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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
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ACT OF 1934
For the quarterly period ended February 29, 2004
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
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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.
2,553,629 Common Shares were outstanding as of February 29, 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 February 29, 2004 (Unaudited)
and August 31, 2003 3
Condensed Consolidated Statements of Operations
Thirteen and Twenty-Six weeks ended February 29, 2004 and
February 23, 2003 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Twenty-Six weeks ended February 29, 2004 and
February 23, 2003 (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 10
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of the Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
2
Part I. Financial Information
Item 1. Financial Statements
WSI INDUSTRIES, INC
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 29, AUGUST 31,
ASSETS 2004 2003
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $1,185,188 $ 891,218
Accounts receivable 1,272,207 1,530,811
Inventories 680,553 606,262
Prepaid and other current assets 55,037 75,747
Deferred tax assets 169,387 169,387
---------- ----------
Total Current Assets 3,362,372 3,273,425
---------- ----------
Property, Plant and Equipment - Net 1,464,044 1,718,599
---------- ----------
Deferred tax assets 1,750,290 1,813,270
---------- ----------
Intangible assets, net 2,368,452 2,368,452
---------- ----------
$8,945,158 $9,173,746
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 444,764 $ 403,277
Accrued compensation and employee withholdings 291,985 384,857
Miscellaneous accrued expenses 145,215 150,289
Current portion of long-term debt 203,551 195,720
---------- ----------
Total Current Liabilities 1,085,515 1,134,143
---------- ----------
Long term debt, net of current portion 544,236 648,008
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,553,629 shares and 2,551,129, respectively 255,363 255,113
Capital in excess of par value 1,829,841 1,826,901
Retained earnings 5,230,203 5,309,581
---------- ----------
Total Stockholders' Equity 7,315,407 7,391,595
---------- ----------
$8,945,158 $9,173,746
========== ==========
See notes to condensed consolidated financial statements
3
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
13 weeks ended 26 weeks ended
---------------------------- ----------------------------
February 29, February 23, February 29, February 23,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales $ 2,615,666 $ 2,359,109 $ 5,421,727 $ 4,793,402
Cost of products sold 2,207,463 1,947,275 4,602,867 3,920,105
----------- ----------- ----------- -----------
Gross margin 408,203 411,834 818,860 873,297
Selling and administrative expense 340,788 310,382 658,677 689,251
Interest and other income (30,334) (43,375) (45,779) (62,349)
Interest and other expense 15,043 38,701 31,026 79,683
----------- ----------- ----------- -----------
Earnings from operations
before income taxes 82,706 106,126 174,936 166,712
Income tax expense 27,116 38,200 62,977 60,135
----------- ----------- ----------- -----------
Net earnings $ 55,590 $ 67,926 $ 111,959 $ 106,577
=========== =========== =========== ===========
Basic earnings per share $ .02 $ .03 $ .04 $ .04
=========== =========== =========== ===========
Diluted earnings per share $ .02 $ .03 $ .04 $ .04
=========== =========== =========== ===========
Cash dividend per share $ .0375 $ -- $ .075 $ --
=========== =========== =========== ===========
Weighted average number of
common shares 2,552,008 2,465,229 2,551,569 2,465,229
=========== =========== =========== ===========
Weighted average number of
common and dilutive potential
common shares 2,625,887 2,465,229 2,628,038 2,465,229
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
26 weeks ended
---------------------------
February 29, February 23,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 111,959 $ 106,577
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 294,827 316,642
Deferred taxes 62,977 60,135
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 258,604 (151,153)
(Increase) decrease in inventories (74,291) 70,285
(Increase) decrease in prepaid expenses 20,710 (1,846)
Increase (decrease) in accounts payable
and accrued expenses (56,456) 133,767
----------- -----------
Net cash provided by operations 618,330 534,407
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (40,272) (151,204)
----------- -----------
Net cash used in investing activities (40,272) (151,204)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 3,190 --
Payments of long-term debt (95,941) (919,985)
Dividends paid (191,337) --
----------- -----------
Net cash used in financing activities (284,088) (919,985)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 293,970 (536,782)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 891,218 1,115,922
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $ 1,185,188 $ 579,140
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for:
Interest $ 31,026 $ 83,331
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 February 29, 2004,
the condensed consolidated statements of operations for the thirteen and
twenty-six weeks ended February 29, 2004 and February 23, 2003 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 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. 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 ended February 29, 2004, and correspondingly, no amount
was owed at February 29, 2004. The credit agreement is secured by all
assets of the Company and expires December 31, 2004. The agreement also
contains restrictive provisions requiring a minimum net worth and current
ratio, and a maximum ratio of tangible net worth to debt. At February 29,
2004, the Company was in compliance with these provisions.
3. 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:
6
February 29, February 23,
2004 2003
---- ----
Goodwill $2,428,264 $2,428,264
Less accumulated amortization 308,595 308,595
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$2,119,669 $2,119,669
========== ==========
Other identifiable intangibles:
Organization Costs $ 285,000 $ 285,000
Less accumulated amortization 36,217 36,217
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$ 248,783 $ 248,783
========== ==========
4. 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 29, February 23, February 29 February 23,
2004 2003 2004 2003
-------------- -------------- -------------- ----------
Numerator for basic and diluted earnings per share:
Net earnings $ 55,590 $ 67,926 $ 111,959 $ 106,577
============== ============== ============== ==========
Denominator
Denominator for basic earnings
per share - weighted average shares 2,552,008 2,465,229 2,551,569 2,465,229
============== ============== ============== ==========
Effect of dilutive securities:
Employee and non-employee options 73,879 -- 76,469 --
============== ============== ============== ==========
Dilutive common shares
Denominator for diluted earnings
Per share 2,625,887 2,465,229 2,628,038 2,465,229
============== ============== ============== ==========
Basic earnings per share $ .02 $ .03 $ .04 $ .04
============== ============== ============== ==========
Diluted earnings per share $ .02 $ .03 $ .04 $ .04
============== ============== ============== ==========
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
Revenue Recognition:
Revenues from sales of product are recorded upon shipment. 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 $2,616,000 for the quarter ending February 29, 2004, an
increase of 11% or $257,000 from the same period of the prior year. Year to date
sales in fiscal 2004 were $5,422,000 compared to $4,793,000 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 16% for the quarter ending February 29, 2004
versus 17% in the year ago period. The slight decrease in gross margin is
attributable to higher levels of production supply and repair expenses. Year to
date gross margins were 15% and 18% for the six-month periods ending February
29, 2004 and February 23, 2003.
Selling and administrative expense of $341,000 for the quarter ending
February 29, 2004 was $30,000 higher than in the prior year period due to higher
professional service costs. Year to date selling and administrative expense of
$659,000 was $30,000 lower than the comparable prior year period. Selling and
administrative expense for the six-month period ending February 23, 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 second quarter of fiscal 2004 was $15,000, which
was $24,000 less than the second quarter of fiscal 2003 amount of $39,000. The
decrease is attributable to reduced levels of debt for the Company - long-term
debt at February 29, 2004 was $748,000 compared to $1,213,000 at February 23,
2003. Year to date interest expense is also down for the same reason.
The Company recorded income tax expense at an effective tax rate of 33%
and 36% for the quarter and six months ended February 29, 2004. For the quarter
and six months ended February 23, 2003, the Company recorded income tax expense
of 36%.
Liquidity and Capital Resources
On February 29, 2004, working capital was $2,277,000 compared to
$2,139,000 at August 31, 2003. The ratio of current assets to current
liabilities at February 29, 2004 was 3.10 to 1.0 compared to 2.89 to 1.0 at
August 31, 2003. The Company's cash balance increased $294,000 during the first
six months primarily from collections of accounts receivable.
As discussed in the Notes to Consolidated Financial Statements, the
Company renewed its $1,000,000 revolving credit facility with its bank. Interest
on the new agreement is at the bank's prime rate. No amounts have been borrowed
since the closing of the original agreement in December 2002.
On each of November 13, 2003 and February 6, 2004, the Company paid
quarterly dividends of $.0375 per share. The dividend payments for the 2004
fiscal year have totaled $191,000.
9
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 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 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.
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 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.
10
PART II. OTHER INFORMATION:
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A. The Annual Meeting of the Company Stockholders was held on January
8, 2004.
B. Directors elected at that meeting were:
Paul Baszucki For 2,437,986 Against 32,374
Melvin L. Katten For 2,435,486 Against 34,874
George J. Martin For 2,437,433 Against 32,927
Eugene J. Mora For 2,435,486 Against 34,874
Michael J. Pudil For 2,426,365 Against 43,995
Michael N. Taglich For 2,436,086 Against 34,274
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 January 8, 2004, reporting under Item 12 its results of
operations for the quarter ended November 30, 2003 and under Item 7,
attaching a press release dated January 8, 2004 announcing the 2004
first quarter results of operations and a dividend.
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: March 18, 2004 /s/ Michael J. Pudil
-------------- -----------------------------------------------
Michael J. Pudil, President & CEO
Date: March 18, 2004 /s/ Paul D. Sheely
-------------- ------------------------------------------------
Paul D. Sheely, Vice President, Finance & CFO
11