Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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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 29, 2009
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
WSI Industries, Inc.
(Exact name of registrant as specified in its charter)
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Minnesota
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41-0691607 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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213 Chelsea Road, Monticello, Minnesota
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55362 |
(Address of principal executive offices)
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(Zip Code) |
(763) 295-9202
(Registrants telephone number, including area code)
Not Applicable
(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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of larger
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: 2,880,909 shares of common stock were outstanding as of December
31, 2009.
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
2
Part I. Financial Information
Item 1. Financial Statements
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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November 29, |
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August 30, |
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2009 |
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2009 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
3,530,011 |
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$ |
2,879,952 |
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Accounts receivable |
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1,974,580 |
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2,735,586 |
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Inventories |
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1,932,282 |
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2,146,531 |
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Prepaid and other current assets |
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35,632 |
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51,902 |
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Deferred tax assets |
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160,040 |
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156,812 |
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Total Current Assets |
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7,632,545 |
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7,970,783 |
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Property, Plant and Equipment Net |
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7,249,879 |
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7,520,359 |
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Deferred tax assets |
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582,535 |
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644,277 |
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Other assets, net |
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2,368,452 |
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2,368,452 |
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$ |
17,833,411 |
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$ |
18,503,871 |
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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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$ |
1,434,263 |
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$ |
2,007,516 |
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Accrued compensation and employee withholdings |
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335,584 |
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313,071 |
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Other accrued expenses |
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119,994 |
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171,450 |
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Current portion of long-term debt |
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2,086,142 |
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2,075,672 |
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Total Current Liabilities |
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3,975,983 |
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4,567,709 |
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Long-term debt, less current portion |
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4,675,763 |
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4,901,748 |
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Stockholders Equity: |
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Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding
2,880,909 and 2,878,868 shares, respectively |
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288,091 |
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287,886 |
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Capital in excess of par value |
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2,842,781 |
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2,871,068 |
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Deferred compensation |
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(290,555 |
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(361,861 |
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Retained earnings |
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6,341,348 |
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6,237,321 |
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Total Stockholders Equity |
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9,181,665 |
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9,034,414 |
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$ |
17,833,411 |
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$ |
18,503,871 |
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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 29, |
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November 30, |
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2009 |
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2008 |
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Net sales |
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$ |
4,254,309 |
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$ |
6,035,431 |
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Cost of products sold |
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3,471,967 |
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5,208,766 |
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Gross margin |
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782,342 |
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826,665 |
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Selling and administrative expense |
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530,324 |
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582,540 |
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Interest and other income |
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(7,979 |
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(5,688 |
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Interest and other expense |
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97,457 |
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92,497 |
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Earnings from operations
before income taxes |
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162,540 |
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157,316 |
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Income taxes |
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58,514 |
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56,633 |
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Net income |
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$ |
104,026 |
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$ |
100,683 |
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Basic earnings per share |
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$ |
.04 |
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$ |
.04 |
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Diluted earnings per share |
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$ |
.04 |
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$ |
.04 |
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Cash dividend per share |
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$ |
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$ |
.0375 |
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Weighted average number of common
shares outstanding, basic |
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2,794,373 |
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2,784,514 |
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Weighted average number of common
Shares outstanding, diluted |
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2,794,373 |
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2,798,030 |
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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 29, |
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November 30, |
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2009 |
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2008 |
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Cash Flows From Operating Activities: |
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Net income |
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$ |
104,026 |
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$ |
100,683 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation |
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270,480 |
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237,297 |
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Amortization of deferred finance cost |
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1,654 |
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Deferred taxes |
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58,514 |
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55,433 |
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Stock option compensation expense |
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46,803 |
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34,979 |
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Changes in assets and liabilities: |
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Decrease in accounts receivable |
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761,006 |
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292,380 |
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(Increase) decrease in inventories |
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214,249 |
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(132,273 |
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(Increase) decrease in prepaid expenses |
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16,270 |
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(15,416 |
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Decrease in accounts payable and
accrued expenses |
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(605,774 |
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(390,512 |
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Net cash provided by operations |
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865,574 |
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184,225 |
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Cash Flows From Investing Activities: |
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Purchase of property, plant and equipment |
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(251,694 |
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Net cash used in investing activities |
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(251,694 |
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Cash Flows From Financing Activities: |
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Payments of long-term debt |
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(215,515 |
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(205,691 |
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Proceeds from issuance of long-term debt |
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625,000 |
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Dividends paid |
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(104,504 |
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Net cash provided by (used in) financing activities |
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(215,515 |
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314,805 |
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Net Increase In Cash And Cash Equivalents |
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650,059 |
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247,336 |
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Cash And Cash Equivalents At Beginning Of Year |
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2,879,952 |
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1,843,601 |
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Cash And Cash Equivalents At End Of Reporting Period |
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$ |
3,530,011 |
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$ |
2,090,937 |
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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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$ |
97,763 |
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$ |
92,736 |
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Payroll withholding taxes in cashless stock option exercise |
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$ |
3,577 |
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$ |
4,651 |
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Income taxes |
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$ |
3,486 |
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$ |
1,200 |
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Non-cash investing and financing activities: |
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Acquisition of equipment through capital lease |
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$ |
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$ |
919,043 |
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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 29, 2009, the condensed
consolidated statements of income for the thirteen weeks ended November 29, 2009 and
November 30, 2008 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. Subsequent events have been evaluated through January
13, 2010, the date the consolidated financial statements were issued.
The condensed consolidated balance sheet at August 30, 2009 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 2009 annual report
to shareholders on Form 10-K. The results of operations for interim periods are not
necessarily indicative of the operating results for the full year.
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 29, |
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August 30, |
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2009 |
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2009 |
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Raw material |
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$ |
273,465 |
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$ |
467,765 |
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WIP |
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1,077,583 |
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1,135,058 |
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Finished goods |
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581,234 |
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543,708 |
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$ |
1,932,282 |
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$ |
2,146,531 |
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Goodwill and other 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 2009 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 $1,653 of amortization
expense for the quarter ended November 30, 2008. The deferred financing costs are fully
amortized as of November 29, 2009.
6
The following table sets forth the computation of basic and diluted earnings per share:
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Thirteen weeks ended |
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November 29, |
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November 30, |
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2009 |
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2008 |
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Numerator for earnings per share: |
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Net income |
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$ |
104,026 |
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$ |
100,683 |
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Denominator: |
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Denominator for basic earnings
per share weighted average shares |
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2,794,373 |
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2,784,514 |
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Effect of dilutive securities: |
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Employee and non-employee options |
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13,516 |
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Dilutive common shares
Denominator for diluted earnings
per share |
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2,794,373 |
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2,798,030 |
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Basic earnings per share |
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$ |
.04 |
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$ |
.04 |
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Diluted earnings per share |
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$ |
.04 |
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$ |
.04 |
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7
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
And
RESULTS OF OPERATIONS
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.
The critical accounting policies and estimates followed in the preparation of the financial
information contained in this Quarterly Report on Form 10-Q are the same as those described in the
Companys Annual Report on Form 10-K for the year ended August 30, 2009. Refer to the Annual
Report on Form 10-K for detailed information on accounting policies.
Results of Operations:
Net sales were $4,254,000 for the first quarter of fiscal year 2010 ending November 29, 2009,
a 30% decrease from the same period of the prior year. The Companys fiscal first quarter sales
decreased across virtually all business lines due to the current economic recession and tight
credit conditions that have affected our customers.
Sales from the Companys ATV and motorcycle markets were $2,548,000 and $3,290,000 for the
quarters ended November 29, 2009 and November 30, 2008, respectively. Sales from the ATV market
decreased by a larger percentage during the fiscal 2009 first quarter as the decrease in the
motorcycle markets sales was mitigated by the Company becoming a sole source supplier on a
particular component it manufactures. Both sectors were negatively impacted by the economic
recession.
Sales from the Companys energy market amounted to $1,283,000 in the first quarter as compared
to $2,112,000 in the prior years first quarter. The decrease in sales is a result of decrease in
volume of orders from these customers that the Company believes is due to a combination of factors
including the recession, tight credit conditions, lower oil prices and a reduction in the demand of
the type of oilfield equipment the Company produces.
Sales from the Companys aerospace and defense markets totaled $369,000 and $486,000 for the
quarters ended November 29, 2009 and November 30, 2008, respectively. As stated in prior
paragraphs, the Company believes the decreases are due to the recession.
8
Sales from the Companys biosciences market totaled $54,000 for the quarter ended November 29,
2009, as compared to the prior year quarters amount of $123,000 with the recession believed to be
the reason for the decrease.
Gross margin for the quarters ended November 29, 2009 and November 30, 2008 were 18% and 14%,
respectively. The gross margin for the quarter ended November 29, 2009 was positively affected by
reductions in overhead that had been made in prior quarters in response to the economic downturn.
Gross margin in the current quarter was also positively affected by a lower material cost of sales
which was a result of a product mix that consisted of parts where material had been consigned to
the Company. The gross margin for the prior year quarter ended November 30, 2008 was negatively
impacted by start-up costs associated with programs in the energy market.
Selling and administrative expense of $530,000 for the quarter ending November 29, 2009 was
$52,000 lower than the prior years quarter. The decrease is primarily attributable to lower
compensation as well as professional service costs.
Interest expense in the first quarter of fiscal 2010 was $97,000 compared to $92,000 in first
quarter of fiscal 2009. This decrease reflected investments in new equipment and a building
addition completed late in the first quarter of fiscal 2009 that incurred little or no interest
expense in the fiscal 2009 first quarter.
The Company recorded income tax expense at an effective tax rate of 36% for the quarter ended
November 29, 2009 and November 30, 2008, respectively.
Liquidity and Capital Resources:
On November 29, 2009, working capital was $3,657,000 compared to $3,403,000 at August 30,
2009. The ratio of current assets to current liabilities at November 29, 2009 was 1.92 to 1.0
compared to 1.75 to 1.0 at August 30, 2009. The improvement in both measurements is attributable
to the generation of cash from operations in the Companys fiscal 2010 first quarter.
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 next 12 months. The Companys line of credit expires February 1, 2010;
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 LIBOR plus 2.75%.
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 the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and those presently
anticipated or projected. These risks and uncertainties are described in the Companys Annual
Report on Form 10-K for the year ended August 30, 2009, as well as other filings the Company makes
with the Securities and Exchange Commission. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of the date made and are
not predictions of actual future results. The Company disclaims any obligation subsequently to
revise any forward-looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
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ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was
performed under the supervision and with the participation of our management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)).
Based on that evaluation, the CEO and CFO have concluded that as of November 29, 2009 our
disclosure controls and procedures were not effective because of the material weakness in internal
control over financial reporting in the areas of segregation of duties and adequacy of personnel as
a result of the Companys reduction in staff during the quarter ended May 31, 2009.
Due to the lack of financial and personnel resources, we do not intend to take any action at
this time to increase our financial accounting staff to remediate this material weakness and the
corresponding deficiency in disclosure controls, but will continue to rely on our remaining staff
and historic oversight of management to provide reasonable assurances regarding the reliability of
our financial reporting.
(b) Changes in Internal Controls over Financial Reporting.
There have been no changes in internal control over financial reporting that occurred during
the fiscal period covered by this report that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION:
ITEM 1A. RISK FACTORS
Not Applicable.
ITEM 6. EXHIBITS
A. The following exhibits are included herein:
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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. |
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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 13, 2010
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/s/ Michael J. Pudil
Michael J. Pudil, CEO
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Date: January 13, 2010
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/s/ Paul D. Sheely
Paul D. Sheely, Vice President, Finance & CFO
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