STARRETT L S CO [SCX] Filings

10-Q 1 scx-20221231.htm 10-Q scx-20221231

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


			For the quarterly period ended			December 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


			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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common - $1.00 Per Share Par Value	SCX	New York Stock Exchange
Class B Common - $1.00 Per Share Par Value	Not applicable	Not applicable

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.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):

Large Accelerated Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting Company ☒

Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒


Common Shares outstanding as of						January 17, 2023
Class A Common Shares						6,804,246
Class B Common Shares						622,645

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, our clinical results and other future conditions. The words “anticipate”, “believe”, “contemplate”, “continue”, “could”, “estimate”, “expect”, “forecast”, “goal”, “intend”, “may”, “plan”, “potential”, “predict”, “project”, “should”, “target”, “will”, “would”, or the negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed in our Annual Report on Form 10-K and other filings with the Securities Exchange Commission (the “SEC”). You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results set forth under Item 1A. “Risk Factors” in our Form 10-K for the year ended June 30, 2022.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or collaborations or strategic partnerships we may enter into. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

THE L. S. STARRETT COMPANY

CONTENTS


			Page No.

Part I.	Financial Information:

	Item 1.	Financial Statements	2

		Condensed Consolidated Balance Sheets – December 31, 2022 (unaudited) and June 30, 2022	4

		Condensed Consolidated Statements of Operations (unaudited) – three and six months ended December 31, 2022 and December 31, 2021	6

		Condensed Consolidated Statements of Comprehensive Income (Loss), (unaudited) – three and six months ended December 31, 2022 and December 31, 2021	7

		Condensed Consolidated Statements of Stockholders' Equity (unaudited) – three and six months ended December 31, 2022 and December 31, 2021	8

		Condensed Consolidated Statements of Cash Flows (unaudited) - six months ended December 31, 2022 and December 31, 2021	9

		Notes to Unaudited Condensed Consolidated Financial Statements	10-18

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

	Item 4.	Controls and Procedures	24

Part II.	Other Information:

	Item 1A.	Risk Factors	25

	Item 6.	Exhibits	26

SIGNATURES			27

THE L. S. STARRETT COMPANY

Condensed Consolidated Balance Sheets

(in thousands except share data)

(unaudited)


	12/31/2022		06/30/2022
ASSETS
Current assets:
Cash	$	8,957	$	14,523
Accounts receivable (less allowance for credit losses of $806 and $796, respectively)	38,151		42,961
Inventories	70,088		66,900
Prepaid expenses and other current assets	9,727		8,669
Total current assets	126,923		133,053

Property, plant and equipment, net	38,121		37,116
Right of use assets	5,379		5,540

Deferred tax assets, net	13,943		14,924
Intangible assets, net	4,450		4,640
Goodwill	1,015		1,015
Other assets	3,280		3,266
Total assets	$	193,111	$	199,554

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt	$	5,259	$	6,547
Current lease liability	2,025		1,530
Accounts payable	13,017		14,624
Accrued expenses	10,335		11,776
Accrued compensation	4,697		6,703
Total current liabilities	35,333		41,180

Other tax obligations	2,974		2,936
Long-term lease liability	3,529		4,166
Long-term debt, net of current portion	20,313		24,905
Postretirement benefit and pension obligations	23,052		23,938
Total liabilities	85,201		97,125

Stockholders' equity:
Class A Common stock $1 par 20,000,000 shares authorized; 6,802,549 outstanding at December 31, 2022 and 6,682,521 outstanding at June 30, 2022)	6,803		6,683
Class B Common stock $1 par (10,000,000 shares authorized; 624,321 outstanding at December 31, 2022 and 610,087 outstanding at June 30, 2022	624		610
Additional paid-in capital	57,454		57,143
Retained earnings	94,246		89,059
Accumulated other comprehensive loss	(51,217)		(51,066)
Total stockholders' equity	107,910		102,429
Total liabilities and stockholders’ equity	$	193,111	$	199,554

See Notes to Unaudited Condensed Consolidated Financial Statements

THE L. S. STARRETT COMPANY

Condensed Consolidated Statements of Operations

(in thousands except per share data)

(unaudited)


	3 Months Ended						6 Months Ended
	12/31/2022			12/31/2021			12/31/2022			12/31/2021

Net sales	$	66,775		$	61,318		$	127,236		$	122,832
Cost of goods sold	45,199			42,368			85,460			83,737
Gross profit	21,576			18,950			41,776			39,095
% of Net sales	32.3		%	30.9		%	32.8		%	31.8		%

Restructuring charges	54			—			244			—
Selling, general and administrative expenses	15,561			14,749			31,855			30,762

Operating income	5,961			4,201			9,677			8,333

Other (expense), net	(1,121)			(662)			(1,797)			(436)

Income before income taxes	4,840			3,539			7,880			7,897

Income tax expense	1,709			1,011			2,693			2,137

Net income	$	3,131		$	2,528		$	5,187		$	5,760


Basic income per share	$	0.42		$	0.35		$	0.71		$	0.80
Diluted income per share	$	0.42		$	0.34		$	0.69		$	0.77

Weighted average outstanding shares used in per share calculations:
Basic	7,405			7,243			7,354			7,185
Diluted	7,541			7,492			7,511			7,473

See Notes to Unaudited Condensed Consolidated Financial Statements

THE L. S. STARRETT COMPANY

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)


	3 Months Ended				6 Months Ended
	12/31/2022		12/31/2021		12/31/2022		12/31/2021

Net income	$	3,131	$	2,528	$	5,187	$	5,760
Other comprehensive income (loss):
Currency translation gain (loss), net of tax	2,716		(871)		(90)		(4,482)
Pension and postretirement plans, net of tax	(36)		(67)		(61)		(133)
Other comprehensive income (loss)	2,680		(938)		(151)		(4,615)

Total comprehensive income	$	5,811	$	1,590	$	5,036	$	1,145

See Notes to Unaudited Condensed Consolidated Financial Statements

THE L. S. STARRETT COMPANY

Condensed Consolidated Statements of Stockholders' Equity

(in thousands) (unaudited)

For the Three and Six-Month Period Ended December 31, 2022:


	Common Stock Outstanding				Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total
	Class A		Class B

Balance June 30, 2022	$	6,683	$	610	$	57,143	$	89,059	$	(51,066)	$	102,429
Total comprehensive income (loss)	—		—		—		2,056		(2,831)		(775)
Repurchase of shares	—		(1)		(5)		—		—		(6)
Stock-based compensation	76		—		109		—		—		185
Conversion	12		(12)		—		—		—		—
Balance September 30, 2022	$	6,771	$	597	$	57,247	$	91,115	$	(53,897)	$	101,833

Total comprehensive income	—		—		—		3,131		2,680		5,811
Repurchase of shares	—		—		(3)		—		—		(3)
Issuance of stock	—		34		50		—		—		84
Stock-based compensation	25		—		160		—		—		185
Conversion	7		(7)		—		—		—		—
Balance December 31, 2022	$	6,803	$	624	$	57,454	$	94,246	$	(51,217)	$	107,910

Accumulated balance consists of:
Translation loss									$	(60,166)
Pension and postretirement plans, net of taxes									8,949
									$	(51,217)

For the Three and Six-Month Period Ended December 31, 2021:


	Common Stock Outstanding				Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total
	Class A		Class B

Balance June 30, 2021	$	6,475	$	634	$	56,507	$	74,181	$	(54,262)	$	83,535
Total comprehensive income (loss)	—		—		—		3,232		(3,677)		(445)
Repurchase of shares	—		(2)		(14)		—		—		(16)
Stock-based compensation	119		—		55		—		—		174
Conversion	25		(25)		—		—		—		—
Balance September 30, 2021	$	6,619	$	607	$	56,548	$	77,413	$	(57,939)	$	83,248

Total comprehensive income (loss)	—		—		—		2,528		(938)		1,590
Repurchase of shares	—		—		(7)		—		—		(7)
Issuance of stock	7		8		102		—		—		117
Stock-based compensation	11		—		226		—		—		237
Conversion	7		(7)		—		—		—		—
Balance December 31, 2021	$	6,644	$	608	$	56,869	$	79,941	$	(58,877)	$	85,185








Accumulated balance consists of:
Translation loss									$	(60,528)
Pension and postretirement plans, net of taxes									1,651
									$	(58,877)

See Notes to Unaudited Condensed Consolidated Financial Statements

THE L. S. STARRETT COMPANY

Condensed Consolidated Statements of Cash Flows

(in thousands) (unaudited)


	6 Months Ended
	12/31/2022		12/31/2021

Cash flows from operating activities:

Net income	$	5,187	$	5,760

Non-cash operating activities:
Depreciation	2,585		2,567
Amortization	720		660
Stock-based compensation	370		411
Net long-term tax obligations	91		86
Deferred taxes	977		305
Postretirement benefit and pension obligations	314		(706)
Working capital changes:
Accounts receivable	4,530		(1,619)
Inventories	(3,307)		(6,002)
Other current assets	(1,098)		(1,063)
Other current liabilities	(4,818)		(3,767)
Prepaid pension expense	(1,147)		(2,071)
Other	70		872
Net cash provided by (used in) operating activities	4,474		(4,567)

Cash flows from investing activities:
Purchases of property, plant and equipment	(3,713)		(4,457)
Software development	(477)		(533)
Net cash (used in) investing activities	(4,190)		(4,990)

Cash flows from financing activities:
Proceeds from borrowing	1,575		29,605
Debt repayments	(7,508)		(20,244)
Proceeds from common stock issued	84		117
Shares repurchased	(9)		(23)
Net cash (used in) provided by financing activities	(5,858)		9,455

Effect of exchange rate changes on cash	8		434

Net (decrease) increase in cash	(5,566)		332
Cash, beginning of period	14,523		9,105
Cash, end of period	$	8,957	$	9,437

Supplemental cash flow information:
Interest paid	$	802	$	465
Income taxes paid, net	3,360		2,222

See Notes to Unaudited Condensed Consolidated Financial Statements

THE L. S. STARRETT COMPANY

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2022

Note 1: Basis of Presentation and Summary of Significant Accounting Policies

The unaudited interim condensed consolidated financial statements as of and for the six months ended December 31, 2022 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 condensed 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 condensed consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2022. The balance sheet as of June 30, 2022 has been derived from the audited condensed consolidated financial statements as of and for the year ended June 30, 2022. 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.

Accounts Receivable and Allowance for Credit Losses

Trade accounts receivable are recorded at invoiced amount and do not bear interest. Allowance for doubtful accounts is the Company's estimate of current expected credit losses on its existing accounts receivable and determined based on historical customer assessments, current financial conditions and reasonable and supportable forecasts. Account balances are charged off against the allowance when the Company determines the receivable will not be recovered.

Fair Value Measurements

Certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities are carried at cost, which approximates their fair value because of their short-term maturity. See Notes 10 and 11 within the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q for financial assets and liabilities held at carrying amount on the condensed consolidated balance sheet.

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 condensed consolidated financial statements and accompanying notes. Note 2 within the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q to the Company’s condensed consolidated financial statements included in the Annual Report on Form 10-K for the year ended June 30, 2022 describes the significant accounting policies and methods used in the preparation of the condensed consolidated financial statements.

Note 2: Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13 "Financial Instruments -Credit Losses" (ASC 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 historic 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 pronouncement was extended for Small Reporting Companies and for the Company beginning July 1, 2022. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

Note 3: Segment Information

The segment information and the accounting policies of each segment are the same as those described in the notes to the condensed 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, 2022. The Company’s business is aggregated into two reportable segments based on geography of operations: North American Operations ("North America") and International Operations (“International”). 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 our Annual Report on Form 10-K for the year ended June 30, 2022. Financial results for each reportable segment are as follows (in thousands):


	North American Operations		International Operations		Unallocated		Total
Three Months ended December 31, 2022

Sales1	$	39,687	$	27,088	$	—	$	66,775

Operating Income (Loss)	$	3,681	$	3,893	$	(1,613)	$	5,961

Three Months ended December 31, 2021

Sales2	$	32,666	$	28,652	$	—	$	61,318

Operating Income (Loss)	$	1,549	$	4,394	$	(1,742)	$	4,201

1.Excludes $707 of North American segment intercompany sales to the International segment, and $4,250 of International segment intercompany sales to the North American segment.

2.Excludes $930 of North American segment intercompany sales to the International segment, and $4,412 of International segment intercompany sales to the North American segment.


	North American Operations		International Operations		Unallocated		Total
Six months ended December 31, 2022

Sales1	$	76,170	$	51,066	$	—	$	127,236
Operating Income (Loss)	$	6,878	$	6,729	$	(3,930)	$	9,677

Six months ended December 31, 2021

Sales2	$	66,475	$	56,357	$	—	$	122,832
Operating Income (Loss)	$	4,050	$	7,977	$	(3,694)	$	8,333

1.Excludes $1,635 of North American segment intercompany sales to the International segment, and $9,285 of International segment intercompany sales to the North American segment.

2.Excludes $1,679 of North American segment intercompany sales to the International segment, and $9,748 of International segment intercompany sales to the North American segment.

Note 4: Revenue from Contracts with Customers

Under ASC Topic 606, the Company is required to present a refund liability and a return asset within the Unaudited Condensed Consolidated Balance Sheet. As of December 31, 2022 and June 30, 2022, the balance of the return asset was $0.1 million and $0.2 million, respectively, and the balance of the refund liability as of December 31, 2022 and June 30, 2022 was $0.1 million

and $0.2 million, respectively. They are presented within prepaid expenses and other current assets and accrued expenses, respectively, on the Condensed 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 one 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 $0.5 million and $0.9 million at December 31, 2022 and June 30, 2022, respectively, located in Accounts Payable in the Condensed 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 and six months ended December 31, 2022 and 2021 (in thousands):


	Three Months Ended				Six Months Ended
	12/31/2022		12/31/2021		12/31/2022		12/31/2021
North America
United States	$	37,620	$	30,912	$	71,892	$	62,932
Canada & Mexico	2,067		1,754		4,278		3,543
	39,687		32,666		76,170		66,475
International
Brazil	20,057		18,687		37,305		37,890
United Kingdom	3,294		4,729		6,494		9,697
China	1,978		2,244		3,665		3,862
Australia & New Zealand	1,759		2,992		3,601		4,908
	27,088		28,652		51,066		56,357

Total Sales	$	66,775	$	61,318	$	127,236	$	122,832

Note 5: Leases

Operating lease cost amounted to $0.5 million and $1.0 million for the three and six months ended December 31, 2022 and $0.8 million and $1.6 million for the three and six months ended December 31, 2021. As of December 31, 2022, the Company’s right-of-use assets "ROU", lease obligations and remaining cash commitment on these leases (in thousands):


	Right-of-Use Assets		Operating Lease Obligations		Remaining Cash Commitment
Operating leases	$	5,379	$	5,553	$	6,775

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 3.8 years. As of December 31, 2022, the Company’s financing leases are not material. The foreign exchange impact affecting the operating leases are, also, not material.

During the quarter ended December 31, 2022 the Company renewed its leases in both Australia (ends September 2026) and New Zealand (ends April 2025) and recorded $0.6 million in new leases as ROU assets. In September 2021, the Company entered into a six year lease in China for 100,682 square feet and recorded a right of use asset for $2.6 million.

At December 31, 2022 the Company had the following fiscal year minimum operating lease commitments (in thousands):


	Operating Lease Commitments
2023 remaining	$	1,076
2024	2,013
2025	1,587
2026	1,293
2027	713
Thereafter	93
Subtotal	$	6,775
Imputed interest	(1,222)
Total	5,553

The Company entered into $1.0 million, in new operating lease commitments in the three and six months ended December 31, 2022, of which $0.6 million is for the Australia and New Zealand renewals, and incurred immaterial increases due to foreign exchange translation of ROU assets during the three and six months ended December 31, 2022.

In July 2021, Starrett UK leased space to another company for annual rent of $0.2 million and incremental applicable service charges. The lease is a 20 year agreement with a contract review in 2026. The rental income is recorded in Other Income in the Company's Condensed Consolidated Statement of Operations.

Note 6: Stock-based Compensation

Compensation expense related to all stock-based plans for the three and six months ended December 31, 2022 were $0.2 million and $0.3 million as compared to the prior year three and six months of $0.2 million and $0.3 million, respectively.

Note 7: Inventories

Inventories consist of the following (in thousands):


	12/31/2022		06/30/2022
Raw material and supplies	$	38,002	$	35,752
Goods in process and finished parts	22,007		22,268
Finished goods	36,198		35,589
	96,207		93,609
LIFO Reserve	(26,119)		(26,709)
	$	70,088	$	66,900

Of the Company’s $70.1 million and $66.9 million total inventory at December 31, 2022 and June 30, 2022, respectively, the $26.1 million and $26.7 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 $41.4 million on a FIFO basis and $15.3 million on a LIFO basis at December 31, 2022. The Core U.S. business had total inventory, on a FIFO basis, of $39.3 million and $12.6 million on a LIFO basis as of June 30, 2022. The use of LIFO, as compared to FIFO, resulted in, during the three months and six months ended December 31, 2022, a $0.1 million increase and $0.6 million decrease in cost of sales as compared to a $0.9 million increase and a $0.9 million decrease in the three and six months ended December 31, 2021.

Note 8: Goodwill and Intangible Assets

Amortizable intangible assets consist of the following (in thousands):


	12/31/2022		6/30/2022
Trademarks and trade names	$	2,070	$	2,070

Customer relationships	630		630
Software development	11,746		11,269

Gross intangible assets	14,446		13,969
Accumulated amortization and impairment	(9,996)		(9,329)
Net intangible assets	$	4,450	$	4,640

The estimated useful lives of the intangible assets subject to amortization range between 5 years for software development and 20 years for trademark and trade name assets.

The goodwill balance at December 31, 2022, gross $4.7 million and accumulated impairment of $3.7 million. There is no change in the six months ended December 31, 2022 to the net goodwill balance of $1.0 million.

Note 9: Accrued Expenses

The following table represents accrued expenses from the Condensed Consolidated Balance Sheets (in thousands)


	12/31/2022		06/30/2022
Sales related programs (commissions, rebates, distributor programs, warranty and related)	$	3,043	$	2,733
Income taxes	773		2,420
Professional fees	1,402		1,758
Other	1,579		1,463
Current portion pension cost	1,308		1,289
Taxes other than income tax	1,174		1,243
Workers compensation and employee deposits	432		518
Freight	624		352
Total	$	10,335	$	11,776

Note 10: 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 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 (expense), in the Condensed Consolidated Statements of Operations except (in the table below) for service cost. Service cost are in cost of sales and selling, general and administrative expenses, allocated based on headcount. Net periodic benefit cost and expected return consist of the following (in thousands):


	Three Months Ended				Six Months Ended
	12/31/2022		12/31/2021		12/31/2022		12/31/2021
Interest cost	1,408		1,031		2,890		2,064
Expected return on plan assets	(960)		(1,098)		(1,992)		(2,198)
Amortization of net loss	10		15		20		28
Expected net cost (benefit) total	$	458	$	(52)	$	918	$	(106)

Net periodic benefit costs (credits) for the Company's Postretirement Medical Plan consists of the following (in thousands):


	Three Months Ended				Six Months Ended
	12/31/2022		12/31/2021		12/31/2022		12/31/2021
Service cost	$	5	$	9	$	11	$	18
Interest cost	17		13		35		25
Amortization of prior service credit	(368)		(369)		(737)		(737)
Amortization of net loss	45		47		89		94
Total net (benefit)	$	(301)	$	(300)	$	(602)	$	(600)

For the three months and six months ended December 31, 2022, the Company contributed in the U.S. $0.7 million. In the UK pension plans the Company contributed $0.2 million and $0.4 million for the same periods. Based upon the actuarial valuations performed on the Company’s defined benefit plans as of June 30, 2022, the contribution for fiscal 2023 for the U.S. plans would require a contribution of $1.4 million and the U.K. plan would require $0.8 million. However, as a result of the American Rescue Plan Act of 2021, the minimum required company contribution for the U.S. Plan was reduced. The Company believes that government regulation is only a small part of deciding the pension funding, and as a result, may contribute more than the federal requirement. The Company contributed $2.5 million in total during fiscal year 2022, with $1.5 million in the U.S. and $1.0 million in the U.K. The Company continues evaluating the U.S. future contribution on a quarterly basis. The Company currently believes contributions in fiscal year 2023 will be similar to the prior year.

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 11: Debt

Debt is comprised of the following (in thousands):


	12/31/2022		06/30/2022
Short-term and current maturities

Loan and security agreement (term loan)	1,495		1,495
Brazil loans	3,764		5,052
	5,259		6,547
Long-term debt (net of current portion)
Loan and security agreement (term loan)	9,504		10,252
Loan and security agreement (line of credit)	8,897		11,397
Brazil loans	2,373		3,771
Debt reacquisition cost	(461)		(515)
	20,313		24,905
Total debt	$	25,572	$	31,452

On April 29, 2022, the Company and certain of the Company’s domestic subsidiaries entered into a Loan and Security agreement (the "Loan and Security Agreement") with HSBC Bank USA ("the Lender"). The Company incurred debt re-acquisition cost of $0.5 million which are recorded net of debt and amortized over five years.

These new credit facilities replaced the Company’s previous TD Bank credit facilities and are comprised of a $30 million revolving Loan and Security Agreement Line of Credit ("Line of Credit") with a $10 million uncommitted accordion provision, a Loan and Security Agreement Term Loan ("the Term Loan") with original principal of $12.1 million and a $7 million Capital Expenditure draw down credit facility (collectively, the "Facilities"). The Facilities are secured by a valid first-priority security interest on substantially all existing and future assets of the Company and its domestic subsidiaries.

The interest rate on the Facilities is based on a grid which uses the percentage of the remaining availability of the revolving credit line to determine the floating margin to be added to the one month or three months Secured Overnight Financing Rate, (SOFR). The Facilities mature on April 29, 2027.

Availability under the revolving line of credit is secured by and subject to a borrowing base comprised of eligible inventory and accounts receivable. The percentage of receivables included in the borrowing base is 90% for domestic investment grade and foreign insured accounts, 85% for domestic accounts that are neither investment grade nor insured, and 75% of foreign uninsured accounts. The percentage of inventory included in the borrowing base is the lower of 65% of the value of eligible inventory at cost or 85% of the net orderly liquidation value of eligible inventory at cost. Receivables and inventory are reported monthly to HSBC and subject to an annual field exam and inventory appraisal by an independent auditor commissioned by the Bank. The Company believes that the agreement provides an initial borrowing base sufficient for current domestic working capital needs and flexibility to accommodate potential growth-related working capital needs.

Availability under the Line of Credit remains subject to a borrowing base comprised of Accounts Receivable, Inventory, and Real Estate. The Company believes that the borrowing base will consistently produce availability under the Line of Credit of $30.0 million. A 0.25% commitment fee is charged on the unused portion of the Line of Credit.

Availability under the Term Loan was comprised of 70% of the fair market value of the Borrower's eligible real estate, which included facilities located in Westlake, Ohio, and Waite Park, Minnesota and totaled $4.6 million; and 85% of the net orderly liquidation value of the Borrowers’ machinery and equipment, capped at $7.5 million. The real estate portion of the Term facility is subject to a 12.5 year straight line amortization paid quarterly, and the machinery and equipment portion of the facility is subject to a 6.67 year straight line amortization, also paid quarterly. The Term Loan is subject to equal quarterly installments of $373,650, payable on the last day of each fiscal quarter.

The capital expenditure loan facility is available for the purchase of new machinery and equipment at 80% of the net invoice value of new machinery and equipment purchases, with a draw period of eighteen months past the closing date, with any amount outstanding under the facility subject to a 3.75% amortization rate per quarter.

The Facilities contain financial covenants with respect to a minimum fixed charge coverage ratio of 1.00, measured on a trailing twelve-month basis, for both the U.S. borrowing companies tested quarterly and the Consolidated L.S. Starrett Company tested semi-annually. The Loan and Security agreement also contains the customary affirmative and negative covenants, including limitations on indebtedness, liens, acquisitions, asset dispositions, fundamental corporate changes, excess pension contributions, and certain customary events of default. Upon the occurrence or continuation of an event of default, the Lender may terminate all commitments and facilities, and require the immediate payment of the entire unpaid principal balances, accrued interest, and all other obligations.

The TD Bank loan was retired in the quarter ended June 2022.

In Brazil, the Company is actively mitigating this consequence of the build-up of ICMS (translate to "Tax on Commerce and Services") credits by filing applications with the relevant tax authorities to change the methodology of charging and re-claiming ICMS on imports and domestic sales so that this credit is subsequently relieved and does not increase at this rate again. The Brazilian federal tax authority has approved the Company's application and now it is awaiting state tax approval. This new methodology is common for similar sized, export focused companies in Brazil. The ICMS balance as of June 30, 2022 was $5.4 million and as of December 31, 2022 was $5.2 million. The ICMS balance increased $0.2 million versus the quarter ended September 30, 2022 due to currency exchange. The Company expects a lower balance by the fiscal year end. The ICMS is an asset and its build-up was one of the reasons that Brazilian operation incurred more debt. The balance is located on the Condensed Consolidated Balance Sheets in prepaid expenses and other current assets.

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. Included in the table below are $0.6 million of financing on purchased fixed assets. The Company’s Brazilian subsidiary has the following loans as of December 31, 2022 (in thousands):

Lending Institution

Interest Rate

Beginning Date

Ending Date

Outstanding Balance

Brasil

4.52%

October 2021

September 2024

4,000

Itau

4.98%

February 2022

February 2024

1,523

Itau

4.95%

August 2022

July 2025

437

Brasil

3.80%

September 2022

August 2024

125

Brasil

4.18%

September 2022

September 2023

6,137

Total debt was reduced by $3.8 million and $5.9 million during the three and six months ended December 31, 2022, respectively, and the Brazilian loans were reduced by $1.0 million and $2.7 million in the three and six months ended December 31, 2022, respectively.

Note 12: Income Taxes

Tax expense for the three month period ended December 31, 2022 was $1.7 million on profit before tax of $4.8 million (an effective tax rate of 35%). Tax expense for the three month period ended December 31, 2021 was $1.0 million on profit before tax of $3.5 million (an effective tax rate of 29%). The effective tax rate for the three month periods ended December 31, 2022 and 2021 were 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. Tax expense for the three month period ended December 31, 2022 reflects the impact of final U.S. foreign tax credit regulations effective in fiscal 2023 that result in an increase in tax expense from the GILTI inclusion.

Tax expense for the six month period ended December 31, 2022 was $2.7 million on profit before tax of $7.9 million (an effective tax rate of 34%). Tax expense for the six month period ended December 31, 2021 was $2.1 million on profit before tax of $7.9 million (an effective tax rate of 27%). The effective tax rate for the six month periods ended December 31, 2022 and 2021 were 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 discrete tax benefits recognized from excess stock compensation deductions, tax credits and permanent deductions generated from research expenses. Tax expense for the six month period ended December 31, 2022 reflects the impact of final U.S. foreign tax credit regulations effective in fiscal 2023 that result in an increase in tax expense from the GILTI inclusion. In the six months ended December 31, 2022 the GILTI impact resulted in a 6.2% rate as compared to the six months ended December 31, 2021 resulting in a rate of 1.2%.

The Company has considered the positive and negative evidence to determine the need for a valuation allowance offsetting the deferred tax assets in the U.S. and has concluded that a partial valuation allowance is required against foreign tax credit carryforwards and certain state net operating loss carryforwards at December 31, 2022 and June 30, 2022. The Company had long term tax obligations related primarily to transfer pricing adjustments at December 31, 2022 and June 30, 2022.

Note 13: Contingencies

The Company is involved in certain legal matters, which arise, in the normal course of business. Although the outcomes of these legal matters are inherently difficult to predict, management does not expect the resolution of these legal matters to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Use of Non- GAAP Financial Measures

In "Management's discussion and analysis on financial condition and results of operations" in this Quarterly Report on Form 10-Q, we discuss non-GAAP financial measures including currency-neutral sales, and adjusted operating income.

We present these non-GAAP financial measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by eliminating items that we do not believe are indicative of our core operating performance. Such non- GAAP financial measures assist investors in understanding the ongoing operating performance of the Company by presenting financial results between periods on a more comparable basis. Such measures should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Currency-neutral sales are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations. Adjusted operating income adjusts for restructuring costs that are reflected in one period but not the other in order to show comparative operational performance. We include a reconciliation of currency-neutral sales and adjusted operating income to its comparable GAAP financial measures.

References to currency-neutral sales and adjusted operating income should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with GAAP and may not be comparable to similarly titled non- GAAP financial measures used by other companies. In evaluating these non-GAAP financial measures, investors should be aware that in the future we may incur expenses or be involved in transactions that are the same as or similar to some of the adjustments in this presentation. Our presentation of non-GAAP financial measures should not be construed to imply that its future results will be unaffected by any such adjustments. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

Please see Note 3 within the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q regarding segment results of operations. 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 following tables as well as in Note 3 within the notes to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q. These tables are included to better explain our consolidated operational performance by showing more detail by business segment and reconciling GAAP operating income and adjusted operating income.

Results of Operations

The following table represents key results of operations on a consolidated basis for the three months and six months ended December 31, 2022 and December 31, 2021:


	Three Months Ended										Six Months Ended
(Amounts in thousands)	12/31/22			12/31/2021			$ Change favorable (unfavorable)		% Change		12/31/2022			12/31/2021			$ Change favorable (unfavorable)	% Change
Net sales	$	66,775		$	61,318		$	5,457	8.9	%	$	127,236		$	122,832		4,404	3.6	%
Gross profit	21,576			18,950			2,626		13.9	%	41,776			39,095			2,681	6.9	%
% of net sales	32.3		%	30.9		%					32.8		%	31.8		%

Selling, general and administrative expenses	15,561			14,749			(812)		(5.5)	%	31,855			30,762			(1,093)	(3.6)	%
% of net sales	23.3		%	24.1		%					25.0		%	25.0		%

Restructuring charges	54			—			(54)		(100.0)	%	244			—			(244)	(100.0)	%


Operating income	5,961			4,201			1,761		41.9	%	9,677			8,333			1,344	16.1	%

Other (expense), net	(1,121)			(662)			(459)		69.4	%	(1,797)			(436)			(1,362)	(312.7)	%

Income before income taxes	4,840			3,539			1,301		36.8	%	7,880			7,897			(18)	(0.2)	%

Income tax expense (benefit)	1,709			1,011			(698)		(69.0)	%	2,693			2,137			(556)	(26.0)	%

Net income	$	3,131		$	2,528		603		23.9	%	$	5,187		$	5,760		(573)	(10.0)	%


GAAP to Non-GAAP reconciliation:
	Three Months Ended							Six Months Ended
(Amounts in thousands)	12/31/2022		12/31/2021		$ Change favorable (unfavorable)	% Change		12/31/2022		12/31/2021		$ Change favorable (unfavorable)	% Change
Operating income as reported	5,961		4,201		1,761	41.9	%	9,677		8,333		1,344	16.1	%
Add back restructuring charges	(54)		—		54	(100)	%	(244)		—		244	(100)	%

Adjusted operating income	6,015		4,201		1,814	43.2	%	9,921		8,333		1,588	19.1	%
% of net sales	9.0	%	6.9	%		210 basis points		7.8	%	6.8	%		100 basis points

The following table represents key results of operations for three months ended December 31, 2022 and 2021 based on our business aggregated into two reportable segments according to geography of operations: North American Operations and International Operations as reflected in the table below:


Key Results by Reporting Segment
	Three Months Ended December 31, 2022											Three Months Ended December 31, 2021
(Amounts in thousands)	North America			International			Corporate		Total			North America			International		Corporate		Total
Net sales	$	39,687		$	27,088		$	—	$	66,775		$	32,666		$	28,652	$	—	$	61,318
Gross profit	11,123			10,453			—		21,576			8,321			10,629				18,950
% of net sales	28.0		%	38.6		%			32.3		%	25.5		%