1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[ ] 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 1-1000
SPARTON CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 38-1054690
- ----------------------- -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 East Ganson Street, Jackson, Michigan 49202
- ------------------------------------------ -------------
(Address of principal executive offices) (Zip Code)
517-787-8600
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by checkmark 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of
common stock outstanding as of April 28, 1995 was 7,811,370.
1
2
SPARTON CORPORATION
INDEX
Page No.
Financial Statements:
Consolidated Condensed Balance Sheet - March 31, 1995 and June 30, 1994 3
Consolidated Condensed Statement of Operations - Three-Month and
Nine-Month Periods ended March 31, 1995 and 1994 4
Consolidated Condensed Statement of Cash Flows - Nine-Month Periods
ended March 31, 1995 and 1994 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Results of Operations
and Financial Condition 7-9
Other Information and Signatures 10
2
3
SPARTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
MARCH 31, 1995 AND JUNE 30, 1994
March 31 June 30
Assets 1995 1994
- ----------------------------------------------- ------------ ------------
Current assets:
Cash and cash equivalents $1,556,920 $1,713,718
Income taxes recoverable 2,053,000 2,591,000
Accounts receivable 33,734,658 31,933,179
Inventories and costs on contracts in progress,
less progress payments of $3,011,000 at
March 31 ($5,627,000 at June 30) 39,273,623 45,835,914
Prepaid expenses 4,813,102 2,434,109
------------ ------------
Total current assets 81,431,303 84,507,920
Miscellaneous receivables and other assets 3,408,285 3,060,062
Property, plant and equipment - net 22,828,048 21,153,958
------------ ------------
Total assets $107,667,636 $108,721,940
============ ============
Liabilities and Shareowners' Equity
- ----------------------------------------------
Current liabilities:
Notes payable - due within one year $22,897,802 $20,614,550
Accounts payable 13,110,089 12,872,286
Taxes on income 233,590 446,331
Accrued liabilities 8,739,855 8,370,212
------------ ------------
Total current liabilities 44,981,336 42,303,379
Deferred income taxes 1,809,500 1,809,500
Deferred compensation 1,967,415 1,912,265
Long-term obligations, net of current maturities 487,596 626,012
Shareowners' equity:
Common stock - 7,811,370 shares outstanding
after deducting 123,342 shares in treasury 9,764,213 9,764,213
Capital in excess of par value 403,067 403,067
Retained earnings 48,254,509 51,903,504
------------ ------------
Total shareowners' equity 58,421,789 62,070,784
------------ ------------
Total liabilities & shareowners' equity $107,667,636 $108,721,940
============ ============
See accompanying notes.
3
4
SPARTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
Three-Month Periods Nine-Month Periods
--------------------------- -----------------------------
1994
As Restated
1995 1994 1995 (Note 2)
----------- ----------- ------------ ------------
Net sales $56,328,180 $51,477,828 $154,870,664 $140,769,148
Costs and expenses 56,632,022 52,195,601 159,539,093 142,117,806
----------- ----------- ------------ ------------
(303,842) (717,773) (4,668,429) (1,348,658)
Interest (476,630) (179,607) (1,147,178) (376,356)
Other - net 60,696 18,738 113,612 33,632
----------- ----------- ------------ ------------
Income (loss) before income
taxes (719,776) (878,642) (5,701,995) (1,691,382)
Provision (credit) for
income taxes (259,000) (316,000) (2,053,000) (609,000)
----------- ----------- ------------ ------------
Net income (loss) ($460,776) ($562,642) ($3,648,995) ($1,082,382)
=========== =========== ============ ============
Net income (loss) per share of
common stock $(.06) $(.08) $(.47) $(.14)
=========== =========== ============ ============
Dividends per share of
common stock $ -0- $ -0- $ -0- $ -0-
=========== =========== ============ ============
See accompanying notes.
4
5
SPARTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE NINE-MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
1994
As Restated
1995 (Note 2)
------------ ------------
Cash flows provided (used) by operating activities:
Income (loss) from operations ($3,648,995) ($1,082,382)
Add non-cash items charged to
operations:
Depreciation 3,033,301 2,909,869
Deferred compensation 135,150 110,271
Deferred income taxes -- (210,000)
Add (deduct) changes in operating assets
and liabilities:
Income taxes recoverable 538,000 (768,000)
Accounts receivable (1,801,479) (3,018,726)
Inventories 6,562,291 (5,068,400)
Accounts payable 237,803 (4,718,462)
Taxes on income (212,741) (850,020)
Other (primarily customer tooling) (2,009,697) (870,833)
------------ ------------
Net cash provided (used) by operations 2,833,633 (13,566,683)
Cash flows provided (used) by investing activities:
Purchases of property, plant and equipment-net (4,707,391) (3,684,578)
Other (428,223) 132,020
------------ ------------
(5,135,614) (3,552,558)
Cash flows provided (used) by financing activities:
Increase in notes payable 2,283,252 16,720,000
Changes in long-term obligations, including
current maturities thereof (138,069) (137,592)
Proceeds from the exercise of
stock options -- 4,375
------------ ------------
2,145,183 16,586,783
------------ ------------
Increase (decrease) in cash and cash equivalents (156,798) (532,458)
Cash and cash equivalents at beginning of period 1,713,718 2,560,566
------------ ------------
Cash and cash equivalents at end of period $1,556,920 $2,028,108
============ ============
Cash paid (refunded) during the period for:
Interest $1,090,000 $371,000
============ ============
Income taxes ($2,524,000) $807,000
============ ============
See accompanying notes.
5
6
SPARTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1) The accompanying consolidated condensed balance sheet at March
31, 1995, and the related consolidated condensed statements of operations for
the three-month and nine-month periods ended March 31, 1995 and 1994 and cash
flows for the nine-month periods ended March 31, 1995 and 1994 are unaudited,
but include all adjustments (consisting only of normal recurring accruals)
which the Company considers necessary for a fair presentation of such financial
statements. The results of operations for the nine-month period ended March
31, 1995 are not necessarily indicative of the results that may be expected for
the full fiscal year.
2) Effective the first quarter of fiscal 1994, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." The cumulative effect of this accounting change was to decrease
the net loss for the first quarter of fiscal 1994 by $264,000 ($.03 per share).
In the fourth quarter of fiscal 1994, the Company elected to early adopt SFAS
No. 112, "Employers' Accounting for Postemployment Benefits," retroactively as
of July 1, 1993. The cumulative effect of this accounting change was to
increase the net loss for the first quarter of fiscal 1994 by $264,000 ($.03
per share), net of income taxes of $149,000. The effect of this postemployment
benefits accounting change on fiscal 1994 operations was not material. Both
accounting changes, when taken together, offset each other for the first
quarter of fiscal 1994, as restated.
The net loss and net loss per common share for the nine
months ended March 31, 1994 have also been restated to reflect the retroactive
application of SFAS No. 112 as discussed above. This restatement increased the
net loss reported at March 31, 1994 by $264,000 ($.03 per share) from amounts
previously reported.
3) Earnings per share are computed using the weighted average
number of shares outstanding as follows: For the three-month periods,
7,811,370 in 1995 and 7,810,781 in 1994. For the nine-month periods, 7,811,370
in 1995 and 7,810,505 in 1994.
4) There are various legal proceedings pending against the Company.
In many cases, these proceedings involve ordinary and routine claims incidental
to the business of the Company. In others, they represent allegations that are
non-routine. The Company and its subsidiaries are also involved in certain
compliance issues with the United States Environmental Protection Agency and
various state environmental regulatory agencies. The Company has been involved
in an environmental clean-up effort at one of its facilities since 1983. A
reserve of $1,200,000 was established and charged against operations in 1991 in
order to cover estimated minimum future costs related to this clean-up effort.
As of March 31, 1995, the remaining reserve for these future costs at this
facility, principally ongoing monitoring, totaled $528,000. The Company has
previously recovered all known amounts available under insurance policies
concerning this clean-up effort.
The ultimate legal and financial liability of the Company with
respect to these matters cannot be estimated with certainty. Based upon its
own examination and experience to date, and upon information provided by legal
counsel and outside consultants, it is management's opinion that the resolution
of these matters should not have a material impact on the Company's
consolidated financial statements.
6
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following is management's discussion and analysis of certain significant
events affecting the Company's earnings and financial condition during the
periods included in the accompanying financial statements.
RESULTS OF OPERATIONS
- ---------------------
Nine-Month Periods
- ------------------
Sales for the nine-month period ended March 31, 1995 were $154,871,000, an
increase of $14,102,000 (10%) from the corresponding period last year. These
revenues were consistent in total with internal expectations. Sales at Sparton
Electronics were slightly below anticipated levels and $2,227,000 (4%) higher
than last year. Certain commercial revenue did not materialize as expected.
Commercial sales volume continues to expand, but not at a level sufficient to
offset the decline in defense-related revenues. Early in the third quarter of
fiscal 1995, Sparton Electronics was awarded a major contract by the U.S. Navy
with deliveries scheduled to begin the middle of fiscal 1996. Sales increased
significantly at the Canadian unit over the depressed levels of the prior year.
Revenues also increased at Sparton Technology, primarily due to expanding
foreign and proprietary product sales. The Automotive and Industrial Products
segment continues to expand with an aggregate sales increase of $9,061,000
(12%) for the current nine-month period compared to the same period last year.
This sales growth, evident at all three units that comprise this business
segment, exceeded internal expectations and reflect both increased customer
demand for existing products as well as new product shipments. There are
indications, however, that the increased demand for existing products from the
various automobile manufacturers may be leveling off.
An operating loss of $4,668,000 was reported for the nine-month period ended
March 31, 1995 compared to an operating loss of $1,349,000 last year. These
results were consistent with internal expectations. Sparton Electronics
operated at a loss as profit margins continue to be adversely impacted by
increased costs associated with lower overall sales volumes, unexpected
production delays, higher material costs, and multiple program launches. The
transition from being primarily a defense-related to that of a
commercial-oriented contract manufacturer continues. The Canadian unit
incurred a loss for the current nine-month period compared to a much larger
loss last year. Sparton Technology reported an operating profit this period
compared to an operating loss last year. These improved operating results at
both Canada and Sparton Technology were primarily due to higher sales volume,
favorable product mixes, and previously instituted cost-cutting measures. The
Automotive and Industrial Products segment incurred a significant operating
loss for the current nine-month period compared to a small loss last year.
Operating results for this segment were as anticipated. Factors contributing
to the loss included continuing productivity and efficiency issues, capacity
problems at certain facilities, difficulties in achieving customer quality
demands, and an inability to adjust certain prices due to competitive
pressures. Significant progress has been made in resolving the problems in
these areas, particularly within the past three months. The Hartford City,
Indiana facility purchased last fiscal year was placed into production early in
this current nine-month period. Price increases on several product lines have
been requested with some success thus far. The efforts to obtain price
increases continue.
Interest expense increased $771,000 to $1,147,000 due to both substantially
higher average borrowings and interest rates. Effective July 1, 1993, the
Company adopted Statement of
7
8
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
The cumulative effect of this accounting change was to decrease the net loss
for the first quarter of fiscal 1994 by $264,000 ($.03 per share). In the
fourth quarter of fiscal 1994, the Company elected to early adopt SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," retroactive to July 1,
1993. The cumulative effect of the accounting change was to increase the net
loss for the first quarter of fiscal 1994 by $264,000 ($.03 per share), net of
income taxes of $149,000. The effect of this change in accounting for
postemployment benefits was not material on fiscal 1994 operations. Both
accounting changes, when taken together, offset each other for the first
quarter of fiscal 1994, as restated. The loss and loss per common share for
the nine months ended March 31, 1994 have also been restated to reflect the
retroactive application of SFAS No. 112. This restatement increased the net
loss reported at March 31, 1994 by $264,000 ($.03 per share) from amounts
previously reported. After provision for applicable income taxes, the
Company's net loss for the nine-month period ended March 31, 1995 was
$3,649,000 ($.47 per share) compared to a net loss of $1,082,000 ($.14 per
share), as restated, for the corresponding period last year.
Three-Month Periods
- -------------------
Sales for the three-month period ended March 31, 1995 were $56,328,000, an
increase of $4,850,000 (9%) from the corresponding period last year. At
Sparton Electronics, sales increased $1,447,000 (8%) from the levels of the
prior year and were comparable to internal expectations. As previously
mentioned, early in the quarter Sparton Electronics was awarded a major
contract by the U.S. Navy with deliveries scheduled to begin the middle of
fiscal 1996. Sales at the Canadian unit were significantly higher than the
historically depressed levels of the prior year. Revenues at Sparton
Technology increased 32% compared to last year primarily due to previously
mentioned expanding foreign and proprietary product sales. The Automotive and
Industrial Products segment reported an increase of $2,179,000 (7%) in overall
sales compared to the same period last year, principally due to increases in
both customer demand for existing products as well as new product shipments.
As previously mentioned, however, there are indications that the demand for
existing products from the various automobile manufacturers may be leveling
off.
An operating loss of $304,000 was reported for the three months ended March 31,
1995 compared to an operating loss of $718,000 for the same period last year.
Sparton Electronics operated at a small loss for the current period,
approximately one-half the loss reported the previous year. While the current
period loss was favorable to internal expectations, the unit is hampered by the
previously mentioned problems of lower overall sales volume, unexpected
production delays, higher material costs, and multiple program launches. The
Canadian unit operated at a loss principally due to their low sales volume.
Sparton Technology operated at a profit for the current period compared to a
loss last year primarily due to higher sales volume and to the previously
mentioned cost-cutting measures implemented last year. The Automotive and
Industrial Products segment operated at a small loss for the current
three-month period compared to a small loss last year. This lack of
profitability was attributable to the previously mentioned productivity and
efficiency issues, capacity problems at certain facilities, difficulties in
achieving customer quality demands, and product pricing. During the quarter,
significant productivity improvements were made and a major pricing issue was
successfully resolved.
Significantly higher average borrowings and borrowing costs during the
three-month period resulted in an increase in interest costs of $297,000 to
$447,000. After provision for applicable income taxes, the Company's net loss
for the three-month period ended March 31,
8
9
1995 was $461,000 ($.06) per share) compared to a net loss of $563,000 ($.08
per share) last year.
FINANCIAL POSITION
- ------------------
For the nine-month period ended March 31, 1995, cash and cash equivalents
decreased $157,000 to $1,557,000. Operating activities provided $2,834,000 in
net cash flows. Principal sources of cash flows from operating activities
included decreases in inventories and recoverable income taxes. Primary uses
included increases in accounts receivable and customer tooling. Cash flows
used by investing activities were $5,136,000, primarily for the purchase of
property, plant and equipment within the Automotive and Industrial Products
segment. Financing activities provided $2,145,000 in cash flows as the Company
increased its short-term borrowings. Late in the second quarter, the Canadian
unit replaced its $723,000 credit facility with a $5,000,000 unsecured line of
credit to be used for working capital purposes. The credit facility, expiring
in October 1995, is subject to a favorable interest rate structure and is
guaranteed by the parent company. No dividends were declared or paid in any of
the periods presented. At March 31, 1995, the Company had $58,422,000 ($7.48
per share) in recorded shareowners' equity, $36,450,000 in working capital, and
a 1.81:1 working capital ratio.
OTHER
- -----
The Company has been involved in an environmental clean-up effort at Sparton
Technology's Coors Road facility since 1983. Costs incurred totalled $135,000
for the current nine-month period compared to $53,000 for the corresponding
period last year. These costs were charged against a reserve initiated in 1991
to cover estimated future minimum costs. As of March 31, 1995, the remaining
reserve for future minimum costs totalled $528,000. The Company has previously
recovered all amounts available under insurance policies concerning the
clean-up effort. A remedial action plan has been developed and submitted for
approval but negotiations continue with respect to such plan. In addition, the
Company is involved in several related issues with State of New Mexico
environmental agencies. Until these and other related issues are resolved,
management is unable to accurately assess what the ultimate costs may be.
Management continues to work diligently in pursuing these issues and believes
that their ultimate resolution should not have a material adverse effect on the
Company's consolidated financial statements.
The Company's sales of sonobuoys, principally to the U.S. Navy, have declined
dramatically from $151,024,000 in fiscal 1992 to $47,645,000 in fiscal 1994.
Based on currently available information, it is expected that the U.S. Navy's
budget for production sonobuoys for the foreseeable future will continue at
greatly reduced levels. The U.S. Navy's procurement practices at these reduced
budget levels may also change. In response to this changing environment, the
Company has previously consolidated certain of its manufacturing facilities,
continues to reduce costs within the defense-oriented operations and is
developing commercial opportunities which will utilize its existing
technological and manufacturing capabilities. In addition, the Company is
focusing on expanding sales in its automotive and other commercial electronics
markets on a worldwide basis. Management, however, cannot predict the level of
U.S. sonobuoy awards it will receive, if any, over the next several years, the
growth in sales volume of new commercial business intended to replace these
declining defense revenues, nor the resulting financial impact of these changes
on the Company's operations. As with any change of this magnitude,
unanticipated delays in new program start-ups and their associated cost impact
can reasonably be expected to occur. Investors should be aware of this
uncertainty and make their own independent evaluation.
9
10
OTHER INFORMATION
PART II
- -------
Item 6 - Exhibits and Reports on Form 10-K and Form 10-Q.
- ------
(a) Exhibits
--------
3 & 4 Instruments defining the rights of security holders have been
previously filed as follows:
Articles of Incorporation of the Registrant were filed on Form 10-K
for the year ended June 30, 1981 and an amendment thereto was filed
on Form 10-Q for the three-month period ending September 30, 1983
and are incorporated herein by reference.
By-laws of the Registrant were filed on Form 10-K for the year
ended June 30, 1981 and are incorporated herein by reference.
Code of Regulations of the Registrant was filed on Form 10-K for the
year ended June 30, 1981 and an amendment thereto was filed on Form
10-Q for the three-month period ended September 30, 1982 and are
incorporated herein by reference.
10 The employment agreement with John. J. Smith was filed on Form 10-Q
for the three-month period ended September 30, 1994 and is
incorporated herein by reference.
27 Submitted to the Securities and Exchange Commission for its
information.
b) Reports on Form 8-K Filed in the Third Quarter of Fiscal 1995: None
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.
SPARTON CORPORATION
-------------------
Registrant
Date: /s/ May 12, 1995 /s/ John J. Smith
---------------- ---------------------------------------
John J. Smith, Chairman of the Board of
Directors and Chief Executive Officer
Date: /s/ May 12, 1995 /s/ Richard Langley
---------------- ---------------------------------------
Richard Langley, Vice President-
Treasurer & Principal Financial Officer
10