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 November 30, 1997 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 January 9, 1998 15,583,696
Part I Financial Information Item 1. Financial Statements WD-40 COMPANY CONSOLIDATED CONDENSED BALANCE SHEET ASSETS (Unaudited) November 30, 1997 August 31, 1997 ----------------- --------------- Current assets: Cash and cash equivalents $ 14,591,000 $ 10,868,000 Trade accounts receivable, less allowance for cash discounts and doubtful accounts of $730,000 and $495,000 24,580,000 22,608,000 Product held at contract packagers 1,548,000 2,132,000 Inventories 2,044,000 3,341,000 Other current assets 3,057,000 3,407,000 ------------ ------------ Total current assets 45,820,000 42,356,000 Property, plant, and equipment, net 3,594,000 4,160,000 Long-term investments 3,628,000 3,711,000 Goodwill, net 13,240,000 13,435,000 Other assets 1,505,000 1,756,000 ------------ ------------ $ 67,787,000 $ 65,418,000 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 5,728,000 $ 6,683,000 Accrued payroll and related expenses 2,106,000 2,383,000 Income taxes payable 3,929,000 1,546,000 Current portion of long-term debt 756,000 756,000 ------------ ------------ Total current liabilities 12,519,000 11,368,000 Long-term debt 1,671,000 1,671,000 Deferred employee benefits 1,062,000 1,039,000 ------------ ------------ 15,252,000 14,078,000 Shareholders' equity: Common stock, no par value, 18,000,000 shares authorized -- shares issued and outstanding of 15,564,742 and 15,561,942 8,508,000 8,459,000 Paid-in capital 321,000 321,000 Retained earnings 42,647,000 42,403,000 Cumulative translation adjustment 1,059,000 157,000 ------------ ------------ Total shareholders' equity 52,535,000 51,340,000 ------------ ------------ $ 67,787,000 $ 65,418,000 ------------ ------------ ------------ ------------ (See accompanying notes to consolidated condensed financial statements.) 2
WD-40 COMPANY CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED) Three Months Ended --------------------------- November 30, --------------------------- 1997 1996 ------------ ------------ Net sales $ 33,597,000 $ 28,265,000 Cost of product sold 14,318,000 11,419,000 ------------ ------------ Gross profit 19,279,000 16,846,000 Operating expenses: Selling, general, administrative, and amortization expenses 7,910,000 7,614,000 Advertising and sales promotion 3,071,000 2,245,000 ------------ ------------ Income from operations 8,298,000 6,987,000 Other income (expense): Interest, net 50,000 21,000 Other, net (184,000) (379,000) ------------ ------------ Income before income taxes 8,164,000 6,629,000 Provision for income taxes 2,939,000 2,389,000 ------------ ------------ Net Income $ 5,225,000 $ 4,240,000 ------------ ------------ ------------ ------------ Earnings per share $0.34 $0.28 ------------ ------------ ------------ ------------ Average number of shares outstanding 15,563,688 15,461,756 ------------ ------------ ------------ ------------ (See accompanying notes to consolidated condensed financial statements.) 3
WD-40 COMPANY CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) Three Months Ended --------------------------- November 30, --------------------------- 1997 1996 ------------ ------------ Cash flows from operating activities: Net income $ 5,225,000 $ 4,240,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 206,000 214,000 Amortization expense 336,000 335,000 Loss on sale of equipment 103,000 8,000 Decrease in deferred income taxes 535,000 295,000 Changes in assets and liabilities: Accounts receivable (1,764,000) 261,000 Product held at contract packagers 584,000 1,062,000 Inventories 1,348,000 96,000 Other assets 596,000 547,000 Accounts payable and accrued expenses (1,012,000) (1,300,000) Income taxes payable 2,075,000 1,845,000 Long-term deferred employee benefits 24,000 35,000 ------------ ------------ Net cash provided by operating activities 8,256,000 7,638,000 ------------ ------------ Cash flows from investing activities: Decrease in short-term investments 104,000 Proceeds from sale of equipment 465,000 60,000 Capital expenditures (500,000) (361,000) ------------ ------------ Net cash used in investing activities (35,000) (197,000) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of common stock 48,000 969,000 Dividends paid (4,981,000) (4,790,000) ------------ ------------ Net cash used in financing activities (4,933,000) (3,821,000) ------------ ------------ Effect of exchange rate changes on cash and cash equivalents 435,000 159,000 Increase in cash and cash equivalents 3,723,000 3,779,000 Cash and cash equivalents at beginning of period 10,868,000 6,748,000 ------------ ------------ Cash and cash equivalents at end of period $ 14,591,000 $ 10,527,000 ------------ ------------ ------------ ------------ (See accompanying notes to consolidated condensed financial statements.) 4
WD-40 COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 1997 (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/A for the year ended August 31, 1997. RECLASSIFICATIONS Certain fiscal 1997 amounts have been reclassified to conform to the current year presentation. On June 23, 1997, the Company declared a two-for-one stock split which was effective on July 11, 1997. All share and per-share amounts have been retroactively restated to reflect the stock split. 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 Earnings per share are based upon the weighted average number of shares outstanding during the period increased by the effect of dilutive stock options, when applicable, using the treasury stock method. In March 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 will be adopted by the Company as required in the second quarter of fiscal 1998. Upon adoption of SFAS No. 128, the Company will present basic earnings per share and diluted earnings per share. Basic earnings per share will be computed based on the weighted average number of shares outstanding during the period. Diluted earnings per share will be computed based on the weighted average number of shares outstanding during the period increased by the effect of dilutive stock options using the treasury stock method. Pro forma basic earnings per share for the three months ended November 30, 1997 and 1996 are $.34 and $.27, respectively. Pro forma diluted earnings per share for the same periods are $.33 and $.27, respectively. 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. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FIRST QUARTER OF FISCAL YEAR 1998 COMPARED TO FIRST QUARTER OF FISCAL YEAR 1997 Consolidated net sales for the quarter were a record $33,597,000, an increase of 18.9% or $5,332,000 from the prior-year period. The record level was due to better overall market penetration in all trading blocs. The substantial increase was primarily due to first quarter sales in the prior year period being below normal due to promotional phasing with the introduction of CO(2) propellant. Cost of product sold increased to 42.6% of net sales this quarter versus 40.4% in the prior-year quarter. The increase is primarily attributed to the mix of customers. The increased export sales in this quarter yielded a lower gross margin, however, the sales generate operating income consistent with domestic sales. Selling, general, administrative, and amortization expenses increased $296,000 or 3.9% in the first quarter of fiscal year 1998 as compared to the same period in 1997. However, these expenses as a percentage of net sales decreased this quarter to 23.5% versus 26.9% in the comparable prior-year period. Amortization expense related to the goodwill associated with the purchase of 3-IN-ONE Oil was unchanged. Advertising and sales promotion expenses increased $826,000 or 36.8% due to the timing of overall promotional activities. Management had limited these activities during the first quarter a year ago because of anticipated lower sales. Foreign currency translation losses amounted to $80,000 for the current quarter, versus $432,000 in the prior year period. Net income increased $985,000 or 23.2% due primarily to the combination of higher sales and lower S, G, & A expenses and lower foreign currency translation losses. Net income as a percentage of net sales this quarter was 15.6% versus 15.0% in the comparable prior-year period. WD-40 COMPANY (U.S.) Net sales increased $3,884,000 or 21.3% compared to the comparable prior-year period. The primary reason for the increased sales was a return to a more normal business environment than existed a year ago due to the Company's transition from hydro-carbon propellant to CO(2) in anticipation of future changes to Federal Standards related to the emission of VOC's (Volatile Organic Compounds). Cost of product sold increased to 43.3% of net sales this quarter as compared to 40.8% in the first quarter of fiscal year 1997 due primarily to promotional phasing and customer mix. Selling, general, administrative, and amortization expenses increased $255,000 or 5.1% over the same period last year, however, as a percentage of net sales they decreased to 23.8% versus 27.4% in the comparable prior-year period. The expense increase is primarily attributable to an increase in the allowance for doubtful accounts in distributor markets. Advertising and sales promotion expenses increased $567,000 or 37.2% due to increased promotional activity this quarter. As a result, net income increased by $838,000 or 25.8%. 6
ITEM 2. (CONTINUED) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS WD-40 COMPANY LTD. (U.K.) Net sales for the quarter increased $1,344,000 or 16.0% compared to the same quarter in fiscal 1997. Strong growth was experienced in the UK, Germany, and Spain as well as distributor markets in other areas of Europe, especially Eastern Europe. Cost of product sold increased to 42.0% of net sales versus 41.3% in the comparable prior-year period. This increase was primarily due to the customer mix resulting from the timing and phasing of promotional activities. As a percentage of net sales, selling, general, administrative, and amortization expenses were 23.4%, down from 27.0% in the comparable prior-year period, due to fixed costs being absorbed by the higher sales base. Advertising and sales promotion expenses increased to 8.3% versus 6.0% in the comparable prior-year period due to the timing of promotional activities. Foreign currency movements resulted in translation losses of $80,000 for the current quarter compared to losses of $432,000 for the first quarter of 1997. Currency movements against the British Pound have been less significant in the current quarter compared to the comparable prior-year period. As a result of the factors described above, net income increased $418,000 or 68.2%. OTHER FOREIGN SUBSIDIARIES Net sales decreased $79,000 or 3.8% and cost of product sold as a percentage of net sales decreased slightly to 46.0% versus 47.0% in the comparable prior-year period. Net income increased $17,000 or 6.5%. These fluctuations are not significant and are well within normal operating ranges. PRICE INCREASES No price increases were initiated during the quarter ended November 30, 1997. CASH AND CASH EQUIVALENTS Cash and cash equivalents increased $3,723,000 during the three months ended November 30, 1997 versus an increase of $3,779,000 for the same period of last year. INTEREST AND OTHER INCOME (EXPENSE), NET Net interest income increased by $29,000 due to increased short-term investments during the quarter. Other expenses, net, decreased by $195,000 primarily due to lower foreign currency losses in the U.K. LIQUIDITY AND CAPITAL RESOURCES The current ratio of 3.7-to-one on November 30, 1997 was consistent with the current ratio of 3.7-to-one on August 31, 1997. The Company's primary source of liquidity are 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 facility upgrades in Europe and the United States. 7
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-K Annual Report filed November 13, 1995, Exhibit 3 (b) thereto. 3 (d) Amendment No. 1 to Restated By-Laws is incorporated by reference from the Registrant's Form 10-K/A filed December 5, 1997, Exhibit 3 (d) 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 November 30, 1997. 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: January 13, 1997 /s/ PETER E. WILLIAMS ----------------------------- Peter E. Williams Chief Financial Officer (Principal Financial Officer) 8