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 September 26, 1998
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 September 26, 1998 :
Class A Common Shares 5,220,090
Class B Common Shares 1,678,805
Page 1 of 10
THE L. S. STARRETT COMPANY
CONTENTS
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Earnings and
Cash Flows - thirteen weeks ended
September 26, 1998 and September 27, 1997
(unaudited) 3
Consolidated Balance Sheets - September 26,
1998 (unaudited) and June 27, 1998 4
Consolidated Statements of Stockholders'
Equity - thirteen weeks ended September 26,
1998 and September 27, 1997 (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 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other information 9-10
Item 6. Exhibits and reports on Form 8-K 10
Page 2 of 10
THE L. S. STARRETT COMPANY
Consolidated Statements of Earnings and Cash Flows
(in thousands of dollars except per share data)(unaudited)
13 Weeks Ended
EARNINGS 9/26/98 9/27/97
Net sales 58,364 65,213
Cost of goods sold (41,221) (44,479)
Selling and general (11,891) (12,794)
Other income and expense 509 460
Earnings before income taxes 5,761 8,400
Provision for federal, foreign and
state income taxes 1,845 2,987
Net earnings 3,916 5,413
Basic earnings per share .57 .78
Average outstanding shares used 6,896 6,924
Diluted earnings per share .57 .78
Average outstanding shares used 6,908 6,940
Dividends per share .20 .19
CASH FLOWS
Cash flows from operating activities:
Net earnings 3,916 5,413
Noncash expenses:
Depreciation and amortization 2,954 2,745
Deferred taxes 207 46
Unrealized translation losses(gains) 83
Working capital changes:
Receivables 1,210 (7,405)
Inventories 1,031 2,155
Other assets and liabilities (1,485) 3,634
Prepaid pension cost and other (763) (419)
Net cash from operations 7,070 6,252
Cash flows from investing activities:
Additions to plant and equipment (5,335) (3,820)
Increase in short-term investments (3,217) (1,310)
Net cash used in investing (8,552) (5,130)
Cash flows from financing activities:
Short-term borrowings, net (401)
Common stock issued 840 886
Treasury shares purchased (861) (3,685)
Dividends (1,378) (1,317)
Net cash used in financing (1,800) (4,116)
Effect of translation rate changes
on cash 38 1
Net decrease in cash (3,244) (2,993)
Cash, beginning of period 3,705 3,053
Cash, end of period 461 60
See notes to consolidated financial statements
Page 3 of 10
THE L. S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands of dollars)
Sep. 26 June 27
1998 1998
ASSETS (unaudited)
Current assets:
Cash 461 3,705
Investments 30,554 27,115
Accounts receivable (less allowance for doubtful
accounts of $2,503,000 and $2,450,000) 39,741 40,764
Inventories:
Finished goods 32,103 30,199
Goods in process and finished parts 25,252 25,825
Raw materials and supplies 15,477 17,753
72,832 73,777
Prepaid expenses and other current assets 2,460 5,335
Total current assets 146,048 150,696
Property, plant and equipment, at cost (less
accumulated depreciation of $68,825,000
and $66,233,000) 71,285 68,818
Cost in excess of net assets acquired (less
accumulated amortization of $4,016,000
and $3,896,000) 7,396 7,484
Prepaid pension cost 22,968 22,035
Other assets 1,084 1,230
248,781 250,263
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities 600 1,001
Accounts payable and accrued expenses 11,652 14,371
Accrued salaries and wages 5,248 8,059
Taxes payable 2,670 1,475
Employee deposits for stock purchase plan 645 528
Total current liabilities 20,815 25,434
Deferred income taxes 9,496 9,367
Long-term debt 3,900 3,900
Accumulated postretirement medical benefit obligation 16,403 16,268
Stockholders' equity:
Class A Common $1 par (20,000,000 shrs. auth.;
5,220,090 outstanding in 9/98, excluding
1,039,852 held in treasury; 5,193,904 outstanding
in 6/98, excluding 1,045,731 held in treasury) 5,220 5,194
Class B Common $1 par (10,000,000 shrs. auth.;
1,678,805 outstanding in 9/98, excluding
278,605 held in treasury; 1,703,434 outstanding
in 6/98, excluding 274,283 held in treasury) 1,679 1,703
Additional paid-in capital 41,933 41,263
Retained earnings reinvested and employed in
the business 153,162 151,317
Foreign currency translation adjustment (4,226) (4,479)
Other equity adjustments 399 296
Total stockholders' equity 198,167 195,294
248,781 250,263
See Notes to Consolidated Financial Statements
Page 4 of 10
THE L. S. STARRETT COMPANY
Consolidated Statements of Stockholders' equity
For the Thirteen Weeks Ended September 26, 1998 and September 27, 1997
(in thousands of dollars)
(unaudited)
Common Addi-
Stock Out- tional Equity
standing Paid-in Retained Adjust-
($1 Par) Capital Earnings ments Total
Balance June 28, 1997 6,944 38,730 137,788 (2,997) 180,465
Net earnings 5,413 5,413
Dividends ($.19) (1,317) (1,317)
Treasury shares:
Purchased (110) (693) (2,882) (3,685)
Issued 26 860 886
Translation loss, net (418) (418)
Investment valuation 0 0
Balance September 27, 1997 6,860 38,897 139,002 (3,415) 181,344
Balance June 27, 1998 6,897 41,263 151,317 (4,183) 195,294
Net earnings 3,916 3,916
Dividends ($.20) (1,378) (1,378)
Treasury shares:
Purchased (23) (145) (693) (861)
Issued 25 815 840
Translation gain, net 253 253
Investment valuation 103 103
Balance September 26, 1998 6,899 41,933 153,162 (3,827) 198,167
See Notes to Consolidated Financial Statements
Page 5 of 10
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 September 26,
1998 and June 27, 1998; the results of operations and cash flows for the
thirteen weeks ended September 26, 1998 and September 27, 1997; and changes in
stockholders' equity for the thirteen weeks ended September 26, 1998 and
September 27, 1997.
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 27, 1998, 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
Ended September
1998 1997
Interest income 499 642
Interest expense and commitment fees (77) (205)
Realized and unrealized exchange losses (31) (97)
Other 118 120
509 460
Approximately 70% of all inventories are valued on the LIFO method. At
September 26, 1998 and June 27, 1998, total inventories are $24,426,000 and
$23,998,000 less, respectively, than if determined on a FIFO basis.
Long-term debt is comprised of the following (in thousands):
September June
1998 1997
Industrial revenue bond 1,500 1,500
Revolving credit agreement 3,000 3,000
4,500 4,500
Less current portion 600 600
3,900 3,900
Effective with the quarter ended September 26, 1998, the Company adopted
Statement of Financial Accounting Standards No.130, "Reporting Comprehensive
Income." Following is the reconciliation of net earnings to comprehensive
income:
Thirteen Weeks
Ended September
1998 1997
Net earnings 3,916 5,413
Unrealized gains on investments 103
Accumulated translation adjustments 253 (418)
Comprehensive income 4,272 4,995
Page 6 of 10
THE L. S. STARRETT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales
Sales for the September quarter are 11% below the corresponding quarter of a
year ago. The decrease comes from most all locations, particularly foreign,
reflecting the negative effects of the strong pound in the U.K. and general
economic conditions in Brazil. In addition, the current quarter is being
compared to a record 1998 first quarter that experienced a 12% sales increase,
significantly higher than the 6% sales increase for the full year.
Earnings Before Taxes
Pretax earnings are down 31% from the September 1997 quarter. This is consis-
tent with the decrease in sales volume mentioned above, the international
pricing pressures resulting from the strong pound, and lower overhead
absorption resulting from lower production activity.
Income Taxes
The effective income tax rate was 32.0% in the September quarter of 1998 and
35.6% in the prior year. The decrease results from favorable tax law changes in
Brazil as well as sales mix changes favoring Puerto Rico, where the effective
tax rate is low.
Year 2000
The Company does not currently anticipate any material disruption of its
operations as a result of any failure by the Company to be year 2000 compliant.
If, however, the Company, its customers or its suppliers are unable to achieve
year 2000 compliance, the potential exists for the Company's business and
results of operations to be adversely affected.
Worldwide, the Company has four major computer systems that are used in the
areas of manufacturing, sales and accounting. Two use third party packages that
the Company believes are or, through vendor upgrades, will be year 2000
compliant. The other two systems are in the process of being converted to third
party packages that the Company believes are already compliant. The Company
expects to complete the reasonably necessary remediation of its significant
systems by the end of fiscal 1999 and has not incurred, and does not expect to
incur, significant additional separately identifiable costs in order to make
its computer systems year 2000 compliant. In the event the Company's planned
upgrades and modifications fail to bring any of these major systems into Year
2000 compliance or fail to do so in a timely manner, the Company will have to
adopt contingency plans to deal with any resulting disruptions in its business.
The Company employs certain manufacturing processes that utilize computer
controlled manufacturing equipment. The Company believes such equipment is year
2000 compliant to the extent reasonably necessary but has not completed its
testing of such equipment. In the event the Company determines that such
equipment cannot readily be made year 2OOO compliant, it believes it can revert
to the manual processes previously employed or outsource such work. The Company
is also in the process of investigating the status of other systems with
respect to year 2000 compliance such as phone, fax, heating/air conditioning,
and electricity and believes they will be year 2000 compliant to the extent
reasonably necessary before the end of 1999. The Company is utilizing internal
resources for this purpose and does not expect to incur significant separately
identifiable costs.
In addition to reviewing its own systems, the Company has polled or is in the
process of polling its significant customers and vendors to get assurance that
Page 7 of 10
they are year 2000 compliant and to attempt to identify potential issues. To
the extent such assurance is not received, appropriate contingency plans will
be developed and implemented. At this time, the Company is not aware of
significant problems. If the Company's customers and vendors do not achieve
year 2000 compliance before the end of 1999, the Company could experience a
variety of problems that might have a material adverse effect on the Company's
business and results of operations. For example, customers might lose EDI
capability or vendors might fail to deliver, but most foreseeable problems can
be overcome by reverting to phone, fax, mail and other manual procedures. It
should be noted that the Company outsources very little other than raw steel
and is not dependent on single source suppliers. In addition it has no customer
accounting for more than ten percent of sales.
LIQUIDITY AND CAPITAL RESOURCES
13 Weeks Ended
9/26/98 9/27/97
Cash provided by operations 7,070 6,252
Cash used in investing activities (8,552) (5,130)
Cash used in financing activities (1,800) (4,116)
Cash effect of translation rate changes 38 1
Net decrease in cash (3,244) (2,993)
Despite a decrease in net earnings, cash flow provided by operations increased
slightly compared to the prior year because the prior year's quarter
experienced a large but temporary increase in accounts receivable. A reduction
in treasury share purchases in the current year's quarter allowed for an
increase in investments.
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 7.0 to 1 as of September 26, 1998 and 5.9 to 1 as of
June 27, 1998.
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This quarterly report, as well as the 1998 Annual Report, including the
Chairman's letter to stockholders, include forward-looking statements about the
Company's business, sales, expenditures, Year 2000 compliance, environmental
regulatory compliance, foreign operations, 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 Year 2000 Issues: The Company continues to explore whether and
to what extent its computer and other systems will be disrupted at the turn of
the century as a result of the widely-publicized dating system flaw inherent in
many computer systems. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Year 2000."
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.
Page 8 of 10
Risks Related to Adoption of the Euro: The new European currency (the Euro)
will begin 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, but there
can be no assurance that there will not be unforeseen economic effects of this
change that might affect the Company's sales or margins on business done with
Euro countries.
Risks Related 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 in emerging markets, 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 the Company's
products is subject to general economic conditions, including the level of
capital spending by industrial companies. As such, recessionary forces
decrease demand for the Company's products and adversely affect 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 4. Submission of Matters to a Vote of Security Holders.
(a) A regular meeting of shareholders was held on September 16, 1998.
(c) The following directors were elected:
Abstentions
Votes Votes and Broker
For Withheld Non-votes
A shares voting as separate class:
Richard B. Kennedy 4,520,306 63,697 N/A
A and B shares voting together:
George B. Webber 19,504,980 94,593 N/A
ITEM 5. Other Information.
Stockholder Proposals - On September 16, 1998, the Company's Board of
Directors voted to amend the Company's bylaws requiring, in general, that
stockholders provide the Company with notice at least 120 days prior to a
stockholders' meeting of any nominations for the Board of Directors or any
proposal to be voted upon at a meeting of the stockholders. Under the Company's
recently amended bylaws, stockholders who wish to make a proposal at the 1999
annual meeting scheduled for September 15, 1999, other than one that will be
included in the Company's proxy materials, must notify the Company no earlier
than April 19, 1999 and no later than May 19, 1999. Under recent changes to the
federal proxy rules, if a stockholder who wishes to present such a proposal
fails to notify the Company by May 19, 1999, then the proxies that management
Page 9 of 10
solicits for the 1999 annual meeting will include discretionary authority to
vote on the stockholder's proposal in the event it is properly brought before
the meeting notwithstanding the Company's bylaws. Stockholder proposals for
inclusion in the Company's proxy statement for its 1999 annual meeting must be
received by the Company no later than April 14, 1999.
ITEM 6. Exhibits and Reports on Form 8-K.
6(a) Exhibit 3. Bylaws as amended 9/16/98 filed herewith electronically
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 November 6, 1998 S/R.U.WELLINGTON, JR.
R. U. Wellington, Jr. (Treasurer
and Chief Financial Officer)
Date November 6, 1998 S/S.G.THOMSON
S. G. Thomson (Chief Accounting Officer)
Page 10 of 10