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			~~December 31, 2021~~September 30, 2022


☐			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						~~January 27,~~October 26, 2022
Class A Common Shares						—6,787,025
Class B Common Shares						—595,381

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, our clinical results and other future conditions. The words “anticipate”, “believe”, “contemplate”, “continue”, “could”, “estimate”, “expect”, “forecast”, “goal”, “intend”, “may”, “plan”, “potential”, “predict”, “project”, “should”, “target”, “will”, “would”, or the negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed in our Annual Report on Form 10-K and other filings with the Securities Exchange Commission (the “SEC”). 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, 2022

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or collaborations or strategic partnerships we may enter into. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

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THE L. S. STARRETT COMPANY

CONTENTS


			Page No.

Part I.	Financial Information:

	Item 1.	Financial Statements	34

		Consolidated Balance Sheets – ~~December 31, 2021~~September 30, 2022 (unaudited) and June 30, ~~2021~~2022	34

		Consolidated Statements of Operations (unaudited)– three ~~and six~~ months ended~~December 31, 2021~~ September 30, 2022 and ~~December 31, 2020~~ September 30, 2021	45

		Consolidated Statements of Comprehensive Income (Loss) (unaudited) – three ~~and six~~ months ended~~December 31, 2021~~ ~~and~~ ~~December 31, 2020~~ September 30, 2022 and September 30, 2021	56

		Consolidated Statements of Stockholders' Equity (unaudited) – three ~~and six~~months ended ~~December 31, 2021~~September 30, 2022 and ~~December 31, 2020~~September 30, 2021	67

		Consolidated Statements of Cash Flows (unaudited) - ~~six~~ three months ended ~~December 31, 2021~~September 30, 2022 and ~~December 31, 2020~~September 30, 2021	78

		Notes to Unaudited Consolidated Financial Statements	89-18

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1817

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2421

	Item 4.	Controls and Procedures	2421

Part II.	Other Information:

	Item 1A.	Risk Factors	2522

	Item 6.	Exhibits	2623

SIGNATURES			2724

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE L. S. STARRETT COMPANY

Consolidated Balance Sheets

(in thousands except share data)

(unaudited)

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


	9/30/2022		6/30/2022
ASSETS
Current assets:
Cash	$	11,902	$	14,523
Accounts receivable (less allowance for credit losses of $770 and $796, respectively)	38,062		42,961
Inventories	70,085		66,900
Prepaid expenses and other current assets	10,142		8,669
Total current assets	130,191		133,053

Property, plant and equipment, net	36,178		37,116
Right of use assets	5,026		5,540

Deferred tax assets, net	14,351		14,924
Intangible assets, net	4,506		4,640
Goodwill	1,015		1,015
Other assets	3,162		3,266
Total assets	$	194,429	$	199,554

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt	$	5,384	$	6,547
Current lease liability	1,432		1,530
Accounts payable	15,748		14,624
Accrued expenses	10,429		11,776
Accrued compensation	5,521		6,703
Total current liabilities	38,514		41,180

Other tax obligations	2,839		2,936
Long-term lease liability	3,777		4,166
Long-term debt, net of current portion	24,007		24,905
Postretirement benefit and pension obligations	23,459		23,938
Total liabilities	92,596		97,125

Stockholders' equity:
Class A Common stock $1 par (20,000,000 shares authorized; 6,770,681 outstanding at September 30, 2022 and 6,682,521 outstanding at June 30, 2022)	6,771		6,683
Class B Common stock $1 par (10,000,000 shares authorized; 596,903 outstanding at September 30, 2022 and 610,087 outstanding at June 30, 2022	597		610
Additional paid-in capital	57,247		57,143
Retained earnings	91,115		89,059
Accumulated other comprehensive loss	(53,897)		(51,066)
Total stockholders' equity	101,833		102,429
Total liabilities and stockholders’ equity	$	194,429	$	199,554

See Notes to Unaudited Consolidated Financial Statements

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THE L. S. STARRETT COMPANY

Consolidated Statements of Operations

(in thousands except per share data)

(unaudited)


	Three Months Ended
	9/30/2022			9/30/2021

Net sales	$	60,461		$	61,514
Cost of goods sold	40,261			41,369
Gross profit	20,200			20,145
% of Net sales	33.4		%	32.7		%

Restructuring charges	190			—
Selling, general and administrative expenses	16,294			16,012

Operating income	3,716			4,133

Other (expense) income	(676)			226

Income before income taxes	3,040			4,359

Income tax expense	984			1,127

Net income	$	2,056		$	3,232


Basic income per share	$	0.28		$	0.45
Diluted income per share	$	0.27		$	0.44

Weighted average outstanding shares used in per share calculations:
Basic	7,304			7,126
Diluted	7,505			7,396

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

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THE L. S. STARRETT COMPANY

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

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


	Three Months Ended
	9/30/2022		9/30/2021

Net income	$	2,056	$	3,232
Other comprehensive (loss):
Currency translation (loss), net of tax	(2,806)		(3,611)
Pension and postretirement plans, net of tax	(25)		(66)
Other comprehensive (loss)	(2,831)		(3,677)

Total comprehensive (loss) income	$	(775)	$	(445)

See Notes to Unaudited Consolidated Financial Statements

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THE L. S. STARRETT COMPANY

Consolidated Statements of Stockholders' Equity

(in thousands)

(unaudited)

For the Three ~~and Six-Month~~Month Period Ended ~~December 31, 2021:~~September 30, 2022:

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)


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

Balance June 30, 2022	$	6,683	$	610	$	57,143	$	89,059	$	(51,066)	$	102,429
Total comprehensive income (loss)	—		—		—		2,056		(2,831)		(775)
Repurchase of shares	—		(1)		(5)		—		—		(6)
Stock-based compensation	76		—		109		—		—		185
Conversion	12		(12)		—		—		—		—
Balance September 30, 2022	$	6,771	$	597	$	57,247	$	91,115	$	(53,897)	$	101,833














Accumulated balance consists of:
Translation loss									$	(62,881)
Pension and postretirement plans, net of taxes									8,984
									$	(53,897)

For the Three ~~and Six-Month~~Month Period Ended ~~December 31, 2020:~~September 30, 2021:

Common Stock
Outstanding Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Total
Class A Class B
Balance June 30, 2020 $ 6,308 $ 680 $ 55,762 $ 58,648 $ (75,415) $ 45,983
Total comprehensive income (loss) — — — 4,116 (258) 3,858
Repurchase of shares — (2) (4) — — (6)
Stock-based compensation 8 — 359 — — 367
Conversion 26 (26) — — — —
Balance September 30, 2020 $ 6,342 $ 652 $ 56,117 $ 62,764 $ (75,673) $ 50,202
Total comprehensive income — — — 3,857 3,847 7,704
Repurchase of shares — — (1) — — (1)
Issuance of stock — 8 17 — — 25
Stock-based compensation 103 — 51 — — 154
Conversion 3 (3) — — — —
Balance December 31, 2020 $ 6,448 $ 657 $ 56,184 $ 66,621 $ (71,826) $ 58,084
Accumulated balance consists of:
Translation loss $ (58,264)
Pension and postretirement plans, net of taxes (13,562)
$ (71,826)

~~See Notes to Unaudited Consolidated Financial Statements~~

~~THE L. S. STARRETT COMPANY~~

~~Consolidated Statements of Cash Flows~~

~~(in thousands) (unaudited)~~
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


	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)

See Notes to Unaudited Consolidated Financial Statements

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THE L. S. STARRETT COMPANY

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Three Months Ended
	9/30/2022		9/30/2021

Cash flows from operating activities:

Net income	$	2,056	$	3,232

Non-cash operating activities:
Depreciation	1,288		1,262
Amortization	363		335
Stock-based compensation	185		174
Net long-term tax obligations	18		38
Deferred taxes	356		193
Postretirement benefit and pension obligations	162		(353)
Working capital changes:
Accounts receivable	3,135		(5,797)
Inventories	(5,022)		(2,887)
Other current assets	(1,740)		(1,888)
Other current liabilities	31		104
Prepaid pension expense	(263)		(288)
Other	59		34
Net cash provided by (used in) operating activities	628		(5,841)

Cash flows from investing activities:
Purchases of property, plant and equipment	(960)		(2,334)
Software development	(202)		(290)
Net cash (used in) investing activities	(1,162)		(2,624)

Cash flows from financing activities:
Proceeds from borrowing	575		13,767
Debt repayments	(2,663)		(8,040)

Shares repurchased	(6)		(16)
Net cash provided (used in) by financing activities	(2,094)		5,711

Effect of exchange rate changes on cash	7		276

Net decrease in cash	(2,621)		(2,478)
Cash, beginning of period	14,523		9,105
Cash, end of period	$	11,902	$	6,627

Supplemental cash flow information:
Interest paid	$	374	$	224
Income taxes paid, net	2,244		1,116

See Notes to Unaudited Consolidated Financial Statements

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THE L. S. STARRETT COMPANY

Notes to Unaudited Consolidated Financial Statements

~~December 31, 2021~~September 30, 2022

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

The unaudited interim consolidated financial statements as of and for the ~~six~~three months ended ~~December 31, 2021~~September 30, 2022 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.~~2022. The balance sheet as of June 30, ~~2021~~2022 has been derived from the audited consolidated financial statements as of and for the year ended June 30, ~~2021.~~2022. 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.

Accounts Receivable and Allowance for Credit Losses

Trade accounts receivable are recorded at invoiced amount and do not bear interest. Allowance for doubtful accounts is the Company's estimate of current expected credit losses on its existing accounts receivable and determined based on historical customer assessments, current financial conditions and reasonable and supportable forecasts. Account balances are charged off against the allowance when the Company determines the receivable will not be recovered.

Fair Value Measurements

Certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities are carried at cost, which approximates their fair value because of their short-term maturity. See Notes 10 and 11 for financial assets and liabilities held at carrying amount on the consolidated balance sheet.

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~~2022 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.

~~Throughout~~

Note 2: Recently Adopted Accounting Pronouncements

In June 2016, the ~~pandemic crisis,~~FASB issued ASU 2016-13 "Financial Instruments -Credit Losses" (ASC 326) "Measurement of Credit Losses on Financial Instruments,” and subsequent amendment to the ~~Company's main focus has been~~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 historic 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 ~~protecting~~either a prospective transition or modified-retrospective approach depending on the ~~health~~subtopic. This pronouncement was extended for Small Reporting Companies 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~~beginning July 1, 2022. The adoption of ~~the~~this standard did not have a material impact on the Company's consolidated financial ~~statements as a result of the on-going pandemic.~~statements.

Note 2:3: 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.~~2022. The Company’s business is aggregated into 2two reportable segments based on geography of operations: North American Operations and International ~~Operations.~~Operations ("International"). Segment income

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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			North American Operations		International Operations		Unallocated		Total
Three Months ended December 31, 2021
Three Months Ended September 30, 2022										Three Months Ended September 30, 2022

Sales1	Sales1	$	32,666	$	28,652	$	—	$	61,318	Sales1	$	36,484	$	23,977	$	—	$	60,461

Operating Income (Loss)	Operating Income (Loss)	$	1,549	$	4,394	$	(1,742)	$	4,201	Operating Income (Loss)	$	3,198	$	2,836	$	(2,318)	$	3,716

Three Months ended December 31, 2020
Three Months Ended September 30, 2021										Three Months Ended September 30, 2021

Sales2	Sales2	$	27,106	$	26,948	$	—	$	54,054	Sales2	$	33,809	$	27,705	$	—	$	61,514

Operating Income (Loss)	Operating Income (Loss)	$	3,688	$	4,436	$	(1,923)	$	6,201	Operating Income (Loss)	$	2,501	$	3,583	$	(1,951)	$	4,133

1.Excludes ~~$930~~$927 of North American segment intercompany sales to the International segment, and ~~$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~~$5,035 of International segment intercompany sales to the North American segment.

2.Excludes ~~$1,737~~$749 of North American segment intercompany sales to the International segment, and ~~$5,396~~$5,336 of International segment intercompany sales to the North American segment.

Note 3:4: 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 ~~December 31, 2021~~September 30, 2022, and June 30, ~~2021,~~2022, the balance of the return asset was $0.1 million and ~~$0.2~~$0.1 million, respectively, and the balance of the refund liability ~~as of December 31, 2021 and June 30, 2021~~ was $0.2 ~~million.~~million and $0.2 million, respectively. 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 $~~0.9~~0.5 million and ~~$0.6~~$0.9 million at ~~December 31, 2021~~September 30, 2022 and June 30, ~~2021,~~2022, respectively, located in Accounts Payable in the Consolidated Balance Sheets.

Disaggregation of Revenue

The Company operates in 2two 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 ~~December 31,~~September 30, 2022 and 2021 ~~and 2020~~ (in thousands):

910

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		Three Months Ended				Six Months Ended					Three Months Ended
		12/31/2021		12/31/2020		12/31/2021		12/31/2020			9/30/2022		9/30/2021
North America	North America									North America
United States	United States	$	30,912	$	25,345	$	62,932	$	49,682	United States	$	34,272	$	32,020
Canada & Mexico	Canada & Mexico	1,754		1,761		3,543		3,408		Canada & Mexico	2,212		1,789
		32,666		27,106		66,475		53,090			36,484		33,809
International	International									International
Brazil	Brazil	18,687		17,493		37,890		32,401		Brazil	17,248		19,203
United Kingdom	United Kingdom	4,729		5,554		9,697		10,548		United Kingdom	3,201		4,968
China	China	2,244		2,005		3,862		3,586		China	1,686		1,618
Australia & New Zealand	Australia & New Zealand	2,992		1,896		4,908		3,839		Australia & New Zealand	1,842		1,916
		28,652		26,948		56,357		50,374			23,977		27,705

Total Sales	Total Sales	$	61,318	$	54,054	$	122,832	$	103,464	Total Sales	$	60,461	$	61,514

Note ~~4: Recent Accounting Pronouncements~~

5~~In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)~~: Measurement of Credit Losses on Financial Instruments,” and subsequent amendment to the guidance, ASU 2018-19 in November 2018. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. The amendment will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2018-19 clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption 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 to July 1, 2022. Leases~~The Company does not expect the adoption of this standard to have a material impact on the financial 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: Leases~~

Operating lease cost amounted to ~~$0.8~~$0.5 million and ~~$1.6~~$0.7 million for ~~the~~ three ~~and six~~ months period ended ~~December 31, 2021~~September 30, 2022 and ~~$0.6 million and $1.2 million for the three and six months period ended December 31, 2020.~~2021. As of ~~December 31, 2021,~~September 30, 2022, the Company’s right-of-use "ROU" assets, lease obligations and remaining cash commitment on these leases (in thousands):

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

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.


	Right-of-Use Assets	Operating Lease Obligations		Remaining Cash Commitment
Operating leases	5,026	$	5,209	$	6,637

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~~3.9 years. As of ~~December 31, 2021,~~September 30, 2022, the Company’s financing leases are de minimis. The foreign exchange impact affecting the operating leases are de minimis.

~~The~~In September 2021, the Company entered into ~~$0.1~~a six year lease in China for 100,682 square feet and recorded a right of use asset for $2.6 million.

In July 2021, Starrett UK leased space to another company for annual rent of $0.2 million and ~~$2.6 million~~incremental applicable service charges. The lease is a 20 year agreement with a contract review in ~~new operating lease commitments and incurred immaterial exchange expense during~~2026. The fees are recorded in Other Income in the ~~three and six months ended December 31, 2021.~~

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

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
Company's Consolidated Statement of Operations.

Note 6: Stock-based Compensation

On September 5, 2012, the Board of Directors adopted The L.S. Starrett Company 2012 Long Term Incentive Plan (the “2012 Stock Plan”). The 2012 Stock Plan was approved by shareholders on October 17, 2012 and the material terms of its performance goals were re-approved by shareholders at the Company’s Annual Meeting held on October 18, 2017. 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 Plans provide for the issuance of up to 500,000 shares of common stock.

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 December 31, 2021, there were 0 stock options and 205,636 restricted stock units outstanding. There were 441,901 shares available for grant under the 2021 Stock Plan as of 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 six months ended December 31, 2021 and 2020.~~

The weighted average contractual term for stock options outstanding as of December 31, 2021 was 1.0 years. There are no stock options outstanding as of December 31, 2021. There were no stock options exercisable as of 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 80,500 RSU awards with a fair value of $11.35 per RSU granted during the six months ended December 31, 2021. There were 124,668 RSUs settled, and 11,174 RSUs forfeited during the six months ended December 31, 2021. The aggregate intrinsic value of RSU awards outstanding as of December 31, 2021 was $1.9 million. As of December 31, 2021, all vested awards 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 and six-month~~three-month periods ended ~~December 31,~~September 30, 2022 and 2021 ~~were $0.2~~was $0.1 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 December 31, 2021, there was $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 $1.1 million is expected to be recognized over a weighted average period of 2.0 years.for both periods.

Note 7: Inventories

Inventories consist of the following (in thousands):

12/31/2021 06/30/2021
Raw material and supplies $ 30,687 $ 29,271
Goods in process and finished parts 16,592 16,096
Finished goods 37,853 37,344
85,132 82,711
LIFO Reserve (21,258) (22,139)
$ 63,874 $ 60,572

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	9/30/2022		6/30/2022
Raw material and supplies	$	36,668	$	35,752
Goods in process and finished parts	23,205		22,268
Finished goods	36,212		35,589
	96,085		93,609
LIFO Reserve	(26,000)		(26,709)
	$	70,085	$	66,900

Of the Company’s ~~$63.9~~$70.1 million and ~~$60.6~~$66.9 million total inventory at ~~December 31, 2021~~September 30, 2022 and June 30, ~~2021,~~2022, respectively, the ~~$21.3~~$26.0 million and ~~$22.1~~$26.7 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 ~~$30.2~~$41.6 million on a FIFO basis and ~~$8.9~~$15.6 million on a LIFO basis at ~~December 31, 2021.~~September 30, 2022. The Core U.S. business had total Inventory, on a FIFO basis, of ~~$27.8~~$39.3 million and ~~$5.7~~$12.6 million on a LIFO basis as of June 30, ~~2021.~~ 2022.The use of LIFO, as compared to FIFO, resulted in a ~~$0.1~~$0.7 million decrease in cost of sales for the goods sold in the period ~~ending December 31, 2021~~ended September 30, 2022 compared to ~~$0.4~~$4.6 million decrease in ~~the six months ending December 31, 2020.~~fiscal 2022.

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 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 determined to be impaired $0.6 million at the private software company and Goodwill of $3.0 million was impaired at the Bytewise reporting unit as of June 30, 2020. As a result, the balance of Goodwill at Bytewise is zero and $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):

12/31/2021 6/30/2021
Trademarks and trade names 2,070 2,070
Customer relationships 630 630
Software development 10,777 10,244
Total 13,477 12,944
Accumulated amortization and impairment (8,716) (8,056)
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.


	9/30/2022		6/30/2022
Trademarks and trade names	2,070		2,070
Completed technology	—		—
Customer relationships	630		630
Software development	11,471		11,269

Gross intangible assets	14,171		13,969
Accumulated amortization and impairment	(9,665)		(9,329)

Net intangible assets	$	4,506	$	4,640

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~~goodwill balance at June 30, 2022, gross $4.7 million and accumulated impairment of $3.7 million. There was no change to goodwill in the ~~remainder of fiscal 2021~~three months ended September 30, 2022 and ~~for each of~~ the ~~next five years and thereafter,~~balance is ~~as follows (in thousands):~~a net $1.0 million.

2022 (Remainder of year) $ 701
2023 1,260
2024 989
2025 829
2026 619
Thereafter 363
Total net balance $ 4,761

Note 9: Accrued Expenses (in thousands):


	09/30/2022		06/30/2022
Sales related programs (commissions, rebates, distributor programs, warranty and related)	$	2,868	$	2,733
Income taxes	614		2,420
Professional fees	1,669		1,758
Other	1,562		1,463
Current portion pension cost	1,297		1,289
Taxes other than income tax	1,058		1,243
Workers compensation and employee deposits	558		518
Freight	803		352
Total	$	10,429	$	11,776

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Note10: Pension and Post-retirement Benefits

The Company has 2two defined benefit pension plans, one for U.S. employees and another for U.K. employees. The Company has a postretirement medical and 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 (expense)~~, net~~ in the 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 expenses. Net periodic benefit costs consist of the following (in thousands):


											Three Months Ended
		Three Months Ended				Six Months Ended					9/30/2022		9/30/2021
		12/31/2021		12/31/2020		12/31/2021		12/31/2020
Interest cost	Interest cost	1,031		1,118		2,064		2,231		Interest cost	1,482		1,033
Expected return on plan assets	Expected return on plan assets	(1,098)		(1,113)		(2,198)		(2,221)		Expected return on plan assets	(1,032)		(1,100)
Amortization of net loss	Amortization of net loss	15		14		28		27		Amortization of net loss	10		14
		$	(52)	$	19	$	(106)	$	37		$	460	$	(53)

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


	Three Months Ended
	9/30/2022		9/30/2021
Service cost	$	6	$	9
Interest cost	18		12
Amortization of prior service credit	(369)		(368)
Amortization of net loss	44		47
	$	(301)	$	(300)

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 ~~and six month periods~~period ended ~~December 31, 2021,~~September 30, 2022, the Company contributed ~~$1.5 million,~~ zero in the U.S. and ~~$0.3 million and $0.5~~$0.2 million in the UK pension ~~plans for the same periods.~~ plans. Based upon the actuarial valuations performed on the Company’s defined benefit plans as of ~~June~~September 30, ~~2021,~~2022, the contribution for fiscal ~~2022~~2023 for the U.S. plans would require a contribution of ~~$5.6~~$1.4 million and the U.K. plan would require one of ~~$1.0~~$0.8 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~~$1.4 million to ~~$0.6 million.~~$0.6 million. The Company believes that government regulation is only a small part of deciding the pension funding, and as a result, ~~intends to~~may 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~~contributed $2.5 million in total during fiscal year 2022, with $1.5 million in the ~~2nd half of fiscal 2022.~~U.S. and $1.0 million in the U.K.

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)%~~(10%) of the greater of the market-related value of plan assets or of the plans’ projected benefit obligation in net periodic (benefit) cost as of the plan measurement date. Net actuarial gains or losses that are less than 10% of the thresholds noted above are accounted for as part of accumulated other comprehensive loss.

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Note ~~10:~~11: Debt

Debt is comprised of the following (in thousands):


		12/31/2021		06/30/2021			9/30/2022		6/30/2022
Short-term and current maturities	Short-term and current maturities					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

Loan and Security Agreement (Term loan)						Loan and Security Agreement (Term loan)	1,495		1,495
Brazil Loans	Brazil Loans	6,714		5,297		Brazil Loans	3,889		5,052
		21,969		15,959			5,384		6,547
Long-term debt (net of current portion)	Long-term debt (net of current portion)					Long-term debt (net of current portion)
Loan and Security Agreement (Term Loan)	Loan and Security Agreement (Term Loan)	5,158		6,010		Loan and Security Agreement (Term Loan)	9,878		10,252
Loan and Security Agreement (Line of Credit)						Loan and Security Agreement (Line of Credit)	11,397		11,397
Brazil Loans	Brazil Loans	4,000		—		Brazil Loans	3,220		3,771
Debt Reacquisition Cost						Debt Reacquisition Cost	(488)		(515)
		9,158		6,010
		$	31,127	$	21,969
							24,007		24,905
Total Debt						Total Debt	$	29,391	$	31,452

On ~~December 31, 2019,~~April 29, 2022, the Company and certain of the Company’s domestic subsidiaries entered into a Loan and Security agreement with HSBC Bank USA (the "Loan and Security Agreement"). The Company incurred an increase in debt of $0.5 million as a result of debt reacquisition cost.

These new credit facilities replaced the ~~Tenth Amendment~~Company’s previous TD Bank credit facilities and are comprised of a $30 million revolving line of credit with a $10 million uncommitted accordion provision, a $12.1 million term loan and a $7 million Capital Expenditure draw down credit facility (collectively, the "Facilities"). The Facilities are secured by a valid first-priority security interest on substantially all existing and future assets of the Company and its domestic subsidiaries.

The interest rate on the Facilities is based on a grid which uses the percentage of the remaining availability of the revolving credit line to determine the floating margin to be added to the one month or three month Secured Overnight Financing Rate, ("SOFR)". The initial rate for the first three months of the Loan and Security Agreement ~~(“Tenth Amendment”)~~is the one-month SOFR plus 1.60%. ~~Under~~The Facilities mature on April 29, 2027.

Availability under the ~~revised~~revolving line of credit is secured by and subject to a borrowing base comprised of eligible inventory and accounts receivable. The percentage of receivables included in the borrowing base is 90% for domestic investment grade and foreign insured accounts, 85% for domestic accounts that are neither investment grade nor insured, and 75% of foreign uninsured accounts. The percentage of inventory included in the borrowing base is the lower of 65% of the value of eligible inventory at cost or 85% of the net orderly liquidation value of eligible inventory at cost. Receivables and inventory are reported monthly to HSBC and subject to an annual field exam and inventory appraisal by an independent auditor commissioned by the Bank. The Company believes that the agreement provides an initial borrowing base sufficient for current domestic working capital needs and flexibility to accommodate potential growth-related working capital needs.

Availability under the ~~credit limit~~Term Loan facility was comprised of 70% of the fair market value of the Borrowers’ eligible real estate, which included facilities located in Westlake, Ohio, and Waite Park, Minnesota and totaled $4.6 million; and 85% of the net orderly liquidation value of the Borrowers’ machinery and equipment, capped at $7.5 million. The real estate portion of the Term facility is subject to a 12.5 year straight line amortization paid quarterly, and the machinery and equipment portion of the facility is subject to a 6.67 year straight line amortization, also paid quarterly. The term loan is subject to equal quarterly installments of $373,650, payable on the last day of each fiscal quarter.

The capital expenditure loan facility is available for the ~~Revolving Loan was increased from $23.0 million to $25.0 million. In addition,~~purchase of new machinery and equipment at 80% of the ~~Company entered into a~~net invoice value of new ~~$10.0 million 5-year Term Loan~~machinery and equipment purchases, with a ~~fixed interest~~draw period of eighteen months past the closing date, with any amount outstanding under the facility subject to a 3.75% amortization rate ~~of 4.0%. Under the Tenth Amendment, the credit limit for external borrowing was increased from $2.5 million~~per quarter.

The Facilities contain financial covenants with respect 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~~a minimum fixed charge coverage ratio of 1.00, measured on a trailing twelve-month basis, for both the U.S. borrowing companies tested quarterly and the Consolidated L.S. Starrett Company tested semi-annually. The Loan and Security agreement also contains the customary affirmative and negative covenants, including limitations on indebtedness, liens, acquisitions, asset dispositions, fundamental corporate changes, excess pension contributions, and certain customary events of default. Upon the occurrence or continuation of an event of default, the Lender may terminate

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all commitments and facilities, and require the immediate payment of the entire unpaid principal balances, accrued interest, and all other obligations.

The TD Bank loan was retired in the quarter ended June ~~30, 2020. In addition, the Amendment and Restatement clarifies that certain non-cash adjustments~~2022.. Prior to the ~~definition of EBITDA are permitted under the~~ Loan and Security 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~~with HSBC, 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. 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 $9.2~~decreased $2.1 million during the ~~six~~three months ended ~~December 31, 2021, $5.4~~September 30, 2022 and $1.7 million of which was ~~an increase~~a decrease in ~~Brazil.~~Brazilian loans. This is ~~in response~~a result of cash provided from operations of $0.6 million and the use of the credit balance of $0.6 million of the contingency gain, related to ~~increased working capital levels required to meet strong customer demand and counteract pandemic related supply chain disruptions and increased transit times.~~exclusion of ICMS.

~~During~~

In Brazil, the ~~six months ended December 31, 2021~~Company is actively mitigating this consequence of 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. The ICMS balance as of June 30, 2022 was $5.4 million and as of September 30, 2022 was $4.9 million.

Availability under the Line of Credit remains subject to a borrowing base comprised of Accounts Receivable, Inventory, and 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 ~~December 31, 2021~~September 30, 2022 (in thousands):


Lending Institution	Lending Institution	Interest Rate	Beginning Date	Ending Date	Outstanding Balance		Lending Institution	Interest Rate		Beginning Date	Ending Date	Outstanding Balance
Santander		5.98%	February 2021	February 2022	$	1,219
Brasil		2.80%	May 2021	May 2022	$	795
Bradesco		1.88%	July 2021	July 2022	$	1,170
Bradesco		2.05%	August 2021	July 2022	$	400
Santander		2.15%	August 2021	July 2022	$	731
Brasil		2.10%	August 2021	August 2022	$	1,400
Itau	Itau	4.52%	October 2021	September 2024	$	4,000	Itau	4.52	%	October 2021	September 2024	$	4,000
Santander	Santander	2.71%	December 2021	December 2022	1,000		Santander	2.71	%	December 2021	December 2022	275
Bradesco							Bradesco	2.52	%	January 2022	January 2023	443
Itau							Itau	4.98	%	February 2022	February 2024	1,828
Brasil							Brasil	4.95	%	August 2022	July 2025	401
Brasil							Brasil	3.80	%	September 2022	August 2024	115
Brasil							Brasil	4.18	%	September 2022	September 2023	48

					$	10,714
												$	7,110

Note ~~11:~~12: Income Taxes

~~The Company is subject to U.S. federal income~~Tax expense for the three month period ended September 30, 2022 was $1.0 million on profit before tax ~~and various state, local, and foreign income taxes in numerous jurisdictions.~~of $3.0 million (an effective tax rate of 32%). Tax expense for the three month period ended September 30, 2021 was $1.1 million on profit before tax of $4.4 million (an effective tax rate of 26%). 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 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.

~~For the~~ three month ~~period~~periods ended December 31, 2021, the Company recognized tax expense of $1.0 million on a profit before tax of $3.5 million or an effective tax rate of 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 fiscalSeptember 30, 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~~were 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. ~~For~~Tax expense for the ~~six~~three month period ended December 31, 2020. the Company recognized tax expense of $(0.4) million on a profit before tax of $7.6 million or an effective tax rate of (5)%.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 toSeptember 30, 2022 reflects the impact of final U.S. foreign tax credit regulations effective in fiscal 2023 that result in an increase in tax expense from the GILTI ~~high-tax exclusion and ($0.2) million related~~inclusion. In the period ended September 30, 2022 the GILTI impact resulted in a 7.27% rate as compared to the ~~impact of the increase~~period ended September 30, 2021 resulting in ~~UK corporate tax rate on the net deferred tax asset. Other factors impacting the tax rate 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.~~2.22%.

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 December 31, 2021, the

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 $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 addressingconsidered 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~~need for a valuation allowance ~~related to the asset to the extent that it is more likely than not that~~offsetting the deferred tax ~~asset will not be realized. Should any significant changes~~assets 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~~U.S. and 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~~concluded 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~~is required against 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.~~at September 30, 2022 and June 30, 2022. The Company had long term tax obligations related primarily to transfer pricing adjustments at September 30, 2022 and June 30, 2022.

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Note ~~12:~~13: Contingencies

The Company is involved in certain legal matters, which arise, in the normal course of business. ~~These~~The Company does not believe it is reasonably possible that these matters ~~are not expected to~~will have a material impact on the Company’s ~~financial condition,~~ results of operations or cash flows.

1716

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

RESULTS OF OPERATIONS

Use of 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- GAAP~~non-GAAP financial measures related to currency-neutral sales, as well as adjusted operating income.

We present these ~~non- GAAP~~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- GAAP~~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 (“GAAP”). Currency-neutral 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 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 GAAP and may not be comparable to similarly titled ~~non- GAAP~~non-GAAP financial measures used by other companies. In evaluating these 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-GAAP financial measures should not be construed to imply that its future results will be unaffected by any such adjustments. 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 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 GAAP operating income and adjusted operating income.

Three months ended September 30, 2022 and September 30, 2021

The following table represents key results of operations on a consolidated basis for the three months ended September 30, 2022 and ~~six months ended December 31, 2021 and December 31, 2020:~~September 30, 2021:

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	Three Months Ended
(Amounts in thousands)	9/30/2022			09/30/2021			$ Change favorable (unfavorable)		% Change
Net sales	$	60,461		$	61,514		$	(1,053)	(1.7)	%
Gross profit	20,200			20,145			55		0.3	%
% of net sales	33.4		%	32.7		%

Restructuring charges	190			—			(190)		(100.0)	%
Selling, general and administrative expenses	16,294			16,012			(282)		(1.8)	%
% of net sales	26.9		%	26.0		%




Operating income	3,716			4,133			(417)		(10.1)	%

Other income (expense), net	(676)			226			(902)		(399.1)	%

Income before income taxes	3,040			4,359			(1,319)		(30.3)	%

Income tax expense (benefit)	984			1,127			143		12.7	%

Net income	$	2,056		$	3,232		(1,176)		(36.4)	%

Key Results by Reporting Segment


	Three Months Ended September 2022											Three Months Ended September 2021
(Amounts in thousands)	North America			International			Corporate		Total			North America			International			Corporate		Total
Net sales	$	36,484		$	23,977		$	—	$	60,461		$	33,809		$	27,705		$	—	$	61,514
Gross profit	10,932			9,268			—		20,200			9,535			10,610			—		20,145
% of net sales	30.0		%	38.7		%			33.4		%	28.2		%	38.3		%			32.7		%
Restructuring charges	—			190			—		190			—			—			—		—
Selling, general and administrative expenses	8,101			6,242			1,951		16,294			7,262			7,027			1,723		16,012
% of net sales	22.2		%	26.0		%			26.9		%	21.5		%	25.4		%			26.0		%


Operating income	2,831			2,836			(1,951)		3,716			2,273			3,583			(1,723)		4,133
% of net sales	7.8		%	11.8		%			6.1		%	6.7		%	12.9		%			6.7		%

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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
Net sales $ 61,318 $ 54,054 $ 7,264 13.4 % $ 122,832 $ 103,464 19,368 18.7 %
Gross margin 18,950 17,605 1,345 7.6 % 39,095 33,177 5,918 17.8 %
% of net sales 30.9 % 32.6 % 31.8 % 32.1 %
Selling, general and administrative expenses 14,749 14,224 (525) (3.7) % 30,762 27,615 (3,147) (11.4) %
% of net sales 24.1 % 26.3 % 25.0 % 26.7 %
Restructuring charges — 384 384 (100.0) % — 730 730 (100.0) %
Gain on sale of building — (3,204) (3,204) — % — (3,204) 3,204 100.0 %
Operating income 4,201 6,201 (2,000) (32.3) % 8,333 8,036 297 3.7 %
Other income (expense), net (662) (426) (236) 55.3 % (436) (427) (9) (2.0) %
Income before income taxes 3,539 5,775 (2,236) (38.7) % 7,897 7,609 288 3.8 %
Income tax expense (benefit) 1,011 1,918 907 47.3 % 2,137 (364) (2,501) 687.2 %
Net income $ 2,528 $ 3,857 (1,329) (34.5) % $ 5,760 $ 7,973 (2,213) (27.8) %

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
Non-GAAP Measure Reconciliation: Fiscal 2023 Q1 "Currency Neutral" Net Sales

~~The following table represents key results of~~


	Three months ended
(Amounts in Thousands)	9/30/2022	9/30/2021	$ Change	% Change
Net Sales, as reported	60,461	61,514	(1,053)	(1.7)	%
Currency Neutralizing Adjustment*	923	—	923	1.5	%
Q1 FY23 Currency Neutral Net Sales	61,384	61,514	(130)	(0.2)	%
North America Net Sales, as reported	36,484	33,809	2,675	7.9	%
Currency Neutralizing Adjustment*	64	—	64	0.2	%
Q1FY23 Currency Neutral North America Net Sales	36,548	33,809	2,739	8.1	%
International Net Sales, as reported	23,977	27,705	(3,728)	(13.5)	%
Currency Neutralizing Adjustment*	859	—	859	3.1	%
Q1FY23 Currency Neutral International Net Sales	24,836	27,705	(2,869)	(10.4)	%
*"Currency Neutralizing Adjustment" = Change when converting Q1FY23 sales in non USD functional currencies at the same exchange rates used in the comparison period

Overview

New order intake remained stable in the North American precision hand tools business and in the precision granite market. However, order intake in our International operations, particularly in Europe, has softened due to the recession there and the on-going war in Ukraine. Although backlog remains very high and nearly 20% higher than on June 30, 2022, the company continues to anticipate a softening in demand for its products across the portfolio.

For the three months ~~ending December 31,~~ended September 30, 2022 and September 30, 2021 sales were $60.5 million and ~~2020 based on~~$61.5 million, respectively, a reduction of $1.1 million or 1.7%. Consolidated gross profit improved $0.1 million versus prior year to $20.2 million in the three months ended September 30, 2022. Gross margin was 33.4% of sales in the three months ended September 30, 2022 versus 32.7% during the prior year. This continues to reflect the positive impact of our ~~business aggregated into two reportable segments according~~factory restructuring efforts completed in fiscal 2021. While the Company continues to ~~geography~~experience supply chain challenges, raw material price increases, and an increase in wages related to labor shortages globally, it has been able to keep pace with selling price increases. Selling, General and Administrative expenses have increased overall by $0.3 million versus prior year to $16.3 million in the three months ended September 30, 2022 due in large part to increases in sales and marketing expenses. In the three months ended September 30, 2022 operating income was $3.7 million, a $0.4 million or a 10.1% reduction versus September 30, 2021 during which the company reported operating income of ~~operations:~~$4.1 million. During the three months ended September 30, 2022, the Company had $0.2 million in restructuring expenses related to the closure of its distribution and sales centers in Singapore and Japan as part of the March 2022 disclosed restructuring with a total expected projected cost $0.8 million. Project-to-date the total incurred as of September 30, 2022 was $0.5 million.

The United States Dollar has strengthened against the United Kingdom, New Zealand and Brazilian currencies versus the prior year. Currency neutral sales for the three months ended September 30, 2022 were $61.4 million bringing sales to the same level compared to net sales of the period ended September 30, 2021.

Net Sales

In the three months ended September 30, 2022 net sales were $60.5 million with North ~~American Operations~~America net sales of $36.5 million and International ~~Operations~~of $24.0 million. In the three months ended September 30, 2022 North America net sales increased 7.9% by $2.7 million to $36.5 million and International net sales declined 13.5% to $24.0 million as ~~reflected~~compared to $27.7 million in the three months ended September 30, 2021. Currency neutral international net sales would have been $24.8 million in the three month ended September 30, 2022, as referenced in the table be~~low:~~above.

Gross Profit

Gross profit of $20.2 million in the three months ended September 30, 2022 is an increase of $0.1 million or 0.3% over the three months ended September 30, 2021 at $20.1 million. In the three months ended September 30, 2022 compared to September 30, 2021, This equates to 33.4% gross margin in the three months ended September 30, 2022 compare to 32.7%, prior year. International gross profit decreased to $9.3 million, or 38.7% of sales, compared to $10.6 million, or 38.3% of sales

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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 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~~

The Company’s net sales for the quarter ended December 31, 2021 were $61.3 million versus $54.0 million for the same period a year prior. North America sales of $32.7 million represent an increase of $5.6 million or 20.6% in quarter ended December 31, 2021. International Sales increased to $28.6 million during the quarter ended December 31, 2021 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 six months ended December 31, 2021 as compared to 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 six months ended December 31, 2021 were $122.8 million, compared to $103.4 million for the same six-month period ended December 31, 2020, representing an improvement of 19.4 million, or 18.7%.

~~Gross Margin~~

Gross margin increased $1.3 million or 7.6% for the three months, and $5.9 million or 17.8% for the six months ended December 31, 2021 as compared to the year prior, primarily as a result of higher sales. Gross 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 COVID-19 pandemic. These include an increase in material and freight costs, and longer transit times which impact 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 restructuring efforts are partially offset by the aforementioned labor shortages and wage inflation. International gross margin is more affected by material and freight cost increases, supply chain disruptions and increased transit times. 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. The Company expects these headwinds to continue throughout the remainder of this fiscal year.

~~For~~ the three months ended ~~December 31, 2021,~~September 30, 2021. In the three months ended September 30, 2022 North American gross ~~margin measured as~~profit improved to $10.9 million, or 30.0% of sales from $9.5 million, or 28.2% of sales in the three months ended September 30, 2021. Although the company continues to be challenged by macro pressures related to supply chain, raw material and labor cost increases in this inflationary environment, it has been able to keep pace with a ~~percent~~series of ~~net sales improved by 0.5 percentage points from 25.0% to 25.5%, compared to~~selling price increases across 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.

For 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.

business.

Selling, General and Administrative Expenses

Selling, general and administrative expenses of $16.3 million in the three months ended September 30, 2022 increased ~~$0.5~~$0.3 million or ~~3.7% during~~1.8% over the ~~quarter~~three months ended ~~December 31,~~September 30, 2021 ~~compared~~at $16.0 million. The increase in selling, general and administrative expenses is due primarily to ~~the quarter ended December 31, 2020, but declined~~some variable selling expenses related to sales and marketing. Overall, selling, general and administrative expenses as a percentage of ~~net~~sales increased to 26.9% in the three months ended September 30, 2022 from 26.0% in the three months ended September 30, 2021. North America increasing from 21.5% of sales to ~~24.1% for the quarter ended December 31, 2021 compared to 26.3% in the prior year quarter ended December 31, 2020.~~

~~Selling, general and administrative~~22.2% of sales, International decreased expenses ~~increased $3.1~~$0.8 million ~~or 11.4% during the six months ended December 31, 2021 compared to 2020, however~~yet expenses increased as a percentage of ~~net~~ sales ~~it has declined~~to 26.0% from ~~26.7% for~~25.4% of sales during the ~~six~~comparative period. Corporate expenses were $2.0 million in the three months ended ~~December 31, 2020~~September 30, 2022 compared to ~~25.0% for~~$1.7 million in the ~~six~~three months ended ~~December 31,~~September 30, 2021.

The Company has continued to benefit from selling, general and administrative reductions enacted as part of the fiscal 2021 restructuring programs, as evidenced in the decline of these costs as a percentage of net sales. This was partially offset by some variable selling costs tied to the higher level of sales, and temporary salary reductions enacted during the 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~~In the three ~~month period~~months ended ~~December 31, 2021,~~September 30, 2022, the Company recognized income tax expense of $1.0 million on a profit before tax of ~~$3.5~~$3.0 million ~~or an~~(an effective tax rate 32%) as compared to income tax expense of $1.1 million on profit before tax of $4.4 million (an effective tax rate of ~~29%. For~~26%), in the three ~~month period~~months ended ~~December 31, 2020, the Company recognized tax expense of $1.9 million on a profit before tax of $5.8 million or an~~September 30, 2021. The higher effective tax rate ~~of 33%. The tax rate for both fiscal~~in the three months ended September 30, 2022, ~~and fiscal~~when compared with the three months ended September 30, 2021 ~~was higher than the U.S. statutory tax rate of 21%~~is primarily due to final U.S. foreign tax credit regulations effective in fiscal 2023 that result in an increase in tax expense from the GILTI ~~provisions~~inclusion which are $0.2 million higher in the quarter ended September 30, 2022 as a result of this change.

Other Income and Net Income

Other expense in the ~~jurisdictional mix~~three months ended September 30, 2022 was $0.7 million mainly related to exchange losses from Brazil, China and New Zealand of ~~earnings, particularly Brazil with~~$0.4 million and interest expense of $0.4 million as SOFR is a ~~statutory~~variable rate. The effective interest rate on the borrowings under the Loan and Security Agreement during the three months ended September 30, 2022 and 2021 was 4.2% and 1.9% respectively. Other income in the three months ended September 30, 2021 was a $0.2 million mainly related to pension adjustments.

In the three months ended September 30, 2022 net income was $2.1 million, $1.2 million or 36.4% lower than net income of ~~34%, offset by tax credits and permanent deductions generated from research expenses.~~$3.2 million in the three months ended September 30, 2021

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. For the six month period ended December 31, 2020. the Company recognized tax expense of $(0.4) million on a profit before tax of $7.6 million or an effective tax rate of (5)%. 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. Other factors impacting the tax rate 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.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows (in thousands) Six Months Ended
12/31/2021 12/31/2020
Cash (used in) provided by operating activities (4,567) 2,401
Cash (used in) provided by investing activities (4,990) 1,627
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 flows (in thousands)	Three Months Ended
	9/30/2022		9/30/2021

Cash provided by (used in) operating activities	$	628	$	(5,841)
Cash (used in) investing activities	(1,162)		(2,624)
Cash (used in) financing activities	(2,094)		5,711
Effect of exchange rate changes on cash	7		276

Net (decrease) in cash	$	(2,621)	$	(2,478)

Net cash flows ~~for~~used in the ~~six~~three months ended ~~December 31, 2021~~September 30, 2022 was $2.6 million. Cash provided ~~a decrease~~by operations was $0.6 million resulting from net income of $2.1 million, decreases in ~~cash~~accounts receivable of ~~$0.3~~$3.1 million ~~compared~~due to anlower sales and the Company planned $5.0 million increase in ~~cash of $1.1 million for the six month period ended December 31, 2020 .~~inventories due to global supply chain issues. Cash used in ~~operations~~investing activities was ~~$4.6~~$1.2 million ~~due to increases in working capital required to meet strong customer demand and counteract supply chain disruptions and increased transit times. The Company has invested $4.5~~as a result of $1.0 million in ~~new equipment~~capital expenditures and ~~increased borrowing $9.3~~$0.2 million in ~~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 the manufacturing activity and, therefore, raw material imports into Brazil. Assoftware development while cash used in financing amounted to $2.1 million 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 chargingborrowed $0.6 million and ~~re-claiming ICMS on imports and domestic sales so that~~repaid $2.7 million.

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~~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 ~~worked~~believes it maintains sufficient liquidity and has the resources to fund its operations with ~~TD Bank to amend the current loan agreement which resulted in a number of changes such as amendments to 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,~~and are adequate to satisfy its working capital, capital expenditure requirements and other contractual obligations for at least the next 12 months. If

On April 29, 2022, the 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~~Company and certain of the Company’s ~~Amended and Restated~~domestic subsidiaries entered into a new Loan and Security ~~Agreement of June 25, 2020,~~agreement with HSBC Bank USA. These new credit facilities replaced 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~~Company’s previous TD Bank credit facilities and ~~(ii) establishment~~are comprised 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$30 million revolving line of credit ~~from 80% of Qualified AR~~with a $10 million uncommitted accordion provision, a $12.1 million term loan and ~~50%~~a $7 million Capital Expenditure draw down credit facility. The Facilities are secured by a valid first-priority security interest on substantially all existing and future assets 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.~~Company and its domestic subsidiaries. As ~~a result of this change,~~September 30, 2022 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 basedhas excess availability on the ~~Company’s plan for a slow pandemic recovery throughout fiscal year 2021~~revolving line of credit and the ~~impact~~term loan of the Company’s restructuring plan initiatives. The Company 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 Agreement reverted to the prior covenant package for the quarter ending September 30, 2021.$16.2 million.

The effective interest rate on the borrowings under the Loan and Security Agreement during the ~~six~~three months ended ~~December 31,~~September 30, 2022 and 2021 ~~and 2020~~ was ~~1.9%~~4.2% 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.~~2022.

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 ~~December 31, 2021,~~September 30, 2022, 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.

~~No change~~ Based on the evaluation of our disclosure controls and procedures as of September 30, 2022, 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 ~~our~~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 ~~three months ended December 31, 2021~~first quarter of fiscal 2023 that ~~has~~have materially affected, or isare reasonably likely to materially affect, ~~our~~its internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of business, we are from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements and other matters. We do not believe we are currently party to any pending legal action, arbitration proceeding or governmental proceeding, the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business or operating results. We are not a party to any material proceedings in which any director, member of senior management or affiliate of ours is either a party adverse to us or our subsidiaries or has a material interest adverse to us or our subsidiaries.

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 risk factors ~~disclosed~~set forth in ~~our~~the Company’s Annual Report on Form 10-K

for the year ended June 30, ~~2021.~~2022.

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ITEM 6. EXHIBITS


~~31a~~31.1*			Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

~~31b~~31.2 *			Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

3232.2+			~~Certifications~~Certification of ~~the Principal Executive Officer and the~~ Principal Financial Officer ~~pursuant~~Pursuant to 18 U.S.C. Section 1350, ~~Chapter 63 of Title 18, United States Code,~~ as ~~adopted pursuant~~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 ~~December 31, 2021~~September 30, 2022 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.
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

+ Furnished, not filed.

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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	~~February 7,~~November 3, 2022	/S/R. Douglas A. Starrett
		Douglas A. Starrett - President and CEO (Principal Executive Officer)

Date	~~February 7,~~November 3, 2022	/S/R. John C. Tripp
		John C. Tripp - ~~Treasurer~~CFO and ~~CFO~~Treasurer (Principal Accounting Officer)

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	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


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


	12/31/2021		6/30/2021
Trademarks and trade names	2,070		2,070

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

Total	13,477		12,944
Accumulated amortization and impairment	(8,716)		(8,056)
Total net balance	$	4,761	$	4,888


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

Thereafter	363
Total net balance	$	4,761


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


	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%