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.
The Webber Gage Division, Cleveland, Ohio, owns and occupies two buildings containing approximately 46,000 square feet.
The Company-owned facility in Mt. Airy, North Carolina has approximately 219,000 square feet. It is occupied by the Company's Saw Division, Granite Surface Plate Division, Coordinate Measuring Machine Division, Optical Comparator Division, Ground Flat Stock Division and Vise Division. This plant is subject to a mortgage collateralizing a $3,900,000 Industrial Revenue Bond.
The Company's Advanced Technology Division, located in Gardner, Massachusetts, occupies about 8,000 square feet of leased facilities.
The Company's Evans Rule Division, located in North Charleston, South Carolina, owns and occupies a 136,000 square foot building. In addition, this division leases 32,000 square feet of manufacturing space located in Mayaguez, Puerto Rico.
The Company's Level Division is located in Alum Bank, Pennsylvania and owns and occupies a 50,000 square foot building.
The Company's Brazil subsidiary is located in a 140,000 square foot building. The Company's Scotland subsidiary occupies a 187,000 square foot building and also leases approximately 16,000 square feet of manufacturing space in Skipton, England, where its wholly owned subsidiary manufactures optical measuring projectors. A subsidiary in Mississauga, Canada occupies a 25,000 square foot building. With the exception of Skipton, these facilities are all owned.
In addition, the Company owns and operates warehouses/sales offices in Atlanta, Georgia; Buena Park, California; Elmhurst, Illinois; and Farmington Hills, Michigan. The Company's two granite quarries in North Carolina were sold in fiscal 1994.
In its opinion, all of the Company's 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 25, 1994.
Executive Officers of the Registrant
The information under the caption Executive Officers of the Registrant in item 10 of this Form 10K is hereby incorporated by reference.
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 Registrant'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 Registrant has paid the same dividends thereon as have been paid on the Class A common stock since that date. At July 22, 1994, there were 2,713 registered holders of Class A common stock and 2,321 registered holders of Class B common stock.
Quarter ended Dividends High Low June 1994 $ 0.17 $ 24.38 $ 21.50 March 1994 0.17 25.50 23.50 December 1993 0.17 25.50 24.13 September 1993 0.17 25.88 23.00
June 1993 0.17 25.38 24.13 March 1993 0.17 25.88 24.00 December 1992 0.17 26.50 21.75 September 1992 0.17 25.13 22.88
Item 6
Item 6 - Selected Financial Data
Years ended in June ($000 except per share data) 1994 1993 1992 1991 1990 Net sales $180,178 $174,801 $180,275 $188,432 $201,625 Net earnings before accounting changes 9,041 8,743 10,537* 12,062 18,752 Earnings per share before accounting changes 1.28 1.25 1.52* 1.74 2.71 Long-term debt 10,843 14,527 18,212 16,898 19,854 Total assets 198,032 194,436 198,002 181,185 177,128 Dividends per share 0.68 0.68 0.68 0.68 0.65
* Before charge of $7,729,000 ($1.12 per share) for cumulative effect on prior year earnings of accounting changes for postretirement benefits and income taxes.
Item 7
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Sales
Sales are up 3% compared to a year ago. This follows a 3% decrease in 1993. The current year increase is all domestic, with the weakening pound in Scotland during the early part of the year and lower volume in Brazil holding foreign sales flat. The sales decline in 1993 was among all divisions and generally a result of worldwide economic conditions as well as the drop in the pound.
Earnings Before Taxes
Pretax earnings are down 9% for the year. This includes a 18% increase in domestic pretax earnings as a result of increased sales. The foreign decline is almost all in Brazil where price competition has been intense. In addition, realized and unrealized exchange losses in Brazil, which are included in other income and expense, are up over $1 million as a result of the extremely high inflation during the year. The 20% drop in pretax earnings in 1993 was primarily the result of a decrease in domestic margins because of lower volume as well as one-time expenses associated with the move of our Saw Division to Mt. Airy, N.C.
Net Earnings
The current year net earnings trend is the opposite of the pretax trend, with 1994 improving 3% over 1993. The effective tax rate is only 17% in 1994 compared to 26% in 1993 and 30% in 1992 (a more normal year). Tax-exempt interest, Puerto Rico tax incentives and dividends on ESOP stock always contribute to an overall effective tax rate that is slightly lower than the normal U.S. statutory rate of 34%. The decline of the effective tax rate in 1994, however, comes from the favorable tax treatment of a fourth quarter dividend from Scotland and also from Brazil, where two things happened. Higher than usual inflation in Brazil resulted in large tax deductions for so-called monetary correction (an accounting concept unique to Brazil), about doubling the expected tax benefit. In addition, there was a favorable partial
resolution ($350,000) to a tax dispute we have been having with the government since 1991.
The 1993 versus 1992 reduction in rate relates to: 1) domestic income mix favoring Puerto Rico, where the effective tax rate is lower and 2) the favorable tax treatment of a third quarter dividend from Scotland.
Accounting Changes
The Company adopted both FAS 106 (retiree medical benefits) and FAS 109 (income taxes) in fiscal 1992, recording the cumulative effect in the first quarter of 1992. The cumulative effect of the income tax change comes from recording the deferred taxes associated with a 1987 acquisition. The cumulative effect of the retiree medical benefit change relates to benefits earned for past service.
In fiscal 1995, the Company will adopt Statement of Financial Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, which will not have a material effect on the financial condition or results of operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to maintain a strong financial position with a working capital ratio of 5.8 to one on June 25, 1994 as well as June 26, 1993. Cash and short-term investments are up over $3 million compared to June 1993. This resulted from being able to hold receivables and inventory even despite increasing sales, along with lower than average fixed asset additions.
The fact that the changes in receivables and payables in the Statement of Cash Flows do not exactly match the changes in the related balance sheet accounts is because of changes in foreign exchange rates. These differences should not be interpreted as uses and sources of cash, but rather as noncash adjustments to net income to arrive at cash generated from operations. Also, in Brazil, these differences tend to be offset by unrealized exchange gains and losses.
Borrowings under the Company's $20 million revolving credit agreement have been used to finance acquisitions. The Company believes that existing cash balances, funds generated from operations and available funds under its credit line will be sufficient to meet foreseeable cash needs. Cash not immediately required for working capital needs is invested in short-term government securities and other money market investments.
Item 8
Item 8 - Financial Statements and Supplementary Data
Contents: Page
Report of Independent Auditors 7
Consolidated Statements of Earnings and Cash Flows 8
Consolidated Balance Sheets 9
Consolidated Statements of Stockholders' Equity 10
Notes to Consolidated Financial Statements 11-17
REPORT OF INDEPENDENT AUDITORS
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 25, 1994 and June 26, 1993, and the related consolidated statements of earnings and cash flows, and stockholders' equity for each of the three years in the period ended June 25, 1994. Our audits also included the financial statement schedules listed in item 14(a)2 of this Form 10K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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 25, 1994 and June 26, 1993, and the results of their operations and their cash flows for each of the three years in the period ended June 25, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in the Accounting Changes note to the consolidated financial statements, in 1992 the Company changed its methods of accounting for income taxes and postretirement benefits other than pensions.
S/DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP Boston, Massachusetts July 29, 1994
THE L.S. STARRETT COMPANY Consolidated Statements of Earnings and Cash Flows For the years ended in June (in thousands of dollars except per share data)
1994 1993 1992 EARNINGS Net sales $180,178 $174,801 $180,275 Cost of goods sold (129,485) (125,131) (126,349) Selling, general and administrative expense (37,832) (36,476) (36,002) Other income and expense (2,007) (1,305) (2,972) Earnings before income taxes and cumulative effect of accounting changes 10,854 11,889 14,952 Income taxes 1,813 3,146 4,415 Net earnings before cumulative effect of accounting changes 9,041 8,743 10,537 Cumulative effect of accounting changes for postretirement benefits and income taxes 7,729 Net earnings $ 9,041 $ 8,743 $ 2,808 Earnings per share before cumulative effect of accounting changes $ 1.28 $ 1.25 $ 1.52 Cumulative effect of accounting changes 1.12 Earnings per share $ 1.28 $ 1.25 $ .40
CASH FLOWS Cash flows from operating activities: Net earnings $ 9,041 $ 8,743 $ 2,808 Noncash expenses: Depreciation and amortization 8,681 8,306 7,802 Deferred taxes (254) 1,209 252 Cumulative effect of accounting changes 7,729 Unrealized translation losses 5,476 5,371 6,332 Working capital changes: Receivables (8,499) (5,061) (7,856) Inventories (17) 4,137 2,557 Other current assets and liabilities 3,400 (85) 2,898 Prepaid pension and other (1,457) (801) (933) Net cash from operating activities 16,371 21,819 21,589 Cash flows from investing activities: Business acquired (1,590) Additions to plant and equipment (6,567) (7,518) (13,915) Increase in short-term investments (3,657) (6,955) (4,690) Net cash used in investing activities (10,224) (14,473) (20,195) Cash flows from financing activities: Long-term borrowings 3,000 Debt repayments (2,600) (2,600) (600) Common stock issued 2,678 3,635 2,061 Treasury shares purchased (1,735) (1,304) (1,315) Dividends (4,805) (4,767) (4,704) Net cash used in financing activities (6,462) (5,036) (1,558) Effect of translation rate changes on cash (152) (258) (57) Net increase (decrease) in cash (467) 2,052 (221) Cash beginning of year 2,845 793 1,014 Cash end of year $ 2,378 $ 2,845 $ 793
Supplemental cash flow information: Interest paid $ 662 $ 958 $ 1,343 Taxes paid $ 1,359 $ 3,791 $ 2,680
See Notes to Consolidated Financial Statements
THE L.S. STARRETT COMPANY Consolidated Balance Sheets (in thousands of dollars) June 25 June 26 ASSETS 1994 1993 Current assets: Cash $ 2,378 $ 2,845 Short-term investments 27,055 23,478 Accounts receivable (less allowance for doubtful accounts of $954,000 and $1,001,000) 29,133 29,057 Inventories 53,165 53,567 Prepaid expenses and other current assets 4,732 3,355
Total current assets 116,463 112,302
Property, plant and equipment, at cost: Land 1,995 1,962 Buildings (less accumulated depreciation of $15,227,000 and $13,859,000) 21,283 22,868 Machinery and equipment (less accumulated depreciation of $33,518,000 and 29,708,000) 34,108 34,788 Total property, plant and equipment 57,386 59,618
Cost in excess of net assets acquired (less accumu- lated amortization of $2,386,000 and $2,034,000) 8,822 9,205 Prepaid pension cost 14,897 12,870 Other assets 464 441 $198,032 $194,436
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Notes payable and current maturities $ 1,583 $ 1,311 Accounts payable and accrued expenses 10,018 10,078 Accrued salaries and wages 4,276 4,042 Taxes payable 2,327 2,360 Dividend payable 1,204 1,198 Employee deposits for stock purchase plan 601 433
Total current liabilities 20,009 19,422
Deferred income taxes 7,110 6,101 Long-term debt 10,843 14,527 Accumulated postretirement benefit obligation 13,422 12,964
Stockholders' equity: Class A Common Stock $1 par (10,000,000 shrs. auth.) 4,851 4,640 Class B Common Stock $1 par (10,000,000 shrs. auth.) 2,256 2,425 Additional paid-in capital 32,272 30,023 Retained earnings reinvested and employed in the business 113,147 110,259 ESOP guaranteed bank loan (543) (1,627) Foreign currency translation adjustment (5,335) (4,298)
Total stockholders' equity 146,648 141,422 $198,032 $194,436
See Notes to Consolidated Financial Statements
THE L.S. STARRETT COMPANY Consolidated Statements of Stockholders' Equity For the years ended in June, 1992 through 1994 (in thousands)
Common Addi- Equity Adjustments Stock Out- tional Currency standing Paid-in Retained Trans- ($1 Par) Capital Earnings ESOP lation Total
Balance, 6/29/91 (1,400,325 Class A and 77,439 Class B shares in treasury)$ 6,911 $25,017 $110,262 $(3,798) $(1,404) $136,988 Net earnings 2,808 2,808 Dividends ($0.68) (4,704) (4,704) Treasury shares: Purchased (55) (207) (1,053) (1,315) Issued 81 1,829 1,910 Options exercised 8 143 151 ESOP loan repayments 1,086 1,086 Translation gain,net 1,928 1,928 Balance, 6/27/92 (1,357,654 Class A and 94,790 Class B shares in treasury) 6,945 26,782 107,313 (2,712) 524 138,852 Net earnings 8,743 8,743 Dividends ($0.68) (4,767) (4,767) Treasury shares: Purchased (54) (220) (1,030) (1,304) Issued 91 2,106 2,197 Options exercised 83 1,355 1,438 ESOP loan repayments 1,085 1,085 Translation loss,net (4,822) (4,822) Balance, 6/26/93 (1,303,954 Class A and 111,482 Class B shares in treasury) 7,065 30,023 110,259 (1,627) (4,298) 141,422 Net earnings 9,041 9,041 Dividends ($0.68) (4,805) (4,805) Treasury shares: Purchased (72) (315) (1,348) (1,735) Issued 102 2,341 2,443 Options exercised 12 223 235 ESOP loan repayments 1,084 1,084 Translation loss,net (1,037) (1,037) Balance, 6/25/94 (1,251,378 Class A and 133,397 Class B shrs in treasury) $ 7,107 $32,272 $113,147 $ (543) $(5,335) $146,648
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, all of which are wholly-owned. All significant intercompany items have been eliminated. The fiscal years of the Company's subsidiaries in Scotland and Brazil end in May and April, respectively.
Fair market value of financial instruments: The Company's financial instruments consist primarily of current assets, current liabilities, and long-term debt. Current assets, except inventory (see Inventories), and current liabilities are stated at cost, which approximates fair market value; long-term debts, which are at current market interest rates, also approximate fair market value.
Short-term investments: Short-term investments, carried at cost, which approximates market, consist primarily of marketable securities, including treasury bills, certificates of deposit, municipal securities and money market preferreds.
Inventories: Inventories are stated at the lower of cost or market. For approximately 80% 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 $39,984,000 and $38,383,000 at the end of 1994 and 1993, respectively, such amounts being $25,391,000 and $25,757,000 less than if determined on a FIFO basis. During 1994, 1993 and 1992, the Company reduced the level of certain LIFO inventories that were carried at significantly lower costs prevailing in prior years. The effect of the LIFO inventory reduction was to increase net earnings approximately $443,000 in 1994 ($.06 per share), $1,420,000 in 1993 ($.20 per share) and $825,000 in 1992 ($.12 per share).
Total inventories at year end are as follows (in thousands):
Goods in Pro- cess and Raw Materials Finished Goods Finished Parts and Supplies Total 1994 $23,530 $16,111 $13,524 $53,165 1993 21,324 19,189 13,054 53,567
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 $45,000,000 at June 1994) or the related unrealized translation adjustments because such amounts are considered permanently invested and, if remitted, the resulting taxes would be offset by foreign tax credits.
Property, plant and equipment: 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 20 years, machinery and equipment 5 to 12 years, motor vehicles 3 to 5 years.
Cost in excess of net assets acquired: These costs are being amortized on a straight-line basis over 10 to 40 years.
Research and development: Research and development costs are $2,718,000 in 1994, $3,122,000 in 1993 and $3,662,000 in 1992.
Earnings per share: Earnings per share are computed using the weighted average number of shares and common stock equivalents (stock options) outstanding during the year.
Translation of foreign currencies: Assets and liabilities in nonhyperinfla- tionary economies are translated at exchange rates in effect on reporting dates, and income and expenses are translated at rates in effect on transaction dates. The resulting differences due to changing exchange rates are charged or credited directly to the "foreign currency translation adjustment" account included as part of stockholders' equity. For the Company's subsidiary in Brazil ( a hyperinflationary economy), the translation method is the same except that inventories and plant and the related charges to cost of sales and depreciation expense are translated at rates in effect at the time the assets were purchased, and the resulting translation gains and losses are included in the determination of net earnings. Translation gains and losses on short-term borrowings and marketable securities in Brazil are netted against the related interest charged or income earned. Similar losses on accounts receivable are treated as sales discounts and are netted against sales.
ACCOUNTING CHANGES In fiscal 1992, the Company adopted Statement of Financial Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes, and FAS 106, Accounting for Postretirement Benefits Other Than Pensions.
The effect of adopting FAS 109 was to increase net earnings $56,000 ($0.01 per share) in 1992, which included a negative cumulative effect on prior years of $251,000 ($0.04 per share) resulting primarily from the effect of a 1987 acquisition.
The effect of adopting FAS 106 was to decrease net earnings $7,623,000 ($1.10 per share) in 1992, which included the cumulative effect on prior years of $7,478,000 ($1.08 per share), and is net of a $4,985,000 tax benefit. FAS 106 requires companies to recognize the future cost of postretirement medical and other nonpension benefits on an accrual basis during an employee's service in a manner similar to the present accounting method for pension costs.
OTHER INCOME AND EXPENSE Other income and expense consists of the following (in thousands):
1994 1993 1992
Interest income $ 1,035 $ 1,147 $ 1,027 Interest expense and commitment fees (662) (812) (1,425) Realized and unrealized translation gains and losses (2,708) (1,594) (2,659) Other 328 (46) 85 $(2,007) $(1,305) $(2,972)
INCOME TAXES The provision for income taxes consists of the following (in thousands):
1994 1993 1992 Current: Federal $ 863 $ 629 $ 1,888 Foreign 615 844 1,528 State 589 464 747 Deferred (254) 1,209 252 $ 1,813 $ 3,146 $ 4,415
The 1994 resolution of a tax dispute in Brazil resulted in a reduction of foreign tax expense of $350,000. Pretax domestic income was $8,916,000, $7,546,000 and $12,219,000 in 1994, 1993 and 1992, respectively.
A reconciliation of expected tax expense at the U.S. statutory rate to actual tax expense is as follows (in thousands):
1994 1993 1992 Expected tax expense $ 3,690 $ 4,042 $ 5,084 Decrease resulting from: State and Puerto Rican taxes net of federal benefit (378) (380) (24) Foreign taxes net of federal credits (1,034) (12) (203) Nontaxable investment income (158) (140) (114) Other (307) (364) (328) Actual tax expense $ 1,813 $ 3,146 $ 4,415
Deferred income taxes at year end are attributable to the following (in thousands): 1994 1993 Deferred assets: Retiree medical benefits $(5,302) $(5,121) Inventories (692) (809) Foreign loss carryforwards (1,198) Other (911) (796) (8,103) (6,726) Deferred liabilities: Prepaid pension 5,933 5,092 Other employee benefits 692 647 Depreciation 5,590 5,224 Other 938 1,116 13,153 12,079 Current portion 2,060 748 $ 7,110 $ 6,101 Foreign loss carryforwards begin expiring in 1998.
EMPLOYEE BENEFIT PLANS The Company has several pension plans, both defined benefit and defined contribution, covering all of its domestic and approximately half 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 retirement benefits otherwise due under the domestic noncontributory defined benefit pension plan. The total cost (benefit) of all such plans for 1994, 1993 and 1992, considering the combined projected benefits and funds of the ESOP as well as the pension plans, was $(124,000), $240,000 and $257,000, 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 1,000,000 shares of the Company's common stock. The cost of these defined benefit plans, including the ESOP, consists of the following components (in thousands): 1994 1993 1992 Cost of benefits earned during current year $ 1,876 $ 1,943 $ 1,748 Interest on projected benefit obligation 3,083 3,124 3,278 Actual return on assets (1,150) (8,929) (7,381) Net amortization and deferral (4,714) 3,417 1,996 $ (905) $ (445) $ (359)
The plans' funded status at year end is as follows (in thousands):
1994 1993 1992 Vested accumulated benefit obligation $57,103 $53,539 $53,940 Nonvested accumulated benefit obligation 1,856 1,638 79 Effect of future compensation increases 5,798 8,812 11,086 Projected benefit obligation 64,757 63,989 65,105 Plan assets at fair market value 93,957 96,054 90,786 Funded status 29,200 32,065 25,681 Unrecognized portion of net assets 14,303 19,195 14,325 Prepaid pension cost $14,897 $12,870 $11,356
The assumed discount rate and rate of increase in compensation used in determining the projected benefit obligation are 7% and 5%, respectively, for the domestic plan and 8% and 6.5% for the foreign plan. The assumed long-term rate of return on plan assets is 7% for the domestic plan and 8% for the foreign plan.
The Company provides certain medical and life insurance benefits for most retired employees in the United States. See Accounting Changes note regarding the adoption of FAS 106 in fiscal 1992.
The status of these plans at year end is as follows (in thousands): 1994 1993 Accumulated postretirement benefit obligation: Retirees $ 6,601 $ 6,095 Active plan participants 9,074 8,379 Unrecognized loss (2,253) (1,510) Accumulated postretirement benefit obligation accrued $13,422 $12,964
Postretirement benefit expense consists of the following (in thousands):
1994 1993 1992 Service cost $ 414 $ 400 $ 301 Interest cost 1,039 950 845 Amortization cost 53 $ 1,506 $ 1,350 $ 1,146
The Company's portion of the annual rate of increase in the per capita cost of covered benefits is assumed to be 2%. A one percentage point increase in the assumed cost escalation rate would increase the accumulated benefit obligation by $1.2 million and the annual expense by $150,000. A discount rate of 7% was used in determining the accumulated benefit obligation.
LONG-TERM DEBT At year end, long-term debt consists of the following (in thousands):
1994 1993 Industrial revenue bond $ 3,900 $ 4,500 ESOP guaranteed loan 543 1,627 Revolving credit agreement 7,000 9,000 11,443 15,127 Less current maturities 600 600 $10,843 $14,527
The industrial revenue bond is collateralized by the Company's plant in Mt. Airy, North Carolina. Principal is payable in semiannual installments of $300,000. Interest is at 92% of the 90 day CD rate (3.3% at June 25, 1994). Interest on the ESOP guaranteed loan is at LIBOR plus 1/2% (4.6% at June 25, 1994). The ESOP guaranteed loan was used to purchase 800,000 shares of Company stock under a ten-year bank term loan that was guaranteed by the Company. Dividends and Company contributions to the ESOP are used to repay the term loan, and the shares sold to the ESOP are being allocated to employee accounts at the rate of 10% per year. Additional contributions are made to replace the dividends used for debt service. The revolving credit agreement is for $20,000,000 with two banks and requires commitment and other fees of .3%. Interest rates vary, but approximate LIBOR plus 3/8% (4.8% as of June 25, 1994). Borrowings are payable in 16 equal quarterly installments commencing December 1995. All debt agreements contain financial covenants, the most restrictive of which is that at June 25, 1994 the Company must have tangible net worth of $124,000,000. Annual principal payments on debt (excluding ESOP) are required as follows: 1995 $600,000, 1996 $1,913,000, 1997-1999 $2,350,000, thereafter $1,337,000.
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, adopted in 1990, 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 the year 2000.
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. The average purchase price of the optioned stock outstanding at the end of 1994, 1993 and 1992 was $20.33, $20.66 and $18.11, respectively. Changes in optioned and unoptioned shares under the plans were as follows:
On Option Unoptioned Balance, June 29, 1991 116,845 566,823 Options granted 27,874 (27,874) Options exercised ($19.13 and $19.55) (7,808) Options canceled (24,537) 24,537 Balance, June 27, 1992 112,374 563,486 Options authorized 800,000 Options granted 51,594 (51,594) Options exercised ($16.90 and $20.19) (83,466) Options canceled (21,166) (557,254) Balance, June 26, 1993 59,336 754,638 Options granted 31,453 (31,453) Options exercised ($19.34 and $20.40) (11,946) Options canceled (17,287) 17,287 Balance, June 25, 1994 61,556 740,472
At June 25, 1994, a total of 802,028 shares of Class A common stock are reserved for issuance under the plans. The outstanding options include the following: Number of 85% of market price Expiration date Class A shares on date of grant October 27, 1994 23,836 $20.40 May 25, 1995 11,010 21.25 November 16, 1995 12,076 20.94 May 23, 1996 14,634 19.02 61,556 In addition, 304,633 shares of Class A common stock are reserved for the Company's 401(k) plan at June 25, 1994. Since inception in 1986, 451,212 Class A and 44,155 Class B shares have been issued under this plan.
OPERATING DATA The Company is engaged in the single business segment of producing and marketing industrial, professional and consumer products. Revenues, operating income and identifiable assets of the Company's domestic and foreign operations are summarized as follows (in thousands): Elimina- Consoli- Domestic Foreign tions dated 1994: Sales $132,804 $ 47,374 $180,178 Intercompany transfers 1,437 6,665 $ (8,102) Revenues 134,241 54,039 (8,102) 180,178 Operating income 7,695 5,166 12,861 Identifiable assets 152,128 55,059 (9,155) 198,032 Net assets 107,237 45,386 (5,975) 146,648 1993: Sales $125,376 $ 49,425 $174,801 Intercompany transfers 1,247 5,542 $ (6,789) Revenues 126,623 54,967 (6,789) 174,801 Operating income 6,604 6,590 13,194 Identifiable assets 145,059 57,542 (8,165) 194,436 Net assets 101,593 46,357 (6,528) 141,422 1992: Sales $129,025 $ 51,250 $180,275 Intercompany transfers 1,034 4,619 $ (5,653) Revenues 130,059 55,869 (5,653) 180,275 Operating income 11,165 6,759 17,924 Identifiable assets 142,349 64,314 (8,661) 198,002 Net assets 94,359 50,575 (6,082) 138,852
Operating income is computed exclusive of other income and expense and income taxes. Transfers are recorded at normal selling price for finished goods and at cost plus a percentage to cover expenses for finished parts, work in process and raw materials. Eliminations relate to investments in subsidiaries and intercompany transactions and balances.
The Company believes it has no significant concentrations of credit risk as of June 25, 1994. Trade receivables are disbursed among a large number of retailers, distributors and industrial accounts in many countries. One customer accounted for approximately 11% of sales in 1994 and 10% in 1993.
The significant foreign operations of the Company are located in Scotland and Brazil. These two locations accounted for approximately the following percentages of the indicated foreign information listed above:
1994 1993 1992 Scotland Brazil Scotland Brazil Scotland Brazil Revenues 49% 51% 49% 51% 52% 48% Operating income 66% 34% 52% 48% 71% 29% Identifiable assets 50% 50% 52% 48% 55% 45%
QUARTERLY FINANCIAL DATA (UNAUDITED)(in thousands except per share data)
Earnings Before Earnings Net Gross Income Net per Quarter ended Sales Profit Taxes Earnings Share June 1994 $ 47,197 $13,427 $ 3,284 $ 3,374 $ 0.48 March 1994 43,672 12,469 1,953 1,392 0.20 December 1993 47,317 13,678 4,288 3,068 0.43 September 1993 41,992 11,119 1,329 1,207 0.17 $180,178 $50,693 $10,854 $ 9,041 $ 1.28
June 1993 44,906 12,572 3,133 2,330 0.33 March 1993 39,900 11,678 2,284 2,026 0.29 December 1992 45,888 12,315 2,933 2,095 0.30 September 1992 44,107 13,105 3,539 2,292 0.33 $174,801 $49,670 $11,889 $ 8,743 $ 1.25
The fiscal 1994 fourth quarter tax provision was negative primarily as a result of the favorable tax effects of a Scotland dividend and the partial settlement of a Brazil tax dispute.
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 3 in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 21, 1994, and is hereby incorporated by reference.
Executive Officers of the Registrant
Held Present Name Age Office Since Position
Douglas R. Starrett 74 1962 President and Director
George B. Webber 73 1962 Vice President Webber Gage Division and Director
Charles H. Morrow 59 1976 Vice President Sales
Douglas A. Starrett 42 1985 Executive Vice Presi- dent and Director
Roger U. Wellington, Jr. 53 1984 Treasurer and Chief Financial Officer and Director
Peter MacDougall 56 1990 Clerk
Douglas R. Starrett, George B. Webber, Charles H. Morrow, and Roger U. Wellington, Jr. have served in the same capacities as listed above for at least the past five years. Douglas A. Starrett (son of Douglas R. Starrett) was previously Vice President of Operations for the Company. Except in the case of Peter MacDougall, the positions listed above represent their principal occupations and employment during the last five years. Peter MacDougall, elected clerk in July 1990, 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 4 through 9 in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 21, 1994 and, except for the information under the caption "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 page 3 of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 21, 1994, 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 and 3 of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 21, 1994, and is hereby incorporated by reference.
(c) The Company knows of no arrangements which 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
(a) 1. Financial statements filed in item 8 of this annual report:
Consolidated Statements of Earnings and Cash Flows for the Three Years in the Period ended June 25, 1994
Consolidated Balance Sheets at June 25, 1994 and June 26, 1993
Consolidated Statements of Stockholders' Equity for the Three Years in the Period Ended June 25, 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules - years ended June, 1992 through 1994:
I - Short-term investments V - Property, plant and equipment VI - Accumulated depreciation of property, plant and equipment VIII - Valuation and qualifying accounts IX - Short-term borrowings X - Supplementary income statement information
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 on page 27.
(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 on page 27.
(d) Not applicable.
THE L.S. STARRETT COMPANY AND SUBSIDIARIES
SCHEDULE I - SHORT-TERM INVESTMENTS JUNE 25, 1994
Amount at which- Principal Market carried in Description Amount Cost Value Balance Sheet
Maturities/tenders to August 31,1994: Treasury bills $ 2,000,000 $ 1,988,196 $ 1,988,196 $ 1,988,196 Tax exempt auction rate preferreds 3,500,000 3,500,000 3,500,000 3,500,000 Bank CD's: Taxable 4,439,427 4,439,427 4,439,427 4,439,427 Nontaxable 2,776,622 2,776,622 2,776,622 2,776,622 Tax exempt money market funds 772,402 772,402 772,402 772,402 Tax exempt municipal bonds and notes 2,460,000 2,460,098 2,460,000 2,460,098
15,948,451 15,936,745 15,936,647 15,936,745 Maturities/tenders from September 1, 1994 to December 31, 1994: Treasury bills 2,000,000 1,979,525 1,979,525 1,979,525 Tax exempt auction rate preferreds 2,500,000 2,500,000 2,500,000 2,500,000 Tax exempt municipal bonds and notes 1,345,000 1,367,773 1,365,327 1,367,773
5,845,000 5,847,298 5,844,852 5,847,298 Maturities/tenders from January 1, 1995 to June 30, 1995: Tax exempt auction rate preferreds 1,500,000 1,500,000 1,500,000 1,500,000 Tax exempt municipal bonds and notes 3,610,000 3,709,805 3,685,278 3,709,805
5,110,000 5,209,805 5,185,278 5,209,805
$26,903,451 $26,993,848 $26,966,777 $26,993,848
THE L.S. STARRETT COMPANY AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT THREE YEARS IN THE PERIOD ENDED JUNE 25, 1994
Classification Machinery and Land Buildings Equipment Total
BALANCE, JUNE 29, 1991 $1,972,921 $32,599,192 $50,545,582 $85,117,695
FAS 109 adjustment 239,475 2,560,525 2,800,000
Exchange rate changes (4,232) 219,132 460,000 674,900
Additions at cost 10,000 7,860,789 6,979,224 14,850,013
Fully depreciated (6,998) (2,412,814) (2,419,812)
Retirements or sales (8,420) (147,702) (630,161) (786,283)
Transfers (1,405,150) 1,405,150
BALANCE, JUNE 27, 1992 1,970,269 39,358,738 58,907,506 100,236,513
Exchange rate changes (6,747) (521,077) (1,205,689 (1,733,513)
Additions at cost 1,464,827 6,053,317 7,518,144
Fully depreciated (157,479) (1,482,721) (1,640,200)
Retirements or sales (1,375) (222,417) (971,486) (1,195,278)
Transfers (3,195,294) 3,195,294
BALANCE, JUNE 26, 1993 1,962,147 36,727,298 64,496,221 103,185,666
Exchange rate changes (6,863) (126,697) (246,586) (380,146)
Additions at cost 1,177,905 5,388,941 6,566,846
Fully depreciated (34,490) (2,403,632) (2,438,122)
Retirements or sales (1,182) (238,911) (562,785) (802,878)
Transfers 40,403 (994,686) 954,283
BALANCE, JUNE 25, 1994 $1,994,505 $36,510,419 $67,626,442 $106,131,366
THE L.S. STARRETT COMPANY AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT THREE YEARS IN THE PERIOD ENDED JUNE 25, 1994
Description Machinery and Buildings Equipment Total
BALANCE, JUNE 29, 1991 $11,224,737 $21,099,204 $32,323,941
FAS 109 adjustment 55,878 1,071,256 1,127,134
Exchange rate changes 76,238 192,083 268,321
Charged to earnings 1,362,953 6,095,717 7,458,670
Fully depreciated (6,998) (2,412,814) (2,419,812)
Retirements or sales (43,225) (161,364) (204,589)
BALANCE, JUNE 27, 1992 12,669,583 25,884,082 38,553,665
Exchange rate changes (210,315) (646,645) (856,960)
Charged to earnings 1,632,988 6,303,493 7,936,481
Fully depreciated (157,479) (1,482,721) (1,640,200)
Retirements or sales (75,300) (349,934) (425,234)
BALANCE, JUNE 26, 1993 13,859,477 29,708,275 43,567,752
Exchange rate changes (57,993) (138,780) (196,773)
Charged to earnings 1,533,019 6,788,900 8,321,919
Fully depreciated (34,490) (2,403,632) (2,438,122)
Retirements or sales (73,179) (436,501) (509,680)
BALANCE, JUNE 25, 1994 $15,226,834 $33,518,262 $48,745,096
THE L.S. STARRETT COMPANY AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS THREE YEARS IN THE PERIOD ENDED JUNE 25, 1994
Balance at Additions Deductions Balance at Beginning Charged to from End of Description of Year Income Reserve Year
Reserves deducted from assets - allowance for doubtful accounts:
1994 $1,001,000 $ 476,203 $ 523,203 $ 954,000
1993 1,036,000 826,000 861,000 1,001,000
1992 809,000 803,000 576,000 1,036,000
NOTE:Included in deductions from reserve are translation losses of $14,000, $63,000 and $341,000 in 1994, 1993 and 1992, respectively.
THE L.S. STARRETT COMPANY AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS THREE YEARS IN THE PERIOD ENDED JUNE 25, 1994
Weighted Maximum Average Weighted Average Amount Amount Average Interest Out- Out- Interest Balance Rate Standing Standing Rate Category of Aggregate End of End of During During During Short-Term Borrowings Year Year Year Year Year
Notes payable, 1994 $ 983,000 12% $ 983,000 $1,580,000 6%
Notes payable, 1993 711,000 7% 1,598,000 3,050,000 4%
Notes payable, 1992 1,598,000 11% 2,860,000 1,940,000 26%
NOTES:
Interest rates reflect the hyperinflationary conditions in Brazil and should not be compared to typical short-term rates in the United States.
Average outstandings computed on a daily basis.
Weighted average interest rate during period computed by dividing actual interest expense by average outstanding balances.
THE L.S. STARRETT COMPANY AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION THREE YEARS IN THE PERIOD ENDED JUNE 25, 1994
1994 1993 1992 Charged to Costs Charged to Costs Charged to Costs Item and Expenses and Expenses and Expenses
Maintenance and repairs $4,227,173 $4,298,521 $3,626,274
Depreciation, amortization, and depletion $8,680,775 $8,305,596 $7,801,981
Advertising costs $3,640,754 $2,988,242 $3,961,004
Other information is omitted because it is either inapplicable or the information required is immaterial as defined in the instructions.
THE L.S. STARRETT COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
(3i) 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.
(3ii) Bylaws, filed with Form 10-Q for the quarter ended September 28, 1991, are hereby incorporated by reference.
(4a) Loan Agreement and related documents, relative to $3,900,000 Industrial Revenue Bond financing dated as of September 1, 1985, between The Surry County Industrial Facilities and Pollution Control Financing Authority and The L.S. Starrett Company will be furnished to the Commission upon request.
(4b) Common Stock Rights Agreement, dated as of June 6, 1990, between the Company and The First National Bank of Boston, as Rights Agent, including Form of Common Stock Purchase Rights Certificate and Summary Common Stock Purchase Rights, filed on June 13, 1990 with the Company's Form 8-A, are hereby incorporated by reference.
(10a) $20,000,000 Credit Agreement dated as of May 27, 1993, between The L.S. Starrett Company and The First National Bank of Boston and Wachovia Bank of Georgia, N.A., filed with Form 10-K for the year ended June 26, 1993, is hereby incorporated by reference.
(10b) Term Loan Agreement dated as of November 7, 1984, between The L.S. Starrett Company Employee Stock Ownership Trust and Wachovia Bank and Trust Company, N.A., filed on November 8, 1984 as Exhibit (b)(2) to the Company's Schedule 13E-4, is hereby incorporated by reference.
(10c) Guaranty dated as of November 7, 1984 of the Company, filed on November 8, 1984 as Exhibit (b) (4) to the Company's Schedule 13E-4, is hereby incorporated by reference.
(11) Statement re: Calculation of Shares for Computation of Consolidated Earnings Per Share. See page 28.
(21) Subsidiaries of the Registrant. See page 29.
(23) Independent Auditors' Consent. See page 30.
(27) Financial Data Schedule submitted in electronic format.
Exhibit 11 THE L.S. STARRETT COMPANY AND SUBSIDIARIES
CALCULATION OF SHARES FOR COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE
1994 1993 1992 1991 1990
PRIMARY EARNINGS PER SHARE
Average shares outstanding during the year 7,062,926 7,002,647 6,916,347 6,902,941 6,891,229 Incremental shares comput- ed on the assumption that dilutive stock options had been exercised, with the proceeds used to purchase treasury stock 8,210 12,766 29,154 21,332 18,374
Average common and common equivalent shares outstanding 7,071,136 7,015,413 6,945,501 6,924,273 6,909,603
FULLY DILUTED EARNINGS PER SHARE
Average shares outstanding during the year 7,062,926 7,002,647 6,916,347 6,902,941 6,891,229
Incremental shares comput- ed on the assumption that dilutive stock options had been exercised, with the proceeds used to pur- chase treasury stock, using year-end market prices where such prices were in excess of average yearly prices, to deter- mine the amount of treasury stock purchased 8,210 13,103 31,817 25,132 20,201
Average common and common equivalent shares used to calculate fully diluted earnings per share 7,071,136 7,015,750 6,948,164 6,928,073 6,911,430
The Company's average common and common equivalent shares (both primary and fully diluted) during the above years do not, in the aggregate, dilute earnings per share 3% or more.
Exhibit 21 THE L.S. STARRETT COMPANY AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT JUNE 25, 1994
The parent company, The L.S. Starrett Company, incorporated in Massachusetts, has the following subsidiaries, all of which are wholly owned:
Fiscal Year End
Starrett Securities Corporation Incorporated in Last Sat. Massachusetts in June
Evans Rule Company, Inc. Incorporated in Last Sat. New Jersey in June
The L.S. Starrett Co. of Canada Incorporated in Last Sat. Limited Canada in June
The L.S. Starrett International Incorporated in Last Sat. Company Barbados in June
The L.S. Starrett Company Incorporated in May 31 Limited Scotland
Starrett Industria e Incorporated in April 30 Comercio Ltda. Brazil
Level Industries, Inc. Incorporated in Last Sat. Massachusetts in June
Exhibit 23 INDEPENDENT AUDITORS' CONSENT
The Board of Directors The L.S. Starrett Company
We consent to the incorporation by reference in the Registration Statements No. 33-31276 and No. 33-3112 of The L.S. Starrett Company on Form S-8, of our report dated July 29, 1994, included in the Company's Annual Report on Form 10-K for the year ended June 25, 1994.
S/DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP Boston, Massachusetts September 7, 1994
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., Treasurer and Chief Financial Officer
Date: September 7, 1994
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 R. STARRETT S/DOUGLAS A. STARRETT Douglas R. Starrett, Sept. 7, 1994 Douglas A. Starrett, Sept. 7, 1994 President and Director Executive Vice President and Director
S/WILLIAM S. HURLEY Andrew B. Sides, Jr., Sept. 7, 1994 William S. Hurley, Sept. 7, 1994 Director Director
S/GEORGE B. WEBBER J. Richard Bullock, Sept. 7, 1994 George B. Webber, Sept. 7, 1994 Director Vice President Webber Gage Division and Director
S/STEVEN G. THOMSON S/ROGER U. WELLINGTON, JR. Steven G. Thomson, Sept. 7, 1994 Roger U. Wellington,Jr, Sept. 7, 1994 Chief Accounting Officer Treasurer and Chief Financial Officer and Director