Liquidity and Capital Resources
Overview
In light of the recent liquidity issues experienced in the global credit and capital markets, we have further evaluated the Company’s financial position and identified steps we will take to maintain our strong financial health. We believe the Company is well positioned to weather the uncertainty in the global credit and capital markets due to our strong balance sheet, efficient business model and growing and diversified global revenues. We are managing all aspects of our business including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing margin enhancement strategies and seeking new opportunities for growth.
Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from operations and cash available from our $10 million revolving credit facility, which was obtained in September 2008. At August 31, 2008, we had a total of $42.0 million in cash and cash equivalents. We believe that our existing cash and cash equivalents at August 31, 2008, the liquidity under our revolving credit facility and our anticipated cash flows from operations will be sufficient to meet the projected operating and capital requirements for our current business plans. We consider various factors when reviewing liquidity needs and plans for available cash on hand including: future debt, principal and interest payments, early debt repayment penalties, future capital expenditure requirements, future dividend payments (which are determined on a quarterly basis by the Company’s Board of Directors), alternative investment opportunities, loan covenants and any other relevant considerations currently facing our business.
Our outstanding indebtedness under our original $75 million, 7.28% fixed-rate term loan was $42.9 million as of August 31, 2008. Outstanding borrowings under our term loan must be repaid in annual principal payments of $10.7 million, with the final payment due in October 2011. In accordance with the terms of the fixed-rate term loan, we are required to maintain minimum consolidated net worth greater than the sum of $57 million plus 25% of consolidated net income for each fiscal quarter beginning with the first fiscal quarter of 2002, plus proceeds of all equity securities other than those issued under the Company’s stock option plan.
A consolidated fixed charge coverage ratio greater than 1.20 to 1.00 on the last day of any fiscal quarter must be maintained. The Company is also limited to a maximum ratio of funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA) of 2.25 to 1.00.
The term loan agreement also limits the Company’s ability, without prior approval from the Company’s lenders, to incur additional unsecured indebtedness, sell, lease or transfer assets, place liens on properties, complete certain acquisitions, mergers or consolidations, enter into guarantee obligations, enter into related party transactions and make certain loan advances and investments.
The events of default under the fixed-rate term loan include the following:
- Failure to pay principal or interest when due;
- Failure to comply with covenants, representations or warranties, terms or conditions under the credit agreements;
- Commencing any proceeding for bankruptcy, insolvency, reorganization, dissolution or liquidation; and
- The sale, transfer, abandonment, forfeiture or disposal of the WD-40 trademark or any other trademark used in a material product line.
The Company is in compliance with all debt covenants as required by the term loan agreement. The Company’s cash balance has not been used to prepay the term loan due to certain prepayment penalties under the loan agreements.
In September 2008, we entered into an unsecured loan agreement for the aforementioned $10 million credit facility, which expires in October 2011. The proceeds of the new credit facility are available for general working capital purposes. The credit facility is currently undrawn, however, outstanding borrowings under the credit facility would accrue interest at either LIBOR plus 1.0 percent or the Bank’s variable interest rate, as selected by the Company. The credit facility is subject to the same covenants as required by the term loan agreement.
On March 27, 2007, the Company’s Board of Directors approved a share buy-back plan. As a result of the share buy-back plan, the Company’s debt covenants related to its fixed-rate term loan were revised. Under the revised debt covenants, the aggregate payments for dividends and share repurchases by the Company are limited to $35 million, plus 75% of consolidated net income for each quarter beginning March 1, 2007.
Cash Flows
Operating Activities
Net cash provided by operating activities for the fiscal year ended August 31, 2008 was $29.4 million. This amount consisted of $27.6 million from net income with an additional $8.7 million of adjustments for non-cash items, including depreciation and amortization, net gains on sales and disposals of property and equipment, impairment of indefinite-lived intangible assets, deferred income tax expense, excess tax benefits from exercises of stock options, distributions received and equity losses from VML and stock-based compensation, partially offset by $7.0 million related to changes in operating assets and liabilities.
Investing Activities
Net cash used in investing activities for the fiscal year ended August 31, 2008 was $5.5 million primarily due to capital expenditures during the period. Capital expenditures were primarily for machinery and equipment related to new product development, computer hardware and software and vehicle replacements. For fiscal year 2009, we expect to spend approximately $3.1 million for new capital assets, largely driven by new product development, computer equipment, software and vehicles.
Financing Activities
Net cash used in financing activities was $40.6 million for the fiscal year ended August 31, 2008, which included the effects of the following transactions:
- In October 2007, we paid our annual principal payment of $10.7 million on our term loan;
- During the six months ended February 29, 2008, we repurchased 528,800 shares of common stock held in treasury for a total of $17.7 million;
- During the year ended August 31, 2008, we paid dividends of $16.7 million; and
- During the year ended August 31, 2008, we received cash proceeds of $4.2 million from the issuance of common stock upon the exercises of stock options.
Marketable Securities
Periodically, we invest in interest-bearing short-term investments. Recently, some of these investments consisted of investment-grade auction rate securities classified as available-for-sale and reported at fair value. Although these investments generally had stated maturities of 13 months to 30 years, this type of investment is designed to provide liquidity through an auction process that resets the applicable interest rates at predetermined periods ranging from 7 to 35 days. This reset mechanism is intended to allow existing investors to continue to own their respective interest in the auction rate security or to gain immediate liquidity by selling their interests at par value. As a result of the recent liquidity issues experienced in the global credit and capital markets, auctions for auction rate securities held by us failed during the second and third quarters of fiscal year 2008. However, we were able to liquidate our investment-grade auction rate securities at par value through successful auctions at the end of May 2008. Therefore, as of August 31, 2008, we did not carry any auction rate securities or other short-term investments.
Working Capital
At August 31, 2008, working capital decreased to $64.9 million, down $11.8 million from $76.7 million at August 31, 2007. The current ratio was 2.2 at August 31, 2008, down from 2.4 at August 31, 2007.
Current assets decreased to $119.5 million at August 31, 2008, down $11.1 million from $130.6 million at August 31, 2007. Accounts receivable increased to $49.3 million, up $2.1 million from $47.2 million at August 31, 2007, as a result of the timing of sales. Inventory increased to $18.3 million, up $5.1 million from $13.2 million at August 31, 2007 primarily due to the build up of inventory for new product introductions in the U.S. as well as the acquisition of inventory from VML, a contract manufacturer and warehouse distributor for the Company. During the first quarter of fiscal year 2008, we began acquiring additional finished goods manufactured by VML, which had previously been owned and warehoused by VML under our historical contract manufacturer model. As we transitioned to direct management of these finished goods, we acquired inventory from VML to supply our distribution centers. We will continue to acquire the inventory manufactured by VML to supply our distribution centers.
Current liabilities were $54.6 million at August 31, 2008, up from $53.9 million at August 31, 2007. Accounts payable and accrued liabilities increased by $0.5 million due to the timing of payments. Accrued payroll and related expenses were down $0.8 million primarily due to the decrease in the bonus accrual since many regions achieved lower profit and other performance metrics for the year ended August 31, 2008 compared to the prior fiscal year. Income taxes payable increased $1.0 million due to the timing of payments for income taxes.
Stock Buy-Back Plan
On March 27, 2007, the Company’s Board of Directors approved a share buy-back plan. Under the plan, which was in effect for up to twelve months, we were authorized to acquire up to $35.0 million of our outstanding shares. During the current fiscal year 2008, we acquired 528,800 shares at a total cost of $17.7 million. As of February 15, 2008, we had acquired a total of 1,028,800 shares at a total cost of $35.0 million under the plan and had completed the repurchase program.
Dividends
On October 6, 2008, the Company’s Board of Directors declared a cash dividend of $0.25 per share payable on October 31, 2008 to shareholders of record on October 17, 2008. Our ability to pay dividends could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants.
Contractual Obligations
The following table sets forth our best estimates as to the amounts and timing of minimum contractual payments for our most significant contractual obligations and commitments as of August 31, 2008 for the next five years and thereafter (in thousands). Future events could cause actual payments to differ significantly from these amounts.
| Total | 1 year | 2-3 years | 4-5 years | Thereafter | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total debt | $ | 42,857 | $ | 10,714 | $ | 21,428 | $ | 10,715 | $ | — | |||||||||
| Interest payments on debt | 5,460 | 2,535 | 2,730 | 195 | — | ||||||||||||||
| Operating leases | 2,991 | 1,444 | 1,286 | 225 | 36 | ||||||||||||||
| Marketing and other commitments | 952 | 534 | 418 | — | — | ||||||||||||||
| Capital expenditures | 1,900 | 1,900 | — | — | — | ||||||||||||||
| $ | 54,160 | $ | 17,127 | $ | 25,862 | $ | 11,135 | $ | 36 | ||||||||||