Notes to Unaudited Consolidated Financial Statements
September 30, 2020
Note 1: Basis of Presentation and Summary of Significant Account Policies
The unaudited interim consolidated financial statements as of and for the three months ended September 30, 2020 have been prepared by The L.S. Starrett Company (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. These unaudited consolidated financial statements, which, in the opinion of management, reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation, should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2020. The balance as of June 30, 2020 has been derived from the audited consolidated financial statements as of and for the year ended June 30, 2020. Operating results are not necessarily indicative of the results that may be expected for any future interim period or for the entire fiscal year. The Company’s “fiscal year” begins July 1st and ends June 30th.
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 amounts reported in the consolidated financial statements and accompanying notes. Note 2 to the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the year ended June 30, 2020 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.
Throughout the COVID-19 pandemic crisis, the Company's main focus has been on protecting the health and well-being of it's employees, and the long-term financial health of the Company. As anticipated, the COVID-19 pandemic has had a negative impact on global sales. It remains very difficult for management to predict when this crisis will have reached its peak and when sales and order intake resume their pre-pandemic levels. Because of this remaining uncertainty, management has conducted several scenario planning exercises and is prepared to take additional necessary steps to preserve the longer-term financial health of the Company. To the extent that pandemic-related events do not provide evidence about conditions that existed at the balance-sheet date, the Company considers it necessary to disclose it cannot estimate all aspects of the impact on the financial statements as a result of COVID-19.
Note 2: Segment Information
The segment information and the accounting policies of each segment are the same as those described in the notes to the consolidated financial statements entitled “Financial Information by Segment & Geographic Area” included in our Annual Report on Form 10-K for the year ended June 30, 2020. The Company’s business is aggregated into two reportable segments based on geography of operations: North American Operations and International Operations. Segment income is measured for internal reporting purposes by excluding corporate expenses, which are included in the unallocated column in the table below. Other income and expense, including interest income and expense, and income taxes are excluded entirely from the table below.
There were no significant changes in the segment operations or in the segment assets from the Annual Report. Financial results for each reportable segment are as follows (in thousands):
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North
American
Operations
|
|
International
Operations
|
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Unallocated
|
|
Total
|
Three Months ended September 30, 2020
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|
|
|
|
|
|
|
|
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|
|
|
|
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Sales1
|
$
|
25,984
|
|
|
$
|
23,427
|
|
|
$
|
—
|
|
|
$
|
49,411
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
$
|
839
|
|
|
$
|
2,830
|
|
|
$
|
(1,834)
|
|
|
$
|
1,835
|
|
|
|
|
|
|
|
|
|
Three Months ended September 30, 2019
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|
|
|
|
|
|
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|
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|
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Sales2
|
$
|
31,009
|
|
|
$
|
21,105
|
|
|
$
|
—
|
|
|
$
|
52,114
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
$
|
2,206
|
|
|
$
|
1,163
|
|
|
$
|
(1,924)
|
|
|
$
|
1,445
|
|
1.Excludes $746 of North American segment intercompany sales to the International segment, and $2,786 of International segment intercompany sales to the North American segment.
2.Excludes $968 of North American segment intercompany sales to the International segment, and $4,242 of International segment intercompany sales to the North American segment.
Note 3: Revenue from Contracts with Customers
On July 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, and all the related amendments (“ASC Topic 606”), using the modified retrospective method. In addition, the Company elected to apply certain of the permitted practical expedients within the revenue recognition guidance and make certain accounting policy elections, including those related to significant financing components, sales taxes and shipping and handling activities. Most of the changes resulting from the adoption of ASC Topic 606 on July 1, 2018 were changes in presentation within the Unaudited Consolidated Balance Sheet. Therefore, while the Company made adjustments to certain opening balances on its July 1, 2018 Unaudited Consolidated Balance Sheet, the Company made no adjustment to opening Retained Earnings.
The core principle of ASC Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The application of the FASB’s guidance on revenue recognition requires the Company to recognize the amount of revenue and consideration that the Company expects to receive in exchange for goods and services transferred to our customers. To do this, the Company applies the five-step model prescribed by the FASB, which requires us to: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation.
The Company accounts for a contract or purchase order when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when control of the product passes to the customer, which is upon shipment, unless otherwise specified within the customer contract or on the purchase order as delivery, and is recognized at the amount that reflects the consideration the Company expects to receive for the products sold, including various forms of discounts. When revenue is recorded, estimates of returns are made and recorded as a reduction of revenue. Contracts with customers are evaluated to determine if there are separate performance obligations related to timing of product shipment that will be satisfied in different accounting periods. When that is the case, revenue is deferred until each performance obligation is met. No revenue was deferred as of September 30, 2020 and 2019. Purchase orders are of durations less than one year. As such, the Company applies the practical expedient in ASC paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, for which work has not yet been performed.
Certain taxes assessed by governmental authorities on revenue producing transactions, such as value added taxes, are excluded from revenue and recorded on a net basis.
Performance Obligations
The Company’s primary source of revenue is derived from the manufacture and distribution of metrology tools and equipment, saw blades and related products sold to distributors. The Company recognizes revenue for sales to our customers when transfer of control of the related good or service has occurred. All of the Company’s revenue was recognized under the point in time approach for the three months ended September 30, 2020 and 2019. Contract terms with certain metrology equipment customers could result in products and services being transferred over time as a result of the customized nature of some of the Company’s products, together with contractual provisions in the customer contracts that provide the Company with an enforceable right to payment for performance completed to date; however, under typical terms, the Company does not have the right to consideration until the time of shipment from its manufacturing facilities or distribution centers, or until the time of delivery to its customers. If certain contracts in the future provide the Company with this enforceable right of payment, the timing of revenue recognition from products transferred to customers over time may be slightly accelerated compared to the Company’s right to consideration at the time of shipment or delivery.
The Company’s typical payment terms vary based on the customer, geographic region, and the type of goods and services in the contract or purchase order. The period of time between invoicing and when payment is due is typically not significant. Amounts billed and due from the Company’s customers are classified as accounts receivables on the Consolidated Balance Sheets. As the Company’s standard payment terms are usually less than one year, the Company has elected the practical expedient under ASC paragraph 606-10-32-18 to not assess whether a contract has a significant financing component.
The Company’s customers take delivery of goods, and they are recognized as revenue at the time of transfer of control to the customer, which is usually at the time of shipment, unless otherwise specified in the customer contract or purchase order. This determination is based on applicable shipping terms, as well as the consideration of other indicators, including timing of when the Company has a present right to payment, when physical possession of products is transferred to customers, when the customer has the asset, and provisions in contracts regarding customer acceptance.
While unit prices are generally fixed, the Company provides variable consideration for certain customers, typically in the form of promotional incentives at the time of sale. The Company utilizes the most likely amount to estimate the effect of uncertainty on the amount of variable consideration to which the Company would be entitled. The most likely amount method considers the single most likely amount from a range of possible consideration amounts. The most likely amounts are based upon the contractual terms of the incentives and historical experience with each customer. The Company records estimates for cash discounts, promotional rebates, and other promotional allowances in the period the related revenue is recognized (“Customer Credits”). The provision for Customer Credits is recorded as a reduction from gross sales and reserves for Customer Credits are presented within accrued expenses on the Consolidated Balance Sheets. Actual Customer Credits have not differed materially from estimated amounts for each period presented. Amounts billed to customers for shipping and handling are included in net sales and costs associated with shipping and handling are included in cost of sales. The Company has concluded that its estimates of variable consideration are not constrained according to the definition within the new standard. Additionally, the Company applies the practical expedient in ASC paragraph 606-10-25-18B and accounts for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment activity, rather than a separate performance obligation.
Under ASC Topic 606, the Company is required to present a refund liability and a return asset within the Unaudited Consolidated Balance Sheet. As of September 30, 2020, and June 30, 2020, the balance of the return asset is $0.1 million and was $0.1 million and the balance of the refund liability is $0.2 million and was $0.2 million. They are presented within prepaid expenses and other current assets and accrued expenses, respectively, on the Consolidated Balance Sheets.
The Company, in general, warrants its products against certain defects in material and workmanship when used as designed, for a period of up to 1 year. The Company does not sell extended warranties.
Contract Balances
Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date on contracts with customers. Contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been met, and therefore, revenue has not been recognized. The Company had no contract asset balances, but had
contract liability balances of $0.4 million and $0.4 million at September 30, 2020 and June 30, 2020 located in Accounts Payable in the Consolidated Balance Sheets.
Disaggregation of Revenue
The Company operates in two reportable segments: North America and International. ASC Topic 606 requires further disaggregation of an entity’s revenue. In the following table, the Company's net sales by shipping origin are disaggregated accordingly for the three months ended September 30, 2020 and 2019 (in thousands):
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Three Months Ended
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|
|
|
09/30/2020
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|
09/30/2019
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|
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North America
|
|
|
|
|
|
|
|
United States
|
$
|
24,337
|
|
|
$
|
28,624
|
|
|
|
|
|
Canada & Mexico
|
1,647
|
|
|
2,385
|
|
|
|
|
|
|
25,984
|
|
|
31,009
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
Brazil
|
14,908
|
|
|
12,822
|
|
|
|
|
|
United Kingdom
|
4,995
|
|
|
5,231
|
|
|
|
|
|
China
|
1,581
|
|
|
1,514
|
|
|
|
|
|
Australia & New Zealand
|
1,943
|
|
|
1,538
|
|
|
|
|
|
|
23,427
|
|
|
21,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
$
|
49,411
|
|
|
$
|
52,114
|
|
|
|
|
|
Note 4: Recent Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement ('Topic 820'): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." The ASU modifies the disclosure requirements in Topic 820, Fair Value Measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The adoption in fiscal 2020 of this standard did not have a material impact on the Company’s financial position and results of operations upon adoption.
Recently Issued Accounting Standards not yet adopted:
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and subsequent amendment to the guidance, ASU 2018-19 in November 2018. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. The amendment will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2018-19 clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption was permitted for annual periods beginning after December 15, 2018, and interim periods therein. This pronouncement was extended for Small Reporting Companies and for the Company until 2023. The Company is currently assessing the effect, if any, that ASU 2018-14 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." ASU 2018-14
removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and added additional disclosures. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2020. The amendments in ASU 2018-14 must be applied on a retrospective basis. The Company is currently assessing the effect, if any, that ASU 2018-14 will have on its consolidated financial statements.
Note 5: Leases
Operating lease cost amounted to $0.6 million and $0.6 million for three months period ended September 30, 2020 and 2019. As of September 30, 2020, the Company’s right-of-use assets, lease obligations and remaining cash commitment on these leases (in thousands):
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|
|
|
|
|
|
|
|
|
Right-of-Use
Assets
|
|
Operating Lease
Obligations
|
|
Remaining Cash
Commitment
|
Operating leases
|
$
|
4,213
|
|
|
$
|
4,323
|
|
|
$
|
5,080
|
|
The Company has other operating lease agreements with commitments of less than one year or that are not significant. The Company elected the practical expedient option and as such, these lease payments are expensed as incurred. The Company’s weighted average discount rate and remaining term on lease liabilities is approximately 9.0% and 4.0 years. As of September 30, 2020, the Company’s financing leases are de minimis. The foreign exchange impact affecting the operating leases are de minimis.
The Company entered into $0.1 million in operating lease commitments during the three months ended September 30, 2020. At September 30, 2020, the Company had the following fiscal year minimum operating lease commitments (in thousands)
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|
|
|
|
|
Three months ended September 30, 2020
|
Operating Lease
Commitments
|
2021 (Remainder of year)
|
$
|
1,757
|
|
2022
|
1,051
|
|
2023
|
740
|
|
2024
|
707
|
|
2025
|
349
|
|
Thereafter
|
476
|
|
Subtotal
|
$
|
5,080
|
|
Imputed interest
|
(757)
|
|
Total
|
4,323
|
|
Note 6: Stock-based Compensation
On September 5, 2012, the Board of Directors adopted The L.S. Starrett Company 2012 Long Term Incentive Plan (the “2012 Stock Plan”). The 2012 Stock Plan was approved by shareholders on October 17, 2012, and the material terms of its performance goals were re-approved by shareholders at the Company’s Annual Meeting held on October 18, 2017. The 2012 Stock Plan permits the granting of the following types of awards to officers, other employees and non-employee directors: stock options; restricted stock awards; unrestricted stock awards; stock appreciation rights; stock units including restricted stock units; performance awards; cash-based awards; and awards other than previously described that are convertible or otherwise based on stock. The 2012 Stock Plan provides for the issuance of up to 500,000 shares of common stock.
Options granted vest in periods ranging from one year to three years and expire ten years after the grant date. Restricted stock units (“RSU”) granted generally vest from one year to three years. Vested restricted stock units will be settled in shares of common stock. As of September 30, 2020, there were 9,000 stock options and 360,134 restricted stock units outstanding. There were 13,233 shares available for grant under the 2012 Stock Plan as of September 30, 2020.
For stock option grants, the fair value of each grant is estimated at the date of grant using the Binomial Options pricing model. The Binomial Options pricing model utilizes assumptions related to stock volatility, the risk-free interest rate, the dividend
yield, and employee exercise behavior. Expected volatilities utilized in the model are based on the historic volatility of the Company’s stock price. The risk-free interest rate is derived from the U.S. Treasury Yield curve in effect at the time of the grant. The expected life is determined using the average of the vesting period and contractual term of the options (Simplified Method).
No stock options were granted during the three months ended September 30, 2020 and 2019.
The weighted average contractual term for stock options outstanding as of September 30, 2020 was 2.25 years. The aggregate intrinsic value of stock options outstanding as of September 30, 2020 was less than $0.1 million. Stock options exercisable as of September 30, 2020 were 20,000 shares. In recognizing stock compensation expense for the 2012 Stock Incentive Plan, management has estimated that there will be no forfeitures of options.
The Company accounts for stock options and RSU awards by recognizing the expense of the grant date fair value ratably over vesting periods generally ranging from one year to three years. The related expense is included in selling, general and administrative expenses.
There were 289,800 RSU awards with a fair value of $3.37 per RSU granted during the three months ended September 30, 2020. There were no RSUs settled, and no RSUs forfeited during the three months ended September 30, 2020. The aggregate intrinsic value of RSU awards outstanding as of September 30, 2020 was $1.1 million. All awards vesting in the quarter ending of September 30, 2020 are expected to be issued in the quarter ending December 31, 2020.
On February 5, 2013, the Board of Directors adopted The L.S. Starrett Company 2013 Employee Stock Ownership Plan (the “2013 ESOP”). The purpose of the plan is to supplement existing Company programs through an employer funded individual account plan dedicated to investment in common stock of the Company, thereby encouraging increased ownership of the Company while providing an additional source of retirement income. The plan is intended as an employee stock ownership plan within the meaning of Section 4975 (e) (7) of the Internal Revenue Code of 1986, as amended. U.S. employees who have completed a year of service are eligible to participate.
Compensation expense related to all stock-based plans for the three-month periods ended September 30, 2020 and 2019 was $0.3 million, and $0.1 million respectively. As of September 30, 2020, there was $2.7 million of total unrecognized compensation costs related to outstanding stock-based compensation arrangements. Of this cost, $1.7 million relates to performance based RSU grants that are not expected to be awarded. The remaining $1.0 million is expected to be recognized over a weighted average period of 2.2 years.
Note 7: Inventories
Inventories consist of the following (in thousands):
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|
|
|
|
|
|
09/30/2020
|
|
06/30/2020
|
Raw material and supplies
|
$
|
30,066
|
|
|
$
|
26,255
|
|
Goods in process and finished parts
|
13,890
|
|
|
13,694
|
|
Finished goods
|
31,168
|
|
|
37,579
|
|
|
75,124
|
|
|
77,528
|
|
LIFO Reserve
|
(25,048)
|
|
|
(24,541)
|
|
|
$
|
50,076
|
|
|
$
|
52,987
|
|
Of the Company’s $50.1 million and $53.0 million total inventory at September 30, 2020 and June 30, 2020, respectively, the $25.0 million and $24.5 million LIFO reserves belong to the U.S. Precision Tools and Saws Manufacturing “Core U.S.” business. The Core U.S. business total inventory was $31.9 million on a FIFO basis and $6.9 million on a LIFO basis at September 30, 2020. The Core U.S. business had total Inventory, on a FIFO basis, of $33.1 million and $8.6 million on a LIFO basis as of June 30, 2020. The use of LIFO, as compared to FIFO, resulted in a $0.5 million increase in cost of sales for the goods sold in the period ending September 30, 2020 compared to a de minimis change in the three months ending September 30, 2019.
Note 8: Goodwill and Intangible Assets
The Company’s acquisition of Bytewise in 2011 and a private software company in 2017 resulted in the recognition of goodwill totaling $4.7 million. During the fourth quarter of fiscal year 2020 the Company, considering the COVID-19 pandemic a triggering event for the private software company and Bytewise due to a drop in sales, tested impairment of intangible assets according to ASC 360 "Property, Plant and Equipment" and determined the carrying value was deemed to be recoverable at Bytewise but not at the private software company where the impairment of intangibles was calculated. The Company concluded that Intangible Assets of the private software company were impaired $2.9 million.
The Company then, according to ASC 350 Intangibles -Goodwill and Other, conducted a step one analysis performed based on the update carrying value for each reporting unit. Goodwill was determined to be impaired $0.6 million at the private software company and Goodwill of $3.0 million was impaired at the Bytewise reporting unit as of June 30, 2020. As a result, the balance of Goodwill at Bytewise is zero and $1.0 million at the private software company as of September 30, 2020.
The Company will continue to perform an annual assessment of goodwill associated with its purchase of a private software company. If future results significantly vary from current estimates, related projections, or business assumptions due to changes in industry or market conditions, the Company may be required to perform an impairment analysis prior to our annual test date if a triggering event is identified. As of September 30, 2020, we did not identify a triggering event.
Amortizable intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
09/30/2020
|
|
6/30/2020
|
Trademarks and trade names
|
2,070
|
|
|
2,070
|
|
Completed technology
|
2,010
|
|
|
2,010
|
|
Customer relationships
|
630
|
|
|
630
|
|
Software development
|
9,696
|
|
|
9,445
|
|
|
|
|
|
Total
|
14,406
|
|
|
14,155
|
|
Accumulated amortization
|
(9,458)
|
|
|
(6,316)
|
|
Intangibles impairment
|
$
|
—
|
|
|
$
|
(2,842)
|
|
Total net balance
|
$
|
4,948
|
|
|
$
|
4,997
|
|
Amortizable intangible assets are being amortized on a straight-line basis over the period of expected economic benefit.
The estimated useful lives of the intangible assets subject to amortization range between 5 years for software development and 20 years for some trademark and trade name assets. The estimated aggregate amortization expense for the remainder of fiscal 2021 and for each of the next five years and thereafter, is as follows (in thousands):
|
|
|
|
|
|
2021 (Remainder of year)
|
$
|
1,071
|
|
2022
|
1,212
|
|
2023
|
978
|
|
2024
|
707
|
|
2025
|
547
|
|
2026
|
204
|
|
Thereafter
|
229
|
|
Total net balance
|
$
|
4,948
|
|
Note 9: Pension and Post-retirement Benefits
The Company has two defined benefit pension plans, one for U.S. employees and another for U.K. employees. The Company has a postretirement medical and life insurance benefit plan for U.S. employees. The Company also has defined contribution plans.
The U.K. defined benefit plan was closed to new entrants in fiscal 2009.
On December 21, 2016, the Company amended the U.S. defined benefit pension plan to freeze benefit accruals effective December 31, 2016. Consequently, the Plan is closed to new participants and current participants will no longer earn additional benefits after December 31, 2016.
Net periodic benefit costs for the Company's defined benefit pension plans are located in Other Income except (in the table below) for service cost. Service cost are in cost of sales and selling, general and administrative. Net periodic benefit costs consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
09/30/2020
|
|
09/30/2019
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Interest cost
|
1,113
|
|
|
1,349
|
|
|
|
|
|
Expected return on plan assets
|
(1,108)
|
|
|
(1,294)
|
|
|
|
|
|
Amortization of net loss
|
13
|
|
|
10
|
|
|
|
|
|
|
$
|
18
|
|
|
$
|
65
|
|
|
|
|
|
Net periodic benefit costs for the Company's Postretirement Medical Plan consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
09/30/2020
|
|
09/30/2019
|
|
|
|
|
Service cost
|
$
|
21
|
|
|
$
|
18
|
|
|
|
|
|
Interest cost
|
51
|
|
|
60
|
|
|
|
|
|
Amortization of prior service credit
|
(134)
|
|
|
(134)
|
|
|
|
|
|
Amortization of net loss
|
42
|
|
|
21
|
|
|
|
|
|
|
$
|
(20)
|
|
|
$
|
(35)
|
|
|
|
|
|
For the three month period ended September 30, 2020, the Company contributed $1.3 million in the U.S. and $0.2 million in the UK pension plans. The Company estimates that it will contribute an additional $6.4 million for the remainder of fiscal 2021.
The Company’s pension plans use fair value as the market-related value of plan assets and recognize net actuarial gains or losses in excess of ten percent (10)% of the greater of the market-related value of plan assets or of the plans’ projected benefit obligation in net periodic (benefit) cost as of the plan measurement date. Net actuarial gains or losses that are less than 10% of the thresholds noted above are accounted for as part of accumulated other comprehensive loss.
Note 10: Debt
Debt is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
09/30/2020
|
|
06/30/2020
|
Short-term and current maturities
|
|
|
|
Loan and Security Agreement (Term Loan)
|
1,376
|
|
|
597
|
|
Brazil Loans
|
4,229
|
|
|
3,935
|
|
|
5,605
|
|
|
4,532
|
|
Long-term debt (net of current portion)
|
|
|
|
Loan and Security Agreement (Term Loan)
|
8,624
|
|
|
5,941
|
|
Loan and Security Agreement (Line of Credit)
|
12,603
|
|
|
20,400
|
|
|
21,227
|
|
|
26,341
|
|
|
$
|
26,832
|
|
|
$
|
30,873
|
|
On June 25, 2020, the Borrowers and TD Bank entered into an amendment and restatement (the “Amendment and Restatement”) of the Loan Agreement. The Amendment and Restatement waived the fixed charge coverage ratio for the quarter ended June 30, 2020. In addition, the Amendment and Restatement clarifies that certain non-cash adjustments to the
definition of EBITDA are permitted under the Loan Agreement, as amended. In addition, the Amendment and Restatement increases the permitted borrowings from a foreign bank from $5.0 million to $15.0 million and permits the Company to draw the remainder of the outstanding balance under the Loan Agreement.
Pursuant to the terms of the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of the Fixed Charge Coverage Ratio until September 30, 2021 and (ii) establishment of a new minimum cumulative EBITDA and minimum liquidity covenants in lieu thereof. TD Bank updated its security interests in the Company’s U.S. based assets, increased the maximum interest charged on the Line Of Credit from and annual interest rate of 2.25% plus Libor to 3.50% plus Libor, and amended the borrowing base for the line of credit from 80% of Qualified AR and 50% of the lower of Cost or Market of US inventory values to 80% of qualified AR plus 85% of the Net Orderly Liquidation Value (NOLV) of US Inventory plus 62.5% of total appraised US real estate values. As a result of this change, the Company is projected to maintain its current borrowing capacity of $25,000,000 under the Line of Credit. The Company underwent a series of appraisals and field exams in all US locations as part of restructuring this agreement and will provide additional reporting supporting the borrowing base and covenants certifications. This minimum adjusted EBITDA covenant is based on the Company’s plan for a slow pandemic recovery throughout FY21 and the impact of the Company’s restructuring plan initiatives. The Company will apply certain proceeds from the sale of US real estate assets against the principle balance of the term loans under the TD Bank loan agreement. The Agreement will revert to the existing covenant package for the quarter ending September 30, 2021 and every quarter thereafter. The Company was compliant with the minimum liquidity requirement and the minimum adjusted cumulative EBITDA required bank covenants as of September 30, 2020.
On December 31, 2019, the Company entered into the Tenth Amendment of its Loan and Security Agreement (“Tenth Amendment”). Under the revised agreement, the credit limit for the Revolving Loan was increased from $23.0 million to $25.0 million. In addition, the Company entered into a new $10.0 million 5-year Term Loan with a fixed interest rate of 4.0%. The new Term Loan will require interest only payments for 12 months and will convert to a term loan requiring both interest and principal payments commencing January 1, 2021. Also, under the Tenth Amendment, the credit limit for external borrowing was increased from $2.5 million to $5.0 million.
Total debt decreased $4.0 million during the three months ending September 30, 2020. Availability under the Line of Credit remains subject to a borrowing base comprised of accounts receivable and inventory. The Company believes that the borrowing base will consistently produce availability under the Line of Credit of $25.0 million. A 0.25% commitment fee is charged on the unused portion of the Line of Credit.
The Company’s Brazilian subsidiary incurs short-term loans with local banks in order to support the Company’s strategic initiatives. The loans are backed by the entity’s US dollar denominated export receivables. The Company’s Brazilian subsidiary has the following loans of September 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending Institution
|
Interest Rate
|
|
Beginning Date
|
|
Ending Date
|
|
Outstanding Balance
|
|
|
|
|
|
|
|
|
Brazil Bank
|
3.10
|
%
|
|
February 2020
|
|
February 2021
|
|
$
|
310
|
|
Brazil Bank
|
2.40
|
%
|
|
March 2020
|
|
February 2021
|
|
300
|
|
Brazil Bank
|
6.05
|
%
|
|
March 2020
|
|
February 2021
|
|
688
|
|
Bradesco
|
5.18
|
%
|
|
May 2020
|
|
May 2021
|
|
1,000
|
|
Brazil Bank
|
4.30
|
%
|
|
September 2020
|
|
August 2021
|
|
1,000
|
|
Santander
|
8.12
|
%
|
|
April 2020
|
|
April 2021
|
|
931
|
|
|
|
|
|
|
|
|
$
|
4,229
|
|
Note 11: Income Taxes
The Company is subject to U.S. federal income tax and various state, local, and foreign income taxes in numerous jurisdictions. The Company’s domestic and foreign 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 provides for income taxes on an interim basis based on an estimate of the effective tax rate for the year. This estimate is reassessed on a quarterly basis. Discrete tax items are accounted for in the quarterly period in which they occur.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted in the United States. The Act reduces the U.S. federal corporate tax rate from a graduated rate of 35% to a flat rate of 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Beginning in fiscal 2019, the Company incorporated certain provisions of the Act in the calculation of the tax provision and effective tax rate, including the provisions related to the Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Base Erosion Anti Abuse Tax (“BEAT”), as well as other provisions, which limit tax deductibility of expenses.
The GILTI provisions are expected to have the most significant impact to the Company. Under the new law, U.S. taxes are imposed on foreign income in excess of a deemed return on tangible assets of its foreign subsidiaries. In general, this foreign income will effectively be taxed at an additional 10.5% tax rate reduced by any available current year foreign tax credits. The ability to benefit foreign tax credits may be limited under the GILTI rules as a result of the utilization of net operating losses, foreign sourced income and other potential limitations within the foreign tax credit calculation.
In July 2020, the IRS issued final regulations and additional proposed regulations that address the application of the high-taxed exclusion from GILTI. Under these regulations, the Company can make an annual election to exclude from its GILTI inclusion, income from its foreign subsidiaries that’s effective income tax rate exceeds 18.9% for that year. The regulations must be applied for tax years beginning after July 23, 2020 but companies have the option to apply retroactively for tax years beginning after December 31, 2017 and before July 23, 2020. In the first quarter of fiscal 2021 the Company recognized a discrete tax benefit of ($2.7) million related to the impact of electing to apply the high-tax exclusion retroactively for fiscal year 2019 and fiscal year 2020.
The tax expense for the first quarter of fiscal 2021 was a benefit of ($2.3) million on a profit before tax of $1.8 million (an effective tax rate of (124)%). Before the discrete benefits relating to legislation enacted during the first quarter in the amount of ($2.7) million related to the impact of the GILTI high-tax exclusion and ($0.2) million related to the impact of the increase in UK corporate tax rate on the net deferred tax asset, tax expense was $0.7 million or 36% of pre-tax income. This was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%, offset by tax credits and permanent deductions generated from research expenses. The tax expense for the first quarter of fiscal 2020 was $0.5 million on a profit before tax of $1.3 million (an effective tax rate of 39%). The tax rate for fiscal 2020 was higher than the U.S. statutory tax rate of 21% primarily due to the GILTI provisions, and the jurisdictional mix of earnings, particularly Brazil with a statutory rate of 34%. The first quarter of fiscal 2020 also includes a discrete tax expense of $0.1 million relating to adjustments to the fourth quarter of fiscal 2019 balances.
U.S. Federal tax returns for years prior to fiscal 2017 are generally no longer subject to review by tax authorities; however, tax loss carryforwards from earlier years are still subject to adjustment. As of September 30, 2020, the Company has substantially resolved all open income tax audits and there were no other local or federal income tax audits in progress. In international jurisdictions including Australia, Brazil, Canada, China, Germany, Mexico, New Zealand, Singapore and the UK, which comprise a significant portion of the Company’s operations, the years that may be examined vary by country. The Company’s most significant foreign subsidiary in Brazil is subject to audit for the calendar years 2015 – present. During the next twelve months, it is possible there will be a reduction of $0.1 million in long-term tax obligations due to the expiration of the statute of limitations on prior year tax returns.
Accounting for income taxes requires estimates of future benefits and tax liabilities. Due to the temporary differences in the timing of 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, the Company assesses the likelihood that the asset will be realized by addressing the positive and negative evidence to determine whether realization is more likely than not to occur. If realization is in doubt because of uncertainty regarding future profitability, the Company provides a valuation allowance related to the asset to the extent that it is more likely than not that the deferred tax asset will not be realized. Should any significant changes in the tax law or the estimate of the necessary valuation allowance occur, the Company would record the impact of the change, which could have a material effect on the Company’s financial position.
No valuation allowance has been recorded for the Company’s U.S. federal and foreign deferred tax assets related to temporary differences included in taxable income. While the Company continues to believe that forecasted future taxable income provide sufficient evidence to, more likely than not, support the realization of the tax benefits provided by those differences; the impact of COVID-19 may significantly impact its ability to forecast future pre-tax earnings in certain jurisdictions. If its forecasts are significantly impacted, the Company may need to record a valuation allowance on some or all its deferred tax assets as soon as the current fiscal year end.
In the U.S., a partial valuation allowance has been provided for foreign tax credit carryforwards due to the uncertainty of generating sufficient foreign source income to utilize those credits in the future and certain state net operating loss carryforwards that will expire in the near future unutilized.
Note 12: Contingencies
The Company is involved in certain legal matters, which arise, in the normal course of business. These matters are not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.
Note 13: Restructuring
In June 2020, the Company recorded a $1.6 million restructuring charge of which $1.0 million remained in the accrual at fiscal 2020 year end. In the three months ending September 30, 2020, $0.3 million of restructuring cost were charged as a period expense and $0.3 million was charge against the accrual. The remaining balance of the accrual at September 30, 2020 was $0.7 million, plus the Company expects to charge an addition $2.0 million in the period those cost are incurred in fiscal year 2021.
The Company decided in January 2018 to vacate its facility in Mt. Airy, North Carolina, and move current operations to a smaller company owned building. The Company is also considering selling the facility with a lease back provision to accommodate remaining operations. While there are no definitive plans set yet, the Company still anticipates that the sale could happen within the current fiscal year, yet based on past experience, the immediate sale is not probable.
As of September 30, 2020, the carrying value of the building is $2.0 million, and based on comparable sales data sourced from the Company’s real estate agent, the Company believes that the current fair value of the building exceeds its carrying value.
Note 14: Subsequent Events
On October 1, 2020, The L. S. Starrett Company (the “Company”) was notified (the “Notice”) by the New York Stock Exchange (the “NYSE”) that it was not in compliance with the continued listing standard set forth in Section 802.01B of the NYSE Listed Company Manual because the Company’s average market capitalization was less than $50 million over a consecutive 30 trading-day period and the stockholders’ equity of the Company was less than $50 million.
The Company notified the NYSE that it intends to submit a plan to cure this deficiency and return to compliance with the NYSE continued listing requirements. In order to avoid delisting under Section 802.01B, the Company has 45 days from the receipt of the Notice to submit a business plan advising the NYSE of definitive actions the Company has taken, or proposes to take, that would bring it into compliance with the market capitalization listing standards on or before April 1, 2022 (the “Cure Period”). The Company has prepared and will submit a plan on or before November 15, 2020, and stockholder's equity had already exceeded the $50.0 million minimum threshold with the quarter ending September 30, 2020. If the NYSE accepts the plan, the Company’s common stock will continue to be listed and traded on the NYSE during the Cure Period, subject to the Company’s compliance with other continued listing standards, and the Company will be subject to quarterly monitoring by the NYSE for compliance with the plan.
The Notice has no immediate impact on the listing of the Company’s common stock, which will continue to be listed and traded on the NYSE during the Plan Period, subject to the Company’s compliance with the other listing requirements of the NYSE. The Company’s common stock will continue to trade under the symbol “SCX,” but will have an added designation of “.BC” to indicate that the Company is not currently in compliance with NYSE continued listing standards.
On October 7, 2020, our information technology (“IT”) systems were exposed to a ransomware attack, which partially impaired certain IT systems for a short period of time. We are investigating the incident, together with legal counsel and other incident response professionals. We do not believe that we have experienced any material losses related to the ransomware attack and were able to recover all material data. Please see Item 1A - Risk Factors for additional information.