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, 1998
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, 1998 was 7,828,090.
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SPARTON CORPORATION
INDEX
Financial Statements: Page No.
--------
Condensed Consolidated Balance Sheet - March 31, 1998 and June 30, 1997 3
Condensed Consolidated Statement of Income - Three-month and Nine-month
Periods ended March 31, 1998 and 1997 4
Condensed Consolidated Statement of Cash Flows - Nine-month Periods ended
March 31, 1998 and 1997 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, 1998 and June 30, 1997
March 31 June 30
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,493,492 $ 8,021,620
Investment securities 22,503,026 21,926,849
Accounts receivable 17,667,746 24,800,904
Inventories and costs on contracts in progress,
less progress payments of $2,842,000 at March 31, 1998
($2,198,000 at June 30, 1997) 27,337,621 29,662,787
Prepaid expenses 3,307,218 3,391,094
Current assets of discontinued automotive operations 9,013,875 8,175,772
------------ ------------
Total current assets 90,322,978 95,979,026
Other assets 5,022,402 5,118,524
Property, plant and equipment - net 11,053,686 9,372,526
Noncurrent assets, principally property, plant and
equipment, of discontinued automotive operations - net 3,432,359 3,707,011
------------ ------------
Total assets $109,831,425 $114,177,087
============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Accounts payable $ 7,000,634 $ 12,219,845
Taxes on income 862,934 2,080,513
Accrued liabilities 8,664,518 8,294,118
Current liabilities of discontinued automotive operations 3,875,627 4,623,617
------------ ------------
Total current liabilities 20,403,713 27,218,093
Deferred income taxes 1,571,500 1,571,500
Other liabilities of discontinued automotive operations 116,206 145,044
Shareowners' equity:
Common stock - 7,828,090 shares outstanding at March 31,1998 (7,818,090 at
June 30,1997) after deducting 106,622 shares at
March 31, 1998 (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 77,460,467 75,029,160
------------ ------------
Total shareowners' equity 87,740,006 85,242,450
------------ ------------
Total liabilities and shareowners' equity $109,831,425 $114,177,087
============ ============
See accompanying notes
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SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Income (Unaudited)
For the Three-month and Nine-month Periods ended March 31, 1998 and 1997
Three-month Periods Nine-month Periods
-------------------------------- --------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
Net sales $ 41,901,535 $ 31,866,062 $ 109,133,276 $ 98,021,546
Costs and expenses 40,423,070 31,716,831 107,249,361 97,711,594
------------- ------------- ------------- -------------
1,478,465 149,231 1,883,915 309,952
Other income (expense):
Interest and investment income 433,486 585,747 1,367,037 803,114
Interest expense (3,039) (720) (884,123)
Other - net (2,486) 6,476 556,075 (11,794)
------------- ------------- ------------- -------------
Income from continuing operations before income 1,909,465 738,415 3,806,307 217,149
taxes
Provision for income taxes 706,000 273,000 1,408,000 79,000
------------- ------------- ------------- -------------
Income from continuing operations 1,203,465 465,415 2,398,307 138,149
Discontinued operations:
Loss from discontinued automotive
operations, net of applicable income tax credits - - - (128,720)
Gain on sale of discontinued automotive
operations, net of applicable income taxes - - -
of $18,551,000 - - - 31,587,357
------------- ------------- ------------- -------------
Net income $ 1,203,465 $ 465,415 $ 2,398,307 $ 31,596,786
============= ============= ============= =============
Basic and diluted earnings per share:
Continuing operations $ 0.15 $ 0.06 $ 0.30 $ 0.02
Discontinued operations - - - 4.02
------------- ------------- ------------- -------------
Net income $ 0.15 $ 0.06 $ 0.30 $ 4.04
============= ============= ============= =============
Dividends per share of common stock -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, 1998 and 1997
1998 1997
------------ ------------
Cash flows provided (used) by operating activities:
Income from continuing operations $ 2,398,307 $ 138,149
Add non-cash items affecting continuing operations:
Depreciation 1,355,995 1,158,451
Deferred compensation - 107,615
------------ ------------
3,754,302 1,404,215
Add (deduct) changes in operating assets and liabilities:
Accounts receivable 7,133,158 (2,606,132)
Inventories 2,325,166 5,321,207
Income taxes recoverable - 2,300,000
Other 487,276 (255,252)
Deferred compensation - (2,288,518)
Taxes on income (1,217,579) (14,145,623)
Accounts payable (5,219,211) (4,875,698)
------------ ------------
Net cash provided (used) by continuing operations 7,263,112 (15,145,801)
Cash flow (used) provided by discontinued operations (878,537) 840,721
------------ ------------
6,384,575 (14,305,080)
Cash flows provided (used) by investing activities:
Proceeds from sale of discontinued operations - 78,829,062
Purchases of investment securities-net (576,177) (22,970,679)
Purchases of property, plant and equipment-net (3,037,155) (2,360,944)
Noncurrent other assets 96,122 (358,912)
Discontinued operations, principally purchases of property,
plant and equipment-net (432,904) (250,474)
------------ ------------
(3,950,114) 52,888,053
Cash flows provided (used) by financing activities:
Decrease in notes payable - (33,594,225)
Decrease in long-term obligations - (75,000)
Common stock transactions principally from exercise of stock options 66,249 44,030
Discontinued operations, changes in long-term obligations (28,838) (64,414)
------------ ------------
37,411 (33,689,609)
Increase in cash and cash equivalents 2,471,872 4,893,364
Cash and cash equivalents at beginning of period 8,021,620 718,363
------------ ------------
Cash and cash equivalents at end of period $ 10,493,492 $ 5,611,727
============ ============
See accompanying notes.
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6
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (Unaudited) - Continued
For the Nine-month Periods ended March 31, 1998 and 1997
1997 1997
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,000 $ 1,287,000
============= ============
Income taxes $ 3,157,000 $ 11,543,000
============= ============
Supplemental schedule of noncash investing activities:
For the nine months ended March 31, 1997, the Company had noncash transactions
relating to the sale of discontinued automotive operations totaling
$8,920,000. These noncash transactions consisted of income tax liabilities of
$4,707,000, a provision for operating losses and other costs of operations not
yet sold of $2,569,000, and various other assets and liabilities of
$1,644,000.
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,
1998, and the related condensed consolidated statements of income and cash flows
for the three-month and nine-month periods ended March 31, 1998 and 1997 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, 1998 are not necessarily indicative of the results that may be
expected for the full fiscal year.
2) The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. The diluted earnings per share calculation is very
similar to the previous fully diluted earnings per share calculation method.
Statement 128 is effective December 31, 1997.
The Company has a simple capital structure and there were no changes
under the Statement 128 methodology to the previously reported earnings per
share amounts for any quarter or year-to-date period within fiscal years 1998 or
1997. Income from continuing operations for purposes of the Statement 128
computations were also the same as those reported for all reporting periods
within fiscal years 1998 or 1997.
Basic earnings per share under Statement 128 were computed using the
weighted average number of shares outstanding. For the three-month periods,
average shares outstanding were 7,828,090 in 1998 and 7,818,121 in 1997; for the
nine-month periods, 7,826,423 in 1998 and 7,815,861 in 1997. Differences in the
weighted average number of shares outstanding for purposes of computing diluted
earnings per share were due to the inclusion of employee incentive stock options
previously granted. These differences in the weighted average number of shares
outstanding for the calculation of basic and diluted earnings per share were
insignificant for all reporting periods within fiscal years 1998 and 1997.
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 March 31, 1998, the Company had net unrealized gains, net of
applicable taxes, of $1,000. These net gains are included within equity. For the
nine months ended March 31, 1998, the Company had gross purchases of investment
securities totaling $8,974,000 and gross sales of investment securities totaling
$7,955,000.
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). 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 being
used by the Company for working capital purposes and for expanding its ECM
business.
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8
In December 1996, the Company recorded a reserve totaling $4,671,000
for the estimated costs of discontinuing its automotive business. This reserve
primarily included Flora operating losses, the potential loss on sale of the
Flora operations, and other associated costs. At March 31, 1998, approximately
$1,998,000 of this reserve remained to cover such costs. In February 1998, the
Company announced an agreement in principle to sale Flora. In April 1998, the
negotiations with the prospective buyer were terminated when the parties were
unable to satisfactorily complete a purchase agreement. During the fourth
quarter, the Company will be reviewing its available options and the adequacy of
the reserves previously recorded.
Operating results of discontinued automotive operations are as follows
for the nine-month period ended March 31, 1997. Operating results for
discontinued operations for the nine-month period ended March 31, 1997 were
classified as such through August 1996, the date the Company formalized its plan
to offer for sale its automotive operations.
Nine-month Period
--------------------
1997
--------------------
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 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
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9
granted, Sparton would be required to install additional monitoring wells and
conduct acquifer testing at an estimated cost of less than $550,000. Sparton is
opposing this motion. A hearing was held on the plaintiffs' request for a
preliminary injunction on March 17, 1998. At the conclusion of the hearing the
judge stated orally he had tentatively decided to issue some type of preliminary
injunction. It is unclear whether this tentative decision will become a final
decision, and, if so, whether Sparton will be required to do anything more than
what it has already offered to do if appropriate permits and authorizations are
provided. 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. EPA has also requested that it be allowed to amend its lawsuit to
add a request that the court enforce the Initial Administrative Order first
issued in September 1996. Sparton is contesting and will continue to contest
this request. A schedule for conducting pretrial activities has been issued.
Discovery has begun. No trial date has been set. Court ordered mediation has
been reconvened.
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 $7,350,000
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 nine months ended March 31, 1998 and 1997, Sparton incurred costs
of $506,000 and $629,000 respectively, principally related to legal and other
defense costs. At March 31, 1998, the reserve to cover future minimum operating
costs totaled $1,265,000. 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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10
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
- ---------------------
Nine-Month Periods
- ------------------
Sales for nine-month period ended March 31, 1998 were $109,133,000, an increase
of $11,111,000 (11%) from the same period last year. All of the higher volume
occurred at Sparton Electronics where sales increased $11,254,000 to
$93,212,000. All of the improvement was in defense related sales. Commercial
sales at Sparton Electronics were flat when compared to the prior year. Sales at
Sparton Technology and Sparton Canada were also flat when compared to the same
period last year. Both businesses encountered problems with programs that
delayed planned shipments. For the period, Sparton Technology's sales were
$13,803,000 while Canadian sales were $3,013,000 for the nine months.
An operating profit of $1,884,000 was reported for the nine-month period ended
March 31, 1998 compared to $310,000 for the same period last year. The 1998
results were slightly above expectations and after unfavorable capacity related
variances of $2,166,000. For the nine months, Sparton Electronics reported an
operating profit of $3,919,000 compared to $346,000 last year. These improved
results reflect higher sales and a favorable product mix that included a number
of defense related product shipments. Sparton Technology reported a profit of
$60,000 which reflects the charge off of start-up costs incurred on several new
program start-ups this year and charges totaling $750,000 related to the
environmental claim discussed on pages 8 and 9. The Canadian unit reported an
operating loss of $402,000 compared to a loss of $862,000 last year on
comparable sales volume.
Interest and Investment Income increased $564,000 to $1,367,000 for the
nine-month period ended March 31, 1998 due to the investment of the sales
proceeds from the December 1996 sale of the KPI automotive operations. This sale
is more fully described below and in Note 4 to these financial statements.
Interest Expense declined from $884,000 last year to $720 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 $556,000 for the current nine-month period compared to Other
Expense-Net of $12,000 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 $2,398,000 ($0.30 per
share) for the nine-month period ended March 31, 1998 compared to $138,000
($0.02 per share) last year.
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11
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 nine months ended March
31, 1997. In addition, as more fully described in Note 4 to these financial
statements, 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 $2,398,000 ($0.30 per share) for the nine months ended March 31,
1998 compared to net income of $31,597,000 ($4.04 per share) for the same period
last year.
Three-Month Periods
- -------------------
Sales for the three months ended March 31,1998 were $41,902,000, an increase of
$10,035,000 (31%) from the same quarter last year. Third quarter 1998 sales were
near expected levels. Again, substantially all of the increase occurred at
Sparton Electronics where defense related sales increased significantly.
Commercial sales were unchanged when compared to last year. Sparton Technology's
sales declined $1,098,000 to $4,680,000 due to the previously mentioned program
delays. Upon completion of customer-funded rework on a major program, Sparton
Technology's sales should return to expected levels. Canadian sales for the
quarter were $1,794,000.
Operating income of $1,478,000 was reported for the three months ended March
31,1998 compared to $149,000 for the same period last year. These results were
slightly above expectations. Sparton Electronics reported an operating profit of
$1,826,000 compared to $132,000 last year. Again, these results were due to
substantially higher defense related sales. Sparton Technology reported a modest
profit of $89,000, which was below expectations. The results reflect the lower
than expected sales and are after provision for EPA related costs of $250,000.
Sparton of Canada was profitable, at $126,000, but it is still focused on
substantially increasing its overall business volume.
Interest and Investment Income declined $152,000 to $433,000 for the three-month
period ended March 31, 1998. Such income reflects the previously discussed
investment of the sales proceeds from the discontinued automotive operations.
There was no significant Interest Expense or Other Income (Expense) - net for
either the current or same period 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 $1,203,000 ($0.15 per share) for the three-month period ended March 31, 1998,
compared to $465,000 ($0.06 per share) for the corresponding period last year.
The Company reported net income of $1,203,000 ($0.15 per share) for the
three-month period ended March 31, 1998 compared to a net income of $465,000
($0.06 per share) for the same period last year.
FINANCIAL POSITION
- ------------------
For the nine-month period ended March 31, 1998, Cash and Cash Equivalents
increased $2,472,000 to $10,493,000. Operating activities provided $6,385,000 in
net cash flows. Principal sources of cash flows from operating activities
included decreases in accounts receivable and 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 $3,950,000, 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 $37,000, primarily from the exercise of employee stock
options.
As previously stated, the Company plans on using the after-tax proceeds from the
sale of its automotive operations 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 March 31, 1998, the Company had $87,740,000
($11.21 per share) in recorded shareowners' equity, $69,919,000 in working
capital, and a 4.43:1.00 working capital ratio.
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12
OTHER
- -----
New Accounting Standards
- ------------------------
As more fully described in Note 2 to these financial statements, the Company
adopted Financial Accounting Standards No. 128, Earnings per Share. Statement
128, effective December 31, 1997, replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share. The
Company has a simple capital structure and there were no changes under Statement
128 to the previously reported earnings per share amounts for any quarter or
year-to-date period reported on within fiscal years 1998 and 1997.
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 "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. The Company is currently surveying customers and
major suppliers to determine their status with respect to year 2000 compliance.
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
- ----------
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
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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 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 less than $550,000. Sparton is opposing this motion. A
hearing was held on the plaintiffs' request for a preliminary injunction on
March 17, 1998. At the conclusion of the hearing the judge stated orally he had
tentatively decided to issue some type of preliminary injunction. It is unclear
whether this tentative decision will become a final decision, and, if so,
whether Sparton will be required to do anything more than what it has already
offered to do if appropriate permits and authorizations are provided. 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. EPA
has also requested that it be allowed to amend its lawsuit to add a request that
the court enforce the Initial Administrative Order first issued in September
1996. Sparton is contesting and will continue to contest this request. A
schedule for conducting pretrial activities has been issued. Discovery has
begun. No trial date has been set. Court ordered mediation have been reconvened.
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 $7,350,000 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 nine
months ended March 31, 1998 and 1997, Sparton incurred costs of $506,000 and
$629,000, respectively, principally related to legal and other defense costs. At
March 31, 1998, the reserve to cover future minimum operating costs totaled
$1,265,000. 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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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 March
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 March 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 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: May 11, 1998 /s/ John J. Smith
------------------- -----------------------------------------
John J. Smith, Chairman of the Board of
Directors and Chief Executive Officer
Date: May 11, 1998 /s/ Richard Langley
------------------- -----------------------------------------
Richard Langley, Vice President/Treasurer
and Principal Financial Officer
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