PART I

 

Item 1 - Business

 

General

Founded in 1880 by Laroy S. Starrett and incorporated in 1929, The L.S. Starrett Company (the “Company”) is engaged in the business of manufacturing over 5,000 different products for industrial, professional and consumer markets. The Company has a long history of global manufacturing experience and currently operates 4 major global manufacturing plants. The one domestic location is in Athol, Massachusetts (1880) and the international operations are located in Itu, Brazil (1956) Jedburgh, Scotland (1958) and Suzhou, China (1997). All subsidiaries principally serve the global manufacturing industrial base with concentration in the metalworking, construction, machinery, equipment, aerospace and automotive markets.

 

The Company offers its broad array of measuring and cutting products to the market through multiple channels of distribution throughout the world. The Company’s products include precision tools, electronic gages, gage blocks, optical vision and laser measuring equipment, custom engineered granite solutions, tape measures, levels, chalk products, squares, band saw blades, hole saws, hacksaw blades, jig saw blades, reciprocating saw blades, M1® lubricant and precision ground flat stock.  The Company primarily distributes its precision hand tools, saw and construction products through distributors or resellers both domestically and internationally. Starrett® is brand recognized around the world for precision, quality and innovation.

 

In accordance with the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 280, Segment Reporting, for the fiscal year ended June 30, 2018 (fiscal 2018), we determined that we have two reportable operating segments (North America and International). Refer to Note 17, Financial Statement Information by Segment & Geographical Area, contained in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for more information on our reportable segments.

 

Products

The Company’s tools and instruments are sold throughout North America and in over 100 other countries. By far the largest consumer of these products is the manufacturing industry including metalworking, aerospace, and automotive but other important consumers are marine and farm equipment shops, do-it-yourselfers and tradesmen such as builders, carpenters, plumbers and electricians.

 

For 138 years the Company has been a recognized leader in providing measurement and cutting solutions to industry. Measurement tools consist of precision instruments such as micrometers, vernier calipers, height gages, depth gages, electronic gages, dial indicators, steel rules, combination squares, custom, non-contact and in-process gaging such as optical, vision and laser measurement systems. The Company has expanded its product offering in the field of test and measurement equipment, with force measurement and material test equipment. Skilled personnel, superior products, manufacturing expertise, innovation and unmatched service has earned the Company its reputation as the “Best in Class” provider of measuring application solutions for industry. During fiscal 2015, the Company introduced material test systems consisting of hardware and cutting edge software with capacities up to 50KN, in addition to new manual and automated FOV (Field of View) measurement systems. These systems we believe will be attractive to industry to reduce measurement and inspection time and are ideal for quality assurance, inspection labs, manufacturing and research facilities.

 

The Company’s saw product lines enjoy strong global brand recognition and market share. These products encompass a breadth of uses. The Company introduced several new products in the recent past including a new line of hand tools for measuring, marking and layout that include tapes, levels, chalk lines and other products for the building trades. In fiscal 2016, the Company introduced new products to its hand tool portfolio to extend its reach into the construction and retail trades. The continued focus on high performance, production band saw applications has resulted in the development of two new ADVANZ carbide tipped products MC5 and MC7 ideal for cutting ferrous materials (MC7) and non-ferrous metals and castings (MC5). These actions are aimed at positioning Starrett for global growth in wide band products for production applications.

 

As one of the premier industrial brands, the Company continues to be focused on every touch point with its customers. To that end, the Company now offers modern, easy-to-use interfaces for distributors and end-users including interactive catalogs and several online applications.

 

Personnel

At June 30, 2018, the Company had 1,572 employees, approximately 52% of whom were domestic. This represents a net decrease from June 30, 2017 of 75 employees. The headcount change included a decrease of 55 domestically and a decrease of 20 internationally.

 

 

None of the Company’s operations are subject to collective bargaining agreements. In general, the Company considers relations with its employees to be excellent. Domestic employees hold shares of Company stock resulting from various stock purchase plans and employee stock ownership plans. The Company believes that this dual role of owner-employee has strengthened employee morale over the years.

 

Competition

The Company competes on the basis of its reputation as the best in class for quality, precision and innovation combined with its commitment to customer service and strong customer relationships. To that end, Starrett is increasingly focusing on providing customer centric solutions. Although the Company is generally operating in highly competitive markets, the Company’s competitive position cannot be determined accurately in the aggregate or by specific market since none of its competitors offer all of the same product lines offered by the Company or serve all of the markets served by the Company.

 

The Company is one of the largest producers of mechanics’ hand measuring tools and precision instruments. In the United States, there are three major foreign competitors and numerous small companies in the field. As a result, the industry is highly competitive. During fiscal 2018, there were no material changes in the Company’s competitive position. The Company’s products for the building trades, such as tape measures and levels, are under constant margin pressure due to a channel shift to large national home and hardware retailers. The Company has responded to such challenges by expanding its manufacturing operations in China.  Certain large customers also offer their own private labels (“own brand”) that compete with Starrett branded products. These products are often sourced directly from low cost countries.

 

Saw products encounter competition from several domestic and international sources. The Company’s competitive position varies by market and country. Continued research and development, new patented products and processes, strategic acquisitions and investments and strong customer support have enabled the Company to compete successfully in both general and performance oriented applications.

 

Foreign Operations

The operations of the Company’s foreign subsidiaries are consolidated in its financial statements. The subsidiaries located in Brazil, Scotland and China are actively engaged in the manufacturing and distribution of precision measuring tools, saw blades, optical and vision measuring equipment and hand tools. Subsidiaries in Canada, Australia, New Zealand, Mexico, and Singapore are engaged in distribution of the Company’s products. The Company expects its foreign subsidiaries to continue to play a significant role in its overall operations. A summary of the Company’s foreign operations is contained in Note 17 to the Company’s fiscal 2018 financial statements.

 

Orders and Backlog

The Company generally fills orders from finished goods inventories on hand. Sales order backlog of the Company at any point in time is not significant, however as of June 30, 2018 backorders had risen to approximately $10.0 million. Total inventories amounted to $58.0 million at June 30, 2018 and $58.1 million at June 30, 2017. 

 

Intellectual Property

When appropriate, the Company applies for patent protection on new inventions and currently owns a number of patents. Its patents are considered important in the operation of the business, but no single patent is of material importance when viewed from the standpoint of its overall business. The Company relies on its continuing product research and development efforts, with less dependence on its current patent position. It has for many years maintained engineers and supporting personnel engaged in research, product development and related activities. The expenditures for these activities during fiscal years 2018, 2017, and 2016 were approximately $3.6 million, $3.5 million, and $2.9 million, respectively.

 

The Company uses trademarks with respect to its products and considers its trademark portfolio to be one of its most valuable assets. All of the Company’s important trademarks are registered and rigorously enforced.

 

Environmental

Compliance with federal, state, local, and foreign provisions that have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to protection of the environment is not expected to have a material effect on the capital expenditures, earnings and competitive position of the Company. Specifically, the Company has taken steps to reduce, control and treat water discharges and air emissions. The Company takes seriously its responsibility to the environment, has embraced renewable energy alternatives and received approval from federal and state regulators in fiscal 2013 to begin using its new hydro – generation facility at its Athol, MA plant to reduce its carbon footprint and energy costs, an investment in excess of $1.0 million.

 

  

Strategic Activities

Globalization has had a profound impact on product offerings and buying behaviors of industry and consumers in North America and around the world, resulting in the Company revising its strategy to fit this new, highly competitive business environment. The Company continuously evaluates most aspects of its business, aiming for new ideas to set itself apart from its competition.

  

Our strategic concentration is on global brand building and providing unique customer value propositions through technically supported application solutions for our customers. Our job is to recommend and produce the best suited standard product or to design and build custom solutions. The combination of the right tool for the job with value added service gives us a competitive advantage. The Company continues its focus on lean manufacturing, plant consolidations, global sourcing, new software and hardware technologies, and improved logistics to optimize its value chain.

 

The execution of these strategic initiatives has expanded the Company’s manufacturing and distribution in developing economies, resulting in international sales revenues totaling 45% of consolidated sales for fiscal 2018.

 

SEC Filings and Certifications

The Company makes its public filings with the Securities and Exchange Commission (“SEC”), including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports, available free of charge at its website, www.starrett.com, as soon as reasonably practicable after the Company files such material with the SEC. Information contained on the Company’s website is not part of this Annual Report on Form 10-K.

 

Item 1A – Risk Factors

 

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

This Annual Report on Form 10-K and the Company’s 2018 Annual Report to Stockholders, including the President’s letter, contain forward-looking statements about the Company’s business, competition, sales, gross margins, capital expenditures, foreign operations, plans for reorganization, 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:

 

Economic and world events could affect our operating results.

The Company’s results of operations may be materially affected by the conditions in the global economy. These include both world - wide and regional economic conditions and geo-political events. These conditions may affect financial markets, consumer and customer confidence. The Company can provide no assurance that current economic trends will or will not continue.

 

Technological innovation by competitors could adversely affect financial results.

Although the Company’s strategy includes 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.

 

International operations and our financial results in those markets may be affected by legal, regulatory, political, currency exchange and other economic risks.

During 2018, revenue from sales outside of the United States was $97.1 million, representing approximately 45% of total net sales. In addition, a significant amount of our manufacturing and production operations are located, or our products are sourced from, outside the United States. As a result, our business is subject to risks associated with international operations. These risks include the burdens of complying with foreign laws and regulations, unexpected changes in tariffs, taxes or regulatory requirements, and political unrest and corruption. Regulatory changes could occur in the countries in which we sell, produce or source our products or significantly increase the cost of operating in or obtaining materials originating from certain countries. Restrictions imposed by such changes can have a particular impact on our business when, after we have moved our operations to a particular location, new unfavorable regulations are enacted in that area or favorable regulations currently in effect are changed.

 

Countries in which our products are manufactured or sold may from time to time impose additional new regulations, or modify existing regulations, including:

•

changes in duties, taxes, tariffs and other charges on imports;

•

limitations on the quantity of goods which may be imported into the United States from a particular country;

 

 

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requirements as to where products and/or inputs are manufactured or sourced;

•

creation of export licensing requirements, imposition of restrictions on export quantities or specification of minimum export pricing and/or export prices or duties;

•

limitations on foreign owned businesses; or

•

government actions to cancel contracts, re-denominate the official currency, renounce or default on obligations, renegotiate terms unilaterally or expropriate assets.

 

In addition, political and economic changes or volatility, geopolitical regional conflicts, terrorist activity, political unrest, civil strife, acts of war, public corruption and other economic or political uncertainties could interrupt and negatively affect our business operations. All of these factors could result in increased costs or decreased revenues and could materially and adversely affect our product sales, financial condition and results of operations.

 

We are also subject to the U.S. Foreign Corrupt Practices Act, in addition to the anti-corruption laws of the foreign countries in which we operate. Although we implement policies and procedures designed to promote compliance with these laws, our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation could result in sanctions or other penalties and have an adverse effect on our business, reputation and operating results.

 

Economic weakness in the industrial manufacturing sector could adversely affect the Company’s financial results.

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 and the general movement of manufacturing to low cost foreign countries where the Company does not have a substantial market presence. Accordingly, economic weakness in the industrial manufacturing sector may, and in some cases has, resulted in decreased demand for certain of the Company’s products, which adversely affects sales and performance. Economic weakness in the consumer market will also adversely impact the Company’s performance. In the event that demand for any of the Company’s products declines significantly, the Company could be required to recognize certain costs as well as asset impairment charges on long-lived assets related to those products.

 

Volatility in the price of energy and raw materials could negatively affect our margins.

Steel is the principal raw material used in the manufacture of the Company’s products. The price of steel has historically fluctuated on a cyclical basis and has often depended on a variety of factors over which the Company has no control. The cost of producing the Company’s products is also sensitive to the price of energy. The selling prices of the Company’s products have not always increased in response to raw material, energy or other cost increases, and the Company is unable to determine to what extent, if any, it will be able to pass future cost increases through to its customers. The Company’s inability to pass increased costs through to its customers could materially and adversely affect its financial condition or results of operations.

 

The inability to meet expected investment returns and changes to interest rates could have a negative impact on Pension plan assets and liabilities.

Currently, the Company’s U.S. defined benefit pension plan is underfunded primarily due to lower discount rates which increase the Company’s liability. The Company made contributions of $3.3 million in fiscal 2018, and $4.0 million in fiscal 2017 and will be required to make additional contributions in fiscal 2019 of $4.5 million. The Company could be required to provide more funding to the domestic plan in the future.  The Company froze the domestic defined benefit pension plan as of December 31, 2016. As a result of this decision, no future benefits will accrue to employees under that plan. The Company’s UK plan, which is also underfunded, required Company contributions of $1.0 million and $1.0 million during fiscal 2018 and 2017, respectively. The Company will be required to make a $1.0 million contribution to its UK pension plan in fiscal 2019.

 

Businesses that we may acquire may fail to perform to expectations.

Acquisitions involve special risks, including the potential assumption of unanticipated liabilities and contingencies, difficulty in assimilating the operations and personnel of the acquired businesses, disruption of the Company’s existing business, dissipation of the Company’s limited management resources, and impairment of relationships with employees and customers of the acquired business as a result of changes in ownership and management. While the Company believes that strategic acquisitions can improve its competitiveness and profitability, the failure to successfully integrate and realize the expected benefits of such acquisitions could have an adverse effect on the Company’s business, financial condition and operating results. 

 

We are subject to certain risks as a result of our financial borrowings. Under the Company’s credit facility with TD Bank, N.A., the Company is required to comply with certain financial covenants, including: 1) funded debt to EBITDA, excluding non-cash and retirement benefit expenses (“maximum leverage”), cannot exceed 2.25 to 1; 2) annual capital expenditures cannot exceed $15.0 million; 3) maintain a Debt Service Coverage Rate of a minimum of 1.25 to 1 and 4) maintain consolidated cash plus liquid investments of not less than $10.0 million at any time. The Company believes that it will be able to service its debt and comply with the financial covenants in future periods; however, it cannot be assured of results of operations or future credit and financial markets conditions. An event of default under the credit facility, if not waived, could prevent additional borrowing and could result in the acceleration of the Company’s debt. As of June 30, 2018, the Company was in compliance with all the covenants. The credit facility expires in April of 2021.

 

 

Any inadequacy, interruption, integration failure or security failure with respect to our information technology could harm our ability to effectively operate our business. 

The efficient operation of the Company's business is dependent on its information systems, including its ability to operate them effectively and to successfully implement new technologies, systems, controls and adequate disaster recovery systems.  In addition, the Company must protect the confidentiality of data of its business, employees, customers and other third parties. The failure of the Company's information systems to perform as designed or its failure to implement and operate them effectively could disrupt the Company's business or subject it to liability and thereby harm its profitability. The Company continues to enhance the applications contained in the Enterprise Resource Planning (ERP) system as well as improvements to other operating systems.

  

Failure to comply with laws, rules and regulations could negatively affect our business operations and financial performance. 

Our business is subject to federal, state, local and international laws, rules and regulations, such as state and local wage and hour laws, the U.S. Foreign Corrupt Practices Act, the False Claims Act, the Employee Retirement Income Security Act (“ERISA”), securities laws, import and export laws (including customs regulations) and many others. The complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to changes in legal and regulatory requirements, increased enforcement and our ongoing expansion into new markets and new channels. In addition, as a result of operating in multiple countries, we must comply with multiple foreign laws and regulations that may differ substantially from country to country and may conflict with corresponding U.S. laws and regulations. We may also be subject to investigations or audits by governmental authorities and regulatory agencies, which can occur in the ordinary course of business or which can result from increased scrutiny from a particular agency towards an industry, country or practice. If we fail to comply with laws, rules and regulations or the manner in which they are interpreted or applied, we may be subject to government enforcement action, class action litigation or other litigation, damage to our reputation, civil and criminal liability, damages, fines and penalties, and increased cost of regulatory compliance, any of which could adversely affect our results of operations and financial performance.

 

Our tax rate is dependent upon a number of factors, a change in any of which could impact our future tax rates and net income.

Our future tax rates may be adversely affected by a number of factors, including tax changes in the U.S. and other countries; other changes in tax laws or the interpretation of such tax laws; changes in the estimated realization of our net deferred tax assets; the jurisdictions in which profits are determined to be earned and taxed; the repatriation of non-U.S. earnings for which we have not previously provided for U.S. income and non-U.S. withholding taxes; adjustments to estimated taxes upon finalization of various tax returns; increases in expenses that are not deductible for tax purposes, including impairment of goodwill in connection with acquisitions; changes in available tax credits; and the resolution of issues arising from tax audits with various tax authorities. Losses for which no tax benefits can be recorded could materially impact our tax rate and its volatility from one quarter to another. Any significant change in our jurisdictional earnings mix or in the tax laws in those jurisdictions could impact our future tax rates and net income in those periods.

 

Item 1B – Unresolved Staff Comments

None.

 

Item 2 - Properties

The Company’s principal plant and its corporate headquarters are located in Athol, MA on approximately 15 acres of Company-owned land. The plant consists of 25 buildings, mostly of brick construction of varying dates, with approximately 535,000 square feet.

 

The Company’s Webber Gage Division in Cleveland, OH, owns and occupies two buildings totaling approximately 50,000 square feet.

 

The Company-owned facility in Mt. Airy, NC consists of a complex of interconnected buildings totaling approximately 320,000 square feet. It is occupied by the Company’s Saw Division, and a distribution center.

 

The Company’s subsidiary in Itu, Brazil owns and occupies several buildings totaling 209,000 square feet.

 

 

The Company’s subsidiary in Jedburgh, Scotland owns and occupies a 175,000 square foot building.

 

A wholly owned manufacturing subsidiary in The People’s Republic of China leases a 133,000 square foot building in Suzhou and leases a sales office in Shanghai.   

 

The Tru-Stone Division owns and occupies a 106,000 square foot facility in Waite Park, MN.

 

The Kinemetric Engineering Division occupies a 18,000 square foot leased facility in Laguna Hills, CA.

 

The Bytewise Division occupies a 22,000 square foot leased facility in Columbus, GA.

 

In addition, the Company operates warehouses and/or sales-support offices in the U.S., Australia, New Zealand, Mexico, Singapore and Japan.  

 

In the Company’s opinion, all of its property, plant and equipment are in good operating condition, well maintained and adequate for its current and foreseeable needs.

 

Item 3 - Legal Proceedings

In the ordinary course of business, the Company is involved from time to time in litigation that is not considered material to its financial condition or operations.

 

Item 4 – Mine Safety Disclosures

Not applicable.

 

PART II

 

Item 5 - Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s Class A common stock is traded on the New York Stock Exchange. Quarterly dividend and high/low closing market price information is presented in the table below. The Company’s Class B common stock is generally nontransferable, except to lineal descendants of stockholders, and thus has no established trading market, but it can be converted into Class A common stock at any time. The Class B common stock was issued on October 5, 1988, and the Company has paid the same dividends thereon as have been paid on the Class A common stock since that date. On June 30, 2018, there were approximately 1,128 registered holders of Class A common stock and approximately 925 registered holders of Class B common stock.

 

Quarter Ended		Dividends				High				Low
September 2016		$	0.10			$	12.74			$	9.75
December 2016			0.10				11.20				8.80
March 2017			0.10				11.85				9.56
June 2017			0.10				10.35				8.20
September 2017			0.10				9.22				6.85
December 2017			0.10				9.05				7.85
March 2018			-				8.95				6.75
June 2018			-				7.25				5.95

 

The Company’s dividend policy is subject to periodic review by the Board of Directors. Based upon economic conditions, the Board of Directors decided to suspend its quarterly dividend of $0.10 as of the quarter ended March 31, 2018.

 

In the fourth quarter of fiscal 2018, there were zero Class A shares and 1,980 Class B shares repurchased.  

 

PERFORMANCE GRAPH

 

The following graph sets forth information comparing the cumulative total return to holders of the Company’s Class A common stock based on the market price of the Company’s Class A common stock over the last five fiscal years with (1) the cumulative total return of the Russell 2000 Index (“Russell 2000”) and (2) a peer group index (the “Peer Group”) reflecting the cumulative total returns of certain small cap manufacturing companies as described below. The peer group is comprised of the following companies: Acme United, Q.E.P. Co. Inc., Badger Meter, National Presto Industries, Regal-Beloit Corp., Tennant Company, The Eastern Company and WD-40.

 

  

 

		BASE				FY2014				FY2015				FY2016				FY2017				FY2018
STARRETT			100.00				154.92				154.78				127.45				95.88				73.04
RUSSELL 2000			100.00				123.64				131.66				122.80				153.01				179.89
PEER GROUP			100.00				128.65				129.70				126.34				161.45				179.69

 

Item 6 - Selected Financial Data

 

The following selected financial data have been derived from and should be read in conjunction with “Management Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and notes thereto, included elsewhere in this Annual Report on Form 10-K.

 

		Years ended June 30 (in $000s except per share data)
		2018				2017				2016				2015				2014
Net sales		$	216,328			$	207,023			$	209,685			$	241,550			$	247,134
Net earnings (loss)			(3,633	)			991				(14,130	)			5,244				6,712
Basic earnings (loss) per share			(0.52	)			0.14				(2.01	)			0.75				0.97
Diluted earnings (loss) per share			(0.52	)			0.14				(2.01	)			0.75				0.97
Long-term debt			17,307				6,095				17,109				18,552				10,804
Total assets			182,286				192,665				201,598				212,272				231,443
Dividends per share			0.20				0.40				0.40				0.40				0.40

 

     

Items 7 and 7A- Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk

 

RESULTS OF OPERATIONS

 

Fiscal 2018 Compared to Fiscal 2017

  

Overview

 

L. S. Starrett is both a geographic and product line diverse company. The Company’s core product lines of precision hand tools and saw products experienced improved revenue and operating profit growth in fiscal 2018, while our high-end metrology capital equipment product line continues to grow revenue and generate favorable profit margins compared to precision hand tools and saw products. The Company completed the consolidation of saw production from four plants to two in fiscal 2018. This reduction coupled with our focus to improve manufacturing processes and systems in our core businesses is expected to reduce costs, improve margins and cash flow, allowing the Company to invest in research and development in our businesses.

 

Net sales for fiscal 2018 increased $9.3 million or 4% compared to fiscal 2017, with North America posting an increase of $3.8 million or 3% and International growing $5.5 million or 7%.  Unit volume and price increases, particularly in Brazil, represented $3.5 million and $4.5 million, respectively of the sales growth.   New products, primarily in high-end metrology capital equipment, accounted for an additional $1.5 million in sales, with foreign currency losses of $0.2 million the remainder of the sales change. Gross margins increased $7.0 million or 11% from $62.0 million or 30% of sales in fiscal 2017 to $69.0 million or 32% of sales in fiscal 2018 with North America and International posting increases of $4.5 million and $2.5 million, respectively.  Selling, general and administrative expenses increased $2.2 million or 4% from $62.0 million in fiscal 2017 to $64.2 million in fiscal 2018.   Restructuring charges related to the saw plant consolidation declined $1.0 million in fiscal 2018 from fiscal 2017.  Operating income improved $5.7 million from a $1.0 million loss in fiscal 2017 to a profit of $4.7 million in fiscal 2018.

 

Net Sales

 

Net sales in North America increased $3.8 million or 3% from $124.6 million in fiscal 2017 to $128.4 million in fiscal 2018, principally due to gains in high-end metrology capital equipment.  International sales increased $5.5 million or 7% from $82.4 million in fiscal 2017 to $87.9 million in fiscal 2018 as all locations, particularly Brazil, posted gains.

 

Gross Margin

 

Gross margin in North America increased $4.5 million from $34.4 million in fiscal 2017 to $38.9 million in fiscal 2018 primarily due to improvements in precision hand tools and high-end metrology capital equipment.  International gross margins increased $2.5 million from $27.6 million in fiscal 2017 to $30.1 million in fiscal 2018 based upon increased sales and reduced cost in Brazil.

 

Selling, General and Administrative Expenses

 

North American selling, general and administrative expenses, which includes Corporate expenses, increased $1.5 million or 4% principally due to increased research and development investment in high-end metrology.  International selling, general and administrative expenses increased $0.7 million or 3% due to increased sales commissions in Brazil.

 

Operating Profit

 

Operating profit improved $5.7 million based upon improved operating profits in North America and International and lower Corporate expenses.

 

Other Income (Expense), Net

 

Other income (expense) in fiscal 2018 increased $0.6 million compared to fiscal 2017 principally due to favorable tax settlements in Brazil.

 

 

Income Taxes

 

The income tax rate for fiscal 2018 was 174.7% on pre-tax income of $4.9 million. This compares to a normalized statutory U.S. federal and state rate of 32%. The primary reason for a higher effective tax rate is due to the reduction of the deferred tax asset due to the change in tax rates enacted in the United States. Before the deferred asset charge, tax expense for fiscal 2018 was 44.7% on pre-tax income of $4.9 million. Excluding the impact of the change in the tax rate applied to deferred tax assets, the effective fiscal 2018 tax rate is higher than the statutory U.S. federal and state rate primarily due to the increase in the valuation allowance recorded against U.S. foreign tax credits and state net operating loss carryforwards which the Company has determined are more likely than not to expire unutilized.

 

The income tax rate for fiscal 2017 was 35.6% on pre-tax income of $1.5 million. This compares to a normalized statutory U.S. federal and state rate of 38%. The primary reasons for a lower effective tax rate is due to the benefit of earnings in foreign jurisdictions with lower effective tax rates and a one-time tax benefit in Canada which was offset by discrete tax charges including the impact of a tax rate change in the U.K. applied to deferred tax assets.

 

The Company continues to recognize the benefit of most U.S. deferred tax assets. After weighing the positive and negative evidence, the Company has provided a valuation allowance against certain foreign tax credits and state net operating loss carryforwards that are expected to expire unutilized. 

 

Fiscal 2017 Compared to Fiscal 2016.  

 

Overview

 

Net sales for fiscal 2017 declined $2.7 million or 1% compared to fiscal 2016, with North America posting a shortfall of $5.6 million or 4% and International growing $2.9 million or 4%.  Price increases, predominantly in Brazil, new products and foreign exchange represented sales gains of $6.4, $1.8 and $1.4 million, respectively, which were offset by domestic and international volume declines of $5.8 million and $6.5 million, respectively. Gross margins increased $15.0 million or 32% from $47.0 million or 22% of sales in fiscal 2016 to $62.0 million or 30% of sales in fiscal 2017 with North America and International posting gains of $10.1 million and $4.9 million, respectively.  Selling, general and administrative expenses decreased $1.3 million or 2% from $63.3 million in fiscal 2016 to $62.0 million in fiscal 2017. Operating income improved $19.4 million from a loss of $20.4 million in fiscal 2016 to a loss of $1.0 million in fiscal 2017. Included in operating income was a $17.5 million pension charge and a $4.1 million asset impairment in fiscal 2016 compared to a $1.0 million restructuring charge in fiscal 2017. The U.S. pension plan was frozen as of December 31, 2016. Consequently, the Plan will be closed to new participants and current participants will no longer earn additional benefits after December 31, 2016.

 

Net Sales

 

Net sales in North America decreased $5.6 million or 4% from $130.2 million in fiscal 2016 to $124.6 million in fiscal 2017 principally due to declines in maintenance, repair & operating (MRO) products and capital equipment of 3% and 6%, respectively.  International sales grew $2.9 million or 4% from $79.5 million in fiscal 2016 to $82.4 million in fiscal 2017 due to net consolidated currency gains of $1.4 million and $1.5 million of new products.

 

Gross Margin

 

Gross margin in North America increased $10.1 million from $24.3 million in fiscal 2016 to $34.4 million in fiscal 2017 primarily due to the comparative absence in fiscal 2017 of a $12.4 million pension charge in fiscal 2016.  International gross margins increased $4.9 million from $22.7 million in fiscal 2016 to $27.6 million in fiscal 2017 with currency exchange rates of $0.6 million and price increases of $6.3 million offsetting volume declines of approximately $2.0 million.

 

The $1.0 million of restructuring charges in fiscal 2017 are principally related to severance costs, equipment installation and freight which represents expenses associated with the saw plant consolidation. The saw consolidation, discussed in previous SEC filings, reduced saw manufacturing facilities from four to two.

 

Selling, General and Administrative Expenses

 

North American selling, general and administrative expenses declined $2.7 million or 7% principally due to the comparative absence in fiscal 2017 of a $3.0 million pension charge in fiscal 2016.  International selling, general and administrative expenses increased $1.4 million or 5% due to increased sales commissions, professional fees and advertising expenses.

 

 

Operating Profit

 

Operating profit improved $19.4 million primarily due to the absence in fiscal 2017 of charges of $17.5 million for pension expense and $4.1 million for the asset impairment of our Mt. Airy facility related to the saw plant consolidation.

 

Other Income (Expense), Net

 

Other income (expense) in fiscal 2017 decreased $0.6 million compared to fiscal 2016 principally due to lower interest income and legal settlements.

 

Income Taxes

 

The income tax rate for fiscal 2017 was 35.6% on pre-tax income of $1.5 million. This compares to a normalized statutory U.S. federal and state rate of 38%. The primary reasons for a lower effective tax rate is due to the benefit of earnings in foreign jurisdictions with lower effective tax rates and a one-time tax benefit in Canada which was offset by discrete tax charges including the impact of a tax rate change in the U.K. applied to deferred tax assets.

 

In fiscal 2016, the tax benefit rate was 30.7% on pre-tax losses of $20.4 million. The primary reason for the lower tax benefit is due to losses in certain foreign subsidiaries for which no tax benefit was taken due to the uncertainty of future profits in those entities.

 

The Company continues to recognize the benefit of most U.S. deferred tax assets as, after weighing the positive and negative evidence, it believes it is more likely than not that those benefits will be recognized.

 

FINANCIAL INSTRUMENT 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 risks that are continually monitored, evaluated and managed. Proper management of these risks helps reduce the likelihood of earnings volatility.

 

The Company does not engage in tracking, market-making or other speculative activities in derivatives markets.  Net foreign monetary assets are approximately $11.4 million as of June 30, 2018.

 

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 or the cash flows or future earnings associated with those financial instruments.  A 10% increase in interest rates would not have a material impact on our borrowing costs.  See Note 13 to the Consolidated Financial Statements for details concerning the Company’s long-term debt outstanding of $17.3 million.

 

LIQUIDITY AND CAPITAL RESOURCES

 

		Years ended June 30 ($000)
		2018				2017				2016
Cash provided by (used in) operating activities		$	4,055			$	2,888			$	14,336
Cash provided by (used in) investing activities			(5,762	)			(3,839	)			(619	)
Cash provided by (used in) financing activities			1,708				(3,911	)			(4,294	)

 

The Company has a working capital ratio of 4.3 as of June 30, 2018 as compared to 3.6 as of June 30, 2017. This increase in working capital was primarily due to the re-classification of the borrowings under the Company’s Line of Credit from short-term back to long-term with the extension of its Credit Facility signed in January 2018. Cash, accounts receivable and inventories represent 94% of current assets in both fiscal 2018 and fiscal 2017.  The Company had accounts receivable turnover of 6.8 in fiscal 2018 and 6.4 in fiscal 2017 and an inventory turnover ratio of 2.5 in fiscal 2018 and 2.5 in fiscal 2017.

 

Net cash provided by operations of $4.1 million in fiscal 2018 was principally due to a $4.7 operating profit plus add back of non-cash expenses of depreciation and amortization of $7.5 million more than offsetting increases in working capital and pension funding.

 

The Company experienced a minimal change in its cash position in fiscal 2018 as $4.1 million provided by operations coupled with $1.7 million provided by financing activities offset $5.8 million of cash used in investing activities.

 

 

Effects of translation rate changes on cash primarily result from the movement of the U.S. dollar against the British Pound, the Euro and the Brazilian Real. The Company uses a limited number of forward contracts to hedge some of this activity and a natural hedge strategy of paying for foreign purchases in local currency when economically advantageous.

 

Liquidity and Credit Arrangements

 

The Company believes it maintains sufficient liquidity and has the resources to fund its operations in the near term.  In addition to its cash the Company has availability under a $23.0 million line of credit, of which, $0.9 million is reserved for letters of credit and $12.9 million was outstanding as of June 30, 2018.  

 

The Company amended its Credit Facility, which includes a Line of Credit and a Term Loan, in January 2018 in order to extend the maturity date of the Line of Credit.  Borrowings under the Line of Credit may not exceed $23.0 million.  The maturity date of the agreement is April 30, 2021 and it has an interest rate of LIBOR plus 1.5%.  As of June 30, 2018, $12.9 million was outstanding on the Line of Credit.

  

Availability under the Line of Credit is subject to a borrowing base comprised of accounts receivable and inventory. The Company believes that the borrowing base will consistently produce availability under the Line of Credit in excess of $23.0 million.

 

The Credit Facility contains financial covenants with respect to leverage, tangible net worth, and interest coverage, and also contains customary affirmative and negative covenants, including limitations on indebtedness, liens, acquisitions, asset dispositions, and fundamental corporate changes, and certain customary events of default. The financial covenants of the amended Credit Facility are: 1) funded debt to EBITDA, excluding non-cash and retirement benefit expenses (“maximum leverage”), not to exceed 2.25 to 1.0, 2) annual capital expenditures not to exceed $15.0 million, 3) maintain a Debt Service Coverage Rate of a minimum of 1.25 to 1.0 and 4) maintain consolidated cash plus liquid investments of not less than $10.0 million at any time. Upon the occurrence and continuation of an event of default, the lender may terminate the revolving credit commitment and require immediate payment of the entire unpaid principal amount of the Credit Facility, accrued interest and all other obligations. As of June 30, 2018, the Company was in compliance with all covenants under the Credit Facility.    

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company does not have any material off-balance sheet arrangements as defined under the Securities and Exchange Commission rules.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 2 to the Company’s Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.

 

Judgments, assumptions, and estimates are used for, but not limited to, the allowance for doubtful accounts receivable and returned goods; inventory allowances; income tax reserves; long lived assets and goodwill impairment; as well as employee turnover, discount and return rates used to calculate pension obligations.

 

Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the Company’s Consolidated Financial Statements. The following sections describe the Company’s critical accounting policies.

 

Revenue Recognition and Accounts Receivable: Sales of merchandise and freight billed to customers are recognized when products are shipped, title and risk of loss has passed to the customer, no significant post-delivery obligations remain and collection of the resulting accounts receivable is reasonably assured. Sales are net of provisions for cash discounts, returns, customer discounts (such as volume or trade discounts), and other sales related discounts. Cooperative advertising payments made to customers are included as advertising expense in selling, general and administrative expense in the Consolidated Statements of Operations.

 

The allowance for doubtful accounts of $1.3 million at the end of fiscal 2018 compared to $0.9 million at the end of fiscal 2017 is based on our assessment of the collectability of specific customer accounts and the aging of our accounts receivable. While the Company believes that the allowance for doubtful accounts is adequate, if there is a deterioration of a major customer’s credit worthiness, actual write-offs are higher than our previous experience, or actual future returns do not reflect historical trends, the estimates of the recoverability of the amounts due the Company could be adversely affected.

 

 

Inventory Valuation:  The Company values inventories at the lower of the cost of inventory or net realizable value, with cost determined by either the last-in, first-out ("LIFO") method for most U.S. inventories or the first-in, first-out ("FIFO") method for all other inventories. The Company establishes reserves for excess, slow moving, and obsolete inventory based on inventory levels, expected product life, and forecasted sales demand. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements compared with inventory levels. Reserve requirements are developed according to our projected demand requirements based on historical demand, competitive factors, and technological and product life cycle changes. It is possible that an increase in our reserve may be required in the future if there is a significant decline in demand for our products and we do not adjust our production schedules accordingly.

  

Property Plant and Equipment:  The Company accounts for property, plant and equipment (PP&E) at historical cost less accumulated depreciation. Impairment losses are recorded when indicators of impairment, such as plant closures, are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. The Company continually reviews for such impairment and believes that PP&E is being carried at its appropriate value.

 

PP&E is reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of such an asset may not be recoverable. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or change in utilization of property and equipment.

 

Recoverability of the net book value of property, plant and equipment is determined by comparison of the carrying amount to estimated future undiscounted net cash flows the asset group is expected to generate. Those cash flows may include an estimated salvage value based on a hypothetical sale at the end of the assets' depreciation period. Estimating these cash flows and terminal values requires management to make judgments about the growth in demand for our products, sustainability of gross margins, and our ability to achieve economies of scale. If assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value. No events or circumstances arose in fiscal 2018 which required management to perform an impairment analysis. In fiscal 2016 the Company determined that the carrying value of a building exceeded its fair value. Consequently, the Company recorded an impairment loss of $4.1 million, which represented the excess of the carrying value of a building over its fair value. See also Impairment of Assets and Restructuring Costs (Note 9 to the Consolidated Financial Statements.)

 

Depreciation is included in cost of goods sold or selling, general and administrative expenses in the Consolidated Statement of Operations based upon the function or use of the specific asset. Depreciation of equipment used in the manufacturing process is a component of inventory cost and included in costs of goods sold upon sale.  Depreciation of equipment used for office and administrative functions is an expense included in selling, general and administrative expenses.

 

Intangible Assets: Identifiable intangible assets are recorded at cost and are amortized on a straight-line basis over a 5-20 year period. The estimated useful lives of the intangible assets subject to amortization are: 15 years for patents,14-20 years for trademarks and trade names, 10 years for completed technology, 8 years for non-compete agreements, 8 years for customer relationships and 5 years for software development.

 

Recoverability of the net book value of intangible assets is determined by comparison of the carrying amount to estimated future undiscounted net cash flows the asset group is expected to generate. Estimating these cash flows requires management to make judgments about the growth in demand for our products, sustainability of gross margins, and our ability to achieve economies of scale. If assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value. No events or circumstances arose in fiscal 2018 which required management to perform an impairment analysis.

 

Goodwill:  Annually, or anytime when events suggest impairment may have occurred, the Company assesses the fair value of its goodwill to determine if the carrying amount of the goodwill is greater than the fair value. An impairment charge would be recognized to the extent the recorded goodwill exceeds the implied fair value of goodwill. The Company performed a quantitative analysis of its Bytewise reporting unit for its October 1, 2017 annual assessment of goodwill (commonly referred to as “Step One” evaluation). With the assistance of an independent third-party valuation specialist, the Company estimated the fair value using an income approach based on the present value of future cash flows. The Company believes this approach yields the most appropriate evidence of fair value.

 

 

Under the quantitative analysis, the fair value assessment of the Bytewise goodwill exceeded the carrying amount by approximately 81%. Therefore, no goodwill impairment was determined to exist. If future results significantly vary from current estimates and related projections, the Company may be required to record impairment charges.

 

The Company performed a qualitative analysis for its February 1, 2018 annual assessment of goodwill (commonly referred to as “Step Zero”) associated with its fiscal 2017 purchase of a private software company. From a qualitative perspective, in evaluating whether it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, relevant events and circumstances are taken into account, with greater weight assigned to events and circumstances that most affect the fair value or the carrying amounts of its assets. Items that were considered included, but were not limited to, the following: macroeconomic conditions, industry and market conditions, cost factors, overall financial performance and changes in management or key personnel. After assessing these and other factors the Company determined that it was more likely than not that the fair value of this reporting unit exceeded its carrying amount as of February 1, 2018. If future results significantly vary from current estimates and related projections, the Company may be required to record impairment charges.

 

Income Taxes:  Accounting for income taxes requires estimates of future benefits and tax liabilities. Due to temporary differences in the timing of recognition of items included in income for accounting and tax purposes, deferred tax assets or liabilities are recorded to reflect the impact arising from these differences on future tax payments. With respect to recorded tax assets, the Company assesses the likelihood that the asset will be realized by evaluating the positive and negative evidence to determine whether realization is more likely than not to occur. Realization of the Company’s deferred tax assets is primarily dependent on future taxable income, the timing and amount of which are uncertain, in part, due to the variable profitability of certain subsidiaries. A valuation allowance is recognized if it is “more likely than not” that some or all of a deferred tax asset will not be realized. In the event that we were to determine that we would not be able to realize our deferred tax assets in the future, an increase in the valuation allowance would be required. In the event we were to determine that we are able to realize our deferred tax assets and a valuation allowance had been recorded against the deferred tax assets, a decrease in the valuation allowance would be required. Should any significant changes in the tax law or the estimate of the necessary valuation allowance occur, the Company would record the impact of the change, which could have a material effect on our financial position or results of operations. See also Income Taxes (Note 11 to the Consolidated Financial Statements.)

 

Defined Benefit Plans: The Company has two defined benefit pension plans, one for U.S. employees and another for U.K. employees. The Company also has a postretirement medical and life insurance benefit plan for U.S. employees.

 

On December 21, 2016, the Company amended the U.S. defined benefit pension plan to freeze benefit accruals effective December 31, 2016. Consequently, the Plan is closed to new participants and current participants no longer earn additional benefits after December 31, 2016.

 

Under our current accounting method, both plans use fair value as the market-related value of plan assets and continue to recognize actuarial gains or losses within the corridor in other comprehensive income but instead of amortizing net actuarial gains or losses in excess of the corridor in future periods, excess gains and losses are recognized in net periodic benefit cost as of the plan measurement date, which is the same as the fiscal year end of the Company. This accounting method (MTM adjustment) is a permitted option which results in immediate recognition of excess net actuarial gains and losses in net periodic benefit cost instead of in other comprehensive income.  Immediate recognition in net periodic benefit cost could potentially increase the volatility of net periodic benefit cost. The MTM adjustments to net periodic benefit cost for 2018, 2017 and 2016 were $0.1 million, $0.2 million, and $17.8 million, respectively.

 

Calculation of pension and postretirement medical costs and obligations are dependent on actuarial assumptions.  These assumptions include discount rates, healthcare cost trends, inflation, salary growth, long-term return on plan assets, employee turnover rates, retirement rates, mortality and other factors. These assumptions are made based on a combination of external market factors, actual historical experience, long-term trend analysis, and an analysis of the assumptions being used by other companies with similar plans. Significant differences in actual experience or significant changes in assumptions would affect pension and other postretirement benefit costs and obligations. Effective December 31, 2013, the Company terminated eligibility for employees 55-64 years old in the Postretirement Medical Plan. See also Employee Benefit Plans (Note 12 to the Consolidated Financial Statements).

 

Cost of Goods Sold:  The Company includes costs of materials, direct and indirect labor and manufacturing overhead in cost of goods sold.  Included in these costs are inbound freight, personnel (manufacturing plants only), receiving costs, internal transferring, employee benefits (including pension expense), depreciation and inspection costs.

 

Selling General and Administrative Expenses:  The Company includes distribution expenses in selling, general and administrative expenses.  Distribution expenses include shipping labor and warehousing costs associated with the storage of finished goods at each manufacturing facility.  The Company also includes costs for our dedicated distribution centers as selling expenses.  Employee benefits, including pension expense attributable to personnel not involved in the manufacturing process, are also included in selling, general and administrative expenses.

 

 

CONTRACTUAL OBLIGATIONS

 

The following table summarizes future estimated payment obligations by period.

 

		Fiscal Year (in millions)
		Total				2019					2020-2021				2022-2023			Thereafter
Debt obligations		$	21.0			$	3.7			$	16.5			$	0.8			$	-
Estimated interest on debt obligations			1.8				0.7				0.7				0.4				-
Operating lease obligations			8.2				2.4				3.8				0.8				1.2
Purchase obligations			17.2				13.5				2.1				1.6				-
Total		$	48.2			$	20.3			$	23.1			$	3.6			$	1.2

 

Estimated interest on debt obligations are based on a standard 10-year loan amortization schedule for the $15.5 million term loan, and the current outstanding balance of the Company's credit line at the current effective interest rate through April 2021 when the current credit line agreement ends. See Note 13 for additional details on these debt instruments.

 

While our purchase obligations are generally cancellable without penalty, certain vendors charge cancellation fees or minimum restocking charges based on the nature of the product or service. The Company’s Brazilian subsidiary has entered into a long-term, volume-based purchase agreement for electricity. Under this agreement the Company is committed to purchase a minimum monthly amount of energy at a fixed price per kilowatt hour. Cancellation of this contract would incur a significant penalty.

 

 

Item 8 - Financial Statements and Supplementary Data

 

Contents:		Page
Report of Independent Registered Public Accounting Firm		19
Consolidated Balance Sheets		20
Consolidated Statements of Operations		21
Consolidated Statements of Comprehensive Income (Loss)		22
Consolidated Statements of Stockholders’ Equity		23
Consolidated Statements of Cash Flows		24
Notes to Consolidated Financial Statements		25-48

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

The L.S. Starrett Company

 

 

Opinion on the financial statements

 

We have audited the accompanying consolidated balance sheets of The L.S. Starrett Company (a Massachusetts corporation) and subsidiaries (the “Company”) as of June 30, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2018, and the related notes and schedule (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated August 24, 2018 expressed an unqualified opinion.

 

Basis for opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ GRANT THORNTON LLP

 

We have served as the Company’s auditor since 2006.

 

Boston, Massachusetts

August 24, 2018

 

 

THE L.S. STARRETT COMPANY

Consolidated Balance Sheets

(in thousands except share data) 

  

 

 See notes to consolidated financial statements

 

 

THE L.S. STARRETT COMPANY

Consolidated Statements of Operations

 (in thousands except per share data)

 

 

See notes to consolidated financial statements

 

 

THE L. S. STARRETT COMPANY

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

 

See notes to consolidated financial statements

 

 

THE L.S. STARRETT COMPANY

Consolidated Statements of Stockholders’ Equity

 (in thousands except per share data)

 

 

See notes to consolidated financial statements 

 

 

THE L. S. STARRETT COMPANY

Consolidated Statements of Cash Flows

 (in thousands)

 

 

See notes to consolidated financial statements

 

 

THE L.S. STARRETT COMPANY

Notes to Consolidated Financial Statements

June 30, 2017 and 2016

 

Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

Item 9A - Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, we carried out an evaluation, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this annual report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date in ensuring that information required to be filed in this annual report was recorded, processed, summarized and reported within the time period required by the rules and regulations of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

There have been no changes in internal control over financial reporting during the fourth quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting

 

 

 Management’s Report on Internal Control Over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those written policies and procedures that:

 

•

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and acquisitions and dispositions of the assets of the Company;

 

•

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;

 

•

Provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and

 

•

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2018.  Management based this assessment on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Board of Directors.

 

Based on our assessment, management concluded that as of June 30, 2018 our internal control over financial reporting was effective based on those criteria. 

 

The Company’s internal control over financial reporting as of June 30, 2018 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report included herein.

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

The L.S. Starrett Company

 

 

Opinion on internal control over financial reporting

 

We have audited the internal control over financial reporting of The L.S. Starrett Company (a Massachusetts corporation) and subsidiaries (the “Company”) as of June 30, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended June 30, 2018, and our report dated August 24, 2018 expressed an unqualified opinion on those financial statements.

 

Basis for opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and limitations of internal control over financial reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/ GRANT THORNTON LLP

 

Boston, Massachusetts

August 24, 2018

  

 

Item 9B - Other Information

None.

 

PART III

 

Item 10 – Directors, Executive Officers and Corporate Governance

The information concerning the Directors of the Registrant will be contained immediately under the heading “Election of Directors” and prior to Section A of Part I in the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 17, 2018 (the “2018 Proxy Statement”), which will be mailed to stockholders on or about September 10, 2018. The information in that portion of the 2018 Proxy Statement is hereby incorporated by reference.

 

Executive Officers of the Registrant

 

Name		Age		Held Present Office Since		Position
Douglas A. Starrett		66		2001		President and CEO and Director
Francis J. O’Brien		71		2009		Chief Financial Officer and Treasurer
Anthony M. Aspin		65		2000		Vice President Sales

 

Douglas A. Starrett has been President of the Company since 1995 and became CEO in 2001.

 

Francis J. O’Brien was previously Chief Financial Officer at Delta Education, LLC, an elementary school education company, from 2005 to 2009.  Prior to Delta Education, he was Chief Financial Officer at StockerYale Corporation, a publicly traded technology company, from 2001 to 2004 and Director of Finance and Business Development at Analogic Corporation, a publicly traded manufacturer of medical and security systems, from 1998 to 2000.  Mr. O’Brien served as Corporate Vice President of Finance & Administration for Addison Wesley, a global education company, from 1982 to 1997 and as Senior Manager at Coopers & Lybrand, an international public accounting firm, from 1976 to 1982.  Mr. O’Brien holds a BA from the University of Massachusetts and an MBA from Suffolk University and is a Certified Public Accountant.

 

Anthony M. Aspin was previously a divisional sales manager with the Company.

 

The positions listed above represent their principal occupations and employment during the last five years.

 

The President and Treasurer hold office until the first meeting of the directors following the next annual meeting of stockholders and until their respective successors are chosen and qualified, and each other officer holds office until the first meeting of directors following the next annual meeting of stockholders, unless a shorter period shall have been specified by the terms of his election or appointment or, in each case, until he sooner dies, resigns, is removed or becomes disqualified.

 

There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past ten years.

 

Code of Ethics

The Company has adopted a Policy on Business Conduct and Ethics (the “Ethics Policy”) applicable to all directors, officers and employees of the Company. The Code is intended to promote honest and ethical conduct, full and accurate reporting, and compliance with laws as well as other matters. The Ethics Policy is available on the Company’s website at www.starrett.com. Stockholders may also obtain free of charge a printed copy of the Ethics Policy by writing to the Clerk of the Company at The L.S. Starrett Company, 121 Crescent Street, Athol, MA 01331. We intend to disclose any future amendments to, or waivers from, the Ethics Policy within four business days of the waiver or amendment through a website posting or by filing a Current Report on Form 8-K with the Securities and Exchange Commission.

  

Item 11 - Executive Compensation

The information concerning management remuneration will be contained under the heading “General Information Relating to the Board of Directors and Its Committees,” and in Sections C-H of Part I of the Company’s 2018 Proxy Statement, and is hereby incorporated by reference.

 

 

On July 15, 2010, the Company entered into a Change of Control Agreement with Francis J. O’Brien.  The terms of Mr. O’Brien’s Agreement are described in section H in the Company’s 2018 Proxy Statement, which is hereby incorporated by reference.

 

On July 15, 2014, the Company entered into a Change of Control Agreement with Anthony M. Aspin.  The terms of Mr. Aspin’s Agreement are described in section H in the Company’s 2018 Proxy Statement, which is hereby incorporated by reference.

 

Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

(a)      The following table gives information about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under the Company’s 2017 Employees’ Stock Purchase Plan (“2017 Plan”) as of June 30, 2018. The 2017 Plan was approved by stockholders at the Company’s 2017 annual meeting and shares of Class A or Class B common stock may be issued under the 2017 Plan. Options are not issued under the Company’s Employees’ Stock Purchase Plan that was adopted in 1952.

 

Plan Category		Number of Securities to be issued Upon Exercise of Outstanding Options, Warrants and Rights (a)				Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b)				Number of Securities Remaining Available For Future Issuance Under Equity Compen- sation Plans (Ex- cluding Securities Reflected in Column (a) (c)
Equity compensation plans approved by security holders			70,515			$	6.75				450,007
Equity compensation plans not approved by security holders			—				—				—
Total			70,515			$	6.75				450,007

 

(b)       Security ownership of certain beneficial owners:

 

The information concerning a more than 5% holder of any class of the Company’s voting shares will be contained under the heading “Security Ownership of Certain Beneficial Owners” in Section I of Part I of the Company’s 2018 Proxy Statement, and is hereby incorporated by reference.

 

(c)       Security ownership of directors and officers:

 

The information concerning the beneficial ownership of each class of equity securities by all directors, and all directors and officers of the Company as a group, will be contained under the heading “Security Ownership of Directors and Officers” in Section I of Part I in the Company’s 2018 Proxy Statement. These portions of the 2018 Proxy Statement are hereby incorporated by reference.

 

(d)       The Company knows of no arrangements that may, at a subsequent date, result in a change in control of the Company.

   

Item 13 - Certain Relationships and Related Transactions, and Director Independence

The information required by this Item 13 will be contained in the Company’s 2018 Proxy Statement, and is hereby incorporated by reference.

 

  

Item 14 - Principal Accountant Fees and Services

The information required by this Item 14 will be contained in the Audit Fee table in Section B of Part I in the Company’s 2018 Proxy Statement. These portions of the Proxy Statement are hereby incorporated by reference.

  

PART IV

 

Item 15 – Exhibits, Financial Statement Schedules

(a)  1.     Financial statements filed in Item 8 of this annual report:

 

Consolidated Balance Sheets at June 30, 2018 and June 30, 2017.

 

Consolidated Statements of Operations for each of the years in the three-year period ended June 30, 2018.

 

Consolidated Statements of Comprehensive Income (Loss) for each of the years in the three-year period ended June 30, 2018.

 

Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended June 30, 2018.

 

Consolidated Statements of Cash Flows for each of the years in the three-year period ended June 30, 2018.

 

Notes to Consolidated Financial Statements

 

       2.    The following consolidated financial statement schedule of the Company included in this annual report on Form 10-K is filed herewith pursuant to Item 15(c) and appears immediately before the Exhibit Index:

 

       3.     See Exhibit Index below. Compensatory plans or arrangements are identified by an “*”.

 

(b)      See Exhibit Index below.

 

(c)      Not applicable.

 

Item 16 – Form 10-K Summary

 

Open

 

 

THE L.S. STARRETT COMPANY AND SUBSIDIARIES - EXHIBIT INDEX

 

Exhibit

  

3a	Restated Articles of Organization as amended, filed with Form 10-K for the year ended June 30, 2012, is hereby incorporated by reference.

 

3b	Amended and Restated Bylaws, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.

 

4a

Rights Agreement dated as of November 2, 2010 between the Company and Mellon Investor Services LLC, as Rights Agent (together with exhibits, including the Form of Rights Certificate, and the Summary of Rights to Purchase Shares of Class A Common Stock), filed with Form 10-Q for the quarter ended September 25, 2010, is hereby incorporated by reference.

 

4b	Amendment No. 1 to Rights Agreement dated as of February 5, 2013 by and between the Company and Computershare Shareowner Services LLC, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.

 

10a	Form of indemnification agreement with directors and executive officers, filed with Form 10-K for the year ended June 29, 2002, is hereby incorporated by reference.

 

10b*	The L.S. Starrett Company 401(k) Stock Savings Plan (2001 Restatement), filed with Form 10-K for the year ended June 29, 2002 is hereby incorporated by reference.

 

10c*	The L.S. Starrett Company Employee Stock Ownership Plan and Trust Agreement, as amended, filed with Form 10-K for the year ended June 30, 2012 is hereby incorporated by reference.

 

10d*	Amendment dated April 1, 2003 to the Company’s 401(k) Stock Savings Plan, filed with Form 10-K for the year ended June 28, 2003, is hereby incorporated by reference.

 

10e*	Amendment dated October 20, 2003 to the Company’s 401(k) Stock Savings Plan, filed with Form 10-Q for the quarter ended September 27, 2003, is hereby incorporated by reference.

 

10f	Loan and Security Agreement dated as of June 30, 2009 by and among the Company, certain subsidiaries of the Company, and TD Bank, N.A., as lender as amended through April 25, 2012, filed with Form 10-K for the year ended June 30, 2012, is hereby incorporated by reference.

 

10g	Change in Control Agreement, dated January 16, 2009, between the Company and Douglas A. Starrett, filed with Form 10-Q for the quarter ended December 27, 2008, is hereby incorporated by reference.

 

10h	Form of Non-Compete Agreement, dated as of January 16, 2009, executed separately by the Company and each of  Francis J. O’Brien, and Douglas A Starrett on July 15, 2010, and January 16, 2009, filed with Form 10-Q for the quarter ended December 27, 2008, is hereby incorporated by reference.

 

10i*	The L. S. Starrett Company 2013 Employee Stock Ownership Plan and Trust Agreement, filed with Form 10-Q for the quarter ended March 31, 2013, is hereby incorporated by reference.

 

10j*	The L.S. Starrett Company 2012 Employees’ Stock Purchase Plan, filed with the Company’s Registration Statement on Form S-8 (File No. 333-184934) filed on November 14, 2012, is hereby incorporated by reference.

 

 

10k*	The L.S. Starrett Company 2012 Long-Term Incentive Plan, filed with the Company’s Registration Statement on Form S-8 (File No. 333-184934) filed on November 14, 2012, is hereby incorporated by reference.
10l	Form of Non-Statutory Stock Option Agreement under The L.S. Starrett Company 2012 Long-Term Incentive Plan, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.
10m	Form of Director Non-Statutory Stock Option Agreement under The L.S. Starrett Company 2012 Long-Term Incentive Plan, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.
10n	Form of Restricted Stock Unit Agreement under The L.S. Starrett Company 2012 Long-Term Incentive Plan, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.
10o	Form of Director Restricted Stock Unit Agreement under The L.S. Starrett Company 2012 Long-Term Incentive Plan, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.
10p	Amendment dated December 23, 2013 to the Loan and Security Agreement dated as of June 30, 2009 by and among the Company, certain subsidiaries of the Company, and TD Bank, N.A., as lender, filed with Form 10-K for the year ended June 30, 2014, is hereby incorporated by reference.
10q	Amendment dated January 26, 2015 to the Loan and Security Agreement dated as of June 30, 2009 by and among the Company, certain subsidiaries of the Company, and TD Bank, N.A., as lender, filed with Form 10-K for the year ended June 30, 2015, is hereby incorporated by reference.
10r	Amendment dated January 30, 2018 to the Loan and Security Agreement dated as of June 30, 2009 by and among the Company, certain subsidiaries of the Company, and TD Bank, N.A., as lender, is filed herewith.
10s*	The L.S. Starrett Company 2017 Employees’ Stock Purchase Plan, filed with the Company’s Registration Statement on Form S-8 (File No. 333-221598) filed on November 16, 2017, is hereby incorporated by reference.
21	Subsidiaries of the L.S. Starrett Company, filed herewith.
23	Consent of Independent Registered Public Accounting Firm, filed herewith.

 

31a	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a), filed herewith.

 

31b	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a), filed herewith.

 

32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), filed herewith.

 

101

The following materials from The L. S. Starrett Company Annual Report on Form 10-K for the year ended June 30,  2018 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity (v) the Consolidated Statements of Cash Flows, and (vi) Notes to the Consolidated Financial Statements, tagged as blocks of text.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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)
	By: /S/ Francis J. O’Brien
	Francis J. O’Brien Treasurer and Chief Financial Officer (Principal Accounting Officer)
Date: Aug. 24, 2018

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:

 

/S/DOUGLAS A. STARRETT		/S/THOMAS J. RIORDAN
Douglas A. Starrett, Aug. 24, 2018  President and CEO and Director (Principal Executive Officer)		Thomas J. Riordan, Aug. 24, 2018  Director

 

By: /S/ Francis J. O’Brien		/S/TERRY A. PIPER
Francis J. O’Brien , Aug. 24, 2018 Treasurer and Chief Financial Officer (Principal Accounting Officer)		Terry A. Piper, Aug. 24, 2018  Director
/S/RICHARD B. KENNEDY		/S/RUSSELL D. CARREKER
Richard B. Kennedy, Aug. 24, 2018		Russell D. Carreker, Aug. 24, 2018
Director		Director
/S/DAVID A. LEMOINE		/S/CHRISTOPHER C. GAHAGAN
David A. Lemoine, Aug. 24, 2018		Christopher C. Gahagan, Aug. 24, 2018
Director		Director

 

 

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