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 May 25, 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 |
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41-0691607 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
213 Chelsea Road, Monticello, Minnesota |
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55362 |
(Address of principal executive offices) |
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(Zip Code) |
(763) 295-9202
(Registrant’s telephone number, including area code)
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 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 ☐ |
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Accelerated filer ☐ |
Non-accelerated filer ☐ |
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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: 2,908,461 shares of common stock were outstanding as of June 25, 2014.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No. | |||
PART I. FINANCIAL INFORMATION: |
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Item 1. |
Financial Statements |
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Condensed Consolidated Balance Sheets May 25, 2014 and August 25, 2013 (Unaudited) |
3 | ||
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Condensed Consolidated Statements of Operations Thirteen and Thirty-nine weeks ended May 25, 2014 and May 26, 2013 (Unaudited) |
4 | ||
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Condensed Consolidated Statements of Cash Flows Thirty-nine weeks ended May 25, 2014 and May 26, 2013 (Unaudited) |
5 | ||
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
6 - 7 | ||
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
8 - 10 | |
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Item 4. |
Controls and Procedures |
10 | |
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PART II. OTHER INFORMATION: |
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Item 1A. |
Risk Factors |
10 | |
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Item 6. |
Exhibits |
11 | |
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Signatures |
11 |
Item I. Financial Statements
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
May 25, 2014 |
August 25, 2013 |
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Assets | ||||||||
Current Assets: |
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Cash and cash equivalents |
$ | 3,538,600 | $ | 1,906,218 | ||||
Accounts receivable |
4,829,522 | 5,318,285 | ||||||
Inventories |
3,729,301 | 3,279,506 | ||||||
Prepaid and other current assets |
189,747 | 310,482 | ||||||
Deferred tax assets |
118,468 | 118,280 | ||||||
Total Current Assets |
12,405,638 | 10,932,771 | ||||||
Property, Plant and Equipment ,net |
13,801,657 | 15,298,713 | ||||||
Goodwill and other assets, net |
2,384,160 | 2,387,168 | ||||||
$ | 28,591,455 | $ | 28,618,652 | |||||
Liabilities and Stockholders’ Equity |
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Current Liabilities: |
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Trade accounts payable |
$ | 2,473,581 | $ | 2,605,249 | ||||
Accrued compensation and employee withholdings |
620,661 | 397,170 | ||||||
Other accrued expenses |
171,052 | 65,555 | ||||||
Current portion of long-term debt |
1,715,667 | 1,921,708 | ||||||
Total Current Liabilities |
4,980,961 | 4,989,682 | ||||||
Long-term debt, less current portion |
8,917,040 | 10,168,597 | ||||||
Deferred tax liabilities |
1,826,186 | 1,322,443 | ||||||
Stockholders’ Equity: |
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Common stock, par value $.10 a share; authorized 10,000,000 shares; issued and outstanding 2,908,461 and 2,903,852 shares, respectively |
290,845 | 290,384 | ||||||
Capital in excess of par value |
3,416,943 | 3,314,193 | ||||||
Deferred compensation |
(23,851 | ) | (73,874 | ) | ||||
Retained earnings |
9,183,331 | 8,607,227 | ||||||
Total Stockholders’ Equity |
12,867,268 | 12,137,930 | ||||||
$ | 28,591,455 | $ | 28,618,652 |
See notes to condensed consolidated financial statements.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
13 weeks ended |
39 weeks ended |
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May 25, 2014 |
May 26, 2013 |
May 25, |
May 26, 2013 |
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Net sales |
$ | 10,702,145 | $ | 9,169,126 | $ | 31,385,464 | $ | 24,931,254 | ||||||||
Cost of products sold |
9,220,735 | 8,240,751 | 27,302,259 | 21,748,913 | ||||||||||||
Gross margin |
1,481,410 | 928,375 | 4,083,205 | 3,182,341 | ||||||||||||
Selling and administrative expense |
883,085 | 688,688 | 2,329,446 | 2,021,014 | ||||||||||||
Interest and other income |
(1,740 | ) | (6,214 | ) | (3,961 | ) | (8,143 | ) | ||||||||
Interest expense |
98,597 | 80,610 | 314,276 | 242,967 | ||||||||||||
Income before income taxes |
501,468 | 165,291 | 1,443,444 | 926,503 | ||||||||||||
Income taxes |
180,528 | 59,505 | 519,730 | 333,541 | ||||||||||||
Net income |
$ | 320,940 | $ | 105,786 | $ | 923,714 | $ | 592,962 | ||||||||
Basic earnings per share |
$ | .11 | $ | .04 | $ | .32 | $ | .21 | ||||||||
Diluted earnings per share |
$ | .11 | $ | .04 | $ | .31 | $ | .20 | ||||||||
Cash dividend per share |
$ | .04 | $ | .04 | $ | .12 | $ | .12 | ||||||||
Weighted average number of common shares outstanding, basic |
2,903,374 | 2,889,095 | 2,897,988 | 2,880,703 | ||||||||||||
Weighted average number of common shares outstanding, diluted |
2,978,670 | 2,941,653 | 2,960,604 | 2,942,758 |
See notes to condensed consolidated financial statements.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
39 weeks ended |
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May 25, 2014 |
May 26, |
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Cash Flows From Operating Activities: |
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Net income |
$ | 923,714 | $ | 592,962 | ||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: |
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Depreciation |
1,687,550 | 1,316,696 | ||||||
Amortization |
3,008 | 335 | ||||||
Gain on sale of equipment |
- | (6,101 | ) | |||||
Net tax benefits related to share-based compensation |
- | (43,853 | ) | |||||
Deferred taxes |
515,292 | 312,798 | ||||||
Stock option compensation expense |
176,060 | 187,889 | ||||||
Changes in assets and liabilities: |
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Decrease in accounts receivable |
488,763 | 618,751 | ||||||
Increase in inventories |
(449,795 | ) | (206,696 | ) | ||||
Decrease (increase) in prepaid expenses |
120,735 | (181,637 | ) | |||||
Increase (decrease) in accounts payable and accrued expenses |
148,920 | (1,081,070 | ) | |||||
Net cash provided by operations |
3,614,247 | 1,510,074 | ||||||
Cash Flows From Investing Activities: |
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Proceeds from sale of equipment |
- | 6,101 | ||||||
Purchase of property, plant and equipment |
(190,495 | ) | (3,663,017 | ) | ||||
Net cash used in investing activities |
(190,495 | ) | (3,656,916 | ) | ||||
Cash Flows From Financing Activities: |
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Proceeds from issuance of long-term debt |
- | 3,148,569 | ||||||
Payments of long-term debt |
(1,457,598 | ) | (1,074,288 | ) | ||||
Issuance of common stock |
13,840 | 21,560 | ||||||
Net tax benefits related to share-based compensation |
- | 43,853 | ||||||
Deferred financing costs |
- | (20,053 | ) | |||||
Dividends paid |
(347,612 | ) | (346,246 | ) | ||||
Net cash (used in) provided by financing activities |
(1,791,370 | ) | 1,773,395 | |||||
Net Increase (Decrease) In Cash And Cash Equivalents |
1,632,382 | (373,447 | ) | |||||
Cash And Cash Equivalents At Beginning Of Year |
1,906,218 | 2,911,961 | ||||||
Cash And Cash Equivalents At End Of Reporting Period |
$ | 3,538,600 | $ | 2,538,514 | ||||
Supplemental cash flow information: |
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Cash paid during the period for: |
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Interest |
$ | 314,763 | $ | 233,092 | ||||
Income taxes |
$ | 4,438 | $ | 20,742 | ||||
Payroll withholding taxes in cashless stock option exercise |
$ | 36,663 | $ | 88,771 | ||||
Non-cash investing and financing activities: |
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Acquisition of machinery through financing |
$ | - | $ | 2,067,812 |
See notes to condensed consolidated financial statements.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. |
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: |
The condensed consolidated balance sheet as of May 25, 2014, the condensed consolidated statements of operations for the thirteen and thirty-nine weeks ended May 25, 2014 and May 26, 2013 and the condensed consolidated statements of cash flows for the thirty-nine 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 2013 annual report to shareholders on Form 10-K. 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:
May 25, 2014 |
August 25, 2013 |
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Raw material |
$ | 1,760,813 | $ | 1,606,358 | ||||
WIP |
1,107,856 | 993,177 | ||||||
Finished goods |
860,632 | 679,971 | ||||||
$ | 3,729,301 | $ | 3,279,506 |
The Company did not dispose of any significant obsolete inventory during the quarter ended May 25, 2014 and therefore there was no material effect on gross margin from any dispositions.
3. |
Goodwill And OTHER Assets: |
Goodwill and other assets consist of costs resulting from business acquisitions which total $2,368,452 at May 25, 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 $15,708 (net of accumulated amortization of $4,345) incurred in connection with the mortgage agreement entered into with the Company’s bank during the fiscal 2013 quarter ended May 26, 2013.
4. |
CLAIMS AND CONTINGENCIES: |
The Company is exposed to a number of asserted and unasserted claims encountered in the ordinary course of business. Although the outcome of any such claim cannot be predicted, management believes that there are no pending legal proceedings or claims against or involving the Company for which the outcome is likely to have a material adverse effect upon its financial position or results of operations.
5. |
EARNINGS PER SHARE: |
The following table sets forth the computation of basic and diluted earnings per share:
Thirteen weeks ended |
Thirty-nine weeks ended |
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May 25, 2014 |
May 26, 2013 |
May 25, 2014 |
May 26, 2013 |
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Numerator for basic and diluted earnings per share: |
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Net income |
$ | 320,940 | $ | 105,786 | $ | 923,714 | $ | 592,962 | ||||||||
Denominator |
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Denominator for basic earnings per share – weighted average shares |
2,903,374 | 2,889,095 | 2,897,988 | 2,880,703 | ||||||||||||
Effect of dilutive securities: |
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Employee and non-employee options |
75,296 | 52,558 | 62,616 | 62,055 | ||||||||||||
Dilutive common shares |
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Denominator for diluted earnings per share |
2,978,670 | 2,941,653 | 2,960,604 | 2,942,758 | ||||||||||||
Basic earnings per share |
$ | .11 | $ | .04 | $ | .32 | $ | .21 | ||||||||
Diluted earnings per share |
$ | .11 | $ | .04 | $ | .31 | $ | .20 |
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 $10,702,000 for the quarter ended May 25, 2014 compared to $9,169,000 in the same period of the prior year, an increase of 17%. Year-to-date sales for the first three quarters of fiscal 2014 were $31,385,000 compared to $24,931,000 in the prior year, an increase of 26%. Sales by product line for the quarter and year-to-date periods are as below:
Fiscal Third Quarter Thirteen Weeks Ended |
Fiscal Third Quarter Year-to-Date Ended |
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May 25, 2014 |
Percent of Total Sales |
May 26, 2013 |
Percent of Total Sales |
Dollar Percent Change |
May 25, 2014 |
Percent of Total Sales |
May 26, 2013 |
Percent of Total Sales |
Dollar Percent Change |
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Recreational Vehicles |
$ | 8,950,000 | 83 | % | $ | 7,109,000 | 77 | % | 26 | % | $ | 25,314,000 | 81 | % | $ | 16,834,000 | 67 | % | 50 | % | ||||||||||||||||||||
Energy |
1,140,000 | 11 | % | 1,358,000 | 15 | % | -16 | % | 3,659,000 | 12 | % | 6,176,000 | 25 | % | -41 | % | ||||||||||||||||||||||||
Aerospace Defense & Other |
612,000 | 6 | % | 702,000 | 8 | % | -13 | % | 2,412,000 | 7 | % | 1,921,000 | 8 | % | 26 | % | ||||||||||||||||||||||||
Total Sales |
$ | 10,702,000 | 100 | % | $ | 9,169,000 | 100 | % | 17 | % | $ | 31,385,000 | 100 | % | $ | 24,931,000 | 100 | % | 26 | % |
The Company’s sales from its recreational vehicle market were up 26% for the fiscal 2014 third quarter as compared to the prior year quarter and its year-to-date sales were up 50%. Sales increases for the fiscal 2014 third quarter were primarily from a new product line that was introduced during the summer of 2013. Year-to-date sales also increased due to the same new product line, but were also affected by increases in demand from two other product lines as well as the substitution of newer product lines with higher per unit prices in replacement of product lines being phased out.
Sales from the Company’s energy business for the fiscal 2013 third quarter and year-to-date periods decreased by 16% and 41%, respectively. The Company’s fiscal third quarter’s sales in its shale fracturing business was comparable to the prior year while the overall decrease in energy based sales was driven primarily by a decrease in the Company’s oilfield equipment business as the Company’s primary customer in that sector continues to outsource to lower cost countries. Year-to-date sales are lower for Company’s shale fracturing business as the Company’s demand levels in the first six months of fiscal 2014 were lower than the prior year. Year-to-date oilfield equipment business is lower for the reason described previously.
Sales from the Company’s aerospace, defense and other markets decreased year over year in the Company’s fiscal 2014 third quarter by 13% while year-to-date sales increased 26%. Fluctuations in quarterly sales are normal for this segment of the Company’s business. Fiscal 2014 third quarter sales, while lower than the prior year fiscal third quarter, were in the range of normal quarterly sales. Year-to-date sales were higher in fiscal 2014 as sales were positively impacted by a strong fiscal first quarter as well as sales from the Company’s firearms business. The Company does not anticipate realizing any additional sales from the firearms business after its fiscal 2014 second quarter.
Gross margin increased to 13.8% for the quarter ended May 25, 2014 versus 10.1% in the prior year period. Gross margin were positively impacted by volume increases as well as manufacturing improvements made from the Company’s ongoing lean activity efforts. Year-to-date gross margins increased to 13.0% versus 12.8% in the prior year-to-date period with the positive impacts previously described being partially offset by 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 was $883,000 for the quarter ended May 25, 2014 versus $689,000 in the prior year quarter. Year-to-date selling and administrative expense of $2,329,000 was $308,000 higher than the comparable prior year period. The quarterly and year-to-date increases are due in large measure to increased incentive compensation and accrued profit sharing.
Interest expense in the third quarter of fiscal 2014 was $99,000 as compared to $81,000 in the prior year quarter. Year-to-date interest expense for fiscal 2014 was $314,000 versus $243,000 in the prior year. The higher interest costs are a result of an overall higher level of long-term debt offset by a lower overall effective interest rate on that debt.
The Company recorded income tax expense at an effective tax rate of 36% for the quarter and year-to-date periods ended May 25, 2014 and May 26, 2013, respectively.
Liquidity and Capital Resources
On May 25, 2014 working capital was $7,425,000 as compared to $5,943,000 at August 25, 2013. The ratio of current assets to current liabilities at May 25, 2014 was 2.49 to 1.0 compared to 2.19 to 1.0 at August 25, 2013. Improvements in both ratios came primarily from the year-to date $3,614,000 in cash generated from operations in fiscal 2014 which led to an overall increase in the level of cash and cash equivalents.
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. At May 25, 2014, the Company had a $1 million line of credit with its bank that had not been accessed.
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 May 25, 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. |
Item 6. | EXHIBITS: | |
A. |
The following exhibits are included herein: | |
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act. | ||
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act. | ||
Exhibit 32 Certification pursuant to 18 U.S.C. § 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.
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WSI INDUSTRIES, INC. |
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Date: June 25, 2014 |
/s/ Benjamin T. Rashleger |
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Benjamin T. Rashleger, President & Chief Executive Officer |
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Date: June 25, 2014 |
/s/ Paul D. Sheely |
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Paul D. Sheely, Vice President, Finance & CFO |
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11