Sparton Corporation 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| |
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| þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
or
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| o |
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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
(State or Other Jurisdiction of Incorporation or Organization)
38-1054690
(I.R.S. Employer 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. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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| Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
(Do not check if a smaller reporting company)
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|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2). o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date.
| |
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|
| |
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Shares outstanding at |
| Class of Common Stock |
|
April 30, 2008 |
| $1.25 Par Value
|
|
9,811,507 |
2
SPARTON CORPORATION AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
3
Part I. Financial Information
Item 1. Financial Statements (Interim, Unaudited)
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
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March 31, 2008 |
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|
June 30, 2007 |
|
ASSETS |
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|
|
|
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|
|
|
|
|
|
|
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|
|
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Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,681,344 |
|
|
$ |
3,982,485 |
|
Accounts receivable |
|
|
28,063,463 |
|
|
|
24,566,104 |
|
Inventories and costs of contracts in
progress |
|
|
62,852,024 |
|
|
|
53,520,533 |
|
Income taxes recoverable |
|
|
— |
|
|
|
485,074 |
|
Deferred income taxes |
|
|
1,984,034 |
|
|
|
2,287,438 |
|
Prepaid expenses and other current
assets |
|
|
729,928 |
|
|
|
949,092 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
97,310,793 |
|
|
|
85,790,726 |
|
|
|
|
|
|
|
|
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|
Property, plant and equipment — net |
|
|
17,129,323 |
|
|
|
17,721,812 |
|
Deferred income taxes — non current |
|
|
6,586,461 |
|
|
|
4,630,819 |
|
Goodwill |
|
|
16,377,804 |
|
|
|
16,378,327 |
|
Other intangibles — net |
|
|
5,882,709 |
|
|
|
6,243,647 |
|
Other non current assets |
|
|
4,297,146 |
|
|
|
6,242,467 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
147,584,236 |
|
|
$ |
137,007,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
LIABILITIES AND SHAREOWNERS’ EQUITY |
|
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Current liabilities: |
|
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|
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Short-term bank borrowings |
|
$ |
8,500,000 |
|
|
$ |
1,000,000 |
|
Current portion of long-term debt |
|
|
3,975,782 |
|
|
|
3,922,350 |
|
Accounts payable |
|
|
23,969,039 |
|
|
|
15,781,046 |
|
Salaries and wages |
|
|
4,351,858 |
|
|
|
4,806,724 |
|
Accrued health benefits |
|
|
1,263,162 |
|
|
|
1,359,844 |
|
Other accrued liabilities |
|
|
6,270,239 |
|
|
|
5,931,638 |
|
|
|
|
|
|
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Total current liabilities |
|
|
48,330,080 |
|
|
|
32,801,602 |
|
|
|
|
|
|
|
|
|
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Pension liability |
|
|
231,628 |
|
|
|
12,495 |
|
Long-term debt — non current portion |
|
|
9,560,850 |
|
|
|
12,088,254 |
|
Environmental remediation — non current
portion |
|
|
5,390,122 |
|
|
|
5,625,776 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
63,512,680 |
|
|
|
50,528,127 |
|
|
|
|
|
|
|
|
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Shareowners’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, no par value; 200,000
shares authorized, none outstanding |
|
|
— |
|
|
|
— |
|
Common stock, $1.25 par value;
15,000,000 shares authorized,
9,811,507 shares outstanding at March
31, 2008 and June 30, 2007 |
|
|
12,264,384 |
|
|
|
12,264,384 |
|
Capital in excess of par value |
|
|
19,598,695 |
|
|
|
19,474,097 |
|
Retained earnings |
|
|
54,078,823 |
|
|
|
56,730,643 |
|
Accumulated other comprehensive loss |
|
|
(1,870,346 |
) |
|
|
(1,989,453 |
) |
|
|
|
|
|
|
|
Total shareowners’ equity |
|
|
84,071,556 |
|
|
|
86,479,671 |
|
|
|
|
|
|
|
|
Total liabilities and shareowners’
equity |
|
$ |
147,584,236 |
|
|
$ |
137,007,798 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
4
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
March 31, 2008 and 2007
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Three months ended |
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Nine months ended |
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2008 |
|
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2007 |
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|
2008 |
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|
2007 |
|
| |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net sales |
|
$ |
58,138,830 |
|
|
$ |
47,725,992 |
|
|
$ |
171,941,620 |
|
|
$ |
149,099,220 |
|
Costs of goods sold |
|
|
53,586,035 |
|
|
|
47,030,124 |
|
|
|
162,108,950 |
|
|
|
144,193,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
4,552,795 |
|
|
|
695,868 |
|
|
|
9,832,670 |
|
|
|
4,905,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Selling and administrative expenses |
|
|
4,901,246 |
|
|
|
4,264,621 |
|
|
|
14,393,913 |
|
|
|
12,978,917 |
|
Amortization of intangibles |
|
|
120,313 |
|
|
|
120,313 |
|
|
|
360,938 |
|
|
|
362,049 |
|
EPA related — net environmental remediation |
|
|
(8 |
) |
|
|
(3,091 |
) |
|
|
920 |
|
|
|
(204,321 |
) |
Net (gain) loss on sale of property, plant and equipment |
|
|
(44,663 |
) |
|
|
3,872 |
|
|
|
(976,685 |
) |
|
|
(201,851 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,976,888 |
|
|
|
4,385,715 |
|
|
|
13,779,086 |
|
|
|
12,934,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(424,093 |
) |
|
|
(3,689,847 |
) |
|
|
(3,946,416 |
) |
|
|
(8,028,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and investment income (loss) |
|
|
43,654 |
|
|
|
74,896 |
|
|
|
121,900 |
|
|
|
145,923 |
|
Interest expense |
|
|
(248,953 |
) |
|
|
(205,877 |
) |
|
|
(849,293 |
) |
|
|
(793,599 |
) |
Equity income (loss) in investment |
|
|
(8,000 |
) |
|
|
75,000 |
|
|
|
(208,000 |
) |
|
|
68,000 |
|
Other — net |
|
|
(283,816 |
) |
|
|
(23,730 |
) |
|
|
309,989 |
|
|
|
(283,635 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(497,115 |
) |
|
|
(79,711 |
) |
|
|
(625,404 |
) |
|
|
(863,311 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(921,208 |
) |
|
|
(3,769,558 |
) |
|
|
(4,571,820 |
) |
|
|
(8,892,282 |
) |
Credit for income taxes |
|
|
(1,555,000 |
) |
|
|
(1,476,000 |
) |
|
|
(1,920,000 |
) |
|
|
(2,757,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
633,792 |
|
|
$ |
(2,293,558 |
) |
|
$ |
(2,651,820 |
) |
|
$ |
(6,135,282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share — basic and diluted |
|
$ |
0.06 |
|
|
$ |
(0.23 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
Nine months ended March 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,651,820 |
) |
|
$ |
(6,135,282 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion |
|
|
1,655,169 |
|
|
|
1,941,812 |
|
Deferred income tax credit |
|
|
(1,713,596 |
) |
|
|
— |
|
Loss on sale of investment securities |
|
|
— |
|
|
|
244,562 |
|
Equity (income) loss in investment |
|
|
208,000 |
|
|
|
(68,000 |
) |
Pension expense |
|
|
399,598 |
|
|
|
372,724 |
|
Share-based compensation |
|
|
124,598 |
|
|
|
187,901 |
|
Gain on sale of property, plant and equipment |
|
|
(932,022 |
) |
|
|
(3,176 |
) |
Gain from sale of non-operating land |
|
|
(44,663 |
) |
|
|
(198,675 |
) |
Other, NRTC litigation loss |
|
|
1,643,396 |
|
|
|
47,420 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(3,497,359 |
) |
|
|
3,956,658 |
|
Income taxes recoverable |
|
|
485,074 |
|
|
|
(2,320,726 |
) |
Inventories, prepaid expenses and other current assets |
|
|
(9,256,323 |
) |
|
|
(5,759,353 |
) |
Accounts payable and accrued liabilities |
|
|
7,735,578 |
|
|
|
(5,604,852 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(5,844,370 |
) |
|
|
(13,338,987 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
Additional goodwill incurred in purchase of Astro |
|
|
— |
|
|
|
(38,528 |
) |
Proceeds from sale of investment securities |
|
|
— |
|
|
|
15,619,068 |
|
Proceeds from maturity of investment securities |
|
|
— |
|
|
|
465,645 |
|
Purchases of property, plant and equipment |
|
|
(701,742 |
) |
|
|
(2,672,559 |
) |
Proceeds from sale of non-operating land |
|
|
49,000 |
|
|
|
811,175 |
|
Proceeds from sale of property, plant and equipment |
|
|
1,076,018 |
|
|
|
7,422 |
|
Other, principally noncurrent other assets |
|
|
93,925 |
|
|
|
9,420 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
517,201 |
|
|
|
14,201,643 |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
Net short-term bank borrowings |
|
|
7,500,000 |
|
|
|
— |
|
Repayment of long-term debt |
|
|
(2,473,972 |
) |
|
|
(2,423,266 |
) |
Proceeds from the exercise of stock options |
|
|
— |
|
|
|
1,346,208 |
|
Tax effect from stock transactions |
|
|
— |
|
|
|
183,093 |
|
Stock dividends — cash paid in lieu of fractional shares |
|
|
— |
|
|
|
(1,977 |
) |
Repurchases of common stock |
|
|
— |
|
|
|
(2,523,920 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
5,026,028 |
|
|
|
(3,419,862 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(301,141 |
) |
|
|
(2,557,206 |
) |
Cash and cash equivalents at beginning of period |
|
|
3,982,485 |
|
|
|
7,503,438 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,681,344 |
|
|
$ |
4,946,232 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated
Statements
of Shareowners’ Equity
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine months ended March 31, 2008 |
|
| |
|
|
|
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
Accumulated other |
|
|
|
|
| |
|
Common Stock |
|
|
in excess |
|
|
Retained |
|
|
comprehensive |
|
|
|
|
| |
|
Shares |
|
|
Amount |
|
|
of par value |
|
|
earnings |
|
|
income (loss) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 1, 2007 |
|
|
9,811,507 |
|
|
$ |
12,264,384 |
|
|
$ |
19,474,097 |
|
|
$ |
56,730,643 |
|
|
$ |
(1,989,453 |
) |
|
$ |
86,479,671 |
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
124,598 |
|
|
|
|
|
|
|
|
|
|
|
124,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,651,820 |
) |
|
|
|
|
|
|
(2,651,820 |
) |
Amortization of unrecognized pension costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,107 |
|
|
|
119,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,532,713 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008 |
|
|
9,811,507 |
|
|
$ |
12,264,384 |
|
|
$ |
19,598,695 |
|
|
$ |
54,078,823 |
|
|
$ |
(1,870,346 |
) |
|
$ |
84,071,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine months ended March 31, 2007 |
|
| |
|
|
|
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
Accumulated other |
|
|
|
|
| |
|
Common Stock |
|
|
in excess |
|
|
Retained |
|
|
comprehensive |
|
|
|
|
| |
|
Shares |
|
|
Amount |
|
|
of par value |
|
|
earnings |
|
|
income (loss) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 1, 2006 |
|
|
9,392,305 |
|
|
$ |
11,740,381 |
|
|
$ |
15,191,990 |
|
|
$ |
70,183,104 |
|
|
$ |
(265,097 |
) |
|
$ |
96,850,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock dividend (5% declared October 25, 2006) |
|
|
466,365 |
|
|
|
582,956 |
|
|
|
3,404,465 |
|
|
|
(3,989,398 |
) |
|
|
|
|
|
|
(1,977 |
) |
Stock options exercised, net of common
stock surrendered to facilitate exercise |
|
|
234,444 |
|
|
|
293,056 |
|
|
|
1,053,152 |
|
|
|
|
|
|
|
|
|
|
|
1,346,208 |
|
Repurchases of common stock as part
of 2005 share repurchase program |
|
|
(292,744 |
) |
|
|
(365,930 |
) |
|
|
(463,554 |
) |
|
|
(1,694,436 |
) |
|
|
|
|
|
|
(2,523,920 |
) |
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
187,901 |
|
|
|
|
|
|
|
|
|
|
|
187,901 |
|
Tax effect of stock transactions |
|
|
|
|
|
|
|
|
|
|
183,093 |
|
|
|
|
|
|
|
|
|
|
|
183,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,135,282 |
) |
|
|
|
|
|
|
(6,135,282 |
) |
Net unrealized loss on investment
securities owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,686 |
|
|
|
122,686 |
|
Reclassification adjustment for net gain
realized and reported in net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,411 |
|
|
|
161,411 |
|
Net unrealized gain on equity investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,000 |
|
|
|
26,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,825,185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
9,800,370 |
|
|
$ |
12,250,463 |
|
|
$ |
19,557,047 |
|
|
$ |
58,363,988 |
|
|
$ |
45,000 |
|
|
$ |
90,216,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
7
SPARTON CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation — The accompanying unaudited condensed consolidated financial statements of
Sparton Corporation and subsidiaries (the Company) have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) for interim financial
information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete financial statements.
All significant intercompany transactions and accounts have been eliminated. The condensed
consolidated balance sheet at March 31, 2008, and the related condensed consolidated statements of
operations, cash flows and shareowners’ equity for the nine months ended March 31, 2008 and 2007
are unaudited, but include all adjustments (consisting only of normal recurring accruals with the
exception of the NRTC litigation loss described in Note 6) which the Company considers necessary
for a fair presentation of such interim financial statements. Operating results for the nine
months ended March 31, 2008 are not necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 2008. The terms “Sparton,” the “Company,” “we,” “us,” and “our”
refer to Sparton Corporation and subsidiaries.
The balance sheet at June 30, 2007, was derived from the audited financial statements at that date
but does not include all of the information and footnotes required by GAAP for complete financial
statements. It is suggested that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007.
Business Acquisition — On May 31, 2006, the Company announced that a membership purchase agreement
was signed, and the acquisition of Astro Instrumentation, LLC (Astro) was completed. Astro was a
privately owned electronic manufacturing services (EMS) provider located in Strongsville, Ohio.
Astro had been in business for approximately five years and had a sales volume for its fiscal
year ended December 31, 2005, of approximately $34 million. This acquisition furthered the
Company’s strategy of pursuing potential acquisition candidates in both the defense and medical
device markets. In January 2007, Astro was renamed Sparton Medical Systems, Inc. (SMS), which
operates as a wholly-owned subsidiary of Sparton Corporation. The acquisition was accounted for
using the purchase method in accordance with Statement of Financial Accounting Standards (SFAS) No.
141, Business Combinations; accordingly, the operating results of SMS since the acquisition date
have been included in the consolidated financial statements of the Company. Additional details
covering this acquisition can be found in the Company’s Annual Reports on Form 10-K for each of the
fiscal years ended June 30, 2007 and 2006.
Operations — The Company operates in one line of business, electronic manufacturing services (EMS).
The Company provides design and electronic manufacturing services, which include a complete range
of engineering, pre-manufacturing and post-manufacturing services. Capabilities range from product
design and development through aftermarket support. All of the facilities are registered to ISO
standards, including 9001 or 13485, with most having additional certifications. Products and
services include complete “Device Manufacturing” products for Original Equipment Manufacturers,
microprocessor-based systems, transducers, printed circuit boards and assemblies, sensors and
electromechanical devices. Markets served are in the government, medical/scientific
instrumentation, aerospace, and other industries, with a focus on regulated markets. The Company
also develops and manufactures sonobuoys, anti-submarine warfare (ASW) devices, used by the U.S.
Navy and other free-world countries. Many of the physical and technical attributes in the
production of sonobuoys are the same as those required in the production of the Company’s other
electrical and electromechanical products and assemblies.
Use of estimates — The Company’s interim condensed consolidated financial statements are prepared
in accordance with accounting principles generally accepted in the United States of America (GAAP).
These accounting principles require management to make certain estimates, judgments and
assumptions. The Company believes that the estimates, judgments and assumptions upon which it
relies are reasonable based upon information available to it at the time that these estimates,
judgments and assumptions are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial statements, as well as
the reported amounts of revenues and expenses during the periods presented. To the extent there are
material differences between these estimates, judgments or assumptions and actual results, the financial statements will be affected. In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not require management’s judgment in its
application. There are also areas in which management’s judgment in selecting among available
alternatives would not produce a materially different result.
8
Revenue recognition — Net sales include primarily product sales, with supplementary revenues earned
from engineering and design services. Standard contract terms are FOB shipping point. Revenue from
product sales is generally recognized upon shipment of the goods; service revenue is recognized as
the service is performed or under the percentage of completion method, depending on the nature of
the arrangement. Long-term contracts relate principally to government defense contracts. These
contracts are accounted for based on completed units accepted and their estimated average contract
cost per unit. Costs and fees billed under cost-reimbursement-type contracts are recorded as sales.
A provision for the entire amount of a loss on a contract is charged to operations as soon as the
loss is identified and the amount is determinable. Shipping and handling costs are included in
costs of goods sold.
Accounts receivable, credit practices, and allowance for probable losses — Accounts receivable are
customer obligations generally due under normal trade terms for the industry. Credit terms are
granted and periodically revised based on evaluations of the customers’ financial condition. The
Company performs ongoing credit evaluations of its customers and although the Company does not
generally require collateral, letters of credit or cash advances may be required from customers in
order to support accounts receivable in certain circumstances. Historically, a majority of
receivables from foreign customers have been secured by letters of credit or cash advances.
The Company maintains an allowance for probable losses on receivables for estimated losses
resulting from the inability of its customers to make required payments. The allowance is estimated
based on historical experience of write-offs, the level of past due amounts (i.e., amounts not paid
within the stated terms), information known about specific customers with respect to their ability
to make payments, and future expectations of conditions that might impact the collectibility of
accounts. When management determines that it is probable that an account will not be collected, all
or a portion of the amount is charged against the allowance for probable losses.
Fair value of financial instruments — The fair value of cash and cash equivalents, trade accounts
receivable, short-term bank borrowings, and accounts payable approximate their carrying value. Cash
and cash equivalents consist of demand deposits and other highly liquid investments with an
original term when purchased of three months or less. With respect to the Company’s issued or
assumed long-term debt instruments, consisting of industrial revenue bonds, notes payable and bank
debt, relating to the May 31, 2006 acquisition of SMS, as reported in Note 5 of this report,
management believes the fair value of these financial instruments approximates their carrying
value at March 31, 2008.
Investment securities — The Company’s investment portfolio historically had maturity dates within a
year or less. Realized gains and losses on investments were determined using the specific identification method. Investments in debt securities that were not cash equivalents or marketable equity
securities had been designated as available for sale. Those securities, all of which were
investment grade, were reported at fair value, with net unrealized gains and losses included in
accumulated other comprehensive income or loss, net of applicable taxes. Unrealized losses that
were other than temporary were recognized in earnings. During the year ended June 30, 2007, the
Company liquidated its investment securities portfolio.
There were no investment securities purchased during the nine months ended March 31, 2008 or 2007.
For the nine months ended March 31, 2008 and 2007 there were $0 and $15,619,000 of proceeds from
the sale of investment securities, respectively.
Other investment — The Company has an investment in Cybernet Systems Corporation, which is included
in other non current assets and is accounted for under the equity method, as more fully described
in Note 9 of this report.
Market
risk exposure — The Company manufactures its products in the United States, Canada, and
Vietnam. Sales of the Company’s products are in the U.S. and Canada, as well as other foreign
markets. The Company is subject to foreign currency exchange rate transaction risk relating to
intercompany activity and balances, receipts from customers, and payments to suppliers in foreign
currencies. Also, adjustments related to the translation of the Company’s Canadian and Vietnamese
financial statements into U.S. dollars are included in current earnings. As a result, the
Company’s financial results are affected by factors such as changes in foreign currency exchange
rates or economic conditions in the domestic and foreign markets in which the Company operates.
However, minimal third party receivables and payables are denominated in foreign currency and the
related market risk exposure is considered to be immaterial. Historically, foreign currency gains
and losses related to intercompany activity and balances have not been significant. However, due
to the strengthened Canadian dollar in recent years, the impact of transaction and translation
gains has increased. If the exchange rate were to materially change, the Company’s financial
position could be significantly affected.
The Company has financial instruments that are subject to interest rate risk. As a result of the
May 31, 2006, Astro acquisition, the Company is obligated on bank debt with an adjustable rate of
interest, as more fully discussed in Note 5 of this report, which would adversely impact operations
should the interest rate increase.
9
Long-lived assets — The Company reviews long-lived assets that are not held for sale for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Impairment is determined by comparing the carrying value of the assets to their
estimated future undiscounted cash flows. If it is determined that an impairment of a long-lived
asset has occurred, a current charge to income is recognized. The Company also has goodwill and
other intangibles which are considered long-lived assets. While a portion of goodwill is associated
with the Company’s investment in Cybernet, the majority of the approximately $22.3 million and
$22.6 million in net carrying value of goodwill and other intangibles reflected on the Company’s
balance sheet as of March 31, 2008 and June 30, 2007, respectively, is associated with the
acquisition of SMS. For a more complete discussion of goodwill and other intangibles, see Note 4 of
this report.
Other assets — At June 30, 2007, the Company’s
Deming, New Mexico facility was classified as held
for sale and carried in other current assets in the Company’s balance sheet. For a further
discussion of the sale of this facility, which transaction closed on July 20, 2007, see Note 10 of
this report. In addition, as of March 31, 2008 and June 30,
2007, other non current assets included a $2.8
million receivable relating to defective inventory materials and
related validation costs for which the Company is seeking reimbursement from other parties,
which is described in Note 6 of this report. Other non current assets
at June 30, 2007, also included $1.6 million related to deferred
costs from two entities that were subsequently expensed during fiscal
2008, see Note 6 for further discussion.
Common stock repurchases — The Company records common stock repurchases at cost. The excess of cost
over par value is first allocated to capital in excess of par value based on the per share amount
of capital in excess of par value for all outstanding shares, with the remainder charged to
retained earnings. Effective September 14, 2005, the Board of Directors authorized a
publicly-announced common share repurchase program for the repurchase, at the discretion of
management, of up to $4 million of shares of the Company’s outstanding common stock in open market
transactions. The program expired September 14, 2007. As of the expiration date repurchased shares
totaled 331,781, at a cumulative cost of approximately $2,887,000. Repurchased shares have been
retired. No shares have been repurchased during fiscal 2008.
Deferred income taxes — Deferred income taxes are based on enacted income tax rates in effect on
the dates temporary differences between the financial reporting and tax bases of assets and
liabilities reverse. The effect on deferred tax assets and liabilities of a change in income tax
rates is recognized in income in the period that includes the enactment date. To the extent that
available evidence about the future raises doubt about the realization of a deferred tax asset, a
valuation allowance would be established. No such valuation allowance was deemed necessary as of
March 31, 2008 or June 30, 2007. For a further discussion on income taxes see Critical Accounting
Policies and Estimates included in Item 2 of this report.
Supplemental cash flows information — Supplemental cash and noncash activities for the nine months
ended March 31, 2008 and 2007 were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
| |
|
|
Net cash paid (refunded) during the period for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
(797,000 |
) |
|
$ |
(314,000 |
) |
|
|
|
|
|
|
|
Interest |
|
$ |
790,000 |
|
|
$ |
749,000 |
|
|
|
|
|
|
|
|
Note: Interest includes $8,000 and $60,000 of capitalized interest in fiscal 2008 and 2007,
respectively.
New accounting standards — In February 2007, the Financial Accounting Standards Board (FASB) issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement provides
reporting entities the one-time election (the “fair value option”) to measure financial
instruments and certain other items at fair value. For items for which the fair value option has
been elected, unrealized gains and losses are to be reported in earnings at each subsequent
reporting date. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No.
157), to eliminate the diversity in practice that exists due to the different definitions of fair
value and the limited guidance for applying those definitions. SFAS No. 157 defines fair value as
the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Both SFAS No. 159 and SFAS No. 157
are effective for financial statements issued by Sparton for the first interim period of our fiscal year beginning on July 1, 2008. In February 2008, the FASB issued FASB Staff Position (FSP)
FAS No. 157-2. This FSP delays the effective date of SFAS No. 157 until fiscal 2010 for nonfinancial assets and nonfinancial liabilities except those items recognized or disclosed at fair
value on an annual or more frequently recurring basis. The Company does not expect that the
adoption of SFAS No. 159 or 157 will have a significant impact on our condensed consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R). This Statement is intended to improve financial reporting by requiring an employer to
recognize the overfunded or underfunded status of a defined benefit postretirement plan
10
as an asset or liability in its balance sheet and to recognize changes in that funded status in the
year in which the changes occur through comprehensive income or loss. This Statement also requires
an employer to measure the funded status of a plan as of its balance sheet date. Prior accounting
standards required an employer to recognize on its balance sheet an asset or liability arising from
a defined benefit postretirement plan, which generally differed from the plan’s overfunded or
underfunded status. SFAS No. 158 was effective for Sparton’s fiscal year ended June 30, 2007,
except for the change in the measurement date which is effective for Sparton’s fiscal year ending
June 30, 2009. An increase in accumulated other comprehensive loss reflecting the amount equal to
the difference between the previously recorded pension asset and the current funded status
(adjusted for income taxes) as of June 30, 2007, the implementation date, was recorded by the
Company. The resulting decrease to shareowners’ equity at that date totaled approximately
$1,989,000 (net of tax benefit of $1,025,000). For further information on the detailed application
of this new pronouncement see Note 6 to the Consolidated Financial Statements included in Item 8 of
the Company’s 2007 Annual Report on Form 10-K, and Note 9 of this report.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN No. 48), an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN No. 48 seeks to
reduce the significant diversity in practice associated with financial statement recognition and
measurement in accounting for income taxes and prescribes a recognition threshold and measurement
attribute for disclosure of tax positions taken or expected to be taken on an income tax return. In
May 2007, the FASB issued FASB Staff Position No. FIN 48-1, Definition of Settlement in FASB
Interpretation No. 48 (FIN 48-1). FIN 48-1 amends FASB Interpretation No. 48 to provide guidance on
how an enterprise should determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. The interpretation was effective upon initial
adoption of FIN No. 48. The Company implemented FIN No. 48 on July 1, 2007, and accordingly
analyzed its filing positions in the federal and state jurisdictions where it is required to file
income tax returns, as well as all open tax years in these jurisdictions. The adoption of FIN No.
48, and the succeeding amendment FIN 48-1, had no significant impact on the Company’s condensed
consolidated financial statements.
Based on our evaluation, we have concluded that there are no significant uncertain tax positions
requiring recognition in the Company’s financial statements. Sparton’s evaluation was performed
for the fiscal years 2004 through 2007, the years which remain subject to examination by major tax
jurisdictions as of March 31, 2008. It is possible that the Company may from time to time be
assessed interest or penalties by major tax jurisdictions, although any such assessments
historically have been minimal and immaterial to our financial results. Any assessment for
interest and/or penalties would be classified in the financial statements as selling and
administrative expenses.
NOTE 2. INVENTORIES AND COSTS OF CONTRACTS IN PROGRESS
Customer orders are based upon forecasted quantities of product, manufactured for shipment over
defined periods. Raw material inventories are purchased to fulfill these customer requirements.
Within these arrangements, customer demands for products frequently change, sometimes creating
excess and obsolete inventories. When it is determined that the Company’s carrying cost of such
excess and obsolete inventories cannot be recovered in full, a charge is taken against income and a
valuation allowance is established for the difference between the carrying cost and the estimated
realizable amount. Conversely, should the disposition of adjusted excess and obsolete inventories
result in recoveries in excess of these reduced carrying values, the remaining portion of the
valuation allowances is reversed and taken into income when such determinations are made. It is
possible that the Company’s financial position, results of operations and cash flows could be
materially affected by changes to inventory valuation allowances. These valuation allowances
totaled $3,770,000 and $2,416,000 at March 31, 2008 and June 30, 2007, respectively.
Inventories are valued at the lower of cost (first-in, first-out basis) or market and include
costs related to long-term contracts. Inventories, other than contract costs, are principally raw
materials and supplies. The following are the approximate major classifications of inventory, net
of progress billings and valuation allowances, at each balance sheet date:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, 2008 |
|
|
June 30, 2007 |
|
| |
|
|
Raw materials |
|
$ |
47,531,000 |
|
|
$ |
36,627,000 |
|
Work in process and finished goods |
|
|
15,321,000 |
|
|
|
16,894,000 |
|
|
|
|
|
|
|
|
|
|
$ |
62,852,000 |
|
|
$ |
53,521,000 |
|
|
|
|
|
|
|
|
Work in process and finished goods inventories include $2.5 million and $3.3 million of
completed, but not yet accepted, sonobuoys at March 31, 2008 and June 30, 2007, respectively.
Inventories are reduced by progress billings to the U.S. government, related to long-term
contracts, of approximately $1.0 million and $8.6 million at March 31, 2008 and June 30, 2007,
respectively.
11
NOTE 3. DEFINED BENEFIT PENSION PLAN
Periodic benefit cost — The Company sponsors a defined benefit pension plan covering certain
salaried and hourly U.S. employees. The components of net periodic pension expense are as follows
for the three and nine months ended March 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
| |
|
|
|
|
Service cost |
|
$ |
134,000 |
|
|
$ |
124,000 |
|
|
$ |
403,000 |
|
|
$ |
371,000 |
|
Interest cost |
|
|
152,000 |
|
|
|
158,000 |
|
|
|
455,000 |
|
|
|
474,000 |
|
Expected return on plan assets |
|
|
(187,000 |
) |
|
|
(217,000 |
) |
|
|
(560,000 |
) |
|
|
(651,000 |
) |
Amortization of prior service cost |
|
|
26,000 |
|
|
|
26,000 |
|
|
|
77,000 |
|
|
|
77,000 |
|
Amortization of unrecognized net actuarial loss |
|
|
35,000 |
|
|
|
34,000 |
|
|
|
104,000 |
|
|
|
102,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
160,000 |
|
|
$ |
125,000 |
|
|
$ |
479,000 |
|
|
$ |
373,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based upon current actuarial calculations and assumptions, a pension contribution in the amount of
$79,000 was made during the quarter ended March 31, 2008 of this fiscal year. No cash contribution
was required or made by the Company in fiscal 2007.
NOTE 4. GOODWILL AND OTHER INTANGIBLES
The Company follows SFAS No. 141, Business Combinations (SFAS No. 141), SFAS No. 142, Goodwill and
Other Intangible Assets (SFAS No. 142) and SFAS No. 144, Accounting for the Impairment or Disposal
of Long-lived Assets (SFAS No. 144). SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations. SFAS No. 141 also specifies the criteria applicable to
intangible assets acquired in a purchase method business combination to be recognized and reported
apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment, at least annually.
Cybernet Systems Corporation’s (Cybernet) goodwill and goodwill related to the SMS purchase is
reviewed for impairment annually, with the next review expected to occur in the fourth quarter of
fiscal 2008. See “Business Acquisition”, Note 1 of this report, for additional information on the
purchase of SMS, which occurred on May 31, 2006. SFAS No. 144 requires that intangible assets with
definite useful lives be amortized over their estimated useful lives to their estimated residual
values and be reviewed for impairment whenever events or changes in circumstances indicate their
carrying amounts may not be recoverable. The change in the carrying amounts of goodwill and
amortizable intangibles during the nine months ended March 31, 2008 and year ended June 30, 2007,
were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Amortizable |
|
|
Total |
|
| |
|
Goodwill |
|
|
Intangibles |
|
|
Intangibles |
|
| |
|
|
Balance at July 1, 2006 |
|
$ |
15,744,000 |
|
|
$ |
6,726,000 |
|
|
$ |
22,470,000 |
|
Goodwill additions |
|
|
634,000 |
|
|
|
— |
|
|
|
634,000 |
|
Amortization |
|
|
— |
|
|
|
(482,000 |
) |
|
|
(482,000 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007 |
|
$ |
16,378,000 |
|
|
$ |
6,244,000 |
|
|
$ |
22,622,000 |
|
Amortization |
|
|
— |
|
|
|
(361,000 |
) |
|
|
(361,000 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008 |
|
$ |
16,378,000 |
|
|
$ |
5,883,000 |
|
|
$ |
22,261,000 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill — Goodwill is comprised of the following: $770,000 related to the Company’s investment in
Cybernet Systems Corporation (Cybernet, see Note 9) and $15,608,000 related to the Company’s
purchase of SMS. Additional goodwill occurred in fiscal 2007 in the amount of $38,000 as a result
of the Company’s purchase of SMS, as well as $596,000 resulting from accrued contingent
consideration determined to be earned by the sellers of SMS and recognized at June 30, 2007. This
contingent consideration was recorded during fiscal 2007 and paid in the first quarter of fiscal
2008.
Other intangibles — Other intangibles of $6,765,000 were recognized upon the purchase of SMS in May
2006, consisting of intangibles for non-compete agreements of $165,000 and customer relationships
of $6,600,000. These costs are being amortized ratably over 4 years and 15 years, respectively.
Accumulated amortization as of March 31, 2008 amounted to $882,000; $75,000 and $807,000 were for
amortization of non-compete agreements and customer relationships, respectively. Amortization of
intangible assets is estimated to be approximately $481,000 for fiscal 2008, 2009 and 2010, and
approximately $440,000 for each of the subsequent 10 years.
12
NOTE 5. BORROWINGS
Short-term debt maturities and line of credit — Short-term debt as of March 31, 2008, includes the
current portion of long-term bank loan debt of $2,000,000, the current portion of long-term notes
payable of $1,872,000, and the current portion of Industrial Revenue bonds of $104,000. Both the
bank loan and the notes payable were incurred as a result of the Company’s purchase of SMS on May
31, 2006, and are due and payable in equal installments over the next several years as further
discussed below. The Industrial Revenue bonds were assumed at the time of SMS’s purchase and were
previously incurred by Astro Instrumentation, LLC (Astro).
The Company also has available a $20,000,000 revolving line-of-credit facility secured by
substantially all assets of the Company and provided by National City Bank to support working
capital needs and other general corporate purposes. This line of credit bears interest at the
variable rate of a base rate determined by reference to a specified index plus 1.25%, which as of
March 31, 2008 equaled an effective rate of 3.79% (6.82% as of June 30, 2007). As of April 2008,
this rate has been adjusted to a variable rate of 3.0% over the specified index. Had the new rate
been in place as of March 31, 2008, our effective rate would have been 5.54%. As of March 31, 2008
and June 30, 2007, there was $8.5 and $1.0 million drawn against this credit facility,
respectively. Interest accrued on those borrowings amounted to approximately $10,000 and $1,000 as
of March 31, 2008 and June 30, 2007, respectively.
Long-term debt — Long-term debt, all of which arose in conjunction with the SMS acquisition,
consists of the following obligations at each balance sheet date:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, 2008 |
|
|
June 30, 2007 |
|
| |
|
|
Industrial Revenue bonds, face value |
|
$ |
2,293,000 |
|
|
$ |
2,376,000 |
|
Less unamortized purchase discount |
|
|
133,000 |
|
|
|
141,000 |
|
|
|
|
|
|
|
|
Industrial Revenue bonds, carrying value |
|
|
2,160,000 |
|
|
|
2,235,000 |
|
Bank loan |
|
|
6,500,000 |
|
|
|
8,000,000 |
|
Notes payable |
|
|
4,877,000 |
|
|
|
5,776,000 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
13,537,000 |
|
|
|
16,011,000 |
|
Less current portion |
|
|
3,976,000 |
|
|
|
3,922,000 |
|
|
|
|
|
|
|
|
Long-term debt, net of current portion |
|
$ |
9,561,000 |
|
|
$ |
12,089,000 |
|
|
|
|
|
|
|
|
The Company has assumed repayment of principal and interest on bonds originally issued to Astro by
the State of Ohio. These bonds are Ohio State Economic Development Revenue Bonds, series 2002-4,
and were issued to finance the construction of Astro’s current operating facility. The principal
amount, including premium, was issued in 2002 and totaled $2,845,000. These bonds have interest
rates which vary, dependent on the maturity date of the bonds. Due to an increase in interest rates
since the original issuance of the bonds, a discount amounting to $151,000 was recorded by Sparton
on the date of assumption.
The bonds carry certain requirements generally obligating the Company to deposit funds into a
sinking fund. The sinking fund requires the Company to make monthly deposits of one twelfth of the
annual obligation plus accrued interest. The purchase discount is being amortized ratably over the
remaining term of the bonds. Amortization expense for the nine months ended March 31, 2008 and 2007
was approximately $8,000 and $6,000, respectively. The Company has issued an irrevocable letter of
credit in the amount of $284,000 to secure repayment of a portion of the bonds. A further
discussion of borrowings and other information related to the Company’s purchase of SMS may be
found in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007.
The bank term loan, provided by National City Bank with an original principal of $10 million, is
being repaid over five years, with quarterly principal payments of $500,000 which commenced
September 1, 2006. This loan bears interest at the variable rate of LIBOR plus 100 basis points,
with interest calculated and paid quarterly along with the principal payment. As of April 2008,
this rate has been adjusted to be equivalent to the rate carried on the above line of credit of
3.0% over a specified index. As of March 31, 2008 and June 30, 2007, respectively, the effective
interest rate equaled 3.70% and 6.32%, with accrued interest of approximately $19,000 and $41,000.
Had the new rate been in place as of March 31, 2008, our effective rate would have been 5.54%. As a
condition of this bank loan, the Company is subject to compliance with certain customary covenants.
The Company met these requirements at March 31, 2008. This debt is secured by substantially all
assets of the Company.
Two notes payable with initial principal of $3,750,000 each, totaling $7.5 million, are payable to
the sellers of Astro. These notes are to be repaid over four years, in aggregate semi-annual
payments of principal and interest in the combined amount of $1,057,000 on June 1 and December 1 of
each year. Payments commenced on December 1, 2006. These notes each bear interest
13
at 5.5% per annum. The notes are proportionately secured by the stock of Astro. As of March 31,
2008 and June 30, 2007, there was interest accrued on these notes in the amount of approximately
$89,000 and $26,000, respectively.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Environmental Remediation
One of Sparton’s former manufacturing facilities, located in Albuquerque, New Mexico (Coors Road),
has been involved with ongoing environmental remediation since the early 1980’s. At March 31, 2008,
Sparton had accrued $5,771,000 as its best estimate of the remaining minimum future undiscounted financial liability with respect to this matter, of which $381,000 is classified as a current
liability and included on the balance sheet in other accrued liabilities. The Company’s minimum
cost estimate is based upon existing technology and excludes legal and related consulting costs,
which are expensed as incurred. The Company’s estimate includes equipment and operating and
maintenance costs for onsite and offsite pump and treat containment systems, as well as continued
onsite and offsite monitoring. It also includes periodic reporting requirements.
In fiscal 2003, Sparton reached an agreement with the United States Department of Energy (DOE) and
others to recover certain remediation costs. Under the settlement terms, Sparton received cash and
the DOE agreed to reimburse Sparton for 37.5% of certain future environmental expenses in excess of
$8,400,000 incurred from the date of settlement. Uncertainties associated with environmental
remediation contingencies are pervasive and often result in wide ranges of reasonably possible
outcomes. Estimates developed in the early stages of remediation can vary significantly. Normally
a finite estimate of cost does not become fixed and determinable at a specific point in time.
Rather, the costs associated with environmental remediation become estimable over a continuum of
events and activities that help to frame and define a liability. Factors which cause uncertainties
for the Company include, but are not limited to, the effectiveness of the current work plans in
achieving targeted results and proposals of regulatory agencies for desired methods and outcomes.
It is possible that cash flows and results of operations could be significantly affected by the
impact of changes associated with the ultimate resolution of this contingency.
Customer Relationships
In September 2002, Sparton Technology, Inc. (STI), a subsidiary of Sparton Corporation, filed an
action in the U.S. District Court for the Eastern District of Michigan to recover certain
unreimbursed costs incurred for the acquisition of raw materials as a result of a manufacturing
relationship with two entities, Util-Link, LLC (Util-Link) of Delaware and National Rural
Telecommunications Cooperative (NRTC) of the District of Columbia. The defendants filed a
counterclaim in the action seeking money damages alleging that STI breached its duties in the
manufacture of products for the defendants.
At the conclusion of the jury trial in November of 2005, STI was awarded damages in an amount in
excess of the unreimbursed costs. The defendants were denied relief on their counterclaim. As of
June 30, 2007, $1.6 million of the deferred costs incurred by the Company were included in other
non current assets on the Company’s balance sheet. NRTC filed an appeal of the judgment with the
U.S. Court of Appeals for the Sixth Circuit and on September 21, 2007, with that court issuing its
opinion vacating the judgment in favor of Sparton and affirming the denial of relief on NRTC’s
counterclaim. Sparton filed a Petition for Certiorari with the U.S. Supreme Court and a Motion for
Judgment as a Matter of Law and/or New Trial with the trial court, both of which were denied by the
respective courts. As a result of the vacation of the judgment in Sparton’s favor by the U.S. Court
of Appeals for the Sixth Circuit, Sparton expensed the previously deferred costs of $1.6 million as
costs of goods sold, which was reflected in the financial results reported for the quarter ended
September 30, 2007.
The Company has pending an action before the U.S. Court of Federal Court of Claims to recover
damages arising out of an alleged infringement by the U.S. Navy of certain patents held by Sparton
and used in the production of sonobuoys. The case was dismissed on summary judgment, however, the
decision of the U.S. Court of Federal Claims was reversed by the U.S. Court of Appeals for the
Federal Circuit. The case is currently scheduled for trial in the second quarter of calendar 2008.
The likelihood that the claim will be resolved and the extent of any recovery in favor of the
Company is unknown at this time.
Product Issues
Some of the printed circuit boards supplied to the Company for its aerospace sales were discovered
in fiscal 2006 to be nonconforming and defective. The defect occurred during production at the
board supplier’s facility, prior to shipment to Sparton for further processing. The Company and our
customer, who received the defective boards, have contained the defective boards.
14
As of March 31, 2008 and June 30, 2007, $2.8 million of related product and associated expenses
have been deferred and classified in Sparton’s balance sheet within other non current assets. In
August 2005, Sparton Electronics Florida, Inc. filed an action in the U.S. District Court of
Florida against Electropac Co., Inc. and a related company (the raw board manufacturer) to recover
these costs. A trial in the matter is scheduled to be held in the third quarter of calendar 2008.
The likelihood that the claim will be resolved and the extent of the Company’s recovery, if any, is
unknown at this time. No loss contingency has been established at March 31, 2008. Should this case
ultimately be decided unfavorably to Sparton, the before tax results at that time could be
adversely affected by $2.8 million.
NOTE 7. COMMON STOCK OPTIONS
As of July 1, 2005, SFAS No. 123(R), Share-Based Payment, became effective for the Company. Under
SFAS No. 123(R), compensation expense is recognized in the Company’s financial statements.
Share-based compensation cost is measured on the grant date, based on the fair value of the award
calculated at that date, and is recognized over the employee’s requisite service period, which
generally is the options’ vesting period. Fair value is calculated using the Black-Scholes option
pricing model.
The Company has an incentive stock option plan under which 970,161 authorized and unissued common
shares, which includes 760,000 original shares adjusted by 210,161 shares for the subsequent
declaration of stock dividends, were reserved for option grants to key employees and directors at
the fair market value of the Company’s common stock at the date of the grant. Options granted to
date have either a five or ten-year term and become vested and exercisable cumulatively beginning
one year after the grant date, in four equal annual installments. Options may terminate before
their expiration dates if the optionee’s status as an employee is terminated, retired, or upon
death.
Employee stock options, which are granted by the Company pursuant to The Plan, which was last
amended and restated on October 24, 2001, are structured to qualify as “incentive stock options”
(ISOs). Stock options granted to non-employee directors are non-qualified stock options (NQSO’s).
Under current federal income tax regulations, the Company does not receive a tax deduction for the
issuance, exercise or disposition of ISOs if the employee meets certain holding period
requirements. If the employee does not meet the holding period requirement a disqualifying
disposition occurs, at which time the Company can receive a tax deduction. The Company does not
record tax benefits related to ISOs unless and until a disqualifying disposition occurs. In the
event of a disqualifying disposition, the entire tax benefit is recorded as a reduction of income
tax expense. In accordance with SFAS No. 123(R), excess tax benefits (where the tax deduction
exceeds the recorded compensation expense) are credited to “capital in excess of par value” in the
consolidated statement of shareowners’ equity and tax benefit deficiencies (where the recorded
compensation expense exceeds the tax deduction) are charged to “capital in excess of par value” to
the extent previous excess tax benefits exist.
The following table presents share-based compensation expense and related components for the three
months and nine months ended March 31, 2008 and 2007, respectively:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
Nine months ended |
| |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Share-based compensation expense |
|
$ |
52,000 |
|
|
$ |
$54,000 |
|
|
$ |
125,000 |
|
|
$ |
188,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related tax benefit |
|
|
— |
|
|
$ |
1,000 |
|
|
|
— |
|
|
$ |
$23,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense impacted basic and
diluted per share amounts by approximately |
|
|
— |
|
|
$ |
0.01 |
|
|
|
— |
|
|
$ |
0.02 |
|
As of March 31, 2008, unrecognized compensation costs related to nonvested awards amounted to
$260,000 and will be recognized over the remaining weighted average period of approximately 1.21
years.
In general, the Company’s policy is to issue new shares upon the exercise of a stock option. A
summary of option activity under the Company’s stock option plan for the nine months ended March
31, 2008 is presented below. The intrinsic value of a stock option is the difference between the
market price of the share under option at the measurement date (i.e., date of exercise or date
outstanding in the table below) and its exercise price. Stock options are excluded from this
calculation if their exercise price is above the market price of the share under option at the
measurement date. All options presented have been adjusted to reflect the impact of all 5% common
stock dividends declared. At March 31, 2008, shares remaining available for future grant totaled
270,606.
15
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Wtd. Avg. |
|
|
| |
|
|
|
|
|
|
|
|
|
Remaining |
|
|
| |
|
Total Shares |
|
Wtd. Avg. |
|
Contractual |
|
Aggregate |
| |
|
Under Option |
|
Exercise Price |
|
Term (years) |
|
Intrinsic Value |
Outstanding at July 1, 2007 |
|
|
300,303 |
|
|
$ |
7.82 |
|
|
|
5.74 |
|
|
$ |
66,000 |
|
Granted |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(76,918 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008 |
|
|
223,385 |
|
|
$ |
8.22 |
|
|
|
6.90 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2008 |
|
|
124,594 |
|
|
$ |
7.96 |
|
|
|
6.55 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding, which includes options exercisable, at March
31, 2008, was $0, as all options both outstanding and exercisable had an exercise price above the
market price of the share under option at that date. The exercise price of stock options
outstanding at March 31, 2008, ranged from $6.52 to $8.57.
There were no stock options granted during the nine months ended March 31, 2008. Assumptions
utilized in determining the amount expensed for stock options during the periods presented herein
are consistent with, and disclosed in, the Company’s previously filed Annual Report on Form 10-K
for the year ended June 30, 2007.
NOTE 8. EARNINGS (LOSS) PER SHARE
Due to the Company’s interim reported net losses for the three months and nine months ended March
31, 2008 and 2007, all common stock options outstanding were excluded from the computation of
diluted earnings per share for those periods, as their inclusion would have been anti-dilutive.
Basic and diluted loss per share for the three months and nine months ended March 31, 2008 and 2007
were computed based on the following shares outstanding:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
| |
|
|
|
|
Weighted average shares outstanding |
|
|
9,811,507 |
|
|
|
9,798,902 |
|
|
|
9,811,507 |
|
|
|
9,822,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share |
|
$ |
0.06 |
|
|
$ |
(0.23 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) as well as unrealized gains and losses, net
of income tax, on investment securities owned and investment securities held by an investee
accounted for by the equity method, as well as changes (beginning in fiscal 2008) in the funded
status of the Company’s defined benefit pension plan, which are excluded from net income (loss).
Unrealized investment gains and losses and changes in the funded status of the pension plan, net of
tax, are excluded from net income (loss), but are reflected as a direct charge or credit to
shareowners’ equity. Comprehensive income (loss) and the related components are disclosed in the
accompanying condensed consolidated statements of shareowners’ equity. Amortization of unrecognized
pension expense for the nine months ended March 31, 2008 of $119,000 includes prior service cost
and net actuarial loss of $51,000 and $68,000, respectively, net of tax. Comprehensive income
(loss) is summarized as follows for the three months and nine months ended March 31, 2008 and 2007,
respectively:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
| |
|
|
|
|
Net income (loss) |
|
$ |
634,000 |
|
|
$ |
(2,294,000 |
) |
|
$ |
(2,652,000 |
) |
|
$ |
(6,135,000 |
) |
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities owned |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
284,000 |
|
Investment securities held by investee accounted for
by the equity method |
|
|
— |
|
|
|
(24,000 |
) |
|
|
— |
|
|
|
26,000 |
|
Amortization of unrecognized pension costs |
|
|
40,000 |
|
|
|
— |
|
|
|
119,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000 |
|
|
|
(24,000 |
) |
|
|
119,000 |
|
|
|
310,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
674,000 |
|
|
$ |
(2,318,000 |
) |
|
$ |
(2,533,000 |
) |
|
$ |
(5,825,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008 and June 30, 2007, shareowners’ equity includes accumulated other comprehensive
loss of $1,870,000 and $1,989,000, respectively, net of tax, which is the sum of the unrecognized
prior service cost and net actuarial loss of the Company’s defined benefit pension plan.
16
In June 1999, the Company purchased a 14% interest (12% on a fully diluted basis) in Cybernet for
$3,000,000, which included a seat on Cybernet’s three member Board of Directors. Cybernet is a
developer of hardware, software, next-generation network computing, and robotics products. It is
located in Ann Arbor, Michigan. The investment is accounted for under the equity method and is
included in other assets and in goodwill on the balance sheet. At March 31, 2008 and June 30, 2007,
the Company’s investment in Cybernet amounted to $1,943,000 and $2,248,000, respectively,
representing its equity interest in Cybernet’s net assets plus $770,000 of goodwill. The Company
believes that the equity method is appropriate given Sparton’s level of involvement in Cybernet.
The use of the equity method requires Sparton to record its share of Cybernet’s income or loss in
earnings (“Equity income/loss in investment”) in Sparton’s statements of operations with a
corresponding increase or decrease in the investment account (“Other non current assets”) in
Sparton’s balance sheets. In addition, Sparton’s share of any unrealized gains (losses) on
available-for-sale securities held by Cybernet is carried in accumulated other comprehensive income
(loss) within the shareowners’ equity section of Sparton’s balance sheets. The unrealized gains
(losses) on available-for-sale securities in fiscal 2007 reflect Cybernet’s investment in
Immersion Corporation, a publicly traded company, as well as other investments. There have been no
unrealized gains or losses in fiscal 2008, as during fiscal 2007 Cybernet liquidated these
investments.
NOTE 10. PLANT CLOSURE
On January 8, 2007, Sparton announced its commitment to close the Deming, New Mexico facility of
Sparton Technology, Inc., a wholly-owned subsidiary of Sparton Corporation. The Deming facility
produced wire harnesses for buses and provided intercompany production support for other Sparton
locations. The closure of this plant was completed by March 31, 2007. The Deming wire harness
production was discontinued, and the intercompany production support relocated to other Sparton
facilities.
Some of the equipment located at the Deming facility was relocated to other Sparton facilities,
primarily in Florida, for their use in ongoing production activities. The land, building,
applicable inventory, and remainder of other Deming assets were sold pursuant to an agreement
signed at the end of March 2007. The sale involved several separate transactions. The sale of the
inventory and equipment for $200,000 was completed on March 30, 2007. The sale of the land and
building for $1,000,000 closed on July 20, 2007. During the interim period, the purchaser leased
the real property. The net value of the land and building sold was included in prepaid expenses and
other current assets in the Company’s balance sheet as of June 30, 2007. The property, plant, and
equipment of the Deming facility was substantially fully depreciated. The ultimate sale of this
facility was completed at a net gain of approximately $868,000. The net gain includes a gain of
approximately $928,000 on the sale of property, plant and equipment, less a loss on the sale of
remaining inventory, which loss is included in the costs of goods sold section of the statement of
operations. The net gain was recognized in full entirely in the first quarter of fiscal 2008 upon
closing of the real estate transaction.
As of June 30, 2007, the following assets and liabilities of the Deming facility were included in
the condensed consolidated balance sheet:
| |
|
|
|
|
Current assets — net of assets held for sale |
|
$ |
9,000 |
|
Property and plant (net), held for sale |
|
|
29,000 |
|
|
|
|
|
Total assets (all current) |
|
$ |
38,000 |
|
|
|
|
|
|
|
|
|
|
Liabilities (all current) |
|
$ |
136,000 |
|
|
|
|
|
Additional details covering this plant closure can be found in Note 15 of Item 8, Part II, of the
Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007.
17
Item 2. 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. Additional information regarding the Company can be accessed via Sparton’s
website at www.sparton.com. Information provided at the website includes, among other items, the
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Quarterly Earnings Releases, News
Releases, and the Code of Ethics, as well as various corporate charters. The Company’s operations
are in one line of business, electronic manufacturing services (EMS). Sparton’s capabilities range
from product design and development through aftermarket support, specializing in total business
solutions for government, medical/scientific instrumentation, aerospace and industrial markets.
This includes the design, development and/or manufacture of electronic parts and assemblies for
both government and commercial customers worldwide. Governmental sales are mainly sonobuoys.
The Private Securities Litigation Reform Act of 1995 reflects Congress’ determination that the
disclosure of forward-looking information is desirable for investors and encourages such disclosure
by providing a safe harbor for forward-looking statements by corporate management. This report on
Form 10-Q contains forward-looking statements within the scope of the Securities Act of 1933 and
the Securities Exchange Act of 1934. The words “expects,” “anticipates,” “believes,” “intends,”
“plans,” “will,” “shall,” and similar expressions, and the negatives of such expressions, are
intended to identify forward-looking statements. In addition, any statements which refer to
expectations, projections or other characterizations of future events or circumstances are
forward-looking statements. The Company undertakes no obligation to publicly disclose any revisions
to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission (SEC). These forward-looking
statements are subject to risks and uncertainties, including, without limitation, those discussed
below. Accordingly, Sparton’s future results may differ materially from historical results or from
those discussed or implied by these forward-looking statements. The Company notes that a variety of
factors could cause the actual results to differ materially from anticipated results or other
expectations expressed in the Company’s forward-looking statements.
Sparton, as a high-mix, low to medium-volume supplier, provides rapid product turnaround for
customers. High-mix describes customers needing multiple product types with generally low volume
manufacturing runs. As a contract manufacturer with customers in a variety of markets, the Company
has substantially less visibility of end user demand and, therefore, forecasting sales can be
problematic. Customers may cancel their orders, change production quantities and/or reschedule
production for a number of reasons. Depressed economic conditions may result in customers delaying
delivery of product, or the placement of purchase orders for lower volumes than previously
anticipated. Unplanned cancellations, reductions, or delays by customers may negatively impact the
Company’s results of operations. As many of the Company’s costs and operating expenses are
relatively fixed within given ranges of production, a reduction in customer demand can
disproportionately affect the Company’s gross margins and operating income. The majority of the
Company’s sales have historically come from a limited number of customers. Significant reductions
in sales to, or a loss of, one of these customers could materially impact business if the Company
were not able to replace those sales with new business.
Other risks and uncertainties that may affect operations, performance, growth forecasts and
business results include, but are not limited to, timing and fluctuations in U.S. and/or world
economies, competition in the overall EMS business, availability of production labor and management
services under terms acceptable to the Company, Congressional budget outlays for sonobuoy
development and production, Congressional legislation, foreign currency exchange rate risk,
uncertainties associated with the outcome of litigation, changes in the interpretation of
environmental laws and the uncertainties of environmental remediation, and uncertainties related to
defects discovered in certain of the Company’s aerospace circuit boards. Other risk factors are
related to the availability and cost of materials used in the manufacture of its products. A number
of events can impact these risks and uncertainties, including potential escalating utility and
other related costs due to natural disasters, as well as political uncertainties such as the conflict in Iraq. The Company has encountered availability and extended lead time issues on some
electronic components due to strong market demand; this resulted in higher prices and late
deliveries. Additionally, the timing of sonobuoy sales to the U.S. Navy is dependent upon access to
the test range and successful passage of product tests performed by the U.S. Navy. Reduced
governmental budgets have made access to the test range less predictable and less frequent than in
the past. Finally, the Sarbanes-Oxley Act of 2002 required changes in, and formalization of, some
of the Company’s corporate governance and compliance practices. The SEC and New York Stock Exchange
(NYSE) also passed rules and regulations requiring additional compliance activities. Compliance
with these rules has increased administrative costs, and it is expected that certain of these costs
will continue indefinitely. For a further discussion of the Company’s risk factors refer to Part
I, Item 1(a), Risk Factors, of the Company’s Annual Report on Form 10-K for the fiscal year ended
June 30, 2007. Management cautions readers not to place undue reliance on forward-looking
statements, which are subject to influence by the enumerated risk factors as well as unanticipated
future events.
18
The following discussion should be read in conjunction with the Condensed Consolidated Financial
Statements and Notes thereto included in this report.
EXECUTIVE SUMMARY
Year to date, fiscal 2008 has been favorably impacted by:
| |
• |
|
Consistent and successful sonobuoy drop tests contributing to increased sales and improved
margins. |
| |
| |
• |
|
Continued sales growth in the Medical/Scientific Instrumentation market and a number of
significant new program orders now in start-up. |
| |
| |
• |
|
Improved margins from a better product mix, improved performance, and repricing on some
products.
|
| |
| |
• |
|
The completion of the sale of the Deming, New Mexico facility at a gain of
approximately $0.9 million. |
These factors, however, have partially been offset by:
| |
• |
|
Sales of several lots of sonobuoys in the early part of fiscal 2008, which contracts
carried minimal or no margin. These programs are now essentially complete. |
| |
| |
• |
|
Significant new program start-up costs related to hiring staff, training personnel and
ordering material in advance of production, compounded by customer delays which has lead to
further unexpected cost growth.
|
| |
| |
• |
|
Increased selling and administrative expenses to support new
program start-ups. |
| |
| |
• |
|
Decreased sales and depressed margins in the Industrial/Other market, due primarily to
reduced sales and pricing concessions to one customer. |
| |
| |
• |
|
The write-off of a $1.6 million litigation claim (previously recorded as a deferred asset),
due to an adverse court opinion. |
| |
| |
• |
|
Increased outside service costs related to management’s obligation to report on internal
control over financial reporting which begins at the end of this fiscal year. |
These various items, among others, are further discussed below.
RESULTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended March 31: |
|
|
|
|
| CURRENT QUARTER |
|
2008 |
|
|
2007 |
|
|
|
|
| MARKET |
|
Sales |
|
|
% of Total |
|
|
Sales |
|
|
% of Total |
|
|
% Change |
|
| |
|
|
Medical/Scientific Instrumentation |
|
$ |
19,174,000 |
|
|
|
33.0 |
% |
|
$ |
14,891,000 |
|
|
|
31.2 |
% |
|
|
28.8 |
% |
Aerospace |
|
|
16,234,000 |
|
|
|
27.9 |
|
|
|
13,441,000 |
|
|
|
28.2 |
|
|
|
20.8 |
|
Government |
|
|
12,847,000 |
|
|
|
22.1 |
|
|
|
7,101,000 |
|
|
|
14.8 |
|
|
|
80.9 |
|
Industrial/Other |
|
|
9,884,000 |
|
|
|
17.0 |
|
|
|
12,293,000 |
|
|
|
25.8 |
|
|
|
(19.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
58,139,000 |
|
|
|
100.0 |
% |
|
$ |
47,726,000 |
|
|
|
100.0 |
% |
|
|
21.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales for the three months ended March 31, 2008, totaled $58,139,000, an increase of $10,413,000
(21.8%) from the same quarter last year. Medical/Scientific Instrumentation sales increased
$4,283,000 (or 28.8%) from the same quarter last year. This increase is partially due to new
customer programs. In addition, higher demand from three existing customers contributed $3,442,000
of the increase. We anticipate the Medical/Scientific Instrumentation customer base and sales will
continue to expand. Aerospace sales were also up $2,793,000 (or 20.8%) from prior year, primarily
due to increased sales to one existing customer of $1,069,000. Government sales in fiscal 2008
continue to be significantly above the depressed level of sales in fiscal 2007. This increase in
sales of $5,746,000 (or 80.9%), is the result of successful sonobuoy testing. However,
Industrial/Other sales declined $2,409,000 (or 19.6%). This decrease was primarily due to lower
demand from one customer, which accounted for a decrease of $2,561,000 during the quarter ended
March 31, 2008. We are uncertain at this time as to the level of future sales to this customer.
The following table presents income statement data as a percentage of net sales for the three
months ended March 31, 2008 and 2007:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs of goods sold |
|
|
92.2 |
|
|
|
98.5 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
7.8 |
|
|
|
1.5 |
|
Selling and administrative expenses |
|
|
8.4 |
|
|
|
8.9 |
|
Other operating expense — net |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(0.7 |
) |
|
|
(7.7 |
) |
Other expense — net |
|
|
(0.9 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(1.6 |
) |
|
|
(7.9 |
) |
Credit for income taxes |
|
|
(2.7 |
) |
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
1.1 |
% |
|
|
(4.8 |
)% |
|
|
|
|
|
|
|
|
|
19
An operating loss of $424,000 was reported for the three months ended March 31, 2008, compared to
an operating loss of $3,690,000 for the three months ended March 31, 2007. The gross profit
percentage for the three months ended March 31, 2008, was 7.8%, an increase from 1.5% for the same
period last year. Gross profit varies from period to period and can be affected by a number of
factors, including product mix, production efficiencies, capacity utilization, and costs
associated with new program introduction. During the quarter ended March 31, 2008, gross profit
was favorably impacted by improved margins on sales to several customers, a result of pricing
increases and improved performance. In addition, successful sonobuoy drop tests allowed for significantly improved Government sales, as well as an increased margin associated with those sales.
However, these improvements were partially offset by price concessions granted to one industrial
customer. Included in the three months ended March 31, 2008 and 2007 were results from the
Company’s Vietnam facility, which has adversely impacted gross profit by $216,000 and $520,000,
respectively.
Government sonobuoy sales with no or minimal margin for the quarter ended March 31, 2008 were
insignificant, compared to $5.6 million for the quarter ended March 31, 2007. With the completion
and sale of several contracts in early fiscal 2008, the majority of the backlog of these
contracts, which totaled $17.9 million at June 30, 2007, has now been completed. The completion of
these contracts is anticipated to allow for improved margins in future quarters. During the
quarters ended March 31, 2008 and 2007, there were cost to complete adjustments totaling
approximately $110,000 of income and $121,000 of expense, respectively, related to the sonobuoy
programs.
The increase in selling and administrative expenses for the three months ended March 31, 2008,
compared to the same period in the prior year, was primarily due to increases in various
categories, such as wages, employee benefits, insurance, regulatory compliance and other items,
many of which increased due to support needed for the large number of job starts under way, and
increased sales activity. A portion of the change, approximately $95,000, was due to increased
wages, related benefits, and employee activity at one facility related to the support and start up
activity of new customers and increased sales within the Medical/Scientific Instrumentation
market. Beginning in fiscal 2006, the Company was required to expense the vested portion of the
fair value of stock options. For the three months ended March 31, 2008 and 2007, $44,000 (or 85%)
and $44,000 (or 81%) of the total $52,000 and $54,000, respectively, was included in selling and
administrative expenses, with the balance reflected in costs of goods sold. The majority of the
decrease in selling and administrative expenses, as a percentage of sales, was due to the significant increase in sales in the three months ended March 31, 2008. Amortization expense, which
totaled $120,000 for the quarters ended March 31, 2008 and 2007, was related to the purchase of SMS
under the purchase accounting rules; for a further discussion see Note 4 of the Condensed
Consolidated Financial Statements.
Interest and investment income decreased from the prior fiscal year, mainly due to less funds
available for investment and lower interest rates. Interest expense of $249,000 and $206,000, net
of capitalized interest, for the three months ended March 31, 2008 and 2007, respectively, was
primarily the result of the debt incurred and assumed as part of the acquisition of SMS. A further
discussion of debt is contained in Note 5 of the Condensed Consolidated Financial Statements.
Other expense-net for the three months ended March 31, 2008 was $284,000, versus $24,000 in fiscal
2007. Translation adjustments, along with gains and losses from foreign currency transactions, in
the aggregate, which are included in other income/expense amounted to a loss of $277,000 and
$36,000 for the three months ended March 31, 2008 and 2007, respectively.
The effective tax rate utilized to calculate the applicable tax provision (credit) requires
management to make certain estimates, judgments, and assumptions. These estimates, judgments, and
assumptions are believed to be reasonable based on information available at that time. To the
extent these estimates, judgments, and assumptions differ from that which actually occurs during
the course of the year, the tax provision (credit) can be, and in the past has been, materially
affected. As a result of the change in fiscal 2008’s estimated effective tax rates to the
year-to-date period’s 42%, approximately $1,168,000 of tax benefit was recognized in the quarter
ended March 31, 2008, that related to the previous six months ended December 31, 2007. Without the
impact of this favorable tax benefit from the prior six months, the third quarters before tax loss
of $921,000 would have had a tax benefit of only $387,000, resulting in a loss for the quarter
ended March 31, 2008, of $534,000. Management believes it is
important for the users of these financial statements to understand
that without the benefit of the tax effect from prior periods, which
is reflected in the third quarter of fiscal 2008’s results, that
the three months ended March 31, 2008, would have reflected the
before mentioned loss of $534,000 rather that the net income of
$634,000 that actually occurred. This change in effective tax rate was due primarily to changes
in forecasted taxable income for the current fiscal year. For a further discussion on income taxes
see Critical Accounting Policies and Estimates included in this report.
Due to the factors described above, the Company reported net income of $634,000 ($0.06 per share,
basic and diluted) for the three months ended March 31, 2008, compared a net loss of $2,294,000
($0.23 per share, basic and diluted) for the corresponding period last year.
20
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine months ended March 31: |
|
|
|
|
| YEAR-TO-DATE |
|
2008 |
|
|
2007 |
|
|
|
|
| MARKET |
|
Sales |
|
|
% of Total |
|
|
Sales |
|
|
% of Total |
|
|
% Change |
|
| |
|
|
Medical/Scientific Instrumentation |
|
$ |
57,928,000 |
|
|
|
33.7 |
% |
|
$ |
45,707,000 |
|
|
|
30.7 |
% |
|
|
26.7 |
% |
Aerospace |
|
|
45,929,000 |
|
|
|
26.7 |
|
|
|
42,187,000 |
|
|
|
28.3 |
|
|
|
8.9 |
|
Government |
|
|
37,378,000 |
|
|
|
21.7 |
|
|
|
19,378,000 |
|
|
|
13.0 |
|
|
|
92.9 |
|
Industrial/Other |
|
|
30,707,000 |
|
|
|
17.9 |
|
|
|
41,827,000 |
|
|
|
28.0 |
|
|
|
(26.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
171,942,000 |
|
|
|
100.0 |
% |
|
$ |
149,099,000 |
|
|
|
100.0 |
% |
|
|
15.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales for the nine months ended March 31, 2008 totaled $171,942,000, an increase of $22,843,000
(15.3%) from the same period last year. Medical/Scientific Instrumentation sales also increased
$12,221,000 (or 26.7%), above sales for the nine months ended March 31, 2008. Again, this increase
is partially due to new customer programs and expanded sales to the existing customer base. A
portion of the increase was due to three customers, who combined contributed $10,181,000 to the
increase. Medical/Scientific Instrumentation sales are expected to continue to expand. Aerospace
sales were up slightly from prior year, primarily due to increased sales to one existing customer
of $1,770,000. Government sales in fiscal 2008 continue to increase due to the results of
successful sonobuoy drop tests, increasing $18,000,000 (or 92.9%), from the prior year. However,
Industrial/Other sales declined $11,120,000 (or 26.6%). This decrease was primarily due to
decreased sales to two existing customers, which accounted for a combined decrease of $11,324,000
during the nine months ended March 31, 2008. We are uncertain at this time as to the level of
future sales to these two customers. This decrease was partially offset by increased sales to other
customers.
The majority of the Company’s sales come from a small number of key strategic and large OEM
customers. Sales to the six largest customers, including government sales, accounted for
approximately 73% and 72% of net sales for the nine months of fiscal 2008 and 2007, respectively.
Five of the customers, including government, were the same both years. During the nine months ended
March 31, 2008 and 2007, Bally, an industrial customer, accounted for 6% and 12% of total sales,
respectively. Additionally, an aerospace customer, Honeywell, with several facilities to which we
supply product, provided 15% and 18% of total sales for the nine months ended March 31, 2008 and
2007, respectively. Siemens Diagnostics (formerly Bayer), a key medical device customer of SMS,
contributed 18% and 19% of total sales during the nine months ended March 31, 2008 and 2007,
respectively.
The following table presents income statement data as a percentage of net sales for the nine months
ended March 31, 2008 and 2007:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs of goods sold |
|
|
94.3 |
|
|
|
96.7 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
5.7 |
|
|
|
3.3 |
|
Selling and administrative expenses |
|
|
8.4 |
|
|
|
8.7 |
|
Other operating income — net |
|
|
(0.4 |
) |
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(2.3 |
) |
|
|
(5.4 |
) |
Other expense — net |
|
|
(0.4 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(2.7 |
) |
|
|
(6.0 |
) |
Credit for income taxes |
|
|
(1.2 |
) |
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(1.5 |
)% |
|
|
(4.1 |
)% |
|
|
|
|
|
|
|
|
|
An operating loss of $3,946,000 was reported for the nine months ended March 31, 2008, compared to
an operating loss of $8,029,000 for the nine months ended March 31, 2007. The gross profit
percentage for the nine months ended March 31, 2008, was 5.7%, an increase from 3.3% for the same
period last year. Gross profit varies from period to period and can be affected by a number of
factors, including product mix, production effi ciencies, capacity utilization, and costs
associated with new program introduction, all of which impacted fiscal 2008’s performance. During
the nine months ended March 31, 2008, gross profit was favorably impacted by improved margins on
several customers, a result of pricing increases and improved performance. In addition, successful
sonobuoy drop tests allowed for significantly improved government sales, as well as an increased
margin associated with those sales. However, these improvements were partially offset by price
concessions granted to one industrial customer, which reduced margins by approximately $674,000 on
similar sales in the prior year. Included in the nine months ended March 31, 2008 and 2007 were
results from the Company’s Vietnam facility, which has adversely impacted gross profit by $622,000
and $1,205,000, respectively. In addition, we have incurred and expensed approximately $1.3 million
in start-up related costs for approximately ten new programs at several facilities.
Also included in costs of goods sold for fiscal 2008 was the write-off of inventory previously
carried as a deferred asset. This write-off totaled approximately $1,643,000 and was the result of
an adverse legal opinion from the Sixth Circuit Court of Ap-
21
peals
where Sparton was defending the appeal of a decision of the lower court in Sparton’s favor.
The gross profit percentage for fiscal 2008 was reduced by 1.0 percentage point due to this
write-off. For a further discussion of this legal claim see Part II, Item 1, Legal Proceedings of
this report.
Negatively impacting gross profit in both periods were $19.0 million and $14.9 million of
government sonobuoy sales with no or minimal margin for the nine months ended March 31, 2008 and
2007, respectively. With the completion and sale of several contracts in the first and second
quarters of fiscal 2008, the majority of the backlog of these contracts, which totaled $17.9
million at June 30, 2007, has been completed. The completion of these contracts is anticipated to
allow for improved margins in future quarters. During the nine months ended March 31, 2008, there
were minimal cost to complete adjustments (totaling approximately $86,000 of income) related to the
sonobuoy programs. This compares to $2.0 million of expense adjustments resulting from changes in
estimates for the same period the prior year. As of March 31, 2008, the backlog remaining of
government contracts with minimalor breakeven margins was approximately $0.7 million compared to
$16.9 million as of March 31, 2007.
Increase in selling and administrative expenses for the nine months ended March 31, 2008, compared
to the same period in the prior year, was primarily due to two factors. A significant portion of
the change, approximately $610,000, was due to increased wages, related benefits, and employee
activity at one facility related to the support and start up activity of new customers and
increased sales within the Medical/Scientific Instrumentation market. In addition, approximately
$231,000 of higher than normaloutside service costs were incurred for assistance in connection
with preparing for compliance with the Company’s obligation to
report on internal control over financial reporting, which commences on June 30, 2008. Beginning in fiscal 2006, the Company was
required to expense the vested portion of the fair value of stock options. For the nine months
ended March 31, 2008 and 2007, $96,000 (or 77%) and $158,000 (or 84%) of the total $125,000 and
$188,000, respectively, was included in selling and administrative expenses, with the balance reflected in costs of goods sold. The remaining increase was due to additional increases in various
categories, such as wages, employee benefits, insurance, regulatory compliance and other items,
many of which increased due to support needed for the large number of job starts under way and
increased sales activity. The majority of the decrease in selling and administrative expenses, as a
percentage of sales, was due to the significant increase in sales in the nine months ended March
31, 2008. Amortization expense, which totaled $361,000 and $362,000 for the nine months ended March
31, 2008 and 2007, was related to the purchase of SMS under the purchase accounting rules; for a
further discussion see Note 4 of the Condensed Consolidated Financial Statements. Net gain on sale
of property, plant and equipment resulted from the sale of the property, plant and equipment of the
Deming facility located in New Mexico. For a further discussion of this sale see Note 10 of the
Condensed Consolidated Financial Statements. Net gain on sale of property, plant and equipment in
fiscal 2007 includes a gain of $199,000 on the sale of undeveloped land in New Mexico.
Interest and investment income decreased from the prior fiscal year, mainly due to less funds
available for investment and lower interest rates. Interest expense of $849,000 and $794,000, net
of capitalized interest, for the nine months ended March 31, 2008 and 2007, respectively, was
primarily the result of the debt incurred and assumed as part of the acquisition of SMS. A further
discussion of debt is contained in Note 5 of the Condensed Consolidated Financial Statements.
Other income-net for the nine months ended March 31, 2008 was $310,000, versus other expense-net of
$284,000 in fiscal 2007. Translation adjustments, along with gains and losses from foreign
currency transactions, are included in other income and, in the aggregate, amounted to a gain of
$313,000 and a loss $297,000 for the nine months ended March 31, 2008 and 2007, respectively.
The effective tax rate utilized to calculate the applicable tax provision (credit) requires
management to make certain estimates, judgments, and assumptions. These estimates, judgments, and
assumptions are believed to be reasonable based on information available at that time. To the
extent these estimates, judgments, and assumptions differ from that which actually occurs during
the course of the year, the tax provision (credit) can be, and in the past has been, materially
affected. As of March 31, 2008, fiscal 2008’s estimated effective tax rate was determined to be
42%, compared to 31% as of March 31, 2007.
Due to the factors described above, the Company reported a net loss of $2,652,000 ($0.27 per share,
basic and diluted) for the nine months ended March 31, 2008, versus a net loss of $6,135,000 ($0.62
per share, basic and diluted) for the corresponding period last year.
22
LIQUIDITY AND CAPITAL RESOURCES
The primary source of liquidity and capital resources has historically been generated from
operations. Certain government contracts 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 has
declined over the past several years, so has the relative importance of progress billings as a
liquidity resource. In addition, investments or the Company’s line of credit have been used to
provide additional working capital. In addition, during fiscal 2007, the Company used a portion of
its investments to fund the Company’s $4,000,000 stock repurchase program. The repurchase program
expired September 14, 2007, at which time shares which had been repurchased under the program
totaled 331,781, at a cumulative cost of approximately $2,887,000. These repurchased shares have
been retired.
For the nine months ended March 31, 2008, cash and cash equivalents decreased $301,000 to
$3,681,000. Operating activities used $5,844,000 in fiscal 2008 and $13,339,000 in fiscal 2007 in
net cash flows. The primary use of cash from operating activities in fiscal 2008 was the increase
in inventories and accounts receivable, as well as funding operating losses. The increase in
inventories and accounts receivable was primarily due to new job starts, the delay in some customer
schedules, and increased sales levels. The primary source of cash in fiscal 2008 reflected in the
cash flow statement was the increase in accounts payable primarily due to the increase in
inventories to support new job starts. The primary use of cash in fiscal 2007 was for operations,
combined with an increase in inventory and a decrease in accounts payable and accrued liabilities.
The increase in inventory was due to build up related to new customer contracts, as well as the
delay in some customer schedules.
Cash flows provided by investing activities in fiscal 2008 totaled $517,000 and were primarily
provided by the sale of the Deming facility located in New Mexico, as further discussed below. Cash
flows provided by investing activities in fiscal 2007 totaled $14,202,000 and was primarily
provided by the proceeds from sale of substantially the entire portfolio of investment securities.
The primary use of cash from investing activities in fiscal 2008 and 2007 was the purchase of
property, plant and equipment. The majority of the expenditure in fiscal 2008 is related to new
roofing at one facility. The majority of the expenditures in fiscal 2007 were for the completed
plant expansion at SMS.
Cash flows provided by financing activities in fiscal 2008 were $5,026,000. Cash flows used by
financing activities were $3,420,000 in fiscal 2007. The primary source of cash from financing
activities in fiscal 2008 was from accessing the Company’s bank line of credit. The primary uses
of cash from financing activities in fiscal 2008 and 2007 was the repayment of debt incurred with
the purchase of SMS, as well as the repurchase of common stock in fiscal 2007.
Historically, the Company’s market risk exposure to foreign currency exchange and interest rates on
third party receivables and payables was not considered to be material, principally due to their
short-term nature and the minimal amount of receivables and payables designated in foreign
currency. However, due to the recently strengthened Canadian dollar, the impact of transaction and
translation gains on intercompany activity and balances has increased. If the exchange rate were to
materially change, the Company’s financial position could be significantly affected. The Company
currently has a bank line of credit totaling $20.0 million, of which $8.5 million has been borrowed
as of March 31, 2008. In addition, the Company has a bank term loan totaling $6.5 million. Finally,
there are notes payable totaling $4.9 million outstanding to the former owners of Astro, as well as
$2.2 million of Industrial Revenue Bonds. Borrowings are discussed further in Note 5 of the
Condensed Consolidated Financial Statements.
At March 31, 2008 and June 30, 2007, the aggregate government funded EMS backlog was approximately
$32 million and $42 million, respectively. The March 31, 2008 backlog includes $20 million of U.S.
Navy sonobuoy contracts awarded during the first quarter of this calendar year. This represents
46% of the contracts to date, with one potentially significant award still in process. A majority
of the March 31, 2008, backlog is expected to be realized in the next 12-15 months. Commercial EMS
orders are not included in the backlog. The Company does not believe the amount of commercial
activity covered by firm purchase orders is a meaningful measure of future sales, as such orders
may be rescheduled or cancelled without significant penalty.
In January 2007, Sparton announced its commitment to close the Deming, New Mexico facility. The
closure of that plant was completed during the third quarter of fiscal 2007. At closing, some
equipment from this facility related to operations performed at other Sparton locations was
relocated to those facilities for their use in ongoing production activities. The land, building,
and remaining assets were sold. The agreement for the sale of the Deming land, building, equipment
and applicable inventory was signed at the end of March 2007 and involved several separate
transactions. The sale of the inventory and equipment for $200,000 was completed on March 30, 2007.
The sale of the land and building for $1,000,000 closed on July 20, 2007. The property, plant, and
equipment of the Deming facility was substantially depreciated. The ultimate sale of this facility
was completed at a net gain of approximately $868,000, as previously discussed, and was recognized
entirely in the first quarter of fiscal 2008.
23
In October 2006, the Company declared a 5% stock dividend, which was distributed January 19, 2007,
to shareowners of record on December 27, 2006.
At March 31, 2008, the Company had $84,072,000 in shareowners’ equity ($8.57 per share),
$48,981,000 in working capital, and a 2.01:1 working capital ratio. The Company believes it has
sufficient liquidity for its anticipated needs over the next 12-18 months. Such liquidity may
include the continued use of our line of credit.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Information regarding the Company’s long-term debt obligations, environmental liability payments,
operating lease payments, and other commitments is provided in Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” of the Company’s Annual
Report on Form 10-K for the fiscal year ended June 30, 2007. There have been no material changes
in the nature or amount of the Company’s contractual obligations since June 30, 2007, other than
noncancelable purchase orders payable within the next twelve months. These noncancelable purchase
orders have increased by $7.5 million, to $23.5 million as of March 31, 2008. This increase is due
to additional inventory on order to support expected increased sales, primarily by customers in the
Medical/Scientific Instrumentation market.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our condensed consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires management to make
estimates, judgments and assumptions that affect the amounts reported as assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. Estimates are
regularly evaluated and are based on historicalexperience and on various other assumptions
believed to be reasonable under the circumstances. Actual results could differ from those
estimates. In many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management’s judgment in application. There are also areas in
which management’s judgment in selecting among available alternatives would not produce a
materially different result. The Company believes that of its significant accounting policies
discussed in the Notes to the Condensed Consolidated Financial Statements, which is
included in Part I, Item 1 of this report, the following involve a higher degree of judgment and
complexity. Senior management has reviewed these critical accounting policies and related
disclosures with the audit committee of Sparton’s Board of Directors.
Environmental Contingencies
One of Sparton’s former manufacturing facilities, located in Albuquerque, New Mexico (Coors Road),
has been the subject of ongoing investigations and remediation efforts conducted with the
Environmental Protection Agency (EPA) under the Resource Conservation and Recovery Act (RCRA). As
discussed in Note 6 of the Condensed Consolidated Financial Statements included in Part I, Item 1,
of this report Sparton has accrued its estimate of the minimum future non-discounted financial
liability. The estimate was developed using existing technology and excludes legal and related
consulting costs. The minimum cost estimate includes equipment, operating and monitoring costs for
both onsite and offsite remediation. Sparton recognizes legal and consulting services in the
periods incurred and reviews its EPA accrual activity quarterly. Uncertainties associated with
environmental remediation contingencies are pervasive and often result in wide ranges of reasonably
possible outcomes. It is possible that cash flows and results of operations could be materially
affected by the impact of changes in these estimates.
Government Contract Cost Estimates
Government production contracts are accounted for based on completed units accepted with respect to
revenue recognition and their estimated average cost per unit regarding costs. Losses for the
entire amount of the contract are recognized in the period when such losses are determinable.
Significant judgment is exercised in determining estimated total contract costs including, but not
limited to, cost experience to date, estimated length of time to contract completion, costs for
materials, production labor and support services to be expended, and known issues on remaining
units to be completed. In addition, estimated total contract costs can be significantly affected
by changing test routines and procedures, resulting design modifications and production rework
from these changing test routines and procedures, and limited range access for testing these design
modifications and rework solutions. Estimated costs developed in the early stages of contracts can
change, sometimes significantly, as the contracts progress, and events and activities take place.
Changes in estimates can also occur when new designs are initially placed into production. The
Company formally reviews its costs incurred-to-date and estimated costs to complete on all significant contracts at least quarterly and revised estimated total contract costs are reflected in the
financial statements. Depending upon the circumstances,
24
it is possible that the Company’s financial position, results of operations and cash flows could
be materially affected by changes in estimated costs to complete on one or more significant
contracts.
Commercial Inventory Valuation Allowances
Inventory valuation allowances for commercial customer inventories require a significant degree of
judgment. These allowances are influenced by the Company’s experience to date with both customers
and other markets, prevailing market conditions for raw materials, contractual terms and customers’
ability to satisfy these obligations, environmental or technological materials obsolescence,
changes in demand for customer products, and other factors resulting in acquiring materials in
excess of customer product demand. Contracts with some commercial customers may be based upon
estimated quantities of product manufactured for shipment over estimated time periods. Raw material
inventories are purchased to fulfill these customer requirements. Within these arrangements,
customer demand for products frequently changes, sometimes creating excess and obsolete
inventories.
The Company regularly reviews raw material inventories by customer for both excess and obsolete
quantities, with adjustments made accordingly. As of March 31, 2008 and June 30, 2007 the valuation
allowances totaled $3,770,000 and $2,416,000, respectively. Wherever possible, the Company attempts
to recover its full cost of excess and obsolete inventories from customers or, in some cases,
through other markets. When it is determined that the Company’s carrying cost of such excess and
obsolete inventories cannot be recovered in full, a charge is taken against income and a valuation
allowance is established for the difference between the carrying cost and the estimated realizable
amount. Conversely, should the disposition of adjusted excess and obsolete inventories result in
recoveries in excess of these reduced carrying values, the remaining portion of the valuation
allowances are reversed and taken into income when such determinations are made. It is possible
that the Company’s financial position, results of operations and cash flows could be materially
affected by changes to inventory valuation allowances for commercial customer excess and obsolete
inventories.
Allowance for Probable Losses on Receivables
The accounts receivable balance is recorded net of allowances for amounts which may not be
collected from customers. The allowance is estimated based on historical experience of write-offs,
the level of past due amounts, information known about specific customers with respect to their
ability to make payments, and future expectations of conditions that might impact the
collectibility of accounts. Accounts receivable are generally due under normal trade terms for the
industry. Credit is granted, and credit evaluations are periodically performed, based on a
customer’s financial condition and other factors. Although the Company does not generally require
collateral, cash in advance or letters of credit may be required from customers in certain
circumstances, including some foreign customers. When management determines that it is probable
that an account will not be collected, it is charged against the allowance for probable losses. The
Company reviews the adequacy of its allowance monthly. The allowance for doubtful accounts was only
$258,000 and $32,000 at March 31, 2008 and June 30, 2007, respectively. If the financial condition
of customers were to deteriorate, resulting in an impairment of their ability to make payment,
additional allowances may be required. Given the Company’s significant balance of government
receivables and letters of credit from foreign customers, collection risk is considered minimal.
Historically, uncollectible accounts have generally been insignificant, have generally not
exceeded management’s expectations, and the minimal allowance is deemed adequate.
Pension Obligations
The Company calculates the cost of providing pension benefits under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 87, Employers’ Accounting for Pensions, as amended. The
key assumptions required within the provisions of SFAS No. 87 are used in making these
calculations. The most significant of these assumptions are the discount rate used to value the
future obligations and the expected return on pension plan assets. The discount rate is consistent
with market interest rates on high-quality, fixed income investments. The expected return on
assets is based on long-term returns and assets held by the plan, which is influenced by
historical averages. If actual interest rates and returns on plan assets materially differ from the
assumptions, future adjustments to the financial statements would be required. While changes in
these assumptions can have a significant effect on the pension benefit obligation and the
unrecognized gain or loss accounts disclosed in the Notes to the Financial Statements, the effect
of changes in these assumptions is not expected to have the same relative effect on net periodic
pension expense in the near term. While these assumptions may change in the future based on changes
in long-term interest rates and market conditions, there are no known expected changes in these
assumptions as of March 31, 2008. To the extent the assumptions differ from actual results, as
indicated above, or if there are changes made to accounting standards for these costs, there would
be a future impact on the financial statements. The extent to which these factors will result in
future recognition or acceleration of expense is not determinable at this time as it will depend
upon a number of variables, including trends in interest rates and the actual return on plan
assets. For fiscal 2008, the Company’s pension contribution totaled $79,000, which was paid during
the quarter ended March 31, 2008.
25
During the prior fiscal year a settlement loss was recognized as a result of lump-sum benefit
distributions. Substantially all plan participants elect to receive their retirement benefit
payments in the form of lump-sum settlements. Pro rata settlement adjustments, which can occur as a
result of these lump-sum payments, are recognized only in years when
the total of such settlement
payments exceed the sum of the service and interest cost components of net periodic pension
expense. The amount of lump-sum retirement payments can vary greatly in any given year. Given the
uncertainty of the occurrence of a settlement loss at this time, and its related amount (if any),
no accrual has been made as of March 31, 2008. However, lump-sum benefit payments are monitored
regularly and if the level of payments should exceed the current estimated service and interest
costs for the year, a settlement adjustment will be considered and recorded if applicable.
On June 30, 2007, the Company adopted the balance sheet recognition and disclosure provisions of
SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.
This statement required Sparton to recognize the funded status (i.e., the difference between the
fair value of plan assets and the projected benefit obligation) of its plan in the June 30, 2007
consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive
income (loss), net of tax. The adjustment to accumulated other comprehensive income (loss) at
adoption represents the net unrecognized actuarial losses and unrecognized prior service costs
remaining from the initial adoption of SFAS No. 87, all of which were previously netted against the
plan’s funded status in Sparton’s balance sheet pursuant to the provisions of SFAS No. 87. Upon
adoption, Sparton recorded an after-tax, unrecognized loss in the amount of $1,989,000, which
represented an increase directly to accumulated other comprehensive loss as of June 30, 2007. These
amounts are being recognized as net periodic plan expenses pursuant to Sparton’s historical
accounting policy for amortizing such amounts. Actuarial gains and losses that are not recognized
as net periodic plan expenses in the same periods are recognized as a component of other
comprehensive income (loss). The adoption of SFAS No. 158 had no effect on Sparton’s consolidated
statement of operations in the year adopted, and it will not affect Sparton’s operating results in
future periods.
Business Combinations
In accordance with generally accepted accounting principles, the Company allocated the purchase
price of its May 2006 SMS acquisition to the tangible and intangible assets acquired and
liabilities assumed based on their estimated fair values. Such valuations require management to
make significant estimates, judgments and assumptions, especially with respect to intangible
assets.
Management arrived at estimates of fair value based upon assumptions believed to be reasonable.
These estimates are based on historical experience and information obtained from the management of
the acquired business and are inherently uncertain. Critical estimates in valuing certain of the
intangible assets include but are not limited to: future expected discounted cash flows from
customer relationships and contracts assuming similar product platforms and completed projects; the
acquired company’s market position, as well as assumptions about the period of time the acquired
customer relationships will continue to generate revenue streams; and attrition and discount rates.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such
assumptions, estimates or actual results, particularly with respect to amortization periods
assigned to identifiable intangible assets.
Valuation of Property, Plant and Equipment
SFAS
No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, requires that the
Company record an impairment charge on our investment in property, plant and equipment that we hold
and use in our operations if and when management determines that the related carrying values may
not be recoverable. If one or more impairment indicators are deemed to exist, Sparton will measure
any impairment of these assets based on current independent appraisals or a projected discounted
cash flow analysis using a discount rate determined by management to be commensurate with the risk
inherent in our business model. Our estimates of cash flows require significant judgment based on
our historical and anticipated operating
results and are subject to many factors. The most recent such impairment analysis was performed
during the fourth quarter of fiscal 2007 and did not result in an impairment charge.
Goodwill and Customer Relationships
The Company annually reviews goodwill associated with its investments in Cybernet and SMS for
possible impairment. This analysis may be performed more often should events or changes in
circumstances indicate their carrying value may not be recoverable. This review is performed in
accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The provisions of SFAS No. 142
require that a two-step impairment test be performed on intangible assets. In the first step, the
Company compares the fair value of each reporting unit to its carrying value. If the fair value of
the reporting unit exceeds the carrying value of the net assets assigned to the unit, goodwill is
considered not impaired and the Company is not required to perform
26
further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the
fair value of the reporting unit, then management will perform the second step of the impairment
test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying
value of a reporting unit’s goodwill exceeds its implied fair value, then the Company would record
an impairment loss equal to the difference. The provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets, require impairment testing of an amortized intangible
whenever indicators are present that an impairment of the asset may exist. If an impairment of the
asset is determined to exist, the impairment is recognized and the asset is written down to its
fair value, which value then becomes the new amortizable base.
Subsequent reversal of a previously
recognized impairment is prohibited.
Determining the fair value of any reporting entity is judgmental in nature and involves the use of
significant estimates and assumptions. These estimates and assumptions include revenue growth
rates, operating margins used to calculate projected future cash flows, risk-adjusted discount
rates, future economic and market conditions and, if appropriate, determination of appropriate
market comparables. The Company bases its fair value estimates on assumptions believed to be
reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ
from those estimates. In addition, the Company makes certain judgments and assumptions in
allocating shared assets and liabilities to determine the carrying values for each of the Company’s
reporting units. The most recent annual goodwill impairment analysis related to the Company’s
Cybernet and SMS investments was performed during the fourth quarter of fiscal 2007. That
impairment analysis did not result in an impairment charge. The next such impairment reviews are
expected to be performed in the fourth quarter of fiscal 2008.
Income Taxes
Our estimates of deferred income taxes and the significant items giving rise to the deferred
income tax assets and liabilities are disclosed in Note 7 to the Consolidated Financial Statements
included in Part II, Item 8, of the Company’s Annual Report on Form 10-K for the fiscal year ended
June 30, 2007. These reflect our assessment of actual future taxes to be paid or received on items
reflected in the financial statements, giving consideration to both timing and probability of
realization. The recorded net deferred income tax assets are significant and our realization of
these recorded benefits is dependent upon the generation of future taxable income. Management
believes that realization of the deferred tax assets related to net operating loss and credit
carryovers is more likely than not and, therefore, a related valuation allowance was not considered
necessary. A valuation allowance for contribution carryovers and stock options, as well as deferred
tax assets related to available Canadian carryovers, has been established. As a result of the
change in fiscal 2008’s estimated effective tax rates to the year-to-date period’s 42%,
approximately $1,168,000 of tax benefit was recognized in the quarter ended March 31, 2008, that
related to the previous six months ended December 31, 2007. This change in effective tax rate was
due primarily to
changes in forecasted taxable income for the current fiscal year. If future levels of taxable
income are not consistent with our expectations, we may be required to record an additional
valuation allowance, which could reduce our operating results by a material amount.
OTHER
Change of Executive Officers
On March 7, 2008 the Company’s former President and Chief Executive Officer, David W.
Hockenbrocht, announced his retirement from the Company. Mr. Hockenbrocht had served as President
of the Company for thirty years and as the CEO and President since 2000. At a meeting of the Board
of Directors on March 7, 2008, the Board of Dirctors appointed Richard L. Langley as interm
President and Chief Executive Officer of the Company and on April 25, 2008, appointed Joseph S.
Lerczak Chief Financial Officer. Mr. Langley was formerly Chief
Financial Officer of the Company
and Mr. Lerczak previously held the offices of Corporate Controller and Secretary, offices he
continues to hold.
Litigation
One of Sparton’s facilities, located in Albuquerque, New Mexico, has been the subject of ongoing
investigations conducted with the Environmental Protection Agency (EPA) under the Resource
Conservation and Recovery Act (RCRA). The investigation began in the early 1980’s and involved a
review of onsite and offsite environmental impacts.
At March 31, 2008, Sparton had accrued $5,771,000 as its estimate of the future undiscounted
minimum financial liability with respect to this matter. The Company’s cost estimate is based upon
existing technology and excludes legal and related consulting costs, which are expensed as
incurred, and is anticipated to cover approximately the next 23 years. The Company’s estimate
includes equipment and operating costs for onsite and offsite operations and is based on existing
methodology. Uncertainties
27
associated with environmental remediation contingencies are pervasive and often result in wide
ranges of reasonably possible outcomes. Estimates developed in the early stages of remediation can
vary significantly. Normally, a finite estimate of cost does not become fixed and determinable
at a specific point in time. Rather, the costs associated with environmental remediation become
estimable over a continuum of events and activities that help to frame and define a liability. It
is possible that cash flows and results of operations could be affected significantly by the
impact of the ultimate resolution of this contingency.
Sparton is currently involved with other legal actions, which are disclosed in Part II, Item 1 -
“Legal Proceedings”, of this report. At this time, the Company is unable to predict the outcome of
those claims.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK EXPOSURE
The Company manufactures its products in the United States, Canada, and Vietnam. Sales are to the
U.S. and Canada, as well as other foreign markets. The Company is potentially subject to foreign
currency exchange rate risk relating to intercompany activity and balances and to receipts from
customers and payments to suppliers in foreign currencies. Also, adjustments related to the
translation of the Company’s Canadian and Vietnamese financial statements into U.S. dollars are
included in current earnings. As a result, the Company’s financial results could be affected by
factors such as changes in foreign currency exchange rates or economic conditions in the domestic
and foreign markets in which the Company operates. However, minimal third party receivables and
payables are denominated in foreign currency and
the related market risk exposure is considered to be immaterial. Historically, foreign currency
gains and losses related to intercompany activity and balances have not been significant. However,
due to the strengthened Canadian dollar in recent years, the impact of transaction and translation
gains has increased. If the exchange rate were to materially change, the Company’s financial
position could be significantly affected.
The Company has financial instruments that are subject to interest rate risk, principally
long-term debt associated with the recent SMS acquisition on May 31, 2006. Historically, the
Company has not experienced material gains or losses due to such interest rate changes. Based on
the fact that interest rates periodically adjust to market values for the majority of term debt
issued or assumed in the recent SMS acquisition, interest rate risk is not considered to be significant.
Item 4T. Controls and Procedures
The Company maintains internal controls over financial reporting intended to provide reasonable
assurance that all material transactions are executed in accordance with Company authorization, are
properly recorded and reported in the financial statements, and that assets are adequately
safeguarded. The Company also maintains a system of disclosure controls and procedures which are
designed to ensure that information required to be disclosed in Company reports, filed or
submitted under the Securities Exchange Act of 1934, is properly reported in the Company’s periodic
and other reports.
As of March 31, 2008, an evaluation was performed by the Company’s management, including the CEO
and CFO, on the effectiveness of the design and operation of the Company’s disclosure controls and
procedures. Based on that evaluation, the Company’s management, including the CEO and CFO,
concluded that the Company’s disclosure controls and procedures continue to be effective as of
March 31, 2008. There have been no changes in the Company’s internal controls over financial
reporting that occurred during the last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Part II. Other Information
Item 1. 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.
Environmental Remediation
The Company and its subsidiaries are involved in certain compliance issues with the United States
Environmental Protection Agency (EPA) and various state agencies, including being named as a
potentially responsible party at several sites. Potentially responsible parties (PRPs) can be held
jointly and severally liable for the clean-up costs at any specific site. The Company’s past
experience, however, has indicated that when it has contributed relatively small amounts of
materials or waste to a specific site
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relative to other PRPs, its ultimate share of any clean-up costs has been minor. Based upon
available information, the Company believes it has contributed only small amounts to those sites in
which it is currently viewed as a PRP.
In February 1997, several lawsuits were filed against Sparton’s wholly-owned subsidiary, Sparton
Technology, Inc. (STI), alleging that STI’s Coors Road facility presented an imminent and
substantial threat to human health or the environment. On March 3, 2000, a Consent Decree was
entered into, settling
the lawsuits. The Consent Decree represents a judicially enforceable settlement and contains work
plans describing remedial activity STI agreed to undertake. The remediation activities called for
by the work plans have been installed and are either completed or are currently in operation. It is
anticipated that ongoing remediation activities will operate for a period of time during which STI
and the regulatory agencies will analyze their effectiveness. The Company believes that it will
take several years before the effectiveness of the groundwater containment wells can be
established. Documentation and research for the preparation of the initial multi-year report and
review are currently underway. If current remedial operations are deemed ineffective, additional
remedies may be imposed at a significantly increased cost. There is no assurance that additional
costs greater than the amount accrued will not be incurred or that no adverse changes in
environmental laws or their interpretation will occur.
Upon entering into the Consent Decree, the Company reviewed its estimates of the future costs
expected to be incurred in connection with its remediation of the environmental issues associated
with its Coors Road facility over the next 30 years. At March 31, 2008, the undiscounted minimum
accrual for future EPA remediation approximates $5.8 million. The Company’s estimate is based upon
existing technology and current costs have not been discounted. The estimate includes equipment,
operating and maintenance costs for the onsite and offsite pump and treat containment systems, as
well as continued onsite and offsite monitoring. It also includes the required periodic reporting
requirements. This estimate does not include legal and related consulting costs, which are expensed
as incurred.
In 1998,
STI commenced litigation in two courts against the United States Department of Energy
(DOE) and others seeking reimbursement of Sparton’s costs incurred in complying with, and defending
against, federal and state environmental requirements with respect to its former Coors Road
manufacturing facility. Sparton also sought to recover costs being incurred by the Company as part
of its continuing remediation at the Coors Road facility. In fiscal 2003, Sparton reached an
agreement with the DOE and others to recover certain remediation costs. Under the agreement,
Sparton was reimbursed a portion of the costs the Company incurred in its investigation and site
remediation efforts at the Coors Road facility. Under the settlement terms, Sparton received cash
and the DOE agreed to reimburse Sparton for 37.5% of certain future
environmental expenses in
excess of $8,400,000 from the date of settlement, thereby allowing Sparton to obtain some degree of
risk protection against future costs.
In 1995, Sparton Corporation and STI filed a Complaint in the Circuit Court of Cook County,
Illinois, against Lumbermens Mutual Casualty Company and American Manufacturers Mutual Insurance
Company demanding reimbursement of expenses incurred in connection with its remediation efforts at
the Coors Road facility based on various primary and excess comprehensive general liability
policies in effect between 1959 and 1975. In June 2005, Sparton reached an agreement with the
insurers under which Sparton received $5,455,000 in cash in July 2005. This agreement reflects a
recovery of a portion of past costs the Company incurred in its investigation and site remediation
efforts, which began in 1983, and was recorded as income in June of fiscal 2005. In October 2006
an additional one-time cash recovery of $225,000 was reached with an additional insurance carrier.
This agreement reflects a recovery of a portion of past costs incurred related to the Company’s
Coors Road facility, and was recognized as income in the second quarter of fiscal 2007. The
Company continues to pursue an additional recovery from an excess carrier. The probability and
amount of recovery is uncertain at this time.
Customer Relationships
In September 2002, Sparton Technology, Inc. (STI), a subsidiary of Sparton Corporation, filed an
action in the U.S. District Court for the Eastern District of Michigan to recover certain
unreimbursed costs incurred for the acquisition of raw materials as a result of a manufacturing
relationship with two entities, Util-Link, LLC (Util-Link) of Delaware and National Rural
Telecommunications Cooperative (NRTC) of the District of Columbia. The defendants filed a
counterclaim in the action seeking money damages alleging that STI breached its duties in the
manufacture of products for the defendants.
At the conclusion of the jury trial in November of 2005, STI was awarded damages in an amount in
excess of the unreimbursed costs. The defendants were denied relief on their counterclaim. As of
June 30, 2007, $1.6 million of the deferred costs incurred by the Company were included in other
non current assets on the
Company’s balance sheet. NRTC filed an appeal of the judgment with the U.S. Court of Appeals for
the Sixth Circuit and on September 21, 2007, with that court issuing its opinion vacating the
judgment in favor of Sparton and affirming the denial of relief on NRTC’s counterclaim. Sparton filed a Petition for Certiorari with the U.S. Supreme Court and a Motion for Judgment as a Matter of
Law and/or New Trial with the trial court, both of which
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were denied by the respective courts. As a result of the vacation of the judgment in Sparton’s
favor by the U.S. Court of Appeals for the Sixth Circuit, Sparton expensed the previously deferred
costs of $1.6 million as costs of goods sold, which was reflected in the financial results
reported for the quarter ended September 30, 2007.
The Company has pending an action before the U.S. Court of Federal Court of Claims to recover
damages arising out of an alleged infringement by the U.S. Navy of certain patents held by Sparton
and used in the production of sonobuoys. The case was dismissed on summary judgment, however, the
decision of the U.S. Court of Federal Claims was reversed by the U.S. Court of Appeals for the
Federal Circuit. The case is currently scheduled for trial in the second quarter of calendar 2008.
The likelihood that the claim will be resolved and the extent of any recovery in favor of the
Company is unknown at this time.
Product Issues
Some of the printed circuit boards supplied to the Company for its aerospace sales were discovered
in fiscal 2006 to be nonconforming and defective. The defect occurred during production at the
board supplier’s facility, prior to shipment to Sparton for further processing. The Company and our
customer, who received the defective boards, have contained the defective boards.
As of March 31, 2008 and June 30, 2007, $2.8 million of related product and associated expenses
have been deferred and classified in Sparton’s balance sheet within other non current assets. In
August 2005, Sparton Electronics Florida, Inc. filed an action in the U.S. District Court of
Florida against Electropac Co., Inc. and a related company (the raw board manufacturer) to recover
these costs. A trial in the matter is scheduled to be held in the third quarter of calendar 2008.
The likelihood that the claim will be resolved and the extent of the Company’s recovery, if any, is
unknown at this time. No loss contingency has been established at March 31, 2008. Should this case
ultimately be decided unfavorably to Sparton, the before tax results at that time could be
adversely affected by $2.8 million.
Item 1(a). Risk Factors
Information regarding the Company’s Risk Factors is provided in Part I, Item 1(a) “Risk Factors,”
of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007. There have
been no significant changes in the Company’s risk factors since June 30, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Effective September 14, 2005, the Board of Directors authorized a publicly-announced common share
repurchase program for the repurchase, at the discretion of management, of up to $4 million of
shares of the Company’s outstanding common stock in open market transactions. As of June 30, 2007,
331,781 shares had been repurchased for cash consideration of approximately $2,887,000. During the
repurchase period, the weighted average share prices for each month’s activity ranged from $8.38 to
$10.18 per share. The program expired September 14, 2007.
Repurchased shares are retired. Included in the fiscal 2007 activity is the repurchase of 199,356
shares concurrent with the co-ordinated exercise in the second quarter of common stock options held
by the Company’s officers, employees, and directors.
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Item 6. Exhibits
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3.1 |
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Amended Articles of Incorporation of the Registrant were filed on Form 10-Q for the
three-month period ended September 30, 2004, and are incorporated herein by reference. |
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3.2 |
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Amended Code of Regulation of the Registrant were filed on Form 10-Q for the three-month
period ended September 30, 2004, and are incorporated herein by reference. |
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3.3 |
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The amended By-Laws of the Registrant were filed on Form 10-Q for the nine-month period ended
March 31, 2004, and are incorporated herein by reference. |
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31.1 |
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Chief Executive Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Chief Financial Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Chief Executive Officer and Chief Financial Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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.
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Date: May 9, 2008
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/s/ RICHARD L. LANGLEY |
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Richard L. Langley, Chief Executive Officer
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Date: May 9, 2008
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/s/ JOSEPH S. LERCZAK |
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Joseph S. Lerczak, Chief Financial Officer
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