UNITED STATES

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VTfu0SWcASyra0JxT5lYh4sRZ1jwckdxswrWg7Ex/q/Ch2fX6kYMmeuH/+gb2rqf qTqxURWzYIxTHM2Kb9YV2g== 0000093676-05-000049.txt : 20051102 0000093676-05-000049.hdr.sgml : 20051102 20051102164026 ACCESSION NUMBER: 0000093676-05-000049 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050924 FILED AS OF DATE: 20051102 DATE AS OF CHANGE: 20051102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARRETT L S CO CENTRAL INDEX KEY: 0000093676 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 041866480 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00367 FILM NUMBER: 051173707 BUSINESS ADDRESS: STREET 1: 121 CRESCENT ST CITY: ATHOL STATE: MA ZIP: 01331 BUSINESS PHONE: 5082493551 10-Q 1 f10q2005qrt1finalversion.htm MAIN DOCUMENT UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 24, 2005

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

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 (I.R.S. Employer

incorporation or organization) 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

Former name, address and fiscal year, if changed since last report.

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 filings requirements for the past 90 days.

YES X NO

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES X NO____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES NO X

Common Shares outstanding as of October 19, 2005:

Class A Common Shares 5,567,365

Class B Common Shares 1,092,056

Page 1 of 15

THE L. S. STARRETT COMPANY

CONTENTS

Page No.

Part I. Financial Information:

Item 1. Financial Statements

Consolidated Statements of Operations -

thirteen weeks ended September 24, 2005

and September 25, 2004 (unaudited) 3

Consolidated Statements of Cash Flows -

thirteen weeks ended September 24, 2005

and September 25, 2004 (unaudited) 4

Consolidated Balance Sheets - September 24,

2005 (unaudited) and June 25, 2005 5

Consolidated Statements of Stockholders'

Equity - thirteen weeks ended September 24,

2005 and September 25, 2004 (unaudited) 6

Notes to Consolidated Financial Statements 7-8

Item 2. Management's Discussion and Analysis of Financial

Condition and Results of Operations 8-13

Item 3. Quantitative and Qualitative Disclosures About

Market Risk 14

Item 4. Controls and Procedures 14

Part II. Other information:

Item 1. Legal Proceedings 14

Item 2. Changes in Securities and Use of Proceeds 14

Item 4. Submission of Matters to a Vote of Security Holders 15

Item 6. Exhibits and reports on Form 8-K 15

SIGNATURES 15

Page 2 of 15

Part I. Financial Information

Item 1. Financial Statements

THE L. S. STARRETT COMPANY

Consolidated Statements of Operations

(in thousands of dollars except per share data)(unaudited)

13 Weeks Ended

9/24/05 9/25/04

Net sales 47,531 46,795

Cost of goods sold (37,515) (33,437)

Selling and general expense (12,590) (11,849)

Other (expense) income (94) 505

(Loss) earnings before income taxes (2,668) 2,014

Income (benefit) taxes (824) 350

Net (loss) earnings (1,844) 1,664

Basic and diluted (loss) earnings per share (.28) .25

Average outstanding shares used in

per share calculations (in thousands)

Basic 6,663 6,648

Diluted 6,670 6,663

Dividends per share .10 .10

See notes to consolidated financial statements

Page 3 of 15

THE L. S. STARRETT COMPANY

Consolidated Statements of Cash Flows

(in thousands of dollars)(unaudited)

13 Weeks Ended

9/24/05 9/25/04

(as restated)

Cash flows from operating activities:

Net (loss) earnings (1,844) 1,664

Noncash operating activities:

Gain from sale of real estate 0 (662)

Depreciation and amortization 2,536 2,561

Deferred taxes (883) 52

Unrealized transaction (gains) losses (56) 0

Retirement benefits (77) (476)

Working capital changes:

Receivables 818 933

Inventories (1,875) (2,368)

Other current assets 390 1,509

Other current liabilities (1,227) (1,798)

Prepaid pension cost and other 153 277

Net cash (used in) from operating activities (2,065) 1,692

Cash flows from investing activities:

Additions to plant and equipment (2,033) (1,680)

Proceeds from sale of real estate 0 1,522

Decrease (increase) in investments 4,987 (480)

Net cash provided from (used in) investing

activities 2,954 (638)

Cash flows from financing activities:

Short-term borrowings 370 650

Short-term debt repayments (850) (217)

Long-term debt repayments (133) (85)

Common stock issued 15 126

Treasury shares purchased (170) 0

Dividends (666) (665)

Net cash used in financing activities (1,434) (191)

Effect of exchange rate changes on cash 32 (9)

Net (decrease) increase in cash (513) 854

Cash, beginning of period 4,479 2,483

Cash, end of period 3,966 3,337

See notes to consolidated financial statements

Page 4 of 15

THE L. S. STARRETT COMPANY

Consolidated Balance Sheets

(in thousands of dollars)

Sept. 24 June 25

2005 2005

ASSETS (unaudited)

Current assets:

Cash 3,966 4,479

Investments 23,572 28,627

Accounts receivable (less allowance for doubtful

accounts of $1,159 and $1,125) 29,911 30,627

Inventories:

Raw materials and supplies 17,553 16,075

Goods in process and finished parts 18,435 17,763

Finished goods 23,137 23,145

59,125 56,983

Prepaid expenses, taxes and other current assets 9,460 9,820

Total current assets 126,034 130,536

Property, plant and equipment, at cost (less

accumulated depreciation of $111,990

and $109,673) 60,470 60,774

Prepaid pension cost 32,237 32,297

Other assets 556 507

219,297 224,114

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Notes payable and current maturities 3,410 3,772

Accounts payable and accrued expenses 14,522 16,867

Accrued salaries and wages 4,400 4,596

Total current liabilities 22,332 25,235

Deferred income taxes 11,036 10,551

Long-term debt 2,820 2,885

Accumulated postretirement medical benefit obligation 16,938 17,017

Total liabilities 53,126 55,688

Stockholders' equity:

Class A Common $1 par (20,000,000 shares authorized;

5,559,725 outstanding at 9/24/05; 5,457,786

outstanding at 6/25/05 5,560 5,458

Class B Common $1 par (10,000,000 shares authorized;

1,095,207 outstanding at 9/24/05; 1,206,266

outstanding at 6/25/05 1,095 1,206

Additional paid-in capital 50,411 50,466

Retained earnings reinvested and employed in

the business 127,774 130,361

Accumulated other comprehensive loss (18,669) (19,065)

Total stockholders' equity 166,171 168,426

219,297 224,114

See notes to consolidated financial statements

Page 5 of 15

THE L. S. STARRETT COMPANY

Consolidated Statements of Stockholders' Equity

For the Thirteen Weeks Ended September 24, 2005 and September 25, 2004

(in thousands of dollars)

(unaudited)

Common Addi- Accumulated

Stock Out- tional Other

standing Paid-in Retained Comprehensive

($1 Par) Capital Earnings Loss Total

Balance June 26, 2004 6,647 49,934 129,282 (23,580) 162,283

Comprehensive income:

Net earnings 1,664 1,664

Unrealized net gain

on investments 89 89

Translation gain, net 882 882

Total comprehensive income (loss) 2,635

Dividends ($.10 per share) (665) (665)

Treasury shares issued 8 118 126

Balance September 25, 2004 6,655 50,052 130,281 (22,609) 164,379

Balance June 25, 2005 6,664 50,466 130,361 (19,065) 168,426

Comprehensive income:

Net (loss) (1,844) (1,844)

Unrealized net loss

on investments (2) (2)

Translation gain, net 398 398

Total comprehensive (loss) (1,448)

Dividends ($.10 per share) (666) (666)

Treasury shares:

Purchased (10) (83) (77) (170)

Issued 1 14 15

Stock Purchase Plan 0 14 14

Balance September 24, 2005 6,655 50,411 127,774 (18,669) 166,171

Cumulative Balance:

Translation loss (15,142)

Unrealized gain on investments 57

Minimum pension liability (3,584)

(18,669)

See notes to consolidated financial statements

Page 6 of 15

THE L. S. STARRETT COMPANY

Condensed Notes to Consolidated Financial Statements

In the opinion of management, the accompanying financial statements contain

all adjustments, consisting only of normal recurring adjustments, necessary

to present fairly the financial position of the Company as of September 24,

2005 and June 25, 2005; the results of operations and cash flows for the thirteen weeks ended September 24, 2005 and September 25, 2004; and changes in stockholders' equity for the thirteen weeks ended September 24, 2005 and September 25, 2004.

The Company follows the same accounting policies in the preparation of interim statements as described in the Company's annual report filed on Form 10-K for the year ended June 25, 2005, and these financial statements should be read in conjunction with said annual report. The cash flow statement in the September 2004 quarter has been restated to properly reflect the gain on the sale of the Company’s Skipton, England manufacturing facility.

Shares used to compute basic and diluted loss per share are the same in the September 2005 quarter since the inclusion of common stock equivalents (6,852 shares) is antidilutive in periods with a loss. For the September 2004 quarter these shares had no impact on the per share calculation due to their magnitude.

Included in investments at September 24, 2005 is $2.3 million of AAA rated Puerto Rico debt obligations that have maturities greater than one year but carry the benefit of possibly reducing repatriation taxes. These investments represent “core cash” and are part of the Company’s overall cash management and liquidity program and, under SFAS 115, are considered “available for sale.” The investments themselves are highly liquid, carry no early redemption penalties, and are not designated for acquiring non-current assets.

Other (expense) income is comprised of the following (in thousands):

Thirteen Weeks

Ended September

2005 2004

Interest income 292 235

Interest expense and commitment fees (336) (195)

Realized and unrealized exchange

gains (losses), Net 41 (147)

Gain on sale of real estate 662

Other (91) (50)

Other (expense) income (94) 505

Net periodic costs (benefits) for the Company's defined benefit pension plans consists of the following (in thousands):

Thirteen Weeks

Ended September

2005 2004

Service cost 957 804

Interest cost 1,624 1,648

Expected return on plan assets (2,613) (2,578)

Amort. of transition obligation (1) (245)

Amort. of prior service cost 107 107

Amort. of unrecognized (gain)loss 79 -

153 (264)

Page 7 of 15

Net Periodic costs for the Company's postretirement medical plan consists of the following (in thousands):

Thirteen Weeks

Ended September

2005 2004

Service cost 138 129

Interest cost 206 238

Amort. of prior service cost (119) (118)

Amort. of unrecognized loss 32 16

257 265

Approximately 57% of all inventories are valued on the LIFO method. At

September 24, 2005 and June 25, 2005, total inventories are approximately

$22 million less than if determined on a FIFO basis. The Company has not realized any material LIFO layer liquidation profits in the periods presented.

Long-term debt is comprised of the following (in thousands):

September June

2005 2005

Capitalized lease obligations payable in

Brazilian currency due 2007-2009, 15%-25% 3,583 3,655

Less current portion 763 770

2,820 2,885

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Overview

As more fully discussed below, the Company had a net loss of $1.8 million, or $.28 per share, in the first quarter of fiscal 2006 (fiscal 2006 quarter) compared to net earnings of $1.7 million, or $.25 per share, in the first quarter of fiscal 2005 (fiscal 2005 quarter). Included in last year’s quarter is a $.7 million gain, both before and after tax, or $.10 per share, on the sale of the Company’s Skipton, England manufacturing facility. For purposes of better understanding the results from the Company’s manufacturing and distribution operations, management reviews results excluding such items as this gain. Without this gain, the Company’s net loss of $1.8 million in the current quarter compares to pro-forma income (non-GAAP) of $1.0 million or $.15 per share for the prior quarter.

Sales

Sales for the fiscal 2006 quarter are up $.7 million or 1.5% compared to the fiscal 2005 quarter. Domestic sales are down $1.7 million or 5.8%, while foreign sales are up $2.4 million or 14.5% (3% in local currency). The decrease in domestic sales is attributable to unevenness in the U.S. economy caused by higher energy and raw material costs. The increase in foreign sales is driven primarily from the strengthening of the Brazilian Real against the U.S. dollar in the fiscal 2006 quarter.

Page 8 of 15

(Loss) earnings before taxes

The current quarter's pretax loss of $2.7 million represents a decrease of pre-tax earnings of $4.7 million from last year’s pre-tax earnings of $2.0 million. $3.4 million of this decrease is at the gross margin line. The gross margin percentage dropped from 28.5% in the prior year to 21.1% in the current quarter. The decrease in gross margin is primarily a result of a higher mix of lower gross margin percentage items in the current quarter sales versus last year. This is primarily driven by the Evans Division which had lower pricing, and in addition, has not been able to pass along higher material costs to its customers. Also the continued impact of costs associated with the transfer of manufacturing operations to the Dominican Republic adversely impacted their results. Gross margin from other domestic operations were impacted by lower sales and lower overhead absorption rates. International operations, particularl y Brazil, were impacted by underutilization of capacity and underabsorbed overhead. Selling and general expense is up $.7 million most of which relates to the impact of the strengthening U.S. dollar on selling and general expense at foreign locations. As discussed above, the prior year’s quarter included a one-time gain on the sale of real estate of $.7 million.

Income tax benefit

The effective income tax rate is 31% in the fiscal 2006 quarter versus 17% in the fiscal 2005 quarter. The current quarter’s rate reflects the impact of permanent book/tax differences and the phasing out of the Puerto Rico tax incentives as those operations were moved to the Dominican Republic. This reflects management’s best estimate of the effective rate for fiscal 2006. The rate for the prior year’s quarter reflects the permanent benefit of no tax cost on the $.7 million gain on the sale of real estate mentioned above as a result of U.K. indexing rules. This had the effect of lowering the effective tax rate by 10 percentage points. Despite the loss in this quarter, the Company continues to believe it is more likely than not that it will be able to utilize its tax operating loss carryforwards generated in the current and prior periods. This is continually monitored and could change in the future.

Net (loss) earnings per share

As a result of the above factors, the Company had basic and diluted net loss per share of $.28 in the fiscal 2006 quarter compared to basic and diluted net earnings per share of $.25 in the fiscal 2005 quarter ($.15 per share before the gain on the sale of real estate).

LIQUIDITY AND CAPITAL RESOURCES

Cash flows 13 Weeks Ended

9/24/05 9/25/04

Cash (used in) provided by operations (2,065) 1,692

Cash provided from (used in) investing activities 2,954 (638)

Cash used in financing activities (1,434) (191)

Cash provided by operations decreased significantly in the current quarter compared to the same quarter a year ago. This decrease is primarily a result of the decline in net earnings, the investment in inventory and payment of current liabilities during the fiscal 2006 quarter.

The Company’s investing activities consist of expenditures for plant and equipment and the investment of cash not immediately needed for operations.

Page 9 of 15

For the current quarter the Company used cash from the liquidation of short-

term investments of $5.0 million to cover the negative cash flow from operations. The Company’s actions currently underway should restore the Company’s ability to generate cash from operations. Therefore, the use of cash is not expected to continue. The comparable quarter in the prior year had $1.5 million of cash provided by the proceeds on the sale of the Company's Skipton, England manufacturing facility.

Liquidity and credit arrangements

The Company believes it maintains sufficient liquidity and has the resources to fund its operations in the near term. If the Company is unable to return to consistent profitability, additional steps will have to be taken in order to maintain liquidity, including plant consolidations and further workforce and dividend reductions (see Reorganization Plans below). In addition to its cash and investments, the Company maintains a $15 million line of credit, of which, as of September 24, 2005, $890,000 is being utilized in the form of standby letters of credit for insurance purposes. Although the credit line is not currently collateralized, it is possible, based on the Company's financial performance, that in the future the Company will have to provide collateral in order to maintain the credit agreement. The Company has a working capital ratio of 5.6 to one as of September 24, 2005 and 5.2 to one as of June 25, 2005.

REORGANIZATION PLANS

The continued migration of manufacturing to low wage countries has adversely affected the Company's customer base and competitive position, particularly in North America. As a result, the Company has been rethinking almost all aspects of its business and is formulating plans to lower wage costs, consolidate operations, move its strategic focus from manufacturing location to product group and distribution channel, as well as to achieving the goals of enhanced marketing focus and global procurement. The Company is trying to sell its Alum Bank, Pennsylvania level manufacturing plant and has relocated the manufacturing to the Dominican Republic, where production began in fiscal 2005. The tape measure production of the Evans Division facilities in Charleston, South Carolina is being transferred to the Dominican Republic at an adjacent site. The Company's goal is to achieve labor savings and maintain margins while satisfying the demands of its customers for lower pric es. However, this move will continue to adversely effect the Company's earnings over the next two quarters.

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

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. The footnotes to the Company's annual report on Form 10K describe the significant accounting policies and methods used in the preparation of the consolidated financial statements.

Page 10 of 15

Judgments, assumptions, and estimates are used for, but not limited to, the allowance for doubtful accounts receivable and returned goods; inventory allowances; income tax reserves; employee turnover, discount, and return rates used to calculate pension obligations; normal expense accruals for such things as workers compensation and employee medical expenses. Actual results could differ from these estimates.

The allowance for doubtful accounts and sales returns is based on our assessment of the collectibility of specific customer accounts, the aging of our accounts receivable and trends in product returns. While the Company believes that the allowance for doubtful accounts and sales returns is adequate, if there is a deterioration of a major customer's credit

worthiness, actual defaults are higher than our previous experience, or actual future returns do not reflect historical trends, the estimates of the recoverability of the amounts due the Company and sales could be adversely affected.

Inventory purchases and commitments are based upon future demand forecasts.

If there is a sudden and significant decrease in demand for our products or

there is a higher risk of inventory obsolescence because of rapidly changing

technology and requirements, the Company may be required to increase the inventory reserve and, as a result, gross profit margin could be adversely

affected.

The Company generally values Property, Plant and Equipment (PP&E) at historical cost less accumulated depreciation. Impairment losses are recorded when indicators of impairment, such as plant closures, are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. The Company continually reviews for such impairment and believes that PP&E is being carried at its appropriate value.

Accounting for income taxes requires estimates of future 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. If realization is in doubt because of uncertainty regarding future profitability or enacted tax rates, the Company provides a valuation allowance related to the asset. 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.

Pension and postretirement medical costs and obligations are dependent on

assumptions used by actuaries in calculating such amounts. 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. Actual results that differ from assumptions are accumulated and amortized over future periods.

Significant differences in actual experience or significant changes in assumptions would affect pension and other postretirement benefit costs and obligations.

Page 11 of 15

SAFE HARBOR STATEMENT

UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report on Form 10-Q, the fiscal 2005 Annual Report to

Stockholders, including the President's letter, and the 2005 Annual Report on Form 10-K, contain forward-looking statements about the Company's business, competition, sales, 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:

Risks Related to Reorganization: The Company continues to evaluate plans to

consolidate and reorganize some of its manufacturing and distribution

operations. There can be no assurance that the Company will be successful

in these efforts or that any consolidation or reorganization will result in

revenue increases or cost savings to the Company. The implementation of these reorganization measures may disrupt the Company's manufacturing and distribution activities, could adversely affect operations, and could result in asset impairment charges and other costs that will be recognized if and when reorganization or restructuring plans are implemented or obligations are incurred. If the Company is unable to maintain consistent profitability,

additional steps will have to be taken, including further plant consolidations and workforce and dividend reductions.

Risks Related to Technology: 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.

Risks Related to Foreign Operations: Approximately 40% of the Company's

sales and 20% of net assets relate to foreign operations. Foreign

operations are subject to special risks that can materially affect the

sales, profits, cash flows, and financial position of the Company, including

taxes and other restrictions on distributions and payments, currency

exchange rate fluctuations, political and economic instability, inflation,

minimum capital requirements, and exchange controls. In particular, the

Company's Brazilian operations, which constitute over half of the Company's

revenues from foreign operations, can be very volatile, changing from year

to year due to the political situation, currency exchange rates and the economy. As a result, the future performance of the Brazilian operations is inherently unpredictable.

Risks Related to Industrial Manufacturing Sector: 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 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.

Page 12 of 15

Risks Related to Shifts in Manufacturing: The Company's primary customers are in the manufacturing business and, in particular, in the metal working

industry. Manufacturing is shifting to low wage countries where the Company

does not have a substantial market presence. As a result, unless the Company

can penetrate these markets, the Company's sales and performance may be

adversely affected.

Risks Related to Competition: The Company's business is subject to direct

and indirect competition from both domestic and foreign firms. In

particular, low-wage foreign sources have created severe competitive pricing

pressures. Under certain circumstances, including significant changes in

U.S. and foreign currency relationships, such pricing pressures tend to

reduce unit sales and/or adversely affect the Company's margins.

Risks Related to Customer Concentration: Sales to the Company's two

biggest customers accounted for approximately 16% of revenues in the current quarter 2005. The Company has ended its relationship with W.W.Grainger, which was previously one of the three largest customers, during fiscal 2005.

The loss of any of the remaining customers or reductions in orders from those customers, including reductions due to market, economic or competitive conditions, or the failure of the Company to replace the Grainger sales could adversely affect business and results of operations. Indeed, the Company's major customers have, and may continue to, place pressure on the Company to reduce its prices. This pricing pressure may affect the Company's margins and revenues, and could adversely affect business and results of operations.

Risks Related to Insurance Coverage: The Company carries liability, property

damage, workers' compensation, medical, and other insurance coverages that

management considers adequate for the protection of its assets and

operations. There can be no assurance, however, that the coverage limits of

such policies will be adequate to cover all claims and losses. Such

uncovered claims and losses could have a material adverse effect on the

Company. The Company self-insures for health benefits and retains risk in

the form of deductibles and sublimits. Depending on the risk, deductibles

can be as high as 5% of the loss or $500,000.

Risks Related to Raw Material and Energy Costs: 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. During fiscal 2005, the cost of steel rose approximately 10%. Because of competitive pressures, the Company generally has not been able to pass on these increases to the customer resulting in reduction to the gross margins. 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.

Risks Related to Stock Market Performance: Although the Company's domestic

defined benefit pension plan is significantly overfunded, a significant

(over 30%) drop in the stock market, even if short in duration, could cause

the plan to become temporarily underfunded and require the temporary

reclassification of prepaid pension cost on the balance sheet from an asset

to a contra equity account, thus reducing stockholders' equity and book

value per share.

Page 13 of 15

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT 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. At September 2005 and 2004, the Company was not a party to any derivative arrangement and the Company does not engage in trading, market-making or other speculative activities in the derivatives markets. The Company does not enter into long-term supply contracts with either fixed prices or quantities. The Company does not engage in regular hedging activities to minimize the impact of foreign currency fluctuations. Net foreign monetary assets are approximately $4 million.

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 (primarily variable rate investments of $21.3 million and debt of $3.4 million at September 24, 2005) or the cash flows or future earnings associated with those financial instruments. A 10% change in interest rates would impact the fair value of the Company's fixed rate investments of approximately $2.3 million by $30,000.

Item 4. CONTROLS AND PROCEDURES

The Company's management, under the supervision and with the participation of the Company's President and Chief Executive Officer and Chief Financial

Officer, have evaluated the Company's disclosure controls and procedures as of September 24, 2005, and they have concluded that these controls and

procedures are effective. There have been no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1 - Legal Proceedings

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Summary of Stock Repurchases:

A summary of the Company's repurchases of shares of its common stock for the

three months ended September 24, 2005 is as follows:

ISSUER PURCHASES OF EQUITY SECURITIES

Shares Purchased Shares yet to be

Shares Average Under Announced Purchased Under

Period Purchased Price Programs Announced Programs

6/26/05-

7/30/05 none none

7/31/05-

8/27/05 none none

8/28/05-

9/24/05 10,000 $15.95 none none

Page 14 of 15

Item 4. Submission of Matters to a Vote of Security Holders.

(a) The annual meeting of shareholders was held on October 12, 2005.

Abstentions

Votes Votes and Broker

For Withheld Non-votes

Class A shares voting as separate class:

Ralph G. Lawrence 4,942,602 41,952 N/A

Class A and B shares voting together:

Antony McLaughlin 12,864,887 710,657 N/A

Stephen F. Walsh 13,310,460 265,084 N/A

Item 6. Exhibits and Reports on Form 8-K.

(a)

Exhibits

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.

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.

(b) Reports on form 8-K

The following report on Form 8-K was filed with or furnished to

the SEC in the quarter covered by this report:

The Company filed a report on Form 8-K on July 18, 2005,

announcing that it changed the record date for its October 12, 2005 annual meeting of stockholders to August 17, 2005 from the previously announced date of July 29, 2005.

SIGNATURES

Pursuant to the requirements 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)

Date November 2, 2005 S/R. J. HYLEK

R. J. HYLEK (Treasurer and

(Chief Financial Officer)

Date November 2, 2005 S/S.G.THOMSON

S.G. THOMSON (Chief Accounting Officer)

Page 15 of 15

EX-31 2 ex31a0905.htm EXHIBIT 31A EXHIBIT 31

EXHIBIT 31.a

CERTIFICATIONS

I, Douglas A. Starrett, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of The L.S. Starrett

Company;

2. Based on my knowledge, this report does not contain any untrue statement

of a material fact or omit to state a material fact necessary to make the

statements made, in light of the circumstances under which such statements

were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial

information included in this report, fairly present in all material respects

the financial condition, results of operations and cash flows of the

registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for

establishing and maintaining disclosure controls and procedures (as defined

in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such

disclosure controls and procedures to be designed under our supervision, to

ensure that material information relating to the registrant, including its

consolidated subsidiaries, is made known to us by others within those

entities, particularly during the period in which this report is being

prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

procedures and presented in this report our conclusions about the

effectiveness of the disclosure controls and procedures, as of the end of

the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control

over financial reporting that occurred during the registrant's most recent

fiscal quarter (the registrant's fourth fiscal quarter in the case of an

annual report) that has materially affected, or is reasonably likely to

materially affect, the registrant's internal control over financial report;

and

5. The registrant's other certifying officer(s) and I have disclosed, based

on our most recent evaluation of internal control over financial reporting,

to the registrant's auditors and the audit committee of the registrant's

board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or

operation of internal control over financial reporting which are reasonably

likely to adversely affect the registrant's ability to record, process,

summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other

employees who have a significant role in the registrant's internal control

over financial reporting.

Date: November 2, 2005 /s/ Douglas A. Starrett

Douglas A. Starrett

Chief Executive Officer

EX-31 3 ex31b0905.htm EXHIBIT 31B EXHIBIT 31

EXHIBIT 31.b

CERTIFICATIONS

I, Randall J. Hylek, certify that: