10-Q 1 fy02sep10q.txt SEPTEMBER2001 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 29, 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 September 29, 2001: Class A Common Shares 5,060,601 Class B Common Shares 1,429,271 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 29, 2001 and September 23, 2000 (unaudited) 3 Consolidated Balance Sheets - September 29, 2001 (unaudited) and June 30, 2001 4 Consolidated Statements of Stockholders' Equity - thirteen weeks ended September 29, 2001 and September 23, 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 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 9/29/01 9/23/00 Net sales 46,522 58,842 Cost of goods sold (33,898) (41,741) Selling and general (11,886) (12,801) Other income (expense) (392) (66) Earnings before income taxes 346 4,234 Provision for federal, foreign and state income taxes 84 1,339 Net earnings 262 2,895 Basic earnings per share .04 .45 Average outstanding shares used 6,472 6,459 Diluted earnings per share .04 .45 Average outstanding shares used 6,484 6,469 Dividends per share .20 .20 CASH FLOWS Cash flows from operating activities: Net earnings 262 2,895 Noncash expenses: Depreciation and amortization 2,977 2,949 Deferred taxes 144 314 Unrealized exchange losses 312 Working capital changes: Receivables 2,162 (3,197) Inventories (1,957) (3,786) Other assets and liabilities 473 3,898 Prepaid pension cost and other (628) (322) Net cash from operations 3,745 2,751 Cash flows from investing activities: Additions to plant and equipment (2,511) (3,181) Short-term investments, net 302 685 Net cash used in investing (2,209) (2,496) Cash flows from financing activities: Short-term borrowing, net (752) (476) Common stock issued 740 800 Treasury shares purchased (93) (1,032) Dividends (1,279) (1,289) Net cash used in financing (1,384) (1,997) Effect of exchange rate changes on cash (82) 104 Net increase (decrease) in cash 70 (1,638) Cash, beginning of period 1,945 2,008 Cash, end of period 2,015 370 See notes to consolidated financial statements Page 3 of 9 THE L. S. STARRETT COMPANY Consolidated Balance Sheets (in thousands of dollars) Sep. 29 June 30 2001 2001 ASSETS (unaudited) Current assets: Cash 2,015 1,945 Investments 7,716 8,238 Accounts receivable (less allowance for doubtful accounts of $2,011,000 and $1,976,000) 31,849 34,080 Inventories: Finished goods 40,543 38,346 Goods in process and finished parts 27,789 27,811 Raw materials and supplies 17,637 18,677 85,969 84,834 Prepaid expenses, taxes and other current assets 3,095 5,830 Total current assets 130,644 134,927 Property, plant and equipment, at cost (less accumulated depreciation of $76,101,000 and $73,652,000) 74,480 75,205 Cost in excess of net assets acquired (less accumulated amortization of $4,014,000 and $3,947,000) 6,287 6,354 Prepaid pension cost 31,692 30,953 Other assets 1,066 1,093 244,169 248,532 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities 4,293 5,045 Accounts payable and accrued expenses 12,388 14,358 Accrued salaries and wages 4,360 4,827 Employee deposits, taxes payable and other 731 916 Total current liabilities 21,772 25,146 Deferred income taxes 15,422 15,218 Long-term debt 7,000 7,000 Accumulated postretirement medical benefit obligation 16,510 16,347 Stockholders' equity: Class A Common $1 par (20,000,000 shrs. auth.; 5,060,601 outstanding at 9/29/01, excluding 1,437,832 held in treasury; 5,017,569 outstanding at 6/30/01, excluding 1,470,544 held in treasury) 5,061 5,018 Class B Common $1 par (10,000,000 shrs. auth.; 1,429,271 outstanding at 9/29/01, excluding 326,103 held in treasury; 1,440,006 outstanding at 6/30/01, excluding 325,688 held in treasury) 1,429 1,440 Additional paid-in capital 45,779 45,112 Retained earnings reinvested and employed in the business 155,557 156,626 Accumulated other comprehensive income (24,361) (23,375) Total stockholders' equity 183,465 184,821 244,169 248,532 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 29, 2001 and September 23, 2000 (in thousands of dollars) (unaudited) Common Addi- Accumulated Stock Out- tional Other standing Paid-in Retained Comprehensive ($1 Par) Capital Earnings Income(loss) Total Balance June 24, 2000 6,473 43,273 155,846 (17,570) 188,022 Comprehensive income: Net earnings 2,895 2,895 Unrealized net gain on investments 13 13 Translation loss, net (777) (777) Total comprehensive income 2,131 Dividends ($.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 Balance June 30, 2001 6,458 45,112 156,626 (23,375) 184,821 Comprehensive income: Net earnings 262 262 Unrealized net loss on investments (145) (145) Translation loss, net (841) (841) Total comprehensive loss (724) Dividends ($.20 per share) (1,279) (1,279) Treasury shares: Purchased (5) (36) (52) (93) Issued 37 703 740 Balance September 29, 2001 6,490 45,779 155,557 (24,361) 183,465 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 29, 2001 and June 30, 2001; the results of operations and cash flows for the thirteen weeks ended September 29, 2001 and September 23, 2000; and changes in stockholders' equity for the thirteen weeks ended September 29, 2001 and September 23, 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 30, 2001, and these financial statements should be read in conjunction with said annual report. The Company will adopt SFAS 142 as of June 30, 2002, the first day of fiscal 2003. SFAS 142 requires goodwill no longer be amortized, but instead tested for impairment annually or more frequently if certain indicators are present. Any goodwill impairment loss at transition is recognized as the cumulative effect of a change in accounting principle. The Company is required to complete the initial step of a transitional impairment test by December 28, 2002 and the final step by the end of fiscal 2003. As of September 29, 2001, goodwill amounted to $6.4 million and related annual amortization was $268,000. The Company is currently assessing but has not yet determined the impact of SFAS 142 on its financial position or results of operations. Other income (expense) is comprised of the following (in thousands): Thirteen Weeks Ended September 2001 2000 Interest income 157 242 Interest expense and commitment fees (162) (175) Realized and unrealized exchange losses (428) (43) Other 41 (90) (392) (66) Approximately 70% of all inventories are valued on the LIFO method. At September 29, 2001 and June 30, 2001, total inventories are $22,629,000 and $22,685,000 less, respectively, than if determined on a FIFO basis. Long-term debt is comprised of the following (in thousands): September June 2001 2001 Note payable due 12/03, 8.3% 4,000 4,000 Revolving credit agreement 3,000 3,000 7,000 7,000 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 Sales for the September quarter are down 21% compared to the corresponding quarter of a year ago. Domestic sales are down 19% and foreign sales are down 28%, although in local currency foreign sales are down 18%. The events of September 11 may have contributed to some of this decline, but worldwide economic conditions were affecting business even before that. The strong pound in the U.K. continues to adversely affect Scotland's business in terms of export pricing and import price competition. Earnings Before Taxes Pretax earnings in the quarter are down $3.9 million or 92%. Three quarters of the decrease can be attributed to our domestic operations. With the exception of $400,000 in unrealized exchange losses in Brazil due to the devaluation of their currency, the drop in earnings is directly attributable to the drop in sales. Income Taxes The effective income tax rate was 24% in the September quarter of 2001 and 32% in the prior year's corresponding quarter. The change comes about because pretax earnings are so close to breakeven in the first quarter of fiscal 2002 that permanent book/tax differences get exaggerated when converted to percentages. Earnings per share As a result of the above factors, earnings per share for the quarter are $.04 compared to $.45 a year ago, a drop of 91%. 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 2001 and September 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 in Scotland and Brazil total approximately $2 million. Inflation in Brazil has decreased to about 10% today from over 2000% in 1994 when its current economic plan was initiated. As a consequence, its 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 $7,500,000 and debt of $11,300,000 at September 29, 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 $2,200,000 by approximately $50,000. Page 7 of 9 LIQUIDITY AND CAPITAL RESOURCES 13 Weeks Ended 9/29/01 9/23/00 Cash provided by operations 3,745 2,751 Cash used in investing activities (2,209) (2,496) Cash used in financing activities (1,384) (1,997) Cash effect of translation rate changes (82) 104 Net increase (decrease) in cash 70 (1,638) Despite the reduction in earnings, cash provided by operations increased, primarily due to the reduction in accounts receivable during this year's quarter compared to an increase in the prior year's quarter. A decrease in treasury share purchases accounted for the decrease in cash used in financing activities. The Company maintains sufficient liquidity and has adequate resources, including lines of credit, to fund its operations and dividends under current business conditions. The Company continues to maintain a strong financial position with a working capital ratio of 6.0 to 1 as of September 29, 2001 and 5.4 to 1 as of June 30, 2001. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996 This quarterly report, as well as the 2001 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 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. 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 4. Submission of Matters to a Vote of Security Holders. (a) A regular meeting of shareholders was held on September 19, 2001. (c) The following directors were elected: Abstentions Votes Votes and Broker For Withheld Non-votes A shares voting as separate class: Richard B. Kennedy 4,131,532 422,999 N/A A and B shares voting together: George B. Webber 15,832,693 807,648 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 12, 2001 S/R.U.WELLINGTON, JR. R. U. Wellington, Jr. (Treasurer and Chief Financial Officer) Date November 12, 2001 S/S.G.THOMSON S. G. Thomson (Chief Accounting Officer) Page 9 of 9