SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

☒	ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended August 30, 2015

 

☐	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

 

Commission File No. 000-00619

 

	WSI Industries, Inc.
	(Exact name of registrant 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)

 

Issuer's telephone number, including area code:           (763) 295-9202

Securities registered pursuant to Section 12(b) of the Act:     None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.10 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐      No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. 

Yes ☐   No ☒

 

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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such filed).    Yes ☒No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☒ 

 

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 definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one)

 

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 ☒

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on February 27, 2015 (the business day immediately prior to the end of the registrant’s second fiscal quarter) was $17,649,000 based upon the closing sale price on that date of $6.06 as reported by The NASDAQ Capital Market. The number of shares of the registrant’s common stock, $0.10 par value, outstanding as of October 16, 2015 was 2,919,500.

 

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on December 21, 2015, which will be filed within 120 days after the end of the fiscal year covered by this report, are incorporated by reference into Part III of this Form 10-K.

 

 

PART I

 

Item 1.

Description of Business.

 

WSI Industries, Inc. (the “Company”) makes its periodic and current reports available free of charge as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. These reports can be obtained by contacting the Company through its website at www.wsiindustries.com.

 

Overview

 

The Company was incorporated in Minnesota in 1950 for the purpose of performing precision contract machining for the aerospace, communication, and industrial markets. The major portions of Company revenues are derived from machining work for the aerospace/avionics/defense industries, recreational powersports vehicles (ATV and motorcycle) markets, energy industry, automotive industry and bioscience industry.

 

Contract manufacturing constitutes the Company's entire business.

 

Products and Services

 

The Company manufactures metal components in medium to high volumes requiring tolerances as close as one ten-thousandth (.0001) of an inch. These components are manufactured in accordance with customer specifications using materials both purchased by the Company as well as being supplied by our customer.

 

Sales and Marketing

 

In each of the past three fiscal years sales have increased over the prior year with increases of 1%, 26% and 5% in fiscal year 2015, 2014 and 2013, respectively. In each of those years, sales increases in recreational powersports business were partially offset by decreases in the energy business. Sales to the recreational powersports vehicle market totaled approximately 86%, 80% and 70% of total sales in fiscal 2015, 2014 and 2013, respectively. Sales to the energy industry totaled approximately 7%, 12% and 22% of sales in fiscal 2015, 2014 and 2013, respectively. Sales to the aerospace/avionics/defense markets totaled approximately 5%, 5% and 6% of total sales in fiscal 2015, 2014 and 2013, respectively. Sales to the bioscience and other industries amounted to approximately 2% - 3% of total sales in each of fiscal years 2013 – 2015.

 

The Company also measures its relative levels of business from a value add sales perspective. The Company defines value add sales as net sales less the cost of material value and the cost of outside service content of the material sold to the customer. The cost of material and outside services can vary widely. In some cases the Company sources and purchases all material and resells the material as well as its machining value to the customer. In other cases the material is provided or consigned at no cost by the customer to the Company and thus the end result is that the Company’s sales consist of only its machining value. Due to these differences, the Company also measures market composition by value add sales. In fiscal 2015, the recreational vehicle market represented 70% of value add sales, the energy business 17%, and the aerospace/avionics/defense business 9% of value add sales. In fiscal 2014, the recreational vehicle market represented 60% of value add sales, the energy business 27%, and the aerospace/avionics/defense business 9% of value add sales. In fiscal 2013, the recreational vehicle market represented 51% of value add sales, the energy business 36%, and the aerospace/avionics/defense business 11% of value add sales.

 

 

The Company has a reputation as a dependable supplier capable of meeting stringent specifications to produce quality components at high production rates. The Company has demonstrated an ability to develop sophisticated manufacturing processes and controls essential to produce precision and reliability in its products.

 

Customers

 

Sales were made to Polaris Industries, Inc. and related entities in the amount of $36,937,000, or 86% of total Company revenues, in fiscal 2015.

 

Competition

 

Although there are a large number of companies engaged in machining, the Company believes the number of entities with the technical capability and capacity for producing products of the class and in the volumes manufactured by the Company is relatively small. Competition is primarily based on product quality, service, timely delivery, and price.

 

Research and Development; Intellectual Property

 

We perform research and development for customers on an as requested and program basis for development of conceptual engineering and design activities prior to manufacturing the products. Our research and development activities are machining process oriented and not done towards the development of products. We did not expend significant dollars in 2015 or 2014 on company-sponsored product research and development. Patents and trademarks are not deemed significant to the Company.

 

Employees

 

At August 30, 2015, the Company had 89 full-time employees, none of whom were subject to a union contract. We consider our relationship with our employees to be good.

 

Foreign and Domestic Operations and Export Sales

 

The Company has no operations or any significant sales in any foreign country.

 

Item 1A.

Risk Factors.

 

In evaluating us as a company, careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report on Form 10-K. Each of these risk factors could adversely affect our business, operating results and/or financial condition, as well as adversely affect the value of an investment in our common stock. In addition to the following disclosures, please refer to the other information contained in this report, including our consolidated financial statements and the related notes.

 

 

The economic conditions in the United States and around the world could adversely affect our financial results. Demand for our services depends upon worldwide economic conditions, including but not limited to overall economic growth rates, consumer spending, oil prices, financing availability, employment rates, interest rates, inflation, consumer confidence, and the profits, capital spending, and liquidity of large OEMs that we serve. A downturn in any of the markets we serve have caused and could continue to cause our OEM customers to reduce ordering levels, resulting in reschedules, program delays or cancelled orders of our services having an adverse effect on our business and our financial results. In addition, some of our customers have their own internal machining capabilities. A downturn in one of their markets could result in them bringing machining services back in house and thus adversely affect our financial results.

 

One of our main markets is in the highly regulated energy industry. The energy industry we serve, and specifically the shale and gas fracturing (“fracking”) business, is controversial from an environmental perspective. Should environmental laws change to limit the fracking industry, it could have an adverse effect on our financial results.

 

We operate in the highly competitive and fragmented contract machining industry. We compete against many contract machining companies. We also compete with OEM in-house operations that are continually evaluating manufacturing products internally against the advantages of outsourcing. We may also be at a competitive disadvantage with respect to price when compared to manufacturers with excess capacity, lower cost structures and availability of lower cost labor. The availability of excess manufacturing capacity of our competitors also creates competitive pressure on price and winning new business. We also face competition from companies that are based in low cost countries. These companies may have lower cost structures and the availability of lower cost labor. To respond to competitive pressures, we may be required to reduce our prices to customers or increase discounts to customers, which would result in lower gross profit margins and decreased revenue. These factors also impact the Company’s ability to obtain additional manufacturing programs and retain our current programs.

 

Controlling manufacturing costs is a significant factor in operating results. The Company’s ability to manage its costs on existing manufacturing programs and its ability to curtail costs and expenses on potential new manufacturing programs could have a significant impact on the Company’s operating results. The Company also faces increasing quality requirements from its customers that could have an impact on the costs to manufacture product.

 

A large percentage of our sales have been made to a small number of customers in a small number of highly competitive industries, and the loss of a major customer would adversely affect us. In fiscal years 2015, 2014 and 2013, one customer in the recreational vehicle market accounted for 86%, 80% and 70% of our revenue, respectively. In addition, in fiscal years 2015, 2014 and 2013, the company had two customers in the energy industry accounting for 6%, 10% and 19% of our sales, respectively. If there is a loss of one or more of these major customers or a significant decline in sales to either of these major customers it could have an adverse effect on our results from operations.

 

Operating results may vary significantly from period to period. We can experience significant fluctuations in our revenue and operating results. One of the principal factors that contribute to these fluctuations is the significant changes in our customer’s delivery requirements. Results of operations in any period, therefore, should not be considered indicative of the results to be expected for any future period. Significant fluctuations in our revenue and operating results could also impact the Company’s ability to comply with its debt covenants of its credit facilities.

 

Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations. We require effective internal control over financial reporting in order to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the circumvention or overriding of controls, or fraud. However, even effective internal controls can provide only reasonable and not absolute assurances with respect to the preparation and fair presentation of financial statements.

 

 

The market price of our common stock has fluctuated significantly in the past and may continue in the future. The market price of our common stock has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include quarterly fluctuations in our financial results, customer contract awards, and general economic and political conditions in our various markets. In addition, the stock prices of small public contract manufacturing companies have experienced significant price and volume fluctuations that often have been unrelated to the operating performance of such companies. This market volatility may adversely affect the market price of our common stock.

 

Complying with securities laws and regulations is costly for us. Changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations promulgated by the SEC and Nasdaq, are creating particular challenges for smaller publicly-held companies like us. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our assessment of our internal control over financial reporting have required, and will continue to require, the expenditure of significant financial and managerial resources. In addition to Sarbanes-Oxley, we also have been and will continue to be required to expend financial and managerial resources to comply with the SEC requirement that mandates that our quarterly and yearly filings with them be in an XBRL readable format as well as requirements related to the Conflict Minerals Reporting as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

Item 1B.

Unresolved Staff Comments.

 

Not applicable.

 

  

Item2.

Properties.

 

The Company purchased an existing 49,000 square foot facility located in Monticello, Minnesota in May 2004 to house its production and its headquarters. The purchase price was $1.9 million and was paid for by a combination of cash and debt. In fiscal 2008, the Company commenced an addition to its facility and with its completion in early fiscal 2009 the addition added 12,500 square feet of manufacturing space. In August 2012, the Company announced a second expansion of 47,000 square feet which roughly doubled the amount of manufacturing space the Company had and increased the total facility size to approximately 107,000 square feet. The expansion was completed in fiscal 2013 and cost approximately $3.8 million which was paid for by a combination of cash on hand and a new mortgage agreement with its bank which was finalized in May 2013.

 

The new mortgage with its bank was for $4.2 million, carries an interest rate of 2.843%, requires monthly payments of $22,964 based on a 20 year amortization schedule and matures on May 8, 2018. The new mortgage satisfied the original mortgage of $1.1 million and provided the Company $3.1 million to use toward its building expansion project. The original mortgage carried an interest rate of 4.38% with monthly payments of $7,637 based on a 25-year amortization schedule.

 

The Company considers its manufacturing equipment, facilities, and other physical properties to be suitable and adequate to meet the requirements of its business.

 

Item 3.

Legal Proceedings.

 

The Company is not a party to any material legal proceedings; we may be subject from time to time to ordinary routine litigation incidental to its business.

 

Item 4.

Mine Safety Disclosure

 

Not applicable.

 

 

PART II

 

 

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

The common stock of the Company is traded on The NASDAQ Capital Market of the NASDAQ Stock Market LLC under the symbol “WSCI.”

 

As of October 26, 2015 there were 294 shareholders of record of the Company’s common stock.

 

The following table sets forth, for the periods indicated, the high and low closing sales price information for our common stock as reported by the Nasdaq Capital Market.

 

		Stock Price
		High				Low
FISCAL 2015:
First quarter		$	7.45			$	5.96
Second quarter			6.68				5.51
Third quarter			6.55				5.68
Fourth quarter			6.50				5.20
FISCAL 2014:
First quarter		$	6.69			$	5.77
Second quarter			6.55				5.85
Third quarter			8.00				6.44
Fourth quarter			9.17				7.25

 

In fiscal years 2015 and 2014, the Company paid a quarterly cash dividend of $.04 per share in each quarter. The Company expects to continue its quarterly dividend program, subject to its financial performance.

 

 

The following table sets forth information regarding our equity compensation plans in effect as of August 30, 2015. Each of our equity compensation plans is an “employee benefit plan” as defined by Rule 405 of Regulation C of the Securities Act of 1933.

 

 

Equity Compensation Plan Information

 

Plan category		Number of shares of common stock to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of shares of common stock remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by shareholders:
2005 Stock Plan			352,501			$	5.64				290,382
Total			352,501			$	5.64				290,382

 

There are no outstanding equity compensation plans not approved by shareholders.

 

The Company made no repurchases of its common stock in fiscal year 2015.

 

 

Item 6.

Selected Financial Data

 

Not applicable.

 

Item 7.

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 consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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. We made no significant changes to our critical accounting policies during fiscal 2015.

 

Application of Critical Accounting Policies:

 

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 by comparing the cost of each item in inventory to its most recent sales price or sales order price. Inventory cost is adjusted down for any excess cost over net realizable value of inventory components.

 

In addition, the Company determines whether its inventory is obsolete by analyzing the sales history of its inventory, sales orders on hand and indications from the Company’s customers as to the future of various parts or programs. If, in the Company’s determination, the inventory value has become impaired, the Company adjusts the inventory value to the amount the Company estimates as the ultimate net realizable value for that inventory. Actual customer requirements in any future periods are inherently uncertain and thus may differ from our estimates. The Company performs its lower of cost or market testing, as well as its excess or obsolete inventory analyses, quarterly.

 

The Company has no specific timeline to dispose of its remaining obsolete inventory and intends to sell this obsolete inventory from time to time, as market conditions allow.

 

Goodwill Impairment:

The Company evaluates the valuation of its goodwill according to the provisions of Accounting Standards Codification (“ASC”) 350 to determine if the current value of goodwill has been impaired. The Company believes that its stock price is not necessarily an indicator of the Company’s value given its limited trading volume and its wide price fluctuations. The Company has also adopted Accounting Standard Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350). With ASU No. 2011-08, an entity is given the option to make a qualitative evaluation of goodwill impairment to determine whether it should calculate the fair value of its reporting unit. In the fiscal 2015 fourth quarter, the Company made its qualitative evaluation of its goodwill considering, among other things, the overall macroeconomic conditions, industry and market considerations, overall financial performance and other relevant company specific events. Based on this qualitative evaluation, the Company concluded that it was more likely than not that its goodwill was not impaired and that it wasn’t required to calculate the fair value of its reporting unit. If the Company has changes in events or circumstances, including reductions in anticipated cash flows generated by its 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 differences between the financial reporting and tax bases of assets and liabilities. A deferred tax valuation allowance is 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 being different than statutory rates. The Company has not established a valuation allowance as it believes it is more likely than not that it will fully realize the benefit of its tax assets. Currently, the Company’s deferred tax assets consists primarily of the temporary accruals that will reverse in future years. The Company believes that is more likely than not to fully utilize its deferred tax assets.

 

Revenue Recognition:

The Company considers its revenue recognition policy to fall under the guidance of FASB’s conceptual framework for revenue recognition. The Company recognizes revenue only after: (a) The Company has received a purchase order identifying price and delivery terms or services to be rendered; (b) shipment has occurred, or in the case of services, after the service has been completed; (c) the Company’s price is fixed as evidenced by the purchase order; and (d) collectability is reasonably assured. The Company continually monitors its accounts receivable for any delinquent or slow paying accounts. The Company believes that based upon its past history with minimal bad debt write-offs, that all accounts are collectible upon shipment or delivery of services. Credit losses from customers have been minimal and within management's expectations. Based on management's evaluation of uncollected accounts receivable, bad debts are provided for on the allowance method. Accounts are considered delinquent if they are 120 days past due. If an uncollectible account should arise during the year, it would be written-off at the point it was determined to be uncollectible. The Company mitigates its credit risk by performing periodic credit checks and actively pursuing past due accounts. The Company refers to “net sales” in its consolidated statements of operations as the Company’s sales are sometimes reduced by product returned by its customers.

 

Liquidity and Capital Resources:

 

The Company’s net working capital at the end of fiscal 2015 was $8,828,000 as compared to $7,967,000 at the end of fiscal 2014. The increase occurred due to an increase in cash primarily attributable to $2,751,000 in cash generated from operations. The ratio of current assets to current liabilities increased to 2.79 to 1.0 at August 30, 2015 from 2.49 to 1.0 at the end of the prior fiscal year due primarily to the reason described above. The Company generated $3,241,000, $3,925,000 and $2,021,000 in cash from operations in fiscal 2015, 2014 and 2013, respectively.

 

In fiscal 2015 and fiscal 2014, additions to property, plant and equipment either by cash or financing were $1,584,000 and $229,000, respectively. In fiscal 2015, of the $1,584,000 in additions, $1,392,000 was acquired using financing arrangements.

 

In fiscal 2015, the Company added three milling machines in the Company’s third quarter for a new program in its recreational powersports business. There were no major pieces of equipment acquired during fiscal 2014. In fiscal 2013, the Company added one milling machine in its fiscal first quarter, and then added eight more machines during its fiscal third and fourth quarters. The machines were needed for new programs as well as increased capacity in its recreational powersports vehicle business. In fiscal 2013, the Company also completed a 47,000 square foot addition to its manufacturing facility that cost approximately $3.8 million.

 

 

In connection with the building addition in fiscal 2013, the Company entered into a new mortgage with its bank for $4.2 million. The mortgage carries an interest rate of 2.843%, requires monthly payments of $22,964 based on a 20 year amortization schedule and matures on May 8, 2018.

 

At February 1, 2015, 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 28, 2016, is collateralized by all assets of the Company and carries an interest rate of LIBOR plus 2%. No balances were owed at August 30, 2015 and August 31, 2014 on the credit line.

 

The Company’s total debt was $9,871,000 at August 30, 2015 which consisted of a mortgage on its building of $3,843,000 and debt secured by production equipment of $6,028,000. Current maturities of long-term debt consist of $1,361,000 due on equipment related debt and $167,000 on its building related debt. During fiscal 2015, the Company made principal payments on its debt of $1,692,000. It is management’s belief that the combination of its current cash balance, its internally generated funds, as well as its revolving line of credit will be sufficient to enable the Company to meet its financial requirements during fiscal 2016.

 

Results of Operations:

 

The Company experienced a sales increase of 1% in fiscal 2015 which came on top of a 26% increase in fiscal 2014. Net sales in fiscal 2015 were approximately $43.0 million as compared to $42.7 million in fiscal 2014 and $34.0 million in fiscal 2013. The increase in fiscal 2015 came from a 8% increase in sales from recreational powersports market partially offset by a 41% decrease in the Company’s energy business. The increase in fiscal 2014 came from a 45% increase in sales from recreational powersports market partially offset by a 28% decrease in the Company’s energy business.

 

 

The following is a reconciliation of sales by major market:

 

		Fiscal 2015				Fiscal 2014				Fiscal 2013
Recreational vehicle		$	36,937,000			$	34,244,000			$	23,695,000
Aerospace and defense		2,103,000					2,273,000				2,162,000
Energy			3,128,000				5,308,000				7,399,000
Biosciences & Other			815,000				889,000				709,000
		$	42,983,000			$	42,714,000			$	33,965,000

 

 

The increase in sales in the recreational vehicle market in both fiscal 2015 and fiscal 2014 resulted from the overall increase in demand from the Company’s largest customer for the parts the Company supplies as well as new programs that had been awarded and started in both fiscal years.

 

Sales from the Company’s aerospace and defense markets were down in fiscal 2015 with a decrease of 7% from the prior year. In fiscal 2014, sales were up with growth of 5% over the prior year. The year to year changes are not attributable to any one factor as sales to the Company’s customers in these markets were mixed with some customers slightly up while others slightly down from year to year.

 

 

Sales from the Company’s energy business continued to decrease in fiscal 2015 with year over year sales down 41%. In fiscal 2014, sales were down 28% as compared to the prior year. All of the Company’s customers in the energy market have their own internal machining capabilities and therefore the Company’s sales are generated primarily when their customers have limited machining capacity and need to outsource. Circumstances such as a low price for oil will tend to drive machining in house and therefore lower the Company’s sales. This fact tends to create volatility in the Company’s sales to the energy industry on top of an energy market that has volatile tendencies. The Company’s two main customers engage in providing equipment to the oil and gas shale fracturing (“fracking”) sector as well as the oil field equipment industry. Sales in both fiscal 2015 and 2014 for both segments were down, with the decreases in the fracking business due to lower levels of demand from the Company’s customer, while the oilfield segment customer decrease in the level of business appears to be related to the customer sourcing certain components to their own facilities in other low cost countries.

 

Sales to the Company’s bioscience and other markets are relatively small as sales from these markets only amount to approximately 1% - 3% of total sales. The fluctuations in these markets have been minimal in the last two fiscal years.

 

The Company’s gross margin decreased to 10.0% in fiscal 2015 from 12.6% in fiscal 2014 while fiscal 2013 gross margins were at 12.3%. The decrease in fiscal 2015 was attributable to a lower level of energy business which led to excess capacity and a higher percentage of sales in fixed costs such as depreciation. The lower gross margin was also attributable to a lower level of sales in the Company’s fiscal fourth quarter from the Company’s largest customer due to internal production issues experienced by that customer. The lower sales to that customer, combined with the decrease in sales to our energy customers, led to manufacturing inefficiencies and lower overall gross margins. The fiscal 2014 increase was primarily due to efficiencies gained with volume increases offset by a higher material content of sales as well as higher fixed costs.

 

The Company’s margins can also vary widely depending on whether the Company purchases its raw material or whether raw material is provided or consigned to them by its customer. Generally, the Company will experience a higher gross margin percentage of sales where material has been consigned or provided by the customer. Therefore, in any particular quarter or year, the Company’s gross margin can vary depending on the mix of parts sold and whether those parts had material that was purchased or had material that had been consigned to them.

 

No significant sales of obsolete items occurred in fiscal years 2013 through 2015 and, correspondingly, no significant gross margin was recognized.

 

Selling and administrative expense in fiscal 2015 was $2,972,000 which was a decrease of $105,000 from fiscal 2014. The decrease in fiscal 2015 was due primarily to lower incentive compensation and profit sharing expense partially offset by higher payroll costs. Selling and administrative expense in fiscal 2014 was approximately $3,077,000, an increase of $381,000 over the fiscal 2013 amount of approximately $2,696,000. The increase in selling and administrative expense in fiscal 2014 is mostly attributable to increased incentive compensation and profit sharing expense as well as higher payroll costs. In addition, the Company incurred professional service expense in each of those three fiscal years in connection with its analysis of internal controls over financial reporting as required by the Sarbanes-Oxley Act as well as requirements related to the Conflict Minerals Reporting as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

Interest expense in fiscal 2015 decreased $64,000 to $346,000 from fiscal 2014, due primarily to a lower average level of debt as well as a lower overall interest rate. Interest expense in fiscal 2014 increased to $410,000 from $353,000 in fiscal 2013 due to a higher average level of debt throughout the year partially offset by a lower overall interest rate level.

 

 

The Company’s effective tax rate in its year ended August 30, 2015 was 1.5% as compared to 36% in the years ended August 31, 2014 and August 25, 2013, respectively. During the current fiscal year, the Company hired an outside consulting firm to conduct an analysis to see if certain activities the Company performs qualify for the Research & Development tax credit (R&D credit) as defined by Internal Revenue Code Section 41. As a result of the analysis, the Company determined that it is performing activities that qualify for the R&D credit, and during the fiscal year 2015 recognized tax benefits related to R&D tax credits which lowered the overall effective tax rate. At the present time, the Federal R&D credit has not been extended for calendar year 2015.  Therefore, no benefit for the Federal R&D tax credit for the portion of the Company’s tax year occurring in calendar year 2015 was recorded.

 

Caution Regarding Forward-Looking Statements

 

Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations elsewhere in this Annual Report on Form 10-K, 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. 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. Forward-looking statements 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 above under Item 1A. Risk Factors.

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 8.

Financial Statements and Supplementary Data.

 

See Consolidated Financial Statements section of this Annual Report on Form 10-K beginning on page 23, attached hereto, which consolidated financial statements are incorporated herein by reference.

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A.

Controls and Procedures.

 

Disclosure Controls and Procedures

 

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended.  Based on that evaluation, Benjamin

T. Rashleger, the chief executive officer, and Paul D. Sheely, the chief financial officer, have concluded that as of August 30, 2015 our disclosure controls and procedures were effective.

 

 

Changes in Internal Controls over Financial Reporting

 

There have been no changes in internal control over financial reporting that occurred during the fourth quarter ended August 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Management’s Report on Internal Control Over Financial Reporting

 

The management of the Company is responsible for the preparation of the financial statements and related financial information appearing in this Annual Report on Form 10-K. The financial statements and notes have been prepared in conformity with accounting principles generally accepted in the United States of America. The management of the Company also is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. A company's internal control over financial reporting is defined as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

 

Management, including the chief executive officer and chief financial officer, does not expect that the Company's internal controls will prevent all error and all fraud. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable, not absolute, assurance that the objectives of the control system are met and may not prevent or detect misstatements. Further, over time control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management hired an outside consulting firm to assist it in the evaluation of the effectiveness of the Company's internal control over financial reporting. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of August 30, 2015 based upon the framework in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of that evaluation, our management has concluded that, as of August 30, 2015, the Company's internal control over financial reporting was effective.

 

This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission.

 

Item 9B.

Other Information.

 

None.

 

 

PART III

 

Pursuant to General Instruction E (3), the Company omits Part III, Items 10, 11, 12, 13 and 14, as a definitive proxy statement will be filed with the Commission pursuant to Regulation 14(a) within 120 days after August 30, 2015 and such information required by such items is incorporated herein by reference from the proxy statement.

 

PART IV

 

 

Item 15.

Exhibits.

 

(a)	Documents filed as part of this report.

 

1.

Consolidated Financial Statements: Reference is made to the Index to Consolidated Financial Statements (page 21) hereinafter contained for all Consolidated Financial Statements.

 

2.

Exhibits.

 

 

Exhibit No.		Description
3.1		Restated Articles of Incorporation of WSI Industries, Inc. Incorporated by reference from Exhibit 3 of the Registrant’s Form 10-Q for the quarter ended November 29, 1998.
3.2		Restated and Amended Bylaws, as amended through January 6, 2005. Incorporated by reference from Exhibit 3.2 of the Registrant’s Form 10-K for the year ended August 28, 2005.
10.1		WSI Industries, Inc. 2005 Stock Plan. Incorporated by reference from Exhibit 4.1 of the Registrant’s Registration Statement on Form S-8 (SEC File No. 333-203225).
10.2		Form of Restricted Stock Award Agreement under the Company’s 2005 Stock Plan. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated February 23, 2007.
10.3		Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement under the Company’s 2005 Stock Plan. Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated February 23, 2007.
10.4		Form of Restricted Stock Bonus Award Agreement under the Company’s 2005 Stock Plan. Incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the year ended August 30, 2009.

 

 

Exhibit No.		Description
10.5		Board of Directors Retirement Program dated June 25, 1982. Incorporated by reference from Exhibit 10.12 of the Registrant’s Form 10-K for the year ended August 25, 2002.
10.6		Employment (change in control) Agreement between Paul D. Sheely and Registrant dated January 11, 2001 incorporated by reference from Exhibit 10.2 of the Registrant’s Form 10-Q for the quarter ended May 27, 2001.
10.7		Amendment No. 1 to Employment (change in control) Agreement between Paul D. Sheely and Registrant dated November 1, 2002. Incorporated by reference from Exhibit 10.11 of the Registrant’s Form 10-K for the year ended August 25, 2002.
10.8		Second Amendment to Employment (Change in Control) Agreement dated December 29, 2008 by and between WSI Industries, Inc. and Paul D. Sheely. Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K dated December 29, 2008.
10.9		Severance Letter Agreement dated October 7, 2009 by and between WSI Industries, Inc. and Paul D. Sheely. Incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8-K dated October 7, 2009.
10.10		Employment Offer Letter dated October 5, 2009 by WSI Industries, Inc. to Benjamin Rashleger. Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K dated October 7, 2009.
10.11		Employment (Change In Control) Agreement dated October 12, 2009 by and between WSI Industries, Inc. and Benjamin Rashleger. Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K dated October 7, 2009.
10.12		Form of Restrictive Covenant Agreement by and between WSI Industries, Inc. and Michael J. Pudil, Paul D. Sheely and Benjamin Rashleger. Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K dated October 7, 2009.
10.13		Loan agreement dated February 1, 2011 between WSI Industries, Inc., Taurus Numeric Tool, Inc., WSI Rochester, Inc., and M&I Marshall & Ilsley Bank (now BMO Harris Bank N.A.). Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 10-Q for the quarter ended February 27, 2011.

 

 

Exhibit No.		Description
10.14		Amended and Restated Revolving Credit Promissory Note dated February 1, 2011 in the principal amount of $1,000,000 by WSI Industries, Inc. in favor of M&I Marshall & Ilsley Bank (now BMO Harris Bank N.A.). Incorporated by reference from Exhibit 10.24 of the Registrant’s Form 10-K for the year ended August 28, 2011.
10.15		Amended and Restated Security Agreement dated February 1, 2011 by and between WSI Industries, Inc. and M&I Marshall & Ilsley Bank (now BMO Harris Bank N.A.). Incorporated by reference from Exhibit 10.25 of the Registrant’s Form 10-K for the year ended August 28, 2011.
10.16		Amended and Restated Security Agreement dated February 1, 2011 by and between Taurus Numeric Tool, Inc. and M&I Marshall & Ilsley Bank (now BMO Harris Bank N.A.). Incorporated by reference from Exhibit 10.26 of the Registrant’s Form 10-K for the year ended August 28, 2011.
10.17		Amended and Restated Security Agreement dated February 1, 2011 by and between WSI Rochester, Inc. and M&I Marshall & Ilsley Bank (now BMO Harris Bank N.A.). Incorporated by reference from Exhibit 10.27 of the Registrant’s Form 10-K for the year ended August 28, 2011.
10.18		Guaranty dated February 1, 2011 by and WSI Rochester, Inc. and M&I Marshall & Ilsley Bank (now BMO Harris Bank N.A.). Incorporated by reference from Exhibit 10.28 of the Registrant’s Form 10-K for the year ended August 28, 2011.
10.19		Guaranty dated February 1, 2011 by and between Taurus Numeric Tool, Inc. and M&I Marshall & Ilsley Bank (now BMO Harris Bank N.A.). Incorporated by reference from Exhibit 10.29 of the Registrant’s Form 10-K for the year ended August 28, 2011.
10.20		First Amendment and Modification of Revolving Line of Credit Promissory Note, Loan Agreement and Reaffirmation of Guaranties dated February 1, 2012 and incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K dated February 15, 2012.
10.21		Second Amendment and Modification of Revolving Line of Credit Promissory Note, Loan Agreement and Reaffirmation of Guaranties, and Amended and Restated Revolving Credit Promissory Note dated January 30, 2013 by and among WSI Industries, Inc., WSI Industries, Co., WSI Rochester, Inc. and BMO Harris Bank, N.A. Incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K dated January 30, 2013.

 

 

Exhibit No.		Description
10.22		Amended and Restated Real Estate Mortgage, Security Agreement and Financing Statement dated May 8, 2013 between WSI Industries, Inc. and BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K dated May 8, 2013.
10.23		Amended and Restated Promissory Note in the principal amount of up to $4,200,000 dated May 8, 2013 between WSI Industries, Inc. and BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.2 of the Registrant’s Form 8-K dated May 8, 2013.
10.24		Loan Agreement dated May 8, 2013 between WSI Industries, Inc. and BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.3 of the Registrant’s Form 8-K dated May 8, 2013.
10.25		Assignment of Leases and Rents dated May 8, 2013 between WSI Industries, Inc. and BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.4 of the Registrant’s Form 8-K dated May 8, 2013.
10.26		Guaranty dated May 8, 2013 between WSI Rochester, Inc. and BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.5 of the Registrant’s Form 8-K dated May 8, 2013.
10.27		Guaranty dated May 8, 2013 between WSI Industries, Co. and BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.6 of the Registrant’s Form 8-K dated May 8, 2013.
10.28		First Amendment to Term Loan Agreement dated January 31, 2014 between WSI Industries, Inc. and BMO Harris Bank N.A.. Incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K dated January 31, 2014.
10.29		Third Amendment to Revolving Loan Agreement and First Amendment to Amended and Restated Revolving Credit Promissory Note dated January 31, 2014 between WSI Industries, Inc. and BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.2 of the Registrant’s Form 8-K dated January 31, 2014.
10.30		Acknowledgement of Guarantors dated January 31, 2014 between WSI Rochester, Inc., WSI Industries, Co. and BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.3 of the Registrant’s Form 8-K dated January 31, 2014.
10.31		Fourth Amendment to Revolving Loan Agreement and First Amendment to Amended and Restated Revolving Credit Promissory Note dated January 26, 2015 between WSI Industries, Inc. and BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.2 of the Registrant’s Form 8-K dated January 26, 2015.
10.32		Acknowledgement of Guarantors dated January 26, 2015 between WSI Rochester, Inc., WSI Industries, Co. and BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.3 of the Registrant’s Form 8-K dated January 26, 2015.

 

 

Exhibit No.		Description
14.1		Code of Ethics & Business Conduct adopted by WSI Industries, Inc. on October 29, 2003. Incorporated by reference to Exhibit 14.1 of the Registrant’s Annual Report on Form 10-K for the year ended August 31, 2003.
21.1		Subsidiaries of the Registrant.
23.1		Consent of Schechter Dokken Kanter Andrews & Selcer Ltd.
31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.
31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.
32.1		Certification 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 Section 13 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.
	BY:	/s/ Benjamin T. Rashleger
		Benjamin T. Rashleger
		Chief Executive Officer
		(principal executive officer)
	BY:	/s/ Paul D. Sheely
		Paul D. Sheely
		Vice President, Finance, Chief Financial Officer and Treasurer
		(principal financial and accounting officer)

 

 

DATE: November 4, 2015

 

 

Each person whose signature appears below hereby constitutes and appoints Benjamin T. Rashleger and Paul D. Sheely, and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments to this Form 10-K and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof.

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

 

Signature		Title		Date
/s/ Benjamin T. Rashleger		President, Chief Executive Officer		November 4, 2015
Benjamin T. Rashleger		and Director
/s/ Michael J. Pudil		Director		November 4, 2015
Michael J. Pudil
/s/ Thomas C. Bender		Director		November 4, 2015
Thomas C. Bender
/s/ Burton F. Myers II		Director		November 4, 2015
Burton F. Myers II
/s/ James D. Hartman		Director		November 4, 2015
James D. Hartman
/s/ Jack R. Veach		Director		November 4, 2015
Jack R. Veach

 

 

INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

 

		Page
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm		22
Consolidated Balance Sheets - August 30, 2015 and August 31, 2014		23
Consolidated Statements of Income - Years Ended August 30, 2015, August 31, 2014 and August 25, 2013		24
Consolidated Statements of Stockholders' Equity - Years Ended August 30, 2015, August 31, 2014 and August 25, 2013		25
Consolidated Statements of Cash Flows - Years Ended August 30, 2015, August 31, 2014 and August 25, 2013		26
Notes to Consolidated Financial Statements		27-36

 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

WSI Industries, Inc.

Monticello, Minnesota

 

We have audited the consolidated balance sheets of WSI Industries, Inc. and Subsidiaries as of August 30, 2015 and August 31, 2014 and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended August 30, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of WSI Industries, Inc. and Subsidiaries as of August 30, 2015 and August 31, 2014, and the results of its operations and its cash flows for each of the years in the three-year period ended August 30, 2015, in conformity with United States generally accepted accounting principles.

 

 

/s/ Schechter Dokken Kanter

      Andrews & Selcer Ltd.

 

Minneapolis, Minnesota

November 4, 2015

 

 

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS
AUGUST 30, 2015 AND AUGUST 31, 2014

---

 

 

See notes to consolidated financial statements.

 

 

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 30, 2015, AUGUST 31, 2014 AND AUGUST 25, 2013

---

 

 

 

 

 

See notes to consolidated financial statements.

 

 

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED AUGUST 30, 2015, AUGUST 31, 2014 AND AUGUST 25, 2013

---

 

 

 

See notes to consolidated financial statements.

 

 

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS     
YEARS ENDED AUGUST 30, 2015, AUGUST 31, 2014 AND AUGUST 25, 2013

---

 

 

 

 

See notes to consolidated financial statements.

  

 

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 30, 2015, AUGUST 31, 2014 AND AUGUST 25, 2013

---

 

 

 

 

 

 

36