Item 2 - Properties
The Company's principal plant is located in Athol, Massachusetts on about 15 acres of Company-owned land. The plant consists of 25 buildings, mostly of brick construction of varying dates, with approximately 535,000 square feet of production and storage area. An additional 9,000 square feet of leased space in Gardner, Massachusetts is considered part of this plant.
The Webber Gage Division, Cleveland, Ohio, owns and occupies two buildings containing approximately 50,000 square feet.
The Company-owned facility in Mt. Airy, North Carolina has approximately 320,000 square feet. It is occupied by the Company's Saw Division, Granite Surface Plate Division, Coordinate Measuring Machine and Optical Comparator Division, and Ground Flat Stock Division. This plant is subject to a mortgage collateralizing an Industrial Revenue Bond with a remaining balance of $300,000 due to be paid off in September 2000.
The Company's Evans Rule Division, located in North Charleston, South Carolina, owns and occupies a 173,000 square foot building. In addition, this division leases 45,000 square feet of manufacturing space in Mayaguez, Puerto Rico.
The Company's Exact Level Division is located in Alum Bank, Pennsylvania and owns and occupies a 50,000 square foot building.
The Company's Brazil subsidiary owns and occupies several buildings totaling 209,000 square feet. The Company's Scotland subsidiary owns and occupies a 187,000 square foot building and also a 33,000 square foot building in Skipton, England, where its wholly owned subsidiary manufactures optical measuring projectors. A second wholly owned subsidiary located in Skipton performs calibration services and leases about 4,000 square feet. A wholly owned subsidiary in the People's Republic of China leases approximately 40,000 square feet.
In addition, the Company operates warehouses/sales-support offices in Glendale, Arizona; Elmhurst, Illinois; Atlanta, Georgia; Mississauga, Canada; Sydney, Australia; and Schmitten, Germany.
In the Company's opinion, all of its property, plant and equipment is in good operating condition, well maintained and adequate for its needs.
Item 3
Item 3 - Legal Proceedings
The Company is not involved in any material pending legal proceedings.
Item 4
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 24, 2000.
Executive Officers of the Registrant
The information under the caption Executive Officers of the Registrant in item 10 of this Form 10K is hereby incorporated by reference.
PART II
Item 5
Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters
The Company's Class A common stock is traded on the New York Stock Exchange. Quarterly dividend and high/low closing market price information is presented in the table below. The Registrant's Class B common stock is generally nontransferable, except to lineal descendants and thus has no established trading market, but it can be converted into Class A common stock at any time. The Class B common stock was issued on October 5, 1988, and the Registrant has paid the same dividends thereon as have been paid on the Class A common stock since that date. At July 28 2000, there were 2,160 registered holders of Class A common stock and 1,712 registered holders of Class B common stock.
Quarter ended Dividends High Low 	September 1998 $ 0.20 $ 39.06 $ 34.25 	December 1998 0.20 37.75 29.81 	March 1999 0.20 34.25 25.75 	June 1999 0.20 30.69 25.13
	September 1999 0.20 29.44 24.25 	December 1999 0.20 27.88 21.25 	March 2000 0.20 24.75 20.50 	June 2000 0.20 24.25 18.50
Item 6
Item 6 - Selected Financial Data
Years ended in June ($000 except per share data) 2000 1999 1998 1997 1996 Net sales $235,169 $232,385 $262,340 $250,503 $235,467 Net earnings 11,489 16,696 23,009 19,859 17,331 Basic earnings per share 1.73 2.44 3.34 2.84 2.45 Diluted earnings per share 1.73 2.44 3.33 2.84 2.45 Long-term debt 3,000 3,300 3,900 6,500 7,100 Total assets 250,418 245,728 250,263 238,746 227,312 Dividends per share 0.80 0.80 0.77 0.72 0.72
Item 7
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
SALES Sales increased 1% in fiscal 2000 following an 11% decrease in fiscal 1999. The current year increase is all domestic. Foreign sales were about even with last year as decreases in the first half of the year, which were the result of the Brazil currency devaluation that took place in January 1999, were overcome by increased unit volume. For the past two years, the strong British pound has been adversely affecting our Scottish subsidiary's business both in terms of export pricing and domestic import competition. The current year increase in domestic sales is substantially due to product mix. The industrial manufacturing sector where we do most of our business continues flat. In fiscal 1999, domestic sales were down 9%, reflecting a downturn in the industrial manufacturing sector, and foreign sales were down 15%. The foreign decrease was due mostly to the 40% devaluation of Brazil's currency in January 1999. In terms of local currency, foreign sales were down only 3%.
EARNINGS BEFORE TAXES Pretax earnings are down 27% for the current year and were down 31% in fiscal 1999. Cost of sales was 71.7% in 2000, 69.3% in 1999, and 67.3% in 1998. Generally, changes in these rates are impacted by the manufacturing efficiencies that are gained or lost as a result of increased or decreased production levels. During 2000, domestic margins were adversely affected by product mix, lower factory overhead absorption, increased fringe benefit costs, particularly pension, and our data processing conversion. The strong pound mentioned above has had a significant negative effect on Scotland's margins for the past two years. In Brazil, the currency devaluation reduced the absolute amount of pretax profits last year, but its effect on importers with whom we compete has allowed our operation to improve margins in both years.
INCOME TAXES The effective tax rate is 33% in 2000 compared to 29% in 1999 and 33% in 1998. Tax-exempt interest on short-term investments in municipal bonds, Puerto Rico tax incentives and somewhat lower foreign income tax rates all contribute to an overall effective tax rate that is slightly lower than the combined U.S. state and federal statutory rate. Nonrecurring permanent differences between book and taxable income for dividends paid from Brazil to the U.S. in all years, but particularly in 1999, have reduced their effective tax rate substantially when reported in U.S. dollars.
NET EARNINGS As a result of the above, net earnings were down 31% in fiscal 2000 when compared to 1999 and 1999 net earnings were down 27% when compared to 1998.
MARKET RISK Market risk is the potential change in a financial instrument's value caused by fluctuations in interest and currency exchange rates, and equity and commodity prices. The Company's operating activities expose it to many risks that are continually monitored, evaluated, and managed. Proper management of these risks helps reduce the likelihood of earnings volatility. At June 2000 and 1999, the Company was not a party to any derivative arrangement and the Company does not engage in trading, market-making or other speculative activities in the derivatives markets. In addition, the Company does not enter into long-term supply contracts with either fixed prices or quantities.
The Company does not engage in regular hedging activities to minimize the impact of foreign currency fluctuations. Net monetary assets in Scotland and Brazil total approximately $3 million. Inflation in Brazil has decreased to about 10% today from over 2000% in 1994 when their current economic plan was initiated. As a consequence, their economy ceased to be considered hyperinflationary as of January 1998.
A 10% change in interest rates would not have a significant impact on the aggregate net fair value of the Company's interest rate sensitive financial instruments (primarily variable rate investments of $7,000,000 and debt of $9,700,000 at June 24, 2000) or the cash flows or future earnings associated with those financial instruments. A 10% change in interest rates would impact the fair value of the Company's fixed rate investments of approximately $6,600,000 by $300,000.
LIQUIDITY AND CAPITAL RESOURCES Years ended In June ($000) 2000 1999 1998 Cash provided by operations $18,822 $16,309 $28,713 Cash used in investing activities (9,267) (10,278) (15,838) Cash used in financing activities (7,892) (9,389) (12,203) Effect of translation rate changes on cash 74 (76) (20) Increase (decrease) in cash $ 1,737 $(3,434) $ 652
Cash flows from operating activities increased $3 million from 1999, and in 1999 decreased $12 million from 1998. Increasing inventories caused the reduced cash flow from operations in 1999.
The Company's investing activities consist mainly of expenditures for property, plant and equipment and the investment of cash not immediately needed for operations. Plant expenditures of $14 million in 2000 are less than the $20 million experienced in 1999 and the $16 million experienced in 1998, but are more normal than those years, especially 1999, which contained a major building expansion.
Cash flows from financing activities are primarily the payment of dividends, which tend to be quite steady from year to year. The Company requires little debt to finance day to day operations and the proceeds from the sale of stock under the various stock plans tend to be used to purchase treasury shares. Treasury share purchases were $9.0 million in 2000 compared to $9.9 million in 1999 and $5.3 million in 1998.
The Company maintains sufficient liquidity and has the resources to fund its operations under current business conditions. The Company maintains a line of credit as discussed in the notes to the financial statements. The Company has not made significant borrowings under this line during the past three years. The Company continues to maintain a strong financial position with a working capital ratio of 4.7 to 1 as of June 24, 2000 and 5.7 to 1 as of June 26, 1999. Cash not immediately required for working capital is invested in high grade money market instruments with maturities generally less than one year (however, see the notes to the financial statements regarding investments in Puerto Rico). Certain cash and investment balances of foreign subsidiaries may not be repatriated without adverse tax consequences and in certain cases may be subject to regulatory restriction.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This document and the 2000 Annual Report, including the Chairman's letter to stockholders, include forward-looking statements about the Company's business, sales, expenditures, environmental regulatory compliance, foreign operations, interest rate sensitivity, debt service, liquidity and capital resources, and other operating and capital requirements. In addition, forward-looking statements may be included in future Company documents and in oral statements by Company representatives to security analysts and investors. The Company is subject to risks that could cause actual events to vary materially from such forward-looking statements, including the following risk factors:
Risks Related to Technology: Although the Company's strategy includes investment in research and development of new and innovative products to meet technology advances, there can be no assurance that the Company will be successful in competing against new technologies developed by competitors.
Risks Related to Adoption of the Euro: The new European currency (the Euro) began being used by the eleven participating European countries January 1, 1999. Although the United Kingdom is not currently a Euro country, the Company's Scottish subsidiary does a significant amount of business with Euro countries. Management believes it has the necessary systems and business processes to deal with what is, in effect, one more foreign currency, but there can be no assurance that there will not be unforeseen economic effects of this change that might affect the Company's sales or margins on business done with Euro countries.
Risks Related to Foreign Operations: For the period ended June 24, 2000, approximately a third of the Company's sales and net assets relate to foreign operations. Foreign operations are subject to special risks that can materially affect the sales, profits, cash flows, and financial position of the Company, including taxes and other restrictions on distributions and payments, currency exchange rate fluctuations, political and economic instability, inflation, minimum capital requirements, and exchange controls. In particular, the Company's Brazilian operations, which constitute over half of the Company's revenues from foreign operations, can be very volatile, changing from year to year due to the political situation and economy. As a result, the future performance of the Brazilian operations is inherently unpredictable. See Management's Discussion (SALES) regarding the recent devaluation of the Brazilian currency.
Risks Related to Cyclical Nature of the Industry: The market for most of the Company's products is subject to economic conditions affecting the industrial manufacturing sector, including the level of capital spending by industrial companies. Accordingly, economic weakness in the industrial manufacturing sector will result in decreased demand for the Company's products and will adversely affect performance.
Risks Related to Competition: The Company's business is subject to direct and indirect competition from both domestic and foreign firms. In particular, low-wage foreign sources have created severe competitive pricing pressures. Under certain circumstances, including significant changes in U.S. and foreign currency relationships, such pricing pressures might reduce unit sales and/or adversely affect the Company's margins.
Item 8
Item 8 - Financial Statements and Supplementary Data
Contents: Page
Report of Independent Auditors 9
Consolidated Statements of Earnings and Cash Flows 10
Consolidated Balance Sheets 11
Consolidated Statements of Stockholders' Equity 12
Notes to Consolidated Financial Statements 13-19
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of The L.S. Starrett Company
We have audited the accompanying consolidated balance sheets of The L.S. Starrett Company and subsidiaries as of June 24, 2000 and June 26, 1999, and the related consolidated statements of earnings, cash flows and changes in stockholders' equity for each of the three years in the period ended June 24, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries as of June 24, 2000 and June 26, 1999, and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 24, 2000, in conformity with accounting principles generally accepted in the United States of America.
S/DELOITTE & TOUCHE LLP
Boston, Massachusetts July 28, 2000
THE L.S. STARRETT COMPANY Consolidated Statements of Earnings and Cash Flows For the years ended in June (in thousands of dollars except per share data)
2000 1999 1998 EARNINGS Net sales $235,169 $232,385 $262,340 Cost of goods sold (168,648) (160,984) (176,591) Selling, general and administrative expense (49,788) (49,393) (53,433) Other income and expense 496 1,618 1,806
Earnings before income taxes 17,229 23,626 34,122 Income taxes 5,740 6,930 11,113
Net earnings $ 11,489 $ 16,696 $ 23,009 Basic earnings per share, based on average outstanding shares of 6,645,019, 6,840,283 and 6,888,854 $ 1.73 $ 2.44 $ 3.34 Diluted earnings per share, based on average outstanding shares of 6,652,796, 6,846,406 and 6,902,950 $ 1.73 $ 2.44 $ 3.33
CASH FLOWS Cash flows from operating activities: Net earnings $ 11,489 $ 16,696 $ 23,009 Noncash expenses: Depreciation and amortization 11,380 11,207 10,727 Deferred taxes 2,108 2,058 1,945 Unrealized translation losses 154 Working capital changes: Receivables (1,189) 2,809 (4,506) Inventories (3,357) (9,110) 1,518 Other current assets and liabilities 1,293 (2,824) (1,016) Prepaid pension and other (2,902) (4,527) (3,118) Net cash from operating activities 18,822 16,309 28,713 Cash flows from investing activities: Additions to plant and equipment (13,974) (20,319) (16,148) Decrease in investments 4,707 10,041 310 Net cash used in investing activities (9,267) (10,278) (15,838) Cash flows from financing activities: Short-term borrowing, net 3,090 2,599 (2,609) Debt repayments, net (300) (600) (2,600) Common stock issued 3,665 3,968 3,590 Treasury shares purchased (9,045) (9,894) (5,286) Dividends (5,302) (5,462) (5,298) Net cash used in financing activities (7,892) (9,389) (12,203) Effect of translation rate changes on cash 74 (76) (20) Net increase (decrease) in cash 1,737 (3,434) 652 Cash beginning of year 271 3,705 3,053 Cash end of year $ 2,008 $ 271 $ 3,705
Supplemental cash flow information: Interest paid $ 844 $ 577 $ 684 Taxes paid $ 4,190 $ 5,822 $ 12,519
See Notes to Consolidated Financial Statements THE L.S. STARRETT COMPANY Consolidated Balance Sheets (in thousands of dollars)
June 24 June 26 ASSETS	 2000 1999 Current assets: Cash $ 2,008 $ 271 Investments 12,043 16,933 Accounts receivable (less allowance for doubtful accounts of $1,790,000 and $2,361,000) 36,509 36,004 Inventories 79,890 78,041 Prepaid expenses and other current assets 7,269 6,173 Total current assets 137,719 137,422
Property, plant and equipment, at cost: Land 1,764 1,775 Buildings (less accumulated depreciation of $15,855,000 and $16,496,000) 25,301 25,131 Machinery and equipment (less accumulated depreciation of $54,613,000 and $53,148,000) 48,618 46,948 Total property, plant and equipment 75,683 73,854
Cost in excess of net assets acquired (less accumu- lated amortization of $4,534,000 and $4,266,000) 6,667 7,094 Prepaid pension cost 29,238 26,212 Other assets 1,111 1,146 $250,418 $245,728 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities $ 6,690 $ 3,600 Accounts payable and accrued expenses 16,315 13,783 Accrued salaries and wages 5,590 6,026 Taxes payable 285 484 Employee deposits for stock purchase plan 518 429 Total current liabilities 29,398 24,322
Deferred income taxes 13,969 11,919 Long-term debt 3,000 3,300 Accumulated postretirement benefit obligation 16,029 16,151 Stockholders' equity: Class A common stock $1 par (20,000,000 shrs. auth.; 4,978,276 outstanding in 2000, excluding 1,461,002 held in treasury; 5,109,173 outstanding in 1999, excluding 1,243,158 held in treasury) 4,978 5,109 Class B Common Stock $1 par (10,000,000 shrs. auth.; 1,495,474 outstanding in 2000, excluding 308,284 held in treasury; 1,596,748 outstanding in 1999, excluding 288,642 held in treasury) 1,495 1,597 Additional paid-in capital 43,273 42,730 Retained earnings reinvested and employed in the business 155,846 155,349 Accumulated other comprehensive income (17,570) (14,749) Total stockholders' equity 188,022 190,036 $250,418 $245,728
See Notes to Consolidated Financial Statements THE L.S. STARRETT COMPANY Consolidated Statements of Stockholders' Equity For the years ended in June, 1998 through 2000 (in thousands)
Common Addi- Accumulated Stock Out- tional Other Com- standing Paid-in Retained prehensive ($1 Par) Capital Earnings Income Total
Balance, June 28, 1997 $ 6,944 $ 38,730 $137,788 $ (2,997) $180,465 Comprehensive income: Net earnings 23,009 23,009 Unrealized net gain on investments 138 138 Translation loss, net (1,324) (1,324) Total comprehensive income 21,823 Dividends ($0.77) (5,298) (5,298) Treasury shares: Purchased (152) (952) (4,182) (5,286) Issued 88 3,144 3,232 Options exercised 17 341 358
Balance, June 27, 1998 6,897 41,263 151,317 (4,183) 195,294 Comprehensive income: Net earnings 16,696 16,696 Unrealized net loss on investments (123) (123) Translation loss, net (10,443) (10,443) Total comprehensive income 6,130 Dividends ($0.80) (5,298) (5,462) Treasury shares: Purchased (329) (2,363) (7,202) (9,894) Issued 118 3,368 3,486 Options exercised 20 462 482
Balance, June 26, 1999 6,706 42,730 155,349 (14,749) 190,036 Comprehensive income: Net earnings 11,489 11,489 Unrealized net loss on investments (113) (113) Translation loss, net (2,708) (2,708) Total comprehensive income 8,668 Dividends ($0.80) (5,302) (5,302) Treasury shares: Purchased (399) (2,956) (5,690) (9,045) Issued 161 3,400 3,561 Options exercised 5 99 104
Balance, June 24, 2000 $ 6,473 $ 43,273 $155,846 $(17,570) $188,022
See Notes to Consolidated Financial Statements THE L. S. STARRETT COMPANY Notes to Consolidated Financial Statements
SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements include the accounts of The L. S. Starrett Company and subsidiaries, a manu- facturer of industrial, professional and consumer products. All subsidiaries are wholly-owned and all significant intercompany items have been eliminated. The Company's fiscal year ends on the last Saturday in June. The fiscal years of the Company's foreign subsidiaries end in May.
Financial instruments and derivatives: The Company's financial instruments consist primarily of current assets, except inventory, current liabilities, and long-term debt. Current assets and liabilities, except investments, are stated at cost, which approximates fair market value. Long-term debts, which are at current market interest rates, also approximate fair market value. In June 1998 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 provides guidance for accounting for all derivative instruments, as defined. This standard requires all derivatives and any hedging assets or liabilities to be accounted for at fair value and will be effective June 25, 2000. The effect of adopting SFAS No. 133 will not be significant.
Investments: Investments consist primarily of marketable securities, including treasury bills, certificates of deposit and municipal securities. The Company considers all its investments "available for sale." As such, these investments are carried at market, which approximates cost, with unrealized temporary gains and losses recorded as a component of stockholders' equity. Included in investments at June 24, 2000 is $6.6 million of liquid AAA rated Puerto Rico debt obligations. These investments were made for the purpose of reducing repatriation taxes and have maturities of up to ten years. Most other investments have maturities of less than one year.
Long-lived assets: Buildings and equipment are depreciated using straight-line and accelerated methods over estimated useful lives as follows: buildings 15 to 50 years, building improvements 10 to 40 years, machinery and equipment 5 to 12 years, motor vehicles 3 to 5 years, computer hardware and software 3 to 7 years. 	Costs in excess of net assets acquired are being amortized on a straight-line basis over 5 to 40 years.
Inventories: Inventories are stated at the lower of cost or market. For approximately 70% of all inventories, cost is determined on a last-in, first-out (LIFO) basis. For all other inventories, cost is determined on a first-in, first-out (FIFO) basis. LIFO inventories are $46,584,000 and $47,858,000 at the end of 2000 and 1999, respectively, such amounts being $22,683,000 and $23,521,000 less than if determined on a FIFO basis. Total inventories at year end are as follows (in thousands):
Goods in Pro- cess and Raw Materials Finished Goods Finished Parts and Supplies Total 2000 $36,121 $26,752 $17,017 $79,890 1999 31,964 31,589 14,488 78,041
Income taxes: Deferred tax expense results from differences in the timing of certain transactions for financial reporting and tax purposes. Deferred taxes have not been recorded on undistributed earnings of foreign subsidiaries (approximately $40,000,000 at June 2000) or the related unrealized translation adjustments because such amounts are considered permanently invested and, if remitted, the resulting taxes would be offset by foreign tax credits.
Research and development: Research and development costs were expensed as follows: $3,111,000 in 2000, $2,860,000 in 1999 and $3,406,000 in 1998.
Earnings per share (EPS): Basic EPS excludes dilution and is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution by securities that could share in the earnings. The Company had 7,777, 6,123 and 14,096 of additional potential common shares in 2000, 1999 and 1998 resulting from shares issuable under its stock option plan.
Translation of foreign currencies: Assets and liabilities are translated at exchange rates in effect on reporting dates, and income and expenses are translated at rates in effect on transaction dates. The resulting differences due to changing exchange rates are charged or credited directly to the "accumulated other comprehensive income" account included as part of stockholders' equity. Prior to January 1, 1998, the translation method used by the Company's subsidiary in Brazil, which until then had been considered a hyperinflationary country, was the same except that inventories and plant and the related charges to cost of sales and depreciation expense were translated at rates in effect at the time the assets were purchased, and the resulting translation gains and losses were included in the determination of net earnings.
Use of accounting estimates: The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Amounts ultimately realized could differ from those estimates.
OTHER INCOME AND EXPENSE Other income and expense consists of the following (in thousands): 2000 1999 1998
Interest income, net $ 660 $ 1,366 $ 1,927 Realized and unrealized translation gains and (losses) (101) 112 (339) Other (63) 140 218 $ 496 $ 1,618 $ 1,806
INCOME TAXES The provision for income taxes consists of the following (in thousands): 2000 1999 1998 Current: Federal $ 1,581 $ 2,851 $ 5,780 Foreign 1,582 1,337 2,454 State 469 684 934 Deferred 2,108 2,058 1,945 $ 5,740 $ 6,930 $11,113
Pretax domestic income as reportable to the IRS was $10,126,000, $22,840,000 and $26,289,000 in 2000, 1999 and 1998, respectively.
A reconciliation of expected tax expense at the U.S. statutory rate to actual tax expense is as follows (in thousands):
2000 1999 1998 Expected tax expense $ 6,030 $ 8,269 $11,943 Increase (decrease) from: State and Puerto Rico taxes, net of federal benefit (210) (32) 108 Foreign taxes, net of federal credits (247) (1,161) (604) Nontaxable investment income (43) (111) (120) Other 210 (35) (214) Actual tax expense $ 5,740 $ 6,930 $11,113
Deferred income taxes at year end are attributable to the following (in thousands): 2000 1999 Deferred assets: Retiree medical benefits $(6,587) $(6,595) Inventories (1,286) (1,242) Other (1,351) (1,247) (9,224) (9,084) Deferred liabilities: Prepaid pension 11,953 10,778 Other employee benefits 547 251 Depreciation 7,614 6,846 Other 990 892 21,104 18,767 Current portion 2,089 2,236 Long-term portion $13,969 $11,919
EMPLOYEE BENEFIT PLANS The Company has several pension plans, both defined benefit and defined contribution, covering all of its domestic and approximately half of its nondomestic employees. In addition, certain domestic employees participate in an Employee Stock Ownership Plan (ESOP). Ninety percent of the actuarially determined annuity value of their ESOP shares is used to offset retirement benefits otherwise due under the domestic noncontributory defined benefit pension plan. The total cost (benefit) of all such plans for 2000, 1999 and 1998, considering the combined projected benefits and funds of the ESOP as well as the other plans, was $(1,608,000), $(2,567,000) and $(1,588,000), respectively.
Under both domestic and foreign defined benefit plans, benefits are based on years of service and final average earnings. Plan assets, including those of the ESOP, consist primarily of investment grade debt obligations, marketable equity securities and approximately 1,000,000 shares of the Company's common stock. The status of these defined benefit plans, including the ESOP, is as follows (in thousands):
2000 1999 1998 Change in benefit obligation: Benefit obligation at beginning of year $ 88,088 $ 87,242 $ 80,929 Service cost 3,263 2,672 2,389 Interest cost 6,172 6,185 5,771 Participant contributions 247 286 239 Plan amendments 481 Exchange rate changes (1,016) (826) (91) Benefits paid (3,315) (3,048) (2,901) Actuarial (gain) or loss (5,546) (4,904) 906 Benefit obligation at end of year $ 87,893 $ 88,088 $ 87,242
Change in plan assets: Fair value of plan assets at beginning of year $137,578 $148,861 $129,292 Actual return on plan assets (12,557) (7,549) 22,364 Participant contributions 247 286 239 Benefits paid (3,315) (3,048) (2,901) Exchange rate changes (1,092) (972) (133) Fair value of plan assets at end of year $120,861 $137,578 $148,861
Reconciliation of funded status: Funded status $ 32,968 $ 49,490 $ 61,619 Unrecognized actuarial gain (3,858) (22,861) (38,143) Unrecognized transition asset (4,818) (5,774) (6,737) Unrecognized prior service cost 4,946 5,357 5,296 Prepaid benefit $ 29,238 $ 26,212 $ 22,035
Components of net periodic benefit cost: Service cost $ 3,263 $ 2,672 $ 2,389 Interest cost 6,172 6,185 5,771 Expected return on plan assets (11,432) (11,241) (9,694) Amortization of prior service cost 409 414 376 Amortization of transition asset (956) (963) (964) Recognized actuarial gain (352) (1,250) (977) Net periodic benefit cost $ (2,896) $ (4,183) $ (3,099)
Weighted average assumptions: Discount rate 7.75% 7.0% 7.0% Expected long-term rate of return 8.50% 8.5% 7.5% Rate of compensation increase 4.50% 5.0% 5.0%
The Company provides certain medical and life insurance benefits for most retired employees in the United States. The status of these plans at year end is as follows (in thousands): 2000 1999 1998 Change in benefit obligation: Benefit obligation at beginning of year $ 13,668 $ 17,707 $ 16,269 Service cost 457 427 498 Interest cost 914 911 1,170 Plan amendments (4,732) Benefits paid (1,170) (1,135) (1,129) Actuarial (gain) or loss 1,232 490 899 Benefit obligation at end of year $ 15,101 $ 13,668 $ 17,707
Reconciliation of funded status: Funded status $ 15,101 $ 13,668 $ 17,707 Unrecognized actuarial loss (3,098) (1,896) (1,439) Unrecognized prior service cost 4,026 4,379 Accrued benefit $ 16,029 $ 16,151 $ 16,268
Components of net periodic benefit cost: Service cost $ 457 $ 427 $ 498 Interest cost 914 911 1,170 Amortization of prior service cost (353) (353) Recognized actuarial gain 30 32 Net periodic benefit cost $ 1,048 $ 1,017 $ 1,668
Weighted average assumptions: Discount rate 7.75% 7.0% 7.0% Rate of compensation increase 4.50% 5.0% 5.0%
For measurement purposes, an 8.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually to 5.0% for 2005 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects: 1% 1% Increase Decrease
Effect on total of service and interest cost $ 109 $ (92) Effect on postretirement benefit obligation 785 (673)
DEBT At year end, long-term debt consists of the following (in thousands):
2000 1999 Industrial revenue bond $ 300 $ 900 Revolving credit agreement 3,000 3,000 3,300 3,900 Less current maturities 300 600 $ 3,000 $ 3,300
The industrial revenue bond is collateralized by the Company's plant in Mt. Airy, North Carolina. Principal is payable in semiannual installments of $300,000. Interest is at 92% of the 90 day CD rate (6.1% at June 24, 2000). The revolving credit agreement is for $25,000,000 and expires June 13, 2004. The credit agreement requires commitment fees of .25%. Interest rates vary, but approximate LIBOR plus .50% (7.3% as of June 24, 2000). All debt agreements contain financial covenants, the most restrictive of which is that at June 24, 2000 the Company must have tangible net worth of $161,000,000. Annual principal payments on debt are required as follows: 2001, $300,000; 2004, $3,000,000. Current notes payable carry interest at a rate of LIBOR plus 1 - 4%. Interest expense, prior to capitalization of interest on self- constructed assets was $877,000, $465,000 and $820,000 in 2000, 1999 and 1998.
COMMON STOCK Class B Common Stock is identical to Class A except that it has 10 votes per share, is generally nontransferable except to lineal descendants, cannot receive more dividends than Class A, and can be converted to Class A at any time. Class A Common Stock is entitled to elect 25% of the directors to be elected at each meeting with the remaining 75% being elected by Class A and Class B voting together. In addition, the Company has a stockholder rights plan, amended and restated in 2000, to protect stockholders from attempts to acquire the Company on unfavorable terms not approved by the Board of Directors. Under certain circumstances, the plan entitles each Class A or Class B share to additional shares of the Company or an acquiring company, as defined, at a 50% discount to market. Generally, the rights will be exercisable if a person or group acquires 15% or more of the Company's outstanding shares. The rights trade together with the underlying common stock. They can be redeemed by the Company for $.01 per right and expire in the year 2000. The Company accounts for stock based compensation under the provisions of Accounting Principles Board Opinion No. 25. Under the Company's stock purchase plans, the purchase price of the optioned stock is 85% of the lower of the market price on the date the option is granted or the date it is exercised. Options become exercisable exactly two years from the date of grant and expire if not exercised. Therefore, no options are exercisable at the end of 2000, 1999, or 1998. A summary of option activity is as follows:
Weighted Average Exercise Shares Shares Price Available On Option At Grant For Grant Balance, June 28, 1997 53,334 $22.92 675,518 Options authorized 800,000 Options granted 26,457 32.14 (26,457) Options exercised ($19.45 and $21.89) (17,507) 20.49 Options canceled (16,484) (670,715) Balance, June 27, 1998 45,800 27.96 778,346 Options granted 55,474 24.97 (55,474) Options exercised ($23.17 and ($25.03)(20,369) 23.70 Options canceled (29,102) 25,325 Balance, June 26, 1999 51,803 24.63 748,197 Options granted 69,122 19.56 (69,122) Options exercised ($20.30 and $17.00) (5,315) 19.50 Options canceled (43,632) 43,632 Balance, June 24, 2000 71,978 $20.26 722,707
At June 24, 2000, a total of 794,685 shares of common stock are reserved for issuance under the plans. The following information relates to outstanding options as of June 24, 2000:
Weighted Average Remaining Life 1.5 years Weighted Average fair value on grant date of options granted in: 1998 $9.50 1999 7.50 2000 6.00
The fair value of each option grant was estimated on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions: volatility - 16% to 25%, interest - 4.3% to 6.5%, and expected lives - 2 years. The pro forma, after tax effect of any compensation costs related to use of SFAS No. 123, "Accounting for Stock Based Compensation," is as follows: 2000 $200,000, 1999 $150,000 and 1998 $150,000, or approximately $.03, $.02, and $.02 per share.
In addition 371,345 shares of common stock are reserved for the Company's 401(k) plan at June 24, 2000. Since inception in 1986, 1,126,964 Class A and 44,155 Class B shares have been issued under this plan.
OPERATING DATA The Company believes it has no significant concentration of credit risk as of June 24, 2000. Trade receivables are dispersed among a large number of retailers, distributors and industrial accounts in many countries. One customer accounted for approximately 13% of sales in 2000 and 11% in 1999.
The Company is engaged in the single business segment of producing and marketing industrial, professional and consumer products. It manufactures over 5,000 items, including precision measuring tools, tape measures, gages and saw blades. Operating segments are identified as components of an enterprise about which separate discrete financial information is used by the chief operating decision maker in how to allocate assets and assess performance of the Company.
The Company's operations are primarily in North America, Brazil, and the United Kingdom. Geographic information about the Company's sales and long- lived assets are as follows:
2000 1999 1998 Sales: North America $ 172,542 $ 171,176 $ 187,925 United Kingdom 33,064 33,249 35,642 Brazil 41,926 40,104 50,923 Eliminations and other (12,363) (12,144) (12,150) Total $ 235,169 $ 232,385 $ 262,340
Long-lived assets: North America $ 95,343 $ 90,379 United Kingdom 8,054 8,433 Brazil 7,028 7,661 Other 2,274 1,833 Total $ 112,699 $ 108,306
QUARTERLY FINANCIAL DATA (UNAUDITED)(in thousands except per share data) Earnings Basic Before Earnings Net Gross Income Net Per Quarter Ended Sales Profit Taxes Earnings Share September 1998 $58,364 $17,143 $ 5,761 $ 3,916 $ 0.57 December 1998 60,890 18,695 6,556 4,513 0.65 March 1999 57,073 16,705 5,226 3,586 0.53 June 1999 56,058 18,858 6,083 4,681 0.69 $232,385 $71,401 $23,626 $16,696 $ 2.44
September 1999 $58,412 $16,145 $ 4,317 $ 2,875 $ 0.43 December 1999 61,245 18,195 5,556 3,817 0.57 March 2000 58,860 15,753 3,519 2,451 0.37 June 2000 56,652 16,428 3,837 2,346 0.36 $235,169 $66,521 $17,229 $11,489 $ 1.73
The Company's Class A Common Stock is traded on the New York Stock Exchange.
Item 9
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The Company had no such changes in or disagreements with its independent auditors.
PART III
Item 10
Item 10 - Directors and Executive Officers of the Registrant
Directors The information concerning the Directors of the Registrant is contained on pages 1 through 5 in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 20, 2000, and is hereby incorporated by reference.
Executive Officers of the Registrant
Held Present Name Age Office Since Position
Douglas R. Starrett 80 1995 Chairman and CEO and Director
Douglas A. Starrett 48 1995 President and Director
George B. Webber 79 1962 Vice President Webber Gage Division and Director
Anthony M. Aspin 47 2000 Vice President Sales
Roger U. Wellington, Jr. 59 1984 Treasurer and Chief Financial Officer and Director
Steven A. Wilcox 45 1997 Clerk
Douglas R. Starrett, Douglas A. Starrett (son of Douglas R. Starrett), George B. Webber and Roger U. Wellington, Jr. have served in the same capacities as listed above for at least the past five years. Anthony M. Aspin was previously a divisional sales manager with the Company. Except in the case of Steven Wilcox, the positions listed above represent their principal occupations and employment during the last five years. Steven Wilcox, elected clerk in 1997, has been a partner in Ropes & Gray, counsel for the Company, throughout that period.
The President, Treasurer and Clerk hold office until the first meeting of the directors following the next annual meeting of stockholders and until their respective successors are chosen and qualified, and each other officer holds office until the first meeting of directors following the next annual meeting of stockholders, unless a shorter period shall have been specified by the terms of his election or appointment or, in each case, until he sooner dies, resigns, is removed or becomes disqualified.
There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any director or executive officer during the past five years.
Item 11
Item 11 - Executive Compensation
The information concerning management remuneration is contained on pages 5 through 10 in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 20, 2000 and, except for the information under the caption "Compensation Committee Report," is hereby incorporated by reference.
Item 12
Item 12 - Security Ownership of Certain Beneficial Owners and Management
(a)	Security ownership of certain beneficial owners: 	The information concerning a more than 5% holder of any class of the Company's voting shares is contained on page 4 of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 20, 2000, and is hereby incorporated by reference.
(b)	Security ownership of management: 	The information concerning the beneficial ownership of each class of equity securities by all directors, and all directors and officers of the Company as a group, is contained on pages 2 through 4 of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 20, 2000, and is hereby incorporated by reference.
(c)	The Company knows of no arrangements that may, at a subsequent date, result in a change in control of the Company.
Item 13
Item 13 - Certain Relationships and Related Transactions
(a)	Transactions with management and others: None (b)	Certain business relationships: Not applicable (c)	Indebtedness of management:	None (d)	Transactions with promoters: Not applicable
PART IV
Item 14
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)	1.	Financial statements filed in item 8 of this annual report:
		 Consolidated Statements of Earnings and Cash Flows for the 		 Three Years in the Period ended June 24, 2000
		 Consolidated Balance Sheets at June 24, 2000 and June 26, 1999
		 Consolidated Statements of Stockholders' Equity for the Three 		 Years in the Period Ended June 24, 2000
		 Notes to Consolidated Financial Statements
2. All other financial statements and schedules are omitted because they are inapplicable, not required under the instructions, or the information is reflected in the financial statements or notes thereto.
	3.	See Exhibit Index below.
(b) The Company filed a report on Form 8-K with the Securities and Exchange Commission on May 23, 2000, which is incorporated herein by reference (see exhibit 4b).
(c)		See Exhibit Index below.
(d)		Not applicable.
THE L.S. STARRETT COMPANY AND SUBSIDIARIES - EXHIBIT INDEX
	(3i)	Restated Articles of Organization dated December 20, 1989, filed with Form 10-Q for the quarter ended December 23, 1989, are hereby incorporated by reference.
	(3ii)	Bylaws as amended September 16, 1999, filed with Form 10-Q for the quarter ended September 24, 1999, are hereby incorporated by reference.
	(4a)	Loan Agreement and related documents, relative to $7,500,000 Industrial Revenue Bond financing dated as of September 1, 1985, between The Surry County Industrial Facilities and Pollution Control Financing Authority and The L.S. Starrett Company will be furnished to the Commission upon request.
	(4b)	Common Stock Rights Agreement, dated as of May 23, 2000, between the Company and Fleet National Bank, as Rights Agent, including Form of Common Stock Purchase Rights Certificate, filed on May 23, 2000 with the Company's Form 8-A, is hereby incorporated by reference.
	(10a)	$25,000,000 Revolving Credit Agreement dated as of June 13, 2000, among The L.S. Starrett Company and Fleet National Bank submitted herewith.
	(21)	Subsidiaries of the Registrant. See page 24.
	(23)	Independent Auditors' Consent. See page 25.
	(27)	Financial Data Schedule submitted herewith.
Exhibit 21 THE L.S. STARRETT COMPANY AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT JUNE 24, 2000
The parent company, The L.S. Starrett Company, incorporated in Massachusetts, has the following subsidiaries, all of which are wholly owned:
Fiscal Year End
Starrett Securities Corporation Incorporated in Last Sat Massachusetts in June
Evans Rule Company, Inc. Incorporated in Last Sat. New Jersey in June
The L.S. Starrett Co. of Canada Incorporated in Last Sat. Limited Canada in June
The L.S. Starrett International Incorporated in Last Sat. Company Barbados in June
The L.S. Starrett Company Incorporated in May 31 Limited Scotland
Starrett Industria e Incorporated in May 31 Comercio Ltda. Brazil
Level Industries, Inc. Incorporated in Last Sat. Massachusetts in June
Starrett Tools (Suzhou) Co., Ltd. Incorporated in Dec. 31 China
The L.S. Starrett Company of Incorporated in June 30 Australia Pty. Ltd. Australia
Exhibit 23 INDEPENDENT AUDITORS' CONSENT
The L.S. Starrett Company
We consent to the incorporation by reference in the Registration Statements No. 33-55623, No. 333-12997 and No. 333-89965 of The L.S. Starrett Company, all on Form S-8, of our report dated July 28, 2000, appearing in the Annual Report on Form 10-K of The L.S. Starrett Company for the year ended June 24, 2000.
S/DELOITTE & TOUCHE LLP
Boston, Massachusetts September 13, 2000
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE L.S. STARRETT COMPANY (Registrant)
By S/ROGER U. WELLINGTON, JR. Roger U. Wellington, Jr., Treasurer and Chief Financial Officer
Date: September 13, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:
S/DOUGLAS R. STARRETT S/DOUGLAS A. STARRETT Douglas R. Starrett, Sept. 13, 2000 Douglas A. Starrett, Sept. 13, 2000 Chairman and CEO and Director President and Director
S/ANDREW B. SIDES, JR. S/WILLIAM S. HURLEY Andrew B. Sides, Jr., Sept. 13, 2000 William S. Hurley, Sept. 13, 2000 Director Director
S/RICHARD B. KENNEDY S/GEORGE B. WEBBER Richard B. Kennedy, Sept. 13, 2000 George B. Webber, Sept. 13, 2000 Director Vice President Webber Gage Division and Director
S/STEVEN G. THOMSON S/ROGER U. WELLINGTON, JR. Steven G. Thomson, Sept. 13, 2000 Roger U. Wellington,Jr.,Sept.13, 2000 Chief Accounting Officer Treasurer and Chief Financial Officer and Director