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
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ACT OF 1934
For the quarterly period ended May 30, 2004
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-619
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WSI Industries, Inc.
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(Exact name of registrant, as specified in its charter)
Minnesota 41-0691607
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(State or other jurisdiction of (I. R. S. Employer
incorporation of organization) Identification No.)
Osseo, Minnesota 55369
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(Address of principal executive offices) (Zip Code)
(763) 428-4308
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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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.
2,555,629 Common Shares were outstanding as of June 28, 2004.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
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PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets May 30, 2004(Unaudited)
and August 31, 2003 3
Condensed Consolidated Statements of Operations
Thirteen and Thirty-Nine weeks ended May 30, 2004
and May 25, 2003 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Thirty-Nine weeks ended May 30, 2004
and May 25, 2003 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6, 7, 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9, 10, 11
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
Part I. Financial Information
Item I. Financial Statements
WSI INDUSTRIES, INC
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 30, AUGUST 31,
ASSETS 2004 2003
---- ----
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 845,237 $ 891,218
Accounts receivable 1,618,557 1,530,811
Inventories 648,369 606,262
Prepaid and other current assets 76,948 75,747
Deferred tax assets 169,387 169,387
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Total Current Assets 3,358,498 3,273,425
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Property, Plant and Equipment - Net 3,596,765 1,718,599
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Deferred tax assets 1,647,184 1,813,270
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Intangible assets and deferred financing, net 2,390,497 2,368,452
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$10,992,944 $ 9,173,746
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 616,729 $ 403,277
Accrued compensation and employee withholdings 266,095 384,857
Miscellaneous accrued expenses 137,583 150,289
Current portion of long-term debt 279,471 195,720
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Total Current Liabilities 1,299,878 1,134,143
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Long term debt, less current portion 2,404,826 648,008
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STOCKHOLDERS' EQUITY:
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,557,629 and 2,551,129 shares, respectively 255,763 255,113
Capital in excess of par value 1,837,441 1,826,901
Retained earnings 5,195,036 5,309,581
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Total Stockholders' Equity 7,288,240 7,391,595
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$10,992,944 $ 9,173,746
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See notes to condensed consolidated financial statements
3
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
13 weeks ended 39 weeks ended
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May 30, May 25, May 30, May 25,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales $ 3,147,009 $ 3,051,583 $ 8,568,737 $ 7,844,985
Cost of products sold 2,735,548 2,435,876 7,338,416 6,355,981
----------- ----------- ----------- -----------
Gross margin 411,461 615,707 1,230,321 1,489,004
Selling and administrative expense 315,368 375,950 974,047 1,065,201
Interest and other income (16,716) (11,441) (62,496) (73,790)
Interest and other expense 17,895 23,164 48,920 102,848
----------- ----------- ----------- -----------
Earnings from operations
before income taxes 94,914 228,034 269,850 394,745
Income tax expense 34,169 82,092 97,146 142,227
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Net earnings $ 60,745 $ 145,942 $ 172,704 $ 252,518
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Basic earnings per share $ .02 $ .06 $ .07 $ .10
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Diluted earnings per share $ .02 $ .06 $ .07 $ .10
=========== =========== =========== ===========
Cash dividend per share $ .0375 $ -- $ .1125 $ --
=========== =========== =========== ===========
Weighted average number of
common shares 2,557,189 2,462,165 2,553,442 2,464,208
=========== =========== =========== ===========
Weighted average number of
Dilutive common shares
Outstanding 2,627,420 2,462,165 2,627,832 2,464,208
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
39 weeks ended
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May 30, May 25,
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 172,704 $ 252,518
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 450,330 473,986
Deferred taxes 166,086 142,227
Changes in assets and liabilities:
Increase in accounts receivable (87,746) (70,230)
(Increase) decrease in inventories (42,107) 170,196
Increase in prepaid expenses (1,201) (19,456)
Increase in accounts payable and
accrued expenses 81,984 87,748
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Net cash provided by operations 740,050 1,036,989
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (2,044,171) (155,944)
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Net cash used in investing activities (2,044,171) (155,944)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 11,190 --
Purchase of Company stock -- (8,228)
Issuance of long-term debt 1,710,000 --
Payments of long-term debt (153,756) (965,658)
Deferred financing costs (22,045) --
Dividends paid (287,249) --
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Net cash provided by (used) in financing activities 1,258,140 (973,886)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (45,981) (92,841)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 891,218 1,115,922
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CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $ 845,237 $ 1,023,081
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 17,894 $ 107,260
Income taxes $ -- $ 4,300
Noncash investing and financing activities:
Acquisition of machinery through capital lease $ 284,325 $ --
See notes to condensed consolidated financial statements.
5
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS:
The condensed consolidated balance sheet as of May 30, 2004, the
condensed consolidated statements of operations for the thirty-nine weeks
ended May 30, 2004 and May 25, 2003 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 31, 2003 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
2003 annual report to shareholders. The results of operations for interim
periods are not necessarily indicative of the operating results for the
full year.
2. PURCHASE OF REAL PROPERTY:
On May 3, 2004, the Company completed the purchase of a facility
located in Monticello, Minnesota. The purchase price was $1,900,000 and
was paid for by a combination of cash and debt. The building is
approximately 49,000 square feet in size on a nine-acre lot.
3. INVENTORIES
Inventories consist primarily of raw material, work-in-progress
(WIP) and finished goods. The following table breaks out the values in
each category net of the inventory valuation allowances of $433,976 and
$422,930 at May 30, 2004 and August 31, 2003, respectively.
May 30, 2004 August 31, 2003
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Raw material $109,816 $185,785
WIP 258,661 211,188
Finished goods 279,892 209,289
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$648,369 $606,262
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4. DEBT AND LINE OF CREDIT:
As described in Note 2, the Company purchased a new facility on May
3, 2004. In order to facilitate the purchase, the Company entered into two
mortgage agreements. The first mortgage was with its bank for $1,360,000
with a monthly payment of $8,307 based on a 25-year amortization schedule.
Interest is at 5.37% with a provision to adjust the rate after 5 years to
the monthly five-year Treasury yield plus 2.5%. The entire principal
balance is due May 1, 2014.
6
The second mortgage is with the City of Monticello Economic
Development Authority (MEDA) for $350,000 with a monthly payment of $1,483
based on a 25-year amortization schedule. Interest is at 2.0%. The entire
balance is due after five years on May 1, 2009. The indebtedness to the
bank is secured pursuant to a mortgage and security agreement and fixture
financing statement and the to MEDA is secured by a mortgage.
In connection with the purchase of the facility, the Company entered
into a second amendment and modification of its Revolving Loan and Credit
Agreement with its bank. The agreement is in the maximum amount of $1
million with interest at prime and is secured by all assets of the
Company. It contains restrictive provisions concerning yearly capital
expenditures, maximum debt to net worth and minimum current ratios, as
well a minimum debt service coverage ratio. The Company has not accessed
the Revolver since the original inception of the agreement on December 2,
2002. The modified agreement expires December 31, 2004.
The Company also entered into a new capital lease agreement during
the quarter. The amount financed was $284,000 with payments over seven
years at an imputed interest rate of 6.07%. The Company currently has
three capitalized leases with principal balances owing in an amount of
$974,000 all secured by various pieces of manufacturing equipment.
5. GOODWILL AND INTANGIBLE ASSETS
Under Statements of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, goodwill and intangible assets are deemed to
have indefinite lives and are not amortized, but are subjected to annual
impairment tests in accordance with the statement. Other intangible assets
will continue to be amortized over their useful lives.
The Company adopted the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of fiscal 2002. The
Company performed its annual impairment test in the fourth quarter of
fiscal 2003 and has determined no charge is warranted.
Goodwill and other intangible assets resulting from acquisitions of
business and the formation of the Company consist of the following:
May 30, August 31,
2004 2003
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Goodwill $2,428,264 $2,428,264
Less accumulated amortization 308,595 308,595
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$2,119,669 $2,119,669
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Other identifiable intangibles:
Organization Costs $ 285,000 $ 285,000
Less accumulated amortization 36,217 36,217
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$ 248,783 $ 248,783
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Deferred financing $ 22,045
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$2,390,497 $2,368,452
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7
6. EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share:
Thirteen weeks ended Thirty-Nine weeks ended
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May 30, May 25, May 30, May 25,
2004 2003 2004 2003
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Numerator for basic and diluted earnings per share:
Net earnings $ 60,745 $ 145,942 $ 172,704 $ 252,518
========== ============== ========== ==========
Denominator for earnings per share:
Denominator for basic earnings
per share - weighted average shares 2,557,189 2,462,165 2,553,442 2,464,208
Effect of dilutive securities:
Employee and non-employee options 70,231 -- 74,390 --
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Denominator for diluted earnings
per share-dilutive common shares 2,627,420 2,462,165 2,627,832 2,469,208
========== ============== ========== ==========
Basic earnings per share $ .02 $ .06 $ .07 $ .10
========== ============== ========== ==========
Diluted earnings per share' $ .02 $ .06 $ .07 $ .10
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8
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 discusses our condensed 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 believe that the estimates, assumptions and judgments involved in the
accounting policies described below have the greatest potential impact on our
financial statements, so we consider these to be our critical accounting
policies. Because of the uncertainty inherent in these matters, actual results
could differ from the estimates we used in applying the critical accounting
policies. Within the context of these critical accounting policies, we are not
currently aware of any reasonably likely event that would result in materially
different amounts being reported.
Allowance for Excess and Obsolete Inventory:
Inventories, which are composed of raw materials, work in process and
finished goods, are valued at the lower of cost or market. On a periodic basis,
the Company analyzes the level of inventory on hand, its cost in relation to
market value and estimated customer requirements to determine whether
write-downs for excess or obsolete inventory are required. Actual customer
requirements in any future periods are inherently uncertain and thus may differ
from our estimates. If actual or expected requirements were significantly
greater or lower than the established reserves, we would record a reduction or
increase to the obsolescence allowance in the period in which we made such a
determination.
Goodwill Impairment:
The Company evaluates the valuation of its goodwill according to the
provisions of SFAS 142 to determine if the current value of goodwill has been
impaired. To do this the Company determines the discounted present value of
anticipated cash flows based on anticipated results of operations for the coming
years. If we have changes in events or circumstances, including reductions in
anticipated cash flows generated by our operations, goodwill could become
impaired which would result in a charge to earnings.
Deferred Taxes:
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary difference between the financial
reporting and tax bases of assets and liabilities. A valuation allowance would
be set up should the realization of any deferred taxes become less likely than
not to occur. The valuation allowance is analyzed periodically by the Company
and may result in income tax expense different than statutory rates.
9
Revenue Recognition:
Revenues from sales of product are recorded upon shipment when all of the
following criteria of Staff Accounting Bulletin No. 101 have been met:
persuasive evidence of an arrangement exists, delivery has occurred, the price
to the customer is fixed or determinable and collectibility is reasonably
assured. Credit losses relating to customers have been minimal and within
management's expectations. Based on management's evaluation of uncollected
accounts receivable at the end of each year, bad debts are provided for on the
allowance method. Accounts are considered delinquent if they are 120 days past
due. The Company mitigates its credit risk by performing credit checks and
actively pursuing past due accounts.
Results of Operations:
Net sales were $3,147,000 for the quarter ending May 30, 2004, an increase
of 3% or $95,000 from the same period of the prior year. Year-to-date sales in
fiscal 2004 were $8,569,000 compared to $7,845,000 in the prior year. The
increase in sales for the quarter, as well as the six months, came from an
increase in sales to the Company's recreational vehicle market.
Gross margin decreased to 13% for the quarter ending May 30, 2004 versus
20% in the year ago period. The margin decrease is due to higher material costs,
as well as start-up expenses related to a new program in the Company's
recreational vehicle market. The decrease is also attributable to higher
production supply and machine repairs expense. Year-to-date gross margins were
14% and 19% for the six-month periods ending May 30, 2004 and May 25, 2003,
respectively.
Selling and administrative expense of $315,000 for the quarter ending May
30, 2004 was $61,000 lower than in the prior year period. The expense is lower
due to lower payroll and other compensation costs. In the current fiscal
quarter, the Company incurred $18,000 in costs associated with the acquisition
of the new Monticello facility that were included in general and administrative
expense. The Company estimates that it will incur $300,000 of costs associated
with the relocation of its business to the new facility. These costs will be
incurred over the next six months, the timing of which is dependent on when
various parts of the business will relocate to the new building. Year-to-date
selling and administrative expense of $974,000 was $91,000 lower than the
comparable prior year period. Selling and administrative expense for the
nine-month period ending May 25, 2003 was negatively affected by $60,000 of
costs associated with a proxy contest that the Company was involved in. The
proxy contest was resolved with all costs incurred by the end of the first
quarter of fiscal 2003.
Interest expense in the third quarter of fiscal 2004 was $18,000, which
was $5,000 less than the second quarter of fiscal 2003 amount of $23,000.
Year-to-date interest expense is also lower in 2004 due to lower average levels
of debt during the year compared to the prior year period.
The Company recorded income tax expense at an effective tax rate of 36%
for the quarter and nine months ended May 30, 2004 and February 23, 2003.
10
Liquidity and Capital Resources:
On May 30, 2004, working capital was $2,059,000 compared to $2,139,000 at
August 31, 2003. The ratio of current assets to current liabilities at May 30,
2004 was 2.58 to 1.0 compared to 2.89 to 1.0 at August 31, 2003. The Company's
cash balance decreased $46,000 during the first nine months. The slight decrease
in the cash balance and the aforementioned ratios is due to the purchase of the
Monticello facility.
As discussed in Note 3 of the Financial Statements, the Company entered
into two separate mortgages for the purchase of the Monticello facility. The
first mortgage is for $1,360,000 with an interest rate of 5.37% adjustable after
5 years and payments of $8,307 with the entire balance due May 1, 2014.
The second mortgage is with the City of Monticello Economic Development
Authority for $350,000 due May 1, 2009. The mortgage has a monthly payment of
$1,483 with interest at 2.0%.
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 for the next twelve months.
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 important factors, among
others, 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 loss of
significant business from any one of its current customers could have a
material adverse effect on the Company; (iii) a significant downturn in
the industries in which the Company participates could have an adverse
effect on the demand for Company services; (iv) the concentration of our
sales in a limited number of highly competitive industries; (v) the prices
of our products are subject to downward pressure from customers and market
pressure from competitors; (vi) the Company's ability to curtail its costs
and expenses for new manufacturing programs, commensurate with expected
revenues; (vii) the Company's ability to comply with covenants of its
credit facility; (viii) fluctuations in operating results due to, among
other things, changes in customer demand for our product, in our
manufacturing costs and efficiently of our 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.
11
ITEM 4. 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 reviewed the Company's disclosure
controls and procedures within 90 days prior to the filing of this report. Based
upon this review, these officers believe that the Company's disclosure controls
and procedures are effective in ensuring that material information related to
the Company is made known to them by others within the Company.
(b) Changes in Internal Controls.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls during the quarter
covered by this report or from the end of the reporting period to the date of
this Form 10-Q.
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K:
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.Section 1350.
B. Reports on Form 8-K:
During the quarter, the Company furnished a Current Report on Form
8-K dated May 11, 2004, reporting under Item 2 the purchase of real
property located at 213 Chelsea Road, Monticello, MN and under item
7 various items associated with that purchase.
12
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.
WSI INDUSTRIES, INC.
Date: June 29, 2004 /s/ Michael J. Pudil
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Michael J. Pudil, President & CEO
Date: June 29, 2004 /s/ Paul D. Sheely
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Paul D. Sheely, Vice President, Finance & CFO
13