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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 November 26, 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)
Not Applicable
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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 December 31, 2000.
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WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets November 26, 2000
(Unaudited) and August 27, 2000 3
Consolidated Statements of Operations
Thirteen weeks ended November 26, 2000 and
November 28, 1999 (Unaudited) 4
Consolidated Statements of Cash Flows
Thirteen weeks ended November 26, 2000 and
November 28, 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
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 10
PART II. OTHER INFORMATION:
Signatures 10
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>
ASSETS NOVEMBER 26, AUGUST 27,
2000 2000
--------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 138,189 $ 6,300
Accounts receivable 2,650,754 3,713,198
Inventories 2,118,802 2,738,346
Prepaid and other current assets 139,958 148,206
--------------- ---------------
Total current assets 5,047,703 6,606,050
Property, plant and equipment, net 10,239,502 10,655,696
Intangible assets, net 6,088,118 6,169,919
--------------- ---------------
$ 21,375,323 $ 23,431,665
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility $ $ 369,134
Trade accounts payable 1,319,487 2,041,089
Accrued compensation and employee withholdings 642,437 857,739
Accrued real estate taxes 118,822 151,230
Miscellaneous accrued expenses 263,476 229,719
Current portion of long-term debt 1,299,780 1,236,460
--------------- ---------------
Total current liabilities 3,644,002 4,885,371
Long-term debt, less current portion 8,719,220 9,601,003
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 7,124,644 7,057,834
--------------- ---------------
Total stockholders' equity 9,012,101 8,945,291
--------------- ---------------
$ 21,375,323 $ 23,431,665
=============== ===============
</TABLE>
See notes to consolidated financial statements.
3
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WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
13 weeks ended
---------------------------------
November 26, November 28,
2000 1999
-------------- ---------------
<S> <C> <C>
Net sales $ 6,575,040 $ 7,294,952
Cost of products sold 5,133,613 6,267,595
-------------- ---------------
Gross margin 1,441,427 1,027,357
Selling and administrative expense 1,139,174 979,700
Pension curtailment (gain) (232,000)
Gain on sale of equipment (269,073)
Severance costs 248,507
Interest and other income (13,037) (6,981)
Interest and other expense 245,480 253,530
-------------- ---------------
Earnings from operations
before income taxes 69,810 53,674
Income tax expense 3,000 3,000
-------------- ---------------
Net earnings $ 66,810 $ 50,674
============== ===============
Basic earnings per share $ .03 $ 0.02
============== ===============
Diluted earnings per share $ .03 $ 0.02
============== ===============
Weighted average number of
common shares 2,465,229 2,455,073
========= =========
Weighted average number of
common and dilutive potential
common shares 2,510,697 2,503,793
========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
13 weeks ended
-------------------------------
November 26, November 28,
2000 1999
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 66,810 $ 50,674
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Gain on sale of property, plant & equipment - (269,071)
Depreciation and amortization 610,379 594,379
(Decrease) in pension liability - (226,062)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 1,062,444 (704,725)
(Increase) decrease in inventories 619,544 480,544
(Increase) decrease in prepaid expenses 8,248 20,600
Increase (decrease) in accounts payable and
accrued expenses (935,553) 74,855
-------------- -------------
Net cash provided by operations 1,431,872 21,194
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment - 562,000
Purchase of property, plant and equipment (112,386) (54,556)
-------------- --------------
Net cash provided by (used in) investing activities (112,386) 507,444
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt and revolving facility (1,187,597) (672,050)
Issuance of common stock - 18,125
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Net cash provided by (used in) financing activities (1,187,597) (653,925)
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 131,889 (125,287)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,300 131,588
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $ 138,189 $ 6,301
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for:
Interest $ 249,438 $ 253,003
Income taxes $ 7,500 $ 0
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of November 26, 2000, the
consolidated statements of operations for the thirteen weeks ended
November 26, 2000 and November 28, 1999 and the 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 balance sheet at August 27, 2000 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 2000 annual report to
shareholders. The results of operations for interim periods are not
necessarily indicative of the operating results for the full year.
2. Business Consolidation and Relocation - Prior Year First Quarter
Financial Impact:
On September 2, 1999, the Company announced that it was
closing its Long Lake, Minnesota facility and transferring all of it
production to its Taurus and Bowman subsidiaries. As a result of this
consolidation, the Company incurred severance costs in the first
quarter of 1999 of $248,507 for employees terminated or given notice in
that period. WSI was also able to sell excess production equipment in
the quarter which contributed a gain on sales of $269,073. Concurrent
with the consolidation decision, the Company also decided to terminate
its defined benefit pension plan that resulted in a gain of $232,000.
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 and
expires March 31, 2002. Interest is accrued at prime plus .75% for the
term loan and prime plus .50% for the revolving credit facility. 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. At November 26, 2000, the outstanding balance on the term loan
was $2,114,000 while there was no outstanding balance on the 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 currently has its term debt and line of credit facility.
The agreement requires monthly principal payments of $13,889 and has a
balance at November 26,2000 of $2,292,000. Interest on the mortgage is
calculated at the bank's base rate plus 1.0% and is paid monthly. The
entire balance is due August 6, 2004.
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The Company also entered into Subordinated Promissory Notes
with both of the former owners of Taurus and Bowman in the total amount
of $3,257,000. The notes bear interest at 7.75% with interest payable
quarterly. Principal payments are due in three equal installments
commencing annually on February 15, 2002 for the Taurus related note
and August 6, 2002 for the Bowman related note. In connection with the
Bowman acquisition, the seller has one remaining contingent earnout
that could be met if certain profitability targets are attained. Any
contingency earned would be added to the principal of the subordinated
promissory 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>
Thirteen weeks ended
----------------------------------------
November 26, November 28,
2000 1999
----------------------------------------
<S> <C> <C>
Numerator for basic and diluted earnings per share:
Net Earnings $ 66,810 $ 50,672
====== ======
Denominator:
Denominator for basic earnings
per share - weighed average shares 2,465,229 2,455,073
Effect of dilutive securities:
Employee/and non-employee options 45,468 48,720
------------- --------------
Dilutive common shares
Denominator for diluted earnings
per share 2,510,697 2,503,793
========= =========
Basic earnings per share $ 0.03 $ 0.02
==== ====
Diluted earnings per share $ 0.03 $ 0.02
==== ====
</TABLE>
7
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATIONS
Results of Operations:
Net sales were $6,575,000 for the quarter ending November 26,
2000, a decrease of 10% or $1,720,000 from the same period of the prior
year. The sales decrease was as a result of two major customers making
the decision to consign raw materials for their manufacturing programs
to the Company, instead of WSI purchasing those materials and
subsequently reselling the material to the customer after
manufacturing. The percent of sales for the first quarter of fiscal
2001 and 2000 were split between the following major markets:
2001 2000
---- ----
Agriculture 39% 29%
Construction &
Power Systems 22% 29%
Aerospace/Avionics 13% 21%
Recreational Vehicle 12% 6%
Gross margin increased to 22% versus 14% in the year ago
period. Gross margin was enhanced by a combination of the consigned
material effect described above, as well as the increased efficiency of
the operations versus the prior year which included consolidation
related expenses.
Selling and administrative expense of $1,139,000 was $159,000
higher than in the prior year period. The amount was higher primarily
due to the carrying cost of the Long Lake, Minnesota facility that has
been closed and listed for sale which was included in selling and
administrative expense in fiscal 2001, but not in fiscal 2000 as it was
still being utilized.
In the thirteen week period ended November 26, 2000, the
Company recorded a tax provision of $3,000 to cover mandatory state
income taxes and federal alternative minimum taxes, and was able to
recognize 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 benefits will be realized.
Liquidity and Capital Resources:
On November 26, 2000, working capital was $1,404,000 compared
to $1,721,000 at August 27, 2000. The decrease of $317,000 was due
primarily to the decrease in the level of accounts receivable. The
August 27, 2000 balances were unusually high due to a high level of
sales in the month of August. When the balances were collected,
$500,000 was used to pay down long-term debt. The ratio of current
assets to current liabilities at November 26, 2000 and August 27, 2000
was 1.38 to 1.0 and 1.35 to 1.0, respectively.
8
<PAGE> 9
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 $2,114,000 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
November 26, 2000. The term loan carries an interest rate at prime plus
.75%. The revolver rate is at prime plus .50%. The Company has paid
down almost $2,300,000 on its term facility since its inception in
August 1999.
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 $2,292,000 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
$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 $1,594,000 with the former owner of Bowman. Interest
is accrued at 7.75% payable quarterly with principal payments due in
equal installments commencing August 6, 2002. The seller of Bowman has
one potential contingent earnout that could be met if certain
profitability targets are attained. If earned, the contingency would be
added to the principal of the subordinated promissory note.
Total capitalized lease debt of $2,356,000 on November 26,
2000 was $120,000 lower than on August 29, 1999. The decrease resulted
from payments on the leases with no new additions during the quarter.
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 2001.
Cautionary Statement:
Statements included in this Management's Discussion and
Analysis of Financial Condition and Results of Operations, in the
letter to shareholders, 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 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.
9
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
1. Not applicable.
PART II. OTHER INFORMATION:
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: January 9, 2001 /s/ Michael J. Pudil
--------------- -----------------------------------------
Michael J. Pudil, President & CEO
Date: January 9, 2001 /s/ Paul D. Sheely
--------------- -----------------------------------------
Paul D. Sheely, Vice President & CFO
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