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 25, 1999
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 25, 1999:
Class A Common Shares 5,124,809
Class B Common Shares 1,572,407
Page 1 of 11
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 25, 1999 and September 26, 1998
(unaudited) 3
Consolidated Balance Sheets - September 25,
1999 (unaudited) and June 26, 1999 4
Consolidated Statements of Stockholders'
Equity - thirteen weeks ended September 25,
1999 and September 26, 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-10
Part II. Other information:
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and reports on Form 8-K 10-11
Page 2 of 11
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 9/25/99 9/26/98
Net sales 58,412 58,364
Cost of goods sold (42,267) (41,221)
Selling and general (11,844) (11,891)
Other income and expense 16 509
Earnings before income taxes 4,317 5,761
Provision for federal, foreign and
state income taxes 1,442 1,845
Net earnings 2,875 3,916
Basic earnings per share .43 .57
Average outstanding shares used 6,698 6,896
Diluted earnings per share .43 .57
Average outstanding shares used 6,706 6,908
Dividends per share .20 .20
CASH FLOWS
Cash flows from operating activities:
Net earnings 2,875 3,916
Noncash expenses:
Depreciation and amortization 2,976 2,954
Deferred taxes 411 207
Unrealized translation losses(gains)
Working capital changes:
Receivables (6,505) 1,210
Inventories 1,158 1,031
Other assets and liabilities 1,130 (1,485)
Prepaid pension cost and other (905) (763)
Net cash from operations 1,140 7,070
Cash flows from investing activities:
Additions to plant and equipment (3,248) (5,335)
Short-term investments, net 1,464 (3,217)
Net cash used in investing (1,784) (8,552)
Cash flows from financing activities:
Short-term borrowings, net 2,415 (401)
Common stock issued 954 840
Treasury shares purchased (1,205) (861)
Dividends (1,339) (1,378)
Net cash used in financing 825 (1,800)
Effect of translation rate changes
on cash (28) 38
Net decrease in cash 153 (3,244)
Cash, beginning of period 271 3,705
Cash, end of period 424 461
See notes to consolidated financial statements
Page 3 of 11
THE L. S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands of dollars)
Sep. 25 June 26
1999 1999
ASSETS (unaudited)
Current assets:
Cash 424 271
Investments 15,356 16,933
Accounts receivable (less allowance for doubtful
accounts of $2,380,000 and $2,361,000) 42,138 36,004
Inventories:
Finished goods 32,178 31,964
Goods in process and finished parts 27,243 31,589
Raw materials and supplies 16,278 14,488
75,699 78,041
Prepaid expenses and other current assets 1,980 6,173
Total current assets 135,597 137,422
Property, plant and equipment, at cost (less
accumulated depreciation of $71,003,000
and $69,685,000) 73,494 73,854
Cost in excess of net assets acquired (less
accumulated amortization of $4,365,000
and $4,266,000) 6,998 7,094
Prepaid pension cost 27,149 26,212
Other assets 1,107 1,146
244,345 245,728
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities 6,016 3,600
Accounts payable and accrued expenses 11,580 13,783
Accrued salaries and wages 4,330 6,026
Taxes payable 691 484
Employee deposits for stock purchase plan 495 429
Total current liabilities 23,112 24,322
Deferred income taxes 12,433 11,919
Long-term debt 3,300 3,300
Accumulated postretirement medical benefit obligation 16,156 16,151
Stockholders' equity:
Class A Common $1 par (20,000,000 shrs. auth.;
5,124,809 outstanding in 9/99, excluding
1,249,165 held in treasury; 5,109,173 outstanding
in 6/99, excluding 1,243,158 held in treasury) 5,125 5,109
Class B Common $1 par (10,000,000 shrs. auth.;
1,572,407 outstanding in 9/99, excluding
291,340 held in treasury; 1,596,748 outstanding
in 6/99, excluding 288,642 held in treasury) 1,572 1,597
Additional paid-in capital 43,316 42,730
Retained earnings reinvested and employed in
the business 156,057 155,349
Foreign currency translation adjustment (16,871) (14,922)
Other equity adjustments 145 173
Total stockholders' equity 189,344 190,036
244,345 245,728
See Notes to Consolidated Financial Statements
Page 4 of 11
THE L. S. STARRETT COMPANY
Consolidated Statements of Stockholders' equity
For the Thirteen Weeks Ended September 25, 1999 and September 26, 1998
(in thousands of dollars)
(unaudited)
Common Addi- Accumulated
Stock Out- tional Other
standing Paid-in Retained Comprehensive
($1 Par) Capital Earnings Income Total
Balance June 27, 1998 6,897 41,263 151,317 (4,183) 195,294
Comprehensive income:
Net earnings 3,916 3,916
Unrealized net gains
on investments 103 103
Translation gain, net 253 253
Total comprehensive income 4,272
Dividends ($.20 per share) (1,378) (1,378)
Treasury shares:
Purchased (23) (145) (693) (861)
Issued 25 815 840
Balance September 26, 1998 6,899 41,933 153,162 (3,827) 198,167
Balance June 26, 1999 6,706 42,730 155,349 (14,749) 190,036
Comprehensive income:
Net earnings 2,875 2,875
Unrealized net losses
on investments (28) (28)
Translation loss, net (1,949) (1,949)
Total comprehensive income 898
Dividends ($.20 per share) (1,339) (1,339)
Treasury shares:
Purchased (46) (331) (828) (1,205)
Issued 37 917 954
Balance September 25, 1999 6,697 43,316 156,057 (16,726) 189,344
See Notes to Consolidated Financial Statements
Page 5 of 11
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 25,
1999 and June 26, 1999; the results of operations and cash flows for the
thirteen weeks ended September 25, 1999 and September 26, 1998; and changes
in stockholders' equity for the thirteen weeks ended September 25, 1999 and
September 26, 1998.
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 26, 1999, 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
1999 1998
Interest income 272 499
Interest expense and commitment fees (212) (77)
Realized and unrealized exchange losses (82) (31)
Other 38 118
16 509
Approximately 70% of all inventories are valued on the LIFO method. At
September 25, 1999 and June 26, 1999, total inventories are $23,508,000 and
$23,521,000 less, respectively, than if determined on a FIFO basis.
Long-term debt is comprised of the following (in thousands):
September June
1999 1999
Industrial revenue bond 900 900
Revolving credit agreement 3,000 3,000
3,900 3,900
Less current portion 600 600
3,300 3,300
Page 6 of 11
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 approximately the same as the
corresponding quarter of a year ago. A 5% decrease in foreign sales is
offset by a slight increase in domestic sales. The foreign decrease is
mainly a result of the Brazil currency devaluation that took place in
January 1999. In addition, the strong pound in the U.K. continues to
adversely affect Scotland's business in terms of export pricing and import
price competition. Foreign sales were actually up over 10% in local
currency. The increase in domestic sales was mostly due to product mix as
the industrial manufacturing sector continues to be weak.
Earnings Before Taxes
Pretax earnings are down 25% from the September 1998 quarter. Almost half of
this decrease relates to the devaluation mentioned above. The rest is due to
international pricing pressures resulting from the strong pound, lower
domestic margins as a result of lower production activity and overhead
absorption, product mix, and less net interest income.
Income Taxes
The effective income tax rate was 33.4% in the September quarter of 1999 and
32.0% in the prior year. The increase is because the prior period contained
the effects of some favorable tax law changes in Brazil.
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 1999
and September 1999, 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.
The Company does not engage in regular hedging activities to minimize the
impact of foreign currency fluctuations. Net monetary assets in Scotland and
Brazil are approximately $5 million and $4 million, respectively. Inflation
in Brazil has decreased to less than 10% today from over 2000% in 1994 when
their current 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 $8,000,000 and debt of
$9,000,000 at September 25, 1999) 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
approximately $6,800,000 by $300,000.
Year 2000
The Company does not currently anticipate any material disruption of its
operations as a result of 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.
Page 7 of 11
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 calendar 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. If it
begins to appear that the Company's planned upgrades and modifications might
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, and for one
system has actually adopted, 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 2000 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 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.
LIQUIDITY AND CAPITAL RESOURCES
13 Weeks Ended
9/25/99 9/26/98
Cash provided by operations 1,140 7,070
Cash used in investing activities (1,784) (8,552)
Cash from (used in) financing activities 825 (1,800)
Cash effect of translation rate changes (28) 38
Net increase (decrease) in cash 153 (3,244)
The drop in net earnings along with an increase in accounts receivable
caused cash flow provided by operations to decrease compared to the prior
year's quarter. Lower fixed asset additions and less cash available for
investment caused the drop in investing activity. Short-term borrowing in
Brazil accounts for the change in cash from financing activities.
Page 8 of 11
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 5.9 to 1 as of September 25, 1999 and 5.7 to
1 as of June 26, 1999.
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996
This quarterly report, as well as the 1999 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, 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 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. While the Company is in the process of
upgrading and modifying its systems in order to address the Year 2000 issue,
there can be no assurance that the Company's existing systems will be
upgraded or modified in time to remedy the Year 2000 issue or that the
Company's computer systems will not be disrupted upon the turn of the
century. Any disruption of the Company's business due to the Year 2000
issue, whether caused by the Company's systems or those of any of its
suppliers, customers, banks, lenders, or insurers, could have a material
adverse effect on the Company's financial condition or results of
operations. 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.
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, 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: Approximately a third of the Company's
sales are derived from foreign operations and approximately a third of the
Company's net assets are located outside the United States. 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
Page 9 of 11
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. See
Management's Discussion (SALES) regarding the recent devaluation of the
Brazilian currency.
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 15, 1999.
(c)1. The following directors were elected:
Abstentions
Votes Votes and Broker
For Withheld Non-votes
A shares voting as separate class:
Andrew B. Sides, Jr. 4,598,250 235,932 N/A
A and B shares voting together:
Douglas R. Starrett 19,037,952 295,910 N/A
Roger U. Wellington, Jr. 19,033,653 300,209 N/A
2. The following additional matters, as more fully described in the
registrant's Notice and Proxy Statement for said meeting, were
voted on:
Approval of an amendment to the Company's By-laws to specify the
the circumstances under which indemnification of directors and
officers and certain employees who are trustees and
administrators of the Company's employee benefit plans is
allowed or required. There were 17,019,084 votes in favor,
141,220 votes against, and 353,169 abstentions.
Approval of a form of indemnification agreement for directors
and officers and certain employees who are trustees and
administrators of the Company's employee benefit plans. There
were 16,884,227 votes in favor, 296,588 votes against, and
332,658 abstentions. Pursuant to this approval, effective
September 15, 1999, the Company entered into indemnification
agreements with such persons.
ITEM 6. Exhibits and Reports on Form 8-K.
6(a) Exhibit 3. Bylaws as amended 9/15/99 filed herewith electronically.
Page 10 of 11
ITEM 6. Exhibits and Reports on Form 8-K. (continued)
6(a)(continued) Exhibit 10. Form of indemnification agreement entered into
with directors and officers and certain employees who are trustees and
administrators of the Company's employee benefit plans 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 8, 1999 S/R.U.WELLINGTON, JR.
R. U. Wellington, Jr. (Treasurer
and Chief Financial Officer)
Date November 8, 1999 S/S.G.THOMSON
S. G. Thomson (Chief Accounting Officer)
Page 11 of 11