-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GzArEyKFn0QOtMPxuwKUt2lOhbxsKH5EH71wDwfJzwZORZePX8RfY1auBBfyjLoO EQCdzgIBI4nM9J6s16iFOA== 0000093676-02-000007.txt : 20020513 0000093676-02-000007.hdr.sgml : 20020513 ACCESSION NUMBER: 0000093676-02-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020330 FILED AS OF DATE: 20020513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARRETT L S CO CENTRAL INDEX KEY: 0000093676 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 041866480 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00367 FILM NUMBER: 02643234 BUSINESS ADDRESS: STREET 1: 121 CRESCENT ST CITY: ATHOL STATE: MA ZIP: 01331 BUSINESS PHONE: 5082493551 10-Q 1 fy02mar10q.txt 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 30, 2002 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 30, 2002: Class A Common Shares 5,102,212 Class B Common Shares 1,414,868 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 thirty-nine weeks ended March 30, 2002 and March 24, 2001 (unaudited) 3 Consolidated Balance Sheets - March 30, 2002 (unaudited) and June 30, 2001 4 Consolidated Statements of Stockholders' Equity - thirty-nine weeks ended March 30, 2002 and March 24, 2001 (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 39 Weeks Ended 3/30/02 3/24/01 3/30/02 3/24/01 OPERATIONS Net sales 45,419 50,638 136,859 170,130 Cost of goods sold (35,380) (36,437) (104,097)(121,707) Selling and general (11,294) (12,361) (34,707) (38,460) Other income and (expense) 127 (217) (255) (443) Earnings (loss) before income taxes (1,128) 1,623 (2,200) 9,520 Provision for federal, foreign and state income taxes (666) 673 (1,389) 3,092 Net earnings (loss) (462) 950 (811) 6,428 Basic earnings (loss) per share (.07) .15 (.12) 1.00 Average shares used 6,513 6,436 6,493 6,448 Diluted earnings (loss) per share (.07) .15 (.12) 1.00 Average shares used 6,513 6,451 6,493 6,459 Dividends per share .20 .20 .60 .60 CASH FLOWS Cash flows from operating activities: Net earnings (loss) (462) 950 (811) 6,428 Noncash expenses: Depreciation and amortization 2,961 2,949 8,949 8,807 Deferred taxes (38) (342) 478 10 Unrealized exchange losses (gains) (295) 175 (19) 175 Retirement benefits (496) (665) (1,712) (1,424) Working capital changes: Receivables (3,945) 3,915 1,500 3,219 Inventories 3,523 (2,035) 2,649 (6,385) Other assets and liabilities (1,482) 115 (737) 5,296 Other 237 433 235 466 Net cash from operations 3 5,495 10,532 16,592 Cash flows from investing activities: Additions to plant and equipment (2,578) (3,281) (7,620) (9,916) Change in short-term investments 3,083 (3,945) (61) (5,003) Net cash used in investing 505 (7,226) (7,681) (14,919) Cash flows from financing activities: Short-term borrowings(repayments),net 363 (1,066) (1,037) (2,466) Long-term borrowings 4,000 4,000 Common stock issued 533 743 2,111 2,450 Treasury shares purchased (498) (567) (924) (2,983) Dividends (1,300) (1,286) (3,874) (3,858) Net cash used in financing (902) 1,824 (3,724) (2,857) Effect of translation rate changes on cash 24 (40) (8) 111 Net increase (decrease) in cash (370) 53 (881) (1,073) Cash, beginning of period 1,434 882 1,945 2,008 Cash, end of period 1,064 935 1,064 935 See notes to consolidated financial statements Page 3 of 9 THE L. S. STARRETT COMPANY Consolidated Balance Sheets (in thousands of dollars) March 30 June 30 2002 2001 ASSETS (unaudited) Current assets: Cash 1,064 1,945 Investments 8,156 8,238 Accounts receivable (less allowance for doubtful accounts of $1,926,000 and $1,976,000) 32,639 34,080 Inventories: Finished goods 37,092 38,346 Goods in process and finished parts 27,365 27,811 Raw materials and supplies 17,642 18,677 82,099 84,834 Prepaid expenses, taxes and other current assets 5,044 5,830 Total current assets 129,002 134,927 Property, plant and equipment, at cost (less accumulated depreciation of $82,045,000 and $73,652,000) 74,026 75,205 Cost in excess of net assets acquired (less accumulated amortization of $4,149,000 and $3,947,000) 6,153 6,354 Prepaid pension cost 32,939 30,953 Other assets 821 1,093 242,941 248,532 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities 4,008 5,045 Accounts payable and accrued expenses 13,913 14,358 Accrued salaries and wages 3,899 4,827 Employee deposits, taxes payable and other 516 916 Total current liabilities 22,336 25,146 Deferred income taxes 15,953 15,218 Long-term debt 7,000 7,000 Accumulated postretirement medical benefit obligation 16,608 16,347 Stockholders' equity: Class A Common $1 par (20,000,000 shrs. auth.; 5,102,212 outstanding on 3/30/02, excluding 1,417,341 in treasury; 5,017,569 outstanding on 6/30/01, excluding 1,470,544 in treasury) 5,102 5,018 Class B Common $1 par (10,000,000 shrs. auth.; 1,414,868 outstanding on 3/30/02, excluding 332,019 in treasury; 1,440,006 outstanding on 6/30/01, excluding 325,688 in treasury) 1,415 1,440 Additional paid-in capital 46,779 45,112 Retained earnings reinvested and employed in the business 151,402 156,626 Accumulated other comprehensive income (23,654) (23,375) Total stockholders' equity 181,044 184,821 242,941 248,532 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 30, 2002 and March 24, 2001 (in thousands of dollars) (unaudited) Common Addi- Accumulated Stock Out- tional Other standing Paid-in Retained Comprehensive ($1 Par) Capital Earnings Income Total Balance June 24, 2000 6,473 43,273 155,846 (17,570) 188,022 Comprehensive income: Net earnings 6,428 6,428 Unrealized net gains on investments 39 39 Translation loss, net (3,176) (3,176) Total comprehensive income 3,291 Dividends ($.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 Balance June 30, 2001 6,458 45,112 156,626 (23,375) 184,821 Comprehensive income: Net loss (811) (811) Unrealized net losses on investments (239) (239) Translation loss, net (40) (40) Total comprehensive loss (1,090) Dividends ($.60) (3,874) (3,874) Treasury shares: Purchased (46) (339) (539) (924) Issued 92 1,794 1,886 Options exercised 13 212 225 Balance March 30, 2002 6,517 46,779 151,402 (23,654) 181,044 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 30, 2002 and June 30, 2001; the results of operations and cash flows for the thirteen weeks and thirty-nine weeks ended March 30, 2002 and March 24, 2001; and changes in stockholders' equity for the thirty-nine weeks ended March 30, 2002 and March 24, 2001. 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 March 30, 2002, 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. Included in investments at March 30, 2002 is $2 million of AAA rated Puerto Rico debt obligations that have maturities greater than one year but carry the benefit of possibly reducing repatriation taxes. These investments are used as part of the Company's overall cash management and liquidity program and, under SFAS 115, are considered "available for sale." The investments themselves are liquid and carry no early redemption penalties and are, therefore, classified as current assets. Other income (expense) is comprised of the following (in thousands): Thirteen Weeks Thirty-nine Weeks Ended March Ended March 2002 2001 2002 2001 Interest income 135 267 493 739 Interest expense and commitment fees (95) (178) (401) (531) Realized and unrealized exchange gains (losses) 307 (207) (93) (379) Other (220) (99) (254) (272) 127 (217) (255) (443) Approximately 70% of all inventories are valued on the LIFO method. At March 30, 2002, and June 30, 2001, total inventories are $22,847,000 and $22,685,000 less, respectively, than if determined on a FIFO basis. Long-term debt is comprised of the following (in thousands): March June 2002 2001 Term loan due Dec. 2003 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 March quarter are down 10% compared to the corresponding quarter of a year ago. For the nine months year to date, sales are down 20% compared to the prior year. Domestic sales are down 12% for the quarter and 19% year to date. Foreign sales are down 11% for the quarter and 21% year to date, although in local currency foreign sales are actually up 1% for the quarter and down only 10% year to date. Worldwide economic conditions continue to adversely affect business, particularly during the last three quarters. The strong pound in the U.K. continues to adversely affect The Company's Scottish subsidiary in terms of export pricing and import price competition. Earnings (Loss) Before Taxes Pretax earnings (loss) are down $2.8 million in the quarter and $11.7 year to date and as a percent of sales represent a pretax loss of 2.5% and 1.6%, respectively. Pretax earnings in the comparable prior year periods were 3.2% and 5.6% of sales. The decrease in pretax earnings, both in the quarter and year to date, is a result of the lower domestic sales mentioned above and the reduced gross margins that are attributable to the drop in sales and production levels. Production levels are currently lower than sales as we try to reduce inventories. The March quarter comparison benefitted from approximately $300,000 in translation gains as Brazil's currency strengthened. In the year to date comparison, these gains are offset by a similar level of translation losses during the first quarter of fiscal 2002. Selling and general expenses have been reduced approximately 10% in the quarter and year to date comparisons. About one third of these reductions is the result of exchange rate changes in Brazil. Income Taxes The effective income tax rate was 59% in the March quarter and 63% year to date. This compares to 41% and 32% in the prior year. The change comes about because pretax earnings (loss) are so close to breakeven in 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 $(.07) and year to date are $(.12). This compares to $.15 and $1.00 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 March 2002, 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. A 10% change in interest rates would not have a significant impact on the Page 7 of 9 aggregate net fair value of the Company's interest rate sensitive financial instruments (primarily variable rate investments of $5,800,000 and debt of $11,000,000 at March 30, 2002) 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 $3,400,000 by approximately $25,000. LIQUIDITY AND CAPITAL RESOURCES 13 Weeks Ended 39 Weeks Ended 3/30/02 3/24/01 3/30/02 3/24/01 Cash provided by operations 3 5,495 10,532 16,592 Cash used in investing activities 505 (7,226) (7,681) (14,919) Cash used in financing activities (902) 1,824 (3,724) (2,857) Cash effect of translation rate changes 24 (40) (8) 111 Net increase (decrease) in cash (370) 53 (881) (1,073) Cash provided by operations decreased, both in the quarterly and year to date comparisons. The decrease in the year to date comparison is mostly accounted for by the decrease in earnings as working capital account changes generally offset each other. In the quarterly comparison, however, an increase in receivables due to extended terms for a major customer contributed to the decrease in cash. "Retirement benefits" under noncash expenses in the detailed cash flow statement on page 3 shows the effect on operating cash flow of the Company's pension and retiree medical plans. Primarily because the Company's domestic defined benefit plan is overfunded, retirement benefits in total are currently generating approximately $500,000 of noncash income per quarter ($250,000 of accrual basis income) (see the footnotes to the Company's 2001 annual report for more detail). Cash used in investing activities tends to offset cash provided from operations as excess funds get temporarily invested. However, reduced fixed asset investments have also contributed to the quarter and year to date drop. Cash from financing activities decreased in the quarter and year to date comparisons due to less borrowing, but this was offset in the year to date comparison by a decrease in treasury share purchases. 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 5.8 to 1 as of March 30, 2002 and 5.4 to 1 as of June 30, 2001. Although many cutbacks have been made, the Company has maintained its core 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 will 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: Page 8 of 9 Risks Related to Technology: Although the Company's strategy includes 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 the Euro: The United Kingdom has not adopted the euro and the Company's Scottish subsidiary transacts a significant amount of business with euro countries. There can be no assurance that this situation will not result in unforseen economic conditions 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: May 13, 2002 S/R.U.WELLINGTON, JR. _ R. U. Wellington, Jr. (Vice President, Treasurer and Chief Financial Officer) Date: May 13, 2002 S/S.G.THOMSON _ S. G. Thomson (Chief Accounting Officer) Page 9 of 9 -----END PRIVACY-ENHANCED MESSAGE-----