10-Q 1 fy02dec10q.txt DECEMBER 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 December 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 filing requirements for the past 90 days. YES X NO Common Shares outstanding as of December 29, 2001 : Class A Common Shares 5,087,735 Class B Common Shares 1,428,532 Page 1 of 9 THE L. S. STARRETT COMPANY CONTENTS Page No. Part I. Financial Information: Item 1. Financial Statements Consolidated Statements of Operations and Cash Flows - thirteen and twenty-six weeks ended December 29, 2001 and December 23, 2000 (unaudited) 3 Consolidated Balance Sheets - December 29, 2001 (unaudited) and June 30, 2001 4 Consolidated Statements of Stockholders' Equity - twenty-six weeks ended December 29, 2001 and December 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 6. Exhibits and reports on Form 8-K 9 Page 2 of 9 THE L. S. STARRETT COMPANY Consolidated Statements of Operations and Cash Flows (in thousands of dollars except per share data)(unaudited) 13 Weeks Ended 26 Weeks Ended OPERATIONS 12/29/01 12/23/00 12/29/01 12/23/00 Net sales 44,918 60,650 91,440 119,492 Cost of goods sold (34,819) (43,529) (68,717) (85,270) Selling and general (11,527) (13,298) (23,413) (26,099) Other income and expense 10 (160) (382) (226) Earnings (loss) before income taxes (1,418) 3,663 (1,072) 7,897 Provision for federal, foreign and state income taxes (807) 1,080 (723) 2,419 Net earnings (loss) (611) 2,583 (349) 5,478 Basic earnings (loss) per share (.09) .40 (.05) .85 Average outstanding shares used 6,494 6,449 6,483 6,454 Diluted earnings (loss) per share (.09) .40 (.05) .85 Average outstanding shares used 6,494 6,457 6,483 6,463 Dividends per share .20 .20 .40 .40 CASH FLOWS Cash flows from operating activities: Net earnings (loss), (611) 2,583 (349) 5,478 Noncash expenses: Depreciation and amortization 3,011 2,909 5,988 5,858 Deferred taxes 372 38 516 352 Unrealized exchange losses (gains) (36) 276 Working capital changes: Receivables 3,283 2,501 5,445 (696) Inventories 1,083 (564) (874) (4,350) Other assets and liabilities 272 1,283 745 5,181 Prepaid pension cost and other (590) (404) (1,218) (726) Net cash from operations 6,784 8,346 10,529 11,097 Cash flows from investing activities: Additions to plant and equipment (2,531) (3,454) (5,042) (6,635) Change in short-term investments (3,446) (1,743) (3,144) (1,058) Net cash used in investing (5,977) (5,197) (8,186) (7,693) Cash flows from financing activities: Short-term borrowings, net (648) (924) (1,400) (1,400) Common stock issued 838 907 1,578 1,707 Treasury shares purchased (333) (1,384) (426) (2,416) Dividends (1,295) (1,283) (2,574) (2,572) Net cash used in financing (1,438) (2,684) (2,822) (4,681) Translation rate change effect on cash 50 47 (32) 151 Net increase (decrease) in cash (581) 512 (511) (1,126) Cash, beginning of period 2,015 370 1,945 2,008 Cash, end of period 1,434 882 1,434 882 See Notes to Consolidated Financial Statements Page 3 of 9 THE L. S. STARRETT COMPANY Consolidated Balance Sheets (in thousands of dollars) Dec. 29 June 30 2001 2001 ASSETS (unaudited) Current assets: Cash 1,434 1,945 Investments 11,093 8,238 Accounts receivable (less allowance for doubtful accounts of $1,953,000 and $1,976,000) 28,468 34,080 Inventories: Finished goods 38,526 38,346 Goods in process and finished parts 28,724 27,811 Raw materials and supplies 17,483 18,677 84,733 84,834 Prepaid expenses, taxes and other current assets 3,479 5,830 Total current assets 129,207 134,927 Property, plant and equipment, at cost (less accumulated depreciation of $78,839,000 and $73,652,000) 73,949 75,205 Cost in excess of net assets acquired (less accumulated amortization of $4,081,000 and $3,947,000) 6,220 6,354 Prepaid pension cost 32,332 30,953 Other assets 1,040 1,093 242,748 248,532 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities 3,645 5,045 Accounts payable and accrued expenses 13,711 14,358 Accrued salaries and wages 4,004 4,827 Employee deposits, taxes payable and other 465 916 Total current liabilities 21,825 25,146 Deferred income taxes 15,709 15,218 Long-term debt 7,000 7,000 Accumulated postretirement medical benefit obligation 16,506 16,347 Stockholders' equity: Class A Common $1 par (20,000,000 shrs. auth.; 5,087,735 outstanding on 12/29/01, excluding 1,419,598 in treasury; 5,017,569 outstanding on 6/30/01, excluding 1,470,544 in treasury) 5,088 5,018 Class B Common $1 par (10,000,000 shrs. auth.; 1,428,532 outstanding on 12/29/01, excluding 330,575 in treasury; 1,440,006 outstanding on 6/30/01, excluding 325,688 in treasury) 1,429 1,440 Additional paid-in capital 46,463 45,112 Retained earnings reinvested and employed in the business 153,445 156,626 Accumulated other comprehensive income (24,717) (23,375) Total stockholders' equity 181,708 184,821 242,748 248,532 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 29, 2001 and December 23, 2000 (in thousands of dollars) (unaudited) Common Addi- Accumulated Stock Out- tional Other standing Paid-in Retained Comprehensive ($1 Par) Capital Earnings Income Total Balance June 24, 2000 6,473 43,273 155,846 (17,570) 188,022 Comprehensive income: Net earnings 5,478 5,478 Unrealized net gain on investments 39 39 Translation loss, net (2,624) (2,624) Total Comprehensive income 2,893 Dividends ($.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 Balance June 30, 2001 6,458 45,112 156,626 (23,375) 184,821 Comprehensive income: Net earnings (loss) (349) (349) Unrealized net losses on investments (250) (250) Translation loss, net (1,092) (1,092) Total comprehensive income (1,691) Dividends ($.40) (2,574) (2,574) Treasury shares: Purchased (21) (147) (258) (426) Issued 67 1,286 1,353 Options exercised 13 212 225 Balance Dec. 29, 2001 6,517 46,463 153,445 (24,717) 181,708 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 29, 2001 and June 30, 2001; the results of operations and cash flows for the thirteen weeks and twenty-six weeks ended December 29, 2001 and December 23, 2000; and changes in stockholders' equity for the twenty-six weeks ended December 29, 2001 and December 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 December 29, 2001, goodwill amounted to $6.2 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 Twenty-six Weeks Ended December Ended December 2001 2000 2001 2000 Interest income 201 230 358 472 Interest expense and com- mitment fees (144) (178) (306) (353) Realized and unrealized exchange gains (losses) 28 (129) (400) (172) Other (75) (83) (34) (173) 10 (160) (382) (226) Approximately 70% of all inventories are valued on the LIFO method. At December 29, 2001, and June 30, 2001, total inventories are $22,738,000 and $22,685,000 less, respectively, than if determined on a FIFO basis. Long-term debt is comprised of the following (in thousands): December June 2001 2001 Note payable due 12/03, 5.6% 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 Total Company sales for the December quarter are down 26% compared to the corresponding quarter of a year ago. For the six months year to date, sales are down 23% compared to the prior year. Domestic sales are down 25% for the quarter and 22% year to date. Foreign sales are down 23% for the quarter and 25% year to date, although in local currency the drop is half that much. The events of September 11 may have contributed indirectly to some of this decline, but worldwide economic conditions have been affecting business for some time, particularly during the last two quarters. 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 (loss)are down $5.1 million in the quarter and $9.0 year to date and as a percent of sales represent a pretax loss of 3% and 1%, respectively. Pretax earnings in the comparable prior year periods were 6% and 7% of sales. Three quarters of the decrease, both in the quarter and year to date, comes from our domestic operations. The decrease is almost entirely attributable to the drop in sales and reduced factory hours, although $400,000 in exchange losses in Brazil during the first quarter of fiscal 2002 and $300,000 in unexpected bad debt losses during the second quarter also contributed to the decrease. Selling and general expenses have been reduced, but not quite as much as sales. Income Taxes The effective income tax rate was 57% in the December quarter and 67% year to date. This compares to 30% and 31% in the prior year. The change comes about because pretax earnings (loss) are so close to breakeven in both quarters of fiscal 2002 that permanent book/tax differences get exaggerated when converted to percentages and because the least profitable operations during the current year have been in the jurisdictions with the highest tax rates. Earnings (loss) per share As a result of the above factors, earnings (loss) per share for the quarter are $(.09) and year to date are $(.05). This compares to $.40 and $.85 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 2001 and December 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 local currency monetary assets in Scotland and Brazil are less than $1 million. Page 7 of 9 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 $10,300,000 and debt of $10,600,000 at December 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. LIQUIDITY AND CAPITAL RESOURCES 13 Weeks Ended 26 Weeks Ended 12/29/01 12/23/00 12/29/01 12/23/00 Cash provided by operations 6,784 8,346 10,529 11,097 Cash used in investing activities (5,977) (5,197) (8,186) (7,693) Cash used in financing activities (1,438) (2,684) (2,822) (4,681) Cash effect of translation rate changes 50 47 (32) 151 Net increase (decrease) in cash (581) 512 (511) (1,126) Cash provided by operations decreased, both in the quarterly and year to date comparisons, but not nearly as much as earnings. This was primarily due to the reduction in working capital requirements related to the decrease in activity. A decrease in treasury share purchases accounted for the decrease in cash used in financing activities. The Company has sufficient liquidity and has adequate resources, including lines of credit, to fund its operations in the near term. The Company continues to maintain a strong financial position with a working capital ratio of 5.9 to 1 as of December 29, 2001 and 5.4 to 1 as of June 30, 2001. Although cutbacks have been made, the Company has to date tried to maintain its skilled workforce and dividend levels, despite the downturn in the industrial manufacturing sector. If economic conditions do not improve, however, and the Company continues to sustain losses at the current rate, additional steps may have to be taken in order to maintain liquidity, including further workforce reductions and/or reducing or eliminating the dividend. 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, theCompany's Scottish subsidiary does a significant amount of business with Euro Page 8 of 9 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 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 11, 2002 S/R.U.WELLINGTON, JR. R. U. Wellington, Jr. (Vice President, Treasurer and Chief Financial Officer) Date February 11, 2002 S/S.G.THOMSON S. G. Thomson (Chief Accounting Officer) Page 9 of 9