THE L.S. STARRETT COMPANY In "Management's discussion and analysis on financial condition and results of
operations" in this quarterly report on Form 10-Q, we discuss non-
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"). Currency-neutral sales are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations. Adjusted operating income adjusts for restructuring costs and the gain on the sale of assets that are reflected in one period but not the other in order to show comparative operational performance. We include a reconciliation of currency-neutral revenues and adjusted operating income to its comparableU.S. GAAP financial measures. References to currency-neutral sales and adjusted operating income should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance withU.S. GAAP and may not be comparable to similarly titled nonU.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 2 regarding segment results of operations. The Company's business is aggregated into two reportable segments based on geography of operations: North American Operations and International Operations. Segment income is measured for internal reporting purposes by excluding corporate expenses, which are included in the unallocated column in the following tables as well as Note 2. These tables above are included to better explain our consolidated operational performance by showing more detail by business segment and reconcilingU.S. GAAP operating income and adjusted operating income.
Three months ended
The following table represents key results of operations on a consolidated basis
for the three months ended
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Table of Contents
Three Months Ended
(Amounts in thousands) 9/30/2021 9/30/2020 $ Change favorable % Change
(unfavorable)
Net sales $ 61,514 $ 49,411 $ 12,103 24.5 %
Gross margin 20,145 15,572 4,573 29.4 %
% of net sales 32.7 % 31.5 %
Selling, general and administrative expenses 16,012 13,391 (2,621) (19.6) %
% of net sales 26.0 % 27.1 %
Restructuring charges - 346 346 100.0 %
Operating income 4,133 1,835 2,298 125.2 %
Other income (expense), net 226 (1) 227 227.0 %
Income before income taxes 4,359 1,834 2,525 137.7 %
Income tax expense (benefit) 1,127 (2,282) (3,409) (149.4) %
Net income $ 3,232 $ 4,116 (884) (21.5) %
Three Months Ended
(Amounts in thousands) 9/30/2021 9/30/2020 $ Change favorable % Change
(unfavorable)
Operating income as reported $ 4,133 $ 1,835 $ 2,298 125 %
Removing restructuring charges - (346) (346) -
Non-U.S. GAAP adjusted operating income $ 4,133 $ 2,181 $ 1,952 90 %
% of net sales 6.7 % 4.4 % 230 basis points
Key Results by Reporting Segment
Three Months Ended September 30, 2021 Three Months Ended September 30,2020
(Amounts in thousands) North America International Corporate Total North America International Corporate Total
Net sales $ 33,809 $ 27,705 $ - $ 61,514 $ 25,984 $ 23,427 $ - $ 49,411
Gross margin 9,535 10,610 - 20,145 6,838 8,734 - 15,572
% of net sales 28.2 % 38.3 % 32.7 % 26.3 % 37.3 % 31.5 %
Selling, general and
administrative expenses 7,034 7,027 1,951 16,012 5,653 5,904 1,834 13,391
% of net sales 20.8 % 25.4 % 26.0 % 21.8 % 25.2 % 27.1 %
Restructuring charges - - - - 346 - - 346
Operating income 2,501 3,583 (1,951) 4,133 839 2,830 (1,834) 1,835
% of net sales 7.4 % 12.9 % 6.7 % 3.2 % 12.1 % 3.7 %
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Table of Contents Non-U.S. GAAP Measure Reconciliation: Fiscal 2022 Q1 "Currency Neutral"Net Sales Three months ended (Amounts in Thousands) 9/30/2021 9/30/2020 $ Change % Change Net Sales, as reported 61,514 49,411 12,103 24.5 % Currency Neutralizing Adjustment* (1,093) - (1,093) (2.2) % Q1 FY22 Currency Neutral Net Sales 60,421 49,411 11,010 22.3 % North America Net Sales, as reported 33,809 25,984 7,825 30.1 % Currency Neutralizing Adjustment* (137) - (137) (0.5) % Q1FY22 Currency Neutral North America Net 33,672 25,984 7,688 29.6 %
Sales
International Net Sales, as reported 27,705 23,427 4,278 18.3 % Currency Neutralizing Adjustment* (956) - (956) (4.1) % Q1FY22 Currency Neutral International Net 26,749 23,427 3,322 14.2 %
Sales
*"Currency Neutralizing Adjustment" = Change when converting Q1FY22 sales in non USD functional currencies at the same exchange rates used in the comparison period
Overview
As the Company closed fiscal 2021, order intake and sales volume across its portfolio were equal to or exceeding pre-pandemic levels. This trend has continued into the September quarter and the Company expects continuation in fiscal 2022. For the three months endingSeptember 30, 2021 andSeptember 30, 2020 sales were$61.5 million and$49.4 million , respectively, a$12.1 million or 24.5% improvement. As the United States Dollar has weakened against the Brazilian currency during the comparison period, currency neutral sales would be$60.4 million , with the percentage increase in sales slightly lower at 22.3%. Consolidated gross margins are improved during the same period, from 31.5% of sales in the period endingSeptember 30, 2020 to 32.7% of sales in the period endingSeptember 30, 2021 . This is the positive impact of our restructuring efforts completed in fiscal 2021, which are partially offset by pandemic related supply chain challenges, raw material price increases, and an increase in wages related to labor shortages inNorth America . The Company expects supply chains issues to continue into calendar year 2022. Selling, General and Administrative expenses have increased overall by$2.6 million , or 19.6% when comparing the quarter ending onSeptember 30, 2020 to the quarter ending onSeptember 30, 2021 , largely due to variable selling expenses related to the increase in sales. As a percentage of sales overall, selling, general and administrative expenses have decreased from 27.1% of sales in the quarter endingSeptember 30, 2020 to 26% in the quarter ending onSeptember 30, 2021 . In the three months endingSeptember 30, 2021 operating income was$4.1 million , a$2.3 million or 125.2% improvement overSeptember 30, 2020 during which the company reported operating income of$1.8 million .Net Sales In the three months endingSeptember 30, 2021 sales were$61.5 million withNorth America sales of$33.8 million and International of$27.7 million . In the three months endingSeptember 30, 2020 North America sales were$26.0 million and International sales were$23.4 million . North American sales have increased 30.1% and International sales have increased 18.3% in the quarter endingSeptember 30, 2021 when comparing to the first quarter of fiscal 2021. The foreign exchange translation impact on reported sales was favorable in the three months endingSeptember 30, 2021 , as compared to being unfavorable during the period ending a year prior. On a currency neutral basis when comparing the two periods, sales in the current period would be$60.4 million or 22.3% higher than the$49.1 million in sales reported for the three months endingSeptember 30, 2020 . Gross Margin Gross margin of$20.1 million in the three months endingSeptember 30, 2021 is an increase of$4.6 million or 29.4% over the three months endingSeptember 30, 2020 at$15.6 million . In the three months endingSeptember 30, 2021 compared toSeptember 30, 2020 , International gross margin improved to$10.6 million , or 38.3% of sales, compared to$8.7 million , or 37.3% of sales. North American gross margin improved to$9.5 million , or 28.2% of sales in the three months endingSeptember 30, 2021 from$6.8 million , or 26.3% of sales in the three months endingSeptember 30, 2020 . Improvement in gross margin as a percentage of sales is related to the positive impact of restructuring projects completed in fiscal 2021 and improved factory utilization rates associated with higher volumes. However, those positive impacts have been partially offset by responses to pandemic related supply chain delays and challenges, an increase in wages related to labor shortages inNorth America , and raw material price increases. 20
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Table of Contents Selling, General and Administrative Expenses Selling, general and administrative expenses of$16.0 million in the three months endingSeptember 30, 2021 increased$2.6 million or 19.6% over the three months endingSeptember 30, 2020 , excluding$0.3 million of restructuring cost at$13.4 million . The increase in selling, general and administrative expenses is due primarily to some variable selling expenses which are increased commensurate with the increase in sales. Additionally, as a cash conserving measure during the height of the pandemic, salaries and compensation of many selling and administrative employees had been temporarily reduced by up to 20% during the period endingSeptember 30, 2020 , and were completely restored during the period endingSeptember 30, 2021 . Overall, selling, general and administrative expenses as a percentage of sales improved to 26.0% in the three months endingSeptember 30, 2021 from 27.1% in the three months endingSeptember 30, 2020 , withNorth America decreasing from 21.8% of sales to 20.8% of sales and International increasing to 25.4% of sales from 25.2% of sales during the comparative period. Income Taxes In the three months endingSeptember 30, 2021 , the tax expense was$1.1 million on a profit before tax of$4.4 million (an effective tax rate of 26%). This was higher than theU.S. statutory tax rate of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularlyBrazil with a statutory rate of 34%, offset by discrete tax benefits recognized from excess stock compensation deductions, tax credits and permanent deductions generated from research expenses. In the three months endingSeptember 30, 2020 , the tax expense was a benefit of$(2.3) million on a profit before tax of$1.8 million (an effective tax rate of (124)%). Before the discrete benefits relating to legislation enacted during the first quarter in the amount of($2.7) million related to the impact of the GILTI high-tax exclusion and($0.2) million related to the impact of the increase inUK corporate tax rate on the net deferred tax asset, tax expense was$0.7 million or 36% of pre-tax income. This was higher than theU.S. statutory tax rate of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularlyBrazil with a statutory rate of 34%, offset by tax credits and permanent deductions generated from research expenses. Net Income In the three months endingSeptember 30, 2021 net income was$3.2 million or 21.5% lower than net income of$4.1 million in the three months endingSeptember 30, 2020 , which had non-recurring income tax benefit of$2.3 million because the first quarter of fiscal 2021 includes a discrete benefit of$2.7 million related to the impact of enacted GILTI legislation.
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