-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, POJ77Zwsjrd3IWAhqADr6d+cJUe42cBij4L2xu5MwBrxw5X83nJlG88Q7Mo4G7zc MRzmMJQ3pmvDK1Y6rwZpgQ== 0000093676-96-000007.txt : 19960912 0000093676-96-000007.hdr.sgml : 19960912 ACCESSION NUMBER: 0000093676-96-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960629 FILED AS OF DATE: 19960911 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARRETT L S CO CENTRAL INDEX KEY: 0000093676 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 042756926 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-00367 FILM NUMBER: 96628409 BUSINESS ADDRESS: STREET 1: 121 CRESCENT ST CITY: ATHOL STATE: MA ZIP: 01331 BUSINESS PHONE: 5082493551 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended JUNE 29, 1996 Commission File No. 1- 367 THE L.S. STARRETT COMPANY (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-1866480 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 121 CRESCENT STREET, ATHOL, MASSACHUSETTS 01331 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 508-249-3551 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Class A Common - $1.00 Per Share Par Value New York Stock Exchange Class B Common - $1.00 Per Share Par Value Not applicable Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No The Registrant had 5,055,185 and 1,994,285 shares, respectively, of its $1.00 par value Class A and B common stock outstanding on July 26, 1996. On that date, the aggregate market value of the common stock held by nonaffiliates was approximately $162,000,000. The exhibit index is located on page 22. Documents incorporated by reference Proxy Statement dated August 16, 1996 - Part III PART I Item I - Business The Company was founded in 1880 and incorporated in 1929 and is engaged in the business of manufacturing industrial, professional, and consumer products. The total number of different items made and sold by the Company exceeds 5,000. Among the items produced are precision tools, tape measures, levels, electronic gages, dial indicators, gage blocks, digital readout measuring tools, granite surface plates, optical measuring projectors, coordinate measuring machines, vises, M1 lubricant, hacksaw blades, hole saws, band saw blades, jig saw blades, reciprocating saw blades, and precision ground flat stock. Much of the Company's production is concentrated in hand measuring tools (such as micrometers, steel rules, combination squares and many other items for the individual craftsman) and precision instruments (such as vernier calipers, height gages, depth gages and measuring instruments that manufacturing companies buy for the use of their employees). These tools and instruments are sold throughout the United States and Canada and over 100 foreign countries, primarily through distributors. By far the largest consumer of these products is the metalworking industry, but other important consumers are automotive, aviation, marine and farm equipment shops, do-it-yourselfers and tradesmen such as builders, carpenters, plumbers and electricians. Most of the Company's products are made from steel purchased from steel mills. Forgings, castings, and a few small finished parts are purchased from other manufacturers. Raw materials have always been readily available to the Company. At June 29, 1996, the Company had 2,855 employees. The Company is one of the largest producers of mechanics' hand measuring tools and precision instruments. In the United States, there are three other major companies and numerous small competitors in the field, including direct foreign competitors. As a result, the industry is highly competitive. During the fiscal year ended June 29, 1996, there were no material changes in the Company's competitive position. During recent years, changes in the volume of sales of the Company have, in general, corresponded with changes throughout the industry. In saws and precision ground flat stock, the Company in the United States competes with many manufacturers. The Company competes principally through the high quality of its products and the service it provides its customers. Sales order backlog of the Company at any point in time is negligible. The operations of the Company's foreign subsidiaries are consolidated in its financial statements. The subsidiaries located in Brazil and Scotland are actively engaged in the manufacture of hacksaw and band saw blades and a limited line of precision tools and measuring tapes. The Company expects its foreign subsidiaries to continue to play a significant role in its overall operations. A summary of the Company's foreign operations is contained in the footnotes to the Company's 1996 financial statements found in item 8 of this Form 10K and is hereby incorporated by reference. The Company generally fills orders from finished goods inventories on hand; total inventories amounted to approximately $70,296,000 at June 29, 1996, and $56,197,000 at June 24, 1995. The Company uses the last-in, first-out (LIFO) method of valuing most inventories, which results in more realistic operating costs and profits. Inventory amounts are approximately $25,852,000 and $25,627,000 lower, respectively, than if determined on a first-in, first-out (FIFO) basis. The Company does apply for patent protection on new inventions and presently owns a number of patents. Its patents are considered important in the operation of the business, but no single patent is of material importance when viewed from the standpoint of its overall business. The Company relies on its continuing product research and development efforts, with less dependence on its present patent position. It has for many years maintained engineers and supporting personnel engaged in research, product development, and related activities. The expenditures for these activities during fiscal years 1996, 1995 and 1994 were approximately $3,472,000, $3,769,000 and $2,718,000, respectively, all of which was expensed in the Company's financial statements. The Company uses trademarks with respect to its products. All of its important trademarks are registered. Compliance with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to protection of the environment is not expected to have a material effect on the capital expenditures, earnings and competitive position of the Company. The Company's business is to some extent seasonal, with sales and earnings generally at the lowest level during the first quarter of the fiscal year. Item 2 - Properties The Company's principal plant is located in Athol, Massachusetts, on about 15 acres of Company-owned land. The plant consists of 25 buildings, mostly of brick construction of varying dates, with approximately 535,000 square feet of production and storage area. The Webber Gage Division, Cleveland, Ohio, owns and occupies two buildings containing approximately 50,000 square feet. The Company-owned facility in Mt. Airy, North Carolina has approximately 234,000 square feet. It is occupied by the Company's Saw Division, Granite Surface Plate Division, Coordinate Measuring Machine Division, Optical Comparator Division, Ground Flat Stock Division and Vise Division. This plant is subject to a mortgage collateralizing a $2,700,000 Industrial Revenue Bond. The Company's Advanced Technology Division, located in Gardner, Massachusetts, occupies about 9,000 square feet of leased facilities. The Company's Evans Rule Division, located in North Charleston, South Carolina, owns and occupies a 136,000 square foot building. In addition, this division leases 45,000 square feet of manufacturing space located in Mayaguez, Puerto Rico. The Company's Exact Level Division is located in Alum Bank, Pennsylvania and owns and occupies a 50,000 square foot building. The Company's Brazil subsidiary occupies several buildings totaling 209,000 square feet. The Company's Scotland subsidiary occupies a 187,000 square foot building and also leases approximately 16,000 square feet of manufacturing space in Skipton, England, where its wholly owned subsidiary manufactures optical measuring projectors. A subsidiary in Mississauga, Canada occupies a 25,000 square foot building. With the exception of Skipton, these facilities are all owned. In addition, the Company owns and operates warehouses/sales offices in Atlanta, Georgia; Glendale, Arizona; and Elmhurst, Illinois. The Company's Buena Park, California warehouse operations were moved to Glendale, Arizona in fiscal 1995 and the Company's Farmington Hills, Michigan sales office was closed at the end of fiscal 1996. In its opinion, all of the Company's property, plant and equipment is in good operating condition, well maintained and adequate for its needs. Item 3 - Legal Proceedings The Company is not involved in any material pending legal proceedings. Item 4 - Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 29, 1996. Executive Officers of the Registrant The information under the caption Executive Officers of the Registrant in item 10 of this Form 10K is hereby incorporated by reference. PART II Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters The Company's Class A common stock is traded on the New York Stock Exchange. Quarterly dividend and high/low closing market price information is presented in the table below. The Registrant's Class B common stock is generally nontransferable, except to lineal descendants and thus has no established trading market, but it can be converted into Class A common stock at any time. The Class B common stock was issued on October 5, 1988, and the Registrant has paid the same dividends thereon as have been paid on the Class A common stock since that date. At July 26, 1996, there were 2,437 registered holders of Class A common stock and 2,008 registered holders of Class B common stock. Quarter ended Dividends High Low September 1994 0.17 $ 22.88 $ 20.38 December 1994 0.17 22.50 20.00 March 1995 0.17 22.75 21.50 June 1995 0.18 23.88 21.88 September 1995 0.18 23.50 22.00 December 1995 0.18 25.88 22.50 March 1996 0.18 25.38 23.50 June 1996 0.18 26.38 24.13 Item 6 - Selected Financial Data Years ended in June ($000 except per share data) 1996 1995 1994 1993 1992 Net sales $235,467 $214,215 $180,178 $174,801 $180,275 Net earnings before accounting changes 17,331 13,487 9,041 8,743 *10,537 Earnings per share before accounting changes 2.45 1.91 1.28 1.25 *1.52 Long-term debt 7,100 8,700 10,843 14,527 18,212 Total assets 227,312 213,940 198,032 194,436 198,002 Dividends per share 0.72 0.69 0.68 0.68 0.68 * Before charge of $7,729,000 ($1.12 per share) for cumulative effect on prior year earnings of accounting changes for postretirement benefits and income taxes. Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Sales Sales increased 10% in 1996 following a 19% increase a year ago. Domestic sales accounted for almost all of the increase in the current year due to better economic conditions in our industry and some added distribution channels. Foreign sales increased only modestly as Brazil struggled with the effects of high real interest rates. Last year's sales increase came primarily from our foreign operations. Exchange rate changes in both Scotland and Brazil contributed somewhat, but the main factor was the Brazilian economy causing 1995 unit volume there to be up 60%. Earnings Before Taxes Pretax earnings are up 16% for the year. This follows a 107% increase in 1995. Looking at domestic results only, pretax earnings are up 59% this year and were up 33% last year, both year's increases being due primarily to volume and the related effects of increased factory hours and overhead absorption. On the foreign side, significant unit volume and price increases achieved in Brazil in fiscal 1995 could not be improved upon in 1996 as the economy fought the effects of high real interest rates. Mandated wage increases in Brazil during a period when it was difficult to raise prices caused a decline in pretax income in 1996. Net Earnings 1996 net earnings are up 29% over 1995 while 1995 earnings were up 49% over 1994. The effective tax rate is 34% in 1996 compared to 40% in 1995 and 17% in 1994. The fiscal 1996 effective tax rate is back to a normal range after two years of wide fluctuation. Tax-exempt interest, Puerto Rico tax incentives and dividends on ESOP stock usually contribute to an overall effective tax rate that is slightly lower than the combined domestic statutory rate. The increase in the effective tax rate in 1995 came about because of the monetary plan instituted in Brazil two years ago that caused high local taxable income until pre plan inventories were sold, which has largely happened by the end of 1996. In addition, there were several statutory rate reductions in Brazil toward the end of 1996. The big drop in the effective tax rate in 1994 again came from Brazil where two things happened: 1) higher inflation resulted in higher tax deductions for monetary correction (an accounting concept unique to Brazil) and 2) the Company resolved favorably a tax dispute dating to 1991. LIQUIDITY AND CAPITAL RESOURCES Years ended in June ($000) 1996 1995 1994 Cash provided by operations $17,770 $18,008 $16,371 Cash used in investing activities (10,744) (11,322) (10,224) Cash used in financing activities (8,187) (6,380) (6,462) Effect of translation rate changes on cash (11) (95) (152) Increase (decrease) in cash $(1,172) $ 211 $ (467) Cash flows provided by operating activities decreased $0.2 million in 1996. The increase in the cash from earnings was more than offset by the cash used to finance increased inventory. The 1995 increase of $1.6 million was primarily due to the increase in earnings. The Company's investing activities consist mainly of expenditures for property, plant and equipment and the investment of cash not immediately needed for operations. Plant expenditures of $11.6, $9.8 and $6.6 million in 1996, 1995 and 1994 are typical and the Company anticipates similar levels of capital expenditures in the near term. Cash flows from financing activities are primarily the payment of dividends, which tend to be quite steady from year to year. The Company requires little debt to finance day to day operations and the proceeds from the sale of stock under the various stock plans tend to be used to purchase treasury shares. The Company maintains sufficient liquidity and has adequate resources to fund its operations under current business conditions. The Company maintains two lines of credit as discussed in the notes to the financial statements. These lines have been used primarily to finance acquisitions in prior years. The Company continues to maintain a strong financial position with a working capital ratio of 4.8 to 1 as of June 29, 1996 and 5.0 to 1 as of June 24, 1995. Cash not immediately required for working capital is invested in short-term money market instruments with maturities generally less than one year (however, see notes to financial statements regarding investments in Puerto Rico). The fact that the changes in receivables and payables in the Statement of Cash Flows do not exactly match the changes in the related balance sheet accounts is because of changes in foreign exchange rates. These differences should not be interpreted as uses and sources of cash, but rather as noncash adjustments to net income to arrive at cash generated from operations. Also, in Brazil, these differences tend to be offset by unrealized exchange gains and losses. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Item, as well as other portions of this document and the 1996 Annual Report, including the Chairman's letter to stockholders, include forward- looking statements about the Company's business, sales, expenditures, foreign operations, debt service, liquidity and capital resources, and other operating and capital requirements. In addition, forward-looking statements may be included in future Company documents and in oral statements by Company representatives to security analysts and investors. The Company is subject to risks that could cause actual events to vary materially from such forward- looking statements, including the following risk factors: Risks Related to Foreign Operations: For the period ended June 29, 1996, approximately 32% of the Company's sales were derived from foreign operations and, as of June 29, 1996, approximately 32% of the Company's net assets were located outside the United States. Foreign operations are subject to special risks that can materially affect the sales, profits, cash flows, and financial position of the Company, including taxes and other restrictions on distributions and payments, currency exchange rate fluctuations, inflation, minimum capital requirements, and exchange controls. In particular, the Company's Brazilian operations, which constitute over half of the Company's revenues from foreign operations, is a study in contrasts, very often changing from year to year due primarily to their political situation and high inflation economy. As a result, the future performance of the Brazilian operations is inherently unpredictable. Risks Related to Cyclical Nature of the Industry: The market for the Company's products is subject to general economic conditions, including the level of capital spending by industrial companies. As such, recessionary forces decrease demand for the Company's products and adversely affect performance. Risks Related to Competition: The Company's business is subject to direct and indirect competition from both domestic and foreign firms. In particular, low- wage foreign sources have created severe competitive pricing pressures. Under certain circumstances, including significant changes in U.S. and foreign currency relationships, such pricing pressures might reduce unit sales and/or adversely affect the Company's margins. Item 8 - Financial Statements and Supplementary Data Contents: Page Report of Independent Auditors 8 Consolidated Statements of Earnings and Cash Flows 9 Consolidated Balance Sheets 10 Consolidated Statements of Stockholders' Equity 11 Notes to Consolidated Financial Statements 12-19 REPORT OF INDEPENDENT AUDITORS To the Stockholders and Directors of The L.S. Starrett Company We have audited the accompanying consolidated balance sheets of The L.S. Starrett Company and subsidiaries as of June 29, 1996 and June 24, 1995, and the related consolidated statements of earnings, cash flows and changes in stockholders' equity for each of the three years in the period ended June 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries as of June 29, 1996 and June 24, 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 29, 1996, in conformity with generally accepted accounting principles. S/DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Boston, Massachusetts August 2, 1996 THE L.S. STARRETT COMPANY Consolidated Statements of Earnings and Cash Flows For the years ended in June (in thousands of dollars except per share data) 1996 1995 1994 EARNINGS Net sales $235,467 $214,215 $180,178 Cost of goods sold (161,238) (149,871) (129,485) Selling, general and administrative expense (49,567) (43,480) (37,832) Other income and expense 1,490 1,648 (2,007) Earnings before income taxes 26,152 22,512 10,854 Income taxes 8,821 9,025 1,813 Net earnings $ 17,331 $ 13,487 $ 9,041 Earnings per share $ 2.45 $ 1.91 $ 1.28 CASH FLOWS Cash flows from operating activities: Net earnings $ 17,331 $ 13,487 $ 9,041 Noncash expenses: Depreciation and amortization 9,268 9,098 8,681 Deferred taxes 10 1,130 (254) Unrealized translation losses 99 596 5,476 Working capital changes: Receivables 564 (10,367) (8,499) Inventories (14,289) (2,554) (17) Other current assets and liabilities 3,639 6,636 3,400 Prepaid pension and other 1,148 (18) (1,457) Net cash from operating activities 17,770 18,008 16,371 Cash flows from investing activities: Additions to plant and equipment (11,609) (9,795) (6,567) Decrease(Increase)in short-term investment 865 (1,527) (3,657) Net cash used in investing activities (10,744) (11,322) (10,224) Cash flows from financing activities: Debt repayments (1,600) (1,600) (2,600) Common stock issued 3,130 3,175 2,678 Treasury shares purchased (4,656) (3,061) (1,735) Dividends (5,061) (4,894) (4,805) Net cash used in financing activities (8,187) (6,380) (6,462) Effect of translation rate changes on cash (11) (95) (152) Net increase (decrease) in cash (1,172) 211 (467) Cash beginning of year 2,589 2,378 2,845 Cash end of year $ 1,417 $ 2,589 $ 2,378 Supplemental cash flow information: Interest paid $ 870 $ 815 $ 662 Taxes paid $ 9,289 $ 5,200 $ 1,359 See Notes to Consolidated Financial Statements THE L.S. STARRETT COMPANY Consolidated Balance Sheets (in thousands of dollars) June 29 June 25 ASSETS 1996 1995 Current assets: Cash $ 1,417 $ 2,589 Short-term investments 27,794 28,511 Accounts receivable (less allowance for doubtful accounts of $1,284,000 and $1,071,000) 37,745 38,716 Inventories 70,296 56,197 Prepaid expenses and other current assets 4,746 4,625 Total current assets 141,998 130,638 Property, plant and equipment, at cost: Land 1,946 2,156 Buildings (less accumulated depreciation of $15,467,000 and $14,673,000) 21,206 21,460 Machinery and equipment (less accumulated depreciation of $40,368,000 and $38,009,000) 36,450 34,519 Total property, plant and equipment 59,602 58,135 Cost in excess of net assets acquired (less accumu- lated amortization of $3,117,000 and $2,766,000) 8,115 8,488 Prepaid pension cost 17,246 16,328 Other assets 351 351 $227,312 $213,940 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities $ 3,199 $ 600 Accounts payable and accrued expenses 14,432 12,803 Accrued salaries and wages 6,149 5,102 Taxes payable 5,545 6,005 Dividend payable 1,277 Employee deposits for stock purchase plan 528 378 Total current liabilities 29,853 26,165 Deferred income taxes 8,001 8,093 Long-term debt 7,100 8,700 Accumulated postretirement benefit obligation 15,073 14,153 Stockholders' equity: Class A Common Stock $1 par (10,000,000 shrs. auth.) 5,051 4,951 Class B Common Stock $1 par (10,000,000 shrs. auth.) 2,004 2,166 Additional paid-in capital 36,650 34,610 Retained earnings reinvested and employed in the business 128,272 119,506 Foreign currency translation adjustment (4,716) (4,147) Other equity adjustments 24 (257) Total stockholders' equity 167,285 156,829 $227,312 $213,940 See Notes to Consolidated Financial Statements THE L.S. STARRETT COMPANY Consolidated Statements of Stockholders' Equity For the years ended in June, 1994 through 1996 (in thousands) Common Addi- Equity Adjustments Stock Out- tional Currency standing Paid-in Retained Trans- ($1 Par) Capital Earnings lation Other Total Balance, 6/26/93 (1,303,954 Class A and 111,482 Class B shares in treasury)$ 7,065 $30,023 $110,259 $(4,298) $(1,627) $141,422 Net earnings 9,041 9,041 Dividends ($0.68) (4,805) (4,805) Treasury shares: Purchased (72) (315) (1,348) (1,735) Issued 102 2,341 2,443 Options exercised 12 223 235 ESOP loan repayments 1,084 1,084 Translation loss,net (1,037) (1,037) Balance, 6/25/94 (1,251,378 Class A and 133,397 Class B shares in treasury) 7,107 32,272 113,147 (5,335) (543) 146,648 Net earnings 13,487 13,487 Dividends ($0.69) (4,894) (4,894) Treasury shares: Purchased (139) (688) (2,234) (3,061) Issued 121 2,541 2,662 Options exercised 28 485 513 ESOP loan repayments 543 543 Short-term investments (257) (257) Translation gain,net 1,188 1,188 Balance, 6/24/95 (883,556 Class A and 155,628 Class B shares in treasury) 7,117 34,610 119,506 (4,147) (257) 156,829 Net earnings 17,331 17,331 Dividends ($0.72) (5,061) (5,061) Treasury shares: Purchased (197) (955) (3,504) (4,656) Issued 120 2,730 2,850 Options exercised 15 265 280 Short-term investments 281 281 Translation loss,net (569) (569) Balance, 6/29/96 (895,516 Class A and 220,572 Class B shrs. in treasury) $ 7,055 $36,650 $128,272 $(4,716) $ 24 $167,285 See Notes to Consolidated Financial Statements THE L. S. STARRETT COMPANY Notes to Consolidated Financial Statements SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation: The consolidated financial statements include the accounts of The L.S. Starrett Company and subsidiaries, a manufacturer of industrial, professional and consumer products. All subsidiaries are wholly- owned and all significant intercompany items have been eliminated. The Company's fiscal year ends on the last Saturday in June. Results for fiscal 1996 include 53 weeks compared to 52 weeks in 1995 and 1994. The fiscal years of the Company's subsidiaries in Scotland and Brazil end in May and April, respectively. Fair market value of financial instruments: The Company's financial instruments consist primarily of current assets, current liabilities, and long-term debt. Current assets, except inventories (see Inventories) and except short- term investments, and current liabilities are stated at cost, which approximates fair market value; long-term debts, which are at current market interest rates, also approximate fair market value. The Company does not purchase derivative financial instruments. Short-term investments: Short-term investments consist primarily of marketable securities, including treasury bills, certificates of deposit and municipal securities. The Company considers all its investments available for sale. As such, these investments are carried at market, which approximates cost, with unrealized temporary gains and losses recorded as a component of stockholders equity. Most investments have maturities of less than one year. Included in investments at June 29, 1996 is $6.7 million of liquid AAA rated Puerto Rico debt obligations. These investments were made for the purpose of reducing repatriation taxes and have maturities of up to ten years. Inventories: Inventories are stated at the lower of cost or market. For approximately 80% of all inventories, cost is determined on a last-in, first- out (LIFO) basis. For all other inventories, cost is determined on a first- in, first-out (FIFO) basis. LIFO inventories are $54,922,000 and $42,473,000 at the end of 1996 and 1995, respectively, such amounts being $25,852,000 and $25,627,000 less than if determined on a FIFO basis. During 1994, the Company reduced the level of certain LIFO inventories that were carried at significantly lower costs prevailing in prior years. The effect of the LIFO inventory reduction was to increase net earnings approximately $443,000 in 1994 ($.06 per share). Total inventories at year end are as follows (in thousands): Goods in Pro- cess and Raw Materials Finished Goods Finished Parts and Supplies Total 1996 $27,692 $22,858 $19,746 $70,296 1995 22,698 18,928 14,571 56,197 Income taxes: Deferred tax expense results from differences in the timing of certain transactions for financial reporting and tax purposes. Deferred taxes have not been recorded on undistributed earnings of foreign subsidiaries (approximately $50,000,000 at June 1996) or the related unrealized translation adjustments because such amounts are considered permanently invested and, if remitted, the resulting taxes would be offset by foreign tax credits. Long-lived assets: Property, plant and equipment: Buildings and equipment are depreciated using straight-line and accelerated methods over estimated useful lives as follows: buildings 15 to 50 years, building improvements 10 to 40 years, machinery and equipment 5 to 12 years, motor vehicles 3 to 5 years. Cost in excess of net assets acquired: These costs are being amortized on a straight-line basis over 10 to 40 years. The Company adopted FAS 121 (Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of) in 1996. The effect on the financial condition and results of operations was not significant. Research and development: Research and development costs are $3,472,000 in 1996, $3,769,000 in 1995 and $2,718,000 in 1994. Earnings per share: Earnings per share are computed using the weighted average number of shares and common stock equivalents (stock options) outstanding during the year. Translation of foreign currencies: Assets and liabilities in nonhyperinfla- tionary economies are translated at exchange rates in effect on reporting dates, and income and expenses are translated at rates in effect on transaction dates. The resulting differences due to changing exchange rates are charged or credited directly to the "foreign currency translation adjustment" account included as part of stockholders' equity. For the Company's subsidiary in Brazil ( a hyperinflationary economy), the translation method is the same except that inventories and plant and the related charges to cost of sales and depreciation expense are translated at rates in effect at the time the assets were purchased, and the resulting translation gains and losses are included in the determination of net earnings. Translation gains and losses on short-term borrowings and marketable securities in Brazil are netted against the related interest charged or income earned. Similar losses on accounts receivable are treated as sales discounts and are netted against sales. Use of accounting estimates: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Amounts ultimately realized could differ from those estimates. OTHER INCOME AND EXPENSE Other income and expense consists of the following (in thousands): 1996 1995 1994 Interest income $ 1,889 $ 2,037 $ 1,035 Interest expense and commitment fees (917) (813) (662) Realized and unrealized translation gains and losses (140) 192 (2,708) Other 658 232 328 $ 1,490 $ 1,648 $(2,007) INCOME TAXES The provision for income taxes consists of the following (in thousands): 1996 1995 1994 Current: Federal $ 5,058 $ 2,380 $ 863 Foreign 2,385 4,603 615 State 1,368 912 589 Deferred 10 1,130 (254) $ 8,821 $ 9,025 $ 1,813 The resolution of a tax dispute in Brazil resulted in a reduction of foreign tax expense of $350,000 in 1994. Pretax domestic income was $19,169,000, $12,022,000 and $8,916,000 in 1996, 1995 and 1994, respectively. A reconciliation of expected tax expense at the U.S. statutory rate to actual tax expense is as follows (in thousands): 1996 1995 1994 Expected tax expense $ 9,153 $ 7,654 $ 3,690 Increase (decrease) from: State and Puerto Rico taxes, net of federal benefit 219 (425) (378) Foreign taxes, net of federal credits (437) 1,815 (1,034) Nontaxable investment income (151) (191) (158) Other 37 172 (307) Actual tax expense $ 8,821 $ 9,025 $ 1,813 Deferred income taxes at year end are attributable to the following (in thousands): 1996 1995 Deferred assets: Retiree medical benefits $(6,109) $(5,595) Inventories (1,111) (886) Foreign loss carryforwards (145) (474) Other (1,169) (1,224) (8,534) (8,179) Deferred liabilities: Prepaid pension 7,056 6,525 Other employee benefits 561 638 Depreciation 6,075 6,237 Other 1,004 942 14,696 14,342 Current portion 1,839 1,930 $ 8,001 $ 8,093 Foreign loss carryforwards begin expiring in 2001. EMPLOYEE BENEFIT PLANS The Company has several pension plans, both defined benefit and defined contribution, covering all of its domestic and approximately half of its nondomestic employees. In addition, certain domestic employees participate in an Employee Stock Ownership Plan (ESOP). Ninety percent of the actuarially determined annuity value of their ESOP shares is used to offset retirement benefits otherwise due under the domestic noncontributory defined benefit pension plan. The total cost (benefit) of all such plans for 1996, 1995 and 1994, considering the combined projected benefits and funds of the ESOP as well as the other plans, was $(87,000), $(152,000) and $(124,000), respectively. Under both domestic and foreign defined benefit plans, benefits are based on years of service and final average earnings. Plan assets, including those of the ESOP, consist primarily of investment grade debt obligations, marketable equity securities and approximately 1,100,000 shares of the Company's common stock. The cost of these defined benefit plans, including the ESOP, consists of the following components (in thousands): 1996 1995 1994 Cost of benefits earned during current year $ 2,238 $ 2,028 $ 1,876 Interest on projected benefit obligation 3,330 3,194 3,083 Actual return on assets (12,349) (8,943) (1,150) Net amortization and deferral 5,830 2,853 (4,714) $ (951) $ (868) $ (905) The plans' funded status at year end is as follows (in thousands): 1996 1995 Vested accumulated benefit obligation $63,175 $61,065 Nonvested accumulated benefit obligation 65 1,929 Effect of future compensation increases 8,026 6,152 Projected benefit obligation 71,266 69,146 Plan assets at fair market value 112,779 102,314 Funded status 41,513 33,168 Unrecognized portion of net assets 24,267 16,840 Prepaid pension cost $17,246 $16,328 The assumed discount rate and rate of increase in compensation used in determining the projected benefit obligation are 7% and 5%, respectively, for the domestic plan and 8.5% and 6.5% for the foreign plan. The assumed long-term rate of return on plan assets is 7% for the domestic plan and 8.5% for the foreign plan. The Company provides certain medical and life insurance benefits for most retired employees in the United States. The status of these plans at year end is as follows (in thousands): 1996 1995 Accumulated postretirement benefit obligation: Retirees $ 6,556 $ 6,526 Active plan participants 9,752 9,378 Unrecognized loss (1,235) (1,751) Accumulated postretirement benefit obligation accrued $15,073 $14,153 Postretirement benefit expense consists of the following (in thousands): 1996 1995 1994 Service cost $ 490 $ 425 $ 414 Interest cost 1,096 1,054 1,039 Amortization cost 27 38 53 $ 1,613 $ 1,517 $ 1,506 The Company's portion of the annual rate of increase in the per capita cost of covered benefits is assumed to be 2%. A one percentage point increase in the assumed cost escalation rate would increase the accumulated benefit obligation by $1.2 million and the annual expense by $150,000. A discount rate of 7% was used in determining the accumulated benefit obligation. LONG-TERM DEBT At year end, long-term debt consists of the following (in thousands): 1996 1995 Industrial revenue bond $ 2,700 $ 3,300 Revolving credit agreement 5,000 6,000 7,700 9,300 Less current maturities 600 600 $ 7,100 $ 8,700 The industrial revenue bond is collateralized by the Company's plant in Mt. Airy, North Carolina. Principal is payable in semiannual installments of $300,000. Interest is at 92% of the 90 day CD rate (5.1% at June 29, 1996). The revolving credit agreement consists of a $10,000,000 line due March 30, 1996 under which there were no borrowings at June 29, 1996 and a $10,000,000 line due March 30, 2000. The credit agreement is with two banks and requires commitment and other fees of .3%. Interest rates vary, but approximate LIBOR plus .33% (5.8% as of June 29, 1996). All debt agreements contain financial covenants, the most restrictive of which is that at June 29, 1996 the Company must have tangible net worth of $134,000,000. Annual principal payments on debt are required as follows: 1997-1999 $600,000; 2000 $5,600,000; 2001 $300,000. COMMON STOCK Class B Common Stock is identical to Class A except that it has 10 votes per share, is generally nontransferable except to lineal descendants, cannot receive more dividends than Class A, and can be converted to Class A at any time. Class A Common Stock is entitled to elect 25% of the directors to be elected at each meeting with the remaining 75% being elected by Class A and Class B voting together. In addition, the Company has a stockholder rights plan, adopted in 1990, to protect stockholders from attempts to acquire the Company on unfavorable terms not approved by the Board of Directors. Under certain circumstances, the plan entitles each Class A or Class B share to additional shares of the Company or an acquiring company, as defined, at a 50% discount to market. Generally, the rights will be exercisable if a person or group acquires 15% or more of the Company's outstanding shares. The rights trade together with the underlying common stock. They can be redeemed by the Company for $.01 per right and expire in the year 2000. Under the Company's stock purchase plans, the purchase price of the optioned stock is 85% of the lower of the market price on the date the option is granted or the date it is exercised. Options become exercisable exactly two years from the date of grant and expire if not exercised. The average purchase price of the optioned stock outstanding at the end of 1996, 1995 and 1994 was $19.45, $18.90 and $20.33, respectively. Changes under the plans were as follows: Shares On Option Unoptioned Balance, June 26, 1993 59,336 754,638 Options granted 31,453 (31,453) Options exercised ($19.34 and $20.40) (11,946) Options canceled (17,287) 15,259 Balance, June 25, 1994 61,556 738,444 Options granted 47,719 (47,719) Options exercised ($17.75 and $19.24) (28,232) Options canceled (21,132) 21,132 Balance, June 24, 1995 59,911 711,857 Options granted 32,793 (32,793) Options exercised ($19.34 and $19.02) (14,548) Options canceled (15,804) 15,804 Balance, June 29, 1996 62,352 694,868 The Company will be required to adopt FAS 123 (Accounting for Stock Based Compensation) in 1997. This standard requires certain disclosure about the value of stock options. At June 29, 1996, a total of 757,220 shares of Class A common stock are reserved for issuance under the plans. The outstanding options include the following: Number of 85% of Market Price Expiration Date Class A Shares on Date of Grant November 7, 1996 22,077 $17.75 June 5, 1997 10,847 19.55 November 20, 1997 14,528 19.45 June 3, 1998 14,900 21.89 62,352 In addition, 87,765 shares of common stock are reserved for the Company's 401(k) plan at June 29, 1996. Since inception in 1986, 668,080 Class A and 44,155 Class B shares have been issued under this plan. In fiscal 1996, 363,473 shares of Class A treasury stock were canceled and returned to the status of authorized but unissued. OPERATING DATA The Company is engaged in the single business segment of producing and marketing industrial, professional and consumer products. Revenues, operating income and identifiable assets of the Company's domestic and foreign operations are summarized as follows (in thousands): Elimina- Consoli- Domestic Foreign tions dated 1996: Sales $161,175 $ 74,292 $235,467 Intercompany transfers 2,076 8,320 $(10,396) Revenues 163,251 82,612 (10,396) 235,467 Operating income 17,034 7,628 24,662 Identifiable assets 167,015 70,699 (10,402) 227,312 Net assets 120,227 53,745 (6,687) 167,285 1995: Sales $143,817 $ 70,398 $214,215 Intercompany transfers 1,515 8,578 $(10,093) Revenues 145,332 78,976 (10,093) 214,215 Operating income 10,284 10,580 20,864 Identifiable assets 159,389 63,306 (8,755) 213,940 Net assets 113,442 49,275 (5,888) 156,829 1994: Sales $132,804 $ 47,374 $180,178 Intercompany transfers 1,437 6,665 $ (8,102) Revenues 134,241 54,039 (8,102) 180,178 Operating income 7,695 5,166 12,861 Identifiable assets 152,128 55,059 (9,155) 198,032 Net assets 107,237 45,386 (5,975) 146,648 Operating income is computed exclusive of other income and expense and income taxes. Transfers are recorded at normal selling price for finished goods and at cost plus a percentage to cover expenses for finished parts, work in process and raw materials. Eliminations relate to investments in subsidiaries and intercompany transactions and balances. The Company believes it has no significant concentrations of credit risk as of June 29, 1996. Trade receivables are disbursed among a large number of retailers, distributors and industrial accounts in many countries. One customer accounted for approximately 11% of sales in 1994. The significant foreign operations of the Company are located in Scotland and Brazil. These two locations accounted for approximately the following percentages of the indicated foreign information listed above: 1996 1995 1994 Scotland Brazil Scotland Brazil Scotland Brazil Revenues 41% 59% 40% 60% 49% 51% Operating income 69% 31% 45% 55% 66% 34% Identifiable assets 46% 54% 48% 52% 50% 50% QUARTERLY FINANCIAL DATA (UNAUDITED)(in thousands except per share data) Earnings Before Earnings Net Gross Income Net Per Quarter Ended Sales Profit Taxes Earnings Share September 1994 $47,316 $13,262 $ 3,316 $ 2,160 $ 0.30 December 1994 56,132 16,707 6,261 3,845 0.55 March 1995 52,720 14,867 4,570 2,819 0.40 June 1995 58,047 19,508 8,365 4,663 0.66 $214,215 $64,344 $22,512 $13,487 $ 1.91 September 1995 $ 52,000 $15,225 $ 3,947 $ 2,563 $ 0.36 December 1995 61,883 18,705 6,934 4,627 0.66 March 1996 53,042 16,179 4,626 3,330 0.47 June 1996 68,542 24,120 10,645 6,811 0.96 $235,467 $74,229 $26,152 $17,331 $ 2.45 The Company's Class A Common Stock is traded on the New York Stock Exchange. Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The Company had no such changes in or disagreements with its independent auditors. PART III Item 10 - Directors and Executive Officers of the Registrant Directors The information concerning the Directors of the Registrant is contained on pages 1 through 4 in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 18, 1996, and is hereby incorporated by reference. Executive Officers of the Registrant Held Present Name Age Office Since Position Douglas R. Starrett 76 1962 Chairman and CEO and Director Douglas A. Starrett 44 1985 President and Director George B. Webber 75 1962 Vice President Webber Gage Division and Director Charles H. Morrow 61 1976 Vice President Sales Roger U. Wellington, Jr. 55 1984 Treasurer and Chief Financial Officer and Director Peter MacDougall 58 1990 Clerk George B. Webber, Charles H. Morrow, and Roger U. Wellington, Jr. have served in the same capacities as listed above for at least the past five years. Douglas R. Starrett was previously President of the Company. Douglas A. Starrett (son of Douglas R. Starrett) was previously Executive Vice President of the Company. Except in the case of Peter MacDougall, the positions listed above represent their principal occupations and employment during the last five years. Peter MacDougall, elected clerk in July 1990, has been a partner in Ropes & Gray, counsel for the Company, throughout that period. The President, Treasurer and Clerk hold office until the first meeting of the directors following the next annual meeting of stockholders and until their respective successors are chosen and qualified, and each other officer holds office until the first meeting of directors following the next annual meeting of stockholders, unless a shorter period shall have been specified by the terms of his election or appointment or, in each case, until he sooner dies, resigns, is removed or becomes disqualified. There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any director or executive officer during the past five years. Item 11 - Executive Compensation The information concerning management remuneration is contained on pages 4 through 10 in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 18, 1996 and, except for the information under the caption "Compensation Committee Report," is hereby incorporated by reference. Item 12 - Security Ownership of Certain Beneficial Owners and Management (a) Security ownership of certain beneficial owners: The information concerning a more than 5% holder of any class of the Company's voting shares is contained on page 3 of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 18, 1996, and is hereby incorporated by reference. (b) Security ownership of management: The information concerning the beneficial ownership of each class of equity securities by all directors, and all directors and officers of the Company as a group, is contained on pages 2 and 3 of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 18, 1996, and is hereby incorporated by reference. (c) The Company knows of no arrangements that may, at a subsequent date, result in a change in control of the Company. Item 13 - Certain Relationships and Related Transactions (a) Transactions with management and others: None (b) Certain business relationships: Not applicable (c) Indebtedness of management: None (d) Transactions with promoters: Not applicable PART IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial statements filed in item 8 of this annual report: Consolidated Statements of Earnings and Cash Flows for the Three Years in the Period ended June 29, 1996 Consolidated Balance Sheets at June 29, 1996 and June 24,1995 Consolidated Statements of Stockholders' Equity for the Three Years in the Period Ended June 29, 1996 Notes to Consolidated Financial Statements 2. All other financial statements and schedules are omitted because they are inapplicable, not required under the instructions, or the information is reflected in the financial statements or notes thereto. 3. See Exhibit Index below on page 22. (b) There were no reports on Form 8-K filed in the last quarter of the period covered by this report. (c) See Exhibit Index below on page 22. (d) Not applicable. THE L.S. STARRETT COMPANY AND SUBSIDIARIES EXHIBIT INDEX (3i) Restated Articles of Organization dated December 20, 1989, filed with Form 10-Q for the quarter ended December 23, 1989, are hereby incorporated by reference. (3ii) Bylaws as amended September 21, 1994, filed with Form 10-K for the year ended June 24, 1995, are hereby incorporated by reference. (4a) Loan Agreement and related documents, relative to $7,500,000 Industrial Revenue Bond financing dated as of September 1, 1985, between The Surry County Industrial Facilities and Pollution Control Financing Authority and The L.S. Starrett Company will be furnished to the Commission upon request. (4b) Common Stock Rights Agreement, dated as of June 6, 1990, between the Company and The First National Bank of Boston, as Rights Agent, including Form of Common Stock Purchase Rights Certificate and Summary Common Stock Purchase Rights, filed on June 13, 1990 with the Company's Form 8-A, are hereby incorporated by reference. (10a) $20,000,000 Amended and Restated Credit Agreement dated as of March 31, 1996, among The L.S. Starrett Company, The First National Bank of Boston and Wachovia Bank of Georgia, N.A. will be furnished to the Commission upon request. (11) Statement re: Calculation of Shares for Computation of Consolidated Earnings Per Share. See page 23. (21) Subsidiaries of the Registrant. See page 24. (23) Independent Auditors' Consent. See page 25. (27) Financial Data Schedule submitted herewith in electronic format. Exhibit 11 THE L.S. STARRETT COMPANY AND SUBSIDIARIES CALCULATION OF SHARES FOR COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE 1996 1995 1994 PRIMARY EARNINGS PER SHARE Average shares outstanding during the year 7,057,675 7,070,032 7,062,926 Incremental shares computed on the assumption that dilutive stock options had been exercised, with the proceeds used to purchase treasury stock 11,444 8,171 8,210 Average common and common equiva- lent shares outstanding 7,069,119 7,078,203 7,071,136 FULLY DILUTED EARNINGS PER SHARE Average shares outstanding during the year 7,057,675 7,070,032 7,062,926 Incremental shares computed on the assumption that dilutive stock options had been exercised, with the proceeds used to purchase treasury stock, using year-end market prices where such prices were in excess of average yearly prices, to determine the amount of treasury stock purchased 14,908 9,909 8,210 Average common and common equivalent shares used to calculate fully diluted earnings per share 7,072,583 7,079,941 7,071,136 The Company's average common and common equivalent shares (both primary and fully diluted) during the above years do not, in the aggregate, dilute earnings per share 3% or more. Exhibit 21 THE L.S. STARRETT COMPANY AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT JUNE 29, 1996 The parent company, The L.S. Starrett Company, incorporated in Massachusetts, has the following subsidiaries, all of which are wholly owned: Fiscal Year End Starrett Securities Corporation Incorporated in Last Sat. Massachusetts in June Evans Rule Company, Inc. Incorporated in Last Sat. New Jersey in June The L.S. Starrett Co. of Canada Incorporated in Last Sat. Limited Canada in June The L.S. Starrett International Incorporated in Last Sat. Company Barbados in June The L.S. Starrett Company Incorporated in May 31 Limited Scotland Starrett Industria e Incorporated in April 30 Comercio Ltda. Brazil Level Industries, Inc. Incorporated in Last Sat. Massachusetts in June Exhibit 23 INDEPENDENT AUDITORS' CONSENT The L.S. Starrett Company We consent to the incorporation by reference in the Registration Statements No. 33-31276 and No. 33-3112 of The L.S. Starrett Company on Form S-8, of our report dated August 2, 1996, appearing in the Annual Report on Form 10-K of The L.S. Starrett Company for the year ended June 29, 1996. S/DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Boston, Massachusetts September 6, 1996 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. THE L.S. STARRETT COMPANY (Registrant) By S/ROGER U. WELLINGTON, JR. Roger U. Wellington, Jr., Treasurer and Chief Financial Officer Date: September 6, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated: S/DOUGLAS R. STARRETT S/DOUGLAS A. STARRETT Douglas R. Starrett, Sept. 6, 1996 Douglas A. Starrett, Sept. 6, 1996 Chairman and CEO President S/ANDREW B. SIDES, JR. S/WILLIAM S. HURLEY Andrew B. Sides, Jr., Sept. 6, 1996 William S. Hurley, Sept. 6, 1996 Director Director S/RICHARD B. KENNEDY S/GEORGE B. WEBBER Richard B. Kennedy, Sept. 6, 1996 George B. Webber, Sept. 6, 1996 Director Vice President Webber Gage Division and Director S/STEVEN G. THOMSON S/ROGER U. WELLINGTON, JR. Steven G. Thomson, Sept. 6, 1996 Roger U. Wellington,Jr.,Sept. 6, 1996 Chief Accounting Officer Treasurer and Chief Financial Officer and Director EX-27 2
5 1,000 YEAR JUN-29-1996 JUN-29-1996 1,417 27,794 39,029 1,284 70,296 141,998 115,437 55,835 227,312 29,853 7,100 0 0 7,055 160,230 227,312 235,467 235,467 161,238 161,238 0 0 917 26,152 8,821 17,331 0 0 0 17,331 2.45 2.45
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