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,~~December 31, 2021


☐			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 21, 2021~~January 27, 2022
Class A Common Shares						~~6,628,421~~—
Class B Common Shares						~~605,292~~—

~~Table of Contents~~

THE L. S. STARRETT COMPANY

CONTENTS


			Page No.

Part I.	Financial Information:

	Item 1.	Financial Statements	3

		Consolidated Balance Sheets – ~~September 30,~~December 31, 2021 (unaudited) and June 30, 2021	3

		Consolidated Statements of Operations (unaudited)– three and six months ended ~~September 30,~~December 31, 2021 and December 31, 2020 ~~September 30, 2020~~	4

		Consolidated Statements of Comprehensive Income (Loss) (unaudited) – three and six months ended ~~September 30,~~December 31, 2021 and December 31, 2020~~and~~ ~~September 30, 2020~~	5

		Consolidated Statements of Stockholders' Equity (unaudited) – three and sixmonths ended ~~September 30,~~December 31, 2021 and ~~September 30,~~December 31, 2020	6

		Consolidated Statements of Cash Flows (unaudited) - ~~three~~six months ended ~~September 30,~~December 31, 2021 and ~~September 30,~~December 31, 2020	7

		Notes to Unaudited Consolidated Financial Statements	8-18

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2224

	Item 4.	Controls and Procedures	2224

Part II.	Other Information:

	Item 1A.	Risk Factors	2325

	Item 6.	Exhibits	2426

SIGNATURES			2527

~~Table of Contents~~

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE L. S. STARRETT COMPANY

Consolidated Balance Sheets

(in thousands except share data)

(unaudited)
9/30/2021 6/30/2021
ASSETS
Current assets:
Cash $ 6,627 $ 9,105
Accounts receivable (less allowance for doubtful accounts of $647 and $665, respectively) 39,087 35,076
Inventories 61,198 60,572
Prepaid expenses and other current assets 15,505 14,467
Total current assets 122,417 119,220
Property, plant and equipment, net 36,115 35,992
Right of use assets 6,490 4,298
Deferred tax assets, net 18,717 19,073
Intangible assets, net 4,843 4,888
Goodwill 1,015 1,015
Total assets $ 189,597 $ 184,486
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt $ 21,997 $ 15,959
Current lease liability 1,779 1,650
Accounts payable 17,310 17,229
Accrued expenses 9,468 8,811
Accrued compensation 5,743 8,040
Total current liabilities 56,297 51,689
Other tax obligations 2,826 2,866
Long-term lease liability 4,847 2,734
Long-term debt, net of current portion 5,540 6,010
Postretirement benefit and pension obligations 36,839 37,652
Total liabilities 106,349 100,951
Stockholders' equity:
Class A Common stock $1 par (20,000,000 shares authorized; 6,619,304 outstanding at September 30, 2021 and 6,475,307 outstanding at June 30, 2021) 6,619 6,475
Class B Common stock $1 par (10,000,000 shares authorized; 607,032 outstanding at September 30, 2021 and 633,505 outstanding at June 30, 2021 607 634
Additional paid-in capital 56,548 56,507
Retained earnings 77,413 74,181
Accumulated other comprehensive loss (57,939) (54,262)
Total stockholders' equity 83,248 83,535
Total liabilities and stockholders’ equity $ 189,597 $ 184,486


	12/31/2021		06/30/2021
ASSETS
Current assets:
Cash	$	9,437	$	9,105
Accounts receivable (less allowance for doubtful accounts of $602 and $665, respectively)	34,535		35,076
Inventories	63,874		60,572
Prepaid expenses and other current assets	14,473		14,467
Total current assets	122,319		119,220

Property, plant and equipment, net	35,851		35,992
Right of use assets	5,772		4,298

Deferred tax assets, net	18,601		19,073
Intangible assets, net	4,761		4,888
Goodwill	1,015		1,015
Total assets	$	188,319	$	184,486

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt	$	21,969	$	15,959
Current lease liability	1,418		1,650
Accounts payable	15,108		17,229
Accrued expenses	9,191		8,811
Accrued compensation	4,128		8,040
Total current liabilities	51,814		51,689

Other tax obligations	2,870		2,866
Long-term lease liability	4,514		2,734
Long-term debt, net of current portion	9,158		6,010
Postretirement benefit and pension obligations	34,778		37,652
Total liabilities	103,134		100,951

Stockholders' equity:
Class A Common stock $1 par 20,000,000 shares authorized; 6,644,107 outstanding at December 31, 2021 and 6,475,307 outstanding at June 30, 2021)	6,644		6,475
Class B Common stock $1 par (10,000,000 shares authorized; 607,748 outstanding at December 31, 2021 and 633,505 outstanding at June 30, 2021	608		634
Additional paid-in capital	56,869		56,507
Retained earnings	79,941		74,181
Accumulated other comprehensive loss	(58,877)		(54,262)
Total stockholders' equity	85,185		83,535
Total liabilities and stockholders’ equity	$	188,319	$	184,486

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

THE L. S. STARRETT COMPANY

Consolidated Statements of Operations

(in thousands except per share data)

(unaudited)

Three Months Ended
9/30/2021 9/30/2020
Net sales $ 61,514 $ 49,411
Cost of goods sold 41,369 33,839
Gross margin 20,145 15,572
% of Net sales 32.7 % 31.5 %
Restructuring charges — 346
Selling, general and administrative expenses 16,012 13,391
Operating income 4,133 1,835
Other (expense) 226 (1)
Income before income taxes 4,359 1,834
Income tax expense (benefit) 1,127 (2,282)
Net income $ 3,232 $ 4,116
Basic income per share $ 0.45 $ 0.59
Diluted income per share $ 0.44 $ 0.57
Weighted average outstanding shares used in per share calculations:
Basic 7,126 6,988
Diluted 7,396 7,245


	3 Months Ended						6 Months Ended
	12/31/2021			12/31/2020			12/31/2021			12/31/2020

Net sales	$	61,318		$	54,054		$	122,832		$	103,464
Cost of goods sold	42,368			36,449			83,737			70,287
Gross margin	18,950			17,605			39,095			33,177
% of Net sales	30.9		%	32.6		%	31.8		%	32.1		%

Restructuring charges	—			384			—			730
Gain on sale of building	—			(3,204)			—			(3,204)
Selling, general and administrative expenses	14,749			14,224			30,762			27,615

Operating income	4,201			6,201			8,333			8,036

Other (expense), net	(662)			(426)			(436)			(427)

Income before income taxes	3,539			5,775			7,897			7,609

Income tax expense (benefit)	1,011			1,918			2,137			(364)

Net income	$	2,528		$	3,857		$	5,760		$	7,973


Basic income per share	$	0.35		$	0.54		$	0.80		$	1.13
Diluted income per share	$	0.34		$	0.53		$	0.77		$	1.10

Weighted average outstanding shares used in per share calculations:
Basic	7,243			7,081			7,185			7,035
Diluted	7,492			7,294			7,473			7,260

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

THE L. S. STARRETT COMPANY

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

Three Months Ended
9/30/2021 9/30/2020
Net income $ 3,232 $ 4,116
Other comprehensive (loss):
Currency translation (loss), net of tax (3,611) (236)
Pension and postretirement plans, net of tax (66) (22)
Other comprehensive (loss) (3,677) (258)
Total comprehensive (loss) income $ (445) $ 3,858


	3 Months Ended				6 Months Ended
	12/31/2021		12/31/2020		12/31/2021		12/31/2020

Net income	$	2,528	$	3,857	$	5,760	$	7,973
Other comprehensive income (loss):
Currency translation gain (loss), net of tax	(871)		3,846		(4,482)		3,610
Pension and postretirement plans, net of tax	(67)		1		(133)		(21)
Other comprehensive income (loss)	(938)		3,847		(4,615)		3,589

Total comprehensive income	$	1,590	$	7,704	$	1,145	$	11,562

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

THE L. S. STARRETT COMPANY

Consolidated Statements of Stockholders' Equity

(in thousands)

(unaudited)

For the Three ~~Month~~and Six-Month Period Ended ~~September 30,~~December 31, 2021:

Common Stock
Outstanding Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Total
Class A Class B
Balance June 30, 2021 $ 6,475 $ 634 $ 56,507 $ 74,181 $ (54,262) $ 83,535
Total comprehensive income (loss) — — — 3,232 (3,677) (445)
Repurchase of shares — (2) (14) — — (16)
Stock-based compensation 119 — 55 — — 174
Conversion 25 (25) — — — —
Balance September 30, 2021 $ 6,619 $ 607 $ 56,548 $ 77,413 $ (57,939) $ 83,248
Accumulated balance consists of:
Translation loss $ (59,657)
Pension and postretirement plans, net of taxes 1,718
$ (57,939)


	Common Stock Outstanding				Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total
	Class A		Class B

Balance June 30, 2021	$	6,475	$	634	$	56,507	$	74,181	$	(54,262)	$	83,535
Total comprehensive income (loss)	—		—		—		3,232		(3,677)		(445)
Repurchase of shares	—		(2)		(14)		—		—		(16)
Stock-based compensation	119		—		55		—		—		174
Conversion	25		(25)		—		—		—		—
Balance September 30, 2021	$	6,619	$	607	$	56,548	$	77,413	$	(57,939)	$	83,248

Total comprehensive income	—		—		—		2,528		(938)		1,590
Repurchase of shares	—		—		(7)		—		—		(7)
Issuance of stock	7		8		102		—		—		117
Stock-based compensation	11		—		226		—		—		237
Conversion	7		(7)		—		—		—		—
Balance December 31, 2021	$	6,644	$	608	$	56,869	$	79,941	$	(58,877)	$	85,185

Accumulated balance consists of:
Translation loss									$	(60,528)
Pension and postretirement plans, net of taxes									1,651
									$	(58,877)

For the Three ~~Month~~and Six-Month Period Ended ~~September 30,~~December 31, 2020:


		Common Stock Outstanding				Additional Paid-in Capital				Retained Earnings			Accumulated Other Comprehensive Loss				Total				Common Stock Outstanding								Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Loss				Total
		Class A		Class B								Class A								Class B

Balance June 30, 2020	Balance June 30, 2020	$	6,308	$	680			$	55,762						$	58,648			$	(75,415)			$	45,983	Balance June 30, 2020		$	6,308			$	680			$	55,762			$	58,648			$	(75,415)	$	45,983
Total comprehensive income (loss)	Total comprehensive income (loss)	—		—		—				4,116			(258)				3,858			Total comprehensive income (loss)	—				—					—				4,116				(258)				3,858

Repurchase of shares	Repurchase of shares	—		(2)		(4)				—			—				(6)			Repurchase of shares	—				(2)				(4)				—				—				(6)

Stock-based compensation	Stock-based compensation	8		—		359				—			—				367			Stock-based compensation	8				—				359				—				—				367
Conversion	Conversion	26		(26)		—				—			—				—			Conversion	26				(26)				—				—				—				—
Balance September 30, 2020	Balance September 30, 2020	$	6,342	$	652	$	56,117			$	62,764		$	(75,673)			$	50,202		Balance September 30, 2020	$	6,342			$	652			$	56,117			$	62,764			$	(75,673)			$	50,202

Total comprehensive income																				Total comprehensive income	—				—				—				3,857				3,847				7,704
Repurchase of shares																				Repurchase of shares	—				—				(1)				—				—				(1)
Issuance of stock																				Issuance of stock	—				8				17				—				—				25
Stock-based compensation																				Stock-based compensation	103				—				51				—				—				154
Conversion																				Conversion	3				(3)				—				—				—				—
Balance December 31, 2020																				Balance December 31, 2020	$	6,448			$	657			$	56,184			$	66,621			$	(71,826)			$	58,084

Accumulated balance consists of:	Accumulated balance consists of:																			Accumulated balance consists of:
Translation loss	Translation loss												$	(62,110)						Translation loss																	$	(58,264)
Pension and postretirement plans, net of taxes	Pension and postretirement plans, net of taxes												(13,563)							Pension and postretirement plans, net of taxes																	(13,562)
													$	(75,673)																							$	(71,826)

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

THE L. S. STARRETT COMPANY

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Three Months Ended
9/30/2021 9/30/2020
Cash flows from operating activities:
Net income $ 3,232 $ 4,116
Non-cash operating activities:
Depreciation 1,262 1,360
Amortization 335 300
Stock-based compensation 174 367
Net long-term tax obligations 38 17
Deferred taxes 193 (2,822)
Postretirement benefit and pension obligations (353) 4
Working capital changes:
Accounts receivable (5,797) (1,656)
Inventories (2,887) 3,194
Other current assets (1,888) (324)
Other current liabilities 104 678
Prepaid pension expense (288) (1,609)
Other 34 38
Net cash (used in) provided by operating activities (5,841) 3,663
Cash flows from investing activities:
Purchases of property, plant and equipment (2,334) (1,543)
Software development (290) (251)
Net cash (used in) investing activities (2,624) (1,794)
Cash flows from financing activities:
Proceeds from borrowing 13,767 4,462
Debt repayments (8,040) (8,475)
Shares repurchased (16) (6)
Net cash provided by (used in) financing activities 5,711 (4,019)
Effect of exchange rate changes on cash 276 253
Net decrease in cash (2,478) (1,897)
Cash, beginning of period 9,105 13,458
Cash, end of period $ 6,627 $ 11,561
Supplemental cash flow information:
Interest paid $ 224 $ 201
Income taxes paid, net 1,116 1,224


	6 Months Ended
	12/31/2021		12/31/2020

Cash flows from operating activities:

Net income	$	5,760	$	7,973

Non-cash operating activities:
Gain from sale of real estate	—		(3,204)
Depreciation	2,567		2,681
Amortization	660		605
Stock-based compensation	411		521
Net long-term tax obligations	86		114
Deferred taxes	305		(2,564)
Postretirement benefit and pension obligations	(706)		32
Working capital changes:
Accounts receivable	(1,619)		(2,911)
Inventories	(6,002)		4,615
Other current assets	(1,063)		(349)
Other current liabilities	(3,767)		(1,813)
Prepaid pension expense	(2,071)		(3,469)
Other	872		170
Net cash (used in) provided by operating activities	(4,567)		2,401

Cash flows from investing activities:
Purchases of property, plant and equipment	(4,457)		(3,050)
Software development	(533)		(537)
Proceeds from sale of real estate	—		5,214
Net cash (used in) provided by investing activities	(4,990)		1,627

Cash flows from financing activities:
Proceeds from borrowing	29,605		9,142
Debt repayments	(20,244)		(12,608)
Proceeds from common stock issued	117		25
Shares repurchased	(23)		(7)
Net cash provided by (used in) financing activities	9,455		(3,448)

Effect of exchange rate changes on cash	434		521

Net increase in cash	332		1,101
Cash, beginning of period	9,105		13,458
Cash, end of period	$	9,437	$	14,559

Supplemental cash flow information:
Interest paid	$	465	$	423
Income taxes paid, net	2,222		2,941

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

THE L. S. STARRETT COMPANY

Notes to Unaudited Consolidated Financial Statements

~~September 30,~~December 31, 2021 ~~(Unaudited)~~

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

The unaudited interim consolidated financial statements as of and for the ~~three~~six months ended ~~September 30,~~December 31, 2021 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 information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. These unaudited consolidated 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 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2021. The balance sheet as of June 30, 2021 has been derived from the audited consolidated financial statements as of and for the year ended June 30, 2021. Operating results are not necessarily indicative of the results that may be expected for any future interim period or for the entire fiscal year. The Company’s “fiscal year” begins July 1st and ends June 30th.

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, 2021 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.

Throughout the pandemic crisis, the Company's main focus has been on protecting the health and well-being of its employees, and the long-term financial health of the Company. It remains very difficult for management to predict when this crisis will no longer be a risk to future sales and operations. To the extent that pandemic-related events do not provide evidence about conditions that existed at the balance-sheet date, the Company considers it necessary to disclose it cannot estimate all aspects of the impact on the financial statements as a result of the on-going pandemic.

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, 2021. The Company’s business is aggregated into 2 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 the unallocated column 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, 2021
Sales1
$ 33,809 $ 27,705 $ — $ 61,514
Operating Income (Loss) $ 2,501 $ 3,583 $ (1,951) $ 4,133
Three Months Ended September 30, 2020
Sales2
$ 25,984 $ 23,427 $ — $ 49,411
Operating Income (Loss) $ 839 $ 2,830 $ (1,834) $ 1,835

~~Table of Contents~~


	North American Operations		International Operations		Unallocated		Total
Three Months ended December 31, 2021

Sales1	$	32,666	$	28,652	$	—	$	61,318

Operating Income (Loss)	$	1,549	$	4,394	$	(1,742)	$	4,201

Three Months ended December 31, 2020

Sales2	$	27,106	$	26,948	$	—	$	54,054

Operating Income (Loss)	$	3,688	$	4,436	$	(1,923)	$	6,201

1.Excludes ~~$749~~$930 of North American segment intercompany sales to the International segment, and ~~$5,336~~$4,412 of International segment intercompany sales to the North American segment.

2.Excludes $992 of North American segment intercompany sales to the International segment, and $2,610 of International segment intercompany sales to the North American segment.


	North American Operations		International Operations		Unallocated		Total
Six months ended December 31, 2021

Sales1	$	66,475	$	56,357	$	—	$	122,832
Operating Income (Loss)	$	4,050	$	7,977	$	(3,694)	$	8,333

Six months ended December 31, 2020

Sales2	$	53,089	$	50,375	$	—	$	103,464
Operating Income (Loss)	$	4,516	$	7,277	$	(3,757)	$	8,036

1.Excludes $1,679 of North American segment intercompany sales to the International segment, and $9,748 of International segment intercompany sales to the North American segment.

2.Excludes ~~$746~~$1,737 of North American segment intercompany sales to the International segment, and ~~$2,786~~$5,396 of International segment intercompany sales to the North American segment.

Note 3: Revenue from Contracts with Customers

Under ASC Topic 606, the Company is required to present a refund liability and a return asset within the Unaudited Consolidated Balance Sheet. As of ~~September 30,~~December 31, 2021 and June 30, 2021, the balance of the return asset was $0.1 million and $0.2 million, respectively, and the balance of the refund liability as of December 31, 2021 and June 30, 2021 was $0.2 ~~million and $0.2 million, respectively.~~million. They are presented within prepaid expenses and other current assets and accrued expenses, respectively, on the Consolidated Balance Sheets.

The Company, in general, warrants its products against certain defects in material and workmanship when used as designed, for a period of up to one 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 ~~$0.5~~$0.9 million and ~~$0.4~~$0.6 million at ~~September 30,~~December 31, 2021 and June 30, 2021, respectively, located in Accounts Payable in the Consolidated Balance Sheets.

Disaggregation of Revenue

The Company operates in 2 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,~~December 31, 2021 and 2020 (in thousands):

Three Months Ended
9/30/2021 9/30/2020
North America
United States $ 32,020 $ 24,337
Canada & Mexico 1,789 1,647
33,809 25,984
International
Brazil 19,203 14,908
United Kingdom 4,968 4,995
China 1,618 1,581
Australia & New Zealand 1,916 1,943
27,705 23,427
Total Sales $ 61,514 $ 49,411


	Three Months Ended				Six Months Ended
	12/31/2021		12/31/2020		12/31/2021		12/31/2020
North America
United States	$	30,912	$	25,345	$	62,932	$	49,682
Canada & Mexico	1,754		1,761		3,543		3,408
	32,666		27,106		66,475		53,090
International
Brazil	18,687		17,493		37,890		32,401
United Kingdom	4,729		5,554		9,697		10,548
China	2,244		2,005		3,862		3,586
Australia & New Zealand	2,992		1,896		4,908		3,839
	28,652		26,948		56,357		50,374

Total Sales	$	61,318	$	54,054	$	122,832	$	103,464

Note 4: Recent Accounting Pronouncements

In ~~August 2018,~~June 2016, the FASB issued ASU ~~No. 2018-14, "Compensation~~2016-13, “Financial Instruments - ~~Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)~~Credit Losses (Topic 326): ~~Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." ASU 2018-14~~

~~Table of Contents~~

removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and added additional disclosures. The Company adopted this ASU on July 1, 2021. The amendments in ASU 2018-14 must be applied on a retrospective basis. The adoption of this pronouncement did not have a material impact on the Company's consolidated financial statements.

~~In December 2019, FASB issued ASU 2019-12, Income Taxes (Topic 740). The amendments in this update simplify the accounting for income taxes by removing the following exceptions:~~

a) Exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income)

~~b) Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment~~

~~c) Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary~~

~~d) Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.~~

~~The amendments in this update also simplify the accounting for income taxes by doing the following:~~

a) Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax. Requiring that an entity evaluate when a step up in the tax basis of

~~goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction.~~

b) Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both

~~not subject to tax and disregarded by the taxing authority.~~

~~c) Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.~~

~~d) Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.~~

~~The Company adopted the amendments in this update on July 1, 2021 without a material impact on its consolidated financial statements.~~

~~Recently Issued Accounting Standards not yet adopted:~~

In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The amendments in this Update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of)

reference rate reform on financial reporting. Optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this Update apply to contract modifications that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). The Company currently has no hedging type contracts or others tied to reference rates where this standard would have a material impact to the Company's accounting. The first amendment to the amended and restated loan and security agreement with TD Bank dated September 17, 2020 increased the maximum interest charged on the LineMeasurement of Credit from and annual interest rate of 2.25% plus LIBOR to 3.50% plus LIBOR, but ultimately our interest rate is capped accordingly in this agreement. The Company does not expect the adoption of this standard to have a material impactionLosses on ~~its consolidated financial statements.~~

In November 2019, FASB issued ASU 2019-10, which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates of certain major new accounting standards. Of those standards affected

~~Table of Contents~~

~~the following is the only one not yet implemented by the Company.~~ Financial Instruments, ~~Credit Losses ASU 2016-13 (ASC 326)~~” 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 was permitted for annual periods beginning after December 15, 2018, and interim periods therein. This pronouncement was extended for Small Reporting Companies and for the Company ~~beginning~~to July 1, 2022. The Company does not expect the adoption of this standard to have a material impact on ~~its consolidated~~the financial ~~statements.~~position and results of operations.

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 the Company beginning July 1, 2021 and must be applied on a retrospective basis. The Company does not expect the adoption of this standard to have a material impact on the financial position and results of operations or the required disclosures.

Note 5:5: Leases

Operating lease cost amounted to ~~$0.7~~$0.8 million and $1.6 million for the three and six months period ended December 31, 2021 and $0.6 million and $1.2 million for the three and six months period ended ~~September 30, 2021 and~~December 31, 2020. As of ~~September 30,~~December 31, 2021, the Company’s right-of-use assets, lease obligations and remaining cash commitment on these leases (in thousands):

Right-of-Use
Assets Operating Lease
Obligations Remaining Cash
Commitment
Operating leases 6,490 $ 6,619 $ 7,936


	Right-of-Use Assets		Operating Lease Obligations		Remaining Cash Commitment
Operating leases	$	5,772	$	5,932	$	7,201

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 4.9 years. As of September 30, 2021, the Company’s financing leases are de minimis. The foreign exchange impact affecting the operating leases are de minimis.

In September 2021, the Company entered into a six year lease in China for 100,682 square feet and recorded a right of use asset for $2.6 million. The facility is expected to be operational by the end of 2021. In July, Starrett UK leased space to another company for annual rent of $0.2 million and incremental applicable service charges. The lease is a 20 year agreement with a contract review in 2026. The fees are recorded in Other Income in the Company's Consolidated Statement of Operations.

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 4.6 years. As of December 31, 2021, the Company’s financing leases are de minimis. The foreign exchange impact affecting the operating leases are de minimis.

The Company entered into $0.1 million and $2.6 million in new operating lease commitments and incurred immaterial exchange expense during the three and six months ended December 31, 2021.

At ~~September 30,~~December 31, 2021, the Company had the following fiscal year minimum operating lease commitments (in thousands)

Three Months Ended September 30, 2021 Operating Lease
Commitments
2022 (Remainder of year) $ 1,727
2023 1,656
2024 1,523
2025 1,166
2026 1,013
Thereafter 850
Subtotal $ 7,936
Imputed interest (1,316)
Total 6,619


Six months ended December 31, 2021	Operating Lease Commitments
2021 (Remainder of year)	$	994
2023	1,689
2024	1,520
2025	1,129
2026	1,044
Thereafter	824
Subtotal	$	7,201
Imputed interest	(1,269)
Total	5,932

Note 6: Stock-based Compensation

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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. There are no shares available under the 2012 Plan.

On September 1, 2021, the Board of Directors adopted The L.S. Starrett Company 2021 Long Term Incentive Plan (the “2021 Stock Plan”). The 2021 Stock Plan was approved by shareholders on October 13, 2021.

Both the 2012 and 2021 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 2021 and 2012 Stock ~~Plan provides~~Plans provide for the issuance of up to 500,000 shares of common stock.

~~Options~~Under both plans, 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,~~December 31, 2021, there were ~~7,500~~0 stock options and ~~135,582~~205,636 restricted stock units outstanding. There were ~~22,401~~441,901 shares available for grant under the ~~2012~~2021 Stock Plan as of ~~September 30,~~December 31, 2021.

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~~six months ended ~~September 30,~~December 31, 2021 and 2020.

The weighted average contractual term for stock options outstanding as of ~~September 30,~~December 31, 2021 was ~~1.25~~1.0 years. ~~The aggregate intrinsic value of~~There are no stock options outstanding as of ~~September 30, 2021 was less than $0.1 million. Stock~~December 31, 2021. There were no stock options exercisable as of ~~September 30, 2021 were 7,500 shares.~~December 31, 2021. In

recognizing stock compensation expense for the 2012 and 2021 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 080,500 RSU awards with a fair value of $11.35 per RSU granted during the ~~three~~six months ended ~~September 30,~~December 31, 2021. There were ~~114,221~~124,668 RSUs settled, and 11,174 RSUs forfeited during the ~~three~~six months ended ~~September 30,~~December 31, 2021. The aggregate intrinsic value of RSU awards outstanding as of ~~September 30,~~December 31, 2021 was ~~$1.7~~$1.9 million. ~~All~~As of December 31, 2021, all vested awards ~~vesting in the quarter ending of September 30, 2021~~ have 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~~three and six-month periods ended ~~September 30,~~December 31, 2021 ~~and 2020 was $0.1~~were $0.2 million and $0.3 million as compared to the prior year three and six months of $0.2 million and $0.5 million, respectively. As of ~~September 30,~~December 31, 2021, there was ~~$2.2~~$2.8 million of total unrecognized compensation costs related to outstanding stock-based compensation arrangements. Of this cost, $1.7 million relates to performance based RSU grants that are not expected to be awarded. The remaining ~~$0.5~~$1.1 million is expected to be recognized over a weighted average period of ~~1.5~~2.0 years.

Note 7: Inventories

Inventories consist of the following (in thousands):

~~Table of Contents~~


		9/30/2021		6/30/2021			12/31/2021		06/30/2021
Raw material and supplies	Raw material and supplies	$	29,123	$	29,271	Raw material and supplies	$	30,687	$	29,271
Goods in process and finished parts	Goods in process and finished parts	15,863		16,096		Goods in process and finished parts	16,592		16,096
Finished goods	Finished goods	36,613		37,344		Finished goods	37,853		37,344
		81,599		82,711			85,132		82,711
LIFO Reserve	LIFO Reserve	(20,401)		(22,139)		LIFO Reserve	(21,258)		(22,139)
		$	61,198	$	60,572		$	63,874	$	60,572

Of the Company’s ~~$61.2~~$63.9 million and $60.6 million total inventory at ~~September 30,~~December 31, 2021 and June 30, 2021, respectively, the ~~$20.4~~$21.3 million and $22.1 million LIFO reserves belong to the U.S. Precision Tools and Saws Manufacturing “Core U.S.” business.The Core U.S. business total inventory was ~~$27.3~~$30.2 million on a FIFO basis and ~~$6.9~~$8.9 million on a LIFO basis at ~~September 30,~~December 31, 2021. The Core U.S. business had total Inventory, on a FIFO basis, of $27.8 million and $5.7 million on a LIFO basis as of June 30, ~~2020.~~2021. The use of LIFO, as compared to FIFO, resulted in a ~~$1.7~~$0.1 million ~~increase~~decrease in cost of sales for the goods sold in the period ending ~~September 30,~~December 31, 2021 compared to ~~$0.5~~$0.4 million ~~increase~~ in the ~~three~~six months ending ~~September 30,~~December 31, 2020.

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. During the fourth quarter of fiscal year 2020 the Company tested impairment of intangible assets according to ASC 360 "Property, Plant and Equipment" and determined the carrying value was deemed to be recoverable at Bytewise but not at the private software company where the impairment of intangibles was calculated. The Company concluded ~~there~~that intangible assets of the private software company were impaired by $2.9 million.

The Company then, according to ASC 350 Intangibles -Goodwill and Other, conducted a step one analysis performed based on the update carrying value for each reporting unit. Goodwill was ~~no triggering events in fiscal 2021 nor in~~determined to be impaired $0.6 million at the ~~Three Months Ended September~~private software company and Goodwill of $3.0 million was impaired at the Bytewise reporting unit as of June 30, ~~2021~~2020. As a result, the balance of Goodwill at Bytewise is zero and ~~0 impairment was recorded during that time.~~$1.0 million at the private software company as of December 31, 2020.

The Company will continue to perform an annual assessment of goodwill associated with its purchase of a private software company. If future results significantly vary from current estimates, related projections, or business assumptions due to changes in industry or market conditions, the Company may be required to perform an impairment analysis prior to our annual test date if a triggering event is identified. As of December 31, 2021 , the Company did not identify a triggering event.

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


		9/30/2021		6/30/2021			12/31/2021		6/30/2021
Trademarks and trade names	Trademarks and trade names	2,070		2,070		Trademarks and trade names	2,070		2,070
Completed technology		2,010		2,010

Customer relationships	Customer relationships	630		630		Customer relationships	630		630
Software development	Software development	10,534		10,244		Software development	10,777		10,244

Gross intangible assets		15,244		14,954
Total						Total	13,477		12,944
Accumulated amortization and impairment	Accumulated amortization and impairment	(10,401)		(10,066)		Accumulated amortization and impairment	(8,716)		(8,056)

Net intangible assets		$	4,843	$	4,888
Total net balance						Total net balance	$	4,761	$	4,888

The category completed technology became fully amortized in November 2021 and, therefore, removed from the above table. 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 2021 and for each of the next 5five years and thereafter, is as follows (in thousands):

2022 remaining $ 1,048
2023 1,211
2024 940
2025 781
2026 571
2027 132
Thereafter 160
Total net balance $ 4,843

~~Table of Contents~~


2022 (Remainder of year)	$	701
2023	1,260
2024	989
2025	829
2026	619

Thereafter	363
Total net balance	$	4,761

Note 9: Pension and Post-retirement Benefits

The Company has 2 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 the Company's defined benefit pension plans are located in Other ~~Income~~(expense), net in Consolidated Statements of Operations except (in the table below) for service ~~cost.~~cost . Service cost are in cost of sales and selling, general and ~~administrative.~~administrative expenses. Net periodic benefit costs consist of the following (in thousands):


		Three Months Ended				Three Months Ended				Six Months Ended
		9/30/2021		9/30/2020				12/31/2021		12/31/2020		12/31/2021		12/31/2020
Service cost		$	—	$	—
Interest cost	Interest cost	1,033		1,113			Interest cost	1,031		1,118		2,064		2,231
Expected return on plan assets	Expected return on plan assets	(1,100)		(1,108)			Expected return on plan assets	(1,098)		(1,113)		(2,198)		(2,221)
Amortization of net loss	Amortization of net loss	14		13			Amortization of net loss	15		14		28		27
		$	(53)	$	18			$	(52)	$	19	$	(106)	$	37

Net periodic benefit costs for the Company's Postretirement Medical Plan consists of the following (in thousands):

Three Months Ended
9/30/2021 9/30/2020
Service cost $ 9 $ 21
Interest cost 12 51
Amortization of prior service credit (368) (134)
Amortization of net loss 47 42
$ (300) $ (20)


	Three Months Ended				Six Months Ended
	12/31/2021		12/31/2020		12/31/2021		12/31/2020
Service cost	$	9	$	22	$	18	$	43
Interest cost	13		52		25		103
Amortization of prior service credit	(369)		(135)		(737)		(269)
Amortization of net loss	47		41		94		83
	$	(300)	$	(20)	$	(600)	$	(40)

For both the three month ~~period~~and six month periods ended ~~September 30,~~December 31, 2021, the Company contributed 0 $1.5 million, in the U.S. and $0.3 million and $0.5 million in the UK pension ~~plans.~~ plans for the same periods. Based upon the actuarial valuations performed on the Company’s defined benefit plans as of June 30, 2021, the contribution for fiscal 2022 for the U.S. plans would require a contribution of $5.6 million and the U.K. plan would require one of $1.0 million However, as a result of the American Rescue Plan Act of 2021, the minimum required company contribution for the U.S. Plan in fiscal 2022 was reduced from $5.6 million to $0.6 million. The Company ~~feels~~believes that government regulation is only a small part of deciding the pension funding, and as a result, intends to contribute more than the federal requirement. The Company is currently planning on evaluating the U.S. future contribution on a quarterly basis and plans to contribute $0.5 million in the 2nd half of fiscal 2022.

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.

Note 10: Debt

Debt is comprised of the following (in thousands):

~~Table of Contents~~

9/30/2021 6/30/2021
Short-term and current maturities
Loan and Security Agreement (Line of Credit) 12,409 9,153
Loan and Security Agreement (Term Loan) 1,494 1,509
Brazil Loans 8,094 5,297
21,997 15,959
Long-term debt (net of current portion)
Loan and Security Agreement (Term Loan) 5,540 6,010
$ 27,537 $ 21,969

~~On June 25, 2020, the Borrowers and TD Bank entered into an amendment and restatement (the “Amendment and Restatement”) of the Loan Agreement.~~The Amendment and Restatement waived the fixed charge coverage ratio for the quarter ended June 30, 2020. In addition, the Amendment and Restatement clarifies that certain non-cash adjustments to the definition of EBITDA are permitted under the Loan Agreement, as amended.In addition, the Amendment and Restatement increases the permitted borrowings from a foreign bank from $5.0 million to $15.0 million and permits the Company to draw the remainder of the outstanding balance under the Loan Agreement.

Pursuant to the terms of the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of the Fixed Charge Coverage Ratio until September 30, 2021~~and (ii) establishment of a new minimum cumulative EBITDA and minimum liquidity covenants in lieu thereof.~~TD Bank updated its security interests in the Company’s U.S. based assets, increased the maximum interest charged on the Line Of Credit from and annual interest rate of 2.25% plus LIBOR to 3.50% plus Libor, and amended the borrowing base for the line of credit from 80% of Qualified AR and 50% of the lower of Cost or Market of US inventory values to 80% of qualified AR plus 85% of the Net Orderly Liquidation Value (NOLV) of US Inventory plus 62.5% of total appraised US real estate values.As a result of this change, the Company is projected to maintain its current borrowing capacity of $25,000,000 under the Line of Credit. The Company underwent a series of appraisals and field exams in all US locations as part of restructuring this agreement and will provide additional reporting supporting the borrowing base and covenants certifications.~~This minimum adjusted EBITDA covenant was based on the Company’s plan for a slow pandemic recovery throughout FY21 and the impact of the Company’s restructuring plan initiatives.The Company has applied certain proceeds from the sale of US real estate assets against the principle balance of the term loans under the TD Bank loan agreement.The Company will also apply certain proceeds from certain future sales against the principle balance of the term loans under the TD Bank loan agreement.~~ The Agreement has reverted to the existing covenant package for the quarter ending September 30, 2021 and every quarter thereafter. The Company was compliant with the minimum liquidity requirement and the minimum adjusted cumulative EBITDA required bank covenants as of September 30, 2021.


	12/31/2021		06/30/2021
Short-term and current maturities
Loan and Security Agreement (Line of credit)	13,746		9,153
Loan and Security Agreement (Term Loan)	1,509		1,509
Brazil Loans	6,714		5,297
	21,969		15,959
Long-term debt (net of current portion)
Loan and Security Agreement (Term Loan)	5,158		6,010
Brazil Loans	4,000		—
	9,158		6,010
	$	31,127	$	21,969

On December 31, 2019, the Company entered into the Tenth Amendment of its Loan and Security Agreement (“Tenth Amendment”). Under the revised agreement, the credit limit for the Revolving Loan was increased from $23.0 million to $25.0 million. In addition, the Company entered into a new $10.0 million 5-year Term Loan with a fixed interest rate of 4.0%. ~~The new Term Loan will require interest only payments for 12 months and will convert to a term loan requiring both interest and principal payments commencing January 1, 2021. Also, under~~Under the Tenth Amendment, the credit limit for external borrowing was increased from $2.5 million to $5.0 million.

On June 25, 2020, the Borrowers and TD Bank entered into an amendment and restatement (the “Amendment and Restatement”) of the Loan Agreement. The Amendment and Restatement waived the fixed charge coverage ratio for the quarter ended June 30, 2020. In addition, the Amendment and Restatement clarifies that certain non-cash adjustments to the definition of EBITDA are permitted under the Loan Agreement, as amended. In addition, the Amendment and Restatement increases the permitted borrowings from a foreign bank from $5.0 million to $15.0 million and permits the Company to draw the remainder of the outstanding balance under the Loan Agreement.

increased the maximum interest charged on the Line Of Credit from and annual interest rate of 2.25% plus Libor to 3.50% plus Libor, and amended the borrowing base for the line of credit from 80% of Qualified AR and 50% of the lower of Cost or Market of US inventory values to 80% of qualified AR plus 85% of the Net Orderly Liquidation Value (NOLV) of US Inventory plus 62.5% of total appraised US real estate values.

As a result of this change, the Company is projected to maintain its current borrowing capacity of $25,000,000 under the Line of Credit. The Company underwent a series of appraisals and field exams in all US locations as part of restructuring this agreement and will provide additional reporting supporting the borrowing base and covenants certifications. This minimum adjusted EBITDA covenant was based on the Company’s plan for a slow pandemic recovery throughout FY21 and the impact of the Company’s restructuring plan initiatives. As of September 30, 2021, the agreement has reverted to the prior covenant package. The Company was compliant with the minimum liquidity requirement and the minimum fixed charge coverage ratio required bank covenants as of December 31, 2021.

Total debt increased ~~$5.6~~$9.2 million during the ~~three~~six months ~~ending September 30, 2021.~~ ended December 31, 2021, $5.4 million of which was an increase in Brazil. This is in response to increased working capital levels required to meet strong customer demand and counteract pandemic related supply chain disruptions and increased transit times.

During the six months ended December 31, 2021 the Brazilian subsidiary realized a build-up of ICMS (sales tax) credits, a consequence of the fiscal 2021 restructuring activities which increased the manufacturing activity and, therefore, raw material imports into Brazil. As the Company's Brazilian subsidiary is now exporting a larger proportion of its sales, its ability to re-claim these ICMS credits has been diminished. The Company is actively mitigating this consequence by filing applications with the relevant tax authorities to change the methodology of charging and re-claiming ICMS on imports and domestic sales so that this credit is subsequently relieved and does not increase at this rate again. This new methodology is common for similar sized, export focused companies in Brazil.

Availability under the Line of Credit remains subject to a borrowing base comprised of ~~accounts receivable~~Accounts Receivable, Inventory, and ~~inventory.~~Real Estate. The Company believes that the borrowing base will consistently produce availability under the Line of Credit of $25.0 million. A 0.25% commitment fee is charged on the unused portion of the Line of Credit.

The Company’s Brazilian subsidiary incurs short-term loans with local banks in order to support the Company’s strategic initiatives. The loans are backed by the entity’s US dollar denominated export receivables. The Company’s Brazilian subsidiary has the following loans of ~~September 30,~~December 31, 2021 (in thousands):

~~Table of Contents~~


Lending Institution	Lending Institution	Interest Rate		Beginning Date	Ending Date	Outstanding Balance		Lending Institution	Interest Rate	Beginning Date	Ending Date	Outstanding Balance
Santander								Santander	5.98%	February 2021	February 2022	$	1,219
Brasil								Brasil	2.80%	May 2021	May 2022	$	795
Bradesco	Bradesco	2.37	%	December 2020	December 2021	$	595	Bradesco	1.88%	July 2021	July 2022	$	1,170
Bradesco	Bradesco	4.74	%	December 2020	December 2021	551		Bradesco	2.05%	August 2021	July 2022	$	400
Santander	Santander	5.98	%	February 2021	February 2022	1,250		Santander	2.15%	August 2021	July 2022	$	731
Brazil Bank		2.80	%	May 2021	May 2022	1,398
Bradesco		1.88	%	July 2021	July 2022	1,300
Bradesco		2.05	%	August 2021	July 2022	400
Brasil								Brasil	2.10%	August 2021	August 2022	$	1,400
Itau								Itau	4.52%	October 2021	September 2024	$	4,000
Santander	Santander	2.15	%	August 2021	July 2022	1,200		Santander	2.71%	December 2021	December 2022	1,000
Brazil Bank		2.10	%	August 2021	August 2022	1,400

						$	8,094					$	10,714

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. Beginning in fiscal 2019, the Company incorporated certain provisions of the Act in the calculation of the tax provision and effective tax rate, including the provisions related to the Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Base Erosion Anti Abuse Tax (“BEAT”), as well as other provisions, which limit tax deductibility of expenses.

The GILTI provisions ~~are expected to~~ have had 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.

In July 2020, the IRS issued final regulations and additional proposed regulations that address the application of the high-taxed exclusion from GILTI. Under these regulations, the Company can make an annual election to exclude from its GILTI inclusion, income from its foreign subsidiaries that’s effective income tax rate exceeds 18.9% for that year.The regulations must be applied for tax years beginning after July 23, 2020 but companies have the option to apply retroactively for tax years beginning after December 31, 2017 and before July 23, 2020. In the first quarter of fiscal 2021 the Company recognized a discrete tax benefit of ($2.7) million related to the impact of electing to apply the high-tax exclusion retroactively for fiscal year 2019 and fiscal year 2020.

~~The~~For the three month period ended December 31, 2021, the Company recognized tax expense ~~for the first quarter~~ of ~~fiscal 2022 was $1.1~~$1.0 million on a profit before tax of ~~$4.4~~$3.5 million ~~(an~~or an effective tax rate of ~~26%)~~29%. For the three month period ended December 31, 2020, the Company recognized tax expense of $1.9 million on a profit before tax of $5.8 million or an effective tax rate of 33%. The tax rate for both fiscal 2022 and fiscal 2021 was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by tax credits and permanent deductions generated from research expenses.

For the six month period ended December 31, 2021, the Company recognized a tax benefit of $2.1 million on a profit before tax of $7.9 million or an effective tax rate of 27%. This was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by discrete tax benefits recognized from excess stock compensation deductions, tax credits, and permanent deductions generated from research expenses. ~~The~~For the six month period ended December 31, 2020. the Company recognized tax expense ~~for the first quarter~~ of ~~fiscal 2021 was a benefit of $(2.3)~~$(0.4) million on a profit before tax of ~~$1.8~~$7.6 million ~~(an~~or an effective tax rate of ~~(124)~~(5)%~~). Before~~.This was lower than the U.S. statutory tax rate of 21% primarily due to the discrete benefits relating to legislation enacted during the first quarter of fiscal 2021 in the amount of ($2.7) million related to the impact of the GILTI high-tax exclusion and ($0.2) million related to the impact of the increase in UK corporate tax rate on the net deferred tax ~~asset,~~asset. Other factors impacting the tax ~~expense was $0.7 million or 36% of pre-tax income. This was higher than the U.S. statutory tax~~ rate

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~~of 21% primarily due to~~ include the GILTI provisions and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by tax credits and permanent deductions generated from research expenses.

U.S. Federal tax returns for years prior to fiscal 2018 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,~~December 31, 2021, 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 2015 – present. During the next twelve months, it is possible there will be a reduction of ~~less than~~ $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 included in taxable income. While the Company continues to believe that forecasted future taxable income provide sufficient evidence to, more likely than not, support the realization of the tax benefits provided by those differences; the impact of COVID-19 may significantly impact its ability to forecast future pre-tax earnings in certain jurisdictions. If its forecasts are significantly impacted, the Company may need to record a valuation allowance on some or all its deferred tax assets as soon as the current fiscal year end.

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.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Use of ~~Non-U.S.~~Non- GAAP Financial Measures

In "Management's discussion and analysis on financial condition and results of operations" in this quarterly report on Form 10-Q, we discuss ~~non-U.S.~~non- GAAP financial measures related to currency-neutral sales, as well as adjusted operating income.

We present these ~~non-U.S.~~non- GAAP financial measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by eliminating items that we do not believe are indicative of our core operating performance. Such ~~non-U.S.~~non- GAAP financial measures assist investors in understanding the ongoing operating performance of the Company by presenting financial results between periods on a more comparable basis. Such measures should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“~~U.S.~~ GAAP”). Currency-neutral ~~sales~~numbers are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations. Adjusted operating income adjusts for restructuring costs and the gain on the sale of assets that are reflected in one period but not the other in order to show comparative operational performance. We include a reconciliation of currency-neutral revenues and adjusted operating income to its comparable ~~U.S.~~ GAAP financial measures.

References to currency-neutral sales and adjusted operating income should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with ~~U.S.~~ GAAP and may not be comparable to similarly titled ~~non U.S~~non- GAAP financial measures used by other companies. In evaluating these ~~non-U.S. GAAP~~non-GAAP financial measures, investors should be aware that in the future we may incur expenses or be involved in transactions that are the same as or similar to some of the adjustments in this presentation. Our presentation of ~~non-U.S. GAAP~~non-GAAP financial measures should not be construed to imply that its future results will be unaffected by any such adjustments. ~~Non-U.S. GAAP~~Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under ~~U.S.~~ GAAP.

Please see Note 2 regarding segment results of operations. 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 the unallocated column in the following tables as well as Note 2. These tables above are included to better explain our consolidated operational performance by showing more detail by business segment and reconciling ~~U.S.~~ GAAP operating income and adjusted operating income.

~~Three months ended September 30, 2021 and September 30, 2020~~

The following table represents key results of operations on a consolidated basis for the three months and six months ended ~~September 30,~~December 31, 2021 and ~~September 30,~~December 31, 2020:

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		Three Months Ended											Three Months Ended										Six Months Ended
(Amounts in thousands)	(Amounts in thousands)	9/30/2021			9/30/2020			$ Change favorable (unfavorable)		% Change		(Amounts in thousands)	12/31/21			12/31/2020			$ Change favorable (unfavorable)		% Change		12/31/2021			12/31/2020			$ Change favorable (unfavorable)	% Change
Net sales	Net sales	$	61,514		$	49,411		$	12,103	24.5	%	Net sales	$	61,318		$	54,054		$	7,264	13.4	%	$	122,832		$	103,464		19,368	18.7	%
Gross margin	Gross margin	20,145			15,572			4,573		29.4	%	Gross margin	18,950			17,605			1,345		7.6	%	39,095			33,177			5,918	17.8	%
% of net sales	% of net sales	32.7		%	31.5		%					% of net sales	30.9		%	32.6		%					31.8		%	32.1		%

Selling, general and administrative expenses	Selling, general and administrative expenses	16,012			13,391			(2,621)		(19.6)	%	Selling, general and administrative expenses	14,749			14,224			(525)		(3.7)	%	30,762			27,615			(3,147)	(11.4)	%
% of net sales	% of net sales	26.0		%	27.1		%					% of net sales	24.1		%	26.3		%					25.0		%	26.7		%

Restructuring charges	Restructuring charges	—			346			346		100.0	%	Restructuring charges	—			384			384		(100.0)	%	—			730			730	(100.0)	%

Gain on sale of building												Gain on sale of building	—			(3,204)			(3,204)		—	%	—			(3,204)			3,204	100.0	%

Operating income	Operating income	4,133			1,835			2,298		125.2	%	Operating income	4,201			6,201			(2,000)		(32.3)	%	8,333			8,036			297	3.7	%

Other income (expense), net	Other income (expense), net	226			(1)			227		227.0 %		Other income (expense), net	(662)			(426)			(236)		55.3	%	(436)			(427)			(9)	(2.0)	%

Income before income taxes	Income before income taxes	4,359			1,834			2,525		137.7	%	Income before income taxes	3,539			5,775			(2,236)		(38.7)	%	7,897			7,609			288	3.8	%

Income tax expense (benefit)	Income tax expense (benefit)	1,127			(2,282)			(3,409)		(149.4)	%	Income tax expense (benefit)	1,011			1,918			907		47.3	%	2,137			(364)			(2,501)	687.2	%

Net income	Net income	$	3,232		$	4,116		(884)		(21.5)	%	Net income	$	2,528		$	3,857		(1,329)		(34.5)	%	$	5,760		$	7,973		(2,213)	(27.8)	%

U.S. GAAP to Non-U.S. GAAP reconciliation:
		Three Months Ended
(Amounts in thousands)		9/30/2021			9/30/2020			$ Change favorable (unfavorable)		% Change
Operating income as reported		$	4,133		$	1,835		$	2,298	125	%
Removing restructuring charges		—			(346)			(346)		—

Non-U.S. GAAP adjusted operating income		$	4,133		$	2,181		$	1,952	90	%
% of net sales		6.7		%	4.4		%			230 basis points


GAAP to Non-GAAP reconciliation:
	Three Months Ended							Six Months Ended
(Amounts in thousands)	12/31/21		12/31/2020		$ Change favorable (unfavorable)	% Change		12/31/2021		12/31/2020		$ Change favorable (unfavorable)	% Change
Operating income as reported	4,201		6,201		(2,000)	(32)	%	8,333		8,036		297	4	%
Add back restructuring charges	—		(384)		(384)	100	%	—		(730)		(730)	100	%
Less gain on sale of building	—		3,204		3,204	(100)	%	—		3,204		3,204	(100)	%
Non- GAAP adjusted operating income	4,201		3,381		820	24	%	8,333		5,562		2,771	50	%
% of net sales	6.9	%	6.3	%		60 basis points		6.8	%	5.4	%		140 basis points

The following table represents key results of operations for three months ending December 31, 2021 and 2020 based on our business aggregated into two reportable segments according to geography of operations: North American Operations and International Operations as reflected in the table be

~~Key Results by Reporting Segment~~

Three Months Ended September 30, 2021 Three Months Ended September 30,2020
(Amounts in thousands) North America International Corporate Total North America International Corporate Total
Net sales $ 33,809 $ 27,705 $ — $ 61,514 $ 25,984 $ 23,427 $ — $ 49,411
Gross margin 9,535 10,610 — 20,145 6,838 8,734 — 15,572
% of net sales 28.2 % 38.3 % 32.7 % 26.3 % 37.3 % 31.5 %
Selling, general and administrative expenses 7,034 7,027 1,951 16,012 5,653 5,904 1,834 13,391
% of net sales 20.8 % 25.4 % 26.0 % 21.8 % 25.2 % 27.1 %
Restructuring charges — — — — 346 — — 346
Operating income 2,501 3,583 (1,951) 4,133 839 2,830 (1,834) 1,835
% of net sales 7.4 % 12.9 % 6.7 % 3.2 % 12.1 % 3.7 %

low:

~~Table of Contents~~

~~Non-U.S. GAAP Measure Reconciliation:~~


	Three Months Ended December 31, 2021											Three Months Ended December 31, 2020
(Amounts in thousands)	North America			International			Corporate		Total			North America			International			Corporate		Total
Net sales	$	32,666		$	28,652		$	—	$	61,318		$	27,106		$	26,948		$	—	$	54,054
Gross margin	8,321			10,629			—		18,950			6,769			10,837					17,605
% of net sales	25.5		%	37.1		%			30.9		%	25.0		%	40.2		%			32.6		%

Selling, general and administrative expenses	6,772			6,235			1,742		14,749			5,976			6,324			1,923		14,224
% of net sales	20.7		%	21.8		%			24.1		%	22.0		%	23.5		%			26.3		%

Restructuring charges	—			—			—		—			308			76			—		384
Gain on sale of building	—			—			—		—			(3,204)			—			—		(3,204)

Operating income (loss)	$	1,549		$	4,394		$	(1,742)	$	4,201		$	3,688		$	4,436		$	(1,923)	$	6,201
% of net sales	4.7		%	15.3		%			6.9		%	13.6		%	16.5		%			11.5		%
Add back restructuring charges							—		—			308			76			—		384
Less gain on sale of building	—			—			—		—			(3,204)			—			—		(3,204)

Non-GAAP adjusted operating income	$	1,549		$	4,394		$	(1,742)	$	4,201		$	792		$	4,512		$	(1,923)	$	3,381
% of net sales	4.7		%	15.3		%			6.9		%	2.9		%	16.7		%			6.3		%

The following table represents key results of operations for six months ending December 31, 2021 and 2020 based on our business aggregated into two reportable segments according to geography of operations : North American Operations and International Operations:


	Six Months Ended December 31, 2021											Six Months Ended December 31, 2020
(Amounts in thousands)	North America			International			Corporate		Total			North America			International			Corporate		Total
Net sales	$	66,475		$	56,357		$—		$	122,832		$	53,089		$	50,375		$—		$	103,464
Gross margin	17,855			21,239			—		39,095			13,595			19,582					33,177
% of net sales	26.9		%	37.7		%			31.8		%	25.6		%	38.9		%			32.1		%

Selling, general and administrative expenses	13,805			13,262			3,694		30,762			11,630			12,229			3,757		27,615
% of net sales	20.8		%	23.5		%			25.0		%	21.9		%	24.3		%			26.7		%

Restructuring charges	—			—					—			654			76			—		730
Gain on sale of building	—			—					—			(3,204)			—			—		(3,204)

Operating income (loss)	$	4,050		$	7,977		$	(3,694)	$	8,333		$	4,516		$	7,277		$	(3,757)	$	8,036
% of net sales	6.1		%	14.2		%			6.8		%	8.5		%	14.4		%			7.8		%
Add back restructuring charges	—			—			—		—			654			76			—		730
Less gain on sale of building	—			—			—		—			(3,204)			—			—		(3,204)

Non-GAAP adjusted operating income	$	4,050		$	7,977		$	(3,694)	$	8,333		$	1,966		$	7,353		$	(3,757)	$	5,562
% of net sales	6.1		%	14.2		%			6.8		%	3.7		%	14.6		%			5.4		%


US GAAP to NON-U.S. GAAP Reconciliation

(Amounts in Thousands)	Quarter Ended 12/31/2021	Comparison to Quarter Ended 12/31/2020			Fiscal 2022 YTD 12/31/2021	Comparison Fiscal 2021 YTD 12/31/2020
		12/31/2020	$ Change	% Change		12/31/2020	$ Change	% Change
Net Sales, as reported	$ 61,318	$ 54,054	$ 7,264	13.44%	$ 122,832	$ 103,464	$19,368	18.7%
Change when converting FY22 sales in non USD functional currencies at the same exchange rates used in the comparison period	389	-	389	0.72%	(703)	-	(703)	(0.68)%
FY22 Currency Neutral Net Sales	$ 61,707	$ 54,054	$ 7,653	14.16%	$ 122,129	$ 103,464	$18,665	18.0%

Three-month and Six-month Periods Ended December 31, 2021 and December 31, 2020

Overview

New order intake remained strong across all areas of the business during the six months ending December 31, 2021, representing an increase of over 16% compared to the six-month period ending December 31, 2020. As a result, backlog remains at historically high levels, over 36% higher on December 31, 2021 compared to December 31, 2020. The Company expects this trend to continue throughout the remainder of Fiscal 2022.

Net sales in the quarter ended December 31, 2021 were $61.3 million, an increase of $7.3 million, or 13.4% compared to $54.0 million in the quarter ended December 31, 2020. Net Sales in the six months ended December 31, 2021 were $122.8 million, compared to $103.4 million for the same six-month period ending December 31, 2020, representing an improvement of 19.4 million, or 18.7%.

Foreign currency translation impact has been minimal over the first six months of Fiscal 2022 ~~Q1 "Currency Neutral"~~ as the United States Dollar had weakened compared to other currencies in the first quarter of the year but has since strengthened. Currency neutral net sales for the quarter ending December 31, 2021 were $61.7 million, an increase of $7.7 million or 14.2% compared to $54.0 million in the quarter ended December 31, 2020. For the six months ended December 31, 2021, currency neutral net sales were lower than reported sales at $122.1 million, representing an increase of $18.7 million, or 18.0% over the $103.4 million reported for the six months ending December 31, 2020.

Operating income in the quarter ended December 31, 2021 of $4.2 million or 6.9% of sales, was $2.0 million lower than the Operating income reported for quarter ending December 31, 2020, which included a $3.2 million gain on the sale of the Mt. Airy, North Carolina building and $0.4 million of restructuring charges. Eliminating the restructuring cost and the one-time gain on the sale of the Mt. Airy North Carolina facility from the prior December quarter, the December 31, 2021 non-GAAP adjusted operating income increased 24% to $4.2 million or 6.9% of sales versus $3.4 million or 6.3% of sales for the three-month period ending December 31, 2020.

Operating income improved from $8.0 million for the six months ended on December 31, 2020 to $8.3 million, or 3.8% for the six months ended December 31, 2021. Eliminating the impact of the aforementioned restructuring charges and the gain on the sale of the North Carolina facility during the six-month period ended on December 31, 2020, non-GAAP adjusted operating income was $8.3 million, or 6.8% of net sales compared to $5.6 million or 5.4% of net sales in the six-month period ended December 31, 2020, representing an improvement of $2.7 million or 50%.

The Company continues to benefit from its restructuring activities completed in Fiscal 2021 that have resulted in a reduction of excess production capacity and selling, general and administrative expenses. However, pandemic related challenges have continued to evolve in relation to supply chain, freight costs, logistics, wage inflation and labor shortages which impact plant utilization in North America. These challenges are offsetting those restructuring gains in the short term, and are expected to continue throughout the remainder of fiscal 2022. In an effort to mitigate the impact of these challenges, the Company implemented price increases in the first quarter of fiscal 2022 in Brazil and the U.S. Additional price increases and surcharges on shipped orders will be implemented on a rolling basis throughout the third quarter of fiscal 2022.

Net income for the quarter ended December 31, 2021 was $2.5 million, which was $1.4 million lower than the Net Income reported for the quarter ended December 31, 2020 of $3.9 million. The prior year included the $3.2 million gain on the sale of the Company’s Mt. Airy, North Carolina facility and $0.4 million of restructuring expense. When removing these items from the prior year, the comparative net income was $1.0 million for the quarter ended December 31, 2020.

For the six-month period ended December 31, 2021, net income was $5.8 million compared to $8.0 million for the six months ended December 31, 2020, a reduction of $2.2 million. However, the prior years’ result included the $3.2 million gain on the sale of the Mt. Airy, North Carolina facility, a $2.7 million tax credit in the first quarter of fiscal 2021 due to changes in legislation related to GILTI, and restructuring charges of $0.7 million. When removing these items from the prior year, the comparative net income was $2.8 million for the six months ended December 31, 2020.

Net Sales

Three months ended
(Amounts in Thousands) 9/30/2021 9/30/2020 $ Change % Change
Net Sales, as reported 61,514 49,411 12,103 24.5 %
Currency Neutralizing Adjustment* (1,093) — (1,093) (2.2) %
Q1 FY22 Currency Neutral Net Sales 60,421 49,411 11,010 22.3 %
North America Net Sales, as reported 33,809 25,984 7,825 30.1 %
Currency Neutralizing Adjustment* (137) — (137) (0.5) %
Q1FY22 Currency Neutral North America Net Sales 33,672 25,984 7,688 29.6 %
International Net Sales, as reported 27,705 23,427 4,278 18.3 %
Currency Neutralizing Adjustment* (956) — (956) (4.1) %
Q1FY22 Currency Neutral International Net Sales 26,749 23,427 3,322 14.2 %
*"Currency Neutralizing Adjustment" = Change when converting Q1FY22 sales in non USD functional currencies at the same exchange rates used in the comparison period

~~Overview~~

AsThe Company’s net sales for the ~~Company closed fiscal~~quarter ended December 31, 2021 ~~order intake and sales volume across its portfolio~~ were equal to or exceeding pre-pandemic levels. This trend has continued into the September quarter and the Company expects continuation in fiscal 2022. For the three months ending September 30, 2021 and September 30, 2020 sales were $61.5$61.3 million ~~and $49.4~~versus $54.0 million respectively, a $12.1 million or 24.5% improvement. As the United States Dollar has weakened against the Brazilian currency during the comparison period, currency neutral sales would be $60.4 million, with the percentage increase in sales slightly lower at 22.3%. Consolidated gross margins are improved duringfor the same period from 31.5% of sales in the period ending September 30, 2020 to 32.7% of sales in the period ending September 30, 2021. This is the positive impact of our restructuring efforts completed in fiscal 2021, which are partially offset by pandemic related supply chain challenges, raw material price increases, and an increase in wages related to labor shortages in North America. The~~Company expects supply chains issues to continue into calendar~~a year 2022. Selling, General and Administrative expenses have increased overall by $2.6 million, or 19.6% when comparing the quarter ending on September 30, 2020 to the quarter ending on September 30, 2021, largely due to variable selling expenses related to the increase in sales. As a percentage of sales overall, selling, general and administrative expenses have decreased from 27.1% of sales in the quarter ending September 30, 2020 to 26% in the quarter ending on September 30, 2021. In the three months ending September 30, 2021 operating income was $4.1 million, a $2.3 million or 125.2% improvement over September 30, 2020 during which the company reported operating income of $1.8 million.

~~Net Sales~~

~~In the three months ending September 30, 2021 sales were $61.5 million with~~prior. North America sales of ~~$33.8~~$32.7 million ~~and~~represent an increase of $5.6 million or 20.6% in quarter ended December 31, 2021. International ~~of $27.7 million. In the three months ending September 30, 2020 North America sales were $26.0~~Sales increased to $28.6 million ~~and International sales were $23.4 million. North American sales have increased 30.1% and International sales have increased 18.3% in~~during the quarter ~~ending September 30,~~ended December 31, 2021 ~~when comparing~~from $26.9 million during the quarter ended December 31, 2020. The Company continues to achieve year on year sales growth across all geographical areas and product offerings.

During the ~~first quarter of fiscal 2021. The foreign exchange translation impact on reported sales was favorable in the three~~six months ~~ending September 30,~~ended December 31, 2021 as compared to ~~being unfavorable during the period ending a year prior. On a currency neutral basis when comparing the two periods,~~2020, North American sales increased $13.4 million or 25.4% while international sales increased $6.0 million or 11.9%. Consolidated Net Sales in the ~~current~~six months ended December 31, 2021 were $122.8 million, compared to $103.4 million for the same six-month period ~~would be $60.4~~ended December 31, 2020, representing an improvement of 19.4 million, or ~~22.3% higher than the $49.1~~18.7%.

Gross Margin

Gross margin increased $1.3 million ~~in sales reported~~or 7.6% for the three months, ~~ending September 30, 2020.~~

~~Gross Margin~~

~~Gross margin of $20.1 million in the three months ending September 30, 2021 is an increase of $4.6~~and $5.9 million or ~~29.4% over~~17.8% for the ~~three~~six months ~~ending September 30, 2020 at $15.6 million. In the three months ending September 30,~~ended December 31, 2021 as compared to ~~September 30, 2020, International gross margin improved to $10.6 million, or 38.3%~~the year prior, primarily as a result of ~~sales, compared to $8.7 million, or 37.3% of~~higher sales. North American gross margin improved to $9.5 million, or 28.2% of sales in the three months ending September 30, 2021 from $6.8 million, or 26.3% of sales in the three months ending September 30, 2020. Improvement in grossGross margin as a percentage of sales declined 1.7 percentage points for the three months, and 0.3 percentage points for the six months ended December 31, 2021 compared to the prior year.

The gross margin erosion is due to the evolution of many challenges related to the ~~positive~~COVID-19 pandemic. These include an increase in material and freight costs, and longer transit times which impact ~~of restructuring projects completed in~~all sectors or the Company’s business. In North America, labor shortages and associated wage inflation continue to drive up costs and impact plant utilization. Although North American gross margin shows some improvement compared to the prior year, fiscal 2021 ~~and improved factory utilization rates associated with higher volumes. However, those positive impacts have been~~restructuring efforts are partially offset by ~~responses to pandemic related~~the aforementioned labor shortages and wage inflation. International gross margin is more affected by material and freight cost increases, supply chain ~~delays~~disruptions and increased transit times. In an effort to mitigate the impact of these challenges, ~~an increase~~the Company implemented price increases in ~~wages related~~the first quarter of fiscal 2022 in Brazil and the U.S. Additional price increases and surcharges on shipped orders will be implemented on a rolling basis throughout the third quarter of fiscal 2022. The Company expects these headwinds to ~~labor shortages in~~continue throughout the remainder of this fiscal year.

For the three months ended December 31, 2021, North ~~America, and raw material price increases.~~American gross margin measured as a percent of net sales improved by 0.5 percentage points from 25.0% to 25.5%, compared to the three-month period ended December 31, 2020. International gross margin declined by 3.1 percentage points from 40.2% at the end of the three-month period ended December 31, 2020 to 37.1% for the three-month period ended December 31, 2021.

20For the six-month period ended December 31, 2021, North American gross margin measured as a percent of Net Sales improved from 25.6% to 26.9%. International gross margin measured the same way declined from 38.9% to 37.7% from December 31, 2020 to December 31, 2021 respectively.

~~Table of Contents~~

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $0.5 million or 3.7% during the quarter ended December 31, 2021 compared to the quarter ended December 31, 2020, but declined as a percentage of ~~$16.0 million~~net sales to 24.1% for the quarter ended December 31, 2021 compared to 26.3% in the ~~three months ending September 30, 2021~~prior year quarter ended December 31, 2020.

Selling, general and administrative expenses increased ~~$2.6~~$3.1 million or ~~19.6% over~~11.4% during the ~~three~~six months ~~ending September 30,~~ended December 31, 2021 compared to 2020, ~~excluding $0.3 million~~however as a percentage of ~~restructuring cost at $13.4 million.~~ net sales it has declined from 26.7% for the six months ended December 31, 2020 to 25.0% for the six months ended December 31, 2021.

The ~~increase in~~Company has continued to benefit from selling, general and administrative ~~expenses is due primarily to some variable selling expenses which are increased commensurate with the increase in sales. Additionally,~~reductions enacted as ~~a cash conserving measure during the height~~part of the ~~pandemic, salaries and compensation~~fiscal 2021 restructuring programs, as evidenced in the decline of many selling and administrative employees had been temporarily reduced by up to 20% during the period ending September 30, 2020, and were completely restored during the period ending September 30, 2021. Overall, selling, general and administrative expensesthese costs as a percentage of ~~sales improved~~net sales. This was partially offset by some variable selling costs tied to ~~26.0% in~~ the ~~three months ending September 30, 2021 from 27.1% in the three months ending September 30, 2020, with North America decreasing from 21.8% of sales to 20.8%~~higher level of sales, and ~~International increasing to 25.4% of sales from 25.2% of sales~~temporary salary reductions enacted during the ~~comparative period.~~initial phase of the pandemic, which have since been restored.

Other Income (Expense)

For the three and six months period ended December 31, 2021 other expense was $0.6 million and $0.4 million, respectively. For the three and six months period ended December 31, 2020 other expense was $0.4 million in both periods.

Income Taxes

For the three ~~months ending September 30,~~month period ended December 31, 2021, the Company recognized tax expense ~~was $1.1~~of $1.0 million on a profit before tax of ~~$4.4~~$3.5 million ~~(an~~or an effective tax rate of ~~26%)~~29%. For the three month period ended December 31, 2020, the Company recognized tax expense of $1.9 million on a profit before tax of $5.8 million or an effective tax rate of 33%. The tax rate for both fiscal 2022 and fiscal 2021 was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by tax credits and permanent deductions generated from research expenses.

For the six month period ended December 31, 2021, the Company recognized a tax benefit of $2.1 million on a profit before tax of $7.9 million or an effective tax rate of 27%. This was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by discrete tax benefits recognized from excess stock compensation deductions, tax credits, and permanent deductions generated from research expenses. InFor the ~~three months ending September 30, 2020,~~six month period ended December 31, 2020. the Company recognized tax expense ~~was a benefit~~ of ~~$(2.3)~~$(0.4) million on a profit before tax of ~~$1.8~~$7.6 million ~~(an~~or an effective tax rate of ~~(124)~~(5)%). ~~Before~~This was lower than the U.S. statutory tax rate of 21% primarily due to the discrete benefits relating to legislation enacted during the first quarter of fiscal 2021 in the amount of ($2.7) million related to the impact of the GILTI high-tax exclusion and ($0.2) million related to the impact of the increase in UK corporate tax rate on the net deferred tax ~~asset, tax expense was $0.7 million or 36% of pre-tax income. This was higher than~~asset. Other factors impacting the ~~U.S. statutory~~ tax rate ~~of 21% primarily due to~~include the GILTI provisions and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by tax credits and permanent deductions generated from research expenses.

~~Net Income~~

In the three months ending September 30, 2021 net income was $3.2 million or 21.5% lower than net income of $4.1 million in the three months ending September 30, 2020, which had non-recurring income tax benefit of $2.3 million because the first quarter of fiscal 2021 includes a discrete benefit of $2.7 million related to the impact of enacted GILTI legislation.

LIQUIDITY AND CAPITAL RESOURCES


Cash flows (in thousands)	Cash flows (in thousands)	Three Months Ended				Cash flows (in thousands)	Six Months Ended
		9/30/2021		9/30/2020			12/31/2021		12/31/2020

Cash (used in) provided by operating activities	Cash (used in) provided by operating activities	$	(5,841)	$	3,663	Cash (used in) provided by operating activities	(4,567)		2,401
Cash (used in) investing activities		(2,624)		(1,794)
Cash (used in) provided by investing activities						Cash (used in) provided by investing activities	(4,990)		1,627
Cash provided by (used in) financing activities	Cash provided by (used in) financing activities	5,711		(4,019)		Cash provided by (used in) financing activities	9,455		(3,448)
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	276		253		Effect of exchange rate changes on cash	434		521

Net (decrease) in cash		$	(2,478)	$	(1,897)
Net increase in cash						Net increase in cash	$	332	$	1,101

Net cash flows for the ~~Three Months Ended September 30,~~six months ended December 31, 2021 ~~decreased $2.5~~provided a decrease in cash of $0.3 million ~~as cash from operations decreased $5.8 million with net income of $3.2 million offset by~~compared to an increase in ~~accounts receivable~~cash of ~~$5.8~~$1.1 million ~~on improved sales and~~for the ~~Company planned $2.9~~six month period ended December 31, 2020 . Cash used in operations was $4.6 million ~~increase in inventories~~ due to ~~global~~increases in working capital required to meet strong customer demand and counteract supply chain ~~issues. Cash from investing activities decreased $2.6 million as a result of $2.3~~disruptions and increased transit times. The Company has invested $4.5 million in ~~capital expenditures~~new equipment and ~~$0.3~~increased borrowing $9.3 million in ~~software development while cash provided from financing~~the six months ended December 31, 2021.

During the six months ended December 31, 2021 the Brazilian subsidiary realized a build-up of ICMS (sales tax) credits, a consequence of the fiscal 2021 restructuring activities which increased ~~$5.7 million as~~the manufacturing activity and, therefore, raw material imports into Brazil. As the Company's ~~borrowed $13.8 million~~Brazilian subsidiary is now exporting a larger proportion of its sales, its ability to re-claim these ICMS credits has been diminished. The Company is actively mitigating this consequence by filing applications with the relevant tax authorities to change the methodology of charging and ~~repaid $8.0 million.~~re-claiming ICMS on imports and domestic sales so that

this credit is subsequently relieved and does not increase at this rate again. This new methodology is common for similar sized, export focused companies in Brazil.

Liquidity and Credit Arrangements

The Company ~~believes it maintains sufficient liquidity and has~~worked with TD Bank to amend the ~~resources~~current loan agreement which resulted in a number of changes such as amendments to ~~fund its operations.~~

the financial covenants through June 2021. The Company believes that existing cash and cash expected to be provided by future operating activities, augmented by the plans highlighted above, are adequate to satisfy its working capital, capital expenditure requirements and other contractual obligations for at least the next 12 months. If the

~~Table of Contents~~

Company's expectations are incorrect or the impact from the COVID-19 pandemic worsens then it may need to take advantage of unanticipated strategic opportunities to strengthen our financial position, which could result in material impacts to the Company’s consolidated financial statements in future reporting periods.

Pursuant to the terms of the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of the Fixed Charge Coverage Ratio until September 30, 2021 and (ii) establishment of a new minimum cumulative EBITDA and minimum liquidity covenants in lieu thereof. TD Bank perfected its security interests in the Company’s U.S. based assets, increased the maximum interest charged on the Line Of Credit from an annual interest rate of 2.25% plus Libor to 3.50% plus Libor, and amended the borrowing base for the line of credit from 80% of Qualified AR and 50% of the lower of Cost or Market of US inventory values to 80% of qualified AR plus 85% of the Net Orderly Liquidation Value (NOLV) of US Inventory plus 62.5% of total appraised US real estate values. As a result of this change, the Company is projected to maintain its current borrowing capacity of $25,000,000 under the Line of Credit. The Company underwent a series of appraisals and field exams in all US locations as part of restructuring this agreement. In addition, the Company will provide additional reporting to TD Bank, including monthly profit and loss statements, balance sheets, cash flow statements and forecasting. This minimum adjusted EBITDA covenant is based on the Company’s plan for a slow pandemic recovery throughout fiscal year 2021 and the impact of the Company’s restructuring plan initiatives. The Company ~~has applied~~will apply certain proceeds from the sale of US real estate assets against the principle balance of the term loans under the TD Bank loan agreement.~~The Company will also apply certain proceeds from certain future sales against the principle balance of the term loans under the TD Bank loan agreement.~~ The Agreement ~~has~~ reverted to the ~~existing~~prior covenant package for the quarter ending September 30, ~~2021 and every quarter thereafter. The Company was compliant with the minimum liquidity requirement and the minimum adjusted cumulative EBITDA required bank covenants as of September 30,~~ 2021.

The effective interest rate on the borrowings under the Loan and Security Agreement during the ~~Three Months Ended September 30,~~six months ended December 31, 2021 and 2020 was 1.9% and 1.9% respectively. The effective rate for the six months ended December 31, 2020 was lower than that specified in the First Amendment to the loan agreement which was executed on September 17, 2020 (See Note 10).

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

One 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, 2021.

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,~~December 31, 2021, 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~~

No change in our disclosure controls and procedures as of September 30, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective. There have not been any changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the ~~first quarter of fiscal 2022~~three months ended December 31, 2021 that ~~have~~has materially affected, or ~~are~~is reasonably likely to materially affect, ~~its~~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, 2021. There have been no material changes from the factors disclosed in our Form 10-K for the year ended June 30, 2021.

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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 ~~March~~December 31, 2021 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.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		THE L. S. STARRETT COMPANY (Registrant)


Date	~~November 5, 2021~~February 7, 2022	/S/R. Douglas A. Starrett
		Douglas A. Starrett - President and CEO (Principal Executive Officer)

Date	~~November 5, 2021~~February 7, 2022	/S/R. John C. Tripp
		John C. ~~Trip~~Tripp - Treasurer and CFO (Principal Accounting Officer)

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Three Months Ended September 30, 2021	Operating Lease Commitments
2022 (Remainder of year)	$	1,727
2023	1,656
2024	1,523
2025	1,166
2026	1,013
Thereafter	850
Subtotal	$	7,936
Imputed interest	(1,316)
Total	6,619


2022 remaining	$	1,048
2023	1,211
2024	940
2025	781
2026	571
2027	132
Thereafter	160
Total net balance	$	4,843


	Three Months Ended September 30, 2021											Three Months Ended September 30,2020
(Amounts in thousands)	North America			International			Corporate		Total			North America			International			Corporate		Total
Net sales	$	33,809		$	27,705		$	—	$	61,514		$	25,984		$	23,427		$	—	$	49,411
Gross margin	9,535			10,610			—		20,145			6,838			8,734			—		15,572
% of net sales	28.2		%	38.3		%			32.7		%	26.3		%	37.3		%			31.5		%
Selling, general and administrative expenses	7,034			7,027			1,951		16,012			5,653			5,904			1,834		13,391
% of net sales	20.8		%	25.4		%			26.0		%	21.8		%	25.2		%			27.1		%
Restructuring charges	—			—			—		—			346			—			—		346

Operating income	2,501			3,583			(1,951)		4,133			839			2,830			(1,834)		1,835
% of net sales	7.4		%	12.9		%			6.7		%	3.2		%	12.1		%			3.7		%