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The L.S. Starrett Company Message Board

  • pmlljl pmlljl Sep 19, 2012 2:08 PM Flag

    SCX retirement plan charge


    The "extraordinary" charge that SCX took in the recent quarterly and annual report that threw the company into a loss was necessitated because the assets in the retirement plan were much less than the liabilities of the retirement plan. This is primarily due to the fact that the return earned on the retirement plan assets has been much less than the expected plan. In addition, the retirement plan can now look forward to much less return than expected in the future. Accordingly, SCX had to face reality and adjust for the fact that SCX will have to make much higher contributions now and in the future. This is going to happen to many other companies as well. My contention that the Fed is responsible is because it is my belief that Bernanke and the FED has been primarily responsible for reducing interest rates and the general decline in investment returns of fixed income returns which is the primary type of securities usually held by retirement plans. How am I wrong?

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    • dcanuel Sep 26, 2012 8:25 PM Flag

      If the retirement plan had been fully funded to begin with, the charge would have been much less. In fact, if the company had been fully funded and had fully matched or defeased the pension liabilities with fixed income assets of similar maturity, the effect of the interest rate drop would have been near zero. You run into a problem when you are underfunded in a defined benefit plan and anticipated earnings rates (and the discount rate applied to the future liabilities) falls. So I think both the central bank and the company's own practice of underfunding are dually responsible for this charge.

      Failure to fully fund pension obligations is a symptom of the declining earning power of the company. It appears that the business is no longer capable of generating sufficient cash flow to 1) invest in the business and acquire new technologies, 2) pay the dividend, and 3) fully fund post-retirement obligations. Perhaps 15 years ago operating margins were high enough to support all of those requirements simultaneously, but that was a long time ago.

      • 1 Reply to dcanuel
      • No offense guys and gals, but you are missing quite a bit of the forest for the trees.....I suggest you all read "Do Stock Prices Reflect Information in Accruals and Cash Flows About Future Earnings?" The Accounting Review 71 (1996)." This research piece was written by Professor Richard Sloan who at the time was at the University of Michigan business school......then I would suggest that you calculate LS Starrett's true cash earnings (from the cash flow statement) relative to what they are claiming on an accrual basis for the latest two fiscal years and you will see a huge gap in reality versus promises....of course I have tried to spoon feed you help, but that does not seem to be working.....true cash earnings are what Warren Buffet calls "owner earnings."........yes, the pension gap is part of the problem and has been responsible for a portion of the shortfall. However the problem is far greater for this company in that they don't make any cash money even when adjusting out for the pension. In the latest fiscal year for example, inventories went up by 27% while revenue went up by 6%. Acquisitions played no part in this disparity, and as you will read in the research piece above, out-of-line inventory growth is one of the more statistically significant red flags in Sloan's accrual anomaly. I have been an Analyst and a Portfolio Manger for 24 years....the numbers on the company's cash flow statement are 100% factual in terms of not lining up with the income statement. Further, it is 100% factual that the pension shortfall only accounts for a (small) portion of the problem. It is all there in black and white. The fact that you are quoting this management team and what they are telling you speaks volumes about your level of investing experience. I am truly tired of beating a dead horse that you don't seem to understand. I could not possibly explain things more fact I have explained things so clearly that a fifth grader could understand them. In other words, I cannot help you any further.

        Good luck and happy investing (although putting your money in LS Starrett is not investing, it is the opposite as has been proven year after year.......and will be the same in the future as long as the management and ownership structure does not change) I have said time and time again, the only thing that will save you with this company is some sort of corporate event like a sale of the company or a large asset sale and one-time dividend.

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