<PAGE>
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, 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 July 7, 1998 15,633,308
<PAGE>
Part I Financial Information
Item 1. Financial Statements
WD-40 COMPANY
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
May 31, 1998 August 31, 1997
------------ ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $15,259,000 $10,868,000
Short term investments 200,000
Trade accounts receivable, less allowance for
cash discounts and doubtful accounts
of $561,000 and $495,000 20,679,000 22,608,000
Product held at contract packagers 2,418,000 2,132,000
Inventories 2,259,000 3,341,000
Other current assets 2,251,000 2,694,000
----------- -----------
Total current assets 43,066,000 41,643,000
Property, plant, and equipment, net 3,582,000 4,160,000
Long-term investments 3,461,000 3,711,000
Goodwill, net 12,685,000 13,435,000
Other assets 2,419,000 2,469,000
----------- -----------
$65,213,000 $65,418,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $4,715,000 $ 6,683,000
Accrued payroll and related expenses 2,507,000 2,383,000
Income taxes payable 1,780,000 1,546,000
Current portion of long-term debt 874,000 756,000
---------- -----------
Total current liabilities 9,876,000 11,368,000
Long-term debt 861,000 1,671,000
Deferred employee benefits 1,057,000 1,039,000
---------- -----------
11,794,000 14,078,000
Shareholders' equity:
Common stock, no par value, 18,000,000 shares
authorized -- shares issued and outstanding
of 15,630,908 and 15,561,942 9,627,000 8,459,000
Paid-in capital 321,000 321,000
Retained earnings 43,053,000 42,403,000
Cumulative translation adjustment 418,000 157,000
----------- -----------
Total shareholders' equity 53,419,000 51,340,000
----------- -----------
$65,213,000 $65,418,000
----------- -----------
----------- -----------
</TABLE>
(See accompanying notes to consolidated condensed financial statements.)
2
<PAGE>
WD-40 COMPANY
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
May 31 May 31 May 31 May 31
----------- ----------- ------------ ------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $31,831,000 $34,525,000 $104,602,000 $102,596,000
Cost of product sold 14,235,000 14,884,000 45,307,000 43,775,000
----------- ----------- ------------ ------------
Gross profit 17,596,000 19,641,000 59,295,000 58,821,000
----------- ----------- ------------ ------------
Operating expenses:
Selling, general & administrative,
and amortization expense 7,829,000 7,570,000 24,236,000 23,052,000
Advertising & sales promotion 3,648,000 3,775,000 10,740,000 9,761,000
----------- ----------- ------------ ------------
Income from operations 6,119,000 8,296,000 24,319,000 26,008,000
----------- ----------- ------------ ------------
Other income (expense) 219,000 (169,000) 76,000 (987,000)
----------- ----------- ------------ ------------
Income before income taxes 6,338,000 8,127,000 24,395,000 25,021,000
Provision for income taxes 2,277,000 2,993,000 8,775,000 9,082,000
----------- ----------- ------------ ------------
Net Income $ 4,061,000 $ 5,134,000 $ 15,620,000 $ 15,939,000
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Basic earnings per share $ 0.26 $ 0.33 $ 1.00 $ 1.03
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Diluted earnings per share $ 0.26 $ 0.33 $ 1.00 $ 1.02
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Basic common equivalent shares 15,629,257 15,530,010 15,594,650 15,497,276
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Diluted common equivalent shares 15,695,318 15,631,499 15,668,030 15,585,304
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
(See accompanying notes to consolidated condensed financial statements.)
3
<PAGE>
WD-40 COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
May 31, 1998 May 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,620,000 $ 15,939,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization expense 1,601,000 1,589,000
Loss on sale of equipment 289,000 56,000
Changes in assets and liabilities:
Accounts receivable 1,843,000 (644,000)
Product held at contract packagers (286,000) (203,000)
Inventories 1,098,000 320,000
Other assets 676,000 340,000
Accounts payable and accrued expenses (1,695,000) (2,107,000)
Income taxes payable 302,000 (144,000)
Long-term deferred employee benefits 19,000 73,000
-------------- --------------
Net cash provided by operating activities 19,467,000 15,219,000
-------------- --------------
Cash flows from investing activities:
Net change in short-term investments (200,000) 104,000
Proceeds from sale of equipment 607,000 202,000
Capital expenditures (1,039,000) (883,000)
-------------- --------------
Net cash used in investing activities (632,000) (577,000)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,167,000 1,735,000
Repayment of long-term debt (686,000) (706,000)
Dividends paid (14,970,000) (14,405,000)
-------------- --------------
Net cash used in financing activities (14,489,000) (13,376,000)
-------------- --------------
Effect of exchange rate changes on cash
and cash equivalents 45,000 70,000
-------------- --------------
Increase in cash and cash equivalents 4,391,000 1,336,000
Cash and cash equivalents at beginning of period 10,868,000 6,748,000
-------------- --------------
Cash and cash equivalents at end of period $ 15,259,000 8,084,000
-------------- --------------
-------------- --------------
</TABLE>
(See accompanying notes to consolidated condensed financial statements.)
4
<PAGE>
WD-40 COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MAY 31, 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 66,061 and 101,489 shares for the three months
ended May 31, 1998 and 1997 were used to calculate diluted earnings per
share. Common stock equivalents of 73,380 and 88,028 shares for the nine
months ended May 31, 1998 and 1997 were used to calculate diluted earnings
per share. There
5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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.
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
THIRD QUARTER OF FISCAL YEAR 1998 COMPARED TO THIRD QUARTER OF FISCAL
YEAR 1997
Consolidated net sales for the quarter were $31,831,000 a decrease of 7.8% or
$2,694,000 from the comparable prior year period. The sales shortfall is
attributable to three principal factors: the economic situation in Asia;
promotional phasing in the UK; and the impact in the U.S. of the Company's
shift to CO2 propellant.
Cost of product sold increased to 44.7% of net sales this quarter versus
43.1% in the comparable prior year period. This increase was not due to
increased product cost, but rather to lower average selling prices which
arise from the general trend in retailing towards consolidation. This trend
has led to the creation of "super" retailers who purchase product from the
Company in substantially larger volumes which earn a higher level of
discounts.
Selling, general, administrative, and amortization expenses increased
$259,000 or 3.4% in the third quarter of fiscal year 1998 versus the same
period last year. The major reason for this increase is the timing of certain
accruals, such as for charitable contributions, which are out of phase with
last year and increased expenses for employee bonus, profit sharing and
relocation.
Advertising and sales promotion expenses decreased $127,000 or 3.4%, in the
third quarter compared to the same period in 1997. The decrease is due to the
timing of overall promotional activities. For the fiscal year, these expenses
are expected to be within the historical level of 10% of sales.
Other income, net, increased by $388,000, resulting primarily from increased
interest income and reduced currency translation losses. Currency translation
gains of $155,000 were realized for the quarter, versus losses of $169,000 in
the comparable period last year.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
As a result of the above factors, net income decreased by $1,073,000 or
20.9%. Net income as a percentage of net sales this quarter was 12.8% versus
14.9% in the comparable prior year period.
WD-40 COMPANY (U.S.)
In the quarter, net sales decreased by $2,178,000 or 8.8% from the comparable
prior year period. The primary reasons for the sales decrease were the
reduction in export sales due to the economic slowdown in Asia and the sales
impact of the Company's conversion to CO2 as a propellant. Export sales to
Asia were down 34% in the third quarter from the same period last year. Among
other factors, the major contributor to this reduction has been the general
weakening of Asian currencies against the U.S. dollar, which has effectively
raised the price of the Company's products in those markets.
The Company began the conversion to CO2 as a propellant in July 1996 and it
is now almost complete. One effect of the change is that each can of WD-40
now contains, on the average, 18% more product than it did previously due to
the fact that CO2 physically occupies less space in the can. A price increase
at the time of the conversion offset some of the impact of this change, but
with more product available in a can, the consumer's re-purchase cycle for
WD-40 has been extended, negatively impacting sales.
Cost of product sold increased to 46.0% of net sales this quarter compared to
43.8% in the same period in 1997, primarily due to the consolidation trend
among the Company's customer base. With more of the Company's sales being
made to fewer, but larger, customers there is continual pressure on pricing
and a greater reliance on the Company's sales and marketing programs to
generate sales.
Selling, general, and administrative expenses increased by $134,000, or 2.7%
over the same period in 1997. This increase is due to certain employee
benefit expenses such as employee bonus, profit sharing, and relocation.
Advertising and sales promotion expenses decreased by 7.5% or $206,000 versus
the same period last year, primarily due to the timing of promotional
activities.
WD-40 COMPANY LTD. (U.K.)
Net sales for the quarter decreased by $666,000 or 8.8% compared to the same
quarter in fiscal 1997. The principal reason for this decrease was a
reduction in sales in the UK due to the timing of promotions. The remainder
of the European countries in the aggregate showed sales gains versus the same
quarter last year, as did the Middle East and Africa.
Cost of product sold increased to 43.9% of net sales versus 41.7% in the
comparable prior year period. A portion of this increase is attributable to
higher than normal freight costs related to increased sales to customers in
the Middle East.
Selling, general, and administrative expenses in the third quarter increased
by $189,000, or 9.9% versus the comparable prior year period while
advertising and sales promotion expenses decreased by $32,000, or 3.8%
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
against the same period in 1997. Most of the increase in SG&A during the
quarter was related to travel and employee-related expenses.
Foreign currency translations resulted in a gain of $155,000 compared to
losses of $169,000 in the third quarter of 1997, due largely to the
Sterling's strength against other European currencies.
OTHER FOREIGN SUBSIDIARIES
Net sales increased by $306,000 or 12.5% from the comparable prior year
period, due primarily to increased sales in the Canadian market.
Cost of product sold as a percentage of net sales was 45.6% versus 48.2% for
the same period in 1997, due to the favorable impact of foreign currency
fluctuations and the mix of sales in Canada.
Selling, general, and administrative expenses decreased by $63,000 versus the
comparable prior year period. Advertising and sales promotion expenses
increased to 10.3% of sales from 7.1% in the third quarter of 1997.
NINE MONTHS FISCAL YEAR 1998 VERSUS NINE MONTHS FISCAL YEAR 1997
Consolidated net sales for the nine months ending May 31, 1998 were
$104,602,000 an increase of $2,006,000 or 2.0% over the same period in 1997.
Cost of product sold as a percentage of net sales increased slightly to 43.3%
versus 42.7% over the same period.
Selling, general, administrative, and amortization expenses increased by
$1,184,000 or 5.1% and advertising and sales promotion expenses increased by
$979,000 or 10.0% over the comparable nine month period last year. These
increases are principally due to differences in timing of promotional
activities, the recognition of certain bad debts, and increased employee
benefit expenses.
Other income, net, increased by $1,063,000 primarily due to a decrease in
foreign currency translation losses. Foreign currency translations resulted
in losses of $40,000 in the current year period compared to losses of
$1,060,000 in the same nine month period in 1997.
WD-40 COMPANY (U.S.)
For the nine month period, net sales increased by $1,474,000 or 2.1%. Sales
throughout Latin America grew by 24.9%, offsetting a minor sales decline in
the U.S. and a 10.2% drop in Asia. U.S. sales have been affected by the 1996
switch to CO2 propellant but the negative impact of this conversion should be
waning in the mature U.S. market. The current unstable economic situation in
Asia, however, has negatively impacted sales and these conditions are
expected to continue indefinitely.
Cost of product sold as a percent of net sales increased to 44.3% versus
43.8% in the prior year period, due primarily to the trend in retailing
towards consolidation where more of the Company's sales are made to fewer,
but larger, customers. The effect of the latter is not necessarily an
increase in cost, but rather puts additional pressure on pricing since the
larger retailers buy from the Company in large volume purchases.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Selling, general, and administrative expenses increased by $1,216,000 or 8.5%
over the comparable nine month period of 1997 as a result of increased
allowance for bad debts due to the financial condition of two Latin American
distributors and increased employee-related expenses.
Advertising and promotion expenses as a percentage of net sales increased to
10.3% versus 9.9% in the prior year period, primarily due to the timing of
promotional activities. Despite increasing pressure for greater promotional
spending by the Company's larger customers, these expenses have remained
close to their historical level of 10% of sales.
WD-40 COMPANY LTD. (U.K.)
Net sales increased by $365,000 or 1.4% compared to the prior year period,
with sales growth of 3% in France, 16% in Germany and 9% in Spain, offset by
a decrease of 5% in the UK. Further, in those countries where the Company
sells through distributors, sales were up by 18% over the first nine months
of 1997.
Cost of product sold as a percent of net sales increased slightly to 42.4%
versus 41.7% in the prior year period.
Selling, general, and administrative expenses as a percentage of net sales
decreased to 24.9% versus 25.3% 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.
Advertising and promotional expenses as a percentage of net sales increased
to 10.1% versus 8.2% in the prior year period, primarily due to the timing of
promotional activities.
Foreign currency fluctuations resulted in translation losses of $40,000 in
the first nine months of fiscal 1998 compared to losses of $1,060,000 in the
prior year period.
OTHER FOREIGN SUBSIDIARIES
Net sales for the first nine months of fiscal 1998 decreased by $101,000 or
1.4% below the comparable period last year. In local currency, sales in
Canada and Australia grew by 3.2% and 13.9% respectively - however, due to
the relative strength of the U.S. dollar, sales in both countries decreased
when converted.
Cost of product sold as a percentage of sales remained relatively unchanged
from year to year at approximately 47% of sales.
Selling, general and administrative expenses decreased by $17,000 or 1.5%
from the prior year.
Advertising and sales promotion expenses increased $32,000 or 5.2%, primarily
due to the timing of promotional activities.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $4,391,000 to $15,259,000 during the
nine months ended May 31, 1998. The increase in the current year period was
primarily due to an increase in cash flows provided by operating activities,
including reductions of $1,843,000 in accounts receivable and $1,098,000 in
inventories. The inventory reduction was largely achieved in Europe where a
conscious effort has been underway during this fiscal year to improve
operations and reduce finished goods inventories warehoused in various
countries.
Working capital grew by $2,915,000 to $33,190,000 over the first nine months
of fiscal 1998 and the current ratio of 4.4-to-one at May 31, 1998 represents
an increase from the ratio of 3.7-to-one at August 31, 1997 due to increased
cash flows.
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. However, the Company is actively evaluating potential acquisition
candidates as a means of expanding its business, and if an acquisition were
to be made, it would likely involve the use of cash and would negatively
impact the Company's liquidity position.
Capital expenditures for the first nine months of fiscal year 1998 have
totaled approximately $1,039,000 and are expected to total approximately
$1,250,000 by fiscal year end. These expenditures are comprised primarily of
vehicles for sales and management staff, office equipment and computers, and
building improvements.
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.
10
<PAGE>
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 May 31, 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: July 14, 1998 /s/ THOMAS J TRANCHINA
----------------------
Thomas J Tranchina
Chief Financial Officer
(Principal Financial Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<CASH> 15,259,000
<SECURITIES> 200,000
<RECEIVABLES> 21,240,000
<ALLOWANCES> 561,000
<INVENTORY> 2,259,000
<CURRENT-ASSETS> 43,066,000
<PP&E> 7,145,000
<DEPRECIATION> 3,563,000
<TOTAL-ASSETS> 65,213,000
<CURRENT-LIABILITIES> 9,876,000
<BONDS> 0
0
0
<COMMON> 9,627,000
<OTHER-SE> 43,792,000
<TOTAL-LIABILITY-AND-EQUITY> 65,213,000
<SALES> 104,602,000
<TOTAL-REVENUES> 104,602,000
<CGS> 45,307,000
<TOTAL-COSTS> 34,976,000
<OTHER-EXPENSES> 357,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (433,000)
<INCOME-PRETAX> 24,395,000
<INCOME-TAX> 8,775,000
<INCOME-CONTINUING> 15,620,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,620,000
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
</TABLE>
