ANNUAL REPORT
FOR THE YEAR ENDED JUNE 30 TH, 2020
P RECISION, QUALI T Y, I NNOVATI O N
PRECISION HAND TOOLS
Generations of craftsmen and toolmakers have relied on
LASER MEASUREMENT
In-line, real-time, non-contact measurement systems
Starrett precision tools. With proven quality and expert
for continuously monitoring key profile dimensions in
technical support, Starrett is the name chosen by serious
complex shapes such as rubber, ceramic, plastic, and
professionals to guarantee repeatability and accuracy in
wood-plastic composite extrusions, roll-formed metal
their precision hand tools.
profiles and profiled wire.
VISION AND OPTICAL
With the unbeatable combination of precision mechanics,
CUSTOM SOLUTIONS
Our Engineers will create a custom tool to fit your
powerful and intuitive software, Starrett Vision and
specifications.
Optical Systems take video-based and multi-sensor
measuring systems to the next level.
BAND SAW BLADES
A range of innovative new technologies and blades with
measurable productivity advantages push the Starrett
brand to the forefront of the saw industries.
JOBSITE AND WORKSHOP
Starrett has a diverse selection of tapes, levels,
protractors, utility knives, hand saw blades and other
construction products. Starrett makes its mark in the
jobsite and workshop trades.
POWER TOOL ACCESSORIES
With tools such as diamond edge hole saws, Dual-Cut®
jig saw blades and a variety of reciprocating blades,
Starrett has become a global leader in power tool
industries.
GAGE BLOCKS AND GRANITE
SURFACE PLATES
A complete range of Steel, Ceramic and Chromium
Carbide gage blocks are available along with a variety of
granite surface plates designed specifically for quality
control labs globally.
TEST EQUIPMENT
Material testing and force measurement systems are
available in capacities up to 50kN (11,200lbf). These
systems are used in the lab or on the production floor.
2
Product
President’s Letter
Financial Highlights
Financial Statistics
Quarterly Financial Data
2
4
8
8
9
10-K
10
Board of Directors B69
Executive Officers B69
BC
Legal Agencies
TAB LE OF CONTENT S
3
P RESIDENT’S LETTE R
TO STARRETT STOCKHOLDER S AND A L L STAR R E T T P ER SON N EL :
Fiscal 2020 was a year of significant change in our business following a resurgent year in Fiscal 2019. We began the year
with a new corporate structure and by December, our new management team was in place and committed to leveraging
the structural changes implemented in the business in the last two years. Between FY 2017 – 2019, sales grew at a 5%
compound annual rate and EBITDA doubled over that period. The world changed dramatically for all of us starting in January
and accelerating in March, when the Coronavirus was declared a pandemic. Sales declined dramatically in the wake of the
pandemic and we finished with revenues of $201.5 million, a decline of 11.6% from the prior year. Our new leadership
team and our global associates managed our businesses extraordinarily well, given the uncertainty of the pandemic’s
shifting sands and imperfect information. The breadth, depth and scope of the pandemic was unfathomable for most of us.
The emotional impact cut across all walks of life, from grandparents to grandchildren, with intrusions on our lives that
society was not prepared for.
The first order of business was protecting the health and safety of our 1,600 global teammates and the Company. Given
the fluidity of each situation, our global management teams were given autonomy to keep our people safe and to reduce
the spread of the virus. We instituted safety protocols following local guidance. All non-essential travel (including sales
personnel), meetings and events were canceled. In our facilities, we continue to limit visitation, practice social distancing,
use enhanced sanitation protocols, eliminate or limit in-person meetings, encourage the use of face coverings and working
remotely where possible. Our prompt attention and proactive steps taken have helped mitigate risk and protected the health
and safety of our valued employees, customers, distributors and communities. From the onset of the pandemic, with few
exceptions, our Company has continued operations globally, as an essential industry supporting critical infrastructure and
first responders. We are not yet out of the woods, but we could not have done this without the cooperation of all our
associates.
Simultaneously, we took prompt measures to protect the Company and cash. In April and May, in response to the steep
decline of incoming orders, we adjusted our cost structure to align with demand. This included layoffs, furloughs, reduced
work hours and wage and salary reductions, which will remain in place until we are confident that we see clear evidence
of a sustainable recovery. These actions stabilized our cash burn and with June recovering modestly, we generated over
$2.0 million in cash in the month. The pandemic has accelerated planned structural changes to right size the business to
the current economic environment. These restructuring plans will entail further plant consolidation and corresponding
headcount reductions throughout Fiscal 2021. The financial repercussions of the pandemic have triggered both cash and
non-cash decrements in Fiscal 2020 and 2021. The most significant non-cash items this fiscal year are $16.7 million of
pension expense related to the substantial decline in the discount rate and $6.5 million of goodwill and intangible asset
impairment. In addition, the Company incurred a cash charge of approximately $1.6 million relative to the aforementioned
restructuring plans. The magnitude of these charges does not accurately reflect how the Company operated during the year.
The following table eliminates the impact of these charges.
FINANCIAL RESULTS
Our earnings (as mentioned above) were impacted by significant cash and non-cash charges this fiscal year, the majority of
which were incurred in the fourth quarter. The results, as reported under “Generally Accepted Accounting Principles” (GAAP)
in the attached 10-K, include these fourth quarter pension charges and are as follows: Sales in Fiscal 2020 were $201.5
million, a decrease of $26.6 million or 11.6%, all the decline in the second half of the year, the majority in the fourth quarter.
Income before tax was a loss of $20.0 million (attributable to the aforementioned cash and non-cash charges), a decrease of
$29.6 million from income of $9.6 million in Fiscal 2019. Net income was a loss of $21.8 million ($3.14 per share) compared
to $6.1 million ($0.87 per share) in Fiscal 2019.
4
The Company’s non–GAAP financial results in the table below exclude the Fiscal 2020 fourth quarter cash and non-cash
charges related to the pandemic and our restructuring efforts. This non–GAAP view provides a clearer picture of our results in
comparison to last year, which is as follows: Sales in Fiscal 2020 were $201.5 million, a decrease of $26.6 million or 11.6%
as a result of the pandemic. Income before tax was $4.8 million, a decrease of $4.8 million (50%) from $9.6 million in Fiscal
2019. Net income was $3.4 million ($0.48 per share) compared to $6.1 million ($0.87 per share) in Fiscal 2019.
PENSION
Given the magnitude of the $16.7 million pension charge, I thought best to remind you that we adopted mark-to-market as
the method for our pension accounting in 2011, and that going forward, we would treat the gains and losses as a period
expense within the given fiscal year. Our pension accounting is driven by three factors – service costs of the pension,
expected return on the pension assets and the discount rate. The Company has some control over the first two factors –
not so with the discount rate, which dropped to 2.73% this year versus last year’s 3.56%, a historic low.
Related to the discount rate, for several years coming into 2020, the U.S. Federal Reserve’s (FED) continued easy money
policy (and resulting low rate environment), record corporate debt issuance and strong investment demand for yield from
global markets, have maintained downward pressure on interest rates. This year, the FED’s massive and unprecedented
stimulus measures launched to 1) keep markets functioning amid the initial market panic when normal activity had
essentially frozen and 2) support the economy through the COVID-19 crisis, have exacerbated that trend to record low
levels. The combination of low treasury rates and tight credit spreads translate into low pension discount rates.
FINANCIAL CONDITION
Our financial condition remains healthy with a current ratio of 3.7 to 1 and a net working capital of $76.3 million. In addition
to normal earnings retained in the business, fluctuations in foreign currency and pension can have a significant effect on
our book value per share. This year, book value per share declined to $6.58 at the end of this year, compared to $12.09 last
year, driven principally by pension expense, restructuring charges and foreign exchange loss. The Company’s cash
decreased $2.1 million to $13.5 million.
INVESTMENTS
Capital expenditures for plant and equipment were $9.3 million in Fiscal 2020, an increase of $3.5 million from $5.8 million
in Fiscal 2019. Software development costs were $1.3 million in Fiscal 2020, level with 2019.
5
EMPLOYEE STOCKHOLDERS
During Fiscal 2020, options for 20,615 shares were exercised by employees through the Employee Stock Purchase Plan
(ESPP). As of June 30, 2020, employees of the Company hold options under the ESPP for 99,193 shares that can be
exercised over the next two years. Our experience over the years has been that employee stock ownership contributes to
the success of the Company, which is good for all stockholders and employees.
TREASURY STOCK
Given the impact of the pandemic and our corresponding cash needs, we have suspended the purchase of Company stock
on the open market. Under normal times, the Company acquires additional shares from time to time, both on the New York
Stock Exchange and in private transactions, to have stock available for miscellaneous corporate purposes and to reduce
the dilutive effect on existing shareholders of the issuance of shares under the various employee stock ownership plans.
RESTRUCTURING
Our restructuring initiatives are focused on achieving a cost structure that will deliver sustainable operating income and
cash generation to emerge from the pandemic a stronger company with the resources to reinvest in our business for future
growth. These rightsizing efforts will be complete in our third quarter of FY 2021 and will consist of:
• Facility cost reductions and manufacturing footprint rationalization.
• Reduction in global employment of 14% to approximately 1,400 associates.
• Preservation of cash by lowering capital expenditures by $5.0 million dollars in the fiscal year.
• Flexing hours and headcount across direct, indirect and selling and general administrative staffing to match
demand and meet delivery requirements.
These actions will result in the business being profitable at FY 2020 run rates and we expect to realize significant EBITDA
improvements when we return to pre-pandemic revenue levels.
LEADERSHIP
We have had a number of changes in our senior leadership team and Board this year. John Tripp – CFO, and David Allen –
VP-Starrett Metrology Systems, joined the Company in November. John and David’s appointments came at the most difficult
time imaginable, with work-from-home mandates and virtual meetings a requirement, making their on-boarding
extraordinarily challenging. They have handled the pandemic environment with aplomb and I look forward to working with
them to execute our restructuring efforts to ensure our post–COVID future is bright.
During calendar 2020, our Board of Directors has and will undergo change as part of our succession plan. Terry Piper
stepped down effective June 30, 2020, succeeded by Scott Sproule. Dave Lemoine will resign from the Board effective
October 14, 2020 succeeded by Deborah Gordon. We will miss both Terry and Dave’s wisdom and guidance and wish them
long and healthy retirements. Both Scott and Deborah bring new skills and expertise to the Board and we look forward to
their engagement.
BUSINESS AND POLITICS
Discussing politics is a toxic subject in these times, but our country and our Company’s health are dependent on the political
landscape. They say a crisis reveals character and the Coronavirus pandemic has brought out the worst in our elected
officials. With the November elections looming, both sides of the aisle are leveraging the health crisis for political gain. The
associated federal pandemic financial relief package should have been a thoughtful and measured response; instead, the
bi-partisan reelection plan was to print $2.0 trillion in cash and distribute it all over the country, whether you needed it or
not. Paying people more for sitting on their backsides than when they are working is our politician’s version of “bread and
circus.”
6
It’s fair to say that the voting public is again not enamored with our choices for a presidential ticket. As such, expectations
of a large voter turnout may not materialize, as the voting public may suffer the paradox of “Buridan's ass,” the exception
being the proverbial donkey had more appealing choices. Holding your nose when you go to the polls is not acceptable.
The question is, why is there a dearth of talent willing to run for President? That issue lies at the feet of the “Fourth Estate.”
After four years of President Trump, we know what we will get and it’s no secret what we will get with a Biden-Harris
presidency – a bigger and more intrusive government. This was summed up in a few phrases by Ronald Reagan years ago
on big government: “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
LOOKING FORWARD
Recovery will come. No one knows when and what this will look like. There has been a lot of rhetoric around the “new
normal”; that will be defined by the industry you are in, and markets that you serve. The Coronavirus (COVID-19) pandemic
will change the global economy, how business is conducted and the way we work in the future. Working from home and
virtual meetings will be far more prevalent, depending on industry; and the growth trajectory of B2B and B2C ecommerce
will continue to increase. The pandemic has also provided a lens on what functions add value and those that do not.
Manufacturing businesses like Starrett will still need bricks and mortar to make things; however, automation will continue
to accelerate, making scale more important.
We are preparing now for our post-COVID-19 future. Re-organizing the Company will be on-going, as we evaluate where
we do business, how we do business and how well we do business. We expect a slow but steady increase in revenue in
FY 2021, the caveat being a surge in COVID-19. Our footprint rationalization initiatives will create a world class saw
business of scale. Recovery in our metrology business will lag our saw business, because of the higher level of capital
spend requirements.
CLOSING THOUGHTS
This is not how I envisioned we would be celebrating our 140th anniversary; however, our Company is one of a few that has
been around long enough to have experienced the pandemic of 1918, at a time when our country and the world were also
fighting a world war. We persevered then, as we will now. We are taking tough measures now so that we can emerge from
this crisis in a position to thrive in the future for all of our stakeholders.
President and CEO
7
FINANCIAL HIGHLIGHTS (IN THOUSANDS EXCEPT PER SHARE
DATA)
Operations for the Years Ended in June
Net sales
Net earnings (loss)
Basic and diluted earnings (loss) per share
2020
201,451 $
(21,839) $
(3.14) $
$
$
$
2019
228,022
6,079
0.87
At Year End
Net working capital
Stockholders’ equity
Book value per share
Number of employees
Approximate number of stockholders
Common shares outstanding
$
$
$
76,264 $
45,983 $
6.58 $
1,485
1,960
6,987,705
87,295
83,379
12.09
1,603
1,994
6,896,102
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Statistics (in thousands except per share data)
Years Ended in June
Net sales
Net earnings (loss)
Basic earnings (loss) per
share
Diluted earnings (loss) per
share
Long-term debt
Total assets
Dividends per share
$
$
$
$
$
$
$
2020
201,451 $
(21,839) $
2019
228,022 $
6,079 $
2018
216,328 $
(3,633) $
2017
207,023 $
991 $
2016
209,685
(14,130)
(3.14) $
0.87 $
(0.52) $
0.14 $
(2.01)
(3.14) $
0.87 $
(0.52) $
0.14 $
(2.01)
26,341 $
172,683 $
0.00 $
17,541 $
190,087 $
0.00 $
17,307 $
182,286 $
0.20 $
6,095 $
192,665 $
0.40 $
17,109
201,598
0.40
8
F INANCIAL REPO RT
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
Financial Statistics (in thousands except per share data)
Years Ended in June
Net sales
Net earnings (loss)
Basic earnings (loss) per
share
share
Diluted earnings (loss) per
Long-term debt
Total assets
Dividends per share
$
$
$
$
$
$
$
2020
2019
2018
2017
2016
201,451 $
228,022 $
216,328 $
207,023 $
209,685
(21,839) $
6,079 $
(3,633) $
991 $
(14,130)
(3.14) $
0.87 $
(0.52) $
0.14 $
(2.01)
(3.14) $
0.87 $
(0.52) $
0.14 $
(2.01)
26,341 $
17,541 $
17,307 $
6,095 $
17,109
172,683 $
190,087 $
182,286 $
192,665 $
201,598
0.00 $
0.00 $
0.20 $
0.40 $
0.40
Quarter
Ended
Sep-18
Dec-18
Mar-19
Jun-19
Sep-19
Dec-19
Mar-20
Jun-20
$
Gross
Profit
Net
Sales
51,901 $ 16,659 $
56,532
58,498
61,091
18,548
19,155
20,579
$ 228,022 $ 74,941 $
$
52,114 $ 17,703 $
56,864
49,998
42,475
18,836
14,844
10,827
$ 201,451 $ 62,210 $
Earnings Before
Income Taxes
Net
Earnings
942 $
2,991
3,045
2,632
9,610 $
584 $
1,926
2,088
1,481
6,079 $
778 $
1,276 $
1,875
287
(23,435)
(19,997) $ (21,839) $
1,260
613
(24,490)
Market Price
Earnings
Per Share
High
0.08 $6.70
6.95
0.27
8.48
0.30
0.22
8.20
0.87
0.11 $6.90
6.03
0.18
6.03
0.09
4.09
(3.52)
(3.14)
Low
$5.96
4.65
5.40
6.62
$5.25
5.23
3.03
3.02
The Company’s Class A common stock is traded on the New York Stock Exchange – Symbol SCX
9
10-K
10
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(check one)
☒☒
☐☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2020
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 No. 1-367
THE L.S. STARRETT COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS
(State or other jurisdiction of
incorporation or organization)
121 CRESCENT STREET, ATHOL, MASSACHUSETTS
(Address of principal executive offices)
04-1866480
(I.R.S. Employer
Identification No.)
01331
(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
Class A Common - $1.00 Per Share Par
Value
Class B Common - $1.00 Per Share Par
Value
Trading Symbol(s)
SCX
Not applicable
Name of each exchange on which
registered
New York Stock Exchange
Not applicable
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. 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 every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T 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 definitions of “large accelerated filer,” “accelerated filer”, “smaller
reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
B1
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 Act). Yes ☐ No ☒
The Registrant had 6,279,632 and 681,219 shares, respectively, of its $1.00 par value Class A and B common stock outstanding on
December 31, 2019. On December 31, 2019, the last business day of the Registrant’s second fiscal quarter, the aggregate market
value of the common stock held by non-affiliates was approximately $35,722,784.
There were 6,329,317 and 657,270 shares, respectively, of the Registrant’s $1.00 par value Class A and Class B common stock
outstanding as of September 4, 2020.
The exhibit index is located on pages 58-59.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant intends to file a definitive Proxy Statement for the Company’s 2020 Annual Meeting of Stockholders within 120
days of the end of the fiscal year ended June 30, 2020. Portions of such Proxy Statement are incorporated by reference in Part III.
B2
THE L.S. STARRETT COMPANY
FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2020
TABLE OF CONTENTS
PART I
PART II
Business
ITEM 1.
ITEM 1A. Risk Factors
ITEM 1B. Unresolved Staff Comments
ITEM 2.
ITEM 3.
ITEM 4. Mine Safety Disclosures
Properties
Legal Proceedings
ITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
ITEM 6.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
ITEM 8.
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9A. Controls and Procedures
ITEM 9B. Other Information
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
ITEM 14. Principal Accounting Fees and Services
PART IV
ITEM 15. Exhibits, Financial Statement Schedules
ITEM 16. Form 10-K Summary
EXHIBIT INDEX
SIGNATURES
Page
Number
4-6
6-12
12
12-13
13
13
13-14
14
14-22
14-22
22-53
53
53-55
56
56-57
57
57
57
57
58
59
59-60
61
All references in this Annual Report to “Starrett”, the “Company”, “we”, “our” and “us” mean The L.S. Starrett Company and its
subsidiaries.
B3
PART I
Item 1 - Business
General
Founded in 1880 by Laroy S. Starrett and incorporated in 1929, The L.S. Starrett Company (the “Company”) is engaged in the
business of manufacturing over 5,000 different products for industrial, professional and consumer markets. The Company has a
long history of global manufacturing experience and currently operates 4 major global manufacturing plants. The one domestic
location is in Athol, Massachusetts (1880) and the international operations are located in Itu, Brazil (1956), Jedburgh, Scotland
(1958) and Suzhou, China (1997). All subsidiaries principally serve the global manufacturing industrial base with concentration in
the metalworking, construction, machinery, equipment, aerospace and automotive markets.
The Company offers its broad array of measuring and cutting products to the market through multiple channels of distribution
throughout the world. The Company’s products include precision tools, electronic gages, gage blocks, optical vision and laser
measuring equipment, custom engineered granite solutions, tape measures, levels, chalk products, squares, band saw blades, hole
saws, hacksaw blades, jig saw blades, reciprocating saw blades, M1® lubricant and precision ground flat stock. The Company
primarily distributes its precision hand tools, saw and construction products through distributors or resellers both domestically and
internationally. Starrett® is brand recognized around the world for precision, quality and innovation.
In accordance with the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
280, Segment Reporting, for the fiscal year ended June 30, 2020 (fiscal 2020), we determined that we have two reportable
operating segments (North America and International). Refer to Note 17, Financial Information by Segment & Geographical Area,
contained in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for
more information on our reportable segments.
Products
The Company’s tools and instruments are sold throughout North America and in over 100 other countries. The largest consumer of
these products is the manufacturing industry including metalworking, aerospace, medical, oil and gas, government and automotive.
Other important consumers are marine and farm equipment shops, do-it-yourselfers and tradesmen such as builders, carpenters,
plumbers and electricians.
For 140 years, the Company has been a recognized leader in providing measurement and cutting solutions to industry.
Measurement tools consist of precision instruments such as micrometers, vernier calipers, height gages, depth gages, electronic
gages, dial indicators, steel rules, combination squares, custom, non-contact gaging such as vision, optical and laser measurement
systems. The Company believes advanced, non-contact systems with easy-to use software will be attractive to industry to reduce
measurement and inspection time and are ideal for quality assurance, inspection labs, manufacturing and research facilities. Skilled
personnel, superior products, manufacturing expertise, innovation and unmatched service has earned the Company its reputation as
the “Best in Class” provider of measuring application solutions for industry.
The Company’s saw and hand tool product lines enjoy strong global brand recognition and market share. These products
encompass a breadth of uses. The Company introduced several new products in the recent past including a new line of hand tools
for measuring, marking and layout that include tapes, levels, chalk lines and other products for the building trades. The Company
also introduced new products to its hand tool portfolio to extend its reach into the construction and retail trades. The continued
focus on high performance, production band saw applications has resulted in the development of two new ADVANZ carbide
tipped products MC5 and MC7 ideal for cutting ferrous materials (MC7) and non-ferrous metals and castings (MC5). These
actions are aimed at positioning the Company for global growth in wide band products for production applications.
Over the last couple of years, the Company has launched new products such as abrasive cut-off wheels and butcher knives
amongst others, to become more product diverse as well as investing in new distribution channels and industries such as the Food
Industry with, in addition to meat and fish cutting blades, a variety of products such as butter knives, skinner and slicer blades,
bandsaw machines and related products. The Company has also invested in new channels taking its traditional products such as Bi-
metal bandsaws and its Power Tool Accessories product lines into welding and eCommerce channels.
As one of the premier industrial brands, the Company continues to be focused on every touch point with its customers. To that end,
the Company now offers modern, easy-to-use interfaces for distributors and end-users including interactive catalogs and several
online applications.
Personnel
At June 30, 2020, the Company had 1,485 employees, approximately 48% of whom were domestic. This represents a net decrease
from June 30, 2019 of 118 employees. The headcount change included a decrease of 114 domestically and 4 internationally. The
Company expects to reduce headcount in fiscal 2021 consistent with the restructuring plan discussed in Note 9 “Restructuring
Cost” to the Consolidated Financial Statements.
B4
None of the Company’s operations are subject to collective bargaining agreements. In general, the Company considers relations
with its employees to be excellent. Domestic employees hold shares of Company stock resulting from various stock purchase plans
and employee stock ownership plans. The Company believes that this dual role of owner-employee has strengthened employee
morale over the years.
Competition
The Company competes on the basis of its reputation as the best in class for quality, precision and innovation combined with its
commitment to customer service and strong customer relationships. To that end, Starrett is increasingly focusing on providing
customer centric solutions. Although the Company is generally operating in highly competitive markets, the Company’s
competitive position cannot be determined accurately in the aggregate or by specific market since none of its competitors offer all
of the same product lines offered by the Company or serve all of the markets served by the Company.
The Company is one of the largest producers of mechanics’ hand measuring tools and precision instruments. In the United States,
there are three major foreign competitors and numerous small companies in the field. As a result, the industry is highly
competitive. During fiscal 2020, there were no material changes in the Company’s competitive position. The Company’s products
for the building trades, such as tape measures and levels, are under constant margin pressure due to a channel shift to large national
home and hardware retailers. The Company has responded to such challenges by expanding its manufacturing operations in
China. Certain large customers also offer their own private labels “own brand” that compete with Starrett branded products. These
products are often sourced directly from low cost countries.
Saw products encounter competition from several domestic and international sources. The Company’s competitive position varies
by market and country. Continued research and development, new patented products and processes, strategic acquisitions and
investments and strong customer support have enabled the Company to compete successfully in both general and performance
applications.
Foreign Operations
The operations of the Company’s foreign subsidiaries are consolidated in its financial statements. The subsidiaries located in
Brazil, Scotland and China are actively engaged in the manufacturing and distribution of precision measuring tools, saw blades,
optical and vision measuring equipment and hand tools. Subsidiaries in Canada, Australia, New Zealand, Mexico, and Singapore
are engaged in distribution of the Company’s products. The Company expects its foreign subsidiaries to continue to play a
significant role in its overall operations. A summary of the Company’s foreign operations is contained in Note 17 “Financial
Information by Segment & Geographic Area” to the Company’s Consolidated Financial Statements.
Orders and Backlog
The Company generally fills orders from finished goods inventories on hand. Sales order backlog to fulfillment for the Company is
shorter than many industries. As of June 30, 2020, backorders in our U.S. Precision Tools and Saws Manufacturing “Core U.S.”
business were approximately $3.7 million or $2.9 million below fiscal 2019. Total Company inventories amounted to $53.0
million at June 30, 2020 and $61.8 million at June 30, 2019.
Intellectual Property
When appropriate, the Company applies for patent protection on new inventions and currently owns a number of patents. Its
patents are considered important in the operation of the business, but no single patent is of material importance when viewed from
the standpoint of its overall business. The Company relies on its continuing product research and development efforts, with less
dependence on its current patent position. The Company has, for many years, maintained engineers and supporting personnel
engaged in research, product development and related activities. The expenditures for these activities during fiscal years 2020,
2019, and 2018 were approximately $3.8 million, $3.7 million, and $3.6 million, respectively.
The Company uses trademarks with respect to its products and considers its trademark portfolio to be one of its most valuable
assets. All of the Company’s important trademarks are registered and rigorously enforced.
Environmental
Compliance with federal, state, local, and foreign provisions that have been enacted or adopted regulating the discharge of
materials into the environment or otherwise relating to protection of the environment is not expected to have a material effect on
the capital expenditures, earnings and competitive position of the Company. The Company seeks to reduce, control and treat water
discharges and air emissions.
Strategic Activities
Globalization has had a profound impact on product offerings and buying behaviors of industry and consumers in North America
and around the world, resulting in the Company revising its strategy to fit this, highly competitive business environment. The
Company continuously evaluates most aspects of its business, aiming for new ideas to set itself apart from its competition.
The Company’s strategic concentration is to continue building a global brand and providing unique customer value propositions
through technically supported application solutions for our customers. The Company’s job is to recommend and produce the best
B5
suited standard product or to design and build custom solutions. The combination of the right tool for the job with value added
service maintains the Company’s competitive advantage. The Company continues its focus on lean manufacturing, plant
consolidations, global sourcing, new software and hardware technologies, and improved logistics to optimize its value chain.
The execution of these strategic initiatives has expanded the Company’s manufacturing and distribution in developing economies,
resulting in international sales revenues totaling 43% of consolidated sales for fiscal 2020.
SEC Filings and Certifications
The Company makes its public filings with the Securities and Exchange Commission “SEC”, including its Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports, available
free of charge at its website, www.starrett.com, as soon as reasonably practicable after the Company files such material with the
SEC. Information contained on the Company’s website is not part of this Annual Report on Form 10-K.
Item 1A – Risk Factors
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K and the Company’s 2020 Annual Report to Stockholders, including the President’s letter,
contain forward-looking statements about the Company’s business, competition, sales, gross margins, capital expenditures, foreign
operations, plans for reorganization, interest rate sensitivity, debt service, liquidity and capital resources, and other operating and
capital requirements. In addition, forward-looking statements may be included in future Company documents and in oral
statements by Company representatives to security analysts and investors. The Company is subject to risks that could cause actual
events to vary materially from such forward-looking statements, including the following risk factors:
Risks Related to Our Company and Financial Position
We operate in a highly competitive environment, which could adversely affect our sales and pricing if we fail to compete
effectively in the future.
We operate in a highly competitive environment. We compete on the basis of a variety of factors, including product performance,
customer service, quality and price. Additionally, the Company’s products for the building trades, such as tape measures and levels,
are under constant margin pressure due to a channel shift to large national home and hardware retailers. Certain large customers also
offer their own private labels “own brand” that compete with Starrett branded products. There can be no assurance that our products
will be able to compete successfully with other companies’ products. Thus, our share of industry sales could be reduced due to
aggressive pricing or product strategies pursued by competitors, unanticipated product or manufacturing difficulties, our failure to
price our products competitively or our failure to produce our products at a competitive cost. Lack of customer acceptance of price
increases we announce from time to time, changes in customer requirements for price discounts, changes in our customers’ behavior
or a weak pricing environment could have an adverse impact on our business, results of operations and financial condition. In addition,
our results and ability to compete may be impacted negatively by changes in our geographic and product mix of sales.
Economic weakness in the industrial manufacturing sector could adversely affect the Company’s financial results.
The market for most of the Company’s products is subject to economic conditions affecting the industrial manufacturing sector,
including the level of capital spending by industrial companies and the general movement of manufacturing to low cost foreign
countries where the Company does not have a substantial market presence. Accordingly, economic weakness in the industrial
manufacturing sector may, and in some cases has, resulted in decreased demand for certain of the Company’s products, which
adversely affects sales and performance. Economic weakness in the consumer market will also adversely impact the Company’s
performance. In the event that demand for any of the Company’s products declines significantly, the Company could be required to
recognize certain costs as well as asset impairment charges on long-lived assets related to those products.
The novel coronavirus disease (COVID-19) pandemic is expected to have a material adverse effect on our business and results
of operations.
The COVID-19 pandemic has negatively impacted the global economy, disrupted consumer spending and global supply chains, and
created significant volatility and disruption of financial markets. We expect the COVID-19 pandemic to have a material adverse
impact on our business and financial performance. The extent of the impact of the COVID-19 pandemic on our business and financial
performance, including our ability to execute our near-term and long-term business strategies and initiatives in the expected time
frame, will depend on future developments, including the duration and severity of the pandemic, which are uncertain and cannot be
predicted.
As a result of the COVID-19 pandemic and in response to government mandates or recommendations, we have initiated several
measures to protect the health and safety of our employees, consumers and communities that has negatively impacted our business,
B6
including following state guidelines for social distancing such as, but not limited to, modifying shift schedules, supporting office-
base employees working remotely, educating employees and making accommodations related to personal and workplace hygiene,
mandating the wearing of masks, daily monitoring of employee’s temperature and regularly communicating accordingly. To
immediately address the immediate financial crisis management implemented plans globally in an effort to control variable cost and
to preserve cash. These actions included, but are not limited to, wage and salary reductions, furloughs, reduced work weeks and
layoffs.
Adverse global economic conditions and world events could affect our operating results, industry and business.
The Company’s results of operations have been and may continue to be materially affected by the conditions in the global economy.
The demand for our products and services has in the past and continues to be significantly reduced in periods of economic weakness
characterized by lower levels of government and business investment, lower levels of business confidence, lower corporate earnings,
high real interest rates, lower credit activity or tighter credit conditions, perceived or actual industry overcapacity, higher
unemployment and lower consumer spending. During the June quarter 2020 the Company initiated restructuring plans and recorded
an impairment of goodwill and intangible assets at two of its reporting units due in large part to the pandemic. Economic conditions
vary across regions and countries, and demand for our products and services generally increases in those regions and countries
experiencing economic growth and investment. Slower economic growth or a change in the global mix of regions and countries
experiencing economic growth and investment could have an adverse effect on our business, results of operations and financial
condition.
The metalworking, construction, machinery, equipment, aerospace and automotive industries are major users of our products.
Customers in these industries frequently base their decisions to purchase our products and services on the expected future performance
of these industries, which in turn are dependent in part on commodity prices. Prices of commodities in these industries are frequently
volatile and can change abruptly and unpredictably in response to general economic conditions and trends, government actions,
regulatory actions, commodity inventories, production and consumption levels, technological innovations, commodity substitutions,
market expectations and any disruptions in production or distribution or changes in consumption. Economic conditions affecting the
industries we serve have in the past and may in the future also lead to reduced capital expenditures by our customers. Reduced capital
expenditures by our customers are likely to lead to a decrease in the demand for our products and services and may also result in a
decrease in demand for aftermarket parts as customers are likely to extend preventative maintenance schedules and delay major
overhauls when possible. The rates of infrastructure spending and commercial construction also play a significant role in our results.
Our products are an integral component of these activities, and as these activities decrease, demand for our products may be
significantly impacted, which could negatively impact our results.
Sustained increases in funding obligations under the pension plans may impair our liquidity or financial condition.
The Company maintains certain defined benefit pension plans in both the United States and the United Kingdom for the benefit of its
employees. Defined benefit pension plans impose certain funding obligations on the Company. The Company froze the domestic
defined benefit pension plan as of December 31, 2016, and therefore no future benefits will accrue to employees under that plan.
Additionally, the Company limited eligibility under the postretirement benefit plan as of December 31, 2013, reducing the liability
for the plan. Nevertheless, the Company expects to be required to provide more funding to the domestic pension (and postretirement)
plan in the future.
The Company’s U.S. defined benefit pension plan is underfunded primarily due to lower discount rates which increase the Company’s
liability. The Company made contributions of $6.8 million in fiscal 2020, and $4.4 million in fiscal 2019 and will be required to make
additional contributions in fiscal 2021 of $7.0 million for the U.S. defined benefit pension plan. The Company’s United Kingdom
pension plan, which is also underfunded, required Company contributions of $0.9 million and $1.0 million during fiscal 2020 and
2019, respectively. The Company expects to make a $0.9 million contribution to its United Kingdom pension plan in fiscal 2021.
In determining our future payment obligations under the plans, we assume certain rates of return on the plan assets and a certain level
of future benefit payments. Significant adverse changes in credit or capital markets could result in actual rates of return being
materially lower than projected and result in increased contribution requirements. Our assumptions for future benefit payments may
also change over time, and could be materially higher than originally projected.
We expect to make contributions to our pension plans in the future, and may be required to make contributions that could be material.
We may fund contributions through the use of cash on hand, the proceeds of borrowings, shares of our common stock, or a
combination of the foregoing, as permitted by applicable law. We may also explore other strategic alternatives in order to address
expected pension liability, including de-risking options or acquisitions or sales of assets or divestitures, in order to meet the
Company’s liquidity needs. Divestitures could result in decreased future revenues and profits, and an obligation to make contributions
to our pension plans could reduce the cash available for working capital and other corporate uses, and may have an adverse impact
on our operations, financial condition and liquidity.
We are subject to certain risks as a result of our financial borrowings.
B7
As of June 30, 2020, our total indebtedness was $30.9 million as compared to indebtedness of $21.6 million as of June 30, 2019.
As previously disclosed in The L.S. Starrett Company’s (the “Company”) Quarterly Report on Form 10-Q for the quarter ended
March 31, 2020, as a result of a decrease in sales related to the COVID-19 epidemic, the Company anticipated potential non-
compliance with its fixed charge coverage ratio for the year ended June 30, 2020 under its Loan and Security Agreement (the “Loan
Agreement”) by and among the Company and its U.S. operating companies (collectively, the “Borrowers”) and TD Bank, N.A. (“TD
Bank”). On June 25, 2020, the Borrowers and TD Bank entered into an amendment and restatement (the “Amendment and
Restatement”) of the Loan Agreement. The Amendment and Restatement waived the fixed charge coverage ratio for the quarter ended
June 30, 2020. In addition, the Amendment and Restatement clarifies that certain non-cash adjustments to the definition of EBITDA
are permitted under the Loan Agreement, as amended In addition, the Amendment and Restatement increases the permitted
borrowings from a foreign bank from $5.0 million to $15.0 million and permits the Company to draw the remainder of the outstanding
balance under the Loan Agreement, which was approximately $7.2 million as of June 30, 2020.
Pursuant to the terms of the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First
Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of the
Fixed Charge Coverage Ratio until September 30, 2021 and (ii) establishment of a new minim um cumulative EBITDA and minimum
liquidity covenants in lieu thereof. TD Bank perfected its security interests in the Company’s U.S. based assets, increased the
maximum interest charged on the Line Of Credit from and annual interest rate of 2.25% plus Libor to 3.50% plus Libor, and amended
the borrowing base for the line of credit from 80% of Qualified AR and 50% of the lower of Cost or Market of US inventory values
to 80% of qualified AR plus 85% of the Net Orderly Liquidation Value (NOLV) of US Inventory plus 62.5% of total appraised US
real estate values. As a result of this change, the Company is projected to maintain its current borrowing capacity of $25,000,000
under the Line of Credit. The Company underwent a series of appraisals and field exams in all US locations as part of restructuring
this agreement. In addition, the Company will provide additional reporting to TD Bank, including monthly profit and loss statements,
balance sheets, cash flow statements and forecasting. This minimum adjusted EBITDA covenant is based on the Company’s plan for
a slow pandemic recovery throughout FY21 and the impact of the Company’s restructuring plan initiatives. The Company will apply
certain proceeds from the sale of US real estate assets against the principle balance of the term loans under the TD Bank loan
agreement. The Agreement will revert to the existing covenant package for the quarter ending September 30, 2021 and every quarter
thereafter.
Our operational results are dependent on how well we can scale our manufacturing capacity and resources to the level of our
customers’ demand.
We sell our products in industries that require manufacturers to make highly efficient use of manufacturing capacity. Insufficient or
excess capacity threatens our ability to generate competitive profit margins and may expose us to liabilities such as contractual
commitments. Although from time to time we close or consolidate facilities, adapting or modifying our capacity is difficult, as
modifications take substantial time to execute, are inherently disruptive and costly and, in some cases, may require regulatory
approval. Additionally, delivering products during process or facility modifications requires special coordination. The cost and
resources required to adapt our capacity, such as through facility acquisitions, facility closings or process moves between facilities,
may negate any planned cost reductions or may result in costly delays, product quality issues or material shortages, all of which could
adversely affect our operational results and our reputation with our customers.
We may not realize all of the anticipated benefits of our acquisitions or divestitures, or these benefits may take longer to
realize than expected.
Acquisitions involve special risks, including the potential assumption of unanticipated liabilities and contingencies, difficulty in
assimilating the operations and personnel of the acquired businesses, disruption of the Company’s existing business, dissipation of
the Company’s limited management resources, and impairment of relationships with employees and customers of the acquired
business as a result of changes in ownership and management.
In pursuing our business strategy, we routinely evaluate targets and enter into agreements regarding possible acquisitions, divestitures
and joint ventures. To be successful, we conduct due diligence to identify valuation issues and potential loss contingencies and manage
post-closing matters such as the integration of acquired businesses. Further, while we seek to mitigate risks and liabilities of such
transactions through due diligence, among other things, there may be risks and liabilities that our due diligence efforts fail to discover
that are not accurately or completely disclosed to us or that we inadequately assess. We may incur unanticipated costs or expenses
following a completed acquisition, including post-closing asset impairment charges, expenses associated with eliminating duplicate
facilities, litigation, and other liabilities. Risks associated with our past or future acquisitions also include the following:
•
•
•
the failure to achieve the acquisition's revenue or profit forecast;
technological and product synergies, economies of scale and cost reductions may not occur as expected;
unforeseen expenses, delays or conditions may be imposed upon the acquisition, including due to required regulatory
approvals or consents;
B8
•
•
•
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the acquisition or assumption of unexpected liabilities or the incurrence of unexpected penalties or other enforcement
actions;
unforeseen difficulties integrating operations, processes and systems;
failure to retain, motivate and integrate key management and other employees of the acquired business; and
problems in retaining customers and integrating customer bases.
Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of
expected revenues and diversion of management’s time and attention. They may also delay the realization of the benefits we anticipate
when we enter into a transaction. Failure to successfully integrate and realize the expected benefits of such acquisitions or to
implement our acquisition strategy, including successfully integrating acquired businesses, could have an adverse effect on our
business, financial condition and results of operations.
Furthermore, we consider strategic divestitures from time to time, including divestures of underperforming or non-core assets or
divestitures designed to generate cash to extinguish or reduce our liabilities. In the case of divestitures, we may agree to indemnify
acquiring parties for certain liabilities arising from our former businesses. These divestitures may also result in continued financial
involvement in the divested businesses following the transaction, including through guarantees or other financial arrangements. Lower
performance by those divested businesses could affect our future financial results and divestitures of profitable operations to generate
cash could reduce our future revenues and profits. (See Note 6 “Goodwill and Intangibles” to the Consolidated Financial Statements
regarding impairment)
If we do not meet customers’ product quality, reliability standards and expectations, we may experience increased or
unexpected product warranty claims and other adverse consequences to our business.
Product quality and reliability are significant factors influencing customers' decisions to purchase our products. Inability to maintain
the high quality of our products relative to the perceived or actual quality of similar products offered by competitors could result in
the loss of market share, loss of revenue, reduced profitability, an increase in warranty costs, government investigations and/or damage
to our reputation.
Product quality and reliability are determined in part by factors that are not entirely within our control. We depend on our suppliers
for parts and components that meet our standards. If our suppliers fail to meet those standards, we may not be able to deliver the
quality of products that our customers expect, which may impair our reputation, resulting in lower revenue and higher warranty costs.
We provide our customers a warranty covering workmanship, and in some cases materials, on products we manufacture. Our warranty
generally provides that products will be free from defects for 1 year. If a product fails to comply with the warranty, we may be
obligated, at our expense, to correct any defect by repairing or replacing the defective product. Although we maintain warranty
reserves in an amount based primarily on the number of units shipped and on historical and anticipated warranty claims, there can be
no assurance that future warranty claims will follow historical patterns or that we can accurately anticipate the level of future warranty
claims. While the Company has historically not incurred significant warranty expense, an increase in the rate of warranty claims or
the occurrence of unexpected warranty claims, for which we are not insured or where we cannot recover from our vendors to the
extent their materials or workmanship were defective, could materially and adversely affect our financial condition, results of
operations and cash flows.
If our manufacturing processes and products do not comply with applicable statutory and regulatory requirements, or if we
manufacture products containing design or manufacturing defects, demand for our products may decline and we may be
subject to product liability claims.
Our designs, manufacturing processes and facilities need to comply with applicable statutory and regulatory requirements. We may
also have the responsibility to ensure that products we design satisfy safety and regulatory standards including those applicable to our
customers and to obtain any necessary certifications. As a result, products that we manufacture may at times contain manufacturing
or design defects, and our manufacturing processes may be subject to errors or not be in compliance with applicable statutory and
regulatory requirements or demands of our customers. Potential defects in the products we manufacture or design, whether caused by
a design, manufacturing or component failure or error, or deficiencies in our manufacturing processes, may result in delayed shipments
to customers, replacement costs or reduced or canceled customer orders. If these defects or deficiencies are significant, our business
reputation may also be damaged. The failure of the products that we manufacture or our manufacturing processes and facilities to
comply with applicable statutory and regulatory requirements may subject us to legal fines or penalties and, in some cases, require us
to shut down or incur considerable expense to correct a manufacturing process or facility.
Any manufacturing or design defects may also result in product liability claims. Furthermore, customers use some of our products in
potentially hazardous applications that can cause injury or loss of life and damage to property, equipment or the environment. We
may be named as a defendant in product liability or other lawsuits asserting potentially large claims if an accident occurs at a location
where our equipment and services have been or are being used. We also maintain certain insurance policies which may limit our
financial exposures. Any significant liabilities which are not covered by insurance could have an adverse effect on our financial
condition, results of operation and cash flows. Likewise, a substantial increase in the number of claims that are made against us or
B9
the amounts of any judgments or settlements could materially and adversely affect our reputation and our financial condition, results
of operations and cash flows.
Volatility in the price of energy and raw materials, large or rapid increases in the cost of raw materials or components parts,
substantial decreases in their availability, or our dependence on particular suppliers of raw materials and component parts
could materially and adversely affect our operating results.
Steel is the principal raw material used in the manufacture of the Company’s products. Historically, market prices of some of our key
raw materials have fluctuated on a cyclical basis and have often depended on a variety of factors over which the Company has no
control, including as a result of tariffs or other trade barriers. If in the future we are not able to reduce product costs in other areas or
pass raw material price increases on to our customers, our margins could be adversely affected. In addition, because we maintain
limited raw material and component inventories, even brief unanticipated delays in delivery by suppliers—including those due to
capacity constraints, labor disputes, impaired financial condition of suppliers, weather emergencies, global pandemics, such as
COVID-19, or other natural disasters— may impair our ability to satisfy our customers and could adversely affect our financial
performance. The cost of producing the Company’s products is also sensitive to the price of energy. If we are unable to manage
pricing from these suppliers effectively or pass future cost increases through to our customers, our financial performance could be
adversely affected. Likewise, if our suppliers terminate these agreements and we are unable to procure alternate products at
substantially similar competitive pricing, our financial performance could be adversely affected.
We may not be able to maintain our engineering, technological and manufacturing expertise.
The markets for our products are characterized by changing technology and evolving process development. The continued success of
our business will depend upon our ability to:
•
hire, retain and expand our pool of qualified engineering and technical personnel;
• maintain technological leadership in our industry;
•
•
successfully anticipate or respond to changes in manufacturing processes in a cost-effective and timely manner; and
successfully anticipate or respond to changes in cost to serve in a cost-effective and timely manner.
We cannot be certain that we will develop the capabilities required by our customers in the future. The emergence of new technologies,
industry standards or customer requirements may render our equipment, inventory or processes obsolete or uncompetitive. We may
have to acquire new technologies and equipment to remain competitive. The acquisition and implementation of new technologies and
equipment may require us to incur significant expense and capital investment, which could reduce our margins and affect our operating
results. When we establish new facilities, we may not be able to maintain or develop our engineering, technological and manufacturing
expertise due to a lack of trained personnel, effective training of new staff or technical difficulties with machinery. Failure to anticipate
and adapt to customers’ changing technological needs and requirements or to hire and retain a sufficient number of engineers and
maintain engineering, technological and manufacturing expertise may have a material adverse effect on our business.
Increased information technology security threats and more sophisticated computer crime pose a risk to our systems,
networks, products and services. Any inadequacy, interruption, integration failure or security failure with respect to our
information technology could harm our ability to effectively operate our business.
The efficient operation of the Company's business is dependent on its information systems, including its ability to operate them
effectively and to successfully implement new technologies, systems, controls and adequate disaster recovery systems. In addition,
the Company must protect the confidentiality of data of its business, employees, customers and other third parties. Information
technology security threats -- from user error to cybersecurity attacks designed to gain unauthorized access to our systems, networks
and data – are increasing in frequency and sophistication. Cybersecurity attacks may range from random attempts to coordinated and
targeted attacks, including sophisticated computer crime and advanced persistent threats. These threats pose a risk to the security of
our systems and networks and the confidentiality, availability and integrity of our data. Cybersecurity attacks could also include
attacks targeting customer data or the security, integrity and/or reliability of the hardware and software installed in our products. It is
possible that our information technology systems and networks, or those managed by third parties, could have vulnerabilities, which
could go unnoticed for a period of time. The failure of the Company's information systems to perform as designed or its failure to
implement and operate them effectively could disrupt the Company's business or subject it to liability and thereby harm its
profitability. While the Company continues to enhance the applications contained in the Enterprise Resource Planning (ERP) system
as well as improvements to other operating systems, there can be no guarantee that the actions and controls we have implemented and
are implementing, or which we cause or have caused third party service providers to implement, will be sufficient to protect our
systems, information or other property.
If we fail to protect our intellectual property rights or maintain our rights to use licensed intellectual property, our business
could be adversely affected.
B10
Our intellectual property, including our patents, trade secrets, trademarks and licenses are important in the operation of our business.
Although we intend to protect our intellectual property rights vigorously, we cannot be certain that we will be successful in doing so.
Third parties may assert or prosecute infringement claims against us in connection with the services and products that we offer, and
we may or may not be able to successfully defend these claims. Litigation, either to enforce our intellectual property rights or to
defend against claimed infringement of the rights of others, could result in substantial costs and in a diversion of our resources.
In addition, if a third party would prevail in an infringement claim against us, then we would likely need to obtain a license from the
third party on commercial terms, which would likely increase our costs. Our failure to maintain or obtain necessary licenses or an
adverse outcome in any litigation relating to patent infringement or other intellectual property matters could have a material adverse
effect on our financial condition, results of operations and cash flows.
Risks Related to Legal and Regulatory
International operations and our financial results in those markets may be affected by legal, regulatory, political, currency
exchange and other economic risks.
During the fiscal year 2020, revenue from sales outside of the United States was $87.5 million, representing approximately 43 % of
consolidated sales. In addition, a significant amount of our manufacturing and production operations are located, or our products are
sourced from, outside the United States. As a result, our business is subject to risks associated with international operations. These
risks include the burdens of complying with foreign laws and regulations, unexpected changes in tariffs, taxes or regulatory
requirements, changes in governmental monetary and fiscal policies, and political unrest and corruption. Regulatory changes could
occur in the countries in which we sell, produce or source our products or significantly increase the cost of operating in or obtaining
materials originating from certain countries. Restrictions imposed by such changes can have a significant impact on our business.
In addition, the functional currency for most of our foreign operations is the applicable local currency. As a result, fluctuations in
foreign currency exchange rates affect the results of our operations and the value of our foreign assets and liabilities, which in turn
may adversely affect results of operations and cash flows and the comparability of period-to-period results of operations. Changes in
foreign currency exchange rates may also affect the relative prices at which we and foreign competitors sell products in the same
market. Foreign governmental policies and actions regarding currency valuation could result in actions by the United States and other
countries to offset the effects of such fluctuations. Given the unpredictability and volatility of foreign currency exchange rates,
ongoing or unusual volatility may adversely impact our business and financial conditions.
Countries in which our products are manufactured or sold may from time to time impose additional new regulations, or modify
existing regulations, including:
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•
•
•
•
•
•
changes in duties, taxes, tariffs and other charges on imports;
limitations on the quantity of goods which may be imported into the United States from a particular country;
requirements as to where products and/or inputs are manufactured or sourced;
creation of export licensing requirements, imposition of restrictions on export quantities or specification of
minimum export pricing and/or export prices or duties;
currency fluctuations;
limitations on foreign owned businesses; or
government actions to cancel contracts, re-denominate the official currency, renounce or default on obligations,
renegotiate terms unilaterally or expropriate assets.
In addition, political and economic changes or volatility, geopolitical regional conflicts, terrorist activity, political unrest, civil strife,
acts of war, public corruption and other economic or political uncertainties could interrupt and negatively affect our business
operations. All of these factors could result in increased costs or decreased revenues and could materially and adversely affect our
product sales, financial condition and results of operations.
Failure to comply with laws, rules and regulations could negatively affect our business operations and financial performance.
Due to the international scope of our operations, we are subject to a complex system of federal, state, local and international laws,
rules and regulations, such as state and local wage and hour laws, the U.S. Foreign Corrupt Practices Act (the “FCPA”), the False
Claims Act, the Employee Retirement Income Security Act (“ERISA”), securities laws, import and export laws (including customs
regulations) and many others. We may also be subject to investigations or audits by governmental authorities and regulatory agencies,
which can occur in the ordinary course of business or which can result from increased scrutiny from a particular agency towards an
industry, country or practice. Such investigations or audits may subject us to increased government scrutiny, investigation and civil
and criminal penalties, and may limit our ability to import or export our products or to provide services outside the United States.
B11
Furthermore, embargoes and sanctions imposed by the United States and other governments restricting or prohibiting sales to specific
persons or countries or based on product classification may expose us to potential criminal and civil sanctions. We cannot predict the
nature, scope or effect of future regulatory requirements to which our operations might be subject or in certain locations the manner
in which existing laws might be administered or interpreted.
In addition, as a result of operating in multiple countries, we must comply with multiple foreign laws and regulations that may differ
substantially from country to country and may conflict with corresponding U.S. laws and regulations. The FCPA and similar foreign
anti-corruption laws generally prohibit companies and their intermediaries from making improper payments or providing anything of
value to improperly influence foreign government officials for the purpose of obtaining or retaining business, or obtaining an unfair
advantage. Recent years have seen a substantial increase in the global enforcement of anti-corruption laws. Our operations outside
the United States, including in developing countries, expose us to the risk of such violations. If we fail to comply with laws, rules and
regulations or the manner in which they are interpreted or applied, we may be subject to government enforcement action, class action
litigation or other litigation, damage to our reputation, civil and criminal liability, damages, fines and penalties, and increased cost of
regulatory compliance, any of which could adversely affect our results of operations and financial performance.
Costs associated with lawsuits or investigations or adverse rulings in enforcement or other legal proceedings may have an
adverse effect on our results of operations.
From time to time, we are involved in various claims and lawsuits that arise in and outside of the ordinary course of our business. The
industries in which we operate are also periodically reviewed or investigated by regulators, which could lead to enforcement actions,
fines and penalties or the assertion of private litigation claims. It is not possible to predict with certainty the outcome of claims,
investigations and lawsuits, and we could in the future incur judgments, fines or penalties or enter into settlements of lawsuits and
claims that could have an adverse effect on our reputation, business, results of operations or financial condition in any particular
period. The global and diverse nature of our operations means that legal and compliance risks will continue to exist and additional
legal proceedings and other contingencies, the outcome of which cannot be predicted with certainty, may arise from time to time. In
addition, subsequent developments in legal proceedings may affect our assessment and estimates of loss contingencies recorded as a
reserve and require us to make payments in excess of our reserves, which could have an adverse effect on our reputation, business
and results of operations or financial condition.
Our tax rate is dependent upon a number of factors, a change in any of which could impact our future tax rates and net
income.
Our future tax rates may be adversely affected by a number of factors, including the enactment of certain tax legislation being
considered in the United States and other countries; other changes in tax laws or the interpretation of such tax laws; changes in the
estimated realization of our net deferred tax assets; the jurisdictions in which profits are determined to be earned and taxed; the
repatriation of non-U.S. earnings for which we have not previously provided for U.S. income and non-U.S. withholding taxes;
adjustments to estimated taxes upon finalization of various tax returns; increases in expenses that are not deductible for tax purposes,
including impairment of goodwill in connection with acquisitions; changes in available tax credits; and the resolution of issues arising
from tax audits with various tax authorities. Losses for which no tax benefits can be recorded could materially impact our tax rate and
its volatility from one quarter to another. Any significant change in our jurisdictional earnings mix or in the tax laws in those
jurisdictions could impact our future tax rates and net income in those periods.
Item 1B – Unresolved Staff Comments
None.
Item 2 - Properties
The Company’s principal plant and its corporate headquarters are located in Athol, MA on approximately 15 acres of Company-
owned land. The plant consists of 25 buildings, mostly of brick construction of varying dates, with approximately 535,000 square
feet.
The Company’s Webber Gage Division in Cleveland, OH, owns and occupies two buildings totaling approximately 50,000 square
feet.
The Company-owned facility in Mt. Airy, NC consists of a complex of interconnected buildings totaling approximately 320,000
square feet. It is occupied by the Company’s Saw Division and a distribution center.
The Company’s subsidiary in Itu, Brazil owns and occupies several buildings totaling 209,000 square feet.
The Company’s subsidiary in Jedburgh, Scotland owns and occupies a 175,000 square foot building.
A wholly owned manufacturing subsidiary in The People’s Republic of China leases a 133,000 square foot building in Suzhou and
leases a sales office in Shanghai.
B12
The Tru-Stone Division owns and occupies a 106,000 square foot facility in Waite Park, MN.
The Kinemetric Engineering Division occupies an 18,000 square foot leased facility in Laguna Hills, CA.
The Bytewise Division occupies a 22,000 square foot leased facility in Columbus, GA.
In addition, the Company operates warehouses and/or sales-support offices in the U.S., Australia, New Zealand, Mexico,
Singapore and Japan.
In the Company’s opinion, all of its property, plant and equipment are in good operating condition, well maintained and adequate
for its current and foreseeable needs.
Item 3 - Legal Proceedings
In the ordinary course of business, the Company is involved from time to time in litigation that is not considered material to its
financial condition or operations.
Item 4 – Mine Safety Disclosures
Not applicable.
PART II
Item 5 - Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
The Company’s Class A common stock is traded on the New York Stock Exchange. Quarterly high/low closing market price
information is presented in the table below. The Company’s Class B common stock is generally nontransferable, except to lineal
descendants of stockholders, and thus has no established trading market, but it can be converted into Class A common stock at any
time. The Class B common stock was issued on October 5, 1988, and the Company has paid the same dividends thereon as have
been paid on the Class A common stock since that date. On June 30, 2020, there were approximately 1,085 registered holders of
Class A common stock and approximately 875 registered holders of Class B common stock. In the fourth quarter of fiscal 2020,
there were zero Class A shares and 2,762 Class B shares repurchased.
Quarter Ended
September 2018
December 2018
March 2019
June 2019
September 2019
December 2019
March 2020
June 2020
High
Low
$ 6.70 $ 5.96
4.65
5.40
6.62
5.25
5.23
3.03
3.02
6.95
8.48
8.20
6.90
6.03
6.03
4.09
The Company’s dividend policy is subject to periodic review by the Board of Directors. Based upon economic conditions, the
Board of Directors suspended its quarterly dividend of $0.10 as of the quarter ended March 31, 2018.
PERFORMANCE GRAPH
The following graph sets forth information comparing the cumulative total return to holders of the Company’s Class A common
stock based on the market price of the Company’s Class A common stock over the last five fiscal years with (1) the cumulative
total return of the Russell 2000 Index (“Russell 2000”) and (2) a peer group index (the “Peer Group”) reflecting the cumulative
total returns of certain small cap manufacturing companies as described below. The peer group is comprised of the following
companies: Acme United, Q.E.P. Co. Inc., Badger Meter, National Presto Industries, Regal-Beloit Corp., Tennant Company, The
Eastern Company and WD-40.
B13
COMPARISON OF 5 YEAR CUMULATIVE TOTAL
RETURN*
Among The L.S. Starrett Company, the Russell 2000 Index,
and a Peer Group
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
6/15
6/16
6/17
6/18
6/19
6/20
The L.S. Starrett Company
Russell 2000
Peer Group
*$100 invested on 6/30/15 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
BASE
FY 2016
FY 2017
FY 2018
FY 2019
FY 2020
ST ARRET T
RUSSELL2000
PEER GROUP
$
$
$
100.00
100.00
100.00
$
$
$
82.34
93.27
97.41
$
$
$
61.95
116.21
124.48
$
$
$
47.19
136.63
138.54
$
$
$
48.81
132.11
141.65
$
$
$
25.00
123.35
156.33
Item 6 - Selected Financial Data
The following selected financial data have been derived from and should be read in conjunction with “Management Discussion
and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and notes thereto,
included elsewhere in this Annual Report on Form 10-K.
Net sales
Net earnings (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Long-term debt
Total assets
Dividends per share
$
Years ended June 30 (in $000s except per share data)
2020
201,451 $
(21,839 )
(3.14 )
(3.14 )
26,341
172,683
0.00
2019
228,022 $
6,079
0.87
0.87
17,541
190,087
0.00
2018
216,328 $
(3,633 )
(0.52 )
(0.52 )
17,307
182,286
0.20
2017
207,023 $
991
0.14
0.14
6,095
192,665
0.40
2016
209,685
(14,130 )
(2.01 )
(2.01 )
17,109
201,598
0.40
Items 7 and 7A- Management’s Discussion and Analysis of Financial Condition and Results of Operations and
Quantitative and Qualitative Disclosures about Market Risk
RESULTS OF OPERATIONS
Fiscal 2020 Compared to Fiscal 2019
COVID-19 pandemic
After a strong and encouraging financial performance in Fiscal 2019, Fiscal 2020 has presented challenges unlike any other
encountered in Starrett’s 140-year history. This storied history includes two World Wars, the 1918 pandemic, the Great Depression
of the 1930’s, and the more recent financial crisis of 2009, amongst other recessions and events. Despite the challenges presented
by the current pandemic situation, we have remained open and operational across the globe.
Globally, Starrett is deemed an “essential business”, as our measuring products are critical criteria in essential manufacturing,
including the defense, aerospace, transportation, supply chain and medical industries. The Company meets the criterial outlined in
the Cybersecurity and Infrastructure Security Agency (“CISA”) guidance, Department of Homeland Security as an “essential
business”. Furthermore, our products are used in the food industry which is critical to the supply chain.
B14
Throughout the pandemic crisis, our main focus has been on protecting the health and well-being of our employees, and the long-
term financial health of the Company. As anticipated, the COVID-19 pandemic has had a negative impact on global sales. The
impact was felt as early as January 2020 in our operation in Suzhou, China and most significantly since March 2020 in North
America, the UK, Europe and Brazil. We were very quick to take austerity measures, reducing payroll and managing variable
operational spending globally to help mitigate this shortfall in sales and preserve cash.
It remains very difficult for management to predict when this crisis will have reached its peak and when revenues and order intake
will begin to resume their normal course. Because of this remaining uncertainty, management has conducted several scenario
planning exercises and is prepared to take additional necessary steps to preserve the longer-term financial health of the Company.
As previously disclosed in our filings, and as a result of a decrease in sales related to the COVID-19 pandemic, we anticipated
potential non-compliance with our fixed charge coverage ratio for the year ended June 30, 2020 under our Loan and Security
Agreement with our main lender, TD Bank, and we notified them accordingly. On June 25, 2020, we entered in into an
amendment and restatement of the Loan Agreement with TD Bank, waiving the fixed charge coverage ratio for the quarter ended
June 30, 2020. Without this covenant relief, we may have been in default of the fixed charge coverage ratio or other covenants
under the Loan Agreement for the quarter ending September 30, 2020, as well. .
Pursuant to the terms of the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First
Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of
the Fixed Charge Coverage Ratio until September 30, 2021 and (ii) establishment of a new minimum cumulative EBITDA and
minimum liquidity covenants in lieu thereof. TD Bank perfected its security interests in the Company’s U.S. based assets,
increased the maximum interest charged on the Line Of Credit from and annual interest rate of 2.25% plus Libor to 3.50% plus
Libor, and amended the borrowing base for the line of credit from 80% of Qualified AR and 50% of the lower of Cost or Market of
US inventory values to 80% of qualified AR plus 85% of the Net Orderly Liquidation Value (NOLV) of US Inventory plus 62.5%
of total appraised US real estate values. As a result of this change, the Company is projected to maintain its current borrowing
capacity of $25,000,000 under the Line of Credit. The Company underwent a series of appraisals and field exams in all US
locations as part of restructuring this agreement. In addition, the Company will provide additional reporting to TD Bank, including
monthly profit and loss statements, balance sheets, cash flow statements and forecasting. This minimum adjusted EBITDA
covenant is based on the Company’s plan for a slow pandemic recovery throughout FY21 and the impact of the Company’s
restructuring plan initiatives. The Company will apply certain proceeds from the sale of US real estate assets against the principle
balance of the term loans under the TD Bank loan agreement. The Agreement will revert to the existing covenant package for the
quarter ending September 30, 2021 and every quarter thereafter.
Overview
For the first half of fiscal year 2020 sales were 0.5% above fiscal year 2019 at $109.0 million with Operating Income of $4.2
million. As previously mentioned, the COVID-19 pandemic has had a negative impact on global sales in the second half of fiscal
2020. This impact was felt as early as January 2020 in our operation in Suzhou, China and most significantly since March 2020 in
North America and in the UK. The March quarter sales of $50.0 million and the June quarter sales of $42.5 of fiscal 2020
(cumulatively $92.5 million) compares unfavorably to the $58.5 in the March quarter and $61.1 million in the June quarter of
fiscal year 2019 (cumulatively $119.6 million). Although overall Sales for fiscal 2020 are down 11.6% compared to fiscal 2019, it
should be noted that second half sales for fiscal 2020 declined 22.6% from fiscal 2019, and fourth quarter sales declined over 30%
from fiscal 2019 to fiscal 2020.
Overall, fiscal year 2020 sales were $201.5 million and fiscal year 2019 sales were $228.0 million.
Gross margins decreased $12.7 million or 17% from $74.9 million to $62.2 million. As a percent of sales, gross margins decreased
from 33% in fiscal 2019 to 31% in fiscal 2020. We have taken austerity measures, reducing payroll and managing variable
operational spending to help mitigate the shortfall in sales, and we are investing in restructuring programs going forward in order
to improve upon the utilization of our manufacturing capacity and lower per unit costing globally.
Selling, general and administrative expenses decreased $4.3 million from $63.7 million in fiscal 2019 to $59.4 million in fiscal
2020 or 7% also as part of cost containment in the second half of fiscal year 2020. Much of the cost reduction was achieved in Q4
of fiscal year 2020.
In the quarter ending June 30, 2020 the Company took a restructuring charge related to headcount reductions and saw
manufacturing consolidation. The Company recorded a $1.6 million restructuring charge, of which $1.1 million remains unpaid at
June 30, 2020. The Company also expects, during fiscal 2021, an additional $2.4 million of expense associated with restructuring
as a period cost at the time incurred. In addition, $6.5 million in goodwill and intangibles were impaired There were neither
restructuring nor impairment charges in fiscal 2019.
B15
Operating income in fiscal 2020 of $2.8 million, exclusive of adjustments related to goodwill and intangibles impairment of a
combined $6.5 million and restructuring of $1.6 million, decreased by $8.4 million, compared to an operating income of $11.2
million in fiscal 2019. Operating income including adjustments was a loss of $5.3 million in fiscal 2020 or $16.5 million lower
than fiscal year 2019.
Net Sales
Net sales in North America decreased $14.6 million or 11% from $136.4 million in fiscal 2019 to $121.8 million in fiscal 2020,
principally due to a $13.3 million or 19% decrease in precision hand tools. International sales decreased $12.0 million or 13%
from $91.6 million in fiscal 2019 to $79.6 million in fiscal 2020 driven by a 22% reduction in sales in the UK and a 18% decrease
in China. Brazilian sales were adversely affected by exchange rate decline versus last year that cost an estimated $7.7 million.
This means Brazil was $5.1 million below last year in USD sales but holding currency neutral would affect a $2.6 million increase
(improvement) in fiscal 2020 vs fiscal 2019, a swing of $7.7 million.
Gross Margin
Gross margin in fiscal 2020 was $62.2 million or 31% of sales and in fiscal 2019 $74.9 million or 33% of sales. Gross margin was
$12.7 million below fiscal 2019, of which $3.4 million was foreign exchange related. The Brazilian Real declined to the U.S.
dollar during fiscal year 2020. The Company’s Brazilian operations saw a decline in gross margin in fiscal year 2020 vs fiscal
year 2019 of $1.6 million but at exchange neutral would have seen a gain of $1.5 million.
North America gross margin decreased $8.1 million from $40.7 million in fiscal 2019 to $32.6 million in fiscal 2020 primarily due
to the decreased net sales, although management did take austerity measures managing variable spending to help mitigate the
shortfall. International gross margins decreased $4.6 million from $34.2 million in fiscal 2019 to $29.6 million in fiscal 2020.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including Corporate expenses, decreased in fiscal year 2020 vs prior fiscal year $4.3
million or 7% due to austerity measures as a result of lower sales. North American selling, general and administrative expenses
decreased $3.5 million or 11% and International selling, general and administrative expenses decreased $1.6 million or 6%.
Operating Profit
During the first half of fiscal 2020, in comparison to fiscal 2019, net sales were better by $0.3 million or 0.5% and operating profit
was down 4.0% or $0.2 million. Fiscal 2019 ended with operating income of $11.2 million or 5% of net sales. Fiscal year 2020
ended at a loss of $5.3 million which was a $16.5 million decline to fiscal year 2019. This downward change in the second half of
fiscal 2020 is predominately related to the pandemic.
Operating income in fiscal 2020 was $2.8 million, exclusive of $8.1 million of adjustments related to impairment and
restructuring. Fiscal year 2019 had neither asset impairment nor restructuring charges. As reported, operating income in fiscal
year 2020 was a loss of $5.3 million versus operating income of $11.2 million in fiscal year 2019.
Other Income (Expense)
Other Income (Expense) was ($14.7) million in fiscal 2020 as compared to ($1.6) million in fiscal 2019. The financial markets
had an adverse impact on earnings in fiscal 2020 as the increased demand for bonds and the associated decrease in interest rates
significantly contributed to a $16.7 million mark-to-market non-cash pension expense due to higher liabilities. The pension
liability is based upon the ten-year Corporate Bond Rate and is set on the last day of the fiscal year. This generally accepted
accounting principle coupled with the historically low interest rates are beyond the control of management. The discount rate to
determine net cost for the US pension liability was lowered from 3.56% in June 2019 to 2.73% in June 2020. The Amortization of
the net pension loss was $256 thousand in fiscal year 2019 compared to $16.7 million in fiscal 2020.
Income Taxes
The tax rate of (9.2%) on pre-tax losses of ($20.0) million in the year ended June 30, 2020 is lower than the U.S. statutory rate
primarily as a result of the Global Intangible Low Taxed Income” GILTI” provisions, non-deductible goodwill impairment, as well
as changes in the jurisdictional mix of earnings, particularly Brazil with a statutory tax rate of 34%. The tax rate was also
negatively impacted by the write-off of the long-term receivable previously established for competent authority relief for historic
transfer pricing adjustments which the Company has determined is no longer feasible to pursue and an increase in the valuation
allowance against foreign tax credits which the Company has determined are more likely than not to expire unutilized.
B16
The income tax rate for fiscal 2019 was 36.7% on pre-tax income of $9.6 million. The tax rate is higher than the U. S. statutory
rate as a result of the “GILTI” provisions, which became effective in fiscal 2019 as well as changes in the international mix of
earnings, particularly in Brazil with a statutory rate of 34%.
The Company continues to recognize the benefit of most U.S. deferred tax assets as, after weighing the positive and negative
evidence, it believes it is more likely than not that those benefits will be recognized.
Fiscal 2019 Compared to Fiscal 2018
Overview
Net sales for fiscal 2019 increased $11.7 million or 5% compared to fiscal 2018. Excluding the effects of foreign currency of $10
million, sales revenue increased $21.7 million or 10%. Unit volume, new products and price increases, represented $13.6, $4.8 and
$3.3 million, respectively of the sales growth.
Gross margins increased $5.3 million or 8% from $69.6 million to $74.9 million. As a percent of sales, gross margins increased
0.7%. North America and International increased $1.4 million and $3.9 million, respectively.
Selling, general and administrative expenses decreased $0.3 million from $64.0 million in fiscal 2018 to $63.7 million in fiscal
2019 as a $2.4 million increase in constant currency was offset by a $2.7 currency decline due to a weaker Brazilian Real and
British Pound.
Operating income more than doubled, increasing $5.7 million from $5.5 million in fiscal 2018 to $11.2 million in fiscal 2019.
Net Sales
Net sales in North America increased $8.0 million or 6% from $128.4 million in fiscal 2018 to $136.4 million in fiscal 2019,
principally due to a $7.3 million or 12% increase in precision hand tools. International sales increased $3.7 million or 4% from
$87.9 million in fiscal 2018 to $91.6 million in fiscal 2019 as a recovery from recession in Brazil resulted in a $4.5 million revenue
improvement offsetting a $10 million reduction related to foreign currency losses. Excluding the aforementioned foreign currency
impacts international sales increased $13.7 million.
Gross Margin
Gross margin in North America increased $1.4 million from $39.4 million in fiscal 2018 to $40.8 million in fiscal 2019 primarily
due to increased revenue and improved margins for precision hand tools. International gross margins increased $3.9 million from
$30.2 million in fiscal 2018 to $34.1 million in fiscal 2019 based upon increased sales and reduced cost in Brazil.
Selling, General and Administrative Expenses
North American selling, general and administrative expenses, including Corporate expenses, increased $1.4 million or 4%
principally due to higher selling and incentive pay expenses. International selling, general and administrative expenses decreased
$1.7 million or 6% due lower foreign exchange in Brazilian expenses.
Operating Profit
Operating profit improved $5.7 million as a result of increased sales revenues and lower costs in both North America and
International.
Other Income (Expense)
As outlined in Notes 10 and 12 to the Consolidated Financial Statements, pension expense, excluding service cost, was reclassified
to Other Income (Expense) for fiscal years 2019, 2018 and 2017. Other expense increased $1.0 million from $0.6 million in fiscal
2018 to an expense of $1.6 million in fiscal 2019 due primarily to income related to an international tax settlement of $1.1 million
and the settlement of patent litigation of $0.7 in fiscal 2019.
Income Taxes
The income tax rate for fiscal 2019 was 36.7% on pre-tax income of $9.6 million. The tax rate is higher than the U. S. statutory
rate as a result of the Global Intangible Low Taxed Income “GILTI” provisions, which became effective in fiscal 2019 as well as
changes in the international mix of earnings, particularly in Brazil with a statutory rate of 34%.
B17
The income tax rate for fiscal 2018 was 174.7% on pre-tax income of $4.9 million. This rate compares to a normalized statutory
U.S. federal and state rate of 32%. The primary reason for the higher effective tax rate is due to the reduction of the deferred tax
asset due to the change in tax rates enacted in the United States.
The Company continues to recognize the benefit of most U.S. deferred tax assets as, after weighing the positive and negative
evidence, it believes it is more likely than not that those benefits will be recognized.
FINANCIAL INSTRUMENT MARKET RISK
Market risk is the potential change in a financial instrument’s value caused by fluctuations in interest and currency exchange rates,
and equity and commodity prices. The Company’s operating activities expose it to risks that are continually monitored, evaluated
and managed. Proper management of these risks helps reduce the likelihood of earnings volatility.
The Company does not engage in tracking, market-making or other speculative activities in derivatives markets. The Company
does enter into long-term supply contracts with either fixed prices or quantities. The Company engages in an immaterial amount of
hedging activity to minimize the impact of foreign currency fluctuations but has no forward currency contracts outstanding at June
30, 2020. Net foreign monetary assets are approximately $7.0 million as of June 30, 2020 and $12.9 million as of June 30, 2019.
A 10% change in interest rates would not have a significant impact on the aggregate net fair value of the Company’s interest rate
sensitive financial instruments or the cash flows or future earnings associated with those financial instruments. A 10% increase in
interest rates would not have a material impact on our borrowing costs. See Note 13 “Debt” to the Consolidated Financial
Statements for details concerning the Company’s long-term debt outstanding of $30.9 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) operating activities
Cash used in investing activities
Cash provided by (used in) financing activities
$
Years ended June 30 ($000)
2020
(1,163 ) $
(10,600 )
9,314
2019
8,397 $
(7,227 )
(225 )
2018
4,055
(5,762 )
1,708
The Company has a working capital ratio of 3.7 as of June 30, 2020 and 3.7 as of June 30, 2019 as lower accounts receivable of
$7.0 million and lower inventory balances of $8.8 million were partially offset by decreased accounts payable, and accrued
expenses. Cash, accounts receivable and inventories represent 92% and 94% of current assets fiscal 2020 and fiscal 2019,
respectively. The Company had accounts receivable turnover of 6.2 in fiscal 2020 and 6.6 in fiscal 2019 and an inventory turnover
ratio of 2.5 in both fiscal 2020 and in fiscal 2019.
Net cash used by operations was $1.2 million in fiscal 2020. Cash used in investing of $10.6 million included $9.3 million
invested in property, plant and equipment and $1.3 million invested in software development. The Company had $9.3 million
provided principally by net borrowing activities.
Effects of translation rate changes on cash primarily result from the movement of the U.S. dollar against the British Pound, the
Euro and the Brazilian Real.
Liquidity and Credit Arrangements
In addition to its cash and short-term investments, the Company has available a $25.0 million line of credit, of which, $0.8 million
is reserved for letters of credit and $20.4 million was outstanding as of June 30, 2020.
During 2020 we implemented a restructuring plan to address changes in our business as a result of the COVID-19 pandemic. This
plan included reducing payroll, consolidation of certain operations and managing variable costs. In addition, we worked with TD
Bank to amend the current loan agreement which resulted in a number of changes such as amendments to the financial covenants
through June 2021. We believe that existing cash and cash expected to be provided by future operating activities, augmented by
the plans highlighted above, are adequate to satisfy our working capital, capital expenditure requirements and other contractual
obligations for at least the next 12 months. If our expectations are incorrect or the impact from the COVID-19 pandemic worsens
then we may need to take advantage of unanticipated strategic opportunities to strengthen our financial position, which could result
in material impacts to the Company’s consolidated financial statements in future reporting periods .
During the period ended March 31, 2020, as a result of a decrease in sales related to the COVID-19 epidemic, the Company
anticipated potential non-compliance with its fixed charge coverage ratio for the year ended June 30, 2020 under its Loan and
Security Agreement (the “Loan Agreement”) by and among the Company and its U.S. operating companies (collectively, the
“Borrowers”) and TD Bank, N.A. (“TD Bank”). On June 25, 2020, the Borrowers and TD Bank entered into an amendment and
B18
restatement (the “Amendment and Restatement”) of the Loan Agreement. The Amendment and Restatement waived the fixed
charge coverage ratio for the quarter ended June 30, 2020.
Pursuant to the terms of the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First
Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of
the Fixed Charge Coverage Ratio until September 30, 2021 and (ii) establishment of a new minimum cumulative EBITDA and
minimum liquidity covenants in lieu thereof. TD Bank perfected its security interests in the Company’s U.S. based assets,
increased the maximum interest charged on the Line Of Credit from and annual interest rate of 2.25% plus Libor to 3.50% plus
Libor, and amended the borrowing base for the line of credit from 80% of Qualified AR and 50% of the lower of Cost or Market of
US inventory values to 80% of qualified AR plus 85% of the Net Orderly Liquidation Value (NOLV) of US Inventory plus 62.5%
of total appraised US real estate values. As a result of this change, the Company is projected to maintain its current borrowing
capacity of $25,000,000 under the Line of Credit. The Company underwent a series of appraisals and field exams in all US
locations as part of restructuring this agreement. In addition, the Company will provide additional reporting to TD Bank, including
monthly profit and loss statements, balance sheets, cash flow statements and forecasting. This minimum adjusted EBITDA
covenant is based on the Company’s plan for a slow pandemic recovery throughout FY21 and the impact of the Company’s
restructuring plan initiatives. The Company will apply certain proceeds from the sale of US real estate assets against the principle
balance of the term loans under the TD Bank loan agreement. The Agreement will revert to the existing covenant package for the
quarter ending September 30, 2021 and every quarter thereafter.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any material off-balance sheet arrangements as defined under the Securities and Exchange
Commission rules.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the
United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in
the consolidated financial statements and accompanying notes. Note 2 to the Company’s Consolidated Financial Statements
describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.
Judgments, assumptions, and estimates are used for, but not limited to, the allowance for doubtful accounts receivable and returned
goods; inventory allowances; income tax reserves; long lived assets and goodwill impairment; as well as employee turnover,
discount and return rates used to calculate pension obligations.
Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the
exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the
Company’s Consolidated Financial Statements. The following sections describe the Company’s critical accounting policies.
Revenue Recognition and Accounts Receivable: 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 Consolidated Balance Sheet. Therefore, while the Company made adjustments to certain opening balances on its July 1, 2018
Consolidated Balance Sheet, the Company made no adjustment to opening Retained Earnings. The impact of the adoption of ASC
Topic 606 has been immaterial to its net income on an ongoing basis; however, adoption did increase the level of disclosures
concerning net sales. Results for reporting periods beginning July 1, 2018 are presented under the new guidance, while prior period
amounts continue to be reported in accordance with previous guidance without revision.
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 as revenue the
amount of 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
B19
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 deferred as of June 30, 2020. Purchase orders are of durations less than one year. As such, the Company
applies the practical expedient in ASC paragraph 606-10-50-14 and does not disclose information about remaining performance
obligations that have original expected durations of one year or less, for which work has not yet been performed.
Certain taxes assessed by governmental authorities on revenue producing transactions, such as value added taxes, are excluded
from revenue and recorded on a net basis. Cooperative advertising payments made to customers are included as advertising
expense in selling, general and administrative expense in the Consolidated Statements of Operations.
The allowance for doubtful accounts of $0.7 million at the end of fiscal 2020 compared to $0.7 million at the end of fiscal 2019 is
based on our assessment of the collectability of specific customer accounts and the aging of our accounts receivable. While the
Company believes that the allowance for doubtful accounts is adequate, if there is a deterioration of a major customer’s credit
worthiness, actual write-offs are higher than our previous experience, or actual future returns do not reflect historical trends, the
estimates of the recoverability of the amounts due the Company could be adversely affected.
Inventory Valuation: The Company values inventories at the lower of the cost of inventory or net realizable value, with cost
determined by either the last-in, first-out "LIFO" method for most U.S. inventories or the first-in, first-out "FIFO" method for all
other inventories. The Company establishes reserves for excess, slow moving, and obsolete inventory based on inventory levels,
expected product life, and forecasted sales demand. In assessing the ultimate realization of inventories, we are required to make
judgments as to future demand requirements compared with inventory levels. Reserve requirements are developed according to our
projected demand requirements based on historical demand, competitive factors, and technological and product life cycle changes.
It is possible that an increase in our reserve may be required in the future if there is a significant decline in demand for our
products and we do not adjust our production schedules accordingly.
Warranty expense: The Company’s warranty obligation is generally one year from shipment to the end user and is affected by
product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Historically, the Company
has not incurred significant warranty expense and consequently its warranty reserves are not material.
Property Plant and Equipment: The Company accounts for property, plant and equipment (PP&E) at historical cost less
accumulated depreciation. PP&E is reviewed for impairment whenever events or changes in circumstances indicate the carrying
amount of such an asset may not be recoverable. Such events or circumstances include, but are not limited to, a significant
decrease in the fair value of the underlying business or change in utilization of property and equipment.
Recoverability of the net book value of PP&E is determined by comparison of the carrying amount to estimated future
undiscounted net cash flows the asset group is expected to generate. Those cash flows may include an estimated salvage value
based on a hypothetical sale at the end of the assets' depreciation period. Estimating these cash flows and terminal values requires
management to make judgments about the growth in demand for our products, sustainability of gross margins, and our ability to
achieve economies of scale. If assets are considered to be impaired, the impairment to be recognized is measured as the amount by
which the carrying amount of the long-lived asset exceeds its fair value.
Depreciation is included in cost of goods sold or selling, general and administrative expenses in the Consolidated Statement of
Operations based upon the function or use of the specific asset. Depreciation of equipment used in the manufacturing process is a
component of inventory cost and included in costs of goods sold upon sale. Depreciation of equipment used for office and
administrative functions is an expense included in selling, general and administrative expenses.
Intangible Assets: Identifiable intangible assets are recorded at cost and are amortized on a straight-line basis over a 5-20 year
period. The estimated useful lives of the intangible assets subject to amortization are: 10-15 years for patents, 14-20 years for
trademarks and trade names, 5-10 years for completed technology, 8 years for non-compete agreements, 8-16 years for customer
relationships and 5 years for software development. The Company in accordance with ASC 350 (Intangibles- Goodwill and
Other), tested as a result of a triggering events identified at the private software company and Bytewise, due to lower sales
“whether it is more likely than not the fair value of the reporting units long lived assets exceeded its carrying amount and
determined intangibles were impairment at the private software company. The Company took a charge of $2.8 million during the
June 2020 quarter for the impairment of intangible assets at its private software reporting unit. See Note 6 “Goodwill and
Intangibles” to the Consolidated Financial Statements for goodwill impairment charge details.
Recoverability of the net book value of intangible assets is determined by comparison of the carrying amount to estimated future
undiscounted net cash flows the asset group is expected to generate. Estimating these cash flows requires management to make
judgments about the growth in demand for our products, sustainability of gross margins, and our ability to achieve economies of
scale. If assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying
amount of the long-lived asset exceeds its fair value.
B20
Goodwill: Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill
is not subject to amortization but is tested for impairment annually and at any time when events suggest impairment may have
occurred. The Company annually tests the goodwill of two reporting units associated with the November 2011 acquisition of
Bytewise and the February 2017 acquisition of a private software company. Bytewise is tested in October and the software
reporting unit is tested in February. The Company contracted with a professional valuation firm “the firm” to perform a
quantitative analysis (commonly referred to as “Step One”) for its February 1, 2020 annual assessment of goodwill associated with
its purchase of a private software company. The firm assisted the Company in estimating 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. During the March quarter fiscal year 2020, it determined the fair value assessment of the software development company’s
goodwill exceeded the carrying amount.
The Company performed a qualitative analysis of its Bytewise reporting unit for its October 1, 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 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.
During the June quarter fiscal year 2020 the Company, considering the COVID-19 pandemic a triggering event at the private
software company and Bytewise due to lower sales, tested the Goodwill at both reporting units and concluded that the fair value,
on a discounted cash flow basis, was less than the carrying value and took a goodwill impairment charge of $3.7 million. See Note
6 “Goodwill and Intangibles” to the Consolidated Financial Statements for impairment charges.
Income Taxes: Accounting for income taxes requires estimates of future benefits and tax liabilities. Due to temporary differences
in the timing of recognition of items included in income for accounting and tax purposes, deferred tax assets or liabilities are
recorded to reflect the impact arising from these differences on future tax payments. With respect to recorded tax assets, the
Company assesses the likelihood that the asset will be realized by evaluating the positive and negative evidence to determine
whether realization is more likely than not to occur. Realization of the Company’s deferred tax assets is primarily dependent on
future taxable income, the timing and amount of which are uncertain, in part, due to the variable profitability of certain
subsidiaries. A valuation allowance is recognized if it is “more likely than not” that some or all of a deferred tax asset will not be
realized. In the event that we were to determine that we would not be able to realize our deferred tax assets in the future, an
increase in the valuation allowance would be required. In the event we were to determine that we are able to realize our deferred
tax assets and a valuation allowance had been recorded against the deferred tax assets, a decrease in the valuation allowance would
be required. Should any significant changes in the tax law or the estimate of the necessary valuation allowance occur, the
Company would record the impact of the change, which could have a material effect on our financial position or results of
operations. (See also Note 11 “Income Taxes” to the Consolidated Financial Statements.)
Defined Benefit Plans: The Company has two defined benefit pension plans, one for U.S. employees and another for U.K.
employees. The Company also has a postretirement medical and life insurance benefit plan for U.S. employees.
On December 21, 2016, the Company amended the U.S. defined benefit pension plan to freeze benefit accruals effective December
31, 2016. Consequently, the Plan is closed to new participants and current participants no longer earn additional benefits after
December 31, 2016.
Under our current accounting method, both plans use fair value as the market-related value of plan assets and continue to
recognize actuarial gains or losses within the corridor in other comprehensive income but instead of amortizing net actuarial gains
or losses in excess of the corridor in future periods, excess gains and losses are recognized in net periodic benefit cost as of the
plan measurement date, which is the same as the fiscal year end of the Company. This mark-to market (MTM adjustment)
accounting method is a permitted option which results in immediate recognition of excess net actuarial gains and losses in net
periodic benefit cost instead of in other comprehensive income. Immediate recognition in net periodic benefit cost could
potentially increase the volatility of net periodic benefit cost. The MTM adjustments to net periodic benefit cost for fiscal years
2020, 2019 and 2018 were $16.9 million, $0.3 million, and $0.1 million, respectively. During Fiscal year 2020 the Company
recorded a $16.8 million non-cash pension expense due to higher liabilities. The pension liability is based upon the ten-year
Corporate Bond Rate and is set on the last day of the fiscal year. This generally accepted accounting principle coupled with the
historically low interest rates are driven by financial markets, economic policy and financial conditions. The discount rate to
determine net cost for the US pension liability was lowered from 3.56% in June 2019 to 2.73% in June 2020.
Calculation of pension and postretirement medical costs and obligations are dependent on actuarial assumptions. These
assumptions include discount rates, healthcare cost trends, inflation, salary growth, long-term return on plan assets, employee
turnover rates, retirement rates, mortality and other factors. These assumptions are made based on a combination of external
market factors, actual historical experience, long-term trend analysis, and an analysis of the assumptions being used by other
companies with similar plans. Significant differences in actual experience or significant changes in assumptions would affect
B21
pension and other postretirement benefit costs and obligations. Effective December 31, 2013, the Company terminated eligibility
for employees 55-64 years old in the Postretirement Medical Plan. (See also Note 12 “Employee Benefit Plans” to the
Consolidated Financial Statements).
CONTRACTUAL OBLIGATIONS
The following table summarizes future estimated payment obligations by period.
Debt obligations
Estimated interest on debt obligations
Operating lease obligations
Purchase obligations
Total
$
$
Fiscal Year (in millions)
Total
30.9 $
1.7
5.4
10.8
48.8 $
2021
4.6 $
0.8
2.2
9.4
17.0 $
2022-
2023
22.9 $
0.7
2.4
1.4
27.4 $
2024-
2025 Thereafter
0.7
-
0.1
-
0.8
2.7 $
0.2
0.7
-
3.6 $
Estimated interest on debt obligations is based on a standard 10-year loan amortization schedule for the $10.0 million term loan,
and the current outstanding balance of the Company's credit line at the current effective interest rate through April 2022 when the
current credit line agreement ends. (See Note 13 “Debt” to the Consolidated Financial Statements for additional details).
While our purchase obligations are generally cancellable without penalty, certain vendors charge cancellation fees or minimum
restocking charges based on the nature of the product or service. The Company’s Brazilian subsidiary has entered into a long-term,
volume-based purchase agreement for electricity. Under this agreement the Company is committed to purchase a minimum
monthly amount of energy at a fixed price per kilowatt hour. Cancellation of this contract would incur a significant penalty.
Item 8 - Financial Statements and Supplementary Data
Contents:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
23
24
25
26
27
28
29-54
B22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
The L.S. Starrett Company
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of The L.S. Starrett Company (a Massachusetts corporation) and
subsidiaries (the “Company”) as of June 30, 2020 and 2019, the related consolidated statements of operations, comprehensive
income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2020, and the related
notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020
and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, in
conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2020, based on criteria established in the 2013
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”), and our report dated September 22, 2020 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2006.
Boston, Massachusetts
September 22, 2020
B23
THE L.S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands except share data)
ASSETS
Current assets:
Cash
$
Accounts receivable (less allowance for doubtful accounts of $736 and $685, respectively)
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Right of use assets
Taxes receivable
Deferred tax assets, net
Intangible assets, net
Goodwill
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt
Current lease liability
Accounts payable
Accrued expenses
Accrued compensation
Total current liabilities
Other tax obligations
Long-term lease liability
Long-term debt, net of current portion
Postretirement benefit and pension obligations
Total liabilities
Stockholders’ equity:
Class A common stock $1 par (20,000,000 shares authorized; 6,308,025 outstanding at June
30, 2020 and 6,206,525 outstanding at June 30, 2019)
Class B common stock $1 par (10,000,000 shares authorized; 679,680 outstanding at June 30,
2020 and 689,577 outstanding at June 30, 2019)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements
$
$
$
6/30/20
6/30/19
13,458 $
29,012
52,987
8,641
104,098
37,090
4,465
-
21,018
4,997
1,015
172,683 $
4,532 $
1,905
7,579
8,838
4,980
27,834
2,532
2,655
26,341
67,338
126,700
15,582
35,980
61,790
6,623
119,975
36,679
-
1,666
18,639
8,460
4,668
190,087
4,065
-
12,881
8,699
7,035
32,680
2,587
-
17,541
53,900
106,708
6,308
6,207
680
55,762
58,648
(75,415 )
45,983
172,683 $
690
55,276
80,487
(59,281 )
83,379
190,087
B24
THE L.S. STARRETT COMPANY
Consolidated Statements of Operations
(in thousands except per share data)
Net sales
Cost of goods sold
Gross margin
% of net sales
Selling, general and administrative expenses
Restructuring charges
Goodwill and intangibles impairment
Operating income (loss)
Other (expense) income
Earnings (loss) before income taxes
Income tax expense
Net earnings (loss)
Basic and diluted earnings (loss) per share
Average outstanding shares used in per share calculations:
Basic
Diluted
$
$
$
Years Ended
6/30/20
201,451 $
139,241
62,210
30.9 %
59,437
1,580
6,496
(5,303 )
6/30/19
228,022 $
153,081
74,941
32.9 %
63,720
-
-
11,221
6/30/18
216,328
146,771
69,557
32.2 %
64,039
-
-
5,518
(14,694 )
(1,611 )
(653 )
(19,997 )
1,842
9,610
3,531
4,865
8,498
(21,839 ) $
6,079
$
(3,633 )
(3.14 ) $
0.87
$
(0.52 )
6,949
6,949
6,957
7,026
7,014
7,014
Dividends per share
$
0.00 $
0.00 $
0.20
See notes to consolidated financial statements
B25
THE L. S. STARRETT COMPANY
Consolidated Statements of Comprehensive (Loss)
(in thousands)
Net earnings (loss)
Other comprehensive (loss) income:
Years Ended
$
6/30/20
(21,839 ) $
6/30/19
6,079 $
6/30/18
(3,633 )
Currency translation (loss), net of tax
Pension and postretirement plans, net of tax of $(962), $(3,140) and
$1,908, respectively
(12,316 )
(593 )
(5,603 )
(3,818 )
(9,488 )
6,428
Other comprehensive (loss) income
(16,134 )
(10,081 )
825
Total comprehensive (loss)
$
(37,973 ) $
(4,002 ) $
(2,808 )
See notes to consolidated financial statements
B26
THE L.S. STARRETT COMPANY
Consolidated Statements of Stockholders’ Equity
(in thousands except per share data)
Balance, July 1, 2017
$
6,268 $
762 $
Common Stock
Outstanding
Class A
Class B
Additional
Paid-in
Capital
55,579 $
Accumulated
Other
Retained
Earnings
Comprehensive
Loss
Total
(49,985 ) $ 92,026
79,402 $
Total comprehensive (loss) income
Dividends ($0.20 per share)
Repurchase of shares
Issuance of stock
Stock-based compensation
Conversion
Balance, June 30, 2018
Total comprehensive (loss) income
Transfer of historical translation
adjustment
Repurchase of shares
Issuance of stock
Stock-based compensation
Conversion
Balance, June 30, 2019
Total comprehensive (loss) income
Repurchase of shares
Issuance of stock
Stock-based compensation
Conversion
Balance, June 30, 2020
$
Cumulative balance:
Currency translation loss, net of
taxes
Pension and postretirement plans, net
of taxes
-
-
(58 )
20
18
54
6,302
-
-
(8 )
20
-
(54 )
720
- (3,633 )
(1,401 )
-
-
(497 )
-
279
-
280
-
-
74,368
55,641
825
-
-
-
-
-
(49,160 )
(2,808 )
(1,401 )
(563 )
319
298
-
87,871
-
-
-
6,079
(10,081 )
(4,002 )
-
(154 )
-
19
40
6,207
-
-
-
76
25
6,308 $
-
(5 )
15
-
(40 )
690
-
(6 )
21
-
(25 )
680 $
-
(791 )
66
360
-
55,276
-
(20 )
52
454
-
55,762 $
40
-
-
-
-
80,487
(21,839 )
-
-
-
-
58,648 $
(40 )
-
-
-
-
(59,281 )
-
(950 )
81
379
-
83,379
(16,134 )
-
-
-
-
(37,973 )
(26 )
73
530
-
(75,415 ) $ 45,983
$
(61,874 )
$
(13,541 )
(75,415 )
See notes to consolidated financial statements
B27
THE L. S. STARRETT COMPANY
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net earnings (loss)
Non cash operating activities:
Depreciation
Amortization
Goodwill and intangibles impairment
Stock-based compensation
Net long-term tax obligations
Deferred taxes
Postretirement benefit and pension obligations
Working capital changes:
Accounts receivable
Inventories
Other current assets
Other current liabilities
Prepaid pension expense
Other
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Software development
Net cash (used in) investing activities
Cash flows from financing activities:
Proceeds from borrowings
Debt repayments
Proceeds from common stock issued
Repurchase of shares
Dividends paid
Net cash provided by (used in) financing activities
Effect of translation rate changes on cash
Net increase (decrease) in cash
Cash beginning of year
Cash end of year
Supplemental cash flow information:
Interest paid
Taxes paid
Years Ended
6/30/20
6/30/19
6/30/18
$
(21,839 ) $
6,079 $
(3,633 )
5,206
1,990
6,496
530
1,881
(1,802 )
16,823
2,284
1,603
(3,071 )
(3,369 )
(8,035 )
140
(1,163 )
(9,277 )
(1,323 )
(10,600 )
14,850
(5,583 )
73
(26 )
-
9,314
325
(2,124 )
15,582
13,458 $
953 $
1,994
5,047
2,291
-
379
(20 )
1,202
1,000
(3,210 )
(4,204 )
610
4,463
(5,766 )
526
8,397
(5,765 )
(1,462 )
(7,227 )
4,300
(3,656 )
81
(950 )
-
(225 )
(190 )
755
14,827
15,582 $
884 $
2,262
5,462
2,049
-
298
80
7,228
876
(4,282 )
(3,461 )
(822 )
4,521
(4,761 )
500
4,055
(4,345 )
(1,417 )
(5,762 )
6,797
(3,444 )
319
(563 )
(1,401 )
1,708
219
220
14,607
14,827
667
122
$
$
See notes to consolidated financial statements
B28
THE L.S. STARRETT COMPANY
Notes to Consolidated Financial Statements
June 30, 2020 and 2019
1. DESCRIPTION OF BUSINESS
The L. S. Starrett Company (the “Company”) is incorporated in the Commonwealth of Massachusetts and is in the business of
manufacturing industrial, professional and consumer measuring and cutting tools and related products. The Company’s
manufacturing operations are primarily in North America, Brazil, China and the United Kingdom “U.K.”. The largest consumer of
these products is the metalworking industry, but others include automotive, aviation, marine, farm, do-it-yourselfers and tradesmen
such as builders, carpenters, plumbers and electricians.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements include the accounts of The L. S. Starrett Company and its
subsidiaries, all of which are wholly-owned. All intercompany items have been eliminated in consolidation.
Cash: Cash held by foreign subsidiaries amounted to $7.1 million and $8.9 million at June 30, 2020 and June 30, 2019,
respectively. Of the June 30, 2020 balance, $4.3 million in U.S. dollar equivalents was held in British Pounds Sterling and $0.7
million in U.S. dollar equivalents was held in Brazilian Reals. Of the June 30, 2019 balance, $4.6 million in U.S. dollar
equivalents was held in British Pounds Sterling and $2.6 million in U.S. dollar equivalents was held in Brazilian Reals.
The Company plans to permanently reinvest cash held in foreign subsidiaries. Cash held in foreign subsidiaries is not available for
use in the U.S. without the likely incurrence of U.S. federal and state income and withholding tax consequences.
Financial instruments and derivatives: The Company’s financial instruments include cash, accounts receivable, accounts payable,
accrued expenses and debt. The carrying value of cash and accounts receivable approximates fair value because of the short-term
nature of these instruments. The carrying value of debt, which is at current market interest rates, also approximates its fair
value. The Company’s U.K. subsidiary utilizes forward exchange contracts to reduce currency risk. The notional amounts of
contracts outstanding as of both June 30, 2020 and June 30, 2019 were zero.
Accounts receivable: Accounts receivable consist of trade receivables from customers. The expense (income) for bad debts
amounted to $0.2 million, $(0.1) million, and $0.5 million in fiscal 2020, 2019 and 2018, respectively. In establishing the
allowance for doubtful accounts, management considers historical losses, the aging of receivables and existing economic
conditions.
Inventories: Inventories are stated at the lower of cost or market. “Market” is defined as “net realizable value,” or the estimated
selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
Substantially all United States inventories are valued using the last-in-first-out “LIFO” method. All non-U.S. subsidiaries use the
first-in-first-out “FIFO” method or the average cost method. LIFO is not a permissible method of inventory costing for tax
purposes outside the U.S.
Property Plant and Equipment: The cost of buildings and equipment is depreciated using straight-line and accelerated methods
over their estimated useful lives as follows: buildings and building improvements 10 to 50 years, machinery and equipment 3 to 12
years. The construction in progress balances in buildings, building improvements and machinery and equipment at June 30, 2020
and June 30, 2019 were $0.6 million and $1.9 million, respectively. Repairs and maintenance of equipment are expensed as
incurred.
Leases: The Company adopted Accounting Standards Codification 842, Leases ("ASC 842") July 1, 2019. 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 Sheets. 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.
Although currently the Company’s Finance Leases are considered di minimis, leases are capitalized under the criteria set forth in
Accounting Standards Codification (ASC) 842, “Leases”.
Long-Lived Asset Impairment: Impairment losses are recorded when indicators of impairment, such as plant closures, are present
and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. Goodwill impairment
analysis fair values are calculated on a discounted cash flow basis.
B29
Recoverability of the net book value of long-lived assets is determined by comparison of the carrying amount to estimated future
undiscounted net cash flows the asset group is expected to generate. Estimating these cash flows and terminal values requires
management to make judgments about the growth in demand for our products, sustainability of gross margins, and our ability to
achieve economies of scale. If assets are considered to be impaired, the impairment to be recognized is measured as the amount by
which the carrying amount of the long-lived asset exceeds its fair value.
During the fourth quarter, as a result of the COVID-19 pandemic which was considered to be a triggering event, at the private
software company and Bytewise, due to its negative impact on the Company’s revenue the Company performed the intangible
assets impairment assessment by running a quantitative analyses on an undiscounted basis for the long-lived assets, including
intangible assets of Bytewise and the private software company, respectively. As a result of this analysis, the Company concluded
that the private software company’s intangible assets were impaired $2.8 million. It was determined that there was no impairment
of long-lived assets or intangibles at the Bytewise reporting unit.
Intangible assets: Identifiable intangibles are recorded at cost and are amortized on a straight-line basis over a 5-20 year period.
The estimated useful lives of the intangible assets subject to amortization are: 10-15 years for patents, 14-20 years for trademarks
and trade names, 5-10 years for completed technology, 8 years for non-compete agreements, 8-16 years for customer relationships
and 5 years for software development. The Company recorded an impairment charge of $2.8 million in fiscal year 2020 and none
in fiscal years 2019 and 2018. See Note 6 “Goodwill and Intangibles” to the Consolidated Financial Statements for impairment
charges.
Goodwill: Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill
is not subject to amortization but is tested for impairment annually and at any time when events suggest impairment may have
occurred. The Company annually tests the goodwill of two reporting units associated with the November 2011 acquisition of
Bytewise and the February 2017 acquisition of a private software company. Bytewise is tested in October and the software
reporting unit is tested in February. The Company contracted with a professional valuation firm “the firm” to perform a
quantitative analysis (commonly referred to as “Step One”) for its February 1, 2020 annual assessment of goodwill associated with
its purchase of a private software company. The firm assisted the Company in estimating 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. During the March quarter fiscal year 2020, it determined the fair value assessment of the software development company’s
goodwill exceeded the carrying amount.
The Company performed a qualitative analysis of its Bytewise reporting unit for its October 1, 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 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.
During the June quarter fiscal year 2020 the Company, considering the COVID-19 pandemic a triggering event at the private
software company and Bytewise due to lower sales, tested the Goodwill at both reporting units and concluded that the fair value,
on a discounted cash flow basis, was less than the carrying value and took a goodwill impairment charge of $3.7 million. See Note
6 “Goodwill and Intangibles” to the Consolidated Financial Statements for impairment charges.
Revenue recognition: 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
Consolidated Balance Sheet. Therefore, while the Company made adjustments to certain opening balances on its July 1, 2018
Consolidated Balance Sheet, the Company made no adjustment to opening Retained Earnings. The impact of the adoption of
ASC Topic 606 has been immaterial to its net income on an ongoing basis; however, adoption did increase the level of
disclosures concerning net sales. Results for reporting periods beginning July 1, 2018 are presented under the new guidance,
while prior period amounts continue to be reported in accordance with previous guidance without revision.
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
as revenue the amount of 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.
B30
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 deferred as of June 30, 2020. Purchase orders are of durations less
than one year. As such, the Company applies the practical expedient in ASC paragraph 606-10-50-14 and does not disclose
information about remaining performance obligations that have original expected durations of one year or less, for which
work has not yet been performed.
Certain taxes assessed by governmental authorities on revenue producing transactions, such as value added taxes, are excluded
from revenue and recorded on a net basis. Cooperative advertising payments made to customers are included as advertising
expense in selling, general and administrative expense in the Consolidated Statements of Operations.
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. Any of the Company’s revenue not recognized under the point in time
approach for the year ended June 30, 2020, was determined to be immaterial. 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 receivables on the Consolidated Balance Sheet. 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 on the Consolidated Balance Sheet. 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 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 Consolidated Statements of Operations. As a result, the balance sheet presentation was adjusted beginning in
B31
fiscal 2019. As of June 30, 2020, and 2019, the balances of the return asset were $0.1 million and the balance of the refund liability
were $0.2 million, and they are presented within prepaid expenses and other current assets and accrued expenses, respectively, on
the 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 million and $0.3 at June 30, 2020 and 2019, respectively.
Allowance for doubtful accounts: The allowance for doubtful accounts of $0.7 million at the end of fiscal 2020 compared to $0.7
million at the end of fiscal 2019 is based on our assessment of the collectability of specific customer accounts and the aging of our
accounts receivable. While the Company believes that the allowance for doubtful accounts is adequate, if there is a deterioration of
a major customer’s credit worthiness, actual write-offs are higher than our previous experience, or actual future returns do not
reflect historical trends, the estimates of the recoverability of the amounts due the Company could be adversely affected.
Advertising costs: The Company’s policy is to generally expense advertising costs as incurred, except catalogs costs, which are
deferred until mailed. Advertising costs were expensed as follows: $3.6 million in fiscal 2020, $5.0 million in fiscal 2019 and $5.1
million in fiscal 2018 and are included in selling, general and administrative expenses.
Freight costs: The cost of outbound freight and the cost for inbound freight included in material purchase costs are both included in
cost of sales.
Warranty expense: The Company’s warranty obligation is generally one year from shipment to the end user and is affected by
product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Historically, the Company
has not incurred significant warranty expense and consequently its warranty reserves are not material.
Pension and Other Postretirement Benefits: The Company has two defined benefit pension plans, one for U.S. employees and
another for U.K. employees. The Company also has defined contribution plans. The Company amended its Postretirement
Medical Plan effective December 31, 2013, whereby the Company terminated eligibility for employees under the age of 65.
On December 21, 2016, the Company amended the U.S. defined benefit pension plan to freeze benefit accruals effective December
31, 2016. Consequently, the Plan is closed to new participants and current participants no longer earn additional benefits after
December 31, 2016. The U.K. Plan was closed to new entrants in fiscal 2009.
The Company sponsors funded U.S. and non-U.S. defined benefit pension plans covering the majority of our U.S. and U.K.
employees. The Company also sponsors an unfunded postretirement benefit plan that provides health care benefits and life
insurance coverage to eligible U.S. retirees. Under the Company’s current accounting method, both pension plans use fair value as
the market-related value of plan assets and continue to recognize actuarial gains or losses within the corridor in other
comprehensive income (loss) but instead of amortizing net actuarial gains or losses in excess of the corridor in future periods, such
excess gains and losses, if any, are recognized in net periodic benefit cost as of the plan measurement date, which is the same as
the fiscal year end of the Company. This mark-to-market (MTM adjustment) method is a permitted option which results in
immediate recognition of excess net actuarial gains and losses in net periodic benefit cost instead of in other comprehensive
income (loss). Such immediate recognition in net periodic benefit cost increases the volatility of net periodic benefit cost. The
MTM adjustments to net periodic benefit cost for fiscal years 2020, 2019 and 2018 were $16.9 million, $0.3 million, and $0.1
million, respectively.
Income taxes: Deferred tax expense results from differences in the timing of certain transactions for financial reporting and tax
purposes. Deferred taxes have not been recorded on approximately $56.4 million of undistributed earnings of foreign subsidiaries
as of June 30, 2020 and the related unrealized translation adjustments because such amounts are considered permanently invested.
In addition, it is possible that remittance taxes, if any, would be reduced by U.S. foreign tax credits to the extent available, after
consideration of U.S. Tax Reform and the dividends received deduction. Valuation allowances are recognized if, based on the
available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized.
Research and development: Research and development costs are expensed, primarily in selling, general and administrative
expenses, and were as follows: $3.8 million in fiscal 2020, $3.7 million in fiscal 2019, and $3.6 million in fiscal 2018.
B32
Earnings per share (EPS): Basic EPS is computed by dividing earnings (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution by securities that could
share in the earnings. The Company had 86,065, 68,378, and 23,771, of potentially dilutive common shares in fiscal 2020, 2019
and 2018, respectively, resulting from shares issuable under its stock-based compensation plans. These additional shares are not
used in the diluted EPS calculation in loss years.
Translation of foreign currencies: The assets and liabilities on the financial statements of our foreign subsidiaries where the local
currency is in functional currency, are translated at exchange rates in effect on reporting dates. The income statement is translated
at average exchange rates over the reporting month throughout the year.
As equity accounts in the Consolidated Financial Statements are translated at historical exchange rates, the resulting foreign
currency translation adjustments “CTA” are recorded in other comprehensive income (loss).
Other foreign subsidiaries may also contain assets or liabilities denominated in a currency other than the prevailing functional
currency. These translations are adjusted into the functional currency on a monthly basis, See Note 10 “Other Income and
Expense” to the Consolidated Financial Statements.
Use of accounting estimates: The preparation of the consolidated financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period.
Judgments, assumptions and estimates are used for, but not limited to: the allowances for doubtful accounts receivable and
returned goods; inventory allowances; income tax valuation allowances, goodwill, uncertain tax positions and pension obligations.
Amounts ultimately realized could differ from those estimates.
Recently Adopted Accounting Standards:
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). 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 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, on and
after the adoption date, for the capitalization of the service cost component of NPBC in assets. As required by the transition
provisions of this update, the following table shows the impact of the adoption on the respective line items in the Consolidated
Statement of Operations for fiscal years 2020 and 2019 and the reclassifications to the fiscal year 2018 Consolidated Statement of
Operations to retroactively apply classification of the service cost component and the other components of NPBC:
(Dollars in Thousands)
Cost of goods sold decrease
Selling, general and administrative expense decrease
Other income (expense) net
Increase (Decrease) to Net Income
FY 2020
FY 2019
FY 2018
$
$
12,790 $
3,963
(16,753)
$
-
710 $
220
(930 )
- $
582
212
(794 )
-
The Company adopted Accounting Standards Codification 842, Leases ("ASC 842") July 1, 2019. As a result, the Company updated
its significant accounting policies for leases. Refer to Note 8 “Leases” to the Consolidate Financial Statements for additional
information related to the Company's lease arrangements and the impact of the adoption of ASC 842.
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 Sheets. 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 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
B33
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
the Company’s Consolidated Balance Sheets, but did not have a material impact on our Consolidated Statements of Operations or
Consolidated Statements of Cash Flows.
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 any
impairment charge by comparing the implied fair value of goodwill with its 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 and interim
periods beginning after December 15, 2019 and should be applied prospectively for annual and any interim goodwill impairment
tests. The Company adopted this guidance in fiscal year 2020.
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. This guidance is effective for fiscal years beginning
after December 15, 2018 and requires companies to disclose whether they are or are not opting to reclassify the income tax effects
from the new 2017 tax act. The adoption of this standard did not have a material impact on the Company’s financial position and
results of operations upon adoption
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 adoption of this standard did not have a material
impact on the Company’s financial position and results of operations upon adoption
Recently Issued Accounting Standards not yet Adopted:
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 adoption of this standard did not have a material impact on the Company’s financial
position and results of operations upon adoption
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.
B34
3. STOCK-BASED COMPENSATION
Long-Term Incentive Plan
On September 5, 2012, the Board of Directors adopted The L.S. Starrett Company 2012 Long Term Incentive Plan (the “2012
Stock Plan”). The 2012 Stock Plan was approved by shareholders on October 17, 2012, and the material terms of its performance
goals were re-approved by shareholders at the Company’s Annual Meeting held on October 18, 2017. The 2012 Stock Plan
permits the granting of the following types of awards to officers, other employees and non-employee directors: stock options;
restricted stock awards; unrestricted stock awards; stock appreciation rights; stock units including restricted stock units;
performance awards; cash-based awards; and awards other than previously described that are convertible or otherwise based on
stock. The 2012 Stock Plan provides for the issuance of up to 500,000 shares of A shares 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 A shares of common
stock. As of June 30, 2020, there were 20,000 stock options and 242,840 restricted stock units outstanding. In addition, there were
119,533 shares available for grant under the 2012 Stock Incentive Plan as of June 30, 2020.
For stock option grants, the fair value of each grant is estimated at the date of grant using the Binomial Options pricing model. The
Binomial Options pricing model utilizes assumptions related to stock volatility, the risk-free interest rate, the dividend yield and
employee exercise behavior. Expected volatilities utilized in the model are based on the historic volatility of the Company’s stock
price. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of the grant. The expected life is
determined using the average of the vesting period and contractual term of the options (simplified method).
There were no stock options granted during fiscal years 2020, 2019 or 2018.
The weighted average contractual term for stock options outstanding as of June 30, 2020 was 2.5 years. The aggregate intrinsic
value of stock options outstanding as of June 30, 2020 was less than $0.1 million. There were 20,000 options exercisable as of
June 30, 2020. 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 RSU awards by recognizing the expense of the intrinsic value at the award date ratably over vesting
periods generally ranging from one year to three years. The related expense is included in selling, general and administrative
expenses. During the year ended June 30, 2020, the Company granted 110,500 RSU awards with fair values of $5.34 per RSU
award, and there were no RSU’s forfeited. During the year ended June 30, 2019, the Company granted 67,000 RSU awards with
fair values of $6.34 per RSU award. During the year ended June 30, 2018, the Company granted 62,000 RSU awards with fair
values of $7.22 per RSU award.
There were 64,661 and 10,800 RSU awards settled in fiscal years 2020 and 2019 respectively. The aggregate intrinsic value of
RSU awards outstanding as of June 30, 2020 was $0.8 million. The aggregate intrinsic value of RSU awards outstanding as of June
30, 2019 was $1.3 million. Compensation expense related to the 2012 Stock Incentive Plan was $345,000, $232,000 and $134,000
for fiscal 2020, 2019 and 2018 respectively. As of June 30, 2020, there was $2.0 million of total unrecognized compensation costs
related to outstanding stock-based compensation arrangements. Of this cost, $1.7 million relates to performance based RSU grants
that are not expected to be awarded. The remaining $0.3 million is expected to be recognized over a weighted average period of
2.1 years.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plans (ESPP) give eligible employees an opportunity to participate in the success of the
Company. The Board of Directors renews each Employee Stock Purchase Plan every five years. Under these plans the purchase
price of the optioned stock is 85% of the lower of the market price on the date the option is granted or the date it is exercised.
Options become exercisable exactly two years from the date of grant and expire if not exercised on such date. No ESPP options
were exercisable at fiscal year ends. The Board of Directors last approved an ESPP renewal in 2017. No additional options will be
granted under the previous 2012 plan. A summary of option activity is as follows:
B35
Balance, July 1, 2017
2012 Plan Expired
2017 Plan Authorized
Options granted
Options exercised
Options canceled
Balance, June 30, 2018
Options granted
Options exercised
Options canceled
Balance, June 30, 2019
Options granted
Options exercised
Options canceled
Balance, June 30, 2020
Shares on
Options
77,285
-
-
63,607
(17,561 )
(52,816 )
70,515
55,227
(11,981 )
(26,628 )
87,133
86,946
(20,615 )
(54,271 )
99,193
Weighted
Average
Exercise
Price
Shares
Available
for
Grant
365,581
(365,581 )
500,000
(63,607 )
-
13,614
450,007
(55,227 )
-
18,087
412,867
(86,946 )
-
54,271
380,192
6.35
6.69
5.45
5.72
3.63
3.52
The following information relates to outstanding options as of June 30, 2020:
Weighted average remaining life (years)
Weighted average fair value on grant date of options granted in:
2018
2019
2020
$
1.3
2.23
2.28
1.63
The fair value of each option grant was estimated on the date of grant based on the Black-Scholes option pricing model with the
following weighted average assumptions: expected stock volatility – 46.72% – 48.95%, risk free interest rate – 0.17% – 1.66%,
expected dividend yield - 0% - 0% and expected lives - 2 years. Compensation expense of $0.1 million, $0.1 million and $0.1
million has been recorded for fiscal 2020, 2019 and 2018, respectively.
Employee Stock Ownership Plan
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 as of December 31, 2012 are eligible to participate. There was no compensation expense for the ESOP in 2020, 2019 or
2018.
4. CASH
Cash held by foreign subsidiaries amounted to $7.1 million and $8.9 million at June 30, 2020 and June 30, 2019, respectively. Of
the June 30, 2020 balance, $4.6 million in U.S. dollar equivalents was held in British Pounds Sterling and $0.7 million in U.S.
dollar equivalents was held in Brazilian Reals. Of the June 30, 2019 balance, $4.3 million in U.S. dollar equivalents was held in
British Pounds Sterling and $2.6 million in U.S. dollar equivalents was held in Brazilian Reals.
The Company plans to permanently reinvest cash held in foreign subsidiaries. Cash held in foreign subsidiaries is not available for
use in the U.S. without the likely incurrence of U.S. federal and state income and withholding tax consequences.
B36
5. INVENTORIES
Inventories consist of the following (in thousands):
Raw materials and supplies
Goods in process and finished parts
Finished goods
LIFO reserve
June 30, 2020
26,255 $
13,694
37,579
77,528
(24,541 )
52,987 $
June 30, 2019
26,106
17,464
41,500
85,070
(23,280 )
61,790
$
$
Of the Company’s $53.0 million and $61.8 million total inventory at June 30, 2020 and 2019, respectively, the $24.5 million and
$23.3 million LIFO reserves belong to the U.S. Precision Tools and Saws Manufacturing “Core U.S.” business. The Core U.S.
business had total Inventory, on a FIFO basis, of $33.1 million and $8.6 million on a LIFO basis as of June 30, 2020. The Core
U.S. business total inventory was $33.2 million on a FIFO basis and $9.8 million on a LIFO basis at June 30, 2019. The use of
LIFO, as compared to FIFO, resulted in a $1.3 million increase in cost of sales for the goods sold in fiscal 2020 compared to a $1.6
million decrease in fiscal 2019.
6. GOODWILL AND INTANGIBLES
The following table presents information about the Company’s goodwill and identifiable intangible assets on the dates indicated:
June 30, 2020
Cost
Accumulated
Amortization
Impairment
Net
Cost
June 30, 2019
Accumulated
Amortization Impairment Net
Bytewise
$ 3,034 $ -
$ (3,034) $ -
$ 3,034 $
Private Software Company
1,634 -
(619) 1,015 1,634
Goodwill
4,668 -
(3,653) 1,015 4,668
-
-
-
$ -
$ 3,034
1,634
-
4,668
Identifiable intangible assets
14,155
(6,316)
(2,842) 4,997 18,707
(10,247) -
8,460
Identifiable intangible assets consist of the following (in thousands):
Non-compete agreements
Trademarks and trade names
Completed technology
Customer relationships
Software development
Other intangible assets
Total cost
Accumulated amortization
Intangibles impairment
Total net balance
June 30, 2020
- $
2,070
2,010
630
9,445
-
14,155
(6,316 )
(2,842 )
4,997 $
$
$
June 30, 2019
600
2,070
2,010
5,580
8,122
325
18,707
(10,247 )
-
8,460
B37
Identifiable intangible assets are being amortized on a straight-line basis over the period of expected economic benefit.
Amortization expense was $1.9 million, $2.3 million and $2.0 million for the year ended June 30, 2020, 2019 and 2018,
respectively. The estimated aggregate amortization expense for each of the next five years, and thereafter, is as follows:
Fiscal Year
2021
2022
2023
2024
2025
Thereafter
(In thousands)
$
1,377
1,162
928
657
501
373
4,997
$
The following tables provides Goodwill carried at fair value measuring on a non-recurring basis as of June 30, 2020. There were no
assets and liabilities carried at fair value measured on a non-recurring basis as of June 30, 2019:
(in thousands)
Goodwill
private software
company
Bytewise
Fair Value Measurements at June 30, 2020
Carrying Value
$ 1,015
Level 1
-
Level 2
-
Level 3
$ 1,015
Expense
Year ended June 30, 2020
$ 619
-
-
-
-
$ 3,034
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 carrying amount. Determining the fair
value of a reporting unit is subjective and requires the use of significant estimates and assumptions.
The Company contracted with a professional valuation firm “the firm” to perform a quantitative analysis (commonly referred to as
“Step One”) for its February 1, 2020 annual assessment of goodwill associated with its purchase of a private software company.
The firm assisted the Company in estimating 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. And during the March quarter fiscal year
2020 determined the fair value assessment of the software development company’s goodwill exceeded the carrying amount.
The Company performed a qualitative analysis of its Bytewise reporting unit for its October 1, 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 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.
The Company determined the COVID-19 pandemic a triggering event at the private software company and Bytewise due to its
negative impact on the Company’s revenue. Under ASC 350 “Intangibles- Goodwill and Other”, the Company is required to test
whether it is more likely than not the fair value of the reporting units goodwill exceeded its carrying amount. As of period ending
March 31, 2020, the Company determined the precise impact to the business was not knowable, and therefore, performed a
sensitivity analysis assuming an annualized percentage reduction of 25% of the projected revenue in the June quarter fiscal year
2020 and fiscal year 2021 and calculated fair value over the book value of equity. After assessing these and other factors the
Company determined, during the March quarter fiscal year 2020, that it was more likely than not that the fair value of the Bytewise
reporting unit and private software company’s fair value exceeded its carrying amount and the Company did not record an
impairment charge.
During the fourth quarter of fiscal year 2020 the Company, considering the COVID-19 pandemic a triggering event for the private
software company and Bytewise due to a drop in sales, performed the goodwill impairment assessment by running a quantitative
analysis (commonly referred to as “Step One”) for both the Bytewise reporting unit and the private software company. The
Company determined that the fair value of the Bytewise and private software company using a discounted cash flow method for
both reporting units. Based on this analysis, it was determined that the fair value of the reporting unit is below their respective
carrying amounts. As a result, the Company concluded that Intangible Assets were impaired $2.9 million and Goodwill was
impaired $0.6 million at the private software company and Goodwill of $3.0 million was impaired at the Bytewise reporting unit
as of June 30, 2020.
B38
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of June 30, 2020 and 2019 (in thousands):
Land
Buildings and building improvements
Machinery and equipment
Total
Land
Buildings and building improvements
Machinery and equipment
Total
As of June 30, 2020
Accumulated
Depreciation
Cost
1,186 $
43,641
115,563
160,390 $
- $
(29,966 )
(93,334 )
(123,300 ) $
Net
1,186
13,675
22,229
37,090
As of June 30, 2019
Accumulated
Depreciation
Cost
1,210 $
44,772
117,386
163,368 $
- $
(30,427 )
(96,262 )
(126,689 ) $
Net
1,210
14,345
21,124
36,679
$
$
$
$
Any finance leases as of June 30, 2020 and June 30, 2019 are de minimis. Depreciation expense was $5.2 million, $5.0 million and
$5.5 million for the years ended June 30, 2020, 2019 and 2018, respectively.
8. LEASES
The Company adopted Accounting Standards Codification 842, Leases "ASC 842" July 1, 2019. The Company has leased buildings,
manufacturing equipment and autos that are classified as ROU assets and operating lease liabilities in the Company's Consolidated
Balance Sheets. 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 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 the Company’s Consolidated Balance
Sheets, but did not have a material impact on our Consolidated Statements of Operations or Consolidated Statements of Cash Flows.
The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.
Operating leases
Right-of-Use
Assets
4,465
$
Operating Lease
Obligations
$
4,560
Remaining Cash
Commitment
$
5,422
The Company’s weighted average discount rate and remaining term on lease liabilities is approximately 9.0% and 4.2 years. As of
June 30, 2020, the Company’s financing leases are de minimis. The foreign exchange impact affecting the operating leases are de
minimis. 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 entered into $0.3 million in operating lease commitments in the twelve months ended June 30, 2020. At June 30, 2020,
the Company had the following fiscal year minimum operating lease commitments (in thousands):
Operating Lease
Commitments
2021
2022
2023
2024
2025
Thereafter
2,228
928
734
707
349
476
B39
Subtotal
Imputed interest
Total
9. RESTRUCTURING COST
$
5,422
(862 )
4,560
In June 2020, the Company recorded a restructuring charge of $1.6 million. The Company also expects, during fiscal 2021, an
additional $2.4 million of expense associated with restructuring as a period cost at the time incurred.
The COVID-19 pandemic has had a negative impact on global sales. The impact was felt as early as January 2020 in the
Company’s operation in Suzhou, China and most significantly in March 2020 in North America and in the UK. We have taken
austerity measures, reducing payroll and managing variable operational spending to help mitigate the shortfall. In addition, the
Company is investing in a strategic realignment focused on a lower cost structure, long term, designed to maximize our global
factory utilization. During fiscal 2020, the Company adopted a plan to consolidate certain saw manufacturing operations for
greater efficiency. This restructuring is strategically targeting improving manufacturing utilization globally and will be carried out
during fiscal 2021. The Company incurred $1.6 million in total restructuring accrual with $0.6 million in related charges for
severance and $1.0 million in equipment related, freight and other costs. The remaining balance of the accrual at June 30, 2020 is
$1.1 million, plus the $2.4 million period restructuring cost is planned to be incurred in the first three quarters of fiscal year 2021.
10. OTHER INCOME AND (EXPENSE)
Other income and expense consist of the following (in thousands):
Interest income
Interest expense
Foreign currency gain (loss), net
Brazil tax settlements
Patent lawsuit settlement
Sale of scrap material
Pension net periodic benefit cost (NPBC)
Other income (expense), net
$
$
2020
90
(975 )
140
2,544
-
100
(16,753 )
160
(14,694 )
2019
71 $
(976 )
(426 )
345
-
110
(930 )
195
(1,611 ) $
2018
128
(845 )
(316 )
1,446
(666 )
70
(794 )
324
(653 )
The impact of the adoption of ASU 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost” on the respective line items in the Consolidated Statement of Earnings for fiscal 2020, 2019 and 2018
is disclosed in Note 2 “Summary of Significant Accounting Policies”.
11. INCOME TAXES
Components of earnings (loss) before income taxes are as follows (in thousands):
Domestic operations
Foreign operations
$
$
2020
(24,450 ) $
4,453
(19,997 ) $
2019
1,507 $
8,103
9,610 $
The provision for (benefit from) income taxes consists of the following (in thousands):
Current:
Federal
Foreign
State
Deferred:
Federal
Foreign
State
2020
2019
$
$
(19 ) $
3,633
30
(1,514 )
53
(341 )
1,842 $
(106 ) $
2,398
37
1,139
(172 )
235
3,531 $
2018
1,351
3,514
4,865
2018
(991 )
2,256
5
6,772
(396 )
852
8,498
Reconciliations of expected tax expense at the U.S. statutory rate to actual tax expense (benefit) are as follows (in thousands):
B40
Expected tax (benefit) expense
State taxes, net of federal effect
Foreign taxes, net of federal credits
Change in valuation allowance
Tax reserve adjustments
Return to provision and other adjustments
Goodwill impairment
Tax rate change applied to deferred tax balances
Global intangible low taxed income
Other permanent items
Actual tax (benefit) expense
$
$
2020
(4,199 ) $
(1,042 )
1,210
1,996
1,946
372
130
54
1,558
(183 )
1,842 $
2019
2,018 $
(5 )
(1,055 )
1,744
(66 )
(57 )
-
(129 )
1,121
(40 )
3,531 $
2018
1,365
-
(1,010 )
2,074
(38 )
(72 )
-
6,324
-
(145 )
8,498
On December 22, 2017, the Tax Cuts and Jobs Act (“the 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. Accounting Standard Codification (“ASC”) 740 requires filers to record the effect of tax law changes in the period
enacted. However, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), that permits filers to record provisional
amounts during a measurement period ending no later than one year from the date of the Act’s enactment.
During the fiscal year ended June 30, 2018, the Company recognized a provisional tax expense of $6.3 million as a reasonable
estimate of the impact of the provisions of the Act, which was included as a component of income tax expense in its Consolidated
Statement of Operations. During the fiscal year ended June 30, 2019, the Company completed the accounting for the tax effects of
the enactment of the Act. The Company recorded additional foreign tax credits of ($1.8) million which were offset by a valuation
allowance, resulting in a nil adjustment to the provisional tax expense previously recorded.
Beginning in fiscal 2019, the Company incorporated certain provisions of the Act in the calculation of the tax provision and
effective tax rate, including the provisions related to the Global Intangible Low Taxed Income (“GILTI”), Foreign Derived
Intangible Income (“FDII”), Base Erosion Anti Abuse Tax (“BEAT”), as well as other provisions, which limit tax deductibility of
expenses. For fiscal 2020, the GILTI provisions 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.
Interpretive guidance on the accounting for GILTI states that an entity can make an accounting policy election to either recognized
deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related
to GILTI in the year the tax is incurred as a period expense only. The Company has made the accounting policy election to
recognize GILTI as a period expense.
The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted in the United States on March 27, 2020.
The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United
States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides extensive tax
changes in response to the COVID-19 pandemic, the provisions are not expected to have a significant impact on the Company’s
financial results.
The tax rate of (9.2%) on pre-tax losses of ($20.0) million in the year ended June 30, 2020 is lower than the U.S. statutory rate
primarily as a result of the GILTI provisions, non-deductible goodwill impairment, as well as changes in the jurisdictional mix of
earnings, particularly Brazil with a statutory tax rate of 34%. The tax rate was also negatively impacted by the write-off of the
long-term receivable previously established for competent authority relief for historic transfer pricing adjustments which the
Company has determined is no longer feasible to pursue and an increase in the valuation allowance against foreign tax credits
which the Company has determined are more likely than not to expire unutilized.
The tax rate of 36.7% on pre-tax income of $9.6 million in the year ended June 30, 2019 is higher than the U.S. statutory rate
primarily as a result of the GILTI provisions, which became effective in fiscal 2019, as well as changes in the jurisdictional mix of
earnings, particularly Brazil with a statutory tax rate of 34%.
The tax rate of 174.7% on pre-tax income of $4.9 million in the year ended June 30, 2018 is higher than the U.S. statutory rate
primarily as a result of the impact of the corporate tax rate reduction on the Company’s net deferred tax assets. Excluding the
impacts of tax reform, the tax rate of 44.7% for fiscal 2018 is higher than the U.S. statutory rate primarily as a result of an increase
in the valuation allowance against foreign tax credits and state net operating loss carryforwards which the Company has
determined are more likely than not to expire unutilized.
B41
Net deferred tax assets at June 30, 2020 were $21.0 million. While these deferred tax assets reflect the tax effect of temporary
differences between book and taxable income in all jurisdictions in which the Company has operations, the majority of the assets
relate to U.S. operations. U.S. net deferred assets are $26.9 million with a valuation allowance of $8.8 million. The Company has
considered the positive and negative evidence to determine the need for a valuation allowance offsetting the deferred tax assets in
the U.S. and has concluded that a partial valuation allowance is required against 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
carryforward that will expire in the near future.
Key positive evidence considered include: a) domestic profitability in 2019 and 2018; b) cost saving plans are being implemented
by the Company; c) indefinite federal loss carryforward periods and d) forecasted domestic profits for future years. The negative
evidence considered is that fiscal years 2020 showed domestic book and tax losses due to the impact of the COVID-19 pandemic
and charges recorded in the fourth quarter.
In fiscal 2020, the valuation allowance increased by $2.1 million due to the impact of the current year domestic loss generated and
revised forecasts of income on the projected utilization of foreign tax credits that will expire at various dates through 2028. In
fiscal 2019, the valuation allowance increased by $1.7 million primarily due to an increase in foreign tax credits that became
available as a result of the one-time transition tax on foreign earnings, in excess of the limitation on their use as a result of the
Company’s overall domestic loss recapture.
Deferred income taxes at June 30, 2020 and 2019 are attributable to the following (in thousands):
2020
Inventories
Employee benefits (other than pension)
Operating lease liabilities
Book reserves
Federal NOL, various carryforward periods
State NOL, various carryforward periods
Foreign NOL, various carryforward periods
Foreign tax credit carryforward, expiring 2023 – 2028
Pension benefits
Retiree medical benefits
Depreciation
Intangibles
Right of use assets
Federal research and development and AMT credit carryforward
Other temporary taxable differences
Other temporary deductible differences
Total deferred tax assets
Valuation allowance
Net deferred tax asset
$ 1,339 $
684
1,111
695
716
1,719
388
7,212
13,175
1,961
(186 )
580
(1,088 )
817
(698 )
1,404
29,828
(8,811 )
$ 21,018 $
2019
1,361
840
-
601
66
1,224
309
7,329
10,289
1,778
(17 )
(630 )
-
786
-
1,446
25,382
(6,743 )
18,639
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 international 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. Reconciliations of the beginning and ending
amount of unrecognized tax benefits are as follows (in thousands):
Balance at July 1, 2017
Increase for tax positions taken during the current period
Increase for tax positions taken during the prior period
Effect of exchange rate changes
Decrease relating to lapse of applicable statute of limitations
Balance at June 30, 2018
Increase for tax positions taken during the current period
Decrease for tax positions taken during the prior period
B42
$ (11,588 )
(287 )
(67 )
130
930
(10,882 )
(215 )
5
Effect of exchange rate changes
Decrease relating to lapse of applicable statute of limitations
Balance at June 30, 2019
Increase for tax positions taken during the current period
Increase for tax positions taken during the prior period
Effect of exchange rate changes
Decrease relating to lapse of applicable statute of limitations
Balance at June 30, 2020
16
137
(10,939 )
(326 )
(188 )
299
48
$ (11,106 )
As of June 30, 2020, 2019 and 2018, the Company has unrecognized tax benefits of $11.1 million, $10.9 million, and $10.9 million,
respectively, of which $7.7 million, $5.6 million and $5.4 million, respectively, would favorably impact the effective tax rate if
recognized.
The long-term tax obligations as of June 30, 2020, 2019 and 2018 relate primarily to transfer pricing adjustments. The Company
has also recorded a non-current tax receivable for $0.0 million and $1.7 million at June 30, 2020 and 2019, respectively,
representing the corollary effect of transfer pricing competent authority adjustments.
The Company has identified uncertain tax positions at June 30, 2020 for which it is possible that the total amount of unrecognized
tax benefits will decrease within the next twelve months by $0.1 million. The Company recognizes interest and penalties related to
income tax matters in income tax expense and has booked $0.1 million in fiscal 2020 for interest expense.
The Company’s U.S. federal tax returns for years prior to fiscal 2017 are no longer subject to U.S. federal examination by the
Internal Revenue Service; however, tax losses and credits carried forward from earlier years are still subject to review and
adjustment. As of June 30, 2020, the Company has resolved all open income tax audits. In international jurisdictions, the years that
may be examined vary by country. The Company’s most significant foreign subsidiary in Brazil is subject to audit for the calendar
years 2015 through 2019.
The federal tax loss carryforward of $3.4 million has an unlimited carryforward period. The state tax loss carryforwards tax
effected benefit of $1.7 million expires at various times beginning in 2021. The state tax credit carryforwards of $0.6 million
expires in the years 2021 through 2035. The foreign tax credit carryforward of $7.2 million expires in the years 2023 through
2028. The research and development tax credit carryforward of $0.8 million expires in the years 2029 through 2040. The foreign
tax loss carryforwards of $2.3 million can be carried forward indefinitely.
At June 30, 2020, the estimated amount of total unremitted earnings of foreign subsidiaries is $56.4 million. The Company has no
plans to repatriate prior year earnings of its foreign subsidiaries and, accordingly,does not believe it is practicable to estimate the
unrecognized deferred taxes related to these earnings as they are indefinitely reinvested. Cash held in foreign subsidiaries is not
available for use in the U.S. without the likely incurrence of U.S. federal and state income and withholding tax consequences.
12. EMPLOYEE BENEFIT AND RETIREMENT PLANS
The Company has two defined benefit pension plans, one for U.S. employees and another for U.K. employees. The UK plan was
closed to new entrants in fiscal 2009. The Company has a postretirement medical and life insurance benefit plan for U.S.
employees. The Company also has defined contribution plans.
On December 21, 2016, the Company amended the U.S. defined benefit pension plan to freeze benefit accruals effective December
31, 2016. Consequently, the Plan is closed to new participants and current participants no longer earn additional benefits after
December 31, 2016.
The Company amended its Postretirement Medical Plan effective December 31, 2013 whereby the Company terminated eligibility
for employees ages 55-64. For retirees 65 and older, the Company’s contribution is fixed at $28.50 or $23.00 per month depending
upon the plan the retiree has chosen.
The total cost of all such plans for fiscal 2020, 2019 and 2018 was $18.6 million, $2.8 million and $2.7 million, respectively.
Included in these amounts are the Company’s contributions to the defined contribution plans amounting to $1.6 million, $1.7 million
and $1.8 million in fiscal 2020, 2019 and 2018, respectively. The financial markets also had an adverse impact on earnings in fiscal
2020 as the increased demand for bonds and the associated decrease in interest rates significantly contributed to a $16.8 million
non-cash pension expense due to higher liabilities. The pension liability is based upon the ten-year Corporate Bond Rate and is set
on the last day of the fiscal year. This generally accepted accounting principle coupled with the historically low interest rates are
driven by financial markets, economic policy and financial conditions. The discount rate to determine net cost for the US pension
liability was lowered from 3.56% in June 2019 to 2.73% in June 2020. The amortization of the net pension loss was $0.3 million in
fiscal year 2019 compared to $16.8 million in fiscal 2020.
B43
Under both U.S and U.K. defined benefit plans, benefits are based on years of service and final average earnings. Plan assets consist
primarily of investment grade debt obligations, marketable equity securities and shares of the Company’s common stock. The asset
allocation of the Company’s domestic pension plan is diversified, consisting primarily of investments in equity and debt securities.
The Company seeks a long-term investment return that is given reasonable prevailing capital market expectations. Target allocations
are 40% to 70% in equities (including 10% to 20% in Company stock), and 30% to 60% in cash and debt securities.
In fiscal 2021, the Company will use an expected long-term rate of return assumption of 5.0% for the U.S. domestic pension plan,
and 2.6% for the U.K. plan. In determining these assumptions, the Company considers the historical returns and expectations for
future returns for each asset class as well as the target asset allocation of the pension portfolio as a whole. In fiscal 2020 and 2019,
the Company used a discount rate assumption of 3.6% and 4.3% for the U.S. plan and 2.4% and 2.8% for the U.K. plan,
respectively. In determining these assumptions, the Company considers published third party data appropriate for the plans.
Other than the discount rate, pension valuation assumptions are generally long-term and not subject to short-term market
fluctuations, although they may be adjusted as warranted by structural shifts in economic or demographic outlooks. Long-term
assumptions are reviewed annually to ensure they do not produce results inconsistent with current market conditions. The discount
rate is adjusted annually based on corporate investment grade (rated AA or better) bond yields, the maturities of which are correlated
with the expected timing of future benefit payments, as of the measurement date.
Based upon the actuarial valuations performed on the Company’s defined benefit plans as of June 30, 2020 the contribution for
fiscal 2021 for the U.S. plans will require a contribution of $7.0 million and the U.K. plan will require one of $0.9 million.
The table below sets forth the actual asset allocation for the assets within the Company’s plans.
Asset category:
Cash equivalents
Fixed income
Equities
Mutual and pooled funds
2020
2019
4 %
27 %
40 %
29 %
100 %
2 %
31 %
35 %
32 %
100 %
The Company determines its investments strategies based upon the composition of the beneficiaries in its defined benefit plans and
the relative time horizons that those beneficiaries are projected to receive payouts from the plans. The Company engages an
independent investment firm to manage the U.S. pension assets.
Cash equivalents are held in money market funds.
The Company’s fixed income portfolio includes mutual funds that hold a combination of short-term, investment-grade fixed income
securities and a diversified selection of investment-grade, fixed income securities, including corporate securities and U.S.
government securities.
The Company invests in equity securities, which are diversified across a spectrum of value and growth in large, medium and small
capitalization funds and companies, as appropriate to achieve the objective of a balanced portfolio, optimize the expected returns and
minimize volatility in the various asset classes.
Other assets include pooled investment funds whose underlying assets consist primarily of property holdings as well as financial
instruments designed to offset the long-term impact of inflation and interest rate fluctuations.
The Company has categorized its financial assets (including its pension plan assets), based on the priority of the inputs to the
valuation technique, into a three-level fair value hierarchy as set forth below. If the inputs used to measure the financial instruments
fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
Financial assets are categorized based on the inputs to the valuation techniques as follows:
o Level 1 – Financial assets whose values are based on unadjusted quoted prices for identical assets or liabilities in an active
market which the Company has the ability to access at the measurement date.
o Level 2 – Financial assets whose value are based on quoted market prices in markets where trading occurs infrequently or
whose values are based on quoted prices of instruments with similar attributes in active markets.
B44
o Level 3 – Financial assets whose values are based on prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value measurement. These inputs reflect management’s own view about the
assumptions a market participant would use in pricing the asset.
The tables below show the portfolio by valuation category as of June 30, 2020 and June 30, 2019 (in thousands):
June 30, 2020
Asset Category
Cash Equivalents
Fixed Income
Equities
Mutual & Pooled Funds
Total
Level 1
Level 2
Level 3
$
$
5,165 $
-
48,947
-
54,112 $
- $
32,740
888
30,687
64,315 $
- $
-
-
-
- $
Total
5,165
32,740
49,835
30,687
118,427
%
4 %
27 %
40 %
29 %
100 %
At June 30, 2020 in the U.K. Pension plan a fund in the amount of $5.4 million was excluded from above and valued under NAV
practical expedient. The value of the combined plan assets at end of year was $123,826.
Included in equity securities at June 30, 2020 and 2019 are shares of the Company’s common stock having a fair value of $2.2
million and $4.6 million, respectively.
June 30, 2019
Asset Category
Cash Equivalents
Fixed Income
Equities
Mutual & Pooled Funds
Total
Level 1
Level 2
Level 3
$
$
1,818 $
-
41,629
2,362
45,809 $
- $
38,232
1,482
36,510
76,224 $
- $
-
-
-
- $
Total
1,818
38,232
43,111
38,872
122,033
%
2 %
31 %
35 %
32 %
100 %
U.S. and U.K. Plans Combined:
The status of these defined benefit plans is as follows (in thousands):
2020
2019
2018
Change in benefit obligation
Benefit obligation at beginning of year
Interest cost
Exchange rate changes
Benefits paid
Actuarial (gain) loss
Benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Exchange rate changes
Fair value of plan assets at end of year
Funded status at end of year
Amounts recognized in balance sheet
Current liability
Noncurrent liability
Net amount recognized in balance sheet
Amounts not yet reflected in net periodic benefit costs and included in
accumulated other comprehensive loss
$
$
$
$
$
169,680 $
5,417
(1,013 )
(7,203 )
17,309
184,190 $
122,033
2,163
7,687
(7,203 )
(845 )
123,826
(60,364 ) $
(373 ) $
(59,991 )
(60,364 ) $
159,213 $
6,013
(1,697 )
(7,217 )
13,368
169,680 $
118,693
6,589
5,413
(7,217 )
(1,445 )
122,033
(47,647 ) $
(324 ) $
(47,323 )
(47,647 ) $
169,696
6,077
707
(6,489 )
(10,778 )
159,213
117,778
2,545
4,366
(6,489 )
493
118,693
(40,520 )
(67 )
(40,453 )
(40,520 )
B45
Accumulated loss
Amounts not yet recognized as a component of net periodic benefit cost
Accumulated net periodic benefit cost in excess of contributions
Net amount recognized
$
$
(19,113 ) $
(19,113 )
(41,249 )
(60,634 ) $
(15,590 ) $
(15,590 )
(32,057 )
(47,647 ) $
(4,038 )
(4,038 )
(36,482 )
(40,520 )
Components of net periodic benefit cost
Interest cost
Expected return on plan assets
Recognized actuarial loss
Net periodic benefit cost
Estimated amounts that will be amortized from accumulated other
comprehensive loss over the next year
Net loss
Information for pension plans with accumulated benefits in excess of
plan assets
Projected benefit obligation
Accumulated benefit obligation
Fair value of assets
U.S. Plan:
The status of the U.S. defined benefit plan is as follows (in thousands):
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Plan curtailment
Benefits paid
Actuarial (gain) loss
Benefit obligation at end of year
Weighted average assumptions – benefit obligation
Discount rate
Rate of compensation increase
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status at end of year
Amounts recognized in balance sheet
Current liability
Noncurrent liability
Net amount recognized in balance sheet
$
$
5,417 $
(5,193 )
16,753
16,977 $
6,013 $
(5,129 )
284
1,168 $
6,077
(5,140 )
26
963
$
(38 ) $
(38 ) $
(28 )
$
$
$
184,190 $
184,190 $
123,826 $
169,680 $
169,680 $
122,033 $
159,213
159,213
118,693
2020
2019
2018
126,380 $
-
4,417
-
(5,682 )
13,016
138,131 $
116,277 $
-
4,854
-
(5,565 )
10,814
126,380 $
124,138
-
4,804
-
(4,786 )
(7,879 )
116,277
2.73 %
n/a
3.56 %
n/a
4.27 %
n/a
85,150 $
1,071
6,753
(5,682 )
87,292
(50,839 ) $
82,140 $
4,132
4,443
(5,565 )
85,150
(41,230 ) $
(373 ) $
(50,466 )
(50,839 ) $
(324 ) $
(40,906 )
(41,230 ) $
81,928
1,645
3,353
(4,786 )
82,140
(34,137 )
(67 )
(34,070 )
(34,137 )
$
$
$
$
$
$
Weighted average assumptions – net periodic benefit cost
Discount rate
3.56 %
4.27 %
3.92 %
B46
Rate of compensation increase
Return on plan assets
Varies
5.00 %
Varies
5.00 %
Varies
5.00 %
Amounts not yet reflected in net periodic benefit cost and included in
accumulated other comprehensive loss
Accumulated loss
$
Amounts not yet recognized as a component of net periodic benefit cost
Accumulated contributions less than net periodic benefit cost
Net amount recognized
Components of net periodic benefit cost
Interest cost
Expected return on plan assets
Recognized actuarial loss
Net periodic benefit cost
$
$
$
(14,507 ) $
(14,507 )
(36,332 )
(50,839 ) $
4,417 $
(4,249 )
14,883
15,051 $
(13,196 ) $
(13,196 )
(28,034 )
(41,230 ) $
4,854 $
(4,067 )
284
1,071 $
(2,731 )
(2,731 )
(31,406 )
(34,137 )
4,804
(4,026 )
26
804
Estimated amounts that will be amortized from accumulated other
comprehensive loss over the next year
Net loss
(53 )
(38 )
(28 )
Information for plan with accumulated benefits in excess of plan assets
Projected benefit obligation
Accumulated benefit obligation
Fair value of assets
$
$
$
138,131 $
138,131 $
87,292 $
126,380 $
126,380 $
85,150 $
116,277
116,277
82,140
U.K. Plan:
The status of the U.K. defined benefit plan is as follows (in thousands):
2020
2019
2018
Change in benefit obligation
Benefit obligation at beginning of year
Interest cost
Exchange rate changes
Benefits paid
Actuarial (gain) loss
Benefit obligation at end of year
Weighted average assumptions - benefit obligation
Discount rate
Rate of compensation increase
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Exchange rate changes
Fair value of plan assets at end of year
Funded status at end of year
Amounts recognized in balance sheet
Noncurrent liability
Net amount recognized in balance sheet
Weighted average assumptions – net periodic benefit cost
Discount rate
Rate of compensation increase
Return on plan assets
$
$
$
$
$
43,300 $
1,000
(1,013 )
(1,521 )
4,293
46,059 $
1.59 %
n/a
36,883 $
1,092
934
(1,521 )
(854 )
36,534
(9,525 ) $
42,936 $
1,159
(1,697)
(1,652 )
2,554
43,300 $
2.39 %
n/a
36,553 $
2,457
970
(1,652 )
(1,445 )
36,883
(6,417 )
(9,525 )
(9,525 ) $
(6,417 )
(6,417 ) $
2.39 %
n/a
2.62 %
2.80 %
n/a
2.98 %
45,558
1,273
707
(1,703 )
(2,899 )
42,936
2.80 %
n/a
35,850
900
1,013
(1,703 )
493
36,553
(6,383 )
(6,383 )
(6,383 )
2.73 %
n/a
3.01 %
B47
Amounts not yet reflected in net periodic benefit costs and included in
accumulated other comprehensive loss
Accumulated loss
$
Amounts not yet recognized as a component of net periodic benefit cost
Accumulated net periodic benefit cost in excess of contributions
Net amount recognized
$
(4,608 ) $
(4,608 )
(4,917 )
(9,525 ) $
(2,394 ) $
(2,394 )
(4,023 )
(6,417 ) $
(1,307 )
(1,307 )
(5,076 )
(6,383 )
Components of net periodic benefit cost
Interest cost
Expected return on plan assets
Amortization of net loss
Net periodic benefit cost
Estimated amounts that will be amortized from accumulated other
comprehensive loss over the next year
Information for plan with accumulated benefits in excess of plan assets
Projected benefit obligation
Accumulated benefit obligation
Fair value of assets
Postretirement Medical and Life Insurance Benefits:
1,000
(944 )
1,870
1,926 $
1,159
(1,062 )
—
97 $
1,273
(1,114 )
—
159
- $
- $
-
46,059 $
46,059 $
36,534 $
43,300 $
43,300 $
36,883 $
42,936
42,936
36,553
$
$
$
$
$
The status of the U.S. postretirement medical and life insurance benefit plan is as follows (in thousands):
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Benefits paid
Actuarial (gain) loss
Benefit obligation at end of year
Weighted average assumptions: benefit obligations
Discount rate
Rate of compensation increase
Change in plan assets
Employer contributions
Benefits paid, net of employee contributions
Fair value of plan assets at end of year
Amounts recognized in balance sheet
Current postretirement benefit obligation
Non-current postretirement benefit obligation
Net amount recognized in balance sheet
Weighted average assumptions – net periodic benefit cost
Discount rate
Rate of compensation increase
Amounts not yet reflected in net periodic benefit cost and included in
accumulated other comprehensive loss
Prior service credit
Accumulated gain (loss)
Amounts not yet recognized as a component of net periodic benefit cost
B48
$
$
$
$
$
2020
2019
6,930 $
73
240
(329 )
791
7,705 $
2.73 %
2.64 %
329
(329 )
—
6,385 $
72
265
(346 )
554
6,930 $
3.56 %
2.64 %
346
(346 )
—
2018
7,086
85
270
(388 )
(668 )
6,385
4.27 %
2.64 %
388
(388 )
—
(358 ) $
(7,347 )
(7,705 ) $
(353 ) $
(6,577 )
(6,930 ) $
(339 )
(6,046 )
(6,385 )
3.56 %
2.64 %
4.27 %
2.64 %
3.92 %
2.64 %
2,240 $
(2,160 )
80
2,777 $
(1,452 )
1,325
3,314
(928 )
2,386
Net periodic benefit cost in excess of accumulated contributions
Net amount recognized
Components of net periodic benefit cost
Service cost
Interest cost
Amortization of prior service credit
Amortization of accumulated loss
Net periodic benefit cost
Estimated amounts that will be amortized from accumulated other
comprehensive loss over the next year
Prior service credit
Net loss
Healthcare cost trend rate assumed for next year
Rate to which the cost trend rate gradually declines
Year that the rate reaches the rate at which it is assumed to remain
$
$
$
$
$
(7,785 )
(7,705 ) $
(8,255 )
(6,390 ) $
(8,771 )
(6,385 )
73 $
240
(537 )
83
(141 ) $
537 $
(166 )
371 $
n/a
n/a
n/a
72 $
265
(537 )
30
(170 ) $
537 $
(83 )
454 $
6.60 %
4.50 %
2037
85
270
(537 )
99
(83 )
537
(30 )
507
6.60 %
4.50 %
2037
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage
point change in assumed health care cost trend rates would have the following effects (in thousands):
Effect on postretirement benefit obligation
Effect on postretirement benefit obligation
1% Increase
2020
1 $
2019
2018
1 $ 1
1% Decrease
2020
(1 ) $
2019
(1 ) $
2018
(1 )
$
$
Future pension and other benefit payments are as follows (in thousands):
Fiscal Year
2021
2022
2023
2024
2025
After
13. DEBT
Debt is comprised of the following (in thousands):
Short-term and current maturities
Loan and Security Agreement (Bytewise)
Loan and Security Agreement (Term Loan)
Brazil Loans
Long-term debt (net of current portion)
Loan and Security Agreement (Bytewise)
Loan and Security Agreement (Term Loan)
Loan and Security Agreement (Line of Credit)
Future maturities of debt are as follows (in thousands):
$
$
$
$
Pension
7,913 $
8,250
8,610
8,643
9,150
56,032
98,598 $
Other
Benefits
358
363
353
358
364
1,889
3,685
June 30, 2020 June 30, 2019
- $
597
3,935
4,532
-
5,941
20,400
26,341
30,873 $
1,765
-
2,300
4,065
2,641
-
14,900
17,541
21,606
B49
Fiscal Year
2021
2022
2023
2024
2025
Thereafter
Total
4,532
21,629
1,280
1,332
1,386
714
30,873
$
As a result of a decrease in sales related to the COVID-19 epidemic, the Company anticipated potential non-compliance with its fixed
charge coverage ratio for the year ended June 30, 2020 under its Loan and Security Agreement (the “Loan Agreement”) by and among
the Company and its U.S. operating companies (collectively, the “Borrowers”) and TD Bank, N.A. (“TD Bank”). On June 25, 2020,
the Borrowers and TD Bank entered into an amendment and restatement (the “Amendment and Restatement”) of the Loan Agreement.
The Amendment and Restatement waived the fixed charge coverage ratio for the quarter ended June 30, 2020. In addition, the
Amendment and Restatement clarifies that certain non-cash adjustments to the definition of EBITDA are permitted under the Loan
Agreement, as amended. In addition, the Amendment and Restatement increases the permitted borrowings from a foreign bank from
$5.0 million to $15.0 million and permits the Company to draw the remainder of the outstanding balance under the Loan Agreement.
Pursuant to the terms of the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First
Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of the
Fixed Charge Coverage Ratio until September 30, 2021 and (ii) establishment of a new minimum cumulative EBITDA and minimum
liquidity covenants in lieu thereof. TD Bank perfected its security interests in the Company’s U.S. based assets, increased the
maximum interest charged on the Line Of Credit from and annual interest rate of 2.25% plus Libor to 3.50% plus Libor, and amended
the borrowing base for the line of credit from 80% of Qualified AR and 50% of the lower of Cost or Market of US inventory values to
80% of qualified AR plus 85% of the Net Orderly Liquidation Value (NOLV) of US Inventory plus 62.5% of total appraised US real
estate values. As a result of this change, the Company is projected to maintain its current borrowing capacity of $25,000,000 under
the Line of Credit. The Company underwent a series of appraisals and field exams in all US locations as part of restructuring this
agreement. In addition, the Company will provide additional reporting to TD Bank, including monthly profit and loss statements,
balance sheets, cash flow statements and forecasting. This minimum adjusted EBITDA covenant is based on the Company’s plan for a
slow pandemic recovery throughout FY21 and the impact of the Company’s restructuring plan initiatives. The Company will apply
certain proceeds from the sale of US real estate assets against the principle balance of the term loans under the TD Bank loan
agreement. The Agreement will revert to the existing covenant package for the quarter ending September 30, 2021 and every quarter
thereafter.
On December 31, 2019, the Company entered into the Tenth Amendment of its Loan and Security Agreement (“Tenth
Amendment”). Under the revised agreement, the credit limit for the Revolving Loan was increased from $23.0 million to $25.0
million. In addition, the Company entered into a new $10.0 million 5-year Term Loan with a fixed interest rate of 4.0%. The new
Term Loan will require interest only payments for 12 months and will convert to a term loan requiring both interest and principal
payments commencing January 1, 2021. Under the Tenth Amendment, the credit limit for external borrowing was increased from
$2.5 million to $5.0 million.
Total debt increased $5.7 million and $6.9 million during the three months and nine months ending March 31, 2020. During the
three months ended March 31, 2020 the Company pay down $3.5 million of the Bytewise term loan (November, 2011) using the
proceeds from borrowing $6.5 million on the Loan and Security Agreement Term Loan. The line of credit balance increased $2.5
million and Brazil loans increased $0.2 million.
Availability under the Line of Credit remains 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 $25.0 million. A 0.25%
commitment fee is charged on the unused portion of the Line of Credit.
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 was a ten-year loan bearing a fixed interest
rate of 4.5% and was payable in fixed monthly payments of principal and interest of $160,640. The Term Loan had a balance of
$3.5 million at December 31, 2019. During the three months ended March 31, 2020 the Company paid down $3.5 million of the
Bytewise term loan.
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 began refinancing debt among Santander, Bradesco
and Brazil Bank as follows as of June 30, 2020 (in thousands):
Lending Institution
Bradesco
B50
Interest Rate
5.18%
Beginning Date Ending Date
May 2020
May 2021
Outstanding Balance
$ 1,000
Santander Bank
Brazil Bank
Brazil Bank
Brazil Bank
Brazil Bank
14. COMMON STOCK
8.12%
3.10%
6.05%
2.40%
3.11%
April 2020
February 2020
March 2020
March 2020
September 2019 September 2020
April 2021
February 2021
February 2021
February 2021
959
500
1,000
300
177
$ 3,936
Class B common stock is identical to Class A except that it has 10 votes per share, is generally nontransferable except to lineal
descendants of stockholders, cannot receive more dividends than Class A, and can be converted to Class A at any time. Class A
common stock is entitled to elect 25% of the directors to be elected at each meeting with the remaining 75% being elected by Class
A and Class B voting together.
15. CONTINGENCIES
The Company is involved in certain legal matters which arise in the normal course of business and are not expected to have a
material impact on the Company’s financial condition, results of operations and cash flows.
16. CONCENTRATIONS OF CREDIT RISK
The Company believes it has little significant concentrations of credit risk as of June 30, 2020. Trade receivables are dispersed
among a large number of retailers, distributors and industrial accounts in many countries, with none exceeding 10% of consolidated
sales.
17. FINANCIAL INFORMATION BY SEGMENT & GEOGRAPHIC AREA
The Company offers its broad array of measuring and cutting products to the market through multiple channels of distribution
throughout the world. The Company’s products include precision tools, electronic gages, gage blocks, optical vision and laser
measuring equipment, custom engineered granite solutions, tape measures, levels, chalk products, squares, band saw blades, hole
saws, hacksaw blades, jig saw blades, reciprocating saw blades, M1® lubricant and precision ground flat stock. The Company
reviews and manages its business geographically and has historically made decisions based on worldwide operations.
The North American segment’s operations include all manufacturing and sales in the United States, Canada and Mexico. The
International segment’s operations include all locations outside North America, primarily in Brazil, United Kingdom and China. The
chief operating decision maker, who is the Company’s CEO, reviews operations on a geographical basis and decisions about where
to invest the Company’s resources are made based on the current results and forecasts of operations in those geographies. Since the
markets for the Company’s products are sufficiently different in North America than they are in the rest of the world and in view of
the significant impact that currency fluctuation plays outside the United States on the revenue of the Company, the Company’s
business review separates North America from operations outside North America. For this reason, the Company is reflecting two
operating segments that align with management’s review of operations and decisions to allocate resources.
Segment income is measured for internal reporting purposes by excluding corporate expenses, other income and expense including
interest income and interest expense and income taxes. Corporate expenses consist primarily of executive compensation, certain
professional fees, and costs associated with the Company’s global headquarters. Financial results for each reportable segment are as
follows (in thousands):
Year Ended June 30, 2020
North
$
Sales1
Goodwill and intangibles impairment
Restructuring
Operating income
Capital expenditures and software development
Depreciation and amortization
Current assets4
Long-lived assets5
America International Unallocated
121,834 $
(6,496 )
(341 )
(2,055 )
6,992
4,942
35,030
34,354
79,617 $
-
(1,239 )
3,841
3,608
2,253
55,610
13,213
- $
-
-
(7,090 )
-
-
13,458
21,018
Total
201,451
(6,496 )
(1,580 )
(5,303 )
10,600
7,195
104,098
68,585
Year Ended June 30, 2019
North
America International Unallocated
Total
B51
Sales2
Operating income (loss)
Capital expenditures and software development
Depreciation and amortization
Current assets4
Long-lived assets5
Sales3
Operating income (loss)
Capital expenditures and software development
Depreciation and amortization
Current assets4
Long-lived assets5
$
$
136,387 $
9,468
3,617
5,022
41,188
35,638
91,635 $
8,043
6,610
2,316
63,205
14,168
- $
(6,209 )
-
-
15,582
20,306
228,022
11,221
7,227
7,338
119,975
70,112
Year Ended June 30, 2018
North
America International Unallocated
128,442 $
8,175
3,426
4,923
37,546
37,489
87,886 $
2,128
2,336
2,588
60,855
13,010
- $
(5,579 )
-
-
14,827
18,559
Total
216,328
4,724
5,762
7,511
113,228
69,058
1 Excludes $4,040 of North American segment intercompany sales to the International segment and $13,820 intercompany sales of the
International segment to the North American segment.
2 Excludes $4,879 of North American segment intercompany sales to the International segment and $16,187 intercompany sales of the
International segment to the North American segment.
3 Excludes $6,468 of North American segment intercompany sales to the International segment and $14,239 intercompany sales of the
International segment to the North American segment.
4 Current assets primarily consist of accounts receivable, inventories and prepaid expenses. Assets not allocated to the segments
include cash and cash equivalents.
5 Long lived assets consist of property, plant and equipment, net taxes receivable, deferred tax assets, net intangible assets & goodwill.
Geographic information about the Company’s sales and long-lived assets are as follows (in thousands):
Sales
North America
United States
Canada & Mexico
International
Brazil
United Kingdom
China
Australia & New Zealand
Total Sales
Long-lived Assets
North America
United States
Canada & Mexico
International
Brazil
United Kingdom
China
Australia & New Zealand
$
$
$
Year Ended June 30,
2019
2020
113,989 $
7,845
121,834
49,254
18,869
6,048
5,446
79,617
201,451 $
127,359 $
9,028
136,387
54,324
24,042
7,370
5,899
91,635
228,022 $
Year Ended June 30,
2019
2020
34,264 $
90
34,354
8,050
1,948
2,881
334
13,213
35,594 $
44
35,638
10,067
2,046
1,944
111
14,168
2018
119,226
9,216
128,442
49,726
25,099
7,323
5,738
87,886
216,328
2018
37,437
52
37,489
8,662
1,876
2,346
126
13,010
Total Long-Lived Assets
$
47,567 $
49,806 $
50,499
B52
18. QUARTERLY FINANCIAL DATA (unaudited) (in thousands except per share data)
Quarter Ended
September 2018
December 2018
March 2019
June 2019
September 2019
December 2019
March 2020
June 2020
Net
Sales
51,901 $
56,532
58,498
61,091
228,022 $
52,114 $
56,864
49,998
42,475
201,451 $
Gross
Margin
16,659 $
18,548
19,155
20,579
74,941 $
17,703 $
18,836
14,844
10,827
62,210 $
$
$
$
$
Earnings
/ (Loss)
Before
Income
Taxes
942 $
2,991
3,045
2,632
9,610 $
1,276 $
1,875
287
(23,435 )
(19,997 ) $
Net
Earnings /
(Loss)
584 $
1,926
2,088
1,481
6,079 $
778 $
1,260
613
(24,490 )
(21,839 ) $
Basic and
Diluted
Earnings
/ (Loss)
Per Share
0.08
0.27
0.30
0.22
0.87
0.11
0.18
0.09
(3.52)
(3.14)
Operating income in the June quarter fiscal 2020 was $2.8 million, exclusive of $8.1 million of adjustments related to impairment
and restructuring. The financial markets also had an adverse impact on earnings in fiscal 2020 as the increased demand for bonds
and the associated decrease in interest rates significantly contributed to a $16.7 million non-cash pension expense due to higher
liabilities. The pension liability, recorded in Other Income, is based upon the ten-year Corporate Bond Rate and is set on the last day
of the fiscal year.
19. SUBSEQUENT EVENTS
Pursuant to the terms of the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First
Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of
the Fixed Charge Coverage Ratio until September 30, 2021 and (ii) establishment of a new minimum cumulative EBITDA and
minimum liquidity covenants in lieu thereof. TD Bank perfected its security interests in the Company’s U.S. based assets, increased
the maximum interest charged on the Line Of Credit from and annual interest rate of 2.25% plus Libor to 3.50% plus Libor, and
amended the borrowing base for the line of credit from 80% of Qualified AR and 50% of the lower of Cost or Market of US
inventory values to 80% of qualified AR plus 85% of the Net Orderly Liquidation Value (NOLV) of US Inventory plus 62.5% of
total appraised US real estate values. As a result of this change, the Company is projected to maintain its current borrowing capacity
of $25,000,000 under the Line of Credit. The Company underwent a series of appraisals and field exams in all US locations as part
of restructuring this agreement. In addition, the Company will provide additional reporting to TD Bank, including monthly profit
and loss statements, balance sheets, cash flow statements and forecasting. This minimum adjusted EBITDA covenant is based on the
Company’s plan for a slow pandemic recovery throughout FY21 and the impact of the Company’s restructuring plan initiatives. The
Company will apply certain proceeds from the sale of US real estate assets against the principle balance of the term loans under the
TD Bank loan agreement. The Agreement will revert to the existing covenant package for the quarter ending September 30, 2021
and every quarter thereafter.
The Company incurred, during quarter ending June 30, 2020, $1.6 million in restructuring related to headcount reductions and saw
manufacturing consolidation comprised of $0.6 million in severance and $1.0 million in equipment write-offs, freight associated
with manufacturing consolidation and other costs. The unpaid amount of the restructuring charge at June 30, 2020 is $1.1 million.
The Company also expects to incur $2.4 million in period restructuring in the first three quarters of fiscal year 2021.
On September 2, 2020 the Board of Directors approved the issuance of an Additional Equity Award to the Company’s Named
Executive Officers “NEOs” and other executive as part of the 2012 Long-Term Incentive Plan “the Plan” . The award is in the
amount of 101.1 thousand shares delivered as 67% fully vested Stock Units (defined in the Plan) and 33% as Restricted Stock Units
(defined in the Plan). The Company’s share price close on September 2, 2020 at $3.37 per share.
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A - Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, we carried out an evaluation, with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
B53
procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this
annual report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of such date in ensuring that information required to be filed in this annual report was
recorded, processed, summarized and reported within the time period required by the rules and regulations of the Securities and
Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There have
been no changes in internal control over financial reporting during the fourth quarter that materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The
Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the United States of America. Internal control over financial reporting includes those written policies and
procedures that:
•
•
•
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
acquisitions and dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the United States of America;
Provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance
with authorization of management and directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2020. Management
based this assessment on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of
the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over
financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Board of Directors.
Based on our assessment, management concluded that as of June 30, 2020 our internal control over financial reporting was effective
based on those criteria.
The Company’s internal control over financial reporting as of June 30, 2020 has been audited by Grant Thornton LLP, an
independent registered public accounting firm, as stated in their report included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
The L.S. Starrett Company
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of The L.S. Starrett Company (a Massachusetts corporation) and
subsidiaries (the “Company”) as of June 30, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of June 30, 2020, based on criteria
established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated financial statements of the Company as of and for the year ended June 30, 2020, and our report dated
September 22, 2020 expressed an unqualified opinion on those financial statements.
B54
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal
Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Boston, Massachusetts
September 22, 2020
B55
Item 9B - Other Information
The Company is filing its fiscal 2020 10-K as a non-accelerated flier. A non-accelerated filer is not required to perform Sarbanes
Oxley testing of Internal Controls over Financial Reporting. However, the Company has engaged its independent registered public
accounting firm to perform an integrated audit.
PART III
Item 10 – Directors, Executive Officers and Corporate Governance
The information concerning the Directors of the Registrant will be contained immediately under the heading “Election of Directors”
and prior to Section A of Part I in the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
November 2, 2020 (the “2020 Proxy Statement”), which will be mailed to stockholders on or about October 2, 2020. The
information in that portion of the 2020 Proxy Statement is hereby incorporated by reference.
Executive Officers of the Registrant
Name
Douglas A. Starrett
John C. Tripp
Emerson T. Leme
Christian Arnsten
Age
67
58
59
53
Held Present
Office Since
2001
2019
2019
2019
Position
President & CEO and Director
Chief Financial Officer and Treasurer
VP & GM Industrial Products North America
VP & GM Industrial Products International
Douglas A. Starrett has been President of the Company since 1995 and became CEO in 2001.
John C. Tripp was appointed Chief Financial Officer of the Company, effective November 4, 2019. Prior to joining the Company,
Mr. Tripp served as Chief Financial Officer of the IWIS Group, The Americas, since 2012, and prior to that, Divisional Chief
Financial Officer of The Stanley Works – Healthcare Solutions, from 2008 to 2012. Mr. Tripp earned a BA in Economics at
Harvard University and an MBA from Boston University.
Emerson T Leme was appointed Vice President Industrial Products North America effective July 2019 and prior to that he was Head
of Metrology Equipment since 2016. Emerson joined the Company in 2004 as the General Manager of Starrett China. Previously,
Mr. Leme worked as manufacturing consultant in 2004, as Latin America Operations Director for Steelcase Co. from 2001 to 2003
and from 1984 to 2001 he held several progressively more responsible positions up to Manufacturing Manager at Toledo do Brazil,
than a subsidiary of Mettler-Toledo. Mr. Leme holds a Bachelor’s degree in mechanical engineering from FEI – Faculdade de
Engenharia Industrial, São Bernando, Brazil and a MBA from Fundação Getulio Vargas, São Paulo, Brazil with an extension at The
University of Chicago Graduate School of Business.
Christian Arnsten was appointed Vice President Industrial Products International effective July 2019 and prior to that was President
of Starrett Brazil since July 2018. He has been working for the Company since 2000 in various International Sales and Marketing
roles as Export Sales Manager Latin America and later as Marketing Director. Mr. Arntsen Previously worked for Norton,
Construction Products Division, a Saint Gobain Abrasives Company in Atlanta, GA, USA from 1996 to 2000 as a Latin American
Export Sales Manager and Regional Sales Manager, South-East, NA. Mr. Arntsen earned a Bachelor’s degree in Economics from
Pontifícia Universidade Católica , São Paulo, Brazil and an MBA from Fundação Getulio Vargas, São Paulo, Brazil
The positions listed above represent their principal occupations and employment.
The President and Treasurer hold office until the first meeting of the directors following the next annual meeting of stockholders and
until their respective successors are chosen and qualified, and each other officer holds office until the first meeting of directors
following the next annual meeting of stockholders, unless a shorter period shall have been specified by the terms of his election or
appointment or, in each case, until he sooner dies, resigns, is removed or becomes disqualified.
There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the
evaluation of the ability and integrity of any executive officer during the past ten years.
Code of Ethics
The Company has adopted a Policy on Business Conduct and Ethics (the “Ethics Policy”) applicable to all directors, officers and
employees of the Company. The Code is intended to promote honest and ethical conduct, full and accurate reporting, and
compliance with laws as well as other matters. The Ethics Policy is available on the Company’s website at www.starrett.com.
Stockholders may also obtain free of charge a printed copy of the Ethics Policy by writing to the Clerk of the Company at The L.S.
Starrett Company, 121 Crescent Street, Athol, MA 01331. We intend to disclose any future amendments to, or waivers from, the
B56
Ethics Policy within four business days of the waiver or amendment through a website posting or by filing a Current Report on Form
8-K with the Securities and Exchange Commission.
Item 11 - Executive Compensation
The information concerning management remuneration will be contained under the heading “General Information Relating to the
Board of Directors and Its Committees,” and in Sections C-H of Part I of the Company’s 2020 Proxy Statement, and is hereby
incorporated by reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) The following table gives information about the Company’s common stock that may be issued upon the exercise of options,
warrants and rights under the Company’s 2017 Employees’ Stock Purchase Plan (“2017 Plan”) as of June 30, 2020. The 2017 Plan
was approved by stockholders at the Company’s 2017 annual meeting and shares of Class A or Class B common stock may be
issued under the 2017 Plan. Options are not issued under the Company’s Employees’ Stock Purchase Plan that was adopted in 1952.
Number of
Securities
Remaining
Available
For Future
Issuance
Under
Equity
Compen-
sation
Plans (Ex-
cluding
Securities
Reflected in
Column (a)
(c)
380,192
—
380,192
Number of
Securities
to be issued
Upon
Exercise of
Outstanding
Options,
Warrants
and Rights
(a)
99,193
—
99,193
$
$
Weighted
Average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights
(b)
3.95
—
3.95
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
(b) Security ownership of certain beneficial owners:
The information concerning a more than 5% holder of any class of the Company’s voting shares will be contained under the
heading “Security Ownership of Certain Beneficial Owners” in Section I of Part I of the Company’s 2020 Proxy Statement, and is
hereby incorporated by reference.
(c) Security ownership of directors and officers:
The information concerning the beneficial ownership of each class of equity securities by all directors, and all directors and
officers of the Company as a group, will be contained under the heading “Security Ownership of Directors and Officers” in Section I
of Part I in the Company’s 2020 Proxy Statement. These portions of the 2020 Proxy Statement are hereby incorporated by reference.
(d) The Company knows of no arrangements that may, at a subsequent date, result in a change in control of the Company.
Item 13 - Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 will be contained in the Company’s 2020 Proxy Statement, and is hereby incorporated by
reference.
Item 14 - Principal Accountant Fees and Services
The information required by this Item 14 will be contained in the Audit Fee table in Section B of Part I in the Company’s 2020
Proxy Statement. These portions of the Proxy Statement are hereby incorporated by reference.
B57
PART IV
Item 15 – Exhibits, Financial Statement Schedules
(a) 1. Financial statements filed in Item 8 of this annual report:
Consolidated Balance Sheets at June 30, 2020 and June 30, 2019.
Consolidated Statements of Operations for each of the years in the three-year period ended June 30, 2020.
Consolidated Statements of Comprehensive Income (Loss) for each of the years in the three-year period ended June 30, 2020.
Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended June 30, 2020.
Consolidated Statements of Cash Flows for each of the years in the three-year period ended June 30, 2020.
Notes to Consolidated Financial Statements
2. The following consolidated financial statement schedule of the Company included in this annual report on Form 10-K is filed
herewith pursuant to Item 15(c) and appears immediately before the Exhibit Index:
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
Schedule II
Valuation and Qualifying Accounts
Allowance for Doubtful Accounts Receivable
(in 000)
Year Ended June 30, 2020
Year Ended June 30, 2019
Year Ended June 30, 2018
Valuation Allowance on Deferred Tax Asset
Balance at
Beginning
of Period
Provisions
Charges to
Other
Accounts
Write-offs
Balance at
End of
Period
$
685 $
1,277
946
244 $
(91 )
538
(155 ) $
(5 )
(71 )
(38 ) $
(496 )
(137 )
736
685
1,277
(in 000)
Year Ended June 30, 2020
Year Ended June 30, 2019
Year Ended June 30, 2018
Balance at
Beginning
of Period
Provisions
Charges to
Other
Accounts
Write-offs
Balance at
End of
Period
$
6,743 $
4,999
2,922
2,068 $
1,744
2,077
- $
-
-
- $
-
-
8,811
6,743
4,999
All other financial statement schedules are omitted because they are inapplicable, not required under the instructions, or the
information is reflected in the financial statements or notes thereto.
3. See Exhibit Index below. Compensatory plans or arrangements are identified by an “*”.
(b) See Exhibit Index below.
(c) Not applicable.
B58
Item 16 – Form 10-K Summary
Open
THE L.S. STARRETT COMPANY AND SUBSIDIARIES - EXHIBIT INDEX
Item 16 – Form 10-K Summary
Open
THE L.S. STARRETT COMPANY AND SUBSIDIARIES - EXHIBIT INDEX
Exhibit
3a
3b
4a
4b
10a
10c*
10d*
10e*
10f*
10g
10h
10i
10j*
10k*
10l*
Restated Articles of Organization as amended, filed with Form 10-K for the year ended June 30, 2012, is hereby
incorporated by reference.
Amended and Restated Bylaws, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by
reference.
Rights Agreement dated as of November 2, 2010 between the Company and Mellon Investor Services LLC, as Rights
Agent (together with exhibits, including the Form of Rights Certificate, and the Summary of Rights to Purchase Shares of
Class A Common Stock), filed with Form 10-Q for the quarter ended September 25, 2010, is hereby incorporated by
reference.
Amendment No. 1 to Rights Agreement dated as of February 5, 2013 by and between the Company and Computershare
Shareowner Services LLC, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by
reference.
Form of indemnification agreement with directors and executive officers, filed with Form 10-K for the year ended June 29,
2002, is hereby incorporated by reference.
The L.S. Starrett Company 401(k) Stock Savings Plan (2001 Restatement), filed with Form 10-K for the year ended June
29, 2002 is hereby incorporated by reference.
The L.S. Starrett Company Employee Stock Ownership Plan and Trust Agreement, as amended, filed with Form 10-K for
the year ended June 30, 2012 is hereby incorporated by reference.
Amendment dated April 1, 2003 to the Company’s 401(k) Stock Savings Plan, filed with Form 10-K for the year ended
June 28, 2003, is hereby incorporated by reference.
Amendment dated October 20, 2003 to the Company’s 401(k) Stock Savings Plan, filed with Form 10-Q for the quarter
ended September 27, 2003, is hereby incorporated by reference.
Change in Control Agreement, dated January 16, 2009, between the Company and Douglas A. Starrett, filed with Form 10-
Q for the quarter ended December 27, 2008, is hereby incorporated by reference.
Form of Change in Control Agreement, executed by the Company and Francis J. O’Brien on July 15, 2010, filed with
Form 10-Q for the quarter ended December 27, 2008, is hereby incorporated by reference.
Form of Non-Compete Agreement, dated as of January 16, 2009, executed separately by the Company and each of Francis
J. O’Brien, and Douglas A Starrett on July 15, 2010, and January 16, 2009, filed with Form 10-Q for the quarter ended
December 27, 2008, is hereby incorporated by reference.
The L. S. Starrett Company 2013 Employee Stock Ownership Plan and Trust Agreement, filed with Form 10-Q for the
quarter ended March 31, 2013, is hereby incorporated by reference.
First Amendment to The L. S. Starrett Company 2013 Employee Stock Ownership Plan and Trust Agreement, dated
December 31, 2013 is hereby incorporated by reference.
The L.S. Starrett Company 2012 Employees’ Stock Purchase Plan, filed with the Company’s Registration Statement on
Form S-8 (File No. 333-184934) filed on November 14, 2012, is hereby incorporated by reference.
B59
10m*
10n
The L.S. Starrett Company 2012 Long-Term Incentive Plan, filed with the Company’s Registration Statement on Form S-8
(File No. 333-184934) filed on November 14, 2012, is hereby incorporated by reference.
Form of Non-Statutory Stock Option Agreement under The L.S. Starrett Company 2012 Long-Term Incentive Plan, filed
with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.
Form of Director Non-Statutory Stock Option Agreement under The L.S. Starrett Company 2012 Long-Term Incentive
Plan, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.
Form of Restricted Stock Unit Agreement under The L.S. Starrett Company 2012 Long-Term Incentive Plan, filed with
Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.
Form of Director Restricted Stock Unit Agreement under The L.S. Starrett Company 2012 Long-Term Incentive Plan, filed
with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.
The L.S. Starrett Company 2017 Employees’ Stock Purchase Plan, filed with the Company’s Registration Statement on
Form S-8 (File No. 333-221598) filed on November 16, 2017, is hereby incorporated by reference.
The Amended and Restated Loan and Security Agreement dated June 25, 2020 by and among The L.S. Starrett Company,
Tru-Stone Technologies, Inc. Starrett Kinemetric Engineering, Inc. and Starrett Bytewise Development, Inc. and TD Bank,
N.A., filed as Exhibit 10.1 with Current Report on Form 8-K (File No. 001-00367) filed on July 1, 2020, is hereby
incorporated by reference.
First Amendment to The Amended and Restated Loan and Security Agreement dated June 25, 2020 by and among The
L.S. Starrett Company, Tru-Stone Technologies, Inc. Starrett Kinemetric Engineering, Inc. and Starrett Bytewise
Development, Inc. and TD Bank, N.A., is filed herewith.
Subsidiaries of the L.S. Starrett Company, filed herewith.
Consent of Independent Registered Public Accounting Firm, filed herewith.
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a), filed herewith.
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a), filed herewith.
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), filed
herewith.
The following materials from The L. S. Starrett Company Annual Report on Form 10-K for the year ended June 30, 2020
are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (I) the Consolidated Balance
Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss),
(iv) the Consolidated Statements of Stockholders' Equity (v) the Consolidated Statements of Cash Flows, and (vi) Notes to
the Consolidated Financial Statements, tagged as blocks of text.
10o
10p
10q
10r*
10s
10t
21
23
31a
31b
32
101
B60
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
THE L.S. STARRETT COMPANY
(Registrant)
By: /S/John C. Tripp
John C. Tripp
Treasurer and Chief Financial Officer
(Principal Accounting Officer)
Date: September 22, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the date indicated:
/S/DOUGLAS A. STARRETT
Douglas A. Starrett, September 22, 2020
President and CEO and Director (Principal Executive
Officer)
/S/THOMAS J. RIORDAN
Thomas J. Riordan, September 22, 2020
Director
By: /S/JOHN C. TRIPP
John C. Tripp, September 22, 2020
Treasurer and Chief Financial Officer (Principal Accounting
Officer)
/S/SCOTT W. SPROULE
Scott W. Sproule, September 22, 2020
Director
/S/RICHARD B. KENNEDY
Richard B. Kennedy, September 22, 2020
Director
/S/RUSSELL D. CARREKER
Russell D. Carreker, September 22, 2020
Director
/S/DAVID A. LEMOINE
David A. Lemoine, September 22, 2020
Director
/S/CHRISTOPHER C. GAHAGAN
Christopher C. Gahagan, September 22, 2020
Director
B61
L.S. Starrett Company
Corporate Organization
Country of State/Province
Type
of
Company
Name
Incorporation
of
Incorporation
Entity
Exhibit 21
Year
Acquired
Year of
Incorporation Business Address
The L.S. Starrett Company
Tru-Stone Technologies, Inc.
U.S.
U.S.
Massachusetts Corporation 1880
Delaware Corporation 2006
1929 Manufacturing 121 Crescent Street, Athol, MA 01331
2006 Manufacturing 1101 Prosper Drive, PO Box 430, Waite Park,
MN 56387
Starrett Kinemetric Engineering,
U.S.
Delaware Corporation 2007
2007 Manufacturing 26052 Merit Circle, Suite 103, Laguna Hills, CA
Inc.
92653
Starrett Bytewise Development,
U.S.
Delaware Corporation 2011
2011 Manufacturing 1150 Brookstone Center Parkway, Columbus,
Inc.
Starrett Worldwide, Inc.
U.S.
Delaware Corporation
2014
Georgia 31904
121 Crescent Street, Athol, MA 01331
Hire Non-US
Employees
The L.S. Starrett Co. of Canada
Canada
Ontario
Corporation 1962
1962
Sales
1244, Kamato Road, Mississauga, Ontario, L4W
1Y1
U.K.
U.K.
Scotland
Corporation 1958
1958 Manufacturing Box 1, Oxnam Road, Jedburgh, TD8
England
Corporation 1990
6LR, Scotland
1990 Manufacturing Snaygill Industrial Estate, Skipton, North
Germany
Singapore
Corporation 2000
Corporation 2010
2000
2010
Sales
Sales
Sales
Yorkshire, BD23 2QR, England
Feldwies 12, 61389 Scmittem/Taunus, Germany
35, Marsiling Industrial State Road 3, #05-04
Singapore 739257
661 -Chrome Taito, Taito-KU, Tokyo 110-0016
Limited
The L.S. Starrett Company
Limited
Starrett Precision Optical
Limited
Starrett GmbH
Starrett (Asia) Pte Ltd.
The L.S. Starrett Company
U.K.
Scotland
Branch
Limited (Japan)
Starrett Industria E Commercio
Brazil
Corporation 1956
Ltda.
The L.S. Starrett Company of
Mexico
Corporation 2001
Mexico, S.deR.L.deC.V.
1956 Manufacturing Av. Laroy S. Starrett, 1880, Caxia Postal 171,
13300-000, Itu, Brasil
Prol. Irlanda N 901 Col Privada, Luxemburgo,
Saltillo, Coahuila, 25240 Mexico
Sales
2001
Starrett Tools (Suzhou) Co. Ltd.
China
Corporation 1997
1997 Manufacturing Suzhou Industrial Park, N. 339 Su Hong Zhong
The L.S. Starrett Co. of Australia
Australia
Corporation 1998
1998
Pty Ltd.
Starrett (New Zealand) Limited
New
Zealand
Corporation 2006
2006
Sales
Sales
Road, Suzhou, Jiangsu Providence
Unit 2, 57 Prince William Drive, Seven Hills,
N.S.W. 2147
28C Hugo Johnston Drive, Penrose, Aukland
B62
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated September 22, 2020, with respect to the consolidated financial statements and internal control
over financial reporting included in the Annual Report of The L.S. Starrett Company on Form 10-K for the year ended June 30,
2020. We consent to the incorporation by reference of said reports in the Registration Statements of The L.S. Starrett Company on
Forms S-8 (File No. 333-221598, File No. 333-184934, File No. 333-147331, File No. 333-104123, File No. 333-101162, File No.
333-12997, and File No. 033-55623).
Exhibit 23
/s/ GRANT THORNTON LLP
Boston, Massachusetts
September 22, 2020
B63
EXHIBIT 31.a
I, Douglas A. Starrett, certify that:
1. I have reviewed this Annual Report on Form 10-K of The L.S. Starrett Company;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial report; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 22, 2020
/S/ Douglas A. Starrett
Douglas A. Starrett
President and CEO and Director (Principal Executive
Officer)
B64
CERTIFICATIONS
EXHIBIT 31.b
I, John C. Tripp, certify that:
1. I have reviewed this Annual Report on Form 10-K of The L.S. Starrett Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial report; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 22, 2020
/S/ John C. Tripp
John C. Tripp
Treasurer and Chief Financial Officer (Principal Accounting
Officer)
B65
CERTIFICATIONS
EXHIBIT 32
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18,
United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18,
United States Code), each of the undersigned officers of The L.S. Starrett Company, a Massachusetts corporation (the
"Company"), does hereby certify, to such officer's knowledge, that:
The Annual Report on Form 10-K for the year ended June 30, 2020 (the "Form 10-K") of the Company fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly
presents, in all material respects, the financial condition and results of operations of the Company.
Date September 22, 2020
Date September 22, 2020
/S/ Douglas A. Starrett
Douglas A. Starrett
President and CEO and Director (Principal Executive
Officer)
/S/ John C. Tripp
John C. Tripp
Treasurer and Chief Financial Officer (Principal
Accounting Officer)
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a
separate disclosure document.
A signed original of this written statement required by Section 906 has been provided to The L.S. Starrett Company and will be
retained by The L.S. Starrett Company and furnished to the Securities and Exchange Commission or its staff upon request.
B66
B67
B68
BOARD OF DIRECTOR S
RUSSELL D. CARREKER
Managing Partner of C3 Investment Properties, a commercial
DAVID A. LEMOINE
Retired Audit Partner, Deloitte & Touche LLP (“D&T”), Boston,
real estate investment company. From 2012-2015, President
MA (1985 – May 2010). Partner-in-charge of D&T’s Boston
of Starrett-Bytewise, a technology company that designs and
audit practice (1995 – 2000). Manager, D&T’s Worcester
manufactures laser measurement systems, and from 1995 to
office (1985 – 1995). From 1980 to 1985, Senior Vice
2012, CEO of Bytewise Measurement Systems.
CHRISTOPHER C. GAHAGAN
From 2018-2019, Mr. Gahagan and his wife are Co-
Founders of a Non-Profit Foundation whose mission is
dedicated to expanding STEM and career opportunities for
underserved populations. From 2015-2017, President and
President, Finance & Administration, Briox Technologies, Inc.,
Worcester, MA. Served on various audit staff and manager
functions (1971 – 1980).
TERRY A. PIPER
Chairman, President and Chief Executive Officer, Precision
Steel Warehouse, Inc., Franklin Park, Illinois, a wholesale
CEO of Symbotic LLC, an early stage company focused on
steel service center.
automation technology for the warehouse and distribution
industry. From 2009-2015, Senior Vice President of Avid
Technologies. a technology company that develops hardware
and software for digital media.
RICHARD B. KENNEDY
Retired President and CEO, Worcester Regional Chamber
of Commerce. Associate Principal and Market Strategy
Consultant, Frank Lynn & Associates, Chicago, Illinois.
Formerly Vice President, Marketing, Saint-Gobain Abrasives,
Worcester, Massachusetts, producer of abrasives products.
THOMAS J. RIORDAN
From 2011 until retirement in 2019, President and CEO of
Neenah Enterprises, Inc., a designer and manufacturer of
castings and forgings. From 2007-2011, President and Chief
Operating Officer of Terex Corporation, a NYSE-listed global
construction company.
DOUGLAS A. STARRETT
President and Chief Executive Officer
DOUGLAS A. STARRETT
President and Chief Executive Officer
JOHN C. TRIPP
Treasurer and Chief Financial Officer
EMERSON T. LEME
Vice President Industrial Products North America
STEVEN A. WILCOX
Clerk; Partner, law firm of Ropes & Gray LLP
B69
THE L.S. STARRETT COMPANY
121 CRESCENT STREET
ATHOL, MA 01331-1915
978-249-3551
TRANSFER AGENT AND REGISTRAR:
COMPUTERSHARE, INC.
PO BOX 505000
LOUISVILLE, KY 40233-5000
TOLL FREE: 800-522-6645
INTERNATIONAL STOCKHOLDERS: 201-680-6578
WWW.COMPUTERSHARE.COM/INVESTOR
AUDITORS:
GRANT THORNTON LLP
75 STATE STREET
13TH FLOOR
BOSTON, MA 02109-1827
COUNSEL:
ROPES & GRAY LLP
PRUDENTIAL TOWER
800 BOYLSTON STREET
BOSTON, MASSACHUSETTS 02199-3600
LISTED:
NEW YORK STOCK EXCHANGE
SYMBOL SCX
WEBSITE:
WWW.STARRETT.COM