e10qsb
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the quarterly period ended           February 24, 2008                     
OR
     
o   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
incorporation of organization)
  (I. R. S. Employer
Identification No.)
     
213 Chelsea Road
Monticello, Minnesota
  55362
     
(Address of principal executive offices)   (Zip Code)
     
(763) 295-9202
 
(Registrant’s telephone number, including area code)
     
     
 
(Former name, former address and former fiscal year, if changed since last report)
     Indicate by check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
           Yes þ           No o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
           Yes o           No þ
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: 2,784,511 shares of common stock were outstanding as of March 31, 2008.
 
 

 


 

WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
         
    Page No.  
       
 
       
       
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6-7  
 
       
    8-10  
 
       
    11  
 
       
       
 
       
    11  
 
       
    12  
 
       
    12  
 Amendment and Modification of Revolving Line of Credit
 Certification of Chief Executive Officer
 Certification of Chief Financial Officer
 Section 1350 Certification

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Part I. Financial Information
     Item I. Financial Statements
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    February 24,     August 26,  
    2008     2007  
Assets
               
 
               
Current Assets:
               
Cash and cash equivalents
  $ 1,923,508     $ 1,626,801  
Accounts receivable
    3,696,709       3,054,050  
Inventories
    2,279,608       1,899,299  
Prepaid and other current assets
    75,565       154,793  
 
           
Deferred tax assets
    183,839       162,535  
 
           
Total Current Assets
    8,159,229       6,897,478  
 
           
 
               
Property, Plant and Equipment — Net
    5,401,896       4,520,382  
 
           
 
               
Deferred tax assets
    517,971       954,162  
 
           
 
               
Goodwill and other assets, net
    2,376,167       2,379,473  
 
           
 
  $ 16,455,263     $ 14,751,495  
 
           
 
               
Liabilities and Stockholders’ Equity
               
 
               
Current Liabilities:
               
Trade accounts payable
  $ 2,389,258     $ 2,200,544  
Accrued compensation and employee withholdings
    643,758       680,419  
Other accrued expenses
    91,023       125,038  
Current portion of long-term debt
    610,734       518,718  
 
           
Total Current Liabilities
    3,734,773       3,524,719  
 
           
Long-term debt, less current portion
    4,105,510       3,328,694  
 
           
 
               
Stockholders’ Equity:
               
Common stock, par value $.10 a share; authorized 10,000,000 shares; issued and outstanding 2,765,644 and 2,731,165 shares, respectively
    276,564       273,117  
Deferred compensation
    (144,921 )     (26,577 )
Capital in excess of par value
    2,432,144       2,214,922  
Retained earnings
    6,051,193       5,436,620  
 
           
Total Stockholders’ Equity
    8,614,980       7,898,082  
 
           
 
  $ 16,455,263     $ 14,751,495  
 
           
See notes to condensed consolidated financial statements

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WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                                 
    13 weeks ended     26 weeks ended  
    February 24,     February 25,     February 24,     February 25,  
    2008     2007     2008     2007  
Net sales
  $ 6,421,607     $ 4,440,158     $ 12,396,192     $ 8,569,537  
 
                               
Cost of products sold
    5,056,809       3,669,393       9,912,351       7,087,508  
 
                       
 
                               
Gross margin
    1,364,798       770,765       2,483,841       1,482,029  
 
                               
Selling and administrative expense
    649,659       510,212       1,226,657       972,456  
Gain on sale of equipment
          (18,000 )     (97,861 )     (18,000 )
Interest and other income
    (27,791 )     (15,363 )     (49,896 )     (31,578 )
Interest expense
    77,194       43,353       144,261       88,285  
 
                       
 
                               
Income before income taxes
    665,736       250,563       1,260,680       470,866  
 
                               
Income taxes
    233,007       95,214       441,238       178,929  
 
                       
 
                               
Net income
  $ 432,729     $ 155,349     $ 819,442     $ 291,937  
 
                       
 
                               
Basic earnings per share
  $ .16     $ .06     $ .30     $ .11  
 
                       
 
                               
Diluted earnings per share
  $ .15     $ .06     $ .29     $ .11  
 
                       
 
                               
Cash dividend per share
  $ .0375     $ .0375     $ .075     $ .075  
 
                       
 
                               
Weighted average number of common shares outstanding, basic
    2,734,278       2,686,567       2,728,918       2,683,599  
 
                       
 
                               
Weighted average number of common shares outstanding, diluted
    2,794,724       2,717,049       2,786,661       2,716,213  
 
                       
See notes to condensed consolidated financial statements.

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WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    26 weeks ended  
    February 24,     February 25,  
    2008     2007  
Cash Flows From Operating Activities:
               
Net earnings
  $ 819,442     $ 291,937  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation
    393,528       227,439  
Amortization
    3,306       3,306  
Gain on sale of equipment
    (97,861 )     (18,000 )
Deferred taxes
    414,887       174,659  
Stock option compensation expense
    68,837       34,511  
Changes in assets and liabilities:
               
Increase in accounts receivable
    (642,659 )     (364,641 )
Increase in inventories
    (380,309 )     (57,190 )
Decrease in prepaid expenses
    79,228       39,518  
Decrease in accounts payable and accrued expenses
    109,441       160,432  
 
           
Net cash provided by operations
    767,840       491,971  
 
           
 
               
Cash Flows From Investing Activities:
               
Proceeds from sales of equipment
    97,861       18,000  
Purchase of property, plant and equipment
    (79,122 )     (45,630 )
 
           
Net cash provided by (used in) investing activities
    18,739       (27,630 )
 
           
 
               
Cash Flows From Financing Activities:
               
Stock options exercised
    42,085       14,405  
Payments of long-term debt
    (327,088 )     (188,129 )
Dividends paid
    (204,869 )     (201,364 )
 
           
Net cash used in financing activities
    (489,872 )     (375,088 )
 
           
 
               
Net Increase In Cash And Cash Equivalents
    296,707       89,253  
 
               
Cash And Cash Equivalents At Beginning Of Year
    1,626,801       1,282,717  
 
           
 
               
Cash And Cash Equivalents At End Of Reporting Period
  $ 1,923,508     $ 1,371,970  
 
           
 
               
Supplemental cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 144,693     $ 88,726  
Income taxes
  $ 6,552     $ 4,270  
Payroll withholding taxes in cashless stock option exercise
  $ 8,597        
Non cash investing and financing activities:
               
Acquisition of equipment through capital lease
  $ 1,195,920     $ 191,455  
See notes to condensed consolidated financial statements.

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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 24, 2008, the condensed consolidated statements of income for the thirteen and twenty-six weeks ended February 24, 2008 and February 25, 2007 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 26, 2007 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 Annual Report on Form 10-KSB for the year ended August 26, 2007. 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 and are valued at the lower of cost or market value:
                 
    February 24,     August 26,  
    2008     2007  
Raw material
  $ 862,394     $ 537,033  
WIP
    990,773       963,702  
Finished goods
    426,441       398,564  
 
           
 
  $ 2,279,608     $ 1,899,299  
 
           
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 recorded prior to the adoption of SFAS No. 142 Goodwill and Other Intangible Assets). 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 2007 fourth quarter did not indicate an impairment of goodwill and since that time no events or circumstances have occurred that suggest an impairment exists. The Company will analyze goodwill annually and more frequently should changes in events or circumstances, including reductions in anticipated cash flows generated by our operations, occur.
     The Company recorded $33,063 of deferred financing costs incurred in connection with mortgages entered into to purchase the Company’s facility in Monticello, Minnesota in May 2004. The costs are being amortized over five years on a straight-line basis with the Company incurring $1,653 of amortization expense for the quarters ended February 24, 2008 and February 25, 2007, respectively.

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4. DEBT AND LINE OF CREDIT:
     Effective January 31, 2008, the Company 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, a maximum debt to net worth ratio, a minimum current ratio, a minimum net worth and a minimum debt service coverage ratio. The Company is in compliance with all of the covenants of the agreement as of February 24, 2008. The credit agreement is secured by all assets of the Company, expires February 1, 2009 and does not have an outstanding balance at February 24, 2008.
5. EARNINGS PER SHARE:
     The following table sets forth the computation of basic and diluted earnings per share:
                                 
    Thirteen weeks ended     Twenty- Six weeks ended  
    February 24,     February 25,     February 24     February 25,  
    2008     2007     2008     2007  
Numerator for basic and diluted earnings per share:
                               
Net earnings
  $ 432,729     $ 155,349     $ 819,442     $ 291,937  
 
                       
 
                               
Denominator
                               
Denominator for basic earnings per share — weighted average shares
    2,734,278       2,686,567       2,728,918       2,683,599  
 
                       
 
                               
Effect of dilutive securities:
                               
Employee and non-employee options
    60,446       30,482       57,743       32,614  
 
                       
 
                               
Dilutive common shares
                               
Denominator for diluted earnings per share
    2,794,724       2,717,049       2,786,661       2,716,213  
 
                       
 
                               
Basic earnings per share
  $ .16     $ .06     $ .30     $ .11  
 
                       
 
                               
Diluted earnings per share
  $ .15     $ .06     $ .29     $ .11  
 
                       

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Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
or
PLAN OF OPERATION
Critical Accounting Policies and Estimates:
     Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss our 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 base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the result of which forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. The estimates and judgments utilized are reviewed by management on an ongoing basis and by the audit committee of our board of directors at the end of each quarter prior to the public release of our financial results.
     The critical accounting policies and estimates followed in the preparation of the financial information contained in this Quarterly Report on Form 10-QSB are the same as those described in the Company’s Annual Report on Form 10-KSB for the year ended August 26, 2007. Refer to the Annual Report on Form 10-KSB for detailed information on accounting policies.
Results of Operations:
     Net sales were $6,422,000 for the thirteen weeks ending February 24, 2008, an increase of 45% or $1,981,000 from the same period of the prior year. Year-to-date sales in fiscal 2008 are $12,396,000 compared to $8,570,000 in the prior year which also equates to a 45 % increase. Both the quarterly and year-to-date sales increases come primarily from the addition of the Company’s energy business, which did not have significant sales until the third quarter of fiscal 2007.
     Sales from the Company’s recreational vehicle market amounted to $3,503,000 and $3,528,000 for the thirteen weeks ended February 24, 2008 and February 25, 2007, respectively. Year-to-date sales for the Company’s recreational vehicle market were $7,260,000 and $6,870,000 for the twenty-six weeks ended February 24, 2008 and February 25, 2007, respectively. Sales from the Company’s ATV market were higher than the prior year for both the quarter and year-to-date periods. Sales from the Company’s motorcycle market were lower for both the quarter and year-to-date periods in fiscal 2008 due primarily to a planned reduction in business announced in March 2007. The second half of this planned reduction in business will commence in the Company’s fiscal 2008 fourth quarter.
     Sales from the Company’s energy business amounted to $2,236,000 and $3,660,000 for the quarter and twenty-six weeks ended February 24, 2008, respectively. In the prior year, the Company had $23,000 in sales that occurred during the fiscal second quarter.
     Sales from the Company’s aerospace and defense markets amounted to $513,000 and $554,000 for the quarter ended February 24, 2008 and February 25, 2007, respectively. Year-to-date sales for the Company’s aerospace and defense markets were $1,043,000 and $1,053,000 for the twenty-six weeks ended February 24,

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2008 and February 25, 2007, respectively. The Company believes that the changes from the prior year’s sales totals are not significant.
     Sales from the Company’s biosciences market totaled $122,000 and $323,000 for the quarter ended February 24, 2008 and February 25, 2007, respectively. Year-to-date sales for the biosciences market were $293,000 and $590,000 for the twenty-six weeks ended February 24, 2008 and February 25, 2007, respectively. As announced previously, the Company has scaled back its business in the biosciences market and is concentrating on profitable portions of this segment.
     Sales from the Company’s other revenue markets are at or under 1% of total sales in the current year and are immaterial to the Company’s revenues as a whole.
     Gross margin increased to 21% for the quarter ending February 24, 2008 versus 17% in the year ago period. Year-to-date gross margins were 20% and 17% for the twenty-six week periods ending February 24, 2008 and February 25, 2007, respectively. The increase in gross margin is attributable to the addition of the new business as well as efficiencies generated from higher volumes. Gross margins in the fiscal 2008 second quarter were also positively affected by a product mix that consisted of a higher than usual value-add content.
     Selling and administrative expense of $650,000 for the quarter ending February 24, 2008 was $139,000 higher than in the prior year period due primarily to higher compensation and stock option compensation expense. Year-to-date selling and administrative expense of $1,227,000 was $254,000 higher than the comparable prior year period due primarily to the same reasons.
     Interest expense in the second quarter of fiscal 2008 was $77,000, which was $34,000 more than the second quarter of fiscal 2007 amount of $43,000. Year-to-date interest expense for fiscal 2008 of $144,000 was higher than the prior year-to-date amount by $56,000. The higher interest costs are as a result of the increased borrowing for investments in new equipment of approximately $2.7 million made by the Company over the past year and a half.
     The Company recorded income tax expense at an effective tax rate of 35% for the quarter and year-to-date periods ended February 24, 2008 and 38% for the quarter and year-to-date periods ended February 25, 2007.
Liquidity and Capital Resources:
     On February 24, 2008, working capital was $4,424,000 compared to $3,373,000 at August 26, 2007. The ratio of current assets to current liabilities at February 24, 2008 was 2.18 to 1.0 compared to 1.96 to 1.0 at August 26, 2007. The improvement in both measurements is attributable to the generation of cash from operations in the Company’s fiscal 2008 first two quarters as well as an increase in the level of accounts receivable and inventories due to the increase in the Company’s overall sales.
     As discussed in the Notes to Condensed Consolidated Financial Statements, the Company renewed its $1,000,000 revolving credit agreement with its bank during the fiscal 2008 second quarter. Interest on the new agreement is at the bank’s prime rate.
     It is the Company’s belief that its current cash balance, plus future internally generated funds and its line of credit, will be sufficient to enable the Company to meet its working capital requirements through the end of calendar year 2008.

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     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 and are not predictions of actual future results.
     The following risks and uncertainties, as well as others not now anticipated, 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 Company’s ability to timely and cost effectively ramp up new programs; (iii) the loss of significant business from any one of its current customers could have a material adverse effect on the Company; (iv) the Company was dependent upon one customer for 75% of its revenues in fiscal year 2007 and expects that a significant portion of its future revenue will be derived from this customer; (v) a significant downturn in the industries in which the Company participates could have an adverse effect on the demand for Company services; (vi) our sales are concentrated in a limited number of highly competitive industries, each with a limited number of customers; (vii) the prices of our products are subject to a downward pressure from customers and market pressure from competitors; (viii) the Company’s ability to curtail its costs and expenses for new manufacturing programs, commensurate with expected revenues; (ix) the Company’s ability to comply with covenants of its credit facility; (x) 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 (xi) 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.

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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.
PART II. OTHER INFORMATION:
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the Shareholders of the Company was held on January 9, 2008. Of the 2,747,927 shares of common stock issued and outstanding and entitled to vote at the close of business on November 13, 2007, shareholders holding 2,422,124 shares were present at the Annual Meeting either in person or by proxy. The following describes the matters considered by the Company’s shareholders at the Annual Meeting, as well as the results of the votes cast at the Annual Meeting:
A. To elect five (5) directors to hold office until the next Annual Meeting of Shareholders or until their respective successors have been elected and shall qualify.
                         
Name of Nominee
                       
Paul Baszucki
  For     2,352,840     Withhold 69,284
Thomas C. Bender
  For     2,353,790     Withhold 68,334
Burton F. Myers II
  For     2,353,440     Withhold 68,684
Eugene J. Mora
  For     2,352,064     Withhold 70,060
Michael J. Pudil
  For     2,353,890     Withhold 68,234
Each director nominee was elected by the shareholders.
B. To approve amendments to the Company’s 2005 Stock Plan
For       904,816            Against       80,019            Abstain       6,525            Broker non-vote       1,430,764
The shareholders approved this proposal.
C. To ratify the appointment of Schechter Dokken Kanter Andrews & Selcer Ltd as independent auditors.
For       2,353,014            Against       13,851            Abstain       55,259
The shareholders approved the appointment.

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ITEM 6. EXHIBITS
           A. The following exhibits are included herein:
            Exhibit 10.1   Amendment and Modification of Revolving Line of Credit dated January 31, 2008 between the Company and M&I Marshall & Ilsley 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. §1350.
SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  WSI INDUSTRIES, INC.
 
 
Date: April 4, 2008  /s/ Michael J. Pudil    
  Michael J. Pudil, President & CEO   
     
 
         
     
Date: April 4, 2008  /s/ Paul D. Sheely    
  Paul D. Sheely, Vice President, Finance & CFO   
     

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