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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 28, 2004
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.)
Monticello, Minnesota 55362
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(763) 295-9202
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Osseo, 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.
2,557,629 shares of common stock were outstanding as of December 31,
2004.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets November 28, 2004(Unaudited)
and August 29, 2004 3
Condensed Consolidated Statements of Income
Thirteen weeks ended November 28, 2004
and November 30, 2003 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Thirteen weeks ended November 28, 2004
and November 30, 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 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 28, AUGUST 29,
ASSETS 2004 2004
- ------ ---- ----
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 631,681 $ 294,766
Accounts receivable 1,527,587 1,757,282
Inventories 1,075,091 923,223
Prepaid and other current assets 73,243 93,394
Deferred tax assets 198,225 198,225
------------- -------------
Total Current Assets 3,505,827 3,266,890
------------- -------------
Property, Plant and Equipment - Net 3,697,774 3,838,910
------------- -------------
Deferred tax assets 1,673,522 1,687,931
------------- -------------
Intangible assets, net 2,397,657 2,399,311
------------- -------------
$ 11,274,780 $ 11,193,042
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 1,065,463 $ 808,047
Accrued compensation and employee withholdings 285,577 251,343
Miscellaneous accrued expenses 82,809 145,294
Current portion of long-term debt 322,688 306,588
------------- -------------
Total Current Liabilities 1,756,537 1,511,272
------------- -------------
Long term debt, less current portion 2,519,920 2,613,150
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,557,629 shares 255,763 255,763
Capital in excess of par value 1,837,441 1,837,441
Retained earnings 4,905,119 4,975,416
------------- -------------
Total Stockholders' Equity 6,998,323 7,068,620
------------- -------------
$ 11,274,780 $ 11,193,042
============= =============
See notes to condensed consolidated financial statements
3
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
13 weeks ended
--------------------------------
November 28, November 30,
2004 2003
-------------- ---------------
Net sales $ 3,874,041 $ 2,806,062
Cost of products sold 3,301,119 2,383,549
-------------- ---------------
Gross margin 572,922 422,513
Selling and administrative expense 494,362 317,889
Interest and other income (1,467) (3,590)
Interest and other expense 40,003 15,983
-------------- ---------------
Earnings from operations before income taxes 40,024 92,231
Income tax expense 14,409 35,861
-------------- ---------------
Net earnings $ 25,615 $ 56,370
============== ===============
Basic earnings per share $ .01 $ .02
============== ===============
Diluted earnings per share $ .01 $ .02
============== ===============
Cash dividend per share $ .0375 $ .0375
============== ===============
Weighted average number of common shares 2,557,629 2,551,129
============== ===============
Weighted average number of
common and dilutive potential common shares 2,618,604 2,629,091
============== ===============
See notes to condensed consolidated financial statements.
4
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
13 weeks ended
-------------------------------
November 28, November 30,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 25,615 $ 56,370
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 159,544 145,033
Amortization 1,653 -
Deferred taxes 14,409 35,861
Changes in assets and liabilities:
Decrease in accounts receivable 229,695 494,673
Increase in inventories (151,868) (55,407)
Decrease in prepaid expenses 20,151 39,468
Increase in accounts payable and
accrued expenses 229,165 74,893
------------- -------------
Net cash provided by operations 528,364 790,891
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (18,407) (19,465)
------------- -------------
Net cash used in investing activities (18,407) (19,465)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (77,130) (47,500)
Dividends paid (95,912) (95,668)
------------- -------------
Net cash used in financing activities (173,042) (143,168)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 336,915 628,258
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 294,766 891,218
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $ 631,681 $ 1,519,476
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 40,232 $ 15,984
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 28,
2004, the condensed consolidated statements of income for the thirteen
weeks ended November 28, 2004 and November 30, 2003 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 29, 2004 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 2004 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 a minimum debt service
coverage ratio. The Company has not accessed the Revolver since the
original inception of the agreement on December 2, 2002. The credit
agreement is secured by all non-real property assets of the Company and
expires December 31, 2005.
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 $422,684 and $409,249 at November 28, 2004 and August 29,
2004, respectively.
November 28, August 29,
2004 2004
---- ----
Raw material $ 312,812 $ 277,359
WIP 431,008 359,432
Finished goods 331,271 286,432
------------- ----------
$ 1,075,091 $ 923,223
============= ==========
4. 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
6
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 2004 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:
November 28, August 29,
2004 2004
---- ----
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
=========== ===========
Deferred financing $ 33,063 $ 33,063
Less accumulated amortization 3,858 2,204
----------- -----------
$ 29,205 $ 30,859
=========== ===========
$ 2,397,657 $ 2,399,311
=========== ===========
5. DEBT:
The Company purchased a new manufacturing facility and office
located in Monticello, Minnesota on May 3, 2004. In order to facilitate
the purchase, the Company entered into two mortgage agreements. The
first mortgage was with its bank for $1,360,000 with a monthly payment
of $8,307 based on a 25-year amortization schedule. Interest is at
5.37% with a provision to adjust the rate after 5 years to the monthly
five-year Treasury yield plus 2.5%. The entire principal balance is due
May 1, 2014.
The second mortgage is with the City of Monticello Economic
Development Authority (MEDA) for $350,000 with a monthly payment of
$1,483 based on a 25-year amortization schedule. Interest is at 2.0%.
The entire balance is due after five years on May 1, 2009. The
indebtedness to the bank is secured pursuant to a mortgage and security
agreement and fixture financing statement and the debt to MEDA is
secured by a mortgage.
7
4. EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share:
Thirteen weeks ended
------------------------
November 28, November 30,
2004 2003
---- ----
Numerator for basic and diluted
earnings per share:
Net earnings $ 25,615 $ 56,370
========== ==========
Denominator:
Denominator for basic earnings
per share - weighted average shares 2,557,629 2,551,129
Effect of dilutive securities:
Employee and non-employee options 60,975 77,962
---------- ----------
Dilutive common shares
Denominator for diluted earnings
per share 2,618,604 2,629,091
========== ==========
Basic earnings per share $ .01 $ .02
========== ==========
Diluted earnings per share $ .01 $ .02
========== ==========
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 discuss 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.
Reclassification: Certain prior year items have been reclassified to
conform to the current year presentation.
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.
Revenue Recognition: Revenues from sales of product are recorded upon
shipment when all of the following criteria of Staff Accounting Bulletin No. 101
have been met: persuasive evidence of an arrangement exists, delivery has
occurred, the price to the customer is fixed or determinable and collectibility
is reasonably
9
assured. Credit losses relating to customers have been minimal and within
management's expectations. Based on management's evaluation of uncollected
accounts receivable at the end of each year, bad debts are provided for on the
allowance method. Accounts are considered delinquent if they are 120 days past
due. The Company mitigates its credit risk by performing credit checks and
actively pursuing past due accounts.
Results of Operations:
Net sales were $3,874,000 for the quarter ending November 28, 2004, an
increase of 38% or $1,068,000 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 remained steady at 15% for the quarter ending November 28,
2004 versus the prior year quarter. Gains from the increase in volume were
offset by higher supplies and machine repair expense as well as inefficiencies
derived from operating in two buildings. With the purchase of the Monticello,
Minnesota facility described in Note 4, the Company has been operating out of
the Monticello building as well as its Osseo, Minnesota facility. The Company
anticipates that it will be fully relocated by the end of its second fiscal
quarter in February 2005.
Selling and administrative expense of $572,000 for the quarter ending
November 28, 2004 was $150,000 higher than in the prior year. Selling and
administrative expense was negatively affected by $168,000 in costs associated
with the relocation of operations to the new facility in Monticello, as well the
costs associated with maintaining the Osseo building.
Interest expense in the first quarter of fiscal 2005 was $40,000, which
was $24,000 higher than the first quarter of fiscal 2004 amount of $16,000. The
increase is attributable to higher debt due to the mortgages on the Monticello
building, as well as additional capitalized leases.
The Company recorded income tax expense at an effective tax rate of 36%
for the quarters ended November 28, 2004 and November 30, 2003, respectively.
Liquidity and Capital Resources:
On November 28, 2004, working capital was $1,749,000 compared to
$1,756,000 at August 29, 2004. The ratio of current assets to current
liabilities at November 28, 2004 was 2.0 to 1.0 compared to 2.16 to 1.0 at
August 29, 2004. The Company's cash balance increased $337,000 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 2005 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 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
2005.
10
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 79% of its revenues in fiscal year 2004 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.
The foregoing list should not be construed as exhaustive and the
Company disclaims any obligation subsequently to revise any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
11
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer, Michael J. Pudil, and Chief
Financial Officer, Paul D. Sheely, have 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
A. The following exhibits are included herein:
Exhibit 10.1 Amendment and Modification of Revolving Line of Credit dated January 1, 2005 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. Section 1350.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WSI INDUSTRIES, INC.
Date: January 11, 2005 /s/ Michael J. Pudil
---------------------------------------------
Michael J. Pudil, President & CEO
Date: January 11, 2005 /s/ Paul D. Sheely
---------------------------------------------
Paul D. Sheely, Vice President, Finance & CFO
13