Sparton (SPA) 8-K Sparton Corporation Reports Fourth Quarter and Fiscal Year 2016 Financial Results

Media Contact:	Joe McCormack
	Sparton Corporation
	Email: ir@sparton.com
	Office: (847) 762-5800

FOR IMMEDIATE RELEASE

Sparton Corporation Reports Fourth Quarter and Fiscal Year 2016 Financial Results

SCHAUMBURG, IL. - September 6, 2016 - Sparton Corporation (NYSE: SPA) today announced financial results for its fourth quarter and fiscal year ended July 3, 2016.

Fourth Quarter Financial Results:

• Net sales of $107.0 million

• Gross profit margin of 20.0%

• SG&A expenses of $13.5 million, 12.6% of sales; $12.4 million, 11.6% on an adjusted basis

• Adjusted operating income of $5.9 million, a 5.5% adjusted operating margin

• Recognized an impairment of MDS Segment goodwill of $64.2 million

• Loss per share of ($4.30); Earnings per share of $0.50 on an adjusted basis

• Adjusted EBITDA of $10.0 million, 9.4% adjusted EBITDA margin

• Free cash flow of $26.0 million

• Borrowings under Credit Facility reduced $26.2 million from Q3 to $97.2 million

Fourth Quarter Highlights

• Announced the exploration of a potential sale of the Company

• Amended Credit Facility to provide additional flexibility

• 66 new program wins in the MDS Segment with expected annual revenue of $15 million when fully ramped up into production

• Total new program wins in the MDS Segment in fiscal 2016 of $61 million of expected annual revenue when fully ramped up into production

• $54 million award for the production of domestic sonobuoys

• $11 million in awards for the production of foreign sonobuoys

• Backlog of:

• $138 million in the MDS Segment

• $142 million in the ECP Segment principally including:

• $117 million in domestic sonobouys

• $6 million in foreign sonobouys

• $14 million in ruggedized displays

Fiscal Year 2016 Financial Results:

• Net sales of $419.4 million

• Gross profit margin of 19.1%

• SG&A expenses of $55.2 million, 13.2% of sales; $51.9 million, 12.4% on an adjusted basis

• Adjusted operating income of $16.3 million, a 3.9% adjusted margin

• Loss per share of ($3.91); Earnings per share of $1.56 on an adjusted basis

• Adjusted EBITDA of $33.5 million, adjusted EBITDA margin of 8.0%

• Free cash flow of $42.0 million

Joseph J. Hartnett, Interim President & CEO, commented, “Our fourth quarter has been a very active one with the ongoing exploration of a potential sale of the Company as well as continuing to implement operational and financial improvements. Our sales pipeline and new program wins continue to show traction as a result of our focus on organic growth initiatives. Additionally, we believe the Company is well on its way to building a business model that supports profitable revenue growth through new business development and improved operating performance. ”

Joe McCormack, Senior Vice President and CFO, commented, “We recognized an impairment of goodwill in our MDS Segment as a result of the underperformance of our Hunter Technology acquisition and our inability to achieve sufficient organic revenue growth to offset the loss of a large customer as well as revenue declines due to fluctuation in customer demand across the segment. While we are disappointed in the need for a goodwill write-off, we continue to have positive developments in our financial performance including continued quarter over quarter improvements in our revenues, continued reductions in our SG&A footprint, and strong free cash flows.”

SELECTED FINANCIAL DATA

	For the Quarters Ended									For Fiscal Year
	Q4 FY16			Q3 FY16			Q4 FY15			2016			2015
	(Dollars in thousands, except per share data)
Consolidated:
Net sales	$	106,967		$	102,175		$	126,393		$	419,362		$	382,125
Gross profit	21,422			19,067			28,090			80,148			74,814
Selling and administrative expenses	13,460			13,727			16,220			55,151			46,969
Impairment of goodwill	64,174			—			—			64,174			—
Operating income (loss)	(59,417		)	2,676			8,809			(51,789		)	17,252
Adjusted operating income (non-GAAP)	5,875			3,740			11,604			16,329			21,760
Earnings (loss) per share - diluted	(4.30		)	0.12			0.51			(3.91		)	1.10
Adjusted Earnings (loss) per share (non-GAAP)	0.50			0.34			0.81			1.56			1.74
EBITDA (non-GAAP)	(55,594		)	6,546			12,398			(36,021		)	28,647
Adjusted EBITDA (non-GAAP)	10,019			7,865			15,361			33,542			34,307
Adjusted EBITDA margin (non-GAAP)	9.4		%	7.7		%	12.2		%	8.0		%	9.0		%
Free cash flow	$	25,953		$	6,235		$	1,296		$	42,034		$	8,950
MDS Segment:
Gross sales	$	72,346		$	68,187		$	84,749		$	282,076		$	263,940
Intercompany sales	(3,627		)	(3,532		)	(6,592		)	(17,028		)	(17,756		)
Net sales	68,719			64,655			78,157			265,048			246,184
Gross profit	9,732			7,771			13,094			34,788			36,461
Selling and administrative expenses	3,155			3,608			6,744			14,621			11,934
Allocation of corporate expenses	2,281			2,242			1,886			9,192			6,681
Impairment of goodwill	64,174			—			—			64,174			—
Operating Income (loss)	(61,861		)	231			2,663			(61,813		)	9,535
Segment EBITDA, excluding goodwill impairment charge	7,597			5,235			7,244			24,424			25,335
ECP Segment:
Gross sales	$	38,262		$	37,566		$	48,305		$	154,559		$	136,315
Intercompany sales	(14		)	(46		)	(69		)	(245		)	(374		)
Net sales	38,248			37,520			48,236			154,314			135,941
Gross profit	11,690			11,296			14,961			45,360			38,353
Selling and administrative expenses	3,115			2,837			2,513			11,128			8,107
Allocation of corporate expenses	1,168			1,061			981			4,354			2,931
Operating Income	6,196			6,424			10,286			25,880			25,033
Segment EBITDA	8,009			8,140			12,027			32,821			29,602

Liquidity and Capital Resources

During the fourth quarter of 2016, the Company entered into Amendment #3 to its Credit Facility. This Amendment, among other things, reduced the facility from $275 million to $175 million and changed certain financial covenants to provide additional flexibility. As of July 3, 2016, the Company had $97 million borrowed and $77 million available under the facility.

Outlook

Mr. Hartnett concluded, "Looking forward, we expect the first quarter of fiscal year 2017 revenues to be in the range of $97 million to $101 million with a gross profit margin of approximately 18%. Segment revenues are expected to provide a similar relationship to this quarter's operating results." 

Conference Call

The Company will host a conference call on Wednesday, September 7, 2016 at 10:00 a.m. CDT/11:00 a.m. EDT to discuss its fourth quarter and fiscal year 2016 financial results. To participate, callers should dial (888) 222-5602. Participants should dial in at least 5 minutes prior to the start of the call. A Web presentation link, including the slide presentation which will accompany the call, will also be available at: http://tinyurl.com/gpa8376. A replay of the call will be available on Sparton’s Web site: http://www.sparton.com in the “Investors” section.

Non-GAAP Financial Measures

In addition to reporting financial results in accordance with U.S. generally accepted accounting principles (“GAAP”), Sparton Corporation has provided certain non-GAAP financial measures as additional information for its operating results. These measures have not been prepared in accordance with GAAP and may be different from measures used by other companies. Whenever we use non-GAAP financial measures, we designate these measures, which exclude the effects of certain expenses and income, as “adjusted” and provide a reconciliation of non-GAAP financial measures to the most closely applicable GAAP financial measure. The non-GAAP financial measures eliminate or add certain items of expense and income from cost of goods sold, total operating expense, other income (expense) and income taxes. Management believes that this presentation is helpful to investors in evaluating the current operational and financial performance of our business and facilitates comparisons to historical results of operations. Management discloses this information along with a reconciliation of the comparable GAAP amounts to provide access to the detail and nature of adjustments made to GAAP financial results. While some of these excluded items have been periodically reported in our statements of operations, their occurrence in future periods depends on future business and economic factors, among other evaluation criteria, and the occurrence of such events and factors may frequently be beyond the control of management.

When we calculate adjusted earnings per share, adjusted EBITDA and other adjustments to the statements of income, we exclude certain expenses and income, including discrete tax benefits, because we believe that they are not related directly to the underlying performance of our fundamental business operations. We exclude these measures when reviewing financial results and for business planning. Although these events are reflected in our GAAP financial statements, these transactions may limit the comparability of our fundamental operations with prior and future periods. We believe EBITDA and adjusted EBITDA are commonly used by financial analysts and others in the industries in which the Company operates and, thus, provide useful information to investors. The Company does not intend, nor should the reader consider, EBITDA or adjusted EBITDA to be an alternative to operating income, net income, net cash provided by operating activities or any other items calculated in accordance with GAAP. The Company's definition of adjusted EBITDA may not be comparable with other companies. Accordingly, the measurement has limitations depending on its use.

About Sparton Corporation

Sparton Corporation (NYSE:SPA), now in its 117th year, is a provider of complex and sophisticated electromechanical devices with capabilities that include concept development, industrial design, design and manufacturing engineering, production, distribution, field service and refurbishment. The primary markets served are Medical & Biotechnology, Military & Aerospace and Industrial & Commercial. Headquartered in Schaumburg, IL, Sparton currently has thirteen manufacturing locations and engineering design centers worldwide. Sparton's Web site may be accessed at www.sparton.com.

Safe Harbor and Fair Disclosure Statement

Safe Harbor statement under the Private Securities Litigation Reform Act of 1995: To the extent any statements made in this release contain information that is not historical, these statements are essentially forward-looking and are subject to risks and uncertainties, including the difficulty of predicting future results, the regulatory environment, fluctuations in operating results and other risks detailed from time to time in Sparton’s filings with the Securities and Exchange Commission (SEC). The matters discussed in this press release may also involve risks and uncertainties concerning Sparton’s services described in Sparton’s filings with the SEC. In particular, see the risk factors described in Sparton’s most recent Form 10K and Form 10Q. Sparton assumes no obligation to update the forward-looking information contained in this press release.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended (Unaudited)										For Fiscal Years
	July 3, 2016					June 30, 2015					July 3, 2016					June 30, 2015
	(Dollars in thousands, except per share data)
Net sales	$	106,967		100.0	%	$	126,393		100.0	%	$	419,362		100.0	%	$	382,125		100.0	%
Cost of goods sold	85,545			80.0	%	98,303			77.8	%	339,214			80.9	%	307,311			80.4	%
Gross profit	21,422			20.0	%	28,090			22.2	%	80,148			19.1	%	74,814			19.6	%
Selling and administrative expenses	13,460			12.6	%	16,220			12.8	%	55,151			13.2	%	46,969			12.3	%
Impairment of goodwill	64,174			60.0	%	—			—	%	64,174			15.3	%	—			—	%
Other operating expenses	3,205			3.0	%	3,061			2.4	%	12,612			3.0	%	10,593			2.8	%
Operating income (loss)	(59,417		)	(55.5	)%	8,809			7.0	%	(51,789		)	(12.3	)%	17,252			4.5	%
Interest expense and other	(1,101		)	(1.0	)%	(865		)	(0.7	)%	(3,710		)	(0.9	)%	(2,297		)	(0.6	)%
Income (loss) before income taxes	(60,518		)	(56.6	)%	7,944			6.3	%	(55,499		)	(13.2	)%	14,955			3.9	%
Income taxes	(18,437		)	(17.2	)%	2,846			2.3	%	(17,216		)	(4.1	)%	3,966			1.0	%
Net income (loss)	$	(42,081	)	(39.3	)%	$	5,098		4.0	%	$	(38,283	)	(9.1	)%	$	10,989		2.9	%
Income (Loss) per share of common stock:
Basic	$	(4.30	)			$	0.52				$	(3.91	)			$	1.10
Diluted	(4.30		)			0.51					(3.91		)			1.10
Weighted average shares of common stock outstanding:
Basic	9,791,212					9,792,873					9,786,315					9,874,441
Diluted	9,791,212					9,794,603					9,786,315					9,885,961

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

	For fiscal years
	2016			2015
	($ in thousands)
Cash Flows from Operating Activities, net of
changes in working capital	$	22,084		$	26,161
Net changes in working capital	26,048			(21,624		)
Cash Flows from Operating Activities	48,132			4,537
Cash Flows from Investing Activities:
Business acquisitions	178			(97,319		)
Capital expenditures	(6,098		)	(5,802		)
Other investing activities	1,078			(986		)
Cash Flows from Investing Activities	(4,842		)	(104,107		)
Cash Flows from Financing Activities:
Net change in Credit Facility	(57,294		)	113,500
Other financing activities	(778		)	(7,044		)
Cash Flows from Financing Activities	(58,072		)	106,456
Change in Cash and Cash Equivalents	(14,782		)	6,886
Cash and Cash Equivalents - Beginning	14,914			8,028
Cash and Cash Equivalents - Ending	$	132		$	14,914

CONDENSED CONSOLIDATED BALANCE SHEETS

	July 3, 2016		June 30, 2015
	($ in thousands)
Assets
Cash and cash equivalents	$	132	$	14,914
Accounts receivable, net	46,759		70,974
Inventories	77,871		79,503
Prepaid and other current assets	5,844		5,488
Property, plant and equipment, net	33,320		32,608
Goodwill	12,663		74,175
Other intangible assets, net	36,933		45,825
Other assets	32,476		14,064
Total assets	$	245,998	$	337,551
Liabilities and Shareholders’ Equity
Accounts payable	$	38,290	$	29,948
Accrued expenses	11,512		12,355
Other current liabilities	12,637		16,328
Credit facility	97,206		154,500
Capital lease obligations	332		—
Environmental	6,117		7,117
Pension	1,276		424
Shareholders’ Equity	78,628		116,879
Total Liabilities and Shareholders’ Equity	$	245,998	$	337,551

RECONCILIATION OF NON-GAAP MEASURES

ADJUSTED EPS (NON-GAAP)	For the Quarters Ended							For the Fiscal Year Ended
	Q4 FY16			Q3 FY16		Q4 FY15		2016			2015
	(Dollars in thousands, except per share data)
Earnings per share - diluted, as reported	$	(4.30	)	$	0.12	$	0.51	$	(3.91	)	$	1.10
Nonrecurring items	4.65			0.06		0.14		4.83			0.21
Amortization of intangible assets	0.15			0.16		0.16		0.64			0.43
Adjusted earnings per share	$	0.50		$	0.34	$	0.81	$	1.56		$	1.74
Adjustments, net of tax:
Impairment of goodwill	$	44,766		$	—	$	—	$	44,766		$	—
Costs related to potential sale of the Company	436			280		—		716			—
Restructuring costs	107			73		—		2,070			—
Other nonrecurring adjustments, net	184			301		1,376		(222		)	2,077
Total nonrecurring	45,493			654		1,376		47,330			2,077
Amortization of intangible assets	1,474			1,535		1,548		6,235			4,284
Total adjustments	$	46,967		$	2,189	$	2,924	$	53,565		$	6,361

ADJUSTED EBITDA (NON-GAAP)	For the Quarters Ended									For the Fiscal Year Ended
	Q4 FY16			Q3 FY16			Q4 FY15			2016			2015
	(Dollars in thousands)
Net income (loss)	$	(42,081	)	$	1,136		$	5,098		$	(38,283	)	$	10,989
Interest expense	1,059			956			894			3,803			2,456
Income taxes	(18,437		)	612			2,846			(17,216		)	3,966
Depreciation and amortization	3,865			3,842			3,560			15,675			11,236
EBITDA	(55,594		)	6,546			12,398			(36,021		)	28,647
Adjustments:
Impairment of goodwill	64,174			—			—			64,174			—
Costs related to potential sale of Company	671			430			—			1,101			—
Restructuring charges	164			113			—			3,185			—
Stock-based compensation	321			255			167			1,445			1,885
Other non-recurring adjustments, net	283			521			2,796			(342		)	3,775
Total adjustments	65,613			1,319			2,963			69,563			5,660
Adjusted EBITDA	$	10,019		$	7,865		$	15,361		$	33,542		$	34,307
Adjusted EBITDA margin	9.4		%	7.7		%	12.2		%	8.0		%	9.0		%

ADJUSTED SG&A AND OPERATING INCOME (NON-GAAP)

	For the Quarters Ended
	Q4 FY16						Q3 FY16						Q4 FY15
	SG&A			Operating Income			SG&A			Operating Income			SG&A			Operating Income
	(Dollars in thousands)
As reported	$	13,460		$	(59,417	)	$	13,727		$	2,676		$	16,220		$	8,809
Percentage of sales	12.6		%	(55.5		)%	13.4		%	2.6		%	12.8		%	7.0		%
Adjustments:
Impairment of goodwill	—			64,174			—			—			—			—
Costs related to potential sale of the Company	671			671			430			430			—			—
Restructuring costs	60			164			371			113			—			—
Other nonrecurring adjustments, net	283			283			321			521			252			2,795
Total adjustments	1,014			65,292			1,122			1,064			252			2,795
As adjusted	$	12,446		$	5,875		$	12,605		$	3,740		$	15,968		$	11,604
Adjusted percentage of sales	11.6		%	5.5		%	12.3		%	3.7		%	12.6		%	9.2		%

	For the Fiscal Year Ended
	July 3, 2016						June 30, 2015
	SG&A			Operating Income			SG&A			Operating Income
	(Dollars in thousands)
As reported	$	55,151		$	(51,789	)	$	46,969		$	17,252
Percentage of sales	13.2		%	(12.3		)%	12.3		%	4.5		%
Adjustments:
Impairment of goodwill	—			64,174			—			—
Costs related to potential sale of the Company	1,101			1,101			—			—
Restructuring costs	979			3,185			—			152
Other nonrecurring adjustments, net	1,188			(342		)	1,322			4,356
Total adjustments	3,268			68,118			1,322			4,508
As adjusted	$	51,883		$	16,329		$	45,647		$	21,760
Adjusted percentage of sales	12.4		%	3.9		%	11.9		%	5.7		%