UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2010

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

WSI Industries, Inc.

Minnesota		41-0691607
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

213 Chelsea Road, Monticello, Minnesota		55362
(Address of principal executive offices)		(Zip Code)

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.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		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 issuer’s classes of common stock, as of the latest practicable date: 2,888,492 shares of common stock were outstanding as of March 31, 2010.

 

 

WSI INDUSTRIES, INC.

AND SUBSIDIARIES

INDEX

		Page No.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets February 28, 2010 and August 30, 2009 (Unaudited)			3
Condensed Consolidated Statements of Income Thirteen and Twenty-Six weeks ended February 28, 2010 and March 1, 2009 (Unaudited)			4
Condensed Consolidated Statements of Cash Flows Twenty-Six weeks ended February 28, 2010 and March 1, 2009 (Unaudited)			5
Notes to Condensed Consolidated Financial Statements (Unaudited)			6-7
Item 2. Management’s Discussion and Analysis of Financial Condition or Plan of Operation			8 - 10
Item 4. Controls and Procedures			10 - 11
PART II. OTHER INFORMATION:
Item 1A. Risk Factors			11
Item 4. Submission of Matters to a Vote of Security Holders			11
Item 6. Exhibits			12
Signatures			12
Exhibit 31.1
Exhibit 31.2
Exhibit 32

Part 1. Financial Information

Item 1. Financial Statements

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

		February 28,				August 30,
		2010				2009
Assets
Current Assets:
Cash and cash equivalents		$	3,928,899			$	2,879,952
Accounts receivable			2,147,147				2,735,586
Inventories			1,856,747				2,146,531
Prepaid and other current assets			75,249				51,902
Deferred tax assets			179,506				156,812
Total Current Assets			8,187,548				7,970,783
Property, Plant and Equipment – Net			6,990,640				7,520,359
Deferred tax assets			547,388				644,277
Goodwill and other assets, net			2,368,452				2,368,452
		$	18,094,028			$	18,503,871
Liabilities and Stockholders’ Equity
Current Liabilities:
Trade accounts payable		$	1,633,106			$	2,007,516
Accrued compensation and employee withholdings			380,849				313,071
Other accrued expenses			281,493				171,450
Current portion of long-term debt			2,098,997				2,075,672
Total Current Liabilities			4,394,445				4,567,709
Long-term debt, less current portion			4,444,997				4,901,748
Stockholders’ Equity:
Common stock, par value $.10 a share; authorized 10,000,000 shares; issued and outstanding 2,888,492 and 2,878,868 shares, respectively			288,850				287,886
Capital in excess of par value			2,846,927				2,871,068
Deferred compensation			(250,414	)			(361,861	)
Retained earnings			6,369,223				6,237,321
Total Stockholders’ Equity			9,254,586				9,034,414
		$	18,094,028			$	18,503,871

See notes to condensed consolidated financial statements.

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

		13 weeks ended								26 weeks ended
		February 28,				March 1,				February 28,				March 1,
		2010				2009				2010				2009
Net sales		$	4,059,599			$	4,001,424			$	8,313,908			$	10,036,855
Cost of products sold			3,402,154				3,809,624				6,874,121				9,018,390
Gross margin			657,445				191,800				1,439,787				1,018,465
Selling and administrative expense			531,075				557,666				1,061,399				1,140,206
Interest and other income			(9,545	)			(4,045	)			(17,524	)			(9,732	)
Interest expense			92,359				117,147				189,817				209,643
Income (loss) before income taxes			43,556				(478,968	)			206,095				(321,652	)
Income taxes (benefits)			15,681				(172,429	)			74,195				(115,796	)
Net income (loss)		$	27,875			$	(306,539	)		$	131,900			$	(205,856	)
Basic earnings (loss) per share		$	.01			$	(.11	)		$	.05			$	(.07	)
Diluted earnings (loss) per share		$	.01			$	(.11	)		$	.05			$	(.07	)
Cash dividend per share		$	—			$	—			$	—			$	.0375
Weighted average number of common shares outstanding, basic			2,800,107				2,788,897				2,797,240				2,786,706
Weighted average number of common shares outstanding, diluted			2,800,107				2,788,897				2,797,240				2,786,706

See notes to condensed consolidated financial statements.

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		26 weeks ended
		February 28,				March 1,
		2010				2009
Cash Flows From Operating Activities:
Net income (loss)		$	131,900			$	(205,856	)
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation			540,255				508,264
Amortization			—				3,306
Deferred taxes			74,195				(96,996	)
Stock option compensation expense			105,095				83,777
Changes in assets and liabilities:
Decrease (increase) in accounts receivable			588,439				(18,392	)
Decrease (increase) in inventories			289,784				(25,582	)
Decrease (increase) in prepaid expenses			(23,347	)			25,803
Decrease in accounts payable and accrued expenses			(213,412	)			(531,639	)
Net cash provided by (used in) operations			1,492,909				(257,315	)
Cash Flows From Investing Activities:
Purchase of property, plant and equipment			(10,536	)			(402,521	)
Net cash used in investing activities			(10,536	)			(402,521	)
Cash Flows From Financing Activities:
Payments of long-term debt			(433,426	)			(409,638	)
Proceeds from issuance of long-term debt			—				625,000
Dividends paid			—				(104,504	)
Net cash provided by (used in) financing activities			(433,426	)			110,858
Net Increase (Decrease) In Cash And Cash Equivalents			1,048,947				(548,978	)
Cash And Cash Equivalents At Beginning Of Year			2,879,952				1,843,601
Cash And Cash Equivalents At End Of Reporting Period		$	3,928,899			$	1,294,623
Supplemental cash flow information:
Cash paid during the period for:
Interest		$	190,696			$	206,849
Income taxes		$	3,486			$	1,200
Payroll withholding taxes in cashless stock option exercise		$	16,823			$	9,540
Non cash investing and financing activities:
Acquisition of equipment through capital lease		$	—			$	919,043

See notes to condensed consolidated financial statements.

WSI INDUSTRIES, INC.
AND SUBSIDIARIES

(Unaudited)

1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

The condensed consolidated balance sheet as of February 28, 2010, the condensed consolidated statements of income for the thirteen and twenty-six weeks ended February 28, 2010 and March 1, 2009 and the condensed consolidated statements of cash flows for the twenty-six 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 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 Company’s 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.

2.

INVENTORIES:

Inventories consist primarily of raw material, work-in-progress (WIP) and finished goods and are valued at the lower of cost or market value:

		February 28,				August 30,
		2010				2009
Raw material		$	294,402			$	467,765
WIP			1,014,302				1,135,058
Finished goods			548,043				543,708
		$	1,856,747			$	2,146,531

3.

GOODWILL AND OTHER ASSETS:

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 Company’s facility in Monticello, Minnesota. The costs are being amortized over five years on a straight-line basis with the Company incurring $1,653 and $3,306 of amortization expense for the quarter and year-to-date periods ended March 1, 2009, respectively. The deferred financing costs are fully amortized as of February 28, 2010.

4.

DEBT AND LINE OF CREDIT:

Effective February 1, 2010, the Company renewed its revolving credit agreement in the maximum amount of $1 million with its bank. Interest on the renewed agreement is at LIBOR plus 2.75%, however the rate shall never go below a floor of 4.50%. At February 28, 2010, the effective rate was 4.50%. The agreement also contains restrictive provisions concerning yearly capital expenditures, a maximum debt to net worth ratio, a minimum current ratio, a minimum net worth and a minimum debt service coverage ratio. The Company is in compliance with all of the covenants of the agreement as of February 28, 2010. The credit agreement is secured by all assets of the Company, expires February 1, 2011 and does not have an outstanding balance at February 28, 2010.

5.

EARNINGS PER SHARE:

The following table sets forth the computation of basic and diluted earnings per share:

		Thirteen weeks ended								Twenty-Six weeks ended
		February 28,				March 1,				February 28,				March 1,
		2010				2009				2010				2009
Numerator for basic and diluted earnings per share:
Net income (loss)		$	27,875			$	(306,539	)		$	131,900			$	(205,856	)
Denominator
Denominator for basic earnings per share – weighted average shares			2,800,107				2,788,897				2,797,240				2,786,706
Effect of dilutive securities:
Employee and non-employee options			—				—				—				—
Dilutive common shares
Denominator for diluted earnings per share			2,800,107				2,788,897				2,797,240				2,786,706
Basic earnings (loss) per share		$	.01			$	(.11	)		$	.05			$	(.07	)
Diluted earnings (loss) per share		$	.01			$	(.11	)		$	.05			$	(.07	)

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND

RESULTS OF OPERATIONS

Critical Accounting Policies and Estimates:

Management’s 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 Company’s 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 $4,060,000 for the thirteen weeks ending February 28, 2010, an increase of 1.5% or $58,000 from the same period of the prior year. Year-to-date sales in fiscal 2010 are $8,314,000 compared to $10,037,000 in the prior year which equates to a 17.2% decrease. Total Company sales by product markets are as follows:

		Fiscal Second Quarter Thirteen Weeks Ended																				Fiscal Second Quarter Year-to-Date Ended
						Percent								Percent				Dollar								Percent								Percent				Dollar
		February				of Total				March				of Total				Percent				February				of Total				March				of Total				Percent
		28, 2010				Sales				1, 2009				Sales				Change				28, 2010				Sales				1, 2009				Sales				Change
ATV & Motorcycle		$	2,476,000				61	%		$	1,869,000				47	%			32	%		$	5,024,000				61	%		$	5,154,000				51	%			-3	%
Energy			1,040,000				26	%			1,635,000				41	%			-36	%			2,324,000				28	%			3,747,000				37	%			-38	%
Aerospace & Defense			333,000				8	%			375,000				9	%			-11	%			682,000				8	%			861,000				9	%			-21	%
Bioscience			119,000				3	%			97,000				2	%			23	%			173,000				2	%			220,000				2	%			-21	%
Other			92,000				2	%			25,000				1	%			268	%			111,000				1	%			55,000				1	%			102	%
Total Sales		$	4,060,000				100	%		$	4,001,000				100	%			1	%		$	8,314,000				100	%		$	10,037,000				100	%			-17	%

Sales from the Company’s ATV and Motorcycle markets were up 32% for the fiscal 2010 second quarter as compared to the prior year quarter due primarily to the Company being the sole source supplier on a select product line in fiscal 2010 while the product line was multi-sourced in the prior year quarter. Year-to-date sales for the ATV and Motorcycle markets were down slightly in fiscal 2010 as compared to fiscal 2009 as the positive effects of the product line sole sourcing described previously was offset by a volume decrease in sales in both the ATV and motorcycle segments.

Sales from the Company’s energy business for the fiscal second quarter and year-to-date periods declined by 36% and 38%, respectively. The Company believes that the reduction of the volume of orders from its customers in this segment is due to a combination of factors including the recession, tight credit conditions, lower oil prices and a reduction in the demand of the particular type of oilfield equipment the Company manufactures.

Sales from the Company’s aerospace and defense markets declined at a slower pace in the Company’s fiscal 2010 second quarter as compared to the fiscal 2010 first quarter. The lower sales in both quarter and year-to-date periods are believed to be due to the economic recession.

Sales from the Company’s biosciences market increased in the fiscal 2010 second quarter as compared to the prior year quarter with the mix of parts sold being the determining factor for the increase as opposed to an increase in volume. Sales year-to-date to the biosciences industry remain down as compared to the prior year which is believed to be still due to the recession.

Sales from the Company’s other category increased in the fiscal 2010 second quarter as compared to the prior year quarter as the Company shipped orders of what it believes will be a one-time sale of repair parts. The Company’s fiscal 2010 year-to-date sales are higher than the prior year for the same reason.

Gross margin increased to 16% for the quarter ending February 28, 2010 versus 5% in the prior year period. Year-to-date gross margins were 17% and 10% for the twenty-six week periods ending February 28, 2010 and March 1, 2009, respectively. The increase in gross margin in the fiscal 2010 second quarter is partially attributable to a lower percentage of material and outside services content in product shipped during the quarter. Thus the value added sales — net sales less material and outside services — were higher during the fiscal 2010 second quarter as compared to the prior year. So while the Company’s overall sales were fairly flat year on year in the fiscal second quarter, the Company’s value added sales were up 16% and this increase in the volume of value added sales, in combination with cost reduction efforts, were the primary drivers in the increase in the gross margin percentage in the fiscal 2010 second quarter. The Company’s year-to-date gross margins were up as compared to the prior year period for largely the same reasons previously described. However, the increase in year-to-date gross margins year over year was somewhat lessened as the fiscal 2009 first quarter had higher sales volumes than the fiscal 2010 first quarter.

Selling and administrative expense of $531,000 for the quarter ending February 28, 2010 was $27,000 lower than in the prior year period due primarily to lower compensation expense as a result of cost reduction measures. Year-to-date selling and administrative expense of $1,061,000 was $79,000 lower than the comparable prior year period due primarily to the same reason. Included in selling and administrative expense are non-cash stock option compensation expense costs related to the adoption of SFAS 123(R) in the amount of $58,000 and $49,000 for the quarters ended February 28, 2010 and March 1, 2009, respectively. The year-to-date stock option compensation expenses are $105,000 and $84,000 for the periods ended February 28, 2010 and March 1, 2009, respectively.

Interest expense in the second quarter of fiscal 2010 was $92,000, which was $25,000 lower than the second quarter of fiscal 2009 amount of $117,000. Year-to-date interest expense for fiscal 2010 of $190,000 was lower than the prior year-to-date amount by $20,000. The lower interest costs are due primarily to lower levels of debt.

The Company recorded income tax expense at an effective tax rate of 36% for the quarter and year-to-date periods ended February 28, 2010 and March 1, 2009.

Liquidity and Capital Resources:

On February 28, 2010 working capital was $3,793,000 as compared to $3,403,000 at August 30, 2009. The ratio of current assets to current liabilities at February 28, 2010 was 1.86 to 1.0 compared to 1.75 to 1.0 at August 30, 2009. In fiscal 2010, the Company’s primary source of funds came from operations as it generated $1,493,000 as compared to the prior year when the Company actually used $257,000 in operations. The Company’s primary uses of funds in fiscal 2010 have been payments of long-term debt as compared to fiscal 2009 where the primary uses of funds were the purchase of property, plant and equipment.

As discussed in the Notes to Condensed Consolidated Financial Statements, the Company renewed its $1,000,000 revolving credit agreement with its bank during the fiscal 2010 second quarter. Interest on the renewed agreement is at LIBOR plus 2.75%, however the rate shall never go below a floor of 4.50%.

It is the Company’s 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.

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 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 Company’s 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.

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(e) and 15d-15(e)). Based on that evaluation, the CEO and CFO have concluded that as of February 28, 2010 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 Company’s 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 Company’s internal control over financial reporting.

PART II. OTHER INFORMATION:

Item 1A. RISK FACTORS.

Not Applicable.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Annual Meeting of the Shareholders of the Company was held on January 6, 2010. Of the 2,880,952 shares of common stock issued and outstanding and entitled to vote at the close of business on November 9, 2009, shareholders holding 2,438,412 shares were present at the Annual Meeting either in person or by proxy. The following describes the matters considered by the Company’s shareholders at the Annual Meeting, as well as the results of the votes cast at the Annual Meeting:

A. To elect five (5) directors to hold office until the next Annual Meeting of Shareholders or until their respective successors have been elected and shall qualify.

Name of Nominee:
Paul Baszucki		For			694,317			Withhold			62,775			Broker non-vote			1,681,320
Thomas C. Bender		For			696,192			Withhold			60,900			Broker non-vote			1,681,320
Burton F. Myers II		For			702,872			Withhold			54,220			Broker non-vote			1,681,320
Eugene J. Mora		For			693,176			Withhold			63,916			Broker non-vote			1,681,320
Michael J. Pudil		For			700,605			Withhold			56,487			Broker non-vote			1,681,320

Each director nominee was elected by the shareholders.

B. To ratify the appointment of Schechter Dokken Kanter Andrews & Selcer Ltd as independent auditors.

For			2,434,908			Against			583			Abstain			2,921

The shareholders approved the appointment.

Item 6. EXHIBITS.

A. The following exhibits are included herein:

Exhibit 31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of the Exchange Act.
Exhibit 31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of the Exchange Act.
Exhibit 32		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.