UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


			For the quarterly period ended			~~September 30,~~December 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


			For the transition period from						to

			Commission file number						1-367


THE L. S. STARRETT COMPANY
(Exact name of registrant as specified in its charter)


Massachusetts						04-1866480
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


121 Crescent Street, Athol, Massachusetts			01331-1915
(Address of principal executive offices)			(Zip Code)


Registrant's telephone number, including area code			978-249-3551

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


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

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

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

Emerging Growth Company ☐

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

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

Yes ☐ No ☒


Common Shares outstanding as of						~~October 26, 2022~~January 17, 2023
Class A Common Shares						~~6,787,025~~6,804,246
Class B Common Shares						~~595,381~~622,645

~~Table of Contents~~

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~~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.

~~Table of Contents~~

THE L. S. STARRETT COMPANY

CONTENTS


			Page No.

Part I.	Financial Information:

	Item 1.	Financial Statements	42

		Condensed Consolidated Balance Sheets – ~~September 30, 2022~~ – December 31, 2022 (unaudited) and June 30, 2022	4

		Condensed Consolidated Statements of Operations (unaudited)~~– three months ended~~ ~~September 30, 2022~~ –three and six~~September 30, 2021~~	5

		~~Consolidated Statements of Comprehensive Income (Loss) (unaudited) – three~~ months ended ~~September 30,~~December 31, 2022 and ~~September 30,~~December 31, 2021	6

		Condensed Consolidated Statements of ~~Stockholders' Equity~~Comprehensive Income (Loss), (unaudited)–three and six months ended ~~September 30,~~December 31, 2022and ~~September 30,~~December 31, 2021	7

		Condensed Consolidated Statements of ~~Cash Flows~~Stockholders' Equity (unaudited) - – threeand six months ended ~~September 30,~~December 31, 2022 and~~September 30,~~ December 31, 2021	8

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

		Notes to Unaudited Condensed Consolidated Financial Statements	910-18

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1718

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2124

	Item 4.	Controls and Procedures	2124

Part II.	Other Information:

	Item 1A.	Risk Factors	2225

	Item 6.	Exhibits	2326

SIGNATURES			2427

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. FINANCIAL STATEMENTS~~

THE L. S. STARRETT COMPANY

Condensed Consolidated Balance Sheets

(in thousands except share data)

(unaudited)


		9/30/2022		6/30/2022			12/31/2022		06/30/2022
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash	Cash	$	11,902	$	14,523	Cash	$	8,957	$	14,523
Accounts receivable (less allowance for credit losses of $770 and $796, respectively)		38,062		42,961
Accounts receivable (less allowance for credit losses of $806 and $796, respectively)						Accounts receivable (less allowance for credit losses of $806 and $796, respectively)	38,151		42,961
Inventories	Inventories	70,085		66,900		Inventories	70,088		66,900
Prepaid expenses and other current assets	Prepaid expenses and other current assets	10,142		8,669		Prepaid expenses and other current assets	9,727		8,669
Total current assets	Total current assets	130,191		133,053		Total current assets	126,923		133,053

Property, plant and equipment, net	Property, plant and equipment, net	36,178		37,116		Property, plant and equipment, net	38,121		37,116
Right of use assets	Right of use assets	5,026		5,540		Right of use assets	5,379		5,540

Deferred tax assets, net	Deferred tax assets, net	14,351		14,924		Deferred tax assets, net	13,943		14,924
Intangible assets, net	Intangible assets, net	4,506		4,640		Intangible assets, net	4,450		4,640
Goodwill	Goodwill	1,015		1,015		Goodwill	1,015		1,015
Other assets	Other assets	3,162		3,266		Other assets	3,280		3,266
Total assets	Total assets	$	194,429	$	199,554	Total assets	$	193,111	$	199,554

LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Current maturities of debt	Current maturities of debt	$	5,384	$	6,547	Current maturities of debt	$	5,259	$	6,547
Current lease liability	Current lease liability	1,432		1,530		Current lease liability	2,025		1,530
Accounts payable	Accounts payable	15,748		14,624		Accounts payable	13,017		14,624
Accrued expenses	Accrued expenses	10,429		11,776		Accrued expenses	10,335		11,776
Accrued compensation	Accrued compensation	5,521		6,703		Accrued compensation	4,697		6,703
Total current liabilities	Total current liabilities	38,514		41,180		Total current liabilities	35,333		41,180

Other tax obligations	Other tax obligations	2,839		2,936		Other tax obligations	2,974		2,936
Long-term lease liability	Long-term lease liability	3,777		4,166		Long-term lease liability	3,529		4,166
Long-term debt, net of current portion	Long-term debt, net of current portion	24,007		24,905		Long-term debt, net of current portion	20,313		24,905
Postretirement benefit and pension obligations	Postretirement benefit and pension obligations	23,459		23,938		Postretirement benefit and pension obligations	23,052		23,938
Total liabilities	Total liabilities	92,596		97,125		Total liabilities	85,201		97,125

Stockholders' equity:	Stockholders' equity:					Stockholders' equity:
Class A Common stock $1 par (20,000,000 shares authorized; 6,770,681 outstanding at September 30, 2022 and 6,682,521 outstanding at June 30, 2022)		6,771		6,683
Class B Common stock $1 par (10,000,000 shares authorized; 596,903 outstanding at September 30, 2022 and 610,087 outstanding at June 30, 2022		597		610
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)						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						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	Additional paid-in capital	57,247		57,143		Additional paid-in capital	57,454		57,143
Retained earnings	Retained earnings	91,115		89,059		Retained earnings	94,246		89,059
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(53,897)		(51,066)		Accumulated other comprehensive loss	(51,217)		(51,066)
Total stockholders' equity	Total stockholders' equity	101,833		102,429		Total stockholders' equity	107,910		102,429
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	194,429	$	199,554	Total liabilities and stockholders’ equity	$	193,111	$	199,554

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table of Contents~~

THE L. S. STARRETT COMPANY

Condensed Consolidated Statements of Operations

(in thousands except per share data)

(unaudited)

Three Months Ended
9/30/2022 9/30/2021
Net sales $ 60,461 $ 61,514
Cost of goods sold 40,261 41,369
Gross profit 20,200 20,145
% of Net sales 33.4 % 32.7 %
Restructuring charges 190 —
Selling, general and administrative expenses 16,294 16,012
Operating income 3,716 4,133
Other (expense) income (676) 226
Income before income taxes 3,040 4,359
Income tax expense 984 1,127
Net income $ 2,056 $ 3,232
Basic income per share $ 0.28 $ 0.45
Diluted income per share $ 0.27 $ 0.44
Weighted average outstanding shares used in per share calculations:
Basic 7,304 7,126
Diluted 7,505 7,396


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

Net sales	$	66,775		$	61,318		$	127,236		$	122,832
Cost of goods sold	45,199			42,368			85,460			83,737
Gross profit	21,576			18,950			41,776			39,095
% of Net sales	32.3		%	30.9		%	32.8		%	31.8		%

Restructuring charges	54			—			244			—
Selling, general and administrative expenses	15,561			14,749			31,855			30,762

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

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

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

Income tax expense	1,709			1,011			2,693			2,137

Net income	$	3,131		$	2,528		$	5,187		$	5,760


Basic income per share	$	0.42		$	0.35		$	0.71		$	0.80
Diluted income per share	$	0.42		$	0.34		$	0.69		$	0.77

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

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table of Contents~~

THE L. S. STARRETT COMPANY

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

Three Months Ended
9/30/2022 9/30/2021
Net income $ 2,056 $ 3,232
Other comprehensive (loss):
Currency translation (loss), net of tax (2,806) (3,611)
Pension and postretirement plans, net of tax (25) (66)
Other comprehensive (loss) (2,831) (3,677)
Total comprehensive (loss) income $ (775) $ (445)


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

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

Total comprehensive income	$	5,811	$	1,590	$	5,036	$	1,145

See Notes to Unaudited ~~Consolidated Financial Statements~~

~~Table of Contents~~

~~THE L. S. STARRETT COMPANY~~

~~Consolidated Statements of Stockholders' Equity~~

~~(in thousands)~~

~~(unaudited)~~

~~For the Three Month Period Ended September 30, 2022:~~

Common Stock
Outstanding Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Total
Class A Class B
Balance June 30, 2022 $ 6,683 $ 610 $ 57,143 $ 89,059 $ (51,066) $ 102,429
Total comprehensive income (loss) — — — 2,056 (2,831) (775)
Repurchase of shares — (1) (5) — — (6)
Stock-based compensation 76 — 109 — — 185
Conversion 12 (12) — — — —
Balance September 30, 2022 $ 6,771 $ 597 $ 57,247 $ 91,115 $ (53,897) $ 101,833
Accumulated balance consists of:
Translation loss $ (62,881)
Pension and postretirement plans, net of taxes 8,984
$ (53,897)

~~For the Three Month Period Ended September 30, 2021:~~

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

~~See Notes to Unaudited~~Condensed Consolidated Financial Statements

~~Table of Contents~~

THE L. S. STARRETT COMPANY

Condensed Consolidated Statements of ~~Cash Flows~~Stockholders' Equity

(in thousands)

(unaudited)

Three Months Ended
9/30/2022 9/30/2021
Cash flows from operating activities:
Net income $ 2,056 $ 3,232
Non-cash operating activities:
Depreciation 1,288 1,262
Amortization 363 335
Stock-based compensation 185 174
Net long-term tax obligations 18 38
Deferred taxes 356 193
Postretirement benefit and pension obligations 162 (353)
Working capital changes:
Accounts receivable 3,135 (5,797)
Inventories (5,022) (2,887)
Other current assets (1,740) (1,888)
Other current liabilities 31 104
Prepaid pension expense (263) (288)
Other 59 34
Net cash provided by (used in) operating activities 628 (5,841)
Cash flows from investing activities:
Purchases of property, plant and equipment (960) (2,334)
Software development (202) (290)
Net cash (used in) investing activities (1,162) (2,624)
Cash flows from financing activities:
Proceeds from borrowing 575 13,767
Debt repayments (2,663) (8,040)
Shares repurchased (6) (16)
Net cash provided (used in) by financing activities (2,094) 5,711
Effect of exchange rate changes on cash 7 276
Net decrease in cash (2,621) (2,478)
Cash, beginning of period 14,523 9,105
Cash, end of period $ 11,902 $ 6,627
Supplemental cash flow information:
Interest paid $ 374 $ 224
Income taxes paid, net 2,244 1,116
For the Three and Six-Month Period Ended December 31, 2022:


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

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

Total comprehensive income	—		—		—		3,131		2,680		5,811
Repurchase of shares	—		—		(3)		—		—		(3)
Issuance of stock	—		34		50		—		—		84
Stock-based compensation	25		—		160		—		—		185
Conversion	7		(7)		—		—		—		—
Balance December 31, 2022	$	6,803	$	624	$	57,454	$	94,246	$	(51,217)	$	107,910

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

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


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

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

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








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

See Notes to Unaudited Condensed Consolidated Financial Statements

~~Table~~

THE L. S. STARRETT COMPANY

Condensed Consolidated Statements of ~~Contents~~Cash Flows

(in thousands) (unaudited)


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

Cash flows from operating activities:

Net income	$	5,187	$	5,760

Non-cash operating activities:
Depreciation	2,585		2,567
Amortization	720		660
Stock-based compensation	370		411
Net long-term tax obligations	91		86
Deferred taxes	977		305
Postretirement benefit and pension obligations	314		(706)
Working capital changes:
Accounts receivable	4,530		(1,619)
Inventories	(3,307)		(6,002)
Other current assets	(1,098)		(1,063)
Other current liabilities	(4,818)		(3,767)
Prepaid pension expense	(1,147)		(2,071)
Other	70		872
Net cash provided by (used in) operating activities	4,474		(4,567)

Cash flows from investing activities:
Purchases of property, plant and equipment	(3,713)		(4,457)
Software development	(477)		(533)
Net cash (used in) investing activities	(4,190)		(4,990)

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

Effect of exchange rate changes on cash	8		434

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

Supplemental cash flow information:
Interest paid	$	802	$	465
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

~~September 30,~~December 31, 2022

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

The unaudited interim condensed consolidated financial statements as of and for the ~~three~~six months ended ~~September 30,~~December 31, 2022 have been prepared by The L.S. Starrett Company (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. These unaudited condensed consolidated financial statements, which, in the opinion of management, reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation, should be read in conjunction with the condensed consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2022. The balance sheet as of June 30, 2022 has been derived from the audited condensed consolidated financial statements as of and for the year ended June 30, 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, 2022 describes the significant accounting policies and methods used in the preparation of the condensed consolidated financial statements.

Note 2: Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13 "Financial Instruments -Credit Losses" (ASC 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 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 either a prospective transition or modified-retrospective approach depending on the subtopic. This pronouncement was extended for Small Reporting Companies and for the Company beginning July 1, 2022. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

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

~~Table of Contents~~

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 September 30, 2022
Sales1
$ 36,484 $ 23,977 $ — $ 60,461
Operating Income (Loss) $ 3,198 $ 2,836 $ (2,318) $ 3,716
Three Months Ended September 30, 2021
Sales2
$ 33,809 $ 27,705 $ — $ 61,514
Operating Income (Loss) $ 2,501 $ 3,583 $ (1,951) $ 4,133


	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 ~~$927~~$707 of North American segment intercompany sales to the International segment, and ~~$5,035~~$4,250 of International segment intercompany sales to the North American segment.

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


	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

1.Excludes $1,635 of North American segment intercompany sales to the International segment, and $9,285 of International segment intercompany sales to the North American segment.

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.

Note 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 ~~September 30,~~December 31, 2022 and June 30, 2022, the balance of the return asset was $0.1 million and ~~$0.1~~$0.2 million, respectively, and the balance of the refund liability as of December 31, 2022 and June 30, 2022 was ~~$0.2~~$0.1 million

and $0.2 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 $0.5 million and $0.9 million at ~~September 30,~~December 31, 2022 and June 30, 2022, respectively, located in Accounts Payable in the Condensed Consolidated Balance Sheets.

Disaggregation of Revenue

The Company operates in two reportable segments: North America and International. ASC Topic 606 requires further disaggregation of an entity’s revenue. In the following table, the Company's net sales by shipping origin are disaggregated accordingly for the three and six months ended ~~September 30,~~December 31, 2022 and 2021 (in thousands):

~~Table of Contents~~


		Three Months Ended				Three Months Ended				Six Months Ended
		9/30/2022		9/30/2021				12/31/2022		12/31/2021		12/31/2022		12/31/2021
North America	North America						North America
United States	United States	$	34,272	$	32,020		United States	$	37,620	$	30,912	$	71,892	$	62,932
Canada & Mexico	Canada & Mexico	2,212		1,789			Canada & Mexico	2,067		1,754		4,278		3,543
		36,484		33,809				39,687		32,666		76,170		66,475
International	International						International
Brazil	Brazil	17,248		19,203			Brazil	20,057		18,687		37,305		37,890
United Kingdom	United Kingdom	3,201		4,968			United Kingdom	3,294		4,729		6,494		9,697
China	China	1,686		1,618			China	1,978		2,244		3,665		3,862
Australia & New Zealand	Australia & New Zealand	1,842		1,916			Australia & New Zealand	1,759		2,992		3,601		4,908
		23,977		27,705				27,088		28,652		51,066		56,357

Total Sales	Total Sales	$	60,461	$	61,514		Total Sales	$	66,775	$	61,318	$	127,236	$	122,832

Note 5:5: Leases

Operating lease cost amounted to $0.5 million and ~~$0.7~~$1.0 million for the three and six months ~~period~~ ended ~~September 30,~~December 31, 2022 and $0.8 million and $1.6 million for the three and six months ended December 31, 2021. As of ~~September 30,~~December 31, 2022, the Company’s right-of-use assets "ROU" ~~assets,~~, lease obligations and remaining cash commitment on these leases (in thousands):

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


	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 ~~3.9~~3.8 years. As of ~~September 30,~~December 31, 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 a six year lease in China for 100,682 square feet and recorded a right of use asset for $2.6 million.

At December 31, 2022 the Company had the following fiscal year minimum operating lease commitments (in thousands):


	Operating Lease Commitments
2023 remaining	$	1,076
2024	2,013
2025	1,587
2026	1,293
2027	713
Thereafter	93
Subtotal	$	6,775
Imputed interest	(1,222)
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 ~~fees are~~rental income is recorded in Other Income in the Company's Condensed Consolidated Statement of Operations.

Note 6: Stock-based Compensation

Compensation expense related to all stock-based plans for the ~~three-month periods~~three and six months ended ~~September 30,~~December 31, 2022 were $0.2 million and ~~2021 was $0.1~~$0.3 million ~~for both periods.~~as compared to the prior year three and six months of $0.2 million and $0.3 million, respectively.

Note 7: Inventories

Inventories consist of the following (in thousands):

~~Table of Contents~~


		9/30/2022		6/30/2022			12/31/2022		06/30/2022
Raw material and supplies	Raw material and supplies	$	36,668	$	35,752	Raw material and supplies	$	38,002	$	35,752
Goods in process and finished parts	Goods in process and finished parts	23,205		22,268		Goods in process and finished parts	22,007		22,268
Finished goods	Finished goods	36,212		35,589		Finished goods	36,198		35,589
		96,085		93,609			96,207		93,609
LIFO Reserve	LIFO Reserve	(26,000)		(26,709)		LIFO Reserve	(26,119)		(26,709)
		$	70,085	$	66,900		$	70,088	$	66,900

Of the Company’s $70.1 million and $66.9 million total inventory at ~~September 30,~~December 31, 2022 and June 30, 2022, respectively, the ~~$26.0~~$26.1 million and $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 ~~$41.6~~$41.4 million on a FIFO basis and ~~$15.6~~$15.3 million on a LIFO basis at ~~September 30,~~December 31, 2022. The Core U.S. business had total ~~Inventory,~~inventory, on a FIFO basis, of $39.3 million and $12.6 million on a LIFO basis as of June 30, 2022.The use of LIFO, as compared to FIFO, resulted in, during the three months and six months ended December 31, 2022, a ~~$0.7~~$0.1 million increase and $0.6 million decrease in cost of sales ~~for the goods sold in the period ended September 30, 2022~~as compared to ~~$4.6~~a $0.9 million increase and a $0.9 million decrease in ~~fiscal 2022.~~the three and six months ended December 31, 2021.

Note 8: Goodwill and Intangible Assets

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

9/30/2022 6/30/2022
Trademarks and trade names 2,070 2,070
Completed technology — —
Customer relationships 630 630
Software development 11,471 11,269
Gross intangible assets 14,171 13,969
Accumulated amortization and impairment (9,665) (9,329)
Net intangible assets $ 4,506 $ 4,640


	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 trademark and trade name assets.

The goodwill balance at ~~June 30,~~December 31, 2022, gross $4.7 million and accumulated impairment of $3.7 million. There ~~was~~is no change ~~to goodwill~~ in the ~~three~~six months ended ~~September 30,~~December 31, 2022 ~~and~~to the net goodwill balance ~~is a net~~of $1.0 million.

Note9: Accrued Expenses

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


		09/30/2022		06/30/2022			12/31/2022		06/30/2022
Sales related programs (commissions, rebates, distributor programs, warranty and related)	Sales related programs (commissions, rebates, distributor programs, warranty and related)	$	2,868	$	2,733	Sales related programs (commissions, rebates, distributor programs, warranty and related)	$	3,043	$	2,733
Income taxes	Income taxes	614		2,420		Income taxes	773		2,420
Professional fees	Professional fees	1,669		1,758		Professional fees	1,402		1,758
Other	Other	1,562		1,463		Other	1,579		1,463
Current portion pension cost	Current portion pension cost	1,297		1,289		Current portion pension cost	1,308		1,289
Taxes other than income tax	Taxes other than income tax	1,058		1,243		Taxes other than income tax	1,174		1,243
Workers compensation and employee deposits	Workers compensation and employee deposits	558		518		Workers compensation and employee deposits	432		518
Freight	Freight	803		352		Freight	624		352
Total	Total	$	10,429	$	11,776	Total	$	10,335	$	11,776

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Note 10: Pension and Post-retirement Benefits

The Company has two defined benefit pension plans, one for U.S. employees and another for U.K. employees. The Company has a postretirement medical ~~and~~ 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), in the Condensed Consolidated Statements of Operations except (in the table below) for service cost. Service cost are in cost of sales and selling, general and administrative ~~expenses.~~expenses, allocated based on headcount. Net periodic benefit ~~costs~~cost and expected return consist of the following (in thousands):

Three Months Ended
9/30/2022 9/30/2021
Interest cost 1,482 1,033
Expected return on plan assets (1,032) (1,100)
Amortization of net loss 10 14
$ 460 $ (53)


	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				Three Months Ended				Six Months Ended
		9/30/2022		9/30/2021				12/31/2022		12/31/2021		12/31/2022		12/31/2021
Service cost	Service cost	$	6	$	9		Service cost	$	5	$	9	$	11	$	18
Interest cost	Interest cost	18		12			Interest cost	17		13		35		25
Amortization of prior service credit	Amortization of prior service credit	(369)		(368)			Amortization of prior service credit	(368)		(369)		(737)		(737)
Amortization of net loss	Amortization of net loss	44		47			Amortization of net loss	45		47		89		94
		$	(301)	$	(300)
Total net (benefit)							Total net (benefit)	$	(301)	$	(300)	$	(602)	$	(600)

For the three ~~month period~~months and six months ended ~~September 30,~~December 31, 2022, the Company contributed ~~zero~~ in the U.S. ~~and $0.2 million in~~$0.7 million. In the UK pension ~~plans.~~ 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 ~~September~~June 30, 2022, the contribution for fiscal 2023 for the U.S. plans would require a contribution of $1.4 million and the U.K. plan would require ~~one of~~ $0.8 ~~million~~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 $1.4 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, may contribute more than the federal requirement. The Company contributed $2.5 million in total during fiscal year 2022, with $1.5 million in the U.S. and $1.0 million in the U.K. The Company continues evaluating the U.S. future contribution on a quarterly basis. The Company currently believes contributions in fiscal year 2023 will be similar to the 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%) 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.

~~Table of Contents~~

Note 11: Debt

Debt is comprised of the following (in thousands):

9/30/2022 6/30/2022
Short-term and current maturities
Loan and Security Agreement (Term loan) 1,495 1,495
Brazil Loans 3,889 5,052
5,384 6,547
Long-term debt (net of current portion)
Loan and Security Agreement (Term Loan) 9,878 10,252
Loan and Security Agreement (Line of Credit) 11,397 11,397
Brazil Loans 3,220 3,771
Debt Reacquisition Cost (488) (515)
24,007 24,905
Total Debt $ 29,391 $ 31,452


	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 April 29, 2022, the Company and certain of the Company’s domestic subsidiaries entered into a Loan and Security agreement ~~with HSBC Bank USA~~ (the "Loan and Security Agreement") with HSBC Bank USA ("the Lender"). The Company incurred ~~an increase in~~ debt re-acquisition cost of $0.5 million ~~as a result~~which are recorded net of debt ~~reacquisition cost.~~and amortized over five years.

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

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

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

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

Availability under the Term Loan ~~facility~~ was comprised of 70% of the fair market value of the ~~Borrowers’~~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~~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

~~Table of Contents~~

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.. Prior to the Loan and Security Agreement with HSBC, the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of the Fixed Charge Coverage Ratio until September 30, 2021 and (ii) establishment of a new minimum cumulative EBITDA and minimum liquidity covenants in lieu thereof.

Total debt decreased $2.1 million during the three months ended September 30, 2022 and $1.7 million of which was a decrease in Brazilian loans. This is a result of cash provided from operations of $0.6 million and the use of the credit balance of $0.6 million of the contingency gain, related to exclusion of ICMS.2022.

In Brazil, the Company is actively mitigating this consequence of the build-up of ICMS ~~(sales tax)~~(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 ~~$4.9 million.~~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.

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

The Company’s Brazilian subsidiary incurs short-term loans with local banks in order to support the Company’s strategic initiatives. The loans are backed by the entity’s US dollar denominated export receivables. 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 ~~September 30,~~December 31, 2022 (in thousands):

Lending Institution Interest Rate Beginning Date Ending Date Outstanding Balance
Itau 4.52 % October 2021 September 2024 $ 4,000
Santander 2.71 % December 2021 December 2022 275
Bradesco 2.52 % January 2022 January 2023 443
Itau 4.98 % February 2022 February 2024 1,828
Brasil 4.95 % August 2022 July 2025 401
Brasil 3.80 % September 2022 August 2024 115
Brasil 4.18 % September 2022 September 2023 48
$ 7,110

Lending Institution

Interest Rate

Beginning Date

Ending Date

Outstanding Balance

Brasil

4.52%

October 2021

September 2024

4,000

Itau

4.98%

February 2022

February 2024

1,523

Itau

4.95%

August 2022

July 2025

437

Brasil

3.80%

September 2022

August 2024

125

Brasil

4.18%

September 2022

September 2023

6,137

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

Note 12: Income Taxes

Tax expense for the three month period ended ~~September 30,~~December 31, 2022 was $1.7 million on profit before tax of $4.8 million (an effective tax rate of 35%).Tax expense for the three month period ended December 31, 2021 was $1.0 million on profit before tax of ~~$3.0~~$3.5 million (an effective tax rate of ~~32%~~29%). ~~Tax expense for the three month period ended September 30, 2021 was $1.1 million on profit before tax of $4.4 million (an effective tax rate of 26%).~~ The effective tax rate for the three month periods ended ~~September 30,~~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 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.

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 was $2.1 million on profit before tax of $7.9 million (an effective tax rate of 27%).The effective tax rate for the six month periods ended December 31, 2022 and 2021 were higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by discrete tax benefits recognized from excess stock compensation deductions, tax credits and permanent deductions generated from research expenses. Tax expense for the ~~three~~six month period ended ~~September 30,~~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. In the ~~period~~six months ended ~~September 30,~~December 31, 2022 the GILTI impact resulted in a ~~7.27%~~6.2% rate as compared to the ~~period~~six months ended ~~September 30,~~December 31, 2021 resulting in a rate of ~~2.22%~~1.2%.

The Company has considered the positive and negative evidence to determine the need for a valuation allowance offsetting the deferred tax assets in the U.S. and has concluded that a partial valuation allowance is required against foreign tax credit carryforwards and certain state net operating loss carryforwards at ~~September 30,~~December 31, 2022 and June 30, 2022. The Company had long term tax obligations related primarily to transfer pricing adjustments at ~~September 30,~~December 31, 2022 and June 30, 2022.

~~Table of Contents~~

Note 13: Contingencies

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

~~Table of Contents~~

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

RESULTS OF OPERATIONS

Use of Non- GAAP Financial Measures

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

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

References to currency-neutral sales and adjusted operating income should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with GAAP and may not be comparable to similarly titled ~~non-GAAP~~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.

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

Results of Operations

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

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~~Table of Contents~~

Three Months Ended
(Amounts in thousands) 9/30/2022 09/30/2021 $ Change favorable (unfavorable) % Change
Net sales $ 60,461 $ 61,514 $ (1,053) (1.7) %
Gross profit 20,200 20,145 55 0.3 %
% of net sales 33.4 % 32.7 %
Restructuring charges 190 — (190) (100.0) %
Selling, general and administrative expenses 16,294 16,012 (282) (1.8) %
% of net sales 26.9 % 26.0 %
Operating income 3,716 4,133 (417) (10.1) %
Other income (expense), net (676) 226 (902) (399.1) %
Income before income taxes 3,040 4,359 (1,319) (30.3) %
Income tax expense (benefit) 984 1,127 143 12.7 %
Net income $ 2,056 $ 3,232 (1,176) (36.4) %

~~Key Results by Reporting Segment~~

Three Months Ended September 2022 Three Months Ended September 2021
(Amounts in thousands) North America International Corporate Total North America International Corporate Total
Net sales $ 36,484 $ 23,977 $ — $ 60,461 $ 33,809 $ 27,705 $ — $ 61,514
Gross profit 10,932 9,268 — 20,200 9,535 10,610 — 20,145
% of net sales 30.0 % 38.7 % 33.4 % 28.2 % 38.3 % 32.7 %
Restructuring charges — 190 — 190 — — — —
Selling, general and administrative expenses 8,101 6,242 1,951 16,294 7,262 7,027 1,723 16,012
% of net sales 22.2 % 26.0 % 26.9 % 21.5 % 25.4 % 26.0 %
Operating income 2,831 2,836 (1,951) 3,716 2,273 3,583 (1,723) 4,133
% of net sales 7.8 % 11.8 % 6.1 % 6.7 % 12.9 % 6.7 %


	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 ended December 31, 2022 and 2021 based on our business aggregated into two reportable segments according to geography of operations: North American Operations and International Operations as reflected in the table below:


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 ended December 31, 2022 and 2021 based on our business aggregated into two reportable segments according to geography of operations: North American Operations and International Operations:


	Six Months Ended December 31, 2022											Six Months Ended December 31, 2021
(Amounts in thousands)	North America			International			Corporate		Total			North America			International			Corporate		Total
Net sales	$	76,170		$	51,066		$—		$	127,236		$	66,475		$	56,357		$—		$	122,832
Gross profit	22,054			19,722			—		41,776			17,855			21,239					39,095
% of net sales	29.0		%	38.6		%			32.8		%	26.9		%	37.7		%			31.8		%

Selling, general and administrative expenses	15,176			12,748			3,930		31,854			13,805			13,262			3,694		30,762
% of net sales	19.9		%	25.0		%			25.0		%	20.8		%	23.5		%			25.0		%

Restructuring charges	—			244					244			—			—					—

Operating income (loss)	$	6,878		$	6,729		$	(3,930)	$	9,677		$	4,050		$	7,977		$	(3,694)	$	8,333
% of net sales	9.0		%	13.2		%			7.6		%	6.1		%	14.2		%			6.8		%
Add back restructuring charges	—			(244)			—		(244)			—						—		—
Less gain on sale of building	—			—			—		—			—			—			—		—

Adjusted operating income	$	6,878		$	6,974		$	(3,930)	$	9,922		$	4,050		$	7,977		$	(3,694)	$	8,333
% 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


	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-months and Six-months Ended December 31, 2022 and December 31, 2021

Overview

Although backlog remains at very high levels, 18.5% higher on December 31, 2022 compared to December 31, 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 anticipates a continued softening of order intake throughout fiscal 2023.

Net sales in the quarter ended December 31, 2022 were $66.8 million, an increase of $5.5 million, or 8.9% compared to $61.3 million in the quarter ended December 31, 2021. 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%.

Foreign currency translation had a negative impact on sales of $0.7 million over the first six months of fiscal 2023 as the United States Dollar had strengthened compared to other currencies in the first quarter and early second quarter of the fiscal year but has begun to weaken during the latter part of the second quarter. Currency neutral net sales for the quarter ended December 31, 2022 were $66.6 million , an increase of $5.3 million or 8.6% compared to $61.3 million in the quarter ended December 31, 2021. For the six months ended December 31, 2022, currency neutral net sales of $128.0 million were an increase of $5.2 million or 4.2% as compared to $122.8 million, for the six months ended December 31, 2021.

Operating income in the quarter ended December 31, 2022 was $6.0 million or 8.9% of sales, reflecting an increase of $1.8 million or 41.9% compared to operating income of $4.2 million reported for quarter ended December 31, 2021. Operating income for the six months ended December 31, 2022 increased 43.2% by 1.3 million to $9.7 million or 7.6% of sales versus $8.3 million or 6.8% of sales for the six months ended December 31, 2021.

Operating income improved from $8.3 million or 6.8% for the six months ended on December 31, 2021 to $9.7 million or 7.6% of sales for the six months ended December 31, 2022. Eliminating the impact of the restructuring charges of $0.2 million during the six-month period ended on December 31, 2022, adjusted operating income was $9.9 million, or 7.8% of net sales compared to $8.3 million or 6.8% of net sales in the six-month period ended December 31, 2021, representing an improvement of $1.6 million or 19.1%.

Net income for the quarter ended December 31, 2022 was $3.1 million, which was $0.6 million or 23.9% greater than the net income reported for the quarter ended December 31, 2021 of $2.5 million. For the six-month period ended December 31, 2022, net income was $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, 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, 2022, North American gross profit measured as a percent of Net Sales improved from 26.9% to 29.0%. International gross margin increased from 37.7% to 38.6% from December 31, 2021 to December 31, 2022 respectively.

Selling, General and Administrative Expenses

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

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

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

Other Income (Expense)

For the three and six months ended

~~Table of Contents~~December 31, 2022

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

other expense was $1.1 million and $1.8 million, respectively. For the three and six months ended

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

~~Overview~~

~~New order intake remained stable~~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 ~~North American precision hand tools business~~pension and post-retirement cost (other than service cost) accounts was $(0.5) million in the precision granite market. However, order intake in our International operations, particularly in Europe, has softened due to the recession there and the on-going war in Ukraine. Although backlog remains very high and nearly 20% higher than on June 30, 2022, the company continues to anticipate a softening in demand for its products across the portfolio.

~~For~~comparing the three months ended ~~September 30,~~December 31, 2022, ~~and September 30, 2021 sales were $60.5~~which had an expense of $(0.1) million ~~and $61.5 million, respectively, a reduction~~compared to an income of ~~$1.1 million or 1.7%. Consolidated gross profit improved $0.1 million versus prior year to $20.2~~$0.4 million in the three months ended ~~September 30, 2022. Gross margin was 33.4% of sales in~~December 31, 2021. For the ~~three~~six months ended ~~September 30,~~December 31, 2022, ~~versus 32.7% during the prior year. This continues~~pension costs were $(0.7) million, compared to ~~reflect the positive impact~~an income of our factory restructuring efforts completed in fiscal 2021. While the Company continues to experience supply chain challenges, raw material price increases, and an increase in wages related to labor shortages globally, it has been able to keep pace with selling price increases. Selling, General and Administrative expenses have increased overall by $0.3 million ~~versus prior year to $16.3 million in~~for the ~~three~~six months ended ~~September 30, 2022 due in large part to increases in sales and marketing expenses. In~~December 31, 2021, a change of $(1.0) million when comparing the three months ended September 30, 2022 operating income was $3.7 million, a $0.4 million or a 10.1% reduction versus September 30, 2021 during which the company reported operating income of $4.1 million. During the three months ended September 30, 2022, the Company had $0.2 million in restructuring expenses related to the closure of its distribution and sales centers in Singapore and Japan as parttwo periods, accounting for most of the ~~March 2022 disclosed restructuring with a total expected projected cost $0.8 million. Project-to-date~~change in Other Income (Expense) between the ~~total incurred as of September 30, 2022 was $0.5 million.~~

~~The United States Dollar has strengthened against the United Kingdom, New Zealand~~two comparative periods. See Note 10 "Pension and ~~Brazilian currencies versus the prior year. Currency neutral sales for the three months ended September 30, 2022 were $61.4 million bringing sales to the same level compared to net sales~~Post-retirement Benefits" of the ~~period ended September 30, 2021.~~notes to unaudited condensed consolidated financial statements.

~~Net Sales~~

Income Taxes

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

~~Gross Profit~~

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

~~Table of Contents~~

in the three months ended September 30, 2021. In the three months ended September 30, 2022 North American gross profit improved to $10.9 million, or 30.0% of sales from $9.5 million, or 28.2% of sales in the three months ended September 30, 2021. Although the company continues to be challenged by macro pressures related to supply chain, raw material and labor cost increases in this inflationary environment, it has been able to keep pace with a series of selling price increases across the business.

~~Selling, General and Administrative Expenses~~

Selling, general and administrative expenses of $16.3 million in the three months ended September 30, 2022 increased $0.3 million or 1.8% over the three months ended September 30, 2021 at $16.0 million. The increase in selling, general and administrative expenses is due primarily to some variable selling expenses related to sales and marketing. Overall, selling, general and administrative expenses as a percentage of sales increased to 26.9% in the three months ended September 30, 2022 from 26.0% in the three months ended September 30, 2021. North America increasing from 21.5% of sales to 22.2% of sales, International decreased expenses $0.8 million yet expenses increased as a percentage of sales to 26.0% from 25.4% of sales during the comparative period. Corporate expenses were $2.0 million in the three months ended September 30, 2022 compared to $1.7 million in the three months ended September 30, 2021.

~~Income Taxes~~

~~In the three months ended September 30,~~December 31, 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 profit before tax of ~~$3.0~~$3.5 million (an effective tax rate ~~32%~~of 29%), in the three months ended December 31, 2021.

In the six months ended December 31, 2022, the Company recognized income tax expense of $2.7 million on profit before tax of $7.9 million (an effective tax rate 34%) as compared to income tax expense of ~~$1.1~~$2.1 million on profit before tax of ~~$4.4~~$7.9 million (an effective tax rate of ~~26%~~27%), in the ~~three~~six months ended ~~September 30,~~December 31, 2021.

The higher effective tax rate in the three and six months ended ~~September 30,~~December 31, 2022, when compared with the three and six months ended ~~September 30,~~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 inclusion ~~which are~~of approximately $0.2 million ~~higher in the quarter ended September 30, 2022~~and $0.4 million, respectively, as a result of this change.

~~Other Income and Net Income~~

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

~~In the three months ended September 30, 2022 net income was $2.1 million, $1.2 million or 36.4% lower than net income of $3.2 million in the three months ended September 30, 2021~~

LIQUIDITY AND CAPITAL RESOURCES


Cash flows (in thousands)	Cash flows (in thousands)	Three Months Ended				Cash flows (in thousands)	Six Months Ended
		9/30/2022		9/30/2021			12/31/2022		12/31/2021

Cash provided by (used in) operating activities	Cash provided by (used in) operating activities	$	628	$	(5,841)	Cash provided by (used in) operating activities	4,474		(4,567)
Cash (used in) investing activities		(1,162)		(2,624)
Cash (used in) financing activities		(2,094)		5,711
Cash (used in) provided by investing activities						Cash (used in) provided by investing activities	(4,190)		(4,990)
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	7		276		Effect of exchange rate changes on cash	8		434

Net (decrease) in cash		$	(2,621)	$	(2,478)
Net (decrease) increase in cash						Net (decrease) increase in cash	$	(5,566)	$	332

Net cash flows used in the ~~three~~six months ended ~~September 30,~~December 31, 2022 was ~~$2.6 million.~~ $5.6 million compared to cash provided by operations of $0.3 million for the six month period ended December 31, 2021. Cash provided by operations was ~~$0.6~~$4.5 million ~~resulting from~~due to increases in net income of ~~$2.1~~$5.2 million ~~decreases in accounts receivable of $3.1 million due~~partially offset by working capital required to ~~lower sales~~meet strong customer demand and ~~the Company planned $5.0 million increase in inventories due to global~~counteract supply chain ~~issues. Cash used in investing activities was $1.2 million as a result of $1.0~~disruptions and increased transit times. The Company has invested $3.7 million in ~~capital expenditures~~new equipment and ~~$0.2~~debt repayments net of additional borrowings were $5.9 million in ~~software development while cash used in financing amounted to $2.1 million as~~ the ~~Company's borrowed $0.6 million and repaid $2.7 million.~~

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six months ended December 31, 2022.

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

contractual obligations for at least the next 12 ~~months.~~months from the date of the financial statements included in this Quarterly Report on Form 10-Q.

On April 29, 2022, the Company and certain of the Company’s domestic subsidiaries entered into a new Loan and Security agreement (the "Loan and Security Agreement") with HSBC Bank USA. These new credit facilities ("the facilities") replaced the Company’s previous TD Bank credit facilities and are comprised of a $30 million revolving line of credit with a $10 million uncommitted accordion provision, a $12.1 million term loan and a $7 million ~~Capital Expenditure~~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 Company and its domestic subsidiaries. ~~As September 30,~~At December 31, 2022 the Company has excess availability on the revolving line of credit and the ~~term loan~~capital expenditure drawn down facility of ~~$16.2~~$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 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 fiscal 2024, and will be financed by use of the $7 million capital expenditure draw down facility which remains unused, and a combination of the revolving line of credit and current cash availability.

The effective interest rate on the borrowings under the Loan and Security Agreement during the three months ended ~~September 30,~~December 31, 2022 and 2021 was ~~4.2%~~5.0% and 1.9% respectively.

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, 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 ~~September 30,~~December 31, 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. Based on the evaluation of our disclosure controls and procedures as of September 30, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective. There have not been any changes in the Company’s internal control over financial reporting during the ~~first quarter~~six months of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors set forth in the Company’s Annual Report on Form 10-K

for the year ended June 30, 2022.

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ITEM 6. EXHIBITS


Exhibit Number			Description of Exhibit

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

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

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

~~32.2+~~32.1+			~~Certification~~Certifications of the Principal Executive Officer and the Principal Financial Officer ~~Pursuant~~pursuant to ~~18 U.S.C.~~ Section 1350, Chapter 63 of Title 18, United States Code, as ~~Adopted Pursuant~~adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101			The following materials from The L. S. Starrett Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30,~~December 31, 2022 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (I) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statement of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

+ Furnished, not filed.

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SIGNATURES

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


		THE L. S. STARRETT COMPANY (Registrant)


Date	~~November 3, 2022~~February 4, 2023	/S/ Douglas A. Starrett
		Douglas A. Starrett - President and CEO (Principal Executive Officer)

Date	~~November 3, 2022~~February 4, 2023	/S/ John C. Tripp
		John C. Tripp - ~~CFO~~Treasurer and ~~Treasurer~~CFO (Principal Accounting Officer)

2427


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


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