-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KPNWJn4kNl0Ex9GmSgu/qTRH4vytzTy5epuJdBoiipPcfsa6Mx46pl9zeiRhANPM Yzj0Gdn72CUvYSF8xAGLKg== 0000950137-07-009365.txt : 20070628 0000950137-07-009365.hdr.sgml : 20070628 20070628101645 ACCESSION NUMBER: 0000950137-07-009365 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20070527 FILED AS OF DATE: 20070628 DATE AS OF CHANGE: 20070628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WSI INDUSTRIES, INC. CENTRAL INDEX KEY: 0000104897 STANDARD INDUSTRIAL CLASSIFICATION: METALWORKING MACHINERY & EQUIPMENT [3540] IRS NUMBER: 410691607 STATE OF INCORPORATION: MN FISCAL YEAR END: 0828 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-00619 FILM NUMBER: 07945431 BUSINESS ADDRESS: STREET 1: 213 CHELSEA ROAD CITY: MONTICELLO STATE: MN ZIP: 55362 BUSINESS PHONE: 763-295-9202 MAIL ADDRESS: STREET 1: 213 CHELSEA ROAD CITY: MONTICELLO STATE: MN ZIP: 55362 FORMER COMPANY: FORMER CONFORMED NAME: WSI INDUSTRIES INC DATE OF NAME CHANGE: 19990113 FORMER COMPANY: FORMER CONFORMED NAME: WASHINGTON SCIENTIFIC INDUSTRIES INC DATE OF NAME CHANGE: 19920703 10QSB 1 c16339e10qsb.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-QSB (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 27, 2007 OR [ ] 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 small business issuer, as specified in its charter) Minnesota 41-0691607 (State or other jurisdiction of (IRS Employer incorporation of organization) Identification No.)
213 Chelsea Road Monticello, Minnesota 55362 (Address of principal executive offices) (Zip Code)
(763) 295-9202 (Issuer's telephone number, including area code) ________________________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report) Indicate by check whether the small business issuer (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 small business issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the small business issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate by check mark if the small business issuer is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X] 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. 2,722,046 shares of common stock were outstanding as of June 22, 2007. WSI INDUSTRIES, INC. AND SUBSIDIARIES INDEX
Page No. -------- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Condensed Consolidated Balance Sheets May 27, 2007 (Unaudited) and August 27, 2006 3 Condensed Consolidated Statements of Operations Thirteen and Thirty-nine weeks ended May 27, 2007 and May 28, 2006 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows Thirty-nine weeks ended May 27, 2007 and May 28, 2006 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 13 Item 3. Controls and Procedures 13 PART II. OTHER INFORMATION: Item 6. Exhibits 14 Signatures 14
2 Part I. Financial Information Item 1. Financial Statements WSI INDUSTRIES, INC AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
AUGUST 27, MAY 27, 2007 2006 ------------ ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,295,085 $ 1,282,717 Accounts receivable 2,918,850 2,347,494 Inventories 1,448,507 1,223,842 Prepaid and other current assets 97,685 115,239 Deferred tax assets 143,627 133,448 ----------- ----------- Total Current Assets 5,903,754 5,102,740 ----------- ----------- Property, Plant and Equipment - Net 4,133,852 3,602,583 ----------- ----------- Deferred tax assets 1,003,581 1,320,940 ----------- ----------- Intangible assets, net 2,381,126 2,386,085 ----------- ----------- $13,422,313 $12,412,348 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 1,618,873 $ 1,129,190 Accrued compensation and employee withholdings 519,240 531,537 Miscellaneous accrued expenses 61,409 174,462 Current portion of long-term debt 473,346 376,116 ----------- ----------- Total Current Liabilities 2,672,868 2,211,305 ----------- ----------- Long term debt, net of current portion 3,055,899 2,709,768 ----------- ----------- STOCKHOLDERS' EQUITY: Common stock, par value $.10 a share; authorized 10,000,000 shares; issued and outstanding 2,722,046 and 2,680,630 shares, respectively 272,205 268,063 Capital in excess of par value 2,135,013 2,129,167 Prepaid stock compensation (26,025) -- Retained earnings 5,312,353 5,094,045 ----------- ----------- Total Stockholders' Equity 7,693,546 7,491,275 ----------- ----------- $13,422,313 $12,412,348 =========== ===========
See notes to condensed consolidated financial statements. 3 WSI INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
13 weeks ended 39 weeks ended ----------------------- ------------------------- May 27, May 28, May 27, May 28, 2007 2006 2007 2006 ---------- ---------- ----------- ----------- Net sales $5,237,690 $4,215,323 $13,807,227 $11,959,139 Cost of products sold 4,248,881 3,446,944 11,336,389 9,936,477 ---------- ---------- ----------- ----------- Gross margin 988,809 768,379 2,470,838 2,022,662 Selling and administrative expense 582,566 459,399 1,555,023 1,250,210 Interest and other income (14,494) (12,260) (64,072) (31,992) Interest expense 51,493 43,809 139,777 127,275 ---------- ---------- ----------- ----------- Earnings from operations before income taxes 369,244 277,431 840,110 677,169 Income tax expense 140,313 105,423 319,242 257,324 ---------- ---------- ----------- ----------- Net earnings $ 228,931 $ 172,008 $ 520,868 $ 419,845 ========== ========== =========== =========== Basic earnings per share $ .08 $ .06 $ .19 $ .16 ========== ========== =========== =========== Diluted earnings per share $ .08 $ .06 $ .19 $ .15 ========== ========== =========== =========== Cash dividend per share $ .0375 $ .0375 $ .1125 $ .1125 ========== ========== =========== =========== Weighted average number of common shares 2,706,792 2,680,630 2,691,385 2,676,850 ========== ========== =========== =========== Weighted average number of common and dilutive potential common shares 2,768,480 2,722,050 2,733,635 2,722,409 ========== ========== =========== ===========
See notes to condensed consolidated financial statements. 4 WSI INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
39 weeks ended ----------------------- May 27, May 28, 2007 2006 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 520,868 $ 419,845 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 365,380 456,702 Amortization 4,959 4,959 Gain on disposal of equipment (18,000) -- Deferred taxes 307,180 257,324 Stock option compensation expense 48,192 -- Changes in assets and liabilities: Increase in accounts receivable (571,356) (215,762) Increase in inventories (224,665) (196,128) (Increase) decrease in prepaid expenses 17,554 (15,091) Increase in accounts payable and accrued expenses 285,699 172,902 ---------- ---------- Net cash provided by operations 735,811 884,751 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of equipment 18,000 -- Purchase of property, plant and equipment (143,340) (72,817) ---------- ---------- Net cash used in investing activities (125,340) (72,817) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of long-term debt (309,948) (244,215) Issuance of common stock 14,405 23,500 Dividends paid (302,560) (301,049) ---------- ---------- Net cash used in financing activities (598,103) (521,764) ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 12,368 290,170 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,282,717 937,575 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $1,295,085 $1,227,745 ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 139,867 $ 127,264 Income taxes $ 4,630 $ 3,152 Payroll taxes in cashless stock option exercise $ 78,634 $ -- Non-cash investing and financing activities: Acquisition of machinery through capital lease $ 753,309 $ 182,879
See notes to condensed consolidated financial statements. 5 WSI INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: The condensed consolidated balance sheet as of May 27, 2007, the condensed consolidated statements of operations for the thirteen and thirty-nine weeks ended May 27, 2007 and May 28, 2006 and the condensed 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 condensed consolidated balance sheet at August 27, 2006 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 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 2006 annual report to shareholders. 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. The following table breaks out the values in each category net of the inventory valuation allowances of $168,773 and $168,782 at May 27, 2007 and August 27, 2006, respectively.
May 27, August 27, 2007 2006 ---------- ---------- Raw material $ 555,337 $ 569,799 WIP 510,645 380,521 Finished goods 382,525 273,522 ---------- ---------- $1,448,507 $1,223,842 ========== ==========
The Company did not dispose of any significant obsolete inventory during the quarter ended May 27, 2007 and therefore there was no material effect on gross margin from any dispositions. 3. GOODWILL AND INTANGIBLE ASSETS: Goodwill and other intangible assets consist of costs resulting from business acquisitions which total $2,368,452 (net of accumulated amortization of $344,812). 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 2006 fourth quarter did not show 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. 6 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 of amortization expense for the quarters ended May 27, 2007 and May 28, 2006, respectively. Accumulated amortization on the deferred financing costs amounted to $20,388 and $15,429 at May 27, 2007 and August 27, 2006, respectively. 4. EARNINGS PER SHARE: The following table sets forth the computation of basic and diluted earnings per share:
Thirteen weeks ended Thirty-nine weeks ended ----------------------- ----------------------- May 27, May 28, May 27, May 28, 2007 2006 2007 2006 ---------- ---------- ---------- ---------- Numerator for basic and diluted earnings per share: Net earnings $ 228,931 $ 172,008 $ 520,868 $ 419,845 ========== ========== ========== ========== Denominator Denominator for basic earnings per share - weighted average shares 2,706,792 2,680,630 2,691,385 2,676,850 ========== ========== ========== ========== Effect of dilutive securities: Employee and non-employee options 61,688 41,420 42,250 45,559 ========== ========== ========== ========== Dilutive common shares Denominator for diluted earnings Per share 2,768,480 2,722,050 2,733,635 2,722,409 ========== ========== ========== ========== Basic earnings per share $ .08 $ .06 $ .19 $ .16 ========== ========== ========== ========== Diluted earnings per share $ .08 $ .06 $ .19 $ .15 ========== ========== ========== ==========
7 5. STOCK BASED COMPENSATION Effective August 28, 2006, the Company adopted the provisions of SFAS No. 123(R), "Share-Based Payment," which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123(R), stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees' requisite service period (generally the vesting period of the equity grant). Before August 28, 2006, the Company accounted for stock-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and complied with the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company adopted SFAS 123(R) using the modified prospective method, which requires the Company to record compensation expense over the vesting period for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Accordingly, financial statements for the periods prior to August 28, 2006 have not been restated to reflect the fair value method of expensing share-based compensation. For the thirteen and thirty-nine weeks ended May 27, 2007, the Company recognized share based compensation cost of $13,681 and $48,192, respectively. The compensation cost is included in selling and administrative expense. The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted and unvested under the Plan for the thirteen and thirty-nine weeks ended May 28, 2006:
Thirteen Thirty-Nine Weeks Weeks --------- ----------- Net income $ 172,008 $419,845 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (12,966) (38,898) ========= ======== Pro forma net income $ 159,042 $380,947 ========= ======== Basic and diluted net income per share: Proforma basic per share $ .06 $ .14 ========= ======== Proforma diluted per share $ .06 $ .14 ========= ========
SFAS No. 123 (R) also requires the benefit of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than an operating cash flow under current accounting literature. Since we do not have the benefit of tax deductions in excess of recognized compensation cost because of our net operating loss position, the change will have no immediate impact on our consolidated financial statements. The Company granted shares of restricted stock to various employees during the fiscal 2007 second quarter. The restricted stock vests over three years, however the grantees of the restricted stock are entitled to receive dividends in additional shares of restricted stock that also vest yearly and to voting rights for the shares. The shares are accounted for under SFAS No. 123(R) as expense over the period that they vest. The shares are also reflected in stockholder's equity as prepaid stock compensation which is calculated at the value of the shares at the date of the grant. 8 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 discusses the Company's condensed 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. The Company believes that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so the Company considers these to be its critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates the Company uses in applying the critical accounting policies. Within the context of these critical accounting policies, the Company is not currently aware of any reasonably likely event that would result in materially different amounts being reported. Allowance for Excess and Obsolete Inventory: Inventories, which are composed of raw materials, work in process and finished goods, are valued at the lower of cost or market by comparing the cost of each item in inventory to its most recent sales price or sales order price. Any excess of cost over the net realizable value of inventory components is included in the allowance for obsolete inventory. In addition, the Company determines the reserve for excess and obsolete inventory by analyzing the sales history of its inventory, sales orders on hand and indications from the Company's customers as to the future of various parts or programs. If, in the Company's determination, the inventory value has become impaired, the Company establishes an obsolescence reserve at the amount the Company estimates as the ultimate net realizable value for that inventory. The obsolescence reserve remains on the Company's books until the inventory is disposed of or sold. Actual customer requirements in any future periods are inherently uncertain and thus may differ from our estimates. If actual or expected customer requirements were significantly lower than the established reserves, the Company would record an increase to the obsolescence allowance in the period in which the Company made such a determination. The Company performs its lower of cost or market testing, as well as its excess or obsolete inventory analyses, quarterly. The Company's allowance for obsolete inventory consists of the following at May 27, 2007 and August 27, 2006:
May 27, 2007 August 27, 2006 ------------ --------------- Obsolete finished goods $ 98,358 $ 87,917 Obsolete work-in-process 6,900 6,900 Cost exceeding market value 63,515 73,965 -------- -------- $168,773 $168,782
The Company has no specific timeline to dispose of its remaining obsolete inventory and intends to sell this obsolete inventory from time to time, as market conditions allow. 9 Goodwill Impairment: The Company evaluates the valuation of its goodwill according to the provisions of SFAS 142 to determine if the current value of goodwill has been impaired. The Company believes that its stock price is not necessarily an indicator of the Company's value given its limited trading volume and its wide price fluctuations. The Company follows the guidance provided by SFAS 142 and utilizes a present value technique to measure fair value by estimating future cash flows. The major assumptions in this analysis include: (a) sales estimates for the Company in part provided with guidance from the Company's customers; and (b) material and labor costs of the Company's major programs. The Company constructs a discounted cash flow analysis based on these assumptions to estimate the fair value of the Company (which is the only reporting unit). The result of the analysis performed in the fiscal 2006 fourth quarter did not show an impairment of goodwill. If the Company has changes in events or circumstances, including reductions in anticipated cash flows generated by our operations, goodwill could become impaired which would result in a charge to earnings. Deferred Taxes: The Company accounts for income taxes using the liability method. Deferred income taxes are provided for temporary difference between the financial reporting and tax bases of assets and liabilities. A valuation allowance would be set up should the realization of any deferred taxes become less likely than not to occur. The valuation allowance is analyzed periodically by the Company and may result in income tax expense different than statutory rates. The Company has not established a valuation allowance as it believes it is more likely than not that it will fully realize the benefit of its tax assets. Currently, the Company's deferred tax assets have two major components which relate to the Company's NOL and the Company's AMT tax credit carryforwards. The Company's AMT tax credit carryforward does not expire. The Company's NOL carryforward has $112,000 expiring in fiscal year 2009, $415,000 in fiscal 2011 and $3.1 million expiring in fiscal 2021 and after. The Company believes that its current rate of growth will be sufficient to fully utilize its NOL carryforwards before they expire. However, a significant loss of a customer or a change in the Company's business could affect the realization of the deferred tax assets. If a major program were discontinued, the Company would immediately assess the impact of the loss of the program on the realization of the deferred tax assets. Revenue Recognition: The Company considers its revenue recognition policy to fall under the guidance of FASB's conceptual framework for revenue recognition. The Company recognizes revenue only after: (a) The Company has received a purchase order identifying price and delivery terms or services to be rendered; (b) shipment has occurred, or in the case of services, after the service has been completed; (c) the Company's price is fixed as evidenced by the purchase order; and (d) collectibility is reasonably assured. The Company continually monitors its accounts receivable for any delinquent or slow paying accounts. The Company believes that based upon its past history with minimal bad debt write-offs, that all accounts are collectible upon shipment or delivery of services. Credit losses customers have been minimal and within management's expectations. Based on management's evaluation of uncollected accounts receivable, bad debts are provided for on the allowance method. Accounts are considered delinquent if they are 120 days past due. If an uncollectible account should arise during the year, it would be written-off at the point it was determined to be uncollectible. The Company mitigates its credit risk by performing periodic credit checks and actively pursuing past due accounts. The Company refers to "net sales" in its consolidated statements of operations as the Company's sales are sometimes reduced by product returned by its customers. 10 Results of Operations: Net sales were $5,238,000 for the quarter ending May 27, 2007 compared to $4,215,000 in the same period of the prior year. Year-to-date sales in fiscal 2007 were $13,807,000 compared to $11,959,000 in the prior year. Third quarter sales for fiscal 2007 were up 24% versus the prior year quarter due to the Company experiencing an increase in sales in both its ATV and motorcycle markets. The Company also recorded sales in its new energy market of $410,000. Year-to-date sales are up 15% versus the prior year with higher sales in both the Company's recreational vehicle, biosciences and energy markets. Sales from the Company's recreational vehicle market amounted to $4,078,000 and $3,437,000 for the quarters ended May 27, 2007 and May 28, 2006, respectively. Year-to-date sales for the Company's recreational vehicle market were $10,948,000 and $9,836,000 for the thirty-nine weeks ended May 27, 2007 and May 28, 2006, respectively. Sales for the quarter and year-to-date ended May 27, 2007 were higher due to sales increases from both the Company's ATV market and motorcycle markets. However, in its upcoming fiscal 2007 fourth quarter, the Company will incur a planned reduction in one of its product lines in its recreational vehicle market. Sales from the Company's aerospace and defense markets amounted to $511,000 and $472,000 for the quarter ended May 27, 2007 and May 28, 2006, respectively. Year-to-date sales for the Company's aerospace and defense markets were $1,582,000 and $1,504,000 for the thirty-nine weeks ended May 27, 2007 and May 28, 2006, respectively. The Company believes these increases are a result from a general increase in the level of the Company's aerospace and defense business with its current customers. Sales from the Company's biosciences market totaled $207,000 and $163,000 for the quarter ended May 27, 2007 and May 28, 2006, respectively. Year-to-date sales for the biosciences market were $797,000 and $352,000 for the nine months ended May 27, 2007 and May 28, 2006, respectively. The year-to-date increase is attributable to the further implementation of the partnering arrangement announced in June 2005. In March 2007, the Company announced that it had secured a new customer in the energy industry. In the fiscal 2007 third quarter, the Company sales from that customer were $410,000. Year-to-date sales in the energy industry are $433,000. Gross margin increased to 18.9% for the quarter ending May 27, 2007 versus 18.2% in the prior year quarter. The increase was related to higher sales volume, but was offset by start-up expenses incurred the energy industry product lines. Similarly, the year-to-date gross margin was 17.9% compared to 16.9% in the prior year. Selling and administrative expense was $583,000 for the quarter ending May 27, 2007, an increase of $123,000 over the prior year. Year-to-date selling and administrative expense of $1,555,000 was $305,000 higher than the comparable prior year period. Increases in both the current quarter and year-to-date periods are due to increased compensation as well as professional service costs. As referenced in Footnote 5, selling and administrative expense was also increased due to the adoption of FAS 123 (R) in fiscal 2007 with the Company recognizing $13,681 and $48,192 of stock option compensation expense in the quarter and year-to-date periods ended May 27, 2007, respectively. Interest expense in the third quarter of fiscal 2007 was $51,000 as compared to $44,000 in the prior year. Year-to-date interest expense for fiscal 2007 was $140,000 versus $127,000 in the prior year. Interest expense is up due to new capitalized leases entered into during the fiscal 2007 second and third quarters. The Company recorded income tax expense at an effective tax rate of 38% for the quarter and year to date periods ended May 27, 2007 and May 28, 2006. 11 Liquidity and Capital Resources On May 27, 2007, working capital was $3,231,000 compared to $2,891,000 at August 27, 2006. The increase in working capital is attributable primarily to an increase in the level of accounts receivable coming from the increased level of business. The ratio of current assets to current liabilities at May 27, 2007 was 2.21 to 1.0 compared to 2.31 to 1.0 at August 27, 2006. The Company renewed its $1,000,000 revolving credit facility with its bank during the Company's second quarter of fiscal 2007. Interest on the new agreement is at the bank's prime rate. At May 27, 2007, the Company did not have a balance owing under this revolving line of credit agreement nor had it borrowed any funds during fiscal 2007. The Company paid quarterly dividends of $.0375 per share of its common stock in each of the first three quarters of fiscal 2007 and 2006. The dividend payments for the first nine months of fiscal 2007 and fiscal 2006 totaled $303,000 and $301,000, respectively. It is the Company's belief that its internally generated funds, as well as its line of credit, will be sufficient to enable the Company to meet its working capital requirements during 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. 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) the Company was dependent upon one customer for 81% of its revenues in fiscal year 2006 and expects that a significant portion of its future revenue will be derived from this customer; (iv) a significant downturn in the industries in which the Company participates could have an adverse effect on the demand for Company services; (v) our sales are concentrated in a limited number of highly competitive industries, each with a limited number of customers; (vi) the prices of our products are subject to downward pressure from customers and market pressure from competitors; (vii) the Company's ability to curtail its costs and expenses for new manufacturing programs, commensurate with expected revenues; (viii) the Company's ability to comply with covenants of its credit facility; (ix) fluctuations in operating results due to, among other things, changes in customer demand for our product, in our manufacturing costs and efficiencies of our operations; and (x) a trend among our customers toward outsourcing manufacturing to foreign operations. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 12 ITEM 3. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer, Michael J. Pudil, and Chief Financial Officer, Paul D. Sheely, have evaluated the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon this review, they have concluded that these controls and procedures are effective. (b) Changes in Internal Controls over Financial Reporting. There have been no changes in internal control financial reporting that occurred during the fiscal period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 13 PART II. OTHER INFORMATION: ITEM 6. EXHIBITS: A. The following exhibits are included herein: Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act. Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WSI INDUSTRIES, INC. Date: June 21, 2007 /s/ Michael J. Pudil ---------------------------------------- Michael J. Pudil, President & CEO Date: June 21, 2007 /s/ Paul D. Sheely ---------------------------------------- Paul D. Sheely, Vice President, Finance & CFO 14 EX-31.1 2 c16339exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 CERTIFICATIONS I, Michael J. Pudil, certify that: 1. I have reviewed this Form 10-QSB of WSI Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(a) and 15d-14(a)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: June 21, 2007 /s/ Michael J. Pudil ---------------------------------------- Michael J. Pudil President and Chief Executive Officer EX-31.2 3 c16339exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATIONS I, Paul D. Sheely, certify that: 1. I have reviewed this Form 10-QSB of WSI Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(a) and 15d-14(a)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: June 21, 2007 /s/ Paul D. Sheely ---------------------------------------- Paul D. Sheely Chief Financial Officer EX-32 4 c16339exv32.txt SECTION 1350 CERTIFICATION EXHIBIT 32 CERTIFICATION The undersigned certify pursuant to 18 U.S.C. Section 1350, that: (1) The accompanying Quarterly Report on Form 10-QSB for the period ended May 27, 2007, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the accompanying Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 21, 2007 /s/ Michael J. Pudil ---------------------------------------- President and Chief Executive Officer Date: June 21, 2007 /s/ Paul D. Sheely ---------------------------------------- Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----