China and distributor-market sales.
- Gross margin declined as petroleum-based materials, aerosol cans, other materials and manufacturing costs, supply-chain transition costs, product mix, and customer discounts more than offset price increases. Management attributed 2.3 percentage points of pressure to petroleum-based materials and aerosol cans for both the quarter and six-month period.
- Operating expenses rose 6% for the six-month period, including increased advertising and sales promotion spending and higher amortization. Lower taxes supported quarterly earnings: the six-month effective tax rate was 29.5%, versus 32.2% a year earlier.
Outlook, risks, and unusual items
- Management said it expects petroleum-based material costs to remain volatile and affect future product costs. North American supply-chain redesign is expected to improve service and lower long-term costs, but may cause additional transition expense and higher or fluctuating inventory before savings are realized.
- Advertising and sales promotion spending for fiscal 2012 was expected to be 7%–8% of sales. Management emphasized long-term 50/30/20 targets; the filing does not provide clear numeric full-year sales or earnings guidance.
- Cash and cash equivalents included $51.8 held in Europe, Australia, and China. The company intends to reinvest foreign earnings indefinitely; repatriation could create additional tax expense. Management said available cash, operating cash flow, and credit access should meet projected needs for at least 12 months.
- The company recorded net tax benefits of about $0.5 in the six-month period, primarily from expiration of statutes of limitation on uncertain tax positions. The Memphis warehouse sale generated an approximately $0.1 pretax loss in the first quarter.
- Risks cited include economic conditions, competition and shelf-space pressures, customer order and promotional timing, raw-material and foreign-exchange volatility, and execution of the supply-chain changes. Ordinary-course claims, including product-liability matters, were not expected to have a material adverse effect; no material risk-factor changes were reported.
- A new $50.0 share-repurchase authorization runs through December 2013; $4.1 had been used by February 29. A $0.29-per-share dividend was declared after quarter-end, payable April 30, 2012.
Important facts for investors to verify
- Whether sales growth, particularly in the Americas and Asia-Pacific, persists after promotional activity and customer-order timing effects.
- Whether gross margins recover as material costs and supply-chain transition expenses change, and whether expected supply-chain savings are achieved.
- Inventory growth, working-capital needs, revolving-credit borrowings, covenant compliance, and the availability of domestic cash given foreign cash-reinvestment plans.
- The sustainability of earnings and EPS given lower six-month net income, reduced share count, and tax benefits from expiring statutes.
- Actual progress against management’s 50/30/20 targets and stated advertising-spending range.