SPARTON CORPORATION 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| [ X ] |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended March 31, 2007
or
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| [ ] |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File number 1-1000
SPARTON CORPORATION
(Exact Name of Registrant as Specified in its Charter)
OHIO
(State or Other Jurisdiction of Incorporation or Organization)
38-1054690
(I.R.S. Employer Identification No.)
2400 East Ganson Street, Jackson, Michigan 49202
(Address of Principal Executive Offices, Zip Code)
(517) 787-8600
(Registrant’s Telephone Number, Including Area Code)
Indicate
by checkmark whether the registrant (1) has filed all reports
required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer
and large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). [ ] Yes [ X ] No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date.
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Shares Outstanding at |
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Class of Common Stock
|
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April 30, 2007
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| |
$1.25 Par Value |
|
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9,800,370 |
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| |
Part I. Financial Information
Item 1. Financial Statements (Interim, Unaudited)
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
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March 31, 2007 |
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June 30, 2006 |
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ASSETS |
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,946,232 |
|
|
$ |
7,503,438 |
|
Investment securities |
|
|
— |
|
|
|
15,969,136 |
|
Accounts receivable |
|
|
21,151,784 |
|
|
|
25,108,442 |
|
Income taxes recoverable |
|
|
2,320,726 |
|
|
|
— |
|
Inventories and costs of contracts in progress |
|
|
52,951,608 |
|
|
|
46,892,183 |
|
Deferred income taxes |
|
|
2,571,000 |
|
|
|
2,662,692 |
|
Prepaid expenses and other current assets |
|
|
1,162,118 |
|
|
|
1,462,190 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
85,103,468 |
|
|
|
99,598,081 |
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|
|
|
|
|
|
|
|
|
Pension asset |
|
|
4,048,208 |
|
|
|
4,420,932 |
|
Property, plant and equipment — net |
|
|
18,139,631 |
|
|
|
17,598,906 |
|
Goodwill and other intangibles — net |
|
|
22,146,286 |
|
|
|
22,469,807 |
|
Other assets |
|
|
5,997,170 |
|
|
|
5,970,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total assets |
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$ |
135,434,763 |
|
|
$ |
150,057,736 |
|
|
|
|
|
|
|
|
|
|
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|
|
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LIABILITIES AND SHAREOWNERS’ EQUITY |
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|
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Current liabilities: |
|
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|
|
|
|
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Current portion of long-term debt |
|
$ |
3,873,593 |
|
|
$ |
3,815,833 |
|
Accounts payable |
|
|
11,018,363 |
|
|
|
16,748,814 |
|
Salaries and wages |
|
|
3,841,222 |
|
|
|
4,388,396 |
|
Accrued health benefits |
|
|
1,316,897 |
|
|
|
1,142,693 |
|
Other accrued liabilities |
|
|
6,015,271 |
|
|
|
4,996,408 |
|
Income taxes payable |
|
|
— |
|
|
|
308,814 |
|
|
|
|
|
|
|
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Total current liabilities |
|
|
26,065,346 |
|
|
|
31,400,958 |
|
|
|
|
|
|
|
|
|
|
Deferred income taxes — noncurrent |
|
|
32,000 |
|
|
|
— |
|
Long-term debt — noncurrent portion |
|
|
13,536,631 |
|
|
|
16,010,616 |
|
Environmental remediation — noncurrent portion |
|
|
5,584,288 |
|
|
|
5,795,784 |
|
|
|
|
|
|
|
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Total liabilities |
|
|
45,218,265 |
|
|
|
53,207,358 |
|
|
|
|
|
|
|
|
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Shareowners’ Equity: |
|
|
|
|
|
|
|
|
Preferred stock, no par value; 200,000 shares authorized, none outstanding |
|
|
— |
|
|
|
— |
|
Common stock, $1.25 par value; 15,000,000 shares authorized,
9,800,370 shares outstanding (9,392,305 at June 30, 2006) |
|
|
12,250,463 |
|
|
|
11,740,381 |
|
Capital in excess of par value |
|
|
19,557,047 |
|
|
|
15,191,990 |
|
Retained earnings |
|
|
58,363,988 |
|
|
|
70,183,104 |
|
Accumulated other comprehensive income (loss) |
|
|
45,000 |
|
|
|
(265,097 |
) |
|
|
|
|
|
|
|
Total shareowners’ equity |
|
|
90,216,498 |
|
|
|
96,850,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total liabilities and shareowners’ equity |
|
$ |
135,434,763 |
|
|
$ |
150,057,736 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
3
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
March 31, 2007 and 2006
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Three months ended |
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Nine months ended |
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2007 |
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|
2006 |
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|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
47,725,992 |
|
|
$ |
45,303,199 |
|
|
$ |
149,099,220 |
|
|
$ |
120,302,471 |
|
Costs of goods sold |
|
|
47,030,124 |
|
|
|
40,562,528 |
|
|
|
144,193,397 |
|
|
|
110,140,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
695,868 |
|
|
|
4,740,671 |
|
|
|
4,905,823 |
|
|
|
10,161,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Selling and administrative expenses |
|
|
4,264,621 |
|
|
|
3,930,958 |
|
|
|
12,978,917 |
|
|
|
11,694,855 |
|
Amortization of intangibles |
|
|
120,313 |
|
|
|
— |
|
|
|
362,049 |
|
|
|
— |
|
EPA related environmental remediation (income) expense -
net |
|
|
(3,091 |
) |
|
|
29,994 |
|
|
|
(204,321 |
) |
|
|
796 |
|
Net (gain) loss on sale of property, plant and equipment |
|
|
3,872 |
|
|
|
(5,693 |
) |
|
|
(201,851 |
) |
|
|
98,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,385,715 |
|
|
|
3,955,259 |
|
|
|
12,934,794 |
|
|
|
11,794,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(3,689,847 |
) |
|
|
785,412 |
|
|
|
(8,028,971 |
) |
|
|
(1,632,820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and investment income |
|
|
74,896 |
|
|
|
293,008 |
|
|
|
145,923 |
|
|
|
820,835 |
|
Interest expense |
|
|
(205,877 |
) |
|
|
— |
|
|
|
(793,599 |
) |
|
|
— |
|
Equity gain in investment |
|
|
75,000 |
|
|
|
3,000 |
|
|
|
68,000 |
|
|
|
2,000 |
|
Other — net |
|
|
(23,730 |
) |
|
|
(11,088 |
) |
|
|
(283,635 |
) |
|
|
266,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79,711 |
) |
|
|
284,920 |
|
|
|
(863,311 |
) |
|
|
1,089,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(3,769,558 |
) |
|
|
1,070,332 |
|
|
|
(8,892,282 |
) |
|
|
(543,809 |
) |
Provision (credit) for income taxes |
|
|
(1,476,000 |
) |
|
|
343,000 |
|
|
|
(2,757,000 |
) |
|
|
(174,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(2,293,558 |
) |
|
$ |
727,332 |
|
|
$ |
(6,135,282 |
) |
|
$ |
(369,809 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share — basic and diluted(1) |
|
$ |
(0.23 |
) |
|
$ |
0.07 |
|
|
$ |
(0.62 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
All share and per share information have been adjusted to
reflect
the impact of the 5% stock dividend declared in October 2006. |
See accompanying notes to condensed consolidated financial statements.
4
SPARTON CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows (Unaudited)
| |
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|
|
|
|
|
|
|
| |
|
Nine months ended March 31, |
|
| |
|
2007 |
|
|
2006 |
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,135,282 |
) |
|
$ |
(369,809 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion |
|
|
1,941,812 |
|
|
|
1,490,979 |
|
Deferred income taxes |
|
|
— |
|
|
|
679,731 |
|
Loss on sale of investment securities |
|
|
244,562 |
|
|
|
25,432 |
|
Equity gain in investment |
|
|
(68,000 |
) |
|
|
(2,000 |
) |
Pension expense |
|
|
372,724 |
|
|
|
410,681 |
|
Share-based compensation |
|
|
187,901 |
|
|
|
253,420 |
|
(Gain) loss on sale of property, plant and equipment |
|
|
(3,176 |
) |
|
|
98,898 |
|
Gain from sale of non-operating land |
|
|
(198,675 |
) |
|
|
— |
|
Other, primarily changes in customer and vendor claims |
|
|
47,420 |
|
|
|
(391,396 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
3,956,658 |
|
|
|
5,946,443 |
|
Environmental settlement receivable |
|
|
— |
|
|
|
5,455,000 |
|
Income taxes recoverable |
|
|
(2,320,726 |
) |
|
|
— |
|
Inventories, prepaid expenses and other current assets |
|
|
(5,759,353 |
) |
|
|
1,061,929 |
|
Accounts payable and accrued liabilities |
|
|
(5,604,852 |
) |
|
|
(7,032,653 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(13,338,987 |
) |
|
|
7,626,655 |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
Additional goodwill incurred in purchase of Astro |
|
|
(38,528 |
) |
|
|
— |
|
Purchases of investment securities |
|
|
— |
|
|
|
(7,052,763 |
) |
Proceeds from sale of investment securities |
|
|
15,619,068 |
|
|
|
1,677,746 |
|
Proceeds from maturity of investment securities |
|
|
465,645 |
|
|
|
2,583,602 |
|
Purchases of property, plant and equipment |
|
|
(2,672,559 |
) |
|
|
(459,895 |
) |
Proceeds from sale of non-operating land |
|
|
811,175 |
|
|
|
— |
|
Proceeds from sale of property, plant and equipment |
|
|
7,422 |
|
|
|
— |
|
Other, principally noncurrent other assets |
|
|
9,420 |
|
|
|
(26,460 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
14,201,643 |
|
|
|
(3,277,770 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
Repayment of long-term debt |
|
|
(2,423,266 |
) |
|
|
— |
|
Proceeds from the exercise of stock options |
|
|
1,346,208 |
|
|
|
571,251 |
|
Tax effect from stock transactions |
|
|
183,093 |
|
|
|
70,029 |
|
Stock dividends — cash paid in lieu of fractional shares |
|
|
(1,977 |
) |
|
|
(3,654 |
) |
Repurchases of common stock |
|
|
(2,523,920 |
) |
|
|
(270,186 |
) |
Cash dividend |
|
|
— |
|
|
|
(889,409 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(3,419,862 |
) |
|
|
(521,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(2,557,206 |
) |
|
|
3,826,916 |
|
Cash and cash equivalents at beginning of period |
|
|
7,503,438 |
|
|
|
9,368,120 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
4,946,232 |
|
|
$ |
13,195,036 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Shareowners’ Equity (Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine months ended March 31, 2007 |
|
| |
|
|
|
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
Accumulated other |
|
|
|
|
| |
|
Common Stock |
|
|
in excess |
|
|
Retained |
|
|
comprehensive |
|
|
|
|
| |
|
Shares |
|
|
Amount |
|
|
of par value |
|
|
earnings |
|
|
income (loss) |
|
|
Total |
|
Balance at July 1, 2006 |
|
|
9,392,305 |
|
|
$ |
11,740,381 |
|
|
$ |
15,191,990 |
|
|
$ |
70,183,104 |
|
|
$ |
(265,097 |
) |
|
$ |
96,850,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock dividend (5%
declared October
25, 2006) |
|
|
466,365 |
|
|
|
582,956 |
|
|
|
3,404,465 |
|
|
|
(3,989,398 |
) |
|
|
|
|
|
|
(1,977 |
) |
Stock options exercised, net of common
stock surrendered to facilitate
exercise |
|
|
234,444 |
|
|
|
293,056 |
|
|
|
1,053,152 |
|
|
|
|
|
|
|
|
|
|
|
1,346,208 |
|
Repurchases of common stock as part of
share repurchase program |
|
|
(292,744 |
) |
|
|
(365,930 |
) |
|
|
(463,554 |
) |
|
|
(1,694,436 |
) |
|
|
|
|
|
|
(2,523,920 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
187,901 |
|
|
|
|
|
|
|
|
|
|
|
187,901 |
|
Tax effect of stock transactions |
|
|
|
|
|
|
|
|
|
|
183,093 |
|
|
|
|
|
|
|
|
|
|
|
183,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,135,282 |
) |
|
|
|
|
|
|
(6,135,282 |
) |
Net unrealized gain on investment
securities owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,686 |
|
|
|
122,686 |
|
Reclassification adjustment for net
loss realized and reported in net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,411 |
|
|
|
161,411 |
|
Net unrealized gain on equity investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,000 |
|
|
|
26,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,825,185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
9,800,370 |
|
|
$ |
12,250,463 |
|
|
$ |
19,557,047 |
|
|
$ |
58,363,988 |
|
|
$ |
45,000 |
|
|
$ |
90,216,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine months ended March 31, 2006 |
|
| |
|
|
|
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
Accumulated other |
|
|
|
|
| |
|
Common Stock |
|
|
in excess |
|
|
Retained |
|
|
comprehensive |
|
|
|
|
| |
|
Shares |
|
|
Amount |
|
|
of par value |
|
|
earnings |
|
|
income (loss) |
|
|
Total |
|
Balance at July 1, 2005 |
|
|
8,830,428 |
|
|
$ |
11,038,035 |
|
|
$ |
10,558,757 |
|
|
$ |
75,619,392 |
|
|
$ |
(44,198 |
) |
|
$ |
97,171,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock dividend (5%
declared October
25, 2005) |
|
|
446,337 |
|
|
|
557,921 |
|
|
|
3,820,645 |
|
|
|
(4,382,220 |
) |
|
|
|
|
|
|
(3,654 |
) |
Stock options exercised, net of common
stock surrendered to facilitate
exercise |
|
|
143,294 |
|
|
|
179,118 |
|
|
|
392,133 |
|
|
|
|
|
|
|
|
|
|
|
571,251 |
|
Repurchases of common stock as part of
share repurchase program |
|
|
(28,237 |
) |
|
|
(35,296 |
) |
|
|
(34,199 |
) |
|
|
(200,691 |
) |
|
|
|
|
|
|
(270,186 |
) |
Cash dividend ($0.10 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(889,409 |
) |
|
|
|
|
|
|
(889,409 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
253,420 |
|
|
|
|
|
|
|
|
|
|
|
253,420 |
|
Tax effect of stock transactions |
|
|
|
|
|
|
|
|
|
|
70,029 |
|
|
|
|
|
|
|
|
|
|
|
70,029 |
|
Comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(369,809 |
) |
|
|
|
|
|
|
(369,809 |
) |
Net unrealized loss on investment
securities owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(224,767 |
) |
|
|
(224,767 |
) |
Reclassification adjustment for net
loss realized and reported in net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,785 |
|
|
|
16,785 |
|
Net unrealized gain on equity investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,000 |
|
|
|
82,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(495,791 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 |
|
|
9,391,822 |
|
|
$ |
11,739,778 |
|
|
$ |
15,060,785 |
|
|
$ |
69,777,263 |
|
|
$ |
(170,180 |
) |
|
$ |
96,407,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
SPARTON CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation - The accompanying unaudited condensed consolidated financial statements of
Sparton Corporation and subsidiaries (the Company) have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP) for interim
financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by GAAP for complete financial
statements. All significant intercompany transactions and accounts have been eliminated. Certain
reclassifications of prior year amounts have been made to conform to the current year
presentation. The condensed consolidated balance sheet at March 31, 2007, and the related
condensed consolidated statements of operations, cash flows and shareowners’ equity for the nine
months ended March 31, 2007 and 2006 are unaudited, but include all adjustments (consisting only
of normal recurring accruals) which the Company considers necessary for a fair presentation of
such interim financial statements. Operating results for the nine months ended March 31, 2007 are
not necessarily indicative of the results that may be expected for the fiscal year ending June 30,
2007.
The balance sheet at June 30, 2006, was derived from the audited financial statements at that date
but does not include all of the information and footnotes required by GAAP for complete financial
statements. It is suggested that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2006.
Business Acquisition - On May 31, 2006, the Company announced that a membership purchase agreement
was signed, and the acquisition of Astro Instrumentation, LLC was completed. Astro was a privately
owned electronic manufacturing services (EMS) provider located in Strongsville, Ohio that had been
in business for approximately five years, with a sales volume for its fiscal year ended December
31, 2005, of approximately $34 million. This acquisition furthered the Company’s strategy of
identifying, evaluating and purchasing potential acquisition candidates in both the defense and
medical device markets. The newly acquired entity was renamed Astro Instrumentation, Inc. (Astro)
and incorporated in the state of Michigan. In January 2007, Astro was renamed Sparton Medical
Systems, Inc. (SMS), which operates as a wholly-owned subsidiary of Sparton Corporation.
The acquisition was accounted for using the purchase method in accordance with Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations; accordingly, the operating
results of SMS since the acquisition date have been included in the consolidated financial
statements of the Company. Additional details covering this acquisition can be found in the
Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2006.
Shown below, and also included in the Company’s condensed consolidated financial statements for
the nine months ended March 31, 2007, are the sales, costs of goods sold and total assets of SMS,
which were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Total |
|
|
SMS |
|
Net sales |
|
$ |
149,099,000 |
|
|
$ |
37,328,000 |
|
Costs of goods sold |
|
|
144,193,000 |
|
|
|
33,767,000 |
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
4,906,000 |
|
|
$ |
3,561,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at March 31, 2007 |
|
$ |
135,435,000 |
|
|
$ |
45,220,000 |
|
|
|
|
|
|
|
|
Operations - The Company operates in one line of business, electronic manufacturing services
(EMS). The Company provides design and electronic manufacturing services, which include a complete
range of engineering, pre-manufacturing and post-manufacturing services. Capabilities range from
product design and development through aftermarket support. All of the facilities are registered to
ISO standards, including 9001 or 13485, with most having additional certifications. Products and
services include complete “Device Manufacturing” products for Original Equipment Manufacturers,
transducers, printed circuit boards and assemblies, sensors, medical instruments, and
electromechanical and electrochemical devices. Markets served are in the government,
medical/scientific instrumentation, aerospace, and other industries, with a focus on regulated
markets. The Company also develops and manufactures sonobuoys, anti-submarine warfare (ASW)
devices, used by the U.S. Navy and other free-world countries. Many of the physical and technical
attributes in the production of sonobuoys are the same as those required in the production of the
Company’s other products and assemblies.
7
Use of estimates - The Company’s interim condensed consolidated financial statements are prepared
in accordance with GAAP. These accounting principles require management to make certain estimates,
judgments and assumptions. The Company believes that the estimates, judgments and assumptions upon
which it relies are reasonable based upon information available to it at the time that these
estimates, judgments and assumptions are made. These estimates, judgments and assumptions can
affect the reported amounts of assets and liabilities as of the date of the financial statements,
as well as the reported amounts of revenues and expenses during the periods presented. To the
extent there are material differences between these estimates, judgments or assumptions and actual
results, the financial statements will be affected. In many cases, the accounting treatment of a
particular transaction is specifically dictated by GAAP and does not require management’s judgment
in its application. There are also areas in which management’s judgment in selecting among
available alternatives would not produce a materially different result.
Revenue recognition - The Company’s net sales are comprised primarily of product sales, with
supplementary revenues earned from engineering and design services. Standard contract terms are FOB
shipping point. Revenue from product sales is generally recognized upon shipment of the goods;
service revenue is recognized as the service is performed or under the percentage of completion
method, depending on the nature of the arrangement. Long-term contracts relate principally to
government defense contracts. These contracts are accounted for based on completed units accepted
and their estimated average contract cost per unit. Costs and fees billed under
cost-reimbursement-type contracts are recorded as sales. A provision for the entire amount of a
loss on a contract is charged to operations as soon as the loss is identified and the amount is
determinable. Shipping and handling costs are included in costs of goods sold.
Fair value of financial instruments - The fair value of cash and cash equivalents, trade accounts
receivable, and accounts payable approximate their carrying value. Cash and cash equivalents
consist of demand deposits and other highly liquid investments with an original term when purchased
of three months or less. With respect to the Company’s recently issued or assumed debt instruments,
consisting of industrial revenue bonds, notes payable and bank debt relating to the May 31, 2006
acquisition of Astro Instrumentation, LLC., management believes that the fair value of these
financial instruments also approximates their carrying value at March 31, 2007.
Investment securities - Investments in debt securities that are not cash equivalents or marketable
equity securities have been designated as available for sale. Those securities, all of which are
investment grade, are reported at fair value, with net unrealized gains and losses included in
accumulated other comprehensive income or loss, net of applicable taxes. Unrealized losses that are
other than temporary are recognized in earnings. The investment portfolio has maturity dates within
a year or less. Realized gains and losses on investments are determined using the specific
identification method.
Other investment - The Company has an active investment in Cybernet Systems Corporation, which is
accounted for under the equity method, as more fully described in Note 10 of the Condensed
Consolidated Financial Statements.
Market risk exposure - The Company manufactures its products in the United States, Canada, and
Vietnam. Sales of the Company’s products are in the U.S. and Canada, as well as other foreign
markets. The Company is potentially subject to foreign currency exchange rate risk relating to
intercompany activity and balances, receipts from customers, and payments to suppliers in foreign
currencies. Adjustments related to the translation of the Company’s Canadian and Vietnamese
financial statements into U.S. dollars are included in current earnings. As a result, the Company’s
financial results could be affected by factors such as changes in foreign currency exchange rates
or economic conditions in the domestic and foreign markets in which the Company operates. However,
minimal third party receivables and payables are denominated in foreign currency and the related
market risk exposure is considered to be immaterial. Historically, foreign currency gains and
losses related to intercompany activity and balances have not been significant. However, due to the
strengthened Canadian dollar in recent years, the impact of transaction and translation gains has
increased. If the exchange rate were to materially change, the Company’s financial position could
be significantly affected.
The Company has financial instruments that are subject to interest rate risk, principally
short-term investments. Historically, the Company has not experienced material gains or losses due
to such interest rate changes. Based on the current holdings of short-term investments, the
interest rate risk is not considered to be material. In addition, as a result of the May 31, 2006,
Astro acquisition, the Company is obligated on bank debt with an adjustable rate of interest, as
more fully discussed in Note 6 of the Condensed Consolidated Financial Statements, which would
adversely impact operations should the interest rate increase.
Long-lived assets - The Company reviews long-lived assets that are not held for sale for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Impairment is determined by comparing the carrying value of the assets to their
fair market value or estimated future undiscounted cash flows. If it is determined that an
impairment of a long-lived asset has occurred, a current charge to income is recognized. The
Company also has goodwill and other intangibles which are considered long-lived assets. While a
portion of goodwill is associated with the Company’s investment in Cybernet, the majority of the
approximately $22 million of goodwill and other intangibles
8
reflected on the Company’s balance sheets as of March 31, 2007 and June 30, 2006, is associated with
the recent acquisition of Astro. For a more complete discussion of goodwill and other intangibles,
see Note 5 of the Condensed Consolidated Financial Statements.
Other assets - At June 30, 2006, undeveloped land located in New Mexico, with a cost of $613,000,
was classified as held-for-sale and carried in other current assets in the Company’s balance sheet
at that date. The sale of this asset was completed in August 2006 at a gain of approximately
$199,000. In addition, included in other assets as of both March 31, 2007 and June 30, 2006, was
$1.8 million and $2.9 million of inventory materials for which the Company is seeking reimbursement
from other parties, which is discussed further in Note 7 of the Condensed Consolidated Financial
Statements.
Common stock repurchases - The Company records common stock repurchases at cost. The excess of cost
over par value is first allocated to capital in excess of par value based on the per share amount
of capital in excess of par value for all shares, with the remainder charged to retained earnings.
Effective September 14, 2005, the Board of Directors authorized a repurchase program for the
repurchase, at the discretion of management, of up to $4 million of shares of the Company’s
outstanding common stock in open market transactions. For the nine months ended March 31, 2007,
292,744 shares were repurchased for cash of $2,524,000. During that period, the weighted average
share prices for each individual month’s activity ranged from $8.43 to $8.75 per share. For the
fiscal year ended June 30, 2006, the Company had purchased 39,037 shares at a cost of approximately
$363,000. As of March 31, 2007, the dollar value of shares that may yet be repurchased under the
program approximated $1,113,000. The program expires September 14, 2007. Repurchased shares are
retired.
Supplemental cash flows information - Supplemental cash and noncash activities for the nine months
ended March 31, 2007 and 2006 were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
Net cash paid (received) for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
(314,000 |
) |
|
$ |
1,395,000 |
|
|
|
|
|
|
|
|
Interest (including $60,000 of capitalized interest) |
|
$ |
749,000 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
Tax rate - The effective tax rate utilized to calculate the applicable interim tax provision
(credit) requires management to make certain estimates, judgments, and assumptions. These
estimates, judgments, and assumptions relied upon are believed to be reasonable based on
information available at the time. To the extent these estimates, judgments, and assumptions differ
from that which actually occurs during the course of the year, the interim tax provision (credit)
can be, and in the past has been, materially affected.
New accounting standards - In February 2007, the Financial Accounting Standards Board (FASB) issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement
provides entities the one-time election (the “fair value option”) to measure financial instruments
and certain other items at fair value. For items for which the fair value option has been elected,
unrealized gains and losses are to be reported in earnings at each subsequent reporting date. SFAS
No. 159 is effective for Sparton’s fiscal year beginning July 1, 2008. The Company does not expect
the adoption of SFAS No. 159 will have a significant impact on its results of operations, financial
position or cash flows.
In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension
and Other Post-retirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). This
Statement is intended to improve financial reporting by requiring an employer to recognize the
overfunded or underfunded status of a defined benefit post-retirement plan as an asset or liability
in its statement of financial position and to recognize changes in that funded status in the year
in which the changes occur through comprehensive income. This Statement requires an employer to
measure the funded status of a plan as of its balance sheet date. Prior accounting standards
required an employer to recognize in its statement of financial position an asset or liability
arising from a defined benefit postretirement plan, which generally differed from the plan’s
overfunded or underfunded status. SFAS No. 158 is effective for Sparton’s fiscal year ending June
30, 2007, except for the change in the measurement date which is effective for Sparton’s fiscal
year ending June 30, 2009. The Company is currently analyzing the expected impact of this new
Statement on its results of operations, financial position and cash flows. The Company expects a
decrease in shareowners’ equity effective June 30, 2007, when SFAS No. 158 is implemented. This
decrease will reflect an amount equal to the difference between the recorded pension asset and the
current funded status as of the implementation date, adjusted for income taxes. These amounts were
$4,421,000 and $965,000, respectively, as of June 30, 2006.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 108 (SAB No. 108) on quantifying financial statement misstatements. In summary, SAB No. 108 was
issued to address the diversity in practice in quantifying financial statement misstatements and
the potential under current practice for the build up of improper amounts on the balance sheet. SAB
No. 108 states that both a balance sheet approach and an income statement approach should be used
when quantifying and evaluating the materiality of a misstatement,
and contains guidance on correcting
9
errors
under this dual approach. SAB No. 108 is effective for Sparton’s annual financial
statements covering our fiscal year ending June 30, 2007. The Company does not expect the adoption
of SAB No. 108 will have a significant impact on its results of operations, financial position or
cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), to
eliminate the diversity in practice that exists due to the different definitions of fair value and
the limited guidance for applying those definitions. SFAS No. 157 defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. SFAS No. 157 is effective for financial
statements issued by Sparton for the first interim period of our fiscal year beginning on July 1,
2008. The Company does not expect the adoption of SFAS No. 157 will have a significant impact on
its results of operations, financial position or cash flows.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN No. 48), an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN No. 48 seeks to
reduce the significant diversity in practice associated with financial statement recognition and
measurement in accounting for income taxes and prescribes a recognition threshold and measurement
attribute for disclosure of tax positions taken or expected to be taken on an income tax return.
This Interpretation is effective for the Company as of July 1, 2007. The Company does not expect
the adoption of FIN No. 48 will have a significant impact on its results of operations, financial
position or cash flows.
In
June 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) on
EITF Issue 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation). The scope of
this Issue includes taxes that are externally imposed on a revenue producing transaction between a
seller and a customer. The EITF concluded that a company should disclose its accounting policy
(i.e., gross or net presentation) regarding the presentation of such taxes. If taxes included in
gross revenues are significant, a company should disclose the amount of such taxes for each period
for which an income statement is presented. The EITF was effective as of the third quarter of
fiscal 2007 and had no impact on the Company’s consolidated financial statements. The Company
records such taxes on a net basis.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement
of APB Opinion No. 20 and SFAS No. 3 (SFAS No. 154). SFAS No. 154 requires retrospective
application to prior periods’ financial statements of a voluntary change in accounting principle
unless it is impracticable. APB Opinion No. 20, Accounting Changes, previously required that most
voluntary changes in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle. This Statement
was effective for the Company as of July 1, 2006, and to date has not had an impact on the manner
of display of its results of operations or financial position.
NOTE 2. INVESTMENT SECURITIES
The investment portfolio has one investment as of March 31, 2007, which has been classified in
cash and cash equivalents on the balance sheet as of that date. A daily market exists for all
investment securities. The Company believes that the impact of fluctuations in interest rates on
its investment portfolio should not have a material impact on its financial position or results of
operations. Those securities are reported at fair value, with net unrealized gains and losses
included in accumulated other comprehensive income (loss), net of applicable taxes. Unrealized
losses that are other than temporary are recognized in earnings. Realized gains and losses on
investments are determined using the specific identification method. These highly liquid
securities are designated as current assets, as it is the Company’s intention to use these
investment securities to provide working capital.
At June 30, 2006, the Company had net unrealized losses of $417,000, on its investment securities
portfolio. At that date, the net after-tax effect of these gains and losses was $284,000, which
amounts were included in accumulated other comprehensive loss within shareowners’ equity. For the
nine months ended March 31, 2007 and 2006, the Company had purchases of investment securities
totaling $0 and $7,053,000 and proceeds from investment securities sales totaling $15,619,000 and
$1,678,000, respectively.
NOTE 3. INVENTORIES AND COSTS OF CONTRACTS IN PROGRESS
Customer orders represent commitments for products to be manufactured for shipment over defined
periods. Raw material inventories are purchased to fulfill these customer requirements. Within
these arrangements, customer demand for products frequently changes, sometimes creating excess
and/or obsolete inventories. When it is determined that the Company’s carrying cost of such excess
and obsolete inventories cannot be recovered in full, a charge is taken against income and a
valuation allowance is established for the difference between the carrying cost and the estimated
realizable amount. Conversely, should the disposition of adjusted excess and obsolete inventories
result in recoveries in excess of these reduced carrying values, the remaining portion of the
valuation allowances are reversed and taken into income when such determinations are made. It is
10
possible that the Company’s financial position, results of operations and cash flows could be
materially affected by changes to inventory valuation allowances for excess and obsolete
inventories. These valuation allowances totaled $2,703,000 and $3,529,000 at March 31, 2007 and
June 30, 2006, respectively.
Inventories are valued at the lower of cost (first-in, first-out basis) or market and include costs
related to long-term contracts. Inventories, other than contract costs, are principally raw
materials and supplies. The following are the approximate major
classifications of inventory, net of
valuation allowances, at each balance sheet date:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, 2007 |
|
|
June 30, 2006 |
|
Raw materials |
|
$ |
34,607,000 |
|
|
$ |
29,388,000 |
|
Work in process and finished goods |
|
|
18,345,000 |
|
|
|
17,504,000 |
|
|
|
|
|
|
|
|
|
|
$ |
52,952,000 |
|
|
$ |
46,892,000 |
|
|
|
|
|
|
|
|
Work in process and finished goods inventories include $4.1 million and $4.5 million of completed,
but not yet accepted, sonobuoys at March 31, 2007 and June 30, 2006, respectively. Inventories are
reduced by progress billings to the U.S. government, related to long-term contracts, of
approximately $12.7 million and $10.7 million at March 31, 2007 and June 30, 2006, respectively.
Inventory balances at March 31, 2007 and June 30, 2006, include $14.6 million and $10.0 million of
inventory, respectively, at the Company’s newest subsidiary, SMS, which is comprised of $12.9
million of raw materials and $1.7 million of work in process and finished goods as of March 31,
2007, and $8.9 million of raw materials and $1.1 million of work in process and finished goods as
of June 30, 2006.
NOTE 4. PENSION ASSET
Periodic benefit cost — The Company sponsors a defined benefit pension plan covering certain
salaried and hourly U.S. employees. The components of net periodic pension expense are as follows
for the three and nine months ended March 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Service cost |
|
$ |
124,000 |
|
|
$ |
128,000 |
|
|
$ |
371,000 |
|
|
$ |
410,000 |
|
Interest cost |
|
|
158,000 |
|
|
|
163,000 |
|
|
|
474,000 |
|
|
|
511,000 |
|
Expected return on plan assets |
|
|
(217,000 |
) |
|
|
(227,000 |
) |
|
|
(651,000 |
) |
|
|
(726,000 |
) |
Amortization of prior service cost |
|
|
26,000 |
|
|
|
24,000 |
|
|
|
77,000 |
|
|
|
75,000 |
|
Amortization of net loss |
|
|
34,000 |
|
|
|
49,000 |
|
|
|
102,000 |
|
|
|
141,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
125,000 |
|
|
$ |
137,000 |
|
|
$ |
373,000 |
|
|
$ |
411,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No cash contributions to the plan were required or paid by the Company in either period due to its
overfunded status. Due to the overfunded status of the plan and current actuarial calculations and
assumptions, no additional funding of the defined benefit pension plan is anticipated prior to
fiscal 2008.
NOTE 5. GOODWILL AND OTHER INTANGIBLES
The Company follows SFAS No. 141, Business Combinations (SFAS No. 141), and SFAS No. 142, Goodwill
and Other Intangible Assets (SFAS No. 142). SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also
specifies the criteria applicable to intangible assets acquired in a purchase method business
combination to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but instead be tested
for impairment, at least annually. Cybernet Systems Corporation’s (Cybernet) goodwill is reviewed
for impairment annually, with the next review to occur in the fourth quarter of fiscal 2007.
Goodwill related to the recent Astro purchase will also be reviewed for impairment in the fourth
quarter of fiscal 2007. See “Business Acquisition”, Note 1 of this report, for additional
information on the purchase of Astro, which occurred on May 31, 2006. SFAS No. 142 also requires
that intangible assets with definite useful lives be amortized over their estimated useful lives to
their estimated residual values and be reviewed regularly for impairment. The change in the
carrying amounts of goodwill and amortizable intangibles during the nine months ended March 31,
2007 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Amortizable |
|
|
Total |
|
| |
|
Goodwill |
|
|
Intangibles |
|
|
Intangibles |
|
Beginning balance at July 1, 2006 |
|
$ |
15,744,000 |
|
|
$ |
6,726,000 |
|
|
$ |
22,470,000 |
|
Goodwill additions |
|
|
38,000 |
|
|
|
— |
|
|
|
38,000 |
|
Amortization |
|
|
— |
|
|
|
(362,000 |
) |
|
|
(362,000 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance at March 31, 2007 |
|
$ |
15,782,000 |
|
|
$ |
6,364,000 |
|
|
$ |
22,146,000 |
|
|
|
|
|
|
|
|
|
|
|
There were no changes in the carrying value of goodwill associated with Cybernet during fiscal
2006.
11
Goodwill — Goodwill in the amount of $14,974,000 was recorded upon the Company’s purchase of Astro
Instrumentation, LLC (Astro) in May 2006, with additional goodwill related to acquisition costs of
$38,000 being capitalized during fiscal 2007. In addition, $770,000 of goodwill is related to the
Company’s investment in Cybernet, as more fully described in Note 10 of the Condensed Consolidated
Financial Statements.
Other intangibles — Other intangibles of $6,765,000 were recognized upon the purchase of Astro.
Other intangibles include non-compete agreements of $165,000 and customer relationships of
$6,600,000. These costs are being amortized ratably over 4 years and 15 years, respectively.
Accumulated amortization as of March 31, 2007, totaled $401,000; $34,000 and $367,000 were for the
amortization of non-compete agreements and customer relationships, respectively. Amortization of
intangible assets is estimated to be approximately $481,000 for each of the four years beginning
July 1, 2006, and approximately $440,000 for each of the subsequent 11 years.
NOTE 6. BORROWINGS
Current debt maturities — Short-term debt as of March 31, 2007, includes the current portion of
$2,000,000 of a long-term bank loan, the current portion of $1,773,000 of long-term notes payable,
and the current portion of $96,000 of industrial revenue bonds. Both the bank loan and the notes
payable were incurred as a result of the Company’s purchase of Astro on May 31, 2006, and are due
and payable in equal installments over the next several years as further discussed below. The
Industrial Revenue bonds were assumed at the time of Astro’s purchase and were previously incurred
by Astro.
The Company also has available an unsecured $20,000,000 revolving line-of-credit facility provided
by a local bank to support working capital needs and other general corporate purposes. Interest on
borrowings would be charged using a floating rate of 1.25% plus a base rate determined by
reference to a specified bank index. There have been no drawings against this credit facility.
Long-term debt — Long-term debt, all of which arose in conjunction with the Astro acquisition,
consists of the following obligations at each balance sheet date:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, 2007 |
|
|
June 30, 2006 |
|
Industrial Revenue bonds, face value |
|
$ |
2,404,000 |
|
|
$ |
2,477,000 |
|
Less unamortized purchase discount |
|
|
143,000 |
|
|
|
150,000 |
|
|
|
|
|
|
|
|
Industrial Revenue bonds, carrying value |
|
|
2,261,000 |
|
|
|
2,327,000 |
|
Bank loan |
|
|
8,500,000 |
|
|
|
10,000,000 |
|
Notes payable (to former Astro owners) |
|
|
6,650,000 |
|
|
|
7,500,000 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
17,411,000 |
|
|
|
19,827,000 |
|
Less current portion |
|
|
3,874,000 |
|
|
|
3,816,000 |
|
|
|
|
|
|
|
|
Long-term debt, net of current portion |
|
$ |
13,537,000 |
|
|
$ |
16,011,000 |
|
|
|
|
|
|
|
|
There were no short or long-term debt or other borrowings outstanding as of March 31, 2006, which
was prior to the Astro acquisition.
The Company assumed repayment of principal and interest on bonds originally issued on behalf of
Astro by the State of Ohio. These bonds are Ohio State Economic Development Revenue Bonds, series
2002-4. Astro originally entered into the loan agreement with the State of Ohio for the issuance of
these bonds to finance the construction of Astro’s current operating facility. The principal
amount, including premium, was issued in 2002 and totaled $2,845,000. These bonds have stated
interest rates which vary, dependent on the maturity date of the bonds. Currently the stated annual
rates range from 3.0 to 3.5%. Due to an increase in interest rates since the original issuance of
the bonds, a discount amounting to $151,000 was recorded when assumed.
The bonds carry certain sinking fund requirements generally obligating the Company to deposit
funds into a sinking fund. The sinking fund requires the Company to make monthly deposits of one
twelfth of the annual obligation plus accrued interest. The purchase discount is being amortized
ratably over the remaining term of the bonds. Amortization expense for the three months and nine
months ended March 31, 2007 was approximately $2,000 and $6,000, respectively. The Company has
issued an irrevocable letter of credit in the amount of $284,000 to secure repayment of a portion
of the bonds. A further discussion of borrowings and other information related to the Company’s
purchase of Astro may be found in the Company’s Annual Report on Form 10-K for the fiscal year
ended June 30, 2006.
The bank loan, with an original balance of $10 million, is being repaid over five years, with
quarterly principal payments of $500,000 which commenced September 1, 2006. This loan bears
interest at the variable rate of LIBOR plus 100 basis points, with interest calculated and paid
quarterly along with the principal payment. As of March 31, 2007, this interest rate
12
equaled 6.32%, resulting in accrued interest of approximately $45,000. As a condition of this bank
loan, the Company is subject to certain customary covenants, which become applicable beginning
with the Company’s fiscal year ending June 30, 2007. This debt is not secured.
Two notes payable of $3,750,000 each, totaling $7.5 million, are payable to the sellers of Astro.
These notes are to be repaid over four years, in aggregate semi-annual payments of principal and
interest in the combined amount of $1,057,000 on July 1 and December 1 of each year; such payments
commenced December 1, 2006. These notes each bear interest at 5.5% per annum. The notes are
proportionately secured by the stock of Astro. At March 31, 2007, there was interest of
approximately $122,000 accrued on these notes.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Environmental Remediation
One of Sparton’s former manufacturing facilities, located in Albuquerque, New Mexico (Coors Road),
has been involved with ongoing environmental remediation since the early 1980’s. At March 31,
2007, Sparton has accrued $6,116,000 as its estimate of the minimum future undiscounted financial
liability, of which $532,000 is classified as a current liability and included in accrued
liabilities. The Company’s minimum cost estimate is based upon existing technology and excludes
legal and related consulting costs, which are expensed as incurred. The Company’s estimate
includes equipment, operating, and continued monitoring costs for onsite and offsite pump and
treat containment systems, as well as periodic reporting requirements.
In fiscal 2003, Sparton reached an agreement with the United States Department of Energy (DOE) and
others to recover certain remediation costs. Under the settlement terms, Sparton received cash and
the DOE agreed to reimburse Sparton for 37.5% of certain future environmental expenses in excess
of $8,400,000 incurred from the date of settlement. Uncertainties associated with environmental
remediation contingencies are pervasive and often result in wide ranges of reasonably possible
outcomes. Estimates developed in the early stages of remediation can vary significantly. Normally
a finite estimate of cost does not become fixed and determinable at a specific point in time.
Rather, the costs associated with environmental remediation become estimable over a continuum of
events and activities that help to frame and define a liability. Factors which cause uncertainties
for the Company include, but are not limited to, the effectiveness of the current work plans in
achieving targeted results and proposals of regulatory agencies for desired methods and outcomes.
It is possible that cash flows and results of operations could be significantly affected by the
impact of changes associated with the ultimate resolution of this contingency.
Customer Relationships
In September 2002, Sparton Technology, Inc. (STI) filed an action in the U.S. District Court for the
Eastern District of Michigan to recover certain unreimbursed costs incurred as a result of a
manufacturing relationship with two entities, Util-Link, LLC (Util-Link) of Delaware and National
Rural Telecommunications Cooperative (NRTC) of the District of Columbia. On or about October 21,
2002, the defendants filed a counterclaim seeking money damages alleging that STI breached its
duties in the manufacture of products for the defendants.
A jury trial was concluded on November 9, 2005. The jury did not grant any relief to the
defendents on their counter claims, which was affirmed by the trial court. The jury awarded
Sparton damages in the amount of $3.6 million, of which approximately $1.9 million represented
costs related to the acquisition of raw materials. These costs were previously deferred and are
included in other long-term assets on the Company’s March 31, 2007 and June 30, 2006 balance
sheets. As a result of post trial proceedings, the judgment in Sparton’s favor was reduced to $1.9
million, which would enable the Company to recover the deferred costs and, accordingly, there
would be no significant impact on operating results. An amended judgment was entered for $1.9
million in Sparton’s favor on April 5, 2006. On May 1, 2006, NRTC filed an appeal of the judgment
with the U.S. Court of Appeals for the Sixth Circuit.
The Company has pending an action before the U.S. Court of Federal Claims to recover damages
arising out of an alleged infringement by the U.S. Navy of certain patents owned by Sparton and
used in the production of sonobuoys. The case was dismissed on summary judgment; however, the
decision of the U.S. Court of Federal Claims was reversed by the U.S. Court of Appeals for the
Federal Circuit. The case is expected to be scheduled for trial in 2007. The likelihood that the
claim will be resolved and the extent of any recovery in favor of the Company is unknown at this
time.
13
Product Issues
Some of the printed circuit boards supplied to the Company for its aerospace sales have been
discovered to be nonconforming and defective. The defect occurred during production at the raw
board supplier’s facility, prior to shipment to Sparton for further processing. Sparton and our
customer, who received the defective assembled boards, have contained the defective boards. While
investigations are underway, $2.9 million of related product and associated expenses have been
classified in Sparton’s balance sheet within other long-term assets as of March 31, 2007 and June
30, 2006. In August 2005, Sparton Electronics Florida, Inc. filed an action in U.S. District Court
of Florida against Electropac Co., Inc. and a related company (the raw board manufacturer) to
recover these costs. The likelihood that the claim will be resolved and the extent of Sparton’s
recovery, if any, is unknown at this time. No loss contingency has been established at March 31,
2007.
NOTE 8. STOCK OPTIONS
As of July 1, 2005, SFAS No. 123(R), Share-Based Payment, became effective for the Company. Under
SFAS No. 123(R), compensation expense has been recognized for all periods presented in the
Company’s interim financial statements. Share-based compensation cost is measured on the grant
date, based on the fair value of the award calculated at that date, and is recognized over the
employee’s requisite service period, which generally is the options’ vesting period. Fair value is
calculated using the Black-Scholes option pricing model.
The Company has an incentive stock option plan under which 970,161 authorized and unissued common
shares, which includes 760,000 original shares adjusted by 210,161 shares for the subsequent
declaration of stock dividends, were reserved for option grants to key employees and directors at
the fair market value of the Company’s common stock at the date of the grant. Options granted to
date have either a five or ten-year term and become vested and exercisable cumulatively beginning
one year after the grant date, in four equal annual installments. Options may terminate before
their expiration dates if the optionee’s status as an employee is terminated, or upon death.
Employee stock options, which are granted by the Company pursuant to a plan last amended and
restated on October 24, 2001, are structured to qualify as “incentive stock options” (ISOs). Stock
options granted to non-employee directors are non-incentive stock options (NSO’s). Under current
federal income tax regulations, the Company does not receive a tax deduction for the issuance,
exercise or disposition of ISOs if the employee meets certain holding period requirements. If the
employee does not meet the holding period requirement a disqualifying disposition occurs, at which
time the Company can receive a tax deduction. The Company does not record tax benefits related to
ISOs unless and until a disqualifying disposition occurs. In the event of a disqualifying
disposition, the entire tax benefit is recorded as a reduction of income tax expense. In accordance
with SFAS No. 123(R), excess tax benefits (where the tax deduction exceeds the recorded
compensation expense) are credited to “capital in excess of par value” in the consolidated
statement of shareowners’ equity and tax benefit deficiencies (where the recorded compensation
expense exceeds the tax deduction) are charged to “capital in excess of par value” to the extent
previous excess tax benefits exist.
The following table presents share-based compensation expense and related components for the three
months and nine months ended March 31, 2007 and 2006, respectively:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
Nine months ended |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Share-based compensation expense |
|
$ |
54,000 |
|
|
$ |
78,000 |
|
|
$ |
188,000 |
|
|
$ |
253,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related tax benefit |
|
$ |
1,000 |
|
|
$ |
2,000 |
|
|
$ |
23,000 |
|
|
$ |
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
expense impacted basic and
diluted per share amounts by
approximately |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
As of March 31, 2007, unrecognized compensation costs related to nonvested awards amounted to
$484,000 and will be recognized over the remaining weighted average period of approximately 1.63
years.
The following table summarizes additional information about stock options outstanding and
exercisable at March 31, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
|
Options Exercisable |
| Range of |
|
|
|
|
|
Wtd. Avg. Remaining |
|
Wtd. Avg. |
|
|
|
Wtd. Avg. |
| Exercise Prices |
|
Number of shares |
|
Contractual Life (years) |
|
Exercise Price |
|
Number
of
shares |
|
Exercise
Price |
$6.52 to $8.57 |
|
|
316,946 |
|
|
|
5.79 |
|
|
$ |
7.77 |
|
|
|
160,599 |
|
|
$ |
7.14 |
|
14
In general, the Company’s policy is to issue new shares upon the exercise of a stock option. A
summary of option activity under the Company’s stock option plan for the nine months ended March
31, 2007 is presented below. All options presented have been adjusted
to reflect the impact of the
5% common stock dividend declared in October 2006. At March 31, 2007, shares remaining available
for future grant totaled 188,182.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Wtd. Avg. Remaining |
|
|
| |
|
Total Shares |
|
Wtd. Avg. |
|
Contractual |
|
Aggregate |
| |
|
Under Option |
|
Exercise Price |
|
Term (years) |
|
Intrinsic Value |
Outstanding at July 1, 2006 |
|
|
542,924 |
|
|
$ |
6.69 |
|
|
|
3.59 |
|
|
$ |
817,000 |
|
Granted |
|
|
26,250 |
|
|
$ |
8.48 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(234,444 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(17,784 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
316,946 |
|
|
$ |
7.77 |
|
|
|
5.79 |
|
|
$ |
197,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007 |
|
|
160,599 |
|
|
$ |
7.14 |
|
|
|
3.46 |
|
|
$ |
181,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value reflects the difference between an option’s fair value and its
exercise price.
Under SFAS No. 123(R), fair value was estimated at the date of grant using the Black-Scholes
option pricing model and the weighted average assumptions for the 26,250 options (25,000 prior to
the adjustment for the 5% stock dividend declared in October 2006) granted during the first
quarter of fiscal 2007 were as follows:
| |
|
|
|
|
Expected option life |
|
10 years |
Expected volatility |
|
|
32.2 |
% |
Risk-free interest rate |
|
|
4.7 |
% |
Cash dividend yield |
|
|
0.0 |
% |
Weighted average grant date fair value |
|
$ |
4.75 |
|
Black-Scholes assumption information: Expected life is the time until expiration of the
options, which is consistent with the timing of the exercise of options historically experienced
by the Company. The expected volatility is based on a 10-year look-back of average stock prices
which is consistent with the current exercise life of options awarded. Risk free interest rate is
based upon the yield on 10-year treasury notes. Cash dividend yield has been set at zero, as the
Company has not historically declared or paid cash dividends on a regularly scheduled basis.
NOTE 9. EARNINGS (LOSS) PER SHARE
On October 25, 2006, Sparton’s Board of Directors approved a 5% common stock dividend, with a
distribution date of January 19, 2007, to eligible shareowners of record on December 27, 2006. To
record the stock dividend, an amount equal to the fair market value of the common shares issued was
transferred from retained earnings to common stock and capital in excess of par value, with the
balance $1,977 paid in cash in January 2007, in lieu of fractional shares of stock. All share and
per share information for fiscal 2007 and 2006 has been adjusted to
reflect the impact of all stock
dividends declared for the periods shown.
Due to the Company’s interim reported net losses for the three months and nine months ended March
31, 2007, and the nine months ended March 31, 2006, all options outstanding were excluded from the
computation of diluted earnings per share for those periods, as their inclusion would have been
anti-dilutive.
Basic and diluted earnings (loss) per share for the three and nine months ended March 31, 2007 and
2006 were computed based on the following shares outstanding:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Weighted average shares outstanding |
|
|
9,798,902 |
|
|
|
9,788,779 |
|
|
|
9,822,999 |
|
|
|
9,786,190 |
|
Effect of dilutive stock options |
|
|
— |
|
|
|
41,132 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
9,798,902 |
|
|
|
9,829,911 |
|
|
|
9,822,999 |
|
|
|
9,786,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic and diluted earnings (loss) per share |
|
$ |
(0.23 |
) |
|
$ |
0.07 |
|
|
$ |
(0.62 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) as well as unrealized gains and losses, net
of income tax, on investment securities owned and investment securities held by an investee
accounted for by the equity method, which are
15
excluded from net income. Unrealized gains and losses, net of tax, are excluded from net income
(loss), but are reflected as a direct charge or credit to shareowners’ equity. Comprehensive income
(loss) and the related components are disclosed in the accompanying consolidated statements of
shareowners’ equity. Comprehensive loss is summarized as follows for the three months and nine
months ended March 31, 2007 and 2006, respectively:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income (loss) |
|
$ |
(2,294,000 |
) |
|
$ |
727,000 |
|
|
$ |
(6,135,000 |
) |
|
$ |
(370,000 |
) |
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities owned |
|
|
— |
|
|
|
(48,000 |
) |
|
|
284,000 |
|
|
|
(208,000 |
) |
Investment securities held by investee accounted for
by the equity method |
|
|
(24,000 |
) |
|
|
26,000 |
|
|
|
26,000 |
|
|
|
82,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,000 |
) |
|
|
(22,000 |
) |
|
|
310,000 |
|
|
|
(126,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(2,318,000 |
) |
|
$ |
705,000 |
|
|
$ |
(5,825,000 |
) |
|
$ |
(496,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2007 and June 30, 2006, shareowners’ equity includes accumulated other comprehensive
income (loss) of $45,000 and ($265,000), respectively, net of tax. The components of these amounts
at those dates are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, 2007 |
|
|
June 30, 2006 |
|
Accumulated other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
Investment securities owned |
|
$ |
— |
|
|
$ |
(284,000 |
) |
Investment securities held by investee accounted for by the equity method |
|
|
45,000 |
|
|
|
19,000 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
$ |
45,000 |
|
|
$ |
(265,000 |
) |
|
|
|
|
|
|
|
In June 1999, the Company purchased a 14% interest (12% on a fully diluted basis) in Cybernet for
$3,000,000. Cybernet is a developer of hardware, software, next-generation network computing, and
robotics products. It is located in Ann Arbor, Michigan. The investment is accounted for under the
equity method and is included in other assets and goodwill on the balance sheet. At March 31, 2007
and June 30, 2006, the Company’s investment in Cybernet amounted to $1,783,000 and $1,645,000,
respectively, representing its equity interest in Cybernet’s net assets plus $770,000 of goodwill.
The Company believes that the equity method is appropriate given Sparton’s level of involvement in
Cybernet. Prior to June 2002, Sparton accounted for its Cybernet investment using the cost method,
which reflected a more passive involvement with Cybernet’s operations. Sparton’s current President
and CEO is one of three Cybernet Board members, and as part of that position is actively involved
in Cybernet’s oversight and operations. In addition, he has a strategic management relationship
with the owners, who are also the other two board members, resulting in his additional involvement
in pursuing areas of common interest for both Cybernet and Sparton. The use of the equity method
requires Sparton to record its share of Cybernet’s income or loss in earnings (“Equity income/loss
in investment”) in Sparton’s income statements with a corresponding increase or decrease in the
investment account (“Other assets”) in Sparton’s balance sheets. In addition, Sparton’s share of
unrealized gains (losses) on available-for-sale securities held by Cybernet, is carried in
accumulated other comprehensive income (loss) within the shareowners’ equity section of Sparton’s
balance sheets. The unrealized gains (losses) on
available-for-sale securities reflect Cybernet’s
investment in Immersion Corporation, a publicly traded company, as well as other investments.
NOTE 11. PLANT CLOSURE
On January 8, 2007, Sparton announced its commitment to close the Deming, New Mexico facility of
Sparton Technology, Inc., a wholly-owned subsidiary of Sparton Corporation. The Deming facility
produced wire harnesses for buses and provided intercompany production support for other Sparton
locations. The closure of this plant was completed by March 31, 2007. The Deming wire harness
production was discontinued, and the intercompany production support relocated to other Sparton
facilities. The following is a summary of net sales and gross profit (loss) for the harness
product line only for the three months and nine months ended March 31, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
265,000 |
|
|
$ |
880,000 |
|
|
$ |
900,000 |
|
|
$ |
2,644,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross profit (loss) |
|
$ |
(91,000 |
) |
|
$ |
63,000 |
|
|
$ |
(146,000 |
) |
|
$ |
104,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During each of the past five fiscal years ended June 30, 2006, wire harness sales represented
approximately 2% or less of Sparton’s consolidated net sales. Accordingly, the discontinuance of
this product line will not be expected to have a significant impact on Sparton’s annual sales or
gross profit results. During the quarter ended March 31, 2007, the Company
16
incurred operating charges associated with employee severance costs of approximately $259,000,
which are included in cost of goods sold, of which approximately $28,000 was paid as of March 31,
2007.
The land, building, and majority of other Deming assets are in the process of being sold, with some
of the equipment located at the Deming facility having been relocated to other Sparton facilities,
primarily in Florida, for their use in ongoing production activities. The property, plant, and
equipment of the Deming facility was almost fully depreciated, with the ultimate sale of this
facility anticipated to be completed at a gain. An agreement for the sale of the Deming land,
building, equipment and applicable inventory was signed the end of March 2007. The sale involves
several separate transactions. The sale of the inventory and equipment for $200,000 was completed
on March 30, 2007. The sale of the land and building for $1,000,000 is scheduled to close on or
before June 29, 2007. During the interim period the purchaser is leasing the real property. Net
value of the land and building to be sold is included in prepaid expenses and other current assets
in the balance sheet as of March 31, 2007. An expected net gain of approximately $850,000 on the
sales of all of these assets will be recognized entirely in the fourth quarter of fiscal 2007 upon
closing of the real estate transaction.
As of March 31, 2007, the following assets and liabilities of the Deming facility were included in
the condensed consolidated balance sheet:
| |
|
|
|
|
Current assets — net of assets held for sale |
|
$ |
447,000 |
|
Property and plant (net), held for sale |
|
|
29,000 |
|
|
|
|
|
Total assets (all current) |
|
$ |
476,000 |
|
|
|
|
|
| |
Liabilities (all current) |
|
$ |
399,000 |
|
|
|
|
|
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of certain significant events affecting the
Company’s earnings and financial condition during the periods included in the accompanying
financial statements. Additional information regarding the Company can be accessed via Sparton’s
website at www.sparton.com. Information provided at the website includes, among other items, the
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Quarterly Earnings Releases, News
Releases, and the Code of Ethics, as well as various corporate charters. The Company’s operations
are in one line of business, electronic manufacturing services (EMS). Sparton’s capabilities range
from product design and development through aftermarket support, specializing in total business
solutions for government, medical/scientific instrumentation, aerospace and industrial markets.
This includes the design, development and/or manufacture of electronic parts and assemblies for
both government and commercial customers worldwide. Governmental sales are mainly sonobuoys. On May
31, 2006, the Company acquired Astro Instrumentation, LLC (now known as Sparton Medical Systems,
Inc.) a provider of electrical manufacturing medical device systems and engineering services.
Results of operations reflect operations of Sparton Medical Systems beginning June 1, 2006.
The Private Securities Litigation Reform Act of 1995 reflects Congress’ determination that the
disclosure of forward-looking information is desirable for investors and encourages such disclosure
by providing a safe harbor for forward-looking statements by corporate management. This report on
Form 10-Q contains forward-looking statements within the scope of the Securities Act of 1933 and
the Securities Exchange Act of 1934. The words “expects,” “anticipates,” “believes,” “intends,”
“plans,” “will,” “shall,” and similar expressions, and the negatives of such expressions, are
intended to identify forward-looking statements. In addition, any statements which refer to
expectations, projections or other characterizations of future events or circumstances are
forward-looking statements. The Company undertakes no obligation to publicly disclose any revisions
to these forward-looking statements to reflect events or
circumstances occurring subsequent to filing
this Form 10-Q with the Securities and Exchange Commission (SEC). These forward-looking statements
are subject to risks and uncertainties, including, without limitation, those discussed below.
Accordingly, Sparton’s future results may differ materially from historical results or from those
discussed or implied by these forward-looking statements. The Company notes that a variety of
factors could cause the actual results to differ materially from anticipated results or other
expectations expressed in the Company’s forward-looking statements.
Sparton, as a high-mix, low to medium-volume supplier, provides rapid product turnaround for
customers. High-mix describes customers needing multiple product types with generally low volume
manufacturing runs. As a contract manufacturer with customers in a variety of markets, the Company
has substantially less visibility of end user demand and, therefore, forecasting sales can be
problematic. Customers may cancel their orders, change production quantities and/or reschedule
production for a number of reasons. Depressed economic conditions may result in customers delaying
delivery of product, or the placement of purchase orders for lower volumes than previously
anticipated. Unplanned cancellations, reductions, or delays by customers may negatively impact the
Company’s results of operations. As many of the Company’s costs and operating expenses are
relatively fixed within given ranges of production, a reduction in customer demand can
disproportionately affect the Company’s gross margins and operating income. The majority of the
Company’s sales have historically come from a limited number of customers. Significant reductions
in sales to, or a loss of, one of these customers could materially impact business if the Company
were not able to replace those sales with new business.
Other risks and uncertainties that may affect operations, performance, growth forecasts and
business results include, but are not limited to, timing and fluctuations in U.S. and/or world
economies, competition in the overall EMS business, availability of production labor and management
services under terms acceptable to the Company, Congressional budget outlays for sonobuoy
development and production, Congressional legislation, foreign currency exchange rate risk,
uncertainties associated with the costs and benefits of new facilities, including the Company’s
plant in Vietnam and the Company’s newest subsidiary Sparton Medical Systems, and the closing of
others, uncertainties associated with the outcome of litigation, changes in the interpretation of
environmental laws and the uncertainties of environmental remediation, and uncertainties related to
defects discovered in certain of the Company’s aerospace circuit boards. Other risk factors are
related to the availability and cost of materials used in the manufacture of its products. A number
of events can impact these risks and uncertainties, including potential escalating utility and
other related costs due to natural disasters, as well as political uncertainties such as the
conflict in Iraq. The Company has encountered (and is currently beginning to experience again)
availability and extended lead time issues on some electronic components due to strong market
demand; this resulted in higher prices and late deliveries. Additionally, the timing of sonobuoy
sales to the U.S. Navy is dependent upon access to the test range and successful passage of product
tests performed by the U.S. Navy. Reduced governmental budgets have made access to the test range
less predictable and less frequent than in the past. Finally, the Sarbanes-Oxley Act of 2002
required changes in, and formalization of, some of the Company’s corporate governance and
compliance practices. The SEC and New York Stock Exchange (NYSE) also passed rules and regulations
requiring additional compliance activities. Compliance with these rules has increased
administrative costs, and it is expected that certain of these costs will
18
continue indefinitely. For a further discussion of the Company’s risk factors refer to Part II,
Item 1(a), Risk Factors, of the Company’s Annual Report on Form 10-K for the fiscal year ended
June 30, 2006. Management cautions readers not to place undue reliance on forward-looking
statements, which are subject to influence by the enumerated risk factors as well as unanticipated
future events.
The following discussion should be read in conjunction with the Condensed Consolidated Financial
Statements and Notes thereto included in this report.
RESULTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended March 31: |
|
| CURRENT QUARTER |
|
2007 |
|
|
2006 |
|
|
|
|
| MARKET |
|
Sales |
|
|
% of Total |
|
|
Sales |
|
|
% of Total |
|
|
% Change |
|
Medical/Scientific Instrumentation |
|
$ |
14,891,000 |
|
|
|
31.2 |
% |
|
$ |
3,840,000 |
|
| |
8.5 |
% |
|
|
287.8 |
% |
Aerospace |
|
|
13,441,000 |
|
|
|
28.2 |
|
|
|
14,531,000 |
|
|
|
32.1 |
|
|
|
(7.5 |
) |
Industrial/Other |
|
|
12,293,000 |
|
|
|
25.8 |
|
|
|
16,147,000 |
|
|
|
35.6 |
|
|
|
(23.9 |
) |
Government |
|
|
7,101,000 |
|
|
|
14.8 |
|
|
|
10,785,000 |
|
|
|
23.8 |
|
|
|
(34.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
47,726,000 |
|
|
|
100.0 |
% |
|
$ |
45,303,000 |
|
|
|
100.0 |
% |
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales for the three months ended March 31, 2007, totaled $47,726,000, an increase of $2,423,000
(5.3%) from the same quarter last year. Medical/scientific instrumentation sales increased $11.1
million from the same quarter last year. This increase in sales was entirely due to the inclusion
of sales of the Company’s newest subsidiary, Sparton Medical Systems Inc. (SMS), which totaled
approximately $12.3 million. Aerospace and industrial/other sales for the quarter were both below
the prior year. Both aerospace and industrial/other sales were lower than expected due to
significant delays in new program start-ups and lower sales to existing customers. Government
sales continue to be below the prior year as design and rework issues have slowed production and
testing of sonobuoys.
The following table presents income statement data as a percentage of net sales for the three
months ended March 31, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs of goods sold |
|
|
98.5 |
|
|
|
89.5 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
1.5 |
|
|
|
10.5 |
|
Selling and administrative expenses |
|
|
8.9 |
|
|
|
8.7 |
|
Other operating expenses — net |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(7.7 |
) |
|
|
1.7 |
|
Other income (expense) — net |
|
|
(0.2 |
) |
|
|
0.7 |
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(7.9 |
) |
|
|
2.4 |
|
Provision (credit) for income taxes |
|
|
(3.1 |
) |
|
|
0.8 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(4.8 |
)% |
|
|
1.6 |
% |
|
|
|
|
|
|
|
An operating loss of $3,690,000 was reported for the three months ended March 31, 2007, versus
an operating profit of $785,000 for the three months ended March 31, 2006. The gross profit
percentage for the three months ended March 31, 2007, was 1.5%, a decrease from 10.5% for the same
period last year. Gross profit varies from period to period and can be affected by a number of
factors, including product mix, production efficiencies, capacity utilization, and new product
introduction, all of which impacted the current quarter’s performance. The primary reason for the
reduction in gross profit from the prior year was the cost impact of design and rework issues on
sonobuoy production. During the quarter, there were approximately $5.6 million of sonobuoy sales
with no or minimal margin. In addition, reflected in gross profit for the three months ended March
31, 2007 and 2006 were charges of $121,000 and $234,000, respectively, from changes in estimates,
primarily related to design and production issues on certain sonobuoy programs. The programs are
loss contracts and the Company recognized the entire estimated losses or any change in the
estimated loss as of March 31, 2007 and 2006. As a result of design and quality issues, government
margins for the remainder of fiscal 2007 will continue to be adversely impacted. Since September
2006, however, the majority of the sonobuoy drop tests have been successful. While the Company’s
margins continue to be affected by the loss contracts, as described above, the sonobuoys related to
these loss contracts are expected to ship by the end of May 2007. As of March 31, 2007, the sales
backlog of government contracts with no or minimal margins was approximately $16.9 million. Gross
margin was further adversely impacted from the
19
prior year by reduced margins on sales to one aerospace customer, resulting in approximately $2.9
million of sales with no margin compared to similar sales with approximately $256,000 of margin in
the same period last year. The related issues are being addressed and, if successful, margins for
this customer are expected to return to more historical levels within the next twelve months. In
addition, competitive pricing issues related to one industrial customer resulted in reduced margins
by approximately $391,000 on similar sales in the prior period. These lower margins are expected to
continue. Included in our results for the three months ended March 31, 2007 and 2006 were results
from the Company’s Vietnam facility, the start-up of which has negatively impacted gross profit by
$520,000 and $589,000, respectively. We expect our Vietnamese operation results to improve during
the next fiscal year, achieving breakeven levels on a monthly basis during fiscal 2008, the timing
of which depends on when new program start-ups occur.
Selling and administrative expenses for the three months ending March 31, 2007 have increased
primarily as a result of the inclusion of those related to Sparton Medical Systems, as well as
minor increases in various categories, such as wages, employee benefits, insurance, litigation and
other items. Beginning in fiscal 2006, the Company was required to expense the vested portion of
the fair value of stock options. For the quarters ended March 31, 2007 and 2006, $44,000 (or 81%)
and $68,000 (or 87%) of the total $54,000 and $78,000, respectively, of share-based compensation
expense was included in selling and administrative expenses, with the balance refected in costs of
goods sold. Results for the quarter ended March 31, 2007, also included $120,000 of expense related
to the amortization of purchased intangibles identified in the Sparton Medical Systems acquisition;
for a further discussion, see Note 5 of the Condensed Consolidated Financial Statements.
Interest and investment income decreased from the prior year, as a result of decreased funds
available for investment. Interest expense of $206,000, net of capitalized interest, was primarily
due to the debt incurred and assumed as part of the acquisition of Sparton Medical Systems. A
further discussion of debt is contained in Note 6 of the Condensed Consolidated Financial
Statements.
Other expense-net in the third quarter of fiscal 2007 was $24,000, versus $11,000 in fiscal 2006.
Translation adjustments, along with gains and losses from foreign currency transactions, in the
aggregate, amounted to a loss of $36,000 and $12,000 for the three months ended March 31, 2007 and
2006, respectively, which was included in other income (expense) for fiscal 2007 and 2006,
respectively.
Due to the factors described above, the Company reported a net loss of $2,294,000 ($(0.23) per
share, basic and diluted) for the three months ended March 31, 2007, versus net income of $727,000
($0.07 per share basic and diluted) for the corresponding period last year.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine months ended March 31: |
|
|
|
|
|
| YEAR TO DATE |
|
2007 |
|
|
2006 |
|
|
|
|
| MARKET |
|
Sales |
|
|
% of Total |
|
|
Sales |
|
|
% of Total |
|
|
% Change |
|
Medical/Scientific Instrumentation |
|
$ |
45,707,000 |
|
|
|
30.7 |
% |
|
$ |
10,537,000 |
|
|
|
8.7 |
% |
|
|
333.8 |
% |
Aerospace |
|
|
42,187,000 |
|
|
|
28.3 |
|
|
|
38,363,000 |
|
|
|
31.9 |
|
|
|
10.0 |
|
Industrial/Other |
|
|
41,827,000 |
|
|
|
28.0 |
|
|
|
43,513,000 |
|
|
|
36.2 |
|
|
|
(3.9 |
) |
Government |
|
|
19,378,000 |
|
|
|
13.0 |
|
|
|
27,889,000 |
|
|
|
23.2 |
|
|
|
(30.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
149,099,000 |
|
|
|
100.0 |
% |
|
$ |
120,302,000 |
|
|
|
100.0 |
% |
|
|
23.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales for the nine months ended March 31, 2007, totaled $149,099,000, an increase of
$28,797,000 (23.9%) from the same period last year. Medical/scientific instrumentation sales
increased $35.2 million from the same period last year. This increase in sales was entirely due to
the inclusion of the Company’s newest subsidiary, Sparton Medical Systems, which had sales totaling
approximately $36.4 million. Aerospace sales also increased compared to the prior year. Additional
aerospace sales were primarily from two existing customers, whose combined sales increased
approximately $7.0 million from the same period last year. Industrial/Other sales decreased
slightly from the prior year as sales to one existing customer declined. The on-going level of
these sales is uncertain due to a reorganization at this customer. Government sales were below the
prior year primarily due to production delays for design and rework caused by test failures earlier
this fiscal year. While sales are below expectation, recent sonobuoy test results have improved.
The majority of the Company’s sales come from a small number of key strategic and large OEM
customers. Sales to the six largest customers, including government sales (separately disclosed
above), accounted for approximately 72% and 78% of net sales for the first nine months of fiscal
2007 and 2006, respectively. Four of the customers, including government, were the same both years.
Bally, an industrial customer, accounted for 12% and 22% of total sales; additionally, an aerospace
customer, Honeywell, with several facilities to which the company supplies product, provided 18%
and 19% of total sales for the nine months ended March 31, 2007 and 2006, respectively. Siemens
Diagnostics (formerly Bayer),
20
a key medical device customer of Sparton Medical Systems, contributed 19% of total sales during the
nine months ended March 31, 2007.
The following table presents income statement data as a percentage of net sales for the nine months
ended March 31, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs of goods sold |
|
|
96.7 |
|
|
|
91.6 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
3.3 |
|
|
|
8.4 |
|
Selling and administrative expenses |
|
|
8.7 |
|
|
|
9.7 |
|
Other operating (income) expenses — net |
|
|
0.0 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
Operating loss |
|
|
(5.4 |
) |
|
|
(1.4 |
) |
Other income (expense) — net |
|
|
(0.6 |
) |
|
|
0.9 |
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(6.0 |
) |
|
|
(0.5 |
) |
Credit for income taxes |
|
|
(1.9 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
Net loss |
|
|
(4.1 |
)% |
|
|
(0.3 |
)% |
|
|
|
|
|
|
|
An operating loss of $8,029,000 was reported for the nine months ended March 31, 2007,
compared to a loss of $1,633,000 for the nine months ended March 31, 2006. The gross profit
percentage for the nine months ended March 31, 2007, was 3.3%, a decrease from 8.4% for the same
period last year. Gross profit varies from period to period and can be affected by a number of
factors, including product mix, production efficiencies, capacity utilization, and new product
introduction and the related production delays. The primary reason for the reduction in gross
profit from the prior year was the cost impact of design or rework issues on sonobuoy production
due to failed sonobuoy drop tests earlier this year. Year to date, there were approximately $14.9
million of sonobuoy sales with no or minimal margin. Reflected in gross profit for the nine months
ended March 31, 2007 and 2006 were charges of $2,031,000 and $886,000, respectively, from changes
in estimates, primarily related to design and production issues on certain sonobuoy programs. The
programs are loss contracts and the Company recognized the entire estimated losses, or changes in
estimated losses, as of March 31, 2007 and 2006. With the additional rework and design changes,
government margins for the remainder of fiscal 2007 are anticipated to be adversely impacted. As of
March 31, 2007, the sales backlog of government contracts with no or minimal margins was
approximately $16.9 million. The majority of these sonobuoys are anticipated to ship in fiscal
2007. Gross margins were further adversely impacted compared to the prior year by reduced margins
from one aerospace customer. These reduced margins resulted in approximately $694,000 of lower
gross profit than in the prior period on similar sales. The related issues are being addressed and,
if successful, margins for this customer are expected to return to more historical levels within
the next twelve months. In addition, competitive pricing issues related to one industrial customer
resulted in reduced margins by approximately $1.1 million on similar sales in the prior period. The
lower margins associated with this industrial customer are expected to continue. Included in the
nine months ended March 31, 2007 and 2006 were results from the Company’s Vietnam facility, the
start-up of which has adversely impacted gross profit by $1,205,000 and $1,275,000, respectively.
We expect our Vietnamese operation results to improve during our next fiscal year, achieving
breakeven levels on a monthly basis during fiscal 2008, the timing of which depends on several new
program start-ups.
Selling and administrative expenses for the nine months ended March 31, 2007 have increased
primarily as a result the inclusion of those related to Sparton Medical Systems, as well as minor
increases in various categories, such as wages, employee benefits, insurance, litigation, and other
items. Beginning in fiscal 2006, the Company was required to expense the vested portion of the fair
value of stock options. For the nine months ended March 31, 2007 and 2006, $158,000 (or 84%) and
$211,000 (or 83%) of the total $188,000 and $253,000, respectively, of share-based compensation
expense was included in selling and administrative expenses, with the
balance reflected in costs of
goods sold. Included in EPA related-net of environmental remediation is a one-time $225,000
insurance settlement received in October 2006. Results for the nine months ended March 31, 2007,
also included $362,000 of amortization expense related to the purchase of Astro under the purchase
accounting rules; for a further discussion, see Note 5 of the Condensed Consolidated Financial
Statements.
Interest and investment income decreased from the prior year, mainly due to decreased funds
available for investment and a loss from sale of investment securities. Substantially all of the
Company’s investment securities portfolio was liquidated during the nine months ended March 31,
2007, primarily to fund the operating loss, additions to property, plant and equipment, repayment
of debt, and repurchases of common stock. Interest expense of $794,000, net of capitalized
interest, was primarily due to the debt incurred and assumed as part of the acquisition of Sparton
Medical Systems. A further discussion of debt is contained in Note 6 of the Condensed Consolidated
Financial Statements.
21
Other expense-net for the nine months ended March 31, 2007 was $284,000, versus other income-net of
$266,000 in fiscal 2006. Translation adjustments, along with gains and losses from foreign currency
transactions, in the aggregate, amounted to a loss of $297,000 and a gain of $267,000 for the nine
months ended March 31, 2007 and 2006, respectively, which was included in other income (expense).
The effective tax rate utilized to calculate the applicable tax provision (credit) requires
management to make certain estimates, judgments, and assumptions. These estimates, judgments, and
assumptions are believed to be reasonable based on information available at that time. To the
extent these estimates, judgments, and assumptions differ from that which actually occurs during
the course of the year, the interim tax provision (credit) can be, and in the past has been,
materially affected. As a result of the change in fiscal 2007’s estimated effective tax rates
(first quarter 32%, second quarter 25%) to the year-to-date period’s 31%, approximately $307,000 of
the $2,757,000 tax benefit was recognized in the quarter ended March 31, 2007, that related to the
previous six months ended December 31, 2006.
Due to the factors described above, the Company reported a net loss of $6,135,000 ($0.62 per share,
basic and diluted) for the nine months ended March 31, 2007, versus a net loss of $370,000 ($0.04
per share, basic and diluted) for the corresponding period last year.
22
LIQUIDITY AND CAPITAL RESOURCES
The primary source of liquidity and capital resources has historically been generated from
operations. Certain government contracts provide for interim progress billings based on costs
incurred. These progress billings reduce the amount of cash that would otherwise be required during
the performance of these contracts. As the volume of U.S. defense-related contract work has
declined over the past several years, so has the relative importance of progress billings as a
liquidity resource. In addition, investments have been used to provide additional working capital.
Growth is expected to be achieved through internal expansion and/or acquisition(s) or joint
venture(s). In addition, the Company’s previously announced $4,000,000 stock repurchase program
utilized a portion of the Company’s investments. Cumulatively through March 31, 2007, approximately
332,000 shares, at a cost of approximately $2.9 million, have been repurchased. These repurchased
shares have been retired.
For the nine months ended March 31, 2007, cash and cash equivalents decreased $2,557,000 to
$4,946,000. Operating activities used $13,339,000 in fiscal 2007 and provided $7,627,000 in net
cash flows in fiscal 2006. The primary use of cash in fiscal 2007 was for operations combined with
an increase in inventory and a decrease in accounts payable and accrued liabilities. The increase
in inventory is due to build up related to new customer contracts, as well as the delay in some
customers’ schedules. The decrease in accounts payable and accrued liabilities as of March 31,
2007, was primarily due to the timing of payments of accounts payable. The primary source of cash
in fiscal 2006 was the receipt of $5,455,000 in cash from a legal settlement, which was reached in
fiscal 2005. Additionally, the collection of a large amount of accounts receivable attributable to
sales at fiscal 2005 year end contributed to cash in fiscal 2006. The primary use of cash in fiscal
2006 was a reduction in accounts payable and accrued liabilities,
which reflected the payment of
$2.4 million of income taxes payable from fiscal 2005, in addition to the timing of payment for
accounts payable.
Cash flows
provided by investing activities in fiscal 2007 totaled $14,202,000, and was primarily
provided by the proceeds from sale of substantially all of the portfolio of investment securities.
The primary use of cash in fiscal 2007 was the purchase of property, plant and equipment,
principally for the current plant expansion at SMS. In addition, cash received from sale of
investment securities was used for the payment of debt related to the SMS acquisition, as well as
funding the Company’s current operational loss, additions to property, plant and equipment and
repurchases of common stock. Cash flows used by investing activities in fiscal 2006 totaled
$3,278,000, and was primarily used in the purchase of investment securities.
Cash flows used in financing activities were $3,420,000 and $522,000 in fiscal 2007 and 2006,
respectively. The primary uses in fiscal 2007 were the repurchase of the Company’s common stock and
the repayment of debt incurred with the purchase of Astro. Common stock repurchases are further
discussed in Part II, Item 2 of the Condensed Consolidated Financial Statements. The primary use of
cash in fiscal 2006 was for the payment of a $0.10 per share cash dividend. The primary source of
cash in fiscal 2007 and 2006 were the proceeds received from the exercise of stock options.
Historically, the Company’s market risk exposure to foreign currency exchange and interest rates on
third party receivables and payables has not been considered to be material, principally due to
their short-term nature and the minimal amount of receivables and payables designated in foreign
currency. However, due to the strengthened Canadian dollar in recent years, the impact of
transaction and translation gains on intercompany activity and balances has increased. If the
exchange rate were to materially change, the Company’s financial position could be significantly
affected. The Company currently has an unused informal line of credit totaling $20.0 million and a
bank loan totaling $8.5 million as of March 31, 2007. In addition, there are notes payable totaling
$6.7 million as of March 31, 2007, outstanding to the former owners of Astro, as well as industrial
revenue bonds assumed as part of the acquisition of Astro. These borrowings are further discussed
in Note 6 of the Condensed Consolidated Financial Statements.
At March 31, 2007 and June 30, 2006, the aggregate government funded EMS backlog was approximately
$44 million and $41 million, respectively. A majority of the March 31, 2007, backlog is expected to
be realized in the next 12-15 months. Commercial EMS orders are not included in the backlog. The
Company does not believe the amount of commercial activity covered by firm purchase orders is a
meaningful measure of future sales, as such orders may be rescheduled or cancelled without
significant penalty.
The Company signed a membership purchase agreement and completed the acquisition of Astro, now
named Sparton Medical Systems, Inc. (SMS), on May 31, 2006. SMS’s sales volume for the twelve
months ended December 31, 2005, prior to Sparton’s acquisition, was approximately $34 million. The
purchase price was approximately $26.2 million, plus the extinguishment by Sparton at closing of
$4.2 million in seller credit facilities and the assumption of $2.3 million in bonded debt. The
purchase price was funded using a combination of cash, $10.0 million in bank debt, and $7.5 million
in notes payable to SMS’s previous owners. During each of the next four years, additional
contingent consideration may be paid to the previous owners of SMS. This contingent consideration
is equal to 20% of SMS’s earnings before interest and
23
taxes as defined, and if paid will be added to goodwill. SMS is an EMS provider that designs and
manufactures a variety of specialized medical products, generally involving high-quality medical
laboratory test equipment. SMS operated from a 40,000 square foot facility in an industrial park.
A 20,000 square foot addition to the facility was undertaken at the beginning of the fiscal year
and is now complete. The increased manufacturing area, 10,000 square feet of the 20,000 square
foot expansion, is expected to allow for increased sales and greater efficiency. Sparton operates
the business as a wholly-owned subsidiary at its present location and with the current operating
management and staff. A further discussion of the SMS purchase is contained in Notes 9 and 13 to
the Consolidated Financial Statements included in Item 8 of the Company’s Annual Report on Form
10-K for the fiscal year ended June 30, 2006. The Company is continuing a program of identifying
and evaluating potential acquisition candidates in both the defense and medical markets.
Construction of the Company’s Spartronics’ plant in Vietnam was completed and production began in
May 2005. This facility is anticipated to provide increased growth opportunities for the Company,
in current as well as new markets. As the Company has not previously conducted business in this
emerging market, there are many uncertainties and risks inherent in this venture. As with the
Company’s other facilities, the majority of the equipment utilized in production operations is
leased.
During fiscal 2006, a $0.10 per share cash dividend, totaling approximately $889,000, was paid to
shareowners on October 5, 2005. Subsequently in October 2005, the Company declared a 5% stock
dividend. This dividend was distributed January 13, 2006, to shareowners of record on December 21,
2005. On October 25, 2006, the Company declared another 5% stock dividend which was distributed
January 19, 2007, to shareowners of record on December 27, 2006.
At March 31, 2007, the Company had $90,216,000 in shareowners’ equity ($9.21 per share),
$59,038,000 in working capital, and a 3.27:1.00 working capital ratio. The Company believes it has
sufficient liquidity resources for its anticipated needs over the next 12-18 months, unless an
additional business acquisition were to be identified and completed for cash. Such resources may
include the use of our informal line of credit.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Information regarding the Company’s long-term debt obligations, environmental liability payments,
operating lease payments, and other commitments is provided in Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” of the Company’s Annual Report on
Form 10-K for the fiscal year ended June 30, 2006. There have been no material changes in the
nature or amount of the Company’s contractual obligations since June 30, 2006.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our condensed consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP) requires management to make
estimates, judgments and assumptions that affect the amounts reported as assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. Estimates are
regularly evaluated and are based on historical experience and on various other assumptions
believed to be reasonable under the circumstances. Actual results could differ from those
estimates. In many cases, the accounting treatment of a particular
transaction is specifically
dictated by GAAP and does not require management’s judgment in application. There are also areas
in which management’s judgment in selecting among available alternatives would not produce a
materially different result. The Company believes that of its significant accounting policies
discussed in the Notes of the Condensed Consolidated Financial Statements, which are included in
Part I, Item 1 of this report, the following involve a higher degree of judgment and complexity.
Senior management has reviewed these critical accounting policies and related disclosures with
Sparton’s audit committee of the Board of Directors.
Environmental Contingencies
One of Sparton’s former manufacturing facilities, located in Albuquerque, New Mexico (Coors Road),
has been the subject of ongoing investigations and remediation efforts conducted with the
Environmental Protection Agency (EPA) under the Resource Conservation and Recovery Act (RCRA). As
discussed in Note 7 of the Condensed Consolidated Financial Statements included in Part I, Item 1,
Sparton has accrued its estimate of the minimum future non-discounted financial liability. The
estimate was developed using existing technology and excludes legal and related consulting costs.
The minimum cost estimate includes equipment, operating and monitoring costs for both onsite and
offsite remediation. Sparton recognizes legal and consulting services in the periods incurred and
reviews its EPA accrual activity quarterly. Uncertainties associated with environmental remediation
contingencies are pervasive and often result in wide ranges of reasonably possible outcomes. It is
possible that cash flows and results of operations could be materially affected by the impact of
changes in these estimates.
24
Government Contract Cost Estimates
Government production contracts are accounted for based on completed units accepted with respect to
revenue recognition and their estimated average cost per unit with respect to costs. Losses for the
entire amount of the contract are recognized in the period when such losses are determinable.
Significant judgment is exercised in determining estimated total contract costs including, but not
limited to, cost experience to date, estimated length of time to contract completion, costs for
materials, production labor and support services to be expended, and known issues on remaining
units to be completed. In addition, estimated total contract costs can be significantly affected by
changing test routines and procedures, resulting design modifications and production rework from
these changing test routines and procedures, and limited range access for testing these design
modifications and rework solutions. Estimated costs developed in the early stages of contracts can
change, sometimes significantly, as the contracts progress, and events and activities take place.
Changes in estimates can also occur when new designs are initially placed into production. The
Company formally reviews its costs incurred-to-date and estimated costs to complete on all
significant contracts at least quarterly and the resulting revised estimated total contract costs
are reflected in the financial statements. Depending upon the circumstances, it is possible that the
Company’s financial position, results of operations and cash flows could be materially affected by
changes in estimated costs to complete on one or more significant contracts.
Commercial Inventory Valuation Allowances
Inventory valuation allowances for commercial customer inventories require a significant degree of
judgment and are influenced by the Company’s experience to date with both customers and other
markets, prevailing market conditions for raw materials, contractual terms and customers’ ability
to satisfy these obligations, environmental or technological materials obsolescence, changes in
demand for customer products, and other factors resulting in acquiring materials in excess of
customer product demand. Contracts with some commercial customers may be based upon estimated
quantities of product manufactured for shipment over estimated time periods. Raw material
inventories are purchased to fulfill these customer requirements. Within these arrangements,
customer demand for products frequently changes, sometimes creating excess and obsolete
inventories.
The Company regularly reviews raw material inventories by customer for both excess and obsolete
quantities, with adjustments made accordingly. Wherever possible, the Company attempts to recover
its full cost of excess and obsolete inventories from customers or, in some cases, through other
markets. When it is determined that the Company’s carrying cost of such excess and obsolete
inventories cannot be recovered in full, a charge is taken against income and a valuation allowance
is established for the difference between the carrying cost and the estimated realizable amount.
Conversely, should the disposition of adjusted excess and obsolete inventories result in recoveries
in excess of these reduced carrying values, the remaining portion of the valuation allowances are
reversed and taken into income when such determinations are made. It is possible that the Company’s
financial position, results of operations and cash flows could be materially affected by changes to
inventory valuation allowances for commercial customer excess and obsolete inventories.
Allowance for Probable Losses on Receivables
The accounts receivable balance is recorded net of allowances for amounts not expected to be
collected from customers. The allowance is estimated based on historical experience of write-offs,
the level of past due amounts, information known about specific customers with respect to their
ability to make payments, and future expectations of conditions that might impact the
collectibility of accounts. Accounts receivable are generally due under normal trade terms for the
industry. Credit is granted, and credit evaluations are periodically performed, based on a
customer’s financial condition and other factors. Although the Company does not generally require
collateral, cash in advance or letters of credit may be required from customers in certain
circumstances, including some foreign customers. When management determines that it is probable
that an account will not be collected, it is charged against the allowance for probable losses.
The Company reviews the adequacy of its allowance monthly. The allowance for doubtful accounts was
$141,000 and $67,000 at March 31, 2007, and June 30, 2006, respectively. If the financial
condition of customers were to deteriorate, resulting in an impairment of their ability to make
payment, additional allowances may be required. Given the Company’s significant balance of
government receivables and letters of credit from foreign customers, collection risk is considered
minimal. Historically, uncollectible accounts have generally been insignificant and the minimal
allowance is deemed adequate.
Pension Obligations
The Company calculates the cost of providing pension benefits under the provisions of SFAS No. 87,
Employers’ Accounting for Pensions, as amended. The key assumptions required within the provisions
of SFAS No. 87 are used in making these calculations. The most significant of these assumptions is
the discount rate used to value the future obligations and the expected return on pension plan
assets. The discount rate is consistent with market interest rates on high-quality, fixed income
investments. The expected return on assets is based on long-term returns and assets held by the
plan, which is
25
influenced by historical averages. If actual interest rates and returns on plan assets materially
differ from the assumptions, future adjustments to the financial statements would be required.
While changes in these assumptions can have a significant effect on the pension benefit obligation
and the unrecognized gain or loss accounts disclosed in the Notes of the Condensed Consolidated
Financial Statements, the effect of changes in these assumptions is not expected to have the same
relative effect on net periodic pension expense in the near term. While these assumptions may
change in the future based on changes in long-term interest rates and market conditions, there are
no known expected changes in these assumptions as of March 31, 2007. To the extent the assumptions
differ from actual results, as indicated above, there would be a future impact on the financial
statements and operating results. The extent to which these factors will result in future
recognition or acceleration of expense is not determinable at this time as it will depend upon a
number of variables, including trends in interest rates and the actual return on plan assets. No
cash payments are expected to be required prior to fiscal 2008 due to the plan’s overfunded status.
As described in New accounting standards, Note 1 of the Condensed Consolidated Financial
Statements, the implementation of SFAS 158 on June 30, 2007, will result in a reduction of
shareowners’ equity on that date as a result of complying with that statement.
Business Combinations
In accordance with accepted business combination accounting, the Company allocated the purchase
price of its recent SMS acquisition to the tangible and intangible assets acquired and liabilities
assumed based on their estimated fair values. The Company engaged an independent, third-party
appraisal firm to assist management in determining the fair value of certain assets acquired and
liabilities assumed. Such valuations require management to make
significant estimates, judgments and
assumptions, especially with respect to intangible assets.
Management arrived at estimates of fair value based upon assumptions believed to be reasonable.
These estimates are based on historical experience and information obtained from the management of
the acquired business and are inherently uncertain. Critical estimates in valuing certain of the
intangible assets include but are not limited to: future expected
discounted cash flows from
customer relationships and contracts assuming similar product platforms and completed projects; the
acquired company’s market position, as well as assumptions about the period of time the acquired
customer relationships will continue to generate revenue streams; and attrition and discount rates.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such
assumptions, estimates or actual results, particularly with respect to amortization periods
assigned to identifiable intangible assets.
Goodwill and Customer Relationships
The Company currently reviews goodwill associated with its Cybernet investment on an annual basis
for possible impairment. Additionally, the Company will review goodwill and customer relationships,
associated with the recent Astro acquisition (now named Sparton Medical Systems, Inc. (SMS)), for
impairment annually, with the first review to occur in the fourth quarter of fiscal 2007. Possible
impairment of these assets will also be reviewed should events or changes in circumstances indicate
their carrying value may not be recoverable in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. The provisions of SFAS No. 142 require that a two-step impairment test be
performed. In the first step, the Company compares the fair value of each reporting unit to its
carrying value. If the fair value of the reporting unit exceeds the carrying value of the net
assets assigned to the unit, goodwill is considered not impaired and the Company is not required to
perform further testing. If the carrying value of the net assets assigned to the reporting unit
exceeds the fair value of the reporting unit, management will perform the second step of the
impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If
the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company would
record an impairment loss equal to the difference.
Determining the fair value of any reporting entity is judgmental in nature and involves the use of
significant estimates and assumptions. These estimates and assumptions include revenue growth
rates, operating margins used to calculate projected future cash flows, risk-adjusted discount
rates, future economic and market conditions and, if appropriate, determination of appropriate
market comparables. The Company bases its fair value estimates on assumptions believed to be
reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ
from those estimates. In addition, the Company makes certain judgments and assumptions in
allocating shared assets and liabilities to determine the carrying values for each of the Company’s
reporting units. The most recent annual goodwill impairment analysis related to the Company’s
Cybernet investment, which was performed during the fourth quarter of fiscal 2006, did not result
in an impairment charge. The next such goodwill impairment review will be performed in the fourth
quarter of fiscal 2007.
26
OTHER
Litigation
One of Sparton’s facilities, located in Albuquerque, New Mexico, has been the subject of ongoing
investigations conducted with the Environmental Protection Agency (EPA) under the Resource
Conservation and Recovery Act (RCRA). The investigation began in the early 1980’s and involved a
review of onsite and offsite environmental impacts.
At March 31, 2007, Sparton has $6,116,000 accrued as its estimate of the future undiscounted
minimum financial liability with respect to this matter. The Company’s cost estimate is based upon
existing technology and excludes legal and related consulting costs, which are expensed as
incurred, and is anticipated to cover approximately the next 24 years. The Company’s estimate
includes equipment and operating costs for onsite and offsite operations and is based on existing
methodology. Uncertainties associated with environmental remediation contingencies are pervasive
and often result in wide ranges of reasonably possible outcomes. Estimates developed in the early
stages of remediation can vary significantly. Normally, a finite estimate of cost does not become
fixed and determinable at a specific point in time. Rather, the costs associated with environmental
remediation become estimable over a continuum of events and activities that help to frame and
define a liability. It is possible that cash flows and results of operations could be affected
significantly by the impact of the ultimate resolution of this contingency.
Some of the printed circuit boards supplied to the Company for its aerospace sales have been
discovered to be nonconforming and defective. The defect occurred during production at the raw
printed circuit board supplier’s facility, prior to shipment to Sparton for further processing.
Sparton and our customer, who received the defective assembled boards, have contained the defective
boards. While investigations are underway, $2.9 million of related product and associated expenses
have been classified in Sparton’s balance sheet within other long-term assets as of March 31, 2007
and June 30, 2006. In August 2005, Sparton Electronics
Florida, Inc. filed an action in U.S.
District Court of Florida against Electropac Co., Inc. and a related company (the raw board
manufacturer) to recover these costs. The likelihood that the claim will be resolved and the extent
of Sparton’s recovery, if any, is unknown at this time. No loss contingency has been established at
March 31, 2007.
Sparton is currently involved in other legal actions, which are disclosed in Part II, Item 1 —
“Legal Proceedings”, of this report. At this time, the Company is unable to predict the outcome of
these claims.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposure
The Company manufactures its products in the United States, Canada, and Vietnam. Sales are to the
U.S. and Canada, as well as other foreign markets. The Company is potentially subject to foreign
currency exchange rate risk relating to intercompany activity and balances and to receipts from
customers and payments to suppliers in foreign currencies. Also, adjustments related to the
translation of the Company’s Canadian and Vietnamese financial statements into U.S. dollars are
included in current earnings. As a result, the Company’s financial results could be affected by
factors such as changes in foreign currency exchange rates or economic conditions in the domestic
and foreign markets in which the Company operates. However, minimal third party receivables and
payables are denominated in foreign currency and the related market risk exposure is considered to
be immaterial. Historically, foreign currency gains and losses related to intercompany activity and
balances have not been significant. However, due to the strengthened Canadian dollar in recent
years, the impact of transaction and translation gains has increased. If the exchange rate were to
materially change, the Company’s financial position could be significantly affected.
The Company has financial instruments that are subject to interest rate risk, principally long-term
debt associated with the recent SMS acquisition on May 31, 2006. Historically, the Company has not
experienced material gains or losses due to such interest rate changes. Based on the fact that
interest rates were at market values for the debt issued in the recent SMS acquisition, interest
rate risk is not currently considered to be significant.
Item 4. Controls and Procedures
The Company maintains internal control over financial reporting intended to provide reasonable
assurance that all material transactions are executed in accordance with Company authorization, are
properly recorded and reported in the financial statements, and that assets are adequately
safeguarded. The Company also maintains a system of disclosure controls and procedures to ensure
that information required to be disclosed in Company reports, filed or submitted under the
Securities Exchange Act of 1934, is properly reported in the Company’s periodic and other reports.
27
As of March 31, 2007, an evaluation was updated by the Company’s management, including the CEO and
CFO, on the effectiveness of the design and operation of the Company’s disclosure controls and
procedures. Based on that evaluation, the Company’s management, including the CEO and CFO,
concluded that the Company’s disclosure controls and procedures continue to be effective as of
March 31, 2007. There have been no changes in the Company’s internal control over financial
reporting during the last fiscal quarter that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
Various litigation is pending against the Company, in many cases involving ordinary and routine
claims incidental to the business of the Company and in others presenting allegations that are
non-routine.
Environmental Remediation
The Company and its subsidiaries are involved in certain compliance issues with the United States
Environmental Protection Agency (EPA) and various state agencies, including being named as a
potentially responsible party at several sites. Potentially responsible parties (PRPs) can be held
jointly and severally liable for the clean-up costs at any specific site. The Company’s past
experience, however, has indicated that when it has contributed relatively small amounts of
materials or waste to a specific site relative to other PRPs, its ultimate share of any clean-up
costs has been minor. Based upon available information, the Company believes it has contributed
only small amounts to those sites in which it is currently viewed as a PRP.
In
February 1997, several lawsuits were filed against Sparton’s wholly-owned subsidiary, Sparton
Technology, Inc. (STI), alleging that STI’s Coors Road facility presented an imminent and
substantial threat to human health or the environment. On March 3, 2000, a Consent Decree was
entered into, settling the lawsuits. The Consent Decree represents a judicially enforceable
settlement and contains work plans describing remedial activity STI agreed to undertake. The
remediation activities called for by the work plans have been installed and are either completed
or are currently in operation. It is anticipated that ongoing remediation activities will operate
for a period of time during which STI and the regulatory agencies will analyze their
effectiveness. The Company believes that it will take several years before the effectiveness of
the groundwater containment wells can be established. Documentation and research for the
preparation of the initial multi-year report and review are currently underway. If current
remedial operations are deemed ineffective, additional remedies may be imposed at a significantly
increased cost. There is no assurance that additional costs greater than the amount accrued will
not be incurred or that no adverse changes in environmental laws or their interpretation will
occur.
Upon entering into the Consent Decree, the Company reviewed its estimates of the future costs
expected to be incurred in connection with its remediation of the environmental issues associated
with its Coors Road facility over the next 30 years. At March 31, 2007, the undiscounted minimum
accrual for future EPA remediation approximates $6,116,000. The Company’s estimate is based upon
existing technology and current costs have not been discounted. The estimate includes equipment,
operating and maintenance costs for the onsite and offsite pump and treat containment systems, as
well as continued onsite and offsite monitoring. It also includes the required periodic reporting
requirements. This estimate does not include legal and related consulting costs, which are
expensed as incurred.
In 1998, STI commenced litigation in two courts against the United States Department of Energy
(DOE) and others seeking reimbursement of Sparton’s costs incurred in complying with, and
defending against, federal and state environmental requirements with respect to its former Coors
Road manufacturing facility. Sparton also sought to recover costs being incurred by the Company as
part of its continuing remediation at the Coors Road facility. In fiscal 2003, Sparton reached an
agreement with the DOE and others to recover certain remediation costs. Under the agreement,
Sparton was reimbursed a portion of the costs the Company incurred in its investigation and site
remediation efforts at the Coors Road facility. Under the settlement terms, Sparton received cash
(and some degree of risk protection) with the DOE’s agreement to reimburse Sparton for 37.5% of
certain future environmental expenses in excess of $8,400,000 from the date of settlement.
In 1995,
Sparton Corporation and STI filed a Complaint in the Circuit Court of Cook County,
Illinois, against Lumbermens Mutual Casualty Company and American Manufacturers Mutual Insurance
Company demanding reimbursement of expenses incurred in connection with its remediation efforts at
the Coors Road facility based on various primary and excess comprehensive general liability
policies in effect between 1959 and 1975. In June 2005, Sparton reached an agreement with an
insurer under which Sparton received $5,455,000 in cash in
July 2005, which reflects a recovery of a
portion of past costs the Company incurred.
28
In October 2006, Sparton reached an agreement with another insurer under which Sparton received
$225,000 in cash in October 2006. This agreement reflects a recovery of a portion of past costs
incurred related to the Company’s Coors Road facility, and was recognized as income in the second
quarter of fiscal 2007. The Company continues to pursue an additional recovery from an excess
carrier. The probability and amount of recovery is uncertain at this time.
Customer Relationships
In
September 2002, STI filed an action in the U.S. District Court for the Eastern District of
Michigan to recover certain unreimbursed costs incurred as a result of a manufacturing relationship
with two entities, Util-Link, LLC (Util-Link) of Delaware and National Rural Telecommunications
Cooperative (NRTC) of the District of Columbia. On or about
October 21, 2002, the defendants filed a
counterclaim seeking money damages alleging that STI breached its duties in the manufacture of
products for the defendants.
A jury trial was concluded on November 9, 2005. The jury did not grant any relief to the
defendents on their counter claims, which was affirmed by the trial court. The jury awarded
Sparton damages in the amount of $3.6 million, of which approximately $1.9 million represented
costs related to the acquisition of raw materials. These costs were previously deferred and are
included in other long-term assets on the Company’s March 31, 2007 and June 30, 2006 balance
sheets. As a result of post trial proceedings, the judgment in Sparton’s favor was reduced to $1.9
million, which would enable the Company to recover the deferred costs and, accordingly, there
would be no significant impact on operating results. An amended judgment was entered for $1.9
million in Sparton’s favor on April 5, 2006. On May 1,
2006, NRTC filed an appeal of the judgment
with the U.S. Court of Appeals for the Sixth Circuit, which could impact the ultimate result.
The Company has pending an action before the U.S. Court of Federal Claims to recover damages
arising out of an alleged infringement by the U.S. Navy of certain patents owned by Sparton and
used in the production of sonobuoys. The case was dismissed on summary judgment; however, the
decision of the U.S. Court of Federal Claims was reversed by the U.S. Court of Appeals for the
Federal Circuit. The case is expected to be scheduled for trial in 2007. The likelihood that the
claim will be resolved and the extent of any recovery in favor of the Company is unknown at this
time.
Product Issues
Some of the printed circuit boards supplied to the Company for its aerospace sales have been
discovered to be nonconforming and defective. The defect occurred during production at the raw
board supplier’s facility, prior to shipment to Sparton for further processing. Sparton and our
customer, who received the defective assembled boards, have contained the defective boards. While
investigations are underway, $2.9 million of related product and associated expenses have been
deferred and classified in Sparton’s balance sheet within other long-term assets as of March 31,
2007 and June 30, 2006. In August 2005, Sparton Electronics
Florida, Inc. filed an action in U.S.
District Court of Florida against Electropac Co., Inc. and a related party (the raw board
manufacturer) to recover these costs. The likelihood that the claim will be resolved and the
extent of Sparton’s recovery, if any, is unknown at this time. No loss contingency has been
established at March 31, 2007.
Item 1(a). Risk Factors
Information regarding the Company’s Risk Factors is provided in Part I, Item 1(a) “Risk Factors,”
of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2006. While there
have been no significant changes in the Company’s risk factors since June 30, 2006, the degree of
one element of risk has increased. In the past Sparton has been adversely impacted by supply
shortages of particular components, which can result in delayed production and thus delayed
shipments to customers and the associated revenue of products using that component. Currently,
several components required in the production of some of the Company’s products are experiencing
allocation constraints due to limited supply and the U.S. Government exercising its preemptive
rights to these components, which are also used in the manufacture of various military products.
Should Sparton be unsuccessful in obtaining the necessary supply of these components to continue
in a timely manner the manufacture of some of the Company’s product sales, operating results for
the remaining quarter of this fiscal year and the next fiscal year could be adversely affected.
29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer
Repurchases of Equity Securities – As of March 31, 2007, the Company had one
publicly-announced share repurchase program outstanding. Announced on August 29, 2005, effective
September 14, 2005, the program provides for the repurchase of up to $4.0 million of shares of the
Company’s outstanding common stock in open market transactions. The program expires September 14,
2007, and the timing and amount of daily purchases are subject to certain limitations. A total of
331,781 shares, at an approximate cost of $2,887,000, had been repurchased from the inception of
this program through the quarter ended December 31, 2006. No shares were repurchased during the
quarter ended March 31, 2007.
The approximate dollar value of shares that may yet be purchased under the program at March 31,
2007 was $1,113,000. Repurchased shares are retired.
Item 6. Exhibits
| 3.1 |
|
Amended Articles of Incorporation of the Registrant were filed on Form 10-Q for
the three-month period ended September 30, 2004, and are incorporated herein by
reference. |
| |
| 3.2 |
|
Amended Code of Regulation of the Registrant were filed on Form 10-Q for the
three-month period ended September 30, 2004, and are incorporated herein by reference. |
| |
| 3.3 |
|
The amended By-Laws of the Registrant were filed on Form 10-Q for the nine-month
period ended March 31, 2004, and are incorporated herein by reference. |
| |
| 31.1 |
|
Chief Executive Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 31.2 |
|
Chief Financial Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 32.1 |
|
Chief Executive Officer and Chief Financial Officer certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
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Date: May 10, 2007
|
|
/s/ DAVID W. HOCKENBROCHT |
|
|
|
|
|
|
|
|
|
David W. Hockenbrocht, Chief Executive Officer |
|
|
|
|
|
|
|
Date: May 10, 2007
|
|
/s/ RICHARD L. LANGLEY |
|
|
|
|
|
|
|
|
|
Richard L. Langley, Chief Financial
Officer |
|
|
30