UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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| For the quarterly period | September 30, 2016 |
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OR | ||
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period |
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from |
| Commission file number | 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 | 01331-1915 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code | 978-249-3551 |
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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. | |
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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 (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One): | |
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Large Accelerated Filer ☐ Accelerated Filer ☒ Non-Accelerated Filer ☐ Smaller Reporting Company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | |
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YES ☐ NO ☒ |
Common Shares outstanding as of |
| October 27, 2016 |
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Class A Common Shares |
| 6,279,715 |
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Class B Common Shares |
| 767,527 |
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1
THE L. S. STARRETT COMPANY
CONTENTS
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Part I. | Financial Information: |
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| Item 1. | Financial Statements |
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| Consolidated Balance Sheets – September 30, 2016 (unaudited) and June 30, 2016 | 3 | |
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| Consolidated Statements of Operations – three months ended September 30, 2016 and September 30, 2015 (unaudited) | 4 | |
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| Consolidated Statements of Comprehensive Loss – three months ended September 30, 2016 and September 30, 2015 (unaudited) | 5 | |
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| Consolidated Statements of Stockholders' Equity – three months ended September 30, 2016 (unaudited) | 6 | ||
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| Consolidated Statements of Cash Flows - three months ended September 30, 2016 and September 30, 2015 (unaudited) | 7 | ||
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| Notes to Unaudited Consolidated Financial Statements | 8-12 | ||
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| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 12-14 | |
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| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 14 | |
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| Item 4. | Controls and Procedures | 14 | |
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Part II. | Other Information: |
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| Item 1A. | Risk Factors | 15 | |
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| Item 6. | Exhibits | 15 | |
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SIGNATURES | 16 |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE L. S. STARRETT COMPANY
Consolidated Balance Sheets
(in thousands except share data)
September 30, 2016 (unaudited) | June 30, 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 21,307 | $ | 19,794 | ||||
Accounts receivable (less allowance for doubtful accounts of $843 and $887, respectively) | 27,360 | 34,367 | ||||||
Inventories | 59,018 | 56,321 | ||||||
Current deferred income tax assets | - | 4,518 | ||||||
Prepaid expenses and other current assets | 7,808 | 5,911 | ||||||
Total current assets | 115,493 | 120,911 | ||||||
Property, plant and equipment, net | 39,983 | 41,010 | ||||||
Income taxes receivable | 2,603 | 2,655 | ||||||
Deferred income tax assets | 29,266 | 25,284 | ||||||
Intangible assets, net | 6,309 | 6,490 | ||||||
Goodwill | 3,034 | 3,034 | ||||||
Other assets | 2,224 | 2,214 | ||||||
Total assets | $ | 198,912 | $ | 201,598 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Notes payable and current maturities of long-term debt | $ | 1,560 | $ | 1,543 | ||||
Accounts payable | 8,538 | 8,981 | ||||||
Accrued expenses | 5,570 | 6,372 | ||||||
Accrued compensation | 4,501 | 4,922 | ||||||
Total current liabilities | 20,169 | 21,818 | ||||||
Long-term debt, net of current portion | 16,713 | 17,109 | ||||||
Other income tax obligations | 4,398 | 3,813 | ||||||
Deferred income tax liabilities | - | 187 | ||||||
Postretirement benefit and pension obligations | 66,708 | 67,158 | ||||||
Total liabilities | 107,988 | 110,085 | ||||||
Stockholders' equity: | ||||||||
Class A Common stock $1 par (20,000,000 shares authorized; 6,273,574 outstanding at September 30, 2016 and 6,249,563 outstanding at June 30, 2016) | 6,274 | 6,250 | ||||||
Class B Common stock $1 par (10,000,000 shares authorized; 768,336 outstanding at September 30, 2016 and 772,742 outstanding at June 30, 2016) | 768 | 773 | ||||||
Additional paid-in capital | 55,376 | 55,227 | ||||||
Retained earnings | 81,286 | 81,228 | ||||||
Accumulated other comprehensive loss | (52,780 | ) | (51,965 | ) | ||||
Total stockholders' equity | 90,924 | 91,513 | ||||||
Total liabilities and stockholders' equity | $ | 198,912 | $ | 201,598 |
See Notes to Unaudited Consolidated Financial Statements
3
THE L. S. STARRETT COMPANY
Consolidated Statements of Operations
(in thousands except per share data) (unaudited)
3 Months Ended | ||||||||
9/30/2016 | 9/30/2015 | |||||||
Net sales | $ | 48,913 | $ | 51,038 | ||||
Cost of goods sold | 34,999 | 35,186 | ||||||
Gross margin | 13,914 | 15,852 | ||||||
% of Net sales | 28.4 | % | 31.1 | % | ||||
Selling, general and administrative expenses | 15,421 | 15,673 | ||||||
Restructuring charges | 343 | - | ||||||
Operating income (loss) | (1,850 | ) | 179 | |||||
Other income | 237 | 303 | ||||||
Gain on sale of building | 3,089 | - | ||||||
Income before income taxes | 1,476 | 482 | ||||||
Income tax expense | 717 | 660 | ||||||
Net income (loss) | $ | 759 | $ | (178 | ) | |||
Basic and diluted income (loss) per share | $ | 0.11 | $ | (0.03 | ) | |||
Weighted average outstanding shares used in per share calculations: | ||||||||
Basic | 7,028 | 7,014 | ||||||
Diluted | 7,059 | 7,014 | ||||||
Dividends per share | $ | 0.10 | $ | 0.10 |
See Notes to Unaudited Consolidated Financial Statements
4
THE L. S. STARRETT COMPANY
Consolidated Statements of Comprehensive Loss
(in thousands) (unaudited)
3 Months Ended | ||||||||
9/30/2016 | 9/30/2015 | |||||||
Net income (loss) | $ | 759 | $ | (178 | ) | |||
Other comprehensive loss: | ||||||||
Translation loss | (768 | ) | (9,780 | ) | ||||
Pension and postretirement plans, net of tax of $0 and $0 respectively | (47 | ) | - | |||||
Other comprehensive loss | (815 | ) | (9,780 | ) | ||||
Total comprehensive loss | $ | (56 | ) | $ | (9,958 | ) |
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THE L. S. STARRETT COMPANY
Consolidated Statements of Stockholders' Equity
For the Three Months Ended September 30, 2016
(in thousands except per share data) (unaudited)
Common Stock Outstanding | Addi- tional Paid-in | Retained | Accumulated Other Com-prehensive | |||||||||||||||||||||
Class A | Class B | Capital | Earnings | Loss | Total | |||||||||||||||||||
Balance June 30, 2016 | $ | 6,250 | $ | 773 | $ | 55,227 | $ | 81,228 | $ | (51,965 | ) | $ | 91,513 | |||||||||||
Total comprehensive income (loss) | 759 | (815 | ) | (56 | ) | |||||||||||||||||||
Dividends ($0.10 per share) | (701 | ) | (701 | ) | ||||||||||||||||||||
Repurchase of shares | (2 | ) | (18 | ) | (20 | ) | ||||||||||||||||||
Issuance of stock | 5 | 56 | 61 | |||||||||||||||||||||
Stock-based compensation | 16 | 111 |
| 127 |
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Conversion | 3 | (3 | ) | - | ||||||||||||||||||||
Balance September 30, 2016 | $ | 6,274 | $ | 768 | $ | 55,376 | $ | 81,286 | $ | (52,780 | ) | $ | 90,924 | |||||||||||
Accumulated balance consists of: | ||||||||||||||||||||||||
Translation loss | $ | (42,654 | ) | |||||||||||||||||||||
Pension and postretirement plans, net of taxes | (10,126 | ) | ||||||||||||||||||||||
$ | (52,780 | ) |
See Notes to Unaudited Consolidated Financial Statements
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THE L. S. STARRETT COMPANY
Consolidated Statements of Cash Flows
(in thousands) (unaudited)
3 Months Ended | ||||||||
9/30/2016 | 9/30/2015 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 759 | $ | (178 | ) | |||
Non-cash operating activities: | ||||||||
Gain on sale of building | (3,089 | ) | - | |||||
Depreciation | 1,390 | 1,558 | ||||||
Amortization | 364 | 333 | ||||||
Stock-based compensation | 127 | 144 | ||||||
Net long-term tax obligations | 603 | 433 | ||||||
Deferred taxes | 281 | 42 | ||||||
Postretirement benefit and pension obligations | 939 | 780 | ||||||
Income from equity method investment | (10 | ) | (47 | ) | ||||
Working capital changes: | ||||||||
Accounts receivable | 6,562 | 6,799 | ||||||
Inventories | (3,165 | ) | (2,298 | ) | ||||
Other current assets | (1,953 | ) | (827 | ) | ||||
Other current liabilities | (1,296 | ) | (826 | ) | ||||
Prepaid pension expense | (1,159 | ) | (1,051 | ) | ||||
Other | 138 | (5 | ) | |||||
Net cash provided by operating activities | 491 | 4,857 | ||||||
Cash flows from investing activities: | ||||||||
Additions to property, plant and equipment | (889 | ) | (2,003 | ) | ||||
Software development | (183 | ) | (162 | ) | ||||
Proceeds from sale of building | 3,321 | - | ||||||
Net cash provided by (used) in investing activities | 2,249 | (2,165 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from long-term borrowings | 750 | |||||||
Long-term debt repayments | (379 | ) | (547 | ) | ||||
Proceeds from common stock issued | 61 | 64 | ||||||
Shares purchased | (20 | ) | (107 | ) | ||||
Dividends paid | (701 | ) | (704 | ) | ||||
Net cash used in financing activities | (1,039 | ) | (544 | ) | ||||
Effect of exchange rate changes on cash | (188 | ) | (317 | ) | ||||
Net increase in cash | 1,513 | 1,831 | ||||||
Cash, beginning of period | 19,794 | 11,108 | ||||||
Cash, end of period | $ | 21,307 | $ | 12,939 | ||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 161 | $ | 163 | ||||
Income taxes paid, net | 34 | 295 |
See Notes to Unaudited Consolidated Financial Statements
7
THE L. S. STARRETT COMPANY
Notes to Unaudited Consolidated Financial Statements
September 30, 2016
Note 1: Basis of Presentation and Summary of Significant Account Policies
The unaudited interim financial statements as of and for the three months ended September 30, 2016, have been prepared by The L.S. Starrett Company (the "Company") in accordance with accounting principles generally accepted in the United States of America for interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. These unaudited financial statements, which, in the opinion of management, reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation, should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2016. Operating results are not necessarily indicative of the results that may be expected for any future interim period or for the entire fiscal year.
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 amounts reported in the consolidated financial statements and accompanying notes. Note 2 to the Company's Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended June 30, 2016 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.
Note 2: Recent A ccounting Pronouncements
In May 2014, the FASB issued a new standard related to the "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 July 1, 2017. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
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 will not have a material impact on our 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 annual periods beginning after December 15, 2018, and interim periods thereafter, 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 March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting." The ASU affects the accounting for employee share-based payment transactions as it relates to accounting for income taxes, accounting for forfeitures, and statutory tax withholding requirements. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those periods with early adoption permitted. The Company has adopted the new guidance prospectively in the first quarter of fiscal 2017. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
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Note 3: Stock-based Compensation
On September 5, 2012, the Board of Directors adopted The L.S. Starrett Company 2012 Long Term Incentive Plan (the "2012 Stock Plan"). The 2012 stock plan was approved by shareholders on October 17, 2012. The 2012 Stock Plan permits the granting of the following types of awards to officers, other employees and non-employee directors: stock options; restricted stock awards; unrestricted stock awards; stock appreciation rights; stock units including restricted stock units; performance awards; cash-based awards; and awards other than previously described that are convertible or otherwise based on stock. The 2012 Stock 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 September 30, 2016, 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 Plan as of September 30, 2016.
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).
No stock options were granted during the three months ended September 30, 2016 and 2015.
The weighted average contractual term for stock options outstanding as of September 30, 2016 was 6.25 years. There was no intrinsic value of stock options outstanding as of September 30, 2016. Stock options exercisable as of September 30, 2016 were 20,000. 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 stock options and RSU awards by recognizing the expense of the grant date fair value ratably over vesting periods generally ranging from one year to three years. The related expense is included in selling, general and administrative expenses.
There were 45,000 RSU awards with a fair value of $10.86 per RSU granted during the three months ended September 30, 2016. There were 12,733 RSUs settled during the three months ended September 30, 2016. The aggregate intrinsic value of RSU awards outstanding as of September 30, 2016 was $1.0 million. As of September 30, 2016 all vested awards had been issued and settled.
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 are eligible to participate.
Compensation expense related to all stock based plans for the three month periods ended September 30, 2016 and 2015 was $0.1 million for both periods. As of September 30, 2016, there was $1.4 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 $0.3 million is expected to be recognized over a weighted average period of 1.8 years.
Note 4: Inventories
Inventories consist of the following (in thousands):
9/30/2016 | 6/30/2016 | |||||||
Raw material and supplies | $ | 28,517 | $ | 29,209 | ||||
Goods in process and finished parts | 15,778 | 16,459 | ||||||
Finished goods | 43,516 | 39,449 | ||||||
87,811 | 85,117 | |||||||
LIFO Reserve | (28,793 | ) | (28,796 | ) | ||||
Inventories | $ | 59,018 | $ | 56,321 |
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LIFO inventories were $11.5 million and $10.5 million at September 30, 2016 and at June 30, 2016, respectively, such amounts being approximately $28.8 million less than if determined on a FIFO basis. The use of LIFO, as compared to FIFO, resulted in no material change in cost of sales for the three months ended September 30, 2016 compared to a $0.1 million increase in the three months ended September 30, 2015.
Note 5: Goodwill and Intangible Assets
The Company's acquisition of Bytewise in 2011 gave rise to goodwill. The Company performed a qualitative analysis in accordance with ASU 2011-08 for its October 1, 2015 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 exceeds its respective carrying amount, relevant events and circumstances were taken into account, with greater weight assigned to events and circumstances that most affect the fair value 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 and changes in management or key personnel. After assessing these and other factors the Company determined that it was more likely than not that the fair value of the reporting unit exceeded its carrying amount as of October 1, 2015.
Amortizable intangible assets consist of the following (in thousands):
9/30/2016 | 6/30/2016 | |||||||
Non-compete agreement | $ | 600 | $ | 600 | ||||
Trademarks and trade names | 1,480 | 1,480 | ||||||
Completed technology | 2,358 | 2,358 | ||||||
Customer relationships | 4,950 | 4,950 | ||||||
Software development | 2,585 | 2,402 | ||||||
Other intangible assets | 325 | 325 | ||||||
Total | 12,298 | 12,115 | ||||||
Accumulated amortization | (5,989 | ) | (5,625 | ) | ||||
Total net balance | $ | 6,309 | $ | 6,490 |
Amortizable intangible assets are being amortized on a straight-line basis over the period of expected economic benefit.
The estimated useful lives of the intangible assets subject to amortization are 14 years for trademarks and trade names, 8 years for non-compete agreements, 10 years for completed technology, 8 years for customer relationships and 5 years for software development.
The estimated aggregate amortization expense for the remainder of fiscal 2017 and for each of the next five years and thereafter, is as follows (in thousands):
2017 (Remainder of year) | $ | 1,213 | ||
2018 | 1,550 | |||
2019 | 1,471 | |||
2020 | 947 | |||
2021 | 544 | |||
2022 | 225 | |||
Thereafter | 359 |
Note 6: Pension and Post-retirement Benefits
Net periodic benefit costs for the Company's defined benefit pension plans consist of the following (in thousands):
Three Months Ended | ||||||||
9/30/2016 | 9/30/2015 | |||||||
Service cost | $ | 791 | $ | 714 | ||||
Interest cost | 1,552 | 1,768 | ||||||
Expected return on plan assets | (1,306 | ) | (1,594 | ) | ||||
Amortization of net loss | 28 | 14 | ||||||
$ | 1,065 | $ | 902 |
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Net periodic benefit costs for the Company's post-retirement medical plan and life insurance consists of the following (in thousands):
Three Months Ended | ||||||||
9/30/2016 | 9/30/2015 | |||||||
Service cost | $ | 23 | $ | 26 | ||||
Interest cost | 68 | 72 | ||||||
Amortization of prior service credit | (168 | ) | (195 | ) | ||||
Amortization of net loss | 30 | 4 | ||||||
$ | (47 | ) | $ | (93 | ) |
The Company's pension plans use fair value as the market-related value of plan assets and recognize net actuarial gains or losses in excess of ten percent (10%) of the greater of the market-related value of plan assets or of the plans' projected benefit obligation in net periodic (benefit) cost as of the plan measurement date, which is the same as the fiscal year end of the Company. Net actuarial gains or losses that are less than 10% of the thresholds noted above are accounted for as part of the accumulated other comprehensive loss.
Note 7: Debt
Debt is comprised of the following (in thousands):
9/30/2016 | 6/30/2016 | |||||||
Notes payable and current maturities of long term debt | ||||||||
Loan and Security Agreement | $ | 1,560 | $ | 1,543 | ||||
Long-term debt | ||||||||
Loan and Security Agreement | 16,713 | 17,109 | ||||||
$ | 18,273 | $ | 18,652 |
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 Line of Credit expires on April 30, 2018 and has an interest rate of LIBOR plus 1.5%. The effective interest rate on the Line of Credit under the Loan and Security Agreement for the three months ended September 30, 2016 and 2015 was 2.4% and 2.1%, respectively. Based upon its three year term, the Line of Credit has been classified as long-term. As of September 30, 2016, $9.4 million was outstanding on the Line of Credit.
On November 22, 2011, in conjunction with the Bytewise acquisition, the Company entered into a $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. The Term Loan, had a balance of $8.9 million at September 30, 2016.
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"), not to exceed 2.25 to 1. 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 and 4) maintain consolidated cash plus liquid investments of not less than $10.0 million at any time. The Company was in compliance with all debt covenants as of September 30, 2016.
Note 8: Income Tax
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 foreign 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.
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The Company provides for income taxes on an interim basis based on an estimate of the effective tax rate for the year. This estimate is reassessed on a quarterly basis. Discrete tax items are accounted for in the quarterly period in which they occur.
The tax expense for the first quarter of fiscal 2017 was $717,000 on a profit before tax of $1,476,000 (an effective tax rate of 48.6%). The tax expense for the first quarter of fiscal 2016 was $660,000 on a profit before tax for the quarter of $482,000 (an effective tax rate of 136.9%). The tax rate in the first quarter of fiscal 2017 is higher than the U.S. statutory rate of approximately 40% as a result of discrete adjustments primarily for the impact of a tax rate change in the U.K. applied to deferred tax assets which increased tax expense by $298,000 in the quarter. The tax rate for the first quarter of fiscal 2016 was higher than the U.S. federal and state statutory rate of approximately 40% primarily due to losses in some foreign jurisdictions for which no tax benefit is recognized. In the first quarter of fiscal 2016, there was a discrete reduction to tax expense of $54,000 related to provision to return adjustments in the UK.
U.S. Federal tax returns through fiscal 2012 are generally no longer subject to review by tax authorities; however, tax loss carryforwards from years before fiscal 2012 are still subject to adjustment. As of September 30, 2016, the Company has substantially resolved all open income tax audits and there were no other local or federal income tax audits in progress. In international jurisdictions including Australia, Brazil, Canada, China, Germany, Mexico, New Zealand, Singapore and the UK, which comprise a significant portion of the Company's operations, 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 2011 – 2015. The Company has identified no new uncertain tax positions during the three month period ended September 30, 2016 for which it is currently likely that the total amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.
Accounting for income taxes requires estimates of future benefits and tax liabilities. Due to the temporary differences in the timing of recognition of items included in income for accounting and tax purposes, deferred tax assets or deferred tax liabilities are recorded to reflect the impact arising from these differences on future tax payments. With respect to recorded deferred tax assets, the Company assesses the likelihood that the asset will be realized by addressing the positive and negative evidence to determine whether realization is more likely than not to occur. If realization is in doubt because of uncertainty regarding future profitability, the Company provides a valuation allowance related to the asset to the extent that it is more likely than not that the deferred tax asset will not be realized. 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 the Company's financial position.