UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended | September 30, 2020March 31, 2021 |
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from | | to |
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| Commission file number | | 1-367 |
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THE L. S. STARRETT COMPANY |
(Exact name of registrant as specified in its charter) |
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Massachusetts | | 04-1866480 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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121 Crescent Street, Athol, Massachusetts | 01331-1915 |
(Address of principal executive offices) | (Zip Code) |
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Registrant's telephone number, including area code | 978-249-3551 |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common - $1.00 Per Share Par Value | SCX | New York Stock Exchange |
Class B Common - $1.00 Per Share Par Value | Not applicable | Not applicable |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting Company ☒
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
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Common Shares outstanding as of | | October 31, 2020April 29, 2021 | |
Class A Common Shares | | 6,434,8156,453,544 | |
Class B Common Shares | | 651,200650,010 | |
THE L. S. STARRETT COMPANY
CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE L. S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands except share data)
| | | (unaudited) 09/30/2020 | | (audited) 06/30/2020 | | (unaudited)3/31/2021 | | 6/30/2020 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets: | Current assets: | | Current assets: | |
Cash | Cash | $ | 11,561 | | | $ | 13,458 | | Cash | $ | 11,247 | | | $ | 13,458 | |
Accounts receivable (less allowance for doubtful accounts of $597 and $736, respectively) | 30,629 | | | 29,012 | | |
Accounts receivable (less allowance for doubtful accounts of $583 and $736, respectively) | | Accounts receivable (less allowance for doubtful accounts of $583 and $736, respectively) | 34,467 | | | 29,012 | |
Inventories | Inventories | 50,076 | | | 52,987 | | Inventories | 52,536 | | | 52,987 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 8,894 | | | 8,641 | | Prepaid expenses and other current assets | 10,355 | | | 8,641 | |
Total current assets | Total current assets | 101,160 | | | 104,098 | | Total current assets | 108,605 | | | 104,098 | |
| Property, plant and equipment, net | Property, plant and equipment, net | 37,156 | | | 37,090 | | Property, plant and equipment, net | 35,001 | | | 37,090 | |
Right of use assets | Right of use assets | 4,213 | | | 4,465 | | Right of use assets | 4,186 | | | 4,465 | |
| Deferred tax assets, net | Deferred tax assets, net | 23,914 | | | 21,018 | | Deferred tax assets, net | 23,513 | | | 21,018 | |
Intangible assets, net | Intangible assets, net | 4,948 | | | 4,997 | | Intangible assets, net | 4,935 | | | 4,997 | |
Goodwill | Goodwill | 1,015 | | | 1,015 | | Goodwill | 1,015 | | | 1,015 | |
Total assets | Total assets | $ | 172,406 | | | $ | 172,683 | | Total assets | $ | 177,255 | | | $ | 172,683 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | LIABILITIES AND STOCKHOLDERS’ EQUITY | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Current maturities of debt | Current maturities of debt | $ | 5,605 | | | $ | 4,532 | | Current maturities of debt | $ | 6,895 | | | $ | 4,532 | |
Current lease liability | Current lease liability | 1,672 | | | 1,905 | | Current lease liability | 1,247 | | | 1,905 | |
Accounts payable | Accounts payable | 9,409 | | | 7,579 | | Accounts payable | 12,089 | | | 7,579 | |
Accrued expenses | Accrued expenses | 8,278 | | | 8,838 | | Accrued expenses | 7,745 | | | 8,838 | |
Accrued compensation | Accrued compensation | 4,671 | | | 4,980 | | Accrued compensation | 5,663 | | | 4,980 | |
Total current liabilities | Total current liabilities | 29,635 | | | 27,834 | | Total current liabilities | 33,639 | | | 27,834 | |
| Other tax obligations | Other tax obligations | 2,578 | | | 2,532 | | Other tax obligations | 2,761 | | | 2,532 | |
Long-term lease liability | Long-term lease liability | 2,651 | | | 2,655 | | Long-term lease liability | 3,027 | | | 2,655 | |
Long-term debt, net of current portion | Long-term debt, net of current portion | 21,227 | | | 26,341 | | Long-term debt, net of current portion | 18,530 | | | 26,341 | |
Postretirement benefit and pension obligations | Postretirement benefit and pension obligations | 66,113 | | | 67,338 | | Postretirement benefit and pension obligations | 61,948 | | | 67,338 | |
Total liabilities | Total liabilities | 122,204 | | | 126,700 | | Total liabilities | 119,905 | | | 126,700 | |
| Stockholders' equity: | Stockholders' equity: | | Stockholders' equity: | |
Class A Common stock $1 par (20,000,000 shares authorized; 6,342,031 outstanding at September 30, 2020 and 6,308,025 outstanding at June 30, 2020) | 6,342 | | | 6,308 | | |
Class B Common stock$1 par (10,000,000 shares authorized; 651,816 outstanding at September 30, 2020 and 679,680 outstanding at June 30, 2020 | 652 | | | 680 | | |
Class A Common stock $1 par (20,000,000 shares authorized; 6,451,960 outstanding at March 31, 2021 and 6,308,025 outstanding at June 30, 2020) | | Class A Common stock $1 par (20,000,000 shares authorized; 6,451,960 outstanding at March 31, 2021 and 6,308,025 outstanding at June 30, 2020) | 6,452 | | | 6,308 | |
Class B Common stock $1 par (10,000,000 shares authorized; 651,968 outstanding at March 31, 2021 and 679,680 outstanding at June 30, 2020) | | Class B Common stock $1 par (10,000,000 shares authorized; 651,968 outstanding at March 31, 2021 and 679,680 outstanding at June 30, 2020) | 652 | | | 680 | |
Additional paid-in capital | Additional paid-in capital | 56,117 | | | 55,762 | | Additional paid-in capital | 56,329 | | | 55,762 | |
Retained earnings | Retained earnings | 62,764 | | | 58,648 | | Retained earnings | 69,638 | | | 58,648 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (75,673) | | | (75,415) | | Accumulated other comprehensive loss | (75,721) | | | (75,415) | |
Total stockholders' equity | Total stockholders' equity | 50,202 | | | 45,983 | | Total stockholders' equity | 57,350 | | | 45,983 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 172,406 | | | $ | 172,683 | | Total liabilities and stockholders’ equity | $ | 177,255 | | | $ | 172,683 | |
|
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Consolidated Statements of Operations
(in thousands except per share data) (unaudited)
| | | 3 Months Ended | | | 3 Months Ended | | 9 Months Ended |
| | 09/30/2020 | | 09/30/2019 | | | 3/31/2021 | | 3/31/2020 | | 3/31/2021 | | 3/31/2020 |
| Net sales | Net sales | $ | 49,411 | | | $ | 52,114 | | | Net sales | $ | 54,944 | | | $ | 49,998 | | | $ | 158,408 | | | $ | 158,976 | |
Cost of goods sold | Cost of goods sold | 33,839 | | | 34,411 | | | Cost of goods sold | 36,795 | | | 35,154 | | | 107,082 | | | 107,793 | |
Gross margin | Gross margin | 15,572 | | | 17,703 | | | Gross margin | 18,149 | | | 14,844 | | | 51,326 | | | 51,183 | |
% of Net sales | 31.5 | % | | 34.0 | % | | |
% of net sales | | % of net sales | 0 | | | 0 | | | 0 | | | 0 | |
| Selling, general and administrative expenses | | Selling, general and administrative expenses | 13,511 | | | 14,780 | | | 41,126 | | | 46,912 | |
Restructuring charges | Restructuring charges | 346 | | | 0 | | | Restructuring charges | 788 | | | 0 | | | 1,518 | | | 0 | |
Selling, general and administrative expenses | 13,391 | | | 16,258 | | | |
Gain on sale of building | | Gain on sale of building | 0 | | | 0 | | | (3,204) | | | 0 | |
| Operating income | Operating income | 1,835 | | | 1,445 | | | Operating income | 3,850 | | | 64 | | | 11,886 | | | 4,271 | |
| Other (expense) | (1) | | | (169) | | | |
Other income (expense), net | | Other income (expense), net | 663 | | | 223 | | | 236 | | | (833) | |
| Income before income taxes | Income before income taxes | 1,834 | | | 1,276 | | | Income before income taxes | 4,513 | | | 287 | | | 12,122 | | | 3,438 | |
| Income tax (benefit) expense | (2,282) | | | 498 | | | |
Income tax expense (benefit) | | Income tax expense (benefit) | 1,496 | | | (326) | | | 1,132 | | | 787 | |
| Net income | Net income | $ | 4,116 | | | $ | 778 | | | Net income | $ | 3,017 | | | $ | 613 | | | $ | 10,990 | | | $ | 2,651 | |
| | Basic income per share | Basic income per share | $ | 0.59 | | | $ | 0.11 | | | Basic income per share | $ | 0.42 | | | $ | 0.09 | | | $ | 1.56 | | | $ | 0.38 | |
Diluted income per share | Diluted income per share | $ | 0.57 | | | $ | 0.11 | | | Diluted income per share | $ | 0.41 | | | $ | 0.09 | | | $ | 1.50 | | | $ | 0.38 | |
| Weighted average outstanding shares used in per share calculations: | Weighted average outstanding shares used in per share calculations: | | | Weighted average outstanding shares used in per share calculations: | |
Basic | Basic | 6,988 | | | 6,904 | | | Basic | $ | 7,104 | | | $ | 6,962 | | | $ | 7,058 | | | $ | 6,941 | |
Diluted | Diluted | 7,245 | | | 7,006 | | | Diluted | $ | 7,390 | | | $ | 7,022 | | | $ | 7,335 | | | $ | 7,017 | |
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Consolidated Statements of Comprehensive Income (Loss)
(in thousands) (unaudited)
| | | | | | | | | | | | | | | | | |
| 3 Months Ended | | |
| 09/30/2020 | | 09/30/2019 | | | | |
| | | | | | | |
Net income | $ | 4,116 | | | $ | 778 | | | | | |
Other comprehensive income (loss): | | | | | | | |
Currency translation (loss), net of tax | (236) | | | (3,739) | | | | | |
Pension and postretirement plans, net of tax | (22) | | | (20) | | | | | |
Other comprehensive (loss) | (258) | | | (3,759) | | | | | |
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Total comprehensive income (loss) | $ | 3,858 | | | $ | (2,981) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 3 Months Ended | | 9 Months Ended |
| 3/31/2021 | | 3/31/2020 | | 3/31/2021 | | 3/31/2020 |
| | | | | | | |
Net income | $ | 3,017 | | | $ | 613 | | | $ | 10,990 | | | $ | 2,651 | |
Other comprehensive income (loss): | | | | | | | |
Currency translation (loss), net of tax | (3,835) | | | (9,813) | | | (225) | | | (10,878) | |
Pension and postretirement plans, net of tax | (60) | | | (21) | | | (81) | | | (64) | |
Other comprehensive (loss) | (3,895) | | | (9,834) | | | (306) | | | (10,942) | |
| | | | | | | |
Total comprehensive income (loss) | $ | (878) | | | $ | (9,221) | | | $ | 10,684 | | | $ | (8,291) | |
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Consolidated Statements of Stockholders' Equity
(in thousands) (unaudited)
For the Three Month Period Ended September 30, 2020:three and nine months ended March 31, 2021:
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| Common Stock Outstanding | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Class A | | Class B | | | | |
| | | | | | | | | | | |
Balance June 30, 2020 | $ | 6,308 | | | $ | 680 | | | $ | 55,762 | | | $ | 58,648 | | | $ | (75,415) | | | $ | 45,983 | |
Total comprehensive income (loss) | — | | | — | | | — | | | 4,116 | | | (258) | | | 3,858 | |
Repurchase of shares | — | | | (2) | | | (4) | | | — | | | — | | | (6) | |
Stock-based compensation | 8 | | | — | | | 359 | | | — | | | — | | | 367 | |
Conversion | 26 | | | (26) | | | — | | | — | | | — | | | 0 | |
Balance September 30, 2020 | $ | 6,342 | | | $ | 652 | | | $ | 56,117 | | | $ | 62,764 | | | $ | (75,673) | | | $ | 50,202 | |
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Total comprehensive income | — | | | — | | | — | | | 3,857 | | | 3,847 | | | 7,704 | |
Repurchase of shares | — | | | — | | | (1) | | | — | | | — | | | (1) | |
Issuance of stock | — | | | 8 | | | 17 | | | — | | | — | | | 25 | |
Stock-based compensation | 103 | | | — | | | 51 | | | — | | | — | | | 154 | |
Conversion | 3 | | | (3) | | | — | | | — | | | — | | | 0 | |
Balance December 31, 2020 | $ | 6,448 | | | $ | 657 | | | $ | 56,184 | | | $ | 66,621 | | | $ | (71,826) | | | $ | 58,084 | |
| | | | | | | | | | | |
Total comprehensive income (loss) | — | | | — | | | — | | | 3,017 | | | (3,895) | | | (878) | |
Repurchase of shares | — | | | (1) | | | (3) | | | — | | | — | | | (4) | |
Stock-based compensation | — | | | — | | | 148 | | | — | | | — | | | 148 | |
Conversion | 4 | | | (4) | | | — | | | — | | | — | | | 0 | |
Balance March 31, 2021 | $ | 6,452 | | | $ | 652 | | | $ | 56,329 | | | $ | 69,638 | | | $ | (75,721) | | | $ | 57,350 | |
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Accumulated balance consists of: | | | | | | | | | | | |
Translation loss | | | | | | | | | $ | (62,099) | | | |
Pension and postretirement plans, net of taxes | | | | | | | | | (13,622) | | | |
| | | | | | | | | $ | (75,721) | | | |
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| Common Stock Outstanding | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Class A | | Class B | | | | |
| | | | | | | | | | | |
Balance June 30, 2020 | $ | 6,308 | | | $ | 680 | | | $ | 55,762 | | | $ | 58,648 | | | $ | (75,415) | | | $ | 45,983 | |
Total comprehensive income (loss) | — | | | — | | | — | | | 4,116 | | | (258) | | | 3,858 | |
Repurchase of shares | — | | | (2) | | | (4) | | | — | | | — | | | (6) | |
Stock-based compensation | 8 | | | — | | | 359 | | | — | | | — | | | 367 | |
Conversion | 26 | | | (26) | | | — | | | — | | | — | | | 0 | |
Balance September 30, 2020 | $ | 6,342 | | | $ | 652 | | | $ | 56,117 | | | $ | 62,764 | | | $ | (75,673) | | | $ | 50,202 | |
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Accumulated balance consists of: | | | | | | | | | | | |
Translation loss | | | | | | | | | $ | (62,110) | | | |
Pension and postretirement plans, net of taxes | | | | | | | | | (13,563) | | | |
| | | | | | | | | $ | (75,673) | | | |
For the Three Month Period Ended September 30, 2019:three and nine months ended March 31, 2020:
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| Common Stock Outstanding | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Class A | | Class B | | | | |
| | | | | | | | | | | |
Balance June 30, 2019 | $ | 6,207 | | | $ | 690 | | | $ | 55,276 | | | $ | 80,487 | | | $ | (59,281) | | | $ | 83,379 | |
Total comprehensive income (loss) | — | | | — | | | — | | | 778 | | | (3,759) | | | (2,981) | |
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Repurchase of shares | — | | | (2) | | | (8) | | | — | | | — | | | (10) | |
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Stock-based compensation | 57 | | | — | | | 157 | | | — | | | — | | | 214 | |
Conversion | 6 | | | (6) | | | — | | | — | | | — | | | — | |
Balance September 30, 2019 | $ | 6,270 | | | $ | 682 | | | $ | 55,425 | | | $ | 81,265 | | | $ | (63,040) | | | $ | 80,602 | |
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Accumulated balance consists of: | | | | | | | | | | | |
Translation loss | | | | | | | | | $ | (53,297) | | | |
Pension and postretirement plans, net of taxes | | | | | | | | | (9,743) | | | |
| | | | | | | | | $ | (63,040) | | | |
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Consolidated Statements of Cash Flows
(in thousands) (unaudited)
| | | | | | | | | | | |
| 3 Months Ended |
| 09/30/2020 | | 09/30/2019 |
| | | |
Cash flows from operating activities: | | | |
| | | |
Net income | $ | 4,116 | | | $ | 778 | |
| | | |
Non-cash operating activities: | | | |
Depreciation | 1,360 | | | 1,212 | |
Amortization | 300 | | | 575 | |
Stock-based compensation | 367 | | | 214 | |
Net long-term tax obligations | 17 | | | 26 | |
Deferred taxes | (2,822) | | | 141 | |
Postretirement benefit and pension obligations | 4 | | | 30 | |
Working capital changes: | | | |
Accounts receivable | (1,656) | | | 3,087 | |
Inventories | 3,194 | | | (5,091) | |
Other current assets | (324) | | | (428) | |
Other current liabilities | 678 | | | (2,796) | |
Prepaid pension expense | (1,609) | | | (1,281) | |
Other | 38 | | | 49 | |
Net cash provided by (used in) operating activities | 3,663 | | | (3,484) | |
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Cash flows from investing activities: | | | |
Purchases of property, plant and equipment | (1,543) | | | (2,625) | |
Software development | (251) | | | (399) | |
Net cash used in investing activities | (1,794) | | | (3,024) | |
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Cash flows from financing activities: | | | |
Proceeds from borrowing | 4,462 | | | 2,500 | |
Debt repayments | (8,475) | | | (1,039) | |
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Shares repurchased | (6) | | | (10) | |
Net cash (used in) provided by financing activities | (4,019) | | | 1,451 | |
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Effect of exchange rate changes on cash | 253 | | | (15) | |
| | | |
Net decrease in cash | (1,897) | | | (5,072) | |
Cash, beginning of period | 13,458 | | | 15,582 | |
Cash, end of period | $ | 11,561 | | | $ | 10,510 | |
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Supplemental cash flow information: | | | |
Interest paid | $ | 201 | | | $ | 269 | |
Income taxes paid, net | 1,224 | | | 594 | |
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| Common Stock Outstanding | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Class A | | Class B | | | | |
| | | | | | | | | | | |
Balance June 30, 2019 | $ | 6,207 | | | $ | 690 | | | $ | 55,276 | | | $ | 80,487 | | | $ | (59,281) | | | $ | 83,379 | |
Total comprehensive income (loss) | — | | | — | | | — | | | 778 | | | (3,759) | | | (2,981) | |
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Repurchase of shares | — | | | (2) | | | (8) | | | — | | | — | | | (10) | |
| | | | | | | | | | | |
Stock-based compensation | 57 | | | — | | | 157 | | | — | | | — | | | 214 | |
Conversion | 6 | | | (6) | | | — | | | — | | | — | | | — | |
Balance September 30, 2019 | $ | 6,270 | | | $ | 682 | | | $ | 55,425 | | | $ | 81,265 | | | $ | (63,040) | | | $ | 80,602 | |
Total comprehensive income (loss) | — | | | — | | | — | | | 1,260 | | | 2,651 | | | 3,911 | |
Repurchase of shares | — | | | — | | | (3) | | | — | | | — | | | (921) | |
Issuance of stock | — | | | 7 | | | 30 | | | — | | | — | | | 37 | |
Stock-based compensation | 2 | | | — | | | 70 | | | — | | | — | | | 72 | |
Conversion | 8 | | | (8) | | | — | | | — | | | — | | | — | |
Balance December 31, 2019 | $ | 6,280 | | | $ | 681 | | | $ | 55,522 | | | $ | 82,525 | | | $ | (60,389) | | | $ | 84,619 | |
Total comprehensive income (loss) | — | | | — | | | — | | | 613 | | | (9,834) | | | (9,221) | |
Repurchase of shares | — | | | (1) | | | (3) | | | — | | | — | | | (4) | |
Stock-based compensation | 10 | | | — | | | 114 | | | — | | | — | | | 124 | |
Conversion | 7 | | | (7) | | | — | | | — | | | — | | | 0 | |
Balance March 31, 2020 | $ | 6,297 | | | $ | 673 | | | $ | 55,633 | | | $ | 83,138 | | | $ | (70,223) | | | $ | 75,518 | |
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Accumulated balance consists of: | | | | | | | | | | | |
Translation loss | | | | | | | | | $ | (60,437) | | | |
Pension and postretirement plans, net of taxes | | | | | | | | | (9,786) | | | |
| | | | | | | | | $ | (70,223) | | | |
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Consolidated Statements of ContentsCash Flows
(in thousands) (unaudited) | | | | | | | | | | | |
| 9 Months Ended |
| 3/31/2021 | | 3/31/2020 |
| | | |
Cash flows from operating activities: | | | |
| | | |
Net income | $ | 10,990 | | | $ | 2,651 | |
| | | |
Non-cash operating activities: | | | |
Gain from sale of real estate | (3,204) | | | 0 | |
Depreciation | 3,912 | | | 3,735 | |
Amortization | 911 | | | 1,540 | |
Stock-based compensation | 669 | | | 410 | |
Net long-term tax obligations | 117 | | | 163 | |
Deferred taxes | (2,279) | | | 264 | |
Postretirement benefit and pension obligations | (11) | | | 92 | |
Working capital changes: | | | |
Accounts receivable | (4,580) | | | 2,876 | |
Inventories | 1,391 | | | (3,097) | |
Other current assets | (1,813) | | | (831) | |
Other current liabilities | 2,803 | | | (5,463) | |
Prepaid pension expense | (6,374) | | | (6,360) | |
Other | 189 | | | 159 | |
Net cash provided by (used in) operating activities | 2,721 | | | (3,861) | |
| | | |
Cash flows from investing activities: | | | |
Purchases of property, plant and equipment | (4,048) | | | (7,595) | |
Software development | (849) | | | (1,023) | |
Proceeds from sale of real estate | 5,214 | | | 0 | |
Net cash provided by (used in) investing activities | 317 | | | (8,618) | |
| | | |
Cash flows from financing activities: | | | |
Proceeds from borrowing | 12,581 | | | 11,556 | |
Debt repayments | (17,924) | | | (4,666) | |
Proceeds from common stock issued | 25 | | | 37 | |
Shares repurchased | (11) | | | (17) | |
Net cash (used in) provided by financing activities | (5,329) | | | 6,910 | |
| | | |
Effect of exchange rate changes on cash | 80 | | | 202 | |
| | | |
Net decrease in cash | (2,211) | | | (5,367) | |
Cash, beginning of period | 13,458 | | | 15,582 | |
Cash, end of period | $ | 11,247 | | | $ | 10,215 | |
| | | |
Supplemental cash flow information: | | | |
Interest paid | $ | 673 | | | $ | 737 | |
Income taxes paid, net | 3,535 | | | 1,304 | |
See Notes to Unaudited Consolidated Financial Statements
THE L. S. STARRETT COMPANY
Notes to Unaudited Consolidated Financial Statements
September 30, 2020March 31, 2021
Note 1: Basis of Presentation and Summary of Significant Account Policies
The unaudited interim consolidated financial statements as of and for the threenine months ended September 30, 2020March 31, 2021 have been prepared by The L.S. Starrett Company (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. These unaudited consolidated financial statements, which, in the opinion of management, reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation, should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2020. The balance sheet as of June 30, 2020 has been derived from the audited consolidated financial statements as of and for the year ended June 30, 2020. Operating results are not necessarily indicative of the results that may be expected for any future interim period or for the entire fiscal year. The Company’s “fiscal year” begins July 1st and ends June 30th.
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 amounts reported in the consolidated financial statements and accompanying notes. Note 2 to the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the year ended June 30, 2020 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.
Throughout the COVID-19 pandemic crisis, the Company's main focus has been on protecting the health and well-being of it'sits employees, and the long-term financial health of the Company. As anticipated, theThe COVID-19 pandemic has hadcontinues to have a negative impact on global sales.It remains very difficult for managementcertain sectors of the Company's Sales, particularly in Industrial and Capital Equipment markets. Products sold through Consumer channels, principally in Brazil, have returned to or even exceed pre-pandemic levels. Some uncertainty still exists when trying to predict when this crisis will have reached its peak and when sales and order intake resume their pre-pandemic levels.Because of this remaining uncertainty, management has conducted several scenario planning exercises and is prepared to take additional necessary steps to preservea full recovery across the longer-term financial health of the Company. To the extent that pandemic-related events do not provide evidence about conditions that existed at the balance-sheet date, the Company considers it necessary to disclose it cannot estimate all aspects of the impact on the financial statements as a result of COVID-19.
whole company.
Note 2: Segment Information
The segment information and the accounting policies of each segment are the same as those described in the notes to the consolidated financial statements entitled “Financial Information by Segment & Geographic Area” included in our Annual Report on Form 10-K for the year ended June 30, 2020. The Company’s business is aggregated into 2 reportable segments based on geography of operations: North American Operations and International Operations. Segment income is measured for internal reporting purposes by excluding corporate expenses, which are included in the unallocated column in the table below. Other income and expense, including interest income and expense, and income taxes are excluded entirely from the table below.
There were no significant changes in the segment operations or in the segment assets from the Annual Report.Report on Form 10-K. Financial results for each reportable segment are as follows (in thousands):
| | | North American Operations | | International Operations | | Unallocated | | Total | | North American Operations | | International Operations | | Unallocated | | Total |
Three Months ended September 30, 2020 | | |
Three months ended March 31, 2021 | | Three months ended March 31, 2021 | |
| Sales1 | Sales1 | $ | 25,984 | | | $ | 23,427 | | | $ | 0 | | | $ | 49,411 | | Sales1 | $ | 32,519 | | | $ | 22,425 | | | $ | 0 | | | $ | 54,944 | |
| Operating Income (Loss) | Operating Income (Loss) | $ | 839 | | | $ | 2,830 | | | $ | (1,834) | | | $ | 1,835 | | Operating Income (Loss) | 2,931 | | | 2,692 | | | (1,773) | | | $ | 3,850 | |
| Three Months ended September 30, 2019 | | |
Three Months ended March 31, 2020 | | Three Months ended March 31, 2020 | |
| Sales2 | Sales2 | $ | 31,009 | | | $ | 21,105 | | | $ | 0 | | | $ | 52,114 | | Sales2 | $ | 33,369 | | | $ | 16,629 | | | $ | 0 | | | $ | 49,998 | |
| Operating Income (Loss) | Operating Income (Loss) | $ | 2,206 | | | $ | 1,163 | | | $ | (1,924) | | | $ | 1,445 | | Operating Income (Loss) | $ | 1,337 | | | $ | 448 | | | $ | (1,721) | | | $ | 64 | |
1.Excludes $746$1,338 of North American segment intercompany sales to the International segment, and $2,786$3,197 of International segment intercompany sales to the North American segment.
2.Excludes $1,063 of North American segment intercompany sales to the International segment, and $2,722 of International segment intercompany sales to the North American segment.
| | | | | | | | | | | | | | | | | | | | | | | |
| North American Operations | | International Operations | | Unallocated | | Total |
Nine Months ended March 31, 2021 | | | | | | | |
| | | | | | | |
Sales1 | $ | 85,609 | | 0 | $ | 72,799 | | | $ | 0 | | | $ | 158,408 | |
Operating Income (Loss) | 8,611 | | | 8,804 | | | $ | (5,529) | | | $ | 11,886 | |
| | | | | | | |
Nine months ended March 31, 2020 | | | | | | | |
| | | | | | | |
Sales2 | $ | 97,475 | | | $ | 61,501 | | | $ | 0 | | | $ | 158,976 | |
Operating Income (Loss) | $ | 6,217 | | | $ | 3,069 | | | $ | (5,015) | | | $ | 4,271 | |
11.Excludes $3,075 of North American segment intercompany sales to the International segment, and $8,593 of International segment intercompany sales to the North American segment.
2.Excludes $968$3,079 of North American segment intercompany sales to the International segment, and $4,242$10,820 of International segment intercompany sales to the North American segment.
Note 3:�� Revenue from Contracts with Customers
On July 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, and all the related amendments (“ASC Topic 606”), using the modified retrospective method. In addition, the Company elected to apply certain of the permitted practical expedients within the revenue recognition guidance and make certain accounting policy elections, including those related to significant financing components, sales taxes and shipping and handling activities. Most of the changes resulting from the adoption of ASC Topic 606 on July 1, 2018 were changes in presentation within the Unaudited Consolidated Balance Sheet. Therefore, while the Company made adjustments to certain opening balances on its July 1, 2018 Unaudited Consolidated Balance Sheet, the Company made 0 adjustment to opening Retained Earnings.
The core principle of ASC Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The application of the FASB’s guidance on revenue recognition requires the Company to recognize the amount of revenue and consideration that the Company expects to receive in exchange for goods and services transferred to our customers. To do this, the Company applies the five-step model prescribed by the FASB, which requires us to: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation.
The Company accounts for a contract or purchase order when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when control of the product passes to the customer, which is upon shipment, unless otherwise specified within the customer contract or on the purchase order as delivery, and is recognized at the amount that reflects the consideration the Company expects to receive for the products sold, including various forms of discounts. When revenue is recorded, estimates of returns are made and recorded as a reduction of revenue. Contracts with customers are evaluated to determine if there are separate performance obligations related to timing of product shipment that will be satisfied in different accounting periods. When that is the case, revenue is deferred until each performance obligation is met. No revenue was deferred as of SeptemberMarch 31, 2021 and June 30, 2020 and 2019.2020. Purchase orders are of durations less than one year. As such, the Company applies the practical expedient in ASC paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, for which work has not yet been performed.
Certain taxes assessed by governmental authorities on revenue producing transactions, such as value added taxes, are excluded from revenue and recorded on a net basis.
Performance Obligations
The Company’s primary source of revenue is derived from the manufacture and distribution of metrology tools and equipment, saw blades and related products sold to distributors. The Company recognizes revenue for sales to our customers when transfer of control of the related good or service has occurred. All of the Company’s revenue was recognized under the point in time approach for the three and nine months ended September 30, 2020March 31, 2021 and 2019.2020. Contract terms with certain metrology equipment customers could result in products and services being transferred over time as a result of the customized nature of some of the Company’s products, together with contractual provisions in the customer contracts that provide the Company with an
1
enforceable right to payment for performance completed to date; however, under typical terms, the Company does not have the right to consideration until the time of shipment from its manufacturing facilities or distribution centers, or until the time of delivery to its customers. If certain contracts in the future provide the Company with this enforceable right of payment, the timing of revenue recognition from products transferred to customers over time may be slightly accelerated compared to the Company’s right to consideration at the time of shipment or delivery.
The Company’s typical payment terms vary based on the customer, geographic region, and the type of goods and services in the contract or purchase order. The period of time between invoicing and when payment is due is typically not significant. Amounts billed and due from the Company’s customers are classified as accounts receivablesreceivable on the Consolidated Balance Sheets. As the Company’s standard payment terms are usually less than one year, the Company has elected the practical expedient under ASC paragraph 606-10-32-18 to not assess whether a contract has a significant financing component.
The Company’s customers take delivery of goods, and they are recognized as revenue at the time of transfer of control to the customer, which is usually at the time of shipment, unless otherwise specified in the customer contract or purchase order. This determination is based on applicable shipping terms, as well as the consideration of other indicators, including timing of when the Company has a present right to payment, when physical possession of products is transferred to customers, when the customer has the asset, and provisions in contracts regarding customer acceptance.
While unit prices are generally fixed, the Company provides variable consideration for certain customers, typically in the form of promotional incentives at the time of sale. The Company utilizes the most likely amount to estimate the effect of uncertainty on the amount of variable consideration to which the Company would be entitled. The most likely amount method considers the single most likely amount from a range of possible consideration amounts. The most likely amounts are based upon the contractual terms of the incentives and historical experience with each customer. The Company records estimates for cash discounts, promotional rebates, and other promotional allowances in the period the related revenue is recognized (“Customer Credits”). The provision for Customer Credits is recorded as a reduction from gross sales and reserves for Customer Credits are presented within accrued expenses on the Consolidated Balance Sheets. Actual Customer Credits have not differed materially from estimated amounts for each period presented. Amounts billed to customers for shipping and handling are included in net sales and costs associated with shipping and handling are included in cost of sales. The Company has concluded that its estimates of variable consideration are not constrained according to the definition within the new standard. Additionally, the Company applies the practical expedient in ASC paragraph 606-10-25-18B and accounts for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment activity, rather than a separate performance obligation.
Under ASC Topic 606, the Company is required to present a refund liability and a return asset within the Unaudited Consolidated Balance Sheet. As of September 30, 2020,March 31, 2021, and June 30, 2020, the balance of the return asset is $0.1$0.2 million and was $0.1 million and the balance of the refund liability is $0.2 million and was $0.2 million.million respectively. They are presented within prepaid expenses and other current assets and accrued expenses, respectively, on the Consolidated Balance Sheets.
The Company, in general, warrants its products against certain defects in material and workmanship when used as designed, for a period of up to 1 year. The Company does not sell extended warranties.
Contract Balances
Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date on contracts with customers. Contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been met, and therefore, revenue has not been recognized. The Company had 0 contract asset balances, but had
contract liability balances of $0.4$0.6 million and $0.4 million at September 30, 2020March 31, 2021 and June 30, 2020 located in Accounts Payable in the Consolidated Balance Sheets.
Disaggregation of Revenue
The Company operates in 2 reportable segments: North America and International. ASC Topic 606 requires further disaggregation of an entity’s revenue. In the following table, the Company's net sales by shipping origin are disaggregated accordingly for the three and nine months ended September 30,March 31, 2021 and 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| 09/30/2020 | | 09/30/2019 | | | | |
North America | | | | | | | |
United States | $ | 24,337 | | | $ | 28,624 | | | | | |
Canada & Mexico | 1,647 | | | 2,385 | | | | | |
| 25,984 | | | 31,009 | | | | | |
International | | | | | | | |
Brazil | 14,908 | | | 12,822 | | | | | |
United Kingdom | 4,995 | | | 5,231 | | | | | |
China | 1,581 | | | 1,514 | | | | | |
Australia & New Zealand | 1,943 | | | 1,538 | | | | | |
| 23,427 | | | 21,105 | | | | | |
| | | | | | | |
Total Sales | $ | 49,411 | | | $ | 52,114 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| 3/31/2021 | | 3/31/2020 | | 3/31/2021 | | 3/31/2020 |
North America | | | | | | | |
United States | $ | 30,307 | | | $ | 31,288 | | | $ | 79,989 | | | $ | 90,996 | |
Canada & Mexico | 2,212 | | | 2,081 | | | 5,620 | | | 6,479 | |
| 32,519 | | | 33,369 | | | 85,609 | | | 97,475 | |
International | | | | | | | |
Brazil | 14,901 | | | 8,729 | | | 47,302 | | | 36,551 | |
United Kingdom | 4,269 | | | 5,333 | | | 14,818 | | | 15,936 | |
China | 1,655 | | | 1,338 | | | 5,240 | | | 4,505 | |
Australia & New Zealand | 1,600 | | | 1,229 | | | 5,439 | | | 4,509 | |
| 22,425 | | | 16,629 | | | 72,799 | | | 61,501 | |
| | | | | | | |
Total Sales | $ | 54,944 | | | $ | 49,998 | | | $ | 158,408 | | | $ | 158,976 | |
Note 4: Recent Accounting Pronouncements
Recently Issued Accounting Standards not yet adopted:
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement ('Topic 820')2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.Defined Benefit Plans." The ASU modifies the disclosure requirements in Topic 820, Fair Value Measurement, by removing2018-14 removes certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertaintydisclosures that are not considered cost beneficial, clarifies certain required disclosures and adding new disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.added additional disclosures. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019.2020, effective for the Company July 1, 2021.. The adoptionamendments in fiscal 2020 of this standard did notASU 2018-14 must be applied on a retrospective basis. The Company is currently assessing the effect, if any, that ASU 2018-14 will have a material impact on the Company’sits consolidated financial position and results of operations upon adoption.statements.
Recently Issued Accounting Standards not yet adopted:
In June 2016, theNovember 2019, FASB issued ASU 2016-13, “Financial2019-10, which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates of certain major new accounting standards. Of those standards affected the following is the only one not yet implemented by the Company. Financial Instruments - Credit Losses (TopicASU 2016-13 (ASC 326): Measurement of Credit Losses on Financial Instruments,” and subsequent amendment to the guidance, ASU 2018-19 in November 2018. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. The amendment will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2018-19 clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption was permitted for annual periods beginning after December 15, 2018, and interim periods therein. This pronouncement was extended for Small Reporting Companies and for the Company until 2023. beginning July 1, 2022. The Company does not expect the adoption of this standard to have a material impact on the financial position and results of operations.
In December 2019, FASB issued ASU 2019-12, Income Taxes (Topic 740). The amendments in this Update simplify the accounting for income taxes by removing the following exceptions:
a) Exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income)
b) Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment
c) Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary
d) Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.
The amendments in this Update also simplify the accounting for income taxes by doing the following:
a) Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax. Requiring that an entity evaluate when a step up in the tax basis of
goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction.
b) Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both
not subject to tax and disregarded by the taxing authority.
c) Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.
d) Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method..
The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 or July 1, 2021 for the Company. The Company is currently assessing the effect, if any, that ASU 2018-14 will have on its consolidated financial statements.
In August 2018, theMarch 2020, FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." ASU 2018-14
removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and added additional disclosures. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2020.2020-04, Reference Rate Reform (Topic 848). The amendments in ASU 2018-14 mustthis Update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of)
reference rate reform on financial reporting. Optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be applied ondiscontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this Update apply to contract modifications that replace a retrospective basis.reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). The Company currently has no hedging type contracts or others tied to reference rates where this standard would have a material impact to the Company's accounting. The first amendment to the amended and restated loan and security agreement with TD Bank dated September 17, 2020 increased the maximum interest charged on the Line Of Credit from and annual interest rate of 2.25% plus LIBOR to 3.50% plus LIBOR, but ultimately our interest rate is currently assessingcapped accordingly in this agreement. The Company does not believe the effect, if any, that ASU 2018-14 will haveadoption of this standard has a material impact on its consolidatedthe financial statements.position and results of operations.
Note 5: Leases
Operating lease cost amounted to $0.6 million and $0.6$1.8 million for three and nine months period ended September 30, 2020 and 2019.March 31, 2021. As of September 30, 2020,March 31, 2021, the Company’s right-of-use assets, lease obligations and remaining cash commitment on these leases (in thousands):
| | | | | | | | | | | | | | | | | |
| Right-of-Use Assets | | Operating Lease Obligations | | Remaining Cash Commitment |
Operating leases | $ | 4,213 | | | $ | 4,323 | | | $ | 5,080 | |
| | | | | | | | | | | | | | | | | |
| Right-of-Use Assets | | Operating Lease Obligations | | Remaining Cash Commitment |
Operating leases | $ | 4,186 | | | $ | 4,274 | | | $ | 5,081 | |
The Company has other operating lease agreements with commitments of less than one year or that are not significant. The Company elected the practical expedient option and as such, these lease payments are expensed as incurred. The Company’s weighted average discount rate and remaining term on lease liabilities is approximately 9.0% and 4.04.1 years. As of September 30, 2020,March 31, 2021, the Company’s financing leases are de minimis. The foreign exchange impact affecting the operating leases are de minimis.
The Company entered into $0.1$0.9 million in operating lease commitments and incurred de minimis exchange impact during the threenine months ended September 30, 2020. March 31, 2021. In December 2020, the Company completed a sale and leaseback of its Mount Airy NC Facility (see note 13) and recognized a Right-Of-Use ("ROU") asset based on leasing 66,000 square feet in the amount of $0.8 million for a three year lease with an option for 2 more years.
At September 30, 2020,March 31, 2021, the Company had the following fiscal year minimum operating lease commitments (in thousands):
| | | | | |
Three months ended September 30, 2020 | Operating Lease Commitments |
2021 (Remainder of year) | $ | 1,757 | |
2022 | 1,051 | |
2023 | 740 | |
2024 | 707 | |
2025 | 349 | |
Thereafter | 476 | |
Subtotal | $ | 5,080 | |
Imputed interest | (757) | |
Total | 4,323 | |
| | | | | |
Nine months ended March 31, 2021 | Operating Lease Commitments |
2021 (Remainder of year) | $ | 574 | |
2022 | 1,318 | |
2023 | 1,122 | |
2024 | 917 | |
2025 | 639 | |
Thereafter | 511 | |
Subtotal | $ | 5,081 | |
Imputed interest | (806) | |
Total | 4,274 | |
Note 6: Stock-based Compensation
On September 5, 2012, the Board of Directors adopted The L.S. Starrett Company 2012 Long Term Incentive Plan (the “2012 Stock Plan”). The 2012 Stock Plan was approved by shareholders on October 17, 2012, and the material terms of its performance goals were re-approved by shareholders at the Company’s Annual Meeting held on October 18, 2017. The 2012 Stock Plan permits the granting of the following types of awards to officers, other employees and non-employee directors: stock options; restricted stock awards; unrestricted stock awards; stock appreciation rights; stock units including restricted stock units; performance awards; cash-based awards; and awards other than previously described that are convertible or otherwise based on stock. The 2012 Stock Plan provides for the issuance of up to 500,000 shares of common stock.
Options granted vest in periods ranging from one year to three years and expire ten years after the grant date. Restricted stock units (“RSU”) granted generally vest from one year to three years. Vested restricted stock units will be settled in shares of common stock. As of September 30, 2020,March 31, 2021, there were 9,0008,250 stock options and 360,134260,977 restricted stock units outstanding. There were 13,23310,477 shares available for grant under the 2012 Stock Plan as of September 30, 2020.March 31, 2021.
For stock option grants, the fair value of each grant is estimated at the date of grant using the Binomial Options pricing model. The Binomial Options pricing model utilizes assumptions related to stock volatility, the risk-free interest rate, the dividend
yield, and employee exercise behavior. Expected volatilities utilized in the model are based on the historic volatility of the Company’s stock price. The risk-free interest rate is derived from the U.S. Treasury Yield curve in effect at the time of the grant. The expected life is determined using the average of the vesting period and contractual term of the options (Simplified Method).
NaN stock options were granted during the threenine months ended September 30, 2020March 31, 2021 and 2019.2020.
The weighted average contractual term for stock options outstanding as of September 30, 2020March 31, 2021 was 2.251.8 years. The aggregate intrinsic value of stock options outstanding as of September 30, 2020March 31, 2021 was less than $0.1 million. Stock options exercisable as of September 30, 2020March 31, 2021 were 20,0008,250 shares. In recognizing stock compensation expense for the 2012 Stock Incentive Plan, management has estimated that there will be 0 forfeitures of options.
The Company accounts for stock options and RSU awards by recognizing the expense of the grant date fair value ratably over vesting periods generally ranging from one year to three years. The related expense is included in selling, general and administrative expenses.
There were 289,800297,140 RSU awards with a fair value of $3.37$3.36 per RSU granted during the threenine months ended September 30, 2020.March 31, 2021. There were 0102,670 RSUs settled, and 03,834 RSUs forfeited during the threenine months ended September 30, 2020.March 31, 2021. The aggregate intrinsic value of RSU awards outstanding as of September 30, 2020March 31, 2021 was $1.1$1.7 million. AllAs of March 31, 2021, all vested awards vesting in the quarter ending of September 30, 2020 are expected to behave been issued in the quarter ending December 31, 2020.and settled.
On February 5, 2013, the Board of Directors adopted The L.S. Starrett Company 2013 Employee Stock Ownership Plan (the “2013 ESOP”). The purpose of the plan is to supplement existing Company programs through an employer funded individual
account plan dedicated to investment in common stock of the Company, thereby encouraging increased ownership of the Company while providing an additional source of retirement income. The plan is intended as an employee stock ownership plan within the meaning of Section 4975 (e) (7) of the Internal Revenue Code of 1986, as amended. U.S. employees who have completed a year of service are eligible to participate.
Compensation expense related to all stock-based plans for the three-monththree and nine-month periods ended September 30, 2020 and 2019 was $0.3March 31, 2021 were $0.1 million, and $0.6 million as compared to the prior year three and nine months of $0.1 million and $0.3 million, respectively. As of September 30, 2020,March 31, 2021, there was $2.7$2.4 million of total unrecognized compensation costs related to outstanding stock-based compensation arrangements. Of this cost, $1.7 million relates to performance based RSU grants that are not expected to be awarded. The remaining $1.0$0.7 million is expected to be recognized over a weighted average period of 2.21.8 years.
Note 7: Inventories
Inventories consist of the following (in thousands):
| | | 09/30/2020 | | 06/30/2020 | | 3/31/2021 | | 6/30/2020 |
Raw material and supplies | Raw material and supplies | $ | 30,066 | | | $ | 26,255 | | Raw material and supplies | $ | 29,149 | | | $ | 26,255 | |
Goods in process and finished parts | Goods in process and finished parts | 13,890 | | | 13,694 | | Goods in process and finished parts | 13,673 | | | 13,694 | |
Finished goods | Finished goods | 31,168 | | | 37,579 | | Finished goods | 34,087 | | | 37,579 | |
| | 75,124 | | | 77,528 | | | 76,909 | | | 77,528 | |
LIFO Reserve | LIFO Reserve | (25,048) | | | (24,541) | | LIFO Reserve | (24,373) | | | (24,541) | |
| | $ | 50,076 | | | $ | 52,987 | | | $ | 52,536 | | | $ | 52,987 | |
Of the Company’s $50.1$52.5 million and $53.0 million total inventory at September 30, 2020March 31, 2021 and June 30, 2020, respectively, the $25.0$24.4 million and $24.5 million LIFO reserves belong to the U.S. Precision Tools and Saws Manufacturing “Core U.S.” business.The Core U.S. business total inventory was $31.9$27.9 million on a FIFO basis and $6.9$3.5 million on a LIFO basis at September 30, 2020.March 31, 2021. The Core U.S. business had total Inventory, on a FIFO basis, of $33.1 million and $8.6 million on a LIFO basis as of June 30, 2020.The use of LIFO, as compared to FIFO, resulted in a $0.5 million increasedecrease in cost of sales for the goods sold in the periodnine months ending September 30, 2020March 31, 2021 compared to a de minimis change$0.3 million increase in the threenine months ending September 30, 2019.March 31, 2020.
Note 8: Goodwill and Intangible Assets
The Company’s acquisition of Bytewise in 2011 and a private software company in 2017 resulted in the recognition of goodwill totalingof $4.7 million. During the fourth quarter of fiscal year 2020 the Company, considering the COVID-19 pandemic a triggering event for the private software company and Bytewise due to a drop in sales, tested impairment of intangible assets according to ASC 360 "Property, Plant and Equipment" and determined the carrying value was deemed to be recoverable at Bytewise but not at the private software company where the impairment of intangibles was calculated. The Company concluded that Intangible Assetsintangible assets of the private software company were impaired by $2.9 million.
The Company then, according to ASC 350 Intangibles -Goodwill and Other, conducted a step one analysis performed based on the update carrying value for each reporting unit. Goodwill was determined to be impaired $0.6 million at the private software company and Goodwillgoodwill of $3.0 million was impaired at the Bytewise reporting unit as of June 30, 2020. As a result, the balance of Goodwillgoodwill at Bytewise is 0 and $1.0 million at the private software company as of September 30, 2020.March 31, 2021.
The Company will continue to perform an annual assessment of goodwill associated with its purchase of a private software company. If future results significantly vary from current estimates, related projections, or business assumptions due to changes in industry or market conditions, the Company may be required to perform an impairment analysis prior to our annual test date if a triggering event is identified. As of September 30, 2020,March 31, 2021, we did not identify a triggering event.
Amortizable intangible assets consist of the following (in thousands):
| | | | | | | | | | | |
| 09/30/2020 | | 6/30/2020 |
Trademarks and trade names | 2,070 | | | 2,070 | |
Completed technology | 2,010 | | | 2,010 | |
Customer relationships | 630 | | | 630 | |
Software development | 9,696 | | | 9,445 | |
| | | |
Total | 14,406 | | | 14,155 | |
Accumulated amortization | (9,458) | | | (6,316) | |
Intangibles impairment | $ | 0 | | | $ | (2,842) | |
Total net balance | $ | 4,948 | | | $ | 4,997 | |
| | | | | | | | | | | |
| 3/31/2021 | | 6/30/2020 |
Trademarks and trade names | 2,070 | | | 2,070 | |
Completed technology | 2,010 | | | 2,010 | |
Customer relationships | 630 | | | 630 | |
Software development | 10,293 | | | 9,445 | |
| | | |
Total | 15,003 | | | 14,155 | |
Accumulated amortization and impairment | (10,068) | | | (9,158) | |
| | | |
Total net balance | $ | 4,935 | | | $ | 4,997 | |
Amortizable intangible assets are being amortized on a straight-line basis over the period of expected economic benefit.
The estimated useful lives of the intangible assets subject to amortization range between 5 years for software development and 20 years for some trademark and trade name assets. The estimated aggregate amortization expense for the remainder of fiscal 2021 and for each of the next five years and thereafter, is as follows (in thousands):
| 2021 (Remainder of year) | 2021 (Remainder of year) | $ | 1,071 | | 2021 (Remainder of year) | $ | 387 | |
2022 | 2022 | 1,212 | | 2022 | 1,331 | |
2023 | 2023 | 978 | | 2023 | 1,096 | |
2024 | 2024 | 707 | | 2024 | 825 | |
2025 | 2025 | 547 | | 2025 | 666 | |
2026 | 2026 | 204 | | 2026 | 401 | |
Thereafter | Thereafter | 229 | | Thereafter | 229 | |
Total net balance | Total net balance | $ | 4,948 | | Total net balance | $ | 4,935 | |
Note 9: Pension and Post-retirement Benefits
The Company has two2 defined benefit pension plans, one for U.S. employees and another for U.K. employees. The Company has a postretirement medical and life insurance benefit plan for U.S. employees. As of January 1, 2021, the Company no longer provided Life Insurance benefits for retirees. The Company also has defined contribution plans.
The U.K. defined benefit plan was closed to new entrants in fiscal 2009.
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 will no longer earn additional benefits after December 31, 2016.
Net periodic benefit costs for the Company's defined benefit pension plans are located in Other Income(expense), net in Consolidated Statements of Operations, except (in the table below) for service cost. Service cost are in cost of sales and selling, general and administrative.administrative expenses. Net periodic benefit costs consist of the following (in thousands):
| | | Three Months Ended | | | | Three Months Ended | | Nine Months Ended |
| | 09/30/2020 | | 09/30/2019 | | | | 3/31/2021 | | 3/31/2020 | | 3/31/2021 | | 3/31/2020 |
Service cost | Service cost | $ | 0 | | | $ | 0 | | | | Service cost | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Interest cost | Interest cost | 1,113 | | | 1,349 | | | | Interest cost | 1,120 | | | 1,362 | | | 3,351 | | | 4,077 | |
Expected return on plan assets | Expected return on plan assets | (1,108) | | | (1,294) | | | | Expected return on plan assets | (1,115) | | | (1,305) | | | (3,336) | | | (3,908) | |
Amortization of net loss | Amortization of net loss | 13 | | | 10 | | | | Amortization of net loss | 13 | | | 9 | | | 40 | | | 28 | |
| | $ | 18 | | | $ | 65 | | | | | $ | 18 | | | $ | 66 | | | $ | 55 | | | $ | 197 | |
Net periodic benefit costs for the Company's Postretirement Medical Plan consists of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| 09/30/2020 | | 09/30/2019 | | | | |
Service cost | $ | 21 | | | $ | 18 | | | | | |
Interest cost | 51 | | | 60 | | | | | |
Amortization of prior service credit | (134) | | | (134) | | | | | |
Amortization of net loss | 42 | | | 21 | | | | | |
| $ | (20) | | | $ | (35) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| 3/31/2021 | | 3/31/2020 | | 3/31/2021 | | 3/31/2020 |
Service cost | $ | 21 | | | $ | 18 | | | $ | 64 | | | $ | 55 | |
Interest cost | 51 | | | 60 | | | 154 | | | 180 | |
Amortization of prior service credit | (134) | | | (134) | | | (403) | | | (403) | |
Amortization of net loss | 41 | | | 20 | | | 124 | | | 62 | |
| $ | (21) | | | $ | (36) | | | $ | (61) | | | $ | (106) | |
For the three and nine month period ended September 30, 2020,March 31, 2021, the Company contributed $1.3$2.6 million and $5.4 million, respectively in the U.S. and $0.2$0.3 million and $0.7 million in the UK pension plans. The Company estimates that it will contribute an additional $6.4$1.8 million for the remainder of fiscal 2021.
The Company’s pension plans use fair value as the market-related value of plan assets and recognize net actuarial gains or losses in excess of ten percent (10)% of the greater of the market-related value of plan assets or of the plans’ projected benefit obligation in net periodic (benefit) cost as of the plan measurement date. Net actuarial gains or losses that are less than 10% of the thresholds noted above are accounted for as part of accumulated other comprehensive loss.
Note 10: Debt
Debt is comprised of the following (in thousands):
| | | | | | | | | | | |
| 09/30/2020 | | 06/30/2020 |
Short-term and current maturities | | | |
Loan and Security Agreement (Term Loan) | 1,376 | | | 597 | |
Brazil Loans | 4,229 | | | 3,935 | |
| 5,605 | | | 4,532 | |
Long-term debt (net of current portion) | | | |
Loan and Security Agreement (Term Loan) | 8,624 | | | 5,941 | |
Loan and Security Agreement (Line of Credit) | 12,603 | | | 20,400 | |
| 21,227 | | | 26,341 | |
| $ | 26,832 | | | $ | 30,873 | |
On June 25, 2020, the Borrowers and TD Bank entered into an amendment and restatement (the “Amendment and Restatement”) of the Loan Agreement.The Amendment and Restatement waived the fixed charge coverage ratio for the quarter ended June 30, 2020. In addition, the Amendment and Restatement clarifies that certain non-cash adjustments to the
definition of EBITDA are permitted under the Loan Agreement, as amended.In addition, the Amendment and Restatement increases the permitted borrowings from a foreign bank from $5.0 million to $15.0 million and permits the Company to draw the remainder of the outstanding balance under the Loan Agreement.
Pursuant to the terms of the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of the Fixed Charge Coverage Ratio until September 30, 2021and (ii) establishment of a new minimum cumulative EBITDA and minimum liquidity covenants in lieu thereof.TD Bank updated its security interests in the Company’s U.S. based assets, increased the maximum interest charged on the Line Of Credit from and annual interest rate of 2.25% plus Libor to 3.50% plus Libor, and amended the borrowing base for the line of credit from 80% of Qualified AR and 50% of the lower of Cost or Market of US inventory values to 80% of qualified AR plus 85% of the Net Orderly Liquidation Value (NOLV) of US Inventory plus 62.5% of total appraised US real estate values.As a result of this change, the Company is projected to maintain its current borrowing capacity of $25,000,000 under the Line of Credit. The Company underwent a series of appraisals and field exams in all US locations as part of restructuring this agreement and will provide additional reporting supporting the borrowing base and covenants certifications.This minimum adjusted EBITDA covenant is based on the Company’s plan for a slow pandemic recovery throughout FY21 and the impact of the Company’s restructuring plan initiatives.The Company will apply certain proceeds from the sale of US real estate assets against the principle balance of the term loans under the TD Bank loan agreement.The Agreement will revert to the existing covenant package for the quarter ending September 30, 2021 and every quarter thereafter. The Company was compliant with the minimum liquidity requirement and the minimum adjusted cumulative EBITDA required bank covenants as of September 30, 2020. | | | | | | | | | | | |
| 3/31/2021 | | 6/30/2020 |
Short-term and current maturities | | | |
Loan and Security Agreement (Term Loan) | 1,732 | | | 597 | |
Brazil Loans | 5,163 | | | 3,935 | |
| 6,895 | | | 4,532 | |
Long-term debt (net of current portion) | | | |
Loan and Security Agreement (Term Loan) | 6,147 | | | 5,941 | |
Loan and Security Agreement (Line of Credit) | 12,384 | | | 20,400 | |
| 18,530 | | | 26,341 | |
| $ | 25,425 | | | $ | 30,873 | |
On December 31, 2019, the Company entered into the Tenth Amendment of its Loan and Security Agreement (“Tenth Amendment”). Under the revised agreement, the credit limit for the Revolving LoanLine of credit was increased from $23.0 million to $25.0 million. In addition, the Company entered into a new $10.0 million 5-year Term Loan with a fixed interest rate of 4.0%. The new Term Loan will require interest only payments for 12 months and will convert to a term loan requiring both interest and principal payments commencing January 1, 2021. Also, under the Tenth Amendment, the credit limit for external borrowing was increased from $2.5 million to $5.0 million.
Total debt decreased $4.0On June 25, 2020, the Borrowers and TD Bank entered into an amendment and restatement (the “Amendment and Restatement”) of the Loan Agreement. The Amendment and Restatement waived the fixed charge coverage ratio for the quarter ended June 30, 2020. In addition, the Amendment and Restatement clarifies that certain non-cash adjustments to the definition of EBITDA are permitted under the Loan Agreement, as amended. In addition, the Amendment and Restatement increases the permitted borrowings from a foreign bank from $5.0 million to $15.0 million and permits the Company to draw the remainder of the outstanding balance under the Loan Agreement.
Pursuant to the terms of the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of the Fixed Charge Coverage Ratio until September 30, 2021 and (ii) establishment of a new minimum cumulative EBITDA and minimum liquidity covenants in lieu thereof. TD Bank updated its security interests in the Company’s U.S. based assets, increased the maximum interest charged on the Line Of Credit from and annual interest rate of 2.25% plus LIBOR to 3.50% plus LIBOR, and amended the borrowing base for the line of credit from 80% of Qualified AR and 50% of the lower of Cost or Market of US inventory values to 80% of qualified AR plus 85% of the Net Orderly Liquidation Value ("NOLV") of US Inventory plus 62.5% of total appraised US real estate values.
As a result of this change, the Company is projected to maintain its current borrowing capacity of $25,000,000 under the Line of Credit. The Company underwent a series of appraisals and field exams in all US locations as part of restructuring this agreement and will provide additional reporting supporting the borrowing base and covenants certifications. This minimum adjusted EBITDA covenant is based on the Company’s plan for a slow pandemic recovery throughout fiscal 2021 and the impact of the Company’s restructuring plan initiatives. Under this amendment, the Company also agreed to apply all proceeds from the sale of US real estate assets, except the Mt. Airy, North Carolina facility, against the principle balance of the term loan and line of credit. The Company agreed to apply the lesser of 50% or $2 million of the net proceeds from the sale of that facility against the principal balance of the Term Loan. Upon closing of the transaction during the three monthsquarter ending December 31, 2020, $2 million was applied against the principal balance of the Term Loan. The Agreement will revert to the existing covenant package for the quarter ending September 30, 2020. 2021 and every quarter thereafter. The Company was compliant with the minimum liquidity requirement and the minimum adjusted cumulative EBITDA required bank covenants as of March 31, 2021 and is expected to comply with the covenants over the next twelve months.
Availability under the Line of Credit remains subject to a borrowing base comprised of accounts receivableAccounts Receivable, Inventory, and inventory.Real Estate. The Company believes that the borrowing base will consistently produce availability under the Line of Credit of $25.0 million. A 0.25% commitment fee is charged on the unused portion of the Line of Credit.
The Company’s Brazilian subsidiary incurs short-term loans with local banks in order to support the Company’s strategic initiatives. The loans are backed by the entity’s US dollar denominated export receivables. The Company’s Brazilian subsidiary has the following loans of September 30, 2020March 31, 2021 (in thousands):
| Lending Institution | Lending Institution | Interest Rate | | Beginning Date | | Ending Date | | Outstanding Balance | Lending Institution | Interest Rate | | Beginning Date | | Ending Date | | Outstanding Balance |
| Brazil Bank | 3.10 | % | | February 2020 | | February 2021 | | $ | 310 | | |
Bradesco | | Bradesco | 5.18 | % | | May 2020 | | May 2021 | | $ | 288 | |
Santander
| | Santander
| 10.18 | % | | November 2020 | | May 2021 | | $ | 263 | |
Brazil Bank | Brazil Bank | 2.40 | % | | March 2020 | | February 2021 | | 300 | | Brazil Bank | 4.30 | % | | September 2020 | | August 2021 | | $ | 991 | |
Brazil Bank | Brazil Bank | 6.05 | % | | March 2020 | | February 2021 | | 688 | | Brazil Bank | 3.38 | % | | November. 2020 | | November 2021 | | $ | 900 | |
Bradesco | Bradesco | 5.18 | % | | May 2020 | | May 2021 | | 1,000 | | Bradesco | 2.37 | % | | December 2020 | | December 2021 | | $ | 1,000 | |
Brazil Bank | 4.30 | % | | September 2020 | | August 2021 | | 1,000 | | |
Bradesco | | Bradesco | 4.74 | % | | December 2020 | | December 2021 | | $ | 527 | |
Santander | Santander | 8.12 | % | | April 2020 | | April 2021 | | 931 | | Santander | 5.98 | % | | February 2021 | | February 2022 | | $ | 1,194 | |
| | $ | 4,229 | | |
| | | $ | 5,163 | |
Note 11: Income Taxes
The Company is subject to U.S. federal income tax and various state, local, and foreign income taxes in numerous jurisdictions. The Company’s domestic and foreign tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to the Company’s interpretation of applicable tax laws in the jurisdictions in which it files.
The Company provides for income taxes on an interim basis based on an estimate of the effective tax rate for the year. This estimate is reassessed on a quarterly basis. Discrete tax items are accounted for in the quarterly period in which they occur.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted in the United States. The Act reduces the U.S. federal corporate tax rate from a graduated rate of 35% to a flat rate of 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Beginning in fiscal 2019, the Company incorporated certain provisions of the Act in the calculation of the tax provision and effective tax rate, including the provisions related to the Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Base Erosion Anti Abuse Tax (“BEAT”), as well as other provisions, which limit tax deductibility ofthe ability to deduct expenses.
The GILTI provisions are expected to have the most significant impact to the Company. Under the new law, U.S. taxes are imposed on foreign income in excess of a deemed return on tangible assets of its foreign subsidiaries. In general, this foreign income will effectively be taxed at an additional 10.5% tax rate reduced by any available current year foreign tax credits. The ability to benefit foreign tax credits may be limited under the GILTI rules as a result of the utilization of net operating losses, foreign sourced income and other potential limitations within the foreign tax credit calculation.
In July 2020, the IRS issued final regulations and additional proposed regulations that address the application of the high-taxed exclusion from GILTI. Under these regulations, the Company can make an annual election to exclude from its GILTI inclusion, income from its foreign subsidiaries that’s effective income tax rate exceeds 18.9% for that year.The regulations must be applied for tax years beginning after July 23, 2020 but companies have the option to apply retroactively for tax years beginning after December 31, 2017 and before July 23, 2020. In the first quarter of fiscal 2021 the Company recognized a discrete tax benefit of ($2.7) million related to the impact of electing to apply the high-tax exclusion retroactively for fiscal year 2019 and fiscal year 2020.
TheFor the three month period ended March 31, 2021, the Company recognized tax expense for the first quarter of fiscal 2021 was a benefit of ($2.3)$1.5 million on a profit before tax of $1.8$4.5 million (anor an effective tax rate of (124)33%. The tax rate for fiscal 2021 was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%. For the three month period ended March 31, 2020, the Company recognized tax benefit of $(0.3) million on a profit before tax of $0.3 million or an effective tax rate of (100)%). The tax rate for fiscal 2020 was lower than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, and the impact of permanent deductible and nondeductible items and research credits. The impact of these items on the tax rate is substantial based on the Company’s profit being $0.3 million in the third quarter of 2020.
For the nine month period ended March 31, 2021, the Company recognized a tax provision of $1.1 million on a profit before tax of $12.1 million or an effective tax rate of 9%. Before the discrete benefits relating to legislation enacted during the first quarter of fiscal 2021 in the amount of ($2.7) million related to the impact of the GILTI high-tax exclusion and ($0.2) million related to the impact of the increase in UK corporate tax rate on the net deferred tax asset, tax expense was $0.7$4.1 million or 36%34% of pre-tax income. This was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by tax credits and permanent deductions generated from research expenses. TheFor the nine month period ended March 31, 2020. the Company recognized tax expense for the first quarter of fiscal 2020 was $0.5$0.8 million on a profit before tax of $1.3$3.4 million (anor an effective tax rate of 39%)24%. The tax rate for fiscal 2020 was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%. The first quarter of fiscal 2020 also includes a discrete tax expense of $0.1 million relating to adjustments to the fourth quarter of fiscal 2019 balances.
U.S. Federal tax returns for years prior to fiscal 2017 are generally no longer subject to review by tax authorities; however, tax loss carryforwards from earlier years are still subject to adjustment. As of September 30, 2020,March 31, 2021, the Company has substantially resolved all open income tax audits and there were no other local or federal income tax audits in progress. In international jurisdictions including Australia, Brazil, Canada, China, Germany, Mexico, New Zealand, Singapore and the UK, which comprise a significant portion of thethe Company’s operations, the years that may be examined vary by country. The Company’s most significant foreign subsidiary in Brazil is subject to audit for the calendar years 2015 – present. During the next twelve months, it is possible there will be a reduction of $0.1 million in long-term tax obligations due to the expiration of the statute of limitations on prior year tax returns.
Accounting for income taxes requires estimates of future benefits and tax liabilities. Due to the 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 addressing the positive and negative evidence to determine whether realization is more likely than not to occur. If realization is in doubt because of uncertainty regarding future profitability, the Company provides a valuation allowance related to the asset to the extent that it is more likely than not that the deferred tax asset will not be realized. 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 the Company’s financial position.
No valuation allowance has been recorded for the Company’s U.S. federal and foreign deferred tax assets related to temporary differences included in taxable income. While the Company continues to believe that forecasted future taxable income provide sufficient evidence to, more likely than not, support the realization of the tax benefits provided by those differences; the impact of COVID-19 may significantly impact its ability to forecast future pre-tax earnings in certain jurisdictions. If its forecasts are significantly impacted, the Company may need to record a valuation allowance on some or all its deferred tax assets as soon as the current fiscal year end.
In the U.S., a partial valuation allowance has been provided for foreign tax credit carryforwards due to the uncertainty of generating sufficient foreign source income to utilize those credits in the future and certain state net operating loss carryforwards that will expire in the near future unutilized.
Note 12: Contingencies
The Company is involved in certain legal matters, which arise, in the normal course of business. TheseManagement believes it is not reasonably possible that these matters are not expected towill have a material negative impact on the Company’sCompany's financial condition, results of operations or cash flows.
Note 13: Facility Sale and Leaseback
The Company completed a sale and leaseback of the Mount Airy, North Carolina facility in December 2020. The Company sold 3 buildings amounting to 313,000 square feet with proceeds of $5.2 million. The carrying value of the property was $2.0 million resulting in a gain in the amount of $3.2 million. The Company entered into an operating lease for 66,000 square feet for on-going operations and recorded a right-of-use asset of $0.8 million. The lease term is for three years with an option for two more years.
Note 14: Restructuring
The COVID-19 pandemic created a negative impact on global sales. The impact was felt as early as January 2020 in the Company’s operation in Suzhou, China and most significantly in March 2020 in North America and in the UK. The Company took austerity measures, reducing payroll and managing variable operational spending to help mitigate the shortfall. In addition, the Company is investing in a strategic realignment focused on a lower cost structure, long term, designed to maximize our global factory utilization. In June 2020, the Company recorded a $1.6 million restructuring charge of which $1.0 million remained in accrued expenses on the accrualConsolidated Balance Sheets at fiscal 2020 year end. In the three months ending September 30, 2020, $0.3 millionThat accrued expense balance was 0 as of March 31, 2021. Total restructuring cost wereof $4.3 million, with $1.2 million in the U.S. and $3.1 million internationally, is expected to drive annual savings of $10-14 million beginning in fiscal 2021 as planned implementation throughout the year, with full annual savings realized in fiscal 2022. These savings will be reflected in the Consolidated Statements of Operations in a reduction to cost of goods sold and selling, general and administrative expenses.
The Company adopted this plan in order to consolidate certain saw manufacturing operations for greater efficiency. This restructuring is strategic to improving manufacturing utilization globally and will be completed in fiscal 2021. Since the project was announced in the quarter ended June 2020, $3.0 million has been charged as a periodrestructuring expense and $0.3including $1.5 million that was charge againstincurred in the accrual.nine months ended March 31, 2021. The remaining balance of the accrual at September 30, 2020 was $0.7 million, plus the Company expects to charge an addition $2.0additional $1.3 million in the period those cost are incurred inremaining three months of fiscal year 2021.
The Company decided in January 2018has recorded a gain on the sale of property, plant and equipment internationally of $0.2 million, related to vacate its facility in Mt. Airy, North Carolina, and move current operations to a smaller company owned building.restructuring. The Company is also considering selling the facility withdoes not expect a lease back provision to accommodate remaining operations. While there are no definitive plans set yet, the Company still anticipates that the sale could happen within the current fiscal year, yet based on past experience, the immediate sale is not probable.
Asmaterial amount of September 30, 2020, the carrying value of the building is $2.0 million, and based on comparable sales data sourced from the Company’s real estate agent, the Company believes that the current fair value of the building exceeds its carrying value.
Note 14: Subsequent Events
On October 1, 2020, The L. S. Starrett Company (the “Company”) was notified (the “Notice”) by the New York Stock Exchange (the “NYSE”) that it was not in compliance with the continued listing standard set forth in Section 802.01B of the NYSE Listed Company Manual because the Company’s average market capitalization was less than $50 million over a consecutive 30 trading-day period and the stockholders’ equity of the Company was less than $50 million.disposal costs.
The Company notified the NYSE that it intends to submit a plan to cure this deficiency and return to compliance with the NYSE continued listing requirements. In order to avoid delisting under Section 802.01B, the Company has 45 days from the receipt of the Notice to submit a business plan advising the NYSE of definitive actions the Company has taken, or proposes to take, that would bring it into compliance with the market capitalization listing standards on or before April 1, 2022 (the “Cure Period”). The Company has prepared and will submit a plan on or before November 15, 2020, and stockholder's equity had already exceeded the $50.0 million minimum threshold with the quarter ending September 30, 2020. If the NYSE accepts the plan, the Company’s common stock will continue to be listed and traded on the NYSE during the Cure Period, subject to the Company’s compliance with other continued listing standards, and the Company will be subject to quarterly monitoring by the NYSE for compliance with the plan.
The Notice has no immediate impact on the listing of the Company’s common stock, which will continue to be listed and traded on the NYSE during the Plan Period, subject to the Company’s compliance with the other listing requirements of the NYSE. The Company’s common stock will continue to trade under the symbol “SCX,” but will have an added designation of “.BC” to indicate that the Company is not currently in compliance with NYSE continued listing standards.
On October 7, 2020, our information technology (“IT”) systems were exposed to a ransomware attack, which partially impaired certain IT systems for a short period of time. We are investigating the incident, together with legal counsel and other incident response professionals. We do not believe that we have experienced any material losses related to the ransomware attack and were able to recover all material data. Please see Item 1A - Risk Factors for additional information.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Use of Non- U.S. GAAP Financial Measures
In "Management's discussion and analysis on financial condition and results of operations" in this quarterly report on Form 10-Q, we discuss non-U.S. GAAP financial measures related to currency-neutral sales revenues, as well as adjusted operating income to adjust for restructuring costs and the gain on the sale of assets that are reflected in one period but not the other in order to show comparative operational performance.
We present these non-U.S. GAAP financial measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by eliminating items that we do not believe are indicative of our core operating performance. Such non-U.S. GAAP financial measures assist investors in understanding the ongoing operating performance of the Company by presenting financial results between periods on a more comparable basis. Such measures should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Currency-neutral sales are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations. We include a reconciliation of adjusted operating income to its comparable U.S. GAAP financial measures.
References to currency-neutral revenues and adjusted operating income should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable to similarly titled non U.S GAAP financial measures used by other companies. In evaluating these non-U.S. GAAP financial measures, investors should be aware that in the future we may incur expenses or be involved in transactions that are the same as or similar to some of the adjustments in this presentation. Our presentation of non-U.S. GAAP financial measures should not be construed to imply that its future results will be unaffected by any such adjustments. Non-U.S. GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under U.S. GAAP.
Please see Note 2 regarding segment results of operations. The Company’s business is aggregated into two reportable segments based on geography of operations: North American Operations and International Operations. Segment income is measured for internal reporting purposes by excluding corporate expenses, which are included in the unallocated column in the following tables as well as Note 2. These tables above are included to better explain our consolidated operational performance by showing more detail by business segment and reconciling U.S. GAAP operating income and adjusted operating income.
The following table represents key results of operations on a consolidated basis for the periods indicated:
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| Three Months Ended (unaudited) | | Nine Months Ended (unaudited) |
(Amounts in thousands) | 3/31/2021 | 3/31/2020 | $ Change favorable (unfavorable) | % Change | | 3/31/2021 | 3/31/2020 | $ Change favorable (unfavorable) | % Change |
Net sales | $ | 54,944 | | $ | 49,998 | | $ | 4,946 | | 9.9 | % | | $ | 158,408 | | $ | 158,976 | | $ | (568) | | (0.4) | % |
Gross margin | 18,149 | | 14,844 | | 3,305 | | 22.3 | % | | 51,326 | | 51,183 | | 143 | | 0.3 | % |
% of net sales | 33.0 | % | 29.7 | % | | | | 32.4 | % | 32.2 | % | | |
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Selling, general and administrative expenses | 13,511 | | 14,780 | | 1,269 | | 8.6 | % | | 41,126 | | 46,912 | | 5,786 | | 12.3 | % |
% of net sales | 24.6 | % | 29.6 | % | | | | 26.0 | % | 29.5 | % | | |
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Restructuring charges | 788 | | 0 | | (788) | | (100.0) | % | | 1,518 | | 0 | | (1,518) | | (100.0) | % |
Gain on sale of building | 0 | | 0 | | — | | — | % | | (3,204) | | 0 | | 3,204 | | 100.0 | % |
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GAAP Operating income as reported | 3,850 | | 64 | | 3,786 | | 5916.1 | % | | 11,886 | | 4,271 | | 7,615 | | 178.3 | % |
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Other income (expense), net | 663 | | 223 | | 440 | | 197.3 | % | | 236 | | (833) | | 1,069 | | 128.3 | % |
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Income before income taxes | 4,513 | | 287 | | 4,226 | | 1472.6 | % | | 12,122 | | 3,438 | | 8,684 | | 252.6 | % |
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Income tax expense (benefit) | 1,496 | | (326) | | (1,822) | | 558.9 | % | | 1,132 | | 787 | | (345) | | (43.8) | % |
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Net income | $ | 3,017 | | $ | 613 | | $ | 2,404 | | 392.2 | % | | $ | 10,990 | | $ | 2,651 | | $ | 8,339 | | 314.6 | % |
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U.S. GAAP to Non-U.S GAAP reconciliation: | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(Amounts in thousands) | 03/31/2021 | 3/31/2020 | $ Change favorable (unfavorable) | % Change | | 3/31/2021 | 3/31/2020 | $ Change favorable (unfavorable) | % Change |
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Operating income as reported | $ | 3,850 | | $ | 64 | | $ | 3,786 | | 5916 | % | | $ | 11,886 | | $ | 4,271 | | $ | 7,615 | | 178 | % |
Removing restructuring charges (adding back) | 788 | | — | | (788) | | — | | | 1,518 | | — | | (1,518) | | — | |
Less gain on sale of building | — | | — | | — | | — | | | (3,204) | | — | | 3,204 | | — | |
Adjusted operating income | $ | 4,638 | | $ | 64 | | $ | 4,574 | | 7147 | % | | $ | 10,200 | | $ | 4,271 | | $ | 5,929 | | 139 | % |
% of net sales | 8.4 | % | 0.1 | % | | 8.3 basis points | | 6.4 | % | 2.7 | % | | 3.8 basis point |
The following table represents key results of operations for three months ending March 31, 2021 and 2020 based on our business aggregated into two reportable segments according to geography of operations : North American Operations and International Operations:
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| Three Months Ended March 2021 (unaudited) | | Three Months Ended March 2020 (unaudited) |
(Amounts in thousands) | North America | International | Corporate | Total | | North America | International | Corporate | Total |
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Net sales | $ | 32,519 | | $ | 22,425 | | — | $ | 54,944 | | | 33,369 | 16,629 | 0 | 49,998 |
Gross margin (loss) | 9,741 | | 8,408 | | — | 18,149 | | | 8,802 | 6,149 | (107) | 14,844 |
% of net sales | 30.0 | % | 37.5 | % | | 33.0 | % | | 26.4% | 37.0% | | 29.7% |
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Selling, general and administrative expenses | 6,628 | | 5,111 | | 1,773 | | 13,511 | | | 7,465 | 5,701 | 1,614 | 14,780 |
% of net sales | 20.4 | % | 22.8 | % | | 24.6 | % | | 22.4% | 34.3% | | 29.6% |
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Restructuring charges | 182 | | 605 | | — | 788 | | | — | — | — | — |
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Operating income | $ | 2,931 | | $ | 2,692 | | $ | (1,773) | | $ | 3,850 | | | 1,337 | | 448 | | (1,721) | | 64 | |
% of net sales | 9.0 | % | 12.0 | % | | 7.0 | % | | 4.0 | % | 2.7 | % | | 0.1 | % |
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U.S. GAAP to Non-U.S. GAAP reconciliation: | | | | | | | |
| Three Months Ended March 2021 | | Three Months Ended March 2020 |
(Amounts in thousands) | North America | International | Corporate | Total | | North America | International | Corporate | Total |
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Operating income as reported | $ | 2,931 | | $ | 2,692 | | $ | (1,773) | | $ | 3,850 | | | $ | 1,337 | | $ | 448 | | $ | (1,721) | | $ | 64 | |
Restructuring charges | 182 | | 605 | | — | | 788 | | | — | | — | | — | | — | |
Adjusted operating income | $ | 3,113 | | $ | 3,297 | | $ | (1,773) | | $ | 4,638 | | | $ | 1,337 | | $ | 448 | | $ | (1,721) | | $ | 64 | |
% of net sales | 9.6 | % | 14.7 | % | | 8.4 | % | | 4.0 | % | 2.7 | % | | 0.1 | % |
The following table represents key results of operations for nine months ending March 31, 2021 and 2020 based on our business aggregated into two reportable segments according to geography of operations: North American Operations and International Operations:
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| Nine Months Ended March 2021 (unaudited) | | Nine Months Ended March 2020 (unaudited) | | |
(Amounts in thousands) | North America | International | Corporate | Total | | North America | International | Corporate | Total | | |
Net sales | $ | 85,609 | | $ | 72,799 | | $ | — | | $ | 158,408 | | | $ | 97,475 | | $ | 61,501 | | $ | — | | $ | 158,976 | | | |
Gross margin | 24,500 | | 26,826 | | — | | 51,326 | | | 28,472 | | 22,679 | | 32 | | 51,183 | | | |
% of net sales | 28.6 | % | 36.8 | % | | 32.4 | % | | 29.2 | % | 36.9 | % | | 32.2 | % | | |
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Selling, general and administrative expenses | 18,257 | | 17,340 | | 5,529 | | 41,126 | | | $ | 22,255 | | $ | 19,610 | | $ | 5,047 | | $ | 46,912 | | | |
% of net sales | — | | — | | | — | | | — | | — | | | — | | | |
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Restructuring charges | 836 | | 682 | | — | | 1,518 | | | — | | — | | — | | — | | | |
Gain on sale of building | (3,204) | | — | | — | | (3,204) | | | — | | — | | — | | — | | | |
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Operating income | $ | 8,611 | | $ | 8,804 | | $ | (5,529) | | $ | 11,886 | | | $ | 6,217 | | $ | 3,069 | | $ | (5,015) | | $ | 4,271 | | | |
% of net sales | 10.1 | % | 12.1 | % | | 7.5 | % | | 6.4 | % | 5.0 | % | | 2.7 | % | | |
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U.S. GAAP to Non-U.S. GAAP reconciliation: | | | | | | | |
| Nine Months Ended March 2021 | | Nine Months Ended March 2020 |
(Amounts in thousands) | North America | International | Corporate | Total | | North America | International | Corporate | Total |
Operating income as reported | $ | 8,611 | | $ | 8,804 | | $ | (5,529) | | $ | 11,886 | | | $ | 6,217 | | $ | 3,069 | | $ | (5,015) | | $ | 4,271 | |
Restructuring charges | 836 | | 682 | | — | | 1,518 | | | — | | — | | — | | — | |
Gain on sale of building | (3,204) | | — | | — | | (3,204) | | | — | | — | | — | | — | |
Adjusted operating income | $ | 6,243 | | $ | 9,486 | | $ | (5,529) | | $ | 10,200 | | | $ | 6,217 | | $ | 3,069 | | $ | (5,015) | | $ | 4,271 | |
% of net sales | 7.3 | % | 13.0 | % | | 6.4 | % | | 6.4 | % | 5.0 | % | | 2.7 | % |
Three months ended September 30,and Nine Months Periods Ended March 31, 2021 and March 31, 2020and September 30, 2019
Overview
We finishedNet sales in the quarter ended March 31, 2021 were $55.0 million, up $5.0 million, an improvement of 10.0% compared to $50.0 million in the quarter ended March 31, 2020. Net Sales in the nine months ended March 31, 2021 of $158.4 million, compared to $159.0 million for the same nine month period ending September 30,March 31, 2020, withwere lower by $0.6 million or 0.4%. Foreign currency translation negatively impacted reported sales of $49.4by $2.6 million and net income of $4.1 million. Although,for the three months ended March 31, 2021. On a foreign currency neutral basis, sales in the quarter ending September 30, 2020 were $2.7 million lower thanMarch 31, 2021 increased 15.0% from the quarter ending September 30, 2019 ,March 31, 2020. Over the nine month period ending March 31, 2021, the unfavorable currency impact on reported Net Sales was $12.8 million. Therefore, on a currency neutral basis, Net Sales have increased by 7.7% for the first nine months of this fiscal year compared to last fiscal year.
Operating income in the quarter ended March 31, 2021 of $3.8 million or 7% of sales, was an improvement of $3.7 million over the same three month period ending March 31, 2020. Operating income in the nine month periods ending March 31, 2021 and March 31, 2020 was increased by 178% to $11.9 million from $4.3 million in the prior fiscal year. Adjusting to compare operationally, in the three months ended March 31, 2021, removing restructuring cost of $0.8 million, adjusted operating income was greater by $0.4$4.6 million dueor 8.4% of sales versus $0.1 million or 0.1% of sales for the three month period ending March 31, 2020. In the nine months period ended March 31, 2021 as compared to 2020, when removing the impact of $1.5 million in large partrestructuring charges and the $3.2 million gain on the sale of our North Carolina facility in December, 2020, adjusted operating income was $10.2 million or 6.4% of sales versus $4.3 million or 2.7% of sales in the same nine-month period ending in March, 2020.
This improvement is the result of aligning our cost structure to previouscurrent pandemic demand and on-going restructuring, initiatives. Additionally, new GILTI legislationand strong sales growth internationally, especially in Brazil. The Company continues to benefit from its restructuring activities that have
resulted in a reduction of selling, general and administrative expenses of $1.3 million in the current quarter ledthree months ending March 31, 2021, and $5.8 million in the nine months ending March 31, 2021, compared to the same periods respectively ending March 31, 2020.
As presented on separate lines on the Consolidated Statements of Operations are a favorable revisiongain on the sale of income tax provisionsthe North Carolina facility of $2.7$3.2 million and a commensurate increase$1.5 million in net income,restructuring charges of which was $3.3 million favorable to the prior year quarter. We generally experience a slow first quarter on a fiscal year basis and we are still being affected by the pandemic. Given lower sales than the prior year quarter in North America of $5.0 million, operating income was $0.8 million in the quarter ending SeptemberU.S. and $0.7 million internationally associated with the fiscal year 2021 plan as disclosed in the June 30, 2020 which was $1.4 million lower than the quarter ending September 30, 2019, partially due to $0.3 million in restructuring charges in the quarter ending September 30, 2020. International sales were $2.3 million higher and operating income was $1.7 million higher versus the prior year quarter.Form 10-K as well as Note 14.
Net Sales
Our total sales decreased $2.7income improved by $2.4 million or 5% from $52.1 million in quarter ending September 30, 2019 versus $49.4to $3.0 million in the quarter ended March 31, 2021, and by $8.3 million to $11.0 million in the nine month period ending September 30,March 31, 2021 compared to the same periods respectively ending March 31, 2020.
Net Sales
The Company’s net sales for the quarter ended March 31, 2021 were $55.0 million versus $50.0 million for the same period a year prior. North America sales of $32.5 million, a decline of $0.9 million in quarter ended March 31, 2021 from $33.4 million in 2020, were more than offset by an increase of $5.8 million in International sales to $22.4 million in the quarter ended March 31, 2021 versus $16.6 million in 2020. The Company continues to achieve sales growth internationally when compared to last year. The quarter ending March 31, 2021 has seen a resurgence in North American sales relative to International sales, as order intake and shipped sales in our North American product lines are steadily returning to pre- pandemic levels.
During the nine months ended March 31, 2021 as compared to 2020, North American sales decreased $5.0$11.8 million or 16% from $31.0 million in the quarter ending September 30, 2019 to $26.0 million in the quarter ending September 30, 2020 principally due to lower sales of $2.8 million for precision measuring tools. The high-end metrology sales were unfavorable $1.2 million from prior year quarter. The uncertainty in the market due to the COVID-19 pandemic is affecting all sales and has a greater impact on the high end metrology product lines.
12.2% while International sales increased $2.3$11.3 million or 11% from $21.1 million18.4%. However, on a currency neutral basis, International Sales have increased by 38.9% for the nine months ending March 31, 2021 compared to the same nine months a year earlier. This is primarily due to a much weaker Brazilian currency, where sales measured in local currency have increased by 69.0% in the quarternine month period ending September 30, 2019March 31, 2021 compared to $23.4 million in the quarter ending September 30, 2020. Brazil sales increased $2.1 million or 16% even with a 26% decline in the exchange rate during the quarter ended September 30, 2020 vs the prior year quarter. The exchange rate impact in the quarter ending September 30, 2020 versus 2019 was $3.4 million, unfavorable.prior.
Gross Margin
Gross margin decreased $2.1increased $3.3 million or 12% principally due22.3% for the three months, and $0.1 million for the nine months ending on March 31, 2021 as compared to the drop in sales volume. Grossyear prior. Total gross margin as a percentage of sales wentimproved by 3.3 percentage points, from 34%29.7% to 32%33.0% for the three month period ending March 31, 2021 compared to March 31, 2020. The quarter on quarter improvement is a result of lower production overheads and capacity achieved as a result of our restructuring program, and higher plant utilization due to higher production levels. For the nine month comparative period ending March 31, 2021, total gross margin as percent of sales improved by 0.2 percentage points from 32.2% to 32.4%. The restructuring benefits of reducing production capacity and costs were starting to be realized beginning in the quarter ending September 30, 2019 versus 2020.March 31, 2021.
For the three months ending March 31, 2021, North American gross margins decreased $2.6 millionmargin measured as a percent of Net Sales improved by 3.60 percentage points from $9.4 million in26.4% to 30.0%, compared to the quarterthree month period ending September 30, 2019March 31, 2020, on a similar level of Net Sales for the quarter. International gross margin improved by 0.5 percentage points from 37.0% at the end of the three month period ending March 31, 2020 to $6.8 million in37.5% for the quarterthree month period ending September 30, 2020March 31, 2021.
For the nine month period ending March 31, 2021, North American gross margin measured as a percent of Net Sales declined from 29.2% to 28.6% due to lower plant utilization on much lower production volumes, when compared to the decline in revenues, reduced manufacturing utilization and lower production.
nine month period ending March 31, 2020. International gross margins increased $0.5 millionmargin measured the same way declined from $8.2 million in the quarter ending September 30, 201936.9% to $8.7 million sales in36.8% from March 31, 2020 based upon an increase in sales volume and manufacturing utilization.to March 31, 2021 respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $2.9$1.3 million or 18% from $16.3 million in8.6% during the quarter ending September 30, 2019ended March 31, 2021 compared to $13.4 million2020. The Company continues to align our cost structure to demand with a reduction in 2020. Austerity measures have been taken with compensationselling, general and lower spending in distribution expenses due to lower sales in addition to $1.3 million in lower sellingadministrative headcount of 122 when comparing these two quarters.
Selling, general and $0.9 million in lower G&A expenses.
North Americanadministrative expenses decreased $1.2$5.8 million or 17% from $7.2 million in12.3% during the quarter ending September 30, 2019nine months ended March 31, 2021 compared to $6.0 million in 2020. Corporate expenses were decreased $0.1are up $0.5 million or 5% in quarter ending September 30, 2020 as compared to 2019.9.6% while the rest of selling, general and administrative costs are down 12.7%.
Other
Income (Expense)Taxes
Other income improved $0.2 million fromFor the three month period ended March 31, 2021, the Company recognized tax expense of $0.2 million in the quarter ending September 30, 2019 to a $0.0 million income in 2020.
Income Taxes
The tax expense for the first quarter of fiscal 2021 was a benefit of ($2.3)$1.5 million on a profit before tax of $1.8$4.5 million (anor an effective tax rate of (124%))33%. The tax rate for fiscal 2021 was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%. For the three month period ended March 31, 2020, the Company recognized tax expense of $(0.3) million on a profit before tax of $0.3 million or an effective tax rate of (100)%. The tax rate for fiscal 2020 was lower than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, and the impact of permanent deductible and nondeductible items and research credits. The impact of these items on the tax rate is substantial based on the Company’s profit being $0.3 million in the third quarter of 2020.
For the nine month period ended March 31, 2021, the Company recognized a tax provision of $1.1 million on a profit before tax of $12.1 million or an effective tax rate of 9%. Before the discrete benefits relating to legislation enacted during the first quarter of fiscal 2021 includes a discrete benefitin the amount of ($2.7) million related to the impact of enactedthe GILTI legislation on the fiscal 2019 and fiscal 2020 tax calculationshigh-tax exclusion and ($0.2) million related to the impact of the increase in the UK corporate tax rate on the net deferred tax assets. Before the discrete benefits of ($2.9) million,asset, tax expense was $0.7$4.1 million or 36%34% of pre-tax income, whichincome. This was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by tax credits and permanent deductions generated from research expenses. TheFor the nine month period ended March 31, 2020. the Company recognized tax expense for the first quarter of fiscal 2020 was $0.5$0.8 million on a profit before tax of $1.3$3.4 million (anor an effective tax rate of 39%)24%. The tax rate for fiscal 2020 was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%. The first quarter of fiscal 2020 also includes a discrete tax expense of $0.1 million relating to adjustments to the fourth quarter of fiscal 2019 balances.
Net Income
The Company recorded net income of $4.1 million or $0.59 per basic share in the quarter ending September 30, 2020 compared to net income of $0.8 million or $0.11 per basic share in 2019 as higher pretax profits and a higher effective tax rate related to the new tax legislation enacted in the quarter ending September 30, 2020.
Three months ended September 30, 2019 and September 30, 2018
Overview
The Company generally experiences a slow first quarter on a fiscal year basis and fiscal 2020 was no exception.Geo-political concerns significantly dampened manufacturing activity and the corresponding reaction in the Company’s distribution channels to reduced inventory levels negatively impacted incoming orders.Despite flat sales, gross margins improved $1.0 million to 34% of sales in the period ending September 30, 2019 compared to 32.1% in 2018. The key drivers for the better performance were the Company’s North American based metrology businesses.
Net sales increased $0.2 million.Operating income increased $0.5 million as higher gross margins more than offset increased Selling, General and Administrative expenses.Net income increased $0.2 million from a net income of $0.6 million or $0.08 per share in the quarter ending September 30, 2018 to net income of $0.8 million or $0.11 per share in 2019..
Net SalesIncome
Net income for the quarter ended March 31, 2021 and 2020 was $3.0 million and $0.6 million respectively, an increase of $2.4 million. Net income for the nine months ended March 31, 2021 and 2020 increased to $11.0 million, up $8.3 million, a 315% increase over the $2.7 million in 2020.
North American sales increased $0.8 million or 3% from $30.2 million in the quarter ending September 30, 2018 to $31.0 million in 2019 as a $1.1 million or 14% increase in high-end metrology products negated a modest $0.3 million decline in saw products.International sales declined $0.6 million or 3% from $21.7 million in the quarter ending September 30, 2018 to $21.1 million in 2019 due to a softening of the European economy and a weakening of the British Pound against the U. S. dollar.
Gross Margin
Gross margins in is the quarter ending September 30, 2019 increased $1.0 million to 34% of sales compared to 32.1% in 2018.North American gross margins increased $1.5 million in the quarter ending September 30, 2019 due to higher sales of higher margin capital equipment and improved margins in core products.International gross margins decreased $0.5 million in the quarter ending September 30, 2019 as compared to 2018 principally due to higher saw and hand tool material costs in Brazil.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $0.5 million or 3%.North American expenses were level as a $0.4 million decline in divisional expenses was offset set by a $0.4 million increase in Corporate expenses related to professional fees. International expenses increased $0.5 million primarily due to higher selling expenses in Brazil.
Other Income (expense)
Other expense increased $0.2 million due to higher interest expense and currency translation losses.
Income Tax Expense
The tax expense for the first quarter of fiscal 2020 was $0.5 million on a profit before tax of $1.3 million (an effective tax rate of 39%).The tax expense for the first quarter of fiscal 2019 was $0.4 million on profit before tax of $0.9 million (an effective tax rate of 38%). The tax rate for both fiscal 2020 and fiscal 2019 was higher than the U.S. statutory tax rate of 21% primarily due to the Global Intangible Low Taxed Income (“GILTI”) provisions, which became effective in fiscal 2019, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%. The first quarter of fiscal 2020 also includes a discrete tax expense of $0.1 million relating to adjustments to the fourth quarter of fiscal 2019 balances.
Net earnings (loss)
The Company recorded net earnings of $0.8 million or $0.11 per share in the first quarter of fiscal 2020 compared to net income of $0.6 million or $0.08 per share in fiscal 2019.
LIQUIDITY AND CAPITAL RESOURCES
| Cash flows (in thousands) | Cash flows (in thousands) | Three Months Ended | Cash flows (in thousands) | Nine Months Ended |
| | 09/30/2020 | | 09/30/2019 | | 3/31/2021 | | 3/31/2020 |
| Cash provided by (used in) operating activities | Cash provided by (used in) operating activities | $ | 3,663 | | | $ | (3,484) | | Cash provided by (used in) operating activities | $ | 2,721 | | | (3,861) | |
Cash (used in) investing activities | (1,794) | | | (3,024) | | |
Cash provided by (used in) financing activities | (4,019) | | | 1,451 | | |
Cash provided by (used in) investing activities | | Cash provided by (used in) investing activities | 317 | | | (8,618) | |
Cash (used in) provided by financing activities | | Cash (used in) provided by financing activities | (5,329) | | | 6,910 | |
Effect of exchange rate changes on cash | Effect of exchange rate changes on cash | 253 | | | (15) | | Effect of exchange rate changes on cash | 80 | | | 202 | |
| Net (decrease) in cash | Net (decrease) in cash | $ | (1,897) | | | $ | (5,072) | | Net (decrease) in cash | $ | (2,211) | | | $ | (5,367) | |
Fiscal year 2021 net
Net cash flows for the threenine months ended September 30, 2020 decreased $1.9March 31, 2021 provided a decrease in cash of $2.2 million ascompared to a decrease in cash fromof $5.4 million for the nine month period ending March 31, 2020. Cash provided by operations increased $3.7to $2.7 million as net incomedue to improved operating performance and working capital management which was $4.1partially offset by investing $2.5 million driven predominatelyon a cash basis in restructuring. Cash provided by the tax benefit from new legislation and an increase in inventories. Cash from investing activities decreased $1.8increased to $0.3 million, largely as a result of $1.5$5.2 million proceeds from the sale of the Mount Airy, North Carolina facility in December 2020. This was offset with capital expendituresinvestment in our factories which were part of the fiscal 2021 restructuring program. With the building sale and $0.3 million in software development whileimproved operating cash provided from financing decreased $4.0 million asflows, the Company was able to reduce its overall debt during the nine months ended March 31, 2021 by $5.4 million. As a result the Company's debt repayments were $8.5 million and borrowings $4.5greater than proceeds from debt by $5.3 million.
Liquidity and Credit Arrangements
The Company believes it maintains sufficient liquidity and has the resources to fund its operations. During 2020fiscal 2021 the Company implemented a restructuring plan to address changes in its business as a result of the COVID-19 pandemic. This plan included reducing payroll, consolidation of certain operations and managing variable costs.
The Company worked with TD Bank to amend the current loan agreement which resulted in a number of changes such as amendments to the financial covenants through June 2021. The Company believes that existing cash and cash expected to be
provided by future operating activities, augmented by the plans highlighted above, are adequate to satisfy its working capital, capital expenditure requirements and other contractual obligations for at least the next 12 months. If the Company's expectations are incorrect or the impact from the COVID-19 pandemic worsens then it may need to take advantage of unanticipated strategic opportunities to strengthen our financial position, which could result in material impacts to the Company’s consolidated financial statements in future reporting periods.
On June 25, 2020, the Borrowers and TD Bank entered into an amendment and restatement (the “Amendment and Restatement”) of the Loan Agreement. The Amendment and Restatement waived the fixed charge coverage ratio for the quarter ended June 30, 2020.
Pursuant to the terms of the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of the Fixed Charge Coverage Ratio until September 30, 2021 and (ii) establishment of a new minimum cumulative EBITDA and minimum liquidity covenants in lieu thereof. TD Bank perfected its security interests in the Company’s U.S. based assets, increased the maximum interest charged on the Line Of Credit from an annual interest rate of 2.25% plus LiborLIBOR to 3.50% plus Libor,LIBOR, and amended the borrowing base for the line of credit from 80% of Qualified AR and 50% of the lower of Cost or Market of US inventory values to 80% of qualified AR plus 85% of the Net Orderly Liquidation Value (NOLV)("NOLV") of US Inventory plus 62.5% of total appraised US real estate values.
As a result of this change, the Company is projected to maintain its current borrowing capacity of $25,000,000 under the Line of Credit. The Company underwent a series of appraisals and field exams in all US locations as part of restructuring this agreement. In addition, the Company will provide additional reporting to TD Bank, including monthly profit and loss statements, balance sheets, cash flow statements and forecasting. This minimum adjusted EBITDA covenant is based on the Company’s plan for a slow pandemic recovery throughout FY21 and the impact of the Company’s restructuring plan initiatives. TheUnder this amendment, the Company willalso agreed to apply certainall proceeds from the sale of US real estate assets, except the Mt. Airy, North Carolina facility, against the principle balance of the term loans underloan and line of credit. The Company agreed to apply the TD Bank loan agreement.lesser of 50% or $2 million of the net proceeds from the sale of that facility against the principal balance of the Term Loan. Upon closing of the transaction during the quarter ending December 31, 2020, $2 million was applied against the principal balance of the Term Loan. The Agreement will revert to the existing covenant package for the quarter ending September 30, 2021 and every quarter thereafter. The Company expects to be in compliance with the covenants over the next twelve months.
The effective interest rate on the borrowings under the Loan and Security Agreement during the threenine months ending September 30,March 31, 2021 and 2020 was 2.2% and 2019 was 1.9% and 3.9%3.5% respectively.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any material off-balance sheet arrangements as defined under the Securities and Exchange Commission rules.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
One should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results set forth under Item 1A. “Risk Factors” in our Form 10-K for the year ended June 30, 2020.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the participation of the Company's President and Chief Executive Officer and Chief Financial Officer, has evaluated the Company's disclosure controls and procedures as of September 30, 2020,March 31, 2021, and they have concluded that our disclosure controls and procedures were effective as of such date. All information required to be filed in this report was recorded, processed, summarized and reported within the time period required by the rules and regulations of the Securities and Exchange Commission, and 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. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of
No change in our disclosure controls and procedures as of September 30, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
There is a potential risk in internal controls tocontrol over financial reporting due(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended March 31, 2021 that has materially affected, or is reasonably likely to increased stress levels and remote working of accounting and finance staff as a result of the pandemic. The Company feels this risk currently has not had a significant impact on internal control. The Company has taken action to allow remote access while working within established guidelines for access and use of its networks. Further, Sarbanes-Oxleymaterially affect, our internal control testing was on-going during the period ending September 30, 2020.
On October 7, 2020, our information technology (“IT”) systems were exposed to a ransomware attack, which partially impaired certain IT systems for a short period of time. We are investigating the incident, together with legal counsel and other incident response professionals. We do not believe that we have experienced any material losses related to the ransomware attack and were able to recover all material data.over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements about the Company’s business, competition, sales, 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 securities analysts and investors. The Company is subject to risks that could cause actual events to vary materially from such forward-looking statements. You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results set forth under Item 1A. “Risk Factors” in our Form 10-K for the year ended June 30, 2020. There have been no material changes from the factors disclosed in our Form 10-K for the year ended June 30, 2020 other than what is set forth below;
On October 1, 2020, The L. S. Starrettthe Company (the “Company”) was notified (the “Notice”) by the New York Stock Exchange (the “NYSE”) that it was not in compliance with the continued listing standard set forth in Section 802.01B of the NYSE Listed Company Manual because the Company’s average market capitalization was less than $50 million over a consecutive 30 trading-day period and the stockholders’ equity of the Company was less than $50 million.
The Company On March 4, 2021 the NYSE notified the NYSECompany that it intendsL.S. Starrett is now considered a company back in compliance in relation to submitthe NYSE's quantitative continued listing standards. This decision comes as a plan to cure this deficiency and return toresult of the Company’s achievement of compliance with the NYSE continued listing requirements. In order to avoid delisting under Section 802.01B,NYSE’s minimum market capitalization and shareholders’ equity requirements over the Company has 45 days from the receipt of the Notice to submit a business plan advising the NYSE of definitive actions the Company has taken, or proposes to take, that would bring it into compliancepast two quarters.
However, in accordance with the market capitalization listing standards on or before April 1, 2022 (the “Cure Period”). TheNYSE’s Listed Company has prepared and will submit a plan on or before November 15, 2020, and stockholder's equity had already exceeded the $50m minimum threshold with the quarter ending September 30, 2020. If the NYSE accepts the plan, the Company’s common stock will continue to be listed and traded on the NYSE during the Cure Period, subject to the Company’s compliance with other continued listing standards, andManual, the Company will be subject to quarterly monitoring bya 12-month follow-up period within which the Company will be reviewed to ensure that the Company does not once again fall below any of the NYSE’s continued listing standards. If within 12 months of this letter the Company is again determined to be below any of the continued listing standards, the NYSE will gain an understanding of the reason(s) for compliance with the plan.
The Notice has no immediate impact on the listingfalling below such standards, which may include a re-evaluation of the Company’s common stock,originally reviewed method of financial recovery. The NYSE will then take the appropriate action, which, will continue to be listed and tradeddepending on circumstances, may include truncating the compliance procedures described in the NYSE duringListed Company Manual or beginning the Plan Period,initiation of NYSE trading suspension procedures. The Company will, of course, be subject to the Company’s compliance with the otherNYSE’s normal continued listing requirements of the NYSE. The Company’s common stock will continue to trade under the symbol “SCX,” but will have an added designation of “.BC” to indicate thatmonitoring.
As the Company is not currentlynow back in compliance, the (“.BC”) indicator will no longer be transmitted beginning with NYSEthe opening of trading on March 5, 2021. Additionally, the Company will no longer be noted as being below continued listing standards.
standards on the NYSE’s web site (www.nyse.com).
Increased information technology security threats and more sophisticated computer crime pose a risk to our systems, networks, products and services. 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. Information technology security threats -- from user error to cybersecurity attacks designed to gain unauthorized access to our systems, networks and data – are increasing in frequency and sophistication. Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced persistent threats. For example, onOn October 7, 2020 our information technology (“IT”("IT") systems were exposed to a ransomware attack, which partially impaired certain IT systems for a short period of time. We are investigating the incident, together with legal counsel and other incident response professionals. We do not believe that we have experienced any material losses related to the ransomwareransom ware attack and were ablealthough we continually attempt to recover all material data.improve upon our security we consider that one attack resolved.
These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. Cybersecurity attacks could also include attacks targeting customer data or the security, integrity and/or reliability of the hardware and software installed in our products. It is possible that our information technology systems and networks, or those managed by third parties, could have vulnerabilities, which could go unnoticed for a period of time. The possible 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. While the Company continues to enhance the applications contained in the Enterprise Resource Planning (ERP) system as well as improvements to other operating systems,
there can be no guarantee that the actions and controls we have implemented and are implementing, or which we cause or have caused third party service providers to implement, will be sufficient to protect our systems, information or other property.
ITEM 6. EXHIBITS
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4.A | |
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101 | The following materials from The L. S. Starrett Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 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 Statement of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text. |
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.
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| | | THE L. S. STARRETT COMPANY (Registrant) |
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Date | November 12, 2020May 7, 2021 | | /S/R. Douglas A. Starrett |
| | | Douglas A. Starrett - President and CEO (Principal Executive Officer) |
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Date | November 12, 2020May 7, 2021 | | /S/R. John C. Tripp |
| | | John C. TripTripp - Treasurer and CFO (Principal Accounting Officer) |