UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
[X]
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For
the Fiscal Year Ended August 27, 2017
[ ]
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For
the transition period from ____________ to _____________
Commission
File No.
000-00619
WSI
Industries, Inc.
(Exact
name of registrant specified in its charter)
Minnesota
|
|
41-0691607
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
213
Chelsea Road, Monticello, Minnesota 55362
(Address
of principal executive offices)(Zip code)
Issuer’s
telephone number, including area code: (763) 295-9202
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.10 par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
[ ]
No
[X]
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes
[ ]
No
[X]
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past 90 days. Yes
[X]
No
[ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such filed). Yes
[X]
No
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
[X]
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 definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large
accelerated filer
[ ]
|
Accelerated
filer
[ ]
|
Non-accelerated
filer
[ ]
|
Smaller
reporting company
[X]
|
Indicate
by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405
of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging
growth company
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
[ ]
No
[X]
The
aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on February 24, 2017
(the business day immediately prior to the end of the registrant’s second fiscal quarter) was $8,375,000 based upon the
closing sale price on that date of $2.87 as reported by The NASDAQ Capital Market. The number of shares of the registrant’s
common stock, $0.10 par value, outstanding as of October 23, 2017 was 2,959,940.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on December 20, 2017, which will be filed
within 120 days after the end of the fiscal year covered by this report, are incorporated by reference into Part III of this Form
10-K.
PART
I
Item
1.
|
Description
of Business.
|
WSI
Industries, Inc. (the “Company”) makes its periodic and current reports available free of charge as soon as reasonably
practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. These reports
can be obtained by contacting the Company through its website at www.wsiindustries.com.
Overview
The
Company was incorporated in Minnesota in 1950 for the purpose of performing precision contract machining for the aerospace, communication,
and industrial markets. The major portions of Company revenues are derived from machining work for the aerospace/avionics/defense
industries, recreational powersports vehicles (ATV and motorcycle) markets, energy industry, automotive industry and bioscience
industry.
Contract
manufacturing constitutes the Company’s entire business.
Products
and Services
The
Company manufactures metal components in medium to high volumes requiring tolerances as close as one ten-thousandth (.0001) of
an inch. These components are manufactured in accordance with customer specifications using materials both purchased by the Company
as well as being supplied by our customer.
Sales
and Marketing
Our
mission is to achieve diversified growth through the expansion of our contract machining and complimentary value-add services,
as well as growth through partnerships and acquisitions. We have a team of direct sales force personnel that are dedicated to
pursuing opportunities to organically grow our business. We also utilize independent sales reps to search out new business where
appropriate. Our overall goal is to add core customers that will diversify the industries that we serve and will eventually become
“pillar” accounts that support the overall organization. Our target markets include aerospace, avionics, defense,
automotive, recreational powersports, heavy equipment and other industries that outsource machining services and have the need
to build long-term relationships with a dependable supplier. We search out these types of customers via a wide variety of methods
including prospecting, trade shows and networking with the goal of receiving request for quotes that we can provide proposals
on and eventually win new business.
The
Company has a reputation as a dependable supplier capable of meeting stringent specifications to produce quality components at
high production rates. The Company has demonstrated an ability to develop sophisticated manufacturing processes and controls essential
to produce precision and reliability in its products.
Customers
Sales
were made to Polaris Industries, Inc. and related entities in the amount of $26,432,000, or 86% of total Company revenues, in
fiscal 2017.
Competition
Although
there are a large number of companies engaged in machining, the Company believes the number of entities with the technical capability
and capacity for producing products of the class and in the volumes manufactured by the Company is relatively small. Competition
is primarily based on product quality, service, timely delivery, and price. The Company also faces competition from customers
with their own in-house machining capabilities. These customers weigh outsourcing on the basis of their own machining capacity
and capabilities, cost and price, timely delivery and service.
Research
and Development; Intellectual Property
We
perform research and development for customers on an as requested and program basis for development of conceptual engineering
and design activities prior to manufacturing the products. Our research and development activities are machining process oriented
and not done towards the development of products. We did not expend significant dollars in 2017 or 2016 on company-sponsored product
research and development. Patents and trademarks are not deemed significant to the Company.
Employees
At
August 27, 2017, the Company had 91 full-time employees, none of whom were subject to a union contract. We consider our relationship
with our employees to be good.
Foreign
and Domestic Operations and Export Sales
The
Company has no operations or any significant sales in any foreign country.
In
evaluating us as a company, careful consideration should be given to the following risk factors, in addition to the other information
included in this Annual Report on Form 10-K. Each of these risk factors could adversely affect our business, operating results
and/or financial condition, as well as adversely affect the value of an investment in our common stock. In addition to the following
disclosures, please refer to the other information contained in this report, including our consolidated financial statements and
the related notes.
A
large percentage of our sales have been made to a small number of customers in a small number of highly competitive industries,
and the loss of a major customer would adversely affect us.
In fiscal years 2017, 2016 and 2015, one customer in the recreational
vehicle powersports market accounted for 86%, 90% and 86% of our revenue, respectively. If there is a loss of this customer or
a significant decline in sales to this customer it could have an adverse effect on our results from operations.
The
economic conditions in the United States and around the world could adversely affect our financial results.
Demand for our
services depends upon worldwide economic conditions, including but not limited to overall economic growth rates, consumer spending,
oil prices, financing availability, employment rates, interest rates, inflation, consumer confidence, and the profits, capital
spending, and liquidity of large OEMs that we serve. A downturn in any of the markets we serve have caused and could continue
to cause our OEM customers to reduce ordering levels, resulting in reschedules, program delays or cancelled orders of our services
having an adverse effect on our business and our financial results. In addition, some of our customers have their own internal
machining capabilities. A downturn in one of their markets could result in them bringing machining services back in house and
thus adversely affect our financial results.
One
of our main markets is in the highly regulated energy industry.
The energy industry we serve, and specifically the shale and
gas fracturing (“fracking”) business, is controversial from an environmental perspective. Should environmental laws
change to limit the fracking industry, it could have an adverse effect on our financial results.
We
operate in the highly competitive and fragmented contract machining industry.
We compete against many contract machining companies.
We also compete with OEM in-house operations that are continually evaluating manufacturing products internally against the advantages
of outsourcing. We may also be at a competitive disadvantage with respect to price when compared to manufacturers with excess
capacity, lower cost structures and availability of lower cost labor. The availability of excess manufacturing capacity of our
competitors also creates competitive pressure on price and winning new business. We also face competition from companies that
are based in low cost countries. These companies may have lower cost structures and the availability of lower cost labor. These
factors also impact the Company’s ability to obtain additional manufacturing programs and retain our current programs.
Controlling
manufacturing costs is a significant factor in operating results.
The Company’s ability to manage its costs on existing
manufacturing programs and its ability to curtail costs and expenses on potential new manufacturing programs could have a significant
impact on the Company’s operating results.
Qualified
production employees are difficult to find and hire.
There continues to be a shortage of qualified production employees in
the types of manufacturing the Company performs. The Company’s ability to attract new employees and maintain their existing
employee base could affect its costs or its ability to deliver its products.
Operating
results may vary significantly from period to period.
We can experience significant fluctuations in our revenue and operating
results. One of the principal factors that contributes to these fluctuations is the significant changes in our customer’s
delivery requirements. Results of operations in any period, therefore, should not be considered indicative of the results to be
expected for any future period. Significant fluctuations in our revenue and operating results could also impact the Company’s
ability to comply with the debt covenants of its credit facilities relating to working capital and tangible net worth.
Internal
control over financial reporting may not prevent or detect misstatements because of its inherent limitations.
We require effective
internal control over financial reporting in order to provide reasonable assurance with respect to our financial reports and to
effectively prevent fraud. Internal control over financial reporting may not prevent or detect misstatements because of its inherent
limitations, including the circumvention or overriding of controls, or fraud. However, even effective internal controls can provide
only reasonable and not absolute assurances with respect to the preparation and fair presentation of financial statements.
The
market price of our common stock has fluctuated significantly in the past and may continue in the future.
The market price
of our common stock has been volatile in the past and several factors could cause the price to fluctuate substantially in the
future. These factors include quarterly fluctuations in our financial results, customer contract awards, and general economic
and political conditions in our various markets. In addition, the stock prices of small public contract manufacturing companies
have experienced significant price and volume fluctuations that often have been unrelated to the operating performance of such
companies. This market volatility may adversely affect the market price of our common stock.
Complying
with securities laws and regulations is costly for us.
Changing laws, regulations and standards relating to corporate governance
and public disclosure, including regulations promulgated by the SEC and Nasdaq, are creating particular challenges for smaller
publicly-held companies like us. We are committed to maintaining high standards of corporate governance and public disclosure.
As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue
to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating
activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and
the related regulations regarding our assessment of our internal control over financial reporting have required, and will continue
to require, the expenditure of significant financial and managerial resources. In addition to Sarbanes-Oxley, we also have been
and will continue to be required to expend financial and managerial resources to comply with the SEC requirement that mandates
that our quarterly and yearly filings with them be in an XBRL readable format as well as requirements related to the Conflict
Minerals Reporting as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Item
1B.
|
Unresolved
Staff Comments.
|
Not
applicable.
The
Company purchased an existing 49,000 square foot facility located in Monticello, Minnesota in May 2004 to house its production
and its headquarters. The purchase price was $1.9 million and was paid for by a combination of cash and debt. In fiscal 2008,
the Company commenced an addition to its facility and with its completion in early fiscal 2009 the addition added 12,500 square
feet of manufacturing space. In August 2012, the Company announced a second expansion of 47,000 square feet which roughly doubled
the amount of manufacturing space the Company had and increased the total facility size to approximately 107,000 square feet.
The expansion was completed in fiscal 2013 and cost approximately $3.8 million.
During
the quarter ended February 26, 2017, the Company entered into a loan agreement with a new bank. The new mortgage paid off the
prior mortgage in its entirety and released all obligations in connection with that mortgage including the requirement to maintain
a restricted cash balance of $1.25 million. The new mortgage was for $3.7 million and carries an interest rate of 3.99% fixed
for five years after which the interest rate will reset at a fixed rate for the subsequent five years. The mortgage requires monthly
payments of $22,511 based on a 20-year amortization schedule and matures in February 2027. The mortgage is secured by all assets
of the Company.
The
Company considers its manufacturing equipment, facilities, and other physical properties to be suitable and adequate to meet the
requirements of our business.
Item
3.
|
Legal
Proceedings.
|
The
Company is not a party to any material legal proceedings; we may be subject from time to time to ordinary routine litigation incidental
to its business.
Item
4.
|
Mine
Safety Disclosures.
|
Not
applicable.
PART
II
Item
5.
|
Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|
The
common stock of the Company is traded on The NASDAQ Capital Market of the NASDAQ Stock Market LLC under the symbol “WSCI.”
As
of October 23, 2017, there were 280 shareholders of record of the Company’s common stock.
The
following table sets forth, for the periods indicated, the high and low closing sales price information for our common stock as
reported by the Nasdaq Capital Market.
|
|
Stock
Price
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
FISCAL 2017:
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
3.79
|
|
|
$
|
2.75
|
|
Second
quarter
|
|
|
3.10
|
|
|
|
2.75
|
|
Third
quarter
|
|
|
3.55
|
|
|
|
2.80
|
|
Fourth
quarter
|
|
|
3.40
|
|
|
|
2.90
|
|
|
|
|
|
|
|
|
|
|
FISCAL 2016:
|
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
5.50
|
|
|
$
|
4.24
|
|
Second
quarter
|
|
|
4.46
|
|
|
|
3.50
|
|
Third
quarter
|
|
|
3.99
|
|
|
|
2.91
|
|
Fourth
quarter
|
|
|
3.66
|
|
|
|
2.77
|
|
In
the first two quarters of fiscal 2016, the Company paid a quarterly cash dividend of $.04 per share in each quarter. The Company
discontinued its quarterly dividend program in March of 2016.
The
following table sets forth information regarding our equity compensation plans in effect as of August 27, 2017. Each of our equity
compensation plans is an “employee benefit plan” as defined by Rule 405 of Regulation C of the Securities Act of 1933.
Equity
Compensation Plan Information
Plan
category
|
|
Number
of shares of
common stock to be
issued upon exercise of
outstanding options,
warrants and rights
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
|
Number
of shares of
common stock remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in the first column)
|
|
Equity
compensation plans approved by shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
Stock Plan
|
|
|
305,201
|
|
|
$
|
4.49
|
|
|
|
297,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
305,201
|
|
|
$
|
4.49
|
|
|
|
297,242
|
|
There
are no outstanding equity compensation plans not approved by shareholders.
The
Company made no repurchases of its common stock in fiscal year 2017.
Item
6.
|
Selected
Financial Data
|
Not
applicable.
Item
7.
|
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 of America. 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. We made no
significant changes to our critical accounting policies during fiscal 2017.
Application
of Critical Accounting Policies:
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. Inventory cost is adjusted down for any
excess cost over net realizable value of inventory components.
In
addition, the Company determines whether its inventory is obsolete 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 adjusts the inventory value to the amount the Company estimates
as the ultimate net realizable value for that inventory. Actual customer requirements in any future periods are inherently uncertain
and thus may differ from our estimates. The Company performs its lower of cost or market testing, as well as its excess or obsolete
inventory analyses, quarterly.
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.
Goodwill
Impairment:
The
Company evaluates the valuation of its goodwill according to the provisions of Accounting Standards Codification (“ASC”)
350 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 has also
adopted Accounting Standard Update (ASU) No. 2011-08,
Intangibles—Goodwill and Other (Topic 350).
With ASU No. 2011-08,
an entity is given the option to make a qualitative evaluation of goodwill impairment to determine whether it should calculate
the fair value of its reporting unit. In addition, the Company adopted ASU 2017-04,
Simplifying the Test for Goodwill Impairment
(ASU 2017-04). ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Under the amendments in this update, an entity
should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value;
however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also
eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment
and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. In the fiscal 2017 fourth quarter,
the Company made its qualitative evaluation of its goodwill considering, among other things, the overall macroeconomic conditions,
industry and market considerations, overall financial performance and other relevant company specific events. Based on this qualitative
evaluation, the Company concluded that it was more likely than not that its goodwill was not impaired and that it wasn’t
required to calculate the fair value of its reporting unit. If the Company has changes in events or circumstances, including reductions
in anticipated cash flows generated by its 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 differences between
the financial reporting and tax bases of assets and liabilities. A deferred tax valuation allowance is 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 being different than statutory rates. The Company established a valuation allowance in fiscal
2016 as it believes it is more likely than not that it will not fully realize the benefit of certain of its tax assets. Currently,
the Company’s deferred tax assets consists primarily of the temporary accruals that will reverse in future years as well
as tax credits.
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) collectability 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 from
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.
Liquidity
and Capital Resources:
At
August 27, 2017, the Company’s cash and cash equivalents were $5,847,000 as compared to $3,739,000 at August 28, 2016. At
August 28, 2016, the Company was required to keep $1,250,000 in cash in a deposit account maintained by its bank. Since the Company
had no right of withdrawal, and the account served as collateral for outstanding debt obligations, this restricted cash was excluded
from cash and cash equivalents at August 27, 2016 and classified as long-term. At August 27, 2017, the restricted cash requirement
had been eliminated and all cash was classified as a current asset in cash and cash equivalents.
The
Company’s net working capital, defined as current assets minus current liabilities, at the end of fiscal 2017 was $7,104,000
as compared to $7,081,000 at the end of fiscal 2016. The small change in working capital resulted from an increase in cash balances
offset by a decrease in accounts receivable and an increase in accounts payable and accruals. The ratio of current assets to current
liabilities decreased to 2.51 to 1.0 at August 27, 2017 from 2.86 to 1.0 as both current assets and current liabilities increased
by roughly the same amounts which led to the decrease.
The
Company generated $3,129,000, $2,978,000 and $3,241,000 in cash from operations in fiscal 2017, 2016 and 2015, respectively.
In
fiscal 2017 and fiscal 2016, additions to property, plant and equipment either by cash or financing were $806,000 and $392,000,
respectively. None of the additions in either fiscal 2017 or fiscal 2016 were acquired using financing arrangements.
During
the quarter ended February 26, 2017, the Company entered into a new loan agreement with a new bank for a new mortgage term loan.
The new mortgage paid off the prior mortgage in its entirety and released all obligations in connection with that mortgage including
the requirement to maintain a restricted cash balance of $1.25 million. The new mortgage was for $3.7 million and carries an interest
rate of 3.99% fixed for five years after which the interest rate will reset at a fixed rate for the subsequent five years. The
mortgage requires monthly payments of $22,511 based on a 20-year amortization schedule and matures in February 2027. The mortgage
is secured by all assets of the Company.
During
the quarter ended February 26, 2017, the Company also entered into a loan agreement with the new bank for a revolving line of
credit. The agreement provides for a maximum loan of $1,500,000 with interest at the thirty day LIBOR rate plus 2.0% with a base
rate of 2.75%. The revolver has a maturity date of February 15, 2018.
Each
of the mortgage term loan agreement and the loan agreement for the revolving line of credit requires that the Company maintain
at all times while the loan is outstanding minimum working capital of no less than $4,500,000.00. The loan agreements also require
that the Company maintain at all times while the loan is outstanding minimum tangible net worth of no less than $9,000,000. Each
of these covenants is measured monthly. At August 27, 2017, the Company was in compliance with these provisions.
During
fiscal 2017, the Company placed purchase orders for two new pieces of equipment for approximately $2,055,000 that will be delivered
and put into service during fiscal 2018. The Company also made advance deposits on that equipment totaling $687,000 which has
been classified as machinery and equipment on the balance sheet. During fiscal 2017, the Company entered into a debt agreement
related to one of the pieces of equipment and subsequent to the August 27, 2017 entered into a second debt agreement on the other
piece of equipment. There were no amounts outstanding related to either debt agreement at August 27, 2017. Both debt agreements
will commence once the equipment is delivered and accepted by the Company. Upon commencement, both agreements will be for five
years and will have interest rates from 4.25% - 5.36%.
The
Company’s total debt was $6,880,000 at August 27, 2017 which consisted of a mortgage on its building of $3,598,000 and debt
secured by production equipment of $3,282,000. There were no amounts outstanding related to the Company’s revolving loan
agreement at August 27, 2017. Current maturities of long-term debt at August 27, 2017 consist of $1,317,000 due on equipment related
debt and $121,000 on its building related debt. During fiscal 2017, the Company made principal payments on its debt of $1,533,000,
excluding the refinancing of its mortgage of $3,593,000 which occurred during the Company’s fiscal 2017 second quarter.
It is management’s belief that the combination of its current cash balance, its internally generated funds, as well as its
revolving line of credit will be sufficient to enable the Company to meet its financial requirements during fiscal 2018.
Results
of Operations:
The
Company’s sales decreased 13% in fiscal 2017 and 18% in fiscal 2016 as compared to an increase of 1% in fiscal 2015. Net
sales in fiscal 2017 were approximately $30.6 million as compared to $35.2 million in fiscal 2016 and $43.0 million in fiscal
2015.
The
sales decrease in fiscal 2017 came primarily from a 16% decrease in the recreational vehicle powersports market and a 68% decrease
in the automotive market which was partially offset by a 37% increase in aerospace and defense and a 196% increase in the Company’s
energy business. In fiscal 2016, sales were negatively affected by a 15% decrease in sales in the recreational powersports business
as well as an 88% decrease in the level of energy business. These two declining factors were partially offset by an increase in
the Company’s automotive business. Sales to the recreational powersports vehicle market totaled approximately 86%, 90% and
86% of total sales in fiscal 2017, 2016 and 2015, respectively. Sales to the energy industry totaled approximately 4%, 1% and
7% of sales in fiscal 2017, 2016 and 2015, respectively. Sales to the aerospace/avionics/defense markets totaled approximately
8% of total sales in fiscal 2017, and 5% in fiscal 2016 and 2015, respectively. Sales to the automotive industries totaled 1%,
3% and 1% in fiscal 2017, 2016 and 2015, respectively. Sales to the bioscience and other industries amounted to approximately
1% - 2% of total sales in each of fiscal years 2015 – 2017.
The
following is a reconciliation of sales by major market:
|
|
Fiscal
2017
|
|
|
Fiscal
2016
|
|
|
Fiscal
2015
|
|
|
|
|
|
|
|
|
|
|
|
Recreational
vehicle
|
|
$
|
26,432,000
|
|
|
$
|
31,526,000
|
|
|
$
|
36,937,000
|
|
Aerospace
and defense
|
|
|
2,416,000
|
|
|
|
1,767,000
|
|
|
|
2,103,000
|
|
Energy
|
|
|
1,152,000
|
|
|
|
389,000
|
|
|
|
3,128,000
|
|
Automotive
|
|
|
294,000
|
|
|
|
910,000
|
|
|
|
389,000
|
|
Biosciences
& Other
|
|
|
347,000
|
|
|
|
624,000
|
|
|
|
426,000
|
|
|
|
$
|
30,641,000
|
|
|
$
|
35,216,000
|
|
|
$
|
42,983,000
|
|
In
fiscal 2017, recreational vehicle powersports sales decreased 16% due in large measure to the Company’s main customer discontinuing
one of its product lines as well as a decrease in demand from the customer in one of its other product lines. In fiscal 2016,
sales in the recreational powersports business decreased 15% due primarily to a decrease in demand in one product line from the
Company’s main customer, offset by increases in another product line due to increased demand.
Sales
from the Company’s aerospace and defense markets were up 37% in fiscal 2017 as opposed to a decrease of 16% in fiscal 2016.
The increase in fiscal 2017 came primarily from sales from a new program with a new customer. Without the new program, sales in
the aerospace and defense markets would have increased 6.6%. The Company believes the fiscal 2016 decrease was attributable to
a general softening in demand for the products that the Company supplies to its aerospace and defense customers in that year.
Sales
from the Company’s energy business increased 196% in fiscal 2017 as the energy market rebounded some from its previous multi-year
slide. Sales to energy customers in fiscal 2016 were down 88%. All of the Company’s customers in the energy market have
their own internal machining capabilities and therefore the Company’s sales are generated primarily when their customers
have limited machining capacity and need to outsource. Circumstances such as a low price for oil will tend to drive machining
in house and therefore lower the Company’s sales. This fact tends to create volatility in the Company’s sales to the
energy industry on top of an energy market that has volatile tendencies.
Sales
to the Company’s automotive business decreased 68% in fiscal 2017 as opposed to an increase of 134% in fiscal 2016. Much
of the sales increase in fiscal 2016 came from programs that appear to be sporadic in nature, and that volatility negatively affected
fiscal 2017 sales.
Sales
to the Company’s bioscience and other markets are relatively small as sales from these markets only amount to approximately
1% - 2% of total sales. The fluctuations in these markets have been minimal in the last two fiscal years.
The
Company’s gross margin decreased to 8.0% in fiscal 2017 from 8.3% in fiscal 2016 while fiscal 2015 gross margins were at
10.0%. The decreases in both fiscal 2017 and 2016 were attributable to lower levels of business which led to excess capacity and
a higher percentage of sales in fixed costs such as depreciation. The lower level of sales also caused manufacturing inefficiencies
which created a drag on gross margins.
The
Company’s margins can also vary widely depending on whether the Company purchases its raw material or whether raw material
is provided or consigned to them by its customer. Generally, the Company will experience a higher gross margin percentage of sales
where material has been consigned or provided by the customer. Therefore, in any particular quarter or year, the Company’s
gross margin can vary depending on the mix of parts sold and whether those parts had material that was purchased or had material
that had been consigned to them.
No
significant sales of obsolete items occurred in fiscal years 2015 through 2017 and, correspondingly, no significant gross margin
was recognized relating to these sales.
During
fiscal 2017, the Company recognized an equipment impairment loss of $148,000. The Company evaluates long-term assets on a periodic
basis in compliance with Accounting Standards Codification (“ASC”) 360, Accounting for the Impairment of Long-lived
Assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are
less than the assets carrying amount. If the undiscounted cash flows are less than the carrying amount, the impairment recognized
is measured by the amount the carrying value of the assets exceeds their fair value determined primarily through the present value
of estimated future cash flows. The Company determined that one of its pieces of equipment was impaired and recognized the $148,000
expense.
Selling
and administrative expense increased to $3,346,000 in fiscal 2017 as compared to $3,012,000 in fiscal 2016. The increase in fiscal
2017 was due to increases in compensation costs related to the change in the Company’s executive leadership that occurred
during the fiscal 2017 third quarter. Fiscal 2016 selling and administrative expense was up slightly from fiscal 2015. Included
in selling and administrative expense are costs associated with professional service expense in connection with the Company’s
analysis of internal controls over financial reporting as required by the Sarbanes-Oxley Act as well as requirements related to
Conflict Minerals Reporting as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Interest
expense in fiscal 2017 and fiscal 2016 decreased $33,000 and $38,000, respectively, due primarily to a lower average level of
debt in each year.
The
Company’s effective tax rate in its year ended August 27, 2017 was a negative (37.6%) as compared to a negative (146.2%)
for the year ended August 28, 2016 and 1.5% for the year ended August 30, 2015, respectively. During fiscal 2016, the Company
hired an outside consulting firm to conduct an analysis to determine if certain activities the Company performs qualifies for
the Research & Development tax credit (R&D credit) as defined by Internal Revenue Code Section 41. As a result of the
analysis, the Company determined that it is performing activities that qualify for the R&D credit, and during the fiscal year
2016 recognized tax benefits related to R&D tax credits from several prior years which lowered the overall effective tax rate.
In addition, during the Company’s fiscal 2016 second quarter, the Federal R&D tax credit law was retroactively renewed
for calendar year 2015 and also made permanent going forward. Since for calendar year 2015 the law was enacted retroactively,
any effects are recognized as a component of income tax expense or benefit from continuing operations in the financial statements
in the interim period that the law was enacted, which in this case was the Company’s fiscal 2016 second quarter. The Company
believes that it has recognized R&D tax benefits for all prior years to the extent possible.
Caution
Regarding Forward-Looking Statements
Statements
included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations elsewhere in this
Annual Report on Form 10-K, in future filings by the Company with the Securities and Exchange Commission, in the Company’s
press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current
facts are “forward-looking statements.” These statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. 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. Forward-looking statements
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 above under Item 1A. Risk Factors.
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Not
applicable.
Item
8.
|
Financial
Statements and Supplementary Data.
|
See
Consolidated Financial Statements section of this Annual Report on Form 10-K beginning on page 24, attached hereto, which consolidated
financial statements are incorporated herein by reference.
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure.
|
None.
Item
9A.
|
Controls
and Procedures.
|
Disclosure
Controls and Procedures
As
of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation
of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based on that evaluation,
Michael J. Pudil, the chief executive officer, and Paul D. Sheely, the chief financial officer, have concluded that as of August
27, 2017 our disclosure controls and procedures were effective.
Changes
in Internal Controls over Financial Reporting
There
have been no changes in internal control over financial reporting that occurred during the fourth quarter ended August 27, 2017
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Management’s
Report on Internal Control over Financial Reporting
The
management of the Company is responsible for the preparation of the financial statements and related financial information appearing
in this Annual Report on Form 10-K. The financial statements and notes have been prepared in conformity with accounting principles
generally accepted in the United States of America. The management of the Company also is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. A company’s
internal control over financial reporting is defined as a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets
of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being
made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
Management,
including the chief executive officer and chief financial officer, does not expect that the Company’s internal controls
will prevent all error and all fraud. Because of its inherent limitations, a system of internal control over financial reporting
can provide only reasonable, not absolute, assurance that the objectives of the control system are met and may not prevent or
detect misstatements. Further, over time control may become inadequate because of changes in conditions or the degree of compliance
with the policies or procedures may deteriorate.
The
Company’s management hired an outside consulting firm to assist it in the evaluation of the effectiveness of the Company’s
internal control over financial reporting. The Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of August 27, 2017 based on criteria established in
Internal Control—Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the results
of that evaluation, our management has concluded that, as of August 27, 2017, the Company’s internal control over financial
reporting was effective.
This
annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent
registered public accounting firm pursuant to rules of the Securities and Exchange Commission.
Item
9B.
|
Other
Information.
|
None.
PART
III
Pursuant
to General Instruction E (3), the Company omits Part III, Items 10, 11, 12, 13 and 14, as a definitive proxy statement will be
filed with the Commission pursuant to Regulation 14(a) within 120 days after August 27, 2017 and such information required by
such items is incorporated herein by reference from the proxy statement.
PART
IV
Item
15.
|
Exhibits
and Financial Statement Schedules.
|
(a)
|
Documents
filed as part of this report.
|
|
1.
|
Consolidated
Financial Statements: Reference is made to the Index to Consolidated Financial Statements (page 24) hereinafter contained
for all Consolidated Financial Statements.
|
|
|
|
|
2.
|
Exhibits.
|
|
Exhibit
No.
|
|
Description
|
|
|
|
|
|
3.1
|
|
Restated
Articles of Incorporation of WSI Industries, Inc. Incorporated by reference from Exhibit 3 of the Registrant’s Form
10-Q for the quarter ended November 29, 1998.
|
|
|
|
|
|
3.2
|
|
Restated
and Amended Bylaws, as amended through January 6, 2005. Incorporated by reference from Exhibit 3.2 of the Registrant’s
Form 10-K for the year ended August 28, 2005.
|
|
|
|
|
|
10.1
|
|
WSI
Industries, Inc. 2005 Stock Plan. Incorporated by reference from Exhibit 4.1 of the Registrant’s Registration Statement
on Form S-8 (SEC File No. 333-203225).
|
|
|
|
|
|
10.2
|
|
Form
of Restricted Stock Award Agreement under the Company’s 2005 Stock Plan. Incorporated by reference to Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K dated February 23, 2007.
|
|
|
|
|
|
10.3
|
|
Form
of Non-Qualified Stock Option and Stock Appreciation Rights Agreement under the Company’s 2005 Stock Plan. Incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated February 23, 2007.
|
|
|
|
|
|
10.4
|
|
Form
of Restricted Stock Bonus Award Agreement under the Company’s 2005 Stock Plan. Incorporated by reference to Exhibit
10.5 to the Registrant’s Annual Report on Form 10-K for the year ended August 30, 2009.
|
|
|
|
|
|
10.5
|
|
Board
of Directors Retirement Program dated June 25, 1982. Incorporated by reference from Exhibit 10.12 of the Registrant’s
Form 10-K for the year ended August 25, 2002.
|
|
|
|
|
|
10.6
|
|
Employment
(change in control) Agreement between Paul D. Sheely and Registrant dated January 11, 2001 incorporated by reference from
Exhibit 10.2 of the Registrant’s Form 10-Q for the quarter ended May 27, 2001.
|
|
Exhibit
No.
|
|
Description
|
|
|
|
|
|
10.7
|
|
Amendment
No. 1 to Employment (change in control) Agreement between Paul D. Sheely and Registrant dated November 1, 2002. Incorporated
by reference from Exhibit 10.11 of the Registrant’s Form 10-K for the year ended August 25, 2002.
|
|
|
|
|
|
10.8
|
|
Second
Amendment to Employment (Change in Control) Agreement dated December 29, 2008 by and between WSI Industries, Inc. and Paul
D. Sheely. Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K dated December 29, 2008.
|
|
|
|
|
|
10.9
|
|
Severance
Letter Agreement dated October 7, 2009 by and between WSI Industries, Inc. and Paul D. Sheely. Incorporated by reference to
Exhibit 10.5 to the Registrant’s Form 8-K dated October 7, 2009.
|
|
|
|
|
|
10.10
|
|
Employment
Offer Letter dated October 5, 2009 by WSI Industries, Inc. to Benjamin Rashleger. Incorporated by reference to Exhibit 10.1
to the Registrant’s Form 8-K dated October 7, 2009.
|
|
|
|
|
|
10.11
|
|
Employment
(Change In Control) Agreement dated October 12, 2009 by and between WSI Industries, Inc. and Benjamin Rashleger. Incorporated
by reference to Exhibit 10.2 to the Registrant’s Form 8-K dated October 7, 2009.
|
|
|
|
|
|
10.12
|
|
Form
of Restrictive Covenant Agreement by and between WSI Industries, Inc. and Michael J. Pudil, Paul D. Sheely and Benjamin Rashleger.
Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K dated October 7, 2009.
|
|
|
|
|
|
10.13
|
|
Loan
agreement dated February 1, 2011 between WSI Industries, Inc., Taurus Numeric Tool, Inc., WSI Rochester, Inc., and M&I
Marshall & Ilsley Bank (now BMO Harris Bank N.A.). Incorporated by reference to Exhibit 10.1 of the Registrant’s
Form 10-Q for the quarter ended February 27, 2011.
|
|
|
|
|
|
10.14
|
|
Amended
and Restated Revolving Credit Promissory Note dated February 1, 2011 in the principal amount of $1,000,000 by WSI Industries,
Inc. in favor of M&I Marshall & Ilsley Bank (now BMO Harris Bank N.A.). Incorporated by reference from Exhibit 10.24
of the Registrant’s Form 10-K for the year ended August 28, 2011.
|
|
|
|
|
|
10.15
|
|
Amended
and Restated Security Agreement dated February 1, 2011 by and between WSI Industries, Inc. and M&I Marshall & Ilsley
Bank (now BMO Harris Bank N.A.). Incorporated by reference from Exhibit 10.25 of the Registrant’s Form 10-K for the
year ended August 28, 2011.
|
|
Exhibit
No.
|
|
Description
|
|
|
|
|
|
10.16
|
|
Amended
and Restated Security Agreement dated February 1, 2011 by and between Taurus Numeric Tool, Inc. and M&I Marshall &
Ilsley Bank (now BMO Harris Bank N.A.). Incorporated by reference from Exhibit 10.26 of the Registrant’s Form 10-K for
the year ended August 28, 2011.
|
|
|
|
|
|
10.17
|
|
Amended
and Restated Security Agreement dated February 1, 2011 by and between WSI Rochester, Inc. and M&I Marshall & Ilsley
Bank (now BMO Harris Bank N.A.). Incorporated by reference from Exhibit 10.27 of the Registrant’s Form 10-K for the
year ended August 28, 2011.
|
|
|
|
|
|
10.18
|
|
Guaranty
dated February 1, 2011 by and WSI Rochester, Inc. and M&I Marshall & Ilsley Bank (now BMO Harris Bank N.A.). Incorporated
by reference from Exhibit 10.28 of the Registrant’s Form 10-K for the year ended August 28, 2011.
|
|
|
|
|
|
10.19
|
|
Guaranty
dated February 1, 2011 by and between Taurus Numeric Tool, Inc. and M&I Marshall & Ilsley Bank (now BMO Harris Bank
N.A.). Incorporated by reference from Exhibit 10.29 of the Registrant’s Form 10-K for the year ended August 28, 2011.
|
|
|
|
|
|
10.20
|
|
First
Amendment and Modification of Revolving Line of Credit Promissory Note, Loan Agreement
and Reaffirmation of Guaranties dated February 1, 2012 and incorporated by reference
from Exhibit 10.1 of the Registrant’s Form 8-K dated February 15, 2012.
|
|
|
|
|
|
10.21
|
|
Second
Amendment and Modification of Revolving Line of Credit Promissory Note, Loan Agreement
and Reaffirmation of Guaranties, and Amended and Restated Revolving Credit Promissory
Note dated January 30, 2013 by and among WSI Industries, Inc., WSI Industries, Co., WSI
Rochester, Inc. and BMO Harris Bank, N.A. Incorporated by reference from Exhibit 10.1
of the Registrant’s Form 8-K dated January 30, 2013.
|
|
|
|
|
|
10.22
|
|
Amended
and Restated Real Estate Mortgage, Security Agreement and Financing Statement dated May
8, 2013 between WSI Industries, Inc. and BMO Harris Bank N.A. Incorporated by reference
from Exhibit 10.1 of the Registrant’s Form 8-K dated May 8, 2013.
|
|
|
|
|
|
10.23
|
|
Amended
and Restated Promissory Note in the principal amount of up to $4,200,000 dated May 8, 2013 between WSI Industries, Inc. and
BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.2 of the Registrant’s Form 8-K dated May 8, 2013.
|
|
|
|
|
|
10.24
|
|
Term
Loan Agreement dated May 8, 2013 between WSI Industries, Inc. and BMO Harris Bank N.A. Incorporated by reference from Exhibit
10.3 of the Registrant’s Form 8-K dated May 8, 2013.
|
|
Exhibit
No.
|
|
Description
|
|
|
|
|
|
10.25
|
|
Assignment
of Leases and Rents dated May 8, 2013 between WSI Industries, Inc. and BMO Harris Bank N.A. Incorporated by reference from
Exhibit 10.4 of the Registrant’s Form 8-K dated May 8, 2013.
|
|
|
|
|
|
10.26
|
|
Guaranty
dated May 8, 2013 between WSI Rochester, Inc. and BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.5 of the
Registrant’s Form 8-K dated May 8, 2013.
|
|
|
|
|
|
10.27
|
|
Guaranty
dated May 8, 2013 between WSI Industries, Co. and BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.6 of the
Registrant’s Form 8-K dated May 8, 2013.
|
|
|
|
|
|
10.28
|
|
First
Amendment to Term Loan Agreement dated January 31, 2014 between WSI Industries, Inc. and BMO Harris Bank N.A. Incorporated
by reference from Exhibit 10.1 of the Registrant’s Form 8-K dated January 31, 2014.
|
|
|
|
|
|
10.29
|
|
Third
Amendment to Revolving Loan Agreement and First Amendment to Amended and Restated Revolving Credit Promissory Note dated January
31, 2014 between WSI Industries, Inc. and BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.2 of the Registrant’s
Form 8-K dated January 31, 2014.
|
|
|
|
|
|
10.30
|
|
Acknowledgement
of Guarantors dated January 31, 2014 between WSI Rochester, Inc., WSI Industries, Co. and BMO Harris Bank N.A. Incorporated
by reference from Exhibit 10.3 of the Registrant’s Form 8-K dated January 31, 2014.
|
|
|
|
|
|
10.31
|
|
Fourth
Amendment to Revolving Loan Agreement and First Amendment to Amended and Restated Revolving Credit Promissory Note dated January
26, 2015 between WSI Industries, Inc. and BMO Harris Bank N.A. Incorporated by reference from Exhibit 10.2 of the Registrant’s
Form 8-K dated January 26, 2015.
|
|
|
|
|
|
10.32
|
|
Acknowledgement
of Guarantors dated January 26, 2015 between WSI Rochester, Inc., WSI Industries, Co. and BMO Harris Bank N.A. Incorporated
by reference from Exhibit 10.3 of the Registrant’s Form 8-K dated January 26, 2015.
|
|
|
|
|
|
10.33
|
|
Fifth
Amendment to Revolving Loan Agreement and
Second
Amendment to Term Loan Agreement and
Amended
and Restated Revolving Credit Promissory Note dated November 27, 2015 between WSI Industries, Inc. and BMO Harris Bank N.A.
Incorporated by reference from Exhibits 10.1, 10.2 and 10.3 of the Registrant’s Form 8-K dated November 27, 2015.
|
|
|
|
|
|
10.34
|
|
Acknowledgement
of Guarantors dated November 27, 2015 between WSI Rochester, Inc., WSI Industries, Co. and BMO Harris Bank N.A. Incorporated
by reference from Exhibit 10.4 of the Registrant’s Form 8-K dated November 27, 2015.
|
|
Exhibit
No.
|
|
Description
|
|
|
|
|
|
10.35
|
|
Sixth
Amendment to Revolving Loan Agreement and
Third
Amendment to Term Loan Agreement dated February 28, 2016 between WSI Industries, Inc. and BMO Harris Bank N.A. Incorporated
by reference from Exhibits 10.1 and 10.2 of the Registrant’s Form 8-K dated February 28, 2016.
|
|
|
|
|
|
10.36
|
|
Acknowledgement
of Guarantors dated February 28, 2016 between WSI Rochester, Inc., WSI Industries, Co. and BMO Harris Bank N.A. Incorporated
by reference from Exhibit 10.3 of the Registrant’s Form 8-K dated February 28, 2016.
|
|
|
|
|
|
10.37
|
|
Seventh
Amendment to Revolving Loan Agreement and
Fourth
Amendment to Term Loan Agreement dated August 26, 2016 between WSI Industries, Inc. and BMO Harris Bank N.A. Incorporated
by reference from Exhibits 10.1 and 10.2 of the Registrant’s Form 8-K dated August 26, 2016.
|
|
|
|
|
|
10.38
|
|
Acknowledgement
of Guarantors dated August 26, 2016 between WSI Rochester, Inc., WSI Industries, Co. and BMO Harris Bank N.A. Incorporated
by reference from Exhibit 10.3 of the Registrant’s Form 8-K dated August 26, 2016.
|
|
|
|
|
|
10.39
|
|
Loan
Agreement dated February 15, 2017 between WSI Industries, Inc. and Tradition Capital
Bank. Incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K
dated February 15, 2017.
|
|
|
|
|
|
10.40
|
|
Promissory
Note dated February 15, 2017 between WSI Industries, Inc. and Tradition Capital Bank.
Incorporated by reference from Exhibit 10.2 of the Registrant’s Form 8-K dated
February 15, 2017.
|
|
|
|
|
|
10.41
|
|
Combination
Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents dated
February 15, 2017 between WSI Industries, Inc. and Tradition Capital Bank. Incorporated
by reference from Exhibit 10.3 of the Registrant’s Form 8-K dated February 15,
2017.
|
|
|
|
|
|
10.42
|
|
Loan
Agreement dated February 15, 2017 between WSI Industries, Inc. and Tradition Capital
Bank. Incorporated by reference from Exhibit 10.4 of the Registrant’s Form 8-K
dated February 15, 2017.
|
|
|
|
|
|
10.43
|
|
Revolving
Promissory Note dated February 15, 2017 between WSI Industries, Inc. and Tradition Capital
Bank. Incorporated by reference from Exhibit 10.5 of the Registrant’s Form 8-K
dated February 15, 2017.
|
|
|
|
|
|
10.44
|
|
Guaranty
– Promissory Note dated February 15, 2017 between WSI Rochester, Inc. an WSI Industries, Co. and Tradition Capital Bank.
Incorporated by reference from Exhibits 10.5 and
10.6
of the Registrant’s Form 8-K dated February 15, 2017.
|
|
Exhibit
No.
|
|
Description
|
|
|
|
|
|
10.45
|
|
Guaranty
– Promissory Note dated February 15, 2017 between WSI Rochester, Inc. an WSI Industries,
Co. and Tradition Capital Bank. Incorporated by reference from Exhibits 10.6 and
10.7
of the Registrant’s Form 8-K dated February 15, 2017.
|
|
|
|
|
|
10.46
|
|
Guaranty
– Revolving Promissory Note dated February 15, 2017 between WSI Rochester, Inc.
and WSI Industries, Co. and Tradition Capital Bank. Incorporated by reference from Exhibits
10.8 and
10.9
of the Registrant’s Form 8-K dated February 15, 2017.
|
|
|
|
|
|
10.47
|
|
Security
Agreements dated February 15, 2017 between WSI Industries, Inc.,
WSI
Rochester, Inc. and
WSI
Industries, Co. and Tradition Capital Bank. Incorporated by reference from Exhibits 10.10,
10.11 and 10.12 of the Registrant’s Form 8-K dated February 15, 2017.
|
|
|
|
|
|
10.48
|
|
Offer
Letter Agreement dated May 19, 2017 by and between WSI Industries, Inc. and Michael J.
Pudil. Incorporated by reference from Exhibit 10.1 of the Registrant’s Form 8-K
dated May 19, 2017.
|
|
|
|
|
|
10.49
|
|
Severance
and Change of Control Letter Agreement dated May 19, 2017 by and between WSI Industries,
Inc. and Michael J. Pudil. Incorporated by reference from Exhibit 10.2 of the Registrant’s
Form 8-K dated May 19, 2017.
|
|
|
|
|
|
10.50
|
|
Separation
Letter Agreement dated May 19, 2017 by and between WSI Industries, Inc. and Benjamin
T. Rashleger. Incorporated by reference from Exhibits 10.3 of the Registrant’s
Form 8-K dated May 19, 2017.
|
|
|
|
|
|
14.1
|
|
Code
of Ethics & Business Conduct adopted by WSI Industries, Inc. on October 29, 2003. Incorporated by reference to Exhibit
14.1 of the Registrant’s Annual Report on Form 10-K for the year ended August 31, 2003.
|
|
|
|
|
|
21.1
|
|
Subsidiaries
of the Registrant.
|
|
|
|
|
|
23.1
|
|
Consent
of Schechter Dokken Kanter Andrews & Selcer Ltd.
|
|
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.
|
|
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.
|
|
|
|
|
|
32.1
|
|
Certification
pursuant to 18 U.S.C. §1350.
|
|
|
|
|
|
101.INS**
|
|
XBRL
Instance
|
|
|
|
|
|
101.SCH**
|
|
XBRL
Taxonomy Extension Schema
|
|
|
|
|
|
101.CAL**
|
|
XBRL
Taxonomy Extension Calculation
|
|
|
|
|
|
101.DEF**
|
|
XBRL
Taxonomy Extension Definition
|
|
|
|
|
|
101.LAB**
|
|
XBRL
Taxonomy Extension Labels
|
|
|
|
|
|
101.PRE**
|
|
XBRL
Taxonomy Extension Presentation
|
SIGNATURES
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
|
WSI
INDUSTRIES, INC.
|
|
|
|
|
BY:
|
/s/
Michael J. Pudil
|
|
|
Michael
J. Pudil
|
|
|
President
and Chief Executive Officer (principal executive officer)
|
|
|
|
|
BY:
|
/s/
Paul D. Sheely
|
|
|
Paul
D. Sheely
|
|
|
Vice
President, Finance, Chief Financial Officer and Treasurer
|
|
|
(principal
financial and accounting officer)
|
DATE:
November 3, 2017
Each
person whose signature appears below hereby constitutes and appoints Michael J. Pudil and Paul D. Sheely, and each of them, as
his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf, individually and in each
capacity stated below, all amendments to this Form 10-K and to file the same, with all exhibits thereto and any other documents
in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as
fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said
attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated:
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Michael J. Pudil
|
|
President,
Chief Executive Officer
|
|
November
3, 2017
|
Michael
J. Pudil
|
|
and
Director
|
|
|
|
|
|
|
|
/s/
Burton F. Myers II
|
|
Director
|
|
November
3, 2017
|
Burton
F. Myers II
|
|
|
|
|
|
|
|
|
|
/s/
James D. Hartman
|
|
Director
|
|
November
3, 2017
|
James
D. Hartman
|
|
|
|
|
|
|
|
|
|
/s/
Jack R. Veach
|
|
Director
|
|
November
3, 2017
|
Jack
R. Veach
|
|
|
|
|
INDEX
TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
|
Page
|
|
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
24
|
Consolidated
Balance Sheets - August 27, 2017 and August 28, 2016
|
25
|
Consolidated
Statements of Income - Years Ended August 27, 2017, August 28, 2016 and August 30, 2015
|
26
|
Consolidated
Statements of Stockholders’ Equity - Years Ended August 27, 2017, August 28, 2016 and August 30, 2015
|
27
|
Consolidated
Statements of Cash Flows - Years Ended August 27, 2017, August 28, 2016 and August 30, 2015
|
28
|
Notes
to Consolidated Financial Statements
|
29-40
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Shareholders
WSI
Industries, Inc.
Monticello,
Minnesota
We
have audited the consolidated balance sheets of WSI Industries, Inc. and Subsidiaries as of August 27, 2017 and August 28, 2016
and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year
period ended August 27, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of WSI Industries, Inc. and Subsidiaries as of August 27, 2017 and August 28, 2016, and the results of its
operations and its cash flows for each of the years in the three-year period ended August 27, 2017, in conformity with United
States generally accepted accounting principles.
/s/
Schechter Dokken Kanter Andrews & Selcer Ltd.
Minneapolis,
Minnesota
November
3, 2017
WSI
INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AUGUST 27, 2017 AND AUGUST 28, 2016
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,846,933
|
|
|
$
|
3,739,324
|
|
Accounts
receivable, less allowance for doubtful accounts of $10,074
|
|
|
2,739,087
|
|
|
|
3,823,545
|
|
Inventories
(Note 2)
|
|
|
3,131,679
|
|
|
|
3,047,512
|
|
Prepaid
and other current assets
|
|
|
78,409
|
|
|
|
286,251
|
|
Total
current assets
|
|
|
11,796,108
|
|
|
|
10,896,632
|
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land
|
|
|
819,000
|
|
|
|
819,000
|
|
Building
and improvements
|
|
|
6,319,087
|
|
|
|
6,288,811
|
|
Machinery
and equipment
|
|
|
21,489,333
|
|
|
|
21,466,372
|
|
Less
accumulated depreciation
|
|
|
(18,306,612
|
)
|
|
|
(17,113,365
|
)
|
Total
property, plant, and equipment
|
|
|
10,320,808
|
|
|
|
11,460,818
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash (Note 3)
|
|
|
-
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
Other
assets (Note 10):
|
|
|
|
|
|
|
|
|
Goodwill
and other assets
|
|
|
2,368,452
|
|
|
|
2,375,136
|
|
|
|
$
|
24,485,368
|
|
|
$
|
25,982,586
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
$
|
2,058,992
|
|
|
$
|
1,729,251
|
|
Accrued
compensation and employee withholdings
|
|
|
664,277
|
|
|
|
394,657
|
|
Other
accrued expenses and deferred revenue
|
|
|
530,552
|
|
|
|
133,477
|
|
Current
portion of long-term debt (Note 3)
|
|
|
1,438,057
|
|
|
|
1,557,801
|
|
Total
current liabilities
|
|
|
4,691,878
|
|
|
|
3,815,186
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion (Note 3)
|
|
|
5,441,848
|
|
|
|
6,785,432
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities (Note 6)
|
|
|
915,068
|
|
|
|
1,402,735
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity (Note 5):
|
|
|
|
|
|
|
|
|
Common
stock, par value $.10 a share; authorized 10,000,000 shares; issued and outstanding 2,959,940 and 2,919,500 shares, respectively
|
|
|
295,994
|
|
|
|
291,950
|
|
Capital
in excess of par value
|
|
|
4,192,578
|
|
|
|
3,848,484
|
|
Deferred
compensation
|
|
|
(76,500
|
)
|
|
|
-
|
|
Retained
earnings
|
|
|
9,024,502
|
|
|
|
9,838,799
|
|
Total
stockholders’ equity
|
|
|
13,436,574
|
|
|
|
13,979,233
|
|
|
|
$
|
24,485,368
|
|
|
$
|
25,982,586
|
|
See
notes to consolidated financial statements.
WSI
INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
YEARS ENDED AUGUST 27, 2017, AUGUST 28, 2016 AND AUGUST
30, 2015
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales (Note 8)
|
|
$
|
30,641,082
|
|
|
$
|
35,215,984
|
|
|
$
|
42,982,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
|
28,195,168
|
|
|
|
32,291,726
|
|
|
|
38,658,881
|
|
Gross
margin
|
|
|
2,445,914
|
|
|
|
2,924,258
|
|
|
|
4,324,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expense
|
|
|
3,345,802
|
|
|
|
3,011,651
|
|
|
|
2,971,576
|
|
Equipment
impairment loss
|
|
|
147,502
|
|
|
|
-
|
|
|
|
-
|
|
Interest
and other income
|
|
|
(18,555
|
)
|
|
|
(21,606
|
)
|
|
|
(5,601
|
)
|
Interest
expense
|
|
|
275,494
|
|
|
|
308,461
|
|
|
|
346,297
|
|
|
|
|
3,750,243
|
|
|
|
3,298,506
|
|
|
|
3,312,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(1,304,329
|
)
|
|
|
(374,248
|
)
|
|
|
1,011,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit) (Note 6)
|
|
|
(490,032
|
)
|
|
|
(547,296
|
)
|
|
|
14,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(814,297
|
)
|
|
$
|
173,048
|
|
|
$
|
997,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$
|
(.28
|
)
|
|
$
|
.06
|
|
|
$
|
.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
$
|
(.28
|
)
|
|
$
|
.06
|
|
|
$
|
.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividend per share
|
|
$
|
-
|
|
|
$
|
.08
|
|
|
$
|
.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, basic
|
|
|
2,930,580
|
|
|
|
2,919,500
|
|
|
|
2,910,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, diluted
|
|
|
2,930,580
|
|
|
|
2,928,126
|
|
|
|
2,960,398
|
|
See
notes to consolidated financial statements.
WSI
INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS
ENDED AUGUST 27, 2017, AUGUST 28, 2016 AND AUGUST 30, 2015
|
|
Common
Stock Shares
|
|
|
Amount
|
|
|
Capital
in Excess of
Par
Value
|
|
|
Deferred
Compensation
|
|
|
Retained
Earnings
|
|
|
Total
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at August 31, 2014
|
|
|
2,908,893
|
|
|
$
|
290,889
|
|
|
$
|
3,480,450
|
|
|
$
|
(24,644
|
)
|
|
$
|
9,367,580
|
|
|
$
|
13,114,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
997,068
|
|
|
|
997,068
|
|
Restricted
stock grants
|
|
|
54
|
|
|
|
6
|
|
|
|
323
|
|
|
|
(329
|
)
|
|
|
-
|
|
|
|
-
|
|
Restricted
stock vesting
|
|
|
-
|
|
|
|
-
|
|
|
|
(24,973
|
)
|
|
|
24,973
|
|
|
|
-
|
|
|
|
-
|
|
Stock
option compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
235,208
|
|
|
|
-
|
|
|
|
-
|
|
|
|
235,208
|
|
Restricted
stock grants payment of withholding taxes
|
|
|
(504
|
)
|
|
|
(51
|
)
|
|
|
(2,863
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,914
|
)
|
Exercise
of stock options and appreciation rights and payment of withholding taxes
|
|
$
|
11,057
|
|
|
|
1,106
|
|
|
|
(4,674
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,568
|
)
|
Dividends
paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(465,337
|
)
|
|
|
(465,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at August 30, 2015
|
|
|
2,919,500
|
|
|
$
|
291,950
|
|
|
$
|
3,683,471
|
|
|
$
|
-
|
|
|
$
|
9,899,311
|
|
|
$
|
13,874,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
173,048
|
|
|
|
173,048
|
|
Stock
option compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
165,013
|
|
|
|
-
|
|
|
|
-
|
|
|
|
165,013
|
|
Dividends
paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(233,560
|
)
|
|
|
(233,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at August 28, 2016
|
|
|
2,919,500
|
|
|
$
|
291,950
|
|
|
$
|
3,848,484
|
|
|
$
|
-
|
|
|
$
|
9,838,799
|
|
|
$
|
13,979,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(814,297
|
)
|
|
|
(814,297
|
)
|
Restricted
stock grants
|
|
|
50,000
|
|
|
|
5,000
|
|
|
|
148,000
|
|
|
|
(153,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Restricted
stock vesting
|
|
|
-
|
|
|
|
-
|
|
|
|
(76,500
|
)
|
|
|
76,500
|
|
|
|
-
|
|
|
|
-
|
|
Stock
option compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
301,726
|
|
|
|
-
|
|
|
|
-
|
|
|
|
301,726
|
|
Restricted
stock grants payment of withholding taxes
|
|
|
(9,725
|
)
|
|
|
(973
|
)
|
|
|
(28,786
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(29,759
|
)
|
Exercise
of stock options and appreciation rights and payment of withholding taxes
|
|
|
165
|
|
|
|
17
|
|
|
|
(346
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at August 27, 2017
|
|
|
2,959,940
|
|
|
$
|
295,994
|
|
|
$
|
4,192,578
|
|
|
$
|
(76,500
|
)
|
|
$
|
9,024,502
|
|
|
$
|
13,436,574
|
|
See
notes to consolidated financial statements.
WSI
INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 27, 2017, AUGUST 28, 2016 AND AUGUST 30, 2015
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(814,297
|
)
|
|
$
|
173,048
|
|
|
$
|
997,068
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment
|
|
|
1,798,853
|
|
|
|
1,832,393
|
|
|
|
1,986,513
|
|
Amortization
|
|
|
8,651
|
|
|
|
4,011
|
|
|
|
4,010
|
|
Net
tax benefits related to share based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,885
|
)
|
Gain
on sale of property, plant and equipment
|
|
|
-
|
|
|
|
(15,000
|
)
|
|
|
-
|
|
Deferred
taxes
|
|
|
(487,667
|
)
|
|
|
(369,555
|
)
|
|
|
(98,553
|
)
|
Impairment
of equipment
|
|
|
147,502
|
|
|
|
-
|
|
|
|
-
|
|
Stock
option compensation
|
|
|
301,726
|
|
|
|
165,013
|
|
|
|
235,208
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,084,458
|
|
|
|
(838,289
|
)
|
|
|
2,978,242
|
|
Inventories
|
|
|
(84,167
|
)
|
|
|
2,904,194
|
|
|
|
(2,184,679
|
)
|
Prepaid
and other current assets
|
|
|
207,842
|
|
|
|
255,813
|
|
|
|
(314,365
|
)
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
966,348
|
|
|
|
(1,133,697
|
)
|
|
|
(346,849
|
)
|
Net
cash provided by operating activities
|
|
|
3,129,249
|
|
|
|
2,977,931
|
|
|
|
3,240,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales of equipment
|
|
|
-
|
|
|
|
15,000
|
|
|
|
-
|
|
Additions
to property, plant, and equipment
|
|
|
(806,345
|
)
|
|
|
(392,311
|
)
|
|
|
(192,009
|
)
|
Net
cash used in investing activities
|
|
|
(806,345
|
)
|
|
|
(377,311
|
)
|
|
|
(192,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
3,700,000
|
|
|
|
-
|
|
|
|
-
|
|
Payment
of long-term debt
|
|
|
(5,125,959
|
)
|
|
|
(1,527,381
|
)
|
|
|
(1,691,560
|
)
|
Net
tax benefits related to share based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
15,885
|
|
Restricted
cash requirement
|
|
|
1,250,000
|
|
|
|
(1,250,000
|
)
|
|
|
-
|
|
Deferred
financing costs
|
|
|
(39,336
|
)
|
|
|
-
|
|
|
|
-
|
|
Issuance
of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
8,520
|
|
Dividends
paid
|
|
|
-
|
|
|
|
(233,560
|
)
|
|
|
(465,337
|
)
|
Net
cash used in financing activities
|
|
|
(215,295
|
)
|
|
|
(3,010,941
|
)
|
|
|
(2,132,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
2,107,609
|
|
|
|
(410,321
|
)
|
|
|
916,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
|
|
3,739,324
|
|
|
|
4,149,645
|
|
|
|
3,233,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
5,846,933
|
|
|
$
|
3,739,324
|
|
|
$
|
4,149,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
273,199
|
|
|
$
|
309,357
|
|
|
$
|
346,604
|
|
Payroll
withholding taxes in cashless stock option exercise
|
|
|
30,088
|
|
|
|
-
|
|
|
|
30,887
|
|
Income
taxes
|
|
|
5,900
|
|
|
|
-
|
|
|
|
468,735
|
|
Noncash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of machinery through debt
|
|
|
-
|
|
|
|
-
|
|
|
|
1,391,890
|
|
Cash
received during the year for income tax refunds
|
|
|
137,040
|
|
|
|
398,750
|
|
|
|
-
|
|
See
notes to consolidated financial statements.
WSI
INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 27, 2017, AUGUST 28, 2016 AND AUGUST 30, 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Business
Description
– WSI Industries, Inc. and Subsidiaries (the Company) is involved in the precision contract metal machining
business primarily serving the recreational vehicle, energy, aerospace/avionics and bioscience industries.
|
|
|
|
Fiscal
Year
- WSI Industries, Inc.’s fiscal years represent a 52- to 53-week period ending the last Sunday in August. Fiscal
years 2015 through 2017 each consisted of 52 weeks.
|
|
|
|
Basis
of Presentation
- The consolidated financial statements include the accounts of WSI Industries, Inc. and its subsidiaries.
All material intercompany balances and transactions have been eliminated.
|
|
|
|
Cash
and Cash Equivalents
- Cash and cash equivalents include cash on hand, demand deposits with financial institutions and
short-term, highly liquid investments with original maturities of three months or less. At times bank balances may exceed
federally insured limits. The Company has experienced no losses with this practice. Cash equivalents are carried at cost plus
accrued interest which approximates fair value.
|
|
|
|
Inventories
- Inventory costs are determined using the average cost method and consist of material, direct labor, and manufacturing
overhead. They 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. Inventory cost is adjusted down for any excess of cost over the net realizable value of
inventory components.
|
|
|
|
In
addition, the Company determines whether its inventory is excess and obsolete 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 adjusts the inventory value to
the amount the Company estimates as the ultimate net realizable value for that inventory. The Company performs its lower of
cost or market testing, as well as its excess or obsolete inventory analyses, quarterly.
|
|
|
|
Property,
plant, equipment and depreciation and amortization
- The cost of substantially all machinery and equipment, and buildings
and improvements are being depreciated using the straight-line method. The estimated useful lives of the assets are as follows:
|
Machinery
and equipment
|
3
to 7 years
|
Building
and improvements
|
10
to 40 years
|
|
Restricted
cash –
At August 28, 2016, the Company was required to keep cash in a deposit account maintained by its Bank. Since
the Company had no right of withdrawal, and the account served as collateral for outstanding debt obligations, restricted
cash was excluded from cash and cash equivalents and classified as long-term. At August 27, 2017, the restricted cash requirement
had been eliminated and all cash was classified as a current asset in cash and cash equivalents.
|
|
|
|
Long-lived
Assets -
The Company evaluates long-term assets on a periodic basis in compliance with Accounting Standards Codification
(“ASC”) 360,
Accounting for the Impairment of Long-lived Assets
when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amount. If the
undiscounted cash flows are less than the carrying amount, the impairment recognized is measured by the amount the carrying
value of the assets exceeds their fair value determined primarily through the present value of estimated future cash flows.
|
|
Goodwill
-
The Company assesses the valuation of its goodwill according to the provisions of ASC 350 to determine if the current
value of goodwill has been impaired. The Company has also adopted Accounting Standard Update (ASU) No. 2011-08,
Intangibles—Goodwill
and Other (Topic 350).
With ASU No. 2011-08, an entity is given the option to make a qualitative
evaluation of goodwill impairment to determine whether it should calculate the fair value of its reporting unit.
In
addition, the Company adopted ASU 2017-04,
Simplifying the Test for Goodwill Impairment
(ASU 2017-04). ASU 2017-04
eliminates Step 2 from the goodwill impairment test. Under the amendments in this update, an entity should recognize an impairment
charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized
should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also eliminates the requirement
for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative
test, to perform Step 2 of the goodwill impairment test. In the fiscal 2017 fourth quarter, the Company made its qualitative
evaluation of its goodwill considering, among other things, the overall macroeconomic conditions, industry and market considerations,
overall financial performance and other relevant company specific events. Based on this qualitative evaluation, the Company
concluded that it was more likely than not that its goodwill was not impaired and that it wasn’t required to calculate
the fair value of its reporting unit. 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.
|
|
|
|
Income
Taxes
- The determination of the Company’s income tax-related account balances requires the exercise of significant
judgment by management. Accordingly, the Company determines deferred tax assets and liabilities based upon the difference
between financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year the differences
are expected to affect taxable income. Management assesses the likelihood that deferred tax assets will be recovered from
future taxable income and establishes a valuation allowance when management believes recovery is unlikely.
|
|
|
|
Revenue
Recognition
- Revenues from sales of product are recorded generally upon shipment. 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) collectability is reasonably assured. The Company refers to its revenues
as “net sales” in its Consolidated Statements of Income as the Company’s sales are reduced for any product
returned by customers.
|
|
|
|
The
Company generally does not require collateral on its trade receivables. The maximum loss that the Company would incur if a
customer failed to pay amounts owed would be limited to the recorded amount due after any allowances provided. Credit losses
relating to customers have been minimal and within management’s expectations. Based on management’s evaluation
of uncollected accounts receivable throughout the year, bad debts are provided for on the allowance method. Accounts are considered
delinquent if they are 120 days past due. The Company mitigates its credit risk by performing credit checks and actively pursuing
past due accounts.
|
|
|
|
Freight
costs –
The Company includes freight, shipping and handling costs, in the cost of goods sold.
|
|
Use
of Estimate
s - The preparation of financial statements in conformity with United States of America generally accepted
accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those estimates. Significant estimates made in those financial
statements consist of estimates related to the impairment of goodwill, the evaluation of excess or obsolete inventory and
the valuation allowance connected to the deferred tax assets.
|
|
|
|
Earnings
per Share
– Basic earnings per share is computed using the weighted average number of common shares outstanding.
Diluted earnings per share is computed using the combination of dilutive common share equivalents and the weighted average
number of common shares outstanding.
|
|
|
|
Stock-based
compensation
- The following information has been determined as if the Company had accounted for its stock options under
the fair value method of ASC 718. The fair value for these options was estimated, for the purpose of determining compensation,
at the date of grant using the Black-Scholes option pricing model with the following assumptions as set forth in the table
below. The estimated fair value of the options is amortized to expense over the options’ vesting period.
|
Date
of Grant in fiscal -
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Dividend
yield
|
|
|
-
|
|
|
|
1.8
|
%
|
|
|
2.2%-2.7
|
%
|
Expected
volatility
|
|
|
29.1%-29.4
|
%
|
|
|
31.8
|
%
|
|
|
51.2%-51.3
|
%
|
Risk
free interest rate
|
|
|
2.0%-2.5
|
%
|
|
|
1.7%-2.3
|
%
|
|
|
1.7%-2.3
|
%
|
Expected
term
|
|
|
5-10
years
|
|
|
|
5-10
years
|
|
|
|
5-10
years
|
|
|
ASC
718 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.
|
|
R
ecent
Accounting Pronouncements
|
|
|
|
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “
Revenue from Contracts with Customers
”. This guidance defines how companies report revenues
from contracts with customers and also requires enhanced disclosures. In July 2015, the Financial Accounting Standards Board
voted to defer the effective date by one year, with early adoption on the original effective date permitted. ASU 2014-09 was
to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within the annual
reporting period. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), Deferral
of the Effective Date (“ASU 2015-14”). The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for
all entities by one year. The Company is currently evaluating the potential effects of the adoption of this update on the
consolidated financial statements.
|
|
|
|
In
March 2016, FASB issued ASU No. 2016-02,
“Leases (Topic 842)
”. ASU 2016-02 requires lessees to recognize
the assets and liabilities that arise from most leases. The main difference between previous U.S. GAAP and ASU 2016-02 is
the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous
U.S. GAAP. For lessors, the guidance included in ASU 2016-02 modifies the classification criteria and the accounting for sales-type
and direct financing leases. ASU 2016-02 provides specific guidance for determining whether a contractual arrangement contains
a lease, lease classification by lessees and lessors, initial and subsequent measurement of leases by lessees and lessors,
sale and leaseback transactions, transition, and financial statement disclosures. ASU 2016-02 requires entities to use a modified
retrospective approach to apply its guidance, and includes a number of optional practical expedients that entities may elect
to apply. For public entities, the amendments included in ASU 2016-02 are effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the potential effects of
the adoption of this guidance on the consolidated financial statements.
|
|
In
November 2015, the FASB issued ASU No. 2015-17, “
Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes
”. The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance
sheet rather than being separated into current and noncurrent. ASU 2015-17 is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either
retrospectively or on a prospective basis to all deferred tax assets and liabilities. We early adopted ASU 2015-17 during
our fourth quarter of fiscal year 2016 on a prospective basis.
|
|
|
|
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation
. ASU 2016-09 identifies areas
for simplification involving several aspects of accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense
with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The amendments
in this update will be effective for the first interim period within annual reporting periods beginning after December 15,
2016. Early adoption is permitted. The Company is currently assessing the impact that adopting this new accounting guidance
will have on its financial statements and footnote disclosures.
|
|
|
|
In
January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
(ASU 2017-04). ASU 2017-04
eliminates Step 2 from the goodwill impairment test. Under the amendments in this update, an entity should recognize an impairment
charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized
should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also eliminates the requirement
for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative
test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective for the Company beginning in the first quarter
of fiscal 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after
January 1, 2017. The Company adopted ASU 2017-04 in the fourth quarter of fiscal 2017 with its annual goodwill impairment
tests. The adoption of ASU 2017-04 did not have an impact on the Company’s Consolidated Financial Statements.
|
2.
INVENTORIES
|
Inventories
consist primarily of raw material, work-in-process (WIP) and finished goods valued at the lower of cost or market value:
|
|
|
August
27, 2017
|
|
|
August
28, 2016
|
|
|
|
|
|
|
|
|
Raw
material
|
|
$
|
1,047,931
|
|
|
$
|
1,598,874
|
|
WIP
|
|
|
1,448,282
|
|
|
|
913,494
|
|
Finished
goods
|
|
|
635,466
|
|
|
|
535,144
|
|
|
|
$
|
3,131,679
|
|
|
$
|
3,047,512
|
|
3.
DEBT
|
Long-term
debt consists of the following:
|
|
|
August
27, 2017
|
|
|
August
28, 2016
|
|
Building
related mortgages & term debt
|
|
$
|
3,598,377
|
|
|
$
|
3,675,794
|
|
Capitalized
lease obligations
|
|
|
3,281,528
|
|
|
|
4,667,439
|
|
|
|
|
6,879,905
|
|
|
|
8,343,233
|
|
Less
current portion
|
|
|
1,438,057
|
|
|
|
1,557,801
|
|
Long-term
debt,
|
|
$
|
5,441,848
|
|
|
$
|
6,785,432
|
|
|
The
Company expanded its Monticello, Minnesota facility during fiscal 2013 which increased the total facility size to approximately
107,000 square feet. The expansion cost approximately $3.8 million which was paid for by a combination of cash on hand and
a mortgage agreement with its prior bank which was finalized in May 2013. The mortgage carried an interest rate of 2.843%,
required monthly payments of $22,964 based on a 20-year amortization schedule and was secured all assets of the Company.
|
|
|
|
During
the quarter ended February 26, 2017, the Company entered into a new loan agreement with a new bank for a new mortgage term
loan. The new mortgage paid off the prior mortgage in its entirety and released all obligations in connection with that mortgage
including the requirement to maintain a restricted cash balance of $1.25 million. The new mortgage was for $3.7 million and
carries an interest rate of 3.99% fixed for five years after which the interest rate will reset at a fixed rate for the subsequent
five years. The mortgage requires monthly payments of $22,511 based on a 20-year amortization schedule and matures in February
2027. The mortgage is secured by all assets of the Company. The mortgage agreement provides for certain restrictive covenants
including a minimum tangible net worth and a minimum working capital. At August 27, 2017, the Company was in compliance with
these provisions.
|
|
|
|
Maturities
of long-term debt are as follows:
|
Fiscal years
ending August:
|
|
|
|
2018
|
|
$
|
1,438,057
|
|
2019
|
|
|
1,121,076
|
|
2020
|
|
|
760,523
|
|
2021
|
|
|
353,670
|
|
2022
|
|
|
269,361
|
|
Thereafter
|
|
|
2,937,218
|
|
|
Included
in the consolidated balance sheet at August 27, 2017 are cost and accumulated depreciation on equipment subject to capitalized
leases of $9,015,281 and $6,079,373 respectively. At August 28, 2016, the amounts were $9,510,889 and $5,086,481, respectively.
The capital leases carry interest rates from 3.5% to 5.2% and mature from 2018 – 2022.
|
|
|
|
The
present value of the net minimum payments on capital leases which is included in long-term debt as of August 27, 2017 is as
follows:
|
Fiscal years
ending August:
|
|
|
|
2018
|
|
$
|
1,412,563
|
|
2019
|
|
|
1,046,852
|
|
2020
|
|
|
651,216
|
|
2021
|
|
|
224,619
|
|
2022
|
|
|
127,319
|
|
Thereafter
|
|
|
-
|
|
Total
minimum lease payments
|
|
|
3,462,569
|
|
Less
amount representing interest
|
|
|
181,041
|
|
Present
value of net minimum lease payments
|
|
|
3,281,528
|
|
Current
portion
|
|
|
1,316,597
|
|
Capital
lease obligation, less current portion
|
|
$
|
1,964,931
|
|
|
During
fiscal 2017, the Company placed purchase orders for two new pieces of equipment for approximately $2,055,000 that will be
delivered and put into service during fiscal 2018. The Company also made advance deposits on that equipment totaling $687,000
which has been classified as machinery and equipment on the balance sheet. During fiscal 2017, the Company entered into a
debt agreement related to one of the pieces of equipment and subsequent to the August 27, 2017 entered into a second debt
agreement on the other piece of equipment. There were no amounts outstanding related to either debt agreement at August 27,
2017. Both debt agreements will commence once the equipment is delivered and accepted by the Company. Upon commencement, both
agreements will be for five years and will have interest rates from 4.25% - 5.36%.
|
|
|
|
Line
of Credit:
|
|
During
the quarter ended February 26, 2017, the Company entered into a loan agreement with its new bank for a revolving line of credit.
The agreement provides for a maximum loan of $1,500,000 with interest at the thirty-day LIBOR rate plus 2.0% with a base rate
of 2.75%. The revolver has a maturity date of February 15, 2018. The loan agreement provides for certain restrictive covenants
including a minimum tangible net worth and a minimum working capital. At August 27, 2017, the Company was in compliance with
these provisions. There were no amounts outstanding related to its revolving loan agreement at August 27, 2017.
|
4.
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The
carrying amounts of financial instruments, including cash and equivalents, receivables, accounts payable and accrued expenses,
and current maturities on long-term debt obligations approximates fair values due to their short-term nature. Interest on
long-term debt is primarily at fixed rates which do not differ significantly from approximate market rates at August 27, 2017.
|
5.
STOCK-BASED COMPENSATION
|
Stock
Options
- The 2005 Stock Option Plan was approved and 800,000 shares of common stock were reserved for granting of options
to officers, key employees and directors. The Plan has been renewed by the Company’s shareholders for a term of 10 years
and will expire in 2025. Stock options vest over a period of six months to three years.
|
|
Option
transactions during the three years ended August 27, 2017 are summarized as follows:
|
|
|
2005
Stock Option Plan
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Price
|
|
Outstanding
at August 31, 2014
|
|
|
303,251
|
|
|
$
|
5.30
|
|
Granted
|
|
|
78,750
|
|
|
$
|
6.01
|
|
Forfeit
|
|
|
-
|
|
|
|
-
|
|
Lapsed
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(29,500
|
)
|
|
$
|
3.13
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at August 30, 2015
|
|
|
352,501
|
|
|
$
|
5.64
|
|
Granted
|
|
|
96,500
|
|
|
$
|
4.43
|
|
Forfeit
|
|
|
(26,000
|
)
|
|
$
|
5.63
|
|
Lapsed
|
|
|
(8,000
|
)
|
|
$
|
6.09
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at August 28, 2016
|
|
|
415,001
|
|
|
$
|
5.35
|
|
Granted
|
|
|
151,250
|
|
|
$
|
3.01
|
|
Forfeit
|
|
|
(240,550
|
)
|
|
$
|
5.08
|
|
Lapsed
|
|
|
(15,500
|
)
|
|
$
|
4.35
|
|
Exercised
|
|
|
(5,000
|
)
|
|
$
|
2.98
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at August 27, 2017
|
|
|
305,201
|
|
|
$
|
4.49
|
|
|
Of
the 5,000 and 29,500 stock options from the 2005 Plan that were exercised in fiscal 2017 and 2015, 4,835 and 18,443 shares
were returned to the Company to pay for the exercise price and for related payroll withholding taxes, respectively.
|
|
|
|
The
weighted fair value of options granted during the years ended August 27, 2017, August 28, 2016 and August 30, 2015 was $1.29,
$1.05 and $2.57, respectively. The total intrinsic value of options exercised for the years August 27, 2017 and August 30,
2015 was $850 and $85,705, respectively. The intrinsic value for all options outstanding at August 27, 2017 was $0.
|
|
|
|
Cash
received from option exercises for year ended August 30, 2015 was $8,520. The actual tax benefit (expense) realized for the
tax deductions from option exercises totaled ($1,365) and $15,885 for fiscal years ended 2017and 2015, respectively.
|
|
|
|
As
of August 27, 2017, there was $116,313 of total unearned compensation cost related to option-based compensation arrangements
to be recognized over an expected weighted average of 1 year.
|
|
As
of August 27, 2017, there were 8,000 shares with an exercise price of $2.13, 115,250 shares with exercise prices between $2.98
and $3.46, 53,700 options outstanding with exercise prices between $4.37 and $4.44, 38,000 options outstanding with exercise
prices between $4.93 and $5.39 and 90,251 with exercise prices between $5.95 and $7.45. At August 27, 2017, outstanding options
had a weighted-average remaining contractual life of 6.7 years.
|
|
The
number of options exercisable as of August 27, 2017, August 28, 2016 and August 30, 2015 were 215,968, 318,830 and 267,748,
respectively, at weighted average share prices of $4.93, $5.46 and $5.49 per share, respectively. At August 27, 2017, there
were 89,233 options that had not vested. The aggregate intrinsic values of options exercisable as of August 27, 2017, August
28, 2016 and August 30, 2015 was $0, $0 and $33,059, respectively, with weighted-average remaining contractual lives of 5.9,
5.8 and 6.3 years.
|
|
|
|
The
Company can also grant non-vested restricted shares as part of the 2005 Stock Option Plan. Non-vested restricted share transactions
during the three years ended August 27, 2017 are as follows:
|
|
|
Options
|
|
|
Average
Price
|
|
Outstanding
at August 31, 2014
|
|
|
4,776
|
|
|
$
|
5.16
|
|
Granted
|
|
|
54
|
|
|
|
6.09
|
|
Vested
|
|
|
(4,830
|
)
|
|
|
5.32
|
|
Outstanding
at August 30, 2015
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at August 28, 2016
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
50,000
|
|
|
|
3.06
|
|
Vested
|
|
|
(25,000
|
)
|
|
|
3.06
|
|
Outstanding
at August 27, 2017
|
|
|
25,000
|
|
|
$
|
3.06
|
|
|
As
of August 27, 2017, there was $34,924 in total unrecognized compensation cost related to non-vested restricted stock compensation
arrangements granted under the Plan.
|
6.
INCOME TAXES
|
Income
taxes consisted of the following:
|
|
|
Years
Ended
|
|
|
|
August
27, 2017
|
|
|
August
28, 2016
|
|
|
August
30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(12,055
|
)
|
|
$
|
(187,241
|
)
|
|
$
|
102,448
|
|
State
|
|
|
9,690
|
|
|
|
9,500
|
|
|
|
10,821
|
|
|
|
|
(2,365
|
)
|
|
|
(177,741
|
)
|
|
|
113,269
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(478,531
|
)
|
|
|
(200,433
|
)
|
|
|
(44,441
|
)
|
State
|
|
|
(9,136
|
)
|
|
|
(169,122
|
)
|
|
|
(54,112
|
)
|
|
|
|
(487,667
|
)
|
|
|
(369,555
|
)
|
|
|
(98,553
|
)
|
Total
|
|
$
|
(490,032
|
)
|
|
$
|
(547,296
|
)
|
|
$
|
14,716
|
|
|
A
reconciliation of the federal income tax provision at the statutory rate with actual taxes provided on earnings from continuing
operations is as follows:
|
|
|
Years
Ended
|
|
|
|
August
27, 2017
|
|
|
August
28, 2016
|
|
|
August
30, 2015
|
|
Ordinary
federal income tax statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
|
34.0
|
%
|
Income
tax credits
|
|
|
(4.4
|
)
|
|
|
(107.1
|
)
|
|
|
(27.0
|
)
|
Domestic
production activities deduction
|
|
|
(.2
|
)
|
|
|
(6.1
|
)
|
|
|
(6.5
|
)
|
State
income taxes net of federal tax effect
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
1.0
|
|
Effective
rate
|
|
|
(37.6
|
%)
|
|
|
(146.2
|
)%
|
|
|
1.5
|
%
|
|
Deferred
income taxes are provided for the temporary differences between the financial reporting and tax basis of the Company’s
assets and liabilities. Temporary differences comprising the net deferred taxes on the balance sheet are as follows:
|
|
|
August
27, 2017
|
|
|
August
28, 2016
|
|
Deferred
Tax Assets
|
|
|
|
|
|
|
|
|
Accrued
liabilities
|
|
$
|
127,765
|
|
|
$
|
61,977
|
|
Inventory
|
|
|
71,013
|
|
|
|
122,871
|
|
Tax
credit carryforwards
|
|
|
710,198
|
|
|
|
717,856
|
|
Stock
option expense
|
|
|
363,632
|
|
|
|
323,728
|
|
Other
|
|
|
16,456
|
|
|
|
7,346
|
|
|
|
|
1,289,064
|
|
|
|
1,233,778
|
|
Less:
valuation allowance
|
|
|
(27,473
|
)
|
|
|
(21,212
|
)
|
Net
deferred tax assets
|
|
|
1,261,591
|
)
|
|
|
1,212,566
|
)
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Liabilities
|
|
|
|
|
|
|
|
|
Tax
depreciation and amortization greater than book
|
|
|
(2,176,659
|
)
|
|
|
(2,615,301
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred taxes
|
|
$
|
(915,068
|
)
|
|
$
|
(1,402,735
|
)
|
The
Company’s effective tax rate in its year ended August 27, 2017 was a negative (37.6%) as compared to a negative (146.2%)
for the year ended August 28, 2016 and 1.5% for the year ended August 30, 2015, respectively. During fiscal 2016, the Company
hired an outside consulting firm to conduct an analysis to determine if certain activities the Company performs qualifies for
the Research & Development tax credit (R&D credit) as defined by Internal Revenue Code Section 41. As a result of the
analysis, the Company determined that it is performing activities that qualify for the R&D credit, and during the fiscal year
2016 recognized tax benefits related to R&D tax credits from several prior years which lowered the overall effective tax rate.
In addition, during the Company’s fiscal 2016 second quarter, the Federal R&D tax credit law was retroactively renewed
for calendar year 2015 and also made permanent going forward. Since for calendar year 2015 the law was enacted retroactively,
any effects are recognized as a component of income tax expense or benefit from continuing operations in the financial statements
in the interim period that the law was enacted, which in this case was the Company’s fiscal 2016 second quarter. The Company
believes that it has recognized R&D tax benefits for all prior years to the extent possible.
As
of August 27, 2017, the Company has federal alternative minimum tax credit carryforwards of approximately $347,000 and approximately
$209,000 in federal R&D tax credit carryforwards. The Company also has $254,000 in state R&D tax credit carryforwards
and $23,000 in state alternative minimum tax credit carry forwards. The R&D tax credit carryforwards that are related to state
jurisdictions begin to expire starting in 2018. The federal R&D tax credits begin to expire in 2033 while the alternative
minimum tax credit carry forwards do not expire.
The
Company files income tax returns in the U.S. federal and various state jurisdictions. The Company classifies interest and penalties
arising from unrecognized income tax positions in income tax expense if they occur. At August 27, 2017 and August 28, 2016, the
Company had no accrued interest or penalties related to uncertain tax positions.
As
previously discussed, the Company has R&D tax credits related to state jurisdictions. These credits can be carried forward
for fifteen years before they expire. The Company applies the accounting standard for recognition of deferred tax assets pursuant
to a more-likely-than-not threshold. The Company believes that it is more likely than not that some of its’ state R&D
tax credits will expire before they can be utilized. Due to this, the Company established a valuation allowance of $27,473 at
August 27, 2017. The Company also applies the more-likely-than-not accounting standard for uncertain tax positions to determine
the recognition and derecognition of uncertain tax positions. Once the more-likely-than-not threshold is met, the amount of benefit
to be recognized is the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon
settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions
be recognized in earnings in the period of such a change. Below is a summary of uncertain tax positions:
Uncertain
tax positions at August 31, 2014
|
|
$
|
-
|
|
Increase
for tax positions related to prior years
|
|
|
30,000
|
|
Uncertain
tax positions at August 30, 2015
|
|
|
30,000
|
|
Increase
for tax positions related to prior years
|
|
|
3,778
|
|
Uncertain
tax positions at August 28, 2016
|
|
|
33,778
|
|
Increases
for tax positions related to prior years
|
|
|
182
|
|
Uncertain
tax positions at August 27, 2017
|
|
$
|
33,960
|
|
The
Company does not believe there will be significant changes to the estimates in the next 12-month period. Due to the complexity
of some of these uncertainties, the ultimate settlement may result in payments that are different from our current estimate of
tax liabilities, resulting in the recognition of additional charges or benefits to income tax expense.
The
Company incurred the following research and development expenses for the following years ended:
August
27, 2017
|
|
$
|
999,000
|
|
August 28,
2016
|
|
$
|
994,000
|
|
August 30,
2015
|
|
$
|
942,000
|
|
The
research and development expenses consist primarily of engineering costs associated with the startup of new parts and programs
and the development and testing of improvements on existing parts and programs. With each new part or program that the Company
secures, the Company has to develop the methods to manufacture these parts. Once the methods have been established, they need
to be tested and proven on the manufacturing floor. In many cases, these tests result in the methods being refined or overhauled
based on the experiences from the manufacturing floor.
7.
EQUIPMENT IMPAIRMENT
|
The
Company evaluates long-term assets on a periodic basis in compliance with Accounting Standards Codification (“ASC”)
360, Accounting for the Impairment of Long-lived Assets when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets carrying amount. If the undiscounted cash flows are
less than the carrying amount, the impairment recognized is measured by the amount the carrying value of the assets exceeds
their fair value determined primarily through the present value of estimated future cash flows. During the quarter ended May
28, 2017, the Company determined that one of its pieces of equipment was impaired and recognized an expense of approximately
$148,000.
|
8.
EMPLOYEE BENEFITS
|
The
Company maintains a 401(k) retirement savings plan that all employees are eligible to participate in as well as a profit sharing
plan. Profit sharing contributions are discretionary and are based on Company results. Contributions charged to operations
for the profit sharing plan and matching contributions for the 401(k) plan for fiscal 2017, 2016 and 2015, were $179,075,
$190,084 and $260,727, respectively.
|
9.
INFORMATION CONCERNING SALES TO MAJOR CUSTOMERS
|
The
Company had sales to one customer that exceeded 10 percent of total sales during fiscal year 2017. Sales in each of fiscal
year 2017, 2016 and 2015 for that customer are listed below:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Customer
|
|
$
|
26,432,000
|
|
|
$
|
31,526,000
|
|
|
$
|
36,937,000
|
|
|
The
Company had accounts receivable from the customer of $1,950,000 and $2,874,000 at August 27, 2017 and August 28, 2016, respectively.
Realization of these receivables, sale of inventory, and its future operations could be significantly affected by adverse
changes in the financial condition or the Company’s relationship with this customer.
|
10.
OTHER ASSETS
|
Other
assets consist of goodwill which resulted from costs from business acquisitions which total $2,368,452 (net of accumulated
amortization of $344,812 recorded prior to the adoption of ASC 350
Goodwill and Other Intangible Assets
). At August
28, 2016, other assets also included deferred financing costs of $6,684 (net of accumulated amortization of $13,368).
|
11.
EARNINGS PER SHARE
|
The
following table sets forth the computation of basic and diluted earnings per share:
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) $
|
|
$
|
(814,297
|
)
|
|
$
|
173,048
|
|
|
$
|
997,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares; denominator for basic earnings per share
|
|
|
2,930,580
|
|
|
|
2,919,500
|
|
|
|
2,910,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities; employee and non-employee options
|
|
|
-
|
|
|
|
8,626
|
|
|
|
49,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
common shares; denominator for diluted earnings per share
|
|
|
2,930,580
|
|
|
|
2,928,126
|
|
|
|
2,960,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
(.28
|
)
|
|
$
|
.06
|
|
|
$
|
.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
earnings per share
|
|
$
|
(.28
|
)
|
|
$
|
.06
|
|
|
$
|
.34
|
|
|
Stock
options to purchase 330,201 and 397,001 shares of common stock were outstanding during the years ended August 27, 2017 and
August 28, 2016, respectively, but were not included in the computation of diluted income per share. The inclusion of these
options would have been anti-dilutive as the options’ exercise prices were greater than the average market price of
the Company’s common shares during the relevant period.
|
12.
CLAIMS AND CONTINGENCIES
|
The
Company is exposed to a number of asserted and unasserted claims encountered in the ordinary course of business. Although
the outcome of any such claim cannot be predicted, management believes that there are no pending legal proceedings or claims
against or involving the Company for which the outcome is likely to have a material adverse effect upon its financial position
or results of operations.
|
Wsi Industries Inc. (delisted) (NASDAQ:WSCI)
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Wsi Industries Inc. (delisted) (NASDAQ:WSCI)
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