STARRETT L S CO - Annual Report: 2009 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________
FORM
10-K
____________
(check
one)
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x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended June 27, 2009
OR
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¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
Commission
File No. 1-367
____________
THE
L.S. STARRETT COMPANY
(Exact
name of registrant as specified in its charter)
____________
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MASSACHUSETTS
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04-1866480
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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121
CRESCENT STREET, ATHOL, MASSACHUSETTS
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01331
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code 978-249-3551
____________
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Class A
Common - $1.00 Per Share Par Value
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New
York Stock Exchange
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Class
B Common - $1.00 Per Share Par Value
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Not
applicable
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____________
1
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
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
x
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 x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or amendment to this
Form 10-K. x
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large
Accelerated Filer ¨ Accelerated
Filer x
Non-Accelerated
Filer ¨ Smaller
Reporting Company ¨
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
The
Registrant had 5,739,388 and 879,135 shares, respectively, of its $1.00 par
value Class A and B common stock outstanding on December 27, 2008. On December
27, 2008, the last business day of the Registrant’s second fiscal quarter, the
aggregate market value of the common stock held by nonaffiliates was
approximately $105,763,000.
There
were 5,788,667 and 863,446 shares, respectively, of the Registrant’s $1.00 par
value Class A and Class B common stock outstanding as of August 31,
2009.
The
exhibit index is located on pages 53-55.
DOCUMENTS
INCORPORATED BY REFERENCE
The
Registrant intends to file a definitive Proxy Statement for the Company’s 2009
Annual Meeting of Stockholders within 120 days of the end of the fiscal year
ended June 27, 2009. Portions of such Proxy Statement are incorporated by
reference in Part III.
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Portions
of the Proxy Statement for October 14, 2009 Annual Meeting (Part
III).
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2
THE
L.S. STARRETT COMPANY
FORM
10-K
FOR
THE PERIOD ENDED JUNE 27, 2009
TABLE
OF CONTENTS
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Page
Number
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PART
I
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ITEM
1.
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Business
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4-7
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ITEM
1A.
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Risk
Factors
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7-9
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ITEM
1B.
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Unresolved
Staff Comments
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9
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ITEM
2.
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Properties
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9-10
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ITEM
3.
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Legal
Proceedings
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10
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ITEM
4.
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Submission
of Matters to a Vote of Security Holders
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10
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PART
II
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ITEM
5.
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Market
for the Company’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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10-11
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ITEM
6.
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Selected
Financial Data
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12
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ITEM
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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12-19
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ITEM
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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12-19
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ITEM
8.
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Financial
Statements and Supplementary Data
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19-48
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ITEM
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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48
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ITEM
9A.
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Controls
and Procedures
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48-50
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ITEM
9B.
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Other
Information
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51
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PART
III
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ITEM
10.
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Directors,
Executive Officers and Corporate Governance
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51
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ITEM
11.
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Executive
Compensation
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52
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ITEM
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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52
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ITEM
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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52
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ITEM
14.
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Principal
Accounting Fees and Services
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52
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PART
IV
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ITEM
15.
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Exhibits
and Financial Statement Schedules
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53
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EXHIBIT
INDEX
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54-55
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SIGNATURES
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56
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All references in this Annual Report to
“Starrett”, the “Company”, “we”, “our” and “us” means The L.S. Starrett Company
and its subsidiaries.
3
PART
I
Item 1 -
Business
General
Founded
in 1880 by Laroy S. Starrett and incorporated in 1929, the Company is engaged in
the business of manufacturing over 5,000 different products for industrial,
professional and consumer markets. As a global manufacturer with major
subsidiaries in Brazil (1956), Scotland (1958) and China (1997), the Company
offers its broad array of products to the market through multiple channels of
distribution throughout the world. The Company’s products include precision
tools, electronic gages, gage blocks, optical and vision 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.
Starrett®
is brand recognized around the world for precision, quality and
innovation.
Products
The
Company’s tools and instruments are sold throughout North America and in over
100 foreign countries. By far the largest consumer of these products is the
metalworking industry including aerospace, medical, and automotive but other
important consumers are marine and farm equipment shops, do-it-yourselfers and
tradesmen such as builders, carpenters, plumbers and electricians.
For 129
years the Company has been a recognized leader in providing measurement
solutions consisting of hand measuring tools and precision instruments such as
micrometers, vernier calipers, height gages, depth gages, electronic gages, dial
indicators, steel rules, combination squares, custom and non contact
gaging and many other items. 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. During fiscal 2008, the Company
enhanced its wireless data collection solutions, making them more
customer-friendly and more software-compatible.
The
Company’s saw product lines enjoy strong global brand recognition and market
share. These products encompass a breadth of uses. Over the last twelve months,
the Company introduced several new products including its ADVANZ carbide tipped
products and its VERSATIX products with a patent pending tooth geometry designed
for the cutting of structurals and small solids. This launch was further
enhanced through the global introduction of new support programs and marketing
collateral. These actions are aimed at positioning Starrett for global growth in
wide band products for production applications as well as product range
expansions for shop applications. A full line of complementary saw products,
including hack, jig, reciprocating saw blades and hole saws provide cutting
solutions for the building trades and are offered primarily through
construction, electrical, plumbing and retail distributors. During
fiscal 2008, the Company was issued a patent for its bi-metal unique®
manufacturing process and products. This break-through Split Chip Advantage
technology enables the Company to produce saw blades, which are up to 50%
stronger and offer up to 170% more contact area than traditional electron beam
(EB) products. This technology is now used on many of the Company’s saw
products.
Recent
acquisitions have added to the Company’s portfolio of custom measuring solutions
that complement the Company’s existing special gaging expertise. On July 17,
2007, the Company purchased all of the assets of Kinemetric Engineering.
Kinemetric Engineering specializes in precision video-based metrology, specialty
motion devices and custom engineered systems for measurement and inspection.
Kinemetric Engineering brings a wealth of experience, engineering and
manufacturing capability. This business unit also oversees the sales and support
of the Company’s high quality line of Starrett Optical Projectors, combining to
make a very comprehensive product offering.
The
Company’s custom engineered granite product offering was further enhanced by the
acquisition of Tru-Stone Technologies Inc. (Tru-Stone) in fiscal 2006. This
strategic acquisition significantly improved the granite surface plate
capabilities providing access to high-end metrology markets such as the
electronics and flat panel display industry. The consolidation of the Company’s
granite surface plate operations with Tru-Stone provided savings in labor and
operating expenses.
4
Personnel
At June
27, 2009, the Company had 1,768 employees, approximately 50% of whom were
domestic. This represents a net decrease from June 28, 2008 of 453 employees.
The headcount reduction is the result of the global recession and includes
reductions at all of the Company’s operating units with the exception of
Mexico.
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 a large share of Company stock resulting from various
stock purchase plans. The Company believes that this dual role of owner-employee
has strengthened employee morale over the years.
Competition
The
Company is competing 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 other major
companies and numerous small competitors in the field, including direct foreign
competitors. As a result, the industry is highly competitive. During fiscal
2009, there were no material changes in the Company’s competitive position in
spite of the current global economic crisis, which is accelerating the migration
of American manufacturing jobs to lower cost countries. Internationally, the
Company’s significant investments in manufacturing and sales operations in China
appears to have resulted in market share gains and enhanced brand recognition.
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 is responding to such
challenges by expanding its manufacturing operations in China and in the
Dominican Republic. Certain large customers offer 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 segment and country.
Continued research and development, new patented products and processes, and
strong customer support have enabled the Company to compete successfully in both
general and performance oriented 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, Argentina, Australia, New Zealand, Mexico and
Germany 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 14 to the Company’s fiscal 2009 financial statements under the caption
“OPERATING DATA” found in Item 8 of this Form 10-K.
Orders
and Backlog
The
Company generally fills orders from finished goods inventories on hand. Sales
order backlog of the Company at any point in time is not significant. Total
inventories amounted to $60.2 million at June 27, 2009 and $61.1 million at June
28, 2008. The Company uses the last-in, first-out (LIFO) method of valuing most
domestic inventories (approximately 55% of all inventories). LIFO inventory
amounts reported in the financial statements are approximately $33.7 million and
$27.5 million, respectively, lower than if determined on a first-in, first-out
(FIFO) basis at June 27, 2009 and June 28, 2008.
5
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. As noted previously, during
fiscal 2008 the Company was issued a patent for its bi-metal unique®
manufacturing process and products. The Company relies on its
continuing product research and development efforts, with less dependence on its
current patent position. It 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 2009, 2008
and 2007 were approximately $1.6 million, $2.4 million and $2.7 million
respectively, all of which were expensed in the Company’s financial
statements.
The
Company uses trademarks with respect to its products and considers its trademark
portfolio as 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. Specifically, the Company has taken steps to reduce, control and treat
water discharges and air emissions. The Company takes seriously its
responsibility to the environment and has embraced renewable energy alternatives
and expects to bring on line a new hydro – generation facility at its Athol, MA
plant in 2010 to reduce its carbon foot print and energy costs, an investment in
excess of $1 million.
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, forcing the Company to
adapt to this new, highly competitive business environment. The Company
continuously evaluates most all aspects of its business, aiming for new
world-class ideas to set itself apart from its competition.
Our
strategic concentration is on global brand building and providing unique
customer value propositions through technically supported application solutions
for our customers. Our job is to recommend and produce the best suited standard
product or design and build custom solutions. The combination of the right tool
for the right job with value added service will give us a competitive advantage.
The Company continues its focus on lean manufacturing, plant consolidations,
global sourcing 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 which has increased its
international sales revenues to 49% of its consolidated sales.
On
September 21, 2006, the Company sold its Alum Bank, PA level manufacturing plant
and relocated the manufacturing to the Dominican Republic, where production
began in fiscal 2005. The tape measure production of the Evans Rule Division
facilities in Puerto Rico and Charleston, SC has been transferred to the
Dominican Republic. The Company vacated and plans to sell its Evans Rule
facility in North Charleston, SC. This move has achieved labor
savings while satisfying the demands of its customers for lower
prices.
The
Tru-Stone acquisition in April 2006 represented a strategic acquisition for the
Company in that it provides an enhancement of the Company’s granite surface
plate capabilities. Profit margins for the Company’s standard plate business
have improved as the Company’s existing granite surface plate facility was
consolidated into Tru-Stone, where average gross margins have been higher. Along
the same lines, the Kinemetric Engineering acquisition in July 2007 represented
another strategic acquisition in the field of precision video-based metrology
which, when combined with the Company’s existing optical projection line, will
provide a very comprehensive product offering.
6
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 2009 Annual Report to Stockholders,
including the President’s letter, contains forward-looking statements about the
Company’s business, competition, sales, gross margins, 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 the Economy:
The Company’s results of operations are materially affected by the conditions in
the global economy. As a result of the global economic recession,
U.S. and foreign economies have experienced and continue to experience
significant declines in employment, household wealth, consumer spending, and
lending. Businesses, including the Company and its customers, have
faced and are likely to continue to face weakened demand for their products and
services, difficulty obtaining access to financing, increased funding costs, and
barriers to expanding operations. The Company’s results of operations
have been negatively impacted by the global economic recession and the Company
can provide no assurance that its results of operations will
improve.
Risks Related to
Reorganization: The Company continues to evaluate to consolidate and
reorganize some of its manufacturing and distribution operations. There can be
no assurance that the Company will be successful in these efforts or that any
consolidation or reorganization will result in revenue increases or cost savings
to the Company. The implementation of these reorganization measures may disrupt
the Company’s manufacturing and distribution activities, could adversely affect
operations, and could result in asset impairment charges and other costs that
will be recognized if and when reorganization or restructuring plans are
implemented or obligations are incurred.
Risks Related to Technology:
Although the Company’s strategy includes investment in research and development
of new and innovative products to meet technology advances, there can be no
assurance that the Company will be successful in competing against new
technologies developed by competitors.
Risks Related to Foreign
Operations: Approximately 49% of the Company’s sales and 40% of net
assets relate to foreign operations. Foreign operations are subject to special
risks that can materially affect the sales, profits, cash flows and financial
position of the Company, including taxes and other restrictions on distributions
and payments, currency exchange rate fluctuations, political and economic
instability, inflation, minimum capital requirements and exchange controls. In
fact, during fiscal 2009, the Company experienced negative foreign exchange
effects as the British Pound and Brazilian Real weakened against the U.S.
dollar. Finally, the Company’s Brazilian operations, which constitute over half
of the Company’s revenues from foreign operations, can be very volatile,
changing from year to year due to the political situation, currency risk and the
economy. As a result, the future performance of the Brazilian operations may be
difficult to forecast.
Risks Related to Industrial
Manufacturing Sector: 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.
7
Risks Related to Competition:
The Company’s business is subject to direct and indirect competition from both
domestic and foreign firms. In particular, low cost foreign sources have created
severe competitive pricing pressures. Under certain circumstances, including
significant changes in U.S. and foreign currency relationships, such pricing
pressures tend to reduce unit sales and/or adversely affect the Company’s
margins.
Risks Related to Insurance
Coverage: The Company carries liability, property damage, workers’
compensation, medical and other insurance coverages that management considers
adequate for the protection of its assets and operations. There can be no
assurance, however, that the coverage limits of such policies will be adequate
to cover all claims and losses. Such uncovered claims and losses could have a
material adverse effect on the Company. Depending on the risk, deductibles can
be as high as 5% of the loss or $500,000.
Risks Related to Raw Material and
Energy Costs: Steel is the principal raw material used in the manufacture
of the Company’s products. The price of steel has historically fluctuated on a
cyclical basis and has often depended on a variety of factors over which the
Company has no control. The cost of producing the Company’s products is also
sensitive to the price of energy. The selling prices of the Company’s products
have not always increased in response to raw material, energy or other cost
increases, and the Company is unable to determine to what extent, if any, it
will be able to pass future cost increases through to its customers. The
Company’s inability to pass increased costs through to its customers could
materially and adversely affect its financial condition or results of
operations.
Risks Related to Stock Market
Performance: Currently, the Company’s domestic defined benefit pension
plan is slightly underfunded. Due to a drop in the stock market, the Company’s
domestic plan became temporarily underfunded and required the reclassification
of prepaid pension cost on the balance sheet from an asset to a contra equity
account, thus reducing stockholders’ equity and book value per share. This has
also occurred for the Company’s UK plan, which was underfunded during fiscal
2007, 2008 and 2009.
Risks Related to Acquisitions:
Acquisitions, such as the Company’s acquisition of Tru-Stone in fiscal
2006 and Kinemetric Engineering in fiscal 2008, 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. While the Company believes that strategic acquisitions
can improve its competitiveness and profitability, the failure to successfully
integrate and realize the expected benefits of such acquisitions could have an
adverse effect on the Company’s business, financial condition and operating
results.
Risks Related to Investor
Expectations: The Company’s share price significantly declined during
fiscal 2009. The Company's earnings may not continue to grow at rates similar to
the growth rates achieved in recent years and may fall short of either a prior
quarter or investors’ expectations. If the Company fails to meet the
expectations of securities analysts or investors, the Company's share price may
continue to decline.
Risks Related to the Company’s Credit
Facility: Under the Company’s credit facility with TD Bank, N.A., the
Company is required to comply with certain financial covenants. While
the Company believes that it will be able to comply with the financial covenants
in future periods, its failure to do so would result in defaults under the
credit facility unless the covenants are amended or waived. An event
of default under the credit facility, if not waived, could prevent additional
borrowing and could result in the acceleration of the Company’s indebtedness.
This could have an impact on the Company’s ability to operate its
business.
8
Risks Related to Information
Systems: 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. 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. For those reasons,
the Company is in the process of developing a broader global IT
strategy.
Risks Related to Litigation and
Changes in Laws, Regulations and Accounting Rules: Various aspects of the
Company's operations are subject to federal, state, local or foreign laws, rules
and regulations, any of which may change from time to time. Generally accepted
accounting principles may change from time to time, as well. In addition, the
Company is regularly involved in various litigation matters that arise in the
ordinary course of business. Litigation, regulatory developments and changes in
accounting rules and principles could adversely affect the Company's business
operations and financial performance.
Item 1B – Unresolved Staff
Comments
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None.
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Item 2 -
Properties
The
Company’s principal plant and its corporate headquarters are located in Athol,
MA on about 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 one building totaling
approximately 320,000 square feet. It is occupied by the Company’s Saw Division,
Ground Flat Stock Division and a distribution center. A separate 36,000 square
foot building which formerly housed the distribution center was vacated in
November 2008 and is currently listed for sale.
The
Company’s Evans Rule Division owns a 173,000 square foot building in North
Charleston, SC. In fiscal 2006, manufacturing operations were moved to a new
50,000 square foot facility in the Dominican Republic from both the North
Charleston site and Mayaguez, Puerto Rico operations. The Company now occupies a
3,400 square foot leased office in North Charleston for administrative personnel
and has the North Charleston property listed for sale.
The
Company’s Exact Level Division was relocated to the Evans Rule facility in the
Dominican Republic. Its 50,000 square foot building located in Alum Bank, PA was
sold on September 21, 2006.
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. Two wholly owned subsidiaries in Suzhou
and Shanghai (People’s Republic of China), lease approximately 41,000 square
feet and 5,000 square feet, respectively. The Company signed a lease for a new
133,000 square foot building in Suzhou to accommodate our need for increased
manufacturing space. We plan to close the Shanghai distribution center and sales
office and consolidate all operations into the new building.
In
addition, the Company operates warehouses and/or sales-support offices in the
U.S., Canada, Australia, New Zealand, Mexico, Germany, Japan, and
Argentina.
A
warehouse in Glendale, AZ encompassing 35,000 square feet was closed in fiscal
2006 and the building was sold during fiscal 2008.
9
With the
acquisition of Tru-Stone in fiscal 2006, the Company added a 90,000 square foot
facility in Waite Park, MN.
With the
acquisition of Kinemetric Engineering in fiscal 2008, the Company added a 9,000
square foot leased facility in Laguna Hills, CA, which was expanded to 14,000
square feet.
The
Company has vacated a sales office in Kennesaw, GA and plans to terminate the
lease.
In the
Company’s opinion, all of its property, plants and equipment are in good
operating condition, well maintained and adequate for its needs.
Item 3 - Legal
Proceedings
The
Company is, in the ordinary course of business, from time to time involved in
litigation that is not considered material to its financial condition or
operations.
Item 4 - Submission of
Matters to a Vote of Security Holders
No
matters were submitted to a vote of security holders during the fourth quarter
of fiscal 2009.
PART II
Item 5 - Market for the
Company’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 dividend and 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, 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 27, 2009, there were approximately 5,100 registered holders
of Class A common stock and approximately 1,900 registered holders of Class B
common stock.
|
Quarter
Ended
|
Dividends
|
High
|
Low
|
|||||||||
|
September
2007
|
$ | 0.10 | 19.48 | 15.27 | ||||||||
|
December
2007
|
0.20 | 20.27 | 17.00 | |||||||||
|
March
2008
|
0.10 | 19.99 | 13.69 | |||||||||
|
June
2008
|
0.12 | 23.83 | 18.15 | |||||||||
|
September
2008
|
0.12 | 28.50 | 13.50 | |||||||||
|
December
2008
|
0.12 | 21.80 | 9.51 | |||||||||
|
March
2009
|
0.12 | 16.31 | 5.30 | |||||||||
|
June
2009
|
0.12 | 11.42 | 6.01 | |||||||||
While the
Company’s dividend policy is subject to periodic review by the Board of
Directors, the Company currently intends to continue to pay comparable dividends
in the future.
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
Summary
of Stock Repurchases:
|
A summary
of the Company’s repurchases of shares of its common stock for the fourth
quarter fiscal 2009 is as follows:
|
Period
|
Shares
Purchased
|
Average
Price
|
Shares
Purchased Under Announced Programs
|
Shares
yet to be Purchased Under Announced Programs
|
|||||||||
|
April
2009
|
None
|
– | – | – | |||||||||
|
May
2009
|
None
|
– | – | – | |||||||||
|
June
2009
|
None
|
– | – | – | |||||||||
10
PERFORMANCE
GRAPH
The
following graph sets forth information comparing the cumulative total return to
holders 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., Thermadyne Holdings Corp., Badger Meter, Federal Screw Works, National
Presto Industries, Regal-Beloit Corp., Tecumseh Products Co., Tennant Company,
The Eastern Company and WD-40.
|
BASE
|
FY2005
|
FY2006
|
FY2007
|
FY2008
|
FY2009
|
|||||||||||||||||||
|
STARRETT
|
100.00 | 115.51 | 88.66 | 121.98 | 162.11 | 48.59 | ||||||||||||||||||
|
RUSSELL
2000
|
100.00 | 109.45 | 125.40 | 146.01 | 122.36 | 91.76 | ||||||||||||||||||
|
PEER
GROUP
|
100.00 | 110.10 | 140.46 | 162.20 | 162.58 | 143.14 | ||||||||||||||||||
11
Item 6 - Selected Financial
Data
|
Years
ended in June ($000 except per share data)
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Net
sales
|
$ | 203,659 | $ | 242,371 | $ | 222,356 | $ | 200,916 | $ | 195,909 | ||||||||||
|
Net
earnings (loss)
|
(3,220 | ) | 10,831 | 6,653 | (3,782 | ) | 3,979 | |||||||||||||
|
Basic
earnings (loss) per share
|
(0.49 | ) | 1.64 | 1.00 | (0.57 | ) | 0.60 | |||||||||||||
|
Diluted
earnings (loss) per share
|
(0.49 | ) | 1.64 | 1.00 | (0.57 | ) | 0.60 | |||||||||||||
|
Long-term
debt (1)
|
1,264 | 5,834 | 8,520 | 13,054 | 2,885 | |||||||||||||||
|
Total
assets
|
194,241 | 250,285 | 234,011 | 228,082 | 224,114 | |||||||||||||||
|
Dividends
per share
|
0.48 | 0.52 | 0.40 | 0.40 | 0.40 | |||||||||||||||
|
(1)
|
Note
that the significant increase in long-term debt in fiscal 2006 is related
to the Tru-Stone acquisition.
|
Items 7
and 7A- Management’s Discussion and Analysis of Financial Condition and Results
of Operations and Quantitative and Qualitative Disclosure about Market
Risk
RESULTS
OF OPERATIONS
Fiscal
2009 Compared to Fiscal 2008
Overview The
Company is engaged in the business of manufacturing over 5,000 different
products for industrial, professional and consumer markets. As a global
manufacturer with major subsidiaries in Brazil, Scotland, and China, the Company
offers a broad array of products to the market through multiple channels of
distribution globally. Net sales decreased 16% in fiscal 2009 compared to fiscal
2008. The Company continued to experience the severity of the global economic
recession during the most recent quarter. The severe decline is due to the
unprecedented slowdown in the global economy and the rapid strengthening of the
U.S. dollar. This is a direct reflection of the financial market crisis, lack of
liquidity and weak consumer confidence. The resultant effect has been a massive
de-stocking throughout the supply chain which caused the most significant drop
in Company sales in the third quarter ending March 28, 2009 in the past thirty
years. Historically, the Company has lagged the economy and we expect the
current harsh economic realities will be with the Company for the balance of
this calendar year. For fiscal 2009, the Company incurred a net loss of $3.2
million, or $(0.49) per basic and diluted share compared to a net income of
$10.8 million or $1.64 per basic and diluted share for fiscal 2008. This
represents a decrease of $14.0 million comprised of a decrease in gross margin
of $16.7 million, the aforementioned goodwill charge of $5.3 million, a decrease
of $3.3 million in other income (expense) offset by a decrease of $2.8 million
in selling, general and administrative costs and a decrease in income tax
expense of $8.4 million from a $6.1 million provision in fiscal 2008 to a $2.3
million benefit in fiscal 2009. The above items are discussed
below.
Net
Sales Net sales for fiscal 2009 were down $38.7 million or 16%
compared to fiscal 2008. North American sales decreased $27.7 million or 21%,
reflecting declining U.S. demand partly caused by the widening of the recession
in the manufacturing sector, decreased sales in Canada and Mexico, and lower
Evans Rule sales. The declines are primarily related to unit volume declines.
The impact of any price concessions and new product sales was not material. It
is likely that the Company’s results will continue to be impacted by the current
global economic recession. Foreign sales (excluding North America) decreased
9.9% (1% increase in local currency), driven by the weakening of the Brazilian
Real, British Pound, Euro, and Australian Dollar against the U.S. dollar, offset
by a growth in Chinese operations ($0.4 million increase). Beyond exchange rate
effects, the declines were mainly related to unit volume declines relative to
the global economic collapse.
Earnings
(loss) before taxes (benefit) The pre-tax loss for fiscal 2009 was $5.6
million, which includes $5.3 million impairment charge for goodwill, compared to
pre-tax earnings of $16.9 million for fiscal 2008. This represents a decrease of
pre-tax earnings of $22.4 million. This is comprised of a decrease in gross
margin of $16.7 million and a decrease of $3.3 million in other income offset by
a decrease in selling, general and administrative costs of $2.8 million. The
decrease in gross margin is primarily attributable to the overall decline in
sales from fiscal 2008 to fiscal 2009 ($10.5 million gross margin effect).
12
The gross
margin percentage decreased from 31.5% in fiscal 2008 to 29.2% in fiscal 2009.
This was primarily driven by lower overhead absorption at certain domestic
plants due to lower sales volumes ($4.5 million effect). Similarly, lower
absorption at foreign plants due to lower sales volumes caused a $.2 million
decline. This was compounded by certain material cost increases that could not
be fully passed on to customers. LIFO liquidations in fiscal 2009 had an
offsetting effect of $1.8 million. LIFO liquidations in fiscal 2008 were not
considered material. Gross margins for fiscal 2010 could again be adversely
impacted by lower absorption rates and material cost increases, which cannot be
fully passed on to customers and by increased competitive pressures in various
markets. As indicated above, selling, general and administrative costs decreased
$2.8 million, although the percentage of sales increased from 25.9% in fiscal
2008 to 29.4% in fiscal 2009. The dollar decrease is a result of decreased sales
commissions, profit sharing and bonuses ($1.9 million), decreases in marketing
and advertising ($.4 million), a decrease in shipping costs ($.4 million),
offset by increases in severance cost ($.7 million) and the bad debt provision
($.3 million). The decrease in other income (expense) is comprised of a decrease
in net interest income ($.7 million), decreased net exchange gains ($.4 million)
and the gain on the sale of the Glendale, AZ facility ($1.7 million) in fiscal
2008. The Company currently includes the Evans North Charleston building and a
building in Mount Airy, NC on the June 27, 2009 Balance Sheet as assets held for
sale of $2.8 million. The Company expects to sell both buildings for a gain
based on a recent appraisal.
In
response to the downturn in sales volume, the Company has reduced spending on
raw materials and indirect production costs. The Company has also cut salaries
at certain locations by 10% and has reduced hourly labor costs through shortened
work weeks, layoffs and attrition. These reductions are done with careful
consideration so as not to compromise customer service levels or the retention
of key employees. This is having an approximate $2.0 million impact per quarter
on cost of sales and selling, general and administrative costs. In addition,
layoffs instituted in April 2009 at certain domestic locations, are having an
approximate $1.1 million impact per quarter on cost of sales and selling,
general and administrative costs. Finally, a reduction in labor force in Brazil
is expected to have a $.2 million impact per quarter. This is in addition to
temporary salary cuts in Brazil taking place over the next 6 months for a
savings of $.4 million. Although the Company’s recent order activity is down
compared to historical levels, this decline is spread relatively proportionately
across most of our customers. The Company fully expects order activity to
rebound once the supply chain de-stocking abates and excess inventory levels at
the Company’s distributors are depleted. The Company does not anticipate any
liquidity constraints given the adequacy of its working capital and its
available credit line. See further discussion under Liquidity and Capital
Resources.
Significant
Fourth Quarter Activity As shown in footnote 14 to the
Consolidated Financial Statements, the Company incurred a loss before income
taxes of $3.9 million during the fourth quarter of fiscal 2009. This was
primarily attributable to the decrease in gross margin caused by the 9% decrease
in sales from the third to fourth quarter and to the recording of a $.8 million
severance charge by the Company’s Brazilian subsidiary.
Income
Taxes The effective rate was 42.0% for fiscal 2009, reflecting
a combined federal, state and foreign worldwide rate adjusted for permanent
book/tax differences, the most significant of which is the deduction allowable
for the Brazilian dividend distributed in December 2008. The effective rate was
36.0% for fiscal 2008, reflecting similar components as fiscal 2009. A portion
of recorded valuation allowances for certain foreign NOL’s were eliminated
during fiscal 2009 and fiscal 2008, reflecting current usage based upon current
earnings. The change in the effective rate percentage from fiscal 2008 to fiscal
2009 reflects the greater impact of permanent book/tax differences on a lower
base due to the loss in fiscal 2009.
No
changes in valuation allowances relating to carryforwards for foreign NOL’s,
foreign tax credits and certain state NOL’s are anticipated at this time other
than reversals relating to realization of NOL benefits for certain foreign
subsidiaries. The Company continues to believe it is more likely than not that
it will be able to utilize its tax operating loss carryforward assets of
approximately $8.8 million reflected on the balance sheet.
13
Fiscal
2008 Compared to Fiscal 2007
Overview For
fiscal 2008, the Company realized net income of $10.8 million, or $1.64 per
basic and diluted share compared to a net income of $6.7 million or $1.00 per
basic and diluted share for fiscal 2007. This represents an increase in net
income of $4.1 million comprised of an increase in gross margin of $10.4
million, an increase of $7.1 million in selling, general and administrative
costs, an increase in other income (expense) of $4.7 million and an increase in
income tax expense of $3.9 million from $2.2 million to $6.1 million. The above
items are discussed in more detail below.
Net
Sales Net sales for fiscal 2008 were up $20.0 million or 9%
compared to fiscal 2007. North American sales increased .9% reflecting steady
U.S. demand, increased sales in Canada, increased penetration in Mexico, and the
acquisition of Kinemetrics on July 17, 2007, offset by lower Evans sales to
Sears. Excluding the Evans Rule Division, North American sales increased $2.6
million (2%). Foreign sales (excluding North America) increased 22% (8% increase
in local currency) driven by the strengthening of the Brazilian Real against the
U.S. dollar, the strengthening of the British Pound against the U.S. dollar,
growing sales for the Chinese operations ($2.8 million increase) and greater
expansion worldwide into newer markets, including Eastern Europe, the Middle
East and China.
Earnings
(loss) before taxes (benefit) Pre-tax earnings for fiscal 2008
was $16.9 million compared to pre-tax earnings of $8.9 million for fiscal 2007.
This represents an increase in pre-tax earnings of $8.0 million or an increase
of 90% over the prior year. This is comprised of an increase in gross margin of
$10.4 million and other income of $4.7 million, offset by an increase in
selling, general and administrative costs of $7.1 million. The gross margin
percentage increased from 29.6% in fiscal 2007 to 31.5% in fiscal 2008. This was
primarily driven by better overhead absorption at certain domestic plants due to
higher sales volumes ($1 million), the impact of lean manufacturing initiatives,
a reduction in cost of sales at the Evans Rule Division, and better overhead
absorption at the U.K. and Brazilian operations ($2.0 million). This increase
was achieved in spite of certain material cost increases that could not be fully
passed on to customers. Effects from LIFO liquidations in fiscal 2008
and 2007 were not considered material. Gross margins for fiscal 2009 could again
be adversely impacted by material cost increases which cannot be fully passed on
to customers and by increased competitive pressures in various markets. As
indicated above, selling, general and administrative costs increased $7.1
million from fiscal 2007 to fiscal 2008, as the percentage of sales increased
slightly from 25.0% in fiscal 2007 to 25.9% in fiscal 2008. The increase is a
result of increased sales commissions, profit sharing and bonuses ($2.5
million), increases in marketing and advertising primarily relating to new
product introductions ($.3 million), and the inclusion of nearly a full year of
Kinemetrics’ selling, general and administrative costs in fiscal 2008 ($1.9
million), and an increase in bad debt write-offs ($.1 million). The increase in
other income (expense) from fiscal 2007 to fiscal 2008 of $4.7 million is a net
of increased net interest income, increased net exchange gains and the higher
gain on the sale of the Glendale, AZ facility ($1.7 million) in fiscal 2008
versus the gain on the sale of the Alum Bank plant in fiscal 2007 ($.3 million).
The Company currently includes the Evans North Charleston facility on June 28,
2008 Balance Sheet as an asset held for sale of $1.9 million.
Significant
Fourth Quarter Activity As shown in footnote 14 to the
Consolidated Financial Statements, only $2.2 million of the $10.8 million of net
income realized during fiscal 2008 was earned in the fourth
quarter. This reflects the recording of the profit sharing plan
accrual of $.9 million for eligible domestic employees and a $.2 million accrual
for executive bonuses. Both of these plans were approved by the
Company’s Board of Directors in June 2008 and as such, the entire year’s accrual
was recorded in the fourth quarter. In addition, certain offsetting
adjustments were made for transfer pricing and return-to-provision adjustments
netting to $.3 million in the fourth quarter.
Income
Taxes The effective income tax rate was 36.0% for fiscal 2008,
reflecting a combined federal, state and foreign worldwide rate adjusted for
permanent book/tax differences, the most significant of which is the deduction
allowable for the Brazilian dividend paid in December 2007. The effective tax
rate for fiscal 2007 was 25%, reflecting the benefits of a release of tax
reserves, the elimination of the valuation allowances for certain state and
foreign NOL’s and the benefit of the tax treatment of the Brazilian dividend. A
net reduction resulted from a release of tax reserves, resulting from the close
out of certain examination years and additional analysis of transfer pricing
exposure and return to provision adjustments resulting from the preparation of
various tax returns. Valuation allowances were eliminated during fiscal 2007 for
certain state and foreign NOL’s as strong earnings in fiscal 2007 increased the
likelihood of realizing the benefits of those NOL’s. Only minor changes in
valuation allowances were made in fiscal 2008. The change in the effective rate
percentage from fiscal 2007 to fiscal 2008 primarily relates to the fiscal 2007
release of the tax reserves and valuation allowance, as well as additional
reserves for transfer pricing issues provided in fiscal 2008.
14
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.
As of
June 28, 2008, the Company held $2.5 million in AAA-rated auction rate
securities for which there were no current active quoted market prices. The
Company liquidated this $2.5 million in September 2008 through November 2008
through the broker’s announced buyback program for auction rate securities.
Thus, the above securities were all redeemed at par value. No such investments
are held as of June 27, 2009.
During
fiscal 2008 and fiscal 2009, the Company was party to an interest swap
arrangement more fully described in Note 11 to the Consolidated Financial
Statements. This arrangement expired on April 28, 2009. The Company does not
engage in tracking, market-making or other speculative activities in derivatives
markets. The Company does not enter into long-term supply contracts with either
fixed prices or quantities. The Company engages in a limited amount of hedging
activity to minimize the impact of foreign currency fluctuations. Net foreign
monetary assets are approximately $6.9 million as of June 27, 2009.
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
(primarily variable rate investments of $2.4 million) or the cash flows or
future earnings associated with those financial instruments. A 10% change in
interest rates would impact the fair value of the Company’s fixed rate
investments of approximately $1.8 million by an immaterial amount. See Note 11
to the Consolidated Financial Statements for details concerning the Company’s
long-term debt outstanding of $1.3 million.
LIQUIDITY
AND CAPITAL RESOURCES
|
Years
ended in June ($000)
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
provided by operations
|
$ | 659 | $ | 19,012 | $ | 12,849 | ||||||
|
Cash
provided by (used in) investing activities
|
5,469 | (13,584 | ) | (852 | ) | |||||||
|
Cash
(used in) financing activities
|
(1,298 | ) | (6,851 | ) | (8,652 | ) | ||||||
The
significant increase in cash provided by operations from fiscal 2007 to fiscal
2008 was primarily driven by the $4.1 million improvement in net earnings, and
an increase in non-cash items and other working capital changes ($2.0 million).
Conversely, the significant decrease in cash provided by operations from fiscal
2008 to fiscal 2009 is primarily driven by the $14.1 million decrease in net
earnings and working capital changes ($7.1 million). The non-cash items relating
to depreciation and amortization are not expected to change significantly over
the next few years.
“Retirement
benefits” under noncash expenses in the detailed cash flow statement shows the
effect on operating cash flow of the Company’s pension and retiree medical
plans. Primarily because the Company’s domestic defined benefit plan had been
overfunded, retirement benefits in total generated approximately $1.6 million,
$2.8 million and $1.1 million of noncash income in fiscal 2009, 2008 and 2007,
respectively. Consolidated retirement benefit expense (income) was approximately
$(0.8) million in 2009, $(1.7) million in 2008, and $.1 million in
2007.
15
As
disclosed in Note 10 to the Company’s Consolidated Financial Statements, the
overfunding status has been eliminated by current market conditions. However,
the Company does not expect to be required to provide any funding to its
domestic pension plan until 2011.
At the
start of fiscal 2007, the Company switched from self-funding to a fixed monthly
premium for both its domestic employee health care plans and its domestic
worker’s compensation plan. This has reduced the cash flow uncertainty related
to these Company expenses.
The
Company’s investing activities consisted of the acquisition of Kinemetric
Engineering in fiscal 2008, expenditures for plant and equipment, the investment
of cash not immediately needed for operations and the proceeds from the sale of
Company assets. Expenditures for plant and equipment have increased over each of
the three years, although they are less than depreciation expense in each of
those years. The Company will continue to invest in plant and equipment as
necessary to optimize the operations of its plants. Details of the Kinemetric
acquisition are disclosed in Note 6 to the Consolidated Financial
Statements.
Cash
flows used in financing activities are primarily the payment of dividends. The
Company increased its dividend from $.10 per share to $.12 per share during the
fourth quarter of fiscal 2008. The Company has paid during fiscal 2009 and
expects to consistently pay this increased dividend in the near future. The
proceeds from the sale of stock under the various stock plans has historically
been used to purchase treasury shares, although in recent years such purchases
have been curtailed. Purchases for fiscal 2009 and fiscal 2008 amounted to $.3
million and $.3 million, respectively. Overall debt has increased slightly from
$10.0 million at the end of fiscal 2008 to $11.4 million at the end of fiscal
2009, primarily due to an increase in capitalized lease obligations in Brazil.
However, as described in Note 11, the amount outstanding on the Company’s line
of credit as of August 31, 2009 is $2.5 million.
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. The
Company uses a limited number of forward contracts to hedge some of this
activity and a natural hedge strategy of paying for foreign purchases in local
currency when economically advantageous.
Liquidity
and Credit Arrangements
The
Company believes it maintains sufficient liquidity and has the resources to fund
its operations in the near term. If the Company is unable to maintain consistent
profitability, additional steps, beyond the salary reductions, layoffs,
shortened work weeks as noted above, will have to be taken in order to maintain
liquidity, including plant consolidations and work force and dividend reductions
(see comments above). In addition to its cash and investments, the
Company had maintained a $10 million line of credit, of which, as of June 27,
2009, $975,000 is being utilized in the form of standby letters of credit for
insurance purposes. On April 28, 2009, the Company signed an
amendment to its existing line of credit agreement extending the termination
date of such agreement from April 28, 2009 to June 30, 2009. With this
amendment, the scheduled principal payment of $2.4 million due under the
Reducing Revolver was extended to June 30, 2009. Under the current credit line,
the interest rate at June 27, 2009 for the Reducing Revolver is LIBOR plus 1.5%
and 3.25% (Prime) for the line of credit. The Company has a working capital
ratio of 4.4 to one as of June 27, 2009 and 4.8 to one as of June 28,
2008.
On June
30, 2009, The L.S. Starrett Company (the “Company”) and certain of the Company’s
subsidiaries (the “Subsidiaries”) entered into a Loan and Security Agreement
(the “New Credit Facility”) with TD Bank, N.A., as lender.
The New
Credit Facility replaced the Company’s previous Bank of America facility with a
$23 million line of credit. On June 30, 2009, the Company utilized this line of
credit to pay off the remaining balances on the Reducing Revolver and Line of
Credit. The interest rate under the New Credit Facility is based upon a grid
which uses the ratio of Funded Debt/EBITDA to determine the floating margin that
will be added to one-month LIBOR. The initial rate is one-month LIBOR plus
1.75%. The New Credit Facility matures on April 30,
2012.
16
The
obligations under the New Credit Facility are unsecured. However, in
the event of certain triggering events, the obligations under the New Credit
Facility will become secured by the assets of the Company and the subsidiaries
party to the New Credit Facility.
Availability
under the New Credit Facility is subject to a borrowing base comprised of
accounts receivable and inventory. The Company believes that the borrowing base
will consistently produce availability under the New Credit Facility in excess
of $23 million. In addition, the Company anticipates that it will not need to
fully utilize the amounts available to the Company and its subsidiaries under
the New Credit Facility. As of August 31, 2009, the Company had
borrowings of $2.5 million under the New Credit Facility.
The New
Credit Facility contains financial covenants with respect to leverage, tangible
net worth, and interest coverage, and also contains customary affirmative and
negative covenants, including limitations on indebtedness, liens, acquisitions,
asset dispositions, and fundamental corporate changes, and certain customary
events of default. Upon the occurrence and continuation of an event of default,
the lender may terminate the revolving credit commitment and require immediate
payment of the entire unpaid principal amount of the New Credit Facility,
accrued interest and all other obligations. As of June 30, 2009, the Company was
in compliance with the covenants required for testing at that time under the New
Credit Facility.
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
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. The second footnote 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; 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.
Sales of
merchandise and freight billed to customers are recognized when title passes and
all substantial risks of ownership change, which generally occurs either upon
shipment or upon delivery based upon contractual terms. Sales are net of
provisions for cash discounts, returns, customer discounts (such as volume or
trade discounts), cooperative advertising and other sales related discounts.
Outbound shipping costs absorbed by the Company and inbound freight included in
material purchases are included in the cost of sales.
The
allowance for doubtful accounts of $0.7 million and $0.7 million at the end of
fiscal 2009 and 2008, respectively, is based on our assessment of the
collectability of specific customer accounts, 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 defaults 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 and sales could be adversely
affected.
17
Inventory
purchases and commitments are based upon future demand forecasts. If there is a
sudden and significant decrease in demand for our products or there is a higher
risk of inventory obsolescence because of rapidly changing technology and
requirements, the Company may be required to increase the inventory reserve and,
as a result, gross profit margin could be adversely affected.
The
Company generally values property, plant and equipment (PP&E) at historical
cost less accumulated depreciation. 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. The Company continually reviews for such impairment and
believes that PP&E is being carried at its appropriate value.
The
Company assesses the fair value of its goodwill generally based upon a
discounted cash flow methodology. The discounted cash flows are estimated
utilizing various assumptions regarding future revenue and expenses, working
capital, terminal value, and market discount rates. If the carrying amount of
the goodwill is greater than the fair value an impairment charge is recognized
to the extent the recorded goodwill exceeds the implied fair value of
goodwill.
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. If realization is in doubt because
of uncertainty regarding future profitability or enacted tax rates, the Company
provides a valuation allowance related to the asset. 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.
Pension
and postretirement medical costs and obligations are dependent on assumptions
used by actuaries in calculating such amounts. 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.
Actual results that differ from assumptions are accumulated and amortized over
future periods. Significant differences in actual experience or significant
changes in assumptions would affect pension and other postretirement benefit
costs and obligations. See also Employee Benefit Plans (Note 10 to the
Consolidated Financial Statements).
CONTRACTUAL
OBLIGATIONS
The
following table summarizes future estimated payment obligations by period. The
majority of the obligations represent commitments for production needs in the
normal course of business.
|
Payments
due by period (in millions)
|
||||||||||||||||||||
|
Total
|
<1yr.
|
1-3yrs.
|
3-5yrs.
|
>5yrs.
|
||||||||||||||||
|
Post-retirement
benefit obligations
|
$ | 7.6 | $ | .8 | $ | 1.5 | $ | 1.4 | $ | 3.9 | ||||||||||
|
Long-term
debt obligations
|
1.3 | .5 | .5 | .3 | — | |||||||||||||||
|
Capital
lease obligations
|
2.0 | .7 | .9 | .3 | .1 | |||||||||||||||
|
Operating
lease obligations
|
2.7 | 1.4 | 1.2 | .1 | — | |||||||||||||||
|
Interest
payments
|
.3 | .2 | .1 | — | — | |||||||||||||||
|
Purchase
obligations
|
10.9 | 10.8 | .1 | — | — | |||||||||||||||
|
Total
|
$ | 24.8 | $ | 14.4 | $ | 4.3 | $ | 2.1 | $ | 4.0 | ||||||||||
It is
assumed that post-retirement benefit obligations would continue on an annual
basis from 2013 to 2016. Total future payments for other obligations cannot be
reasonably estimated beyond year 5.
18
ANNUAL
NYSE CEO CERTIFICATION AND SARBANES-OXLEY SECTION 302
CERTIFICATIONS
In fiscal
2009, the Company submitted an unqualified “Annual CEO Certification” to the New
York Stock Exchange as required by Section 303A.12(a) of the New York Stock
Exchange Listed Company Manual. Further, the Company is filing with the
Securities and Exchange Commission the certifications required by Section 302 of
the Sarbanes-Oxley Act of 2002 as exhibits to the Company’s Annual Report on
Form 10-K.
Item 8 - Financial
Statements and Supplementary Data
|
Contents:
|
Page
|
|||
|
Report
of Independent Registered Public Accounting Firm
|
20 | |||
|
Consolidated
Statements of Operations
|
21 | |||
|
Consolidated
Statements of Cash Flows
|
22 | |||
|
Consolidated
Balance Sheets
|
23 | |||
|
Consolidated
Statements of Stockholders’ Equity
|
24 | |||
|
Notes
to Consolidated Financial Statements
|
25-48 | |||
19
To the
Board of Directors and Stockholders of
The L.S.
Starrett Company
We have
audited the accompanying consolidated balance sheets of The L.S. Starrett
Company and subsidiaries (“the Company”) as of June 27, 2009 and June 28,
2008, and the related consolidated statements of operations, stockholders’
equity, and cash flows for each of the three years in the period ended
June 27, 2009. Our audits of the basic financial statements
included the financial statement schedule listed in the index appearing under
Item 15 (a)(2). These consolidated financial statements and financial
statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of The L.S. Starrett Company
and subsidiaries as of June 27, 2009 and June 28, 2008, and the results of
their operations and their cash flows for each of the three years in the period
ended June 27, 2009 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As
discussed in Note 9 to the consolidated financial statements, on July 1,
2007, the Company adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109” issued by the Financial Accounting Standards
Board. As discussed in Note 10 to the consolidated financial
statements, as of June 30, 2007, the Company adopted FASB Statement No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans.”
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), The L.S. Starrett Company’s internal control
over financial reporting as of June 27, 2009, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our accompanying report dated September 10, 2009
expressed an adverse opinion on the effectiveness of the Company’s internal
control over financial reporting.
/s/ Grant
Thornton LLP
Boston,
Massachusetts
September
10, 2009
20
Consolidated
Statements of Operations
For the
three years ended on June 27, 2009
(in
thousands of dollars except per share data)
|
6/27/2009
|
6/28/08
|
6/30/07
|
||||||||||
|
(52
weeks)
|
(52
weeks)
|
(53
weeks)
|
||||||||||
|
Net
sales
|
$ | 203,659 | $ | 242,371 | $ | 222,356 | ||||||
|
Cost
of goods sold
|
(144,115 | ) | (166,133 | ) | (156,530 | ) | ||||||
|
Selling,
general and administrative expenses
|
(59,904 | ) | (62,707 | ) | (55,596 | ) | ||||||
|
Goodwill
impairment (Note 5)
|
(5,260 | ) | — | — | ||||||||
|
Other
income (expense)
|
67 | 3,340 | (1,378 | ) | ||||||||
|
(Loss)
earnings before income taxes
|
(5,553 | ) | 16,871 | 8,852 | ||||||||
|
Income
tax (benefit) expense
|
(2,333 | ) | 6,040 | 2,199 | ||||||||
|
Net
(loss) earnings
|
$ | (3,220 | ) | $ | 10,831 | $ | 6,653 | |||||
|
Basic
and diluted (loss) earnings per share
|
$ | (0.49 | ) | $ | 1.64 | $ | 1.00 | |||||
|
Average
outstanding shares used in per share calculations (in
thousands):
|
||||||||||||
|
Basic
|
6,622 | 6,596 | 6,663 | |||||||||
|
Diluted
|
6,628 | 6,605 | 6,671 | |||||||||
|
Dividends
per share
|
$ | 0.48 | $ | 0.52 | $ | 0.40 | ||||||
See notes
to consolidated financial statements
21
Consolidated
Statements of Cash Flows
For the
three years ended on June 27, 2009
(in
thousands of dollars)
|
6/27/2009
|
6/28/08
|
6/30/07
|
||||||||||
|
(52
weeks)
|
(52
weeks)
|
(53
weeks)
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
(loss) income
|
$ | (3,220 | ) | $ | 10,831 | $ | 6,653 | |||||
|
Noncash
operating activities:
|
||||||||||||
|
Gain
from sale of real estate
|
— | (1,703 | ) | (299 | ) | |||||||
|
Depreciation
|
8,649 | 9,535 | 10,047 | |||||||||
|
Amortization
|
1,247 | 1,240 | 1,103 | |||||||||
|
Impairment
of fixed assets
|
52 | 95 | 724 | |||||||||
|
Goodwill
impairment
|
5,260 | — | — | |||||||||
|
Net
long-term tax payable
|
604 | 847 | — | |||||||||
|
Deferred
taxes
|
(6,145 | ) | 1,221 | 1,646 | ||||||||
|
Unrealized
transaction gains
|
1,077 | (990 | ) | (592 | ) | |||||||
|
Retirement
benefits
|
(2,088 | ) | (3,332 | ) | (1,519 | ) | ||||||
|
Working
capital changes:
|
||||||||||||
|
Receivables
|
7,170 | 893 | (2,720 | ) | ||||||||
|
Inventories
|
(4,233 | ) | (45 | ) | 2,252 | |||||||
|
Other
current assets
|
(2,759 | ) | (157 | ) | (689 | ) | ||||||
|
Other
current liabilities
|
(7,313 | ) | 478 | (3,127 | ) | |||||||
|
Prepaid
pension cost and other
|
2,358 | 99 | (630 | ) | ||||||||
|
Net
cash provided by operating activities
|
659 | 19,012 | 12,849 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase
of Kinemetric Engineering
|
(208 | ) | (2,060 | ) | — | |||||||
|
Additions
to plant and equipment
|
(9,443 | ) | (8,924 | ) | (6,574 | ) | ||||||
|
(Increase)
decrease in investments
|
15,120 | (5,016 | ) | 5,328 | ||||||||
|
Proceeds
from sale of real estate
|
— | 2,416 | 394 | |||||||||
|
Net
cash provided by (used in) investing activities
|
5,469 | (13,584 | ) | (852 | ) | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from short-term borrowings
|
29,518 | 5,007 | 2,934 | |||||||||
|
Short-term
debt repayments
|
(28,603 | ) | (5,800 | ) | (3,115 | ) | ||||||
|
Proceeds
from long-term borrowings
|
1,188 | — | 203 | |||||||||
|
Long-term
debt repayments
|
(552 | ) | (2,929 | ) | (4,589 | ) | ||||||
|
Common
stock issued
|
596 | 620 | 446 | |||||||||
|
Treasury
shares purchased
|
(263 | ) | (317 | ) | (1,867 | ) | ||||||
|
Dividends
|
(3,182 | ) | (3,432 | ) | (2,664 | ) | ||||||
|
Net
cash (used in) financing activities
|
(1,298 | ) | (6,851 | ) | (8,652 | ) | ||||||
|
Effect
of translation rate changes on cash
|
(1,097 | ) | 230 | 387 | ||||||||
|
Net
increase (decrease) in cash
|
3,733 | (1,193 | ) | 3,732 | ||||||||
|
Cash
beginning of year
|
6,515 | 7,708 | 3,976 | |||||||||
|
Cash
end of year
|
$ | 10,248 | $ | 6,515 | $ | 7,708 | ||||||
|
Supplemental
cash flow information:
|
||||||||||||
|
Interest
received
|
$ | 1,037 | $ | 1,648 | $ | 1,194 | ||||||
|
Interest
paid
|
1,127 | 914 | 1,713 | |||||||||
|
Taxes
paid, net
|
3,663 | 3,546 | 1,231 | |||||||||
22
THE L.S. STARRETT
COMPANY
Consolidated
Balance Sheets
(in
thousands except share data)
|
June
27, 2009
|
June
28, 2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
(Note 4)
|
$ | 10,248 | $ | 6,515 | ||||
|
Investments
(Note 4)
|
1,791 | 19,806 | ||||||
|
Accounts
receivable (less allowance for doubtful accounts of $678 and
$701)
|
27,233 | 39,627 | ||||||
|
Inventories:
|
||||||||
|
Raw
materials and supplies
|
19,672 | 15,104 | ||||||
|
Goods
in process and finished parts
|
20,265 | 16,653 | ||||||
|
Finished
goods
|
20,289 | 29,400 | ||||||
|
Total
inventories
|
60,226 | 61,157 | ||||||
|
Current
deferred income tax asset (Note 9)
|
5,170 | 5,996 | ||||||
|
Prepaid
expenses and other current assets
|
8,054 | 5,535 | ||||||
|
Total
current assets
|
112,722 | 138,636 | ||||||
|
Property,
plant and equipment, at cost, net (Note 7)
|
56,956 | 60,945 | ||||||
|
Property
held for sale (Note 7)
|
2,771 | 1,912 | ||||||
|
Intangible
assets (less accumulated amortization of $3,724 and $2,477) (Note
5)
|
2,517 | 3,764 | ||||||
|
Goodwill
(Note 5)
|
981 | 6,032 | ||||||
|
Pension
asset (Note 10)
|
— | 34,643 | ||||||
|
Other
assets
|
275 | 1,877 | ||||||
|
Long-term
taxes receivable (Note 9)
|
2,807 | 2,476 | ||||||
|
Long-term
deferred income tax asset (Note 9)
|
15,212 | |||||||
|
Total
assets
|
$ | 194,241 | $ | 250,285 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Notes
payable and current maturities (Note 11)
|
$ | 10,136 | $ | 4,121 | ||||
|
Accounts
payable and accrued expenses
|
10,369 | 18,041 | ||||||
|
Accrued
salaries and wages
|
5,109 | 6,907 | ||||||
|
Total
current liabilities
|
25,614 | 29,069 | ||||||
|
Long-term
taxes payable (Note 9)
|
9,140 | 8,522 | ||||||
|
Deferred
income taxes (Note 9)
|
— | 6,312 | ||||||
|
Long-term
debt (Note 11)
|
1,264 | 5,834 | ||||||
|
Postretirement
benefit and pension liability (Note 10)
|
15,345 | 13,775 | ||||||
|
Total
liabilities
|
51,363 | 63,512 | ||||||
|
Stockholders’
equity (Note 12):
|
||||||||
|
Class A
common stock $1 par (20,000,000 shrs. auth.; 5,769,894 outstanding at June
27, 2009, 5,708,100 outstanding at June 28, 2008)
|
5,770 | 5,708 | ||||||
|
Class
B common stock $1 par (10,000,000 shrs. auth.; 869,426 outstanding at June
27, 2009, 906,065 outstanding at June 28, 2008)
|
869 | 906 | ||||||
|
Additional
paid-in capital
|
49,984 | 49,613 | ||||||
|
Retained
earnings reinvested and employed in the business
|
127,707 | 134,109 | ||||||
|
Accumulated
other comprehensive loss
|
(41,452 | ) | (3,563 | ) | ||||
|
Total
stockholders’ equity
|
142,878 | 186,773 | ||||||
|
Total
liabilities and stockholders’equity
|
$ | 194,241 | $ | 250,285 | ||||
See notes
to consolidated financial statements
23
Consolidated
Statements of Stockholders’ Equity
For the
three years ended on June 27, 2009 (in thousands)
|
Common
Stock
Out-standing
($1
Par)
|
||||||||||||||||||||||||
|
Class
A
|
Class
B
|
Addi-
tional
Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Other
Com-
prehensive
Loss
|
Total
|
|||||||||||||||||||
|
Balance,
June 24, 2006
|
$ | 5,629 | $ | 1,040 | 50,569 | 123,034 | (15,909 | ) | 164,363 | |||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
6,653 | 6,653 | ||||||||||||||||||||||
|
Unrealized
net loss on investments and swap agreement
|
(15 | ) | (15 | ) | ||||||||||||||||||||
|
Minimum
pension liability, net
|
1,775 | 1,775 | ||||||||||||||||||||||
|
Translation
gain, net
|
7,280 | 7,280 | ||||||||||||||||||||||
|
Total
comprehensive income
|
15,693 | |||||||||||||||||||||||
|
Dividends
($0.40 per share)
|
(2,664 | ) | (2,664 | ) | ||||||||||||||||||||
|
Treasury
shares:
|
||||||||||||||||||||||||
|
Purchased
|
(105 | ) | – | (1,762 | ) | (1,867 | ) | |||||||||||||||||
|
Issued
|
23 | – | 320 | 343 | ||||||||||||||||||||
|
Issuance
of stock under ESPP
|
– | 8 | 155 | 163 | ||||||||||||||||||||
|
Conversion
|
85 | (85 | ) | – | ||||||||||||||||||||
|
Balance,
June 30, 2007 (before FAS 158)
|
$ | 5,632 | $ | 963 | $ | 49,282 | $ | 127,023 | $ | (6,869 | ) | $ | 176,031 | |||||||||||
|
Adjustment
to initially adopt FAS 158(1):
|
||||||||||||||||||||||||
|
Pension
Plans (net of tax benefits)
|
(1,365 | ) | (1,365 | ) | ||||||||||||||||||||
|
Post-retirement
benefits (net of tax liability)
|
2,448 | 2,448 | ||||||||||||||||||||||
|
Balance,
June 30, 2007
|
$ | 5,632 | $ | 963 | $ | 49,282 | $ | 127,023 | $ | (5,786 | ) | $ | 177,114 | |||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
10,831 | 10,831 | ||||||||||||||||||||||
|
Unrealized
net loss on investments and swap agreement
|
(281 | ) | (281 | ) | ||||||||||||||||||||
|
Minimum
pension liability, net
|
(4,911 | ) | (4,911 | ) | ||||||||||||||||||||
|
Translation
gain, net
|
7,415 | 7,415 | ||||||||||||||||||||||
|
Total
comprehensive income
|
13,054 | |||||||||||||||||||||||
|
Tax
adjustment for FIN 48 adoption
|
(313 | ) | (313 | ) | ||||||||||||||||||||
|
Dividends
($0.52 per share)
|
(3,432 | ) | (3,432 | ) | ||||||||||||||||||||
|
Treasury
shares:
|
||||||||||||||||||||||||
|
Purchased
|
(20 | ) | – | (297 | ) | (317 | ) | |||||||||||||||||
|
Issued
|
24 | – | 394 | 418 | ||||||||||||||||||||
|
Issuance
of stock under ESPP
|
– | 15 | 234 | 249 | ||||||||||||||||||||
|
Conversion
|
72 | (72 | ) | – | ||||||||||||||||||||
|
Balance,
June 28, 2008
|
$ | 5,708 | $ | 906 | $ | 49,613 | $ | 134,109 | $ | (3,563 | ) | $ | 186,773 | |||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||
|
Net
loss
|
(3,220 | ) | (3,220 | ) | ||||||||||||||||||||
|
Unrealized
net gain on investments and swap agreement
|
339 | 339 | ||||||||||||||||||||||
|
Minimum
pension liability, net
|
(23,804 | ) | (23,804 | ) | ||||||||||||||||||||
|
Translation
loss, net
|
(14,424 | ) | (14,424 | ) | ||||||||||||||||||||
|
Total
comprehensive loss
|
(41,109 | ) | ||||||||||||||||||||||
|
Dividends
($0.48 per share)
|
(3,182 | ) | (3,182 | ) | ||||||||||||||||||||
|
Treasury
shares:
|
||||||||||||||||||||||||
|
Purchased
|
(26 | ) | (237 | ) | (263 | ) | ||||||||||||||||||
|
Issued
|
44 | 480 | 524 | |||||||||||||||||||||
|
Issuance
of stock under ESPP
|
7 | 128 | 135 | |||||||||||||||||||||
|
Conversion
|
44 | (44 | ) | – | ||||||||||||||||||||
|
Balance,
June 27, 2009
|
$ | 5,770 | $ | 869 | $ | 49,984 | $ | 127,707 | $ | (41,452 | ) | $ | 142,878 | |||||||||||
24
|
Cumulative
balance:
|
||||
|
Translation
loss
|
$ |
(13,819)
|
||
|
Unrealized
net loss on investments
|
(1)
|
|||
|
Amount
not recognized as a component of net periodic benefit cost
|
(27,632)
|
|||
| $ |
(41,452)
|
(1)
Components of adjustment to initially adopt FAS 158 are as follows:
|
Gross
|
Tax
|
Net
|
||||||||||
|
1.
Pension Plan
|
(2,242 | ) | 877 | (1,365 | ) | |||||||
|
2.
Post-retirement benefits:
|
4,019 | (1,571 | ) | 2,448 | ||||||||
|
Net
effect of adoption
|
1,777 | (694 | ) | 1,083 | ||||||||
See notes
to consolidated financial statements
THE L.S.
STARRETT COMPANY
Notes to
Consolidated Financial Statements
1.
DESCRIPTION OF BUSINESS
The
Company is in the business of manufacturing industrial, professional and
consumer measuring and cutting tools and related products. 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 significant intercompany items have been eliminated. The
Company’s fiscal year ends on the last Saturday in June. Fiscal 2007 represents
a 53 week year while fiscal 2009 and 2008 represent 52 week years. The fiscal
years of the Company’s major foreign subsidiaries end in May. This one month lag
facilitates timely reporting of results and does not materially impact the
Company’s Results of Operations.
Financial instruments and
derivatives: The Company’s financial instruments consist primarily of
cash, investments and receivables, current liabilities and long term debt.
Current assets and liabilities, except investments, are stated at cost, which
approximates fair market value. Long-term debts, which are at current market
interest rates, also approximate fair market value. The Company has entered into
an interest rate swap agreement to limit the amount of exposure resulting from
increases in its variable LIBOR rate on its $12 million Reducing Revolver. This
is being accounted for as an effective cash flow hedge under SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities.” The amount of
(increase) decrease in other comprehensive income for fiscal 2009, 2008 and 2007
relating to the swap agreement is ($106,174), $55,767, and $50,406,
respectively. The Company’s U.K. subsidiary entered into various forward
exchange contracts during fiscal 2007. The amount of contracts outstanding as of
May 31, 2009 and 2008 (foreign subsidiary year-end) amounted to $6.8 million and
$3.1 million (dollar equivalent), respectively. The value of these contracts do
not differ materially from the corresponding receivables.
Accounts receivable:
Accounts receivable consist of trade receivables from customers. The provision
for bad debts amounted to $451,000, $461,000 and $370,000 in fiscal 2009, 2008
and 2007, respectively. In establishing the allowance for doubtful accounts,
management considers historical losses, the aging of receivables and existing
economic conditions.
25
Inventories:
Inventories are stated at the lower of cost or market. For approximately 55% of
all inventories, cost is determined on a last-in, first-out (LIFO) basis. For
all other inventories, cost is determined on a first-in, first-out (FIFO) basis.
LIFO inventories were $17.8 million and $17.9 million at the end of fiscal 2009
and 2008, respectively, such amounts being approximately $33.7 million and $27.5
million, respectively, less than if determined on a FIFO basis. The amounts of
income (expense) related to LIFO liquidations amounted to $1.8 million and
($300,000) in fiscal 2009 and fiscal 2008, respectively. The Company has not
adopted LIFO for its Tru-Stone and Kinemetric Engineering acquisitions and does
not expect to adopt LIFO for any future acquisitions. The Company’s inventories
turned 2.4 times and 2.7 times during fiscal 2009 and fiscal 2008,
respectively.
Long-lived assets:
Buildings and equipment are depreciated using straight-line and accelerated
methods over estimated useful lives as follows: buildings and building
improvements 10 to 50 years, machinery and equipment 3 to 12 years. Leases are
capitalized as required under SFAS 13. Long-lived assets are reviewed for
impairment when circumstances indicate the carrying amount may not be
recoverable. The Company does this evaluation at the reporting unit level using
an undiscounted cash flow model. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell. A gain
or loss is recorded on individual fixed assets when retired or disposed of.
Included in buildings and building improvements and machinery and equipment at
June 27, 2009 and June 28, 2008 were $3.3 million and $3.9 million,
respectively, of construction in progress. Also included in machinery and
equipment at June 27, 2009 and June 28, 2008 were $420,500 and $273,000,
respectively, of capitalized interest cost. Repairs and maintenance of equipment
are expensed as incurred.
Intangible assets and
goodwill: Intangibles are recorded at cost and are amortized on a
straight-line basis over a 5 year period. 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
assesses the fair value of its goodwill using impairment tests, generally based
upon a discounted cash flow methodology. The discounted cash flows are estimated
utilizing various assumptions regarding future revenue and expenses, working
capital, terminal value and market discount rates. In the event that the
carrying value of goodwill exceeds the fair value of the goodwill, an impairment
loss would be recorded for the amount of that excess.
Revenue recognition:
Sales of merchandise and freight billed to customers are recognized when title
passes and all substantial risks of ownership change, which generally occurs
either upon shipment or upon delivery based upon contractual terms. Sales are
net of provisions for cash discounts, returns, customer discounts (such as
volume or trade discounts), cooperative advertising and other sales related
discounts. While the Company does allow its customers the right to return in
certain circumstances, revenue is not deferred, but rather a reserve for sales
returns is provided based on experience, which historically has not been
significant.
Advertising costs:
The Company’s policy is to generally expense advertising costs as incurred.
Advertising costs were expensed as follows $4.6 million in fiscal 2009, $4.9
million in fiscal 2008 and $4.6 million in fiscal 2007.
Freight costs: The
cost of outbound freight absorbed by the Company for customers or the cost for
inbound freight included in material purchase cost 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. Any such failures tend
to occur soon after shipment. Historically, the Company has not incurred
significant predictable warranty expense and consequently its warranty reserves
are not material. In the event a material warranty liability is deemed probable,
a reserve is established for the event.
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 $60.4 million of undistributed earnings of
foreign subsidiaries as of June 27, 2009 or 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. 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.
26
Sales and use tax:
Sales and use tax is recorded as incurred and represents a cost of certain
purchased materials.
Research and
development: Research and development costs were expensed as follows:
$1.6 million in fiscal 2009, $2.4 million in fiscal 2008 and $2.7 million in
fiscal 2007.
Earnings per share
(EPS): Basic EPS excludes dilution and is computed by dividing earnings
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 5,501, 8,330, and
7,904 of potentially dilutive common shares in fiscal 2009, 2008 and 2007,
respectively, resulting from shares issuable under its stock option plan. For
fiscal 2009 and 2008, these shares had no impact on the calculated per share
amounts due to their magnitude. These additional shares are not used for the
diluted EPS calculation in loss years.
Translation of foreign
currencies: Assets and liabilities are translated at exchange rates in
effect on reporting dates, and income and expense items are translated at
average rates or rates in effect on transaction dates as appropriate. The
resulting differences due to changing exchange rates are charged or credited
directly to the “Accumulated Other Comprehensive Loss” account included as part
of stockholders’ equity.
Use of accounting
estimates: The preparation of the 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
sales and expenses during the reporting period. 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;
employee turnover, discount, and return rates used to calculate pension
obligations; normal expense accruals for such things as workers compensation and
employee medical expenses. Amounts ultimately realized could differ from those
estimates.
Related party
transactions: The Company’s policy is to disclose all significant related
party transactions. At this time, there are no reportable
transactions.
Treasury stock:
Treasury stock is accounted for using the par value method. The number of
treasury shares held by the Company at June 27, 2009 and June 28, 2008 was
1,727,517 and 1,745,662, respectively.
Other: Accounts
payable and accrued expenses at June 27, 2009 and June 28, 2008 consist
primarily of accounts payable ($3.7 million and $9.0 million), accrued benefits
($1.2 million and $1.1 million) and accrued taxes other than income ($2.1
million and $2.1 million) and accrued expenses and other ($3.4 million and $5.8
million).
Reclassifications:
Certain reclassifications have been made to the prior periods as a result of the
current year presentation with no effect on net earnings.
3.
RECENT ACCOUNTING PRONOUNCEMENTS
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FAS 115 (“SFAS No.
159”). SFAS 159 permits companies to make a one-time election to carry eligible
types of financial assets and liabilities at fair value, even if fair value
measurement is not required under generally accepted accounting principles in
the United States (“U.S. GAAP”). SFAS 159 has been adopted by the Company
beginning in the first quarter of fiscal 2009, and the Company has determined
SFAS 159 has no material impact on its consolidated financial
statements.
27
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) will significantly change the
accounting for business combinations. Under SFAS 141(R), an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value with limited exceptions. SFAS
141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. The Company will be required to adopt FAS 141(R)
for fiscal 2010. The Company does not expect the adoption of SFAS 141(R) to have
a material impact on its consolidated financial statements.
In
December 2008, the FASB issued FSP FAS 132R-1 “Employers’ Disclosures about
Postretirement Benefit Plan Assets”, which amends FASB Statement 132 (revised
2003), Employers’ Disclosures
about Pensions and Other Postretirement Benefits. Beginning in fiscal
years ending after December 15, 2009, employers will be required to provide more
transparency about the assets in their postretirement benefit plans, including
defined benefit pension plans. FSP FAS 132R-1 was issued in response to users’
concerns that employers’ financial statements do not provide adequate
transparency about the types of assets and associated risks in employers’
postretirement plans. In current disclosures of the major categories of plan
assets, many employers provide information about only four asset categories:
equity, debt, real estate, and other investments. For many employers, the “other
investment” category has increased to include a significant percentage of plan
assets. Users indicate that such disclosure is not sufficiently specific to
permit evaluation of the nature and risks of assets held as
investments.
In
addition, the FSP requires new disclosures similar to those in FASB Statement
157, “Fair Value Measurements,” in terms of the three-level fair value
hierarchy, including a reconciliation of the beginning and ending balances of
plan assets that fall within Level 3 of the hierarchy.
FSP FAS
132R-1’s amended disclosure requirements about plan assets are principles-based.
The objectives of the disclosures are to provide users with an understanding of
the following:
|
-
|
How
investment decisions are made, including factors necessary to
understanding investment policies and
strategies
|
|
-
|
The
major categories of plan assets
|
|
-
|
The
inputs and valuation techniques used to measure the fair value of plan
assets
|
|
-
|
The
effect of fair value measurements using significant unobservable inputs
(Level 3 measurements in Statement 157 on changes in plan assets for the
period)
|
|
-
|
Significant
concentrations of risk within plan
assets
|
Employers
are required to consider these overall disclosure objectives in providing the
detailed disclosures required by Statement 132R, as amended by FSP FAS
132R-1.
FSP FAS
132R-1 is effective for periods ending after December 15, 2009. The disclosure
requirements are annual and do no apply to interim financial statements. The
technical amendment to Statement 132R was effective as of December 30, 2008. The
Company is currently evaluating the additional disclosure requirements upon the
adoption of FSP 132R-1.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“FAS
157”), which addresses how companies should measure fair value when they are
required to use a fair value measure for recognition or disclosure purposes
under generally accepted accounting principles. FAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. In
February 2008, the FASB issued FASB Staff Position 157-2, “Effective Date of
FASB Statement No. 157” (FSP 157-2), which partially defers the effective date
of FAS 157 for one year for non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a
non-recurring basis. Consequently, FAS 157 will be effective for the Company in
fiscal 2009 for financial assets and liabilities carried at fair value and
non-financial assets and liabilities that are recognized or disclosed at fair
value on a recurring basis. As a result of the deferral, FAS 157 will be
effective in fiscal 2010 for non-recurring, non-financial assets and liabilities
that are recognized or disclosed at fair value. The Company is currently
evaluating the potential impact of FAS 157 on its financial position and results
of operations.
28
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 clarifies the classification of noncontrolling interests in
consolidated balance sheets and reporting transactions between the reporting
entity and holders of noncontrolling interests. Under this statement,
noncontrolling interests are considered equity and reported as an element of
consolidated equity. Further, net income encompasses all consolidated
subsidiaries with disclosure of the attribution of net income between
controlling and noncontrolling interests. SFAS 160 is effective prospectively
for fiscal years beginning after December 15, 2008. As of June 27,2009, there
were no noncontrolling interests in any of the Company’s
subsidiaries.
In March
2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”),
which expands the disclosure requirements in SFAS 133 about an entity’s
derivative instruments and hedging activities. SFAS 161 expands the disclosure
provisions to apply to all entities with derivative instruments subject to SFAS
133 and its related interpretations. The provisions also apply to related hedged
items, bifurcated derivatives, and nonderivative instruments that are designated
and qualify as hedging instruments. Entities with instruments subject to SFAS
161 must provide more robust qualitative disclosures and expanded quantitative
disclosures. Such disclosures, as well as existing SFAS 133 required
disclosures, generally will need to be presented for every annual and interim
reporting period. SFAS 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. The Company has not determined the impact, if
any, of the adoption of SFAS 161.
In April
2008, the FASB issued FSP SFAS No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FAS 142-3”). FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FAS 142, “Goodwill and Other
Intangible Assets” (“FAS 142”). The intent of FAS 142-3 is to improve the
consistency between the useful life of a recognized intangible asset under FAS
142 and the period of expected cash flows used to measure the fair value of the
asset under FAS 141(R) and other applicable accounting literature. FAS 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and must be applied prospectively to intangible assets
acquired after the effective date. The Company has not determined the impact, if
any, of the adoption of FAS 142-3.
In April
2009, the FASB issued FASB Staff Position 107-1 and 28-1, Interim
Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and
28-1”), to require disclosures about fair value of financial instruments for
interim reporting periods of publicly traded companies as well as in annual
financial statements. FSP 107-1 and 28-1 also amends APB Opinion No. 28, Interim
Financial Reporting, to require those disclosures in summarized financial
information at interim reporting periods. FSP 107-1 and 28-1 shall be
effective for interim reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The
Company has not determined the impact, if any, FSP 107-1 and 28-1 will have on
its financial position or results of operations.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”). SFAS 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued, and specifically requires the disclosure of the
date through which an entity has evaluated subsequent events and the basis for
that date. SFAS 165 became effective for the Company for the three months
ended June 27, 2009, and the Company has evaluated all subsequent events
through September 10, 2009, the date of issuance of the Company’s financial
statements and noted no material events except as described in Note
15.
In June
2009, the FASB concurrently issued SFAS No. 166, “Accounting for Transfers
of Financial Assets, an amendment of FASB Statement No. 140,” and SFAS
No. 167, “Amendments to FASB Interpretation No. 46(R),” (collectively,
“SFAS 166 and SFAS 167”) that change the way entities account for
securitizations and other transfers of financial instruments. In addition
to increased disclosure, SFAS 166 and SFAS 167 eliminate the concept of
qualifying special purpose entities and change the test for consolidation of
variable interest entities. SFAS 166 and SFAS 167 are effective for the
Company on January 1, 2010. The Company is in the process of
evaluating these standards to determine whether they will impact the Company’s
financial condition or results of operations.
29
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification™ and the Hierarchy of Generally Accepted Accounting Principles (a
replacement of FASB Statement No. 162)” (“SFAS 168”). SFAS 168 establishes
the FASB Accounting Standards Codification™ (“Codification”) as the single
source of authoritative U.S. generally accepted accounting principles (“GAAP”).
The Codification does not create any new GAAP standards but incorporates
existing accounting and reporting standards into a new topical
structure. The Codification will be effective for the Company June 27,
2009, and beginning with the Company’s interim report for the period ending
September 26, 2009, a new referencing system will be used to identify
authoritative accounting standards, replacing the existing references to SFAS,
EITF, FSP, etc. Existing standards will be designated by their Accounting
Standards Codification (ASC) topical reference and new standards will be
designated as Accounting Standards Updates, with a year and assigned sequence
number.
4.
CASH AND INVESTMENTS
As of
June 28, 2008, the Company held $2.5 million in AAA-rated auction rate
securities for which there were no current active quoted market prices. The
Company liquidated this $2.5 million in September 2008 through November 2008
through the broker’s announced buyback program for auction rate securities.
Thus, the above securities were all redeemed at par value. No such investments
are held as June 27, 2009.
Included
in investments at June 27, 2009 is $1.8 million of AAA rated Puerto Rico debt
obligations that have maturities greater than one year but carry the benefit of
possibly reducing repatriation taxes. These investments represent “core cash”
and are part of the Company’s overall cash management and liquidity program and,
under Statement of Financial Accounting Standards No. 115, “Accounting for
Certain Investments in Debt and Equity Securities” (“SFAS 115”), are considered
“available for sale.” The investments themselves are highly liquid, carry no
early redemption penalties, and are not designated for acquiring non-current
assets. On July 1, 2009, $0.5 million of these bonds were redeemed at face
value. Cash and investments held in foreign locations amounted to $8.4 million
and $18.8 million at June 27, 2009 and June 28, 2008, respectively. Of this
amount, $1.8 million in U.S. dollar equivalents was held in British Pound
Sterling. The reduction in cash and investments from June 28, 2008 to
June 27, 2009 resulted primarily from foreign exchange effects and the movement
of cash and investments to the U.S.
On
October 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements” (“SFAS 157”).
SFAS 157 defines and establishes a framework for measuring fair value and
expands disclosures about fair value instruments. In accordance with
SFAS 157, the Company has categorized its financial assets, based on the
priority of the inputs to the valuation technique, into a three-level fair value
hierarchy as set forth below. The Company does not have any financial
liabilities that are required to be measured at fair value on a recurring basis.
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 recorded on the balance sheets 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 (examples include active
exchange-traded equity securities and most U.S. Government and agency
securities).
|
|
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.
The Company does not currently have any Level 2 financial
assets.
|
30
|
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 Company does not currently have any Level 3 financial
assets.
|
As of
June 27, 2009 and June 28, 2008, the Company’s Level 1 financial assets were as
follows (in thousands):
|
Level 1
|
||||||||
|
6/27/09
|
6/28/08
|
|||||||
|
Money
Market Funds
|
— | 1,450 | ||||||
|
Certificates
of Deposits
|
— | 13,205 | ||||||
|
International
Bonds (Puerto Rican debt obligations)
|
1,791 | 1,667 | ||||||
|
Domestic
Bonds
|
— | 2,750 | ||||||
|
Municipal
Securities
|
— | 734 | ||||||
| $ | 1,791 | $ | 19,806 | |||||
5.
GOODWILL AND INTANGIBLES
The
Company performed its annual goodwill impairment test for Tru-Stone as of June
28, 2008, which resulted in an implied fair value greater than its carrying
value. As noted in the Company’s second quarter fiscal year 2009 Form 10-Q, a
triggering event occurred during the second quarter relating to the $5.3 million
of goodwill resulting from the acquisition of Tru-Stone. Based upon the
Company’s analysis, it was determined that the implied fair value of the
goodwill associated with Tru-Stone continued to be greater than its carrying
value ($5.3 million).
Due to
continued declines in Tru-Stone’s results during the third quarter of fiscal
year 2009, an impairment review was performed on its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 144 “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) and its
goodwill in accordance with Statement of Financial Accounting Standards No. 142
“Goodwill and Other Intangible Assets” (“SFAS 142”). Based on the undiscounted
cash flows’ projection, the carrying value of the long lived assets is currently
recoverable; accordingly, no impairment write-down was necessary. Projections of
cash flow were generated for this asset group utilizing estimates from sales,
operations, and finance to arrive at the projected cash flows. A significant
drop in sales growth rates could result in a future impairment charge.
Similarly, the Company estimates that a 25% drop in cash flows (primarily
related to a drop in sales growth rates) could result in future impairment
charges. The difference between Tru-Stone’s carrying value and its fair value
after the goodwill impairment writedown of $5.3 million was approximately
$700,000.
To
estimate the fair value of its Tru-Stone reporting unit, the Company utilized a
combination of income and market approaches. The income approach, specifically a
discounted cash flow methodology, included assumptions for, among others,
forecasted revenues, gross profit margins, operating profit margins, working
capital cash flow, perpetual growth rates and long term discount rates, all of
which require significant judgments by management. These assumptions take into
account the current recessionary environment and its impact on the Company’s
business. In addition, the Company utilized a discount rate appropriate to
compensate for the additional risk in the equity markets regarding the Company’s
future cash flows in order to arrive at a control premium considered supportable
based upon historical comparable transactions.
As the
carrying value of Tru-Stone exceeded its estimated fair value as of March 28,
2009, the Company performed the second step of the impairment analysis for
Tru-Stone. Step two of the impairment test requires the Company to fair value
all of the reporting unit’s assets and liabilities, including identifiable
intangible assets, and compare the implied fair value of goodwill to its
carrying value. The results of step two indicated that the goodwill in
Tru-Stone’s reporting unit was fully impaired, resulting in a $5.3 million
impairment recorded in the third quarter. Both step one and step two were
performed by an independent third party appraiser under the supervision of
management. The impairment charge of $5.3 million is comprised of goodwill and
was a direct result of the SFAS No. 142 testing. This impairment charge was due
primarily to the combination of a decline in the market capitalization of the
Company at March 28, 2009 and the decline in the estimated forecasted discounted
cash flows expected by the Company.
31
The
Company performed its annual goodwill impairment test for Kinemetrics as of June
27, 2009, which resulted in an implied fair value greater than its carrying
value. The approach used is similar to that outlined above for Tru-Stone
adjusting the assumptions as necessary for the Kinemetrics business
unit.
The
following tables present information about the Company’s goodwill and other
intangible assets on the dates or for the periods indicated (in
thousands):
|
As of June 27, 2009
|
As of June 28, 2008
|
|||||||||||||||||||||||
|
Carrying Amount
|
Accumulated Amortization
|
Net
|
Carrying Amount
|
Accumulated Amortization
|
Net
|
|||||||||||||||||||
|
Goodwill
|
$ | 981 | - | $ | 981 | $ | 6,032 | - | $ | 6,032 | ||||||||||||||
|
Other
Intangible Assets
|
$ | 6,241 | $ | (3,724 | ) | $ | 2,517 | $ | 6,241 | $ | (2,477 | ) | $ | 3,764 | ||||||||||
The
estimated amortization of intangible assets for the next four succeeding years
is: $1,254 for year 1, $1,083 for year 2, $187 for year 3 and $11 for year
4.
6.
ACQUISITIONS
On July
17, 2007, a wholly owned subsidiary of the Company entered into an asset
purchase agreement with Kinemetric Engineering, LLC (Kinemetric Engineering),
pursuant to which the Company purchased all of the assets of Kinemetric
Engineering for $2.3 million in cash. The asset purchase was financed through
existing cash and a draw on the Company’s existing line of credit. In connection
with the asset purchase agreement, $.3 million of the purchase price was placed
into escrow to support the indemnification obligations of Kinemetric Engineering
and its shareholders. Kinemetric Engineering specializes in precision
video-based metrology, specialty motion devices, and custom engineered systems
for measurement and inspection. This business unit also oversees the sales and
support of the Company’s high quality line of Starrett Optical Projectors. The
Company has completed the final purchase price allocation based on the fair
value of the assets and liabilities acquired. The total purchase price of $2.5
million was allocated to current assets ($.6 million), fixed assets ($.2
million), intangibles ($.9 million) and goodwill ($.8 million).
7.
PROPERTY, PLANT AND EQUIPMENT
|
2009
|
||||||||||||
|
Cost
|
Accumulated
Depreciation
|
Net
|
||||||||||
|
Land
|
$ | 1,384 | $ | — | $ | 1,384 | ||||||
|
Buildings
and building improvements
|
39,550 | (19,403 | ) | 20,147 | ||||||||
|
Machinery
and equipment
|
133,977 | (98,552 | ) | 35,425 | ||||||||
|
Total
|
$ | 174,911 | $ | (117,955 | ) | $ | 56,956 | |||||
|
2008
|
||||||||||||
|
Cost
|
Accumulated
Depreciation
|
Net
|
||||||||||
|
Land
|
$ | 1,608 | $ | — | $ | 1,608 | ||||||
|
Buildings
and building improvements
|
40,798 | (19,576 | ) | 21,222 | ||||||||
|
Machinery
and equipment
|
145,195 | (107,080 | ) | 38,115 | ||||||||
|
Total
|
$ | 187,601 | $ | (126,656 | ) | $ | 60,945 | |||||
32
Assets
held for sale for fiscal 2008 represents the North Charleston building. Assets
held for sale for fiscal 2009 represent the north Charleston building and a
building in Mt. Airy, NC. Included in machinery and equipment are capital leases
of $2.0 million as of June 27, 2009 and $3.9 million as of June 28, 2008
relating to the domestic and Brazilian operations (Note 11). The amortization
relating to these leases was $.7 million and $.6 million for fiscal 2009 and
2008, respectively. This equipment primarily represents factory machinery in
their main plant. Operating lease expense was $1.6 million, $1.6 million and
$1.1 million in fiscal 2009, 2008 and 2007, respectively. Operating lease
payments for the next 5 years are as follows:
|
Year
|
$ | 000’s | ||
|
2010
|
$ | 1,361 | ||
|
2011
|
734 | |||
|
2012
|
313 | |||
|
2013
|
127 | |||
|
2014
|
54 | |||
|
Thereafter
|
89 |
8.
OTHER INCOME AND EXPENSE
|
|
Other
income and expense consists of the following (in
thousands):
|
|
2009
|
2008
|
2007
|
||||||||||
|
Interest
income
|
$ | 716 | $ | 1,443 | $ | 1,194 | ||||||
|
Interest
expense and commitment fees
|
(844 | ) | (773 | ) | (1,713 | ) | ||||||
|
Realized
and unrealized translation gains (losses), net
|
383 | 815 | 32 | |||||||||
|
Gain
on sale of assets
|
— | 1,703 | 299 | |||||||||
|
Impairment
of fixed assets
|
(52 | ) | (95 | ) | (724 | ) | ||||||
|
Other
income (expense)
|
(136 | ) | 247 | (466 | ) | |||||||
| $ | 67 | $ | 3,340 | $ | (1,378 | ) | ||||||
9.
INCOME TAXES
|
|
Components
of income (loss) before income taxes (in
thousands):
|
|
2009
|
2008
|
2007
|
||||||||||
|
Domestic
operations
|
$ | (15,462 | ) | $ | 3,433 | $ | 5,069 | |||||
|
Foreign
operations
|
9,909 | 13,438 | 3,783 | |||||||||
| $ | (5,553 | ) | $ | 16,871 | $ | 8,852 | ||||||
The
amount of domestic taxable income (loss) (in thousands) for fiscal 2009, 2008
and 2007 amounted to $(14,709), $5,879 and $6,982, respectively.
33
The
provision (benefit) for income taxes consists of the following (in
thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 442 | $ | 488 | $ | (855 | ) | |||||
|
Foreign
|
3,293 | 4,170 | 1,316 | |||||||||
|
State
|
77 | 161 | 92 | |||||||||
|
Deferred
|
||||||||||||
|
Federal
|
(5,421 | ) | 1,358 | 2,358 | ||||||||
|
Foreign
|
(384 | ) | (196 | ) | (125 | ) | ||||||
|
State
|
(340 | ) | 59 | (587 | ) | |||||||
| $ | (2,333 | ) | $ | 6,040 | $ | 2,199 | ||||||
A
reconciliation of expected tax expense at the U.S. statutory rate to actual tax
expense is as follows (in thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Expected
tax expense (benefit)
|
$ | (1,880 | ) | $ | 5,736 | $ | 3,010 | |||||
|
Increase
(decrease) from:
|
||||||||||||
|
State
taxes, net of federal benefit
|
(493 | ) | 208 | 215 | ||||||||
|
Foreign
taxes, net of federal credits
|
(316 | ) | (270 | ) | (368 | ) | ||||||
|
Change
in valuation allowance
|
(308 | ) | (138 | ) | (942 | ) | ||||||
|
Return
to provision and tax reserve adjustments
|
298 | 246 | (247 | ) | ||||||||
|
Foreign
loss not benefited
|
— | — | 296 | |||||||||
|
Other
permanent items
|
366 | 258 | 235 | |||||||||
|
Actual
tax expense (benefit)
|
$ | (2,333 | ) | $ | 6,040 | $ | 2,199 | |||||
The tax
expense for fiscal 2007 was reduced by a net reduction in the valuation
allowance. This included a release of valuation allowance for foreign NOL’s
caused by an increase in taxable income in those countries and a release of
valuation allowance for state NOL’s also caused by a significant increase in
taxable income in those states. This was offset by an increase in the valuation
allowance related to certain state tax credits.
The tax
expense for fiscal 2007 was also reduced by a reduction in tax reserves as a
result of the close of certain examination years, further analysis of transfer
pricing exposure, and the reduced likelihood of future assessment due to changes
in circumstances offset by return to provision adjustments from the fiscal 2006
tax returns.
No
valuation allowance has been recorded for the domestic federal NOL. The Company
believes that forecasted future taxable income and certain tax planning
opportunities eliminate the need for any valuation allowance.
Conversely,
a valuation allowance was provided in fiscal 2006 on state NOL’s as a result of
much shorter carryforward periods and the uncertainty of generating adequate
taxable income at the state level. This valuation allowance has
remained through fiscal 2009. Similarly, a valuation allowance has
been provided on foreign NOL’s and the uncertainty of generating future taxable
income. Lastly, a valuation allowance has been provided for foreign tax credit
carryforwards due to the uncertainty of generating sufficient foreign source
income in the future. The need for any valuation allowance on the domestic
federal NOL and the continued need for allowance on state and foreign NOL’s and
tax credits will be reevaluated periodically in the future as certain facts and
assumptions change over time.
The long
term-taxes payable on the balance sheet as of June 27, 2009 and June 28, 2008
relate primarily to reserves for transfer pricing issues.
34
Deferred
income taxes at June 27, 2009 and June 28, 2008 are attributable to the
following (in thousands):
|
2009
|
2008
|
|||||||
|
Deferred
assets (current):
|
||||||||
|
Inventories
|
$ | (3,396 | ) | $ | (4,399 | ) | ||
|
Employee
benefits (other than pension)
|
(525 | ) | (234 | ) | ||||
|
Book
reserves
|
(1,249 | ) | (1,281 | ) | ||||
|
Other
|
— | (82 | ) | |||||
| $ | (5,170 | ) | $ | (5,996 | ) | |||
|
Deferred
assets (long-term):
|
||||||||
|
Federal
NOL carried forward
|
$ | (7,347 | ) | $ | (2,501 | ) | ||
|
State
NOL various carryforward periods
|
(865 | ) | (482 | ) | ||||
|
Foreign
NOL carried forward indefinitely
|
(752 | ) | (1,049 | ) | ||||
|
Foreign
tax credit carryforward expiring 2009-11
|
(1,194 | ) | (1,194 | ) | ||||
|
Pension
benefit
|
(1,439 | ) | — | |||||
|
Retiree
medical benefits
|
(4,228 | ) | (4,241 | ) | ||||
|
Intangibles
|
(2,983 | ) | — | |||||
|
Other
|
(558 | ) | (1,263 | ) | ||||
| $ | (19,366 | ) | $ | (10,730 | ) | |||
|
Valuation
reserve for state NOL, foreign NOL and foreign tax credits
|
$ | 1,687 | $ | 1,995 | ||||
|
Long-term
deferred assets
|
$ | (17,679 | ) | $ | (8,735 | ) | ||
|
Deferred
liabilities (current):
|
$ | — | $ | 3 | ||||
|
Misc
credits
|
$ | — | $ | 3 | ||||
|
Deferred
liabilities (long-term):
|
||||||||
|
Prepaid
pension
|
$ | — | $ | 12,372 | ||||
|
Depreciation
|
2,467 | 2,675 | ||||||
| $ | 2,467 | $ | 15,047 | |||||
|
Net
deferred tax liability (asset)
|
$ | (20,382 | ) | $ | 319 | |||
As of
June 27, 2009 and June 28, 2008, the net long-term deferred tax asset and
deferred tax liability respectively, on the balance sheet are as
follows:
|
2009
|
2008
|
|||||||
|
Long-term
liabilities
|
$ | 2,467 | $ | 15,047 | ||||
|
Long-term
assets
|
(17,679 | ) | (8,735 | ) | ||||
| $ | (15,212 | ) | $ | 6,312 | ||||
Foreign
operations deferred assets (current) relate primarily to book
reserves.
Foreign
operations net deferred assets (long-term) relate primarily to foreign NOL and
foreign tax credits carryforwards.
Amounts
related to foreign operations included in the long-term portion of deferred
liabilities relate primarily to depreciation.
The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN No. 48”), at the beginning of fiscal year 2008. FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes.” FIN No. 48 prescribes a two-step process to determine the
amount of tax benefit to be recognized. First, the tax position must be
evaluated to determine the likelihood that it will be sustained upon external
examination. If the tax position is deemed “more-likely-than-not” to be
sustained, the tax position is then assessed to determine the amount of benefit
to recognize in the financial statements. The amount of the benefit that may be
recognized is the largest amount that has a greater than 50 percent likelihood
of being realized upon ultimate settlement. As a result of implementing FIN No.
48, the Company recognized a cumulative effect adjustment of $.3 million to
decrease the July 1, 2007 retained earnings balance and increase long-term tax
payable. Also in connection with this implementation the Company has
reclassified $1.8 million of unrecognized tax benefits into a long-term taxes
receivable representing the corollary effect of transfer pricing competent
authority adjustments.
35
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
are as follows:
|
Balance
at July 1, 2007
|
$ | 6,964 | ||
|
Increases for tax positions
taken during a prior period
|
1,558 | |||
|
Increases for tax positions
taken during the current period
|
— | |||
|
Decreases relating to
settlements
|
— | |||
|
Decreases resulting from the
expiration of the statue of limitations
|
— | |||
|
Balance
at June 28, 2008
|
$ | 8,522 | ||
|
Increases for tax positions
taken during a prior period
|
— | |||
|
Increases for tax positions
taken during the current period
|
618 | |||
|
Decreases relating to
settlements
|
— | |||
|
Decreases resulting from the
expiration of the statue of limitations
|
— | |||
|
Balance
at June 27, 2009
|
$ | 9,140 |
Of the
$9.1 million and $8.5 million of unrecognized tax benefits as of June 27, 2009,
$6.2 million and $6.0 million, respectively, would impact the effective income
tax rate if recognized. During the next 12 months, the Company does
not anticipate any significant changes to the total amount of unrecognized tax
benefits, other than the accrual of additional interest expense in an amount
similar to the prior year’s expense.
The
Company is subject to U.S. federal income tax and various state, local and
international 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.
The
Company has substantially concluded all U.S. federal income tax matters for
years through fiscal 2003. As of June 27, 2009, the Company did not have any
income tax audits in progress in the numerous states, local and international
jurisdictions in which the Company operates. In international jurisdictions
including Argentina, Australia, Brazil, Canada, China, U.K., Germany, New
Zealand, Dominican Republic and Mexico, which comprise a significant portion of
the Company’s operations, the years that may be examined vary, with the earliest
year being 2004 (except for Brazil, which has 1997-2009 still open for
examination).
The
Company recognizes interest expense related to income tax matters in income tax
expense. The Company has accrued $.1 million of interest as of July 1, 2007. The
amount did not change significantly during fiscal 2008 or fiscal
2009.
The
federal NOL carryforward of $7.3 million expires in the years 2023, 2025, and
2026. The state NOL carryforwards of $.9 million expire at various times over
the next 5 years. The foreign tax credit carryforward of $1.2 million expires in
the years 2010 through 2016.
No
deferred taxes have been provided on the undistributed non-U.S. subsidiary
earnings that are considered to be permanently invested. At June 27, 2009, the
estimated amount of total unremitted earnings is $60.4 million. The Company has
not disclosed the total amount of the unrecognized deferred taxes related to
these earnings. Compiling the data necessary for such disclosure is not
practical as it would involve an extensive study requiring the Company to go
back many years to calculate the earnings and profits for a number of foreign
subsidiaries.
36
10.
EMPLOYEE BENEFIT AND RETIREMENT PLANS
The
Company has several pension plans, both defined benefit and defined
contribution, covering all of its domestic and most of its nondomestic
employees. In addition, certain domestic employees participate in an Employee
Stock Ownership Plan (ESOP). The Company makes periodic contributions to the
ESOP in the form of Company stock or in cash to be invested in Company stock.
Employees are not required or permitted to make contributions to the ESOP.
Ninety percent of the actuarially determined annuity value of their ESOP shares
is used to offset benefits otherwise due under the domestic defined benefit
pension plan. The total cost (benefit) of all such plans for fiscal 2009, 2008
and 2007, considering the combined projected benefits and funds of the ESOP as
well as the other plans, was $(839,000), $(1,652,000) and $64,000 respectively.
Included in these amounts are the Company’s contributions to the defined
contribution plan amounting to $511,000, $622,000 and $588,000 in fiscal 2009,
2008 and 2007, respectively.
Under
both domestic and foreign defined benefit plans, benefits are based on years of
service and final average earnings. Plan assets, including those of the ESOP,
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 reasonable given 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.
The
Company uses an expected long-term rate of return assumption of 8.0% for the
domestic pension plan, and 6.7% for the nondomestic 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. The Company uses a discount rate assumption of
6.75% for the domestic plan and 6.3% for the U.K. plan. In determining these
assumptions, the Company considers published third party data appropriate for
the plans. The change from the prior year discount rate for the domestic plan
reflects the overall decline in comparable market rates for the applicable
measurement dates.
Historically,
the Company’s U.S. qualified defined benefit pension plan has been appropriately
funded, and remains reasonably so according to our latest estimates. The
actuarial valuation was done as of June 30, 2009. While the recent decline in
plan assets may affect future funding requirements, there are no required
minimum contributions before the end of fiscal 2010. The impact of the decline
in asset values will be recognized in the calculation of future net periodic
benefit cost through a decrease in the expected return on assets and
amortization of the asset loss over 13 years. If the plan’s funded status drops
below 90% by the end of 2010, additional funding of the plan may be required by
March 15, 2011.
Other
than the discount rate, these are generally long-term assumptions and not
subject to short-term market fluctuations, though they may be adjusted as
warranted by structural shifts in economic or demographic outlooks, as
applicable, and the long-term assumptions are reviewed annually to ensure they
do not produce results inconsistent with current market conditions. The impact
of variation in the medical cost trend rates is shown below. The long-term
expected return on assets assumption affects the pension expense, and a 1%
change in the assumed return would change the U.S. pension expense by
approximately $0.9 million for fiscal year ended June 27, 2009. The discount
rate is adjusted annually based on corporate investment grade (rated AA or
better) bond yields as of the measurement date. The rate selected at June 27,
2009 is 6.50%. A 1% change in the discount rate would change the benefit
obligations for the U.S. pension and postretirement benefit plans by
approximately 11% as of the end of the year, and change the service cost and
interest cost by approximately $.1 million for the fiscal year ended June 30,
2009. The changes in benefit obligations and pension expense are inversely
related to changes in the discount rate.
37
Based on
June 30, 2007 information, FAS 158 required an adjustment to increase the
Company’s accumulated other comprehensive loss in the amount of $2.2 million
(before tax effect), which represents the excess of the Company’s net prepaid
($38.9 million) over the Company’s PBO funded status ($36.7
million).
In
addition, the amount is offset by an increase in AOCI due to the retiree medical
plan. This plan has an increase to AOCI in the amount of $4.0 million (before
tax effect), which represents the excess of the Company’s accrued benefit
liability ($16.0 million) over the Company’s APBO funded status ($12.0
million).
The
estimated net result is an increase in AOCI of $1.8 million (before tax
effect).
The table
below details assets by category for the Company’s domestic pension plan. These
assets consist primarily of publicly traded equity and fixed income securities,
including 947,908 shares of Company common stock with a fair value of
$6.4 million (9.6% of total plan assets) at June 30, 2009, and 987,704 shares of
the Company’s common stock with a fair value of $21.3 million (20% of total plan
assets) at June 30, 2008. The majority of these shares are in the Company’s ESOP
plan.
|
2009
|
2008
|
|||||||
|
Asset
category:
|
||||||||
|
Cash
|
6 | % | 1 | % | ||||
|
Equities
|
41 | % | 79 | % | ||||
|
Debt
|
53 | % | 20 | % | ||||
| 100 | % | 100 | % | |||||
Effective
June 30, 2007, the Company adopted the recognition and disclosure provisions of
Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”). SFAS 158
required the Company to recognize the funded status (i.e., the difference
between the fair value of plan assets and the projected benefit obligations) of
its pension plans in the June 30, 2007 consolidated balance sheet, with a
corresponding adjustment to accumulated other comprehensive loss, net of tax.
The adjustment to accumulated other comprehensive loss at adoption represents
the net losses, unrecognized prior service costs, and accumulated gains, all of
which were previously netted against the plan’s funded status in the Company’s
historical accounting policy for amortizing such amounts. Further, actuarial
gains and losses that arise in subsequent periods and are not recognized as net
periodic pension cost in the same periods will be recognized as a component of
other comprehensive income. Those amounts will be subsequently recognized as a
component of net periodic pension cost on the same basis as the amounts
recognized in accumulated other comprehensive loss upon adoption of SFAS
158.
The
incremental effects of adopting the provisions of SFAS 158 on the Company’s
consolidated balance sheet at June 30, 2007 are presented in the following
table. The adoption of SFAS 158 had no effect on the Company’s consolidated
statement of operations for the fiscal year ended June 30, 2007 or for any prior
period presented, and it will not affect the Company’s operating results in
future periods. Had the Company not been required to adopt SFAS 158 at June 30,
2007, it would have recognized an additional minimum liability pursuant to the
provisions of SFAS 87. The effect of recognizing the additional minimum
liability is included in the table below in the column labeled “Prior to
Adopting SFAS 158.”
38
|
At
June 30, 2007
|
||||||||||||
|
Prior
to Adopting SFAS 158
|
Effect
of Adopting SFAS 158
|
As
Reported at June 30, 2007
|
||||||||||
|
Pension
asset
|
$ | 38,898 | $ | (2,242 | ) | $ | 36,656 | |||||
|
Postretirement
benefit liability
|
(16,044 | ) | 4,019 | (12,025 | ) | |||||||
|
Deferred
income taxes
|
(8,977 | ) | (694 | ) | (9,671 | ) | ||||||
|
Accumulated
other comprehensive loss
|
— | 1,083 | 1,083 | |||||||||
|
Total
assets
|
236,253 | (2,242 | ) | 234,011 | ||||||||
|
Total
liabilities
|
(59,343 | ) | 3,325 | (56,018 | ) | |||||||
|
Total
stockholders’ equity
|
(176,910 | ) | (1,083 | ) | (177,993 | ) | ||||||
Included
in accumulated other comprehensive gain at June 30, 2007 is $1.8 million ($1.1
million net tax) related to net unrecognized actuarial losses and unrecognized
prior service credit that have not yet been recognized in net periodic pension
or benefit cost for pensions and post-retirements. The Company recognized $.4
million in net actuarial losses and prior service credit in net periodic pension
and benefit cost during fiscal 2008.
Domestic
and U.K. Plans Combined:
The
status of these defined benefit plans, including the ESOP, is as follows (in
thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Change
in benefit obligation
|
||||||||||||
|
Benefit
obligation at beginning of year
|
$ | 109,837 | $ | 120,849 | $ | 115,485 | ||||||
|
Service
cost
|
2,090 | 2,376 | 2,727 | |||||||||
|
Interest
cost
|
6,754 | 6,980 | 6,807 | |||||||||
|
Participant
contributions
|
244 | 300 | 282 | |||||||||
|
Exchange
rate changes
|
(7,306 | ) | 11 | 2,242 | ||||||||
|
Benefits
paid
|
(6,017 | ) | (5,287 | ) | (5,210 | ) | ||||||
|
Actuarial
(gain) loss
|
(9,435 | ) | (15,392 | ) | (1,484 | ) | ||||||
|
Benefit
obligation at end of year
|
$ | 96,167 | $ | 109,837 | $ | 120,849 | ||||||
|
Weighted
average assumptions – benefit obligations (domestic)
|
||||||||||||
|
Discount
rate
|
6.50 | % | 6.75 | % | 6.20 | % | ||||||
|
Rate
of compensation increase
|
2.64 | % | 3.25 | % | 3.25 | % | ||||||
|
Cost
of living increase
|
2.50 | % | 2.50 | % | 2.50 | % | ||||||
|
Change
in plan assets
|
||||||||||||
|
Fair
value of plan assets at beginning of year
|
$ | 140,829 | $ | 157,505 | $ | 138,044 | ||||||
|
Actual
return on plan assets
|
(38,015 | ) | (12,368 | ) | 21,700 | |||||||
|
Employer
contributions
|
511 | 622 | 588 | |||||||||
|
Participant
contributions
|
244 | 300 | 282 | |||||||||
|
Benefits
paid
|
(6,017 | ) | (5,287 | ) | (5,210 | ) | ||||||
|
Exchange
rate changes
|
(6,691 | ) | 57 | 2,102 | ||||||||
|
Fair
value of plan assets at end of year
|
$ | 90,864 | $ | 140,829 | $ | 157,505 | ||||||
|
Funded
status at end of year
|
||||||||||||
|
Funded
status
|
$ | (5,303 | ) | $ | 30,992 | $ | 36,656 | |||||
|
Unrecognized
actuarial gain
|
N/A | N/A | N/A | |||||||||
|
Unrecognized
transition asset
|
N/A | N/A | N/A | |||||||||
|
Unrecognized
prior service cost
|
N/A | N/A | N/A | |||||||||
|
Net
amount recognized
|
$ | (5,303 | ) | $ | 30,992 | $ | 36,656 | |||||
39
|
2009
|
2008
|
2007
|
||||||||||
|
Amounts
recognized in statement of financial position
|
||||||||||||
|
Noncurrent
assets
|
$ | — | $ | 34,643 | $ | 36,656 | ||||||
|
Current
liability
|
(23 | ) | (23 | ) | — | |||||||
|
Non
current liability
|
(5,280 | ) | (3,628 | ) | — | |||||||
|
Net
amount recognized in statement of financial position
|
$ | (5,303 | ) | $ | 30,992 | $ | 36,656 | |||||
|
Weighted
average assumptions – net periodic benefit cost (domestic)
|
||||||||||||
|
Discount
rate
|
6.75 | % | 6.20 | % | 6.20 | % | ||||||
|
Cost
of living increase
|
2.50 | % | 2.50 | % | 2.50 | % | ||||||
|
Rate
of compensation increase
|
3.25 | % | 3.25 | % | 3.25 | % | ||||||
|
Return
on Plan Assets
|
8.00 | % | 8.00 | % | 8.00 | % | ||||||
|
Amounts
not yet reflected in net periodic benefit cost and
included
in accumulated other comprehensive income
|
||||||||||||
|
Transition
asset (obligation)
|
$ | — | $ | — | $ | — | ||||||
|
Prior
service credit (cost)
|
(1,217 | ) | (1,684 | ) | (2,127 | ) | ||||||
|
Accumulated
gain (loss)
|
(47,080 | ) | (8,836 | ) | (115 | ) | ||||||
|
Amounts
not yet recognized as a component of net periodic benefit
cost
|
(48,297 | ) | (10,520 | ) | (2,242 | ) | ||||||
|
Accumulated
contributions in excess of net periodic benefit cost
|
$ | 42,994 | $ | 41,512 | $ | 38,898 | ||||||
|
Net
amount recognized
|
$ | (5,303 | ) | $ | 30,992 | $ | 36,656 | |||||
|
Net
increase/(decrease) in accumulated other comprehensive income (loss) due
to FAS 158
|
$ | — | $ | — | $ | (2,242 | ) | |||||
|
Components
of net periodic (benefit) cost (Domestic and U.K.)
|
||||||||||||
|
Service
cost
|
$ | 2,090 | $ | 2,375 | $ | 2,728 | ||||||
|
Interest
cost
|
6,754 | 6,980 | 6,807 | |||||||||
|
Expected
return on plan assets
|
(10,204 | ) | (11,789 | ) | (10,377 | ) | ||||||
|
Amortization
of prior service cost
|
414 | 446 | 439 | |||||||||
|
Amortization
of transitional (asset) or obligation
|
— | — | — | |||||||||
|
Recognized
actuarial (gain) or loss
|
(15 | ) | (7 | ) | 152 | |||||||
|
Net
periodic (benefit) cost
|
$ | (961 | ) | $ | (1,995 | ) | $ | (251 | ) | |||
|
Estimated
amounts that will be amortized from accumulated
other
comprehensive income over the next year
|
||||||||||||
|
Initial
net obligation(asset)
|
$ | — | $ | — | $ | — | ||||||
|
Prior
service cost
|
(383 | ) | (443 | ) | (443 | ) | ||||||
|
Net
gain (loss)
|
(2,805 | ) | 11 | 6 | ||||||||
|
Additional
disclosure for all pension plans
|
||||||||||||
|
Accumulated
benefit obligation
|
$ | 94,351 | $ | 103,340 | $ | 113,633 | ||||||
40
|
2009
|
2008
|
2007
|
||||||||||
|
Information
for pension plans with projected benefit
obligation
in excess of plan assets
|
||||||||||||
|
Projected
benefit obligation
|
$ | 96,167 | $ | 41,040 | $ | 40,150 | ||||||
|
Fair
value of plan assets
|
$ | 90,864 | $ | 37,389 | $ | 40,067 | ||||||
|
Information
for pension plans with accumulated benefits
in
excess of plan assets
|
||||||||||||
|
Projected
benefit obligation
|
96,167 | 41,040 | 523 | |||||||||
|
Accumulated
benefit obligation
|
94,351 | 40,897 | 469 | |||||||||
|
Fair
value of assets
|
90,864 | 37,389 | N/A | |||||||||
|
Underfunded
Plans (Primarily U.K.):
|
||||||||||||
|
Year-end
information for plans with accumulated benefit
obligations
in excess of plan assets (primarily U.K.)
|
||||||||||||
|
Projected
benefit obligation
|
$ | 27,753 | $ | 40,527 | $ | 40,150 | ||||||
|
Accumulated
benefit obligation
|
27,753 | 40,466 | 39,905 | |||||||||
|
Fair
value of plan assets
|
23,738 | 37,389 | 40,067 | |||||||||
|
Weighted
average assumptions – benefit obligations (U.K.)
|
||||||||||||
|
Discount
rate
|
7.10 | % | 6.30 | % | 5.60 | % | ||||||
|
Rate
of compensation increase
|
3.70 | % | 3.70 | % | 3.30 | % | ||||||
|
Cost
of living increase
|
3.00 | % | 3.70 | % | 2.80 | % | ||||||
|
Components
of net periodic benefit cost (benefit)
|
||||||||||||
|
Service
cost
|
$ | 483 | $ | 557 | $ | 650 | ||||||
|
Interest
cost
|
2,085 | 2,235 | 1,970 | |||||||||
|
Expected
return on plan assets
|
(2,087 | ) | (2,551 | ) | (2,186 | ) | ||||||
|
Amortization
of prior service cost
|
143 | 173 | 166 | |||||||||
|
Amortization
of transition asset
|
— | — | — | |||||||||
|
Recognized
actuarial gain
|
— | — | 156 | |||||||||
|
Net
periodic benefit cost
|
$ | 624 | $ | 414 | $ | 756 | ||||||
|
Weighted
average assumptions – net periodic benefit cost (U.K.)
|
||||||||||||
|
Discount
rate
|
6.30 | % | 5.60 | % | 5.10 | % | ||||||
|
Expected
long-term rate of return
|
6.70 | % | 7.20 | % | 6.90 | % | ||||||
|
Rate
of compensation increase
|
3.70 | % | 3.30 | % | 3.00 | % | ||||||
|
Medical
and Life Insurance Benefits – Retired Employees:
|
||||||||||||
|
The
Company provides certain medical and life insurance
benefits
for most retired employees in the United States.
The
status of these plans at year end is as follows (in
thousands):
|
||||||||||||
|
Change
in benefit obligation
|
||||||||||||
|
Benefit
obligation at beginning of year
|
$ | 10,843 | $ | 12,025 | $ | 12,694 | ||||||
|
Service
cost
|
326 | 393 | 380 | |||||||||
|
Interest
cost
|
701 | 742 | 728 | |||||||||
|
Plan
amendments
|
— | — | (1,409 | ) | ||||||||
|
Benefits
paid
|
(706 | ) | (1,062 | ) | (1,011 | ) | ||||||
|
Actuarial
(gain) loss
|
(347 | ) | (1,255 | ) | 643 | |||||||
|
Benefit
obligation at end of year
|
$ | 10,817 | $ | 10,843 | $ | 12,025 | ||||||
41
|
2009
|
2008
|
2007
|
||||||||||
|
Weighted
average assumptions – benefit obligations
|
||||||||||||
|
Discount
rate
|
6.50 | % | 6.75 | % | 6.20 | % | ||||||
|
Rate
of compensation increase
|
2.64 | % | 3.25 | % | 3.25 | % | ||||||
|
Cost
of living increase
|
2.50 | % | 3.20 | % | 2.50 | % | ||||||
|
Change
in plan assets
|
||||||||||||
|
Fair
value of plan assets at beginning of year
|
$ | — | $ | — | $ | — | ||||||
|
Actual
return on plan assets
|
— | — | — | |||||||||
|
Employer
contributions
|
706 | 1,062 | 1,011 | |||||||||
|
Participant
contributions
|
— | — | — | |||||||||
|
Benefits
paid
|
(706 | ) | (1,062 | ) | (1,011 | ) | ||||||
|
Exchange
rate changes
|
— | — | — | |||||||||
|
Fair
value of plan assets at end of year
|
$ | — | $ | — | $ | — | ||||||
|
Funded
status at end of year
|
$ | (10,817 | ) | $ | (10,843 | ) | $ | (12,025 | ) | |||
|
Unrecognized
actuarial gain
|
N/A | N/A | N/A | |||||||||
|
Unrecognized
transition asset
|
N/A | N/A | N/A | |||||||||
|
Unrecognized
prior service cost
|
N/A | N/A | N/A | |||||||||
|
Net
amount recognized at year-end
|
$ | (10,817 | ) | $ | (10,843 | ) | $ | (12,025 | ) | |||
|
Less
current liability
|
— | — | ||||||||||
|
Net
amount recognized in statement of financial position
|
$ | (10,817 | ) | $ | (10,843 | ) | $ | (12,025 | ) | |||
|
Amounts
recognized in statement of financial position
|
||||||||||||
|
Prepaid
benefit cost
|
$ | — | $ | — | $ | — | ||||||
|
Current
post-retirement benefit liability
|
(752 | ) | (696 | ) | (784 | ) | ||||||
|
Post-retirement
benefit liability
|
(10,065 | ) | (10,147 | ) | (11,241 | ) | ||||||
|
Net
amount recognized in statement of financial position
|
$ | (10,817 | ) | $ | (10,843 | ) | $ | (12,025 | ) | |||
|
Weighted
average assumptions – net periodic benefit cost
|
||||||||||||
|
Discount
rate
|
6.75 | % | 6.75 | % | 6.20 | % | ||||||
|
Rate
of compensation increase
|
3.25 | % | 3.25 | % | 3.25 | % | ||||||
|
Cost
of living increase
|
2.50 | % | 2.50 | % | 2.50 | % | ||||||
|
Amounts
not yet reflected in net periodic benefit cost and included in accumulated
other comprehensive income
|
||||||||||||
|
Transition
asset (obligation)
|
$ | — | $ | — | $ | — | ||||||
|
Prior
service credit (cost)
|
4,604 | 5,509 | 6,414 | |||||||||
|
Accumulated
gain (loss)
|
(682 | ) | (1,027 | ) | (2,395 | ) | ||||||
|
Amounts
not yet recognized as a component of net periodic benefit
cost
|
3,922 | 4,482 | 4,019 | |||||||||
|
Net
periodic benefit cost in excess of accumulated
contributions
|
$ | (14,739 | ) | $ | (15,325 | ) | $ | (16,044 | ) | |||
|
Net
amount recognized
|
$ | (10,817 | ) | $ | (10,843 | ) | $ | (12,025 | ) | |||
A 9%
annual rate of increase in the per capita cost of covered health care benefits
was assumed for fiscal 2009. The rate was assumed to decrease gradually to 5.0%
for 2016 and remain at that level thereafter. Plan amendments for retired
employees relate to reductions in the Company’s contributions.
42
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):
|
1%
Increase
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Effect
on total of service and interest cost
|
$ | 106 | $ | 126 | $ | 124 | ||||||
|
Effect
on postretirement benefit obligation
|
950 | 1,001 | 1,159 | |||||||||
|
1%
Decrease
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Effect
on total of service and interest cost
|
$ | ( 90 | ) | $ | (106 | ) | $ | (104 | ) | |||
|
Effect
on postretirement benefit obligation
|
(816 | ) | (858 | ) | (988 | ) | ||||||
For
fiscal 2009, the Company expects no contributions (required or discretionary) to
the qualified domestic pension plan, $23,000 to the nonqualified domestic
pension plan, $468,930 to the nondomestic pension plan, and $752,000 to the
retiree medical and life insurance plan.
|
2009
|
2008
|
2007
|
||||||||||
|
Components
of net periodic benefit cost (benefit)
|
||||||||||||
|
Service
cost
|
$ | 326 | $ | 393 | $ | 380 | ||||||
|
Interest
cost
|
701 | 742 | 728 | |||||||||
|
Amortization
of prior service cost
|
(905 | ) | (905 | ) | (894 | ) | ||||||
|
Recognized
actuarial gain
|
— | 113 | 101 | |||||||||
|
Net
periodic benefit cost
|
$ | 122 | $ | 343 | $ | 315 | ||||||
Future
pension and other benefit payments are as follows:
|
Fiscal
year
|
Pension
|
Other
Benefits
|
||||||
|
2010
|
$ | 5,795 | $ | 752 | ||||
|
2011
|
5,932 | 741 | ||||||
|
2012
|
6,082 | 723 | ||||||
|
2013
|
6,270 | 720 | ||||||
|
2014
|
6,485 | 727 | ||||||
|
2015-2019
|
35,533 | 3,888 | ||||||
In
December 2003, legislation was enacted providing a Medicare prescription drug
benefit beginning in 2006 and federal subsidies to employers who provide drug
coverage to retirees. Although the Company has experienced some savings, this
legislation has not materially impacted plan obligations.
11.
DEBT
Effective
April 28, 2006, the Company entered into a credit facility agreement with Bank
of America comprised of a $10 million revolving credit facility (Revolver), a $3
million sub-limit under the Revolver for the issuance of letters of credit, and
a $12 million reducing revolving (Reducing Revolver) credit facility. The
Revolver required a commitment fee of .25%. Interest rates on all the above
facilities varied from LIBOR plus 1.25% to LIBOR plus 2.0% depending on funded
debt to earnings before interest, taxes, depreciation and amortization (EBITDA)
ratio, as defined in the credit facility. On April 28, 2006, the Company
borrowed $12 million under the Reducing Revolver to finance the Tru-Stone
acquisition previously described. The actual interest rate at June 27, 2009 for
the Reducing Revolver is 1.82%, which includes the cost of the interest rate
swap described below. The Reducing Revolver has been reduced by one fifth of the
original principal amount at the end of each year, except during 2009. The
Reducing Revolver, which was to expire on April 28, 2009, was extended through
June 30, 2009 under the same terms as described herein.
43
At year
end, long-term debt consists of the following (in thousands):
|
2009
|
2008
|
|||||||
|
Reducing
Revolver
|
$ | — | $ | 7,200 | ||||
|
Capitalized
lease obligations – domestic (payable in U.S. dollars)
|
1,077 | — | ||||||
|
Capitalized
lease obligations payable in Brazilian currency, due 2010 to 2011, 6.3% to
23.7%
|
811 | 1,569 | ||||||
| 1,888 | 8,769 | |||||||
|
Less
current maturities
|
624 | 2,935 | ||||||
| $ | 1,264 | $ | 5,834 | |||||
Included
in Notes Payable and Current Maturities at June 27, 2009 and June 28, 2008 is
$0.1 and $0.5 million, respectively, of short-term financing collateralizing a
portion of the Company’s Brazilian subsidiary receivables. Also included in
Notes Payable and Current Maturities is short-term financing of the Company’s
Brazilian subsidiary amounting to $2.6 million at year end.
Under the
credit facility, as amended and extended, the Company must maintain certain
covenants. The Company had issued $1.0 million of standby letters of credit
under this agreement that guarantee future payments which may be required under
certain insurance programs. As of June 27, 2009, the Company had received the
payoff letter for this debt from Bank of America and on June 30, 2009 the
Reducing Revolver was paid off by the new facility with TD Bank described below.
As such, the outstanding balances under the Reducing Revolver at June 27, 2009
were classified as current on the Company’s Balance Sheet.
Current
notes payable representing current portion of the Reducing Revolver and capital
lease obligations carry interest at a rate of LIBOR plus 1% to LIBOR plus 4%.
Interest expense, prior to capitalization of interest on self-constructed
assets, was $.9 million, $1.0 million and $1.7 million in fiscal 2009, 2008, and
2007. On June 29, 2007, the Company borrowed $1.0 million under the Revolver.
The portion of interest expense relating to capital leases is $.1 million for
fiscal 2009. Estimated interest cost related to capital leases over the next
three years is $.1 million per year.
The
Company provides guarantees of debt for its Brazilian and Scottish subsidiaries
of up to $6.0 million and $1.8 million, respectively. Outstanding debt covered
by these guarantees is reflected on the Company’s Consolidated Balance Sheet as
of June 27, 2009 and June 28, 2008. The Company’s Brazilian subsidiary has also
pledged $0.1 and $.5 million of trade receivables as collateral for a short-term
loan at the year ended June 27, 2009 and June 28, 2008. These receivables are
included in the Company’s Accounts Receivable balance as of June 27, 2009 and
June 28, 2008.
The
Company has entered into an interest rate swap agreement designed to limit the
amount of exposure resulting from increases in its variable LIBOR rate on the
$12 million Reducing Revolver originally outstanding. The swap agreement covers
$6 million of the $12 million outstanding for the first 3 years of the 5 year
term of the debt. The agreement acts as a cash flow hedge which requires cash
payment when the LIBOR rate is below 5.69% and provides cash receipts when the
LIBOR rates exceed 5.69%. As of June 28, 2008 the swap agreement had an
immaterial value. This agreement expired on April 30, 2009 and was not renewed.
At that time, the swap agreement had an immaterial value, which was written off
through Other Comprehensive Income.
On June
30, 2009, the Company and certain of the Company’s subsidiaries entered into a
Loan and Security Agreement (the “New Credit Facility”) with TD Bank,
N.A.
The New
Credit Facility replaced the Company’s previous Bank of America facility with a
$23 million line of credit. The interest rate under the New Credit
Facility is based upon a grid which uses the ratio of Funded Debt/EBITDA to
determine the floating margin that will be added to one-month
LIBOR. The initial rate is one-month LIBOR plus 1.75%. The
New Credit Facility matures on April 30, 2012.
44
The
obligations under the New Credit Facility are unsecured. However, in
the event of certain triggering events, the obligations under the New Credit
Facility will become secured by the assets of the Company and the
Subsidiaries.
Availability
under the New Credit Facility is subject to a borrowing base comprised of
accounts receivable and inventory. The Company believes that the
borrowing base will consistently produce availability under the New Credit
Facility in excess of $23 million. In addition, the Company
anticipates that it will not need to fully utilize the amounts available to the
Company and the Subsidiaries under the New Credit Facility. As
of September 8, 2009, the Company had borrowings of $3.3 million under this
facility. A .25% commitment fee is charged on the unused portion of the line of
credit.
The New
Credit Facility contains financial covenants with respect to leverage, tangible
net worth, and interest coverage, and also contains customary affirmative and
negative covenants, including limitations on indebtedness, liens, acquisitions,
asset dispositions, and fundamental corporate changes, and certain customary
events of default. Upon the occurrence and continuation of an event
of default, the lender may terminate the revolving credit commitment and require
immediate payment of the entire unpaid principal amount of the New Credit
Facility, accrued interest and all other obligations. As of June 30, 2009, the
Company was in compliance with all covenants required to be tested at that
time.
12.
COMMON STOCK
Class B
common stock is identical to Class A except that it has 10 votes per share, is
generally nontransferable except to lineal descendants, 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. In addition, the Company has a stockholder rights plan to protect
stockholders from attempts to acquire the Company on unfavorable terms not
approved by the Board of Directors. Under certain circumstances, the plan
entitles the holder of each Class A or Class B share to additional shares of the
Company or an acquiring company, as defined, at a 50% discount to market.
Generally, the rights will be exercisable if a person or group acquires 15% or
more of the Company’s outstanding shares. The rights trade together with the
underlying common stock. They can be redeemed by the Company for $.01 per right
and expire in 2010. As of June 27, 2009 and June 28, 2008, the Company held
1,727,517 and 1,745,662, respectively, of treasury shares.
Under the
Company’s employee stock purchase plans (ESPP), 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. Therefore, no options
were exercisable at fiscal year ends. A summary of option activity is as
follows:
|
Shares
On Option
|
Weighted
Average Exercise Price
|
Shares
Available
For Grant
|
||||||||||
|
Balance,
June 24, 2006
|
48,075 | 13.50 | 704,770 | |||||||||
|
Options
granted ($13.26 and $13.61)
|
27,887 | 13.41 | (27,887 | ) | ||||||||
|
Options
exercised ($13.27 and $13.26)
|
(7,747 | ) | 13.26 | |||||||||
|
Options
canceled
|
(27,125 | ) | — | 27,125 | ||||||||
|
Balance,
June 30, 2007
|
41,090 | 13.24 | 704,008 | |||||||||
|
Options
granted ($15.98 and $19.64)
|
25,415 | 17.83 | (25,415 | ) | ||||||||
|
Options
exercised ($15.60 and $11.69)
|
(15,520 | ) | 13.52 | |||||||||
|
Options
canceled
|
(16,746 | ) | — | 16,746 | ||||||||
|
Balance,
June 28, 2008
|
34,239 | 15.74 | 695,339 | |||||||||
|
Options
granted ($14.17 and $7.51)
|
76,519 | 9.86 | (76,519 | ) | ||||||||
|
Options
exercised ($13.26 and $6.55)
|
(7,010 | ) | 11.08 | |||||||||
|
Options
canceled
|
(42,401 | ) | — | 42,401 | ||||||||
|
Balance,
June 27, 2009
|
61,347 | 11.83 | 661,221 | |||||||||
45
The
following information relates to outstanding options as of June 27,
2009:
|
Weighted
average remaining life
|
1.25 years
|
|||
|
Weighted
average fair value on grant date of options granted in:
|
||||
|
2007
|
4.22 | |||
|
2008
|
6.04 | |||
|
2009
|
4.74 | |||
The fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected volatility – 37.7% - 79.4%, interest - 1.2% to 3.8%, and
expected lives - 2 years.
In
December 2004, the FASB issued FAS 123(R), Share-Based Payment, which requires
companies to measure and recognize compensation expense for all stock-based
payments at fair value. The Company adopted FAS 123(R) at the beginning of
fiscal 2006 using the modified prospective method. As a result, compensation
expense of $64,300, $47,800 and $60,500 has been recorded for fiscal 2009, 2008
and 2007, respectively. It is not anticipated that future compensation expense
related to FAS 123(R) will vary materially from this amount under the current
employee stock purchase plan.
13.
CONTINGENCIES
The
Company is involved in some matters which arise in the normal course of
business, which are not expected to have a material impact on the Company’s
financial statements.
14.
OPERATING DATA
The
Company believes it has no significant concentration of credit risk as of June
27, 2009. Trade receivables are dispersed among a large number of retailers,
distributors and industrial accounts in many countries, with none exceeding 10%
of consolidated sales.
The
Company is engaged in the single business segment of producing and marketing
industrial, professional and consumer products. It manufactures over 5,000
items, including precision measuring tools, tape measures, gages and saw blades.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is used by the chief operating decision
maker in determining how to allocate assets and assess performance of the
Company.
The
Company has (and is managed through) nine manufacturing plants or reporting
units, which are in Scotland, Brazil, Athol, MA, Cleveland, OH, Mt. Airy, NC,
China, Waite Park, MN, Laguna Hills, CA, and the Dominican Republic. Internal
operating statements used by the chief operating decision maker (the CEO) are
prepared on the basis of the operating results of each of these units, and the
Company believes these reporting units meet the aggregation criteria of SFAS
131.
The
Company has concluded that its principal units in North America, Scotland and
Brazil have similar economic characteristics and therefore similar long-term
financial prospects because they operate in worldwide markets, produce and
market the same or similar finished products in the same way, generate
comparable gross margins, have comparable return on equity, and sell primarily
through distribution as opposed to directly to the end user of the
product. Because the units operate in different countries, the
economic climate in each country may affect the short-term results of each unit
differently; however, over the long run, the units in general are expected to
operate similarly and generate similar returns.
46
Other
reporting unit similarities include:
|
a.
|
All
the Company’s units produce tools and related products used primarily by
the metal-working and construction trades. These include rules
and tape measures, levels, dial indicators, band saw and hole saw blades,
gage blocks, ground flat stock, granite surface plates, micrometers and
calipers, etc. All the Company’s products are included in a
single catalog regardless where
manufactured.
|
|
b.
|
The
production processes for all products (regardless of where manufactured)
are the same or similar in that they use metal or granite as a raw
material.
|
|
c.
|
The
Company’s products are sold from its manufacturing units through a
customer base of resellers, primarily industrial
distributors.
|
|
d.
|
The
Company and its individual units are not materially affected by the
regulatory environment.
|
For these
reasons, the Company believes it is appropriate to report on the basis of one
reporting segment.
The
Company’s operations are primarily in North America, Brazil and the United
Kingdom. Geographic information about the Company’s sales and long-lived assets
are as follows (in thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Sales
|
||||||||||||
|
United
States
|
$ | 104,410 | $ | 124,427 | $ | 124,436 | ||||||
|
North
America (other than U.S.)
|
10,034 | 13,028 | 11,800 | |||||||||
|
United
Kingdom
|
28,135 | 37,674 | 35,397 | |||||||||
|
Brazil
|
71,666 | 73,118 | 57,709 | |||||||||
|
Eliminations
and other
|
(10,586 | ) | (5,876 | ) | (6,986 | ) | ||||||
|
Total
|
$ | 203,659 | $ | 242,371 | $ | 222,356 | ||||||
|
Long-lived
Assets
|
||||||||||||
|
United
States
|
$ | 59,148 | $ | 87,224 | $ | 84,703 | ||||||
|
North
America (other than U.S.)
|
648 | 516 | 398 | |||||||||
|
United
Kingdom
|
4,316 | 4,495 | 5,403 | |||||||||
|
Brazil
|
15,191 | 16,975 | 15,744 | |||||||||
|
Other
and eliminations
|
2,215 | 2,439 | 2,135 | |||||||||
|
Total
|
$ | 81,518 | $ | 111,649 | $ | 108,383 | ||||||
QUARTERLY
FINANCIAL DATA (unaudited)
(in
thousands except per share data)
|
Quarter
Ended
|
Net
Sales
|
Gross
Profit
|
Earnings
(loss)
Before
Income
Taxes
|
Net
Earnings
|
Basic
Earnings
Per
Share
|
|||||||||||||||
|
Sep.
2007
|
$ | 59,550 | $ | 18,554 | $ | 3,585 | $ | 2,330 | $ | 0.35 | ||||||||||
|
Dec.
2007
|
62,437 | 19,545 | 5,940 | 3,423 | 0.52 | |||||||||||||||
|
Mar.
2008
|
60,101 | 19,060 | 4,977 | 2,861 | 0.43 | |||||||||||||||
|
Jun.
2008
|
60,283 | 19,079 | 2,369 | 2,217 | 0.34 | |||||||||||||||
| $ | 242,371 | $ | 76,238 | $ | 16,871 | $ | 10,831 | $ | 1.64 | |||||||||||
|
Sep.
2008
|
$ | 67,985 | $ | 21,193 | $ | 4,230 | $ | 2,623 | $ | 0.40 | ||||||||||
|
Dec.
2008
|
54,081 | 16,315 | 1,642 | 1,135 | 0.17 | |||||||||||||||
|
Mar.
2009
|
42,764 | 11,136 | (7,515 | ) | (4,750 | ) | (0.72 | ) | ||||||||||||
|
Jun.
2009
|
38,829 | 10,900 | (3,910 | ) | (2,228 | ) | (0.34 | ) | ||||||||||||
| $ | 203,659 | $ | 59,544 | $ | (5,553 | ) | $ | (3,220 | ) | $ | (0.49 | ) | ||||||||
The
Company’s Class A common stock is traded on the New York Stock
Exchange.
15.
SUBSEQUENT EVENTS
In May
2009, the Financial Accounting Standards Board issued Statement 165 (“SFAS
165”), subsequent events to incorporate the accounting and disclosure
requirements for subsequent events into U.S. generally accepted accounting
principles. SFAS 165 introduces new terminology, defines a date
through which an entity must recognize and disclose events or transactions
occurring after the balance sheet date. The Company adopted SFAS 165 as of June
27, 2009 which was the required effective date.
47
The
Company evaluated June 27, 2009 financial statement for subsequent events
through September 10, 2009, the date of the financial statements were available
to be issued. Except for the refinancing of debt described in Note
11, the Company is not aware of any subsequent events which would require
recognition or disclosure in the financial statements.
Item 9 - Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
Not
applicable.
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 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
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during
the fourth quarter of fiscal 2009 identified in connection with our Chief
Executive Officer’s and Chief Financial Officer’s evaluation that have
materially affected, or are reasonably likely to materially affect, our 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 as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934. 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.
|
Internal
control over financial reporting includes the controls themselves, monitoring
and internal auditing practices and actions taken to correct deficiencies as
identified.
48
A
deficiency in internal control exists when the design or operation of a control
does not allow management or employees, in the normal course of performing their
assigned functions, to prevent or detect misstatements on a timely
basis.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis. A significant
deficiency is a deficiency, or a combination of deficiencies, in internal
control over financial reporting that is less severe than a material weakness,
yet important enough to merit attention by those responsible for oversight of
the company’s financial reporting (also referred to as those charged with
governance).
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 27, 2009. Management based this assessment on criteria for
effective internal control over financial reporting described in “Internal
Control – Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission. 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
this assessment, we consider the following identified control deficiencies to
aggregate to a material weakness around the operating effectiveness of certain
financial reporting controls: financial reporting resources and
oversight of subsidiary operations. Subsidiary financial reporting resources
failed to identify certain significant accounting issues and the
corporate financial reporting resources failed to detect the related errors
during the close process. In light of these matters, management has taken
additional steps to ensure the accuracy of the Form 10-K.
Planned
remediation efforts regarding this material weakness include the
following: 1) hiring of appropriate financial reporting resources and
additional training of existing resources to ensure proper accounting at the
subsidiary level and adequate oversight at Corporate; 2) enhancement of
accounting policies and procedures with country specific translations for a
global rollout during the first half of fiscal year 2010; 3) affirmation of
subsidiary reporting responsibility to the Corporate CFO including monthly
written representations; 4) improved subsidiary and corporate-level analysis of
all significant financial statement accounts and changes monthly; and 5) more
frequent visits to subsidiary locations by Corporate Accounting and Internal
Audit during the year.
Management
believes that the efforts described above, when fully implemented, will be
effective in remediation of the material weaknesses.
The
effectiveness of our internal control over financial reporting as of June 27,
2009 has been audited by Grant Thornton LLP, our independent registered public
accounting firm, as stated in their report, which is included as Item 9A(e) of
this Form 10-K.
49
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
The L.S.
Starrett Company
We have
audited The L.S. Starrett Company and subsidiaries’ (the “Company”) internal
control over financial reporting as of June 27, 2009, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). 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, and for its assertion of the effectiveness of internal control over
financial reporting included in the accompanying “Management’s Report on
Internal Control Over Financial Reporting” (“Management’s Report”). Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with attestation standards established by the
American Institute of Certified Public Accounts. 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.
A
Company’s internal control over financial reporting is a process effected by
those charged with governance, management, and other personnel, designed to
provide reasonable assurance regarding the preparation of reliable financial
statements 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 those charged with governance; and (3) provide
reasonable assurance regarding prevention, or timely detection and correction 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 and correct 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.
A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s financial statements will not be
prevented, or detected and corrected on a timely basis. The following material
weakness has been identified and included in Management’s Report: a weakness
related to financial reporting resources at both the corporate and subsidiary
level. This weakness resulted in material adjustments to the
consolidated financial statements.
In our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of June 27,
2009 based on criteria established in Internal Control—Integrated
Framework issued by COSO.
We also
have audited, in accordance with the auditing standards generally accepted in
the United States of America as established by the American Institute of
Certified Public Accounts, the consolidated balance sheets of the Company as of
June 27, 2009 and June 28, 2008, and the related consolidated statements of
operations, shareholders’ equity, and cash flows for each of the three years in
the period ended June 27, 2009. The material weakness identified
above was considered in determining the nature, timing, and extent of audit
tests applied in our audit of the fiscal 2009 financial statements, and this
report does not affect our report dated September 10, 2009 expressing an
unqualified opinion on those financial statements.
We do not
express an opinion or any other form of assurance on management’s remediation
plans with respect to the material weakness included in Management’s
Report.
/s/ Grant
Thornton LLP
Boston,
Massachusetts
September
10, 2009
50
Item 9B - Other
Information
None.
PART III
Item 10 – Directors,
Executive Officers and Corporate Governance
Directors
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 October 14, 2009 (the “2009 Proxy Statement”), which
will be mailed to stockholders on or about September 11, 2009. The information
in that portion of the 2009 Proxy Statement is hereby incorporated by
reference.
Executive Officers of the
Registrant
|
Name
|
|
Age
|
|
Held Present
Office
Since
|
|
Position
|
|
Douglas
A. Starrett
|
|
57
|
|
2001
|
|
President and CEO and Director
|
|
Randall
J. Hylek
|
|
54
|
|
2005
|
|
Chief Financial Officer and Treasurer
|
|
Anthony
M. Aspin
|
|
56
|
|
2000
|
|
Vice
President Sales
|
|
Stephen
F. Walsh
|
|
63
|
|
2001
|
|
Senior Vice President Operations and Director
|
Douglas
A. Starrett has been President of the Company since 1995 and became CEO in
2001.
From 2002
until he joined the company in 2005, Mr. Hylek served as interim Vice President,
Finance of Cooper Wiring Devices, a manufacturer of electrical wiring products,
a transitional Finance Manager at MCI (formerly World Com), and as an outside
consultant for Sarbanes-Oxley implementation at various medium and large public
companies. From 1999 to 2002 he was Vice President Finance for CTC
Communications, a telecommunications provider.
Anthony
M. Aspin was previously a divisional sales manager with the
Company.
Stephen
F. Walsh was previously President of the Silicon Carbide Division of
Saint-Gobain Industrial Ceramics before joining the Company in 2001 as Vice
President Operations.
The
positions listed above represent their principal occupations and employment
during the last five years.
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 five 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, 121 Crescent Street, Athol, MA 01331.
We intend to disclose any future amendments to, or waivers from, the 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.
51
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 2009 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 2007 Employees’ Stock Purchase Plan (“2007 Plan”) as of June 27,
2009. The 2007 Plan was approved by stockholders at the Company’s 2007
annual meeting and shares of Class A or Class B common stock may be issued
under the 2007 Plan. Options are not issued under the Company’s Employees’
Stock Purchase Plan that was adopted in
1952.
|
|
Plan
Category
|
Number
of Securities
to
be issued Upon Exercise of Outstanding
Options,
Warrants and Rights
(a)
|
Weighted
Average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights
(b)
|
Number
of Securities
Remaining
Available
For
Future Issuance
Under
Equity Compen-
sation
Plans (Ex-
cluding
Securities
Reflected
in Column (a)
(c)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
61,347 | 11.83 | 661,221 | |||||||||
|
Equity
compensation plans not approved by security holders
|
— | — | — | |||||||||
|
Total
|
61,347 | 11.83 | 661,221 | |||||||||
|
(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 2009 Proxy Statement,
and is hereby incorporated by reference.
|
(c)
|
Security
ownership of management:
|
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 Management” in
Section I of Part I in the Company’s 2009 Proxy Statement. These portions of the
2009 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 2009
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 2009 Proxy Statement. These portions of the
Proxy Statement are hereby incorporated by reference.
52
PART IV
Item 15 – Exhibits and
Financial Statement Schedules
|
(a)
|
1.
Financial statements filed in Item 8 of this annual
report:
|
Consolidated
Statements of Operations for each of the three years in the period ended June
27, 2009
Consolidated
Statements of Cash Flows for each of the three years in the period ended June
27, 2009
Consolidated
Balance Sheets at June 27, 2009 and June 28, 2008
Consolidated
Statements of Stockholders’ Equity for each of the three years in the period
ended June 27, 2009
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
All other
financial statements and 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.
|
53
|
|
Schedule
II
|
|
|
The
L.S. Starrett Company
|
|
|
Valuation
and Qualifying Accounts
|
|
|
Allowance
for Doubtful Accounts
|
|
(in
000)
|
Balance
at Beginning of Period
|
Provisions
|
Charges
to Other Accounts
|
Write-offs
(1)
|
Balance
at End of Period
|
|||||||||||||||
|
Allowance
for Doubtful Accounts:
|
||||||||||||||||||||
|
Year
Ended June 27, 2009
|
$ | 701 | $ | 451 | $ | (21 | ) | $ | (453 | ) | $ | 678 | ||||||||
|
Year
Ended June 28, 2008
|
1,623 | 461 | 18 | (1,401 | ) | 701 | ||||||||||||||
|
Year
Ended June 30, 2007
|
1,416 | 370 | (7 | ) | (156 | ) | 1,623 | |||||||||||||
|
|
(1) Represents
accounts written off during the
year.
|
THE L.S. STARRETT COMPANY
AND SUBSIDIARIES - EXHIBIT INDEX
|
|
Exhibit
|
|
2.1*
|
Asset
Purchase Agreement dated as of April 28, 2006 by and among Starrett
Acquisition Corporation, a Delaware Corporation, Tru-Stone Technologies,
Inc., a Minnesota corporation (the “Company”), St. Cloud and each
individual shareholder of St. Cloud that signed the Asset Purchase
Agreement filed with Form 8-K dated May 8, 2006 is hereby incorporated by
reference.
|
|
3a
|
Restated
Articles of Organization dated December 20, 1989, filed with Form 10-Q for
the quarter ended December 23, 1989, are hereby incorporated by
reference.
|
|
3b
|
Bylaws
as amended September 16, 1999, filed with Form 10-Q for the quarter ended
September 24, 1999, are hereby incorporated by
reference.
|
|
4
|
Second
Amended and Restated Rights Agreement, dated as of March 13, 2002, between
the Company and Mellon Investor Services, as Rights Agent, including Form
of Common Stock Purchase Rights Certificate, filed with Form 10-K for the
year ended June 29, 2002, is hereby incorporated by
reference.
|
|
10a*
|
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.
|
|
10b*
|
The
L.S. Starrett Company Supplemental Executive Retirement Plan, filed with
Form 10-K for the year ended June 29, 2002 is hereby incorporated by
reference.
|
|
10c*
|
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.
|
|
10d*
|
2002
Employees’ Stock Purchase Plan filed with Form 10-Q for the quarter ended
September 28, 2002 is hereby incorporated by
reference.
|
|
10e*
|
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.
|
|
10f*
|
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.
|
|
10g
|
Amended
and Restated Credit Agreement, dated as of April 28, 2006 by and among the
Company, the lenders from time to time party thereto, and Bank of America,
N.A., as agent, filed with Form 8-K dated May 8, 2006 is hereby
incorporated by reference.
|
|
10h
|
Amendment
dated as of June 24, 2006 to the Company’s Amended and Restated Credit
Agreement, filed with Form 10-K for the year ended June 24, 2006, is
hereby incorporated by reference.
|
54
|
10i*
|
Loan
and Security Agreement dated as of June 30, 2009 by and among the Company,
certain subsidiaries of the Company, and TD Bank, NA, as lender, filed
with Form 8-K dated July 2, 2009 is hereby incorporated by
reference.
|
|
10j*
|
2007
Employees’ Stock Purchase Plan filed with the Definitive Proxy Statement
for the 2008 Annual Meeting of Stockholders is hereby incorporated by
reference.
|
|
10k*
|
Cash
Bonus Plan for Executive Officers of the Company, filed with Form 10-K for
the year ended June 28, 2008, is hereby incorporated by
reference.
|
|
10l*
|
Cash
Bonus Plan for Anthony M. Aspin, filed with Form 10-K for the year ended
June 28, 2008, is hereby incorporated by
reference.
|
|
10m*
|
Change
in Control Agreement, dated as of 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.
|
|
10n*
|
Form
of Change in Control Agreement, dated as of January 16, 2009, executed
separately by the Company and each of Randall J. Hylek and Stephen F.
Walsh, filed with Form 10-Q for the quarter ended December 27, 2008, is
hereby incorporated by reference.
|
|
10o
|
Form
of Non-Compete Agreement, dated as of January 16, 2009, executed
separately by the Company and each of Douglas A Starrett, Randall J. Hylek
and Stephen F. Walsh, filed with Form 10-Q for the quarter ended December
27, 2008, is hereby incorporated by
reference.
|
|
11
|
Earnings
per share (not considered necessary – no difference in basic and diluted
per share amounts).
|
|
21
|
Subsidiaries
of the Registrant, filed herewith.
|
|
23
|
Consent
of Independent Registered Public Accounting Firm, filed
herewith.
|
|
31a
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
|
31b
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to Rule
13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2003 (subsections
(a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code),
filed herewith.
|
|
99.1
|
The
audited financial statements of Tru-Stone for the years ended December 31,
2005 and December 31, 2004, and the unaudited financial statements for the
quarters ended March 31, 2006 and March 31, 2005 filed with Form 8-K/A
(Amendment I) dated July 13, 2006, is hereby incorporated by
reference.
|
|
99.2
|
The
unaudited pro forma combined balance sheet of the Company and Tru- Stone
as of March 25, 2006 and the unaudited pro forma combined statement of
operations of the Company and Tru-Stone for the year ended June 25, 2005
and the nine months ended March 25, 2006 filed with Form 8-K/A (Amendment
I) dated July 13, 2006, is hereby incorporated by
reference.
|
55
SIGNATURES
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.
|
THE
L.S. STARRETT COMPANY
|
||
|
(Registrant)
|
||
|
By
|
/S/
RANDALL J. HYLEK
|
|
|
Randall
J. Hylek,
|
||
|
Treasurer
and Chief Financial Officer
|
||
|
|
Date:
September 10, 2009
|
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:
|
DOUGLAS
A. STARRETT
|
SALVADOR
DE CAMARGO, JR.
|
|||
|
Douglas
A. Starrett, Sept. 10, 2009
|
Salvador
de Camargo, Jr., Sept. 10, 2009
|
|||
|
President
and CEO and Director
|
President
Starrett Industria e Comercio, Ltda, Brazil
|
|||
|
RALPH
G. LAWRENCE
|
TERRY
A. PIPER
|
|||
|
Ralph
G. Lawrence, Sept. 10, 2009
|
Terry
A. Piper, Sept. 10, 2009
|
|||
|
Director
|
Director
|
|||
|
RICHARD
B. KENNEDY
|
ROBERT
L. MONTGOMERY, JR.
|
|||
|
Richard
B. Kennedy, Sept. 10, 2009
|
Robert
L. Montgomery, Jr., Sept. 10, 2009
|
|||
|
Director
|
Director
|
|||
|
ROBERT
J. SIMKEVICH
|
STEPHEN
F. WALSH
|
|||
|
Robert
J. Simkevich, Sept. 10, 2009
|
Stephen
F. Walsh, Sept. 10, 2009
|
|||
|
Corporate
Controller
|
Senior
Vice President Operations and
Director
|
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56