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 25, 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 March 25, 2000 :
Class A Common Shares 5,071,221
Class B Common Shares 1,523,856
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 25, 2000 and
March 27, 1999 (unaudited) 3
Consolidated Balance Sheets - March 25,
2000 (unaudited) and June 26, 1999 4
Consolidated Statements of Stockholders'
Equity - thirty-nine weeks ended
March 25, 2000 and March 27, 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 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 3/25/00 3/27/99 3/25/00 3/27/99
Net sales 58,860 57,074 178,517 176,327
Cost of goods sold (43,107) (40,369) (128,424)(123,784)
Selling and general (12,402) (11,882) (36,873) (36,390)
Other income and expense 168 403 172 1,389
Earnings before income taxes 3,519 5,226 13,392 17,542
Provision for federal, foreign and
state income taxes 1,068 1,640 4,249 5,527
Net earnings 2,451 3,586 9,143 12,015
Basic earnings per share .37 .53 1.37 1.75
Average shares used 6,658 6,833 6,684 6,871
Diluted earnings per share .37 .53 1.37 1.75
Average shares used 6,667 6,838 6,692 6,878
Dividends per share .20 .20 .60 .60
CASH FLOWS
Cash flows from operating activities:
Net earnings 2,451 3,586 9,143 12,015
Noncash expenses:
Depreciation and amortization 2,863 2,814 8,815 8,780
Deferred taxes (30) 163 787 97
Working capital changes:
Receivables 3,291 (3,359) (2,965) (315)
Inventories 1,521 (540) 1,370 (479)
Other assets and liabilities (1,220) (147) 1,343 476
Prepaid pension cost and other (139) (1,197) (1,879) (2,317)
Net cash from operations 8,737 1,320 16,614 18,257
Cash flows from investing activities:
Additions to plant and equipment (3,406) (4,050) (9,548) (13,830)
Change in short-term investments (2,690) 3,987 (2,298) 628
Net cash used in investing (6,096) (63) (11,846) (13,202)
Cash flows from financing activities:
Short-term borrowings, net 894 3,675 (401)
Long-term debt repayments (1,000) (1,300) (300)
Common stock issued 923 831 2,839 2,924
Treasury shares purchased (3,618) (2,895) (5,517) (5,912)
Dividends (1,325) (1,366) (4,004) (4,117)
Net cash used in financing (4,126) (3,430) (4,307) (7,806)
Effect of translation rate changes
on cash 68 (165) 45 (179)
Net increase (decrease) in cash (1,417) (2,338) 506 (2,930)
Cash, beginning of period 2,194 3,113 271 3,705
Cash, end of period 777 775 777 775
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 25 June 26
2000 1999
ASSETS (unaudited) _______
Current assets:
Cash 777 271
Investments 19,125 16,933
Accounts receivable (less allowance for doubtful
accounts of $2,395,000 and $2,361,000) 38,852 36,004
Inventories:
Finished goods 32,339 31,964
Goods in process and finished parts 27,460 31,589
Raw materials and supplies 16,398 14,488
76,197 78,041
Prepaid expenses and other current assets 4,264 6,173
Total current assets 139,215 137,422
Property, plant and equipment, at cost (less
accumulated depreciation of $76,943,000
and $69,685,000) 74,522 73,854
Cost in excess of net assets acquired (less
accumulated amortization of $4,541,000
and $4,266,000) 6,804 7,094
Prepaid pension cost 28,212 26,212
Other assets 1,158 1,146
249,911 245,728
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities 7,275 3,600
Accounts payable and accrued expenses 15,031 13,783
Accrued salaries and wages 4,529 6,026
Taxes payable (749) 484
Employee deposits for stock purchase plan 525 429
Total current liabilities 26,611 24,322
Deferred income taxes 13,448 11,919
Long-term debt 2,000 3,300
Accumulated postretirement medical benefit obligation 16,253 16,151
Stockholders' equity:
Class A Common $1 par (20,000,000 shrs. auth.;
5,071,221 outstanding 3/00, excluding
1,345,390 held in treasury; 5,109,173 outstanding
6/99, excluding 1,243,158 held in treasury) 5,071 5,109
Class B Common $1 par (10,000,000 shrs. auth.;
1,523,856 outstanding 3/00, excluding
301,280 held in treasury; 1,596,748 outstanding
6/99, excluding 288,642 held in treasury) 1,524 1,597
Additional paid-in capital 43,733 42,730
Retained earnings reinvested and employed in
the business 156,918 155,349
Accumulated other comprehensive income (15,647) (14,749)
Total stockholders' equity 191,599 190,036
249,911 245,728
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 Thirty-nine Weeks Ended March 25, 2000 and March 27, 1999
(in thousands of dollars)
(unaudited)
Common Addi- Accumulated
Stock Out- tional Other
standing Paid-in Retained Comprehensive
($1 Par) Capital Earnings Income Total
Balance June 27, 1998 6,897 41,263 151,317 (4,183) 195,294
Comprehensive income:
Net earnings 12,015 12,015
Unrealized net gains
on investments 94 94
Translation loss, net (12,936) (12,936)
Total comprehensive income (827)
Dividends ($.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
Balance March 27, 1999 6,811 42,769 154,807 (17,025) 187,362
Balance June 26, 1999 6,706 42,730 155,349 (14,749) 190,036
Comprehensive income:
Net earnings 9,143 9,143
Unrealized net losses
on investments (104) (104)
Translation loss, net (794) (794)
Total comprehensive income 8,245
Dividends ($.60) (4,004) (4,004)
Treasury shares:
Purchased (233) (1,714) (3,570) (5,517)
Issued 118 2,639 2,757
Options exercised 4 78 82
Balance March 25, 2000 6,595 43,733 156,918 (15,647) 191,599
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 25,
2000 and June 26, 1999; the results of operations and cash flows for the
thirteen weeks and thirty-nine weeks ended March 25, 2000 and March 27,
1999; and changes in stockholders' equity for the thirty-nine weeks ended March
25, 2000 and March 27, 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 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 Thirty-nine Weeks
Ended March Ended March
2000 1999 2000 1999
Interest income 378 393 926 1,357
Interest expense and commitment fees (218) (115) (639) (307)
Realized exchange gains and losses 77 57 (21) 30
Other (69) 68 (94) 309
168 403 172 1,389
Approximately 70% of all inventories are valued on the LIFO method. At
March 25, 2000, and June 26, 1999, total inventories are $24,021,000 and
$23,521,000 less, respectively, than if determined on a FIFO basis.
Long-term debt is comprised of the following (in thousands):
March June
2000 1999
Industrial revenue bond 600 900
Revolving credit agreement 2,000 3,000
2,600 3,900
Less current portion 600 600
2,000 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 March quarter are up 3% and for the nine month comparison are up
1%. The increase in the quarter all comes from foreign operations, particularly
Brazil. The year to date increase is all domestic because foreign sales were
down in the first two quarters. Foreign sales decreases in the first two
quarters of the year, which were the result of the Brazil currency devaluation
that took place in January 1999, have been overcome by increased unit volume,
but the strong pound in the U.K. continues to adversely affect Scotland's
overall business because of export and import price competition. The year to
date increase in domestic sales referred to above is mostly due to product mix.
The industrial manufacturing sector where we do most of our business continues
flat.
Earnings Before Taxes
Pretax earnings are down 33% in the March quarter and 24% year to date. The
negative comparison in the quarter comes from the domestic side where margins
are being adversely affected by product mix, lower factory overhead absorption,
increased fringe benefit costs, particularly pension and medical, and our data
processing conversion. In addition, advertising costs are up and net interest
income is down. The international pricing pressures referred to above resulting
from the strong British pound are also contributing to the negative
comparisons.
Income Taxes
The effective income tax rate is 30% for the quarter and 32% year to date. The
rates were 31% and 32% in corresponding prior periods. The main reason for the
quarter versus year to date decrease is the favorable tax treatment of
dividends paid from Brazil in both years. The current year effect is a little
more significant because Brazil is contributing more of the overall pretax
earnings and carries a lower effective tax rate than the rest of the company.
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 March
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.
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 $8 million. Inflation in Brazil has decreased to
under 20% today from over 2000% in 1994 when their current economic plan was
initiated. Brazil's 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 variable rate financial instruments
(primarily short term money market investments of $13,000,000 and debt of
$9,000,000 at March 25, 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 approximately
$6,800,000 by $300,000.
Page 7 of 9
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LIQUIDITY AND CAPITAL RESOURCES
13 Weeks Ended 39 Weeks Ended
3/25/00 3/27/99 3/25/00 3/27/99
Cash provided by operations 8,737 1,320 16,614 18,257
Cash used in investing activities (6,096) (63) (11,846) (13,202)
Cash used in financing activities (4,126) (3,430) (4,307) (7,806)
Cash effect of translation rate changes 68 (165) 45 (179)
Net increase (decrease) in cash (1,417) (2,338) 506 (2,930)
The drop in net earnings is the primary cause of the reduction in year to date
cash flow. The increase in the quarter comparison is due to the fact that
working capital (primarily accounts receivable) was increasing in the prior
period and decreasing in the current period. Cash used in investing is down
year to date due to lower fixed asset additions. The increase in the current
quarter comes from increased cash investments as a result of the decreasing
working capital mentioned above. Short-term borrowing in Brazil in the second
quarter is the major reason for the year to date decrease in cash used in
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 5.2 to 1 as of March 25, 2000 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 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,
Page 8 of 9
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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 May 8, 2000 S/R.U.WELLINGTON, JR.
R. U. Wellington, Jr. (Treasurer
and Chief Financial Officer)
Date May 8, 2000 S/S.G.THOMSON
S. G. Thomson (Chief Accounting Officer)
Page 9 of 9
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-24-2000
<PERIOD-END> MAR-25-2000
<CASH> 777
<SECURITIES> 19,125
<RECEIVABLES> 41,247
<ALLOWANCES> 2,395
<INVENTORY> 76,197
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<PP&E> 151,465
<DEPRECIATION> 76,943
<TOTAL-ASSETS> 249,911
<CURRENT-LIABILITIES> 26,611
<BONDS> 2,000
0
0
<COMMON> 6,595
<OTHER-SE> 185,004
<TOTAL-LIABILITY-AND-EQUITY> 249,911
<SALES> 178,517
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<TOTAL-COSTS> 128,424
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