UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


			For the quarterly period ended			~~December~~March 31, ~~2020~~2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


			For the transition period from						to

			Commission file number						1-367


THE L. S. STARRETT COMPANY
(Exact name of registrant as specified in its charter)


Massachusetts						04-1866480
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


121 Crescent Street, Athol, Massachusetts			01331-1915
(Address of principal executive offices)			(Zip Code)


Registrant's telephone number, including area code			978-249-3551

Securities registered pursuant to Section 12(b) of the Act:


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 ☒


Common Shares outstanding as of						~~January 27,~~April 29, 2021
Class A Common Shares						~~6,449,298~~6,453,544
Class B Common Shares						~~655,281~~650,010

THE L. S. STARRETT COMPANY

CONTENTS


			Page No.

Part I.	Financial Information:

	Item 1.	Financial Statements	3

		Consolidated Balance Sheets – March 31, 2021~~December~~ 31~~, 2020~~ (unaudited) and June 30, 2020	3

		Consolidated Statements of Operations (unaudited)– three and nine months ended March 31, 2021 ~~and six~~ ~~months ended~~ ~~December~~ 3 1 , ~~2020~~ and ~~December~~ 3 1 ~~, 2019~~ March 31, 2020	4

		Consolidated Statements of Comprehensive Income (Loss) (unaudited) – three and ~~six~~ nine months ended March 31, 2021 ~~December~~ 3 1 ~~, 2020~~ and ~~December~~March 31, 2020 3 1 ~~, 2019~~	5

		Consolidated Statements of Stockholders' Equity (unaudited) – three and ~~six~~nine months ended March 31, 2021 ~~Decembe~~r 31~~, 2020~~ and March 31, 2020~~December 31, 2019~~	6-7

		Consolidated Statements of Cash Flows (unaudited) - ~~six~~ nine months ended March 31, 2021~~December~~ 3 1 ~~, 2020~~ and ~~December~~March 31,, ~~2019~~ 2020	78

		Notes to Unaudited Consolidated Financial Statements	89~~-18~~-19

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1921

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2327

	Item 4.	Controls and Procedures	2327

Part II.	Other Information:

	Item 1A.	Risk Factors	2528

	Item 6.	Exhibits	2730

SIGNATURES			2831

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE L. S. STARRETT COMPANY

Consolidated Balance Sheets

(in thousands except share data)


		(unaudited)12/31/2020		(audited) 06/30/2020			(unaudited)3/31/2021		6/30/2020
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash	Cash	$	14,559	$	13,458	Cash	$	11,247	$	13,458
Accounts receivable (less allowance for doubtful accounts of $623 and $736, respectively)		34,378		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	51,022		52,987		Inventories	52,536		52,987
Prepaid expenses and other current assets	Prepaid expenses and other current assets	9,392		8,641		Prepaid expenses and other current assets	10,355		8,641
Total current assets	Total current assets	109,351		104,098		Total current assets	108,605		104,098

Property, plant and equipment, net	Property, plant and equipment, net	36,112		37,090		Property, plant and equipment, net	35,001		37,090
Right of use assets	Right of use assets	4,782		4,465		Right of use assets	4,186		4,465

Deferred tax assets, net	Deferred tax assets, net	23,846		21,018		Deferred tax assets, net	23,513		21,018
Intangible assets, net	Intangible assets, net	4,930		4,997		Intangible assets, net	4,935		4,997
Goodwill	Goodwill	1,015		1,015		Goodwill	1,015		1,015
Total assets	Total assets	$	180,036	$	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	$	7,130	$	4,532	Current maturities of debt	$	6,895	$	4,532
Current lease liability	Current lease liability	1,591		1,905		Current lease liability	1,247		1,905
Accounts payable	Accounts payable	10,356		7,579		Accounts payable	12,089		7,579
Accrued expenses	Accrued expenses	7,492		8,838		Accrued expenses	7,745		8,838
Accrued compensation	Accrued compensation	4,179		4,980		Accrued compensation	5,663		4,980
Total current liabilities	Total current liabilities	30,748		27,834		Total current liabilities	33,639		27,834

Other tax obligations	Other tax obligations	2,809		2,532		Other tax obligations	2,761		2,532
Long-term lease liability	Long-term lease liability	3,283		2,655		Long-term lease liability	3,027		2,655
Long-term debt, net of current portion	Long-term debt, net of current portion	20,329		26,341		Long-term debt, net of current portion	18,530		26,341
Postretirement benefit and pension obligations	Postretirement benefit and pension obligations	64,783		67,338		Postretirement benefit and pension obligations	61,948		67,338
Total liabilities	Total liabilities	121,952		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; 6,447,739 outstanding at December 31, 2020 and 6,308,025 outstanding at June 30, 2020)		6,448		6,308
Class B Common stock $1 par (10,000,000 shares authorized; 656,908 outstanding at December 31, 2020 and 679,680 outstanding at June 30, 2020		657		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	56,184		55,762		Additional paid-in capital	56,329		55,762
Retained earnings	Retained earnings	66,621		58,648		Retained earnings	69,638		58,648
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(71,826)		(75,415)		Accumulated other comprehensive loss	(75,721)		(75,415)
Total stockholders' equity	Total stockholders' equity	58,084		45,983		Total stockholders' equity	57,350		45,983
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	180,036	$	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						6 Months Ended							3 Months Ended				9 Months Ended
		12/31/2020			12/31/2019			12/31/2020			12/31/2019				3/31/2021		3/31/2020		3/31/2021		3/31/2020

Net sales	Net sales	$	54,054		$	56,864		$	103,464		$	108,978		Net sales	$	54,944	$	49,998	$	158,408	$	158,976
Cost of goods sold	Cost of goods sold	36,449			38,228			70,287			72,639			Cost of goods sold	36,795		35,154		107,082		107,793
Gross margin	Gross margin	17,605			18,636			33,177			36,339			Gross margin	18,149		14,844		51,326		51,183
% of Net sales		32.6		%	32.8		%	32.1		%	33.3		%
% 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	384			0			730			0			Restructuring charges	788		0		1,518		0
Gain on sale of building	Gain on sale of building	(3,204)			0			(3,204)			0			Gain on sale of building	0		0		(3,204)		0
Selling, general and administrative expenses		14,224			15,874			27,615			32,132

Operating income	Operating income	6,201			2,762			8,036			4,207			Operating income	3,850		64		11,886		4,271

Other (expense), net		(426)			(887)			(427)			(1,056)
Other income (expense), net														Other income (expense), net	663		223		236		(833)

Income before income taxes	Income before income taxes	5,775			1,875			7,609			3,151			Income before income taxes	4,513		287		12,122		3,438

Income tax expense (benefit)	Income tax expense (benefit)	1,918			615			(364)			1,113			Income tax expense (benefit)	1,496		(326)		1,132		787

Net income	Net income	$	3,857		$	1,260		$	7,973		$	2,038		Net income	$	3,017	$	613	$	10,990	$	2,651

Basic income per share	Basic income per share	$	0.54		$	0.18		$	1.13		$	0.29		Basic income per share	$	0.42	$	0.09	$	1.56	$	0.38
Diluted income per share	Diluted income per share	$	0.53		$	0.18		$	1.10		$	0.29		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	7,081			6,955			7,035			6,930			Basic	$	7,104	$	6,962	$	7,058	$	6,941
Diluted	Diluted	7,294			7,015			7,260			7,011			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				6 Months Ended					3 Months Ended				9 Months Ended
		12/31/2020		12/31/2019		12/31/2020		12/31/2019			3/31/2021		3/31/2020		3/31/2021		3/31/2020

Net income	Net income	$	3,857	$	1,260	$	7,973	$	2,038	Net income	$	3,017	$	613	$	10,990	$	2,651
Other comprehensive income (loss):	Other comprehensive income (loss):									Other comprehensive income (loss):
Currency translation gain (loss), net of tax		3,846		2,674		3,610		(1,065)
Currency translation (loss), net of tax										Currency translation (loss), net of tax	(3,835)		(9,813)		(225)		(10,878)
Pension and postretirement plans, net of tax	Pension and postretirement plans, net of tax	1		(23)		(21)		(43)		Pension and postretirement plans, net of tax	(60)		(21)		(81)		(64)
Other comprehensive income (loss)		3,847		2,651		3,589		(1,108)
Other comprehensive (loss)										Other comprehensive (loss)	(3,895)		(9,834)		(306)		(10,942)

Total comprehensive income		$	7,704	$	3,911	$	11,562	$	930
Total comprehensive income (loss)										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~~three and ~~Six-Month Period Ended December~~nine months ended March 31, ~~2020:~~2021:


		Common Stock Outstanding				Additional Paid-in Capital				Retained Earnings			Accumulated Other Comprehensive Loss				Total				Common Stock Outstanding								Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Loss				Total
		Class A		Class B								Class A								Class B

Balance June 30, 2020	Balance June 30, 2020	$	6,308	$	680			$	55,762						$	58,648			$	(75,415)			$	45,983	Balance June 30, 2020		$	6,308			$	680			$	55,762			$	58,648			$	(75,415)	$	45,983
Total comprehensive income (loss)	Total comprehensive income (loss)	—		—		—				4,116			(258)				3,858			Total comprehensive income (loss)	—				—					—				4,116				(258)				3,858
Repurchase of shares	Repurchase of shares	—		(2)		(4)				—			—				(6)			Repurchase of shares	—				(2)				(4)				—				—				(6)
Stock-based compensation	Stock-based compensation	8		—		359				—			—				367			Stock-based compensation	8				—				359				—				—				367
Conversion	Conversion	26		(26)		—				—			—				—			Conversion	26				(26)				—				—				—				0
Balance September 30, 2020	Balance September 30, 2020	$	6,342	$	652	$	56,117			$	62,764		$	(75,673)			$	50,202		Balance September 30, 2020	$	6,342			$	652			$	56,117			$	62,764			$	(75,673)			$	50,202

Total comprehensive income	Total comprehensive income	—		—		—				3,857			3,847				7,704			Total comprehensive income	—				—				—				3,857				3,847				7,704
Repurchase of shares	Repurchase of shares	—		—		(1)				—			—				(1)			Repurchase of shares	—				—				(1)				—				—				(1)
Issuance of stock	Issuance of stock	—		8		17				—			—				25			Issuance of stock	—				8				17				—				—				25
Stock-based compensation	Stock-based compensation	103		—		51				—			—				154			Stock-based compensation	103				—				51				—				—				154
Conversion	Conversion	3		(3)		—				—			—				—			Conversion	3				(3)				—				—				—				0
Balance December 31, 2020	Balance December 31, 2020	$	6,448	$	657	$	56,184			$	66,621		$	(71,826)			$	58,084		Balance December 31, 2020	$	6,448			$	657			$	56,184			$	66,621			$	(71,826)			$	58,084

Total comprehensive income (loss)																				Total comprehensive income (loss)	—				—				—				3,017				(3,895)				(878)
Repurchase of shares																				Repurchase of shares	—				(1)				(3)				—				—				(4)
Stock-based compensation																				Stock-based compensation	—				—				148				—				—				148
Conversion																				Conversion	4				(4)				—				—				—				0
Balance March 31, 2021																				Balance March 31, 2021	$	6,452			$	652			$	56,329			$	69,638			$	(75,721)			$	57,350

Accumulated balance consists of:	Accumulated balance consists of:																			Accumulated balance consists of:
Translation loss	Translation loss												$	(58,264)						Translation loss																	$	(62,099)
Pension and postretirement plans, net of taxes	Pension and postretirement plans, net of taxes												(13,562)							Pension and postretirement plans, net of taxes																	(13,622)
													$	(71,826)																							$	(75,721)

For the ~~Three~~three and ~~Six-Month Period Ended December~~nine months ended March 31, ~~2019:~~2020:

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)
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 — — — 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
Accumulated balance consists of:
Translation loss $ (50,624)
Pension and postretirement plans, net of taxes (9,765)
$ (60,389)

~~See Notes to Unaudited Consolidated Financial Statements~~

~~THE L. S. STARRETT COMPANY~~

~~Consolidated Statements of Cash Flows~~

~~(in thousands) (unaudited)~~
6 Months Ended
12/31/2020 12/31/2019
Cash flows from operating activities:
Net income $ 7,973 $ 2,038
Non-cash operating activities:
Gain from sale of real estate (3,204) 0
Depreciation 2,681 2,430
Amortization 605 1,109
Stock-based compensation 521 286
Net long-term tax obligations 114 192
Deferred taxes (2,564) 484
Postretirement benefit and pension obligations 32 58
Working capital changes:
Accounts receivable (2,911) 1,825
Inventories 4,615 (4,088)
Other current assets (349) 41
Other current liabilities (1,813) (3,784)
Prepaid pension expense (3,469) (2,933)
Other 170 85
Net cash provided by (used in) operating activities 2,401 (2,257)
Cash flows from investing activities:
Purchases of property, plant and equipment (3,050) (4,663)
Software development (537) (718)
Proceeds from sale of real estate 5,214 0
Net cash provided by (used in) investing activities 1,627 (5,381)
Cash flows from financing activities:
Proceeds from borrowing 9,142 3,989
Debt repayments (12,608) (2,813)
Proceeds from common stock issued 25 37
Shares repurchased (7) (13)
Net cash (used in) provided by financing activities (3,448) 1,200
Effect of exchange rate changes on cash 521 238
Net increase (decrease) in cash 1,101 (6,200)
Cash, beginning of period 13,458 15,582
Cash, end of period $ 14,559 $ 9,382
Supplemental cash flow information:
Interest paid $ 423 $ 502
Income taxes paid, net 2,941 1,180


	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)

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


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 Cash 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

~~December~~

THE L. S. STARRETT COMPANY

Notes to Unaudited Consolidated Financial Statements

March 31, ~~2020~~2021

Note 1: Basis of Presentation and Summary of Significant Account Policies

The unaudited interim consolidated financial statements as of and for the ~~six~~nine months ended ~~December~~March 31, ~~2020~~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's~~its employees, and the long-term financial health of the Company. The COVID-19 pandemic continues to have a negative impact on certain 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 a full recovery across the 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 December 31, 2020
Three months ended March 31, 2021										Three months ended March 31, 2021

Sales1	Sales1	$	27,106	$	26,948	$	0	$	54,054	Sales1	$	32,519	$	22,425	$	0	$	54,944

Operating Income (Loss)	Operating Income (Loss)	$	3,688	$	4,436	$	(1,923)	$	6,201	Operating Income (Loss)	2,931		2,692		(1,773)		$	3,850

Three Months ended December 31, 2019
Three Months ended March 31, 2020										Three Months ended March 31, 2020

Sales2	Sales2	$	33,098	$	23,766	$	0	$	56,864	Sales2	$	33,369	$	16,629	$	0	$	49,998

Operating Income (Loss)	Operating Income (Loss)	$	2,547	$	1,725	$	(1,510)	$	2,762	Operating Income (Loss)	$	1,337	$	448	$	(1,721)	$	64

1.Excludes ~~$992~~$1,338 of North American segment intercompany sales to the International segment, and ~~$2,610~~$3,197 of International segment intercompany sales to the North American segment.

2.Excludes ~~$1,049~~$1,063 of North American segment intercompany sales to the International segment, and ~~$3,855~~$2,722 of International segment intercompany sales to the North American segment.


		North American Operations			International Operations		Unallocated		Total			North American Operations			International Operations		Unallocated		Total
Six months ended December 31, 2020
Nine Months ended March 31, 2021											Nine Months ended March 31, 2021

Sales1	Sales1	$	53,089	0	$	50,375	$	0	$	103,464	Sales1	$	85,609	0	$	72,799	$	0	$	158,408
Operating Income (Loss)	Operating Income (Loss)	$	4,516		$	7,277	$	(3,757)	$	8,036	Operating Income (Loss)	8,611			8,804		$	(5,529)	$	11,886

Six months ended December 31, 2019
Nine months ended March 31, 2020											Nine months ended March 31, 2020

Sales2	Sales2	$	64,106		$	44,872	$	0	$	108,978	Sales2	$	97,475		$	61,501	$	0	$	158,976
Operating Income (Loss)	Operating Income (Loss)	$	4,751		$	2,889	$	(3,433)	$	4,207	Operating Income (Loss)	$	6,217		$	3,069	$	(5,015)	$	4,271

1.Excludes ~~$1,737~~$3,075 of North American segment intercompany sales to the International segment, and ~~$5,396~~$8,593 of International segment intercompany sales to the North American segment.

2.Excludes ~~$2,016~~$3,079 of North American segment intercompany sales to the International segment, and ~~$8,097~~$10,820 of International segment intercompany sales to the North American segment.

Note 3: Revenue from Contracts with Customers

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 ~~December~~March 31, ~~2020~~2021 and ~~2019.~~June 30, 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 ~~six~~nine months ended ~~December~~March 31, ~~2020~~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

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 ~~receivables~~receivable 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 ~~December~~March 31, ~~2020,~~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 ~~$0.7~~$0.6 million and $0.4 million at ~~December~~March 31, ~~2020~~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 ~~six~~nine months ended ~~December~~March 31, ~~2020~~2021 and ~~2019~~2020 (in thousands):

1011


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		12/31/2020		12/31/2019		12/31/2020		12/31/2019			3/31/2021		3/31/2020		3/31/2021		3/31/2020
North America	North America									North America
United States	United States	$	25,345	$	31,085	$	49,682	$	59,708	United States	$	30,307	$	31,288	$	79,989	$	90,996
Canada & Mexico	Canada & Mexico	1,761		2,013		3,408		4,398		Canada & Mexico	2,212		2,081		5,620		6,479
		27,106		33,098		53,090		64,106			32,519		33,369		85,609		97,475
International	International									International
Brazil	Brazil	17,493		15,000		32,401		27,822		Brazil	14,901		8,729		47,302		36,551
United Kingdom	United Kingdom	5,554		5,372		10,548		10,603		United Kingdom	4,269		5,333		14,818		15,936
China	China	2,005		1,653		3,586		3,167		China	1,655		1,338		5,240		4,505
Australia & New Zealand	Australia & New Zealand	1,896		1,741		3,839		3,280		Australia & New Zealand	1,600		1,229		5,439		4,509
		26,948		23,766		50,374		44,872			22,425		16,629		72,799		61,501

Total Sales	Total Sales	$	54,054	$	56,864	$	103,464	$	108,978	Total Sales	$	54,944	$	49,998	$	158,408	$	158,976

Note 4: Recent Accounting Pronouncements

Recently Issued Accounting Standards not yet adopted:

In ~~June 2016,~~August 2018, the FASB issued ASU ~~2016-13, “Financial~~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, effective for the Company July 1, 2021.. The amendments in ASU 2018-14 must be applied on a retrospective basis. The Company is currently assessing the effect, if any, that ASU 2018-14 will have on its consolidated financial statements.

In November 2019, FASB issued ASU 2019-10, 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 ~~(Topic~~ASU 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 ~~August 2018, the~~December 2019, FASB issued ASU ~~No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes~~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 ~~Disclosure Requirements~~incremental approach for ~~Defined Benefit Plans." ASU 2018-14 removes certain disclosures~~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 ~~are~~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 ~~considered cost beneficial, clarifies certain~~ required ~~disclosures~~to allocate the consolidated amount of current and ~~added additional disclosures. This ASU~~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 ~~public companies for annual reporting periods~~fiscal years, and interim periods within those ~~annual periods~~fiscal years, beginning after December 15, ~~2020. The amendments in ASU 2018-14 must be applied on a retrospective basis.~~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 March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The amendments in this 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 discontinued 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 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 capped accordingly in this agreement. The Company does not believe the adoption of this standard has a material impact on the financial position and results of operations.

Note 5: Leases

Operating lease cost amounted to $0.6 million and ~~$1.2~~$1.8 million for ~~six~~three and nine months period ended ~~December~~March 31, ~~2020 and 2019.~~2021. As of ~~December~~March 31, ~~2020,~~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 $ 4,782 $ 4,873 $ 5,774


	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 4.1 years. As of ~~December~~March 31,

~~2020,~~ 2021, the Company’s financing leases are de minimis. The foreign exchange impact affecting the operating leases are de minimis.

The Company entered into $0.9 million in operating lease commitments and incurred ~~$0.1 of~~de minimis exchange ~~expense~~impact during the ~~six~~nine months ended March 31, 2021. In December ~~31, 2020. The~~2020, the Company completed a sale and leaseback of ~~their~~its Mount Airy NC Facility (see note 13) and recognized ~~an ROU~~a Right-Of-Use ("ROU") asset ofbased 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 ~~December~~March 31, ~~2020,~~2021, the Company had the following fiscal year minimum operating lease commitments (in thousands):


Six months ended December 31, 2020		Operating Lease Commitments
Nine months ended March 31, 2021				Nine months ended March 31, 2021	Operating Lease Commitments
2021 (Remainder of year)	2021 (Remainder of year)	$	1,256	2021 (Remainder of year)	$	574
2022	2022	1,342		2022	1,318
2023	2023	1,110		2023	1,122
2024	2024	913		2024	917
2025	2025	640		2025	639
Thereafter	Thereafter	512		Thereafter	511
Subtotal	Subtotal	$	5,774	Subtotal	$	5,081
Imputed interest	Imputed interest	(901)		Imputed interest	(806)
Total	Total	4,873		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 ~~December~~March 31, ~~2020,~~2021, there were 8,250 stock options and 260,977 restricted stock units outstanding. There were 10,477 shares available for grant under the 2012 Stock Plan as of ~~December~~March 31, ~~2020.~~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 ~~six~~nine months ended ~~December~~March 31, ~~2020~~2021 and ~~2019.~~2020.

The weighted average contractual term for stock options outstanding as of ~~December~~March 31, ~~2020~~2021 was ~~2.0~~1.8 years. The aggregate intrinsic value of stock options outstanding as of ~~December~~March 31, ~~2020~~2021 was less than $0.1 million. Stock options exercisable as of ~~December~~March 31, ~~2020~~2021 were 8,250 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 297,140 RSU awards with a fair value of $3.36 per RSU granted during the ~~six~~nine months ended ~~December~~March 31, ~~2020.~~2021. There were 102,670 RSUs settled, and 3,834 RSUs forfeited during the ~~six~~nine months ended ~~December~~March 31, ~~2020.~~2021. The aggregate intrinsic value of RSU awards outstanding as of ~~December~~March 31, ~~2020~~2021 was ~~$1.1~~$1.7 million. As of ~~December~~March 31, ~~2020,~~2021, all vested awards have been issued 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 and ~~six-month~~nine-month periods ended ~~December~~March 31, ~~2020~~2021 were ~~$0.2~~$0.1 million, and ~~$0.5~~$0.6 million as compared to the prior year three and ~~six~~nine months of $0.1 million and ~~$0.2~~$0.3 million, respectively. As of ~~December~~March 31, ~~2020,~~2021, there was ~~$2.5~~$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 ~~$0.8~~$0.7 million is expected to be recognized over a weighted average period of ~~2.0~~1.8 years.

Note 7: Inventories

Inventories consist of the following (in thousands):


		12/31/2020		06/30/2020			3/31/2021		6/30/2020
Raw material and supplies	Raw material and supplies	$	30,738	$	26,255	Raw material and supplies	$	29,149	$	26,255
Goods in process and finished parts	Goods in process and finished parts	13,035		13,694		Goods in process and finished parts	13,673		13,694
Finished goods	Finished goods	32,208		37,579		Finished goods	34,087		37,579
		75,981		77,528			76,909		77,528
LIFO Reserve	LIFO Reserve	(24,959)		(24,541)		LIFO Reserve	(24,373)		(24,541)
		$	51,022	$	52,987		$	52,536	$	52,987

Of the Company’s ~~$51.0~~$52.5 million and $53.0 million total inventory at ~~December~~March 31, ~~2020~~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 ~~$29.8~~$27.9 million on a FIFO basis and ~~$4.8~~$3.5 million on a LIFO basis at ~~December~~March 31, ~~2020.~~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 ~~$0.1~~$0.5 million ~~increase~~decrease in cost of sales for the goods sold in the ~~period~~nine months ending ~~December~~March 31, ~~2020~~2021 compared to ~~$0.4~~$0.3 million increase in the ~~six~~nine months ending ~~December~~March 31, ~~2019.~~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 ~~totaling~~of $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 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 ~~Goodwill~~goodwill of $3.0 million was impaired at the Bytewise reporting unit as of June 30, 2020. As a result, the balance of ~~Goodwill~~goodwill at Bytewise is 0 and $1.0 million at the private software company as of ~~December~~March 31, ~~2020.~~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 ~~December~~March 31, ~~2020,~~2021, we did not identify a triggering event.

Amortizable intangible assets consist of the following (in thousands):

1315


		12/31/2020		6/30/2020			3/31/2021		6/30/2020
Trademarks and trade names	Trademarks and trade names	2,070		2,070		Trademarks and trade names	2,070		2,070
Completed technology	Completed technology	2,010		2,010		Completed technology	2,010		2,010
Customer relationships	Customer relationships	630		630		Customer relationships	630		630
Software development	Software development	9,982		9,445		Software development	10,293		9,445

Total	Total	14,692		14,155		Total	15,003		14,155
Accumulated amortization		(9,763)		(6,316)
Intangibles impairment		$	0	$	(2,842)
Accumulated amortization and impairment						Accumulated amortization and impairment	(10,068)		(9,158)

Total net balance	Total net balance	$	4,930	$	4,997	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)	$	743	2021 (Remainder of year)	$	387
2022	2022	1,269		2022	1,331
2023	2023	1,034		2023	1,096
2024	2024	764		2024	825
2025	2025	604		2025	666
2026	2026	287		2026	401
Thereafter	Thereafter	229		Thereafter	229
Total net balance	Total net balance	$	4,930	Total net balance	$	4,935

Note 9: Pension and Post-retirement Benefits

The Company has 2 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 (expense), net in Consolidated Statements of Operations, except (in the table below) for service ~~cost .~~cost. Service cost are in cost of sales and selling, general and administrative expenses. Net periodic benefit costs consist of the following (in thousands):


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		12/31/2020		12/31/2019		12/31/2020		12/31/2019			3/31/2021		3/31/2020		3/31/2021		3/31/2020
Service cost	Service cost	$	0	$	0	$	0	$	0	Service cost	$	0	$	0	$	0	$	0
Interest cost	Interest cost	1,118		1,366		2,231		2,715		Interest cost	1,120		1,362		3,351		4,077
Expected return on plan assets	Expected return on plan assets	(1,113)		(1,309)		(2,221)		(2,603)		Expected return on plan assets	(1,115)		(1,305)		(3,336)		(3,908)
Amortization of net loss	Amortization of net loss	14		9		27		19		Amortization of net loss	13		9		40		28
		$	19	$	66	$	37	$	131		$	18	$	66	$	55	$	197

Net periodic benefit costs for the Company's Postretirement Medical Plan consists of the following (in thousands):

1416


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
		12/31/2020		12/31/2019		12/31/2020		12/31/2019			3/31/2021		3/31/2020		3/31/2021		3/31/2020
Service cost	Service cost	$	22	$	19	$	43	$	37	Service cost	$	21	$	18	$	64	$	55
Interest cost	Interest cost	52		60		103		120		Interest cost	51		60		154		180
Amortization of prior service credit	Amortization of prior service credit	(135)		(135)		(269)		(269)		Amortization of prior service credit	(134)		(134)		(403)		(403)
Amortization of net loss	Amortization of net loss	41		21		83		42		Amortization of net loss	41		20		124		62
		$	(20)	$	(35)	$	(40)	$	(70)		$	(21)	$	(36)	$	(61)	$	(106)

For the three ~~month~~ and ~~six~~nine month period ended ~~December~~March 31, ~~2020,~~2021, the Company contributed ~~$1.5~~$2.6 million and ~~$2.8~~$5.4 million, respectively in the U.S. and $0.3 million and ~~$0.5~~$0.7 million in the UK pension plans. The Company estimates that it will contribute an additional ~~$4.6~~$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):


		12/31/2020		06/30/2020			3/31/2021		6/30/2020
Short-term and current maturities	Short-term and current maturities					Short-term and current maturities
Loan and Security Agreement (Term Loan)	Loan and Security Agreement (Term Loan)	1,475		597		Loan and Security Agreement (Term Loan)	1,732		597
Brazil Loans	Brazil Loans	5,655		3,935		Brazil Loans	5,163		3,935
		7,130		4,532			6,895		4,532
Long-term debt (net of current portion)	Long-term debt (net of current portion)					Long-term debt (net of current portion)
Loan and Security Agreement (Term Loan)	Loan and Security Agreement (Term Loan)	6,525		5,941		Loan and Security Agreement (Term Loan)	6,147		5,941
Loan and Security Agreement (Line of Credit)	Loan and Security Agreement (Line of Credit)	13,804		20,400		Loan and Security Agreement (Line of Credit)	12,384		20,400
		20,329		26,341			18,530		26,341
		$	27,459	$	30,873		$	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 Loan~~Line 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.

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, 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~~LIBOR 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.

1517

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~~fiscal 2021 and the impact of the Company’s restructuring plan initiatives. ~~The~~Under this amendment, the Company ~~will~~also agreed to apply ~~certain~~all proceeds from the sale of US real estate assets, except the Mt. Airy, North Carolina facility, against the principle balance of the term ~~loans under~~loan 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 was compliant with the minimum liquidity requirement and the minimum adjusted cumulative EBITDA required bank covenants as of ~~December~~March 31, ~~2020.~~2021 and is expected to comply with the covenants over the next twelve months.

~~Total debt decreased $3.4 million during the six months ended December 31, 2020.~~ Availability under the Line of Credit remains subject to a borrowing base comprised of Accounts Receivable, Inventory, and 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 ~~December~~March 31, ~~2020~~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		6.05	%	March 2020	March 2021	$	377
Bradesco								Bradesco	5.18	%	May 2020	May 2021	$	288
Santander	Santander	8.12	%	April 2020	April 2021	$	1,010	Santander	10.18	%	November 2020	May 2021	$	263
Bradesco		5.18	%	May 2020	May 2021	$	791
Brazil Bank		4.30	%	September 2020	August 2021	$	1,000
Brazil Bank	Brazil Bank	3.38	%	November 2020	November 2021	$	900	Brazil Bank	4.30	%	September 2020	August 2021	$	991
Brazil Bank	Brazil Bank	4.74	%	December 2020	December 2021	$	577	Brazil Bank	3.38	%	November. 2020	November 2021	$	900
Bradesco	Bradesco	2.37	%	December 2020	December 2021	$	1,000	Bradesco	2.37	%	December 2020	December 2021	$	1,000
Bradesco								Bradesco	4.74	%	December 2020	December 2021	$	527
Santander								Santander	5.98	%	February 2021	February 2022	$	1,194

						$	5,655						$	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 of~~the 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.

For the three month period ended ~~December~~March 31, ~~2020,~~2021, the Company recognized tax expense of ~~$1.9~~$1.5 million on a profit before tax of ~~$5.8 million or an effective tax rate of 33%.For the three month period ended December 31, 2019, the Company recognized tax expense of $0.6 million on a profit before tax of $1.9~~$4.5 million or an effective tax rate of 33%. The tax rate for ~~both~~ fiscal 2021 ~~and fiscal 2020~~ was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, ~~which became effective in fiscal 2019,~~ and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%.

For the ~~six~~three month period ended ~~December~~March 31, 2020, the Company recognized a tax benefit of ~~($0.4)~~$(0.3) million on a profit before tax of ~~$7.6~~$0.3 million or an effective tax rate of ~~(5)~~(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 ~~$2.5~~$4.1 million or 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. For the ~~six~~nine month period ended ~~December~~March 31, ~~2019.~~2020. the Company recognized tax expense of ~~$1.1~~$0.8 million on a profit before tax of ~~$3.2~~$3.4 million or an effective tax rate of ~~35%~~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%. .

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 ~~December~~March 31, ~~2020,~~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 ~~the~~the 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. ~~These~~Management believes it is not reasonably possible that these matters ~~are not expected to~~will have a material negative impact on the ~~Company’s~~Company'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

In June 2020, the Company recorded a $1.6 million restructuring charge of which $1.0 million remained in the accrual at fiscal 2020 year end. The total planned expenditure is $4.0 million, $1.2 million in the U.S. and $2.8 million internationally, expensed during the five quarters from Q42020 to Q42021. $2.3 million has been charged as restructuring in the nine months ending December 31, 2020. The Company adopted this plan in order to consolidate certain saw manufacturing operations for greater efficiency. This restructuring is strategically targeting improving manufacturing utilization globally and will be completed in fiscal 2021.

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 Consolidated Balance Sheets at fiscal 2020 year end. That accrued expense balance was 0 as of March 31, 2021. Total restructuring cost of ~~$4.0~~$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 ~~annually~~ beginning in fiscal ~~year~~ 2021 as planned implementation throughout the year, with full annual savings realized in fiscal ~~year~~ 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.

InThe 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 ~~six~~project was announced in the quarter ended June 2020, $3.0 million has been charged as restructuring expense including $1.5 million that was incurred in the nine months ended ~~December~~March 31, 2020, $0.7 million of restructuring cost were charged as a period expense in the Consolidated Statements of Operations, on a separate line, and $1.0 million was charged against accrued expenses on the Consolidate Balance Sheets. The remaining balance of the accrual at December 31, 2020 is 0.2021. The Company expects to charge an ~~addition $1.7~~additional $1.3 million in the ~~period those cost are incurred in the~~ remaining ~~six~~three months of fiscal ~~year~~ 2021. ~~There currently have been no material losses related to disposal of assets.~~ The Company has recorded a gain on the sale of ~~fixed assets~~property, plant and equipment internationally of $0.2 ~~million.~~million, related to restructuring. The Company does not expect a material amount of disposal costs.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

~~Three months ended December 31, 2020and December 31, 2019~~

~~Overview~~

Net sales in the quarter ended December 31, 2020 were $54.1 million, down $2.8 million or 4.9% compared to $56.8 million in the quarter ended December 31, 2019. Foreign currency translation negatively impacted reported sales by $5.2 million for the three months ended December 31, 2020. On a foreign currency neutral basis, sales in the quarter ending December 31, 2020 increased 4.2% from the quarter ending December 31, 2019. International sales in the quarter represent 50% of our global sales mix led by a resurgent Brazil.

Operating Income increased $3.4 milllion to $6.2 million compared to $2.8 million in quarter ended December 31, 2019 due in large part to the gain of $ 3.2 million on the sale of the Mount Airy, North Carolina facility in December 2020 (see Note 13). In addition, $0.4 million in restructuring cost were in the quarter ended December 31, 2020 and not in the prior year quarter and operating income increased as a result of operations in the amount of $0.6 million or 21%. Given the pandemic affecting the corresponding decline in sales we are seeing benefits from our restructuring.

This improvement is the result of aligning our cost structure to current pandemic demand and on-going restructuring. The Company continues to benefit from its restructuring activities that have resulted in a reduction of selling, general and administrative expenses of $1.7 million in the quarter ending December 31, 2020 compared to quarter ending December 31, 2019.

Net income improved by $2.6 million in the quarter ended December 31, 2020 to $3.9 million. The improvements compared to the quarter ended December 31, 2019 resulted from the gain on the sale of the facility of $3.2 million, $1.6 million of lower selling, general and administrative expenses and improved other income of $0.5 million. Those benefits were partially offset by lower gross margin of $1.0 million as a result of lower sales, higher taxes of $1.3 million and restructuring cost of $0.4 million.

Use of ~~Non-GAAP~~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~~Form 10-Q, we discuss ~~non-GAAP~~non-U.S. GAAP financial measures related to currency-neutral sales revenues, ~~which~~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.

Management uses these non-GAAP financial measures when evaluating the Company's performance, including when making financial and operating decisions. Additionally, management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing our underlying business performance and trends. However, referencesReferences 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-GAAP~~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.

~~Net Sales~~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 breakdown of the Company’s net sales of $54.1 million was North America with sales of $27.1 million, a decline of $6.0 million, offset by an increase of $3.2 million in International sales to $26.9 million in the quarter ended December 31, 2020.

International sales were adversely impacted by the aforementioned currency fluctuation primarily in Brazil. On a currency neutral basis our Brazilian subsidiary's sales increased 53% for the quarter ending December 31, 2020 compared to the quarter ending December 31, 2019. This was due to strong performance across most all of its product portfolio led by its consumer markets.

North American sales declined 18% in the quarter ended December 31, 2020. All of our U.S. subsidiaries collectively recorded lower sales in the quarter ended December 31, 2020 as compared to the prior year quarter. This was driven by significantly

1921

lower demand in our industrial and capital equipment markets as the result of channel inventories declining and capital projects on hold due to the COVID-19 pandemic, the exception being the semi-conductor market which has exhibited resilience.

~~Gross Margin~~

~~Gross margin decreased $1.0 million or 5.5%, commensurate with~~The following table represents key results of operations on a consolidated basis for the ~~drop in~~periods indicated:


	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		%

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		%

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	%

GAAP Operating income as reported	3,850			64			3,786		5916.1	%	11,886			4,271			7,615		178.3	%

Other income (expense), net	663			223			440		197.3	%	236			(833)			1,069		128.3	%

Income before income taxes	4,513			287			4,226		1472.6	%	12,122			3,438			8,684		252.6	%

Income tax expense (benefit)	1,496			(326)			(1,822)		558.9	%	1,132			787			(345)		(43.8)	%

Net income	$	3,017		$	613		$	2,404	392.2	%	$	10,990		$	2,651		$	8,339	314.6	%


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

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:


	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

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%

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%



Restructuring charges	182			605			—		788			—		—		—	—


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	%


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

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:


	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		%

Selling, general and administrative expenses	18,257			17,340			5,529		41,126			$	22,255		$	19,610		$	5,047	$	46,912
% of net sales	—			—					—			—			—					—



Restructuring charges	836			682			—		1,518			—			—			—		—
Gain on sale of building	(3,204)			—			—		(3,204)			—			—			—		—

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		%


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 and Nine Months Periods Ended March 31, 2021 and March 31, 2020

Overview

Net sales ~~volume. Total gross margin as a percentage of sales was essentially flat~~ in the quarter ended ~~December~~March 31, ~~2020 at 32.6%~~2021 were $55.0 million, up $5.0 million, an improvement of sales, and in the quarter ended December 31, 2019 at 32.8% of sales. North American gross margin percentage declined 5.5% of sales due in large part to sales mix and lower volume and plant utilization.

~~International gross margins increased by 4.3% of sales to 40.2 % in the quarter ended December 31, 2020 as~~10.0% compared to ~~the prior year quarter. International gross margins increased $2.3 million to $10.8~~$50.0 million in the quarter ended ~~December~~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 March 31, 2020, ~~based upon an increase~~were lower by $0.6 million or 0.4%. Foreign currency translation negatively impacted reported sales by $2.6 million for the three months ended March 31, 2021. On a foreign currency neutral basis, sales in ~~sales volume and improved manufacturing utilization.~~the quarter ending March 31, 2021 increased 15.0% from the quarter ending 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.

~~Selling, General and Administrative Expenses~~

~~Selling, general and administrative expense decreased $1.7 million or 10.4%~~Operating income in the quarter ended ~~December~~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 vswas increased by 178% to $11.9 million from $4.3 million in the prior ~~year quarter.~~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 $4.6 million or 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 restructuring charges and the $3.2 million gain on the sale of our North ~~America~~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 current pandemic demand and on-going restructuring, and 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 ~~expense was $1.6 million lower, International selling, general and administrative expense was $0.5 million lower, and Corporate~~ expenses ~~were up $0.4~~of $1.3 million in the ~~quarter ended December~~three months ending March 31, ~~2020 vs the prior quarter. The decline in expenses reflects the Company’s efforts to align our cost structure to demand. Corporate expenses were higher by $0.4~~2021, and $5.8 million in the ~~quarter ended December~~nine months ending March 31, ~~2020 as~~2021, compared to ~~prior quarter due to RSU stock expense, increased insurance premiums, and investment in Treasury, FP&A and SEC reporting tools.~~the same periods respectively ending March 31, 2020.

As presented on separate lines on the Consolidated Statements of Operations are a gain on the sale of the North Carolina facility of $3.2 million and ~~$0.4~~$1.5 million in restructuring charges of which ~~$0.3~~$0.8 million in the U.S. and ~~$0.1~~$0.7 million ~~in the U.K.~~internationally associated with the fiscal year 2021 plan as disclosed in the June 30, 2020 Form 10-K as well as Note 14.

~~Other Income (Expense)~~

~~Other Income (expense)~~Net income improved ~~$0.5~~by $2.4 million ~~from the prior year quarter~~ to ~~an expense of $(0.4)~~$3.0 million in the quarter ended ~~December~~March 31, 2021, and by $8.3 million to $11.0 million in the nine month period ending March 31, 2021 compared to the same periods respectively ending March 31, 2020. ~~Other Income (expense) was $(0.9)~~

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 ~~December~~March 31, ~~2019. Other Income (expense) improved~~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 $11.8 million or 12.2% while International sales increased $11.3 million or 18.4%. 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 nine month period ending March 31, 2021 compared to the year prior.

Gross Margin

Gross margin increased $3.3 million or 22.3% for the three months, and $0.1 million for the nine months ending on March 31, 2021 as compared to the ~~prior~~ year prior. Total gross margin as a percentage of sales improved by 3.3 percentage points, from 29.7% to 33.0% for the three month period ending March 31, 2021 compared to March 31, 2020. The quarter ~~namely~~on quarter improvement is a result of lower production overheads and capacity achieved as a result ~~offsetting $0.3 million income~~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 ~~a consolidated gain~~32.2% to 32.4%. The restructuring benefits of ~~fixed asset sales, increased other miscellaneous income as well~~reducing production capacity and costs were starting to be realized beginning in the quarter ending March 31, 2021.

For the three months ending March 31, 2021, North American gross margin measured as a ~~favorable tax settlement~~percent of ~~$0.2~~Net Sales improved by 3.60 percentage points from 26.4% to 30.0%, compared to the three month period ending March 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 37.5% for the three month period ending March 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 nine month period ending March 31, 2020. International gross margin measured the same way declined from 36.9% to 36.8% from March 31, 2020 to March 31, 2021 respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $1.3 million or 8.6% during the quarter ended March 31, 2021 compared to 2020. The Company continues to align our cost structure to demand with a reduction in ~~Brazil.~~selling, general and administrative headcount of 122 when comparing these two quarters.

Selling, general and administrative expenses decreased $5.8 million or 12.3% during the nine months ended March 31, 2021 compared to 2020. Corporate expenses are up $0.5 million or 9.6% while the rest of selling, general and administrative costs are down 12.7%.

Income Taxes

~~The~~For the three month period ended March 31, 2021, the Company recognized tax expense ~~for the second quarter~~ of ~~fiscal 2021 was $1.9~~$1.5 million on a profit before tax of ~~$5.8 million or an effective tax rate of 33%. The tax expense for the second quarter of fiscal 2020 was $0.6 million on a profit before tax of $1.9~~$4.5 million or an effective tax rate of 33%. The tax rate for ~~the second quarter of both~~ fiscal 2021 ~~and fiscal 2020~~ was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, ~~which became effective in fiscal 2019,~~ and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%.

~~Net Income~~

The Company recorded net income of $3.9 million or $0.54 per basic share in the quarter ended December 31, 2020 compared to net income of $1.3 million or $0.18 per basic share in the quarter ended December 31, 2019. Pretax income was $5.8 million, an increase of $3.9 million. Tax expense rose $1.3 million to $1.9 million. higher as a result of a $2.6 million increase in net income in the quarter ended December 31, 2020 as compared to the quarter ended December 31, 2019.

~~Six months ended December 31, 2020 and December 31, 2019~~

~~Overview~~

The company finished the six months ended December 31, 2020 with sales of $103.5 million and net income of $8.0 million or $5.5 million lower sales yet $6.0 million of more net income as compared to the six months ended December 31, 2019. In the six months ended December 31, 2020, sales declined $11.0 million in North America, which was offset by an increase in our international markets of $5.5 million as compared to the six months ended December 31, 2019. The weakening of the Brazilian currency relative to the U.S. Dollar between the two comparative periods negatively impacted reported sales by $10.7 million. Eliminating the impact of foreign exchange translation, sales have increased 4.2% year on year for the first six months of this

fiscal year. As a result operating income, which includes the gain on the Sale of our Mt. Airy North Carolina facility improved by $3.8 million in six months ended December 31, 2020 as compared to the prior year six months.

Gross Margin as a percentage of sales was down to 32.1% of sales or $33.2 million in the six months ended December 31, 2020, a decrease of $3.2 million as compared to the $36.4 million gross margin or 33.3% of sales in the six months ended December 31, 2019. Selling, general and administrative expense was at $27.6 million in the six months ended December 31, 2020 or $4.5 million lower compared to the prior year six months.

Net income improved by $5.9 million in the six months ended December 31, 2020 . The improvement was due to the following: A $ 3.2 million gain on the sale of the Mount Airy, North Carolina facility in December 2020, a $0.6 million improvement in other expense for small gains on sales of fixed assets globally, taxes were $1.5 million lower due to chanes in GILTI legislation requiring adjustments in the September 2020 quarter as well as the on-going operational improvement of $0.6 million.

~~Net Sales~~

Net sales in the six months ended December 31, 2020 were $103.5 million or $5.5 million lower as compared to the six months ended December 31, 2019. International sales were $5.5 million higher in the quarter ended December 31, 2020 or $50.4 million as compared to $44.9 million in the prior year six months. Brazil was up 16.5% to $32.4 million in reported sales as compared to $27.8 million in the prior year six months. On a currency neutral basis, Brazil's sales to third party customers have increased by 55% from the comparative period in the prior year, showing strong gains in all product categories.

North American sales in the six months ended December 31, 2020 were $11.0 million lower, or $53.1 million as compared to $64.1 million in the prior year six months. In the U.S. sales in our industrial and capital equipment markets declined by $10 million. Our industrial products sold primarily through distribution channel partners continue to be negatively affected by the lack of inventory replenishment relative to the pandemic. With capital projects shelved as most industries preserve cash, sales of high end metrology products have significantly declined from pre COVID -19 levels. The semi-conductor market has remained stable to the benefit of our custom engineered products.

~~Gross Margin~~

Gross margin decreased $3.2 million or 8.7% principally due to the drop in sales volume. Total gross margin as a percentage of sales declined 1.3% points due in large part to lower utilization in manufacturing in the U.S. for the six months ended December 31, 2020 as compared to 2019. For the ~~six months~~three month period ended ~~December~~March 31, 2020, the ~~gross margin percentage of sales was 32.1% of sales and in the six months ended December 31, 2019 gross margin was 33.4% of sales.~~

North American gross margin percentage declined 4.9% of sales due in large part to sales mix and lower volume as well as lower plant utilization. International gross margins increased by 1.5% of sales to 38.9 % in the quarter ended December 31, 2020 as compared to 37.4% during the prior year six months. International gross margins increased $2.8 million to $19.6 million in the six months that ended December 31, 2020 based upon an increase in sales volume and manufacturing utilization.

~~Selling, General and Administrative Expenses~~

Selling, general and administrative expenses of $27.6 million were lower by $4.5 million or 14.1% in the six months ended December 31, 2020 as compared to the prior year. North American expenses were $3.2 million lower in the six months ended December 31, 2020 as compared to the prior year six months primarily due to $1.2 million lower selling costs as a result of less travel and entertainment, no trade show participation, and lower headcount. Distribution expenses also attributed to $0.4 million in lower expenses due to lower sales, and general and administrative expenses were lower $1.1 million due to lower cost structure.

~~Selling, general and administrative expenses internationally were $12.2 million for the six months ended December 31, 2020 or~~

$1.7 million or 12.1% lower than the six months ended December 31, 2019. Internationally, selling expenses were $1.1 million lower and marketing expenses were $0.6 million lower in the six months ended December 31, 2020 as compared to prior year as a result of no trade show participation, lower head count and minimal travel and entertainment costs.

Corporate expenses were $3.8 million in the six months ended December 31, 2020 or $0.3 million higher than the prior year six months as a result of higher RSU expense, increased insurance premiums and professional services. In addition, the Company ~~has made some investments in financial planning, analysis, reporting, treasury, and external reporting tools.~~

As presented as separate lines on the Consolidated Statements of Operations is the gain of $3.2 million on the sale of our Mount Airy, North Carolina facility (See Note 13) and $0.7 million in restructuring charges with $0.6 million in the U.S. and $0.1 million in the U.K. associated with the fiscal year 2021 plan as disclosed in the June 30, 2020 Form 10-K as well as Note 14.

~~Other Income (expense)~~

Other Income (expense) improved $0.7 million from the prior year six months to $(0.4) million in the six months ended December 31, 2020. Other Income (expense) was $(1.1) million in the six months ended December 31, 2019. Other Income (expense) declined in the six months compared to the prior year period namely as a result of $0.3 million income from a consolidated gain of fixed asset sales, a favorable tax settlement of $0.2 million in Brazil and $0.2 million in interest income and scrap sales combined.

~~Income Tax Expense~~

~~The~~recognized tax expense ~~for the first half~~ of ~~fiscal 2021 was a benefit of ($0.4)~~$(0.3) million on a profit before tax of ~~$7.6~~$0.3 million or an effective tax rate of ~~(5%)~~(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 ~~half~~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 ~~$2.5~~$4.1 million or 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.The~~expenses. For the nine month period ended March 31, 2020. the Company recognized tax expense ~~for the first half~~ of ~~fiscal 2020 was $1.1~~$0.8 million on a profit before tax of ~~$3.2~~$3.4 million or an effective tax rate of ~~35%~~24%. ~~This~~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%. .

Net Income

~~The Company recorded net~~Net income ~~of $8.0 million or $1.13 per basic share in~~for the quarter ended ~~December~~March 31, 2020 compared to net income of $2.0 million or $0.29 per basic share in the quarter ended December 31, 2019. Pretax income was $7.6 million, an improvement of $4.5 million compared to the six months ended December 31, 2019. Tax expense in the six months ended December 31,2021 and 2020 was ~~$1.5~~$3.0 million ~~lower than in the comparative period, resulting in~~and $0.6 million respectively, an increase of ~~net~~$2.4 million. Net income ~~of $6.0 million to $8.0 million as compared to $2.0 million~~ for the ~~six~~nine months ended ~~December~~March 31, ~~2019.~~2021 and 2020 increased to $11.0 million, up $8.3 million, a 315% increase over the $2.7 million in 2020.

LIQUIDITY AND CAPITAL RESOURCES


Cash flows (in thousands)	Cash flows (in thousands)	Six Months Ended				Cash flows (in thousands)	Nine Months Ended
		12/31/2020		12/31/2019			3/31/2021		3/31/2020

Cash provided by (used in) operating activities	Cash provided by (used in) operating activities	$	2,401	(2,257)		Cash provided by (used in) operating activities	$	2,721	(3,861)
Cash provided by (used in) investing activities	Cash provided by (used in) investing activities	1,627		(5,381)		Cash provided by (used in) investing activities	317		(8,618)
Cash (used in) provided by financing activities	Cash (used in) provided by financing activities	(3,448)		1,200		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	521		238		Effect of exchange rate changes on cash	80		202

Net increase (decrease) in cash		$	1,101	$	(6,200)
Net (decrease) in cash						Net (decrease) in cash	$	(2,211)	$	(5,367)

Net cash flows for the ~~six~~nine months ended ~~December~~March 31, ~~2020~~2021 provided ~~an increase~~a decrease in cash of ~~$1.1~~$2.2 million compared to a decrease in cash of ~~$6.2m~~$5.4 million for the ~~six~~nine month period ending ~~December~~March 31, ~~2019.~~2020. Cash provided by operations increased to ~~$2.4~~$2.7 million due to improved operating performance and working capital ~~management.~~management which was partially offset by investing $2.5 million on a cash basis in restructuring. Cash provided by investing activities increased to ~~$1.6~~$0.3 million, largely as a result of $5.2 million proceeds from the sale of the Mount Airy, North Carolina facility in December 2020. This was ~~partially~~ offset ~~by $3.0 million~~with capital investment in ~~capital investments during the period~~our factories which were ~~largely~~ part of the fiscal 2021 ~~planned restructuring.~~restructuring program. With the building sale and improved operating cash flows, the Company was able to reduce its overall debt during the ~~six-month period between June 30, 2020 and December~~nine months ended March 31, ~~2020~~2021 by ~~$3.4m.~~$5.4 million. As a result the Company's debt repayments were greater 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 ~~2020~~fiscal 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.

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 ~~Libor~~LIBOR 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. ~~The~~Under this amendment, the Company ~~will~~also agreed to apply ~~certain~~all proceeds from the sale of US real estate assets, except the Mt. Airy, North Carolina facility, against the principle balance of the term ~~loans under~~loan 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 ~~six~~nine months ending ~~December~~March 31, ~~2020~~2021 and ~~2019 was 1.9% and 3.7% respectively. The effective rate for the six months ending December 31,~~ 2020 was lower than that specified in the First Amendment to the loan agreement which was executed on September 17, 2020 (See Note 10). Upon investigation, the bank had discovered that it had not re-set its system2.2% and had been undercharging the company interest since the inception of the September 17, 2020 amendment. The Bank has since corrected the issue and will bill the company retroactively for the interest not charged during the six month period ending December 31, 2020.3.5% 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 ~~December~~March 31, ~~2020,~~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 our disclosure controls and procedures as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended ~~December~~March 31, ~~2020~~2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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. Starrett~~the 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 ~~NYSE~~Company that ~~it intends~~L.S. Starrett is now considered a company back in compliance in relation to ~~submit~~the NYSE's quantitative continued listing standards. This decision comes as a ~~plan to cure this deficiency and return to~~result of the Company’s achievement of compliance with the ~~NYSE~~NYSE’s minimum market capitalization and shareholders’ equity requirements over the past two quarters.

However, in accordance with the NYSE’s Listed Company Manual, the Company will be subject to a 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 ~~requirements. In order to avoid delisting under Section 802.01B,~~standards. If within 12 months of this letter the Company ~~had 45 days from the receipt~~is again determined to be below any of the ~~Notice to submit a business plan advising~~continued listing standards, the NYSE will gain an understanding of ~~definitive actions~~the reason(s) for falling below such standards, which may include a re-evaluation of the Company’s originally reviewed method of financial recovery. The NYSE will then take the appropriate action, which, depending on circumstances, may include truncating the compliance procedures described in the NYSE Listed Company Manual or beginning the initiation of NYSE trading suspension procedures. The Company will, of course, be subject to the NYSE’s normal continued listing monitoring.

As the Company ~~has taken, or proposes to take, that would bring it into~~is now back in compliance, the (“.BC”) indicator will no longer be transmitted beginning with the ~~market capitalization~~opening of trading on March 5, 2021. Additionally, the Company will no longer be noted as being below continued listing standards on ~~or before April 1, 2022 (the “Cure Period”). The Company has prepared and submitted a plan on November 10, 2020, at which time stockholder's equity had already exceeded~~ the $50m minimum threshold with the quarter ending September 30, 2020. The plan was officially accepted by the NYSE as confirmed in a letter addressed to the Company dated December 23, 2020. Subsequent to the plan submission and acceptance by the NYSE, the company has posted a second consecutive quarter with Owners' Equity in excess of $50 million with the filing of this report for the quarter ending December 31, 2020. In accordance with NYSE listing standards, the company has regained full compliance. The NYSE has indicated that it will review the current quarterly report, and once it has deemed the company to be fully compliant, it will issue the Company a cure letter, remove the company from the list of non-compliant issuers, and remove the ".BC" appendage from the stock ticker.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, on~~On 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 continuing to investigate the incident, together with legal counsel and other incident response professionals. Although minimal data may have been compromised, current data mining exercises will determine if any sensitive data had been accessed in that breach We do not believe ~~that~~ we ~~have~~ experienced any material losses related to the ~~ransomware~~ransom ware attack and ~~were able~~although we continually attempt to ~~recover all material data. Most systems have been restored to pre-attack capabilities, and~~improve upon our ~~major ERP system and associated financial and transactional data were never impacted by this breach.~~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.

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ITEM 6. EXHIBITS


31a			Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31b			Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

32			Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		THE L. S. STARRETT COMPANY (Registrant)


Date	~~February 5,~~May 7, 2021	/S/R. Douglas A. Starrett
		Douglas A. Starrett - President and CEO (Principal Executive Officer)

Date	~~February 5,~~May 7, 2021	/S/R. John C. Tripp
		John C. Tripp - Treasurer and CFO (Principal Accounting Officer)

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