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 23, 2000
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 23, 2000:
Class A Common Shares 4,986,191
Class B Common Shares 1,474,858
Page 1 of 9
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 23, 2000 and September 25, 1999
(unaudited) 3
Consolidated Balance Sheets - September 23,
2000 (unaudited) and June 24, 2000 4
Consolidated Statements of Stockholders'
Equity - thirteen weeks ended September 23,
2000 and September 25, 1999 (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 6. Exhibits and reports on Form 8-K 9
Page 2 of 9
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 9/23/00 9/25/99
Net sales 58,842 58,412
Cost of goods sold (41,741) (42,267)
Selling and general (12,801) (11,844)
Other income (expense) (66) 16
Earnings before income taxes 4,234 4,317
Provision for federal, foreign and
state income taxes 1,339 1,442
Net earnings 2,895 2,875
Basic earnings per share .45 .43
Average outstanding shares used 6,459 6,698
Diluted earnings per share .45 .43
Average outstanding shares used 6,469 6,706
Dividends per share .20 .20
CASH FLOWS
Cash flows from operating activities:
Net earnings 2,895 2,875
Noncash expenses:
Depreciation and amortization 2,949 2,976
Deferred taxes 314 411
Working capital changes:
Receivables (3,197) (6,505)
Inventories (3,786) 1,158
Other assets and liabilities 3,898 1,130
Prepaid pension cost and other (322) (905)
Net cash from operations 2,751 1,140
Cash flows from investing activities:
Additions to plant and equipment (3,181) (3,248)
Short-term investments, net 685 1,464
Net cash used in investing (2,496) (1,784)
Cash flows from financing activities:
Short-term borrowing, net (476) 2,415
Common stock issued 800 954
Treasury shares purchased (1,032) (1,205)
Dividends (1,289) (1,339)
Net cash used in financing (1,997) 825
Effect of exchange rate changes
on cash 104 (28)
Net increase (decrease) in cash (1,638) 153
Cash, beginning of period 2,008 271
Cash, end of period 370 424
See notes to consolidated financial statements
Page 3 of 9
THE L. S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands of dollars)
Sep. 23 June 24
2000 2000
ASSETS (unaudited)
Current assets:
Cash 370 2,008
Investments 11,388 12,043
Accounts receivable (less allowance for doubtful
accounts of $1,809,000 and $1,790,000) 39,360 36,509
Inventories:
Finished goods 38,877 36,121
Goods in process and finished parts 26,710 26,752
Raw materials and supplies 17,695 17,017
83,282 79,890
Prepaid expenses and other current assets 4,168 7,269
Total current assets 138,568 137,719
Property, plant and equipment, at cost (less
accumulated depreciation of $71,547,000
and $70,510,000) 75,678 75,683
Cost in excess of net assets acquired (less
accumulated amortization of $4,583,000
and $4,534,000) 6,588 6,667
Prepaid pension cost 29,654 29,238
Other assets 1,093 1,111
251,581 250,418
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities 6,214 6,690
Accounts payable and accrued expenses 16,799 16,315
Accrued salaries and wages 5,031 5,590
Taxes payable 932 285
Employee deposits for stock purchase plan 617 518
Total current liabilities 29,593 29,398
Deferred income taxes 14,284 13,969
Long-term debt 3,000 3,000
Accumulated postretirement medical benefit obligation 16,072 16,029
Stockholders' equity:
Class A Common $1 par (20,000,000 shrs. auth.;
4,986,191 outstanding at 9/23/00, excluding
1,471,646 held in treasury; 4,978,276 outstanding
at 6/24/00, excluding 1,461,002 held in treasury) 4,986 4,978
Class B Common $1 par (10,000,000 shrs. auth.;
1,474,858 outstanding at 9/23/00, excluding
310,341 held in treasury; 1,495,474 outstanding
at 6/24/00, excluding 308,284 held in treasury) 1,475 1,495
Additional paid-in capital 43,608 43,273
Retained earnings reinvested and employed in
the business 156,897 155,846
Accumulated other comprehensive income (18,334) (17,570)
Total stockholders' equity 188,632 188,022
251,581 250,418
See Notes to Consolidated Financial Statements
Page 4 of 9
THE L. S. STARRETT COMPANY
Consolidated Statements of Stockholders' equity
For the Thirteen Weeks Ended September 23, 2000 and September 25, 1999
(in thousands of dollars)
(unaudited)
Common Addi- Accumulated
Stock Out- tional Other
standing Paid-in Retained Comprehensive
($1 Par) Capital Earnings Income(loss) Total
Balance June 26, 1999 6,706 42,730 155,349 (14,749) 190,036
Comprehensive income:
Net earnings 2,875 2,875
Unrealized net loss
on investments (28) (28)
Translation loss net (1,949) (1,949)
Total comprehensive income 898
Dividends ($.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
Balance June 24, 2000 6,473 43,273 155,846 (17,570) 188,022
Comprehensive income:
Net earnings 2,895 2,895
Unrealized net gain
on investments 13 13
Translation loss, net (777) (777)
Total comprehensive income 2,131
Dividends ($.20 per share) (1,289) (1,289)
Treasury shares:
Purchased (55) (422) (555) (1,032)
Issued 43 757 800
Balance September 23, 2000 6,461 43,608 156,897 (18,334) 188,632
See Notes to Consolidated Financial Statements
Page 5 of 9
THE L. S. STARRETT COMPANY
Condensed 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 23,
2000 and June 24, 2000; the results of operations and cash flows for the
thirteen weeks ended September 23, 2000 and September 25, 1999; and changes
in stockholders' equity for the thirteen weeks ended September 23, 2000 and
September 25, 1999.
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 24, 2000, 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
2000 1999
Interest income 242 272
Interest expense and commitment fees (175) (212)
Realized and unrealized exchange losses (43) (82)
Other (90) 38
(66) 16
Approximately 70% of all inventories are valued on the LIFO method. At
September 23, 2000 and June 24, 2000, total inventories are $22,763,000 and
$22,683,000 less, respectively, than if determined on a FIFO basis.
Long-term debt is comprised of the following (in thousands):
September June
2000 2000
Industrial revenue bond 300 300
Revolving credit agreement 3,000 3,000
3,300 3,300
Less current portion 300 300
3,000 3,000
Page 6 of 9
THE L. S. STARRETT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales
Both foreign and domestic sales for the September quarter are approximately
1% higher than in the corresponding quarter of a year ago. Excluding
intercompany sales, sales of our Brazil subsidiary are down slightly while
sales of our Scotland subsidiary are up, although the strong pound in the
U.K. continues to adversely affect Scotland's business in terms of export
pricing and import price competition. The domestic industrial manufacturing
sector continues flat.
Earnings Before Taxes
Pretax earnings in the quarter are about the same as in the September
quarter of a year ago. Slightly improved domestic gross margins, despite
significant increases in domestic fringe benefit costs, were offset in the
foreign operations, particularly by increased promotional spending in
Brazil.
Income Taxes
The effective income tax rate was 31.7% in the September quarter of 2000 and
33.4% in the prior year's quarter. The decrease comes primarily from Brazil
where the effective tax rate has been affected by the timing of dividend
payments.
Earnings per share
As a result of the above factors and a 4% reduction in outstanding shares,
earnings per share for the quarter are 5% higher than a year ago.
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 2000
and September 2000, 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. In addition, the
Company does not enter into long-term supply contracts with either fixed
prices or quantities.
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 $2 million. Inflation in Brazil has decreased to
about 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 $5,000,000 and debt of
$9,000,000 at September 23, 2000) 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
$6,600,000 by approximately $300,000.
Page 7 of 9
LIQUIDITY AND CAPITAL RESOURCES
13 Weeks Ended
9/23/00 9/25/99
Cash provided by operations 2,751 1,140
Cash used in investing activities (2,496) (1,784)
Cash from (used in) financing activities (1,997) 825
Cash effect of translation rate changes 104 (28)
Net increase (decrease) in cash (1,638) 153
The decrease in cash used to finance net working capital additions caused
cash flow provided by operations to increase compared to the prior year's
quarter, and a reduction in short-term borrowing caused the decrease in cash
from financing activity.
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 4.7 to 1 as of both September 23, 2000 and
September 25, 1999.
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996
This quarterly report, as well as the 2000 Annual Report, including the
Chairman's letter to stockholders, include forward-looking statements about
the Company's business, sales, expenditures, 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 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 and net assets relate 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, inflation, minimum capital
requirements, and exchange controls. In particular, the Company's Brazilian
Page 8 of 9
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 most of the
Company's products is subject to economic conditions affecting the
industrial manufacturing sector, including the level of capital spending by
industrial companies. Accordingly, economic weakness in the industrial
manufacturing sector will result in decreased demand for the Company's
products and will 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 20, 2000.
(c) The following directors were elected:
Abstentions
Votes Votes and Broker
For Withheld Non-votes
A shares voting as separate class:
William S. Hurley 4,653,745 100,549 N/A
A and B shares voting together:
Douglas A. Starrett 18,020,504 158,230 N/A
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 November 6, 2000 S/R.U.WELLINGTON, JR.
R. U. Wellington, Jr. (Treasurer
and Chief Financial Officer)
Date November 6, 2000 S/S.G.THOMSON
S. G. Thomson (Chief Accounting Officer)
Page 9 of 9
