UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarterly period ended May 26, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-619
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WSI Industries, Inc.
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(Exact name of registrant, as specified in its charter)
Minnesota 41-0691607
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(State or other jurisdiction of (I. R. S. Employer
incorporation of organization) Identification No.)
Osseo, Minnesota 55369
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(Address of principal executive offices) (Zip Code)
(763) 428-4308
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(Registrant's telephone number, including area code)
Wayzata, Minnesota
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
2,465,229 Common Shares were outstanding as of June 30, 2002.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets May 26, 2002 (Unaudited)
and August 26, 2001 3
Consolidated Statements of Operations
Thirteen and Thirty-Nine weeks ended May 26, 2002
and May 27, 2001 (Unaudited) 4
Consolidated Statements of Cash Flows
Thirty-Nine weeks ended May 26, 2002
and May 27, 2001 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6, 7, 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9, 10, 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk 11
PART II. OTHER INFORMATION:
Item 7. Exhibits and Reports on Form 8-K 11
Signatures 11
2
Part I. Financial Information
Item I. Financial Statements
WSI INDUSTRIES, INC
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
MAY 26, AUGUST 26,
ASSETS 2002 2001
------ ---- ----
Current Assets:
Cash and cash equivalents $ 702,038 $ 8,292
Accounts receivable 1,257,258 1,778,969
Inventories 1,019,465 1,584,415
Prepaid and other current assets 38,425 101,879
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Total Current Assets 3,017,186 3,473,555
Property, Plant and Equipment-- Net 2,344,464 6,691,360
Intangible Assets 2,368,452 6,173,158
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$ 7,730,102 $ 16,338,073
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 384,447 $ 687,426
Accrued compensation and employee withholdings 199,834 445,693
Miscellaneous accrued expenses 347,655 425,330
Current portion of long-term debt 731,630 2,916,061
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Total Current Liabilities 1,663,566 4,474,510
Long term debt, less current portion 1,444,493 4,111,462
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,465,229 shares 246,523 246,523
Capital in excess of par value 1,640,934 1,640,934
Retained earnings 2,734,586 5,864,644
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Total Stockholders' Equity 4,622,043 7,752,101
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$ 7,730,102 $ 16,338,073
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See notes to consolidated financial statements
3
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
13 weeks ended 39 weeks ended
------------------------------- ------------------------------
May 26, May 27, May 26, May 27,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 2,144,586 $ 5,140,495 $ 10,608,962 $ 17,086,091
Cost of products sold 1,873,100 4,140,070 9,362,968 13,540,444
------------ ------------ ------------ ------------
Gross margin 271,486 1,000,425 1,245,994 3,545,647
Selling and administrative expense 366,052 1,111,865 1,563,075 3,419,198
Loss on sale of subsidiary -- -- 2,505,918 --
Interest and other income (5,665) -- (14,169) (17,322)
Interest and other expense 45,809 203,794 321,228 664,890
------------ ------------ ------------ ------------
Earnings (loss) from operations
before income taxes (134,710) (315,234) (3,130,058) (521,119)
Income tax expense -- -- -- 3,000
------------ ------------ ------------ ------------
Net earnings (loss) $ (134,710) $ (315,234) $ (3,130,058) $ (524,119)
============ ============ ============ ============
Basic and diluted loss per share $ (.05) $ (.13) $ (1.27) $ (.21)
============ ============ ============ ============
Weighted average number of
common shares 2,465,229 2,465,229 2,465,229 2,465,229
============ ============ ============ ============
See notes to consolidated financial statements.
4
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
39 weeks ended
------------------------------
May 26, May 27,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,130,058) $ (524,119)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loss on sale of subsidiary 2,505,919
Depreciation and amortization 1,123,162 1,837,734
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (457,101) 1,641,758
(Increase) decrease in inventories 295,456 929,014
(Increase) decrease in prepaid expenses 58,741 21,729
Increase (decrease) in accounts payable and
accrued expenses (931,591) (1,410,108)
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Net cash provided by (used in) operations (535,472) 2,496,008
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 6,550 --
Purchase of property, plant and equipment (1,096) (175,960)
Purchase of subsidiary -- (280,600)
Sale of subsidiary 3,235,262 --
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Net cash provided by (used in) investing activities 3,240,716 (456,560)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (2,011,498) (2,320,048)
Proceeds from issuance of long term debt -- 280,600
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Net cash provided by (used in) financing activities (2,011,498) (2,039,448)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 693,746 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,292 6,300
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CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $ 702,038 $ 6,300
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 343,605 $ 678,358
Income taxes $ -- $ 7,500
Noncash investing and financing activities:
Acquisition of machinery through capital lease $ 606,618 $ 322,671
See notes to consolidated financial statements.
5
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of May 26, 2002, the
consolidated statements of operations for the thirteen weeks and
thirty-nine weeks ended May 26, 2002 and May 27, 2001 and the
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 balance sheet at August 26, 2001 is derived from the audited
balance sheet as of that date. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles 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 2001 annual report to
shareholders. The results of operations for interim periods are not
necessarily indicative of the operating results for the full year.
2. SALE OF SUBSIDIARY
On February 22, 2002, the Company completed the asset sale of one
of its subsidiaries, Bowman Tool & Machining, Inc., to W. Bowman
Consulting Company, an affiliate of the prior owner of Bowman. The
Company received approximately $3.2 million in cash from the sale, with
the buyer also assuming another $3.4 million in long-term debt as well
as purchasing $1.2 million in accounts receivable and inventory. The
buyer also assumed any remaining liabilities associated with amounts
due on the non-compete and employment agreements that were a result of
the original 1999 Bowman acquisition. The sale included substantially
all of the assets of Bowman. The Company retained approximately
$628,000 in accounts payable and accrued liabilities that were not part
of the sale.
The sale was completed at the close of the last working day of the
second quarter, so the consolidated statement of operations reflects
six months of activity for Bowman up through that date.
Correspondingly, the balance sheet reflects the reduction of the assets
and the assumption of certain debt that were a part of the sale.
3. DEBT AND LINE OF CREDIT:
Pursuant to the Bowman transaction, the Company paid off its
credit and security agreement with its bank. The agreement has been
terminated and no further amounts may be borrowed against it.
The Company also has a Subordinated Promissory Note issued in
connection with a prior acquisition with an original amount of
$1,663,000. The note bears interest at 7.75% payable quarterly.
Principal payments are due in three annual installments commencing
February 15, 2002. During the third quarter of fiscal 2002, the Company
made the first payment of $554,000 and correspondingly, the principal
balance remaining is $1,109,000 at May 26, 2002.
6
With the acquisition the prior owner was able to earn an
additional amount based on the profitability of Taurus for the period
February 15, 1999 to February 15, 2000. No amount was earned. The
contingent payment terms were detailed in the purchase agreement and
did not require continued employment of the former principal to be
earned.
WSI Industries also had a Subordinated Promissory Note in
connection with the original 1999 Bowman acquisition in the amount of
$1,935,000. With the completion of the sale back to the prior owner as
described in Note 2, the Subordinated Promissory Note was assumed by
the prior owner, and no further amounts are due.
Prior to the sale of Bowman, the Company had capitalized lease
debt totaling approximately $2.6 million. With the sale, the buyer
assumed capitalized lease debt of $1.5 million, with WSI keeping the
remaining $1.1 million. The remaining capitalized leases have monthly
payments of approximately $21,000 with principal payments due of:
Fiscal Year
Remainder of Fiscal 2002 $ 43,000
Fiscal 2003 181,000
Fiscal 2004 196,000
Fiscal 2005 198,000
Fiscal 2006 143,000
Fiscal 2007 154,000
After Fiscal 2007 153,000
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Total Principal Payments $ 1,068,000
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4. GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001 with early
adoption permitted for companies with fiscal years beginning after
March 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the statements.
Other intangible assets will continue to be amortized over their useful
lives.
The Company adopted the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of fiscal 2002.
Effective with the August 27, 2001 adoption of FAS 142, goodwill is no
longer amortized but is instead subject to an annual impairment test.
The company has not yet performed its transitional impairment test in
conjunction with the adoption of FAS 142.
Goodwill and other intangible assets resulting from acquisitions
of business and the formation of the Company consist of the following:
7
May 26, 2002 August 26, 2001
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Goodwill $ 2,428,264 $ 6,329,763
Less accumulated amortization 308,595 647,609
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$ 2,119,669 $ 5,682,154
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Other identifiable intangibles:
Organization Costs $ 285,000 $ 555,000
Less accumulated amortization 36,217 63,996
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$ 248,783 $ 491,004
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With the sale of the Bowman assets as described in Note 2., the
goodwill and organization costs related to Bowman were eliminated.
Goodwill amounted to $3,901,499 with related accumulated amortization
of $339,014. Organization costs were $270,000 with related accumulated
amortization of $27,779.
With the adoption of FAS 142 the Company ceased amortization of
goodwill as of August 27, 2001. The following table presents the
results of the Company for all periods presented on a comparable basis:
13 weeks ended 26 weeks ended
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May 26, May 27, May 26, May 27,
2002 2001 2002 2001
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Reported net loss
attributed to common shareholder $ (134,710) $ (315,234) $ (3,130,058) $ (524,119)
Add back amortization -- 95,548 -- $ 257,889
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Adjusted net loss
attributed to common shareholders $ (134,710) $ (219,686) $ (3,130,058) $ (266,230)
============= ============= ============== =============
Basic and diluted net loss per share:
Reported net loss
attributed to common shareholders $ (.05) $ (.13) $ (1.27) $ (.21)
Goodwill amortization $ -- $ .04 $ -- $ .10
------------- ----------- -------------- -------------
Adjusted net loss
attributed to common shareholders $ (.05) $ (.09) $ (1.27) $ (.11)
============= ============ ============== =============
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATIONS
Results of Operations:
Net sales of $2,145,000 for the quarter ending May 26, 2002
decreased 58% or $2,996,000 from the same period of the prior year.
Sales for the quarter were down compared to last year due primarily to
the sale of assets of a subsidiary as described in Note 2 of the
Financial Statements. Comparable sales with the one remaining division
(Taurus) in the prior year were $2,140,000. Year to date sales of
$10,609,000 were $6,477,000 or 38% less than the prior year.
Approximately 47% of the decrease is attributable to the sale of the
subsidiary assets. The remaining decrease, as discussed in previous
10-Q's, resulted from two major customers making the decision to
consign raw materials for their manufacturing programs to the Company
instead of WSI purchasing the material and subsequently reselling the
material to the customer after manufacturing. The Company also
experienced lower sales in the power system market as one customer
moved part of its production to Mexico, and due to the Company losing
one customer in the agriculture industry. All three factors, the
consigned inventory, the Mexico production, and the loss of the
customer, related to the subsidiary whose assets were sold and
therefore only affected sales in the first six months.
Comparable year to date sales for Taurus alone were $6,106,000 for
fiscal 2002 versus $6,586,000 for 2001. This decrease reflects the
downturn in the aerospace/avionics markets since the events of
September 11, 2001 partially offset by an increase in the recreational
vehicle market.
Gross margin for the Company decreased to 13% for the quarter as
compared to 19% in the prior year. The margin decreased in large
measure due to volume inefficiencies related to the softness of the
aerospace/avionics markets. It is also due to the
non-aerospace/avionics business consisting of higher material content
products. Comparable Taurus only margins for the prior year were 25%.
Gross margin year to date was 12% as compared to 21% in the year
prior period. The year to date margins were affected by a $255,000
increase in the Company's inventory obsolescence reserve made in the
second quarter due to the softening of the aerospace/avionics business.
Year to date margins for Taurus only were 9% and 28% for 2002 and 2001,
respectively.
Selling and administrative expense of $366,000 was $746,000 lower
than the prior year quarter. Year to date selling and administration
expense of $1,563,000 was $1,856,000 lower in fiscal 2002 than fiscal
2001. In 2001, selling and administrative expense included the carrying
costs of the Long Lake, Minnesota building that the Company eventually
sold in June 2001. The carrying costs included in selling and
administrative expense in 2001 amounted to $345,000 for the nine-month
period.
The Company's selling and administrative expense was also lower in
2002 due the Company's adoption of FAS 142 Goodwill and Other
Intangible Assets as outlined in Note 4.
The sale of the Bowman subsidiary generated approximately $285,000
in savings of selling and administrative expense in the third quarter
of fiscal 2002.
9
WSI's selling and administrative expense was also lower in 2002
due to cost containment measures that included lower salary and benefit
costs as well as professional service expense.
Interest and other expense decreased $158,000 for the quarter and
$344,000 year to date due to the lower levels of long term debt in
Fiscal 2002 versus Fiscal 2001. A portion of the interest expense
decrease relates to the sale of the Long Lake, Minnesota building and
the corresponding payoff of the mortgage related to the building.
Interest expense on the mortgage was included in fiscal 2001 expense up
through the sale in June. Interest expense is also lower due to the
elimination of the bank debt and subordinated promissory note as a
result of the sale of the Bowman subsidiary as more fully described in
Note 3 of the Financial Statements.
In the thirty-nine week period ended May 27, 2001, the Company
recorded a tax provision of $3,000 to cover mandatory state income
taxes and federal alternative minimum taxes. The Company has not
recorded the benefit of net operating losses and other net deductible
temporary differences in the consolidated statement of operations due
to the fact that the Company has not been able to establish that it is
more likely than not that the tax benefit will be realized.
Liquidity and Capital Resources:
On May 26, 2002 working capital was $1,354,000 compared to a
negative $1,001,000 at August 26, 2001, an increase of $2,355,000. The
increase resulted primarily from the sale of the Bowman assets
described in Note 2 and the resulting influx of cash and current
liability reduction due to the assignment and payoff of debt. The ratio
of current assets to current liabilities at May 27, 2002 and August 26,
2001 was 1.81 to 1.0 and .78 to 1.0, respectively.
As described previously in the Notes to Consolidated Statements,
the Company paid off its credit and security agreement with its bank as
of February 22, 2002. The term loan carried an interest rate at prime
plus .75%. The revolver rate was at prime plus .50%. No further amounts
may be borrowed under the agreement.
As also described in the Notes, the Company previously entered
into a subordinated promissory note with the former owner of Taurus for
approximately $1,109,000. Interest is accrued at a rate of 7.75% paid
quarterly. Principal payments are due in three equal installments
commencing on February 15, 2002. The Company made its first payment
during the third quarter of fiscal 2002.
The Company is presently finalizing a new line of credit agreement
with a new bank.
It is management's belief that its internally generated funds
combined with a new line of credit will be sufficient to enable the
Company to meet its financial requirements during fiscal 2002.
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 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 and are subject to certain risks and
uncertainties that could cause actual results to differ
10
materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which
speak only as of the date made. The following important factors, among
others, in some cases have affected and in the future could affect the
Company's actual results and could cause the Company's actual financial
performance to differ materially from that expressed in any
forward-looking statement: (i) the Company's ability to obtain
additional manufacturing programs and retain current programs; (ii) the
loss of significant business from any one of its current customers
could have a material adverse effect on the Company; (iii) a
significant downturn in the industries in which the Company
participates could have an adverse effect on the demand for Company
services; (iv) and the Company's ability to obtain new lending
agreements. The foregoing list should not be construed as exhaustive
and the Company disclaims any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
1. Not Applicable
PART II. OTHER INFORMATION:
Item 7. Exhibits and Reports on Form 8-K:
A. Form 8-K dated February 27, 2002 reporting the sale of
Bowman Tool & Machining, Inc.
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: July 7, 2002 /s/ Michael J. Pudil
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Michael J. Pudil, President & CEO
Date: July 7, 2002 /s/ Paul D. Sheely
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Paul D. Sheely, Vice President, Finance & CFO
11