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

March 31, 20152016

OR

 

OR

☐

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

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 (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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). 

YES ☒     NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check One):

YES ☒     NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check One):

Large Accelerated Filer ☐    Accelerated Filer ☒    Non-Accelerated Filer ☐    Smaller Reporting Company ☐

 

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

 

April 30, 201521, 2016

  

  

 

  

Class A Common Shares

 

6,220,5396,242,838

  

  

 

  

Class B Common Shares

 

774,146771,825

  

 

 

 

 THE L. S. STARRETT COMPANY

 

CONTENTS

 

Page No.

Part I.

Financial Information

Part I.

Financial Information:

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets – March 31, 20152016 (unaudited) and June 30, 20142015

3

 

 

 

 

Consolidated Statements of Operations – three and nine months ended March 31, 20152016 and March 31, 20142015 (unaudited)

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) – three and nine months ended March 31, 20152016 and March 31, 20142015 (unaudited)

5

 

 

 

 

Consolidated Statements of Stockholders' Equity – nine months ended March 31, 20152016 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows - nine months ended March 31, 20152016 and March 31, 20142015 (unaudited)

7

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

8-12

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

13-1512-15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

15

 

 

 

Item 4.

Controls and Procedures

15

    
Part II.Other Information: 
    
 Item 1A.Risk Factors16
    
 Item 6.Exhibits16

SIGNATURES17

  

 

 

PART I.                      FINANCIAL INFORMATION

FINANCIAL INFORMATION

ITEM 1.                      FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

 

THE L. S. STARRETT COMPANY

Consolidated Balance Sheets

(in thousands except share data)

 

March 31,

2015

(unaudited)

  

June 30,

2014

  

March 31,

2016

(unaudited)

  

June 30,

2015

 
                

ASSETS

                

Current assets:

                

Cash

 $13,646  $16,233  $22,231  $11,108 

Short-term investments

  7,410   8,723   -   7,855 

Accounts receivable (less allowance for doubtful accounts of $603 and $704, respectively)

  31,016   43,712 

Accounts receivable (less allowance for doubtful accounts of $746 and $612, respectively)

  31,738   40,311 

Inventories

  66,219   65,582   57,663   63,003 

Current deferred income tax assets

  5,411   6,037   4,274   4,554 

Prepaid expenses and other current assets

  7,587   6,615   5,897   6,582 

Total current assets

  131,289   146,902   121,803   133,413 
                

Property, plant and equipment, net

  44,669   51,537   42,555   44,413 

Long-term income taxes receivable

  3,775   3,775 

Long-term deferred income tax assets, net of current portion

  15,407   16,537 

Income taxes receivable

  2,730   3,383 

Deferred income tax assets, net of current portion

  18,573   18,803 

Intangible assets, net

  7,249   7,760   6,647   7,125 

Goodwill

  3,034   3,034   3,034   3,034 

Other assets

  2,069   1,898   2,185   2,101 

Total assets

 $207,492  $231,443  $197,527  $212,272 
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

                

Current liabilities:

                

Notes payable and current maturities of long-term debt

 $1,570  $10,548  $1,531  $1,552 

Accounts payable

  10,183   9,980   10,415   9,471 

Accrued expenses

  6,225   8,516   5,347   7,011 

Accrued compensation

  5,093   6,642   4,022   5,565 

Total current liabilities

  23,071   35,686   21,315   23,599 
                

Long-term debt, net of current portion

  19,543   10,804   17,500   18,552 

Other income tax obligations

  5,444   3,013   4,615   4,607 

Deferred income tax liabilities

  1,822   2,037   1,441   1,548 

Postretirement benefit and pension obligations

  37,780   43,589   46,081   49,536 

Total liabilities

  87,660   95,129   90,952   97,842 
                

Stockholders' equity:

                

Class A Common stock $1 par (20,000,000 shares authorized; 6,215,042 outstanding at March 31, 2015 and 6,165,838 outstanding at June 30, 2014)

  6,215   6,166 

Class B Common stock $1 par (10,000,000 shares authorized; 776,488 outstanding at March 31, 2015 and 794,990 outstanding at June 30, 2014)

  776   795 

ClClass A Common stock $1 par (20,000,000 shares authorized; 6,236,900 outstanding at March 31, 2016 and 6,223,558 outstanding at June 30, 2015)

  6,237   6,224 

ClClass B Common stock $1 par (10,000,000 shares authorized; 772,500 outstanding at March 31, 2016 and 789,069 outstanding at June 30, 2015)

  773   789 

Additional paid-in capital

  54,581   54,063   55,020   54,869 

Retained earnings

  99,427   95,715   96,933   98,164 

Accumulated other comprehensive loss

  (41,167

)

  (20,425

)

  (52,388

)

  (45,616

)

Total stockholders' equity

  119,832   136,314   106,575   114,430 

Total liabilities and stockholders’ equity

 $207,492  $231,443  $197,527  $212,272 

 


 

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

  

9 Months Ended

  

3 Months Ended

  

9 Months Ended

 
 

3/31/2015

  

3/31/2014

  

3/31/2015

  

3/31/2014

  

3/31/2016

  

3/31/2015

  

3/31/2016

  

3/31/2015

 
                                

Net sales

 $56,116  $58,281  $180,109  $177,609  $50,329  $56,116  $155,038  $180,109 

Cost of goods sold

  37,422   39,022   120,108   120,196   35,596   37,422   108,454   120,108 

Gross margin

  18,694   19,259   60,001   57,413   14,733   18,694   46,584   60,001 

% of Net sales

  33.3

%

  33.0

%

  33.3

%

  32.3

%

  29.3

%

  33.3

%

  30.0

%

  33.3

%

                                
                                

Selling, general and administrative expenses

  15,574   16,342   52,112   51,332   13,819   15,574   44,288   52,112 
                                

Operating income

  3,120   2,917   7,889   6,081   914   3,120   2,296   7,889 
                                

Other income (expense)

  388   (250

)

  1,683   372 

Other income

  285   388   377   1,683 
                                

Income before income taxes

  3,508   2,667   9,572   6,453   1,199   3,508   2,673   9,572 
                                

Income tax expense

  1,071   985   3,765   2,773   602   1,071   1,796   3,765 
                                

Net income

 $2,437  $1,682  $5,807  $3,680  $597  $2,437  $877  $5,807 
                                
                                
                

Basic and diluted income per share

 $0.35  $0.24  $0.83  $0.53 

Basic income per share

 $.09  $0.35  $.13  $0.83 

Diluted income per share

 $.08  $0.35  $.12  $0.83 
                                

Weighted average outstanding shares used in per share calculations:

                                

Basic

  6,992   6,940   6,977   6,919   7,013   6,992   7,016   6,977 

Diluted

  7,045   6,996   7,024   6,964   7,031   7,045   7,045   7,024 
                                
                                
                                

Dividends per share

 $0.10  $0.10  $0.30  $0.30  $0.10  $0.10  $0.30  $0.30 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

THE L. S. STARRETT COMPANY

Consolidated Statements of Comprehensive Income (Loss)

 (in thousands) (unaudited)

 

 

3 Months Ended

 

 

9 Months Ended

 

 

3 Months Ended

  

9 Months Ended

 

 

3/31/2015

 

 

3/31/2014

 

 

3/31/2015

 

 

3/31/2014

 

 

3/31/2016

  

3/31/2015

  

3/31/2016

  

3/31/2015

 

 

 

 

 

 

 

 

 

 

 

 

 

                

Net income

 

$

2,437

 

 

$

1,682

 

 

$

5,807

 

 

$

3,680

 

 $597  $2,437  $877  $5,807 

Other comprehensive income (loss):

 

 

  

 

 

 

 

 

 

  

 

 

 

 

                

Translation gain (loss)

 

 

(8,952

)

 

 

1,868

 

 

 

(20,720

)

 

 

923

   2,906   (8,952

)

  (6,772

)

  (20,720

)

Pension and postretirement plans, net of tax of$0,$0,$22 and $0 respectively

 

 

-

 

 

 

(14

)

 

 

(22

)

 

 

(44

)

Pension and postretirement plans, net of tax of $0,$0,$0 and $22 respectively

  -   -   -   (22

)

Other comprehensive income (loss)

 

 

(8,952

)

 

 

1,854

 

 

 

(20,742

)

 

 

879

   2,906   (8,952

)

  (6,772

)

  (20,742

)

 

 

  

 

 

 

 

 

 

  

 

 

 

 

                

Total comprehensive income (loss)

 

$

(6,515

)

 

$

3,536

 

 

$

(14,935

)

 

$

4,559

  $3,503  $(6,515

)

 $(5,895

)

 $(14,935

)

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

THE L. S. STARRETT COMPANY

Consolidated Statements of Stockholders' Equity

For the Nine Months Ended March 31, 20152016

(in thousands except per share data) (unaudited)

 

 

Common Stock

Outstanding

  

Addi-

tional

Paid-in

  

Retained

  

Accumulated

Other Com-prehensive

      

Common Stock

Outstanding

  

Addi-

tional

Paid-in

  

Retained

  

Accumulated

Other Com-prehensive

     
 

Class A

  

Class B

  

Capital

  

Earnings

  

Loss

  

Total

  

Class A

  

Class B

  

Capital

  

Earnings

  

Loss

  

Total

 

Balance June 30, 2014

 $6,166  $795  $54,063  $95,715  $(20,425

)

 $136,314 

Balance June 30, 2015

 $6,224  $789  $54,869  $98,164  $(45,616

)

 $114,430 

Total comprehensive income (loss)

              5,807   (20,742

)

  (14,935

)

  -   -   -   877   (6,772

)

  (5,895

)

Dividends ($0.30 per share)

              (2,095

)

      (2,095

)

  -   -   -   (2,108

)

  -   (2,108

)

Repurchase of shares

  (1

)

  (3

)

  (60

)

          (64

)

  (37

)

  (3

)

  (406

)

  -   -   (446

)

Issuance of stock under 1984 ESOP

  12       184           196 

Issuance of stock under Long Term Incentive Plan

  3       49           52 

Issuance of stock under ESPP

      14   111           125 

Issuance of stock for length of service awards

  5       71           76 

Issuance of stock

  28   9   397   -   -   434 

Stock-based compensation

          163           163   -   -   160   -   -   160 

Conversion of class B to class A

  30   (30

)

              - 

Balance March 31, 2015

 $6,215  $776  $54,581  $99,427  $(41,167

)

 $119,832 

Conversion

  22   (22

)

  -   -   -   - 

Balance March 31, 2016

 $6,237  $773  $55,020  $96,933  $(52,388

)

 $106,575 
                                                

Accumulated balance consists of:

                                                

Translation loss

                 $(39,031

)

                     $(44,072

)

  �� 

Pension and postretirement plans, net of taxes

                  (2,136

)

                      (8,316

)

    
                 $(41,167

)

                     $(52,388

)

    

 


See Notes to Unaudited Consolidated Financial Statements

 

 

   

THE L. S. STARRETT COMPANY

Consolidated Statements of Cash Flows

(in thousands of dollars) (unaudited)

 

 

9 Months Ended

  

9 Months Ended

 
 

3/31/2015

  

3/31/2014

  

3/31/2016

  

3/31/2015

 
                

Cash flows from operating activities:

                

Net income

 $5,807  $3,680  $877  $5,807 

Non-cash operating activities:

                

Depreciation

  5,817   6,093   4,385   5,817 

Amortization

  951   873   1,036   951 

Stock-based compensation

  163   105   315   287 

Stock based compensation - length of service awards

  76   59 

Stock based compensation - Long-Term Incentive Plan

  48   39 

Net long-term tax obligations

  2,893   -   627   2,893 

Deferred taxes

  821   1,221   57   821 

Unrealized transaction gain

  (2

)

  (4

)

  66   (2

)

Income on equity method investment

  (170

)

  (196

)

  (89

)

  (170

)

Working capital changes:

                

Accounts receivable

  5,669   4,447   4,744   5,669 

Inventories

  (10,607

)

  (8,801

)

  1,425   (10,607

)

Other current assets

  (2,150

)

  (15

)

  190   (1,399

)

Other current liabilities

  499   (238

)

  441   499 

Postretirement benefit and pension obligations

  (4,184

)

  1,338   (2,481

)

  (4,184

)

Other

  791   (525

)

  60   480 

Net cash provided by operating activities

  6,422   8,076   11,653   6,862 
                

Cash flows from investing activities:

                

Additions to property, plant and equipment

  (4,048

)

  (6,258

)

  (4,048

)

  (4,048

)

Software development

  (557

)

  (440

)

Purchase of investments

  (45

)

  (79

)

  -   (45

)

Proceeds from sale of investments

  201   -   7,621   201 

Net cash used in investing activities

  (3,892

)

  (6,337

)

Net cash provided by (used in) investing activities

  3,016   (4,332

)

                

Cash flows from financing activities:

                

Proceeds from short-term borrowings

  922   (26

)

  -   922 

Short-term debt repayments

  -   500 

Proceeds from long-term borrowings

  750   - 

Long-term debt repayments

  (1,159

)

  (4,150

)

  (1,822

)

  (1,159

)

Proceeds from common stock issued

  325   337   280   325 

Shares repurchased

  (64

)

  -   (446

)

  (64

)

Dividends paid

  (2,095

)

  (2,078

)

  (2,108

)

  (2,095

)

Net cash used in financing activities

  (2,071

)

  (5,417

)

  (3,346

)

  (2,071

)

                

Effect of exchange rate changes on cash

  (3,046

)

  24   (200

)

  (3,046

)

                

Net decrease in cash

  (2,587

)

  (3,654

)

Net increase (decrease) in cash

  11,123   (2,587

)

Cash, beginning of period

  16,233   19,755   11,108   16,233 

Cash, end of period

 $13,646  $16,101  $22,231  $13,646 
                

Supplemental cash flow information:

                

Interest paid

 $547  $627  $487  $547 

Income taxes paid, net

  1,238   2,727   732   1,238 
        

Supplemental disclosure of non-cash activities:

        

Issuance of stock under 2013 ESOP

 $-  $773 

 

 

See Notes to Unaudited Consolidated Financial Statements

 

 

 

THE L. S. STARRETT COMPANY

Notes to Unaudited Consolidated Financial Statements

March 31, 20152016

 

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

Basis of Presentation and Summary of Significant Account Policies

 

The balance sheet as of June 30, 2014,2015, which has been derived from audited financial statements, and the unaudited interim financial statements as of and for the three and nine months ended March 31, 2016 and March 31, 2015, 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 reporting.  Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements.  These unaudited 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 financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2014.2015.  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 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, 20142015 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.

 

Note 2:Recent Accounting Pronouncements

Recent Accounting Pronouncements

 

In May 2014, the FASB issued a new standard related to the “Revenue from Contracts with Customers” which amends the existing accounting standards for revenue recognition. The standard requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. This standard is applicable for fiscal years beginning after December 15, 2017 and for interim periods within those years and early adoption is not permitted.years. Earlier application will be permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company expects to adopt this standard on July 1, 2018. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

 

Accounting Standards Update 2013-11,Income Taxes: Presentation(ASU) 2015-11, "Inventory - Simplifying the Measurement of an Unrecognized Tax Benefit WhenInventory" requires companies to measure most inventory at the lower of cost or net realizable value, thereby simplifying the current guidance under which a Net Operating Loss Carryforward,company must measure inventory at the lower of cost or market. This Update eliminates the need to determine replacement cost and evaluate whether said cost is within a Similar Tax Loss, orquantitative range. This Update also further aligns U.S. GAAP and international accounting standards. For public companies, the guidance in ASU 2015-11 is effective for annual periods beginning after December 15, 2016, and interim periods thereafter. Early adoption is permitted. Management does not expect ASU 2015-11 to have a Tax Credit Carryforward Existswas approved bymaterial impact on the FASB in July 2013Company's financial statements and disclosures.

Accounting Standards Update 2015-17, “Balance Sheet Classification of Deferred Taxes” requires that companies report their tax reserves net of the impact of tax loss and credit carryforwardsclassify all deferred taxes as non-current assets or liabilities. This change is applicable for fiscal years beginning after December 15, 2013. The Company has implemented this pronouncement in the first quarter of fiscal 2015 with retrospective application as permitted by the standard. Amounts presented2016 and for priorinterim periods have been reclassified to conform.within those years. There is no effect onimpact to earnings as a result of this change; however, current assets will be reduced by the amount of the current deferred tax expenseasset as that amount will be included with the long term deferred tax asset upon adoption of this ASU.

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842). The amendments in this update will increase the transparency and net income. There is a reduction in Deferred Tax Assets of $7.9 millioncomparability among organizations by recognizing lease assets and a reduction in Other Tax Obligations of $7.9Mlease liabilities on the June 30, 2014 Consolidated Balance Sheet.balance sheet and disclosing key information about leasing arrangements. This amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effect, if any, on its financial statements.

 

 

Note 3:  Stock-based Compensation

 Stock-based Compensation

 

On September 5, 2012, the Board of Directors adopted TheL.S.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. 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 March 31, 2015,2016, there were 20,000 stock options and 42,23373,367 restricted stock units outstanding. In addition, there were 431,800391,600 shares available for grant under the 2012 Stock Plan as of March 31, 2015.2016.

 

For the stock option grantgrants the fair value of each grant wasis 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 (Short-cut method)(Simplified Method).

 


 

The fair value ofNo stock options issuedwere granted during the 9nine months ended March 31, 2015 of $3.82 was estimated using the following assumptions:2016 and 2015.

Risk-free interest rate

1.0

%

Expected life (years)

6.0

Expected stock volatility

52.3

%

Expected dividend yield

4.0

%

 

The weighted average contractual term for stock options outstanding as of MarchofMarch 31, 20152016 was 7.756.75 years.  The aggregate intrinsic value of stock options outstanding as of MarchofMarch 31, 20152016 was $0.1 million. Stock options exercisable as of MarchofMarch 31, 20152016 were 13,167.20,000.

 

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 39,50040,200 RSU awards issuedwith a fair value of $15.11 per RSU granted during the nine months ended March 31, 2015.2016. There were 2,7339,067 RSUs vestedsettled during the nine months ended March 31, 2015.2016.  The aggregate intrinsic value of RSU awards outstanding as of March 31, 20152016 was $0.8 million.  RSU awards granted and vested asAs of March 31, 2015 were 5,466.2016 all vested awards had 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. 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 nine month periodperiods ended March 31, 2016 and 2015 and March 31, 2014 was $0.2$0.3 million and $0.1$0.2 million, respectively.  As of March 31, 2015,2016, there was $0.7$1.1 million of total unrecognized compensation costs related to outstanding stock-based compensation arrangements. Of this cost $0.3$0.7 million relates to performance based RSU grants that are not expected to be awarded. The remaining $0.4 million is expected to be recognized over a weighted average period of 2.3 years and $0.4 million relates to performance based RSU awards that are not expected to vest.2.0 years.

 

Note 4:   Inventories

  Inventories

 

Inventories consist of the following (in thousands):

 

 

3/31/2016

  

6/30/2015

 
 

3/31/2015

(Unaudited)

  

6/30/2014

  

(Unaudited)

     

Raw material and supplies

 $33,813  $31,303  $30,632  $32,784 

Goods in process and finished parts

  19,378   19,148   16,493   18,569 

Finished goods

  40,542   42,459   38,885   39,689 
  93,733   92,910   86,010   91,042 

LIFO Reserve

  (27,514

)

  (27,328

)

  (28,347)  (28,039

)

Inventories

 $66,219  $65,582  $57,663  $63,003 

 

LIFO inventories were $16.3$10.7 million and $14.1$14.6 million at March 31, 2015and2016 and June 30, 2014,2015, respectively, orsuch amounts being approximately $27.5$28.3 million and $ 27.3$28.0 million, respectively, less than their balances accounted forif determined on a FIFO basis.  The use of LIFO, as compared to FIFO, resulted in a $0.2$0.3 million increase in cost of sales for the nine months ended March 31, 2015compared2016 compared to a $1.4$0.2 million decreaseincrease for the nine months ended March 31, 2014.2015.

 


Note 5:   Goodwill and Intangible Assets

  Goodwill and Intangible Assets

 

Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to identifiable tangible and intangible assets acquired less liabilities assumed. The Company’s acquisition of Bytewise in 2011 gave rise to goodwill.a goodwill asset balance. The Company performs an impairmentperformed a qualitative analysis in accordance with ASU 2011-08 for its October 1, 2015 annual assessment on an annual basisof goodwill (commonly referred to as of“Step Zero”). From a qualitative perspective, in evaluating whether it is more likely than not that the end of our October month end or more frequently if circumstances warrant. For fiscal year 2015, our impairment assessment was a two-step process. The first step requires a comparison of the implied fair value of the reporting unit exceeds its respective carrying amount, relevant events and circumstances were taken into account, with greater weight assigned to its carrying value. Ifevents and circumstances that most affect the fair value or the carrying amounts of its assets. Items that were considered included, but were not limited to, the following: macroeconomic conditions, industry and market conditions, cost factors, overall financial performance and changes in management or key personnel. After assessing these and other factors the Company determined that it was more likely than not that the fair value of the reporting unit is higher thanexceeded its fair value, there is an indication that impairment may exist and the second step of the evaluation must be performed. In the second step, the potential impairment is calculated by comparing the implied fair value of the reporting unit’s goodwill with the carrying value of the goodwill. If the carrying value of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment loss will be recognized for the excess.


Determining the fair value of a reporting unit is subjective and requires the use of significant estimates and assumptions. With the assistance of an independent third-party appraisal firm, the Company estimates the fair value using an income approach based on the present value of future cash flows. The Company believes this approach yields the most appropriate evidence of fair value. The Company also utilizes the comparable company multiples method and market transaction fair value method to validate the fair value amount it obtains using the income approach. The key assumptions utilized in the discounted cash flow model includes estimates of future cash flows from operating activities offset by estimated capital expenditures of the reporting unit, the estimated terminal value for the reporting unit, a discount rate based on a weighted average cost of capital, overall economic conditions, and an assessment of current market capitalization. Any unfavorable material changes to these key assumptions could potentially impact the Company’s fair value determinations.

The fair value of the 2015 goodwill assessment exceeded the carrying amount by approximately 37%. Therefore no goodwill impairment was recorded. If future results significantly vary from current estimates, related projections, or business assumptions in the future due to changes in industry or market conditions, the Company may be required to record impairment charges.as of October 1, 2015.

 

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

 

 

3/31/2016

  

6/30/2015

 
 

3/31/2015

(Unaudited)

  

6/30/2014

  

(Unaudited)

     

Non-compete agreement

 $600  $600  $600  $600 

Trademarks and trade names

  1,480   1,480   1,480   1,480 

Completed technology

  2,358   2,358   2,358   2,358 

Customer relationships

  4,950   4,950   4,950   4,950 

Software development

  1,447   1,007   2,213   1,655 

Other intangible assets

  325   325   325   325 

Total

  11,160   10,720   11,926   11,368 

Accumulated amortization

  (3,911

)

  (2,960

)

  (5,279

)

  (4,243

)

Total net balance

 $7,249  $7,760  $6,647  $7,125 

 

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 are 14 years for trademarks and trade names, 8 years for non-compete agreements, 10 years for completed technology,  8 years for customer relationships and 5 years for software development.

 

The estimated aggregate amortization expense for the remainder of fiscal 20152016 and for each of the next five years and thereafter, is as follows (in thousands):

 

2015 (Remainder of year)

 

$

348

 

2016

 

 

1,392

 

2016 (Remainder of year)

 $386 

2017

 

 

1,390

 

  1,543 

2018

 

 

1,322

 

  1,475 

2019

 

 

1,243

 

  1,397 

2020

 

704

   873 

2021

  430 

Thereafter

 

 

850

 

  543 

 

Note 6:  Pension and Post-retirement Benefits

Pension and Post-retirement Benefits

 

Net periodic benefit costs for the Company's defined benefit pension plans consist of the following (in thousands):

 

 

 

Three Months Ended

  

Nine Months Ended

  

Three Months Ended

  

Nine Months Ended

 
 

3/31/2015

(Unaudited)

  

3/31/2014

  

3/31/2015

(Unaudited)

  

3/31/2014

  

3/31/2016

(Unaudited)

  

3/31/2015

(Unaudited)

  

3/31/2016

(Unaudited)

  

3/31/2015

(Unaudited)

 

Service cost

 $694  $716  $2,081  $2,139  $714  $694  $2,143  $2,081 

Interest cost

  1,673   1,746   5,085   5,197   1,732   1,673   5,259   5,085 

Expected return on plan assets

  (1,724

)

  (1,589

)

  (5,236

)

  (4,732

)

  (1,560

)

  (1,724

)

  (4,739

)

  (5,236

)

Amortization of prior service cost

  -   29   -   87 

Amortization of net gain

  7   2   23   8 

Amortization of net loss

  13   7   39   23 
 $650  $904  $1,953  $2,699  $899  $650  $2,702  $1,953 

 

 

 

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

 

 

Three Months Ended

  

Nine months Ended

  

Three Months Ended

  

Nine Months Ended

 
 

3/31/2015

(Unaudited)

  

3/31/2014

  

3/31/2015

(Unaudited)

  

3/31/2014

  

3/31/2016

(Unaudited)

  

3/31/2015

(Unaudited)

  

3/31/2016

(Unaudited)

  

3/31/2015

(Unaudited)

 

Service cost

 $29  $25  $85  $202  $26  $29  $79  $85 

Interest cost

  61   66   183   331   71   61   215   183 

Amortization of prior service credit

  (200

)

  (260

)

  (599

)

  (511

)

  (195

)

  (200

)

  (586

)

  (599

)

Amortization of accumulated loss

  -   (1

)

  -   (1

)

Amortization of net loss

  4   -   11   - 
 $(110

)

 $(170

)

 $(331

)

 $21  $(94

)

 $(110

)

 $(281

)

 $(331

)

  

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, which is the same as the fiscal year end of the Company. Net actuarial gains or losses that are less than 10% of the thresholds noted above are accounted for as part of the accumulated other comprehensive income (loss).loss.

 

Effective DecemberMarch 31, 2013,2015, the Company terminated the eligibility of employees ages 55 -64- 64 years old to enter into the PostretirementPost-retirement Medical Plan.

 

Note 7:   Debt

  Debt

 

Debt, including capitalized lease obligations, is comprised of the following (in thousands):

 

 

3/31/2015

(Unaudited)

  

6/30/2014

  

3/31/2016

(Unaudited)

  

6/30/2015

 

Notes payable and current maturities of long term debt

                

Loan and Security Agreement

 $1,457  $10,410  $1,525  $1,474 

Capitalized leases

  113   138   6   78 
  1,570   10,548   1,531   1,552 

Long-term debt

                

Loan and Security Agreement

  19,543   10,726   17,500   18,552 

Capitalized leases

  -   78 
  19,543   10,804  $19,031  $20,104 
 $21,113  $21,352 

 

The Company executed an amendment toamended its Loan and Security Agreement, (Linewhich includes a Line of Credit) as ofCredit and a Term Loan, in January 2015 with changes that took effect on April 25, 2012.  On January 26, 20152015.  Borrowings under the Line of Credit was further amended and extended based on the current debt limits and financial covenants and will expiremay not exceed $23.0 million.  The agreement expires on April 30, 2018. As a result of this three year extension, all Line of Credit balances have been classified as long-term.  The agreement continued the previous line of $23.0 million, of which $12.3 million is available as of March 31, 2015, with2018 and has an interest rate of LIBOR plus 1.5%. 

As of March 31, 20152016, $9.4 million was outstanding on the materialLine of Credit.

The financial covenants of the amended Loan and Security Agreement were:are: 1) funded debt to EBITDA, excluding non-cash and retirement benefit expenses (“maximum leverage”), not to exceed 2.25 to 1,1.0 2) annual capital expenditures not to exceed $15.0 million, 3) maintain a Debt Service Coverage Rate of a minimum of 1.25 to 11.0 and 4) maintain consolidated cash plus liquid investments of not less than $10.0 million at any time.  The Company was in compliance with all debt covenants as of March 31, 2015.

The effective interest rate on the Line of Credit under the Loan and Security Agreement for the nine months ended March 31, 2015 and 2014 was 2.0% and 2.0%, respectively.2016.

 

On November 22, 2011, in conjunction with the Bytewise acquisition, the Company entered into a $15.5 million term loan (the “Term Loan”) under the existing Loan and Security Agreement with TD Bank N.A.  The term loanTerm Loan is a ten year loan bearing a fixed interest rate of 4.5% and is payable in fixed monthly payments of principal and interest of $160,640.  The term loan,Term Loan, which had a balance of $11.1$9.6 million at March 31, 2015,2016, is subject to the same financial covenants ascontained in the Loan and Security Agreement.

The effective interest rate on the Line of Credit under the Loan and Security Agreement for the nine months ended March 31, 2016 and 2015 was 2.2% and 2.0%, respectively.

 

 

 

Note 8:   Income Taxes

  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.

 

The effective tax rate for the third quarter of fiscal 20152016 was 30.5%. The50.2% and the effective tax rate for the third quarter of fiscal 20142015 was 36.9%30.5%. For the first nine months of fiscal 2015,2016, the effective tax rate was 39.3%67.2% and for the first nine months of fiscal 2014,2015, it was 43.0%39.3%. The tax rate is higher than the U.S. statutory rate for the year to date results in part due to losses in some foreign jurisdictions for which no tax benefit is recognized. In the third quarter of fiscal 2016, there was a benefit of $140,000 to reflect the reversal of the valuation allowance to recognize the benefit of foreign subsidiary tax loss carryforwards. In the first nine months of fiscal 2016, there were additional discrete reductions of tax expense of $216,000 for tax return to provision adjustments. In addition, there were discrete increases of $70,000 for interest on audit exposures. In the first nine months of fiscal 2015, there were discrete reductions to tax expense of $66,000 related to use of tax loss carryforwards, $42,000 for reduction in audit exposure due to the expiration of the statute of limitations and $332,000 related to return to provision adjustment and other tax reconciliations;adjustments; the return to provision adjustmentlast item was fully booked in the third quarter which is the primary reason for the tax rate in this quarter being lower than the U.S. statutory rate. In the first nine months of fiscal 2014 there was a discrete tax expense of $278,000 for the effect of a tax rate change in the UK applied to the net deferred tax assets in that jurisdiction and discrete tax benefits of $67,000 related to use of tax loss carryforwards and $109,000 related to return to provision adjustments.

 

U.S. Federal tax returns through fiscal 20112012 are generally no longer subject to review by tax authorities; however, tax loss carryforwards from years before fiscal 20122013 are still subject to adjustment. As of March 31, 2015,2016, 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 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 years 20092010 – 2014.2015. The Company has identified no new uncertain tax positions during the nine month period ended March 31, 20152016 for which it is currently likely that the total amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

 

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 deferred 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 domestic federal net operating loss (NOL) carry forwards. The Company continues to believe that due to forecasted future taxable income and certain tax planning strategies available, it is more likely than not that it will be able to utilize the U.S. federal NOL carryforwards. In certain other countries where Company operations are in a loss position, the deferred tax assets for tax loss carryforwards and other temporary differences are fully offset by a valuation allowance.

 

Note 9:  Contingencies

 Contingencies

 

The Company is involved in certain legal matters which arise in the normal course of business. These matters are not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.

 


 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

RESULTS OF OPERATIONS

 

Three Monthsmonths EndedMarch 31, 20152016 andMarch 31, 20142015

 

Overview

The Company experienced improved bottom line results duringoperates as a global business and is impacted by worldwide economic, political and industrial shifts. A slowdown in the quartermanufacturing sector coupled with a retrenchment in a challenging sales environment; with gains in operating income and income before tax of 7% and 31%.respectively. Moderate sales growththe oil patch negatively impacted revenue in North America, helped counteract a slowdownwhile the international markets continue to be stagnant in economic activityEurope, recessionary in China coupled with unfavorable economicLatin America and political issuessoftening in Brazil. TheChina. In addition, the strong USU. S. dollar resulted in international operations lagging prior sales performance.has negatively impacted demand for domestic products and reduced foreign subsidiary’s contribution to consolidated sales.

 

Net sales decreased $2.2$5.8 million or 4.0%10% from $58.3 million in fiscal 2014 to $56.1 million in fiscal 2015 as growthto $50.3 million in our capital equipment sectors in North America was offset byfiscal 2016 with International foreign currency losses caused by a strong dollar Fiscal 2015 operatingaccounting for $4.3 million or 75% of the shortfall. Operating income increased $0.2declined $2.2 million versus a strong fiscal 2014 quarter as a $0.5due to $4.0 million declineerosion in gross margin wasmore than offset by $0.7a $1.8 million decrease in selling, general and administrative savings.expenses.


 

Net Sales

North American sales increased $0.8decreased $1.5 million or 3%4% from $33.2 million in fiscal 2014 to $34.0 million in fiscal 2015 due to $32.5 million in fiscal 2016 as a 19% sales gainweakening in manufacturing activity resulted in reduced demand for precision hand tool and saw products more than offsetting continued gains in capital equipment metrology products.

 

International sales declined $3.0$4.3 million or 12%19% from $25.1 million in fiscal 2014 to $22.1 million in fiscal 2015 to $17.8 million in fiscal 2016 as a sales gainrecession in Brazil; an economic slowdown in China; the unfavorable pricing impact of 13.5%a strong dollar; and $3.3 million in Brazilian Reals was negated by a $3.4 effect of fluctuation in exchange rates.currency losses all contributed to difficult trading overseas.

 

Gross Margin

Gross margin declined $0.5decreased $4.0 million or 3% but remained level at21% from 33% of sales in both years.fiscal 2015 to 29% of sales in fiscal 2016 with the profit impact of lower revenues and margin decline representing $1.9 million and $2.1 million, respectively.

 

North American gross margins increased $1.1decreased $2.7 million from $11.0$12.1 million or 36% of sales in fiscal 20142015 to $12.1$9.4 million or 29% of sales in fiscal 2015. Improved efficiencies in manufacturing2016. The reduced gross margins were the prime factor contributing toresult of a revenue decline in precision hand tool and saw product lines without a comparable reduction in overhead costs more than offsetting gains in the bettercapital equipment gross margin performance.margins.

 

International gross margins declined $1.6 principally due$1.3 million from $6.6 million in fiscal 2015 to the impact of a weaker Brazilian Real.$5.3 million in fiscal 2016 with volume declines and unfavorable exchange rates impacting Brazil performance by $0.4 and $0.8 million, respectively

 

Selling, General &and Administrative Expenses

Selling, general and administrative expenses declined $0.7decreased $1.8 million or 4% primarily due12% from 15.6 million in fiscal 2015 to lower salaries and benefits of $0.6$13.8 million and reduced and marketing expenses of $0.1 million.in fiscal 2016.

 

North American expenses decreased $0.3$0.2 million from $8.7 million in fiscal 2014 to $8.4 million in fiscal 2015 to $8.2 million in fiscal 2016 as a result of lowerreduced salaries and incentive expense.compensation more than offset higher employee benefits, professional fees and marketing expenses.

 

International expenses declined $0.4$1.6 million primarily related to loweror 22% as the strong dollar resulted in a $0.8 million decrease in Brazilian expenses expressed in U. S. dollars.dollars as the Brazilian currency declined 24% in the quarter versus the prior year. In addition to currency differences, Brazil reduced salaries, employee benefits, and professional fees $0.7 million in constant exchanges rates.

 

Other Income (expense)

Other income increased $0.6declined $0.1 million due to reduced interest income of $0.4 millionas foreign exchange and interest expense remained level in fiscal 2015 compared to an expense of $0.2 million in fiscal 2014 as the stronger U. S. dollar resulted in foreign subsidiaries dollar denominated assets, primarily accounts receivable related to export sales, translated to higher balances in local currency.both periods

 

Income Tax ExpenseTaxes

The effective tax ratesrate for the third quarter of fiscal 2016 and 2015 was 50% and 2014 were 30.5% and 36.9%31%, respectively. The quarterly tax rate is increased in both years due to losses in some foreign subsidiaries for which no tax benefit is recognized. The tax rate forwas reduced by discrete benefits of $0.1 million in fiscal 2016 and $0.3 million in fiscal 2015.

Net Income

The Company recorded net income of $0.6 million or $0.08 per diluted share in the third quarter of fiscal 2015 is lower than the statutory rate in large part due2016 compared to a higher adjustment for the differences between the tax return and the provision of $332,000 in fiscal 2015 and $109,000 in fiscal 2014.

Net Income

The Company recorded net income of $2.4 million or $0.35 per share in the third quarter of fiscal 2015 compared to a net income of $1.7 million or $0.24 per share in fiscal 2014 principally due to reduced operating income and a higher effective tax rate.

Nine months ended March 31, 2016 andMarch 31, 2015

Overview

Net sales declined $25.1 million or 14% from $180.1 million in fiscal 2015 to $155.0 million in fiscal 2016 with North America and International posting declines of $4.3 and $20.8 million, respectively. Operating income decreased $5.6 million in fiscal 2016 from $7.9 million in fiscal 2015 to $2.3 million in fiscal 2016 as lower sales and related gross margins more than offset reduced selling, general and administrative expenses and increased other income.expenses.

 

 

 

Nine Months EndedMarch 31, 2015 andMarch 31, 2014Net Sales

 

Overview

Net sales increased $2.5 million from $177.6 million in fiscal 2014 to $180.1 million in fiscal 2015 despite a $6.9 foreign exchange reduction caused by the US dollar strengthening against both the Brazilian Real and the Canadian dollar by 9%. Operating income increased $1.8 million with a $7.9 million profit in fiscal 2015 compared to a $6.1 million profit in fiscal 2015 as a $2.6 million improvement in gross margin more than offset a $0.8 increase in selling, general and administrative expenses.

Net Sales

North American sales increased $7.8decreased $4.3 million or 8%4% from $95.7 million in fiscal 2014 to $103.5 million in fiscal 2015 led by a 7% gainto $99.2 million in fiscal 2016 as demand for all precision hand tools declined, particularly in the oil and continued growth in optical, vision and laser metrology capital equipment products.

agricultural sectors.

International sales declined $5.3$20.8 million or 6%27% from $81.9 million in fiscal 2014 to $76.6 million in fiscal 2015 to $55.8 million in fiscal 2016 with the weakening Brazilian Real accounting for $5.1unfavorable exchange rates representing $15.0 million. Brazilian salesThe impact of a recessionary economic environment was significant in Brazil as revenue declined 8% in local currency rose by 10%.currency.

 

Gross Margin

Gross margin increased $2.6decreased $13.4 million or 5% and improved22% from 32% of sales in fiscal 2014 to 33% of sales in fiscal 2015 primarily as a resultto 30% of improved marginssales in North America.fiscal 2016 with the profit impact of lower revenues and margin decline representing $8.4 and $5.0 million, respectively.

 

North American gross margins increaseddecreased $5.4 million or 16% in fiscal 2015 and improved from 31% of sales in 20142016 compared to 34% of sales infiscal 2015 as a result of improved efficienciesreduced precision hand tool and higher sales of high margin capital equipment products.saw product line revenues and increased costs.

 

International gross margins decreased $2.8declined $8.0 million principally due to the impact of a $1.7with weakening currencies representing $4.7 million. Excluding foreign exchange economic factors impacting margins, volume declines represented $1.5 and $1.1 million cost increase related to the weaker Brazilian Real.in Brazil and Europe, respectively.

 

Selling, General and Administrative Expenses

Selling, general and administrative expense increased $0.8decreased $7.8 million or 2%15% from $51.3 million in fiscal 2014 to $52.1 million in fiscal 2015 as higher travel and entertainment, Information Technology, professional fees and marketing expenses offset savingsto $44.3 million in employee salaries and benefits .fiscal 2016.

 

North American expenses increased $0.7decreased $2.4 million or 9% due to termination of profit sharing in November of 2014 related to the Bytewise acquisition; lower incentive compensation; reduced professional fees; and completion of software amortization in fiscal 2015 related to a new ERP system.

International expenses decreased $5.4 million or 22% due to a $4.9 foreign currency reduction for expenses expressed in U. S. dollars, primarily due to a weakening of the Brazilian Real relative to the U. S. dollar. In addition, reduced spending for salaries, employee benefits and commissions contributed a combined $0.6 million.

Other Income

Other income declined $1.3 million principally due to higher travellower interest income and entertainment, Information Technology, professional fees and marketing expenses offset by savings in employee salaries and benefits

International expensesthe devalued Chinese Yuan, which increased $0.1 million as higher professional fees and trade show expenses offset salary and benefit savings.our Chinese subsidiary’ U. S. dollar denominated liabilities.

 

Other income/(expense)Income Taxes

Other income increased $1.3 million to income of $1.7 million in fiscal 2015 compared to income of $0.4 million in fiscal 2014 as the stronger U. S. dollar resulted in foreign subsidiaries dollar denominated assets, primarily accounts receivable related to export sales, translated to higher balances in local currency.

Income Tax Expense

The effective tax ratesrate for the first nine months of fiscal 2016 and 2015 was 67% and 2014 were 39.3% and 43.0%39%, respectively. The tax rate is higher thanfor the U.S. statutory rate in both years in part due tofirst nine months ended March 31, 2016 and 2015 increased as a result of losses in some foreign jurisdictionssubsidiaries for which no tax benefit is recognized. was recognized and was reduced by net discrete benefits of $0.3 million in fiscal 2016 and $0.4 million in fiscal 2015.

 

Net Income

The Company recorded net income of $0.9 million or $0.12 per diluted share in the first three quarters of fiscal 2016 compared to net income of $5.8 million or $0.83 per share in fiscal 2015 compared to net income of $3.7 million or $0.53 per share in fiscal 2014 principally due to an increase gross margin offsetting higher selling, general and administrative expenses, higherlower operating income, reduced other income and a 3% reduction in thehigher effective tax rate.


 

LIQUIDITY AND CAPITAL RESOURCES

 

 

Cash flows (in thousands)

 

Nine months Ended

  

Nine Months Ended

 
 

3/31/2015

  

3/31/2014

  

3/31/2016

  

3/31/2015

 
                

Cash provided by operating activities

 $6,422  $8,076  $11,653  $6,862 

Cash used in investing activities

  (3,892

)

  (6,337

)

Cash provided by (used in) investing activities

  3,016   (4,332

)

Cash used in financing activities

  (2,071

)

  (5,417

)

  (3,346

)

  (2,071

)

Effect of exchange rate changes on cash

  (3,046

)

  24   (200

)

  (3,046

)

                

Net decrease in cash

 $(2,587

)

 $(3,654

)

Net increase (decrease) in cash

 $11,123  $(2,587

)

   


Net cash flow as of March 31, 2015 declined $2.6 million compared to June 30, 2014 as a $6.4 million contribution from operations was more than offset by disbursements for capital equipment, debt repayments, dividends and a write down on cash balances at international subsidiaries caused by the strengthening of the U.S. dollar.

 

Net cash flowfor the nine months ended March 31, 2016 increased $11.1 million from June 30, 2015 as improved working capital and the sale of investments of $6.8 and $7.6 million, respectively, offset by $4.0 in property, plant and equipment expenditures.

Net cash for the first three quarters of fiscal 2015nine months ended March 31, 2016 improved $1.1$13.7 million compared to the first three quarters of fiscal 2014 due principallynine months ended March 31, 2015 primarily due to lowerthe sale of investments of $7.6 million, improved working capital expenditures and a reduced debt repayments.impact of foreign currency exchange rates on cash balances.

 

 

Liquidity and Credit Arrangements

 

The Company believes it hasmaintains sufficient liquidity and has the resources to fund its operations.  In addition to its cash, and investments, the Company maintains a $23 million line of credit in connection with its Loan and Security Agreement, of which, $9.9$9.4 million was outstanding as of March 31, 2015.2016.  Availability under the agreement is further reduced by open letters of credit totaling $0.9 million. The Loan and Security Agreement was amended onrenewed in January 26, 2015 and matures in April 30 of 2018.2015.  The Loan and Security Agreement contains financial covenants with respect to leverage, tangible net worth, and interest coverage, and also contains customary affirmative and negative covenants, including limitations on indebtedness, liens, acquisitions, asset dispositions and fundamental corporate changes, and certain customary events of default.  As of March 31, 2015,2016, the Company was in compliance with all debt covenants related to its Loan and Security Agreement. The Loan and Security Agreement expires on April 30, 2018.

 

The effective interest rate on the short term borrowings under the Loan and Security Agreement during the nine months ended March 31, 2016 and 2015 was 2.2% and 2.0%. respectively.

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company has no off-balance sheet arrangements other than operating leases, that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

ITEM 3.             QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

There have been no material changes in quantitativequalitative and qualitativequantitative disclosures about market risk from what was reported in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014.2015.

ITEM 4.             CONTROLS AND PROCEDURES

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 March 31, 2015,2016, 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 March 31, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

 

Based on management’s evaluation of controls at our Bytewise subsidiary at June 30, 2014, management concluded that the Company did not design and maintain effective controls over revenue transactions and the information technology system at that subsidiary. Therefore, material weaknessesThere have been no changes in the design and operating effectiveness of the internal control over revenue transactions and the information technology system at Bytewise exist. As a result, management has concluded that the Company’s internal control over financial reporting was not effective as of June 30, 2014.

Management’s remediation ofthat materially affected, or are reasonably likely to materially affect, the material weaknesses that existed as of June 30, 2014, and which were noted in Item 9A ofCompany's internal control over financial reporting during the Company’s 2014 Annual Report on Form 10-K filed on September 10, 2014, is not complete as ofquarter ended March 31, 2015. Management visited Bytewise during the third quarter of fiscal 2015 and developed a remediation plan with Bytewise management. The plan was implemented during the third quarter and implementation is expected to be complete by the end of the fourth quarter.2016.

 

 

 

PART II.             OTHER INFORMATION

OTHER INFORMATION

ITEM 1A.          RISK FACTORS

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, 2014.2015. There have been no material changes from the factors disclosed in our Form 10-K for the year ended June 30, 2014.2015.

ITEM 6.

EXHIBITS

  

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.

 

10.1

The L.S. Starrett Company 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 4.2 to The L.S. Starrett Company’s Registration Statement on Form S-8 (File No. 333-184934) filed November 14, 2012).

 

101

The following materials from The L. S. Starrett Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 20152016 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 Unaudited Consolidated Financial Statements, tagged as blocks of text.

 

 

 

SIGNATURES

 

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

 

  

  

  

THE L. S. STARRETT COMPANY

(Registrant)

  

  

  

  

Date

May 4, 2015April 21, 2016

  

/S/R. Douglas A. Starrett

  

  

  

Douglas A. Starrett - President and CEO (Principal Executive Officer)

  

  

  

  

Date

May 4, 2015April 21, 2016

  

/S/R. Francis J. O’Brien

  

  

  

Francis J. O’Brien - Treasurer and CFO (Principal Accounting Officer)

 

 

 

17