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EX-32 - EXHIBIT 32 - WSI INDUSTRIES, INC.ex32.htm
EX-31 - EXHIBIT 31.2 - WSI INDUSTRIES, INC.ex31-2.htm
EX-31 - EXHIBIT 31.1 - WSI INDUSTRIES, INC.ex31-1.htm


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended February 23, 2014

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

incorporation or 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)

 

Not Applicable

(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  ☒ No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒ No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "larger accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  

  

Accelerated filer   

     

Non-accelerated filer   

  

Smaller reporting company   ☒

 

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No   ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2,907,164 shares of common stock were outstanding as of March 31, 2014.

 

 
1

 

 

 

WSI INDUSTRIES, INC.

 

AND SUBSIDIARIES

 

INDEX

   

 

Page No.

 

 

 

 

PART I.   FINANCIAL INFORMATION:  

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets February 23, 2014 and August 25, 2013 (Unaudited)

 

 

 

 

 

 

Condensed Consolidated Statements of Income Thirteen and Twenty-Six weeks ended February 23, 2014 and February 24, 2013 (Unaudited)

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows Twenty-Six weeks ended February 23, 2014 and February 24, 2013 (Unaudited)

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6-7 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

8-10 

 

 

 

 

 

Item 4.

Controls and Procedures

10 

 

 

 

 

PART II.   OTHER INFORMATION:  

 

 

 

 

 

  Item 1A. Risk Factors 10
       
  Item 6. Exhibits 11
       
  Signatures 11

 

 
2

 

 

Part 1. Financial Information

 

Item 1. Financial Statements

 

WSI INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   

February 23,

   

August 25,

 

Assets

 

2014

   

2013

 
                 

Current Assets:

               

Cash and cash equivalents

  $ 2,957,360     $ 1,906,218  

Accounts receivable

    5,405,529       5,318,285  

Inventories

    3,343,318       3,279,506  

Prepaid and other current assets

    113,270       310,482  

Deferred tax assets

    101,026       118,280  

Total Current Assets

    11,920,503       10,932,771  
                 

Property, Plant and Equipment – Net

    14,334,613       15,298,713  
                 

Goodwill and other assets, net

    2,385,163       2,387,168  
                 

Total Assets

  $ 28,640,279     $ 28,618,652  
                 

Liabilities and Stockholders’ Equity

               
                 

Current Liabilities:

               

Trade accounts payable

  $ 2,667,300     $ 2,605,249  

Accrued compensation and employee withholdings

    560,163       397,170  

Other accrued expenses

    76,693       65,555  

Current portion of long-term debt

    1,776,128       1,921,708  

Total Current Liabilities

    5,080,284       4,989,682  
                 

Long-term debt, less current portion

    9,328,046       10,168,597  
                 

Deferred tax liabilities

    1,633,875       1,322,443  
                 

Stockholders’ Equity:

               

Common stock, par value $.10 a share; authorized 10,000,000 shares; issued and outstanding 2,907,164 and 2,903,852 shares, respectively

    290,715       290,384  

Capital in excess of par value

    3,352,670       3,314,193  

Deferred compensation

    (23,851 )     (73,874 )

Retained earnings

    8,978,540       8,607,227  

Total Stockholders’ Equity

    12,598,074       12,137,930  

Total Liabilities and Stockholders’ Equity

  $ 28,640,279     $ 28,618,652  

 

 

See notes to condensed consolidated financial statements.

 

 
3

 

  

WSI INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

   

13 weeks ended

    26 weeks ended  
   

February 23,

   

February 24,

   

February 23,

   

February 24,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

Net sales

  $ 10,483,998     $ 7,178,389     $ 20,683,319     $ 15,762,129  
                                 

Cost of products sold

    9,232,943       6,406,388       18,081,524       13,508,162  
                                 

Gross margin

    1,251,055       772,001       2,601,795       2,253,967  
                                 

Selling and administrative expense

    746,196       604,476       1,446,361       1,332,325  

Interest and other income

    (1,238 )     (497 )     (2,222 )     (1,928 )

Interest expense

    102,451       80,896       215,680       162,358  
                                 

Income before income taxes

    403,646       87,126       941,976       761,212  
                                 

Income taxes

    145,403       31,365       339,202       274,036  
                                 

Net income

  $ 258,243     $ 55,761     $ 602,774     $ 487,176  
                                 

Basic earnings per share

  $ .09     $ .02     $ .21     $ .17  
                                 

Diluted earnings per share

  $ .09     $ .02     $ .20     $ .17  
                                 

Cash dividend per share

  $ .04     $ .04     $ .08     $ .08  
                                 

Weighted average number of common shares outstanding, basic

    2,898,325       2,884,061       2,895,295       2,876,507  
                                 

Weighted average number of common shares outstanding, diluted

    2,953,330       2,938,748       2,951,571       2,943,310  

 

 

 

See notes to condensed consolidated financial statements.

 

 

 
4

 

 

WSI INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    26 weeks ended  
   

February 23,

   

February 24,

 
   

2014

   

2013

 

Cash Flows From Operating Activities:

               

Net income

  $ 602,774     $ 487,176  

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

               

Depreciation

    1,137,866       859,506  

Amortization

    2,005       -  

Net tax benefits related to share based compensation

    -       (43,853 )

Deferred taxes

    339,201       262,688  

Stock option compensation expense

    105,634       107,862  

Changes in assets and liabilities:

               

(Increase) decrease in accounts receivable

    (87,244 )     1,235,037  

Increase in inventories

    (63,812 )     (743,877 )

Decrease (increase) in prepaid and other current assets

    197,212       (59,404 )

Increase (decrease) in accounts payable and accrued expenses

    195,026       (1,115,989 )

Net cash provided by operations

    2,428,662       989,146  
                 

Cash Flows From Investing Activities:

               

Purchase of property, plant and equipment

    (173,766 )     (2,935,466 )

Net cash used in investing activities

    (173,766 )     (2,935,466 )
                 

Cash Flows From Financing Activities:

               

Payments of long-term debt

    (986,131 )     (713,323 )

Net borrowings on revolving line of credit

    -       2,500,000  

Net tax benefits related to share based compensation

    -       43,853  

Issuance of common stock

    13,839       21,560  

Dividends paid

    (231,462 )     (230,682 )

Net cash (used in) provided by financing activities

    (1,203,754 )     1,621,408  
                 

Net Increase (Decrease) In Cash And Cash Equivalents

    1,051,142       (324,912 )
                 

Cash And Cash Equivalents At Beginning Of Year

    1,906,218       2,911,961  
                 

Cash And Cash Equivalents At End Of Reporting Period

  $ 2,957,360     $ 2,587,049  
                 

Supplemental cash flow information:

               

Cash paid during the period for:

               

Interest

  $ 216,436     $ 162,523  

Income taxes

  $ -     $ 11,348  

Payroll withholding taxes in cashless stock option exercise

  $ 30,641     $ 88,771  

Non cash investing and financing activities:

               

Acquisition of equipment through financing

  $ -     $ 508,086  

 

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 23, 2014, the condensed consolidated statements of income for the thirteen and twenty-six weeks ended February 23, 2014 and February 24, 2013 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 25, 2013 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-K for the year ended August 25, 2013. 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:

 

   

February 23, 2014

   

August 25, 2013

 
                 

Raw material

  $ 1,460,156     $ 1,606,358  

WIP

    809,220       993,177  

Finished goods

    1,073,942       679,971  
    $ 3,343,318     $ 3,279,506  

 

3.     OTHER ASSETS

Goodwill and other assets consist of costs resulting from business acquisitions which total $2,368,452 at February 23, 2014 (net of accumulated amortization of $344,812 recorded prior to the adoption of ASC 350 Goodwill and Other Intangible Assets) as well as deferred financing costs of $16,711 (net of accumulated amortization of $3,342) incurred in connection with a mortgage agreement entered into with the Company’s bank during the fiscal 2013 quarter ended May 26, 2013.

 

 
6

 

 

4.     DEBT AND LINE OF CREDIT:

 

During the quarter ended February 23, 2014, the Company renewed and modified its Revolving Line of Credit with its bank. Under the agreement the Company can borrow up to $1 million. The agreement expires on February 1, 2015, is collateralized by all assets of the Company and carries an interest rate of LIBOR plus 2%. The agreement also contains restrictive provisions requiring a minimum net worth, a maximum debt to tangible net worth ratio as well as a debt service coverage ratio. At February 23, 2014, the Company was in compliance with these provisions.

 

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 23,

   

February 24,

   

February 23,

   

February 24,

 
   

2014

   

2013

   

2014

   

2013

 

Numerator for basic and diluted earnings per share:

                               

Net income

  $ 258,243     $ 55,761     $ 602,774     $ 487,176  
                                 

Denominator

                               

Denominator for basic earnings per share – weighted average shares

    2,898,325       2,884,061       2,895,295       2,876,507  
                                 

Effect of dilutive securities:

                               

Employee and non-employee options

    55,005       54,687       56,276       66,803  
                                 

Dilutive common shares

                               

Denominator for diluted earnings per share

    2,953,330       2,938,748       2,951,571       2,943,310  
                                 

Basic earnings per share

  $ .09     $ .02     $ .21     $ .17  
                                 

Diluted earnings per share

  $ .09     $ .02     $ .20     $ .17  

 

 
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 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 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-Q are the same as those described in the Company’s Annual Report on Form 10-K for the year ended August 25, 2013. Refer to the Annual Report on Form 10-K for detailed information on accounting policies.

 

 

Results of Operations:

 

Net sales were $10,484,000 for the thirteen weeks ending February 23, 2014, an increase of 46% or $3,306,000 from the same period of the prior year. Year-to-date sales in fiscal 2014 are $20,683,000 compared to $15,762,000 in the prior year which equates to a 31% increase. Total Company sales by product markets are as follows:

 

   

Fiscal Second Quarter Thirteen Weeks Ended

   

Fiscal Second Quarter Year-to-Date Ended

 
           

Percent

           

Percent

   

Dollar

           

Percent

           

Percent

   

Dollar

 
   

February 23,

   

of Total

   

February 24,

   

of Total

   

Percent

   

February 23,

   

of Total

   

February 24,

   

of Total

   

Percent

 
   

2014

   

Sales

   

2013

   

Sales

   

Change

   

2014

   

Sales

   

2013

   

Sales

   

Change

 

ATV & Motorcycle

  $ 8,513,000       81 %   $ 4,685,000       65 %     82 %   $ 16,365,000       79 %   $ 9,726,000       62 %     68 %

Energy

    1,195,000       11 %     1,893,000       26 %     -37 %     2,518,000       12 %     4,818,000       30 %     -48 %

Aerospace, Defense & Other

    776,000       8 %     600,000       9 %     29 %     1,800,000       9 %     1,218,000       8 %     48 %

Total Sales

  $ 10,484,000       100 %   $ 7,178,000       100 %     46 %   $ 20,683,000       100 %   $ 15,762,000       100 %     31 %

 

 
8

 

 

Sales from the Company’s ATV and Motorcycle markets were up 82% for the fiscal 2014 second quarter as compared to the prior year quarter. The Company experienced increases in demand from its primary customer across all product lines as well as the introduction of a new product line that had minimal sales in the prior year fiscal second quarter. Year-to-date sales for the ATV and Motorcycle markets were up 68% as compared to the prior year for the same reasons.

 

Sales from the Company’s energy business for the fiscal second quarter were lower by 37% over the prior year’s second quarter as sales generally softened across all product lines during the quarter. Year-to-date sales as of February 23, 2014 were also lower by 48% as compared to the prior year to date period. The reductions in sales in fiscal 2014 are a result in lower customer demand for product in both the oilfield equipment and shale fracturing industries. However, the Company anticipates that sales will increase in its energy business in the second half of fiscal 2014 as compared to fiscal 2013 levels.

 

Sales from the Company’s aerospace, defense and other markets were up 29% and 48% for the fiscal 2014 second quarter and year-to-date periods, respectively over the prior year. The increases are attributable to general increases in demand in the aerospace market as well as sales generated from the Company’s firearms business which had no sales in the prior year respective periods. The Company does not anticipate realizing any additional sales from the firearms business after its fiscal 2014 second quarter.

 

Gross margin in the fiscal 2014 second quarter increased to 11.9% from 10.8% in the prior year quarter. Gross margin was positively affected by manufacturing efficiencies which were partially offset by a higher level of fixed cost in the fiscal 2014 second quarter. Year-to-date gross margin in fiscal 2014 was 12.6%, which was a decrease over the prior year-to-date gross margin of 14.3%. The lower year-to-date gross margin is attributable to labor inefficiencies and a higher level of fixed cost that occurred in the Company’s fiscal 2014 first quarter as compared to the prior year first quarter.

 

Selling and administrative expense of $746,000 for the quarter ending February 23, 2014 was $142,000 higher than in the prior year period due primarily to higher compensation expense which includes accrued incentive compensation and profit sharing. Year-to-date selling and administrative expense of $1,446,000 was $114,000 higher than the comparable prior year period due primarily to the same reason.

 

Interest expense in the second quarter of fiscal 2014 was $102,000, which was an increase over the prior year of $22,000. Year-to-date interest expense of $339,000 was higher than the previous year-to-date period by $65,000. The higher interest costs are a result of the overall higher level of long-term debt offset by a lower overall effective interest rate of that debt.

 

The Company recorded income tax expense at an effective tax rate of 36% for the quarter and year-to-date periods ended February 23, 2014 and February 24, 2013.

 

 
9

 

 

Liquidity and Capital Resources:

 

On February 23, 2014 working capital was $6,840,000 as compared to $5,943,000 at August 25, 2013. The ratio of current assets to current liabilities at February 23, 2014 was 2.35 to 1.0 compared to 2.19 to 1.0 at August 25, 2013. The increase in these measures is a result of an increase in cash and cash equivalents at February 23, 2014 versus August 25, 2013. The increase in the level of cash is due primarily to a lower level of accounts receivable as the Company’s days sales outstanding ratio was at a lower level than is typical at the end of its fiscal second quarter. The Company expects the ratio to return to a more historical average during the remainder of fiscal 2014.

 

During the quarter ended February 23, 2014, the Company renewed and modified its Revolving Line of Credit with its bank. Under the agreement the Company can borrow up to $1 million. The agreement expires on February 1, 2015, is collateralized by all assets of the Company and carries an interest rate of LIBOR plus 2%. The agreement also contains restrictive provisions requiring a minimum net worth, a maximum debt to tangible net worth ratio as well as a debt service coverage ratio. At February 23, 2014, the Company was in compliance with these provisions.

 

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 next 12 months.

 

Cautionary Statement:

 

Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer that are not historical or current facts are "forward-looking statements." These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. These risks and uncertainties are described in the Company's Annual Report on Form 10-K for the year ended August 25, 2013, as well as other filings the Company makes with the Securities and Exchange Commission. 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 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.

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the CEO and CFO have concluded that as of February 23, 2014 our disclosure controls and procedures were effective.

 

(b)  Changes in Internal Controls over Financial Reporting.

 

There have been no changes in internal control over 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 1A. RISK FACTORS

 

Not Applicable.

 

 
10

 

 

Item 6. EXHIBITS

 

 

A.

The following exhibits are included herein:

 

 

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.

 

 

101.INS**

XBRL Instance

 

 

101.SCH**

XBRL Taxonomy Extension Schema

 

 

101.CAL**

XBRL Taxonomy Extension Calculation

 

 

101.DEF**

XBRL Taxonomy Extension Definition

 

 

101.LAB**

XBRL Taxonomy Extension Labels

 

 

101.PRE**

XBRL Taxonomy Extension Presentation

 

 

 

 

 

 

 

 

 

 

 

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 1, 2014

/s/ Benjamin T. Rashleger

 

 

Benjamin T. Rashleger, President & CEO

 

 

 

 

 

 

 

 

 

 

Date: April 1, 2014

/s/ Paul D. Sheely

 

 

Paul D. Sheely, Vice President, Finance & CFO

 

 

 

11