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~~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, 2022~~17, 2023
Class A Common Shares						—6,804,246
Class B Common Shares						—622,645

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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.

THE L. S. STARRETT COMPANY

CONTENTS


			Page No.

Part I.	Financial Information:

	Item 1.	Financial Statements	32

		Condensed Consolidated Balance Sheets–December 31, ~~2021~~2022 (unaudited) and June 30, ~~2021~~	3

		~~Consolidated Statements of Operations (unaudited)– three~~ ~~and six~~ ~~months ended~~ ~~December 31, 2021 and December 31, 2020~~ 2022	4

		Condensed Consolidated Statements of ~~Comprehensive Income (Loss)~~Operations (unaudited)–three and six months ended December 31, ~~2021~~2022 and ~~December 31, 2020~~	5

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

		Condensed Consolidated Statements of ~~Cash Flows~~Comprehensive Income (Loss), (unaudited) - –three and six months ended December 31, ~~2021~~2022 and December 31, ~~2020~~2021	7

		Condensed Consolidated Statements of Stockholders' Equity (unaudited)– three and six months ended December 31, 2022 and December 31, 2021	8

		Condensed Consolidated Statements of Cash Flows (unaudited)- six months ended December 31, 2022 and December 31, 2021	9

		Notes to Unaudited Condensed Consolidated Financial Statements	810-18

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

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

	Item 4.	Controls and Procedures	24

Part II.	Other Information:

	Item 1A.	Risk Factors	25

	Item 6.	Exhibits	26

SIGNATURES			27

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. FINANCIAL STATEMENTS~~

THE L. S. STARRETT COMPANY

Condensed 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


	12/31/2022		06/30/2022
ASSETS
Current assets:
Cash	$	8,957	$	14,523
Accounts receivable (less allowance for credit losses of $806 and $796, respectively)	38,151		42,961
Inventories	70,088		66,900
Prepaid expenses and other current assets	9,727		8,669
Total current assets	126,923		133,053

Property, plant and equipment, net	38,121		37,116
Right of use assets	5,379		5,540

Deferred tax assets, net	13,943		14,924
Intangible assets, net	4,450		4,640
Goodwill	1,015		1,015
Other assets	3,280		3,266
Total assets	$	193,111	$	199,554

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt	$	5,259	$	6,547
Current lease liability	2,025		1,530
Accounts payable	13,017		14,624
Accrued expenses	10,335		11,776
Accrued compensation	4,697		6,703
Total current liabilities	35,333		41,180

Other tax obligations	2,974		2,936
Long-term lease liability	3,529		4,166
Long-term debt, net of current portion	20,313		24,905
Postretirement benefit and pension obligations	23,052		23,938
Total liabilities	85,201		97,125

Stockholders' equity:
Class A Common stock $1 par 20,000,000 shares authorized; 6,802,549 outstanding at December 31, 2022 and 6,682,521 outstanding at June 30, 2022)	6,803		6,683
Class B Common stock $1 par (10,000,000 shares authorized; 624,321 outstanding at December 31, 2022 and 610,087 outstanding at June 30, 2022	624		610
Additional paid-in capital	57,454		57,143
Retained earnings	94,246		89,059
Accumulated other comprehensive loss	(51,217)		(51,066)
Total stockholders' equity	107,910		102,429
Total liabilities and stockholders’ equity	$	193,111	$	199,554

See Notes to Unaudited Condensed Consolidated Financial Statements

THE L. S. STARRETT COMPANY

Condensed Consolidated Statements of Operations

(in thousands except per share data)

(unaudited)


		3 Months Ended						6 Months Ended							3 Months Ended						6 Months Ended
		12/31/2021			12/31/2020			12/31/2021			12/31/2020				12/31/2022			12/31/2021			12/31/2022			12/31/2021

Net sales	Net sales	$	61,318		$	54,054		$	122,832		$	103,464		Net sales	$	66,775		$	61,318		$	127,236		$	122,832
Cost of goods sold	Cost of goods sold	42,368			36,449			83,737			70,287			Cost of goods sold	45,199			42,368			85,460			83,737
Gross margin		18,950			17,605			39,095			33,177
Gross profit														Gross profit	21,576			18,950			41,776			39,095
% of Net sales	% of Net sales	30.9		%	32.6		%	31.8		%	32.1		%	% of Net sales	32.3		%	30.9		%	32.8		%	31.8		%

Restructuring charges	Restructuring charges	—			384			—			730			Restructuring charges	54			—			244			—
Gain on sale of building		—			(3,204)			—			(3,204)
Selling, general and administrative expenses	Selling, general and administrative expenses	14,749			14,224			30,762			27,615			Selling, general and administrative expenses	15,561			14,749			31,855			30,762

Operating income	Operating income	4,201			6,201			8,333			8,036			Operating income	5,961			4,201			9,677			8,333

Other (expense), net	Other (expense), net	(662)			(426)			(436)			(427)			Other (expense), net	(1,121)			(662)			(1,797)			(436)

Income before income taxes	Income before income taxes	3,539			5,775			7,897			7,609			Income before income taxes	4,840			3,539			7,880			7,897

Income tax expense (benefit)		1,011			1,918			2,137			(364)
Income tax expense														Income tax expense	1,709			1,011			2,693			2,137

Net income	Net income	$	2,528		$	3,857		$	5,760		$	7,973		Net income	$	3,131		$	2,528		$	5,187		$	5,760

Basic income per share	Basic income per share	$	0.35		$	0.54		$	0.80		$	1.13		Basic income per share	$	0.42		$	0.35		$	0.71		$	0.80
Diluted income per share	Diluted income per share	$	0.34		$	0.53		$	0.77		$	1.10		Diluted income per share	$	0.42		$	0.34		$	0.69		$	0.77

Weighted average outstanding shares used in per share calculations:	Weighted average outstanding shares used in per share calculations:													Weighted average outstanding shares used in per share calculations:
Basic	Basic	7,243			7,081			7,185			7,035			Basic	7,405			7,243			7,354			7,185
Diluted	Diluted	7,492			7,294			7,473			7,260			Diluted	7,541			7,492			7,511			7,473

See Notes to Unaudited Condensed Consolidated Financial Statements

THE L. S. STARRETT COMPANY

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)


		3 Months Ended				6 Months Ended					3 Months Ended				6 Months Ended
		12/31/2021		12/31/2020		12/31/2021		12/31/2020			12/31/2022		12/31/2021		12/31/2022		12/31/2021

Net income	Net income	$	2,528	$	3,857	$	5,760	$	7,973	Net income	$	3,131	$	2,528	$	5,187	$	5,760
Other comprehensive income (loss):	Other comprehensive income (loss):									Other comprehensive income (loss):
Currency translation gain (loss), net of tax	Currency translation gain (loss), net of tax	(871)		3,846		(4,482)		3,610		Currency translation gain (loss), net of tax	2,716		(871)		(90)		(4,482)
Pension and postretirement plans, net of tax	Pension and postretirement plans, net of tax	(67)		1		(133)		(21)		Pension and postretirement plans, net of tax	(36)		(67)		(61)		(133)
Other comprehensive income (loss)	Other comprehensive income (loss)	(938)		3,847		(4,615)		3,589		Other comprehensive income (loss)	2,680		(938)		(151)		(4,615)

Total comprehensive income	Total comprehensive income	$	1,590	$	7,704	$	1,145	$	11,562	Total comprehensive income	$	5,811	$	1,590	$	5,036	$	1,145

See Notes to Unaudited Condensed Consolidated Financial Statements

THE L. S. STARRETT COMPANY

Condensed Consolidated Statements of Stockholders' Equity

(in thousands) (unaudited)

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


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

Balance June 30, 2021		$	6,475	$	634			$	56,507						$	74,181			$	(54,262)			$	83,535
Balance June 30, 2022																				Balance June 30, 2022	$	6,683			$	610		$	57,143		$	89,059		$	(51,066)		$	102,429
Total comprehensive income (loss)	Total comprehensive income (loss)	—		—		—				3,232			(3,677)				(445)			Total comprehensive income (loss)	—				—		—			2,056			(2,831)			(775)
Repurchase of shares	Repurchase of shares	—		(2)		(14)				—			—				(16)			Repurchase of shares	—				(1)		(5)			—			—			(6)
Stock-based compensation	Stock-based compensation	119		—		55				—			—				174			Stock-based compensation	76				—		109			—			—			185
Conversion	Conversion	25		(25)		—				—			—				—			Conversion	12				(12)		—			—			—			—
Balance September 30, 2021		$	6,619	$	607	$	56,548			$	77,413		$	(57,939)			$	83,248
Balance September 30, 2022																				Balance September 30, 2022	$	6,771			$	597	$	57,247		$	91,115		$	(53,897)		$	101,833

Total comprehensive income	Total comprehensive income	—		—		—				2,528			(938)				1,590			Total comprehensive income	—				—		—			3,131			2,680			5,811
Repurchase of shares	Repurchase of shares	—		—		(7)				—			—				(7)			Repurchase of shares	—				—		(3)			—			—			(3)
Issuance of stock	Issuance of stock	7		8		102				—			—				117			Issuance of stock	—				34		50			—			—			84
Stock-based compensation	Stock-based compensation	11		—		226				—			—				237			Stock-based compensation	25				—		160			—			—			185
Conversion	Conversion	7		(7)		—				—			—				—			Conversion	7				(7)		—			—			—			—
Balance December 31, 2021		$	6,644	$	608	$	56,869			$	79,941		$	(58,877)			$	85,185
Balance December 31, 2022																				Balance December 31, 2022	$	6,803			$	624	$	57,454		$	94,246		$	(51,217)		$	107,910

Accumulated balance consists of:	Accumulated balance consists of:																			Accumulated balance consists of:
Translation loss	Translation loss												$	(60,528)						Translation loss													$	(60,166)
Pension and postretirement plans, net of taxes	Pension and postretirement plans, net of taxes												1,651							Pension and postretirement plans, net of taxes													8,949
													$	(58,877)																			$	(51,217)

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


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

Balance June 30, 2020		$	6,308	$	680			$	55,762						$	58,648			$	(75,415)			$	45,983
Balance June 30, 2021																				Balance June 30, 2021	$	6,475			$	634		$	56,507		$	74,181		$	(54,262)		$	83,535
Total comprehensive income (loss)	Total comprehensive income (loss)	—		—		—				4,116			(258)				3,858			Total comprehensive income (loss)	—				—		—			3,232			(3,677)			(445)
Repurchase of shares	Repurchase of shares	—		(2)		(4)				—			—				(6)			Repurchase of shares	—				(2)		(14)			—			—			(16)
Stock-based compensation	Stock-based compensation	8		—		359				—			—				367			Stock-based compensation	119				—		55			—			—			174
Conversion	Conversion	26		(26)		—				—			—				—			Conversion	25				(25)		—			—			—			—
Balance September 30, 2020		$	6,342	$	652	$	56,117			$	62,764		$	(75,673)			$	50,202
Balance September 30, 2021																				Balance September 30, 2021	$	6,619			$	607	$	56,548		$	77,413		$	(57,939)		$	83,248

Total comprehensive income		—		—		—				3,857			3,847				7,704
Total comprehensive income (loss)																				Total comprehensive income (loss)	—				—		—			2,528			(938)			1,590
Repurchase of shares	Repurchase of shares	—		—		(1)				—			—				(1)			Repurchase of shares	—				—		(7)			—			—			(7)
Issuance of stock	Issuance of stock	—		8		17				—			—				25			Issuance of stock	7				8		102			—			—			117
Stock-based compensation	Stock-based compensation	103		—		51				—			—				154			Stock-based compensation	11				—		226			—			—			237
Conversion	Conversion	3		(3)		—				—			—				—			Conversion	7				(7)		—			—			—			—
Balance December 31, 2020		$	6,448	$	657	$	56,184			$	66,621		$	(71,826)			$	58,084
Balance December 31, 2021																				Balance December 31, 2021	$	6,644			$	608	$	56,869		$	79,941		$	(58,877)		$	85,185

Accumulated balance consists of:	Accumulated balance consists of:																			Accumulated balance consists of:
Translation loss	Translation loss												$	(58,264)						Translation loss													$	(60,528)
Pension and postretirement plans, net of taxes	Pension and postretirement plans, net of taxes												(13,562)							Pension and postretirement plans, net of taxes													1,651
													$	(71,826)																			$	(58,877)

See Notes to Unaudited Condensed Consolidated Financial Statements

THE L. S. STARRETT COMPANY

Condensed Consolidated Statements of Cash Flows

(in thousands) (unaudited)


		6 Months Ended					6 Months Ended
		12/31/2021		12/31/2020			12/31/2022		12/31/2021

Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:

Net income	Net income	$	5,760	$	7,973	Net income	$	5,187	$	5,760

Non-cash operating activities:	Non-cash operating activities:					Non-cash operating activities:
Gain from sale of real estate		—		(3,204)
Depreciation	Depreciation	2,567		2,681		Depreciation	2,585		2,567
Amortization	Amortization	660		605		Amortization	720		660
Stock-based compensation	Stock-based compensation	411		521		Stock-based compensation	370		411
Net long-term tax obligations	Net long-term tax obligations	86		114		Net long-term tax obligations	91		86
Deferred taxes	Deferred taxes	305		(2,564)		Deferred taxes	977		305
Postretirement benefit and pension obligations	Postretirement benefit and pension obligations	(706)		32		Postretirement benefit and pension obligations	314		(706)
Working capital changes:	Working capital changes:					Working capital changes:
Accounts receivable	Accounts receivable	(1,619)		(2,911)		Accounts receivable	4,530		(1,619)
Inventories	Inventories	(6,002)		4,615		Inventories	(3,307)		(6,002)
Other current assets	Other current assets	(1,063)		(349)		Other current assets	(1,098)		(1,063)
Other current liabilities	Other current liabilities	(3,767)		(1,813)		Other current liabilities	(4,818)		(3,767)
Prepaid pension expense	Prepaid pension expense	(2,071)		(3,469)		Prepaid pension expense	(1,147)		(2,071)
Other	Other	872		170		Other	70		872
Net cash (used in) provided by operating activities		(4,567)		2,401
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	4,474		(4,567)

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchases of property, plant and equipment	Purchases of property, plant and equipment	(4,457)		(3,050)		Purchases of property, plant and equipment	(3,713)		(4,457)
Software development	Software development	(533)		(537)		Software development	(477)		(533)
Proceeds from sale of real estate		—		5,214
Net cash (used in) provided by investing activities		(4,990)		1,627
Net cash (used in) investing activities						Net cash (used in) investing activities	(4,190)		(4,990)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from borrowing	Proceeds from borrowing	29,605		9,142		Proceeds from borrowing	1,575		29,605
Debt repayments	Debt repayments	(20,244)		(12,608)		Debt repayments	(7,508)		(20,244)
Proceeds from common stock issued	Proceeds from common stock issued	117		25		Proceeds from common stock issued	84		117
Shares repurchased	Shares repurchased	(23)		(7)		Shares repurchased	(9)		(23)
Net cash provided by (used in) financing activities		9,455		(3,448)
Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(5,858)		9,455

Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	434		521		Effect of exchange rate changes on cash	8		434

Net increase in cash		332		1,101
Net (decrease) increase in cash						Net (decrease) increase in cash	(5,566)		332
Cash, beginning of period	Cash, beginning of period	9,105		13,458		Cash, beginning of period	14,523		9,105
Cash, end of period	Cash, end of period	$	9,437	$	14,559	Cash, end of period	$	8,957	$	9,437

Supplemental cash flow information:	Supplemental cash flow information:					Supplemental cash flow information:
Interest paid	Interest paid	$	465	$	423	Interest paid	$	802	$	465
Income taxes paid, net	Income taxes paid, net	2,222		2,941		Income taxes paid, net	3,360		2,222

See Notes to Unaudited Condensed Consolidated Financial Statements

THE L. S. STARRETT COMPANY

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, ~~2021~~2022

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

The unaudited interim condensed consolidated financial statements as of and for the six months ended December 31, ~~2021~~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 condensed 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 condensed 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 condensed 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 within the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for financial assets and liabilities held at carrying amount on the condensed 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 condensed consolidated financial statements and accompanying notes. Note 2 within the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q to the Company’s condensed 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 condensed 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 condensed 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 condensed 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 ("North America") and International ~~Operations.~~Operations(“International”). Segment income is measured for internal reporting purposes by excluding corporate expenses, which are included in the unallocated column in the table below. Other income and expense, including interest income and expense, and income taxes are excluded entirely from the table below. There were no significant changes in the segment operations or in the segment assets from our Annual Report on Form 10-K for the ~~Annual Report.~~year ended June 30, 2022. Financial results for each reportable segment are as follows (in thousands):

North
American
Operations International
Operations Unallocated Total
Three Months ended December 31, 2021
Sales1
$ 32,666 $ 28,652 $ — $ 61,318
Operating Income (Loss) $ 1,549 $ 4,394 $ (1,742) $ 4,201
Three Months ended December 31, 2020
Sales2
$ 27,106 $ 26,948 $ — $ 54,054
Operating Income (Loss) $ 3,688 $ 4,436 $ (1,923) $ 6,201


	North American Operations		International Operations		Unallocated		Total
Three Months ended December 31, 2022

Sales1	$	39,687	$	27,088	$	—	$	66,775

Operating Income (Loss)	$	3,681	$	3,893	$	(1,613)	$	5,961

Three Months ended December 31, 2021

Sales2	$	32,666	$	28,652	$	—	$	61,318

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

1.Excludes $707 of North American segment intercompany sales to the International segment, and $4,250 of International segment intercompany sales to the North American segment.

2.Excludes $930 of North American segment intercompany sales to the International segment, and $4,412 of International segment intercompany sales to the North American segment.


	North American Operations		International Operations		Unallocated		Total
Six months ended December 31, 2022

Sales1	$	76,170	$	51,066	$	—	$	127,236
Operating Income (Loss)	$	6,878	$	6,729	$	(3,930)	$	9,677

Six months ended December 31, 2021

Sales2	$	66,475	$	56,357	$	—	$	122,832
Operating Income (Loss)	$	4,050	$	7,977	$	(3,694)	$	8,333

2.1.Excludes ~~$992~~$1,635 of North American segment intercompany sales to the International segment, and ~~$2,610~~$9,285 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

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

2.~~Excludes $1,737 of North American segment intercompany sales to the International segment, and $5,396 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 Condensed Consolidated Balance Sheet. As of December 31, ~~2021~~2022 and June 30, ~~2021,~~2022, the balance of the return asset was $0.1 million and $0.2 million, respectively, and the balance of the refund liability as of December 31, ~~2021~~2022 and June 30, ~~2021~~2022 was $0.1 million

and $0.2 ~~million.~~million, respectively. They are presented within prepaid expenses and other current assets and accrued expenses, respectively, on the Condensed 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~~2022 and June 30, ~~2021,~~2022, respectively, located in Accounts Payable in the Condensed 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 and six months ended December 31, ~~2021~~2022 and ~~2020~~2021 (in thousands):

Three Months Ended Six Months Ended
12/31/2021 12/31/2020 12/31/2021 12/31/2020
North America
United States $ 30,912 $ 25,345 $ 62,932 $ 49,682
Canada & Mexico 1,754 1,761 3,543 3,408
32,666 27,106 66,475 53,090
International
Brazil 18,687 17,493 37,890 32,401
United Kingdom 4,729 5,554 9,697 10,548
China 2,244 2,005 3,862 3,586
Australia & New Zealand 2,992 1,896 4,908 3,839
28,652 26,948 56,357 50,374
Total Sales $ 61,318 $ 54,054 $ 122,832 $ 103,464

~~Note 4: Recent Accounting Pronouncements~~

In 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. ~~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.


	Three Months Ended				Six Months Ended
	12/31/2022		12/31/2021		12/31/2022		12/31/2021
North America
United States	$	37,620	$	30,912	$	71,892	$	62,932
Canada & Mexico	2,067		1,754		4,278		3,543
	39,687		32,666		76,170		66,475
International
Brazil	20,057		18,687		37,305		37,890
United Kingdom	3,294		4,729		6,494		9,697
China	1,978		2,244		3,665		3,862
Australia & New Zealand	1,759		2,992		3,601		4,908
	27,088		28,652		51,066		56,357

Total Sales	$	66,775	$	61,318	$	127,236	$	122,832

Note 5: Leases

Operating lease cost amounted to $0.5 million and $1.0 million for the three and six months ended December 31, 2022 and $0.8 million and $1.6 million for the three and six months ~~period~~ ended December 31, ~~2021 and $0.6 million and $1.2 million for the three and six months period ended December 31, 2020.~~2021. As of December 31, ~~2021,~~2022, the Company’s right-of-use assets "ROU", 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	$	5,379	$	5,553	$	6,775

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~~3.8 years. As of December 31, ~~2021,~~2022, the Company’s financing leases are ~~de minimis.~~not material. The foreign exchange impact affecting the operating leases are, ~~de minimis.~~also, not material.

~~The~~

During the quarter ended December 31, 2022 the Company renewed its leases in both Australia (ends September 2026) and New Zealand (ends April 2025) and recorded $0.6 million in new leases as ROU assets. In September 2021, the Company entered into ~~$0.1 million~~a six year lease in China for 100,682 square feet and recorded a right of use asset for $2.6 ~~million in new operating lease commitments and incurred immaterial exchange expense during the three and six months ended December 31, 2021.~~million.

At December 31, ~~2021,~~2022 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
					Operating Lease Commitments
2023 remaining				2023 remaining	$	1,076
2024	2024	1,520		2024	2,013
2025	2025	1,129		2025	1,587
2026	2026	1,044		2026	1,293
2027				2027	713
Thereafter	Thereafter	824		Thereafter	93
Subtotal	Subtotal	$	7,201	Subtotal	$	6,775
Imputed interest	Imputed interest	(1,269)		Imputed interest	(1,222)
Total	Total	5,932		Total	5,553

The Company entered into $1.0 million, in new operating lease commitments in the three and six months ended December 31, 2022, of which $0.6 million is for the Australia and New Zealand renewals, and incurred immaterial increases due to foreign exchange translation of ROU assets during the three and six months ended December 31, 2022.

In July 2021, 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 rental income is recorded in Other Income in the Company's Condensed 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 periods~~six months ended December 31, ~~2021~~2022 were $0.2 million and $0.3 million as compared to the prior year three and six months of $0.2 million and ~~$0.5~~$0.3 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.

Note 7: Inventories

Inventories consist of the following (in thousands):


		12/31/2021		06/30/2021			12/31/2022		06/30/2022
Raw material and supplies	Raw material and supplies	$	30,687	$	29,271	Raw material and supplies	$	38,002	$	35,752
Goods in process and finished parts	Goods in process and finished parts	16,592		16,096		Goods in process and finished parts	22,007		22,268
Finished goods	Finished goods	37,853		37,344		Finished goods	36,198		35,589
		85,132		82,711			96,207		93,609
LIFO Reserve	LIFO Reserve	(21,258)		(22,139)		LIFO Reserve	(26,119)		(26,709)
		$	63,874	$	60,572		$	70,088	$	66,900

Of the Company’s ~~$63.9~~$70.1 million and ~~$60.6~~$66.9 million total inventory at December 31, ~~2021~~2022 and June 30, ~~2021,~~2022, respectively, the ~~$21.3~~$26.1 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~~$41.4 million on a FIFO basis and ~~$8.9~~$15.3 million on a LIFO basis at December 31, ~~2021.~~2022. The Core U.S. business had total ~~Inventory,~~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, during the three months and six months ended December 31, 2022, a $0.1 million increase and $0.6 million decrease in cost of sales ~~for the goods sold~~as compared to a $0.9 million increase and a $0.9 million decrease in the ~~period ending~~three and six months ended December 31, ~~2021 compared to $0.4 million in the six months ending December 31, 2020.~~2021.

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.


	12/31/2022		6/30/2022
Trademarks and trade names	$	2,070	$	2,070

Customer relationships	630		630
Software development	11,746		11,269

Gross intangible assets	14,446		13,969
Accumulated amortization and impairment	(9,996)		(9,329)
Net intangible assets	$	4,450	$	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 December 31, 2022, gross $4.7 million and accumulated impairment of $3.7 million. There is no change in the ~~remainder~~six months ended December 31, 2022 to the net goodwill balance of ~~fiscal 2021 and for each of the next five years and thereafter, is as follows (in thousands):~~

2022 (Remainder of year) $ 701
2023 1,260
2024 989
2025 829
2026 619
Thereafter 363
Total net balance $ 4,761
$1.0 million.

Note 9: Accrued Expenses

The following table represents accrued expenses from the Condensed Consolidated Balance Sheets (in thousands)


	12/31/2022		06/30/2022
Sales related programs (commissions, rebates, distributor programs, warranty and related)	$	3,043	$	2,733
Income taxes	773		2,420
Professional fees	1,402		1,758
Other	1,579		1,463
Current portion pension cost	1,308		1,289
Taxes other than income tax	1,174		1,243
Workers compensation and employee deposits	432		518
Freight	624		352
Total	$	10,335	$	11,776

Note 9:10: 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 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 Condensed 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.~~expenses, allocated based on headcount. Net periodic benefit ~~costs~~cost and expected return consist of the following (in thousands):

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


	Three Months Ended				Six Months Ended
	12/31/2022		12/31/2021		12/31/2022		12/31/2021
Interest cost	1,408		1,031		2,890		2,064
Expected return on plan assets	(960)		(1,098)		(1,992)		(2,198)
Amortization of net loss	10		15		20		28
Expected net cost (benefit) total	$	458	$	(52)	$	918	$	(106)

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


		Three Months Ended				Six Months Ended					Three Months Ended				Six Months Ended
		12/31/2021		12/31/2020		12/31/2021		12/31/2020			12/31/2022		12/31/2021		12/31/2022		12/31/2021
Service cost	Service cost	$	9	$	22	$	18	$	43	Service cost	$	5	$	9	$	11	$	18
Interest cost	Interest cost	13		52		25		103		Interest cost	17		13		35		25
Amortization of prior service credit	Amortization of prior service credit	(369)		(135)		(737)		(269)		Amortization of prior service credit	(368)		(369)		(737)		(737)
Amortization of net loss	Amortization of net loss	47		41		94		83		Amortization of net loss	45		47		89		94
		$	(300)	$	(20)	$	(600)	$	(40)
Total net (benefit)										Total net (benefit)	$	(301)	$	(300)	$	(602)	$	(600)

For ~~both~~ the three ~~month~~months and six ~~month periods~~months ended December 31, ~~2021,~~2022, the Company contributed ~~$1.5 million,~~ in the U.S. ~~and $0.3 million and $0.5 million in~~$0.7 million. In the UK pension plans the Company contributed $0.2 million and $0.4 million for the same periods. Based upon the actuarial valuations performed on the Company’s defined benefit plans as of June 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 million~~$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 million to $0.6 million.~~reduced. 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~~contributed $2.5 million in total during fiscal year 2022, with $1.5 million in the U.S. and $1.0 million in the U.K. The Company continues evaluating the U.S. future contribution on a quarterly ~~basis and plans~~basis. The Company currently believes contributions in fiscal year 2023 will be similar to ~~contribute $0.5 million in~~ the ~~2nd half of fiscal 2022.~~prior year.

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.

Note ~~10:~~11: Debt

Debt is comprised of the following (in thousands):

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


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

Loan and security agreement (term loan)	1,495		1,495
Brazil loans	3,764		5,052
	5,259		6,547
Long-term debt (net of current portion)
Loan and security agreement (term loan)	9,504		10,252
Loan and security agreement (line of credit)	8,897		11,397
Brazil loans	2,373		3,771
Debt reacquisition cost	(461)		(515)
	20,313		24,905
Total debt	$	25,572	$	31,452

On ~~December 31, 2019,~~April 29, 2022, the Company and certain of the Company’s domestic subsidiaries entered into ~~the Tenth Amendment of its~~a Loan and Security ~~Agreement (“Tenth Amendment”). Under the revised~~ agreement the credit limit for the Revolving Loan was increased from $23.0 million to $25.0 million. In addition, the Company entered into a new $10.0 million 5-year Term Loan with a fixed interest rate of 4.0%. Under the Tenth Amendment, the credit limit for external borrowing was increased from $2.5 million to $5.0 million.

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

~~Pursuant to the terms of the Company’s Amended and Restated Loan~~"Loan and Security ~~Agreement~~Agreement") with HSBC Bank USA ("the Lender"). The Company incurred debt re-acquisition cost of ~~June 25, 2020, the “First Amendment” to this loan agreement was executed on September 17, 2020,~~$0.5 million which ~~include, among other things, (i) pause testing~~are recorded net of ~~the Fixed Charge Coverage Ratio until September 30, 2021~~debt 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,~~amortized over five years.

1415

~~increased~~

These new credit facilities replaced the ~~maximum~~Company’s previous TD Bank credit facilities and are comprised of a $30 million revolving Loan and Security Agreement Line of Credit ("Line of Credit") with a $10 million uncommitted accordion provision, a Loan and Security Agreement Term Loan ("the Term Loan") with original principal of $12.1 million and a $7 million Capital Expenditure draw down credit facility (collectively, the "Facilities"). The Facilities are secured by a valid first-priority security interest ~~charged~~on substantially all existing and future assets of the Company and its domestic subsidiaries.

The interest rate on the ~~Line Of Credit from~~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 months Secured Overnight Financing Rate, (SOFR). The Facilities mature on April 29, 2027.

Availability under the revolving line of credit is secured by and ~~annual interest rate~~subject to a borrowing base comprised of ~~2.25% plus Libor to 3.50% plus Libor,~~eligible inventory and ~~amended~~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 ~~line of credit from 80% of Qualified AR and 50% of~~borrowing base is the lower of ~~Cost~~65% of the value of eligible inventory at cost or ~~Market of US inventory values to 80% of qualified AR plus~~ 85% of the ~~Net Orderly Liquidation Value (NOLV)~~net orderly liquidation value of ~~US Inventory plus 62.5% of total appraised US real estate values.~~

~~As a result of this change,~~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 ~~Company is projected to maintain its current borrowing capacity of $25,000,000 under the Line of Credit.~~Bank. The Company ~~underwent a series of appraisals and field exams in all US locations as part of restructuring this~~believes that the agreement ~~and will provide additional reporting supporting the~~provides an initial borrowing base ~~and covenants certifications. This minimum adjusted EBITDA covenant was based on the Company’s plan~~sufficient 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 million during the six months ended December 31, 2021, $5.4 million of which was an increase in Brazil. This is in response to increased~~current domestic working capital ~~levels required~~needs and flexibility to ~~meet strong customer demand and counteract pandemic related supply chain disruptions and increased transit times.~~

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

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~~$30.0 million. A 0.25% commitment fee is charged on the unused portion of the Line of Credit.

Availability under the Term Loan was comprised of 70% of the fair market value of the Borrower's 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 purchase of new machinery and equipment at 80% of the net invoice value of new machinery and equipment purchases, with a draw period of eighteen months past the closing date, with any amount outstanding under the facility subject to a 3.75% amortization rate per quarter.

The Facilities contain financial covenants with respect to 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 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 2022.

In Brazil, the Company is actively mitigating this consequence of the build-up of ICMS (translate to "Tax on Commerce and Services") credits 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. The Brazilian federal tax authority has approved the Company's application and now it is awaiting state tax approval. 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 December 31, 2022 was $5.2 million. The ICMS balance increased $0.2 million versus the quarter ended September 30, 2022 due to currency exchange. The Company expects a lower balance by the fiscal year end. The ICMS is an asset and its build-up was one of the reasons that Brazilian operation incurred more debt. The balance is located on the Condensed Consolidated Balance Sheets in prepaid expenses and other current assets.

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. Included in the table below are $0.6 million of financing on purchased fixed assets. The Company’s Brazilian subsidiary has the following loans as of December 31, ~~2021~~2022 (in thousands):

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 4.52% October 2021 September 2024 $ 4,000
Santander 2.71% December 2021 December 2022 1,000
$ 10,714

Lending Institution

Interest Rate

Beginning Date

Ending Date

Outstanding Balance

Brasil

4.52%

October 2021

September 2024

4,000

Itau

4.98%

February 2022

February 2024

1,523

Itau

4.95%

August 2022

July 2025

437

Brasil

3.80%

September 2022

August 2024

125

Brasil

4.18%

September 2022

September 2023

6,137

Total debt was reduced by $3.8 million and $5.9 million during the three and six months ended December 31, 2022, respectively, and the Brazilian loans were reduced by $1.0 million and $2.7 million in the three and six months ended December 31, 2022, respectively.

Note ~~11:~~12: Income Taxes

~~The Company is subject to U.S. federal income~~Tax expense for the three month period ended December 31, 2022 was $1.7 million on profit before tax ~~and various state, local, and foreign income taxes in numerous jurisdictions. The Company’s domestic and foreign tax liabilities are subject to the allocation~~ of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to the Company’s interpretation of applicable tax laws in the jurisdictions in which it files.

~~The Company provides for income taxes on an interim basis based on an estimate of the~~$4.8 million (an 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%expense 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 ended December 31, 2021 ~~the Company recognized tax expense of~~was $1.0 million on a profit before tax of $3.5 million ~~or an~~(an effective tax rate of 29%). ~~For~~The effective tax rate for the three month ~~period~~periods ended December 31, ~~2020, the Company recognized tax expense of $1.9 million on a profit before tax of $5.8 million or an effective tax rate of 33%. The tax rate for both fiscal~~ 2022 and ~~fiscal~~ 2021 ~~was~~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 tax credits and permanent deductions generated from research expenses. Tax expense for the three month period ended December 31, 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 inclusion.

~~For~~

Tax expense for the six month period ended December 31, 2022 was $2.7 million on profit before tax of $7.9 million (an effective tax rate of 34%).Tax expense for the six month period ended December 31, 2021 ~~the Company recognized a tax benefit of~~was $2.1 million on a profit before tax of $7.9 million ~~or an~~(an effective tax rate of 27%). ~~This was~~The effective tax rate for the six month periods ended December 31, 2022 and 2021 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 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 to2022 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 six months ended December 31, 2022 the GILTI impact resulted in a 6.2% rate as compared to the ~~impact of the increase~~six months ended December 31, 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.~~1.2%.

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 December 31, 2022 and June 30, 2022. The Company had long term tax obligations related primarily to transfer pricing adjustments at December 31, 2022 and June 30, 2022.

Note ~~12:~~13: Contingencies

The Company is involved in certain legal matters, which arise, in the normal course of business. ~~These~~Although the outcomes of these legal matters are inherently difficult to predict, management does not ~~expected~~expect the resolution of these legal matters to have a material ~~impact~~adverse effect on the Company’s financial condition, results of operations or cash flows.

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

RESULTS OF OPERATIONS

Use of Non- GAAP Financial Measures

In "Management's discussion and analysis on financial condition and results of operations" in this ~~quarterly report~~Quarterly Report on Form 10-Q, we discuss ~~non- GAAP~~non-GAAP financial measures ~~related to~~including currency-neutral sales, ~~as well as~~and 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 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~~sales 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~~sales 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 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 23 within the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q 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 in Note 2.3 within the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q. 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.

Results of Operations

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

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


	Three Months Ended										Six Months Ended
(Amounts in thousands)	12/31/22			12/31/2021			$ Change favorable (unfavorable)		% Change		12/31/2022			12/31/2021			$ Change favorable (unfavorable)	% Change
Net sales	$	66,775		$	61,318		$	5,457	8.9	%	$	127,236		$	122,832		4,404	3.6	%
Gross profit	21,576			18,950			2,626		13.9	%	41,776			39,095			2,681	6.9	%
% of net sales	32.3		%	30.9		%					32.8		%	31.8		%

Selling, general and administrative expenses	15,561			14,749			(812)		(5.5)	%	31,855			30,762			(1,093)	(3.6)	%
% of net sales	23.3		%	24.1		%					25.0		%	25.0		%

Restructuring charges	54			—			(54)		(100.0)	%	244			—			(244)	(100.0)	%


Operating income	5,961			4,201			1,761		41.9	%	9,677			8,333			1,344	16.1	%

Other (expense), net	(1,121)			(662)			(459)		69.4	%	(1,797)			(436)			(1,362)	(312.7)	%

Income before income taxes	4,840			3,539			1,301		36.8	%	7,880			7,897			(18)	(0.2)	%

Income tax expense (benefit)	1,709			1,011			(698)		(69.0)	%	2,693			2,137			(556)	(26.0)	%

Net income	$	3,131		$	2,528		603		23.9	%	$	5,187		$	5,760		(573)	(10.0)	%


GAAP to Non-GAAP reconciliation:
	Three Months Ended							Six Months Ended
(Amounts in thousands)	12/31/2022		12/31/2021		$ Change favorable (unfavorable)	% Change		12/31/2022		12/31/2021		$ Change favorable (unfavorable)	% Change
Operating income as reported	5,961		4,201		1,761	41.9	%	9,677		8,333		1,344	16.1	%
Add back restructuring charges	(54)		—		54	(100)	%	(244)		—		244	(100)	%

Adjusted operating income	6,015		4,201		1,814	43.2	%	9,921		8,333		1,588	19.1	%
% of net sales	9.0	%	6.9	%		210 basis points		7.8	%	6.8	%		100 basis points

The following table represents key results of operations for three months ~~ending~~ended December 31, ~~2021~~2022 and ~~2020~~2021 based on our business aggregated into two reportable segments according to geography of operations: North American Operations and International Operations as reflected in the table below:

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 %


Key Results by Reporting Segment
	Three Months Ended December 31, 2022											Three Months Ended December 31, 2021
(Amounts in thousands)	North America			International			Corporate		Total			North America			International			Corporate		Total
Net sales	$	39,687		$	27,088		$	—	$	66,775		$	32,666		$	28,652		$	—	$	61,318
Gross profit	11,123			10,453			—		21,576			8,321			10,629					18,950
% of net sales	28.0		%	38.6		%			32.3		%	25.5		%	37.1		%			30.9		%

Selling, general and administrative expenses	7,442			6,507			1,613		15,562			6,772			6,235			1,742		14,749
% of net sales	18.8		%	24.0		%			23.3		%	20.7		%	21.8		%			24.1		%

Restructuring charges	—			54			—		54			—			—			—		—

Operating income (loss)	$	3,681		$	3,893		$	(1,613)	$	5,961		$	1,549		$	4,394		$	(1,742)	$	4,201
% of net sales	9.3		%	14.4		%			8.9		%	4.7		%	15.3		%			6.9		%
Add back restructuring charges	—			(54)			—		(54)			—			—			—		—

Adjusted operating income	$	3,681		$	3,946		$	(1,613)	$	6,014		$	1,549		$	4,394		$	(1,742)	$	4,201
% of net sales	9.3		%	14.6		%			9.0		%	4.7		%	15.3		%			6.9		%

The following table represents key results of operations for six months ~~ending~~ended December 31, ~~2021~~2022 and ~~2020~~2021 based on our business aggregated into two reportable segments according to geography of ~~operations :~~operations: North American Operations and International Operations:


		Six Months Ended December 31, 2021											Six Months Ended December 31, 2020												Six Months Ended December 31, 2022											Six Months Ended December 31, 2021
(Amounts in thousands)	(Amounts in thousands)	North America			International			Corporate		Total			North America			International			Corporate		Total			(Amounts in thousands)	North America			International			Corporate		Total			North America			International			Corporate		Total
Net sales	Net sales	$	66,475		$	56,357		$—		$	122,832		$	53,089		$	50,375		$—		$	103,464		Net sales	$	76,170		$	51,066		$—		$	127,236		$	66,475		$	56,357		$—		$	122,832
Gross margin		17,855			21,239			—		39,095			13,595			19,582					33,177
Gross profit																								Gross profit	22,054			19,722			—		41,776			17,855			21,239					39,095
% of net sales	% of net sales	26.9		%	37.7		%			31.8		%	25.6		%	38.9		%			32.1		%	% of net sales	29.0		%	38.6		%			32.8		%	26.9		%	37.7		%			31.8		%

Selling, general and administrative expenses	Selling, general and administrative expenses	13,805			13,262			3,694		30,762			11,630			12,229			3,757		27,615			Selling, general and administrative expenses	15,176			12,748			3,930		31,854			13,805			13,262			3,694		30,762
% of net sales	% of net sales	20.8		%	23.5		%			25.0		%	21.9		%	24.3		%			26.7		%	% of net sales	19.9		%	25.0		%			25.0		%	20.8		%	23.5		%			25.0		%

Restructuring charges	Restructuring charges	—								—			654			76			—		730			Restructuring charges	—			244					244			—								—
Gain on sale of building		—								—			(3,204)			—					(3,204)

Operating income (loss)	Operating income (loss)	$	4,050		$	7,977		$	(3,694)	$	8,333		$	4,516		$	7,277		$	(3,757)	$	8,036		Operating income (loss)	$	6,878		$	6,729		$	(3,930)	$	9,677		$	4,050		$	7,977		$	(3,694)	$	8,333
% of net sales	% of net sales	6.1		%	14.2		%			6.8		%	8.5		%	14.4		%			7.8		%	% of net sales	9.0		%	13.2		%			7.6		%	6.1		%	14.2		%			6.8		%
Add back restructuring charges	Add back restructuring charges	—											654			76			—		730			Add back restructuring charges	—			(244)			—		(244)			—						—
Less gain on sale of building	Less gain on sale of building	—											(3,204)			—					(3,204)			Less gain on sale of building	—											—

Non-GAAP adjusted operating income		$	4,050		$	7,977		$	(3,694)	$	8,333		$	1,966		$	7,353		$	(3,757)	$	5,562
Adjusted operating income																								Adjusted operating income	$	6,878		$	6,974		$	(3,930)	$	9,922		$	4,050		$	7,977		$	(3,694)	$	8,333
% of net sales	% of net sales	6.1		%	14.2		%			6.8		%	3.7		%	14.6		%			5.4		%	% of net sales	9.0		%	13.7		%			7.8		%	6.1		%	14.2		%			6.8		%

Non-GAAP Measure Reconciliation: Fiscal 2023 Q2 "Currency Neutral" Net Sales

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 months ended							Six months ended
(Amounts in Thousands)	12/31/2022		12/31/2021		$ Change	% Change		12/31/2022		12/31/2021		$ Change	% Change
Net Sales, as reported	$	66,775	$	61,318	5,457	8.9	%	$	127,236	$	122,832	4,404	3.6	%
Currency Neutralizing Adjustment*	(173)		—		(173)	(0.3)	%	749		—		749	0.6	%
Q2 FY23 Currency Neutral Net Sales	66,602		61,318		5,284	8.6	%	127,985		122,832		5,153	4.2	%
North America Net Sales, as reported	$	39,687	$	32,666	7,021	21.5	%	$	76,170	$	66,475	9,695	14.6	%
Currency Neutralizing Adjustment*	54		—		54	0.2	%	117		—		117	0.2	%
Q2FY23 Currency Neutral North America Net Sales	39,741		32,666		7,075	21.7	%	76,287		66,475		9,812	14.8	%
International Net Sales, as reported	$	27,088	$	28,652	(1,564)	(5.5)	%	$	51,066	56,357		(5,291)	(9.4)	%
Currency Neutralizing Adjustment*	(227)		—		(227)	(0.8)	%	632		—		632	1.1	%
Q2FY23 Currency Neutral International Net Sales	26,861		28,652		(1,791)	(6.3)	%	51,698		$	56,357	(4,659)	(8.3)	%
*"Currency Neutralizing Adjustment" = Change when converting Q2FY23 sales in non USD functional currencies at the same exchange rates used in the comparison period

~~Three-month~~Three-months and ~~Six-month Periods~~Six-months Ended December 31, ~~2021~~2022 and December 31, ~~2020~~2021

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,Although backlog remains at ~~historically~~very high levels, ~~over 36%~~18.5% higher on December 31, ~~2021~~2022 compared to December 31, ~~2020.~~ 2021, order intake overall has begun to soften in the three month period ended December 31, 2022.As a result, overall order intake is down about 4.0% for the six months ended December 31, 2022 compared to the six months ended December 31, 2021. North America order intake has increased by 9.4%, and International order intake has decreased by 19.6% for the six months ended December 31, 2022 compared to the same six month period a year prior.North American order intake has been supported by continued high demand for precision granite products and stable order intake through industrial distribution for our portfolio of precision measuring tools and saw blades.International order intake has been negatively impacted, particularly in Europe, as a result of recession pressures and the ongoing war in Ukraine.The ~~Company expects this trend to continue~~company anticipates a continued softening of order intake throughout ~~the remainder of Fiscal 2022.~~fiscal 2023.

Net sales in the quarter ended December 31, ~~2021~~2022 were ~~$61.3~~$66.8 million, an increase of ~~$7.3~~$5.5 million, or ~~13.4%~~8.9% compared to ~~$54.0~~$61.3 million in the quarter ended December 31, ~~2020.~~2021. Net Sales in the six months ended December 31, ~~2021~~2022 were ~~$122.8~~$127.2 million, compared to ~~$103.4~~$122.8 million for the same six-month period ~~ending~~ended December 31, ~~2020,~~2021, representing an improvement of ~~19.4~~$4.4 million, or ~~18.7%~~3.6%.

Foreign currency translation had a negative impact ~~has been minimal~~on sales of $0.7 million over the first six months of ~~Fiscal 2022~~fiscal 2023 as the United States Dollar had ~~weakened~~strengthened compared to other currencies in the first quarter and early second quarter of the fiscal year but has ~~since strengthened.~~begun to weaken during the latter part of the second quarter. Currency neutral net sales for the quarter ~~ending~~ended December 31, ~~2021~~2022 were ~~$61.7~~$66.6 million , an increase of ~~$7.7~~$5.3 million or ~~14.2%~~8.6% compared to ~~$54.0~~$61.3 million in the quarter ended December 31, ~~2020.~~2021. For the six months ended December 31, ~~2021,~~2022, currency neutral net sales ~~were lower than reported sales at $122.1~~of $128.0 million ~~representing~~were an increase of ~~$18.7~~$5.2 million or ~~18.0% over the $103.4~~4.2% as compared to $122.8 million, ~~reported~~ for the six months ~~ending~~ended December 31, ~~2020.~~2021.

Operating income in the quarter ended December 31, ~~2021~~2022 was $6.0 million or 8.9% of sales, reflecting an increase of $1.8 million or 41.9% compared to operating income of $4.2 million ~~or 6.9% of sales, was $2.0 million lower than the Operating income~~ reported for quarter ~~ending~~ended December 31, ~~2020, which included a $3.2 million gain on~~2021. Operating income for 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, thesix months ended December 31, ~~2021 non-GAAP adjusted operating income~~2022 increased ~~24%~~43.2% by 1.3 million to ~~$4.2~~$9.7 million or ~~6.9%~~7.6% of sales versus ~~$3.4~~$8.3 million or ~~6.3%~~6.8% of sales for the ~~three-month period ending~~six months ended December 31, ~~2020.~~2021.

Operating income improved from ~~$8.0~~$8.3 million or 6.8% for the six months ended on December 31, ~~2020~~2021 to ~~$8.3~~$9.7 million or ~~3.8%~~7.6% of sales for the six months ended December 31, ~~2021.~~2022. Eliminating the impact of the ~~aforementioned~~ restructuring charges ~~and the gain on the sale~~ of ~~the North Carolina facility~~$0.2 million during the six-month period ended on December 31, ~~2020, non-GAAP~~2022, adjusted operating income was ~~$8.3~~$9.9 million, or ~~6.8%~~7.8% of net sales compared to ~~$5.6~~$8.3 million or ~~5.4%~~6.8% of net sales in the six-month period ended December 31, ~~2020,~~2021, representing an improvement of ~~$2.7~~$1.6 million or ~~50%~~19.1%.

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~~2022 was ~~$2.5~~$3.1 million, which was ~~$1.4~~$0.6 million ~~lower~~or 23.9% greater than the ~~Net Income~~net income reported for the quarter ended December 31, ~~2020~~2021 of ~~$3.9~~$2.5 million. ~~The prior year included~~For 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~~six-month period ended December 31, 2022, net income was ~~$1.0~~$5.2 million compared to $5.8 million for the six month period ended December 31, 2021, representing a decrease of $0.6 million or 10.0%, driven principally by higher interest rates.

Net Sales

The Company’s net sales for the quarter ended December 31, 2022 were $66.8 million which was $5.5 million or 8.9% higher versus $61.3 million for the quarter ended December 31, ~~2020.~~2021, primarily driven by an 11.0% increase from price realization and a 0.3% increase due to currency translation, offset by a 2.4% decrease in volume. North America sales for the quarter ended December 31, 2022 were $39.7 million which was an increase of $7.0 million or 21.5% versus $32.7 million in quarter ended December 31, 2021, primarily driven by an 11.8% increase from price realization and an increase of 9.4% due to volume, offset by a decrease of 0.2% due to currency translation. North American net sales have been positively impacted by continued stronger sales of precision granite products and increased sales of precision measuring tools and saw blades as our North American facilities are continuing to recover from the labor shortages experienced a year ago and deliver on the Company's order entry. International net sales for the quarter ended December 31, 2022 were $27.1 million which was $1.6 million or 5.5% less than the $28.7 million for the quarter ended December 31, 2021, primarily driven by a 15.8% decline in volume offset by a 10.1% increase realized from pricing and a favorable impact of 0.8% from currency translation. International net sales have been negatively impacted, particularly in Europe, as a result of recession pressures and the ongoing war in Ukraine.

During the six months ended December 31, 2022 as compared to 2021, North American sales increased $9.7 million or 14.6% while International sales decreased $5.3 million or 9.4%. North American sales increased 10.6% due to pricing actions and 4.0% due to volume offset by 0.2% from currency translation, while International sales declined by 25.8% due to volume and 1.1% due to currency translation, but were offset by 17.5% of pricing realization. Consolidated net sales in the six months ended December 31, 2022 were $127.2 million, compared to $122.8 million for the same six-month period ended December 31, 2021, representing an improvement of $4.4 million, or 3.6%. Overall this was driven by increases due to pricing actions of 13.9% offset by volume reductions of 9.7% and currency translation of 0.6%.

Gross Profit

Gross profit increased $2.6 million or 13.9% for the three months, and $2.7 million or 6.9% for the six months ended December 31, 2022 as compared to the year prior. In addition to higher sales, the Company improved gross margin through a series of price increases, despite continuing to experience macro-economic and inflationary pressures on most production inputs. Gross Profit was $21.6 million and $41.8 million for the three months and six months ended December 31, 2022 compared to $18.9 million and $39.1 million for the three months and six months ended December 31, 2021. Gross profit as a percentage of sales increased 1.4 percentage points for the three months, and 1.0 percentage points for the six months ended December 31, 2022 compared to the prior year.

For the three months ended December 31, 2022, North American gross profit increased $2.8 million or 33.7% to $11.1 million versus $8.3 million in the three months ended December 31, 2021. Gross margin measured as a percent of net sales improved 2.6 percentage points from 25.5% to 28.0% compared to the three-month period ended December 31, 2021.

Although International gross profit declined slightly due to lower sales, International gross margin increased 1.5 percentage points from 37.1% of sales at the end of the three-month period ended December 31, 2021 to 38.6% for the three-month period ended December 31, 2022.

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. Although2022, 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, North American gross margin measured as a percent of net sales improved by 0.5 percentage points from 25.0% to 25.5%, compared to the three-month period ended December 31, 2020. International gross margin declined by 3.1 percentage points from 40.2% at the end of the three-month period ended December 31, 2020 to 37.1% for the three-month period ended December 31, 2021.

~~For the six-month period ended December 31, 2021, North American gross margin~~profit measured as a percent of Net Sales improved from ~~25.6%~~26.9% to ~~26.9%~~29.0%. International gross margin ~~measured the same way declined~~increased from ~~38.9%~~37.7% to ~~37.7%~~38.6% from December 31, ~~2020~~2021 to December 31, ~~2021~~2022 respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses including Corporate expense for the three months and six months ended December 31, 2022 were $15.6 million and $31.9 million, respectively versus $14.7 million and $30.8 million for the same time periods ending December 31, 2021.

Selling, general and administrative expenses increased ~~$0.5~~$0.8 million or ~~3.7%~~5.5% during the quarter ended December 31, ~~2021~~2022 compared to the quarter ended December 31, ~~2020,~~2021, but declined as a percentage of net sales to ~~24.1%~~23.3% for ~~the~~the quarter ended December 31, ~~2021~~2022 compared to ~~26.3%~~24.1% in the prior year quarter ended December 31, ~~2020.~~2021.

Selling, general and administrative expenses increased ~~$3.1~~$1.1 million or ~~11.4%~~3.6% during the six months ended December 31, ~~2021~~2022 compared to ~~2020,~~2021, however as a percentage of net sales it has ~~declined~~remained steady from ~~26.7%~~25.0% for the six months ended December 31, ~~2020~~2021 to 25.0% for the six months ended December 31, ~~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.2022.

Other Income (Expense)

For the three and six months ~~period~~ ended December 31, ~~2021~~2022 other expense was ~~$0.6~~$1.1 million and ~~$0.4~~$1.8 million, respectively. For the three and six months ~~period~~ended December 31, 2021 other expense was $0.7 million and $0.4 million. Other Expense has been impacted by the increase in interest rates, which has impacted periodic pension costs and interest cost on debt. The change in other income (expense) for the pension and post-retirement cost (other than service cost) accounts was $(0.5) million in comparing the three months ended December 31, ~~2020 other~~2022, which had an expense ~~was~~of $(0.1) million compared to an income of $0.4 million in ~~both~~the three months ended December 31, 2021. For the six months ended December 31, 2022, pension costs were $(0.7) million, compared to an income of $0.3 million for the six months ended December 31, 2021, a change of $(1.0) million when comparing the two periods, accounting for most of the change in Other Income (Expense) between the two comparative periods. See Note 10 "Pension and Post-retirement Benefits" of the notes to unaudited condensed consolidated financial statements.

Income Taxes

~~For~~In the three ~~month period~~months ended December 31, ~~2021,~~2022, the Company recognized income tax expense of $1.7 million on profit before tax of $4.8 million (an effective tax rate 35%) as compared to income tax expense of $1.0 million on a profit before tax of $3.5 million ~~or an~~(an effective tax rate of 29%~~. For~~), in the three ~~month period~~months ended December 31, ~~2020,~~2021.

In the six months ended December 31, 2022, the Company recognized income tax expense of ~~$1.9~~$2.7 million on a profit before tax of $5.8 million or an effective tax rate of 33%. The tax rate for both fiscal 2022 and fiscal 2021 was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by tax credits and permanent deductions generated from research expenses.

~~For the six month period ended December 31, 2021, the Company recognized a tax benefit of $2.1 million on a~~ profit before tax of $7.9 million ~~or an~~(an effective tax rate 34%) as compared to income tax expense of $2.1 million on profit before tax of $7.9 million (an effective tax rate of 27%~~. This was~~), in the six months ended December 31, 2021.

The higher ~~than the U.S. statutory~~effective tax rate ~~of 21%~~in the three and six months ended December 31, 2022, when compared with the three and six months ended December 31, 2021, respectively, 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 of approximately $0.2 million and ~~the jurisdictional mix~~$0.4 million, respectively, as a result 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.this change.

LIQUIDITY AND CAPITAL RESOURCES


Cash flows (in thousands)	Cash flows (in thousands)	Six Months Ended				Cash flows (in thousands)	Six Months Ended
		12/31/2021		12/31/2020			12/31/2022		12/31/2021

Cash (used in) provided by operating activities		(4,567)		2,401
Cash provided by (used in) operating activities						Cash provided by (used in) operating activities	4,474		(4,567)
Cash (used in) provided by investing activities	Cash (used in) provided by investing activities	(4,990)		1,627		Cash (used in) provided by investing activities	(4,190)		(4,990)
Cash provided by (used in) financing activities		9,455		(3,448)
Cash (used in) provided by financing activities						Cash (used in) provided by financing activities	(5,858)		9,455
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	434		521		Effect of exchange rate changes on cash	8		434

Net increase in cash		$	332	$	1,101
Net (decrease) increase in cash						Net (decrease) increase in cash	$	(5,566)	$	332

Net cash flows ~~for~~used in the six months ended December 31, ~~2021 provided a decrease in cash of $0.3~~2022 was $5.6 million compared to ~~an increase in~~ cash provided by operations of ~~$1.1~~$0.3 million for the six month period ended December 31, ~~2020 .~~2021. Cash ~~used in~~provided by operations was ~~$4.6~~$4.5 million due to increases in net income of $5.2 million partially offset by working capital required to meet strong customer demand and counteract supply chain disruptions and increased transit times. The Company has invested ~~$4.5~~$3.7 million in new equipment and ~~increased borrowing $9.3~~debt repayments net of additional borrowings were $5.9 million in the six months ended December 31, ~~2021.~~

~~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~~

2022.

The Company ~~worked with TD Bank~~believes it maintains sufficient liquidity and has the resources 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~~fund its operations and cash expected to be provided by future operating activities ~~augmented by the plans highlighted above,~~ are adequate to satisfy ~~its~~ working capital, capital expenditure requirements and other

contractual obligations for at least the next 12 ~~months. If the Company's expectations are incorrect or the impact~~months from the ~~COVID-19 pandemic worsens then it may need to take advantage~~date of ~~unanticipated strategic opportunities to strengthen our financial position, which could result in material impacts to~~ the ~~Company’s consolidated~~ financial statements included in ~~future reporting periods.~~this Quarterly Report on Form 10-Q.

~~Pursuant to~~On April 29, 2022, 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 (the "Loan and Security Agreement") with HSBC Bank USA. These new credit facilities ("the ~~“First Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of~~facilities") replaced 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~~Company and its domestic subsidiaries. At December 31, 2022 the Company has excess availability on the revolving line of ~~Cost or Market~~credit and the capital expenditure drawn down facility of ~~US inventory values~~$21.8 million.

The Company has approved a $5 million dollar expansion at our precision granite manufacturing facility in Waite Park, MN in order to ~~80%~~meet continued high demand for its products anticipated over the next several years. The project is expected to continue throughout fiscal 2023 and into the first quarter of ~~qualified AR plus 85%~~fiscal 2024, and will be financed by use of the ~~Net Orderly Liquidation Value (NOLV) of US Inventory plus 62.5% of total appraised US real estate values. As~~$7 million capital expenditure draw down facility which remains unused, and a result of this change, the Company is projected to maintain its current borrowing capacity of $25,000,000 under the Line of Credit. The Company underwent a series of appraisals and field exams in all US locations as part of restructuring this agreement. In addition, the Company will provide additional reporting to TD Bank, including monthly profit and loss statements, balance sheets, cash flow statements and forecasting. This minimum adjusted EBITDA covenant is based on the Company’s plan for a slow pandemic recovery throughout fiscal year 2021 and the impactcombination of the ~~Company’s restructuring plan initiatives. The Company will apply certain proceeds from the sale~~revolving line 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.~~credit and current cash availability.

The effective interest rate on the borrowings under the Loan and Security Agreement during the ~~six~~three months ended December 31, 2022 and 2021 ~~and 2020~~ was ~~1.9%~~5.0% 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the U.S. requires management to make judgments, assumptions and estimates that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Judgments, assumptions, and estimates are used for, but not limited to, inventory allowances; income tax reserves; long lived assets and goodwill impairment; as well as employee turnover, discount and return rates used to calculate pension obligations.

Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires management to exercise judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the Company’s condensed consolidated financial statements.

During the three months ended December 31, 2022, there were no material changes to our critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended June 30, 2022, filed with the SEC on August 25, 2022.

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,~~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~~ 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~~six months ~~ended December 31, 2021~~of fiscal 2023 that ~~has~~have materially affected, or isare reasonably likely to materially affect, ~~our~~its internal control over financial reporting.

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.

ITEM 6. EXHIBITS


~~31a~~ Exhibit Number			Description of Exhibit

10.1*			The L.S. Starrett Company 2022 Employees’ Stock Purchase Plan, filed herewith.

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.

3232.1+			Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101			The following materials from The L. S. Starrett Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, ~~2021~~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 Condensed 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.

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, 2022~~4, 2023	/S/R. Douglas A. Starrett
		Douglas A. Starrett - President and CEO (Principal Executive Officer)

Date	February ~~7, 2022~~4, 2023	/S/R. John C. Tripp
		John C. Tripp - Treasurer and CFO (Principal Accounting Officer)


	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


	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		%


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%