Sparton Corporation Reports Fiscal 2015 Full Year Revenue Growth of 14% and Adjusted Earnings Per Share of $1.30

Fourth Quarter Revenue Growth of 35% and Adjusted EBITDA Growth of 29%

SCHAUMBURG, Ill.--()--Sparton Corporation (NYSE: SPA) today announced results for the fourth quarter of fiscal 2015 ended June 30, 2015. The Company reported fourth quarter sales of $126.4 million, or an increase of 35% from $93.5 million for the fourth quarter of fiscal 2014. Operating income for the fourth quarter of fiscal 2015 was $8.8 million, which included $2.8 million for the L-3 settlement and associated legal costs to that matter incurred in that quarter. This compares to operating income of $5.0 million in the fourth quarter of fiscal 2014, which included recognition of $4.2 million of environmental remediation expense. Net income for the fourth quarter of fiscal 2015 was $5.1 million or $0.52 per basic share, and $0.51 per diluted share compared to net income of $3.0 million, or $0.29 per share, basic and diluted, in the same quarter a year ago.

Consolidated Results for the Quarters and Years Ended June 30, 2015 and 2014 (in thousands, except per share amounts):

  For the Three Months Ended   For the Years Ended
June 30,   June 30,   June 30,   June 30,  
2015 2014 % Chg 2015 2014 % Chg
Net sales $ 126,393 $ 93,500 35.2 % $ 382,125 $ 336,501 13.6 %
Base business 104,534 93,500 11.8 % 297,963 310,574 (4.1 )%
Acquisitions 21,859 84,162 25,927 224.6 %
Gross profit 28,055 20,908 34.2 % 74,671 64,815 15.2 %
Adjusted gross profit 28,099 20,989 33.9 % 74,970 65,152 15.1 %
Selling and administrative expenses 13,588 10,559 28.7 % 46,876 35,698 31.3 %
Legal settlement 2,500 2,500
Environmental remediation 4,238 4,238
Operating income 8,809 4,984 76.7 % 17,252 20,251 (14.8 )%
Adjusted operating income 11,605 9,303 24.7 % 21,760 25,014 (13.0 )%
Net income 5,098 2,971 71.6 % 10,989 12,987 (15.4 )%
Adjusted net income 6,473 5,698 13.6 % 13,066 16,013 (18.4 )%
Income per share - basic 0.52 0.29 1.10 1.28
Adjusted income per share - basic 0.65 0.56 1.30 1.58
Income per share - diluted 0.51 0.29 1.10 1.28
Adjusted income per share - diluted 0.65 0.56 1.30 1.58
Adjusted EBITDA 15,360 11,920 28.9 % 34,305 34,979 (1.9 )%
 

Cary Wood, President & CEO, commented, “Given the headwinds we faced going into fiscal 2015, we are very pleased with the final results for the year. We finished the year at an adjusted earnings per share of $1.30, revenue increased 14%, gross margins improved for the sixth straight year and adjusted EBITDA was $34.3 million, approximately the same as compared to the same prior year period. Consolidated legacy revenues decreased 4% or $12.6 million for the year, primarily due to the MDS segment’s 15% reduction in revenues led by the Fenwal rebalancing activities of $19 million as well as fluctuations in customer demand due to program cancellations, governmental funding and customer design related delays, partially offset by the ECP segment’s growth of 20% or $19.0 million led by increased production requirements of the new U.S. Navy sonobuoy contract. The seven acquisitions completed in the year added approximately $84.2 million of revenue, representing 22% of fiscal 2015’s revenue. Our gross margin improvements continue to be realized through the deployment of the Sparton Business System, a collection of benchmarked best practices that are implemented through employee led lean events. Adjusted EBITDA for the year came in at 9.0% of sales, 100 basis points below our objective, due to SG&A expenses, primarily from the increased M&A activity of completing seven transactions as compared to three in the prior year, fourth quarter integration activities related to the Hunter acquisition and other key investments in preparation of executing our 2020 Vision. In the fourth quarter, with the Fenwal rebalancing behind us, we realized 12% growth in our base business over the prior year’s quarter, with ECP and MDS growing at 27% and 2% respectively, indicating the positive health of our legacy business as we enter fiscal 2016. The results have continued to reflect the successful execution and completion of our 2010 Strategic Growth Plan, in particular our new business development process and our approach to adding complementary acquisitions; however, in fiscal 2015, the impact from the loss of certain Fenwal programs, coupled with multiple customer initiated production delays, were greater than the increased new business we launched throughout the course of the year.”

Fourth Quarter Financial Highlights

  • Quarterly revenue grew 35% to $126 million as compared to the same quarter of the prior year.
  • 170 new program or product wins were awarded with a first time order value of $12.0 million (excludes domestic sonobuoy awards).

    • 70 in MDS with a first time order value of $9.1 million
    • 100 in ECP with a first time order value of $2.9 million
  • Quarter end sales backlog of approximately $313 million, representing a 113% increase over the prior year quarter.
  • Completed the acquisition of Hunter Technology Corporation in April 2015.
  • Settled the L-3 dispute for $2.5 million.
  • Amended revolving credit facility, increasing committed facility size from $200 million to $275 million and resetting the facility's accordion feature to $100 million.

Additional Fiscal 2015 Highlights

  • Annual revenue growth of 14% to $382 million as compared to prior year.
  • 421 new business programs awarded with potential sales of $58.6 million (excludes domestic sonobuoy awards)

    • 122 wins in MDS with $30.2 million in potential annualized sales
    • 299 wins in ECP with $28.4 million in first time sales
  • Completed seven acquisitions comprising of Hunter Technology, Stealth.com, KEP, Real-Time, Argotec, IED and eMT
  • Annual adjusted EBITDA of $34 million.

Hunter Technology Corporation

On April 14, 2015, the Company completed the acquisition of Hunter Technology Corporation ("Hunter"), an $80.5 million (unaudited) annual revenue business, with operations located in Milpitas, CA (San Jose) and Lawrenceville, GA (Atlanta), in a $55.0 million all-cash transaction. Hunter, which is part of the Company's MDS segment, was founded in 1968 and was one of the first electronic contract manufacturing providers specializing in military and aerospace applications. Today, Hunter is one of the few suppliers in the Silicon Valley region providing engineering design, new product introduction (NPI) and full-rate production manufacturing solutions working with major defense and aerospace companies, test and measurement suppliers, secure networking solution providers, medical device manufacturers and a wide variety of industrial customers.

Segment Results

During the first quarter of fiscal 2015, the Company changed its reportable segments to align with the way it internally reports and manages the business. The prior reportable segments of Medical and Complex Systems have been combined and are referred to as Manufacturing & Design Services or "MDS". The prior DSS reportable segment and subsequently acquired businesses providing rugged electronics are now referred to as Engineered Components & Products or "ECP".

Manufacturing & Design Services (“MDS”) (in thousands)

  For the Three Months Ended June 30,
  % of     % of    
2015 Sales 2014 Sales $ Chg   % Chg
Sales:
Base business $ 58,425 68.9 % $ 57,232 92.1 % $ 1,193 2.1 %
Acquisitions 19,732 23.3 % 19,732
Intercompany 6,592   7.8 % 4,916   7.9 % 1,676   34.1 %
Total Sales 84,749 100.0 % 62,148 100.0 % 22,601 36.4 %
 
Gross profit 13,094 15.5 % 9,038 14.5 % 4,056 44.9 %
 
Selling and administrative expenses 6,130 7.3 % 4,259 6.8 % 1,871 43.9 %
Amortization of intangible assets 1,801 2.1 % 982 1.6 % 819 83.4 %
Legal settlement 2,500   3.0 %   2,500  
Operating income $ 2,663   3.1 % $ 3,797   6.1 % $ (1,134 ) (29.9 )%
 

MDS base business sales reflect sales from MDS facilities that were owned for both the three months ended June 30, 2015 and 2014. MDS acquisition sales relate to the acquisitions of Hunter, RTEmd and eMT in fiscal 2015. Base business sales were up slightly from the comparative prior year period.

The increase in gross margin percentage on MDS sales was positively affected in the current year by increased volume as compared to the prior year. The selling and administrative expense increase is primarily comprised of incremental direct and allocated expenses related to the Hunter, RTEmd and eMT operations.

The increase in amortization of intangible assets relates to the amortization of customer relationships and non-compete agreements acquired as part of the fiscal 2015 Hunter transaction, customer relationships acquired as part of the fiscal 2015 RTE transaction and customer relationships, non-compete agreements and trade names acquired as part of the fiscal 2015 eMT transaction.

  For the Years Ended June 30,
  % of     % of    
2015 Sales 2014 Sales $ Chg   % Chg
Sales:
Base business $ 184,159 69.8 % $ 215,787 87.7 % $ (31,628 ) (14.7 )%
Acquisitions 62,025 23.5 % 11,673 4.7 % 50,352 431.4 %
Intercompany 17,756   6.7 % 18,669   7.6 % (913 ) (4.9 )%
Total Sales 263,940 100.0 % 246,129 100.0 % 17,811 7.2 %
 
Gross profit 36,461 13.8 % 34,782 14.1 % 1,679 4.8 %
 
Selling and administrative expenses 18,615 7.1 % 14,449 5.9 % 4,166 28.8 %
Amortization of intangible assets 5,811 2.2 % 3,116 1.2 % 2,695 86.5 %
Legal settlement 2,500 0.9 % 2,500
Restructuring charges   188   0.1 % (188 )
Operating income $ 9,535   3.6 % $ 17,029   6.9 % $ (7,494 ) (44.0 )%
 

MDS base business sales reflect sales from MDS facilities that were owned for both the entire years ended June 30, 2015 and 2014. MDS acquisition sales relate to the acquisitions of Hunter, RTEmd and eMT in fiscal 2015 and the acquisitions of Aubrey and Beckwood in fiscal 2014. The comparative decrease in base business sales reflects a rebalancing of Fenwal program engagements with the Company that began in the Company's fiscal 2014 third quarter. Fenwal contributed 14% and 20% of MDS segment net sales and 10% and 14% of consolidated company net sales during the fiscal years ended June 30, 2015 and 2014, respectively. The lost Fenwal programs negatively affected comparative sales $19.0 million in fiscal 2015, but were partially offset by a $6.8 million increase in sales in retained Fenwal programs. The remaining segment sales decrease reflects fluctuations in customer demand due to program cancellations, governmental funding and customer design related delays. MDS backlog was approximately $170.1 million at June 30, 2015 compared to $114.7 million at June 30, 2014. Commercial orders, in general, may be rescheduled or canceled without significant penalty, and, as a result, may not be a meaningful measure of future sales. A majority of the June 30, 2015 MDS backlog is currently expected to be realized in the next 12 months.

The decrease in gross margin percentage on MDS sales primarily reflects the effect of fixed overhead costs on lower base business sales. The selling and administrative expense increase is primarily comprised of incremental direct and allocated expenses related to the Hunter, RTEmd, eMT, Aubrey and Beckwood operations.

The increase in amortization of intangible assets relates to the amortization of customer relationships and non-compete agreements acquired as part of the fiscal 2015 Hunter transaction, customer relationships acquired as part of the fiscal 2015 RTE transaction, customer relationships, non-compete agreements and trade names acquired as part of the fiscal 2015 eMT transaction, non-compete agreements acquired as part of the fiscal 2014 Aubrey transaction and customer relationships and non-compete agreements acquired as part of the fiscal 2014 Beckwood transaction.

Engineered Components & Products (“ECP”) (in thousands)

  For the Three Months Ended June 30,
  % of     % of    
2015 Sales 2014 Sales $ Chg   % Chg
Sales:
Base business $ 46,109 95.5 % $ 36,268 99.9 % $ 9,841 27.1 %
Acquisitions 2,127 4.4 % 2,127
Intercompany 69   0.1 % 42   0.1 % 27   64.3 %
Total Sales 48,305 100.0 % 36,310 100.0 % 11,995 33.0 %
 
Gross profit 14,961 31.0 % 11,870 32.7 % 3,091 26.0 %
 
Selling and administrative expenses 3,307 6.9 % 2,766 7.6 % 541 19.6 %
Internal research and development expenses 787 1.6 % 165 0.4 % 622
Amortization of intangible assets 581   1.2 % (18 ) 599  
Operating income $ 10,286   21.3 % $ 8,957   24.7 % $ 1,329   14.8 %
 

ECP base business sales reflect sales from ECP facilities that were owned for both the three months ended June 30, 2015 and 2014 as well as sales in fiscal 2015 relating to KEP, Argotec and IED, as sales relating to these tuck-in acquisitions were not considered material for separate presentation. ECP acquisition sales relate to the acquisition of Stealth in fiscal 2015. The increase in ECP base business sales reflects increased sonobuoy sales to the U.S. Navy as well as increased U.S. Navy engineering sales, partially offset by decreased sonobuoy sales to foreign governments.

Gross profit percentage on ECP sales was negatively affected in the current quarter by unfavorable product mix. The selling and administrative expense increase is primarily comprised of incremental direct and allocated expenses related to the Stealth operations as well as increased costs in anticipation of future growth.

The increase in amortization of intangible assets relates to the amortization of customer relationships, non-compete agreements and trade names acquired as part of the fiscal 2015 Stealth transaction, customer relationships and trade names acquired as part of the fiscal 2015 KEP transaction and customer relationships and non-compete agreements acquired as part of the fiscal 2015 IED transaction.

Internal research and development expenses reflect costs incurred for the internal development of technologies for use in navigation, oil and gas exploration and flat panel display technology. These costs include salaries and related expenses, contract labor and consulting costs, materials and the cost of certain research and development specific equipment.

  For the Years Ended June 30,
  % of     % of    
2015 Sales 2014 Sales $ Chg   % Chg
Sales:
Base business $ 113,804 83.5 % $ 94,787 86.8 % $ 19,017 20.1 %
Acquisitions 22,137 16.2 % 14,254 13.1 % 7,883 55.3 %
Intercompany 374   0.3 % 93   0.1 % 281   302.2 %
Total Sales 136,315 100.0 % 109,134 100.0 % 27,181 24.9 %
 
Gross profit 38,210 28.0 % 30,033 27.5 % 8,177 27.2 %
 
Selling and administrative expenses 10,895 7.9 % 8,750 7.9 % 2,145 24.5 %
Internal research and development expenses 1,502 1.1 % 1,169 1.1 % 333 28.5 %
Amortization of intangible assets 780   0.6 % 171   0.2 % 609   356.1 %
Operating income $ 25,033   18.4 % $ 19,943   18.3 % $ 5,090   25.5 %
 

ECP base business sales reflect sales from ECP facilities that were owned for both the entire years ended June 30, 2015 and 2014 as well as sales in fiscal 2015 relating to KEP, Argotec and IED as sales relating to these tuck-in acquisitions were not considered material for separate presentation. ECP acquisition sales relate to the acquisition of Stealth in fiscal 2015, as well as Aydin in fiscal 2014. The increase in ECP base business sales reflects increased sonobuoy sales to the U.S. Navy as well as increased U.S. Navy engineering sales, partially offset by decreased sonobuoy sales to foreign governments. Total sonobuoy sales to the U.S. Navy for the full years ended June 30, 2015 and 2014 were approximately $81.4 million and $53.0 million, respectively, which represented 60% and 49% of ECP segment sales and 21% and 16% of consolidated Company net sales for those periods. Sonobuoy sales to foreign governments were $15.3 million and $29.7 million for the full years ended June 30, 2015 and 2014, respectively. Government related engineering sales were $13.5 million and $10.1 million for the full years ended June 30, 2015 and 2014, respectively. ECP backlog was approximately $143.3 million at June 30, 2015 compared to $32.4 million at June 30, 2014. A majority of the June 30, 2015 ECP backlog is currently expected to be realized in the next 18 months.

Gross profit percentage on ECP sales was positively affected in the current year by increased volume as compared to the prior year. The selling and administrative expense increase is primarily comprised of incremental direct and allocated expenses related to the Stealth and Aydin operations.

The increase in amortization of intangible assets relates to the amortization of customer relationships, non-compete agreements and trade names acquired as part of the fiscal 2015 Stealth transaction, customer relationships and trade names acquired as part of the fiscal 2015 KEP transaction and customer relationships and non-compete agreements acquired as part of the fiscal 2015 IED transaction.

Internal research and development expenses reflect costs incurred for the internal development of technologies for use in navigation, oil and gas exploration and flat panel display technology. These costs include salaries and related expenses, contract labor and consulting costs, materials and the cost of certain research and development specific equipment.

L-3 Litigation & Revised Fiscal 2015 Quarterly Adjusted Earnings Per Share Results

On September 24, 2013, L-3 Communications Corporation, doing business as L-3 Linkabit, filed a complaint in the United States District Court for the Middle District of Florida, Orlando Division, against Sparton Corporation and Sparton Electronics. On August 24, 2015, Sparton and L-3 signed a mutual accord resolving the dispute. The agreement requires Sparton to pay L-3 $2.5 million on or before October 1, 2015 in consideration for dismissal of the litigation and is recorded in other accrued expenses on the Consolidated Balance Sheet. Neither party admitted to any mistakes, damage or fault.

Legal expenses related to this matter in fiscal 2015 totaled $977,000 and are reflected in the fiscal 2015 adjusted earnings per share result of $1.30. $252,000 was expended in the fourth quarter, which are eliminated in the fourth quarter adjusted earnings per share result of $0.65. The remaining $725,000 of legal expense incurred in the first three quarters had not been previously removed from earnings; therefore, the adjusted earnings per share quarterly results are revised as follows:

        Q1   Q2   Q3
Original Adjusted EPS $0.09   $0.17   $0.33
Revised Adjusted EPS $0.10 $0.19 $0.36
 

Liquidity and Capital Resources

As of June 30, 2015, the Company had $154.5 million borrowed and approximately $119.8 million available under its credit facility and had available cash and cash equivalents of $14.9 million. As of that date, the Company had received performance based payments under U.S. Navy contracts in excess of the funding of production to date under those contracts of $1.8 million and were recorded in the Consolidated Balance Sheets as other accrued expenses.

Sparton entered into a Second Amendment dated as of April 13, 2015 (“Amendment”) to its Amended and Restated Credit and Guaranty Agreement and Security Agreement (“Credit Agreement”) with BMO Harris Bank N.A., Bank of America, N.A., U.S. Bank National Association, SunTrust Bank, Fifth Third Bank, Associated Bank, N.A., Keybank National Association and Wintrust Bank. BMO Harris Bank acted as the lead agent for the lenders in a syndication arranged by BMO Capital Markets.

The Amendment augments the Company’s Credit Agreement by increasing the revolving line of credit facility by $75 million, to $275 million and adding a $50 million multi-currency sublimit to support the Company’s future acquisitions, working capital needs and other general corporate purposes. The Company has the right to request an increase of the facility in an amount of up to $100 million. It is secured by substantially all assets of the Company and its subsidiaries and expires on September 11, 2019.

Outlook

Cary Wood concluded, “As we move into fiscal 2016, I am optimistic that we will achieve our customary annual organic growth target of 3%-5% with the Fenwal rebalancing activities behind us. Not only is the focus on the top line with revenue performance, but more importantly, the flow through of that revenue as EBITDA and, ultimately, earnings per share. With the addition of Hunter Technology in the fourth quarter and the full-year effect of all acquisition’s made in fiscal 2015, our pro-forma revenue would be approximately $462 million, bringing us very close at accomplishing our targeted run-rate of $500 million of revenue by the end of fiscal 2015. We will continue to meet our growth expectations by focusing on new business development, internal product research and development and compatible and complementary acquisitions. We are experiencing positive momentum from our new business development process with additional new business wins, increased inclusion of our inertial navigation sensors and rugged electronic products in key OEM projects and increased Medical and Defense engineering program wins that may lead to potential long-term manufacturing opportunities. With fourteen acquisitions completed in the last five years, seven alone in the past year, we will be taking a short pause to allow for integration activities and other business synergies to be fully realized in the near term. Executing the 2020 Vision remains a priority, in particular, the grouping and management of product platforms for our existing product lines as well as the identification and development of new product platforms that will support the overall business objectives previously communicated at our Investor Day in October 2014. We had a strong fourth quarter to finish fiscal 2015 and expect to carry that momentum into next fiscal with a focus on increasing top line sales organically, supported by a solid new business funnel, and expanding margins, through continued cost reduction and synergy initiatives, for what we expect to be a successful fiscal 2016 on all fronts.”

Conference Call

Sparton will host a conference call with investors and analysts on September 9, 2015 at 10:00 a.m. CDT/11:00 a.m. EDT to discuss its fiscal year 2015 fourth quarter financial results, provide a general business update, and respond to investor questions. To participate, callers should dial (800) 272-9104. Participants should dial in at least 15 minutes prior to the start of the call. A Web presentation link is also available for the conference call: http://tinyurl.com/om2k7pd

Investors and financial analysts are invited to ask questions after the presentation is made. The presentation and a replay of the call will be available on Sparton’s Web site: http://www.sparton.com in the “Investor Relations” section for up to two years after the conference call.

Non-GAAP Financial Measures

In addition to reporting financial results in accordance with U.S. generally accepted accounting principles (“GAAP”), Sparton Corporation has provided non-GAAP financial measures as additional information for its operating results. These measures have not been prepared in accordance with GAAP and may be different from measures used by other companies. Whenever we use non-GAAP financial measures, we designate these measures, which exclude the effect of certain expenses and income, as “adjusted” and provide a reconciliation of non-GAAP financial measures to the most closely applicable GAAP financial measure. The non-GAAP financial measures eliminate or add certain items of expense and income from cost of goods sold, total operating expense, other income (expense) and income taxes. Management believes that this presentation is helpful to investors in evaluating the current operational and financial performance of our business and facilitates comparisons to historical results of operations. Management discloses this information along with a reconciliation of the comparable GAAP amounts to provide access to the detail and nature of adjustments made to GAAP financial results. While some of these excluded items have been periodically reported in our statements of operations, including significant restructuring and impairment charges as well as certain gains on sales of assets, their occurrence in future periods depends on future business and economic factors, among other evaluation criteria, and the occurrence of such events and factors may frequently be beyond the control of management.

We exclude restructuring/impairment charges, gross profit effects of capitalized profit in inventory from acquisitions, acquisition contingency settlement, changes in the liability for future estimated costs for environmental remediation and litigation settlements and related legal costs in matters considered not integral to the Company's operations nor recurring, the related tax effect of these items, as well as unusual discrete tax benefits or expense because we believe that they are not related directly to the underlying performance of our fundamental business operations. We exclude these measures when reviewing financial results and for business planning. Although these events are reflected in our GAAP financial statements, these transactions may limit the comparability of our fundamental operations with prior and future periods.

Adjusted EBITDA represents earnings before interest expense and income, taxes, depreciation and amortization as adjusted for restructuring/impairment charges, gross profit effects of capitalized profit in inventory from acquisitions and acquisition contingency settlement, legal settlement and charges for changes in the liability for future estimated costs for environmental remediation and stock based compensation expense. The Company believes Adjusted EBITDA is commonly used by financial analysts and others in the industries in which the Company operates and, thus, provides useful information to investors. The Company does not intend, nor should the reader consider, Adjusted EBITDA an alternative to operating income, net income, net cash provided by operating activities or any other items calculated in accordance with GAAP. The Company's definition of Adjusted EBITDA may not be comparable with Adjusted EBITDA as defined by other companies. Accordingly, the measurement has limitations depending on its use.

About Sparton Corporation

Sparton Corporation (NYSE:SPA), now in its 116th year, is a provider of complex and sophisticated electromechanical devices with capabilities that include concept development, industrial design, design and manufacturing engineering, production, distribution, field service and refurbishment. The primary markets served are Medical & Biotechnology, Military & Aerospace and Industrial & Commercial. Headquartered in Schaumburg, IL, Sparton currently has fifteen manufacturing locations and engineering design centers worldwide. Sparton's Web site may be accessed at www.sparton.com.

Safe Harbor and Fair Disclosure Statement

Certain statements described in this press release are forward-looking statements within the scope of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements may be identified by the words “believe,” “expect,” “anticipate,” “project,” “plan,” “estimate,” “will” or “intend” and similar words or expressions. These forward-looking statements reflect Sparton’s current views with respect to future events and are based on currently available financial, economic and competitive data and its current business plans. Actual results could vary materially depending on risks and uncertainties that may affect Sparton’s operations, markets, prices and other factors. Important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, Sparton’s financial performance and the implementations and results of its ongoing strategic initiatives. For a more detailed discussion of these and other risk factors, see Part I, Item 1A, Risk Factors and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Sparton’s Form 10-K for the year ended June 30, 2015, and its other filings with the Securities and Exchange Commission. Sparton undertakes no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

SPARTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
 
  June 30,   June 30,
2015 2014
Assets
Current Assets:
Cash and cash equivalents $ 14,914 $ 8,028
Accounts receivable, net of allowance for doubtful accounts of $173 and $126, respectively 70,974 48,697
Inventories and cost of contracts in progress, net 79,503 53,372
Deferred income taxes, net 4,714 3,813
Prepaid expenses and other current assets 5,488   2,654  
Total current assets 175,593 116,564
Property, plant and equipment, net 32,608 28,523
Goodwill 74,175 28,189
Other intangible assets, net 45,825 20,041
Deferred income taxes, net — non-current 2,199 1,192
Pension asset 44
Other non-current assets 7,151   4,427  
Total assets $ 337,551   $ 198,980  
Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of long-term debt $ $ 900
Accounts payable 29,948 16,543
Accrued salaries and wages 9,089 7,854
Accrued health benefits 1,510 1,538
Performance based payments on customer contracts 1,756 3,196
Other accrued expenses 16,328   11,090  
Total current liabilities 58,631 41,121
Pension liability — non-current portion 424
Long-term debt — non-current portion 154,500 40,100
Environmental remediation — non-current portion 7,117   7,644  
Total liabilities 220,672 88,865
Commitments and contingencies
Shareholders’ Equity:
Preferred stock, no par value; 200,000 shares authorized; none issued
Common stock, $1.25 par value; 15,000,000 shares authorized, 9,886,618 and
10,129,031 shares issued and outstanding, respectively 12,358 12,661
Capital in excess of par value 16,045 19,478
Retained earnings 89,933 78,944
Accumulated other comprehensive loss (1,457 ) (968 )
Total shareholders’ equity 116,879   110,115  
Total liabilities and shareholders’ equity $ 337,551   $ 198,980  
 
SPARTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
 
  For the Three Months Ended   For the Years Ended
June 30,   June 30, June 30,   June 30,
2015 2014 2015 2014
Net sales $ 126,393 $ 93,500 $ 382,125 $ 336,501
Cost of goods sold 98,338   72,592   307,454   271,686  
Gross profit 28,055 20,908 74,671 64,815
Operating expense:
Selling and administrative expenses 13,588 10,559 46,876 35,698
Internal research and development expenses 787 165 1,502 1,169
Amortization of intangible assets 2,382 964 6,591 3,287
Legal settlement 2,500 2,500
Environmental remediation 4,238 4,238
Restructuring charges 188
Other operating income, net (11 ) (2 ) (50 ) (16 )
Total operating expense, net 19,246   15,924   57,419   44,564  
Operating income 8,809 4,984 17,252 20,251
Other income (expense):
Interest expense (895 ) (291 ) (2,456 ) (838 )
Interest income 1 7 3 9
Other, net 29   29   156   180  
Total other expense, net (865 ) (255 ) (2,297 ) (649 )
Income before income taxes 7,944 4,729 14,955 19,602
Income taxes 2,846   1,758   3,966   6,615  
Net income $ 5,098   $ 2,971   $ 10,989   $ 12,987  
Income per share of common stock:
Basic $ 0.52 $ 0.29 $ 1.10 $ 1.28
Diluted $ 0.51 $ 0.29 $ 1.10 $ 1.28
Weighted average shares of common stock outstanding:
Basic 9,792,873 10,127,638 9,874,441 10,109,915
Diluted 9,794,603 10,150,641 9,885,961 10,141,395
 
SPARTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 
  For the years ended June 30,
2015   2014
Cash Flows from Operating Activities:
Net income $ 10,989 $ 12,987
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 4,645 4,700
Amortization of intangible assets 6,591 3,423
Deferred income taxes, net (873 ) (976 )
Stock-based compensation expense 1,885 1,662
Legal settlement 2,500
Environmental remediation 4,238
Gross profit effect of capitalized profit in inventory from acquisitions 299 337
Excess tax benefit from stock-based compensation (1,044 ) (522 )
Other, net 739 247
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable (7,040 ) 4,886
Inventories and cost of contracts in progress, net 501 1,484
Prepaid expenses and other assets (1,889 ) 419
Performance based payments on customer contracts (1,440 ) (17,706 )
Accounts payable and accrued expenses (11,326 ) (2,728 )
Net cash provided by operating activities 4,537   12,451  
Cash Flows from Investing Activities:
Acquisition of businesses, net of cash acquired and post-closing adjustments (97,319 ) (35,560 )
Purchase of securities available for sale (986 )
Purchases of property, plant and equipment (5,802 ) (3,501 )
Proceeds from sale of property, plant and equipment   69  
Net cash used in investing activities (104,107 ) (38,992 )
Cash Flows from Financing Activities:
Borrowings of long-term debt 215,835 70,000
Repayments of long-term debt (102,335 ) (40,623 )
Payment of debt financing costs (1,423 )
Repurchase of stock (6,830 ) (1,559 )
Proceeds from the exercise of stock options 165 144
Excess tax benefit from stock-based compensation 1,044   522  
Net cash provided by financing activities 106,456   28,484  
Net increase in cash and cash equivalents 6,886 1,943
Cash and cash equivalents at beginning of year 8,028   6,085  
Cash and cash equivalents at end of year $ 14,914   $ 8,028  
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,747 $ 631
Cash paid for income taxes $ 7,190 $ 7,065
Supplemental disclosure of non-cash investing activities:
Accounts payable recognized in relation to purchase consideration adjustment $ 603 $ 252
 
SPARTON CORPORATION AND SUBSIDIARIES
SELECT SEGMENT INFORMATION
(UNAUDITED)
(Dollars in thousands)
 

Net sales:

 
  For the Three Months Ended June 30,   For the Years Ended June 30,
SEGMENT 2015   2014   % Chg 2015   2014   % Chg
Manufacturing & Design Services $ 84,749 $ 62,148 36.4 % $ 263,940 $ 246,129 7.2 %
Engineered Components & Products 48,305 36,310 33.0 % 136,315 109,134 24.9 %
Eliminations (6,661 ) (4,958 ) 34.3 % (18,130 ) (18,762 ) (3.4 )%
Totals $ 126,393   $ 93,500   35.2 % $ 382,125   $ 336,501   13.6 %

Gross profit:

 
  For the Three Months Ended June 30,   For the Years Ended June 30,
SEGMENT 2015   GP %   2014   GP % 2015   GP %   2014   GP %
Manufacturing & Design Services $ 13,094 15.5 % $ 9,038 14.5 % $ 36,461 13.8 % $ 34,782 14.1 %
Engineered Components & Products 14,961   31.0 % 11,870   32.7 % 38,210   28.0 % 30,033   27.5 %
Totals $ 28,055   22.2 % $ 20,908   22.4 % $ 74,671   19.5 % $ 64,815   19.3 %

Adjusted gross profit:

 
  For the Three Months Ended June 30,   For the Years Ended June 30,
SEGMENT 2015   GP %   2014   GP % 2015   GP %   2014   GP %
Manufacturing & Design Services $ 13,138 15.5 % $ 9,038 14.5 % $ 36,760 13.9 % $ 34,849 14.2 %
Engineered Components & Products 14,961   31.0 % 11,951   32.9 % 38,210   28.0 % 30,303   27.8 %
Totals $ 28,099   22.2 % $ 20,989   22.4 % $ 74,970   19.6 % $ 65,152   19.4 %

Operating income:

 
  For the Three Months Ended June 30,   For the Years Ended June 30,
  % of     % of   % of     % of
SEGMENT 2015 Sales 2014 Sales 2015 Sales 2014 Sales
Manufacturing & Design Services $ 2,663 3.1 % $ 3,797 6.1 % $ 9,535 3.6 % $ 17,029 6.9 %
Engineered Components & Products 10,286 21.3 % 8,957 24.7 % 25,033 18.4 % 19,943 18.3 %
Other Unallocated (4,140 ) (7,770 ) (17,316 ) (16,721 )
Totals $ 8,809   7.0 % $ 4,984   5.3 % $ 17,252   4.5 % $ 20,251   6.0 %

Adjusted operating income:

 
  For the Three Months Ended June 30,   For the Years Ended June 30,
  % of     % of   % of     % of
SEGMENT 2015 Sales 2014 Sales 2015 Sales 2014 Sales
Manufacturing & Design Services $ 5,459 6.4 % $ 3,797 6.1 % $ 13,311 5.0 % $ 17,284 7.0 %
Engineered Components & Products 10,286 21.3 % 9,038 24.9 % 25,033 18.4 % 20,213 18.5 %
Other Unallocated (4,140 ) (3,532 ) (16,584 ) (12,483 )
Totals $ 11,605   9.2 % $ 9,303   9.9 % $ 21,760   5.7 % $ 25,014   7.4 %
 
SPARTON CORPORATION AND SUBSIDIARIES

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(UNAUDITED)
(Dollars in thousands, except share data)
 
  For the Three Months Ended June 30, 2015   For the Three Months Ended June 30, 2014
  Non-GAAP   Non-GAAP
GAAP Adjustment Adjusted GAAP Adjustment Adjusted
Net sales $ 126,393 $ $ 126,393 $ 93,500 $ $ 93,500
Cost of goods sold 98,338   (44 ) (a) 98,294   72,592   (81 ) (a) 72,511  
Gross profit 28,055 44 28,099 20,908 81 20,989
Operating Expense:
Selling and administrative expenses 13,588 (252 ) (b) 13,336 10,559 10,559
Internal research and development expenses 787 787 165 165
Amortization of intangible assets 2,382 2,382 964 964
Legal settlement 2,500 (2,500 ) (c)
Environmental remediation 4,238 (4,238 ) (e)
Other operating income, net (11 )   (11 ) (2 )   (2 )
Total operating expense, net 19,246   (2,752 ) 16,494   15,924   (4,238 ) 11,686  
Operating income 8,809 2,796 11,605 4,984 4,319 9,303
Other income (expense):
Interest expense (895 ) (895 ) (291 ) (291 )
Interest income 1 1 7 7
Other, net 29     29   29     29  
Total other expense, net (865 )   (865 ) (255 )   (255 )
Income before income taxes 7,944 2,796 10,740 4,729 4,319 9,048
Income taxes 2,846   1,421   (d) 4,267   1,758   1,592   3,350  
Net income $ 5,098   $ 1,375   $ 6,473   $ 2,971   $ 2,727   $ 5,698  
Income per share of common stock:
Basic $ 0.52 $ 0.65 $ 0.29 $ 0.56
Diluted $ 0.51 $ 0.65 $ 0.29 $ 0.56
Weighted average shares of common stock outstanding:
Basic 9,792,873 9,792,873 10,127,638 10,127,638
Diluted 9,794,603 9,794,603 10,150,641 10,150,641
 
(a) Gross profit effect of capitalized profit in inventory from acquisitions
(b) Legal expenses related to a settlement
(c) Recognition of settled litigation
(d) Includes Canadian NOL as it relates to the purchase of Stealth.
(e) Recognition of environmental remediation expense
 
SPARTON CORPORATION AND SUBSIDIARIES

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(UNAUDITED)
(Dollars in thousands, except share data)
 
  For the Year Ended June 30, 2015   For the Year Ended June 30, 2014
  Non-GAAP   Non-GAAP
GAAP Adjustment Adjusted GAAP Adjustment Adjusted
Net sales $ 382,125 $ $ 382,125 $ 336,501 $ $ 336,501
Cost of goods sold 307,454   (299 ) (a) 307,155   271,686   (337 ) (a) 271,349  
Gross profit 74,671 299 74,970 64,815 337 65,152
Operating Expense:
Selling and administrative expenses 46,876 (1,709 ) (b) 45,167 35,698 35,698
Internal research and development expenses 1,502 1,502 1,169 1,169
Amortization of intangible assets 6,591 6,591 3,287 3,287
Legal settlement 2,500 (2,500 ) (c)
Environmental remediation 4,238 (4,238 ) (f)
Restructuring charges 188 (188 )
Other operating income, net (50 )   (50 ) (16 )   (16 )
Total operating expense, net 57,419   (4,209 ) 53,210   44,564   (4,426 ) 40,138  
Operating income 17,252 4,508 21,760 20,251 4,763 25,014
Other income (expense):
Interest expense (2,456 ) 421 (d) (2,035 ) (838 ) (838 )
Interest income 3 3 9 9
Other, net 156     156   180     180  
Total other expense, net (2,297 ) 421   (1,876 ) (649 )   (649 )
Income before income taxes 14,955 4,929 19,884 19,602 4,763 24,365
Income taxes 3,966   2,852   (e) 6,818   6,615   1,737   8,352  
Net income $ 10,989   $ 2,077   $ 13,066   $ 12,987   $ 3,026   $ 16,013  
Income per share of common stock:
Basic $ 1.10 $ 1.30 $ 1.28 $ 1.58
Diluted $ 1.10 $ 1.30 $ 1.28 $ 1.58
Weighted average shares of common stock outstanding:
Basic 9,874,441 9,874,441 10,109,915 10,109,915
Diluted 9,885,961 9,885,961 10,141,395 10,141,395
 
(a) Gross profit effect of capitalized profit in inventory from acquisitions
(b) Includes adjustments to remove $430 success based acquisition finder's fee paid in relation to the acquisition of eMT, remove $150 success based finder's fee paid in relation to acquisition of IED, $152 of costs recognized in relation to the reorganization of the Company's finance function and $977 of legal expenses related to a settlement
(c) Recognition of settled litigation
(d) Accelerated recognition of unamortized debt financing costs from prior credit facility due to refinancing
(e) Includes Canadian NOL as it relates to the purchase of Stealth.
(f) Recognition of environmental remediation expense
 
SPARTON CORPORATION AND SUBSIDIARIES

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(UNAUDITED)
(Dollars in thousands)
 
  For the Three Months Ended   For the Years Ended
June 30,   June 30, June 30,   June 30,
2015 2014 2015 2014
Net income $ 5,098 $ 2,971 $ 10,989 $ 12,987
Interest expense 895 291 2,456 838
Interest income (1 ) (7 ) (3 ) (9 )
Income taxes 2,846 1,758 3,966 6,615
Depreciation and amortization 3,559 2,213 11,236 8,123
Legal settlement and related expense 2,752 3,477
Environmental remediation 4,238 4,238
Restructuring charges 188
Gross profit effect of capitalized profit in inventory from acquisitions 44 81 299 337
Stock based compensation expense - Non-Directors 167 375 1,590 1,397
Stock based compensation expense - Directors     295   265  
Adjusted EBITDA $ 15,360   $ 11,920   $ 34,305   $ 34,979  
 
SPARTON CORPORATION AND SUBSIDIARIES

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(UNAUDITED)
(Dollars in thousands)
 
  For the Three Months Ended June 30, 2015
Manufacturing   Engineered    
& Design Components & Other
Services Products Unallocated Total
Gross profit $ 13,094 $ 14,961 $ $ 28,055
Gross profit effect of capitalized profit in inventory from acquisition 44       44
Adjusted gross profit $ 13,138   $ 14,961   $   $ 28,099
 
  For the Three Months Ended June 30, 2014
Manufacturing   Engineered    
& Design Components & Other
Services Products Unallocated Total
Gross profit $ 9,038 $ 11,870 $ $ 20,908
Gross profit effect of capitalized profit in inventory from acquisition   81     81
Adjusted gross profit $ 9,038   $ 11,951   $   $ 20,989
 
  For the Year Ended June 30, 2015
Manufacturing   Engineered    
& Design Components & Other
Services Products Unallocated Total
Gross profit $ 36,461 $ 38,210 $ $ 74,671
Gross profit effect of capitalized profit in inventory from acquisitions 299       299
Adjusted gross profit $ 36,760   $ 38,210   $   $ 74,970
 
  For the Year Ended June 30, 2014
Manufacturing   Engineered    
& Design Components & Other
Services Products Unallocated Total
Gross profit $ 34,782 $ 30,033 $ $ 64,815
Gross profit effect of capitalized profit in inventory from acquisitions 67   270     337
Adjusted gross profit $ 34,849   $ 30,303   $   $ 65,152
 
SPARTON CORPORATION AND SUBSIDIARIES

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(UNAUDITED)
(Dollars in thousands)
 
  For the Three Months Ended June 30, 2015
Manufacturing   Engineered    
& Design Components & Other
Services Products Unallocated Total
Operating income (loss) $ 2,663 $ 10,286 $ (4,140 ) $ 8,809
Gross profit effect of capitalized profit in inventory from acquisition 44 44
Legal settlement 2,500 2,500
Legal settlement expense 252       252
Adjusted operating income (loss) $ 5,459   $ 10,286   $ (4,140 ) $ 11,605
 
Depreciation/amortization $ 2,650 $ 706 $ 203 $ 3,559
 
  For the Three Months Ended June 30, 2014
Manufacturing   Engineered    
& Design Components & Other
Services Products Unallocated Total
Operating income (loss) $ 3,797 $ 8,957 $ (7,770 ) $ 4,984
Gross profit effect of capitalized profit in inventory from acquisition 81 81
Environmental remediation     4,238   4,238
Adjusted operating income (loss) $ 3,797   $ 9,038   $ (3,532 ) $ 9,303
 
Depreciation/amortization $ 1,862 $ 244 $ 107 $ 2,213
 
  For the Year Ended June 30, 2015
Manufacturing   Engineered    
& Design Components & Other
Services Products Unallocated Total
Operating income (loss) $ 9,535 $ 25,033 $ (17,316 ) $ 17,252
Gross profit effect of capitalized profit in inventory from acquisitions 299 299
Legal settlement 2,500 2,500
Legal settlement expense 977 977
Success based acquisition finder's fees and finance reorganization     732   732
Adjusted operating income (loss) $ 13,311   $ 25,033   $ (16,584 ) $ 21,760
 
Depreciation/amortization $ 8,875 $ 1,648 $ 713 $ 11,236
 
  For the Year Ended June 30, 2014
Manufacturing   Engineered    
& Design Components & Other
Services Products Unallocated Total
Operating income (loss) $ 17,029 $ 19,943 $ (16,721 ) $ 20,251
Gross profit effect of capitalized profit in inventory from acquisitions 67 270 337
Environmental remediation 4,238 4,238
Restructuring charges 188       188
Adjusted operating income (loss) $ 17,284   $ 20,213   $ (12,483 ) $ 25,014
 
Depreciation/amortization $ 6,576 $ 1,149 $ 398 $ 8,123
 

Contacts

Mike Osborne
Sparton Corporation
Email: ir@sparton.com
Office: (847) 762-5800

Contacts

Mike Osborne
Sparton Corporation
Email: ir@sparton.com
Office: (847) 762-5800