THE L.S. STARRETT COMPANY 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 annual report on Form 10-K, we discuss non-U.S. GAAP financial measures related to currency-neutral sales revenues, as well as adjusted operating income to adjust for restructuring costs, gain on the sale of assets, or the impairment of intangibles that are reflected in one period but not the other, in order to show comparative operational performance. 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 inthe United States of America ("U.S. GAAP"). $ We include a reconciliation of adjusted operating income to its comparableU.S. GAAP financial measures. References to currency-neutral revenues and adjusted operating income should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance withU.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 underU.S. GAAP. Please see Note 17 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 17. These tables below are included to better explain our consolidated operational performance by showing more detail by business segment and reconcilingU.S. GAAP operating income and adjusted operating income.
The following tables represent key results of operations on a consolidated basis for the periods indicated:
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Comparison to Fiscal Year 2020 Comparison to Fiscal Year 2019
Fiscal Year Fiscal Year Favorable Fiscal Year Favorable
(unfavorable) (unfavorable)
(Amounts in Thousands) 6/30/2021 6/30/2020 $ Change % Change 6/30/2019 $ Change % Change
Net sales $ 219,644 $ 201,451 $ 18,193 9.0 % 228,022 (8,378) (3.7) %
Gross margin 73,342 62,210 11,132 17.9 % 74,941 (1,599) (2.1) %
% of net sales 33.4 % 30.9 % 32.9 %
Selling, general, and 56,316 59,437 3,121 5.3 % 63,720 7,404 11.6 %
administrative expenses
% of net sales 25.6 % 29.5 % 27.9 %
Restructuring charges 3,664 1,580 (2,084) (131.9) % - (3,664) (100.0) %
Goodwill and intangible - 6,496 6,496 100.0 % - +0 - %
impairment
Gain on sale of building (3,204) - 3,204 100.0 % - 3,204 100.0 %
Operating income 16,566 (5,303) 21,869 412.4 % 11,221 5,345 47.6 %
% of net sales 7.5 % (2.6) % 4.9 %
Other Income (expense) 860 (14,694) 15,554 105.9 % (1,611) 2,471 (153.4) %
Net earnings (loss) 17,426 (19,997) 37,423 187.1 % 9,610 7,816 81.3 %
Income tax expense 1,893 1,842 (51) (2.8) % 3,531 1,638 46.4 %
Net earnings (loss) $ 15,533 $ (21,839) $ 37,372 171.1 % $ 6,079 $ 9,454 155.5 %
US GAAP to NON-U.S. GAAP Reconciliation Comparison to Fiscal 2020 Comparison to Fiscal 2019
Fiscal Year Fiscal Year Favorable Fiscal Year Favorable
(unfavorable) (unfavorable)
(Amounts in Thousands) 6/30/2021 6/30/2020 $ Change % Change 6/30/2019 $ Change % Change
Operating income, as reported $ 16,566 $ (5,303) $ 21,869 412.4 % $ 11,221 $ 5,345 47.6 %
Restructuring charges 3,664 1,580 2,084 131.9 % - 3,664 100.0 %
Goodwill and intangibles - 6,496 (6,496) (100.0) % - - - %
impairment
Gain on sale of building (3,204) - (3,204) 100.0 % - (3,204) (100.0) %
Adjusted operating income $ 17,026 $ 2,773 $ 14,253 514.0 % $ 11,221 $ 5,805 51.7 %
% of net sales 7.8 % 1.4 % +640 bps 4.9 % +290 bps
US GAAP to NON-
Fiscal Year 2021 Fiscal Year 2020 Fiscal Year 2019
(Amounts in Thousands) North America Inter-national Corp Total North America Inter-national Corp Total North America Inter-national Corp Total
Net Sales $ 119,619 $ 100,025 $ - $ 219,644 $ 121,834 $ 79,617 $ 201,451 $ 136,387 $ 91,635 $ 228,022
Operating income, as reported 13,144 10,821 (7,399) 16,566 (2,055) 3,842 (7,090) (5,303) 9,468 8,043 (6,290) 11,221
Restructuring charges 1,059 2,605 - 3,664 341 1,239 - 1,580 - - - -
Goodwill and intangibles impairment - - - - 6,496 - - 6,496 - - - -
Gain on sale of building (3,204) - - (3,204) - - - - - - - -
Adjusted operating income $ 10,999 $ 13,426 $ (7,399) $ 17,026 $ 4,782 $ 5,081 $ (7,090) $ 2,773 $ 9,468 $ 8,043 $ (6,290) $ 11,221
% of net sales 9.2 % 13.4 % 7.8 % 3.9 % 6.4 % 1.4 % 6.9 % 8.8 % 4.9 %
17-------------------------------------------------------------------------------- T able of Conte nts NON-U.S. GAAP Measure Reconciliation: FY21 "Currency Neutral"Net Sales Fiscal Year Comparison to Fiscal Year 2020 Fiscal Year Comparison to Fiscal Year 2019 ending ending
(Amounts in Thousands)
9.0 % $ 219,644 $ 228,022 $ (8,378) (3.7) %
Currency Neutralizing 11,361 - 11,361 5.6 % 24,695 - 24,695 10.8 %
Adjustment*
TOTAL FY21 Currency Neutral Net
14.7 %$ 244,339 $ 228,022 $ 16,317 7.2 % Sales North AmericaNet Sales , as reported 119,619 121,834 -2,215 (1.8) % 119,619 136,387 (16,768) (12.3) % Currency Neutralizing Adjustment* (174) - -174 (0.1) % 67 - +67 - FY21 Currency Neutral North America Net Sales 119,445 121,834 (2,389) (2.0) % 119,686 136,387 (16,701) (12.2) % InternationalNet Sales , as reported 100,025 79,617 20,408 25.6 % 100,025 91,635 8,390 9.2 % Currency Neutralizing Adjustment* 11,535 - 11,535 14.5 % 24,628 - 24,628 26.9 % FY21 Currency Neutral International Net Sales$ 111,560 $ 79,617 $31,943 40.1 %$ 124,653 $ 91,635 $ 33,018 36.0 %
*"Currency Neutralizing Adjustment" = Change when converting FY21 sales in non USD functional currencies at the same exchange rates used in the comparison period
COVID-19 pandemic The Covid-19 Pandemic has had a substantial impact on the Company's global sales over the past two fiscal years. This impact was felt beginning inJanuary 2020 in our operation inSuzhou, China and then intensified inMarch 2020 by affecting our global markets. We initiated several restructuring activities designed to consolidate manufacturing capacity and reduce selling, general and administrative expenses globally, which included the sale of our facility inMt. Airy, North Carolina . These restructuring activities commenced in the second quarter of fiscal 2020, continued throughout and completed in fiscal 2021. As we closed fiscal 2021, order intake and sales volume across our offerings were equal to or exceeding pre-pandemic levels. Sales began to increase in the first half of fiscal 2021 particularly inBrazil and in our Tru-Stone subsidiary, reflective of the strength of the sectors in which they participate.Brazil experienced strong growth in the Consumer DIY and Food sectors, and Tru-Stone benefited from increasingly high demand in equipment for the high end chip making industry . Order intake and sales volume in other areas of theNorth American Industrial and Metrology businesses remained very low in the first half of fiscal 2021, and only began to show signs of recovery late in the third quarter. With the increased sales volume, reduced cost, and planned production utilization improvement throughout fiscal 2021, our financial performance continued to improve, and was especially strong during the fourth quarter. In fiscal 2021, we had a 7.8% operating income as a percentage of sales as compared to an operating loss in fiscal 2020 and operating income of 4.9% in fiscal 2019. As shown in the above table, management also looks at the non-GAAP reconciliation, adjusting out restructuring, impairment and the gain on facility sales. The non-GAAP adjusted operating income was 7.8%, the same asU.S. GAAP because the facility gain and restructuring expense essentially offset. This was a 640 basis point increase over fiscal 2020 and a 290 basis point increase over 2019, even though fiscal 2019 had$8.4 million more in annual sales. Fiscal 2021 Compared to Fiscal 2020 and Fiscal 2019 The Company recognizes the more standard presentation is to first compare fiscal 2021 with fiscal 2020 and separately compare fiscal 2020 with fiscal 2019, as we have in previous fiscal years. As a smaller reporting company this discussion covers the two-year period required and uses a presentation we believe will allow the reader to view performance from management's perspective, given that fiscal 2019 was the last year prior to fiscal 2020, the first fiscal year which was materially impacted by the COVID-19 pandemic. Overview Sales for the first half of fiscal 2021 were 4.9% below the first half of fiscal 2020 at$103.5 million , largely due to the pandemic. This trend began to change in the second quarter of fiscal 2021, as international sales, particularly inBrazil , began to strengthen. The March quarter sales of$54.9 million and the June quarter sales of$61.2 of fiscal 2021 (cumulatively$116.1 million ) compares favorably to the$50.0 in the March quarter and$42.5 million in the June quarter of fiscal year 2020 (cumulatively$92.5 million ), emphasizing the continuous steady sales recovery throughout fiscal 2021. 18 -------------------------------------------------------------------------------- T able of Conte nts Overall, fiscal 2021 sales were$219.6 million and fiscal 2020 sales were$201.5 million , an increase of$18.2 million , or 9.0%. On a foreign currency neutral basis, sales in the fiscal year endingJune 30, 2021 increased by$29.5 million , or 14.7% from fiscal 2020, reflecting the weakening of the Brazilian currency versus theU.S. Dollar during the comparative periods. In comparison to fiscal 2019, the full year prior to the pandemic, reported sales in fiscal 2021 were 3.7%, or$8.4 million lower than the$228.0 million of reported sales in fiscal 2019. However, on a foreign currency neutral basis, fiscal 2021 sales exceeded fiscal 2019 by 7.2%. This is due to the higher mix ofBrazil sales in fiscal 2021, as sales inBrazil recovered before North American sales, and a 39.3% weakening of the Brazilian currency from fiscal 2019 through fiscal 2021. Gross margins increased$11.1 million in fiscal 2021, or 17.9% from$62.2 million in fiscal 2020 to$73.3 million . As a percent of sales, gross margins increased from 30.9% in fiscal 2020 to 33.4% in fiscal 2021. The increase in gross margin is the result of both the increase in sales of$18.2 million and the favorable impact of restructuring activities completed throughout the last six quarters as shown through improved plant utilization and higher gross margin as a percentage of sales. When comparing fiscal 2021 to fiscal 2019, gross margin decreased by$1.7 million , but as a percentage of sales, increased from 32.9% in fiscal 2019 to 33.4% in fiscal 2021. Selling, general and administrative expenses decreased by$3.1 million from$59.4 million in fiscal 2020 to$56.3 million in fiscal 2021, or 5.3%. Several austerity measures began in Q3 of fiscal 2020, restructuring began in Q4 of fiscal 2020, and plant consolidations were carried on throughout the last three quarters of fiscal 2021. The reductions were partially offset by increases in some variable selling costs in International locations which experienced substantial sales growth in fiscal 2021. Compared to fiscal 2019, selling, general and administrative expenses were$7.4 million , or 11.7% lower in fiscal 2021. In the quarter endingJune 30, 2020 we recorded a restructuring charge related to headcount reductions and saw manufacturing consolidation in response to conditions presented by the COVID-19 pandemic. The Company recorded a$1.6 million restructuring charge, of which$1.1 million remained accrued atJune 30, 2020 . During fiscal year 2021, as we completed the restructuring plans, an additional$3.7 million of restructuring charges were recorded as costs were incurred. There were no restructuring charges recorded in fiscal 2019. As shown, above, in theU.S. GAAP to non-GAAP reconciliation, non-GAAP operating income in fiscal 2021 was$17.0 million , an increase of$14.4 million over the prior year excluding adjustments related to restructuring of$3.7 million , and the gain on the sale of the building of$3.2 million . This compares to a non-GAAP operating income of$2.8 million in fiscal 2020 exclusive of adjustments related to goodwill and intangibles impairment of a combined$6.5 million and restructuring of$1.6 million . Compared to fiscal 2019, which had no adjustments, fiscal 2021 non-GAAP operating income as adjusted above increased by$5.8 million , or 51.7% from an operating income of$11.2 million in fiscal 2019. Net Sales Net sales inNorth America decreased by$2.2 million or 1.8% from$121.8 million in fiscal 2020 to$119.6 million in fiscal 2021. North American sales only began to rebound in the fourth quarter of fiscal 2021. International sales increased$20.4 million or 25.6% from$79.6 million in fiscal 2020 to$100.0 million in fiscal 2021 driven primarily byBrazil . When adjusting for foreign exchange, the increase in International sales is even more pronounced, at 40.6%, primarily due toBrazil , which benefited from strong demand in the Consumer DIY and Food sectors. When comparing to fiscal 2019, net sales inNorth America decreased from$136.4 million in fiscal 2019 to$119.6 million in fiscal 2021, a decrease of 12.3%. International sales increased to$100.0 million in fiscal 2021, from$91.6 million in fiscal 2019, or by 9.2%. On a currency-neutral basis, fiscal 2021 International sales increased 36.0% from fiscal 2019, reflecting a significant increase in sales inBrazil beginning in the second quarter of fiscal 2021, and a 39.3% devaluation of the Brazilian Real relative to theU.S. Dollar during the two comparative periods. Gross Margin Gross margin in fiscal 2021 increased$11.1 million or 17.9% to$73.3 million or 33.4% of sales compared to$62.2 million or 30.8% of sales in fiscal 2020. The increase in absolute and relative gross margin can be attributed to the increase in revenues and the restructuring activities completed over the last six quarters, in addition to a favorable LIFO adjustment of$2.2 million inNorth America in the fourth quarter of fiscal 2021.North America gross margin increased$3.4 million or 10.5% to$36.0 million from$32.6 million , in fiscal 2020, or 30.1% and 26.8% of sales respectively This improvement is due to sales mix and restructuring activities, in addition to the LIFO adjustment mentioned above as a result of lower inventory levels in theU.S. Compared to fiscal 2019, North American gross margin in fiscal 2021 decreased by$4.7 million , or 11.6% to$36.0 from$40.7 million in fiscal 2019, or 29.9% and 30.1% of sales respectively. This is commensurate with the reduction in sales between the two comparative periods 19 -------------------------------------------------------------------------------- T able of Conte nts International gross margins increased$7.7 million or 26% to$37.3 million from$29.6 million , in fiscal 2020 or 37.3% and 37.1% of sales respectively, commensurate with the increase in sales. Compared to fiscal 2019, International gross margins in fiscal 2021 increased$3.1 million or 9.1% to$37.3 from$34.2 million in fiscal 2019 or 37.3% and 37.3% of sales in fiscal 2021. Selling, General and Administrative Expenses Selling, general and administrative expenses, including corporate expenses, decreased in fiscal year 2021 compared to the prior fiscal year by$3.1 million or 5.3% due to restructuring activities and austerity measures begun in the fourth quarter of fiscal 2020 in response to the COVID-19 pandemic. North American selling, general and administrative expenses decreased$2.8 million , or 10.0% , from$27.9 million in fiscal 2020 to$25.0 million in fiscal 2021. International selling, general and administrative expenses decreased$0.6 million or 2.6% from$24.5 million in fiscal 2020 to$23.9 million in fiscal 2021. In the case of International selling, general and administrative expenses, restructuring and austerity measures were partially offset by increases in some variable selling expenses in line with the substantial increase in sales. Corporate expenses increased$0.2 million during the same period due to higher insurance and legal expenses. When comparing to fiscal 2019, Selling, general, and administrative expenses declined$7.4 million or 11.6%, from$63.7 million in fiscal 2019 to$56.3 million in fiscal 2021. This is due to the impact of austerity measures and restructuring efforts begun in fiscal 2020 that continued into fiscal 2021. North American selling, general and administrative expenses declined$6.2 million or 19.9%, from$31.3 million in fiscal 2019 to$25.0 million in fiscal 2021. International selling, general and administrative expenses declined$2.2 million , or 8.7%, from$26.1 million in fiscal 2019 to$23.9 million in fiscal 2021. Operating Income Operating income was$16.6 million , a loss of$5.3 million and income of$11.2 million in fiscal years 2021, 2020 and 2019 respectively. In fiscal 2021 North American operating income was$13.1 million , an increase of$15.2 million compared to fiscal 2020 and an increase of$3.7 million over fiscal 2019. The North American operating loss was$2.1 million in fiscal 2020 and operating income in fiscal 2019 was$9.5 million . In International operations operating income in fiscal 2021 was$10.8 million an increase over fiscal 2020 of$7.0 million and an increase of$2.8 million from fiscal 2019. International operations had operating income in fiscal 2020 of$3.8 million and fiscal 2019 of$8.0 million . Adjusted operating income in fiscal 2021 of$17.0 million , exclusive of restructuring charges of$3.7 million , and the gain on the sale of the building of$3.2 million , increased by$14.3 million , compared to an operating income of$2.8 million , exclusive of charges related to goodwill and intangibles impairment of a combined$6.5 million and restructuring of$1.6 million , in fiscal 2020. North American adjusted operating income, exclusive of all adjustments related to restructuring, intangibles impairment and gain on the sale of the building increased by$6.2 million , or 130.0.% from$4.8 million , or 3.9% of sales in fiscal 2020 to$11.0 million , or 9.2% of sales in fiscal 2021. International operating income, exclusive of all adjustments related to restructuring, increased by$8.3 million , or 164.2%, from$5.1 million , or 6.4% of sales in fiscal 2020 to$13.4 million , or 13.4% of sales in fiscal 2021. When comparing to fiscal 2019, adjusted operating income increased by$5.8 million or 51.7%, from$11.2 million or 4.9% of sales in fiscal 2019 to$17.0 million , exclusive of adjustments related to restructuring of$3.7 million , and the gain on the sale of the building of$3.2 million or 7.8% of sales. North American adjusted operating income decreased$1.5 million , or 16.2% , from$9.5 million , or 6.9% of sales in fiscal 2019 to$11.0 million , or 9.2% of sales in fiscal 2021. International adjusted operating income increased by$5.4 million , or 66.9% from$8.0 million or 8.8% of sales in fiscal 2019, to$13.4 million or 13.4% of sales in fiscal 2021. Other Income (Expense) Other income in fiscal 2021 was$0.9 million , compared to other expense of$14.7 million and$1.6 million in fiscal years 2020 and 2019, respectively. The primary driver of the changes were the changes in the overall funding status of the Company's pension plans, see Note 12. The Company recorded a pension cost benefit of$0.7 million in fiscal 2021 and a cost of$16.8 million and$0.9 million in fiscal years 2020 and 2019, respectively. See Note 10 "Other Income and Expense" to the Company's Consolidated Financial Statements for more details. Income Taxes 20 -------------------------------------------------------------------------------- T able of Conte nts Income taxes in fiscal 2021 were$1.9 million on pre-tax income of$17.4 million resulting in an effective tax rate of 10.9%. Included in the fiscal 2021 tax expense is a tax benefit of($2.6) million relating toU.S. legislation enacted in the first quarter of fiscal 2021reducing the impact of GILTI retroactive to fiscal 2020 and 2019 and a tax benefit of$0.6 million relating to the impact of the increase inUnited Kingdom corporate tax rate on the net deferred tax asset. The rate was negatively impacted by the jurisdictional mix of earnings, particularly fromBrazil with a statutory tax rate of 34%. Income taxes in fiscal 2020 were$1.8 million on pre-tax losses of($20.0) million resulting in an effective tax rate of (9.2%). The effective tax rate was lower than theU.S. statutory rate due to the impact of the GILTI provisions and the jurisdictional mix of earnings, particularly fromBrazil with a statutory tax rate of 34%.The tax rate was negatively impacted by the write-off of a$1.6 million long-term receivable previously established for competent authority relief for historic transfer pricing adjustments which the Company has determined is no longer feasible to pursue and an increase in the valuation allowance of$2.1 million against foreign tax credits which the Company has determined are more likely than not to expire unutilized Income taxes in fiscal 2019 were$3.5 million on pre-tax income of$9.6 million resulting in an effective tax rate of 36.7%. The effective tax rate was higher than theU.S. statutory rate due to the impact of the GILTI provisions and the jurisdictional mix of earnings, particularly fromBrazil with a statutory tax rate of 34%. FINANCIAL INSTRUMENT MARKET RISK Market risk is the potential change in a financial instrument's value caused by fluctuations in interest and currency exchange rates, and equity and commodity prices. The Company's operating activities expose it to risks that are continually monitored, evaluated and managed. Proper management of these risks helps reduce the likelihood of earnings volatility. The Company does not engage in tracking, market-making or other speculative activities in derivatives markets. The Company does enter into long-term supply contracts with either fixed prices or quantities. The Company engages in an immaterial amount of hedging activity to minimize the impact of foreign currency fluctuations but has no forward currency contracts outstanding atJune 30, 2021 . Net foreign cash and cash equivalents are approximately$5.9 million as ofJune 30, 2021 and$7.0 million as ofJune 30, 2020 . A 10% change in interest rates would not have a significant impact on the aggregate net fair value of the Company's interest rate sensitive financial instruments or the cash flows or future earnings associated with those financial instruments. A 10% increase in interest rates would not have a material impact on our borrowing costs. See Note 13 "Debt" to the Consolidated Financial Statements for details concerning the Company's long-term debt outstanding of$6.0 million . LIQUIDITY AND CAPITAL RESOURCES
Years ended
2021 2020 2019
Cash provided by (used in) operating activities 4,568 (1,163) 8,397
Cash used in investing activities (493) (10,600) (7,227)
Cash (used in) provided by financing activities (9,013) 9,314 (225)
The Company had a working capital ratio of 2.3 as of June 30, 2021 and 3.7 as of
June 30, 2020 as the improvement in sales and improved manufacturing utilization
created higher accounts receivable of $5.9 million and higher inventory
balances, net of the LIFO reserve, of $5.1 million , which were offset by
increased accounts payable and accrued expenses. Cash, accounts receivable and
inventories represented 88% and 92% of current assets fiscal 2021 and fiscal
2020, respectively. The Company had accounts receivable turnover of 6.2 in
fiscal 2021 and 6.9 in fiscal 2020 and an inventory turnover ratio of 2.6 in
both fiscal 2021 and in fiscal 2020.
Net cash provided by operations was $4.6 million in fiscal 2021. Cash provided
by operations increased due to improved operating performance and working
capital management which was partially offset by investing $4.7 million on a
cash basis in restructuring. Cash used in investing of $0.5 million included
$4.6 million invested in property, plant and equipment and $1.3 million invested
in software development, mostly offset by the proceeds from the sale of the Mt.
Airy North Carolina facility of $5.2 million . The Company also repaid $9.0
million in debt during fiscal 2021.
Effects of translation rate changes on cash primarily result from the movement
of the U.S. dollar against the British Pound, the Euro and the Brazilian Real.
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Liquidity and Credit Arrangements
In addition to its cash and short-term investments, the Company has available a
$25.0 million line of credit, of which, $0.8 million is reserved for letters of
credit and $9.1 million was outstanding as of June 30, 2021 .
We believe that existing cash and cash expected to be provided by future
operating activities, are adequate to satisfy our working capital, capital
expenditure requirements and other contractual obligations for at least the next
12 months.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any material off-balance sheet arrangements as defined
under the Securities and Exchange Commission rules.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the U.S. requires management to
make judgments, assumptions and estimates that affect the amounts reported in
the consolidated financial statements and accompanying notes. Note 2 to the
Company's Consolidated Financial Statements describes the significant accounting
policies and methods used in the preparation of the consolidated financial
statements.
Judgments, assumptions, and estimates are used for, but not limited to, the
allowance for doubtful accounts receivable ; inventory allowances; income tax
reserves; long lived assets and goodwill impairment; as well as employee
turnover, discount and return rates used to calculate pension obligations.
Future events and their effects cannot be determined with absolute certainty.
Therefore, the determination of estimates requires management to exercise
judgment. Actual results inevitably will differ from those estimates, and such
differences may be material to the Company's Consolidated Financial Statements.
The following sections describe the Company's critical accounting policies.
Revenue Recognition and Accounts Receivable: On July 1, 2018 , the Company
adopted ASC Topic 606, Revenue from Contracts with Customers, and all the
related amendments "ASC Topic 606", using the modified retrospective method. In
addition, the Company elected to apply certain of the permitted practical
expedients within the revenue recognition guidance and make certain accounting
policy elections, including those related to significant financing components,
sales taxes and shipping and handling activities.
The core principle of ASC Topic 606 is that an entity recognizes revenue to
depict the transfer of promised goods and services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in
exchange for those goods and services. The application of the FASB's guidance on
revenue recognition requires the Company to recognize as revenue the amount of
consideration that the Company expects to receive in exchange for goods and
services transferred to our customers. To do this, the Company applies the
five-step model prescribed by the FASB, which requires us to: (1) identify the
contract with the customer; (2) identify the performance obligations in the
contract; (3) determine the transaction price; (4) allocate the transaction
price to the performance obligations in the contract; and (5) recognize revenue
when, or as, the Company satisfies a performance obligation.
The Company accounts for a contract or purchase order when it has approval and
commitment from both parties, the rights of the parties are identified, payment
terms are identified, the contract has commercial substance and collectability
of consideration is probable. Revenue is recognized when control of the product
passes to the customer, which is upon shipment, unless otherwise specified
within the customer contract or on the purchase order as delivery, and is
recognized at the amount that reflects the consideration the Company expects to
receive for the products sold, including various forms of discounts. When
revenue is recorded, estimates of returns are made and recorded as a reduction
of revenue. Contracts with customers are evaluated to determine if there are
separate performance obligations related to timing of product shipment that will
be satisfied in different accounting periods. When that is the case, revenue is
deferred until each performance obligation is met. No performance obligation
related amounts were deferred as of June 30, 2021 . Purchase orders are of
durations less than one year. As such, the Company applies the practical
expedient in ASC paragraph 606-10-50-14 and does not disclose information about
remaining performance obligations that have original expected durations of one
year or less, for which work has not yet been performed.
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Certain taxes assessed by governmental authorities on revenue producing
transactions, such as value added taxes, are excluded from revenue and recorded
on a net basis. Cooperative advertising payments made to customers are included
as advertising expense in selling, general and administrative expense in the
Consolidated Statements of Operations.
Inventory Valuation: The Company values inventories at the lower of the cost of
inventory or net realizable value, with cost determined by either the last-in,
first-out "LIFO" method for most U.S. inventories or the first-in, first-out
"FIFO" method for all other inventories. The Company periodically writes down
for excess, slow moving, and obsolete inventory based on inventory levels,
expected product life, and forecasted sales demand. In assessing the ultimate
realization of inventories, we are required to make judgments as to future
demand requirements compared with inventory levels. Write downs are based on our
projected demand requirements based on historical demand, competitive factors,
and technological and product life cycle changes. It is possible that an
increased write downs may be required in the future if there is a significant
decline in demand for our products and we do not adjust our production schedules
accordingly.
Income Taxes: Accounting for income taxes requires estimates of future benefits
and tax liabilities. Due to temporary differences in the timing of recognition
of items included in income for accounting and tax purposes, deferred tax assets
or liabilities are recorded to reflect the impact arising from these differences
on future tax payments. With respect to recorded tax assets, the Company
assesses the likelihood that the asset will be realized by evaluating the
positive and negative evidence to determine whether realization is more likely
than not to occur. Realization of the Company's deferred tax assets is primarily
dependent on future taxable income, the timing and amount of which are
uncertain, in part, due to the variable profitability of certain subsidiaries. A
valuation allowance is recognized if it is "more likely than not" that some or
all of a deferred tax asset will not be realized. In the event that we were to
determine that we would not be able to realize our deferred tax assets in the
future, an increase in the valuation allowance would be required. In the event
we were to determine that we are able to realize our deferred tax assets and a
valuation allowance had been recorded against the deferred tax assets, a
decrease in the valuation allowance would be required. Should any significant
changes in the tax law or the estimate of the necessary valuation allowance
occur, the Company would record the impact of the change, which could have a
material effect on our financial position or results of operations.
The Company files income tax returns in all jurisdictions in which we operate. A
liability is recorded for uncertain tax positions taken or expected to be taken
in income tax returns. The financial statements reflect expected future tax
consequences of such positions presuming the taxing authorities' full knowledge
of the position and all relevant facts. A liability is recorded for the portion
of unrecognized tax benefits claimed that we have determined are not
more-likely-than-not realizable. These tax reserves have been established based
on management's assessment as to the potential exposure attributable to our
uncertain tax positions as well as interest and penalties attributable to these
uncertain tax positions. All tax reserves are analyzed quarterly and adjustments
are made as events occur that result in changes in judgment. (See also Note 11
"Income Taxes" to the Consolidated Financial Statements.)
Defined Benefit Plans: The Company has two defined benefit pension plans, one
for U.S. employees and another for U.K. employees. The Company also has a
postretirement medical and life insurance benefit plan for U.S. employees.
On December 21, 2016 , the Company amended the U.S. defined benefit pension plan
to freeze benefit accruals effective December 31, 2016 . Consequently, the Plan
is closed to new participants and current participants no longer earn additional
benefits after December 31, 2016 .
Under our current accounting method, both plans use fair value as the
market-related value of plan assets and continue to recognize actuarial gains or
losses within the corridor in other comprehensive income but instead of
amortizing net actuarial gains or losses in excess of the corridor in future
periods, excess gains and losses are recognized in net periodic benefit cost as
of the plan measurement date, which is the same as the fiscal year end of the
Company. This mark-to market (MTM adjustment) accounting method is a permitted
option which results in immediate recognition of excess net actuarial gains and
losses in net periodic benefit cost instead of in other comprehensive
income. Immediate recognition in net periodic benefit cost could potentially
increase the volatility of net periodic benefit cost. The MTM adjustments to net
periodic benefit cost for fiscal years 2021, 2020 and 2019 were $0.2 million ,
$16.9 million , and $0.3 million , respectively.
Calculation of pension and postretirement medical costs and obligations are
dependent on actuarial assumptions. These assumptions include discount rates,
healthcare cost trends, inflation, salary growth, long-term return on plan
assets, employee turnover rates, retirement rates, mortality and other factors.
These assumptions are made based on a combination of external market factors,
actual historical experience, long-term trend analysis, and an analysis of the
assumptions being used by other companies with similar plans. Significant
differences in actual experience or significant changes in assumptions would
affect pension and other postretirement benefit costs and obligations. Effective
December 31, 2013 , the Company terminated eligibility for employees 55-64 years
old in the Postretirement Medical Plan. (See also Note 12 "Employee Benefit
Plans" to the Consolidated Financial Statements).
23
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CONTRACTUAL OBLIGATIONS
The following table summarizes future estimated payment obligations by period.
Fiscal Year (in millions)
2023- 2025-
Total 2022 2024 2026 Thereafter
Debt obligations $ 22.0 $ 16.0 $ 3.2 $ 2.8 $ -
Estimated interest on debt obligations 0.9 0.5 0.3 0.1 -
Operating lease obligations 5.1 2.0 2.0 1.0 0.1
Purchase obligations 15.9 14.5 1.1 0.3 -
Total $ 43.9 $ 33.0 $ 6.6 $ 4.2 $ 0.1
Estimated interest on debt obligations is based on a standard 10-year loan
amortization schedule for the $10.0 million term loan, and the current
outstanding balance of the Company's credit line at the current effective
interest rate through April 2022 when the current credit line agreement ends.
(See Note 13 "Debt" to the Consolidated Financial Statements for additional
details).
While our purchase obligations are generally cancellable without penalty,
certain vendors charge cancellation fees or minimum restocking charges based on
the nature of the product or service. The Company's Brazilian subsidiary has
entered into a long-term, volume-based purchase agreement for electricity. Under
this agreement the Company is committed to purchase a minimum monthly amount of
energy at a fixed price per kilowatt hour. Cancellation of this contract would
incur a significant penalty.
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Item 8 - Financial Statements and Supplementary Data
Contents: Page
Report of Independent Registered Public Accounting Firm
27
Consolidated Balance Sheets
28
Consolidated Statements of Operations
29
Consolidated Statements of Comprehensive Income (Loss)
30
Consolidated Statements of Stockholders' Equity
31
Consolidated Statements of Cash Flows
32
Notes to Consolidated Financial Statements 33 - 60
25-------------------------------------------------------------------------------- T able of Conte nts REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders TheL.S. Starrett Company Opinion on the financial statements We have audited the accompanying consolidated balance sheets of TheL.S. Starrett Company (aMassachusetts corporation) and subsidiaries (the "Company") as ofJune 30, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period endedJune 30, 2021 , and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as ofJune 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period endedJune 30, 2021 , in conformity with accounting principles generally accepted inthe United States of America . We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States ) ("PCAOB"), the Company's internal control over financial reporting as ofJune 30, 2021 , based on criteria established in the 2013 Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of theTreadway Commission ("COSO"), and our report datedSeptember 2, 2021 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Realizability of Deferred Tax Assets
As described further in Note 11 to the consolidated financial statements, deferred tax assets reflect the tax effect of temporary differences between book and taxable income in all jurisdictions in which the Company has operations. Valuation allowances are provided, based on the evaluation of both positive and negative evidence, to reduce the deferred tax assets to an amount that is more likely than not to be realized. We identified the realizability of deferred tax assets as a critical audit matter. The principal considerations for our determination that the realizability of deferred tax assets is a critical audit matter are the length of time and the high level of estimation uncertainty associated with the Company's forecast of future taxable income ofU.S. operations. Our audit procedures related to the realizability of the deferred tax assets included the following procedures, among others: a.We evaluated management's ability to forecast taxable income by assessing the historical accuracy of forecasts developed in prior years b.We assessed the appropriateness of management's assumptions and estimates within its future forecasts and compared forecasts to historical trends and current industry and economic trends c.We involved tax professionals to evaluate relevant tax laws and regulations in assessing the appropriateness of management's estimate of future sources of taxable income d.We evaluated the design and tested the operating effectiveness of the key controls over the Company's forecasting process, evaluation of the realizability of deferred tax assets and establishment of valuation allowances
/s/
We have served as the Company's auditor since 2006.
Boston, Massachusetts September 2, 2021 26
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THE L.S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands except share data)
6/30/2021 6/30/2020
ASSETS
Current assets:
Cash $
9,105
35,076 29,012
Inventories, net 60,572 52,987
Prepaid expenses and other current assets 14,467 8,641
Total current assets 119,220 104,098
Property, plant and equipment, net 35,992 37,090
Right of use assets 4,298 4,465
Deferred tax assets, net 19,073 21,018
Intangible assets, net 4,888 4,997
Goodwill 1,015 1,015
Total assets $ 184,486 $ 172,683
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt $ 15,959 $ 4,532
Current lease liability 1,650 1,905
Accounts payable 17,229 7,579
Accrued expenses 8,811 8,838
Accrued compensation 8,040 4,980
Total current liabilities 51,689 27,834
Other tax obligations 2,866 2,532
Long-term lease liability 2,734 2,655
Long-term debt, net of current portion 6,010 26,341
Postretirement benefit and pension obligations 37,652 67,338
Total liabilities 100,951 126,700
Stockholders' equity:
Class A common stock
6,475 6,308
Class B common stock $1 par (10,000,000 shares authorized; 633,505
outstanding at June 30, 2021 and 679680 outstanding at June 30, 2020
) 634 680
Additional paid-in capital 56,507 55,762
Retained earnings 74,181 58,648
Accumulated other comprehensive loss (54,262) (75,415)
Total stockholders' equity 83,535 45,983
Total liabilities and stockholders' equity $ 184,486 $ 172,683
See notes to consolidated financial statements
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THE L.S. STARRETT COMPANY
Consolidated Statements of Operations
(in thousands except per share data)
Years Ended
6/30/2021 6/30/2020 6/30/2019
Net sales $ 219,644 $ 201,451 $ 228,022
Cost of goods sold 146,302 139,241 153,081
Gross margin 73,342 62,210 74,941
% of net sales 33.4 % 30.9 % 32.9 %
Selling, general and administrative expenses 56,316 59,437 63,720
Restructuring charges 3,664 1,580 -
Goodwill and intangibles impairment - 6,496 -
Gain on sale of facility (3,204) - -
Operating income (loss) 16,566 (5,303) 11,221
Other income (expense) 860 (14,694) (1,611)
Earnings (loss) before income taxes 17,426 (19,997) 9,610
Income tax expense 1,893 1,842 3,531
Net earnings (loss) $ 15,533 Basic earnings (loss) per share$ 2.20 $ (3.14) $ 0.87 Diluted earnings (loss) per share$ 2.11
Weighted average outstanding shares used in per share
calculations:
Basic 7,070 6,949 6,957
Diluted 7,367 6,949 7,026
See notes to consolidated financial statements
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THE L. S. STARRETT COMPANY
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Years Ended
6/30/2021 6/30/2020 6/30/2019
Net earnings (loss) $ 15,533 $ (21,839) $ 6,079
Other comprehensive (loss) income:
Currency translation gain (loss), net of tax 5,828 (12,316) (593)
Pension and postretirement plans, net of tax of
15,325 (3,818) (9,488)
Other comprehensive income (loss) 21,153 (16,134) (10,081)
Total comprehensive income (loss) $ 36,686 $ (37,973) $ (4,002)
See notes to consolidated financial statements
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THE L.S. STARRETT COMPANY
Consolidated Statements of Stockholders' Equity
(in thousands except per share data)
Accumulated
Other
Common Stock Additional Comprehensive
Outstanding Paid-in Retained Income
Class A Class B Capital Earnings (Loss) Total
Balance, July 1, 2018 $ 6,302 $ 720 $ 55,641 $ 74,368 $ (49,160) $ 87,871
Total comprehensive (loss)
income - - - 6,079 (10,081) (4,002)
Transfer of historical
translation adjustment - - - 40 (40) -
Repurchase of shares (154) (5) (791) - - (950)
Issuance of stock - 15 66 - - 81
Stock-based compensation 19 - 360 - - 379
Conversion 40 (40) - - - -
Balance, June 30, 2019 6,207 690 55,276 80,487 (59,281) 83,379
Total comprehensive (loss)
income - - - (21,839) (16,134) (37,973)
Repurchase of shares - (6) (20) - - (26)
Issuance of stock - 21 52 - - 73
Stock-based compensation 76 - 454 - - 530
Conversion 25 (25) - - - -
Balance, June 30, 2020 6,308 680 55,762 58,648 (75,415) 45,983
Total comprehensive income - - - 15,533 21,153 36,686
Repurchase of shares - (6) (26) - - (32)
Issuance of stock - 16 59 - - 75
Stock-based compensation 111 - 712 - - 823
Conversion 56 (56) - - - -
Balance, June 30, 2021 $ 6,475 $ 634 $ 56,507 $ 74,181 $ (54,262) $ 83,535
Cumulative balance:
Currency translation loss,
net of taxes $ (56,046)
Pension and postretirement
plans, net of taxes 1,784
$ (54,262)
See notes to consolidated financial statements
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THE L. S. STARRETT COMPANY
Consolidated Statements of Cash Flows
(in thousands)
Years Ended
6/30/2021 6/30/2020 6/30/2019
Cash flows from operating activities:
Net earnings (loss) $ 15,533 $ (21,839) $ 6,079
Non cash operating activities:
Gain on sale of real estate (3,204) - - Depreciation 5,059 5,206 5,047 Amortization 1,233 1,990 2,291 Goodwill and intangibles impairment - 6,496 - Stock-based compensation 823 530 379 Net long-term tax obligations 127 1,881 (20) Deferred taxes (3,003) (1,802) 1,202 Postretirement benefit and pension obligations (589) 16,823 1,000 Working capital changes: Accounts receivable (3,009) 2,284 (3,210) Inventories (3,694) 1,603 (4,204) Other current assets (4,930) (3,071) 610 Other current liabilities 8,517 (3,369) 4,463 Prepaid pension expense (8,186) (8,035) (5,766) Other (109) 140 526
Net cash provided (used in) by operating activities 4,568 (1,163) 8,397
Cash flows from investing activities: Purchases of property, plant and equipment (4,583) (9,277) (5,765) Software development (1,124)
(1,323) (1,462)
Proceeds from sale of real estate 5,214 - - Net cash (used in) investing activities (493)
(10,600) (7,227)
Cash flows from financing activities: Proceeds from borrowings 44,751 14,850 4,300 Debt repayments (53,807) (5,583) (3,656) Proceeds from common stock issued 75 73 81 Repurchase of shares (32)
(26) (950)
Net cash (used in) provided by financing activities (9,013) 9,314
(225)
Effect of translation rate changes on cash 585 325 (190)
Net increase (decrease) in cash (4,353) (2,124) 755
Cash beginning of year 13,458 15,582 14,827
Cash end of year $ 9,105 $ 13,458 $ 15,582
Supplemental cash flow information:
Interest paid $ 889 $ 953 $ 884
Taxes paid 4,979 1,994 2,262
See notes to consolidated financial statements
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THE L.S. STARRETT COMPANY
Notes to Consolidated Financial Statements
June 30, 2021 and 2020
1. DESCRIPTION OF BUSINESS
The L. S. Starrett Company (the "Company") is incorporated in the Commonwealth
of Massachusetts and is in the business of manufacturing industrial,
professional and consumer measuring and cutting tools and related products. The
Company's manufacturing operations are primarily in North America , Brazil , and
China . The largest consumer of these products is the metalworking industry, but
others include automotive, aviation, marine, farm, "do-it-yourselfers" and
tradesmen such as builders, carpenters, plumbers and electricians.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying balance sheets and related
statements of income, cash flows, and stockholders' equity include all
adjustments, in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue, and expenses. Actual results and outcomes may
differ from management's estimates and assumptions.
Principles of consolidation: The consolidated financial statements include the
accounts of The L. S. Starrett Company and its subsidiaries, all of which are
wholly-owned. All intercompany items have been eliminated in consolidation.
The Company plans to permanently reinvest cash held in foreign subsidiaries.
Cash held in foreign subsidiaries is generally not available for use in the U.S.
without the likely U.S. federal and state income and withholding tax
consequences.
Financial instruments and derivatives: The Company's financial instruments
include cash, accounts receivable, accounts payable, accrued expenses and debt.
The carrying value of cash and accounts receivable approximates fair value
because of the short-term nature of these instruments. The carrying value of
debt, which is at current market interest rates, also approximates its fair
value. The Company's U.K. subsidiary utilizes forward exchange contracts to
reduce currency risk. The notional amounts of contracts outstanding as of both
June 30, 2021 and June 30, 2020 were zero.
Accounts receivable: Accounts receivable consist of trade receivables from
customers. The expense (income) for bad debts amounted to $0.1 million , $0.2
million , and $(0.1) million in fiscal 2021, 2020 and 2019, respectively. In
establishing the allowance for doubtful accounts, management considers
historical losses, the aging of receivables and existing economic conditions.
Inventories: Inventories are stated at the lower of cost or market. "Market" is
defined as "net realizable value," or the estimated selling price in the
ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. Substantially all United States inventories are
valued using the last-in-first-out "LIFO" method. All non-U.S. subsidiaries use
the first-in-first-out "FIFO" method or the average cost method. LIFO is not a
permissible method of inventory costing for tax purposes outside the U.S.
Property Plant and Equipment: The cost of buildings and equipment is depreciated
using straight-line and accelerated methods over their estimated useful lives as
follows: buildings and building improvements 10 to 50 years, machinery and
equipment 3 to 12 years. The construction in progress balances in buildings,
building improvements and machinery and equipment at June 30, 2021 and June 30,
2020 were $1.5 million and $0.6 million , respectively. Repairs and maintenance
of equipment are expensed as incurred.
Leases: The Company adopted Accounting Standards Codification 842, Leases ("ASC
842") July 1, 2019 . The Company has leased buildings, manufacturing equipment
and autos that are classified as operating lease right-of use "ROU" assets and
operating lease liabilities in the Company's Consolidated Balance Sheets. ROU
assets and lease liabilities are recognized based on the present value of the
future minimum lease payments over the lease term at the commencement date for
leases exceeding 12 months. Minimum lease payments include only the fixed lease
component of the agreement.
Although currently the Company's Finance Leases are considered de minimis,
leases are capitalized under the criteria set forth in Accounting Standards
Codification (ASC) 842, "Leases".
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Intangible assets: Identifiable intangibles are recorded at cost and are
amortized on a straight-line basis over a 5-20 years period. The estimated
useful lives of the intangible assets subject to amortization are: 14-20 years
for trademarks and trade names, 5-10 years for completed technology, 8 years for
non-compete agreements, 8-16 years for customer relationships and 5 years for
software development.
Revenue recognition: On July 1, 2018 , the Company adopted ASC Topic 606, Revenue
from Contracts with Customers, and all the related amendments ("ASC Topic 606"),
using the modified retrospective method. In addition, the Company elected to
apply certain of the permitted practical expedients within the revenue
recognition guidance and make certain accounting policy elections, including
those related to significant financing components, sales taxes and shipping and
handling activities. .
Performance Obligations
The Company's primary source of revenue is derived from the manufacture and
distribution of metrology tools and equipment and saw blades and related
products sold to distributors. The Company recognizes revenue for sales to our
customers when transfer of control of the related good or service has occurred.
Any of the Company's revenue not recognized under the point in time approach for
the year ended June 30, 2021 , was determined to be immaterial. Contract terms
with certain metrology equipment customers could result in products and services
being transferred over time as a result of the customized nature of some of the
Company's products, together with contractual provisions in the customer
contracts that provide the Company with an enforceable right to payment for
performance completed to date; however, under typical terms, the Company does
not have the right to consideration until the time of shipment from its
manufacturing facilities or distribution centers, or until the time of delivery
to its customers. If certain contracts in the future provide the Company with
this enforceable right of payment, the timing of revenue recognition from
products transferred to customers over time may be slightly accelerated compared
to the Company's right to consideration at the time of shipment or delivery.
The Company's typical payment terms vary based on the customer, geographic
region, and the type of goods and services in the contract or purchase order.
The period of time between invoicing and when payment is due is typically not
significant. Amounts billed and due from the Company's customers are classified
as receivables on the Consolidated Balance Sheet. As the Company's standard
payment terms are usually less than one year, the Company has elected the
practical expedient under ASC paragraph 606-10-32-18 to not assess whether a
contract has a significant financing component.
The Company's customers take delivery of goods, and they are recognized as
revenue at the time of transfer of control to the customer, which is usually at
the time of shipment, unless otherwise specified in the customer contract or
purchase order. This determination is based on applicable shipping terms, as
well as the consideration of other indicators, including timing of when the
Company has a present right to payment, when physical possession of products is
transferred to customers, when the customer has the significant risks and
rewards of ownership of the asset, and any provisions in contracts regarding
customer acceptance.
While unit prices are generally fixed, the Company provides variable
consideration for certain of our customers, typically in the form of promotional
incentives at the time of sale. The Company utilizes the most likely amount
consistently to estimate the effect of uncertainty on the amount of variable
consideration to which the Company would be entitled. The most likely amount
method considers the single most likely amount from a range of possible
consideration amounts. The most likely amounts are based upon the contractual
terms of the incentives and historical experience with each customer. The
Company records estimates for cash discounts, promotional rebates, and other
promotional allowances in the period the related revenue is recognized
("Customer Credits"). The provision for Customer Credits is recorded as a
reduction from gross sales and reserves for Customer Credits are presented
within accrued sales incentives on the Consolidated Balance Sheet. Actual
Customer Credits have not differed materially from estimated amounts for each
period presented. Amounts billed to customers for shipping and handling are
included in net sales and costs associated with shipping and handling are
included in cost of sales. The Company has concluded that its estimates of
variable consideration are not constrained according to the definition within
the new standard. Additionally, the Company applies the practical expedient in
ASC paragraph 606-10-25-18B and accounts for shipping and handling activities
that occur after the customer has obtained control of a good as a fulfillment
activity, rather than a separate performance obligation.
With the adoption of ASC Topic 606, the Company reclassified certain amounts
related to variable consideration. Under ASC Topic 606, the Company is required
to present a refund liability and a return asset within the Consolidated Balance
Sheet, whereas in periods prior to adoption, the Company presented the estimated
margin impact of expected returns as a contra-asset within accounts receivable.
The changes in the refund liability are reported in net sales, and the changes
in the return asset are reported in cost of sales in the Consolidated Statements
of Operations. As a result, the balance sheet presentation was adjusted
beginning in fiscal 2020. As of June 30, 2021 , and 2020, the balances of the
return asset were $0.2 million and $0.1 million and the balance of the refund
liability were $0.1 million both fiscal years, and they are presented within
prepaid expenses and other current assets and accrued expenses, respectively, on
the Consolidated Balance Sheet.
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The Company, in general, warrants its products against certain defects in
material and workmanship when used as designed, for a period of up to 1 year.
The Company does not sell extended warranties.
Contract Balances
Contract assets primarily relate to the Company's rights to consideration for
work completed but not billed at the reporting date on contracts with customers.
Contract assets are transferred to receivables when the rights become
unconditional. Contract liabilities primarily relate to contracts where advance
payments or deposits have been received, but performance obligations have not
yet been met, and therefore, revenue has not been recognized. The Company had no
contract asset balances, but had contract liability balances of $0.6 million and
$0.4 million at June 30, 2021 and 2020, respectively.
Advertising costs: The Company's policy is to generally expense advertising
costs as incurred, except catalogs costs of $0.1 million in fiscal years 2021
and 2020 , which are deferred until mailed. Advertising costs were expensed as
follows: $3.2 million in fiscal 2021, $3.6 million in fiscal 2020 and $5.0
million in fiscal 2019 and are included in selling, general and administrative
expenses.
Freight costs: The cost of outbound freight and the cost for inbound freight
included in material purchase costs are both included in cost of sales.
Pension and Other Postretirement Benefits: The Company has two defined benefit
pension plans, one for U.S. employees and another for U.K. employees. The
Company also has defined contribution plans. The Company amended its
Postretirement Medical Plan effective December 31, 2013 , whereby the Company
terminated eligibility for employees under the age of 65.
On December 21, 2016 , the Company amended the U.S. defined benefit pension plan
to freeze benefit accruals effective December 31, 2016 . Consequently, the Plan
is closed to new participants and current participants no longer earn additional
benefits after December 31, 2016 . The U.K. Plan was closed to new entrants in
fiscal 2009.
The Company sponsors funded U.S. and non-U.S. defined benefit pension plans
covering the majority of our U.S. and U.K. employees. The Company also sponsors
an unfunded postretirement benefit plan that provides health care benefits and
life insurance coverage to eligible U.S. retirees. Under the Company's current
accounting method, both pension plans use fair value as the market-related value
of plan assets and continue to recognize actuarial gains or losses within the
corridor in other comprehensive income (loss) but instead of amortizing net
actuarial gains or losses in excess of the corridor in future periods, such
excess gains and losses, if any, are recognized in net periodic benefit cost as
of the plan measurement date, which is the same as the fiscal year end of the
Company. This mark-to-market (MTM adjustment) method is a permitted option which
results in immediate recognition of excess net actuarial gains and losses in net
periodic benefit cost instead of in other comprehensive income (loss). Such
immediate recognition in net periodic benefit cost increases the volatility of
net periodic benefit cost. The MTM adjustments to net periodic benefit cost for
fiscal years 2021, 2020 and 2019 were $0.2 million , $16.9 million , and $0.3
million , respectively.
Income taxes: Deferred tax expense results from differences in the timing of
certain transactions for financial reporting and tax purposes. Deferred taxes
have not been recorded on approximately $77.7 million of undistributed earnings
of foreign subsidiaries as of June 30, 2021 and the related unrealized
translation adjustments because such amounts are considered permanently
invested. In addition, it is possible that remittance taxes, if any, would be
reduced by U.S. foreign tax credits to the extent available, after consideration
of U.S. Tax Reform and the dividends received deduction. Valuation allowances
are recognized if, based on the available evidence, it is more likely than not
that some portion of the deferred tax assets will not be realized.
Research and development: Research and development costs are expensed, primarily
in selling, general and administrative expenses, and were as follows: $3.0
million in fiscal 2021, $3.8 million in fiscal 2020, and $3.7 million in fiscal
2019.
Earnings per share (EPS): Basic EPS is computed by dividing earnings (loss)
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution by
securities that could share in the earnings. The Company had 297,054, 86,065,
and 68,378, of potentially dilutive common shares in fiscal 2021, 2020 and 2019,
respectively, resulting from shares issuable under its stock-based compensation
plans. These additional shares are not used in the diluted EPS calculation in
loss years.
Translation of foreign currencies: The assets and liabilities on the financial
statements of our foreign subsidiaries where the local currency is in functional
currency, are translated at exchange rates in effect on reporting dates. The
income statement is translated at average exchange rates over the reporting
month throughout the year.
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As equity accounts in the Consolidated Financial Statements are translated at
historical exchange rates, the resulting foreign currency translation
adjustments "CTA" are recorded in other comprehensive income (loss).
Other foreign subsidiaries may also contain assets or liabilities denominated in
a currency other than the prevailing functional currency. These translations are
adjusted into the functional currency on a monthly basis, See Note 10 "Other
Income and Expense" to the Consolidated Financial Statements.
Use of accounting estimates: The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of net sales and expenses during the
reporting period. Judgments, assumptions and estimates are used for, but not
limited to: the allowances for doubtful accounts receivable; inventory
allowances; income tax valuation allowances, goodwill, uncertain tax positions
and pension obligations. Amounts ultimately realized could differ from those
estimates.
Recently Issued Accounting Standards not yet adopted:
In August 2018 , the FASB issued ASU No. 2018-14, "Compensation - Retirement
Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure
Framework - Changes to the Disclosure Requirements for Defined Benefit Plans."
ASU 2018-14 removes certain disclosures that are not considered cost beneficial,
clarifies certain required disclosures and added additional disclosures. This
ASU is effective for public companies for annual reporting periods and interim
periods within those annual periods beginning after December 15, 2020 , effective
for the Company July 1, 2021 . The amendments in ASU 2018-14 must be applied on a
retrospective basis. The Company does not believe that ASU 2018-14 will have a
material effect 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 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 believe that ASU 2018-14 will have a material effect on its
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
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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 amendments in this Update are effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2020 or July 1,
2021 for the Company. The Company does not believe that ASU 2019-12 will have a
material effect on its consolidated financial statements.
In March 2020 , FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The
amendments in this Update are effective for all entities as of March 12, 2020
through December 31, 2022 . 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 the Company's interest rate is
capped accordingly in this agreement. The Company does not believe that ASU
2018-14 will have a material effect on its consolidated financial statements.
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3. STOCK-BASED COMPENSATION
Long-Term Incentive Plan
On September 5, 2012 , the Board of Directors adopted The L.S. Starrett Company
2012 Long Term Incentive Plan (the "2012 Stock Plan"). The 2012 Stock Plan was
approved by shareholders on October 17, 2012 , and the material terms of its
performance goals were re-approved by shareholders at the Company's Annual
Meeting held on October 18, 2017 . The 2012 Stock Plan permits the granting of
the following types of awards to officers, other employees and non-employee
directors: stock options; restricted stock awards; unrestricted stock awards;
stock appreciation rights; stock units including restricted stock units;
performance awards; cash-based awards; and awards other than previously
described that are convertible or otherwise based on stock. The 2012 Stock Plan
provides for the issuance of up to 500,000 shares of Class A 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 Class A shares of common stock. As of June 30, 2021 , there were 8,250 stock
options and 260,977 restricted stock units outstanding. In addition, there were
10,477 shares available for grant under the 2012 Stock Incentive Plan as of
June 30, 2021 and 119,533 were available for grant as of June 30, 2020 .
There were no stock options granted during fiscal years 2021, 2020 or 2019.
The weighted average contractual term for stock options outstanding as of
June 30, 2021 was 1.5 years. The aggregate intrinsic value of stock options
outstanding as of June 30, 2021 was less than $0.1 million . There were 8,250
options exercisable as of June 30, 2021 . In recognizing stock compensation
expense for the 2012 Stock Incentive Plan management has estimated that there
will be no forfeitures of options.
The Company accounts for RSU awards by recognizing the expense of the intrinsic
value at the award date ratably over vesting periods generally ranging from one
year to three years. The related expense is included in selling, general and
administrative expenses. During the year ended June 30, 2021 , the Company
granted 297,140 RSU awards with fair values of $3.36 per RSU award, and there
were 3,834 RSU's forfeited. During the year ended June 30, 2020 , the Company
granted 110,500 RSU awards with fair values of $5.34 per RSU award. During the
year ended June 30, 2019 , the Company granted 67,000 RSU awards with fair values
of $6.34 per RSU award.
There were 102,670 and 64,661 RSU awards settled in fiscal years 2021 and 2020
respectively. The aggregate intrinsic value of RSU awards outstanding as of
June 30, 2021 was $2.4 million . The aggregate intrinsic value of RSU awards
outstanding as of June 30, 2020 was $0.8 million . Compensation expense related
to the 2012 Stock Incentive Plan was $675,000 , $345,000 and $232,000 for fiscal
2021, 2020 and 2019 respectively. As of June 30, 2021 , there was $2.3 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 $0.6 million
is expected to be recognized over a weighted average period of 1.7 years.
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Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plans (ESPP) give eligible employees an
opportunity to participate in the success of the Company. The Board of Directors
renews each Employee Stock Purchase Plan every five years. Under these plans the
purchase price of the optioned stock is 85% of the lower of the market price on
the date the option is granted or the date it is exercised. Options become
exercisable exactly two years from the date of grant and expire if not exercised
on such date. No ESPP options were exercisable at fiscal year ends. The Board of
Directors last approved an ESPP renewal in 2017. A summary of option activity is
as follows:
Weighted
Average Shares
Shares on Exercise Available for
Options Price Grant
Balance, June 30, 2018 70,515 450,007
Options granted 55,227 5.45 (55,227)
Options exercised (11,981) 5.72 -
Options canceled (26,628) 18,087
Balance, June 30, 2019 87,133 412,867
Options granted 86,946 3.63 (86,946)
Options exercised (20,615) 3.52 -
Options canceled (54,271) 54,271
Balance, June 30, 2020 99,193 380,192
Options granted 70,985 3.26 (70,985)
Options exercised (16,196) 4.65 -
Options canceled (36,022) 36,022
Balance, June 30, 2021 117,960 345,229
The following information relates to outstanding options as of
1.3
Weighted average fair value on grant date of options granted in: 2019$ 2.28 2020 1.63 2021 1.51 The fair value of each option grant was estimated on the date of grant based on the Black-Scholes option pricing model with the following weighted average assumptions: expected stock volatility - 51.73% - 51.93%, risk free interest rate - 0.16%- 0.19%, expected dividend yield - 0% - 0% and expected lives - 2 years. Compensation expense of$0.1 million ,$0.1 million and$0.1 million has been recorded for fiscal 2021, 2020 and 2019, respectively. Employee Stock Ownership Plan OnFebruary 5, 2013 , the Board of Directors adopted TheL.S. Starrett Company 2013 Employee Stock Ownership Plan (the "2013 ESOP"). The purpose of the plan is to supplement existing Company programs through an employer funded individual account plan dedicated to investment in common stock of the Company, thereby encouraging increased ownership of the Company while providing an additional source of retirement income. The plan is intended as an employee stock ownership plan within the meaning of Section 4975 (e) (7) of the Internal Revenue Code of 1986, as amended.U.S. employees who have completed a year of service as ofDecember 31, 2012 are eligible to participate. There was no compensation expense for the ESOP in 2021, 2020 or 2019. 38 -------------------------------------------------------------------------------- T able of Conte nts 4. CASH Cash held by foreign subsidiaries amounted to$5.9 million and$7.1 million atJune 30, 2021 andJune 30, 2020 , respectively. Of theJune 30, 2021 balance,$2.4 million inU.S. dollar equivalents was held in British Pounds Sterling and$0.9 million inU.S. dollar equivalents was held in Brazilian Reals. Of theJune 30, 2020 balance,$4.6 million inU.S. dollar equivalents was held in British Pounds Sterling and$0.7 million inU.S. dollar equivalents was held in Brazilian Reals. 5. INVENTORIES Inventories consist of the following (in thousands): 6/30/2021 6/30/2020 Raw materials and supplies$ 29,271 $ 26,255 Goods in process and finished parts 16,096 13,694 Finished goods 37,344 37,579 82,711 77,528 LIFO reserve (22,139) (24,541)$ 60,572 $ 52,987 Of the Company's$60.6 million and$53.0 million total inventory atJune 30, 2021 and 2020, respectively, the$22.1 million and$24.5 million LIFO reserves belong to theU.S. Precision Tools and Saws Manufacturing "CoreU.S. " business. The CoreU.S. business had total Inventory, on a FIFO basis, of$27.8 million and$5.7 million on a LIFO basis as ofJune 30, 2021 . The CoreU.S. business total inventory was$33.1 million on a FIFO basis and$8.6 million on a LIFO basis atJune 30, 2020 . The use of LIFO, as compared to FIFO, resulted in a$2.4 million decrease in cost of sales for the goods sold in fiscal 2021 compared to a$1.3 million increase in fiscal 2020. 6. GOODWILL AND INTANGIBLES The following table presents information about the Company's goodwill and identifiable intangible assets on the dates indicated ( in thousands): 06/30/2021 6/30/2020 Cost Impairment Net Cost Impairment Net Bytewise $ - $- $ -$ 3,034 $ (3,034) $ - Private Software Company 1,015 - 1,015 1,634 (619) 1,015 Goodwill 1,015 - 1,015 4,668 (3,653) 1,015
Identifiable intangible assets consist of the following (in thousands):
6/30/2021 06/30/2020
Trademarks and trade names $ 2,070 $ 2,070
Completed technology 2,010 2,010
Customer relationships 630 630
Software development 10,244 9,445
Other intangible assets - -
Gross intangible assets 14,954 14,155Accumulated amortization and impairment (10,066) (9,158)
Net intangible assets$ 4,888 $ 4,997 Identifiable intangible assets are being amortized on a straight-line basis over the period of expected economic benefit. Amortization expense was$1.2 million ,$1.9 million and 2.0 million for the year endedJune 30, 2021 , 2020 and 2019, respectively. The estimated aggregate amortization expense for each of the next five years, and thereafter, is as follows: 39 -------------------------------------------------------------------------------- T able of Conte nts Fiscal Year (In thousands) 2022$ 1,391 2023 1,152 2024 882 2025 722 2026 512 Thereafter 229$ 4,888
The following tables provides
Fair Value Measurements June 30, 2020 Expense
Goodwill Carrying Value Level 1 Level 2 Level 3 Year ended June 30, 2020
Private software company $1,634 - - $1,015 $619
The Company's acquisition of Bytewise in 2011 and a private software company in
2017 resulted in the recognition of goodwill totaling $4.7 million . In fiscal
year 2020, the Company determined the COVID-19 pandemic was a triggering event
at the private software company and Bytewise due to its negative impact on the
Company's revenue. The Company performed the intangible asset impairment
assessment by running a quantitative analyses on an undiscounted basis for the
intangible assets and determined an impairment of $2.8 million at the private
software company and no impairment at Bytewise.
Under ASC 350 "Intangibles- Goodwill and Other", the Company was required to
test whether it is more likely than not the fair value of the reporting units
goodwill exceeded its carrying amount. The Company performed the goodwill
impairment assessment by running a quantitative analysis (commonly referred to
as "Step One") for both the Bytewise reporting unit and the private software
company. The Company determined the fair value of the Bytewise and private
software company using a discounted cash flow method for both reporting units.
Based on this analysis, it was determined that the fair value of the reporting
units was below their respective carrying amounts. As a result, the Company
concluded that goodwill was impaired $3.7 million as of June 30, 2020 . The
Company concluded there was no triggering events in fiscal 2021 and no
impairment was recorded as of June 30, 2021 .
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of June 30, 2021 and
2020 (in thousands):
As of June 30, 2021
Accumulated
Cost Depreciation Net
Land $ 1,012 $ - $ 1,012
Buildings and building improvements 29,599 (17,085) 12,514
Machinery and equipment 107,649 (85,183) 22,466
Total $ 138,260 $ (102,268) $ 35,992
As of June 30, 2020
Accumulated
Cost Depreciation Net
Land $ 1,186 $ - $ 1,186
Buildings and building improvements 43,641 (29,966) 13,675
Machinery and equipment 115,563 (93,334) 22,229
Total $ 160,390 $ (123,300) $ 37,090 Any finance leases as of
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8. LEASES
The Company adopted Accounting Standards Codification 842, Leases "ASC 842" on
July 1, 2019 . The Company has leased buildings, manufacturing equipment and
autos that are classified as Right of Use assets "ROU" and operating lease
liabilities beginning in fiscal 2020 in the Company's Consolidated Balance
Sheets. ROU assets and lease liabilities are recognized based on the present
value of the future minimum lease payments over the lease term at the
commencement date for leases exceeding 12 months. Minimum lease payments include
only the fixed lease component of the agreement.
The Company has implemented internal controls such as updated accounting
policies and expanded data gathering procedures to comply with the additional
disclosure requirements. The adoption had a material impact on the Company's
Consolidated Balance Sheets, but did not have a material impact on our
Consolidated Statements of Operations or Consolidated Statements of Cash Flows.
The most significant impact was the recognition of ROU assets and lease
liabilities for operating leases.
Right-of-Use Operating Lease Remaining Cash
Assets Obligations Commitment
Operating leases $ 4,298 $ 4,384 $ 5,107
The Company's weighted average discount rate and remaining term on lease
liabilities is approximately 9.0% and 3.7 years. As of June 30, 2021 , the
Company's financing leases are de minimis. The foreign exchange impact affecting
the operating leases are de minimis. The Company has other operating lease
agreements with commitments of less than one year or that are not significant.
The Company elected the practical expedient option and as such, these lease
payments are expensed as incurred.
The Company entered into $1.5 million in operating lease commitments in the
twelve months ended June 30, 2021 . The Company expects to enter into a new lease
for a facility in China during fiscal year 2022. At June 30, 2021 , the Company
had the following fiscal year minimum operating lease commitments (in
thousands):
Operating Lease
Commitments
2022 $ 1,960
2023 1,100
2024 942
2025 576
2026 410
Thereafter 120
Subtotal $ 5,107
Imputed Interest (723)
Total $ 4,384
9. RESTRUCTURING COST
The COVID-19 pandemic created a negative impact on the Company's global sales.
The impact was felt in January 2020 in the Suzhou, China operations and in March
2020 in the Company's global markets and operations. The Company took austerity
measures, reducing payroll and managing variable operational spending to help
mitigate the shortfall. In addition, the Company invested in a strategic
realignment focused on a lower cost structure, long term, designed to maximize
global factory utilization. In June 2020 , the Company recorded a $1.6 million
restructuring charge of which $1.0 million remained in accrued expenses on the
Consolidated Balance Sheets at fiscal 2020 year end. That liability was paid out
in fiscal 2021.
As the project has concluded in fiscal 2021 the total restructuring cost was
$5.2 million with $1.6 million in fiscal 2020 and $3.6 million in fiscal 2021.
In fiscal 2020, $1.3 million was related to employee termination and
$0.3 million was other. In fiscal 2021, $0.2 million in training and travel,
$0.4 million in employee termination and retention and $3.0 million in other to
include asset relocation. Total project cost was $3.8 million in International
operations and $1.4 million in North America . In fiscal 2021, cost in North
America were $1.0 million and $2.6 million in International operations. These
costs are located in the Consolidated Statements of Operations entitled
restructuring charges.
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The Company adopted this plan in order to consolidate certain saw manufacturing
operations for greater efficiency. This restructuring is strategic to improving
manufacturing utilization globally and was completed in fiscal 2021. The Company
does not expect a material amount of disposal costs.
10. OTHER INCOME AND (EXPENSE)
Other income and expense consist of the following (in thousands):
2021 2020 2019
Interest income $ 350 $ 90 $ 71
Interest expense (999) (975) (976)
Foreign currency (loss) gain, net (1,151) 140 (426)
Brazil tax settlements 1,125 2,544 345
Sale of scrap material 261 100 110Pension net periodic benefit cost (NPBC) 654.00 (16,753)
(930)
Other income , net 620 160 195
$ 860 $ (14,694) $ (1,611)
In fiscal 2021, other income was $0.9 million and other expense was
$14.7 million in fiscal 2020. The pension liability charge in fiscal 2020 of
$16.8 million non-cash related to the marked-to-market accounting methodology.
(see Note 12) drove other expense. Brazilian tax settlements of $1.1 million and
$2.5 million in fiscal years 2021 and 2020, respectively, related to prior
period over payments.
11. INCOME TAXES
Components of earnings (loss) before income taxes are as follows (in
thousands):
2021 2020 2019
Domestic operations $ 4,308 $ (24,450) $ 1,507
Foreign operations 13,118 4,453 8,103
$ 17,426 $ (19,997) $ 9,610
The provision for (benefit from) income taxes consists of the following (in
thousands):
2021 2020 2019
Current:
Federal $ 165 $ (19) $ (106)
Foreign 4,686 3,633 2,398
State 45 30 37
Deferred:
Federal (1,843) (1,514) 1,139
Foreign (1,390) 53 (172)
State 230 (341) 235
$ 1,893 $ 1,842 $ 3,531
42-------------------------------------------------------------------------------- T able of Conte nts Reconciliations of expected tax expense at theU.S. statutory rate to actual tax expense (benefit) are as follows (in thousands): 2021 2020
2019
Expected tax expense (benefit)$ 3,660 $ (4,199) $ 2,018 State taxes, net of federal effect 171 (1,042)
(5)
Foreign taxes, net of federal credits 1,424 1,210
(1,055)
Change in valuation allowance - 1,996
1,744
Tax reserve adjustments (63) 1,946
(66)
Return to provision and other adjustments 165 372
(57)
Goodwill impairment - 130
-
Tax rate change applied to deferred tax balances (675) 54
(129)
Global intangible low taxed income (2,622) 1,558 1,121 Other permanent items (167) (183) (40) Actual tax expense$ 1,893 $ 1,842 $ 3,531 Beginning in fiscal 2019, the Company incorporated certain provisions of the Tax Cuts and Jobs Act ("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. Under the GILTI provisions,U.S. taxes are imposed on foreign income in excess of a deemed return on tangible assets of its foreign subsidiaries. The ability to benefit from a deduction and foreign tax credits against a portion of the GILTI income 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. InJuly 2020 , theIRS 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 afterJuly 23, 2020 but companies have the option to apply retroactively for tax years beginning afterDecember 31, 2017 and beforeJuly 23, 2020 . In fiscal 2021 the Company recognized a tax benefit of($2.6) million related to the impact of electing to apply the high-tax exclusion retroactively for fiscal 2019 and fiscal 2020. The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted inthe United States onMarch 27, 2020 . The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthenthe United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides extensive tax changes in response to the COVID-19 pandemic, the provisions are not expected to have a significant impact on the Company's financial results. The tax rate of 10.9% on pre-tax income of$17.4 million in the year endedJune 30, 2021 is lower than theU.S. statutory rate primarily as a result of the tax benefit recognized for the retroactive application of the GILTI high-tax exclusion to fiscal 2019 and fiscal 2020 and the impact of theUnited Kingdom's statutory rate increase from 17% to 25% on the Company's net deferred tax asset, offset by the jurisdictional mix of earnings, particularly fromBrazil with a statutory tax rate of 34%. The tax rate of a benefit of 9.2% on pre-tax losses of$20.0 million in the year endedJune 30, 2020 is lower than theU.S. statutory rate primarily as a result of the GILTI provisions, non-deductible goodwill impairment, as well as changes in the jurisdictional mix of earnings, particularlyBrazil with a statutory tax rate of 34%.The tax rate was also negatively impacted by the write-off of the long-term receivable previously established for competent authority relief for historic transfer pricing adjustments which the Company has determined is no longer feasible to pursue and an increase in the valuation allowance against foreign tax credits which the Company has determined are more likely than not to expire unutilized. The tax rate of 36.7% on pre-tax income of$9.6 million in the year endedJune 30, 2019 is higher than theU.S. statutory rate primarily as a result of the GILTI provisions, which became effective in fiscal 2019, as well as changes in the jurisdictional mix of earnings, particularlyBrazil with a statutory tax rate of 34%. Net deferred tax assets atJune 30, 2021 were$19.1 million . While these deferred tax assets reflect the tax effect of temporary differences between book and taxable income in all jurisdictions in which the Company has operations, the majority of the assets relate toU.S. operations.U.S. net deferred assets are$23.4 million with a valuation allowance of$8.8 million . The Company has considered the positive and negative evidence to determine the need for a valuation allowance offsetting the deferred tax assets in theU.S. and has concluded that a partial valuation allowance is required against foreign tax credit 43 -------------------------------------------------------------------------------- T able of Conte nts carryforwards due to the uncertainty of generating sufficient foreign source income to utilize those credits in the future and certain state net operating loss carryforward that will expire in the near future. Key positive evidence considered include: a) domestic profitability in 2021 and 2019; b) cost saving plans are being implemented by the Company; c) indefinite federal loss carryforward periods and d) forecasted domestic profits for future years. The negative evidence considered is that fiscal years 2020 showed domestic book and tax losses due to the impact of the COVID-19 pandemic and charges recorded in the fourth quarter. In fiscal 2021, the valuation allowance decreased by($0.1) million primarily due to foreign currency fluctuations. In fiscal 2020, the valuation allowance increased by$2.1 million due to the impact of the fiscal 2020 domestic loss generated and revised forecasts of income on the projected utilization of foreign tax credits that will expire at various dates through 2028. Deferred income taxes atJune 30, 2021 and 2020 are attributable to the following (in thousands): 2021 2020 Inventories$ 936 $ 1,339 Employee benefits (other than pension) 1,469 684 Operating lease liabilities 1,004 1,111 Book reserves 541 695 Federal NOL, various carryforward periods 5,004
716
State NOL, various carryforward periods 2,072
1,719
Foreign NOL, various carryforward periods 707
388
Foreign tax credit carryforward, expiring 2023 - 2028 7,329 7,212 Pension benefits 8,253 13,175 Retiree medical benefits 481 1,961 Depreciation 18 (186) Intangibles (91) 580 Right of use assets (1,027) (1,088)
Federal research and development and AMT credit carryforward 961
817
Contingency accruals (1,275)
(698)
Other temporary taxable differences (382)
-
Other temporary deductible differences 1,832 1,404 Total deferred tax assets 27,832 29,829 Valuation allowance (8,759) (8,811) Net deferred tax asset$ 19,073 $ 21,018 The Company is subject toU.S. federal income tax and various state, local and foreign income taxes in numerous jurisdictions. The Company's domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to the Company's interpretation of applicable tax laws in the jurisdictions in which it files.
Reconciliations of the beginning and ending amount of unrecognized tax benefits are as follows (in thousands):
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Balance July 1, 2018 $ (10,882)
Increase for tax positions taken during the current period
(215)
Increase for tax positions taken during the prior period 5 Effect of exchange rate changes 16
Decrease relating to lapse of applicable statute of limitations 137
Balance
(10,939)
Increase for tax positions taken during the current period
(326)
Decrease for tax positions taken during the prior period
(188)
Effect of exchange rate changes 299
Decrease relating to lapse of applicable statute of limitations 48
Balance
(11,106)
Increase for tax positions taken during the current period
(494)
Increase for tax positions taken during the prior period 386 Effect of exchange rate changes
(207)
Decrease relating to lapse of applicable statute of limitations 61
Balance
$ (11,360)
As ofJune 30, 2021 , 2020 and 2019, the Company has unrecognized tax benefits of$11.4 million ,$11.1 million , and$10.9 million , respectively, of which$7.9 million ,$7.7 million and$5.6 million , respectively, would favorably impact the effective tax rate if recognized. The long-term tax obligations as ofJune 30, 2021 , 2020 and 2019 relate primarily to transfer pricing adjustments. The Company has identified uncertain tax positions atJune 30, 2021 for which it is possible that the total amount of unrecognized tax benefits will decrease within the next twelve months by less than$0.1 million . The Company recognizes interest and penalties related to income tax matters in income tax expense and has booked$0.1 million in fiscal 2021 for interest expense. The Company'sU.S. federal tax returns for years prior to fiscal 2018 are no longer subject toU.S. federal examination by the Internal Revenue Service; however, tax losses and credits carried forward from earlier years are still subject to review and adjustment. As ofJune 30, 2021 , the Company has resolved all open income tax audits. In international jurisdictions, the years that may be examined vary by country. The Company's most significant foreign subsidiary inBrazil is subject to audit for the calendar years 2015 through 2020. The federal tax loss carryforward of$23.8 million has an unlimited carryforward period. The state tax loss carryforwards tax effected of$2.0 million expires at various times in years 2022 through 2041 and$0.1 can be carried forward indefinitely. The state tax credit carryforwards of$0.4 million expires in the years 2023 through 2036 and$0.3 million can be carried forward indefinitely. The foreign tax credit carryforward of$7.3 million expires in the years 2023 through 2028. The research and development tax credit carryforward of$1.0 million expires in the years 2029 through 2041. The foreign tax loss carryforwards of$3.5 million can be carried forward indefinitely. AtJune 30, 2021 , the estimated amount of total unremitted earnings of foreign subsidiaries is$77.7 million . The foreign subsidiaries do not have the cash on hand to repatriate that amount. Meanwhile the Company has no plans to repatriate prior year earnings of its foreign subsidiaries and, accordingly, does not believe it is practicable to estimate the unrecognized deferred taxes related to these earnings as they are indefinitely reinvested. Cash held in foreign subsidiaries is not available for use in theU.S. without the likelyU.S. federal and state income and withholding tax consequences. 12. EMPLOYEE BENEFIT AND RETIREMENT PLANSThe Company has two defined benefit pension plans, one forU.S. employees and another forU.K. employees, together referred to as the "Plans Combined". TheU.K. plan was closed to new entrants in fiscal 2009. The Company has a postretirement medical and life insurance benefit plan forU.S. employees with a total benefit in fiscal 2021, 2020 and 2019 of$0.5 million ,$0.1 million and$0.2 million . The Company also has defined contribution plans with a total cost in fiscal 2021, 2020 and 2019 of$1.4 million ,$1.6 million and$1.7 million , respectively. The total Plans Combined cost for fiscal 2021, 45 -------------------------------------------------------------------------------- T able of Conte nts 2020 and 2019 was a benefit of$0.1 million , and a cost of$16.9 million and$1.2 million , respectively. The Net Periodic Benefit Cost for theU.S. Retirement Plan decreased significantly during the year due to the marked-to-market accounting methodology. OnDecember 21, 2016 , the Company amended theU.S. defined benefit pension plan to freeze benefit accruals effectiveDecember 31, 2016 . Consequently, the plan is closed to new participants and current participants no longer earn additional benefits afterDecember 31, 2016 . The Company amended its Postretirement Medical Plan effectiveDecember 31, 2013 whereby the Company terminated eligibility for employees ages 55-64. For retirees 65 and older, the Company's contribution is fixed at$28.50 or$23.00 per month depending upon the plan the retiree has chosen. Both the funded status and the Net Periodic Benefit Cost for the Non-qualified Excess Plan remained stable from the prior year. Although the plan experienced a liability increase due to discount rate decreases as well as demographic experience, gains and losses for this plan are smoothed over a longer time period - average lifetime - rather than being recognized immediately. The funded status for theU.K. Plan improved during the year as the plan experienced a liability decrease due to increase in discount rate from 1.59% atJune 30, 2020 to 1.86% atJune 30, 2021 . Similar to the Retirement Plan, the Net Periodic Benefit Cost for theU.K. Plan also decreased significantly during the year due to the marked-to-market accounting for this plan. The Net Periodic Benefit Cost for the Post Retirement Benefit Plan decreased significantly from the prior year due to re-measurement following the elimination of Life Insurance coverage effectiveFebruary 1, 2021 referred to below as the "Plan amendment". The funded status of the Plans Combined went from underfunded amount of$60.3 million in fiscal 2020 to$37.4 million in fiscal 2021, an improvement of$22.9 million as the benefit obligation decreased by$11.5 million and the assets increased by$11.4 million . The Plans Combined had a$19.6 million return on assets, the Company contributions were$8.0 million and the impact of foreign currency exchange increased the combined assets by$4.2 million . The Plans Combined assets as well as the benefit obligations were both reduced by benefits paid of$9.0 million and plan settlements of$11.4 million . The Plans Combined obligation also increased$5.2 million from foreign currency exchange,$4.5 million in service cost and was also reduced by$0.9 million due to an actuarial gain. In FY2020 the actuarial loss was$17.3 million . A plan settlement "Settlement" occurred during fiscal 2021, in theU.S. Retirement Plan, as a result of the annuity purchased, which decreased both liabilities and assets. The plan was also amended during fiscal 2021 to the Postretirement Benefit Plan to eliminate Life Insurance coverage. Settlement ASC 715-30-35 (subsections 79 to 83) describes the treatment of a pension settlement. A settlement is defined as: a transaction that (a) is an irrevocable action, (b) relieves the employer (or the plan) of primary responsibility for a pension benefit obligation, and (c) eliminates significant risks related to the obligation and the assets used to effect the settlement. The Company purchased an annuity contract on behalf of participants in which an insurance company unconditionally undertook a legal obligation to provide specified benefits to specific individuals and is considered a settlement for GAAP purposes. As such, special settlement accounting is triggered requiring accelerated recognition of the unrecognized gain recorded in Other Income on the Consolidated Statement of Operations and in the Postretirement benefit and pension obligation on the Consolidated Balance Sheets. The settlement expense is recorded in the period of the purchase. Liabilities and assets were remeasured as ofJune 30, 2021 and the change as a result of the remeasurement in the asset and liability values as included in the existing unrecognized gain/loss. A fraction of the determined gain/loss was recognized immediately in Other Income on the Consolidated Statement of Operations, and was based on the ratio of the amount settled divided by the total liability. The table below illustrates the funded status and unrecognized amounts before the remeasurement, after the remeasurement, as well as the effect of the settlement. These amounts are as of the remeasurement date ofJune 30, 2021 , in thousands. 46
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Before Effect of Effect of
remeasurement remeasurement After remeasurement settlement After settlement
Benefit obligation $ 133,748 $ 75 $ 133,823 $ (11,411) $ 122,412
Market value of assets $ 107,259 $ - $ 107,259 $ (11,411) $ 95,848
Funded status $ 26,489 $ 75 $ 26,564 $ - $ 26,564
Unrecognized (gain) loss $ 1,606 $ (75) $ 1,531 $ (130) $ 1,401
Prepaid / (Accrued) $ 28,095 $ - $ 28,095 $ (130) $ 27,965
The total annuity purchase amount released from the plan assets was
$11.4 million and a settlement credit of $0.1 million (based on 8.53% of
liability settled) was included in the net periodic benefit cost for fiscal year
ending June 30, 2021 .
Plan amendment
With a plan amendment that results in a change in liability, liabilities are
remeasured as of the effective date of the change and a new prior service
cost/(credit) base was created equal to the amount of the change in liability.
This prior service cost/(credit) was recognized in Other Comprehensive Income at
the date of the amendment and amortized as a component of the net periodic
benefit cost in future periods.
Effective February 1, 2021 , the Company amended the Postretirement Benefit Plan
to eliminate Life Insurance coverage for current and future retirees. This
amendment resulted in a decrease in liability of $5.6 million and triggered a
remeasurement of the net periodic benefit cost for fiscal 2021. This change is
amortized over 5.96 years, which results in a credit of $0.9 million per year.
However, only $0.4 million (5/12 of the annual amortization amount) is
recognized in fiscal 2021 based on the effective date of the plan change. The
total net periodic benefit cost for fiscal 2021 is based on 7/12 of the original
expense, plus 5/12 of the remeasured expense (including the plan amendment). The
table below summarizes the total net periodic benefit cost for the Post
Retirement Benefit plan for fiscal 2021, in thousands:
7/1/20 to 1/31/21 2/1/21 to
(before amendment) (after amendment) for fiscal 2021
Service cost $ 50 $ 15 $ 65
Interest cost $ 120 $ 21 $ 141
Amortization of prior service (credit) $ (313) $ (614) $ (927)
Amortization of net (gain) $ 97 $ 97 $ 194
Total expense $ (46) $ (481) $ (527)
Measurement date June 30, 2020 January 31, 2021 n/a
Discount rate 2.73 % 2.57 % n/a
In fiscal 2021 the Plans Combined had a Net Periodic Benefit gain of
$0.1 million as compared to an expense in fiscal 2020 of $17.0 million . In
fiscal 2020 the financial markets had an adverse impact on the Company's
earnings as an increased demand for bonds and the associated decrease in
interest rates significantly contributed to a $16.8 million non-cash pension
expense due to higher liabilities. The pension liability is based upon the
ten-year Corporate Bond Rate and is set on the last day of the fiscal year. This
generally accepted accounting principle coupled with the historically low
interest rates are driven by financial markets, economic policy and financial
conditions. The discount rate to determine net cost for the US pension liability
was lowered from 4.27% in June 2019 to 3.56% in June 2020 and 2.73% in June
2021 .
Under both U.S and U.K. defined benefit plans, benefits are based on years of
service and final average earnings. Plan assets consist primarily of investment
grade debt obligations, marketable equity securities and shares of the Company's
common stock. The asset allocation of the Company's domestic pension plan is
diversified, consisting primarily of investments in equity and debt securities.
The Company seeks a long-term investment return that is given reasonable
prevailing capital market expectations. Target allocations are 40% to 70% in
equities (including 10% to 20% in Company stock), and 30% to 60% in cash and
debt securities.
In fiscal 2022, the Company will use an expected long-term rate of return
assumption of 3.6% for the U.S. domestic pension plan, and 1.9% for the U.K.
plan. In determining these assumptions, the Company considers the historical
returns and expectations for future returns for each asset class as well as the
target asset allocation of the pension portfolio as a whole. In fiscal 2021 and
2020, the Company used a discount rate assumption of 2.7% and 3.6%, respectively
for the U.S. plan and 1.6%
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and 2.4%, respectively for the U.K. plan. In determining these assumptions, the
Company considers published third party data appropriate for the plans.
Other than the discount rate, pension valuation assumptions are generally
long-term and not subject to short-term market fluctuations, although they may
be adjusted as warranted by structural shifts in economic or demographic
outlooks. Long-term assumptions are reviewed annually to ensure they do not
produce results inconsistent with current market conditions. The discount rate
is adjusted annually based on corporate investment grade (rated AA or better)
bond yields, the maturities of which are correlated with the expected timing of
future benefit payments, as of the measurement date.
Based upon the actuarial valuations performed on the Company's defined benefit
plans as of June 30, 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 table below sets forth the actual asset allocation for the assets within the
Company's plans.
2021 2020
Asset category:
Cash equivalents 2 % 4 %
Fixed income 28 % 27 %
Equities 39 % 40 %
Mutual and pooled funds 31 % 29 %
100 % 100 %
The Company determines its investments strategies based upon the composition of
the beneficiaries in its defined benefit plans and the relative time horizons
that those beneficiaries are projected to receive payouts from the plans. The
Company engages an independent investment firm to manage the U.S. pension
assets.
Cash equivalents are held in money market funds.
The Company's fixed income portfolio includes mutual funds that hold a
combination of short-term, investment-grade fixed income securities and a
diversified selection of investment-grade, fixed income securities, including
corporate securities and U.S. government securities.
The Company invests in equity securities, which are diversified across a
spectrum of value and growth in large, medium and small capitalization funds and
companies, as appropriate to achieve the objective of a balanced portfolio,
optimize the expected returns and minimize volatility in the various asset
classes.
Other assets include pooled investment funds whose underlying assets consist
primarily of property holdings as well as financial instruments designed to
offset the long-term impact of inflation and interest rate fluctuations.
The Company has categorized its financial assets (including its pension plan
assets), based on the priority of the inputs to the valuation technique, into a
three-level fair value hierarchy as set forth below. If the inputs used to
measure the financial instruments fall within different levels of the hierarchy,
the categorization is based on the lowest level input that is significant to the
fair value measurement of the instrument.
Financial assets are categorized based on the inputs to the valuation techniques
as follows:
•Level 1 - Financial assets whose values are based on unadjusted quoted prices
for identical assets or liabilities in an active market which the Company has
the ability to access at the measurement date.
•Level 2 - Financial assets whose value are based on quoted market prices in
markets where trading occurs infrequently or whose values are based on quoted
prices of instruments with similar attributes in active markets.
•Level 3 - Financial assets whose values are based on prices or valuation
techniques that require inputs that are both unobservable and significant to the
overall fair value measurement. These inputs reflect management's own view about
the assumptions a market participant would use in pricing the asset.
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The tables below show the portfolio by valuation category as of June 30, 2021
and June 30, 2020 (in thousands):
June 30, 2021
Asset Category Level 1 Level 2 Level 3 Total %
Cash Equivalents $ 2,457 $ - $ - $ 2,457 2 %
Fixed Income - 38,155 - 38,155 28 %
Equities 51,095 1,887 - 52,982 39 %
Mutual & Pooled Funds 1,703 39,895 - 41,598 31 %
Total $ 55,255 $ 79,937 $ - $ 135,192 100 %
Included in equity securities at June 30, 2021 and 2020 are shares of the
Company's common stock having a fair value of $5.6 million and $2.2 million ,
respectively.
June 30, 2020
Asset Category Level 1 Level 2 Level 3 Total %
Cash Equivalents $ 5,165 $ - $ - $ 5,165 4 %
Fixed Income - 32,740 - 32,740 27 %
Equities 48,947 888 - 49,835 40 %
Mutual & Pooled Funds - 30,687 - 30,687 29 %
Total $ 54,112 $ 64,315 $ - $ 118,427 100 %
At June 30, 2020 in the U.K. Pension plan a fund in the amount of $5.4 million
was excluded from above and valued under NAV practical expedient. The value of
the combined plan assets at June 30, 2020 was $123,826 .
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U.S. and U.K. Plans Combined:
The status of these defined benefit plans is as follows (in thousands):
2021 2020 2019
Change in benefit obligation
Benefit obligation at beginning of year $ 184,190 $ 169,680 $ 159,213
Interest cost 4,476 5,417 6,013
Plan Settlement (11,411) - -
Exchange rate changes 5,238 (1,013) (1,697)
Benefits paid (9,019) (7,203) (7,217)
Actuarial (gain) loss (857) 17,309 13,368
Benefit obligation at end of year $ 172,617 $ 184,190 $ 169,680
Change in plan assets
Fair value of plan assets at beginning of year 123,826 122,033 118,693
Actual return on plan assets 19,616 2,163 6,589
Employer contributions 7,999 7,687 5,413
Plan Settlement (11,411) - -
Benefits paid (9,019) (7,203) (7,217)
Exchange rate changes 4,181 (854) (1,445)
Fair value of plan assets at end of year 135,192 123,826 122,033
Funded status at end of year $ (37,425) $ (60,364) $ (47,647)
Amounts recognized in balance sheet
Current liability $ (1,556) $ (373) $ (324)
Non-current liability (35,869) (59,991) (47,323)
Net amount recognized in balance sheet $ (37,425) $ (60,364) $ (47,647)
Amounts not yet reflected in net periodic benefit
costs and included in accumulated other comprehensive
loss
Accumulated loss $ (3,685) $ (19,115) $ (15,590)
Amounts not yet recognized as a component of net
periodic benefit cost (3,685) (19,115) (15,590)
Accumulated net periodic benefit cost in excess of contributions
(33,740) (41,249) (32,057)
Net amount recognized $ (37,425) $ (60,364) $ (47,647)
Components of net periodic benefit cost
Interest cost $ 4,476 $ 5,417 $ 6,013
Expected return on plan assets (4,457) (5,193) (5,129)
Settlement (gain) recognized (130) - -
Recognized actuarial loss 53 16,753 284
Net periodic (benefit)cost $ (58) $ 16,977 $ 1,168
Estimated amounts that will be amortized from
accumulated other comprehensive loss over the next
year
Net loss $ (57) $ (38) $ (38)
Information for pension plans with accumulated
benefits in excess of plan assets
Projected benefit obligation $ 172,617 $ 184,190 $ 169,680
Accumulated benefit obligation $ 172,617 $ 184,190 $ 169,680
Fair value of assets $ 135,192 $ 123,826 $ 122,033
50-------------------------------------------------------------------------------- T able of Conte ntsU.S. Plan: The status of theU.S. defined benefit plan is as follows (in thousands): 2021 2020 2019 Change in benefit obligation Benefit obligation at beginning of year$ 138,131 $ 126,380 $ 116,277 Interest cost 3,689 4,417 4,854 Plan Settlement (11,411) - - Benefits paid (5,880) (5,682) (5,565) Actuarial loss 104 13,016 10,814 Benefit obligation at end of year$ 124,633 $ 138,131 $ 126,380 Weighted average assumptions - benefit obligation Discount rate 2.69 % 2.73 % 3.56 % Rate of compensation increase n/a n/a n/a Change in plan assets Fair value of plan assets at beginning of year$ 87,292 $ 85,150 $ 82,140 Actual return on plan assets 18,864 1,071 4,132 Employer contributions 6,983 6,753 4,443 Plan Settlement (11,411) - - Benefits paid (5,880) (5,682) (5,565) Fair value of plan assets at end of year 95,848 87,292 85,150 Funded status at end of year$ (28,785) $ (50,839) $ (41,230) Amounts recognized in balance sheet Current liability$ (1,556) $ (373) $ (324) Noncurrent liability (27,229) (50,466) (40,906) Net amount recognized in balance sheet$ (28,785) $ (50,839) $ (41,230) Weighted average assumptions - net periodic benefit cost Discount rate 2.73 % 3.56 % 4.27 % Rate of compensation increase Varies Varies Varies Return on plan assets 4.25 % 5.00 % 5.00 %
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive loss
Income (loss)$ 464 $ (14,507) $ (13,196) Amounts not yet recognized as a component of net periodic benefit cost 464 (14,507) (13,196) Accumulated contributions less than net periodic benefit cost (29,249) (36,332) (28,034) Net amount recognized$ (28,785) $ (50,839) $ (41,230) Components of net periodic benefit cost Interest cost$ 3,689 $ 4,417 $ 4,854 Expected return on plan assets (3,712) (4,249) (4,067) Settlement (gain) recognized (130) - - Recognized actuarial loss 53 14,883 284 Net periodic (benefit) cost$ (100) $ 15,051 $ 1,071 Estimated amounts that will be amortized from accumulated other comprehensive loss over the next year Net loss (57) (53) (38) Information for plan with accumulated benefits in excess of plan assets Projected benefit obligation$ 124,633 $ 138,131 $ 126,380 Accumulated benefit obligation$ 124,633 $ 138,131 $ 126,380 Fair value of assets$ 95,848 $ 87,292 $ 85,150 51
-------------------------------------------------------------------------------- T able of Conte ntsU.K. Plan: The status of theU.K. defined benefit plan is as follows (in thousands): 2021 2020 2019 Change in benefit obligation Benefit obligation at beginning of year$ 46,059 $ 43,300 $ 42,936 Interest cost 787 1,000 1,159 Exchange rate changes 5,238 (1,013) (1,697) Benefits paid (3,139) (1,521) (1,652) Actuarial (gain) loss (961) 4,293 2,554 Benefit obligation at end of year$ 47,984 $ 46,059 $ 43,300 Weighted average assumptions - benefit obligation Discount rate 1.86 % 1.59 % 2.39 % Rate of compensation increase n/a n/a n/a Change in plan assets Fair value of plan assets at beginning of year$ 36,534 $ 36,883 $ 36,553 Actual return on plan assets 752 1,092 2,457 Employer contributions 1,016 934 970 Benefits paid (3,139) (1,521) (1,652) Exchange rate changes 4,181 (854) (1,445) Fair value of plan assets at end of year 39,344 36,534 36,883 Funded status at end of year$ (8,640) $ (9,525) $ (6,417) Amounts recognized in balance sheet Noncurrent liability (8,640) (9,525) (6,417) Net amount recognized in balance sheet (8,640) (9,525) (6,417)
Weighted average assumptions - net periodic benefit cost Discount rate
1.59 % 2.39 % 2.80 %
Rate of compensation increase n/a n/a n/a
Return on plan assets 1.88 % 2.62 % 2.98 %
Amounts not yet reflected in net periodic benefit
costs and included in accumulated other comprehensive
loss
Accumulated loss $ (4,149) $ (4,608) $ (2,394)
Amounts not yet recognized as a component of net
periodic benefit cost (4,149) (4,608) (2,394)
Accumulated net periodic benefit cost in excess of contributions
(4,491) (4,917) (4,023)
Net amount recognized $ (8,640) $ (9,525) $ (6,417)
Components of net periodic benefit cost
Interest cost 787 1,000 1,159
Expected return on plan assets (745) (944) (1,062)
Amortization of net loss - 1,870 -
Net periodic benefit cost $ 42 $ 1,926 $ 97
Information for plan with accumulated benefits in
excess of plan assets
Projected benefit obligation $ 47,984 $ 46,059 $ 43,300
Accumulated benefit obligation $ 47,984 $ 46,059 $ 43,300
Fair value of assets $ 39,344 $ 36,534 $ 36,883
52-------------------------------------------------------------------------------- T able of Conte nts Postretirement Medical and Life Insurance Benefits: The status of theU.S. postretirement medical and life insurance benefit plan is as follows (in thousands): 2021 2020 2019 Change in benefit obligation: Benefit obligation at beginning of year$ 7,705 $ 6,930 $ 6,385 Service cost 65 73 72 Interest cost 141 240 265 Plan amendments (5,585) - - Benefits paid (206) (329) (346) Actuarial (gain) loss (230) 791 554 Benefit obligation at end of year$ 1,890 $ 7,705 $ 6,930 Weighted average assumptions: benefit obligations Discount rate 2.69 % 2.73 % 3.56 % Rate of compensation increase n/a 2.64 % 2.64 % Change in plan assets Employer contributions 206 329 346 Benefits paid, net of employee contributions (206) (329) (346) Fair value of plan assets at end of year - - - Amounts recognized in balance sheet Current postretirement benefit obligation$ (107) $ (358) $ (353) Non-current postretirement benefit obligation (1,783) (7,347) (6,577) Net amount recognized in balance sheet$ (1,890) $ (7,705) $ (6,930) Weighted average assumptions - net periodic benefit cost Discount rate 2.73 % 3.56 % 4.27 % Rate of compensation increase n/a 2.64 % 2.64 %
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive loss Prior service credit
$ 6,898 $ 2,240 $ 2,777 Accumulated gain (loss) (1,736) (2,160) (1,452) Amounts not yet recognized as a component of net periodic benefit cost 5,162 80 1,325
Net periodic benefit cost in excess of accumulated contributions
(7,052) (7,785) (8,255)
Net amount recognized $ (1,890) $ (7,705) $ (6,930)
Components of net periodic benefit cost
Service cost $ 65 $ 73 $ 72
Interest cost 141 240 265
Amortization of prior service credit (927) (537) (537)
Amortization of accumulated loss 194 83 30
Net periodic benefit $ (527) $ (141) $ (170)
Estimated amounts that will be amortized from
accumulated other comprehensive loss over the next year
Prior service credit $ (1,474) $ 537 $ 537
Net loss 189 (166) (83)
$ (1,285) $ 371 $ 454
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one percentage point change in assumed
health care cost trend rates would have the following effects (in thousands):
1% Increase
2021 2020 2019
Effect on postretirement benefit obligation
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1% Decrease
2021 2020 2019
Effect on postretirement benefit obligation
Future pension and other benefit payments are as follows (in thousands):
Other
Fiscal Year Pension Benefits
2022 $ 9,476 $ 107
2023 7,963 105
2024 8,206 104
2025 8,192 104
2026 8,337 105
After 50,247 528
$ 92,421 $ 1,053
13. DEBT
Debt is comprised of the following (in thousands):
6/30/2021 6/30/2020
Short-term and current maturities
Loan and Security Agreement (Line of Credit)
1,509 597
Brazil Loans 5,297 3,935
15,959 4,532
Long-term debt (net of current portion)
Loan and Security Agreement (Term Loan) 6,010 5,941
Loan and Security Agreement (Line of Credit) - 20,400
6,010 26,341
$ 21,969 $ 30,873
Future maturities of debt are as follows (in thousands):
Fiscal Year
2022 $ 15.959
2023 1.560
2024 1.617
2025 1.677
2026 1.156
Thereafter -
Total $ 21.969
As a result of a decrease in sales related to the COVID-19 pandemic, the Company
anticipated potential non-compliance with its fixed charge coverage ratio for
the year ended June 30, 2021 under its Loan and Security Agreement (the "Loan
Agreement") by and among the Company and its U.S. operating companies
(collectively, the "Borrowers") and TD Bank, N.A . ("TD Bank "). On June 25,
2020 , the Borrowers and TD Bank entered into an amendment and restatement (the
"Amendment and Restatement") of the Loan Agreement. The Amendment and
Restatement waived the fixed charge coverage ratio for the quarter ended
June 30, 2021 . 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
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increases the permitted borrowings from a foreign bank from $5.0 million to
$15.0 million and permits the Company to draw the remainder of the outstanding
balance under the Loan Agreement.
Pursuant to the terms of the Company's Amended and Restated Loan and Security
Agreement of June 25, 2020 , the "First Amendment" to this loan agreement was
executed on September 17, 2020 , which include, among other things, (i) pause
testing of the Fixed Charge Coverage Ratio until September 30, 2021 and (ii)
establishment of a new minimum cumulative EBITDA and minimum liquidity covenants
in lieu thereof. TD Bank perfected its security interests in the Company's U.S.
based assets, increased the maximum interest charged on the Line of Credit from
and annual interest rate of 2.25% plus LIBOR to 3.50% plus LIBOR, and amended
the borrowing base for the line of credit from 80% of Qualified AR and 50% of
the lower of Cost or Market of US inventory values to 80% of qualified AR plus
85% of the Net Orderly Liquidation Value (NOLV) of US Inventory plus 62.5% of
total appraised US real estate values. As a result of this change, the Company
is projected to maintain its current borrowing capacity of $25,000,000 under the
Line of Credit. The Company underwent a series of appraisals and field exams in
all US locations as part of restructuring this agreement. In addition, the
Company will provide additional reporting to TD Bank, including monthly profit
and loss statements, balance sheets, cash flow statements and forecasting. This
minimum adjusted EBITDA covenant is based on the Company's plan for a slow
pandemic recovery throughout FY21 and the impact of the Company's restructuring
plan initiatives. The Company will apply certain proceeds from the sale of US
real estate assets against the principle balance of the term loans under the TD
Bank loan agreement. The Agreement will revert to the existing covenant package
for the quarter ending September 30, 2021 and every quarter thereafter.
On December 31, 2019 , the Company entered into the Tenth Amendment of its Loan
and Security Agreement ("Tenth Amendment"). Under the revised agreement, the
credit limit for the Revolving Loan was increased from $23.0 million to $25.0
million . In addition, the Company entered into a new $10.0 million 5 years 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 principle payments commencing January 1, 2021 . Under the Tenth
Amendment, the credit limit for external borrowing was increased from $2.5
million to $5.0 million .
In fiscal 2020 the Company paid-off $3.5 million of the Bytewise term loan
(November 2011 ) using the proceeds from borrowing $6.5 million on the Loan and
Security Agreement Term Loan.
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 loans are backed by the entity's US dollar
denominated export receivables were made with Brazilian Banks. As of June 30,
2021 the following table represents Brazil's outstanding debt (in thousands):
Outstanding
Lending Institution Interest Rate Beginning Date Ending Date Balance
Brasil 4.30 % September 2020 August 2021 $ 119
Brasil 3.38 % November 2020 November 2021 719
Bradesco 2.37 % December 2020 December 2021 1,000
Bradesco 4.74 % December 2020 December 2021 600
Santanter 5.98 % February 2021 February 2022 1,500
Brasil 2.80 % May 2021 May 2022 1,359
$ 5,297
14. COMMON STOCK
Class B common stock is identical to Class A except that it has 10 votes per
share, is generally nontransferable except to lineal descendants of
stockholders, cannot receive more dividends than Class A, and can be converted
to Class A at any time. Class A common stock is entitled to elect 25% of the
directors to be elected at each meeting with the remaining 75% being elected by
Class A and Class B voting together.
15. CONTINGENCIES AND COMMITMENTS
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The Company is involved in certain legal matters which arise in the normal
course of business and we believe it is not reasonably possible such matters
would have a material adverse impact on the Company's financial condition,
results of operations and cash flows.
While our purchase obligations are generally cancellable without penalty,
certain vendors charge cancellation fees or minimum restocking charges based on
the nature of the product or service. The Company's Brazilian subsidiary has
been into a long-term, volume-based purchase agreement for electricity which
expires in 2023. Under this agreement if the Company purchases more than minimum
monthly amount of energy it pays the incremental purchase at market rates. If
the Company does not use the monthly amount they sell it back at market rates.
In the event we cancel we are subject to $0.6 million per year fee for the next
two years until it expires. We expect to enter into a new contract beginning in
2024 with the same cancellation fee per year for the three year period.
16. CONCENTRATIONS OF CREDIT RISK
The Company believes it has little significant concentrations of credit risk as
of June 30, 2021 . Trade receivables are dispersed among a large number of
retailers, distributors and industrial accounts in many countries, with none
exceeding 10% of consolidated sales.
17. FINANCIAL INFORMATION BY SEGMENT & GEOGRAPHIC AREA
The Company offers its broad array of measuring and cutting products to the
market through multiple channels of distribution throughout the world. The
Company's products include precision tools, electronic gauges, gauge blocks,
optical vision and laser measuring equipment, custom engineered granite
solutions, tape measures, levels, chalk products, squares, band saw blades, hole
saws, hacksaw blades, jig saw blades, reciprocating saw blades, M1® lubricant
and precision ground flat stock. The Company reviews and manages its business
geographically and has historically made decisions based on worldwide
operations.
The North American segment's operations include all manufacturing and sales in
the U.S. , Canada and Mexico . The International segment's operations include all
locations outside North America , primarily in Brazil , United Kingdom and China .
The chief operating decision maker, who is the Company's CEO, reviews operations
on a geographical basis and decisions about where to invest the Company's
resources are made based on the current results and forecasts of operations in
those geographies. Since the markets for the Company's products are sufficiently
different in North America than they are in the rest of the world and in view of
the significant impact that currency fluctuation plays outside the U.S. on the
revenue of the Company, the Company's business review separates North America
from operations outside North America . For this reason, the Company is
reflecting two operating segments that align with management's review of
operations and decisions to allocate resources.
Segment income is measured for internal reporting purposes by excluding
corporate expenses, other income and expense including interest income and
interest expense and income taxes. Corporate expenses consist primarily of
executive compensation, certain professional fees, and costs associated with the
Company's global headquarters. Goodwill and debt are unallocated. Financial
results for each reportable segment are as follows (in thousands):
Year Ended June 30, 2021
North
America International Unallocated Total
Sales1 $ 119,619 $ 100,025 $ - $ 219,644
Restructuring (1,059) (2,606) - (3,664)
Operating income (loss) 13,144 10,821 (7,399) 16,566
Capital expenditures and software
development 3,017 2,690 - 5,707
Depreciation and amortization 4,126 2,166 - 6,292
Current assets4 39,512 70,611 9,105 119,228
Long-lived assets5 31,006 15,187 18,818 65,011
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Year Ended June 30, 2020
North
America International Unallocated Total
Sales2 $ 121,834 $ 79,617 $ - $ 201,451
Goodwill and intangibles impairment (6,496) - - (6,496)
Restructuring (341) (1,239) - (1,580)
Operating (loss) income (2,055) 3,841 (7,090) (5,303)
Capital expenditures and software
development 6,992 3,608 - 10,600
Depreciation and amortization 4,942 2,253 - 7,195
Current assets4 35,030 55,610 13,458 104,098
Long-lived assets5 34,354 13,213 21,018 68,585
Year Ended June 30, 2019
North
America International Unallocated Total
Sales3 $ 136,387 $ 91,635 $ - $ 228,022
Operating income (loss) 9,468 8,043 (6,209) 11,221
Capital expenditures and software
development 3,617 6,610 - 7,227
Depreciation and amortization 5,022 2,316 - 7,338
Current assets4 41,188 63,205 15,582 119,975
Long-lived assets5 35,638 14,168 20,306 70,112
_______________
1.Excludes $4,323,000 of North American segment intercompany sales to the
International segment and $12,765,000 intercompany sales of the International
segment to the North American segment.
2 Excludes $4,040 of North American segment intercompany sales to the
International segment and $13,820 intercompany sales of the International
segment to the North American segment.
3.Excludes $4,879 of North American segment intercompany sales to the
International segment and $16,187 intercompany sales of the International
segment to the North American segment.
4.Current assets primarily consist of accounts receivable, inventories and
prepaid expenses. Assets not allocated to the segments include cash and cash
equivalents.
5.Long lived assets consist of property, plant and equipment, net taxes
receivable, deferred tax assets, net intangible assets & goodwill.
Geographic information about the Company's sales and long-lived assets are as
follows (in thousands):
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Sales Year Ended June 30,
2021 2020 2019
North America
United States $ 111,935 $ 113,989 $ 127,359
Canada & Mexico 7,684 7,845 9,028
119,619 121,834 136,387
International
Brazil 65,198 49,254 54,324
United Kingdom 19,783 18,869 24,042
China 7,746 6,048 7,370
Australia & New Zealand 7,298 5,446 5,899
100,025 79,617 91,635
Total Sales $ 219,644 $ 201,451 $ 228,022
Long-lived Assets Year Ended June 30,
2021 2020 2019
North America
United States $ 30,935 $ 34,264 $ 35,594
Canada & Mexico 71 90 44
31,006 34,354 35,638
International
Brazil 10,796 8,050 10,067
United Kingdom 1,320 1,948 2,046
China 2,713 2,881 1,944
Australia & New Zealand 358 334 111
15,187 13,213 14,168
Total Long-Lived Assets $ 46,193 $ 47,567 $ 49,806
18. QUARTERLY FINANCIAL DATA (unaudited) (in thousands except per share data)
Earnings
/ (Loss) Diluted
Before Net Basic Earnings Earnings
Net Gross Income Earnings / / (Loss) / (Loss)
Quarter Ended Sales Margin Taxes (Loss) Per Share Per Share
September 2019 $ 52,114 $ 17,703 $ 1,276 $ 778 $ 0.11 $ 0.11
December 2019 56,864 18,836 1,875 1,260 0.18 0.18
March 2020 49,998 14,844 287 613 0.09 0.09
June 2020 42,475 10,827 (23,435) (24,490) (3.52) (3.52)
$ 201,451 $ 62,210 $ (19,997) $ (21,839) $ (3.14) $ (3.14)
September 2020 $ 49,411 $ 15,572 $ 1,834 $ 4,116 $ 0.59 $ 0.57
December 2020 54,054 17,605 5,775 3,857 0.54 0.53
March 2021 54,944 18,149 4,513 3,017 0.42 0.41
June 2021 61,235 22,016 5,304 4,543 0.65 0.60
$ 219,644 $ 73,342 $ 17,426 $ 15,533 $ 2.20 $ 2.11
Operating income in the June quarter fiscal 2021 was $4.7 million , exclusive of
$2.1 million of adjustments related to restructuring. Restructuring expense for
fiscal year 2021 was $3.7 million .
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