<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1995
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 January 31, 1996 was 7,811,370.
1
<PAGE> 2
SPARTON CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
Financial Statements:
<S> <C>
Consolidated Condensed Balance Sheet - December 31 and June 30, 1995 3
Consolidated Condensed Statement of Operations - Three-Month and Six-Month
Periods ended December 31, 1995 and 1994 4
Consolidated Condensed Statement of Cash Flows - Six-Month Periods ended
December 31, 1995 and 1994 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial Condition and Results of
Operations 8
Other Information and Signatures 11
</TABLE>
2
<PAGE> 3
SPARTON CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheet (Unaudited)
December 31 and June 30, 1995
<TABLE>
<CAPTION>
December 31 June 30
Assets 1995 1995
------ ------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,644,385 $1,203,184
Income taxes recoverable 2,909,937 2,283,646
Accounts receivable 27,572,368 36,987,676
Inventories and costs on contracts in progress,
less progress payments of $6,163,000 at
December 31 ($1,025,000 at June 30) 40,999,394 39,608,812
Prepaid expenses 5,478,239 3,746,705
-------------- --------------
Total current assets 78,604,323 83,830,023
Miscellaneous receivables and other assets 4,102,799 4,276,130
Property, plant and equipment - net 23,254,503 22,548,619
-------------- --------------
Total assets $105,961,625 $110,654,772
============== ==============
Liabilities and Shareowners' Equity
-----------------------------------
Current liabilities:
Notes payable - due within one year $29,539,722 $25,580,740
Accounts payable 11,343,811 16,170,576
Taxes on income 317,967 596,006
Accrued liabilities 8,571,937 8,294,926
-------------- -------------
Total current liabilities 49,773,437 50,642,248
Deferred income taxes 1,959,500 1,959,500
Deferred compensation 2,077,081 1,976,593
Long-term obligations, net of current maturities 348,911 466,368
Shareowners' equity:
Common stock - 7,811,370 shares outstanding
after deducting 123,342 shares in treasury 9,764,213 9,764,213
Capital in excess of par value 403,067 403,067
Retained earnings 41,635,416 45,442,783
-------------- -----------
Total shareowners' equity 51,802,696 55,610,063
-------------- -----------
Total liabilities & shareowners' equity $105,961,625 $110,654,772
============== ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
SPARTON CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statement of Operations (Unaudited)
For the Three-month and Six-month Periods Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Three-month Periods Six-month Periods
----------- ----------- ----------- -----------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C>
Net sales $52,613,017 $48,262,461 $97,182,965 $98,542,484
Costs and expenses 53,738,153 50,974,532 102,357,186 102,907,071
----------- ----------- ----------- -----------
(1,125,136) (2,712,071) (5,174,221) (4,364,587)
Other income (expense):
Interest (734,098) (344,560) (1,120,120) (670,548)
Other - net 82,259 29,630 345,974 52,916
----------- ----------- ----------- -----------
Income (loss) before income
taxes (1,776,975) (3,027,001) (5,948,367) (4,982,219)
Provision (credit) for income
taxes (639,000) (1,090,000) (2,141,000) (1,794,000)
----------- ----------- ----------- -----------
Net income (loss) ($1,137,975) ($1,937,001) ($3,807,367) ($3,188,219)
=========== =========== =========== ===========
Information per share of
common stock:
Net income (loss) $(.15) $(.25) $(.49) $(.41)
=========== =========== =========== ===========
Dividends $-0- $-0- $-0- $-0-
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SPARTON CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statement of Cash Flows (Unaudited)
For the Six-month Periods Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Operating activities:
Net income (loss) ($3,807,367) ($3,188,219)
Add non-cash items charged to operations:
Depreciation 2,240,816 1,955,407
Deferred compensation 100,488 86,526
------------ ------------
(1,466,063) (1,146,286)
Add (deduct) changes in operating assets
and liabilities:
Accounts receivable 9,415,308 930,613
Accounts payable (4,826,765) (2,972,211)
Inventories (1,390,582) 6,447,920
Income taxes recoverable (626,291) 797,000
Taxes on income (278,039) (191,453)
Other (1,454,774) (1,697,062)
------------ ------------
Net cash provided (used) by operating activities (627,206) 2,168,521
Investing activities:
Purchases of property, plant and equipment-net (2,946,700) (2,678,580)
Other 173,331 29,011
------------ ------------
Net cash (used) by investing activities (2,773,369) (2,649,569)
Financing activities:
Increase in notes payable 3,958,982 2,585,450
Changes in long-term obligations, including
current maturities thereof (117,206) (117,005)
------------ ------------
Net cash provided by financing activities 3,841,776 2,468,445
------------ ------------
Increase in cash and cash equivalents 441,201 1,987,397
Cash and cash equivalents at beginning of period 1,203,184 1,713,718
------------ ------------
Cash and cash equivalents at end of period $1,644,385 $3,701,115
============ ============
Cash paid (received) during the period for:
Interest $1,112,000 $608,000
============ ============
Income taxes (refunded) ($1,483,000) ($2,590,000)
============ ============
</TABLE>
5
See accompanying notes.
<PAGE> 6
SPARTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1) The accompanying consolidated condensed balance sheet at
December 31, 1995, and the related consolidated condensed statements of
operations for the three-month and six-month periods ended December 31, 1995
and 1994 and cash flows for the six-month periods ended December 31, 1995 and
1994 are unaudited, but include all adjustments (consisting only of normal
recurring accruals) which the Company considers necessary for a fair
presentation of such financial statements. The results of operations for the
six-month period ended December 31, 1995 are not necessarily indicative of the
results that may be expected for the full fiscal year.
2) Earnings per share are computed using the weighted average
number of shares outstanding as follows: For the three-month periods,
7,811,370 in both 1995 and 1994. For the six-month periods, 7,811,370 in both
1995 and 1994.
3) In December 1995, the Company entered into a revolving credit
facility (the Agreement) with a group of three banks which provides for
borrowings of up to $34,000,000 through October 1996. This Agreement replaced
the unsecured, informal lines of credit totaling $33,000,000. Interest is
payable at least quarterly and at the Company's option, is subject to several
interest rate structures involving the prime and LIBOR based rates. The
Agreement also provides for a commitment fee of 1/2% per annum on the unused
portion of the credit facility. At December 31, 1995, the weighted average
interest rate was 8.18% on borrowings outstanding under the Agreement.
Borrowings under this formal revolving credit facility are secured by
substantially all non real estate assets owned by the Company. In addition,
the Company is subject to loan covenant restrictions related to additional
indebtedness, the acquisition and disposition of assets, and the maintenance of
defined minimum net worth and working capital levels.
4) There are various legal proceedings pending against the Company.
In many cases, these proceedings involve ordinary and routine claims incidental
to the business of the Company. In others, they represent allegations that are
non-routine. The Company and its subsidiaries are also involved in certain
compliance issues with the United States Environmental Protection Agency and
various state environmental regulatory agencies.
The Company has been involved in an environmental clean-up
effort at Sparton Technology's Coors Road facility in Albuquerque, New Mexico
since 1983. Costs incurred totaled $99,000 for the current six-month period
compared to $79,000 for the corresponding period last year. These costs were
charged against a reserve initiated in 1991 to cover estimated future minimum
costs. As of December 31, 1995, the remaining reserve for future minimum costs
totaled $380,000. In December 1995, the United States Environmental Protection
Agency (EPA) published a Statement of Basis describing various remedial
alternatives for the facility. Several of the listed alternatives, which are
subject to public comment and administrative review, include remediation tasks
which the Company believes are either unnecessary or technically impractical.
The Company supports an alternative that is cost effective and technically
practicable. If a remedy is forced on Sparton, other than one proposed by the
Company, the ultimate clean-up costs for the facility may significantly
increase. The Company is presently pursuing recoveries concerning this
clean-up effort that may be available under existing insurance policies, but
the ultimate amounts to be recovered, if any, are unknown at this time.
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
6
<PAGE> 7
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.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
events affecting the Company's earnings and financial condition during the
periods included in the accompanying financial statements.
RESULTS OF OPERATIONS
- ---------------------
Six-Month Periods
- -----------------
Sales for the six-month period ended December 31, 1995 were $97,183,000, a
decrease of $1,360,000 (1%) from the corresponding period last year. Revenues
were below internal expectations. The Electronics segment's sales declined
$2,973,000. Sales at Sparton Electronics were $3,371,000 (9%) lower this year
than for the same six-month period last year. Both commercial and defense
revenues did not materialize as planned, the former primarily due to
customer-driven program delays. Sales increased at Sparton Technology but were
down at Sparton of Canada. Both business unit's revenues, however, were below
internal expectations. The Automotive and Industrial Products segment had an
aggregate sales increase of $1,613,000 (3%) for the current six-month period
compared to the same period last year. This sales growth was below internal
expectations, primarily due to a slackening of demand for product shipments by
the automobile manufacturers.
An operating loss of $5,174,000 was reported for the six-month period ended
December 31, 1995 compared to an operating loss of $4,365,000 last year. These
results were below management's expectations. The Electronics segment incurred
an operating loss of $2,529,000 compared to an operating loss of $1,353,000
last year. Sparton Electronics operated at a loss for the six-month period
primarily due to higher material costs, unanticipated customer scheduling
changes and gross profit erosion on some contracts. Sparton Technology
reported a modest operating profit and the Canadian unit incurred an operating
loss. Sparton Technology's profitable operations were primarily due to a
favorable product mix. The Automotive and Industrial Products segment incurred
an operating loss for the current six-month period. The loss was higher than
anticipated but lower than last year. Factors contributing to this loss
included continuing efficiency issues, overly aggressive product pricing by
certain customers and start-up costs associated with several new programs.
Progress continues to be made in resolving some of these problems. Pricing and
continuing cost reductions will be significant issues in this business segment
for the foreseeable future. In late November 1995, a consolidation was
announced of two of the three automotive units, effective January 1, 1996. The
consolidation of Sparton Engineered Products, Inc. - Lake Odessa Group and
Sparton Engineered Products, Inc. - KPI Group was initiated in order to achieve
economies of scale and to lower overall administrative costs. This action will
result in the closing of the Kentwood, Michigan Administrative and Technical
Center and the reduction of personnel.
Interest expense increased $450,000 to $1,120,000 primarily due to higher
average borrowings and significantly higher borrowing costs. As detailed in
Note 3 to these financial statements, in December the Company replaced its
informal unsecured lines of credit totaling $33,000,000 with a secured
revolving credit facility totaling $34,000,000. Nonoperating income increased
$293,000 to $346,000 due to the gain realized on the sale of some equipment.
After provision for applicable income taxes, the Company's net loss for the
8
<PAGE> 9
six-month period ended December 31, 1995 was $3,807,000 ($.49 per share)
compared to a net loss of $3,188,000 ($.41 per share) for the corresponding
period last year.
Three-Month Periods
- -------------------
Sales for the three-month period ended December 31, 1995 were $52,613,000, an
increase of $4,351,000 (9%) from the same period last year. The Electronics
segment's revenues increased $3,668,000 for the three-month period, but were
still below anticipated levels. Sales at Sparton Electronics were $3,322,000
(21%) higher this period than the same period last year primarily due to
shipments of products delayed by the customer from the first quarter. Revenues
increased at Sparton Technology but declined at Sparton of Canada. Both
business unit's sales were below internal expectations. The Automotive and
Industrial Products segment had a slight aggregate increase in revenues for the
three-month period compared to last year. Demand for existing products from
the automobile manufacturers appears to be weakening.
An operating loss of $1,125,000 was reported for the three months ended
December 31, 1995 compared to an operating loss of $2,712,000 for the same
period last year. While these results were a significant improvement over last
year, they were below management's expectations. The Electronics segment
incurred an operating loss of $691,000 compared to an operating loss of
$1,058,000 last year. Sparton Electronics operated at a loss for the current
three-month period due to the previously mentioned problems of higher material
costs, unanticipated customer scheduling changes, and gross profit erosion on
some contracts. Sparton Technology reported an operating profit for the
three-month period due to a favorable product mix and the Canadian unit
incurred an operating loss principally due to low sales volume. The Automotive
and Industrial Products segment operated at a loss that was less than one-half
the loss incurred during the same three-month period last year. A small
operating profit, however, was anticipated. The loss was primarily due to the
previously mentioned efficiency issues, product pricing, and start-up costs
associated with new programs. As mentioned earlier, a merger was announced in
late November 1995 of two of the three units that comprise this business
segment, effective January 1, 1996. Expectations are that this combination
will achieve economies of scale and lower overall administrative costs.
Higher average borrowings and significantly higher borrowing costs during the
three-month period resulted in an increase in interest costs of $390,000 to
$734,000. After provision for applicable income taxes, the Company's net loss
for the three-month period ended December 31, 1995 was $1,138,000 ($.15 per
share) compared to a net loss of $1,937,000 ($.25 per share) last year.
FINANCIAL POSITION
- ------------------
For the six-month period ended December 31, 1995, cash and cash equivalents
increased $441,000 to $1,644,000. Operating activities used $627,000 in net
cash flows. The primary source of cash flows from operating activities was a
decrease in accounts receivable. Primary uses included the operating loss,
decreases in accounts payable, and decreases in inventories. Cash flows used
by investing activities were $2,773,000, primarily for the purchase of property
and equipment within the Electronics segment. Financing activities provided
$3,842,000 in cash flows as the Company increased its short-term borrowings.
No dividends were declared in any of the periods presented. At December 31,
1995, the Company had $51,803,000 ($6.63 per share) of recorded shareowners'
equity, $28,831,000 of working capital, and a 1.58:1.00 working capital ratio.
As previously mentioned, the Company has entered into a formal secured
revolving credit facility with three banks through October 31, 1996.
9
<PAGE> 10
OTHER
- -----
The Company has been involved in an environmental clean-up effort at Sparton
Technology's Coors Road facility in Albuquerque, New Mexico since 1983. Costs
incurred totaled $99,000 for the current six-month period compared to $79,000
for the corresponding period last year. These costs were charged against a
reserve initiated in 1991 to cover estimated future minium costs. As of
December 31, 1995, the remaining reserve for future minimum costs totaled
$380,000. In December 1995, the United States Environmental Protection Agency
(EPA) published a Statement of Basis describing various remedial alternatives
for the facility. Several of the listed alternatives, which are subject to
public comment and administrative review, include remediation tasks which the
Company believes are either unnecessary or technically impractical. The Company
supports an alternative that is cost effective and technically practicable. If
a remedy is forced on Sparton, other than one proposed by the Company, the
ultimate clean-up costs for the facility may significantly increase.
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. In response,
the Company is developing commercial electronics opportunities which will
utilize its existing technological and manufacturing capabilities, largely in
the North American electronic contract manufacturing markets. 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.
10
<PAGE> 11
OTHER INFORMATION
PART II
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 ending
September 30, 1983 and are incorporated herein by reference.
By-laws of the Registrant were filed on Form 10-K for the year
ended June 30, 1981 and are incorporated herein by reference.
Code of Regulations of the Registrant was filed on Form 10-K
for the year ended June 30, 1981 and an amendment thereto was
filed on Form 10-Q for the three-month period ended September
30, 1982 and are incorporated herein by reference.
10 The employment agreement with John. J. Smith was filed on Form
10-Q for the three month period ended September 30, 1994 and is
incorporated herein by reference.
27 Submitted to the Securities and Exchange Commission for its
information.
b) Reports on Form 8-K Filed in the Second Quarter of Fiscal 1996: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPARTON CORPORATION
-------------------
Registrant
Date: February 12, 1996
/s/ David W. Hockenbrocht
-------------------------------
David W. Hockenbrocht,
President
Date: February 12, 1996
/s/ Richard Langley
--------------------------------
Richard Langley, Vice President-
Treasurer & Principal
Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,644,385
<SECURITIES> 0
<RECEIVABLES> 27,572,368
<ALLOWANCES> 0
<INVENTORY> 40,999,394
<CURRENT-ASSETS> 78,604,323
<PP&E> 23,254,503
<DEPRECIATION> 0
<TOTAL-ASSETS> 105,961,625
<CURRENT-LIABILITIES> 49,773,437
<BONDS> 348,911
<COMMON> 9,764,213
0
0
<OTHER-SE> 42,038,483
<TOTAL-LIABILITY-AND-EQUITY> 105,961,625
<SALES> 97,182,965
<TOTAL-REVENUES> 97,182,965
<CGS> 102,357,186
<TOTAL-COSTS> 102,357,186
<OTHER-EXPENSES> (345,974)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,120,120
<INCOME-PRETAX> (5,948,367)
<INCOME-TAX> (2,141,000)
<INCOME-CONTINUING> (3,807,367)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,807,367)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> (.49)
</TABLE>
