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, 1997
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
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(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, 1997 was 7,818,090.
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SPARTON CORPORATION
INDEX
Financial Statements: Page No.
-------
Condensed Consolidated Balance Sheet - March 31, 1997 and June 30, 1996 3
Condensed Consolidated Statement of Operations - Three-month and
Nine-month Periods ended March 31, 1997 and 1996 4
Condensed Consolidated Statement of Cash Flows - Nine-month Periods
ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
Other Information and Signatures 14
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3
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet (Unaudited)
March 31, 1997 and June 30, 1996
March 31 June 30
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,611,727 $ 718,363
Investment securities 22,838,679 -
Income taxes recoverable - 2,300,000
Accounts receivable 21,411,254 18,805,122
Inventories and costs on contracts in progress,
less progress payments of $8,615,000 at March 31,1997
($4,535,000 at June 30, 1996) 28,896,331 34,217,538
Prepaid expenses 3,160,829 2,840,189
Current assets of discontinued automotive operations 9,085,719 34,351,930
------------ -------------
Total current assets 91,004,539 93,233,142
Miscellaneous receivables and other assets 3,946,747 3,587,835
Property, plant and equipment - net 10,949,741 9,402,283
Noncurrent assets, principally property, plant and
equipment of discontinued automotive operations - net 4,090,747 13,047,403
------------ -------------
Total assets $109,991,774 $119,270,663
============ =============
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Notes payable - due within one year $ - $ 33,594,225
Accounts payable 6,414,018 11,289,716
Taxes on income 4,636,358 279,676
Accrued liabilities 11,552,338 6,127,877
Current liabilities of discontinued automotive operations 2,173,247 12,000,855
------------- -------------
Total current liabilities 24,775,961 63,292,349
Deferred income taxes 1,961,500 1,961,500
Deferred compensation - 2,180,903
Long-term obligations, net of current maturities - 75,000
Other liabilities of discontinued automotive operations 166,618 231,032
Shareowners' equity:
Common stock - 7,818,090 shares outstanding at March 31, 1997
(7,811,370 at June 30,1996) after deducting 116,622 shares at
March 31, 1997 (123,342 at June 30, 1996) in treasury 9,772,612 9,764,213
Capital in excess of par value 440,677 403,067
Retained earnings 72,874,406 41,362,599
------------- -------------
Total shareowners' equity 83,087,695 51,529,879
------------- -------------
Total liabilities and shareowners' equity $109,991,774 $119,270,663
============= =============
See accompanying notes.
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4
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations (Unaudited)
For the Three-month and Nine-month Periods ended March 31, 1997 and 1996
Three-month Periods Nine-month Periods
--------------------------------- ---------------------------------
1997 1996 1997 1996
------------ ------------ ------------- ------------
Net sales $31,866,062 $25,185,127 $98,021,546 $66,645,911
Costs and expenses 31,716,831 25,712,442 97,711,594 70,221,077
------------ -------------- ------------ ------------
149,231 (527,315) 309,952 (3,575,166)
Other income (expense):
Interest and investment income 585,747 48,221 803,114 125,711
Interest expense (3,039) (266,078) (884,123) (853,021)
Other - net 6,476 (13,995) (11,794) 106,370
------------ -------------- ----------- ------------
Income (loss) from continuing operations
before income taxes (credits) 738,415 (759,167) 217,149 (4,196,106)
Provision (credit) for income taxes 273,000 (274,000) 79,000 (1,511,000)
------------ -------------- ------------ ------------
Income (loss) from continuing operations 465,415 (485,167) 138,149 (2,685,106)
Discontinued operations:
Loss from discontinued automotive
operations, net of applicable income tax credits - (331,108) (128,720) (1,938,536)
Gain on sale of discontinued automotive
operations, including provision of $3,491,000
for operating losses of operations not sold as of
March 31, 1997, net of applicable
income taxes of $18,551,000 - - 31,587,357 -
---------- ------------- ------------ ------------
Net income (loss) $ 465,415 $ (816,275) $ 31,596,786 $ (4,623,642)
========== ============= ============ ============
Information per share of common stock:
Continuing operations $ 0.06 $(0.06) $0.02 $(0.34)
Discontinued operations - (0.04) 4.02 (0.25)
----- ------ ----- ------
Net income (loss) $ 0.06 $(0.10) $4.04 $(0.59)
===== ====== ===== ======
Dividends $ -0- $ -0- $-0- $ -0-
====== ====== ===== ======
See accompanying notes.
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SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the Nine-month Periods ended March 31, 1997 and 1996
1997 1996
----------- ------------
Cash flows provided (used) by operating activities:
Income (loss) from continuing operations $ 138,149 $ (2,685,106)
Add non-cash items affecting continuing operations:
Depreciation 1,158,451 896,406
Deferred compensation 107,615 152,415
------------ ------------
1,404,215 (1,636,285)
Add (deduct) changes in operating assets and liabilities:
Inventories 5,321,207 (6,542,353)
Income taxes recoverable 2,300,000 (1,166,447)
Other (255,252) 801,876
Deferred compensation (2,288,518) --
Accounts receivable (2,606,132) 4,369,689
Accounts payable (4,875,698) 128,364
Taxes on income (14,145,623) (208,883)
------------ ------------
Net cash provided (used) by continuing operations (15,145,801) (4,254,039)
Cash flow provided by discontinued operations 840,721 3,815,107
------------ ------------
(14,305,080) (438,932)
Cash flows provided (used) by investing activities:
Proceeds from sale of discontinued operations 78,829,062 --
Purchases of investment securities-net (22,970,679) --
Purchases of property, plant and equipment-net (2,360,944) (2,104,700)
Noncurrent other assets (358,912) 19,543
Discontinued operations, principally purchases of property,
plant and equipment-net (250,474) (1,055,995)
------------ ------------
52,888,053 (3,141,152)
Cash flows provided (used) by financing activities:
(Decrease) increase in notes payable (33,594,225) 3,608,809
Decrease in long-term obligations (75,000) (75,000)
Common stock transactions principally from exercise of stock options 44,030 --
Discontinued operations, changes in long-term obligations (64,414) (63,938)
------------ ------------
(33,689,609) 3,469,871
------------ ------------
Increase (decrease) in cash and cash equivalents 4,893,364 (110,213)
Cash and cash equivalents at beginning of period 718,363 873,783
------------ ------------
Cash and cash equivalents at end of period $ 5,611,727 $ 763,570
============ ============
See accompanying notes.
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SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (Unaudited) - Continued
For the Nine-month Periods ended March 31, 1997 and 1996
1997 1996
----------- ----------
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the period for:
Interest $1,287,000 $ 1,708,000
========== ===========
Income taxes $11,543,000 $(1,458,000)
=========== ===========
Supplemental schedule of noncash investing activities:
The Company had noncash transactions relating to the sale of discontinued
automotive operations as follows:
Income tax liabilities $4,707,000
Provision for operating losses of operations not yet sold as of
March 31,1997 2,569,000
Other assets and liabilities 1,644,000
-------------
$8,920,000
=============
See accompanying notes.
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SPARTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) The accompanying condensed consolidated balance sheet at March 31,
1997, and the related condensed consolidated statements of operations for the
three-month and nine-month periods ended March 31, 1997 and 1996 and cash flows
for the nine-month periods ended March 31, 1997 and 1996 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,
1997 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. For the three-month periods, average shares outstanding were
7,818,121 in 1997 and 7,811,370 in 1996; for the nine-month periods, 7,815,861
in 1997 and 7,811,370 in 1996.
3) Cash and cash equivalents consist of demand deposits and other
highly liquid investments with an original maturity date of less than three
months.
4) Investments in debt secuities that are not cash equivalents and
marketable equity securities have been designated as available for sale. Those
securities are reported at fair value. Net unrealized losses, net of applicable
taxes of $83,000, have been reflected as a reduction in retained earnings at
March 31, 1997. Unrealized losses that are other than temporary are recognized
in earnings. Realized gains and losses on investments are determined using the
specific identification method. The Company has had investment securities since
January 1997. Details of the investment securities portfolio as of March 31,
1997 are as follows:
Amortized Gross Unrealized Estimated
Cost Gains (Losses) Fair Value
------------ ------------- ------------
Debt securities
Corporate-primarily U.S. $ 14,665,433 $ (56,183) $ 14,609,250
U.S. government and federal agency 4,049,636 (17,411) 4,032,225
State and municipal 1,615,314 (18,507) 1,596,807
Equity securities-primarily preferred stock 2,640,439 (39,899) 2,600,540
------------ ------------ ------------
$ 22,970,822 $ (132,000) $ 22,838,822
============ ============ ============
A large majority of the investment portfolio has an original maturity date of
less than two years and a daily market exists for all of the investment
securities. The Company believes that the impact of fluctuations in interest
rates on its investment portfolio should not have a material impact on financial
position or results of operations. It is the Company's intention to use these
investment securities to provide working capital for its expanding electronic
contract manufacturing (ECM) business.
For the three months ended March 31, 1997, the Company had gross purchases of
investment securities totaling $23,306,104.
5) In August 1996, the Company formalized its plan to offer for sale
its automotive operations. Accordingly, these operating results have been
reclassified and reported as discontinued operations. In December 1996, the
Company sold substantially all of the net assets and operations of the Sparton
Engineered Products, Inc.-KPI Group (KPI) business unit. The KPI business ,
which included the former Sparton Engineered Products, Inc.-Lake Odessa Group,
comprised approximately 80% of the automotive operations of the Company. This
sale did not include the net assets and operations of the remaining automotive
unit, Sparton Engineered Products, Inc.-Flora Group (Flora). Flora is actively
being offered for sale.
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8
In consideration for the assets and operations of the KPI unit, the Company
received approximately $80,500,000 in cash, before costs and expenses, and
retained ownership of certain assets totaling $345,000 as well as certain
liabilities totaling $550,000. The Company used a portion of the KPI sale
proceeds to eliminate short-term bank borrowings and canceled its formal credit
facility. Remaining proceeds from the sale of discontinued automotive operations
are intended to be used by the Company for working capital purposes and for
expanding its ECM business.
Operating results of discontinued automotive operations are as follows for the
three-month period ended March 31, 1996 and the nine-month periods ended March
31, 1997 and 1996. Operating results for discontinued operations for the
nine-month period ended March 31, 1997 are classified as such through August
1996, the date the Company formalized its plan to offer for sale its automotive
operations:
Three-month
Period Nine-month Periods
------------ ------------------------------
1996 1997 1996
------------ ------------- ------------
Revenues $ 28,815,964 $ 30,461,930 $ 84,538,145
============ ============ ============
Loss before income taxes $ (517,108) $ (200,720) $ (3,028,536)
Income tax credits (186,000) (72,000) (1,090,000)
------------ ------------ ------------
Net loss $ (331,108) $ (128,720) $ (1,938,536)
============ ============ ============
6) Various litigation is pending against the Company, in many cases
involving ordinary and routine claims incidental to the business of the Company
and in others presenting allegations that are non-routine. The Company and its
subsidiaries are also involved in certain compliance issues with the United
States Environmental Protection Agency (EPA) and various state agencies,
including being named as a potentially responsible party at several sites.
Potentially responsible parties (PRP's) can be held jointly and severally liable
for the cleanup costs at any specific site. The Company's past experience,
however, has indicated that when it has contributed only relatively small
amounts of materials or waste to a specific site relative to other PRP's, its
ultimate share of any cleanup costs has been minor. Based upon available
information, the Company believes it has contributed only small amounts to those
sites in which it is currently viewed a potentially responsible party.
Environmental compliance issues involving either the discontinued oil and gas
operations, which were sold in fiscal 1991, or the discontinued automotive
operations, are not material.
One of Sparton's facilities located in New Mexico has been the subject of
ongoing investigations with the EPA under the Resource Conservation and Recovery
Act (RCRA). This EPA compliance issue is related to continuing operations, but
involves a now idle facility. To date, this work has involved, among other
things, on-site and off-site investigations of environmental impacts,
negotiation and execution of an Administrative Order on Consent (AOC) with EPA
and the installation of some on-site groundwater recovery wells and air
stripping equipment. A remedial investigation called for in the AOC has been
completed and approved. In May 1996, Sparton submitted to EPA a final Corrective
Measures Study, based upon the results of its investigation, as required in the
AOC. In June 1996, EPA issued its final decision selecting remedies for
corrective action at the site. EPA estimated that the present value cost of its
remedies would range from between $15,000,000 and $26,400,000 based on a 30-year
time frame. In Sparton's judgment, the remedies proposed by EPA are either
unnecessary or technically impractical. Sparton is vigorously challenging EPA's
remedy selection and has filed suit in Federal District Court in Dallas
asserting that EPA's decision on remedy selection violates the AOC. In September
1996, EPA issued an Initial Administrative Order under RCRA ordering Sparton to
implement their selected remedy for corrective action. Sparton is vigorously
contesting this action both judicially and administratively, and does not
believe that EPA has the authority to issue such an order.
8
9
In February 1997, three lawsuits were filed against Sparton in Federal District
Court in Albuquerque, one by the United States on behalf of the EPA, the second
by the State of New Mexico, and the third by the City of Albuquerque and the
County of Bernalillo. All three actions allege that the impacts to soil and
groundwater associated with Sparton's now idled facility present an imminent and
substantial threat to human health or the environment. Through these lawsuits
the plaintiffs seek to compel Sparton to undertake additional testing and to
implement the same remedy selected by EPA in June of 1996, referred to above.
Sparton is vigorously contesting these actions on procedural and substantive
grounds.
In March 1997, the plaintiffs in these three lawsuits filed a motion for
preliminary injunction, which if granted would require Sparton to install
additional monitoring wells and conduct acquifer testing at an estimated cost of
$550,000. Sparton is opposing this motion.
Sparton continues to seek regulatory acceptance of alternative remedies that it
believes should adequately protect human health and the environment, but with
costs in the first five years of operation of approximately $500,000 to
$1,000,000. Acceptance of such a remedy, either by the plaintiffs or the courts,
is uncertain. To date, Sparton has incurred approximately $6,600,000 since this
contamination problem was first identified in the early 1980's. $3,000,000 of
this amount has been recovered from insurance companies. A reserve was initiated
in 1991 to cover the then estimated future minimum costs. For the nine months
ended March 31, 1997 and 1996, Sparton incurred costs of $629,000 and $151,000
respectively. At March 31, 1997, the remaining reserve to cover future minimum
costs totaled $444,000. If a remedy is imposed on Sparton, other than the one it
has proposed, the ultimate cleanup costs may significantly increase. There is no
assurance that additional costs greater than the amount reserved will not be
incurred or that significant changes in environmental laws or their
interpretation will not require that additional amounts be spent. At this time,
it is not possible to estimate the ultimate cost to resolve this matter.
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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. The Company's
continuing operations are in one line of business, the design, development
and/or manufacture and sale of electronic parts and assemblies for both
government and commercial customers worldwide. In August 1996, the Company
formalized its plan to offer for sale its automotive operations. Accordingly,
these operations, formerly classified as the Automotive and Industrial Products
segment, have been reclassified and reported as discontinued operations.
The Private Securities Litigation Reform Act of 1995 reflects Congress'
determination that the disclosures of forward-looking information is desirable
for investors and encourages such disclosure by providing a safe harbor for
forward-looking statements by corporate management. The following discussion
about the Company's results of operations and financial condition contains
forward-looking statements that involve risk and uncertainty. The Company notes
that a variety of factors could cause the actual results and experience to
differ materially from anticipated results or other expectations expressed in
the Company's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, growth forecasts, and results of the
Company's business include, but are not limited to, fluctuations in U. S. and
world economies, competition in the overall electronic contract manufacturing
(ECM) business, the availability of materials, production labor, and management
services under terms acceptable to the Company, Congressional budget outlays for
sonobuoy development and production, Congressional legislation, and changes in
the interpretation of environmental laws.
RESULTS OF OPERATIONS
- ---------------------
Nine-Month Periods
- ------------------
Sales for the nine-month period ended March 31, 1997 were $98,022,000, an
increase of $31,376,000 (47%), over the corresponding period last year. Revenues
increased $29,807,000 (58%) to $81,958,000 at Sparton Electronics. While both
commercial and defense sales increased substantially from last year, delays in
planned shipments on several ECM and defense contracts caused total revenues to
be lower than expected. Sales increased 15% to $14,018,000 at Sparton
Technology, primarily due to significant foreign and proprietary product
revenues to the worldwide telecommunications industry as well as increased sales
of wiring harnesses to an ECM customer. This sales level at Sparton Technology
was consistent with internal expectations. Canadian revenues totaled $3,270,000,
which amount is 21% higher than in 1996. While sales were below anticipated
levels, the Canadian unit continues to make progress in developing a new
commercial sales base to offset declining government defense revenues.
Operating income of $310,000 was reported for the nine months ended March 31,
1997 compared to an operating loss of $3,575,000 last year. Sparton Electronics
had an operating profit of $346,000 compared to an operating loss of $2,820,000
last year. While below expectations, these significantly improved operating
results were primarily due to higher sales volume, improving cost controls and
greater proficiency in the management of the ECM multiple product customer mix.
These operating results include adverse capacity variances totaling $2,454,000
charged to operations which were caused by underutilized capacity at two
production facilities. Sparton Technology reported an operating profit of
$842,000 for the nine-month period compared to an operating profit of $642,000
last year. These results were above expectations and due primarily to increased
sales volume and a favorable product mix. The Canadian unit incurred an
operating loss of $862,000 in 1997 compared to a loss of $902,000 for the same
nine-month period last year. Underutilized manufacturing capacity was the
primary reason for the 1997 loss as an undercapacity variance totaling $551,000
was charged to operations. These results at the Canadian unit were as
anticipated.
Interest and Investment Income increased $677,000 to $803,000 in 1997 due to the
investment of the sales proceeds from the December 1996 sale of the automotive
operations. These investment securities are more fully described in Note 4 to
the financial statements. Interest Expense increased by $31,000 to $884,000 due
to
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11
significantly higher borrowing costs in 1997 partially offset by lower year
to date average borrowings. In December 1996, the Company used a portion of the
proceeds from the sale of its automotive operations to eliminate short-term bank
borrowings. Since December 1996, the Company has incurred substantially no
interest expense. After provision for applicable income taxes, the Company
reported income from continuing operations of $138,000 ($.02 per share) for the
nine-month period ended March 31, 1997 compared to a loss from continuing
operations of $2,685,000 ($.34 per share) last year.
In August 1996, the Company formalized its plans to sell its automotive
operations, and accordingly reclassified and reported operating results as
discontinued operations. Operating results from discontinued operations for the
nine-month period ended March 31, 1997 are classified as such through August
1996, the date the Company formalized it plan to offer for sale its automotive
operations. After provision for applicable income taxes, the Company reported a
loss from discontinued automotive operations for the nine-month period ended
March 31, 1997 of $129,000 compared to a loss of $1,939,000 last year. As
described in Note 5 to the financial statements, in December 1996, the Company
sold substantially all of the net assets and operations of the Sparton
Engineered Products, Inc.-KPI Group (KPI) business unit for cash and retained
ownership of certain assets and liabilities. The KPI sale included the former
Sparton Engineered Products, Inc.-Lake Odessa Group. This sale did not include
the net assets and operations of the remaining automotive unit, Sparton
Engineered Products, Inc.-Flora Group (Flora). Flora is actively offered for
sale. After provision for applicable income taxes, the Company reported a gain
on sale of discontinued automotive operations of $31,587,000 in December 1996.
Reflected in this gain is a charge of $3,491,000 for the estimated operating
losses and other costs associated with the Flora operations which were not sold.
This charge represents the Company's best estimate of the operating losses and
other costs expected to be incurred by Flora through June 1997. The amounts that
the Company ultimately incurs could differ materially from the charge recorded.
The Company is currently negotiating the sale of the Flora operations with
several interested parties; however, no definitive sales agreement has been
concluded at this time. After provision for applicable income taxes, the Company
reported a gain from discontinued operations of $31,459,000 ($4.02 per share)
for the nine-month period ended March 31, 1997 compared to a loss from
discontinued operations of $1,938,000 ($.21 per share) for the corresponding
period last year.
The Company reported net income of $31,597,000 ($4.04 per share) for the
nine-month period ended March 31, 1997 compared to a net loss of $4,624,000
($.59 per share) for the same period last year.
Three-month Periods
- -------------------
Sales for the three-month period ended March 31, 1997 were $31,866,000, an
increase of $6,681,000 (27%) over last year. Revenues at Sparton Electronics
were $25,380,000 for the current three-month period compared to $19,076,000 in
1996. While this was an increase in sales of $6,304,000 (33%) over last year,
this revenue level was below anticipated amounts. Sales increased in both the
commercial and government areas, but delays in several ECM and government
contracts caused total revenues to be below expectations. Revenues at Sparton
Technology were $5,778,000, an increase of $690,000 (14%), and consistent with
expectations. As previously mentioned, shipments of wiring harnesses to a
customer have significantly increased. Product shipments commenced in December
1996 on a contract for emergency warning radios with shipments increasing each
month. This program had been delayed for more than one year. Revenues were
$1,121,000 at the Canadian unit in 1997, down slightly from last year and below
expectations as sales did not materialize as planned.
Operating income of $149,000 was reported for the three-month period ended March
31, 1997 compared to an operating loss of $527,000 for the same period last
year. Sparton Electronics operated at a small profit for the current period
compared to an operating loss of $863,000 in 1996. These favorable operating
results were primarily due to the previously mentioned factors of higher sales
volume, better cost controls and improved multiple contract production
management. Overall, however, these results were below expectations. Included
within operating income were excess capacity variances totaling $915,000 which
were charged against operations. As previously noted, theses variances were due
to excess capacity at two production facilities. Sparton Technology reported
operating income of $521,000 in 1997, consistent with operating income reported
for the comparable period last year. These quarterly results were above
expectations and were primarily the result of strong proprietary sales to both
foreign and domestic customers. The Canadian unit reported an operating loss of
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12
$141,000. While this was an improvement over the loss incurred in 1996,
operating results were below those anticipated. As previously mentioned, the
loss was primarily due to underutilized manufacturing capacity.
Interest and Investment Income increased $538,000 to $586,000 due to the
previously mentioned investment of proceeds from the December 1996 sale of the
KPI automotive operations. Interest Expense declined $263,000 to $3,000 as the
Company had no outstanding bank debt. After an annualized provision for
applicable income taxes, the Company reported income from continuing operations
of $465,000 ($.06 per share) for the three-month period ended March 31, 1997
compared to a loss from continuing operations of $485,000 ($.06 per share) for
the same period last year.
As previously discussed, the Company formalized its plans in August 1996 to sell
its automotive operations, and accordingly reclassified and reported operating
results as discontinued operations through August 1996. Operating results from
discontinued operations after this date were included as part of the gain on
sale recorded in December 1996. After provision for applicable income taxes, the
Company reported a loss from discontinued operations of $331,000 ($.04 per
share) for the three-month period ended March 31, 1996.
The Company reported net income of $465,000 ($.06 per share) for the three-month
period ended March 31, 1997 compared to a net loss of $816,000 ($.10 per share)
for the same period last year.
FINANCIAL POSITION
- ------------------
For the nine-month period ended March 31, 1997, Cash and Cash Equivalents
increased $4,893,000 to $5,612,000. Operating activities used $14,305,000 in net
cash flows. Principal sources of cash flows from operating activities included a
decline in inventories and the receipt of recoverable income taxes. The
principal uses of cash flows from operating activities were reductions in income
tax liabilities and accounts payable, increases in accounts receivable, and the
payment of the balance accrued in the deferred compensation account. A federal
income tax estimated payment of $13,500,000, relating to the previously
discussed gain on sale of the automotive operations, was made in March 1997.
Cash flows provided by investing activities were $52,888,000, principally from
the proceeds of the sale of the automotive KPI business unit, partially offset
by the purchase of investment securities and the purchase of equipment. The
Company will continue to strategically invest in additional property, plant and
equipment to accommodate growth in the ECM business.
Cash flows used by financing activities were $33,690,000, primarily for the
elimination of short-term bank borrowings. The Company used a portion of the KPI
sale proceeds to pay-off all bank borrowings and canceled its formal credit
facility. This formal line of credit, originally maturing in October 1996, had
been extended pending the KPI sale. Noncash transactions arising from the sale
of the discontinued automotive operations totaled $8,920,000 and are primarily
related to income tax accruals and liabilities for operating losses of
operations not yet sold as of March 31, 1997.
At the present time, the Company plans on using the remaining proceeds from the
KPI sale, after paying income taxes and other related costs of the sale, to
provide working capital for its expanding ECM business. To the extent not
immediately used, these proceeds will continue to be invested in high quality
marketable securities. The resulting interest and investment income, combined
with a lack of interest expense, should favorably impact the Company's
operations. There can be no assurance, however, regarding either the amount or
duration of this favorable non-operating income trend. It is dependent upon how
quickly the Company's ECM business grows as well as the emergence of alternate
uses for these sales proceeds. No dividends were declared in any of the periods
presented. At March 31, 1997, the Company had $83,088,000 ($10.63 per share) in
recorded shareowners' equity, $66,229,000 in working capital, and a 3.67:1.00
working capital ratio.
OTHER
- -----
Various litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are non-routine. The Company and its
subsidiaries are also involved in certain compliance issues with the United
States Environmental Protection
12
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Agency (EPA) and various state agencies, including being named as a potentially
responsible party at several sites. Potentially responsible parties (PRP's) can
be held jointly and severally liable for the cleanup costs at any specific site.
The Company's past experience, however, has indicated that when it has
contributed only relatively small amounts of materials or waste to a specific
site relative to other PRP's, its ultimate share of any cleanup costs has been
minor. Based upon available information, the Company believes it has contributed
only small amounts to those sites in which it is currently viewed a potentially
responsible party. Environmental compliance issues involving either the
discontinued oil and gas operations, which were sold in fiscal 1991, or the
discontinued automotive operations, are not material.
One of Sparton's facilities located in New Mexico has been the subject of
ongoing investigations with the EPA under the Resource Conservation and Recovery
Act (RCRA). This EPA compliance issue is related to continuing operations, but
involves a now idle facility. To date, this work has involved, among other
things, on-site and off-site investigations of environmental impacts,
negotiation and execution of an Administrative Order on Consent (AOC) with EPA
and the installation of some on-site groundwater recovery wells and air
stripping equipment. A remedial investigation called for in the AOC has been
completed and approved. In May 1996, Sparton submitted to EPA a final Corrective
Measures Study, based upon the results of its investigation, as required in the
AOC. In June 1996, EPA issued its final decision selecting remedies for
corrective action at the site. EPA estimated that the present value cost of its
remedies would range from between $15,000,000 and $26,400,000 based on a 30-year
time frame. In Sparton's judgment, the remedies proposed by EPA are either
unnecessary or technically impractical. Sparton is vigorously challenging EPA's
remedy selection and has filed suit in Federal District Court in Dallas
asserting that EPA's decision on remedy selection violates the AOC. In September
1996, EPA issued an Initial Administrative Order under RCRA ordering Sparton to
implement their selected remedy for corrective action. Sparton is vigorously
contesting this action both judicially and administratively, and does not
believe that EPA has the authority to issue such an order.
In February 1997, three lawsuits were filed against Sparton in Federal District
Court in Albuquerque, one by the United States on behalf of the EPA, the second
by the State of New Mexico, and the third by the City of Albuquerque and the
County of Bernalillo. All three actions allege that the impacts to soil and
groundwater associated with Sparton's now idled facility present an imminent and
substantial threat to human health or the environment. Through these lawsuits
the plaintiffs seek to compel Sparton to undertake additional testing and to
implement the same remedy selected by EPA in June of 1996, referred to above.
Sparton is vigorously contesting these actions on procedural and substantive
grounds.
In March 1997, the plaintiffs in these three lawsuits filed a motion for
preliminary injunction, which if granted would require Sparton to install
additional monitoring wells and conduct acquifer testing at an estimated cost of
$550,000. Sparton is opposing this motion.
Sparton continues to seek regulatory acceptance of alternative remedies that it
believes should adequately protect human health and the environment, but with
costs in the first five years of operation of approximately $500,000 to
$1,000,000. Acceptance of such a remedy, either by the plaintiffs or the courts,
is uncertain. To date, Sparton has incurred approximately $6,600,000 since this
contamination problem was first identified in the early 1980's. $3,000,000 of
this amount has been recovered from insurance companies. A reserve was initiated
in 1991 to cover the then estimated future minimum costs. For the nine months
ended March 31, 1997 and 1996, Sparton incurred costs of $629,000 and $151,000
respectively. At March 31, 1997, the remaining reserve to cover future minimum
costs totaled $444,000. If a remedy is imposed on Sparton, other than the one it
has proposed, the ultimate cleanup costs may significantly increase. There is no
assurance that additional costs greater than the amount reserved will not be
incurred or that significant changes in environmental laws or their
interpretation will not require that additional amounts be spent. At this time,
it is not possible to estimate the ultimate cost to resolve this matter.
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OTHER INFORMATION
PART II
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Item 6 - Exhibits and Reports on Form 10-K and 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 ended December
31, 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 Regulation 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 December 31, 1982
and are 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 1997
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: May 14, 1997 /s/ John J. Smith
------------------- ----------------------------------------
John J. Smith, Chairman of the Board of
Directors and Chief Executive Officer
Date: May 14, 1997 /s/ Richard Langley
------------------ -----------------------------------------
Richard Langley, Vice President/Treasurer
and Principal Financial Officer
14