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 December 29, 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 filing requirements for the past 90 days.
YES X NO
Common Shares outstanding as of December 29, 2001 :
Class A Common Shares 5,087,735
Class B Common Shares 1,428,532
Page 1 of 9
THE L. S. STARRETT COMPANY
CONTENTS
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Operations and
Cash Flows - thirteen and twenty-six
weeks ended December 29, 2001 and
December 23, 2000 (unaudited) 3
Consolidated Balance Sheets - December 29,
2001 (unaudited) and June 30, 2001 4
Consolidated Statements of Stockholders'
Equity - twenty-six weeks ended
December 29, 2001 and December 23, 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 Operations and Cash Flows
(in thousands of dollars except per share data)(unaudited)
13 Weeks Ended 26 Weeks Ended
OPERATIONS 12/29/01 12/23/00 12/29/01 12/23/00
Net sales 44,918 60,650 91,440 119,492
Cost of goods sold (34,819) (43,529) (68,717) (85,270)
Selling and general (11,527) (13,298) (23,413) (26,099)
Other income and expense 10 (160) (382) (226)
Earnings (loss) before income taxes (1,418) 3,663 (1,072) 7,897
Provision for federal, foreign and
state income taxes (807) 1,080 (723) 2,419
Net earnings (loss) (611) 2,583 (349) 5,478
Basic earnings (loss) per share (.09) .40 (.05) .85
Average outstanding shares used 6,494 6,449 6,483 6,454
Diluted earnings (loss) per share (.09) .40 (.05) .85
Average outstanding shares used 6,494 6,457 6,483 6,463
Dividends per share .20 .20 .40 .40
CASH FLOWS
Cash flows from operating activities:
Net earnings (loss), (611) 2,583 (349) 5,478
Noncash expenses:
Depreciation and amortization 3,011 2,909 5,988 5,858
Deferred taxes 372 38 516 352
Unrealized exchange losses (gains) (36) 276
Working capital changes:
Receivables 3,283 2,501 5,445 (696)
Inventories 1,083 (564) (874) (4,350)
Other assets and liabilities 272 1,283 745 5,181
Prepaid pension cost and other (590) (404) (1,218) (726)
Net cash from operations 6,784 8,346 10,529 11,097
Cash flows from investing activities:
Additions to plant and equipment (2,531) (3,454) (5,042) (6,635)
Change in short-term investments (3,446) (1,743) (3,144) (1,058)
Net cash used in investing (5,977) (5,197) (8,186) (7,693)
Cash flows from financing activities:
Short-term borrowings, net (648) (924) (1,400) (1,400)
Common stock issued 838 907 1,578 1,707
Treasury shares purchased (333) (1,384) (426) (2,416)
Dividends (1,295) (1,283) (2,574) (2,572)
Net cash used in financing (1,438) (2,684) (2,822) (4,681)
Translation rate change effect on cash 50 47 (32) 151
Net increase (decrease) in cash (581) 512 (511) (1,126)
Cash, beginning of period 2,015 370 1,945 2,008
Cash, end of period 1,434 882 1,434 882
See Notes to Consolidated Financial Statements
Page 3 of 9
THE L. S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands of dollars)
Dec. 29 June 30
2001 2001
ASSETS (unaudited)
Current assets:
Cash 1,434 1,945
Investments 11,093 8,238
Accounts receivable (less allowance for doubtful
accounts of $1,953,000 and $1,976,000) 28,468 34,080
Inventories:
Finished goods 38,526 38,346
Goods in process and finished parts 28,724 27,811
Raw materials and supplies 17,483 18,677
84,733 84,834
Prepaid expenses, taxes and other current assets 3,479 5,830
Total current assets 129,207 134,927
Property, plant and equipment, at cost (less
accumulated depreciation of $78,839,000
and $73,652,000) 73,949 75,205
Cost in excess of net assets acquired (less
accumulated amortization of $4,081,000
and $3,947,000) 6,220 6,354
Prepaid pension cost 32,332 30,953
Other assets 1,040 1,093
242,748 248,532
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities 3,645 5,045
Accounts payable and accrued expenses 13,711 14,358
Accrued salaries and wages 4,004 4,827
Employee deposits, taxes payable and other 465 916
Total current liabilities 21,825 25,146
Deferred income taxes 15,709 15,218
Long-term debt 7,000 7,000
Accumulated postretirement medical benefit obligation 16,506 16,347
Stockholders' equity:
Class A Common $1 par (20,000,000 shrs. auth.;
5,087,735 outstanding on 12/29/01, excluding
1,419,598 in treasury; 5,017,569 outstanding
on 6/30/01, excluding 1,470,544 in treasury) 5,088 5,018
Class B Common $1 par (10,000,000 shrs. auth.;
1,428,532 outstanding on 12/29/01, excluding
330,575 in treasury; 1,440,006 outstanding
on 6/30/01, excluding 325,688 in treasury) 1,429 1,440
Additional paid-in capital 46,463 45,112
Retained earnings reinvested and employed in
the business 153,445 156,626
Accumulated other comprehensive income (24,717) (23,375)
Total stockholders' equity 181,708 184,821
242,748 248,532
See Notes to Consolidated Financial Statements
Page 4 of 9
THE L. S. STARRETT COMPANY
Consolidated Statements of Stockholders' Equity
For the Twenty-six Weeks Ended December 29, 2001 and December 23, 2000
(in thousands of dollars)
(unaudited)
Common Addi- Accumulated
Stock Out- tional Other
standing Paid-in Retained Comprehensive
($1 Par) Capital Earnings Income Total
Balance June 24, 2000 6,473 43,273 155,846 (17,570) 188,022
Comprehensive income:
Net earnings 5,478 5,478
Unrealized net gain
on investments 39 39
Translation loss, net (2,624) (2,624)
Total Comprehensive income 2,893
Dividends ($.40) (2,572) (2,572)
Treasury shares:
Purchased (126) (937) (1,353) (2,416)
Issued 88 1,599 1,687
Options exercised 1 19 20
Balance Dec. 23, 2000 6,436 43,954 157,399 (20,155) 187,634
Balance June 30, 2001 6,458 45,112 156,626 (23,375) 184,821
Comprehensive income:
Net earnings (loss) (349) (349)
Unrealized net losses
on investments (250) (250)
Translation loss, net (1,092) (1,092)
Total comprehensive income (1,691)
Dividends ($.40) (2,574) (2,574)
Treasury shares:
Purchased (21) (147) (258) (426)
Issued 67 1,286 1,353
Options exercised 13 212 225
Balance Dec. 29, 2001 6,517 46,463 153,445 (24,717) 181,708
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 December 29,
2001 and June 30, 2001; the results of operations and cash flows for the
thirteen weeks and twenty-six weeks ended December 29, 2001 and December 23,
2000; and changes in stockholders' equity for the twenty-six weeks ended
December 29, 2001 and December 23, 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 30, 2001, and these financial statements should be read
in conjunction with said annual report.
The Company will adopt SFAS 142 as of June 30, 2002, the first day of fiscal
2003. SFAS 142 requires goodwill no longer be amortized, but instead tested
for impairment annually or more frequently if certain indicators are present.
Any goodwill impairment loss at transition is recognized as the cumulative
effect of a change in accounting principle. The Company is required to complete
the initial step of a transitional impairment test by December 28, 2002 and the
final step by the end of fiscal 2003. As of December 29, 2001, goodwill
amounted to $6.2 million and related annual amortization was $268,000. The
Company is currently assessing but has not yet determined the impact of SFAS
142 on its financial position or results of operations.
Other income (expense) is comprised of the following (in thousands):
Thirteen Weeks Twenty-six Weeks
Ended December Ended December
2001 2000 2001 2000
Interest income 201 230 358 472
Interest expense and com-
mitment fees (144) (178) (306) (353)
Realized and unrealized
exchange gains (losses) 28 (129) (400) (172)
Other (75) (83) (34) (173)
10 (160) (382) (226)
Approximately 70% of all inventories are valued on the LIFO method. At
December 29, 2001, and June 30, 2001, total inventories are $22,738,000 and
$22,685,000 less, respectively, than if determined on a FIFO basis.
Long-term debt is comprised of the following (in thousands):
December June
2001 2001
Note payable due 12/03, 5.6% 4,000 4,000
Revolving credit agreement 3,000 3,000
7,000 7,000
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
Total Company sales for the December quarter are down 26% compared to the
corresponding quarter of a year ago. For the six months year to date, sales are
down 23% compared to the prior year. Domestic sales are down 25% for the
quarter and 22% year to date. Foreign sales are down 23% for the quarter and
25% year to date, although in local currency the drop is half that much. The
events of September 11 may have contributed indirectly to some of this decline,
but worldwide economic conditions have been affecting business for some time,
particularly during the last two quarters. The strong pound in the U.K.
continues to adversely affect Scotland's business in terms of export pricing
and import price competition.
Earnings Before Taxes
Pretax earnings (loss)are down $5.1 million in the quarter and $9.0 year to
date and as a percent of sales represent a pretax loss of 3% and 1%,
respectively. Pretax earnings in the comparable prior year periods were 6% and
7% of sales. Three quarters of the decrease, both in the quarter and year to
date, comes from our domestic operations. The decrease is almost entirely
attributable to the drop in sales and reduced factory hours, although $400,000
in exchange losses in Brazil during the first quarter of fiscal 2002 and
$300,000 in unexpected bad debt losses during the second quarter also
contributed to the decrease. Selling and general expenses have been reduced,
but not quite as much as sales.
Income Taxes
The effective income tax rate was 57% in the December quarter and 67% year to
date. This compares to 30% and 31% in the prior year. The change comes about
because pretax earnings (loss) are so close to breakeven in both quarters of
fiscal 2002 that permanent book/tax differences get exaggerated when converted
to percentages and because the least profitable operations during the current
year have been in the jurisdictions with the highest tax rates.
Earnings (loss) per share
As a result of the above factors, earnings (loss) per share for the quarter are
$(.09) and year to date are $(.05). This compares to $.40 and $.85 a year ago.
Market Risk
Market risk is the potential change in a financial instrument's value caused by
fluctuations in interest and currency exchange rates, and equity and commodity
prices. The Company's operating activities expose it to many risks that are
continually monitored, evaluated, and managed. Proper management of these risks
helps reduce the likelihood of earnings volatility. At June 2001 and December
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 local currency monetary assets in
Scotland and Brazil are less than $1 million.
Page 7 of 9
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 $10,300,000 and debt of
$10,600,000 at December 29, 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
$2,200,000 by approximately $50,000.
LIQUIDITY AND CAPITAL RESOURCES
13 Weeks Ended 26 Weeks Ended
12/29/01 12/23/00 12/29/01 12/23/00
Cash provided by operations 6,784 8,346 10,529 11,097
Cash used in investing activities (5,977) (5,197) (8,186) (7,693)
Cash used in financing activities (1,438) (2,684) (2,822) (4,681)
Cash effect of translation rate changes 50 47 (32) 151
Net increase (decrease) in cash (581) 512 (511) (1,126)
Cash provided by operations decreased, both in the quarterly and year to date
comparisons, but not nearly as much as earnings. This was primarily due to the
reduction in working capital requirements related to the decrease in activity.
A decrease in treasury share purchases accounted for the decrease in cash used
in financing activities.
The Company has sufficient liquidity and has adequate resources, including
lines of credit, to fund its operations in the near term. The Company continues
to maintain a strong financial position with a working capital ratio of 5.9 to
1 as of December 29, 2001 and 5.4 to 1 as of June 30, 2001. Although cutbacks
have been made, the Company has to date tried to maintain its skilled workforce
and dividend levels, despite the downturn in the industrial manufacturing
sector. If economic conditions do not improve, however, and the Company
continues to sustain losses at the current rate, additional steps may have to
be taken in order to maintain liquidity, including further workforce reductions
and/or reducing or eliminating the dividend.
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996
This quarterly report, as well as the 2001 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, theCompany's
Scottish subsidiary does a significant amount of business with Euro
Page 8 of 9
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 a third 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
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 February 11, 2002 S/R.U.WELLINGTON, JR.
R. U. Wellington, Jr. (Vice President,
Treasurer and Chief Financial Officer)
Date February 11, 2002 S/S.G.THOMSON
S. G. Thomson (Chief Accounting Officer)
Page 9 of 9