Filed with the SEC from July 19 to July 25:
L.S. Starrett (SCX)
Gamco Investors (ticker: GBL) called Starrett shares "undervalued." Gamco also said it "would like to purchase more" Starrett shares.
Founded in 1880 by Laroy S. Starrett and incorporated in 1929, the Company is engaged in the business of manufacturing over 5,000 different products for industrial, professional and consumer markets. As a global manufacturer with major subsidiaries in Brazil (1956), Scotland (1958) and China (1997), the Company offers its broad array of products to the market through multiple channels of distribution throughout the world. The Companyâ€™s products include precision tools, electronic gages, gage blocks, optical and vision 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 Â® lubricant and precision ground flat stock. The Companyâ€™s financial reporting is based upon one business segment.
StarrettÂ® is brand recognized around the world for precision, quality and innovation.
The Companyâ€™s tools and instruments are sold throughout North America and in over 100 foreign countries. By far the largest consumer of these products is the metalworking industry including aerospace, medical, and automotive but other important consumers are marine and farm equipment shops, do-it-yourselfers and tradesmen such as builders, carpenters, plumbers and electricians.
For 131 years the Company has been a recognized leader in providing measurement solutions consisting of hand measuring tools and precision instruments such as micrometers, vernier calipers, height gages, depth gages, electronic gages, dial indicators, steel rules, combination squares, custom and non contact gaging and many other items. Skilled personnel, superior products, manufacturing expertise, innovation and unmatched service has earned the Company its reputation as the â€śBest in Classâ€ť provider of measuring application solutions for industry. During fiscal 2008, the Company enhanced its wireless data collection solutions, making them more customer-friendly and more software-compatible.
The Companyâ€™s saw product lines enjoy strong global brand recognition and market share. These products encompass a breadth of uses. During 2009, the Company introduced several new products including its ADVANZ carbide tipped products and its VERSATIX products with a patent pending tooth geometry designed for the cutting of structurals and small solids. This launch was further enhanced through the global introduction of new support programs and marketing collateral. These actions are aimed at positioning Starrett for global growth in wide band products for production applications as well as product range expansions for shop applications. A full line of complementary saw products, including hack, jig, reciprocating saw blades and hole saws provide cutting solutions for the building trades and are offered primarily through construction, electrical, plumbing and retail distributors.
At June 30, 2011, the Company had 1,951 employees, approximately 51% of whom were domestic. This represents a net increase from June 26, 2010 of 207 employees. The headcount increase was 96 domestically and 111 internationally.
None of the Companyâ€™s operations are subject to collective bargaining agreements. In general, the Company considers relations with its employees to be excellent. Domestic employees hold a large share of Company stock resulting from various stock purchase plans. The Company believes that this dual role of owner-employee has strengthened employee morale over the years.
The Company is competing on the basis of its reputation as the best in class for quality, precision and innovation combined with its commitment to customer service and strong customer relationships. To that end, Starrett is increasingly focusing on providing customer centric solutions. Although the Company is generally operating in highly competitive markets, the Companyâ€™s competitive position cannot be determined accurately in the aggregate or by specific market since none of its competitors offer all of the same product lines offered by the Company or serve all of the markets served by the Company.
The Company is one of the largest producers of mechanicsâ€™ hand measuring tools and precision instruments. In the United States, there are three other major companies and numerous small competitors in the field, including direct foreign competitors. As a result, the industry is highly competitive. During fiscal 2011, there were no material changes in the Companyâ€™s competitive position. The Companyâ€™s products for the building trades, such as tape measures and levels, are under constant margin pressure due to a channel shift to large national home and hardware retailers. The Company is responding to such challenges by expanding its manufacturing operations in China. Certain large customers offer private labels (â€śown brandâ€ť) that compete with Starrett branded products. These products are often sourced directly from low cost countries.
Saw products encounter competition from several domestic and international sources. The Companyâ€™s competitive position varies by market segment and country. Continued research and development, new patented products and processes, and strong customer support have enabled the Company to compete successfully in both general and performance oriented applications.
The operations of the Companyâ€™s foreign subsidiaries are consolidated in its financial statements. The subsidiaries located in Brazil, Scotland and China are actively engaged in the manufacturing and distribution of precision measuring tools, saw blades, optical and vision measuring equipment and hand tools. Subsidiaries in Canada, Argentina, Australia, New Zealand, Mexico and Germany are engaged in distribution of the Companyâ€™s products. The Company expects its foreign subsidiaries to continue to play a significant role in its overall operations. A summary of the Companyâ€™s foreign operations is contained in Note 15 to the Companyâ€™s fiscal 2011 financial statements under the caption â€śOPERATING DATAâ€ť found in Item 8 of this Form 10-K.
Orders and Backlog
The Company generally fills orders from finished goods inventories on hand. Sales order backlog of the Company at any point in time is not significant. Total inventories amounted to $58.8 million at June 30, 2011 and $46.2 million at June 26, 2010.
When appropriate, the Company applies for patent protection on new inventions and currently owns a number of patents. Its patents are considered important in the operation of the business, but no single patent is of material importance when viewed from the standpoint of its overall business. The Company relies on its continuing product research and development efforts, with less dependence on its current patent position. It has for many years maintained engineers and supporting personnel engaged in research, product development and related activities. The expenditures for these activities during fiscal years 2011, 2010 and 2009 were approximately $1.5 million, $0.9 million and $1.6 million respectively, all of which were expensed in the Companyâ€™s financial statements.
The Company uses trademarks with respect to its products and considers its trademark portfolio as one of its most valuable assets. All of the Companyâ€™s important trademarks are registered and rigorously enforced.
Compliance with federal, state, local, and foreign provisions that have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to protection of the environment is not expected to have a material effect on the capital expenditures, earnings and competitive position of the Company. Specifically, the Company has taken steps to reduce, control and treat water discharges and air emissions. The Company takes seriously its responsibility to the environment, has embraced renewable energy alternatives and is ready to bring a new hydro â€“ generation facility on line at its Athol, MA plant to reduce its carbon foot print and energy costs, an investment in excess of $1.0 million.
Globalization has had a profound impact on product offerings and buying behaviors of industry and consumers in North America and around the world, forcing the Company to adapt to this new, highly competitive business environment. The Company continuously evaluates most aspects of its business, aiming for new world-class ideas to set itself apart from its competition.
Our strategic concentration is on global brand building and providing unique customer value propositions through technically supported application solutions for our customers. Our job is to recommend and produce the best suited standard product or to design and build custom solutions. The combination of the right tool for the job with value added service gives us a competitive advantage. The Company continues its focus on lean manufacturing, plant consolidations, global sourcing and improved logistics to optimize its value chain.
The execution of these strategic initiatives has expanded the Companyâ€™s manufacturing and distribution in developing economies, increasing its international sales revenues to 56% of its consolidated sales for fiscal 2011.
SEC Filings and Certifications
The Company makes its public filings with the Securities and Exchange Commission (â€śSECâ€ť), including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports, available free of charge at its website, www.starrett.com, as soon as reasonably practicable after the Company files such material with the SEC. Information contained on the Companyâ€™s website is not part of this Annual Report on Form 10-K.
Ralph G. Lawrence (68)
Until retirement in 2003, President and Chief Operating Officer, Hyde Manufacturing Company, a producer of hand tools and specialty machine blades.
Salvador de Camargo, Jr. (65)
President, Starrett Industria e Comercio Ltda. (Brazil), a wholly-owned subsidiary of the Company.
Stephen F. Walsh (65)
Since 2005, Senior Vice President Operations of the Company.From 2001 to 2005, Vice President Operations of the Company.Prior to 2001, Mr. Walsh was President of the Silicon Carbide Division of Saint-Gobain Industrial Ceramics, a producer of ceramic and abrasive products.
MANAGEMENT DISCUSSION FROM LATEST 10K
The Company changed its method of accounting for pensions in fiscal 2011. The impact of this change is described in Note 2.
The Company began to experience an economic upturn in the second quarter of fiscal 2010. To service higher demand the Company began to increase manufacturing output, inventory raw material purchases, and selling, general, and administrative expenses globally in the third quarter of fiscal 2010. Sales increased $21.5 million or 24% in the second half of fiscal 2011 compared to the first half of fiscal 2010. Sales in the first half of 2011 were $23.7 million or 26% higher than in the first half of 2010. The Company experienced higher backorder levels in the first half of fiscal 2011 as a result of the inability to quickly adjust inventory and manufacturing staffing levels to match demand, however, this backorder position decreased in the second half of fiscal 2011.
Net sales for fiscal 2011 increased $41.1 million or 20% compared to fiscal 2010 due to global economic recovery and increased market penetration. Gross margins improved $25.4 million from $56.4 million or 28% of sales in fiscal 2010 to $81.8 million or 33% of sales in fiscal 2011. Selling, general and administrative expenses increased $6.7 million or 10% from $64.1 million in fiscal 2010 to $70.8 million in fiscal 2011. Operating income increased $21.8 million from a loss of $9.4 million in fiscal 2010 to a profit of $12.4 million in fiscal 2011.
Net sales in North America increased $22.6 million or 23% from $97.1 million in fiscal 2010 to $119.7 million in fiscal 2011. All divisions posted gains except Evans Rule, which lost the Sears contract in the fourth quarter of fiscal 2010. Tru-Stone and Kinemetric benefited from renewed capital equipment markets registering sales increases in fiscal 2011 of 64% and 71%, respectively, as our customers reinvested in their businesses. International sales, excluding U.S. exports, increased $18.5 million or 17% from $106.6 million in fiscal 2010 to $125.1 million in fiscal 2011. Foreign currency exchange rate fluctuations represented $8.1 million of the sales gain principally due to a weaker U.S. dollar. All International subsidiaries achieved double digit sales increases and account for over 50% of the Companyâ€™s global revenues. The Company is cautiously optimistic about fiscal 2012 based upon orders through August of fiscal 2012; however, recent unfavorable economic news could have a negative impact on the year.
Gross margin in North America increased $10.8 million or 44% from $24.5 million in fiscal 2010 to $35.3 million in fiscal 2011 and improved as a percentage of sales from 25.3% in fiscal 2010 to 29.5% in fiscal 2011. Higher sales, improved manufacturing efficiencies, and a reduction in pension cost were the key drivers in the improved margin performance. In addition, the gross margin improvement overcame an unfavorable LIFO swing of $9.5 million based upon a reduction in cost of sales of $8.5 million in fiscal 2010 to an increase in cost of sales of $1.0 million in fiscal 2011. The change in LIFO was the result of lower inventories during the recession in fiscal 2010 compared to an increase in inventories in conjunction with the economic recovery in fiscal 2011. International gross margins increased $14.6 million or 46% from $31.9 million in fiscal 2010 to $46.5 million in fiscal 2011 and improved as a percentage of sales from 30% in fiscal 2010 to 37% in fiscal 2011. Higher sales, improved manufacturing efficiencies, lower pension expense and favorable foreign exchange rates all contributed to the improved international gross margins.
Selling, General and Administrative Expenses
North American selling, general and administrative expenses increased $3.6 million or 11% but declined as a percentage of sales from 33% in fiscal 2010 to 30% in fiscal 2011. Salaries and benefits in North America increased $2.2 million in fiscal 2011 compared to fiscal 2010, principally due to the restoration of previous salary reductions, a 3% salary increase and higher medical costs. Higher sales also resulted in a $0.9 million increase in travel and commission expenses. International selling, general and administrative expenses increased $3.1 million or 10% and declined from 30% to 28% of sales. Salaries and benefits increased $2.5 million due to restoration of previous salary reductions, while increased sales resulted in a $1.3 million increase in travel and commission expenses. These expense increases were partially offset by a $2.2 million reduction in pension expense.
Operating income in fiscal 2011 of $12.4 million represented a $21.8 million improvement from an operating loss of $9.4 million in fiscal 2010. Higher sales and improved margins accounted for $11.4 and $14.0 million, respectively of the $25.4 million gross margin improvement and offset the selling, general and administrative increase of $6.7 million, resulting in an $18.7 gain in operating income from operations. The net impact of combined losses related to restructuring costs and goodwill impairment of $1.7 million in fiscal 2010 compared to a $1.3 million gain on the sale of a building in fiscal 2011 represents the incremental operating profit improvement of $3.0 million.
Other Operating Income
Higher interest income was the primary factor for the $0.8 million improvement in other operating income.
Significant Fourth Quarter Activity
As shown in Note 15, the Company recorded a $4.5 million profit before taxes in the fourth quarter of fiscal 2011 compared to a comparable $1.5 million loss in fiscal 2010.
Consolidated sales increased $7.4 million or 12 % from $63.9 million in fiscal 2010 to $71.3 million in fiscal 2011 with North America representing $7.3 million of the increase. International sales increase was modest due to three months of sales in fiscal 2011 compared to four months in fiscal 2010. The four months in fiscal 2010 for International was a result of dropping the one month lag. Higher sales and improved margins generated a $5.3 million increase in gross margins which more than offset a $0.6 million increase in selling, general and administrative expenses resulting in a $4.7 million net contribution to profits. The remaining $1.5 comparative profit improvement was principally due to losses of $1.7 million related to restructuring and impairment charges in fiscal 2010 compared to no similar costs in fiscal 2011.
The effective tax rate was 48% for fiscal 2011. The rate reflects federal, state and foreign adjustments for permanent book tax differences. The principal reason for the 8% increase over a normalized combined federal and state statutory tax rate of approximately 40% is book losses not tax benefited principally in China and the Dominican Republic as well as provisions for valuation allowances.
The effective tax rate for fiscal 2010 was 14%. The Brazilian audit settlement and losses not benefited principally in China and the Dominican Republic were the principal factors reducing the normalized benefit of 40% to 14%.
There was a $0.9 million increase in valuation allowances relating primarily to carryforwards for foreign NOLâ€™s. The Company continues to believe that it is more likely than not that it will be able to realize its domestic tax operating loss carryforward assets of approximately $8.5 million reflected on the Balance Sheet.
Fiscal 2010 Compared to Fiscal 2009
The Company began to experience the economic downturn in the second quarter of fiscal 2009 and significantly reduced its manufacturing and selling, general administrative expenses in the third quarter of fiscal 2009. These cost reductions remained in place for one year until the third quarter of fiscal 2010, when an uptick in orders resulted in restoring reduced hours to normal hours for both the factory and office personnel. The economyâ€™s cycle created significant problems in managing costs and inventory levels in fiscal 2010 compared to fiscal 2009 as first half fiscal 2010 sales declined $31.0 million, or 25%, compared to $31.1 million, or 38%, increase in the second half.
Net sales for fiscal 2010 remained level with fiscal 2009 at $203.6 million. Gross margins improved $22.5 million from $33.9 million or 16.7% of sales in fiscal 2009 to $56.4 million or 27.7% of sales in fiscal 2010. Selling, general and administrative expenses decreased $2.7 million of 4.0% from $66.8 million in fiscal 2009 to $64.1 million in fiscal 2010. The operating loss declined $28.8 million principally due to a change in accounting for pension expense which reduced cost of sales and selling, general and administrative expenses $25.3 million from $32.5 million in fiscal 2009 to $7.2 million in fiscal 2010.
Net sales in North America declined $5.8 million, or 5.7%, from $102.9 million in fiscal 2009 to $97.1 million in fiscal 2010. With the exception of Tru-Stone, all divisions posted declines as reduced volume from Sears impacting the Evans Rule division and the significant decline in customer capital expenditures adversely affecting the demand for Kinemetricâ€™s products. International sales increased $5.9 million, or 5.9%, from $100.7 million in fiscal 2009 to $106.6 million in fiscal 2010. Foreign currency exchange rate fluctuations represented a $4.1 million of the sales gain with a stronger Brazilian Real accounting for $5.2 million and a weaker Pound Sterling posing a $1.1 million decline.
Gross margin in North America increased $29.0 million, from a negative $4.5 million in fiscal 2009 to $24.5 million in fiscal 2010. A reduction in pension expense represented $21.0 or 72% of the change. In addition, cost reductions and reduced manufacturing hours implemented in February of 2009 coupled with increased volume, particularly in the second half of fiscal 2010, represented $1.0 million while inventory reductions resulted in an additional net $4.3 million LIFO liquidation. International gross margins declined $6.5 million, from $38.4 million in fiscal 2009 to $31.9 million in fiscal 2010. A $2.2 million increase in pension expense coupled with higher fixed manufacturing costs and under absorbed overhead as a result of lower production were the prime factors influencing the gross margin decline.
Selling, General & Administrative Expenses
Selling, general and administrative expenses decreased $2.7 million, or 4.0%, from $66.8 million in fiscal 2009 to $64.1 million in fiscal 2010. North American expenses decreased $5.5 million, due to a $4.3 million reduction in pension expense as well as savings related to reduced salaries, travel and advertising costs of $0.9 million. International expenses increased $2.8 million, due to a $2.2 million increase in pension expense as well as higher salaries and benefits.
The operating loss decreased $28.8 million from a loss of $38.2 million in fiscal 2009 to a loss of $9.4 million in fiscal 2010 principally due to a $25.3 million reduction in pension expense.
FINANCIAL INSTRUMENT MARKET RISK
Market risk is the potential change in a financial instrumentâ€™s value caused by fluctuations in interest and currency exchange rates, and equity and commodity prices. The Companyâ€™s operating activities expose it to risks that are continually monitored, evaluated and managed. Proper management of these risks helps reduce the likelihood of earnings volatility.
As of June 30, 2011, the Companyâ€™s Scottish subsidiary held a $6.4 million six month fixed rate deposit.
The Company does not engage in tracking, market-making or other speculative activities in derivatives markets. The Company does not enter into long-term supply contracts with either fixed prices or quantities. The Company engages in an immaterial amount of hedging activity to minimize the impact of foreign currency fluctuations. Net foreign monetary assets are approximately $24.6 million as of June 30, 2011.
A 10% change in interest rates would not have a significant impact on the aggregate net fair value of the Companyâ€™s interest rate sensitive financial instruments or the cash flows or future earnings associated with those financial instruments. A 10% change in interest rates would impact the fair value of the Companyâ€™s fixed rate investments of $6.4 million by an immaterial amount. A 10% increase in interest rates would not have a material impact on our short-term borrowing costs. See Note 12 to the Consolidated Financial Statements for details concerning the Companyâ€™s long-term debt outstanding of $0.7 million.
Liquidity and Credit Arrangements
The Company believes it maintains sufficient liquidity and has the resources to fund its operations in the near term. In addition to its cash and investments, the Company has maintained a $23.0 million line of credit, of which, $0.4 million is reserved for letters of credit and $8.0 million was outstanding as of June 30, 2011.
On June 30, 2009, The L.S. Starrett Company (the â€śCompanyâ€ť) and certain subsidiaries of the Company subsidiaries (the â€śSubsidiariesâ€ť) entered into a Loan and Security Agreement (the â€śCredit Facilityâ€ť) with TD Bank, N.A., as lender.
The Credit Facility replaced the Companyâ€™s previous Bank of America facility with a $23.0 million line of credit. On June 30, 2009, the Company utilized this line of credit to pay off the remaining balances on the Bank of America Reducing Revolver and Line of Credit. The interest rate under the Credit Facility is based on a grid which uses the ratio of Funded Debt/EBITDA to determine the floating margin that will be added to one-month LIBOR. The initial rate was one-month LIBOR plus 1.75%, and is currently one-month LIBOR plus 1.50%. The Credit Facility matures on April 30, 2012. The Company plans to extend this credit facility before maturity, however, there are no assurances the extension will be available to the Company.
The obligations under the Credit Facility are unsecured. However, in the event of certain triggering events, the obligations under the Credit Facility will become secured by the assets of the Company and the subsidiaries party to the Credit Facility. Triggering events are two consecutive quarters of failure to achieve the financial covenants outlined in Note 12.
Availability under the Credit Facility is subject to a borrowing base comprised of accounts receivable and inventory. The Company believes that the borrowing base will consistently produce availability under the Credit Facility in excess of $23.0 million. In addition, the Company anticipates that it will not need to fully utilize the amounts available to the Company and its subsidiaries under the Credit Facility. As of August 31, 2011, the Company had borrowings of $9.6 million under the Credit Facility.
The Credit Facility contains financial covenants with respect to leverage, tangible net worth, and interest coverage, and also contains customary affirmative and negative covenants, including limitations on indebtedness, liens, acquisitions, asset dispositions, and fundamental corporate changes, and certain customary events of default. Upon the occurrence and continuation of an event of default, the lender may terminate the revolving credit commitment and require immediate payment of the entire unpaid principal amount of the Credit Facility, accrued interest and all other obligations. As of June 30, 2011, the Company was in compliance with the financial covenants required for testing at that time under the Credit Facility.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any material off-balance sheet arrangements as defined under the Securities and Exchange Commission rules.
CRITICAL ACCOUNTING POLICIES and ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. The second footnote to the Companyâ€™s Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.
Judgments, assumptions, and estimates are used for, but not limited to, the allowance for doubtful accounts receivable and returned goods; inventory allowances; income tax reserves; employee turnover, discount, and return rates used to calculate pension obligations.
Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the Companyâ€™s Consolidated Financial Statements. The following sections describe the Companyâ€™s critical accounting policies.
Revenue Recognition and Accounts Receivable : Sales of merchandise and freight billed to customers are recognized when products are delivered, title and risk of loss has passed to the customer, no significant post delivery obligations remain and collection of the resulting receivable is reasonably assured. Sales are net of provisions for cash discounts, returns, customer discounts (such as volume or trade discounts), cooperative advertising and other sales related discounts. Cooperative advertising payments made to customers are included as advertising expense in selling, general and administrative in the Consolidated Statements of Operations. While the Company does allow its customers the right to return in certain circumstances, revenue is not deferred, but rather a reserve for sales returns is provided based on experience, which historically has not been significant.
The allowance for doubtful accounts of $0.4 million and $0.6 million at the end of fiscal 2011 and 2010, respectively, is based on our assessment of the collectability of specific customer accounts and the aging of our accounts receivable. While the Company believes that the allowance for doubtful accounts is adequate, if there is a deterioration of a major customerâ€™s credit worthiness, actual defaults are higher than our previous experience, or actual future returns do not reflect historical trends, the estimates of the recoverability of the amounts due the Company and sales could be adversely affected.
Inventory Valuation : Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and requirements, the Company may be required to increase the inventory reserve and, as a result, gross profit margin could be adversely affected.
Long-lived Assets and Goodwill : The Company values property, plant and equipment (PP&E) at historical cost less accumulated depreciation. Impairment losses are recorded when indicators of impairment, such as plant closures, are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. The Company continually reviews for such impairment and believes that PP&E is being carried at its appropriate value.
The Company assesses the fair value of its goodwill 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. If the carrying amount of the goodwill is greater than the fair value, an impairment charge is recognized to the extent the recorded goodwill exceeds the implied fair value of goodwill.
Our long-lived assets consist primarily of property, plant and equipment. The Company groups long-lived assets for impairment analysis by division and/or product line. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of such an asset may not be recoverable. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or change in utilization of property and equipment.
Recoverability of the undepreciated cost of property, plant and equipment is measured by comparison of the carrying amount to estimated future undiscounted net cash flows the assets are expected to generate. Those cash flows include an estimated terminal value based on a hypothetical sale at the end of the assets' depreciation period. Estimating these cash flows and terminal values requires management to make judgments about the growth in demand for our products, sustainability of gross margins, and our ability to achieve economies of scale. If assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
The Company benefitted from the economic recovery, particularly in the manufacturing sector, as both the North America and International groups posted sales gains. Net sales increased $5.8 million or 10% from $58.7 million in fiscal 2011 to $64.5 million in fiscal 2012. Operating income of $3.0 million for fiscal 2011, which included a $1.35 million gain on sale of building, exceeded fiscal 2012 profits of $2.8 million by $0.2 million.
Net sales in North America increased $3.0 million or 10% from $30.3 million to $33.3 million. Precision tools and saw products were the primary drivers for the gain more than offsetting modest declines in granite and optical shipments. Bytewise, acquired on November 22, 2011, also contributed $1.8 million to the improved performance in North America. International net sales increased $2.8 million or 10% from $28.4 million to $31.2 million with gains of 9% and 6% from Brazil and Scotland, respectively. Exchange rate fluctuations were unfavorable by $1.2 million.
Gross margins increased $1.9 million but declined from 33.3% of sales in fiscal 2011 to 33.2 % of sales in fiscal 2012. North American gross margins increased $1.8 million or 20% from $9.1 million or 30% of sales in fiscal 2011 to $10.9 or 33% of sales in fiscal 2012. Efficiencies in our major manufacturing facilities, the elimination of losses from the shutdown of the Dominican Republic facility, and inclusion of the higher margin Bytewise sales all contributed to the improved performance. The Bytewise acquisition contributed $1.0 million to the higher gross margins. International gross margins increased a modest $0.1 million due to unfavorable exchange rates related to a weakening Brazilian Real.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $0.8 million or 4.5%. North American expenses increased $0.9 million principally due to expenses of the newly acquired Bytewise business. International expenses declined $0.1 million or 2% due to exchange rate changes.
Other (Expense) / Income
An increase of other expense of $0.5 million was the result of higher interest costs related to higher debt levels and unfavorable exchange rates.
Net earnings declined $0.8 million from $2.3 million or $0.35 cents per share to $1.6 million or $0.23 cents per share, primarily due to a $0.9 after tax gain on the sale of a building in fiscal 2011.
Nine months ended March 31, 2012 and March 26, 2011
Balanced global growth continued in fiscal 2012 compared to fiscal 2011 with sales gains realized equally in North America and International. Net sales increased $16.5 million or 9.5 % from $173.6 million in fiscal 2011 to $190.1 million in fiscal 2012. Operating income of $8.2 million for fiscal 2011, which included a $1.35 million gain on sale of building, exceeded fiscal 2012 operating income of $7.9 million by $0.3 million.
Net sales in North America increased $8.3 million or 10% from $86.6 million in fiscal 2011 to $94.9 million in fiscal 2012 as a result of a strong revenue growth for precision tools and saw products as well as $2.8 million in incremental revenue from the Bytewise acquisition. International net sales increased $8.2 million or 9% from $86.9 million in fiscal 2011 to $95.1 million in fiscal 2012 based upon increases of $4.0 and $2.5 million in Brazil and Scotland, respectively. Exchange rate fluctuations were unfavorable by $0.9 million.
Gross margins increased $7.0 million or 12% and improved from 33.5% of sales to 34.3% of sales with sales volume and margin improvement representing $5.5 million and $1.5 million, respectively. North American gross margins increased $3.8 million or 14% from $26.4 million or 30% of sales in fiscal 2011 to $30.2 million or 32% of sales in fiscal 2012. The principal reasons for the North American margin improvement were higher plant utilization and improved efficiencies that more than offset a $0.6 million unfavorable swing in LIFO valuations. International gross margins increased $3.2 million or 10% based upon higher sales at all locations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $6.0 million or 12%. North American expenses increased $1.1 million or 4%. Salaries and benefits represent $1.4 million of the increase partially offset by $0.4 million in lower amortization and depreciations costs. Bytewise expenses, which are included in North America represent a $1.4 million increase in fiscal 2012 expenses. International expenses increased $4.9 million or 20%, as a result of a $1.0 million increase in salaries and benefits; increased sales and marketing expenses of $0.5 of $0.7 million, respectively; higher research and development expenses of $0.6 million and a $0.8 million provision for bad debt.
Other (Expense) / Income
Other income increased $0.8 million from $0.5 million in fiscal 2011 to $1.3 million in fiscal 2012 principally due to favorable exchange rates as the Brazilian Real weakened against the US dollar partially offset by lower interest income.
Net earnings increased $0.2 million from $5.3 million or $0.79 cents per share to $5.2 million or $0.82 cents per share.
Liquidity and Credit Arrangements
The Company believes it maintains sufficient liquidity and has the resources to fund its operations. In addition to its cash and investments, the Company maintains a $23 million Line of Credit, of which, $15.1 million was outstanding as of March 31, 2012. Availability under the agreement is further reduced by open letters of credit totaling $0.4 million. The Line of Credit was modified in the second quarter of fiscal 2012 at which time certain financial covenants were amended. As of March 31, 2012, the Company was in compliance with all debt covenants related to its Line of Credit. The effective interest rate on the borrowings under the Line of Credit during the nine months ended March 31, 2012 was 1.91%.