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. 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; 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
Item 3 - Legal Proceedings
The Company is not involved in any material pending legal proceedings.
Item 4
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 29, 2002.
PART II
Item 5
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 26, 2002, there were 1,997 registered holders of Class A common stock and 1,682 registered holders of Class B common stock.
Quarter ended Dividends High Low 	September 2000 $ 0.20 $ 19.44 $ 16.88 	December 2000 0.20 22.94 16.69 	March 2001 0.20 23.85 19.75 	June 2001 0.20 22.74 17.45
	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
Item 6
Item 6 - Selected Financial Data
Years ended in June ($000 except per share data) 2002 2001 2000 1999 1998 Net sales $184,346 $225,857 $235,169 $232,385 $262,340 Net earnings(loss) (380) 8,097 11,489 16,696 23,009 Basic earnings(loss)per share (0.06) 1.26 1.73 2.44 3.34 Diluted earnings(loss)per shr. (0.06) 1.25 1.73 2.44 3.33 Long-term debt 7,000 7,000 3,000 3,300 3,900 Total assets 239,097 248,532 250,418 245,728 250,263 Dividends per share 0.80 0.80 0.80 0.80 0.77
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
SALES Sales decreased 18% in fiscal 2002 following a 4% decrease in fiscal 2001. The 2002 decrease is both domestic and foreign, 18% and 20%, respectively, although foreign sales were only down 10% in fiscal 2002 when measured in local currencies. In fiscal 2001, the 4% decrease was made up of a 5% decrease on the domestic side and a 1% decrease on the foreign side (7% increase in local currencies). Worldwide economic conditions continue to adversely affect business, although fourth quarter 2002 sales were not down as much (15%) as year to date. For the past three years, sales of our Scotland subsidiary have been adversely affected by the weak euro as compared to the British pound, which hurts business in terms of export pricing and import price competition. The devaluation of Brazil's currency accounts for about 1/4 of the current year's overall sales decrease of 18%. The current year decrease in domestic sales reflects the weak U.S. industrial manufacturing sector.
EARNINGS (LOSS) BEFORE TAXES Primarily because of sales volume, pretax earnings dropped $12.7 million in 2002 to a loss of $(1.2) million. 2001 sales were 34% below 2000. Cost of sales was 75.6% in 2002, 71.1% in 2001, and 71.7% in 2000. Changes in these rates 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 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. In 2001, selling and general expenses actually increased despite the slight drop in sales due to increased expenditures on advertising, information technology, and employee benefits. 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 and 33% in 2000. 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 39%. The current year's rate is not easily compared to the prior years because pretax earnings are so close to breakeven that permanent book/tax differences get exaggerated when converted to percentages. Nonrecurring permanent differences between book and taxable income for dividends paid from Brazil to the U.S. in 2001 and 2000 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 and 2000. On the other hand, this is offset by the mix of income in 2002, with the more profitable divisions being in the jurisdictions with the lowest tax rates. Higher than usual foreign tax credits and a refund of prior year state taxes caused the 2001 overall rate to be lower than in 2000.
EARNINGS (LOSS) PER SHARE As a result of the above, earnings (loss) per share were $(0.06) in fiscal 2002, $1.26 in 2001, and $1.73 in 2000.
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 2002 and 2001, 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 total approximately $5 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 $8,600,000 and debt of $8,000,000 at June 29, 2002) 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 $3,500,000 by $25,000.
LIQUIDITY AND CAPITAL RESOURCES Years ended In June ($000) 2002 2001 2000 Cash provided by operations $17,700 $12,499 $18,822 Cash used in investing activities (10,451) (9,496) (9,267) Cash used in financing activities (7,435) (3,138) (7,892)
Cash flows from operating activities increased $5 million from 2001, and in 2001 decreased $6 million from 2000. In 2002, decreasing inventories offset the drop in earnings. Increasing inventories was the main reason for the reduced cash flow from operations in 2001. "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 generated approximately $2.2, $1.4, and $2.9 million of noncash income in 2002, 2001, and 2000 ($.4, ($.9), and $.5 million, respectively, of accrual basis income (expense)).
The Company's investing activities consist of expenditures for plant and equipment and the investment of cash not immediately needed for operations. Plant expenditures of $8 million in 2002 were well below the $13 million and $14 million expended in 2001 and 2000 because of the need to conserve cash and because our multi-year information technology improvement project was essentially completed at the end of 2001.
Cash flows from financing activities are primarily the payment of dividends, which tend to be quite steady from year to year. The Company requires little debt to finance day to day operations and the proceeds from the sale of stock under the various stock plans tend to be used to purchase treasury shares. Treasury share purchases were $1.8 million in 2002 compared to $3.8 million in 2001 and $9.0 million in 2000. Borrowings decreased $4.1 million in 2002 while increasing $2.4 million in 2001 and $2.8 million in 2000.
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 workforce reductions and/or reducing or eliminating dividends. The Company maintains a $25 million line of credit but has not made significant borrowings under it during the past three years. The Company has a working capital ratio of 6.7 to 1 as of June 29, 2002 versus 5.4 to 1 as of June 30, 2001. Cash not immediately required for working capital is invested in high grade debt instruments as explained in the accounting policies footnote. Certain cash and investment balances of foreign subsidiaries may not be repatriated without adverse tax consequences and in certain cases may be subject to regulatory restriction.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K and the 2002 Annual Report, including the President's letter to stockholders, include forward-looking statements about the Company's business, sales, expenditures, environmental regulatory compliance, foreign operations, 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 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. Indeed, the weakness of the euro as compared to the British pound has had an adverse impact on the Company's sales and margins on business done with euro countries.
Risks Related to Foreign Operations: Approximately a third of the Company's sales and 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.
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. 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.
Item 8
Item 8 - Financial Statements and Supplementary Data
Contents: Page
Report of Independent Auditors 9
Consolidated Statements of Operations and Cash Flows 10
Consolidated Balance Sheets 11
Consolidated Statements of Stockholders' Equity 12
Notes to Consolidated Financial Statements 13-19
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 29, 2002 and June 30, 2001, 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 29, 2002. 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 29, 2002 and June 30 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 29, 2002, in conformity with accounting principles generally accepted in the United States of America.
S/DELOITTE & TOUCHE LLP
Boston, Massachusetts August 2, 2002
THE L.S. STARRETT COMPANY Consolidated Statements of Operations and Cash Flows For the years ended in June (in thousands of dollars except per share data)
2002 2001 2000 OPERATIONS Net sales $184,346 $225,857 $235,169 Cost of goods sold (139,413) (160,562) (168,648) Selling, general and administrative expense (45,945) (52,223) (49,788) Other income and expense (217) (1,640) 496
Earnings (loss) before income taxes (1,229) 11,432 17,229 Income taxes (benefit) (849) 3,335 5,740
Net earnings (loss) $ (380) $ 8,097 $ 11,489 Basic earnings (loss) per share, based on average outstanding shares of 6,500,026, 6,446,457 and 6,645,019 $ (0.06) $ 1.26 $ 1.73 Diluted earnings (loss) per share, based on average outstanding shares of 6,500,026, 6,457,554 and 6,652,796 $ (0.06) $ 1.25 $ 1.73
CASH FLOWS Cash flows from operating activities: Net earnings (loss) $ (380) $ 8,097 $ 11,489 Noncash expenses: Depreciation and amortization 11,741 11,662 11,380 Deferred taxes 561 97 2,108 Unrealized translation losses 263 748 Retirement Benefits (2,170) (1,396) (2,916) Working capital changes: Receivables 1,664 707 (1,189) Inventories 7,656 (9,261) (3,357) Other current assets and liabilities (1,862) 1,665 1,293 Other 227 180 14 Net cash from operating activities 17,700 12,499 18,822 Cash flows from investing activities: Additions to plant and equipment (8,028) (13,198) (13,974) Decrease (increase) in investments (2,423) 3,702 4,707 Net cash used in investing activities (10,451) (9,496) (9,267) Cash flows from financing activities: Short-term borrowing, net (4,050) (1,645) 3,090 Long-term borrowings (repayments) 4,000 (300) Common stock issued 3,598 3,444 3,665 Treasury shares purchased (1,796) (3,792) (9,045) Dividends (5,187) (5,145) (5,302) Net cash used in financing activities (7,435) (3,138) (7,892) Effect of translation rate changes on cash (87) 72 74 Net increase (decrease) in cash (273) (63) 1,737 Cash beginning of year 1,945 2,008 271 Cash end of year $ 1,672 $ 1,945 $ 2,008
Supplemental cash flow information: Interest paid $ 695 $ 950 $ 844 Taxes paid, net $ (725) $ 1,688 $ 4,190
See notes to consolidated financial statements
THE L.S. STARRETT COMPANY Consolidated Balance Sheets (in thousands of dollars)
June 29 June 30 ASSETS 2002 2001 Current assets: Cash $ 1,672 $ 1,945 Investments 10,479 8,238 Accounts receivable (less allowance for doubtful accounts of $1,790,000 and $1,976,000) 32,391 34,080 Inventories: Raw materials and supplies 17,228 18,677 Goods in process and finished parts 24,632 27,811 Finished goods 34,762 38,346 Total inventories 76,622 84,834 Prepaid expenses, taxes and other current assets 5,903 5,830 Total current assets 127,067 134,927
Property, plant and equipment, at cost: Land 1,893 1,902 Buildings (less accumulated depreciation of $17,151,000 and $16,469,000) 22,698 23,272 Machinery and equipment (less accumulated depreciation of $61,813,000 and $57,142,000) 46,839 50,031 Total property, plant and equipment 71,430 75,205
Cost in excess of net assets acquired (less accumu- lated amortization of $4,216,000 and $3,947,000) 6,086 6,354 Prepaid pension cost 33,651 30,953 Other assets 863 1,093 $239,097 $248,532 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities $ 996 $ 5,045 Accounts payable and accrued expenses 13,472 14,358 Accrued salaries and wages 4,163 4,827 Other 402 916 Total current liabilities 19,033 25,146
Deferred income taxes 16,012 15,218 Long-term debt 7,000 7,000 Accumulated postretirement benefit obligation 16,711 16,347 Stockholders' equity: Class A common stock $1 par (20,000,000 shrs. auth.; 5,147,201 outstanding in 2002, excluding 1,397,659 held in treasury; 5,017,569 outstanding in 2001, excluding 1,470,544 held in treasury) 5,147 5,018 Class B common stock $1 par (10,000,000 shrs. auth.; 1,397,480 outstanding in 2002, excluding 332,019 held in treasury; 1,440,006 outstanding in 2001, excluding 325,688 held in treasury) 1,397 1,440 Additional paid-in capital 47,858 45,112 Retained earnings reinvested and employed in the business 150,029 156,626 Accumulated other comprehensive income (loss) (24,090) (23,375) Total stockholders' equity 180,341 184,821 $239,097 $248,532
See notes to consolidated financial statements THE L.S. STARRETT COMPANY Consolidated Statements of Stockholders' Equity For the years ended in June, 2000 through 2002 (in thousands)
Common Addi- Accumulated Stock Out- tional Other Com- standing Paid-in Retained prehensive ($1 Par) Capital Earnings Income(loss) Total
Balance, June 26, 1999 $ 6,706 $ 42,730 $155,349 $ (14,749) $190,036 Comprehensive income: Net earnings 11,489 11,489 Unrealized net loss on investments (113) (113) Translation loss, net (2,708) (2,708) Total comprehensive income 8,668 Dividends ($0.80 per share) (5,302) (5,302) Treasury shares: Purchased (399) (2,956) (5,690) (9,045) Issued 161 3,400 3,561 Options exercised 5 99 104
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 income: Net earnings (380) (380) Unrealized net loss on investments (169) (169) Translation loss, net ** (546) (546) Total comprehensive income (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
** Subsequent to May 31, 2002, the fiscal year of our subsidiary in Brazil, the exchange rate for their currency declined approximately 12%. The effect of this decline, which has not been reflected in these financial statements, would be to increase Accumulated Other Comprehensive Income (Loss) by about $2.5 million and therefore reduce Stockholders' equity by the same amount.
See notes to consolidated financial statements THE L. S. STARRETT COMPANY Notes to Consolidated Financial Statements
SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements include the accounts of The L. S. Starrett Company and subsidiaries, manufacturers of industrial, professional and consumer products. All subsidiaries are wholly-owned and 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 2000. 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 contracts.
Investments: Investments consist primarily of marketable securities, including treasury bills, certificates of deposit and municipal securities. 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 29, 2002 is $3.5 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. Costs in excess of net assets acquired are being amortized on a straight-line basis over 25 to 40 years.
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 $47,859,000 and $52,799,000 at the end of 2002 and 2001, respectively, such amounts being $23,835,000 and $22,685,000 less than if determined on a FIFO basis. Revenue is generally recognized when inventory is shipped to the customer or installed if installation is necessary.
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 2002) 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: $2,727,000 in 2002, $2,663,000 in 2001 and $3,111,000 in 2000.
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 9,573, 11,097 and 7,777 of additional potential common shares in 2002, 2001 and 2000 resulting from shares issuable 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.
ACCOUNTING PRONOUNCEMENTS The Company will adopt SFAS 142 as of the first day of fiscal 2003. This requires goodwill no longer be amortized, but instead tested for impairment. Any goodwill impairment loss at transition is recognized as the cumulative effect of a change in accounting principle. The Company has net goodwill of $6.1 million that it expects to write off as a result of adopting SFAS 142 and related annual amortization expense is $268,000.
OTHER INCOME AND EXPENSE Other income and expense consists of the following (in thousands): 2002 2001 2000
Interest income, net $ 179 $ 131 $ 660 Realized and unrealized translation gains (losses) (351) (1,859) (101) Other (45) 88 (63) $ (217) $(1,640) $ 496
INCOME TAXES The provision for income taxes consists of the following (in thousands): 2002 2001 2000 Current: Federal $(1,640) $ 1,600 $ 1,581 Foreign 266 1,271 1,582 State (36) 367 469 Deferred 561 97 2,108 $ (849) $ 3,335 $ 5,740
Pretax domestic income (loss) as reportable to the IRS was $(3,100,000), $8,279,000 and $7,704,000 in 2002, 2001 and 2000, respectively.
A reconciliation of expected tax expense at the U.S. statutory rate to actual tax expense is as follows (in thousands):
2002 2001 2000 Expected tax expense $ (430) $ 4,001 $ 6,030 Increase (decrease) from: State and Puerto Rico taxes, net of federal benefit (672) (588) (210) Foreign taxes, net of federal credits 163 (17) (247) Nontaxable investment income (10) (21) (43) Other 100 (40) 210 Actual tax expense $ (849) $ 3,335 $ 5,740
Deferred income taxes at year end are attributable to the following (in thousands): 2002 2001 Deferred assets: Retiree medical benefits $(6,768) $(6,716) Inventories (1,840) (1,335) Foreign NOL carried forward indefinately (1,235) (915) Foreign tax credit carryforward expiring 2012 (700) Other (826) (1,155) (11,369) (10,121) Deferred liabilities: Prepaid pension 13,550 12,625 Other employee benefits 680 459 Depreciation 7,296 8,252 Other 1,934 1,057 23,460 22,393 Valuation reserve for foreign tax credits 700 _______ Net deferred tax liability $12,791 $12,272 Long-term portion $16,012 $15,218
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 2002, 2001 and 2000, considering the combined projected benefits and funds of the ESOP as well as the other plans, was $(1,783,000), $(462,000) and $(1,608,000), 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 1,028,000 shares of the Company's common stock. The status of these defined benefit plans, including the ESOP, is as follows (in thousands): 2002 2001 2000 Change in benefit obligation: Benefit obligation at beginning of year $ 83,203 $ 87,893 $ 88,088 Service cost 3,106 2,887 3,263 Interest cost 5,958 5,950 6,172 Participant contributions 226 242 247 Exchange rate changes 820 (1,942) (1,016) Benefits paid (3,614) (3,393) (3,315) Actuarial (gain) loss 3,650 (8,434) (5,546) Benefit obligation at end of year $ 93,349 $ 83,203 $ 87,893
Change in plan assets: Fair value of plan assets at beginning of year $128,038 $120,861 $137,578 Actual return on plan assets 633 12,213 (12,557) Employer contributions 92 Participant contributions 226 242 247 Benefits paid (3,614) (3,393) (3,315) Exchange rate changes 779 (1,885) (1,092) Fair value of plan assets at end of year $126,154 $128,038 $120,861
Reconciliation of funded status: Funded status $ 32,805 $ 44,835 $ 32,968 Unrecognized actuarial gain (370) (14,555) (3,858) Unrecognized transition asset (2,932) (3,869) (4,818) Unrecognized prior service cost 4,148 4,542 4,946 Prepaid pension cost $ 33,651 $ 30,953 $ 29,238
Amounts recognized in statement of financial Position: Prepaid pension cost $ 35,069 $ 32,390 $ 30,513 Accrued benefit liability (4,301) (1,558) (1,397) Intangible asset 1,133 121 122 Accumulated other comp. income 1,750 Prepaid pension cost $ 33,651 $ 30,953 $ 29,238
Components of net periodic benefit cost: Service cost $ 3,106 $ 2,887 $ 3,263 Interest cost 5,958 5,950 6,172 Expected return on plan assets (10,863) (9,986) (11,432) Amortization of prior service cost 394 404 409 Amortization of transition asset (937) (949) (956) Recognized actuarial gain (264) (20) (352) Net periodic benefit cost $ (2,606) $ (1,714) $ (2,896)
Weighted average assumptions: Discount rate 7.00% 7.50% 7.75% Expected long-term rate of return 8.00% 8.50% 8.50% Rate of compensation increase 3.75% 4.00% 4.50%
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):
2002 2001 2000 Change in benefit obligation: Benefit obligation at beginning of year $ 15,197 $ 15,101 $ 13,668 Service cost 551 509 457 Interest cost 1,097 1,122 914 Benefits paid (1,014) (1,071) (1,170) Actuarial (gain) loss (182) (464) 1,232 Benefit obligation at end of year $ 15,649 $ 15,197 $ 15,101
Reconciliation of funded status: Funded status $(15,649) $(15,197) $(15,101) Unrecognized actuarial gain 2,259 2,523 3,098 Unrecognized prior service cost (3,321) (3,673) (4,026) Accrued benefit liability $(16,711) $(16,347) $(16,029)
Components of net periodic benefit cost: Service cost $ 551 $ 509 $ 457 Interest cost 1,097 1,122 914 Amortization of prior service cost (353) (353) (353) Recognized actuarial gain 81 111 30 Net periodic benefit cost $ 1,376 $ 1,389 $ 1,048
Weighted average assumptions: Discount rate 7.00% 7.50% 7.75% Rate of compensation increase 3.75% 4.00% 4.50%
For measurement purposes, a 12.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003. 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 $ 43 $ (88) Effect on postretirement benefit obligation 286 (627)
DEBT At year end, long-term debt consists of the following (in thousands):
2002 2001 Note payable due 12/03, 8.3% $ 4,000 $ 4,000 Revolving credit agreement 3,000 3,000 $ 7,000 $ 7,000
All debt is due in fiscal 2004. The revolving credit agreement is for $25,000,000 and expires June 13, 2004. The credit agreement requires commitment fees of .25%. Interest rates vary, but approximate LIBOR plus ..50% (2.3% as of June 29, 2002). All debt agreements contain financial covenants, the most restrictive of which is that at June 29, 2002 the Company must have tangible net worth of $164,000,000 and an EBITDA to debt service ratio of at least 1.5. Current notes payable carry interest at a rate of LIBOR plus 1 - 4%. Interest expense, prior to capitalization of interest on self-constructed assets was $641,000, $973,000 and $877,000 in 2002, 2001 and 2000.
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.
The Company accounts for stock based compensation under the provisions of Accounting Principles Board Opinion No. 25. 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 2002, 2001, or 2000. A summary of option activity is as follows:
Weighted Average Exercise Shares Shares Price Available On Option At Grant For Grant Balance, June 26, 1999 51,803 $24.63 748,197 Options granted 69,122 19.56 (69,122) Options exercised ($20.30 and $17.00) (5,315) 19.50 Options canceled (43,632) 43,632 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
At June 29, 2002, a total of 763,362 shares of common stock are reserved for issuance under the plan. The following information relates to outstanding options as of June 29, 2002:
Weighted average remaining life 1.0 years Weighted average fair value on grant date of options granted in: 2000 $6.00 2001 5.50 2002 5.00
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 28%, interest - 3.5% to 6.5%, and expected lives - 2 years. The pro forma, after tax effect of any compensation costs related to use of SFAS No. 123, "Accounting for Stock Based Compensation," is as follows: 2002 $90,000, 2001 $170,000 and 2000 $200,000, or approximately $.01, $.03, and $.03 per share.
In addition 99,045 shares of common stock are reserved for the Company's 401(k) plan at June 29, 2002.
OPERATING DATA The Company believes it has no significant concentration of credit risk as of June 29, 2002. 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 2002 and 13% in 2001 and 2000.
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:
2002 2001 2000 Sales: North America $ 133,895 $ 164,572 $ 172,542 United Kingdom 26,331 30,520 33,064 Brazil 31,559 43,421 41,926 Eliminations and other (7,439) (12,656) (12,363) Total $ 184,346 $ 225,857 $ 235,169
Long-lived assets: North America $ 96,163 $ 97,656 United Kingdom 7,916 7,655 Brazil 5,857 6,037 Other 2,094 2,257 Total $ 112,030 $ 113,605
QUARTERLY FINANCIAL DATA (UNAUDITED)(in thousands except per share data)
Earnings(Loss) Basic Before Net Earnings Net Gross Income Earnings (Loss) Per Quarter Ended Sales Profit Taxes (Loss) Share September 2000 $58,842 $17,101 $ 4,234 $ 2,895 $ 0.45 December 2000 60,650 17,121 3,664 2,583 0.40 March 2001 50,637 14,201 1,622 950 0.15 June 2001 55,728 16,872 1,912 1,669 0.26 $225,857 $65,295 $11,432 $ 8,097 $ 1.26
September 2001 $46,522 $12,624 $ 345 $ 262 $ 0.04 December 2001 44,918 10,099 (1,417) (611) (0.09) March 2002 45,419 10,039 (1,128) (462) (0.07) June 2002 47,487 12,171 971 431 0.06 $184,346 $44,933 $(1,229) $ (380) $(0.06)
In the fourth quarter of fiscal 2001, the Company recorded a benefit related primarily to prior year state taxes and foreign tax credits.
The Company's Class A common stock is traded on the New York Stock Exchange.
Item 9
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.
PART III
Item 10
Item 10 - Directors and Executive Officers of the Registrant
Directors The information concerning the Directors of the Registrant is contained on pages 1 through 5 in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 18, 2002, as filed with the Securities and Exchange Commission ("SEC"), and is hereby incorporated by reference.
Executive Officers of the Registrant
Held Present Name Age Office Since Position
Douglas A. Starrett 50 2001 President and CEO and Director
Roger U. Wellington, Jr. 61 1984 Vice President, Treasurer and Chief Financial Officer and Director
George B. Webber 81 1962 Vice President Webber Gage Division and Director
Anthony M. Aspin 49 2000 Vice President Sales
Stephen F. Walsh 56 2002 Vice President Operations
Steven A. Wilcox 47 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 Wilcox, the positions listed above represent their principal occupations and employment during the last five years. Steven Wilcox, elected clerk in 1997, has been a partner in Ropes & Gray, counsel for the Company, throughout that period.
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 director or executive officer during the past five years.
Item 11
Item 11 - Executive Compensation
The information concerning management remuneration is contained on pages 8 through 12 in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 18, 2002, as filed with the SEC, and, except for the information under the captions "Compensation Committee Report," is hereby incorporated by reference.
Item 12
Item 12 - Security Ownership of Certain Beneficial Owners and Management
(a)	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 on pages 3 through 4 of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 18, 2002, as filed with the SEC, and is hereby incorporated by reference.
(b)	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 on pages 2 through 4 of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 18, 2002, as filed with the SEC, and is hereby incorporated by reference.
(c)	The Company knows of no arrangements that may, at a subsequent date, result in a change in control of the Company.
Item 13
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
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Accompanying this Form 10-K are the certificates of the Chief Executive Officer and Chief Financial Officer required by Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, copies of which are furnished as exhibits to this report.
(a)	1.	Financial statements filed in item 8 of this annual report:
		 Consolidated Statements of Operations and Cash Flows for each of the three years in the Period ended June 29, 2002
		 Consolidated Balance Sheets at June 29, 2002 and June 30, 2001
		 Consolidated Statements of Stockholders' Equity for each of the three years in the Period Ended June 29, 2002
		 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) There were no reports on Form 8-K filed in the last quarter of the period covered by this report.
(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 herewith.
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 herewith.
10c*The L.S. Starrett Company Supplemental Executive Retirement Plan, filed herewith.
10d*The L.S. Starrett Company 401(k) Stock Savings Plan (2001 Restatement), filed herewith.
21 Subsidiaries of the Registrant, filed herewith.
23 Independent Auditors' Consent, filed herewith.
99a Certification of Douglas A. Starrett pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
99b Certification of Roger U. Wellington, Jr. pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes- Oxley Act of 2002, 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 16, 2002
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. 16, 2002 Antony McLaughlin, Aug. 16, 2002 President and CEO and Director President Starrett Industria e Comercio, Ltda, Brazil
S/WILLIAM S. HURLEY Thomas E. Mahoney, Aug. 16, 2002 William S. Hurley, Aug. 16, 2002 Director Director
S/RICHARD B. KENNEDY S/GEORGE B. WEBBER Richard B. Kennedy, Aug. 16, 2002 George B. Webber, Aug. 16, 2002 Director Vice President Webber Gage Division and Director
S/STEVEN G. THOMSON S/ROGER U. WELLINGTON, JR. Steven G. Thomson, Aug. 16, 2002 Roger U. Wellington,Jr., Aug.16, 2002 Chief Accounting Officer Vice President, Treasurer and CFO and Director
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