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 May 28, 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 (IRS Employer Identification No.)
incorporation of organization)
213 Chelsea Road
Monticello, Minnesota 55362
(Address of principal executive offices) (Zip Code)
(763) 295-9202
(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 X No
----- -----
Indicate by check mark whether the small business issuer is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
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 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 June 20, 2006.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets May 28, 2006
(Unaudited) and August 28, 2005 3
Condensed Consolidated Statements of Operations
Thirteen and Thirty-nine weeks ended May 28, 2006
and May 29, 2005 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Thirty-nine weeks ended May 28, 2006 and
May 29, 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 3. Controls and Procedures 13
PART II. OTHER INFORMATION:
Item 6. Exhibits 14
Signatures 14
2
Part I. Financial Information
Item 1. Financial Statements
WSI INDUSTRIES, INC
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
MAY 28, AUGUST 28,
2006 2005
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,227,745 $ 937,575
Accounts receivable 2,123,632 1,907,870
Inventories 1,214,094 1,017,966
Prepaid and other current assets 88,343 73,252
Deferred tax assets 139,412 121,581
----------- -----------
Total Current Assets 4,793,226 4,058,244
----------- -----------
Property, Plant and Equipment - Net 3,508,432 3,709,438
----------- -----------
Deferred tax assets 1,400,351 1,675,506
----------- -----------
Intangible assets, net 2,387,739 2,392,698
----------- -----------
$12,089,748 $11,835,886
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 1,162,930 $ 881,197
Accrued compensation and employee withholdings 411,851 479,296
Miscellaneous accrued expenses 100,688 142,074
Current portion of long-term debt 348,065 311,030
----------- -----------
Total Current Liabilities 2,023,534 1,813,597
----------- -----------
Long term debt, net of current portion 2,630,085 2,728,456
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,680,630 and 2,672,630 shares, respectively 268,063 267,263
Capital in excess of par value 2,126,989 2,104,289
Retained earnings 5,041,077 4,922,281
----------- -----------
Total Stockholders' Equity 7,436,129 7,293,833
----------- -----------
$12,089,748 $11,835,886
=========== ===========
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
----------------------- -------------------------
May 28, May 29, May 28, May 29,
2006 2005 2006 2005
---------- ---------- ----------- -----------
Net sales $4,215,323 $4,244,285 $11,959,139 $11,772,801
Cost of products sold 3,446,944 3,471,359 9,936,477 9,808,795
---------- ---------- ----------- -----------
Gross margin 768,379 772,926 2,022,662 1,964,006
Selling and administrative expense 459,399 461,596 1,250,210 1,492,838
Interest and other income (12,260) (5,988) (31,992) (12,644)
Interest expense 43,809 46,140 127,275 128,339
---------- ---------- ----------- -----------
Earnings from operations
before income taxes 277,431 271,178 677,169 355,473
Income tax expense 105,423 97,624 257,324 127,970
---------- ---------- ----------- -----------
Net earnings $ 172,008 $ 173,554 $ 419,845 $ 227,503
========== ========== =========== ===========
Basic earnings per share $ .06 $ .07 $ .16 $ .09
========== ========== =========== ===========
Diluted earnings per share $ .06 $ .07 $ .15 $ .09
========== ========== =========== ===========
Cash dividend per share $ .0375 $ .0375 $ .1125 $ .1125
========== ========== =========== ===========
Weighted average number of
common shares 2,680,630 2,557,629 2,676,850 2,557,629
========== ========== =========== ===========
Weighted average number of
common and dilutive potential
common shares 2,722,050 2,639,010 2,722,409 2,629,243
========== ========== =========== ===========
See notes to condensed consolidated financial statements.
4
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
39 weeks ended
----------------------
May 28, May 29,
2006 2005
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 419,845 $ 227,503
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 456,702 499,549
Amortization 4,959 4,960
Loss on disposal of equipment -- 1,125
Deferred taxes 257,324 127,970
Changes in assets and liabilities:
Increase in accounts receivable (215,762) (176,343)
Increase in inventories (196,128) (200,911)
Increase in prepaid expenses (15,091) (8,291)
Increase in accounts payable
and accrued expenses 172,902 322,450
---------- ---------
Net cash provided by operations 884,751 798,012
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (72,817) (79,855)
---------- ---------
Net cash used in investing activities (72,817) (79,855)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (244,215) (255,199)
Issuance of common stock 23,500 --
Dividends paid (301,049) (287,736)
---------- ---------
Net cash used in financing activities (521,764) (542,935)
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 290,170 175,222
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 937,575 294,766
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $1,227,745 $ 469,988
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 127,364 $ 128,822
Income taxes $ 3,152 $ 2,205
Noncash investing and financing activities:
Acquisition of machinery through capital lease $ 182,879 $ 456,570
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 28, 2006, the
condensed consolidated statements of operations for the thirteen and
thirty-nine weeks ended May 28, 2006 and May 29, 2005 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 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 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 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. 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 $201,413 and $173,956
at May 28, 2006 and August 28, 2005, respectively.
May 28, August 28,
2006 2005
---------- ----------
Raw material $ 590,912 $ 335,798
WIP 375,377 338,219
Finished goods 247,805 343,949
---------- ----------
$1,214,094 $1,017,966
========== ==========
The Company did not dispose of any significant obsolete inventory during
the quarter ended May 28, 2006 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 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.
6
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 May 28, 2006 and May 29, 2005,
respectively. Accumulated amortization on the deferred financing costs
amounted to $13,776 and $8,817 at May 28, 2006 and August 28, 2005,
respectively.
4. EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share:
Thirteen weeks ended Thirty-nine weeks ended
----------------------- -----------------------
May 28, May 29, May 29, May 29,
2006 2005 2005 2005
---------- ---------- ---------- ----------
Numerator for basic and diluted
earnings per share:
Net earnings $ 172,008 $ 173,554 $ 419,845 $ 227,503
========== ========== ========== ==========
Denominator
Denominator for basic earnings
per share - weighted average shares 2,680,630 2,557,629 2,676,850 2,557,629
========== ========== ========== ==========
Effect of dilutive securities:
Employee and non-employee options 41,420 81,381 45,559 71,614
========== ========== ========== ==========
Dilutive common shares
Denominator for diluted earnings
Per share 2,722,050 2,639,010 2,722,409 2,629,243
========== ========== ========== ==========
Basic earnings per share $ .06 $ .07 $ .16 $ .09
========== ========== ========== ==========
Diluted earnings per share $ .06 $ .07 $ .15 $ .09
========== ========== ========== ==========
7
5. 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 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
May 28, 2006 and August 28, 2005:
May 28, 2006 August 28, 2005
------------ ---------------
Obsolete finished goods $ 80,461 $ 85,853
Obsolete work-in-process 6,900 6,900
Cost exceeding market value 114,052 81,203
-------- --------
$201,413 $173,956
9
The Company has no specific timeline to dispose of its remaining 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 in part provided 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 customers 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 $4,215,000 for the quarter ending May 28, 2006 compared to
$4,244,000 in the same period of the prior year. Year-to-date sales in fiscal
2006 were $11,959,000 compared to $11,773,000 in the prior year. Quarterly sales
for the respective periods were comparable with lower sales from the Company's
ATV market offset by an increase in sales to its biosciences industry.
Year-to-date sales are up 1.6% versus the prior year with higher sales in both
the Company's motorcycle and biosciences markets partially offset by lower sales
in its ATV market.
Sales from the Company's recreational vehicle market amounted to $3,437,000
and $3,702,000 for the quarters ended May 28, 2006 and May 29, 2005,
respectively. Year-to-date sales for the Company's recreational vehicle market
were $9,836,000 and $9,994,000 for the nine months ended May 28, 2006 and May
29, 2005, respectively. Sales for the quarter and year-to-date ended May 28,
2006 were lower due to sales from the Company's ATV market, although sales for
the current quarter from the ATV market rebounded significantly from the
Company's second quarter ended February 26, 2006.
Sales from the Company's aerospace and defense markets amounted to $472,000
and $441,000 for the quarter ended May 28, 2006 and May 29, 2005, respectively.
Year-to-date sales for the Company's aerospace and defense markets were
$1,504,000 and $1,269,000 for the nine months ended May 28, 2006 and May 29,
2005, respectively. The Company believes these increases are not as a result of
significant change in a customer or product requirement, but rather as a result
from a general increase in the level of the Company's aerospace and defense
business with its current customers.
Sales from the Company's other revenue markets amounted to $306,000 and
$101,000 for the quarter ended May 28, 2006 and May 29, 2005, respectively.
Year-to-date sales for the Company's other revenue markets were $619,000 and
$510,000 for the nine months ended May 28, 2006 and May 29, 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 $163,000 and $352,000 for the quarter and year to date
ended May 28, 2006 versus $39,000 and $92,000 for the prior year periods,
respectively. The increase is attributable to the partnering arrangement
announced in June 2005.
Gross margin held steady at 18% for the quarter ending May 28, 2006, the
same percentage as the prior year. Similarly, year-to-date gross margin was 17%,
comparable to the prior year.
Selling and administrative expense of $459,000 for the quarter ending May
28, 2006 was comparable to the prior year quarter's total of $462,000.
Year-to-date selling and administrative expense of $1,250,000 was $243,000 lower
than the comparable prior year period. During the last quarter of fiscal 2004
and 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
$340,000 for the nine months ended May 29, 2005 with no material costs being
incurred after the Company's fiscal 2005 second quarter ended February 27, 2005.
The $243,000 of lower selling and administrative cost is attributable to these
relocation expenses, but were offset somewhat by higher compensation related
costs in first three quarters of fiscal 2006.
11
Interest expense in the third quarter of fiscal 2006 was $44,000, which was
similar to the prior year's quarter of $46,000. Year-to-date interest expense
for fiscal 2006 was $127,000 versus $128,000 in the prior year.
The Company recorded income tax expense at an effective tax rate of 38% for
the quarter and year to date periods ended May 28, 2006 and 36% for the quarter
and year to date ended May 29, 2005.
Liquidity and Capital Resources
On May 28, 2006, working capital was $2,770,000 compared to $2,245,000 at
August 28, 2005. The increase in working capital is attributable to an overall
increase in the level of cash, accounts receivable and inventory at May 28, 2006
versus August 28, 2005. The ratio of current assets to current liabilities at
May 28, 2006 was 2.37 to 1.0 compared to 2.24 to 1.0 at August 28, 2005. The
Company's cash balance increased $290,000 during the first nine months of fiscal
2006 with $885,000 in cash flow from operations being used to pay down $244,000
in long-term debt, $301,000 in dividends as well as to purchase $73,000 in
equipment.
The Company renewed its $1,000,000 revolving credit facility with its bank
during the Company's second quarter of fiscal 2006. Interest on the new
agreement is at the bank's prime rate. At May 28, 2006, the Company did not have
a balance owing under this revolving line of credit agreement nor had it
borrowed any funds during fiscal 2006.
The Company paid quarterly dividends of $.0375 per share of its common
stock in each of the first three quarters of fiscal 2006 and 2005. The dividend
payments for the first nine months of fiscal 2006 and fiscal 2005 totaled
$301,000 and $288,000, 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.
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
12
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 efficiencies of our operations; and (x) 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.
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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. Section 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.
WSI INDUSTRIES, INC.
Date: June 20, 2006 /s/ Michael J. Pudil
----------------------------------------
Michael J. Pudil, President & CEO
Date: June 20, 2006 /s/ Paul D. Sheely
----------------------------------------
Paul D. Sheely, Vice President, Finance
& CFO
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