Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2010

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 000-06936

WD-40 COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware   95-1797918

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of January 5, 2011 was 17,066,318.

 

 

 


Table of Contents

WD-40 COMPANY

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended November 30, 2010

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION   
         Page  

Item 1.

  Financial Statements      3   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      17   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      26   

Item 4.

  Controls and Procedures      26   
PART II — OTHER INFORMATION   

Item 1.

  Legal Proceedings      28   

Item 1A.

  Risk Factors      28   

Item 6.

  Exhibits      29   

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

WD-40 COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except share and per share amounts)

 

     November 30,
2010
    August 31,
2010
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 73,249      $ 75,928   

Trade accounts receivable, less allowance for doubtful accounts of $327 and $299 at November 30, 2010 and August 31, 2010, respectively

     46,939        47,846   

Product held at contract packagers

     1,547        1,536   

Inventories

     15,830        13,037   

Current deferred tax assets, net

     4,761        4,747   

Other current assets

     4,744        7,314   
                

Total current assets

     147,070        150,408   

Property, plant and equipment, net

     9,400        9,322   

Goodwill

     95,255        95,235   

Other intangible assets, net

     31,110        31,272   

Other assets

     2,897        2,871   
                

Total assets

   $ 285,732      $ 289,108   
                

Liabilities and Shareholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 18,859      $ 18,943   

Accrued liabilities

     15,351        14,382   

Current portion of long-term debt

     10,715        10,714   

Accrued payroll and related expenses

     7,107        14,265   

Income taxes payable

     364        1,516   
                

Total current liabilities

     52,396        59,820   

Long-term debt

     —          10,715   

Long-term deferred tax liabilities, net

     18,260        17,414   

Deferred employee benefits and other long-term liabilities

     4,669        4,635   
                

Total liabilities

     75,325        92,584   
                

Shareholders’ equity:

    

Common stock — authorized 36,000,000 shares, $0.001 par value; 18,558,258 and 18,251,142 shares issued at November 30, 2010 and August 31, 2010, respectively; and 16,994,760 and 16,687,644 shares outstanding at November 30, 2010 and August 31, 2010, respectively

     19        18   

Additional paid-in capital

     101,939        93,101   

Retained earnings

     162,350        157,805   

Accumulated other comprehensive loss

     (3,835     (4,334

Common stock held in treasury, at cost — 1,563,498 shares at November 30, 2010 and August 31, 2010

     (50,066     (50,066
                

Total shareholders’ equity

     210,407        196,524   
                

Total liabilities and shareholders’ equity

   $ 285,732      $ 289,108   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

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WD-40 COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share amounts)

 

     Three Months Ended November 30,  
     2010     2009  

Net sales

   $ 80,927      $ 77,721   

Cost of products sold

     39,705        37,808   
                

Gross profit

     41,222        39,913   
                

Operating expenses:

    

Selling, general and administrative

     21,649        19,801   

Advertising and sales promotion

     6,069        5,198   

Amortization of definite-lived intangible assets

     182        185   
                

Total operating expenses

     27,900        25,184   
                

Income from operations

     13,322        14,729   

Other income (expense):

    

Interest income

     55        35   

Interest expense

     (322     (524

Other income, net

     197        114   
                

Income before income taxes

     13,252        14,354   

Provision for income taxes

     4,173        4,941   
                

Net income

   $ 9,079      $ 9,413   
                

Earnings per common share:

    

Basic

   $ 0.54      $ 0.57   
                

Diluted

   $ 0.53      $ 0.56   
                

Shares used in per share calculations:

    

Basic

     16,796        16,556   
                

Diluted

     16,991        16,652   
                

Dividends declared per common share

   $ 0.27      $ 0.25   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

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WD-40 COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

     Three Months Ended November 30,  
     2010     2009  

Operating activities:

    

Net income

   $ 9,079      $ 9,413   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     978        1,082   

Net gains on sales and disposals of property and equipment

     (8     (2

Deferred income taxes

     35        501   

Excess tax benefits from exercises of stock options and conversions of restricted stock units to common shares

     (574     (108

Stock-based compensation

     806        665   

Unrealized foreign currency exchange losses (gains), net

     566        (469

Provision for bad debts

     25        —     

Changes in assets and liabilities:

    

Trade accounts receivable

     514        3,798   

Product held at contract packagers

     (3     405   

Inventories

     (2,737     (1,629

Other assets

     2,414        534   

Accounts payable and accrued expenses and liabilities

     (7,036     (1,133

Income taxes payable

     226        3,272   

Deferred employee benefits and other long-term liabilities

     27        (12
                

Net cash provided by operating activities

     4,312        16,317   
                

Investing activities:

    

Capital expenditures

     (774     (314

Proceeds from sales of property and equipment

     57        17   
                

Net cash used in investing activities

     (717     (297
                

Financing activities:

    

Repayments of long-term debt

     (10,714     (10,714

Dividends paid

     (4,534     (4,149

Proceeds from issuance of common stock

     8,124        859   

Excess tax benefits from exercises of stock options and conversions of restricted stock units to common shares

     574        108   
                

Net cash used in financing activities

     (6,550     (13,896
                

Effect of exchange rate changes on cash and cash equivalents

     276        796   
                

Net (decrease) increase in cash and cash equivalents

     (2,679     2,920   

Cash and cash equivalents at beginning of period

     75,928        45,956   
                

Cash and cash equivalents at end of period

   $ 73,249      $ 48,876   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

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WD-40 COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited and in thousands)

 

     Three Months Ended November 30,  
     2010      2009  

Net income

   $ 9,079       $ 9,413   

Other comprehensive income:

     

Equity adjustment from foreign currency translation, net of income taxes

     499         977   
                 

Total comprehensive income

   $ 9,578       $ 10,390   
                 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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WD-40 COMPANY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company

WD-40 Company (“the Company”), based in San Diego, California, is a global consumer products company dedicated to delivering unique, high value and easy-to-use solutions for a wide variety of maintenance needs of “doer” and “on-the-job” users by leveraging and building the brand fortress of the Company. The Company markets three multi-purpose maintenance product brands, WD-40®, 3-IN-ONE® Oil and BLUE WORKS™. Blue Works, which is targeted at the industrial channel, is the newest of these product brands. The Company launched Blue Works in the U.S. in the second quarter of fiscal year 2010 and in select markets in Europe starting in November 2010. The Company also markets the following homecare and cleaning product brands: X-14® mildew stain remover and automatic toilet bowl cleaners, 2000 Flushes® automatic toilet bowl cleaners, Carpet Fresh® and No Vac® rug and room deodorizers, Spot Shot® aerosol and liquid carpet stain removers, 1001® carpet and household cleaners and rug and room deodorizers and Lava® and Solvol® heavy-duty hand cleaners.

The Company’s brands are sold in various locations around the world. Multi-purpose maintenance products are sold worldwide in markets throughout North, Central and South America, Asia, Australia and the Pacific Rim, Europe, the Middle East and Africa. Homecare and cleaning products are sold primarily in North America, the U.K., Australia and the Pacific Rim. The Company’s products are sold primarily through mass retail and home center stores, warehouse club stores, grocery stores, hardware stores, automotive parts outlets and industrial distributors and suppliers.

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The condensed consolidated financial statements included herein have been prepared by the Company, without audit, according to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The August 31, 2010 year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the 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. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

In the opinion of management, the unaudited financial information for the interim periods shown reflects all adjustments necessary for a fair presentation thereof. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2010, which was filed with the SEC on October 18, 2010.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Reclassifications

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

Foreign Currency Forward Contracts

In the normal course of business, the Company employs established policies and procedures to manage its exposure to fluctuations in foreign currency exchange rates. The Company’s U.K. subsidiary, whose functional currency is

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

Pound Sterling, utilizes foreign currency forward contracts to limit its exposure in converting cash and intercompany accounts receivable balances denominated in non-functional currencies. The principal currency affected is the Euro. The Company regularly monitors its foreign currency exchange rate exposures to ensure the overall effectiveness of its foreign currency hedge positions. While the Company engages in foreign currency hedging activity to reduce its risk, for accounting purposes, none of its foreign currency forward contracts are designated as hedges.

Foreign currency forward contracts are accounted for on a mark-to-market basis, with net realized and unrealized gains and losses recognized currently in other income (expense) in the Company’s condensed consolidated statements of operations. Cash flows from settlements of foreign currency forward contracts are included in operating activities in the condensed consolidated statements of cash flows. Foreign currency forward contracts in an asset position at the end of the reporting period are included in other current assets, while foreign currency forward contracts in a liability position at the end of the reporting period are included in accrued liabilities in the Company’s condensed consolidated balance sheets.

The Company continually monitors its positions with, and the credit quality of, the financial institution that is counterparty to its foreign currency forward contracts, and has not experienced nonperformance by this counterparty. As a matter of policy, the Company does not purchase foreign currency forward contracts that exceed the amount of its cash and intercompany accounts receivable balances denominated in non-functional currencies. At November 30, 2010, the Company had $8.1 million of foreign currency forward contracts outstanding which mature from December 2010 through March 2011. Unrealized net gains and losses related to foreign currency forward contracts were not material at November 30, 2010 and August 31, 2010. Realized net losses related to foreign currency forward contracts were $0.2 million and $0.4 million for the three months ended November 30, 2010 and 2009, respectively.

Income Taxes

Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax liability or asset is established for the expected future tax consequences resulting from the differences in financial reporting and tax bases of assets and liabilities. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized. In addition to valuation allowances, the Company provides for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards prescribed by the authoritative guidance on income taxes. Amounts for uncertain tax positions are adjusted in periods when new information becomes available or when positions are effectively settled. The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense.

U.S. federal income tax expense is provided on remittances of foreign earnings and on unremitted foreign earnings that are not indefinitely reinvested. U.S. federal income taxes and foreign withholding taxes are not provided when foreign earnings are indefinitely reinvested. The Company determines whether its foreign subsidiaries will invest their undistributed earnings indefinitely based on the capital needs of the foreign subsidiaries and reassesses this determination each reporting period. Changes to the Company’s determination may be warranted based on the Company’s experience as well as plans regarding future international operations and expected remittances.

Earnings per Common Share

The Company calculates earnings per common share (“EPS”) using the two-class method, which provides for an allocation of net income between common stock and other participating securities based on their respective participation rights to share in dividends. Basic EPS is calculated by dividing net income available to common shareholders for the period by the weighted-average number of common shares outstanding during the period. Net income available to common shareholders for the period includes dividends paid to common shareholders during the period plus a proportionate share of undistributed net income allocable to common shareholders for the period; the proportionate share of undistributed net income allocable to common shareholders for the period is based on the proportionate share of total weighted-average common shares and participating securities outstanding during the period.

Diluted EPS is calculated by dividing net income available to common shareholders for the period by the weighted-average number of common shares outstanding during the period increased by the weighted-average number of

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

potentially dilutive common shares (dilutive securities) that were outstanding during the period if the effect is dilutive. Dilutive securities are comprised of stock options, restricted stock units and performance share units granted under the Company’s prior stock option plan and current equity incentive plan.

Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board (“FASB”) issued updated authoritative guidance related to fair value measurements which requires certain new disclosures related to activities in Level 3 fair value measurements, including purchases, sales, issuances and settlements. This updated authoritative guidance is effective for annual periods beginning after December 15, 2010. The Company does not expect the adoption of this updated authoritative guidance to have a material impact on its consolidated financial statement disclosures.

In July 2010, the FASB issued updated authoritative guidance related to financing receivables which enhances the disclosure requirements about the credit quality and related allowance for credit losses of financing receivables. This updated authoritative guidance is effective for interim and annual reporting periods ending on or after December 15, 2010. The Company has evaluated this updated authoritative guidance, and it does not expect it to impact its consolidated financial statement disclosures.

In December 2010, the FASB issued updated authoritative guidance related to when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. Per this updated authoritative guidance, when a reporting unit has a zero or negative carrying amount, Step 2 of the goodwill impairment test will be performed if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The qualitative factors to be considered are consistent with the current interim impairment triggers for goodwill. Upon adoption, an entity will perform Step 2 of the goodwill impairment test if it is more likely than not that goodwill is impaired. Furthermore, any impairment identified at the time of adoption will be recognized as a cumulative effect adjustment to beginning retained earnings. The Company is required to apply these new requirements in its fiscal year beginning after December 15, 2010. The Company has evaluated this updated authoritative guidance, and it does not expect it to have a material impact on its consolidated financial statements.

Note 3. Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of tangible and intangible assets acquired. Other intangible assets, including both indefinite-lived intangible assets and definite-lived intangible assets, consist of trade names and non-contractual customer relationships. The carrying values of goodwill and indefinite-lived intangible assets are reviewed for possible impairment annually during the Company’s second fiscal quarter.

In addition to the annual impairment tests, goodwill and indefinite-lived intangible assets are evaluated each reporting period. Goodwill is evaluated each reporting period to determine whether events and circumstances would more likely than not reduce the fair value of a reporting unit below its carrying value. Indefinite-lived intangible assets are evaluated each reporting period to determine whether events and circumstances continue to support an indefinite useful life and to determine whether any indicators of impairment exist. Indicators such as underperformance relative to historical or projected future operating results, changes in the Company’s strategy for its overall business or use of acquired assets, unexpected negative industry or economic trends, decline in the Company’s stock price for a sustained period, decreased market capitalization relative to net book values, unanticipated technological change or competitive activities, loss of key distribution, change in consumer demand, loss of key personnel and acts by governments and courts may signal that an asset has become impaired.

Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives and are evaluated each reporting period to determine whether events and circumstances indicate that their carrying amounts may not be recoverable and/or their remaining useful lives may no longer be appropriate.

During the second quarter of fiscal year 2010, the Company performed its annual impairment tests of goodwill and indefinite-lived intangible assets. The annual goodwill impairment test was performed at the reporting unit level as required by the authoritative guidance on intangibles, goodwill and other. This annual test follows a two-step process and is conducted by applying fair value concepts. Only the first step of the annual goodwill impairment test

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

was required as the fair values of all reporting units significantly exceeded their carrying values. In performing the annual impairment test of its goodwill and indefinite-lived intangible assets, the Company considered the fair value concepts of a market participant and the highest and best use for its intangible assets. Based on the results of these annual impairment tests, the Company determined that no impairment existed related to either its goodwill or indefinite-lived intangible assets as of February 28, 2010.

In addition, there were no indicators of impairment identified as a result of the Company’s review of events and circumstances related to its goodwill or other intangible assets for the three months ended November 30, 2010.

Goodwill

Changes in the carrying amounts of goodwill by segment for the three months ended November 30, 2010 are summarized below (in thousands):

 

     Americas      Europe      Asia-Pacific      Total  

Balance as of August 31, 2010

   $ 85,546       $ 8,479       $ 1,210       $ 95,235   

Translation adjustments

     3         17         —           20   
                                   

Balance as of November 30, 2010

   $ 85,549       $ 8,496       $ 1,210       $ 95,255   
                                   

To date, there have been no impairment losses identified and recorded related to the Company’s goodwill.

Indefinite-lived Intangible Assets

Indefinite-lived intangible assets, which are not being amortized, consist of the 2000 Flushes, Spot Shot and 1001 trade names and are included in other intangible assets, net in the Company’s condensed consolidated balance sheets. Changes in the carrying amounts of indefinite-lived intangible assets by segment for the three months ended November 30, 2010 are summarized below (in thousands):

 

            Americas      Europe      Asia-Pacific      Total  

Balance as of August 31, 2010

      $ 24,500       $ 3,149       $ —         $ 27,649   

Translation adjustments

        —           15         —           15   
                                      

Balance as of November 30, 2010

      $ 24,500       $ 3,164       $ —         $ 27,664   
                                      

Definite-lived Intangible Assets

The Company’s definite-lived intangible assets consist of the Carpet Fresh and X-14 trade names and certain non-contractual customer relationships from the acquisition of the 1001 line of products in fiscal year 2004 and are included in other intangible assets, net in the Company’s condensed consolidated balance sheets. The Carpet Fresh and X-14 trade names are being amortized on a straight-line basis over their estimated useful lives of thirteen and eight years, respectively. The non-contractual customer relationships intangible asset is being amortized on a straight-line basis over its estimated useful life of eight years. The following table summarizes the definite-lived intangible assets and the related accumulated amortization (in thousands):

 

     November 30,
2010
    August 31,
2010
 

Gross carrying amount

   $ 6,860      $ 6,842   

Accumulated amortization

     (3,414     (3,219
                

Net carrying amount

   $ 3,446      $ 3,623   
                

Changes in the carrying amounts of definite-lived intangible assets by segment for the three months ended November 30, 2010 are summarized below (in thousands):

 

     Americas     Europe     Asia-Pacific      Total  

Balance as of August 31, 2010

   $ 2,892      $ 731      $ —         $ 3,623   

Amortization expense

     (64     (117     —           (181

Translation adjustments

     —          4        —           4   
                                 

Balance as of November 30, 2010

   $ 2,828      $ 618      $ —         $ 3,446   
                                 

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

The estimated future amortization expense for the non-contractual customer relationships intangible asset is based on current foreign currency exchange rates, and amounts in future periods may differ from those presented due to fluctuations in those rates. The estimated amortization expense for the Carpet Fresh and X-14 trade names and non-contractual customer relationships intangible assets in future fiscal years is as follows (in thousands):

 

     Trade
Names
     Non-Contractual
Customer
Relationships
 

Remainder of fiscal year 2011

   $ 194       $ 348   

Fiscal year 2012

     258         270   

Fiscal year 2013

     258         —     

Fiscal year 2014

     258         —     

Fiscal year 2015

     258         —     

Thereafter

     1,602         —     
                 

Total

   $ 2,828       $ 618   
                 

Note 4. Fair Value Measurements

Financial Assets and Liabilities

The Company categorizes its financial assets and liabilities measured at fair value into a hierarchy that categorizes fair value measurements into the following three levels based on the types of inputs used in measuring their fair value:

Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities;

Level 2: Observable market-based inputs or observable inputs that are corroborated by market data; and

Level 3: Unobservable inputs reflecting the Company’s own assumptions.

Financial assets measured at fair value on a recurring basis are summarized below (in thousands):

 

     Significant Other
Observable Inputs (Level 2)
 
     November  30,
2010
     August  31,
2010
 
     

Assets:

     

Money market funds

   $ 22,439       $ 24,362   
                 

Money market funds are highly liquid investments classified as cash equivalents in the Company’s condensed consolidated balance sheets at November 30, 2010 and August 31, 2010. These securities are valued based on third party quotations of similar assets in active markets, and are thus classified as Level 2 within the fair value hierarchy.

There were no transfers between Level 1 and Level 2 fair value measurements during the three months ended November 30, 2010.

The carrying values of trade accounts receivable and accounts payable approximate their fair values due to their short-term maturities. The estimated fair value of long-term debt, including current maturities, was $11.3 million and $22.4 million at November 30, 2010 and August 31, 2010, respectively, based on discounted future cash flows using current market interest rates.

Nonfinancial Assets and Liabilities

The Company’s nonfinancial assets and liabilities are recognized at fair value subsequent to initial recognition when they are deemed to be impaired. There were no nonfinancial assets and liabilities deemed to be impaired and measured at fair value on a nonrecurring basis as of November 30, 2010 and August 31, 2010.

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

Note 5. Balance Sheet Details

The condensed consolidated balance sheet details are summarized below (in thousands):

 

     November 30,
2010
    August 31,
2010
 

Inventories:

    

Raw materials and components

   $ 1,613      $ 1,811   

Work-in-process

     1,523        979   

Finished goods

     12,694        10,247   
                

Total

   $ 15,830      $ 13,037   
                

Other current assets:

    

Prepaids and other current assets

   $ 4,744      $ 4,717   

Federal and state income taxes receivable

     —          2,597   
                

Total

   $ 4,744      $ 7,314   
                

Property, plant and equipment, net:

    

Machinery, equipment and vehicles

   $ 12,583      $ 12,162   

Buildings and improvements

     4,456        4,416   

Computer and office equipment

     3,165        3,075   

Software

     4,083        4,011   

Furniture and fixtures

     1,113        1,092   

Land

     543        542   
                

Subtotal

     25,943        25,298   

Less: accumulated depreciation and amortization

     (16,543     (15,976
                

Total

   $ 9,400      $ 9,322   
                

Accrued liabilities:

    

Accrued advertising and sales promotion expenses

   $ 8,950      $ 8,940   

Accrued professional services fees

     1,194        1,160   

Accrued other taxes

     1,061        914   

Accrued sales taxes

     803        797   

Other

     3,343        2,571   
                

Total

   $ 15,351      $ 14,382   
                

Accrued payroll and related expenses:

    

Accrued profit sharing

   $ 2,428      $ 2,051   

Accrued payroll

     1,889        2,020   

Accrued payroll taxes

     1,512        1,388   

Accrued bonuses

     816        8,333   

Other

     462        473   
          

Total

   $ 7,107      $ 14,265   
                

Deferred employee benefits and other long-term liabilities:

    

Supplemental employee retirement plan benefits liability

   $ 699      $ 705   

Other income taxes payable

     3,846        3,846   

Other

     124        84   
                

Total

   $ 4,669      $ 4,635   
                

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

Note 6. Shareholders’ Equity

Changes in shareholders’ equity for the three months ended November 30, 2010 were as follows (in thousands):

 

Balance at August 31, 2010

   $ 196,524   

Net income

     9,079   

Issuance of common stock upon exercises of stock options and conversions of restricted stock units to common shares

     7,473   

Tax benefit from exercises of stock options and conversions of restricted stock units to common shares

     560   

Stock-based compensation

     806   

Cash dividends

     (4,534

Foreign currency translation adjustment, net of income taxes

     499   
        

Balance at November 30, 2010

   $ 210,407   
        

Note 7. Share Repurchase Plan

On December 8, 2009, the Company’s Board of Directors approved a share buy-back plan. Under the plan, which is in effect for up to twelve months from the date of approval, the Company is authorized to acquire up to $15.0 million of its outstanding shares. During the period from December 8, 2009 through November 30, 2010, the Company did not purchase any shares under this share buy-back plan. See Note 12 for details on a new share buy-back plan that was approved by the Company’s Board of Directors on December 14, 2010.

Note 8. Earnings per Common Share

The table below reconciles net income to net income available to common shareholders (in thousands):

 

     Three Months Ended November 30,  
     2010     2009  

Net income

   $ 9,079      $ 9,413   

Less: Net income allocated to participating securities

     (31     (27
                

Net income available to common shareholders

   $ 9,048      $ 9,386   
                

The table below summarizes the weighted-average number of common shares outstanding included in the calculation of basic and diluted EPS (in thousands):

 

     Three Months Ended November 30,  
     2010      2009  

Weighted-average common shares outstanding, basic

     16,796         16,556   

Weighted-average dilutive securities

     195         96   
                 

Weighted-average common shares outstanding, diluted

     16,991         16,652   
                 

For the three months ended November 30, 2010, there were no anti-dilutive stock options outstanding. For the three months ended November 30, 2009, weighted-average stock options outstanding to purchase 624,202 shares of the Company’s common stock were excluded from the weighted-average number of common shares and potential common shares outstanding used in the calculation of diluted EPS as the effect of including them would be anti-dilutive because the stock options had an exercise price greater than or equal to the average market value of the Company’s common stock during the period.

Note 9. Commitments and Contingencies

The Company has relationships with various suppliers (contract manufacturers) who manufacture the Company’s products. Although the Company typically does not have definitive minimum purchase obligations included in the contract terms with its contract manufacturers, when such obligations have been included, they have been immaterial to date. Supply needs are communicated by the Company to its contract manufacturers and the Company is committed to purchase the products produced based on orders and short-term projections, ranging from two to five months, provided to the contract manufacturers. The Company is also obligated to purchase obsolete or slow-moving inventory from its contract manufacturers and has done so in the past under these commitments, the amounts of which have been immaterial.

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

In addition to the commitments to purchase products from contract manufacturers described above, the Company may also enter into commitments with other manufacturers to purchase finished goods and components to support innovation initiatives and/or supply chain initiatives. As of November 30, 2010, no such commitments were outstanding.

The Company is party to various claims, legal actions and complaints, including product liability litigation, arising in the ordinary course of business. With the possible exception of the legal proceedings discussed below, management is of the opinion that none of these matters is likely to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

On October 3, 2010, a legal action was filed against the Company in the United States Federal Court for the Eastern District of Texas (Promote Innovation, LLC v. WD-40 Company). The complaint is a qui tam action brought by the plaintiff on behalf of the United States of America for alleged violation of Section 292 of the Patent Act (Title 35 U.S. Code, Section 292) for false patent marking. The complaint alleges that the Company included reference to an expired patent on certain product packaging, specifically including 2000 Flushes brand products, with an intent to deceive the public. The complaint seeks to recover a civil monetary fine of $500 per false marking offense, or an alternative amount determined by the court, one-half of which is to be paid to the United States. The Company intends to vigorously defend this claim of intentional false patent marking. At the present time, the Company is unable to estimate the extent of possible loss or a range of possible loss with respect to this claim.

On June 18, 2010, a legal action was filed against the Company in the Superior Court of California for the County of Orange (Andrea Burns v. WD-40 Company). The complaint seeks class action status and alleges that the Company misrepresented that its 2000 Flushes Bleach and 2000 Flushes Blue Plus Bleach automatic toilet bowl cleaners (“ATBCs”) are safe for plumbing systems and unlawfully omitted to advise consumers regarding the allegedly damaging effect the use of the ATBCs has on toilet parts made of plastic and rubber. This action is substantively similar to the Drimmer v. WD-40 Company case that was filed by the same plaintiff law firm in April 2006 in the United States District Court, Southern District of California. In August 2008, the Company defeated class certification in that case, a decision that was upheld by the Ninth Circuit Court of Appeals in September 2009, and the case was dismissed with prejudice in March 2010. As in the Drimmer case, the Company intends to vigorously defend against the Burns case. If, however, class action certification is granted in the Burns case, it is reasonably possible that the outcome could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows. There is not sufficient information available at this time to determine the likelihood that class certification will be granted or the extent of possible loss if class certification is granted.

Since 2004, the Company has been named as a defendant in lawsuits brought by a group of attorneys on behalf of individual plaintiffs who assert that exposure to products that allegedly contain benzene is a cause of certain cancers (the “Benzene Lawsuits”). The Company is one of many defendants in these legal proceedings whose products are alleged to contain benzene. However, the Company specifies that its suppliers provide constituent ingredients free of benzene. The Company believes its products have always been formulated without containing benzene and that the facts developed in litigation to date support this position. The plaintiffs in the Benzene Lawsuits typically seek damages in unspecified amounts for injuries or death attributable to a form of cancer linked to exposure to benzene. The Company is unable to quantify the total amount of damages asserted by the plaintiffs in the Benzene Lawsuits. Except for self-insured retention amounts applicable to each separately filed lawsuit, the Company expects that the Benzene Lawsuits will be adequately covered by insurance and will not have a material impact on the Company’s consolidated financial position or results of operations. The Company is vigorously defending these lawsuits. The Company is unable to assess the expected cost of defense of these lawsuits in future periods. If the number of Benzene Lawsuits filed against the Company increases, it is reasonably possible that such costs of defense may materially affect the Company’s consolidated financial position, results of operations and cash flows in future periods.

As permitted under Delaware law, the Company has agreements whereby it indemnifies senior officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

indemnification agreements is unlimited; however, the Company maintains Director and Officer insurance coverage that mitigates the Company’s exposure with respect to such obligations. As a result of the Company’s insurance coverage, management believes that the estimated fair value of these indemnification agreements is minimal. Thus, no liabilities have been recorded for these agreements as of November 30, 2010.

From time to time, the Company enters into indemnification agreements with certain contractual parties in the ordinary course of business, including agreements with lenders, lessors, contract manufacturers, marketing distributors, customers and certain vendors. All such indemnification agreements are entered into in the context of the particular agreements and are provided in an attempt to properly allocate risk of loss in connection with the consummation of the underlying contractual arrangements. Although the maximum amount of future payments that the Company could be required to make under these indemnification agreements is unlimited, management believes that the Company maintains adequate levels of insurance coverage to protect the Company with respect to most potential claims arising from such agreements and that such agreements do not otherwise have value separate and apart from the liabilities incurred in the ordinary course of the Company’s business. Thus, no liabilities have been recorded with respect to such indemnification agreements as of November 30, 2010.

Note 10. Income Taxes

The Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

The provision for income taxes was 31.5% and 34.4% of income before income taxes for the three months ended November 30, 2010 and 2009, respectively. The decrease in the effective tax rate is partially due to provision adjustments of $0.1 million associated with the Company’s fiscal year 2010 federal tax return, which was timely filed during the current quarter. Historically, such provision adjustments have been recorded during the third fiscal quarter. In addition, the tax benefit associated with the qualified domestic production deduction increased by $0.1 million for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year, resulting in a lower effective tax rate for the current period.

The total amount of unrecognized tax benefits was $3.6 million as of November 30, 2010 and August 31, 2010, of which $1.1 million would impact the effective tax rate if recognized. The gross liability for income taxes related to unrecognized tax benefits is included in other long-term liabilities in the Company’s condensed consolidated balance sheets.

The total balance of accrued interest related to uncertain tax positions was $0.3 million and $0.2 million as of November 30, 2010 and August 31, 2010, respectively. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. There were no material interest or penalties included in income tax expense for each of the three month periods ended November 30, 2010 and 2009.

The Company is subject to taxation in the U.S. and in various state and foreign jurisdictions. Due to expired statutes, the Company’s federal income tax returns for years prior to fiscal year 2007 are not subject to examination by the U.S. Internal Revenue Service. Generally, for the majority of state and foreign jurisdictions where the Company does business, periods prior to fiscal year 2006 are no longer subject to examination. The Company is currently under audit in various state and local jurisdictions for fiscal years 2005 through 2008. The Company has estimated that up to $0.4 million of unrecognized tax benefits related to income tax positions may be affected by the resolution of tax examinations or expiring statutes of limitation within the next twelve months. Audit outcomes and the timing of settlements are subject to significant uncertainty.

Note 11. Business Segments and Foreign Operations

The Company evaluates the performance of its segments and allocates resources to them based on sales, operating income and expected return. The Company is organized based on geographic location. Segment data does not include inter-segment revenues and incorporates corporate expenses into the Americas segment, with the exception of certain research and development expenses which the Europe segment started to incur during the current fiscal

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

year. All such corporate expenses are not allocated to other segments because the Company’s segments are run independently. As a result, there are few costs that could be considered only corporate expenses that would qualify for allocation to other segments. The most significant portion of corporate expenses relates to the Americas segment both as a percentage of time and sales. Therefore, any allocation to other segments would be arbitrary.

The tables below present information about reportable segments and net sales by product line (in thousands):

As of and for the Three Months Ended November 30:

 

     Americas      Europe      Asia-Pacific      Total  

2010

           

Net sales

   $ 39,215       $ 30,757       $ 10,955       $ 80,927   

Income from operations (1)

   $ 4,178       $ 6,609       $ 2,535       $ 13,322   

Depreciation and amortization expense

   $ 622       $ 311       $ 45       $ 978   

Interest income

   $ 5       $ 26       $ 24       $ 55   

Interest expense

   $ 320       $ —         $ 2       $ 322   

Total assets

   $ 188,893       $ 84,821       $ 12,018       $ 285,732   

2009

           

Net sales

   $ 43,679       $ 27,247       $ 6,795       $ 77,721   

Income from operations (1)

   $ 6,870       $ 6,726       $ 1,133       $ 14,729   

Depreciation and amortization expense

   $ 727       $ 319       $ 36       $ 1,082   

Interest income

   $ —         $ 23       $ 12       $ 35   

Interest expense

   $ 522       $ —         $ 2       $ 524   

Total assets

   $ 178,459       $ 75,479       $ 8,854       $ 262,792   

 

(1) Income from operations for the Americas segment included corporate expenses of $4.5 million and $4.4 million for the three months ended November 30, 2010 and 2009, respectively. Research and development expenses included in income from operations for the Europe segment were not significant for the three months ended November 30, 2010.

Net Sales by Product Line:

 

     Three Months Ended November 30,  
     2010      2009  

Multi-purpose maintenance products

   $ 66,533       $ 60,679   

Homecare and cleaning products

     14,394         17,042   
                 

Total

   $ 80,927       $ 77,721   
                 

Note 12. Subsequent Events

On December 8, 2010, the Company’s existing share buy-back plan expired. The Company did not repurchase any shares under this share buy-back plan during the twelve month period it was in effect.

On December 14, 2010, the Company’s Board of Directors approved a new share buy-back plan. Under the plan, which is in effect through December 13, 2011, the Company is authorized to acquire up to $25.0 million of its outstanding shares on such terms and conditions as may be acceptable to the Company’s Chief Executive Officer or Chief Financial Officer and subject to lender approval from Prudential Capital and in compliance with all laws and regulations applicable thereto.

Also on December 14, 2010, the Company’s Board of Directors declared a cash dividend of $0.27 per share payable on January 31, 2011 to shareholders of record on January 7, 2011.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used in this report, the terms “we,” “our,” “us” and “the Company” refer to WD-40 Company and its wholly-owned subsidiaries, unless the context suggests otherwise. Amounts and percents in tables and discussions may not total due to rounding.

The following information is provided as a supplement to, and should be read in conjunction with, the unaudited condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2010, which was filed with the Securities and Exchange Commission (“SEC”) on October 18, 2010.

In order to show the impact of changes in foreign currency exchange rates on our consolidated results of operations, we have included constant currency disclosures, where necessary, in the Overview and Results of Operations sections which follow. Constant currency disclosures represent the translation of our current fiscal year revenues and expenses from the functional currencies of our subsidiaries to U.S. dollars using the exchange rates in effect for the corresponding period of the prior fiscal year.

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. These statements include, but are not limited to, references to the near-term growth expectations for multi-purpose maintenance products and homecare and cleaning products, the impact of changes in product distribution, competition for shelf space, the impact of competition on product pricing, the level of promotional and advertising spending, plans for and success of product innovation, the impact of new product introductions on the growth of sales, the impact of customer mix and costs of raw materials, components and finished goods on gross margins, the impact of promotional programs on sales, the rate of sales growth in the Asia-Pacific segment, direct European countries and Eastern and Northern Europe, foreign currency exchange rates and fluctuations in those rates, the impact of changes in inventory management, the effect of future income tax provisions and audit outcomes on tax rates, and the effects of, and changes in, worldwide economic conditions and legal proceedings and other risk factors. The Company undertakes no obligation to revise or update any forward-looking statements.

Actual events or results may differ materially from those projected in forward-looking statements due to various factors, including, but not limited to, those identified in Part I—Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2010, and in the Company’s Quarterly Reports on Form 10-Q, which may be updated from time to time.

Overview

The Company

WD-40 Company, based in San Diego, California, is a global consumer products company dedicated to delivering unique, high value and easy-to-use solutions for a wide variety of maintenance needs of “doer” and “on-the-job” users by leveraging and building the brand fortress of the Company. We market three multi-purpose maintenance product brands, WD-40®, 3-IN-ONE® Oil and BLUE WORKS™. Blue Works, which is targeted at the industrial channel, is the newest of these product brands. We launched Blue Works in the U.S. in the second quarter of fiscal year 2010 and in select markets in Europe starting in November 2010. We also market the following homecare and cleaning product brands: X-14® mildew stain remover and automatic toilet bowl cleaners, 2000 Flushes® automatic toilet bowl cleaners, Carpet Fresh® and No Vac® rug and room deodorizers, Spot Shot® aerosol and liquid carpet stain removers, 1001® carpet and household cleaners and rug and room deodorizers and Lava® and Solvol® heavy-duty hand cleaners.

 

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Our brands are sold in various locations around the world. Multi-purpose maintenance products are sold worldwide in markets throughout North, Central and South America, Asia, Australia and the Pacific Rim, Europe, the Middle East and Africa. Homecare and cleaning products are sold primarily in North America, the U.K., Australia and the Pacific Rim. We sell our products primarily through mass retail and home center stores, warehouse club stores, grocery stores, hardware stores, automotive parts outlets and industrial distributors and suppliers.

Highlights

Highlights for our business for the three months ended November 30, 2010, include the following:

 

   

Changes in foreign currency exchange rates had an unfavorable impact of $0.5 million on consolidated net sales for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates in the Europe segment had an unfavorable impact on net sales of $1.0 million which was partially offset by the favorable impact of changes in foreign currency exchanges rates on net sales of $0.3 million and $0.1 million in the Asia-Pacific and Americas segments, respectively. Changes in foreign currency exchange rates did not have a material impact on consolidated net income for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year.

 

   

Sales of multi-purpose maintenance products increased 10% for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year due to sales growth in the Europe and Asia-Pacific segments of 13% and 70%, respectively. Sales of multi-purpose maintenance products in the Europe segment increased primarily due to improved economic conditions, the continued growth of the WD-40 Smart Straw and 3-IN-ONE products, the timing of promotional activities and the ongoing growth of our base business. Sales of multi-purpose maintenance products in the Asia-Pacific segment increased due to improved economic conditions and significant promotional activities. Partially offsetting these increases was a decrease in sales of multi-purpose maintenance products in the Americas segment of 5% due to lower sales of WD-40 products in the U.S.

 

   

Sales of homecare and cleaning products decreased 16% for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year primarily due to the sales decrease of 22% in the Americas segment primarily related to Spot Shot products. Although we remain focused on stabilizing the sales of our homecare and cleaning products, sales of these products continue to be negatively impacted by competition, lost distribution and the volatility of orders from and promotional programs with customers, particularly those in the warehouse club and mass retail channels.

 

   

Our gross profit as a percentage of net sales remained flat at 51% for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year due to several factors which offset each other. Gross margin was favorably impacted by lower aerosol can costs, lower advertising and promotional discounts and sales price increases implemented on certain products during the three months ended November 30, 2010. These favorable items were offset by higher costs of petroleum-based materials and the impact of unfavorable changes in foreign currency exchange rates from period to period.

Our core strategic initiatives and the areas where we will continue to focus our time and resources for the remainder of fiscal year 2011 and in future periods include: (i) expanding geographically in countries where end users could benefit from or continue to benefit from using the WD-40 brand; (ii) maximizing our position in the multi-purpose maintenance products segment by focusing our research and development resources to leverage our multi-purpose maintenance products and adjacent categories; (iii) developing our business through acquisitions, joint ventures, licensing and/or other strategic partnerships; and (iv) leveraging the trust the WD-40 brand has established with its wide user base to grow our revenues and profits.

 

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Results of Operations

Three Months Ended November 30, 2010 Compared to Three Months Ended November 30, 2009

Operating Items

The following table summarizes operating data for our consolidated operations (in thousands, except percentages and per share amounts):

 

     Three Months Ended November 30,  
                   Change from
Prior Year
 
   2010      2009      Dollars     Percent  

Net sales:

          

Multi-purpose maintenance products

   $ 66,533       $ 60,679       $ 5,854        10

Homecare and cleaning products

     14,394         17,042         (2,648     (16 )% 
                            

Total net sales

     80,927         77,721         3,206        4

Cost of products sold

     39,705         37,808         1,897        5
                            

Gross profit

     41,222         39,913         1,309        3

Operating expenses

     27,900         25,184         2,716        11
                            

Income from operations

   $ 13,322       $ 14,729       $ (1,407     (10 )% 
                            

Net income

   $ 9,079       $ 9,413       $ (334     (4 )% 
                            

Earnings per common share – diluted

   $ 0.53       $ 0.56       $ (0.03     (5 )% 
                            

Net Sales by Segment

The following table summarizes net sales by segment (in thousands, except percentages):

 

     Three Months Ended November 30,  
                   Change from
Prior Year
 
     2010      2009      Dollars     Percent  

Americas

   $ 39,215       $ 43,679       $ (4,464     (10 )% 

Europe

     30,757         27,247         3,510        13

Asia-Pacific

     10,955         6,795         4,160        61
                            

Total

   $ 80,927       $ 77,721       $ 3,206        4
                            

Americas

The following table summarizes net sales by product line for the Americas segment (in thousands, except percentages):

 

     Three Months Ended November 30,  
                 Change from
Prior Year
 
     2010     2009     Dollars     Percent  

Multi-purpose maintenance products

   $ 28,456      $ 29,920      $ (1,464     (5 )% 

Homecare and cleaning products

     10,759        13,759        (3,000     (22 )% 
                          

Total

   $ 39,215      $ 43,679      $ (4,464     (10 )% 
                          

% of consolidated net sales

     48     56    
                    

Sales in the Americas segment, which includes the U.S., Canada and Latin America, decreased to $39.2 million, down $4.5 million, or 10%, for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a material impact on sales for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year.

Sales of multi-purpose maintenance products in the Americas segment decreased $1.5 million, or 5%, for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year. This sales decrease was driven by lower sales of WD-40 products in the U.S. which were down $1.6 million, or 7%, for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year primarily due to lost distribution, a lower level of replenishment orders from and the timing of promotional activities with certain of our key customers.

 

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Sales of homecare and cleaning products in the Americas segment decreased $3.0 million, or 22%, for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year. Although we remain focused on stabilizing the sales of our homecare and cleaning products, sales of these products continue to be negatively impacted by competition, lost distribution and the volatility of orders from and promotional programs with customers, particularly those in the warehouse club and mass retail channels. Sales of homecare and cleaning products in the U.S., which is where the majority of such sales originate, decreased $3.0 million, or 24%, from period to period. This sales decrease was driven primarily by lower sales of Spot Shot products, which were down $2.5 million, or 43%, in the U.S. for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year. This decrease in Spot Shot sales was due to several factors, including the timing and lower level of promotional activities, specifically those within the warehouse club channel, lost distribution and the effect of competitive factors.

For the Americas segment, 79% of sales came from the U.S., and 21% of sales came from Canada and Latin America combined for the three months ended November 30, 2010, compared to the distribution for the three months ended November 30, 2009, when 81% of sales came from the U.S., and 19% of sales came from Canada and Latin America combined.

Europe

The following table summarizes net sales by product line for the Europe segment (in thousands, except percentages):

 

     Three Months Ended November 30,  
                 Change from
Prior Year
 
     2010     2009     Dollars      Percent  

Multi-purpose maintenance products

   $ 28,544      $ 25,161      $ 3,383         13

Homecare and cleaning products

     2,213        2,086        127         6
                           

Total

   $ 30,757      $ 27,247      $ 3,510         13
                           

% of consolidated net sales

     38     35     
                     

Sales in the Europe segment increased to $30.8 million, up $3.5 million, or 13%, for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year had an unfavorable impact on sales. Sales for the three months ended November 30, 2010 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $31.7 million in the Europe segment. Thus, on a constant currency basis, sales would have increased by $4.5 million, or 16%, for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year.

The countries in Europe where we sell through a direct sales force include the U.K., Italy, France, Iberia (which includes Spain and Portugal) and the Germanics sales region (which includes Germany, Austria, Denmark, Holland and Switzerland). Overall, sales from these direct markets increased $2.8 million, or 17%, for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year and accounted for 64% of the Europe segment’s sales for the three months ended November 30, 2010 compared to 62% of the Europe segment’s sales for the corresponding period of the prior fiscal year. We experienced sales growth throughout most of the Europe segment for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year, with percentage increases in sales as follows: Germanics sales region, 29%; U.K., 28%; Italy, 26%; and France, 1%. Partially offsetting these sales increases was a sales decrease in Iberia of 5% for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year.

The sales growth throughout the Europe segment, where we sell direct, was primarily due to improved economic conditions, the continued growth of the WD-40 Smart Straw and 3-IN-ONE products, the timing of promotional activities and the ongoing growth of our base business. The sales decrease in Iberia was solely related to the unfavorable impact of changes in foreign currency exchange rates which more than offset the sales increase in local currency of 3% for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year.

In the countries in which we sell through local distributors, sales increased $0.7 million, or 7%, for the three months

 

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ended November 30, 2010 compared to the corresponding period of the prior fiscal year, driven by increased sales of WD-40 products in Eastern Europe primarily due to increased promotional activities. The distributor markets accounted for 36% of the total Europe segment sales for the three months ended November 30, 2010, compared to 38% for the corresponding period of the prior fiscal year.

Asia-Pacific

The following table summarizes net sales by product line for the Asia-Pacific segment (in thousands, except percentages):

 

     Three Months Ended November 30,  
                 Change from
Prior Year
 
     2010     2009     Dollars      Percent  

Multi-purpose maintenance products

   $ 9,534      $ 5,599      $ 3,935         70

Homecare and cleaning products

     1,421        1,196        225         19
                           

Total

   $ 10,955      $ 6,795      $ 4,160         61
                           

% of consolidated net sales

     14     9     
                     

In the Asia-Pacific segment, which includes Australia and Asia, sales increased to $11.0 million, up $4.2 million, or 61%, for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year had a favorable impact on sales. Sales for the three months ended November 30, 2010 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $10.6 million in the Asia-Pacific segment. Thus, on a constant currency basis, sales would have increased by $3.8 million, or 57%, for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year.

Sales in Asia, which represented 68% of the total sales in the Asia-Pacific segment for the three months ended November 30, 2010, increased $3.4 million, or 86%, for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year reflecting improved economic conditions throughout the Asia region. The distributor markets in the Asia region experienced a sales increase of $2.3 million, or 75%, for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year, primarily due to the continued growth of the WD-40 products throughout the distributor markets, including those in the Philippines, Taiwan, Indonesia, Hong Kong and Singapore. Sales in China increased $1.1 million, or 123%, due to the ongoing growth of our base business and significant promotional activities aimed at building user awareness and distribution in the China region for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year.

Sales in Australia increased $0.7 million, or 26%, for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year partially due to the favorable impact of changes in foreign currency exchange rates. On a constant currency basis, sales would have increased $0.4 million, or 16%, for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year primarily due to improved economic conditions and promotional activities with several key customers.

Gross Profit

Gross profit increased to $41.2 million for the three months ended November 30, 2010 compared to $39.9 million for the corresponding period of the prior fiscal year. As a percentage of net sales, gross profit decreased slightly to 50.9% for the three months ended November 30, 2010 compared to 51.4% for the corresponding period of the prior fiscal year due to a variety of items which offset each other, including costs associated with aerosol cans and oil-based materials, sales price increases and the level of discounts offered to our customers.

Lower costs of aerosol cans and sales price increases implemented on certain products during the three months ended November 30, 2010 positively affected gross margin by 0.7 percentage points and 0.1 percentage points, respectively.

During the three months ended November 30, 2010, advertising, promotional and other discounts decreased

 

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compared to the corresponding period of the prior fiscal year, positively impacting gross margin by 0.5 percentage points. The decrease in such discounts was due to the fact that a lower percentage of sales during the three months ended November 30, 2010 was subject to promotional allowances compared to the corresponding period in the prior fiscal year. In general, the timing of advertising, promotional and other discounts, which are recorded as a reduction to sales, as well as shifts in product and customer mix, may cause fluctuations in gross margin from period to period. Examples of advertising, promotional and other discounts include coupon redemptions, consideration and allowances given to retailers for space and/or favorable display positions in their stores, co-operative advertising and promotional activity, volume discounts and other one-time or ongoing incentives.

More than offsetting the aforementioned favorable impacts to gross margin were the higher costs for petroleum-based materials and changes in foreign currency exchange rates which negatively impacted gross margin by 1.6 percentage points and 0.2 percentage points, respectively, for the three months ended November 30, 2010.

Note that our gross profits and gross margins may not be comparable to those of other reporting entities, since some entities include all costs related to distribution of their products in cost of products sold, whereas we exclude the portion associated with amounts paid to third parties for distribution to our customers from our contract packagers and include these costs in selling, general and administrative expenses. These costs totaled $3.4 million and $3.3 million for the three months ended November 30, 2010 and 2009, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses for the three months ended November 30, 2010 increased $1.8 million, or 9%, to $21.6 million from $19.8 million for the corresponding period of the prior fiscal year. As a percentage of net sales, SG&A expenses increased to 26.8% for the three months ended November 30, 2010 from 25.5% for the corresponding period of the prior fiscal year. The increase in SG&A expenses was largely attributable to higher employee-related costs, a higher level of expenses associated with travel and meetings and increased professional services costs. Employee-related costs, which include salaries, bonuses, profit sharing, stock-based compensation and other fringe benefits, increased $0.5 million for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year. The increase in employee-related costs from period to period was partially due to annual compensation increases, which were implemented in the first quarter of the current fiscal year and not in the prior fiscal year, and higher staffing levels. Travel and meeting expenses increased $0.6 million due to a higher level of travel expenses associated with various sales meetings and activities in support of our strategic initiatives. Professional services costs increased $0.3 million due to higher legal and consulting fees and other miscellaneous expenses, which included broker sales commissions and insurance, increased by $0.4 million period over period. Changes in foreign currency exchange rates did not have a material impact on SG&A expenses for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year.

We continued our research and development investment in support of our focus on innovation and renovation of our products. Research and development costs for both the three months ended November 30, 2010 and 2009 were $1.2 million. Our product development team, Team Tomorrow, engages in consumer research, product development, current product improvement and testing activities. This team leverages its development capabilities by partnering with a network of outside resources including our current and prospective outsource suppliers.

Advertising and Sales Promotion Expenses

Advertising and sales promotion expenses for the three months ended November 30, 2010 increased $0.9 million, or 17%, to $6.1 million from $5.2 million for the corresponding period of the prior fiscal year. As a percentage of net sales, these expenses increased to 7.5% for the three months ended November 30, 2010 from 6.7% for the corresponding period of the prior fiscal year. The increase in advertising and sales promotion expenses was due to a higher level of advertising and promotional activities period over period, primarily in our Europe and Asia-Pacific segments. Changes in foreign currency exchange rates did not have a material impact on advertising and sales promotion expenses for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year. Investment in global advertising and sales promotion expenses for fiscal year 2011 is expected to be in the range of 6.5% to 8.0% of net sales.

As a percentage of net sales, advertising and sales promotion expenses may fluctuate period to period based upon the type of marketing activities we employ and the period in which the costs are incurred. The costs of certain

 

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promotional activities are required to be recorded as a reduction to sales, while others are recorded as advertising and sales promotion expenses. Total promotional costs recorded as a reduction to sales for the three months ended November 30, 2010 were $4.4 million compared to $4.9 million for the corresponding period of the prior fiscal year. Therefore, our total investment in advertising and sales promotion activities totaled $10.5 million and $10.1 million for the three months ended November 30, 2010 and 2009, respectively.

Amortization of Definite-lived Intangible Assets Expense

Amortization of our definite-lived intangible assets, which include the Carpet Fresh and X-14 trade names and the 1001 non-contractual customer relationships, was $182,000 and $185,000 for the three months ended November 30, 2010 and 2009, respectively.

Non-Operating Items

The following table summarizes non-operating income and expenses for our consolidated operations (in thousands):

 

     Three Months Ended November 30,  
     2010      2009      Change  

Interest income

   $ 55       $ 35       $ 20   

Interest expense

   $ 322       $ 524       $ (202

Other income, net

   $ 197       $ 114       $ 83   

Provision for income taxes

   $ 4,173       $ 4,941       $ (768

Interest Income

Interest income increased for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year primarily due to higher average cash balances during the first quarter of fiscal year 2011 compared to the corresponding period of the prior fiscal year.

Interest Expense

Interest expense decreased $0.2 million for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year due to the lower principal balance on long-term borrowings resulting from the annual $10.7 million principal payment made in October 2010.

Other Income, Net

Other income, net increased $0.1 million for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year primarily due to higher foreign currency exchange gains for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year.

Provision for Income Taxes

The provision for income taxes was 31.5% and 34.4% of income before income taxes for the three months ended November 30, 2010 and 2009, respectively. The decrease in the effective tax rate is partially due to provision adjustments of $0.1 million associated with our fiscal year 2010 federal tax return, which was timely filed during the current quarter. Historically, such provision adjustments have been recorded during the third fiscal quarter. In addition, the tax benefit associated with the qualified domestic production deduction increased by $0.1 million for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year, resulting in a lower effective tax rate for the current period.

Net Income

Net income was $9.1 million, or $0.53 per common share on a fully diluted basis for the three months ended November 30, 2010, compared to $9.4 million, or $0.56 per common share on a fully diluted basis for the corresponding period of the prior fiscal year. The change in foreign currency exchange rates did not have a material impact on net income for the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year.

 

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Liquidity and Capital Resources

Overview

The Company’s financial condition and liquidity remain strong. Net cash provided by operations was $4.3 million for the three months ended November 30, 2010 compared to $16.3 million for the corresponding period of the prior fiscal year. We believe we continue to be well positioned to weather any uncertainty in the capital markets and global economy due to our strong balance sheet and efficient business model, along with our growing and diversified global revenues. We continue to manage all aspects of our business including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies and developing 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 expires in October 2011, and is currently undrawn. At November 30, 2010, we had a total of $73.2 million in cash and cash equivalents. We believe that these existing cash and cash equivalents at November 30, 2010, the liquidity provided by 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.

The outstanding indebtedness under our original $75 million, 7.28% fixed-rate term loan was $10.7 million as of November 30, 2010. The final payment on this term loan is due in October 2011.

Cash Flows

Operating Activities

Net cash provided by operating activities decreased $12.0 million to $4.3 million for the three months ended November 30, 2010 from $16.3 million for the corresponding period of the prior fiscal year. Cash provided by operating activities decreased for the three months ended November 30, 2010 compared to the corresponding period in the prior fiscal year primarily due to changes in operating assets and liabilities, primarily changes in accounts payable and accrued expenses and liabilities, trade accounts receivable, inventories and income taxes payable. Accounts payable and accrued expenses and liabilities decreased from period to period primarily due to the payment of fiscal year 2010 bonuses during the three months ended November 30, 2010 which were significantly higher than those paid in the corresponding period of the prior fiscal year. Trade accounts receivable provided less cash towards operations during the three months ended November 30, 2010 as compared to the corresponding period of the prior fiscal year due to the timing of payments by our customers. Inventories increased due to additional purchases in support of promotions in the upcoming quarters and purchases associated with innovation initiatives and/or supply chain initiatives. Income taxes payable decreased due to the timing of income tax accruals and the related payments during the three months ended November 30, 2010 compared to the corresponding period of the prior fiscal year.

Investing Activities

Net cash used for investing activities increased $0.4 million to $0.7 million for the three months ended November 30, 2010 from $0.3 million for the corresponding period of the prior fiscal year due primarily to higher capital expenditures. Capital expenditures during the three months ended November 30, 2010 were primarily for machinery and equipment, computer equipment and software.

Financing Activities

Net cash used for financing activities decreased $7.3 million to $6.6 million for the three months ended November 30, 2010 from $13.9 million for the corresponding period of the prior fiscal year due primarily to significantly higher proceeds from the issuance of common stock which were slightly offset by higher dividend payments from period to period.

 

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Commercial Commitments

We have relationships with various suppliers (contract manufacturers) who manufacture our products. Although we typically do not have definitive minimum purchase obligations included in the contract terms with the contract manufacturers, when such obligations have been included, they have been immaterial to date. Supply needs are communicated by us to our contract manufacturers, and we are committed to purchase the products produced based on orders and short-term projections, ranging from two to five months, provided to the contract manufacturers. We are also obligated to purchase obsolete or slow-moving inventory from our contract manufacturers and have done so in the past under these commitments, the amounts of which have been immaterial.

In addition to the commitments to purchase products from contract manufacturers described above, we may also enter into commitments with other manufacturers to purchase finished goods and components to support innovation initiatives and/or supply chain initiatives. As of November 30, 2010, no such commitments were outstanding.

Share Repurchase Plan

On December 8, 2009, the Company’s Board of Directors approved a share buy-back plan. Under the plan, which was in effect for up to twelve months from the date of approval, we are authorized to acquire up to $15.0 million of our outstanding shares. During the period from December 8, 2009 through the share buy-back plan’s expiration date of December 8, 2010, we did not purchase any shares under this share buy-back plan.

On December 14, 2010, the Company’s Board of Directors approved a new share buy-back plan. Under the plan, which is in effect through December 13, 2011, we are authorized to acquire up to $25.0 million of our outstanding shares on such terms and conditions as may be acceptable to our Chief Executive Officer or Chief Financial Officer and subject to lender approval from Prudential Capital and in compliance with all laws and regulations applicable thereto.

Dividends

On December 14, 2010, the Company’s Board of Directors declared a cash dividend of $0.27 per share payable on January 31, 2011 to shareholders of record on January 7, 2011. Our ability to pay dividends could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants.

Income Taxes

The total amount of unrecognized tax benefits was $3.6 million as of November 30, 2010 and August 31, 2010, of which $1.1 million would impact the effective tax rate if recognized. The gross liability for income taxes related to unrecognized tax benefits is included in other long-term liabilities in our condensed consolidated balance sheets.

The total balance of accrued interest related to uncertain tax positions was $0.3 million and $0.2 million as of November 30, 2010 and August 31, 2010, respectively. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. There were no material interest or penalties included in income tax expense for each of the three month periods ended November 30, 2010 and 2009.

We are subject to taxation in the U.S. and in various state and foreign jurisdictions. Due to expired statutes, our federal income tax returns for years prior to fiscal year 2007 are not subject to examination by the U.S. Internal Revenue Service. Generally, for the majority of state and foreign jurisdictions where we do business, periods prior to fiscal year 2006 are no longer subject to examination. We are currently under audit in various state and local jurisdictions for fiscal years 2005 through 2008. We have estimated that up to $0.4 million of unrecognized tax benefits related to income tax positions may be affected by the resolution of tax examinations or expiring statutes of limitation within the next twelve months. Audit outcomes and the timing of settlements are subject to significant uncertainty.

Critical Accounting Policies

Our discussion and analysis of our operating results and financial condition is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

 

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Critical accounting policies are those that involve subjective or complex judgments, often as a result of the need to make estimates. The following areas all require the use of judgments and estimates: revenue recognition and sales incentives, allowance for doubtful accounts, accounting for income taxes and valuation of goodwill and indefinite-lived intangible assets. Estimates in each of these areas are based on historical experience and various judgments and assumptions that we believe are appropriate. Actual results may differ from these estimates.

Our critical accounting policies are discussed in more detail in Part II — Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 2 to our consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2010, which was filed with the SEC on October 18, 2010.

Recently Issued Accounting Standards

In January 2010, the FASB issued updated authoritative guidance related to fair value measurements which requires certain new disclosures related to activities in Level 3 fair value measurements, including purchases, sales, issuances and settlements. This updated authoritative guidance is effective for annual periods beginning after December 15, 2010. We do not expect the adoption of this updated authoritative guidance to have a material impact on our consolidated financial statement disclosures.

In July 2010, the FASB issued updated authoritative guidance related to financing receivables which enhances the disclosure requirements about the credit quality and related allowance for credit losses of financing receivables. This updated authoritative guidance is effective for interim and annual reporting periods ending on or after December 15, 2010. We have evaluated this updated authoritative guidance, and we do not expect it to impact our consolidated financial statement disclosures.

In December 2010, the FASB issued updated authoritative guidance related to when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. Per this updated authoritative guidance, when a reporting unit has a zero or negative carrying amount, Step 2 of the goodwill impairment test will be performed if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The qualitative factors to be considered are consistent with the current interim impairment triggers for goodwill. Upon adoption, an entity will perform Step 2 of the goodwill impairment test if it is more likely than not that goodwill is impaired. Furthermore, any impairment identified at the time of adoption will be recognized as a cumulative effect adjustment to beginning retained earnings. We are required to apply these new requirements in our fiscal year beginning after December 15, 2010. We have evaluated this updated authoritative guidance, and we do not expect it to have a material impact on our consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Refer to Part II — Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2010, which was filed with the SEC on October 18, 2010.

 

Item 4. Controls and Procedures

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (“Exchange Act”). The term disclosure controls and procedures means controls and other procedures of a Company that are designed to ensure the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of November 30, 2010, the end of the period covered by this report (the Evaluation Date), and they have concluded that, as of the Evaluation Date, such controls and procedures were effective at ensuring that

 

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required information will be disclosed on a timely basis in the Company’s reports filed under the Exchange Act. Although management believes the Company’s existing disclosure controls and procedures are adequate to enable the Company to comply with its disclosure obligations, management continues to review and update such controls and procedures. The Company has a disclosure committee, which consists of certain members of the Company’s senior management.

There were no changes to the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that materially affected, or would be reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

The Company is party to various claims, legal actions and complaints, including product liability litigation, arising in the ordinary course of business.

On October 3, 2010, a legal action was filed against the Company in the United States Federal Court for the Eastern District of Texas (Promote Innovation, LLC v. WD-40 Company). The complaint is a qui tam action brought by the plaintiff on behalf of the United States of America for alleged violation of Section 292 of the Patent Act (Title 35 U.S. Code, Section 292) for false patent marking. The complaint alleges that the Company included reference to an expired patent on certain product packaging, specifically including 2000 Flushes brand products, with an intent to deceive the public. The complaint seeks to recover a civil monetary fine of $500 per false marking offense, or an alternative amount determined by the court, one-half of which is to be paid to the United States. The Company intends to vigorously defend this claim of intentional false patent marking. At the present time, the Company is unable to estimate the extent of possible loss or a range of possible loss with respect to this claim.

On June 18, 2010, a legal action was filed against the Company in the Superior Court of California for the County of Orange (Andrea Burns v. WD-40 Company). The complaint seeks class action status and alleges that the Company misrepresented that its 2000 Flushes Bleach and 2000 Flushes Blue Plus Bleach automatic toilet bowl cleaners (“ATBCs”) are safe for plumbing systems and unlawfully omitted to advise consumers regarding the allegedly damaging effect the use of the ATBCs has on toilet parts made of plastic and rubber. This action is substantively similar to the Drimmer v. WD-40 Company case that was filed by the same plaintiff law firm in April 2006 in the United States District Court, Southern District of California. In August 2008, the Company defeated class certification in that case, a decision that was upheld by the Ninth Circuit Court of Appeals in September 2009, and the case was dismissed with prejudice in March 2010. As in the Drimmer case, the Company intends to vigorously defend against the Burns case. If, however, class action certification is granted in the Burns case, it is reasonably possible that the outcome could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows. There is not sufficient information available at this time to determine the likelihood that class certification will be granted or the extent of possible loss if class certification is granted.

Since 2004, the Company has been named as a defendant in lawsuits brought by a group of attorneys on behalf of individual plaintiffs who assert that exposure to products that allegedly contain benzene is a cause of certain cancers (the “Benzene Lawsuits”). The Company is one of many defendants in these legal proceedings whose products are alleged to contain benzene. However, the Company specifies that its suppliers provide constituent ingredients free of benzene. The Company believes its products have always been formulated without containing benzene and the facts developed in litigation to date support this position. The plaintiffs in the Benzene Lawsuits typically seek damages in unspecified amounts for injuries or death attributable to a form of cancer linked to exposure to benzene. The Company is unable to quantify the total amount of damages asserted by the plaintiffs in the Benzene Lawsuits. Except for self-insured retention amounts applicable to each separately filed lawsuit, the Company expects that the Benzene Lawsuits will be adequately covered by insurance and will not have a material impact on the Company’s consolidated financial position or results of operations. The Company is vigorously defending these lawsuits. The Company is unable to assess the expected cost of defense of these lawsuits in future periods. If the number of Benzene Lawsuits filed against the Company increases, it is reasonably possible that such costs of defense may materially affect the Company’s consolidated financial position, results of operations and cash flows in future periods.

During the quarter ended November 30, 2010, there were no material developments with respect to legal proceedings that were pending as of the prior fiscal year end and disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2010, which was filed with the SEC on October 18, 2010.

 

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I — Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2010, which was filed with the SEC on October 18, 2010.

 

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Item 6. Exhibits

 

Exhibit

No.

 

Description

   3(a)   Certificate of Incorporation, incorporated by reference from the Registrant’s Form 10-K filed October 25, 2007, Exhibit 3(a) thereto.
   3(b)   Bylaws, incorporated by reference from the Registrant’s Form 10-Q filed January 9, 2009, Exhibit 3(b) thereto.
31(a)   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32(a)   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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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 10, 2011   By:  

/s/    GARRY O. RIDGE        

   

Garry O. Ridge

President and Chief Executive Officer

(Principal Executive Officer)

  By:  

/s/    JAY W. REMBOLT        

   

Jay W. Rembolt

Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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