starrett_10q-093012.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended
September 30, 2012
   
OR
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from
 
to
 
 
 
Commission file number
1-367
 
 
THE L. S. STARRETT COMPANY
(Exact name of registrant as specified in its charter)
 
MASSACHUSETTS
 
04-1866480
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
121 CRESCENT STREET, ATHOL, MASSACHUSETTS
01331-1915
(Address of principal executive offices)
(Zip Code)
 
 
Registrant's telephone number, including area code
978-249-3551
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES x    NO o
 
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 x     NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check One):
 
Large Accelerated Filer o    Accelerated Filer x    Non-Accelerated Filer o    Smaller Reporting Company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
YES o    NO x
 
Common Shares outstanding as of
 
 October 31, 2012
 
     
Class A Common Shares
   6,036,114  
     
Class B Common Shares
   756,852  
 
 
1

 
 
THE L. S. STARRETT COMPANY

CONTENTS

     
Page No.
       
Part I.  
Financial Information:
 
       
 
Item 1.
Financial Statements  
       
   
Condensed Consolidated Balance Sheets - September 30, 2012 (unaudited) and June 30, 2012
3
       
   
Condensed Consolidated Statements of Operations - three months ended September 30, 2012 and September 30, 2011 (unaudited)
4
       
    Condensed  Consolidated Statements of Comprehensive Income (Loss) – three months ended September 30, 2012 and September 30, 2011 (unaudited)
5
       
    Condensed Consolidated Statements of Stockholders' Equity - three months ended September 30, 2012 and September 30, 2011(unaudited)
6
       
    Condensed Consolidated Statements of Cash Flows - three months ended September 30, 2012 and September 30, 2011(unaudited)
7
       
    Notes to Unaudited Condensed Consolidated Financial Statements
8-12
       
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
12-13
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
13
       
 
Item 4.
Controls and Procedures
14
     
Part II.  
Other Information:
 
       
 
Item 1A.
Risk Factors
14
       
 
Item 6.
Exhibits
14
       
SIGNATURES    
15
 
 
2

 
 
PART I.        FINANCIAL INFORMATION

ITEM 1.        FINANCIAL STATEMENTS

THE L. S. STARRETT COMPANY
Condensed Consolidated Balance Sheets
(in thousands except share data)
 
   
September 30,
2012
(unaudited)
   
June 30,
2012
 
             
ASSETS
           
Current assets:
           
Cash
  $ 17,261     $ 17,502  
Short-term investments
    6,465       6,282  
Accounts receivable (less allowance for doubtful accounts of $749 and $965, respectively)
    34,153       42,167  
Inventories
    74,413       69,895  
Current deferred income tax asset
    7,319       7,620  
Prepaid expenses and other current assets
    7,374       7,764  
Total current assets
    146,985       151,230  
                 
Property, plant and equipment, net
    53,493       53,597  
Taxes receivable
    3,711       3,814  
Deferred tax asset, net
    29,914       29,842  
Intangible assets, net
    8,647       8,755  
Goodwill
    3,034       3,034  
Other assets
    2,047       1,894  
Total assets
  $ 247,831     $ 252,166  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Notes payable and current maturities
  $ 1,642     $ 1,800  
Accounts payable and accrued expenses
    18,393       20,912  
Accrued compensation
    5,756       7,299  
Total current liabilities
    25,791       30,011  
Deferred tax liabilities
    2,805       2,530  
Other tax obligations
    10,200       10,590  
Long-term debt
    28,995       29,387  
Postretirement benefit and pension liabilities
    52,366       51,810  
Total liabilities
    120,157       124,328  
                 
Stockholders' equity:
               
Class A Common stock $1 par (20,000,000 shares authorized); 6,028,568 outstanding at 9/30/2012 and 6,017,227 outstanding at 6/30/2012
    6,029       6,017  
Class B Common stock $1 par (10,000,000 shares authorized); 763,857 outstanding at 9/30/2012 and 753,307 outstanding at 6/30/2012
    764       753  
Additional paid-in capital
    52,160       51,941  
Retained earnings
    93,631       94,661  
Accumulated other comprehensive loss
    (24,910 )     (25,534 )
Total stockholders' equity
    127,674       127,838  
Total liabilities and stockholders’ equity
  $ 247,831     $ 252,166  
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
 
3

 

THE L. S. STARRETT COMPANY
Condensed Consolidated Statements of Operations
(in thousands except per share data) (unaudited)
 
   
3 Months Ended
 
   
9/30/2012
   
9/30/2011
 
             
Net sales
  $ 56,937     $ 63,384  
Cost of goods sold
    39,248       41,794  
Gross margin
    17,689       21,590  
% of Net sales
    31.1 %     34.1 %
                 
                 
Selling, general and administrative expenses
    18,571       19,663  
                 
Operating (loss)/income
    (882 )     1,927  
                 
Other income
    144       1,824  
                 
Earnings (loss) before income taxes
    (738 )     3,751  
                 
Income tax expense (benefit)
    (387 )     1,502  
                 
Net (loss)/earnings
  $ (351 )   $ 2,249  
                 
                 
                 
Basic and diluted (loss)/earnings per share
  $ (0.05 )   $ 0.33  
                 
Average outstanding shares used in per share calculations:
               
Basic
    6,783       6,740  
Diluted
    6,783       6,755  
                 
Dividends per share
  $ 0.10     $ 0.10  
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
 
4

 
 
THE L. S. STARRETT COMPANY
Condensed Consolidated Statements of Comprehensive Income (Loss)
For the Three Months Ended September 30, 2012 and September 30, 2011
(in thousands) (unaudited)
 
   
3 Months Ended
 
   
9/30/2012
   
9/30/2011
 
             
Net earnings (loss)
  $ (351 )   $ 2,249  
Other comprehensive income (loss), net of tax:
               
Translation gain (loss)
    635       (10,915 )
Pension and postretirement plans
    (11 )     (16 )
Other comprehensive income (loss)
    624       (10,931 )
                 
Total comprehensive income (loss)
  $ 273     $ (8,682 )
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
 
5

 

THE L. S. STARRETT COMPANY
Condensed Consolidated Statements of Stockholders' Equity
For the Three Months Ended September 30, 2012 and September 30, 2011
(in thousands except per share data) (unaudited)
 
    Common Stock 
Outstanding
                                 
     
Class A
     
Class B
    Addi-
tional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other Com-prehensive
Loss
     
Total
 
Balance June 30, 2011
  $ 5,933     $ 801     $ 51,411     $ 96,477     $ (1,961 )   $ 152,661  
Net earnings
                            2,249               2,249  
Other comprehensive loss
                                    (10,931 )     (10,931 )
Dividends ($0.10 per share)
                            (674 )             (674 )
Issuance of stock under ESOP
    10               96                       106  
Stock-based compensation
                    38                       38  
Conversion
    13       (13 )                             -  
Balance September 30, 2011
  $ 5,956     $ 788     $ 51,545     $ 98,052     $ (12,892 )   $ 143,449  
                                                 
Balance June 30, 2012
  $ 6,017     $ 753     $ 51,941     $ 94,661     $ (25,534 )   $ 127,838  
Net loss
                            (351 )             (351 )
Other comprehensive income
                                    624       624  
Dividends ($0.10 per share)
                            (679 )             (679 )
Issuance of stock under ESOP
    8               84                       92  
Issuance of stock under ESPP
            15       94                       109  
Stock-based compensation
                    41                       41  
Conversion
    4       (4 )                             -  
Balance September 30, 2012   $ 6,029     $ 764     $ 52,160     $ 93,631     $ (24,910 )   $ 127,674  
                                                 
Cumulative Balance:
                                               
Translation loss
                                  $ (15,269 )        
Pension and postretirement plans net of taxes
                                    (9,641 )        
                                    $ (24,910 )        

See Notes to Unaudited Condensed Consolidated Financial Statements
 
 
6

 
 
THE L. S. STARRETT COMPANY
Condensed Consolidated Statements of Cash Flows
(in thousands of dollars) (unaudited)

   
3 Months Ended
 
   
9/30/2012
   
9/30/2011
 
             
Cash flows from operating activities:
           
Net (loss)/earnings
  $ (351 )   $ 2,249  
Non-cash operating activities:
               
Depreciation
    2,166       2,305  
Amortization
    368       47  
Other tax obligations
    (280 )     122  
Deferred taxes
    559       (107 )
Unrealized transaction (gain) loss
    1       (20 )
Equity (gain) loss on investment
    (157 )     54  
Working capital changes:
               
Receivables
    8,312       801  
Inventories
    (3,590 )     (5,881 )
Other current assets
    86       (566 )
Other current liabilities
    (4,572 )     (2,520 )
Postretirement benefit and pension obligations
    244       160  
Other
    181       544  
Net cash provided by (used in) operating activities
    2,967       (2,812 )
                 
Cash flows from investing activities:
               
Additions to property, plant and equipment
    (2,304 )     (1,649 )
Net cash used in investing activities
    (2,304 )     (1,649 )
                 
Cash flows from financing activities:
               
Proceeds from short-term borrowings
    -       1,549  
Short-term debt repayments
    (152 )     (9 )
Proceeds from long-term borrowings
    -       137  
Long-term debt repayments
    (395 )     (116 )
Proceeds from common stock issued
    201       106  
Dividends paid
    (679 )     (674 )
Net cash provided by (used in) financing activities
    (1,025 )     993  
                 
Effect of exchange rate changes on cash
    121       (1,656 )
                 
Net decrease in cash
    (241 )     (5,124 )
Cash, beginning of period
    17,502       21,572  
Cash, end of period
  $ 17,261     $ 16,448  
                 
Supplemental cash flow information:
               
                 
Interest paid
  $ 247     $ 68  
Income taxes paid, net
    1,025       1,667  

See Notes to Unaudited Condensed Consolidated Financial Statements
 
 
7

 
 
THE L. S. STARRETT COMPANY
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2012

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

The condensed balance sheet as of June 30, 2012, which has been derived from audited financial statements, and the unaudited interim condensed financial statements have been prepared by The L.S. Starrett Company (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial reporting.  Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements.  These unaudited condensed financial statements, which, in the opinion of management, reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation, should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2012.  Operating results are not necessarily indicative of the results that may be expected for any future interim period or for the entire fiscal year.

As discussed further in Note 3, on November 22, 2011, the Company acquired all the assets of Bytewise Development Corporation.  The results of operations for this acquired business are included in the Company’s results of operations as presented herein since such date.

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, 2012 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. There were no changes in any of the Company’s significant accounting policies during the quarter ended September 30, 2012.

Note 2:  Recent Accounting Pronouncements
 
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04 to amend fair value measurements and related disclosures; the guidance becomes effective on a prospective basis for interim and annual periods beginning after December 15, 2012. This new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between International Financial Reporting Standards (“IFRS”) and U.S. GAAP. The new guidance also changes some fair value measurement principles and enhances disclosure requirements related to activities in Level 3 of the fair value hierarchy. The adoption of this updated authoritative guidance is not expected to have any impact on our consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08 to amend the impairment assessment criteria for goodwill. The guidance permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is then necessary to perform the two-step goodwill impairment test. The more likely than not threshold is defined as having a likelihood of more than 50%. The guidance is effective for the second quarter of fiscal 2013.  The Company is in the process of evaluating whether it will utilize a qualitative approach in its upcoming annual goodwill impairment assessment.
 
Note 3:  Acquisition

On November 22, 2011 a wholly-owned subsidiary of the Company entered into an asset purchase agreement (the “Purchase Agreement”) with Bytewise Development Corporation (“Bytewise”) pursuant to which the wholly-owned subsidiary of the Company purchased all of the assets of Bytewise for $15.4 million in cash plus the assumption of certain liabilities.  The asset purchase was financed through a term loan under the Company’s existing security agreement.  The Purchase Agreement contains customary representations, warranties and covenants.  Under the Purchase Agreement, the former owners of Bytewise will be entitled to a 40% share of any profits from Bytewise’s operations over the next three years so long as they remain employed by the Company.  The Company has accrued for such profit sharing as an expense based on Bytewise’s results of operations since the date of acquisition.
 
 
8

 

Bytewise designs, develops and manufactures non-contact, industrial measurement systems and software that capture the external geometric profile of a product and analyze that data to meet measurement and/or quality control requirements.

The acquisition was accounted for under the acquisition method of accounting.  The total purchase price was allocated to Bytewise’s net tangible assets and identifiable intangible assets based on their estimated fair value as of November 22, 2011.  The allocation of the purchase price is based upon management’s valuation and was finalized in the fourth quarter of fiscal 2012.

The table below presents the allocation of the purchase price to the acquired net assets of Bytewise (in thousands):

Cash
 
$
298
 
Accounts receivable
   
1,897
 
Inventories
   
1,674
 
Other current assets
   
74
 
Intangibles
   
9,300
 
Goodwill
   
3,034
 
Other long-term assets
   
69
 
Accounts payable
   
(379
)
Accrued compensation costs
   
(270
)
Accrued expenses
   
(329
)
Cash paid to sellers   15,368  
 
The allocation for definite-lived amortizable intangible assets acquired include approximately $4.95 million for customer relationships, $1.48 million for trademarks and trade names, $2.0 million for completed technology, $0.6 million for non-compete agreements and $0.26 million for order backlog.

The acquisition was completed on November 22, 2011 and accordingly results of operations from such date have been included in the Company’s Statement of Operations.

Supplemental Pro Forma Information

The following information reflects the Bytewise acquisition as if the transaction had occurred as of the beginning of the Company’s fiscal 2012.  The unaudited pro forma information does not necessarily reflect the actual results that would have occurred had the Company and Bytewise been combined during the periods presented, nor is it necessarily indicative of the future results of operations of the combined companies.

The following table represents select unaudited consolidated pro forma data (in thousands except per share amounts):

   
3 Months Ended
 
   
9/30/2011
 
       
Unaudited consolidated pro forma revenue
  $ 65,572  
Unaudited consolidated pro forma net earnings (loss)
  $ 2,175  
Unaudited consolidated pro forma diluted earnings (loss) per share
  $ 0.32  
 
Note 4: Inventories

          Inventories consist of the following (in thousands):

   
9/30/2012
   
6/30/2012
 
Raw material and supplies
  $ 35,240     $ 35,803  
Goods in process and finished parts
    25,070       24,044  
Finished goods
    41,585       37,553  
      101,895       97,400  
LIFO Reserve
    (27,482 )     (27,505 )
Inventories
  $ 74,413     $ 69,895  

 
9

 
 
LIFO inventories were $19.9 million and $19.7 million at September 30, 2012 and June 30, 2012, respectively, or approximately $27.5 million less than their respective balances if costed on a FIFO basis.  The use of LIFO, as compared to FIFO, had no effect on the cost of sales for the three months ended September 30, 2012 compared to a $0.6 million increase in cost of sales for the three months ended September 30, 2011.

Note 5: Goodwill and Intangibles

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

 
       9/30/2012
 
6/30/2012
Non-Compete agreement
600
 
600
 
Trademarks and trade names
1,480
 
1,480
 
Completed technology
2,616
 
2,292
 
Customer relationships
4,950
 
4,950
 
Backlog
260
 
260
 
Other intangible assets
976
 
6,276
 
Total
10,882
 
15,858
 
Accumulated amortization
(2,235)
 
(7,103)
 
Total net balance
8,647
 
8,755
 

Amortizable intangible assets are being amortized on a straight-line basis over the period of expected economic benefit.

The estimated useful lives of the intangible assets subject to amortization are 14 years for trademarks and trade names, 8 years for non-compete agreements, 10 years for completed technology,  8 years for customer relationships and .5 years for backlog.

The estimated aggregate amortization expense for the remainder of fiscal 2013, for each of the next five years and thereafter, is as follows (in thousands):

2013 (Remainder of year)
  $ 802  
2014
  $ 1,076  
2015
  $ 1,076  
2016
  $ 1,061  
2017
  $ 1,054  
Thereafter
  $ 3,578  
 
Note 6: Pension and Post Retirement Benefits

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

   
Three Months Ended
 
   
9/30/2012
   
9/30/2011
 
Service cost
  $ 738     $ 575  
Interest cost
    1,494       1,664  
Expected return on plan assets
    (1,602 )     (1,652 )
Amortization of prior service cost
    59       59  
Amortization of net gain
    -       (1 )
    $ 689     $ 645  

Net periodic benefit costs for the Company's postretirement medical plan and life insurance consists of the following (in thousands):

   
Three Months Ended
 
   
9/30/2012
   
9/30/2011
 
Service cost
  $ 128     $ 96  
Interest cost
    136       156  
Amortization of prior service credit
    (279 )     (226 )
Amortization of accumulated loss
    40       5  
    $ 25     $ 31  

 
10

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

Note 7: Debt

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

 
 
9/30/2012
   
6/30/2012
 
Notes payable and current maturities
           
Loan and Security Agreement
  $ 1,304     $ 1,289  
Short-term foreign credit facility
    70       231  
Capitalized leases
    268       280  
    $ 1,642     $ 1,800  
Long-term debt
               
Loan and Security Agreement
    28,655     $ 28,985  
Capitalized leases
    340       402  
      28,995       29,387  
    $ 30,637     $ 31,187  

The Company completed the negotiations for an amended Loan and Security Agreement (Line of Credit) and executed the new agreement as of April 25, 2012.  The new Line of Credit is effective for three years commencing April 25, 2012 and expires on April 30, 2015.  The new agreement continues the previous line of $23.0 million and interest rate of LIBOR plus 1.5%.  On September 7, 2012, the Company completed another amendment to change the financial covenants.  The material financial covenants of the amended Loan and Security Agreement are: 1) funded debt to EBITDA, excluding non-cash and retirement benefit expenses, cannot exceed 1:45 to 1, 2) annual capital expenditures cannot exceed $15.0 million, 3) maintain a Debt Service Coverage Rate of a minimum of 1.25 to 1 and 4) maintain consolidated cash plus liquid investments of not less than $10.0 million at any time.  
  
The effective interest rate on the Line of Credit under the Loan and Security Agreement for the first quarter of fiscal 2013 and 2012 was 1.9% and 2.1%, respectively.
 
On November 22, 2011, in conjunction with the Bytewise acquisition, the Company entered into a new $15.5 million term loan (the “Term Loan”) under the existing Loan and Security Agreement with TD Bank N.A.  The term loan is a ten year loan bearing a fixed interest rate of 4.5% and is payable in fixed monthly payments of principal and interest of $160,640.  The term loan which had a balance of $14.5 million at September 30, 2012, is subject to the same financial covenants as the Loan and Security Agreement.

The Company was in compliance with its debt covenants as of September 30, 2012.

Note 8: Income Tax

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

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

The effective tax rate for the first quarter of fiscal 2013 was 52.4%.  The effective tax rate for the first quarter of 2012 was 40.0%.  Discrete items impacting the fiscal 2013 effective tax rate included a reduction in the Company’s net tax liability for uncertain tax positions of $91,000. The Company has identified no new uncertain tax positions during the first quarter ended September 30, 2012 for which it is currently likely that the total amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.
 
 
11

 

No valuation allowance has been recorded for the Company’s domestic federal net operating loss (NOL) carry forwards. The Company continues to believe that due to forecasted future taxable income and certain tax planning strategies available, it is more likely than not that it will be able to utilize the federal NOL carry forwards.

Note 9:  Contingencies

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

Note 10:  Subsequent Events

On September 5, 2012 the Board of Directors (the “Board”) adopted The L.S. Starrett Company 2012 Long Term Incentive Plan (the “Plan”).  The Plan will be administered by the Compensation Committee of the Board.  Under the Plan, stock options, stock appreciation rights, restricted stock, unrestricted stock, performance awards (in cash or stock) and stock units may be granted to key employees, directors, consultants and advisors of the company.  A total of 500,000 shares of Class A Stock may be issued under the Plan, as adjusted for any stock dividend, stock split or combination of shares (including a reverse stock split), recapitalization or other change in the Company’s capital structure.  The Plan provides that the maximum number of shares  which may be granted to any participant during any fiscal year will be 150,000 and the maximum amount payable to any person in any fiscal year as cash awards will be $2 million.  The plan became effective as of October 17, 2012 when it was approved by shareholders.

On October 17, 2012 The L.S. Starrett Company 2012 Stock Purchase Plan, which authorizes employees to subscribe for up to 500,000 shares of Company stock over the ensuing five years, was approved by shareholders.
 
 
ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Three months Ended September 30, 2012 and September 30, 2011

Overview
 
The first quarter of fiscal 2013 was a very challenging environment globally. U.S. election inertia, European debt concerns, and China and Brazil sluggishness contributed to a significant revenue shortfall in the period. This combined with unfavorable currency exchange rates negatively impacted the Company’s operating results, particularly in its international businesses.  Net sales declined $6.5 million or 10% from $63.4 million in fiscal 2012 to $56.9 million in fiscal 2013.  Operating income declined $2.8 million as a $3.9 million reduction in gross margin was only partially offset by $1.1 million savings in selling, general and administrative expenses.  The company incurred a net loss of $0.4 million or $0.05 per share in fiscal 2013 compared to net earnings of $2.2 million or $0.33 per share in fiscal 2012.

Net Sales

North American sales increased a modest $0.3 million from $29.9 million in fiscal 2012 to $30.2 million in fiscal 2013.  Bytewise, acquired in the second quarter of fiscal 2012, contributed a $2.7 million in sales, which offset saw and granite product revenue declines of $1.5 and $0.5 million, respectively.  International sales declined $6.8 million or 20% from $33.5 million in fiscal 2012 to $26.7 million in fiscal 2013.  Unfavorable currency exchanges rates represented $4.9 million or 72% of the sales deficit.  The Brazilian Real accounted for most of the foreign exchange decline as it weakened 27% against the US dollar.  In addition, a July 1, 2012 product price increase in Brazil influenced a shift in revenue from the first quarter of fiscal 2013 to the fourth quarter of fiscal 2012.  Brazil sales in local currency were down 10%.

Gross Margin

Gross margins declined $3.9 million with volume and margin erosion representing $2.2 million and $1.7 million, respectively.  North American margins improved $0.4 million as gains in precision tools and the incremental profit from the Bytewise acquisition offset a decrease in the saw business.  International gross margins declined $4.3 million with volume and margin erosion representing $2.5 million and $1.8 million, respectively.  Unfavorable exchange rates, particularly in Brazil, represented $1.4 million or 80% of the margin erosion.
 
 
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Selling, General and Administrative Expenses

Selling, general and administrative expenses declined $1.1 million or 6%.  North American expenses increased $0.7 million as savings in professional fees were offset by the inclusion of $1.0 million of Bytewise expenses.  International expenses declined $1.8 million with currency exchange rates representing $1.5 million or 80% of the savings.
 
Other Income

Other income declined $1.7 million from $1.8 million in fiscal 2012 to $0.1 million due to a severe weakening of the Brazilian Real to the U. S. dollar in the prior year period.

Net (loss) earnings

The Company recorded a net loss of $0.4 million or $0.05 per share in the first quarter of fiscal 2013 compared to net earnings of $2.2 million or $0.33 per share principally as a result of reduced International sales and gross margins, which were adversely impacted by currency exchange rates, particularly in Brazil.
 
LIQUIDITY AND CAPITAL RESOURCES
 
   
Three Months
 
   
9/30/2012
   
9/30/2011
 
Cash flows (in thousands)            
Cash provided by (used in) operating activities
  $ 2,967     $ (2,812 )
Cash used in investing activities
    (2,304 )     (1,649 )
Cash (used in) provided by financing activities
    (1,025 )     993  
Effect of exchange rate changes on cash
    121       (1,656 )
                 
Net decrease in cash
  $ (241 )   $ (5,124 )

Net cash declined $0.2 million in the first quarter of fiscal 2013 as capital expenditures, debt repayments and dividends offset an improved working capital position. The $4.9 million improvement in cash flow in comparison with the same period one year ago is due primarily to improved working capital management despite lower profits.
 
Liquidity and Credit Arrangements

The Company believes it maintains sufficient liquidity and has the resources to fund its operations.  In addition to its cash and investments, the Company maintains a $23 million line of credit in connection with its Loan and Security Agreement, of which, $15.5 million was outstanding as of September 30, 2012.  Availability under the agreement is further reduced by open letters of credit totaling $0.4 million. The Loan and Security Agreement matures in April of 2015.  The Loan and Security Agreement was modified in the first quarter of fiscal 2013 at which time certain financial covenants were amended.  As of September 30, 2012, the Company was in compliance with all debt covenants related to its Loan and Security Agreement.

The effective interest rate on the short term borrowings under the Loan and Security Agreement during the three months ended September 30, 2012 was 1.90%.
 
INFLATION

The Company has experienced modest inflation relative to its material cost, much of which cannot be passed on to the customer through increased prices.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements, other than operating leases, that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
 
ITEM 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There have been no material changes in qualitative and quantitative disclosures about market risk from what was reported in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.
 
 
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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, 2012, 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 that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There have been no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
 
 
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, 2012. There have been no material changes from the factors disclosed in our Form 10-K for the year ended June 30, 2012.
 
ITEM 6.        EXHIBITS

31a
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31b
Certification of Principal Financial Officer pursuant to Section 202 of the Sarbanes-Oxley Act of 2002, filed herewith.

32
Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101
The following materials from L. S. Starrett’s Quarterly Report on Form 10-Q for the quarter ended September 30,  2012 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Stockholders' Equity, (v)the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed 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)
       
       
Date
November 6, 2012  
S/R. Douglas A. Starrett
     
Douglas A. Starrett - President and CEO
       
Date
November 6, 2012  
S/R. Francis J. O’Brien
     
Francis J. O’Brien - Treasurer and CFO