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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 ACT OF 1934
For the quarterly period ended November 30, 2003
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 registrant, as specified in its charter)
Minnesota 41-0691607
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation of organization) Identification No.)
Osseo, Minnesota 55369
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(763) 428-4308
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(Registrant's telephone number, including area code)
Wayzata, Minnesota
- -------------------------------------------------------------------------------
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(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.
2,551,129 Common Shares were outstanding as of December 31, 2003.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets November 30, 2003(Unaudited)
and August 31, 2003 3
Condensed Consolidated Statements of Income
Thirteen weeks ended November 30, 2003
and November 24, 2002 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Thirteen weeks ended November 30, 2003
and November 24, 2002 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6, 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8, 9, 10
Item 4. Controls and Procedures 11
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
2
Part I. Financial Information
Item I. Financial Statements
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, AUGUST 31,
2003 2003
------------ ----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,519,476 $ 891,218
Accounts receivable 1,036,138 1,530,811
Inventories 661,668 606,262
Prepaid and other current assets 36,280 75,747
Deferred tax assets 169,387 169,387
---------- ----------
Total Current Assets 3,422,949 3,273,425
---------- ----------
Property, Plant and Equipment - Net 1,593,031 1,718,599
---------- ----------
Deferred tax assets 1,777,409 1,813,270
---------- ----------
Intangible assets, net 2,368,452 2,368,452
---------- ----------
$9,161,841 $9,173,746
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 570,677 $ 403,277
Accrued compensation and employee withholdings 269,021 384,857
Miscellaneous accrued expenses 173,618 150,289
Current portion of long-term debt 199,597 195,720
---------- ----------
Total Current Liabilities 1,212,913 1,134,143
---------- ----------
Long term debt, less current portion 596,631 648,008
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,551,129 shares 255,113 255,113
Capital in excess of par value 1,826,901 1,826,901
Retained earnings 5,270,283 5,309,581
---------- ----------
Total Stockholders' Equity 7,352,297 7,391,595
---------- ----------
$9,161,841 $9,173,746
========== ==========
See notes to condensed consolidated financial statements
3
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
13 weeks ended
-----------------------------------
November 30, November 24,
2003 2002
----------- -----------
Net sales $ 2,806,062 $ 2,434,293
Cost of products sold 2,395,405 1,972,831
----------- -----------
Gross margin 410,657 461,462
Selling and administrative expense 317,889 378,869
Interest and other income (15,446) (18,974)
Interest and other expense 15,983 40,982
----------- -----------
Earnings from operations
before income taxes 92,231 60,585
Income tax expense 35,861 21,935
----------- -----------
Net earnings $ 56,370 $ 38,650
=========== ===========
Basic earnings per share $ .02 $ .02
=========== ===========
Diluted earnings per share $ .02 $ .02
=========== ===========
Cash dividend per share $ .0375 $ --
=========== ===========
Weighted average number of
common shares 2,551,129 2,465,229
=========== ===========
Weighted average number of
common and dilutive potential
common shares 2,629,091 2,465,229
=========== ===========
See notes to condensed consolidated financial statements.
4
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
13 weeks ended
------------------------------------
November 30, November 24,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 56,370 $ 38,650
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 145,033 158,508
Deferred taxes 35,861 21,935
Changes in assets and liabilities:
Decrease in accounts receivable 494,673 52,198
Increase in inventories (55,407) (57,861)
Decrease in prepaid expenses 39,468 16,859
Increase in accounts payable and
accrued expenses 74,893 38,524
----------- -----------
Net cash provided by operations 790,891 268,813
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (19,465) (9,356)
----------- -----------
Net cash used in investing activities (19,465) (9,356)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (47,500) (43,917)
Dividends paid (95,668) --
----------- -----------
Net cash used in financing activities (143,168) (43,917)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 628,258 215,540
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 891,218 1,115,922
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $ 1,519,476 $ 1,331,462
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 15,984 $ 41,217
Income taxes $ -- $ --
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 November 30,
2003, the condensed consolidated statements of income for the thirteen
weeks ended November 30, 2003 and November 24, 2002 and the condensed
consolidated statements of cash flows for the thirteen 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 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 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. 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. The revolver was not accessed
during the quarter, and correspondingly, no amount was owed at the end
of the current quarter. The credit agreement is secured by all assets
of the Company and expires December 31, 2004.
3. GOODWILL AND INTANGIBLE ASSETS
Under SFAS 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.
6
Goodwill and other intangible assets resulting from
acquisitions of business and the formation of the Company consist of
the following:
November 30, November 24,
2003 2002
------------ ------------
Goodwill $2,428,264 $2,428,264
Less accumulated amortization 308,595 308,595
---------- ----------
$2,119,669 $2,119,669
========== ==========
Other identifiable intangibles:
Organization costs $ 285,000 $ 285,000
Less accumulated amortization 36,217 36,217
---------- ----------
$ 248,783 $ 248,783
========== ==========
4. EARNINGS PER SHARE:
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 Earnings
per Share. Statement 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements.
The following table sets forth the computation of basic and
diluted earnings per share:
Thirteen weeks ended
----------------------------------
November 30, November 24,
2003 2002
------------ ------------
Numerator for basic and diluted earnings per share:
Net earnings $ 56,370 $ 38,650
========== ==========
Denominator:
Denominator for basic earnings
per share - weighted average shares 2,551,129 2,465,229
Effect of dilutive securities:
Employee and non-employee options 77,962 --
---------- ----------
Dilutive common shares
Denominator for diluted earnings
per share 2,629,091 2,465,229
========== ==========
Basic earnings per share $ .02 $ .02
========== ==========
Diluted earnings per share $ .02 $ .02
========== ==========
7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and
Results of Operations 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.
8
Results of Operations:
Net sales were $2,806,000 for the quarter ending November 30, 2003, an
increase of 15% or $372,000 from the same period of the prior year. The
increase was due primarily to higher sales in the Company's recreational
vehicle market.
Gross margin decreased to 15% for the quarter ending November 30, 2003
versus 19% in the year ago period. The lower gross margin was due in large part
to a higher than normal level of supplies and machine repair expense.
Selling and administrative expense of $318,000 for the quarter ending
November 30, 2003 was $61,000 lower than in the prior year. Prior year selling
and administrative expense 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 first quarter of fiscal 2004 was $16,000,
which was $25,000 less than the first quarter of fiscal 2003 amount of $41,000.
The decrease is attributable to the subordinated promissory note being paid off
in fiscal 2003, and thus not having any interest expense being accrued against
it in fiscal 2004.
The Company recorded income tax expense at an effective tax rate of
39% and 36% for the quarters ended November 30, 2003 and November 24, 2002,
respectively.
Liquidity and Capital Resources:
On November 30, 2003, working capital was $2,210,000 compared to
$2,139,000 at August 31, 2003. The ratio of current assets to current
liabilities at November 30, 2003 was 2.82 to 1.0 compared to 2.89 to 1.0 at
August 31, 2003. The Company's cash balance increased $628,000 during the first
quarter, primarily from collections of accounts receivable.
As discussed in the Notes to Condensed Consolidated Financial
Statements, the Company renewed its $1,000,000 revolving credit facility with
its bank subsequent to the end of the fiscal 2004 first quarter. Interest on
the new agreement is at prime. No amounts have been borrowed since the closing
of the original agreement in December 2002.
It is the Company's belief that with 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
fiscal 2004.
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 which 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
9
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. 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.
10
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 that review, they have concluded that these 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 over Financial Reporting.
There have been no significant 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 6. EXHIBITS AND REPORTS ON FORM 8-K:
A. The following exhibits are included herein:
Exhibit 10.1 Amendment and Modification of Revolving Line of
Credit dated December 31, 2003 between the Company and Excel
Bank.
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.ss.1350.
B. Reports on Form 8-K:
During the quarter, the Company furnished a Current Report on
Form 8-K dated October 15, 2003, reporting under Item 12 its
results of operations for the fiscal year ended August 31,
2003 and under Item 7, attaching a press release dated
October 15, 2003 announcing the 2003 fiscal year results of
operations and a dividend.
11
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: January 13, 2004 /s/ Michael J. Pudil
---------------- ---------------------------------------
Michael J. Pudil, President & CEO
Date: January 13, 2004 /s/ Paul D. Sheely
---------------- ---------------------------------------
Paul D. Sheely, Vice President,
Finance & CFO
12