Sparton Corporation Reports Fiscal 2016 Second Quarter Results

SCHAUMBURG, Ill.

Sparton Corporation (NYSE: SPA) today announced results for the second quarter of fiscal 2016 ended December 27, 2015. The Company reported second quarter sales of $103.5 million, an increase of 21%, from $85.6 million for the second quarter of fiscal 2015. Operating income for the second quarter of fiscal 2016 was $0.5 million compared to $2.7 million in the second quarter of fiscal 2015. Net income for the second quarter of fiscal 2016 was $0.3 million or $0.03 per share, basic and diluted compared to net income of $1.6 million or $0.16 per share, basic and diluted in the same quarter a year ago. Adjusted net income for the second quarter of fiscal 2016 was $2.5 million or $0.25 per share compared to $2.7 million or $0.27 per share in the same quarter a year ago.

Select Consolidated Results were as follows (dollars in thousands, except per share data):

Cary Wood, President & CEO, commented, “The second quarter $0.25 adjusted earnings per share, as compared to $0.27 adjusted earnings per share in the prior year, was the result of continued MDS legacy business revenue challenges. Gross margins for the quarter remained consistent with those of the prior year quarter. Total revenue in the quarter was up 21% from the prior year quarter; legacy business revenues decreased by 5%. Legacy business growth continues to be strong in the ECP segment, up 35% from the prior year, primarily driven by increased sonobuoy sales to foreign governments. In the MDS segment, legacy business revenues decreased by 26% due to fluctuations in customer demand as well as product insourcing. As disappointing as the results in the MDS segment have been in recent quarters, we continue to see momentum from new business development activities and anticipate 36 new program launches starting the second half of fiscal 2016 and continuing into the following fiscal year and, barring any customer related delays, these new programs could add over $30 million of new revenues in fiscal 2017. Our selling and administrative expenses increased $3.5 million and, as a percent of sales, was 13.9% as compared to 12.6% of sales in the prior year quarter. The increase in selling and administrative expense was due to the selling and administrative expenses of acquired companies, as well as expenses associated with a corporate reorganization, and additional legal, insurance and other costs related to prior periods. In addition to the recently announced closures and consolidations of the Lawrenceville manufacturing facility and the Irvine Design Engineering Center, we continue to evaluate our overhead structure within the MDS segment. These actions will continue to increase the capacity utilization and reduce overhead expense, which will result in increasing our bottom line earnings once restructuring efforts are complete.”

Second Quarter Highlights

• Consolidated revenues increased by 21%. Within the ECP segment, legacy business revenues increased 35%, while legacy business revenues in the MDS segment decreased 26%.
• 213 new program or product wins were awarded with a first time revenue potential of $40.0 million as compared to 77 new product or program wins with a first time revenue potential of $17.7 million in the prior year quarter.
  • 91 in MDS with a first time revenue potential of $18.5 million versus 14 with a first time revenue potential of $4.0 million in the prior year quarter.
  • 122 in ECP (excluding domestic sonobuoy awards) with first time revenue potential of $21.5 million versus 63 with a first time revenue potential of $13.7 million in the prior year quarter.

• Quarter end sales backlog of approximately $264 million, representing a 16% increase over the prior year quarter, but a 5% decrease from the end of the first quarter of fiscal 2016.
• Sonobuoy sales to the U.S. Navy decreased to $17.4 million from $20.7 million in Q2 fiscal 2015; sonobuoy sales to foreign governments increased to $9.4 million from $0.9 million; engineering sales increased to $4.7 million from $2.3 million.

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

The decrease in legacy business sales was due to declines in overall customer demand, including certain programs going end-of-life, customer insourcing, customer delays and customers managing their working capital to match end-market demands. MDS backlog was approximately $144.4 million at the end of second quarter of fiscal year 2016 compared to $121.2 million at the end of second quarter of fiscal year 2015 and $156.6 million at the end of first quarter of fiscal 2016. 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 second quarter fiscal 2016 MDS backlog is currently expected to be realized in the next 12 months.

Gross profit percentage on MDS sales was negatively affected in the current quarter by increased overhead as a result of decreased volume and a shift in product mix as compared to the second quarter of the prior year. The increase in selling and administrative expense is due to the selling and administrative expenses of acquired businesses, as well as final costs related to a previously settled legal matter.

The increase in amortization of intangible assets is due to the amortization of customer relationships and non-compete agreements acquired in the acquisitions of Hunter Technology Corporation and Real-Time Enterprises, Inc.. Restructuring charges relate to the previously discussed closing of the Company’s Lawrenceville, GA manufacturing operations and consolidation of its Irvine, CA design center into its Irvine, CA manufacturing operations.

Previously accrued contingent purchase price consideration related to the Hunter Technology Corporation and Real-Time Enterprises, Inc. acquisitions was reversed in the second quarter of fiscal 2016 based on the Company’s determination that the required performance thresholds necessary to earn the contingent considerations would not be achieved.

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

ECP legacy business sales increased $10.1 million as a result of increased sonobuoy sales to foreign governments of $8.5 million, increased engineering revenue of $2.4 million, increased revenue in the Rugged Electronics platform of $1.9 million and increased revenue in the Precision Sensing & Measurements platform of $0.6 million as offset by decreased sonobuoy sales to the U.S. Navy of $3.3 million. Total sales to the U.S. Navy in the second quarters of fiscal years 2016 and 2015 were approximately $22.1 million and $23.0 million, respectively. For the second quarters of fiscal years 2016 and 2015, sales to the U.S. Navy accounted for 21% and 27%, respectively, of consolidated Company net sales and 54% and 80%, respectively, of ECP segment net sales. ECP backlog was approximately $119.1 million at the end of second quarter of fiscal year 2016 compared to $105.4 million at the end of second quarter of fiscal year 2015. A majority of the second quarter fiscal year 2016 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 quarter by increased volume as well as product mix as compared to the prior year quarter. The increase in selling and administrative expense is due to the acquired selling and administration expenses of Stealth.com as well as professional service expenses associated with governmental audits and compliance.

The increase in amortization of intangible assets is due to the amortization of customer relationships, non-compete agreements, trademarks/tradenames and unpatented technology acquired in the acquisitions of Stealth.com, KEP Marine and IED.

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.

Liquidity and Capital Resources

As of December 27, 2015, the Company had $133.8 million borrowed and approximately $140.7 million available under its credit facility and had available cash and cash equivalents of $4.8 million.

Outlook

Cary Wood concluded, “We are pleased with the progress the ECP segment has made with its increased foreign sonobuoy sales, as well as increased engineering revenue to the U.S. Navy and positive effects related to its acquisition integrations. Although the Company’s overall legacy business sales pipeline continues to grow, the revenue softening we have been experiencing in the MDS legacy business is a concern that we are closely monitoring. We continue to work towards minimizing this effect through our new business development activities, which is evidenced by the launch of 36 new programs in the MDS segment over the next few quarters. Customer-facing enhancements have also been identified and will be implemented in the coming months to drive a focused increase in new business wins from our existing customer base within both segments. We continue to drive the earnings performance in the MDS segment by capitalizing on the synergies from our most recent acquisitions as well as other cost savings initiatives taking place across the entire Company including the recent decision to close and consolidate the Lawrenceville manufacturing facility and the Irvine Engineering Center into other existing assets. In the coming quarters, we will continue to monitor the serviceable end-markets and current customers and will determine if any other operational adjustments and control actions are required to mitigate any near-term margin challenges.”

Conference Call

Sparton will host a conference call with investors and analysts on February 3, 2016 at 10:00 a.m. CST/11:00 a.m. EST to discuss its fiscal year 2016 second quarter financial results, provide a general business update and respond to investor questions. To participate, callers should dial (888) 222-2795. 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/zm9h4sj.

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, 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 net income and other non-GAAP income statement measures, we exclude certain legal expenses, corporate reorganization charges, amortization of intangible assets, certain restructuring charges, reversal of accrued contingent consideration, gross profit effects of capitalized profit in inventory from acquisitions, success based acquisition finder’s fees and the related tax effect of these items, as well as unusual discrete tax benefits of 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, certain legal expenses, certain restructuring charges, stock-based compensation expense, corporate reorganization charges, reversal of accrued contingent consideration, gross profit effects of capitalized profit in inventory from acquisitions and success based acquisition finder’s fees. 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, Illinois, 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.

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