UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(check one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 28, 2003
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-367
THE L.S. STARRETT COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1866480
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
121 CRESCENT STREET, ATHOL, MASSACHUSETTS 01331
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 978-249-3551
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Class A Common - $1.00 Per Share Par Value New York Stock Exchange
Class B Common - $1.00 Per Share Par Value Not applicable
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
Yes X No ____
The Registrant had 5,247,042 and 1,356,199 shares, respectively, of its $1.00
par value Class A and B common stock outstanding on December 28, 2002. On that
date, the aggregate market value of the common stock held by nonaffiliates was
approximately $114,000,000.
The exhibit index is located on page 28.
Documents incorporated by reference
Definitive Proxy Statement dated August 15, 2003 - Part III
PART I
Item I - Business
The Company was founded in 1880 and incorporated in 1929 and is engaged in the
business of manufacturing industrial, professional, and consumer products. The
total number of different items made and sold by the Company exceeds 5,000.
Among the items produced are precision tools, tape measures, levels,
electronic gages, dial indicators, gage blocks, digital readout measuring
tools, granite surface plates, optical measuring projectors, coordinate
measuring machines, vises, M1 lubricant, hacksaw blades, hole saws, band saw
blades, jig saw blades, reciprocating saw blades, and precision ground flat
stock. Much of the Company's production is concentrated in hand measuring
tools (such as micrometers, steel rules, combination squares and many other
items for the individual craftsman) and precision instruments (such as vernier
calipers, height gages, depth gages and measuring instruments that
manufacturing companies buy for the use of their employees).
These tools and instruments are sold throughout the United States and Canada
and over 100 foreign countries, primarily to distributors. By far the largest
consumer of these products is the metalworking industry, but other important
consumers are automotive, aviation, marine and farm equipment shops,
do-it-your-selfers and tradesmen such as builders, carpenters, plumbers and
electricians. One retailer, Sears, accounted for approximately 14% of the
Company's sales in fiscal 2003, and the Company's top three customers
accounted for approximately 25% of sales.
Most of the Company's products are made from steel purchased from steel mills.
Forgings, castings, and a few small finished parts are purchased from other
manufacturers. Raw materials have always been readily available to the Company
and, in most cases, the Company does not rely on sole sources. In the event of
unavailability of purchased materials, the Company would be adversely
affected, as would its competitors. Similarly, the ability of the Company to
pass along raw material price increases is dependent on the competitive
situation and cannot be assured.
At June 28, 2003, the Company had 2,150 employees, approximately 65% of whom
were domestic. None of the Company's operations are subject to collective
bargaining agreements. In general, the Company considers its relations with
its employees to be excellent. Because of various stock ownership plans,
Company domestic personnel hold a large share of Company stock and this dual
role of owner-employee has been good for morale over the years.
The Company is one of the largest producers of mechanics' hand measuring tools
and precision instruments. In the United States, there are three other major
companies and numerous small competitors in the field, including direct
foreign competitors. As a result, the industry is highly competitive. During
the fiscal year ended June 28, 2003, there were no material changes in the
Company's competitive position. However, during recent years, changes in the
volume of sales of the Company have been negatively affected by the general
migration of manufacturing to low cost production areas such as China. In
saws and precision ground flat stock, the Company in the United States
competes with many manufacturers. The Company competes principally through
the high quality of its products and the service it provides its customers.
The operations of the Company's foreign subsidiaries are consolidated in its
financial statements. The subsidiaries located in Brazil, Scotland, and China
are actively engaged in the manufacture of hacksaw and band saw blades and a
limited line of precision tools and measuring tapes. Subsidiaries in
Australia, Mexico and Germany are engaged in distribution of the Company's
products. The Company expects its foreign subsidiaries to continue to play a
significant role in its overall operations. A summary of the Company's foreign
operations is contained in the footnotes to the Company's fiscal 2003
financial statements under the caption "OPERATING DATA" found in item 8 of
this Form 10-K and is hereby incorporated by reference.
The Company generally fills orders from finished goods inventories on hand.
Sales order backlog of the Company at any point in time is negligible. Total
inventories amounted to $54,035,000 at June 28, 2003, and $76,622,000 at June
29, 2002. The Company uses the last-in, first-out (LIFO) method of valuing
most domestic inventories (approximately 70% of all inventories). Inventory
amounts are $23,204,000 and $23,835,000 lower, respectively, than if
determined on a first-in, first-out (FIFO) basis.
The Company does apply for patent protection on new inventions and presently
owns a number of patents. Its patents are considered important in the
operation of the business, but no single patent is of material importance when
viewed from the standpoint of its overall business. The Company relies on its
continuing product research and development efforts, with less dependence on
its present patent position. It has for many years maintained engineers and
supporting personnel engaged in research, product development, and related
activities. The expenditures for these activities during fiscal years 2003,
2002 and 2001 were approximately $2,929,000, $2,727,000 and $2,663,000,
respectively, all of which was expensed in the Company's financial statements.
The Company uses trademarks with respect to its products. All of its
important trademarks are registered.
Compliance with federal, state and local provisions that have been enacted or
adopted regulating the discharge of materials into the environment or
otherwise relating to protection of the environment is not expected to have a
material effect on the capital expenditures, earnings and competitive position
of the Company. Specifically, the Company has taken steps to reduce and
control water discharges and air emissions.
The Company's business is to a small extent seasonal, with sales and earnings
generally at the lowest level during the first and third quarters of the
fiscal year.
Where To Find More Information
The Company makes its public filings with the Securities and Exchange
Commission ("SEC"), including its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and
amendments to these reports, available free of charge at its website,
www.starrett.com, as soon as reasonably practicable after the Company files
such material with the SEC. The Company began posting these reports on its
website on August 12, 2003. Information contained on the Company's website is
not part of this report.
Item 2 - Properties
The Company's principal plant is located in Athol, Massachusetts on about 15
acres of Company-owned land. The plant consists of 25 buildings, mostly of
brick construction of varying dates, with approximately 535,000 square feet of
production and storage area. An additional 9,000 square feet of leased space
in Gardner, Massachusetts is considered part of this plant.
The Webber Gage Division, Cleveland, Ohio, owns and occupies two buildings
totaling approximately 50,000 square feet.
The Company-owned facility in Mt. Airy, North Carolina consists of two
buildings totaling approximately 356,000 square feet. It is occupied by the
Company's Saw Division, Granite Surface Plate Division, Coordinate Measuring
Machine/Optical Comparator Division, and Ground Flat Stock Division.
The Company's Evans Rule Division, located in North Charleston, South
Carolina, owns and occupies a 173,000 square foot building. In addition, this
division leases 35,000 square feet of manufacturing space in Mayaguez, Puerto
Rico.
The Company's Exact Level Division is located in Alum Bank, Pennsylvania and
owns and occupies a 50,000 square foot building.
The Company's subsidiary in Itu, Brazil owns and occupies several buildings
totaling 209,000 square feet. The Company's subsidiary in Jedburgh, Scotland
owns and occupies a 187,000 square foot building and also a 33,000 square foot
building in Skipton, England, where its wholly owned subsidiary manufactures
optical measuring projectors. The Skipton plant is scheduled to be
consolidated into Jedburgh during fiscal 2004. Two wholly owned subsidiaries
in the Shanghai area of the People's Republic of China lease approximately
40,000 square feet and 2,000 square feet.
In addition, the Company operates warehouses/sales-support offices in
Glendale, Arizona; Elmhurst, Illinois; Atlanta, Georgia; Mississauga, Canada;
Sydney, Australia; Saltillo, Mexico; and Schmitten, Germany.
In the Company's opinion, all of its property, plant and equipment is in good
operating condition, well maintained and adequate for its needs.
Item 3 - Legal Proceedings
The Company's CMM division is presently the subject of a federal government
investigation being coordinated through the Department of Justice. The
division, which is based in the Company's Mt. Airy, North Carolina facility,
accounted for less than 3% of the Company's net sales in 2002 and less than 2%
in 2003. The CMM division manufactures and sells coordinate measuring
machines, including the Rapid Check 2 and Rapid Check 3 machines. The
Company's CMMs operate with computer measurement software sold by the Company,
including software sold under the "Apogee" brand name. The Company became
aware of the investigation on September 5, 2002, when federal agents conducted
a search of the CMM division. The government's investigation appears to be
focused on the division's Rapid Check coordinate measuring machine product
line and other Starrett CMMs using the Apogee software. On September 12, 2002,
the Wall Street Journal published an article in which allegations that the
Company had defrauded its customers and the government were attributed to
Richard Parks, a former independent contractor to the Company. The article
indicated that the investigation apparently was prompted by a qui tam action
filed under seal in federal court in Boston, Massachusetts by Mr. Parks. The
Company has not been served with a complaint in connection with any qui tam
action. In response to that article, the Company denied that it defrauded its
customers or the government. The Company is cooperating with the government in
its investigation.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 28, 2003.
PART II
Item 5 - Market for the Registrant's Common Equity and Related
Stockholder Matters
The Company's Class A common stock is traded on the New York Stock Exchange.
Quarterly dividend and high/low closing market price information is presented
in the table below. The Company's Class B common stock is generally
nontransferable, except to lineal descendants, and thus has no established
trading market, but it can be converted into Class A common stock at any time.
The Class B common stock was issued on October 5, 1988, and the Company has
paid the same dividends thereon as have been paid on the Class A common stock
since that date. At July 25, 2003, there were 1,979 registered holders of
Class A common stock and 1,623 registered holders of Class B common stock.
Quarter ended Dividends High Low
September 2001 $ 0.20 $ 20.85 $ 18.00
December 2001 0.20 21.15 18.95
March 2002 0.20 21.82 19.00
June 2002 0.20 25.25 21.20
September 2002 0.20 25.30 15.28
December 2002 0.20 17.60 13.80
March 2003 0.20 17.10 12.45
June 2003 0.10 14.60 11.63
Item 6 - Selected Financial Data
Years ended in June ($000 except per share data)
2003 2002 2001 2000 1999
Net sales $175,711 $184,346 $225,857 $235,169 $232,385
Earnings (loss) before
change in accounting (4,489) (380) 8,097 11,489 16,696
Net earnings(loss) (10,575) (380) 8,097 11,489 16,696
Basic earnings(loss)per share (1.60) (0.06) 1.26 1.73 2.44
Diluted earnings(loss)per shr. (1.60) (0.06) 1.25 1.73 2.44
Long-term debt 2,652 7,000 7,000 3,000 3,300
Total assets 219,740 239,097 248,532 250,418 245,728
Dividends per share 0.70 0.80 0.80 0.80 0.80
Items 7 and 7A- Management's Discussion and Analysis of Financial Condition
and Results of Operations and Quantitative and Qualitative
Disclosure about Market Risk
RESULTS OF OPERATIONS
2003 versus 2002
Overview: As more fully discussed below, for fiscal 2003 the Company incurred
a net loss of $10.6 million, or $1.60 per basic and diluted share, compared to
a net loss of $.4 million, or $.06 per share, for 2002. A significant portion
of the current year's loss was caused by two unusual charges: the writeoff of
$6.1 million in the first quarter, or $.92 per share after tax, of goodwill
(as discussed in the notes to the financial statements) and a $3.7 million
($2.3 million, or $.35 per share after tax) provision in connection with a
government investigation of the Company's CMM division (see below).
Excluding these charges, the Company incurred a net loss for 2003 of $2.2
million, or $.33 per share, compared to a net loss of $.4 million, or $.06 per
share, in the prior year.
Sales: Sales for 2003 decreased 5% compared to 2002. Excluding intercompany
sales, domestic sales are down 7% and foreign sales are up 2%. In local
currency, foreign sales are up 14%, primarily because of the devaluation of
Brazil's currency. The decrease in domestic sales reflects the continued weak
U.S. industrial manufacturing sector, particularly in the third quarter, and
lower first quarter shipments to a major consumer products customer as they
rebalanced their inventories.
Loss before taxes and cumulative effect of change in accounting principle:
Results for the year, before income taxes and the cumulative effect of the
change in accounting principle for goodwill (see footnotes regarding adoption
of FASB 142) are down $6.9 million from last year. $3.7 million of this
decrease relates to charges taken in connection with our CMM division as
further described below. Excluding the goodwill write-off and CMM division
charges, cost of sales is 77.1% compared to 75.6% in 2002 and pretax results
are down $3.2 million. Changes in the cost of sales rate are mainly impacted
by the manufacturing efficiencies that are gained or lost as a result of
increased or decreased production levels, but also by pricing, product mix,
and overhead spending. The major items causing the decrease in earnings are
lower sales (approximately $2.5 million), increased domestic fringe benefit
and insurance costs, mainly retirement ($1.0 million), additional reserves for
slow moving inventory ($.9 million) and the effect on unabsorbed overhead
($3.0 to $4.0 million) of production levels being about 15% below sales as the
Company continues to reduce inventories. These cost increases were partially
offset by headcount and other cost reduction measures ($3.5 million), LIFO
layer liquidation profits ($.9 million) and the elimination of goodwill
amortization ($.3 million).
Coordinate Measuring Machine (CMM) Division: The Company's CMM division is
presently the subject of a federal government investigation being coordinated
through the Department of Justice. The division, which is based in the
Company's Mt. Airy, North Carolina facility, accounted for less than 3% of the
Company's net sales in 2002 and less than 2% in 2003. The CMM division
manufactures and sells coordinate measuring machines, including the Rapid
Check 2 and Rapid Check 3 machines. The Company's CMMs operate with computer
measurement software sold by the Company, including software sold under the
"Apogee" brand name. The Company became aware of the investigation on
September 5, 2002, when federal agents conducted a search of the CMM division.
The government's investigation appears to be focused on the division's Rapid
Check coordinate measuring machine product line and other Starrett CMMs using
the Apogee software. On September 12, 2002, the Wall Street Journal published
an article in which allegations that the Company had defrauded its customers
and the government were attributed to Richard Parks, a former independent
contractor to the Company. The article indicated that the investigation
apparently was prompted by a qui tam action filed under seal in federal court
in Boston, Massachusetts by Mr. Parks. The Company has not been served with a
complaint in connection with any qui tam action. In response to that article,
the Company denied that it defrauded its customers or the government. The
Company is cooperating with the government in its investigation.
Beginning late in calendar 2001, the Company, on its own initiative and as
part of its review of its Rapid Check product line, made certain improvements
to the Rapid Check machines and incorporated these improvements in new Rapid
Check machines. Beginning in March 2002, the Company informed its customers of
these improvements and initiated a program to replace the affected Rapid Check
machines at no cost to its customers. This replacement program is essentially
complete.
As a result of the investigation and replacement program outlined above, the
Company charged pretax operations with $3.1 million ($.29 per share after tax)
in the September 2002 quarter and an additional $.6 million ($.06 per share
after tax) in the March 2003 quarter. Of this, $2.1 million was charged to
selling and general expense in the Statements of Operations and relates to
professional fees, primarily legal. The remaining $1.6 million related to the
Rapid Check replacement program and other CMM inventory valuation expenses and
appears as part of cost of goods sold in the Statements of Operations. No
assurances can be made that these charges reflect the actual costs that will
ultimately be incurred by the Company or that the Company will not need to
take additional charges. As of June 28, 2003, actual expenditures related to
these charges were approximately $3 million. Total CMM division inventories
were approximately $4.5 million as of June 28, 2003.
Income Taxes: The effective income tax rate before goodwill write-off was 44%
for fiscal 2003 and 69% for 2002. Puerto Rico tax incentives, and somewhat
lower foreign income tax rates all contribute to an overall effective tax rate
that is normally slightly lower than the combined U.S. state and federal rate
of approximately 38%. The large change in effective rate comes about because
pretax results are close enough to breakeven in both years that permanent
book/tax differences and jurisdictional tax rate differentials have an
exaggerated effect when converted to percentages. The rates are relatively
high compared to our normal rate of about 35% because the least profitable
operations have been in the jurisdictions with the highest tax rates.
Loss per share before change in accounting: As a result of the above factors
and before the change in accounting principle for goodwill (adoption of SFAS
142), the Company incurred a basic and diluted loss per share of $.68 ($.33
before the CMM division charges discussed above) compared to a loss of $.06
per share a year ago.
Net loss per share after change in accounting: Basic and diluted net loss per
share was $1.60 for 2003. Excluding the $.35 related to the CMM division
charges and the $.92 related to the writeoff of goodwill, the net loss was
$.33 per share compared to a net loss of $.06 per share a year ago.
2002 versus 2001
Sales: Sales decreased 18% in fiscal 2002 compared to 2001. The decrease was
both domestic and foreign, 18% and 20%, respectively, although foreign sales
were only down 10% when measured in local currencies. Worldwide economic
conditions adversely affected business, and sales of our Scotland subsidiary
continued to be hurt by the weak euro as compared to the British pound, which
hurt business in terms of export pricing and import price competition. The
devaluation of the Brazil's currency accounted for about 1/4 of the 2002 sales
decrease of 18%. The decrease in domestic sales reflected the weak U.S.
industrial manufacturing sector to which we sell.
Income before Income Taxes: Primarily because of sales volume, pretax
earnings dropped $12.7 million in 2002 to a loss of $(1.2) million. Cost of
sales was 75.6% in 2002, compared to 71.1% in 2001. The cost of sales percent
was adversely affected in 2002 by production levels about 5% lower than sales
levels. Production levels were about 5% higher than sales in 2001. Selling and
general expenses were reduced 12% in 2002 but as a percent of sales increased
slightly from 23.1% to 24.9% because sales dropped more. Although fringe
benefit costs were favorably affected in 2002 ($800,000) due to our overfunded
pension plan, this was offset by nonrecurring employee severence costs
($600,000), warranty expenses ($700,000), and bad debts ($400,000).
Income taxes: The effective income tax rate was 69% in 2002 compared to 29% in
2001. Pretax earnings are so close to breakeven that permanent book/tax
differences and jurisdictional tax rate differentials have an exaggerated
effect when converted to percentages. Nonrecurring permanent differences
between book and taxable income for dividends paid from Brazil to the U.S. in
2001 reduced Brazil's effective tax rate substantially when reported in U.S.
dollars. We were unable to utilize and record the U.S. tax benefit of the
foreign tax credits generated by the 2002 Brazil dividend and this caused our
overall tax provision to be $700,000 higher when compared to 2001. On the
other hand, this was offset by the mix of income in 2002, with the more
profitable divisions being in the jurisdictions with the lowest tax rates.
Earnings per Share: As a result of the above, basic earnings (loss) per share
was $(0.06) in fiscal 2002 compared to $1.26 in 2001.
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. At June 2003 and
2002, the Company was not a party to any derivative arrangement and the
Company does not engage in trading, market-making or other speculative
activities in the derivatives markets. The Company does not enter into long-
term supply contracts with either fixed prices or quantities. The Company does
not engage in regular hedging activities to minimize the impact of foreign
currency fluctuations. Net foreign monetary assets are less than $2 million.
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 (primarily variable rate investments of $19,700,000 and debt of
$6,200,000 at June 28, 2003) or the cash flows or future earnings associated
with those financial instruments. A 10% change in interest rates would impact
the fair value of the Company's fixed rate investments of approximately
$2,300,000 by $40,000.
LIQUIDITY AND CAPITAL RESOURCES
Years ended In June ($000)
2003 2002 2001
Cash provided by operations $24,336 $17,700 $12,499
Cash used in investing activities (17,643) (10,451) (9,496)
Cash used in financing activities (5,187) (7,435) (3,138)
Despite operating losses in 2003 and 2002 plus the additional $3.7 million
incurred in connection with the CMM division investigation, cash provided by
operations has been positive and increasing period to period. By far the
biggest factor contributing to the increases has been the reduction in
inventories that began in mid 2002. "Retirement benefits" under noncash
expenses in the detailed cash flow statement shows the effect on operating
cash flow of the Company's pension and retiree medical plans. Primarily
because the Company's domestic defined benefit plan is overfunded, retirement
benefits in total are currently generating approximately $.8 million of
noncash income ($2.2 and $1.4 million in 2002 and 2001). On an accrual basis,
retirement benefit expense (income) was approximately $.7 million in 2003,
$(.4) million in 2002 and $.9 million in 2001.
The Company's investing activities consist of expenditures for plant and
equipment and the investment of cash not immediately needed for operations.
Increased short-term investments partially offset by less capital expenditures
accounts for the increase in investing activities in 2003. Cash flows from
financing activities are primarily the payment of dividends. The proceeds from
the sale of stock under the various stock plans has historically been used to
purchase treasury shares, although in recent years such treasury share
purchases have been curtailed. Overall debt has been reduced from $12 million
at the end of 2001 to $6 million at the end of 2003.
The Company maintains sufficient liquidity and has the resources to fund its
operations in the near term. If economic conditions do not improve and the
Company continues to sustain losses, additional steps will have to be taken in
order to maintain liquidity, including further dividend and workforce
reductions. The Company maintains a $15 million line of credit (in the process
of being reduced from $25 million), but has not made significant borrowings
under it. The Company has a working capital ratio of 5.9 to 1 as of June 28,
2003 and 6.7 to 1 as of June 29, 2002.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any material off-balance sheet arrangements as
defined under Securities Exchange Commission rules.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect
the amounts reported in the consolidated financial statements and accompanying
notes. The first footnote to these financial statements describes the
significant accounting policies and methods used in the preparation of the
consolidated financial statements.
Judgements, assumptions, and estimates are used for, but not limited to, the
allowance for doubtful accounts receivable and returned goods; inventory
allowances; income tax reserves; employee turnover, discount, and return
rates used to calculate pension obligations; normal expense accruals for
such things as workers compensation and employee medical expenses; and of
particular importance this fiscal year the previously discussed charges
connected with the government investigation of our CMM division. Actual
results could differ from these estimates.
The allowance for doubtful accounts and sales returns is based on our
assessment of the collectibility of specific customer accounts, the aging of
our accounts receivable and trends in product returns. While we believe that
our allowance for doubtful accounts and sales returns is adequate, if there
is a deterioration of a major customer's credit worthiness, actual defaults
are higher than our previous experience, or actual future returns do not
reflect historical trends, our estimates of the recoverability of the
amounts due us and our sales could be adversely affected.
Inventory purchases and commitments are based upon future demand forecasts.
If there is a sudden and significant decrease in demand for our products or
there is a higher risk of inventory obsolescence because of rapidly changing
technology and requirements, we may be required to increase our inventory
reserve and, as a result, our gross profit margin could be adversely
affected.
Accounting for income taxes requires estimates of our future tax
liabilities. Due to timing differences in the 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, we
assess the likelihood that the asset will be realized. If realization is in
doubt because of uncertainty regarding future profitability or enacted tax
rates, we provide a valuation allowance related to the asset. Should any
significant changes in the tax law or our estimate of the necessary
valuation allowance occur, we would record the impact of the change, which
could have a material effect on our financial position or results of
operations.
Pension and postretirement medical costs and obligations are dependent on
assumptions used by our actuaries in calculating such amounts. These
assumptions include discount rates, healthcare cost trends, inflation,
salary growth, long-term return on plan assets, retirement rates, mortality
rates, 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. Actual results that differ from our assumptions are
accumulated and amortized over future periods. Significant differences in
actual experience or significant changes in assumptions would affect our
pension and other postretirement benefit costs and obligations.
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K and the 2003 Annual Report, including the
President's letter to stockholders, include forward-looking statements about
the Company's business, competition, sales, expenditures, environmental
regulatory compliance, foreign operations, progress and effect of the
government investigation, interest rate sensitivity, debt service, liquidity
and capital resources, and other operating and capital requirements. In
addition, forward-looking statements may be included in future Company
documents and in oral statements by Company representatives to security
analysts and investors. The Company is subject to risks that could cause
actual events to vary materially from such forward-looking statements,
including the following risk factors:
Risks related to government investigation: Based on information currently
known to management, the Company has recorded an estimate of the costs
related to the government investigation of its CMM division. However, no
assurances can be made that charges recorded for this matter reflect the
actual costs that will ultimately be incurred by the Company or that the
Company will not need to take additional charges.
Risks Related to Technology: Although the Company's strategy includes
investment in research and development of new and innovative products to meet
technology advances, there can be no assurance that the Company will be
successful in competing against new technologies developed by competitors.
Risks Related to the Euro: The United Kingdom has not adopted the euro and the
Company's Scottish subsidiary transacts a significant amount of business with
euro countries. There can be no assurance that this situation will not result
in unforseen economic conditions that affect the Company's business.
Risks Related to Foreign Operations: Approximately 30% of the Company's sales
and 25% of net assets relate to foreign operations. Foreign operations are
subject to special risks that can materially affect the sales, profits, cash
flows, and financial position of the Company, including taxes and other
restrictions on distributions and payments, currency exchange rate
fluctuations, political and economic instability, inflation, minimum capital
requirements, and exchange controls. In particular, the Company's Brazilian
operations, which constitute over half of the Company's revenues from foreign
operations, can be very volatile, changing from year to year due to the
political situation and economy. As a result, the future performance of the
Brazilian operations is inherently unpredictable. In addition, the recent
outbreak of severe acute respiratory syndrome (SARS) in the People's Republic
of China and concerns over its spread in Asia and elsewhere could have a
negative effect on the economies, financial markets and business activity in
Asia and elsewhere. The Company's manufacturing operations in China and its
sales in Asia may be affected by this risk.
Risks Related to Cyclical Nature of the Industry: The market for most of the
Company's products is subject to economic conditions affecting the industrial
manufacturing sector, including the level of capital spending by industrial
companies and the general movement of manufacturing to low cost foreign
countries. Accordingly, economic weakness in the industrial manufacturing
sector will result in decreased demand for the Company's products and will
adversely affect performance. Economic weakness in the consumer market also
impacts the Company's performance.
Risks Related to Competition: The Company's business is subject to direct and
indirect competition from both domestic and foreign firms. In particular,
low-wage foreign sources have created severe competitive pricing pressures.
Under certain circumstances, including significant changes in U.S. and foreign
currency relationships, such pricing pressures might reduce unit sales and/or
adversely affect the Company's margins.
Risks Related to Customer Concentration: Sales to the Company's three biggest
customers account for approximately 25% of revenues. The loss or reduction in
orders by any of these customers, including reductions due to market, economic
or competitive conditions, could adversely affect business and results of
operations.
Risks Related to Insurance Coverage. The Company carries liability, property
damage, workers' compensation, medical, and other insurance coverages that
management considers adequate for the protection of its assets and operations.
There can be no assurance, however, that the coverage limits of such policies
will be adequate to cover all claims and losses. Such uncovered claims and
losses could have a material adverse effect on the Company. The Company self-
insures for health benefits and retains risk in the form of deductibles and
sublimits. Depending on the risk, deductibles can be as high as 5% of the loss
or $500,000.
Item 8 - Financial Statements and Supplementary Data
Contents: Page
Report of Independent Auditors 12
Consolidated Statements of Operations 13
Consolidated Statements of Cash Flows 14
Consolidated Balance Sheets 15
Consolidated Statements of Stockholders' Equity 16
Notes to Consolidated Financial Statements 17-25
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of
The L.S. Starrett Company
We have audited the accompanying consolidated balance sheets of The L.S.
Starrett Company and subsidiaries as of June 28, 2003 and June 29, 2002, and
the related consolidated statements of operations, cash flows and changes in
stockholders' equity for each of the three years in the period ended June 28,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and subsidiaries as
of June 28, 2003 and June 29, 2002, and the results of their operations and
their cash flows for each of the three fiscal years in the period ended June
28, 2003, in conformity with accounting principles generally accepted in the
United States of America.
As more fully described in the notes to the financial statements, the Company
adopted the provisions of Statements of Financial Accounting Standards Nos.
142 and 144 during the year ended June 28, 2003.
S/DELOITTE & TOUCHE LLP
Boston, Massachusetts
August 1, 2003
THE L.S. STARRETT COMPANY
Consolidated Statements of Operations
For the years ended in June (in thousands of dollars except per share data)
2003 2002 2001
OPERATIONS
Net sales $175,711 $184,346 $225,857
Cost of goods sold (137,036) (139,413) (160,562)
Selling, general and administrative expense (46,169) (45,945) (52,223)
Other expense (585) (217) (1,640)
Earnings (loss) before income taxes and
Cumulative effect of change in
Accounting principle (8,079) (1,229) 11,432
Income taxes (benefit) (3,590) (849) 3,335
Earnings (loss) before cumulative effect of
Change in accounting principle (4,489) (380) 8,097
Cumulative effect of change in accounting
For goodwill (6,086)
Net earnings (loss) $(10,575) $ (380) $ 8,097
Basic earnings (loss) per share:
Before cumulative effect of accounting
change $ (0.68) $ (0.06) $ 1.26
Cumulative effect of change in
accounting for goodwill (0.92)
$ (1.60) $ (0.06) $ 1.26
Diluted earnings (loss) per share:
Before cumulative effect of accounting
change $ (0.68) $ (0.06) $ 1.25
Cumulative effect of change in
accounting for goodwill (0.92)
$ (1.60) $ (0.06) $ 1.25
Average outstanding shares used:
Basic earnings (loss) per share 6,608 6,500 6,446
Diluted earnings (loss) per share 6,608 6,500 6,458
Dividends per share $ 0.70 $ 0.80 $ 0.80
See notes to consolidated financial statements
THE L. S. STARRETT COMPANY
Consolidated Statements of Cash Flows
For the years ended in June (in thousands of dollars)
2003 2002 2001
Cash flows from operating activities:
Net earnings (loss) $(10,575) $ (380) $ 8,097
Noncash operating activities:
Cumulative effect of change in
accounting principle 6,086
Depreciation and amortization 10,988 11,741 11,662
Deferred taxes (3,875) 561 97
Unrealized translation losses 453 263 748
Retirement Benefits (1,338) (2,170) (1,396)
Working capital changes:
Receivables 695 1,664 707
Inventories 22,345 7,656 (9,261)
Other current assets and liabilities (841) (1,862) 1,665
Prepaid pension cost and other 398 227 180
Net cash from operating activities 24,336 17,700 12,499
Cash flows from investing activities:
Additions to plant and equipment (5,860) (8,028) (13,198)
Decrease (increase) in investments (11,783) (2,423) 3,702
Net cash used in investing activities (17,643) (10,451) (9,496)
Cash flows from financing activities:
Short-term borrowing, net (372) (4,050) (1,645)
Long-term borrowings (repayments) (1,991) 4,000
Common stock issued 2,453 3,598 3,444
Treasury shares purchased (658) (1,796) (3,792)
Dividends (4,619) (5,187) (5,145)
Net cash used in financing activities (5,187) (7,435) (3,138)
Effect of translation rate changes on cash 128 (87) 72
Net increase (decrease) in cash 1,634 (273) (63)
Cash beginning of year 1,672 1,945 2,008
Cash end of year $ 3,306 $ 1,672 $ 1,945
Supplemental cash flow information:
Interest paid $ 848 $ 695 $ 950
Taxes paid, net $ (958) $ (725) $ 1,688
Non-cash capital lease financing $ 3,000
See notes to consolidated financial statements
THE L.S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands of dollars)
June 28 June 29
ASSETS 2003 2002
Current assets:
Cash $ 3,306 $ 1,672
Investments 21,995 10,479
Accounts receivable (less allowance for doubtful
accounts of $1,392,000 and $1,790,000) 32,175 32,391
Inventories:
Raw materials and supplies 9,859 17,228
Goods in process and finished parts 20,344 24,632
Finished goods 23,832 34,762
Total inventories 54,035 76,622
Prepaid expenses, taxes and other current assets 9,703 5,903
Total current assets 121,214 127,067
Property, plant and equipment, at cost:
Land 1,885 1,893
Buildings (less accumulated depreciation of
$18,463,000 and $17,151,000) 21,295 22,698
Machinery and equipment (less accumulated
depreciation of $70,719,000 and $61,813,000) 43,913 46,839
Total property, plant and equipment 67,093 71,430
Cost in excess of net assets acquired (goodwill)(less
accumulated amortization of $4,216,000 in 2002) 6,086
Prepaid pension cost 30,565 33,651
Other assets 868 863
$219,740 $239,097
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities $ 3,585 $ 996
Accounts payable and accrued expenses 12,859 13,874
Accrued salaries and wages 3,940 4,163
Total current liabilities 20,384 19,033
Deferred income taxes 14,696 16,012
Long-term debt 2,652 7,000
Accumulated postretirement benefit obligation 17,057 16,711
Stockholders' equity:
Class A common stock $1 par (20,000,000 shrs. auth.;
5,344,033 outstanding in 2003, excluding
1,294,542 held in treasury; 5,147,201 outstanding
in 2002, excluding 1,397,659 held in treasury) 5,344 5,147
Class B common stock $1 par (10,000,000 shrs. auth.;
1,315,489 outstanding in 2003, excluding
332,019 held in treasury; 1,397,480 outstanding
in 2002, excluding 332,019 held in treasury) 1,315 1,397
Additional paid-in capital 49,826 47,858
Retained earnings reinvested and employed in
the business 134,547 150,029
Accumulated other comprehensive income (loss) (26,081) (24,090)
Total stockholders' equity 164,951 180,341
$219,740 $239,097
See notes to consolidated financial statements
THE L.S. STARRETT COMPANY
Consolidated Statements of Stockholders' Equity
For the years ended in June, 2001 through 2003
(in thousands)
Common Addi- Accumulated
Stock Out- tional Other Com-
standing Paid-in Retained prehensive
($1 Par) Capital Earnings Income(loss) Total
Balance, June 24, 2000 $ 6,473 $ 43,273 $155,846 $ (17,570) $188,022
Comprehensive income:
Net earnings 8,097 8,097
Unrealized net loss
on investments (38) (38)
Translation loss, net (5,767) (5,767)
Total comprehensive income 2,292
Dividends ($0.80 per share) (5,145) (5,145)
Treasury shares:
Purchased (192) (1,428) (2,172) (3,792)
Issued 166 3,078 3,244
Options exercised 11 189 200
Balance, June 30, 2001 6,458 45,112 156,626 (23,375) 184,821
Comprehensive loss:
Net loss (380) (380)
Unrealized net loss
on investments (169) (169)
Translation loss, net (546) (546)
Total comprehensive loss (1,095)
Dividends ($0.80 per share) (5,187) (5,187)
Treasury shares:
Purchased (87) (679) (1,030) (1,796)
Issued 153 3,073 3,226
Options exercised 20 352 372
Balance, June 29, 2002 6,544 47,858 150,029 (24,090) 180,341
Comprehensive loss
Net loss (10,575) (10,575)
Unrealized net gain
on investments 152 152
Minimum pension liability (3,207) (3,207)
Translation gain, net 1,064 1,064)
Total comprehensive loss (12,566)
Dividends ($0.70 per share) (4,619) (4,619)
Treasury shares:
Purchased (39) (331) (288) (658)
Issued 142 2,159 2,301
Options exercised 12 140 152
Balance, June 28, 2003 $ 6,659 $ 49,826 $134,547 $(26,081) $164,951
See notes to consolidated financial statements
THE L. S. STARRETT COMPANY
Notes to Consolidated Financial Statements
SIGNIFICANT ACCOUNTING POLICIES
Description of the business and principles of consolidation: The Company is
in the business of manufacturing industrial, professional, and consumer
measuring and cutting tools and related products. The largest consumer of
these products is the metal working industry, but others include automotive,
aviation, marine, farm, do-it-yourselfers, and tradesmen such as builders,
carpenters, plumbers, and electricians. The consolidated financial
statements include the accounts of The L. S. Starrett Company and its
subsidiaries, all of which are wholly-owned. All significant intercompany
items have been eliminated. Since the Company's fiscal year ends on the last
Saturday in June, the 2001 fiscal year contains 53 weeks compared to 52
weeks in 2002 and 2003. The fiscal years of the Company's major foreign
subsidiaries end in May.
Financial instruments and derivatives: The Company's financial instruments
consist primarily of current assets, except inventory, current liabilities,
and long-term debt. Current assets and liabilities, except investments, are
stated at cost, which approximates fair market value. Long-term debts, which
are at current market interest rates, also approximate fair market value.
The Company does not enter into derivative arrangements.
Investments: Investments consist primarily of marketable securities such as
treasury bills, certificates of deposit, municipal securities, and money
market funds. The Company considers all its investments "available for
sale." As such, these investments are carried at market, which approximates
cost, with unrealized temporary gains and losses recorded as a component of
stockholders' equity. Included in investments at June 28, 2003 is $2.3
million of AAA rated Puerto Rico debt obligations that have maturities
greater than one year but carry the benefit of possibly reducing
repatriation taxes. These investments represent "core cash" and are part of
the Company's overall cash management and liquidity program and, under SFAS
115, are considered "available for sale." The investments themselves are
highly liquid, carry no early redemption penalties, and are not designated
for acquiring non-current assets. Most other investments have maturities of
less than one year.
Long-lived assets: Buildings and equipment are depreciated using straight-
line and accelerated methods over estimated useful lives as follows:
buildings 15 to 50 years, building improvements 10 to 40 years, machinery
and equipment 5 to 12 years, motor vehicles 3 to 5 years, computer hardware
and software 3 to 7 years. The Company evaluates potential impairment of
long-lived assets in accordance with SFAS No. 144, "Accounting for the
impairment or disposal of Long-Lived Assets."
Inventories: Inventories are stated at the lower of cost or market. For
approximately 70% of all inventories, cost is determined on a last-in,
first-out (LIFO) basis. For all other inventories, cost is determined on a
first-in, first-out (FIFO) basis. LIFO inventories are $28,784,000 and
$47,859,000 at the end of 2003 and 2002, respectively, such amounts being
$23,204,000 and $23,835,000 less than if determined on a FIFO basis. During
2003, the Company reduced the levels of certain LIFO inventories that were
carried in the aggregate at lower costs prevailing in prior years. The
effect of the LIFO inventory reduction was to increase 2003 net earnings,
primarily in the fourth quarter, by approximately $575,000 or $.09 per
share.
Revenue recognition: Revenue is recognized when inventory is shipped to the
customer or installed if installation is necessary. While the Company does
allow its customers the right to return in certain circumstances, revenue is
not deferred, but rather a reserve for sales returns is provided based on
experience, which historically has not been significant.
Warranty expense: The Company's warranty obligation is generally one year
from shipment to the end user and is affected by product failure rates,
material usage, and service delivery costs incurred in correcting a product
failure. Any such failures tend to occur soon after shipment. Historically,
the Company has not incurred significant predictable warranty expense and
consequently its warranty reserves are not material. In the event a material
warranty liability is deemed probable, a reserve is established.
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 undistributed earnings of foreign
subsidiaries (approximately $40,000,000 at June 2003) or the related
unrealized translation adjustments because such amounts are considered
permanently invested. Valuation allowances are provided where management
believes certain deferred tax benefits may not be realized.
Research and development: Research and development costs were expensed as
follows: $2,929,000 in 2003, $2,727,000 in 2002 and $2,663,000 in 2001.
Earnings per share (EPS): Basic EPS excludes dilution and is computed by
dividing earnings 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 7,329, 9,573 and 11,097 of additional potential common shares in
2003, 2002 and 2001 resulting from shares issueable under its stock option
plan. These additional shares are not used for the diluted EPS calculation
in loss years.
Translation of foreign currencies: Assets and liabilities are translated at
exchange rates in effect on reporting dates, and income and expense items
are translated at rates in effect on transaction dates. The resulting
differences due to changing exchange rates are charged or credited directly
to the "accumulated other comprehensive income" account included as part of
stockholders' equity.
Use of accounting estimates: The preparation of the 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 sales and expenses during the
reporting period. Amounts ultimately realized could differ from those
estimates.
CHANGE IN ACCOUNTING FOR GOODWILL
The Company adopted SFAS 142, Goodwill and Other Intangible Assets, as of
June 30, 2002, the first day of fiscal 2003, and performed a transitional
fair value based impairment test as of that date. As a result, a non-cash
impairment charge of $6,086,000 ($.92 per share), relating primarily to the
acquisition of the Company's Evans Rule division in 1986, was recorded as of
the first day of 2003 and related amortization of $268,000 per year was
discontinued. The charge is reflected as the cumulative effect of a change
in accounting principle in the accompanying Statements of Operations and
Cash Flows. There were no income taxes associated with the charge. Had
goodwill not been amortized in the prior years, net earnings (loss) and net
earnings (loss) per share would have been as follows (in thousands):
2003 2002 2001
Net earnings (loss) as reported $(10,575) $ (380) $ 8,097
Add back goodwill amortization 268 268
Pro forma net earnings (loss) (10,575) (112) 8,365
Earnings (loss) per share as reported:
Basic $ (1.60) $ (0.06) $ 1.26
Diluted $ (1.60) $ (0.06) $ 1.25
Proforma earnings (loss) per share:
Basic $ (1.60) $ (0.02) $ 1.30
Diluted $ (1.60) $ (0.02) $ 1.29
ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of SFAS No. 123. SFAS No. 148
provides alternative methods for a voluntary change to the fair value-based
method of accounting for employee stock-based compensation. These
alternative methods will only impact the Company if it changes to the fair
value-based method of accounting for employee stock-based compensation,
which it has not implemented but is considering. The Company has not
incurred any employee stock-based compensation under the intrinsic value
method of Accounting Principles Board Opinion 25 in these financial
statements. The Company has computed below the pro forma disclosures
required under SFAS No. 148 using the Black-Scholes option pricing model
with the indicated assumed interest rates and volatility and an expected
life of two years (in thousands except per share data).
2003 2002 2001
Net earnings (loss) as reported $(10,575) $ (380) $ 8,097
After tax employee stock based compensaton
Under fair value method (90) (90) (170)
Pro forma net earnings (loss) $(10,665) $ (470) $ 7,927
Earnings (loss) per share as reported:
Basic $ (1.60) $ (0.06) $ 1.26
Diluted $ (1.60) $ (0.06) $ 1.25
Proforma earnings (loss) per share:
Basic $ (1.61) $ (0.07) $ 1.23
Diluted $ (1.61) $ (0.07) $ 1.22
Assumed interest rate 1.5%-2.8% 3.5% 4.3%-5.9%
Assumed volatility 29% 22% 28%
The following recently issued Statements of Financial Accounting Standards
(SFAS) are either not applicable to the Company or the Company does not
expect their implementation to have a material impact on the Company's
financial position or results of operations: SFAS No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections; SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities; SFAS No. 147, Acquisitions of Certain Financial
Institutions; SFAS No. 149, Amendment of SFAS No. 133 on Derivative
Instruments and Hedging Activities; and SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity;
FASB Financial Interpretation No. 46, Consolidation of Variable Interest
Entities.
OTHER INCOME AND EXPENSE
Other income and expense consists of the following (in thousands):
2003 2002 2001
Interest income, net $ 13 $ 179 $ 131
Realized and unrealized translation
gains (losses), net (390) (351) (1,859)
Other (208) (45) 88
$ (585) $ (217) $(1,640)
INCOME TAXES
The provision for income taxes consists of the following (in thousands):
2003 2002 2001
Current:
Federal $ 50 $(1,640) $ 1,600
Foreign 234 266 1,271
State 1 (36) 367
Deferred (3,875) 561 97
$(3,590) $ (849) $ 3,335
Pretax domestic income (loss) as reportable to the IRS was $(10,300,000),
$(3,274,000) and $8,279,000 in 2003, 2002 and 2001, respectively.
A reconciliation of expected tax expense at the U.S. statutory rate to actual
tax expense is as follows (in thousands):
2003 2002 2001
Expected tax expense (benefit) $(4,816) $ (430) $ 4,001
Increase (decrease) from:
State and Puerto Rico taxes, net
of federal benefit (1,126) (672) (588)
Foreign taxes, net of federal credits 235 163 (17)
Goodwill writeoff 2,069
Other 48 90 (61)
Actual tax expense $(3,590) $ (849) $ 3,335
Deferred income taxes at year end are attributable to the following (in
thousands):
2003 2002
Deferred assets:
Retiree medical benefits $(6,907) $(6,768)
Inventories (2,280) (1,840)
Domestic NOL carried forward 20 years (3,515)
Foreign NOL carried forward indefinately (1,165) (1,235)
Foreign tax credit carryforward expiring 2007 (745) (700)
Other (907) (826)
(15,519) (11,369)
Deferred liabilities:
Prepaid pension 12,928 13,550
Other employee benefits 540 680
Depreciation 7,081 7,296
Other 1,593 1,934
22,142 23,460
Valuation reserve for foreign tax credits 745 ____700
Net deferred tax liability $ 7,368 $12,791
Long-term portion $14,696 $16,012
EMPLOYEE BENEFIT PLANS
The Company has several pension plans, both defined benefit and defined
contribution, covering all of its domestic and most of its nondomestic
employees. In addition, certain domestic employees participate in an Employee
Stock Ownership Plan (ESOP). Ninety percent of the actuarially determined
annuity value of their ESOP shares is used to offset benefits otherwise due
under the domestic defined benefit pension plan. The total cost (benefit) of
all such plans for 2003, 2002 and 2001, considering the combined projected
benefits and funds of the ESOP as well as the other plans, was $(678,000),
$(1,783,000) and $(462,000), respectively.
Under both domestic and foreign defined benefit plans, benefits are based on
years of service and final average earnings. Plan assets, including those of
the ESOP, consist primarily of investment grade debt obligations, marketable
equity securities and approximately 1,030,000 shares of the Company's common
stock. The status of these defined benefit plans, including the ESOP, is as
follows (in thousands):
2003 2002 2001
Change in benefit obligation:
Benefit obligation at beginning of year $ 93,349 $ 83,203 $ 87,893
Service cost 3,278 3,106 2,887
Interest cost 6,490 5,958 5,950
Participant contributions 219 226 242
Exchange rate changes 3,066 820 (1,942)
Benefits paid (3,648) (3,614) (3,393)
Actuarial (gain) loss (1,925) 3,650 (8,434)
Benefit obligation at end of year $100,829 $ 93,349 $ 83,203
Change in plan assets:
Fair value of plan assets at beginning
of year $126,154 $128,038 $120,861
Actual return on plan assets (10,522) 633 12,213
Employer contributions 467 92
Participant contributions 219 226 242
Benefits paid (3,648) (3,614) (3,393)
Exchange rate changes 2,521 779 (1,885
Fair value of plan assets at end of year $115,191 $126,154 $128,038
Reconciliation of funded status:
Funded status $ 14,362 $ 32,805 $ 44,835
Unrecognized actuarial gain 19,009 (370) (14,555)
Unrecognized transition asset (1,922) (2,932) (3,869)
Unrecognized prior service cost 3,698 4,148 4,542
Prepaid pension cost $ 35,147 $ 33,651 $ 30,953
Amounts recognized in statement of financial
Position:
Prepaid benefit cost $ 36,172 $ 35,069 $ 32,390
Accrued benefit liability (6,606) (2,551) (1,558)
Intangible asset 999 1,133 121
Accumulated other comprehensive income 4,582
Prepaid pension cost $ 35,147 $ 33,651 $ 30,953
Year-end information for plans with
accumulated benefit obligations in
excess of plan assets
Projected benefit obligation $ 28,832
Accumulated benefit obligation 26,617
Fair value of plan assets 22,011
Components of net periodic benefit cost:
Service cost $ 3,278 $ 3,106 $ 2,887
Interest cost 6,490 5,958 5,950
Expected return on plan assets (10,271) (10,863) (9,986)
Amortization of prior service cost 408 394 404
Amortization of transition asset (956) (937) (949)
Recognized actuarial gain (58) (264) (20)
Net periodic benefit cost $ (1,109) $ (2,606) $ (1,714)
Weighted average assumptions:
Discount rate 6.00% 7.00% 7.50%
Expected long-term rate of return 8.00% 8.50% 8.50%
Rate of compensation increase 3.25% 3.75% 4.00%
The Company provides certain medical and life insurance benefits for most
retired employees in the United States. The status of these plans at year end
is as follows (in thousands):
2003 2002 2001
Change in benefit obligation:
Benefit obligation at beginning of year $ 15,649 $ 15,197 $ 15,101
Service cost 633 551 509
Interest cost 1,057 1,097 1,122
Benefits paid (1,047) (1,014) (1,071)
Actuarial (gain) loss 1,547 (182) (464)
Benefit obligation at end of year $ 17,839 $ 15,649 $ 15,197
Reconciliation of funded status:
Funded status $(17,839) $(15,649) $(15,197)
Unrecognized actuarial gain 3,750 2,259 2,523
Unrecognized prior service cost (2,968) (3,321) (3,673)
Accrued benefit liability $(17,057) $(16,711) $(16,347)
Components of net periodic benefit cost:
Service cost $ 633 $ 551 $ 509
Interest cost 1,057 1,097 1,122
Amortization of prior service cost (353) (353) (353)
Recognized actuarial gain 56 81 111
Net periodic benefit cost $ 1,393 $ 1,376 $ 1,389
Weighted average assumptions:
Discount rate 6.00% 7.00% 7.50%
Rate of compensation increase 3.25% 3.75% 4.00%
An 11.0% annual rate of increase in the per capita cost of covered health care
benefits was assumed for 2004. The rate was assumed to decrease gradually to
5.0% for 2014 and remain at that level thereafter.
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% 1%
Increase Decrease
Effect on total of service and interest cost $ 46 $ (98)
Effect on postretirement benefit obligation 302 (728)
DEBT
At year end, long-term debt consists of the following (in thousands):
2003 2002
Note payable due 12/03, 4.0% $ 2,318 $ 4,000
Capitalized lease obligations payable in Brazilian
currency, due 2004 to 2007, 17% to 34% 3,433
Revolving credit agreement 3,000
5,751 7,000
Less current maturities 3,099
$ 2,652 $ 7,000
The Company and its lender are in the process of amending the revolving
credit agreement. The new agreement will be for $15 million (currently $25
million), expires June 13, 2005, and requires commitment fees of .25%.
Interest rates vary from LIBOR plus .5% to 2% depending on EBITDA. The
Company must maintain tangible net worth of $14 million and an EBITDA (as
defined) to debt service ratio of at least 1.5. Current notes payable carry
interest at a rate of LIBOR plus 1 to 4%. Interest expense, prior to
capitalization of interest on self-constructed assets was $761,000, $641,000
and $973,000 in 2003, 2002 and 2001. Long-term debt maturities from 2005 to
2008 are as follows: $500,000, $600,000, $400,000, and $1,152,000.
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, 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. In addition, the Company has a stockholder rights
plan to protect stockholders from attempts to acquire the Company on
unfavorable terms not approved by the Board of Directors. Under certain
circumstances, the plan entitles each Class A or Class B share to additional
shares of the Company or an acquiring company, as defined, at a 50% discount
to market. Generally, the rights will be exercisable if a person or group
acquires 15% or more of the Company's outstanding shares. The rights trade
together with the underlying common stock. They can be redeemed by the
Company for $.01 per right and expire in 2010.
Under the Company's stock purchase 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. Therefore, no
options are exercisable at the end of 2003, 2002, or 2001. A summary of
option activity is as follows:
Weighted
Average
Exercise Shares
Shares Price Available
On Option At Grant For Grant
Balance, June 24, 2000 71,978 $20.26 722,707
Options granted 53,285 17.14 (53,285)
Options exercised ($15.52 and $18.96) (10,771) 18.55
Options canceled (41,156) 41,156
Balance, June 30, 2001 73,336 18.22 710,578
Options granted 28,191 18.06 (28,191)
Options exercised ($17.77 and $18.65) (20,552) 18.11
Options canceled (32,026) 32,026
Balance, June 29, 2002 48,949 17.48 714,413
Options authorized 800,000
Options granted 82,567 13.28 (82,567)
Options exercised ($13.22 and $11.10) (11,724) 12.93
Options canceled (51,720) (693,936)
Balance, June 28, 2003 68,072 13.20 737,910
The following information relates to outstanding options as of June 28,
2003:
Weighted average remaining life 1.3 years
Weighted average fair value on grant date
of options granted in:
2001 $5.50
2002 5.00
2003 4.00
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes options pricing model with the following weighted average
assumptions: volatility - 22% to 29%, interest - 1.5% to 6.0%, and expected
lives - 2 years.
CONTINGENCIES
The Company is the subject of a government investigation apparently prompted
by a qui tam action filed under seal, which has not been served on the
Company. The Company is cooperating with the government but, until the
investigation is concluded, no final evaluation of the financial impact of
this matter can be made. Based on information currently known to management,
the Company has recorded an estimate of the costs for this matter. However,
no assurances can be made that charges recorded for this matter reflect the
actual costs that will ultimately be incurred by the Company or that the
Company will not need to take additional charges.
OPERATING DATA
The Company believes it has no significant concentration of credit risk as
of June 28, 2003. Trade receivables are dispersed among a large number of
retailers, distributors and industrial accounts in many countries. One
customer accounted for approximately 14% of sales in 2003 and 2002, and 13%
in 2001.
The Company is engaged in the single business segment of producing and
marketing industrial, professional and consumer products. It manufactures
over 5,000 items, including precision measuring tools, tape measures, gages
and saw blades. Operating segments are identified as components of an
enterprise about which separate discrete financial information is used by
the chief operating decision maker in determining how to allocate assets and
assess performance of the Company.
The Company's operations are primarily in North America, Brazil, and the
United Kingdom. Geographic information about the Company's sales and long-
lived assets are as follows:
2003 2002 2001
Sales:
North America $ 124,006 $ 133,895 $ 164,572
United Kingdom 28,910 26,331 30,520
Brazil 29,630 31,559 43,421
Eliminations and other (6,835) (7,439) (12,656)
Total $ 175,711 $ 184,346 $ 225,857
Long-lived assets:
North America $ 83,790 $ 96,163 $ 97,656
United Kingdom 7,978 7,916 7,655
Brazil 9,446 5,857 6,037
Other 1,894 2,094 2,257
Total $ 103,108 $ 112,030 $ 113,605
QUARTERLY FINANCIAL DATA (UNAUDITED)(in thousands except per share data)
(* before write-off of $6,086 of goodwill in July 2002)
Earnings Basic Basic
(Loss) Earnings Earnings
Before Net (Loss) (Loss)
Quarter Net Gross Income Earnings Earnings Per Per
Ended Sales Profit Taxes* (Loss)* (Loss) _ _Share* Share
Sep 2001 $ 46,522 $12,624 $ 345 $ 262 $ 262 $ 0.04 $ 0.04
Dec 2001 44,918 10,099 (1,417) (611) (611) (0.09) (0.09)
Mar 2002 45,419 10,039 (1,128) (462) (462) (0.07) (0.07)
Jun 2002 47,487 12,171 971 431 431 0.06 0.06
$184,346 $44,933 $(1,229) $ (380) $ (380) $(0.06) $ 0.06
Sep 2002 $ 45,335 $ 8,736 $(4,496) $(2,535) $ (8,621) $(0.39) $(1.31)
Dec 2002 44,828 10,342 (1,339) (641) (641) (0.09) (0.09)
Mar 2003 41,525 9,162 (2,255) (1,267) (1,267) (0.19) (0.19)
Jun 2003 44,023 10,435 11 (46) (46) (0.01) (0.01)
$175,711 $38,675 $(8,079) $(4,489) $(10,575) $(0.68) $(1.60)
The Company's Class A common stock is traded on the New York Stock Exchange.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company had no such changes in or disagreements with its independent
auditors.
Item 9A - Controls and Procedures
The Company's management, under the supervision and with the participation of
the Company's President and Chief Executive Officer and Chief Financial
Officer, have evaluated the Company's disclosure controls and procedures as
of June 28, 2003, and they have concluded that these controls and procedures
are effective. There have been no significant changes in internal control
over financial reporting that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting. The Company's management and its outside auditors reported to the
Audit Committee one reportable condition related to computer file access and
the Company has corrected the condition.
PART III
Item 10 - Directors and Executive Officers of the Registrant
Directors
The information concerning the Directors of the Registrant is contained
immediately under the heading "Election of Directors" and prior to Section A
of Part I (pages 2-4) in the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on September 17, 2003 (the "2003
Proxy Statement") as filed with the SEC, and is hereby incorporated by
reference.
Executive Officers of the Registrant
Held Present
Name Age Office Since Position
Douglas A. Starrett 51 2001 President and CEO and
Director
Roger U. Wellington, Jr. 62 1984 Vice President, Treasurer
and Chief Financial
Officer and Director
George B. Webber 82 1962 Vice President
Webber Gage Division
and Director
Anthony M. Aspin 50 2000 Vice President Sales
Stephen F. Walsh 57 2002 Vice President Operations
Steven A. Wilcox 48 1997 Clerk
Douglas A. Starrett has been President of the Company since 1995 and became
CEO in 2001. Roger U. Wellington, Jr. and George B. Webber have served in the
same capacities as listed above for at least the past five years. Anthony M.
Aspin was previously a divisional sales manager with the Company. Stephen F.
Walsh was previously president of the Silicon Carbide Division of Saint-Gobain
Industrial Ceramics. Except in the case of Steven A. Wilcox, the positions
listed above represent their principal occupations and employment during the
last five years. Steven A. Wilcox, elected clerk in 1997, has been a partner
in Ropes & Gray, counsel for the Company, throughout that period, and is not
an employee of the Company.
The President, Treasurer and Clerk hold office until the first meeting of the
directors following the next annual meeting of stockholders and until their
respective successors are chosen and qualified, and each other officer holds
office until the first meeting of directors following the next annual meeting
of stockholders, unless a shorter period shall have been specified by the
terms of his election or appointment or, in each case, until he sooner dies,
resigns, is removed or becomes disqualified.
There have been no events under any bankruptcy act, no criminal proceedings
and no judgments or injunctions material to the evaluation of the ability and
integrity of any executive officer during the past five years.
Item 11 - Executive Compensation
The information concerning management remuneration is contained in (i) the
last paragraph on page 3, (ii) in Sections C-F of Part I (pages 7-11), and
(iii) in the information under "Compensation Committee Interlocks and Insider
Participation" in Section B of Part I (page 4) in the Company's 2003 Proxy
Statement, and is hereby incorporated by reference.
Item 12 - Security Ownership of Certain Beneficial Owners and
Management
(a) The following table gives information about the Company's Common Stock
that may be issued upon the exercise of options, warrants and rights
under the Company's 1997 Employees' Stock Purchase Plan ("1997 Plan")
and the Company's 2002 Employees' Stock Purchase Plan ("2002 Plan") as
of June 28, 2003. Both the 1997 and 2002 Plans were approved by
stockholders and shares of Class A or Class B Common Stock may be issued
under either plan. No new options can be granted under the 1997 Plan.
Options are not issued under the Company's Employees' Stock Purchase
Plan that was adopted in 1952.
Number of Securities
Remaining Available
Number of Securities For Future Issuance
to be issued Upon Ex- Weighted Average Under Equity Compen-
ercise of Outstanding Exercise Price of sation Plans (Ex-
Plan Options, Warrants and Outanding Options, cluding Securities
Category Rights Warrants and Rights Reflected in Col (a)
(a) (b) (c)
Equity compensa-
tion plans ap-
proved by secur-
ity holders 68,072 13.20 737,910
Equity compensa-
tion plans not
approved by se-
curity holders
ity 0 0 0
Total 68,072 3.20 737,910
(b) Security ownership of certain beneficial owners:
The information concerning a more than 5% holder of any class of the
Company's voting shares is contained under the heading "Security
Ownership of Certain Beneficial Owners" in Section H of Part I (pages
14-15) of the Company's 2003 Proxy Statement, and is hereby incorporated
by reference.
(c) Security ownership of management:
The information concerning the beneficial ownership of each class of
equity securities by all directors, and all directors and officers of
the Company as a group, is contained under the heading "Security
Ownership of Management" in Section H of Part I (pages 12-15) in the
Company's 2003 Proxy Statement, and is hereby incorporated by reference.
(d) The Company knows of no arrangements that may, at a subsequent date,
result in a change in control of the Company.
Item 13 - Certain Relationships and Related Transactions
(a) Transactions with management and others: None
(b) Certain business relationships: Not applicable
(c) Indebtedness of management: None
(d) Transactions with promoters: Not applicable
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) 1. Financial statements filed in item 8 of this annual report:
Consolidated Statements of Operations for each of the three
years in the Period ended June 28, 2003
Consolidated Statements of Cash Flows for each of the three
years in the Period ended June 28, 2003
Consolidated Balance Sheets at June 28, 2003 and June 29, 2002
Consolidated Statements of Stockholders' Equity for each of
the three years in the Period Ended June 28, 2003
Notes to Consolidated Financial Statements
2. All other financial statements and schedules are omitted because
they are inapplicable, not required under the instructions, or the
information is reflected in the financial statements or notes
thereto.
3. See Exhibit Index below. Compensatory plans or arrangements are
identified by an "*."
(b) The following reports on Form 8-K were filed with or furnished to
the SEC in the last quarter of the period covered by this report:
The Company filed a report on Form 8-K on June 5, 2003
announcing the issuance of press release concerning the
quarterly dividend on the Company's common stock.
The Company filed a report on Form 8-K on June 27, 2003
announcing that the Company had mailed its quarterly dividend on
the common stock accompanied by a letter from the Company's
President.
(c) See Exhibit Index below.
(d) Not applicable.
THE L.S. STARRETT COMPANY AND SUBSIDIARIES - EXHIBIT INDEX
3a Restated Articles of Organization dated December 20, 1989, filed with Form
10-Q for the quarter ended December 23, 1989, are hereby incorporated by
reference.
3b Bylaws as amended September 16, 1999, filed with Form 10-Q for the
quarter ended September 24, 1999, are hereby incorporated by reference.
4 Second Amended and Restated Rights Agreement, dated as of March 13,
2002, between the Company and Mellon Investor Services, as Rights Agent,
including Form of Common Stock Purchase Rights Certificate, filed with
Form 10-K for the year ended June 29, 2002, is hereby incorporated by
reference.
10a $25,000,000 Revolving Credit Agreement dated as of June 13, 2000, among
The L.S. Starrett Company and Fleet National Bank filed with Form 10-K
for the year ended June 24, 2000 is hereby incorporated by reference.
10b Form of indemnification agreement with directors and executive officers,
filed with Form 10-K for the year ended June 29, 2002, is hereby
incorporated by reference.
10c*The L.S. Starrett Company Supplemental Executive Retirement Plan, filed
with Form 10-K for the year ended June 29, 2002 is hereby incorporated
by reference.
10d*The L.S. Starrett Company 401(k) Stock Savings Plan (2001 Restatement),
filed with Form 10-K for the year ended June 29, 2002 is hereby
incorporated by reference.
10e 2002 Employees' Stock Purchase Plan filed with Form 10-Q for the quarter
ended September 28, 2002 is hereby incorporated by reference.
10f Amendment dated April 1, 2003 to the Company's 401(k) Stock Savings
Plan, filed herewith.
21 Subsidiaries of the Registrant, filed herewith.
23 Independent Auditors' Consent, filed herewith.
31a Certification of Chief Executive Officer Pursuant to Rule 13a-14(a),
filed herewith.
31b Certification of Chief Financial Officer Pursuant to Rule 13a-14(a),
filed herewith.
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act
of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title
18, United States Code), filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE L.S. STARRETT COMPANY
(Registrant)
By S/ROGER U. WELLINGTON, JR.
Roger U. Wellington, Jr.,
Vice President, Treasurer and Chief
Financial Officer
Date: August 29, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
S/DOUGLAS A. STARRETT S/ANTONY MCLAUGHLIN
Douglas A. Starrett, Aug. 29, 2003 Antony McLaughlin, Aug. 29, 2003
President and CEO and Director President Starrett Industria e
Comercio, Ltda, Brazil
S/RALPH G. LAWRENCE S/WILLIAM S. HURLEY
Ralph G. Lawrence, Aug. 29, 2003 William S. Hurley, Aug. 29, 2003
Director Director
S/RICHARD B. KENNEDY S/GEORGE B. WEBBER
Richard B. Kennedy, Aug. 29, 2003 George B. Webber, Aug. 29, 2003
Director Vice President Webber Gage Division
and Director
S/STEVEN G. THOMSON S/ROGER U. WELLINGTON, JR.
Steven G. Thomson, Aug. 29, 2003 Roger U. Wellington,Jr., Aug.29, 2003
Chief Accounting Officer Vice President, Treasurer and CFO
and Director
25