UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended | September 30, 20222023 |
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | | | | | | | | | |
| For the transition period from | | to |
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| 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.) |
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121 Crescent Street, Athol, Massachusetts | 01331-1915 |
(Address of principal executive offices) | (Zip Code) |
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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, 202224, 2023 | |
Class A Common Shares | | 6,787,0256,934,387 | |
Class B Common Shares | | 595,381549,319 | |
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 Annual Report on Form 10-K, as amended, for the year ended June 30, 20222023.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or collaborations or strategic partnerships we may enter into. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
THE L. S. STARRETT COMPANY
CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE L. S. STARRETT COMPANY
Condensed Consolidated Balance Sheets
(in thousands except share data)
(unaudited) | | | 9/30/2022 | | 6/30/2022 | | 9/30/2023 | | 6/30/2023 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets: | Current assets: | | Current assets: | |
Cash | Cash | $ | 11,902 | | | $ | 14,523 | | Cash | $ | 12,529 | | | $ | 10,454 | |
Accounts receivable (less allowance for credit losses of $770 and $796, respectively) | 38,062 | | | 42,961 | | |
Accounts receivable (less allowance for credit losses of $508 and $449, respectively) | | Accounts receivable (less allowance for credit losses of $508 and $449, respectively) | 34,506 | | | 36,611 | |
Inventories | Inventories | 70,085 | | | 66,900 | | Inventories | 65,126 | | | 65,414 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 10,142 | | | 8,669 | | Prepaid expenses and other current assets | 9,859 | | | 9,723 | |
Total current assets | Total current assets | 130,191 | | | 133,053 | | Total current assets | 122,020 | | | 122,202 | |
| Property, plant and equipment, net | Property, plant and equipment, net | 36,178 | | | 37,116 | | Property, plant and equipment, net | 42,600 | | | 39,375 | |
Right of use assets | Right of use assets | 5,026 | | | 5,540 | | Right of use assets | 4,630 | | | 4,931 | |
| Deferred tax assets, net | Deferred tax assets, net | 14,351 | | | 14,924 | | Deferred tax assets, net | 17,313 | | | 17,056 | |
Intangible assets, net | Intangible assets, net | 4,506 | | | 4,640 | | Intangible assets, net | 4,774 | | | 4,672 | |
Goodwill | Goodwill | 1,015 | | | 1,015 | | Goodwill | 1,015 | | | 1,015 | |
Other assets | Other assets | 3,162 | | | 3,266 | | Other assets | 3,417 | | | 3,551 | |
Total assets | Total assets | $ | 194,429 | | | $ | 199,554 | | Total assets | $ | 195,769 | | | $ | 192,802 | |
| 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 | $ | 5,270 | | | $ | 4,961 | |
Current lease liability | Current lease liability | 1,432 | | | 1,530 | | Current lease liability | 1,625 | | | 1,689 | |
Accounts payable | Accounts payable | 15,748 | | | 14,624 | | Accounts payable | 16,587 | | | 15,047 | |
Accrued expenses | Accrued expenses | 10,429 | | | 11,776 | | Accrued expenses | 11,646 | | | 11,579 | |
Accrued compensation | Accrued compensation | 5,521 | | | 6,703 | | Accrued compensation | 6,379 | | | 6,287 | |
Total current liabilities | Total current liabilities | 38,514 | | | 41,180 | | Total current liabilities | 41,507 | | | 39,563 | |
| Other tax obligations | Other tax obligations | 2,839 | | | 2,936 | | Other tax obligations | 2,859 | | | 2,884 | |
Long-term lease liability | Long-term lease liability | 3,777 | | | 4,166 | | Long-term lease liability | 3,149 | | | 3,423 | |
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 | 7,944 | | | 5,273 | |
Postretirement benefit and pension obligations | Postretirement benefit and pension obligations | 23,459 | | | 23,938 | | Postretirement benefit and pension obligations | 11,320 | | | 12,192 | |
Total liabilities | Total liabilities | 92,596 | | | 97,125 | | Total liabilities | 66,779 | | | 63,335 | |
Contingencies (Note 12) | | Contingencies (Note 12) | |
| 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; 8,340,540 issued, and 6,932,646 outstanding at September 30, 2023 and 8,265,033 issued and 6,853,673 outstanding at June 30, 2023) | | Class A Common stock $1 par (20,000,000 shares authorized; 8,340,540 issued, and 6,932,646 outstanding at September 30, 2023 and 8,265,033 issued and 6,853,673 outstanding at June 30, 2023) | 6,933 | | | 6,854 | |
Class B Common stock $1 par (10,000,000 shares authorized; 851,907 issued 551,039 outstanding at September 30, 2023 and 875,192 issued and 576,396 outstanding at June 30, 2023) | | Class B Common stock $1 par (10,000,000 shares authorized; 851,907 issued 551,039 outstanding at September 30, 2023 and 875,192 issued and 576,396 outstanding at June 30, 2023) | 551 | | | 576 | |
Additional paid-in capital | Additional paid-in capital | 57,247 | | | 57,143 | | Additional paid-in capital | 57,813 | | | 57,825 | |
Retained earnings | Retained earnings | 91,115 | | | 89,059 | | Retained earnings | 114,067 | | | 112,147 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (53,897) | | | (51,066) | | Accumulated other comprehensive loss | (50,374) | | | (47,935) | |
Total stockholders' equity | Total stockholders' equity | 101,833 | | | 102,429 | | Total stockholders' equity | 128,990 | | | 129,467 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 194,429 | | | $ | 199,554 | | Total liabilities and stockholders’ equity | $ | 195,769 | | | $ | 192,802 | |
|
See Notes to Unaudited Condensed Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Condensed Consolidated Statements of Operations
(in thousands except per share data)
(unaudited)
| | | | | | | | | | | | | | | |
| 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 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| 9/30/2023 | | 9/30/2022 | | | | |
| | | | | | | |
Net sales | $ | 60,636 | | | $ | 60,461 | | | | | |
Cost of goods sold | 41,100 | | | 40,261 | | | | | |
Gross profit | 19,536 | | | 20,200 | | | | | |
% of Net sales | 32.2 | % | | 33.4 | % | | | | |
| | | | | | | |
Restructuring charges | — | | | 190 | | | | | |
Selling, general and administrative expenses | 17,077 | | | 16,294 | | | | | |
| | | | | | | |
Operating income | 2,459 | | | 3,716 | | | | | |
| | | | | | | |
Other (expense) | (365) | | | (676) | | | | | |
| | | | | | | |
Income before income taxes | 2,094 | | | 3,040 | | | | | |
| | | | | | | |
Income tax expense | 174 | | | 984 | | | | | |
| | | | | | | |
Net income | $ | 1,920 | | | $ | 2,056 | | | | | |
| | | | | | | |
| | | | | | | |
Basic income per share | $ | 0.26 | | | $ | 0.28 | | | | | |
Diluted income per share | $ | 0.25 | | | $ | 0.27 | | | | | |
| | | | | | | |
Weighted average outstanding shares used in per share calculations: | | | | | | | |
Basic | 7,437 | | | 7,304 | | | | | |
Diluted | 7,608 | | | 7,505 | | | | | |
See Notes to Unaudited Condensed Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
| | | Three Months Ended | | | Three Months Ended | |
| | 9/30/2022 | | 9/30/2021 | | | 9/30/2023 | | 9/30/2022 | |
| Net income | Net income | $ | 2,056 | | | $ | 3,232 | | | Net income | $ | 1,920 | | | $ | 2,056 | | |
Other comprehensive (loss): | Other comprehensive (loss): | | | Other comprehensive (loss): | | |
Currency translation (loss), net of tax | Currency translation (loss), net of tax | (2,806) | | | (3,611) | | | Currency translation (loss), net of tax | (2,405) | | | (2,806) | | |
Pension and postretirement plans, net of tax | Pension and postretirement plans, net of tax | (25) | | | (66) | | | Pension and postretirement plans, net of tax | (34) | | | (25) | | |
Other comprehensive (loss) | Other comprehensive (loss) | (2,831) | | | (3,677) | | | Other comprehensive (loss) | (2,439) | | | (2,831) | | |
| Total comprehensive (loss) income | $ | (775) | | | $ | (445) | | | |
Total comprehensive (loss) | | Total comprehensive (loss) | $ | (519) | | | $ | (775) | | |
See Notes to Unaudited Condensed Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Condensed Consolidated Statements of Stockholders' Equity
(in thousands)
(unaudited)
For the Three Month Period Ended September 30, 2022:2023:
| | | Common Stock Outstanding | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total | | Common Stock Outstanding | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | Class A | | Class B | | | Class A | | Class B | |
| Balance June 30, 2022 | $ | 6,683 | | | $ | 610 | | | $ | 57,143 | | | $ | 89,059 | | | $ | (51,066) | | | $ | 102,429 | | |
Balance June 30, 2023 | | Balance June 30, 2023 | $ | 6,854 | | | $ | 576 | | | $ | 57,825 | | | $ | 112,147 | | | $ | (47,935) | | | $ | 129,467 | |
Total comprehensive income (loss) | Total comprehensive income (loss) | — | | | — | | | — | | | 2,056 | | | (2,831) | | | (775) | | Total comprehensive income (loss) | — | | | — | | | — | | | 1,920 | | | (2,439) | | | (519) | |
Repurchase of shares | Repurchase of shares | — | | | (1) | | | (5) | | | — | | | — | | | (6) | | Repurchase of shares | — | | | (2) | | | (21) | | | — | | | — | | | (23) | |
Stock-based compensation | Stock-based compensation | 76 | | | — | | | 109 | | | — | | | — | | | 185 | | Stock-based compensation | 56 | | | — | | | 9 | | | — | | | — | | | 65 | |
Conversion | Conversion | 12 | | | (12) | | | — | | | — | | | — | | | — | | Conversion | 23 | | | (23) | | | — | | | — | | | — | | | — | |
Balance September 30, 2022 | $ | 6,771 | | | $ | 597 | | | $ | 57,247 | | | $ | 91,115 | | | $ | (53,897) | | | $ | 101,833 | | |
Balance September 30, 2023 | | Balance September 30, 2023 | $ | 6,933 | | | $ | 551 | | | $ | 57,813 | | | $ | 114,067 | | | $ | (50,374) | | | $ | 128,990 | |
| | Accumulated balance consists of: | Accumulated balance consists of: | | Accumulated balance consists of: | |
Translation loss | Translation loss | | $ | (62,881) | | | Translation loss | | $ | (58,245) | | |
Pension and postretirement plans, net of taxes | Pension and postretirement plans, net of taxes | | 8,984 | | | Pension and postretirement plans, net of taxes | | 7,871 | | |
| | $ | (53,897) | | | | $ | (50,374) | | |
For the Three Month Period Ended September 30, 2021:2022:
| | | Common Stock Outstanding | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total | | Common Stock Outstanding | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | Class A | | Class B | | | Class A | | Class B | |
| Balance June 30, 2021 | $ | 6,475 | | | $ | 634 | | | $ | 56,507 | | | $ | 74,181 | | | $ | (54,262) | | | $ | 83,535 | | |
Balance June 30, 2022 | | Balance June 30, 2022 | $ | 6,683 | | | $ | 610 | | | $ | 57,143 | | | $ | 89,059 | | | $ | (51,066) | | | $ | 102,429 | |
Total comprehensive income (loss) | Total comprehensive income (loss) | — | | | — | | | — | | | 3,232 | | | (3,677) | | | (445) | | Total comprehensive income (loss) | — | | | — | | | — | | | 2,056 | | | (2,831) | | | (775) | |
| Repurchase of shares | Repurchase of shares | — | | | (2) | | | (14) | | | — | | | — | | | (16) | | Repurchase of shares | — | | | (1) | | | (5) | | | — | | | — | | | (6) | |
| Stock-based compensation | Stock-based compensation | 119 | | | — | | | 55 | | | — | | | — | | | 174 | | Stock-based compensation | 76 | | | — | | | 109 | | | — | | | — | | | 185 | |
Conversion | Conversion | 25 | | | (25) | | | — | | | — | | | — | | | — | | Conversion | 12 | | | (12) | | | — | | | — | | | — | | | — | |
Balance September 30, 2021 | $ | 6,619 | | | $ | 607 | | | $ | 56,548 | | | $ | 77,413 | | | $ | (57,939) | | | $ | 83,248 | | |
Balance September 30, 2022 | | Balance September 30, 2022 | $ | 6,771 | | | $ | 597 | | | $ | 57,247 | | | $ | 91,115 | | | $ | (53,897) | | | $ | 101,833 | |
| | Accumulated balance consists of: | Accumulated balance consists of: | | Accumulated balance consists of: | |
Translation loss | Translation loss | | $ | (59,657) | | | Translation loss | | $ | (62,881) | | |
Pension and postretirement plans, net of taxes | Pension and postretirement plans, net of taxes | | 1,718 | | | Pension and postretirement plans, net of taxes | | 8,984 | | |
| | $ | (57,939) | | | | $ | (53,897) | | |
See Notes to Unaudited Condensed Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| | | | | | | | | | | |
| Three Months Ended |
| 9/30/2022 | | 9/30/2021 |
| | | |
Cash flows from operating activities: | | | |
| | | |
Net income | $ | 2,056 | | | $ | 3,232 | |
| | | |
Non-cash operating activities: | | | |
Depreciation | 1,288 | | | 1,262 | |
Amortization | 363 | | | 335 | |
Stock-based compensation | 185 | | | 174 | |
Net long-term tax obligations | 18 | | | 38 | |
Deferred taxes | 356 | | | 193 | |
Postretirement benefit and pension obligations | 162 | | | (353) | |
Working capital changes: | | | |
Accounts receivable | 3,135 | | | (5,797) | |
Inventories | (5,022) | | | (2,887) | |
Other current assets | (1,740) | | | (1,888) | |
Other current liabilities | 31 | | | 104 | |
Prepaid pension expense | (263) | | | (288) | |
Other | 59 | | | 34 | |
Net cash provided by (used in) operating activities | 628 | | | (5,841) | |
| | | |
Cash flows from investing activities: | | | |
Purchases of property, plant and equipment | (960) | | | (2,334) | |
Software development | (202) | | | (290) | |
Net cash (used in) investing activities | (1,162) | | | (2,624) | |
| | | |
Cash flows from financing activities: | | | |
Proceeds from borrowing | 575 | | | 13,767 | |
Debt repayments | (2,663) | | | (8,040) | |
| | | |
Shares repurchased | (6) | | | (16) | |
Net cash provided (used in) by financing activities | (2,094) | | | 5,711 | |
| | | |
Effect of exchange rate changes on cash | 7 | | | 276 | |
| | | |
Net decrease in cash | (2,621) | | | (2,478) | |
Cash, beginning of period | 14,523 | | | 9,105 | |
Cash, end of period | $ | 11,902 | | | $ | 6,627 | |
| | | |
Supplemental cash flow information: | | | |
Interest paid | $ | 374 | | | $ | 224 | |
Income taxes paid, net | 2,244 | | | 1,116 | |
| | | | | | | | | | | |
| Three Months Ended |
| 9/30/2023 | | 9/30/2022 |
| | | |
Cash flows from operating activities: | | | |
| | | |
Net income | $ | 1,920 | | | $ | 2,056 | |
| | | |
Non-cash operating activities: | | | |
Depreciation | 1,377 | | | 1,288 | |
Amortization | 260 | | | 363 | |
Stock-based compensation | 65 | | | 185 | |
Net long-term tax obligations | 23 | | | 18 | |
Deferred taxes | (454) | | | 356 | |
Postretirement benefit and pension obligations | 153 | | | 162 | |
Working capital changes: | | | |
Accounts receivable | 1,057 | | | 3,135 | |
Inventories | (892) | | | (5,022) | |
Other current assets | (370) | | | (1,740) | |
Other current liabilities | 2,511 | | | 31 | |
Prepaid pension expense | (903) | | | (263) | |
Other | 71 | | | 59 | |
Net cash provided by operating activities | 4,818 | | | 628 | |
| | | |
Cash flows from investing activities: | | | |
Purchases of property, plant and equipment | (3,145) | | | (960) | |
Software development | (367) | | | (202) | |
Net cash (used in) investing activities | (3,512) | | | (1,162) | |
| | | |
Cash flows from financing activities: | | | |
| | | |
Proceeds from line of credit borrowings | 2,000 | | | 575 | |
Term debt repayments | (1,047) | | | (2,663) | |
| | | |
| | | |
Shares repurchased | (23) | | | (6) | |
Net cash provided by (used in) financing activities | 930 | | | (2,094) | |
| | | |
Effect of exchange rate changes on cash | (161) | | | 7 | |
| | | |
Net increase (decrease) in cash | 2,075 | | | (2,621) | |
Cash, beginning of period | 10,454 | | | 14,523 | |
Cash, end of period | $ | 12,529 | | | $ | 11,902 | |
| | | |
Supplemental cash flow information: | | | |
Interest paid | $ | 150 | | | $ | 374 | |
Income taxes paid, net | 987 | | | 2,244 | |
Property and equipment acquired through term-loan borrowings | 2,000 | | | — | |
See Notes to Unaudited Condensed Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 20222023
Note 1: Basis of Presentation and Summary of Significant Accounting Policies
The unaudited interim consolidated financial statementsCondensed Consolidated Financial Statements as of and for the three months ended September 30, 20222023 have been prepared by The L.S. Starrett Company (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. These unaudited consolidated financial statements,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 consolidated financial statementsaudited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K, as amended, for the year ended June 30, 2022.2023. The balance sheet as of June 30, 20222023 has been derived from the audited consolidated financial statementsConsolidated Financial Statements as of and for the year ended June 30, 2022.2023. 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 accountscredit losses 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 to the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for financial assets and liabilities held at carrying amount on the consolidated balance sheet.unaudited 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 consolidated financial statements and accompanying notes. Note 2 within the notes to the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q and the Company’s consolidated financial statementsConsolidated Financial Statements included in the Annual Report on Form 10-K, as amended, for the year ended June 30, 20222023 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
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 consolidated financial statements.
Note 3:2: 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”Segment” included in our Annual Report on Form 10-K, as amended, for the year ended June 30, 2022.2023. The chief operating decision maker, who is the Company’s business is aggregated into two reportable segmentsPresident and CEO, allocates resources and assesses performance based on geography of operations:three segments: North American OperationsAmerica Industrial "NAI", International Industrial "INI" and International Operations ("International")Global Test and Measurement "GTM".
Segment income
is measured for internal reporting purposes by excluding corporate expenses, which are included in the unallocated column in the table below. Other income and expense, including interest income and expense, and income taxes are excluded entirely from the table below. There were no significant changes in the segment operations or in the segment assets
from the Annual Report.Report on Form 10-K, as amended for the year ended June 30, 2023. Financial results for each reportable segment are as follows (in thousands):
| | | North American Operations | | International Operations | | Unallocated | | Total | | NAI | INI | GTM | Unallocated | Total |
Three Months Ended September 30, 2022 | | |
Three Months Ended September 30, 2023 | | Three Months Ended September 30, 2023 | |
| Sales1 | Sales1 | $ | 36,484 | | | $ | 23,977 | | | $ | — | | | $ | 60,461 | | Sales1 | $ | 19,470 | | $ | 25,374 | | $ | 15,792 | | $ | — | | $ | 60,636 | |
| Operating Income (Loss) | Operating Income (Loss) | $ | 3,198 | | | $ | 2,836 | | | $ | (2,318) | | | $ | 3,716 | | Operating Income (Loss) | $ | (683) | | $ | 2,760 | | $ | 2,371 | | $ | (1,989) | | $ | 2,459 | |
| Three Months Ended September 30, 2021 | | |
Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2022 | |
| Sales2 | Sales2 | $ | 33,809 | | | $ | 27,705 | | | $ | — | | | $ | 61,514 | | Sales2 | $ | 22,371 | | $ | 23,299 | | $ | 14,791 | | $ | — | | $ | 60,461 | |
| Operating Income (Loss) | Operating Income (Loss) | $ | 2,501 | | | $ | 3,583 | | | $ | (1,951) | | | $ | 4,133 | | Operating Income (Loss) | $ | 700 | | $ | 2,880 | | $ | 2,278 | | $ | (2,142) | | $ | 3,716 | |
1.Excludes $927$334 of North AmericanNAI segment intercompany sales to the InternationalINI segment, and $5,035$78 of InternationalGTM segment intercompany sales to the North American segment.INI segment, $3,475 of INI segment intercompany sales to NAI and $202 of GTM intercompany sales to NAI.
2.Excludes $749$652 of North AmericanNAI segment intercompany sales to the InternationalINI segment, and $5,336$275 of InternationalGTM segment intercompany sales to the North American segment.INI segment, $4,626 of INI segment intercompany sales to NAI and $409 of GTM intercompany sales to NAI.
Note 4:3: Revenue from Contracts with Customers
Under ASC Topic 606, the Company is required to present a refund liability and a return asset within the Unauditedunaudited Condensed Consolidated Balance Sheet. As of September 30, 2022,2023, and June 30, 2022,2023, the balance of the return asset was $0.1 $0.2 million and $0.1 million, respectively, and the balance of the refund liability was $0.2$0.3 million and $0.2 million, respectively. They are presented within prepaid expenses and other current assets and accrued expenses, respectively, on the unaudited 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 $0.50.3 million and $0.9$0.3 million at September 30, 20222023 and June 30, 2022,2023, respectively, located in Accounts Payable in the unaudited Condensed Consolidated Balance Sheets.
Disaggregation of Revenue
The Company operates in twothree reportable segments: North AmericaNAI, INI and International.GTM. ASC Topic 606 requires further disaggregation of an entity’s revenue. In the following table, the Company's net sales by shipping origin are disaggregated accordingly for the three months ended September 30, 20222023 and 20212022 (in thousands):
| | | Three Months Ended | | | | Three Months Ended | | |
| | 9/30/2022 | | 9/30/2021 | | | | 9/30/2023 | | 9/30/2022 | | |
North America | North America | | | | | | North America | | | | | |
United States | United States | $ | 34,272 | | | $ | 32,020 | | | | United States | $ | 32,777 | | | $ | 34,272 | | | |
Canada & Mexico | Canada & Mexico | 2,212 | | | 1,789 | | | | Canada & Mexico | 1,758 | | | 2,212 | | | |
| | 36,484 | | | 33,809 | | | | | 34,535 | | | 36,484 | | | |
International | International | | | International | | |
Brazil | Brazil | 17,248 | | | 19,203 | | | | Brazil | 19,430 | | | 17,248 | | | |
United Kingdom | United Kingdom | 3,201 | | | 4,968 | | | | United Kingdom | 3,535 | | | 3,201 | | | |
China | China | 1,686 | | | 1,618 | | | | China | 1,456 | | | 1,686 | | | |
Australia & New Zealand | Australia & New Zealand | 1,842 | | | 1,916 | | | | Australia & New Zealand | 1,680 | | | 1,842 | | | |
| | 23,977 | | | 27,705 | | | | | 26,101 | | | 23,977 | | | |
| Total Sales | Total Sales | $ | 60,461 | | | $ | 61,514 | | | | Total Sales | $ | 60,636 | | | $ | 60,461 | | | |
Note 54: Leases
Operating lease costexpense amounted to $0.5 million and $0.7$0.5 million for three months period ended September 30, 20222023 and 2021.2022. As of September 30, 2022,2023, the Company’s right-of-use "ROU" assets, lease obligations and remaining cash commitment on these leases were as follows (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 | $ | 4,630 | | | $ | 4,773 | | | $ | 5,486 | |
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 3.93.1 years. As of September 30, 2022,2023, the Company’s financing leases are de minimis.not material. The foreign exchange impact affecting the operating leases are, de minimis.also, not material.
In September 2021,There are no significant changes to fiscal year minimum operating lease commitments as reported in Note 9 to 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.
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 recorded in Other IncomeConsolidated Financial Statements in the Company's Consolidated Statement of Operations.Annual Report on Form 10-K, as amended, for the period ended June 30, 2023.
Note 6:5: Stock-based Compensation
Compensation expense related to all stock-based plans for the three-month periodsperiod ended September 30, 2022 and 20212023 was $0.1 million recorded and adjusted down for both periods.cancelled performance shares and for the three-month period ended 2022 as $0.1 million.
Note7: 6: Inventories
Inventories consist of the following (in thousands):
| | | | | | | | | | | |
| 9/30/2023 | | 6/30/2023 |
Raw material and supplies | $ | 36,975 | | | $ | 36,402 | |
Goods in process and finished parts | 20,153 | | | 20,978 | |
Finished goods | 34,305 | | | 34,414 | |
| 91,433 | | | 91,794 | |
LIFO Reserve | (26,307) | | | (26,380) | |
Total Inventory | $ | 65,126 | | | $ | 65,414 | |
| | | | | | | | | | | |
| 9/30/2022 | | 6/30/2022 |
Raw material and supplies | $ | 36,668 | | | $ | 35,752 | |
Goods in process and finished parts | 23,205 | | | 22,268 | |
Finished goods | 36,212 | | | 35,589 | |
| 96,085 | | | 93,609 | |
LIFO Reserve | (26,000) | | | (26,709) | |
| $ | 70,085 | | | $ | 66,900 | |
Of the Company’s $70.1$65.1 million and $66.9$65.4 million total inventory at September 30, 20222023 and June 30, 2022,2023, respectively, the $26.0$26.3 million and $26.7$26.4 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$37.8 million on a FIFO basis and $15.6$11.5 million on a LIFO basis at September 30, 2022.2023. The Core U.S. business had total Inventory, on a FIFO basis, of $39.3$38.1 million and $12.6$11.7 million on a LIFO basis as of June 30, 2022.2023. The use of LIFO, as compared to FIFO, resulted in a $0.7$0.1 million decrease in cost of sales for the goods sold in the three month period ended September 30, 20222023 compared to $4.6$0.3 million decrease in fiscalthe three month period ended September 30, 2022.
Note8: 7: Goodwill and Intangible Assets
Amortizable intangible assets consist of the following (in thousands):
| | | 9/30/2022 | | 6/30/2022 | | 9/30/2023 | | 6/30/2023 |
Trademarks and trade names | Trademarks and trade names | 2,070 | | | 2,070 | | Trademarks and trade names | $ | 2,070 | | | $ | 2,070 | |
Completed technology | — | | | — | | |
Customer relationships | Customer relationships | 630 | | | 630 | | Customer relationships | 630 | | | 630 | |
Software development | Software development | 11,471 | | | 11,269 | | Software development | 9,429 | | | 11,149 | |
| Other intangible assets | | Other intangible assets | 101 | | | 105 | |
Gross intangible assets | Gross intangible assets | 14,171 | | | 13,969 | | Gross intangible assets | 12,230 | | | 13,954 | |
Accumulated amortization and impairment | Accumulated amortization and impairment | (9,665) | | | (9,329) | | Accumulated amortization and impairment | (7,456) | | | (9,282) | |
| Net intangible assets | Net intangible assets | $ | 4,506 | | | $ | 4,640 | | Net intangible assets | $ | 4,774 | | | $ | 4,672 | |
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 gross balance at JuneSeptember 30, 2022, gross2023 was $4.7 million and accumulated impairment of $3.7 million. There was no change to goodwill in the three months ended September 30, 20222023 and the balance is a net $1.0 million.
Note 89:: Accrued Expenses (in thousands):
| | | 09/30/2022 | | 06/30/2022 | | 09/30/2023 | | 06/30/2023 |
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) | $ | 2,893 | | | $ | 2,590 | |
Income taxes | Income taxes | 614 | | | 2,420 | | Income taxes | 192 | | | 509 | |
Professional fees | Professional fees | 1,669 | | | 1,758 | | Professional fees | 2,412 | | | 2,237 | |
Other | Other | 1,562 | | | 1,463 | | Other | 1,319 | | | 1,499 | |
Current portion pension cost | Current portion pension cost | 1,297 | | | 1,289 | | Current portion pension cost | 2,215 | | | 2,216 | |
Taxes other than income tax | Taxes other than income tax | 1,058 | | | 1,243 | | Taxes other than income tax | 1,950 | | | 1,888 | |
Workers compensation and employee deposits | Workers compensation and employee deposits | 558 | | | 518 | | Workers compensation and employee deposits | 377 | | | 491 | |
Freight | Freight | 803 | | | 352 | | Freight | 288 | | | 149 | |
Total | Total | $ | 10,429 | | | $ | 11,776 | | Total | $ | 11,646 | | | $ | 11,579 | |
Note 10:9: Pension and Post-retirement Benefits
The Company has two defined benefit pension plans, one for U.S. employees which was frozen for new participants in 2016 and another for U.K. employees.employees frozen for new participants in 2009. The Company has a postretirement medical and insurance benefit plan for U.S. employees.employees which remains open. 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 unaudited 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 on headcount. Net periodic benefit costs 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 | | |
| 9/30/2023 | | 9/30/2022 | | | | |
| | | | | | | |
Interest cost | 1,552 | | | 1,482 | | | | | |
Expected return on plan assets | (1,098) | | | (1,032) | | | | | |
Amortization of net loss | 10 | | | 10 | | | | | |
| $ | 464 | | | $ | 460 | | | | | |
Net periodic benefit costs for the Company's Postretirement Medical Plan consists of the following (in thousands):
| | | Three Months Ended | | | | Three Months Ended | | |
| | 9/30/2022 | | 9/30/2021 | | | | 9/30/2023 | | 9/30/2022 | | |
Service cost | Service cost | $ | 6 | | | $ | 9 | | | | Service cost | $ | 5 | | | $ | 6 | | | |
Interest cost | Interest cost | 18 | | | 12 | | | | Interest cost | 17 | | | 18 | | | |
Amortization of prior service credit | Amortization of prior service credit | (369) | | | (368) | | | | Amortization of prior service credit | (369) | | | (369) | | | |
Amortization of net loss | Amortization of net loss | 44 | | | 47 | | | | Amortization of net loss | 31 | | | 44 | | | |
| | $ | (301) | | | $ | (300) | | | | | $ | (316) | | | $ | (301) | | | |
For the three month periodmonths ended September 30, 2022, 2023, the Company contributed zero $0.6 million in the U.S. and $0.2 million in the UK pension plans. Based upon the actuarial valuations performed on the Company’s defined benefit plans as of September 30, 2022, the contribution for fiscal 20232024 for the U.S. plans would requirerequires a contribution of $1.4$3.0 million and the U.K. plan would require requires one of $0.8 million$0.9 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.2024 can be lower. 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$2.2 million in total during fiscal year 2022,2023, with $1.5$1.4 million in the U.S. and $1.0$0.8 million in the U.K.
The Company’s pension plans use fair value as the market-related value of plan assets and recognize net actuarial gains or losses in excess of ten percent (10%) of the greater of the market-related value of plan assets or of the plans’ projected benefit obligation in net periodic (benefit) cost as of the plan measurement date. Net actuarial gains or losses that are less than 10% of the thresholds noted above are accounted for as part of accumulated other comprehensive loss.
Note 11:10: Debt
Debt is comprised of the following (in thousands):
| | | 9/30/2022 | | 6/30/2022 | | 9/30/2023 | | 6/30/2023 |
Short-term and current maturities | Short-term and current maturities | | | | Short-term and current maturities | | | |
| Loan and Security Agreement (Term loan) | 1,495 | | | 1,495 | | |
Loan and Security Agreement (Term Loan) | | Loan and Security Agreement (Term Loan) | $ | 2,168 | | | $ | 1,495 | |
Brazil Loans | Brazil Loans | 3,889 | | | 5,052 | | Brazil Loans | 3,102 | | | 3,466 | |
| 5,384 | | | 6,547 | | |
Subtotal short-term and current maturities | | Subtotal short-term and current maturities | 5,270 | | | 4,961 | |
Long-term debt (net of current portion) | Long-term debt (net of current portion) | | Long-term debt (net of current portion) | |
Loan and Security Agreement (Term Loan) | Loan and Security Agreement (Term Loan) | 9,878 | | | 10,252 | | Loan and Security Agreement (Term Loan) | 3,284 | | | 1,957 | |
Loan and Security Agreement (Line of Credit) | Loan and Security Agreement (Line of Credit) | 11,397 | | | 11,397 | | Loan and Security Agreement (Line of Credit) | 4,897 | | | 2,897 | |
Brazil Loans | Brazil Loans | 3,220 | | | 3,771 | | Brazil Loans | 145 | | | 827 | |
Debt Reacquisition Cost | Debt Reacquisition Cost | (488) | | | (515) | | Debt Reacquisition Cost | (382) | | | (408) | |
| | 24,007 | | | 24,905 | | |
Subtotal long-term debt | | Subtotal long-term debt | 7,944 | | | 5,273 | |
Total Debt | Total Debt | $ | 29,391 | | | $ | 31,452 | | Total Debt | $ | 13,214 | | | $ | 10,234 | |
On April 29, 2022, the Company and certain of the Company’s domestic subsidiaries entered into a Loan and Security agreement (the "Loan and Security Agreement") with HSBC Bank USA (the "Loan and Security Agreement""Lender"). The Company incurred an increase in debt re-acquisition cost of $0.5 million as a resultwhich 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 lineLoan and Security Agreement Line of creditCredit ("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 monthmonths 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%. 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’ 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 loanTerm 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 Condensed Consolidated L.S. Starrett Company tested semi-annually. The Loan and Security agreement also contains the customary affirmative and negative covenants, including limitations on indebtedness, liens, acquisitions, asset dispositions, fundamental corporate changes, excess pension contributions, and certain customary events of default. Upon the occurrence or continuation of an event of default, the Lender may terminate
all commitments and facilities, and require the immediate payment of the entire unpaid principal balances, accrued interest, and all other obligations.
The TD Bank loan was retired in the quarter ended June 2022.. 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.
In Brazil affecting the need for borrowing, the Company is actively mitigating this consequence of thehistorically had a build-up of ICMS (sales tax) credits by filing applications with the relevant tax authorities(which translates to change"Tax on Commerce and Services"). The Company has changed 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 thisthat rate again. This new methodology is common for similar sized, export focused companies in Brazil. The ICMS balance as of June 30, 20222023 was $5.4$4.9 million and $4.8 million as of September 30, 2022 was $4.9 million.
Availability under the Line of Credit remains subject to a borrowing base comprised of Accounts Receivable, Inventory, and Real Estate.2023. The Company believes that the borrowing base will consistently produce availability under the Line of Credit of $25.0 million. A 0.25% commitment feebalance is chargedlocated on the unused portion of the Line of Credit.unaudited Condensed Consolidated Balance Sheets in prepaid expenses and other current assets.
The Company’s Brazilian subsidiary incurs short-term loans with local banks in order to support the Company’s strategic initiatives. The loans are backed by the entity’s US dollar denominated export receivables. The Company’s Brazilian subsidiary has the following loans of September 30, 20222023 (in thousands):
| Lending Institution | Lending Institution | Interest Rate | | Beginning Date | | Ending Date | | Outstanding Balance | Lending Institution | Interest Rate | | Beginning Date | | Ending Date | | Outstanding Balance |
Itau | Itau | 4.52 | % | | October 2021 | | September 2024 | | $ | 4,000 | | Itau | 4.52 | % | | October 2021 | | September 2024 | | $ | 2,286 | |
Santander | 2.71 | % | | December 2021 | | December 2022 | | 275 | | |
Bradesco | 2.52 | % | | January 2022 | | January 2023 | | 443 | | |
Itau | Itau | 4.98 | % | | February 2022 | | February 2024 | | 1,828 | | Itau | 4.98 | % | | February 2022 | | February 2024 | | 609 | |
Brasil | 4.95 | % | | August 2022 | | July 2025 | | 401 | | |
Brasil | Brasil | 3.80 | % | | September 2022 | | August 2024 | | 115 | | Brasil | 4.95 | % | | August 2022 | | July 2025 | | 289 | |
Brasil | Brasil | 4.18 | % | | September 2022 | | September 2023 | | 48 | | Brasil | 3.80 | % | | September 2022 | | August 2024 | | 63 | |
| | | | $ | 7,110 | | | $ | 3,247 | |
Note 12:11: Income Taxes
Tax expense for the three month period ended September 30, 2023 was $0.2 million on profit before tax of $2.1 million (an effective tax rate of 8%). During the three months ended September 30, 2023 the Company recorded a discrete tax benefit of $0.7 million primarily related to IRS Notice 2023-55 released in July 2023, which grants taxpayers temporary relief from applying these final foreign tax credit regulations for tax years beginning on or after December 28, 2021 and ending on or before December 31, 2023. Excluding this discrete tax benefit recorded, the effective tax rate for the three months ended September 30, 2023 was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, foreign losses not benefitted, and non-creditable foreign withholding tax.
Tax expense for the three month period ended September 30, 2022 was $1.0 million on profit before tax of $3.0 million (an effective tax rate of 32%). Tax expenseThe effective tax rate for the three month period ended September 30, 20212022 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, 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 month period ended September 30, 2022 reflects the impact of final U.S. foreign tax credit regulations effective in fiscal 2023 that result in an increase in tax expense from the GILTI inclusion. In the period ended September 30, 2022 the GILTI impact resulted in a 7.27% rate as compared to the period ended September 30, 2021 resulting in a rate of 2.22%.
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 and a full valuation allowance against deferred tax assets generated in China and Australia at September 30, 20222023 and June 30, 2022.2023. The Company had long term tax obligations related primarily to transfer pricing adjustments at September 30, 20222023 and June 30, 2022.
Note 13:12: Contingencies
The Company is involved in certain legal matters, which arise, in the normal course of business. The Company does not believe it is reasonably possible that these matters will have a material impact on the Company’s results of operations or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Use of Non- GAAP Financial Measures
In "Management's discussionDiscussion and analysisAnalysis on financial conditionFinancial Condition and resultsResults of operations"Operations" in this quarterly reportQuarterly Report on Form 10-Q, we discuss non-GAAP financial measures related to currency-neutral sales, as well as 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 financial measures assist investors in understanding the ongoing operating performance of the Company by presenting financial results between periods on a more comparable basis. Such measures should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Currency-neutral numberssales are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations. Adjusted operating income adjusts for restructuring costs and the gain on the sale of assets in order to show comparative operational performance. We include a reconciliation of currency-neutral revenuessales and adjusted operating income to its comparable GAAP financial measures.
References to currency-neutral sales and adjusted operating income should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with GAAP and may not be comparable to similarly titled non-GAAP financial measures used by other companies. In evaluating these non-GAAP financial measures, investors should be aware that in the future we may incur expenses or be involved in transactions that are the same as or similar to some of the adjustments in this presentation. Our presentation of non-GAAP financial measures should not be construed to imply that its future results will be unaffected by any such adjustments. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.
Please see Note 2 to the unaudited Condensed Consolidated Financial Statement in this Quarterly Report on this Form 10-Q regarding segment results of operations. The Company’sOur business is aggregatedorganized into twothree reportable segments based on geography of operations:between North American OperationsIndustrial "NAI", International Industrial, "INI", and International Operations.the Global Test and Measurement, "GTM". Segment income is measured for internal reporting purposes by excluding corporate expenses, which are included in the unallocated column in the following tables as well as Note 2. These tables abovebelow are included to better explain our consolidated operational performance by showing more detail by business segment and reconciling U.S. GAAP operating income and adjusted operating income.
Three months ended September 30, 20222023 and September 30, 20212022
The following table represents key results of operations on a consolidated basis for the three months ended September 30, 20222023 and September 30, 2021:2022:
| | | Three Months Ended | | Three Months Ended |
(Amounts in thousands) | (Amounts in thousands) | | 9/30/2022 | 09/30/2021 | $ Change favorable (unfavorable) | % Change | (Amounts in thousands) | | 9/30/2023 | 09/30/2022 | $ Change favorable (unfavorable) | % Change |
Net sales | Net sales | | $ | 60,461 | | $ | 61,514 | | $ | (1,053) | | (1.7) | % | Net sales | | $ | 60,636 | | $ | 60,461 | | $ | 149 | | 0.2 | % |
Gross profit | Gross profit | | 20,200 | | 20,145 | | 55 | | 0.3 | % | Gross profit | | 19,536 | | 20,200 | | (664) | | (3.3) | % |
% of net sales | % of net sales | | 33.4 | % | 32.7 | % | | % of net sales | | 32.2 | % | 33.4 | % | |
| Restructuring charges | Restructuring charges | | 190 | | — | | (190) | | (100.0) | % | Restructuring charges | | — | | 190 | | 190 | | (100.0) | % |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 16,294 | | 16,012 | | (282) | | (1.8) | % | Selling, general and administrative expenses | | 17,077 | | 16,294 | | (783) | | (4.8) | % |
% of net sales | % of net sales | | 26.9 | % | 26.0 | % | | % of net sales | | 28.2 | % | 27.3 | % | |
| | Operating income | Operating income | | 3,716 | | 4,133 | | (417) | | (10.1) | % | Operating income | | 2,459 | | 3,716 | | (1,249) | | (33.6) | % |
| Other income (expense), net | | (676) | | 226 | | (902) | | (399.1) | % | |
Other (expense), net | | Other (expense), net | | (365) | | (676) | | 311 | | (46.0) | % |
| Income before income taxes | Income before income taxes | | 3,040 | | 4,359 | | (1,319) | | (30.3) | % | Income before income taxes | | 2,094 | | 3,040 | | (946) | | (31.1) | % |
| Income tax expense (benefit) | | 984 | | 1,127 | | 143 | | 12.7 | % | |
Income tax expense | | Income tax expense | | 174 | | 984 | | 810 | | 82.3 | % |
| Net income | Net income | | $ | 2,056 | | $ | 3,232 | | (1,176) | | (36.4) | % | Net income | | $ | 1,920 | | $ | 2,056 | | $ | (136) | | (6.6) | % |
| | | | | | | | | | | | | | |
GAAP to Non-GAAP reconciliation: | | |
| Three Months Ended |
(Amounts in thousands) | 09/30/23 | 09/30/22 | $ Change favorable (unfavorable) | % Change |
Operating income as reported | $ | 2,459 | | $ | 3,716 | | $ | (1,257) | | (33.8) | % |
Add back restructuring charges | — | | 190 | | (190) | | (100.0) | % |
Non- GAAP adjusted operating income | $ | 2,459 | | $ | 3,906 | | $ | (1,918) | | (49.1) | % |
Key Results by Reporting Segment
| | | Three Months Ended September 2022 | | Three Months Ended September 2021 | | Three Months Ended September 2023 | | Three Months Ended September 2022 |
(Amounts in thousands) | (Amounts in thousands) | North America | International | Corporate | Total | | North America | International | Corporate | Total | (Amounts in thousands) | NAI | INI | GTM | Corporate | Total | | NAI | INI | GTM | Corporate | Total |
Net sales | Net sales | $ | 36,484 | | $ | 23,977 | | $ | — | | $ | 60,461 | | | $ | 33,809 | | $ | 27,705 | | $ | — | | $ | 61,514 | | Net sales | $ | 19,470 | | $ | 25,374 | | $ | 15,792 | | $ | — | | $ | 60,636 | | | $ | 22,371 | | $ | 23,299 | | $ | 14,791 | | — | | $ | 60,461 | |
Gross profit | Gross profit | 10,932 | | 9,268 | | — | | 20,200 | | | 9,535 | | 10,610 | | — | | 20,145 | | Gross profit | 3,928 | | 9,776 | | 5,832 | | — | | 19,536 | | | 5,415 | | 8,952 | | 5,833 | | — | | 20,200 | |
% of net sales | % of net sales | 30.0 | % | 38.7 | % | | 33.4 | % | | 28.2 | % | 38.3 | % | | 32.7 | % | % of net sales | 20.2 | % | 38.5 | % | 36.9 | % | | 32.2 | % | | 24.2 | % | 38.4 | % | 39.4 | % | — | | 33.4 | % |
Restructuring charges | Restructuring charges | — | | 190 | | — | | 190 | | | — | | — | | — | | — | | Restructuring charges | — | | — | | — | | — | | — | | | — | | — | | — | | 190 | | 190 | |
Selling, general and administrative expenses | Selling, general and administrative expenses | 8,101 | | 6,242 | | 1,951 | | 16,294 | | | 7,262 | | 7,027 | | 1,723 | | 16,012 | | Selling, general and administrative expenses | 4,611 | | 7,016 | | 3,461 | | 1,989 | | 17,077 | | | 4,715 | | 6,072 | | 3,555 | | 1,952 | | 16,294 | |
% of net sales | % of net sales | 22.2 | % | 26.0 | % | | 26.9 | % | | 21.5 | % | 25.4 | % | | 26.0 | % | % of net sales | 23.7 | % | 27.7 | % | 21.9 | % | | 28.2 | % | | 21.1 | % | 26.1 | % | 24.0 | % | — | | 26.9 | % |
| Operating income | 2,831 | | 2,836 | | (1,951) | | 3,716 | | | 2,273 | | 3,583 | | (1,723) | | 4,133 | | |
Operating (loss) income | | Operating (loss) income | $ | (683) | | $ | 2,760 | | $ | 2,371 | | $ | (1,989) | | $ | 2,459 | | | $ | 700 | | $ | 2,880 | | $ | 2,278 | | $ | (2,142) | | $ | 3,716 | |
% of net sales | % of net sales | 7.8 | % | 11.8 | % | | 6.1 | % | | 6.7 | % | 12.9 | % | | 6.7 | % | % of net sales | (3.5) | % | 10.9 | % | 15.0 | % | | 4.1 | % | | 3.1 | % | 12.4 | % | 15.4 | % | — | | 6.1 | % |
Non-GAAP Measure Reconciliation: Fiscal 2024 Q1 "Currency Neutral" Net Sales
| | | | | | | | | | | | | | |
| Three months ended |
(Amounts in Thousands) | 9/30/2023 | 9/30/2022 | $ Change | % Change |
Net Sales, as reported | $ | 60,636 | | $ | 60,461 | | $ | 175 | | 0.3 | % |
Currency Neutralizing Adjustment* | (1,574) | | — | | (1,574) | | (2.6) | % |
Q1 FY24 Currency Neutral Net Sales | 59,062 | | 60,461 | | (1,399) | | (2.3) | % |
NAI Net Sales, as reported | 20,432 | | 22,371 | | (1,939) | | (8.7) | % |
Currency Neutralizing Adjustment* | (93) | | — | | (93) | | (0.4) | % |
Q1FY24 Currency Neutral NAI Net Sales | 20,339 | | 22,371 | | (2,032) | | (9.1) | % |
INl Net Sales, as reported | 25,655 | | 23,299 | | 2,356 | | 10.1 | % |
Currency Neutralizing Adjustment* | (1,449) | | — | | (1,449) | | (6.2) | % |
Q1FY24 Currency Neutral INI Net Sales | 24,206 | | 23,299 | | 907 | | 3.9 | % |
GTM Net Sales, as reported | 14,549 | | 14,791 | | (242) | | (2) | % |
Currency Neutralizing Adjustment* | (32) | | — | | (32) | | 100 | % |
Q1FY24 Currency Neutral GTM Net Sales | $ | 14,517 | | $ | 14,791 | | $ | (274) | | (2) | % |
*"Currency Neutralizing Adjustment" = Change when converting Q1FY24 sales in non USD functional currencies at the same exchange rates used in the comparison period. |
Overview
Net Sales for the three months ended September 30, 2023 and September 30, 2022 were $60.6 million and $60.5 million, respectively, an increase of $0.1 million or 0.3%. An increase to net sales due to pricing actions of 2.9% and a positive foreign exchange impact of 2.6% was offset by volume and mix declines totaling 5.2% compared to the prior year quarter. Consolidated gross profit was down $0.7 million or 3.3% versus prior year to $19.5 million for the three months ended September 30, 2023. Gross margin was 32.2% of sales in the three months ended September 30, 2023 versus 33.4% during the prior year. Selling, General and Administrative expenses have increased overall by $0.8 million or 4.8% versus prior year to $17.1 million in the three months ended September 30, 2023. In the three months ended September 30, 2023 operating income was $2.5 million, a $1.2 million or a 33.6% reduction versus September 30, 2022 during which we reported operating income of $3.7 million.
The U, S. Dollar has weakened since the prior year, predominately against the Brazilian Real, favorably impacting the translation of the Brazilian Real into United States Dollars. Currency neutral net sales for the three months ended September 30, 2023 would have been $59.1 million, representing a decline of $1.6 million or 2.3%, by using the exchange rates of the period ended September 30, 2022.
Net Sales
In the three months ended September 30, 2023 consolidated net sales were $60.6 million, with NAI net sales of $19.5 million. INI net sales of $25.4 million and GTM net sales of $15.8 million. In the three months ended September 30, 2023 NAI net sales decreased $2.9 million or 13.0% from $22.4 million in the three months ended September 30, 2022, While incoming orders remain stable and backlog healthy at over $10 million, NAI sales have been negatively impacted by low factory utilization and output of the measuring tools plant due to labor challenges. INI net sales increased $2.1 million or 8.9% from $23.3 million in the three months ended September 30, 2022. This increase is partially due to increased volumes in Brazil and Europe buoyed by new product introductions, and by favorable FX translation as the US Dollar has weakened since the comparative period. GTM net sales increased in the three months ended September 30, 2023 by $1.0 million or 6.8% from $14.8 million net sales in the three months ended September 30, 2022, and continue to be supported by high demand for our precision granite products. Currency neutral net sales consolidated would have been $59.1 million in the three months ended September 30, 2022, as referenced in the table above. Currency neutral net sales adjustments for the three months September 30, 2023 would lower net sales by $0.1 million in NAI, $1.4 million in INI.
Gross Profit
Gross profit of $19.5 million in the three months ended September 30, 2023 decreased $0.7 million or 3.3% over the three months ended September 30, 2022 of $20.2 million. In the three months ended September 30, 2023 gross margin was 32.2% compared to 33.4% for the three months ended September 30, 2022.
Non-GAAP Measure Reconciliation: Fiscal 2023 Q1 "Currency Neutral" Net Sales
| | | | | | | | | | | | | | |
| Three months ended |
(Amounts in Thousands) | 9/30/2022 | 9/30/2021 | $ Change | % Change |
Net Sales, as reported | 60,461 | | 61,514 | | (1,053) | | (1.7) | % |
Currency Neutralizing Adjustment* | 923 | | — | | 923 | | 1.5 | % |
Q1 FY23 Currency Neutral Net Sales | 61,384 | | 61,514 | | (130) | | (0.2) | % |
North America Net Sales, as reported | 36,484 | | 33,809 | | 2,675 | | 7.9 | % |
Currency Neutralizing Adjustment* | 64 | | — | | 64 | | 0.2 | % |
Q1FY23 Currency Neutral North America Net Sales | 36,548 | | 33,809 | | 2,739 | | 8.1 | % |
International Net Sales, as reported | 23,977 | | 27,705 | | (3,728) | | (13.5) | % |
Currency Neutralizing Adjustment* | 859 | | — | | 859 | | 3.1 | % |
Q1FY23 Currency Neutral International Net Sales | 24,836 | | 27,705 | | (2,869) | | (10.4) | % |
*"Currency Neutralizing Adjustment" = Change when converting Q1FY23 sales in non USD functional currencies at the same exchange rates used in the comparison period |
Overview
New order intake remained stable in the North American precision hand tools business and in the precision granite market. However, order intake in our International operations, particularly in Europe, has softened due to the recession there and the on-going war in Ukraine. Although backlog remains very high and nearly 20% higher than on June 30, 2022, the company continues to anticipate a softening in demand for its products across the portfolio.
ForIn the three months ended September 30, 2022 and September 30, 2021 sales were $60.5 million and $61.5 million, respectively, a reduction of $1.12023, NAI gross profit decreased $1.5 million or 1.7%. Consolidated gross profit improved $0.127.5% to $3.9 million, versus prior year to $20.2or 20.2% of sales from $5.4 million, in the three months ended September 30, 2022. Gross margin was 33.4%or 24.2% of sales in the three months ended September 30, 2022 versus 32.7% during2022. This is a result of the prior year. This continues to reflect the positive impact ofaforementioned headwinds in 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 havemeasuring tool production facility. INI gross profit increased overall by $0.3 million versus prior year to $16.3 million in the three months ended September 30, 2022 due in large part to increases in sales and marketing expenses. In the three months ended September 30, 2022 operating income was $3.7 million, a $0.4$0.8 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 related9.2% to the closure of its distribution and sales centers in Singapore and Japan as part of the March 2022 disclosed restructuring with a total expected projected cost $0.8 million. Project-to-date the total incurred as of September 30, 2022 was $0.5 million.
The United States Dollar has strengthened against the United Kingdom, New Zealand and Brazilian currencies versus the prior year. Currency neutral sales for the three months ended September 30, 2022 were $61.4 million bringing sales to the same level compared to net sales of the period ended September 30, 2021.
Net Sales
In the three months ended September 30, 2022 net sales were $60.5 million with North 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 $9.8 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%38.5% of sales, compared to $10.6$9.0 million, or 38.3% of sales
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%38.4% of sales in the three months ended September 30, 2021. Although2022. GTM gross profit remained flat at $5.8 million on $1.0 million more in sales with gross margin at 36.9% in the company continuesthree months ended September 30, 2023 as compared to be challenged by macro pressures related39.4% in the three months ended September 30, 2022. This is partially due to supply chain, raw material and labor cost increases in this inflationary environment, itmix, as sales of our higher margin in-line laser measuring systems has been able to keep pace withdeclined as a seriesresult of selling price increasesthe U.S. automotive strikes that temporarily paused capital spending across the business.sector.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $16.3$17.1 million in the three months ended September 30, 20222023 increased $0.3$0.8 million or 1.8%4.8% over the three months ended September 30, 20212022 at $16.0$16.3 million. TheAbout half of this increase in selling, general and administrative expenses is due primarily to some variable selling expenses related to sales and marketing.the impact of the translation of foreign currencies into United States Dollars, notably the Brazilian Real. Overall, selling, general and administrative expenses as a percentage of sales increased to 26.9%as the company reinvested globally. Selling, general and administrative expenses were 28.2% in the three months ended September 30, 2022 from 26.0%2023, compared to 27.3% including $0.2 million in restructuring in the three months ended September 30, 2021. North America increasing2022. NAI increased $0.1 million or 2.2% from 21.5%21.1% of sales to 22.2%23.7% of sales, International decreasedsales. INI selling, general and administrative expenses $0.8increased $0.9 million yetor 10.5% as expenses increased as a percentage of sales to 26.0%27.7% from 25.4%26.1% of sales during the comparative period. GTM selling, general and administrative expenses decreased in the three months ended September 30, 2023 $0.1 million or 2.6% to $3.5 million as compared to the three months ended September 30, 2022 of $3.6 million. Corporate expenses wereremained flat at $2.0 million in the three months ended September 30, 20222023 compared to $1.7 million in the three months ended September 30, 2021.2022.
Income Taxes
In the three months ended September 30, 2022,2023, the Company recognized income tax expense of $0.2 million on profit before tax of $2.1 million (an effective tax rate of 8%) as compared to income tax expense of $1.0 million on profit before tax of $3.0 million (an effective tax rate 32%) as compared to income tax expense of $1.1 million on profit before tax of $4.4 million (an effective tax rate of 26%32%), in the three months ended September 30, 2021.2022. The higherlower effective tax rate in the three months ended September 30, 2022,2023, when compared with the three months ended September 30, 20212022 is primarily due to a discrete tax benefit of $0.7 million related to IRS Notice 2023-55 released in July 2023, which grants taxpayers temporary relief from applying these final U.S. foreign tax credit regulations effective in fiscalfor tax years beginning on or after December 28, 2021 and ending on or before December 31, 2023, that result in an increase in tax expense fromoffset by certain foreign losses not benefited for the GILTI inclusion which are $0.2 million higher in the quarterthree months ended September 30, 2022 as a result of this change.2023.
Other Income and Net Income
Other expense in the three months ended September 30, 2023 and 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$0.7 million, respectively. Exchange gain was $0.1 million in the three months ended September 30, 2023 and exchange loss was $0.4 million as SOFR is a variable rate.in the three months ended September 30, 2022. The effective interest rate on the borrowings under the Loan and Security Agreement during the three months ended September 30, 2023 and 2022 was 8.9% 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, 20222023 net income was $2.1$1.9 million, $1.2$0.1 million or 36.4%6.6% lower than net incomeincome of $3.2$2.1 million in the three months ended September 30, 20212022. Dilutive earnings per share for the three months ended September 30, 2023 and 2022 were $0.25 and $0.27, respectively.
LIQUIDITY AND CAPITAL RESOURCES
| Cash flows (in thousands) | Cash flows (in thousands) | Three Months Ended | Cash flows (in thousands) | Three Months Ended |
| | 9/30/2022 | | 9/30/2021 | | 9/30/2023 | | 9/30/2022 |
| Cash provided by (used in) operating activities | $ | 628 | | | $ | (5,841) | | |
Cash provided by operating activities | | Cash provided by operating activities | $ | 4,818 | | | $ | 628 | |
Cash (used in) investing activities | Cash (used in) investing activities | (1,162) | | | (2,624) | | Cash (used in) investing activities | (3,512) | | | (1,162) | |
Cash (used in) financing activities | (2,094) | | | 5,711 | | |
Cash provided by (used in) financing activities | | Cash provided by (used in) financing activities | 930 | | | (2,094) | |
Effect of exchange rate changes on cash | Effect of exchange rate changes on cash | 7 | | | 276 | | Effect of exchange rate changes on cash | (161) | | | 7 | |
| Net (decrease) in cash | $ | (2,621) | | | $ | (2,478) | | |
Net increase (decrease) in cash | | Net increase (decrease) in cash | $ | 2,075 | | | $ | (2,621) | |
Net cash flows used in the three months ended September 30, 20222023 was $2.6$2.1 million. Cash provided by operations was $0.6$4.8 million resulting from net income of $2.1$1.9 million, decreasesincreases in accounts receivable of $3.1$1.1 million partially due to lowerhigher sales, and the Company planned $5.0in other current liabilities of $2.5 million increasedriven by accounts payable and partially offset by a decrease of $0.9 million in inventories due to global supply chain issues.inventories. Cash used in investing activities was $1.2$3.5 million as a result of $1.0$3.1 million in capital expenditures and $0.2$0.4 million in software development while cash used inprovided by financing activities amounted to $2.1$0.9 million as the Company'swe borrowed $0.6$2.0 million and repaid $2.7$1.1 million.
The Company believes it maintainsWe believe we maintain sufficient liquidity and has the resources to fund its operations withthat existing cash and cash expected to be provided by future operating activities and available credit are adequate to satisfy itsour working capital, capital expenditure requirements and other contractual obligations for at least the next 12 months.
On April 29, 2022,months from the Company and certaindate of the Company’s domestic subsidiaries entered intofinancial statements included in this Quarterly Report on Form 10-Q.
We have implemented a new Loan$5 million expansion at our precision granite manufacturing facility in Waite Park, MN in order to meet continued high demand for our products. The project is nearing completion and Security agreement with HSBC Bank USA. These new credit facilities replacedis expected to be completed during fiscal year 2024. It is being financed by the Company’s previous TD Bank credit facilities and are compriseduse of a $30$2.0 million revolving line of credit with a $10borrowed from $7.0 million uncommitted accordion provision, a $12.1 million term loancapital expenditure draw down facility, which was previously unused, and a $7 million Capital Expenditure draw down credit facility. The Facilities are secured by a valid first-priority security interest on substantially all existing and future assetscombination of the Company and its domestic subsidiaries. As September 30, 2022 the Company has excess availability on the revolving line of credit and the term loan of $16.2 million.current cash availability.
The effective interest rate on the borrowings under the Loan and Security Agreement during the three months ended September 30, 2023 and 2022 was 8.9% and 2021 was 4.2% and 1.9%, respectively.
The Company does
We do not have any material off-balance sheet arrangements as defined under the Securities and Exchange Commission rules.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
One should carefully review
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and considerare not required to provide 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.this item.
ITEM 4. CONTROLS AND PROCEDURES
During the year ended June 30, 2023, in connection with evaluating the error in segment reporting, we identified a material weakness in our internal control over financial reporting. The Company's management, under the supervision and with the participationCompany has implemented certain changes in our internal controls as of the Company's Presidentfiling of this report to address the material weakness to include, among other changes quarterly monitoring to any changes of the reporting package reviewed by the chief operating decision maker "CODM". The material weakness cannot be considered fully remediated until the improved controls have been in place and operated for a sufficient period of time. However, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the Company's disclosure controls and procedures as of September 30, 2022, and they have concluded that, notwithstanding the identified material weakness in our disclosure controlsinternal control over financial reporting, the financial statements fairly present, in all material respects, our financial condition, results of operations and procedures were effective as of such date. cash flows for the periods presented in conformity with U.S. GAAP.
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
Other than 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 reportingremediation actions described above, during the first quarter of fiscal 2024, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2023 that havehas materially affected, or areis reasonably likely to materially affect, itsour internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we are from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements and other matters. We do not believe we are currently party to any pending legal action, arbitration proceeding or governmental proceeding, the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business or operating results. We are not a party to any material proceedings in which any director, member of senior management or affiliate of ours is either a party adverse to us or our subsidiaries or has a material interest adverse to us or our subsidiaries.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors set forth in the Company’s Annual Report on Form 10-K,
as amended for the year ended June 30, 2022.
2023.
ITEM 6. EXHIBITS
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3a | Restated Articles of Organization as amended, filed with Form 10-K for the year ended June 30, 2012 filed September 12, 2012, is hereby incorporated by reference. |
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3b | Amended and Restated Bylaws, filed with Form 10-Q for the quarter ended December 31, 2012 filed February 7, 2013, is hereby incorporated by reference |
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4a | Rights Agreement dated as of November 2, 2010 between the Company and Mellon Investor Services LLC, as Rights Agent (together with exhibits, including the Form of Rights Certificate, and the Summary of Rights to Purchase Shares of Class A Common Stock), filed with Form 10-Q for the quarter ended September 25, 2010, filed November 4, 2010 is hereby incorporated by reference. |
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4b | Amendment No. 1 to Rights Agreement dated as of February 5, 2013 by and between the Company and Computershare Shareowner Services LLC, filed with Form 10-Q for the quarter ended December 31, 2012, filed February 7, 2013 is hereby incorporated by reference. |
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31.1* | |
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31.2 * | |
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32.1+ | |
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32.2+ | |
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101 | The following materials from The L. S. Starrett Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 20222023 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (I) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statement of Stockholders' Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
+ Furnished, not filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | THE L. S. STARRETT COMPANY (Registrant) |
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Date | November 3, 202210, 2023 | | /S/ Douglas A. Starrett |
| | | Douglas A. Starrett - President and CEO (Principal Executive Officer) |
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Date | November 3, 202210, 2023 | | /S/ John C. Tripp |
| | | John C. Tripp - CFO and Treasurer (Principal Accounting Officer) |