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 |
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OR
OR | ||
☐ | 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.) |
121 CRESCENT STREET, ATHOL, MASSACHUSETTS | 01331-1915 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code | 978-249-3551 |
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 (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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
YES ☒ NO ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One): | |
Large Accelerated Filer ☐ Accelerated Filer ☒ Non-Accelerated Filer ☐ Smaller Reporting Company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | |
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YES ☐ NO ☒ |
Common Shares outstanding as of |
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Class A Common Shares |
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Class B Common Shares |
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THE L. S. STARRETT COMPANY
CONTENTS
Page No. | |||||
Part I. | Financial Information: | ||||
Item 1. | Financial Statements |
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| Consolidated Balance Sheets – | 3 | |||
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| Consolidated Statements of Operations – three and | 4 | |||
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| Consolidated Statements of Comprehensive Income (Loss) – three and | 5 | |||
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| Consolidated Statements of Stockholders' Equity – | 6 | |||
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| Consolidated Statements of Cash Flows - | 7 | |||
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| Notes to Unaudited Consolidated Financial Statements |
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Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. | Controls and Procedures |
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Part II. | Other Information: | ||||
Item 1A. | Risk Factors | 16 | |||
Item 6. | Exhibits | 17 | |||
SIGNATURES | 18 | ||||
PART I. FINANCIAL INFORMATION |
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ITEM 1. FINANCIAL STATEMENTS |
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THE L. S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands except share data)
March 31, 2016 (unaudited) | June 30, 2015 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 22,231 | $ | 11,108 | ||||
Short-term investments | - | 7,855 | ||||||
Accounts receivable (less allowance for doubtful accounts of $746 and $612, respectively) | 31,738 | 40,311 | ||||||
Inventories | 57,663 | 63,003 | ||||||
Current deferred income tax assets | 4,274 | 4,554 | ||||||
Prepaid expenses and other current assets | 5,897 | 6,582 | ||||||
Total current assets | 121,803 | 133,413 | ||||||
Property, plant and equipment, net | 42,555 | 44,413 | ||||||
Income taxes receivable | 2,730 | 3,383 | ||||||
Deferred income tax assets, net of current portion | 18,573 | 18,803 | ||||||
Intangible assets, net | 6,647 | 7,125 | ||||||
Goodwill | 3,034 | 3,034 | ||||||
Other assets | 2,185 | 2,101 | ||||||
Total assets | $ | 197,527 | $ | 212,272 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Notes payable and current maturities of long-term debt | $ | 1,531 | $ | 1,552 | ||||
Accounts payable | 10,415 | 9,471 | ||||||
Accrued expenses | 5,347 | 7,011 | ||||||
Accrued compensation | 4,022 | 5,565 | ||||||
Total current liabilities | 21,315 | 23,599 | ||||||
Long-term debt, net of current portion | 17,500 | 18,552 | ||||||
Other income tax obligations | 4,615 | 4,607 | ||||||
Deferred income tax liabilities | 1,441 | 1,548 | ||||||
Postretirement benefit and pension obligations | 46,081 | 49,536 | ||||||
Total liabilities | 90,952 | 97,842 | ||||||
Stockholders' equity: | ||||||||
ClClass A Common stock $1 par (20,000,000 shares authorized; 6,236,900 outstanding at March 31, 2016 and 6,223,558 outstanding at June 30, 2015) | 6,237 | 6,224 | ||||||
ClClass B Common stock $1 par (10,000,000 shares authorized; 772,500 outstanding at March 31, 2016 and 789,069 outstanding at June 30, 2015) | 773 | 789 | ||||||
Additional paid-in capital | 55,020 | 54,869 | ||||||
Retained earnings | 96,933 | 98,164 | ||||||
Accumulated other comprehensive loss | (52,388 | ) | (45,616 | ) | ||||
Total stockholders' equity | 106,575 | 114,430 | ||||||
Total liabilities and stockholders’ equity | $ | 197,527 | $ | 212,272 | ||||
December 31, 2016 (unaudited) | June 30, 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 16,727 | $ | 19,794 | ||||
Accounts receivable (less allowance for doubtful accounts of $752 and $887, respectively) | 31,388 | 34,367 | ||||||
Inventories | 58,204 | 56,321 | ||||||
Current deferred income tax assets | - | 4,518 | ||||||
Prepaid expenses and other current assets | 7,316 | 5,911 | ||||||
Total current assets | 113,635 | 120,911 | ||||||
Property, plant and equipment, net | 39,870 | 41,010 | ||||||
Income taxes receivable | 2,517 | 2,655 | ||||||
Deferred income tax assets, net of current portion | 25,069 | 25,284 | ||||||
Intangible assets, net | 6,126 | 6,490 | ||||||
Goodwill | 3,034 | 3,034 | ||||||
Other assets | 2,258 | 2,214 | ||||||
Total assets | $ | 192,509 | $ | 201,598 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Notes payable and current maturities of long-term debt | $ | 1,578 | $ | 1,543 | ||||
Accounts payable | 8,056 | 8,981 | ||||||
Accrued expenses | 5,758 | 6,372 | ||||||
Accrued compensation | 3,924 | 4,922 | ||||||
Total current liabilities | 19,316 | 21,818 | ||||||
Long-term debt, net of current portion | 16,311 | 17,109 | ||||||
Other income tax obligations | 4,609 | 3,813 | ||||||
Deferred income tax liabilities | - | 187 | ||||||
Postretirement benefit and pension obligations | 55,308 | 67,158 | ||||||
Total liabilities | 95,544 | 110,085 | ||||||
Stockholders' equity: | ||||||||
Class A Common stock $1 par (20,000,000 shares authorized; 6,286,978 outstanding at December 31, 2016 and 6,249,563 outstanding at June 30, 2016) | 6,287 | 6,250 | ||||||
Class B Common stock $1 par (10,000,000 shares authorized; 766,623 outstanding at December 31, 2016 and 772,742 outstanding at June 30, 2016) | 767 | 773 | ||||||
Additional paid-in capital | 55,567 | 55,227 | ||||||
Retained earnings | 81,643 | 81,228 | ||||||
Accumulated other comprehensive loss | (47,299 | ) | (51,965 | ) | ||||
Total stockholders' equity | 96,965 | 91,513 | ||||||
Total liabilities and stockholders’ equity | $ | 192,509 | $ | 201,598 | ||||
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Consolidated Statements of Operations
(in thousands except per share data) (unaudited)
3 Months Ended | 9 Months Ended | 3 Months Ended | 6 Months Ended | |||||||||||||||||||||||||||||
3/31/2016 | 3/31/2015 | 3/31/2016 | 3/31/2015 | 12/31/2016 | 12/31/2015 | 12/31/2016 | 12/31/2015 | |||||||||||||||||||||||||
Net sales | $ | 50,329 | $ | 56,116 | $ | 155,038 | $ | 180,109 | $ | 53,187 | $ | 53,671 | $ | 102,100 | $ | 104,709 | ||||||||||||||||
Cost of goods sold | 35,596 | 37,422 | 108,454 | 120,108 | 36,365 | 37,672 | 71,364 | 72,858 | ||||||||||||||||||||||||
Gross margin | 14,733 | 18,694 | 46,584 | 60,001 | 16,822 | 15,999 | 30,736 | 31,851 | ||||||||||||||||||||||||
% of Net sales | 29.3 | % | 33.3 | % | 30.0 | % | 33.3 | % | 31.6 | % | 29.8 | % | 30.1 | % | 30.4 | % | ||||||||||||||||
Selling, general and administrative expenses | 14,942 | 14,796 | 30,363 | 30,469 | ||||||||||||||||||||||||||||
Restructuring charges | 51 | - | 394 | - | ||||||||||||||||||||||||||||
Selling, general and administrative expenses | 13,819 | 15,574 | 44,288 | 52,112 | ||||||||||||||||||||||||||||
Operating income (loss) | 1,829 | 1,203 | (21 | ) | 1,382 | |||||||||||||||||||||||||||
Operating income | 914 | 3,120 | 2,296 | 7,889 | ||||||||||||||||||||||||||||
Other income | 285 | 388 | 377 | 1,683 | ||||||||||||||||||||||||||||
Other income (expense) | (312 | ) | (211 | ) | (75 | ) | 92 | |||||||||||||||||||||||||
Gain on sale of building | - | - | 3,089 | - | ||||||||||||||||||||||||||||
Income before income taxes | 1,199 | 3,508 | 2,673 | 9,572 | 1,517 | 992 | 2,993 | 1,474 | ||||||||||||||||||||||||
Income tax expense | 602 | 1,071 | 1,796 | 3,765 | 454 | 534 | 1,171 | 1,194 | ||||||||||||||||||||||||
Net income | $ | 597 | $ | 2,437 | $ | 877 | $ | 5,807 | $ | 1,063 | $ | 458 | $ | 1,822 | $ | 280 | ||||||||||||||||
Basic income per share | $ | .09 | $ | 0.35 | $ | .13 | $ | 0.83 | ||||||||||||||||||||||||
Diluted income per share | $ | .08 | $ | 0.35 | $ | .12 | $ | 0.83 | ||||||||||||||||||||||||
Basic and diluted income per share | $ | 0.15 | $ | 0.07 | $ | 0.26 | $ | 0.04 | ||||||||||||||||||||||||
Weighted average outstanding shares used in per share calculations: | ||||||||||||||||||||||||||||||||
Basic | 7,013 | 6,992 | 7,016 | 6,977 | 7,050 | 7,022 | 7,039 | 7,018 | ||||||||||||||||||||||||
Diluted | 7,031 | 7,045 | 7,045 | 7,024 | 7,068 | 7,043 | 7,068 | 7,050 | ||||||||||||||||||||||||
Dividends per share | $ | 0.10 | $ | 0.10 | $ | 0.30 | $ | 0.30 | $ | 0.10 | $ | 0.10 | $ | 0.20 | $ | 0.20 | ||||||||||||||||
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Consolidated Statements of Comprehensive Income (Loss)
(in thousands) (unaudited)
3 Months Ended | 9 Months Ended | 3 Months Ended | 6 Months Ended | |||||||||||||||||||||||||||||
3/31/2016 | 3/31/2015 | 3/31/2016 | 3/31/2015 | 12/31/2016 | 12/31/2015 | 12/31/2016 | 12/31/2015 | |||||||||||||||||||||||||
Net income | $ | 597 | $ | 2,437 | $ | 877 | $ | 5,807 | $ | 1,063 | $ | 458 | $ | 1,822 | $ | 280 | ||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||
Translation gain (loss) | 2,906 | (8,952 | ) | (6,772 | ) | (20,720 | ) | (988 | ) | 102 | (1,756 | ) | (9,678 | ) | ||||||||||||||||||
Pension and postretirement plans, net of tax of $0,$0,$0 and $22 respectively | - | - | - | (22 | ) | |||||||||||||||||||||||||||
Pension and postretirement plans, net of tax of $3,958,$0,$3,958 and $0 respectively | 6,469 | - | 6,422 | - | ||||||||||||||||||||||||||||
Other comprehensive income (loss) | 2,906 | (8,952 | ) | (6,772 | ) | (20,742 | ) | 5,481 | 102 | 4,666 | (9,678 | ) | ||||||||||||||||||||
Total comprehensive income (loss) | $ | 3,503 | $ | (6,515 | ) | $ | (5,895 | ) | $ | (14,935 | ) | $ | 6,544 | $ | 560 | $ | 6,488 | $ | (9,398 | ) | ||||||||||||
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Consolidated Statements of Stockholders' Equity
For the NineSix Months Ended MarchDecember 31, 2016
(in thousands except per share data) (unaudited)
Common Stock Outstanding | Addi- tional Paid-in | Retained | Accumulated Other Com-prehensive | Common Stock Outstanding | Addi- tional Paid-in | Retained | Accumulated Other Com-prehensive | |||||||||||||||||||||||||||||||||||||||||
Class A | Class B | Capital | Earnings | Loss | Total | Class A | Class B | Capital | Earnings | Loss | Total | |||||||||||||||||||||||||||||||||||||
Balance June 30, 2015 | $ | 6,224 | $ | 789 | $ | 54,869 | $ | 98,164 | $ | (45,616 | ) | $ | 114,430 | |||||||||||||||||||||||||||||||||||
Total comprehensive income (loss) | - | - | - | 877 | (6,772 | ) | (5,895 | ) | ||||||||||||||||||||||||||||||||||||||||
Dividends ($0.30 per share) | - | - | - | (2,108 | ) | - | (2,108 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance June 30, 2016 | $ | 6,250 | $ | 773 | $ | 55,227 | $ | 81,228 | $ | (51,965 | ) | $ | 91,513 | |||||||||||||||||||||||||||||||||||
Total comprehensive income | - | - | - | 1,822 | 4,666 | 6,488 | ||||||||||||||||||||||||||||||||||||||||||
Dividends ($0.20 per share) | - | - | - | (1,407 | ) | - | (1,407 | ) | ||||||||||||||||||||||||||||||||||||||||
Repurchase of shares | (37 | ) | (3 | ) | (406 | ) | - | - | (446 | ) | - | (3 | ) | (30 | ) | - | - | (33 | ) | |||||||||||||||||||||||||||||
Issuance of stock | 28 | 9 | 397 | - | - | 434 | 11 | 7 | 163 | - | - | 181 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | 160 | - | - | 160 | 16 | - | 207 | - | - | 223 | ||||||||||||||||||||||||||||||||||||
Conversion | 22 | (22 | ) | - | - | - | - | 10 | (10 | ) | - | - | - | - | ||||||||||||||||||||||||||||||||||
Balance March 31, 2016 | $ | 6,237 | $ | 773 | $ | 55,020 | $ | 96,933 | $ | (52,388 | ) | $ | 106,575 | |||||||||||||||||||||||||||||||||||
Balance December 31, 2016 | $ | 6,287 | $ | 767 | $ | 55,567 | $ | 81,643 | $ | (47,299 | ) | $ | 96,965 | |||||||||||||||||||||||||||||||||||
Accumulated balance consists of: | ||||||||||||||||||||||||||||||||||||||||||||||||
Translation loss | $ | (44,072 | ) | �� | $ | (43,642 | ) | |||||||||||||||||||||||||||||||||||||||||
Pension and postretirement plans, net of taxes | (8,316 | ) | (3,657 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| $ | (52,388 | ) | $ | (47,299 | ) | |||||||||||||||||||||||||||||||||||||||||||
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Consolidated Statements of Cash Flows
(in thousands of dollars) (unaudited)
9 Months Ended | 6 Months Ended | |||||||||||||||
3/31/2016 | 3/31/2015 | 12/31/2016 | 12/31/2015 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 877 | $ | 5,807 | $ | 1,822 | $ | 280 | ||||||||
Non-cash operating activities: | ||||||||||||||||
Gain on sale of building | (3,089 | ) | - | |||||||||||||
Depreciation | 4,385 | 5,817 | 2,732 | 3,052 | ||||||||||||
Amortization | 1,036 | 951 | 732 | 667 | ||||||||||||
Stock-based compensation | 315 | 287 | 223 | 227 | ||||||||||||
Net long-term tax obligations | 627 | 2,893 | 842 | 320 | ||||||||||||
Deferred taxes | 57 | 821 | 413 | (1 | ) | |||||||||||
Unrealized transaction gain | 66 | (2 | ) | |||||||||||||
Income on equity method investment | (89 | ) | (170 | ) | ||||||||||||
Postretirement benefit and pension obligations | 1,743 | 1,561 | ||||||||||||||
Income from equity method investment | (43 | ) | (73 | ) | ||||||||||||
Working capital changes: | ||||||||||||||||
Accounts receivable | 4,744 | 5,669 | 1,849 | 4,666 | ||||||||||||
Inventories | 1,425 | (10,607 | ) | (3,389 | ) | (661 | ) | |||||||||
Other current assets | 190 | (1,399 | ) | (1,563 | ) | (235 | ) | |||||||||
Other current liabilities | 441 | 499 | (1,026 | ) | (1,307 | ) | ||||||||||
Postretirement benefit and pension obligations | (2,481 | ) | (4,184 | ) | ||||||||||||
Prepaid pension expense | (2,418 | ) | (2,238 | ) | ||||||||||||
Other | 60 | 480 | 188 | (79 | ) | |||||||||||
Net cash provided by operating activities | 11,653 | 6,862 | ||||||||||||||
Net cash provided by (used in) operating activities | (984 | ) | 6,179 | |||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Additions to property, plant and equipment | (4,048 | ) | (4,048 | ) | (2,412 | ) | (3,611 | ) | ||||||||
Software development | (557 | ) | (440 | ) | (368 | ) | (325 | ) | ||||||||
Purchase of investments | - | (45 | ) | |||||||||||||
Proceeds from sale of investments | 7,621 | 201 | - | 7,621 | ||||||||||||
Net cash provided by (used in) investing activities | 3,016 | (4,332 | ) | |||||||||||||
Proceeds from sale of building | 3,321 | - | ||||||||||||||
Net cash provided by investing activities | 541 | 3,685 | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from short-term borrowings | - | 922 | ||||||||||||||
Proceeds from long-term borrowings | 750 | - | - | 750 | ||||||||||||
Long-term debt repayments | (1,822 | ) | (1,159 | ) | (762 | ) | (1,448 | ) | ||||||||
Proceeds from common stock issued | 280 | 325 | 181 | 217 | ||||||||||||
Shares repurchased | (446 | ) | (64 | ) | (33 | ) | (297 | ) | ||||||||
Dividends paid | (2,108 | ) | (2,095 | ) | (1,407 | ) | (1,407 | ) | ||||||||
Net cash used in financing activities | (3,346 | ) | (2,071 | ) | (2,021 | ) | (2,185 | ) | ||||||||
Effect of exchange rate changes on cash | (200 | ) | (3,046 | ) | (603 | ) | (407 | ) | ||||||||
Net increase (decrease) in cash | 11,123 | (2,587 | ) | (3,067 | ) | 7,272 | ||||||||||
Cash, beginning of period | 11,108 | 16,233 | 19,794 | 11,108 | ||||||||||||
Cash, end of period | $ | 22,231 | $ | 13,646 | $ | 16,727 | $ | 18,380 | ||||||||
Supplemental cash flow information: | ||||||||||||||||
Interest paid | $ | 487 | $ | 547 | $ | 302 | $ | 349 | ||||||||
Income taxes paid, net | 732 | 1,238 | 113 | 557 | ||||||||||||
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Notes to Unaudited Consolidated Financial Statements
MarchDecember 31, 2016
Note 1: Basis of Presentation and Summary of Significant Account Policies |
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The balance sheet as of June 30, 2015, which has been derived from audited financial statements, and the unaudited interim financial statements as of and for the three and ninesix months ended MarchDecember 31, 2016 and March 31, 2015, 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 reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. These unaudited 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 financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2015.2016. 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 preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect amounts reported in the consolidated financial statements and accompanying notes. Note 2 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended June 30, 20152016 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.
Note 2:Recent Accounting Pronouncements |
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In May 2014, the FASB issued a new standard related to the “Revenue from Contracts with Customers” which amends the existing accounting standards for revenue recognition. The standard requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. This standard is applicable for fiscal years beginning after December 15, 2017 and for interim periods within those years. Earlier application will be permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company expects to adopt this standard onfor its fiscal year beginning July 1, 2018. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
Accounting Standards Update (ASU)In July 2015, the FASB issued ASU No. 2015-11, "Inventory -(Topic 330): Simplifying the Measurement of Inventory" requires companiesInventory." Previous to measure most inventory at the lowerissuance of cost or net realizable value, thereby simplifying the current guidance under which a company mustthis ASU, ASC 330 required that an entity measure inventory at the lower of cost or market. This Update eliminates the need to determine replacement cost and evaluate whether said cost is within a quantitative range. This Update also further aligns U.S. GAAP and international accounting standards. For public companies, the guidance in ASU 2015-11 specifies that “market” is defined as “net realizable value,” or the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for annual periods beginning after December 15, 2016,fiscal years, and for interim periods thereafter. Early adoption is permitted. Management does not expect ASU 2015-11 to have a material impact on the Company's financial statements and disclosures.
Accounting Standards Update 2015-17, “Balance Sheet Classification of Deferred Taxes” requires that companies classify all deferred taxes as non-current assets or liabilities. This change is applicable forwithin those fiscal years, beginning after December 15, 2016 and for interim periods within those years. There2016. Application is no impact to earningsbe applied prospectively with earlier application permitted as a result of this change; however, current assets will be reduced by the amount of the current deferred tax asset as that amount will be included with the long term deferred tax asset uponbeginning of an interim or annual reporting period. The adoption of this ASU.ASU No. 2015-11 will not have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,Leases “Leases (Topic 842)”. The amendments in this update will increase the transparency and comparability amongASU requires that organizations by recognizingthat lease assets recognize assets and lease liabilities on the balance sheet for the rights and disclosing key information about leasing arrangements.obligations created by those leases. The ASU will affect the presentation of lease related expenses on the income statement and statement of cash flows and will increase the required disclosures related to leases. This amendmentASU is effective for fiscal yearsannual periods beginning after December 15, 2018, includingand interim periods within those fiscal years. Earlythereafter, with early adoption is permitted. The Company is currently evaluating the effect, if any,impact of ASU No. 2016-02 on its consolidated financial statements. It is expected that a key change upon adoption will be the balance sheet recognition of leased assets and liabilities and that any changes in income statement recognition will not be material.
Note 3: Stock-based Compensation |
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On September 5, 2012, the Board of Directors adopted The L.S. Starrett Company 2012 Long Term Incentive Plan (the “2012 Stock Plan”). The 2012 stock plan was approved by shareholders on October 17, 2012. The 2012 Stock Plan permits the granting of the following types of awards to officers, other employees and non-employee directors: stock options; restricted stock awards; unrestricted stock awards; stock appreciation rights; stock units including restricted stock units; performance awards; cash-based awards; and awards other than previously described that are convertible or otherwise based on stock. The 2012 Stock Plan provides for the issuance of up to 500,000 shares of common stock.
Options granted vest in periods ranging from one year to three years and expire ten years after the grant date. Restricted stock units (“RSU”) granted generally vest from one year to three years. Vested restricted stock units will be settled in shares of common stock. As of MarchDecember 31, 2016, there were 20,000 stock options and 73,367105,634 restricted stock units outstanding. In addition, there were 391,600346,600 shares available for grant under the 2012 Stock Plan as of MarchDecember 31, 2016.
For stock option grants the fair value of each grant is estimated at the date of grant using the Binomial Options pricing model. The Binomial Options pricing model utilizes assumptions related to stock volatility, the risk-free interest rate, the dividend yield, and employee exercise behavior. Expected volatilities utilized in the model are based on the historic volatility of the Company’s stock price. The risk free interest rate is derived from the U.S. Treasury Yield curve in effect at the time of the grant. The expected life is determined using the average of the vesting period and contractual term of the options (Simplified Method).
No stock options were granted during the ninesix months ended MarchDecember 31, 2016 and 2015.
The weighted average contractual term for stock options outstanding as ofMarchofDecember 31, 2016 was 6.756 years. The aggregate intrinsic value of stock options outstanding as ofMarchofDecember 31, 2016 was $0.1 million.negligible. Stock options exercisable as ofMarchofDecember 31, 2016 were 20,000.20,000.In recognizing stock compensation expense for the 2012 Stock Incentive Plan management has estimated that there will be no forfeitures of options.
The Company accounts for stock options and RSU awards by recognizing the expense of the grant date fair value ratably over vesting periods generally ranging from one year to three years. The related expense is included in selling, general and administrative expenses.
There were 40,20045,000 RSU awards with a fair value of $15.11$10.86 per RSU granted during the ninesix months ended MarchDecember 31, 2016. There were 9,06712,733 RSUs settled during the ninesix months ended MarchDecember 31, 2016. The aggregate intrinsic value of RSU awards outstanding as of MarchDecember 31, 2016 was $0.8$1.0 million. As of MarchDecember 31, 2016 all vested awards had been issued and settled.
On February 5, 2013, the Board of Directors adopted The L.S. Starrett Company 2013 Employee Stock Ownership Plan (the “2013 ESOP”). The purpose of the plan is to supplement existing Company programs through an employer funded individual account plan dedicated to investment in common stock of the Company, thereby encouraging increased ownership of the Company while providing an additional source of retirement income. The plan is intended as an employee stock ownership plan within the meaning of Section 4975 (e) (7) of the Internal Revenue Code of 1986, as amended. U.S. employees who have completed a year of service are eligible to participate.
Compensation expense related to all stock based plans for the ninesix month periods ended MarchDecember 31, 2016 and 2015 was $0.3$0.2 million and $0.2 million, respectively. As of MarchDecember 31, 2016, there was $1.1$1.4 million of total unrecognized compensation costs related to outstanding stock-based compensation arrangements. Of this cost $0.7$1.1 million relates to performance based RSU grants that are not expected to be awarded. The remaining $0.4$0.3 million is expected to be recognized over a weighted average period of 2.01.6 years.
Note 4: Inventories |
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Inventories consist of the following (in thousands):
3/31/2016 | 6/30/2015 | |||||||||||||||
(Unaudited) | 12/31/2016 | 6/30/2016 | ||||||||||||||
Raw material and supplies | $ | 30,632 | $ | 32,784 | $ | 28,568 | $ | 29,209 | ||||||||
Goods in process and finished parts | 16,493 | 18,569 | 15,394 | 16,459 | ||||||||||||
Finished goods | 38,885 | 39,689 | 42,584 | 39,449 | ||||||||||||
| 86,010 | 91,042 | 86,546 | 85,117 | |||||||||||||
LIFO Reserve | (28,347 | ) | (28,039 | ) | (28,342 | ) | (28,796 | ) | ||||||||
Inventories | $ | 57,663 | $ | 63,003 | $ | 58,204 | $ | 56,321 | ||||||||
LIFO inventories were $10.7$9.7 million and $14.6$10.5 million at MarchDecember 31, 2016 and June 30, 2015,2016, respectively, such amounts being approximately $28.3 million and $28.0$28.8 million, respectively, less than if determined on a FIFO basis. The use of LIFO, as compared to FIFO, resulted in a $0.3$0.5 million increasedecrease in cost of sales for the ninesix months ended MarchDecember 31, 2016 compared to a $0.2$0.4 million increase for the ninesix months ended MarchDecember 31, 2015.
Note 5: Goodwill and Intangible Assets |
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The Company’s acquisition of Bytewise in 2011 gave rise to a goodwill asset balance.goodwill. The Company performed a qualitative analysis in accordance with ASU 2011-08 for its October 1, 20152016 annual assessment of goodwill (commonly referred to as “Step Zero”). From a qualitative perspective, in evaluating whether it is more likely than not that the fair value of the reporting unit exceeds its respective carrying amount, relevant events and circumstances were taken into account, with greater weight assigned to events and circumstances that most affect the fair value or the carrying amounts of its assets. Items that were considered included, but were not limited to, the following: macroeconomic conditions, industry and market conditions, cost factors, overall financial performance and changes in management or key personnel. After assessing these and other factors the Company determined that it was more likely than not that the fair value of the reporting unit exceeded its carrying amount as of October 1, 2015.
2016.
Amortizable intangible assets consist of the following (in thousands):
3/31/2016 | 6/30/2015 | |||||||||||||||
(Unaudited) | 12/31/2016 | 6/30/2016 | ||||||||||||||
Non-compete agreement | $ | 600 | $ | 600 | $ | 600 | $ | 600 | ||||||||
Trademarks and trade names | 1,480 | 1,480 | 1,480 | 1,480 | ||||||||||||
Completed technology | 2,358 | 2,358 | 2,358 | 2,358 | ||||||||||||
Customer relationships | 4,950 | 4,950 | 4,950 | 4,950 | ||||||||||||
Software development | 2,213 | 1,655 | 2,770 | 2,402 | ||||||||||||
Other intangible assets | 325 | 325 | 325 | 325 | ||||||||||||
Total | 11,926 | 11,368 | 12,483 | 12,115 | ||||||||||||
Accumulated amortization | (5,279 | ) | (4,243 | ) | (6,357 | ) | (5,625 | ) | ||||||||
Total net balance | $ | 6,647 | $ | 7,125 | $ | 6,126 | $ | 6,490 | ||||||||
Amortizable intangible assets are being amortized on a straight-line basis over the period of expected economic benefit.
The estimated useful lives of the intangible assets subject to amortization are 14 years for trademarks and trade names, 8 years for non-compete agreements, 10 years for completed technology, 8 years for customer relationships and 5 years for software development.
The estimated aggregate amortization expense for the remainder of fiscal 20162017 and for each of the next five years and thereafter, is as follows (in thousands):
2016 (Remainder of year) | $ | 386 | ||||||
2017 | 1,543 | |||||||
2017 (Remainder of year) | $ | 862 | ||||||
2018 | 1,475 | 1,587 | ||||||
2019 | 1,397 | 1,491 | ||||||
2020 | 873 | 984 | ||||||
2021 | 430 | 581 | ||||||
2022 | 262 | |||||||
Thereafter | 543 | 359 | ||||||
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Note 6: 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 U.K. plan was closed to new entrants in fiscal 2009. The Company has a postretirement medical and life insurance benefit plan for U.S. employees. The Company also has defined contribution plans.
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 will be closed to new participants and current participants will no longer earn additional benefits after December 31, 2016.
The amendment of the defined benefit pension plan triggered a pension curtailment which required a remeasurement of the Plan's obligation as of December 31, 2016. The remeasurement resulted in a decrease in the benefit obligation of approximately $6.9 million primarily due to an increase in the discount rate from 3.77% to 4.31%, with an additional $4.2 million decrease resulting from the impact of the curtailment. These reductions in the Plan’s benefit obligation were recorded as other comprehensive income, net of taxes.
Reconciliation of Funded Status of U.S. Defined Benefit Pension Plan as of December 31, 2016 | ||||
Benefit obligation as of June 30, 2016 | $ | 130,863 | ||
Service cost | 1,405 | |||
Interest cost | 2,457 | |||
Benefits paid | (2,374 | ) | ||
Actuarial (gain)/loss | (8,443 | ) | ||
Benefit obligation prior to curtailment | 123,908 | |||
Effect of curtailment | (4,170 | ) | ||
Benefit obligation as of December 31, 2016 | 119,738 | |||
Fair value of assets | 80,989 | |||
Funded status as of December 31, 2016 | $ | (38,749 | ) | |
Net periodic benefit costs for all of the Company's defined benefit pension plans consist of the following (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
3/31/2016 (Unaudited) | 3/31/2015 (Unaudited) | 3/31/2016 (Unaudited) | 3/31/2015 (Unaudited) | |||||||||||||
Service cost | $ | 714 | $ | 694 | $ | 2,143 | $ | 2,081 | ||||||||
Interest cost | 1,732 | 1,673 | 5,259 | 5,085 | ||||||||||||
Expected return on plan assets | (1,560 | ) | (1,724 | ) | (4,739 | ) | (5,236 | ) | ||||||||
Amortization of net loss | 13 | 7 | 39 | 23 | ||||||||||||
| $ | 899 | $ | 650 | $ | 2,702 | $ | 1,953 | |||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
12/31/2016 (Unaudited) | 12/31/2015 | 12/31/2016 (Unaudited) | 12/31/2015 | |||||||||||||
Service cost | $ | 614 | $ | 715 | $ | 1,405 | $ | 1,429 | ||||||||
Interest cost | 1,533 | 1,759 | 3,085 | 3,527 | ||||||||||||
Expected return on plan assets | (1,288 | ) | (1,585 | ) | (2,594 | ) | (3,179 | ) | ||||||||
Amortization of net loss | 68 | 12 | 96 | 26 | ||||||||||||
| $ | 927 | $ | 901 | $ | 1,992 | $ | 1,803 | |||||||||
Net periodic benefit costs for the Company's Postretirement Medical Plan consists of the following (in thousands):
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
3/31/2016 (Unaudited) | 3/31/2015 (Unaudited) | 3/31/2016 (Unaudited) | 3/31/2015 (Unaudited) | 12/31/2016 (Unaudited) | 12/31/2015 | 12/31/2016 (Unaudited) | 12/31/2015 | |||||||||||||||||||||||||
Service cost | $ | 26 | $ | 29 | $ | 79 | $ | 85 | $ | 24 | $ | 27 | $ | 47 | $ | 53 | ||||||||||||||||
Interest cost | 71 | 61 | 215 | 183 | 68 | 72 | 136 | 144 | ||||||||||||||||||||||||
Amortization of prior service credit | (195 | ) | (200 | ) | (586 | ) | (599 | ) | (169 | ) | (196 | ) | (337 | ) | (391 | ) | ||||||||||||||||
Amortization of net loss | 4 | - | 11 | - | 30 | 3 | 60 | 7 | ||||||||||||||||||||||||
| $ | (94 | ) | $ | (110 | ) | $ | (281 | ) | $ | (331 | ) | $ | (47 | ) | $ | (94 | ) | $ | (94 | ) | $ | (187 | ) | |||||||||
For the six-month period ended December 31, 2016, the Company contributed $1.9 million to the U.S. and $0.5 to the UK pension plans. The Company estimates that it will contribute an additional $3.0 million for the remainder of fiscal 2017.
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, which is the same as the fiscal year end of the Company.date. Net actuarial gains or losses that are less than 10% of the thresholds noted above are accounted for as part of the accumulated other comprehensive loss.
Effective March 31, 2015, the Company terminated the eligibility of employees ages 55 - 64 years old to enter into the Post-retirement Medical Plan.
Note 7: Debt |
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Debt including capitalized lease obligations, is comprised of the following (in thousands):
3/31/2016 (Unaudited) | 6/30/2015 | 12/31/2016 | 6/30/2016 | |||||||||||||
Notes payable and current maturities of long term debt | ||||||||||||||||
Loan and Security Agreement | $ | 1,525 | $ | 1,474 | $ | 1,578 | $ | 1,543 | ||||||||
Capitalized leases | 6 | 78 | ||||||||||||||
| 1,531 | 1,552 | |||||||||||||||
Long-term debt | ||||||||||||||||
Loan and Security Agreement | 17,500 | 18,552 | 16,311 | 17,109 | ||||||||||||
| $ | 19,031 | $ | 20,104 | $ | 17,889 | $ | 18,652 | |||||||||
The Company amended its Loan and Security Agreement, which includes a Line of Credit and a Term Loan, in January 2015 with changes that took effect on April 25, 2015. Borrowings under the Line of Credit may not exceed $23.0 million. The Line of Credit agreement expires on April 30, 2018 and has an interest rate of LIBOR plus 1.5%. The effective interest rate on the Line of Credit under the Loan and Security Agreement for the six months ended December 31, 2016 and 2015 was 2.4% and 2.1%, respectively. Based upon its three year term, the Line of Credit has been classified as long term. As of MarchDecember 31, 2016, $9.4 million was outstanding on the Line of Credit.
The financial covenants of the amended Loan and Security Agreement are: 1) funded debt to EBITDA, excluding non-cash and retirement benefit expenses (“maximum leverage”), not to exceed 2.25 to 1.0 2) annual capital expenditures not to exceed $15.0 million, 3) maintain a Debt Service Coverage Rate of a minimum of 1.25 to 1.0 and 4) maintain consolidated cash plus liquid investments of not less than $10.0 million at any time. The Company was in compliance with all debt covenants as of March 31, 2016.
On November 22, 2011, in conjunction with the Bytewise acquisition, the Company entered into a $15.5 million term loan (the “Term Loan”) under the then existing Loan and Security Agreement with TD Bank N.A.Agreement. The Term Loan is a ten year loan bearing a fixed interest rate of 4.5% and is payable in fixed monthly payments of principal and interest of $160,640. The Term Loan which had a balance of $9.6$8.5 million at MarchDecember 31, 2016, is subject to the same financial covenants contained in the Loan and Security Agreement.2016.
The effective interest rate onmaterial financial covenants of the Line of Credit under theamended Loan and Security Agreement for the nine months ended Marchare: 1) funded debt to EBITDA, excluding non-cash and retirement benefit expenses (“maximum leverage”), not to exceed 2.25 to 1.2) annual capital expenditures not to exceed $15.0 million, 3) maintain a Debt Service Coverage Rate of a minimum of 1.25 to 1 and 4) maintain consolidated cash plus liquid investments of not less than $10.0 million at any time. The Company was in compliance with all debt covenants as of December 31, 2016 and 2015 was 2.2% and 2.0%, respectively.2016.
Note 8: Income Taxes |
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The Company is subject to U.S. federal income tax and various state, local and foreign income taxes in numerous jurisdictions. The Company’s domestic and foreign tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to the Company’s interpretation of applicable tax laws in the jurisdictions in which it files.
The Company provides for income taxes on an interim basis based on an estimate of the effective tax rate for the year. This estimate is reassessed on a quarterly basis. Discrete tax items are accounted for in the quarterly period in which they occur.
The effective tax rate for the thirdsecond quarter of fiscal 2017 was 29.9% and for the second quarter of fiscal 2016, it was 50.2% and the effective tax rate for the third quarter of fiscal 2015 was 30.5%53.8%. For the first nine monthshalf of fiscal 2016,2017, the effective tax rate was 67.2%39.1% and for the first nine monthshalf of fiscal 2015,2016, it was 39.3%. The81.0%.The tax rate in the second quarter of fiscal 2017 is lower than the U.S. statutory rate as a result of earnings in foreign jurisdictions with lower effective tax rates. This benefit was offset as a result of discrete adjustments primarily for the impact of a tax rate change in the U.K. applied to deferred tax assets which increased tax expense by $298,000 in the first quarter. In fiscal 2016, the tax rate is higher than the U.S. statutory rate for the year to date results in partprimarily due to losses in some foreign jurisdictions for which no tax benefit is recognized. In addition, in the third quarterfirst half of fiscal 2016, there was a benefit of $140,000 to reflect the reversal of the valuation allowance to recognize the benefit of foreign subsidiary tax loss carryforwards. In the first nine months of fiscal 2016, there were additional discrete reductions of tax expense of $216,000 for tax return to provision adjustments. In addition, there were discrete increases of $70,000 for interest on audit exposures. In the first nine months of fiscal 2015, there were discrete reductions to tax expense primarily as a result of $66,000 related to use of tax loss carryforwards, $42,000 for reduction in audit exposure due to the expiration of the statute of limitations and $332,000 related to return to provision adjustments; the last item was fully booked in the third quarter which is the primary reason for the tax rate in this quarter being lower than the U.S. statutory rate.adjustments of $200,000.
U.S. Federal tax returns through fiscal 2012 are generally no longer subject to review by tax authorities; however, tax loss carryforwards from years before fiscal 20132012 are still subject to adjustment. As of MarchDecember 31, 2016, the Company has substantially resolved all open income tax audits and there were no other local or federal income tax audits in progress. In international jurisdictions including Australia, Brazil, Canada, China, Germany, Mexico, New Zealand, Singapore and the UK, which comprise a significant portion of the Company’s operations, the years that may be examined vary by country. The Company’s most significant foreign subsidiary in Brazil is subject to audit for the calendar years 20102011 – 2015. The Company has identified no new uncertain tax positions during the nine month period ended March 31, 2016 for which it is currently likely that the total amount of unrecognized tax benefits will significantly increase or decrease withinDuring the next twelve months.months, there are no significant changes expected in the Company’s long term tax obligations for prior year exposures.
Accounting for income taxes requires estimates of future benefits and tax liabilities. Due to the temporary differences in the timing of recognition of items included in income for accounting and tax purposes, deferred tax assets or liabilities are recorded to reflect the impact arising from these differences on future tax payments. With respect to recorded tax assets, the Company assesses the likelihood that the asset will be realized by addressing the positive and negative evidence to determine whether realization is more likely than not to occur. If realization is in doubt because of uncertainty regarding future profitability, the Company provides a valuation allowance related to the asset to the extent that it is more likely than not that the deferred tax asset will not be realized. Should any significant changes in the tax law or the estimate of the necessary valuation allowance occur the Company would record the impact of the change, which could have a material effect on the Company’s financial position.
No valuation allowance has been recorded for the Company’s domestic federal net operating loss (NOL) carry forwards.deferred tax assets related to temporary differences in items included in taxable income. The Company continues to believe that due to forecasted future taxable income and certain tax planning strategies available, it is more likely than not that it will be able to utilize the tax benefit provided by those differences. In the U.S. federal NOL carryforwards., there is a valuation allowance against foreign tax credits to the extent they are limited. In certain other countries where Companycompany operations are in a loss position, the deferred tax assets for tax loss carryforwards and other temporary differences are fully offset by a valuation allowance.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17 ("ASU 2015-17") regarding ASC Topic 740 "Income Taxes: Balance Sheet Classification of Deferred Taxes." The amendments in ASU 2015-17 eliminate the requirement to bifurcate Deferred Taxes between current and non-current on the balance sheet and requires that all deferred tax liabilities and assets be classified as noncurrent on the balance sheet. The amendments for ASU-2015-17 can be applied retrospectively or prospectively and early adoption is permitted. The Company has adopted the new guidance prospectively in the first quarter of fiscal 2017. Prior periods were not retrospectively adjusted.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting." The ASU affects the accounting for employee share-based payment transactions as it relates to accounting for income taxes, accounting for forfeitures, and statutory tax withholding requirements. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those periods with early adoption permitted. The Company has adopted the new guidance prospectively in the first quarter of fiscal 2017.
Note 9: Contingencies |
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The Company is involved in certain legal matters which arise in the normal course of business. These matters are not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.
Note 10. Segment Information
The segment information and the accounting policies of each segment are the same as those described in the notes to the consolidated financial statements entitled “Financial Information by Segment & Geographic Area” included in our Annual Report on Form 10-K for the year ended June 30, 2016. Our 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 unallocated in the table below. Other income and expense, including interest income and expense, the gain on the sale of a building and income taxes are excluded entirely from the table below. There were no significant changes in the segment operations or in the segment assets from the Annual Report. Financial results for each reportable segment are as follows (in thousands):
North American | International Operations | Unallocated | Total | |||||||||||||
Three Months ended December 31, 2016 | ||||||||||||||||
Sales1 | $ | 32,151 | $ | 21,036 | $ | — | $ | 53,187 | ||||||||
Operating Income (Loss) | $ | 2,805 | $ | 636 | $ | (1,612 | ) | $ | 1,829 | |||||||
Three Months ended December 31, 2015 | ||||||||||||||||
Sales2 | $ | 34,304 | $ | 19,367 | $ | — | $ | 53,671 | ||||||||
Operating Income (Loss) | $ | 2,804 | $ | (423 | ) | $ | (1,178 | ) | $ | 1,203 | ||||||
1. | Excludes $2,339 of North American segment sales to the International segment and $2,968 of International segment sales to the North American segment. |
2. | Excludes $2,333 of North American segment sales to the International segment and $2,416 of International segment sales to the North American segment. |
North American | International Operations | Unallocated | Total | |||||||||||||
Six Months ended December 31, 2016 | ||||||||||||||||
Sales3 | $ | 60,554 | $ | 41,546 | $ | — | $ | 102,100 | ||||||||
Operating Income (Loss) | $ | 2,957 | $ | 550 | $ | (3,528 | ) | $ | (21 | ) | ||||||
Six Months ended December 31, 2015 | ||||||||||||||||
Sales4 | $ | 66,715 | $ | 37,994 | $ | — | $ | 104,709 | ||||||||
Operating Income (Loss) | $ | 5,630 | $ | (1,471 | ) | $ | (2,777 | ) | $ | 1,382 | ||||||
3. | Excludes $4,696 of North American segment sales to the International segment and $6,049 of International segment sales to the North American segment. |
4. | Excludes $4,242 of North American segment sales to the International segment and $4,679 of International segment sales to the North American segment. |
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months EndedMarchDecember 31, 2016 andMarchDecember 31, 2015
Overview
The Company operates as a global business and is impacted by worldwide economic,managed through the political and industrial shifts. A slowdown ineconomic volatility of the manufacturing sector coupled with a retrenchment inquarter posting flat revenue and higher net income. The North American market suffered from the oil patch negatively impacted revenue in North America,uncertainty of decisions regarding major investments as the high-end Metrology sales declined 15%, while the international markets continue to be stagnantInternational saw and hand tool business improved, especially in Europe, recessionary in Latin America and softening in China. In addition, the strong U. S. dollar has negatively impacted demand for domestic products and reduced foreign subsidiary’s contribution to consolidated sales.
Brazil.
Net sales decreased $5.8$0.5 million or 10%1% from $56.1 million in fiscal 2015 to $50.3$53.7 million in fiscal 2016 to $53.2 million in fiscal 2017 with North America declining $2.1 million and International accounting for $4.3 million or 75% of the shortfall.growing $1.6 million. Operating income declined $2.2increased $0.6 million due to $4.0as a $0.8 million erosionimprovement in gross margin more thanwas only partially offset by a $1.8$0.2 million decreaseincrease in selling, general and administrative expenses.expenses plus restructuring charges of $0.1 million.
Net Sales
North American sales decreased $1.5$2.1 million or 4%6% from $34.0 million in fiscal 2015 to $32.5$34.3 million in fiscal 2016 asto $32.2 million in fiscal 2017 due to a weakening in manufacturing activity resulted in reduced demand for precision hand tool and saw products more than offsetting continued gains in capital equipment metrology products.
International sales declined $4.3increased $1.6 million or 19%8% from $22.1 million in fiscal 2015 to $17.8$19.4 million in fiscal 2016 as a recession in Brazil; an economic slowdown in China; the unfavorable pricing impact of a strong dollar; and $3.3to $21.0 million in currency losses all contributedfiscal 2017 due to difficult trading overseas.organic growth in Europe and a 15% improvement of the Brazilian Real to the US dollar offsetting a weak pound sterling.
Gross Margin
Gross margin decreased $4.0increased $0.8 million or 21%5% from 33%30% of sales in fiscal 20152016 to 32% of sales in fiscal 2017.
North American gross margins decreased $0.5 million from $9.9 million or 29% of sales in fiscal 2016 with the profit impact of lower revenues and margin decline representing $1.9 million and $2.1 million, respectively.
North American gross margins decreased $2.7 million from $12.1 million or 36% of sales in fiscal 2015 to $9.4 million or 29% of sales in fiscal 2016. The reduced gross margins were the result2017 due to product mix related to lower sales of a revenue decline in precision hand tool and saw product lines without a comparable reduction in overhead costs more than offsetting gains in thehigher margin capital equipment gross margins.
products.
International gross margins declinedincreased $1.3 million from $6.6 million in fiscal 2015 to $5.3 million31% of sales in fiscal 2016 to 35% of sales in fiscal 2017 based upon an improved international performance with volume declineshigher margins in Europe and unfavorablea favorable exchange rates impacting Brazil performance by $0.4 and $0.8 million, respectivelyrate relative to the Brazilian Real to the US dollar.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, decreased $1.8including restructuring charges, increased $0.2 million or 12%1% from 15.6$14.8 million in fiscal 20152016 to $13.8$15.0 million in fiscal 2016.2017.
North American expenses, including Corporate, decreased $0.2$0.1 million from $8.4$8.3 million in fiscal 20152016 to $8.2 million in fiscal 20162017 as reduced salariesemployee and incentive compensation more thancommission expenses offset higher employee benefits, professional fees and marketing expenses.
fees.
International expenses declined $1.6increased $0.3 million or 22% as5% due principally to the strongweakening of the US dollar resulted in a $0.8 million decrease in Brazilian expenses expressed in U. S. dollars asto the Brazilian currency declined 24% in the quarter versus the prior year. In addition to currency differences, Brazil reduced salaries, employee benefits, and professional fees $0.7 million in constant exchanges rates.Real.
Other Income(Expense)
Other income declinedexpense increased $0.1 million primarily due to reduced interest income as foreign exchange and interest expense remained level in both periodstranslation losses.
Income Taxes
The effective tax rate for the thirdsecond quarter of fiscal 2017 and 2016 were 30% and 2015 was 50% and 31%54%, respectively. The quarterly tax rate increasedis lower than a normalized combined federal and state rate of approximately 40% due to lossesprofits in some foreign subsidiaries for which nowith lower effective tax benefit is recognized.rates. The tax rate was reduced byincludes discrete benefitstax expense of $0.1 million in fiscal 2016 and $0.32017 compared to a $0.1 million tax benefit in fiscal 2015.2016.
Net Income
The Company recorded net income of $0.6$1.1 million or $0.08$0.15 per diluted share in the thirdsecond quarter of fiscal 20162017 compared to net income of $2.4$0.5 million or $0.35$0.07 per share in fiscal 20152016 principally due to reduced operating incomehigher Operating Income and a higherlower effective tax rate.
Nine months ended MarchSix Months Ended December 31,2016 and December 31,March 31, 2015
Overview
Net sales declined $25.1$2.6 million or 14%3% from $180.1 million in fiscal 2015 to $155.0$104.7 million in fiscal 2016 with North America and International posting declines of $4.3 and $20.8to $102.1 million respectively.in fiscal 2017. Operating income decreased $5.6$1.4 million in fiscal 20162017 from $7.9$1.4 million profit in fiscal 20152016 compared to $2.3$0.0 million or breakeven in fiscal 20162017 as lower sales and related gross margins more than offset reduced selling, general and administrative expenses.
Net Sales
North American sales decreased $4.3$6.2 million or 4%9% from $103.5 million in fiscal 2015 to $99.2$66.7 million in fiscal 2016 as demand for allto $60.5 million in fiscal 2017 due to lower precision hand tools declined, particularly in the oiltool and agricultural sectors.high end metrology shipments.
International sales declined $20.8increased $3.6 million or 27%10% from $76.6 million in fiscal 2015 to $55.8$38.0 million in fiscal 2016 to $41.6 million in fiscal 2017 with unfavorablestrong organic growth in Brazil. The weakening British Pound offset the strengthening Brazilian Real resulting in no impact related to foreign exchange rates representing $15.0 million. The impact of a recessionary economic environment was significant in Brazil as revenue declined 8% in local currency.rates.
Gross Margin
Gross margin decreased $13.4$1.1 million or 22% from 33% of sales in fiscal 2015 to3% but remained level at 30% of sales in fiscal 2016 with the profit impact of lower revenues and margin decline representing $8.4 and $5.0 million, respectively.
sales.
North American gross margins decreased $5.4$3.4 million or 16%17% in fiscal 20162017 compared to fiscal 2015 as a result2016 due to lower sales of reduced precision hand tool and saw product line revenues and increased costs.higher margin capital equipment products.
International gross margins declined $8.0increased $2.3 million with weakening currenciesvolume and margin improvement representing $4.7 million. Excluding foreign exchange economic factors impacting margins, volume declines represented $1.5$1.1 and $1.1$1.2 million, in Brazil and Europe, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expense decreased $7.8$0.1 million or 15%1% from $52.1$30.5 million in fiscal 20152016 to $44.3$30.4 million in fiscal 2016.2017.
North American expenses, including Corporate, decreased $2.4$0.5 million or 9% due to termination of profit sharing in November of 2014 related to the Bytewise acquisition;3% as lower incentive compensation; reducedcommissions and travel expenses more than offset higher professional fees; and completion of software amortization in fiscal 2015 related to a new ERP system.fees.
International expenses decreased $5.4increased $0.4 million or 22%3% due toincreased selling expenses and a $4.9 foreign currency reduction for expenses expressed in U. S. dollars, primarily due to a weakening ofstrengthening Brazilian Reals versus the Brazilian Real relative to the U. S.US dollar. In addition, reduced spending for salaries, employee benefits and commissions contributed a combined $0.6 million.
Other Income(Expense)
Other income declined $1.3$0.2 million principally due to lower interest income and the devalued Chinese Yuan, which increased our Chinese subsidiary’ U. S. dollar denominated liabilities.foreign exchange translation losses.
Income Taxes
The effective tax raterates for the first nine monthshalf of fiscal 2017 and 2016 were 39% and 2015 was 67% and 39%81%, respectively. The effective tax rate for the first nine months ended March 31,is slightly lower than federal and state statutory rates of approximately 40% in fiscal 2017 due to profits in foreign jurisdictions subject to lower effective rates which was partly offset by a discrete net increase in tax expense of $0.3 million. The effective rate in fiscal 2016 and 2015 increased as a result ofis higher due to losses in some foreign subsidiaries for which no tax benefit wasis recognized and was reduced by net discrete benefits of $0.3 million in fiscal 2016 and $0.4 million in fiscal 2015.consolidation.
Net Income
The Company recorded net income of $0.9$1.8 million or $0.12$0.26 per diluted share in the first three quartershalf of fiscal 20162017 compared to net income of $5.8$0.3 million or $0.83$0.04 per share in fiscal 20152016 principally due to lower operating income, reduced other income and a higher effectivean after tax rate.gain of $1.6 million on the sale of the Canadian distribution facility in the first quarter of fiscal 2017.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows (in thousands) | Nine Months Ended | Six Months Ended | ||||||||||||||
3/31/2016 | 3/31/2015 | 12/31/2016 | 12/31/2015 | |||||||||||||
Cash provided by operating activities | $ | 11,653 | $ | 6,862 | ||||||||||||
Cash provided by (used in) investing activities | 3,016 | (4,332 | ) | |||||||||||||
Cash provided by (used in) operating activities | $ | (984 | ) | $ | 6,179 | |||||||||||
Cash provided by investing activities | 541 | 3,685 | ||||||||||||||
Cash used in financing activities | (3,346 | ) | (2,071 | ) | (2,021 | ) | (2,185 | ) | ||||||||
Effect of exchange rate changes on cash | (200 | ) | (3,046 | ) | (603 | ) | (407 | ) | ||||||||
Net increase (decrease) in cash | $ | 11,123 | $ | (2,587 | ) | $ | (3,067 | ) | $ | 7,272 | ||||||
NetFiscal 2017 net cash for the ninesix months ended MarchDecember 31, 2016 increased $11.1decreased $3.1 million primarily due to Net Income of $1.8 million and proceeds of $3.3 million from June 30, 2015 as improved working capital and the sale of investments of $6.8 and $7.6 million, respectively,the Canadian distribution facility which were offset by $4.0 inincreased working capital of $4.1 million; prepaid payments to the pension of $2.4 million; and property plant and equipment expenditures.expenditures of $2.4 million.
Net cash for the nine months ended March 31, 2016 improved $13.7 million compared to the nine months ended March 31, 2015 primarily due to the sale of investments of $7.6 million, improved working capital and a reduced impact of foreign currency exchange rates on cash balances.
Liquidity and Credit Arrangements
The Company believes it maintains sufficient liquidity and has the resources to fund its operations. In addition to its cash, the Company maintains a $23 million line of credit in connection with its Loan and Security Agreement, of which, $9.4 million was outstanding as of MarchDecember 31, 2016. Availability under the agreement is further reduced by open letters of credit totaling $0.9 million. The Loan and Security Agreement was renewed in January of 2015. The Loan and Security Agreement contains financial covenants with respect to leverage, tangible net worth, and interest coverage, and also contains customary affirmative and negative covenants, including limitations on indebtedness, liens, acquisitions, asset dispositions and fundamental corporate changes, and certain customary events of default. As of MarchDecember 31, 2016, the Company was in compliance with all debt covenants related to its Loan and Security Agreement. The Loan and Security Agreement expires on April 30, 2018.2018 and the Company plans to negotiate an extension to the agreement.
The effective interest rate on the borrowings under the Loan and Security Agreement during the ninesix months ended MarchDecember 31, 2016 and 2015 was 2.2%2.4% and 2.0%2.1% respectively.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
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There have been no material changes in qualitative and quantitative disclosures about market risk from what was reported in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015.2016.
ITEM 4. CONTROLS AND PROCEDURES |
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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 MarchDecember 31, 2016, 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 MarchDecember 31, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
There have been no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting during the quarter ended MarchDecember 31, 2016.
PART II. OTHER INFORMATION |
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ITEM 1A. RISK FACTORS |
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SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements about the Company’s business, competition, sales, expenditures, foreign operations, plans for reorganization, interest rate sensitivity, debt service, liquidity and capital resources, and other operating and capital requirements. In addition, forward-looking statements may be included in future Company documents and in oral statements by Company representatives to securities analysts and investors. The Company is subject to risks that could cause actual events to vary materially from such forward-looking statements. You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results set forth under Item 1A. “Risk Factors” in our Form 10-K for the year ended June 30, 2015.2016. There have been no material changes from the factors disclosed in our Form 10-K for the year ended June 30, 2015.2016.
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ITEM 6. EXHIBITS
31a | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
31b | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
32 | Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
10.1 | The L.S. Starrett Company 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 4.2 to The L.S. Starrett Company’s Registration Statement on Form S-8 (File No. 333-184934) filed November 14, 2012). |
101 | The following materials from The L. S. Starrett Company’s Quarterly Report on Form 10-Q for the quarter ended |
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 |
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| /S/R. Douglas A. Starrett |
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| Douglas A. Starrett - President and CEO (Principal Executive Officer) |
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| /S/R. Francis J. O’Brien |
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| Francis J. O’Brien - Treasurer and CFO (Principal Accounting Officer) |
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