10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	September 30, 2019
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

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 incorporation or organization)	(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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common - $1.00 Per Share Par Value	SCX	New York Stock Exchange
Class B Common - $1.00 Per Share Par Value	Not applicable	Not applicable

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 ☒    NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). 

YES ☒     NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check One):

Large Accelerated Filer ☐    Accelerated Filer ☐   Non-Accelerated Filer ☒   Smaller Reporting Company ☐

Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐    NO ☒

Common Shares outstanding as of	October 25, 2019
Class A Common Shares	6,273,368
Class B Common Shares	678,272

1

 THE L. S. STARRETT COMPANY

CONTENTS

			Page No.
Part I.	Financial Information:
	Item 1.	Financial Statements
		Consolidated Balance Sheets – September 30, 2019 (unaudited) and June 30, 2019	3
		Consolidated Statements of Operations – three months ended September 30, 2019 and 2018 (unaudited)	4
		Consolidated Statements of Comprehensive Income (Loss) – three months ended September 30, 2019 and 2018 (unaudited)	5
		Consolidated Statements of Stockholders' Equity –three months ended September 30, 2019 and 2018 (unaudited)	6
		Consolidated Statements of Cash Flows – three months ended September 30, 2019 and 2018 (unaudited)	7
		Notes to Unaudited Consolidated Financial Statements	8-17
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18-19
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
	Item 4.	Controls and Procedures	19
Part II.	Other Information:
	Item 1A.	Risk Factors	20
	Item 6.	Exhibits	21
SIGNATURES			22

2

PART I.                      FINANCIAL INFORMATION

ITEM 1.                      FINANCIAL STATEMENTS

THE L. S. STARRETT COMPANY

Consolidated Balance Sheets

(in thousands except share data) (unaudited)

	09/30/2019			06/30/2019
ASSETS
Current assets:
Cash	$	10,510		$	15,582
Accounts receivable (less allowance for doubtful accounts of $633 and $685, respectively)		31,340			35,980
Inventories		64,525			61,790
Prepaid expenses and other current assets		6,739			6,623
Total current assets		113,114			119,975
Property, plant and equipment, net		37,078			36,679
Right of use assets		5,779			-
Taxes receivable		1,633			1,666
Deferred tax assets, net		18,341			18,639
Intangible assets, net		8,305			8,460
Goodwill		4,668			4,668
Total assets	$	188,918		$	190,087
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt	$	3,979		$	4,065
Current lease liability		1,903			-
Accounts payable		11,799			12,881
Accrued expenses		7,192			8,699
Accrued compensation		5,474			7,035
Total current liabilities		30,347			32,680
Other tax obligations		2,523			2,587
Long-term lease liability		3,922			-
Long-term debt, net of current portion		19,088			17,541
Postretirement benefit and pension obligations		52,436			53,900
Total liabilities		108,316			106,708
Stockholders' equity:
Class A Common stock $1 par (20,000,000 shares authorized; 6,269,669 outstanding at September 30, 2019 and 6,206,525 outstanding at June 30, 2019)		6,270			6,207
Class B Common stock $1 par (10,000,000 shares authorized; 681,971 outstanding at September 30, 2019 and 689,577 outstanding at June 30, 2019)		682			690
Additional paid-in capital		55,425			55,276
Retained earnings		81,265			80,487
Accumulated other comprehensive loss		(63,040	)		(59,281	)
Total stockholders' equity		80,602			83,379
Total liabilities and stockholders’ equity	$	188,918		$	190,087

See Notes to Unaudited Consolidated Financial Statements

3

THE L. S. STARRETT COMPANY

Consolidated Statements of Operations

(in thousands except per share data) (unaudited)

	3 Months Ended
	09/30/2019			09/30/2018
Net sales	$	52,114		$	51,901
Cost of goods sold		34,411			35,242
Gross margin		17,703			16,659
% of Net sales		34.0	%		32.1	%
Selling, general and administrative expenses		16,258			15,723
Operating income		1,445			936
Other income (expense)		(169	)		6
Income before income taxes		1,276			942
Income tax expense		498			358
Net income (loss)	$	778		$	584
Basic income (loss) per share	$	0.11		$	0.08
Diluted income (loss) per share	$	0.11		$	0.08
Weighted average outstanding shares used in per share calculations:
Basic		6,904			7,025
Diluted		7,006			7,083

See Notes to Unaudited Consolidated Financial Statements

4

THE L. S. STARRETT COMPANY

Consolidated Statements of Comprehensive Income (Loss)

 (in thousands) (unaudited)

	3 Months Ended
	09/30/2019			09/30/2018
Net income (loss)	$	778		$	584
Other comprehensive income (loss):
Currency translation (loss), net of tax		(3,739	)		(1,571	)
Pension and postretirement plans, net of tax		(20	)		-
Other comprehensive income (loss)		(3,759	)		(1,571	)
Total comprehensive income (loss)	$	(2,981	)	$	(987	)

See Notes to Unaudited Consolidated Financial Statements

5

THE L. S. STARRETT COMPANY

Consolidated Statements of Stockholders' Equity

For the Three Months Ended September 30, 2019 and 2018

(in thousands except per share data) (unaudited)

	Common Stock Outstanding					Additional Paid-in			Retained		Accumulated Other Comprehensive
	Class A		Class B			Capital			Earnings		Loss			Total
Balance June 30, 2019	$	6,207	$	690		$	55,276		$	80,487	$	(59,281	)	$	83,379
Total comprehensive income (loss)		-		-			-			778		(3,759	)		(2,981	)
Repurchase of shares		-		(2	)		(8	)		-		-			(10	)
Stock-based compensation		57		-			157			-		-			214
Conversion		6		(6	)		-			-		-			-
Balance September 30, 2019	$	6,270	$	682		$	55,425		$	81,265	$	(63,040	)	$	80,602
Accumulated balance consists of:
Translation loss, net of taxes											$	(53,297	)
Pension and postretirement plans, net of taxes												(9,743	)
											$	(63,040	)

	Common Stock Outstanding					Additional Paid-in			Retained		Accumulated Other Comprehensive
	Class A		Class B			Capital			Earnings		Loss			Total
Balance June 30, 2018	$	6,302	$	720		$	55,641		$	74,368	$	(49,160	)	$	87,871
Total comprehensive income (loss)		-		-			-			584		(1,571	)		(987	)
Transfer of historical translation adjustment		-		-			-			40		(40	)		-
Repurchase of shares		-		(2	)		(11	)		-		-			(13	)
Issuance of stock		-		2			10			-		-			12
Stock-based compensation		17		-			90			-		-			107
Conversion		10		(10	)		-			-		-			-
Balance September 30, 2018	$	6,329	$	710		$	55,730		$	74,992	$	(50,771	)	$	86,990
Accumulated balance consists of:
Translation loss, net of taxes											$	(50,537	)
Pension and postretirement plans, net of taxes												(234	)
											$	(50,771	)

See Notes to Unaudited Consolidated Financial Statements

6

THE L. S. STARRETT COMPANY

Consolidated Statements of Cash Flows

(in thousands) (unaudited)

	3 Months Ended
	09/30/2019			09/30/2018
Cash flows from operating activities:
Net income	$	778		$	584
Non-cash operating activities:
Depreciation		1,212			1,260
Amortization		575			577
Stock-based compensation		214			107
Net long-term tax obligations		26			44
Deferred taxes		141			75
Postretirement benefit and pension obligations		30			161
Working capital changes:
Accounts receivable		3,087			1,604
Inventories		(5,091	)		(1,078	)
Other current assets		(428	)		(696	)
Other current liabilities		(2,796	)		(770	)
Prepaid pension expense		(1,281	)		(1,197	)
Other		49			234
Net cash provided by (used in) operating activities		(3,484	)		905
Cash flows from investing activities:
Purchases of property, plant and equipment		(2,625	)		(721	)
Software development		(399	)		(362	)
Net cash provided by (used in) investing activities		(3,024	)		(1,083	)
Cash flows from financing activities:
Proceeds from borrowing		2,500			-
Debt repayments		(1,039	)		(608	)
Proceeds from common stock issued		-			12
Shares repurchased		(10	)		(13	)
Net cash provided by (used in) financing activities		1,451			(609	)
Effect of exchange rate changes on cash		(15	)		(24	)
Net increase (decrease) in cash		(5,072	)		(811	)
Cash, beginning of period		15,582			14,827
Cash, end of period	$	10,510		$	14,016
Supplemental cash flow information:
Interest paid	$	269		$	185
Income taxes paid, net		594			775
Supplemental disclosure of non-cash activities:
Recognition of right-of-use assets		6,149			-
Recognition of operating lease liability		6,149			-

See Notes to Unaudited Consolidated Financial Statements

7

THE L. S. STARRETT COMPANY

Notes to Unaudited Consolidated Financial Statements

September 30, 2019

Note 1:   Basis of Presentation and Summary of Significant Account Policies

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, 2019.  Operating results are not necessarily indicative of the results that may be expected for any future interim period or for the entire fiscal year. Our “fiscal year” begins July 1^st and ends June 30^th.

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, 2019 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.

Note 2: Segment Information

The segment information and the accounting policies of each segment are the same as those described in the notes to the consolidated financial statements entitled “Financial Information by Segment & Geographic Area” included in our Annual Report on Form 10-K for the year ended June 30, 2019. The Company’s business is aggregated into two reportable segments based on geography of operations: North American Operations and International Operations. Segment income is measured for internal reporting purposes by excluding corporate expenses, which are included in unallocated in the table below. Other income and expense, including interest income and expense, and income taxes are excluded entirely from the table below. There were no significant changes in the segment operations or in the segment assets from the Annual Report. Financial results for each reportable segment are as follows (in thousands):

	North American Operations		International Operations		Unallocated			Total
Three Months ended September 30, 2019
Sales1	$	31,009	$	21,105	$	-		$	52,114
Operating Income (Loss)	$	2,206	$	1,163	$	(1,924	)	$	1,445
Three Months ended September 30, 2018
Sales2	$	30,200	$	21,701	$	-		$	51,901
Operating Income (Loss) 3	$	373	$	2,119	$	(1,556	)	$	936

1. Excludes $968 of North American segment intercompany sales to the International segment, and $4,242 of International segment intercompany sales to the North American segment.

2. Excludes $1,134 of North American segment intercompany sales to the International segment, and $3,320 of International segment intercompany sales to the North American segment.

3. As a result of the adoption of ASU 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, the respective line items in the Consolidated Statement of Earnings for Fiscal 2019 have been reclassified.

Note 3:  Revenue from Contracts with Customers

On July 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, and all the related amendments (“ASC Topic 606”), using the modified retrospective method. In addition, the Company elected to apply certain of the permitted practical expedients within the revenue recognition guidance and make certain accounting policy elections, including those related to significant financing components, sales taxes and shipping and handling activities. Most of the changes resulting from the adoption of ASC Topic 606 on July 1, 2018 were changes in presentation within the Unaudited Consolidated Balance Sheet. Therefore, while the Company made adjustments to certain opening balances on its July 1, 2018 Unaudited Consolidated Balance Sheet, the Company made no adjustment to opening Retained Earnings.

8

The core principle of ASC Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The application of the FASB’s guidance on revenue recognition requires the Company to recognize the amount of revenue and consideration that the Company expects to receive in exchange for goods and services transferred to our customers. To do this, the Company applies the five-step model prescribed by the FASB, which requires us to: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation.

The Company accounts for a contract or purchase order when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when control of the product passes to the customer, which is upon shipment, unless otherwise specified within the customer contract or on the purchase order as delivery, and is recognized at the amount that reflects the consideration the Company expects to receive for the products sold, including various forms of discounts. When revenue is recorded, estimates of returns are made and recorded as a reduction of revenue. Contracts with customers are evaluated to determine if there are separate performance obligations related to timing of product shipment that will be satisfied in different accounting periods. When that is the case, revenue is deferred until each performance obligation is met. No performance obligation related amounts were deferred as of September 30, 2019. Purchase orders are of durations less than one year. As such, the Company applies the practical expedient in ASC paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, for which work has not yet been performed.

Certain taxes assessed by governmental authorities on revenue producing transactions, such as value added taxes, are excluded from revenue and recorded on a net basis.

Performance Obligations

The Company’s primary source of revenue is derived from the manufacture and distribution of metrology tools and equipment and saw blades and related products sold to distributors. The Company recognizes revenue for sales to our customers when transfer of control of the related good or service has occurred. All of the Company’s revenue was recognized under the point in time approach for the three months ended September 30, 2019 and 2018. Contract terms with certain metrology equipment customers could result in products and services being transferred over time as a result of the customized nature of some of the Company’s products, together with contractual provisions in the customer contracts that provide the Company with an enforceable right to payment for performance completed to date; however, under typical terms, the Company does not have the right to consideration until the time of shipment from its manufacturing facilities or distribution centers, or until the time of delivery to its customers. If certain contracts in the future provide the Company with this enforceable right of payment, the timing of revenue recognition from products transferred to customers over time may be slightly accelerated compared to the Company’s right to consideration at the time of shipment or delivery.

The Company’s typical payment terms vary based on the customer, geographic region, and the type of goods and services in the contract or purchase order. The period of time between invoicing and when payment is due is typically not significant. Amounts billed and due from the Company’s customers are classified as receivables on the Unaudited Consolidated Balance Sheet. As the Company’s standard payment terms are usually less than one year, the Company has elected the practical expedient under ASC paragraph 606-10-32-18 to not assess whether a contract has a significant financing component.

The Company’s customers take delivery of goods, and they are recognized as revenue at the time of transfer of control to the customer, which is usually at the time of shipment, unless otherwise specified in the customer contract or purchase order. This determination is based on applicable shipping terms, as well as the consideration of other indicators, including timing of when the Company has a present right to payment, when physical possession of products is transferred to customers, when the customer has the significant risks and rewards of ownership of the asset, and any provisions in contracts regarding customer acceptance.

While unit prices are generally fixed, the Company provides variable consideration for certain of our customers, typically in the form of promotional incentives at the time of sale. The Company utilizes the most likely amount consistently to estimate the effect of uncertainty on the amount of variable consideration to which the Company would be entitled. The most likely amount method considers the single most likely amount from a range of possible consideration amounts. The most likely amounts are based upon the contractual terms of the incentives and historical experience with each customer. The Company records estimates for cash discounts, promotional rebates, and other promotional allowances in the period the related revenue is recognized (“Customer Credits”). The provision for Customer Credits is recorded as a reduction from gross sales and reserves for Customer Credits are presented within accrued sales incentives on the Unaudited Consolidated Balance Sheet. Actual Customer Credits have not differed materially from estimated amounts for each period presented. Amounts billed to customers for shipping and handling are included in net sales and costs associated with shipping and handling are included in cost of sales. The Company has concluded that its estimates of variable consideration are not constrained according to the definition within the new standard. Additionally, the Company applies the practical expedient in ASC paragraph 606-10-25-18B and accounts for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment activity, rather than a separate performance obligation.

9

With the adoption of ASC Topic 606, the Company reclassified certain amounts related to variable consideration. Under ASC Topic 606, the Company is required to present a refund liability and a return asset within the Unaudited Consolidated Balance Sheet, whereas in periods prior to adoption, the Company presented the estimated margin impact of expected returns as a contra-asset within accounts receivable. The changes in the refund liability are reported in net sales, and the changes in the return asset are reported in cost of sales in the Unaudited Consolidated Statements of Operations. As a result, the balance sheet presentation was adjusted beginning in Fiscal 2019. As of September 30, 2019, the balance of the return asset is $0.1 million and the balance of the refund liability is $0.2 million, and they are presented within prepaid expenses and other current assets and accrued expenses, respectively, on the Unaudited Consolidated Balance Sheet.

The Company, in general, warrants its products against certain defects in material and workmanship when used as designed, for a period of up to 1 year. The Company does not sell extended warranties.

Contract Balances

Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date on contracts with customers. Contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been met, and therefore, revenue has not been recognized. The Company had no contract asset balances, but had contract liability balances of $0.4 million at September 30, 2019 recorded in Accounts Payable on the Consolidated Balance Sheets.

Disaggregation of Revenue

The Company operates in two reportable segments: North America and International. ASC Topic 606 requires further disaggregation of an entity’s revenue. In the following table, the Company's net sales by shipping origin are disaggregated accordingly for the three months ended September 30, 2019 and 2018:

	Three Months Ended
	09/30/19		09/30/18
North America
United States	$	28,624	$	27,947
Canada & Mexico		2,385		2,253
		31,009		30,200
International
Brazil		12,822		12,367
United Kingdom		5,231		6,017
China		1,514		1,708
Australia & New Zealand		1,538		1,609
		21,105		21,701
Total Sales	$	52,114	$	51,901

Note 4: Recent Accounting Pronouncements

The Company adopted, prospectively, Accounting Standards Codification 842, Leases ("ASC 842") July 1, 2019.  As a result, the Company updated its significant accounting policies for leases below. Refer to Note 5 Commitments and Contingencies for additional information related to the Company's lease arrangements and the impact of the adoption of ASC 842 on the Company's Consolidated Financial Statements.

The Company has leased buildings, manufacturing equipment and autos that are classified as operating lease right-of use "ROU" assets and operating lease liabilities in the Company's Consolidated Balance Sheet. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component of the agreement.

The Company estimates its incremental borrowing rate for its leases using a portfolio approach based on the respective weighted average term of the agreements. The estimation considers the market rates of the Company's outstanding borrowings and rates of external outstanding borrowings including market comparisons. Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales, general and administrative expenses.

10

The standard was effective for Starrett beginning this fiscal year. The Company has elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. The Company also elected the package of practical expedients permitted within the new standard, which among other things, allows the Company to carry forward historical lease classification. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the ROU assets or operating lease liabilities. These are expensed as incurred and recorded as variable lease expense. The Company determines if an arrangement is a lease at the inception of a contract. Operating lease ROU assets and operating lease liabilities are stated separately in the Consolidated Balance Sheet.

In preparation for adoption of the standard, the Company has implemented internal controls such as updated accounting policies and expanded data gathering procedures to comply with the additional disclosure requirements. The adoption had a material impact on our Consolidated Balance Sheets, but did not have a material impact on our Consolidated Statements of Operations. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.

Adoption of this standard resulted in the recognition of additional ROU assets and lease liabilities for operating leases and had the following impact to the reported results as of June 30, 2019 on our Consolidated Financial Statements:

Dollars in Thousands Consolidated Balance Sheet	As Reported June 30, 2019		New Lease Standard Adjustment		Adjusted July 1, 2019
Right-of-Use Asset		-	$	6,149	$	6,149
Current portion of operating lease obligations		-	$	1,798	$	1,798
Operating long term lease obligations		-	$	4,351	$	4,351

The Company adopted ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715) in FY19: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (NPBC). This update requires that an employer disaggregate the service cost component from the other components of NPBC. In addition, only the service cost component will be eligible for capitalization. The Company amended the U.S. defined benefit pension plan to freeze benefit accurals effective December 31, 2016.  Consequently, the Plan is closed to new participants and current participants no longer earn additional benefits. The amendments in this update are required to be applied retrospectively for the presentation of the service cost component and the other components of NPBC in the Consolidated Statement of Operations and prospectively. The Consolidated Statement of Operations and related disclosure are recorded accordingly.

The retrospective reclassification to FY 2019 by quarter follows (in thousands):

	Increase (Decrease) to Net Income
	Q1 FY19			Q2 FY19			Q3 FY19			Q4 FY19			FY2019
Cost of goods sold	$	127		$	127		$	127		$	329		$	710
Selling, general and administrative		41			41			41			97			220
Other income (expense) net		(168	)		(168	)		(168	)		(426	)		(930	)
	$	-		$	-		$	-		$	-		$	-

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. For deferred tax items recognized in Accumulated Other Comprehensive Income (AOCI), changes in tax rates can leave amounts “stranded” in AOCI. Under ASU 2018-02, FASB has given companies an option to reclassify the stranded tax effects resulting from the tax law and tax rate changes under the Tax Cuts and Jobs Act of 2017 from AOCI to retained earnings. The Company declined the reclassification option upon adopting this standard July 1, 2019. The new standard did not have a material impact on the Company’s financial position and results of operations upon adoption.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and subsequent amendment to the guidance, ASU 2018-19 in November 2018. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. The amendment will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2018-19 clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." Under the new guidance, if a reporting unit's carrying value amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the requirement to calculate goodwill impairment using Step 2, which calculates an impairment charge by comparing the implied fair value of goodwill with its carrying amount. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2019 and should be applied prospectively for annual and any interim goodwill impairment tests. Early adoption is permitted for entities for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the update on our consolidated financial statements.

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In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement ('Topic 820'): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The ASU modifies the disclosure requirements in Topic 820, Fair Value Measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The Company is currently evaluating the effect, if any, that ASU 2018-13 will have on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." ASU 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and added additional disclosures. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2020. The amendments in ASU 2018-14 must be applied on a retrospective basis. The Company is currently assessing the effect, if any, that ASU 2018-14 will have on its consolidated financial statements.

Note 5: Commitments and Contingencies

Operating lease cost amounted to $0.6 million for  the three months ended September 30, 2019. As of September 30, 2019, the Company’s right-of-use assets, lease obligations and remaining cash commitment on these leases, in thousands, are as follows:

	Right-of-use Assets		Operating Lease Obligations		Remaining Cash Commitment
Operating leases	$	5,779	$	5,825	$	6,984

The Company has other operating lease agreements with commitments of less than one year or that are not significant. The Company elected the practical expedient option and as such, these lease payments are expensed as incurred. The Company’s weighted average discount rate and remaining term on lease liabilities is approximately 9.0% and 4.5 years. As of September 30, 2019, the Company’s financing leases are di minimis.

Supplemental cash flows information related to leases for the three months ended September 30, 2019 was $6.1 million. The Company entered into one equipment operating lease commitment in the three months ended September 30, 2019. At September 30, 2019, the Company had the following fiscal year minimum operating lease commitments:

Three months ending September 30, 2019	Operating Lease Commitments
2020 remaining	$	1,743
2021		2,151
2022		845
2023		718
2024		702
Thereafter		825
Subtotal	$	6,984
Imputed interest		(1,159	)
Total		5,825

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The aggregate lease payments for operating leases as of June 30, 2019 were as follows (in thousands):

Fiscal Year
2020	$	2,434
2021		2,328
2022		943
2023		762
2024		502
Thereafter		1,092
	$	8,061

Note 6:  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 on October 17, 2012, and the material terms of its performance goals were re-approved by shareholders at the Company’s Annual Meeting held on October 18, 2017. 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, 2019, there were 20,000 stock options and 212,507 restricted stock units outstanding. In addition, there were 169,533 shares available for grant under the 2012 Stock Plan as of September 30, 2019.

For stock option grants, the fair value of each grant is 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 (Simplified Method). 

No stock options were granted during the three months ended September 30, 2019 and 2018.

The weighted average contractual term for stock options outstanding as of September 30, 2019 was 3.25 years.  The aggregate intrinsic value of stock options outstanding as of September 30, 2019 was less than $0.1 million.  Stock options exercisable as of September 30, 2019 were 20,000.  In recognizing stock compensation expense for the 2012 Stock Incentive Plan, management has estimated that there will be no forfeitures of options.

The Company accounts for stock options and RSU awards by recognizing the expense of the grant date 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 60,500 RSU awards with a fair value of $5.52 per RSU granted during the three months ended September 30, 2019. There were 44,995 RSUs settled, and no RSUs forfeited during the three months ended September 30, 2019.  The aggregate intrinsic value of RSU awards outstanding as of September 30, 2019 was $1.2 million. As of September 30, 2019, all vested awards had been issued and settled.

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 are eligible to participate.

Compensation expense related to all stock based plans for the three month periods ended September 30, 2019 and 2018 was $0.1 million, and $0.1 million respectively.  As of September 30, 2019, there was $1.9 million of total unrecognized compensation costs related to outstanding stock-based compensation arrangements. Of this cost, $1.4 million relates to performance based RSU grants that are not expected to be awarded. The remaining $0.5 million is expected to be recognized over a weighted average period of 2.1 years.

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Note 7:   Inventories

Inventories consist of the following (in thousands):	09/30/2019			6/30/2019
Raw material and supplies	$	27,718		$	26,106
Goods in process and finished parts		16,374			17,464
Finished goods		43,760			41,500
		87,852			85,070
LIFO Reserve		(23,327	)		(23,280	)
	$	64,525		$	61,790

LIFO inventories were $11.9 million and $9.8 million at September 30, 2019 and June 30, 2019, respectively, such amounts being approximately $23.3 million and $23.3 million, respectively, less than if determined on a FIFO basis.  The use of LIFO, as compared to FIFO, resulted in a de minimis change in cost of sales for the three months ended September 30, 2019 compared to a $0.3 million decrease for the three months ended September 30, 2018.

Note 8:   Goodwill and Intangible Assets

The Company’s acquisition of Bytewise in 2011 and a private software company in 2017 resulted in the recognition of goodwill totaling $4.7 million. The Company is required, on a set date, to annually assess its goodwill in order to determine whether or not it is more likely than not that the fair value of the reporting unit’s goodwill exceeded its carrying amount. Determining the fair value of a reporting unit is subjective and requires the use of significant estimates and assumptions.

The Company performed a qualitative analysis of its Bytewise reporting unit for its October 1, 2018 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 a reporting unit exceeds its carrying amount, relevant events and circumstances are taken into account, with greater weight assigned to events and circumstances that most affect the fair value 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 and changes in management or key personnel. 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 exceeded its carrying amount as of October 1, 2018. If future results significantly vary from current estimates and related projections due to changes in industry or market conditions, the Company may be required to record impairment charges.

Determining the fair value of a reporting unit is subjective and requires the use of the significant estimates and assumptions. The Company estimates the fair value using an income approach based on the present value of future cash flows. The Company believes this approach yields the most appropriate evidence of fair value. The key assumptions utilized in the discounted cash flow model includes estimates of future cash flows from operating activities offset by estimated capital expenditures of the reporting unit, the estimated terminal value for the reporting unit, a discount rate based on a weighted average cost of capital and overall economic conditions. Any unfavorable material changes to these key assumptions could potentially impact the Company’s fair value determinations.

The Company performed a quantitative analysis for its February 1, 2019 annual assessment of goodwill (commonly referred to as “Step One” evaluation) associated with its fiscal 2017 purchase of a private software company. The Company estimated the fair value using an income approach based on the present value of future cash flows. The Company believes this approach yields the most appropriate evidence of fair value. Under the quantitative analysis, the 2019 fair value assessment of the software development company’s goodwill exceeded the carrying amount. Therefore, no goodwill impairment was determined to exist. If future results significantly vary from current estimates, related projections, or business assumptions in the future due to changes in industry or market conditions, the Company may be required to record impairment charges.

Amortizable intangible assets consist of the following (in thousands):

	09/30/2019			6/30/2019
Non-compete agreement	$	600		$	600
Trademarks and trade names		2,070			2,070
Completed technology		2,358			2,358
Customer relationships		5,580			5,580
Software development		9,351			8,952
Other intangible assets		325			325
Total		20,284			19,885
Accumulated amortization		(11,979	)		(11,425	)
Total net balance	$	8,305		$	8,460

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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 range between 5 years for software development and 20 years for some trademark and trade name assets.

The estimated aggregate amortization expense for the remainder of fiscal 2020 and thereafter, is as follows (in thousands):

2020, remaining		1,486
2021		1,724
2022		1,492
2023		1,151
2024		858
2025		514
Thereafter		1,080
	$	8,305

Note 9:  Pension and Post-retirement Benefits

The Company has two defined benefit pension plans, one for U.S. employees and another for U.K. employees.  The Company has a postretirement medical and life insurance benefit plan for U.S. employees. The Company also has defined contribution plans.

The U.K. defined benefit plan was closed to new entrants in fiscal 2009.

On December 21, 2016, the Company amended the U.S. defined benefit pension plan to freeze benefit accruals effective December 31, 2016. Consequently, the Plan is closed to new participants and current participants will no longer earn additional benefits after December 31, 2016.

Net periodic benefit costs for all of the Company's defined benefit pension plans are recorded in Other income (expense) in the Consolidated Statements of Operations and consist of the following (in thousands):

	Three Months Ended
	09/30/2019			09/30/2018
Service cost	$	-		$	-
Interest cost		1,349			1,506
Expected return on plan assets		(1,294	)		(1,284	)
Amortization of net loss		10			7
	$	65		$	229

Net periodic benefit costs for the Company's Postretirement Medical Plan are recorded in Other income (expense) except the Service cost component recoded in operations in the Consolidated Statements of Operations and consists of the following (in thousands):

	Three Months Ended
	09/30/2019			09/30/2018
Service cost	$	18		$	18
Interest cost		60			66
Amortization of prior service credit		(134	)		(134	)
Amortization of net loss		21			7
	$	(35	)	$	(43	)

For the three month period ended September 30, 2019, the Company contributed $1.0 million to the U.S. and $0.2 million to the UK pension plans. The Company estimates that it will contribute an additional $6.5 million for the remainder of fiscal 2020.

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. Net actuarial gains or losses that are less than 10% of the thresholds noted above are accounted for as part of accumulated other comprehensive loss.

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Note 10:   Debt

Debt is comprised of the following (in thousands):

	09/30/2019		6/30/2019
Short-term and current maturities
Loan and Security Agreement	$	1,785	$	1,765
Other loans		2,194		2,300
		3,979		4,065
Long-term debt
Loan and Security Agreement, net of current portion		19,088		17,541
	$	23,067	$	21,606

The Company amended its Loan and Security Agreement, which includes a Line of Credit and a Term Loan (“Credit Facility”), in January 2018.  Borrowings under the Line of Credit may not exceed $23.0 million.  The Line of Credit has an interest rate of LIBOR plus 1.5%, and expires on April 30, 2021.  The effective interest rate on the Line of Credit under the Loan and Security Agreement for the three months ended September 30, 2019 and 2018 was 3.9% and 3.8%, respectively. As of September 30, 2019, $16.9 million was outstanding on the Line of Credit.

Availability under the Line of Credit is subject to a borrowing base comprised of accounts receivable and inventory. The Company believes that the borrowing base will consistently produce availability under the Line of Credit of $23.0 million. A 0.25% commitment fee is charged on the unused portion of the Line of Credit.

The obligations under the Credit Facility are unsecured. In the event of certain triggering events, such obligations would become secured by the assets of the Company’s domestic subsidiaries. A triggering event occurs when the Company fails to achieve any of the financial covenants noted below in consecutive quarters.

The financial covenants of the amended Loan and Security Agreement are: 1) funded debt to EBITDA, excluding non-cash and retirement benefit expenses (“maximum leverage”), not to exceed 2.25 to 1.00, 2) annual capital expenditures not to exceed $15.0 million, 3) maintain a Debt Service Coverage Rate of a minimum of 1.25 to 1.00, and 4) maintain consolidated cash plus liquid investments of not less than $10.0 million at any time.  As of September 30, 2019, the Company was in compliance with all the financial debt covenants related to its Loan and Security Agreement.

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 then existing Loan and Security Agreement.  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 had a balance of $4.0 million at September 30, 2019.

In December 2017, the Company’s Brazilian subsidiary entered into two short-term loans with local banks in order to support the Company’s strategic initiatives. The loans backed by the entity’s US dollar denominated export receivables were made with Santander Bank and Bradesco Bank. In February 2019, the Company’s Brazilian subsidiary, again, began refinancing debt among Santander, Bradesco and Brazil Bank as follows (in thousands) as of 9/30/2019:

Lending Institution	Interest Rate		Beginning Date	Ending Date	Outstanding Balance
Santander		5.30%	February 2019	February 2020	$	432
Bradesco		4.27%	March 2019	March 2020		262
Bradesco		4.00%	April 2019	April 2020		1,000
Brazil Bank		3.11%	September 2019	September 2020		500
					$	2,194

Note 11:   Income Taxes

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.

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On December 22, 2017, the Tax Cuts and Jobs Act was enacted in the United States. The Act reduces the U.S. federal corporate tax rate from a graduated rate of 35% to a flat rate of 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Other impacts of tax reform that became effective for the Company beginning in fiscal 2019 include the provisions related to Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Base Erosion Anti Abuse Tax (“BEAT”), and limitation on tax deductibility of interest expenses.

The GILTI provisions are expected to have the most significant impact to the Company. Under the new law, U.S. taxes are imposed on foreign income in excess of a deemed return on tangible assets of its foreign subsidiaries. In general, this foreign income will effectively be taxed at an additional 10.5% tax rate reduced by any available current year foreign tax credits. The ability to benefit foreign tax credits may be limited under the GILTI rules as a result of the utilization of net operating losses, foreign sourced income and other potential limitations within the foreign tax credit calculation.

The tax expense for the first quarter of fiscal 2020 was $0.5 million on a profit before tax of $1.3 million (an effective tax rate of 39%). The tax expense for the first quarter of fiscal 2019 was $0.4 million on profit before tax of $0.9 million (an effective tax rate of 38%). The tax rate for both fiscal 2020 and fiscal 2019 was higher than the U.S. statutory tax rate of 21% primarily due to the Global Intangible Low Taxed Income (“GILTI”) provisions, which became effective in fiscal 2019, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%. The first quarter of fiscal 2020 also includes a discrete tax expense of $0.1 million relating to adjustments to the fourth quarter of fiscal 2019 balances.

U.S. Federal tax returns for years prior to fiscal 2016 are generally no longer subject to review by tax authorities; however, tax loss carryforwards from earlier years are still subject to adjustment. As of September 30, 2019, the Company has substantially resolved all open income tax audits and there were no other local or federal income tax audits in progress. In international jurisdictions including Australia, Brazil, Canada, China, Germany, 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 calendar years 2013 – present. During the next twelve months, it is possible there will be a reduction of $0.1 million in long-term tax obligations due to the expiration of the statute of limitations on prior year tax returns.

Accounting for income taxes requires estimates of future benefits and tax liabilities. Due to the temporary differences in the timing of recognition of items included in income for accounting and tax purposes, deferred tax assets or liabilities are recorded to reflect the impact arising from these differences on future tax payments. With respect to recorded tax assets, the Company assesses the likelihood that the asset will be realized by addressing the positive and negative evidence to determine whether realization is more likely than not to occur. If realization is in doubt because of uncertainty regarding future profitability, the Company provides a valuation allowance related to the asset to the extent that it is more likely than not that the deferred tax asset will not be realized. Should any significant changes in the tax law or the estimate of the necessary valuation allowance occur, the Company would record the impact of the change, which could have a material effect on the Company’s financial position.

No valuation allowance has been recorded for the Company’s U.S. federal and foreign deferred tax assets related to temporary differences in items included in taxable income. 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 tax benefit provided by those differences. In the U.S., a partial valuation allowance has been provided for foreign tax credit carryforwards due to the uncertainty of generating sufficient foreign source income to utilize those credits in the future and certain state net operating loss carryforwards that will expire in the near future unutilized.

Note 12:  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.

Note 13:  Facility Closure

The Company decided in January 2018 to significantly reduce the operations in its facility in Mt. Airy, North Carolina, and move most operations to a smaller building. The Company is also considering selling the facility with a lease back provision to accommodate remaining operations. While there are no definitive plans set yet, the Company believes that the sale could happen within the current fiscal year, yet based on past experience, the immediate sale is not probable. The Company incurred a $4.1 million impairment charge in fiscal 2016, when the majority of the plant’s operations were relocated to the Company’s Brazilian production facility. As of September 30, 2019, the carrying value of the building is $2.1 million, and based on comparable sales data sourced from the Company’s real estate agent, the Company believes that the current fair value of the building exceeds its carrying value.

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ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Three months Ended September 30, 2019 and September 30, 2018

Overview

The Company generally experiences a slow first quarter on a fiscal year basis and fiscal 2020 was no exception. Geo-political concerns significantly dampened manufacturing activity and the corresponding reaction in the Company’s distribution channels to reduced inventory levels negatively impacted incoming orders. Despite flat sales, gross margins improved $1.0 million to 34% of sales in fiscal 2020 compared to 32.1% in fiscal 2019. The key drivers for the better performance were the Company’s North American based metrology businesses.

Net sales increased $0.2 million. Operating income increased $0.5 million as higher gross margins more than offset increased Selling, General and Administrative expenses. Net income increased $0.2 million from a net income of $0.6 million or $0.08 per share in fiscal 2019 to net income of $0.8 million or $0.11 per share in fiscal 2020.

Net Sales

North American sales increased $0.8 million or 3% from $30.2 million in fiscal 2019 to $31.0 million in fiscal 2020 as a $1.1 million or 14% increase in high-end metrology products negated a modest $0.3 million decline in saw products. International sales declined $0.6 million or 3% from $21.7 million in fiscal 2019 to $21.1 million in fiscal 2020 due to a softening of the European economy and a weakening of the British Pound against the U. S. dollar.

Gross Margin

Gross margins in fiscal 2020 increased $1.0 million to 34% of sales compared to 32.1% in fiscal 2019. North American gross margins increased $1.5 million in fiscal 2020 due to higher sales of higher margin capital equipment and improved margins in core products. International gross margins decreased $0.5 million as compared to fiscal principally due to higher saw and hand tool material costs in Brazil.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $0.5 million or 3%. North American expenses were level as a $0.4 million decline in divisional expenses was offset set by a $0.4 million increase in Corporate expenses related to professional fees. International expenses increased $0.5 million primarily due to higher selling expenses in Brazil.

Other Income (expense)

Other expense increased $0.2 million due to higher interest expense and currency translation losses.

Income Tax Expense

The tax expense for the first quarter of fiscal 2020 was $0.5 million on a profit before tax of $1.3 million (an effective tax rate of 39%). The tax expense for the first quarter of fiscal 2019 was $0.4 million on profit before tax of $0.9 million (an effective tax rate of 38%). The tax rate for both fiscal 2020 and fiscal 2019 was higher than the U.S. statutory tax rate of 21% primarily due to the Global Intangible Low Taxed Income (“GILTI”) provisions, which became effective in fiscal 2019, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%. The first quarter of fiscal 2020 also includes a discrete tax expense of $0.1 million relating to adjustments to the fourth quarter of fiscal 2019 balances.

Net earnings (loss)

The Company recorded net earnings of $0.8 million or $0.11 per share in the first quarter of fiscal 2020 compared to net income of $0.6 million or $0.08 per share in fiscal 2019.

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LIQUIDITY AND CAPITAL RESOURCES

Cash flows (in thousands)	Three Months Ended
	09/30/2019			09/30/2018
Cash provided by (used in) operating activities	$	(3,484	)	$	905
Cash provided by (used in) investing activities		(3,024	)		(1,083	)
Cash provided by (used in) financing activities		1,451			(609	)
Effect of exchange rate changes on cash		(15	)		(24	)
Net increase (decrease) in cash	$	(5,072	)	$	(811	)

Net cash decreased $5.1 million as decreases in working capital and capital investment more than offset a net increase in debt of $1.5 million.

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, $16.9 million was outstanding as of September 30, 2019. Availability under the agreement is further reduced by open letters of credit totaling $0.9 million. 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, 2019, the Company was in compliance with all debt covenants related to its loan and Security Agreement. The Loan and Security Agreement expires on April 30, 2021.

The effective interest rate on the short term borrowings under the Loan and Security Agreement during the three months ended September 30, 2019 was 3.9%.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any material off-balance sheet arrangements as defined under the Securities and Exchange Commission rules.

ITEM 3.             QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There have been no material changes in quantitative and qualitative 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, 2019.

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, 2019, 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 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, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

In preparation for adoption of ASC 842 Leases, the Company has implemented internal controls such as updated accounting policies and expanded data gathering procedures to comply with the additional disclosure requirements. There were no other changes during the fiscal quarter ended September 30, 2019 in our internal control over financial reporting, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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, 2019. There have been no material changes from the factors disclosed in our Form 10-K for the year ended June 30, 2019.

20

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, 2019 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 Statement of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text.

21

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	October 31, 2019	/S/R. Douglas A. Starrett
		Douglas A. Starrett - President and CEO (Principal Executive Officer)
Date	October 31, 2019	/S/R. Francis J. O’Brien
		Francis J. O’Brien - Treasurer and CFO (Principal Accounting Officer)

22

EX-31.A

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: October 31, 2019	/S/	Douglas A. Starrett
		Douglas A. Starrett Chief Executive Officer

EX-31.B

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: October 31, 2019	/S/	Francis J. O’Brien
		Francis J. O’Brien Chief Financial Officer

EX-32

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, 2019 (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	October 31, 2019	/S/ Douglas A. Starrett
		Douglas A. Starrett Chief Executive Officer
Date	October 31, 2019	/S/ Francis J. O’Brien
		Francis J. O’Brien Chief Financial Officer

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.

XML

Note 13 - Facility Closure

3 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Restructuring and Related Activities Disclosure [Text Block]

Note

1

3

:  Facility Closure

The Company decided in

January 2018

to significantly reduce the operations in its facility in Mt. Airy, North Carolina, and move most operations to a smaller building. The Company is also considering selling the facility with a lease back provision to accommodate remaining operations. While there are

no

definitive plans set yet, the Company believes that the sale could happen within the current fiscal year, yet based on past experience, the immediate sale is

not

probable. The Company incurred a

$4.1

million impairment charge in fiscal

2016,

when the majority of the plant’s operations were relocated to the Company’s Brazilian production facility. As of

September 30, 2019,

the carrying value of the building is

$2.1

million, and based on comparable sales data sourced from the Company’s real estate agent, the Company believes that the current fair value of the building exceeds its carrying value.

XML

Note 4 - Recent Accounting Pronouncements (Tables)

3 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of New Accounting Pronouncements and Changes in Accounting Principles [Table Text Block]

Dollars in Thousands Consolidated Balance Sheet	As Reported June 30, 2019		New Lease Standard Adjustment		Adjusted July 1, 2019
Right-of-Use Asset		-	$	6,149	$	6,149
Current portion of operating lease obligations		-	$	1,798	$	1,798
Operating long term lease obligations		-	$	4,351	$	4,351

	Increase (Decrease) to Net Income
	Q1 FY19			Q2 FY19			Q3 FY19			Q4 FY19			FY2019
Cost of goods sold	$	127		$	127		$	127		$	329		$	710
Selling, general and administrative		41			41			41			97			220
Other income (expense) net		(168	)		(168	)		(168	)		(426	)		(930	)
	$	-		$	-		$	-		$	-		$	-

XML

Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Cash flows from operating activities:
Net income	$ 778	$ 584
Non-cash operating activities:
Depreciation	1,212	1,260
Amortization	575	577
Stock-based compensation	214	107
Net long-term tax obligations	26	44
Deferred taxes	141	75
Postretirement benefit and pension obligations	30	161
Working capital changes:
Accounts receivable	3,087	1,604
Inventories	(5,091)	(1,078)
Other current assets	(428)	(696)
Other current liabilities	(2,796)	(770)
Prepaid pension expense	(1,281)	(1,197)
Other	49	234
Net cash provided by (used in) operating activities	(3,484)	905
Cash flows from investing activities:
Purchases of property, plant and equipment	(2,625)	(721)
Software development	(399)	(362)
Net cash provided by (used in) investing activities	(3,024)	(1,083)
Cash flows from financing activities:
Proceeds from borrowing	2,500
Debt repayments	(1,039)	(608)
Proceeds from common stock issued		12
Shares repurchased	(10)	(13)
Net cash provided by (used in) financing activities	1,451	(609)
Effect of exchange rate changes on cash	(15)	(24)
Net increase (decrease) in cash	(5,072)	(811)
Cash, beginning of period	15,582	14,827
Cash, end of period	10,510	14,016
Supplemental cash flow information:
Interest paid	269	185
Income taxes paid, net	594	775
Supplemental disclosure of non-cash activities:
Recognition of right-of-use assets	6,149
Recognition of operating lease liability	$ 6,149

XML

Consolidated Balance Sheets (Current period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Sep. 30, 2019	Jun. 30, 2019
Allowance for doubtful accounts	$ 633	$ 685
Common Class A [Member]
Common stock, par value (in dollars per share)	$ 1	$ 1
Common stock, authorized (in shares)	20,000,000	20,000,000
Common stock, outstanding (in shares)	6,269,669	6,206,525
Common Class B [Member]
Common stock, par value (in dollars per share)	$ 1	$ 1
Common stock, authorized (in shares)	10,000,000	10,000,000
Common stock, outstanding (in shares)	681,971	689,577

XML

Note 9 - Pension and Post-retirement Benefits (Tables)

3 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of Net Benefit Costs [Table Text Block]

	Three Months Ended
	0 9 /3 0 /2019			0 9 /3 0 /2018
Service cost	$	-		$	-
Interest cost		1,349			1,506
Expected return on plan assets		(1,294	)		(1,284	)
Amortization of net loss		10			7
	$	65		$	229

	Three Months Ended
	0 9 /3 0 /2019			0 9 /3 0 /2018
Service cost	$	18		$	18
Interest cost		60			66
Amortization of prior service credit		(134	)		(134	)
Amortization of net loss		21			7
	$	(35	)	$	(43	)

XML

Note 10 - Debt - Short-term Debt (Details) - Notes Payable to Banks [Member] - USD ($) $ in Thousands	Sep. 01, 2020	Apr. 01, 2020	Mar. 01, 2020	Feb. 01, 2020	Sep. 30, 2019
Santander					$ 2,194
Five Point Three Percent Short Term Loan [Member] | Santander Bank [Member]
Santander				5.30%
Santander					432
Four Point Two Seven Percent Short Term Loan [Member] | Bradesco Bank [Member]
Santander			4.27%
Santander					262
Four Point Zero Percent Short Term Loan [Member] | Bradesco Bank [Member]
Santander		4.00%
Santander					1,000
Three Point One One Percent Short Term Loan Member | Brazil Bank Member
Santander	3.11%
Santander					$ 500

XML

Note 9 - Pension and Post-retirement Benefits (Details Textual) $ in Millions	3 Months Ended
	Sep. 30, 2019 USD ($)
Defined Benefit Plan, Expected Future Employer Contributions, Remainder of Fiscal Year	$ 6.5
Pension Plan [Member] | UNITED STATES
Defined Benefit Plan, Expected Future Employer Contributions, Next Fiscal Year	1.0
Pension Plan [Member] | Foreign Plan [Member]
Defined Benefit Plan, Plan Assets, Contributions by Employer	$ 0.2

XML

Note 7 - Inventories - Components of Inventories (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jun. 30, 2019
Raw material and supplies	$ 27,718	$ 26,106
Goods in process and finished parts	16,374	17,464
Finished goods	43,760	41,500
Total, before LIFO Reserve	87,852	85,070
LIFO Reserve	(23,327)	(23,280)
Total	$ 64,525	$ 61,790

XML

Note 11 - Income Taxes (Details Textual) - USD ($) $ in Thousands	3 Months Ended			12 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Sep. 30, 2018	Jun. 30, 2019
Additional Tax Rate On Foreign Income	10.50%
Income Tax Expense (Benefit), Total	$ 498		$ 358
Income (Loss) from Continuing Operations before Income Taxes, Noncontrolling Interest, Total	$ 1,276		$ 942
Effective Income Tax Rate Reconciliation, Percent, Total	39.00%		38.00%
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent	21.00%			21.00%
Tax Adjustments, Settlements, and Unusual Provisions		$ 100
Deferred Tax Assets, Valuation Allowance, Total	$ 0
Foreign Tax Authority [Member] | Secretariat of the Federal Revenue Bureau of Brazil [Member]
Effective Income Tax Rate Reconciliation, Foreign Income Tax Rate Differential, Percent				34.00%
Unrecognized Tax Benefits, Ending Balance	$ 100

XML

Note 5 - Commitments and Contingencies

3 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Lessee, Operating Leases [Text Block]

Note

5:

Commitments and Contingencies

Operating lease cost amounted to

$0.6

million for  the

three

months ended

September 30, 2019.

As of

September 30, 2019,

the Company’s right-of-use assets, lease obligations and remaining cash commitment on these leases, in thousands, are as follows:

	Right-of-use Assets		Operating Lease Obligations		Remaining Cash Commitment
Operating leases	$	5,779	$	5,825	$	6,984

The Company has other operating lease agreements with commitments of less than

one

year or that are

not

significant. The Company elected the practical expedient option and as such, these lease payments are expensed as incurred. The Company’s weighted average discount rate and remaining term on lease liabilities is approximately

9.0%

and

4.5

years. As of

September 30, 2019,

the Company’s financing leases are di minimis.

Supplemental cash flows information related to leases for the

three

months ended

September 30, 2019

was

$6.1

million. The Company entered into

one

equipment operating lease commitment in the

three

months ended

September 30, 2019.

At

September 30, 2019,

the Company had the following fiscal year minimum operating lease commitments:

Three months ending September 30, 2019	Operating Lease Commitments
2020 remaining	$	1,743
2021		2,151
2022		845
2023		718
2024		702
Thereafter		825
Subtotal	$	6,984
Imputed interest		(1,159	)
Total		5,825

The aggregate lease payments for operating leases as of

June 30, 2019

were as follows (in thousands):

Fiscal Year
2020	$	2,434
2021		2,328
2022		943
2023		762
2024		502
Thereafter		1,092
	$	8,061

XML

Note 9 - Pension and Post-retirement Benefits

3 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Pension and Other Postretirement Benefits Disclosure [Text Block]

Note

9

:  Pension and Post-retirement Benefits

The Company has

two

defined benefit pension plans,

one

for U.S. employees and another for U.K. employees.  The Company has a postretirement medical and life insurance benefit plan for U.S. employees. The Company also has defined contribution plans.

The U.K. defined benefit plan was closed to new entrants in fiscal

2009.

On

December 21, 2016,

the Company amended the U.S. defined benefit pension plan to freeze benefit accruals effective

December 31, 2016.

Consequently, the Plan is closed to new participants and current participants will

no

longer earn additional benefits after

December 31, 2016.

Net periodic benefit costs for all of the Company's defined benefit pension plans are recorded in Other income (expense) in the Consolidated Statements of Operations and consist of the following (in thousands):

	Three Months Ended
	0 9 /3 0 /2019			0 9 /3 0 /2018
Service cost	$	-		$	-
Interest cost		1,349			1,506
Expected return on plan assets		(1,294	)		(1,284	)
Amortization of net loss		10			7
	$	65		$	229

Net periodic benefit costs for the Company's Postretirement Medical Plan are recorded in Other income (expense) except the Service cost component recoded in operations in the Consolidated Statements of Operations and consists of the following (in thousands):

	Three Months Ended
	0 9 /3 0 /2019			0 9 /3 0 /2018
Service cost	$	18		$	18
Interest cost		60			66
Amortization of prior service credit		(134	)		(134	)
Amortization of net loss		21			7
	$	(35	)	$	(43	)

For the

three

month period ended

September 30, 2019,

the Company contributed

$1.0

million to the U.S. and

$0.2

million to the UK pension plans. The Company estimates that it will contribute an additional

$6.5

million for the remainder of fiscal

2020.

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. Net actuarial gains or losses that are less than

10%

of the thresholds noted above are accounted for as part of accumulated other comprehensive loss.

XML

Note 6 - Stock-based Compensation (Details Textual) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 05, 2012
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized			500,000
The 2012 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant	169,533
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term	3 years 91 days
Share-based Payment Arrangement, Expense	$ 0.1	$ 0.1
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total	$ 0.5
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition	2 years 36 days
The 2012 Stock Incentive Plan [Member] | Portion Relating to RSU Grants Not Expected to be Awarded [Member]
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total	$ 1.4
Share-based Payment Arrangement, Option [Member] | The 2012 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period	10 years
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance	20,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Intrinsic Value	$ 0.1
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercisable, Number	20,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures in Period	0
Restricted Stock Units (RSUs) [Member] | The 2012 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Outstanding, Number, Ending Balance	212,507
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross		0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Intrinsic Value	$ 1.2
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period	60,500
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period, Weighted Average Grant Date Fair Value	$ 5.52
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period	44,995
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Forfeited in Period	0
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total	$ 1.9
Minimum [Member] | Share-based Payment Arrangement, Option [Member] | The 2012 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	1 year
Minimum [Member] | Restricted Stock Units (RSUs) [Member] | The 2012 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	1 year
Maximum [Member] | Share-based Payment Arrangement, Option [Member] | The 2012 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	3 years
Maximum [Member] | Restricted Stock Units (RSUs) [Member] | The 2012 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	3 years

XML

Note 5 - Commitments and Contingencies (Details Textual) $ in Millions	3 Months Ended
	Sep. 30, 2019 USD ($)
Operating Lease, Cost	$ 0.6
Operating Lease, Weighted Average Discount Rate, Percent	9.00%
Operating Lease, Weighted Average Remaining Lease Term	4 years 182 days
Operating Lease, Payments	$ 6.1
Number of Equipment Operating Leases	1

XML

Note 2 - Segment Information - Summary of Financial Results for Reportable Segments (Details) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2019		Sep. 30, 2018
Sales	$ 52,114	[1]	$ 51,901	[2]
Operating Income (Loss)	1,445		936	[3]
North American Segment [Member]
Sales	31,009	[1]	30,200	[2]
Operating Income (Loss)	2,206		373	[3]
International [Member]
Sales	21,105	[1]	21,701	[2]
Operating Income (Loss)	1,163		2,119	[3]
Unallocated [Member]
Sales		[1]		[2]
Operating Income (Loss)	$ (1,924)		$ (1,556)	[3]

[1] Excludes $968 of North American segment intercompany sales to the International segment, and $4,242 of International segment intercompany sales to the North American segment.

[2] Excludes $1,134 of North American segment intercompany sales to the International segment, and $3,320 of International segment intercompany sales to the North American segment.

[3] As a result of the adoption of ASU 2017-07 "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost", the respective line items in the Consolidated Statement of Earnings for Fiscal 2019 have been reclassified.

XML

Note 13 - Facility Closure (Details Textual) - USD ($) $ in Thousands	12 Months Ended
	Jun. 30, 2016	Sep. 30, 2019	Jun. 30, 2019
Property, Plant and Equipment, Net, Ending Balance		$ 37,078	$ 36,679
Vacated Facility at Mt. Airy, North Carolina [Member]
Impairment of Long-Lived Assets to be Disposed of	$ 4,100
Property, Plant and Equipment, Net, Ending Balance		$ 2,100

XML

Note 6 - Stock-based Compensation

3 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

Note

6

:  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 on

October 17, 2012,

and the material terms of its performance goals were re-approved by shareholders at the Company’s Annual Meeting held on

October 18, 2017.

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, 2019,

there were

20,000

stock options and

212,507

restricted stock units outstanding. In addition, there were

169,533

shares available for grant under the

2012

Stock Plan as of

September 30, 2019.

For stock option grants, the fair value of each grant is 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 (Simplified Method). 

No

stock options were granted during the

three

months ended

September 30, 2019

and

2018.

The weighted average contractual term for stock options outstanding as of

September 30, 2019

was

3.25

years.  The aggregate intrinsic value of stock options outstanding as of

September 30, 2019

was less than

$0.1

million.  Stock options exercisable as of

September 30, 2019

were

20,000.

 In recognizing stock compensation expense for the

2012

Stock Incentive Plan, management has estimated that there will be

no

forfeitures of options.

The Company accounts for stock options and RSU awards by recognizing the expense of the grant date 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

60,500

RSU awards with a fair value of

$5.52

per RSU granted during the

three

months ended

September 30, 2019.

There were

44,995

RSUs settled, and

no

RSUs forfeited during the

three

months ended

September 30, 2019. 

The aggregate intrinsic value of RSU awards outstanding as of

September 30, 2019

was

$1.2

million. As of

September 30, 2019,

all vested awards had been issued and settled.

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 are eligible to participate.

Compensation expense related to all stock based plans for the

three

month periods ended

September 30, 2019

and

2018

was

$0.1

million, and

$0.1

million respectively.  As of

September 30, 2019,

there was

$1.9

million of total unrecognized compensation costs related to outstanding stock-based compensation arrangements. Of this cost,

$1.4

million relates to performance based RSU grants that are

not

expected to be awarded. The remaining

$0.5

million is expected to be recognized over a weighted average period of

2.1

years.

XML

Note 10 - Debt

3 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Debt Disclosure [Text Block]

Note

10

:   Debt

Debt is comprised of the following (in thousands):

	0 9 / 3 0 /2019		6/30/201 9
Short-term and current maturities
Loan and Security Agreement	$	1,785	$	1,765
Other loans		2,194		2,300
		3,979		4,065
Long-term debt
Loan and Security Agreement, net of current portion		19,088		17,541
	$	23,067	$	21,606

The Company amended its Loan and Security Agreement, which includes a Line of Credit and a Term Loan (“Credit Facility”), in

January 2018.  

Borrowings under the Line of Credit

may

not

exceed

$23.0

million.  The Line of Credit has an interest rate of LIBOR plus

1.5%,

and expires on

April 30, 2021. 

The effective interest rate on the Line of Credit under the Loan and Security Agreement for the

three

months ended

September 30, 2019

and

2018

was

3.9%

and

3.8%,

respectively. As of

September 30, 2019,

$16.9

million was outstanding on the Line of Credit.

Availability under the Line of Credit is subject to a borrowing base comprised of accounts receivable and inventory. The Company believes that the borrowing base will consistently produce availability under the Line of Credit of

$23.0

million. A

0.25%

commitment fee is charged on the unused portion of the Line of Credit.

The obligations under the Credit Facility are unsecured. In the event of certain triggering events, such obligations would become secured by the assets of the Company’s domestic subsidiaries. A triggering event occurs when the Company fails to achieve any of the financial covenants noted below in consecutive quarters.

The financial covenants of the amended Loan and Security Agreement are:

1

) funded debt to EBITDA, excluding non-cash and retirement benefit expenses (“maximum leverage”),

not

to exceed

2.25

to

1.00,

2

) annual capital expenditures

not

to exceed

$15.0

million,

3

) maintain a Debt Service Coverage Rate of a minimum of

1.25

to

1.00,

and

4

) maintain consolidated cash plus liquid investments of

not

less than

$10.0

million at any time.  As of

September 30, 2019,

the Company was in compliance with all the financial debt covenants related to its Loan and Security Agreement.

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 then existing Loan and Security Agreement.  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 had a balance of

$4.0

million at

September 30, 2019.

In

December 2017,

the Company’s Brazilian subsidiary entered into

two

short-term loans with local banks in order to support the Company’s strategic initiatives. The loans backed by the entity’s US dollar denominated export receivables were made with Santander Bank and Bradesco Bank. In

February 2019,

the Company’s Brazilian subsidiary, again, began refinancing debt among Santander, Bradesco and Brazil Bank as follows (in thousands) as of 

9/30/2019:

Lending Institution	Interest Rate		Beginning Date	Ending Date	Outstanding Balance
Santander		5.30%	February 2019	February 2020	$	432
Bradesco		4.27%	March 2019	March 2020		262
Bradesco		4.00%	April 2019	April 2020		1,000
Brazil Bank		3.11%	September 2019	September 2020		500
					$	2,194

XML

Note 4 - Recent Accounting Pronouncements - Consolidated Statement of Financial Condition (Details) - USD ($) $ in Thousands	3 Months Ended					12 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2019	Jul. 01, 2019
Operating leases, Right-of-Use Assets	$ 5,779						$ 6,149
Current portion of operating lease obligations	1,903						1,798
Operating long term lease obligations	3,922						4,351
Cost of goods sold	34,411				$ 35,242
Selling, general and administrative	16,258				15,723
Other income (expense) net	$ (169)				6
Accounting Standards Update 2016-02 [Member]
Operating leases, Right-of-Use Assets							6,149
Current portion of operating lease obligations							1,798
Operating long term lease obligations							$ 4,351
Accounting Standards Update 2017-07 [Member] | Restatement Adjustment [Member]
Cost of goods sold		329	$ 127	$ 127	127	710
Selling, general and administrative		97	41	41	41	220
Other income (expense) net		$ (426)	$ (168)	$ (168)	$ (168)	$ (930)

XML

Note 2 - Segment Information (Details Textual) $ in Thousands	3 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)
Number of Reportable Segments	2
Intersegment Eliminations [Member] | North American Segment [Member]
Revenue from Contract with Customer, Including Assessed Tax	$ 968	$ 1,134
Intersegment Eliminations [Member] | International Segment [Member]
Revenue from Contract with Customer, Including Assessed Tax	$ 4,242	$ 3,320

XML

Note 5 - Commitments and Contingencies - Payments for Operating Leases (Details) $ in Thousands	Jun. 30, 2019 USD ($)
2020	$ 2,434
2021	2,328
2022	943
2023	762
2024	502
Thereafter	1,092
Total	$ 8,061

XML

Consolidated Statements of Stockholders' Equity (Unaudited) - USD ($) $ in Thousands	Common Stock [Member] Common Class A [Member]	Common Stock [Member] Common Class B [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]	Total
Balance at Jun. 30, 2018	$ 6,302	$ 720	$ 55,641	$ 74,368	$ (49,160)	$ 87,871
Total comprehensive income (loss)				584	(1,571)	(987)
Repurchase of shares		(2)	(11)			(13)
Stock-based compensation	17		90			107
Conversion	10	(10)
Balance at Sep. 30, 2018	6,329	710	55,730	74,992	(50,771)	86,990
Transfer of historical translation adjustment				40	(40)
Issuance of stock		2	10			12
Translation loss, net of taxes					(50,537)
Pension and postretirement plans, net of taxes					(234)
Total					(50,771)
Total						(59,281)
Balance at Jun. 30, 2019	6,207	690	55,276	80,487	(59,281)	83,379
Total comprehensive income (loss)				778	(3,759)	(2,981)
Repurchase of shares		(2)	(8)			(10)
Stock-based compensation	57		157			214
Conversion	6	(6)
Balance at Sep. 30, 2019	6,270	682	55,425	81,265	(63,040)	80,602
Translation loss, net of taxes					(53,297)
Pension and postretirement plans, net of taxes					(9,743)
Total					$ (63,040)	$ (63,040)

XML

Consolidated Balance Sheets (Current period Unaudited) - USD ($) $ in Thousands	Sep. 30, 2019	Jun. 30, 2019
ASSETS
Cash	$ 10,510	$ 15,582
Accounts receivable (less allowance for doubtful accounts of $633 and $685, respectively)	31,340	35,980
Inventories	64,525	61,790
Prepaid expenses and other current assets	6,739	6,623
Total current assets	113,114	119,975
Property, plant and equipment, net	37,078	36,679
Right of use assets	5,779
Taxes receivable	1,633	1,666
Deferred tax assets, net	18,341	18,639
Intangible assets, net	8,305	8,460
Goodwill	4,668	4,668
Total assets	188,918	190,087
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current maturities of debt	3,979	4,065
Current lease liability	1,903
Accounts payable	11,799	12,881
Accrued expenses	7,192	8,699
Accrued compensation	5,474	7,035
Total current liabilities	30,347	32,680
Other tax obligations	2,523	2,587
Long-term lease liability	3,922
Long-term debt, net of current portion	19,088	17,541
Postretirement benefit and pension obligations	52,436	53,900
Total liabilities	108,316	106,708
Stockholders' equity:
Additional paid-in capital	55,425	55,276
Retained earnings	81,265	80,487
Accumulated other comprehensive loss	(63,040)	(59,281)
Total stockholders' equity	80,602	83,379
Total liabilities and stockholders’ equity	188,918	190,087
Common Class A [Member]
Stockholders' equity:
Common stock	6,270	6,207
Common Class B [Member]
Stockholders' equity:
Common stock	$ 682	$ 690

XML

Note 10 - Debt (Tables)

3 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of Debt [Table Text Block]

	0 9 / 3 0 /2019		6/30/201 9
Short-term and current maturities
Loan and Security Agreement	$	1,785	$	1,765
Other loans		2,194		2,300
		3,979		4,065
Long-term debt
Loan and Security Agreement, net of current portion		19,088		17,541
	$	23,067	$	21,606

Schedule of Short-term Debt [Table Text Block]

Lending Institution	Interest Rate		Beginning Date	Ending Date	Outstanding Balance
Santander		5.30%	February 2019	February 2020	$	432
Bradesco		4.27%	March 2019	March 2020		262
Bradesco		4.00%	April 2019	April 2020		1,000
Brazil Bank		3.11%	September 2019	September 2020		500
					$	2,194

XML

Significant Accounting Policies (Policies)

3 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

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, 2019.  

Operating results are

not

necessarily indicative of the results that

may

be expected for any future interim period or for the entire fiscal year. Our “fiscal year” begins

July 1

st

and ends

June 30

th

.

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, 2019

describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.

XML

Note 5 - Commitments and Contingencies (Tables)

3 Months Ended

Sep. 30, 2019

Notes Tables

Assets And Liabilities Lessee [Table Text Block]

	Right-of-use Assets		Operating Lease Obligations		Remaining Cash Commitment
Operating leases	$	5,779	$	5,825	$	6,984

Lessee, Operating Lease, Liability, Maturity [Table Text Block]

Three months ending September 30, 2019	Operating Lease Commitments
2020 remaining	$	1,743
2021		2,151
2022		845
2023		718
2024		702
Thereafter		825
Subtotal	$	6,984
Imputed interest		(1,159	)
Total		5,825

Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block]

Fiscal Year
2020	$	2,434
2021		2,328
2022		943
2023		762
2024		502
Thereafter		1,092
	$	8,061

XML

Note 8 - Goodwill and Intangible Assets - Estimated Aggregate Amortization Expense (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jun. 30, 2019
2020, remaining	$ 1,486
2021	1,724
2022	1,492
2023	1,151
2024	858
2025	514
Thereafter	1,080
Total	$ 8,305	$ 8,460

XML

Note 7 - Inventories (Details Textual) - USD ($) $ in Millions	3 Months Ended
	Sep. 30, 2018	Sep. 30, 2019	Jun. 30, 2019
LIFO Inventory Amount		$ 11.9	$ 9.8
Inventory Difference Using FIFO Basis		$ 23.3	$ 23.3
Cost of Sales [Member]
Inventory, LIFO Reserve, Effect on Income, Net, Total	$ 0.3

XML

Note 10 - Debt - Debt Schedule (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jun. 30, 2019
Short-term and current maturities
Loan and Security Agreement	$ 1,785	$ 1,765
Other loans	2,194	2,300
Total	3,979	4,065
Long-term debt
Loan and Security Agreement, net of current portion	19,088	17,541
Total	$ 23,067	$ 21,606

XML

Note 5 - Commitments and Contingencies - Operating Leases (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jul. 01, 2019	Jun. 30, 2019
Operating leases, Right-of-Use Assets	$ 5,779	$ 6,149
Operating leases. Operating Lease Obligations	5,825
Operating leases, Remaining Cash Commitment	$ 6,984

XML

Note 3 - Revenue From Contracts With Customers (Details Textual) $ in Thousands	1 Months Ended	3 Months Ended
	Jul. 31, 2018 USD ($)	Sep. 30, 2019 USD ($)
Adjustments to Additional Paid in Capital, Dividends in Excess of Retained Earnings	$ 0
Contract with Customer, Asset, after Allowance for Credit Loss, Total		$ 0
Contract with Customer, Liability, Total		$ 400
Number of Reportable Segments		2
Prepaid Expenses and Other Current Assets [Member]
Contract with Customer, Right to Recover Product, Total		$ 100
Accrued Expenses [Member]
Contract with Customer, Refund Liability, Total		$ 200

XML

Note 4 - Recent Accounting Pronouncements

3 Months Ended

Sep. 30, 2019

Notes to Financial Statements

New Accounting Pronouncements and Changes in Accounting Principles [Text Block]

Note

4:

Recent A

ccounting Pronouncements

The Company adopted, prospectively, Accounting Standards Codification

842,

Leases ("ASC

842"

)

July 1, 2019. 

As a result, the Company updated its significant accounting policies for leases below. Refer to Note

5

Commitments and Contingencies for additional information related to the Company's lease arrangements and the impact of the adoption of ASC

842

on the Company's Consolidated Financial Statements.

The Company has leased buildings, manufacturing equipment and autos that are classified as operating lease right-of use "ROU" assets and operating lease liabilities in the Company's Consolidated Balance Sheet. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding

12

months. Minimum lease payments include only the fixed lease component of the agreement.

The Company estimates its incremental borrowing rate for its leases using a portfolio approach based on the respective weighted average term of the agreements. The estimation considers the market rates of the Company's outstanding borrowings and rates of external outstanding borrowings including market comparisons. Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales, general and administrative expenses.

The standard was effective for Starrett beginning this fiscal year. The Company has elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. The Company also elected the package of practical expedients permitted within the new standard, which among other things, allows the Company to carry forward historical lease classification. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are

not

included in the ROU assets or operating lease liabilities. These are expensed as incurred and recorded as variable lease expense. The Company determines if an arrangement is a lease at the inception of a contract. Operating lease ROU assets and operating lease liabilities are stated separately in the Consolidated Balance Sheet.

In preparation for adoption of the standard, the Company has implemented internal controls such as updated accounting policies and expanded data gathering procedures to comply with the additional disclosure requirements. The adoption had a material impact on our Consolidated Balance Sheets, but did

not

have a material impact on our Consolidated Statements of Operations. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.

Adoption of this standard resulted in the recognition of additional ROU assets and lease liabilities for operating leases and had the following impact to the reported results as of

June 30, 2019

on our Consolidated Financial Statements:

Dollars in Thousands Consolidated Balance Sheet	As Reported June 30, 2019		New Lease Standard Adjustment		Adjusted July 1, 2019
Right-of-Use Asset		-	$	6,149	$	6,149
Current portion of operating lease obligations		-	$	1,798	$	1,798
Operating long term lease obligations		-	$	4,351	$	4,351

The Company adopted ASU

No.

2017

-

07,

Compensation-Retirement Benefits (Topic

715

) in

FY19:

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (NPBC). This update requires that an employer disaggregate the service cost component from the other components of NPBC. In addition, only the service cost component will be eligible for capitalization. The Company amended the U.S. defined benefit pension plan to freeze benefit accurals effective

December 31, 2016. 

Consequently, the Plan is closed to new participants and current participants

no

longer earn additional benefits. The amendments in this update are required to be applied retrospectively for the presentation of the service cost component and the other components of NPBC in the Consolidated Statement of Operations and prospectively. The Consolidated Statement of Operations and related disclosure are recorded accordingly.

The retrospective reclassification to FY

2019

by quarter follows (in thousands):

	Increase (Decrease) to Net Income
	Q1 FY19			Q2 FY19			Q3 FY19			Q4 FY19			FY2019
Cost of goods sold	$	127		$	127		$	127		$	329		$	710
Selling, general and administrative		41			41			41			97			220
Other income (expense) net		(168	)		(168	)		(168	)		(426	)		(930	)
	$	-		$	-		$	-		$	-		$	-

In

February 2018,

the FASB issued ASU

No.

2018

-

02,

“Income Statement – Reporting Comprehensive Income (Topic

220

): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. For deferred tax items recognized in Accumulated Other Comprehensive Income (AOCI), changes in tax rates can leave amounts “stranded” in AOCI. Under ASU

2018

-

02,

FASB has given companies an option to reclassify the stranded tax effects resulting from the tax law and tax rate changes under the Tax Cuts and Jobs Act of

2017

from AOCI to retained earnings. The Company declined the reclassification option upon adopting this standard

July 1, 2019.

The new standard did

not

have a material impact on the Company’s financial position and results of operations upon adoption.

In

June 2016,

the FASB issued ASU

2016

-

13,

“Financial Instruments - Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments,” and subsequent amendment to the guidance, ASU

2018

-

19

in

November 2018.

The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are

not

measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. The amendment will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets

not

excluded from the scope that have the contractual right to receive cash. ASU

2018

-

19

clarifies that receivables arising from operating leases are accounted for using lease guidance and

not

as financial instruments. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. This ASU is effective for annual periods beginning after

December 15, 2019,

and interim periods therein. Early adoption is permitted for annual periods beginning after

December 15, 2018,

and interim periods therein. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In

January 2017,

the FASB issued ASU

No.

2017

-

04,

"Intangibles-Goodwill and Other (Topic

350

): Simplifying the Test for Goodwill Impairment." Under the new guidance, if a reporting unit's carrying value amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the requirement to calculate goodwill impairment using Step

2,

which calculates an impairment charge by comparing the implied fair value of goodwill with its carrying amount. The standard does

not

change the guidance on completing Step

1

of the goodwill impairment test. The amendments in this ASU are effective for annual and interim periods beginning after

December 15, 2019

and should be applied prospectively for annual and any interim goodwill impairment tests. Early adoption is permitted for entities for interim or annual goodwill impairment tests performed on testing dates after

January 1, 2017.

The Company is currently evaluating the impact of the update on our consolidated financial statements.

In

August 2018,

the FASB issued ASU

No.

2018

-

13,

"Fair Value Measurement ('Topic

820'

): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The ASU modifies the disclosure requirements in Topic

820,

Fair Value Measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level

3

fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level

3

fair value measurements. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after

December 15, 2019.

The Company is currently evaluating the effect, if any, that ASU

2018

-

13

will have on its consolidated financial statements.

In

August 2018,

the FASB issued ASU

No.

2018

-

14,

"Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic

715

-

20

): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." ASU

2018

-

14

removes certain disclosures that are

not

considered cost beneficial, clarifies certain required disclosures and added additional disclosures. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after

December 15, 2020.

The amendments in ASU

2018

-

14

must be applied on a retrospective basis. The Company is currently assessing the effect, if any, that ASU

2018

-

14

will have on its consolidated financial statements.

XML

Note 8 - Goodwill and Intangible Assets

3 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Goodwill and Intangible Assets Disclosure [Text Block]

Note

8

:   Goodwill and Intangible Assets

The Company’s acquisition of Bytewise in

2011

and a private software company in

2017

resulted in the recognition of goodwill totaling

$4.7

million. The Company is required, on a set date, to annually assess its goodwill in order to determine whether or

not

it is more likely than

not

that the fair value of the reporting unit’s goodwill exceeded its carrying amount. Determining the fair value of a reporting unit is subjective and requires the use of significant estimates and assumptions.

The Company performed a qualitative analysis of its Bytewise reporting unit for its

October 1, 2018

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 a reporting unit exceeds its carrying amount, relevant events and circumstances are taken into account, with greater weight assigned to events and circumstances that most affect the fair value 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 and changes in management or key personnel. 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 exceeded its carrying amount as of

October 1, 2018.

If future results significantly vary from current estimates and related projections due to changes in industry or market conditions, the Company

may

be required to record impairment charges.

Determining the fair value of a reporting unit is subjective and requires the use of the significant estimates and assumptions. The Company estimates the fair value using an income approach based on the present value of future cash flows. The Company believes this approach yields the most appropriate evidence of fair value. The key assumptions utilized in the discounted cash flow model includes estimates of future cash flows from operating activities offset by estimated capital expenditures of the reporting unit, the estimated terminal value for the reporting unit, a discount rate based on a weighted average cost of capital and overall economic conditions. Any unfavorable material changes to these key assumptions could potentially impact the Company’s fair value determinations.

The Company performed a quantitative analysis for its

February 1, 2019

annual assessment of goodwill (commonly referred to as “Step One” evaluation) associated with its fiscal

2017

purchase of a private software company. The Company estimated the fair value using an income approach based on the present value of future cash flows. The Company believes this approach yields the most appropriate evidence of fair value. Under the quantitative analysis, the

2019

fair value assessment of the software development company’s goodwill exceeded the carrying amount. Therefore,

no

goodwill impairment was determined to exist. If future results significantly vary from current estimates, related projections, or business assumptions in the future due to changes in industry or market conditions, the Company

may

be required to record impairment charges.

Amortizable intangible assets consist of the following (in thousands):

	0 9 / 3 0 /2019			6/30/201 9
Non-compete agreement	$	600		$	600
Trademarks and trade names		2,070			2,070
Completed technology		2,358			2,358
Customer relationships		5,580			5,580
Software development		9,351			8,952
Other intangible assets		325			325
Total		20,284			19,885
Accumulated amortization		(11,979	)		(11,425	)
Total net balance	$	8,305		$	8,460

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 range between

5

years for software development and

20

years for some trademark and trade name assets.

The estimated aggregate amortization expense for the remainder of fiscal

2020

and thereafter, is as follows (in thousands):

2020, remaining		1,486
2021		1,724
2022		1,492
2023		1,151
2024		858
2025		514
Thereafter		1,080
	$	8,305

XML

Note 12 - Contingencies

3 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

Note

1

2

:  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.

XML

Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Sep. 30, 2019		Sep. 30, 2018
Net sales	$ 52,114	[1]	$ 51,901	[2]
Cost of goods sold	34,411		35,242
Gross margin	$ 17,703		$ 16,659
% of Net sales	34.00%		32.10%
Selling, general and administrative	$ 16,258		$ 15,723
Operating income	1,445		936	[3]
Other income (expense)	(169)		6
Income before income taxes	1,276		942
Income tax expense	498		358
Net income (loss)	$ 778		$ 584
Basic income (loss) per share (in dollars per share)	$ 0.11		$ 0.08
Diluted income (loss) per share (in dollars per share)	$ 0.11		$ 0.08
Weighted average outstanding shares used in per share calculations:
Basic (in shares)	6,904		7,025
Diluted (in shares)	7,006		7,083

[1] Excludes $968 of North American segment intercompany sales to the International segment, and $4,242 of International segment intercompany sales to the North American segment.

[2] Excludes $1,134 of North American segment intercompany sales to the International segment, and $3,320 of International segment intercompany sales to the North American segment.

[3] As a result of the adoption of ASU 2017-07 "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost", the respective line items in the Consolidated Statement of Earnings for Fiscal 2019 have been reclassified.

XML

Note 1 - Basis of Presentation and Summary of Significant Account Policies

3 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Basis of Presentation and Significant Accounting Policies [Text Block]

Note

1:

   Basis of Presentation and Summary of Significant Account Policies

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, 2019.  

Operating results are

not

necessarily indicative of the results that

may

be expected for any future interim period or for the entire fiscal year. Our “fiscal year” begins

July 1

st

and ends

June 30

th

.

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, 2019

describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.

XML

Note 3 - Revenue From Contracts With Customers (Tables)

3 Months Ended

Sep. 30, 2019

Notes Tables

Disaggregation of Revenue [Table Text Block]

	Three Months Ended
	09/30/19		09/30/18
North America
United States	$	28,624	$	27,947
Canada & Mexico		2,385		2,253
		31,009		30,200
International
Brazil		12,822		12,367
United Kingdom		5,231		6,017
China		1,514		1,708
Australia & New Zealand		1,538		1,609
		21,105		21,701
Total Sales	$	52,114	$	51,901

XML

Note 8 - Goodwill and Intangible Assets (Tables)

3 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of Finite-Lived Intangible Assets [Table Text Block]

	0 9 / 3 0 /2019			6/30/201 9
Non-compete agreement	$	600		$	600
Trademarks and trade names		2,070			2,070
Completed technology		2,358			2,358
Customer relationships		5,580			5,580
Software development		9,351			8,952
Other intangible assets		325			325
Total		20,284			19,885
Accumulated amortization		(11,979	)		(11,425	)
Total net balance	$	8,305		$	8,460

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block]

2020, remaining		1,486
2021		1,724
2022		1,492
2023		1,151
2024		858
2025		514
Thereafter		1,080
	$	8,305

XML

Note 9 - Pension and Post-retirement Benefits - Net Periodic Costs (Details) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Pension Plan [Member]
Service cost
Interest cost	1,349	1,506
Expected return on plan assets	(1,294)	(1,284)
Amortization of net loss	10	7
Total	65	229
Post Retirement Medical Plan [Member]
Service cost	18	18
Interest cost	60	66
Amortization of net loss	21	7
Total	(35)	(43)
Amortization of prior service credit	$ (134)	$ (134)

XML

Note 8 - Goodwill and Intangible Assets (Details Textual) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2019	Jun. 30, 2019
Goodwill, Ending Balance	$ 4,668	$ 4,668
Goodwill, Impairment Loss	$ 0
Computer Software, Intangible Asset [Member]
Finite-Lived Intangible Asset, Useful Life	5 years
Trademarks and Trade Names [Member]
Finite-Lived Intangible Asset, Useful Life	20 years

XML

Note 2 - Segment Information

3 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

Note

2:

Segment Information

The segment information and the accounting policies of each segment are the same as those described in the notes to the consolidated financial statements entitled “Financial Information by Segment & Geographic Area” included in our Annual Report on Form

10

-K for the year ended

June 30, 2019.

The Company’s business is aggregated into

two

reportable segments based on geography of operations: North American Operations and International Operations. Segment income is measured for internal reporting purposes by excluding corporate expenses, which are included in unallocated in the table below. Other income and expense, including interest income and expense, and income taxes are excluded entirely from the table below. There were

no

significant changes in the segment operations or in the segment assets from the Annual Report. Financial results for each reportable segment are as follows (in thousands):

	North American Operations		International Operations		Unallocated			Total
Three Months ended September 3 0 , 20 19
Sales 1	$	31,009	$	21,105	$	-		$	52,114
Operating Income (Loss)	$	2,206	$	1,163	$	(1,924	)	$	1,445
Three Months ended September 30 , 20 1 8
Sales 2	$	30,200	$	21,701	$	-		$	51,901
Operating Income (Loss) 3	$	373	$	2,119	$	(1,556	)	$	936

1. Excludes $968 of North American segment intercompany sales to the International segment, and $4,242 of International segment intercompany sales to the North American segment.

2. Excludes $1,134 of North American segment intercompany sales to the International segment, and $3,320 of International segment intercompany sales to the North American segment.

3. As a result of the adoption of ASU 2017 - 07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, the respective line items in the Consolidated Statement of Earnings for Fiscal 2019 have been reclassified.

XML

Note 2 - Segment Information (Tables)

3 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of Segment Reporting Information, by Segment [Table Text Block]

	North American Operations		International Operations		Unallocated			Total
Three Months ended September 3 0 , 20 19
Sales 1	$	31,009	$	21,105	$	-		$	52,114
Operating Income (Loss)	$	2,206	$	1,163	$	(1,924	)	$	1,445
Three Months ended September 30 , 20 1 8
Sales 2	$	30,200	$	21,701	$	-		$	51,901
Operating Income (Loss) 3	$	373	$	2,119	$	(1,556	)	$	936

XML

Note 7 - Inventories (Tables)

3 Months Ended

Sep. 30, 2019

Notes Tables

Schedule of Inventory, Current [Table Text Block]

Inventories consist of the following (in thousands):	0 9 / 3 0 / 2019			6/30/201 9
Raw material and supplies	$	27,718		$	26,106
Goods in process and finished parts		16,374			17,464
Finished goods		43,760			41,500
		87,852			85,070
LIFO Reserve		(23,327	)		(23,280	)
	$	64,525		$	61,790

XML

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Net income (loss)	$ 778	$ 584
Other comprehensive income (loss):
Currency translation (loss), net of tax	(3,739)	(1,571)
Pension and postretirement plans, net of tax	(20)
Other comprehensive income (loss)	(3,759)	(1,571)
Total comprehensive income (loss)	$ (2,981)	$ (987)

XML

Document And Entity Information - shares	3 Months Ended
	Sep. 30, 2019	Oct. 25, 2019
Document Information [Line Items]
Entity Registrant Name	STARRETT L S CO
Entity Central Index Key	0000093676
Trading Symbol	scx
Current Fiscal Year End Date	--06-30
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	false
Entity Shell Company	false
Document Type	10-Q
Document Period End Date	Sep. 30, 2019
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q1
Amendment Flag	false
Title of 12(b) Security	Common Stock
Common Class A [Member]
Document Information [Line Items]
Entity Common Stock, Shares Outstanding (in shares)		6,273,368
Common Class B [Member]
Document Information [Line Items]
Entity Common Stock, Shares Outstanding (in shares)		678,272

XML

Note 10 - Debt (Details Textual)		1 Months Ended	3 Months Ended
	Nov. 22, 2011 USD ($)	Jan. 31, 2018	Sep. 30, 2019 USD ($)	Sep. 30, 2018	Jun. 30, 2019 USD ($)	Jan. 01, 2018 USD ($)
Line of Credit Facility, Maximum Borrowing Capacity						$ 23,000,000
Line of Credit Facility, Interest Rate During Period			3.90%	3.80%
Long-term Line of Credit, Total			$ 16,900,000
Line of Credit Facility, Commitment Fee Percentage			0.25%
Minimum Consolidated Cash and Liquid Investments Pursuant to New Loan and Security Agreement			$ 10,000,000
Long-term Debt, Total			23,067,000		$ 21,606,000
Term Loan [Member]
Debt Instrument, Face Amount	$ 15,500,000
Debt Instrument, Term	10 years
Debt Instrument, Interest Rate, Stated Percentage	4.50%
Debt Instrument, Periodic Payment, Total	$ 160,640
Long-term Debt, Total			$ 4,000,000
Maximum [Member]
Current Funded Debt to EBITDA Ratio			2.25
Annual Capital Expenditures			$ 15,000,000
Debt Service Coverage Rate			1.25
Minimum [Member]
Current Funded Debt to EBITDA Ratio			1
Debt Service Coverage Rate			1
London Interbank Offered Rate (LIBOR) [Member]
Debt Instrument, Basis Spread on Variable Rate		1.50%

XML

Note 8 - Goodwill and Intangible Assets - Finite-lived Intangible Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jun. 30, 2019
Intangible assets, gross	$ 20,284	$ 19,885
Accumulated amortization	(11,979)	(11,425)
Total net balance	8,305	8,460
Noncompete Agreements [Member]
Intangible assets, gross	600	600
Trademarks and Trade Names [Member]
Intangible assets, gross	2,070	2,070
Completed Technology [Member]
Intangible assets, gross	2,358	2,358
Customer Relationships [Member]
Intangible assets, gross	5,580	5,580
Software Developement [Member]
Intangible assets, gross	9,351	8,952
Other Intangible Assets [Member]
Intangible assets, gross	$ 325	$ 325

XML

Note 5 - Commitments and Contingencies - Operating Lease Commitments (Details) $ in Thousands	Sep. 30, 2019 USD ($)
2020 remaining	$ 1,743
2021	2,151
2022	845
2023	718
2024	702
Thereafter	825
Subtotal	6,984
Imputed interest	(1,159)
Operating leases. Operating Lease Obligations	$ 5,825

XML

Note 3 - Revenue From Contracts With Customers - Revenue From Contracts With Customers (Details) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2019		Sep. 30, 2018
Net sales	$ 52,114	[1]	$ 51,901	[2]
North American Segment [Member]
Net sales	31,009	[1]	30,200	[2]
International Segment [Member]
Net sales	21,105		21,701
UNITED STATES | North American Segment [Member]
Net sales	28,624		27,947
Canada and Mexico [Member] | North American Segment [Member]
Net sales	2,385		2,253
BRAZIL | International Segment [Member]
Net sales	12,822		12,367
UNITED KINGDOM | International Segment [Member]
Net sales	5,231		6,017
CHINA | International Segment [Member]
Net sales	1,514		1,708
Australia and New Zealand [Member] | International Segment [Member]
Net sales	$ 1,538		$ 1,609

[1] Excludes $968 of North American segment intercompany sales to the International segment, and $4,242 of International segment intercompany sales to the North American segment.

[2] Excludes $1,134 of North American segment intercompany sales to the International segment, and $3,320 of International segment intercompany sales to the North American segment.

XML

Note 11 - Income Taxes

3 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

Note

11:

   Income Taxes

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.

On

December 22, 2017,

the Tax Cuts and Jobs Act was enacted in the United States. The Act reduces the U.S. federal corporate tax rate from a graduated rate of

35%

to a flat rate of

21%,

requires companies to pay a

one

-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Other impacts of tax reform that became effective for the Company beginning in fiscal

2019

include the provisions related to Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Base Erosion Anti Abuse Tax (“BEAT”), and limitation on tax deductibility of interest expenses.

The GILTI provisions are expected to have the most significant impact to the Company. Under the new law, U.S. taxes are imposed on foreign income in excess of a deemed return on tangible assets of its foreign subsidiaries. In general, this foreign income will effectively be taxed at an additional

10.5%

tax rate reduced by any available current year foreign tax credits. The ability to benefit foreign tax credits

may

be limited under the GILTI rules as a result of the utilization of net operating losses, foreign sourced income and other potential limitations within the foreign tax credit calculation.

The tax expense for the

first

quarter of fiscal

2020

was

$0.5

million on a profit before tax of

$1.3

million (an effective tax rate of

39%

). The tax expense for the

first

quarter of fiscal

2019

was

$0.4

million on profit before tax of

$0.9

million (an effective tax rate of

38%

). The tax rate for both fiscal

2020

and fiscal

2019

was higher than the U.S. statutory tax rate of

21%

primarily due to the Global Intangible Low Taxed Income (“GILTI”) provisions, which became effective in fiscal

2019,

and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of

34%.

The

first

quarter of fiscal

2020

also includes a discrete tax expense of

$0.1

million relating to adjustments to the

fourth

quarter of fiscal

2019

balances.

U.S. Federal tax returns for years prior to fiscal

2016

are generally

no

longer subject to review by tax authorities; however, tax loss carryforwards from earlier years are still subject to adjustment. As of

September 30, 2019,

the Company has substantially resolved all open income tax audits and there were

no

other local or federal income tax audits in progress. In international jurisdictions including Australia, Brazil, Canada, China, Germany, 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 calendar years

2013

– present. During the next

twelve

months, it is possible there will be a reduction of

$0.1

million in long-term tax obligations due to the expiration of the statute of limitations on prior year tax returns.

Accounting for income taxes requires estimates of future benefits and tax liabilities. Due to the temporary differences in the timing of recognition of items included in income for accounting and tax purposes, deferred tax assets or liabilities are recorded to reflect the impact arising from these differences on future tax payments. With respect to recorded tax assets, the Company assesses the likelihood that the asset will be realized by addressing the positive and negative evidence to determine whether realization is more likely than

not

to occur. If realization is in doubt because of uncertainty regarding future profitability, the Company provides a valuation allowance related to the asset to the extent that it is more likely than

not

that the deferred tax asset will

not

be realized. Should any significant changes in the tax law or the estimate of the necessary valuation allowance occur, the Company would record the impact of the change, which could have a material effect on the Company’s financial position.

No

valuation allowance has been recorded for the Company’s U.S. federal and foreign deferred tax assets related to temporary differences in items included in taxable income. 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 tax benefit provided by those differences. In the U.S., a partial valuation allowance has been provided for foreign tax credit carryforwards due to the uncertainty of generating sufficient foreign source income to utilize those credits in the future and certain state net operating loss carryforwards that will expire in the near future unutilized.

XML

Note 3 - Revenue From Contracts With Customers

3 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

Note

3:

  

Revenue from Contract

s

with Customers

On

July 1, 2018,

the Company adopted ASC Topic

606,

Revenue from Contracts with Customers, and all the related amendments (“ASC Topic

606”

), using the modified retrospective method. In addition, the Company elected to apply certain of the permitted practical expedients within the revenue recognition guidance and make certain accounting policy elections, including those related to significant financing components, sales taxes and shipping and handling activities. Most of the changes resulting from the adoption of ASC Topic

606

on

July 1, 2018

were changes in presentation within the Unaudited Consolidated Balance Sheet. Therefore, while the Company made adjustments to certain opening balances on its

July 1, 2018

Unaudited Consolidated Balance Sheet, the Company made

no

adjustment to opening Retained Earnings.

The core principle of ASC Topic

606

is that an entity recognizes revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The application of the FASB’s guidance on revenue recognition requires the Company to recognize the amount of revenue and consideration that the Company expects to receive in exchange for goods and services transferred to our customers. To do this, the Company applies the

five

-step model prescribed by the FASB, which requires us to: (

1

) identify the contract with the customer; (

2

) identify the performance obligations in the contract; (

3

) determine the transaction price; (

4

) allocate the transaction price to the performance obligations in the contract; and (

5

) recognize revenue when, or as, the Company satisfies a performance obligation.

The Company accounts for a contract or purchase order when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when control of the product passes to the customer, which is upon shipment, unless otherwise specified within the customer contract or on the purchase order as delivery, and is recognized at the amount that reflects the consideration the Company expects to receive for the products sold, including various forms of discounts. When revenue is recorded, estimates of returns are made and recorded as a reduction of revenue. Contracts with customers are evaluated to determine if there are separate performance obligations related to timing of product shipment that will be satisfied in different accounting periods. When that is the case, revenue is deferred until each performance obligation is met.

No

performance obligation related amounts were deferred as of

September 30, 2019.

Purchase orders are of durations less than

one

year. As such, the Company applies the practical expedient in ASC paragraph

606

-

10

-

50

-

14

and does

not

disclose information about remaining performance obligations that have original expected durations of

one

year or less, for which work has

not

yet been performed.

Certain taxes assessed by governmental authorities on revenue producing transactions, such as value added taxes, are excluded from revenue and recorded on a net basis.

Performance Obligations

The Company’s primary source of revenue is derived from the manufacture and distribution of metrology tools and equipment and saw blades and related products sold to distributors. The Company recognizes revenue for sales to our customers when transfer of control of the related good or service has occurred. All of the Company’s revenue was recognized under the point in time approach for the

three

months ended

September 30, 2019

and

2018.

Contract terms with certain metrology equipment customers could result in products and services being transferred over time as a result of the customized nature of some of the Company’s products, together with contractual provisions in the customer contracts that provide the Company with an enforceable right to payment for performance completed to date; however, under typical terms, the Company does

not

have the right to consideration until the time of shipment from its manufacturing facilities or distribution centers, or until the time of delivery to its customers. If certain contracts in the future provide the Company with this enforceable right of payment, the timing of revenue recognition from products transferred to customers over time

may

be slightly accelerated compared to the Company’s right to consideration at the time of shipment or delivery.

The Company’s typical payment terms vary based on the customer, geographic region, and the type of goods and services in the contract or purchase order. The period of time between invoicing and when payment is due is typically

not

significant. Amounts billed and due from the Company’s customers are classified as receivables on the Unaudited Consolidated Balance Sheet. As the Company’s standard payment terms are usually less than

one

year, the Company has elected the practical expedient under ASC paragraph

606

-

10

-

32

-

18

to

not

assess whether a contract has a significant financing component.

The Company’s customers take delivery of goods, and they are recognized as revenue at the time of transfer of control to the customer, which is usually at the time of shipment, unless otherwise specified in the customer contract or purchase order. This determination is based on applicable shipping terms, as well as the consideration of other indicators, including timing of when the Company has a present right to payment, when physical possession of products is transferred to customers, when the customer has the significant risks and rewards of ownership of the asset, and any provisions in contracts regarding customer acceptance.

While unit prices are generally fixed, the Company provides variable consideration for certain of our customers, typically in the form of promotional incentives at the time of sale. The Company utilizes the most likely amount consistently to estimate the effect of uncertainty on the amount of variable consideration to which the Company would be entitled. The most likely amount method considers the single most likely amount from a range of possible consideration amounts. The most likely amounts are based upon the contractual terms of the incentives and historical experience with each customer. The Company records estimates for cash discounts, promotional rebates, and other promotional allowances in the period the related revenue is recognized (“Customer Credits”). The provision for Customer Credits is recorded as a reduction from gross sales and reserves for Customer Credits are presented within accrued sales incentives on the Unaudited Consolidated Balance Sheet. Actual Customer Credits have

not

differed materially from estimated amounts for each period presented. Amounts billed to customers for shipping and handling are included in net sales and costs associated with shipping and handling are included in cost of sales. The Company has concluded that its estimates of variable consideration are

not

constrained according to the definition within the new standard. Additionally, the Company applies the practical expedient in ASC paragraph

606

-

10

-

25

-

18B

and accounts for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment activity, rather than a separate performance obligation.

With the adoption of ASC Topic

606,

the Company reclassified certain amounts related to variable consideration. Under ASC Topic

606,

the Company is required to present a refund liability and a return asset within the Unaudited Consolidated Balance Sheet, whereas in periods prior to adoption, the Company presented the estimated margin impact of expected returns as a contra-asset within accounts receivable. The changes in the refund liability are reported in net sales, and the changes in the return asset are reported in cost of sales in the Unaudited Consolidated Statements of Operations. As a result, the balance sheet presentation was adjusted beginning in Fiscal

2019.

As of

September 30, 2019,

the balance of the return asset is

$0.1

million and the balance of the refund liability is

$0.2

million, and they are presented within prepaid expenses and other current assets and accrued expenses, respectively, on the Unaudited Consolidated Balance Sheet.

The Company, in general, warrants its products against certain defects in material and workmanship when used as designed, for a period of up to

1

year. The Company does

not

sell extended warranties.

Contract Balances

Contract assets primarily relate to the Company’s rights to consideration for work completed but

not

billed at the reporting date on contracts with customers. Contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have

not

yet been met, and therefore, revenue has

not

been recognized. The Company had

no

contract asset balances, but had contract liability balances of

$0.4

million at

September 30, 2019

recorded in Accounts Payable on the Consolidated Balance Sheets.

Disaggregation of Revenue

The Company operates in

two

reportable segments: North America and International. ASC Topic

606

requires further disaggregation of an entity’s revenue. In the following table, the Company's net sales by shipping origin are disaggregated accordingly for the

three

months ended

September 30, 2019

and

2018:

	Three Months Ended
	09/30/19		09/30/18
North America
United States	$	28,624	$	27,947
Canada & Mexico		2,385		2,253
		31,009		30,200
International
Brazil		12,822		12,367
United Kingdom		5,231		6,017
China		1,514		1,708
Australia & New Zealand		1,538		1,609
		21,105		21,701
Total Sales	$	52,114	$	51,901

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Note 7 - Inventories

3 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Inventory Disclosure [Text Block]

Note

7

:   Inventories

Inventories consist of the following (in thousands):	0 9 / 3 0 / 2019			6/30/201 9
Raw material and supplies	$	27,718		$	26,106
Goods in process and finished parts		16,374			17,464
Finished goods		43,760			41,500
		87,852			85,070
LIFO Reserve		(23,327	)		(23,280	)
	$	64,525		$	61,790

LIFO inventories were

$11.9

million and

$9.8

million at

September 30, 2019

and

June 30, 2019,

respectively, such amounts being approximately

$23.3

million and

$23.3

million, respectively, less than if determined on a FIFO basis.  The use of LIFO, as compared to FIFO, resulted in a de minimis change in cost of sales for the

three

months ended

September 30, 2019

compared to a

$0.3

million decrease for the

three

months ended

September 30, 2018.