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, 1998 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 7, 1998 15,630,408
Part I Financial Information Item 1. Financial Statements WD-40 COMPANY CONSOLIDATED CONDENSED BALANCE SHEET ASSETS ------ <TABLE> <CAPTION> (Unaudited) February 28, 1998 August 31, 1997 ----------------- --------------- <S> <C> <C> Current assets: Cash and cash equivalents $ 13,229,000 $ 10,868,000 Trade accounts receivable, less allowance for cash discounts and doubtful accounts of $769,000 and $495,000 30,423,000 22,608,000 Product held at contract packagers 2,541,000 2,132,000 Inventories 1,866,000 3,341,000 Other current assets 2,518,000 2,694,000 ------------ ------------- Total current assets 50,577,000 41,643,000 Property, plant, and equipment, net 3,614,000 4,160,000 Long-term investments 3,544,000 3,711,000 Goodwill, net 12,949,000 13,435,000 Other assets 1,535,000 2,469,000 ------------ ------------- $ 72,219,000 $ 65,418,000 ------------ ------------- ------------ ------------- LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable and accrued liabilities $ 8,309,000 $ 6,683,000 Accrued payroll and related expenses 2,573,000 2,383,000 Income taxes payable 4,126,000 1,546,000 Current portion of long-term debt 885,000 756,000 ------------ ------------- Total current liabilities 15,893,000 11,368,000 Long-term debt 861,000 1,671,000 Deferred employee benefits 1,059,000 1,039,000 ------------ ------------- 17,813,000 14,078,000 Shareholders' equity: Common stock, no par value, 18,000,000 shares authorized -- shares issued and outstanding of 15,622,932 and 15,561,942 9,505,000 8,459,000 Paid-in capital 321,000 321,000 Retained earnings 43,994,000 42,403,000 Cumulative translation adjustment 586,000 157,000 ------------ ------------- Total shareholders' equity 54,406,000 51,340,000 ------------ ------------- $ 72,219,000 $ 65,418,000 ------------ ------------- ------------ ------------- </TABLE> (See accompanying notes to consolidated condensed financial statements.) 2
WD-40 COMPANY CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------------ ------------------------------- February 28 February 28 % February 28 February 28 % ----------- ----------- ----------- ----------- 1998 1997 Change 1998 1997 Change ----------- --------------------- ----------- ----------------------- <S> <C> <C> <C> <C> <C> <C> Net sales $ 39,174,000 $ 39,806,000 (1.6%) $ 72,771,000 $ 68,071,000 6.9% Cost of product sold 16,754,000 17,472,000 (4.1%) 31,072,000 28,891,000 7.5% ------------ ------------ ------------ ------------ Gross profit 22,420,000 22,334,000 0.4% 41,699,000 39,180,000 6.4% ------------ ------------ ------------ ------------ Operating expenses: Selling, general & administrative, and amortization expense 8,497,000 7,868,000 8.0% 16,407,000 15,482,000 6.0% Advertising & sales promotions 4,021,000 3,741,000 7.5% 7,092,000 5,986,000 18.5% ------------ ------------ ------------ ------------ Income from operations 9,902,000 10,725,000 (7.7%) 18,200,000 17,712,000 2.8% ------------ ------------ ------------ ------------ Other income (expense) (9,000) (460,000) (98.0%) (143,000) (818,000) (82.5%) ------------ ------------ ------------ ------------ Income before income taxes 9,893,000 10,265,000 (3.6%) 18,057,000 16,894,000 6.9% Provision for income taxes 3,559,000 3,700,000 (3.8%) 6,498,000 6,089,000 6.7% ------------ ------------ ------------ ------------ Net Income $ 6,334,000 $ 6,565,000 (3.5%) $ 11,559,000 $ 10,805,000 7.0% ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Basic earnings per share $ 0.41 $ 0.42 $ 0.74 $ 0.70 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Diluted earnings per share $ 0.40 $ 0.42 $ 0.74 $ 0.69 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Basic common equivalent shares 15,590,237 15,499,334 15,576,963 15,480,544 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Diluted common equivalent shares 15,664,618 15,586,114 15,654,407 15,561,511 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ </TABLE> (See accompanying notes to consolidated condensed financial statements.) 3
WD-40 COMPANY CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Six Months Ended ----------------------------------------------- February 28, 1998 February 28, 1997 ----------------- ----------------- <S> <C> <C> Cash flows from operating activities: Net income $ 11,559,000 $ 10,805,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 1,074,000 1,066,000 Loss on sale of equipment 225,000 61,000 Changes in assets and liabilities: Accounts receivable (7,806,000) (9,473,000) Product held at contract packagers (409,000) (235,000) Inventories 1,499,000 29,000 Other assets 1,347,000 352,000 Accounts payable and accrued expenses 2,041,000 2,392,000 Income taxes payable 2,576,000 1,706,000 Long-term deferred employee benefits 21,000 38,000 ------------- -------------- Net cash provided by operating activities 12,127,000 6,741,000 ------------- -------------- Cash flows from investing activities: Decrease in short-term investments 0 104,000 Proceeds from sale of equipment 520,000 197,000 Capital expenditures (835,000) (657,000) ------------- -------------- Net cash used in investing activities (315,000) (356,000) ------------- -------------- Cash flows from financing activities: Proceeds from issuance of common stock 1,046,000 1,408,000 Repayment of long-term debt (680,000) 0 Dividends paid (9,968,000) (9,592,000) ------------- -------------- Net cash used in financing activities (9,602,000) (8,184,000) ------------- -------------- Effect of exchange rate changes on cash and cash equivalents 151,000 12,000 ------------- -------------- Increase in cash and cash equivalents 2,361,000 (1,787,000) Cash and cash equivalents at beginning of period 10,868,000 6,748,000 ------------- -------------- Cash and cash equivalents at end of period $ 13,229,000 $ 4,961,000 ------------- -------------- ------------- -------------- </TABLE> (See accompanying notes to consolidated condensed financial statements.) 4
WD-40 COMPANY NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FEBRUARY 28, 1998 ----------------- (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. 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 and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's 1997 Annual Report to Shareholders, which statements and notes are incorporated by reference in the Company's Annual Report on Form 10-K for the year ended August 31, 1997. 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 In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", which establishes new standards for computing earnings per share and which became effective for financial statements for periods ending after December 15, 1997, including interim periods. Under the new requirements, historically reported "primary" and "fully diluted" earnings per share have been replaced with "basic" and "diluted" earnings per share. Basic earnings per share is based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalents outstanding during the period. The Company's common stock equivalents consist of options granted under the Company's stock option plans, which are included in the diluted earnings per share calculations using the treasury stock method. Common stock equivalents of 74,381 and 86,780 shares for the three months ended February 28, 1998 and 1997 were used to calculate diluted earnings per share. Common stock equivalents of 77,444 and 80,967 shares for the six months ended February 28, 1998 and 1997 were used to calculate diluted earnings per share. There were no reconciling items in calculating the numerator for basic and diluted earnings per share for any of the periods presented. RECLASSIFICATIONS Certain fiscal 1997 amounts have been reclassified to conform to the current year presentation. 5
(CONTINUED)NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SECOND QUARTER OF FISCAL YEAR 1998 COMPARED TO SECOND QUARTER OF FISCAL YEAR 1997 Consolidated net sales for the quarter were $39,174,000 a decrease of 1.6% or $632,000 from the comparable prior year period. The sales shortfall is attributable to the slowdown in the Asian markets and in the Middle East. Cost of product sold decreased to 42.8% of net sales this quarter versus 43.9% in the comparable prior year period. Management believes that costs have stabilized and that there will be minimal inflationary impact for the remainder of fiscal year 1998. Selling, general, administrative, and amortization expenses increased $629,000 or 8.0% in the second quarter of fiscal year 1998 as compared to the same period in 1997. Such expenses as a percentage of net sales increased this quarter to 21.7% versus 19.8% in the comparable prior year period. The increase is due primarily to freight costs and approximately $325,000 of "one time" expenses in both Europe and the Americas related to employee relocation and operational restructuring. Advertising and sales promotion expenses increased $280,000 or 7.5%, in the second quarter of fiscal year 1998 as compared to the same period in 1997. Such expense as a percentage of net sales increased to 10.3% versus 9.4% in the comparable prior year period. The increase is due to the timing of overall promotional activities and the increased investment in the development of the new brand T.A.L. 5. These expenses are expected to be within the historical level of 10% of sales at fiscal year end. Other income, net, increased by $451,000, resulting primarily from increased interest income, net, and a reduction of currency translation losses. Currency translation losses were reduced to $114,000 for the quarter, versus currency translation losses of $459,000 in the comparable prior year period. Net income decreased $231,000 or 3.5%. Net income as a percentage of net sales this quarter was 16.2% versus 16.5% in the comparable prior year period. WD-40 COMPANY (U.S.) Net sales decreased $232,000 or .8% from the comparable prior year period. The primary reason for the sales decrease was the slowdown in the Asian markets. 6
ITEM 2. (CONTINUED) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cost of product sold decreased to 43.5% of net sales this quarter as compared to 45.8% in the same period in fiscal year 1997, primarily due to the mix of sales generated by promotional packaging, export sales and 3-IN-ONE Oil. Selling, general, and administrative expenses increased $828,000 or 17.3% to 20.2% of sales versus 17.1% in the same period in 1997, reflecting increased freight costs, employee relocation and operational restructuring. Advertising and sales promotion expenses increased 1.9% or $52,000 to 10.2% of sales compared to 9.9% for the same period in the prior year, primarily due to the timing of promotional activities. As a result, net income decreased by $454,000 or 8.2%. WD-40 COMPANY LTD. (U.K.) Net sales for the quarter decreased $312,000 or 3.2% compared to the same quarter in fiscal 1997. Sales to the Middle East were down 40% because of large buying during the second quarter of the prior year. Cost of product sold decreased slightly to 41.9% of net sales versus 42.0% in the comparable prior year period. As a percentage of net sales, selling, general, and administrative expenses were 22.8% of sales versus 24.3% in the comparable prior year period, resulting from reduced commissions to the Middle East, lower warehousing costs due to supply chain improvements and lower expatriate staffing costs. Advertising and sales promotion expenses increased to 10.7% versus 7.7% in 1997, primarily due to the timing of promotional activities. Foreign currency translations resulted in a loss of $115,000 compared to losses of $459,000 in the second quarter of 1997. As a result of the factors described above, net income increased $223,000 or 31.3%. OTHER FOREIGN SUBSIDIARIES Net sales decreased $328,000 or 12.0% from the comparable prior year period, due primarily to decreased sales in the Canadian Market. Cost of product sold as a percentage of net sales was 49.0% versus 46.1% for the same period in 1997, due to the impact of foreign currency fluctuations and the mix of sales in the Canadian market. Selling, general, and administrative expenses increased by $18,000 or 16.1% of sales versus 13.5% in the comparable prior year period. Advertising and sales promotion expenses decreased slightly to 7.9% of sales from 8.0% in the second quarter of 1997. Net income decreased by $127,000, or 27.1% due primarily to decreased sales in the Canadian market and the lower gross profit percentage. 7
ITEM 2. (CONTINUED) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIX MONTHS FISCAL YEAR 1998 VERSUS SIX MONTHS FISCAL YEAR 1997 Consolidated net sales were $72,771,000 an increase of $4,700,000 or 6.9% over the same fiscal year period in 1997. Cost of product sold as a percentage of net sales remained consistent at 42.7% versus 42.4% in the same six month period in the prior year. Selling, general, administrative, and amortization expenses increased $925,000 or 6.0% but remained consistent at 22.5% sales, in comparison to 22.7% in the comparable prior year period. Advertising and sales promotion expenses increased $1,106,000 or 18.5% and, as a percentage of sales increased to 9.7% of sales, in comparison to 8.8% in the same period in fiscal year 1997. The increase is due to the timing of overall promotional activities and to the increased investment in the T.A.L. 5 brand. Other income, net, increased by $675,000 primarily due to a decrease in foreign currency translation losses. Foreign currency translations resulted in losses of $194,000 in the current year period compared to losses of $891,000 in the same six month period in 1997. Net income increased $754,000 or 7.0% due to the items described above. WD-40 COMPANY (U.S.) Net sales increased $3,652,000 or 7.9%. The primary reason for the sales increase was an improvement in the U.S. domestic market. Cost of product sold as a percent of net sales decreased to 43.5% versus 43.8% in the prior year period. Selling, general, and administrative expenses as a percentage of net sales increased to 21.2% versus 20.5% in the prior year period. Advertising and promotion expenses as a percentage of net sales increased to 9.8% versus 9.3% in the prior year period, primarily due to the timing of promotional activities. Net income increased $384,000 or 4.4%, due largely to the increased sales as described above. WD-40 COMPANY LTD. (U.K.) Net sales increased $1,031,000 or 5.7% compared to the prior year period, with double digit growth in the German and Spanish sectors. Cost of product sold as a percent of net sales increased slightly to 41.9% versus 41.7% in the prior year period. Selling, general, and administrative expenses as a percentage of net sales decreased to 23.0% versus 25.4% in the prior year period, primarily due to improved volume and lower warehousing and distribution costs following supply chain changes implemented in the prior year. 8
ITEM 2. (CONTINUED) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Advertising and promotional expenses as a percentage of net sales increased to 9.5% versus 6.9% in the prior year period, primarily due to the timing of promotional activities. Foreign currency fluctuations resulted in translation losses of $195,000 in the first six months of fiscal 1998 compared to losses of $891,000 in the prior year period. Net income increased $641,000 or 48.4%, due to the items described above. OTHER FOREIGN SUBSIDIARIES Net sales decreased $407,000 or 8.5%, due primarily to decreased sales in the Canadian market. Cost of product sold as a percentage of sales increased to 47.6% from 46.5% in the prior year period. Advertising and sales promotion expenses decreased $79,000 or 17.9%, primarily due to the timing of promotional activities. Net income decreased by $110,000 or 15.1%, largely due to the decreased sales as described above. CASH AND CASH EQUIVALENTS Cash and cash equivalents increased $2,361,000 during the six months ended February 28, 1998 versus a decrease of $1,787,000 for the same period last year. The increase in the current year period was primarily due to an increase in cash flows provided by operating activities. LIQUIDITY AND CAPITAL RESOURCES The current ratio of 3.2-to-one on February 28, 1998 represents a decrease from the current ratio of 3.7-to-one at August 31, 1997. An increase in trade accounts payable related to timing of sales and promotional activities was largely responsible for the ratio decrease. The Company's primary source of liquidity is funds provided by operations. The Company's cash flows from operations are expected to provide sufficient funds to meet both short and long-term operating needs, as well as future dividends. Capital expenditures for fiscal year 1998 are expected to total approximately $1,000,000, principally for improving management information systems and facilities upgrades in Europe and the United States. YEAR 2000 ISSUE Many existing computer programs were designed and developed using only two digits to identify a year in the date field. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000 (the "Year 2000 Issue"). The Company has developed comprehensive global plans to assess and address, in a timely manner, its business processes involving information technology, supply chain management and other key service providers. The majority of the Company's order processing, production, distribution, sales, human resource and financial systems are Year 2000 compliant, with plans for the remaining systems to be Year 2000 compliant by December 1998. The cost impact of completing the required changes is not expected to be material. 9
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) Restated By-Laws 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, 1998. 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, 1998 /s/ Garry O. Ridge ----------------------------- Garry O. Ridge President and Chief Financial Officer (Principal Financial Officer) 10