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 |
|
|
| |
OR | ||
|
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from |
| to |
|
| Commission file number | 1-367 |
THE L. S. STARRETT COMPANY |
(Exact name of registrant as specified in its charter) |
MASSACHUSETTS |
| 04-1866480 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
121 CRESCENT STREET, ATHOL, MASSACHUSETTS | 01331-1915 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code | 978-249-3551 |
| |
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, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
|
|
| |
|
| |||
|
| |||
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 |
|
|
|
|
|
| |
Class A Common Shares |
|
|
|
|
|
| |
Class B Common Shares |
|
|
|
THE L. S. STARRETT COMPANY
CONTENTS
|
|
| Page No. | |||
|
|
|
| |||
Part I. | Financial Information: |
| ||||
|
|
|
| |||
| Item 1. | Financial Statements |
| |||
|
|
|
| |||
|
| Consolidated Balance Sheets – | 3 | |||
|
|
|
| |||
|
|
| 4 | |||
|
|
|
| |||
|
| Consolidated Statements of Comprehensive Income (Loss) – three and | 5 | |||
|
|
|
| |||
|
| Consolidated Statements of Stockholders' Equity – | 6 | |||
|
|
|
| |||
|
| Consolidated Statements of Cash Flows - | 7 | |||
|
|
|
| |||
|
| Notes to Unaudited Consolidated Financial Statements |
| |||
|
|
|
| |||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 15-18 | |||
|
|
|
| |||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 18 | |||
|
|
|
| |||
| Item 4. | Controls and Procedures | 18 | |||
Part II. | Other Information: | |||||
Item 1A. | Risk Factors | 19 | ||||
Item 6. | Exhibits | 20 | ||||
|
|
| ||||
SIGNATURES |
|
|
| |||
|
|
| ||||
|
|
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE L. S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands except share data)
March 31, 2017 (unaudited) | June 30, 2016 | 12/31/2017 (unaudited) | 06/30/2017 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 17,061 | $ | 19,794 | $ | 15,131 | $ | 14,607 | ||||||||
Accounts receivable (less allowance for doubtful accounts of $773 and $887, respectively) | 28,006 | 34,367 | ||||||||||||||
Accounts receivable (less allowance for doubtful accounts of $1,162 and $946, respectively) | 29,349 | 30,425 | ||||||||||||||
Inventories | 58,225 | 56,321 | 61,789 | 58,097 | ||||||||||||
Current deferred income tax assets | - | 4,518 | ||||||||||||||
Prepaid expenses and other current assets | 7,381 | 5,911 | 8,860 | 6,994 | ||||||||||||
Total current assets | 110,673 | 120,911 | 115,129 | 110,123 | ||||||||||||
Property, plant and equipment, net | 39,963 | 41,010 | 39,265 | 39,345 | ||||||||||||
Income taxes receivable | 2,547 | 2,655 | ||||||||||||||
Deferred income tax assets, net of current portion | 24,198 | 25,284 | ||||||||||||||
Taxes receivable | 2,716 | 2,627 | ||||||||||||||
Deferred tax assets, net | 18,856 | 26,032 | ||||||||||||||
Intangible assets, net | 8,370 | 6,490 | 9,563 | 9,868 | ||||||||||||
Goodwill | 5,652 | 3,034 | 4,668 | 4,668 | ||||||||||||
Other assets | 2 | 2,214 | - | 2 | ||||||||||||
Total assets | $ | 191,405 | $ | 201,598 | $ | 190,197 | $ | 192,665 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Notes payable and current maturities of long-term debt | $ | 1,596 | $ | 1,543 | ||||||||||||
Current maturities of long-term debt | $ | 17,051 | $ | 11,514 | ||||||||||||
Accounts payable | 8,278 | 8,981 | 9,084 | 8,366 | ||||||||||||
Accrued expenses | 5,016 | 6,372 | 6,618 | 5,424 | ||||||||||||
Accrued compensation | 4,441 | 4,922 | 4,090 | 5,435 | ||||||||||||
Total current liabilities | 19,331 | 21,818 | 36,843 | 30,739 | ||||||||||||
Other tax obligations | 4,016 | 3,645 | ||||||||||||||
Long-term debt, net of current portion | 15,904 | 17,109 | 5,261 | 6,095 | ||||||||||||
Other income tax obligations | 3,773 | 3,813 | ||||||||||||||
Deferred income tax liabilities | - | 187 | ||||||||||||||
Postretirement benefit and pension obligations | 53,804 | 67,158 | 57,415 | 58,571 | ||||||||||||
Other non-current liabilities | 1,569 | - | 1,630 | 1,589 | ||||||||||||
Total liabilities | 94,381 | 110,085 | 105,165 | 100,639 | ||||||||||||
Stockholders' equity: | ||||||||||||||||
Class A Common stock $1 par (20,000,000 shares authorized; 6,296,769 outstanding at March 31, 2017 and 6,249,563 outstanding at June 30, 2016) | 6,297 | 6,250 | ||||||||||||||
Class B Common stock $1 par (10,000,000 shares authorized; 761,630 outstanding at March 31, 2017 and 772,742 outstanding at June 30, 2016) | 762 | 773 | ||||||||||||||
Class A Common stock $1 par (20,000,000 shares authorized; 6,254,182 outstanding at December 31, 2017 and 6,267,603 outstanding at June 30, 2017) | 6,254 | 6,268 | ||||||||||||||
Class B Common stock $1 par (10,000,000 shares authorized; 758,954 outstanding at December 31, 2017 and 761,588 outstanding at June 30, 2017) | 759 | 762 | ||||||||||||||
Additional paid-in capital | 55,702 | 55,227 | 55,467 | 55,579 | ||||||||||||
Retained earnings | 80,151 | 81,228 | 71,906 | 79,402 | ||||||||||||
Accumulated other comprehensive loss | (45,888 | ) | (51,965 | ) | (49,354 | ) | (49,985 | ) | ||||||||
Total stockholders' equity | 97,024 | 91,513 | 85,032 | 92,026 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 191,405 | $ | 201,598 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 190,197 | $ | 192,665 |
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 | |||||||||||||||||||||||||||||
3/31/2017 | 3/31/2016 | 3/31/2017 | 3/31/2016 | 12/31/2017 | 12/31/2016 | 12/31/2017 | 12/31/2016 | |||||||||||||||||||||||||
Net sales | $ | 50,670 | $ | 50,329 | $ | 152,770 | $ | 155,038 | $ | 52,124 | $ | 53,187 | $ | 103,942 | $ | 102,100 | ||||||||||||||||
Cost of goods sold | 36,191 | 35,596 | 107,555 | 108,454 | 36,194 | 36,365 | 71,473 | 71,364 | ||||||||||||||||||||||||
Gross margin | 14,479 | 14,733 | 45,215 | 46,584 | 15,930 | 16,822 | 32,469 | 30,736 | ||||||||||||||||||||||||
% of Net sales | 28.6 | % | 29.3 | % | 29.6 | % | 30.0 | % | 30.6 | % | 31.6 | % | 31.2 | % | 30.1 | % | ||||||||||||||||
Selling, general and administrative expenses | 15,326 | 13,819 | 45,689 | 44,288 | 15,486 | 14,942 | 31,576 | 30,363 | ||||||||||||||||||||||||
Restructuring charges | 6 | - | 400 | - | - | 51 | - | 394 | ||||||||||||||||||||||||
Operating income (loss) | (853 | ) | 914 | (874 | ) | 2,296 | 444 | 1,829 | 893 | (21 | ) | |||||||||||||||||||||
Other income (expense) | (391 | ) | 285 | (466 | ) | 377 | 653 | (312 | ) | 844 | (75 | ) | ||||||||||||||||||||
Gain on sale of building | - | - | 3,089 | �� | - | - | - | - | 3,089 | |||||||||||||||||||||||
Income (loss) before income taxes | (1,244 | ) | 1,199 | 1,749 | 2,673 | 1,097 | 1,517 | 1,737 | 2,993 | |||||||||||||||||||||||
Income tax expense (benefit) | (458 | ) | 602 | 713 | 1,796 | |||||||||||||||||||||||||||
Income tax expense | 7,618 | 454 | 7,832 | 1,171 | ||||||||||||||||||||||||||||
Net income (loss) | $ | (786 | ) | $ | 597 | $ | 1,036 | $ | 877 | $ | (6,521 | ) | $ | 1,063 | $ | (6,095 | ) | $ | 1,822 | |||||||||||||
Basic income (loss) per share | $ | (0.11 | ) | $ | .09 | $ | 0.15 | $ | 0.13 | $ | (0.93 | ) | $ | 0.15 | $ | (0.87 | ) | $ | 0.26 | |||||||||||||
Diluted income (loss) per share | $ | (0.11 | ) | $ | .08 | $ | 0.15 | $ | 0.12 | $ | (0.93 | ) | $ | 0.15 | $ | (0.87 | ) | $ | 0.26 | |||||||||||||
Weighted average outstanding shares used in per share calculations: | ||||||||||||||||||||||||||||||||
Basic | 7,058 | 7,013 | 7,046 | 7,016 | 7,008 | 7,050 | 7,009 | 7,039 | ||||||||||||||||||||||||
Diluted | 7,058 | 7,031 | 7,078 | 7,045 | 7,008 | 7,068 | 7,009 | 7,068 | ||||||||||||||||||||||||
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 | 6 Months Ended | |||||||||||||||
12/31/2017 | 12/31/2016 | 12/31/2017 | 12/31/2016 | |||||||||||||
Net income (loss) | $ | (6,521 | ) | $ | 1,063 | $ | (6,095 | ) | $ | 1,822 | ||||||
Other comprehensive income (loss): | ||||||||||||||||
Currency translation gain (loss net of tax) | (1,576 | ) | (988 | ) | 685 | (1,756 | ) | |||||||||
Pension and postretirement plans, net of tax of $0, $3,958, $0, and $3,958, respectively | (27 | ) | 6,469 | (54 | ) | 6,422 | ||||||||||
Other comprehensive income (loss) | (1,603 | ) | 5,481 | 631 | 4,666 | |||||||||||
Total comprehensive income (loss) | $ | (8,124 | ) | $ | 6,544 | $ | (5,464 | ) | $ | 6,488 |
3 Months Ended | 9 Months Ended | |||||||||||||||
3/31/2017 | 3/31/2016 | 3/31/2017 | 3/31/2016 | |||||||||||||
Net income (loss) | $ | (786 | ) | $ | 597 | $ | 1,036 | $ | 877 | |||||||
Other comprehensive income (loss): | ||||||||||||||||
Translation gain (loss) | 1,456 | 2,906 | (300 | ) | (6,772 | ) | ||||||||||
Pension and postretirement plans, net of tax of $0,$0,$3,958 and $0 respectively | (45 | ) | - | 6,377 | - | |||||||||||
Other comprehensive income (loss) | 1,411 | 2,906 | 6,077 | (6,772 | ) | |||||||||||
Total comprehensive income (loss) | $ | 625 | $ | 3,503 | $ | 7,113 | $ | (5,895 | ) |
See Notes to Unaudited Consolidated Financial Statements
THETHE L. S. STARRETT COMPANY
Consolidated Statements of Stockholders' Equity
For the NineSix Months Ended MarchDecember 31, 2017
(in thousands except per share data) (unaudited)
Common Stock Outstanding | Addi- tional Paid-in | Retained | Accumulated Other Com-prehensive | |||||||||||||||||||||
Class A | Class B | Capital | Earnings | Loss | Total | |||||||||||||||||||
Balance June 30, 2016 | $ | 6,250 | $ | 773 | $ | 55,227 | $ | 81,228 | $ | (51,965 | ) | $ | 91,513 | |||||||||||
Total comprehensive income | - | - | - | 1,036 | 6,077 | 7,113 | ||||||||||||||||||
Dividends ($0.30 per share) | - | - | - | (2,113 | ) | - | (2,113 | ) | ||||||||||||||||
Repurchase of shares | - | (5 | ) | (46 | ) | - | - | (51 | ) | |||||||||||||||
Issuance of stock | 18 | 7 | 217 | - | - | 242 | ||||||||||||||||||
Stock-based compensation | 16 | - | 304 | - | - | 320 | ||||||||||||||||||
Conversion | 13 | (13 | ) | - | - | - | - | |||||||||||||||||
Balance March 31, 2017 | $ | 6,297 | $ | 762 | $ | 55,702 | $ | 80,151 | $ | (45,888 | ) | $ | 97,024 | |||||||||||
Accumulated balance consists of: | ||||||||||||||||||||||||
Translation loss | $ | (42,186 | ) | |||||||||||||||||||||
Pension and postretirement plans, net of taxes | (3,702 | ) | ||||||||||||||||||||||
$ | (45,888 | ) |
Common Stock Outstanding | Additional Paid-in | Retained | Accumulated Other Comprehensive | |||||||||||||||||||||
Class A | Class B | Capital | Earnings | Loss | Total | |||||||||||||||||||
Balance June 30, 2017 | $ | 6,268 | $ | 762 | $ | 55,579 | $ | 79,402 | $ | (49,985 | ) | $ | 92,026 | |||||||||||
Total comprehensive income (loss) | - | - | - | (6,095 | ) | 631 | (5,464 | ) | ||||||||||||||||
Dividends ($0.20 per share) | - | - | - | (1,401 | ) | - | (1,401 | ) | ||||||||||||||||
Repurchase of shares | (58 | ) | (4 | ) | (472 | ) | - | - | (534 | ) | ||||||||||||||
Issuance of stock | 13 | 14 | 193 | - | - | 220 | ||||||||||||||||||
Stock-based compensation | 18 | - | 167 | - | - | 185 | ||||||||||||||||||
Conversion | 13 | (13 | ) | - | - | - | - | |||||||||||||||||
Balance December 31, 2017 | $ | 6,254 | $ | 759 | $ | 55,467 | $ | 71,906 | $ | (49,354 | ) | $ | 85,032 | |||||||||||
Accumulated balance consists of: | ||||||||||||||||||||||||
Translation loss | $ | (42,638 | ) | |||||||||||||||||||||
Pension and postretirement plans, net of taxes | (6,716 | ) | ||||||||||||||||||||||
$ | (49,354 | ) |
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Consolidated Statements of Cash Flows
(in thousands of dollars)thousands) (unaudited)
9 Months Ended | 6 Months Ended | |||||||||||||||
3/31/2017 | 3/31/2016 | 12/31/2017 | 12/31/2016 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 1,036 | $ | 877 | ||||||||||||
Net income (loss) | $ | (6,095 | ) | $ | 1,822 | |||||||||||
Non-cash operating activities: | ||||||||||||||||
Gain on sale of building | (3,089 | ) | - | - | (3,089 | ) | ||||||||||
Depreciation | 4,020 | 4,385 | 2,802 | 2,732 | ||||||||||||
Amortization | 1,280 | 1,036 | 978 | 732 | ||||||||||||
Stock-based compensation | 320 | 315 | 185 | 223 | ||||||||||||
Net long-term tax obligations | (31 | ) | 627 | 343 | 842 | |||||||||||
Deferred taxes | 702 | 57 | 7,250 | 413 | ||||||||||||
Postretirement benefit and pension obligations | 1,916 | 2,342 | 294 | 1,743 | ||||||||||||
(Income) loss from equity method investment | 223 | (89 | ) | - | (43 | ) | ||||||||||
Working capital changes, net of effects of business acquisition: | ||||||||||||||||
Working capital changes: | ||||||||||||||||
Accounts receivable | 6,200 | 4,744 | 1,618 | 1,849 | ||||||||||||
Inventories | (2,184 | ) | 1,425 | (3,245 | ) | (3,389 | ) | |||||||||
Other current assets | (1,501 | ) | 190 | (1,874 | ) | (1,563 | ) | |||||||||
Other current liabilities | (1,790 | ) | 507 | 179 | (1,026 | ) | ||||||||||
Prepaid pension expense | (4,303 | ) | (4,823 | ) | (1,857 | ) | (2,418 | ) | ||||||||
Other | 222 | 60 | 57 | 188 | ||||||||||||
Net cash provided by operating activities | 3,021 | 11,653 | ||||||||||||||
Net cash provided by (used in) operating activities | 635 | (984 | ) | |||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Business acquisition, net of cash acquired and long-term liability | (1,324 | ) | - | |||||||||||||
Additions to property, plant and equipment | (3,478 | ) | (4,048 | ) | (2,625 | ) | (2,412 | ) | ||||||||
Software development | (750 | ) | (557 | ) | (633 | ) | (368 | ) | ||||||||
Proceeds from sale of investments | - | 7,621 | ||||||||||||||
Proceeds from sale of building | 3,321 | - | - | 3,321 | ||||||||||||
Net cash provided by (used in) investing activities | (2,231 | ) | 3,016 | (3,258 | ) | 541 | ||||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from long-term borrowings | - | 750 | ||||||||||||||
Proceeds from borrowings | 5,500 | - | ||||||||||||||
Long-term debt repayments | (1,151 | ) | (1,822 | ) | (797 | ) | (762 | ) | ||||||||
Proceeds from common stock issued | 242 | 280 | 220 | 181 | ||||||||||||
Shares repurchased | (51 | ) | (446 | ) | (534 | ) | (33 | ) | ||||||||
Dividends paid | (2,113 | ) | (2,108 | ) | (1,401 | ) | (1,407 | ) | ||||||||
Net cash used in financing activities | (3,073 | ) | (3,346 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 2,988 | (2,021 | ) | |||||||||||||
Effect of exchange rate changes on cash | (450 | ) | (200 | ) | 159 | (603 | ) | |||||||||
Net increase (decrease) in cash | (2,733 | ) | 11,123 | 524 | (3,067 | ) | ||||||||||
Cash, beginning of period | 19,794 | 11,108 | 14,607 | 19,794 | ||||||||||||
Cash, end of period | $ | 17,061 | $ | 22,231 | $ | 15,131 | $ | 16,727 | ||||||||
Supplemental cash flow information: | ||||||||||||||||
Interest paid | $ | 474 | $ | 487 | $ | 307 | $ | 302 | ||||||||
Income taxes paid, net | (213 | ) | 732 | (323 | ) | 113 |
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Notes to Unaudited Consolidated Financial Statements
MarchDecember 31, 2017
Note 1: Basis of Presentation and Summary of Significant Account Policies
The unaudited interim financial statements as of and for the three and ninesix months ended MarchDecember 31, 2017 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-K10-K for the year ended June 30, 2016. 2017. 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-K10-K for the year ended June 30, 2016 2017 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.
Note 2: Recent Accounting Pronouncements
In May 2014, the FASB issued a new standard related to “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 on a modified retrospective basis for its fiscal year beginning July 1,2018.
The Company is currently evaluatingprimarily sells goods and recognizes revenues at point of sale or delivery, which will not change under the impactnew standard. However, a full assessment of the adoptionnew standard’s impact on all the Company’s revenue streams ahead of this standard on its consolidated financial statements. implementation in the next fiscal year is still in process.
In July 2015, February 2016, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." Previous to the issuance of this ASU, ASC 330 required that an entity measure inventory at the lower of cost or market. 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 fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Application is to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of 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,-02, “Leases (Topic 842)842)”. The ASU requires that organizations that lease assets recognize assets and liabilities on the balance sheet for the rights and 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 ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of ASU No. 2016-022016-02 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.
InOctober 2016, the FASB issued ASU No. 2016-16,2016-16, "Income Taxes (Topic 740)740): Intra-Entity Transfers of Assets Other Than Inventory,"Inventory", which is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This update removes the current exception in GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory,within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The amendments in this update are effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the impact of the future adoption of this updateASU No.2016-16 is not expected to have a material impact on itsthe Company’s consolidated financial statements.
InJanuary 2017,the FASB issued ASU No. 2017-01,2017-01, "Business Combinations (Topic 805)805) - Clarifying the Definition of a Business,"Business", with the objective to assist entities with evaluating whether transactions should be accounted for as acquisitions ( or(or disposals) of assets versus businesses. The amendments in ASU 2017-012017-01 provide a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired ( or(or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen is expected to reduce the number of transactions that need to be further evaluated. IftheIf the screen is not met, the amendments in ASU 2017-012017-01 (i) require that to be considered a business, a set of assets and liabilities acquired must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output; and (ii) remove the evaluation of whether a market participant could replace missing elements. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2017 and should be applied prospectively. Early adoption is permitted for transactions for which the acquisition date occurs before the issuance date of ASU 2017-01,2017-01,only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The Company is currently assessing the impact of the adoption of this updateASU No.2017-01 is not expected to have a material impact on itsthe Company’s consolidated financial statements.
InJanuary 2017,the FASB issued ASU No. 2017-04,2017-04, "Intangibles-Goodwill and Other (Topic 350)350): Simplifying the Test for Goodwill Impairment."Impairment". Under the new guidance, if a reporting unit's carrying value amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates today'sthe requirement to calculate goodwill impairment using Step 2, which calculates anyan impairment charge by comparing the implied fair value of goodwill with its carrying amount. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2019 and should be applied prospectively for annual and any interim goodwill impairment tests. Early adoption is permitted for entities for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the update on ourits consolidated financial statements.
Note 3: Stock-based Compensation
On September 5, 2012, the Board of Directors adopted The L.S. Starrett Company 2012 Long Term Incentive Plan (the “2012“2012 Stock Plan”). The 2012 stock plan was approved by shareholders on October 17, 2012. 2012, and the material terms of its performance goals were recently re-approved by shareholders at the Company’s Annual Meeting held on October 18, 2017. 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, 2017, there were 20,000 stock options and 105,634153,235 restricted stock units outstanding. In addition, there were 346,600284,600 shares available for grant under the 2012 Stock Plan as of MarchDecember 31, 2017.
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’sCompany’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, 2017 and 2016.
The weighted average contractual term for stock options outstanding as ofMarchof December 31, 2017 was 5.755 years. The aggregate intrinsic value of stock options outstanding as ofMarchof December 31, 2017 was negligible.less than $0.1 million. Stock options exercisable as ofMarchof December 31, 2017 were 20,000.In20,000.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 45,00062,000 RSU awards with a fair value of $10.86$7.22 per RSU granted during the ninesix months ended MarchDecember 31, 2017. There were 12,73314,400 RSUs settled during the ninesix months ended MarchDecember 31, 2017. The aggregate intrinsic value of RSU awards outstanding as of MarchDecember 31, 2017 was $1.1$1.3 million. As of MarchDecember 31, 2017 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“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)(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, 2017 and 2016 was $0.3$0.2 million, and $0.3$0.2 million respectively. As of MarchDecember 31, 2017, there was $1.3$1.6 million of total unrecognized compensation costs related to outstanding stock-based compensation arrangements. Of this cost $1.1$1.4 million relates to performance based RSU grants that are not expected to be awarded. The remaining $0.2$0.2 million is expected to be recognized over a weighted average period of 1.42.0 years.
Note 4: Inventories
Note 4: InventoriesIn July 2015, the FASB issued ASU No.2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." Previous to the issuance of this ASU, ASC 330 required that an entity measure inventory at the lower of cost or market. 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 fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Application is to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU No.2015-11 did not have a material impact on our consolidated financial statements.
Inventories consist of the following (in thousands):
3/31/2017 | 6/30/2016 | |||||||
Raw material and supplies | $ | 26,919 | $ | 29,209 | ||||
Goods in process and finished parts | 17,356 | 16,459 | ||||||
Finished goods | 41,220 | 39,449 | ||||||
85,495 | 85,117 | |||||||
LIFO Reserve | (27,270 | ) | (28,796 | ) | ||||
Inventories | $ | 58,225 | $ | 56,321 |
12/31/2017 | 6/30/2017 | |||||||
Raw material and supplies | $ | 26,777 | $ | 26,293 | ||||
Goods in process and finished parts | 19,512 | 16,419 | ||||||
Finished goods | 41,881 | 41,591 | ||||||
88,170 | 84,303 | |||||||
LIFO Reserve | (26,381 | ) | (26,206 | ) | ||||
$ | 61,789 | $ | 58,097 |
LIFO inventories were $7.2$8.5 million and $10.5$7.7 million at MarchDecember 31, 2017 and June 30, 2016, 2017, respectively, such amounts being approximately $27.3$26.4 million and $28.8$26.2 million, respectively, less than if determined on a FIFO basis. The use of LIFO, as compared to FIFO, resulted in a $1.5$0.2 million increase in cost of sales for the six months ended December 31, 2017 compared to a $0.5 million decrease in cost of sales for the ninesix months ended MarchDecember 31, 2017 compared to a $0.3 million increase for the nine months ended March 31, 2016.2016.
Note 5: Business Acquisition
In fiscal 2010, the Company entered into an agreement with a private software company to invest $1.5$1.5 million in exchange for a 36% equity interest therein. In the third quarter of fiscal 2017, the Company entered into a new agreement to invest an additional $3.6$3.6 million for an additional 63%64% of equity in the company. The Company paid $1.8$1.8 million in cash at closing and is obligated to pay an additional $1.8$1.8 million in cash three years subsequent to closing (discounted to $1.6$1.6 million on the purchase date). In addition, the agreement provides for the former owners to receive a 30% share of operating profits of the business over the next three years so long as they remain employed by the Company.Company. The Company has accrued for such profit sharing as an expense based on results of operations since the date of acquisition.
The acquisition has been accounted for as a business combination and the financial results of the company have been included in our consolidated financial statements as ofsince the date of acquisition. Under the acquisition method of accounting, the purchase price was allocated to net tangible and intangible assets based upon their estimated fair values as of the acquisition date. The Company expects to finalize the valuation in the fourth quarter of 2017.
The table below presents the preliminary allocation of thethe purchase price to the acquired net assets (in thousands):
Cash | $ | 509 | $ | 509 | ||||
Accounts receivable | 273 | 273 | ||||||
Inventories | 243 | 243 | ||||||
Other current assets | 18 | 18 | ||||||
Deferred software development costs | 2,397 | 2,520 | ||||||
Intangible Assets | 1,220 | |||||||
Goodwill | 1,634 | |||||||
Fixed assets | 47 | 47 | ||||||
Goodwill | 2,618 | |||||||
Deferred tax liability | (647 | ) | (1,090 | ) | ||||
Accounts payable & current liabilities | (80 | ) | (80 | ) | ||||
Purchase Price (1) | $ | 5,378 | $ | 5,294 |
| $1,833 + 1,555 |
Pro-forma financial information has not been presented for this acquisition because it is not considered material to the Company’sCompany’s financial position or results of operations.
Note 6:6: Goodwill and Intangible Assets
The following represents the change in the carrying amount of goodwill for the nine months ended March 31, 2017 (in thousands):
Balance at June 30, 2016 | $ | 3,034 | ||
Acquisition of software company | 2,618 | |||
Balance at March 31, 2017 | $ | 5,652 |
The Company’sCompany’s acquisition of Bytewise in 2011 gave rise to goodwill of $3,034. The Company performed a qualitative analysis and the private software company in accordance with ASU 2011-08 for its October 1, 2016 annual assessment2017 resulted in the recognition of goodwill (commonly referredtotaling $4.67 million. Under ASU 2011-08, the Company is required, on a set date, to as “Step Zero”). From a qualitative perspective,annually assess its goodwill in evaluatingorder to determine whether or notit iswas more likely than not that the fair value of the reporting unit exceedsunit’s goodwill exceeded its respective carrying amount, relevant events and circumstances were taken into account,amount. For Bytewise, this date was October 1, 2017. The Company performed a quantitative analysis in accordance with greater weight assignedASU 2011-08 for its annual assessment (commonly referred 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 thatas “Step One”).
Determining the fair value of a reporting unit is subjective and requires the use of significant estimates and assumptions. With the assistance of an independent third-party valuation specialist, the Company estimates the fair value using an income approach based on the present value of future cash flows. The Company believes this approach yields the most appropriate evidence of fair value. The Company also utilizes the comparable company multiples method and market transaction fair value method to validate the fair value amount obtained using the income approach. The key assumptions utilized in the discounted cash flow model includes estimates of future cash flows from operating activities offset by estimated capital expenditures of the reporting unit, the estimated terminal value for the reporting unit, a discount rate based on a weighted average cost of capital, overall economic conditions, and an assessment of current market capitalization. Any unfavorable material changes to these key assumptions could potentially impact the Company’s fair value determinations.
Under the quantitative analysis, the 2017 fair value assessment of the Bytewise goodwill exceeded itsthe carrying amount as of October 1, 2016.by approximately 81.1%. Therefore no goodwill impairment was determined to exist. If future results significantly vary from current estimates, related projections, or business assumptions in the future due to changes in industry or market conditions, the Company may be required to record impairment charges.
The Company has set the date at February 1st, 2018, to test the annual impairment of the reporting unit goodwill for the software company purchased in February 2017; however, no events or circumstances have occurred which would indicate that the unit’s goodwill may be impaired and needs to be tested other than annually.
Amortizable intangible assets consist of the following (in thousands):
3/31/2017 | 6/30/2016 | 12/31/2017 | 6/30/2017 | |||||||||||||
Non-compete agreement | $ | 600 | $ | 600 | $ | 600 | $ | 600 | ||||||||
Trademarks and trade names | 1,480 | 1,480 | 2,070 | 2,070 | ||||||||||||
Completed technology | 2,358 | 2,358 | 2,358 | 2,358 | ||||||||||||
Customer relationships | 4,950 | 4,950 | 5,580 | 5,580 | ||||||||||||
Software development | 5,548 | 2,402 | 6,816 | 6,184 | ||||||||||||
Other intangible assets | 325 | 325 | 325 | 325 | ||||||||||||
Total | 15,261 | 12,115 | 17,749 | 17,117 | ||||||||||||
Accumulated amortization | (6,891 | ) | (5,625 | ) | (8,186 | ) | (7,249 | ) | ||||||||
Total net balance | $ | 8,370 | $ | 6,490 | $ | 9,563 | $ | 9,868 |
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 range between 5 years for software development.development and 20 years for some trademark and trade name assets.
The estimated aggregate amortization expense for the remainder of fiscal 20172018 and for each of the next five years and thereafter, is as follows (in thousands):
2017 (Remainder of year) | $ | 653 | ||||||
2018 | 2,421 | |||||||
2019 | 2,186 | |||||||
2020 | 1,480 | |||||||
2021 | 872 | |||||||
2022 | 400 | |||||||
2018 (Remainder of year) | $ | 1,093 | ||||||
2019 | 2,134 | |||||||
2020 | 1,611 | |||||||
2021 | 1,207 | |||||||
2022 | 975 | |||||||
2023 | 609 | |||||||
Thereafter | 358 | 1,934 |
Note 7:7: 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 remeasurementre-measurement of the Plan's obligation as of December 31, 2016. The remeasurementre-measurement resulted in a decrease in the benefit obligation of approximately $6.9$6.9 million primarily due to an increase in the discount rate from 3.77% to 4.31%, with an additional $4.2$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.
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 | |||||||||||||||
3/31/2017 (Unaudited) | 3/31/2016 (Unaudited) | 3/31/2017 (Unaudited) | 3/31/2016 (Unaudited) | |||||||||||||
Service cost | $ | - | $ | 714 | $ | 1,405 | $ | 2,143 | ||||||||
Interest cost | 1,574 | 1,732 | 4,659 | 5,259 | ||||||||||||
Expected return on plan assets | (1,284 | ) | (1,560 | ) | (3,878 | ) | (4,739 | ) | ||||||||
Amortization of net loss | 6 | 13 | 102 | 39 | ||||||||||||
$ | 296 | $ | 899 | $ | 2,288 | $ | 2,702 |
Three Months Ended | Six Months Ended | |||||||||||||||
12/31/2017 | 12/31/2016 | 12/31/2017 | 12/31/2016 | |||||||||||||
Service cost | $ | - | $ | 614 | $ | - | $ | 1,405 | ||||||||
Interest cost | 1,518 | 1,533 | 3,029 | 3,085 | ||||||||||||
Expected return on plan assets | (1,291 | ) | (1,288 | ) | (2,576 | ) | (2,594 | ) | ||||||||
Amortization of net loss | 6 | 68 | 12 | 96 | ||||||||||||
$ | 233 | $ | 927 | $ | 465 | $ | 1,992 |
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 | |||||||||||||||||||||||||||||
3/31/2017 (Unaudited) | 3/31/2016 (Unaudited) | 3/31/2017 (Unaudited) | 3/31/2016 (Unaudited) | 12/31/2017 | 12/31/2016 | 12/31/2017 | 12/31/2016 | |||||||||||||||||||||||||
Service cost | $ | 23 | $ | 26 | $ | 70 | $ | 79 | $ | 22 | $ | 24 | $ | 43 | $ | 47 | ||||||||||||||||
Interest cost | 67 | 71 | 203 | 215 | 67 | 68 | 134 | 136 | ||||||||||||||||||||||||
Amortization of prior service credit | (168 | ) | (195 | ) | (505 | ) | (586 | ) | (135 | ) | (169 | ) | (269 | ) | (337 | ) | ||||||||||||||||
Amortization of net loss | 30 | 4 | 90 | 11 | 25 | 30 | 50 | 60 | ||||||||||||||||||||||||
$ | (48 | ) | $ | (94 | ) | $ | (142 | ) | $ | (281 | ) | $ | (21 | ) | $ | (47 | ) | $ | (42 | ) | $ | (94 | ) |
For the nine-monthsix month period ended MarchDecember 31, 2017, the Company contributed $3.5$1.4 million to the U.S. and $0.8$0.5 million to the UK pension plans. The Company estimates that it will contribute an additional $1.1$2.8 million for the remainder of fiscal 2017.2018.
The Company’sCompany’s pension plans use fair value as the market-related value of plan assets and recognize net actuarial gains or losses in excess of ten percent (10%(10%) of the greater of the market-related value of plan assets or of the plans’ projected benefit obligation in net periodic (benefit) cost as of the plan measurement date. Net actuarial gains or losses that are less than 10% of the thresholds noted above are accounted for as part of the accumulated other comprehensive loss.
Note 8: Debt
Debt is comprised of the following (in thousands):
3/31/2017 | 6/30/2016 | 12/31/2017 | 6/30/2017 | |||||||||||||
Notes payable and current maturities of long term debt | ||||||||||||||||
Short-term and current maturities | ||||||||||||||||
Loan and Security Agreement | $ | 1,596 | $ | 1,543 | $ | 17,051 | $ | 11,514 | ||||||||
Long-term debt | ||||||||||||||||
Loan and Security Agreement | 15,904 | 17,109 | ||||||||||||||
Loan and Security Agreement, net of current portion | 5,261 | 6,095 | ||||||||||||||
$ | 17,500 | $ | 18,652 | $ | 22,312 | $ | 17,609 |
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$23.0 million. The Line of Credit 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 ninesix months ended MarchDecember 31, 2017 and 2016 was 2.5%3.1% and 2.2%2.4%, respectively. Based upon its threeSince the expiration date of the loan agreement on December 31, 2017 was within the current fiscal year, term, the Line of Credit has been classified as longshort term. As of MarchDecember 31, 2017, $9.4$11.9 million was outstanding on the Line of Credit.
On November 22, 2011,Availability under the Line of Credit is subject to a borrowing base comprised of accounts receivable and inventory. The Company believes that the borrowing base will consistently produce availability under the Line of Credit in conjunction withexcess of $23.0 million. A 0.25% commitment fee is charged on the Bytewise acquisition,unused portion of the Line of Credit.
The obligations under the Credit Facility are unsecured. In the event of certain triggering events, such obligations would become secured by the assets of the Company’s domestic subsidiaries. A triggering event occurs when the Company entered into a $15.5 million term loan (the “Term Loan”) underfails to achieve any of the then existing Loan and Security Agreement. The Term Loan is a ten year loan bearing a fixed interest rate of 4.5% and is payablefinancial covenants noted below in fixed monthly payments of principal and interest of $160.6 thousand. The Term Loan had a balance of $8.1 million at March 31, 2017.consecutive quarters.
The material financial covenants of the amended Loan and Security Agreement are: 1)1) funded debt to EBITDA, excluding non-cash and retirement benefit expenses (“maximum leverage”), not to exceed 2.25 to 1.2)1.00,2) annual capital expenditures not to exceed $15.0$15.0 million, 3)3) maintain a Debt Service Coverage Rate of a minimum of 1.25 to 11.00, and 4)4) maintain consolidated cash plus liquid investments of not less than $10.0$10.0 million at any time. TheAs of December 31, 2017, the Company wasnot in compliance with allthe funded debt to EBITDA ratio, as the Company’s ratio rose to 2.58 to 1.00. This event of noncompliance was the result of the combination of lower than anticipated second quarter operating profits and the addition of the new short-term loans in Brazil. Additionally, the Company was also not in compliance with one of its non-financial covenants asrelated to these additional borrowings. The Company has received a waiver for both of March 31, 2017.these non-compliances, and expects to be able to meet these covenants in future periods.
On January 30, 2018, the Company executed an amendment to its Loan and Security Agreement to extend the Line of Credit through April 30, 2021. The agreement was scheduled to expire on April 30, 2018. The amended agreement maintains the previous line of $23.0 million and the same loan covenants.
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. 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 had a balance of $6.9 million at December 31, 2017.
In December 2017, the Company’s Brazilian subsidiary entered into two short-term loans with local banks in order to support the Company’s strategic initiatives. The loans backed by the entity’s US dollar denominated export receivables were made with Santander Bank and Bradesco Bank and totaled $3.5 million. The Santander loan of $1.5 million has a term of 180 days and a rate of 4.19% and the Bradesco loan of $2.0 million has a term of 360 days and a rate of 4.75%.
Note 9:9: Income TaxesTaxes
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.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law in the United States. This law made numerous changes to federal taxation in the U.S., including a reduction in the federal corporate tax rate to 21% and a one-time tax on historical foreign earnings that had not yet been repatriated. The effect of the tax rate change is that the Company’s federal tax rate is reduced to a blended rate of 28% from the previous rate of 34% for fiscal 2018, and then will further reduce to the enacted 21% in Fiscal 2019 and beyond. In addition, there are also a number of other changes primarily related to U.S. taxation of income earned by foreign subsidiaries and on transactions with those subsidiaries. As a result of this legislation, in the quarter ended December 31, 2017, the Company performed an initial assessment of the impact of tax reform and has taken a charge to tax expense of $7,250,000 to reflect the estimated impact of the tax rate reduction on its deferred tax assets. The Company has estimated the overall federal tax impact for the one time transition tax to be zero. Further guidance from the Department of Treasury and various state taxing authorities as well as year-end financial data is required, however, before the various tax calculations can be considered complete.
The Company is reviewing all aspects of the tax law change and, other than the reduced tax rate on earnings going forward, which will provide a favorable benefit, the Company does not believe the other provisions will have a significant impact to tax expense. The Company will continue to measure the impact of these provisions and will record any changes in subsequent quarters when information and guidance becomes available.
The tax expense for the second quarter of fiscal 2018 was $7,618,000 on profit before tax of $1,097,000 for an effective tax rate of 694%. Before the tax charge related to the new tax legislation, tax expense was $368,000 or 33.5% of pre-tax income. The effective tax rate for the thirdsecond quarter of fiscal 2017 was 36.8% and for29.9%. For the third quarterfirst half of fiscal 2016, it2018, tax expense was 50.2%$7,832,000 on profit before tax of $1,737,000 for an effective tax rate of 451%. Before the tax charge related to new tax legislation, tax expense was $582,000 or 33.5% of pre-tax income. For the first nine months half of fiscal 2017, the effective tax rate was 40.8% and39.1%. In addition to the charge for the first nine monthschange in the tax law, the tax expense in the second quarter of fiscal 2016, it2018 was 67.2%.Thereduced by $34,000 of net discrete benefits primarily for U.S. tax return provision to return adjustments and a refundable credit for research and development in the U.K. The second quarter discrete tax benefit is in addition to a net first quarter discrete tax benefit of $21,000 reflecting a tax benefit for losses in the U.K. which was partially offset by discrete tax expense due to tax deductions related to stock grants which were lower than the book deductions. The tax rate in the second quarter of fiscal 2017 is higherlower than the U.S. statutory rate since the benefitas a result of earnings in foreign jurisdictions with lower effective tax ratesrates. This benefit was more than offset byas a result of discrete tax charges includingadjustments 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$298,000 in the first quarter. In fiscal 2016, the tax rate is higher than the U.S. statutory rate primarily due to losses in foreign jurisdictions for which no tax benefit is recognized which was partially offset by discrete reductions to tax expense primarily as a result of return to provision adjustments of $216,000.
U.S. Federal tax returns through fiscal 2013 are generally no longer subject to review by tax authorities; however, tax loss carryforwards from years before fiscal 2014 are still subject to adjustment. As of MarchDecember 31, 2017, 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 20112012 – 2016.2017. During the next twelve months, it is possible that there will be a reduction of $1 million in the Company’s long term tax obligations fordue to the expiration of the statute of limitations on prior year exposures of $931,000.tax returns.
Accounting for income taxes requires estimates of future benefits and tax liabilities. Due to the temporary differences in the timing of recognition of items included in income for accounting and tax purposes, deferred tax assets or liabilities are recorded to reflect the impact arising from these differences on future tax payments. With respect to recorded tax assets, the Company assesses the likelihood that the asset will be realized by 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’sCompany’s domestic 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., there is a partial valuation allowance againsthas been provided for foreign tax creditscredit carryforwards due to the extent they are limited.uncertainty of generating sufficient foreign source income to utilize those credits in the future. 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 10:10: Contingencies
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’sCompany’s financial condition, results of operations or cash flows.
In the second quarter of this year, the Company’s Brazilian subsidiary received a favorable ruling on an old tax dispute related to the Brazilian Program of Social Integration (PIS) taxes. This ruling resulted in the recognition of other income of approximately $1.0 million, and was awarded in the form of tax credits to be used to offset future tax payments
Note 11:. 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-K10-K for the year ended June 30, 2016. 2017. 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 in fiscal 2017,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 | North American | International Operations | Unallocated | Total | |||||||||||||||||||||||||
Three Months ended March 31, 2017 | ||||||||||||||||||||||||||||||||
Three Months ended December 31, 2017 | ||||||||||||||||||||||||||||||||
Sales1 | $ | 31,791 | $ | 18,879 | $ | $ | 50,670 | $ | 31,100 | $ | 21,024 | $ | - | $ | 52,124 | |||||||||||||||||
Operating Income (Loss) | $ | 1,563 | $ | (693 | ) | $ | (1,723 | ) | $ | (853 | ) | $ | 1,365 | $ | 243 | $ | (1,164 | ) | $ | 444 | ||||||||||||
Three Months ended March 31, 2016 | ||||||||||||||||||||||||||||||||
Three Months ended December 31, 2016 | ||||||||||||||||||||||||||||||||
Sales2 | $ | 32,473 | $ | 17,856 | $ | $ | 50,329 | $ | 32,151 | $ | 21,036 | $ | - | $ | 53,187 | |||||||||||||||||
Operating Income (Loss) | $ | 2,542 | $ | (112 | ) | $ | (1,515 | ) | $ | 914 | $ | 2,805 | $ | 636 | $ | (1,612 | ) | $ | 1,829 |
1. | Excludes |
2. | Excludes |
North American | International Operations | Unallocated | Total | |||||||||||||
Nine Months ended March 31, 2017 | ||||||||||||||||
Sales3 | $ | 92,345 | $ | 60,425 | $ | $ | 152,770 | |||||||||
Operating Income (Loss) | $ | 4,520 | $ | (143 | ) | $ | (5,251 | ) | $ | (874 | ) | |||||
Nine Months ended March 31, 2016 | ||||||||||||||||
Sales4 | $ | 99,188 | $ | 55,850 | $ | $ | 155,038 | |||||||||
Operating Income (Loss) | $ | 8,172 | $ | (1,583 | ) | $ | (4,292 | ) | $ | 2,296 |
North American | International Operations | Unallocated | Total | |||||||||||||
Six Months ended December 31, 2017 | ||||||||||||||||
Sales1 | $ | 60,818 | $ | 43,124 | $ | - | $ | 103,942 | ||||||||
Operating Income (Loss) | $ | 2,714 | $ | 1,000 | $ | (2,821 | ) | $ | 893 | |||||||
Six Months ended December 31, 2016 | ||||||||||||||||
Sales2 | $ | 60,554 | $ | 41,546 | $ | - | $ | 102,100 | ||||||||
Operating Income (Loss) | $ | 2,957 | $ | 550 | $ | (3,528 | ) | $ | (21 | ) |
| Excludes |
| Excludes |
Note 12: Subsequent Events
Subsequent to December 31, 2017, the Company decided to vacate its facility in Mt. Airy, North Carolina, and move current operations to a smaller building. While no definitive date for this move has been set yet, the Company anticipates that the move will happen within the next 12 months. The Company incurred a $4.1 million impairment charge in fiscal 2016, when the majority of the plant’s operations were relocated to the Company’s Brazilian production facility. As of December 31, 2017, the carrying value of the building is $2.0 million, and the Company believes that the current fair value exceeds the carrying value. The Company expects that there may be restructuring costs, including severance payments, and equipment relocation costs that will be incurred in connection with this decision. These costs will be recorded as incurred.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
ThreeThree months EndedMarchDecember 31, 2017 andMarchDecember 31, 2016
Overview
Globally the Company experienced healthy incoming orders in the quarter, which exceeded our operations’ ability to satisfy the demand before the end of the December in our largest markets, the U.S. and Brazil. The Company expects this backorder build will begin to be relieved during the third quarter.
The Company continued to experience moderate declines in the domestic market and improvement in the International sector during the quarter posting flat revenue and lower profits. The North American market encounteredAs a softening in the industrial distribution market and a modest recovery in the high-end metrology sector while a weakening US dollar resulted in higher International revenue, especially in Brazil.
Netresult, net sales increased $0.4decreased $1.1 million or 1%2% from $50.3 million in fiscal 2016 to $50.7$53.2 million in fiscal 2017 to $52.1 million in fiscal 2018 with North America declining $0.7 million and International growing $1.1 million.accounting for the full decline. Operating income declined $1.8decreased $1.4 million from a profit of $0.9 million in fiscal 2016 to a loss of $0.9 million in fiscal 2017 due to a $0.3$0.9 million declinedecrease in gross margin coupled withand a $1.5$0.5 million increase in operatingselling, general, and administrative expenses.
Net Sales
North American sales decreased $0.7$ 1.1 million or 2%3% from $32.5 million in fiscal 2016 to $31.8$32.2 million in fiscal 2017 to $31.1 million in fiscal 2018 due to constrained production capacity in our Athol facility due to a declineshortage of skilled labor which contributed to an increase in metrology tools sold thruback orders. Capacity issues are being addressed by increased outsourcing of production to counterbalance the industrial distribution channel.loss of experienced personnel due to retirement.
International sales increased $1.1were flat at $21.1 million or 6% from $17.8 million in fiscal 2016 to $18.9 million inbetween fiscal 2017 and fiscal 2018. Improved sales in China, and Asia/Pacific offset the sales decline at our Brazilian operations due to 20% improvement of the Brazilian Real to the US dollar and improvement in the European sector.not meeting export sales demand.
Gross Margin
Gross margin decreased $0.3$0.9 million or 2%5% from 29.3%32% of sales in fiscal 20162017 to 28.6%31% of sales in fiscal 2017.2018.
North American gross margins decreased $0.4$0.6 million from $9.3$9.4 million or 29% of sales in fiscal 20162017 to $8.9$8.8 million or 28% of sales in fiscal 20172018 due to lower sales volume and higher cost in the industrial distribution channel.short-term effects of increased outsourcing of production.
International gross margins increased $0.1decreased $0.3 million moving from $5.5 million in fiscal 2016 to $5.6 million35% of sales in fiscal 2017 based uponto 34% of sales in fiscal 2018 because of lower volume and an improved International performance with higher margins in Europe and China.unfavorable product mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.5$0.5 million or 11%3% rising from $13.8$15.0 million in fiscal 20162017 to $15.3$15.5 million in fiscal 2017. 2018.
North American expenses, including Corporate, increased $0.6$0.3 million going from $6.7 million in fiscal 2016 to $7.3$8.3 million in fiscal 2017 to $8.6 million in fiscal 2018, as a result of increased salesresearch and marketing expenses in thedevelopment spending on high-end metrology business.more than offset reductions in professional fees.
International expenses increased $0.8$0.2 million or 14%1% due principally to the weakening of the US dollar to the Brazilian Real.British Pound.
Corporate expenses increased $0.1 million from $1.5 million in fiscal 2016 to $1.7 million in fiscal 2017 due to higher professional fees.
Other Income(Expense)
Other expenseincome increased $0.7$1.0 million from income of $0.3 million in fiscal 2016 to a $0.4 million loss in fiscal 2017 due to a $0.3$1.0 million cumulative loss related to an investmentfavorable legal settlement in a software development company and lower foreign exchange translation gains.Brazil in fiscal 2018.
Income Taxes
The effectiveThe tax expense for the second quarter of fiscal 2018 was $7.6 million on pre-tax income of $1.1 million. Tax expense included a charge of $7.2 million for a reduction of the deferred tax asset due to the change in tax rates enacted in the United States. Before the charge, tax expense for the thirdquarter was $0.4 million or 33.5% of pre-tax income. The tax expense for the second quarter of fiscal 2017 was $0.5 million on pre-tax income of $1.5 million for an effective tax rate of 29.9%. Excluding the impact of the change in the tax rate applied to deferred tax assets, the effective fiscal 2018 tax rate is higher than the fiscal 2018 marginal U.S. combined federal and 2016 were 37% and 50%, respectively.state tax rate of approximately 31% primarily due to non-deductible items in each tax jurisdiction. The fiscal 2017 quarterly tax rate is lower than a normalized combined federal and state rate of approximately 40% in fiscal 2017 due to profits in some foreign subsidiaries with lower effective tax rates. The tax rate includes negligible discrete items in fiscal 2017 and a discrete tax benefit of $0.1 million in fiscal 2016.
Net Income
The Company recorded net loss of $0.8$6.5 million or $0.11$(0.93) per share in the thirdsecond quarter of fiscal 20172018 compared to net income of $0.6$1.1 million or $0.09$0.15 per share in fiscal 20162017 principally due to lower Operating Income and a one-time investment write-off.higher effective tax rate related to the new tax legislation enacted in December 2017.
SixNine Months months EndedMarchDecember 31, 2017 andMarchDecember 31, 2016
Overview
Net sales declined $2.3increased $1.8 million or 1%2% from $155.0 million in fiscal 2016 to $152.7 million in fiscal 2017. Operating income decreased $3.2$102.1 million in fiscal 2017 from $2.3to $103.9 million profit in fiscal 2016 compared to2018. Operating income increased $0.9 million lossin fiscal 2018 from a breakeven position in fiscal 2017, due to lower sales and relatedwith higher gross margins and higherof $1.7 million offsetting a $1.2 million increase in selling, general, and administrative expenses.expenses coupled with the absence of a $0.4 million restructuring charge in fiscal 2017.
Net Sales
North American sales decreased $6.9increased $0.2 million or 7%increasing from $99.2 million in fiscal 2016 to $92.3$60.6 million in fiscal 2017 due to lower$60.8 million in fiscal 2018, as gains in higher-end metrology tool sales through the industrial distribution channel and decreasesmore than offset declines in high-end metrology sales to end-user customers.precision hand tools.
International sales increased $4.6$1.6 million or 8%4.0% rising from $55.8 million in fiscal 2016 to $60.4$41.5 million in fiscal 2017 withto $43.1 million in fiscal 2018 based upon strong organic growth in Europe and a strengthening Brazilian Real relative to the US dollar.Brazil.
Gross Margin
Gross margin decreased $1.3increased $1.7 million or 3%6% and also declined as a %improved to 31% of sales from 30.0% in fiscal 2016 to 29.6%2018, from 30% of sales in fiscal 2017.
North American gross margins decreased $3.9increased $0.7 million or 13% from $29.4 million4.0% in fiscal 20162018 as compared to $25.5 million in fiscal 20162017 due to lower precision tool sales as well as lowerincreased sales of higher margin capital equipment products.equipment.
International gross margins increased $2.6$1.0 million withbased upon increased volume and margin improvement representing $1.4 and $1.2 million, respectively. The stronger Brazilian Real contributed an incremental $1.6 million while the weakening British Pound resultedimproved margins in a $0.9 million decrement to the gross margin gain.Brazil.
Selling, General and Administrative Expenses
Selling, general and administrative expense increased $1.4$1.2 million or 3%4.0%, rising from $44.3$30.4 million in fiscal 20162017 to $45.7$31.6 million in fiscal 2017.2018.
North American expenses, decreased $0.3including Corporate, increased $0.7 million or 2% due to lower commissions4% as increased research and travel expenses.development spending on high-end metrology more than offset reduced professional fees.
International expenses increased $1.1$0.5 million or 6% principally4% due to the strengthening Brazilian Reals versus the US dollar.increased sales commission expense related to sales gains in Brazil.
Corporate expenses increased $0.6 million or 13% principally due to higher professional fees.
Other income (expense)Income(Expense)
Other income declined $0.8 million due to foreign exchange translation losses and a $0.3 million cumulative loss related to an investment in a software development company. The $3.1 million gain on sale of a building is net profit realized on the sale of the Canadian distribution center in the first quarterhalf of fiscal 2017.
Income Taxes
The effective tax rates for2018 declined $2.2 million from the first three quartershalf of fiscal 2017, and 2016 was 41% and 67%, respectively. The effective tax rateis higher thanas the U.S. statutory rate since the benefit of earnings in foreign jurisdictions with lower effective tax rates was more than offset by discrete tax charges including 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.. The effective rate in fiscal 2016 is higher due to losses in some foreign subsidiaries for which no tax benefit is recognized in consolidation.
Net Income
The Company recorded net income of $1.0$3.1 million or $0.15 per share in the first three quarters of fiscal 2017 compared to net income of $0.9 million or $0.13 per share in fiscal 2016 principally due to the gain on the sale of the Canadian distribution facilitywarehouse in fiscal 2017 and a lowerreduction in interest income of $0.3 million between fiscal 2017 and fiscal 2018, more than offset $1.4 million in favorable legal settlements in Brazil during the current year.
Income Taxes
The tax expense for the first half of fiscal 2018 was $7.8 million on pre-tax income of $1.7 million. Tax expense included a charge of $7.2 million for a reduction of the deferred tax asset due to the change in tax rates enacted in the United States. Before the charge, tax expense for the first half was $0.6 million or 33.5% of pre-tax income. The tax expense for the first half of fiscal 2017 was $1.2 million on pre-tax income of $3.0 million for an effective tax rate offsettingof 39.1%. Excluding the impact of the change in the tax rate applied to deferred tax assets, the effective fiscal 2018 tax rate is higher than the fiscal 2018 marginal U.S. combined federal and state tax rate of approximately 31% primarily due to non-deductible items in each tax jurisdiction. The effective tax rate for the first half of fiscal 2017 is slightly lower operating income.than federal and state statutory rates of approximately 40% 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.
Net Income
The Company recorded net loss of $6.1 million or $(0.87) per share in the first half of fiscal 2018 compared to net income of $1.8 million or $0.26 per share in fiscal 2017 principally due to a higher effective tax rate related to the new tax legislation enacted in December 2017.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows (in thousands) | Six Months Ended | |||||||
12/31/2017 | 12/31/2016 | |||||||
Cash provided by (used in) operating activities | $ | 635 | $ | (984 | ) | |||
Cash provided by (used in) investing activities | (3,258 | ) | 541 | |||||
Cash provided by (used in) financing activities | 2,988 | (2,021 | ) | |||||
Effect of exchange rate changes on cash | 159 | (603 | ) | |||||
Net increase (decrease) in cash | $ | 524 | $ | (3,067 | ) |
Fiscal 2018 net cash flow for the six months ended December 31, 2017 increased $3.6 million compared to the six months ended December 31, 2016 as the net change in cash provided by operations of $1.6 million coupled with the change in financing of $5.0 million more than offset a $3.8 million increase in investments.
Cash flows (in thousands) | Nine Months Ended | |||||||
3/31/2017 | 3/31/2016 | |||||||
Cash provided by operating activities | $ | 3,021 | $ | 11,653 | ||||
Cash provided by (used in) investing activities | (2,231 | ) | 3,016 | |||||
Cash used in financing activities | (3,073 | ) | (3,346 | ) | ||||
Effect of exchange rate changes on cash | (450 | ) | (200 | ) | ||||
Net increase (decrease) in cash | $ | (2,733 | ) | $ | 11,123 |
Fiscal 2017 net cash for the nine months ended March 31, 2017 decreased $2.7 million as cash provided from operations of $3.0 million was offset by investments of $2.2 million and debt and dividend payments of $3.1 million. In addition, exchange rates negatively impacted cash in US dollars by $0.5 million.
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$11.9 million was outstanding as of MarchDecember 31, 2017. 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, 2017, the Company was not in compliance with allits maximum funded debt covenantsto EBITDA covenant and another non-financial covenant related to its Loanthe additional borrowings. A waiver has been received for both of these events of noncompliance, and Security Agreement.the Company expects to be in compliance with these covenants in the future. The Loan and Security Agreement expireswas amended on January 30, 2018 to extend the Line of Credit for an additional three years until April 30, 2018 and the Company plans to negotiate an extension to the agreement.2021.
The effective interest rate on the borrowings under the Loan and Security Agreement during the ninesix months ended MarchDecember 31, 2017 and 2016 was 2.5%3.1% and 2.2%2.4% 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
There have been no material changes in qualitativequantitative and quantitativequalitative 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, 2016.2017.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the participation of the Company's President and Chief Executive Officer and Chief Financial Officer, has evaluated the Company's disclosure controls and procedures as of MarchDecember 31, 2017, 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, 2017, 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, 2017.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements about the Company’sCompany’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, 2016.2017. There have been no material changes from the factors disclosed in our Form 10-K for the year ended June 30, 2016.2017.
ITEM 6. EXHIBITS
31a |
31b |
32 |
|
|
101 | The following materials from The L. S. Starrett |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
| THE L. S. STARRETT COMPANY (Registrant) |
|
|
|
|
|
|
|
|
Date |
|
| /S/R. Douglas A. Starrett |
|
|
| Douglas A. Starrett - President and CEO (Principal Executive Officer) |
|
|
|
|
Date |
|
| /S/R. Francis J. |
|
|
| Francis J. Officer) |
21
20