Sparton Corporation Reports $0.15 EPS for Fiscal 2013 Third Quarter; Fiscal Year 2013 Results Expect

Sparton Corporation Reports $0.15 EPS for Fiscal 2013 Third Quarter; Fiscal Year 2013 Results Expected to Outpace Prior Year

SCHAUMBURG, Ill.--(BUSINESS WIRE)-- Sparton Corporation (NYS: SPA) today announced results for the third quarter of fiscal 2013 ended March 31, 2013. The Company reported third quarter sales of $63.9 million, or an increase of 16.0 %, from $55.0 million for the third quarter of fiscal 2012. Reported net income for the third quarter of fiscal 2013 was $1.5 million or $0.15 per share, basic and $0.14 per share, diluted compared to net income of $2.0 million, or $0.20 per share, basic and diluted in the same quarter a year ago.

Cary Wood, President & CEO, commented, "The first three quarters $0.50 diluted adjusted earnings per share results were relatively even with the first three quarters of the prior year's $0.52 diluted adjusted earnings per share. As projected last quarter, the third quarter diluted earnings per share of $0.14 fell short as compared to last year's $0.19 adjusted earnings per share result due to lower comparative foreign sonobuoy shipments which can fluctuate from quarter to quarter. However, we continue to experience solid momentum with our new business development initiatives. In the third quarter, we launched the Conquering ComplexityTM corporate branding and marketing campaign and won 18 new programs across all business segments, with an annualized potential of $11.3 million of revenue."


Consolidated results for the quarters ended March 31, 2013 and 2012:

       
For the Three Months Ended March 31,For the Nine Months Ended March 31,
($ in 000's, except per share)2013201220132012
Net sales$63,880$55,048$178,879$162,251
Net sales excluding Onyx51,90655,048160,790162,251
 
Gross profit10,0429,16128,66326,241
Gross profit excluding Onyx8,4749,16126,79426,241
 
Operating income2,2673,1707,1248,478
Operating income excluding Onyx2,1843,1707,6088,478
 
Provision for income taxes8021,1282713,046
 
Net income1,4832,0056,8375,456
Adjusted net income1,4831,9375,1485,269
 
Income per share - basic0.150.200.670.53
Adjusted income per share - basic0.150.190.500.52
 
Income per share - diluted0.140.200.670.53
Adjusted income per share - diluted0.140.190.500.51
 
Adjusted EBITDA3,9373,61811,0019,931
Adjusted EBITDA excluding Onyx2,8333,6189,4399,931

Third Quarter Financial Highlights

  Awarded 18 new business programs during the third quarter of fiscal 2013 with estimated annual revenue of $11.3 million.
 
Quarter end sales backlog of approximately $208.8 million, including approximately $32.2 million from the Company's newly acquired business, representing 42% increase over a year ago. Excluding the newly acquired business, backlog was approximately $176.6 million representing a 20% increase over the same quarter a year ago.
 
Net sales of $12.0 million, operating income of $0.1 million and adjusted EBITDA of $1.1 million resulting from the acquired Sparton Onyx medical business.

Onyx Acquisition

On November 15, 2012, the Company completed the acquisition of Onyx EMS, LLC ("Onyx") in a $43.25 million all-cash transaction, subject to certain post-closing adjustments, which was financed through the use of Company cash and borrowings under the Company's new credit facility. Additional consideration of $2.19 million was paid in relation to a post-closing working capital adjustment, which was settled in the Company's fiscal 2013 third quarter. The transaction includes an approximate $4.3 million escrowed holdback which is available to fund potential seller indemnification obligations in relation to the acquisition agreement.

Included in the Company's and its Medical segment's results for the three and nine months ended March 31, 2013 are net sales of approximately $12.0 million and $18.1 million, respectively, operating income (loss) of approximately $0.1 million and $(0.5) million, respectively, and adjusted EBITDA of $1.1 million and $1.6 million resulting from the acquisition of Onyx since November 15, 2012. Mr. Wood commented, "While these results have been below our initial expectations for this acquisition, we continue to remain confident that this business will be accretive to earnings and deliver sales and operating results over the next twelve months in-line with the Company's acquisition financial modeling."

Segment Results

Medical Device ("Medical")

Excluding the fiscal year 2013 incremental sales from the acquisition of Onyx, legacy Medical sales were flat, increasing approximately $0.1 million as compared with the prior year quarter. Reflected within the increase is $2.3 million of increased sales to this business unit's largest customer due to expanded demand for its programs and additional refurbishment service revenue which began in the second half of fiscal 2012. Additionally reflected is $1.1 million of increased sales to two other customers to meet increased demand for their products. Offsetting these increases were decreased sales to two customers totaling $3.6 million. Decreased sales to one customer reflect its previously announced dual sourcing of certain of its programs with the Company during fiscal 2012. Decreased sales to the other customer reflect this customer's disengagement during fiscal 2012. Several other customers in the aggregate accounted for the remaining sales variance. Mr. Wood stated, "Medical won 11 new projects which include 6 engineering design opportunities, all with new customers to Sparton. We are pleased with the progress of the Onyx integration activities and, as anticipated through the acquisition, 8 of the 11 new projects won in the third quarter within the Medical segment came from Onyx's business funnel."

Excluding Onyx, the gross profit percentage on Medical sales increased to 13.9% from 13.3% for the three months ended March 31, 2013 and 2012, respectively. This improvement in margin on Medical sales primarily reflects certain favorable product mix between the two periods. Mr. Wood continued, "Medical's gross margin improvement is, in part, indicative of the replacement of less profitable programs in the prior period with more profitable sales from newer programs."

Excluding Onyx, selling and administrative expenses relating to the Medical segment were $1.3 million and $1.4 million for the three months ended March 31, 2013 and 2012, respectively. Excluding Onyx, Medical reported operating income of $2.4 million for the quarter ended March 31, 2013 compared to operating income of $2.0 million in the prior year quarter.

Complex Systems ("CS")

Excluding an increase in intercompany sales of $0.5 million, CS sales to external customers for the three months ended March 31, 2013 increased $3.2 million, or 37%, as compared with the same quarter last year, due to increased sales to the majority of this segment's customers, reflecting relative demand for each of these customers' products. Mr. Wood commented, "Complex Systems has demonstrated significantly improved performance over the past few years and our Vietnam facility has evolved into a key strategic asset for customers. The segment won three new programs from new and existing customers during the second quarter, bringing the year-to-date new program total to 15."

The gross profit percentage on CS sales increased to 11.5% for the three months ended March 31, 2013 compared to 7.3% for the three months ended March 31, 2012, primarily reflecting increased capacity utilization and favorable product mix between the comparative periods.

Selling and administrative expenses relating to the CS segment were $0.7 million for each of the three months ended March 31, 2013 and 2012, respectively. CS reported operating income of $1.2 million for the quarter ended March 31, 2013 compared to operating income of $0.2 million in the prior year quarter.

Defense & Security Systems ("DSS")

DSS sales decreased approximately $6.4 million, or 33%, in the three months ended March 31, 2013 as compared with the same quarter last year, reflecting decreased sonobuoy sales to foreign governments and decreased U.S. Navy engineering sales, partially offset by increased U.S. Navy sonobuoy production in the current year quarter. Mr. Wood commented, "Foreign sonobuoy orders can fluctuate greatly and the timing of these orders can have a significant effect on DSS results either to the positive or to the negative as we experienced in the third quarter. However, we expect larger than normal domestic and foreign sonobuoy shipping volume in the fourth quarter to drive positive year over year sales compared to the prior year."

The gross profit percentage on DSS sales decreased to 21.8% for the three months ended March 31, 2013 compared to 23.9% for the three months ended March 31, 2012. Gross profit percentage was unfavorably affected in the current year quarter by a significant decrease in foreign sonobuoy sales as compared to the prior year quarter.

Selling and administrative expenses relating to the DSS segment were $1.2 million and $1.0 million for the three months ended March 31, 2013 and 2012, respectively, primarily reflecting increased business development efforts and increased corporate allocated charges in the current fiscal quarter. The Company incurred $0.3 million of internally funded research and development expenses in each of the three months ended March 31, 2013 and 2012, respectively. DSS reported operating income of $1.3 million for the quarter ended March 31, 2013 compared to operating income of $3.3 million in the prior year quarter.

Liquidity and Capital Resources

As of March 31, 2013, the Company had $13.0 million borrowed and $52.0 million available under its new credit facility, available cash and cash equivalents of $4.4 million and performance based payments received under U.S. Navy contracts in excess of the funding of production to date under those contracts of $12.3 million. Mr. Wood commented, "Our strong capital structure has positioned us to execute on our recently announced plan to repurchase up to $3.0 million of the Company's common stock over the next twelve months. We believe this plan demonstrates our commitment to increase shareholder value, and continues to leave the Company well capitalized to execute on current and future growth initiatives."

Outlook

Cary Wood concluded, "We remain highly optimistic for fiscal 2013 and continue to expect year-over-year increases in revenue and profitability from our legacy business, with both enhanced by the inclusion of the Onyx results. Now that the third quarter softening issues are behind us, we expect a very strong fourth quarter and anticipate that our fiscal 2013 full-year adjusted earnings per share results will more than outpace our fiscal 2012 adjusted earnings per share of $0.91. We also continue to be pleased with the progress being made related to our 5-Year Strategic Growth Plan and look forward to finishing the year strong and carrying that momentum into fiscal 2104."

Conference Call

Sparton will host a conference call with investors and analysts on May 8, 2013 at 10:00 a.m. CDT/11:00 a.m. EDT to discuss its fiscal year 2013 third quarter financial results, provide a general business update, and respond to investor questions. To participate, callers should dial (800) 771-6883. 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: https://www.livemeeting.com/cc/gc_min_pro_usa/join?id=4RSNBJ&role=attend

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 provision for (benefit from) 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 acquisition and acquisition contingency settlement, and gain on sale of investment, 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 financials, these transactions may limit the comparability of our fundamental operations with prior and future periods.

Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization as adjusted for restructuring/impairment charges, gross profit effects of capitalized profit in inventory from acquisition and acquisition contingency settlement, and gain on sale of investment. 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.

Related to Onyx, adjusted gross profit and adjusted operating income exclude the gross profit effect of capitalized profit in inventory from acquisition and unusual write-downs of inventory and accounts receivable related to an Onyx customer ("Augustine") which was excluded from the acquisition. Adjusted EBITDA related to Onyx represents operating income before depreciation and amortization as adjusted for the gross profit effect of capitalized profit in inventory from acquisition and unusual write-downs of inventory and accounts receivable related to an Onyx customer ("Augustine") which was excluded from the acquisition.

About Sparton Corporation

Sparton Corporation (NYS: SPA) , now in its 113th year, is a provider of complex and sophisticated electromechanical devices with capabilities that include concept development, industrial design, design and manufacturing engineering, production, distribution, and field service. The primary market classifications served are Navigation & Exploration, Defense & Security, Medical, and Complex Systems. Headquartered in Schaumburg, IL, Sparton currently has six manufacturing locations worldwide. Sparton's Web site may be accessed at http://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, 2012, 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

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


(In thousands, except share and per share amounts)

 
March 31,
2013
June 30,
2012 (a)
Assets
Current Assets:
Cash and cash equivalents$4,358$46,950
Restricted cash535
Accounts receivable, net of allowance for doubtful accounts of $236 and $146, respectively38,36629,618
Inventories and cost of contracts in progress, net46,92835,102
Deferred income taxes2,0202,020
Prepaid expenses and other current assets 3,784  2,054 
 
Total current assets95,991115,744
Property, plant and equipment, net28,83514,260
Goodwill14,9037,472
Other intangible assets, net11,0341,618
Deferred income taxes — non-current4,8025,136
Other non-current assets 707  325 
 
Total assets$156,272 $144,555 
 
 
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt$134$131
Accounts payable20,28017,152
Accrued salaries and wages7,0515,855
Accrued health benefits1,5671,210
Performance based payments on customer contracts12,27025,836
Other accrued expenses 6,536  6,213 
 
Total current liabilities47,83856,397
Pension liability — non-current portion891990
Long-term debt — non-current portion14,4381,538
Environmental remediation — non-current portion 2,896  3,142 
 
Total liabilities66,06362,067
 
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, 10,222,050 and 10,105,759 shares issued and outstanding, respectively12,77812,632
Capital in excess of par value20,22919,579
Retained earnings58,83251,995
Accumulated other comprehensive loss (1,630) (1,718)
 
Total shareholders' equity 90,209  82,488 
 
Total liabilities and shareholders' equity$156,272 $144,555 
 

(a) Derived from the Company's audited financial statements as of June 30, 2012.

 

SPARTON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


(Dollars in thousands, except share data)

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