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WDFC > SEC Filings for WDFC > Form 10-Q on 8-Apr-2013All Recent SEC Filings

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Form 10-Q for WD 40 CO


8-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

As used in this report, the terms "we," "our," "us" and "the Company" refer to WD-40 Company and its wholly-owned subsidiaries, unless the context suggests otherwise. Amounts and percents in tables and discussions may not total due to rounding.

The following information is provided as a supplement to, and should be read in conjunction with, the unaudited condensed consolidated financial statements and notes thereto included in Part I-Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2012, which was filed with the Securities and Exchange Commission ("SEC") on October 22, 2012.

In order to show the impact of changes in foreign currency exchange rates on our results of operations, we have included constant currency disclosures, where necessary, in the Overview and Results of Operations sections which follow. Constant currency disclosures represent the translation of our current fiscal year revenues and expenses from the functional currencies of our subsidiaries to U.S. dollars using the exchange rates in effect for the corresponding period of the prior fiscal year. We use results on a constant currency basis as one of the measures to understand our operating results and evaluate our performance in comparison to prior periods. Results on a constant currency basis are not in accordance with accounting principles generally accepted in the United States of America ("non-GAAP") and should be considered in addition to, not as a substitute for, results prepared in accordance with GAAP.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. This report contains forward-looking statements, which reflect the Company's current views with respect to future events and financial performance.

These forward-looking statements are subject to certain risks and uncertainties. The words "aim," "believe," "expect," "anticipate," "intend," "estimate" and other expressions that indicate future events and trends identify forward-looking statements. These statements include, but are not limited to, references to the near-term growth expectations for multi-purpose maintenance products and homecare and cleaning products, the impact of changes in product distribution, competition for shelf space, the impact of competition on product pricing, the level of promotional and advertising spending, plans for and success of product innovation, the impact of new product introductions on the growth of sales, the impact of customer mix and costs of raw materials, components and finished goods on gross margins, the impact of promotional programs on sales, the rate of sales growth in the Asia-Pacific segment, direct European countries and Eastern and Northern Europe, foreign currency exchange rates and fluctuations in those rates, the impact of changes in inventory management, the effect of future income tax provisions and audit outcomes on tax rates, and the effects of, and changes in, worldwide economic conditions and legal proceedings and other risk factors. The Company undertakes no obligation to revise or update any forward-looking statements.

Actual events or results may differ materially from those projected in forward-looking statements due to various factors, including, but not limited to, those identified in Part I-Item 1A, "Risk Factors," in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2012, and in the Company's Quarterly Reports on Form 10-Q, which may be updated from time to time.

Overview

The Company

WD-40 Company, based in San Diego, California, is a global consumer products company dedicated to delivering unique, high value and easy-to-use solutions for a wide variety of maintenance needs of "doer" and "on-the-job" users by leveraging and building upon the Company's fortress of brands. We market multi-purpose maintenance products - under the WD-40®, 3-IN-ONE®, and BLUE WORKS® brand names. Currently included in the WD-40 brand are the WD-40 multi-use product and the WD-40 Specialist® and WD-40 BikeTM product lines. We launched the WD-40 Specialist product line in the United States ("U.S.") during the first quarter of fiscal year 2012 and continued to launch the product line in Canada, Latin America, Asia and select countries in Europe throughout fiscal year 2012 and going into fiscal year 2013. The WD-40 Specialist product line has contributed to sales of the multi-purpose maintenance products since its initial launch. In the fourth quarter of fiscal year 2012, we developed the WD-40 Bike product line, which is focused on a comprehensive line of bicycle maintenance products that include wet and dry chain lubricants, heavy-duty degreasers, foaming bike wash and frame protectants that are designed specifically for the avid cyclist, bike enthusiasts and mechanics. We started to launch certain products in this line in the U.S. during the first quarter of fiscal year 2013, but the focus for such sales is to smaller independent bike dealers rather than larger retailers. As a result of this, initial sales have been immaterial and sales are expected to remain immaterial in its initial year of launch. We also market the following homecare and cleaning brands: X-14® mildew stain remover and automatic toilet bowl cleaners, 2000 Flushes® automatic toilet bowl cleaners, Carpet Fresh® and No Vac® rug and room deodorizers, Spot Shot® aerosol and liquid carpet stain removers, 1001® household cleaners and rug and room deodorizers and Lava® and Solvol® heavy-duty hand cleaners.


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Our brands are sold in various locations around the world. Multi-purpose maintenance products are sold worldwide in markets throughout North, Central and South America, Asia, Australia and the Pacific Rim, Europe, the Middle East and Africa. Homecare and cleaning products are sold primarily in North America, the U.K., Australia and the Pacific Rim. We sell our products primarily through mass retail and home center stores, warehouse club stores, grocery stores, hardware stores, automotive parts outlets, sport retailers, independent bike dealers and industrial distributors and suppliers.

Highlights

The following summarizes the financial and operational highlights for our business during the six months ended February 28, 2013:

• Consolidated net sales increased $11.1 million, or 6%, for the six months ended February 28, 2013 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a material impact on sales for the six months ended February 28, 2013 compared to the corresponding period of the prior fiscal year.

† Multi-purpose maintenance products sales, which include the WD-40, 3-IN-ONE and BLUE WORKS brands, were $157.2 million, up 11% from the same period last fiscal year.

† Homecare and cleaning products sales, which include all other brands, were $24.8 million, down 14% from the same period last fiscal year.

• Americas segment sales were $85.6 million, down 1% compared to the same period last fiscal year. Europe segment sales were $67.6 million, up 16% compared to the same period last fiscal year. Asia-Pacific segment sales were $28.8 million, up 10% compared to the same period last fiscal year.

• Gross profit as a percentage of net sales increased to 50.5% for the six months ended February 28, 2013 compared to 48.8% for the corresponding period of the prior fiscal year.

• Consolidated net income increased $4.0 million, or 23%, for the six months ended February 28, 2013 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had a favorable impact of $0.2 million on net income for the six months ended February 28, 2013. Thus, on a constant currency basis, consolidated net income would have increased $3.8 million, or 22%, for the six months ended February 28, 2013 compared to the corresponding period of the prior fiscal year.

• Diluted earnings per common share for the six months ended February 28, 2013 were $1.35 versus $1.07 in the prior fiscal year period.

• Progress continues to be made on the development and launch of new multi-purpose maintenance products. The Company launched the WD-40 Specialist product line in the U.S. during the first quarter of fiscal year 2012 and continued to launch the product line in Canada, Latin America, Asia and select countries in Europe throughout fiscal year 2012 and going into fiscal year 2013.

• Share repurchases continue to be executed under the current $50.0 million share buy-back plan, which was approved by the Company's Board of Directors in December 2011. During the six months ended February 28, 2013, the Company repurchased an additional 252,958 shares at an average price of $49.06 per share, bringing the total cost of the repurchases to $33.7 million under this plan.


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• The project which we started in early fiscal year 2012 to redesign our supply chain architecture in North America has progressed well and is nearing completion. Once fully integrated in late fiscal year 2013, we expect this redesign to result in overall cost savings within our supply chain network, improved service to our customers and an increase in our inventory over historical levels. Although we have incurred additional costs and our inventory levels have fluctuated during the transition phases of this project, we have seen some stabilization of our inventory levels and have started to realize net manufacturing cost savings in recent periods as a result of this supply chain redesign.

Our core strategic initiatives and the areas where we will continue to focus our time, talent and resources for the remainder of fiscal year 2013 and in future periods include: (i) maximizing the WD-40 brand through geographic expansion and market penetration; (ii) becoming the global leader in the Company's product categories within our prioritized platforms; (iii) developing strategic business relationships; (iv) pursuing global innovation efforts; and (v) attracting, developing and retaining people.

Results of Operations

Three Months Ended February 28, 2013 Compared to Three Months Ended February 29, 2012

Operating Items

The following table summarizes operating data for our consolidated operations
(in thousands, except percentages and per share amounts):



                                                                 Three Months Ended
                                                                                          Change from
                                          February 28,         February 29,               Prior Year
                                              2013                 2012            Dollars          Percent
Net sales:
Multi-purpose maintenance products       $       75,447       $       71,409       $  4,038                6 %
Homecare and cleaning products                   11,265               14,557         (3,292 )            (23 )%

Total net sales                                  86,712               85,966            746                1 %
Cost of products sold                            42,586               43,823         (1,237 )             (3 )%

Gross profit                                     44,126               42,143          1,983                5 %
Operating expenses                               29,691               27,434          2,257                8 %

Income from operations                   $       14,435       $       14,709       $   (274 )             (2 )%

Net income                               $       10,461       $       10,584       $   (123 )             (1 )%

Earnings per common share - diluted      $         0.66       $         0.65       $   0.01                2 %

Net Sales by Segment

The following table summarizes net sales by segment (in thousands, except
percentages):



                                            Three Months Ended
                                                                   Change from
                        February 28,       February 29,            Prior Year
                            2013               2012          Dollars        Percent
        Americas       $       40,217     $       46,023     $ (5,806 )          (13 )%
        Europe                 32,420             28,001        4,419             16 %
        Asia-Pacific           14,075             11,942        2,133             18 %

        Total          $       86,712     $       85,966     $    746              1 %


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Americas

The following table summarizes net sales by product line for the Americas
segment (in thousands, except percentages):



                                                                Three Months Ended
                                                                                          Change from
                                        February 28,          February 29,                Prior Year
                                            2013                  2012             Dollars          Percent
Multi-purpose maintenance products     $       32,516        $       35,306        $ (2,790 )             (8 )%
Homecare and cleaning products                  7,701                10,717          (3,016 )            (28 )%

Total                                  $       40,217        $       46,023        $ (5,806 )            (13 )%

% of consolidated net sales                        46 %                  53 %

Sales in the Americas segment, which includes the U.S., Canada and Latin America, decreased to $40.2 million, down $5.8 million, or 13%, for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a material impact on sales for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year.

Sales of multi-purpose maintenance products in the Americas segment decreased $2.8 million, or 8%, for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year. This sales decrease was primarily driven by lower sales of WD-40 multi-purpose maintenance products in the U.S., which were down 11% for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year. The sales decrease in the U.S. was primarily due to a significant promotional program for the WD-40 multi-use products which was conducted with a key customer during the second quarter of fiscal year 2012 but was not conducted during the second quarter of the current fiscal year. Although the overall sales of the multi-purpose maintenance products decreased in the Americas segment, sales of the WD-40 Specialist product line increased from period to period due to new distribution and product offerings in the U.S. and the launch of this product line in Canada during the first quarter of fiscal year 2013. As a result of fluctuations in the promotional patterns with certain of our key customers, particularly those in the mass retail, home center and warehouse club channels in the U.S., it is common for our sales to vary period over period and year over year.

Sales of homecare and cleaning products in the Americas segment decreased $3.0 million, or 28%, for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year. Sales of homecare and cleaning products in the U.S., which is where the majority of such sales originate, decreased 32% from period to period. This sales decrease was driven primarily by lower sales of the Carpet Fresh and Spot Shot products and the 2000 Flushes automatic toilet bowl cleaners, which were down 54%, 33% and 30%, respectively, in the U.S. for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year. While each of our homecare and cleaning products continue to generate positive cash flows, we have continued to experience decreased sales for these products primarily due to lost distribution, reduced product offerings, competition, category declines and the volatility of orders from and promotional programs with certain of our customers, particularly those in the warehouse club and mass retail channels. In March 2013, the Board of Directors authorized management to evaluate the strategic alternatives for the homecare and cleaning products in the Americas segment. To date, this evaluation is in its early stages and no decisions have been made relative to the future strategic plans for these brands.

For the Americas segment, 78% of sales came from the U.S., and 22% of sales came from Canada and Latin America combined for the three months ended February 28, 2013 compared to distribution for the three months ended February 29, 2012, when 81% of sales came from the U.S., and 19% of sales came from Canada and Latin America combined.

Europe

The following table summarizes net sales by product line for the Europe segment
(in thousands, except percentages):



                                                                Three Months Ended
                                                                                          Change from
                                        February 28,          February 29,                Prior Year
                                            2013                  2012             Dollars          Percent
Multi-purpose maintenance products     $       30,676        $       25,872        $  4,804               19 %
Homecare and cleaning products                  1,744                 2,129            (385 )            (18 )%

Total                                  $       32,420        $       28,001        $  4,419               16 %

% of consolidated net sales                        38 %                  33 %


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Sales in the Europe segment increased to $32.4 million, up $4.4 million, or 16%, for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year had a favorable impact on sales. Sales for the three months ended February 28, 2013 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $31.6 million in the Europe segment. Thus, on a constant currency basis, sales would have increased by $3.6 million, or 13%, for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year.

The countries in Europe where we sell through a direct sales force include the U.K., Italy, France, Iberia (which includes Spain and Portugal) and the Germanics sales region (which includes Germany, Austria, Denmark, Switzerland, Sweden and the Netherlands). Overall, sales from direct markets increased $2.7 million, or 14%, for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year. We experienced sales increases throughout most of the Europe segment for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year, with percentage increases in sales as follows: the Germanics sales region, 34%; France, 18%; Iberia 11% and Italy, 6%. Sales in the U.K. remained relatively constant period over period.

The sales increase in the direct markets was primarily due to new distribution, a higher level of replenishment orders and the positive impacts of sales price increases which were implemented in certain locations and markets throughout Europe during the second quarter of fiscal year 2013. Although sales in the direct markets increased period over period, sales in these markets were negatively impacted throughout fiscal year 2012 primarily due to the particularly adverse economic conditions which existed in Europe during this time period. To date in our fiscal year 2013, the Europe economy has started to show signs of stabilization and this has positively impacted our sales levels, but it is uncertain whether this stability will continue into future periods. Sales from direct markets accounted for 69% of the Europe segment's sales for the three months ended February 28, 2013 compared to 70% of the Europe segment's sales for the corresponding period of the prior fiscal year.

In the countries in which we sell through local distributors, sales increased $1.7 million, or 20%, for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year primarily due to increased sales of WD-40 multi-use products in all markets and initial sales of the WD-40 Specialist product line in Eastern Europe and the Middle East. Overall, sales in the distributor markets were increased from period to period primarily due to the continued growth of the base business in key markets, particularly those in Eastern and Northern Europe. In general, the markets in which we sell through local distributors have remained more stable in recent periods from an economic standpoint than other countries in Europe. The distributor markets accounted for 31% of the Europe segment's total sales for the three months ended February 28, 2013, compared to 30% for the corresponding period of the prior fiscal year.

Asia-Pacific

The following table summarizes net sales by product line for the Asia-Pacific
segment (in thousands, except percentages):



                                                                 Three Months Ended
                                                                                          Change from
                                         February 28,          February 29,                Prior Year
                                             2013                  2012             Dollars         Percent
Multi-purpose maintenance products      $       12,255        $       10,232        $  2,023              20 %
Homecare and cleaning products                   1,820                 1,710             110               6 %

Total                                   $       14,075        $       11,942        $  2,133              18 %

% of consolidated net sales                         16 %                  14 %

Sales in the Asia-Pacific segment, which includes Australia, China and other countries in the Asia region, increased to $14.1 million, up $2.1 million, or 18%, for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a material impact on sales for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year.


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Sales in Asia, which represented 69% of the total sales in the Asia-Pacific segment for the three months ended February 28, 2013, increased $1.8 million, or 24%, for the second quarter of fiscal year 2013 as compared to the same period of the prior fiscal year primarily due to the stable economic conditions which currently exist throughout most of the Asia region. The distributor markets in the Asia region experienced a sales increase of $1.6 million, or 31%, for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year, primarily due to the continued growth of the WD-40 multi-use products throughout the distributor markets, including those in Indonesia, the Philippines and Singapore. Sales in China increased $0.2 million, or 10%, for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year due to a higher level of promotional activities from period to period and the impacts of sales price increases for certain products which became effective in the first quarter of fiscal year 2013.

Sales in Australia increased $0.3 million, or 6%, for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year primarily due to stable economic conditions and the ongoing growth of our base business.

Gross Profit

Gross profit increased to $44.1 million for the three months ended February 28, 2013 compared to $42.1 million for the corresponding period of the prior fiscal year. As a percentage of net sales, gross profit increased to 50.9% for the three months ended February 28, 2013 compared to 49.0% for the corresponding period of the prior fiscal year due to a variety of items which positively impacted gross margin, including sales price increases, the level of discounts offered to our customers, lower manufacturing costs in our Asia-Pacific segment and the net lower costs associated with the restructure of our North American supply chain. These favorable items were slightly offset by the negative impacts of changes in foreign currency exchange rates, costs associated with petroleum-based materials and aerosol cans and other raw materials and manufacturing costs.

Gross margin was positively impacted by 0.9 percentage points for the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year due to sales price increases. These sales price increases were implemented in certain locations and markets in the first half of fiscal year 2013 and throughout most of fiscal year 2012. Advertising, promotional and other discounts, which are recorded as a reduction to sales, decreased during the three months ended February 28, 2013 compared to the corresponding period of the prior fiscal year, primarily in the Americas segment, positively impacting gross margin by 0.9 percentage points. The decrease in such discounts was due to a lower percentage of sales, particularly those for our homecare and cleaning products, being subject to promotional allowances during the three months ended February 28, 2013 compared to the corresponding period in the prior fiscal year. In general, the timing of advertising, promotional and other discounts may cause fluctuations in gross margin from period to period. The costs associated with certain promotional activities are recorded as a reduction to sales while others are recorded as advertising and sales promotion expenses. The costs of promotional activities such as sales incentives, trade promotions, coupon offers and cash discounts that we give to our customers are recorded as a reduction to sales. The costs associated with promotional activities that we pay to third parties, which include costs for advertising, administration of coupon programs, consumer promotions, product demonstration, public relations, agency costs, package design expenses and market research costs, are recorded as advertising and sales promotion expenses in our consolidated statements of operations.

In addition, gross margin was positively impacted by 0.1 percentage points from period to period due to our North American supply chain restructure project. We incurred higher warehousing costs, handling fees and freight costs, all of which are associated with the storage and movement of our product between our third-party contract manufacturers and distribution centers, during the second quarter of fiscal year 2013 compared to the same time period of the prior fiscal . . .

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