-----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, GOlUViv4bQ9zFdK23IakEsia2dBD+jtm84Ix4zp7zW9x+RGUnfGrKs0ndUVuxZL+ u48PJAkyI7s4GIc6SO4hzg== 0000093676-99-000003.txt : 19990209 0000093676-99-000003.hdr.sgml : 19990209 ACCESSION NUMBER: 0000093676-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981226 FILED AS OF DATE: 19990208 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-Q SEC ACT: SEC FILE NUMBER: 001-00367 FILM NUMBER: 99523503 BUSINESS ADDRESS: STREET 1: 121 CRESCENT ST CITY: ATHOL STATE: MA ZIP: 01331 BUSINESS PHONE: 5082493551 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 26, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from Commission file number 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 01331-1915 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 978-249-3551 Former name, address and fiscal year, if changed since last report. 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 Common Shares outstanding as of December 26, 1998 : Class A Common Shares 5,254,971 Class B Common Shares 1,622,230 Page 1 of 9 THE L. S. STARRETT COMPANY CONTENTS Page No. Part I. Financial Information: Item 1. Financial Statements Consolidated Statements of Earnings and Cash Flows - thirteen and twenty-six weeks ended December 26, 1998 and December 27, 1997 (unaudited) 3 Consolidated Balance Sheets - December 26, 1998 (unaudited) and June 27, 1998 4 Consolidated Statements of Stockholders' Equity - twenty-six weeks ended December 26, 1998 and December 27, 1997 (unaudited) 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 Part II. Other information: Item 6. Exhibits and reports on Form 8-K 9 Page 2 of 9 THE L. S. STARRETT COMPANY Consolidated Statements of Earnings and Cash Flows (in thousands of dollars except per share data)(unaudited) 13 Weeks Ended 26 Weeks Ended EARNINGS 12/26/98 12/27/97 12/26/98 12/27/97 Net sales 60,889 68,638 119,253 133,851 Cost of goods sold (42,194) (45,372) (83,415) (89,851) Selling and general (12,617) (14,216) (24,508) (26,010) Other income and expense 477 382 986 842 Earnings before income taxes 6,555 9,432 12,316 17,832 Provision for federal, foreign and state income taxes 2,042 3,041 3,887 6,028 Net earnings 4,513 6,391 8,429 11,804 Basic earnings per share .65 .93 1.22 1.71 Average shares used 6,884 6,865 6,890 6,894 Diluted earnings per share .65 .93 1.22 1.71 Average shares used 6,888 6,879 6,898 6,909 Dividends per share .20 .19 .40 .38 CASH FLOWS Cash flows from operating activities: Net earnings 4,513 6,391 8,429 11,804 Noncash expenses: Depreciation and amortization 3,012 2,650 5,966 5,395 Deferred taxes (273) (254) (66) (208) Unrealized translation losses 71 154 Working capital changes: Receivables 1,834 1,378 3,044 (6,027) Inventories (970) 1,234 61 3,389 Other assets and liabilities 2,108 (583) 623 3,051 Prepaid pension cost and other (357) (1,113) (1,120) (1,532) Net cash from operations 9,867 9,774 16,937 16,026 Cash flows from investing activities: Additions to plant and equipment (4,445) (3,986) (9,780) (7,806) Increase in short-term investments (142) (3,211) (3,359) (4,521) Net cash used in investing (4,587) (7,197) (13,139) (12,327) Cash flows from financing activities: Short-term borrowings, net 101 (401) 101 Long-term debt repayments (300) (300) (300) (300) Common stock issued 1,253 934 2,093 1,820 Treasury shares purchased (2,156) (334) (3,017) (4,019) Dividends (1,373) (1,302) (2,751) (2,619) Net cash used in financing (2,576) (901) (4,376) (5,017) Translation rate change effect on cash (52) 25 (14) 26 Net increase (decrease) in cash 2,652 1,701 (592) (1,292) Cash, beginning of period 461 60 3,705 3,053 Cash, end of period 3,113 1,761 3,113 1,761 See notes to consolidated financial statements Page 3 of 9 THE L. S. STARRETT COMPANY Consolidated Balance Sheets (in thousands of dollars) Dec. 26 June 27 1998 1998 ASSETS (unaudited) Current assets: Cash 3,113 3,705 Investments 30,615 27,115 Accounts receivable (less allowance for doubtful accounts of $2,472,000 and $2,450,000) 37,644 40,764 Inventories: Finished goods 32,550 30,199 Goods in process and finished parts 25,722 25,825 Raw materials and supplies 15,018 17,753 73,290 73,777 Prepaid expenses and other current assets 2,394 5,335 Total current assets 147,056 150,696 Property, plant and equipment, at cost (less accumulated depreciation of $71,168,000 and $66,233,000) 72,389 68,818 Cost in excess of net assets acquired (less accumulated amortization of $4,099,000 and $3,896,000) 7,294 7,484 Prepaid pension cost 23,366 22,035 Other assets 1,189 1,230 251,294 250,263 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities 600 1,001 Accounts payable and accrued expenses 13,301 14,371 Accrued salaries and wages 5,732 8,059 Taxes payable 2,166 1,475 Employee deposits for stock purchase plan 549 528 Total current liabilities 22,348 25,434 Deferred income taxes 9,608 9,367 Long-term debt 3,600 3,900 Accumulated postretirement medical benefit obligation 16,539 16,268 Stockholders' equity: Class A Common $1 par (20,000,000 shrs. auth.; 5,254,971 outstanding in Dec.1998, excluding 1,072,074 in treasury; 5,193,904 outstanding in June 1998, excluding 1,045,731 in treasury) 5,255 5,194 Class B Common $1 par (10,000,000 shrs. auth.; 1,622,230 outstanding in Dec.1998, excluding 282,602 in treasury; 1,703,434 outstanding in June 1998, excluding 274,283 in treasury) 1,622 1,703 Additional paid-in capital 42,647 41,263 Retained earnings reinvested and employed in the business 154,707 151,317 Foreign currency translation adjustment (5,467) (4,479) Other equity adjustments 435 296 Total stockholders' equity 199,199 195,294 251,294 250,263 See Notes to Consolidated Financial Statements Page 4 of 9 THE L. S. STARRETT COMPANY Consolidated Statements of Stockholders' equity For the Twenty-six Weeks Ended December 26, 1998 and December 27, 1997 (in thousands of dollars) (unaudited) Common Addi- Stock Out- tional Equity standing Paid-in Retained Adjust- ($1 Par) Capital Earnings ments Total Balance June 28, 1997 6,944 38,730 137,788 (2,997) 180,465 Net earnings 11,804 11,804 Dividends ($.38) (2,619) (2,619) Treasury shares: Purchased (119) (745) (3,155) (4,019) Issued 46 1,579 1,625 Options exercised 10 185 195 Translation gain, net 820 820 Investment valuation 77 77 Balance Dec. 27, 1997 6,881 39,749 143,818 (2,100) 188,348 Balance June 27, 1998 6,897 41,263 151,317 (4,183) 195,294 Net earnings 8,429 8,429 Dividends ($.40) (2,751) (2,751) Treasury shares: Purchased (88) (641) (2,288) (3,017) Issued 54 1,703 1,757 Options exercised 14 322 336 Translation loss, net (988) (988) Investment valuation 139 139 Balance Dec. 26, 1998 6,877 42,647 154,707 (5,032) 199,199 See Notes to Consolidated Financial Statements Page 5 of 9 THE L. S. STARRETT COMPANY Notes to Consolidated Financial Statements In the opinion of management, the accompanying financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of December 26, 1998 and June 27, 1998; the results of operations and cash flows for the thirteen weeks and twenty-six weeks ended December 26, 1998 and December 27, 1997; and changes in stockholders' equity for the twenty-six weeks ended December 26, 1998 and December 27, 1997. The Company follows the same accounting policies in the preparation of interim statements as described in the Company's annual report filed on form 10-K for the year ended June 27, 1998, and these financial statements should be read in conjunction with said annual report. Other income (expense) is comprised of the following (in thousands): Thirteen Weeks Twenty-six Weeks Ended December Ended December 1998 1997 1998 1997 Interest income 465 746 964 1,388 Interest expense and com- mitment fees (115) (252) (192) (457) Realized and unrealized ex- change losses 4 (135) (27) (232) Other 123 23 241 143 477 382 986 842 Approximately 70% of all inventories are valued on the LIFO method. At December 26, 1998, and June 27, 1998, total inventories are $24,702,000 and $23,998,000 less, respectively, than if determined on a FIFO basis. Long-term debt is comprised of the following (in thousands): December June 1998 1998 Industrial revenue bond 1,200 1,500 Revolving credit agreement 3,000 3,000 4,200 4,500 Less current portion 600 600 3,600 3,900 Effective with the quarter ended September 26, 1998, the Company adopted Statement of Financial Accounting Standards No.130, "Reporting Comprehensive Income." Following is the reconciliation of net earnings to comprehensive income: Thirteen Weeks Twenty-six Weeks Ended December Ended December 1998 1997 1998 1997 Net earnings 4,513 6,391 8,429 11,804 Unrealized gains on investments 36 77 139 Accumulated translation adjustments (1,241) 1,238 (988) 820 Comprehensive income 3,308 7,706 7,580 12,624 Page 6 of 9 THE L. S. STARRETT COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Sales Sales are down 11% compared to a year ago, both for the December quarter and year to date comparisons. The year to date decrease is spread fairly evenly between foreign and domestic operations, although foreign sales were down more than domestic in the first quarter and domestic sales were down more in the second quarter. These decreases in revenue directly reflect the manufacturing economies, both in the U.S. and abroad. Over the past six months, manufacturing operations on the industrial side in the U.S. have slowed. In Scotland we are still being hurt by the strong British pound and, in Brazil, the economy is slowing. It is too early to predict what the effect of the recent currency devaluation will be in Brazil. It will certainly disrupt economic activity for a few months but, beyond that, remains to be seen. Earnings Before Taxes Pretax earnings are down 31% for both the quarter and year to date comparisons. This is consistent with the decrease in sales volume mentioned above and the lower margins resulting from 1) international pricing pressures due to the strong pound and 2) lower overhead absorption due to lower production activity. Income Taxes The effective income tax rate is 31% for the quarter and 32% year to date. The rates were slightly higher (32% and 34%) in the corresponding periods in the prior year. The main cause of the decrease is a shift in income mix favoring Brazil, where the effective tax rate is lower than our average. Year 2000 The Company does not currently anticipate any material disruption of its operations as a result of any failure by the Company to be year 2000 compliant. If, however, the Company, its customers or its suppliers are unable to achieve year 2000 compliance, the potential exists for the Company's business and results of operations to be adversely affected. Worldwide, the Company has four major computer systems that are used in the areas of manufacturing, sales and accounting. Two use third party packages that the Company believes are or, through vendor upgrades, will be year 2000 compliant. The other two systems are in the process of being converted to third party packages that the Company believes are already compliant. The Company expects to complete the reasonably necessary remediation of its significant systems by the end of fiscal 1999 and has not incurred, and does not expect to incur, significant additional separately identifiable costs in order to make its computer systems year 2000 compliant. If it begins to appear that the Company's planned upgrades and modifications might fail to bring any of these major systems into Year 2000 compliance or fail to do so in a timely manner, the Company will have to adopt contingency plans to deal with any resulting disruptions in its business. The Company employs certain manufacturing processes that utilize computer controlled manufacturing equipment. The Company believes such equipment is year 2000 compliant to the extent reasonably necessary but has not completed its testing of such equipment. In the event the Company determines that such equipment cannot readily be made year 2OOO compliant, it believes it can revert to the manual processes previously employed or outsource such work. The Company is also in the process of investigating the status of other systems with respect to year 2000 compliance such as phone, fax, heating/air conditioning, Page 7 of 9 and electricity and believes they will be year 2000 compliant to the extent reasonably necessary before the end of 1999. The Company is utilizing internal resources for this purpose and does not expect to incur significant separately identifiable costs. In addition to reviewing its own systems, the Company has polled or is in the process of polling its significant customers and vendors to get assurance that they are year 2000 compliant and to attempt to identify potential issues. To the extent such assurance is not received, appropriate contingency plans will be developed and implemented. At this time, the Company is not aware of significant problems. If the Company's customers and vendors do not achieve year 2000 compliance before the end of 1999, the Company could experience a variety of problems that might have a material adverse effect on the Company's business and results of operations. For example, customers might lose EDI capability or vendors might fail to deliver, but most foreseeable problems can be overcome by reverting to phone, fax, mail and other manual procedures. It should be noted that the Company outsources very little other than raw steel and is not dependent on single source suppliers. In addition it has no customer accounting for more than ten percent of sales. LIQUIDITY AND CAPITAL RESOURCES 13 Weeks Ended 26 Weeks Ended 12/26/98 12/27/97 12/26/98 12/27/97 Cash provided by operations 9,867 9,774 16,937 16,026 Cash used in investing activities (4,587) (7,197) (13,139) (12,327) Cash used in financing activities (2,576) (901) (4,376) (5,017) Cash effect of translation rate changes (52) 25 (14) 26 Net increase (decrease) in cash 2,652 1,701 (592) (1,292) Despite a decrease in net earnings, the quarter and year to date cash flow provided by operations increased slightly compared to the prior year because of working capital changes and increased depreciation. An increase in treasury share purchases (a financing activity) in the current year's quarter resulted in less funds being available for short-term investing. The Company maintains sufficient liquidity and has adequate resources, including lines of credit, to fund its operations under current business conditions. The Company continues to maintain a strong financial position with a working capital ratio of 6.6 to 1 as of December 26, 1998 and 5.9 to 1 as of June 27, 1997 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This quarterly report, as well as the 1998 Annual Report, including the Chairman's letter to stockholders, include forward-looking statements about the Company's business, sales, expenditures, Year 2000 compliance, environmental regulatory compliance, 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 Year 2000 Issues: The Company continues to explore whether and to what extent its computer and other systems will be disrupted at the turn of the century as a result of the widely-publicized dating system flaw inherent in many computer systems. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Year 2000." Page 8 of 9 Risks Related to Technology: Although the Company's strategy includes significant investment in research and development of new and innovative products to meet technology advances, there can be no assurance that the Company will be successful in competing against new technologies developed by competitors. Risks Related to Adoption of the Euro: The new European currency (the Euro) began being used by the eleven participating European countries January 1, 1999. Although the United Kingdom is not currently a Euro country, the Company's Scottish subsidiary does a significant amount of business with Euro countries. Management believes it has the necessary systems and business processes to deal with what is, in effect, one more foreign currency, but there can be no assurance that there will not be unforeseen economic effects of this change that might affect the Company's sales or margins on business done with Euro countries. Risks Related to Foreign Operations: 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, political and economic instability in emerging markets, 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, can be very volatile, changing from year to year due to the political situation and economy. As a result, the future performance of the Brazilian operations is inherently unpredictable. See Management's Discussion regarding the recent devaluation of the Brazilian currency. 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. PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K. none SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE L. S. STARRETT COMPANY (Registrant) Date February 8, 1999 S/R.U.WELLINGTON, JR. R. U. Wellington, Jr. (Treasurer and Chief Financial Officer) Date February 8, 1999 S/S.G.THOMSON S. G. Thomson (Chief Accounting Officer) Page 9 of 9 EX-27 2
5 1,000 6-MOS JUN-26-1999 DEC-26-1998 3,113 30,615 40,116 2,472 73,290 147,056 143,557 71,168 251,294 22,348 3,600 0 0 6,877 192,322 251,294 119,253 119,253 83,415 83,415 0 0 192 12,316 3,887 8,429 0 0 0 8,429 1.22 1.22
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