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 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 filing requirements for the past 90 days.
YES X NO
Common Shares outstanding as of December 25, 1999 :
Class A Common Shares 5,158,608
Class B Common Shares 1,553,374
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 25, 1999 and
December 26, 1998 (unaudited) 3
Consolidated Balance Sheets - December 25,
1999 (unaudited) and June 26, 1999 4
Consolidated Statements of Stockholders'
Equity - twenty-six weeks ended
December 25, 1999 and December 26, 1998
(unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
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 12/25/99 12/26/98 12/25/99 12/26/98
Net sales 61,245 60,889 119,657 119,253
Cost of goods sold (43,050) (42,194) (85,317) (83,415)
Selling and general (12,627) (12,617) (24,471) (24,508)
Other income and expense (12) 477 4 986
Earnings before income taxes 5,556 6,555 9,873 12,316
Provision for federal, foreign and
state income taxes 1,739 2,042 3,181 3,887
Net earnings 3,817 4,513 6,692 8,429
Basic earnings per share .57 .65 1.00 1.22
Average shares used 6,696 6,884 6,697 6,890
Diluted earnings per share .57 .65 1.00 1.22
Average shares used 6,702 6,888 6,704 6,898
Dividends per share .20 .20 .40 .40
CASH FLOWS
Cash flows from operating activities:
Net earnings 3,817 4,513 6,692 8,429
Noncash expenses:
Depreciation and amortization 2,976 3,012 5,952 5,966
Deferred taxes 406 (273) 817 (66)
Working capital changes:
Receivables 249 1,834 (6,256) 3,044
Inventories (1,309) (970) (151) 61
Other assets and liabilities 1,433 2,108 2,563 623
Prepaid pension cost and other (835) (357) (1,740) (1,120)
Net cash from operations 6,737 9,867 7,877 16,937
Cash flows from investing activities:
Additions to plant and equipment (2,894) (4,445) (6,142) (9,780)
Change in short-term investments (1,072) (142) 392 (3,359)
Net cash used in investing (3,966) (4,587) (5,750) (13,139)
Cash flows from financing activities:
Short-term borrowings, net 366 2,781 (401)
Long-term debt repayments (300) (300) (300) (300)
Common stock issued 962 1,253 1,916 2,093
Treasury shares purchased (694) (2,156) (1,899) (3,017)
Dividends (1,340) (1,373) (2,679) (2,751)
Net cash used in financing (1,006) (2,576) (181) (4,376)
Translation rate change effect on cash 5 (52) (23) (14)
Net increase (decrease) in cash 1,770 2,652 1,923 (592)
Cash, beginning of period 424 461 271 3,705
Cash, end of period 2,194 3,113 2,194 3,113
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. 25 June 26
1999 1999
ASSETS (unaudited)
Current assets:
Cash 2,194 271
Investments 16,387 16,933
Accounts receivable (less allowance for doubtful
accounts of $2,487,000 and $2,361,000) 41,841 36,004
Inventories:
Finished goods 32,090 31,964
Goods in process and finished parts 29,414 31,589
Raw materials and supplies 15,415 14,488
76,919 78,041
Prepaid expenses and other current assets 3,263 6,173
Total current assets 140,604 137,422
Property, plant and equipment, at cost (less
accumulated depreciation of $73,761,000
and $69,685,000) 73,435 73,854
Cost in excess of net assets acquired (less
accumulated amortization of $4,456,000
and $4,266,000) 6,901 7,094
Prepaid pension cost 27,967 26,212
Other assets 1,181 1,146
250,088 245,728
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities 6,381 3,600
Accounts payable and accrued expenses 14,322 13,783
Accrued salaries and wages 4,555 6,026
Taxes payable 383 484
Employee deposits for stock purchase plan 434 429
Total current liabilities 26,075 24,322
Deferred income taxes 12,942 11,919
Long-term debt 3,000 3,300
Accumulated postretirement medical benefit obligation 16,204 16,151
Stockholders' equity:
Class A Common $1 par (20,000,000 shrs. auth.;
5,158,608 outstanding in Dec.1999, excluding
1,234,625 in treasury; 5,109,173 outstanding
in June 1999, excluding 1,243,158 in treasury) 5,159 5,109
Class B Common $1 par (10,000,000 shrs. auth.;
1,553,374 outstanding in Dec.1999, excluding
295,140 in treasury; 1,596,748 outstanding
in June 1999, excluding 288,642 in treasury) 1,553 1,597
Additional paid-in capital 44,028 42,730
Retained earnings reinvested and employed in
the business 158,075 155,349
Foreign currency translation adjustment (17,056) (14,922)
Other equity adjustments 108 173
Total stockholders' equity 191,867 190,036
250,088 245,728
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 25, 1999 and December 26, 1998
(in thousands of dollars)
(unaudited)
Common Addi- Accumulated
Stock Out- tional Other
standing Paid-in Retained Comprehensive
($1 Par) Capital Earnings Income Total
Balance June 27, 1998 6,897 41,263 151,317 (4,183) 195,294
Comprehensive income:
Net earnings 8,429 8,429
Unrealized net gains
on investments 139 139
Translation loss, net (988) (988)
Total Comprehensive income 7,580
Dividends ($.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
Balance Dec. 26, 1998 6,877 42,647 154,707 (5,032) 199,199
Balance June 26, 1999 6,706 42,730 155,349 (14,749) 190,036
Comprehensive income:
Net earnings 6,692 6,692
Unrealized net losses
on investments (65) (65)
Translation loss, net (2,134) (2,134)
Total comprehensive income 4,493
Dividends ($.40) (2,679) (2,679)
Treasury shares:
Purchased (75) (537) (1,287) (1,899)
Issued 77 1,757 1,834
Options exercised 4 78 82
Balance Dec. 25, 1999 6,712 44,028 158,075 (16,948) 191,867
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 25,
1999 and June 26, 1999; the results of operations and cash flows for the
thirteen weeks and twenty-six weeks ended December 25, 1999 and December 26,
1998; and changes in stockholders' equity for the twenty-six weeks ended
December 25, 1999 and December 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 Twenty-six Weeks
Ended December Ended December
1999 1998 1999 1998
Interest income 276 465 548 964
Interest expense and com-
mitment fees (209) (115) (421) (192)
Realized exchange losses (16) 4 (98) (27)
Other (63) 123 (25) 241
(12) 477 4 986
Approximately 70% of all inventories are valued on the LIFO method. At
December 25, 1999, and June 26, 1999, total inventories are $23,621,000 and
$23,521,000 less, respectively, than if determined on a FIFO basis.
Long-term debt is comprised of the following (in thousands):
December June
1999 1999
Industrial revenue bond 600 900
Revolving credit agreement 3,000 3,000
3,600 3,900
Less current portion 600 600
3,000 3,300
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 for the December quarter and year to date are approximately the same as
the corresponding periods of a year ago. A 6% decrease in foreign sales in both
the quarter and year to date comparisons is offset by increases in domestic
sales. The foreign decreases are primarily a result of the Brazil currency
devaluation that took place in January 1999 and the strong pound in the U.K.
that continues to adversely affect Scotland's business in terms of export
pricing and import price competition. Quarter and year to date foreign sales
are actually up in local currency. The increase in domestic sales was mostly
due to product mix, although the industrial manufacturing sector appears to
have stabilized.
Earnings Before Taxes
Pretax earnings are down 15% in the December quarter and 20% year to date, the
improvement in the comparisons coming mostly on the domestic side. The single
largest factor causing these decreases is the international pricing pressure
resulting from the strong British pound. On the domestic side, margins are
being adversely affected by product mix and fringe benefit costs, particularly
pension and medical.
Income Taxes
The effective income tax rate is 31% for the quarter and 32% year to date. The
rates were approximately the same in the corresponding periods in the prior
year. The main cause of the decrease is the favorable tax treatment of
dividends paid from Brazil in the second quarter of both years.
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 December
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 total approximately $5 million. Inflation in Brazil has decreased to
approximately 20% 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 $11,000,000 and debt of
$9,000,000 at December 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 has not experienced any material disruption of its operations as a
result of any failure by the Company, its customers, or its suppliers to be
year 2000 compliant. The potential still exists, however, for the Company's
Page 7 of 9
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business and results of operations to be adversely affected if its customers or
suppliers are unable to achieve year 2000 compliance, although no such problems
are known to exist at this time. 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. The Company has not incurred significant
separately identifiable costs related to year 2000 compliance.
LIQUIDITY AND CAPITAL RESOURCES
13 Weeks Ended 26 Weeks Ended
12/25/99 12/26/98 12/25/99 12/26/98
Cash provided by operations 6,737 9,867 7,877 16,937
Cash used in investing activities (3,966) (4,587) (5,750) (13,139)
Cash used in financing activities (1,006) (2,576) (181) (4,376)
Cash effect of translation rate changes 5 (52) (23) (14)
Net increase (decrease) in cash 1,770 2,652 1,923 (592)
The drop in net earnings along with changes in working capital components
(particularly accounts receivable increases in the first quarter of 1999)
caused cash flow provided by operations to decrease compared to the prior
year's quarter and year to date. Lower fixed asset additions and less cash
available for investment caused the drop in investing activity. Short-term
borrowing in Brazil and less treasury share purchases are the major reasons for
the changes in cash from financing activities.
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 5.4 to 1 as of December 25, 1999 and 5.7 to 1 as of
June 26, 1999.
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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: 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
Page 8 of 9
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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 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 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 7, 1999 S/R.U.WELLINGTON, JR.
R. U. Wellington, Jr. (Treasurer
and Chief Financial Officer)
Date February 7, 1999 S/S.G.THOMSON
S. G. Thomson (Chief Accounting Officer)
Page 9 of 9
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-24-2000
<PERIOD-END> DEC-25-1999
<CASH> 2,194
<SECURITIES> 16,387
<RECEIVABLES> 44,328
<ALLOWANCES> 2,487
<INVENTORY> 76,919
<CURRENT-ASSETS> 140,604
<PP&E> 147,196
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0
0
<COMMON> 6,712
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