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, 20212022 |
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | | | | | | | | | |
| For the transition period from | | to |
| | | |
| Commission file number | | 1-367 |
| | |
THE L. S. STARRETT COMPANY |
(Exact name of registrant as specified in its charter) |
| | | | | | | | |
Massachusetts | | 04-1866480 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | |
121 Crescent Street, Athol, Massachusetts | 01331-1915 |
(Address of principal executive offices) | (Zip Code) |
| | | | | |
Registrant's telephone number, including area code | 978-249-3551 |
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common - $1.00 Per Share Par Value | SCX | New York Stock Exchange |
Class B Common - $1.00 Per Share Par Value | Not applicable | Not applicable |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting Company ☒
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
| | | | | | | | | | | |
Common Shares outstanding as of | | January 27, 202217, 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
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, 20212022
Note 1: Basis of Presentation and Summary of Significant AccountAccounting Policies
The unaudited interim condensed consolidated financial statements as of and for the six months ended December 31, 20212022 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, 20212022 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, 20212022 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 beenguidance, 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 protectingeither a prospective transition or modified-retrospective approach depending on the healthsubtopic. 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 aspectsbeginning July 1, 2022. The adoption of thethis 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, 20212022 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, 20212022 and June 30, 20212022 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 $0.90.5 million and $0.6$0.9 million at December 31, 20212022 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, 20212022 and 20202021 (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 4.63.8 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.
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 milliona 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 periodssix months ended December 31, 20212022 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, 20212022 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 soldas compared to a $0.9 million increase and a $0.9 million decrease in the period endingthree 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 forgoodwill balance at December 31, 2022, gross $4.7 million and accumulated impairment of $3.7 million. There is no change in the remaindersix 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 costscost 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 monthmonths and six month periodsmonths 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 20222023 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 tomay contribute more than the federal requirement. The Company is currently planning oncontributed $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 plansbasis. 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 itsa 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 AgreementAgreement") 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 testingare recorded net of the Fixed Charge Coverage Ratio until September 30, 2021debt 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.
These new credit facilities replaced the maximumCompany’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 chargedon substantially all existing and future assets of the Company and its domestic subsidiaries.
The interest rate on the Line Of Credit fromFacilities 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 ratesubject to a borrowing base comprised of 2.25% plus Libor to 3.50% plus Libor,eligible inventory and amendedaccounts 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% ofborrowing base is the lower of Cost65% 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 thisbelieves that the agreement and will provide additional reporting supporting theprovides an initial borrowing base and covenants certifications. This minimum adjusted EBITDA covenant was based on the Company’s plansufficient 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 increasedcurrent domestic working capital levels requiredneeds 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, 20212022 (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 | | 52 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | $ | 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 incomeTax 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 ofwas $1.0 million on a profit before tax of $3.5 million or an(an effective tax rate of 29%). ForThe effective tax rate for the three month periodperiods 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 waswere 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 ofwas $2.1 million on a profit before tax of $7.9 million or an(an effective tax rate of 27%). This wasThe 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. ForTax 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 relatedinclusion. In the six months ended December 31, 2022 the GILTI impact resulted in a 6.2% rate as compared to the impact of the increasesix 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 providesneed for a valuation allowance related to the asset to the extent that it is more likely than not thatoffsetting the deferred tax asset will not be realized. Should any significant changesassets 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 allowanceU.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 believeconcluded 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 foris 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. TheseAlthough the outcomes of these legal matters are inherently difficult to predict, management does not expectedexpect the resolution of these legal matters to have a material impactadverse 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 reportQuarterly Report on Form 10-Q, we discuss non- GAAPnon-GAAP financial measures related toincluding currency-neutral sales, as well asand adjusted operating income.
We present these non- GAAPnon-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 numberssales 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 revenuessales 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, 20212022 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 endingended December 31, 20212022 and 20202021 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 endingended December 31, 20212022 and 20202021 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-monthThree-months and Six-month PeriodsSix-months Ended December 31, 20212022 and December 31, 20202021
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 historicallyvery high levels, over 36%18.5% higher on December 31, 20212022 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 continuecompany anticipates a continued softening of order intake throughout the remainder of Fiscal 2022.fiscal 2023.
Net sales in the quarter ended December 31, 20212022 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, 20212022 were $122.8$127.2 million, compared to $103.4$122.8 million for the same six-month period endingended 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 minimalon sales of $0.7 million over the first six months of Fiscal 2022fiscal 2023 as the United States Dollar had weakenedstrengthened 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 endingended December 31, 20212022 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 $122.1of $128.0 million representingwere an increase of $18.7$5.2 million or 18.0% over the $103.44.2% as compared to $122.8 million, reported for the six months endingended December 31, 2020.2021.
Operating income in the quarter ended December 31, 20212022 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 endingended December 31, 2020, which included a $3.2 million gain on2021. 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 income2022 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 endingsix 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, 20202021 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-GAAP2022, 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, 20212022 was $2.5$3.1 million, which was $1.4$0.6 million loweror 23.9% greater than the Net Incomenet income reported for the quarter ended December 31, 20202021 of $3.9$2.5 million. The prior year includedFor 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 comparativesix-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 marginprofit 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 declinedincreased from 38.9%37.7% to 37.7%38.6% from December 31, 20202021 to December 31, 20212022 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, 20212022 compared to the quarter ended December 31, 2020,2021, but declined as a percentage of net sales to 24.1%23.3% for thethe quarter ended December 31, 20212022 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, 20212022 compared to 2020,2021, however as a percentage of net sales it has declinedremained steady from 26.7%25.0% for the six months ended December 31, 20202021 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, 20212022 other expense was $0.6$1.1 million and $0.4$1.8 million, respectively. For the three and six months periodended 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 other2022, which had an expense wasof $(0.1) million compared to an income of $0.4 million in boththe 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
ForIn the three month periodmonths 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 periodmonths 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. statutoryeffective 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 provisionsinclusion 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 forused in the six months ended December 31, 2021 provided a decrease in cash of $0.32022 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 inprovided 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 $9.3debt repayments net of additional borrowings were $5.9 million in the six months ended December 31, 2021.
During the six months ended December 31, 2021 the Brazilian subsidiary realized a build-up of ICMS (sales tax) credits, a consequence of the fiscal 2021 restructuring activities which increased the manufacturing activity and, therefore, raw material imports into Brazil. 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.
Liquidity and Credit Arrangements
2022.
The Company worked with TD Bankbelieves 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 cashfund 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 impactmonths from the COVID-19 pandemic worsens then it may need to take advantagedate 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 toOn April 29, 2022, the termsCompany and certain of the Company’s Amended and Restateddomestic 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 offacilities") replaced the Fixed Charge Coverage Ratio until September 30, 2021Company’s previous TD Bank credit facilities and (ii) establishmentare 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 ARwith 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 lowerCompany and its domestic subsidiaries. At December 31, 2022 the Company has excess availability on the revolving line of Cost or Marketcredit 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 salerevolving 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 sixthree 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 ourthe 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 threesix months ended December 31, 2021of fiscal 2023 that hashave materially affected, or isare reasonably likely to materially affect, ourits 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 disclosedset forth in ourthe Company’s Annual Report on Form 10-K
for the year ended June 30, 2021.
2022.
ITEM 6. EXHIBITS
| | | | | |
31aExhibit Number | Description of Exhibit |
| |
10.1* | |
| |
31.1* | |
| |
31b31.2* | |
| |
3232.1+ | |
| |
101 | The following materials from The L. S. Starrett Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 20212022 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, 20224, 2023 | | /S/R. Douglas A. Starrett |
| | | Douglas A. Starrett - President and CEO (Principal Executive Officer) |
| | | |
Date | February 7, 20224, 2023 | | /S/R. John C. Tripp |
| | | John C. Tripp - Treasurer and CFO (Principal Accounting Officer) |