STARRETT L S CO - Quarter Report: 2011 March (Form 10-Q)

starrett_10q-032611.htm

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	March 26, 2011

OR

o	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 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


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 filing requirements for the past 90 days. YES x NO o

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 definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act, (Check One):

Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

Common Shares outstanding as of	April 30, 2011

Class A Common Shares	5,914,376

Class B Common Shares	788,925

THE L. S. STARRETT COMPANY

CONTENTS

		Page No.

Part I. Condensed Consolidated Unaudited Financial Statements:

Item 1.	Financial Statements

	Consolidated Balance Sheets- March 26, 2011 (unaudited) and June 26, 2010	3

	Consolidated Statements of Operations- thirteen and thirty-nine weeks ended March 26, 2011 and March 27, 2010 (unaudited)	4

	Consolidated Statements of Cash Flows- thirty-nine weeks ended March 26, 2011 and March 27, 2010 (unaudited)	5

	Consolidated Statements of Stockholders' Equity - Thirty-nine weeks ended March 26, 2011 and March 27, 2010 (unaudited)	6

	Notes to Unaudited Consolidated Financial Statements	7-10

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11-13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	13

Item 4.	Controls and Procedures	14

Part II. Other information:

Item 1A.	Risk Factors	15

Item 6.	Exhibits	15

SIGNATURES

Part I.

Financial Information

Item 1.

Condensed Consolidated Unaudited Financial Statements

THE L. S. STARRETT COMPANY

Consolidated Balance Sheets

(in thousands of dollars except share data)

	March 26 2011 (unaudited)			June 26 2010 (audited)
ASSETS
Current assets:
Cash	$	21,834		$	20,478
Investments		-			1,250
Accounts receivable (less allowance for doubtful accounts of $1,092 and $607)		40,078			33,707
Inventory		55,837			46,156
Deferred income tax asset		3,589			3,300
Prepaid expenses, taxes and other current assets		7,854			5,510
Total current assets		129,192			110,401

Property, plant and equipment, at cost (less accumulated depreciation of $130,654 and $120,943)		55,072			56,529
Property held for sale		788			2,699
Intangible assets (less accumulated amortization of $5,910 and $4,973)		367			1,303
Other assets		692			280
Taxes receivable		2,807			2,807
Deferred income tax asset, net		26,101			26,115
Total assets	$	215,019		$	200,134

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt and current maturities	$	6,277		$	2,696
Accounts payable and accrued expenses		15,937			17,740
Accrued salaries and wages		5,381			5,037
Total current liabilities		27,595			25,473
Long-term taxes payable		9,290			9,132
Deferred income tax liabilities		2,341			2,436
Long-term debt		532			706
Postretirement benefit liability		32,971			30,005
Total liabilities		72,729			67,752

Stockholders' equity:
Class A Common $1 par (20,000,000 shares authorized) 5,910,263 outstanding on 3/26/2011 and 5,858,700 outstanding on 6/26/2010		5,910			5,859
Class B Common $1 par (10,000,000 shares authorized) 788,825 outstanding on 3/26/2011 and 821,204 outstanding on 6/26/2010		789			821
Additional paid-in capital		50,597			50,373
Retained earnings reinvested and employed in the business		125,086			122,724
Accumulated other comprehensive loss		(40,092	)		(47,395	)
Total stockholders' equity		142,290			132,382
Total liabilities and stockholders’ equity	$	215,019		$	200,134

See Notes to Unaudited Consolidated Financial Statements

THE L. S. STARRETT COMPANY

Consolidated Statements of Operations

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

	13 Weeks Ended						39 Weeks Ended
	3/26/2011			3/27/2010			3/26/2011			3/27/2010

Net sales	$	58,763		$	48,643		$	173,592		$	139,751
Cost of goods sold		39,821			33,110			117,300			98,285

Gross margin		18,942			15,533			56,292			41,466
% of Net sales		32.2	%		31.9	%		32.4	%		29.7	%

Selling and general expense		18,049			14,600			51,801			43,312
Gain on sale of building		(1,350	)		-			(1,350	)		-

Operating income (loss)		2,243			933			5,841			(1,846	)

Other income (expense)		(44	)		108			493			(534	)

Earnings (loss) before income taxes		2,199			1,041			6,334			(2,380	)

Income tax expense		494			862			2,500			884

Net earnings (loss)	$	1,705		$	179		$	3,834		$	(3,264	)



Basic and diluted earnings (loss) per share	$	0.25		$	0.03		$	0.57		$	(0.49	)

Average outstanding shares used in per share calculations (in thousands):
Basic		6,698			6,673			6,691			6,663
Diluted		6,724			6,687			6,712			6,663

Dividends per share	$	0.08		$	0.06		$	0.22		$	0.24

See Notes to Unaudited Consolidated Financial Statements

THE L. S. STARRETT COMPANY

Consolidated Statements of Cash Flows

(in thousands of dollars)(unaudited)

	39 Weeks Ended
	3/26/2011			3/27/2010

Cash flows from operating activities:
Net earnings (loss)	$	3,834		$	(3,264	)
Gain in sale of building		(1,350	)		-
Non-cash operating activities:
Depreciation		7,010			6,795
Amortization		936			902
Fixed asset impairment		-			130
Net long-term tax payable		107			(453	)
Deferred taxes		(12	)		(623	)
Unrealized transaction (gains)/losses		(137	)		(222	)
Retirement benefits		2,727			2,229
Equity method loss on investment in private software development company		541			-
Working capital changes
Receivables		(3,308	)		(4,441	)
Inventories		(7,076	)		13,855
Other current assets		(2,298	)		510
Other current liabilities		(2,887	)		2,474
Prepaid pension cost and other		77			(116	)
Net (used in) by operating activities		(1,836	)		17,776

Cash flows from investing activities:
Additions to property, plant and equipment		(4,051	)		(5,914	)
Decrease in investments		1,250			618
Investment in private software development company		(950	)		-
Proceeds from sale of building		3,262			-
Earn-out paid for Kinemetric Engineering		-			(110	)
Net cash (used in) investing activities		(489	)		(5,406	)

Cash flows from financing activities:
Proceeds from short-term borrowings		4,887			13,982
Short-term debt repayments		(1,303	)		(19,233	)
Proceeds from long-term borrowings		-			129
Long-term debt repayments		(202	)		(523	)
Proceeds from common stock issued		196			305
Dividends paid		(1,472	)		(1,599	)
Net cash provided by (used in) financing activities		2,106			(6,939	)

Effect of exchange rate changes on cash		1,575			(450	)

Net increase in cash		1,356			4,981
Cash, beginning of period		20,478			10,248
Cash, end of period	$	21,834		$	15,229

Supplemental cash flow information:

Interest paid	$	245	$	1,537
Taxes paid, net	$	3,357	$	880

See Notes to Unaudited Consolidated Financial Statements

THE L. S. STARRETT COMPANY

Consolidated Statements of Stockholders' Equity

For the Thirty-nine Weeks Ended March 26, 2011 and March 27, 2010

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

	Common Stock Out-standing ($1 Par)					Additional Paid-in		Retained			Accumulated Other Comprehensive
	Class A		Class B			Capital		Earnings			Loss			Total
Balance June 27, 2009	$	5,770	$	869		$	49,984	$	127,707		$	(41,452	)	$	142,878
Comprehensive income (loss):
Net loss									(3,264	)					(3,264	)
Unrealized net gain on investments												5			5
Translation loss, net												2,615			2,615
Total comprehensive loss															(644	)
Dividends ($.24 per share)									(1,599	)					(1,599	)
Treasury shares:
Issued		33					261								294
Issuance of stock under ESPP				2			59								61
Conversion		32		(32	)										-

Balance March 27, 2010	$	5,835	$	839		$	50,304	$	122,844		$	(38,832	)	$	140,990

Balance June 26, 2010	$	5,859	$	821		$	50,373	$	122,724		$	(47,395	)	$	132,382
Comprehensive income:
Net income									3,834						3,834
Minimum pension liability, net												118			118
Translation gain, net												7,185			7,185
Total comprehensive income															11,137
Dividends ($0.22 per share)									(1,472	)					(1,472	)
Treasury shares:
Issued		17					156								173
Issuance of stock under ESPP				2			68								70
Conversion		34		(34	)										-

Balance March 26, 2011	$	5,910	$	789		$	50,597	$	125,086		$	(40,092	)	$	142,290

Cumulative Balance:
Translation loss											$	(4,386	)
Amounts not recognized as a component of net periodic benefit cost												(35,706	)
											$	(40,092	)

See Notes to Unaudited Consolidated Financial Statements

THE L. S. STARRETT COMPANY

Notes to Unaudited Consolidated Financial Statements

Note 1: Basis of Presentation

In the opinion of management, the accompanying unaudited, consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of March 26, 2011 and June 26, 2010; the results of operations for the thirteen and thirty-nine weeks ended March 26, 2011 and March 27, 2010, the cash flows for the thirty-nine weeks ended March 26, 2011 and March 27, 2010; and changes in stockholders' equity for the thirty-nine weeks ended March 26, 2011 and March 27, 2010.

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 26, 2010, and these financial statements should be read in conjunction with said Annual Report on Form 10-K.

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. The second footnote to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended June 26, 2010 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.

Note 2: Investments

The Company has categorized its financial assets, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. 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 recorded on the balance sheets 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 (examples include active exchange-traded equity securities and most U.S. Government and agency securities).

As of March 26, 2011 and June 26, 2010, the Company’s Level 1 financial assets were as follows (in thousands):

	Level 1
	3/26/2011		6/26/2010
International Bonds Puerto Rican debt obligations		-		1,250
		-		1,250

As of March 26, 2011 and June 26, 2010, the Company did not have any level 2 or 3 assets.

Note 3: Inventory

Inventory consists of the following:

		March 26 2011			June 26 2010
Raw Material and Supplies		$	30,632		$	27,251
Goods in Process and Finished Parts			23,862			19,136
Finished Goods			26,707			24,960
			81,201			71,347
	LIFO Reserve		(25,364	)		(25,191	)
	Net Inventory	$	55,837		$	46,156

LIFO inventories were $14.4 million and $12.3 million at March 26, 2011 and June 26, 2010, respectively, such amounts being approximately $25.4 million and $25.2 million respectively, less than if determined on a FIFO basis. The use of LIFO, as compared to FIFO, on a year-to-date third quarter basis resulted in a $0.1 million increase in cost of sales in fiscal 2011 compared to a $6.9 million reduction in cost of sales in fiscal 2010.

Note 4: Pension and Post Retirement Benefits

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

	Thirteen Weeks Ended March						Thirty-nine Weeks Ended March
	2011			2010			2011			2010
Service cost	$	575		$	484		$	1,724		$	1,457
Interest cost		1,618			1,567			4,847			4,720
Expected return on plan assets		(1,867	)		(1,775	)		(5,594	)		(5,346	)
Amortization of prior service cost		158			95			472			288
Amortization of unrecognized actuarial loss		680			701			2,040			2,104
	$	1,164		$	1,072		$	3,489		$	3,223

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

	Thirteen Weeks Ended March						Thirty-nine Weeks Ended March
	2011			2010			2011			2010
Service cost	$	92		$	85		$	276		$	254
Interest cost		151			169			453			508
Amortization of prior service benefit		(226	)		(226	)		(679	)		(679	)
Amortization of unrecognized actuarial loss		7			-			21			-
	$	24		$	28		$	71		$	83

Note 5: Debt

Debt, including capitalized lease obligations, is comprised of the following (in thousands):

	March 26, 2011		June 26, 2010
Short-term and current maturities
Loan and Security Agreement	$	6,000	$	1,700
Short-term foreign credit facility		41		738
Capitalized leases		236		258
	$	6,277	$	2,696
Long-term debt
Capitalized leases	$	532	$	706
	$	6,809	$	3,402

The material financial covenants of the Loan and Security Agreement are 1) achieve a minimum EBITDA of $3.5 million on a trailing twelve month basis, 2) achieve a minimum Tangible Net Worth of $130 million excluding any pension liability, 3) incur no more than $10.0 million for capital expenditures on a fiscal year basis, and 4) maintain a Debt Service Coverage Ratio of a minimum of 1:25 to 1. As of March 26, 2011, the Company was in compliance with each of these financial covenants. The effective interest rate on the Loan and Security agreement through March 26, 2011 was 2.3%.

Note 6: Income Tax

The Company is subject to U.S. federal income tax and various state, local and international 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.

The Company has substantially concluded all U.S. federal income tax matters for years through fiscal 2006. As of March 26, 2011, we do not have any income tax audits in progress in the various federal, local and international jurisdictions in which we operate. We do have one state audit in process. In international jurisdictions including Argentina, Australia, Brazil, Canada, China, UK, Germany, New Zealand, and Mexico, which comprise a significant portion of the Company’s operations, the years that may be examined vary, with the earliest year being 2004.

The effective tax rate through the third quarter of fiscal 2011 was 39.5%. Discrete items included in the effective tax rate were an Argentinean valuation allowance of $462,000 recorded in the second quarter and a United Kingdom tax rate differential of $112,000 recorded in the first quarter partially offset by a favorable adjustment related to state net operating loss of $261,000 recorded in the third quarter.

The Company has identified no new uncertain tax positions during the thirty-nine week period ended March 26, 2011 for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

No valuation allowance has been recorded for the domestic federal net operating losses (NOL) as the Company continues to believe that based on forecasted future taxable income and certain tax planning strategies available, it is more likely than not that it will be able to utilize the federal NOL

Note 7: Fair Value

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate value.

Cash and short term instruments

The carrying amount approximates fair value because of the short maturity of those investments

Investments

The fair value of some investments are estimated on quoted market prices for those or similar investments.

Short and long-term debt

The fair value of the Company’s short and long term debt is estimated based on quoted market prices for corporate debt having similar characteristics or on the current rates offered to the Company for debt of the same remaining maturities.

The estimated fair value of the Company’s financial instruments is as follows in thousands (000):

	March 26, 2011				June 26, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Cash	$	21,834	$	21,834	$	20,478	$	20,478
Short-term debt		6,277		6,277		2,696		2,696
Investments		-		-		1,250		1,250
Long-term debt		532		532		706		706

Note 8: Investments

The Company entered into an investment agreement with a private software development company in the fourth quarter of fiscal 2010. Under the agreement the Company is scheduled to invest $1.5 million over twelve to eighteen months and will receive 36% equity in the software development company. The Company has invested $1.2 million through the third quarter of fiscal 2011 and has recorded a $0.5 million loss under the equity method of accounting, which is included in other income (expense) in the Consolidated Statement of Operations. The $0.7 million net carrying value of the investment as of March 26, 2011 is included in other long term assets in the Consolidated Balance Sheet.

Note 9: Subsequent Events

The Company has evaluated events occurring subsequent to March 26, 2011 through the date of issuance of the financial statements and determined there were no material subsequent events to be disclosed.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

THREE MONTHS ENDED March 26, 2011 and March 27, 2010

Overview

Net sales increased $10.1 million or 21% from $48.7 million to $58.8 million. A weaker U. S. dollar translated into a $1.5 million of the revenue increase. Operating income improved $1.3 million due to the gain on the sale of a building. A $3.4 million improvement in gross margin was offset by a $3.4 million increase in selling and general expenses. Net income for fiscal 2011was $1.7 million ,$0.25 per share, compared to $0.2 million ,$0.03 per share in fiscal 2010, primarily due to improved profits and a lower effective tax rate.

Net Sales

Net sales in North America increased $4.0 million or 15% from $26.3 million to $30.3 million as strong gains in the industrial sector, particularly in precision tools, saws and capital equipment, more than offset declines in the construction markets. International net sales increased $6.1 million or 27% from $22.4 million to $28.5 million, with gains in Latin America, Europe and Asia.

Gross Margin

Gross margin improved $3.4 million from $15.5 (31.9% of revenue) million to $18.9 (32.2% of revenue) million, with North America and International posting gains of $0.3 million and $3.1 million, respectively. North American gross margins as a percentage of revenue declined 3.2% from 31.6% to 28.4% due the comparative impact of LIFO inventory levels, which reduced cost of sales in fiscal 2010 while increasing cost of sales in fiscal 2011. International gross margins improved 4.5% from 32.1% to 36.6% as a result of improved pricing and efficiencies in Brazil.

Selling and General Expenses

Selling and general expenses increased $3.4 million or 23% from $14.6 million to $18.0 million with North America and International posting increases of $1.6 million and $1.8 million, respectively. The North American increase reflects increased wages related to the restoration of a 10% reduction in management salaries; higher commissions based upon revenue improvement; higher employee benefits costs; and the amortization expense of the new ERP system. Higher selling expenses were the key factor in the International increase.

Earnings Before Taxes

Earnings before taxes increased $1.2 million from $1.0 million in fiscal 2010 to $2.2 million in fiscal 2011. The improvement was primarily the result of the gain on the building sale as an improvement in gross margins was offset by an increase in selling and general expenses.

NINE MONTHS ENDED March 26, 2011 and March 27, 2010

Overview

Net sales increased $33.8 million or 24% from $139.8 million to $173.6 million. A weaker U. S. dollar translated into $3.8 million or 11% of the revenue gain. Operating income increased $7.7 million as an increase in gross margins of $14.8 million offset an increase in selling and general expenses of $8.5 million, contributing $6.3 million. The gain on the sale of the building represented an additional $1.4 million. Net income for fiscal 2011 was $3.8 million ,$0.57 per share, compared to a $3.3 million net loss ,$(0.49) per share, in fiscal 2010 as a result of improved profits and a lower effective tax rate.

Net Sales

Net sales in North America increased $15.4 million or 22% as a continued recovery in the industrial sector mitigated a decline in the construction market. Increased demand for precision tools, saws and metrology equipment from our Tru Stone and Kinemetric divisions led the North American performance. International net sales increased $18.4 million or 27% with Latin America and Europe posting gains of 30%and 22%, respectively.

Gross Margin

Gross margin increased $14.8 million or 36% with volume representing $10.0 million and improved margins accounting for $4.9 million. North American margins improved 2.2% from 26.4% to 28.6% largely due to a favorable product mix led by a strong recovery by the Tru Stone division. International margins improved 3.3% from 32.9% to 36.2% led by a 3.0% improvement in Latin America.

Selling and General Expenses

Selling and general expenses increased $8.5 million or 20% with North America and International each posting increases of $4.2 million. The North American increase reflects higher wages related to the restoration of a 10% reduction in management salaries; higher commissions based upon revenue growth; increased employee benefits costs; and the amortization expense of the new ERP system. Higher selling expenses were the prime factor resulting in the International expense increase.

Other Income/(Expense)

Other income/(expense) increased $1.0 million from a $0.5 million expense in fiscal 2010 to income of $0.5 million in fiscal 2011 due to higher interest income, including $0.5 million related to settlement of a non-income tax lawsuit with the Brazilian government recorded in the second quarter of fiscal 2011. The fiscal 2011 interest income of $1.0 million more than offset a $0.5 million equity loss in a private software company.

Earnings Before Taxes

Earnings before taxes increased $8.7 million from a loss of $2.4 million in fiscal 2010 to a profit of $6.3 million in fiscal 2011. The improvement was the result of a $7.7 million gain in operating income and a $1.0 million favorable swing in other income.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows (in thousands)	Thirty-nine Weeks
	3/26/2011			3/27/2010

Cash (used in) operations	$	(1,836	)	$	17,776
Cash (used in) investing activities		(489	)		(5,406	)
Cash provided by (used in) financing activities		2,106			(6,939	)
Effect of exchange rates changes on cash		1,575			(450	)

Net increase in cash	$	1,356		$	4,981

Cash increased $1.4 million as increased borrowings and favorable foreign exchange more than offset higher working capital requirements. The $19.6 million swing in cash provided by operations from a $17.8 million gain in fiscal 2010 to $1.8 million deficit in fiscal 2011 was primarily due to the economic recovery resulting in a net increase in inventories of $20.9 million between fiscal years. Cash used in investing activities declined $4.9 million principally reflecting the expenditures for the new ERP system in fiscal 2010 and proceeds from the building sale in fiscal 2011. The cash provided from financing activities increased $9.1 million reflecting a net $5.3 million in short-term debt repayments in fiscal 2010 versus a net increase in debt of $3.6 million in fiscal 2011. The change in debt position between fiscal years is a function of the economic conditions from recession in fiscal 2010 to recovery in fiscal 2011.

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 maintain consistent profitability, additional steps will be taken in order to maintain liquidity, including plant consolidations, work force and dividend reductions. In addition to its cash, the Company maintains a $23 million Loan and Security agreement, of which, $6.0 million was outstanding as of March 26, 2011. This Loan and Security agreement matures as of April 30, 2012.

INFLATION

The Company has experienced modest inflation relative to its material cost, much of which cannot be passed on to the customer through increased prices.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any material off-balance sheet arrangements.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There have been no material changes in qualitative and quantitative disclosures about market risk from what was reported in our Annual Report on Form 10-K for the fiscal year ended June 26, 2010.

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, has evaluated the Company's disclosure controls and procedures as of March 26, 2011, and they have concluded that our disclosure controls and procedures were effective as of such date. All information required to be filed in this 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 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Management’s remediation efforts related to the material weakness that existed as of June 26, 2010, and noted in Item 9A of the Company’s 2010 Annual Report on Form 10-K filed on September 21, 2010, are not complete as of March 26, 2011. The plan includes recruiting additional financial resources and correcting the reporting and control problems associated with the fourth quarter fiscal 2010 ERP implementation. An update as to the status of managements’ efforts is listed below.

	o	The Company completed the development of an improved financial reporting framework which will facilitate a uniform approach to consolidated and subsidiary financial reporting and analysis. This project was completed in the second quarter of fiscal 2011.
	o	The Company has added experienced financial resources to its staff and will continue to evaluate further requirements. The plan to correct the major financial reporting and control problems began in October of 2010 and is expected to be completed by the fourth quarter fiscal 2011.

PART II.

OTHER INFORMATION

Item 1A.

Risk Factors

SAFE HARBOR STATEMENT

UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report on Form 10-Q contains 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 securities analysts and investors. The Company is subject to risks that could cause actual events to vary materially from such forward-looking statements. You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results set forth under Item 1A. “Risk Factors” in our Form 10-K for the year ended June 26, 2010. There have been no material changes from the factors disclosed in our Form 10-K for the year ended June 26, 2010.

In addition to the risk factors outlined in Form 10-K, management has developed a plan to remediate material weaknesses over financial reporting, which is described in Item 4 in this Form 10-Q. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the Securities and Exchange Commission.

Item 6.

Exhibits

31a	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31b	Certification of Principal Financial Officer pursuant to Section 202 of the Sarbanes-Oxley Act of 2002, filed herewith.

32	Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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	May 4 , 2011	S/R. Douglas A. Starrett
		Douglas A. Starrett - President and CEO

Date	May 4 , 2011	S/R. Francis J. O’Brien
		Francis J. O’Brien - Treasurer and CFO