SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
20549
-----------------------------------
FORM 10-Q
QUARTERLY REPORTS UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended November 30, 1999
Commission File No. 0-6936-3
WD-40 COMPANY
(Exact Name of Registrant as specified in its charter)
Delaware 95-1797918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1061 Cudahy Place, San Diego, California 92110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 275-1400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock as of Jan 5, 1999 15,460,491
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WD-40 COMPANY
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
(unaudited)
November 30, 1999 August 31, 1999
----------------- ---------------
Current assets:
Cash and cash equivalents $ 8,129,000 $ 9,935,000
Trade accounts receivable, less allowance for
cash discounts and doubtful accounts
of $768,000 and $710,000 22,427,000 28,646,000
Product held at contract packagers 1,236,000 1,868,000
Inventories 6,290,000 6,104,000
Other current assets 4,314,000 5,594,000
----------------- ---------------
Total current assets 42,396,000 52,147,000
Property, plant, and equipment, net 4,447,000 3,861,000
Low income housing investments 3,295,000 3,312,000
Goodwill, net 30,205,000 30,792,000
Other assets 1,877,000 1,845,000
----------------- ---------------
$ 82,220,000 $ 91,957,000
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 9,113,000 $ 11,262,000
Accrued payroll and related expenses 1,921,000 3,328,000
Income taxes payable 3,457,000 3,311,000
Current portion of long-term debt 2,461,000 2,461,000
----------------- ---------------
Total current liabilities 16,952,000 20,362,000
Long-term debt 10,660,000 14,065,000
Deferred employee benefits 1,395,000 1,356,000
----------------- ---------------
29,007,000 35,783,000
Shareholders' equity:
Common stock, no par value, 18,000,000 shares
authorized -- shares issued and outstanding
of 15,562,811 and 15,603,146 7,960,000 8,931,000
Paid-in capital 509,000 509,000
Retained earnings 44,493,000 46,420,000
Accumulated other comprehensive income 251,000 314,000
----------------- ---------------
Total shareholders' equity 53,213,000 56,174,000
----------------- ---------------
$ 82,220,000 $ 91,957,000
================= ===============
(See accompanying notes to consolidated condensed financial statements.)
2
WD-40 COMPANY
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended
-------------------------------------------------
November 30,1999 November 30,1998
--------------------- -----------------------
Net sales $ 32,182,000 $ 29,617,000
Cost of product sold 14,735,000 13,116,000
------------------------ --------------------------
Gross profit 17,447,000 16,501,000
------------------------ --------------------------
Operating expenses:
Selling, general & administrative 8,354,000 7,573,000
Advertising & sales promotions 3,605,000 3,066,000
Amortization 599,000 269,000
------------------------ --------------------------
Income from operations 4,889,000 5,593,000
------------------------ --------------------------
Other income (expense)
Interest income (expense), net (205,000) 79,000
Other income (expense), net (56,000) 161,000
------------------------ --------------------------
Income before income taxes 4,628,000 5,833,000
Provision for income taxes 1,575,000 2,131,000
------------------------ --------------------------
Net Income $ 3,053,000 $ 3,702,000
======================== ==========================
Basic earnings per share $ 0.20 $ 0.24
======================== ==========================
Diluted earnings per share $ 0.20 $ 0.24
======================== ==========================
Basic common equivalent shares 15,570,449 15,596,751
======================== =======================
Diluted common equivalent shares 15,583,977 15,637,731
======================== =======================
(See accompanying notes to consolidated condensed financial statements.)
3
WD-40 COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended
-----------------------------------------------
November 30, 1999 November 30, 1998
----------------------- ----------------------
Cash flows from operating activities:
Net income $ 3,053,000 $ 3,702,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 842,000 473,000
Gain on sale of equipment (6,000) (1,000)
Deferred income taxes (12,000) (3,000)
Changes in assets and liabilities:
Trade accounts receivable 6,198,000 5,706,000
Product held at contract packagers 632,000 622,000
Inventories (190,000) (349,000)
Other assets 1,252,000 551,000
Accounts payable and accrued expenses (3,554,000) (889,000)
Income taxes payable 150,000 741,000
Long-term deferred employee benefits 39,000 41,000
----------------------- --------------------
Net cash provided by operating activities 8,404,000 10,594,000
----------------------- --------------------
Cash flows from investing activities:
Decrease (increase) in short-term investments 157,000 (1,760,000)
Proceeds from sale of equipment 48,000 19,000
Capital expenditures (880,000) (374,000)
----------------------- --------------------
Net cash used in investing activities (675,000) (2,115,000)
----------------------- --------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 47,000 359,000
Repurchase of common stock (1,019,000) (1,245,000)
Repayment of long-term debt (3,405,000) (5,000)
Dividends paid (4,980,000) (4,986,000)
----------------------- --------------------
Net cash used in financing activities (9,357,000) (5,877,000)
----------------------- --------------------
Effect of exchange rate changes on cash
and cash equivalents (22,000) (90,000)
----------------------- --------------------
Increase in cash and cash equivalents (1,650,000) 2,512,000
Cash and cash equivalents at beginning of period 9,741,000 8,572,000
----------------------- --------------------
Cash and cash equivalents at end of period $ 8,091,000 $ 11,084,000
======================= ====================
(See accompanying notes to consolidated condensed financial statements.)
4
WD-40 COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, WD-40 Manufacturing Company, WD-40 Company Ltd.
(U.K.), WD-40 Products (Canada) Ltd. and WD-40 Company (Australia) Pty. Ltd. All
significant intercompany transactions and balances have been eliminated.
The financial statements included herein have been prepared by the Company,
without audit, according to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
In the opinion of management, the unaudited financial information for the
interim periods shown reflects all adjustments (which include only normal,
recurring adjustments) necessary for a fair presentation thereof. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended August 31, 1999.
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
EARNINGS PER SHARE
Common stock equivalents of 13,528 and 40,980 shares for the three months ended
November 30, 1999 and 1998 were used to calculate diluted earnings per share.
Common stock equivalents are comprised of options granted under the Company's
stock option plan. There were no reconciling items in calculating the numerator
for basic and diluted earnings per share for any of the periods presented. For
the three months ended November 30, 1999 and 1998, 339,784 and 135,600 options
outstanding were excluded from the calculation of diluted EPS, as their effect
would have been antidilutive.
5
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
NEW PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB
Statement No. 133." SFAS No. 133 standardizes the accounting for derivative
instruments by requiring that all derivatives be recognized as assets and
liabilities and measured at fair value. The Company will be required to adopt
this standard during the year ending August 31, 2001. The Company has not
determined what impact, if any, the adoption of SFAS No. 133 will have on the
Company's consolidated financial position or results of operations.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
The Company is party to various claims, legal actions and complaints, including
product liability litigation, arising in the ordinary course of business. In the
opinion of management, all such matters are adequately covered by insurance or
will not have a material adverse effect on the Company's financial position or
results of operations.
NOTE 3 - COMPREHENSIVE INCOME
WD-40 Company's total comprehensive income was as follows:
Three months ended November 30,
1999 1998
--------------- --------------
Net income $ 3,053,000 $ 3,702,000
Other comprehensive income (loss) net of related tax effects:
Foreign currency translation adjustments (63,000) (105,000)
--------------- --------------
Total comprehensive income $ 2,990,000 $ 3,597,000
=============== ==============
NOTE 4 - SELECTED FINANCIAL STATEMENT INFORMATION
November 30, 1999 August 31, 1999
----------------- ---------------
Inventories
Raw Materials $ 715,000 $ 520,000
Finished Goods 5,575,000 5,584,000
----------------- ---------------
$ 6,290,000 $ 6,104,000
================= ===============
6
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
November 30, 1999 August 31, 1999
----------------- ---------------
Property, plant and equipment $ 8,469,000 $ 7,744,000
Accumulated depreciation (4,022,000) (3,883,000)
----------------- ---------------
$ 4,447,000 $ 3,861,000
================= ===============
Goodwill 34,991,000 34,991,000
Accumulated amortization (4,786,000) (4,199,000)
----------------- ---------------
$ 30,205,000 $ 30,792,000
================= ===============
NOTE 5 - SUBSEQUENT EVENTS
On December 14, 1999, the Company's Board of Directors declared a cash dividend
of $.32 per share payable on January 28, 2000 to shareholders of record on
January 7, 2000.
From December 21, 1999 through January 3, 2000, the Company repurchased 102,320
shares of its common stock on the open market for a total cost of approximately
$1,996,500. These purchases were made pursuant to a plan authorized by the Board
of Directors for management to acquire up to five percent of the Company's
outstanding shares from time to time in the open market subject to available
cash flow and market conditions.
At the Company's Annual Meeting of Shareholders held on December 14, 1999,
shareholders approved a change in the Company's state of incorporation from
California to Delaware and an increase in the number of authorized shares of
common stock from 18 million to 36 million. The reincorporation was accomplished
on December 15, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales were $32.2 million in the first quarter ended November 30, 1999, an
increase of 8.7% from net sales of $29.6 million in the comparable prior year
period. Sales for the Company's three trading blocs are broken down as follows
(in millions):
7
-------------------------------------------------
Three months ended November 30,
1999 1998
- -----------------------------------------------------------------------------
Americas $ 21.0 65% $ 18.0 61%
Europe 7.9 25% 9.1 31%
Asia Pacific 3.3 10% 2.5 8%
- -----------------------------------------------------------------------------
TOTAL $ 32.2 100% $ 29.6 100%
- -----------------------------------------------------------------------------
In the Americas region, sales for the first quarter ended November 30, 1999 were
up 17% over the prior year period, with increases in the U.S., Canada and Latin
America of 18%, 13% and 9% respectively. For the region, 82% of the sales in the
first quarter came from the U.S., and 18% came from Canada and Latin America.
This distribution reflects a slight change from the first quarter of fiscal 1999
in which 81% of the sales came from the U.S., and 19% came from Canada and Latin
America. A major reason for the increase in U.S. sales was the inclusion of
sales of the Lava brand of heavy-duty hand cleaners acquired in April 1999. Lava
sales were $2.1 million in the quarter, all in the U.S. In addition, sales of
WD-40 in the U.S. were up by $1.1 million due to the timing of promotions in the
quarter. Because of the high market penetration enjoyed by the WD-40 product
line as well as the extremely high percentage of WD-40 product sales to total
Company sales, the timing of promotions in the U.S. can have a material impact
on sales in any given quarter. Further, the ability to run a promotion is
somewhat outside the Company's control, as the retailer's own promotion schedule
is a major factor.
In Europe, first quarter sales were 14% lower than sales in the comparable
period of fiscal 1999, primarily due to lower sales volume in France and the
U.K. and the timing of purchases by distributors in the Middle East.
In the Asia/Pacific region, total sales were up 30% over the prior year period.
While the economic troubles continue to affect the economies of several of the
countries in the region, sales for the first quarter of the fiscal year were
strong. Sales in the region for the full year are expected to achieve the levels
recorded before the economic problems hit the region two years ago.
Gross profit was $17.4 million, or 54.2% of sales in the first quarter, up from
$16.5 million, or 55.7% of sales in the comparable period last year. Changes in
gross profit percentage from quarter to quarter are due primarily to changes in
average selling prices arising from both the mix of products sold and the mix of
customers and trade channels in which the products are sold. In addition, during
the first quarter, the Company incurred increased transportation costs related
to establishing Lava in the supply chain, as well as a higher level of price
discounting in response to competitive pressures in Latin America in advance of
moving to local manufacturing in the region. The Company expects continued
pressure on gross profit due to changes in its customer mix, as an increasing
portion of the Company's sales are made to fewer, but larger, customers with
greater purchasing power, negatively impacting selling prices and margins. The
Company has announced plans to raise the price of WD-40 in the U.S. effective
2/1/00 and this action should ease some of the pressure on gross profit.
8
A breakdown of gross profit by trading bloc by period follows (in millions):
--------------------------------------------------
Three months ended November 30,
1999 1998
- -------------------------------------------------------------------------------
Americas $11.2 53.5% $9.9 55.2%
Europe 4.6 58.7% 5.3 58.5%
Asia/Pacific 1.6 48.1% 1.3 49.6%
- -------------------------------------------------------------------------------
Total $17.4 54.2% $16.5 55.7%
- -------------------------------------------------------------------------------
Selling, general, & administrative expenses for the quarter ended November 30,
1999 increased to $8.4 million from $7.6 million for the comparable prior year
period. As a percentage of sales, SG&A increased slightly to 26.0% in the first
quarter from 25.6% last year. The increase in SG&A is due to an increased
investment in supply chain and information systems, restructuring of the sales
force, and increased freight costs on shipments to customers.
Advertising and sales promotion expense increased to $3.6 million for the first
quarter from $3.1 million for the first quarter last year. Advertising and sales
promotion as a percentage of sales increased to 11.2% in the first quarter from
10.4% in the comparable prior year period. The increase over the prior year is
primarily due to the timing of certain expenditures and promotions as well as
expenses related to the new Lava products. For the year the Company expects
advertising and sales promotion to be in the historical range of 10% of sales.
Amortization expense was $.6 million for the first quarter compared to $.3
million in the comparable period last year. The increased expense is due to the
amortization of goodwill associated with the Lava acquisition.
Income from operations was $4.9 million, or 15.2% of sales in the first quarter,
compared to $5.6 million, or 18.9% of sales in the first quarter of fiscal 1999.
The decline in income from operations as a percentage of sales was due to the
items discussed above, namely the lower gross profit percentage and increases in
SG&A, advertising and sales promotion and amortization costs.
The components of other income (expense) are shown below:
- -------------------------------------------------------------------------------
For the three months ended
November 30,
1999 1998
- ------------------------------------------------------------------------------
Interest Income (Expense), net ($205,000) $79,000
Foreign Currency Gains (Losses) (64,000) 137,000
Loss on Disposal of PP&E 6,000 1,000
Other Income 2,000 23,000
-------------------------------------
TOTAL ($261,000) $240,000
- -------------------------------------------------------------------------------
The change in interest income (expense) net from $79,000 of income for the
quarter ended November 30, 1998 to $205,000 of expense for the quarter ended
November 30, 1999 is due to the
9
interest costs associated with the Lava acquisition. To finance this
acquisition, the Company obtained a $16.0 million term loan from a bank. Foreign
currency exchange produced losses of $64,000 for the first quarter compared to
gains of $137,000 for the comparable prior year period.
The Company's effective tax rate for fiscal 2000 is 34% compared to 36.5% for
the year ended August 31, 1999. The difference in the effective tax rates is
due to different allocations of taxable income between taxing jurisdictions
from year to year primarily as a result of operational changes within the U.S.
Net income was $3.1 million, or $.20 per share on a fully diluted basis in the
first quarter of the fiscal year, versus $3.7 million, or $.24 in the comparable
period last year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1.8 million from $9.9 million at the end
of fiscal 1999 to $8.1 million at November 30, 1999. Accounts receivable
decreased by $6.2 million from $28.6 million to $22.4 million. Accounts
receivable was higher at the end of fiscal 1999 due to increased sales volumes
during the last two months of the year.
At November 30, 1999 working capital was $25.4 million, a decrease of $6.4
million from $31.8 million at the end of fiscal 1999. The current ratio of 2.5
at November 30, 1999 is slightly lower than the 2.6 at the end of fiscal 1999
primarily due to the Company's use of cash to repurchase shares of its common
stock. On September 30, 1998, the Company announced that its board of directors
had authorized the Company to repurchase up to five percent of its then
outstanding common shares. In fiscal 1999, the Company repurchased 53,620 shares
of the Company's common stock. During the first quarter of fiscal 2000, the
Company repurchased 43,279 shares of the Company's common stock at a cost of
$1.0 million. During the first quarter, current liabilities decreased by $3.4
million to $17.0 million at November 30, 1999.
The Company has an unsecured $20.0 million credit facility with Union Bank of
California. The line is comprised of a $16.0 million term loan which matures on
May 1, 2006 and a $4.0 million revolving line of credit facility which matures
on April 30, 2001. At November 30, 1999, $12.2 million remained due under the
term loan, and no borrowings were outstanding under the revolving line of
credit. This represents a decrease of $3.4 million in long-term debt from $15.6
million at August 31, 1999.
The Company's primary source of funds is cash flow from operations, which is
expected to provide sufficient funds to meet both short and long-term operating
needs, as well as future dividends. In an effort to augment the growth of the
business by leveraging its core competencies, the Company has announced that it
is seeking to make an acquisition of one or more branded products in related
markets. If the Company is successful in doing so, existing cash flow may not be
sufficient and additional outside financing may be required to support the
acquisition.
The Company spent $0.9 million for new capital assets during the first quarter,
primarily in the area of computer hardware and software and vehicle
replacements. In fiscal 2000, the Company
10
expects to spend approximately $2.2 million for new capital assets, primarily
for computer hardware and software in support of sales and operations,
production molds for new products, and vehicle replacements in Europe.
YEAR 2000 ISSUE
In 1997, the Company established a project team, reporting to the Year 2000
Compliance Committee of the board of directors, to ensure an uninterrupted
transition to the year 2000. The project encompassed software, hardware, EDI,
supply chain systems, third party contract packagers, environmental and safety
systems, facilities, utilities, supplier readiness and other outside agencies.
The project team assessed all internal systems and acquired the necessary
computer hardware and software to assure compliance of its internal systems.
The Company also contacted all key service suppliers, subcontractors, electronic
commerce customers, and other customers to assess their compliance. The team
determined that these key third parties had also taken appropriate steps to
ensure compliance with year 2000 requirements.
The Company also had developed contingency plans in the event that either
internal systems or systems of key outside parties were not compliant. Costs
related to the year 2000 issue were expensed as incurred except for certain
hardware and software acquisition costs which were considered capital
expenditures. All costs related to the year 2000 issue have been funded through
operating cash flows, and have not been material.
The Company has not experienced any business disruption due to year 2000 issues
in the period from January 1, 2000 to date.
MARKET RISK
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in the market value of its investments. In the normal
course of its business, the Company employs established policies and procedures
to manage its exposure to fluctuations in foreign currency values and changes in
the market value of its investments.
The Company's objective in managing its exposure to foreign currency exchange
rate fluctuations is to reduce the impact of adverse fluctuations in earnings
and cash flows associated with foreign currency exchange rate changes.
Accordingly, the Company's U.K. subsidiary utilizes forward contracts to hedge
its exposure on converting cash balances maintained in French francs, German
marks, Italian lira and Spanish pesetas into sterling. The Company regularly
monitors its foreign exchange exposures to ensure the overall effectiveness of
its foreign currency hedge positions. However, there can be no assurance the
Company's foreign currency hedging activities will substantially offset the
impact of fluctuations in currency exchange rates on its results of operations
and financial position.
11
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.
Actual future results and trends may differ materially from historical results
or those anticipated depending upon factors including, but not limited to, the
rate of sales growth in Latin America, The Middle East, the Asia/Pacific region
and direct European countries, the impact of customer mix on gross margins, the
effect of increasing WD-40 selling prices on gross margins, the amount of future
advertising and promotional expenses, the effect of future income tax
provisions, the impact of one or more acquisitions, the amount of future capital
expenditures, foreign exchange rates and fluctuations in those rates, the
effects of, and changes in, worldwide economic conditions, particularly in the
Asia/Pacific region, the impact of the year 2000 issue, and legal proceedings.
Readers also should be aware that while the Company does, from time to time,
communicate with securities analysts, it is against the Company's policy to
disclose to them any material non-public information or other confidential
commercial information. Accordingly, shareholders should not assume that the
Company agrees with any statement or report issued by any analyst irrespective
of the content of the statement or report. Further, the Company has a policy
against issuing or confirming financial forecasts or projections issued by
others. Accordingly, to the extent that reports issued by securities analysts
contain any projections, forecasts or opinions, such reports are not the
responsibility of the Company.
12
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit No. Description
----------- -----------
Certificate of Incorporation and Bylaws
3 (a) Certificate of Incorporation of WD-40 Company.
3 (b) Bylaws of WD-40 Company.
Material Contracts
10 The form of Indemnity Agreement between the
registrant and its executive officers and directors
is incorporated herein by reference from the
registrant's Proxy Statement filed by the registrant
with the SEC on November 9, 1999 (Appendix D
thereto.)
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended November 30, 1999.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WD-40 COMPANY
Registrant
/s/ Thomas J. Tranchina
Date: January 14, 2000 -----------------------------
Thomas J. Tranchina
Chief Financial Officer
(Principal Financial Officer)
13