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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, 1996
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 30, 1996 was 7,811,370.
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SPARTON CORPORATION
INDEX
Page No.
Financial Statements: -------
Consolidated Condensed Balance Sheet - March 31, 1996 and June 30, 1995 3
Consolidated Condensed Statement of Operations - Three-Month and Nine-Month
Periods ended March 31, 1996 and 1995 4
Consolidated Condensed Statement of Cash Flows - Nine-Month Periods ended
March 31, 1996 and 1995 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Results of Operations and Financial
Condition 8
Other Information and Signatures 11
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SPARTON CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheet (Unaudited)
March 31, 1996 and June 30, 1995
March 31 June 30
Assets 1996 1995
- ---------------------------------------------------- ----------- ------------
Current assets:
Cash and cash equivalents $830,954 $1,203,184
Income taxes recoverable 3,346,447 2,283,646
Accounts receivable 32,017,594 36,987,676
Inventories and costs on contracts in progress,
less progress payments of $9,145,000 at
March 31 ($1,025,000 at June 30) 43,263,715 39,608,812
Prepaid expenses 6,422,114 3,746,705
----------- ------------
Total current assets 85,880,824 83,830,023
Other receivables and assets 4,068,049 4,276,130
Property, plant and equipment - net 22,465,517 22,548,619
----------- ------------
Total assets $112,414,390 $110,654,772
============ ============
Liabilities and Shareowners' Equity
- ----------------------------------------------------
Current liabilities:
Notes payable - due within one year $29,189,549 $25,580,740
Accounts payable 17,630,540 16,170,576
Taxes on income 275,477 596,006
Accrued liabilities 9,916,465 8,294,926
----------- ------------
Total current liabilities 57,012,031 50,642,248
Deferred income taxes 1,959,500 1,959,500
Deferred compensation 2,129,008 1,976,593
Long-term obligations, net of current maturities 327,430 466,368
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 40,819,141 45,442,783
----------- ------------
Total shareowners' equity 50,986,421 55,610,063
----------- ------------
Total liabilities & shareowners' equity $112,414,390 $110,654,772
============ ============
See accompanying notes.
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SPARTON CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statement of Operations (Unaudited)
For the Three-Month and Nine-Month Periods Ended March 31, 1996 and 1995
Three-Month Periods Nine-Month Periods
--------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- ------------
Net sales $54,001,091 $56,328,180 $151,184,056 $154,870,664
Costs and expenses 54,803,810 56,632,022 157,160,996 159,539,093
----------- ----------- ------------ ------------
(802,719) (303,842) (5,976,940) (4,668,429)
Other income (expense):
Interest (507,782) (476,630) (1,627,902) (1,147,178)
Other - net 34,226 60,696 380,200 113,612
----------- ----------- ----------- ------------
Income (loss) before income
taxes (1,276,275) (719,776) (7,224,642) (5,701,995)
Provision (credit) for income
taxes (460,000) (259,000) (2,601,000) (2,053,000)
----------- ----------- ------------ ------------
Net income (loss) ($816,275) ($460,776) ($4,623,642) ($3,648,995)
=========== =========== ============ ============
Information per share of
common stock:
Net income (loss) $(.10) $(.06) $(.59) $(.47)
=========== =========== =========== =============
Dividends $-0- $-0- $-0- $-0-
=========== =========== =========== ============
See accompanying notes.
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SPARTON CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows (Unaudited)
For the Nine-Month Periods Ended March 31, 1996 and 1995
1996 1995
------------ -----------
Operating activities:
Net income (loss) ($4,623,642) ($3,648,995)
Add non-cash items charged to operations:
Depreciation 3,426,699 3,033,301
Deferred compensation 152,415 135,150
----------- -----------
(1,044,528) (480,544)
Add (deduct) changes in operating assets
and liabilities:
Accounts receivable 4,970,082 (1,801,479)
Accounts payable 1,459,964 237,803
Inventories (3,654,903) 6,562,291
Income taxes recoverable (1,062,801) 538,000
Taxes on income (320,529) (212,741)
Other (primarily customer tooling) (1,054,248) (2,009,697)
----------- -----------
Net cash provided (used) by operating activities (706,963) 2,833,633
Investing activities:
Purchases of property, plant and equipment-net (3,343,597) (4,707,391)
Other 208,081 (428,223)
------------ -----------
Net cash (used) by investing activities (3,135,516) (5,135,614)
Financing activities:
Increase in notes payable 3,608,809 2,283,252
Changes in long-term obligations, including
current maturities thereof (138,560) (138,069)
----------- -----------
Net cash provided by operating activities 3,470,249 2,145,183
----------- -----------
Increase (decrease) in cash and cash equivalents (372,230) (156,798)
Cash and cash equivalents at beginning of period 1,203,184 1,713,718
----------- -----------
Cash and cash equivalents at end of period $830,954 $1,556,920
=========== ===========
Cash paid (refunded) during the period for:
Interest $1,708,000 $1,090,000
=========== ===========
Income taxes (refund) ($1,458,000) ($2,524,000)
=========== ===========
See accompanying notes.
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SPARTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1) The accompanying consolidated condensed balance sheet at
March 31, 1996, and the related consolidated condensed statements of
operations for the three-month and nine-month periods ended March 31, 1996
and 1995 and cash flows for the nine-month periods ended March 31, 1996 and
1995 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, 1996 are not necessarily indicative of the
results that may be expected for the full fiscal year.
2) Earnings per share are computed using the weighted
average number of shares outstanding as follows: For the three-month periods,
7,811,370 in both 1996 and 1995. For the nine-month periods, 7,811,370 in
both 1996 and 1995.
3) In December 1995, the Company entered into a revolving
credit facility (the Agreement) with a group of three banks which
provides for borrowings of up to $34,000,000 through October 1996. This
Agreement replaced unsecured, informal lines of credit totaling $33,000,000.
Interest is payable at least quarterly and at the Company's option, is subject
to several interest rate structures involving the prime and LIBOR based
rates. The Agreement also provides for a commitment fee of 1/2% per annum
on the unused portion of the credit facility. At March 31, 1996, the weighted
average interest rate was 7.70% on borrowings outstanding under the
Agreement. Borrowings under this formal revolving credit facility are
secured by substantially all non real estate assets owned by the Company.
In addition, the Company is subject to loan covenant restrictions related
to additional indebtedness, the acquisition and disposition of assets and
the maintenance of defined minimum net worth and working capital levels.
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 and municipal environmental regulatory
agencies.
The Company has been involved in an environmental
investigation and clean-up effort at Sparton Technology's Coors Road facility
in Albuquerque, New Mexico since 1983. Costs incurred totaled $151,000 for the
current nine-month period compared to $135,000 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, 1996, the remaining
reserve for future minimum costs totaled $328,000. In December 1995, the
United States Environmental Protection Agency (EPA) published a Statement of
Basis describing various remedial alternatives for the facility. Several of the
listed alternatives, which are subject to administrative review, include
remediation tasks which the Company believes are either unnecessary or
technically impractical. The Company supports an alternative that is cost
effective and technically practicable. If a remedy is forced on Sparton, other
than one proposed by the Company, the ultimate investigation and clean-up
costs for the facility may significantly increase from this minimum estimate.
The Company is presently pursuing recoveries concerning this clean-up effort
that may be available under existing insurance policies, but the ultimate
amounts to be recovered, if any, are unknown at this time.
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The ultimate financial liability of the Company with
respect to these various legal matters cannot be estimated with certainty.
Based upon its own examination and experience to date, and upon information
provided by legal counsel and consultants, it is management's opinion that the
resolution of these matters should not have a material impact on the
Company's consolidated financial position and cash flow. The impact in any one
year, however, could be material to the consolidated results of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 1996 were $151,184,000,
a decrease of $3,687,000 (2%) from the corresponding period last year and
below expectations. The Electronics segment's sales declined $2,264,000.
Sales at Sparton Electronics were $4,345,000 (8%) lower than last year. In
particular, defense sales declined $7,547,000 as start up on a new
production sonobuoy contract was slower than expected. Commercial sales
increased 10%. Sales increased 20% at Sparton Technology but still were
below anticipated levels. Revenues at Sparton Canada were flat compared to
last year. The Automotive and Industrial Products segment had an aggregate
sales decline of $1,282,000 (2%) for the nine-month period compared to the
same period last year. This decrease was due primarily to lower than expected
OEM passenger car sales at both the Ford Motor Company and General Motors
Corporation.
An operating loss of $5,977,000 was reported for the nine-month period
ended March 31, 1996 compared to an operating loss of $4,668,000 last year.
These results were below expectations. The Electronics segment incurred an
operating loss of $3,038,000 compared to an operating loss of $1,433,000
last year. Sparton Electronics operated at a loss for the nine-month period
primarily due to multiple commercial program startups, delays in product
acceptance on a defense program and continuous unfavorable capacity
variances. Sparton Technology reported an operating profit above
expectations and higher than the operating profit reported for the same
period last year. These results were primarily due to the higher sales volume
and a favorable product mix. Sparton of Canada incurred an operating loss due
to low sales volume. The Automotive and Industrial Products segment
incurred an operating loss for the current nine-month period. The loss
was higher than anticipated but lower than last year. Factors contributing
to this loss included continuing efficiency issues, overly aggressive
product pricing by certain customers, start-up costs associated with
several new programs, and an unanticipated drop in product shipments.
Progress continues to be made in resolving some of these problems. Pricing
and continuing cost reductions will be significant issues in this
business segment for the foreseeable future. In late November 1995,
a consolidation of two of the three automotive units was announced,
effective January 1, 1996. The consolidation of Sparton Engineered Products,
Inc. - Lake Odessa Group and Sparton Engineered Products, Inc. - KPI Group was
initiated to achieve economies of scale and to lower overall administrative
costs. This action resulted in the closing of the Kentwood, Michigan
Administrative and Technical Center and a reduction in personnel. To date, the
merger is proceeding as expected.
Interest expense increased $481,000 to $1,628,000 principally due to
higher average borrowings and higher borrowing costs. As detailed in Note 3
to these financial statements, in December the Company replaced its informal
unsecured lines of credit totaling $33,000,000 with a secured revolving
credit facility totaling $34,000,000. Nonoperating income increased $266,000
to $380,000 due to the gain realized on the sale of equipment. After
provision for applicable income tax credits, the Company's net loss for
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the nine-month period ended March 31, 1996 was $4,624,000 ($.59 per share)
compared to a net loss of $3,649,000 ($.49 per share) for the corresponding
period last year.
Three-Month Periods
- -------------------
Sales for the three-month period ended March 31, 1996 were $54,001,000,
a decrease of $2,327,000 (4%) from the corresponding period last year.
The Electronics segment's revenue increased $723,000 for the three-month
period, but was still below anticipated levels. Sales at Sparton Electronics
were $974,000 (4%) lower primarily due to delays in several commercial and
defense programs. Revenues increased at both Sparton Technology and
Sparton of Canada. The Automotive and Industrial Products segment had a
decrease in revenues of $2,895,000 (9%) for the three-month period
compared to last year. This sales level was below expectations and due
principally to the previously mentioned soft demand for products from two of
the Big Three automobile manufacturers.
An operating loss of $803,000 was reported for the three months ended March
31, 1996 compared to an operating loss of $304,000 for the same period last
year. A small operating profit for the current three-month period was
anticipated. The Electronics segment incurred an operating loss of
$508,000 compared to an operating loss of $80,000 last year. Sparton
Electronics operated at a loss for the current three-month period due to
the previously mentioned problems of multiple program startups, product
acceptance delays on one defense program, and continued capacity variances.
Sparton Technology reported an operating profit for the three-month period
due to a favorable product mix and strong sales volume. The Canadian unit
incurred an operating loss principally due to low sales volume. The
Automotive and Industrial Products segment reported an operating loss for
the three-month period similar to the operating loss incurred last year. The
loss was primarily due to the previously mentioned efficiency issues,
product pricing, start-up costs associated with new programs, and the
decrease in sales volume. As described earlier, two of the three units
that comprise this business segment merged on January 1, 1996 and the
former administrative and technical headquarters of Sparton Engineered
Products, Inc. - Lake Odessa Group closed.
Higher borrowing costs during the current three-month period resulted in
an increase in interest costs of $31,000 to $508,000. After provision
for applicable income tax credits, the Company's net loss for the three-month
period ended March 31, 1996 was $816,000 ($.10 per share) compared to a net
loss of $461,000 ($.06 per share) last year.
FINANCIAL POSITION
- ------------------
For the nine-month period ended March 31, 1996, cash and cash
equivalents decreased $372,000 to $831,000. Operating activities used
$707,000 in net cash flows. The primary sources of cash flows from
operating activities were a decline in accounts receivable and an increase in
accounts payable. Primary uses included the operating loss, increased
inventories, and increased in-process customer tooling. Cash flows used by
investing activities were $3,136,000, primarily for the purchase of
property and equipment within the Electronics segment. Financing
activities provided $3,470,000 in cash flows as the Company increased its
short-term borrowings. No dividends were declared in any of the periods
presented. At March 31, 1996, the Company had $50,986,000 ($6.53 per share)
of recorded shareowners' equity, $28,869,000 of working capital, and a
1.51:1.00 working capital ratio. As previously mentioned, the Company
has entered into a formal secured revolving credit facility with three banks
through October 31, 1996.
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OTHER
The Company has been involved in an environmental investigation and
clean-up effort at Sparton Technology's Coors Road facility in Albuquerque,
New Mexico since 1983. Costs incurred totaled $151,000 for the current
nine-month period compared to $135,000 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, 1996, the remaining reserve
for future minimum costs totaled $328,000. In December 1995, the United
States Environmental Protection Agency (EPA) published a Statement of Basis
describing various remedial alternatives for the facility. Several of the
listed alternatives, which are subject to administrative review, include
remediation tasks which the Company believes are either unnecessary or
technically impractical. The Company supports an alternative that is cost
effective and technically practicable. If a remedy is forced on Sparton, other
than one proposed by the Company, the ultimate clean-up costs for the facility
may significantly increase from this minimum estimate.
The ultimate financial liability of the Company with respect to
this environmental investigation and clean-up effort 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 position and cash flow.
The impact in any one year, however, could be material to the consolidated
results of operations.
The Company's sales of sonobuoys, principally to the U.S. Navy, have
declined dramatically from $151,024,000 in 1992 to $34,663,000 in 1995. In
anticipation of this decline, the Company has been developing
commercial electronics opportunities which will utilize its existing
technological and manufacturing capabilities, largely in the North American
electronic contract manufacturing markets. The Company's experience to date
indicates that significant commercial electronics opportunities exist.
Because of the many new customers and markets involved, management continues
to struggle with the ability to forecast near-term sales and margins with
accuracy. As with any change of this magnitude, unanticipated problems can be
reasonably expected to occur. Investors should be aware of this uncertainty and
make their own independent evaluation.
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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 1996: 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 14, 1996 /s/ John J. Smith
John J. Smith, Chairman of the Board of
Directors and Chief Executive Officer
Date: /s/ May 14, 1996 /s/ Richard Langley
Richard Langley, Vice President-
Treasurer & Principal Financial Officer
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