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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
EXCHANGE ACT OF 1934
For the quarterly period ended May 28, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
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.)
Wayzata, Minnesota 55391
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(Address of principal executive offices) (Zip Code)
(952) 473-1271
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(Registrant's telephone number, including area code)
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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
------ ------
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, 2000.
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WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
Page No.
-------
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets May 28, 2000 (Unaudited)
and August 29, 1999 3
Consolidated Statements of Operations
Thirteen and Thirty-Nine weeks ended May 28, 2000
Thirteen and Thirty-Nine weeks ended May 30, 1999 (Unaudited) 4
Consolidated Statements of Cash Flows
Thirty-Nine weeks ended May 28, 2000 and Thirty-Nine weeks
ended May 30, 1999 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6, 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8, 9, 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk 10
PART II. OTHER INFORMATION:
Item 7. Exhibits and Reports on Form 8-K 11
Signatures 11
</TABLE>
2
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Part I. Financial Information
Item I. Financial Statements
WSI INDUSTRIES, INC
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
MAY 28, AUGUST 29,
ASSETS 2000 1999
------ ---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 6,300 $ 131,588
Accounts receivable 3,741,344 2,962,268
Inventories 3,042,069 3,491,900
Prepaid and other current assets 124,824 72,478
------------- -------------
Total Current Assets 6,914,537 6,658,234
Property, Plant and Equipment - Net 11,096,123 12,181,909
Intangible Assets 5,494,509 5,684,869
------------- -------------
$ 23,505,169 $ 24,525,012
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Revolving credit facility $ 0 $ 279,578
Trade accounts payable 3,161,501 1,438,324
Accrued compensation and employee withholdings 748,256 627,731
Miscellaneous accrued expenses 450,619 716,655
Acquisition payments due 0 742,733
Current portion of long-term debt 1,284,011 1,442,199
------------- -------------
Total Current Liabilities 5,644,387 5,247,220
Long term debt, less current portion 9,124,405 10,666,120
Long term pension liability 0 347,437
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding 2,465,229
and 2,453,425 shares respectively 246,523 245,343
Capital in excess of par value 1,640,934 1,600,302
Retained earnings 6,848,920 6,418,590
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Total Stockholders' Equity 8,736,377 8,264,235
------------- -------------
$23,505,169 $24,525,012
============= =============
</TABLE>
See notes to consolidated financial statements
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WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
13 weeks ended 39 weeks ended
--------------------------------- -------------------------------
May 28, May 30, May 28, May 30,
2000 1999 2000 1999
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 9,085,495 $ 5,989,247 $ 24,091,137 $ 15,359,113
Cost of products sold 7,211,702 5,033,490 20,091,913 13,412,318
-------------- ------------- ------------- --------------
Gross margin 1,873,793 955,757 3,999,224 1,946,795
Selling and administrative expense 1,159,232 729,191 3,354,778 1,851,490
Pension curtailment (gain) (121,375) (353,375)
Gain on sale of equipment (394,682)
Severance costs - 248,507
Interest and other income (19,212) (5,286) (57,760) (137,952)
Interest and other expense 237,231 177,218 753,327 304,295
-------------- ------------- ------------- -----------
Earnings (loss) from operations
before income taxes 617,917 54,634 448,429 (71,038)
Income tax expense 15,100 (2,700) 18,100 15,800
-------------- -------------- ------------- -----------
Net earnings (loss) $ 602,817 $ 57,334 $ 430,329 $ (86,838)
============== ============= ============= ===============
Basic earnings per share $ .24 $ .02 $ .17 $ (.04)
============== ============= ============= ===============
Diluted earnings per share $ .23 $ .02 $ .17 $ (.03)
============== ============= ============= ===============
Weighted average number of
common shares 2,465,229 2,453,425 2,460,897 2,451,307
========= ========= ========= =========
Weighted average number of
common and dilutive potential
common shares 2,567,145 2,522,801 2,535,726 2,540,934
========= ========= ========= =========
See notes to consolidated financial statements.
</TABLE>
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WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
39 weeks ended
------------------------------
May 28, May 30,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 430,329 $ (86,838)
Adjustments to reconcile net earnings to net cash:
provided by operating activities:
Gain on sale of property, plant & equipment (394,682) (38,858)
Depreciation and amortization 1,761,076 1,057,660
(Decrease) in pension liability (347,437) (23,413)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (779,076) 1,149,669
(Increase) decrease in inventories 449,831 (680,521)
(Increase) decrease in prepaid expenses (52,346) 104,869
Increase (decrease) in accounts payable and
accrued expenses 834,934 (1,193,867)
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Net cash provided by operations 1,902,629 288,701
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 746,165 47,730
Purchase of property, plant and equipment (430,788) (230,038)
Increase in goodwill 27,000
Purchase of subsidiary (net of cash acquired) - (6,533,324)
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Net cash provided by (used in) investing activities 342,377 (6,715,632)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (2,412,107) (1,094,623)
Proceeds from issuance of long term debt - 4,816,200
Issuance of common stock 41,813 8,250
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Net cash provided by (used in) financing activities (2,370,294) 3,729,827
-------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (125,288) (2,697,104)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 131,588 2,697,104
------------- ---------
CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $ 6,300 $ 0
============= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 760,517 $ 282,773
Income taxes $ 25,083 $ 33,561
Noncash investing and financing activities:
Acquisition of machinery through capital lease $ 432,625 $ 980,250
See notes to consolidated financial statements.
</TABLE>
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WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of May 28, 2000, the
consolidated statements of operations for the thirteen weeks and
thirty-nine weeks ended May 28, 2000 and May 30, 1999 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 29, 1999 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 1999 annual report to
shareholders. The results of operations for interim periods are not
necessarily indicative of the operating results for the full year.
The Company acquired Taurus Numeric Tool, Inc. on February 15,
1999. The Company subsequently acquired Bowman Tool and Machining, Inc.
on August 6, 1999. Accordingly, the balance sheet as of May 28, 2000
and statements of operations and cash flows for the thirteen and
thirty-nine weeks ended May 28, 2000 include the effects of both Taurus
and Bowman for the entire respective periods. However, the statements
of operations and cash flows for the previous year only reflect
approximately 15 weeks of Taurus activity and no activity of Bowman as
it had not yet been acquired.
2 BUSINESS CONSOLIDATION AND RELOCATION
During the first and second quarters of fiscal 2000, the
Company closed its Long Lake, Minnesota facility and transferred all of
its production to its Taurus and Bowman subsidiaries. As a result of
this consolidation, the Company incurred severance costs of $248,507in
the first quarter of 2000 for employees terminated or given notice in
that period. WSI was also able to sell excess production equipment
during the first half of the year which contributed a gain of $394,682.
Concurrent with the consolidation decision, the Company also decided to
terminate its defined benefit pension plan which resulted in a gain of
$353,375.
3. DEBT AND LINE OF CREDIT:
Pursuant to the Bowman transaction, the Company amended its
credit and security agreement with its bank. The amended agreement
calls for a term loan in the principal amount of $4,400,000 and a
revolving credit facility in the maximum amount of $3,000,000. Interest
is accrued at prime plus .75% for the term loan and prime plus .50% for
the revolving credit facility payable monthly. Each facility has a
LIBOR rate option. The term loan is payable in equal monthly
installments of $52,381 of principal commencing August 31, 1999 and
matures March 31, 2002. At May 28, 2000, the outstanding balance on the
term loan was $2,928,571 while there was no outstanding balance on the
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revolving facility. The fair value of the term debt is estimated to be
its carrying value since the debt has a variable interest rate.
During fiscal 1999, the Company obtained a mortgage with the
same bank that it has its term debt and line of credit facility. The
agreement requires monthly principal payments of $13,889, plus interest
at prime plus 1.0% and has a balance at May 28, 2000 of $2,375,000.
The Company also entered into Subordinated Promissory Notes
with the former owners of Taurus and Bowman in the total amount of
$2,507,000. The notes bear interest at 7.75% payable quarterly.
Principal payments are due in three annual equal installments
commencing on February 15, 2002 for the Taurus related note and August
6, 2002 for the Bowman related note.
4. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 Earnings per
Share. Statement 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earning per share.
Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
13 weeks ended 39 weeks ended
------------------------------ -------------------------------
May 28, May 30, May 28, May 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Net Earnings (loss) $ 602,817 $ 57,334 $ 430,329 $ (86,838)
======= ====== ======= =======
Denominator:
Denominator for basic earnings
per share - weighed average shares 2,465,229 2,453,425 2,460,897 2,451,307
Effect of dilutive securities:
Employee/Director stock options 101,916 69,376 74,829 89,627
----------- ----------- ----------- -----------
Dilutive potential common shares
Denominator for diluted earnings
per share-adjusted weighted shares
and assumed conversions 2,567,145 2,522,801 2,535,726 2,540,934
========= ========= ========= =========
Basic earnings per share $ .24 $ .02 $ .17 $ (.04)
========== =========== ========== ============
Diluted earnings per share $ .23 $ .02 $ .17 $ (.03)
========== =========== ========== ===========
</TABLE>
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATIONS
Results of Operations:
Net sales of $9,085,000 for the quarter ending May 28, 2000
increased 52% or $3,096,000 from the same period of the prior year.
Sales growth for the quarter was generated by the addition of the
Bowman subsidiary, as well as an improvement in the agribusiness market
over the prior year. The agribusiness market accounted for
approximately 39% of sales in the third quarter. Sales to Deere &
Company amounted to approximately 61% of sales during the quarter.
Sales year to date were $24,091,000 a 57% increase over year to date
fiscal 1999. The sales growth came from the additions of Taurus and
Bowman as well as increases in the agriculture market.
Gross margin improved to 21% as compared to 16% in the year
ago quarter, reflecting the improved efficiencies of the Bowman and
Taurus operations as well as improvements related to volume increases.
Gross margin year to date was 17% for the current year compared to 13%
in the prior year again reflecting the addition of Bowman and Taurus as
well as increased volumes.
Selling and administrative expense of $1,159,000 for the
quarter was $430,000 higher than in the prior year quarter. Year to
date selling and administrative expense was up $1,503,000 versus fiscal
1999. The amounts were higher due to the addition of Taurus and Bowman
selling and administrative expense as well as the related intangible
asset amortization not incurred in the prior year.
Interest and other expense increased $60,000 in the quarter
versus the prior year quarter due to the debt incurred on the Bowman
transaction not being reflected in the prior years financials.
During Fiscal 2000, WSI sold excess manufacturing equipment
with a net book value of $351,000 for $746,000, generating a gain of
$395,000. The Long Lake, Minnesota facility in now closed and the
building is for sale.
In the thirty-nine week period ended May 28, 2000, the Company
recorded a tax provision of $18,100 to cover mandatory state income
taxes and federal alternative minimum taxes, and was able to recognized
the benefit of a portion of its net operating loss carry-forwards. 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 28, 2000 working capital was $1,270,000 compared to
$1,411,000 at August 29, 1999, a decrease of $141,000. The level of
current assets and current liabilities have risen during the
thirty-nine weeks of Fiscal 2000 in conjunction with the overall
increase in the level of business versus the fourth quarter of fiscal
1999. The ratio of current assets to current liabilities at May 28,
2000 and August 29, 1999 was 1.23 to 1.0 and 1.27 to 1.0, respectively.
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As described previously in the Notes to Consolidated
Statements, the Company amended its credit and security agreement with
its bank on August 6, 1999. Currently, the Company owes $2,929,000 on
its term loan facility but does not have a balance due on its revolving
facility. The revolving facility had $3,000,000 of availability at May
28, 2000. The term loan carries an interest rate at prime plus .75%.
The revolver rate is at prime plus .50%. The Company paid down
$1,000,000 in addition to its regular monthly payments on the term loan
during the quarter.
The Company also entered into a mortgage with the same bank on
August 6, 1999 as outlined in the Notes to Consolidated Statements. The
Company currently owes $2,375,000 with interest paid at prime plus
1.0%.
As also described in the Notes, the Company entered into a
subordinated promissory note with the former owner of Taurus for
approximately $1,663,000. Interest is accrued at a rate of 7.75% paid
quarterly. Principal payments are due in three equal annual
installments commencing on February 15, 2002. The Company also has a
subordinated promissory note of $844,000 with the former owner of
Bowman. Interest is accrued at 7.75% payable quarterly with principal
payments due in equal annual installments commencing August 6, 2002.
Total capitalized lease debt of $2,597,000 on May 28, 2000 was
$105,000 lower than on August 29, 1999. The decrease resulted from the
net effect of principal payments of $538,000 offset by a new capital
lease of $433,000.
It is management's belief that its internally generated funds
combined with the line of credit will be sufficient to enable the
Company to meet its financial requirements during fiscal 2000.
Year 2000 Compliance:
As of June 30, 2000, the Company has not experienced any
material effects from the Year 2000 conversion.
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 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, principally the agricultural industry, could
have an adverse effect on the demand for Company services. The
foregoing list should not be construed as exhaustive and the Company
disclaims any obligation
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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
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PART II. OTHER INFORMATION:
------------------
Item 7. Exhibits and Reports on Form 8-K:
A. Exhibit 27. Financial Data Schedule, Q3, Fiscal 2000
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 10, 2000 /s/ Michael J. Pudil
------------- -----------------------------------
Michael J. Pudil, President & CEO
Date: July 10, 2000 /s/ Paul D. Sheely
------------- ------------------------------------
Paul D. Sheely, Vice President, Finance & CFO
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