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 December 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
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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 January 31, 1998 was 7,828,090.
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SPARTON CORPORATION
INDEX
Financial Statements: Page No.
--------
Condensed Consolidated Balance Sheet - December 31 and June 30, 1997 3
Condensed Consolidated Statement of Operations - Three-Month and Six-Month
Periods ended December 31, 1997 and 1996 4
Condensed Consolidated Statement of Cash Flows - Six-Month Periods ended
December 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 15
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3
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet (Unaudited)
December 31 and June 30, 1997
December 31 June 30
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,825,393 $ 8,021,620
Investment securities 21,185,048 21,926,849
Income taxes recoverable 2,480,727 --
Accounts receivable 18,671,283 24,800,904
Inventories and costs on contracts in progress,
less progress payments of $ 7,419,000 at December 31, 1997
($2,198,000 at June 30, 1997) 26,350,072 29,662,787
Prepaid expenses 3,143,975 3,391,094
Current assets of discontinued automotive operations 7,559,885 8,175,772
------------ ------------
Total current assets 90,216,383 95,979,026
Other assets 5,055,802 5,118,524
Property, plant and equipment - net 10,623,288 9,372,526
Noncurrent assets, principally property, plant and
equipment, of discontinued automotive operations - net 3,462,322 3,707,011
------------ ------------
Total assets $109,357,795 $114,177,087
============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable $ 8,411,696 $ 12,219,845
Taxes on income -- 2,080,513
Accrued liabilities 8,977,601 8,294,118
Current liabilities of discontinued automotive operations 3,730,692 4,623,617
------------ ------------
Total current liabilities 21,119,989 27,218,093
Deferred income taxes 1,571,500 1,571,500
Other liabilities of discontinued automotive operations 94,765 145,044
Shareowners' equity:
Common stock - 7,828,090 shares outstanding at December 31,1997
(7,818,090 at June 30,1997) after deducting 106,622 shares at
December 31, 1997 (116,622 at June 30, 1997) in treasury 9,785,112 9,772,613
Capital in excess of par value 494,427 440,677
Retained earnings 76,292,002 75,029,160
------------ ------------
Total shareowners' equity 86,571,541 85,242,450
------------ ------------
Total liabilities and shareowners' equity $109,357,795 $114,177,087
============ ============
See accompanying notes
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SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Operations (Unaudited)
For the Three-Month and Six-Month Periods ended December 31, 1997 and 1996
Three-Month Periods Six-Month Periods
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net sales $ 34,865,638 $ 32,875,199 $ 67,231,741 $ 66,155,484
Costs and expenses 33,867,773 32,678,780 66,826,291 65,994,763
------------ ------------ ------------ ------------
997,865 196,419 405,450 160,721
Other income (expense):
Interest and investment income 403,107 143,339 933,551 217,367
Interest expense -- (473,422) (720) (881,084)
Other - net (15,784) (8,360) 558,561 (18,270)
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income taxes (credits) 1,385,188 (142,024) 1,896,842 (521,266)
Provision (credit) for income taxes 513,000 (57,000) (702,000) (194,000)
------------ ------------ ------------ ------------
Income (loss) from continuing operations 872,188 (85,024) 1,194,842 (327,266)
Loss from discontinued automotive
operations, net income tax credits of
$72,000 -- -- -- (128,720)
Gain on sale of discontinued automotive
operations, including provision of
$2,363,000 for operating losses and
other costs of operations not sold as of
December 31, 1997, net of applicable
income taxes of $18,551,000 . 31,587,357 . 31,587,357
------------ ------------ ------------ ------------
-- . 31,587,357 -- . 31,458,637
------------ ------------ ------------ ------------
Net income $ 872,188 $ 31,502,333 $ 1,194,842 $ 31,131,371
============ ============ ============ ============
Information per share of common stock:
Continuing operations $ 0.11 $ (0.01) $ 0.15 $ (0.04)
Discontinued operations - . 4.04 - . 4.02
------ ------- ------ -------
Net income $ 0.11 $ 4.03 $ 0.15 $ 3.98
====== ======= ====== =======
Dividends $ -0-. $ -0- . $ -0-. $ -0- .
====== ======= ====== =======
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See accompanying notes
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SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited) For the Six-Month Periods ended
December 31, 1997 and 1996
1997 1996
------------- --------------
Cash flows provided (used) by operating activities:
Income (loss) from continuing operations $ 1,194,842 $ (327,266)
Add non-cash items affecting continuing operations:
Depreciation 887,043 774,433
Deferred compensation -- . 107,615
------------- --------------
2,081,885 554,782
Add (deduct) changes in operating assets and liabilities:
Accounts receivable 6,129,621 (319,454)
Inventories 3,312,715 4,684,601
Other 998,602 809,754
Taxes on income (2,080,513) (547,377)
Income taxes recoverable (2,480,727) 2,274,221
Deferred compensation -- (2,288,518)
Accounts payable (3,808,149) (3,029,344)
------------- -------------
Net cash provided by continuing operations 4,153,434 2,138,665
Cash flow provided by discontinued operations 189,124 1,140,499
------------- -------------
4,342,558 3,279,164
Cash flows provided (used) by investing activities:
Proceeds from sale of discontinued operations -- 78,829,062
Purchases of investment securities-net 741,801 --
Noncurrent other assets 62,722 (361,273)
Purchases of property, plant and equipment-net (2,137,805) (2,222,062)
Discontinued operations, principally purchases of property,
plant and equipment-net (221,473) (213,329)
------------- -------------
(1,554,755) 76,032,398
Cash flows provided (used) by financing activities:
Decrease in notes payable -- (33,594,225)
Decrease in long-term obligations -- (75,000)
Common stock transactions from exercise of stock options 66,249 46,377
Discontinued operations, decrease in long-term obligations (50,279) (42,885)
------------- --------------
15,970 (33,665,733)
------------- --------------
Increase in cash and cash equivalents 2,803,773 45,645,829
Cash and cash equivalents at beginning of period 8,021,620 718,363
------------- --------------
Cash and cash equivalents at end of period $ 10,825,393 $ 46,364,192
============= ==============
See accompanying notes
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SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (Unaudited) - Continued
For the Six-Month Periods ended December 31, 1997 and 1996
1997 1996
------------ -----------
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the period for:
Interest expense $ 1,000 $ 1,284,000
========== ===========
Income taxes $6,175,000 $(2,009,000)
========== ===========
Supplemental schedule of noncash investing activities:
For the six months ended December 31, 1996, the Company had noncash
transactions relating to the sale of discontinued automotive operations
totaling $23,565,000. These noncash transactions consisted of income tax
liabilities of $18,551,000, a provision for operating losses and other costs
of operations not yet sold of $3,250,000, and various other assets and
liabilities of $1,764,000.
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 December
31, 1997, and the related condensed consolidated statements of operations and
cash flows for the three-month and six-month periods ended December 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
six-month period ended December 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
7,828,090 in 1997 and 7,818,142 in 1996; for the six-month periods, 7,825,590 in
1997 and 7,814,756 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.
The Company has had investment securities since January 1997. A large
majority of the investment portfolio had an original maturity date of less than
two years and a daily market exists for all 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 ECM business.
At December 31, 1997, the Company had net unrealized gains, net of
applicable taxes, of $36,000. These net gains are included within equity. For
the six months ended December 31, 1997, the Company had gross purchases of
investment securities totaling $3,760,000 and gross sales of investment
securities totaling $4,329,000.
4) 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. In December 1996, the Company recorded a reserve
totaling $4,671,000 for the estimated costs of discontinuing it's automotive
business including operating losses, the potential loss on sale of the Flora
operations, and other associated costs. At December 31, 1997, approximately
$2,363,000 of this reserve remained to cover such costs. Management does not
anticipate such costs will exceed what was anticipated and recorded in December,
1996.
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 six-month period ended December 31, 1996. Operating results for
discontinued operations for the six-month period ended December 31,
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1996 were classified as such through August 1996, the date the Company
formalized its plan to offer for sale its automotive operations.
Six-month Period
-----------
1996
-----------
Revenues $30,461,930
============
Loss before income taxes $ (200,720)
Income tax credits (72,000)
------------
Net loss $ (128,720)
============
5) 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 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 deminimus amounts of material or
waste to a specific site, its ultimate share of any cleanup costs has been very
small. Based upon available information, and subject to the exception noted
below, the Company believes it has contributed only deminimus amounts to those
sites in which it is currently viewed a potentially responsible party.
One of Sparton's facilities located in New Mexico has been the subject
of ongoing investigations conducted with the EPA under the Resource Conservation
and Recovery Act (RCRA). This EPA compliance issue is related to continuing
operations, but involves its now largely 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 the 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
the EPA a final Corrective Measures Study, based upon the results of its
investigation, as required in the AOC. In June 1996, the EPA issued its final
decision selecting remedies for corrective action at the site. The 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 the EPA are either unnecessary or technically impractical.
Sparton is vigorously challenging the EPA's remedy selection and filed suit in
Federal District Court in Dallas asserting that the EPA's decision on remedy
selection violates the AOC. In September 1996, the EPA issued an Initial
Administrative Order under RCRA ordering Sparton to undertake additional testing
to justify implementing the remedy selected by the Agency in June 1996, and then
implement that remedy. Sparton is vigorously contesting this action both
judicially and administratively, and does not believe that the 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 the EPA in June of 1996 and
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. If this motion is granted, Sparton
would be required to install additional monitoring wells and conduct acquifer
testing at an estimated cost of $550,000. Sparton is opposing this motion. In
July 1997, Sparton's action in Dallas was transferred to Federal District Court
in Albuquerque and
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consolidated with the three lawsuits filed in February 1997. No action has been
taken on the request for a preliminary injunction and no hearing date has been
set. The parties to all of the actions in Federal District Court were recently
instructed to develop a schedule for getting all matters ready for trial. No
trial date has been set, nor has discovery begun.
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 three to five years of operations ranging from $815,000
to $1,120,000. Acceptance of such a remedy, either by the plaintiffs or the
courts, is uncertain. To date, Sparton has incurred approximately $7,200,000
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 operating
costs. For the six months ended December 31, 1997 and 1996, Sparton incurred
costs of $353,000 and $506,000, respectively, principally related to legal and
other defense costs. At December 31, 1997, the reserve to cover future minimum
operating costs totaled $1,168,000. 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 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, namely the design,
development and/or manufacture 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, were 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 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 include, but are not
limited to, fluctuations in U. S. and world economies, competition in the
overall electronic contract manufacturing (ECM) business, Congressional budget
outlays for sonobuoy development and production, Congressional legislation,
changes in the interpretation of environmental laws, the uncertainties of
environmental litigation and the availability of materials, production labor and
management services under terms acceptable to the Company.
RESULTS OF OPERATIONS
- ---------------------
Six-Month Periods
- -----------------
Sales for the six-month period ended December 31, 1997 were $67,232,000, and
increase of $1,076,000 (2%) from the corresponding six-month period last year.
While revenues increased very slightly from the prior period, they were below
expectations as unanticipated delays were encountered in the start-up of several
programs. Sales increased $913,000 (2%) to $57,491,000 at Sparton Electronics.
Defense-related revenues increased 4%, while commercial revenues were flat
compared to the same period last year. Revenues increased at Sparton Technology
by $882,000 (11%) to $9,123,000, primarily due to the start-up of a new program
as well as additional business with several existing customers. This sales
level, however, was below management's expectations. Revenues at Sparton of
Canada totaled $1,219,000, down $930,000 from the same period last year and
below expectations, primarily due to the delay of a scheduled program launch.
An operating profit of $405,000 was reported for the six-month period ended
December 31, 1997 compared to $161,000 for the same period last year. These
results were consistent with internal expectations. Sparton Electronics reported
an operating profit of $2,093,000 for the current period compared to $214,000
for the same period last year. These improved operating results reflect a more
favorable product mix and lower general and administrative costs. Included
within these operating results were adverse capacity variances of $1,161,000
caused by underutilized capacity at two production facilities. Sparton
Technology incurred an operating loss of $30,000 compared to operating income of
$322,000 last year. Included within these results were charges totaling $554,000
in the current period and $210,000 last year related to the environmental claim
previously discussed on pages 8 and 9. Without consideration of the effects of
environmental costs, operating results were below expectations, primarily due to
an unfavorable product mix. The Canadian unit incurred an operating loss of
$528,000 compared to a loss of $721,000 last year. These results were consistent
with management's expectations as low sales volume
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continues to impact operations. Underutilized manufacturing capacity resulted in
a current charge of $347,000 to the Canadian operations.
Interest and Investment Income increased $717,000 to $934,000 for the six-month
period ended December 31, 1997 due to the investment of the sales proceeds from
the December 1996 sale of the discontinued automotive operations. This sale is
more fully described below and in Note 4 to these financial statements. Interest
Expense declined from $881,000 last year to $1,000 for the current period. In
December 1996, the Company used a portion of the proceeds from the sale of its
automotive operations to eliminate short-term borrowings. Since December 1996,
the Company has incurred substantially no interest expense. Other Income-Net was
$559,000 for the current six-month period compared to Other Expense-Net of
$18,000 last year. Included within the current period Other Income-Net was a
gain of $511,000 from the sale of equipment and other assets at the Canadian
operating unit. After provision for applicable income taxes, the Company
reported income from continuing operations of $1,195,000 ($0.15 per share) for
the six-month period ended December 31, 1997 compared to a loss from continuing
operations of $327,000 ($0.04 per share) for the same period 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
fiscal year ended June 30, 1997 were classified as such through August 1996.
After provision for applicable income taxes, the Company reported a loss from
discontinued automotive operations of $128,000 for the six months ended December
31, 1996. In addition, as described more fully below, the Company reported in
December 1996, a gain on sale of discontinued operations of $31,587,000, net of
applicable income taxes. The Company reported net income of $1,195,000 ($0.15
per share) for the six months ended December 31, 1997 compared to net income of
$31,131,000 ($3.98 per share) for the same period last year.
Three-Month Periods
- -------------------
Sales for the three-month period ended December 31, 1997 were $34,866,000, an
increase of $1,991,000 (6%) compared to the same quarter last year. Revenues at
Sparton Electronics were $29,332,000, an increase of $1,329,000 (5%) from the
same period last year, primarily due to increased defense shipments. Overall
sales were within management's expectations. Revenues at Sparton Technology were
$5,140,000, up $1,163,000 (29%) when compared to the previous year, primarily
due to a new contract started late in the first quarter. At the Canadian unit,
revenues were $614,000 for the current period compared to $1,189,000 for the
same period last year. This unit continues to be challenged in replacing lost
government defense sales with profitable ECM opportunities.
Operating income of $998,000 was reported for the three months ended December
31, 1997 compared to $196,000 for the same period last year. These current
operating results were consistent with management's expectations. Sparton
Electronics reported an operating profit of $1,560,000 for the current
three-month period compared to $123,000 last year. These results were primarily
due to the previously mentioned factors of a more favorable product mix and
reduced general and administrative costs. Included within these current
three-month results were adverse capacity variances of $328,000 caused by
underutilized capacity at two production facilities. Sparton Technology had an
operating profit of $220,000 for the current three-month period compared to
$64,000 last year and Sparton of Canada incurred an operating loss of $223,000.
Higher sales volume at Sparton Technology was the primary reason for these
favorable operating results, while the continued low revenue levels at the
Canadian unit was responsible for the operating loss.
Interest and Investment Income increased to $403,000 for the three-month period
ended December 31, 1997 compared to $143,000 last year due to the previously
discussed investment of the sales proceeds from the discontinued automotive
operations. There was no Interest Expense for the current period compared to
$473,000 last year. As previously discussed, in December 1996 the Company used a
portion of the proceeds from the sale of its automotive operations to eliminate
short-term borrowings. After provision for applicable income taxes, the Company
reported income from continuing operations of $872,000 ($0.11 per share) for the
three-month period
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ended December 31, 1997, compared to a loss from continuing operations of
$85,000 ($0.01 per share) for the corresponding 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 therefor included as part of the
gain on sale recorded. As more fully described in Note 4 to these financial
statements, the Company sold substantially all of the net assets and operations
of the Sparton Engineered Products, Inc.-KPI Group (KPI) business unit in
December 1996 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). The
Company is actively pursuing the sale of Flora. Reflected in the December 1996
after-tax gain of $31,587,000 on the sale of discontinued automotive operations
was a charge of $4,671,000 for the estimated costs (including operating losses,
the potential loss on sale and other costs) associated with the discontinued
automotive operations. This charge represented the Company's best estimate of
the costs, principally operating losses and other costs to be incurred by Flora
through the date of disposal. At December 31, 1997, approximately $2,363,000 of
this reserve remained to cover these costs. Management does not anticipate that
such costs will exceed what was anticipated and recorded in December 1996. The
amounts that the Company ultimately incurs, however, could differ materially
from the charge recorded. After provision for applicable income taxes, the
Company reported a gain from discontinued operations of $31,587,000 ($4.04 per
share) for the three-month period ended December 31, 1997.
The Company reported net income of $872,000 ($0.11 per share) for the
three-month period ended December 31, 1997 compared to a net income of
$31,502,000 ($4.03 per share) for the same period last year.
FINANCIAL POSITION
- ------------------
For the six-month period ended December 31, 1997, Cash and Cash Equivalents
increased $2,804,000 to $10,825,000. Operating activities provided $4,343,000 in
net cash flows. Principal sources of cash flows from operating activities
included decreases in accounts receivable, decreases in inventories, and income
from continuing operations. Principle uses were decreases in accounts payable
and changes in income tax assets and liabilities. Cash flows used by investing
activities were $1,555,000, principally for 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 provided by
financing activities were $16,000, primarily from the exercise of employee stock
options.
As previously stated, the Company plans on using the proceeds from the sale of
its automotive operations, after paying income taxes and other costs, 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. It is
uncertain, however, how long and to what extent this favorable non-operating
income trend will continue. This trend is dependent upon how quickly the
Company's ECM business grows as well as the emergence of alternate uses for
these proceeds. No dividends were declared in any of the periods presented. At
December 31, 1997, the Company had $86,572,000 ($11.06 per share) in recorded
shareowners' equity, $69,096,000 in working capital, and a 4.27:1.00 working
capital ratio.
OTHER
- -----
Impact of Year 2000
- -------------------
The Year 2000 Issue is the result of many older computer programs being written
using two digits rather than four to define the applicable year. A computer
program that has time-sensitive software may recognize a date using
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"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Sparton Electronics implemented a new business information system in the summer
of 1997, to further enhance the Company's competitive position. This system,
called Manufacturing Total Management System (MTMS), will enable information to
be shared between all of Sparton's manufacturing locations. The information
system is presently being implemented throughout the remainder of the Company's
management units with full implementation scheduled for completion by December
31, 1998. The decision to purchase and implement MTMS was independent of the
Year 2000 issue. The Company believes that implementation of MTMS will render
its internal information systems Year 2000 compliant and with no disruptions in
operations. With respect to suppliers and customers software being year 2000
compliant, the Company does not believe that there is sufficient integration or
dependency of such software to cause a material impact on the Company's business
operating systems or processes.
A large majority of the Company's revenues are generated in the ECM and
government defense areas, where products are built to contract specifications,
dictated by the customer using a customer-owned design. As these products are
non-proprietary in nature, the Company believes that potential Year 2000
problems, if any, associated with these products are the customer's
responsibility. Regarding proprietary products, the Company has completed an
assessment of both current and past products. Corrective measures for current
products have been completed where applicable. Corrective measures for past
products have been identified, where applicable, and affected customers
notified.
Litigation
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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 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 deminimus amounts of material or
waste to a specific site, its ultimate share of any cleanup costs has been very
small. Based upon available information, and subject to the exception noted
below, the Company believes it has contributed only deminimus amounts to those
sites in which it is currently viewed a potentially responsible party.
One of Sparton's facilities located in New Mexico has been the subject of
ongoing investigations conducted with the EPA under the Resource Conservation
and Recovery Act (RCRA). This EPA compliance issue is related to continuing
operations, but involves its now largely 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 the 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
the EPA a final Corrective Measures Study, based upon the results of its
investigation, as required in the AOC. In June 1996, the EPA issued its final
decision selecting remedies for corrective action at the site. The 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 the EPA are either unnecessary or technically impractical.
Sparton is vigorously challenging the EPA's remedy selection and filed suit in
Federal District Court in Dallas asserting that the EPA's decision on remedy
selection violates the AOC. In September 1996, the EPA issued an Initial
Administrative Order under RCRA ordering Sparton to undertake additional testing
to justify implementing the remedy selected by the Agency in June 1996, and then
implement that remedy. Sparton is vigorously contesting this action both
judicially and administratively, and does not believe that the EPA has the
authority to issue such an order.
13
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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 the EPA in June of 1996 and 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. If this motion is granted, Sparton would be
required to install additional monitoring wells and conduct acquifer testing at
an estimated cost of $550,000. Sparton is opposing this motion. In July 1997
Sparton's action in Dallas was transferred to Federal District Court in
Albuquerque and consolidated with the three lawsuits filed in February 1997. No
action has been taken on the request for a preliminary injunction and no hearing
date has been set. The parties to all of the actions in Federal District Court
were recently instructed to develop a schedule for getting all matters ready for
trial. No trial date has been set, nor has discovery begun.
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 three to five years of operations ranging from $815,000 to
$1,120,000. Acceptance of such a remedy, either by the plaintiffs or the courts,
is uncertain. To date, Sparton has incurred approximately $7,200,000 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 operating costs. For the six
months ended December 31, 1997 and 1996, Sparton incurred costs of $353,000 and
$506,000, respectively, principally related to legal and other defense costs. At
December 31, 1997, the reserve to cover future minimum operating costs totaled
$1,168,000. 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 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.
Challenges of the Electronics Contract Manufacturing Business
- -------------------------------------------------------------
The Company's sales of sonobuoys, principally to the U.S. Navy, have declined
dramatically from the levels of the early 1990's. The Company has chosen to
focus on electronic contract manufacturing which will utilize its existing
technological and manufacturing capabilities, primarily in the U.S. and Canadian
ECM markets. The Company's experience indicates that significant commercial
electronics opportunities exist. As with any change of this magnitude,
unanticipated problems can be reasonably expected to occur. Because of the many
new customers and markets involved, management continues to be challenged in its
attempts to forecast near-term sales and margins with accuracy (see reference
above regarding forward-looking information). Investors should be aware of this
uncertainty and make their own independent evaluation.
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15
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 September
30, 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 Second Quarter of Fiscal 1998: 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: February 12, 1998 /s/ David W. Hockenbrocht
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David W. Hockenbrocht, President
Date: February 12, 1998 /s/ Richard Langley
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Richard Langley, Vice President/Treasurer
and Principal Financial Officer