SPA Sparton Corp.

Sparton Corporation (NYSE:SPA) today announced results for the first quarter of fiscal year 2019 ended September 30, 2018.

Fourth Quarter Financial Results and Highlights

Joseph J. Hartnett, Interim President & CEO, commented, "We are pleased to report that we have started the fiscal year off with a strong operating performance, supported by organic growth in our MDS segment, a healthy backlog in both MDS and ECP segments and improved consolidated gross margins when compared to the same quarter last year."

Joseph G. McCormack, Senior Vice President & CFO, commented, “During the first quarter of fiscal year 2019, we adopted the new revenue recognition standard, ASC 606. As a result of the application of the new rules, our net sales were $1.5 million less and our net income was $0.9 million less than what would have been recorded under the old rules. ASC 606 also impacts the classification of certain balance sheet accounts which have reduced our accounts receivables by $7.8 million and increased our inventories by $9.8 million from what would have been reported under the old rules.”

Consolidated:

• Net sales of $89.5 million; $82.8 million in prior year Q1

• Gross profit margin of 19.7%; 19.2% in prior year Q1

• SG&A expenses of $12.4 million or 13.8% of sales; adjusted SG&A of $11.7 million, 13.1% of sales

• Earnings per share of $0.02, adjusted earnings per share of $0.20; adjusted earnings per share in prior year Q1 of $0.08

• Adjusted EBITDA of $6.0 million, a 6.7% adjusted EBITDA margin

MDS Segment:

• Gross sales of $59.3 million; $55.3 million in prior year Q1

• Gross profit margin of 12.2%; 10.8% in prior year Q1

• Operating income of $0.3 million; loss of $1.5 million in prior year Q1

• Adjusted EBITDA of $4.5 million, a 7.6% adjusted EBITDA margin

• New program wins in Q1 have expected revenue of $14.8 million when fully ramped up into production

• Trailing four quarter new program win revenue of $66.3 million, which continues to support our future organic growth

• Backlog of $156 million; prior year Q1 backlog of $131 million

ECP Segment:

• Gross sales of $33.3 million; $30.4 million in prior year Q1

• Gross profit margin of 31.3%; 32.7% in prior year Q1

• Operating income of $5.1 million; $5.4 million in prior year Q1

• Adjusted EBITDA of $6.7 million, a 20.1% adjusted EBITDA margin

• Backlog of $180 million; prior year Q1 backlog of $142 million

 

SELECTED FINANCIAL DATA

      For the Quarters Ended Q1 FY19   Q1 FY18

(Dollars in thousands, except per share data)

Consolidated: Net sales $ 89,462 $ 82,763 Gross profit 17,639 15,924 Gross margin 19.7 % 19.2 % Selling and administrative expenses 12,370 15,205 Operating income (loss) 2,250 (1,776 ) Adjusted operating income (non-GAAP) 4,601 2,498 Earnings (loss) per share 0.02 (0.20 ) Adjusted earnings per share (non-GAAP) 0.20 0.08 EBITDA (non-GAAP) 5,316 1,673 Adjusted EBITDA (non-GAAP) 5,984 4,235 Adjusted EBITDA margin (non-GAAP) 6.7 % 5.1 % Free cash flow (non-GAAP) $ 11,578 $ (23,684 )   MDS Segment: Gross sales $ 59,294 $ 55,308 Intercompany sales   (3,144 )   (2,937 ) Net sales 56,150 52,371 Gross profit 7,209 5,993 Gross margin 12.2 % 10.8 % Selling and administrative expenses 3,335 3,454 Allocation of corporate expenses 2,209 2,446 Operating income (loss) 290 (1,485 ) Adjusted segment EBITDA (non-GAAP) $ 4,490 3,250   ECP Segment: Gross sales $ 33,312 $ 30,399 Intercompany sales   —     (7 ) Net sales 33,312 30,392 Gross profit 10,430 9,931 Gross margin 31.3 % 32.7 % Selling and administrative expenses 2,556 2,589 Allocation of corporate expenses 1,127 991 Operating income 5,103 5,434 Adjusted segment EBITDA (non-GAAP) 6,712 7,014  

Liquidity and Capital Resources

As of September 30, 2018, Sparton Corporation ("the Company") had $43 million available under its $120 million credit facility that expires in September 2019. We intend to restructure this facility upon its expiration in September 2019, or sooner as conditions dictate, to provide for appropriate ongoing liquidity. As of September 30, 2018, we were compliant with all covenants under our credit facility.

Potential Sale Transaction

On March 5, 2018, the Company announced the termination by the Company and Ultra Electronics Holdings plc (“Ultra”) of their July 7, 2017 merger agreement as a result of the staff of the United States Department of Justice (the “DOJ”) informing the parties that it intended to recommend that the DOJ block the merger. At that time, the Company announced that it will seek to re-engage with parties that previously expressed an interest in acquiring all or a part of the Company and that are in a position to expeditiously proceed to effect such a transaction. There can be no assurance that any such process will result in the execution of a definitive agreement or the completion of a transaction.

Non-GAAP Financial Measures

In addition to reporting financial results in accordance with U.S. generally accepted accounting principles (“GAAP”), Sparton Corporation has provided certain 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 effects 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 or to operating 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, 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.

When we calculate adjusted earnings per share, adjusted EBITDA and other adjustments to the statements of income, we exclude certain expenses and income 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. We believe EBITDA and adjusted EBITDA are 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, EBITDA or adjusted EBITDA to be 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 other companies. Accordingly, the measurement has limitations depending on its use.

About Sparton Corporation

Sparton Corporation (NYSE:SPA), now in its 119th 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 thirteen manufacturing locations and engineering design centers worldwide. Sparton's Web site may be accessed at www.sparton.com.

Safe Harbor and Fair Disclosure Statement

Safe Harbor statement under the Private Securities Litigation Reform Act of 1995: To the extent any statements made in this release contain information that is not historical, these statements are essentially forward-looking and are subject to risks and uncertainties, including the difficulty of predicting future results, the regulatory environment, fluctuations in operating results and other risks detailed from time to time in Sparton’s filings with the Securities and Exchange Commission (SEC). The matters discussed in this press release may also involve risks and uncertainties concerning Sparton’s services described in Sparton’s filings with the SEC. In particular, see the risk factors described in Sparton’s most recent Form 10-K and Form 10-Q. Sparton assumes no obligation to update the forward-looking information contained in this press release.

 

CONSOLIDATING FINANCIAL INFORMATION - Q1 FISCAL YEAR 2019(Dollars in thousands, except per share data)

      Corporate   MDS   ECP   Total Net sales $ — $ 56,150 $ 33,312 $ 89,462 Cost of goods sold —   48,941   22,882   71,823   Gross profit — 7,209 10,430 $ 17,639 Operating expenses: Selling and administrative 6,479 3,335 2,556 12,370 Selling and administrative - Corp allocations (3,336 ) 2,209 1,127 — Internal research and development — — 1,349 1,349 Amortization of intangible assets —   1,375   295   1,670   Total operating expenses 3,143   6,919   5,327   15,389   Income from operations (3,143 ) 290 5,103 2,250 Interest expense, net (1,949 ) — — (1,949 ) Other income (expense) 4 (22 ) 4 (14 ) Income tax (expense) benefit 20   (95 ) —   (75 ) Net income $ (5,068 ) $ 173   $ 5,107   $ 212   Income per share of common stock: Basic $ 0.02 Diluted 0.02 Weighted average shares of common stock outstanding: Basic 9,834,723 Diluted 9,834,723    

CONSOLIDATING FINANCIAL INFORMATION - Q1 FISCAL YEAR 2018(Dollars in thousands, except per share data)

      Corporate   MDS   ECP   Total Net sales $ — $ 52,371 $ 30,392 $ 82,763 Cost of goods sold —   46,378   20,461   66,839   Gross profit — 5,993 9,931 15,924 Operating expenses: Selling and administrative 9,162 3,454 2,589 15,205 Selling and administrative - Corp allocations (3,437 ) 2,446 991 — Internal research and development — — 572 572 Amortization of intangible assets —   1,578   345   1,923   Total operating expenses 5,725   7,478   4,497   17,700   Income (loss) from operations (5,725 ) (1,485 ) 5,434 (1,776 ) Interest expense, net (1,266 ) — — (1,266 ) Other income (expense) — (38 ) 28 (10 ) Income tax (expense) benefit 1,068   —   —   1,068   Net income (loss) $ (5,923 ) $ (1,523 ) $ 5,462   $ (1,984 ) Income per share of common stock: Basic $ (0.20 ) Diluted (0.20 ) Weighted average shares of common stock outstanding: Basic 9,856,649 Diluted 9,856,649    

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

     

For the First Quarter of Fiscal Years

2019   2018 ($ in thousands) Cash Flows from Operating Activities: Operating activities, net of working capital changes $ 3,661 $ 1,917 Net changes in working capital 8,568   (25,146 ) Cash Flows from Operating Activities 12,229 (23,229 ) Cash Flows from Investing Activities: Capital expenditures (651 ) (455 ) Cash Flows from Investing Activities (651 ) (455 ) Cash Flows from Financing Activities: Net change in credit facility (11,500 ) 23,100 Other financing activities (68 ) (85 ) Cash Flows from Financing Activities (11,568 ) 23,015   Change in Cash and Cash Equivalents 10 (669 )   Cash and Cash Equivalents - Beginning 1,160   988   Cash and Cash Equivalents - Ending $ 1,170   $ 319      

CONDENSED CONSOLIDATED BALANCE SHEETS

 

September 30, 2018

July 1, 2018

($ in thousands) Assets Cash and cash equivalents $ 1,170 $ 1,160 Accounts receivable, net 46,011 60,454 Inventories 91,230 72,406 Legal settlements - insurance receivable 4,500 4,500 Prepaid and other current assets 6,823 3,944 Property, plant and equipment, net 32,024 32,790 Goodwill 12,663 12,663 Other intangible assets, net 19,438 21,108 Other assets 22,630   22,977   Total assets $ 236,489   $ 232,002   Liabilities and Shareholders’ Equity Accounts payable $ 39,393 $ 28,636 Accrued expenses and other current liabilities 39,745 32,986 Accrued legal settlements 5,500 5,500 Credit facility 73,000 84,500 Environmental remediation 4,705 4,866 Pension liability 657 690 Other non-current liabilities — 1,220 Shareholders’ Equity 73,489   73,604   Total Liabilities and Shareholders’ Equity $ 236,489   $ 232,002      

RECONCILIATION OF NON-GAAP MEASURES

 

EBITDA Reconciliation (Non-GAAP) - Q1 Fiscal Year 2019(Dollars in thousands)

      Corporate   MDS   ECP   Total Net income $ (5,068 ) $ 173 $ 5,107 $ 212 Interest expense, net 1,949 — — 1,949 Income tax expense (benefit) (20 ) 95 — 75 Amortization of intangible assets — 1,375 295 1,670 Depreciation 589 638 183 1,410 Selling and administrative - Corp allocations (3,336 ) 2,209   1,127   —   EBITDA, excluding corporate allocation (5,886 ) 4,490 6,712 5,316 Adjustments for nonrecurring operating expenses: Stock-based compensation (13 ) — — (13 ) Costs related to potential sale of Company 681   —   —   681   Adjusted EBITDA, before corporate allocation $ (5,218 ) $ 4,490   $ 6,712   $ 5,984     Adjusted EBITDA, after corporate allocation $ (1,882 ) $ 2,281 $ 5,585 $ 5,984   Adjusted EBITDA margin 6.7 %    

EBITDA Reconciliation (Non-GAAP) - Q1 Fiscal Year 2018(Dollars in thousands)

      Corporate   MDS   ECP   Total Net income (loss) $ (5,923 ) $ (1,523 ) $ 5,462 $ (1,984 ) Interest expense, net 1,266 — — 1,266 Income tax expense (benefit) (1,068 ) — — (1,068 ) Amortization of intangible assets — 1,578 345 1,923 Depreciation 571 749 216 1,536 Selling and administrative - Corp allocations (3,437 ) 2,446   991   —   EBITDA, excluding corporate allocation (8,591 ) 3,250 7,014 1,673 Adjustments for nonrecurring operating expenses: Stock-based compensation 211 — — 211 Costs related to potential sale of company 2,351   —   —   2,351   Adjusted EBITDA, before corporate allocation $ (6,029 ) $ 3,250   $ 7,014   $ 4,235     Adjusted EBITDA, after corporate allocation $ (2,592 ) $ 804 $ 6,023 $ 4,235   Adjusted EBITDA margin 5.1 %    

Adjusted EPS (Non-GAAP)

      For the Quarter Ended Q1 FY19   Q1 FY18

(Dollars in thousands, except per share data)

Earnings (loss) per share - diluted, as reported $ 0.02 $ (0.20 ) Nonrecurring items 0.05 0.15 Amortization of intangible assets 0.13   0.13   Adjusted earnings per share $ 0.20   $ 0.08     Adjustments, net of tax (21% and 35%, respectively): Costs related to potential sale of Company 538   $ 1,528   Total nonrecurring, net of tax 538 1,528 Amortization of intangible assets, net of tax 1,319   1,250   Total adjustments $ 1,857   $ 2,778      

Adjusted SG&A and Operating Income (Non-GAAP)

      For the Quarters Ended Q1 FY19   Q1 FY18 SG&A  

OperatingIncome

SG&A  

OperatingIncome

(Dollars in thousands) As reported $ 12,370 $ 2,250 $ 15,205 $ (1,776 ) Percentage of sales 13.8 % 2.5 % 18.4 % (2.1 )% Adjustments: Amortization of intangible assets — 1,670 — 1,923 Costs related to potential sale of Company   681     681     2,351     2,351   Total adjustments   681     2,351     2,351     4,274   As adjusted $ 11,689   $ 4,601   $ 12,854   $ 2,498     Adjusted percentage of sales 13.1 % 5.1 % 15.5 % 3.0 %  

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Sparton CorporationJoe McCormack, Office: 847-762-5800ir@sparton.com