10-Q 1 fy01sep10qa.txt SEPTEMBER 2000 10Q 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 September 23, 2000 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 filings requirements for the past 90 days. YES X NO Common Shares outstanding as of September 23, 2000: Class A Common Shares 4,986,191 Class B Common Shares 1,474,858 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 weeks ended September 23, 2000 and September 25, 1999 (unaudited) 3 Consolidated Balance Sheets - September 23, 2000 (unaudited) and June 24, 2000 4 Consolidated Statements of Stockholders' Equity - thirteen weeks ended September 23, 2000 and September 25, 1999 (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 4. Submission of Matters to a Vote of Security Holders 9 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 EARNINGS 9/23/00 9/25/99 Net sales 58,842 58,412 Cost of goods sold (41,741) (42,267) Selling and general (12,801) (11,844) Other income (expense) (66) 16 Earnings before income taxes 4,234 4,317 Provision for federal, foreign and state income taxes 1,339 1,442 Net earnings 2,895 2,875 Basic earnings per share .45 .43 Average outstanding shares used 6,459 6,698 Diluted earnings per share .45 .43 Average outstanding shares used 6,469 6,706 Dividends per share .20 .20 CASH FLOWS Cash flows from operating activities: Net earnings 2,895 2,875 Noncash expenses: Depreciation and amortization 2,949 2,976 Deferred taxes 314 411 Working capital changes: Receivables (3,197) (6,505) Inventories (3,786) 1,158 Other assets and liabilities 3,898 1,130 Prepaid pension cost and other (322) (905) Net cash from operations 2,751 1,140 Cash flows from investing activities: Additions to plant and equipment (3,181) (3,248) Short-term investments, net 685 1,464 Net cash used in investing (2,496) (1,784) Cash flows from financing activities: Short-term borrowing, net (476) 2,415 Common stock issued 800 954 Treasury shares purchased (1,032) (1,205) Dividends (1,289) (1,339) Net cash used in financing (1,997) 825 Effect of exchange rate changes on cash 104 (28) Net increase (decrease) in cash (1,638) 153 Cash, beginning of period 2,008 271 Cash, end of period 370 424 See notes to consolidated financial statements Page 3 of 9 THE L. S. STARRETT COMPANY Consolidated Balance Sheets (in thousands of dollars) Sep. 23 June 24 2000 2000 ASSETS (unaudited) Current assets: Cash 370 2,008 Investments 11,388 12,043 Accounts receivable (less allowance for doubtful accounts of $1,809,000 and $1,790,000) 39,360 36,509 Inventories: Finished goods 38,877 36,121 Goods in process and finished parts 26,710 26,752 Raw materials and supplies 17,695 17,017 83,282 79,890 Prepaid expenses and other current assets 4,168 7,269 Total current assets 138,568 137,719 Property, plant and equipment, at cost (less accumulated depreciation of $71,547,000 and $70,510,000) 75,678 75,683 Cost in excess of net assets acquired (less accumulated amortization of $4,583,000 and $4,534,000) 6,588 6,667 Prepaid pension cost 29,654 29,238 Other assets 1,093 1,111 251,581 250,418 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities 6,214 6,690 Accounts payable and accrued expenses 16,799 16,315 Accrued salaries and wages 5,031 5,590 Taxes payable 932 285 Employee deposits for stock purchase plan 617 518 Total current liabilities 29,593 29,398 Deferred income taxes 14,284 13,969 Long-term debt 3,000 3,000 Accumulated postretirement medical benefit obligation 16,072 16,029 Stockholders' equity: Class A Common $1 par (20,000,000 shrs. auth.; 4,986,191 outstanding at 9/23/00, excluding 1,471,646 held in treasury; 4,978,276 outstanding at 6/24/00, excluding 1,461,002 held in treasury) 4,986 4,978 Class B Common $1 par (10,000,000 shrs. auth.; 1,474,858 outstanding at 9/23/00, excluding 310,341 held in treasury; 1,495,474 outstanding at 6/24/00, excluding 308,284 held in treasury) 1,475 1,495 Additional paid-in capital 43,608 43,273 Retained earnings reinvested and employed in the business 156,897 155,846 Accumulated other comprehensive income (18,334) (17,570) Total stockholders' equity 188,632 188,022 251,581 250,418 See Notes to Consolidated Financial Statements Page 4 of 9 THE L. S. STARRETT COMPANY Consolidated Statements of Stockholders' equity For the Thirteen Weeks Ended September 23, 2000 and September 25, 1999 (in thousands of dollars) (unaudited) Common Addi- Accumulated Stock Out- tional Other standing Paid-in Retained Comprehensive ($1 Par) Capital Earnings Income(loss) Total Balance June 26, 1999 6,706 42,730 155,349 (14,749) 190,036 Comprehensive income: Net earnings 2,875 2,875 Unrealized net loss on investments (28) (28) Translation loss net (1,949) (1,949) Total comprehensive income 898 Dividends ($.20 per share) (1,339) (1,339) Treasury shares: Purchased (46) (331) (828) (1,205) Issued 37 917 954 Balance September 25, 1999 6,697 43,316 156,057 (16,726) 189,344 Balance June 24, 2000 6,473 43,273 155,846 (17,570) 188,022 Comprehensive income: Net earnings 2,895 2,895 Unrealized net gain on investments 13 13 Translation loss, net (777) (777) Total comprehensive income 2,131 Dividends ($.20 per share) (1,289) (1,289) Treasury shares: Purchased (55) (422) (555) (1,032) Issued 43 757 800 Balance September 23, 2000 6,461 43,608 156,897 (18,334) 188,632 See Notes to Consolidated Financial Statements Page 5 of 9 THE L. S. STARRETT COMPANY Condensed 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 September 23, 2000 and June 24, 2000; the results of operations and cash flows for the thirteen weeks ended September 23, 2000 and September 25, 1999; and changes in stockholders' equity for the thirteen weeks ended September 23, 2000 and September 25, 1999. 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 24, 2000, 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 Ended September 2000 1999 Interest income 242 272 Interest expense and commitment fees (175) (212) Realized and unrealized exchange losses (43) (82) Other (90) 38 (66) 16 Approximately 70% of all inventories are valued on the LIFO method. At September 23, 2000 and June 24, 2000, total inventories are $22,763,000 and $22,683,000 less, respectively, than if determined on a FIFO basis. Long-term debt is comprised of the following (in thousands): September June 2000 2000 Industrial revenue bond 300 300 Revolving credit agreement 3,000 3,000 3,300 3,300 Less current portion 300 300 3,000 3,000 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 Both foreign and domestic sales for the September quarter are approximately 1% higher than in the corresponding quarter of a year ago. Excluding intercompany sales, sales of our Brazil subsidiary are down slightly while sales of our Scotland subsidiary are up, although the strong pound in the U.K. continues to adversely affect Scotland's business in terms of export pricing and import price competition. The domestic industrial manufacturing sector continues flat. Earnings Before Taxes Pretax earnings in the quarter are about the same as in the September quarter of a year ago. Slightly improved domestic gross margins, despite significant increases in domestic fringe benefit costs, were offset in the foreign operations, particularly by increased promotional spending in Brazil. Income Taxes The effective income tax rate was 31.7% in the September quarter of 2000 and 33.4% in the prior year's quarter. The decrease comes primarily from Brazil where the effective tax rate has been affected by the timing of dividend payments. Earnings per share As a result of the above factors and a 4% reduction in outstanding shares, earnings per share for the quarter are 5% higher than a year ago. Market Risk Market risk is the potential change in a financial instrument's value caused by fluctuations in interest and currency exchange rates, and equity and commodity prices. The Company's operating activities expose it to many risks that are continually monitored, evaluated, and managed. Proper management of these risks helps reduce the likelihood of earnings volatility. At June 2000 and September 2000, the Company was not a party to any derivative arrangement and the Company does not engage in trading, market-making or other speculative activities in the derivatives markets. In addition, the Company does not enter into long-term supply contracts with either fixed prices or quantities. The Company does not engage in regular hedging activities to minimize the impact of foreign currency fluctuations. Net monetary assets in Scotland and Brazil total approximately $2 million. Inflation in Brazil has decreased to about 10% today from over 2000% in 1994 when their current economic plan was initiated. As a consequence, their economy ceased to be considered hyperinflationary as of January 1998. A 10% change in interest rates would not have a significant impact on the aggregate net fair value of the Company's interest rate sensitive financial instruments (primarily variable rate investments of $5,000,000 and debt of $9,000,000 at September 23, 2000) or the cash flows or future earnings associated with those financial instruments. A 10% change in interest rates would impact the fair value of the Company's fixed rate investments of $6,600,000 by approximately $300,000. Page 7 of 9 LIQUIDITY AND CAPITAL RESOURCES 13 Weeks Ended 9/23/99 9/25/98 Cash provided by operations 2,751 1,140 Cash used in investing activities (2,496) (1,784) Cash from (used in) financing activities (1,997) 825 Cash effect of translation rate changes 104 (28) Net increase (decrease) in cash 153 (3,244) The decrease in cash used to finance net working capital additions caused cash flow provided by operations to increase compared to the prior year's quarter, and a reduction in short-term borrowing caused the decrease in cash from financing activity. 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 4.7 to 1 as of both September 23, 2000 and September 25, 1999. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996 This quarterly report, as well as the 2000 Annual Report, including the Chairman's letter to stockholders, include forward-looking statements about the Company's business, sales, expenditures, environmental regulatory compliance, foreign operations, interest rate sensitivity, 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 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: Approximately a third of the Company's sales and net assets relate 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, inflation, minimum capital requirements, and exchange controls. In particular, the Company's Brazilian Page 8 of 9 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. Risks Related to Cyclical Nature of the Industry: The market for most of the Company's products is subject to economic conditions affecting the industrial manufacturing sector, including the level of capital spending by industrial companies. Accordingly, economic weakness in the industrial manufacturing sector will result in decreased demand for the Company's products and will 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 4. Submission of Matters to a Vote of Security Holders. (a) A regular meeting of shareholders was held on September 20, 2000. (c) The following directors were elected: Abstentions Votes Votes and Broker For Withheld Non-votes A shares voting as separate class: William S. Hurley 4,653,745 100,549 N/A A and B shares voting together: Douglas A. Starrett 18,020,504 158,230 N/A 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 November 6, 2000 S/R.U.WELLINGTON, JR. R. U. Wellington, Jr. (Treasurer and Chief Financial Officer) Date November 6, 2000 S/S.G.THOMSON S. G. Thomson (Chief Accounting Officer) Page 9 of 9