WD-40 Company — Q1 FY2012 Form 10-Q
Reporting period: Three months ended November 30, 2011; filed January 9, 2012. WD-40 is a global consumer-products company selling multi-purpose maintenance products and homecare and cleaning products. Comparisons are with the three months ended November 30, 2010 unless otherwise noted. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2012 | Prior period | Change |
|---|---|---|---|
| Net sales | $84.9 million | $80.9 million | Up 5% |
| Gross profit / margin | $41.3 million / 48.7% | $41.2 million / 50.9% | Margin down 2.2 percentage points |
| Operating expenses | $31.0 million | $27.9 million | Up 11% |
| Operating income | $10.3 million | $13.3 million | Down 23% |
| Net income | $6.8 million | $9.1 million | Down 25% |
| Diluted EPS | $0.42 | $0.53 | Down $0.11 |
| Cash from operations | $12.8 million | $4.3 million | Up $8.5 million |
Sales grew 4% on a constant-currency basis; foreign exchange contributed approximately $1.1 million. Net income declined 27% on a constant-currency basis, despite a favorable foreign-exchange impact of about $0.2 million. Tax expense was $3.1 million, at a 31.6% effective rate, essentially unchanged year over year.
Sales and operating drivers
- Multi-purpose maintenance product sales rose 6% to $70.8 million; homecare and cleaning sales fell 2% to $14.1 million.
- By segment, Americas sales increased 4% to $40.6 million, Europe declined 2% to $30.1 million, and Asia-Pacific rose 30% to $14.2 million. On a constant-currency basis, Europe declined 4% and Asia-Pacific grew 25%.
- Gross margin pressure reflected higher petroleum-based materials and aerosol-can costs, other raw-material and manufacturing costs, supply-chain transition costs, product/channel mix, and higher promotional discounts. Pricing increases partly offset these pressures.
- Advertising and sales promotion expense increased 29% to $7.8 million. The company said fiscal 2012 investment in these expenses was expected to be 6.5%–8.0% of sales. Total advertising and promotional activity, including amounts recorded as reductions to sales, was $13.1 million versus $10.5 million.
- WD-40 Specialist launched in the U.S. in September 2011; management reported strong initial sales and planned launches in certain European markets in the following months.
Cash, debt and liquidity
- At November 30, cash and cash equivalents were $66.6 million, short-term investments $0.5 million, and total current assets $149.6 million. Current liabilities were $78.0 million.
- Debt was $32.0 million drawn on the $75.0 million revolving credit facility. The final $10.7 million balance on the former 7.28% term loan was repaid in October 2011. The company reported compliance with revolving-facility covenants, including the $40.0 million minimum trailing-12-month EBITDA requirement.
- Operating cash flow was $12.8 million; investing activities provided $0.1 million, including approximately $0.8 million from the sale of the Memphis warehouse. Financing activities used $0.4 million. Cash increased $10.3 million, to $66.6 million; exchange-rate movements reduced cash by $2.2 million.
- Inventory rose to $23.0 million from $17.6 million, primarily reflecting the North American supply-chain redesign and support for the new product line. Management expected inventory to remain higher than historical levels and fluctuate during the transition.
- Management stated that cash, operating cash flow and the revolving facility should be sufficient for operating and capital needs for at least the next 12 months. Of cash on hand, $48.7 million was held outside the U.S. and intended to be indefinitely reinvested; repatriation could create additional tax expense.
Capital returns, outlook and risks
- The company completed its prior $60.0 million repurchase authorization, buying 1,484,912 shares from December 2010 through November 30, 2011. A new $50.0 million repurchase plan was approved December 13, 2011.
- After quarter-end, the board raised the regular quarterly dividend 7%, from $0.27 to $0.29 per share, payable January 31, 2012.
- Management described a North American supply-chain redesign expected to improve service and reduce costs once implemented, but said transition costs may continue and inventory may fluctuate.
- Key disclosed uncertainties include volatile raw-material costs, promotional timing and customer orders, competition and distribution changes, economic conditions in Europe, foreign-exchange fluctuations, and the execution and costs of the supply-chain redesign. Management provided no specific consolidated sales or earnings guidance in the supplied filing text.
- Ordinary-course claims and product-liability matters were disclosed; none was expected to have a material adverse effect. The company reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether sales growth, particularly Asia-Pacific growth and the WD-40 Specialist launch, can be sustained without relying on promotional or timing effects.
- Whether pricing and cost management can restore gross margin after raw-material, freight, mix and supply-chain pressures.
- How the supply-chain redesign affects operating costs, service levels, and the elevated inventory balance as the transition proceeds.
- Cash availability and flexibility given foreign-held cash, the $32.0 million revolver balance, future repurchases, and the higher dividend.
- The filing reports 15,975,176 shares outstanding at November 30, while its cover reports 15,977,176 shares as of January 4, 2012; verify the applicable share count and any subsequent activity.