Item 2 - Properties
The Company's principal plant is located in Athol, Massachusetts on about 15 acres of Company-owned land. The plant consists of 25 buildings, mostly of brick construction of varying dates, with approximately 535,000 square feet of production and storage area. An additional 9,000 square feet of leased space in Gardner, Massachusetts is considered part of this plant.
The Webber Gage Division, Cleveland, Ohio, owns and occupies two buildings totaling approximately 50,000 square feet.
The Company-owned facility in Mt. Airy, North Carolina consists of two buildings totaling approximately 356,000 square feet. It is occupied by the Company's Saw Division, Granite Surface Plate Division, Coordinate Measuring Machine/Optical Comparator Division, and Ground Flat Stock Division.
The Company's Evans Rule Division, located in North Charleston, South Carolina, owns and occupies a 173,000 square foot building. In addition, this division leases 35,000 square feet of manufacturing space in Mayaguez, Puerto Rico.
The Company's Exact Level Division is located in Alum Bank, Pennsylvania and owns and occupies a 50,000 square foot building.
The Company's subsidiary in Itu, Brazil owns and occupies several buildings totaling 209,000 square feet. The Company's subsidiary in Jedburgh, Scotland owns and occupies a 187,000 square foot building and also a 33,000 square foot building in Skipton, England, where its wholly owned subsidiary manufactures optical measuring projectors. The Skipton plant is scheduled to be consolidated into Jedburgh during fiscal 2004. Two wholly owned subsidiaries in the Shanghai area of the People's Republic of China lease approximately 40,000 square feet and 2,000 square feet.
In addition, the Company operates warehouses/sales-support offices in Glendale, Arizona; Elmhurst, Illinois; Atlanta, Georgia; Mississauga, Canada; Sydney, Australia; Saltillo, Mexico; and Schmitten, Germany.
In the Company's opinion, all of its property, plant and equipment is in good operating condition, well maintained and adequate for its needs.
Item 3
Item 3 - Legal Proceedings
The Company's CMM division is presently the subject of a federal government investigation being coordinated through the Department of Justice. The division, which is based in the Company's Mt. Airy, North Carolina facility, accounted for less than 3% of the Company's net sales in 2002 and less than 2% in 2003. The CMM division manufactures and sells coordinate measuring machines, including the Rapid Check 2 and Rapid Check 3 machines. The Company's CMMs operate with computer measurement software sold by the Company, including software sold under the "Apogee" brand name. The Company became aware of the investigation on September 5, 2002, when federal agents conducted a search of the CMM division. The government's investigation appears to be focused on the division's Rapid Check coordinate measuring machine product line and other Starrett CMMs using the Apogee software. On September 12, 2002, the Wall Street Journal published an article in which allegations that the Company had defrauded its customers and the government were attributed to Richard Parks, a former independent contractor to the Company. The article indicated that the investigation apparently was prompted by a qui tam action filed under seal in federal court in Boston, Massachusetts by Mr. Parks. The Company has not been served with a complaint in connection with any qui tam action. In response to that article, the Company denied that it defrauded its customers or the government. The Company is cooperating with the government in its investigation.
Item 4
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 28, 2003.
PART II
Item 5
Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters
The Company's Class A common stock is traded on the New York Stock Exchange. Quarterly dividend and high/low closing market price information is presented in the table below. The Company's Class B common stock is generally nontransferable, except to lineal descendants, and thus has no established trading market, but it can be converted into Class A common stock at any time. The Class B common stock was issued on October 5, 1988, and the Company has paid the same dividends thereon as have been paid on the Class A common stock since that date. At July 25, 2003, there were 1,979 registered holders of Class A common stock and 1,623 registered holders of Class B common stock.
Quarter ended Dividends High Low 	September 2001 $ 0.20 $ 20.85 $ 18.00 	December 2001 0.20 21.15 18.95 	March 2002 0.20 21.82 19.00 	June 2002 0.20 25.25 21.20
	September 2002 0.20 25.30 15.28 	December 2002 0.20 17.60 13.80 	March 2003 0.20 17.10 12.45 	June 2003 0.10 14.60 11.63
Item 6
Item 6 - Selected Financial Data
Years ended in June ($000 except per share data) 2003 2002 2001 2000 1999 Net sales $175,711 $184,346 $225,857 $235,169 $232,385 Earnings (loss) before change in accounting (4,489) (380) 8,097 11,489 16,696 Net earnings(loss) (10,575) (380) 8,097 11,489 16,696 Basic earnings(loss)per share (1.60) (0.06) 1.26 1.73 2.44 Diluted earnings(loss)per shr. (1.60) (0.06) 1.25 1.73 2.44 Long-term debt 2,652 7,000 7,000 3,000 3,300 Total assets 219,740 239,097 248,532 250,418 245,728 Dividends per share 0.70 0.80 0.80 0.80 0.80
Items 7 and 7A- Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure about Market Risk
RESULTS OF OPERATIONS
2003 versus 2002
Overview: As more fully discussed below, for fiscal 2003 the Company incurred a net loss of $10.6 million, or $1.60 per basic and diluted share, compared to a net loss of $.4 million, or $.06 per share, for 2002. A significant portion of the current year's loss was caused by two unusual charges: the writeoff of $6.1 million in the first quarter, or $.92 per share after tax, of goodwill (as discussed in the notes to the financial statements) and a $3.7 million ($2.3 million, or $.35 per share after tax) provision in connection with a government investigation of the Company's CMM division (see below). Excluding these charges, the Company incurred a net loss for 2003 of $2.2 million, or $.33 per share, compared to a net loss of $.4 million, or $.06 per share, in the prior year.
Sales: Sales for 2003 decreased 5% compared to 2002. Excluding intercompany sales, domestic sales are down 7% and foreign sales are up 2%. In local currency, foreign sales are up 14%, primarily because of the devaluation of Brazil's currency. The decrease in domestic sales reflects the continued weak U.S. industrial manufacturing sector, particularly in the third quarter, and lower first quarter shipments to a major consumer products customer as they rebalanced their inventories.
Loss before taxes and cumulative effect of change in accounting principle: Results for the year, before income taxes and the cumulative effect of the change in accounting principle for goodwill (see footnotes regarding adoption of FASB 142) are down $6.9 million from last year. $3.7 million of this decrease relates to charges taken in connection with our CMM division as further described below. Excluding the goodwill write-off and CMM division charges, cost of sales is 77.1% compared to 75.6% in 2002 and pretax results are down $3.2 million. Changes in the cost of sales rate are mainly impacted by the manufacturing efficiencies that are gained or lost as a result of increased or decreased production levels, but also by pricing, product mix, and overhead spending. The major items causing the decrease in earnings are lower sales (approximately $2.5 million), increased domestic fringe benefit and insurance costs, mainly retirement ($1.0 million), additional reserves for slow moving inventory ($.9 million) and the effect on unabsorbed overhead ($3.0 to $4.0 million) of production levels being about 15% below sales as the Company continues to reduce inventories. These cost increases were partially offset by headcount and other cost reduction measures ($3.5 million), LIFO layer liquidation profits ($.9 million) and the elimination of goodwill amortization ($.3 million).
Coordinate Measuring Machine (CMM) Division: The Company's CMM division is presently the subject of a federal government investigation being coordinated through the Department of Justice. The division, which is based in the Company's Mt. Airy, North Carolina facility, accounted for less than 3% of the Company's net sales in 2002 and less than 2% in 2003. The CMM division manufactures and sells coordinate measuring machines, including the Rapid Check 2 and Rapid Check 3 machines. The Company's CMMs operate with computer measurement software sold by the Company, including software sold under the "Apogee" brand name. The Company became aware of the investigation on September 5, 2002, when federal agents conducted a search of the CMM division. The government's investigation appears to be focused on the division's Rapid Check coordinate measuring machine product line and other Starrett CMMs using the Apogee software. On September 12, 2002, the Wall Street Journal published an article in which allegations that the Company had defrauded its customers and the government were attributed to Richard Parks, a former independent contractor to the Company. The article indicated that the investigation apparently was prompted by a qui tam action filed under seal in federal court in Boston, Massachusetts by Mr. Parks. The Company has not been served with a complaint in connection with any qui tam action. In response to that article, the Company denied that it defrauded its customers or the government. The Company is cooperating with the government in its investigation.
Beginning late in calendar 2001, the Company, on its own initiative and as part of its review of its Rapid Check product line, made certain improvements to the Rapid Check machines and incorporated these improvements in new Rapid Check machines. Beginning in March 2002, the Company informed its customers of these improvements and initiated a program to replace the affected Rapid Check machines at no cost to its customers. This replacement program is essentially complete.
As a result of the investigation and replacement program outlined above, the Company charged pretax operations with $3.1 million ($.29 per share after tax) in the September 2002 quarter and an additional $.6 million ($.06 per share after tax) in the March 2003 quarter. Of this, $2.1 million was charged to selling and general expense in the Statements of Operations and relates to professional fees, primarily legal. The remaining $1.6 million related to the Rapid Check replacement program and other CMM inventory valuation expenses and appears as part of cost of goods sold in the Statements of Operations. No assurances can be made that these charges reflect the actual costs that will ultimately be incurred by the Company or that the Company will not need to take additional charges. As of June 28, 2003, actual expenditures related to these charges were approximately $3 million. Total CMM division inventories were approximately $4.5 million as of June 28, 2003.
Income Taxes: The effective income tax rate before goodwill write-off was 44% for fiscal 2003 and 69% for 2002. Puerto Rico tax incentives, and somewhat lower foreign income tax rates all contribute to an overall effective tax rate that is normally slightly lower than the combined U.S. state and federal rate of approximately 38%. The large change in effective rate comes about because pretax results are close enough to breakeven in both years that permanent book/tax differences and jurisdictional tax rate differentials have an exaggerated effect when converted to percentages. The rates are relatively high compared to our normal rate of about 35% because the least profitable operations have been in the jurisdictions with the highest tax rates.
Loss per share before change in accounting: As a result of the above factors and before the change in accounting principle for goodwill (adoption of SFAS 142), the Company incurred a basic and diluted loss per share of $.68 ($.33 before the CMM division charges discussed above) compared to a loss of $.06 per share a year ago.
Net loss per share after change in accounting: Basic and diluted net loss per share was $1.60 for 2003. Excluding the $.35 related to the CMM division charges and the $.92 related to the writeoff of goodwill, the net loss was $.33 per share compared to a net loss of $.06 per share a year ago.
2002 versus 2001
Sales: Sales decreased 18% in fiscal 2002 compared to 2001. The decrease was both domestic and foreign, 18% and 20%, respectively, although foreign sales were only down 10% when measured in local currencies. Worldwide economic conditions adversely affected business, and sales of our Scotland subsidiary continued to be hurt by the weak euro as compared to the British pound, which hurt business in terms of export pricing and import price competition. The devaluation of the Brazil's currency accounted for about 1/4 of the 2002 sales decrease of 18%. The decrease in domestic sales reflected the weak U.S. industrial manufacturing sector to which we sell.
Income before Income Taxes: Primarily because of sales volume, pretax earnings dropped $12.7 million in 2002 to a loss of $(1.2) million. Cost of sales was 75.6% in 2002, compared to 71.1% in 2001. The cost of sales percent was adversely affected in 2002 by production levels about 5% lower than sales levels. Production levels were about 5% higher than sales in 2001. Selling and general expenses were reduced 12% in 2002 but as a percent of sales increased slightly from 23.1% to 24.9% because sales dropped more. Although fringe benefit costs were favorably affected in 2002 ($800,000) due to our overfunded pension plan, this was offset by nonrecurring employee severence costs ($600,000), warranty expenses ($700,000), and bad debts ($400,000).
Income taxes: The effective income tax rate was 69% in 2002 compared to 29% in 2001. Pretax earnings are so close to breakeven that permanent book/tax differences and jurisdictional tax rate differentials have an exaggerated effect when converted to percentages. Nonrecurring permanent differences between book and taxable income for dividends paid from Brazil to the U.S. in 2001 reduced Brazil's effective tax rate substantially when reported in U.S. dollars. We were unable to utilize and record the U.S. tax benefit of the foreign tax credits generated by the 2002 Brazil dividend and this caused our overall tax provision to be $700,000 higher when compared to 2001. On the other hand, this was offset by the mix of income in 2002, with the more profitable divisions being in the jurisdictions with the lowest tax rates.
Earnings per Share: As a result of the above, basic earnings (loss) per share was $(0.06) in fiscal 2002 compared to $1.26 in 2001.
Market Risk
Market risk is the potential change in a financial instrument's value caused by fluctuations in interest and currency exchange rates, and equity and commodity prices. The Company's operating activities expose it to risks that are continually monitored, evaluated, and managed. Proper management of these risks helps reduce the likelihood of earnings volatility. At June 2003 and 2002, the Company was not a party to any derivative arrangement and the Company does not engage in trading, market-making or other speculative activities in the derivatives markets. The Company does not enter into long- term supply contracts with either fixed prices or quantities. The Company does not engage in regular hedging activities to minimize the impact of foreign currency fluctuations. Net foreign monetary assets are less than $2 million.
A 10% change in interest rates would not have a significant impact on the aggregate net fair value of the Company's interest rate sensitive financial instruments (primarily variable rate investments of $19,700,000 and debt of $6,200,000 at June 28, 2003) or the cash flows or future earnings associated with those financial instruments. A 10% change in interest rates would impact the fair value of the Company's fixed rate investments of approximately $2,300,000 by $40,000.
LIQUIDITY AND CAPITAL RESOURCES Years ended In June ($000) 2003 2002 2001 Cash provided by operations $24,336 $17,700 $12,499 Cash used in investing activities (17,643) (10,451) (9,496) Cash used in financing activities (5,187) (7,435) (3,138)
Despite operating losses in 2003 and 2002 plus the additional $3.7 million incurred in connection with the CMM division investigation, cash provided by operations has been positive and increasing period to period. By far the biggest factor contributing to the increases has been the reduction in inventories that began in mid 2002. "Retirement benefits" under noncash expenses in the detailed cash flow statement shows the effect on operating cash flow of the Company's pension and retiree medical plans. Primarily because the Company's domestic defined benefit plan is overfunded, retirement benefits in total are currently generating approximately $.8 million of noncash income ($2.2 and $1.4 million in 2002 and 2001). On an accrual basis, retirement benefit expense (income) was approximately $.7 million in 2003, $(.4) million in 2002 and $.9 million in 2001.
The Company's investing activities consist of expenditures for plant and equipment and the investment of cash not immediately needed for operations. Increased short-term investments partially offset by less capital expenditures accounts for the increase in investing activities in 2003. Cash flows from financing activities are primarily the payment of dividends. The proceeds from the sale of stock under the various stock plans has historically been used to purchase treasury shares, although in recent years such treasury share purchases have been curtailed. Overall debt has been reduced from $12 million at the end of 2001 to $6 million at the end of 2003.
The Company maintains sufficient liquidity and has the resources to fund its operations in the near term. If economic conditions do not improve and the Company continues to sustain losses, additional steps will have to be taken in order to maintain liquidity, including further dividend and workforce reductions. The Company maintains a $15 million line of credit (in the process of being reduced from $25 million), but has not made significant borrowings under it. The Company has a working capital ratio of 5.9 to 1 as of June 28, 2003 and 6.7 to 1 as of June 29, 2002.
OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any material off-balance sheet arrangements as defined under Securities Exchange Commission rules.
CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. The first footnote to these financial statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.
Judgements, assumptions, and estimates are used for, but not limited to, the allowance for doubtful accounts receivable and returned goods; inventory allowances; income tax reserves; employee turnover, discount, and return rates used to calculate pension obligations; normal expense accruals for such things as workers compensation and employee medical expenses; and of particular importance this fiscal year the previously discussed charges connected with the government investigation of our CMM division. Actual results could differ from these estimates.
The allowance for doubtful accounts and sales returns is based on our assessment of the collectibility of specific customer accounts, the aging of our accounts receivable and trends in product returns. While we believe that our allowance for doubtful accounts and sales returns is adequate, if there is a deterioration of a major customer's credit worthiness, actual defaults are higher than our previous experience, or actual future returns do not reflect historical trends, our estimates of the recoverability of the amounts due us and our sales could be adversely affected.
Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and requirements, we may be required to increase our inventory reserve and, as a result, our gross profit margin could be adversely affected.
Accounting for income taxes requires estimates of our future tax liabilities. Due to timing differences in the recognition of items included in income for accounting and tax purposes, deferred tax assets or liabilities are recorded to reflect the impact arising from these differences on future tax payments. With respect to recorded tax assets, we assess the likelihood that the asset will be realized. If realization is in doubt because of uncertainty regarding future profitability or enacted tax rates, we provide a valuation allowance related to the asset. Should any significant changes in the tax law or our estimate of the necessary valuation allowance occur, we would record the impact of the change, which could have a material effect on our financial position or results of operations.
Pension and postretirement medical costs and obligations are dependent on assumptions used by our actuaries in calculating such amounts. These assumptions include discount rates, healthcare cost trends, inflation, salary growth, long-term return on plan assets, retirement rates, mortality rates, and other factors. These assumptions are made based on a combination of external market factors, actual historical experience, long-term trend analysis, and an analysis of the assumptions being used by other companies with similar plans. Actual results that differ from our assumptions are accumulated and amortized over future periods. Significant differences in actual experience or significant changes in assumptions would affect our pension and other postretirement benefit costs and obligations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K and the 2003 Annual Report, including the President's letter to stockholders, include forward-looking statements about the Company's business, competition, sales, expenditures, environmental regulatory compliance, foreign operations, progress and effect of the government investigation, interest rate sensitivity, debt service, liquidity and capital resources, and other operating and capital requirements. In addition, forward-looking statements may be included in future Company documents and in oral statements by Company representatives to security analysts and investors. The Company is subject to risks that could cause actual events to vary materially from such forward-looking statements, including the following risk factors:
Risks related to government investigation: Based on information currently known to management, the Company has recorded an estimate of the costs related to the government investigation of its CMM division. However, no assurances can be made that charges recorded for this matter reflect the actual costs that will ultimately be incurred by the Company or that the Company will not need to take additional charges.
Risks Related to Technology: Although the Company's strategy includes investment in research and development of new and innovative products to meet technology advances, there can be no assurance that the Company will be successful in competing against new technologies developed by competitors.
Risks Related to the Euro: The United Kingdom has not adopted the euro and the Company's Scottish subsidiary transacts a significant amount of business with euro countries. There can be no assurance that this situation will not result in unforseen economic conditions that affect the Company's business.
Risks Related to Foreign Operations: Approximately 30% of the Company's sales and 25% of net assets relate to foreign operations. Foreign operations are subject to special risks that can materially affect the sales, profits, cash flows, and financial position of the Company, including taxes and other restrictions on distributions and payments, currency exchange rate fluctuations, political and economic instability, inflation, minimum capital requirements, and exchange controls. In particular, the Company's Brazilian operations, which constitute over half of the Company's revenues from foreign operations, can be very volatile, changing from year to year due to the political situation and economy. As a result, the future performance of the Brazilian operations is inherently unpredictable. In addition, the recent outbreak of severe acute respiratory syndrome (SARS) in the People's Republic of China and concerns over its spread in Asia and elsewhere could have a negative effect on the economies, financial markets and business activity in Asia and elsewhere. The Company's manufacturing operations in China and its sales in Asia may be affected by this risk.
Risks Related to Cyclical Nature of the Industry: The market for most of the Company's products is subject to economic conditions affecting the industrial manufacturing sector, including the level of capital spending by industrial companies and the general movement of manufacturing to low cost foreign countries. Accordingly, economic weakness in the industrial manufacturing sector will result in decreased demand for the Company's products and will adversely affect performance. Economic weakness in the consumer market also impacts the Company's performance.
Risks Related to Competition: The Company's business is subject to direct and indirect competition from both domestic and foreign firms. In particular, low-wage foreign sources have created severe competitive pricing pressures. Under certain circumstances, including significant changes in U.S. and foreign currency relationships, such pricing pressures might reduce unit sales and/or adversely affect the Company's margins.
Risks Related to Customer Concentration: Sales to the Company's three biggest customers account for approximately 25% of revenues. The loss or reduction in orders by any of these customers, including reductions due to market, economic or competitive conditions, could adversely affect business and results of operations.
Risks Related to Insurance Coverage. The Company carries liability, property damage, workers' compensation, medical, and other insurance coverages that management considers adequate for the protection of its assets and operations. There can be no assurance, however, that the coverage limits of such policies will be adequate to cover all claims and losses. Such uncovered claims and losses could have a material adverse effect on the Company. The Company self- insures for health benefits and retains risk in the form of deductibles and sublimits. Depending on the risk, deductibles can be as high as 5% of the loss or $500,000.
Item 8
Item 8 - Financial Statements and Supplementary Data
Contents: Page
Report of Independent Auditors 12
Consolidated Statements of Operations 13
Consolidated Statements of Cash Flows 14
Consolidated Balance Sheets 15
Consolidated Statements of Stockholders' Equity 16
Notes to Consolidated Financial Statements 17-25
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of The L.S. Starrett Company
We have audited the accompanying consolidated balance sheets of The L.S. Starrett Company and subsidiaries as of June 28, 2003 and June 29, 2002, and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the three years in the period ended June 28, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries as of June 28, 2003 and June 29, 2002, and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 28, 2003, in conformity with accounting principles generally accepted in the United States of America.
As more fully described in the notes to the financial statements, the Company adopted the provisions of Statements of Financial Accounting Standards Nos. 142 and 144 during the year ended June 28, 2003.
S/DELOITTE & TOUCHE LLP
Boston, Massachusetts August 1, 2003
THE L.S. STARRETT COMPANY Consolidated Statements of Operations For the years ended in June (in thousands of dollars except per share data)
2003 2002 2001 OPERATIONS Net sales $175,711 $184,346 $225,857 Cost of goods sold (137,036) (139,413) (160,562) Selling, general and administrative expense (46,169) (45,945) (52,223) Other expense (585) (217) (1,640)
Earnings (loss) before income taxes and Cumulative effect of change in Accounting principle (8,079) (1,229) 11,432 Income taxes (benefit) (3,590) (849) 3,335 Earnings (loss) before cumulative effect of Change in accounting principle (4,489) (380) 8,097 Cumulative effect of change in accounting For goodwill (6,086)
Net earnings (loss) $(10,575) $ (380) $ 8,097 Basic earnings (loss) per share: Before cumulative effect of accounting change $ (0.68) $ (0.06) $ 1.26 Cumulative effect of change in accounting for goodwill (0.92) $ (1.60) $ (0.06) $ 1.26 Diluted earnings (loss) per share: Before cumulative effect of accounting change $ (0.68) $ (0.06) $ 1.25 Cumulative effect of change in accounting for goodwill (0.92) $ (1.60) $ (0.06) $ 1.25 Average outstanding shares used: Basic earnings (loss) per share 6,608 6,500 6,446 Diluted earnings (loss) per share 6,608 6,500 6,458
Dividends per share $ 0.70 $ 0.80 $ 0.80
See notes to consolidated financial statements
THE L. S. STARRETT COMPANY Consolidated Statements of Cash Flows For the years ended in June (in thousands of dollars)
2003 2002 2001 Cash flows from operating activities: Net earnings (loss) $(10,575) $ (380) $ 8,097 Noncash operating activities: Cumulative effect of change in accounting principle 6,086 Depreciation and amortization 10,988 11,741 11,662 Deferred taxes (3,875) 561 97 Unrealized translation losses 453 263 748 Retirement Benefits (1,338) (2,170) (1,396) Working capital changes: Receivables 695 1,664 707 Inventories 22,345 7,656 (9,261) Other current assets and liabilities (841) (1,862) 1,665 Prepaid pension cost and other 398 227 180 Net cash from operating activities 24,336 17,700 12,499
Cash flows from investing activities: Additions to plant and equipment (5,860) (8,028) (13,198) Decrease (increase) in investments (11,783) (2,423) 3,702 Net cash used in investing activities (17,643) (10,451) (9,496)
Cash flows from financing activities: Short-term borrowing, net (372) (4,050) (1,645) Long-term borrowings (repayments) (1,991) 4,000 Common stock issued 2,453 3,598 3,444 Treasury shares purchased (658) (1,796) (3,792) Dividends (4,619) (5,187) (5,145) Net cash used in financing activities (5,187) (7,435) (3,138) Effect of translation rate changes on cash 128 (87) 72 Net increase (decrease) in cash 1,634 (273) (63) Cash beginning of year 1,672 1,945 2,008 Cash end of year $ 3,306 $ 1,672 $ 1,945
Supplemental cash flow information: Interest paid $ 848 $ 695 $ 950 Taxes paid, net $ (958) $ (725) $ 1,688 Non-cash capital lease financing $ 3,000
See notes to consolidated financial statements
THE L.S. STARRETT COMPANY Consolidated Balance Sheets (in thousands of dollars)
June 28 June 29 ASSETS 2003 2002 Current assets: Cash $ 3,306 $ 1,672 Investments 21,995 10,479 Accounts receivable (less allowance for doubtful accounts of $1,392,000 and $1,790,000) 32,175 32,391 Inventories: Raw materials and supplies 9,859 17,228 Goods in process and finished parts 20,344 24,632 Finished goods 23,832 34,762 Total inventories 54,035 76,622 Prepaid expenses, taxes and other current assets 9,703 5,903 Total current assets 121,214 127,067
Property, plant and equipment, at cost: Land 1,885 1,893 Buildings (less accumulated depreciation of $18,463,000 and $17,151,000) 21,295 22,698 Machinery and equipment (less accumulated depreciation of $70,719,000 and $61,813,000) 43,913 46,839 Total property, plant and equipment 67,093 71,430
Cost in excess of net assets acquired (goodwill)(less accumulated amortization of $4,216,000 in 2002) 6,086 Prepaid pension cost 30,565 33,651 Other assets 868 863 $219,740 $239,097 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities $ 3,585 $ 996 Accounts payable and accrued expenses 12,859 13,874 Accrued salaries and wages 3,940 4,163 Total current liabilities 20,384 19,033
Deferred income taxes 14,696 16,012 Long-term debt 2,652 7,000 Accumulated postretirement benefit obligation 17,057 16,711 Stockholders' equity: Class A common stock $1 par (20,000,000 shrs. auth.; 5,344,033 outstanding in 2003, excluding 1,294,542 held in treasury; 5,147,201 outstanding in 2002, excluding 1,397,659 held in treasury) 5,344 5,147 Class B common stock $1 par (10,000,000 shrs. auth.; 1,315,489 outstanding in 2003, excluding 332,019 held in treasury; 1,397,480 outstanding in 2002, excluding 332,019 held in treasury) 1,315 1,397 Additional paid-in capital 49,826 47,858 Retained earnings reinvested and employed in the business 134,547 150,029 Accumulated other comprehensive income (loss) (26,081) (24,090) Total stockholders' equity 164,951 180,341 $219,740 $239,097
See notes to consolidated financial statements THE L.S. STARRETT COMPANY Consolidated Statements of Stockholders' Equity For the years ended in June, 2001 through 2003 (in thousands)
Common Addi- Accumulated Stock Out- tional Other Com- standing Paid-in Retained prehensive ($1 Par) Capital Earnings Income(loss) Total
Balance, June 24, 2000 $ 6,473 $ 43,273 $155,846 $ (17,570) $188,022 Comprehensive income: Net earnings 8,097 8,097 Unrealized net loss on investments (38) (38) Translation loss, net (5,767) (5,767) Total comprehensive income 2,292 Dividends ($0.80 per share) (5,145) (5,145) Treasury shares: Purchased (192) (1,428) (2,172) (3,792) Issued 166 3,078 3,244 Options exercised 11 189 200
Balance, June 30, 2001 6,458 45,112 156,626 (23,375) 184,821 Comprehensive loss: Net loss (380) (380) Unrealized net loss on investments (169) (169) Translation loss, net (546) (546) Total comprehensive loss (1,095) Dividends ($0.80 per share) (5,187) (5,187) Treasury shares: Purchased (87) (679) (1,030) (1,796) Issued 153 3,073 3,226 Options exercised 20 352 372
Balance, June 29, 2002 6,544 47,858 150,029 (24,090) 180,341 Comprehensive loss Net loss (10,575) (10,575) Unrealized net gain on investments 152 152 Minimum pension liability (3,207) (3,207) Translation gain, net 1,064 1,064) Total comprehensive loss (12,566) Dividends ($0.70 per share) (4,619) (4,619) Treasury shares: Purchased (39) (331) (288) (658) Issued 142 2,159 2,301 Options exercised 12 140 152
Balance, June 28, 2003 $ 6,659 $ 49,826 $134,547 $(26,081) $164,951
See notes to consolidated financial statements THE L. S. STARRETT COMPANY Notes to Consolidated Financial Statements
SIGNIFICANT ACCOUNTING POLICIES
Description of the business and principles of consolidation: The Company is in the business of manufacturing industrial, professional, and consumer measuring and cutting tools and related products. The largest consumer of these products is the metal working industry, but others include automotive, aviation, marine, farm, do-it-yourselfers, and tradesmen such as builders, carpenters, plumbers, and electricians. The consolidated financial statements include the accounts of The L. S. Starrett Company and its subsidiaries, all of which are wholly-owned. All significant intercompany items have been eliminated. Since the Company's fiscal year ends on the last Saturday in June, the 2001 fiscal year contains 53 weeks compared to 52 weeks in 2002 and 2003. The fiscal years of the Company's major foreign subsidiaries end in May.
Financial instruments and derivatives: The Company's financial instruments consist primarily of current assets, except inventory, current liabilities, and long-term debt. Current assets and liabilities, except investments, are stated at cost, which approximates fair market value. Long-term debts, which are at current market interest rates, also approximate fair market value. The Company does not enter into derivative arrangements.
Investments: Investments consist primarily of marketable securities such as treasury bills, certificates of deposit, municipal securities, and money market funds. The Company considers all its investments "available for sale." As such, these investments are carried at market, which approximates cost, with unrealized temporary gains and losses recorded as a component of stockholders' equity. Included in investments at June 28, 2003 is $2.3 million of AAA rated Puerto Rico debt obligations that have maturities greater than one year but carry the benefit of possibly reducing repatriation taxes. These investments represent "core cash" and are part of the Company's overall cash management and liquidity program and, under SFAS 115, are considered "available for sale." The investments themselves are highly liquid, carry no early redemption penalties, and are not designated for acquiring non-current assets. Most other investments have maturities of less than one year.
Long-lived assets: Buildings and equipment are depreciated using straight- line and accelerated methods over estimated useful lives as follows: buildings 15 to 50 years, building improvements 10 to 40 years, machinery and equipment 5 to 12 years, motor vehicles 3 to 5 years, computer hardware and software 3 to 7 years. The Company evaluates potential impairment of long-lived assets in accordance with SFAS No. 144, "Accounting for the impairment or disposal of Long-Lived Assets."
Inventories: Inventories are stated at the lower of cost or market. For approximately 70% of all inventories, cost is determined on a last-in, first-out (LIFO) basis. For all other inventories, cost is determined on a first-in, first-out (FIFO) basis. LIFO inventories are $28,784,000 and $47,859,000 at the end of 2003 and 2002, respectively, such amounts being $23,204,000 and $23,835,000 less than if determined on a FIFO basis. During 2003, the Company reduced the levels of certain LIFO inventories that were carried in the aggregate at lower costs prevailing in prior years. The effect of the LIFO inventory reduction was to increase 2003 net earnings, primarily in the fourth quarter, by approximately $575,000 or $.09 per share.
Revenue recognition: Revenue is recognized when inventory is shipped to the customer or installed if installation is necessary. While the Company does allow its customers the right to return in certain circumstances, revenue is not deferred, but rather a reserve for sales returns is provided based on experience, which historically has not been significant.
Warranty expense: The Company's warranty obligation is generally one year from shipment to the end user and is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Any such failures tend to occur soon after shipment. Historically, the Company has not incurred significant predictable warranty expense and consequently its warranty reserves are not material. In the event a material warranty liability is deemed probable, a reserve is established.
Income taxes: Deferred tax expense results from differences in the timing of certain transactions for financial reporting and tax purposes. Deferred taxes have not been recorded on undistributed earnings of foreign subsidiaries (approximately $40,000,000 at June 2003) or the related unrealized translation adjustments because such amounts are considered permanently invested. Valuation allowances are provided where management believes certain deferred tax benefits may not be realized.
Research and development: Research and development costs were expensed as follows: $2,929,000 in 2003, $2,727,000 in 2002 and $2,663,000 in 2001.
Earnings per share (EPS): Basic EPS excludes dilution and is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution by securities that could share in the earnings. The Company had 7,329, 9,573 and 11,097 of additional potential common shares in 2003, 2002 and 2001 resulting from shares issueable under its stock option plan. These additional shares are not used for the diluted EPS calculation in loss years.
Translation of foreign currencies: Assets and liabilities are translated at exchange rates in effect on reporting dates, and income and expense items are translated at rates in effect on transaction dates. The resulting differences due to changing exchange rates are charged or credited directly to the "accumulated other comprehensive income" account included as part of stockholders' equity.
Use of accounting estimates: The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Amounts ultimately realized could differ from those estimates.
CHANGE IN ACCOUNTING FOR GOODWILL The Company adopted SFAS 142, Goodwill and Other Intangible Assets, as of June 30, 2002, the first day of fiscal 2003, and performed a transitional fair value based impairment test as of that date. As a result, a non-cash impairment charge of $6,086,000 ($.92 per share), relating primarily to the acquisition of the Company's Evans Rule division in 1986, was recorded as of the first day of 2003 and related amortization of $268,000 per year was discontinued. The charge is reflected as the cumulative effect of a change in accounting principle in the accompanying Statements of Operations and Cash Flows. There were no income taxes associated with the charge. Had goodwill not been amortized in the prior years, net earnings (loss) and net earnings (loss) per share would have been as follows (in thousands):
2003 2002 2001
Net earnings (loss) as reported $(10,575) $ (380) $ 8,097 Add back goodwill amortization 268 268 Pro forma net earnings (loss) (10,575) (112) 8,365
Earnings (loss) per share as reported: Basic $ (1.60) $ (0.06) $ 1.26 Diluted $ (1.60) $ (0.06) $ 1.25 Proforma earnings (loss) per share: Basic $ (1.60) $ (0.02) $ 1.30 Diluted $ (1.60) $ (0.02) $ 1.29
ACCOUNTING PRONOUNCEMENTS In December 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123. SFAS No. 148 provides alternative methods for a voluntary change to the fair value-based method of accounting for employee stock-based compensation. These alternative methods will only impact the Company if it changes to the fair value-based method of accounting for employee stock-based compensation, which it has not implemented but is considering. The Company has not incurred any employee stock-based compensation under the intrinsic value method of Accounting Principles Board Opinion 25 in these financial statements. The Company has computed below the pro forma disclosures required under SFAS No. 148 using the Black-Scholes option pricing model with the indicated assumed interest rates and volatility and an expected life of two years (in thousands except per share data).
2003 2002 2001
Net earnings (loss) as reported $(10,575) $ (380) $ 8,097 After tax employee stock based compensaton Under fair value method (90) (90) (170) Pro forma net earnings (loss) $(10,665) $ (470) $ 7,927
Earnings (loss) per share as reported: Basic $ (1.60) $ (0.06) $ 1.26 Diluted $ (1.60) $ (0.06) $ 1.25 Proforma earnings (loss) per share: Basic $ (1.61) $ (0.07) $ 1.23 Diluted $ (1.61) $ (0.07) $ 1.22
Assumed interest rate 1.5%-2.8% 3.5% 4.3%-5.9% Assumed volatility 29% 22% 28%
The following recently issued Statements of Financial Accounting Standards (SFAS) are either not applicable to the Company or the Company does not expect their implementation to have a material impact on the Company's financial position or results of operations: SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections; SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities; SFAS No. 147, Acquisitions of Certain Financial Institutions; SFAS No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities; and SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity; FASB Financial Interpretation No. 46, Consolidation of Variable Interest Entities.
OTHER INCOME AND EXPENSE Other income and expense consists of the following (in thousands): 2003 2002 2001
Interest income, net $ 13 $ 179 $ 131 Realized and unrealized translation gains (losses), net (390) (351) (1,859) Other (208) (45) 88 $ (585) $ (217) $(1,640)
INCOME TAXES The provision for income taxes consists of the following (in thousands): 2003 2002 2001 Current: Federal $ 50 $(1,640) $ 1,600 Foreign 234 266 1,271 State 1 (36) 367 Deferred (3,875) 561 97 $(3,590) $ (849) $ 3,335
Pretax domestic income (loss) as reportable to the IRS was $(10,300,000), $(3,274,000) and $8,279,000 in 2003, 2002 and 2001, respectively.
A reconciliation of expected tax expense at the U.S. statutory rate to actual tax expense is as follows (in thousands):
2003 2002 2001 Expected tax expense (benefit) $(4,816) $ (430) $ 4,001 Increase (decrease) from: State and Puerto Rico taxes, net of federal benefit (1,126) (672) (588) Foreign taxes, net of federal credits 235 163 (17) Goodwill writeoff 2,069 Other 48 90 (61) Actual tax expense $(3,590) $ (849) $ 3,335
Deferred income taxes at year end are attributable to the following (in thousands): 2003 2002 Deferred assets: Retiree medical benefits $(6,907) $(6,768) Inventories (2,280) (1,840) Domestic NOL carried forward 20 years (3,515) Foreign NOL carried forward indefinately (1,165) (1,235) Foreign tax credit carryforward expiring 2007 (745) (700) Other (907) (826) (15,519) (11,369) Deferred liabilities: Prepaid pension 12,928 13,550 Other employee benefits 540 680 Depreciation 7,081 7,296 Other 1,593 1,934 22,142 23,460 Valuation reserve for foreign tax credits 745 ____700 Net deferred tax liability $ 7,368 $12,791 Long-term portion $14,696 $16,012
EMPLOYEE BENEFIT PLANS The Company has several pension plans, both defined benefit and defined contribution, covering all of its domestic and most of its nondomestic employees. In addition, certain domestic employees participate in an Employee Stock Ownership Plan (ESOP). Ninety percent of the actuarially determined annuity value of their ESOP shares is used to offset benefits otherwise due under the domestic defined benefit pension plan. The total cost (benefit) of all such plans for 2003, 2002 and 2001, considering the combined projected benefits and funds of the ESOP as well as the other plans, was $(678,000), $(1,783,000) and $(462,000), respectively.
Under both domestic and foreign defined benefit plans, benefits are based on years of service and final average earnings. Plan assets, including those of the ESOP, consist primarily of investment grade debt obligations, marketable equity securities and approximately 1,030,000 shares of the Company's common stock. The status of these defined benefit plans, including the ESOP, is as follows (in thousands):
2003 2002 2001 Change in benefit obligation: Benefit obligation at beginning of year $ 93,349 $ 83,203 $ 87,893 Service cost 3,278 3,106 2,887 Interest cost 6,490 5,958 5,950 Participant contributions 219 226 242 Exchange rate changes 3,066 820 (1,942) Benefits paid (3,648) (3,614) (3,393) Actuarial (gain) loss (1,925) 3,650 (8,434) Benefit obligation at end of year $100,829 $ 93,349 $ 83,203
Change in plan assets: Fair value of plan assets at beginning of year $126,154 $128,038 $120,861 Actual return on plan assets (10,522) 633 12,213 Employer contributions 467 92 Participant contributions 219 226 242 Benefits paid (3,648) (3,614) (3,393) Exchange rate changes 2,521 779 (1,885 Fair value of plan assets at end of year $115,191 $126,154 $128,038
Reconciliation of funded status: Funded status $ 14,362 $ 32,805 $ 44,835 Unrecognized actuarial gain 19,009 (370) (14,555) Unrecognized transition asset (1,922) (2,932) (3,869) Unrecognized prior service cost 3,698 4,148 4,542 Prepaid pension cost $ 35,147 $ 33,651 $ 30,953
Amounts recognized in statement of financial Position: Prepaid benefit cost $ 36,172 $ 35,069 $ 32,390 Accrued benefit liability (6,606) (2,551) (1,558) Intangible asset 999 1,133 121 Accumulated other comprehensive income 4,582 Prepaid pension cost $ 35,147 $ 33,651 $ 30,953
Year-end information for plans with accumulated benefit obligations in excess of plan assets Projected benefit obligation $ 28,832 Accumulated benefit obligation 26,617 Fair value of plan assets 22,011
Components of net periodic benefit cost: Service cost $ 3,278 $ 3,106 $ 2,887 Interest cost 6,490 5,958 5,950 Expected return on plan assets (10,271) (10,863) (9,986) Amortization of prior service cost 408 394 404 Amortization of transition asset (956) (937) (949) Recognized actuarial gain (58) (264) (20) Net periodic benefit cost $ (1,109) $ (2,606) $ (1,714)
Weighted average assumptions: Discount rate 6.00% 7.00% 7.50% Expected long-term rate of return 8.00% 8.50% 8.50% Rate of compensation increase 3.25% 3.75% 4.00%
The Company provides certain medical and life insurance benefits for most retired employees in the United States. The status of these plans at year end is as follows (in thousands):
2003 2002 2001 Change in benefit obligation: Benefit obligation at beginning of year $ 15,649 $ 15,197 $ 15,101 Service cost 633 551 509 Interest cost 1,057 1,097 1,122 Benefits paid (1,047) (1,014) (1,071) Actuarial (gain) loss 1,547 (182) (464) Benefit obligation at end of year $ 17,839 $ 15,649 $ 15,197
Reconciliation of funded status: Funded status $(17,839) $(15,649) $(15,197) Unrecognized actuarial gain 3,750 2,259 2,523 Unrecognized prior service cost (2,968) (3,321) (3,673) Accrued benefit liability $(17,057) $(16,711) $(16,347)
Components of net periodic benefit cost: Service cost $ 633 $ 551 $ 509 Interest cost 1,057 1,097 1,122 Amortization of prior service cost (353) (353) (353) Recognized actuarial gain 56 81 111 Net periodic benefit cost $ 1,393 $ 1,376 $ 1,389
Weighted average assumptions: Discount rate 6.00% 7.00% 7.50% Rate of compensation increase 3.25% 3.75% 4.00%
An 11.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2004. The rate was assumed to decrease gradually to 5.0% for 2014 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects (in thousands):
1% 1% Increase Decrease
Effect on total of service and interest cost $ 46 $ (98) Effect on postretirement benefit obligation 302 (728)
DEBT At year end, long-term debt consists of the following (in thousands): 2003 2002 Note payable due 12/03, 4.0% $ 2,318 $ 4,000 Capitalized lease obligations payable in Brazilian currency, due 2004 to 2007, 17% to 34% 3,433 Revolving credit agreement 3,000 5,751 7,000 Less current maturities 3,099 $ 2,652 $ 7,000 The Company and its lender are in the process of amending the revolving credit agreement. The new agreement will be for $15 million (currently $25 million), expires June 13, 2005, and requires commitment fees of .25%. Interest rates vary from LIBOR plus .5% to 2% depending on EBITDA. The Company must maintain tangible net worth of $14 million and an EBITDA (as defined) to debt service ratio of at least 1.5. Current notes payable carry interest at a rate of LIBOR plus 1 to 4%. Interest expense, prior to capitalization of interest on self-constructed assets was $761,000, $641,000 and $973,000 in 2003, 2002 and 2001. Long-term debt maturities from 2005 to 2008 are as follows: $500,000, $600,000, $400,000, and $1,152,000.
COMMON STOCK Class B common stock is identical to Class A except that it has 10 votes per share, is generally nontransferable except to lineal descendants, cannot receive more dividends than Class A, and can be converted to Class A at any time. Class A common stock is entitled to elect 25% of the directors to be elected at each meeting with the remaining 75% being elected by Class A and Class B voting together. In addition, the Company has a stockholder rights plan to protect stockholders from attempts to acquire the Company on unfavorable terms not approved by the Board of Directors. Under certain circumstances, the plan entitles each Class A or Class B share to additional shares of the Company or an acquiring company, as defined, at a 50% discount to market. Generally, the rights will be exercisable if a person or group acquires 15% or more of the Company's outstanding shares. The rights trade together with the underlying common stock. They can be redeemed by the Company for $.01 per right and expire in 2010.
Under the Company's stock purchase plans, the purchase price of the optioned stock is 85% of the lower of the market price on the date the option is granted or the date it is exercised. Options become exercisable exactly two years from the date of grant and expire if not exercised. Therefore, no options are exercisable at the end of 2003, 2002, or 2001. A summary of option activity is as follows: Weighted Average Exercise Shares Shares Price Available On Option At Grant For Grant Balance, June 24, 2000 71,978 $20.26 722,707 Options granted 53,285 17.14 (53,285) Options exercised ($15.52 and $18.96) (10,771) 18.55 Options canceled (41,156) 41,156 Balance, June 30, 2001 73,336 18.22 710,578 Options granted 28,191 18.06 (28,191) Options exercised ($17.77 and $18.65) (20,552) 18.11 Options canceled (32,026) 32,026 Balance, June 29, 2002 48,949 17.48 714,413 Options authorized 800,000 Options granted 82,567 13.28 (82,567) Options exercised ($13.22 and $11.10) (11,724) 12.93 Options canceled (51,720) (693,936) Balance, June 28, 2003 68,072 13.20 737,910
The following information relates to outstanding options as of June 28, 2003:
Weighted average remaining life 1.3 years Weighted average fair value on grant date of options granted in: 2001 $5.50 2002 5.00 2003 4.00
The fair value of each option grant was estimated on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions: volatility - 22% to 29%, interest - 1.5% to 6.0%, and expected lives - 2 years.
CONTINGENCIES The Company is the subject of a government investigation apparently prompted by a qui tam action filed under seal, which has not been served on the Company. The Company is cooperating with the government but, until the investigation is concluded, no final evaluation of the financial impact of this matter can be made. Based on information currently known to management, the Company has recorded an estimate of the costs for this matter. However, no assurances can be made that charges recorded for this matter reflect the actual costs that will ultimately be incurred by the Company or that the Company will not need to take additional charges.
OPERATING DATA The Company believes it has no significant concentration of credit risk as of June 28, 2003. Trade receivables are dispersed among a large number of retailers, distributors and industrial accounts in many countries. One customer accounted for approximately 14% of sales in 2003 and 2002, and 13% in 2001.
The Company is engaged in the single business segment of producing and marketing industrial, professional and consumer products. It manufactures over 5,000 items, including precision measuring tools, tape measures, gages and saw blades. Operating segments are identified as components of an enterprise about which separate discrete financial information is used by the chief operating decision maker in determining how to allocate assets and assess performance of the Company.
The Company's operations are primarily in North America, Brazil, and the United Kingdom. Geographic information about the Company's sales and long- lived assets are as follows:
2003 2002 2001 Sales: North America $ 124,006 $ 133,895 $ 164,572 United Kingdom 28,910 26,331 30,520 Brazil 29,630 31,559 43,421 Eliminations and other (6,835) (7,439) (12,656) Total $ 175,711 $ 184,346 $ 225,857
Long-lived assets: North America $ 83,790 $ 96,163 $ 97,656 United Kingdom 7,978 7,916 7,655 Brazil 9,446 5,857 6,037 Other 1,894 2,094 2,257 Total $ 103,108 $ 112,030 $ 113,605
QUARTERLY FINANCIAL DATA (UNAUDITED)(in thousands except per share data) (* before write-off of $6,086 of goodwill in July 2002)
Earnings Basic Basic (Loss) Earnings Earnings Before Net (Loss) (Loss) Quarter Net Gross Income Earnings Earnings Per Per Ended Sales Profit Taxes* (Loss)* (Loss) _ _Share* Share Sep 2001 $ 46,522 $12,624 $ 345 $ 262 $ 262 $ 0.04 $ 0.04 Dec 2001 44,918 10,099 (1,417) (611) (611) (0.09) (0.09) Mar 2002 45,419 10,039 (1,128) (462) (462) (0.07) (0.07) Jun 2002 47,487 12,171 971 431 431 0.06 0.06 $184,346 $44,933 $(1,229) $ (380) $ (380) $(0.06) $ 0.06
Sep 2002 $ 45,335 $ 8,736 $(4,496) $(2,535) $ (8,621) $(0.39) $(1.31) Dec 2002 44,828 10,342 (1,339) (641) (641) (0.09) (0.09) Mar 2003 41,525 9,162 (2,255) (1,267) (1,267) (0.19) (0.19) Jun 2003 44,023 10,435 11 (46) (46) (0.01) (0.01) $175,711 $38,675 $(8,079) $(4,489) $(10,575) $(0.68) $(1.60)
The Company's Class A common stock is traded on the New York Stock Exchange.
Item 9
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The Company had no such changes in or disagreements with its independent auditors.
Item 9A
Item 9A - Controls and Procedures
The Company's management, under the supervision and with the participation of the Company's President and Chief Executive Officer and Chief Financial Officer, have evaluated the Company's disclosure controls and procedures as of June 28, 2003, and they have concluded that these controls and procedures are effective. There have been no significant changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company's management and its outside auditors reported to the Audit Committee one reportable condition related to computer file access and the Company has corrected the condition.
PART III
Item 10
Item 10 - Directors and Executive Officers of the Registrant
Directors The information concerning the Directors of the Registrant is contained immediately under the heading "Election of Directors" and prior to Section A of Part I (pages 2-4) in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 17, 2003 (the "2003 Proxy Statement") as filed with the SEC, and is hereby incorporated by reference.
Executive Officers of the Registrant
Held Present Name Age Office Since Position
Douglas A. Starrett 51 2001 President and CEO and Director
Roger U. Wellington, Jr. 62 1984 Vice President, Treasurer and Chief Financial Officer and Director
George B. Webber 82 1962 Vice President Webber Gage Division and Director
Anthony M. Aspin 50 2000 Vice President Sales
Stephen F. Walsh 57 2002 Vice President Operations
Steven A. Wilcox 48 1997 Clerk
Douglas A. Starrett has been President of the Company since 1995 and became CEO in 2001. Roger U. Wellington, Jr. and George B. Webber have served in the same capacities as listed above for at least the past five years. Anthony M. Aspin was previously a divisional sales manager with the Company. Stephen F. Walsh was previously president of the Silicon Carbide Division of Saint-Gobain Industrial Ceramics. Except in the case of Steven A. Wilcox, the positions listed above represent their principal occupations and employment during the last five years. Steven A. Wilcox, elected clerk in 1997, has been a partner in Ropes & Gray, counsel for the Company, throughout that period, and is not an employee of the Company.
The President, Treasurer and Clerk hold office until the first meeting of the directors following the next annual meeting of stockholders and until their respective successors are chosen and qualified, and each other officer holds office until the first meeting of directors following the next annual meeting of stockholders, unless a shorter period shall have been specified by the terms of his election or appointment or, in each case, until he sooner dies, resigns, is removed or becomes disqualified.
There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past five years.
Item 11
Item 11 - Executive Compensation
The information concerning management remuneration is contained in (i) the last paragraph on page 3, (ii) in Sections C-F of Part I (pages 7-11), and (iii) in the information under "Compensation Committee Interlocks and Insider Participation" in Section B of Part I (page 4) in the Company's 2003 Proxy Statement, and is hereby incorporated by reference.
Item 12
Item 12 - Security Ownership of Certain Beneficial Owners and Management (a) The following table gives information about the Company's Common Stock that may be issued upon the exercise of options, warrants and rights under the Company's 1997 Employees' Stock Purchase Plan ("1997 Plan") and the Company's 2002 Employees' Stock Purchase Plan ("2002 Plan") as of June 28, 2003. Both the 1997 and 2002 Plans were approved by stockholders and shares of Class A or Class B Common Stock may be issued under either plan. No new options can be granted under the 1997 Plan. Options are not issued under the Company's Employees' Stock Purchase Plan that was adopted in 1952.
Number of Securities Remaining Available Number of Securities For Future Issuance to be issued Upon Ex- Weighted Average Under Equity Compen- ercise of Outstanding Exercise Price of sation Plans (Ex- Plan Options, Warrants and Outanding Options, cluding Securities Category Rights Warrants and Rights Reflected in Col (a) (a) (b) (c)
Equity compensa- tion plans ap- proved by secur- ity holders 68,072 13.20 737,910
Equity compensa- tion plans not approved by se- curity holders ity 0 0 0
Total 68,072 3.20 737,910
(b)	Security ownership of certain beneficial owners:
	The information concerning a more than 5% holder of any class of the Company's voting shares is contained under the heading "Security Ownership of Certain Beneficial Owners" in Section H of Part I (pages 14-15) of the Company's 2003 Proxy Statement, and is hereby incorporated by reference.
(c)	Security ownership of management:
	The information concerning the beneficial ownership of each class of equity securities by all directors, and all directors and officers of the Company as a group, is contained under the heading "Security Ownership of Management" in Section H of Part I (pages 12-15) in the Company's 2003 Proxy Statement, and is hereby incorporated by reference.
(d)	The Company knows of no arrangements that may, at a subsequent date, result in a change in control of the Company.
Item 13
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 Operations for each of the three years in the Period ended June 28, 2003
Consolidated Statements of Cash Flows for each of the three years in the Period ended June 28, 2003
		 Consolidated Balance Sheets at June 28, 2003 and June 29, 2002
		 Consolidated Statements of Stockholders' Equity for each of the three years in the Period Ended June 28, 2003
		 Notes to Consolidated Financial Statements
2. All other financial statements and schedules are omitted because they are inapplicable, not required under the instructions, or the information is reflected in the financial statements or notes thereto.
	3.	See Exhibit Index below. Compensatory plans or arrangements are identified by an "*."
(b) The following reports on Form 8-K were filed with or furnished to the SEC in the last quarter of the period covered by this report:
The Company filed a report on Form 8-K on June 5, 2003 announcing the issuance of press release concerning the quarterly dividend on the Company's common stock.
The Company filed a report on Form 8-K on June 27, 2003 announcing that the Company had mailed its quarterly dividend on the common stock accompanied by a letter from the Company's President.
(c)		See Exhibit Index below.
(d)		Not applicable.
THE L.S. STARRETT COMPANY AND SUBSIDIARIES - EXHIBIT INDEX
3a Restated Articles of Organization dated December 20, 1989, filed with Form 10-Q for the quarter ended December 23, 1989, are hereby incorporated by reference.
3b Bylaws as amended September 16, 1999, filed with Form 10-Q for the quarter ended September 24, 1999, are hereby incorporated by reference.
4 Second Amended and Restated Rights Agreement, dated as of March 13, 2002, between the Company and Mellon Investor Services, as Rights Agent, including Form of Common Stock Purchase Rights Certificate, filed with Form 10-K for the year ended June 29, 2002, is hereby incorporated by reference.
10a $25,000,000 Revolving Credit Agreement dated as of June 13, 2000, among The L.S. Starrett Company and Fleet National Bank filed with Form 10-K for the year ended June 24, 2000 is hereby incorporated by reference.
10b Form of indemnification agreement with directors and executive officers, filed with Form 10-K for the year ended June 29, 2002, is hereby incorporated by reference.
10c*The L.S. Starrett Company Supplemental Executive Retirement Plan, filed with Form 10-K for the year ended June 29, 2002 is hereby incorporated by reference.
10d*The L.S. Starrett Company 401(k) Stock Savings Plan (2001 Restatement), filed with Form 10-K for the year ended June 29, 2002 is hereby incorporated by reference.
10e 2002 Employees' Stock Purchase Plan filed with Form 10-Q for the quarter ended September 28, 2002 is hereby incorporated by reference.
10f Amendment dated April 1, 2003 to the Company's 401(k) Stock Savings Plan, filed herewith.
21 Subsidiaries of the Registrant, filed herewith.
23 Independent Auditors' Consent, filed herewith.
31a Certification of Chief Executive Officer Pursuant to Rule 13a-14(a), filed herewith.
31b Certification of Chief Financial Officer Pursuant to Rule 13a-14(a), filed herewith.
32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE L.S. STARRETT COMPANY (Registrant)
By S/ROGER U. WELLINGTON, JR. Roger U. Wellington, Jr., Vice President, Treasurer and Chief Financial Officer Date: August 29, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
S/DOUGLAS A. STARRETT S/ANTONY MCLAUGHLIN Douglas A. Starrett, Aug. 29, 2003 Antony McLaughlin, Aug. 29, 2003 President and CEO and Director President Starrett Industria e Comercio, Ltda, Brazil
S/RALPH G. LAWRENCE S/WILLIAM S. HURLEY Ralph G. Lawrence, Aug. 29, 2003 William S. Hurley, Aug. 29, 2003 Director Director
S/RICHARD B. KENNEDY S/GEORGE B. WEBBER Richard B. Kennedy, Aug. 29, 2003 George B. Webber, Aug. 29, 2003 Director Vice President Webber Gage Division and Director
S/STEVEN G. THOMSON S/ROGER U. WELLINGTON, JR. Steven G. Thomson, Aug. 29, 2003 Roger U. Wellington,Jr., Aug.29, 2003 Chief Accounting Officer Vice President, Treasurer and CFO and Director