THE L.S. STARRETT COMPANY RESULTS OF OPERATIONS
Use of Non-
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, adjusted operating income, adjusted net income, and adjusted earnings per share to adjust for restructuring costs, gain on the sale of assets, one-time tax credits, or the impairment of intangible assets and the large pension impact 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"). Currency-neutral sales revenues 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. We include a reconciliation of currency neutral sales, adjusted operating income, adjusted net income, and adjusted earnings per share to its comparableU.S. GAAP financial measures. References to currency-neutral revenues, adjusted operating income, adjusted net income, and adjusted earnings per share 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:
18
--------------------------------------------------------------------------------
Fiscal 2022 comparison to Fiscal 2021 Fiscal 2021 comparison to Fiscal 2020
Fiscal Year Fiscal Year Favorable Fiscal Year Favorable
(unfavorable) (unfavorable)
(Amounts in Thousands) 6/30/2022 6/30/2021 $ Change % Change 6/30/2020 $ Change % Change
Net sales $ 253,701 $ 219,644 $ 34,057 15.5 % $ 201,451 $ 18,193 9.0 %
Gross margin 84,246 $ 73,342 $ 10,904 14.9 % $ 62,210 $ 11,132 17.9 %
% of net sales 33.2 % 33.4 % 30.9 %
Selling, general, and 62,260 $ 56,316 $ (5,944) (10.6) % $ 59,437 $ 3,121 5.3 %
administrative expenses
% of net sales 24.5 % 25.6 % 29.5 %
Restructuring charges 431 $ 3,664 $ 3,233 88.2 % $ 1,580 $ (2,084) (131.9) %
Goodwill and intangible - - - - % $ 6,496 6,496 100.0 %
impairment
Gain on sale of building - (3,204) (3,204) 100.0 % - 3,204,000 100.0 % Operating income 21,555$ 16,566 $ 4,989 30.1 %$ (5,303) $ 21,869 412.4 % % of net sales 8.5 % 7.5 % (2.6) % Other Income (expense) (36)$ 860 $ (896) (104.2) %$ (14,694) $ 15,554 105.9 % Net earnings (loss) 21,519$ 17,426 $ 4,093 23.5 %$ (19,997) $ 37,423 187.1 % Income tax expense 6,641$ 1,893 $ (4,748) (250.8) %$ 1,842 $ (51) 2.8 % Net earnings (loss)$ 14,878 $ 15,533 $ (655) (4.2) %$ (21,839) $ 37,372 171.1 % US GAAP to NON-U.S. GAAP Operating Income Reconciliation Fiscal 2022 comparison to Fiscal 2021 Fiscal 2021 comparison to Fiscal 2020 Fiscal Year Fiscal Year Favorable Fiscal Year Favorable (unfavorable) (unfavorable) (Amounts in Thousands) 6/30/2022 6/30/2021 $ Change % Change 6/30/2020 $ Change % Change Operating income, as reported$ 21,555 $ 16,566 $ 4,989 30.1 %$ (5,303) $ 21,869 412.4 % Restructuring charges 431$ 3,664 (3,233) (88.2) %$ 1,580 $ 2,084 131.9 %Goodwill and intangibles impairment - $ - - - %$ 6,496 $ (6,496) (100.0) % Gain on sale of building - (3,204) 3,204 100.0 % $ - $ (3,204) (100.0) % Adjusted operating income$ 21,986 $ 17,026 $ 4,960 29.1 %$ 2,773 $ 14,253 514.0 % % of net sales 8.7 % 7.8 % + 90 bps 1.4 % + 640 bps US GAAP to NON-U.S. GAAP Net Income and EPS Reconciliation FY22 FY21 FY20 Net income (loss), as reported$ 14,878 $ 15,533 $ (21,839) Less Gain on sale - (3,204) 0 Less GILTI Recalculation 9-30-20 - (2,608) 0 Restructuring add back 431 3,664 1,580 Goodwill and intangibles impairment add back - - 6,496 Pension net periodic benefit cost add back - - 16,753 Non-GAAP adjusted net income$ 15,309 $ 13,385 $ 2,990 Shares diluted 7,437 7,367 6,949 Non-GAAP adjusted diluted EPS$ 2.06 $ 1.82 $ 0.43 19
--------------------------------------------------------------------------------
US GAAP to NON-
Fiscal Year 2022 Fiscal Year 2021 Fiscal Year 2020
(Amounts in Thousands) North America Inter-national Corp Total North America Inter-national Corp Total North America Inter-national Corp Total
Net Sales $141,470 $112,231 $0 $253,701 $119,619 $100,025 0 $219,644 $121,834 $79,617 $0 $201,451
Gross Margin 41,703 42,544 - 84,246 36,066 37,277 - 73,342 32,635 29,575 - 62,210
Selling, general and admin 27,830 26,677 7,753 62,260 25,066 23,850 7,400 56,316 34,349 24,495 7,090 65,934
Operating income, as reported 13,873 15,435 (7,753) 21,555 13,144 10,821 (7,399) 16,566 (2,055) 3,842 (7,090) (5,303)
Restructuring charges - 431 - 431 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 $13,873 $15,867 $-7,753 $21,986 $10,999 $13,426 $-7,399 $17,026 $4,782 $5,081 $-7,090 $2,773
% of net sales 9.8 % 14.1 % 8.7 % 9.2 % 13.4 % 7.8 % 3.9 % 6.4 % 1.4 %
NON-U.S. GAAP Measure Reconciliation: Fiscal Years 2022-2020 "Currency Neutral"
Net Sales
FY22 comparison to FY21: FY21 comparison to FY20:
Amounts in Thousands Fiscal 2022 Fiscal 2021 $ Change % Change Fiscal 2021 Fiscal2020 $ Change % Change
Total sales, as reported 253,701 219,644 34,057 15.5 % 219,644 201,451 18,193 9.0 % Currency neutralizing adjustment (2,014) - (2,014) (0.9) % 11,369 - 11,369 5.6 % Total FY22 currency neutral net sales 251,687 219,644 32,043 14.6 % 231,013 201,451 29,562 14.7 % North America net sales, as reported 141,470 119,619 21,851 18.3 % 119,619 121,834 (2,215) (1.8) % Currency neutralizing adjustment (135) - (135) (0.1) % (174) - (174) (0.1) % FY22 currency neutral North American net sales 141,335 119,619 21,716 18.2 % 119,445 121,834 (2,389) (2.0) % International net sales, as reported 112,231 100,025 12,206 12.2 % 100,025 79,617 20,408 25.6 % Currency neutralizing adjustment (1,879) - (1,879) (1.9) % 11,543 - 11,543 14.5 % FY22 currency neutral International sales net sales 110,352 100,025 10,327 10.3 % 111,568 79,617 31,951 40.1 %
*"Currency Neutralizing Adjustment" = Change when converting one year (FY22 and FY21) sales in non USD functional currencies at the same exchange rates used in the comparison period (FY21 and FY20).
Fiscal 2022 Compared to Fiscal 2021
Overview
New order intake remained strong across the business throughout fiscal 2022, representing an increase of over 16% compared to fiscal 2021. As a result, backlog remained at historically high levels, over 38% higher as ofJune 30, 2022 , compared toJune 30, 2021 . However, the Company is anticipating a softening in order intake over the next several months.Net Sales overall during fiscal year 2022 were$253.7 million , up 15.5% as compared to fiscal 2021. Although foreign currency translation impact in aggregate had been minimal over the first six months of fiscal 2022, the United States Dollar weakened in the last half of fiscal 2022, particularly in relation to the Brazilian Real. This has had the impact of inflatingNet Sales by$2.0 million throughout the fiscal year. Currency neutral net sales for fiscal 2022 were$251.7 million , an increase of$32.1 million or 14.6% compared to$219.6 million for fiscal 2021. 20 -------------------------------------------------------------------------------- The Company continued to benefit from its restructuring activities completed in Fiscal 2021 that resulted in a reduction of excess production capacity and selling, general and administrative expenses. However, pandemic related challenges continued to evolve throughout the fiscal year in relation to supply chain, freight costs, logistics, and wage inflation and labor shortages which impacted plant utilization inNorth America . These challenges had been offsetting those restructuring gains in the first half of the fiscal year. In an effort to mitigate the impact of these challenges, the Company implemented price increases in the first quarter of fiscal 2022 inBrazil and in theU.S. Additional price increases and surcharges on shipped orders were implemented on a rolling basis throughout the third quarter of fiscal 2022, and were successfully implemented and taking nearly full effect by the end of that quarter and throughout the fourth quarter of fiscal 2022. The Company will continue to monitor such challenges as they evolve and adjust accordingly to maintain sufficient operating margins. Operating income was$21.6 million in fiscal year 2022 or 8.5% of net sales, compared to$16.6 million or 7.5% of net sales in fiscal 2021.. Non-GAAP adjusted operating income, which removes the impact of restructuring costs and the gain on sales of assets, when applicable was$22.0 million in fiscal year 2022, or 8.7% of net sales, compared to$17.0 million in fiscal 2021, or 7.8% of net sales, representing a 30% overall and 90 basis point improvement relative to net sales. Net income for fiscal 2022 was$14.9 million , compared to$15.5 million for fiscal 2021. However, while fiscal 2022 included$0.4 million in restructuring expense, fiscal 2021 included the$3.2 million gain on the sale of the Company'sMt. Airy, North Carolina facility, a$2.6 million GILTI tax credit, and$3.7 million of restructuring expense. When adjusting for those one-time items, Adjusted Net Income for fiscal 2022 was$15.3 million compared to$13.4 million for fiscal 2021, a 17% increase. Diluted earnings per share, "EPS" were$2.00 for fiscal 2022, compared to$2.11 for fiscal 2021. However, when adjusting Net Income for the one-time items listed in the Non-GAAP Adjusted Net Income calculation, fiscal 2022 diluted earnings per share are$2.06 compared to$1.82 for fiscal 2021, an increase of$0.24 per share or 13%. InMarch 2022 , the Company adopted restructuring plans at a total projected cost of$0.8 million related to the closure of its distribution and sales centers inSingapore andJapan . The Company will continue to serviceAsia out ofBrazil andChina . The plan was successfully completed byJune 30, 2022 . The cost to close theSingapore andJapan operations was comprised of$0.6 million in headcount reduction,$0.1 in fixed asset and lease disposal, and$0.1 million in professional fees The Company anticipates an annualized savings reflected in the Consolidated Statements of Operations in Selling, General and Administrative expenses for this project of$0.6 million . (See Note 9 Restructuring) The COVID pandemic has recently impacted our operation inSuzhou, China and still could have an impact globally. Along with the ongoing global supply chain challenges, theSuzhou China operation was impacted by government controls as it relates to pandemic related cases and it affects the Company's ability to bring in material and ship finished product to third-partycustomers and Starrett intercompany partners. Currently, it has not materially affected the Company's Consolidated Statement of Operations. As ofJune 30, 2022 , theShanghai ports had been restored to full functionality. However, it remains very difficult for management to predict pandemic related measures that could be implemented by the Chinese government. As a result, management continues its planning process and expects itsSuzhou plant may continue to have logistical difficulties in the early stages of fiscal 2023 and potentially longer.
Fiscal year 2022 net sales were$253.7 million an increase of$34.1 million or 15.5% compared to fiscal year 2021 of$219.6 million . Net sales during fiscal year 2022 inNorth America were$141.5 million compared to$119.6 million in fiscal year 2021 an increase of$21.8 million or 18.3%. Net sales during fiscal year 2022 in International operations were$112.2 million compared to$100.0 million in fiscal year 2021, an increase of$12.2 million or 12.2%. Fiscal 2022 net sales compared to fiscal 2021 were positively impacted by$2.0 million , or 0.9% due to currency fluctuation, of which$0.1 was in North American operations (Mexico andCanada ) and$1.9 million due to our International operations, primarilyBrazil .
Gross Margin
Gross margin in fiscal 2022 increased to$84.2 million or 33.2% of sales compared to$73.3 million or 33.4% of sales in fiscal 2021. The decrease in relative gross margin is due to continued pandemic related headwinds involving material cost increases, labor shortages and wage inflation, and logistics challenges particularly in the first half of fiscal 2022. These challenges have since been mitigated through pricing actions and surcharges implemented and taking effect in the second half of the fiscal year.North America gross margin increased$5.6 million or 15.5% to$41.7 million from$36.1 million in fiscal 2021, or 29.5% and 30.2% of sales respectively. International gross margins increased$5.2 million or 13.9% to$42.5 million from$37.3 million in fiscal 2021 or 37.9% and 37.1% of sales respectively, due largely to the increase in sales. 21 --------------------------------------------------------------------------------
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including corporate expenses,
increased in fiscal year 2022 by
The Company has continued to benefit from selling, general and administrative reductions enacted as part of the fiscal 2021 restructuring programs, as evidenced in the decline of these costs as a percentage of net sales, from 25.6% in fiscal 2021 to 24.5% in fiscal 2022. This benefit was partially offset by some variable selling costs tied to the higher level of sales, and temporary salary reductions enacted during the initial phase of the pandemic that carried over into the first six months of fiscal 2021 which have since been restored.
Operating Income
Operating income was$21.6 million in fiscal year 2022, an increase of$5.0 million or 30.1% compared to operating income in fiscal 2021 of$16.6 million . The North American operating income was$13.9 million remaining flat as compared to fiscal 2021 of$13.1 million . International operations had operating income in fiscal 2022 of$15.4 million an increase of$4.6 million or 42.6% compared to operating income of$10.8 million in fiscal 2021. Adjusted operating income was$22.0 million or 8.7% of sales in fiscal year 2022 as compared to$17.0 million or 7.8% or sales. The non-GAAP adjustments add back restructuring charges in both years and removes the gain on the sale of the building in fiscal 2021 for comparison purposes.
Other Income (Expense)
Other income in fiscal 2022 was
Income Taxes Income taxes in fiscal 2022 were$6.6 million on pre-tax income of$21.5 million resulting in an effective tax rate of 30.9%. The effective tax rate 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. 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%.
Fiscal 2021 Compared to Fiscal 2020
Overview
The Covid Pandemic has had a substantial impact on the Company's global sales fiscal years 2021 and 2020. The 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 net 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, the Company
22
--------------------------------------------------------------------------------
had a 7.8% operating income as a percentage of sales as compared to an operating
loss in fiscal 2020. As shown in the above table, management also looks at the
non-GAAP reconciliation, adjusting out restructuring, impairment and the gain on
facility sales. Adjusted operating income was 7.8%, the same as U.S. GAAP
because the facility gain and restructuring offset each other. This was a 640
basis point increase over fiscal 2020.
Net sales in fiscal 2021 were $219.6 million , an increase of $18.2 million or
9.0% compared to net sales of $201.5 million in fiscal 2020. Net sales in North
America decreased $2.2 million or 1.8% from $121.8 million in fiscal 2020 to
$119.6 million in 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 by Brazil . When adjusting for the impact of foreign exchange, the
increase in International sales is even more pronounced, at 40.6%, primarily due
to Brazil , which benefited from strong demand in the Consumer DIY and Food
sectors. (see table above)
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, 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 was 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.
International gross margins increased
Selling, General and Administrative
Selling, general, and administrative expenses declined$9.6 million or 14.6%, from$65.9 million in fiscal 2020 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$9.3 million or 37.0%, from$34.3 million in fiscal 2020 to$25.0 million in fiscal 2021. International selling, general and administrative expenses declined$0.6 million , or 2.6% from$24.5 million in fiscal 2020 to$23.9 million in fiscal 2021.
Operating Income
Operating income was$16.6 million and a loss of$5.3 million in fiscal years 2021 and 2020 respectively. In fiscal 2021 North American operating income was$13.1 million , an increase of$15.2 million compared to fiscal 2020. The North American operating loss was$2.1 million in fiscal 2020. In International operations operating income in fiscal 2021 was$10.8 million an increase over fiscal 2020 of$7.0 million . International operations had operating income in fiscal 2021 of$10.8 million an increase of 181.7% compared to fiscal 2020 of$3.8 million . Other Income (Expense) Other income in fiscal 2021 was$0.9 million , compared to other expense of$14.7 million in fiscal year 2020 . 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 in fiscal years 2020.
Income Taxes
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 2021 reducing 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 23 -------------------------------------------------------------------------------- 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.
LIQUIDITY AND CAPITAL RESOURCES
Years ended June 30,
(in Thousands) 2022 2021
2020
Cash provided by (used in) operating activities
$ (1,163) Cash used in investing activities (9,007) (493)
(10,600)
Cash (used in) provided by financing activities 9,746 (9,013)
9,314
The Company had a working capital ratio of 3.2 as ofJune 30, 2022 and 2.3 as ofJune 30, 2021 as the improvement in sales and improved manufacturing utilization created higher accounts receivable of$7.9 million and$10.9 million higher inventory balances, net of the LIFO reserve, current liabilities were slightly unfavorable as accounts payable decreased$2.6 million and accrued expenses increased$3.0 million . Cash, accounts receivable and inventories represented 93% and 88% of current assets at fiscal 2022 and fiscal 2021, respectively. Net cash provided by operations was$5.3 million in fiscal 2022,$4.6 million in fiscal 2021 and net cash used by operations was$1.2 million in fiscal 2020. Cash provided by operations increased during fiscal 2022 due to improved operating performance and the reduction in required pension contributions which were partially offset by increased working capital and investing$0.4 million on a cash basis in restructuring. Cash used in investing of$9.0 million included$8.0 million invested in property, plant and equipment and$1.0 million invested in software development. The Company also increased borrowings$9.6 million during fiscal 2022 .
Effects of translation rate changes on cash primarily result from the movement
of the
The Company does not have any material off-balance sheet arrangements as defined
under the
Liquidity and Credit Arrangements
On
These new credit facilities replaced the Company's previous TD Bank credit facilities and are comprised of a$30 million revolving line of credit with a$10 million uncommitted accordion provision, a$12.1 million term loan and a$7 million Capital Expenditure draw down credit facility.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in theU.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, 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.
24
--------------------------------------------------------------------------------
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
increase of 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
and level of uncertainty associated with the Company's forecast of future
taxable income. These conclusions require significant judgments. 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
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. EffectiveDecember 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).
CONTRACTUAL OBLIGATIONS
The following table summarizes future estimated payment obligations by period.
Fiscal Year (in millions)
2024- 2026-
Total 2023 2025 2027 Thereafter
Debt obligations $ 31.5 $ 6.4 $ 6.6 $ 14.2 $ 4.3
Estimated interest on debt obligations 4.3 1.2 1.6 1.1 0.4
Operating lease obligations 6.8 1.9 3.0 1.8 0.1
Purchase obligations 21.8 18.8 1.7 1.3 -
Total $ 64.4 $ 28.3 $ 12.9 $ 18.4 $ 4.8
The new credit facilities mature on April 29, 2027 . (See Note 13 "Debt" to the
Consolidated Financial Statements for additional details). These new credit
facilities replaced the Company's previous TD Bank credit facilities and are
comprised of a $30 million revolving line of credit with a $10 million
uncommitted accordion provision, a $12.1 million term loan and a $7 million
capital expenditure draw down credit facility. The interest rate on the new
facilities is based on a grid which uses the percentage of the remaining
availability of the revolving credit line to determine the floating margin to be
added to the one
25
--------------------------------------------------------------------------------month or three-month Secured Overnight Financing Rate, herein "SOFR". The initial rate for the first three months of the agreement is the one-month SOFR plus 1.60%.
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.
© Edgar Online, source
