WD 40 CO - Quarter Report: 2008 May (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

  For the quarterly period ended May 31, 2008

OR

  For the transition period from              to             

Commission File Number 000-06936

WD-40 COMPANY

(Exact name of registrant as specified in its charter)

(619) 275-1400

(Registrant’s telephone number, including area code)

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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 June 30, 2008 was 16,441,067.

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WD-40 COMPANY

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended May 31, 2008

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PART I FINANCIAL INFORMATION

WD-40 COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except share amounts)

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)

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)

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)

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 building brand equities that are first or second choice in their respective categories. The Company markets two multi-purpose lubricant brands, WD-40^® and 3-IN-ONE^® Oil, two heavy-duty hand cleaner brands, Lava^® and Solvol^®, and six household product brands, X-14^® hard surface cleaners 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 and 1001^® carpet and household cleaners and rug and room deodorizers.

The Company’s brands are sold in various locations around the world. Lubricant brands are sold worldwide in markets such as North, Central and South America, Asia, Australia and the Pacific Rim, Europe, the Middle East and Africa. Heavy-duty hand cleaner brands are sold primarily in the U.S. and Australia. Household product brands are currently sold primarily in North America, the U.K., Australia and the Pacific Rim.

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

Basis of Presentation

The financial statements included herein have been prepared by the Company, without audit, according to the rules and regulations of the Securities and Exchange Commission (“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 have been condensed or omitted pursuant to such rules and regulations. The August 31, 2007 year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2007 filed with the SEC on October 25, 2007.

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

Marketable Securities

Periodically, the Company invests in interest-bearing short-term investments. Recently, some of these investments consisted of investment-grade auction rate securities classified as available-for-sale and reported at fair value. Although these investments generally had stated maturities of 13 months to 30 years, this type of investment is designed to provide liquidity through an auction process that resets the applicable interest rates at predetermined periods ranging from 7 to 35 days. This reset mechanism is intended to allow existing investors to continue to own their respective interest in the auction rate security or to gain immediate liquidity by selling their interests at par value. As a result of the recent liquidity issues experienced in the global credit and capital markets, auctions for auction rate securities held by the Company failed during the second and third quarters of fiscal year 2008. However, the Company was able to liquidate its investment-grade auction rate securities at par value through successful auctions at the end of May 2008. Therefore, as of May 31, 2008, the Company did not carry any auction rate securities or other short-term investments. The Company did not carry any short-term investments at August 31, 2007.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Sales Concentration

Wal-Mart Stores, Inc. is a significant U.S. mass retail customer and offers a variety of the Company’s products. Sales to U.S. Wal-Mart stores accounted for approximately 6 percent and 8 percent of the Company’s consolidated net sales during the three months ended May 31, 2008 and 2007, respectively, and 7 percent and 9 percent of the Company’s consolidated net sales during the nine months ended May 31, 2008 and 2007, respectively. Excluding sales to U.S. Wal-Mart stores, sales to affiliates of Wal-Mart worldwide accounted for approximately 3 percent during each of the three-month periods ended May 31, 2008 and 2007 and 3 percent and 4 percent during the nine-month periods ended May 31, 2008 and 2007, 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.

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 in accordance with Accounting Principles Board Opinion No. 23, “Accounting for Income Taxes, Special Areas.” The Company determines whether its foreign subsidiaries will invest their undistributed earnings indefinitely based on the capital needs of the foreign subsidiaries. The Company periodically reassesses this determination. 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

Basic earnings per common share (“EPS”) is calculated by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income for the period by the weighted average number of common shares outstanding during the period increased by the weighted average number of potentially dilutive common shares (dilutive securities) that were outstanding during the period. Dilutive securities are comprised of stock options and restricted stock units granted under the Company’s stock option plan and stock incentive plan. The table below summarizes the weighted average number of common shares outstanding included in the calculation of basic and diluted earnings per common share for the periods ended May 31, 2008 and 2007 (in thousands):

For the three months ended May 31, 2008 and 2007, there were 638,277 and 280,500 weighted average stock options outstanding, respectively, that were excluded from the calculation of diluted EPS as a result of the stock options having an exercise price greater than or equal to the average market value of the Company’s common stock during the period. For the nine months ended May 31, 2008 and 2007, there were 409,014 and 231,960 weighted average stock options outstanding, respectively, that were excluded from the calculation of diluted EPS as a result of the stock options having an exercise price greater than or equal to the average market value of the Company’s common stock during the period.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Additionally, for the nine months ended May 31, 2008, there were 142,779 weighted average stock options outstanding which were excluded from the calculation of diluted EPS under the treasury stock method as they were anti-dilutive. These stock options were anti-dilutive as a result of the assumed proceeds from (i) amounts option holders must pay for exercising stock options, (ii) the amount of compensation costs for future service that the Company has not yet recognized as expense, and (iii) the amount of tax benefits that would be recorded in additional paid-in capital upon exercise of the stock options. For the three months ended May 31, 2008, as well as for each of the three- and nine-month periods ended May 31, 2007, there were no additional anti-dilutive weighted average stock options outstanding excluded from the calculation of diluted EPS under the treasury stock method.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”) which permits entities to choose to measure eligible financial instruments and certain other items at fair value. The Company will be required to adopt SFAS 159 in the first quarter of fiscal year 2009. Management is currently evaluating the impact that the implementation of SFAS 159 may have on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The Company will be required to adopt SFAS 157 in the first quarter of fiscal year 2009. Management is currently evaluating SFAS 157 to determine the impact, if any, on the Company’s consolidated financial statements.

Note 3. Goodwill and Other Intangible Assets

Goodwill and other intangible assets principally relate to the excess of the purchase price over the fair value of tangible assets acquired. Goodwill and intangible assets that have indefinite useful lives are tested at least annually for impairment during the Company’s second fiscal quarter and otherwise when there is evidence that events or changes in circumstances indicate that an impairment condition may exist. During the second quarter of fiscal year 2008, the Company tested its goodwill and indefinite-lived intangible assets for impairment. Based on this test, the Company determined that there were no instances of impairment.

Although there were no instances of impairment, if the Company’s innovation initiatives and new product introductions are unsuccessful, and sales of household products continue to decline and are determined to be other than temporary, and/or if the Company’s profit margins for its household products were to continue to deteriorate due to rising costs, the Company’s intangible assets associated with these brands could be subject to material impairment. The Company will continue to closely monitor events and circumstances that could trigger impairment.

The Company tests for goodwill impairment based on the SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”) goodwill impairment model, which is a two-step process. First, the impairment model requires comparison of the book value of net assets to the fair value of the related reporting units that have goodwill assigned to them. If the fair value is determined to be less than book value, a second step is performed to compute the amount of impairment. In the second step, the implied fair value of goodwill is estimated as the fair value of the reporting unit used in the first step less the fair values of all other net tangible and intangible assets of the reporting unit. If the carrying amount of goodwill exceeds its implied fair market value, an impairment loss is recognized in an amount equal to that excess, not to exceed the carrying amount of the goodwill. The Company tests for impairment of intangible assets with indefinite useful lives in accordance with SFAS 142 based on discounted future cash flows compared to the related book values. The Company’s impairment test is based on a discounted cash flow approach that requires significant management judgment and estimates with respect to, among other considerations, forecasted sales revenue, advertising and promotional expenses, cost of products sold, gross margins, operating margins, the success of product innovations and introductions, customer retention, tax rates, terminal growth values and the selection of appropriate discount and royalty rates.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

In addition to the annual impairment tests, goodwill and intangible assets with indefinite lives 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. Intangible assets with indefinite lives 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, decline in the Company’s stock price for a sustained period, unexpected adverse industry or economic trends, 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.

Intangible assets with definite lives are amortized over their useful lives and are also evaluated each reporting period to determine whether events and circumstances continue to support their remaining useful lives.

Acquisition-related Goodwill

Changes in the carrying amounts of acquisition-related goodwill by segment for the nine months ended May 31, 2008 are summarized below (in thousands):

Indefinite-lived Intangible Assets

Intangible assets, excluding acquisition-related goodwill, which are not amortized as they have been determined to have indefinite lives, consist of the trade names Carpet Fresh, X-14, 2000 Flushes, Spot Shot and 1001. Changes in the carrying amounts of indefinite-lived intangible assets by segment for the nine months ended May 31, 2008 are summarized below (in thousands):

Definite-lived Intangible Asset

The Company’s definite-lived intangible asset consists of certain non-contractual customer relationships from the acquisition of the 1001 line of products during fiscal year 2004. This definite-lived intangible asset is included in the Europe segment and is being amortized on a straight-line basis over its estimated eight-year life. The following table summarizes the non-contractual customer relationships intangible asset and the related amortization (in thousands):

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Changes in the carrying amount of the definite-lived intangible asset for the nine months ended May 31, 2008 are summarized below (in thousands):

The estimated 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 for the non-contractual customer relationships intangible asset in future fiscal years is as follows (in thousands):

Note 4. Supplementary Balance Sheet Information (in thousands):

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Note 5. Stock Repurchase Plan

On March 27, 2007, the Company’s Board of Directors approved a share buy-back plan. Under the plan, which was in effect for up to twelve months, the Company was authorized to acquire up to $35.0 million of the Company’s outstanding shares. During the fourth quarter of fiscal year 2007 and the first six months of fiscal year 2008, the Company completed the repurchase program by acquiring 1,028,800 shares at a total cost of $35.0 million.

Prior to the share buy-back plan described above, the Company had 534,698 shares of common stock held in treasury at a total cost of $15.0 million. These shares were the result of the Company’s share buy-back plan that was completed in fiscal year 2004.

Note 6. Related Parties

VML Company L.L.C. (“VML”), a Delaware company, was formed in April 2001, at which time the Company acquired a 30% membership interest. Since formation, VML has served as the Company’s contract manufacturer for certain household products and acted as a warehouse distributor for other product lines of the Company. Although VML has begun to expand its business to other customers, the Company continues to be its largest customer. VML makes profit distributions to the Company and the 70% owner on a discretionary basis in proportion to each party’s respective interest.

The Company has a put option to sell its interest in VML to the 70% owner, and the 70% owner has a call option to purchase the Company’s interest. The sale price in each case is established pursuant to formulas based on VML’s operating results.

Under Financial Interpretation No. (“FIN”) 46(R), “Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51,” VML qualifies as a variable interest entity, and it has been determined that the Company is not the primary beneficiary. The Company’s investment in VML is accounted for using the equity method of accounting, and its equity in earnings or losses of VML is recorded as a component of cost of products sold, as VML acts primarily as a contract manufacturer to the Company. The Company recorded equity losses related to its investment in VML of $229,000 and $1,000 for the three months ended May 31, 2008 and 2007, respectively. For the nine months ended May 31, 2008, the Company recorded equity losses related to its investment in VML of $248,000. For the nine months ended May 31, 2007, the Company recorded equity earnings related to its investment in VML of $35,000.

The Company’s maximum exposure to loss as a result of its involvement with VML was $0.8 million as of May 31, 2008. This amount represents the balance of the Company’s equity investment in VML, which is presented as investment in related party in the Company’s condensed consolidated balance sheets. The Company’s investment in VML as of August 31, 2007 was $1.0 million.

Cost of products sold which were purchased from VML, net of rebates and equity earnings or losses, was approximately $5.9 million and $4.5 million during the three months ended May 31, 2008 and 2007, respectively, and $17.1 million and $14.3 million for the nine months ended May 31, 2008 and 2007, respectively. The Company had product payables to VML of $0.4 million and $1.5 million at May 31, 2008 and August 31, 2007, respectively. Additionally, the Company receives rental income from VML, which is recorded as a component of other income, net in the Company’s condensed consolidated statements of operations. Rental income from VML was $48,000 during each of the three-month periods ended May 31, 2008 and 2007, and $143,000 during each of the nine-month periods ended May 31, 2008 and 2007.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Note 7. Commitments and Contingencies

The Company is party to various claims, legal actions and complaints, including product liability litigation, arising in the ordinary course of business. 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 April 19, 2006, a legal action was filed against the Company in the United States District Court, Southern District of California (Drimmer v. WD-40 Company). After several of the plaintiff’s factual claims were dismissed by way of motion, the plaintiff filed an amended complaint on September 20, 2006, seeking class action status and alleging 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. The amended complaint seeks to remedy such allegedly wrongful conduct: (i) by requiring the Company to identify all consumers who have purchased the ATBCs and to return money as may be ordered by the court; and (ii) by the granting of other equitable relief, interest, attorneys’ fees and costs. On August 24, 2007, the Company successfully defeated the plaintiff’s attempt to have the case certified as a class action. The plaintiff has been granted permission to appeal the District Court’s decision. If the plaintiff is successful in an appeal and class action certification is granted in this aforementioned legal action, it is reasonably possible that the outcome could have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. There is not sufficient information to estimate the Company’s exposure at this time.

Since 2004, the Company has been named as a defendant in lawsuits brought by a growing 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 condition 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 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. No liabilities have been recorded for these agreements as of May 31, 2008.

The Company has relationships with various suppliers (contract manufacturers) who manufacture the Company’s products. Although the Company does not have any definitive minimum purchase obligations included in the contract terms with the contract manufacturers, supply needs are communicated and the Company is committed to purchase the products produced based on orders and short-term projections provided to the contract manufacturers, ranging from two to five months. The Company is also obligated to purchase obsolete or slow-moving inventory.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

The Company has purchased inventory under these commitments, the amounts of which have not been material.

As the Company continues to focus on innovation and renovation, it also maintains relationships with other manufacturers to develop new products. As of May 31, 2008, the Company had open commitments with these manufacturers to purchase $3.4 million of finished goods and components related to new products.

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 May 31, 2008.

Note 8. Income Taxes

In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes – An interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position must be recognized in the financial statements at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a fifty percent likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company adopted the provisions of FIN 48 effective September 1, 2007. The cumulative effect of adopting FIN 48 resulted in a decrease of $0.6 million to the September 1, 2007 balance of retained earnings. At May 31, 2008, the Company’s gross liability for income taxes related to unrecognized tax benefits totaled $2.3 million and is included in other long-term liabilities in the Company’s condensed consolidated balance sheets. The total amount of unrecognized tax benefits that, if recognized, would affect the Company’s tax rate was $1.0 million at May 31, 2008.

In accordance with FIN 48, the Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. Accrued interest of $0.3 million is included in the $2.3 million of gross unrecognized tax benefits referenced above.

The Company is subject to taxation in the U.S. and in various state and foreign jurisdictions. The Company currently has no years under examination by the U.S. Internal Revenue Service and is not subject to examination for years prior to fiscal year 2004. The Company is currently under audit in various state and local jurisdictions for fiscal years 2003 through 2006. The Company is also currently under audit in a foreign jurisdiction for fiscal years 2005 and 2006. The Company has estimated that up to $0.5 million of unrecognized tax benefits relate to income tax positions that may be affected by the resolution of tax examinations or expiring statutes of limitation.

During the nine months ended May 31, 2008, the Company recorded liabilities related to unrecognized tax benefits of $0.3 million in the current fiscal year, partially offset by recognized tax benefits of $0.5 million due to expiring statutes.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Note 9. Supplemental Employee Retirement Plan Agreements

The Company provides fixed retirement benefits to certain of its current and retired key executives under supplemental employee retirement plan agreements. On March 25, 2008, the Company settled benefit obligations with certain current key executives by granting 25,739 restricted stock units with a total grant date fair market value of $0.9 million, or $33.99 per share. This settlement resulted in a net gain of $0.2 million, which was recorded as a reduction to selling, general and administrative expenses for the three and nine months ended May 31, 2008 in the Company’s condensed consolidated statements of operations. The projected benefit obligation under the agreements, which is based on an actuarially determined present value of all future benefit payments, was $0.9 million and $2.0 million as of May 31, 2008 and August 31, 2007, respectively, and is recorded as a component of deferred employee benefits and other long-term liabilities in the Company’s condensed consolidated balance sheets.

Note 10. 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 costs from corporate headquarters into the Americas segment, without allocation to other segments. The Company’s segments are run independently and, as a result, there are few costs that could be considered only costs from headquarters that would qualify for allocation to other segments. The most significant portions of costs from headquarters relate 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 for the three and nine months ended May 31, 2008 and 2007 (in thousands):

As of and for the Three Months Ended May 31:

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

As of and for the Nine Months Ended May 31:

Note 11. Subsequent Event

On June 24, 2008, the Company’s Board of Directors declared a cash dividend of $0.25 per share payable on July 31, 2008 to shareholders of record on July 17, 2008.

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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, 2007 filed with the Securities and Exchange Commission, or SEC, on October 25, 2007.

Overview

The Company

We are a global consumer products company dedicated to building brand equities that are first or second choice in their respective categories. We market two multi-purpose lubricant brands, WD-40^® and 3-IN-ONE^® Oil, two heavy-duty hand cleaner brands, Lava^® and Solvol^®, and six household product brands, X-14^® hard surface cleaners 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 and 1001^® carpet and household cleaners and rug and room deodorizers. Lubricant brands are sold in markets such as North, Central and South America, Asia, Australia and the Pacific Rim, Europe, the Middle East and Africa. Heavy-duty hand cleaner brands are sold primarily in the U.S. and Australia. Household product brands are currently sold primarily in North America, the U.K., Australia and the Pacific Rim.

Highlights

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Results of Operations

Three Months Ended May 31, 2008 Compared to Three Months Ended May 31, 2007

The following table summarizes operating data for our consolidated operations for the three months ended May 31, 2008 and 2007 (in thousands, except percentages and per share amounts):

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Segment Results

The following table summarizes net sales by segment for the three months ended May 31, 2008 and 2007 (in thousands, except percentages):

Americas

The following table summarizes net sales by product line for the Americas segment for the three months ended May 31, 2008 and 2007 (in thousands, except percentages):

For the three months ended May 31, 2008, sales in the Americas increased to $48.6 million, up $2.7 million, or 6%, compared to sales in the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates compared to the corresponding period of the prior fiscal year contributed to the growth of sales. Sales for the three months ended May 31, 2008 translated at exchange rates for the corresponding period in the prior fiscal year would have produced sales of $48.2 million in this region. Thus, the impact of the change in foreign currency exchange rates period over period positively affected sales for the three months ended May 31, 2008 by approximately $0.4 million, or 0.8%.

The increase in lubricant sales in the Americas during the three months ended May 31, 2008 compared to last fiscal year’s third quarter was primarily due to the increase in WD-40 sales of 10% and 35% in the U.S. and Latin America, respectively. The increase in WD-40 sales in the U.S. was primarily due to the conversion of several can sizes to the Smart Straw format during the quarter. The WD-40 Smart Straw format has a higher selling price than the traditional WD-40 cans. The increase in Latin America was primarily the result of increased distribution and the timing of customer purchases.

Sales of household products in the Americas during the three months ended May 31, 2008 were down $0.4 million, or 3%, compared to the corresponding period of the prior fiscal year due primarily to sales declines in the U.S., which was primarily the result of decreased sales of X-14 hard surface cleaners. This decline was the result of several factors, including lost distribution, declining categories and the effect of competitive factors.

U.S. sales of X-14 hard surface cleaners decreased 40% in the current fiscal year third quarter versus the prior fiscal year third quarter due primarily to lost distribution as a result of competitors’ activities and temporary manufacturing disruptions that occurred during the first half of the current fiscal year. In an effort to offset these losses and generate growth for the brand, we are focused on new distribution channels.

Spot Shot sales decreased 2% in the U.S. during the three months ended May 31, 2008 as compared to the corresponding period of the prior fiscal year due to reduced sales to key customers and overall declines in the aerosol spot and stain category. The declines in the aerosol category are due to retailers reducing shelf space for aerosol spot and stain removers. In an effort to offset these declines, we have developed and recently launched

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environmentally friendly products such as Spot Shot “Instant Carpet Stain and Odor Eliminator ^TM ” and Spot Shot “PetClean^TM” which are non-toxic and biodegradable.

U.S. sales of 2000 Flushes/X-14 automatic toilet bowl cleaners were essentially flat in the current fiscal year third quarter compared to the prior fiscal year third quarter. Although these products have experienced increased competition and decreased distribution with key customers resulting in lost sales, we were able to offset the recent decline in sales as a result of increased promotional activity and sales into a new distribution channel during the current fiscal year third quarter. The decrease in distribution with key customers was the result of the continued decline in sales velocity of the in-bowl products, as consumer tastes have shifted toward the drop-in and manual cleaning categories. As a result, we have shifted our product line focus toward the drop-in category. Overall, sales in the entire toilet bowl cleaning category have declined in the grocery trade channel. To generate growth for the brand, we are focusing on enhancing our distribution in channels outside of the grocery trade, as well as developing new distribution channels for our automatic toilet bowl cleaning products.

The sales declines of X-14 and Spot Shot were partially offset by a 10% increase in U.S. sales of Carpet Fresh during the current fiscal year third quarter compared to the prior fiscal year third quarter. The increase in sales of Carpet Fresh was due primarily to an increase in promotional activity as well as sales into a new distribution channel. In general, we have experienced reduced distribution and category declines in the mass retail and grocery trade channels. In recent years, retailers have reduced shelf space for traditional rug and room deodorizers for reallocation to other air care products. As a result, the rug and room deodorizer category as a whole has declined in the mass retail and grocery trade channels. We continue to refine our marketing, promotions and pricing strategies to create new distribution opportunities for the Carpet Fresh brand.

Our U.S. household products compete in a highly competitive market and currently face diminishing product categories or shifts within these categories, as well as significant competitor activity. We are addressing these challenges through our focus on innovation, the continued renovation of our household brands and new distribution channels. Our innovation and renovation efforts are focused in the areas of new product offerings, packaging enhancements and promotional strategies.

Sales of heavy-duty hand cleaners for the Americas increased 4% in the current fiscal year third quarter compared to the prior fiscal year third quarter. Distribution and sell-through remain consistent and stable through the grocery trade and other classes of trade.

For the Americas, 85% of sales came from the U.S. while 15% came from Canada and Latin America in the third quarter of fiscal year 2008, compared to the distribution in the third quarter of fiscal year 2007, when 86% of sales came from the U.S., and 14% came from Canada and Latin America.

Europe

The following table summarizes net sales by product line for the Europe segment for the three months ended May 31, 2008 and 2007 (in thousands, except percentages):

For the three months ended May 31, 2008, sales in Europe increased to $26.3 million, up $0.9 million, or 3%, compared to sales in the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates compared to the corresponding period of the prior fiscal year contributed to the growth of sales. Sales for the three months ended May 31, 2008 translated at exchange rates for the corresponding period in the prior fiscal year would have produced sales of $26.1 million in this region. Thus, the impact of the change in foreign currency exchange rates period over period positively affected third quarter fiscal year 2008 sales by approximately $0.2 million, or 0.8%.

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The countries in Europe where we sell through a direct sales force include the U.K., Spain, Portugal, Italy, France, Germany, the Netherlands, Denmark and Austria. Sales from these countries increased 6% for the three months ended May 31, 2008 compared to the corresponding period of the prior fiscal year and accounted for 72% of the region’s sales in the current fiscal year third quarter, up from 71% in the prior fiscal year third quarter. Percentage increases in sales in U.S. dollars across the various parts of the region for the three months ended May 31, 2008 compared to the corresponding period of the prior fiscal year were as follows: U.K., 8%; France, 27%; and Italy, 46%. We experienced decreases in sales in the German sales region of 6% and in Spain/Portugal of 14% for the three months ended May 31, 2008 compared to the corresponding period of the prior fiscal year. In the long term, the number of countries where we sell through a direct sales force is expected to increase, and these direct sales markets are expected to continue to be important contributors to the region’s growth.

The U.K. market benefited from sales growth of the WD-40 Smart Straw, 3-IN-ONE products and No Vac. The sales growth in France was the result of the continued growth in sales of the WD-40 brand, including the WD-40 Smart Straw, as well as increased distribution of the 3-IN-ONE Professional line of products. The sales growth in Italy was also the result of increased awareness and penetration of the WD-40 brand and the continued growth in sales of the WD-40 Smart Straw. The decreased sales in the sales region that includes Germany, the Netherlands, Denmark and Austria were due to the timing of customer purchases. Sales in Spain/Portugal declined during the third quarter of the current fiscal year as customers reduced their inventory levels in response to the slowing economy during the period.

In the countries in which we sell through local distributors, sales decreased 3% for the three months ended May 31, 2008 compared to the corresponding period in the prior fiscal year due to the timing of promotional activities and promotional offerings in Eastern Europe. The distributor market accounted for approximately 28% of the total Europe segment sales for the three months ended May 31, 2008 compared to 29% for the corresponding period of the prior fiscal year. We expect these markets to continue to experience growth in distribution and usage resulting from increased market penetration and brand awareness.

Asia-Pacific

The following table summarizes net sales by product line for the Asia-Pacific segment for the three months ended May 31, 2008 and 2007 (in thousands, except percentages):