UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the quarterly period ended |
September 30, 2013 |
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OR | ||
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from |
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to |
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Commission file number |
1-367 |
THE L. S. STARRETT COMPANY |
(Exact name of registrant as specified in its charter) |
MASSACHUSETTS |
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04-1866480 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer 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 |
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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. | |
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YES ☒ NO ☐ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One): | |
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Large Accelerated Filer ☐ Accelerated Filer ☒ Non-Accelerated Filer ☐ Smaller Reporting Company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | |
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YES ☐ NO ☒ |
Common Shares outstanding as of |
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October 31, 2013 |
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Class A Common Shares |
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6,106,625 |
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Class B Common Shares |
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814,379 |
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THE L. S. STARRETT COMPANY
CONTENTS
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Page No. | |
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Part I. |
Financial Information: |
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Item 1. |
Financial Statements |
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Consolidated Balance Sheets – September 30, 2013 (unaudited) and June 30, 2013 |
3 | |
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Consolidated Statements of Operations - three months ended September 30, 2013 and September 30, 2012 (unaudited) |
4 | |
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Consolidated Statements of Comprehensive Income (Loss) – three months ended September 30, 2013 and September 30, 2012 (unaudited) |
5 | |
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Consolidated Statements of Stockholders' Equity – three months ended September 30, 2013 and September 30, 2012 (unaudited) |
6 | |
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Consolidated Statements of Cash Flows - three months ended September 30, 2013 and September 30, 2012 (unaudited) |
7 | |
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Notes to Unaudited Consolidated Financial Statements |
8-12 | |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
12-13 | |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
14 | |
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Item 4. |
Controls and Procedures |
14 | |
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Part II. |
Other Information: |
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Item 1A. |
Risk Factors |
14 | |
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Item 6. |
Exhibits |
14 | |
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SIGNATURES |
15 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE L. S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands except share data)
September 30, 2013 (unaudited) |
June 30, 2013 |
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ASSETS |
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Current assets: |
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Cash |
$ | 21,148 | $ | 19,755 | ||||
Short-term investments |
8,174 | 7,657 | ||||||
Accounts receivable (less allowance for doubtful accounts of $681 and $697, respectively) |
33,980 | 37,875 | ||||||
Inventories |
58,191 | 56,501 | ||||||
Current deferred income tax asset |
4,776 | 4,978 | ||||||
Prepaid expenses and other current assets |
8,279 | 7,182 | ||||||
Total current assets |
134,548 | 133,948 | ||||||
Property, plant and equipment, net |
50,642 | 51,200 | ||||||
Taxes receivable |
3,770 | 3,770 | ||||||
Deferred tax asset, net |
28,114 | 28,274 | ||||||
Intangible assets, net |
7,986 | 8,222 | ||||||
Goodwill |
3,034 | 3,034 | ||||||
Other assets |
2,434 | 2,346 | ||||||
Total assets |
$ | 230,528 | $ | 230,794 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Notes payable and current maturities |
$ | 1,534 | $ | 1,557 | ||||
Accounts payable and accrued expenses |
16,538 | 17,084 | ||||||
Accrued compensation |
5,483 | 5,304 | ||||||
Total current liabilities |
23,555 | 23,945 | ||||||
Long-term debt net of current portion |
22,372 | 24,252 | ||||||
Other tax obligations |
10,504 | 10,514 | ||||||
Deferred tax liabilities |
2,182 | 2,182 | ||||||
Postretirement benefit and pension obligations |
43,532 | 42,386 | ||||||
Other non-current liability |
- | 773 | ||||||
Total liabilities |
102,145 | 104,052 | ||||||
Stockholders' equity: |
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Class A Common stock $1 par (20,000,000 shares authorized; 6,099,400 outstanding at 9/30/2013 and 6,076,698 outstanding at 6/30/2013) |
6,099 | 6,077 | ||||||
Class B Common stock $1 par (10,000,000 shares authorized; 815,534 outstanding at 9/30/2013 and 750,563 outstanding at 6/30/2013) |
816 | 750 | ||||||
Additional paid-in capital |
53,481 | 52,613 | ||||||
Retained earnings |
91,303 | 91,778 | ||||||
Accumulated other comprehensive loss |
(23,316 |
) |
(24,476 |
) | ||||
Total stockholders' equity |
128,383 | 126,742 | ||||||
Total liabilities and stockholders’ equity |
$ | 230,528 | $ | 230,794 |
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Consolidated Statements of Operations
(in thousands except per share data) (unaudited)
3 Months Ended |
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9/30/2013 |
9/30/2012 |
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Net sales |
$ | 57,487 | $ | 56,937 | ||||
Cost of goods sold |
39,678 | 39,248 | ||||||
Gross margin |
17,809 | 17,689 | ||||||
% of Net sales |
31.0 |
% |
31.1 |
% | ||||
Selling, general and administrative expenses |
17,073 | 18,571 | ||||||
Operating income (loss) |
736 | (882 |
) | |||||
Other income |
109 | 144 | ||||||
Income (loss) before income taxes |
845 | (738 |
) | |||||
Income tax expense (benefit) |
629 | (387 |
) | |||||
Net Income (loss) |
$ | 216 | $ | (351 |
) | |||
Basic and diluted Income (loss) per share |
$ | 0.03 | $ | (0.05 |
) | |||
Weighted average outstanding shares used in per share calculations: |
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Basic |
6,895 | 6,783 | ||||||
Diluted |
6,931 | 6,783 | ||||||
Dividends per share |
$ | .10 | $ | .10 |
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Consolidated Statements of Comprehensive Income
(in thousands) (unaudited)
3 Months Ended |
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9/30/2013 |
9/30/2012 |
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Net earnings (loss) |
$ | 216 | $ | (351 |
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Other comprehensive income (loss), net of tax: |
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Translation gain |
1,175 | 635 | ||||||
Pension and postretirement plans |
(15 |
) |
(11 |
) | ||||
Other comprehensive income |
1,160 | 624 | ||||||
Total comprehensive income |
$ | 1,376 | $ | 273 |
THE L. S. STARRETT COMPANY
Consolidated Statements of Stockholders' Equity
For the Three Months Ended September 30, 2013 and September 30, 2012
(in thousands except per share data) (unaudited)
Common Stock Outstanding |
Addi- tional Paid-in |
Retained |
Accumulated Other Com- prehensive |
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Class A |
Class B |
Capital |
Earnings |
Loss |
Total |
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Balance June 30, 2012 |
$ | 6,017 | $ | 753 | $ | 51,941 | $ | 94,661 | $ | (25,534 |
) |
$ | 127,838 | |||||||||||
Total comprehensive income (loss) |
(351 |
) |
624 | 273 | ||||||||||||||||||||
Dividends ($0.10 per share) |
(679 |
) |
(679 |
) | ||||||||||||||||||||
Issuance of stock under 1984 ESOP |
6 | 64 | 70 | |||||||||||||||||||||
Issuance of stock under compensation plans |
2 | 15 | 114 | 131 | ||||||||||||||||||||
Stock-based compensation |
41 | 41 | ||||||||||||||||||||||
Conversion |
4 | (4 |
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- | ||||||||||||||||||||
Balance September 30, 2012 |
$ | 6,029 | $ | 764 | $ | 52,160 | $ | 93,631 | $ | (24,910 |
) |
$ | 127,674 | |||||||||||
Balance June 30, 2013 |
$ | 6,077 | $ | 750 | $ | 52,613 | $ | 91,778 | $ | (24,476 |
) |
$ | 126,742 | |||||||||||
Total comprehensive income |
216 | 1,160 | 1,376 | |||||||||||||||||||||
Dividends ($0.10 per share) |
(691 |
) |
(691 |
) | ||||||||||||||||||||
Issuance of stock under 1984 ESOP |
7 | 62 | 69 | |||||||||||||||||||||
Issuance of stock under 2013 ESOP |
76 | 697 | 773 | |||||||||||||||||||||
Issuance of stock under compensation plans |
5 | 54 | 59 | |||||||||||||||||||||
Stock-based compensation |
55 | 55 | ||||||||||||||||||||||
Conversion |
10 | (10 |
) |
- | ||||||||||||||||||||
Balance September 30, 2013 |
$ | 6,099 | $ | 816 | $ | 53,481 | $ | 91,303 | $ | (23,316 |
) |
$ | 128,383 | |||||||||||
Accumulated balance consists of: |
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Translation loss |
$ | (20,459 |
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Pension and postretirement plans net of taxes |
(2,857 |
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$ | (23,316 |
) |
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Consolidated Statements of Cash Flows
(in thousands of dollars) (unaudited)
3 Months Ended |
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9/30/2013 |
9/30/2012 |
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Cash flows from operating activities: |
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Net income (loss) |
$ | 216 | $ | (351 |
) | |||
Non-cash operating activities: |
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Depreciation |
2,023 | 2,166 | ||||||
Amortization |
289 | 368 | ||||||
Stock-based compensation |
114 | 41 | ||||||
Net long-term tax obligations |
- | (280 |
) | |||||
Deferred taxes |
480 | 559 | ||||||
Unrealized transaction gain (loss) |
(5 |
) |
1 | |||||
Income on equity method investment |
(94 |
) |
(157 |
) | ||||
Working capital changes: |
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Accounts receivable |
4,481 | 8,312 | ||||||
Inventories |
(1,133 |
) |
(3,590 |
) | ||||
Other current assets |
(1,074 |
) |
86 | |||||
Other current liabilities |
(733 |
) |
(4,572 |
) | ||||
Postretirement benefit and pension obligations |
443 | 244 | ||||||
Other |
230 | 140 | ||||||
Net cash provided by operating activities |
5,237 | 2,967 | ||||||
Cash flows from investing activities: |
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Additions to property, plant and equipment |
(1,451 |
) |
(2,304 |
) | ||||
Increase in short-term investments |
(26 |
) |
- | |||||
Net cash used in investing activities |
(1,477 |
) |
(2,304 |
) | ||||
Cash flows from financing activities: |
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Short-term debt repayments |
(15 |
) |
(152 |
) | ||||
Long-term debt repayments |
(1,887 |
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(395 |
) | ||||
Proceeds from common stock issued |
69 | 201 | ||||||
Dividends paid |
(691 |
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(679 |
) | ||||
Net cash used in financing activities |
(2,524 |
) |
(1,025 |
) | ||||
Effect of exchange rate changes on cash |
157 | 121 | ||||||
Net increase (decrease) in cash |
1,393 | (241 |
) | |||||
Cash, beginning of period |
19,755 | 17,502 | ||||||
Cash, end of period |
$ | 21,148 | $ | 17,261 | ||||
Supplemental cash flow information: |
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Interest paid |
$ | 239 | $ | 247 | ||||
Income taxes paid, net |
1,840 | 1,025 | ||||||
Supplemental disclosure of non-cash activities: |
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Issuance of stock under 2013 ESOP |
$ | 773 | - |
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Notes to Unaudited Consolidated Financial Statements
September 30, 2013
Note 1: Basis of Presentation and Summary of Significant Account Policies
The balance sheet as of June 30, 2013, which has been derived from audited financial statements, and the unaudited interim financial statements have been prepared by The L.S. Starrett Company (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. These unaudited financial statements, which, in the opinion of management, reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation, should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2013. Operating results are not necessarily indicative of the results that may be expected for any future interim period or for the entire fiscal year.
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect amounts reported in the consolidated financial statements and accompanying notes. Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended June 30, 2013 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. There were no changes in any of the Company’s significant accounting policies during the three months ended September 30, 2013.
Note 2: Recent Accounting Pronouncements
In July 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU No. 2013-11 resolves the diversity in practice regarding the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU comes into effect for the first annual period beginning after December 15, 2013. We do not expect adoption of ASU No. 2013-11 to affect our results of operations or cash flows.
Note 3: Stock-based Compensation
On September 5, 2012 the Board of Directors adopted The L.S. Starrett Company 2012 Long Term Incentive Plan (the “2012 Stock Plan”). The 2012 stock plan was approved by shareholders October 17, 2012. The 2012 Stock Plan permits the granting of the following types of awards to officers, other employees and non-employee directors: stock options; restricted stock awards; unrestricted stock awards; stock appreciation rights; stock units including restricted stock units; performance awards; cash-based awards; and awards other than previously described that are convertible or otherwise based on stock. The 2012 Stock Plan provides for the issuance of up to 500,000 shares of common stock.
Options granted vest in periods ranging from one year to three years and expire ten years after the grant date. Restricted stock units (“RSU”) granted generally vest from one year to three years. Vested restricted stock units will be settled in shares of common stock. As of September 30, 2013, there were 20,500 stock options and 8,200 restricted stock units outstanding. In addition, there were 471,300 shares available for grant under the 2012 Stock Plan as of September 30, 2013.
For the stock option grant, the fair value of each grant was estimated at the date of grant using the Binomial Options pricing model. The Binomial Options pricing model utilizes assumptions related to stock volatility, the risk-free interest rate, the dividend yield and employee exercise behavior. Expected volatilities utilized in the model are based on the historic volatility of the Company’s stock price. The risk free interest rate is derived from the U.S. Treasury Yield curve in effect at the time of the grant. The expected life is determined using the average of the vesting period and contractual term of the options (Short-cut method).
The fair value of stock options as of September 30, 2013 of $3.82 was estimated using the following assumptions:
Risk-free interest rate |
1.0 |
% | ||
Expected life (years) |
6.0 | |||
Expected stock volatility |
52.3 |
% | ||
Expected dividend yield |
4.0 |
% |
The weighted average contractual term for stock options outstanding as of September 30, 2013 was 9.25 years. The aggregate intrinsic value of stock options outstanding as of September 30, 2013 was $0.1 million. There were no options exercisable as of September 30, 2013.
The Company accounts for RSU awards by recognizing the expense of the fair value ratably over vesting periods generally ranging from one year to three years. The related expense is included in selling, general and administrative expenses.
There were no RSU awards settled during the three months ended September 30, 2013. The aggregate intrinsic value of RSU awards outstanding as of September 30, 2013 was $0.1 million. There were no RSU awards vested as of September 30, 2013.
On February 5, 2013, the Board of Directors adopted The L.S. Starrett Company 2013 Employee Stock Ownership Plan (the “2013 ESOP”). The purpose of the plan is to supplement existing Company programs through an employer funded individual account plan dedicated to investment in common stock of the Company, thereby encouraging increased ownership of the Company while providing an additional source of retirement income. The plan is intended as an employee stock ownership plan within the meaning of Section 4975 (e) (7) of the Internal Revenue Code of 1986, as amended. U.S. employees who have completed a year of service as of December 31, 2012 are eligible to participate.
On June 5, 2013 the Board of Directors approved a contribution to the 2013 ESOP for fiscal 2013 in the amount of two percent of each participant’s compensation (as defined in the Plan). Compensation expense related to the 2013 ESOP of $.8 million was recognized in the year ended June 30, 2013. The $.8 million liability was included in other non-current liabilities on the Consolidated Balance Sheet on June 30, 2013. Shares of Class B common stock were contributed to the 2013 ESOP on July 30, 2013 in order to fund this liability.
Compensation expense related to all stock based plans for the three month period ended September 30, 2013 was $0.1 million. As of September 30, 2013, there was $0.1 million of total unrecognized compensation costs related to outstanding stock-based compensation arrangements. The cost is expected to be recognized over a weighted average period of 2.2 years.
Note 4: Inventories
Inventories consist of the following (in thousands):
9/30/2013 |
6/30/2013 |
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Raw material and supplies |
$ | 30,343 | $ | 29,565 | ||||
Goods in process and finished parts |
21,082 | 20,256 | ||||||
Finished goods |
37,356 | 37,507 | ||||||
88,781 | 87,328 | |||||||
LIFO Reserve |
(30,590 |
) |
(30,827 |
) | ||||
Inventories |
$ | 58,191 | $ | 56,501 |
LIFO inventories were $12.9 million at September 30, 2013 and June 30, 2013, or approximately $30.6 million and $30.8 million, respectively, less than their balances accounted for on a FIFO basis. The use of LIFO, as compared to FIFO, resulted in a $0.2 million decrease in cost of sales for the three months ended September 30, 2013 compared to no effect in the three months ended September 30, 2012.
Note 5: Goodwill and Intangibles
The Company performed a qualitative analysis in accordance with ASU 2011-08 for its Bytewise reporting unit for its October 1, 2012 annual assessment of goodwill (commonly referred to as “Step Zero”). From a qualitative perspective, in evaluating whether it is more likely than not that the fair value of the reporting units is not less than their respective carrying amount, relevant events and circumstances were taken into account, with greater weight assigned to events and circumstances that most affect the fair value of Bytewise or the carrying amounts of its assets. Items that were considered included, but were not limited to, the following: macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, changes in management or key personnel, and other Bytewise specific events. After assessing these and other factors the Company determined that it was more likely than not that the fair value of the Bytewise reporting unit was not less than the carrying amount as of October 1, 2012. The company is currently performing its annual impairment test for fiscal 2014 and expects to have it completed by December 31, 2013.
Amortizable intangible assets consist of the following (in thousands):
9/30/2013 |
6/30/2013 |
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Non-compete agreement |
$ | 600 | $ | 600 | ||||
Trademarks and trade names |
1,480 | 1,480 | ||||||
Completed technology |
2,010 | 2,010 | ||||||
Customer relationships |
4,950 | 4,950 | ||||||
Software development |
688 | 635 | ||||||
Other intangible assets |
325 | 325 | ||||||
Total |
10,053 | 10,000 | ||||||
Accumulated amortization |
(2,067 |
) |
(1,778 |
) | ||||
Total net balance |
$ | 7,986 | $ | 8,222 |
Amortizable intangible assets are being amortized on a straight-line basis over the period of expected economic benefit.
The estimated useful lives of the intangible assets subject to amortization are 14 years for trademarks and trade names, 8 years for non-compete agreements, 10 years for completed technology, 8 years for customer relationships and 5 years for software development.
The estimated aggregate amortization expense for the remainder of fiscal 2014, for each of the next five years and thereafter, is as follows (in thousands):
2014 (Remainder of year) |
$ | 878 | ||
2015 |
1,171 | |||
2016 |
1,171 | |||
2017 |
1,169 | |||
2018 |
1,101 | |||
2019 |
1,036 | |||
Thereafter |
1,460 |
Note 6: Pension and Post-retirement Benefits
Net periodic benefit costs for the Company's defined benefit pension plans consist of the following (in thousands):
Three Months Ended |
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9/30/2013 |
9/30/2012 |
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Service cost |
$ | 709 | $ | 738 | ||||
Interest cost |
1,715 | 1,494 | ||||||
Expected return on plan assets |
(1,562 |
) |
(1,602 |
) | ||||
Amortization of prior service cost |
29 | 59 | ||||||
Amortization of net loss |
3 | - | ||||||
$ | 894 | $ | 689 |
Net periodic benefit costs for the Company's postretirement medical plan and life insurance consists of the following (in thousands):
Three Months Ended |
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9/30/2013 |
9/30/2012 |
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Service cost |
$ | 88 | $ | 128 | ||||
Interest cost |
133 | 136 | ||||||
Amortization of prior service credit |
(126 |
) |
(279 |
) | ||||
Amortization of accumulated loss |
- | 40 | ||||||
$ | 95 | $ | 25 |
The Company’s pension plans use fair value as the market-related value of plan assets and recognize net actuarial gains or losses in excess of ten percent (10%) of the greater of the market-related value of plan assets or of the plans’ projected benefit obligation in net periodic (benefit) cost as of the plan measurement date, which is the same as the fiscal year end of the Company. Net actuarial gains or losses that are less than 10% of the thresholds noted above are accounted for as part of the accumulated other comprehensive income (loss).
Note 7: Debt
Debt, including capitalized lease obligations, is comprised of the following (in thousands):
9/30/2013 |
6/30/2013 |
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Notes payable and current maturities |
||||||||
Loan and Security Agreement |
$ | 1,364 | $ | 1,348 | ||||
Short-term foreign credit facility |
13 | 27 | ||||||
Capitalized leases |
157 | 182 | ||||||
1,534 | 1,557 | |||||||
Long-term debt |
||||||||
Loan and Security Agreement |
22,191 | 24,037 | ||||||
Capitalized leases |
181 | 215 | ||||||
22,372 | 24,252 | |||||||
$ | 23,906 | $ | 25,809 |
The Company executed an amendment to its Loan and Security Agreement (Line of Credit) as of April 25, 2012. The Line of Credit is effective for three years commencing April 25, 2012 and expires on April 30, 2015. The agreement continues the previous line of $23.0 million and interest rate of LIBOR plus 1.5%. On September 7, 2012, the Company completed another amendment to change the financial covenants. The material financial covenants of the amended Loan and Security Agreement are: 1) funded debt to EBITDA, excluding non-cash and retirement benefit expenses (“maximum leverage”), cannot exceed 1.45 to 1, 2) annual capital expenditures cannot exceed $15.0 million, 3) maintain a Debt Service Coverage Rate of a minimum of 1.25 to 1 and 4) maintain consolidated cash plus liquid investments of not less than $10.0 million at any time.
On May 9, 2013, the Company further amended the agreement to adjust the current funded debt to EBITDA ratio from 1.45 to 1, to 2.25 to 1 for the fourth quarter of fiscal 2013 and the first quarter of fiscal 2014. Thereafter, and through the end of the agreement on April 30, 2015, the funded debt to EBITDA covenant reverts to 1.45 to 1.
The effective interest rate on the Line of Credit under the Loan and Security Agreement for the three months ended September 30, 2013 and 2012 was 2.0% and 1.9%, respectively.
On November 22, 2011, in conjunction with the Bytewise acquisition, the Company entered into a $15.5 million term loan (the “Term Loan”) under the existing Loan and Security Agreement with TD Bank N.A. The term loan is a ten year loan bearing a fixed interest rate of 4.5% and is payable in fixed monthly payments of principal and interest of $160,640. The term loan, which had a balance of $13.2 million at September 30, 2013, is subject to the same financial covenants as the Loan and Security Agreement.
The Company was in compliance with its debt covenants as of September 30, 2013.
Note 8: Income Tax
The Company is subject to U.S. federal income tax and various state, local and foreign income taxes in numerous jurisdictions. The Company’s domestic and foreign tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to the Company’s interpretation of applicable tax laws in the jurisdictions in which it files.
The Company provides for income taxes on an interim basis based on an estimate of the effective tax rate for the year. This estimate is reassessed on a quarterly basis. Discrete tax items are accounted for in the quarterly period in which they occur.
The tax expense for the first quarter of fiscal 2014 was $629,000 on a profit before tax for the quarter of $845,000 (an effective tax rate of 74.4%). The tax expense for the first quarter of fiscal 2013 was a benefit of $387,000 on a loss before tax of $738,000 (an effective tax rate of 52.4%). The primary reason for the high effective tax rate in the first quarter of fiscal 2014 is a discrete tax charge of $278,000 for the effect of a tax rate decrease in the UK applied to the net deferred tax assets in that jurisdiction. In the first quarter of fiscal 2013, a discrete tax benefit was booked reducing the Company’s net tax liability for uncertain tax positions of $91,000.
U.S. Federal tax returns through fiscal 2009 are generally no longer subject to review by tax authorities; however, tax loss carryforwards from years before fiscal 2010 are still subject to review. As of September 30, 2013, the Company has substantially resolved all open income tax audits and there were no other local or federal income tax audits in progress as of September 30, 2013. In international jurisdictions including Argentina, Australia, Brazil, Canada, China, Germany, Japan, Mexico, New Zealand, Singapore and the UK, which comprise a significant portion of the Company’s operations, the years that may be examined vary by country. The Company’s most significant foreign subsidiary in Brazil is subject to audit for the years 2008 – 2013.
The Company has identified no new uncertain tax positions during the three month period ended September 30, 2013 for which it is currently likely that the total amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.
No valuation allowance has been recorded for the Company’s domestic federal net operating loss (NOL) carry forwards. The Company continues to believe that due to forecasted future taxable income and certain tax planning strategies available, it is more likely than not that it will be able to utilize the federal NOL carry forwards. The valuation allowance for subsidiary NOL’s in certain foreign countries, notably China, are being released in fiscal 2014 to the extent of forecasted taxable income in fiscal 2014.
Note 9: Contingencies
The Company is involved in certain legal matters which arise in the normal course of business. These matters are not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended September 30, 2013 and September 30, 2012
Overview
The Company recorded a small increase in sales revenues in comparison to the prior year. Foreign exchange as discussed below negatively impacted revenue growth. The slow revenue growth trend is indicative of the broad global economic weakness that affected most of our core markets through much of last fiscal year. Recognizing this trend, the Company implemented cost reductions in the second half of fiscal 2013. The cost reductions were targeted in operating overhead departments, where new systems and processes facilitated savings without sacrificing critical customer service and new strategic sales and marketing programs. Net sales increased $0.6 million or 1%, however, excluding the impact of foreign currency exchange rates, primarily in Brazil, sales increased $2.7 million or 5%. Operating income improved $1.6 million as flat gross margins were offset by a $1.5 million or an 8% reduction in selling, general and administrative expenses. Net income improved from a loss of $0.4 million or $0.05 per share to income of $0.2 million or $0.03 per share.
Net Sales
North American sales increased a modest $0.7 million from $30.2 million in fiscal 2013 to $30.9 million in fiscal 2014. A rebound in the capital equipment sector, particularly custom engineered granite and optical and vision products, accounted for the improved performance. International sales declined $0.1 million or 1% from $26.7 million in fiscal 2013 to $26.6 million in fiscal 2014. Unfavorable exchange rates represented $2.1 million, with the Brazilian Real weakening by 10% and negatively impacting comparable sales by $2.0 million.
Gross Margin
Gross margin improved $0.1 million with higher revenue representing growth of $0.2 million and margin erosion accounting for $0.1 million. North American fiscal 2014 gross margin of $9.4 million was flat with fiscal 2013 as improved margins in the saw business were offset by higher costs for precision tools. The higher precision tool costs were the result of an inventory reduction program implemented in the second half of fiscal 2013 without a corresponding decrease in fixed overhead costs. International gross margins improved $0.1 million to $8.4 million despite a $0.7 million unfavorable impact due to exchange rates. Reduced overhead cost was the key driver in the international margin improvement.
Selling, General and Administrative Expenses
Selling, general and administrative expenses declined $1.5 million or 8%. North American expenses declined $0.5 million or 5% due to lower salaries, travel and marketing costs. International expenses declined $1.0 million due to lower salaries, sales commissions, information technology and professional fees. The weakening Brazilian Real represented $0.5 million or 50% of the International savings.
Other Income
Other Income remained level in fiscal 2014 with fiscal 2013 as favorable exchange gains combined with lower interest expense and higher interest income in fiscal 2014 offset a favorable insurance settlement in fiscal 2013.
Net Earnings (Loss)
The Company recorded net earnings of $0.2 million or $0.03 per share in the first quarter of fiscal 2014 compared to a net loss of $0.4 million or $0.05 per share in fiscal 2013 principally due to lower selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows (in thousands) |
Three Months Ended |
|||||||
9/30/2013 |
9/30/2012 |
|||||||
Cash provided by operating activities |
$ | 5,237 | $ | 2,967 | ||||
Cash used in investing activities |
(1,477 |
) |
(2,304 |
) | ||||
Cash used in financing activities |
(2,524 |
) |
(1,025 |
) | ||||
Effect of exchange rate changes on cash |
157 | 121 | ||||||
Net increase (decrease) in cash |
$ | 1,393 | $ | (241 |
) |
Net cash increased $1.4 million as profits and improved working capital management were sufficient to invest $1.5 million in capital equipment and repay $1.9 million in debt. The $1.6 million improvement in cash flow compared to the same period one year ago was primarily due to improved profitability, lower working capital and reduced capital expenditures more than offsetting increased debt repayments.
Liquidity and Credit Arrangements
The Company believes it maintains sufficient liquidity and has the resources to fund its operations. In addition to its cash and investments, the Company maintains a $23 million line of credit in connection with its Loan and Security Agreement, of which, $10.4 million was outstanding as of September 30, 2013. Availability under the agreement is further reduced by open letters of credit totaling $0.6 million. The Loan and Security Agreement matures in April of 2015. The Loan and Security Agreement contains financial covenants with respect to leverage, tangible net worth, and interest coverage, and also contains customary affirmative and negative covenants, including limitations on indebtedness, liens, acquisitions, asset dispositions and fundamental corporate changes, and certain customary events of default. As of September 30, 2013, the Company was in compliance with all debt covenants related to its loan and Security Agreement.
The effective interest rate on the borrowings under the Loan and Security Agreement during the three months ended September 30, 2013 was 2.0%.
INFLATION
The Company has experienced modest inflation relative to its material cost, much of which cannot be passed on to the customer through increased prices.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements, other than operating leases, that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in qualitative and quantitative disclosures about market risk from what was reported in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the participation of the Company's President and Chief Executive Officer and Chief Financial Officer, has evaluated the Company's disclosure controls and procedures as of September 30, 2013, and they have concluded that our disclosure controls and procedures were effective as of such date. All information required to be filed in this report was recorded, processed, summarized and reported within the time period required by the rules and regulations of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2013, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
There have been no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements about the Company’s business, competition, sales, expenditures, foreign operations, plans for reorganization, 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 securities analysts and investors. The Company is subject to risks that could cause actual events to vary materially from such forward-looking statements. You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results set forth under Item 1A. “Risk Factors” in our Form 10-K for the year ended June 30, 2013. There have been no material changes from the factors disclosed in our Form 10-K for the year ended June 30, 2013.
ITEM 6. EXHIBITS
31a |
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
31b |
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
32 |
Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101 |
The following materials from The L. S. Starrett Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity, (v)the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text. |
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 5, 2013 |
|
/S/R. Douglas A. Starrett |
|
|
|
Douglas A. Starrett - President and CEO |
|
|
|
|
Date |
November 5, 2013 |
|
/S/R. Francis J. O’Brien |
|
|
|
Francis J. O’Brien - Treasurer and CFO |
15
EXHIBIT 31.a
CERTIFICATIONS
I, Douglas A. Starrett, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of The L.S. Starrett Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial report; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 5, 2013 |
/S/ |
Douglas A. Starrett |
Douglas A. Starrett |
EXHIBIT 31.b
CERTIFICATIONS
I, Francis J. O’Brien, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of The L.S. Starrett Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial report; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 5, 2013 |
/S/ |
Francis J. O’Brien |
Francis J. O’Brien |
EXHIBIT 32
CERTIFICATIONS
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of The L.S. Starrett Company, a Massachusetts corporation (the "Company"), does hereby certify, to such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 (the "Form 10-Q") of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date |
November 5, 2013 |
/S/ Douglas A. Starrett | |
Douglas A. Starrett | |||
Date |
November 5, 2013 |
/S/ Francis J. O’Brien | |
Francis J. O’Brien |
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.
A signed original of this written statement required by Section 906 has been provided to The L.S. Starrett Company and will be retained by The L.S. Starrett Company and furnished to the Securities and Exchange Commission or its staff upon request.
Note 9 - Contingencies
|
3 Months Ended |
---|---|
Sep. 30, 2013
|
|
Commitments and Contingencies Disclosure [Abstract] | |
Commitments and Contingencies Disclosure [Text Block] | Note 9: Contingencies The Company is involved in certain legal matters which arise in the normal course of business. These matters are not expected to have a material impact on the Company’s financial condition, results of operations or cash flows. |
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