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 May 31, 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 July 6, 1999 15,600,636
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WD-40 COMPANY
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
(Unaudited)
May 31, 1999 August 31, 1998
------------ ---------------
Current assets:
Cash and cash equivalents $ 9,830,000 $ 8,572,000
Short-term investments 151,000 6,093,000
Trade accounts receivable, less allowance for
cash discounts and doubtful accounts
of $622,000 and $585,000 22,976,000 27,037,000
Product held at contract packagers 1,568,000 2,038,000
Inventories 5,464,000 1,697,000
Other current assets 3,933,000 4,329,000
------------- ------------
Total current assets 43,922,000 49,766,000
Property, plant, and equipment, net 3,534,000 3,593,000
Low income housing investments 3,328,000 3,378,000
Goodwill, net 31,371,000 12,468,000
Other assets 1,898,000 1,740,000
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$ 84,053,000 $ 70,945,000
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 7,194,000 $ 6,906,000
Accrued payroll and related expenses 2,578,000 3,059,000
Income taxes payable 1,757,000 3,115,000
Current portion of long-term debt 861,000 830,000
------------- ------------
Total current liabilities 12,390,000 13,910,000
Long-term debt 16,072,000 916,000
Deferred employee benefits 1,313,000 1,121,000
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29,775,000 15,947,000
Shareholders' equity:
Common stock, no par value, 18,000,000 shares
authorized -- shares issued and outstanding
of 15,600,396 and 15,633,308 8,880,000 9,680,000
Paid-in capital 509,000 321,000
Retained earnings 44,465,000 44,318,000
Accumulated other comprehensive income 424,000 679,000
------------- ------------
Total shareholders' equity 54,278,000 54,998,000
------------- ------------
$ 84,053,000 $ 70,945,000
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(See accompanying notes to consolidated condensed financial statements.)
2
WD-40 COMPANY
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
May 31 May 31 May 31 May 31
------------ ------------- ------------- -------------
1999 1998 1999 1998
------------ ------------- ------------- -------------
Net sales $ 33,469,000 $ 31,831,000 $ 104,795,000 $ 104,602,000
Cost of product sold 14,472,000 14,235,000 46,171,000 45,307,000
------------ ------------- ------------- -------------
Gross profit 18,997,000 17,596,000 58,624,000 59,295,000
Operating expenses:
Selling, general & administrative 8,289,000 7,493,000 24,229,000 23,228,000
Advertising & sales promotions 2,989,000 3,648,000 9,872,000 10,740,000
Amortization 379,000 336,000 917,000 1,008,000
------------ ------------- ------------- -------------
Income from operations 7,340,000 6,119,000 23,606,000 24,319,000
Other income (expense):
Interest income (expense), net 103,000 160,000 233,000 433,000
Other income (expense), net (168,000) 59,000 (33,000) (357,000)
------------ ------------- ------------- -------------
Income before income taxes 7,275,000 6,338,000 23,806,000 24,395,000
Provision for income taxes 2,651,000 2,277,000 8,689,000 8,775,000
------------ ------------- ------------- -------------
Net Income $ 4,624,000 $ 4,061,000 $ 15,117,000 $ 15,620,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Basic earnings per share $ 0.30 $ 0.26 $ 0.97 $ 1.00
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Diluted earnings per share $ 0.30 $ 0.26 $ 0.97 $ 1.00
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Basic common equivalent shares 15,599,552 15,629,257 15,598,009 15,594,650
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Diluted common equivalent shares 15,657,755 15,695,318 15,652,130 15,668,030
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
(See accompanying notes to consolidated condensed financial statements.)
3
WD-40 COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
---------------------------------------
May 31, 1999 May 31, 1998
------------ ------------
Cash flows from operating activities:
Net income $ 15,117,000 $ 15,620,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization expense 1,576,000 1,601,000
Loss on sale of equipment 34,000 289,000
Changes in assets and liabilities:
Trade accounts receivable 3,803,000 1,843,000
Product held at contract packagers 470,000 (286,000)
Inventories (3,793,000) 1,098,000
Other assets 384,000 676,000
Accounts payable and accrued expenses (118,000) (1,695,000)
Income taxes payable (1,323,000) 302,000
Long-term deferred employee benefits 189,000 19,000
------------- ------------
Net cash provided by operating activities 16,339,000 19,467,000
------------- ------------
Cash flows from investing activities:
Net change in short-term investments 5,946,000 (200,000)
Proceeds from sale of equipment 58,000 607,000
Business acquisition expenditures- Lava brand (19,830,000)
Capital expenditures (701,000) (1,039,000)
------------- ------------
Net cash used in investing activities (14,527,000) (632,000)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 633,000 1,167,000
Repurchase of common stock (1,245,000)
Repayment of long-term debt (824,000) (686,000)
Proceeds from issuance of long-term debt 16,000,000
Dividends paid (14,969,000) (14,970,000)
------------- ------------
Net cash used in financing activities (405,000) (14,489,000)
------------- ------------
Effect of exchange rate changes on cash
and cash equivalents (149,000) 45,000
------------- ------------
Increase in cash and cash equivalents 1,258,000 4,391,000
Cash and cash equivalents at beginning of period 8,572,000 10,868,000
------------- ------------
Cash and cash equivalents at end of period $ 9,830,000 $ 15,259,000
------------- ------------
------------- ------------
(See accompanying notes to consolidated condensed financial statements.)
4
WD-40 COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MAY 31,1999
(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 58,203 and 66,061 shares for the three months ended
May 31, 1999 and 1998 were used to calculate diluted earnings per share. Common
stock equivalents of 54,121 and 73,380 shares for the nine months ended May 31,
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, 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
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 May 31, 1999 1998
--------------- -------------
Net income $ 4,624,000 $ 4,061,000
Other comprehensive income (loss) net of related tax effects:
Foreign currency translation adjustments (21,000) (168,000)
--------------- -------------
Total comprehensive income $ 4,063,000 $ 3,893,000
--------------- -------------
--------------- -------------
6
Nine months ended May 31, 1999 1998
--------------- --------------
Net income $ 15,117,000 $ 15,620,000
Other comprehensive income (loss) net of related tax effects:
Foreign currency translation adjustments (255,000) 261,000
--------------- --------------
Total comprehensive income $ 14,862,000 $ 15,881,000
--------------- --------------
--------------- --------------
NOTE 4 - ACQUISITION
On April 30, 1999, the registrant acquired all of the worldwide trademarks and
other intangible assets relating to the purchase of the Lava brand heavy-duty
hand cleaner product line from Block Drug Company, Inc. The acquisition of
assets also included inventory on hand.
The registrant paid cash in the amount of $19.0 million for the Lava brand,
including intangible assets and certain equipment. The purchase price for the
brand represented approximately two times recent annual revenues of the Lava
brand. In addition, the registrant purchased approximately $3.4 million in
product inventory and incurred approximately $750,000 in costs related to the
transaction. To finance the transaction, the registrant borrowed $16.0 million
from a commercial bank and used cash from the liquidation of short-term
investments for the balance.
The following summary presents the results of operations for the nine months
ended May 31, 1999 and 1998, on an unaudited pro forma basis, as if the
acquisition completed during the nine months ended May 31, 1999 had occurred
September 1, 1997. The pro forma operating results are for illustrative purposes
only and do not purport to be indicative of the actual results which would have
occurred had the transactions been consummated as of those earlier dates, nor
are they indicative of results of operations which may occur in the future.
Nine Months Ended (unaudited)
-------------------------------------------------
May 31 May 31
1999 1998
---------- -----------
Net sales $ 111,147,000 $ 111,757,000
---------------- -----------------
---------------- -----------------
Net income $ 13,385,000 $ 13,869,000
---------------- -----------------
---------------- -----------------
Basic earnings per share $ 0.86 $ 0.89
---------------- -----------------
---------------- -----------------
Diluted earnings per share $ 0.86 $ 0.89
---------------- -----------------
---------------- -----------------
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THIRD QUARTER OF FISCAL YEAR 1999 COMPARED TO THIRD QUARTER OF FISCAL YEAR 1998
Net sales were $33.5 million in the third quarter of fiscal 1999 vs. $31.8
million in the comparable prior year period, representing an increase of 5.1%.
Sales for the Company's three trading blocs are broken down as follows (in
millions):
------------------------------------------------
Three months ended May 31, 1999 1998
---------------------------------------------------------------------------------
Americas $ 21.2 63% $ 22.8 72%
Europe 8.9 27% 6.9 22%
Asia/Pacific 3.4 10% 2.1 6%
---------------------------------------------------------------------------------
TOTAL $ 33.5 100% $ 31.8 100%
---------------------------------------------------------------------------------
In the Americas region, 82% of the sales in the third quarter of fiscal 1999
came from the U.S., and 18% came from Canada and Latin America. This
distribution reflects a change from the third quarter of fiscal 1998 in which
79% of the sales came from the U.S., and 21% of the sales came from Canada and
Latin America. Sales in all sectors of the region decreased in the third quarter
of fiscal 1999 from the comparable prior year period. Sales in the U.S.
decreased 3% from the third quarter of fiscal 1998, while sales in Canada
decreased by 36% and sales in Latin America decreased by 11%. The decreases in
U.S. and Canada sales are primarily due to the timing of sales promotions year
to year, and, in the case of Canada, a weakness in the Canadian dollar. Third
quarter fiscal 1999 sales fell off after a particularly strong second quarter
where record sales were achieved in response to promotions in January and
February. Latin America sales decreased from the prior year primarily due to
adverse economic conditions that have been building in several Latin American
countries. In these countries, including Brazil, Colombia, Argentina and Chile,
the Company's ability to remain competitive by exporting from the U.S. and
conducting business in U.S. dollars while local currencies depreciate in value
has been severely impacted. Consequently, in certain of these countries, the
Company is developing plans for local manufacturing of some of its products
under a royalty arrangement in order to remain competitive.
Sales of the Lava brand, which was acquired on April 30, 1999, were not
significant during the quarter as the Company was only able to benefit from one
month's sales of the brand. Currently, this brand is sold only in the U.S.
In Europe, third quarter fiscal 1999 sales were 28% higher than sales in the
comparable period of fiscal 1998, primarily due to increases in the U.K.,
Germany, Spain, the Middle East and certain distributor markets. Third quarter
sales in the U.K. were up 30%, and this area accounted for 36% of the region's
sales in the quarter, compared to 35% in the third quarter of fiscal 1998. Those
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 third quarter of fiscal 1999,
8
compared to 31% in the comparable last year. Sales in Germany and Spain grew by
33% and 25% respectively, from the comparable period last year while sales in
France grew more moderately and were up 4% from last year. In order to
capitalize on the market potential in the country, the Company has decided to
change its strategy in Italy, and will convert that country from a distributor
to a direct market in September 1999.
In the Asia/Pacific region, sales continued to rebound in the third quarter and
were up $1.3 million or 63% from the third quarter of fiscal 1998. This is due
in large part to the economic recovery in many of the Asian markets as the
Company's sales were most negatively affected by the Asian economic crisis in
the second and third quarters of fiscal 1998. It appears that as a whole the
region has experienced the worst and is now in the initial stages of recovery.
While sales for both the second and third quarters of fiscal 1999 were up
significantly from the comparable prior year periods, the Company expects more
moderate growth from this region in the fourth quarter.
Gross profit was $19.0 million, or 56.8% of sales in the third quarter of fiscal
1999, up from $17.6 million or 55.3% in the comparable period of fiscal 1998. A
breakdown of gross profit by trading bloc by period follows (in millions):
------------------------------------------------
Three months ended May 31, 1999 1998
---------------------------------------------------------------------------------
Americas $11.9 56.3% $12.7 55.6%
Europe 5.3 59.7% 3.9 56.1%
Asia/Pacific 1.8 52.0% 1.0 49.4%
---------------------------------------------------------------------------------
Total $19.0 56.8% $17.6 55.3%
---------------------------------------------------------------------------------
In the Americas, the U.S. and Latin America had an increase in their gross
profit percentages for the third quarter of fiscal 1999 from the comparable
prior year period. Canada had a decrease in the gross profit percentage for the
third quarter of fiscal 1999 from the comparable prior year period. The increase
in gross profit percentage in the U.S. is primarily the result of changes in the
mix in products sold from period to period, while the increase in Latin America
is due to increased sales in countries where the Company sells direct. Sales to
these countries achieve a higher margin than sales to the distributor markets.
In Europe, the increase in the gross profit margin is attributable to a current
year reduction in product costs, product mix and the increase in sales to direct
markets.
In Asia/Pacific, the increase in gross profit percentage in the third quarter of
fiscal 1999 from the comparable prior year period is primarily due increased
sales volumes this year.
Selling, general, & administrative expenses increased to $8.3 million for the
third quarter of fiscal 1999 from $7.5 million for the third quarter of fiscal
1998. As a percentage of sales, SG&A grew to 24.8% in the third quarter of
fiscal 1999 from 23.5% in the comparable prior year period. The $800,000
increase in SG&A expenses for the third quarter of fiscal 1999 over the
comparable prior year period is primarily due to increased employee related
costs for bonuses, warehouse and freight costs, professional services and bad
debts.
9
Advertising and sales promotion expense decreased to $3.0 million for the third
quarter of fiscal 1999 from $3.6 million in the third quarter of fiscal 1998.
Advertising and sales promotion as a percentage of sales decreased to 8.9% in
the third quarter of fiscal 1999 down from 11.5% 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 third 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 $7.3 million, or 21.9% of sales in the third quarter
of fiscal 1999, compared to $6.1 million, or 19.2% 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 increase in gross
profit percentage.
Other income decreased from a gain of $59,000 in the third quarter of fiscal
1998 to a loss of $168,000 in the third quarter of fiscal 1999. The decrease was
primarily due to foreign currency exchange losses in Europe where the pound
sterling increased significantly against the currencies of many continental
European countries.
The provision for income taxes was 36.5% of taxable income in the third 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 $4.6 million, or $.30 per share on a fully diluted basis in the
third quarter of fiscal 1999, versus $4.1 million, or $.26 in the comparable
prior year period.
NINE MONTHS ENDED MAY 31, 1999 VS. NINE MONTHS ENDED MAY 31, 1998
Net sales were $104.8 million for the first nine months of fiscal 1999 vs.
$104.6 million in the comparable prior year period, representing an increase of
0.2%. Sales for the Company's three trading blocs are broken down as follows (in
millions):
------------------------------------------------
Nine months ended May 31, 1999 1998
---------------------------------------------------------------------------------
Americas $ 68.7 66% $ 70.9 68%
Europe 27.5 26% 26.2 25%
Asia/Pacific 8.6 8% 7.5 7%
---------------------------------------------------------------------------------
TOTAL $ 104.8 100% $ 104.6 100%
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10
In the Americas region, 83% of the sales for the first nine months of fiscal
1999 came from the U.S., and 17% came from Canada and Latin America. For the
first nine months of fiscal 1998, 82% of the sales came from the U.S. and 18%
came from Canada and Latin America. Sales in Canada decreased 5% over the
comparable prior year period and sales in Latin America declined 15% from the
comparable prior year period. While reported Canada sales declined from the
comparable prior year period, Canada sales in local currency increased slightly,
so the entire sales decline can be attributed to the weakness of the Canadian
dollar. Sales in the U.S. for the first nine months of fiscal 1999 were 2% lower
than U.S. sales for the first nine 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 and the decline in Latin America sales is primarily
due to the economic slow down that is affecting several Latin American
countries.
In Europe, nine month fiscal 1999 sales were 5% higher than sales in the
comparable period of fiscal 1998, primarily due to increases in the U.K.,
Germany, France and Spain. Nine month sales from the U.K., which is a mature and
well-established market for the Company's products, were up 2%, and accounted
for 37% of the region's sales in fiscal 1999, compared to 38% 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 27% in the comparable
period last year due to increased market penetration and brand awareness of the
WD-40 product in these countries. For the balance of the fiscal year, the
Company expects the majority of its growth in the region to continue to come
from France, Germany and Spain.
In the Asia/Pacific region, sales were up 14% from the comparable prior year
period. The increase is due to the economic recovery now occurring in several of
the major Asian markets. Fiscal 1999 annual sales in Asia are expected to exceed
that of the prior year.
Gross profit was $58.6 million, or 55.9% of sales for the first nine months of
fiscal 1999, down from $59.3 million or 56.7% 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 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):
------------------------------------------------
Nine months ended May 31, 1999 1998
---------------------------------------------------------------------------------
Americas $38.1 55.5% $40.4 57.0%
Europe 16.2 58.8% 15.1 57.6%
Asia/Pacific 4.3 50.2% 3.8 50.9%
---------------------------------------------------------------------------------
Total $58.6 55.9% $59.3 56.7%
---------------------------------------------------------------------------------
11
Selling, general, & administrative expenses increased to $24.2 million for the
first nine months of fiscal 1999 from $23.2 million for the comparable prior
year period. As a percentage of sales, SG&A rose to 23.1% in fiscal 1999 from
22.2% in fiscal 1998. The increase in SG&A expenses for the period ended May 31,
1999 over the comparable prior year period is primarily due to increased
employee related costs for bonuses, payroll taxes, relocation and retirement
benefits, increased computer vendor services and increased warehousing and
distribution costs.
Advertising and sales promotion expense decreased to $9.9 million for the first
nine months of fiscal 1999 from $10.7 million in the first nine months of fiscal
1998. Advertising and sales promotion as a percentage of sales decreased to 9.4%
for the first nine months of fiscal 1999 from 10.3% for the comparable prior
year period. 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 $23.6 million, or 22.5% of sales for the first nine
months of fiscal 1999, compared to $24.4 million, or 23.2% 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 gross profit percentage.
Other expense decreased to $33,000 for the first nine months of fiscal 1999 from
$357,000 in the first nine months of fiscal 1998. The decrease is primarily due
to the small current year gain on the sale of equipment compared to the fiscal
1998 loss of $300,000 on the disposal of the automobile fleet. Foreign currency
exchange gains and losses moved to a loss of $95,000 in the first nine months of
fiscal 1999 from $40,000 for the first nine months of fiscal 1998. For fiscal
1999, the Company has put in place programs, particularly in the U.K., to better
manage the risks of foreign currency exposure.
The provision for income taxes was 36.5% of taxable income for the first nine
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.
Net income was $15.1 million, or $.97 per share on a fully diluted basis for the
first nine months of fiscal 1999, versus $15.6 million, or $1.00 in the
comparable prior year period.
PRODUCT STRATEGY
The Company recently announced a comprehensive product strategy designed to
provide growth in revenues. The strategy includes maintaining market share in
developed markets and growing existing brands in developing markets; adding new
products under these brands; and, acquiring brands where an identifiable
gap exists between brand performance and brand potential. In line with this
strategy, the Company announced its decision to discontinue T.A.L. 5, the
longer-lasting lubricant developed several years ago, as it no longer fits this
strategic plan. In the third quarter of
12
this fiscal year, sales of T.A.L. 5 were approximately $80,000, or 0.2% of total
sales, and in the first three quarters of the year were $932,000, or 0.9% of the
total sales. The cost of discontinuing this brand has not yet been determined
but is not expected to be significant.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments decreased by $4.7 million
from $14.7 million at the end of fiscal 1998 to $10.0 million at the end of the
third quarter of fiscal 1999. Accounts receivable decreased by $4.5 million from
the end of fiscal 1998 due to increased collection efforts and the timing of
sales and extended promotional terms in place at August 31, 1998. Inventories
increased to $5.5 million from $1.7 at the end of fiscal 1998 reflecting
inventory purchased as part of the Lava acquisition. In addition, the decreases
in cash and cash equivalents and short-term investments included the repurchase
of common stock in the first quarter of fiscal 1999, the payment of dividends,
and the acquisition of the Lava brand during the period. 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.
During each quarter of fiscal 1999, the Company has paid a common stock dividend
of $ .32 per share, aggregating $15.0 million for the nine months of fiscal
1999. On June 29, 1999, the Board of Directors declared a common stock dividend
of $ .32 per share payable on July 30, 1999 to shareholders of record on July
12, 1999.
At May 31, 1999, working capital was $31.5 million, a decrease of $4.4 million
from $35.9 million at the end of fiscal 1998. The current ratio of 3.5 at May
31,1999 is slightly lower than the 3.6 at the end of fiscal 1998 . Current
liabilities decreased by $1.5 million to $12.4 million at May 31, 1999 from
$13.9 million at August 31, 1998.
The Company has an unsecured $4.0 million line of credit with a commercial bank
which expires on November 30, 2000. On April 30, 1999, the Company acquired 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. To finance the acquisition of the Lava product line, the Company
borrowed $16.0 million under a new long term debt facility provided by a local
commercial bank.
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 $0.7 million for new capital assets during the first nine
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.
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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 its 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 fourth 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
14
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 May 31,
1999 was $151,000. The Company's investment policy is to manage its portfolio of
marketable securities in order to preserve principal and liquidity while
maximizing the return.
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, the
impact of discontinuing the T.A.L. 5 brand, 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.
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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.
(1) On May 14, 1999, the Registrant filed a Form 8-K to report the
Company's acquisition, on April 30, 1999, of the Lava brand
heavy-duty hand cleaner product line from Block Drug Company, Inc.
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: July 13, 1999 /s/ Thomas J. Tranchina
--------------------------
Thomas J. Tranchina
Chief Financial Officer
(Principal Financial Officer)
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