10-K
THE L.S. STARRETT COMPANY
Notes to Consolidated Financial Statements June 30, 2012 and 2011
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 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. SIGNIFICANT ACCOUNTING POLICIES
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 significant intercompany items have been eliminated in consolidation. The Company’s fiscal year ends on June 30 effective for fiscal year 2011. Previously the fiscal year ended on the last Saturday in June. Fiscal year 2010 represents a 52 week year. This change in reporting period was not considered material to the Company’s results of operations, therefore the results of operations for fiscal 2010 have not been restated.
Financial instruments and derivatives: The Company’s financial instruments include cash, investments and long term debt. Investments are stated at cost which approximates fair market value. The carrying value of long-term debt, which is at current market interest rates, also approximates its fair value. The Company’s U.K. subsidiary entered into various forward exchange contracts. The amount of contracts outstanding as of June 30, 2012 and June 30, 2011 amounted to $2.0 million and $10.7 million, respectively.
Accounts receivable: Accounts receivable consist of trade receivables from customers. The expense for bad debts amounted to $0.8, $0.3, and $0.1 million in fiscal 2012, 2011 and 2010, 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. Substantially all United States inventories are valued using the last-in-first-out (“LIFO”) method of accounting. All non-U.S. subsidiaries use the first-in-first-out (“FIFO”) method or the average cost method, as LIFO is not an accepted method of inventory valuation outside the U.S.
Long-lived assets: 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. Leases are capitalized under the criteria set forth in Accounting Standards Codification (ASC) 840, “Leases” which establishes the four criteria of a capital lease. At least one of the four following criteria must be met for a lease to be considered a capital lease: a transfer of ownership of the property to the lessee by the end of the lease term; a bargain purchase option; a lease term that is greater than or equal to 75 percent of the economic life of the leased property; present value of the future minimum lease payments equals or exceeds 90 percent of the fair market value of the leased property. If none of the aforementioned criteria are met, the lease will be an operating lease. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. A gain or loss is recorded on individual fixed assets when retired or disposed of. Included in buildings and building improvements and machinery and equipment at June 30, 2012 and June 30, 2011 were $3.3 million and $5.0 million, respectively, of construction in progress. Also included in machinery and equipment at June 30, 2012 and June 30, 2011 were $0.5 million and $0.5 million net of depreciation, respectively, of capitalized interest cost. Repairs and maintenance of equipment are expensed as incurred.
Intangible assets and goodwill: Intangibles are recorded at cost and are amortized on a straight-line basis over a 5-14 year period. Patents are amortized over 15 years. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is not subject to amortization but is tested for impairment annually and at any time when events suggest impairment may have occurred. The Company will annually test the goodwill associated with the November 2011 acquisition of Bytewise as of October 1.. The Company assesses the fair value of its goodwill using impairment tests, generally based upon a discounted cash flow methodology. The discounted cash flows are estimated utilizing various assumptions regarding future revenue and expenses, working capital, terminal value and market discount rates. In the event that the carrying value of goodwill exceeds the fair value of the goodwill, an impairment loss would be recorded for the amount of that excess.
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