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STARRETT L S CO - Quarter Report: 2021 September (Form 10-Q)

Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2021
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission file number1-367
THE L. S. STARRETT COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts04-1866480
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
121 Crescent Street, Athol, Massachusetts
01331-1915
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code
978-249-3551
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common - $1.00 Per Share Par ValueSCXNew York Stock Exchange
Class B Common - $1.00 Per Share Par ValueNot applicableNot applicable 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒    No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒     No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check One):
Large Accelerated Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting Company ☒
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐    No ☒
Common Shares outstanding as ofOctober 21, 2021
Class A Common Shares6,628,421
Class B Common Shares605,292

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THE L. S. STARRETT COMPANY
CONTENTS
Page No.
8-18

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PART I.    FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
THE L. S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands except share data)
(unaudited)
9/30/20216/30/2021
ASSETS
Current assets:
Cash$6,627 $9,105 
Accounts receivable (less allowance for doubtful accounts of $647 and $665, respectively)
39,087 35,076 
Inventories61,198 60,572 
Prepaid expenses and other current assets15,505 14,467 
Total current assets122,417 119,220 
Property, plant and equipment, net36,115 35,992 
Right of use assets6,490 4,298 
Deferred tax assets, net18,717 19,073 
Intangible assets, net4,843 4,888 
Goodwill1,015 1,015 
Total assets$189,597 $184,486 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt$21,997 $15,959 
Current lease liability1,779 1,650 
Accounts payable17,310 17,229 
Accrued expenses9,468 8,811 
Accrued compensation5,743 8,040 
Total current liabilities56,297 51,689 
Other tax obligations2,826 2,866 
Long-term lease liability4,847 2,734 
Long-term debt, net of current portion5,540 6,010 
Postretirement benefit and pension obligations36,839 37,652 
Total liabilities106,349 100,951 
Stockholders' equity:
Class A Common stock $1 par (20,000,000 shares authorized; 6,619,304 outstanding at September 30, 2021 and 6,475,307 outstanding at June 30, 2021)
6,619 6,475 
Class B Common stock $1 par (10,000,000 shares authorized; 607,032 outstanding at September 30, 2021 and 633,505 outstanding at June 30, 2021
607 634 
Additional paid-in capital56,548 56,507 
Retained earnings77,413 74,181 
Accumulated other comprehensive loss(57,939)(54,262)
Total stockholders' equity83,248 83,535 
Total liabilities and stockholders’ equity$189,597 $184,486 
See Notes to Unaudited Consolidated Financial Statements
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THE L. S. STARRETT COMPANY
Consolidated Statements of Operations
(in thousands except per share data)
(unaudited)
Three Months Ended
9/30/20219/30/2020
Net sales$61,514 $49,411 
Cost of goods sold41,369 33,839 
Gross margin20,145 15,572 
% of Net sales32.7 %31.5 %
Restructuring charges— 346 
Selling, general and administrative expenses16,012 13,391 
Operating income4,133 1,835 
Other (expense)226 (1)
Income before income taxes4,359 1,834 
Income tax expense (benefit)1,127 (2,282)
Net income$3,232 $4,116 
Basic income per share$0.45 $0.59 
Diluted income per share$0.44 $0.57 
Weighted average outstanding shares used in per share calculations:
Basic7,126 6,988 
Diluted7,396 7,245 


See Notes to Unaudited Consolidated Financial Statements
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THE L. S. STARRETT COMPANY
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)

Three Months Ended
9/30/20219/30/2020
Net income$3,232 $4,116 
Other comprehensive (loss):
Currency translation (loss), net of tax(3,611)(236)
Pension and postretirement plans, net of tax(66)(22)
Other comprehensive (loss)(3,677)(258)
Total comprehensive (loss) income $(445)$3,858 



See Notes to Unaudited Consolidated Financial Statements
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THE L. S. STARRETT COMPANY
Consolidated Statements of Stockholders' Equity
(in thousands)
(unaudited)
For the Three Month Period Ended September 30, 2021:

Common Stock
Outstanding		Additional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Total
Class AClass B
Balance June 30, 2021$6,475 $634 $56,507 $74,181 $(54,262)$83,535 
Total comprehensive income (loss)— — — 3,232 (3,677)(445)
Repurchase of shares— (2)(14)— — (16)
Stock-based compensation119 — 55 — — 174 
Conversion25 (25)— — — — 
Balance September 30, 2021$6,619 $607 $56,548 $77,413 $(57,939)$83,248 
Accumulated balance consists of:
Translation loss$(59,657)
Pension and postretirement plans, net of taxes1,718 
$(57,939)

For the Three Month Period Ended September 30, 2020:
Common Stock
Outstanding		Additional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Total
Class AClass B
Balance June 30, 2020$6,308 $680 $55,762 $58,648 $(75,415)$45,983 
Total comprehensive income (loss)— — — 4,116 (258)3,858 
Repurchase of shares— (2)(4)— — (6)
Stock-based compensation8 — 359 — — 367 
Conversion26 (26)— — — — 
Balance September 30, 2020$6,342 $652 $56,117 $62,764 $(75,673)$50,202 
Accumulated balance consists of:
Translation loss$(62,110)
Pension and postretirement plans, net of taxes(13,563)
$(75,673)
See Notes to Unaudited Consolidated Financial Statements
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THE L. S. STARRETT COMPANY
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
9/30/20219/30/2020
Cash flows from operating activities:
Net income$3,232 $4,116 
Non-cash operating activities:
Depreciation1,262 1,360 
Amortization335 300 
Stock-based compensation174 367 
Net long-term tax obligations38 17 
Deferred taxes193 (2,822)
Postretirement benefit and pension obligations(353)4 
Working capital changes:
Accounts receivable(5,797)(1,656)
Inventories(2,887)3,194 
Other current assets(1,888)(324)
Other current liabilities104 678 
Prepaid pension expense(288)(1,609)
Other34 38 
Net cash (used in) provided by operating activities(5,841)3,663 
Cash flows from investing activities:
Purchases of property, plant and equipment(2,334)(1,543)
Software development(290)(251)
Net cash (used in) investing activities(2,624)(1,794)
Cash flows from financing activities:
Proceeds from borrowing13,767 4,462 
Debt repayments(8,040)(8,475)
Shares repurchased(16)(6)
Net cash provided by (used in) financing activities 5,711 (4,019)
Effect of exchange rate changes on cash276 253 
Net decrease in cash(2,478)(1,897)
Cash, beginning of period9,105 13,458 
Cash, end of period$6,627 $11,561 
Supplemental cash flow information:
Interest paid$224 $201 
Income taxes paid, net1,116 1,224 
See Notes to Unaudited Consolidated Financial Statements
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THE L. S. STARRETT COMPANY
Notes to Consolidated Financial Statements
September 30, 2021 (Unaudited)
Note 1:    Basis of Presentation and Summary of Significant Account Policies
The unaudited interim consolidated financial statements as of and for the three months ended September 30, 2021 have been prepared by The L.S. Starrett Company (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements.  These unaudited consolidated financial statements, which, in the opinion of management, reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation, should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2021. The balance as of June 30, 2021 has been derived from the audited consolidated financial statements as of and for the year ended June 30, 2021.  Operating results are not necessarily indicative of the results that may be expected for any future interim period or for the entire fiscal year. The Company’s “fiscal year” begins July 1st and ends June 30th.
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect amounts reported in the consolidated financial statements and accompanying notes.  Note 2 to the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the year ended June 30, 2021 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.

Throughout the pandemic crisis, the Company's main focus has been on protecting the health and well-being of its employees, and the long-term financial health of the Company. It remains very difficult for management to predict when this crisis will no longer be a risk to future sales and operations. To the extent that pandemic-related events do not provide evidence about conditions that existed at the balance-sheet date, the Company considers it necessary to disclose it cannot estimate all aspects of the impact on the financial statements as a result of the on-going pandemic.

Note 2:    Segment Information
The segment information and the accounting policies of each segment are the same as those described in the notes to the consolidated financial statements entitled “Financial Information by Segment & Geographic Area” included in our Annual Report on Form 10-K for the year ended June 30, 2021. The Company’s business is aggregated into two reportable segments based on geography of operations: North American Operations and International Operations. Segment income is measured for internal reporting purposes by excluding corporate expenses, which are included in the unallocated column in the table below. Other income and expense, including interest income and expense, and income taxes are excluded entirely from the table below. There were no significant changes in the segment operations or in the segment assets from the Annual Report. Financial results for each reportable segment are as follows (in thousands):
North
American
Operations		International
Operations		UnallocatedTotal
Three Months Ended September 30, 2021
Sales1
$33,809 $27,705 $— $61,514 
Operating Income (Loss)$2,501 $3,583 $(1,951)$4,133 
Three Months Ended September 30, 2020
Sales2
$25,984 $23,427 $— $49,411 
Operating Income (Loss) $839 $2,830 $(1,834)$1,835 
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1.Excludes $749 of North American segment intercompany sales to the International segment, and $5,336 of International segment intercompany sales to the North American segment.
2.Excludes $746 of North American segment intercompany sales to the International segment, and $2,786 of International segment intercompany sales to the North American segment.

Note 3:    Revenue from Contracts with Customers
Under ASC Topic 606, the Company is required to present a refund liability and a return asset within the Unaudited Consolidated Balance Sheet. As of September 30, 2021, and June 30, 2021, the balance of the return asset was $0.1 million and $0.2 million, respectively, and the balance of the refund liability was $0.2 million and $0.2 million, respectively. They are presented within prepaid expenses and other current assets and accrued expenses, respectively, on the Consolidated Balance Sheets.
The Company, in general, warrants its products against certain defects in material and workmanship when used as designed, for a period of up to one year. The Company does not sell extended warranties.
Contract Balances
Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date on contracts with customers. Contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been met, and therefore, revenue has not been recognized. The Company had no contract asset balances, but had contract liability balances of $0.5 million and $0.4 million at September 30, 2021 and June 30, 2021, respectively, located in Accounts Payable in the Consolidated Balance Sheets.
Disaggregation of Revenue
The Company operates in two reportable segments: North America and International. ASC Topic 606 requires further disaggregation of an entity’s revenue. In the following table, the Company's net sales by shipping origin are disaggregated accordingly for the three months ended September 30, 2021 and 2020 (in thousands):
Three Months Ended
9/30/20219/30/2020
North America
United States$32,020 $24,337 
Canada & Mexico1,789 1,647 
33,809 25,984 
International
Brazil19,203 14,908 
United Kingdom4,968 4,995 
China1,618 1,581 
Australia & New Zealand1,916 1,943 
27,705 23,427 
Total Sales$61,514 $49,411 

Note 4:    Recent Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." ASU 2018-14
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removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and added additional disclosures. The Company adopted this ASU on July 1, 2021. The amendments in ASU 2018-14 must be applied on a retrospective basis. The adoption of this pronouncement did not have a material impact on the Company's consolidated financial statements.
In December 2019, FASB issued ASU 2019-12, Income Taxes (Topic 740). The amendments in this update simplify the accounting for income taxes by removing the following exceptions:
a) Exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income)
b) Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment
c) Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary
d) Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

The amendments in this update also simplify the accounting for income taxes by doing the following:

a) Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax. Requiring that an entity evaluate when a step up in the tax basis of
goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction.
b) Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both
not subject to tax and disregarded by the taxing authority.
c) Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.
d) Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.

The Company adopted the amendments in this update on July 1, 2021 without a material impact on its consolidated financial statements.
Recently Issued Accounting Standards not yet adopted:
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The amendments in this Update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of)
reference rate reform on financial reporting. Optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this Update apply to contract modifications that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). The Company currently has no hedging type contracts or others tied to reference rates where this standard would have a material impact to the Company's accounting. The first amendment to the amended and restated loan and security agreement with TD Bank dated September 17, 2020 increased the maximum interest charged on the Line of Credit from and annual interest rate of 2.25% plus LIBOR to 3.50% plus LIBOR, but ultimately our interest rate is capped accordingly in this agreement. The Company does not expect the adoption of this standard to have a material impaction on its consolidated financial statements.


In November 2019, FASB issued ASU 2019-10, which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates of certain major new accounting standards. Of those standards affected
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the following is the only one not yet implemented by the Company. Financial Instruments Credit Losses ASU 2016-13 (ASC 326) and subsequent amendment to the guidance, ASU 2018-19 in November 2018. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. The amendment will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2018-19 clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption was permitted for annual periods beginning after December 15, 2018, and interim periods therein. This pronouncement was extended for Small Reporting Companies and for the Company beginning July 1, 2022. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
Note 5:    Leases
Operating lease cost amounted to $0.7 million and $0.6 million for three months period ended September 30, 2021 and 2020. As of September 30, 2021, the Company’s right-of-use assets, lease obligations and remaining cash commitment on these leases (in thousands):
Right-of-Use
Assets		Operating Lease
Obligations		Remaining Cash
Commitment
Operating leases6,490 $6,619 $7,936 
The Company has other operating lease agreements with commitments of less than one year or that are not significant. The Company elected the practical expedient option and as such, these lease payments are expensed as incurred. The Company’s weighted average discount rate and remaining term on lease liabilities is approximately 9.0% and 4.9 years. As of September 30, 2021, the Company’s financing leases are de minimis. The foreign exchange impact affecting the operating leases are de minimis.
In September 2021, the Company entered into a six year lease in China for 100,682 square feet and recorded a right of use asset for $2.6 million. The facility is expected to be operational by the end of 2021. In July, Starrett UK leased space to another company for annual rent of $0.2 million and incremental applicable service charges. The lease is a 20 year agreement with a contract review in 2026. The fees are recorded in Other Income in the Company's Consolidated Statement of Operations.
At September 30, 2021, the Company had the following fiscal year minimum operating lease commitments (in thousands)
Three Months Ended September 30, 2021Operating Lease
Commitments
2022 (Remainder of year)$1,727 
20231,656 
20241,523 
20251,166 
20261,013 
Thereafter850 
Subtotal$7,936 
Imputed interest(1,316)
Total6,619 

Note 6:    Stock-based Compensation

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On September 5, 2012, the Board of Directors adopted The L.S. Starrett Company 2012 Long Term Incentive Plan (the “2012 Stock Plan”). The 2012 Stock Plan was approved by shareholders on October 17, 2012, and the material terms of its performance goals were re-approved by shareholders at the Company’s Annual Meeting held on October 18, 2017. The 2012 Stock Plan permits the granting of the following types of awards to officers, other employees and non-employee directors: stock options; restricted stock awards; unrestricted stock awards; stock appreciation rights; stock units including restricted stock units; performance awards; cash-based awards; and awards other than previously described that are convertible or otherwise based on stock. The 2012 Stock Plan provides for the issuance of up to 500,000 shares of common stock.

Options granted vest in periods ranging from one year to three years and expire ten years after the grant date. Restricted stock units (“RSU”) granted generally vest from one year to three years. Vested restricted stock units will be settled in shares of common stock. As of September 30, 2021, there were 7,500 stock options and 135,582 restricted stock units outstanding. There were 22,401 shares available for grant under the 2012 Stock Plan as of September 30, 2021.
For stock option grants, the fair value of each grant is estimated at the date of grant using the Binomial Options pricing model. The Binomial Options pricing model utilizes assumptions related to stock volatility, the risk-free interest rate, the dividend yield, and employee exercise behavior. Expected volatilities utilized in the model are based on the historic volatility of the Company’s stock price. The risk-free interest rate is derived from the U.S. Treasury Yield curve in effect at the time of the grant. The expected life is determined using the average of the vesting period and contractual term of the options (Simplified Method).
No stock options were granted during the three months ended September 30, 2021 and 2020.
The weighted average contractual term for stock options outstanding as of September 30, 2021 was 1.25 years.  The aggregate intrinsic value of stock options outstanding as of September 30, 2021 was less than $0.1 million. Stock options exercisable as of September 30, 2021 were 7,500 shares. In recognizing stock compensation expense for the 2012 Stock Incentive Plan, management has estimated that there will be no forfeitures of options.
The Company accounts for stock options and RSU awards by recognizing the expense of the grant date fair value ratably over vesting periods generally ranging from one year to three years. The related expense is included in selling, general and administrative expenses.
There were no RSU awards granted during the three months ended September 30, 2021. There were 114,221 RSUs settled, and 11,174 RSUs forfeited during the three months ended September 30, 2021.  The aggregate intrinsic value of RSU awards outstanding as of September 30, 2021 was $1.7 million. All awards vesting in the quarter ending of September 30, 2021 have been issued and settled.
On February 5, 2013, the Board of Directors adopted The L.S. Starrett Company 2013 Employee Stock Ownership Plan (the “2013 ESOP”). The purpose of the plan is to supplement existing Company programs through an employer funded individual account plan dedicated to investment in common stock of the Company, thereby encouraging increased ownership of the Company while providing an additional source of retirement income.  The plan is intended as an employee stock ownership plan within the meaning of Section 4975 (e) (7) of the Internal Revenue Code of 1986, as amended. U.S. employees who have completed a year of service are eligible to participate.
Compensation expense related to all stock-based plans for the three-month periods ended September 30, 2021 and 2020 was $0.1 million, and $0.3 million, respectively. As of September 30, 2021, there was $2.2 million of total unrecognized compensation costs related to outstanding stock-based compensation arrangements. Of this cost, $1.7 million relates to performance based RSU grants that are not expected to be awarded. The remaining $0.5 million is expected to be recognized over a weighted average period of 1.5 years.
Note 7:    Inventories
Inventories consist of the following (in thousands):
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9/30/20216/30/2021
Raw material and supplies$29,123 $29,271 
Goods in process and finished parts15,863 16,096 
Finished goods36,613 37,344 
81,599 82,711 
LIFO Reserve(20,401)(22,139)
$61,198 $60,572 

Of the Company’s $61.2 million and $60.6 million total inventory at September 30, 2021 and June 30, 2021, respectively, the $20.4 million and $22.1 million LIFO reserves belong to the U.S. Precision Tools and Saws Manufacturing “Core U.S.” business. The Core U.S. business total inventory was $27.3 million on a FIFO basis and $6.9 million on a LIFO basis at September 30, 2021. The Core U.S. business had total Inventory, on a FIFO basis, of $27.8 million and $5.7 million on a LIFO basis as of June 30, 2020. The use of LIFO, as compared to FIFO, resulted in a $1.7 million increase in cost of sales for the goods sold in the period ending September 30, 2021 compared to $0.5 million increase in the three months ending September 30, 2020.
Note 8:    Goodwill and Intangible Assets

The Company concluded there was no triggering events in fiscal 2021 nor in the Three Months Ended September 30, 2021 and no impairment was recorded during that time.
The Company will continue to perform an annual assessment of goodwill associated with its purchase of a private software company. If future results significantly vary from current estimates, related projections, or business assumptions due to changes in industry or market conditions, the Company may be required to perform an impairment analysis prior to our annual test date if a triggering event is identified.
Amortizable intangible assets consist of the following (in thousands):
9/30/20216/30/2021
Trademarks and trade names2,070 2,070 
Completed technology2,010 2,010 
Customer relationships630 630 
Software development10,534 10,244 
Gross intangible assets15,244 14,954 
Accumulated amortization and impairment(10,401)(10,066)
Net intangible assets$4,843 $4,888 
Amortizable intangible assets are being amortized on a straight-line basis over the period of expected economic benefit.
The estimated useful lives of the intangible assets subject to amortization range between 5 years for software development and 20 years for some trademark and trade name assets. The estimated aggregate amortization expense for the remainder of fiscal 2021 and for each of the next 5 years and thereafter, is as follows (in thousands):
2022 remaining$1,048 
20231,211 
2024940 
2025781 
2026571 
2027132 
Thereafter160 
Total net balance$4,843 
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Note 9:    Pension and Post-retirement Benefits
The Company has two defined benefit pension plans, one for U.S. employees and another for U.K. employees.  The Company has a postretirement medical and life insurance benefit plan for U.S. employees. The Company also has defined contribution plans.
The U.K. defined benefit plan was closed to new entrants in fiscal 2009.
On December 21, 2016, the Company amended the U.S. defined benefit pension plan to freeze benefit accruals effective December 31, 2016. Consequently, the Plan is closed to new participants and current participants will no longer earn additional benefits after December 31, 2016.
Net periodic benefit costs for the Company's defined benefit pension plans are located in Other Income except (in the table below) for service cost. Service cost are in cost of sales and selling, general and administrative. Net periodic benefit costs consist of the following (in thousands):
Three Months Ended
9/30/20219/30/2020
Service cost$— $— 
Interest cost1,033 1,113 
Expected return on plan assets(1,100)(1,108)
Amortization of net loss14 13 
$(53)$18 
Net periodic benefit costs for the Company's Postretirement Medical Plan consists of the following (in thousands):
Three Months Ended
9/30/20219/30/2020
Service cost$9 $21 
Interest cost12 51 
Amortization of prior service credit(368)(134)
Amortization of net loss47 42 
$(300)$(20)
For the three month period ended September 30, 2021, the Company contributed zero in the U.S. and $0.3 million in the UK pension plans. Based upon the actuarial valuations performed on the Company’s defined benefit plans as of June 30, 2021, the contribution for fiscal 2022 for the U.S. plans would require a contribution of $5.6 million and the U.K. plan would require one of $1.0 million However, as a result of the American Rescue Plan Act of 2021, the minimum required company contribution for the U.S. Plan in fiscal 2022 was reduced from $5.6 million to $0.6 million. The Company feels that government regulation is only a small part of deciding the pension funding, and as a result, intends to contribute more than the federal requirement.
The Company’s pension plans use fair value as the market-related value of plan assets and recognize net actuarial gains or losses in excess of ten percent (10)% of the greater of the market-related value of plan assets or of the plans’ projected benefit obligation in net periodic (benefit) cost as of the plan measurement date. Net actuarial gains or losses that are less than 10% of the thresholds noted above are accounted for as part of accumulated other comprehensive loss.
Note 10:     Debt
Debt is comprised of the following (in thousands):

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9/30/20216/30/2021
Short-term and current maturities
Loan and Security Agreement (Line of Credit)12,409 9,153 
Loan and Security Agreement (Term Loan)1,494 1,509 
Brazil Loans8,094 5,297 
21,997 15,959 
Long-term debt (net of current portion)
Loan and Security Agreement (Term Loan)5,540 6,010 
$27,537 $21,969 

On June 25, 2020, the Borrowers and TD Bank entered into an amendment and restatement (the “Amendment and Restatement”) of the Loan Agreement. The Amendment and Restatement waived the fixed charge coverage ratio for the quarter ended June 30, 2020. In addition, the Amendment and Restatement clarifies that certain non-cash adjustments to the definition of EBITDA are permitted under the Loan Agreement, as amended. In addition, the Amendment and Restatement increases the permitted borrowings from a foreign bank from $5.0 million to $15.0 million and permits the Company to draw the remainder of the outstanding balance under the Loan Agreement.

Pursuant to the terms of the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of the Fixed Charge Coverage Ratio until September 30, 2021 and (ii) establishment of a new minimum cumulative EBITDA and minimum liquidity covenants in lieu thereof. TD Bank updated its security interests in the Company’s U.S. based assets, increased the maximum interest charged on the Line Of Credit from and annual interest rate of 2.25% plus LIBOR to 3.50% plus Libor, and amended the borrowing base for the line of credit from 80% of Qualified AR and 50% of the lower of Cost or Market of US inventory values to 80% of qualified AR plus 85% of the Net Orderly Liquidation Value (NOLV) of US Inventory plus 62.5% of total appraised US real estate values. As a result of this change, the Company is projected to maintain its current borrowing capacity of $25,000,000 under the Line of Credit. The Company underwent a series of appraisals and field exams in all US locations as part of restructuring this agreement and will provide additional reporting supporting the borrowing base and covenants certifications. This minimum adjusted EBITDA covenant was based on the Company’s plan for a slow pandemic recovery throughout FY21 and the impact of the Company’s restructuring plan initiatives. The Company has applied certain proceeds from the sale of US real estate assets against the principle balance of the term loans under the TD Bank loan agreement. The Company will also apply certain proceeds from certain future sales against the principle balance of the term loans under the TD Bank loan agreement. The Agreement has reverted to the existing covenant package for the quarter ending September 30, 2021 and every quarter thereafter. The Company was compliant with the minimum liquidity requirement and the minimum adjusted cumulative EBITDA required bank covenants as of September 30, 2021.
On December 31, 2019, the Company entered into the Tenth Amendment of its Loan and Security Agreement (“Tenth Amendment”). Under the revised agreement, the credit limit for the Revolving Loan was increased from $23.0 million to $25.0 million. In addition, the Company entered into a new $10.0 million 5-year Term Loan with a fixed interest rate of 4.0%. The new Term Loan will require interest only payments for 12 months and will convert to a term loan requiring both interest and principal payments commencing January 1, 2021. Also, under the Tenth Amendment, the credit limit for external borrowing was increased from $2.5 million to $5.0 million.
Total debt increased $5.6 million during the three months ending September 30, 2021.  Availability under the Line of Credit remains subject to a borrowing base comprised of accounts receivable and inventory. The Company believes that the borrowing base will consistently produce availability under the Line of Credit of $25.0 million. A 0.25% commitment fee is charged on the unused portion of the Line of Credit.
The Company’s Brazilian subsidiary incurs short-term loans with local banks in order to support the Company’s strategic initiatives. The loans are backed by the entity’s US dollar denominated export receivables. The Company’s Brazilian subsidiary has the following loans of September 30, 2021 (in thousands):
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Lending InstitutionInterest RateBeginning DateEnding DateOutstanding Balance
Bradesco2.37 %December 2020December 2021$595 
Bradesco4.74 %December 2020December 2021551 
Santander5.98 %February 2021February 20221,250 
Brazil Bank2.80 %May 2021May 20221,398 
Bradesco1.88 %July 2021July 20221,300 
Bradesco2.05 %August 2021July 2022400 
Santander2.15 %August 2021July 20221,200 
Brazil Bank2.10 %August 2021August 20221,400 
$8,094 

Note 11:     Income Taxes

The Company is subject to U.S. federal income tax and various state, local, and foreign income taxes in numerous jurisdictions. The Company’s domestic and foreign tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to the Company’s interpretation of applicable tax laws in the jurisdictions in which it files.

The Company provides for income taxes on an interim basis based on an estimate of the effective tax rate for the year. This estimate is reassessed on a quarterly basis. Discrete tax items are accounted for in the quarterly period in which they occur.

On December 22, 2017, the Tax Cuts and Jobs Act was enacted in the United States. The Act reduces the U.S. federal corporate tax rate from a graduated rate of 35% to a flat rate of 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Beginning in fiscal 2019, the Company incorporated certain provisions of the Act in the calculation of the tax provision and effective tax rate, including the provisions related to the Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Base Erosion Anti Abuse Tax (“BEAT”), as well as other provisions, which limit tax deductibility of expenses.

The GILTI provisions are expected to have the most significant impact to the Company. Under the new law, U.S. taxes are imposed on foreign income in excess of a deemed return on tangible assets of its foreign subsidiaries. In general, this foreign income will effectively be taxed at an additional 10.5% tax rate reduced by any available current year foreign tax credits. The ability to benefit foreign tax credits may be limited under the GILTI rules as a result of the utilization of net operating losses, foreign sourced income and other potential limitations within the foreign tax credit calculation.

In July 2020, the IRS issued final regulations and additional proposed regulations that address the application of the high-taxed exclusion from GILTI. Under these regulations, the Company can make an annual election to exclude from its GILTI inclusion, income from its foreign subsidiaries that’s effective income tax rate exceeds 18.9% for that year. The regulations must be applied for tax years beginning after July 23, 2020 but companies have the option to apply retroactively for tax years beginning after December 31, 2017 and before July 23, 2020. In the first quarter of fiscal 2021 the Company recognized a discrete tax benefit of ($2.7) million related to the impact of electing to apply the high-tax exclusion retroactively for fiscal year 2019 and fiscal year 2020.

The tax expense for the first quarter of fiscal 2022 was $1.1 million on a profit before tax of $4.4 million (an effective tax rate of 26%). This was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by discrete tax benefits recognized from excess stock compensation deductions, tax credits and permanent deductions generated from research expenses. The tax expense for the first quarter of fiscal 2021 was a benefit of $(2.3) million on a profit before tax of $1.8 million (an effective tax rate of (124)%). Before the discrete benefits relating to legislation enacted during the first quarter in the amount of ($2.7) million related to the impact of the GILTI high-tax exclusion and ($0.2) million related to the impact of the increase in UK corporate tax rate on the net deferred tax asset, tax expense was $0.7 million or 36% of pre-tax income. This was higher than the U.S. statutory tax rate
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of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by tax credits and permanent deductions generated from research expenses.

U.S. Federal tax returns for years prior to fiscal 2018 are generally no longer subject to review by tax authorities; however, tax loss carryforwards from earlier years are still subject to adjustment. As of September 30, 2021, the Company has substantially resolved all open income tax audits and there were no other local or federal income tax audits in progress. In international jurisdictions including Australia, Brazil, Canada, China, Germany, Mexico, New Zealand, Singapore and the UK, which comprise a significant portion of the Company’s operations, the years that may be examined vary by country. The Company’s most significant foreign subsidiary in Brazil is subject to audit for the calendar years 2015 – present. During the next twelve months, it is possible there will be a reduction of less than $0.1 million in long-term tax obligations due to the expiration of the statute of limitations on prior year tax returns.

Accounting for income taxes requires estimates of future benefits and tax liabilities. Due to the temporary differences in the timing of recognition of items included in income for accounting and tax purposes, deferred tax assets or liabilities are recorded to reflect the impact arising from these differences on future tax payments. With respect to recorded tax assets, the Company assesses the likelihood that the asset will be realized by addressing the positive and negative evidence to determine whether realization is more likely than not to occur. If realization is in doubt because of uncertainty regarding future profitability, the Company provides a valuation allowance related to the asset to the extent that it is more likely than not that the deferred tax asset will not be realized. Should any significant changes in the tax law or the estimate of the necessary valuation allowance occur, the Company would record the impact of the change, which could have a material effect on the Company’s financial position.

No valuation allowance has been recorded for the Company’s U.S. federal and foreign deferred tax assets related to temporary differences included in taxable income. While the Company continues to believe that forecasted future taxable income provide sufficient evidence to, more likely than not, support the realization of the tax benefits provided by those differences; the impact of COVID-19 may significantly impact its ability to forecast future pre-tax earnings in certain jurisdictions. If its forecasts are significantly impacted, the Company may need to record a valuation allowance on some or all its deferred tax assets as soon as the current fiscal year end.

In the U.S., a partial valuation allowance has been provided for foreign tax credit carryforwards due to the uncertainty of generating sufficient foreign source income to utilize those credits in the future and certain state net operating loss carryforwards that will expire in the near future unutilized.

Note 12:     Contingencies
The Company is involved in certain legal matters, which arise, in the normal course of business. These matters are not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.
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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Use of Non-U.S. GAAP Financial Measures

In "Management's discussion and analysis on financial condition and results of operations" in this quarterly report on Form 10-Q, we discuss non-U.S. GAAP financial measures related to currency-neutral sales, as well as adjusted operating income.

We present these non-U.S. GAAP financial measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by eliminating items that we do not believe are indicative of our core operating performance. Such non-U.S. GAAP financial measures assist investors in understanding the ongoing operating performance of the Company by presenting financial results between periods on a more comparable basis. Such measures should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Currency-neutral sales are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations. Adjusted operating income adjusts for restructuring costs and the gain on the sale of assets that are reflected in one period but not the other in order to show comparative operational performance. We include a reconciliation of currency-neutral revenues and adjusted operating income to its comparable U.S. GAAP financial measures.

References to currency-neutral sales and adjusted operating income should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable to similarly titled non U.S GAAP financial measures used by other companies. In evaluating these non-U.S. GAAP financial measures, investors should be aware that in the future we may incur expenses or be involved in transactions that are the same as or similar to some of the adjustments in this presentation. Our presentation of non-U.S. GAAP financial measures should not be construed to imply that its future results will be unaffected by any such adjustments. Non-U.S. GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under U.S. GAAP.

Please see Note 2 regarding segment results of operations. The Company’s business is aggregated into two reportable segments based on geography of operations: North American Operations and International Operations. Segment income is measured for internal reporting purposes by excluding corporate expenses, which are included in the unallocated column in the following tables as well as Note 2. These tables above are included to better explain our consolidated operational performance by showing more detail by business segment and reconciling U.S. GAAP operating income and adjusted operating income.

Three months ended September 30, 2021 and September 30, 2020

The following table represents key results of operations on a consolidated basis for the three months ended September 30, 2021 and September 30, 2020:
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Three Months Ended
(Amounts in thousands)9/30/20219/30/2020$ Change favorable (unfavorable)% Change
Net sales$61,514 $49,411 $12,103 24.5 %
Gross margin20,145 15,572 4,573 29.4 %
% of net sales32.7 %31.5 %
Selling, general and administrative expenses16,012 13,391 (2,621)(19.6)%
% of net sales26.0 %27.1 %
Restructuring charges— 346 346 100.0 %
Operating income4,133 1,835 2,298 125.2 %
Other income (expense), net226 (1)227 227.0 %
Income before income taxes4,359 1,834 2,525 137.7 %
Income tax expense (benefit)1,127 (2,282)(3,409)(149.4)%
Net income$3,232 $4,116 (884)(21.5)%
U.S. GAAP to Non-U.S. GAAP reconciliation:
Three Months Ended
(Amounts in thousands)9/30/20219/30/2020$ Change favorable (unfavorable)% Change
Operating income as reported$4,133 $1,835 $2,298 125 %
Removing restructuring charges — (346)(346)— 
Non-U.S. GAAP adjusted operating income$4,133 $2,181 $1,952 90 %
% of net sales6.7 %4.4 %230 basis points


Key Results by Reporting Segment

Three Months Ended September 30, 2021Three Months Ended September 30,2020
(Amounts in thousands)North AmericaInternationalCorporateTotalNorth AmericaInternationalCorporateTotal
Net sales$33,809 $27,705 $— $61,514 $25,984 $23,427 $— $49,411 
Gross margin9,535 10,610 — 20,145 6,838 8,734 — 15,572 
% of net sales28.2 %38.3 %32.7 %26.3 %37.3 %31.5 %
Selling, general and administrative expenses7,034 7,027 1,951 16,012 5,653 5,904 1,834 13,391 
% of net sales20.8 %25.4 %26.0 %21.8 %25.2 %27.1 %
Restructuring charges— — — — 346 — — 346 
Operating income2,501 3,583 (1,951)4,133 839 2,830 (1,834)1,835 
% of net sales7.4 %12.9 %6.7 %3.2 %12.1 %3.7 %





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Non-U.S. GAAP Measure Reconciliation: Fiscal 2022 Q1 "Currency Neutral" Net Sales

Three months ended
(Amounts in Thousands)9/30/20219/30/2020$ Change% Change
Net Sales, as reported61,514 49,411 12,103 24.5 %
Currency Neutralizing Adjustment*(1,093)— (1,093)(2.2)%
Q1 FY22 Currency Neutral Net Sales 60,421 49,411 11,010 22.3 %
North America Net Sales, as reported33,809 25,984 7,825 30.1 %
Currency Neutralizing Adjustment*(137)— (137)(0.5)%
Q1FY22 Currency Neutral North America Net Sales33,672 25,984 7,688 29.6 %
International Net Sales, as reported27,705 23,427 4,278 18.3 %
Currency Neutralizing Adjustment*(956)— (956)(4.1)%
Q1FY22 Currency Neutral International Net Sales26,749 23,427 3,322 14.2 %
*"Currency Neutralizing Adjustment" = Change when converting Q1FY22 sales in non USD functional currencies at the same exchange rates used in the comparison period
Overview
As the Company closed fiscal 2021, order intake and sales volume across its portfolio were equal to or exceeding pre-pandemic levels. This trend has continued into the September quarter and the Company expects continuation in fiscal 2022. For the three months ending September 30, 2021 and September 30, 2020 sales were $61.5 million and $49.4 million, respectively, a $12.1 million or 24.5% improvement. As the United States Dollar has weakened against the Brazilian currency during the comparison period, currency neutral sales would be $60.4 million, with the percentage increase in sales slightly lower at 22.3%. Consolidated gross margins are improved during the same period, from 31.5% of sales in the period ending September 30, 2020 to 32.7% of sales in the period ending September 30, 2021. This is the positive impact of our restructuring efforts completed in fiscal 2021, which are partially offset by pandemic related supply chain challenges, raw material price increases, and an increase in wages related to labor shortages in North America. The Company expects supply chains issues to continue into calendar year 2022. Selling, General and Administrative expenses have increased overall by $2.6 million, or 19.6% when comparing the quarter ending on September 30, 2020 to the quarter ending on September 30, 2021, largely due to variable selling expenses related to the increase in sales. As a percentage of sales overall, selling, general and administrative expenses have decreased from 27.1% of sales in the quarter ending September 30, 2020 to 26% in the quarter ending on September 30, 2021. In the three months ending September 30, 2021 operating income was $4.1 million, a $2.3 million or 125.2% improvement over September 30, 2020 during which the company reported operating income of $1.8 million.
Net Sales
In the three months ending September 30, 2021 sales were $61.5 million with North America sales of $33.8 million and International of $27.7 million. In the three months ending September 30, 2020 North America sales were $26.0 million and International sales were $23.4 million. North American sales have increased 30.1% and International sales have increased 18.3% in the quarter ending September 30, 2021 when comparing to the first quarter of fiscal 2021. The foreign exchange translation impact on reported sales was favorable in the three months ending September 30, 2021, as compared to being unfavorable during the period ending a year prior. On a currency neutral basis when comparing the two periods, sales in the current period would be $60.4 million or 22.3% higher than the $49.1 million in sales reported for the three months ending September 30, 2020.
Gross Margin
Gross margin of $20.1 million in the three months ending September 30, 2021 is an increase of $4.6 million or 29.4% over the three months ending September 30, 2020 at $15.6 million. In the three months ending September 30, 2021 compared to September 30, 2020, International gross margin improved to $10.6 million, or 38.3% of sales, compared to $8.7 million, or 37.3% of sales. North American gross margin improved to $9.5 million, or 28.2% of sales in the three months ending September 30, 2021 from $6.8 million, or 26.3% of sales in the three months ending September 30, 2020. Improvement in gross margin as a percentage of sales is related to the positive impact of restructuring projects completed in fiscal 2021 and improved factory utilization rates associated with higher volumes. However, those positive impacts have been partially offset by responses to pandemic related supply chain delays and challenges, an increase in wages related to labor shortages in North America, and raw material price increases.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses of $16.0 million in the three months ending September 30, 2021 increased $2.6 million or 19.6% over the three months ending September 30, 2020, excluding $0.3 million of restructuring cost at $13.4 million. The increase in selling, general and administrative expenses is due primarily to some variable selling expenses which are increased commensurate with the increase in sales. Additionally, as a cash conserving measure during the height of the pandemic, salaries and compensation of many selling and administrative employees had been temporarily reduced by up to 20% during the period ending September 30, 2020, and were completely restored during the period ending September 30, 2021. Overall, selling, general and administrative expenses as a percentage of sales improved to 26.0% in the three months ending September 30, 2021 from 27.1% in the three months ending September 30, 2020, with North America decreasing from 21.8% of sales to 20.8% of sales and International increasing to 25.4% of sales from 25.2% of sales during the comparative period.
Income Taxes
In the three months ending September 30, 2021, the tax expense was $1.1 million on a profit before tax of $4.4 million (an effective tax rate of 26%). This was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by discrete tax benefits recognized from excess stock compensation deductions, tax credits and permanent deductions generated from research expenses. In the three months ending September 30, 2020, the tax expense was a benefit of $(2.3) million on a profit before tax of $1.8 million (an effective tax rate of (124)%). Before the discrete benefits relating to legislation enacted during the first quarter in the amount of ($2.7) million related to the impact of the GILTI high-tax exclusion and ($0.2) million related to the impact of the increase in UK corporate tax rate on the net deferred tax asset, tax expense was $0.7 million or 36% of pre-tax income. This was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by tax credits and permanent deductions generated from research expenses.
Net Income
In the three months ending September 30, 2021 net income was $3.2 million or 21.5% lower than net income of $4.1 million in the three months ending September 30, 2020, which had non-recurring income tax benefit of $2.3 million because the first quarter of fiscal 2021 includes a discrete benefit of $2.7 million related to the impact of enacted GILTI legislation.


LIQUIDITY AND CAPITAL RESOURCES
Cash flows (in thousands)Three Months Ended
9/30/20219/30/2020
Cash (used in) provided by operating activities$(5,841)$3,663 
Cash (used in) investing activities(2,624)(1,794)
Cash provided by (used in) financing activities5,711 (4,019)
Effect of exchange rate changes on cash276 253 
Net (decrease) in cash$(2,478)$(1,897)
Net cash flows for the Three Months Ended September 30, 2021 decreased $2.5 million as cash from operations decreased $5.8 million with net income of $3.2 million offset by an increase in accounts receivable of $5.8 million on improved sales and the Company planned $2.9 million increase in inventories due to global supply chain issues. Cash from investing activities decreased $2.6 million as a result of $2.3 million in capital expenditures and $0.3 million in software development while cash provided from financing increased $5.7 million as the Company's borrowed $13.8 million and repaid $8.0 million.
The Company believes it maintains sufficient liquidity and has the resources to fund its operations.  
The Company believes that existing cash and cash expected to be provided by future operating activities are adequate to satisfy its working capital, capital expenditure requirements and other contractual obligations for at least the next 12 months. If the
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Company's expectations are incorrect or the impact from the COVID-19 pandemic worsens then it may need to take advantage of unanticipated strategic opportunities to strengthen our financial position, which could result in material impacts to the Company’s consolidated financial statements in future reporting periods.

On June 25, 2020, the Borrowers and TD Bank entered into an amendment and restatement (the “Amendment and Restatement”) of the Loan Agreement. The Amendment and Restatement waived the fixed charge coverage ratio for the quarter ended June 30, 2020.

Pursuant to the terms of the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of the Fixed Charge Coverage Ratio until September 30, 2021 and (ii) establishment of a new minimum cumulative EBITDA and minimum liquidity covenants in lieu thereof. TD Bank perfected its security interests in the Company’s U.S. based assets, increased the maximum interest charged on the Line Of Credit from an annual interest rate of 2.25% plus Libor to 3.50% plus Libor, and amended the borrowing base for the line of credit from 80% of Qualified AR and 50% of the lower of Cost or Market of US inventory values to 80% of qualified AR plus 85% of the Net Orderly Liquidation Value (NOLV) of US Inventory plus 62.5% of total appraised US real estate values. As a result of this change, the Company is projected to maintain its current borrowing capacity of $25,000,000 under the Line of Credit. The Company underwent a series of appraisals and field exams in all US locations as part of restructuring this agreement. The Company has applied certain proceeds from the sale of US real estate assets against the principle balance of the term loans under the TD Bank loan agreement. The Company will also apply certain proceeds from certain future sales against the principle balance of the term loans under the TD Bank loan agreement. The Agreement has reverted to the existing covenant package for the quarter ending September 30, 2021 and every quarter thereafter. The Company was compliant with the minimum liquidity requirement and the minimum adjusted cumulative EBITDA required bank covenants as of September 30, 2021.

The effective interest rate on the borrowings under the Loan and Security Agreement during the Three Months Ended September 30, 2021 and 2020 was 1.9% and 1.9% respectively.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any material off-balance sheet arrangements as defined under the Securities and Exchange Commission rules.
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
One should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results set forth under Item 1A. “Risk Factors” in our Form 10-K for the year ended June 30, 2021.
ITEM 4.    CONTROLS AND PROCEDURES

The Company's management, under the supervision and with the participation of the Company's President and Chief Executive Officer and Chief Financial Officer, has evaluated the Company's disclosure controls and procedures as of September 30, 2021, and they have concluded that our disclosure controls and procedures were effective as of such date. All information required to be filed in this report was recorded, processed, summarized and reported within the time period required by the rules and regulations of the Securities and Exchange Commission, and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective. There have not been any changes in the Company’s internal control over financial reporting during the first quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.


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PART II.    OTHER INFORMATION
ITEM 1A.    RISK FACTORS

SAFE HARBOR STATEMENT

UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report on Form 10-Q contains forward-looking statements about the Company’s business, competition, sales, expenditures, foreign operations, plans for reorganization, interest rate sensitivity, debt service, liquidity and capital resources, and other operating and capital requirements. In addition, forward-looking statements may be included in future Company documents and in oral statements by Company representatives to securities analysts and investors. The Company is subject to risks that could cause actual events to vary materially from such forward-looking statements. You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results set forth under Item 1A. “Risk Factors” in our Form 10-K for the year ended June 30, 2021. There have been no material changes from the factors disclosed in our Form 10-K for the year ended June 30, 2021.


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ITEM 6.    EXHIBITS
31a
31b
32
101
The following materials from The L. S. Starrett Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (I) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statement of Stockholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE L. S. STARRETT COMPANY
(Registrant)
DateNovember 5, 2021/S/R. Douglas A. Starrett
Douglas A. Starrett - President and CEO (Principal Executive Officer)
DateNovember 5, 2021/S/R. John C. Tripp
John C. Trip - Treasurer and CFO (Principal Accounting Officer)

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