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 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 filing requirements for the past 90 days.
YES X NO
Common Shares outstanding as of December 26, 1998 :
Class A Common Shares 5,254,971
Class B Common Shares 1,622,230
Page 1 of 9
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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 twenty-six
weeks ended December 26, 1998 and
December 27, 1997 (unaudited) 3
Consolidated Balance Sheets - December 26,
1998 (unaudited) and June 27, 1998 4
Consolidated Statements of Stockholders'
Equity - twenty-six weeks ended
December 26, 1998 and December 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 6. Exhibits and reports on Form 8-K 9
Page 2 of 9
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THE L. S. STARRETT COMPANY
Consolidated Statements of Earnings and Cash Flows
(in thousands of dollars except per share data)(unaudited)
13 Weeks Ended 26 Weeks Ended
EARNINGS 12/26/98 12/27/97 12/26/98 12/27/97
Net sales 60,889 68,638 119,253 133,851
Cost of goods sold (42,194) (45,372) (83,415) (89,851)
Selling and general (12,617) (14,216) (24,508) (26,010)
Other income and expense 477 382 986 842
Earnings before income taxes 6,555 9,432 12,316 17,832
Provision for federal, foreign and
state income taxes 2,042 3,041 3,887 6,028
Net earnings 4,513 6,391 8,429 11,804
Basic earnings per share .65 .93 1.22 1.71
Average shares used 6,884 6,865 6,890 6,894
Diluted earnings per share .65 .93 1.22 1.71
Average shares used 6,888 6,879 6,898 6,909
Dividends per share .20 .19 .40 .38
CASH FLOWS
Cash flows from operating activities:
Net earnings 4,513 6,391 8,429 11,804
Noncash expenses:
Depreciation and amortization 3,012 2,650 5,966 5,395
Deferred taxes (273) (254) (66) (208)
Unrealized translation losses 71 154
Working capital changes:
Receivables 1,834 1,378 3,044 (6,027)
Inventories (970) 1,234 61 3,389
Other assets and liabilities 2,108 (583) 623 3,051
Prepaid pension cost and other (357) (1,113) (1,120) (1,532)
Net cash from operations 9,867 9,774 16,937 16,026
Cash flows from investing activities:
Additions to plant and equipment (4,445) (3,986) (9,780) (7,806)
Increase in short-term investments (142) (3,211) (3,359) (4,521)
Net cash used in investing (4,587) (7,197) (13,139) (12,327)
Cash flows from financing activities:
Short-term borrowings, net 101 (401) 101
Long-term debt repayments (300) (300) (300) (300)
Common stock issued 1,253 934 2,093 1,820
Treasury shares purchased (2,156) (334) (3,017) (4,019)
Dividends (1,373) (1,302) (2,751) (2,619)
Net cash used in financing (2,576) (901) (4,376) (5,017)
Translation rate change effect on cash (52) 25 (14) 26
Net increase (decrease) in cash 2,652 1,701 (592) (1,292)
Cash, beginning of period 461 60 3,705 3,053
Cash, end of period 3,113 1,761 3,113 1,761
See notes to consolidated financial statements
Page 3 of 9
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THE L. S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands of dollars)
Dec. 26 June 27
1998 1998
ASSETS (unaudited)
Current assets:
Cash 3,113 3,705
Investments 30,615 27,115
Accounts receivable (less allowance for doubtful
accounts of $2,472,000 and $2,450,000) 37,644 40,764
Inventories:
Finished goods 32,550 30,199
Goods in process and finished parts 25,722 25,825
Raw materials and supplies 15,018 17,753
73,290 73,777
Prepaid expenses and other current assets 2,394 5,335
Total current assets 147,056 150,696
Property, plant and equipment, at cost (less
accumulated depreciation of $71,168,000
and $66,233,000) 72,389 68,818
Cost in excess of net assets acquired (less
accumulated amortization of $4,099,000
and $3,896,000) 7,294 7,484
Prepaid pension cost 23,366 22,035
Other assets 1,189 1,230
251,294 250,263
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities 600 1,001
Accounts payable and accrued expenses 13,301 14,371
Accrued salaries and wages 5,732 8,059
Taxes payable 2,166 1,475
Employee deposits for stock purchase plan 549 528
Total current liabilities 22,348 25,434
Deferred income taxes 9,608 9,367
Long-term debt 3,600 3,900
Accumulated postretirement medical benefit obligation 16,539 16,268
Stockholders' equity:
Class A Common $1 par (20,000,000 shrs. auth.;
5,254,971 outstanding in Dec.1998, excluding
1,072,074 in treasury; 5,193,904 outstanding
in June 1998, excluding 1,045,731 in treasury) 5,255 5,194
Class B Common $1 par (10,000,000 shrs. auth.;
1,622,230 outstanding in Dec.1998, excluding
282,602 in treasury; 1,703,434 outstanding
in June 1998, excluding 274,283 in treasury) 1,622 1,703
Additional paid-in capital 42,647 41,263
Retained earnings reinvested and employed in
the business 154,707 151,317
Foreign currency translation adjustment (5,467) (4,479)
Other equity adjustments 435 296
Total stockholders' equity 199,199 195,294
251,294 250,263
See Notes to Consolidated Financial Statements
Page 4 of 9
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THE L. S. STARRETT COMPANY
Consolidated Statements of Stockholders' equity
For the Twenty-six Weeks Ended December 26, 1998 and December 27, 1997
(in thousands of dollars)
(unaudited)
Common Addi-
Stock Out- tional Equity
standing Paid-in Retained Adjust-
($1 Par) Capital Earnings ments Total
Balance June 28, 1997 6,944 38,730 137,788 (2,997) 180,465
Net earnings 11,804 11,804
Dividends ($.38) (2,619) (2,619)
Treasury shares:
Purchased (119) (745) (3,155) (4,019)
Issued 46 1,579 1,625
Options exercised 10 185 195
Translation gain, net 820 820
Investment valuation 77 77
Balance Dec. 27, 1997 6,881 39,749 143,818 (2,100) 188,348
Balance June 27, 1998 6,897 41,263 151,317 (4,183) 195,294
Net earnings 8,429 8,429
Dividends ($.40) (2,751) (2,751)
Treasury shares:
Purchased (88) (641) (2,288) (3,017)
Issued 54 1,703 1,757
Options exercised 14 322 336
Translation loss, net (988) (988)
Investment valuation 139 139
Balance Dec. 26, 1998 6,877 42,647 154,707 (5,032) 199,199
See Notes to Consolidated Financial Statements
Page 5 of 9
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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 26,
1998 and June 27, 1998; the results of operations and cash flows for the
thirteen weeks and twenty-six weeks ended December 26, 1998 and December 27,
1997; and changes in stockholders' equity for the twenty-six weeks ended
December 26, 1998 and December 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 Twenty-six Weeks
Ended December Ended December
1998 1997 1998 1997
Interest income 465 746 964 1,388
Interest expense and com-
mitment fees (115) (252) (192) (457)
Realized and unrealized ex-
change losses 4 (135) (27) (232)
Other 123 23 241 143
477 382 986 842
Approximately 70% of all inventories are valued on the LIFO method. At
December 26, 1998, and June 27, 1998, total inventories are $24,702,000 and
$23,998,000 less, respectively, than if determined on a FIFO basis.
Long-term debt is comprised of the following (in thousands):
December June
1998 1998
Industrial revenue bond 1,200 1,500
Revolving credit agreement 3,000 3,000
4,200 4,500
Less current portion 600 600
3,600 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 Twenty-six Weeks
Ended December Ended December
1998 1997 1998 1997
Net earnings 4,513 6,391 8,429 11,804
Unrealized gains on investments 36 77 139
Accumulated translation adjustments (1,241) 1,238 (988) 820
Comprehensive income 3,308 7,706 7,580 12,624
Page 6 of 9
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THE L. S. STARRETT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales
Sales are down 11% compared to a year ago, both for the December quarter and
year to date comparisons. The year to date decrease is spread fairly evenly
between foreign and domestic operations, although foreign sales were down more
than domestic in the first quarter and domestic sales were down more in the
second quarter. These decreases in revenue directly reflect the manufacturing
economies, both in the U.S. and abroad. Over the past six months, manufacturing
operations on the industrial side in the U.S. have slowed. In Scotland we are
still being hurt by the strong British pound and, in Brazil, the economy is
slowing. It is too early to predict what the effect of the recent currency
devaluation will be in Brazil. It will certainly disrupt economic activity for
a few months but, beyond that, remains to be seen.
Earnings Before Taxes
Pretax earnings are down 31% for both the quarter and year to date comparisons.
This is consistent with the decrease in sales volume mentioned above and the
lower margins resulting from 1) international pricing pressures due to the
strong pound and 2) lower overhead absorption due to lower production activity.
Income Taxes
The effective income tax rate is 31% for the quarter and 32% year to date. The
rates were slightly higher (32% and 34%) in the corresponding periods in the
prior year. The main cause of the decrease is a shift in income mix favoring
Brazil, where the effective tax rate is lower than our average.
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. 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 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,
Page 7 of 9
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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. In addition it has no customer
accounting for more than ten percent of sales.
LIQUIDITY AND CAPITAL RESOURCES
13 Weeks Ended 26 Weeks Ended
12/26/98 12/27/97 12/26/98 12/27/97
Cash provided by operations 9,867 9,774 16,937 16,026
Cash used in investing activities (4,587) (7,197) (13,139) (12,327)
Cash used in financing activities (2,576) (901) (4,376) (5,017)
Cash effect of translation rate changes (52) 25 (14) 26
Net increase (decrease) in cash 2,652 1,701 (592) (1,292)
Despite a decrease in net earnings, the quarter and year to date cash flow
provided by operations increased slightly compared to the prior year because of
working capital changes and increased depreciation. An increase in treasury
share purchases (a financing activity) in the current year's quarter resulted
in less funds being available for short-term investing. 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 6.6 to 1
as of December 26, 1998 and 5.9 to 1 as of June 27, 1997
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."
Page 8 of 9
<PAGE>
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: 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. See Management's Discussion
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 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 8, 1999 S/R.U.WELLINGTON, JR.
R. U. Wellington, Jr. (Treasurer
and Chief Financial Officer)
Date February 8, 1999 S/S.G.THOMSON
S. G. Thomson (Chief Accounting Officer)
Page 9 of 9
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