Item
1. Financial Statements
WSI
INDUSTRIES, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
May
27, 2018
|
|
|
August
27, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,920,095
|
|
|
$
|
5,846,933
|
|
Accounts
receivable
|
|
|
3,790,935
|
|
|
|
2,739,087
|
|
Inventories
|
|
|
3,405,695
|
|
|
|
3,131,679
|
|
Prepaid
and other current assets
|
|
|
118,394
|
|
|
|
78,409
|
|
Total
Current Assets
|
|
|
12,235,119
|
|
|
|
11,796,108
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment – Net
|
|
|
10,852,944
|
|
|
|
10,320,808
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and other assets, net
|
|
|
2,368,452
|
|
|
|
2,368,452
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
25,456,515
|
|
|
$
|
24,485,368
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
$
|
1,697,170
|
|
|
$
|
2,058,992
|
|
Accrued
compensation and employee withholdings
|
|
|
770,119
|
|
|
|
664,277
|
|
Other
accrued expenses and deferred revenue
|
|
|
249,440
|
|
|
|
530,552
|
|
Current
portion of long-term debt
|
|
|
1,587,100
|
|
|
|
1,438,057
|
|
Total
Current Liabilities
|
|
|
4,303,829
|
|
|
|
4,691,878
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
6,132,839
|
|
|
|
5,441,848
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
543,811
|
|
|
|
915,068
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, par value $.10 a share; authorized 10,000,000 shares; issued and outstanding 2,970,283 and 2,959,940 shares, respectively
|
|
|
297,029
|
|
|
|
295,994
|
|
Capital
in excess of par value
|
|
|
4,192,174
|
|
|
|
4,192,578
|
|
Deferred
compensation
|
|
|
-
|
|
|
|
(76,500
|
)
|
Retained
earnings
|
|
|
9,986,833
|
|
|
|
9,024,502
|
|
Total
Stockholders’ Equity
|
|
|
14,476,036
|
|
|
|
13,436,574
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
25,456,515
|
|
|
$
|
24,485,368
|
|
See
notes to condensed consolidated financial statements.
WSI
INDUSTRIES, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
13
weeks ended
|
|
|
39
weeks ended
|
|
|
|
May
27, 2018
|
|
|
May
28, 2017
|
|
|
May
27, 2018
|
|
|
May
28, 2017
|
|
Net
sales
|
|
$
|
9,790,735
|
|
|
$
|
9,593,941
|
|
|
$
|
25,873,460
|
|
|
$
|
22,237,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
|
8,340,645
|
|
|
|
8,563,262
|
|
|
|
22,645,623
|
|
|
|
20,692,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
1,450,090
|
|
|
|
1,030,679
|
|
|
|
3,227,837
|
|
|
|
1,545,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expense
|
|
|
833,732
|
|
|
|
1,202,533
|
|
|
|
2,486,853
|
|
|
|
2,684,676
|
|
Equipment
impairment loss
|
|
|
-
|
|
|
|
147,502
|
|
|
|
-
|
|
|
|
147,502
|
|
Interest
and other income
|
|
|
(8,640
|
)
|
|
|
(6,870
|
)
|
|
|
(37,204
|
)
|
|
|
(10,127
|
)
|
Interest
expense
|
|
|
80,602
|
|
|
|
72,510
|
|
|
|
229,346
|
|
|
|
206,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
544,396
|
|
|
|
(384,996
|
)
|
|
|
548,842
|
|
|
|
(1,483,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
78,257
|
|
|
|
(165,323
|
)
|
|
|
(532,257
|
)
|
|
|
(579,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
466,139
|
|
|
$
|
(219,673
|
)
|
|
$
|
1,081,099
|
|
|
$
|
(904,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$
|
.16
|
|
|
$
|
(.08
|
)
|
|
$
|
.37
|
|
|
$
|
(.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
$
|
.16
|
|
|
$
|
(.08
|
)
|
|
$
|
.36
|
|
|
$
|
(.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividend per share
|
|
$
|
.04
|
|
|
$
|
-
|
|
|
$
|
.04
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, basic
|
|
|
2,969,610
|
|
|
|
2,923,483
|
|
|
|
2,956,381
|
|
|
|
2,920,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, diluted
|
|
|
3,001,058
|
|
|
|
2,923,483
|
|
|
|
2,975,972
|
|
|
|
2,920,828
|
|
See
notes to condensed consolidated financial statements.
WSI
INDUSTRIES, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
39
weeks ended
|
|
|
|
May
27, 2018
|
|
|
May
28, 2017
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,081,099
|
|
|
$
|
(904,228
|
)
|
Adjustments
to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,279,937
|
|
|
|
1,361,510
|
|
Amortization
|
|
|
2,950
|
|
|
|
7,667
|
|
Deferred
taxes
|
|
|
(532,257
|
)
|
|
|
(579,326
|
)
|
Impairment
of property, plant and equipment
|
|
|
-
|
|
|
|
147,502
|
|
Stock
option compensation expense
|
|
|
310,191
|
|
|
|
220,204
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts receivable
|
|
|
(1,051,848
|
)
|
|
|
808,158
|
|
Decrease
(increase) in inventories
|
|
|
(274,016
|
)
|
|
|
257,474
|
|
Increase
in prepaid and other current assets
|
|
|
(39,985
|
)
|
|
|
(34,197
|
)
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
(537,092
|
)
|
|
|
1,213,591
|
|
Net
cash provided by operations
|
|
|
238,979
|
|
|
|
2,498,355
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(515,917
|
)
|
|
|
(785,705
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
(515,917
|
)
|
|
|
(785,705
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
-
|
|
|
|
3,700,000
|
|
Equipment
advance payments exchanged with debt
|
|
|
687,245
|
|
|
|
-
|
|
Payments
of long-term debt
|
|
|
(1,146,317
|
)
|
|
|
(4,745,057
|
)
|
Restricted
cash requirement
|
|
|
-
|
|
|
|
1,250,000
|
|
Payroll
withholding taxes in cashless stock option exercise
|
|
|
(72,060
|
)
|
|
|
(29,759
|
)
|
Deferred
financing costs
|
|
|
-
|
|
|
|
(39,336
|
)
|
Dividends
paid
|
|
|
(118,768
|
)
|
|
|
-
|
|
Net
cash provided by (used in) by financing activities
|
|
|
(649,900
|
)
|
|
|
135,848
|
|
|
|
|
|
|
|
|
|
|
Net
Increase In Cash And Cash Equivalents
|
|
|
(926,838
|
)
|
|
|
1,848,498
|
|
|
|
|
|
|
|
|
|
|
Cash
And Cash Equivalents At Beginning Of Year
|
|
|
5,846,933
|
|
|
|
3,739,324
|
|
|
|
|
|
|
|
|
|
|
Cash
And Cash Equivalents At End Of Reporting Period
|
|
$
|
4,920,095
|
|
|
$
|
5,587,822
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
229,554
|
|
|
$
|
203,680
|
|
Income
taxes
|
|
$
|
7,350
|
|
|
$
|
4,200
|
|
Noncash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of machinery through debt
|
|
$
|
1,983,401
|
|
|
$
|
-
|
|
See
notes to condensed consolidated financial statements.
WSI
INDUSTRIES, INC.
AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS:
|
The
condensed consolidated balance sheet as of May 27, 2018, the condensed consolidated statements of income for the thirteen and
thirty-nine weeks ended May 27, 2018 and May 28, 2017 and the condensed consolidated statements of cash flows for the thirty-nine
weeks then ended, respectively, have been prepared by the Company without audit. In the opinion of management, all adjustments
(which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash
flows for all periods presented have been made.
The
condensed consolidated balance sheet at August 27, 2017 is derived from the audited consolidated balance sheet as of that date.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been condensed or omitted. Therefore, these condensed consolidated
financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended August 27, 2017. The results of operations for interim periods are not necessarily
indicative of the operating results for the full year.
Inventories
consist primarily of raw material, work-in-progress (WIP) and finished goods and are valued at the lower of cost or net realizable
value:
|
|
May
27, 2018
|
|
|
August
27, 2017
|
|
|
|
|
|
|
|
|
Raw
material
|
|
$
|
960,056
|
|
|
$
|
1,047,931
|
|
WIP
|
|
|
1,328,060
|
|
|
|
1,448,282
|
|
Finished
goods
|
|
|
1,117,579
|
|
|
|
635,466
|
|
|
|
$
|
3,405,695
|
|
|
$
|
3,131,679
|
|
Goodwill
and other assets consist of costs resulting from business acquisitions which total $2,368,452 at May 27, 2018 (net of accumulated
amortization of $344,812 recorded prior to the adoption of ASC 350
Goodwill and Other Intangible Assets
).
The
Company’s effective tax rate for its fiscal third quarter ended May 27, 2018 was 14.4% as compared to a negative (42.9)%
for the quarter ended May 28, 2017. The year-to-date effective tax rate was a negative (97.0)% in the current year versus a negative
(39.1)% in for the prior year.
On
December 22, 2017, H.R.1, known as the “Tax Cuts and Jobs Act,” was signed into law. Among other things, the Tax Cuts
and Jobs Act permanently lowers the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective for tax
years including or commencing January 1, 2018. As a result of the reduction of the corporate tax rate to 21%, U.S. generally accepted
accounting principles require companies to re-value their deferred tax assets and liabilities as of the date of enactment, with
resulting tax effects accounted for in the reporting period of enactment which occurred during the Company’s fiscal second
quarter ending February 25, 2018. After the revaluation of its net deferred tax liability, the Company recognized an overall income
tax benefit of $663,000 during the fiscal quarter ending February 25, 2018, of which most of that amount was attributable to the
revaluation.
The
Company will continue to evaluate the effects of the new law on its effective tax rate as the law contains provisions for limiting
the deductibility of interest expense, imposes limitations on the utilization of operating loss carryforwards, retroactively applies
the 100% bonus depreciation deduction under the new tax legislation, which applies to qualified property placed in service after
September 27, 2017 as well as the lowering of the corporate tax to 21% for a portion of the Company’s fiscal year.
The
Company has also determined that certain of its activities the Company performs qualify for the Research & Development tax
credit (R&D credit) as defined by Internal Revenue Code Section 41 which affects the Company’s effective tax rate.
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.
6.
|
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.
The
following table sets forth the computation of basic and diluted earnings per share:
|
|
Thirteen
weeks ended
|
|
|
Thirty-nine
weeks ended
|
|
|
|
May
27, 2018
|
|
|
May
28, 2017
|
|
|
May
27, 2018
|
|
|
May
28, 2017
|
|
Numerator
for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
466,139
|
|
|
$
|
(219,673
|
)
|
|
$
|
1,081,099
|
|
|
$
|
(904,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share – weighted average shares
|
|
|
2,969,610
|
|
|
|
2,923,483
|
|
|
|
2,956,381
|
|
|
|
2,920,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
and non-employee options
|
|
|
31,448
|
|
|
|
-
|
|
|
|
19,591
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
common shares Denominator for diluted earnings per share
|
|
|
3,001,058
|
|
|
|
2,923,483
|
|
|
|
2,975,972
|
|
|
|
2,920,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$
|
.16
|
|
|
$
|
(.08
|
)
|
|
$
|
.37
|
|
|
$
|
(.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
$
|
.16
|
|
|
$
|
(.08
|
)
|
|
$
|
.36
|
|
|
$
|
(.31
|
)
|
8.
|
RECENT
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
March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting which provides guidance that
amends the accounting for stock-based compensation and requires excess tax benefits and deficiencies to be recognized as a component
of income tax expense rather than equity. The inclusion of excess tax benefits and deficiencies as a component of income tax expense
will increase volatility within our provision for income taxes as the amount of excess tax benefits or deficiencies from stock-based
compensation awards depends on our stock price at the date the awards vest. This guidance also requires excess tax benefits and
deficiencies to be presented as operating activity in the statement of cash flows and allows an entity to make an accounting policy
election to either estimate expected forfeitures or to account for them as they occur. We adopted this guidance during the first
quarter of fiscal 2018 and elected to recognize forfeitures as they occur.
Item
2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS
OF OPERATIONS
Critical
Accounting Policies and Estimates:
Management’s
Discussion and Analysis of Financial Condition and Results of Operations discuss our 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.
We
base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances,
the result of which forms the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which
we based our assumptions. The estimates and judgments utilized are reviewed by management on an ongoing basis and by the audit
committee of our board of directors at the end of each quarter prior to the public release of our financial results.
The
critical accounting policies and estimates followed in the preparation of the financial information contained in this Quarterly
Report on Form 10-Q are the same as those described in the Company’s Annual Report on Form 10-K for the year ended August
27, 2017. Refer to the Annual Report on Form 10-K for detailed information on accounting policies.
Results
of Operations:
Net
sales were $9,791,000 for the quarter ended May 27, 2018 compared to $9,594,000 in the same period of the prior year, an increase
of 2%. Year-to-date sales for the first three quarters of fiscal 2018 were $25,873,000 compared to $22,237,000 in the prior year,
an increase of 16%. Sales by product line for the quarter and year-to-date periods are as below:
|
|
Fiscal Third Quarter
Thirteen Weeks Ended
|
|
|
Fiscal Third Quarter
Year-to-Date Ended
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
May 27,
|
|
|
of Total
|
|
|
May 28,
|
|
|
of Total
|
|
|
Dollar
Percent
|
|
|
May 27,
|
|
|
of Total
|
|
|
May 28,
|
|
|
of Total
|
|
|
Dollar
Percent
|
|
|
|
2018
|
|
|
Sales
|
|
|
2017
|
|
|
Sales
|
|
|
Change
|
|
|
2018
|
|
|
Sales
|
|
|
2017
|
|
|
Sales
|
|
|
Change
|
|
Recreational Vehicles
|
|
$
|
7,366,000
|
|
|
|
75
|
%
|
|
$
|
8,229,000
|
|
|
|
86
|
%
|
|
|
-10
|
%
|
|
$
|
20,149,000
|
|
|
|
78
|
%
|
|
$
|
19,153,000
|
|
|
|
86
|
%
|
|
|
5
|
%
|
Energy
|
|
|
1,050,000
|
|
|
|
11
|
%
|
|
|
507,000
|
|
|
|
5
|
%
|
|
|
107
|
%
|
|
|
2,313,000
|
|
|
|
9
|
%
|
|
|
841,000
|
|
|
|
4
|
%
|
|
|
175
|
%
|
Aerospace Defense & Other
|
|
|
1,375,000
|
|
|
|
14
|
%
|
|
|
858,000
|
|
|
|
9
|
%
|
|
|
60
|
%
|
|
|
3,411,000
|
|
|
|
13
|
%
|
|
|
2,243,000
|
|
|
|
10
|
%
|
|
|
52
|
%
|
Total Sales
|
|
$
|
9,791,000
|
|
|
|
100
|
%
|
|
$
|
9,594,000
|
|
|
|
100
|
%
|
|
|
2
|
%
|
|
$
|
25,873,000
|
|
|
|
100
|
%
|
|
$
|
22,237,000
|
|
|
|
100
|
%
|
|
|
16
|
%
|
Sales
from the Company’s ATV and Motorcycle markets for the fiscal 2018 third quarter were down 10% as compared to the prior year
quarter. During the fiscal 2017 third quarter, the Company experienced a one-time sale of remaining product related to its primary
customer’s wind down of one of their product lines. Otherwise, overall sales for the Company’s ATV and Motorcycle
lines were up 5% as compared to the prior year’s quarter. Excluding the one-time sale, year-to-date sales for the ATV and
Motorcycle markets were also up 12% as compared to the prior year.
Sales
from the Company’s energy business for the fiscal 2018 third quarter increased by 107% over the prior year’s third
quarter. Year-to-date sales as of May 27, 2018 were 175% higher than the same year-to-date period of the prior year. The increases
in sales are derived from increased demand from existing as well as new customers in the energy sector.
Sales
from the Company’s aerospace, defense and other markets were up 60% in the fiscal 2018 third quarter and the year-to-date
period was up 52% as compared to the prior year. The increase in the fiscal 2018 third quarter and year-to-date aerospace and
defense sales were derived mostly from new programs and customers as well as increases in demand from existing customers.
Gross
margin increased to 14.8% from 10.7% in the quarter ended May 27, 2018 versus the prior year quarter. Year-to-date gross margins
increased to 12.5% versus 6.9% in the prior year-to-date period. The increases in gross margins came from both volume efficiencies
and operational improvements.
Selling
and administrative expense was $834,000 for the quarter ended May 27, 2018 versus $1,203,000 in the prior year quarter. Year-to-date
selling and administrative expense was $2,487,000 as compared to $2,685,000 in the prior year-to-date period. The decrease in
the quarterly and year-to-date expense was due primarily to increases in compensation costs and stock option expense related to
the change in the Company’s executive leadership that occurred during the fiscal 2017 third quarter.
Interest
expense in the third quarter of fiscal 2018 was $81,000 as compared to $73,000 in the prior year quarter. Year-to-date interest
expense for fiscal 2018 was $229,000 versus $207,000 in the prior year. The higher interest costs are a result of a higher level
of long-term debt.
The
Company’s effective tax rate for its fiscal third quarter ended May 27, 2018 was 14.4% as compared to a negative (42.9)%
for the quarter ended May 28, 2017. The year-to-date effective tax rate was a negative (97.0)% in the current year versus a negative
(39.1)% in for the prior year.
On
December 22, 2017, H.R.1, known as the “Tax Cuts and Jobs Act,” was signed into law. Among other things, the Tax Cuts
and Jobs Act permanently lowers the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective for tax
years including or commencing January 1, 2018. As a result of the reduction of the corporate tax rate to 21%, U.S. generally accepted
accounting principles require companies to re-value their deferred tax assets and liabilities as of the date of enactment, with
resulting tax effects accounted for in the reporting period of enactment which occurred during the Company’s fiscal second
quarter ending February 25, 2018. After the revaluation of its net deferred tax liability, the Company recognized an overall income
tax benefit of $663,000 during the fiscal quarter ending February 25, 2018, of which most of that amount was attributable to the
revaluation.
Liquidity
and Capital Resources:
On
May 27, 2018 working capital was $7,931,000 as compared to $7,104,000 at August 27, 2017. The ratio of current assets to current
liabilities at May 27, 2018 was 2.84 to 1.0 compared to 2.51 to 1.0 at August 27, 2017. The increase in these two ratios came
primarily from an increase in accounts receivable and inventories and lower accounts payable partially offset by a lower level
of cash and cash equivalents.
The
Company has a revolving credit agreement with its bank. The revolving credit 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,
2019. No amounts have been drawn against the revolving line of credit.
It
is the Company’s belief that its current cash balance, plus future internally generated funds and its line of credit, will
be sufficient to enable the Company to meet its working capital requirements through the next 12 months.
Cautionary
Statement:
Statements
included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, in future filings
by the Company with the Securities and Exchange Commission, in the Company’s press releases and in oral statements made
with the approval of an authorized executive officer that are not historical or current facts are “forward-looking statements.”
These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those
presently anticipated or projected. These risks and uncertainties are described in the Company’s Annual Report on Form 10-K
for the year ended August 27, 2017, 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.