<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
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 of Incorporation) (IRS Employer Identification No.)
2400 East Ganson St., Jackson, Michigan 49202
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 787-8600
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
- ----------------------------- -------------------------------------------
COMMON STOCK, $1.25 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of September 1, 1995 was $20,765,000.
The number of shares of common stock outstanding as of September 1, 1995 were
7,811,370.
Document incorporated in by reference:
Proxy Statement for October 25, 1995 Meeting - Part III
<PAGE> 2
PART I
- ------
Item l. Business
- ------ --------
Except as otherwise indicated, the term "Company" refers to Sparton
Corporation, and the term "Sparton" refers to Sparton Corporation and its
consolidated subsidiaries.
The Company has been in continuous existence since 1900. It was last
reorganized in 1919 as an Ohio corporation. Sparton operates in two principal
business segments. The major products of both industry segments and selected
data are included in the Annual Report in Note 9, Segment Information, of the
Notes to Consolidated Financial Statements on pages 16 and 17 and are filed as
part of Exhibit 13. Additional information about each segment is as follows.
Electronics
- -----------
Historically, the electronics segment's principal product has been
sonobuoys, which are anti-submarine warfare devices used by the U.S. Navy and
other free world military organizations. It competes with a limited number of
qualified manufacturers for sonobuoy procurements by the U.S. and selected
foreign governments. Contracts are obtained through competitive bid or
directed procurement. The electronics segment also designs and/or manufactures
a variety of electronic and electromechanical products for the
telecommunications, electronics and other industries. Many of the physical and
technical attributes used in the production of sonobuoys are required in these
markets. Sales are generally obtained on a competitive basis. Competitive
factors include technical ability, customer service, product quality and price.
A majority of the proprietary products,
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principally transducers and condition monitoring systems, are sold to the
telecommunications industry worldwide. The primary industries of the Company's
contract manufacturing business include telecommunications, medical and
industrial controls and scientific instrumentation. In the general contract
manufacturing business, it must compete with a number of domestic and foreign
manufacturers. Commercial electronics products are distributed through a
direct sales force and through a small group of manufacturers' representatives.
Material availability, product quality and cost are very important factors in
this latter business.
At June 30, 1995 and June 30, 1994, the aggregate backlog was
approximately $100 million and $90 million, respectively. A majority of the
1995 backlog is expected to be realized in 1996.
The Company's sales of sonobuoys, principally to the U.S. Navy, have
declined dramatically from $151,024,000 in 1992 to $34,663,000 in 1995. It is
expected that the international demand for production sonobuoys will continue
at reduced and unpredictable levels for the foreseeable future. In response to
this changing environment, the Company continues to reduce overhead costs
within the defense-oriented operations and is developing commercial
opportunities which will utilize its existing technological and manufacturing
capabilities. In addition, the Company is focusing on expanding sales in its
automotive and other commercial electronics markets on a worldwide basis. The
Company is also restructuring its business operations to compete in the
commercial electronics markets where the risks and environment is significantly
different than that historically found within the defense-oriented industry.
As with any change of this magnitude, unanticipated problems and delays can
reasonably be expected to occur. Investors should be aware of this uncertainty
and make their own independent evaluation.
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Automotive and Industrial Products
- ----------------------------------
The automotive and industrial products segment produces a variety of
automatic transmission shifters, horns, metal airbag components, spare tire
carriers, parking brakes, brake pedal modules and stampings and assemblies for
manufacturers of automobiles, trucks and other industrial and marine equipment.
In the automotive supplier industry, the Company must compete with a number of
globally-based manufacturers on the basis of product quality, customer service
and price. The Company is believed to be one of the largest independent
manufacturers of automatic transmission shifters and horns in North America.
Sales are generally obtained on a competitive basis through either a direct
sales force or manufacturers' representatives.
Other Information
- -----------------
Sparton's two principal business markets are dependent on a limited number
of customers and the loss of any one of them could have a material adverse
financial effect. Materials for the manufacturing segments are obtained from a
variety of worldwide sources, except electronic components. Access to
competitively priced materials is critical to success in the electronic
contract manufacturing business. While Sparton holds a number of patents
relating to its products and processes, none are considered of material
importance to any of the individual business segments. Neither of the business
segments has encountered or expects to encounter significant long-term problems
in obtaining sufficient raw materials although the contract manufacturing
operations have experienced spot shortages of key components needed to
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complete a customer order. While sales fluctuate during the year, such
fluctuations have not historically reflected a definitive seasonal pattern or
tendency.
Research and development expenditures amounted to approximately
$20,440,000 in 1995, $19,621,000 in 1994 and $18,511,000 in 1993 (approximately
$15,985,000, $16,197,000 and $15,155,000 of these expenditures, respectively,
were customer funded), primarily in the electronics segment. There are
approximately 300 employees involved in research and development. Few, if any,
devote all of their time to such efforts.
Sparton employed approximately 2400 people at June 30, 1995. The Company
has one operating division and eight wholly-owned active subsidiaries.
Item 2. Properties
- ------- ----------
The table below lists the principal properties of Sparton, by segment.
All are owned except as noted. There are manufacturing and/or office
facilities at each location. Sparton believes these facilities are suitable
for its operations, except as noted.
Electronics:
Jackson, Michigan
DeLeon Springs, Florida (2 plants)
Brooksville, Florida
London, Ontario
Albuquerque, New Mexico (see below)
Rio Rancho, New Mexico
Deming, New Mexico (lease/purchase, see below)
Automotive and industrial products:
Flora, Illinois
Grayville, Illinois
Lake Odessa, Michigan
Kentwood, Michigan (leased)
Gladwin, Michigan
Grand Haven, Michigan (leased)
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White Cloud, Michigan (leased)
Spring Lake, Michigan
Brownstown, Indiana
Hartford City, Indiana
The Company leases the Deming, New Mexico facility under terms of a
capital lease and has exercised an option to purchase the facility at the end
of the lease term which expires on July 1, 1997. Future minimum payments under
this capital lease at June 30, 1995 are as follows: 1996 - $85,000, 1997 -
$80,000, and $75,000 in 1998. Interest of $15,000, payable over the remaining
lease term at 6 1/8% per annum, was deducted in arriving at the capitalized
lease obligation liability at June 30, 1995. The Company's Coors Road,
Albuquerque, New Mexico facility is not being fully utilized and is offered for
sale.
Both the White Cloud, Michigan and Grand Haven, Michigan facilities are
occupied under lease agreements that allow termination by either party upon
ninety (90) day notice. These facilities are owned by John J. Smith and Lawson
K. Smith, Chief Executive Officer, and Vice President-Secretary, respectively,
of Sparton Corporation. The agreements, the result of arms-length type
negotiations, grant the Company the option to acquire the properties during the
lease term for $252,400 and $223,200, respectively.
The administrative facility in Kentwood, Michigan is presently leased
under an agreement that expires in October, 1997.
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Item 3. Legal Proceedings
- ------ -----------------
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 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, the Company believes it has
contributed only deminimus amounts to those sites in which it is currently
viewed a potentially responsible party.
One of the Company's facilities located in New Mexico has been the subject
of ongoing investigations by the United States Environmental Protection Agency
(EPA). To date, the work has involved remedial investigations, negotiation and
execution of an administrative order on consent with the EPA, establishment of
on-site and off-site monitoring systems, and the installation of some
groundwater recovery and air stripping equipment. The remedial investigation
has been completed and approved. The Company has prepared a corrective action
plan based upon the results of its investigation. In August 1995 the EPA
announced its preferred remedy for the site. The EPA's proposed remedy, which
is subject to public comment and administrative review, includes remediation
tasks which the Company believes are either unnecessary or technically
impractical. The Company is challenging the EPA's proposed remedy selection.
These additional tasks would add significantly to the ultimate clean-up
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costs for the facility. In addition, the Company is involved in related issues
with State of New Mexico environmental agencies and a nearby landowner. The
Company has charged to expense approximately $2,700,000, net of $3,000,000 of
insurance recoveries received, since the contamination problem was first
identified in the early 1980's. All amounts available under insurance
policies concerning this clean-up effort have been previously recovered.
Efforts to resolve these matters will likely continue for a number of years.
The ultimate legal and financial liability of the Company in respect to the
above matters cannot be estimated with any certainty. Management of the
Company believes, however, based on its examination of such matters, experience
to date and discussions with legal counsel and other consultants, that such
ultimate liability (including insurance recoveries, where applicable) should
not be material in relation to the Company's consolidated financial position
and cash flows. The impact in any one year, however, could be material to the
Company's consolidated results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to a vote of the security holders during the
last quarter of the period covered by this report.
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Executive Officers
- ------------------
Information with respect to executive officers of the Registrant is set
forth below. The positions noted have been held for at least five years,
except where noted.
<TABLE>
<CAPTION>
Age
---
<S> <C>
John J. Smith, Chairman of the Board, Chief Executive Officer and 83
- -------------
Director.
David W. Hockenbrocht, President, Chief Operating Officer and Director. 60
- ---------------------
Lawson K. Smith, Vice President, Secretary and Director; President of 80
- ---------------
Sparton Engineered Products, Inc.-Lake Odessa Group.
Richard L. Langley, Vice President-Treasurer and Assistant Secretary. 50
- ------------------
Mark W. Pickard, Vice President and General Manager of Sparton of 42
- ---------------
Canada, Ltd. since October 1992. Prior to that date, Mr. Pickard
was employed by the Company in several capacities, principally
within financial management.
Douglas E. Johnson, Vice President and General Manager of Sparton 47
- ------------------
Electronics since July 1994. Prior to that date, Mr. Johnson was
the Assistant General Manager of Sparton Electronics and prior to
August 1992, was employed by the Company in several capacities,
principally within engineering and manufacturing.
</TABLE>
-8-
<PAGE> 10
<TABLE>
<CAPTION>
Age
---
<S> <C>
Gary A. White, Vice President and General Manager of Sparton Engineered 44
- -------------
Products, Inc.-Lake Odessa Group since August 1991. Prior to that
date , Mr. White was employed by the Company as acting General
Manager of Sparton Engineered Products, Inc.-KPI Group and prior
to January 1991, as Director of Manufacturing.
Jerry R. Gause, Vice President and General Manager of Sparton Engineered 54
- --------------
Products, Inc.-KPI Group since July 1991. Employed as Vice President
and General Manager of Sparton Engineered Products, Inc.-Lake Odessa
Group since November 1989.
William C. Mirgain, Vice President and General Manager of Sparton 52
- ------------------
Engineered Products, Inc.-Flora Group since July 1994. Prior to that
date, Mr. Mirgain was employed as Managing Director of DME Europe
since August 1991 and prior to that date, was employed as Director
of International Manufacturing for FMC Corporation.
Richard D. Mico, Vice President and General Manager of Sparton Technology, 65
- ---------------
Inc.
R. Jan Appel, Vice President, General Counsel and Assistant Secretary 49
- ------------
Joseph S. Lerczak, Assistant Treasurer 38
- -----------------
</TABLE>
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John J. Smith and Lawson K. Smith are brothers. There are no other family
relationships between the persons named above. John J. Smith is employed as
Chief Executive Officer under the terms of an employment agreement through June
30, 1997. All other officers are elected annually and serve at the discretion
of the Board of Directors.
PART II
- -------
Item 5. Market for the Registrant's Common Stock
- ------- ----------------------------------------
and Related Security Holder Matters
----------------------------------------
Information with respect to the market for the Company's stock, including
stock prices, stock exchange and number of shareowners, and quarterly dividends
for the two year period ended June 30, 1995, is included under "Financial
Highlights" on page 1 of the Annual Report and is included in Exhibit 13 filed
herewith.
Item 6. Selected Financial Data
- ------- -----------------------
The "Selected Financial Data" on page 18 of the Annual Report is
included in Exhibit 13 filed herewith.
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Item 7. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" on pages 19-21 of the Annual Report is included in Exhibit 13
filed herewith.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
The consolidated financial statements and "Report of Independent Auditors"
are included in the Annual Report on pages 8-17 and 12, respectively, and are
included in Exhibit 13 filed herewith.
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------- -----------------------------------------------------------
and Financial Disclosure
--------------------------
None.
PART III
- --------
Item 10. Directors and Executive Officers
- -------- --------------------------------
of the Registrant
-----------------
Information with respect to directors is included in the Proxy Statement
under "Election of Directors" and is incorporated herein by reference.
Information concerning the executive officers is included in Part I on pages
8-10.
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Item 11. Executive Compensation
- -------- ----------------------
Information concerning executive compensation is included under
"Compensation of Executive Officers and Directors" in the Proxy Statement and
is incorporated herein by reference.
Item 12. Security Ownership of Certain
- -------- -----------------------------
Beneficial Owners and Management
--------------------------------
Information on management and certain other beneficial ownership of the
Company's common stock is included under "Outstanding Shares and Voting" in the
Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Information as to certain relationships and related transactions is
included under "Certain Relationships and Transactions" in the Proxy Statement
and is incorporated herein by reference.
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<TABLE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 10-K
- -------- ----------------------------------------------------------------
(a) Exhibits
See Exhibit Index on page 14
(b) Financial Statement Schedules
All prescribed schedules have been omitted since the required
information is not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
(c) Reports on Form 10-K
The following financial statements are filed as part of this report:
Index to Financial Statements Covered by Report of Independent Auditors:
------------------------------------------------------------------------
<CAPTION>
Page Reference
--------------------------------
Annual Report
to Shareowners
------------------
<S> <C>
Data from the 1995 Annual Report to Share-
owners of Sparton Corporation:
Consolidated balance sheets at June 30, 8 - 9
1995 and 1994
For the years ended June 30, 1995, 1994,
and 1993:
Consolidated statements of operations 10
Consolidated statements of cash flows 11
Consolidated statements of share- 12
owners' equity
Notes to consolidated financial 13 - 17
statements
</TABLE>
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<TABLE>
<CAPTION>
Exhibit Index
- -------------
<S> <C>
3 and 4 Articles of Incorporation of the Registrant were filed with Form 10-K for the year ended June 30, 1981 and an
amendment thereto was filed with Form 10-Q for the three-month period ended September 30, 1983, and are
incorporated herein by reference.
By-laws of the Registrant were filed with Form 10-K for the year ended June 30, 1981, and are incorporated
herein by reference.
Code of Regulations of the Registrant were filed with Form 10-K for the year ended June 30, 1981 and an
amendment thereto was filed with Form 10-Q for the three-month period ended September 30, 1982, and are
incorporated herein by reference.
10 The employment agreement with John J. Smith was filed with Form 10-K for the year ended June 30, 1981 and
subsequent amendments thereto were filed with Form 10-Q for the three-month period ended September 30,
1988, with Form 10-Q for the three-month period ended September 30, 1991 and with Form 10-Q for the
three-month period ended September 30, 1994 and are incorporated herein by reference.
13 Portions of the 1995 Annual Report to Shareowners (filed herewith and attached).
22 Subsidiaries (filed herewith and attached).
</TABLE>
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<PAGE> 16
<TABLE>
<S> <C>
23 Consent of independent auditors (filed herewith and attached).
27 Financial data schedule, submitted to the Securities and Exchange Commission for its information.
(filed herewith and attached)
</TABLE>
Reports on Form 8-K Filed in the Fourth Quarter of Fiscal 1995
- --------------------------------------------------------------
No reports on Form 8-K were required to be filed by the Registrant during
the last quarter of the period covered by this report.
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<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
------------------------------------
Date: September 28, 1995 By /s/ Richard L. Langley
------------------------------------
Richard L. Langley, Vice President-
Treasurer (Principal Accounting and
Financial Officer)
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<PAGE> 18
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature and Title Date
------------------- ----
<S> <C>
By /s/ John J. Smith August 25, 1995
- -------------------------------------------------- ---------------
John J. Smith, Chairman of the Board
of Directors and Chief Executive Officer
By /s/ David W. Hockenbrocht August 25, 1995
- -------------------------------------------------- ---------------
David W. Hockenbrocht, President,
Chief Operating Officer and Director
By /s/ Lawson K. Smith August 25, 1995
- -------------------------------------------------- ---------------
Lawson K. Smith, Vice President, Secretary
and Director
By /s/ James N. DeBoer August 25, 1995
- -------------------------------------------------- ---------------
James N. DeBoer, Director
By /s/ Robert J. Kirk August 25, 1995
- -------------------------------------------------- ---------------
Robert J. Kirk, Director
By /s/ Marshall V. Noecker August 25, 1995
- -------------------------------------------------- ---------------
Marshall V. Noecker, Director
By /s/ Rory Riggs August 25, 1995
- -------------------------------------------------- ---------------
Rory Riggs, Director
By /s/ David B. Schoon August 25, 1995
- -------------------------------------------------- ---------------
David B Schoon, Director
By /s/ Michael N. Taglich August 25, 1995
- -------------------------------------------------- ---------------
Michael N. Taglich, Director
By /s/ Blair H. Thompson August 25, 1995
- -------------------------------------------------- ---------------
Blair H. Thompson, Director
</TABLE>
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<PAGE> 1
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SPARTON CORPORATION & SUBSIDIARIES For Years Ended June 30
===============================================================================================================
1995 1994 1993
===============================================================================================================
<S> <C> <C> <C>
Net Sales $209,530,768 $201,174,014 $233,052,133
Net Income (Loss) (6,460,721) (4,899,414) 6,637,942
Working Capital 33,187,775 42,204541 51,212,170
Working Capital Ratio 1.66:1 2.00:1 2.56:1
Common Shares Outstanding at June 30 7,811,370 7,811,370 7,810,370
Long-Term Obligations $ 466,368 $ 626,012 $ 785,120
Per Common Share:
Net Income (Loss) $(.83) $(.63) $ .85
Working Capital 4.25 5.40 6.56
Shareowners' Equity 7.12 7.95 8.57
Dividends -- -- --
</TABLE>
<TABLE>
<CAPTION>
Market Data
PRICE RANGE
NEW YORK STOCK EXCHANGE YEARS ENDED JUNE 30
===================================================================================================================
1995 1994 1993
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended: High Low High Low High Low
--------------- ---------------- ---------------
September 30 5 3/4 4 5/8 6 5/8 5 3/8 8 1/8 5 1/4
December 31 5 5/8 4 1/4 7 1/2 6 6 5/8 4 3/4
March 31 4 1/2 3 3/8 7 1/4 6 1/8 6 1/4 5 7/8
June 30 5 1/4 3 1/2 6 1/2 4 7/8 6 1/4 5
</TABLE>
Recent Price as of August 25, 1995 4 3/4
Shareowners of record 1,102
1
<PAGE> 2
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SPARTON CORPORATION & SUBSIDIARIES June 30, 1995 and 1994
=======================================================================================================================
1995 1994
=======================================================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,203,184 $ 1,713,718
Income taxes recoverable 2,283,646 2,591,000
Accounts receivable:
Trade, less allowance of $179,000 ($103,000 in 1994)
for doubtful accounts 28,312,939 24,783,888
U.S. and foreign governments 8,674,737 7,149,291
Inventories (Notes 1 and 2) 39,608,812 45,835,914
Prepaid expenses (Note 6) 3,746,705 2,434,109
------------- -------------
Total current assets 83,830,023 84,507,920
Other assets (Note 5) 4,276,130 3,060,062
Property, plant and equipment, at cost:
Land and land improvements 1,849,285 1,823,505
Buildings and building equipment 19,470,730 19,184,574
Machinery and equipment 41,902,310 38,675,057
------------- -------------
63,222,325 59,683,136
Less accumulated depreciation (40,673,706) (38,529,178)
------------- -------------
Net property, plant and equipment 22,548,619 21,153,958
------------- -------------
$ 110,654,772 $ 108,721,940
============= =============
</TABLE>
See accompanying notes
<TABLE>
<CAPTION>
FINANCIAL TRENDS AT A GLANCE
NET SALES NET INCOME (LOSS) PER COMMON SHARE
(In Millions of Dollars)
'91 '92 '93 '94 '95 '91 '92 '93 '94 '95
<S> <C> <C> <C> <C> <S> <C> <C> <C> <C>
$214.4 $245.4 $233.1 $201.2 $209.5 $0.53 $1.02 $0.85 $(.63) (.83)
</TABLE>
8
<PAGE> 3
<TABLE>
<CAPTION>
SPARTON CORPORATION & SUBSIDIARIES June 30, 1995 and 1994
=====================================================================================================================
1995 1994
=====================================================================================================================
<S> <C> <C>
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Notes payable (Note 3) $ 25,580,740 $ 20,614,550
Accounts payable (Note 2) 16,170,576 12,872,286
Salaries and wages 3,143,024 2,840,827
Income taxes 596,006 446,331
Accrued liabilities 5,151,902 5,529,385
------------ ------------
Total current liabilities 50,642,248 42,303,379
Deferred compensation 1,976,593 1,912,265
Deferred income taxes (Note 6) 1,959,500 1,809,500
Long-term obligations, net of current maturities (Note 3) 466,368 626,012
Commitments and contingencies (Note 7)
Shareowners' equity:
Preferred stock, serial, no par value; 200,000 shares authorized,
none outstanding --- ---
Common stock, $1.25 par value; 8,500,000 shares authorized,
7,811,370 shares outstanding after deducting 123,342 shares
in treasury (Note 4) 9,764,213 9,764,213
Capital in excess of par value 403,067 403,067
Retained earnings 45,442,783 51,903,504
------------ ------------
Total shareowners' equity 55,610,063 62,070,784
------------ ------------
$110,654,772 $108,721,940
============ ============
</TABLE>
<TABLE>
<CAPTION>
Equity Per Common Share Working capital
(In Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
'91 '92 '93 '94 '95 '91 '92 '93 '94 '95
$6.71 7.74 8.57 7.95 7.12 $37.3 45.3 51.2 42.2 33.2
</TABLE>
9
<PAGE> 4
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
SPARTON CORPORATION & SUBSIDIARIES Years ended June 30, 1995, 1994 and 1993
=========================================================================================================================
1995 1994 1993
=========================================================================================================================
<S> <C> <C> <C>
Net sales $209,530,768 $201,174,104 $233,052,133
Costs and expenses:
Costs of goods sold 195,946,377 183,941,559 198,059,278
Selling and administrative 22,093,481 24,038,992 23,977,155
------------ ------------ ------------
218,039,858 207,980,551 222,036,433
------------ ------------ ------------
(8,509,090) (6,806,447) 11,015,700
Other income (expense):
Interest (1,655,847) (685,279) (601,975)
Other-net 650,216 471,312 229,217
------------ ------------ ------------
(1,005,631) (213,967) (372,758)
------------ ------------ ------------
Income (loss) before income taxes (9,514,721) (7,020,414) 10,642,942
Provision (credit) for income taxes (Notes 1 and 6) (3,054,000) (2,121,000) 4,005,000
------------ ------------ ------------
Net income (loss) $ (6,460,721) $ (4,899,414) $ 6,637,942
============ ============ ============
Net income (loss) per share of common stock $(.83) $(.63) $.85
===== ===== ====
See accompanying notes
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL TRENDS AT A GLANCE (continued)
Governmental Sales Commercial Sales
(In Millions of Dollars) (In Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
'91 '92 '93 '94 '95 '91 '92 '93 '94 '95
$139.6 165.0 111.1 50.2 38.5 $74.8 80.4 122.0 151.0 171.0
</TABLE>
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<PAGE> 5
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SPARTON CORPORATION & SUBSIDIARIES Years ended June 30, 1995, 1994 and 1993
<CAPTION>
=======================================================================================================================
1995 1994 1993
=======================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(6,460,721) $(4,899,414) $ 6,637,942
Add (deduct) non-cash items affecting operations:
Depreciation 4,421,868 3,488,907 3,074,963
Deferred income taxes (928,000) 102,000 517,000
Other (362,783) (470,104) (363,243)
Add (deduct) changes in operating assets and liabilities:
Income taxes recoverable 307,354 (2,591,000) 348,580
Accounts receivable (5,295,331) (314,308) (668,129)
Inventories and prepaid expenses 5,790,272 1,666,407 (5,906,256)
Accounts payable, salaries and wages, accrued liabilities
and income taxes 3,372,208 (7,592,865) 4,119,432
---------- ---------- ----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 844,867 (10,610,377) 7,760,289
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (6,093,808) (6,911,908) (3,381,636)
Proceeds from sale of property, plant and equipment 277,279 23,205 13,362
Other (345,889) 71,918 (62,846)
---------- ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (6,162,418) (6,816,785) (3,431,120)
FINANCING ACTIVITIES:
Increase (decrease) in notes payable 4,966,190 16,734,550 (5,078,810)
Proceeds from the exercise of stock options --- 4,375 51,938
Principal payments on long-term borrowings (159,173) (158,611) (157,916)
---------- ---------- ----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 4,807,017 16,580,314 (5,184,788)
---------- ---------- ----------
DECREASE IN CASH (510,534) (846,848) (855,619)
Cash at beginning of year 1,713,718 2,560,566 3,416,185
---------- ---------- ----------
CASH AT END OF YEAR $ 1,203,184 $ 1,713,718 $ 2,560,566
========== ========== ==========
Supplemental disclosures of cash paid (refunded) during the year for
Interest $ 1,545,276 $ 672,199 $ 580,508
========== ========== ==========
Income taxes $(2,621,789) $ 984,844 $ 3,103,929
========== ========== ==========
See accompanying notes
</TABLE>
11
<PAGE> 6
CONSOLIDATED STATEMENTS OF SHAREOWNER'S EQUITY
<TABLE>
SPARTON CORPORATION & SUBSIDIARIES Years ended June 30, 1995, 1994 and 1993
<CAPTION>
=====================================================================================================================
Common stock,
$1.25 par value Capital in
-------------------------- excess of Retained
Shares Amount par value earnings Total
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance July 1, 1992 7,791,672 $9,739,590 $371,377 $50,164,976 $60,275,943
Net income 6,637,942 6,637,942
Exercise of Stock options 18,698 23,373 28,565 51,938
--------- ---------- -------- ----------- -----------
Balance June 30, 1993 7,810,370 9,762,963 399,942 56,802,918 66,965,823
Net loss (4,899,414) (4,899,414)
Exercise of stock options 1,000 1,250 3,125 4,375
--------- ---------- -------- ----------- -----------
Balance June 30, 1994 7,811,370 9,764,213 403,067 51,903,504 62,070,784
Net loss (6,460,721) (6,460,721)
--------- ---------- -------- ----------- -----------
Balance June 30, 1995 7,811,370 $9,764,213 $403,067 $45,442,783 $55,610,063
========= ========== ======== =========== ===========
See accompanying notes
</TABLE>
Report of Independent Auditors
The Board of Directors and Shareowners
Sparton Corporation
We have audited the accompanying consolidated balance sheets of Sparton
Corporation and subsidiaries as of June 30, 1995 and 1994, and the related
consolidated statements of operations, shareowners' equity, and cash flows for
each of the three years in the period ended June 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sparton
Corporation and subsidiaries at June 30, 1995 and 1994, and the consolidated
results of thee operations and their cash flows for each of the three years in
the period ended June 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, in the year ended June 30,
1994, the Company changed its methods of accounting for income taxes and
postemployment benefits.
ERNST & YOUNG LLP
Toledo, Ohio
August 18, 1995
12
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Sparton Corporation and all subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
CONTRACT ACCOUNTING - long-term contracts relate principally to government
defense and commercial contracts within the Electronics segment. Production
contracts are accounted for based on completed units shipped and their
estimated average contract cost per unit. Development contracts are accounted
for based on percentage completion. Costs and fees billed under cost
reimbursement type contracts are recorded as sales.
CREDIT PRACTICES - The Company manufactures and sells products principally in
the commercial electronics, defense and automotive manufacturing industries.
Credit terms are granted and periodically revised based on evaluations of the
customers' financial condition with collateral generally not required.
Receivables from foreign customers are generally secured by letters of credit.
Credit losses relating to customers consistently have been within management's
expectations.
INVENTORIES - Inventories are valued at the lower of cost (first-in, first-out
basis) or market.
DEPRECIATION - Depreciation is provided over estimated useful lives on
accelerated methods, except for certain buildings, machinery and equipment with
an aggregate cost of approximately $12,507,000 at June 30, 1995, which are
being depreciated on the straight-line method.
RESEARCH AND DEVELOPMENT EXPENDITURES - Expenditures for research and
development not funded by customers amounted to approximately $4,455,000 in
1995, $3,424,000 in 1994, and $3,356,000 in 1993.
EARNINGS PER SHARE - Earnings per shale are computed using the weighted average
number of common shares outstanding of 7,811,370 in 1995, 7,810,721 in 1994 and
7,800,543 in 1993. Inclusion of outstanding stock options in the computation
would not result in any significant dilution.
CHANGES IN METHODS OF ACCOUNTING - Effective the first quarter of 1994, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities. They are measured using the enacted tax
rates and laws that will be in effect when such differences are expected to
reverse. Prior years financial statements have not been restated to apply the
provisions of SFAS No. 109 and, accordingly, reflect the deferred method. Under
the deferred method, deferred income tax provisions were made for all timing
differences between earnings for financial reporting and income tax purposes.
The adoption of SFAS No. 109 has not changed the actual amount of income tax
paid by the Company. The cumulative effect of this accounting change was to
decrease the net loss for the first quarter of fiscal 1994 by $264,000 ($.03
per share).
In the fourth quarter of 1994, the Company elected to early adopt
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits," retroactively as of July 1, 1993. Under this new
method of accounting, the Company accrues disability benefits when it becomes
probable that such benefits will be paid and when sufficient information exists
to make reasonable estimates of the amounts to be paid. Prior to adoption, the
Company recognized the cost of providing these benefits on a cash basis. Prior
years financial statements have not been restated. The cumulative effect of
this accounting change was to increase the net loss for the first quarter of
1994 by $264,000 ($.03 per share), net of income taxes of $149,000. The effect
of this accounting change on 1994 operations was not material.
The accounting changes offset each other and, therefore, had no effect
on the net loss reported for 1994.
2. LONG-TERM CONTRACTS
Inventories include costs related to long-term contracts of approximately
$12,461,000 and $17,471,000 at June 30, 1995 and 1994, respectively, reduced by
progress billings from the United States government of approximately $1,025,000
and $5,627,000, respectively.
Accounts payable includes billings in excess of costs of $6,045,000 and
$1,236,000 at June 30, 1995 and 1994, respectively.
3. DEBT AND LEASE INFORMATION
At June 30, 1995, the Company had unsecured, informal lines of credit totaling
$28,000,000 with three separate banks. During 1995, the Company's Canadian
subsidiary obtained an unsecured informal line of credit with a Canadian bank
for borrowings up to $5,000,000. The short-term borrowings outstanding had
weighted average interest rates of 7.20% and 5.53% at June 30, 1995 and 1994,
respectively.
Long-term obligations consisted of unsecured 3% notes payable and a
capitalized lease obligation. Annual maturities of long-term obligations,
including the principal portion of the capital lease, for the years subsequent
to June 30, 1995 are as follows: 1996 - $139,000, 1997 - $160,000, 1998 -
$161,000, 1999 - $87,000, 2000 - $58,000.
The Company leases various facilities and equipment under agreements
accounted for as operating leases. Rent expense amounted to approximately
$1,051,000, $1,980,000, and $2,145,000 in 1995, 1994 and 1993, respectively.
Commitments under these leases are not significant.
4. STOCK OPTIONS
The Company has an incentive stock option plan under which 400,000 common
shares were reserved for option grants to key employees at the fair market
value of the stock at the date of the grant. Under the plan, the options
generally become exercisable cumulatively, beginning one year after the date
granted, in equal annual installments. Individual grants may have a stock
appreciation rights feature whereby optionees can surrender up to one-half of
their unexercised options to the extent then exercisable in exchange for cash
or common shares equal to the difference between the then current market value
and the option prices for shares issuable upon surrender of such options. In
addition, the plan permits the Company to award restricted stock to eligible
employees, providing the recipient with limited ability to sell or
otherwise transfer the restricted shares.
13
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information on options is as follows:
<TABLE>
<CAPTION>
SHARES
UNDER
OPTION PRICE RANGE
================================================================
<S> <C> <C>
Outstanding at July 1, 1992 92,096 $2.69 to $4.38
Granted 71,000 6.63
Exercised (17,698 as stock
appreciation rights) (36,396) 2.69 to 4.38
Cancelled (4,900) 4.38 to 6.63
------- --------------
Outstanding at June 30, 1993 121,800 4.38 to 6.63
Exercised (1,000) 4.38
Cancelled (9,200) 4.38 to 6.63
------- --------------
Outstanding at June 30, 1994 111,600 4.38 to 6.63
Exercised as stock
appreciation rights (7,500) 4.38
Cancelled or expired (55,100) 4.38 to 6.63
------- --------------
Outstanding at June 30, 1995 49,000 $6.63
======= ==============
</TABLE>
At June 30, 1995 there were 341,500 shares reserved for option grants and
17,643 share options exercisable which expire in 1997 and 1999. The remaining
31,357 share options outstanding become exercisable beginning in 1996 and
expire through 1999.
5. EMPLOYEE BENEFIT PLANS
The Company has a contributory pension plan for the benefit of certain salaried
and hourly employees. Basic plan benefits are based upon the participants'
years of service. Additional benefits are available to contributory
participants based upon their years of contributory service and compensation.
The Company's policy is to fund the plan based upon legal requirements and tax
regulations.
The following major assumptions were used in the actuarial valuations:
Long-term rate of investment return 8.0%
Long-term rate of increase in compensation levels 5.0%
Discount rate (7.5% for 1994 and 1993) 8.0%
Net periodic pension income of $427,000, $458,000 and $576,000 was
recognized in 1995, 1994 and 1993, respectively. The components of these
credits are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
===============================================================
<S> <C> <C> <C>
Service cost-benefits
earned during the year $ 239,000 $ 240,000 $ 178,000
Interest on projected
benefit obligation 623,000 599,000 577,000
Actual return on
plan assets 85,000 (251,000) (571,000)
Net amortization
and deferral (1,374,000) (1,046,000) (760,000)
--------- --------- ---------
Net periodic
pension income $ (427,000) $ (458,000) $(576,000)
========= ========= =========
</TABLE>
The following table summarizes the funding status of the
plan at March 31:
<TABLE>
<CAPTION>
1995 1994
===========================================================================
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested $ 7,277,000 $ 6,754,000
Nonvested 167,000 160,000
----------- -----------
$ 7,444,000 $ 6,914,000
=========== ===========
Projected benefit obligation $ 8,532,000 $ 8,197,000
Market value of plan assets consisting
principally of common stock
(including 319,100 shares of the
Company's common stock),
corporate bonds, and U.S.
Government obligations 11,485,000 12,523,000
----------- -----------
Excess of plan assets over projected
benefit obligation 2,953,000 4,326,000
Unrecognized net loss 2,537,000 969,000
Unrecognized net transition asset (2,139,000) (2,371,000)
----------- -----------
Prepaid pension cost included in
other assets $ 3,351,000 $ 2,924,000
=========== ===========
</TABLE>
The Company also maintains several contributory progress sharing
retirement plans. The aggregate costs of these plans amounted to $543,000 for
1995, $484,000 for 1994 and $485,000 for 1993.
6. INCOME TAXES
During the first quarter of 1994, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." The Statement requires the use of the asset and liability
approach for financial accounting and reporting for income taxes (liability
method). Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities. The cumulative effect of adopting SFAS No. 109 as of July 1, 1993
was to decrease the net loss by $264,000 ($.03 per share), primarily due to a
reduction in the expected tax rates used to measure the deferred tax assets and
liabilities. Financial statements for prior years have not been restated.
Comparative income tax information is reflected under the liability method for
1995 and 1994 and the deferred method for 1993.
14
<PAGE> 9
Significant components of the Company's deferred tax assets and
liabilities at June 30, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
================================================================
<S> <C> <C>
Deferred tax assets:
Canadian tax carryovers $1,596,000 $ 1,304,000
Employment and compensation 1,264,000 1,231,000
Inventories 2,243,000 1,164,000
Other 391,000 397,000
---------- ----------
Total deferred tax assets 5,494,000 4,096,000
Less valuation reserve for Canadian
tax carryovers (1,596,000) (1,304,000)
---------- ----------
3,898,000 2,792,000
Deferred tax liabilities:
Property, plant and equipment 1,618,000 1,593,000
Prepaid pension costs 1,207,000 1,053,000
---------- ----------
Total deferred tax liabilities 2,825,000 2,646,000
---------- ----------
Net deferred tax assets $ 1,073,000 $ 146,000
========== ==========
</TABLE>
Deferred taxes are included in the balance sheet at June 30, 1995 and 1994
as follows:
<TABLE>
<S> <C> <C>
Prepaid expenses $3,032,500 $1,955,500
Deferred tax liabilities 1,959,500 1,809,500
---------- ----------
$1,073,000 $ 146,000
========== ==========
</TABLE>
Income (loss) before income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
==================================================================
<S> <C> <C>
United States $(8,716,442) $(5,625,236) $12,069,999
Canada (798,279) (1,395,178) (1,427,057)
----------- ----------- -----------
$(9,514,721) $(7,020,414) $10,642,942
=========== =========== ===========
</TABLE>
The related provision (credit) for income taxes consists of:
<TABLE>
<CAPTION>
1995 1994 1993
===============================================================
<S> <C> <C> <C>
Current
United States $(2,188,000) $(2,397,000) $3,073,000
Canada (32,000) (48,000)
State and local 62,000 206,000 463,000
---------- ---------- ----------
(2,126,000) (2,223,000) 3,488,000
Deferred:
United States (928,000) 102,000 447,000
Canada -- -- 70,000
---------- ---------- ----------
(928,000) 102,000 517,000
---------- ---------- ----------
$(3,054,000) $(2,121,000) $4,005,000
========== ========== ==========
</TABLE>
Timing differences affecting deferred taxes in 1993 included inventory
valuation for financial reporting purposes under those for tax purposes of
$970,000 and net periodic pension income not currently taxable of $576,000.
The consolidated effective tax rate differs from the statutory U.S.
federal tax rate for the following reasons and by the following percentages:
<TABLE>
<CAPTION>
1995 1994 1993
=================================================================
<S> <C> <C> <C>
Statutory U.S. federal tax
(benefit) rate (34.0%) (34.0%) 34.0%
Significant increases
(reductions) resulting from:
Canadian tax loss
carryovers 2.9 6.3 4.7
State and local
income taxes 0.7 1.9 2.9
Tax benefit of foreign
sales corporation (2.3) (2.4) (2.5)
Other 0.6 (2.0) (1.5)
---- ---- ----
Effective tax (benefit) rate (32.1%) (30.2%) 37.6%
==== ==== ====
</TABLE>
For Canadian income tax purposes, approximately $3,140,000 of non-capital
losses and scientific research and experimental development expenditures are
available at June 30, 1995 for carryover against income in future tax years.
These carryovers begin to expire in the year 2000. In addition, unused
investment tax credits of approximately $340,000 at June 30, 1995 are available
for carryover against tax liabilities in future tax years. These carryover
credits will begin to expire in the year 2004. For financial reporting
purposes, a valuation reserve of $622,000, the full amount of the Canadian
carryovers, had been established at the beginning of 1994.
7. COMMITMENTS AND CONTINGENCIES
There are various legal proceedings pending against the Company. In many cases,
these proceedings involve ordinary and routine claims incidental to the
business of the Company. In others, they represent allegations that are
non-routine. The Company and its subsidiaries are also involved in certain
compliance issues with the United States Environmental Protection Agency (EPA)
and various state environmental regulatory agencies.
The Company has been involved in an environmental clean-up effort at one
of its facilities since 1983. A reserve of $1,200,000 was established and
charged against operations in 1991 in order to cover estimated minimum future
costs of this clean-up effort. As of June 30, 1995, the remaining reserve for
these future costs at this facility, principally ongoing monitoring, totaled
$479,000. In August 1995, the EPA announced its preferred remedy for the site.
The EPA's proposed remedy, which is subject to public comment and
administrative review, includes remediation tasks which the Company believes
are either unnecessary or technically impractical. The Company is challenging
the EPA's proposed remedy selection. These additional tasks would add
significantly to the ultimate clean-up costs for the facility. The Company has
previously recovered all amounts available under insurance policies concerning
this cleanup effort.
15
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In the fourth quarter of 1995, the Company resolved litigation that
arose during the ownership of its oil and gas operations which were sold in
1991. The Company had retained responsibility for resolving this litigation.
Upon settlement, a gain of $846,000 was recorded on the financial statements
and included in other income.
The ultimate financial liability of the Company with respect to these
various legal matters cannot be estimated with certainty. Based upon its own
examination and experience to date, and upon information provided by legal
counsel and outside consultants, it is management's opinion that the resolution
of these matters should not have a material impact on the Company's
consolidated financial position and cash flow. The impact in any one year,
however, could be material to the consolidated results of operations.
8. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following unaudited information shows selected items by quarter for the
years ended June 30, 1995 and 1994, respectively. As explained In Note 1,
Changes in Methods of Accounting, the first quarter 1994 loss and loss per
common shad have been restated to reflect the retroactive application of SFAS
No. 112. This restatement increased the first quarter 1994 net loss by $264,000
($.03 per share) from amounts previously reported.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales:
1995 $50,280,023 $48,262,461 $56,328,180 $54,660,104
1994 41,392,602 47,898,718 51,477,828 60,404,956
Gross profit:
1995 3,599,512 3,035,516 5,493,982 1,455,381
1994 5,101,531 6,209,244 5,191,543 730,227
Net income (loss):
1995 (1,251,218) (1,937,001) (460,776) (2,811,726)
1994 (715,971) 196,231 (562,642) (3,817,032)
Net income (loss) per common share:
1995 $(.16) $(.25) $(.06) $(.36)
1994 (.09) .03 (.08) (.49)
</TABLE>
In the fourth quarters of 1995 and 1994, gross profit decreased by
approximately $5,500,000 and $4,600,000, respectively, due to downward
adjustments in the carrying value of inventories and related costs of certain
commercial and defense contracts within the Electronics segment.
9. SEGMENT INFORMATION
The Company's operations have been classified into two segments: (1) ELECTRONICS
includes micro-processor based systems, transducers, printed circuit boards and
assemblies, sensors, and electronic and electromechanical contract
manufacturing for the telecommunications, electronics and other industries. It
also includes sonobuoys which are anti-submarine warfare (ASW) devices used by
the U.S. Navy and other free world military establishments. (2) AUTOMOTIVE AND
INDUSTRIAL PRODUCTS include electric and air horns for passenger cars, trucks
and boats, stampings and assemblies for a variety of passenger cars and trucks
including floor shifters, spare tire carriers, metal airbag components, other
automotive parts and marine devices and products for the telecommunications
industry.
Total sales to the Ford Motor Company were $40,244,000 in 1995,
$34,428,000 in 1994 and $30,623,000 in 1993; total sales to General Motors
Corporation were $30,533,000, $30,962,000 and $24,437,000 in 1995, 1994 and
1993, respectively, from the Automotive and Industrial Products segment. Total
direct sales on prime contracts to United States Government agencies were
$25,927,000 in 1995, $33,649,000 in 1994 and $88,006,000 in 1993, principally
from the Electronics segment. No other customer accounted for 10% or more of
consolidated sales in 1995, 1994 or 1993. Trade receivables of the Automotive
and Industrial Products segment, principally representing the thee largest
domestic automotive manufacturers, were approximately $17,065,000, $16,522,000
and $13,615,000 at June 30, 1995, 1994 and 1993, respectively.
Foreign export sales by U.S. operations to unaffiliated customers were
$35,986,000 in 1995, $34,675,000 in 1994 and $32,607,000 in 1993, respectively.
A majority of these sales in 1995 were from the Automotive and Industrial
Products segment while the major portion of foreign sales in 1994 and 1993 were
from the Electronics segment. Sales of ASW devices and related engineering
contract services for the years 1995-1991 contributed approximately 17%, 24%,
45%, 61% and 61%, respectively, to total sales. Sales of floor shifter
assemblies for 1995 and 1994 contributed approximately 19% and 18%,
respectively, to total sales while sales of horns for 1995 contributed
approximately 12% to total sales. Sales between segments were not significant
in any of these years.
Operating profit for the Electronics and Automotive and Industrial
Products segments, as presented below, is total revenue less operating expenses
and does not include general corporate expenses and interest expense. General
corporate expenses include general and administrative costs. General corporate
assets consist primarily of cash and invested funds, deferred taxes, prepaid
pension costs and income taxes recoverable.
16
<PAGE> 11
NOTES
<TABLE>
YEARS ENDED JUNE 30
========================================================================================================================
<CAPTION>
1995 1994 1993 1992 1991
========================================================================================================================
<S> <C> <C> <C> <C> <C>
(not covered by Report of
Independent Auditors)
SALES:
Electronics $ 94,514,784 $ 95,453,340 $147,457,053 $180,945,228 $153,775,837
Automotive and Industrial Products 115,015,984 105,720,764 85,595,080 64,434,738 60,580,936
------------ ------------ ------------ ------------ ------------
$209,530,768 $201,174,104 $233,052,133 $245,379,966 $214,356,773
============ ============ ============ ============ ============
OPERATING PROFIT (LOSS):
Electronics $ (4,682,662) $ (5,274,868) $ 9,865,696 $ 15,518,782 $ 14,022,267
Automotive and Industrial Products (2,206,344) 573,524 3,160,202 (982,050) (2,602,540)
------------ ------------ ------------ ------------ ------------
(6,889,006) (4,701,344) 13,025,898 14,536,732 11,419,727
General corporate expenses (1,620,084) (2,105,103) (2,010,198) (2,071,313) (2,135,147)
------------ ------------ ------------ ------------ ------------
$ (8,509,090) $ (6,806,447) $ 11,015,700 $ 12,465,419 $ 9,284,580
============ ============ ============ ============ ============
IDENTIFIABLE ASSETS:
Electronics $ 55,480,727 $ 55,820,560 $ 63,627,181 $ 62,026,667 $ 68,404,250
Automotive and Industrial Products 46,328,068 45,137,343 35,304,845 31,286,830 29,263,794
General corporate 8,845,977 7,764,037 5,456,693 5,257,583 5,344,239
------------ ------------ ------------ ------------ ------------
$110,654,772 $108,721,940 $104,388,719 $ 98,571,080 $103,012,283
============ ============ ============ ============ ============
PROVISION FOR DEPRECIATION:
Electronics $ 1,000,416 $ 935,345 $ 963,582 $ 1,151,321 $ 1,425,243
Automotive and Industrial Products 3,405,050 2,546,650 2,106,533 1,575,177 1,441,472
General corporate 16,402 6,912 4,848 3,084 1,728
------------ ------------ ------------ ------------ ------------
$ 4,421,868 $ 3,488,907 $ 3,074,963 $ 2,729,582 $ 2,868,443
============ ============ ============ ============ ============
CAPITAL EXPENDITURES:
Electronics $ 2,081,384 $ 1,092,066 $ 398,712 $ 846,898 $ 603,054
Automotive and Industrial Products 4,009,970 5,797,573 2,977,916 2,201,911 1,336,314
General corporate 2,454 22,269 5,008 5,110 4,056
------------ ------------ ------------ ------------ ------------
$ 6,093,808 $ 6,911,908 $ 3,381,636 $ 3,053,919 $ 1,943,424
============ ============ ============ ============ ============
</TABLE>
17
<PAGE> 12
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SPARTON CORPORATION & SUBSIDIARIES Years Ended June 30
======================================================================================================================
1995 1994 1993 1992 1991
======================================================================================================================
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net Sales $209,530,768 $201,174,104 $233,052,133 $245,379,966 $214,356,773
Costs and expenses 218,039,858 207,980,551 222,036,433 232,914,547 205,063,593
------------ ------------ ------------ ------------ ------------
(8,509,090) (6,806,447) 11,015,700 12,465,419 9,293,180
Other income (expense):
Interest (1,655,847) (685,279) (601,975) (1,073,423) (2,675,050)
Other-net 650,216 471,312 229,217 417,295 924,206
------------ ------------ ------------ ------------ ------------
(1,005,631) (213,967) (372,758) (656,128) (1,750,844)
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations before income taxes (9,514,721) (7,020,414) 10,642,942 11,809,291 7,542,336
Provision (credit) for income taxes (3,054,000) (2,121,000) 4,005,000 3,841,000 3,245,000
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations (6,460,721) (4,899,414) 6,637,942 7,968,291 4,297,336
Loss from discontinued oil and gas
operations, net of income taxes -- -- -- -- (167,880)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (6,460,721) $ (4,899,414) $ 6,637,942 $ 7,968,291 $ 4,129,456
============ ============ ============ ============ ============
Weighted average common
shares outstanding 7,811,370 7,810,721 7,800,543 7,791,672 7,791,672
PER SHARE OF COMMON STOCK
Income (loss):
Continuing operations $(.83) $(.63) $ .85 $1.02 $ .55
Discontinued operations -- -- -- -- (.02)
----- ----- ----- ----- -----
$(.83) $(.63) $ .85 $1.02 $ .53
===== ===== ===== ===== =====
Shareowners' equity $7.12 $7.95 $8.57 $7.74 $6.71
Dividends -- -- -- -- --
OTHER FINANCIAL DATA
Total assets $110,654,772 $108,721,940 $104,388,719 $ 98,571,080 $103,012,283
Working capital 33,187,775 42,204,541 51,212,170 45,308,069 37,336,643
Working capital ratio 1.66:1 2.00:1 2.56:1 2.34:1 1.81:1
Long-term obligations $ 466,368 $ 626,012 $ 785,120 $ 943,423 $ 1,101,184
Shareowners' equity 55,610,063 62,070,784 66,965,823 60,275,943 52,307,652
</TABLE>
18
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company operations have been classified into two
segments: Electronics and Automotive and Industrial Products.
FISCAL 1995 COMPARED TO FISCAL 1994
Sales for the year ended June 30, 1995 were $209,531,000, an increase of
$8,357,000 (4%) from 1994. These revenues, however, were below internal
expectations. The Electronics segment's sales declined $939,000 from last year.
Sales decreased $4,924,000 (6%) at Sparton Electronics compared to last year
and were slightly below anticipated levels as certain expected commercial
revenue did not materialize. Commercial sales volume continues to expand, but
not at a level sufficient to offset the long-term decline in defense-related
revenues. Early in the third quarter of 1995, Sparton Electronics was awarded a
major sonobuoy contract by the U.S. Navy with deliveries scheduled to begin
late in 1996. Sales increased significantly at the Canadian unit over the
depressed levels of the prior year. Revenues also increased at Sparton
Technology, primarily due to expanding foreign and proprietary product sales to
the worldwide telecommunications industry. The Automotive and Industrial
Products segment continues to expand with an aggregate sales increase of
$9,295,000 (9%) for the current year. This sales growth, evident at all three
units that comprise this business segment, exceeded internal expectations and
reflects both increased demand for existing products as well as new product
shipments. Increased demand for existing products from the various automobile
manufacturers, however, appears to be leveling off.
The Company reported a loss from operations of $8,509,000 in 1995 compared
to a loss from operations of $6,806,000 in 1994. These results were below
expectations. The Electronics segment's loss was slightly below that of the
prior year. Sparton Electronics incurred a loss for the current year that was
larger than the loss of the previous year. Margins continue to be adversely
impacted by increased costs associated with lower overall sales volumes,
unexpected production delays, higher material costs and multiple program
launches. In the fourth quarters of 1995 and 1994, gross margins decreased by
approximately $5,500,000 and $4,600,000, respectively, due to the writedown in
carrying value of inventories and related costs of specific commercial and
defense programs within Sparton Electronics. These adjustments resulted from
reviews of products and markets and the net realizable value of the affected
inventories. The Canadian unit incurred a loss in 1995, but this loss was
significantly less than that incurred in the prior year. Sparton Technology had
an operating profit this year compared to a loss in 1994. These improved
operating results at both Canada and Sparton Technology were primarily due to
higher sales volume, favorable product mixes and previously instituted
cost-cutting measures. The Automotive and Industrial Products segment incurred
an operating loss for the current year compared to a small profit last year.
Factors contributing to the loss included continuing productivity and
efficiency issues, capacity problems at certain facilities. difficulties in
achieving customer quality demand and an inability to adjust certain prices due
to competitive pressures. One of the three units experienced severe
difficulties in meeting customer demand, resulting in significant overtime,
premium freight and material scrap charges. Progress has been made in recent
months in resolving some of the problems in these areas, although two of the
three units are still operating at unprofitable levels. The Hartford City,
Indiana facility purchased in 1994 was placed into production early in 1995.
Price increases on several product lines have been requested and obtained over
the past year. Pricing and continuing cost reductions will be significant
issues in this segment for the foreseeable future.
Interest expense increased $971,000 in 1995 to $1,656,000 due to
substantially higher average borrowings and rising interest rates. Other income
increased $179,000 to $650,000 primarily due to the resolution of litigation
which arose during ownership of the oil and gas operations that were sold in
1991. After provision for applicable income taxes, as discussed in Note 6 to
the financial statements, the Company incurred a net loss of $6,461,000 ($.83
per share) in 1995 compared to a net loss of $4,899,000 ($.63 per share) in
1994.
FISCAL 1994 COMPARED TO FISCAL 1993
Sales for the year ended June 30, 1994 totaled $201,174,000, a decline of
$31,878,000 (14%) from 1993. The Electronic segment's sales declined
$52,004,000. Sales decreased 36% at Sparton Electronics, reflecting both the
declining level of U.S. government defense-related sales and delays in certain
defense product shipments. In addition, certain commercial sales did not
materialize as planned. Commercial sales volume at Sparton Electronics
increased, but not at a level sufficient to offset the decline in
defense-related revenues. Sales decreased substantially at the Canadian unit
compared to the prior year. Revenues also declined at Sparton Technology, due
to reduced government and contract manufacturing sales. This revenue decrease
was partially offset by expanding foreign and proprietary product revenues. The
Automotive and Industrial Products segment sales expanded with an aggregate
revenue increase of $20,126,000 (24%). Sales increases occurred at all three
units that comprise this segment. This growth reflected both increased demand
as well as new product shipments.
19
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company reported a loss from operations of $6,806,000 in 1994 compared
to income from operations of $11,016,000 in 1993. The Electronics segment
reported an operating loss compared to an operating profit last year. Sparton
Electronics incurred a loss for the current year compared to profitable
operations the previous year. Margins were adversely impacted by increased
costs associated with the start-up of several new programs, unexpected
production delays and lower than anticipated sales volumes. In the fourth
quarter of 1994, gross margins were decreased by approximately $4,600,000 due
to the writedown in carrying value of inventories and related costs of certain
commercial and defense contracts within Sparton Electronics. This adjustment
resulted from a review of existing products and markets and the inventories'
realizable value. The Canadian unit incurred an operating loss primarily due to
extremely low sales volume. Sparton Technology reported a small loss in 1994,
but this loss was significantly less than that incurred in 1993 primarily due
to various cost cutting measures. The Automotive and Industrial Products
segment incurred a small operating loss for the current year compared to an
operating profit last year. Factors contributing to this loss included costs
associated with the relocation of a production facility, unexpected
difficulties on new product launches, capacity problems at certain facilities
and an inability to adjust certain prices due to competitive pressures. A
production facility was purchased in Hartford City, Indiana during the year in
order to expand this segment's manufacturing capacity.
Interest expense increased $83,000 in 1994 to $685,000 due to higher
average borrowings. Other income increased $242,000 to $471,000 primarily due
to the realization of gain on the sale of a plant. As discussed in Note 1 to the
financial statements, effective July 1, 1993, the Company adopted Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes." The
cumulative effect of this required change in the method for accounting for
income taxes resulted in a credit In the first quarter of 1994 of $264,000
($.03 per share). In the fourth quarter of 1994, the Company elected to early
adopt Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits," retroactively as of July 1, 1993. The
cumulative effect of this change as of the beginning of the year was a charge
of $264,000 ($.03 per share), net of income taxes of $149,000. This accounting
change had no material effect on the results of operations for the year or for
the individual quarterly reporting periods. The accounting changes offset each
other and, therefore, had no effect on the net loss reported for 1994.
After provision (credit) for applicable income taxes, which are discussed
in Note 6 to the financial statements, the Company incurred a net loss of
$4,899,000 ($.63 per share) in 1994 compared to net income of $6,638,000 ($.85
per share) in 1993.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of cash equivalents has historically been from operations.
Short-term credit facilities are used to provide liquidity. The Company is
experiencing a change in its liquidity resources as the volume of U.S.
defense-related contract work declines. Certain contracts within the defense
operations of Sparton Electronics provide for interim progress billings based
on costs incurred. These progress billings reduce the amount of cash that would
otherwise be required during the performance of these contracts. As the volume
of U.S. defense-related contract work declines, so will the relative importance
of progress billings as a component of the Company's aggregate financial
resources. Unused amounts available under existing credit facilities are the
only immediate source of cash and equivalents.
Cash flows provided by operating activities were $845,000 in 1995 compared
to cash flows used of $10,610,000 in 1994. Cash flows provided by operating
activities were $7,760,000 in 1993. Primary sources of the 1995 net cash flows
provided by operating activities were decreases in inventories and increases in
accounts payable offset by operating losses and increases in accounts
receivable.
Cash flows used by investing activities were $6,162,000 in 1995,
$6,817,000 in 1994 and $3,431,000 in 1993. The Company's principal investing
activity was the purchase of property, plant and equipment. The Company will
continue to invest in additional plant and equipment to accommodate additional
commercial electronics and automotive business previously awarded.
Cash flows from financing activities were $4,807,000 in 1995 and
$16,580,000 in 1994 compared to cash flows used of $5,185,000 in 1993. The
increase in 1995 was due to the increase in the Company's short-term borrowings
to fund its operating and investing activities. The Company maintains
unsecured, informal lines of credit currently totaling $28,000,000 with three
separate banks as well as an unsecured informal line of credit of $5,000,000
with a Canadian bank for the benefit of the Company's Canadian subsidiary.
At June 30, 1995, the Company had $33,188,000 in working capital. At that
date, there were no significant unusual contractual commitments.
20
<PAGE> 15
OTHER
The Company has been involved in an environmental clean-up effort at Sparton
Technology's Coors Road facility since 1983. Costs incurred totaled $184,000
for 1995 compared to $81,000 last year. These costs were charged against a
reserve initiated in 1991 to cover estimated future minimum costs. As of June
30, 1995, the remaining reserve for future minimum costs totaled $479,000. The
Company has previously recovered all amounts available under insurance policies
concerning this clean-up effort. In August 1995, the United States
Environmental Protection Agency (EPA) published its preferred remedial action
plan. The EPA's proposed remedy, which is subject to public comment and
administrative review, includes remediation tasks which the Company believes
are either unnecessary or technically impractical. The Company is challenging
the EPA's proposed remedy selection. These additional steps would add
significantly to the ultimate clean-up costs for the facility. In addition, the
Company is involved in several related issues with State of New Mexico
environmental agencies.
The ultimate financial liability of the Company with respect to this
environmental clean-up effort cannot be estimated with certainty. Based upon
its own examination and experience to date, and upon information provided by
legal counsel and outside consultants, it is management's opinion that the
resolution of these matters should not have a material impact on the Company's
consolidated financial position and cash flow. The impact in any one year,
however, could be material to the consolidated results of operations.
The Company's sales of sonobuoys, principally to the U.S. Navy, have
declined dramatically from $151,024,000 in 1992 to $34,663,000 in 1995. It is
expected that the international demand for production sonobuoys will also
continue at significantly reduced levels for the foreseeable future. In
response to this changing environment, the Company is developing commercial
opportunities which will utilize its existing technological and manufacturing
capabilities, largely in the electronic contract manufacturing markets. In
addition, the Company is focusing on expanding sales in its automotive and
other commercial electronics markets on a worldwide basis. As with any change
of this magnitude, unanticipated problems can be reasonably expected to occur.
Investors should be aware of this uncertainty and make their own independent
evaluation.
DIRECTORS
[PHOTO OF DIRECTORS]
The Sparton Board of Directors are, standing left to right, David B. Schoon,
Rory B. Riggs, Michael N. Taglich, Marshall V. Noecker, Robert J. Kirk, Blair
H. Thompson and James N. DeBoer. Seated, left to right, are David W.
Hockenbrocht, John J. Smith and Lawson K. Smith
21
<PAGE> 1
EXHIBIT 22
SPARTON CORPORATION
The Registrant, Sparton Corporation, an Ohio Corporation, had the following
subsidiaries at June 30, 1995:
<TABLE>
<CAPTION>
Incorporated
Name In
- ------------------------------------------------ ------------
<S> <C>
Domestic:
Sparton Engineered Products, Inc.-KPI Group Michigan
Sparton Engineered Products, Inc.-KPI Group Indiana
Sparton Engineered Products, Inc.-Lake
Odessa Group Michigan
Sparton Engineered Products, Inc.-Flora Group Illinois
Sparton Electronics Florida, Inc. Florida
Sparton Technology, Inc. New Mexico
Foreign:
Sparton of Canada, Limited Ontario, Canada
Sparton Electronics International Sales, Ltd. Barbados
</TABLE>
E-1
<PAGE> 1
EXHIBIT 23
SPARTON CORPORATION
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Sparton Corporation of our report dated August 18, 1995, included in the
1995 Annual Report to Shareowners of Sparton Corporation and subsidiaries.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-43703) pertaining to the Sparton Corporation 1989 Stock Option
Plan of our report dated August 18, 1995, with respect to the consolidated
financial statements of Sparton Corporation and subsidiaries incorporated by
reference in this Annual Report (Form 10-K) for the year ended June 30, 1995.
/s/ ERNST & YOUNG LLP
Toledo, Ohio
September 28, 1995
E-2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 1,203,184
<SECURITIES> 0
<RECEIVABLES> 37,166,676
<ALLOWANCES> 179,000
<INVENTORY> 39,608,812
<CURRENT-ASSETS> 83,830,023
<PP&E> 63,222,325
<DEPRECIATION> 40,673,706
<TOTAL-ASSETS> 110,654,772
<CURRENT-LIABILITIES> 50,642,248
<BONDS> 466,368
<COMMON> 9,764,213
0
0
<OTHER-SE> 45,845,850
<TOTAL-LIABILITY-AND-EQUITY> 110,654,772
<SALES> 209,530,768
<TOTAL-REVENUES> 209,530,768
<CGS> 195,946,377
<TOTAL-COSTS> 218,039,858
<OTHER-EXPENSES> (650,216)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,655,847
<INCOME-PRETAX> (9,514,721)
<INCOME-TAX> (3,054,000)
<INCOME-CONTINUING> (6,460,721)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,460,721)
<EPS-PRIMARY> (.83)
<EPS-DILUTED> (.83)
</TABLE>
