**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

 

**ý****                                ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

 

**For the quarterly period ended March 31, 2006**

 

**or**

 

**o****                                ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

 

**Commission file number:**

**333-115490**

 

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**WIICOMPONENTS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**             | ** ** | **No. 73-1662631**                   |
|--------------------------|------------|--------------------------------------|
| (State of Incorporation) |       | (I.R.S. Employer Identification No.) |

 

**525 Lincoln Avenue SE, St. Cloud, Minnesota 56304**

(Addressof principal executive offices) (Zip Code)

 

**(320)252-1503**

(Registrant’stelephone number, Including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes ý No o.

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 
| Large  Accelerated Filer o |   | Accelerated  Filer o |   | Non-accelerated  Filer  ý. |
|---------------------------------|--------|----------------------|--------|--------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

 

Yes o No ý.

 

Asof May 9, 2006, 21,751,331 shares of voting common stock, $.01 par value pershare, were outstanding and 854,261 shares of non-voting common stock, $.01 parvalue per share, were outstanding (all of which are privately owned and nottraded on a public market).

 

 

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**WII COMPONENTS, INC.**

 

**FORM 10-Q**

**Quarter Ended March 31, 2006**

 

**Table of Contents**

 
| **Part I—Financial Information**                                                                                                             |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1. Financial Statements                                                                                                                      |   |
| Condensed Consolidated  Balance Sheets as of March 31, 2006 and December 31, 2005 (unaudited)                                                     | 1      |
| Condensed Consolidated  Statements of Operations for the Three Months Ended March 31, 2006 and the  Three Months Ended March 31, 2005 (unaudited) | 2      |
| Condensed Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2006 and the  Three Months Ended March 31, 2005 (unaudited) | 3      |
| Notes to  Condensed Consolidated Financial Statements (unaudited)                                                                                 | 4      |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                               | 7      |
| Item 3. Quantitative and  Qualitative Disclosures about Market Risk                                                                               | 11     |
| Item  4. Controls and Procedures                                                                                                                  | 11     |
|                                                                                                                                              |   |
| **Part II-Other  Information**                                                                                                                    |   |
| Item  1. Legal Proceedings                                                                                                                        | 12     |
| Item  1A. Risk Factors                                                                                                                            | 12     |
| Item 2. Unregistered Sales  of Equity Securities and Use of Proceeds                                                                              | 12     |
| Item 3. Defaults Upon Senior  Securities                                                                                                          | 12     |
| Item 4. Submission of  Matters to a Vote of Security Holders                                                                                      | 12     |
| Item  5. Other Information                                                                                                                        | 12     |
| Item 6.  Exhibits                                                                                                                                 | 12     |
| Signatures                                                                                                                                        | 13     |

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                    | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                    |       |                     |       |                        |       |
| Current Assets:                               |       |                     |       |                        |       |
| Cash                                          |       | $                        | 638        |                        | $          | 3,981 |   |
| Accounts receivable, net                      |       | 16,478                   |       | 14,682                      |       |
| Inventories                                   |       | 20,650                   |       | 20,770                      |       |
| Other current assets                          |       | 2,690                    |       | 2,492                       |       |
| Total current assets                          |       | 40,456                   |       | 41,925                      |       |
|                                          |       |                     |       |                        |       |
| Property, plant, and equipment, net           |       | 53,919                   |       | 49,921                      |       |
| Goodwill                                      |       | 107,748                  |       | 107,748                     |       |
| Customer relationship                         |       | 14,482                   |       | 14,896                      |       |
| Noncompete agreements                         |       | 733                      |       | 849                         |       |
| Other assets                                  |       | 5,985                    |       | 6,255                       |       |
| TOTAL                                         |       | $                        | 223,323    |                        | $          | 221,594 |   |
|                                          |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** |       |                     |       |                        |       |
| Current Liabilities:                          |       |                     |       |                        |       |
| Current maturities of long-term debt          |       | $                        | 925        |                        | $          | 1,262 |   |
| Accounts payable                              |       | 9,251                    |       | 6,993                       |       |
| Accrued payroll                               |       | 3,329                    |       | 3,674                       |       |
| Other current liabilities                     |       | 9,442                    |       | 13,027                      |       |
| Total current liabilities                     |       | 22,947                   |       | 24,956                      |       |
|                                          |       |                     |       |                        |       |
| Long-term debt, net of current maturities     |       | 127,500                  |       | 127,500                     |       |
| Other noncurrent liabilities                  |       | 5,137                    |       | 5,219                       |       |
|                                          |       |                     |       |                        |       |
| Stockholders’ Equity:                    |       |                     |       |                        |       |
| Common stock—voting                      |       | 217                      |       | 217                         |       |
| Common stock—nonvoting                   |       | 9                        |       | 9                           |       |
| Additional paid-in capital                    |       | 53,081                   |       | 51,927                      |       |
| Retained earnings                             |       | 14,432                   |       | 11,766                      |       |
| Total stockholders’ equity               |       | 67,739                   |       | 63,919                      |       |
| TOTAL                                         |       | $                        | 223,323    |                        | $          | 221,594 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

1

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                               | ** ** | **Three Months  Ended  March 31, 2006** | ** ** | **Three Months  Ended  March 31, 2005** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| NET SALES                                |       | $                                                      | 76,341     |                                                   | $          | 57,808 |   |
| COST OF SALES                            |       | 63,362                                                 |       | 48,594                                                 |       |
| Gross profit                             |       | 12,979                                                 |       | 9,214                                                  |       |
|                                     |       |                                                   |       |                                                   |       |
| OPERATING EXPENSES:                      |       |                                                   |       |                                                   |       |
| General and administrative               |       | 3,125                                                  |       | 2,305                                                  |       |
| Selling and marketing                    |       | 806                                                    |       | 784                                                    |       |
| Stock compensation expense               |       | 1,154                                                  |       | 353                                                    |       |
| Total operating expenses                 |       | 5,085                                                  |       | 3,442                                                  |       |
|                                     |       |                                                   |       |                                                   |       |
| OPERATING INCOME                         |       | 7,894                                                  |       | 5,772                                                  |       |
|                                     |       |                                                   |       |                                                   |       |
| OTHER EXPENSE:                           |       |                                                   |       |                                                   |       |
| Interest income                          |       | 23                                                     |       | 3                                                      |       |
| Interest expense                         |       | (3,422                                                 | )          | (3,196                                                 | )          |
| Other (expense) income                   |       | (2                                                     | )          | 3                                                      |       |
| Total other expense                      |       | (3,401                                                 | )          | (3,190                                                 | )          |
|                                     |       |                                                   |       |                                                   |       |
| INCOME BEFORE PROVISION FOR INCOME TAXES |       | 4,493                                                  |       | 2,582                                                  |       |
| INCOME TAX PROVISION                     |       | 1,827                                                  |       | 981                                                    |       |
| NET INCOME                               |       | $                                                      | 2,666      |                                                   | $          | 1, 601 |   |

 

See notes to condensed consolidated financial statements (unaudited).

 

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(UNAUDITED)**

**(In thousands)**

 
| ** **                                                                                   | ** ** | **Three Months  Ended  March 31, 2006** | ** ** | **Three Months  Ended  March 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| OPERATING ACTIVITIES:                                                                        |       |                                                   |       |                                                   |       |
| Net income                                                                                   |       | $                                                      | 2,666      |                                                   | $          | 1,601 |   |
|                                                                                         |       |                                                   |       |                                                   |       |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |                                                   |       |                                                   |       |
| Depreciation and amortization                                                                |       | 1,866                                                  |       | 1,594                                                  |       |
| Amortization of debt issue costs                                                             |       | 269                                                    |       | 262                                                    |       |
| Stock compensation expense                                                                   |       | 1,154                                                  |       | 353                                                    |       |
|                                                                                         |       |                                                   |       |                                                   |       |
| Change in operating assets and liabilities:                                                  |       |                                                   |       |                                                   |       |
| Accounts receivable                                                                          |       | (1,796                                                 | )          | (2,451                                                 | )          |
| Inventories                                                                                  |       | 120                                                    |       | (1,227                                                 | )          |
| Other current assets                                                                         |       | (198                                                   | )          | 935                                                    |       |
| Accounts payable                                                                             |       | 1,741                                                  |       | 486                                                    |       |
| Accrued payroll and other current liabilities                                                |       | (3,930                                                 | )          | (2,624                                                 | )          |
| Net cash provided by (used in) operating  activities                                         |       | 1,892                                                  |       | (1,071                                                 | )          |
|                                                                                         |       |                                                   |       |                                                   |       |
| INVESTING ACTIVITIES:                                                                        |       |                                                   |       |                                                   |       |
| Purchases of property, plant, and equipment                                                  |       | (4,815                                                 | )          | (1,495                                                 | )          |
| Change in other assets                                                                       |       | —                                                 |       | (12                                                    | )          |
| Net cash used in investing activities                                                        |       | (4,815                                                 | )          | (1,507                                                 | )          |
|                                                                                         |       |                                                   |       |                                                   |       |
| FINANCING ACTIVITIES:                                                                        |       |                                                   |       |                                                   |       |
| Principal payments under long-term  financing agreements                                     |       | (1,320                                                 | )          | (3,165                                                 | )          |
| Borrowings of long-term debt                                                                 |       | 900                                                    |       | 6,000                                                  |       |
| Net cash (used in) provided by financing  activities                                         |       | (420                                                   | )          | 2,835                                                  |       |
|                                                                                         |       |                                                   |       |                                                   |       |
| NET (DECREASE) INCREASE IN CASH                                                              |       | (3,343                                                 | )          | 257                                                    |       |
| CASH—Beginning of period                                                                |       | 3,981                                                  |       | 2                                                      |       |
|                                                                                         |       |                                                   |       |                                                   |       |
| CASH—End of period                                                                      |       | $                                                      | 638        |                                                   | $          | 259 |   |
|                                                                                         |       |                                                   |       |                                                   |       |
| SUPPLEMENTAL CASH FLOW INFORMATION:                                                          |       |                                                   |       |                                                   |       |
| Cash paid for interest                                                                       |       | $                                                      | 6,203      |                                                   | $          | 6,087 |   |
|                                                                                         |       |                                                   |       |                                                   |       |
| Cash paid for income taxes—net                                                          |       | $                                                      | 254        |                                                   | $          | 82 |   |
| NONCASH ACTIVITY:                                                                            |       |                                                   |       |                                                   |       |
| Capital expenditures in accounts payable                                                     |       | $                                                      | 1,170      |                                                   | $          | — |   |

 

Seenotes to condensed consolidated financial statements (unaudited).

 

3

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**WII COMPONENTS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED**

**CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1. BASIS OF PRESENTATION**

 

TheCompany prepared the accompanying unaudited condensed consolidated financialstatements following the requirements of the Securities and Exchange Commissionfor interim reporting. As permitted under those rules, certain notes or otherfinancial information normally required by accounting principles generallyaccepted in the United States of America have been condensed or omitted.Therefore, the Company suggests that these financial statements be read inconjunction with the consolidated financial statements and accompanying notesfor the year ended December 31, 2005 included in its Form 10-K as filedwith the Securities and Exchange Commission on March 23, 2006. The condensedconsolidated balance sheet as of December 31, 2005 has been derived fromthe audited consolidated financial statements at that date, but does notinclude all the information and notes required by accounting principlesgenerally accepted in the United States of America for complete presentation.

 

In our opinion, theaccompanying unaudited condensed consolidated financial statements include alladjustments (consisting of normal recurring items) considered necessary topresent fairly, when read in conjunction with the consolidated financialstatements and accompanying notes for the period ended December 31, 2005 includedin our 10-K as filed with the Securities and Exchange Commission on March 23,2006, our financial position, results of operations and cash flows for theperiods presented.

 

Theunaudited condensed consolidated financial statements include the accounts ofthe Company and its wholly owned subsidiaries. On July 28, 2005 the Companycompleted the acquisition of substantially all of the assets of DimensionMoldings, Inc. (Note 3). All intercompany accounts and transactions have beeneliminated in the preparation of the consolidated financial statements.

 

**2. SIGNIFICANT ACCOUNTING POLICIES**

 

***Inventories***—Inventories consisted of the following (inthousands):

 
| ** **      | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                        | 12,626     |                        | $          | 11,369 |   |
| Work in process |       | 5,049                    |       | 5,954                       |       |
| Finished goods  |       | 4,125                    |       | 4,360                       |       |
| LIFO adjustment |       | (1,150                   | )          | (913                        | )          |
|            |       | $                        | 20,650     |                        | $          | 20,770 |   |

 

Themajority of inventory is valued at the lower of last-in, first-out (“LIFO”)cost or market. The remainder of the inventory is valued under the first-in,first-out method (“FIFO”). As of March 31, 2006 and December 31, 2005,inventory on the LIFO method represented 64% and 59%, respectively, ofconsolidated inventories.

 

***Goodwill***—As discussed in Note 3, in 2002, theCompany adopted and accounts for goodwill in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets*. Inpart, SFAS No. 142 states that companies are no longer required toamortize goodwill but instead must evaluate goodwill for impairment at leastannually. The Company has elected to perform its annual tests for goodwill impairmentas of December 31 of each year. Fair value is measured using a marketmultiple valuation method. There were no changes in the carrying amount ofgoodwill between December 31, 2005 and March 31, 2006.

 

***Customer Relationship—***Customer relationships relates to anintangible asset recorded through the purchase price allocation of the GrandValley acquisition and the acquisition of the assets of Dimension Moldings,Inc. for relationships with a significant customer. The original cost ofthese customer relationships is $16.6 million, and the related accumulatedamortization as of March 31, 2006 is $2.1 million. The intangible assets are being amortized over the estimated life of 10years. Amortization for the three-month period ended March 31, 2006 was $414,000.Expected annual amortization is as follows for the years ending December 31 (inthousands):

 
| 2006      |   | $     | 1,657  |   |
|-----------|--------|-------|--------|--------|
| 2007      |   | 1,657 |   |
| 2008      |   | 1,657 |   |
| 2009      |   | 1,657 |   |
| 2010      |   | 1,657 |   |
| 2011-2015 |   | 6,611 |   |

 

***Noncompete Agreement***—Noncompete agreements primarily relate toagreements with the former owners of Brentwood, Grand Valley, and DimensionMoldings, Inc. The original cost of these noncompete agreements is $2.3million, and the related accumulated amortization as of March 31, 2006 is $1.6million. Noncompete rights are beingamortized over the applicable terms of the agreements (5 years,7 years, and 5 years respectively), and are expected to be fully amortizedby July 2007, April 2011, and July 2010 respectively.

 

4

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Amortizationfor the three-month period ended March 31, 2006 was $116,000. Expected annual amortizationis as follows for the years ending December 31 (in thousands):

 
| 2006 |   | $   | 465    |   |
|------|--------|-----|--------|--------|
| 2007 |   | 285 |   |
| 2008 |   | 34  |   |
| 2009 |   | 34  |   |
| 2010 |   | 26  |   |
| 2011 |   | 5   |   |

 

***Stock Options*****—**In April 2003, the 2003 Stock Option andGrant Plan (“2003 Plan”) was approved by the stockholders of the Company. The2003 Plan allows the granting of both incentive stock options and nonqualifiedstock options. Under the terms of the 2003 Plan, a maximum of 2,500,000 sharesof stock, subject to adjustment, were made available for awards to officers,employees, directors, consultants, and other key persons of the Company. Awardsmay include, but are not limited to, stock options, restricted stock, unrestrictedstock awards, and substitute performance awards. Option awards are generallygranted with an exercise price equal to the calculated fair market value of thecompany’s stock. Options generally vest over four years and have 10-yearcontractual terms.

 

EffectiveJanuary 1, 2006 the Company adopted Statement of Financial Accounting StandardsNo. 123(R), *Share Based Payment* (SFAS No. 123(R)),which requires all share-based payments, including grants of stockoptions, to be recognized in the statement of operations as an operatingexpense, based on their fair values over the requisite service period. TheCompany utilized the prospective transition method as permitted by SFAS 123(R).Under this transition method, SFAS No. 123(R) will be applied prospectively to allnew awards issued as well as awards modified, repurchased, or cancelled afterthe effective date. The Company shall continue to account for the 1,517,000options outstanding at the effective date using the accounting principlesoriginally applied to those options. The Company recorded $1,154,000 of related stock-based compensationexpense for the three months ended March 31, 2006. The total income tax benefitfor share-based compensation arrangements was $470,000. In accordance with theprospective transition method of SFAS 123(R), results for prior periods havenot been restated.

 

Asof March 31, 2006, $1,926,000 of unrecognized compensation costs related tonon-vested awards is expected to be recognized over a weighted average periodof approximately thirteen months. In addition, $17,000 of unrecognizedcompensation costs related to non-vested awards is expected to be recognizedover a weighted average period of approximately three years and eleven months.

 

TheCompany uses the Black-Scholes option pricing model to determine the weightedaverage fair value of options. The weighted average fair value of optionsgranted during the three months ended March 31, 2006 was $1.73. The fair valueof options at the date of grant and the weighted-average assumptions utilizedto determine such values are indicated in the following table:

 
| ** **               | ** ** | **Three Months Ended  March 31, 2006** | ** ** |
|--------------------------|------------|------------------------------------------------------------|------------|
| Risk-free interest rate  |       | 4.73                                                       | %          |
| Expected volatility      |       | 25.4                                                       | %          |
| Expected life (in years) |       | 6.25                                                       |       |
| Dividend yield           |       | —                                                     |       |

 

Therisk-free interest rate is based on a treasury instrument whose term isconsistent with the expected life of our stock options. The expected volatilityis based on the average historical volatility of the stock of similar companieswith publicly traded shares. The Company estimated the expected life of thestock options and stock option forfeitures based on historical experience.

 

Optiontransactions during the three months ended March 31, 2006 are summarized asfollows:

 
| ** **                       | ** ** | **Options** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining Contractual  Term** | ** ** |
|----------------------------------|------------|-------------|------------|------------------------------------------------|------------|-------------------------------------------------------------|------------|
| Outstanding, beginning of period |       | 2,351,000   |       | $                                              | 2.62       |                                                        |       |   |
| Granted                          |       | 10,000      |       | 4.74                                           |       |                                                        |       |
| Exercised                        |       | —      |       | —                                         |       |                                                        |       |
| Canceled                         |       | —      |       | —                                         |       |                                                        |       |
| Outstanding, end of period       |       | 2,361,000   |       | $                                              | 2.63       |                                                        | 7.6        |   |
| Exercisable, end of period       |       | 893,250     |       | $                                              | 2.09       |                                                        | 7.2        |   |

 

***New Accounting Pronouncements***— In November 2004, the FASB issuedSFAS No. 151, *Inventory Costs*. ThisStatement requires that abnormal amounts of idle facility expense, freight,handling costs, and spoilage be recognized as current period charges. TheStatement also requires that fixed production overhead be allocated toconversion costs based on the normal capacity of the

 

5

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production facilities. SFAS No. 151 was effective for inventory costsincurred by the Company beginning January 1, 2006. The adoption of thisStatement did not have a material impact on the Company’s consolidatedfinancial position, results of operations, or cash flows.

 

**3. ACQUISITIONS**

 

On July 28, 2005, the Companyacquired substantially all of the assets of a moldings manufacturing company operatingunder the name of Dimension Moldings, Inc. The Company paid a cash purchaseprice at closing of $9.3 million and will be required to pay up toan aggregate of $7.0 million if certain earnings targets are met at the end ofeach calendar year from 2005 to 2010. Slightly less than half of the purchase price paid at closing was fundedwith borrowings under the senior secured revolving credit facility and theremainder was funded from the proceeds of an equity contribution from existingstockholders. The acquired assets of Dimension Moldings, Inc. are now operatedand owned by Woodcraft Industries, Inc., the Company’s subsidiary. In the firstquarter 2006, the Company paid $2.0 million to the sellers of DimensionMoldings as a result of the acquired business meeting the earnings target setfor 2005.

 

Theacquisition of the assets of Dimension Moldings, Inc. was accounted for usingthe purchase method of accounting. Accordingly, the assets acquired and theliabilities assumed by the Company were recorded at fair value as of the dateof the acquisition, including assigning value to certain intangible assets acquired(a customer relationship for $8.7 million and a noncompete for $0.1 million). Thispurchase price allocation is preliminary and the Company expects to completetheir review by the second quarter of 2006. Based on this preliminary purchaseprice allocation, the Company determined the fair value of the net assetsacquired exceeded the $9.3 million closing purchase price by approximately $2.0million. As a result, the Company recorded a current liability for $2.0 millionas of December 31, 2005, which was paid in the first quarter 2006. Any additional contingent consideration paidin excess of the original purchase price allocation will be recorded asgoodwill. The components of the purchase price allocation are as follows (inthousands):

 
| Current assets                 |   | $      | 1,504  |   |
|--------------------------------|--------|--------|--------|--------|
| Property, plant, and equipment |   | 1,271  |   |
| Goodwill                       |   | 147    |   |
| Customer relationship          |   | 8,704  |   |
| Noncompete agreement           |   | 100    |   |
| Assets acquired                |   | 11,726 |   |
| Liabilities assumed            |   | (437   | )      |
| Net assets acquired            |   | 11,289 |   |
| Contingent consideration       |   | (2,000 | )      |
| Closing purchase price         |   | $      | 9,289  |   |

 

**4. RELATED-PARTY TRANSACTIONS**

 

The Company has a managementservices agreement with an affiliate of its primary investor whereby theCompany pays a transaction fee to the affiliate for services provided for eachfinancing, refinancing, acquisition, or similar nonrecurring transaction. TheCompany received services from this affiliate related to the acquisition of theassets of Dimension Moldings, Inc. totaling $313,000, which is included in thepurchase price allocation.

 

TheCompany entered into noncompete agreements on April 30, 2004 with theformer owners of Grand Valley, and on July 28, 2005 with the owners ofDimension Moldings, Inc. (Notes 2 and 3).

 

6

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### **Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

###  

**FORWARD-LOOKING STATEMENTS**

 

Certainstatements in this report are “forward-looking statements” within the meaningof the Private Securities Litigation Reform Act of 1995. Statements that arepredictive in nature, that depend upon or refer to future events or conditionsor that include words such as “believe,” “anticipate,” “expect,” “estimate,” “may,”“will,” “should,” “continue,” “plans,” “intends,” “likely” or other similarexpressions are forward-looking statements. We caution you that forward-lookingstatements involve unknown risks, uncertainties and other factors that maycause our actual results and performance to differ materially from any futureresults or performance expressed or implied by these forward-looking statements.Please also see our discussion of risk factors contained in Item 1A. Part II ofthis Report on Form 10-Q.

 

Withoutlimiting the generality of the preceding statement, all statements in thisreport providing estimates and projections concerning or relating to thefollowing matters are forward-looking statements:

 

•      financial results and conditions;

 

•      margins, costs and expenditures;

 

•      cash flows and growth rates;

 

•      demand for our products;

 

•      industry trends;

 

•      new product and customer initiatives;

 

•      our current plans for capital expenditures;

 

•      manufacturing and other cost-saving initiatives; and

 

•      our liquidity and capital resources.

 

Inaddition, we, through our senior management, from time to time makeforward-looking public statements concerning our expected future operations andperformance and other developments. Such forward-looking statements arenecessarily estimates reflecting our judgment based upon current informationand involve a number of risks and uncertainties. There can be no assurance thatother factors will not affect the accuracy of these forward-looking statementsor that our actual results will not differ materially from the resultsanticipated in such forward-looking statements. Although we believe that theseforward-looking statements are based on reasonable assumptions, you should beaware that many factors could affect our actual financial results or results ofoperations and could cause actual results to differ materially from thoseexpressed in the forward-looking statements. Those factors include, among otherthings:

 

•      our high degree of leverage and significant debt service obligations;

 

•      our ability to integrate acquired businesses;

 

•      our need for additional manufacturing capacity;

 

•      restrictions under the indenture governing the notes and our seniorsecured credit facility;

 

•      changes in interest rates and general economic, homebuilding industry orhome repair and remodeling industry conditions;

 

•      changes in the price of raw materials;

 

•      interruptions in deliveries of raw materials or finished goods;

 

•      the highly competitive nature of our industry; and

 

•      increases in the cost of labor.

 

7

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**Overview**

 

We are one of the leadingmanufacturers of hardwood cabinet doors and components and engineered woodproducts in the United States. Our products include (1) hardwood cabinetdoor components, face frames and drawer fronts, (2) fully assembledhardwood cabinet doors, (3) rigid thermofoil, or RTF, cabinet doors andcomponents, (4) veneer raised panels, or VRPs, and (5) a variety oflaminated and profile-wrapped components. We generate approximately 95% of oursales from the kitchen and bath cabinet manufacturing industry. Our customers,in turn, distribute their products through various sales channels, includingspecialty kitchen and bath cabinet dealers, home center retailers andhomebuilders. We conduct all of our operations through our Woodcraft,PrimeWood, Grand Valley and Brentwood subsidiaries and we operate ten manufacturingfacilities located in Minnesota, North Dakota, Ohio, Oregon, Pennsylvania,Kansas, and Kentucky that allow us to distribute our products nationwide.

 

We consummated four strategicacquisitions that have substantially enhanced our market position, productbreadth and geographic reach. In June 1998, we acquired our PrimeWoodsubsidiary, or PrimeWood, a manufacturer of RTF, VRP and profile-wrappedengineered wood products based in North Dakota. In July 2002, we acquiredour Brentwood subsidiary, or Brentwood, a manufacturer of solid wood and RTFcabinet doors located in Oregon. In April 2004, we acquired our GrandValley subsidiary, or Grand Valley, a manufacturer of cabinet doors located inOhio. In July 2005, we acquired Dimension Moldings, Inc. (DMI), a manufacturerof hardwood component moldings located in Ohio.

 

InSeptember 2005, we amended and restated the existing senior secured creditfacility by expanding the revolving line of credit capacity to $40.0 million,advancing a $7.5 million nonamortizing term loan, and allowing the flexibilityto advance up to $7.5 million through June 30, 2006 on a nonamortizing capitalexpenditure loan. We have the option, without penalty, to prepay the term loanand capital expenditure loan throughout the loan commitment period.

 

**Results of Operations**

 

***Three Months Ended March 31, 2006 Comparedto the Three Months Ended March 31, 2005***

 

Thefollowing table outlines, for the three months ended March 31, 2006 and for thethree months ended March 31, 2005, selected operating data derived from our condensedconsolidated statements of operations and presents this information as apercentage of net sales:

 
| ** **               | ** ** | **WII Components, Inc.**                         | ** ** |
|--------------------------|------------|------------------------------------------------------------|------------|
| ** **               | ** ** | **Three Months Ended  March 31, 2006** | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
| ** **               | ** ** | **(dollars in thousands)**                       | ** ** |
| Net sales                |       | $                                                          | 76,341     |   | $ | 57,808 |   |
| *% of net sales*         | * *   | *100.0*                                                    | *%*        | *100.0* | *%* |
| Cost of sales            |       | 63,362                                                     |       | 48,594 |   |
| *% of net sales*         | * *   | *83.0*                                                     | *%*        | *84.1* | *%* |
| * *                 | * *   | * *                                                   | * *   | * * | * * |
| Gross profit             |       | 12,979                                                     |       | 9,214 |   |
| *% of net sales*         | * *   | *17.0*                                                     | *%*        | *15.9* | *%* |
| Operating expenses       |       | 5,085                                                      |       | 3,442 |   |
| *% of net sales*         | * *   | *6.7*                                                      | *%*        | *5.9* | *%* |
| * *                 | * *   | * *                                                   | * *   | * * | * * |
| Operating income         |       | 7,894                                                      |       | 5,772 |   |
| *% of net sales*         | * *   | *10.3*                                                     | *%*        | *10.0* | *%* |
| Other expenses (income): |       |                                                       |       |   |   |
| Interest expense         |       | 3,422                                                      |       | 3,196 |   |
| *% of net sales*         | * *   | *4.5*                                                      | *%*        | *5.5* | *%* |
| Other income, net        |       | (21                                                        | )          | (6 | ) |
| *% of net sales*         | * *   | *-0.0*                                                     | *%*        | *-0.0* | *%* |
| Income tax provision     |       | 1,827                                                      |       | 981 |   |
| *% of net sales*         | * *   | *2.4*                                                      | *%*        | *1.7* | *%* |
| * *                 | * *   | * *                                                   | * *   | * * | * * |
| Net income               |       | 2,666                                                      |       | 1,601 |   |
| *% of net sales*         | * *   | *3.5*                                                      | *%*        | *2.8* | *%* |
|                          |            |                                                            |            |  |  |  |  |

 

*Net sales.*Net sales increased $18.5 million, or 32.0%, from $57.8 millionfor the three months ended March 31, 2005 to $76.3 million for the threemonths ended March 31, 2006. Sales in our hardwood product line increased $18.7 millionattributable to a combination of (i) increases in volume due to overallindustry growth and market share gain, (ii) the inclusion of the results of thebusiness acquired in the acquisition of the assets of Dimension Moldings, Inc.in July 2005, and (iii) to a lesser extent, price adjustments made inresponse to prior increases in raw material costs. This increase was offset bya $0.2 million decrease in sales relates to our engineered wood products line, attributableto decreases in market share.

 

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*Cost of sales.*Cost of sales increased $14.7 million, or 30.2%, from $48.6 millionfor the three months ended March 31, 2005 to $63.3 million for the threemonths ended March 31, 2006. This increase in cost of sales is primarily attributableto higher material, labor and overhead costs as a result of higher volume ofsales, but other factors include; (i) the acquisition of the assets ofDimension Moldings, Inc. in July 2005, and (ii) start-up costs in ourPennsylvania facility. These costs were partially offset by (i) improvedoperational performance, primarily at our Ohio and Oregon door makingfacilities, and (ii) the spreading of our fixed costs over a larger sales base.

 

*Gross profit.*Gross profit increased $3.8 million, or 41.3%, from $9.2 millionfor the three months ended March 31, 2005 to $13.0 million for the sameperiod in 2006. As a percentage of net sales, our gross profit increased 110basis points from 15.9% for the three months ended March 31, 2005 to 17.0%for the same period in 2006. This increase reflects (i) improved operationalperformance, primarily at our Ohio and Oregon door making facilities,(ii) stabilized raw material costs in our hardwood product line since thefirst half 2005, and (iii) the spreading of our fixed costs over a larger salesbase.

 

*Operating expenses.*Operating expenses increased $1.7 million,or 50.0%, from $3.4 million for the three months ended March 31, 2005 to $5.1 millionfor the same period in 2006. The increase partially consists of (i)$0.8 million additional stock compensation expense in 2006, (ii) $0.3 milliondue to the inclusion of three full months of operations of our Middlefieldfacility, which includes $0.2 million amortization for a customer relationshipintangible asset, and (iii) $0.4 million of additional professional fees and employeeincentive expense.

 

*Operating income.*Operating income increased by $2.1 million, or 36.2%, from $5.8 millionfor the three months ended March 31, 2005 to $7.9 million for the threemonths ended March 31, 2006 as a result of the net effect of the factorsdescribed above.

 

*Interest expense.*Interest expense increased $0.2 million, or 6.3%, from $3.2 millionfor the three months ended March 31, 2005 to $3.4 million for the threemonths ended March 31, 2006. This increase relates to a higher average debtbalance due to increased capital expenditures and the acquisition of the assetsof Dimension Moldings, Inc. in July 2005.

 

*Other income.*Other income increased from $6,000 for the three months ended March 31,2005 to $21,000 for the three months ended March 31, 2006. This increaserelates to the interest received related to short term investments incertificate of deposits.

 

*Income tax provision.*Income tax expense increased $0.8 million,or 80.0% from an income tax expense of $1.0 million for the three monthsended March 31, 2005 to an income tax expense of $1.8 million for thethree months ended March 31, 2006 as a result of higher earnings and a highereffective tax rate. The effective tax rate increased 270 basis points from 38.0%in 2005 to 40.7% in 2006 due to additional state taxes as a result ofacquisitions.

 

*Net income.*Net income increased $1.1 million, or 68.8%, from a net income of $1.6 millionfor the three months ended March 31, 2005 to a net income of $2.7 millionfor the three months ended March 31, 2006 as a result of the factors describedabove.

 

**Liquidity and Capital Resources**

 

Our primary cash needs areworking capital, capital expenditures and debt service. We have historicallyfinanced these cash requirements through internally generated cash flow andfunds borrowed under our existing senior secured credit facilities.

 

*Refinancing*. On February 18, 2004, we issued $120.0 million of 10% senior notesdue in 2012, and paid the entire outstanding balance of our old senior securedcredit facility and terminated the related credit agreement. Our existing $55.0million credit facility, which was amended and restated in September 2005,provides for revolving credit of up to $40.0 million subject to aborrowing base, $7.5 million nonamortizing term loan, and $7.5 millionnonamortizing capital expenditure loan to be drawn upon through June 30, 2006. Theoutstanding principal bears interest at a fluctuating rate equal to either thebase rate plus 23⁄4% per annum or LIBOR plus 3.0% per annum. Asof March 31, 2006, the borrowing base allowed for $39.3 million of the $40.0million revolving credit. We had no amount outstanding under ourrevolving credit as of March 31, 2006 or December 31, 2005. As of March 31, 2006 and December 31, 2005,we had $7.5 million outstanding and no amount outstanding, under thenonamortizing term loan and nonamortizing capital expenditure loan,respectively. We must comply withcertain financial covenants under our credit facility including maintenance ofa minimum fixed charge coverage ratio, a maximum total leverage ratio and anEBITDA minimum. As of March 31, 2006 and December 31, 2005, we were incompliance with these covenants. As of March 31, 2006, we had $2.0 million ofcapital lease obligations, of which $0.9 million was current and as of December31, 2005 we had $2.5 million of capital lease obligations, of which $1.3 millionwas current.

 

The acquisition ofsubstantially all of the assets of DMI, and associated fees and expenses atclosing were funded slightly more than one-half by the sale of shares of theCompany’s voting common stock to existing stockholders, and the remainder withoperating cash and a draw down on the Company’s senior secured credit facility.In the first quarter of 2006,we paid an earn-out payment in the amount of $2.0 million to the DMI sellers asa result of the operations of the DMI assets meeting agreed upon earningstargets.

 

Our existing senior securedrevolving credit facility and the indenture for the senior notes impose certainrestrictions on us, including restrictions on our ability to incurindebtedness, pay dividends, make investments, grant liens, sell our assets andengage in certain other activities. Indebtedness under our existing seniorsecured revolving credit facility is secured by substantially all of ourassets, including our real and personal property, inventory, accountsreceivable, intellectual property and other intangibles.

 

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*Cash flow from operating activities.*As of March 31, 2006, we had $638,000 ofcash and cash equivalents available for working capital purposes, compared to$259,000 as of March 31, 2005. Cash provided by operating activities for thethree months ended March 31, 2006 was $1.9 million compared to cash used byoperating activities for the three months ended March 31, 2005 of $1.1 million.The increase is primarily driven by the increased net income and increasednoncash stock compensation expense for the three months ended March 31, 2006.

 

*Cash flow from investing activities.*Net cash used in investing activities was $4.8 millionfor the three months ended March 31, 2006 and $1.5 million for the three monthsended March 31, 2005. Capitalexpenditures for the three months ended March 31, 2006 were $4.8 million comparedto $1.5 million for the three months ended March 31, 2005. The increase isprimarily due to expenditures in 2006 for (i) the expansion of our St. Clouddoor plant and (ii) the equipment for the roughmill facility in Greenville,Pennsylvania.

 

*Cash flow from financing activities.*Net cash used in financing activities for thethree months ended March 31, 2006 totaled $0.4 million due to paymentsmade on capital leases. Net cash provided by financing activities in the threemonth period ended March 31, 2005 totaled $2.8 million.

 

Weanticipate that the funds generated by operations and funds available under thesenior secured credit facility will be sufficient to meet working capitalrequirements and to finance capital expenditures over the next twelve months.We cannot provide assurances that our business will generate sufficient cashflow from operations, that anticipated net sales growth and operatingimprovements will be realized or that future borrowings will be available underour senior secured credit facility in an amount sufficient to enable us toservice our indebtedness, including the notes, or to fund our other liquidityneeds. In addition, we cannot provide assurances that we will be able torefinance any of our indebtedness, including our senior secured credit facilityand the notes, on commercially reasonable terms, if at all. We are currently approaching our fullmanufacturing capacity. We intend to incur capital expenditures in order tocontinue to fulfill increased manufacturing demands, including withoutlimitation, the current expansions at our roughmill facility in Pennsylvaniaand our St. Cloud door facility for which we have expended approximately $8.8million as of March 31, 2006. We currently believe that an additional amountbetween $7.2 million and $9.2 million will be required to complete theseexpansions. These expansion costs include the acquisition of the roughmillfacility.

 

**Inflation**

 

Ourcost of sales is subject to inflationary pressures on labor costs, prices ofthe raw materials we use and various overhead costs. We generally have beenable over time to offset the effects of inflation and price fluctuationsthrough a combination of sales price increases and operational efficiencies.

 

**Seasonality**

 

Oursales historically have been moderately seasonal, reflecting the temporary slowdown in consumer purchasing activity during the winter holiday season and thesummer months.

 

### **Critical Accounting Policies**

###  

Inour Annual Report on Form 10-K for the year ended December 31, 2005, weidentified the critical accounting policies which affect our more significantestimates and assumptions used in preparing our consolidated financialstatements. We have not changed these policies from those previously disclosedin our annual report.

 

**New Accounting Standards**

 

See Note 2 of the Condensed ConsolidatedFinancial Statements for information pertaining to recently adopted accountingstandards or accounting standards to be adopted in the future.

 

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### **Item 3. Quantitative and Qualitative Disclosuresabout Market Risk**

###  

Weare subject to various market risks such as fluctuating lumber prices andinterest rates.

 

*Commodity price risk.*Hardwood lumber accounts for the largestportion of our material costs. Our profitability is therefore affected by theprices of lumber which may fluctuate based on a number of factors beyond ourcontrol, including, among others, changes in supply and demand, generaleconomic conditions, labor costs, competition and, in some cases, governmentregulation. Though we are not dependent on any single supplier for our rawmaterials, we have no long-term supply contracts and thus, are subject tochanges in the prices charged by our suppliers. The prices for the primaryhardwood species we use in the production of our hardwood doors and componentsare subject to some volatility.

 

*Interest rate risk.*We are exposed to market risk relating tochanges in interest rates in respect of a portion of our long-term debt and aportion of our capital leases. As of March 31, 2006, we had $7.5 millionoutstanding under the nonamortizing term loan issued under our senior securedcredit facility, which bears interest at variable rates. In addition, as of that date, we hadapproximately $0.9 million of capital leases that bear interest atvariable rates. We believe that a one percent (1%) increase in the interestrates currently in effect would not have a material adverse effect on ourfinancial condition or results of operations.

 

### **Item 4. Controls and Procedures**

###  

(a)           Evaluation of disclosure controls andprocedures.

 

Asrequired by Rule 13a-15 under the Securities Exchange Act of 1934, wecarried out an evaluation under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of our disclosure controls and procedures as ofMarch 31, 2006. In designing and evaluating our disclosure controls andprocedures, we and our management recognize that any controls and procedures,no matter how well designed and operated, can provide only reasonable assuranceof achieving the desired control objectives, and our management necessarily wasrequired to apply its judgment in evaluating and implementing possible controlsand procedures. Based upon that evaluation, our Chief Executive Officer andChief Financial Officer have concluded that they believe that, as of March 31,2006, our disclosure controls and procedures were reasonably effective to ensurethat information required to be disclosed by us in the reports we file orsubmit under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the Securities and Exchange Commission’srules and forms. We will continue to review and document our disclosurecontrols and procedures on an ongoing basis, and may from time to time makechanges aimed at enhancing their effectiveness and to ensure that our systemsevolve with our business.

 

(b)           Changes in internal controls over financialreporting.

 

None.

 

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**PART II—OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

None.

 

**Item 1A. Risk Factors**

 

TheCompany has included in its Annual Report on Form 10-K for the year endedDecember 31, 2005, a description of certain risks and uncertainties that couldaffect the Company’s business, future performance or financial condition (the “RiskFactors”). The Risk Factors are hereby incorporated in Part II, Item IA of thisForm 10-Q. Investors should consider the Risk Factors prior to making aninvestment decision with respect to the Company’ s securities.

 

**Item 2. Unregistered Sales of Equity Securities and Useof Proceeds**

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

**Item 4. Submission of Matters to a Vote of SecurityHolders**

 

None.

 

**Item 5. Other Information**

 

### **None.**

###  

### **Item 6. Exhibits**

###  

31.1         Certification of Vice President, Treasurer andSecretary of WII Components, Inc., pursuant to Rules 13a-14(a) and15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002

31.2         Certification of Chief Executive Officer ofWII Components, Inc., pursuant to Rules 13a-14(a) and 15d-14(a), asadopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*       Certification of Vice President, Treasurer andSecretary of WII Components, Inc., pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002

32.2*       Certification of Chief Executive Officer ofWII Components, Inc., pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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*                                        This certification shall not be deemed “filed”for purposes of Section 18 of the Securities Exchange Act of 1934, orotherwise subject to the liability of that section, nor shall it be deemed tobe incorporated by reference into any filing under the Securities Act of 1933or the Securities Exchange Act of 1934.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                | WII  COMPONENTS, INC. |
|---------------------|-----------------------|
|                |                  |
| Dated:  May 9, 2006 | By:                   |
|                |                  |  /s/ John Fitzpatrick |
|                |                  | John  Fitzpatrick |
|                |                  | Chief  Executive Officer |
|                |                  | (Principal  Executive Officer) |
| Dated:  May 9, 2006 |                  |   |
|                |                  | /s/  Dale B. Herbst |
|                |                  | Dale  B. Herbst |
|                |                  | Vice  President, Treasurer and Secretary |
|                |                  | (Principal  Financial and Accounting Officer) |

 

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