THE L.S. STARRETT COMPANY
December 3, 2004
Mr. Rufus Decker, Accounting Branch Chief
U.S. Securities and Exchange Commission
Division of Corporate Finance
Washington, D.C. 20549-0510
RE: Form 10-K for the fiscal year ended June 26, 2004
Form 10-Q for the period ended September 25, 2004
File No. 1-367
Dear Mr. Decker:
We have reviewed your comment letter dated November 9, 2004 and will adjust
future filings to reflect the Staff's comments where applicable. In
connection with these responses to your comments, and as requested, The L.S.
Starrett Company (the "Company") acknowledges 1) that it is responsible for
the adequacy and accuracy of the disclosures in its filings, 2) that staff
comments or changes to disclosures in response to staff comments do not
foreclose the Commission from taking any action with respect to the filing,
and 3) that Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States. Below are detailed responses keyed to
your letter. This response is being submitted by the extended date
previously agreed to with Ernest Greene of the SEC on November 24, 2004.
1. Comment: Where a comment below requests additional disclosures or other
revisions to be made, please show us in your supplemental response what the
revisions will look like. These revisions should be included in your future
filings.
1. Response: The Company will make the agreed to additional disclosures and
revisions in future filings and, where appropriate, has provided examples of
proposed revisions.
2. Comment: You are presenting non-GAAP financial measures in your results
of operations when you discuss your net income and other amounts excluding
unusual charges. Whenever a non-GAAP financial measure is included in a
filing you should include the following:
(a) a presentation, with equal or greater prominence, of the most directly
comparable GAAP measure,
(b) a reconciliation (by schedule or other clearly understandable method) of
the differences between the non-GAAP measure and the most directly
comparable GAAP measure,
(c) a statement disclosing the reasons why the presentation of the non-GAAP
financial measure provides useful information to investors and,
(d) a statement disclosing how management uses non-GAAP financial measure.
Please provide the appropriate supporting disclosures regarding measures
that eliminate certain charges or credits that are regarded as non-recurring
or unusual. See Question 9 of our Frequently Asked Questions Regarding Non-
GAAP Financial Measures dated June 13, 2003 and Item 10 (e)(1)(i)(A) to (D)
of Regulation S-K2.
2. Response: The Company believes it complied with the requirement for equal
prominence and reconciliation to the comparable GAAP measure by providing
the table at the end of the "2004 versus 2003" section of MD&A (page 8 of its
10-K for fiscal 2004). The Company believes that the nature of the unusual
items themselves justifies their inclusion in the table because they are
individually material and not expected to continue. For example, the CMM
investigation is believed to be the only such investigation that has
occurred in the Company's history. There were four material events that were
Page 1 of 6
highlighted to allow the reader to better evaluate the results of operations
in much the same way as management evaluates results. In the Company's
judgment, the items are truly unusual. The entire goodwill balance was
written off, the CMM investigation was settled, it is very unlikely that
additional LIFO inventory liquidation profits will be realized, and the real
estate gain was the only transaction of its type in at least 10 years. In
future filings, the Company will carefully consider how it highlights events
such as these and will do so only to enhance overall understanding of the
operations of the Company and will further elaborate on the reasons for the
disclosures.
3. Comment: Please explain to us how your discussion of unusual charges in
your Management's Discussion and Analysis section meets the requirements of
Item l0(e)(1)(ii)(B) of Regulation S-K.
3. Response: The unusual items that have been disclosed and removed from net
income in our disclosure all relate to single, material, infrequent and/or
unusual events even though the CMM investigation and the inventory reduction
initiative happened to span two years. With the possible exception of the
LIFO inventory liquidation profits, none of these items relates to the
regular manufacturing and distribution operations of the Company. In
addition, the LIFO inventory liquidation profits were highlighted because
the Company believed unusual charges and unusual credits should both be
highlighted in order to have a balanced presentation.
4. Comment: Please consider revising your table of contractual cash
obligations to include the following:
(a) Estimated interest payments on your debt; and
(b) Planned funding of pension and other postretirement benefit obligations.
Because the table is aimed at increasing transparency of cash flow, we
believe these payments should be included in the table. Please also disclose
any assumptions you made to derive these amounts. If you choose not to
include these payments, a footnote to the table should clearly identify the
excluded items and provide any additional information that is material to an
understanding of your cash requirements.
4. Response: While Item 303(a)(5) of Regulation S-K does not appear to call
for the inclusion of interest and retirement obligations, the Company will
consider revising the table of contractual obligations or including a
footnote for interest and retirement payments. It may be difficult, however,
to enhance the readers understanding of these obligations since, unlike the
other obligation categories in the table, both these payment categories are
extremely difficult if not impossible to forecast accurately because they
are so sensitive to changes in market rate and investment performance
assumptions. Additional information covering both categories discussed above
is available to the reader elsewhere in the financial statements.
5. Comment: Please explain to us how your netting of cash flows related to
net change in long-term and short-term borrowings meets the requirements in
paragraph 13 of SFAS 95 for netting. Otherwise, please present the gross
changes in long-term and short-term borrowings.
5. Response: The netting of borrowings and repayments in the financing
section the cash flow statement was done because the amounts were considered
immaterial. In future filings the Company will adjust the wording and/or, if
material, present the transactions gross. The following table shows what the
gross presentation would have been (in thousands):
Page 2 of 6
2004 2003 2002
Short-term:
Borrowings 518 436
Repayments (188) (808) (4,050)
330 (372) (4,050)
Long-term:
Borrowings 741 1,009
Repayments (2,318) (3,000)
(1,577) (1,991)
6. Comment: Please explain to us how your netting of cash flows related to
other current assets and liabilities meets the requirements in paragraphs 12
and 13 of SFAS 95 for netting. Otherwise, please present the gross changes
in other current assets and liabilities separately.
6. Response: We have combined the presentation of the other current asset
and liability component because the elements are not individually meaningful
or significant by themselves. In future filings we will present other assets
and other liabilities on separate lines whenever it is determined that the
individual items are material.
7. Comment: Please disclose the accumulated balances for each classification
in your accumulated other comprehensive loss on the face of the balance
sheet, in the statement of stockholders' equity or in the notes to the
financial statements as required by paragraph 26 of SFAS 130.
7. Response: In future filings we will add lines as follows at the end of
the statement of stockholders' equity detailing the components of
accumulated other comprehensive income (loss)(in thousands):
Consisting of:
Translation losses (21,087)
Unrealized losses on investments (51)
Minimum pension liability (2,442)
(23,580)
8. Comment: For securities classified as available-for-sale, please disclose
the aggregate fair value, gross unrealized holding gains, gross unrealized
holding losses, and amortized cost basis by major security type as of each
date for which a statement of financial position is presented. In addition,
for each period for which the results of operations are presented, please
disclose the following:
a) The proceeds from sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales
b) The basis on which the cost was determined in computing realized gain or
loss
c) The gross gains and losses included in the earnings from transfers or
securities from available-for-sale category into the trading category
d) The change in net unrealized holding gain or loss on available-for-sale
securities that has been included in the separate component of shareholders'
equity during the period
e) The change in the net unrealized holding gain or loss on trading
securities that has been included in earnings during the period.
See paragraphs .19 and .21 of SFAS 115.
8. Response: All the Company's securities are considered available-for-sale,
and there is no transferring between available-for-sale and trading
securities. Most securities turn over daily or monthly. Unrealized gains and
losses are less than 1% of the value of the securities ($51,000 at June 26,
2004), which is not material, and the other disclosures above are either not
material or have been made in the statements of stockholders' equity. With
Page 3 of 6
the additional disclosure contemplated in item 7 above, we believe our
investment disclosures will address your concerns.
9. Comment: Please disclose the types of inventory that are accounted for
under the LIFO inventory method. In addition, please disclose the types of
inventory that are accounted for under the F1IFO inventory method.
9. Response: The use of the LIFO/FIFO inventory method is a function of
geography rather than type of inventory. Domestic (U.S.) inventories are on
LIFO and foreign inventories are on FIFO. For example, the same product
could be on LIFO in the U.S. and FIFO in Brazil or Scotland. We will make
this clearer in the inventory accounting policy footnote in future filings.
10. Comment: Please disclose how you account for shipping and handling costs
in your financial statements. Please tell us where your shipping and
handling charges that are billed to customers are included in the income
statement and also tell us where the costs incurred for shipping and
handling are classified in the income statement. See EITF 00-10.
10. Response: Billings to customers for the cost of freight on their
purchases, which approximate 0.7% of sales, have historically been netted
against the actual cost of freight out in sales because it was judged to be
immaterial. Beginning with the next fiscal quarter, the Company plans to
change its reporting prospectively. All such customer billings will be
recorded as revenue and all freight out as cost of sales. The Company will
disclose these amounts in the footnotes at least until all periods presented
are on the same basis. There is no effect on net income and the effect on
gross margins is approximately 0.5%.
11. Comment: Please include the tabular presentation for awards of stock-
based employee compensation as required by paragraph 45(c) of SFAS 123, as
amended by SFAS 148. See paragraph B13 of SFAS 148 for an illustration.
11. Response: The Company believes the tabular presentation for awards of
stock-based employee compensation is not necessary since the amounts
involved, which result solely from the Company's employee stock purchase
plan, which is the Company's only option plan, have historically not been
material as stated and demonstrated in the footnotes ($57,000 for fiscal
2004) although, were this to change, we would provide the tabular
presentation. We will endeavor in future filings to make it clear that the
Company has only one stock plan, which is an employee stock purchase plan,
and that the expense related to this plan is immaterial.
12. Comment: Please provide us with an analysis of your deferred tax assets
and liabilities by jurisdiction that shows how you netted your current
assets and liabilities by jurisdiction. Please provide us with a similar
analysis regarding your long-term deferred tax assets and liabilities by
jurisdiction. In addition, please include a reconciliation to the amounts
shown on your balance sheets at June 26, 2004 and June 28, 2003. Please
disclose what caused the $10 million current deferred tax asset as or June
26, 2004 and the $7 million current deferred tax asset as of June 28, 2003.
12. Response: Following is an analysis that addresses the questions
regarding current and long-term deferred taxes by jurisdiction as well as
the major components of each category. Note that the major components of
current deferred taxes are 1)foreign tax credit and operating loss
carryforwards and 2) valuation reserves that are not deductible for tax
purposes until realized (in thousands).
Page 4 of 6
Jurisdiction Domestic U.K. Brazil Total
Fiscal 2004
Current deferred:
FTC/NOL carryfowards 3,933 1,341 24 5,298
CMM investigation and
inventory reserves 2,907 2,907
Other invty reserves 2,275 2,275
Other (745) (65) 445 (365)
8,370 1,276 469 10,115
Long-term deferred:
Retiree benefits (7,744) 1,216 (6,528)
Depreciation (5,083) (1,021) (21) (6,125)
Other (974) (587) (1,561)
(13,801) (392) (21) (14,214)
Fiscal 2003
Current deferred:
FTC/NOL carryfowards 3,515 1,017 93 4,625
CMM investigation and
inventory reserves 813 813
Other invty reserves 1,243 1,243
Other 141 55 451 647
5,712 1,072 544 7,328
Long-term deferred:
Retiree benefits (7,614) 1,593 (6,021)
Depreciation (6,023) (1,038) (20) (7,081)
Other (1,007) (587) (1,594)
(14,644) (32) (20) (14,696)
13. Comment: Please include a more robust description of the plan(s)
including the general terms of awards under the plan, such as vesting
requirements and the maximum term of options granted. In addition, please
explain to us why no options would be exercisable at fiscal year ends if
options become exercisable exactly two years from the date of grant. Please
include the range of exercise prices for outstanding options in accordance
with SEAS 123, paragraph 48.
13. Response: The plan being described is a traditional qualified employee
stock purchase plan open to all domestic employees that allows them to buy
Company stock at the lower of 85% of its market price at date of grant or
date of exercise. It is a means for employees to buy Company stock at a
discount rather than an incentive stock option plan. The Company has no
incentive stock option plans. There are no vesting requirements and the term
is exactly two years as stated in the footnotes. Options to execute
purchases are exercisable only at the end of the two year period and, if not
exercised at that time, the options expire. In recent years, expiration
rates have been over 50%. In future filings we will add to the table the
exact grant prices parenthetically after "options granted" similar to what
we do after "options exercised." It does not seem to us to make sense to
disclose a specific range of exercise prices as of year end because the
exercise price is the "lower of" the grant price, which will be disclosed,
and 85% of the market value on the second anniversary of the grant, which is
unknown.
14. Comment: You have several pension plans, both defined benefit and
defined contribution, covering all of your domestic and most of your foreign
employees. However, you show both your US plans and foreign plans combined.
According to FAS 132, paragraph 38, disclosures about US plans may be
combined with those about foreign plans unless the benefit obligations of
the foreign plans are significant relative to your total obligation and
those plans use significantly different assumptions. Please support your
Page 5 of 6
combined treatment. Otherwise, please provide a disclosure that separates US
plans from foreign plans. See SPAS 132, paragraphs 7 and 38.
14. Response: The Company believes combined presentation of its foreign and
domestic defined benefit plans is appropriate for the following reasons. The
Company's foreign defined benefit plan represents approximately 25% of the
combined plans' assets and obligations and both the domestic and foreign
plans are actuarially mature. From an actuarial point of view, the
assumptions are similar and the costs and obligations are computed
consistently under SFAS 87. Assumption changes of similar magnitude in the
foreign and domestic plans will result in changes in costs and obligations
of similar relative magnitude and we therefore believe the assumptions
should be considered "similar."
15. Comment: You indicate that you are engaged in the single business of
producing and marketing industrial, professional and consumer products.
Based on your discussion in the Business section, Management's Discussion
and Analysis section and your website, it is unclear whether you have one
operating segment, as defined by paragraph 10 of SFAS 131, or you have
aggregated several operating segments into one reportable segment. Please
explain whether each of your divisions constitutes an operating segment, and
if not, why not. If more than one operating segment that has been aggregated
into one reportable segment, address how you have met each of the
aggregation criteria set forth in paragraph 17 of SFAS 131, including how
each operating segment has similar economic characteristics.
15. Response: The Company has (and is managed through) six manufacturing
plants or reporting units, which are in Scotland, Brazil, Athol MA,
Cleveland OH, Mt. Airy NC, and Charleston SC. Internal operating statements
used by the chief operating decision maker (the CEO) are prepared on the
basis of the operating results of each of these units, and the Company
believes these reporting units meet the aggregation criteria of SFAS 131.
They each produce tools primarily used by professionals in metal-working and
construction trades. The products are complementary and in many cases the
same product is produced in more than one of these plants. The production
processes are the same or similar in that they use metal as a raw material,
which is then converted to the end product by means of direct labor and
metal-working machinery. The Company's products are sold from these units
through a customer base that is capable of carrying the Company's full line
of products (primarily industrial distributors, but also Sears who sells
some of the Company's products, primarily measuring tapes, to the
construction trades). For these reasons, the Company believes it is
appropriate to report on the basis of one reporting segment although, as
discussed in the fiscal 2004 Form 10-K under "Reorganization/Restructuring
Plans" on page 11, the Company is in the process of experimenting with and
considering other organizational structures that could potentially lead to a
change in P&L responsibility and reporting if it is determined that these
potential changes will allow the Company to better meet the challenges of
the markets it serves. It is premature, however, to conclude at this time
that the Company will eventually have more than one segment.
16. Comment: Please address the comments above in your interim filings as
well.
16. Response: The Company will apply the responses above in its future
interim filings.
Very truly yours,
The L.S. Starrett Company
cc: Steven Wilcox, Ropes & Gray by: Roger Wellington, Jr.
Austin Lydon, Deloitte & Touche Treasurer and CFO
Page 6 of 6