Edgar Filing: STARRETT L S CO

scx20170630_10k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(check one)

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2017

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________

Commission File No. 1-367

THE L.S. STARRETT COMPANY

(Exact name of registrant as specified in its charter)

MASSACHUSETTS

04-1866480

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


121 CRESCENT STREET, ATHOL, MASSACHUSETTS	01331
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code 978-249-3551

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


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

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or amendment to this Form 10-K. ☒

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer ☐ Accelerated Filer ☒

Non-Accelerated Filer (Do not check if smaller reporting company) Smaller Reporting Company ☐ Emerging Growth Company ☐

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The Registrant had 6,286,978 and 766,623 shares, respectively, of its $1.00 par value Class A and B common stock outstanding on December 31, 2016. On December 31, 2016, the last business day of the Registrant’s second fiscal quarter, the aggregate market value of the common stock held by nonaffiliates was approximately $58,068,772.

There were 6,219,238 and 764,545 shares, respectively, of the Registrant’s $1.00 par value Class A and Class B common stock outstanding as of August 18, 2017.

The exhibit index is located on pages 52-53.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant intends to file a definitive Proxy Statement for the Company’s 2017 Annual Meeting of Stockholders within 120 days of the end of the fiscal year ended June 30, 2017. Portions of such Proxy Statement are incorporated by reference in Part III.

THE L.S. STARRETT COMPANY

FORM 10-K

FOR THE YEAR ENDED JUNE 30, 2017

TABLE OF CONTENTS

		Page Number
	PART I

ITEM 1.	Business	4-6
ITEM 1A.	Risk Factors	6-8
ITEM 1B.	Unresolved Staff Comments	8
ITEM 2.	Properties	8-9
ITEM 3.	Legal Proceedings	9
ITEM 4.	Mine Safety Disclosures	9

	PART II

ITEM 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	9-10
ITEM 6.	Selected Financial Data	10
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11-17
ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk	11-17
ITEM 8.	Financial Statements and Supplementary Data	18-46
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	46
ITEM 9A.	Controls and Procedures	46
ITEM 9B.	Other Information	49

	PART III

ITEM 10.	Directors, Executive Officers and Corporate Governance	49
ITEM 11.	Executive Compensation	50
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	50
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	51
ITEM 14.	Principal Accounting Fees and Services	51

	PART IV

ITEM 15.	Exhibits, Financial Statement Schedules	51
EXHIBIT INDEX		52-53
SIGNATURES		54

All references in this Annual Report to “Starrett”, the “Company”, “we”, “our” and “us” mean The L.S. Starrett Company and its subsidiaries.

PART I

Item 1 - Business

General

Founded in 1880 by Laroy S. Starrett and incorporated in 1929, The L.S. Starrett Company (the “Company”) is engaged in the business of manufacturing over 5,000 different products for industrial, professional and consumer markets. The Company has a long history of global manufacturing experience and currently operates 5 major global manufacturing plants. Domestic locations are Athol, Massachusetts (1880) and Mt. Airy, North Carolina (1985) with international operations located in Itu, Brazil (1956) Jedburgh, Scotland (1958) and Suzhou, China (1997). All subsidiaries principally serve the global manufacturing industrial base with concentration in the metalworking, construction, machinery, equipment, aerospace and automotive markets.

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 gages, gage 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 primarily distributes its precision hand tools, saw and construction products through distributors or resellers both domestically and internationally. Starrett® is brand recognized around the world for precision, quality and innovation.

In accordance with the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 280, Segment Reporting, for the fiscal year ended June 30, 2017 (fiscal 2017), we determined that we have two reportable operating segments (North America and International). Refer to Note 17, Financial Statement Information by Segment & Geographical Area, contained in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, for more information on our reportable segments.

Products

The Company’s tools and instruments are sold throughout North America and in over 100 other countries. By far the largest consumer of these products is the manufacturing industry including metalworking, 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 137 years the Company has been a recognized leader in providing measurement and cutting solutions to industry. Measurement tools consist of precision instruments such as micrometers, vernier calipers, height gages, depth gages, electronic gages, dial indicators, steel rules, combination squares, custom, non-contact and in-process gaging such as optical, vision and laser measurement systems. The Company has expanded its product offering in the field of test and measurement equipment, with force measurement and material test equipment. Skilled personnel, superior products, manufacturing expertise, innovation and unmatched service has earned the Company its reputation as the “Best in Class” provider of measuring application solutions for industry. During fiscal 2015, the Company introduced material test systems consisting of hardware and cutting edge software with capacities up to 50KN, in addition to new manual and automated FOV (Field of View) measurement systems. These systems we believe will be attractive to industry to reduce measurement and inspection time and are ideal for quality assurance, inspection labs, manufacturing and research facilities.

The Company’s saw product lines enjoy strong global brand recognition and market share. These products encompass a breadth of uses. The Company introduced several new products in the recent past including a new line of hand tools for measuring, marking and layout that include tapes, levels, chalk lines and other products for the building trades. In fiscal 2016, the Company introduced new products to its hand tool portfolio to extend its reach into the construction and retail trades. The continued focus on high performance, production band saw applications has resulted in the development of two new ADVANZ carbide tipped products MC5 and MC7 ideal for cutting ferrous materials (MC7) and non-ferrous metals and castings (MC5). These actions are aimed at positioning Starrett for global growth in wide band products for production applications.

As one of the premier industrial brands, the Company continues to be focused on every touch point with its customers. To that end, the Company now offers modern, easy-to-use interfaces for distributors and end-users including interactive catalogs and several online applications.

Personnel

At June 30, 2017, the Company had 1,647 employees, approximately 53% of whom were domestic. This represents a net decrease from June 30, 2016 of 47 employees. The headcount change included a decrease of 13 domestically and a decrease of 34 internationally.

None of the Company’s operations are subject to collective bargaining agreements. In general, the Company considers relations with its employees to be excellent. Domestic employees hold shares of Company stock resulting from various stock purchase plans and employee stock ownership plans. The Company believes that this dual role of owner-employee has strengthened employee morale over the years.

Competition

The Company competes 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 Company’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 mechanics’ hand measuring tools and precision instruments. In the United States, there are three major foreign competitors and numerous small companies in the field. As a result, the industry is highly competitive. During fiscal 2017, there were no material changes in the Company’s competitive position. The Company’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 has responded to such challenges by expanding its manufacturing operations in China. Certain large customers also offer their own private labels (“own brand”) 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 Company’s competitive position varies by market and country. Continued research and development, new patented products and processes, strategic acquisitions and investments and strong customer support have enabled the Company to compete successfully in both general and performance oriented applications.

Foreign Operations

The operations of the Company’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, Australia, New Zealand, Mexico, Germany and Singapore are engaged in distribution of the Company’s products. The Company expects its foreign subsidiaries to continue to play a significant role in its overall operations. A summary of the Company’s foreign operations is contained in Note 17 to the Company’s fiscal 2017 financial statements.

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 $58.1 million at June 30, 2017 and $56.3 million at June 30, 2016.

Intellectual Property

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 2017, 2016, and 2015 were approximately $1.9 million, $1.8 million, and $1.7 million, respectively.

The Company uses trademarks with respect to its products and considers its trademark portfolio to be one of its most valuable assets. All of the Company’s important trademarks are registered and rigorously enforced.

Environmental

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 received approval from federal and state regulators in fiscal 2013 to begin using its new hydro – generation facility at its Athol, MA plant to reduce its carbon footprint and energy costs, an investment in excess of $1.0 million.

Strategic Activities

Globalization has had a profound impact on product offerings and buying behaviors of industry and consumers in North America and around the world, resulting in the Company revising its strategy to fit this new, highly competitive business environment. The Company continuously evaluates most aspects of its business, aiming for new 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, new software and hardware technologies, and improved logistics to optimize its value chain.

The execution of these strategic initiatives has expanded the Company’s manufacturing and distribution in developing economies, resulting in international sales revenues totaling 44% of consolidated sales for fiscal 2017.

SEC Filings and Certifications

The Company makes its public filings with the Securities and Exchange Commission (“SEC”), 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 Company’s website is not part of this Annual Report on Form 10-K.

Item 1A – Risk Factors

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Annual Report on Form 10-K and the Company’s 2017 Annual Report to Stockholders, including the President’s letter, contain forward-looking statements about the Company’s business, competition, sales, gross margins, capital expenditures, foreign operations, plans for reorganization, interest rate sensitivity, debt service, liquidity and capital resources, and other operating and capital requirements. In addition, forward-looking statements may be included in future Company documents and in oral statements by Company representatives to security analysts and investors. The Company is subject to risks that could cause actual events to vary materially from such forward-looking statements, including the following risk factors:

Economic and world events could affect our operating results.

The Company’s results of operations may be materially affected by the conditions in the global economy. These include both world - wide and regional economic conditions and geo-political events. These conditions may affect financial markets, consumer and customer confidence. The Company can provide no assurance that current economic trends will or will not continue.

Technological innovation by competitors could adversely affect financial results.

Although the Company’s strategy includes investment in research and development of new and innovative products to meet technology advances, there can be no assurance that the Company will be successful in competing against new technologies developed by competitors.

International operations and our financial results in those markets may be affected by legal, regulatory, political, currency exchange and other economic risks.

During 2017, revenue from sales outside of the United States was $91.5 million, representing approximately 44% of total net sales. In addition, a significant amount of our manufacturing and production operations are located, or our products are sourced from, outside the United States. As a result, our business is subject to risks associated with international operations. These risks include the burdens of complying with foreign laws and regulations, unexpected changes in tariffs, taxes or regulatory requirements, and political unrest and corruption. Regulatory changes could occur in the countries in which we sell, produce or source our products or significantly increase the cost of operating in or obtaining materials originating from certain countries. Restrictions imposed by such changes can have a particular impact on our business when, after we have moved our operations to a particular location, new unfavorable regulations are enacted in that area or favorable regulations currently in effect are changed.

Countries in which our products are manufactured or sold may from time to time impose additional new regulations, or modify existing regulations, including:

•

changes in duties, taxes, tariffs and other charges on imports;

•

limitations on the quantity of goods which may be imported into the United States from a particular country;

•

requirements as to where products and/or inputs are manufactured or sourced;

•

creation of export licensing requirements, imposition of restrictions on export quantities or specification of minimum export pricing and/or export prices or duties;

•

limitations on foreign owned businesses; or

•

government actions to cancel contracts, re-denominate the official currency, renounce or default on obligations, renegotiate terms unilaterally or expropriate assets.

In addition, political and economic changes or volatility, geopolitical regional conflicts, terrorist activity, political unrest, civil strife, acts of war, public corruption and other economic or political uncertainties could interrupt and negatively affect our business operations. All of these factors could result in increased costs or decreased revenues and could materially and adversely affect our product sales, financial condition and results of operations.

We are also subject to the U.S. Foreign Corrupt Practices Act, in addition to the anti-corruption laws of the foreign countries in which we operate. Although we implement policies and procedures designed to promote compliance with these laws, our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation could result in sanctions or other penalties and have an adverse effect on our business, reputation and operating results.

Economic weakness in the industrial manufacturing sector could adversely affect the Company’s financial results.

The market for most of the Company’s products is subject to economic conditions affecting the industrial manufacturing sector, including the level of capital spending by industrial companies and the general movement of manufacturing to low cost foreign countries where the Company does not have a substantial market presence. Accordingly, economic weakness in the industrial manufacturing sector may, and in some cases has, resulted in decreased demand for certain of the Company’s products, which adversely affects sales and performance. Economic weakness in the consumer market will also adversely impact the Company’s performance. In the event that demand for any of the Company’s products declines significantly, the Company could be required to recognize certain costs as well as asset impairment charges on long-lived assets related to those products.

Volatility in the price of energy and raw materials could negatively affect our margins.

Steel is the principal raw material used in the manufacture of the Company’s products. The price of steel has historically fluctuated on a cyclical basis and has often depended on a variety of factors over which the Company has no control. The cost of producing the Company’s products is also sensitive to the price of energy. The selling prices of the Company’s products have not always increased in response to raw material, energy or other cost increases, and the Company is unable to determine to what extent, if any, it will be able to pass future cost increases through to its customers. The Company’s inability to pass increased costs through to its customers could materially and adversely affect its financial condition or results of operations.

The inability to meet expected investment returns and changes to interest rates could have a negative impact on Pension plan assets and liabilities.

Currently, the Company’s U.S. defined benefit pension plan is underfunded primarily due to lower discount rates which increase the Company’s liability. The Company made contributions of $4.0 million in fiscal 2017, and $3.4 million in fiscal 2016 and will be required to make additional contributions in fiscal 2018 of $3.3 million. The Company could be required to provide more funding to the domestic plan in the future. The Company froze the domestic defined benefit pension plan as of December 31, 2016. As a result of this decision, no future benefits will accrue to employees under that plan. The Company’s UK plan, which is also underfunded, required Company contributions of $1.0 million and $1.1 million during fiscal 2017 and 2016, respectively. The Company will be required to make a $1.0 million contribution to its UK pension plan in fiscal 2018.

Businesses that we may acquire may fail to perform to expectations.

Acquisitions involve special risks, including the potential assumption of unanticipated liabilities and contingencies, difficulty in assimilating the operations and personnel of the acquired businesses, disruption of the Company’s existing business, dissipation of the Company’s limited management resources, and impairment of relationships with employees and customers of the acquired business as a result of changes in ownership and management. While the Company believes that strategic acquisitions can improve its competitiveness and profitability, the failure to successfully integrate and realize the expected benefits of such acquisitions could have an adverse effect on the Company’s business, financial condition and operating results.

We are subject to certain risks as a result of our financial borrowings. Under the Company’s credit facility with TD Bank, N.A., the Company is required to comply with certain financial covenants, including: 1) funded debt to EBITDA, excluding non-cash and retirement benefit expenses (“maximum leverage”), cannot exceed 2.25 to 1; 2) annual capital expenditures cannot exceed $15.0 million; 3) maintain a Debt Service Coverage Rate of a minimum of 1.25 to 1 and 4) maintain consolidated cash plus liquid investments of not less than $10.0 million at any time. The Company believes that it will be able to service its debt and comply with the financial covenants in future periods; however, it cannot be assured of results of operations or future credit and financial markets conditions. An event of default under the credit facility, if not waived, could prevent additional borrowing and could result in the acceleration of the Company’s debt. As of June 30, 2017, the Company was in compliance with all the covenants. The credit facility expires in April of 2018 and the Company intends to negotiate an extension.

Any inadequacy, interruption, integration failure or security failure with respect to our information technology could harm our ability to effectively operate our business.

The efficient operation of the Company's business is dependent on its information systems, including its ability to operate them effectively and to successfully implement new technologies, systems, controls and adequate disaster recovery systems. In addition, the Company must protect the confidentiality of data of its business, employees, customers and other third parties. The failure of the Company's information systems to perform as designed or its failure to implement and operate them effectively could disrupt the Company's business or subject it to liability and thereby harm its profitability. The Company continues to enhance the applications contained in the Enterprise Resource Planning (ERP) system as well as improvements to other operating systems.

Failure to comply with laws, rules and regulations could negatively affect our business operations and financial performance.

Our business is subject to federal, state, local and international laws, rules and regulations, such as state and local wage and hour laws, the U.S. Foreign Corrupt Practices Act, the False Claims Act, the Employee Retirement Income Security Act (“ERISA”), securities laws, import and export laws (including customs regulations) and many others. The complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to changes in legal and regulatory requirements, increased enforcement and our ongoing expansion into new markets and new channels. In addition, as a result of operating in multiple countries, we must comply with multiple foreign laws and regulations that may differ substantially from country to country and may conflict with corresponding U.S. laws and regulations. We may also be subject to investigations or audits by governmental authorities and regulatory agencies, which can occur in the ordinary course of business or which can result from increased scrutiny from a particular agency towards an industry, country or practice. If we fail to comply with laws, rules and regulations or the manner in which they are interpreted or applied, we may be subject to government enforcement action, class action litigation or other litigation, damage to our reputation, civil and criminal liability, damages, fines and penalties, and increased cost of regulatory compliance, any of which could adversely affect our results of operations and financial performance.

Our tax rate is dependent upon a number of factors, a change in any of which could impact our future tax rates and net income.

Our future tax rates may be adversely affected by a number of factors, including the enactment of certain tax legislation being considered in the U.S. and other countries; other changes in tax laws or the interpretation of such tax laws; changes in the estimated realization of our net deferred tax assets; the jurisdictions in which profits are determined to be earned and taxed; the repatriation of non-U.S. earnings for which we have not previously provided for U.S. income and non-U.S. withholding taxes; adjustments to estimated taxes upon finalization of various tax returns; increases in expenses that are not deductible for tax purposes, including impairment of goodwill in connection with acquisitions; changes in available tax credits; and the resolution of issues arising from tax audits with various tax authorities. Losses for which no tax benefits can be recorded could materially impact our tax rate and its volatility from one quarter to another. Any significant change in our jurisdictional earnings mix or in the tax laws in those jurisdictions could impact our future tax rates and net income in those periods.

Item 1B – Unresolved Staff Comments

None.

Item 2 - Properties

The Company’s principal plant and its corporate headquarters are located in Athol, MA on approximately 15 acres of Company-owned land. The plant consists of 25 buildings, mostly of brick construction of varying dates, with approximately 535,000 square feet.

The Company’s Webber Gage Division in Cleveland, OH, owns and occupies two buildings totaling approximately 50,000 square feet.

The Company-owned facility in Mt. Airy, NC consists of one building totaling approximately 320,000 square feet. It is occupied by the Company’s Saw Division, Ground Flat Stock Division and a distribution center.

The Company’s subsidiary in Itu, Brazil owns and occupies several buildings totaling 209,000 square feet.

The Company’s subsidiary in Jedburgh, Scotland owns and occupies a 175,000 square foot building.

A wholly owned manufacturing subsidiary in The People’s Republic of China leases a 133,000 square foot building in Suzhou and leases a sales office in Shanghai.

The Tru-Stone Division owns and occupies a 106,000 square foot facility in Waite Park, MN.

The Kinemetric Engineering Division occupies a 18,000 square foot leased facility in Laguna Hills, CA.

The Bytewise Division occupies a 22,000 square foot leased facility in Columbus, GA.

In addition, the Company operates warehouses and/or sales-support offices in the U.S., Australia, New Zealand, Mexico, Singapore and Japan.

In the Company’s opinion, all of its property, plant and equipment are in good operating condition, well maintained and adequate for its current and foreseeable needs.

Item 3 - Legal Proceedings

In the ordinary course of business the Company is involved from time to time in litigation that is not considered material to its financial condition or operations.

Item 4 – Mine Safety Disclosures

Not applicable.

PART II

Item 5 - Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s Class A common stock is traded on the New York Stock Exchange. Quarterly dividend and high/low closing market price information is presented in the table below. The Company’s Class B common stock is generally nontransferable, except to lineal descendants of stockholders, and thus has no established trading market, but it can be converted into Class A common stock at any time. The Class B common stock was issued on October 5, 1988, and the Company has paid the same dividends thereon as have been paid on the Class A common stock since that date. On June 30, 2017, there were approximately 1,169 registered holders of Class A common stock and approximately 961 registered holders of Class B common stock.

Quarter Ended	Dividends		High		Low
September 2015	$	0.10	$	17.53	$	11.81
December 2015		0.10		13.31		9.04
March 2016		0.10		10.74		8.46
June 2016		0.10		12.87		9.76
September 2016		0.10		12.74		9.75
December 2016		0.10		11.20		8.80
March 2017		0.10		11.85		9.56
June 2017		0.10		10.35		8.20

The Company’s dividend policy is subject to periodic review by the Board of Directors. Based upon economic conditions, the Board of Directors decided to maintain the quarterly dividend at $0.10 for all quarters of fiscal 2017.

The Company repurchased 3,560 shares of Class B and 35,168 shares of Class A stock in the fourth quarter of fiscal 2017.

PERFORMANCE GRAPH

The following graph sets forth information comparing the cumulative total return to holders of the Company’s Class A common stock based on the market price of the Company’s Class A common stock over the last five fiscal years with (1) the cumulative total return of the Russell 2000 Index (“Russell 2000”) and (2) a peer group index (the “Peer Group”) reflecting the cumulative total returns of certain small cap manufacturing companies as described below. The peer group is comprised of the following companies: Acme United, Q.E.P. Co. Inc., Badger Meter, National Presto Industries, Regal-Beloit Corp., Tennant Company, The Eastern Company and WD-40.

BASE

FY2013

FY2014

FY2015

FY2016

FY2017

STARRETT

100.00

91.64

141.97

141.84

116.79

87.87

RUSSELL 2000

100.00

124.21

153.57

163.53

152.52

190.05

PEER GROUP

100.00

110.97

142.76

143.93

140.20

179.16

Item 6 - Selected Financial Data

The following selected financial data have been derived from and should be read in conjunction with “Management Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and notes thereto, included elsewhere in this Annual Report on Form 10-K.

	Years ended June 30 (in $000s except per share data)
	2017		2016			2015		2014		2013
Net sales	$	207,023	$	209,685		$	241,550	$	247,134	$	243,797
Net earnings (loss)		991		(14,130	)		5,244		6,712		(162	)
Basic earnings (loss) per share		0.14		(2.01	)		0.75		0.97		(0.02	)
Diluted earnings (loss) per share		0.14		(2.01	)		0.75		0.97		(0.02	)
Long-term debt		6,095		17,109			18,552		10,804		24,252
Total assets		192,665		201,598			212,272		231,443		230,794
Dividends per share		0.40		0.40			0.40		0.40		0.40

Items 7 and 7A- Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk

RESULTS OF OPERATIONS

Fiscal 2017 Compared to Fiscal 2016

Overview

L. S. Starrett is a global company and is subject to the political and economic issues both domestically and internationally. Domestically, the presidential election and subsequent congressional stalemate has resulted in customers postponing investment, especially in capital equipment, while the international markets have stabilized in Brazil and begun to grow in Europe.

Net sales for fiscal 2017 declined $2.7 million or 1% compared to fiscal 2016, with North America posting a shortfall of $5.6 million or 4% and International growing $2.9 million or 4%. Price increases, predominantly in Brazil, new products and foreign exchange represented sales gains of $6.4, $1.8 and $1.4 million, respectively, which were offset by domestic and international volume declines of $5.8 million and $6.5 million, respectively. Gross margins increased $15.0 million or 32% from $47.0 million or 22% of sales in fiscal 2016 to $62.0 million or 30% of sales in fiscal 2017 with North America and International posting gains of $10.1 million and $4.9 million, respectively. Selling, general and administrative expenses decreased $1.3 million or 2% from $63.3 million in fiscal 2016 to $62.0 million in fiscal 2017. Operating income improved $19.4 million from a loss of $20.4 million in fiscal 2016 to a loss of $1.0 million in fiscal 2017. Included in operating income was a $17.5 million pension charge and a $4.1 million asset impairment in fiscal 2016 compared to a $1.0 million restructuring charge in fiscal 2017. The U.S. pension plan was frozen as of December 31, 2016. Consequently the Plan will be closed to new participants and current participants will no longer earn additional benefits after December 31, 2016.

Net Sales

Net sales in North America decreased $5.6 million or 4% from $130.2 million in fiscal 2016 to $124.6 million in fiscal 2017 principally due to declines in maintenance, repair & operating (MRO) products and capital equipment of 3% and 6%, respectively. International sales grew $2.9 million or 4% from $79.5 million in fiscal 2016 to $82.4 million in fiscal 2017 due to net consolidated currency gains of $1.4 million and $1.5 million of new products.

Gross Margin

Gross margin in North America increased $10.1 million from $24.3 million in fiscal 2016 to $34.4 million in fiscal 2017 primarily due to the comparative absence in fiscal 2017 of a $12.4 million pension charge in fiscal 2016. International gross margins increased $4.9 million from $22.7 million in fiscal 2016 to $27.6 million in fiscal 2017 with currency exchange rates of $0.6 million and price increases of $6.3 million offsetting volume declines of approximately $2.0 million.

The $1.0 million of restructuring charges in fiscal 2017 are principally related to severance costs, equipment installation and freight which represents expenses associated with the saw plant consolidation. The saw consolidation, discussed in in previous SEC filings, represents reducing saw manufacturing facilities from four to two.

Selling, General and Administrative Expenses

North American selling, general and administrative expenses declined $2.7 million or 7% principally due to the comparative absence in fiscal 2017 of a $3.0 million pension charge in fiscal 2016. International selling, general and administrative expenses increased $1.4 million or 5% due to increased sales commissions, professional fees and advertising expenses.

Operating Profit

Operating profit improved $19.4 million primarily due to the absence in fiscal 2017 of charges of $17.5 million for pension expense and $4.1 million for the asset impairment of our Mt. Airy facility related to the saw plant consolidation.

Other Income (Expense), Net

Other income (expense) in fiscal 2017 decreased $0.6 million compared to fiscal 2016 principally due to lower interest income and legal settlements.

Income Taxes

The income tax rate for fiscal 2017 was 35.6% on pre-tax income of $1.5 million. This compares to a normalized statutory U.S. federal and state rate of 38%. The primary reasons for a lower effective tax rate is due to the benefit of earnings in foreign jurisdictions with lower effective tax rates and a one-time tax benefit in Canada which was offset by discrete tax charges including the impact of a tax rate change in the U.K. applied to deferred tax assets.

In fiscal 2016, the tax benefit rate was 30.7% on pre-tax losses of $20.4 million. The primary reason for the lower tax benefit is due to losses in certain foreign subsidiaries for which no tax benefit was taken due to the uncertainty of future profits in those entities.

Fiscal 2016 Compared to Fiscal 2015.

Overview

L. S. Starrett, as a global company, was negatively impacted by political, economic and currency issues during fiscal 2016. The recession, corruption and currency problems in Brazil significantly reduced the sales and profits of our largest international subsidiary compared to fiscal 2015. The slowdown in China and stagnation in Europe resulted in lower sales compared to fiscal 2015 in both regions, while North America suffered from the cost reductions implemented in the oil industry.

The financial markets, including the timing of Brexit, also reduced earnings in fiscal 2016 as the flight to safety increased the demand for bonds and the associated decrease in interest rates, which significantly contributed to a $17.5 million non-cash pension expense due to higher liabilities. The pension liability is based upon the ten year Corporate Bond Rate and is set on the last day of the fiscal year. This generally accepted accounting principle coupled with the volatility of interest rates results in fourth quarter financial variations which management cannot control. The pension discount rate as of June 30, 2016 was 3.77% compared to 4.00% at the end of May 2016 and 4.49% at the end of June 2015 the total consolidated expense in fiscal 2016 was $21.4 million. Excluding the fourth quarter adjustment of $17.5 million, normal annual pension expense is $3.9 million.

In addition, due to excess saw manufacturing capacity, the Company decided to reduce its manufacturing footprint resulting in a $4.1 million non-cash charge in the fourth quarter of fiscal 2016.

Net sales for fiscal 2016 were $209.7 million, a decline of $31.9 million or 13% compared to $241.6 in fiscal 2015, with North America and International posting decreases of $7.0 million and $24.9 million, respectively. Price increases, particularly in Brazil, and new products represented sales gains of $6.5 and $4.7 million, respectively, which were offset by volume declines of $24.3 million and unfavorable exchange rates of $18.9 million. Gross margins declined $29.7 million from $76.7 million, or 31.8%, of sales in fiscal 2015 to $47.0 million, or 22.4% of sales, in fiscal 2016 with North America and International posting decreases of $19.3 and $10.4 respectively. Selling, general and administrative expenses decreased $4.8 million, or 7%, from $68.1 million in fiscal 2015 to $63.3 million in fiscal 2016 principally due to reduced International expenses expressed in U. S. dollars. Operating income, including a $4.1 asset impairment charge, declined $29.0 million from profit of $8.6 million in fiscal 2015 to a loss of $20.4 million in fiscal 2016.

Net Sales

Net sales in North America decreased $7.0 million or 5% from $137.1 million in fiscal 2015 to $130.1 million in fiscal 2016 with a 9% decline in precision hand tools offsetting high end metrology gains of 8%. International sales decreased $24.9 million or 24% from $104.5 million in fiscal 2015 to $79.6 million in fiscal 2016 with the weak Brazilian Real translated to the strong U. S. dollar representing $16.0 million and the recession in Brazil accounting for a $10.0 million volume decline.

Gross Margin

Gross margin in North America decreased $20.7 million from $43.6 million in fiscal 2015 to $22.9 million in fiscal 2016 with a non-cash pension charge representing $12.4 million or 60% of the margin erosion. Lower sale volume and level fixed overhead costs accounted for the majority of the additional $8.3 million in the deficit. International gross margins decreased $10.4 million from $33.1 million in fiscal 2015 to $22.7 million in fiscal 2016 with unfavorable exchange rates representing $5.3 million. A United Kingdom non-cash pension charge of $1.8 million coupled with a $3.3 million associated with lower sales volume accounted for the additional $5.1 million in the decline.

Selling, General and Administrative Expenses

North American selling, general and administrative expenses increased $1.0 million or 3% as savings in salaries, incentive payments, travel and entertainment of $2.3 million was offset by a $3.0 million non-cash pension charge and higher professional fees. International selling, general and administrative expenses decreased $6.0 million or 19% with a $5.5 million savings due to the stronger U. S. dollar. Reduced sales commissions due to lower sales, particularly in Brazil, accounted for the additional $0.5 million in savings.

Operating Profit

The operating profit declined $29.0 million with a non-cash fourth quarter pension expense of $17.5 million and a $4.1 million non-cash asset impairment charge representing $21.6 million or 75% of the difference. Lower sales and associated gross margins contributed to the remaining $7.4 million decline.

Other Income, Net

Other income in fiscal 2016 decreased $1.2 million compared to fiscal 2015 principally due to $0.3 million of lower interest income and a $1.1 million loss related to dollar denominated debt of our Chinese subsidiary as a result of the Chinese Yuan currency declining in value relative to the U. S. dollar.

Income Taxes

The income tax rate for fiscal 2016 was 30.7% on pre-tax losses of $20.4 million. This compares to a normalized statutory U.S. federal and state tax rate of 38%. The primary reason for the lower tax benefit is due to losses in certain foreign subsidiaries for which no tax benefit is taken due to the uncertainty of future profits in those entities.

The income tax rate for fiscal 2015 was 47.2% on pre-tax profits of $9.9 million. This compares to a normalized statutory U.S. federal and state tax rate of 38%. The primary reason for the higher tax cost is due to losses in certain foreign subsidiaries for which no tax benefit is taken due to the uncertainty of future profits in those entities.

The Company continues to recognize the benefit of most U.S. deferred tax assets as, after weighing the positive and negative evidence, it believes it is more likely than not that those benefits will be recognized. The valuation allowances relating to carryforwards for foreign NOLs increased by $0.5 million and to foreign tax credits increased by $0.2 million.

FINANCIAL INSTRUMENT MARKET RISK

Market risk is the potential change in a financial instrument’s value caused by fluctuations in interest and currency exchange rates, and equity and commodity prices. The Company’s operating activities expose it to risks that are continually monitored, evaluated and managed. Proper management of these risks helps reduce the likelihood of earnings volatility.

The Company does not engage in tracking, market-making or other speculative activities in derivatives markets. The Company engages in an immaterial amount of hedging activity to minimize the impact of foreign currency fluctuations and had $1.4 million in forward currency contracts outstanding at June 30, 2017. Net foreign monetary assets are approximately $17.1 million as of June 30, 2017.

A 10% change in interest rates would not have a significant impact on the aggregate net fair value of the Company’s interest rate sensitive financial instruments or the cash flows or future earnings associated with those financial instruments. A 10% increase in interest rates would not have a material impact on our borrowing costs. See Note 13 to the Consolidated Financial Statements for details concerning the Company’s long-term debt outstanding of $6.1 million.

LIQUIDITY AND CAPITAL RESOURCES

	Years ended June 30 ($000)
	2017			2016			2015
Cash provided by operating activities	$	2,888		$	14,336		$	6,800
Cash used in investing activities		(3,839	)		(619	)		(5,544	)
Cash used in financing activities		(3,911	)		(4,294	)		(3,547	)

The Company has a working capital ratio of 3.6 as of June 30, 2017 as compared to 5.5 as of June 30, 2016 due to the reclassification of the line of credit of $9.9 million from long-term to short-term. The reclassification of the line of credit to short-term is required as the agreement expires in April 2018, which is less than twelve months. Cash, accounts receivable and inventories represent 94% and 91% of current assets in fiscal 2017 and fiscal 2016, respectively. The Company had accounts receivable turnover of 6.4 in fiscal 2017 and 5.6 in fiscal 2016 and an inventory turnover ratio of 2.5 in fiscal 2017 and 2.7 in fiscal 2016.

Net cash provided by operations of $2.9 million in fiscal 2017 was principally due to the add back of non-cash depreciation and amortization plus reduced accounts receivable more than offsetting increases in inventory and pension funding.

The Company posted a $5.2 million cash flow deficit in fiscal 2017 as $2.9 million provided by operations was offset by $3.8 million in investing, $3.9 million in financing and $0.3 million in currency cash translation.

Effects of translation rate changes on cash primarily result from the movement of the U.S. dollar against the British Pound, the Euro and the Brazilian Real. The Company uses a limited number of forward contracts to hedge some of this activity and a natural hedge strategy of paying for foreign purchases in local currency when economically advantageous.

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 the Company has maintained a $23.0 million line of credit, of which, $0.9 million is reserved for letters of credit and $9.9 million was outstanding as of June 30, 2017.

The Company amended its Loan and Security Agreement, which includes a Line of Credit and a Term Loan, in January 2015 with changes that took effect on April 25, 2015. Borrowings under the Line of Credit may not exceed $23.0 million. The agreement expires on April 30, 2018 and has an interest rate of LIBOR plus 1.5%. As of June 30, 2017, $9.9 million was outstanding on the Line of Credit.

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.

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. The financial covenants of the amended Loan and Security Agreement are: 1) funded debt to EBITDA, excluding non-cash and retirement benefit expenses (“maximum leverage”), not to exceed 2.25 to 1.0, 2) annual capital expenditures not to exceed $15.0 million, 3) maintain a Debt Service Coverage Rate of a minimum of 1.25 to 1.0 and 4) maintain consolidated cash plus liquid investments of not less than $10.0 million at any time. 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, 2017, the Company was in compliance with all covenants 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. Note 2 to the Company’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; long lived assets and goodwill impairment; as well as 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 Company’s Consolidated Financial Statements. The following sections describe the Company’s critical accounting policies.

Revenue Recognition and Accounts Receivable: Sales of merchandise and freight billed to customers are recognized when products are shipped, title and risk of loss has passed to the customer, no significant post-delivery obligations remain and collection of the resulting accounts receivable is reasonably assured. Sales are net of provisions for cash discounts, returns, customer discounts (such as volume or trade discounts), 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.

The allowance for doubtful accounts of $0.9 million at the end of both fiscal 2017 and 2016 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 customer’s credit worthiness, actual write-offs 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 net sales could be adversely affected.

Inventory Valuation: The Company values inventories at the lower of the cost of inventory or net realizable value, with cost determined by either the last-in, first-out ("LIFO") method for most U.S. inventories or the first-in, first-out ("FIFO") method for all other inventories. The Company establishes reserves for excess, slow moving, and obsolete inventory based on inventory levels, expected product life, and forecasted sales demand. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements compared with inventory levels. Reserve requirements are developed according to our projected demand requirements based on historical demand, competitive factors, and technological and product life cycle changes. It is possible that an increase in our reserve may be required in the future if there is a significant decline in demand for our products and we do not adjust our production schedule accordingly.

Property Plant and Equipment: The Company accounts for 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 groups PP&E for impairment analysis by division and/or product line. PP&E 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 net book value of property, plant and equipment is determined 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 salvage 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. In fiscal 2016 the Company determined that the carrying value of a building exceeded its fair value. Consequently, the Company recorded an impairment loss of $4.1 million, which represents the excess of the carrying value of a building over its fair value. See also Impairment of Assets and Restructuring Costs (Note 9 to the Consolidated Financial Statements.)

Depreciation is included in cost of goods sold or selling, general and administrative expenses in the Consolidated Statement of Operations based upon the function or use of the specific asset. Depreciation of equipment used in the manufacturing process is a component of inventory cost and included in costs of goods sold upon sale. Depreciation of equipment used for office and administrative functions is an expense included in selling, general and administrative expenses.

Intangible Assets: Identifiable intangible assets are recorded at cost and are amortized on a straight-line basis over a 5-15 year period. The estimated useful lives of the intangible assets subject to amortization are: 15 years for patents, 14 years for trademarks and trade names, 10 years for completed technology, 8 years for non-compete agreements, 8 years for customer relationships and 5 years for software development.

Recoverability of the net book value of intangible assets is determined by comparison of the carrying amount to estimated future undiscounted net cash flows the assets are expected to generate. Estimating these cash flows 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. No events or circumstances arose in fiscal 2017 which required management to perform an impairment analysis.

Goodwill: Annually, or anytime when events suggest impairment may have occurred, the Company assesses the fair value of its goodwill to determine if the carrying amount of the goodwill is greater than the fair value. An impairment charge would be recognized to the extent the recorded goodwill exceeds the implied fair value of goodwill.

The Company performed a qualitative analysis in accordance with ASU 2011-08 of its Bytewise reporting unit for its October 1, 2016 annual assessment of goodwill (commonly referred to as “Step Zero”). From a qualitative perspective, in evaluating whether it is more likely than not that the fair value of the reporting unit is not less than its carrying amount, relevant events and circumstances were taken into account, with greater weight assigned to events and circumstances that most affect the fair value of Bytewise or the carrying amounts of its assets. Items that were considered included, but were not limited to, the following: macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, changes in management or key personnel, and other Bytewise specific events. After assessing these and other factors the Company determined that it was more likely than not that the fair value of the Bytewise reporting unit was not less than the carrying amount as of October 1, 2016.

Income Taxes: Accounting for income taxes requires estimates of future benefits and tax liabilities. Due to temporary differences in the timing of recognition of items included in income for accounting and tax purposes, deferred tax assets or liabilities are recorded to reflect the impact arising from these differences on future tax payments. With respect to recorded tax assets, the Company assesses the likelihood that the asset will be realized by evaluating the positive and negative evidence to determine whether realization is more likely than not to occur. Realization of the Company’s deferred tax assets is primarily dependent on future taxable income, the timing and amount of which are uncertain, in part, due to the variable profitability of certain subsidiaries. A valuation allowance is recognized if it is “more likely than not” that some or all of a deferred tax asset will not be realized. In the event that we were to determine that we would not be able to realize our deferred tax assets in the future, an increase in the valuation allowance would be required. In the event we were to determine that we are able to use our deferred tax assets and a valuation allowance had been recorded against the deferred tax assets, a decrease in the valuation allowance would be required. Should any significant changes in the tax law or the estimate of the necessary valuation allowance occur, the Company would record the impact of the change, which could have a material effect on our financial position or results of operations. See also Income Taxes (Note 11 to the Consolidated Financial Statements.)

Defined Benefit Plans: The Company has two defined benefit pension plans, one for U.S. employees and another for U.K. employees. The Company also has a postretirement medical and life insurance benefit plan for U.S. employees.

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 will be closed to new participants and current participants will no longer earn additional benefits after December 31, 2016.

Under our current accounting method, both 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 but instead of amortizing net actuarial gains or losses in excess of the corridor in future periods, excess gains and losses 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 accounting method (MTM adjustment) 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. Immediate recognition in net periodic benefit cost could potentially increase the volatility of net periodic benefit cost. The MTM adjustments to net periodic benefit cost for 2017, 2016 and 2015 were $0.2 million, $17.8 million, and $1.3 million, respectively.

Calculation of pension and postretirement medical costs and obligations are dependent on actuarial assumptions. These assumptions include discount rates, healthcare cost trends, inflation, salary growth, long-term return on plan assets, employee turnover rates, retirement rates, mortality and other factors. These assumptions are made based on a combination of external market factors, actual historical experience, long-term trend analysis, and an analysis of the assumptions being used by other companies with similar plans. Significant differences in actual experience or significant changes in assumptions would affect pension and other postretirement benefit costs and obligations. Effective December 31, 2013, the Company terminated eligibility for employees 55-64 years old in the Postretirement Medical Plan. See also Employee Benefit Plans (Note 12 to the Consolidated Financial Statements).

Cost of Goods Sold: The Company includes costs of materials, direct and indirect labor and manufacturing overhead in cost of goods sold. Included in these costs are inbound freight, personnel (manufacturing plants only), receiving costs, internal transferring, employee benefits (including pension expense), depreciation and inspection costs.

Selling General and Administrative Expenses: The Company includes distribution expenses in selling, general and administrative expenses. Distribution expenses include shipping labor and warehousing costs associated with the storage of finished goods at each manufacturing facility. The Company also includes costs for our dedicated distribution centers as selling expenses. Employee benefits, including pension expense attributable to personnel not involved in the manufacturing process, are also included in selling, general and administrative expenses.

CONTRACTUAL OBLIGATIONS

The following table summarizes future estimated payment obligations by period.

	Fiscal Year (in millions)
	Total		2018		2019-2020		2021-2022		Thereafter
Debt obligations	$	17.6	$	11.5	$	3.5	$	2.6	$	-
Estimated interest on debt obligations		1.1		0.6		0.4		0.1		-
Operating lease obligations		9.7		2.4		3.7		2.1		1.5
Purchase obligations		15.6		10.4		2.6		1.9		0.7
Total	$	44.0	$	24.9	$	10.2	$	6.7	$	2.2

Estimated interest on debt obligations are based on a standard 10 year loan amortization schedule for the $15.5 million term loan, and the current outstanding balance of the Company's credit line at the current effective interest rate through April 2018 when the current credit line agreement ends. See Note 13 for additional details on these debt instruments.

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 entered into a long-term, volume-based purchase agreement for electricity. Under this agreement the Company is committed to purchase a minimum monthly amount of energy at a fixed price per kilowatt hour. Cancellation of this contract would incur a significant penalty.

Item 8 - Financial Statements and Supplementary Data

Contents:		Page
Report of Independent Registered Public Accounting Firm		19
Consolidated Balance Sheets		20
Consolidated Statements of Operations		21
Consolidated Statements of Comprehensive Income (Loss)		22
Consolidated Statements of Stockholders’ Equity		23
Consolidated Statements of Cash Flows		24
Notes to Consolidated Financial Statements		25-46

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

The L.S. Starrett Company

We have audited the accompanying consolidated balance sheets of The L.S. Starrett Company (a Massachusetts corporation) and subsidiaries (the “Company”) as of June 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2017. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15 (2) of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The L.S. Starrett Company and subsidiaries as of June 30, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2017, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 25, 2017 expressed an unqualified opinion.

/s/ Grant Thornton LLP

Boston, Massachusetts

August 25, 2017

THE L.S. STARRETT COMPANY

Consolidated Balance Sheets

(in thousands except share data)

	6/30/17			6/30/16
ASSETS
Current assets:
Cash	$	14,607		$	19,794
Accounts receivable (less allowance for doubtful accounts of $946 and $887, respectively)		30,425			34,367
Inventories		58,097			56,321
Current deferred tax asset		-			4,518
Prepaid expenses and other current assets		6,994			5,911
Total current assets		110,123			120,911
Property, plant and equipment, net		39,345			41,010
Taxes receivable		2,627			2,655
Deferred tax assets, net		26,032			25,284
Intangible assets, net		9,868			6,490
Goodwill		4,668			3,034
Other assets		2			2,214
Total assets	$	192,665		$	201,598

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt	$	11,514		$	1,543
Accounts payable		8,366			8,981
Accrued expenses		5,424			6,372
Accrued compensation		5,435			4,922
Total current liabilities		30,739			21,818
Deferred tax liabilities		-			187
Other tax obligations		3,645			3,813
Long-term debt, net of current portion		6,095			17,109
Postretirement benefit and pension obligations		58,571			67,158
Other non-current liabilities		1,589			-
Total liabilities		100,639			110,085

Stockholders’ equity:
Class A common stock $1 par (20,000,000 shares authorized; 6,267,603 outstanding at June 30, 2017 and 6,249,563 outstanding at June 30, 2016)		6,268			6,250
Class B common stock $1 par (10,000,000 shares authorized; 761,588 outstanding at June 30, 2017 and 772,742 outstanding at June 30, 2016)		762			773
Additional paid-in capital		55,579			55,227
Retained earnings		79,402			81,228
Accumulated other comprehensive loss		(49,985	)		(51,965	)
Total stockholders’ equity		92,026			91,513
Total liabilities and stockholders’ equity	$	192,665		$	201,598

See notes to consolidated financial statements

THE L.S. STARRETT COMPANY

Consolidated Statements of Operations

(in thousands except per share data)

	Years Ended
	6/30/17			6/30/16			6/30/15
Net sales	$	207,023		$	209,685		$	241,550
Cost of goods sold		145,073			162,697			164,855
Gross margin		61,950			46,988			76,695
% of net sales		29.9	%		22.4	%		31.8	%

Selling, general and administrative expenses		62,006			63,319			68,092
Restructuring charges		988			-			-
Impairment of assets		-			4,114			-
Operating income (loss)		(1,044	)		(20,445	)		8,603

Other income (expense), net		(507	)		70			1,339
Gain on sale of building		3,089			-			-

Earnings (loss) before income taxes		1,538			(20,375	)		9,942
Income tax expense (benefit)		547			(6,245	)		4,698

Net earnings (loss)	$	991		$	(14,130	)	$	5,244

Basic and diluted earnings (loss) per share	$	0.14		$	(2.01	)	$	0.75

Average outstanding shares used in per share calculations:
Basic		7,048			7,017			6,983
Diluted		7,081			7,017			7,023

Dividends per share	$	0.40		$	0.40		$	0.40

See notes to consolidated financial statements

THE L. S. STARRETT COMPANY

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

	Years Ended
	6/30/17			6/30/16			6/30/15
Net earnings (loss)	$	991		$	(14,130	)	$	5,244
Other comprehensive (loss):
Translation gain (loss)		(1,436	)		(4,585	)		(18,989	)
Pension and postretirement plans, net of tax of $1,896, $(1,371) and $(3,857) respectively		3,416			(1,764	)		(6,202	)

Other comprehensive income (loss)		1,980			(6,349	)		(25,191	)

Total comprehensive income (loss)	$	2,971		$	(20,479	)	$	(19,947	)

See notes to consolidated financial statements

THE L.S. STARRETT COMPANY

Consolidated Statements of Stockholders’ Equity

(in thousands except per share data)

	Common Stock Outstanding						Additional Paid-in			Retained			Accumulated Other Comprehensive
	Class A			Class B			Capital			Earnings			Loss			Total
Balance, June 30, 2014	$	6,166		$	795		$	54,063		$	95,715		$	(20,425	)	$	136,314

Total comprehensive income											5,244			(25,191	)		(19,947	)
Dividends ($0.40 per share)											(2,795	)					(2,795	)
Repurchase of shares		(1	)		(3	)		(64	)								(68	)
Issuance of stock		15			33			516									564
Stock-based compensation		8						354									362
Conversion		36			(36	)											-
Balance, June 30, 2015		6,224			789			54,869			98,164			(45,616	)		114,430

Total comprehensive income											(14,130	)		(6,349	)		(20,479	)
Dividends ($0.40 per share)											(2,806	)					(2,806	)
Repurchase of shares		(37	)		(5	)		(421	)								(463	)
Issuance of stock		21			18			388									427
Stock-based compensation		13						391									404
Conversion		29			(29	)											-
Balance, June 30, 2016		6,250			773			55,227			81,228			(51,965	)		91,513

Total comprehensive income											991			1,980			2,971
Dividends ($0.40 per share)											(2,817	)					(2,817	)
Repurchase of shares		(35	)		(8	)		(343	)								(386	)
Issuance of stock		23			11			301									335
Stock-based compensation		16						394									410
Conversion		14			(14	)											-
Balance, June 30, 2017	$	6,268		$	762		$	55,579		$	79,402		$	(49,985	)	$	92,026

Cumulative balance:
Translation loss, net of taxes													$	(43,322	)
Pension and postretirement plans, net of taxes														(6,663	)
													$	(49,985	)

See notes to consolidated financial statements

THE L. S. STARRETT COMPANY

Consolidated Statements of Cash Flows

(in thousands)

	Years Ended
	6/30/17			6/30/16			6/30/15
Cash flows from operating activities:
Net earnings (loss)	$	991		$	(14,130	)	$	5,244
Non cash operating activities:
Gain on sale of building		(3,089	)		-			-
Depreciation		5,368			5,832			7,434
Amortization		1,658			1,382			1,283
Impairment of building		-			4,114			-
Stock-based compensation		410			404			362
Net long-term tax obligations		(132	)		(256	)		2,414
Deferred taxes		498			(6,888	)		985
Postretirement benefit and pension obligations		2,387			20,947			3,367
(Income) loss from equity method investment		307			(118	)		(203	)
Working capital changes:
Accounts receivable		3,863			2,774			(2,615	)
Inventories		(2,498	)		3,615			(6,185	)
Other current assets		(1,192	)		309			483
Other current liabilities		(523	)		1,477			718
Prepaid pension expense		(5,481	)		(5,148	)		(6,731	)
Other		321			22			244
Net cash provided by operating activities		2,888			14,336			6,800

Cash flows from investing activities:
Business acquisition, net of cash acquired		(1,324	)		-			-
Additions to property, plant and equipment		(4,574	)		(7,493	)		(5,052	)
Software development		(1,262	)		(747	)		(648	)
Purchase of short-term investments		-			-			(45	)
Proceeds from sale of short-term investments		-			7,621			201
Proceeds from sale of building		3,321			-			-
Net cash used in investing activities		(3,839	)		(619	)		(5,544	)

Cash flows from financing activities:
Proceeds from borrowings		500			750			900
Long-term debt repayments		(1,543	)		(2,202	)		(2,148	)
Proceeds from common stock issued		335			427			564
Repurchase of shares		(386	)		(463	)		(68	)
Dividends paid		(2,817	)		(2,806	)		(2,795	)
Net cash used in financing activities		(3,911	)		(4,294	)		(3,547	)
Effect of translation rate changes on cash		(325	)		(737	)		(2,834	)
Net increase (decrease) in cash		(5,187	)		8,686			(5,125	)
Cash beginning of year		19,794			11,108			16,233
Cash end of year	$	14,607		$	19,794		$	11,108
Supplemental cash flow information:
Interest paid	$	635		$	654		$	724
Taxes paid, net		(136	)		1,113			2,169
Non-cash investing and financing activity:
Liability for business acquisition		1,555			-			-

See notes to consolidated financial statements

THE L.S. STARRETT COMPANY

Notes to Consolidated Financial Statements

June 30, 2017 and 2016

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, China and the United Kingdom. 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.

Financial instruments and derivatives: The Company’s financial instruments include cash, investments and debt and are valued using level 1 inputs. Investments are stated at cost which approximates fair market value. The carrying value of debt, 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 amount of contracts outstanding as of June 30, 2017 and June 30, 2016 amounted to $1.4 million and $0.9 million, respectively.

Accounts receivable: Accounts receivable consist of trade receivables from customers. The expense for bad debts amounted to $0.3, $0.3, and $0.2 million in fiscal 2017, 2016 and 2015, 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. 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. 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 treated as an operating lease. Property plant and equipment 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, 2017 and June 30, 2016 were $1.6 million and $2.9 million, respectively, of construction in progress. Repairs and maintenance of equipment are expensed as incurred. A decision to reduce saw manufacturing capacity was made in fiscal 2016 which required management to perform an impairment analysis. Consequently, the Company recorded an impairment loss of $4,114,000, which represents the excess of the carrying value of a building over its fair value. See also Impairment of Assets and Restructuring Costs (Note 9 to the Consolidated Financial Statements.)

Intangible assets: Identifiable intangibles are recorded at cost and are amortized on a straight-line basis over a 5-15 year period. The estimated useful lives of the intangible assets subject to amortization are: 10-15 years for patents, 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. The Company tests identifiable intangible assets for impairment whenever events or circumstances indicate they may be impaired.

Goodwill: 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 annually tests the goodwill associated with the November 2011 acquisition of Bytewise in October. As of October 1, 2016, the Company performed an analysis of qualitative factors to determine whether it is more likely than not that the fair value of the Bytewise business is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test. Based on the Company's analysis of qualitative factors, the Company determined that it was not necessary to perform a two-step goodwill impairment test.

Revenue recognition: Sales of merchandise and freight billed to customers are recognized when products have shipped, 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 presented net of provisions for cash discounts, returns, customer discounts (such as volume or trade discounts), and other sales related discounts. Cooperative advertising payments made to customers are included in selling, general and administrative expenses in the Consolidated Statements of Operations. While the Company does allow its customers the right to return in certain circumstances, revenue is not deferred, rather a reserve for sales returns is provided based on experience, which historically has not been significant.

Advertising costs: The Company’s policy is to generally expense advertising costs as incurred, except catalogs costs, which are deferred until mailed. Advertising costs were expensed as follows: $5.2 million in fiscal 2017, $5.0 million in fiscal 2016 and $5.7 million in fiscal 2015 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.

Warranty expense: The Company’s warranty obligation is generally one year from shipment to the end user and is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Historically, the Company has not incurred significant warranty expense and consequently its warranty reserves are not material.

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.

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 (MTM adjustment). This 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 2017, 2016 and 2015 were $0.2 million, $17.8 million, and $1.3 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 $65 million of undistributed earnings of foreign subsidiaries as of June 30, 2017 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. 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: $1.9 million in fiscal 2017, $1.8 million in fiscal 2016, and $1.7 million in fiscal 2015 and are included in selling general and administrative expenses in the Consolidated Statements of Operations.

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 32,674, 32,833, and 40,214, of potentially dilutive common shares in fiscal 2017, 2016 and 2015, respectively, resulting from shares issuable under its stock option plans. These additional shares are not used in the diluted EPS calculation in loss years.

Translation of foreign currencies: The financial statements of our foreign subsidiaries, where the local currency is the functional currency, are translated at exchange rates in effect on reporting dates, and income and expense items are translated at average rates or rates in effect on transaction dates as appropriate. The resulting foreign currency translation adjustments are charged or credited directly to the other comprehensive income (loss) as noted in the Consolidated Statements of Comprehensive Income (Loss). Net foreign currency gains (losses) are disclosed in Note 10.

Use of accounting estimates: The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of 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 and returned goods; inventory allowances; income tax valuation allowances, uncertain tax positions and pension obligations. Amounts ultimately realized could differ from those estimates.

Recent Accounting Pronouncements:

In May 2014, the FASB issued a new standard related to “Revenue from Contracts with Customers” which amends the existing accounting standards for revenue recognition. The standard requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. This standard is applicable for fiscal years beginning after December 15, 2017 and for interim periods within those years. Earlier application will be permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company expects to adopt this standard on a modified prospective basis for its fiscal year beginning July 1, 2018.

The Company primarily sells goods and recognizes revenues at point of sale or delivery, which will not change under the new standard. The Company does not sell extended warranties to its customers and believes that the majority of its warranties are standard in nature, requiring no separate performance obligations and therefore expects little to no change in the accounting for its warranties under ASU 2014-09. The Company has reviewed a sample of customer contracts that the Company believes is representative of its significant revenue streams identified for the current fiscal year. The assessment of the impact on revenue and expenses based on these reviews to determine the impact to the Company’s results of operations and cash flows as a result of this guidance is ongoing.

In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." Previous to the issuance of this ASU, ASC 330 required that an entity measure inventory at the lower of cost or market. ASU 2015-11 specifies that “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. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Application is to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU No. 2015-11 is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The ASU requires that organizations that lease assets recognize assets and liabilities on the balance sheet for the rights and obligations created by those leases. The ASU will affect the presentation of lease related expenses on the income statement and statement of cash flows and will increase the required disclosures related to leases. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of ASU No. 2016-02 on its consolidated financial statements. It is expected that a key change upon adoption will be the balance sheet recognition of leased assets and liabilities and that any changes in income statement recognition will not be material.

In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This update removes the current exception in GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The amendments in this update are effective for public entities for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The adoption of ASU No. 2016-16 is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a Business," with the objective to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets versus businesses. The amendments in ASU 2017-01 provide a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen is expected to reduce the number of transactions that need to be further evaluated. If the screen is not met, the amendments in ASU 2017-01 (i) require that to be considered a business, a set of assets and liabilities acquired must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output; and (ii) remove the evaluation of whether a market participant could replace missing elements. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2017 and should be applied prospectively. Early adoption is permitted for transactions for which the acquisition date occurs before the issuance date of ASU 2017-01, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The adoption of ASU No. 2017-01 is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." Under the new guidance, if a reporting unit's carrying value amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the requirement to calculate goodwill impairment using Step 2, which calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2019 and should be applied prospectively for annual and any interim goodwill impairment tests. Early adoption is permitted for entities for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the update on our consolidated financial statements.

3. BUSINESS ACQUISITION

In fiscal 2010, the Company entered into an agreement with a private software company to invest $1.5 million in exchange for a 36% equity interest therein. In the third quarter of fiscal 2017, the Company entered into a new agreement to invest an additional $3.6 million for the remaining 64% that company’s equity. The Company paid $1.8 million in cash at closing and is obligated to pay an additional $1.8 million in cash three years subsequent to closing (discounted to $1.6 million on the purchase date). In addition, the agreement provides for the former owners to receive a 30% share of operating profits of the business over the next three years so long as they remain employed by the Company. The Company has accrued for such profit sharing as an expense based on results of operations since the date of acquisition.

The acquisition has been accounted for as a business combination and the financial results of the company have been included in our consolidated financial statements as of the date of acquisition. Under the acquisition method of accounting, the purchase price was allocated to net tangible and intangible assets based upon their estimated fair values as of the acquisition date.

The table below presents the allocation of the purchase price to the acquired net assets (in thousands):

Cash	$	509
Accounts receivable		273
Inventories		243
Other current assets		18
Deferred software development costs		2,520
Fixed assets		47
Intangibles		1,220
Goodwill		1,634
Deferred tax liability		(1,090	)
Accounts payable & current liabilities		(80	)
Purchase Price¹	$	5,294

Pro-forma financial information has not been presented for this acquisition because it is not considered material to the Company’s financial position or results of operations.

________________________________

¹ $1,833 + 1,555 ($1.8 million discounted at 5%) = $3,388 purchase price divided by 64% = $5.294 million.

4. STOCK-BASED COMPENSATION

Long-Term Incentive Plan

During the quarter ended December 31, 2012, the Company implemented The L.S. Starrett Company 2012 Long-Term Incentive Plan (the “2012 Stock Incentive Plan”), which was adopted by the Board of Directors September 5, 2012 and approved by shareholders October 17, 2012. The 2012 Stock Incentive 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 2012 Stock Incentive Plan provides for the issuance of up to 500,000 shares of common stock.

Options granted vest in periods ranging from one year to three years and expire ten years after the grant date. Restricted stock units (“RSU”) granted generally vest from one year to three years. Vested restricted stock units will be settled in shares of common stock. As of June 30, 2017, there were 20,000 stock options and 105,634 restricted stock units outstanding. In addition, there were 346,600 shares available for grant under the 2012 Stock Incentive Plan as of June 30, 2017.

For stock option grants, the fair value of each grant is estimated at the date of grant using the Binomial Options pricing model. The Binomial Options pricing model utilizes assumptions related to stock volatility, the risk-free interest rate, the dividend yield and employee exercise behavior. Expected volatilities utilized in the model are based on the historic volatility of the Company’s stock price. The risk free interest rate is derived from the U.S. Treasury yield curve in effect at the time of the grant. The expected life is determined using the average of the vesting period and contractual term of the options (simplified method).

There were no stock options granted during fiscal years 2017, 2016 or 2015.

The weighted average contractual term for stock options outstanding as of June 30, 2017 was 5.5 years. The aggregate intrinsic value of stock options outstanding as of June 30, 2017 was less than $0.1 million. There were 20,000 options exercisable as of June 30, 2017. In recognizing stock compensation expense for the 2012 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 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, 2017, the Company granted 45,000 RSU awards with fair values of $10.86 per RSU award. During the year ended June 30, 2016, the Company granted 40,200 RSU awards with fair values of $15.11 per RSU award. During the year ended June 30, 2015, the Company granted 39,500 RSU awards with fair values of $17.49 per RSU award.

There were 12,732 and 9,067 RSU awards settled in fiscal years 2017 and 2016 respectively. The aggregate intrinsic value of RSU awards outstanding as of June 30, 2017 was $0.9 million. The aggregate intrinsic value of RSU awards outstanding as of June 30, 2016 was $0.9 million. Compensation expense related to the 2012 Stock Incentive Plan was $223,000, $214,000 and $146,000 for fiscal 2017, 2016 and 2015 respectively. As of June 30, 2017, there was $1.3 million of total unrecognized compensation costs related to outstanding stock-based compensation arrangements.

Of this cost $1.1 million relates to performance based RSU grants that are not expected to be awarded. The remaining $0.2 million is expected to be recognized over a weighted average period of 1.3 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. No options were exercisable at fiscal year ends. The Board of Directors last approved an ESPP renewal in 2012. No additional options will be granted under the previous 2007 plan. A summary of option activity is as follows:

	Shares On Option			Weighted Average Exercise Price		Shares Available For Grant
Balance, June 30, 2014		75,388					424,612
Options granted		35,208			13.97		(35,208	)
Options exercised		(30,718	)		8.82		-
Options canceled		(25,571	)				25,571
Balance, June 30, 2015		54,307					414,975
Options granted		52,836			9.37		(52,836	)
Options exercised		(15,523	)		9.57		-
Options canceled		(27,705	)				27,705
Balance, June 30, 2016		63,915					389,844
Options granted		55,766			7.88		(55,766	)
Options exercised		(10,893	)		8.34		-
Options canceled		(31,503	)				31,503
Balance, June 30, 2017		77,285					365,581

The following information relates to outstanding options as of June 30, 2017:

Weighted average remaining life (years)		1.3
Weighted average fair value on grant date of options granted in:
2015	$	4.68
2016		3.34
2017		2.76

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 – 40.78% – 43.00%, risk free interest rate – 0.81% – 1.27%, expected dividend yield - 4.11% - 4.42% and expected lives - 2 years. Compensation expense of $0.15 million, $0.14 million and $0.14 million has been recorded for fiscal 2017, 2016 and 2015, 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 2015, 2016 or 2017.

5. CASH AND SHORT-TERM INVESTMENTS

Cash and investments held by foreign subsidiaries amounted to $9.0 million and $10.2 million at June 30, 2017 and June 30, 2016, respectively. Of the June 30, 2017 balance, $4.2 million in U.S. dollar equivalents was held in British Pounds Sterling and $2.0 million in U.S. dollar equivalents was held in Brazilian Reals.

The Company plans to permanently reinvest cash held in foreign subsidiaries. Cash held in foreign subsidiaries is not available for use in the U.S. without the likely incurrence of U.S. federal and state income tax consequences.

6. INVENTORIES

Inventories consist of the following (in thousands):

	June 30, 2017			June 30, 2016
Raw materials and supplies	$	26,293		$	29,209
Goods in process and finished parts		16,419			16,459
Finished goods		41,591			39,449
		84,303			85,117
LIFO reserve		(26,206	)		(28,796	)
	$	58,097		$	56,321

LIFO inventories were $7.7 million and $10.5 million at June 30, 2017 and June 30, 2016, respectively, such amounts being approximately $26.2 million and $28.8 million, respectively, less than if determined on a FIFO basis. The use of LIFO, as compared to FIFO, resulted in a $2.6 million decrease in cost of sales for the goods sold in fiscal 2017 compared to a $0.8 million increase in fiscal 2016.

7. GOODWILL AND INTANGIBLES

The following tables present information about the Company’s goodwill and identifiable intangible assets on the dates indicated (in thousands):

	June 30, 2017							June 30, 2016
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Goodwill	$	4,668	$	-		$	4,668	$	3,034	$	-		$	3,034
Identifiable intangible assets		17,117		(7,249	)		9,868		12,115		(5,625	)		6,490

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

	June 30, 2017			June 30, 2016
Non-compete agreements	$	600		$	600
Trademarks and trade names		2,070			1,480
Completed technology		2,358			2,358
Customer relationships		5,580			4,950
Software development		6,184			2,402
Other intangible assets		325			325
Total		17,117			12,115
Accumulated amortization		(7,249	)		(5,625	)
Total net balance	$	9,868		$	6,490

Identifiable intangible assets are being amortized on a straight-line basis over the period of expected economic benefit.

The estimated aggregate amortization expense for each of the next five years, and thereafter, is as follows (in thousands):

Fiscal Year
2018	$	2,086
2019		2,008
2020		1,484
2021		1,081
2022		848
Thereafter		2,361

The Company performed a qualitative analysis in accordance with ASU 2011-08 of its Bytewise reporting unit for its October 1, 2016 annual assessment of goodwill (commonly referred to as “Step Zero”). From a qualitative perspective, in evaluating whether it is more likely than not that the fair value of the reporting units is not less than its carrying amount, relevant events and circumstances were taken into account, with greater weight assigned to events and circumstances that most affect the fair value of Bytewise or the carrying amounts of its assets. Items that were considered included, but were not limited to, the following: macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, changes in management or key personnel, and other Bytewise specific events. After assessing these and other factors the Company determined that it was more likely than not that the fair value of the Bytewise reporting unit was not less than the carrying amount as of October 1, 2016. There were no triggering events identified from the annual assessment date through the fiscal year-end.

8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following as of June 30, 2017 and 2016 (in thousands):

	As of June 30, 2017
	Cost		Accumulated Depreciation			Net
Land	$	1,223	$	-		$	1,223
Buildings and building improvements		44,980		(29,641	)		15,339
Machinery and equipment		124,315		(101,532	)		22,783
Total	$	170,518	$	(131,173	)	$	39,345

	As of June 30, 2016
	Cost		Accumulated Depreciation			Net
Land	$	1,314	$	-		$	1,314
Buildings and building improvements		45,486		(29,595	)		15,891
Machinery and equipment		126,882		(103,077	)		23,805
Total	$	173,682	$	(132,672	)	$	41,010

No assets under capital leases are included in machinery and equipment as of June 30, 2017 or June 30, 2016.

Operating lease expense was $2.3 million, $2.3 million and $2.2 million in fiscal 2017, 2016 and 2015, respectively. Future commitments under operating leases are as follows (in thousands):

Fiscal Year
2018	$	2,356
2019		2,052
2020		1,635
2021		1,623
2022		457
Thereafter		1,536
	$	9,659

9. IMPAIRMENT OF ASSETS AND RESTRUCTURING COSTS

In fiscal 2016, the Company adopted a plan to consolidate certain saw manufacturing operations for greater efficiency. This restructuring generally shifted production from facilities in the U.S. and China to facilities in the U.K. and Brazil and was carried out during fiscal 2017. A primary element of the plan involved transfer of production of certain saw products from its facility in Mt. Airy, North Carolina to its facility in Itú, Brazil. Because the transfer left one of the buildings at the Mt. Airy facility vacant, the Company determined in fiscal 2016 that the carrying value of the building exceeded its fair value. Consequently, the Company recorded an impairment loss of $4,114,000, which represents the excess of the carrying value of the building over its fair value. The Company determined the amount of the impairment charge by relating the square footage of the vacated section of the building complex with the values in its fixed asset registers specifically related to that building addition. Fair value of the vacated section of the complex was determined by comparison to the price per square foot obtained in recent sales of similar property in the local region. The impairment loss is recorded as a separate line item (‘‘Impairment of assets’’) in the Consolidated Statement of Operations for fiscal 2016.

The vacated building is one within a larger complex of buildings which remains in use. While a particular area of the production floor has been vacated, the Company does not intend to close the facility or to decommission machinery and equipment.

In addition to the impairment loss recognized in fiscal 2016, the Company has incurred $988,000 in related restructuring charges, representing severance compensation, equipment installation and freight costs, in fiscal 2017.

10. OTHER INCOME AND EXPENSE

Other income and expense consists of the following (in thousands):

	2017			2016			2015
Interest income	$	399			504		$	828
Interest expense		(674	)		(669	)		(713	)
Foreign currency gain (loss), net		(86	)		(59	)		705
Income (loss) from equity investment		(307	)		118			203
Brazil recovery of export taxes		-			-			232
Patent lawsuit settlement		(100	)		-			-
Sale of scrap material		71			95			93
Other income (expense), net		190			81			(9	)
	$	(507	)		70		$	1,339

11. INCOME TAXES

Components of earnings (loss) before income taxes are as follows (in thousands):

	2017			2016			2015
Domestic operations	$	(1,547	)	$	(17,541	)	$	8,118
Foreign operations		3,085			(2,834	)		1,824
	$	1,538		$	(20,375	)	$	9,942

The provision for (benefit from) income taxes consists of the following (in thousands):

	2017			2016			2015
Current:
Federal	$	(989	)	$	(317	)	$	1,744
Foreign		999			866			1,855
State		39			94			114
Deferred:
Federal		597			(6,092	)		670
Foreign		(85	)		47			(71	)
State		14			(843	)		386
	$	545		$	(6,245	)	$	4,698

Reconciliations of expected tax expense at the U.S. statutory rate to actual tax expense (benefit) are as follows (in thousands):

	2017			2016			2015
Expected tax expense	$	523		$	(6,928	)	$	3,380
State taxes, net of federal effect		9			(740	)		378
Foreign taxes, net of federal credits		(210	)		278			235
Change in valuation allowance		(107	)		196			(51	)
Tax reserve adjustments		272			250			361
Return to provision and other adjustments		(17	)		(167	)		(332	)
Losses not benefited		123			885			701
Tax rate change applied to deferred tax balances		315			-			-
Canada Real Estate Gain Deduction		(337	)		-			-
Other permanent items		(24	)		(19	)		26
Actual tax expense (benefit)	$	547		$	(6,245	)	$	4,698

The tax rate in fiscal 2017 is slightly higher than the U.S. statutory rate since the benefit of earnings in foreign jurisdictions with lower effective tax rates and a one-time tax benefit in Canada was more than offset by discrete tax charges including the impact of a tax rate change from 20% to 17% in the U.K. applied to deferred tax assets which increased tax expense by $0.3 million. As a result of closing and selling the warehouse and product assembly center in Canada, the Canadian subsidiary had cash in excess of its long term needs. Thus, there was a dividend of $2.0 million paid from the Company’s subsidiary in Canada to the U.S. parent company out of the subsidiary’s fiscal 2017 earnings. While the dividend is fully taxable in the U.S., the impact to tax expense was negligible due to the use of foreign tax credits.

The tax benefit rate of 30.7% on the pre-tax loss of $20.4 million in the year ended June 30, 2016 was lower than the U.S. statutory rate due primarily to losses in foreign entities for which no tax benefit was taken. Substantial benefit was reflected for US federal and state income taxes primarily as a result of increases in deferred tax assets related to pension expense and the write-down of fixed assets. In fiscal 2016, several of the subsidiaries in foreign countries reported financial losses. In these cases, no tax benefit from those losses was recognized and an additional valuation allowance was taken to reduce any deferred tax assets since future income is not more likely than not to be recognized.

The tax rate in fiscal 2015 was higher than the U.S. Statutory rate because of losses in foreign subsidiaries that were not able to be benefitted for tax purposes. There was a dividend of $2.3 million paid from the Company’s subsidiary in Brazil to the U.S. parent company out of the subsidiary’s fiscal 2015 earnings. While the dividend is fully taxable in the U.S., the impact to tax expense was negligible due to the use of foreign tax credits.

Net deferred tax assets at June 30, 2017 are $26.0 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 operations in the U.S. where the Company had book losses in the current year. U.S. net deferred assets are $22.9 million with a valuation allowance of $2.9 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 it is more likely than not that the deferred tax assets net of the recorded valuation allowance will be realized.

Key positive evidence considered include: a) Significant domestic book profits in 2015 and 2014; b) losses in fiscal 2016 are primarily due to one-time events including a $19 million pension expense, most of which is not deductible for tax purposes until paid; c) cost saving plans are being implemented by the Company; d) prior year taxable income is available for carryback losses; e) tax planning opportunities, including an election to revoke the LIFO election; and f) forecasted domestic profits for future years. The negative evidence considered is that fiscal years 2017 and 2016 showed domestic book and tax losses.

A valuation allowance has been provided on foreign deferred tax assets related to foreign tax loss carryforwards (NOLs) due to the uncertainty of generating future taxable income in those jurisdictions. Similarly, a partial valuation allowance has been provided for foreign tax credit carryforwards due to the uncertainty of generating sufficient foreign source income to utilize those credits in the future.

In fiscal 2017, the valuation allowance decreased by $2.3 million primarily due to the use of foreign net operating losses previously fully valued. This was partly offset by an increase in foreign tax credits in excess of the limitation on their use as a result of limited foreign source income. In fiscal 2016, the valuation allowance increased by $0.7 million primarily due to the increase in foreign losses.

Deferred income taxes at June 30, 2017 and 2016 are attributable to the following (in thousands):

	2017			2016
Deferred tax assets (liabilities):
Inventories	$	1,753		$	2,888
Employee benefits (other than pension)		807			988
Book reserves		725			1,347
State NOL, various carryforward periods		786			975
Foreign NOL, various carryforward periods		452			1,738
Foreign tax credit carryforward, expiring 2018 – 2027		4,222			2,638
Pension benefits		16,074			19,573
Retiree medical benefits		2,679			2,790
Depreciation		134			99
Intangibles		(269	)		1,243
Federal research and development and AMT credit carryforward		545			-
Other		1,046			582
Total deferred tax assets		28,954			34,861
Valuation allowance		(2,922	)		(5,246	)
Net deferred tax asset	$	26,032		$	29,615

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 at June 30, 2014	$	(11,209	)
Increase for tax positions taken during the current period		(405	)
Effect of exchange rate changes		440
Decrease relating to lapse of applicable statute of limitations		42
Balance at June 30, 2015		(11,132	)
Increase for tax positions taken during the current period		(184	)
Effect of exchange rate changes		82
Decrease relating to lapse of applicable statute of limitations		414
Balance at June 30, 2016		(10,820	)
Increase for tax positions taken during the current period		(813	)
Effect of exchange rate changes		38
Decrease relating to lapse of applicable statute of limitations		7
Balance at June 30, 2017	$	(11,588	)

The long-term tax obligations as of June 30, 2017, 2016 and 2015 relate primarily to transfer pricing adjustments. The Company has also recorded a non-current tax receivable for $2.6 million and $2.7 million at June 30, 2017 and 2016, respectively, representing the corollary effect of transfer pricing competent authority adjustments.

The Company has identified uncertain tax positions at June 30, 2017 for which it is possible that the total amount of unrecognized tax benefits will decrease within the next twelve months by $0.2 million. The Company recognizes interest and penalties related to income tax matters in income tax expense and has booked an increase of $0.1 million in fiscal 2017 for interest expense.

The Company’s U.S. federal tax returns for years prior to fiscal 2014 are no longer subject to U.S. federal examination by the Internal Revenue Service; however, tax losses carried forward from earlier years are still subject to review and adjustment. As of June 30, 2017, 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 2012 through 2016.

The state tax loss carryforwards tax effected benefit of $0.8 million expires at various times over the next 2 to 20 years. The foreign tax credit carryforward of $4.2 million expires in the years 2018 through 2027; amounts expiring in the next 5 years have a full valuation allowance against it. The research and development tax credit carryforward of $0.5 million expires in the years 2022 through 2036.

At June 30, 2017, the estimated amount of total unremitted earnings of foreign subsidiaries is $65 million. The Company received a cash dividend from foreign subsidiaries of $2.0 million in fiscal 2017 and of $2.3 million in fiscal 2015 out of earnings for those years. The Company has no plans to repatriate prior year earnings of its foreign subsidiaries and, accordingly, no estimate of the unrecognized deferred taxes related to these earnings has been made. Cash held in foreign subsidiaries is not available for use in the U.S. without the likely incurrence of U.S. federal and state income 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. The UK plan was closed to new entrants in fiscal 2009. The Company has a postretirement medical and life insurance benefit plan for U.S. employees. The Company also has defined contribution plans.

The amendment of the defined benefit pension plan triggered a pension curtailment which required a remeasurement of the Plan's obligation as of December 31, 2016. The remeasurement resulted in a decrease in the benefit obligation of approximately $6.9 million primarily due to an increase in the discount rate from 3.77% to 4.31%, with an additional $4.2 million decrease resulting from the impact of the curtailment. These reductions in the Plan’s benefit obligation were recorded as other comprehensive income, net of taxes.

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 total cost of all such plans for fiscal 2017, 2016 and 2015 was $3.9 million, $22.2 million and $4.6 million, respectively. Included in these amounts are the Company’s contributions to the defined contribution plans amounting to $1.3 million, $0.8 million and $0.8 million in fiscal 2017, 2016 and 2015, respectively.

Under both U.S and U.K. defined benefit plans, 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 reasonable given 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 2018 the Company will use an expected long-term rate of return assumption of 5.0% for the U.S. domestic pension plan, and 3.0% 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 2017 and 2016, the Company used a discount rate assumption of 3.9% and 3.8% for the U.S. plan and 2.7% and 3.0% for the U.K. plan, respectively. 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.

Based upon the actuarial valuations performed on the Company’s defined benefit plans as of June 30, 2017, the U.S. plans will require a $3.3 million contribution in fiscal 2018 and the U.K. plan will require a $1.0 million contribution in fiscal 2018.

The table below sets forth the actual asset allocation for the assets within the Company’s plans.

	2017			2016
Asset category:
Cash equivalents		1	%		0	%
Fixed income		18	%		18	%
Equities		24	%		27	%
Mutual and pooled funds		57	%		55	%
		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.

In accordance with “ASC 820 Fair Value Measurement”, 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, 2017 and June 30, 2016 (in thousands).

June 30, 2017
Asset Category	Level 1		Level 2		Level 3		Total		%
Cash Equivalents	$	780	$	-	$	-	$	780		1	%
Fixed Income		-		21,128		-		21,128		18	%
Equities		26,580		1,709		-		28,289		24	%
Mutual & Pooled Funds		31,867		35,714		-		67,581		57	%
Total	$	59,227	$	58,551	$	-	$	117,778		100	%

June 30, 2016
Asset Category	Level 1		Level 2		Level 3		Total		%
Cash Equivalents	$	672	$	-	$	-	$	672		0	%
Fixed Income		-		20,342		-		20,342		18	%
Equities		28,639		2,435		-		31,074		27	%
Mutual & Pooled Funds		30,057		30,060		2,810		62,927		55	%
Total	$	59,368	$	52,837	$	2,810	$	115,015		100	%

Included in equity securities at June 30, 2017 and 2016 are shares of the Company’s common stock having a fair value of $6.9 million and $9.7 million, respectively.

A reconciliation of the beginning and ending balances of Level 3 assets is as follows (in thousands):

	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	2017			2016

Beginning balance	$	2,810		$	4,084
Actual returns on assets		-			(718	)
Translation gain (loss)		-			(556	)
Transferred out of Level 3		(2,810	)		-

Ending balance	$	-		$	2,810

The Level 3 assets consist of units of a pooled investment fund which invests in a mix of properties selected from across retail, office, industrial and other sectors predominantly located in the U.K. In addition to direct investments, the fund may also invest indirectly in property through investment vehicles such as quoted and unquoted property companies or collective investment trusts. Redemptions from the fund are not readily available given the illiquid nature of its assets.

U.S. and U.K. Plans Combined:

The status of these defined benefit plans is as follows (in thousands):

	2017			2016			2015
Change in benefit obligation
Benefit obligation at beginning of year	$	175,233		$	166,189		$	161,062
Service cost		1,405			2,757			2,663
Interest cost		6,246			7,032			6,818
Plan curtailment		(4,170	)		-			-
Exchange rate changes		(909	)		(7,825	)		(4,167	)
Benefits paid		(6,902	)		(6,590	)		(6,524	)
Actuarial (gain) loss		(1,207	)		13,670			6,337
Benefit obligation at end of year	$	169,696		$	175,233		$	166,189

Change in plan assets
Fair value of plan assets at beginning of year		115,015			122,787			122,924
Actual return on plan assets		5,302			226			3,466
Employer contributions		5,000			4,482			6,049
Benefits paid		(6,902	)		(6,590	)		(6,524	)
Exchange rate changes		(637	)		(5,890	)		(3,128	)
Fair value of plan assets at end of year		117,778			115,015			122,787
Funded status at end of year	$	(51,918	)	$	(60,218	)	$	(43,402	)
Amounts recognized in balance sheet
Current liability	$	(63	)	$	(45	)	$	(37	)
Noncurrent liability		(51,855	)		(60,173	)		(43,365	)
Net amount recognized in balance sheet	$	(51,918	)	$	(60,218	)	$	(43,402	)

Amounts not yet reflected in net periodic benefit costs and included in accumulated other comprehensive loss
Prior service cost	$	-		$	-		$	-
Accumulated loss		(12,131	)		(17,849	)		(16,795	)
Amounts not yet recognized as a component of net periodic benefit cost		(12,131	)		(17,849	)		(16,795	)
Accumulated net periodic benefit cost in excess of contributions		(39,787	)		(42,369	)		(26,607	)
Net amount recognized	$	(51,918	)	$	(60,218	)	$	(43,402	)

Components of net periodic benefit cost
Service cost	$	1,405		$	2,757		$	2,663
Interest cost		6,246			7,032			6,818
Expected return on plan assets		(5,173	)		(6,268	)		(6,966	)
Recognized actuarial loss		107			17,878			1,309
Net periodic benefit cost	$	2,585		$	21,399		$	3,824

Estimated amounts that will be amortized from accumulated other comprehensive loss over the next year
Prior service cost	$	-		$	-		$	-
Net loss		(26	)		(114	)		(53	)

Information for pension plans with accumulated benefits in excess of plan assets
Projected benefit obligation	$	169,696		$	175,233		$	166,189
Accumulated benefit obligation		169,696			168,119			159,174
Fair value of assets		117,779			115,015			122,787

U.S. Plan:

The status of the U.S. defined benefit plan is as follows (in thousands):

	2017			2016			2015
Change in benefit obligation
Benefit obligation at beginning of year	$	130,863		$	116,398		$	110,054
Service cost		1,405			2,757			2,663
Interest cost		4,994			5,248			4,839
Plan curtailment		(4,170	)		-			-
Benefits paid		(5,106	)		(4,593	)		(4,372	)
Actuarial loss		(3,848	)		11,053			3,214
Benefit obligation at end of year	$	124,138		$	130,863		$	116,398

Weighted average assumptions – benefit obligation
Discount rate		3.92	%		3.77	%		4.49	%
Rate of compensation increase	Varies			Varies			Varies

Change in plan assets
Fair value of plan assets at beginning of year	$	81,910		$	84,853		$	84,629
Actual return on plan assets		1,079			(1,730	)		(274	)
Employer contributions		4,045			3,380			4,870
Benefits paid		(5,106	)		(4,593	)		(4,372	)
Fair value of plan assets at end of year		81,928			81,910			84,853
Funded status at end of year	$	(42,210	)	$	(48,953	)	$	(31,545	)

Amounts recognized in balance sheet
Current liability	$	(63	)	$	(45	)	$	(37	)
Noncurrent liability		(42,147	)		(48,908	)		(31,508	)
Net amount recognized in balance sheet	$	(42,210	)	$	(48,953	)	$	(31,545	)

Weighted average assumptions – net periodic benefit cost
Discount rate		3.77	%		4.49	%		4.29	%
Rate of compensation increase	Varies			Varies			Varies
Return on plan assets		5.00	%		5.50	%		6.00	%

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive loss
Prior service cost	$	-		$	-		$	-
Accumulated loss		(8,254	)		(13,412	)		(11,817	)
Amounts not yet recognized as a component of net periodic benefit cost		(8,254	)		(13,412	)		(11,817	)
Accumulated contributions less than net periodic benefit cost		(33,956	)		(35,541	)		(19,728	)
Net amount recognized	$	(42,210	)	$	(48,953	)	$	(31,545	)

Components of net periodic benefit cost
Service cost	$	1,405		$	2,757		$	2,663
Interest cost		4,994			5,248			4,839
Expected return on plan assets		(4,046	)		(4,589	)		(5,063	)
Recognized actuarial loss		107			15,779			319
Net periodic benefit cost	$	2,460		$	19,195		$	2,758

Estimated amounts that will be amortized from accumulated other comprehensive loss over the next year
Prior service cost	$	-		$	-		$	-
Net loss		(26	)		(114	)		(53	)

Information for plan with accumulated benefits in excess of plan assets
Projected benefit obligation	$	124,138		$	130,863		$	116,398
Accumulated benefit obligation		124,138			123,749			109,383
Fair value of assets		81,928			81,910			84,853

U.K. Plan:

The status of the U.K. defined benefit plan is as follows (in thousands):

	2017			2016			2015
Change in benefit obligation
Benefit obligation at beginning of year	$	44,370		$	49,791		$	51,008
Interest cost		1,252			1,784			1,979
Exchange rate changes		(909	)		(7,825	)		(4,167	)
Benefits paid		(1,796	)		(1,997	)		(2,152	)
Actuarial loss		2,641			2,617			3,123
Benefit obligation at end of year	$	45,558		$	44,370		$	49,791

Weighted average assumptions - benefit obligation
Discount rate		2.73	%		3.00	%		3.90	%
Rate of compensation increase		n/a			n/a			n/a

Change in plan assets
Fair value of plan assets at beginning of year	$	33,105		$	37,934		$	38,295
Actual return on plan assets		4,223			1,956			3,740
Employer contributions		954			1,102			1,179
Benefits paid		(1,796	)		(1,997	)		(2,152	)
Exchange rate changes		(636	)		(5,890	)		(3,128	)
Fair value of plan assets at end of year		35,850			33,105			37,934
Funded status at end of year	$	(9,708	)	$	(11,265	)		(11,857	)
Amounts recognized in balance sheet
Current liability	$	—		$	—		$	—
Noncurrent liability		(9,708	)		(11,265	)		(11,857	)
Net amount recognized in balance sheet	$	(9,708	)	$	(11,265	)	$	(11,857	)

Weighted average assumptions – net periodic benefit cost

Discount rate		3.00	%		3.90	%		4.30	%
Rate of compensation increase		n/a			n/a			n/a
Return on plan assets		3.59	%		4.77	%		5.45	%

Amounts not yet reflected in net periodic benefit costs and included in accumulated other comprehensive loss
Prior service cost	$	—		$	—		$	—
Accumulated loss		(3,877	)		(4,437	)		(4,978	)
Amounts not yet recognized as a component of net periodic benefit cost		(3,877	)		(4,437	)		(4,978	)
Accumulated net periodic benefit cost in excess of contributions		(5,831	)		(6,828	)		(6,879	)
Net amount recognized	$	(9,708	)	$	(11,265	)	$	(11,857	)

Components of net periodic benefit cost
Service cost	$	—		$	—		$	—
Interest cost		1,252			1,784			1,979
Expected return on plan assets		(1,127	)		(1,679	)		(1,903	)
Amortization of net loss		—			2,099			990
Net periodic benefit cost	$	125		$	2,204		$	1,066

Estimated amounts that will be amortized from accumulated other comprehensive loss over the next year	$	—		$	—		$	—

Information for plan with accumulated benefits in excess of plan assets
Projected benefit obligation	$	45,558		$	44,370		$	49,791
Accumulated benefit obligation		45,558			44,370			49,791
Fair value of assets		35,851			33,104			37,934

Postretirement Medical and Life Insurance Benefits:

The status of the U.S. postretirement medical and life insurance benefit plan is as follows (in thousands):

	2017			2016			2015
Change in benefit obligation:
Benefit obligation at beginning of year	$	7,381		$	6,611		$	5,867
Service cost		85			105			113
Interest cost		269			287			244
Benefits paid		(483	)		(772	)		(647	)
Actuarial (gain) loss		(166	)		1,150			1,034
Benefit obligation at end of year	$	7,086		$	7,381		$	6,611

Weighted average assumptions: benefit obligations
Discount rate		3.92	%		3.77	%		4.49	%
Rate of compensation increase		2.64	%		2.64	%		2.64	%

Change in plan assets
Fair value of plan assets at beginning of year	$	—		$	—		$	—
Employer contributions		483			772			647
Benefits paid, net of employee contributions		(483	)		(772	)		(647	)
Fair value of plan assets at end of year		—			—			—

Amounts recognized in balance sheet
Current postretirement benefit obligation	$	(370	)	$	(396	)	$	(441	)
Non-current postretirement benefit obligation		(6,716	)		(6,985	)		(6,170	)
Net amount recognized in balance sheet	$	(7,086	)	$	(7,381	)	$	(6,611	)

Weighted average assumptions – net periodic benefit cost
Discount rate		3.77	%		4.49	%		4.29	%
Rate of compensation increase		2.64	%		2.64	%		2.64	%

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive loss
Prior service credit	$	3,851		$	4,523		$	5,305
Accumulated gain (loss)		(1,696	)		(1,983	)		(850	)
Amounts not yet recognized as a component of net periodic benefit cost		2,155			2,540			4,455
Net periodic benefit cost in excess of accumulated contributions		(9,241	)		(9,921	)		(11,066	)
Net amount recognized	$	(7,086	)	$	(7,381	)	$	(6,611	)

Components of net periodic benefit cost
Service cost	$	85		$	105		$	113
Interest cost		269			287			244
Amortization of prior service credit		(673	)		(781	)		(799	)
Amortization of accumulated loss		121			15			—
Net periodic benefit cost	$	(198	)	$	(374	)	$	(442	)


Estimated amounts that will be amortized from accumulated other comprehensive loss over the next year
Prior service credit	$	537		$	673		$	781
Net loss		(99	)		(120	)		(15	)
	$	438		$	553		$	766


Healthcare cost trend rate assumed for next year		6.60	%		6.90	%		8.00	%
Rate to which the cost trend rate gradually declines		4.50	%		4.50	%		4.50	%
Year that the rate reaches the rate at which it is assumed to remain	2037			2037			2028

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
	2017		2016		2015
Effect on total of service and interest cost	$	-	$	-	$	-
Effect on postretirement benefit obligation		2		2		4

	1% Decrease
	2017			2016			2015
Effect on total of service and interest cost	$	-		$	-		$	-
Effect on postretirement benefit obligation		(2	)		(2	)		(4	)

For fiscal 2018, the Company expects to make a $3.3 million contribution to the domestic pension plans, $1.0 million to the U.K. pension plan, and $370,000 to the postretirement medical and life insurance plan.

Future pension and other benefit payments are as follows (in thousands):

Fiscal Year	Pension		Other Benefits
2018	$	6,874	$	370
2019		7,132		362
2020		7,368		367
2021		7,611		373
2022		7,986		381
2023-2027		43,702		1,937

13. DEBT

Debt is comprised of the following (in thousands):

	June 30, 2017		June 30, 2016
Short-term and current maturities
Loan and Security Agreement	$	11,514	$	1,543

Long-term debt
Loan and Security Agreement, net of current portion	$	6,095	$	17,109

Total debt	$	17,609	$	18,652

Future maturities of debt are as follows (in thousands):

Fiscal Year
2018	$	11,514
2019		1,688
2020		1,765
2021		1,846
2022		796
Thereafter		-
Total	$	17,609

The Company completed the negotiations for an amended Loan and Security Agreement which includes a Line of Credit and a term loan and executed the new agreement as of April 25, 2015. Borrowings under the Line of Credit may not exceed $23.0 million. The agreement expires on April 30, 2018 and has an interest rate of LIBOR plus 1.5%. The effective interest rate under the agreement for fiscal 2017 was 2.61%.

The material financial covenants of the amended Loan and Security Agreement are: 1) funded debt to EBITDA, excluding non-cash and retirement benefit expenses (“maximum leverage”), cannot exceed 2.25 to 1; 2) annual capital expenditures cannot exceed $15.0 million; 3) maintain a Debt Service Coverage Rate of a minimum of 1.25 to 1 and 4) maintain consolidated cash plus liquid investments of not less than $10.0 million at any time. As of June 30, 2017, the Company was in compliance with all the covenants. The Company expects to be able to meet the covenants in future periods.

On November 22, 2011, in conjunction with the Bytewise acquisition, the Company entered into a new $15.5 million term loan (the “Term Loan”) under the then existing Loan and Security Agreement. The Term Loan is a ten year loan bearing a fixed interest rate of 4.5% and is payable in fixed monthly payments of principal and interest of $160,640. As of June 30, 2017, $7.7 million of the term loan was outstanding.

Availability under the Line of Credit 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 Line of Credit in excess of $23.0 million. As of June 30, 2017, the Company had borrowings of $9.9 million under this facility. A 0.25% commitment fee is charged on the unused portion of the Line of Credit.

The Company has one standby letter of credit totaling $0.9 million which reduces the $23.0 million available Line of Credit to $22.1 million. As of June 30, 2017, the Company has approximately $12.2 million available on the Line of Credit.

The obligations under the Credit Facility are unsecured. In the event of certain triggering events, such obligations would become secured by the assets of the Company’s domestic subsidiaries. A triggering event occurs when the Company fails to achieve any of the financial covenants noted above in consecutive quarters.

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

The Company is involved in certain legal matters which arise in the normal course of business and are not expected to have a material impact on the Company’s financial condition, results of operations and cash flows.

16. CONCENTRATIONS OF CREDIT RISK

The Company believes it has no significant concentration of credit risk as of June 30, 2017. 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 gages, gage 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. In fiscal 2016, the Company changed its reportable business segment from one reportable segment to two reportable segments, specifically, North American Operations and International Operations. The Company has recast its segment information disclosure for all periods presented to conform to this segment presentation.

The North American segment’s operations include all manufacturing and sales in the United States, 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 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 United States 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. Financial results for each reportable segment are as follows (in thousands):

	Year Ended June 30, 2017
	North America			International			Unallocated			Total
Sales¹	$	124,606		$	82,417		$	-		$	207,023
Restructuring charges		(82	)		(906	)		-			(988	)
Operating income		6,138			268			(7,450	)		(1,044	)
Capital expenditures and software development		2,765			3,071			-			5,836
Depreciation and amortization		4,551			2,475			-			7,026
Current assets⁴		33,555			61,961			14,607			110,123
Long-lived assets⁵		39,199			14,684			28,659			82,542

	Year Ended June 30, 2016
	North America			International			Unallocated			Total
Sales²	$	130,108		$	79,577		$	-		$	209,685
Asset impairment		(4,114	)		-			-			(4,114	)
Operating income		(8,311	)		(3,117	)		(9,017	)		(20,445	)
Capital expenditures and software development		5,040			3,200			-			8,240
Depreciation and amortization		4,537			2,677			-			7,214
Current assets⁴		33,787			62,810			24,314			120,911
Long-lived assets⁵		36,539			13,995			30,153			80,687

	Year Ended June 30, 2015
	North America		International		Unallocated			Total
Sales³	$	137,085	$	104,465	$	-		$	241,550
Operating income		13,353		1,333		(6,083	)		8,603
Capital expenditures and software development		3,449		2,251		-			5,700
Depreciation and amortization		5,604		3,113		-			8,717
Current assets⁴		41,240		68,656		23,517			133,413
Long-lived assets⁵		40,506		14,066		24,287			78,859

¹ Excludes $7,902 of North American segment intercompany sales to the International segment and $11,677 intercompany sales of the International segment to the North American segment.

² Excludes $8,259 of North American segment intercompany sales to the International segment and $9,282 intercompany sales of the International segment to the North American segment.

³ Excludes $12,276 of North American segment intercompany sales to the International segment and $9,842 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, deferred income taxes, and other non-current assets.

⁵ Long lived assets consist of property, plant and equipment, goodwill, and other intangible assets. Long term deferred and other tax assets are not allocated to the segments.

Geographic information about the Company’s sales and long-lived assets are as follows (in thousands):

Sales

	Year Ended June 30,
North America	2017		2016		2015
United States	$	115,562	$	119,638	$	125,534
Canada & Mexico		9,044		10,470		11,551
		124,606		130,108		137,085
International
Brazil		45,614		43,283		63,961
United Kingdom		24,954		24,485		26,691
China		6,873		7,207		8,357
Australia & New Zealand		4,976		4,602		5,456
		82,417		79,577		104,465
Total Sales	$	207,023	$	209,685	$	241,550

Long-lived Assets

	Year Ended June 30,
North America	2017		2016		2015
United States	$	39,131	$	36,189	$	40,146
Canada & Mexico		68		350		360
		39,199		36,539		40,506
International
Brazil		10,111		8,818		7,986
United Kingdom		1,976		2,143		2,647
China		2,426		2,887		3,291
Australia & New Zealand		171		147		142
		14,684		13,995		14,066

Total Long Lived Assets	$	53,883	$	50,534	$	54,572

18. QUARTERLY FINANCIAL DATA (unaudited)

(in thousands except per share data)

Quarter Ended	Net Sales		Gross Margin		Earnings Before Income Taxes			Net Earnings / (Loss)			Basic and Diluted Earnings / (Loss) Per Share
September 2015	$	51,038	$	15,852	$	482		$	(178	)	$	(0.03	)
December 2015		53,671		15,999		992			458			0.07
March 2016		50,329		14,733		1,199			597			0.09
June 2016		54,647		404		(23,048	)		(15,007	)		(2.14	)
	$	209,685	$	46,988	$	(20,375	)	$	(14,130	)	$	(2.01	)
September 2016	$	48,913	$	13,914	$	1,476		$	759		$	0.11
December 2016		53,187		16,822		1,517			1,063			0.15
March 2017		50,670		14,479		(1,244	)		(786	)		(0.11	)
June 2017		54,253		16,735		(211	)		(45	)		(0.01	)
	$	207,023	$	61,950	$	1,538		$	991		$	0.14

Fourth quarter sales in fiscal 2017 were $0.4 million lower than in the fourth quarter of fiscal 2016. North American sales decreased $0.9 million offsetting a $0.5 million increase in international sales. Gross margins increased $16.3 million with a pension charge of $14.2 million in fiscal 2016 representing approximately 87% of the difference.

19. RELATED PARTY TRANSACTIONS

In the fourth quarter of fiscal 2016, Mr. Guilherme Camargo was appointed Operations Manager of Armco do Brasil S.A. (Armco.) Armco is the largest supplier of steel to our subsidiary in Brazil. Mr. Camargo is the son of Salvador de Camargo, who is the president of our subsidiary in Brazil and a member of the board of directors. The Company made annual purchases from Armco of $5.1 million, $3.2 million and $4.1 million in fiscal 2017, 2016 and 2015, respectively. The Company had accounts payable of $0.2 and $0.0 million as of June 30, 2017 and June 30, 2016, respectively.

Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A - Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, we carried out an evaluation, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this annual report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date in ensuring that information required to be filed in this annual report was recorded, processed, summarized and reported within the time period required by the rules and regulations of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There have been no changes in internal control over financial reporting during the fourth quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting

Management’s Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those written policies and procedures that:

•

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and acquisitions and dispositions of the assets of the Company;

•

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;

•

Provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and

•

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2017. Management based this assessment on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Board of Directors.

Based on our assessment, management concluded that as of June 30, 2017 our internal control over financial reporting was effective based on those criteria.

The Company’s internal control over financial reporting as of June 30, 2017 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report included herein.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

The L.S. Starrett Company

We have audited the internal control over financial reporting of The L.S. Starrett Company (a Massachusetts corporation) and subsidiaries (the “Company”) as of June 30, 2017, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, The L.S. Starrett Company and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended June 30, 2017 and our report dated August 25, 2016 expressed an unqualified opinion on those financial statements.

/s/ Grant Thornton LLP

Boston, Massachusetts

August 25, 2017

Item 9B - Other Information

None.

PART III

Item 10 – Directors, Executive Officers and Corporate Governance

The information concerning the Directors of the Registrant will be contained immediately under the heading “Election of Directors” and prior to Section A of Part I in the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 18, 2017 (the “2017 Proxy Statement”), which will be mailed to stockholders on or about September 11, 2017. The information in that portion of the 2017 Proxy Statement is hereby incorporated by reference.

Executive Officers of the Registrant

Name	Age	Held Present Office Since	Position
Douglas A. Starrett	65	2001	President and CEO and Director
Francis J. O’Brien	70	2009	Chief Financial Officer and Treasurer
Anthony M. Aspin	64	2000	Vice President Sales
James B. Taylor	51	2015	Vice President Operations

Douglas A. Starrett has been President of the Company since 1995 and became CEO in 2001.

Francis J. O’Brien was previously Chief Financial Officer at Delta Education, LLC, an elementary school education company, from 2005 to 2009. Prior to Delta Education, he was Chief Financial Officer at StockerYale Corporation, a publicly traded technology company, from 2001 to 2004 and Director of Finance and Business Development at Analogic Corporation, a publicly traded manufacturer of medical and security systems, from 1998 to 2000. Mr. O’Brien served as Corporate Vice President of Finance & Administration for Addison Wesley, a global education company, from 1982 to 1997 and as Senior Manager at Coopers & Lybrand, an international public accounting firm, from 1976 to 1982. Mr. O’Brien holds a BA from the University of Massachusetts and an MBA from Suffolk University and is a Certified Public Accountant.

Anthony M. Aspin was previously a divisional sales manager with the Company.

Mr. Taylor joined the Company on June 22, 2015. He was previously Division Vice President, Operations for Zygo Corporation, a unit of Ametek’s Ultra Precision Technologies Division, from 2014 to 2015, Director of Optical Components Manufacturing of Zygo Corporation from 2010 to 2014, and Vice President of JML Optical Industries, Inc. from 2004 to 2010. Mr. Taylor holds a Bachelor’s degree, a Master’s degree, and a Doctorate in Industrial Engineering from Purdue University.

The positions listed above represent their principal occupations and employment during the last five years.

The President and Treasurer hold office until the first meeting of the directors following the next annual meeting of stockholders and until their respective successors are chosen and qualified, and each other officer holds office until the first meeting of directors following the next annual meeting of stockholders, unless a shorter period shall have been specified by the terms of his election or appointment or, in each case, until he sooner dies, resigns, is removed or becomes disqualified.

There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past ten years.

Code of Ethics

The Company has adopted a Policy on Business Conduct and Ethics (the “Ethics Policy”) applicable to all directors, officers and employees of the Company. The Code is intended to promote honest and ethical conduct, full and accurate reporting, and compliance with laws as well as other matters. The Ethics Policy is available on the Company’s website at www.starrett.com. Stockholders may also obtain free of charge a printed copy of the Ethics Policy by writing to the Clerk of the Company at The L.S. Starrett Company, 121 Crescent Street, Athol, MA 01331. We intend to disclose any future amendments to, or waivers from, the Ethics Policy within four business days of the waiver or amendment through a website posting or by filing a Current Report on Form 8-K with the Securities and Exchange Commission.

Item 11 - Executive Compensation

The information concerning management remuneration will be contained under the heading “General Information Relating to the Board of Directors and Its Committees,” and in Sections C-H of Part I of the Company’s 2017 Proxy Statement, and is hereby incorporated by reference.

On July 15, 2010, the Company entered into a Change of Control Agreement with Francis J. O’Brien. The terms of Mr. O’Brien’s Agreement are described in section H in the Company’s 2017 Proxy Statement, which is hereby incorporated by reference.

On July 15, 2014, the Company entered into a Change of Control Agreement with Anthony M. Aspin. The terms of Mr. Aspin’s Agreement are described in section H in the Company’s 2017 Proxy Statement, which is hereby incorporated by reference.

Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

(a) The following table gives information about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under the Company’s 2012 Employees’ Stock Purchase Plan (“2012 Plan”) as of June 30, 2017. The 2012 Plan was approved by stockholders at the Company’s 2012 annual meeting and shares of Class A or Class B common stock may be issued under the 2012 Plan. Options are not issued under the Company’s Employees’ Stock Purchase Plan that was adopted in 1952.

Plan Category	Number of Securities to be issued Upon Exercise of Outstanding Options, Warrants and Rights (a)		Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b)		Number of Securities Remaining Available For Future Issuance Under Equity Compen- sation Plans (Ex- cluding Securities Reflected in Column (a) (c)
Equity compensation plans approved by security holders		77,285	$	8.42		365,581
Equity compensation plans not approved by security holders		—		—		—
Total		77,285	$	8.42		365,581

(b) Security ownership of certain beneficial owners:

The information concerning a more than 5% holder of any class of the Company’s voting shares will be contained under the heading “Security Ownership of Certain Beneficial Owners” in Section I of Part I of the Company’s 2017 Proxy Statement, and is hereby incorporated by reference.

The information concerning the beneficial ownership of each class of equity securities by all directors, and all directors and officers of the Company as a group, will be contained under the heading “Security Ownership of Directors and Officers” in Section I of Part I in the Company’s 2017 Proxy Statement. These portions of the 2017 Proxy Statement are hereby incorporated by reference.

(d) The Company knows of no arrangements that may, at a subsequent date, result in a change in control of the Company.

Item 13 - Certain Relationships and Related Transactions, and Director Independence

The information required by this Item 13 will be contained in the Company’s 2017 Proxy Statement, and is hereby incorporated by reference.

Item 14 - Principal Accountant Fees and Services

The information required by this Item 14 will be contained in the Audit Fee table in Section B of Part I in the Company’s 2017 Proxy Statement. These portions of the Proxy Statement are hereby incorporated by reference.

PART IV

Item 15 – Exhibits, Financial Statement Schedules

(a) 1. Financial statements filed in Item 8 of this annual report:

Consolidated Balance Sheets at June 30, 2017 and June 30, 2016.

Consolidated Statements of Operations for each of the years in the three year period ended June 30, 2017.

Consolidated Statements of Comprehensive Income (Loss) for each of the years in the three year period ended June 30, 2017.

Consolidated Statements of Stockholders’ Equity for each of the years in the three year period ended June 30, 2017.

Consolidated Statements of Cash Flows for each of the years in the three year period ended June 30, 2017.

Notes to Consolidated Financial Statements

2. The following consolidated financial statement schedule of the Company included in this annual report on Form 10-K is filed herewith pursuant to Item 15(c) and appears immediately before the Exhibit Index:

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

Schedule II

Valuation and Qualifying Accounts

Allowance for Doubtful Accounts

(in 000)	Balance at Beginning of Period		Provisions		Charges to Other Accounts			Write-offs			Balance at End of Period

Allowance for Doubtful Accounts:
Year Ended June 30, 2017	$	887	$	284	$	(23	)	$	(202	)	$	946
Year Ended June 30, 2016		612		352		(2	)		(75	)		887
Year Ended June 30, 2015		704		179		(163	)		(108	)		612

Valuation Allowance on Deferred Tax Asset

(in 000)	Balance at Beginning of Period		Provisions		Charges to Other Accounts			Write-offs			Balance at End of Period


Year Ended June 30, 2017	$	5,246	$	117	$	1		$	(2,442	)	$	2,922
Year Ended June 30, 2016		4,501		1,193		(344	)		(104	)		5,246
Year Ended June 30, 2015		3,334		1,242		(24	)		(51	)		4,501

All other financial statement schedules are omitted because they are inapplicable, not required under the instructions, or the information is reflected in the financial statements or notes thereto.

3. See Exhibit Index below. Compensatory plans or arrangements are identified by an “*”.

(b) See Exhibit Index below.

THE L.S. STARRETT COMPANY AND SUBSIDIARIES - EXHIBIT INDEX

Exhibit

3a	Restated Articles of Organization as amended, filed with Form 10-K for the year ended June 30, 2012, is hereby incorporated by reference.

3b	Amended and Restated Bylaws, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.

Rights Agreement dated as of November 2, 2010 between the Company and Mellon Investor Services LLC, as Rights Agent (together with exhibits, including the Form of Rights Certificate, and the Summary of Rights to Purchase Shares of Class A Common Stock), filed with Form 10-Q for the quarter ended September 25, 2010, is hereby incorporated by reference.

4b	Amendment No. 1 to Rights Agreement dated as of February 5, 2013 by and between the Company and Computershare Shareowner Services LLC, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.

10a	Form of indemnification agreement with directors and executive officers, filed with Form 10-K for the year ended June 29, 2002, is hereby incorporated by reference.

10b*	The L.S. Starrett Company Supplemental Executive Retirement Plan, as amended and restated on January 1, 2009 is hereby incorporated by reference.

10c*	The L.S. Starrett Company 401(k) Stock Savings Plan (2001 Restatement), filed with Form 10-K for the year ended June 29, 2002 is hereby incorporated by reference.

10d*	The L.S. Starrett Company Employee Stock Ownership Plan and Trust Agreement, as amended, filed with Form 10-K for the year ended June 30, 2012 is hereby incorporated by reference.

10e*	Amendment dated April 1, 2003 to the Company’s 401(k) Stock Savings Plan, filed with Form 10-K for the year ended June 28, 2003, is hereby incorporated by reference.

10f*	Amendment dated October 20, 2003 to the Company’s 401(k) Stock Savings Plan, filed with Form 10-Q for the quarter ended September 27, 2003, is hereby incorporated by reference.

10g	Amendment dated as of June 24, 2006 to the Company’s Amended and Restated Credit Agreement, filed with Form 10-K for the year ended June 24, 2006, is hereby incorporated by reference.

10h	Loan and Security Agreement dated as of June 30, 2009 by and among the Company, certain subsidiaries of the Company, and TD Bank, N.A., as lender as amended through April 25, 2012, filed with Form 10-K for the year ended June 30, 2012, is hereby incorporated by reference.

10i*	2007 Employees’ Stock Purchase Plan filed with the Definitive Proxy Statement for the 2008 Annual Meeting of Stockholders is hereby incorporated by reference.

10j	Change in Control Agreement, dated January 16, 2009, between the Company and Douglas A. Starrett, filed with Form 10-Q for the quarter ended December 27, 2008, is hereby incorporated by reference.

10k	Form of Change in Control Agreement, executed by the Company and each of Stephen F. Walsh and Francis J. O’Brien on January 16, 2009 and July 15, 2010, respectively, filed with Form 10-Q for the quarter ended December 27, 2008, is hereby incorporated by reference.

10l	Form of Non-Compete Agreement, dated as of January 16, 2009, executed separately by the Company and each of Francis J. O’Brien, Douglas A Starrett and Stephen F. Walsh on July 15, 2010, January 16, 2009 and January 16, 2009, filed with Form 10-Q for the quarter ended December 27, 2008, is hereby incorporated by reference.

10m*	The L. S. Starrett Company 2013 Employee Stock Ownership Plan and Trust Agreement, filed with Form 10-Q for the quarter ended March 31, 2013, is hereby incorporated by reference.

10n*	First Amendment to The L. S. Starrett Company 2013 Employee Stock Ownership Plan and Trust Agreement, dated December 31, 2013 is hereby incorporated by reference.

10o*	The L.S. Starrett Company 2012 Employees’ Stock Purchase Plan, filed with the Company’s Registration Statement on Form S-8 (File No. 333-184934) filed on November 14, 2012, is hereby incorporated by reference.

10p*	The L.S. Starrett Company 2012 Long-Term Incentive Plan, filed with the Company’s Registration Statement on Form S-8 (File No. 333-184934) filed on November 14, 2012, is hereby incorporated by reference.

10q	Form of Non-Statutory Stock Option Agreement under The L.S. Starrett Company 2012 Long-Term Incentive Plan, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.

10r	Form of Director Non-Statutory Stock Option Agreement under The L.S. Starrett Company 2012 Long-Term Incentive Plan, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.

10s	Form of Restricted Stock Unit Agreement under The L.S. Starrett Company 2012 Long-Term Incentive Plan, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.

10t	Form of Director Restricted Stock Unit Agreement under The L.S. Starrett Company 2012 Long-Term Incentive Plan, filed with Form 10-Q for the quarter ended December 31, 2012, is hereby incorporated by reference.

10u*	Cash Bonus Plan for executives officers of the Company, filed with Form 10-K for the year ended June 30, 2013, is hereby incorporated by reference.

10v	Amendment dated December 23, 2013 to the Company’s amended Loan and Security Agreement, is hereby incorporated by reference.

10w	Amendment dated January 26, 2015 to the Loan and Security Agreement dated as of June 30, 2009 by and among the Company, certain subsidiaries of the Company, and TD Bank, N.A., as lender, filed with Form 10-K for the year ended June 30, 2015, is hereby incorporated by reference.

21	Subsidiaries of the L.S. Starrett Company, filed herewith.

23	Consent of Independent Registered Public Accounting Firm, filed herewith.

31a	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a), filed herewith.

31b	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a), filed herewith.

32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), filed herewith.

101

The following materials from The L. S. Starrett Company Annual Report on Form 10-K for the year ended June 30, 2017 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Stockholders' Equity (v) the Consolidated Statements of Cash Flows, and (vi) Notes to the Consolidated Financial Statements, tagged as blocks of text.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	THE L.S. STARRETT COMPANY (Registrant)

	By: /S/ Francis J. O’Brien
	Francis J. O’Brien Treasurer and Chief Financial Officer (Principal Accounting Officer)
Date: Aug. 25, 2017

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:

/S/DOUGLAS A. STARRETT

/S/SALVADOR DE CAMARGO, JR.

Douglas A. Starrett, Aug. 25, 2017

President and CEO and Director (Principal Executive Officer)

Salvador de Camargo, Jr., Aug. 25, 2017

President and Director

Starrett Industria e Comercio Ltda, Brazil

By: /S/ Francis J. O’Brien		/S/TERRY A. PIPER
Francis J. O’Brien , Aug. 25, 2017 Treasurer and Chief Financial Officer (Principal Accounting Officer)		Terry A. Piper, Aug. 25, 2017 Director


/S/RICHARD B. KENNEDY		/S/STEPHEN F. WALSH
Richard B. Kennedy, Aug. 25, 2017		Stephen F Walsh, Aug. 25, 2017
Director		Director

/S/DAVID A. LEMOINE		/S/RALPH G. LAWRENCE
David A. Lemoine, Aug. 25, 2017		Ralph G. Lawrence, Aug. 25, 2017
Director		Director