q32009form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
(Mark
One)
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
x |
For
the quarterly period ended
|
March
28, 2009
|
|
|
OR
|
|
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
o |
For
the transition period from
|
|
to
|
|
|
|
|
Commission
file number
|
1-367
|
|
THE
L. S. STARRETT COMPANY
|
(Exact
name of registrant as specified in its charter)
|
|
MASSACHUSETTS
|
|
04-1866480
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
121
CRESCENT STREET, ATHOL, MASSACHUSETTS
|
01331-1915
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
Registrant's
telephone number, including area code
|
978-249-3551
|
|
|
Former
name, address and fiscal year, if changed since last
report
|
|
Indicate
by check mark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
|
|
|
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer,” “large
accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act, (Check One):
|
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|
|
|
|
Common
Shares outstanding as of
|
April
30, 2009
|
|
|
|
Class
A Common Shares
|
5,765,293
|
|
|
|
Class
B Common Shares
|
869,467
|
|
THE L. S.
STARRETT COMPANY
CONTENTS
|
|
Page No.
|
|
|
|
Part
I. Financial
Information:
|
|
|
|
|
|
Item
1. Financial
Statements
|
|
|
|
|
|
Consolidated
Statements of Operations –
thirteen
weeks and thirty-nine weeks ended March 28, 2009 and March 29, 2008
(unaudited)
|
|
3
|
|
|
|
Consolidated
Statements of Cash Flows –
thirteen
and thirty-nine weeks ended March 28, 2009 and March 29, 2008
(unaudited)
|
|
4
|
|
|
|
Consolidated
Balance Sheets –
March
28, 2009 (unaudited) and June 28, 2008
|
|
5
|
|
|
|
Consolidated
Statements of Stockholders' Equity -
thirty-nine
weeks ended March 28, 2009 and March 29, 2008 (unaudited)
|
|
6
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
7-12
|
|
|
|
Item
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
|
|
13-19
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures
About Market Risk
|
|
19
|
|
|
|
Item
4. Controls and Procedures
|
|
19
|
|
|
|
Part
II. Other information:
|
|
|
|
|
|
Item
1A. Risk Factors
|
|
19-21
|
|
|
|
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds
|
|
22
|
|
|
|
Item
6. Exhibits
|
|
22
|
|
|
|
SIGNATURES
|
|
22
|
Part I.
Financial Information
Item 1.
Financial Statements
THE L. S.
STARRETT COMPANY
Consolidated
Statements of Operations
(in
thousands of dollars except per share data)(unaudited)
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
3/28/09
|
|
|
3/29/08
|
|
|
3/28/09
|
|
|
3/29/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
42,764 |
|
|
$ |
60,101 |
|
|
$ |
164,830 |
|
|
$ |
182,087 |
|
Cost
of goods sold
|
|
|
(31,628 |
) |
|
|
(41,041 |
) |
|
|
(116,186 |
) |
|
|
(124,929 |
) |
Selling
and general expense
|
|
|
(13,190 |
) |
|
|
(15,237 |
) |
|
|
(46,181 |
) |
|
|
(45,706 |
) |
Goodwill
impairment (Note 4)
|
|
|
(5,260 |
) |
|
|
- |
|
|
|
(5,260 |
) |
|
|
- |
|
Other
income (expense)
|
|
|
(201 |
) |
|
|
1,155 |
|
|
|
1,154 |
|
|
|
3,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
Earnings before income taxes
|
|
|
(7,515 |
) |
|
|
4,978 |
|
|
|
(1,643 |
) |
|
|
14,503 |
|
Income
tax (benefit) expense
|
|
|
(2,765 |
) |
|
|
2,116 |
|
|
|
(651 |
) |
|
|
5,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings
|
|
$ |
(4,750 |
) |
|
$ |
2,862 |
|
|
$ |
(992 |
) |
|
$ |
8,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share
|
|
$ |
(0.72 |
) |
|
$ |
0.43 |
|
|
$ |
(0.15 |
) |
|
$ |
1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares used in per share calculations (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,622 |
|
|
|
6,598 |
|
|
|
6,619 |
|
|
|
6,594 |
|
Diluted
|
|
|
6,622 |
|
|
|
6,606 |
|
|
|
6,619 |
|
|
|
6,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per share
|
|
$ |
0.12 |
|
|
$ |
0.10 |
|
|
$ |
0.36 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes
to Consolidated Financial Statements
THE L. S.
STARRETT COMPANY
Consolidated
Statements of Cash Flows
(in
thousands of dollars)(unaudited)
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
3/28/09
|
|
|
3/29/08
|
|
|
3/28/09
|
|
|
3/29/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
earnings
|
|
$ |
(4,750 |
) |
|
$ |
2,862 |
|
|
$ |
(992 |
) |
|
$ |
8,615 |
|
Non-cash items
included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from sale of real
estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,703 |
) |
Depreciation
|
|
|
2,063 |
|
|
|
2,460 |
|
|
|
6,569 |
|
|
|
7,299 |
|
Impaired fixed
assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
95 |
|
Goodwill
impairment
|
|
|
5,260 |
|
|
|
- |
|
|
|
5,260 |
|
|
|
- |
|
Amortization
|
|
|
312 |
|
|
|
312 |
|
|
|
936 |
|
|
|
928 |
|
Net long-term tax
payable
|
|
|
104 |
|
|
|
- |
|
|
|
328 |
|
|
|
- |
|
Deferred taxes
|
|
|
(3,092 |
) |
|
|
1,290 |
|
|
|
(3,654 |
) |
|
|
2,397 |
|
Unrealized transaction (gains)
losses
|
|
|
41 |
|
|
|
(399 |
) |
|
|
1,336 |
|
|
|
(955 |
) |
Retirement
benefits
|
|
|
(488 |
) |
|
|
(775 |
) |
|
|
(1,477 |
) |
|
|
(2,518 |
) |
Working capital
changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
2,336 |
|
|
|
184 |
|
|
|
3,336 |
|
|
|
(546 |
) |
Inventories
|
|
|
(923 |
) |
|
|
(1,055 |
) |
|
|
(12,032 |
) |
|
|
3,757 |
|
Other current
assets
|
|
|
(384 |
) |
|
|
238 |
|
|
|
(1,145 |
) |
|
|
906 |
|
Other current
liabilities
|
|
|
(2,120 |
) |
|
|
(1,415 |
) |
|
|
(5,295 |
) |
|
|
(684 |
) |
Prepaid pension cost and
other
|
|
|
131 |
|
|
|
(250 |
) |
|
|
1,963 |
|
|
|
398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
|
(1,510 |
) |
|
|
3,452 |
|
|
|
(4,867 |
) |
|
|
17,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to plant and
equipment
|
|
|
(2,415 |
) |
|
|
(2,718 |
) |
|
|
(7,840 |
) |
|
|
(6,816 |
) |
Proceeds from sale of real
estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,416 |
|
(Increase) decrease in
investments
|
|
|
1,800 |
|
|
|
1,045 |
|
|
|
8,483 |
|
|
|
(8,805 |
) |
Purchase of Kinemetric
Engineering
|
|
|
62 |
|
|
|
- |
|
|
|
(208 |
) |
|
|
(2,060 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(553 |
) |
|
|
(1,673 |
) |
|
|
435 |
|
|
|
(15,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term
borrowings
|
|
|
6,489 |
|
|
|
475 |
|
|
|
16,135 |
|
|
|
4,956 |
|
Short-term debt
repayments
|
|
|
(1,337 |
) |
|
|
(1,507 |
) |
|
|
(5,702 |
) |
|
|
(5,218 |
) |
Proceeds from long-term debt
borrowings
|
|
|
1,188 |
|
|
|
- |
|
|
|
1,188 |
|
|
|
- |
|
Long-term debt
repayments
|
|
|
(145 |
) |
|
|
(160 |
) |
|
|
(335 |
) |
|
|
(384 |
) |
Common stock
issued
|
|
|
138 |
|
|
|
155 |
|
|
|
470 |
|
|
|
423 |
|
Treasury shares
purchased
|
|
|
(75 |
) |
|
|
- |
|
|
|
(263 |
) |
|
|
(317 |
) |
Dividends
|
|
|
(795 |
) |
|
|
(660 |
) |
|
|
(2,384 |
) |
|
|
(2,638 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
5,463 |
|
|
|
(1,697 |
) |
|
|
9,109 |
|
|
|
(3,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(338 |
) |
|
|
10 |
|
|
|
(1,998 |
) |
|
|
176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
3,062 |
|
|
|
92 |
|
|
|
2,679 |
|
|
|
(278 |
) |
Cash,
beginning of period
|
|
|
6,132 |
|
|
|
7,338 |
|
|
|
6,515 |
|
|
|
7,708 |
|
Cash,
end of period
|
|
$ |
9,194 |
|
|
$ |
7,430 |
|
|
$ |
9,194 |
|
|
$ |
7,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes
to Consolidated Financial Statements
THE L. S.
STARRETT COMPANY
Consolidated
Balance Sheets
(in
thousands of dollars except share data)
|
|
March
28, 2009 (unaudited)
|
|
|
June
28, 2008
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
|
|
$ |
9,194 |
|
|
$ |
6,515 |
|
Investments
|
|
|
8,068 |
|
|
|
19,806 |
|
Accounts receivable (less
allowance for doubtful accounts of $560 and $701)
|
|
|
27,470 |
|
|
|
39,627 |
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials and
supplies
|
|
|
20,474 |
|
|
|
15,104 |
|
Goods in process and finished
parts
|
|
|
18,482 |
|
|
|
16,653 |
|
Finished goods
|
|
|
24,414 |
|
|
|
29,400 |
|
|
|
|
63,370 |
|
|
|
61,157 |
|
Current deferred income tax
asset
|
|
|
5,545 |
|
|
|
5,996 |
|
Prepaid expenses, taxes and other
current assets
|
|
|
5,705 |
|
|
|
5,535 |
|
Total current
assets
|
|
|
119,352 |
|
|
|
138,636 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost (less accumulated depreciation of $116,854
and $131,386)
|
|
|
55,380 |
|
|
|
60,945 |
|
Property
held for sale
|
|
|
1,912 |
|
|
|
1,912 |
|
Intangible
assets (less accumulated amortization of $3,413 and
$2,477)
|
|
|
2,828 |
|
|
|
3,764 |
|
Goodwill
(Note 4)
|
|
|
981 |
|
|
|
6,032 |
|
Pension
asset
|
|
|
35,683 |
|
|
|
34,643 |
|
Other
assets
|
|
|
276 |
|
|
|
1,877 |
|
Long-term
taxes receivable
|
|
|
2,905 |
|
|
|
2,476 |
|
Total assets
|
|
$ |
219,317 |
|
|
$ |
250,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Notes payable and current
maturities
|
|
$ |
14,403 |
|
|
$ |
4,121 |
|
Accounts payable and accrued
expenses
|
|
|
11,347 |
|
|
|
18,041 |
|
Accrued salaries and
wages
|
|
|
4,376 |
|
|
|
6,907 |
|
Total current
liabilities
|
|
|
30,126 |
|
|
|
29,069 |
|
|
|
|
|
|
|
|
|
|
Long-term
taxes payable
|
|
|
8,624 |
|
|
|
8,522 |
|
Deferred
income taxes
|
|
|
2,717 |
|
|
|
6,312 |
|
Long-term
debt
|
|
|
6,150 |
|
|
|
5,834 |
|
Postretirement
benefit liability
|
|
|
12,307 |
|
|
|
13,775 |
|
Total liabilities
|
|
|
59,924 |
|
|
|
63,512 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Class
A Common $1 par (20,000,000 shrs. authorized)
5,746,385
outstanding on 3/28/09,
5,708,100
outstanding on 6/28/08
|
|
|
5,746 |
|
|
|
5,708 |
|
Class
B Common $1 par (10,000,000 shrs. authorized)
873,939
outstanding on 3/28/09,
906,065
outstanding on 6/28/08
|
|
|
874 |
|
|
|
906 |
|
Additional paid-in
capital
|
|
|
49,865 |
|
|
|
49,613 |
|
Retained earnings reinvested
and employed in the business
|
|
|
130,733 |
|
|
|
134,109 |
|
Accumulated other comprehensive
loss
|
|
|
(27,825 |
) |
|
|
(3,563 |
) |
Total stockholders'
equity
|
|
|
159,393 |
|
|
|
186,773 |
|
Total liabilities and
stockholders’ equity
|
|
$ |
219,317 |
|
|
$ |
250,285 |
|
See Notes
to Consolidated Financial Statements
THE L. S.
STARRETT COMPANY
Consolidated
Statements of Stockholders' Equity
For the
Thirty-nine Weeks Ended March 28, 2009 and March 29, 2008
(in
thousands of dollars except per share data)
(unaudited)
|
|
Common
Stock Outstading
($1
Par)
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive Loss
|
|
|
Total
|
|
|
|
Class
A
|
|
|
Class
B
|
|
|
|
|
|
Prior
Quarter
|
|
|
|
|
|
|
|
Balance
June 30, 2007
|
|
$ |
5,632 |
|
|
$ |
963 |
|
|
$ |
49,282 |
|
|
$ |
127,023 |
|
|
$ |
(5,786 |
) |
|
$ |
177,114 |
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,615 |
|
|
|
|
|
|
|
8,615 |
|
Unrealized net loss on investments
andswap agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85 |
) |
|
|
(85 |
) |
Translation gain,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,376 |
|
|
|
5,376 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,906 |
|
Tax
adjustment for FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(313 |
) |
|
|
|
|
|
|
(313 |
) |
Dividends
($.40 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,638 |
) |
|
|
|
|
|
|
(2,638 |
) |
Treasury
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
(20 |
) |
|
|
|
|
|
|
(297 |
) |
|
|
|
|
|
|
|
|
|
|
(317 |
) |
Issued
|
|
|
20 |
|
|
|
|
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
342 |
|
Issuance
of stock under ESPP
|
|
|
|
|
|
|
5 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
115 |
|
Conversion
|
|
|
51 |
|
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
March 29, 2008
|
|
$ |
5,683 |
|
|
$ |
917 |
|
|
$ |
49,417 |
|
|
$ |
132,687 |
|
|
$ |
(495 |
) |
|
$ |
188,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
June 28, 2008
|
|
$ |
5,708 |
|
|
$ |
906 |
|
|
$ |
49,613 |
|
|
$ |
134,109 |
|
|
$ |
(3,563 |
) |
|
$ |
186,773 |
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(992 |
) |
|
|
|
|
|
|
(992 |
) |
Unrealized net gain on investments
andswap agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
312 |
|
|
|
312 |
|
Translation gain (loss),
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,574 |
) |
|
|
(24,574 |
) |
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,254 |
) |
Dividends
($.36 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,384 |
) |
|
|
|
|
|
|
(2,384 |
) |
Treasury
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
(26 |
) |
|
|
|
|
|
|
(237 |
) |
|
|
|
|
|
|
|
|
|
|
(263 |
) |
Issued
|
|
|
28 |
|
|
|
|
|
|
|
393 |
|
|
|
|
|
|
|
|
|
|
|
421 |
|
Issuance
of stock under ESPP
|
|
|
|
|
|
|
4 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
100 |
|
Conversion
|
|
|
36 |
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
March 28, 2009
|
|
$ |
5,746 |
|
|
$ |
874 |
|
|
$ |
49,865 |
|
|
$ |
130,733 |
|
|
$ |
(27,825 |
) |
|
$ |
159,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,968 |
) |
|
|
|
|
Unrealized net loss on investments
and
swap agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29 |
) |
|
|
|
|
Amounts not recognized as a
component of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,828 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(27,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes
to Consolidated Financial Statements
THE L. S.
STARRETT COMPANY
Notes to
Consolidated Financial Statements
1.
Basis of Presentation
In the
opinion of management, the accompanying financial statements contain all
adjustments, consisting only of normal recurring adjustments as well as an
impairment charge (See Note 4), necessary to present fairly the financial
position of the Company as of March 28, 2009; the results of operations and cash
flows for the thirteen and thirty-nine weeks ended March 28, 2009 and March 29,
2008; and changes in stockholders' equity for the thirty-nine weeks ended March
28, 2009 and March 29, 2008.
The
Company follows the accounting policies in the preparation of interim statements
as described in the Company's Annual Report filed on Form 10-K for the fiscal
year ended June 28, 2008, and these financial statements should be read in
conjunction with said annual report. Note that significant foreign
locations are reported on a one month lag.
2.
Cash and Investments
Included
in investments at March 28, 2009 is $1.8 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. Cash and investments held in
foreign locations amounted to $6.4 million and $18.8 million at March 28, 2009
and June 28, 2008, respectively. The reduction in cash and investments from June
28, 2008 to March 28, 2009 resulted primarily from foreign exchange effects and
the movement of cash and investments to the U.S. The other significant component
of investments at March 28, 2009 is $3.7 million of investment in certificates
of deposits.
On
October 1, 2008, the Company adopted SFAS No. 157, Fair Value
Measurements (“Statement No. 157”). Statement No. 157 defines and
establishes a framework for measuring fair value and expands disclosures about
fair value instruments. In accordance with Statement No. 157, the Company
has categorized its financial assets, based on the priority of the inputs to the
valuation technique, into a three-level fair value hierarchy as set forth below.
The Company does not have any financial liabilities that are required to be
measured at fair value on a recurring basis. If the inputs used to measure the
financial instruments fall within different levels of the hierarchy, the
categorization is based on the lowest level input that is significant to the
fair value measurement of the instrument.
Financial
assets recorded on the balance sheets are categorized based on the inputs to the
valuation techniques as follows:
o
|
Level
1 – Financial assets whose values are based on unadjusted quoted prices
for identical assets or liabilities in an active market which the company
has the ability to access at the measurement date (examples include active
exchange-traded equity securities and most U.S. Government and agency
securities).
|
o
|
Level
2 – Financial assets whose value are based on quoted market prices in
markets where trading occurs infrequently or whose values are based on
quoted prices of instruments with similar attributes in active markets.
The Company does not currently have any Level 2 financial
assets.
|
o
|
Level
3 – Financial assets whose values are based on prices or valuation
techniques that require inputs that are both unobservable and significant
to the overall fair value measurement. These inputs reflect management’s
own view about the assumptions a market participant would use in pricing
the asset. The Company does not currently have any Level 3 financial
assets.
|
As of
March 28, 2009, the Company’s Level 1 financial assets were as follows (in
thousands):
|
|
Level 1
|
|
|
|
|
|
Money
Market Funds
|
|
|
2,570 |
|
Certificates
of Deposits
|
|
|
3,722 |
|
International
Bonds (Puerto Rican debt obligations)
|
|
|
1,776 |
|
|
|
$ |
8,068 |
|
3.
Inventories
Approximately
58% of all inventories are valued on the LIFO method. At March 28,
2009 and June 28, 2008, total inventories were approximately $33.8 and $27.5
million less, respectively, than they would have been if determined on a FIFO
basis. The Company has not realized any material LIFO layer liquidation profits
in the periods presented. The Company had inventory turnover of 2.7 times and
3.8 times at March 28, 2009 and June 28, 2008, respectively.
4.
Goodwill and Intangibles
The
Company performed its annual goodwill impairment test as of June 28, 2008, which
resulted in an implied fair value greater than its carrying value. As noted in
the Company’s second quarter fiscal year 2009 Form 10-Q, a triggering event
occurred during the second quarter relating to $5.3 million of goodwill
resulting from the acquisition of Tru-Stone. Based upon the Company’s analysis,
it was determined that the implied fair value of the goodwill associated with
Tru-Stone continued to be greater than its carrying value ($5.3
million).
Due to
continued declines in Tru-Stone’s results during the third quarter of fiscal
year 2009, an impairment review was performed on its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 144 “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”) and its
goodwill in accordance with Statement of Financial Accounting Standards No. 142
“Goodwill and Other Intangible Assets” (“FAS 142”). Based on the undiscounted
cash flows’ projection, the carrying value of the long lived assets is currently
recoverable; accordingly, no impairment write-down was necessary. Projections of
cash flow were generated for this asset group utilizing estimates from sales,
operations, and finance to arrive at the projected cash flows. A significant
drop in sales growth rates could result in a future impairment charge. The
Company estimates that a 25% drop in cash flows could result in future
impairment charges. The difference between the units carrying value and its fair
value after the goodwill impairment writedown of $5.3 million is approximately
$700,000.
To
estimate the fair value of its Tru-Stone reporting unit, the Company utilized a
combination of income and market approaches. The income approach, specifically a
discounted cash flow methodology, included assumptions for, among others,
forecasted revenues, gross profit margins, operating profit margins, working
capital cash flow, perpetual growth rates and long term discount rates, all of
which require significant judgments by management. These assumptions take into
account the current recessionary environment and its impact on the Company’s
business. In addition, the Company utilized a discount rate appropriate to
compensate for the additional risk in the equity markets regarding the Company’s
future cash flows in order to arrive at a premium considered supportable based
upon historical comparable transactions.
As the
carrying value of Tru-Stone exceeded its estimated fair value as of March 28,
2009, the Company performed the second step of the impairment analysis for
Tru-Stone. Step two of the impairment test requires the Company to fair value
all of the reporting unit’s assets and liabilities, including identifiable
intangible assets, and compare the implied fair value of goodwill to its
carrying value. The results of step two indicated that the goodwill in
Tru-Stone’s reporting unit was fully impaired, resulting in a $5.3 million
impairment recorded in the current quarter. Both step one and step two were
performed by an independent third party appraiser under the supervision of
management. The impairment charge of $5.3 million is comprised of goodwill and
was a direct result of the SFAS No. 142 testing. This impairment charge was due
primarily to the combination of a decline in the market capitalization of the
Company at March 28, 2009 and the decline in the estimated forecasted discounted
cash flows expected by the Company. The total impairment charge of $5.3 million
is recorded in the current quarter.
The
following tables present information about the Company’s goodwill and other
intangible assets on the dates or for the periods indicated (in
thousands):
|
|
As of March 28, 2009
|
|
|
As of June 28, 2008
|
|
|
|
Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
981 |
|
|
|
- |
|
|
$ |
981 |
|
|
$ |
6,032 |
|
|
|
- |
|
|
$ |
6,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Intangible Assets
|
|
$ |
6,241 |
|
|
$ |
(3,413 |
) |
|
$ |
2,828 |
|
|
$ |
6,241 |
|
|
$ |
(2,477 |
) |
|
$ |
3,764 |
|
5.
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses at March 28, 2009 and June 28, 2008 consist
primarily of accounts payable ($6.1 million and $9.0 million), accrued benefits
($1.0 million and $1.1 million), accrued taxes other than income ($.8 million
and $2.1 million), and other accrued expenses ($3.4 million and $5.8 million).
Days in accounts payable were 82 days and 62 days at March 28, 2009 and June 28,
2008, respectively. The decrease in accounts payable relates to decreased
purchases commensurate with the decline in sales.
6.
Other Income (Expense)
Other
income (expense) is comprised of the following (in thousands):
|
|
Thirteen Weeks
Ended March
|
|
|
Thirty-nine Weeks
Ended March
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
102 |
|
|
$ |
356 |
|
|
$ |
643 |
|
|
$ |
1,090 |
|
Interest expense and commitment
fees
|
|
|
(221 |
) |
|
|
(108 |
) |
|
|
(617 |
) |
|
|
(561 |
) |
Realized and unrealized exchange
gains (losses)
|
|
|
62 |
|
|
|
708 |
|
|
|
1,160 |
|
|
|
787 |
|
Gains on sale of real
estate
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,703 |
|
Other
|
|
|
(144 |
) |
|
|
199 |
|
|
|
(32 |
) |
|
|
32 |
|
|
|
$ |
(201 |
) |
|
$ |
1,155 |
|
|
$ |
1,154 |
|
|
$ |
3,051 |
|
7.
Income Taxes
The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN No. 48”), at the beginning of fiscal year 2008. FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes.” FIN No. 48 prescribes a two-step process to determine the
amount of tax benefit to be recognized. First, the tax position must be
evaluated to determine the likelihood that it will be sustained upon external
examination. If the tax position is deemed “more-likely-than-not” to be
sustained, the tax position is then assessed to determine the amount of benefit
to recognize in the financial statements. The amount of the benefit that may be
recognized is the largest amount that has a greater than 50 percent likelihood
of being realized upon ultimate settlement. As a result of implementing FIN No.
48, the Company recognized a cumulative effect adjustment of $.3 million to
decrease the July 1, 2007 retained earnings balance and increase long-term tax
payable. Also, in connection with this implementation, the Company has
reclassified $2.9 million of unrecognized tax benefits into a long-term taxes
receivable representing the corollary effect of transfer pricing competent
authority adjustments.
The
Company is subject to U.S. federal income tax and various state, local and
international income taxes in numerous jurisdictions. The Company’s domestic and
international tax liabilities are subject to the allocation of revenues and
expenses in different jurisdictions and the timing of recognizing revenues and
expenses. Additionally, the amount of income taxes paid is subject to the
Company’s interpretation of applicable tax laws in the jurisdictions in which it
files.
The
Company has substantially concluded all U.S. federal income tax matters for
years through fiscal 2003. Currently, we do not have any income tax audits in
progress in the numerous states, local and international jurisdictions in which
we operate. In international jurisdictions including Argentina, Australia,
Brazil, Canada, China, UK, Germany, New Zealand, and Mexico, which comprise a
significant portion of the Company’s operations, the years that may be examined
vary, with the earliest year being 2004 (except for Brazil, which has 1997-2006
still open for examination).
The
Company recognizes interest expense related to income tax matters in income tax
expense. The Company has accrued $.1 million of interest as of June 28, 2008.
The amount did not change significantly during the nine months ended March 28,
2009.
The
Company has identified no uncertain tax position for which it is reasonably
possible that the total amount of unrecognized tax benefits will significantly
increase or decrease within the next twelve months.
The
decrease in the deferred income tax liability from June 28, 2008 to March 28,
2009 relates primarily to the increase in the Federal and State NOL tax
operating loss carryforward assets which are netted against this liability
balance.
8.
Pensions and Post Retirement Benefits
Net
periodic benefit costs (benefits) for the Company's defined benefit pension
plans consist of the following (in thousands):
|
|
Thirteen Weeks
Ended March
|
|
|
Thirty-nine Weeks
Ended March
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
541 |
|
|
$ |
597 |
|
|
$ |
1,670 |
|
|
$ |
1,796 |
|
Interest cost
|
|
|
1,639 |
|
|
|
1,742 |
|
|
|
5,133 |
|
|
|
5,245 |
|
Expected return on plan
assets
|
|
|
(2,490 |
) |
|
|
(2,944 |
) |
|
|
(7,686 |
) |
|
|
(8,853 |
) |
Amort. of prior service
cost
|
|
|
100 |
|
|
|
111 |
|
|
|
314 |
|
|
|
335 |
|
Amort. of unrecognized (gain)
loss
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(8 |
) |
|
|
(5 |
) |
|
|
$ |
(213 |
) |
|
$ |
(495 |
) |
|
$ |
(577 |
) |
|
$ |
(1,482 |
) |
Net
periodic benefit costs (benefits) for the Company's postretirement medical plan
consists of the following (in thousands):
|
|
Thirteen Weeks
Ended March
|
|
|
Thirty-nine Weeks
Ended March
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
88 |
|
|
$ |
98 |
|
|
$ |
265 |
|
|
$ |
294 |
|
Interest cost
|
|
|
177 |
|
|
|
186 |
|
|
|
531 |
|
|
|
557 |
|
Amort. of prior service
cost
|
|
|
(226 |
) |
|
|
(226 |
) |
|
|
(679 |
) |
|
|
(679 |
) |
Amort. of unrecognized
loss
|
|
|
- |
|
|
|
28 |
|
|
|
- |
|
|
|
85 |
|
|
|
$ |
39 |
|
|
$ |
86 |
|
|
$ |
117 |
|
|
$ |
257 |
|
Historically,
our U.S. qualified defined benefit pension plan has been appropriately funded,
and remains so according to our latest estimates. While the recent decline in
plan assets may affect future funding requirements, there are no required
minimum contributions before the end of fiscal 2009. The impact of the decline
in asset values will be recognized in the calculation of future net periodic
benefit cost through a decrease in the expected return on assets and
amortization of the asset loss over 13 years. If the plan’s funded status drops
below 90% at July 1, 2009, additional funding of the plan will be required by
March 15, 2011.
Other
than the discount rate, these are generally long-term assumptions and not
subject to short-term market fluctuations, though they may be adjusted as
warranted by structural shifts in economic or demographic outlooks, as
applicable, and the long-term assumptions are reviewed annually to ensure they
do not produce results inconsistent with current market conditions. The
long-term expected return on assets assumption affects the pension expense, and
a 1% change in the assumed return would change the U.S. pension expense by
approximately $1 million for the fiscal year ended June 28, 2008. The discount
rate is adjusted annually based on corporate investment grade (rated AA or
better) bond yields as of the measurement date. The rate selected at June 30,
2008 is 6.75%. A 1% change in the discount rate would change the benefit
obligations for the U.S. pension and postretirement benefit plans by
approximately 11% as of the end of the year, and change the service cost and
interest cost by approximately $.1 million for the fiscal year ended June 28,
2008. The changes in benefit obligations and pension expense are inversely
related to changes in the discount rate.
9.
Long-term Debt
Long-term
debt is comprised of the following (in thousands):
|
|
March
28, 2009
|
|
|
June
28, 2008
|
|
|
|
|
|
|
|
|
Reducing
revolver
|
|
$ |
7,200 |
|
|
$ |
7,200 |
|
Capitalized
lease obligations – domestic (payable in U.S. dollars)
|
|
|
1,131 |
|
|
|
- |
|
Capitalized
lease obligations payable in Brazilian currency due 2009-2011,
13.3%-23.7%
|
|
|
778 |
|
|
|
1,569 |
|
|
|
$ |
9,109 |
|
|
$ |
8,769 |
|
Less current
portion
|
|
|
2,959 |
|
|
|
2,935 |
|
|
|
$ |
6,150 |
|
|
$ |
5,834 |
|
Current
notes payable, primarily in Brazilian currency, carry interest at up to
23.7%. The average rate for the current quarter was approximately
14.7%.
10.
Recent Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements” (“SFAS No. 157”), which addresses how
companies should measure fair value when they are required to use a fair value
measure for recognition or disclosure purposes under generally accepted
accounting principles. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. In
February 2008, the FASB issued FASB Staff Position 157-2, “Effective Date of
FASB Statement No. 157” (FSP 157-2), which partially defers the effective date
of SFAS No. 157 for one year for non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a
non-recurring basis. Consequently, SFAS No. 157 will be effective for the
Company in fiscal 2009 for financial assets and liabilities carried at fair
value and non-financial assets and liabilities that are recognized or disclosed
at fair value on a recurring basis. As a result of the deferral, SFAS No. 157
will be effective in fiscal 2010 for non-recurring, non-financial assets and
liabilities that are recognized or disclosed at fair value. The Company is
currently evaluating the potential impact of SFAS No. 157 on its financial
position and results of operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FAS 115 (“SFAS No.
159”). SFAS 159 permits companies to make a one-time election to carry eligible
types of financial assets and liabilities at fair value, even if fair value
measurement is not required under generally accepted accounting principles in
the United States (“U.S. GAAP”). SFAS 159 has been adopted by the Company
beginning in the first quarter of fiscal 2009, and the Company has determined
SFAS 159 has no material impact on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” SFAS No. 141(R) will significantly change the accounting for
business combinations. Under SFAS No. 141(R), an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions. SFAS No.
141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. The Company will be required to adopt SFAS No.
141(R) for fiscal 2010. The Company does not expect the adoption of SFAS 141(R)
to have a material impact on its consolidated financial statements.
In
December 2008, the FASB issued FSP FAS 132R-1 “Employers’ Disclosures about
Postretirement Benefit Plan Assets”, which amends FASB Statement 132 (revised
2003), Employers’ Disclosures
about Pensions and Other Postretirement Benefits. Beginning in fiscal
years ending after December 15, 2009, employers will be required to provide more
transparency about the assets in their postretirement benefit plans, including
defined benefit pension plans. FSP FAS 132R-1 was issued in response to users’
concerns that employers’ financial statements do not provide adequate
transparency about the types of assets and associated risks in employers’
postretirement plans. In current disclosures of the major categories of plan
assets, many employers provide information about only four asset categories:
equity, debt, real estate, and other investments. For many employers, the “other
investment” category has increased to include a significant percentage of plan
assets. Users indicate that such disclosure is not sufficiently specific to
permit evaluation of the nature and risks of assets held as
investments.
In
addition, the FSP requires new disclosures similar to those in FASB Statement
157, “Fair Value Measurements,” in terms of the three-level fair value
hierarchy, including a reconciliation of the beginning and ending balances of
plan assets that fall within Level 3 of the hierarchy.
FSP FAS
132R-1’s amended disclosure requirements about plan assets are principles-based.
The objectives of the disclosures are to provide users with an understanding of
the following:
-
|
How
investment decisions are made, including factors necessary to
understanding investment policies and
strategies
|
-
|
The
major categories of plan assets
|
-
|
The
inputs and valuation techniques used to measure the fair value of plan
assets
|
-
|
The
effect of fair value measurements using significant unobservable inputs
(Level 3 measurements in Statement 157 on changes in plan assets for the
period)
|
-
|
Significant
concentrations of risk within plan
assets
|
Employers
are required to consider these overall disclosure objectives in providing the
detailed disclosures required by Statement 132R, as amended by FSP FAS
132R-1.
FSP FAS
132R-1 is effective for periods ending after December 15, 2009. The disclosure
requirements are annual and do no apply to interim financial statements. The
technical amendment to Statement 132R was effective as of December 30, 2008. The
Company is currently evaluating the additional disclosure requirements upon the
adoption of FSP 132R-1.
In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
160, “Noncontrolling Interests in Consolidated Financial Statements – an
amendment of ARB No. 51”. This statement improves the relevance, comparability
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing accounting and
reporting standards that are required for non-controlling interests. SFAS No.
160 affects those entities that have an outstanding noncontrolling interest in
one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Early adoption is prohibited. The
Company does not believe that SFAS No. 160 will have an impact on its
consolidated financial statements.
In April
2009, the FASB issued FASB Staff Position 107-1 and 28-1, Interim
Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and
28-1”), to require disclosures about fair value of financial instruments for
interim reporting periods of publicly traded companies as well as in annual
financial statements. FSP 107-1 and 28-1 also amends APB Opinion No. 28, Interim
Financial Reporting, to require those disclosures in summarized financial
information at interim reporting periods. FSP 107-1 and 28-1 shall be
effective for interim reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The
Company has not determined the impact, if any, FSP 107-1 and 28-1 will have on
its financial position or results of operations.
In April
2009, the FASB issued FASB Staff Position 157-4, Determining Fair Value when the
Volume and Level of Activity for the Asset or Liability have Significantly
Decreased and Identifying Transactions that are not Orderly (“FSP FAS 157-4”),
which provides additional guidance for estimating fair value in accordance with
SFAS No. 157, Fair Value Measurements, when the volume and level of activity for
the asset or liability have significantly decreased. FSP FAS 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. FSP FAS 157-4 shall be effective for interim and annual reporting
periods ending after June 15, 2009, and shall be applied
prospectively. The Company has not determined the impact, if any FSP
FAS 157-4 will have on its financial position or results of
operations.
In April
2009, the FASB issued FASB Staff Position 115-2 and 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2 and 124-2”),
which amends the other-than-temporary impairment guidance in U.S. GAAP for debt
securities to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities
in the financial statements. FSP FAS 115-2 and 124-2 does not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. FSP FAS 115-2 and 124-2 shall be effective for
interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. The Company has
not determined the impact, if any FSP FAS 115-2 and 124-2 will have on its
financial position or results of operations.
Item
2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS
OF OPERATIONS
QUARTERS
ENDED MARCH 28, 2009 AND MARCH 29, 2008
Overview
The
Company is engaged in the business of manufacturing over 5,000 different
products for industrial, professional and consumer markets. As a global
manufacturer with major subsidiaries in Brazil, Scotland, and China, the Company
offers a broad array of products to the market through multiple channels of
distribution globally. Net sales decreased 29% and 9.5% for the thirteen week
and thirty-nine week periods ended March 28, 2009, as compared to to the same
periods in fiscal 2008. The severe decline is due to the unprecedented slowdown
in the global economy and the rapid strengthening of the U.S. dollar. This is a
direct reflection of the financial market crisis, lack of liquidity and weak
consumer confidence. The resultant effect has been a massive de-stocking
throughout the supply chain which caused the most significant drop in Company
sales in a thirteen week period in the past thirty years. Historically, the
Company has lagged the economy and we expect the current harsh economic
realities will be with the Company for the balance of this calendar
year.
The
Company continued to experience the severity of the global economic recession
during the quarter. A net loss of $(4.8) million, or $(.72) per basic and
diluted share, in the third quarter of fiscal 2009 (fiscal 2009 quarter)
compared to net income of $2.9 million, or $.43 per basic and diluted share, in
the third quarter of fiscal 2008 (fiscal 2008 quarter). The quarter to quarter
comparison was negatively impacted by lower sales volume primarily due to unit
volume declines and the strengthening of the U.S. dollar upon consolidation of
international results. This represents a decrease in net income of $7.6 million
comprised of a decrease in gross margin of $7.9 million, an impairment charge
for goodwill of $5.3 million and a decrease in other income of $1.4 million.
This was offset by a decrease of $2.1 million in selling, general and
administrative costs, and a decrease in income tax expense of $4.9 million.
These items are discussed in more detail below.
Net
Sales
Net sales
for the fiscal 2009 quarter were $42.8 million, a decrease of 29% compared to
the fiscal 2008 quarter. North American sales decreased $9.9 million or 30%,
while international sales excluding North America decreased $7.4 million or 27%
(19% in local currency). The decrease in North American sales is related to the
widening of the recession to the manufacturing sector in the U.S., lower Evans
Rule sales to the construction sector, and decreased sales in Canada. The
declines are primarily related to unit volume declines. The impact of any price
concessions and new product sales was not material. It is likely that the
Company’s results will continue to be impacted by the current global economic
recession.
The
decrease in international sales is driven by the weakening of the Brazilian
Real, British Pound, and Australian Dollar against the U.S. Dollar, partially
offset by greater penetration into the Chinese markets. Beyond exchange rate
effects, the declines were mainly related to unit volume declines relative to
the global economic collapse and do not reflect a loss of market
share.
Earnings before income
taxes
The
fiscal 2009 quarter's loss before income taxes of $7.5 million represents a
decrease of earnings before income taxes of $12.5 million from the fiscal 2008
quarter’s earnings before income taxes of $5.0 million. Approximately $7.9
million of the decrease is at the gross margin line. The gross margin percentage
decreased from 31.7% in the fiscal 2008 quarter to 26.0% in the fiscal 2009
quarter. The decrease in gross margin is primarily a result of sales decreases
quarter over quarter ($5.0 million gross margin effect) and lower overhead
absorption ($2.4 million) at both domestic and international operations due to
this lower sales dollar volume.
Selling,
general and administrative expense decreased $2.1 million. However, as a
percentage of sales, selling and general expenses increased from 25.4% in the
fiscal 2008 quarter to 30.8% in the fiscal 2009 quarter. The decrease in selling
and general expense is primarily a result of reduced accruals for incentives for
the fiscal 2009 quarter ($.3 million), a decrease in bad debt ($.2 million), a
decrease in travel ($.3 million), a decrease in shipping costs ($.2 million), a
decrease in professional fees ($.3 million), a decrease in salaries ($.5
million), and a decrease in advertising ($.2 million).
In
response to the downturn in sales volume, the Company has reduced spending on
raw materials and MRO and has cut salaries at certain domestic locations by 10%
and has reduced hourly labor costs through shortened work weeks, layoffs and
attrition. These reductions are done with careful consideration so as not to
compromise customer service levels or the retention of key employees. This is
expected to have an approximate $2.0 million impact per quarter on cost of sales
and selling, general and administrative costs once full implementation takes
effect. In addition, more layoffs were instituted in April at certain domestic
locations, which will have an approximate $1.1 million impact per quarter on
cost of sales and selling, general and administrative costs. Although the
Company’s recent order activity is down compared to historical levels, this
decline is spread relatively proportionately across most of our customers. The
Company fully expects order activity to rebound once the supply chain
de-stocking abates and excess inventory levels at the Company’s distributors are
depleted. The Company does not anticipate any liquidity constraints given the
adequacy of its working capital and its available credit line. See further
discussion under Liquidity and Capital Resources.
Income
Taxes
The
effective income tax rate is 36.8% in the fiscal 2009 quarter versus 42.4% for
the fiscal 2008 quarter. Both rates reflect a combined federal, state and
foreign rate adjusted for permanent book/tax differences, the most significant
of which is the effect of the deduction allowable for the Brazilian dividend
paid in the second quarter of fiscal 2009 and in the third quarter of fiscal
2008. The change in the effective rate percentage reflects the increased impact
of the Brazilian dividend and other permanent differences on a lower denominator
due to lower forecasted taxable income.
No
changes in valuation allowances relating to carryforwards for foreign NOL’s,
foreign tax credits and certain state NOL’s are anticipated for fiscal 2009 at
this time other than reversals relating to realization of NOL benefits for
certain foreign subsidiaries. The Company continues to believe it is more likely
than not that it will be able to utilize its tax operating loss carryforward
assets of approximately $4.9 million reflected on the balance
sheet.
Net earnings (loss) per
share
As a
result of the above factors, the Company had a basic and diluted net loss of
$.72 per share in the fiscal 2009 quarter compared to a basic and diluted net
earnings per share of $.43 in the fiscal 2008 quarter, a decrease of $1.15 per
share. Included in the current quarters net loss is a loss of $.79 per share
relating to goodwill impairment.
NINE
MONTH PERIODS ENDED MARCH 28, 2009 AND MARCH 29, 2008
Overview
The
Company had a net loss of $1.0 million, or $.15 per basic and diluted share in
the first nine months of fiscal 2009, compared to net income of $8.6 million, or
$1.30 per basic and diluted share in the first nine months of fiscal 2008. This
represents a decrease in net income of $9.6 million comprised of a decrease in
gross margin of $8.5 million, an impairment charge for goodwill of $5.3 million,
and a decrease in other income of $1.9 million, offset by a decrease in selling,
general and administrative expenses of $.5 million and a decrease in income tax
expense of $6.5 million. These items are discussed in more detail
below.
Net
Sales
Net sales
for the first nine months of fiscal 2009 were $164.8 million, down $17.3 million
compared to the first nine months of fiscal 2008. Domestic sales were down 15%,
while international sales decreased 4% (2% decrease in local currency). North
American sales reflect lower U.S., Canadian and Mexican demand and lower Evans
Rule sales to Sears, partially offset by the acquisition of Kinemetrics in July
2007. The decline in sales is mainly attributable to unit volume
declines.
The
relatively small decrease in international sales is driven by strong sales in
the Brazilian domestic markets and continued expansion in global markets,
including Eastern Europe, the Middle East and China, offset by the weakening of
the Brazilian Real and British Pound against the U.S. Dollar.
Earnings (loss) before
income taxes
The loss
before income taxes for the first nine months of fiscal 2009 was $1.6 million
compared to $14.5 million of earnings before income taxes for the first nine
months of fiscal 2008.
This
represents a decrease of earnings before income taxes of $16.1 million.
Approximately $8.5 million of this decrease is at the gross margin line. The
gross margin percentage decreased from 31.4% in the first nine months of fiscal
2008 to 29.5% in the first nine months of fiscal 2009. The decrease in gross
margin dollars reflects lower sales from period to period ($5.0 million gross
margin effect), and decreases of fixed overhead absorption at domestic and
foreign manufacturing locations as a result of less capacity utilization ($3.2
million).
This
decrease in gross margin is accompanied by an increase of $.5 million in
selling, general and administrative expense from the first nine months of fiscal
2008 to the first nine months of fiscal 2009. The increase in selling, general
and administrative expense is primarily a result of increases in computer
maintenance and support ($.4 million) and additional salaries related primarily
to sales and marketing ($.4 million), offset by a decrease in bad debts ($.3
million). Finally a one-time gain of $1.7 million from the sale of the Company’s
Glendale, Arizona facility during the first nine months of fiscal 2008,
primarily contributed to a $1.9 million decrease in other income from the first
nine months of fiscal 2008 to the first nine months of fiscal 2009.
Income
Taxes
The
effective income tax rate is a 39.6% provision for the first nine months of
fiscal 2009 versus a 40.6% tax rate for the first nine months of fiscal 2008.
Both rates reflect a combined federal, state and foreign worldwide rate adjusted
for permanent book/tax differences, the most significant of which is the
deduction allowable for the Brazilian dividend paid in December 2008 and
December 2007. The change in the effective income tax rate percentage primarily
reflects the larger impact of the Brazilian dividend and other permanent
differences on a lower denominator due to lower anticipated earnings for fiscal
2009.
The
Company continues to believe it is more likely than not that it will be able to
utilize its tax operating loss carryforward of approximately $4.9 million
reflected on the balance sheet.
Net earnings (loss) per
share
As a
result of the above factors, the Company had a basic and diluted net loss per
share for the first nine months of fiscal 2009 of $.15 per share compared to an
earnings per share of $1.30 in the first nine months of fiscal 2008, a decrease
of $1.45 per share. Included in the loss for the first nine months of fiscal
2009 is a loss of $.79 per share relating to goodwill impairment. Included in
the $1.30 earnings per share for the first nine months of fiscal 2008 is $.15
per share related to the sale of the Glendale facility.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
flows (in thousands)
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
3/28/09
|
|
|
3/29/08
|
|
|
3/28/09
|
|
|
3/29/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used by) provided by
operations
|
|
$ |
(1,510 |
) |
|
$ |
3,452 |
|
|
$ |
(4,867 |
) |
|
$ |
17,989 |
|
Cash (used in) provided from
investing activities
|
|
|
(553 |
) |
|
|
(1,673 |
) |
|
|
435 |
|
|
|
(15,265 |
) |
Cash provided from (used in)
financing activities
|
|
|
5,463 |
|
|
|
(1,697 |
) |
|
|
9,109 |
|
|
|
(3,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by operations in the current quarter decreased by $5.0 million compared
to the same quarter a year ago. This decrease is primarily a result
of the decrease in net earnings ($(7.6) million), offset by an increase in
non-cash items and working capital changes ($2.6 million).
Cash
provided by operations decreased significantly in the current nine month period
compared to the same nine month period a year ago. This decrease is
primarily a result of an increase in inventories ($15.8 million change), a
decline in net earnings ($9.6 million), and a decrease ($4.6 million) in current
liabilities in the current nine month period versus the prior nine month period,
which is partially offset by a decrease in non-cash items (excluding the $5.3
million relating to goodwill impairment) and other working capital changes ($1.9
million).
The
decline in the nine month period was driven by a build up of inventories at
locations throughout the world as the slowdown in production and sales caused a
temporary build up of raw materials. Purchase activity has been adjusted and it
is expected that inventory levels will decrease over the next three quarters.
Sufficient cash balances for operations are maintained at each location
worldwide with 10% of consolidated cash maintained in foreign bank accounts,
excluding UK accounts. The balances in the UK banks are highly liquid and
readily transferable to the U.S.
The
Company’s investing activities for the current quarter and nine month period
consist of expenditures for plant and equipment and the investment of cash not
immediately needed for operations. Expenditures for plant and
equipment decreased $.3 million from the current quarter to the same period a
year ago, reflecting lower equipment purchases at various manufacturing
locations. Such expenditures for the nine month period increased $1.0
million compared to the same period a year ago, reflecting equipment purchases
at various manufacturing locations. The proceeds from the sale of the
Glendale distribution facility is included in the prior nine month
period. The purchase of Kinemetrics was completed in the first
quarter of fiscal 2008 and is included in the prior nine month
period.
Cash
flows related to financing activities are primarily the payment of dividends and
repayments of debt.
Liquidity and credit
arrangements
The
Company believes it maintains sufficient liquidity and has the resources to fund
its operations in the near term. If the Company is unable to maintain consistent
profitability, additional steps, beyond the salary reductions, layoffs,
shortened work weeks as noted above, will have to be taken in order to maintain
liquidity, including plant consolidations and work force and dividend reductions
(see Strategic and Other Activities below). In addition to its cash
and investments, the Company had maintained a $10 million line of credit, of
which, as of March 28, 2009, $975,000 is being utilized in the form of standby
letters of credit for insurance purposes. On April 28,
2009, the Company signed an amendment to its existing line of credit agreement
extending the termination date of such agreement from April 28, 2009 to June 15,
2009. With this amendment, the scheduled principal payment of $2.4 million due
under the Reducing Revolver was extended to June 15, 2009. The Company is
currently in compliance with debt covenants referenced in this amendment. Under
the current credit line, our interest rate for the Reducing Revolver is LIBOR
plus 1.5% and 3.25% (Prime) for the line of credit. In advance of the
termination date of the line of credit agreement, the Company has solicited
competitive bids and is in the process of reviewing offers from several
potential lenders including the Company’s current lender, Bank of America. The
Company has a working capital ratio of 4.0 to one as of March 28, 2009 and 4.8
to one as of June 28, 2008.
STRATEGIC
AND OTHER ACTIVITIES
Globalization
has had a profound impact on product offerings and buying behaviors of industry
and consumers in North America and around the world, forcing the Company to
adapt to this new, highly competitive business environment. The Company
continuously evaluates most all aspects of its business, aiming for new
world-class ideas to set itself apart from its competition.
The
strategic focus has shifted from manufacturing locations to global brand
building through product portfolio and distribution channel management while
reducing costs through lean manufacturing, plant consolidations, global sourcing
and improved logistics.
The
execution of these strategic initiatives has expanded the Company’s
manufacturing and distribution in developing economies which has increased its
international sales revenues to approximately 48% of its consolidated
sales.
On
September 21, 2006, the Company sold its Alum Bank, PA level manufacturing plant
and relocated the manufacturing to the Dominican Republic, where production
began in fiscal 2005. The tape measure production of the Evans Rule Division
facilities in Puerto Rico and Charleston, SC has been transferred to the
Dominican Republic. The Company vacated and plans to sell its Evans Rule
facility in North Charleston, SC. The Company’s goal is to achieve labor savings
and maintain margins while satisfying the demands of its customers for lower
prices. The Company has closed three warehouses, the most recent being the
Glendale, AZ facility, which was sold in fiscal 2008. Also during fiscal 2006,
the Company began a lean manufacturing initiative in its Athol, MA facility,
which has reduced costs over time. Lean has been expanded to encompass other
operations including Mt. Airy, N.C., Charleston, S.C., Tru-Stone Technologies,
MN, and hand tools in the Dominican Republic This initiative has continued
through fiscal 2007, 2008 and 2009.
The
Tru-Stone acquisition in April 2006 represented a strategic acquisition for the
Company in that it provided an enhancement of the Company’s granite surface
plate capabilities. Profit margins for the Company’s standard plate business
have improved as the Company’s existing granite surface plate facility was
consolidated into Tru-Stone, where average gross margins have been higher. Along
the same line, the Kinemetric Engineering acquisition in July 2007 represented
another strategic acquisition in the field of precision video-based metrology
which, when combined with the Company’s existing optical projection line, has
provided a very comprehensive product offering.
If the
Company continues to be impacted by the worldwide recession, there will likely
be additional layoffs, shortened hours per week and possible temporary idling of
manufacturing plants to reduce costs in the short-term.
INFLATION
The
Company has experienced modest inflation relative to its material cost, much of
which cannot be passed on to the customer through increased prices.
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company does not have any material off-balance sheet arrangements as defined
under the Securities and 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 the Company's Consolidated Financial Statements
included in the Form 10-K for the fiscal year ended June 28, 2008 describes the
significant accounting policies and methods used in the preparation of the
consolidated financial statements.
Judgments,
assumptions, and estimates are used for, but not limited to, impairment analysis
of 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 and normal expense accruals for such
things as workers’ compensation and employee medical expenses.
Future
events and their effects cannot be determined with absolute
certainty. Therefore, the determination of estimates requires the
exercise of judgment. Actual results may differ from those estimates,
and such differences may be material to the Company’s Consolidated Financial
Statements. The following sections describe the Company’s critical
accounting policies.
Sales of
merchandise and freight billed to customers are recognized when title passes and
substantially all risks of ownership change, which occurs either upon shipment
or upon delivery based upon contractual terms. Sales are net of
provision for cash discounts, returns, customer discounts (such as volume or
trade discounts), cooperative advertising and other sales related discounts.
Cash discounts are recognized when taken by the customer. Volume discounts,
trade discounts and sales incentives are calculated and recorded at the time of
sale based on an estimate considering historical data and future trends. Cash
discounts, volume discounts, trade discounts and sales incentives are charged
against sales and appear in the sales line of the Consolidated Statement of
Operations.
The
Company has no advertising expenditures for direct response advertising.
Cooperative advertising payments made to customers and other advertising costs
are charged to advertising expense as incurred and are shown in the selling,
general and administrative expense line of the consolidated statement of
operations. No advertising costs were amortized.
The days
sales outstanding for accounts receivable were 59 days and 60 days, at March 28,
2009 and June 28, 2008, respectively.
The
allowance for doubtful accounts and sales returns of $.9 million and $1.2
million as of March 28, 2009 and June 28, 2008, respectively, 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.
The
Company generally values property, plant and equipment (PP&E) at historical
cost less accumulated depreciation. Impairment losses are recorded when
indicators of impairment, such as plant closures, are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount. The Company continually reviews for such impairment and
believes that PP&E is being carried at its appropriate value. Events may
occur that would adversely affect the reported value of the Company’s assets.
Once per quarter, the Company looks at decreases in the market prices of
long-lived assets, adverse changes in long-lived asset usage, changes in legal
factors, accumulated costs significantly in excess of the expected acquisition
costs and current period operating or cash flow loss in conjunction with prior
or projected operating and cash flow losses of long-lived assets.
For
assets to be disposed of, the Company accumulates the assets that will be
offered for sale as a group and evaluates the group of impairment once per
quarter. Impairment for long-lived assets from continuing operations are
evaluated by grouping assets with liabilities at the lowest level of
identifiable cash flows.
The
Company may utilize a quoted current market price or the income approach to
estimate the fair value of an asset depending on the current
circumstances.
The
Company utilizes the capital asset pricing model or the build-up method to
estimate the discount rate utilized in discounting the future cash flow of the
asset group. Projections of cash flow are generated by the Company utilizing
estimates from sales, operations and finance to arrive at the projected cash
flows. Sensitivity analysis is utilized to estimate potential beneficial or
detrimental impacts on cash flow and discount rate from the most likely outcome
derived by management. The Company estimates that a 1% change in the discount
rate would have a 3% change in cash flow.
Goodwill
testing is done on an annual basis at the Company’s fiscal year end. The Company
tests for impairment between annual tests if an event occurs or circumstances
change that would more likely than not reduce the fair value of the reporting
unit. Examples of events or circumstances include:
o
|
A
significant adverse change in legal factors or in the business
climate
|
o
|
An
adverse action or assessment by a
regulator
|
o
|
Unanticipated
competition
|
o
|
A
loss of key personnel
|
o
|
A
more likely than not expectation that a reporting unit or significant
portion of a reporting unit will be sold or otherwise disposed
of
|
o
|
The
testing for recoverability of significant long lived asset groups under
FAS 144.
|
The
Company assesses the fair value of its goodwill, generally based upon a
discounted cash flow methodology. The discounted cash flows are
estimated utilizing various assumptions regarding future revenue and expenses,
working capital, terminal value, and market discount rates. If the
carrying amount of the goodwill is greater than the fair value, goodwill
impairment may be present. An impairment charge is recognized to the
extent the recorded goodwill exceeds the implied fair value of goodwill. As
noted in Footnote 4 of the Financial Statements, a $5.3 million impairment was
recorded during the fiscal quarter related to Tru-Stone.
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. Tax
reserves are also established to cover risks associated with activities or
transactions that may be at risk for additional taxes. Should any significant
changes in the tax law or our estimate of the necessary valuation allowances or
reserves 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.
Item
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT 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 March 29, 2008, the
Company was party to an interest rate swap agreement, which is more fully
described in the fiscal 2008 Annual Report on Form 10-K. The Company does engage
in limited hedging activities to minimize the impact of foreign currency
transactions. Net foreign monetary assets are approximately $11.9
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 debt of $7.2 million at March 28, 2009) or the cash flows or future
earnings associated with those financial instruments. A 10% change in interest
rates would have an insignificant impact on the fair value of the Company's
fixed rate investments of approximately $1.7 million.
Item
4. 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, has
evaluated the Company's disclosure controls and procedures as of March 28, 2009,
and they have concluded that the Company’s disclosure controls and procedures
were effective as of such date to ensure that all information required to be
filed in this report was recorded, processed, summarized and reported within the
time period required by the rules and regulations of the Securities and Exchange
Commission, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure. There have been no 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.
PART
II. OTHER INFORMATION
Item
1A Risk
Factors
SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This
Quarterly Report on Form 10-Q contains forward-looking statements about the
Company’s business, competition, sales, expenditures, foreign operations, plans
for reorganization, 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 the Economy:
The Company’s results of operations are materially affected by the conditions in
the global economy. As a result of the global economic recession,
U.S. and foreign economies have experienced and continue to experience
significant declines in employment, household wealth, consumer spending, and
lending. Businesses, including the Company and its customers, have
faced and are likely to continue to face weakened demand for their products and
services, difficulty obtaining access to financing, increased funding costs, and
barriers to expanding operations. The Company’s results of operations
have been negatively impacted by the global economic recession and the Company
can provide no assurance that its results of operations will
improve.
Risks Related to
Reorganization: The Company continues to evaluate plans to consolidate
and reorganize some of its manufacturing and distribution operations. There can
be no assurance that the Company will be successful in these efforts or that any
consolidation or reorganization will result in revenue increases or cost savings
to the Company. The implementation of these reorganization measures may disrupt
the Company’s manufacturing and distribution activities, could adversely affect
operations, and could result in asset impairment charges and other costs that
will be recognized if and when reorganization or restructuring plans are
implemented or obligations are incurred. This has occurred with the Company’s
move to the Dominican Republic from South Carolina. Indeed, the relocation,
restructuring and closure of the Company’s Evans Division’s Charleston, South
Carolina facility and start up of that Division’s Dominican Republic operations
was a factor contributing to the Company’s fiscal 2006 loss. If the Company is
unable to maintain consistent profitability, additional steps will have to be
taken, including further plant consolidations and workforce and dividend
reductions.
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 Foreign Operations: Approximately 48%
of the Company’s sales and 38% 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. As a result, the future performance of the Brazilian
operations is inherently unpredictable.
Risks Related to Industrial
Manufacturing Sector: 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
migration of manufacturing to low cost foreign countries where the Company is
working to increase market presence. Accordingly, economic weakness in the
industrial manufacturing sector as well as the shift of manufacturing to low
cost countries where the Company does not have a substantial market presence
may, and in some cases has, resulted in decreased demand for certain of the
Company’s products, which adversely affects performance. Accordingly,
economic weakness in the consumer market could adversely impact the Company’s
performance as well. In the event that demand for any of the Company's products
declines significantly, the Company could be required to recognize certain costs
as well as additional asset impairment charges on long-lived assets related to
those products.
Risks Related to Competition: The Company’s
business is subject to direct and indirect competition from both domestic and
foreign firms. In particular, low cost foreign sources have created
severe competitive pricing pressures. Under certain circumstances, including
significant changes in U.S. and foreign currency relationships, such pricing
pressures tend to reduce unit sales and/or adversely affect the Company’s
margins.
Risks Related to Customer
Concentration: None of the Company’s top customers account for
10% or more of revenue. Sears sales and unit volume has decreased significantly
over the past several years and for the first nine months and third quarter of
fiscal 2009. This situation is problematic and if the Sears Craftsman brand we
support is no longer viable, this would have a negative effect on the Company’s
financial performance. The further loss or reduction in orders by Sears or any
of the Company’s remaining large customers, including reductions due to market,
economic or competitive conditions could adversely affect business and results
of operations. Moreover, the Company’s major customers have placed, and may
continue to place pressure on the Company to reduce its prices. This pricing
pressure may affect the Company’s margins and revenues and 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 dental benefits and retains risk in the form of
deductibles and sublimits for most coverages noted above. Depending on the risk,
deductibles can be as high as 5% of the loss, or $500,000.
Risks Related to Raw Material and Energy Costs: Steel is
the principal raw material used in the manufacture of the Company’s products.
The price of steel has historically fluctuated on a cyclical basis and has often
depended on a variety of factors over which the Company has no control. During
fiscal 2008 and the first nine months of fiscal 2009, the increase in demand for
steel in developing countries has driven steel prices up approximately 7% in
fiscal 2008 and 6% in the first nine months of fiscal 2009 and has extended lead
times. The cost of producing the Company's products is also sensitive to the
price of energy for which the Company has recently experienced increases. The
selling prices of the Company’s products have not always increased in response
to raw material, energy or other cost increases, and the Company is unable to
determine to what extent, if any, it will be able to pass future cost increases
through to its customers. Indeed, the Company has recently experienced
difficulty in passing along the increases in steel and energy costs to its major
customers. The Company's inability to pass increased costs through to its
customers could materially and adversely affect its financial condition or
results of operations.
Risks Related to Stock Market
Performance: Due to the recent reduction in value of
the Company's domestic defined benefit pension plan, a significant
(over 30%) drop in the stock market, even if short in duration, could cause the
plan to become temporarily underfunded and require the temporary
reclassification of prepaid pension cost on the balance sheet from an asset to a
contra equity account, thus reducing stockholders' equity and book value per
share. There would be a similar risk to the Company’s UK plan, which was
underfunded during fiscal 2007 and 2008.
Risks Related to Acquisitions:
Acquisitions, such as our acquisition of Tru-Stone in fiscal 2006 and
Kinemetrics in fiscal 2008, involve special risks, including, the potential
assumption of unanticipated liabilities and contingencies, difficulty in
assimilating the operations and personnel of the acquired businesses, disruption
of the Company’s existing business, dissipation of the Company’s limited
management resources, and impairment of relationships with employees and
customers of the acquired business as a result of changes in ownership and
management. While the Company believes that strategic acquisitions can improve
its competitiveness and profitability, the failure to successfully integrate and
realize the expected benefits of such acquisitions could have an adverse effect
on the Company’s business, financial condition and operating
results.
Risks Related to Investor
Expectations: The Company's operating results have fluctuated from
quarter to quarter in the past, and the Company expects that they will continue
to do so in the future. The Company's earnings may not grow and may fall short
of either a prior quarter or investors’ expectations. If the Company fails to
meet the expectations of securities analysts or investors, the Company's share
price may decline.
Risks Related to Information Systems:
The efficient operation of the Company's business is dependent on its
information systems, including its ability to operate them effectively and to
successfully implement new technologies, systems, controls and adequate disaster
recovery systems. In addition, the Company must protect the confidentiality of
data relating to its business, employees, customers and other third parties. The
failure of the Company's information systems to perform as designed or the
Company’s failure to implement and operate such systems effectively could
disrupt the Company's business or subject it to liability and thereby harm its
profitability.
Risks Related to Litigation and
Changes in Laws, Regulations and Accounting Rules: Various aspects of the
Company's operations are subject to federal, state, local or foreign laws, rules
and regulations, any of which may change from time to time. Generally accepted
accounting principles may change from time to time, as well. In addition, the
Company is regularly involved in various litigation matters that arise in the
ordinary course of business. Litigation, regulatory developments and changes in
accounting rules and principles could adversely affect the Company's business
operations and financial performance.
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds
A summary
of the Company's repurchases of shares of its common stock for the three months
ended March 28, 2009 is as follows:
ISSUER
PURCHASES OF EQUITY SECURITIES
|
Period
|
Shares
Purchased
|
Average
Price
|
Shares
Purchased Under Announced Programs
|
Shares
yet to be Purchased Under Announced Programs
|
12/27/2008
- 2/2/2009
|
none
|
-
|
none
|
none
|
2/3/2009
- 3/1/2009
|
2,000
|
8.09
|
2,000
|
none
|
3/2/2009
- 3/28/2009
|
9,400
|
6.22
|
9,400
|
none
|
Item
6. Exhibits
|
10.l
|
Second
Amendment dated as of April 28,1009 to the Company’s Amended and Restated
Credit Agreement, filed herewith.
|
|
31a
|
Certification
of Chief Executive Officer Pursuant to Rules 13a-15(e)/15(d)-15(e) and
13a-15(f)/15(d)-15(f).
|
|
31b
|
Certification
of Chief Financial Officer Pursuant to Rules 13a-15(e)/15(d)-15(e) and
13a-15(f)/15(d)-15(f).
|
|
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).
|
SIGNATURES
Pursuant
to the requirements 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)
|
|
|
|
|
|
|
|
|
Date
|
May
7, 2009
|
|
S/R.
J. Hylek
|
|
|
|
R.
J. Hylek (Treasurer and Chief Financial Officer)
|
|
|
|
|
Date
|
May
7, 2009
|
|
S/S.
R.J. Simkevich
|
|
|
|
R.J.
Simkevich (Corp. Controller/Chief Accounting
Officer)
|