Notes to Consolidated Financial Statements
June 30, 2022 and 2021
1. DESCRIPTION OF BUSINESS
The L. S. Starrett Company (the “Company”) is incorporated in the Commonwealth of Massachusetts and is in the business of manufacturing industrial, professional and consumer measuring and cutting tools and related products. The Company’s manufacturing operations are primarily in North America, Brazil, and China. The largest consumer of these products is the metalworking industry, but others include automotive, aviation, marine, farm, "do-it-yourselfers" and tradesmen such as builders, carpenters, plumbers and electricians.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying balance sheets and related statements of income, cash flows, and stockholders’ equity include all adjustments, in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results and outcomes may differ from management’s estimates and assumptions.
Principles of consolidation: The consolidated financial statements include the accounts of The L. S. Starrett Company and its subsidiaries, all of which are wholly-owned. All intercompany items have been eliminated in consolidation.
The Company plans to permanently reinvest cash held in foreign subsidiaries. Cash held in foreign subsidiaries is generally not available for use in the U.S. without the likely U.S. federal and state income and withholding tax consequences.
Financial instruments and derivatives: The Company’s financial instruments include cash, accounts receivable, accounts payable, accrued expenses and debt. The carrying value of cash and accounts receivable approximates fair value because of the short-term nature of these instruments. The carrying value of debt as of ,June 30, 2022 $31.5 million of which is at current market interest rates, also approximates its fair value. The Company’s U.K. subsidiary utilizes forward exchange contracts to reduce currency risk. The notional amounts of contracts outstanding as of both June 30, 2022 and June 30, 2021 were zero.
Accounts receivable: Accounts receivable consist of trade receivables from customers. The expense for bad debts amounted to $0.1 million, $0.1 million, and $0.2 million in fiscal 2022, 2021 and 2020, respectively. In establishing the allowance for doubtful accounts, management considers historical losses, the aging of receivables and existing economic conditions.
Inventories: Inventories are stated at the lower of cost or market. “Market” is defined as “net realizable value,” or the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Substantially all United States inventories are valued using the last-in-first-out “LIFO” method. All non-U.S. subsidiaries use the first-in-first-out “FIFO” method or the average cost method. LIFO is not a permissible method of inventory costing for tax purposes outside the U.S.
Property Plant and Equipment: The cost of buildings and equipment is depreciated using straight-line and accelerated methods over their estimated useful lives as follows: buildings and building improvements 10 to 50 years, machinery and equipment 3 to 12 years. The construction in progress balances in buildings, building improvements and machinery and equipment at June 30, 2022 and June 30, 2021 were $2.3 million and $1.5 million, respectively. Repairs and maintenance of equipment are expensed as incurred.
Leases: The Company adopted Accounting Standards Codification 842, Leases ("ASC 842") July 1, 2019. The Company has leased buildings, manufacturing equipment and autos that are classified as operating lease right-of use "ROU" assets and operating lease liabilities in the Company's Consolidated Balance Sheets. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component of the agreement.
Although currently the Company’s Finance Leases are considered de minimis, leases are capitalized under the criteria set forth in Accounting Standards Codification (ASC) 842, “Leases”.
Intangible assets: Identifiable intangibles are recorded at cost and are amortized on a straight-line basis over a 5-20 years period. The estimated useful lives of the intangible assets subject to amortization are: 14-20 years for trademarks and trade
names, 5-10 years for completed technology, 8 years for non-compete agreements, 8-16 years for customer relationships and 5 years for software development.
Revenue Recognition:
The core principle of ASC Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The application of the FASB’s guidance on revenue recognition requires the Company to recognize as revenue the amount of consideration that the Company expects to receive in exchange for goods and services transferred to our customers. To do this, the Company applies the five-step model prescribed by the FASB, which requires us to: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation.
The Company accounts for a contract or purchase order when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when control of the product passes to the customer, which is upon shipment, unless otherwise specified within the customer contract or on the purchase order as delivery, and is recognized at the amount that reflects the consideration the Company expects to receive for the products sold, including various forms of discounts.
Certain taxes assessed by governmental authorities on revenue producing transactions, such as value added taxes, are excluded from revenue and recorded on a net basis.
Performance Obligations
The Company’s primary source of revenue is derived from the manufacture and distribution of metrology tools and equipment and saw blades and related products sold to distributors. The Company recognizes revenue for sales to our customers when transfer of control of the related good or service has occurred. Any of the Company’s revenue not recognized under the point in time approach for the year ended June 30, 2022, was determined to be immaterial. Contract terms with certain metrology equipment customers could result in products and services being transferred over time as a result of the customized nature of some of the Company’s products, together with contractual provisions in the customer contracts that provide the Company with an enforceable right to payment for performance completed to date; however, under typical terms, the Company does not have the right to consideration until the time of shipment from its manufacturing facilities or distribution centers, or until the time of delivery to its customers. If certain contracts in the future provide the Company with this enforceable right of payment, the timing of revenue recognition from products transferred to customers over time may be slightly accelerated compared to the Company’s right to consideration at the time of shipment or delivery. No performance obligation related amounts were deferred as of June 30, 2022. Purchase orders are of durations less than one year. As such, the Company applies the practical expedient in ASC paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, for which work has not yet been performed.
The Company’s typical payment terms vary based on the customer, geographic region, and the type of goods and services in the contract or purchase order. The period of time between invoicing and when payment is due is typically not significant. Amounts billed and due from the Company’s customers are classified as receivables on the Consolidated Balance Sheet. As the Company’s standard payment terms are usually less than one year, the Company has elected the practical expedient under ASC paragraph 606-10-32-18 to not assess whether a contract has a significant financing component.
The Company’s customers take delivery of goods, and they are recognized as revenue at the time of transfer of control to the customer, which is usually at the time of shipment, unless otherwise specified in the customer contract or purchase order. This determination is based on applicable shipping terms, as well as the consideration of other indicators, including timing of when the Company has a present right to payment, when physical possession of products is transferred to customers, when the customer has the significant risks and rewards of ownership of the asset, and any provisions in contracts regarding customer acceptance.
While unit prices are generally fixed, the Company provides variable consideration for certain of our customers, typically in the form of promotional incentives at the time of sale. The Company utilizes the most likely amount consistently to estimate the effect of uncertainty on the amount of variable consideration to which the Company would be entitled. The most likely amount method considers the single most likely amount from a range of possible consideration amounts. The most likely amounts are based upon the contractual terms of the incentives and historical experience with each customer. The Company records estimates for cash discounts, promotional rebates, and other promotional allowances in the period the related revenue is recognized (“Customer Credits”). The provision for Customer Credits is recorded as a reduction from gross sales and reserves
for Customer Credits are presented within accrued sales incentives on the Consolidated Balance Sheet. Actual Customer Credits have not differed materially from estimated amounts for each period presented. Amounts billed to customers for shipping and handling are included in net sales and costs associated with shipping and handling are included in cost of sales. The Company has concluded that its estimates of variable consideration are not constrained according to the definition within the new standard. Additionally, the Company applies the practical expedient in ASC paragraph 606-10-25-18B and accounts for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment activity, rather than a separate performance obligation.
Under ASC Topic 606, the Company is required to present a refund liability and a return asset within the Consolidated Balance Sheet. The changes in the refund liability are reported in net sales, and the changes in the return asset are reported in cost of sales in the Consolidated Statements of Operations. As of June 30, 2022, and 2021, the balances of the return asset were $0.1 million and $0.2 million and the balance of the refund liability was $0.2 million as of June 30, 2022 and $0.1 million in the prior year, and they are presented within prepaid expenses and other current assets and accrued expenses, respectively, on the Consolidated Balance Sheet.
The Company, in general, warrants its products against certain defects in material and workmanship when used as designed, for a period of up to 1 year. The Company does not sell extended warranties.
Contract Balances
Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date on contracts with customers. Contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been met, and therefore, revenue has not been recognized. The Company had no contract asset balances, but had contract liability balances of $0.9 million and $0.6 million at June 30, 2022 and 2021, respectively.
Advertising costs: The Company’s policy is to generally expense advertising costs as incurred, except catalogs costs of $0.1 million in fiscal years 2022 and 2021 , which were deferred until mailed. Advertising costs were expensed as follows: $3.1 million in fiscal 2022, $3.2 million in fiscal 2021 and $3.6 million in fiscal 2020 and are included in selling, general and administrative expenses.
Freight costs: The cost of outbound freight and the cost for inbound freight included in material purchase costs are both included in cost of sales.
Pension and Other Postretirement Benefits: The Company has two defined benefit pension plans, one for U.S. employees and another for U.K. employees. The Company also has defined contribution plans. The Company amended its Postretirement Medical Plan effective December 31, 2013, whereby the Company terminated eligibility for employees under the age of 65.
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 no longer earn additional benefits after December 31, 2016. The U.K. Plan was closed to new entrants in fiscal 2009.
The Company sponsors funded U.S. and non-U.S. defined benefit pension plans covering the majority of our U.S. and U.K. employees. The Company also sponsors an unfunded postretirement benefit plan that provides health care benefits and life insurance coverage to eligible U.S. retirees. Under the Company’s current accounting method, both pension plans use fair value as the market-related value of plan assets and continue to recognize actuarial gains or losses within the corridor in other comprehensive income (loss) but instead of amortizing net actuarial gains or losses in excess of the corridor in future periods, such excess gains and losses, if any, are recognized in net periodic benefit cost as of the plan measurement date, which is the same as the fiscal year end of the Company. This mark-to-market (MTM adjustment) method is a permitted option which results in immediate recognition of excess net actuarial gains and losses in net periodic benefit cost instead of in other comprehensive income (loss). Such immediate recognition in net periodic benefit cost increases the volatility of net periodic benefit cost. The MTM adjustments to net periodic benefit cost for fiscal years 2022, 2021 and 2020 were $0.2 million, $0.2 million, and $16.9 million, respectively.
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 approximately $83.8 million of undistributed earnings of foreign subsidiaries as of June 30, 2022 and the related unrealized translation adjustments because such amounts are considered permanently invested. In addition, it is possible that remittance taxes, if any, would be reduced by U.S. foreign tax credits to the extent available, after consideration of U.S. Tax Reform and the dividends received deduction. Valuation allowances are
recognized if, based on the available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized.
Research and development: Research and development costs are expensed, primarily in selling, general and administrative expenses, and were as follows: $3.5 million in fiscal 2022, $3.0 million in fiscal 2021, and $3.8 million in fiscal 2020.
Earnings per share (EPS): Basic EPS is computed by dividing earnings (loss) 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 211,220, 297,054, and 86,065, of potentially dilutive common shares in fiscal 2022, 2021 and 2020, respectively, resulting from shares issuable under its stock-based compensation plans. These additional shares are not used in the diluted EPS calculation in loss years.
Translation of foreign currencies: The assets and liabilities on the financial statements of our foreign subsidiaries where the local currency is in functional currency, are translated at exchange rates in effect on reporting dates. The income statement is translated at average exchange rates over the reporting month throughout the year.
As equity accounts in the Consolidated Financial Statements are translated at historical exchange rates, the resulting foreign currency translation adjustments “CTA” are recorded in other comprehensive income (loss).
Other foreign subsidiaries may also contain assets or liabilities denominated in a currency other than the prevailing functional currency. These translations are adjusted into the functional currency on a monthly basis, See Note 10 “Other Income and Expense” to the Consolidated Financial Statements.
Use of accounting estimates: The preparation of the consolidated 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 net sales and expenses during the reporting period. Judgments, assumptions and estimates are used for, but not limited to: the allowances for doubtful accounts receivable; inventory allowances; income tax valuation allowances, goodwill, uncertain tax positions and pension obligations. Amounts ultimately realized could differ from those estimates.
Recently Issued Accounting Standards:
In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." ASU 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and added additional disclosures. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2020, effective for the Company July 1, 2021. The amendments in ASU 2018-14 must be applied on a retrospective basis. The adoption of ASU 2018-14 does not have a material effect on the Company's consolidated financial statements.
In November 2019, FASB issued ASU 2019-10, which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates of certain major new accounting standards. Of those standards affected the following is the only one not yet implemented by the Company. Financial Instruments Credit Losses ASU 2016-13 (ASC 326) and subsequent amendment to the guidance, ASU 2018-19 in November 2018. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. The amendment will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2018-19 clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. The amendments should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption was permitted for annual periods beginning after December 15, 2018, and interim periods therein. This pronouncement was extended for Small Reporting Companies and for the Company beginning July 1, 2022. The Company does not believe that ASU 2019-10 will have a material effect on its consolidated financial statements.
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022. The amendments in this Update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on
financial reporting. Optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this Update apply to contract modifications that replace a reference rate affected by reference rate reform (including rates referenced in fallback provisions) and contemporaneous modifications of other contract terms related to the replacement of the reference rate (including contract modifications to add or change fallback provisions). The Company currently has no hedging type contracts or others tied to reference rates where this standard would have a material impact to the Company's accounting. There is no material impact to the Company's financials as a result of adopting this amendment regarding the HSBC loan agreement. The Company does not believe that ASU 2020-04 will have a material effect on its consolidated financial statements.
In December 2019, FASB issued ASU 2019-12, Income Taxes (Topic 740).
The amendments in this Update simplify the accounting for income taxes by doing the following:
a) Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax. Requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction
b) Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both
not subject to tax and disregarded by the taxing authority.
c) Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.
d) Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.
The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 or July 1, 2021 for the Company. The the adoption of ASU 2019-12 does not have a material effect on the Company's consolidated financial statements.
3. STOCK-BASED COMPENSATION
Long-Term Incentive Plan
On September 5, 2012, the Board of Directors adopted The L.S. Starrett Company 2012 Long Term Incentive Plan (the “2012 Stock Plan”). The 2012 Stock Plan was approved by shareholders on October 17, 2012 and the material terms of its performance goals were re-approved by shareholders at the Company’s Annual Meeting held on October 18, 2017. There are no shares available under the 2012 Plan.
On September 1, 2021, the Board of Directors adopted The L.S. Starrett Company 2021 Long Term Incentive Plan (the “2021 Stock Plan”). The 2021 Stock Plan was approved by shareholders on October 13, 2021.
Both the 2012 and 2021 Stock Plan permits the granting of the following types of awards to officers, other employees and non-employee directors: stock options; restricted stock awards; unrestricted stock awards; stock appreciation rights; stock units including restricted stock units; performance awards; cash-based awards; and awards other than previously described that are convertible or otherwise based on stock. The 2021 and 2012 Stock Plans provide for the issuance of up to 500,000 shares in each plan of common stock.
Restricted stock units (“RSU”) granted generally vest from one year to three years. Vested restricted stock units will be settled in Class A shares of common stock. As of June 30, 2022, there were no stock options and 163,807 restricted stock units outstanding. In addition, there were 474,401 shares available for grant under the 2021 Stock Incentive Plan as of June 30, 2022 and 10,477 were available for grant as of June 30, 2021.
There were no stock options granted during fiscal years 2022, 2021 or 2020.
There were no stock options outstanding as of June 30, 2022. There were no stock options exercisable as of June 30, 2022. In recognizing stock compensation expense for the 2012 and 2021 Stock Incentive Plan, management has estimated that there will be no forfeitures of options.
The Company accounts for RSU awards by recognizing the expense of the intrinsic value at the award date ratably over vesting periods generally ranging from one year to three years. The related expense is included in selling, general and administrative expenses. During the year ended June 30, 2022, the Company granted 80,500 RSU awards with fair values of $11.35 per RSU award, and there were 11,174 RSU’s forfeited. During the year ended June 30, 2021, the Company granted 297,140 RSU awards with fair values of $3.36 per RSU award. During the year ended June 30, 2020, the Company granted 110,500 RSU awards with fair values of $5.34 per RSU award.
There were 133,995 and 102,670 RSU awards settled in fiscal years 2022 and 2021 respectively. The aggregate intrinsic value of RSU awards outstanding as of June 30, 2022 was $1.1 million. The aggregate intrinsic value of RSU awards outstanding as of June 30, 2021 was $2.4 million. Compensation expense related to the 2012 Stock Incentive Plan was $501,000, $675,000 and $345,000 for fiscal 2022, 2021 and 2020 respectively. As of June 30, 2022, there was $2.7 million of total unrecognized compensation costs related to outstanding stock-based compensation arrangements. Of this cost, $2.1 million relates to performance based RSU grants that are not expected to be awarded. The remaining $0.6 million is expected to be recognized over a weighted average period of 1.9 years.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plans (ESPP) give eligible employees an opportunity to participate in the success of the Company. The Board of Directors renews each Employee Stock Purchase Plan every five years. Under these 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 on such date. The Board of Directors last approved an ESPP renewal in 2017. A summary of option activity is as follows:
| | | | | | | | | | | | | | | | | |
| Shares on Options | | Weighted Average Exercise Price | | Shares Available for Grant |
Balance, June 30, 2019 | 87,133 | | | | | 412,867 | |
Options granted | 86,946 | | | 3.63 | | | (86,946) | |
Options exercised | (20,615) | | | 3.52 | | | — | |
Options canceled | (54,271) | | | | | 54,271 | |
Balance, June 30, 2020 | 99,193 | | | | | 380,192 | |
Options granted | 70,985 | | | 3.26 | | | (70,985) | |
Options exercised | (16,196) | | | 4.65 | | | — | |
Options canceled | (36,022) | | | | | 36,022 | |
Balance, June 30, 2021 | 117,960 | | | | | 345,229 | |
Options granted | 26,614 | | | 7.94 | | | (26,614) | |
Options exercised | (43,658) | | | 3.18 | | | — | |
Options canceled | (30,866) | | | | | 30,866 | |
Balance, June 30, 2022 | 70,050 | | | | | 349,481 | |
The following information relates to outstanding options as of June 30, 2022:
| | | | | |
Weighted average remaining life (years) | 1.3 |
Weighted average fair value on grant date of options granted in: | |
2020 | $ | 1.63 | |
2021 | 1.51 | |
2022 | 4.00 | |
The fair value of each option grant was estimated on the date of grant based on the Black-Scholes option pricing model with the following weighted average assumptions: expected stock volatility – 57.19% – 60.0%, risk free interest rate – 0.41%– 2.61%, expected dividend yield - 0% - 0% and expected lives - 2 years. Compensation expense of $0.1 million, $0.1 million and $0.1 million has been recorded for fiscal 2022, 2021 and 2020, respectively.
Employee Stock Ownership Plan
On February 5, 2013, the Board of Directors adopted The L.S. Starrett Company 2013 Employee Stock Ownership Plan (the “2013 ESOP”). The purpose of the plan is to supplement existing Company programs through an employer funded individual account plan dedicated to investment in common stock of the Company, thereby encouraging increased ownership of the Company while providing an additional source of retirement income. The plan is intended as an employee stock ownership plan within the meaning of Section 4975 (e) (7) of the Internal Revenue Code of 1986, as amended. U.S. employees who have completed a year of service as of December 31, 2012 are eligible to participate. There was no compensation expense for the ESOP in 2022, 2021 or 2020.
4. CASH
Cash held by foreign subsidiaries amounted to $7.2 million and $5.9 million at June 30, 2022 and June 30, 2021, respectively. Of the June 30, 2022 balance, $2.1 million in U.S. dollar equivalents was held in British Pounds Sterling and $3.6 million in U.S. dollar equivalents was held in Brazilian Reals. Of the June 30, 2021 balance, $2.4 million in U.S. dollar equivalents was held in British Pounds Sterling and $0.9 million in U.S. dollar equivalents was held in Brazilian Reals. Cash is maintained at federally insured financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to cash balances. The Balance in excess of federally insured limits was approximately $5.0 million at June 30, 2022, and $1.0 million at June 30, 2021.
5. INVENTORIES
Inventories consist of the following (in thousands):
| | | | | | | | | | | |
| 6/30/2022 | | 6/30/2021 |
Raw materials and supplies | $ | 35,752 | | | $ | 29,271 | |
Goods in process and finished parts | 22,268 | | | 16,096 | |
Finished goods | 35,589 | | | 37,344 | |
| 93,609 | | | 82,711 | |
LIFO reserve | (26,709) | | | (22,139) | |
| $ | 66,900 | | | $ | 60,572 | |
Of the Company’s $66.9 million and $60.6 million total inventory at June 30, 2022 and 2021, respectively, the $26.7 million and $22.1 million LIFO reserves belong to the U.S. Precision Tools and Saws Manufacturing “Core U.S.” business. 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 Core U.S. business total inventory was $27.8 million on a FIFO basis and $5.7 million on a LIFO basis at June 30, 2021. The use of LIFO, as compared to FIFO, resulted in a $4.6 million decrease in cost of sales for the goods sold in fiscal 2022 compared to a $2.4 million decrease in fiscal 2021.
6. GOODWILL AND INTANGIBLES
The Company's acquisition of Bytewise in 2011 and a private software company in 2017 resulted in the recognition of goodwill totaling $4.7 million. In fiscal year 2020 the Company recorded an impairment charge of $3.7 million. The balance of goodwill on the Consolidated Balance Sheets as of June 30, 2022 is $1.0 million.
Identifiable intangible assets consist of the following (in thousands):
| | | | | | | | | | | |
| 6/30/2022 | | 06/30/2021 |
| | | |
Trademarks and trade names | $ | 2,070 | | | $ | 2,070 | |
Completed technology | — | | | 2,010 | |
Customer relationships | 630 | | | 630 | |
Software development | 11,269 | | | 10,244 | |
Other intangible assets | — | | | — | |
Gross intangible assets | 13,969 | | | 14,954 | |
Accumulated amortization and impairment | (9,329) | | | (10,066) | |
| | | |
Net intangible assets | $ | 4,640 | | | $ | 4,888 | |
Identifiable intangible assets are being amortized on a straight-line basis over the period of expected economic benefit. Amortization expense was $1.3 million, $1.2 million and $1.9 million for the year ended June 30, 2022, 2021 and 2020, respectively. The estimated aggregate amortization expense for each of the next five years, and thereafter, is as follows:
| | | | | |
Fiscal Year | (In thousands) |
2023 | $ | 1,358 | |
2024 | 1,088 | |
2025 | 928 | |
2026 | 717 | |
2027 | 389 | |
Thereafter | 160 | |
| $ | 4,640 | |
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| As of June 30, 2022 |
| Cost | | Accumulated Depreciation | | Net |
Land | $ | 1,009 | | | $ | — | | | $ | 1,009 | |
Buildings and building improvements | 29,424 | | | (17,242) | | | 12,182 | |
Machinery and equipment | 110,469 | | | (86,544) | | | 23,925 | |
Total | $ | 140,902 | | | $ | (103,786) | | | $ | 37,116 | |
| | | | | | | | | | | | | | | | | |
| As of June 30, 2021 |
| Cost | | Accumulated Depreciation | | Net |
Land | $ | 1,012 | | | $ | — | | | $ | 1,012 | |
Buildings and building improvements | 29,599 | | | (17,085) | | | 12,514 | |
Machinery and equipment | 107,649 | | | (85,183) | | | 22,466 | |
Total | $ | 138,260 | | | $ | (102,268) | | | $ | 35,992 | |
Any finance leases as of June 30, 2022 and June 30, 2021 are de minimis. Depreciation expense was $5.3 million, $5.1 million and $5.2 million for the years ended June 30, 2022, 2021 and 2020, respectively.
8. LEASES
The Company adopted Accounting Standards Codification 842, Leases "ASC 842" on July 1, 2019. The Company has leased buildings, manufacturing equipment and autos that are classified as Right of Use assets "ROU" and operating lease liabilities beginning in fiscal 2020 in the Company's Consolidated Balance Sheets. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component of the agreement.
The following tables shows the balance of ROU assets and lease liabilities for operating leases as of June 30, 2022.
| | | | | | | | | | | |
| Right-of-Use Assets | Operating Lease Obligations | Remaining Cash Commitment |
Operating leases | $ | 5,540 | | $ | 5,696 | | $ | 6,838 | |
The Company’s weighted average discount rate and remaining term on lease liabilities is approximately 9.0% and 4.2 years. As of June 30, 2022, the Company’s financing leases are de minimis. The foreign exchange impact affecting the operating leases are de minimis. 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 entered into $3.0 million in operating lease commitments in the twelve months ended June 30, 2022. At June 30, 2022, the Company had the following fiscal year minimum operating lease commitments (in thousands):
| | | | | |
| Operating Lease Commitments |
2023 | $ | 1,896 | |
2024 | 1,777 | |
2025 | 1,264 | |
2026 | 1,112 | |
2027 | 693 | |
Thereafter | 96 | |
Subtotal | $ | 6,838 | |
Imputed Interest | (1,142) | |
Total | $ | 5,696 | |
9. RESTRUCTURING COST
In March 2022, the Company adopted restructuring plans at a total estimated projected cost of $0.8 million related to the closure of its distribution and sales centers in Singapore and Japan. The cost to close the Singapore and Japan operations was projected to be comprised of $0.6 million in headcount reduction, $0.1 in fixed asset and lease disposal, and $0.1 million in professional fees. As of June 30, 2022 the Company completed $0.4 million in the closure of the distribution and sales centers. The Company estimates $0.3 million remaining related to the planned headcount, lease and fixed asset cost to be completed during the first quarter of fiscal 2023. These costs are located in the Consolidated Statements of Operations entitled restructuring charges. The Company anticipates an annualized savings reflected in the Consolidated Statements of Operations in Selling, General and Administrative expenses for this project of $0.6 million.
In fiscal year 2020 as a result of the pandemic, the Company invested in a strategic realignment focused on a lower cost structure long term, designed to maximize global factory utilization. The total restructuring planned was $5.2 million with $1.6 million in fiscal 2020 and $3.6 million in fiscal 2021. In fiscal 2020, $1.3 million was related to employee termination and $0.3 million was other. In fiscal 2021, $0.2 million in training and travel, $0.4 million in employee termination and retention and $3.0 million in other to include asset relocation. Total project cost was $3.8 million in International operations and $1.4 million in North America. In fiscal 2021, cost in North America were $1.0 million and $2.6 million in International operations. These costs are located in the Consolidated Statements of Operations entitled restructuring charges.
10. OTHER INCOME AND (EXPENSE)
Other income and expense consist of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Interest income | $ | 504 | | | $ | 350 | | | $ | 90 | |
Interest expense | (1,265) | | | (999) | | | (975) | |
Foreign currency (loss) gain, net | (301) | | | (1,151) | | | 140 | |
Brazil tax settlements | — | | | 1,125 | | | 2,544 | |
| | | | | |
Sale of scrap material | 205 | | | 261 | | | 100 | |
Pension net periodic benefit cost (NPBC) | 1,441 | | | 654 | | | (16,753) | |
Other (expense) income , net | (620) | | | 620 | | | 160 | |
| $ | (36) | | | $ | 860 | | | $ | (14,694) | |
In fiscal 2022, other income was $0.0 million and $0.9 million fiscal 2021. The pension liability charge in fiscal 2020 of $16.8 million non-cash related to the marked-to-market accounting methodology drove other expense. Brazilian tax settlements of $1.1 million and $2.5 million in fiscal years 2021 and 2020, respectively, related to prior period over payments.
11. INCOME TAXES
Components of earnings (loss) before income taxes are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Domestic operations | $ | 7,619 | | | $ | 4,308 | | | $ | (24,450) | |
Foreign operations | 13,900 | | | 13,118 | | | 4,453 | |
| $ | 21,519 | | | $ | 17,426 | | | $ | (19,997) | |
The provision for (benefit from) income taxes consists of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Current: | | | | | |
Federal | $ | (319) | | | $ | 165 | | | $ | (19) | |
Foreign | 5,478 | | | 4,686 | | | 3,633 | |
State | 33 | | | 45 | | | 30 | |
Deferred: | | | | | |
Federal | 2,256 | | | (1,843) | | | (1,514) | |
Foreign | (928) | | | (1,390) | | | 53 | |
State | 121 | | | 230 | | | (341) | |
| $ | 6,641 | | | $ | 1,893 | | | $ | 1,842 | |
Reconciliations of expected tax expense at the U.S. statutory rate to actual tax expense (benefit) are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Expected tax expense (benefit) | $ | 4,519 | | | $ | 3,660 | | | $ | (4,199) | |
State taxes, net of federal effect | 321 | | | 171 | | | (1,042) | |
Foreign taxes, net of federal credits | 1,091 | | | 1,424 | | | 1,210 | |
Change in valuation allowance | 247 | | | — | | | 1,996 | |
Tax reserve adjustments | 127 | | | (63) | | | 1,946 | |
Return to provision and other adjustments | 323 | | | 165 | | | 372 | |
Goodwill impairment | — | | | — | | | 130 | |
Tax rate change applied to deferred tax balances | 43 | | | (675) | | | 54 | |
Global intangible low taxed income | 322 | | | (2,622) | | | 1,558 | |
Other permanent items | (352) | | | (167) | | | (183) | |
Actual tax expense | $ | 6,641 | | | $ | 1,893 | | | $ | 1,842 | |
Beginning in fiscal 2019, the Company incorporated certain provisions of the Tax Cuts and Jobs Act (“the Act”) in the calculation of the tax provision and effective tax rate, including the provisions related to the Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Base Erosion Anti Abuse Tax (“BEAT”), as well as other provisions, which limit tax deductibility of expenses. Under the GILTI provisions, U.S. taxes are imposed on foreign income in excess of a deemed return on tangible assets of its foreign subsidiaries. The ability to benefit from a deduction and foreign tax credits against a portion of the GILTI income may be limited under the GILTI rules as a result of the utilization of net operating losses, foreign sourced income, and other potential limitations within the foreign tax credit calculation.
In July 2020, the IRS issued final regulations and additional proposed regulations that address the application of the high-taxed exclusion from GILTI. Under these regulations, the Company can make an annual election to exclude from its GILTI inclusion, income from its foreign subsidiaries that’s effective income tax rate exceeds 18.9% for that year. The regulations must be applied for tax years beginning after July 23, 2020 but companies have the option to apply retroactively for tax years beginning after December 31, 2017 and before July 23, 2020. In fiscal 2021 the Company recognized a tax benefit of $2.6 million related to the impact of electing to apply the high-tax exclusion retroactively for fiscal 2019 and fiscal 2020.
The tax rate of 30.9% on pre-tax income of $21.5 million in the year ended June 30, 2022 is 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.
The tax rate of a benefit of 10.9% on pre-tax income of $17.4 million in the year ended June 30, 2021 is lower than the U.S. statutory rate primarily as a result of the tax benefit recognized for the retroactive application of the GILTI high-tax exclusion to fiscal 2019 and fiscal 2020 and the impact of the United Kingdom's statutory rate increase from 17% to 25% on the Company's net deferred tax asset, offset by the jurisdictional mix of earnings, particularly from Brazil with a statutory tax rate of 34%.
The tax rate of 9.2% on pre-tax losses of $20.0 million in the year ended June 30, 2020 is lower than the U.S. statutory rate primarily as a result of the GILTI provisions, non-deductible goodwill impairment, as well as changes in the jurisdictional mix of earnings, particularly Brazil with a statutory tax rate of 34%.The tax rate was also negatively impacted by the write-off of the long-term receivable previously established for competent authority relief for historic transfer pricing adjustments which the Company has determined is no longer feasible to pursue and an increase in the valuation allowance against foreign tax credits which the Company has determined are more likely than not to expire unutilized.
Net deferred tax assets at June 30, 2022 were $14.9 million. While these deferred tax assets reflect the tax effect of temporary differences between book and taxable income in all jurisdictions in which the Company has operations, the majority of the assets relate to U.S. operations. U.S. net deferred assets are $19.0 million with a valuation allowance of $8.5 million. 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 due to the uncertainty of generating sufficient foreign source income to utilize those credits in the future and certain state net operating loss carryforward that will expire in the near future.
Key positive evidence considered include: a) domestic profitability in 2022 and 2021; b) cost saving plans are continuing to be reviewed and implemented by the Company; c) indefinite federal loss carryforward periods and d) forecasted domestic profits for future years. The negative evidence considered is that fiscal years 2020 showed domestic book and tax losses due to the impact of the COVID-19 pandemic and charges recorded in the fourth quarter.
In fiscal 2022, the valuation allowance increased by $0.2 million primarily due to state net operating losses that expired offset by a reserve against a UK deferred tax asset not expected to be realized. In fiscal 2021, the valuation allowance decreased by $0.1 million primarily due to foreign currency fluctuations.
Deferred income taxes at June 30, 2022 and 2021 are attributable to the following (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Inventories | $ | 2,009 | | | $ | 936 | |
Employee benefits (other than pension) | 859 | | | 1,469 | |
Operating lease liabilities | 1,403 | | | 1,004 | |
Book reserves | 859 | | | 541 | |
Federal NOL, various carryforward periods | 2,440 | | | 5,004 | |
State NOL, various carryforward periods | 1,719 | | | 2,072 | |
Foreign NOL, various carryforward periods | 365 | | | 707 | |
Foreign tax credit carryforward, expiring 2023 – 2028 | 7,316 | | | 7,329 | |
Pension benefits | 5,527 | | | 8,253 | |
Retiree medical benefits | 382 | | | 481 | |
Depreciation | (336) | | | 18 | |
Intangibles | (272) | | | (91) | |
Right of use assets | (1,372) | | | (1,027) | |
Federal research and development and AMT credit carryforward | 894 | | | 961 | |
Contingency accruals | 92 | | | (1,275) | |
Other temporary taxable differences | (151) | | | (382) | |
Other temporary deductible differences | 2,140 | | | 1,832 | |
Total deferred tax assets | 23,874 | | | 27,832 | |
Valuation allowance | (8,950) | | | (8,759) | |
Net deferred tax asset | $ | 14,924 | | | $ | 19,073 | |
The Company is subject to U.S. federal income tax and various state, local and foreign income taxes in numerous jurisdictions. The Company’s domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to the Company’s interpretation of applicable tax laws in the jurisdictions in which it files.
Reconciliations of the beginning and ending amount of unrecognized tax benefits are as follows (in thousands):
| | | | | |
Balance July 1, 2019 | $ | (10,939) | |
Increase for tax positions taken during the current period | (326) | |
Increase for tax positions taken during the prior period | (188) | |
Effect of exchange rate changes | 299 | |
Decrease relating to lapse of applicable statute of limitations | 48 | |
Balance June 30, 2020 | (11,106) | |
| |
Increase for tax positions taken during the current period | (494) | |
Decrease for tax positions taken during the prior period | 386 | |
Effect of exchange rate changes | (207) | |
Decrease relating to lapse of applicable statute of limitations | 61 | |
Balance June 30, 2021 | (11,360) | |
| |
Increase for tax positions taken during the current period | (66) | |
Increase for tax positions taken during the prior period | — | |
Effect of exchange rate changes | 98 | |
Decrease relating to lapse of applicable statute of limitations | 40 | |
Balance June 30, 2022 | $ | (11,288) | |
As of June 30, 2022, 2021 and 2020, the Company has unrecognized tax benefits of $11.3 million, $11.4 million, and $11.1 million, respectively, of which $7.8 million, $7.9 million and $7.7 million, respectively, would favorably impact the effective tax rate if recognized. The long-term tax obligations as of June 30, 2022, 2021 and 2020 relate primarily to transfer pricing adjustments.
The Company has identified uncertain tax positions at June 30, 2022 for which it is possible that the total amount of unrecognized tax benefits will decrease within the next twelve months by less than $0.2 million. The Company recognizes interest and penalties related to income tax matters in income tax expense and has booked ($0.1) million in fiscal 2022 for interest expense.
The Company’s U.S. federal tax returns for years prior to fiscal 2019 are no longer subject to U.S. federal examination by the Internal Revenue Service; however, tax losses and credits carried forward from earlier years are still subject to review and adjustment. As of June 30, 2022, the Company has resolved all open income tax audits. In international jurisdictions, the years that may be examined vary by country. The Company’s most significant foreign subsidiary in Brazil is subject to audit for the calendar years 2015 through 2021.
The federal tax loss carryforward of $11.6 million has an unlimited carryforward period. The state tax loss carryforwards tax effected of $1.6 million expires at various times in years 2023 through 2042 and $0.1 can be carried forward indefinitely. The state tax credit carryforwards of $0.4 million expires in the years 2023 through 2038 and $0.3 million can be carried forward indefinitely. The foreign tax credit carryforward of $7.3 million expires in the years 2023 through 2028. The research and development tax credit carryforward of $0.9 million expires in the years 2029 through 2042. The foreign tax loss carryforwards of $2.5 million can be carried forward indefinitely.
At June 30, 2022, the estimated amount of total unremitted earnings of foreign subsidiaries is $83.8 million. The foreign subsidiaries do not have the cash on hand to repatriate that amount. Meanwhile the Company has no plans to repatriate prior year earnings of its foreign subsidiaries and, accordingly, does not believe it is practicable to estimate the unrecognized deferred taxes related to these earnings as they are indefinitely reinvested. Cash held in foreign subsidiaries is not available for use in the U.S. without the likely U.S. federal and state income and withholding tax consequences.
12. EMPLOYEE BENEFIT AND RETIREMENT PLANS
The Company has two defined benefit pension plans, one for U.S. employees and another for U.K. employees, together referred to as the "Plans Combined". The U.K. plan was closed to new entrants in fiscal 2009. The Company has a postretirement medical and life insurance benefit plan for U.S. employees with a total benefit in fiscal 2022, 2021 and 2020 of $1.2 million, $0.5 million and $0.1 million. The Company also has defined contribution plans with a total cost in fiscal 2022, 2021 and 2020 of $1.6 million, $1.4 million and $1.6 million, respectively. The total Plans Combined cost for fiscal 2022, 2021 and 2020 was a benefit of $0.2 million and $0.1 million and a cost of $16.9 million, respectively. The Net Periodic Benefit Cost for the U.S. Retirement Plan decreased slightly and the U.K. plan increased slightly during the year.
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 no longer earn additional benefits after December 31, 2016.
The Company amended its Postretirement Medical Plan effective December 31, 2013 whereby the Company terminated eligibility for employees ages 55-64. For retirees 65 and older, the Company’s contribution is fixed at $28.50 or $23.00 per month depending upon the plan the retiree has chosen.
The year end obligation for the Non-qualified Excess Plan improved $0.2 million during fiscal 2022 to $2.0 million as compared to $2.2 million in the prior year. The change was mostly due to an actuarial gain of $0.2 million. The Net Periodic Benefit Cost remained flat from the prior year.
The main drivers of the actuarial gains and losses are as follows:
The year-end obligation for the Non-qualified Excess Plan improved $0.2 million during fiscal 2022 to $2.0 million as compared to $2.2 million in the prior year, primarily due to the higher discount rate from 2.69% to 4.77%, offset by changes in demographic assumptions and other experience gains and losses.
The funded status for the U.K. Plan improved during the year by $3.9 million to an under-funded balance of $4.6 million as the plan experienced a liability gain due to increase in discount rate from 1.86% at June 30, 2021 to 3.82% at June 30, 2022.
The funded status of the Plans Combined went from underfunded amount of $37.4 million in fiscal 2021 to underfunded $23.7 million in fiscal 2022, an improvement of $13.7 million as the benefit obligation decreased by $38.3 million and the assets decreased by $24.6 million. This was due to the increase in discount rate from 2.69% to 4.77%, offset by asset losses during the year.
The Post Retirement Benefit Plan also improved during the year due to the higher discount rate. The Net Periodic Benefit Cost for the current year improved as compared to the prior year, due to a plan settlement "Settlement" occurred during fiscal 2021, in the U.S. Retirement Plan, as a result of the annuity purchased, which decreased both liabilities and assets. The plan was also amended during fiscal 2021 to the Postretirement Benefit Plan to eliminate Life Insurance coverage. There were no plan settlements in fiscal 2022.
A plan settlement "Settlement" occurred during fiscal 2021, in the U.S. Retirement Plan, as a result of the annuity purchased, which decreased both liabilities and assets. The plan was also amended during fiscal 2021 to the Postretirement Benefit Plan to eliminate Life Insurance coverage. There were no plan settlements in fiscal 2022.
Settlement
ASC 715-30-35 (subsections 79 to 83) describes the treatment of a pension settlement. A settlement is defined as: a transaction that (a) is an irrevocable action, (b) relieves the employer (or the plan) of primary responsibility for a pension benefit obligation, and (c) eliminates significant risks related to the obligation and the assets used to effect the settlement.
The Company purchased an annuity contract on behalf of participants in which an insurance company unconditionally undertook a legal obligation to provide specified benefits to specific individuals and is considered a settlement for GAAP purposes. As such, special settlement accounting is triggered requiring accelerated recognition of the unrecognized gain recorded in Other Income on the Consolidated Statement of Operations and in the Postretirement benefit and pension obligation on the Consolidated Balance Sheets. The settlement expense is recorded in the period of the purchase. Liabilities and assets were remeasured as of June 30, 2021 and the change as a result of the remeasurement in the asset and liability values as included in the existing unrecognized gain/loss. A fraction of the determined gain/loss was recognized immediately in Other Income on the Consolidated Statement of Operations, and was based on the ratio of the amount settled divided by the total liability.
The table below illustrates the funded status and unrecognized amounts before the remeasurement, after the remeasurement, as well as the effect of the settlement. These amounts are as of the remeasurement date of June 30, 2021, in thousands.
| | | | | | | | | | | | | | | | | |
| Before remeasurement | Effect of remeasurement | After remeasurement | Effect of settlement | After settlement |
Benefit obligation | $ | 133,748 | | $ | 75 | | $ | 133,823 | | $ | (11,411) | | $ | 122,412 | |
Market value of assets | $ | 107,259 | | $ | — | | $ | 107,259 | | $ | (11,411) | | $ | 95,848 | |
Funded status | $ | 26,489 | | $ | 75 | | $ | 26,564 | | $ | — | | $ | 26,564 | |
Unrecognized (gain) loss | $ | 1,606 | | $ | (75) | | $ | 1,531 | | $ | (130) | | $ | 1,401 | |
Prepaid / (Accrued) | $ | 28,095 | | $ | — | | $ | 28,095 | | $ | (130) | | $ | 27,965 | |
The total annuity purchase amount released from the plan assets was $11.4 million and a settlement credit of $0.1 million (based on 8.53% of liability settled) was included in the net periodic benefit cost for fiscal year ending June 30, 2021.
Plan amendment
With a plan amendment that results in a change in liability, liabilities are remeasured as of the effective date of the change and a new prior service cost/(credit) base was created equal to the amount of the change in liability. This prior service cost/(credit) was recognized in Other Comprehensive Income at the date of the amendment and amortized as a component of the net periodic benefit cost in future periods.
Effective February 1, 2021, the Company amended the Postretirement Benefit Plan to eliminate Life Insurance coverage for current and future retirees. This amendment resulted in a decrease in liability of $5.6 million and triggered a remeasurement of the net periodic benefit cost for fiscal 2021. This change is amortized over 5.96 years, which results in a credit of $0.9 million per year. However, only $0.4 million (5/12 of the annual amortization amount) is recognized in fiscal 2021 based on the effective date of the plan change. The total net periodic benefit cost for fiscal 2021 is based on 7/12 of the original expense,
plus 5/12 of the remeasured expense (including the plan amendment). The table below summarizes the total net periodic benefit cost for the Post Retirement Benefit plan for fiscal 2021, in thousands:
| | | | | | | | | | | |
| 7/1/20 to 1/31/21 | 2/1/21 to 6/30/21 | Total expense |
| (before amendment) | (after amendment) | for fiscal 2021 |
Service cost | $ | 50 | | $ | 15 | | $ | 65 | |
Interest cost | $ | 120 | | $ | 21 | | $ | 141 | |
Amortization of prior service (credit) | $ | (313) | | $ | (614) | | $ | (927) | |
Amortization of net (gain) | $ | 97 | | $ | 97 | | $ | 194 | |
Total expense | $ | (46) | | $ | (481) | | $ | (527) | |
| | | |
Measurement date | June 30, 2020 | January 31, 2021 | n/a |
Discount rate | 2.73 | % | 2.57 | % | n/a |
Under the Plans Combined, benefits are based on years of service and final average earnings. Plan assets consist primarily of investment grade debt obligations, marketable equity securities and shares of the Company’s common stock. The asset allocation of the Company’s domestic pension plan is diversified, consisting primarily of investments in equity and debt securities. The Company seeks a long-term investment return that is given reasonable prevailing capital market expectations. Target allocations are 40% to 70% in equities (including 10% to 20% in Company stock), and 30% to 60% in cash and debt securities.
In fiscal 2023, the Company will use an expected long-term rate of return assumption of 4.8% for the U.S. domestic pension plan, and 3.8% for the U.K. plan. In determining these assumptions, the Company considers the historical returns and expectations for future returns for each asset class as well as the target asset allocation of the pension portfolio as a whole. In fiscal 2022 and 2021, the Company used a discount rate assumption of 4.8% and 2.7%, respectively for the U.S. plan and 3.8% and 1.9%, respectively for the U.K. plan. In determining these assumptions, the Company considers published third party data appropriate for the plans.
Other than the discount rate, pension valuation assumptions are generally long-term and not subject to short-term market fluctuations, although they may be adjusted as warranted by structural shifts in economic or demographic outlooks. Long-term assumptions are reviewed annually to ensure they do not produce results inconsistent with current market conditions. The discount rate is adjusted annually based on corporate investment grade (rated AA or better) bond yields, the maturities of which are correlated with the expected timing of future benefit payments, as of the measurement date.
As a result of the American Rescue Plan Act of 2021, the minimum required company contribution for the U.S. Plan in fiscal 2022 was reduced from $5.6 million to $0.6 million. The Company contributed $2.5 million to the Plans Combined with $1.0 million in the U.K. and $1.5 million in the U.S.. 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. The Company feels that government regulation combined with the actuarial estimates are two important factors and continues to evaluate its contribution into the plans on an ongoing basis.
The table below sets forth the actual asset allocation for the assets within the Company’s plans.
| | | | | | | | | | | |
| 2022 | | 2021 |
Asset category: | | | |
Cash equivalents | 2 | % | | 2 | % |
Fixed income | 40 | % | | 28 | % |
Equities | 32 | % | | 39 | % |
Mutual and pooled funds | 26 | % | | 31 | % |
| 100 | % | | 100 | % |
The Company determines its investments strategies based upon the composition of the beneficiaries in its defined benefit plans and the relative time horizons that those beneficiaries are projected to receive payouts from the plans. The Company engages an independent investment firm to manage the U.S. pension assets.
Cash equivalents are held in money market funds.
The Company’s fixed income portfolio includes mutual funds that hold a combination of short-term, investment-grade fixed income securities and a diversified selection of investment-grade, fixed income securities, including corporate securities and U.S. government securities.
The Company invests in equity securities, which are diversified across a spectrum of value and growth in large, medium and small capitalization funds and companies, as appropriate to achieve the objective of a balanced portfolio, optimize the expected returns and minimize volatility in the various asset classes.
Other assets include pooled investment funds whose underlying assets consist primarily of property holdings as well as financial instruments designed to offset the long-term impact of inflation and interest rate fluctuations.
The Company has categorized its financial assets (including its pension plan assets), based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets are categorized based on the inputs to the valuation techniques as follows:
◦Level 1 – Financial assets whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market which the Company has the ability to access at the measurement date.
◦Level 2 – Financial assets whose value are based on quoted market prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets.
◦Level 3 – Financial assets whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own view about the assumptions a market participant would use in pricing the asset.
The tables below show the portfolio by valuation category as of June 30, 2022 and June 30, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2022 | | | | | | | | | | |
Asset Category | | Level 1 | | Level 2 | | Level 3 | | Total | | % |
Cash Equivalents | | $ | 2,620 | | | $ | — | | | $ | — | | | $ | 2,620 | | | 2 | % |
Fixed Income | | — | | | 44,562 | | | — | | | 44,562 | | | 40 | % |
Equities | | 33,869 | | | 965 | | | — | | | 34,834 | | | 31 | % |
Mutual & Pooled Funds | | — | | | 28,598 | | | — | | | 28,598 | | | 26 | % |
Total | | $ | 36,489 | | | $ | 74,125 | | | $ | — | | | $ | 110,614 | | | 100 | % |
Included in equity securities at June 30, 2022 and 2021 are shares of the Company’s common stock having a fair value of $3.8 million and $5.6 million, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2021 | | | | | | | | | | |
Asset Category | | Level 1 | | Level 2 | | Level 3 | | Total | | % |
Cash Equivalents | | $ | 2,457 | | | $ | — | | | $ | — | | | $ | 2,457 | | | 2 | % |
Fixed Income | | — | | | 38,155 | | | — | | | 38,155 | | | 28 | % |
Equities | | 51,095 | | | 1,887 | | | — | | | 52,982 | | | 39 | % |
Mutual & Pooled Funds | | 1,703 | | | 39,895 | | | — | | | 41,598 | | | 31 | % |
Total | | $ | 55,255 | | | $ | 79,937 | | | $ | — | | | $ | 135,192 | | | 100 | % |
U.S. and U.K. Plans Combined:
The status of these defined benefit plans is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Change in benefit obligation | | | | | |
Benefit obligation at beginning of year | $ | 172,617 | | | $ | 184,190 | | | $ | 169,680 | |
Interest cost | 4,113 | | | 4,476 | | | 5,417 | |
Plan Settlement | — | | | (11,411) | | | — | |
Exchange rate changes | (4,985) | | | 5,238 | | | (1,013) | |
Benefits paid | (6,941) | | | (9,019) | | | (7,203) | |
Actuarial (gain) loss | (30,501) | | | (857) | | | 17,309 | |
Benefit obligation at end of year | $ | 134,303 | | | $ | 172,617 | | | $ | 184,190 | |
Change in plan assets | | | | | |
Fair value of plan assets at beginning of year | 135,192 | | | 123,826 | | | 122,033 | |
Actual return on plan assets | (15,941) | | | 19,616 | | | 2,163 | |
Employer contributions | 2,517 | | | 7,999 | | | 7,687 | |
Plan Settlement | — | | | (11,411) | | | — | |
Benefits paid | (6,941) | | | (9,019) | | | (7,203) | |
Exchange rate changes | (4,213) | | | 4,181 | | | (854) | |
Fair value of plan assets at end of year | 110,614 | | | 135,192 | | | 123,826 | |
Funded status at end of year | $ | (23,689) | | | $ | (37,425) | | | $ | (60,364) | |
Amounts recognized in balance sheet | | | | | |
Current liability | $ | (1,157) | | | $ | (1,556) | | | $ | (373) | |
Non-current liability | (22,532) | | | (35,869) | | | (59,991) | |
Net amount recognized in balance sheet | $ | (23,689) | | | $ | (37,425) | | | $ | (60,364) | |
Amounts not yet reflected in net periodic benefit costs and included in accumulated other comprehensive loss | | | | | |
Accumulated loss | $ | 6,883 | | | $ | (3,685) | | | $ | (19,115) | |
Amounts not yet recognized as a component of net periodic benefit cost | 6,883 | | | (3,685) | | | (19,115) | |
Accumulated net periodic benefit cost in excess of contributions | (30,572) | | | (33,740) | | | (41,249) | |
Net amount recognized | $ | (23,689) | | | $ | (37,425) | | | $ | (60,364) | |
Components of net periodic benefit cost | | | | | |
Interest cost | $ | 4,113 | | | $ | 4,476 | | | $ | 5,417 | |
Expected return on plan assets | (4,378) | | | (4,457) | | | (5,193) | |
Settlement (gain) recognized | — | | | (130) | | | — | |
Recognized actuarial loss | 57 | | | 53 | | | 16,753 | |
Net periodic (benefit)cost | $ | (208) | | | $ | (58) | | | $ | 16,977 | |
Estimated amounts that will be amortized from accumulated other comprehensive loss over the next year | | | | | |
Net loss | $ | (57) | | | $ | (57) | | | $ | (38) | |
Information for pension plans with accumulated benefits in excess of plan assets | | | | | |
Projected benefit obligation | $ | 134,303 | | | $ | 172,617 | | | $ | 184,190 | |
Accumulated benefit obligation | $ | 134,303 | | | $ | 172,617 | | | $ | 184,190 | |
Fair value of assets | $ | 110,614 | | | $ | 135,192 | | | $ | 123,826 | |
U.S. Plan:
The status of the U.S. defined benefit plan is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Change in benefit obligation | | | | | |
Benefit obligation at beginning of year | $ | 124,633 | | | $ | 138,131 | | | $ | 126,380 | |
| | | | | |
Interest cost | 3,274 | | | 3,689 | | | 4,417 | |
Plan Settlement | — | | | (11,411) | | | — | |
Benefits paid | (5,191) | | | (5,880) | | | (5,682) | |
Actuarial loss | (22,136) | | | 104 | | | 13,016 | |
Benefit obligation at end of year | $ | 100,580 | | | $ | 124,633 | | | $ | 138,131 | |
Weighted average assumptions – benefit obligation | | | | | |
Discount rate | 4.77 | % | | 2.69 | % | | 2.73 | % |
Rate of compensation increase | n/a | | n/a | | n/a |
Change in plan assets | | | | | |
Fair value of plan assets at beginning of year | $ | 95,848 | | | $ | 87,292 | | | $ | 85,150 | |
Actual return on plan assets | (10,633) | | | 18,864 | | | 1,071 | |
Employer contributions | 1,523 | | | 6,983 | | | 6,753 | |
Plan Settlement | — | | | (11,411) | | | — | |
Benefits paid | (5,191) | | | (5,880) | | | (5,682) | |
Fair value of plan assets at end of year | 81,547 | | | 95,848 | | | 87,292 | |
Funded status at end of year | $ | (19,033) | | | $ | (28,785) | | | $ | (50,839) | |
Amounts recognized in balance sheet | | | | | |
Current liability | $ | (1,157) | | | $ | (1,556) | | | $ | (373) | |
Noncurrent liability | (17,876) | | | (27,229) | | | (50,466) | |
Net amount recognized in balance sheet | $ | (19,033) | | | $ | (28,785) | | | $ | (50,839) | |
Weighted average assumptions – net periodic benefit cost | | | | | |
Discount rate | 2.69 | % | | 2.73 | % | | 3.56 | % |
Rate of compensation increase | Varies | | Varies | | Varies |
Return on plan assets | 3.56 | % | | 4.25 | % | | 5.00 | % |
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive loss | | | | | |
Income (loss) | $ | 8,650 | | | $ | 464 | | | $ | (14,507) | |
Amounts not yet recognized as a component of net periodic benefit cost | 8,650 | | | 464 | | | (14,507) | |
Accumulated contributions less than net periodic benefit cost | (27,683) | | | (29,249) | | | (36,332) | |
Net amount recognized | $ | (19,033) | | | $ | (28,785) | | | $ | (50,839) | |
Components of net periodic benefit cost | | | | | |
Interest cost | $ | 3,274 | | | $ | 3,689 | | | $ | 4,417 | |
Expected return on plan assets | (3,374) | | | (3,712) | | | (4,249) | |
Settlement (gain) recognized | — | | | (130) | | | — | |
Recognized actuarial loss | 57 | | | 53 | | | 14,883 | |
Net periodic (benefit) cost | $ | (43) | | | $ | (100) | | | $ | 15,051 | |
Estimated amounts that will be amortized from accumulated other comprehensive loss over the next year | | | | | |
Net loss | (57) | | | (57) | | | (53) | |
Information for plan with accumulated benefits in excess of plan assets | | | | | |
Projected benefit obligation | $ | 100,580 | | | $ | 124,633 | | | $ | 138,131 | |
Accumulated benefit obligation | $ | 100,580 | | | $ | 124,633 | | | $ | 138,131 | |
Fair value of assets | $ | 81,547 | | | $ | 95,848 | | | $ | 87,292 | |
U.K. Plan:
The status of the U.K. defined benefit plan is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Change in benefit obligation | | | | | |
Benefit obligation at beginning of year | $ | 47,984 | | | $ | 46,059 | | | $ | 43,300 | |
Interest cost | 839 | | | 787 | | | 1,000 | |
Exchange rate changes | (4,985) | | | 5,238 | | | (1,013) | |
Benefits paid | (1,750) | | | (3,139) | | | (1,521) | |
Actuarial (gain) loss | (8,365) | | | (961) | | | 4,293 | |
Benefit obligation at end of year | $ | 33,723 | | | $ | 47,984 | | | $ | 46,059 | |
Weighted average assumptions - benefit obligation | | | | | |
Discount rate | 3.82 | % | | 1.86 | % | | 1.59 | % |
Rate of compensation increase | n/a | | n/a | | n/a |
Change in plan assets | | | | | |
Fair value of plan assets at beginning of year | $ | 39,344 | | | $ | 36,534 | | | $ | 36,883 | |
Actual return on plan assets | (5,308) | | | 752 | | | 1,092 | |
Employer contributions | 994 | | | 1,016 | | | 934 | |
Benefits paid | (1,750) | | | (3,139) | | | (1,521) | |
Exchange rate changes | (4,212) | | | 4,181 | | | (854) | |
Fair value of plan assets at end of year | 29,068 | | | 39,344 | | | 36,534 | |
Funded status at end of year | $ | (4,655) | | | $ | (8,640) | | | $ | (9,525) | |
Amounts recognized in balance sheet | | | | | |
Noncurrent liability | (4,655) | | | (8,640) | | | (9,525) | |
Net amount recognized in balance sheet | (4,655) | | | (8,640) | | | (9,525) | |
Weighted average assumptions – net periodic benefit cost | | | | | |
Discount rate | 1.86 | % | | 1.59 | % | | 2.39 | % |
Rate of compensation increase | n/a | | n/a | | n/a |
Return on plan assets | 2.69 | % | | 1.88 | % | | 2.62 | % |
Amounts not yet reflected in net periodic benefit costs and included in accumulated other comprehensive loss | | | | | |
Accumulated loss | $ | (1,766) | | | $ | (4,149) | | | $ | (4,608) | |
Amounts not yet recognized as a component of net periodic benefit cost | (1,766) | | | (4,149) | | | (4,608) | |
Accumulated net periodic benefit cost in excess of contributions | (2,889) | | | (4,491) | | | (4,917) | |
Net amount recognized | $ | (4,655) | | | $ | (8,640) | | | $ | (9,525) | |
Components of net periodic benefit cost | | | | | |
Interest cost | 839 | | | 787 | | | 1,000 | |
Expected return on plan assets | (1,004) | | | (745) | | | (944) | |
Amortization of net loss | — | | | — | | | 1,870 | |
Net periodic benefit cost | $ | (165) | | | $ | 42 | | | $ | 1,926 | |
| | | | | |
| | | | | |
| | | | | |
Information for plan with accumulated benefits in excess of plan assets | | | | | |
Projected benefit obligation | $ | 33,723 | | | $ | 47,984 | | | $ | 46,059 | |
Accumulated benefit obligation | $ | 33,723 | | | $ | 47,984 | | | $ | 46,059 | |
Fair value of assets | $ | 29,068 | | | $ | 39,344 | | | $ | 36,534 | |
Postretirement Medical and Life Insurance Benefits:
The status of the U.S. postretirement medical and life insurance benefit plan is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Change in benefit obligation: | | | | | |
Benefit obligation at beginning of year | $ | 1,890 | | | $ | 7,705 | | | $ | 6,930 | |
Service cost | 36 | | | 65 | | | 73 | |
Interest cost | 49 | | | 141 | | | 240 | |
Plan amendments | — | | | (5,585) | | | — | |
Benefits paid | (95) | | | (206) | | | (329) | |
Actuarial (gain) loss | (366) | | | (230) | | | 791 | |
Benefit obligation at end of year | $ | 1,514 | | | $ | 1,890 | | | $ | 7,705 | |
Weighted average assumptions: benefit obligations | | | | | |
Discount rate | 4.77 | % | | 2.69 | % | | 2.73 | % |
Rate of compensation increase | n/a | | n/a | | 2.64 | % |
Change in plan assets | | | | | |
Employer contributions | 95 | | | 206 | | | 329 | |
Benefits paid, net of employee contributions | (95) | | | (206) | | | (329) | |
Fair value of plan assets at end of year | — | | | — | | | — | |
Amounts recognized in balance sheet | | | | | |
Current postretirement benefit obligation | $ | (108) | | | $ | (107) | | | $ | (358) | |
Non-current postretirement benefit obligation | (1,406) | | | (1,783) | | | (7,347) | |
Net amount recognized in balance sheet | $ | (1,514) | | | $ | (1,890) | | | $ | (7,705) | |
Weighted average assumptions – net periodic benefit cost | | | | | |
Discount rate | 2.69 | % | | 2.73 | % | | 3.56 | % |
Rate of compensation increase | n/a | | n/a | | 2.64 | % |
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive loss | | | | | |
Prior service credit | $ | 5,424 | | | $ | 6,898 | | | $ | 2,240 | |
Accumulated gain (loss) | (1,181) | | | (1,736) | | | (2,160) | |
Amounts not yet recognized as a component of net periodic benefit cost | 4,243 | | | 5,162 | | | 80 | |
Net periodic benefit cost in excess of accumulated contributions | (5,757) | | | (7,052) | | | (7,785) | |
Net amount recognized | $ | (1,514) | | | $ | (1,890) | | | $ | (7,705) | |
Components of net periodic benefit cost | | | | | |
Service cost | $ | 36 | | | $ | 65 | | | $ | 73 | |
Interest cost | 49 | | | 141 | | | 240 | |
Amortization of prior service credit | (1,474) | | | (927) | | | (537) | |
Amortization of accumulated loss | 189 | | | 194 | | | 83 | |
Net periodic benefit | $ | (1,200) | | | $ | (527) | | | $ | (141) | |
Estimated amounts that will be amortized from accumulated other comprehensive loss over the next year | | | | | |
Prior service credit | $ | (1,474) | | | $ | (1,474) | | | $ | 537 | |
Net loss | 189 | | | 189 | | | (166) | |
| $ | (1,285) | | | $ | (1,285) | | | $ | 371 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects (in thousands):
| | | | | | | | | | | | | | | | | |
| 1% Increase |
| 2022 | | 2021 | | 2020 |
Effect on postretirement benefit obligation | $ | 1 | | | $ | 1 | | | $ | 1 | |
| | | | | | | | | | | | | | | | | |
| 1% Decrease |
| 2022 | | 2021 | | 2020 |
Effect on postretirement benefit obligation | $ | (1) | | | $ | (1) | | | $ | (1) | |
Future pension and other benefit payments are as follows (in thousands):
| | | | | | | | | | | |
Fiscal Year | Pension | | Other Benefits |
2023 | $ | 9,158 | | | $ | 108 | |
2024 | 8,295 | | | 108 | |
2025 | 8,353 | | | 108 | |
2026 | 8,462 | | | 109 | |
2027 | 8,807 | | | 109 | |
After | 50,754 | | | 529 | |
| $ | 93,829 | | | $ | 1,071 | |
13. DEBT
Debt is comprised of the following (in thousands):
| | | | | | | | | | | |
| 6/30/2022 | | 6/30/2021 |
Short-term and current maturities | | | |
Loan and Security Agreement (Line of Credit) | $ | — | | | $ | 9,153 | |
Loan and Security Agreement (Term Loan) | 1,495 | | | 1,509 | |
Brazil Loans | 5,052 | | | 5,297 | |
| 6,547 | | | 15,959 | |
Long-term debt (net of current portion) | | | |
| | | |
Loan and Security Agreement (Term Loan) | 10,252 | | | 6,010 | |
Loan and Security Agreement (Line of Credit) | 11,397 | | | — | |
Brazil Loans | 3,771 | | | — | |
Debt Reacquisition Cost | (515) | | | — | |
| 24,905 | | | 6,010 | |
Total Debt | $ | 31,452 | | | $ | 21,969 | |
Future maturities of debt are as follows (in thousands):
| | | | | |
Fiscal Year | |
2023 | $ | 6,441 | |
2024 | 4,588 | |
2025 | 1,959 | |
2026 | 1,388 | |
2027 | 12,803 | |
Thereafter | 4,273 | |
Total | $ | 31,452 | |
On April 29, 2022, the Company and certain of the Company’s domestic subsidiaries entered into a new Loan and Security agreement with HSBC Bank USA. The Company incurred an increase in debt of $0.5 million as a result of debt reacquisition cost.
These new credit facilities replaced the Company’s previous TD Bank credit facilities and are comprised of a $30 million revolving line of credit with a $10 million uncommitted accordion provision, a $12.1 million term loan and a $7 million Capital Expenditure draw down credit facility. 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 new 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-month Secured Overnight Financing Rate, herein "SOFR". The initial rate for the first three months of the agreement is the one-month SOFR plus 1.60%. The new credit 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. The initial borrowing base is estimated at about $19 million. 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 Term Loan facility was comprised of 70% of the fair market value of the Borrowers’ 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 new credit 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 is now retired. Prior to the new agreement with HSBC, the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of the Fixed Charge Coverage Ratio until September 30, 2021 and (ii) establishment of a new minimum cumulative EBITDA and minimum liquidity covenants in lieu thereof.
On December 31, 2019, the Company entered into the Tenth Amendment of its Loan and Security Agreement (“Tenth Amendment”). Under that revised agreement, the credit limit for the Revolving Loan was increased from $23.0 million to $25.0 million. In addition, the Company entered into a $10.0 million 5 years Term Loan with a fixed interest rate of 4.0%.
The Company’s Brazilian subsidiary loans are backed by the entity’s US dollar denominated export receivables were made with Brazilian Banks. As of June 30, 2022 the following table represents Brazil's outstanding debt (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Lending Institution | | Interest Rate | | Beginning Date | | Ending Date | | Outstanding Balance |
Brasil | | 2.10 | % | | August 2021 | | August 2022 | | $ | 691 | |
Itau | | 4.52 | % | | October 2021 | | September 2024 | | 4,000 | |
Santander | | 2.71 | % | | December 2021 | | July 2022 | | 1,000 | |
Bradesco | | 2.52 | % | | January 2022 | | January 2023 | | 1,000 | |
Itau | | 4.98 | % | | February 2022 | | February 2024 | | 2,133 | |
| | | | | | | | |
| | | | | | | | $ | 8,824 | |
14. 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 of stockholders, 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.
15. CONTINGENCIES AND COMMITMENTS
The Company is involved in certain legal matters which arise in the normal course of business and we believe it is not reasonably possible such matters would have a material adverse impact on the Company’s financial condition, results of operations and cash flows.
While our purchase obligations are generally cancellable without penalty, certain vendors charge cancellation fees or minimum restocking charges based on the nature of the product or service. The Company’s Brazilian subsidiary has been into a long-term, volume-based purchase agreement for electricity which expires in 2023. Under this agreement if the Company purchases more than minimum monthly amount of energy it pays the incremental purchase at market rates. If the Company does not use the monthly amount they sell it back at market rates. In the event we cancel we are subject to $0.6 million per year fee for the next two years until it expires. We expect to enter into a new contract beginning in 2024 with the same cancellation fee per year for the three year period.
16. CONCENTRATIONS OF CREDIT RISK
The Company does not have significant concentrations of credit risk as of June 30, 2022. Trade receivables are dispersed among a large number of retailers, distributors and industrial accounts in many countries, with none exceeding 10% of consolidated sales.
17. FINANCIAL INFORMATION BY SEGMENT & GEOGRAPHIC AREA
The Company offers its broad array of measuring and cutting products to the market through multiple channels of distribution throughout the world. The Company’s products include precision tools, electronic gauges, gauge blocks, optical vision and laser measuring equipment, custom engineered granite solutions, tape measures, levels, chalk products, squares, band saw blades, hole saws, hacksaw blades, jig saw blades, reciprocating saw blades, M1® lubricant and precision ground flat stock. The Company reviews and manages its business geographically and has historically made decisions based on worldwide operations.
The North American segment’s operations include all manufacturing and sales in the U.S., Canada and Mexico. The International segment’s operations include all locations outside North America, primarily in Brazil, United Kingdom and China. The chief operating decision maker, who is the Company’s CEO, reviews operations on a geographical basis and decisions about where to invest the Company’s resources are made based on the current results and forecasts of operations in those geographies. Since the markets for the Company’s products are sufficiently different in North America than they are in the rest of the world and in view of the significant impact that currency fluctuation plays outside the U.S. on the revenue of the Company, the Company’s business review separates North America from operations outside North America. For this reason,
the Company is reflecting two operating segments that align with management’s review of operations and decisions to allocate resources.
Segment income is measured for internal reporting purposes by excluding corporate expenses, other income and expense including interest income and interest expense and income taxes. Corporate expenses consist primarily of executive compensation, certain professional fees, and costs associated with the Company’s global headquarters. Goodwill and debt are unallocated. Financial results for each reportable segment are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended June 30, 2022 |
| North America | | International | | Unallocated | | Total |
Sales1 | $141,470 | | $112,231 | | $ | — | | | $ | 253,701 | |
| | | | | | | |
Restructuring (expense) | $ | — | | | (431) | | | — | | | (431) | |
Operating income | $ | 13,873 | | | $ | 15,435 | | | $ | (7,753) | | | 21,555 | |
Capital expenditures and software development | 3,321 | | | 5,686 | | | — | | | 9,007 | |
Depreciation and amortization | 3,881 | | | 2,749 | | | — | | | 6,630 | |
Current assets4 | 50,473 | | | 68,057 | | | 14,523 | | | 133,053 | |
Long-lived assets5 | 30,264 | | | 21,312 | | | 14,925 | | | 66,501 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended June 30, 2021 |
| North America | | International | | Unallocated | | Total |
Sales2 | $ | 119,619 | | | $ | 100,025 | | | $ | — | | | $ | 219,644 | |
| | | | | | | |
Restructuring | (1,059) | | | (2,606) | | | — | | | (3,664) | |
Operating (loss) income | 13,144 | | | 10,821 | | | (7,399) | | | 16,566 | |
Capital expenditures and software development | 3,017 | | | 2,690 | | | — | | | 5,707 | |
Depreciation and amortization | 4,126 | | | 2,166 | | | — | | | 6,292 | |
Current assets4 | 39,512 | | | 70,611 | | | 9,105 | | | 119,228 | |
Long-lived assets5 | 31,006 | | | 15,187 | | | 18,818 | | | 65,011 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended June 30, 2020 |
| North America | | International | | Unallocated | | Total |
Sales3 | $ | 121,834 | | | $ | 79,617 | | | $ | — | | | $ | 201,451 | |
Goodwill and intangibles impairment | (6,496) | | | — | | | — | | | (6,496) | |
Restructuring | (341) | | | (1,239) | | | — | | | (1,580) | |
Operating income (loss) | (2,055) | | | 3,841 | | | (7,090) | | | (5,303) | |
Capital expenditures and software development | 6,992 | | | 3,608 | | | — | | | 10,600 | |
Depreciation and amortization | 4,942 | | | 2,253 | | | — | | | 7,195 | |
Current assets4 | 35,030 | | | 55,610 | | | 13,458 | | | 104,098 | |
Long-lived assets5 | 34,354 | | | 13,213 | | | 21,018 | | | 68,585 | |
_______________
1.Excludes $3,497 of North American segment intercompany sales to the International segment and $18,819 intercompany sales of the International segment to the North American segment.
2 Excludes $4,323 of North American segment intercompany sales to the International segment and $12,765 intercompany sales of the International segment to the North American segment.
3.Excludes $4,040 of North American segment intercompany sales to the International segment and $13,820 intercompany sales of the International segment to the North American segment.
4.Current assets primarily consist of accounts receivable, inventories and prepaid expenses. Assets not allocated to the segments include cash and cash equivalents.
5.Long lived assets consist of property, plant and equipment, net taxes receivable, deferred tax assets, net intangible assets & goodwill.
Geographic information about the Company’s sales and long-lived assets are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
Sales | Year Ended June 30, |
| 2022 | | 2021 | | 2020 |
North America | | | | | |
United States | $ | 133,615 | | | $ | 111,935 | | | $ | 113,989 | |
Canada & Mexico | 7,855 | | | 7,684 | | | 7,845 | |
| 141,470 | | | 119,619 | | | 121,834 | |
International | | | | | |
Brazil | 75,873 | | | 65,198 | | | 49,254 | |
United Kingdom | 20,331 | | | 19,783 | | | 18,869 | |
China | 7,840 | | | 7,746 | | | 6,048 | |
Australia & New Zealand | 8,187 | | | 7,298 | | | 5,446 | |
| 112,231 | | | 100,025 | | | 79,617 | |
Total Sales | $ | 253,701 | | | $ | 219,644 | | | $ | 201,451 | |
| | | | | | | | | | | | | | | | | |
Long-lived Assets | Year Ended June 30, |
| 2022 | | 2021 | | 2020 |
North America | | | | | |
United States | $ | 30,202 | | | $ | 30,935 | | | $ | 34,264 | |
Canada & Mexico | 62 | | | 71 | | | 90 | |
| 30,264 | | | 31,006 | | | 34,354 | |
International | | | | | |
Brazil | 15,359 | | | 10,796 | | | 8,050 | |
United Kingdom | 362 | | | 1,320 | | | 1,948 | |
China | 5,239 | | | 2,713 | | | 2,881 | |
Australia & New Zealand | 352 | | | 358 | | | 334 | |
| 21,312 | | | 15,187 | | | 13,213 | |
| | | | | |
Total Long-Lived Assets | $ | 51,576 | | | $ | 46,193 | | | $ | 47,567 | |
18. QUARTERLY FINANCIAL DATA (unaudited) (in thousands except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Quarter Ended | Net Sales | | Gross Margin | | Earnings / (Loss) Before Income Taxes | | Net Earnings / (Loss) | | Basic Earnings / (Loss) Per Share | Diluted Earnings / (Loss) Per Share |
September 2020 | $ | 49,411 | | | $ | 15,572 | | | $ | 1,834 | | | $ | 4,116 | | | $ | 0.59 | | $ | 0.57 | |
December 2020 | 54,054 | | | 17,605 | | | 5,775 | | | 3,857 | | | 0.54 | | 0.53 | |
March 2021 | 54,944 | | | 18,149 | | | 4,513 | | | 3,017 | | | 0.42 | | 0.41 | |
June 2021 | 61,235 | | | 22,016 | | | 5,304 | | | 4,543 | | | 0.65 | | 0.60 | |
| $ | 219,644 | | | $ | 73,342 | | | $ | 17,426 | | | $ | 15,533 | | | $ | 2.20 | | $ | 2.11 | |
September 2021 | $ | 61,514 | | | $ | 20,145 | | | $ | 4,359 | | | $ | 3,232 | | | $ | 0.45 | | $ | 0.44 | |
December 2021 | 61,318 | | | 18,950 | | | 3,539 | | | 2,528 | | | 0.35 | | 0.34 |
March 2022 | 60,479 | | | 21,020 | | | 6,058 | | | 4,284 | | | 0.59 | | 0.57 |
June 2022 | 70,390 | | | 24,131 | | | 7,563 | | | 4,834 | | | 0.67 | | 0.65 |
| $ | 253,701 | | | $ | 84,246 | | | $ | 21,519 | | | $ | 14,878 | | | $ | 2.06 | | $ | 2.00 | |
Operating income in the June quarter of fiscal 2022 was $7.6 million, and for fiscal year 2021 was $3.7 million.