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	~~September 30,~~December 31, 2019

OR

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

For the transition period from

Commission file number

1-367

THE L. S. STARRETT COMPANY

(Exact name of registrant as specified in its charter)

MASSACHUSETTS		04-1866480
(State or other jurisdiction of 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		~~October 25, 2019~~
	January 24, 2020
Class A Common Shares		~~6,273,368~~
	6,279,632
Class B Common Shares		~~678,272~~681,219

THE L. S. STARRETT COMPANY

CONTENTS

				Page No.

Part I.		Financial Information:

		Item 1.	Financial Statements

			Consolidated Balance Sheets – ~~September 30,~~December 31, 2019 (unaudited) and June 30, 2019	3

			Consolidated Statements of Operations – three and six months ended ~~September 30,~~December 31, 2019 and December 31, 2018 (unaudited)	4

			Consolidated Statements of Comprehensive Income (Loss) – three and six months ended ~~September 30,~~December 31, 2019 and December 31, 2018 (unaudited)	5

			Consolidated Statements of Stockholders' Equity ~~–three~~– three and six months ended ~~September 30,~~December 31, 2019 and 2018 (unaudited)	6

			Consolidated Statements of Cash Flows ~~– three~~- six months ended ~~September 30,~~December 31, 2019 and December 31, 2018 (unaudited)	7

			Notes to Unaudited Consolidated Financial Statements	~~8-17~~8-18

		Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	~~18-19~~19-21

		Item 3.	Quantitative and Qualitative Disclosures About Market Risk	1921

		Item 4.	Controls and Procedures	1921

Part II.	Other Information:

	Item 1A.		Risk Factors	2022

	Item 6.		Exhibits	2123

SIGNATURES				2224

09/30/2019

06/30/2019

ASSETS

Current assets:

Cash
$ 10,510 $ 15,582
Accounts receivable (less allowance for doubtful accounts of $633 and $685, respectively)
31,340 35,980
Inventories
64,525 61,790
Prepaid expenses and other current assets
6,739 6,623
Total current assets
113,114 119,975

Property, plant and equipment, net
37,078 36,679
Right of use assets
5,779 -
Taxes receivable
1,633 1,666
Deferred tax assets, net
18,341 18,639
Intangible assets, net
8,305 8,460
Goodwill
4,668 4,668
Total assets
$ 188,918 $ 190,087

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Current maturities of debt
$ 3,979 $ 4,065
Current lease liability
1,903 -
Accounts payable
11,799 12,881
Accrued expenses
7,192 8,699
Accrued compensation
5,474 7,035
Total current liabilities
30,347 32,680

Other tax obligations
2,523 2,587
Long-term lease liability
3,922 -
Long-term debt, net of current portion
19,088 17,541
Postretirement benefit and pension obligations
52,436 53,900
Total liabilities
108,316 106,708

Stockholders' equity:

Class A Common stock $1 par (20,000,000 shares authorized; 6,269,669 outstanding at September 30, 2019 and 6,206,525 outstanding at June 30, 2019)
6,270 6,207
Class B Common stock $1 par (10,000,000 shares authorized; 681,971 outstanding at September 30, 2019 and 689,577 outstanding at June 30, 2019)
682 690
Additional paid-in capital
55,425 55,276
Retained earnings
81,265 80,487
Accumulated other comprehensive loss
(63,040
)
(59,281
)
Total stockholders' equity
80,602 83,379
Total liabilities and stockholders’ equity
$ 188,918 $ 190,087

	12/31/2019			06/30/2019

ASSETS
Current assets:
Cash	$	9,382		$	15,582
Accounts receivable (less allowance for doubtful accounts of $685 and $685, respectively)		33,992			35,980
Inventories		65,110			61,790
Prepaid expenses and other current assets		6,420			6,623
Total current assets		114,904			119,975

Property, plant and equipment, net		38,364			36,679
Right of use assets		5,507			-
Taxes receivable		1,706			1,666
Deferred tax assets, net		18,145			18,639
Intangible assets, net		8,110			8,460
Goodwill		4,668			4,668
Total assets	$	191,404		$	190,087

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt	$	4,154		$	4,065
Current lease liability		2,027			-
Accounts payable		11,730			12,881
Accrued expenses		7,879			8,699
Accrued compensation		4,819			7,035
Total current liabilities		30,609			32,680

Other tax obligations		2,746			2,587
Long-term lease liability		3,544			-
Long-term debt, net of current portion		18,628			17,541
Postretirement benefit and pension obligations		51,258			53,900
Total liabilities		106,785			106,708

Stockholders' equity:
Class A Common stock $1 par (20,000,000 shares authorized; 6,279,632 outstanding at December 31, 2019 and 6,206,525 outstanding at June 30, 2019)		6,280			6,207
Class B Common stock $1 par (10,000,000 shares authorized; 681,219 outstanding at December 31, 2019 and 689,577 outstanding at June 30, 2019)		681			690
Additional paid-in capital		55,522			55,276
Retained earnings		82,525			80,487
Accumulated other comprehensive loss		(60,389	)		(59,281	)
Total stockholders' equity		84,619			83,379
Total liabilities and stockholders’ equity	$	191,404		$	190,087

For the Three ~~Months~~and Six-Month Period Ended ~~September 30,~~December 31, 2019 and 2018

	3 Months Ended						6 Months Ended
	09/30/2019			09/30/2018			12/31/2019			12/31/2018

Cash flows from operating activities:

Net income	$	778		$	584		$	2,038		$	2,510

Non-cash operating activities:
Depreciation		1,212			1,260			2,430			2,561
Amortization		575			577			1,109			1,155
Stock-based compensation		214			107			286			174
Net long-term tax obligations		26			44			192			111
Deferred taxes		141			75			484			532
Postretirement benefit and pension obligations		30			161			58			323

Working capital changes:
Accounts receivable		3,087			1,604			1,825			1,118
Inventories		(5,091	)		(1,078	)		(4,088	)		(3,294	)
Other current assets		(428	)		(696	)		41			(1,393	)
Other current liabilities		(2,796	)		(770	)		(3,784	)		1,160
Prepaid pension expense		(1,281	)		(1,197	)		(2,933	)		(2,498	)
Other		49			234			85			347
Net cash provided by (used in) operating activities		(3,484	)		905
Net cash (used in) provided by operating activities								(2,257	)		2,806

Cash flows from investing activities:
Purchases of property, plant and equipment		(2,625	)		(721	)		(4,663	)		(1,877	)
Software development		(399	)		(362	)		(718	)		(695	)
Net cash provided by (used in) investing activities		(3,024	)		(1,083	)
Net cash used in investing activities								(5,381	)		(2,572	)

Cash flows from financing activities:
Proceeds from borrowing		2,500			-			3,989			1,000
Debt repayments		(1,039	)		(608	)		(2,813	)		(1,534	)
Proceeds from common stock issued		-			12			37			40
Shares repurchased		(10	)		(13	)		(13	)		(934	)
Net cash provided by (used in) financing activities		1,451			(609	)
Net cash (used in) provided by financing activities								1,200			(1,428	)

Effect of exchange rate changes on cash		(15	)		(24	)		238			(206	)

Net increase (decrease) in cash		(5,072	)		(811	)
Net decrease in cash								(6,200	)		(1,400	)
Cash, beginning of period		15,582			14,827			15,582			14,827
Cash, end of period	$	10,510		$	14,016		$	9,382		$	13,427

Supplemental cash flow information:
Interest paid	$	269		$	185		$	502		$	428
Income taxes paid, net		594			775			1,180			1,221

Supplemental disclosure of non-cash activities:
Recognition of right-of-use assets		6,149			-			6,149			-
Recognition of operating lease liability		6,149			-			6,149			-

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, 2019. 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 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. Financial results for each reportable segment are as follows (in thousands):

	North American Operations		International Operations		Unallocated			Total		North American Operations		International Operations		Unallocated			Total
Three Months ended September 30, 2019
Three Months ended December 31, 2019
Sales¹	$	31,009	$	21,105	$	-		$	52,114	$	33,098	$	23,766	$	-		$	56,864
Operating Income (Loss)	$	2,206	$	1,163	$	(1,924	)	$	1,445	$	2,547	$	1,725	$	(1,510	)	$	2,762

Three Months ended September 30, 2018
Three Months ended December 31, 2018
Sales²	$	30,200	$	21,701	$	-		$	51,901	$	34,628	$	21,904	$	-		$	56,532
Operating Income (Loss)³	$	373	$	2,119	$	(1,556	)	$	936	$	3,081	$	1,741	$	(1,374	)	$	3,448

Note 3: Revenue from Contracts with Customers

On July 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, and all the related amendments (“ASC Topic 606”), using the modified retrospective method. In addition, the Company elected to apply certain of the permitted practical expedients within the revenue recognition guidance and make certain accounting policy elections, including those related to significant financing components, sales taxes and shipping and handling activities. Most of the changes resulting from the adoption of ASC Topic 606 on July 1, 2018 were changes in presentation within the Unaudited Consolidated Balance Sheet. Therefore, while the Company made adjustments to certain opening balances on its July 1, 2018 Unaudited Consolidated Balance Sheet, the Company made no adjustment to opening Retained Earnings.

The core principle of ASC Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The application of the FASB’s guidance on revenue recognition requires the Company to recognize the amount of revenue and consideration that the Company expects to receive in exchange for goods and services transferred to our customers. To do this, the Company applies the five-step model prescribed by the FASB, which requires us to: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation.

The Company accounts for a contract or purchase order when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when control of the product passes to the customer, which is upon shipment, unless otherwise specified within the customer contract or on the purchase order as delivery, and is recognized at the amount that reflects the consideration the Company expects to receive for the products sold, including various forms of discounts. When revenue is recorded, estimates of returns are made and recorded as a reduction of revenue. Contracts with customers are evaluated to determine if there are separate performance obligations related to timing of product shipment that will be satisfied in different accounting periods. When that is the case, revenue is deferred until each performance obligation is met. No ~~performance obligation related amounts were~~revenue was deferred as of ~~September 30,~~December 31, 2019. 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, ~~and~~ 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 months ended ~~September 30,~~December 31, 2019 and 2018. 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 on the ~~Unaudited~~ Consolidated Balance ~~Sheet.~~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 ~~significant risks and rewards of ownership of the~~ asset, and ~~any~~ provisions in contracts regarding customer acceptance.

While unit prices are generally fixed, the Company provides variable consideration for certain ~~of our~~ customers, typically in the form of promotional incentives at the time of sale. The Company utilizes the most likely amount ~~consistently~~ 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 ~~sales incentives~~expenses on the Unaudited Consolidated Balance ~~Sheet.~~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.

With the adoption of ASC Topic 606, the Company reclassified certain amounts related to variable consideration. Under ASC Topic 606, the Company is required to present a refund liability and a return asset within the Unaudited Consolidated Balance Sheet, whereas in periods prior to adoption, the Company presented the estimated margin impact of expected returns as a contra-asset within accounts receivable. The changes in the refund liability are reported in net sales, and the changes in the return asset are reported in cost of sales in the Unaudited Consolidated Statements of Operations. As a result, the balance sheet presentation was adjusted beginning in Fiscal 2019. As of ~~September 30,~~December 31, 2019, the balance of the return asset is $0.1 million and the balance of the refund liability is $0.2 million, and they are presented within prepaid expenses and other current assets and accrued expenses, respectively, on the Unaudited Consolidated Balance Sheet.

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 no contract asset balances, but had contract liability balances of ~~$0.4~~$0.6 million at ~~September 30,~~December 31, 2019 ~~recorded~~located in Accounts Payable onin the Consolidated Balance Sheets.

Disaggregation of Revenue

The Company operates in two 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 months ended ~~September 30,~~December 31, 2019 and ~~2018:~~2018 (in thousands):

	Three Months Ended				Three Months Ended				Six Months Ended
	09/30/19		09/30/18		12/31/19		12/31/18		12/31/19		12/31/18
North America
United States	$	28,624	$	27,947	$	31,085	$	32,413	$	59,708	$	60,360
Canada & Mexico		2,385		2,253		2,013		2,215		4,398		4,468
		31,009		30,200		33,098		34,628		64,106		64,828
International
Brazil		12,822		12,367		15,000		12,519		27,822		24,886
United Kingdom		5,231		6,017		5,372		5,657		10,603		11,673
China		1,514		1,708		1,653		2,052		3,167		3,761
Australia & New Zealand		1,538		1,609		1,741		1,676		3,280		3,285
		21,105		21,701		23,766		21,904		44,872		43,605

Total Sales	$	52,114	$	51,901	$	56,864	$	56,532	$	108,978	$	108,433

Note 4: Recent Accounting Pronouncements

The Company adopted, prospectively, Accounting Standards Codification 842, Leases ("ASC 842") July 1, 2019. As a result, the Company updated its significant accounting policies for leases below. Refer to Note 5 Commitments and Contingencies for additional information related to the Company's lease arrangements and the impact of the adoption of ASC 842 on the Company's Consolidated Financial Statements.

The Company has leased buildings, manufacturing equipment and autos that are classified as operating lease right-of use "ROU" assets and operating lease liabilities in the Company's Consolidated Balance Sheet. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component of the agreement.

The Company estimates its incremental borrowing rate for its leases using a portfolio approach based on the respective weighted average term of the agreements. The estimation considers the market rates of the Company's outstanding borrowings and rates of external outstanding borrowings including market comparisons. Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of goods sold and sales, general and administrative expenses.

The Company adopted the standard ~~was effective for Starrett~~ beginning this fiscal year. The Company has elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. The Company also elected the package of practical expedients permitted within the new standard, which among other things, allows the Company to carry forward historical lease classification. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the ROU assets or operating lease liabilities. These are expensed as incurred and recorded as variable lease expense. The Company determines if an arrangement is a lease at the inception of a contract. Operating lease ROU assets and operating lease liabilities are stated separately in the Consolidated Balance Sheet.

In preparation for adoption of the standard, the Company has implemented internal controls such as updated accounting policies and expanded data gathering procedures to comply with the additional disclosure requirements. The adoption had a material impact on ~~our~~the Company’s Consolidated Balance Sheets, but did not have a material impact on our Consolidated Statements of ~~Operations.~~Operations or Consolidated Statements of Cash Flows (unaudited). The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.

Adoption of this standard resulted in the recognition of additional ROU assets and lease liabilities for operating leases and had the following impact to the reported results as of June 30, 2019 on our Consolidated Financial ~~Statements:~~Statements (in thousands):

Dollars in Thousands Consolidated Balance Sheet	As Reported June 30, 2019		New Lease Standard Adjustment		Adjusted July 1, 2019
Consolidated Balance Sheet							As Reported June 30, 2019		New Lease Standard Adjustment		Adjusted July 1, 2019

Right-of-Use Asset		-	$	6,149	$	6,149		-	$	6,149	$	6,149
Current portion of operating lease obligations		-	$	1,798	$	1,798		-	$	1,798	$	1,798
Operating long term lease obligations		-	$	4,351	$	4,351
Operating long-term lease obligations								-	$	4,351	$	4,351

The Company adopted ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715) in FY19: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ~~(NPBC)~~“NPBC”. This update requires that an employer disaggregate the service cost component from the other components of NPBC. In addition, only the service cost component will be eligible for capitalization. The Company amended the U.S. defined benefit pension plan “U.S. Plan” to freeze benefit ~~accurals~~accruals effective December 31, 2016. Consequently, the U.S. Plan is closed to new participants and current participants no longer earn additional benefits. The amendments in this update are required to be applied retrospectively for the presentation of the service cost component and the other components of NPBC in the Consolidated Statement of Operations and prospectively. The Consolidated Statement of Operations and related disclosure are recorded accordingly.

The retrospective reclassification to FY 2019 by quarter follows (in thousands):

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. For deferred tax items recognized in Accumulated Other Comprehensive Income (AOCI), changes in tax rates can leave amounts “stranded” in AOCI. Under ASU 2018-02, FASB has given companies an option to reclassify the stranded tax effects resulting from the tax law and tax rate changes under the Tax Cuts and Jobs Act of 2017 from AOCI to retained earnings. The Company declined the reclassification option upon adopting this standard July 1, 2019. The new standard did not have a material impact on the Company’s financial position and results of operations upon adoption.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 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 is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." Under the new guidance, if a reporting unit's carrying value amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the requirement to calculate goodwill impairment using Step 2, which calculates an impairment charge by comparing the implied fair value of goodwill with ~~its~~it carrying amount. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. The amendments in this ASU are effective for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019 and should be applied prospectively for annual and any interim goodwill impairment tests. Early adoption is permitted for entities for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the update on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement ('Topic 820'): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The ASU modifies the disclosure requirements in Topic 820, Fair Value Measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The Company is currently evaluating the effect, if any, that ASU 2018-13 will have on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." ASU 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and added additional disclosures. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2020. 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.

Note 5: Commitments and Contingencies

Operating lease cost amounted to $0.6 million and $1.2 million for the three months and six months period ended ~~September 30,~~December 31, 2019. As of ~~September 30,~~December 31, 2019, the Company’s right-of-use assets, lease obligations and remaining cash commitment on these leases ~~in thousands, are as follows:~~(in thousands):

Right-of-use
Assets

Operating Lease
Obligations

Remaining Cash
Commitment

Operating leases
$ 5,779 $ 5,825 $ 6,984

Right-of-Use

Assets

Operating Lease

Obligations

Remaining Cash

Commitment

Operating leases

5,507

5,572

6,629

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 ~~4.5~~4.3 years. As of ~~September 30,~~December 31, 2019, the Company’s financing leases are dide minimis. The foreign exchange impact affecting the operating leases are de minimis.

~~Supplemental cash flows information related to leases for the three months ended September 30, 2019 was $6.1 million.~~ The Company entered into ~~one equipment~~$0.2 million and $0.3 million in operating lease ~~commitment~~commitments in the three and six months ended ~~September 30,~~December 31, 2019. At ~~September 30,~~December 31, 2019, the Company had the following fiscal year minimum operating lease ~~commitments:~~

Three months ending September 30, 2019

Operating Lease
Commitments

2020 remaining
$ 1,743
2021
2,151
2022
845
2023
718
2024
702
Thereafter
825
Subtotal
$ 6,984
Imputed interest
(1,159
)
Total
5,825

~~The aggregate lease payments for operating leases as of June 30, 2019 were as follows~~commitments (in thousands):

Fiscal Year
2020	$	2,434
Six months ending December 31, 2019			Operating Lease
			Commitments
2020 remaining			$	1,215
2021		2,328		2,250
2022		943		905
2023		762		731
2024		502		703
Thereafter		1,092		825
	$	8,061
Subtotal			$	6,629
Imputed interest				(1,057	)
Total				5,572

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~~Stock Plan was approved by shareholders on October 17, 2012, and the material terms of its performance goals were re-approved by shareholders at the Company’s Annual Meeting held on October 18, 2017. The 2012 Stock Plan permits the granting of the following types of awards to officers, other employees and non-employee directors: stock options; restricted stock awards; unrestricted stock awards; stock appreciation rights; stock units including restricted stock units; performance awards; cash-based awards; and awards other than previously described that are convertible or otherwise based on stock. The 2012 Stock Plan provides for the issuance of up to 500,000 shares of common stock.

Options granted vest in periods ranging from one year to three years and expire ten years after the grant date. Restricted stock units (“RSU”) granted generally vest from one year to three years. Vested restricted stock units will be settled in shares of common stock. As of ~~September 30,~~December 31, 2019, there were 20,000 stock options and ~~212,507~~260,008 restricted stock units outstanding. In addition, there were ~~169,533~~119,533 shares available for grant under the 2012 Stock Plan as of ~~September 30,~~December 31, 2019.

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~~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).

No stock options were granted during the ~~three~~six months ended ~~September 30,~~December 31, 2019 and 2018.

The weighted average contractual term for stock options outstanding as of ~~September 30,~~December 31, 2019 was ~~3.25~~3 years. The aggregate intrinsic value of stock options outstanding as of ~~September 30,~~December 31, 2019 was less than $0.1 million. Stock options exercisable as of ~~September 30,~~December 31, 2019 were ~~20,000.~~20,000 shares. In recognizing stock compensation expense for the 2012 Stock Incentive Plan, management has estimated that there will be no 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 ~~60,500~~110,500 RSU awards with a fair value of ~~$5.52~~$5.53 per RSU granted during the ~~three~~six months ended ~~September 30,~~December 31, 2019. There were ~~44,995~~47,494 RSUs settled, and no RSUs forfeited during the ~~three~~six months ended ~~September 30,~~December 31, 2019. The aggregate intrinsic value of RSU awards outstanding as of ~~September 30,~~December 31, 2019 was ~~$1.2~~$1.5 million. As of ~~September 30,~~December 31, 2019, 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 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~~stock-based plans for the three and six month periods ended ~~September 30,~~December 31, 2019 were $0.1 million and $0.2 million and 2018 was $0.1 million, and ~~$0.1~~$0.2 million respectively. As of ~~September 30,~~December 31, 2019, there was ~~$1.9~~$2.2 million of total unrecognized compensation costs related to outstanding stock-based compensation arrangements. Of this cost, ~~$1.4~~$1.7 million relates to performance based RSU grants that are not expected to be awarded. The remaining $0.5 million is expected to be recognized over a weighted average period of ~~2.1~~2.4 years.

LIFO inventories were ~~$11.9~~$13.5 million and $9.8 million at ~~September 30,~~December 31, 2019 and June 30, 2019, respectively, such amounts being approximately ~~$23.3~~$23.7 million and $23.3 million, respectively, less than if determined on a FIFO basis. The use of LIFO, as compared to FIFO, resulted in a ~~de minimis change~~$0.1 million and $0.4 million increase in cost of sales for the ~~three months~~three- and six-months period ended ~~September 30,~~December 31, 2019 compared to a $0.3 million and $0.6 million decrease for the ~~three months~~three- and six-month periods ended ~~September 30,~~December 31, 2018.

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 $4.7 million. The Company is required, on a set date, to annually assess its goodwill in order to determine whether or not it is more likely than not that the fair value of the reporting unit’s goodwill exceeded ~~its~~it carrying amount. Determining the fair value of a reporting unit is subjective and requires the use of significant estimates and assumptions.

The Company performed a qualitative analysis of its Bytewise reporting unit for its October 1, ~~2018~~2019 annual assessment of goodwill (commonly referred to as “Step Zero”). From a qualitative perspective, in evaluating whether it is more likely than not that the fair value of a reporting unit exceeds ~~its~~it carrying amount, relevant events and circumstances are taken into account, with greater weight assigned to events and circumstances that most affect the fair value or the carrying amounts of its assets. Items that were considered included, but were not limited to, the following: macroeconomic conditions, industry and market conditions, cost factors, overall financial performance and changes in management or key personnel. After assessing these and other factors the Company determined that it was more likely than not that the fair value of the Bytewise reporting unit exceeded ~~its~~it carrying amount as of October 1, ~~2018.~~2019. If future results significantly vary from current estimates and related projections due to changes in industry or market conditions, the Company may be required to record impairment charges.

Determining the fair value of a reporting unit is subjective and requires the use of the significant estimates and assumptions. 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 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 and overall economic conditions. Any unfavorable material changes to these key assumptions could potentially impact the Company’s fair value determinations.

The Company last performed a quantitative analysis for its February 1, 2019 annual assessment of goodwill ~~(commonly referred to as “Step One” evaluation)~~ associated with its ~~fiscal 2017~~ purchase of a private software company. The Company estimated the fair value using an income approach based on the present value of future cash flows. The Company believes this approach yields the most appropriate evidence of fair value. Under the quantitative analysis, the 2019 fair value assessment of the software development company’s goodwill exceeded the carrying amount. Therefore, no goodwill impairment was determined to exist. 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. The Company will perform the annual Step one assessment as of February 1, 2020.

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

09/30/2019

6/30/2019

Non-compete agreement
$ 600 $ 600
Trademarks and trade names
2,070 2,070
Completed technology
2,358 2,358
Customer relationships
5,580 5,580
Software development
9,351 8,952
Other intangible assets
325 325
Total
20,284 19,885
Accumulated amortization
(11,979
)
(11,425
)
Total net balance
$ 8,305 $ 8,460

	12/31/2019			6/30/2019
Non-compete agreement	$	600		$	600
Trademarks and trade names		2,070			2,070
Completed technology		2,358			2,358
Customer relationships		5,580			5,580
Software development		9,671			8,952
Other intangible assets		325			325
Total		20,604			19,885
Accumulated amortization		(12,494	)		(11,425	)
Total net balance	$	8,110		$	8,460

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 2020 and for each of the next five years and thereafter, is as follows (in thousands):

2020, remaining		1,486
2020 (Remainder of year)			$	1,012
2021		1,724		1,761
2022		1,492		1,531
2023		1,151		1,179
2024		858		881
2025		514		673
Thereafter		1,080		1,073
	$	8,305	$	8,110

Note 9: Pension and Post-retirement Benefits

The Company has two 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. 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 all of the Company's defined benefit pension plans are recorded in Other income (expense) in the Consolidated Statements of Operations ~~and consist of the following~~(unaudited) (in thousands):

	Three Months Ended						Three Months Ended						Six Months Ended
	09/30/2019			09/30/2018			12/31/2019			12/31/2018			12/31/2019			12/31/2018
Service cost	$	-		$	-		$	-		$	-		$	-		$	-
Interest cost		1,349			1,506			1,366			1,500			2,715			3,006
Expected return on plan assets		(1,294	)		(1,284	)		(1,309	)		(1,279	)		(2,603	)		(2,563	)
Amortization of net loss		10			7			9			7			19			14
	$	65		$	229		$	66		$	228		$	131		$	457

Net periodic benefit costs for the Company's Postretirement Medical Plan ~~are recorded in Other income (expense) except the Service cost component recoded in operations in the Consolidated Statements of Operations and~~ consists of the following (in thousands):

For the ~~three month~~six-month period ended ~~September 30,~~December 31, 2019, the Company contributed ~~$1.0~~$2.3 million to the U.S. and ~~$0.2~~$0.5 million to the UK pension plans. The Company estimates that it will contribute an additional ~~$6.5~~$4.9 million for the remainder of fiscal 2020.

The Company’s pension plans use fair value as the market-related value of plan assets and recognize net actuarial gains or losses in excess of ten percent (10%) of the greater of the market-related value of plan assets or of the plans’ projected benefit obligation in net periodic (benefit) cost as of the plan measurement date. Net actuarial gains or losses that are less than 10% of the thresholds noted above are accounted for as part of accumulated other comprehensive loss.

Note 10: Debt

Debt is comprised of the following (in thousands):

09/30/2019

6/30/2019

Short-term and current maturities

Loan and Security Agreement
$ 1,785 $ 1,765
Other loans
2,194 2,300
3,979 4,065
Long-term debt

Loan and Security Agreement, net of current portion
19,088 17,541
$ 23,067 $ 21,606

	12/31/2019		6/30/2019
Short-term and current maturities
Loan and Security Agreement (Bytewise)	$	1,805	$	1,765
Brazil Loans		2,349		2,300
		4,154		4,065
Long-term debt (net of current portion)
Loan and Security Agreement (Bytewise)		1,728		2,641
Loan and Security Agreement (Line of Credit)		16,900		14,900
		18,628		17,541
	$	22,782	$	21,606

~~The~~On December 31, 2019, the Company ~~amended~~entered into the Tenth Amendment of its Loan and Security Agreement ~~which includes~~“Tenth Amendment”. Under the revised agreement, the credit limit for the Revolving Loan 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 Company did not drawdown additional funds under the Tenth Amendment during the three-month period ended December 31, 2019. 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. The new Term Loan will be used to retire the outstanding balance, beginning in 2020, of approximately $3.5 million of the $15.5 million Bytewise term loan (November, 2011), resulting in an available balance of approximately $6.5 million.

The financial covenants under the new agreement are: 1) a Fixed Charge Coverage Ratio must exceed 1:15. The Fixed Charge Coverage Ratio is based upon EBITDA less dividends, unfunded Capital Expenditures, less required pension payments divided by the current portion of term loans, excluding, the Line of Credit and external debt; and 2) maintain consolidated Cash and available Credit Line of not less than $7.5 million on the closing date of any quarter. The Company was in compliance with the covenants of the new Loan Agreement as of December 31, 2019.

The obligations under the Tenth Amendment are unsecured unless a triggering event occurs. A triggering event would be failure on a quarterly basis to meet the thresholds of the Fixed Charge Coverage Ratio described above.

Prior to Tenth Amendment, the Line of Credit and a Term Loan (“Credit Facility”), was last amended in January 2018. Borrowings under the Line of Credit ~~may~~were not to exceed $23.0 million. The Line of Credit ~~has~~had an interest rate of LIBOR plus 1.5%, and ~~expires~~was to expire on April 30, 2021. The Tenth Amendment moved the expiration date to April 30, 2022. The effective interest rate on the Line of Credit under the Loan and Security Agreement for the three months ended ~~September 30,~~December 31, 2019 and 2018 was ~~3.9%~~3.7% and ~~3.8%~~3.9%, respectively. As of ~~September 30,~~December 31, 2019, $16.9 million was outstanding on the Line of Credit.

Availability under the Line of Credit isremains subject to a borrowing base comprised of accounts receivable and inventory. The Company believes that the borrowing base will consistently produce availability under the Line of Credit of ~~$23.0~~$25.0 million. A 0.25% commitment fee is charged on the unused portion of the Line of Credit.

The obligations under the Credit Facility are unsecured. In the event of certain triggering events, such obligations would become secured by the assets of the Company’s domestic subsidiaries. A triggering event occurs when the Company fails to achieve any of the financial covenants noted below in consecutive quarters.

~~The~~ financial covenants of the ~~amended~~previous Loan and Security Agreement ~~are:~~“Credit Facility” were: 1) funded debt to EBITDA, excluding non-cash and retirement benefit expenses (“maximum leverage”), not to exceed 2.25 to 1.00, 2) annual capital expenditures not to exceed $15.0 million, 3) maintain a Debt Service Coverage Rate of a minimum of 1.25 to 1.00, and 4) maintain consolidated cash ~~plus liquid investments~~ of not less than $10.0 million at any time. As of ~~September 30,~~December 31, 2019, the Company was in compliance with all the financial debt covenants related to its Loan and Security Agreement.

The obligations under the previous Credit Facility were unsecured. In the event of certain triggering events, such obligations would have become secured by the assets of the Company’s domestic subsidiaries. A triggering event would have occurred when the Company failed to achieve any of the financial covenants noted above in consecutive quarters.

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 then existing Loan and Security Agreement. The Term Loan is a ~~ten year~~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 had a balance of ~~$4.0~~$3.5 million at ~~September 30,~~December 31, 2019.

In December 2017, the Company’s Brazilian subsidiary entered into two short-term loans with local banks in order to support the Company’s strategic initiatives. The loans backed by the entity’s US dollar denominated export receivables were made with Santander Bank and Bradesco Bank. In February 2019, the Company’s Brazilian subsidiary, again, began refinancing debt among Santander, Bradesco and Brazil Bank as follows ~~(in thousands)~~ as of ~~9/30/2019:~~12/31/2019 (in thousands):

Lending Institution	Interest Rate		Beginning Date	Ending Date	Outstanding Balance		Interest Rate	Beginning Date	Ending Date	Outstanding Balance
Santander		5.30%	February 2019	February 2020	$	432	5.30%	February 2019	February 2020	$	157
Bradesco		4.27%	March 2019	March 2020		262	4.27%	March 2019	March 2020		124
Bradesco		4.00%	April 2019	April 2020		1,000	4.00%	April 2019	April 2020		783
Brazil Bank		3.11%	September 2019	September 2020		500	3.11%	September 2019	September 2020		500
Santander							10.76%	Overdraft	account		785
					$	2,194				$	2,349

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. Other impacts of tax reform that became effective for the Company beginning in fiscal 2019 include the provisions related to Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Base Erosion Anti Abuse Tax (“BEAT”), and limitation on tax deductibility of interest 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.

The tax expense for the ~~first~~second quarter of fiscal 2020 was ~~$0.5~~$0.6 million on a profit before tax of ~~$1.3~~$1.9 million (an effective tax rate of ~~39%~~33%). The tax expense for the ~~first~~second quarter of fiscal 2019 was ~~$0.4~~$1.1 million on a profit before tax of ~~$0.9~~$3.0 million (an effective tax rate of ~~38%~~36%). The tax rate for both fiscal 2020 and fiscal 2019 was higher than the U.S. statutory tax rate of 21% primarily due to the Global Intangible Low Taxed Income (“GILTI”) provisions, which became effective in fiscal 2019, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%. ~~The~~

For the first ~~quarter~~half of fiscal 2020, ~~also includes a discrete~~ tax expense was $1.1 million on profit before tax of ~~$0.1~~$3.2 million ~~relating to adjustments to~~(an effective tax rate of 35%). For the ~~fourth quarter~~first half of fiscal 2019, ~~balances.~~tax expense was $1.4 million on profit before tax of $3.9 million (an effective tax rate of 36%). The tax rate for both fiscal 2020 and fiscal 2019 was higher than the U.S. statutory tax rate of 21% primarily due to the Global Intangible Low Taxed Income (“GILTI”) provisions, which became effective in fiscal 2019, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%.

U.S. Federal tax returns for years prior to fiscal 2016 are generally no longer subject to review by tax authorities; however, tax loss carryforwards from earlier years are still subject to adjustment. As of ~~September 30,~~December 31, 2019, 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 calendar years 2013 – 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 in items included in taxable income. 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 tax benefit provided by those differences. 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.

Three months ~~Ended September 30, 2019~~ended December 31, 2019 and ~~September 30, 2018~~December 31, 2018

Revenue was level in the second quarter 2019 as declines in the core precision hand tool and saw product lines were offset by a 12% growth in the high-end metrology group. Excluding the unfavorable impact of foreign exchange, particularly in Brazil, revenue would have increased 3%.

The ~~Company generally experiences~~North American precision hand tool business experienced a ~~slow first quarter on~~decline in sales as distributors continued to reduce previously accumulated inventory. The successful implementation of a new production planning system has improved fulfillment rates and reduced backorders providing shorter lead times to distributors. International sales increased $1.9 million led by a 10% gain in Brazil.

Net sales increased $0.4 million or 1% from $56.5 million in fiscal ~~year basis and~~2019 to $56.9 million in fiscal 2020 with North America posting a decline of $1.5 million and international posting gains of $1.9 million. Operating income decreased $0.7 million as a $0.1 million increase in gross margin was ~~no exception. Geo-political concerns significantly dampened manufacturing activity~~more than offset by a $0.8 million increase in selling, general and administrative expenses.

North American sales decreased $1.5 million or 4% from $34.6 million in fiscal 2019 to $33.1 million in fiscal 2020 due primarily to lower order levels for precision hand tools from distributors who were continuing to reduce inventory levels. International sales increased $1.9 million from $21.9 million in fiscal 2019 to $23.8 million in fiscal 2020 primarily due to increased volumes in Brazil and Scotland offsetting the ~~corresponding reaction~~impact of unfavorable currency fluctuations.

Gross margin increased $0.1 million, but remained flat at 33% of sales in ~~the Company’s distribution channels~~fiscal 2019 compared to ~~reduced inventory levels negatively impacted incoming orders. Despite flat~~33% of sales in fiscal 2020.

North American gross margins ~~improved $1.0~~decreased $0.4 million from $10.4 million or 30% of sales in fiscal 2019 to ~~34%~~$10.0 million or 30% of sales in fiscal 2020 ~~compared~~principally due to ~~32.1% in fiscal 2019. The key drivers for the better performance were the Company’s North American based metrology businesses.~~decreased sales volume of precision measuring tools and relatively stable fixed overhead.

~~Net sales increased $0.2 million. Operating income~~International gross margins increased $0.5 million as higher gross margins more than offset increased Selling, General and Administrative expenses. Net income increased $0.2 million from a net income of $0.6 million or $0.08 per share in fiscal 2019 to net income of $0.8 million or $0.11 per share in fiscal 2020.

North American sales increased $0.8 million or 3% from $30.2 million in fiscal 2019 to $31.0 million in fiscal 2020 as a $1.1 million or 14% increase in high-end metrology products negated a modest $0.3 million decline in saw products. International sales declined $0.6 million or 3% from $21.7 million in fiscal 2019 to $21.1 million in fiscal 2020 due to a softening of the European economy and a weakening of the British Pound against the U. S. dollar.

~~Gross margins in fiscal 2020 increased $1.0 million to 34% of sales compared to 32.1% in fiscal 2019. North American gross margins increased $1.5 million in fiscal 2020 due to~~based on higher sales of higher margin capital equipment and improved margins in core products. International gross margins decreased $0.5 million as compared to fiscal principally due to higher saw and hand tool material costsvolume in Brazil.

Selling, general and administrative expenses increased ~~$0.5~~$0.8 million or ~~3%.~~ 5% from $15.1 million in fiscal 2019 to $15.9 million in fiscal 2019.

North American expenses, ~~were level~~including Corporate, increased 0.3 million from $8.7 million in fiscal 2019 to $9.0 million in fiscal 2020 as a ~~$0.4 million decline in divisional expenses was offset set by a $0.4 million increase in Corporate~~result of higher organizational cost and non-recurring expenses related to ~~professional fees.~~ executive recruitment.

International expenses increased $0.5 million ~~primarily~~or 8% due principally to higher ~~selling expenses~~commissions related to increased sales in Brazil.

Other expense increased ~~$0.2~~$0.4 million principally due to ~~higher interest expense and currency translation~~unrealized foreign exchanges losses.

The tax expense for the ~~first~~second quarter of fiscal 2020 was ~~$0.5~~$0.6 million on a profit before tax of ~~$1.3~~$1.9 million ~~(an~~or an effective tax rate of ~~39%)~~33%. The tax expense for the ~~first~~second quarter of fiscal 2019 was ~~$0.4~~$1.1 million on a profit before tax of ~~$0.9~~$3.0 million ~~(an~~or an effective tax rate of ~~38%)~~36%. The tax rate for both fiscal 2020 and fiscal 2019 was higher than the U.S. statutory tax rate of 21% primarily due to the Global Intangible Low Taxed Income (“GILTI”) provisions, which became effective in fiscal 2019, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%. ~~The first quarter of fiscal 2020 also includes a discrete tax expense of $0.1 million relating to adjustments to the fourth quarter of fiscal 2019 balances.~~

The Company recorded net ~~earnings~~income of ~~$0.8~~$1.3 million or ~~$0.11~~$0.18 per diluted share in the ~~first~~second quarter of fiscal 2020 compared to net income of $1.9 million or $0.27 per diluted share in fiscal 2019 principally due to a $0.7 million decrease in operating income.

Net sales increased $0.6 million or ~~$0.08 per share~~1% from $108.4 million in fiscal 2019 to $109.0 million in fiscal 2020. Operating income decreased from $4.4 million in fiscal 2019 to $4.2 million in fiscal 2020. The change was the result of a $1.1 million increase in gross margin offset by a $1.3 million increase in selling, general and administrative expenses.

North American sales decreased $0.7 million or 1% from $64.8 million in fiscal 2019 to $64.1 million in fiscal 2020.

International sales increased $1.2 million or 3% from $43.7 million in fiscal 2019 to $44.9 million in fiscal 2020 based upon continued growth in Brazil.

Gross margin increased $1.1 million or 3% and improved to 33% of sales in fiscal 2020 from 32% of sales in fiscal 2019.

North American gross margins increased $1.3 million or 7.0% in fiscal 2020 compared to fiscal 2019 as increased sales volume of high margin metrology equipment offset lower sales of precision hand tools.

International gross margins decreased $0.2 million despite increased sales due to higher raw materials costs caused by the strengthening USD, particularly in Brazil. Customer price increases have been implemented, but slightly lagging the increase in costs.

Selling, general and administrative expense increased $1.3 million or 4.0% from $30.8 million in fiscal 2019 to $32.1 million in fiscal 2020.

North American expenses, including Corporate, increased $0.4 million or 2% due primarily to non-recurring executive recruitment costs.

International expenses increased $0.9 million or 6% as increased selling and marketing spending of $1.2 million was offset by $0.3 million favorable currency adjustments related primarily to the weaker Brazilian Real.

Other expense increased $0.6 million from fiscal 2019 to fiscal 2020 principally due to unrealized foreign exchange losses.

The tax expense for the first half of fiscal 2020 was $1.1 million on a profit before tax of $3.2 million or an effective tax rate of 35%. The tax expense for the first half of fiscal 2019 was $1.4 million on a profit before tax of $3.9 million or an effective tax rate of 36%. The tax rate for both fiscal 2020 and fiscal 2019 was higher than the U.S. statutory tax rate of 21% primarily due to the Global Intangible Low Taxed Income (“GILTI”) provisions, which became effective in fiscal 2019, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%.

The Company recorded net income of $2.0 million or $0.29 per diluted share in the first half of fiscal 2020 compared to net income of $2.5 million or $0.35 per diluted share in fiscal 2019 principally due to unrealized foreign exchange losses.

~~Net~~Fiscal 2020 net cash flow for the three and six months periods ended December 31, 2019 decreased $5.1 million ~~as decreases in working~~and $6.2 million compared to the three and six months periods ending December 31, 2018 principally due to higher inventory levels and increased capital ~~and capital investment more than offset a net increase in debt of $1.5 million.~~equipment investments.

The Company believes it maintains sufficient liquidity and has the resources to fund its operations. In addition to its cash, ~~and investments,~~ the Company maintains a ~~$23~~$25 million line of credit in connection with ~~its~~the Tenth Amendment of the Loan and Security Agreement, of which, $16.9 million was outstanding as of ~~September 30,~~December 31, 2019. ~~Availability~~In addition, the Company entered into a new $10.0 million 5-year Term Loan with a fixed interest rate of 4.0%. The financial covenants under the new agreement are: 1) a Fixed Charge Coverage Ratio must exceed 1:15. The Fixed Charge Coverage Ratio is ~~further reduced~~based upon EBITDA less dividends, unfunded Capital Expenditures, less required pension payments divided by ~~open letters~~the current portion of ~~credit totaling $0.9 million.~~term loans, excluding, the Line of Credit and external debt; and 2) maintain consolidated Cash and available Credit Line of not less than $7.5 million on the closing date of any quarter. 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 September 30, 2019, the Company was in compliance with ~~all debt~~the covenants ~~related to its loan and Security Agreement. The~~of the amended Loan ~~and Security~~ Agreement ~~expires on April 30, 2021.~~as of December 31, 2019.

The effective interest rate on the ~~short term~~ borrowings under the Loan and Security Agreement during the ~~three~~six months ended ~~September 30,~~December 31, 2019 and 2018 was 3.7% and 3.9%. respectively.

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

There have been no material changes in quantitative and qualitative 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, 2019.

The Company's management, under the supervision and with the participation of the Company's President and Chief Executive Officer and Chief Financial Officer, has evaluated the Company's disclosure controls and procedures as of ~~September 30,~~December 31, 2019, 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 ~~September 30,~~December 31, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

In preparation for adoption of ASC 842 Leases, the Company has implemented internal controls such as updated accounting policies and expanded data gathering procedures to comply with the additional disclosure requirements. There ~~were~~have been no ~~other~~ changes ~~during the fiscal quarter ended September 30, 2019~~ in ~~our~~ internal control over financial reporting ~~which have~~that materially affected, or are reasonably likely to materially affect, ~~our~~the Company's internal control over financial ~~reporting.~~reporting during the quarter ended December 31, 2019.

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, 2019. There have been no material changes from the factors disclosed in our Form 10-K for the year ended June 30, 2019.

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.

	3 Months Ended						3 Months Ended						6 Months Ended
	09/30/2019			09/30/2018			12/31/2019			12/31/2018			12/31/2019			12/31/2018

Net sales	$	52,114		$	51,901		$	56,864		$	56,532		$	108,978		$	108,433
Cost of goods sold		34,411			35,242			38,228			37,984			72,639			73,226
Gross margin		17,703			16,659			18,636			18,548			36,339			35,207
% of Net sales		34.0	%		32.1	%
% of net sales								32.8	%		32.8	%		33.3	%		32.5	%


Selling, general and administrative expenses		16,258			15,723			15,874			15,100			32,132			30,823

Operating income		1,445			936			2,762			3,448			4,207			4,384

Other income (expense)		(169	)		6
Other expense								(887	)		(457	)		(1,056	)		(451	)

Income before income taxes		1,276			942			1,875			2,991			3,151			3,933

Income tax expense		498			358			615			1,065			1,113			1,423

Net income (loss)	$	778		$	584
Net income							$	1,260		$	1,926		$	2,038		$	2,510


Basic income (loss) per share	$	0.11		$	0.08
Diluted income (loss) per share	$	0.11		$	0.08
Basic income per share							$	0.18		$	0.27		$	0.29		$	0.36
Diluted income per share							$	0.18		$	0.27		$	0.29		$	0.35

Weighted average outstanding shares used in per share calculations:
Basic		6,904			7,025			6,955			7,018			6,930			7,022
Diluted		7,006			7,083			7,015			7,067			7,011			7,077

	3 Months Ended						3 Months Ended					6 Months Ended
	09/30/2019			09/30/2018			12/31/2019			12/31/2018		12/31/2019			12/31/2018

Net income (loss)	$	778		$	584
Net income							$	1,260		$	1,926	$	2,038		$	2,510
Other comprehensive income (loss):
Currency translation (loss), net of tax		(3,739	)		(1,571	)
Currency translation gain (loss), net of tax								2,674			696		(1,065	)		(875	)
Pension and postretirement plans, net of tax		(20	)		-			(23	)		-		(43	)		-
Other comprehensive income (loss)		(3,759	)		(1,571	)		2,651			696		(1,108	)		(875	)

Total comprehensive income (loss)	$	(2,981	)	$	(987	)
Total comprehensive income							$	3,911		$	2,622	$	930		$	1,635

																	Common Stock Outstanding						Additional Paid-in			Retained		Accumulated Other Comprehensive
	Common Stock Outstanding					Additional Paid-in			Retained		Accumulated Other Comprehensive						Class A			Class B			Capital			Earnings		Loss			Total
	Class A		Class B			Capital			Earnings		Loss			Total
Balance June 30, 2018	$	6,302	$	720		$	55,641		$	74,368	$	(49,160	)	$	87,871		$	6,302		$	720		$	55,641		$	74,368	$	(49,160	)	$	87,871
Total comprehensive income (loss)		-		-			-			584		(1,571	)		(987	)		-			-			-			584		(1,571	)		(987	)
Transfer of historical translation adjustment		-		-			-			40		(40	)		-			-			-			-			40		(40	)		-
Repurchase of shares		-		(2	)		(11	)		-		-			(13	)		-			(2	)		(11	)		-		-			(13	)
Issuance of stock		-		2			10			-		-			12			-			2			10			-		-			12
Stock-based compensation		17		-			90			-		-			107			17			-			90			-		-			107
Conversion		10		(10	)		-			-		-			-			10			(10	)		-			-		-			-
Balance September 30, 2018	$	6,329	$	710		$	55,730		$	74,992	$	(50,771	)	$	86,990		$	6,329		$	710		$	55,730		$	74,992	$	(50,771	)	$	86,990

Total comprehensive income																		-			-			-			1,926		696			2,622
Repurchase of shares																		(154	)		(1	)		(766	)		-		-			(921	)
Issuance of stock																		-			6			22			-		-			28
Stock-based compensation																		2			-			65			-		-			67
Conversion																		5			(5	)		-			-		-			-
Balance December 31, 2018																	$	6,182		$	710		$	55,051		$	76,918	$	(50,075	)	$	88,786

Accumulated balance consists of:
Translation loss, net of taxes											$	(50,537	)
Translation loss																												$	(49,841	)
Pension and postretirement plans, net of taxes												(234	)																(234	)
											$	(50,771	)															$	(50,075	)

	Increase (Decrease) to Net Income
	Q1 FY19			Q2 FY19			Q3 FY19			Q4 FY19			FY2019
Cost of goods sold	$	127		$	127		$	127		$	329		$	710
Selling, general and administrative		41			41			41			97			220
Other income (expense) net		(168	)		(168	)		(168	)		(426	)		(930	)
	$	-		$	-		$	-		$	-		$	-

Inventories consist of the following (in thousands):	09/30/2019			6/30/2019
							12/31/2019			6/30/2019
Raw material and supplies	$	27,718		$	26,106		$	29,006		$	26,106
Goods in process and finished parts		16,374			17,464			15,811			17,464
Finished goods		43,760			41,500			44,000			41,500
		87,852			85,070			88,817			85,070
LIFO Reserve		(23,327	)		(23,280	)		(23,707	)		(23,280	)
	$	64,525		$	61,790		$	65,110		$	61,790

Three months ending September 30, 2019	Operating Lease Commitments
2020 remaining	$	1,743
2021		2,151
2022		845
2023		718
2024		702
Thereafter		825
Subtotal	$	6,984
Imputed interest		(1,159	)
Total		5,825

Cash flows (in thousands)	Three Months Ended
	09/30/2019			09/30/2018

Cash provided by (used in) operating activities	$	(3,484	)	$	905
Cash provided by (used in) investing activities		(3,024	)		(1,083	)
Cash provided by (used in) financing activities		1,451			(609	)
Effect of exchange rate changes on cash		(15	)		(24	)

Net increase (decrease) in cash	$	(5,072	)	$	(811	)

Cash flows (in thousands)	Six Months Ended
	12/31/2019			12/31/2018

Cash (used in) provided by operating activities	$	(2,257	)	$	2,806
Cash (used in) provided by investing activities		(5,381	)		(2,572	)
Cash (used in) provided by financing activities		1,200			(1,428	)
Effect of exchange rate changes on cash		238			(206	)

Net decrease in cash	$	(6,200	)	$	(1,400	)

		THE L. S. STARRETT COMPANY (Registrant)


Date	~~October~~January 31, ~~2019~~2020	/S/R. Douglas A. Starrett
		Douglas A. Starrett - President and CEO (Principal Executive Officer)

Date	~~October~~January 31, ~~2019~~2020	/S/R. ~~Francis J. O’Brien~~John C. Tripp
		~~Francis J. O’Brien~~John C. Tripp - Treasurer and CFO (Principal Accounting Officer)