e10qsb
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the quarterly period ended November 25, 2007
OR
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o |
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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
(Exact Name of Small Business Issuer, as Specified in Its Charter)
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Minnesota
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41-0691607 |
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(State or other jurisdiction of
incorporation of organization)
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(I. R. S. Employer
Identification No.) |
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213 Chelsea Road
Monticello, Minnesota
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55362 |
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(Address of principal executive offices)
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(Zip Code) |
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: 2,754,087 shares of common stock were outstanding as of December
31, 2007.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
2
Part I. Financial Information
Item I. Financial Statements
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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November 25, |
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August 26, |
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2007 |
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2007 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
1,850,182 |
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$ |
1,626,801 |
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Accounts receivable |
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3,026,160 |
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3,054,050 |
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Inventories |
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1,557,265 |
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1,899,299 |
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Prepaid and other current assets |
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234,380 |
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154,793 |
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Deferred tax assets |
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213,759 |
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162,535 |
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Total Current Assets |
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6,881,746 |
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6,897,478 |
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Property, Plant and Equipment Net |
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5,565,155 |
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4,520,382 |
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Deferred tax assets |
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701,259 |
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954,162 |
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Goodwill and other assets, net |
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2,377,820 |
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2,379,473 |
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$ |
15,525,980 |
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$ |
14,751,495 |
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Liabilities and Stockholders Equity |
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Current Liabilities: |
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Trade accounts payable |
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$ |
1,823,512 |
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$ |
2,200,544 |
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Accrued compensation and employee withholdings |
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531,164 |
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680,419 |
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Other accrued expenses |
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80,516 |
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125,038 |
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Current portion of long-term debt |
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643,006 |
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518,718 |
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Total Current Liabilities |
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3,078,198 |
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3,524,719 |
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Long-term debt, less current portion |
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4,243,335 |
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3,328,694 |
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Stockholders Equity: |
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Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,748,087 and 2,731,165 shares, respectively |
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274,808 |
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273,117 |
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Deferred compensation |
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(143,294 |
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(26,577 |
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Capital in excess of par value |
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2,351,734 |
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2,214,922 |
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Retained earnings |
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5,721,199 |
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5,436,620 |
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Total Stockholders Equity |
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8,204,447 |
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7,898,082 |
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$ |
15,525,980 |
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$ |
14,751,495 |
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See notes to condensed consolidated financial statements
3
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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13 weeks ended |
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November 25, |
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November 26, |
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2007 |
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2006 |
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Net sales |
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$ |
5,974,584 |
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$ |
4,129,379 |
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Cost of products sold |
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4,855,541 |
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3,418,115 |
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Gross margin |
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1,119,043 |
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711,264 |
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Selling and administrative expense |
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576,998 |
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462,244 |
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Gain on sale of equipment |
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(97,861 |
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Interest and other income |
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(22,105 |
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(16,215 |
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Interest and other expense |
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67,067 |
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44,932 |
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Earnings from operations
before income taxes |
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594,944 |
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220,303 |
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Income taxes |
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208,231 |
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83,715 |
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Net income |
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$ |
386,713 |
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$ |
136,588 |
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Basic earnings per share |
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$ |
.14 |
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$ |
.05 |
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Diluted earnings per share |
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$ |
.14 |
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$ |
.05 |
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Cash dividend per share |
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$ |
.0375 |
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$ |
.0375 |
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Weighted average number of common
shares outstanding, basic |
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2,723,559 |
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2,680,630 |
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Weighted average number of common
Shares outstanding, diluted |
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2,804,071 |
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2,715,376 |
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See notes to condensed consolidated financial statements.
4
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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13 weeks ended |
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November 25, |
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November 26, |
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2007 |
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2006 |
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Cash Flows From Operating Activities: |
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Net earnings |
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$ |
386,713 |
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$ |
136,588 |
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Adjustments to reconcile net earnings to net cash
provided by operating activities: |
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Depreciation |
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187,249 |
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113,158 |
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Amortization of deferred finance cost |
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1,653 |
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1,653 |
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Gain on sale of equipment |
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(97,861 |
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Deferred taxes |
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201,679 |
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80,215 |
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Stock option compensation expense |
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21,786 |
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16,509 |
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Changes in assets and liabilities: |
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Decrease in accounts receivable |
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27,890 |
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414,304 |
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(Increase) decrease in inventories |
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342,034 |
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(99,560 |
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(Increase) decrease in prepaid expenses |
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(79,587 |
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22,217 |
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Decrease in accounts payable and
accrued expenses |
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(570,809 |
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(29,983 |
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Net cash provided by operations |
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420,747 |
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655,101 |
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Cash Flows From Investing Activities: |
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Purchase of property, plant and equipment |
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(36,102 |
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(3,656 |
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Proceeds from sale of equipment |
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97,861 |
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Net cash provided by (used in) investing activities |
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61,759 |
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(3,656 |
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Cash Flows From Financing Activities: |
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Payments of long-term debt |
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(156,991 |
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(91,486 |
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Dividends paid |
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(102,134 |
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(100,525 |
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Net cash used in financing activities |
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(259,125 |
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(192,011 |
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Net Increase In Cash And Cash Equivalents |
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223,381 |
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459,434 |
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Cash And Cash Equivalents At Beginning Of Year |
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1,626,801 |
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1,282,717 |
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Cash And Cash Equivalents At End Of Reporting Period |
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$ |
1,850,182 |
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$ |
1,742,151 |
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Supplemental cash flow information: |
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Cash paid during the period for: |
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Interest |
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$ |
67,284 |
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$ |
45,154 |
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Income taxes |
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$ |
6,552 |
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$ |
3,500 |
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Non-cash investing and financing activities: |
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Acquisition of equipment through capital lease |
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$ |
1,195,920 |
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$ |
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See notes to condensed consolidated financial statements.
5
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. |
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CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: |
The condensed consolidated balance sheet as of November 25, 2007, the condensed
consolidated statements of income for the thirteen weeks ended November 25, 2007 and
November 26, 2006 and the condensed consolidated statements of cash flows for the thirteen
weeks then ended, respectively, have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include normal recurring adjustments)
necessary to present fairly the financial position, results of operations and cash flows for
all periods presented have been made.
The condensed consolidated balance sheet at August 26, 2007 is derived from the audited
consolidated balance sheet as of that date. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted.
Therefore, these condensed consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Companys 2007 annual report
to shareholders. The results of operations for interim periods are not necessarily
indicative of the operating results for the full year.
Inventories consist primarily of raw material, work-in-progress (WIP) and finished
goods and are valued at the lower of cost or market value:
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November 25, |
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August 26, |
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2007 |
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2007 |
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Raw material |
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$ |
338,658 |
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$ |
537,033 |
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WIP |
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773,141 |
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963,702 |
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Finished goods |
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445,466 |
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398,564 |
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$ |
1,557,265 |
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$ |
1,899,299 |
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3. |
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GOODWILL AND INTANGIBLE ASSETS |
Goodwill and other intangible assets consist of costs resulting from business acquisitions
which total $2,368,452 (net of accumulated amortization of $344,812 recorded prior to the
adoption of SFAS No. 142 Goodwill and Other Intangible Assets). The Company assesses the
valuation or potential impairment of its goodwill by utilizing a present value technique to
measure fair value by estimating future cash flows. The Company constructs a discounted
cash flow analysis based on various sales and cost assumptions to estimate the fair value of
the Company (which is the only reporting unit). The result of the analysis performed in the
fiscal 2007 fourth quarter did not indicate an impairment of goodwill. The Company will
analyze goodwill more frequently should changes in events or circumstances, including
reductions in anticipated cash flows generated by our operations, occur.
The Company recorded $33,063 of deferred financing costs incurred in connection with
mortgages entered into in order to purchase the Companys facility in Monticello, Minnesota.
The costs are being amortized over five years on a straight-line basis with the Company
incurring $1,653 of amortization expense for the quarters ended November 25, 2007 and
November 26, 2006, respectively.
6
During the quarter ended November 25, 2007, the Company entered into capitalized leases of
approximately $1.2 million in connection with the acquisition of machinery and equipment.
The leases carry interest rates that range from 6.3% to 6.9% and mature in 2014.
The following table sets forth the computation of basic and diluted earnings per share:
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Thirteen weeks ended |
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November 25, |
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November 26, |
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2007 |
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2006 |
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Numerator for earnings per share: |
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Net income |
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$ |
386,713 |
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$ |
136,588 |
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Denominator: |
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Denominator for basic earnings
per share weighted average shares |
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2,723,559 |
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2,680,630 |
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Effect of dilutive securities: |
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Employee and non-employee options |
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80,512 |
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34,746 |
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Dilutive
common shares
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Denominator for diluted earnings
per share |
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2,804,071 |
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2,715,376 |
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Basic earnings per share |
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$ |
.14 |
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$ |
.05 |
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Diluted earnings per share |
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$ |
.14 |
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$ |
.05 |
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7
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
or
PLAN OF OPERATION
Critical Accounting Policies and Estimates:
Managements Discussion and Analysis of Financial Condition and Results of Operations discuss
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.
We base our estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the result of which forms the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Results may differ from these estimates due to actual outcomes being different from
those on which we based our assumptions. The estimates and judgments utilized are reviewed by
management on an ongoing basis and by the audit committee of our board of directors at the end of
each quarter prior to the public release of our financial results. We made no changes to our
critical accounting policies during fiscal 2007 or in the first quarter of fiscal 2008.
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 excess and obsolete by analyzing
the sales history of its inventory, sales orders on hand and indications from the Companys
customers as to the future of various parts or programs. If, in the Companys 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.
If actual or expected customer requirements were significantly lower than the established reserves,
the Company would adjust inventory value down in the period in which the Company made such a
determination. 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 SFAS 142 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 Companys value given its limited trading volume and
its wide price fluctuations. The Company follows the guidance provided by SFAS 142 and utilizes a
present value technique to measure fair value by estimating future cash flows. The major
assumptions in this analysis include: (a) sales estimates for the Company in part provided with
guidance from the Companys customers; and (b) material and labor
costs of the Companys major programs. The Company
8
constructs a discounted cash flow analysis
based on these assumptions to estimate the fair value of the Company (which is the only reporting
unit). The result of the analysis performed in the fiscal 2007 fourth quarter did not indicate an
impairment of goodwill. If the Company has changes in events or circumstances, including
reductions in anticipated cash flows generated by our 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 difference between the financial reporting and tax bases of assets and
liabilities. A valuation allowance would be 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 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 Companys deferred tax assets have two major
components which relate to the Companys NOL and the Companys AMT tax credit carryforwards. The
Companys AMT tax credit carryforward does not expire. The Companys NOL carryforward has $2.9
million expiring in fiscal 2021 and after. The Company believes that its current rate of growth
will be sufficient to fully utilize its NOL carryforwards before they expire. However, a
significant loss of a customer or a change in the Companys business could affect the realization
of the deferred tax assets. If a major program were discontinued, the Company would immediately
assess the impact of the loss of the program on the realization of the deferred tax assets.
Revenue Recognition:
The Company considers its revenue recognition policy to fall under the guidance of FASBs
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 Companys price is fixed as evidenced by the purchase order; and (d)
collectibility 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 managements expectations.
Based on managements 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 Companys sales are sometimes reduced by product
returned by its customers.
Results of Operations:
Net sales were $5,975,000 for the quarter ending November 25, 2007, an increase of 45% from
the same period of the prior year. The increase in sales came primarily from increases in the
Companys energy business as well as its all terrain vehicle (ATV) market.
Sales from the Companys ATV and motorcycle markets were $3,757,000 and $3,341,000 for the
quarters ended November 25, 2007 and November 26, 2006, respectively. The 12% increase in sales in
the quarter ended November 25, 2007 as compared to November 26, 2006 came primarily from higher
volume in the ATV market.
The Company entered the energy field in the spring of 2007 with the addition of three new
programs. In the summer of 2007, the Company added a fourth program. Sales from the energy field
in the first quarter of fiscal 2008 amounted to approximately $1.4 million.
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Sales from the Companys aerospace and defense markets totaled $531,000 and $481,000 for the
quarters ended November 25, 2007 and November 26, 2006, respectively. The Company believes that
these increases are not a result of significant change in a customer or product requirement, but
rather a result of a general increase in the level of business with the Companys customers in
these markets. The addition of two new customers occurred late in fiscal 2007 and did not have a
significant impact in fiscal 2008 first quarter sales.
Sales from the Companys biosciences market totaled $146,000 for the quarter ended November
25, 2007, as compared to the prior year quarters amount of $239,000. The Company scaled back its
involvement in this market during fiscal 2007 as gross margins were not acceptable. Due to this,
the Company expects fiscal 2008 biosciences sales to be less than fiscal 2007 as the Company pares
unprofitable programs.
Gross margin for the quarters ended November 25, 2007 and November 26, 2006 were 19% and 17%,
respectively. The gross margin increase for the quarter ended November 25, 2007 is attributable to
higher efficiencies obtained from increased levels of manufacturing volume and the Companys
emphasis on making its various programs profitable.
Selling and administrative expense of $570,000 for the quarter ending November 25, 2007 was
$107,000 higher than in the prior year quarter due primarily to higher payroll and compensation
expense as well as higher professional service cost.
During the quarter ended November 25, 2007, and as part of its program to maintain its capital
equipment at the highest technical level, the Company sold some fully-depreciated equipment which
generated a gain on sale of equipment of $98,000.
Interest expense in the first quarter of fiscal 2008 was $67,000 compared to $45,000 in first
quarter of fiscal 2007 reflecting the investment in new equipment of approximately $2.7 million
made by the Company over the past five quarters.
The Company recorded income tax expense at an effective tax rate of 35% for the quarter ended
November 25, 2007 and 38% for quarter ended November 26, 2006.
Liquidity and Capital Resources:
On November 25, 2007, working capital was $3,804,000 compared to $3,373,000 at August 26,
2007. The ratio of current assets to current liabilities at November 25, 2007 was 2.24 to 1.0
compared to 1.96 to 1.0 at August 26, 2007. The improvement in both measurements is attributable
to the generation of cash from operations in the Companys fiscal 2008 first quarter. The
Companys cash balance increased $223,000 during the first quarter of fiscal 2008 which was derived
primarily from a lower level of inventory.
It is the Companys belief that its current cash balance, plus future internally generated
funds and its line of credit, will be sufficient to enable the Company to meet its working capital
requirements through the end of calendar year 2008. The Companys line of credit expires January
31, 2008; however, it expects that it will renew the line at that point. No amounts have been
borrowed under the line of credit which carries an interest rate at prime.
Cautionary Statement:
Statements included in this Managements Discussion and Analysis of Financial Condition and
Results of Operations, in future filings by the Company with the Securities and Exchange
Commission, in the Companys 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
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the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual
results to differ materially from historical earnings and those presently anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made and are not predictions of actual future results.
The following risks and uncertainties, as well as others not now anticipated, in some cases
have affected, and in the future could affect, the Companys actual results and could cause the
Companys actual financial performance to differ materially from that expressed in any
forward-looking statement: (i) the Companys ability to obtain additional manufacturing programs
and retain current programs; (ii) the Companys ability to timely and cost effectively ramp up new
programs; (iii) the loss of significant business from any one of its current customers could have
a material adverse effect on the Company; (iv) the Company was dependent upon one customer for 75%
of its revenues in fiscal year 2007 and expects that a significant portion of its future revenue
will be derived from this customer; (v) a significant downturn in the industries in which the
Company participates could have an adverse effect on the demand for Company services; (vi) our
sales are concentrated in a limited number of highly competitive industries, each with a limited
number of customers; (vii) the prices of our products are subject to a downward pressure from
customers and market pressure from competitors; (viii) the Companys ability to curtail its costs
and expenses for new manufacturing programs, commensurate with expected revenues; (ix) the
Companys ability to comply with covenants of its credit facility; (x) fluctuations in operating
results due to, among other things, changes in customer demand for our product in our manufacturing
costs and efficiencies of our operations; and (xi) a trend among our customers toward outsourcing
manufacturing to foreign operations.
The foregoing list should not be construed as exhaustive and the Company disclaims any
obligation subsequently to revise any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or unanticipated
events.
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ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The Companys Chief Executive Officer, Michael J. Pudil, and Chief Financial Officer, Paul D.
Sheely, have evaluated the Companys disclosure controls and procedures as of the end of the period
covered by this report. Based upon this review, they have concluded that these controls and
procedures are effective.
(b) Changes in Internal Controls over Financial Reporting.
There have been no changes in internal control financial reporting that occurred during the
fiscal period covered by this report that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION:
ITEM 6. EXHIBITS
A. The following exhibits are included herein:
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Exhibit 31.1
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Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of
the Exchange Act. |
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Exhibit 31.2
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Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of
the Exchange Act. |
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Exhibit 32
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Certificate pursuant to 18 U.S.C. §1350. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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WSI INDUSTRIES, INC.
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Date: January 9, 2008 |
/s/ Michael J. Pudil
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Michael J. Pudil, President & CEO |
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Date: January 9, 2008 |
/s/ Paul D. Sheely
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Paul D. Sheely, Vice President, Finance & CFO |
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