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 February 28,1999
Commission File No. 0-6936-3
WD-40 COMPANY
(Exact Name of Registrant as specified in its charter)
California 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 April 6, 1998 15,598,636
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WD-40 COMPANY
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
(Unaudited)
February 28, 1999 August 31, 1998
----------------- ---------------
Current assets:
Cash and cash equivalents $ 4,370,000 $ 8,572,000
Short-term investments 5,705,000 6,093,000
Trade accounts receivable, less allowance for
cash discounts and doubtful accounts
of $574,000 and $585,000 33,978,000 27,037,000
Product held at contract packagers 2,428,000 2,038,000
Inventories 1,627,000 1,697,000
Other current assets 4,721,000 4,329,000
------------------ ---------------
Total current assets 52,829,000 49,766,000
Property, plant, and equipment, net 3,680,000 3,593,000
Low income housing investments 3,345,000 3,378,000
Goodwill, net 11,902,000 12,468,000
Other assets 1,878,000 1,740,000
------------------ ---------------
$ 73,634,000 $ 70,945,000
------------------ ---------------
------------------ ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 10,430,000 $ 6,906,000
Accrued payroll and related expenses 2,751,000 3,059,000
Income taxes payable 3,793,000 3,115,000
Current portion of long-term debt 861,000 830,000
------------------ ---------------
Total current liabilities 17,835,000 13,910,000
Long-term debt 73,000 916,000
Deferred employee benefits 1,273,000 1,121,000
------------------ ---------------
19,181,000 15,947,000
Shareholders' equity:
Common stock, no par value, 18,000,000 shares
authorized -- shares issued and outstanding
of 15,598,636 and 15,633,308 8,854,000 9,680,000
Paid-in capital 321,000 321,000
Retained earnings 44,833,000 44,318,000
Accumulated other comprehensive income 445,000 679,000
------------------ ---------------
Total shareholders' equity 54,453,000 54,998,000
------------------ ---------------
$ 73,634,000 $ 70,945,000
------------------ ---------------
------------------ ---------------
(See accompanying notes to consolidated condensed financial statements.)
2
WD-40 COMPANY
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
-----------------------------------------------------------------------------------
February 28 February 28 February 28 February 28
----------------- ----------------- ----------------- ---------------
1999 1998 1999 1998
----------------- ----------------- ----------------- ----------------
Net sales $ 41,709,000 $ 39,174,000 $ 71,326,000 $ 72,771,000
Cost of product sold 18,583,000 16,754,000 31,699,000 31,072,000
----------------- ----------------- ----------------- ----------------
Gross profit 23,126,000 22,420,000 39,627,000 41,699,000
----------------- ----------------- ----------------- ----------------
Operating expenses:
Selling, general & administrative,
and amortization expense 8,636,000 8,497,000 16,478,000 16,407,000
Advertising & sales promotions 3,817,000 4,021,000 6,883,000 7,092,000
----------------- ----------------- ----------------- ----------------
Income from operations 10,673,000 9,902,000 16,266,000 18,200,000
----------------- ----------------- ----------------- ----------------
Other income (expense) 25,000 (9,000) 265,000 (143,000)
----------------- ----------------- ----------------- ----------------
Income before income taxes 10,698,000 9,893,000 16,531,000 18,057,000
Provision for income taxes 3,907,000 3,559,000 6,038,000 6,498,000
----------------- ----------------- ----------------- ----------------
Net Income $ 6,791,000 $ 6,334,000 $ 10,493,000 $ 11,559,000
----------------- ----------------- ----------------- ----------------
----------------- ----------------- ----------------- ----------------
Basic earnings per share $ 0.44 $ 0.41 $ 0.67 $ 0.74
----------------- ----------------- ----------------- ----------------
----------------- ----------------- ----------------- ----------------
Diluted earnings per share $ 0.43 $ 0.40 $ 0.67 $ 0.74
----------------- ----------------- ----------------- ----------------
----------------- ----------------- ----------------- ----------------
Basic common equivalent shares 15,597,704 15,590,237 15,597,225 15,576,963
----------------- ----------------- ----------------- ----------------
----------------- ----------------- ----------------- ----------------
Diluted common equivalent shares 15,662,081 15,664,618 15,649,355 15,654,407
----------------- ----------------- ----------------- ----------------
----------------- ----------------- ----------------- ----------------
(See accompanying notes to consolidated condensed financial statements.)
3
WD-40 COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
---------------------------------------------
February 28, 1999 February 28, 1998
----------------- -----------------
Cash flows from operating activities:
Net income $ 10,493,000 $ 11,559,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization expense 968,000 1,074,000
Loss on sale of equipment 225,000
Changes in assets and liabilities:
Trade accounts receivable (7,266,000) (7,806,000)
Product held at contract packagers (391,000) (409,000)
Inventories 46,000 1,499,000
Other assets (404,000) 1,347,000
Accounts payable and accrued expenses 3,294,000 2,041,000
Income taxes payable 736,000 2,576,000
Long-term deferred employee benefits 152,000 21,000
----------------- -----------------
Net cash provided by operating activities 7,628,000 12,127,000
----------------- -----------------
Cash flows from investing activities:
Net change in short-term investments 388,000
Proceeds from sale of equipment 43,000 520,000
Capital expenditures (580,000) (835,000)
----------------- -----------------
Net cash used in investing activities (149,000) (315,000)
----------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 420,000 1,046,000
Repurchase of common stock (1,245,000)
Repayment of long-term debt (819,000) (680,000)
Dividends paid (9,977,000) (9,968,000)
----------------- -----------------
Net cash used in financing activities (11,621,000) (9,602,000)
----------------- -----------------
Effect of exchange rate changes on cash
and cash equivalents (60,000) 151,000
----------------- -----------------
(Decrease) increase in cash and cash equivalents (4,202,000) 2,361,000
Cash and cash equivalents at beginning of period 8,572,000 10,868,000
----------------- -----------------
Cash and cash equivalents at end of period $ 4,370,000 $ 13,229,000
----------------- -----------------
----------------- -----------------
(See accompanying notes to consolidated condensed financial statements.)
4
WD-40 COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FEBRUARY 28,1999
(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 Company Ltd. (U.K.), WD-40 Products
(Canada) Ltd., WD-40 Company (Australia) Pty. Ltd. and WD-40 Manufacturing
Company. 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, 1998.
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 64,377 and 74,381 shares for the three months ended
February 28, 1999 and 1998 were used to calculate diluted earnings per share.
Common stock equivalents of 52,130 and 77,444 shares for the six months ended
February 28, 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.
5
NEW PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." 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, 2000. 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
Effective September 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in the annual financial
statements. This Statement requires all items recognized under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other
financial statements. For the interim periods, only a total for comprehensive
income shall be reported in the condensed financial statements.
SFAS No. 130 requires foreign currency translation adjustments to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130. WD-40 Company's
total comprehensive income was as follows:
Three months ended February 28, 1999 1998
--------------- -------------
Net income $ 6,791,000 $ 6,334,000
Other comprehensive income (loss) net of related tax effects:
Foreign currency translation adjustments (129,000) (473,000)
--------------- -------------
Total comprehensive income $ 6,662,000 $ 5,861,000
--------------- -------------
--------------- -------------
6
Six months ended February 28, 1999 1998
-------------- -------------
Net income $ 10,493,000 $ 11,559,000
Other comprehensive income (loss) net of related tax effects:
Foreign currency translation adjustments (234,000) 429,000
-------------- --------------
Total comprehensive income $ 10,259,000 $ 11,988,000
-------------- -------------
-------------- -------------
NOTE 4 - SUBSEQUENT EVENT
On March 25, 1999, the Company agreed to acquire all of the worldwide trademarks
and other intangible assets relating to the LAVA brand soap products from Block
Drug Company Inc. under an asset purchase agreement. The acquisition will
include some equipment, inventory and the exclusive rights to manufacture, sell
and distribute this product line. The acquisition will be financed in part by
Company funds and in part by the proceeds of long-term borrowings. The purchase
price and other financial aspects of the transaction have not been disclosed
pending completion of the purchase.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SECOND QUARTER OF FISCAL YEAR 1999 COMPARED TO SECOND QUARTER OF
FISCAL YEAR 1998
Net sales were $41.7 million in the 2nd quarter of fiscal 1999 vs. $39.2 million
in the comparable prior year period, representing an increase of 6.5%. Sales for
the Company's three trading blocs are broken down as follows (in millions):
--------------------------------------------------
Three months ended February 28, 1999 1998
----------------------------------------------------------------------------------------------
Americas $ 29.5 71% $ 27.4 70%
Europe 9.6 23% 9.5 24%
Asia/Pacific 2.6 6% 2.3 6%
----------------------------------------------------------------------------------------------
TOTAL $ 41.7 100% $ 39.2 100%
----------------------------------------------------------------------------------------------
In the Americas region, 86% of the sales in the second quarter of fiscal 1999
came from the U.S., and 14% came from Canada and Latin America. This
distribution reflects a change from the second quarter of fiscal 1998 in
which 83% of the sales came from the U.S., and 17% of the sales came from
Canada and Latin America. Sales in the US increased 11% from the second
quarter of fiscal 1998 and sales to Canada increased by 23%, while sales to
Latin America decreased by 27%. The increases in both U.S. sales and Canada
sales are primarily due to the timing of sales promotions during the quarter.
Because of the high market penetration enjoyed by the WD-40
7
product line as well as the extremely high percentage of WD-40 product sales
to total Company sales, the timing of promotions can have a material impact
on sales in any given quarter. The decrease in Latin America sales is
primarily due to the region's economic weakness. While Brazil has been the
hardest hit, Chile, Venezuela and Ecuador also had significantly reduced
sales in the second quarter of fiscal 1999. Mexico and Argentina sales have
remained strong while sales to the Caribbean have experienced significant
growth.
In Europe, second quarter fiscal 1999 sales were 1% higher than sales in the
comparable period of fiscal 1998, primarily due to increases in France and
Germany. Second quarter sales from the U.K., which is a mature and
well-established market for the Company's products, were down 2%, and this
area accounted for 36% of the region's sales in the second quarter of fiscal
1999, compared to 37% in the second quarter of fiscal 1998. The principal
European countries where the Company sells through a direct sales force -
France, Germany and Spain - together accounted for 29% of the region's sales
in the second quarter of fiscal 1999, compared to 25% in the comparable
period of fiscal 1998. Second quarter fiscal 1999 sales in France and Germany
each grew by 22% from the comparable period last year. Second quarter sales
in Spain grew more moderately and were up 1% from the comparable period last
year. In markets where the Company sells through marketing distributors,
sales decreased by 7% from the comparable prior year period. A large part of
this decrease stemmed from Russia, where economic conditions have negatively
impacted sales. The Company expects the majority of its growth in the region
to continue to come from France, Germany and Spain during the remainder of
this fiscal year.
In the Asia/Pacific region, second quarter sales were up 15% from the second
quarter of fiscal 1998. This increase is in part due to the fact that much of
the negative effects of the economic situation in Asia were not apparent
until the second quarter of the prior fiscal year and significantly affected
sales in that period. While sales for the second quarter of fiscal 1999 were
up significantly from the comparable prior year period, the Company continues
to expect only moderate growth from this region in the near future.
Gross profit was $23.1 million, or 55.4% of sales in the second quarter of
fiscal 1999, down from 22.4 million or 57.2% in the comparable period of
fiscal 1998. A breakdown of gross profit by trading bloc by period follows
(in millions):
---------------------------------------------------------
Three months ended February 28, 1999 1998
-------------------------------------------------------------------------------------------------------
Americas $16.3 55.2% $15.7 57.4%
Europe 5.5 58.1% 5.5 58.1%
Asia/Pacific 1.3 48.3% 1.2 51.2%
-------------------------------------------------------------------------------------------------------
Total $23.1 55.4% $22.4 57.2%
-------------------------------------------------------------------------------------------------------
In the Americas, the U.S., Latin America and Canada each had their gross profits
percentages for the second quarter of fiscal 1999 decrease from the comparable
prior year period. This decrease in gross profit percentages is primarily the
result of lower average selling prices due to the timing of promotions in the
quarter.
8
In Asia/Pacific, the decline in gross profit percentage in the second quarter
of fiscal 1999 from the comparable prior year period is primarily due to a
reduction in average selling prices resulting from product mix, promotional
timing and pricing responses to the Asian economic crisis.
Selling, general, & administrative expenses increased slightly to $8.4
million for the second quarter of fiscal 1999 from $8.2 million for the
second quarter of fiscal 1998. As a percentage of sales, SG&A decreased to
20.1% in the second quarter of fiscal 1999 from 20.8% in the comparable prior
year period. The $200,000 increase in SG&A expenses for the second quarter of
fiscal 1999 over the comparable prior year period is primarily due to
increased commissions for the Latin American direct countries and increased
employee related costs for bonuses and relocation. The decrease in SG&A as a
percentage of sales is due to the fact that a large portion of these expenses
are fixed, rather than variable, and with higher sales in the quarter, the
SG&A percentage decreased.
Advertising and sales promotion expense decreased to $3.8 million for the
second quarter of fiscal 1999 from $4.0 million in the second quarter of
fiscal 1998. Advertising and sales promotion as a percentage of sales
decreased to 9.2% in the second quarter of fiscal 1999 down from 10.3% in the
comparable period of fiscal 1998. The decrease in advertising and sales
promotion both in dollars and as a percentage of sales is primarily due to
the timing of expenditures for promotional programs. While the second quarter
of fiscal 1999 was below the comparable prior year period, the Company
expects its annual advertising and sales promotion to be in the historical
range of 10% of sales.
Income from operations was $10.7 million, or 25.6% of sales in the second
quarter of fiscal 1999, compared to $9.9 million, or 25.3% of sales in the
comparable prior year period. The increase in income from operations was due
to the items discussed above, namely the increase in net sales and the lower
gross profit percentage.
Other income increased to $25,000 in the second quarter of fiscal 1999 from a
loss of 9,000 in the second quarter of fiscal 1998. The increase was
primarily due to reduced foreign currency exchange losses for the three
months ended February 28, 1999 versus the comparable period in fiscal 1998 as
well as reduced losses on the disposal of fixed assets.
The provision for income taxes was 36.5% of taxable income in the first
quarter of fiscal 1999, compared to 36.0% in the comparable prior year
period. The Company is continuing to evaluate its income tax provision in
light of expected shifts in taxable income throughout the world and expects
the effective tax rate will remain at the increased level throughout the
fiscal year.
Net income was $6.8 million, or $.43 per share on a fully diluted basis in
the second quarter of fiscal 1999, versus $6.3 million, or $.40 in the
comparable prior year period.
9
SIX MONTHS ENDED FEBRUARY 28, 1999 VS. SIX MONTHS ENDED FEBRUARY 28, 1998
Net sales were $71.3 million for the first six months of fiscal 1999 vs.
$72.8 million in the comparable prior year period, representing a decrease of
2.0%. Sales for the Company's three trading blocs are broken down as follows
(in millions):
--------------------------------------------------
Six months ended February 28, 1999 1998
----------------------------------------------------------------------------------------------
Americas $ 47.4 67% $ 48.1 66%
Europe 18.7 26% 19.3 27%
Asia/Pacific 5.2 7% 5.4 7%
----------------------------------------------------------------------------------------------
TOTAL $ 71.3 100% $ 72.8 100%
----------------------------------------------------------------------------------------------
In the Americas region, 84% of the sales for the first six months of fiscal
1999 came from the U.S., and 16% came from Canada and Latin America. While
this distribution is unchanged from the first six months of fiscal 1998,
sales in Canada increased 17% over the comparable prior year period and sales
in Latin America declined 16% from the comparable prior year period. Sales in
the U.S. for the first six months of fiscal 1999 were 1% lower than U.S.
sales for the first six months of fiscal 1998. In the U.S. sales variability
on a quarterly or yearly basis is primarily due to the timing and nature of
sales promotions. The decline in Latin America sales is primarily due to the
economic slow down that is affecting several Latin American countries where
the Company typically has strong sales-most notably Brazil, Venezuela,
Colombia and Chile.
In Europe, six month fiscal 1999 sales were 3% lower than sales in the
comparable period of fiscal 1998, primarily due to decreases in the U.K. and
in certain distributor markets. Six month sales from the U.K., which is a
mature and well-established market for the Company's products, were down 7%,
accounting for 37% of the region's sales in fiscal 1999, compared to 39% in
the comparable prior year period. The principal European countries where the
Company sells through a direct sales force - France, Germany and Spain -
together accounted for 29% of the region's sales in fiscal 1999, compared to
25% in the comparable period of fiscal 1998. Fiscal 1999 sales in France,
Germany and Spain grew by 16%, 17% and 7% respectively, from the comparable
prior year period. Sales to the distributor markets declined 13% from the
prior year. This decline is primarily due to the fragile economic conditions
in Russia and softer than expected sales in Italy. For the balance of the
fiscal year, the region's principal growth is expected to continue to come
from the direct European countries of France, Germany and Spain.
In the Asia/Pacific region, sales were down 5% from the comparable prior year
period. The decrease is due to the fact that the full effects of the Asian
economic crisis were not felt until the second quarter of fiscal 1998. For
the year, Asia/Pacific sales are expected to exceed fiscal 1998.
Gross profit was $39.6 million, or 55.6% of sales for the first six months of
fiscal 1999, down from $ 41.7 million or 57.3% in the comparable period of
fiscal 1998. Changes in gross profit percentage from period to period 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. The Company expects continued pressure on gross profit due
to changes in its customer
10
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. Therefore, the gross margin percentages experienced in
fiscal 1999 to date are more indicative of percentages that might be achieved
in the future.
A breakdown of gross profit by trading bloc by period follows (in millions):
---------------------------------------------------------
Six months ended February 28, 1999 1998
-------------------------------------------------------------------------------------------------------
Americas $26.2 55.2% $27.7 57.6%
Europe 10.9 58.3% 11.2 58.1%
Asia/Pacific 2.5 48.9% 2.8 51.5%
-------------------------------------------------------------------------------------------------------
Total $39.6 55.6% $41.7 57.3%
-------------------------------------------------------------------------------------------------------
Selling, general, & administrative expenses increased slightly to $15.9
million for the first six months of fiscal 1999 from $15.7 million for the
comparable prior year period. As a percentage of sales, SG&A rose to 22.3% in
fiscal 1999 from 21.6% in fiscal 1998. The increase in SG&A expenses for the
second quarter of fiscal 1999 over the comparable prior year period is
primarily due to increased commissions for the Latin American direct
countries and increased employee related costs for bonuses, relocation and
retirement benefits.
Advertising and sales promotion expense decreased to $6.9 million for the
first six months of fiscal 1999 from $7.1 million in the first six months of
fiscal 1998. Advertising and sales promotion as a percentage of sales
remained at 9.7% for the first six months of fiscal 1999 and fiscal 1998. The
decrease in these expenses is due to the timing of expenditures for
promotional programs. For the year, the Company expects advertising and sales
promotion to be in the historical range of 10% of sales.
Income from operations was $16.3 million, or 22.8% of sales for the first six
months of fiscal 1999, compared to $18.2 million, or 25.0% of sales in the
comparable prior year period. The decrease in income from operations was due
to the items discussed above, namely the decrease in net sales and the lower
gross profit percentage.
Other income increased to $265,000 for the first six months of fiscal 1999
from a loss of $143,000 in the first six months of fiscal 1998. The increase
is primarily due to the current year reversal of fiscal 1998 foreign currency
exchange losses and a small current year gain on the sale of fixed assets
compared to the fiscal 1998 loss on the disposal of automobiles. For fiscal
1999, the Company has experienced favorable exchange rate movements in
countries where it operates in local currencies and has put in place
programs, particularly in the U.K., to better manage currency conversion.
The provision for income taxes was 36.5% of taxable income for the first six
months of fiscal 1999, compared to 36.0% in the comparable prior year period.
The Company is continuing to evaluate its income tax provision in light of
expected shifts in taxable income throughout the world and expects the effective
tax rate will remain at the increased level throughout the fiscal year.
11
Net income was $10.5 million, or $.67 per share on a fully diluted basis for
the first six months of fiscal 1999, versus $11.6 million, or $.74 in the
comparable prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments decreased by $4.6
million from $14.7 million at the end of fiscal 1998 to $10.1 million at the
end of the second quarter of fiscal 1999. The decreases in cash and cash
equivalents and short-term investments resulted primarily from the repurchase
of common stock in the first quarter of fiscal 1999, the repayment of
long-term debt and the significant increase in accounts receivable during the
quarter. 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. During the first quarter of fiscal 1999, the
Company repurchased 53,620 shares of the Company's common stock which reduced
current assets by $1.25 million. Accounts receivable increased by $6.9
million from the end of fiscal 1998 due to the timing of sales and extended
promotional terms during January and February. The cash effect of the
increase in accounts receivable has been partially offset by the $3.5 million
increase in accounts payable and accrued liabilities.
During each quarter of fiscal 1999, the Company has paid a common stock
dividend of $ .32 per share, aggregating $ 10.0 million for the six months of
fiscal 1999. On March 30, 1999, the Board of Directors again declared a
common stock dividend of $ .32 per share payable on April 30, 1999 to
shareholders of record on April 12, 1999.
At February 28, 1999, working capital was $35.0 million, a decrease of $0.9
million from $35.9 million at the end of fiscal 1998. The current ratio of
3.0 at February 28,1999 is slightly lower than the 3.6 at the end of fiscal
1998 . Current liabilities increased by $3.9 million to $17.8 million at
February 28, 1999 from $13.9 million at August 31, 1998.
The Company has an unsecured $10.0 million line of credit with a commercial
bank which expires on November 30, 2000. To date, no funds have been borrowed
under this line of credit. On March 25, 1999, the Company agreed to acquire
all of the worldwide trademarks and other intangible assets relating to the
LAVA brand soap products from Block Drug Company Inc. under an asset purchase
agreement. In order to complete the acquisition of the LAVA product line, the
Company anticipates that it will borrow funds under a new long term debt
facility provided by a bank. Finalization of the terms of this debt facility
is currently in progress.
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.
The Company spent $0.6 million for new capital assets during the first six
months of fiscal 1999, primarily in the area of improvements to existing
facilities and computer hardware and software. In fiscal 1999, the Company
expects to spend approximately $1.6 million for new capital assets, primarily
for computer hardware and software in support of sales and operations.
12
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 encompasses software, hardware, EDI,
supply chain systems, third party contract packagers, environmental and
safety systems, facilities, utilities, supplier readiness and other outside
agencies. To date, the project team has assessed all internal systems and
acquired the necessary computer hardware and software to assure compliance of
its internal systems.
The Company has also contacted all key service suppliers, subcontractors,
electronic commerce customers, and other customers to assess their
compliance. Based on these contacts, management believes that all key outside
parties will be compliant in a timely manner, however, there can be no
assurance that there will not be a material adverse effect on the Company if
third parties do not convert their systems in a timely manner and in a way
that is compatible with the Company's systems.
Noncompliance with year 2000 requirements may cause a material adverse impact
on the results of operations in several ways: (1) in the event that the
Company's internal systems are not compliant, the Company may be unable to
efficiently process customer orders, manage production, deliver products, and
perform other related functions; (2) noncompliance by a service provider
could result in the Company being deprived of a resource necessary for
ongoing operations, such as electrical power, communications, and
transportation; (3) noncompliance by one or more subcontractors could result
in the Company being unable to manufacture a sufficient supply of finished
goods to meet demand; and, (4) noncompliance by one or more customers could
result in the customers' inability to order, receive, and sell the Company's
products.
The Company is in the process of developing contingency plans in the event
that either internal systems or systems of key outside parties are not
compliant. Costs related to the year 2000 issue are expensed as incurred
except for certain hardware and software acquisition costs which may be
considered capital expenditures. All costs related to the year 2000 issue
have been funded through operating cash flows, and have not been material.
EURO COMPLIANCE
The Company transacts business in Europe through it's wholly-owned U.K.
subsidiary. To meet possible demands on its information systems brought on by
the introduction of the Euro, the Company's U.K. subsidiary is currently
updating its information systems to become Euro compatible and expects
implementation to be completed in the third quarter of fiscal 1999.
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
13
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, 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.
The fair value of the Company's investments in marketable securities at
February 28, 1999 was $5,705,000. The Company's investment policy is to
manage its portfolio of marketable securities in order to preserve principal
and liquidity while maximizing the return. The Company's portfolio is
primarily invested in variable rate demand notes issued by state and local
governmental agencies. These notes offer liquidity on regularly scheduled
auction dates, on a one-week or five-week cycle and are traded at face value,
thereby eliminating risk of principal loss. While these notes depend upon the
creditworthiness of the issuers, the Company attempts to minimize credit risk
by limiting its investment in any one particular state or local agency.
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, Asia/Pacific and direct European
countries, the impact of customer mix on gross margins, 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
14
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.
15
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit No. Description
----------- -----------
Articles of Incorporation and By-Laws
3 (a) The Restated Articles of Incorporation are incorporated
by reference from the Registrant's Form 10-K Annual
Report filed November 13, 1995, Exhibit 3 (a)
thereto.
3 (b) The Certificate of Amendment of Restated Articles of
Incorporation is incorporated by reference from the
Registrant's Form 10-K/A filed December 5, 1997, Exhibit
3 (b) thereto.
3 (c) The Restated By-Laws are incorporated by reference from
the Registrant's Form 10-Q filed April 14, 1998, Exhibit
3 (c) 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 February 28, 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
Date: April 14, 1999 /s/ THOMAS J. TRANCHINA
-----------------------
Thomas J. Tranchina
Chief Financial Officer
(Principal Financial Officer)
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