10-Q 1 fy01dec10qb.txt FORM 10Q DEC 2000 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 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 filing requirements for the past 90 days. YES X NO Common Shares outstanding as of December 23, 2000 : Class A Common Shares 4,975,685 Class B Common Shares 1,460,636 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 23, 2000 and December 25, 1999 (unaudited) 3 Consolidated Balance Sheets - December 23, 2000 (unaudited) and June 24, 2000 4 Consolidated Statements of Stockholders' Equity - twenty-six weeks ended December 23, 2000 and December 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 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 12/23/00 12/25/99 12/23/00 12/25/99 Net sales 60,650 61,245 119,492 119,657 Cost of goods sold (43,529) (43,050) (85,270) (85,317) Selling and general (13,298) (12,627) (26,099) (24,471) Other income and expense (160) (12) (226) 4 Earnings before income taxes 3,663 5,556 7,897 9,873 Provision for federal, foreign and state income taxes 1,080 1,739 2,419 3,181 Net earnings 2,583 3,817 5,478 6,692 Basic earnings per share .40 .57 .85 1.00 Average outstanding shares used 6,449 6,696 6,454 6,697 Diluted earnings per share .40 .57 .85 1.00 Average outstanding shares used 6,457 6,702 6,463 6,704 Dividends per share .20 .20 .40 .40 CASH FLOWS Cash flows from operating activities: Net earnings 2,583 3,817 5,478 6,692 Noncash expenses: Depreciation and amortization 2,909 2,976 5,858 5,952 Deferred taxes 38 406 552 817 Working capital changes: Receivables 2,501 249 (696) (6,256) Inventories (564) (1,309) (4,350) (151) Other assets and liabilities 1,283 1,433 4,981 2,563 Prepaid pension cost and other (404) (835) (726) (1,740) Net cash from operations 8,346 6,737 11,097 7,877 Cash flows from investing activities: Additions to plant and equipment (3,454) (2,894) (6,635) (6,142) Change in short-term investments (1,743) (1,072) (1,058) 392 Net cash used in investing (5,197) (3,966) (7,693) (5,750) Cash flows from financing activities: Short-term borrowings, net (924) 366 (1,400) 2,781 Long-term debt repayments (300) (300) Common stock issued 907 962 1,707 1,916 Treasury shares purchased (1,384) (694) (2,416) (1,899) Dividends (1,283) (1,340) (2,572) (2,679) Net cash used in financing (2,684) (1,006) (4,681) (181) Translation rate change effect on cash 47 5 151 (23) Net increase (decrease) in cash 512 1,770 (1,126) 1,923 Cash, beginning of period 370 424 2,008 271 Cash, end of period 882 2,194 882 2,194 See Notes to Consolidated Financial Statements Page 3 of 9 THE L. S. STARRETT COMPANY Consolidated Balance Sheets (in thousands of dollars) Dec. 23 June 24 2000 2000 ASSETS (unaudited) Current assets: Cash 882 2,008 Investments 13,139 12,043 Accounts receivable (less allowance for doubtful accounts of $1,769,000 and $1,790,000) 36,262 36,509 Inventories: Finished goods 38,208 36,121 Goods in process and finished parts 26,034 26,752 Raw materials and supplies 18,387 17,017 82,629 79,890 Prepaid expenses and other current assets 3,837 7,269 Total current assets 136,749 137,719 Property, plant and equipment, at cost (less accumulated depreciation of $73,727,000 and $70,510,000) 75,627 75,683 Cost in excess of net assets acquired (less accumulated amortization of $4,648,000 and $4,534,000) 6,510 6,667 Prepaid pension cost 30,134 29,238 Other assets 1,069 1,111 250,089 250,418 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities 5,290 6,690 Accounts payable and accrued expenses 17,540 16,315 Accrued salaries and wages 5,141 5,590 Taxes payable 278 285 Employee deposits for stock purchase plan 648 518 Total current liabilities 28,897 29,398 Deferred income taxes 14,449 13,969 Long-term debt 3,000 3,000 Accumulated postretirement medical benefit obligation 16,109 16,029 Stockholders' equity: Class A Common $1 par (20,000,000 shrs. auth.; 4,975,685 outstanding at 12/23/00, excluding 1,489,410 in treasury; 4,978,276 outstanding at 6/24/00, excluding 1,461,002 in treasury) 4,976 4,978 Class B Common $1 par (10,000,000 shrs. auth.; 1,460,636 outstanding at 12/23/00, excluding 318,580 in treasury; 1,495,474 outstanding at 6/24/00, excluding 308,284 in treasury) 1,460 1,495 Additional paid-in capital 43,954 43,273 Retained earnings reinvested and employed in the business 157,399 155,846 Accumulated other comprehensive income (20,155) (17,570) Total stockholders' equity 187,634 188,022 250,089 250,418 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 23, 2000 and December 25, 1999 (in thousands of dollars) (unaudited) Common Addi- Accumulated Stock Out- tional Other standing Paid-in Retained Comprehensive ($1 Par) Capital Earnings Income Total Balance June 26, 1999 6,706 42,730 155,349 (14,749) 190,036 Comprehensive income: Net earnings 6,692 6,692 Unrealized net losses on investments (65) (65) Translation loss, net (2,134) (2,134) Total Comprehensive income 4,493 Dividends ($.40) (2,679) (2,679) Treasury shares: Purchased (75) (537) (1,287) (1,899) Issued 77 1,757 1,834 Options exercised 4 78 82 Balance Dec. 25, 1999 6,712 44,028 158,075 (16,948) 191,867 Balance June 24, 2000 6,473 43,273 155,846 (17,570) 188,022 Comprehensive income: Net earnings 5,478 5,478 Unrealized net gains on investments 39 39 Translation loss, net (2,624) (2,624) Total comprehensive income 2,893 Dividends ($.40) (2,572) (2,572) Treasury shares: Purchased (126) (937) (1,353) (2,416) Issued 88 1,599 1,687 Options exercised 1 19 20 Balance Dec. 23, 2000 6,436 43,954 157,399 (20,155) 187,634 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 23, 2000 and June 24, 2000; the results of operations and cash flows for the thirteen weeks and twenty-six weeks ended December 23, 2000 and December 25, 1999; and changes in stockholders' equity for the twenty-six weeks ended December 23, 2000 and December 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 Twenty-six Weeks Ended December Ended December 2000 1999 2000 1999 Interest income 230 276 472 548 Interest expense and com- mitment fees (178) (209) (353) (421) Realized exchange losses (129) (16) (172) (98) Other (83) (63) (173) (25) (160) (12) (226) 4 Approximately 70% of all inventories are valued on the LIFO method. At December 23, 2000, and June 24, 2000, total inventories are $22,755,000 and $22,683,000 less, respectively, than if determined on a FIFO basis. Long-term debt is comprised of the following (in thousands): December June 2000 2000 Industrial revenue bond 300 Revolving credit agreement 3,000 3,000 3,000 3,300 Less current portion 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 Compared to the prior year, total Company sales are down 1% for the quarter and flat year to date. Foreign sales are up slightly both for the quarter and year to date, but this is offset by a 4% decline in domestic sales in the second quarter. Sales to the domestic consumer market were noticeably down during the current holiday season. On a year to date basis, sales of our Brazil subsidiary are up while sales of our Scotland subsidiary are down (up slightly in local currency), reflecting the strong pound in the U.K., which 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 are down 34% for the quarter, 20% year to date. This is primarily attributable to the domestic decrease in sales and related factory activity along with significant increases in the cost of maintaining existing domestic fringe benefit programs. Income Taxes The effective income tax rate was 29.5% for the quarter and 30.6% year to date. This compares to 31.3% and 32.2% in the prior periods. The change is a result of changes in income mix between different taxing jurisdictions. Earnings per share As a result of the above factors, offset slightly by a 4% reduction in outstanding shares, earnings per share are down 30% for the quarter and 15% year to date. Market Risk At June 24, 2000 and December 23, 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 at our foreign locations are less than $2 million. Inflation in Brazil has decreased to approximately 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 $6,500,000 and debt of $8,300,000 at December 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 26 Weeks Ended 12/23/00 12/25/99 12/23/00 12/25/99 Cash provided by operations 8,346 6,737 11,097 7,877 Cash used in investing activities (5,197) (3,966) (7,693) (5,750) Cash used in financing activities (2,684) (1,006) (4,681) (181) Cash effect of translation rate changes 47 5 151 (23) Net increase (decrease) in cash 512 1,770 (1,126) 1,923 Despite the drop in net earnings, both for the quarter and year to date, changes in working capital components (particularly accounts receivable decreases in the second quarter of 2000) caused cash flow provided by operations to increase compared to the prior year's quarter and year to date. The increase in cash used in investing activities represents an increase in short-term investments. The changes in financing activities reflects increased purchases of treasury shares as well as a reduction of short term borrowings in the first quarter of the current year compared to an increase in the first quarter of the prior year. 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 December 23, 2000 and June 24, 2000. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 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 economic effects of this change that affect the Company's sales or margins on business done with Euro countries. Risks Related to Foreign Operations: Approximately 30 percent 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 Page 8 of 9 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 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. Economic weakness in the consumer market also impacts the Company's 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 5, 2001 S/R.U.WELLINGTON, JR. R. U. Wellington, Jr. (Treasurer and Chief Financial Officer) Date February 5, 2001 S/S.G.THOMSON S. G. Thomson (Chief Accounting Officer) Page 9 of 9