10-Q 1 fy01mar10q.txt MARCH 2001 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 March 24, 2001 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 March 24, 2001: Class A Common Shares 5,000,168 Class B Common Shares 1,447,493 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 thirty-nine weeks ended March 24, 2001 and March 25, 2000 (unaudited) 3 Consolidated Balance Sheets - March 24, 2001 (unaudited) and June 24, 2000 4 Consolidated Statements of Stockholders' Equity - thirty-nine weeks ended March 24, 2001 and March 25, 2000 (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 39 Weeks Ended EARNINGS 3/24/01 3/25/00 3/24/01 3/25/00 Net sales 50,638 58,860 170,130 178,517 Cost of goods sold (36,437) (43,107) (121,707)(128,424) Selling and general (12,361) (12,402) (38,460) (36,873) Other income and expense (217) 168 (443) 172 Earnings before income taxes 1,623 3,519 9,520 13,392 Provision for federal, foreign and state income taxes 673 1,068 3,092 4,249 Net earnings 950 2,451 6,428 9,143 Basic earnings per share .15 .37 1.00 1.37 Average shares used 6,436 6,658 6,448 6,684 Diluted earnings per share .15 .37 1.00 1.37 Average shares used 6,451 6,667 6,459 6,692 Dividends per share .20 .20 .60 .60 CASH FLOWS Cash flows from operating activities: Net earnings 950 2,451 6,428 9,143 Noncash expenses: Depreciation and amortization 2,949 2,863 8,807 8,815 Deferred taxes (342) (30) 10 787 Working capital changes: Receivables 3,915 3,291 3,219 (2,965) Inventories (2,035) 1,521 (6,385) 1,370 Other assets and liabilities 115 (1,220) 5,296 1,343 Prepaid pension cost and other (57) (139) (783) (1,879) Net cash from operations 5,495 8,737 16,592 16,614 Cash flows from investing activities: Additions to plant and equipment (3,281) (3,406) (9,916) (9,548) Change in short-term investments (3,945) (2,690) (5,003) (2,298) Net cash used in investing (7,226) (6,096) (14,919) (11,846) Cash flows from financing activities: Short-term borrowings(repayments),net(1,066) 894 (2,466) 3,675 Long-term borrowings(repayments) 4,000 (1,000) 4,000 (1,300) Common stock issued 743 923 2,450 2,839 Treasury shares purchased (567) (3,618) (2,983) (5,517) Dividends (1,286) (1,325) (3,858) (4,004) Net cash used in financing 1,824 (4,126) (2,857) (4,307) Effect of translation rate changes on cash (40) 68 111 45 Net increase (decrease) in cash 53 (1,417) (1,073) 506 Cash, beginning of period 882 2,194 2,008 271 Cash, end of period 935 777 935 777 See notes to consolidated financial statements Page 3 of 9 THE L. S. STARRETT COMPANY Consolidated Balance Sheets (in thousands of dollars) March 24 June 24 2001 2000 ASSETS (unaudited) _______ Current assets: Cash 935 2,008 Investments 17,056 12,043 Accounts receivable (less allowance for doubtful accounts of $1,800,000 and $1,790,000) 32,283 36,509 Inventories: Finished goods 37,028 36,121 Goods in process and finished parts 27,243 26,752 Raw materials and supplies 19,889 17,017 84,160 79,890 Prepaid expenses and other current assets 3,826 7,269 Total current assets 138,260 137,719 Property, plant and equipment, at cost (less accumulated depreciation of $76,288,000 and $70,510,000) 75,385 75,683 Cost in excess of net assets acquired (less accumulated amortization of $4,736,000 and $4,534,000) 6,432 6,667 Prepaid pension cost 30,822 29,238 Other assets 1,043 1,111 251,942 250,418 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities 4,224 6,690 Accounts payable and accrued expenses 17,163 16,315 Accrued salaries and wages 4,734 5,590 Taxes payable 297 285 Employee deposits for stock purchase plan 768 518 Total current liabilities 27,186 29,398 Deferred income taxes 14,684 13,969 Long-term debt 7,000 3,000 Accumulated postretirement medical benefit obligation 16,150 16,029 Stockholders' equity: Class A Common $1 par (20,000,000 shrs. auth.; 5,000,168 outstanding 3/24/01, excluding 1,476,292 held in treasury; 4,978,276 outstanding at 6/24/00, excluding 1,461,002 in treasury) 5,000 4,978 Class B Common $1 par (10,000,000 shrs. auth.; 1,447,493 outstanding 3/24/01, excluding 320,358 held in treasury; 1,495,474 outstanding at 6/24/00, excluding 308,284 in treasury) 1,447 1,495 Additional paid-in capital 44,468 43,273 Retained earnings reinvested and employed in the business 156,714 155,846 Accumulated other comprehensive income (20,707) (17,570) Total stockholders' equity 186,922 188,022 251,942 250,418 See Notes to Consolidated Financial Statements Page 4 of 9 THE L. S. STARRETT COMPANY Consolidated Statements of Stockholders' Equity For the Thirty-nine Weeks Ended March 24, 2001 and March 25, 2000 (in thousands of dollars) (unaudited) Common Addi- Accumulated Stock Out- tional Other standing Paid-in Retained Comprehensive ($1 Par) Capital Earnings Income Total Balance June 26, 1999 6,706 42,730 155,349 (14,749) 190,036 Comprehensive income: Net earnings 9,143 9,143 Unrealized net losses on investments (104) (104) Translation loss, net (794) (794) Total comprehensive income 8,245 Dividends ($.60) (4,004) (4,004) Treasury shares: Purchased (233) (1,714) (3,570) (5,517) Issued 118 2,639 2,757 Options exercised 4 78 82 Balance March 25, 2000 6,595 43,733 156,918 (15,647) 191,599 Balance June 24, 2000 6,473 43,273 155,846 (17,570) 188,022 Comprehensive income: Net earnings 6,428 6,428 Unrealized net gains on investments 39 39 Translation loss, net (3,176) (3,176) Total comprehensive income 3,291 Dividends ($.60) (3,858) (3,858) Treasury shares: Purchased (151) (1,130) (1,702) (2,983) Issued 124 2,306 2,430 Options exercised 1 19 20 Balance March 24, 2001 6,447 44,468 156,714 (20,707) 186,922 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 March 24, 2001 and June 24, 2000; the results of operations and cash flows for the thirteen weeks and thirty-nine weeks ended March 24, 2001 and March 25, 2000; and changes in stockholders' equity for the thirty-nine weeks ended March 24, 2001 and March 25, 2000. 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 Thirty-nine Weeks Ended March Ended March 2001 2000 2001 2000 Interest income 267 378 739 926 Interest expense and commitment fees (178) (218) (531) (639) Realized exchange gains and losses (207) 77 (379) (21) Other (99) (69) (272) (94) (217) 168 (443) 172 Approximately 70% of all inventories are valued on the LIFO method. At March 24, 2001, and June 24, 2000, total inventories are $23,019,000 and $22,683,000 less, respectively, than if determined on a FIFO basis. Long-term debt is comprised of the following (in thousands): March June 2001 2000 Industrial revenue bond 300 Term loan due Dec. 2003 4,000 Revolving credit agreement 3,000 3,000 7,000 3,300 Less current portion 300 7,000 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 14% for the quarter and 5% year to date. Foreign sales are down 21% for the quarter (15% in local currency) and 4% year to date. Domestic sales are down 11% for the quarter and 5% year to date, reflecting a drop in our industrial demand during the quarter as well as weak consumer demand during the second quarter holiday season. Although sales of our Brazil subsidiary are up slightly on a year to date basis, customer inventory rebalancing and unfavorable changes in the exchange rate caused a significant drop in sales for the quarter. Sales of our Scotland subsidiary are down for quarter and year to date reflecting the strong pound compared to the euro, which continues to adversely affect Scotland's business in terms of export pricing and import price competition. Earnings Before Taxes Pretax earnings are down 54% for the quarter, 29% year to date. For the quarterly comparison, this is primarily attributable to the foreign decrease in sales and related factory activity. The year to date comparison is a result of both foreign and domestic sales decreases along with significant increases in the cost of maintaining existing domestic fringe benefit programs. Income Taxes The effective income tax rate was 41% for the quarter and 32% year to date. This compares to 30% and 32% in the prior periods. The change in the quarterly comparison is a result of changes in income mix between foreign and domestic taxing jurisdictions, with domestic tax rates generally being higher. Earnings per share As a result of the above factors, earnings per share are down 59% for the quarter and 27% year to date. Market Risk At June 24, 2000 and March 24, 2001, 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 new 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 $10,400,000 and debt of $11,200,000 at March 24, 2001) 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 39 Weeks Ended 3/24/01 3/25/00 3/24/01 3/25/00 Cash provided by operations 5,495 8,737 16,592 16,614 Cash used in investing activities (7,226) (6,096) (14,919) (11,846) Cash used in financing activities 1,824 (4,126) (2,857) (4,307) Cash effect of translation rate changes (40) 68 111 45 Net increase (decrease) in cash 53 (1,417) (1,073) 506 Lower earnings and increased inventories were the main contributors to the decrease in cash provided by operations during the quarter. In the year to date comparison, the drop in earnings was offset by changes in working capital components. The increase in cash used in investing activities represents an increase in short-term investments. The changes in financing activities reflect increased borrowings in the current quarter to support foreign operations and decreased purchases of treasury shares both in the quarter and year to date. 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 5.1 to 1 as of March 24, 2001 and 4.7 to 1 as of 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. There can be no assurance, however, that there will not be unforeseen economic effects of this change that affect the Company's business. Indeed, the current weakness of the euro as compared to the British pound and U.S. dollar has had an adverse impact on the Company's sales and 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 May 7, 2001 S/R.U.WELLINGTON, JR. R. U. Wellington, Jr. (Treasurer and Chief Financial Officer) Date May 7, 2001 S/S.G.THOMSON S. G. Thomson (Chief Accounting Officer) Page 9 of 9