UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 24, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
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 (I.R.S. Employer
incorporation or organization) 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
Former name, address and fiscal year, if changed since last report.
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 filings requirements for the past 90 days.
YES X NO
Common Shares outstanding as of March 24, 2001:
Class A Common Shares 5,000,168
Class B Common Shares 1,447,493
Page 1 of 9
THE L. S. STARRETT COMPANY
CONTENTS
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Earnings and
Cash Flows - thirteen and thirty-nine
weeks ended March 24, 2001 and
March 25, 2000 (unaudited) 3
Consolidated Balance Sheets - March 24,
2001 (unaudited) and June 24, 2000 4
Consolidated Statements of Stockholders'
Equity - thirty-nine weeks ended
March 24, 2001 and March 25, 2000
(unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
Part II. Other information:
Item 6. Exhibits and reports on Form 8-K 9
Page 2 of 9
THE L. S. STARRETT COMPANY
Consolidated Statements of Earnings and Cash Flows
(in thousands of dollars except per share data)(unaudited)
13 Weeks Ended 39 Weeks Ended
EARNINGS 3/24/01 3/25/00 3/24/01 3/25/00
Net sales 50,638 58,860 170,130 178,517
Cost of goods sold (36,437) (43,107) (121,707)(128,424)
Selling and general (12,361) (12,402) (38,460) (36,873)
Other income and expense (217) 168 (443) 172
Earnings before income taxes 1,623 3,519 9,520 13,392
Provision for federal, foreign and
state income taxes 673 1,068 3,092 4,249
Net earnings 950 2,451 6,428 9,143
Basic earnings per share .15 .37 1.00 1.37
Average shares used 6,436 6,658 6,448 6,684
Diluted earnings per share .15 .37 1.00 1.37
Average shares used 6,451 6,667 6,459 6,692
Dividends per share .20 .20 .60 .60
CASH FLOWS
Cash flows from operating activities:
Net earnings 950 2,451 6,428 9,143
Noncash expenses:
Depreciation and amortization 2,949 2,863 8,807 8,815
Deferred taxes (342) (30) 10 787
Working capital changes:
Receivables 3,915 3,291 3,219 (2,965)
Inventories (2,035) 1,521 (6,385) 1,370
Other assets and liabilities 115 (1,220) 5,296 1,343
Prepaid pension cost and other (57) (139) (783) (1,879)
Net cash from operations 5,495 8,737 16,592 16,614
Cash flows from investing activities:
Additions to plant and equipment (3,281) (3,406) (9,916) (9,548)
Change in short-term investments (3,945) (2,690) (5,003) (2,298)
Net cash used in investing (7,226) (6,096) (14,919) (11,846)
Cash flows from financing activities:
Short-term borrowings(repayments),net(1,066) 894 (2,466) 3,675
Long-term borrowings(repayments) 4,000 (1,000) 4,000 (1,300)
Common stock issued 743 923 2,450 2,839
Treasury shares purchased (567) (3,618) (2,983) (5,517)
Dividends (1,286) (1,325) (3,858) (4,004)
Net cash used in financing 1,824 (4,126) (2,857) (4,307)
Effect of translation rate changes
on cash (40) 68 111 45
Net increase (decrease) in cash 53 (1,417) (1,073) 506
Cash, beginning of period 882 2,194 2,008 271
Cash, end of period 935 777 935 777
See notes to consolidated financial statements
Page 3 of 9
THE L. S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands of dollars)
March 24 June 24
2001 2000
ASSETS (unaudited) _______
Current assets:
Cash 935 2,008
Investments 17,056 12,043
Accounts receivable (less allowance for doubtful
accounts of $1,800,000 and $1,790,000) 32,283 36,509
Inventories:
Finished goods 37,028 36,121
Goods in process and finished parts 27,243 26,752
Raw materials and supplies 19,889 17,017
84,160 79,890
Prepaid expenses and other current assets 3,826 7,269
Total current assets 138,260 137,719
Property, plant and equipment, at cost (less
accumulated depreciation of $76,288,000
and $70,510,000) 75,385 75,683
Cost in excess of net assets acquired (less
accumulated amortization of $4,736,000
and $4,534,000) 6,432 6,667
Prepaid pension cost 30,822 29,238
Other assets 1,043 1,111
251,942 250,418
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities 4,224 6,690
Accounts payable and accrued expenses 17,163 16,315
Accrued salaries and wages 4,734 5,590
Taxes payable 297 285
Employee deposits for stock purchase plan 768 518
Total current liabilities 27,186 29,398
Deferred income taxes 14,684 13,969
Long-term debt 7,000 3,000
Accumulated postretirement medical benefit obligation 16,150 16,029
Stockholders' equity:
Class A Common $1 par (20,000,000 shrs. auth.;
5,000,168 outstanding 3/24/01, excluding
1,476,292 held in treasury; 4,978,276 outstanding
at 6/24/00, excluding 1,461,002 in treasury) 5,000 4,978
Class B Common $1 par (10,000,000 shrs. auth.;
1,447,493 outstanding 3/24/01, excluding
320,358 held in treasury; 1,495,474 outstanding
at 6/24/00, excluding 308,284 in treasury) 1,447 1,495
Additional paid-in capital 44,468 43,273
Retained earnings reinvested and employed in
the business 156,714 155,846
Accumulated other comprehensive income (20,707) (17,570)
Total stockholders' equity 186,922 188,022
251,942 250,418
See Notes to Consolidated Financial Statements
Page 4 of 9
THE L. S. STARRETT COMPANY
Consolidated Statements of Stockholders' Equity
For the Thirty-nine Weeks Ended March 24, 2001 and March 25, 2000
(in thousands of dollars)
(unaudited)
Common Addi- Accumulated
Stock Out- tional Other
standing Paid-in Retained Comprehensive
($1 Par) Capital Earnings Income Total
Balance June 26, 1999 6,706 42,730 155,349 (14,749) 190,036
Comprehensive income:
Net earnings 9,143 9,143
Unrealized net losses
on investments (104) (104)
Translation loss, net (794) (794)
Total comprehensive income 8,245
Dividends ($.60) (4,004) (4,004)
Treasury shares:
Purchased (233) (1,714) (3,570) (5,517)
Issued 118 2,639 2,757
Options exercised 4 78 82
Balance March 25, 2000 6,595 43,733 156,918 (15,647) 191,599
Balance June 24, 2000 6,473 43,273 155,846 (17,570) 188,022
Comprehensive income:
Net earnings 6,428 6,428
Unrealized net gains
on investments 39 39
Translation loss, net (3,176) (3,176)
Total comprehensive income 3,291
Dividends ($.60) (3,858) (3,858)
Treasury shares:
Purchased (151) (1,130) (1,702) (2,983)
Issued 124 2,306 2,430
Options exercised 1 19 20
Balance March 24, 2001 6,447 44,468 156,714 (20,707) 186,922
See Notes to Consolidated Financial Statements
Page 5 of 9
THE L. S. STARRETT COMPANY
Notes to Consolidated Financial Statements
In the opinion of management, the accompanying financial statements contain
all adjustments, consisting only of normal recurring adjustments, necessary
to present fairly the financial position of the Company as of March 24,
2001 and June 24, 2000; the results of operations and cash flows for the
thirteen weeks and thirty-nine weeks ended March 24, 2001 and March 25,
2000; and changes in stockholders' equity for the thirty-nine weeks ended March
24, 2001 and March 25, 2000.
The Company follows the same accounting policies in the preparation of interim
statements as described in the Company's annual report filed on form 10-K for
the year ended June 24, 2000, and these financial statements should be read
in conjunction with said annual report.
Other income (expense) is comprised of the following (in thousands):
Thirteen Weeks Thirty-nine Weeks
Ended March Ended March
2001 2000 2001 2000
Interest income 267 378 739 926
Interest expense and commitment fees (178) (218) (531) (639)
Realized exchange gains and losses (207) 77 (379) (21)
Other (99) (69) (272) (94)
(217) 168 (443) 172
Approximately 70% of all inventories are valued on the LIFO method. At
March 24, 2001, and June 24, 2000, total inventories are $23,019,000 and
$22,683,000 less, respectively, than if determined on a FIFO basis.
Long-term debt is comprised of the following (in thousands):
March June
2001 2000
Industrial revenue bond 300
Term loan due Dec. 2003 4,000
Revolving credit agreement 3,000 3,000
7,000 3,300
Less current portion 300
7,000 3,000
Page 6 of 9
THE L. S. STARRETT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales
Compared to the prior year, total Company sales are down 14% for the quarter
and 5% year to date. Foreign sales are down 21% for the quarter (15% in local
currency) and 4% year to date. Domestic sales are down 11% for the quarter and
5% year to date, reflecting a drop in our industrial demand during the quarter
as well as weak consumer demand during the second quarter holiday season.
Although sales of our Brazil subsidiary are up slightly on a year to date
basis, customer inventory rebalancing and unfavorable changes in the exchange
rate caused a significant drop in sales for the quarter. Sales of our Scotland
subsidiary are down for quarter and year to date reflecting the strong pound
compared to the euro, which continues to adversely affect Scotland's business
in terms of export pricing and import price competition.
Earnings Before Taxes
Pretax earnings are down 54% for the quarter, 29% year to date. For the
quarterly comparison, this is primarily attributable to the foreign decrease in
sales and related factory activity. The year to date comparison is a result of
both foreign and domestic sales decreases along with significant increases in
the cost of maintaining existing domestic fringe benefit programs.
Income Taxes
The effective income tax rate was 41% for the quarter and 32% year to date.
This compares to 30% and 32% in the prior periods. The change in the quarterly
comparison is a result of changes in income mix between foreign and domestic
taxing jurisdictions, with domestic tax rates generally being higher.
Earnings per share
As a result of the above factors, earnings per share are down 59% for the
quarter and 27% year to date.
Market Risk
At June 24, 2000 and March 24, 2001, the Company was not a party to any
derivative arrangement and the Company does not engage in trading, market-
making or other speculative activities in the derivatives markets. In addition,
the Company does not enter into long-term supply contracts with either fixed
prices or quantities.
The Company does not engage in regular hedging activities to minimize the
impact of foreign currency fluctuations. Net monetary assets at our foreign
locations are less than $2 million. Inflation in Brazil has decreased to
approximately 10% today from over 2000% in 1994 when their new economic plan
was initiated. As a consequence, their economy ceased to be considered
hyperinflationary as of January 1998.
A 10% change in interest rates would not have a significant impact on the
aggregate net fair value of the Company's interest rate sensitive financial
instruments (primarily variable rate investments of $10,400,000 and debt of
$11,200,000 at March 24, 2001) or the cash flows or future earnings associated
with those financial instruments. A 10% change in interest rates would impact
the fair value of the Company's fixed rate investments of $6,600,000 by
approximately $300,000.
Page 7 of 9
LIQUIDITY AND CAPITAL RESOURCES
13 Weeks Ended 39 Weeks Ended
3/24/01 3/25/00 3/24/01 3/25/00
Cash provided by operations 5,495 8,737 16,592 16,614
Cash used in investing activities (7,226) (6,096) (14,919) (11,846)
Cash used in financing activities 1,824 (4,126) (2,857) (4,307)
Cash effect of translation rate changes (40) 68 111 45
Net increase (decrease) in cash 53 (1,417) (1,073) 506
Lower earnings and increased inventories were the main contributors to the
decrease in cash provided by operations during the quarter. In the year to date
comparison, the drop in earnings was offset by changes in working capital
components. The increase in cash used in investing activities represents an
increase in short-term investments. The changes in financing activities reflect
increased borrowings in the current quarter to support foreign operations and
decreased purchases of treasury shares both in the quarter and year to date.
The Company maintains sufficient liquidity and has adequate resources,
including lines of credit, to fund its operations under current business
conditions. The Company continues to maintain a strong financial position with
a working capital ratio of 5.1 to 1 as of March 24, 2001 and 4.7 to 1 as of
June 24, 2000.
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This quarterly report, as well as the 2000 Annual Report, including the
Chairman's letter to stockholders, include forward-looking statements about the
Company's business, sales, expenditures, environmental regulatory compliance,
foreign operations, 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 security analysts and investors.
The Company is subject to risks that could cause actual events to vary
materially from such forward-looking statements, including the following risk
factors:
Risks Related to Technology: Although the Company's strategy includes
significant investment in research and development of new and innovative
products to meet technology advances, there can be no assurance that the
Company will be successful in competing against new technologies developed by
competitors.
Risks Related to Adoption of the Euro: The new European currency (the euro)
began being used by the eleven participating European countries January 1,
1999. Although the United Kingdom is not currently a euro country, the
Company's Scottish subsidiary does a significant amount of business with euro
countries. Management believes it has the necessary systems and business
processes to deal with what is, in effect, one more foreign currency. There can
be no assurance, however, that there will not be unforeseen economic effects of
this change that affect the Company's business. Indeed, the current weakness of
the euro as compared to the British pound and U.S. dollar has had an adverse
impact on the Company's sales and margins on business done with euro countries.
Risks Related to Foreign Operations: Approximately 30 percent of the Company's
sales and net assets relate to foreign operations. Foreign operations are
subject to special risks that can materially affect the sales, profits, cash
flows, and financial position of the Company, including taxes and other
Page 8 of 9
restrictions on distributions and payments, currency exchange rate
fluctuations, political and economic instability, inflation, minimum capital
requirements, and exchange controls. In particular, the Company's Brazilian
operations, which constitute over half of the Company's revenues from foreign
operations, can be very volatile, changing from year to year due to the
political situation and economy. As a result, the future performance of the
Brazilian operations is inherently unpredictable.
Risks Related to Cyclical Nature of the Industry: The market for most of the
Company's products is subject to economic conditions affecting the industrial
manufacturing sector, including the level of capital spending by industrial
companies. Accordingly, economic weakness in the industrial manufacturing
sector will result in decreased demand for the Company's products and will
adversely affect performance. Economic weakness in the consumer market also
impacts the Company's performance.
Risks Related to Competition: The Company's business is subject to direct and
indirect competition from both domestic and foreign firms. In particular, low-
wage foreign sources have created severe competitive pricing pressures. Under
certain circumstances, including significant changes in U.S. and foreign
currency relationships, such pricing pressures might reduce unit sales and/or
adversely affect the Company's margins.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K. none
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 May 7, 2001 S/R.U.WELLINGTON, JR.
R. U. Wellington, Jr. (Treasurer
and Chief Financial Officer)
Date May 7, 2001 S/S.G.THOMSON
S. G. Thomson (Chief Accounting Officer)
Page 9 of 9