Form 10-Q WSI INDUSTRIES, INC. For: Nov 30

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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

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For the quarterly period ended�November 30, 2014

OR

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

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For the transition period from ���������������� to ����������������

Commission file number 0-619

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WSI Industries, Inc.

(Exact name of registrant as specified in its charter)

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

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

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(763) 295-9202

(Registrants telephone number, including area code)

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Not Applicable

(Former name, former address and former fiscal year, if changed

since last report)

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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� �No� 

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (�232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes� �No� 

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.� See the definitions of "larger accelerated filer," "accelerated filer" and "smaller reporting company" in�Rule 12b-2 of the Exchange Act.

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Large accelerated filer��	��	Accelerated filer���
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Non-accelerated filer���	��	Smaller reporting company���
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�Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).����Yes��  ����No�� 

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Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 2,908,884 shares of common stock were outstanding as of December 19, 2014.

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WSI INDUSTRIES, INC.

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AND SUBSIDIARIES

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INDEX

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�	Page No.
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PART I. FINANCIAL INFORMATION:			�
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�	Item 1.	Financial Statements	�
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�	�	Condensed Consolidated Balance Sheets November 30, 2014 and August 31, 2014 (Unaudited)	� 3
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�	�	Condensed Consolidated Statements of Income Thirteen weeks ended November 30, 2014 and November 24, 2013 (Unaudited)	� 4
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�	�	Condensed Consolidated Statements of Cash Flows Thirteen weeks ended November 30, 2014�and November 24, 2013 (Unaudited)	� 5
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�	�	Notes to Condensed Consolidated Financial Statements (Unaudited)	� 6-7
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�	Item 2.	Managements Discussion and Analysis of Financial Condition and Results of Operation	8-10
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�	Item 4.	Controls and Procedures	� 10
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PART II. OTHER INFORMATION:			�
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�	Item 6.	Exhibits	11
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�	Signatures	�	11�

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Part I.��� Financial Information

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��Item I. Financial Statements

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WSI INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

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See notes to condensed consolidated financial statements.

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WSI INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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�

�

See notes to condensed consolidated financial statements.

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�WSI INDUSTRIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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See notes to condensed consolidated financial statements.

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WSI INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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Item 2.

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

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And

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RESULTS OF OPERATIONS

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Critical Accounting Policies and Estimates:

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Management's Discussion and Analysis of Financial Condition and Results of Operations discuss our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.

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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.

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The critical accounting policies and estimates followed in the preparation of the financial information contained in this Quarterly Report on Form 10-Q are the same as those described in the Companys Annual Report on Form 10-K for the year ended August 31, 2014. Refer to the Annual Report on Form 10-K for detailed information on accounting policies.

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Results of Operations:

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Net sales were $10,098,000 for the first quarter of fiscal year 2015 ending November 30, 2014, a 1% decrease from the same period of the prior year. Sales by product line for the quarter and year-to-date periods are as below:

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Fiscal First Quarter Thirteen Weeks Ended

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Percent

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�

�

�

Percent

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�

Dollar

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�

�

November 30,

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of Total

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November 24,

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of Total

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�

Percent

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2014

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�

Sales

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2013

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Sales

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Change

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ATV & Motorcycle

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$

7,918,000

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�

�

78

%

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$

7,852,000

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77

%

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�

1

%

Energy

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1,507,000

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�

15

%

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1,323,000

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�

13

%

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14

%

Aerospace, Defense & Other

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673,000

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7

%

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1,024,000

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�

�

10

%

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�

-34

%

Total Sales

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$

10,098,000

�

�

�

100

%

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$

10,199,000

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�

�

100

%

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�

-1

%

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The Company also measures its relative levels of business from a value add sales perspective. The Company defines value add sales as net sales, less the cost of material and the cost of outside service content of the parts sold to its customers. By this definition, value add sales are then the net value of the machining services that we provide to our customers.

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The cost of material and outside services can vary widely. In some cases the Company sources and purchases all material and resells the material as well as its machining value to the customer. In other cases the material is provided or consigned at no cost by the customer to the Company and thus the end result is that the Companys sales consist of only its machining value. The mix of product sold, product with consigned material versus product with purchased material content, can have large impacts in the end level of net sales and gross margin in any given quarter or year. In the first quarter ended November 30, 2014, the Companys net sales decreased 1% versus the prior year quarter, however, the Companys value add sales decreased by 6%.

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Sales from the Companys ATV and motorcycle markets increased 1% in the fiscal 2015 first quarter as compared to the prior years first quarter. During the fiscal 2015 first quarter, the demand for the Companys products demand varied across its product lines as some lines experienced an increase from the prior year while other lines experienced a decrease. The Company views these increases and decreases as normal fluctuations that can occur when comparing one quarter to a prior year quarter.

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Sales from the Companys energy business for the fiscal first quarter of 2015 increased by 13% versus the prior years first quarter. The Companys fiscal first quarters sales experienced an increase in it sales to its shale fracturing customers which offset a decline in other sectors of the Companys energy business.

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Sales from the Companys aerospace, defense and other markets decreased in the Companys fiscal first quarter of 2015 by 34% as compared to the fiscal first quarter of 2014. The decrease is partially attributable to one of the Companys customers losing two defense related programs that the Company supplied parts for, as well as a cyclical decrease in demand from two other customers. The Companys sales also decreased due to no sales in its firearms business in fiscal 2015. The Company had sales in its firearms business in the first quarter of fiscal 2014.

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Gross margin decreased to 10.3% of net sales for the quarter ending November 30, 2014 as compared to 13.2% of net sales for the quarter ending November 24, 2013. Gross margin was negatively impacted by product mix, investments in quality and a lower level of sales and value add sales. The quarter was also affected by unusually large repair and maintenance costs to our equipment and higher product scrap costs.

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Selling and administrative expense was $700,000 in both the fiscal 2015 first quarter as well as the prior year first quarter.

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Interest expense in the first quarter of fiscal 2015 was $88,000 as compared to $113,000 in first quarter of fiscal 2014. The decrease was due to a lower overall level of debt.

The Company recorded income tax expense at an effective tax rate of 34% for the quarter ended November 30, 2014 and 36% for the quarter ended November 24, 2013.

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Liquidity and Capital Resources:

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At November 30, 2014, working capital was $8,262,000 which was a $295,000 increase as compared to $7,967,000 at August 31, 2014. The increase was due to offsetting factors but was primarily due to a decrease in trade accounts payable which drove a decrease in current liabilities that was larger than the decrease in current assets that occurred during the fiscal 2015 first quarter. The ratio of current assets to current liabilities of was 2.75 to 1.0 at November 30, 2014 as compared to the 2.49 to 1.0 ratio at August 31, 2014. The improvement in the current ratio was due to the same reasons.

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It is the Companys belief that its current cash balance, plus future internally generated funds and its line of credit, will be sufficient to enable the Company to meet its working capital requirements through the next 12 months. The Companys line of credit expires February 1, 2015. The Company will be seeking renewal of the line of credit; however there can be no assurance that the line of credit will be renewed. There is also no assurance that if the line of credit is renewed, that the material terms (such as availability and interest rate) will be the same as the Companys current line of credit. No amounts have been borrowed under the line of credit, which carries an interest rate at LIBOR plus 2.0%.

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Cautionary Statement:

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Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer that are not historical or current facts are "forward-looking statements." These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. These risks and uncertainties are described in the Company's Annual Report on Form 10-K for the year ended August 31, 2014, as well as other filings the Company makes with the Securities and Exchange Commission. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made and are not predictions of actual future results. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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ITEM 4. CONTROLS AND PROCEDURES

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(a)

Evaluation of Disclosure Controls and Procedures.

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As of the end of the period covered by this Quarterly Report on Form�10-Q, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules�13a-15(e) and 15d-15(e)). Based on that evaluation, the CEO and CFO have concluded that as of November 30, 2014 our disclosure controls and procedures were effective.

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(b) Changes in Internal Controls over Financial Reporting.

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There have been no changes in internal control over financial reporting that occurred during the fiscal period covered by this report that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

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PART II. OTHER INFORMATION:

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ITEM 6. EXHIBITS

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A.�����The following exhibits are included herein:

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�	Exhibit 31.1��	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.
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�	Exhibit 31.2�����	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act.
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�	Exhibit 32	Certification pursuant to 18 U.S.C. �1350.

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101.INS**

XBRL Instance

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101.SCH**

XBRL Taxonomy Extension Schema

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101.CAL**

XBRL Taxonomy Extension Calculation

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101.DEF**

XBRL Taxonomy Extension Definition

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101.LAB**

XBRL Taxonomy Extension Labels

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101.PRE**

XBRL Taxonomy Extension Presentation

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SIGNATURES

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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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�	WSI INDUSTRIES, INC.
�	�
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Date: December 23, 2014�	/s/ Benjamin T. Rashleger���������������������������� �������������
�	Benjamin T. Rashleger, President & CEO
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Date: December 23, 2014�	/s/ Paul D. Sheely��������������������������������� ���������������������
�	Paul D. Sheely, Vice President, Finance & CFO

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11

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Exhibit 31.1

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CERTIFICATIONS

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I, Benjamin T. Rashleger, certify that:

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1.	I have reviewed this quarterly report on Form 10-Q of WSI Industries, Inc.;

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2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

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3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

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4.

The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

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��

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

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(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

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(c)

evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

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(d)

disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and

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5.	The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):

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��

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and

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(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.

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Date: December 23, 2014	�
�	/s/ Benjamin T. Rashleger����������������������� ����� Benjamin T. Rashleger President & Chief Executive Officer (principal executive officer)

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�Exhibit 31.2

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CERTIFICATIONS

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I, Paul D. Sheely, certify that:

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1.	I have reviewed this quarterly report on Form 10-Q of WSI Industries, Inc.;

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2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

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3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

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4.

The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

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��

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

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(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

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��

(c)

evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

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(d)

disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and

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5.	The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):

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��

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and

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(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.

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Date: December 23, 2014	�
�	/s/ Paul D. Sheely����������������������������� Paul D. Sheely Chief Financial Officer (principal financial and accounting officer)

Exhibit 32

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CERTIFICATION

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The undersigned certify pursuant to 18 U.S.C. � 1350, that:

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(1) The accompanying Quarterly Report on Form 10-Q for the period ended November 30, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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(2) The information contained in the accompanying Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

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Date: December 23, 2014���	/s/ Benjamin T. Rashleger������������ ������� President & Chief Executive Officer (principal executive officer)
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Date: December 23, 2014����	/s/ Paul D. Sheely������������������������� ������� Chief Financial Officer (principal financial and accounting officer)

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