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 27, 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 March 27, 1999 :
Class A Common Shares 5,202,511
Class B Common Shares 1,608,357
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 thirty-nine
weeks ended March 27, 1999 and
March 28, 1998 (unaudited) 3
Consolidated Balance Sheets - March 27,
1999 (unaudited) and June 27, 1998 4
Consolidated Statements of Stockholders'
Equity - thirty-nine weeks ended
March 27, 1999 and March 28, 1998
(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 39 Weeks Ended
EARNINGS 3/27/99 3/28/98 3/27/99 3/28/98
Net sales 57,074 61,195 176,327 195,046
Cost of goods sold (40,369) (41,317) (123,784)(131,168)
Selling and general (11,882) (12,761) (36,390) (39,771)
Other income and expense 403 319 1,389 1,161
Earnings before income taxes 5,226 7,436 17,542 25,268
Provision for federal, foreign and
state income taxes 1,640 2,441 5,527 8,469
Net earnings 3,586 4,995 12,015 16,799
Basic earnings per share .53 .72 1.75 2.43
Average shares used 6,833 6,880 6,871 6,889
Diluted earnings per share .53 .72 1.75 2.43
Average shares used 6,838 6,894 6,878 6,904
Dividends per share .20 .19 .60 .57
CASH FLOWS
Cash flows from operating activities:
Net earnings 3,586 4,995 12,015 16,799
Noncash expenses:
Depreciation and amortization 2,814 2,802 8,780 8,197
Deferred taxes 163 232 97 24
Unrealized translation losses 154
Working capital changes:
Receivables (3,359) 2,265 (315) (3,762)
Inventories (540) 336 (479) 3,725
Other assets and liabilities (147) 169 476 3,220
Prepaid pension cost and other (1,197) (1,043) (2,317) (2,575)
Net cash from operations 1,320 9,756 18,257 25,782
Cash flows from investing activities:
Additions to plant and equipment (4,050) (4,242) (13,830) (12,048)
Change in short-term investments 3,987 (2,070) 628 (6,591)
Net cash used in investing (63) (6,312) (13,202) (18,639)
Cash flows from financing activities:
Short-term borrowings, net (1,382) (401) (1,281)
Long-term debt repayments (2,000) (300) (2,300)
Common stock issued 831 820 2,924 2,640
Treasury shares purchased (2,895) (505) (5,912) (4,524)
Dividends (1,366) (1,304) (4,117) (3,923)
Net cash used in financing (3,430) (4,371) (7,806) (9,388)
Effect of translation rate changes
on cash (165) (2) (179) 24
Net decrease in cash (2,338) (929) (2,930) (2,221)
Cash, beginning of period 3,113 1,761 3,705 3,053
Cash, end of period 775 832 775 832
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)
March 27 June 27
1999 1998
ASSETS (unaudited) _______
Current assets:
Cash 775 3,705
Investments 26,226 27,115
Accounts receivable (less allowance for doubtful
accounts of $2,387,000 and $2,450,000) 38,560 40,764
Inventories:
Finished goods 26,553 30,199
Goods in process and finished parts 26,579 25,825
Raw materials and supplies 14,823 17,753
67,955 73,777
Prepaid expenses and other current assets 1,107 5,335
Total current assets 134,623 150,696
Property, plant and equipment, at cost (less
accumulated depreciation of $69,035,000
and $66,233,000) 68,751 68,818
Cost in excess of net assets acquired (less
accumulated amortization of $4,171,000
and $3,896,000) 7,190 7,484
Prepaid pension cost 24,470 22,035
Other assets 1,143 1,230
236,177 250,263
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities 600 1,001
Accounts payable and accrued expenses 11,162 14,371
Accrued salaries and wages 4,948 8,059
Taxes payable 1,981 1,475
Employee deposits for stock purchase plan 508 528
Total current liabilities 19,199 25,434
Deferred income taxes 9,717 9,367
Long-term debt 3,600 3,900
Accumulated postretirement medical benefit obligation 16,299 16,268
Stockholders' equity:
Class A Common $1 par (20,000,000 shrs. auth.;
5,202,511 outstanding in 1999, excluding
1,134,731 held in treasury; 5,193,904 outstanding
in 1998, excluding 1,045,731 held in treasury) 5,203 5,194
Class B Common $1 par (10,000,000 shrs. auth.;
1,608,357 outstanding in 1999, excluding
286,278 held in treasury; 1,703,434 outstanding
in 1998, excluding 274,283 held in treasury) 1,608 1,703
Additional paid-in capital 42,769 41,263
Retained earnings reinvested and employed in
the business 154,807 151,317
Foreign currency translation adjustment (17,414) (4,479)
Other equity adjustments 389 296
Total stockholders' equity 187,362 195,294
236,177 250,263
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 Thirty-nine Weeks Ended March 27, 1999 and March 28, 1998
(in thousands of dollars)
(unaudited)
Common Addi-
Stock Out- tional Equity
standing Paid-in Retained Adjust-
($1 Par) Capital Earnings ments Total
Balance June 28, 1997 6,944 38,730 137,788 (2,997) 180,465
Net earnings 16,799 16,799
Dividends ($.57) (3,923) (3,923)
Treasury shares:
Purchased (132) (826) (3,566) (4,524)
Issued 68 2,377 2,445
Options exercised 10 185 195
Translation loss, net (498) (498)
Investment valuation 126 126
Balance March 28, 1998 6,890 40,466 147,098 (3,369) 191,085
Balance June 27, 1998 6,897 41,263 151,317 (4,183) 195,294
Net earnings 12,015 12,015
Dividends ($.60) (4,117) (4,117)
Treasury shares:
Purchased (184) (1,320) (4,408) (5,912)
Issued 84 2,504 2,588
Options exercised 14 322 336
Translation loss, net (12,936) (12,936)
Investment valuation 94 94
Balance March 27, 1999 6,811 42,769 154,807 (17,025) 187,362
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 March 27,
1999 and June 27, 1998; the results of operations and cash flows for the
thirteen weeks and thirty-nine weeks ended March 27, 1999 and March 28,
1998; and changes in stockholders' equity for the thirty-nine weeks ended March
27, 1999 and March 28, 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 27, 1998, and these financial statements should be read
in conjunction with said annual report. In the third quarter of fiscal 1998,
the Company's operations in Brazil ceased to be considered highly inflationary
and, accordingly, the Company now accounts for any resulting translation
adjustments as a component of equity.
Other income (expense) is comprised of the following (in thousands):
Thirteen Weeks Thirty-nine Weeks
Ended March Ended March
1999 1998 1999 1998
Interest income 393 711 1,357 2,099
Interest expense and commitment fees (115) (171) (307) (628)
Realized and unrealized exchange losses 57 (237) 30 (469)
Other 68 16 309 159 .
403 319 1,389 1,161 .
Approximately 70% of all inventories are valued on the LIFO method. At
March 27, 1999, and June 27, 1998, total inventories are $25,013,000 and
$23,998,000 less, respectively, than if determined on a FIFO basis.
Long-term debt is comprised of the following (in thousands):
March June
1999 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
Following is the reconciliation of net earnings to comprehensive income:
Thirteen Weeks Thirty-nine Weeks
Ended March Ended March
1999 1998 1999 1998
Net earnings 3,586 4,995 12,015 16,799
Unrealized gains on investments (45) 49 94 126
Accumulated translation adjustments (11,948) (1,318) (12,936) (498)
Comprehensive income (8,407) 3,726 (827) 16,427
The devaluation of the Brazilian Real in January 1999 resulted in an exchange
rate of about 2.0 Reals to the U.S. dollar at the end of the current quarter
compared to 1.2 at the beginning of the quarter, causing virtually all of the
translation adjustment being shown above for the quarter. At the end of April,
the rate had fallen back to about 1.7 Reals to the dollar, reversing about
$4,000,000 of the decline shown above.
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
Compared to a year ago, sales are down 7% in the March quarter and 10% for the
three quarters ended in March. Of these decreases, approximately 4 and 2
percentage points, respectively, are due to the 40% devaluation of the
Brazilian Real that took place during the March quarter (this devaluation has
reversed itself to around 30% at the end of April). The year to date decrease
is spread fairly evenly between foreign and domestic operations, although
foreign sales actually were flat in the March quarter comparison if the effect
of the devaluation is ignored. These decreases in revenue directly reflect the
industrial manufacturing economies, both in the U.S. and abroad. Over the past
nine months, manufacturing operations on the industrial side in the U.S. have
slowed, although our March sales would indicate that the downward trend has
bottomed. In Scotland we are still being hurt by the strong British pound. In
Brazil, the economy is slow, but the effects of the devaluation do not appear,
at least so far, to be as severe as some had predicted.
Earnings Before Taxes
Pretax earnings are down 30% for the quarter and 31% for the year to date
comparisons. This is consistent with the decrease in sales 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 (33% and 34%) in the corresponding periods in the
prior year. The main cause of the decrease is the favorable tax effect of a
dividend paid by our Scottish subsidiary during the current quarter.
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 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 2OOO compliant, it believes it can revert
to the manual processes previously employed or outsource such work. The Company
Page 7 of 9
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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. In addition it has no customer
accounting for more than ten percent of sales.
LIQUIDITY AND CAPITAL RESOURCES
13 Weeks Ended 39 Weeks Ended
3/27/99 3/28/98 3/27/99 3/28/98
Cash provided by operations 1,320 9,756 18,257 25,782
Cash used in investing activities (63) (6,312) (13,202) (18,639)
Cash used in financing activities (3,430) (4,371) (7,806) (9,388)
Cash effect of translation rate changes (165) (2) (179) 24
Net increase (decrease) in cash (2,338) (929) (2,930) (2,221)
Although earnings have decreased compared to prior periods, the main reasons
for the decrease in cash flow provided from operations are the working capital
changes. These working capital changes as well as an increase in treasury share
purchases (a financing activity) in both the current and year to date
comparisons have resulted in less funds being available for short-term
investing and, in the current quarter, the need to liquidate certain short-term
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 March 27, 1999 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 may include forward-looking statements about the
Company's business, general economic conditions, 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
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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 May 7, 1999 S/R.U.WELLINGTON, JR.
R. U. Wellington, Jr. (Treasurer
and Chief Financial Officer)
Date May 7, 1999 S/S.G.THOMSON
S. G. Thomson (Chief Accounting Officer)
Page 9 of 9
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