SPA Sparton Corp.

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

Second Quarter Financial Results and Highlights

Consolidated:

• Net sales of $105.2 million; $97.8 million in prior year Q2

• Gross profit margin of 21.9%; 22.2% in prior year Q2

• SG&A expenses of $14.7 million or 14.0% of sales; adjusted SG&A of $12.3 million, 11.7% of sales

• Earnings per share of $0.19, adjusted earnings per share of $0.51; adjusted earnings per share of $0.52 in prior year Q2

• Adjusted EBITDA of $10.7 million, a 10.1% adjusted EBITDA margin

MDS Segment:

• Gross sales of $65.4 million; $58.4 million in prior year Q2

• Gross profit margin of 13.5%; 11.9% in prior year Q2

• Operating income of $1.7 million; loss of $0.2 million in prior year Q2

• Adjusted EBITDA of $6.0 million, a 9.1% adjusted EBITDA margin

• New program wins in Q2 have expected revenue of $15.5 million when fully ramped up into production

• Trailing four quarter new program win revenue of $61.9 million, which continues to support our future organic growth

• Backlog of $154 million; prior year Q2 backlog of $142 million

ECP Segment:

• Gross sales of $43.0 million; $42.5 million in prior year Q2

• Gross profit margin of 33.1%; 34.8% in prior year Q2

• Operating income of $9.0 million; $10.2 million in prior year Q2

• Adjusted EBITDA of $10.6 million, a 24.6% adjusted EBITDA margin

• Backlog of $144 million; prior year Q2 backlog of $130 million

       

SELECTED FINANCIAL DATA

 

For the Second Quarter of Fiscal Year

For the First Two Quarters of Fiscal Year

2019   2018 2019   2018 (Dollars in thousands, except per share data) Consolidated: Net sales $ 105,248 $ 97,819 $ 194,710 $ 180,582 Gross profit 23,072 21,749 40,711 37,673 Gross margin 21.9 % 22.2 % 20.9 % 20.9 % Selling and administrative expenses $ 14,734 $ 14,074 $ 27,104 $ 29,279 Operating income 5,255 5,113 7,505 3,337 Adjusted operating income (non-GAAP) 9,285 8,373 13,886 10,871 Earnings (loss) per share 0.19 (0.82 ) 0.22 (1.02 ) Adjusted earnings per share (non-GAAP) 0.51 0.52 0.73 0.60 EBITDA (non-GAAP) 8,203 8,473 13,519 10,146 Adjusted EBITDA (non-GAAP) 10,652 9,850 16,636 14,085 Adjusted EBITDA margin (non-GAAP) 10.1 % 10.1 % 8.5 % 7.8 % Free cash flow (non-GAAP) $ 9,182 $ 19,711 $ 20,760 $ (3,973 )   MDS Segment: Gross sales $ 65,402 $ 58,353 $ 124,696 $ 113,661 Intercompany sales (3,137 ) (2,970 ) (6,281 ) (5,907 ) Net sales 62,265 55,383 118,415 107,754 Gross profit 8,855 6,960 16,064 12,953 Gross margin 13.5 % 11.9 % 12.9 % 11.4 % Selling and administrative expenses $ 3,457 $ 3,513 $ 6,792 $ 6,967 Allocation of corporate expenses 2,301 2,101 4,510 4,547 Operating income (loss) 1,746 (208 ) 2,036 (1,693 ) Adjusted segment EBITDA (non-GAAP) 5,957 4,159 10,447 7,409   ECP Segment: Gross sales $ 42,983 $ 42,468 $ 76,295 $ 72,867 Intercompany sales —   (32 ) —   (39 ) Net sales 42,983 42,436 76,295 72,828 Gross profit 14,217 14,789 24,647 24,720 Gross margin 33.1 % 34.8 % 32.3 % 33.9 % Selling and administrative expenses $ 2,347 $ 2,533 $ 4,903 $ 5,122 Allocation of corporate expenses 1,150 1,037 2,277 2,028 Operating income 8,988 10,211 14,091 15,645 Adjusted segment EBITDA (non-GAAP) 10,573 11,778 17,285 18,792  

Liquidity and Capital Resources

As of December 30, 2018, Sparton Corporation ("Sparton" or "the Company") had $50 million available under its $120 million credit facility that expires in September 2019. The Company intends to restructure this facility upon its expiration in September 2019, or sooner as conditions dictate, to provide for appropriate ongoing liquidity. As of December 30, 2018, the Company was compliant with all covenants under its credit facility.

Pending Acquisition of the Company

On December 11, 2018, Sparton Corporation entered into an Agreement and Plan of Merger (the "Merger Agreement") with Striker Parent 2018, LLC ("Parent"), a Delaware limited liability company and affiliate of Cerberus Capital Management, L.P. ("Cerberus"), and Striker Merger Sub 2018, Inc. ("Merger Sub"), an Ohio corporation and a wholly owned subsidiary of Parent. Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into the Company (the "Merger") with the Company surviving the Merger as a wholly owned subsidiary of Parent.

At the effective time of the Merger (the "Effective Time"), each issued and outstanding share of common stock, par value $1.25 per share, of the Company (each, a "Share") (other than (i) Shares that immediately prior to the Effective Time are owned by Parent, Merger Sub or any other wholly owned subsidiary of Parent or owned by the Company or any wholly owned subsidiary of the Company (including as treasury stock) and (ii) Shares that are held by any record holder who is entitled to demand and properly demands payment of the fair cash value of such Shares as a dissenting shareholder pursuant to, and who complies in all respects with, the provisions of Section 1701.85 of the Ohio General Corporation Law) will be canceled and converted into the right to receive $18.50 per Share in cash, without interest.

Consummation of the Merger is subject to the satisfaction or (to the extent permitted by law) waiver of specified closing conditions, including (i) the adoption of the Merger Agreement by the affirmative vote of the holders of at least two-thirds of all the outstanding Shares entitled to vote thereon at a special meeting of the Company's shareholders (the "Shareholders Meeting") to be held on March 1, 2019, as more fully described in the proxy statement of the Company, filed with the SEC on January 23, 2019 (the "Proxy Statement"), (ii) the absence of any law, executive order, ruling, injunction or other order ("Orders") that restrains, enjoins or otherwise prohibits the consummation of the Merger (the "No Order Condition"), (iii) the expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") which expired on January 22, 2019, (such condition, the "HSR Act Condition"), (iv) any agreement with a governmental authority not to consummate the Merger, which agreement shall have been entered into with the prior written consent of both the Company and Parent, shall have expired or been terminated (the "Governmental Authority Agreement Condition") and (v) other customary closing conditions, including the accuracy of each party's representations and warranties and each party's compliance with its covenants and agreements contained in the Merger Agreement (subject in the case of this clause (v) to certain qualifications as to materiality). Consummation of the Merger is not subject to Parent obtaining any financing for or related to the transactions contemplated by the Merger Agreement.

The Company has called a special meeting on March 1, 2019, of holders of shares of common stock of the Company, at which time it is expected that the shareholders of record as of January 18, 2019, the record date for the special meeting, will vote on adoption of the Merger Agreement and the other related matters as described in the Proxy Statement.

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 operations, 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, provide 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 - FOR THE SECOND QUARTER OF FISCAL YEAR 2019 (Dollars in thousands, except per share data)   Corporate MDS ECP Total Net sales $ — $ 62,265 $ 42,983 $ 105,248 Cost of goods sold —   53,410   28,766   82,176   Gross profit — 8,855 14,217 $ 23,072 Operating expenses: Selling and administrative 8,930 3,457 2,347 14,734 Selling and administrative - Corp allocations (3,451 ) 2,301 1,150 — Internal research and development — — 1,442 1,442 Amortization of intangible assets —   1,351   290   1,641   Total operating expenses 5,479   7,109   5,229   17,817   Income from operations (5,479 ) 1,746 8,988 5,255 Interest expense, net (1,800 ) 9 1 (1,790 ) Other income (expense) (1 ) (6 ) (50 ) (57 ) Income tax (expense) (1,404 ) (87 ) —   (1,491 ) Net income $ (8,684 ) $ 1,662   $ 8,939   $ 1,917   Income per share of common stock: Basic $ 0.19 Diluted 0.19 Weighted average shares of common stock outstanding: Basic 9,834,723 Diluted 9,834,723               CONSOLIDATING FINANCIAL INFORMATION - FOR THE SECOND QUARTER OF FISCAL YEAR 2018 (Dollars in thousands, except per share data)   Corporate MDS ECP Total Net sales $ — $ 55,383 $ 42,436 $ 97,819 Cost of goods sold —   48,423   27,647   76,070   Gross profit — 6,960 14,789 21,749 Operating expenses: Selling and administrative 8,028 3,513 2,533 14,074 Selling and administrative - Corp allocations (3,138 ) 2,101 1,037 — Internal research and development — — 669 669 Amortization of intangible assets —   1,554   339   1,893   Total operating expenses 4,890   7,168   4,578   16,636   Income (loss) from operations (4,890 ) (208 ) 10,211 5,113 Interest expense, net (1,507 ) — — (1,507 ) Other income (expense) (1 ) 19 (5 ) 13 Income tax (expense) (11,666 ) (37 ) —   (11,703 ) Net income (loss) $ (18,064 ) $ (226 ) $ 10,206   $ (8,084 ) Loss per share of common stock: Basic $ (0.82 ) Diluted (0.82 ) Weighted average shares of common stock outstanding: Basic 9,834,723 Diluted 9,834,723        

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

 

For the First Two Quarters of Fiscal Years

2019   2018 ($ in thousands) Cash Flows from Operating Activities: Operating activities, net of working capital changes $ 11,989 $ 7,709 Net changes in working capital 10,724   (8,583 ) Cash Flows from Operating Activities 22,713 (874 ) Cash Flows from Investing Activities: Capital expenditures (1,953 ) (3,099 ) Other investing activities —   14   Cash Flows from Investing Activities (1,953 ) (3,085 ) Cash Flows from Financing Activities: Net change in credit facility (20,400 ) 4,400 Other financing activities (135 ) (325 ) Cash Flows from Financing Activities (20,535 ) 4,075   Change in Cash and Cash Equivalents 225 116 Cash and Cash Equivalents - Beginning 1,160   988   Cash and Cash Equivalents - Ending $ 1,385   $ 1,104            

CONDENSED CONSOLIDATED BALANCE SHEETS

  December 30, 2018 July 1, 2018 ($ in thousands) Assets Cash and cash equivalents $ 1,385 $ 1,160 Accounts receivable, net 47,280 60,454 Inventories 86,295 72,406 Legal settlements - insurance receivable — 4,500 Prepaid and other current assets 8,131 3,944 Property, plant and equipment, net 31,969 32,790 Goodwill 12,663 12,663 Other intangible assets, net 17,797 21,108 Other assets 19,202   22,977 Total assets $ 224,722   $ 232,002 Liabilities and Shareholders’ Equity Accounts payable $ 45,682 $ 28,636 Accrued expenses and other current liabilities 34,223 32,986 Accrued legal settlements — 5,500 Credit facility 64,100 84,500 Environmental remediation 4,598 4,866 Pension liability 633 690 Other non-current liabilities — 1,220 Shareholders’ Equity 75,486   73,604 Total Liabilities and Shareholders’ Equity $ 224,722   $ 232,002               RECONCILIATION OF NON-GAAP MEASURES   EBITDA Reconciliation (Non-GAAP) - For the Second Quarter of Fiscal Year 2019 (Dollars in thousands)   Corporate MDS ECP Total Net income $ (8,684 ) $ 1,662 $ 8,939 $ 1,917 Interest expense, net 1,800 (9 ) (1 ) 1,790 Income tax expense 1,404 87 — 1,491 Amortization of intangible assets — 1,351 290 1,641 Depreciation 604 565 195 1,364 Selling and administrative - Corp allocations (3,451 ) 2,301   1,150   —   EBITDA, excluding corporate allocation (8,327 ) 5,957 10,573 8,203 Adjustments for nonrecurring operating expenses: Stock-based compensation 60 — — 60 Costs related to potential sale of Company 2,389   —   —   2,389   Adjusted EBITDA, before corporate allocation $ (5,878 ) $ 5,957   $ 10,573   $ 10,652     Adjusted EBITDA, after corporate allocation $ (2,427 ) $ 3,656   $ 9,423   $ 10,652     Adjusted EBITDA margin 10.1 %               EBITDA Reconciliation (Non-GAAP) - For the Second Quarter of Fiscal Year 2018 (Dollars in thousands)   Corporate MDS ECP Total Net income (loss) $ (18,064 ) $ (226 ) $ 10,206 $ (8,084 ) Interest expense, net 1,507 — — 1,507 Income tax expense 11,666 37 — 11,703 Amortization of intangible assets — 1,554 339 1,893 Depreciation 565 693 196 1,454 Selling and administrative - Corp allocations (3,138 ) 2,101   1,037   —   EBITDA, excluding corporate allocation (7,464 ) 4,159 11,778 8,473 Adjustments for nonrecurring operating expenses: Stock-based compensation 10 — — 10 Costs related to potential sale of company 1,367   —   —   1,367   Adjusted EBITDA, before corporate allocation $ (6,087 ) $ 4,159   $ 11,778   $ 9,850     Adjusted EBITDA, after corporate allocation $ (2,949 ) $ 2,058   $ 10,741   $ 9,850     Adjusted EBITDA margin 10.1 %          

Adjusted EPS (Non-GAAP)

 

For the Second Quarter of Fiscal Year

For the First Two Quarters of Fiscal Year

2019   2018 2019   2018 (Dollars in thousands, except per share data) Earnings (loss) per share - diluted, as reported $ 0.19 $ (0.82 ) $ 0.22 $ (1.02 ) Nonrecurring items 0.19 0.12 0.25 0.27 Amortization of intangible assets 0.13 0.15 0.26 0.28 Adjustments for Tax Act —   1.07   —   1.07   Adjusted earnings per share $ 0.51   $ 0.52   $ 0.73   $ 0.60     Adjustments, net of tax (21% and 28%, respectively): Costs related to potential sale of Company $ 1,887   $ 1,149   $ 2,425   $ 2,677   Total nonrecurring, net of tax 1,887 1,149 2,425 2,677 Amortization of intangible assets, net of tax 1,296   1,498   2,615   2,748   Total adjustments, net of tax 3,183 2,647 5,040 5,425 Adjustments for Tax Act —   10,500   —   10,500   Total adjustments $ 3,183   $ 13,147   $ 5,040   $ 15,925          

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

  For the Second Quarter of Fiscal Year 2019   2018 SG&A  

Operating Income

SG&A  

Operating Income

(Dollars in thousands) As reported $ 14,734 $ 5,255 $ 14,074 $ 5,113 Percentage of sales 14.0 % 5.0 % 14.4 % 5.2 % Adjustments: Amortization of intangible assets — 1,641 — 1,893 Costs related to potential sale of Company 2,389   2,389   1,367   1,367   Total adjustments 2,389   4,030   1,367   3,260   As adjusted $ 12,345   $ 9,285   $ 12,707   $ 8,373     Adjusted percentage of sales 11.7 % 8.8 % 13.0 % 8.6 %       For the First Two Quarters of Fiscal Year 2019 2018 SG&A

Operating Income

SG&A

Operating Income

(Dollars in thousands) As reported $ 27,104 $ 7,505 $ 29,279 $ 3,337 Percentage of sales 13.9 % 3.9 % 16.2 % 1.8 % Adjustments: Amortization of intangible assets — 3,311 — 3,816 Costs related to potential sale of Company 3,070   3,070   3,718   3,718   Total adjustments 3,070   6,381   3,718   7,534   As adjusted $ 24,034   $ 13,886   $ 25,561   $ 10,871     Adjusted percentage of sales 12.3 % 7.1 % 14.2 % 6.0 %

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Media:Joe McCormackSparton CorporationEmail: ir@sparton.comOffice: (847) 762-5800