WSI Industries, Inc. 10QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
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| þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 25, 2008
OR
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| o |
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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 0-619
(Exact name of small business issuer, as specified in its charter)
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| Minnesota
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41-0691607 |
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| (State or other jurisdiction of
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|
(IRS Employer Identification No.) |
| incorporation of organization) |
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| 213 Chelsea Road |
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| Monticello, Minnesota
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55362 |
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| (Address of principal executive offices)
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(Zip Code) |
(Issuer’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check whether the small business issuer (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 small business issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the small business issuer is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
Indicate by check mark if the small business issuer is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date:
2,825,111 shares of common stock were outstanding as of June 18, 2008.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
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Page No. |
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PART I. FINANCIAL INFORMATION: |
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4 |
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5 |
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6-7 |
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8 - 10 |
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10 |
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11 |
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11 |
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2
Item I. Financial Statements
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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May 25, |
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August 26, |
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2008 |
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2007 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
1,619,384 |
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$ |
1,626,801 |
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Accounts receivable |
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3,418,622 |
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3,054,050 |
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Inventories |
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2,464,958 |
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1,899,299 |
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Prepaid and other current assets |
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289,495 |
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154,793 |
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Deferred tax assets |
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169,124 |
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162,535 |
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Total Current Assets |
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7,961,583 |
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6,897,478 |
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Property, Plant and Equipment – Net |
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5,730,874 |
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4,520,382 |
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Deferred tax assets |
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677,751 |
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954,162 |
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Goodwill and other assets, net |
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2,374,514 |
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2,379,473 |
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$ |
16,744,722 |
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$ |
14,751,495 |
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Liabilities and Stockholders’ Equity |
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Current Liabilities: |
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Trade accounts payable |
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$ |
2,244,360 |
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$ |
2,200,544 |
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Accrued compensation and employee withholdings |
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581,694 |
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680,419 |
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Other accrued expenses |
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41,861 |
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125,038 |
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Current portion of long-term debt |
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938,155 |
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518,718 |
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Total Current Liabilities |
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3,806,070 |
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3,524,719 |
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Long-term debt, less current portion |
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4,076,970 |
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3,328,694 |
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Stockholders’ Equity: |
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Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,825,111 and 2,731,165 shares, respectively |
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282,511 |
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273,117 |
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Deferred compensation |
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(244,433 |
) |
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(26,577 |
) |
Capital in excess of par value |
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2,519,250 |
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2,214,922 |
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Retained earnings |
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6,304,354 |
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5,436,620 |
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Total Stockholders’ Equity |
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8,861,682 |
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7,898,082 |
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$ |
16,744,722 |
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$ |
14,751,495 |
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See notes to condensed consolidated financial statements
3
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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13 weeks ended |
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39 weeks ended |
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May 25, |
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May 27, |
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May 25, |
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May 27, |
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2008 |
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2007 |
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2008 |
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2007 |
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Net sales |
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$ |
6,702,648 |
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$ |
5,237,690 |
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$ |
19,098,840 |
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$ |
13,807,227 |
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Cost of products sold |
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5,497,337 |
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4,248,881 |
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15,409,688 |
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11,336,389 |
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Gross margin |
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1,205,311 |
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988,809 |
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3,689,152 |
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2,470,838 |
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Selling and administrative expense |
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596,806 |
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582,566 |
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1,823,463 |
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1,555,023 |
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Interest and other income |
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(16,099 |
) |
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(14,494 |
) |
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(163,855 |
) |
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(64,072 |
) |
Interest expense |
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75,123 |
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51,493 |
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219,384 |
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139,777 |
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Earnings from operations
before income taxes |
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549,481 |
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369,244 |
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1,810,160 |
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840,110 |
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Income tax expense |
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192,018 |
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140,313 |
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633,256 |
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319,242 |
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Net earnings |
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$ |
357,463 |
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$ |
228,931 |
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$ |
1,176,904 |
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$ |
520,868 |
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Basic earnings per share |
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$ |
.13 |
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$ |
.08 |
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$ |
.43 |
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$ |
.19 |
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Diluted earnings per share |
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$ |
.13 |
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$ |
.08 |
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$ |
.42 |
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$ |
.19 |
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Cash dividend per share |
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$ |
.0375 |
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$ |
.0375 |
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$ |
.1125 |
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$ |
.1125 |
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Weighted average number of
common shares outstanding, basic |
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2,763,895 |
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2,706,792 |
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2,740,577 |
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2,691,385 |
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Weighted average number of
common shares outstanding, diluted |
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2,859,507 |
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2,768,480 |
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2,811,097 |
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2,733,635 |
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See notes to condensed consolidated financial statements.
4
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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39 weeks ended |
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May 25, |
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May 27, |
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2008 |
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2007 |
|
Cash Flows From Operating Activities: |
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Net earnings |
|
$ |
1,176,904 |
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$ |
520,868 |
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Adjustments to reconcile net earnings to net cash
provided by operating activities: |
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Depreciation |
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592,230 |
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|
365,380 |
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Amortization |
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4,959 |
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|
4,959 |
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Gain on disposal of equipment |
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(94,869 |
) |
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(18,000 |
) |
Deferred taxes |
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|
616,635 |
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|
307,180 |
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Stock option compensation expense |
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121,224 |
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|
48,192 |
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Changes in assets and liabilities: |
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Increase in accounts receivable |
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(364,572 |
) |
|
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(571,356 |
) |
Increase in inventories |
|
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(565,659 |
) |
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(224,665 |
) |
(Increase) decrease in prepaid expenses |
|
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(134,702 |
) |
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|
17,554 |
|
Increase (decrease) in accounts payable
and accrued expenses |
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(552,341 |
) |
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|
285,699 |
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Net cash provided by operations |
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|
799,809 |
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|
735,811 |
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Cash Flows From Investing Activities: |
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Proceeds from sales of equipment |
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123,073 |
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|
18,000 |
|
Purchase of property, plant and equipment |
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(171,106 |
) |
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(143,340 |
) |
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Net cash used in investing activities |
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(48,033 |
) |
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(125,340 |
) |
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Cash Flows From Financing Activities: |
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Payments of long-term debt |
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(492,108 |
) |
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(309,948 |
) |
Issuance of common stock |
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|
42,085 |
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|
14,405 |
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Dividends paid |
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(309,170 |
) |
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(302,560 |
) |
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Net cash used in financing activities |
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(759,193 |
) |
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(598,103 |
) |
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Net Increase (Decrease) In Cash And Cash Equivalents |
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(7,417 |
) |
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12,368 |
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Cash And Cash Equivalents At Beginning Of Year |
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1,626,801 |
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1,282,717 |
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Cash And Cash Equivalents At End Of Reporting Period |
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$ |
1,619,384 |
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$ |
1,295,085 |
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Supplemental cash flow information: |
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Cash paid during the period for: |
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Interest |
|
$ |
219,659 |
|
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$ |
139,867 |
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Income taxes |
|
$ |
10,530 |
|
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$ |
4,630 |
|
Payroll withholding taxes in cashless stock option exercise |
|
$ |
414,255 |
|
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$ |
78,634 |
|
Non-cash investing and financing activities: |
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Acquisition of machinery through capital lease |
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$ |
1,659,820 |
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$ |
753,309 |
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Deferred tax benefit from exercise of stock options |
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$ |
346,813 |
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$ |
— |
|
See notes to condensed consolidated financial statements.
5
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. |
|
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: |
The condensed consolidated balance sheet as of May 25, 2008, the condensed consolidated
statements of operations for the thirteen and thirty-nine weeks ended May 25, 2008 and May
27, 2007 and the condensed consolidated statements of cash flows for the thirty-nine weeks
then ended, respectively, have been prepared by the Company without audit. In the opinion
of management, all adjustments (which include normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for all periods
presented have been made.
The condensed consolidated balance sheet at August 26, 2007 is derived from the audited
consolidated balance sheet as of that date. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Therefore, these condensed
consolidated financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company’s 2007 annual report to shareholders.
The results of operations for interim periods are not necessarily indicative of the
operating results for the full year.
Inventories consist primarily of raw material, work-in-progress (WIP) and finished goods and
are valued at the lower of cost or market value:
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May 25, |
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August 26, |
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2008 |
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2007 |
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Raw material |
|
$ |
949,469 |
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$ |
537,033 |
|
WIP |
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|
1,029,467 |
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|
963,702 |
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Finished goods |
|
|
486,022 |
|
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|
398,564 |
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$ |
2,464,958 |
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$ |
1,899,299 |
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The Company did not dispose of any significant obsolete inventory during the quarter ended
May 25, 2008 and therefore there was no material effect on gross margin from any
dispositions.
| 3. |
|
GOODWILL AND INTANGIBLE ASSETS: |
Goodwill and other intangible assets consist of costs resulting from business
acquisitions which total $2,368,452 (net of accumulated amortization of $344,812). The
Company assesses the valuation or potential impairment of its goodwill by utilizing a
present value technique to measure fair value by estimating future cash flows. The Company
constructs a discounted cash flow analysis based on various sales and cost assumptions to
estimate the fair value of the Company (which is the only reporting unit). The result of
the analysis performed in the fiscal 2007 fourth quarter did not show an impairment of
goodwill. The Company will analyze goodwill more frequently should changes in events or
circumstances, including reductions in anticipated cash flows generated by our operations,
occur.
The Company recorded $33,063 of deferred financing costs incurred in connection with
mortgages entered into in order to purchase the Company’s facility in Monticello, Minnesota.
The costs
6
are being amortized over five years on a straight-line basis with the Company
incurring $1,653 of amortization expense for the quarters ended May 25, 2008 and May 27,
2007, respectively. Accumulated amortization on the deferred financing costs amounted to
$27,001 and $20,388 at May 25, 2008 and August 26, 2007, respectively.
The following table sets forth the computation of basic and diluted earnings per share:
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| |
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Thirteen weeks ended |
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Thirty-nine weeks ended |
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| |
|
May 25, |
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|
May 27, |
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|
May 25, |
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|
May 27, |
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| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Numerator for basic and diluted
earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
357,463 |
|
|
$ |
228,931 |
|
|
$ |
1,176,904 |
|
|
$ |
520,868 |
|
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Denominator |
|
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|
Denominator for basic earnings
per share – weighted average shares |
|
|
2,763,895 |
|
|
|
2,706,792 |
|
|
|
2,740,577 |
|
|
|
2,691,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee and non-employee options |
|
|
95,612 |
|
|
|
61,688 |
|
|
|
70,520 |
|
|
|
42,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
per share |
|
|
2,859,507 |
|
|
|
2,768,480 |
|
|
|
2,811,097 |
|
|
|
2,733,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
.13 |
|
|
$ |
.08 |
|
|
$ |
.43 |
|
|
$ |
.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
.13 |
|
|
$ |
.08 |
|
|
$ |
.42 |
|
|
$ |
.19 |
|
|
|
|
|
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7
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the result of which forms the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Results may differ from these estimates due to actual outcomes being different from
those on which we based our assumptions. The estimates and judgments utilized are reviewed by
management on an ongoing basis and by the audit committee of our board of directors at the end of
each quarter prior to the public release of our financial results.
The critical accounting policies and estimates followed in the preparation of the financial
information contained in this Quarterly Report on Form 10-QSB are the same as those described in
the Company’s Annual Report on Form 10-KSB for the year ended August 26, 2007. Refer to the
Annual Report on Form 10-KSB for detailed information on accounting policies.
Results of Operations:
Net sales were $6,703,000 for the quarter ending May 25, 2008 compared to $5,238,000 in the
same period of the prior year, an increase of 28%. Year-to-date sales for the first three quarters
of fiscal 2008 were $19,099,000 compared to $13,807,000 in the prior year, an increase of 38%. The
Company’s fiscal third quarter sales increased due to an increase in the Company’s energy business
and the Company’s ATV business offset by decreases in sales to the Company’s motorcycle market.
The overall increase in 2008 year-to-date sales as compared to 2007 were due to factors similar to
those of the fiscal 2008 third quarter.
Sales from the Company’s recreational vehicle market amounted to $3,444,000 and $4,078,000 for
the quarters ended May 25, 2008 and May 27, 2007, respectively. Year-to-date sales for the
Company’s recreational vehicle market were $10,703,000 and $10,948,000 for the three quarters ended
May 25, 2008 and May 27, 2007, respectively. Sales for the quarter and year-to-date ended May 25,
2008 for the Company’s ATV market continue to be strong and are up 55% year-to-date over the prior
year. Sales to the Company’s motorcycle market were lower due to both a previously announced
volume reduction, but also due to a model year changeover occurring in the Company’s fiscal third
quarter which normally occurs primarily in the Company’s fiscal fourth quarter.
Sales from the Company’s energy business amounted to $2,471,000 and $6,131,000 for the quarter
and year-to-date ended May 25, 2008, respectively. In the prior year, the Company had $410,000 and
$434,000 in sales for the quarter and year-to-date ended May 27, 2007, with the increases in fiscal
2008 due to the ramping up of production and new programs. In March 2008, the Company announced
that it had secured a new
customer in the energy industry and it expects that it will recognize its initial sales to
this customer in the Company’s fiscal 2008 fourth quarter.
8
Sales from the Company’s aerospace and defense markets amounted to $592,000 and $511,000 for
the quarter ended May 25, 2008 and May 27, 2007, respectively. Year-to-date sales for the
Company’s aerospace and defense markets were $1,662,000 and $1,582,000 for the three quarters ended
May 25, 2008 and May 27, 2007, respectively. The Company believes these increases are a result
from increases in business with certain of its existing customers as well as new sales from
recently secured customers in these markets.
Sales from the Company’s biosciences market totaled $162,000 and $207,000 for the quarter
ended May 25, 2008 and May 27, 2007, respectively. Year-to-date sales for the biosciences market
were $455,000 and $797,000 for the three quarters ended May 25, 2008 and May 27, 2007,
respectively. The decreases in sales are due to the Company scaling back its involvement in this
market and concentrating on higher margin components.
Sales from the Company’s other revenue markets are at or under 1% of total sales in the
current year and are immaterial to the Company’s revenues as a whole.
Gross margin decreased to 18.0% for the quarter ending May 25, 2008 versus 18.9% in the prior
year quarter. The decrease was due primarily to a sales mix that included parts with higher
material content and therefore generally lower gross margins. Year-to-date gross margins increased
to 19.3% from 17.9% with the increase primarily related to higher sales volume.
Selling and administrative expense was $597,000 for the quarter ending May 25, 2008 versus
$583,000 in the prior year quarter. Year-to-date selling and administrative expense of $1,823,000
was $268,000 higher than the comparable prior year period due to increases in compensation costs.
Interest expense in the third quarter of fiscal 2008 was $75,000 as compared to $51,000 in the
prior year quarter. Year-to-date interest expense for fiscal 2008 was $219,000 versus $140,000 in
the prior year. Interest expense is up due to new capitalized leases entered into during fiscal
2008.
The Company recorded income tax expense at an effective tax rate of 35% for the quarter and
year-to-date periods ended May 25, 2008 and 38% for the quarter and year-to-date periods ended May
27, 2007.
Liquidity and Capital Resources
On May 25, 2008, working capital was $4,156,000 compared to $3,373,000 at August 26, 2007.
The increase in working capital is attributable primarily to increases in the level of accounts
receivable and inventories coming from an increased level of business. The ratio of current assets
to current liabilities at May 25, 2008 was 2.09 to 1.0 compared to 1.96 to 1.0 at August 26, 2007.
The Company renewed its $1,000,000 revolving credit facility with its bank during the
Company’s second quarter of fiscal 2008. Interest on the new agreement is at the bank’s prime
rate. At May 25, 2008, the Company did not have a balance owing under this revolving line of
credit agreement nor had it borrowed any funds during fiscal 2008.
The Company paid quarterly dividends of $.0375 per share of its common stock in each of the
first three quarters of fiscal 2008 and 2007. The dividend payments for the first three quarters
of fiscal 2008 and fiscal 2007 totaled $309,000 and $303,000, respectively.
It is the Company’s belief that its internally generated funds, as well as its line of credit,
will be sufficient to enable the Company to meet its working capital requirements during the next
12 months.
9
Cautionary Statement:
Statements included in this Management’s Discussion and Analysis of Financial Condition and
Results of Operations, in future filings by the Company with the Securities and Exchange
Commission, in the Company’s press releases and in oral statements made with the approval of an
authorized executive officer that are not historical or current facts are “forward-looking
statements.” These statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made.
The following risks and uncertainties, as well as others not now anticipated, in some cases
have affected, and in the future could affect, the Company’s actual results and could cause the
Company’s actual financial performance to differ materially from that expressed in any
forward-looking statement: (i) the Company’s ability to obtain additional manufacturing programs
and retain current programs; (ii) the Company’s ability to timely and cost effectively ramp up new
programs; (iii) the loss of significant business from any one of its current customers could have
a material adverse effect on the Company; (iv) the Company was dependent upon one customer for 75%
of its revenues in fiscal year 2007 and expects that a significant portion of its future revenue
will be derived from this customer; (v) a significant downturn in the industries in which the
Company participates could have an adverse effect on the demand for Company services; (vi) our
sales are concentrated in a limited number of highly competitive industries, each with a limited
number of customers; (vii) the prices of our products are subject to a downward pressure from
customers and market pressure from competitors; (viii) the Company’s ability to curtail its costs
and expenses for new manufacturing programs, commensurate with expected revenues; (ix) the
Company’s ability to comply with covenants of its credit facility; (x) fluctuations in operating
results due to, among other things, changes in customer demand for our product in our manufacturing
costs and efficiencies of our operations; and (xi) a trend among our customers toward outsourcing
manufacturing to foreign operations.
The foregoing list should not be construed as exhaustive and the Company disclaims any
obligation subsequently to revise any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or unanticipated
events.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The Company’s Chief Executive Officer, Michael J. Pudil, and Chief Financial Officer, Paul D.
Sheely, have evaluated the Company’s disclosure controls and procedures as of the end of the period
covered by this report. Based upon this review, they have concluded that these controls and
procedures are effective.
(b) Changes in Internal Controls over Financial Reporting.
There have been no changes in internal control financial reporting that occurred during the
fiscal period covered by this report that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
10
PART II. OTHER INFORMATION:
ITEM 6. EXHIBITS:
| |
A. |
|
The following exhibits are included herein: |
| |
| |
|
|
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and
15d-14(a) of the Exchange Act. |
| |
| |
|
|
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and
15d-14(a) of the Exchange Act |
| |
| |
|
|
Exhibit 32 Certification pursuant to 18 U.S.C. § 1350. |
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
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|
|
WSI INDUSTRIES, INC. |
|
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|
|
Date: June 18, 2008
|
|
/s/ Michael J. Pudil
|
|
|
|
|
Michael J. Pudil, President & CEO |
|
|
|
|
|
|
|
Date: June 18, 2008
|
|
/s/ Paul D. Sheely
Paul D. Sheely, Vice President, Finance & CFO
|
|
|
11