UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 26, 2006
OR
[ ] 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
WSI Industries, Inc.
(Exact Name of Small Business Issuer, as Specified in Its Charter)
Minnesota 41-0691607
(State or other jurisdiction of (I. R. S. Employer
incorporation of organization) Identification No.)
213 Chelsea Road
Monticello, Minnesota 55362
(Address of principal executive offices) (Zip Code)
(763) 295-9202
(Registrant's telephone number, including area code)
_______________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
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. 2,680,630 shares of common
stock were outstanding as of March 24, 2006.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets February 26, 2006
(Unaudited) and August 28, 2005 3
Condensed Consolidated Statements of Income
Thirteen and Twenty-Six weeks ended February 26, 2006
and February 27, 2005 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Twenty-Six weeks ended February 26, 2006
and February 27, 2005 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of the Security Holders 14
Item 6. Exhibits 15
Signatures 15
2
Part I. Financial Information
Item I. Financial Statements
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
FEBRUARY 26, AUGUST 28,
2006 2005
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,126,291 $ 937,575
Accounts receivable 1,836,602 1,907,870
Inventories 968,913 1,017,966
Prepaid and other current assets 46,128 73,252
Deferred tax assets 172,027 121,581
----------- -----------
Total Current Assets 4,149,961 4,058,244
----------- -----------
Property, Plant and Equipment - Net 3,597,374 3,709,438
----------- -----------
Deferred tax assets 1,473,159 1,675,506
----------- -----------
Intangible assets, net 2,389,392 2,392,698
----------- -----------
$11,609,886 $11,835,886
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 769,398 $ 881,197
Accrued compensation and employee withholdings 358,867 479,296
Miscellaneous accrued expenses 54,993 142,074
Current portion of long-term debt 341,348 311,030
----------- -----------
Total Current Liabilities 1,524,606 1,813,597
----------- -----------
Long term debt, less current portion 2,720,633 2,728,456
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,680,630 shares and 2,672,630, respectively 268,063 267,263
Capital in excess of par value 2,126,989 2,104,289
Retained earnings 4,969,595 4,922,281
----------- -----------
Total Stockholders' Equity 7,364,647 7,293,833
----------- -----------
$11,609,886 $11,835,886
=========== ===========
See notes to condensed consolidated financial statements
3
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
13 weeks ended 26 weeks ended
--------------------------- ---------------------------
February 26, February 27, February 26, February 27,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net sales $3,573,617 $3,654,475 $7,743,817 $7,528,516
Cost of products sold 3,043,416 3,036,317 6,489,533 6,337,436
---------- ---------- ---------- ----------
Gross margin 530,201 618,158 1,254,284 1,191,080
Selling and administrative expense 383,866 536,880 790,811 1,031,244
Interest and other income (10,930) (5,189) (19,732) (6,656)
Interest expense 45,188 42,196 83,466 82,199
---------- ---------- ---------- ----------
Earnings from operations
before income taxes 112,077 44,271 399,739 84,293
Income tax expense 42,589 15,937 151,901 30,346
---------- ---------- ---------- ----------
Net earnings $ 69,488 $ 28,334 $ 247,838 $ 53,947
========== ========== ========== ==========
Basic earnings per share $ .03 $ .01 $ .09 $ .02
========== ========== ========== ==========
Diluted earnings per share $ .03 $ .01 $ .09 $ .02
========== ========== ========== ==========
Cash dividend per share $ .0375 $ .0375 $ .075 $ .075
========== ========== ========== ==========
Weighted average number of
common shares 2,677,289 2,557,629 2,674,960 2,557,629
========== ========== ========== ==========
Weighted average number of
common and dilutive potential
common shares 2,720,546 2,630,114 2,722,588 2,624,359
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
4
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
26 weeks ended
---------------------------
February 26, February 27,
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 247,838 $ 53,947
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 342,245 326,367
Amortization 3,306 3,307
Loss on disposal of equipment -- 1,125
Deferred taxes 151,901 30,346
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 71,268 (155,690)
(Increase) decrease in inventories 49,053 (225,014)
Decrease in prepaid expenses 27,124 30,541
Decrease in accounts payable
and accrued expenses (319,309) (6,111)
---------- ---------
Net cash provided by operations 573,426 58,818
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (47,302) (61,044)
---------- ---------
Net cash used in investing activities (47,302) (61,044)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 23,500 --
Net borrowings on revolving line of credit -- 100,000
Payments of long-term debt (160,384) (164,045)
Dividends paid (200,524) (191,826)
---------- ---------
Net cash used in financing activities (337,408) (255,871)
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 188,716 (258,097)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 937,575 294,766
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $1,126,291 $ 36,669
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 83,914 $ 81,696
Income taxes $ 900 $ 1,500
Non cash investing and financing activities:
Acquisition of equipment through capital lease $ 182,879 $ 335,000
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 February 26, 2006, the
condensed consolidated statements of income for the twenty-six weeks ended
February 26, 2006 and February 27, 2005 and the condensed consolidated
statements of cash flows for the twenty-six 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 28, 2005 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 accounting principles generally
accepted in the United States of America 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 2005 annual report to shareholders. The results of operations
for interim periods are not necessarily indicative of the operating results
for the full year.
2. DEBT AND LINE OF CREDIT:
The Company has renewed its revolving credit agreement in the maximum
amount of $1 million with its bank. Interest on the renewed agreement is at
the bank's prime rate. It contains restrictive provisions concerning yearly
capital expenditures, maximum debt to net worth and minimum current ratios,
as well as a minimum debt service coverage ratio. The Company is in
compliance with all of the provisions. The credit agreement is secured by
all non-real property assets of the Company and expires January 1, 2007.
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 $193,663 and $173,956
at February 26, 2006 and August 28, 2005, respectively.
February 26, August 28,
2006 2005
------------ ----------
Raw material $383,517 $ 335,798
WIP 302,113 338,219
Finished goods 283,283 343,949
-------- ----------
$968,913 $1,017,966
======== ==========
The Company did not dispose of any significant inventory during the quarter
ended February 26, 2006 and therefore there was no material effect on gross
margin from any dispositions.
6
4. 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 2005 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 are being amortized over five
years on a straight-line basis with the Company incurring $1,653 of
amortization expense for the quarters ended February 26, 2006 and February
27, 2005, respectively. Accumulated amortization on the deferred financing
costs amounted to $12,123 and $8,817 at February 26, 2006 and August 28,
2005, respectively.
5. EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share:
Thirteen weeks ended Twenty- Six weeks ended
--------------------------- --------------------------
February 26, February 27, February 26 February 27,
2006 2005 2006 2005
------------ ------------ ----------- ------------
Numerator for basic and diluted
earnings per share:
Net earnings $ 69,488 $ 28,334 $ 247,838 $ 53,947
========== ========== ========== ==========
Denominator
Denominator for basic earnings
per share - weighted average shares 2,677,289 2,557,629 2,674,960 2,557,629
========== ========== ========== ==========
Effect of dilutive securities:
Employee and non-employee options 43,257 72,485 47,628 66,730
========== ========== ========== ==========
Dilutive common shares
Denominator for diluted earnings
Per share 2,720,546 2,630,114 2,722,588 2,624,359
========== ========== ========== ==========
Basic earnings per share $ .03 $ .01 $ .09 $ .02
========== ========== ========== ==========
Diluted earnings per share $ .03 $ .01 $ .09 $ .02
========== ========== ========== ==========
6. Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (R) (revised 2004),
Share-Based Payment, which is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No 123 (R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and Amends SFAS No 95, Statement
of Cash Flows. Generally, the approach in SFAS No. 123 (R) is similar to
the approach described in SFAS No. 123. However, SFAS No. 123 (R) requires
all shared-based payments to
7
employees, including grants of employee stock options, to be recognized in
the income statement based on their fair values. Pro forma disclosure is
not an alternative. SFAS No. 123 (R) must be adopted no later than the
first interim period for fiscal years beginning after December 15, 2005 for
small business filers. We expect to adopt SFAS No. 123 (R) on August 28,
2006.
SFAS No. 123 (R) permits public companies to adopt its requirements
using one of two methods: a "modified prospective" approach or a "modified
retrospective" approach. Under the modified prospective approach,
compensation cost is recognized beginning with the effective date based on
the requirements of SFAS 123 (R) for all share-based payments granted after
the effective date and the requirements of SFAS No. 123 (R) for all awards
granted to employees prior to the effective date of SFAS No. 123 (R) that
remain unvested on the effective date. The modified retrospective approach
includes the requirements of the modified prospective approach but also
permits entities to restate based on the amounts previously recognized
under SFAS No. 123 for purposes of pro forma disclosures either for all
prior periods presented or prior interim periods of the year of adoption.
We are evaluating which method to adopt.
As permitted by SFAS No. 123, we currently account for the share-based
payments to employees using APB Opinion No. 25's intrinsic value method
and, as such, generally recognize no compensation cost for employee stock
options. We expect the adoption of SFAS No. 123 (R) to have an unfavorable
effect on our results of operations. If we had adopted SFAS No. 123 (R) in
prior periods, the impact of that standard would have approximated the
impact of SFAS No. 123 as described in Note 5 to our financial statements
included in our Form 10-K for the year ended August 28, 2005.
SFAS No. 123 (R) also requires the benefit of tax deductions in excess
of recognized compensation cost to be reported as a financing cash flow,
rather than an operating cash flow under current accounting literature.
Since we do not have the benefit of tax deductions in excess of recognized
compensation cost, because of our net operating loss position, the change
will have no immediate impact on our consolidated financial statements.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151 "Inventory Costs - an amendment of ARB No. 43, Chapter 4"
("SFAS No. 151") effective for fiscal years beginning after June 15, 2005,
SFAS No. 151 became effective for WSI on August 29, 2005, the beginning of
our fiscal 2006 year. This Statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). This Statement requires that those items be recognized
as current-period charges. In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facility. We believe that
the adoption of SFAS No. 151 will not have a material effect on our
financial position or results of operations.
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 the Company's 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.
The Company believes that the estimates, assumptions and judgments involved
in the accounting policies described below have the greatest potential impact on
our financial statements, so the Company considers these to be its critical
accounting policies. Because of the uncertainty inherent in these matters,
actual results could differ from the estimates the Company uses in applying the
critical accounting policies. Within the context of these critical accounting
policies, the Company is 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 by comparing the cost
of each item in inventory to its most recent sales price or sales order price.
Any excess of cost over the net realizable value of inventory components is
included in the allowance for obsolete inventory.
In addition, the Company determines the reserve for excess and obsolete
inventory by analyzing the sales history of its inventory, sales orders on hand
and indications from the Company's customers as to the future of various parts
or programs. If, in the Company's determination, the inventory value has become
impaired, the Company establishes an obsolescence reserve at the amount the
Company estimates as the ultimate net realizable value for that inventory. The
obsolescence reserve remains on the Company's books until the inventory is
disposed of or sold. Actual customer requirements in any future periods are
inherently uncertain and thus may differ from our estimates. If actual or
expected customer requirements were significantly lower than the established
reserves, the Company would record an increase to the obsolescence allowance in
the period in which the Company made such a determination. The Company performs
its lower of cost or market testing as well as its excess or obsolete inventory
analyses, quarterly.
The Company's allowance for obsolete inventory consists of the following at
February 26, 2006 and August 28, 2005:
February 26, 2006 August 28, 2005
----------------- ---------------
Obsolete finished goods $ 80,946 $ 85,853
Obsolete work-in-process 6,900 6,900
Cost exceeding market value 105,817 81,203
-------- --------
$193,663 $173,956
9
The Company has no specific timeline to dispose of its obsolete inventory and
intends to sell this obsolete inventory from time to time, as market conditions
allow.
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. The Company believes that its stock price is not necessarily an
indicator of the Company's value given its limited trading volume and its wide
price fluctuations. The Company follows the guidance provided by SFAS 142 and
utilizes a present value technique to measure fair value by estimating future
cash flows. The major assumptions in this analysis include: (a) sales estimates
for the Company provided, in part, with guidance from the Company's customers;
and (b) material and labor costs of the Company's major programs. The Company
constructs a discounted cash flow analysis based on these assumptions to
estimate the fair value of the Company (which is the only reporting unit). The
result of the analysis performed in the fiscal 2005 fourth quarter did not show
an impairment of goodwill. If the Company has 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. The Company
has not established a valuation allowance as it believes it is more likely than
not that it will fully realize the benefit of its tax assets. Currently, the
Company's deferred tax assets have two major components which relate to the
Company's NOL and the Company's AMT tax credit carryforwards. The Company's AMT
tax credit carryforward does not expire. The Company's NOL carryforward has
$870,000 expiring in fiscal year 2009, $415,000 in fiscal 2011 and $3.1 million
expiring in fiscal 2021 and after. The Company believes that its current rate of
growth will be sufficient to fully utilize its NOL carryforwards before they
expire. However, a significant loss of a customer or a change in the Company's
business could affect the realization of the deferred tax assets. If a major
program were discontinued, the Company would immediately assess the impact of
the loss of the program on the realization of the deferred tax assets.
Revenue Recognition:
The Company considers its revenue recognition policy to fall under the
guidance of FASB's conceptual framework for revenue recognition. The Company
recognizes revenue only after: (a) The Company has received a purchase order
identifying price and delivery terms or services to be rendered; (b) shipment
has occurred, or in the case of services, after the service has been completed;
(c) the Company's price is fixed as evidenced by the purchase order; and (d)
collectibility is reasonably assured. The Company continually monitors its
accounts receivable for any delinquent or slow paying accounts. The Company
believes that based upon its past history with minimal bad debt write-offs, that
all accounts are collectible upon shipment or delivery of services. Credit
losses have been minimal and within management's expectations. Based on
management's evaluation of uncollected accounts receivable, bad debts are
provided for on the allowance method. Accounts are considered delinquent if they
are 120 days past due. If an uncollectible account should arise during the year,
it would be written-off at the point it was determined to be uncollectible. The
Company mitigates its credit risk by performing periodic credit checks and
actively pursuing past due accounts. The Company refers to "net sales" in its
consolidated statements of operations as the Company's sales are sometimes
reduced by product returned by its customers.
10
Results of Operations:
Net sales were $3,574,000 for the quarter ending February 26, 2006, a
decrease of 2% or $81,000 from the same period of the prior year. Year-to-date
sales in fiscal 2006 were $7,744,000 compared to $7,529,000 in the prior year, a
3 % increase.
Sales from the Company's recreational vehicle market amounted to $2,838,000
and $3,012,000 for the quarter ended February 26, 2006 and February 27, 2005,
respectively. Year to date sales for the Company's recreational vehicle market
were $6,399,000 and $6,292,000 for the six months ended February 26, 2006 and
February 27, 2005, respectively. Sales were lower for the quarter ended February
26, 2006 due primarily to lower sales in the Company's ATV market offset by an
increase in sales in the Company's motorcycle market. Year to date sales had the
same trends as the quarterly sales; however in the year to date case the
increase in motorcycle parts sales was greater than the decrease in ATV parts
sales.
Sales from the Company's aerospace and defense markets amounted to $564,000
and $372,000 for the quarter ended February 26, 2006 and February 27, 2005,
respectively. Year to date sales for the Company's aerospace and defense markets
were $1,032,000 and $774,000 for the six months ended February 26, 2006 and
February 27, 2005, respectively. For both the quarter and year to date
increases, the Company believes that the increases are as a result of higher
levels of volume with existing parts.
Sales from the Company's other revenue markets amounted to $172,000 and
$271,000 for the quarter ended February 26, 2006 and February 27, 2005,
respectively. Year to date sales for the Company's other revenue markets were
$313,000 and $463,000 for the six months ended February 26, 2006 and February
27, 2005, respectively. The Company's other revenue markets consist primarily of
computer components, small engine parts and components for the bioscience
industry. It is the Company's belief that the parts made for the computer
components and small engine parts industries are generally spare or repair parts
with sales of these parts decreasing over the last several years. The Company's
sales to the biosciences industry were $112,000 and $190,000 for the quarter and
year to date ended February 26, 2006 versus $19,000 and $53,000 for the prior
year periods, respectively.
Gross margin decreased to 15% for the quarter ending February 26, 2006
versus 17% in the year ago period. The decrease in gross margin is attributable
to the lower level of sales to the ATV market as described previously as well as
start-up costs related to the biosciences industry sales. Year-to-date gross
margins were 16% for both six-month periods ending February 26, 2006 and
February 27, 2005, respectively.
No significant sales of obsolete inventory items occurred during the year
to date periods ending February 26, 2006 and February 27, 2005. Correspondingly,
no significant gross margin was realized from any of those sales. During the
fiscal 2005 second quarter ending February 27, 2005, the Company disposed of all
but $8,740 of its obsolete WIP inventory. The amount disposed amounted to 6% of
the gross inventory value.
During the first two quarters of fiscal 2005, the Company moved its office
and manufacturing operations from its former site in Osseo, Minnesota to its
current location in Monticello, Minnesota. During this time, the Company
recorded relocation costs, as well as the costs associated with leasing and
maintaining the Osseo facility, as selling and administrative cost. These costs
amounted to approximately $326,000 for the six months ended February 27, 2005.
The relocation was completed by the end of the Company's fiscal 2005 second
quarter.
Selling and administrative expense of $384,000 for the quarter ending
February 26, 2006 was $153,000 lower than in the prior year period due primarily
to the relocation costs mentioned previously. Year to date selling and
administrative expense of $791,000 was $240,000 lower than the comparable prior
year period. The
11
year to date decrease was due to fiscal 2006 not incurring any relocation costs;
however that decrease was partially offset by an increase in compensation
expense.
Interest expense in the second quarter of fiscal 2006 was $45,000, which
was $3,000 more than the second quarter of fiscal 2005 amount of $42,000.
Year-to-date interest expense for fiscal 2006 was also up by a similar
immaterial amount.
The Company recorded income tax expense at an effective tax rate of 38% for
the quarter and year to date periods ended February 26, 2006 and 36% for the
quarter and year to date ended February 27, 2005.
Liquidity and Capital Resources:
On February 26, 2006, working capital was $2,625,000 compared to $2,245,000
at August 28, 2005. The ratio of current assets to current liabilities at
February 26, 2006 was 2.72 to 1.0 compared to 2.24 to 1.0 at August 28, 2005.
The improvement in both measurements is attributable to the generation of cash
from operations during the first two quarters of fiscal 2006
As discussed in the Notes to Condensed Consolidated Financial Statements,
the Company renewed its $1,000,000 revolving credit facility with its bank
during the fiscal 2006 second quarter. Interest on the new agreement is at
prime.
It is the Company's belief that its current cash balance, plus future
internally generated funds and its line of credit, will be sufficient to enable
the Company to meet its working capital requirements through the end of calendar
year 2006.
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) the Company was dependent upon one customer for 84%
of its revenues in fiscal year 2005 and expects that a significant portion of
its future revenue will be derived from this customer; (iv) a significant
downturn in the industries in which the Company participates could have an
adverse effect on the demand for Company services; (v) our sales are
concentrated in a limited number of highly competitive industries, each with a
limited number of customers; (vi) the prices of our products are subject to
downward pressure from customers and market pressure from competitors; (vii) the
Company's ability to curtail its costs and expenses for new manufacturing
programs, commensurate with expected revenues; (viii) the Company's ability to
comply with covenants of its credit facility; (ix) 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; (x) a trend among
our customers toward outsourcing manufacturing to foreign operations.
12
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.
13
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 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.
PART II. OTHER INFORMATION:
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the Company Stockholders was held on January 4,
2006. Of the 2,672,630 shares were issued and outstanding and entitled
to vote at the close of business on November 7, 2005 shareholders
holding 2,479,316 shares were present at the meeting either in person
or by proxy. The following describes the matters considered by the
Company's shareholders at the Annual Meeting, as well as the results
of the votes cast at the Annual Meeting:
A. To elect five (5) directors to hold office until the next Annual
Meeting of Shareholders or until their respective successors have been
elected and shall qualify.
Name of Nominee
----------------
Paul Baszucki For 2,428,235 Against 51,081
Melvin L. Katten For 2,426,585 Against 52,731
George J. Martin For 2,423,985 Against 55,331
Eugene J. Mora For 2,418,211 Against 61,105
Michael J. Pudil For 2,426,585 Against 52,731
Each director nominee was elected by the shareholders.
B. To adopt the Company's 2005 Stock Plan
For 810,423 Against 235,141 Abstain 25,971 Broker non-vote 1,407,781
The shareholders approved this proposal.
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ITEM 6. EXHIBITS
A. The following exhibits are included herein:
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14
and 15d-14 of the Exchange Act.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14
and 15d-14 of the Exchange Act.
Exhibit 32 Certificate pursuant to 18 U.S.C. Section 1350.
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: April 4, 2006 /s/ Michael J. Pudil
----------------------------------------
Michael J. Pudil, President & CEO
Date: April 4, 2006 /s/ Paul D. Sheely
----------------------------------------
Paul D. Sheely, Vice President, Finance
& CFO
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