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Sparton Corporation Reports Fiscal 2017 Second Quarter Results

SCHAUMBURG, Ill.--(BUSINESS WIRE)--Feb. 7, 2017-- Sparton Corporation (NYSE:SPA) today announced results for the second quarter of fiscal year 2017 ended January 1, 2017.

Second Quarter Financial Results and Highlights

Joseph J. Hartnett, Interim President & CEO, commented, “We are pleased to report that our Q2 performance reflects the continued improvement in revenues and profitability in our MDS segment as well as the continued strengthening of our balance sheet. The MDS segment reported net organic revenue growth along with increased new program wins and stronger margins as compared to the prior quarter and Q2 of fiscal 2016. Our ECP segment did not perform as expected due to delays in production of the Q53G sonobuoy and the need to record a loss on a contract in our rugged display platform. Both of these issues have been addressed and are not expected to have any impact on future results."

Joe McCormack, Senior Vice President and CFO, commented, “Through our continued focus on working capital management and cash flow, we generated strong free cash flow in the quarter of $10 million, principally as a result of the management of inventory levels and our supply chain. We are pleased to report that our borrowings under our revolving credit agreement was reduced to $85.7 million.”

Consolidated:

• Net sales of $97.4 million

• Gross profit margin of 16.3%

• SG&A expenses of $13.0 million or 13.3% of sales; adjusted SG&A of $12.3 million, 12.6%

• Earnings (loss) per share of $(0.09), adjusted EPS of $0.10

• Adjusted EBITDA of $5.6 million, a 5.7% adjusted EBITDA margin

• Borrowings under Credit Facility reduced $10.1 million to $85.7 million

• Free cash flow of $10.0 million

MDS Segment:

• Gross sales of $67.4 million

• Gross profit margin of 12.4% as compared to 11.2% in the prior quarter and 10.3% in Q2 FY16

• Operating income of $1.0 million as compared to operating losses of $0.5 million and $2.5 million in the prior quarter and in Q2 FY16, respectively

• Adjusted EBITDA of $5.9 million, an 8.7% adjusted EBITDA margin, as compared to $4.7 million (7.2%) and $4.2 million (6.2%) in the prior quarter and in Q2 FY16, respectively

• New program wins in Q2 have expected revenue of $14.5 million when fully ramped up into production

• Q2 new program wins increased $2 million over the prior quarter wins

• Trailing four quarter win revenue of $59 million, which continues to support our future organic growth

• Backlog of $123 million

ECP Segment:

• Gross sales of $32.4 million

• Gross profit margin of 23.3% as compared to 26.6% in the prior quarter and 28.4% in Q2 FY16

• Margins were impacted by the delay in reaching full run-rate production for the Q53G sonobuoy and the recognition of a loss contract in the rugged display platform

• Operating income of $3.1 million as compared to $5.4 million and $7.0 million in the prior quarter and in Q2 FY16, respectively

• Adjusted EBITDA of $4.6 million, a 14.4% adjusted EBITDA margin as compared to $7.2 million (19.2%) and $8.7 million (21.4%) in the prior quarter and in Q2 FY16, respectively

• Backlog of $113 million comprised principally of $89 million in domestic sonobuoys, $11 million in foreign sonobuoys, and $9 million in rugged displays

 

SELECTED FINANCIAL DATA

 
      For the Quarters Ended   For First Two Quarters
Q2 FY17   Q1 FY17   Q2 FY16 2017   2016
(Dollars in thousands, except per share data)
Consolidated:
Net sales $ 97,399 $ 100,367 $ 103,529 $ 197,766 $ 210,220
Gross profit 15,898 17,285 18,521 33,183 39,659
Selling and administrative expenses 12,953 13,383 14,340 26,336 27,964
Operating income 221 1,332 454 1,553 4,952
Adjusted operating income (non-GAAP) 3,107 4,314 4,674 7,421 11,675
Earnings per share (0.09 ) 0.01 0.03 (0.08 ) 0.27
Adjusted Earnings per share (non-GAAP) 0.10 0.20 0.25 0.31 0.66
EBITDA (non-GAAP) 3,890 5,071 4,762 8,961 13,023
Adjusted EBITDA (non-GAAP) 5,553 6,143 6,961 11,696 15,654
Adjusted EBITDA margin (non-GAAP) 5.7 % 6.1 % 6.7 % 5.9 % 7.4 %
Free cash flow (non-GAAP) $ 10,008 $ 2,093 $ 6,893 $ 12,101 $ 9,846
 
MDS Segment:
Gross sales $ 67,382 $ 65,002 $ 67,586 $ 132,384 $ 141,543
Intercompany sales (2,333 ) (2,200 ) (4,640 ) (4,533 ) (9,869 )
Net sales 65,049 62,802 62,946 127,851 131,674
Gross profit 8,357 7,294 6,989 15,651 17,285
Selling and administrative expenses 3,384 3,508 4,128 6,892 7,858
Allocation of corporate expenses 2,177 2,468 2,518 4,645 4,669
Operating Income (loss) 986 (514 ) (2,524 ) 472 (183 )
Adjusted Segment EBITDA (non-GAAP) $ 5,875 $ 4,691 $ 4,184 $ 10,566 $ 11,594
 
ECP Segment:
Gross sales $ 32,350 $ 37,592 $ 40,642 $ 69,942 $ 78,731
Intercompany sales   (27 ) (59 ) (27 ) (185 )
Net sales 32,350 37,565 40,583 69,915 78,546
Gross profit 7,541 9,991 11,532 17,532 22,374
Selling and administrative expenses 2,550 2,624 2,653 5,174 5,208
Allocation of corporate expenses 995 1,200 1,062 2,195 2,104
Operating Income 3,082 5,429 6,957 8,511 13,260
Adjusted Segment EBITDA (non-GAAP) $ 4,646 $ 7,228 $ 8,690 $ 11,874 $ 16,672
 

Liquidity and Capital Resources

As of January 1, 2017, the Company had $84 million available under its $175 million credit facility.

Outlook

Mr. Hartnett concluded, “Looking forward, we expect third quarter revenues to be in the range of $97 million to $101 million with a gross profit margin of approximately 18.5%.”

Potential Sale Transaction

As previously announced, the Board of Directors of Sparton Corporation is exploring a possible sale of the Company. There can be no assurance that such a sale will occur.

Conference Call

The Company will host a conference call on Wednesday, February 8, 2017 at 10:00 a.m. CST/11:00 a.m. EST to discuss its fiscal year 2017 second quarter financial results. To participate, callers should dial 800-708-4339. Participants should dial in at least 5 minutes prior to the start of the call. A web presentation link, including the slide presentation which will accompany the call, will also be available for the conference call: http://tinyurl.com/zhgwppz. The presentation and conference call audio will be available on Sparton’s website: http://www.sparton.com in the “Investors” section.

Non-GAAP Financial Measures

In addition to reporting financial results in accordance with U.S. generally accepted accounting principles (“GAAP”), Sparton Corporation has provided certain non-GAAP financial measures as additional information for its operating results. These measures have not been prepared in accordance with GAAP and may be different from measures used by other companies. Whenever we use non-GAAP financial measures, we designate these measures, which exclude the effects of certain expenses and income, as “adjusted” and provide a reconciliation of non-GAAP financial measures to the most closely applicable GAAP financial measure. The non-GAAP financial measures eliminate or add certain items of expense and income from total operating expense and income taxes. Management believes that this presentation is helpful to investors in evaluating the current operational and financial performance of our business and facilitates comparisons to historical results of operations. Management discloses this information along with a reconciliation of the comparable GAAP amounts to provide access to the detail and nature of adjustments made to GAAP financial results. While some of these excluded items have been periodically reported in our statements of operations, their occurrence in future periods depends on future business and economic factors, among other evaluation criteria, and the occurrence of such events and factors may frequently be beyond the control of management.

When we calculate adjusted earnings per share, adjusted EBITDA and other adjustments to the statements of income, we exclude certain expenses and income because we believe that they are not related directly to the underlying performance of our fundamental business operations. We exclude these measures when reviewing financial results and for business planning. Although these events are reflected in our GAAP financial statements, these transactions may limit the comparability of our fundamental operations with prior and future periods. We believe EBITDA and adjusted EBITDA are commonly used by financial analysts and others in the industries in which the Company operates and, thus, provides useful information to investors. The Company does not intend, nor should the reader consider, EBITDA or adjusted EBITDA to be an alternative to operating income, net income, net cash provided by operating activities or any other items calculated in accordance with GAAP. The Company's definition of adjusted EBITDA may not be comparable with other companies. Accordingly, the measurement has limitations depending on its use.

About Sparton Corporation

Sparton Corporation (NYSE:SPA), now in its 117th year, is a provider of complex and sophisticated electromechanical devices with capabilities that include concept development, industrial design, design and manufacturing engineering, production, distribution, field service and refurbishment. The primary markets served are Medical & Biotechnology, Military & Aerospace and Industrial & Commercial. Headquartered in Schaumburg, IL, Sparton currently has thirteen manufacturing locations and engineering design centers worldwide. Sparton's Web site may be accessed at www.sparton.com.

Safe Harbor and Fair Disclosure Statement

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

 

CONSOLIDATING FINANCIAL INFORMATION - Q2 FISCAL YEAR 2017
(Dollars in thousands, except per share data)

 
      Corporate   MDS   ECP   Total
Net Sales $ $ 65,049 $ 32,350 $ 97,399
Cost of goods sold   56,692   24,809   81,501  
Gross profit 8,357 7,541 $ 15,898
Operating expenses:
Selling and administrative 7,019 3,384 2,550 12,953
Selling and administrative - Corp allocations (3,172 ) 2,177 995
Internal research and development 533 533
Amortization of intangible assets   1,810   381   2,191  
Total operating expenses 3,847   7,371   4,459   15,677  
Income (loss) from operations (3,847 ) 986 3,082 221
Interest expense, net (1,071 ) 4 (1,067 )
Other income (expense) (7 ) 12 (16 ) (11 )
Income taxes (45 ) (5 )   (50 )
Net income (loss) $ (4,970 ) $ 997   $ 3,066   $ (907 )
Income per share of common stock:
Basic $ (0.09 )
Diluted (0.09 )
Weighted average shares of common stock outstanding:
Basic 9,802,664
Diluted 9,802,664
 
 

CONSOLIDATING FINANCIAL INFORMATION - Q2 FISCAL YEAR 2016
(Dollars in thousands, except per share data)

 
      Corporate   MDS   ECP   Total
Net Sales $ $ 62,946 $ 40,583 $ 103,529
Cost of goods sold   55,957   29,051   85,008  
Gross profit 6,989 11,532 $ 18,521
Operating expenses:
Selling and administrative 7,559 4,128 2,653 14,340
Selling and administrative - Corp allocations (3,580 ) 2,518 1,062
Internal research and development 438 438
Amortization of intangible assets 2,037 422 2,459
Restructuring charges 2,360 2,360
Reversal of accrued contingent consideration   (1,530 )   (1,530 )
Total operating expenses 3,979   9,513   4,575   18,067  
Income (loss) from operations (3,979 ) (2,524 ) 6,957 454
Interest expense, net (899 ) (1 ) (900 )
Other income (expense) 3 23 8 34
Income taxes 704   (24 )   680  
Net income (loss) $ (4,171 ) $ (2,526 ) $ 6,965   $ 268  
Income per share of common stock:
Basic $ 0.03
Diluted 0.03
Weighted average shares of common stock outstanding:
Basic 9,783,237
Diluted 9,783,237
 
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

 
      For the First Two Quarters
2017   2016
($ in thousands)
Cash Flows from Operating Activities, net of
changes in working capital $ 8,158 $ 9,985
Net changes in working capital 6,513   3,124  
Cash Flows from Operating Activities 14,671 13,109
Cash Flows from Investing Activities:
Business acquisitions 750
Capital expenditures (2,570 ) (3,263 )
Cash Flows from Investing Activities (2,570 ) (2,513 )
Cash Flows from Financing Activities:
Net change in Credit Facility (11,500 ) (20,700 )
Other financing activities (144 ) 20  
Cash Flows from Financing Activities (11,644 ) (20,680 )
Change in Cash and Cash Equivalents 457 (10,084 )
Cash and Cash Equivalents - Beginning 132   14,914  
Cash and Cash Equivalents - Ending $ 589   $ 4,830  
 
 

CONDENSED CONSOLIDATED BALANCE SHEETS

 
     

January 1,
2017

 

July 3,
2016

($ in thousands)
Assets
Cash and cash equivalents $ 589 $ 132
Accounts receivable, net 47,396 46,759
Inventories 59,871 77,871
Prepaid and other current assets 5,615 5,844
Property, plant and equipment, net 32,901 33,320
Goodwill 12,663 12,663
Other intangible assets, net 32,533 36,933
Other assets 31,604   32,476
Total assets $ 223,172   $ 245,998
Liabilities and Shareholders’ Equity
Accounts payable $ 29,798 $ 38,290
Accrued expenses 10,303 11,512
Other current liabilities 10,963 12,637
Credit facility 85,706 97,206
Capital lease obligations 302 332
Environmental 5,700 6,117
Pension 1,204 1,276
Shareholders’ Equity 79,196   78,628
Total Liabilities and Shareholders’ Equity $ 223,172   $ 245,998
 
 

RECONCILIATION OF NON-GAAP MEASURES

 

EBITDA Reconciliation (Non-GAAP) - Q2 Fiscal Year 2017
(Dollars in thousands)

 
      Corporate   MDS   ECP   Total
Net income (loss) $ (4,970 ) $ 997 $ 3,066 $ (907 )
Interest expense, net 1,071 (4 ) 1,067
Income taxes 45 5 50
Amortization of intangible assets 1,810 381 2,191
Depreciation included in SG&A above 446 839 204 1,489
Selling and administrative - Corp allocations (3,172 ) 2,177   995    
EBITDA, excluding corporate allocation (6,580 ) 5,824 4,646 3,890
Adjustments for nonrecurring operating expenses:
Costs related to potential sale of Company 644 51 695
Stock-based compensation 968       968  
Adjusted EBITDA, before corporate allocation $ (4,968 ) $ 5,875   $ 4,646   $ 5,553  
 
Adjusted EBITDA, after corporate allocation $ (1,796 ) $ 3,698 $ 3,651 $ 5,553
 
Adjusted EBITDA margin 5.7 %
 
 

EBITDA Reconciliation (Non-GAAP) - Q2 Fiscal Year 2016
(Dollars in thousands)

 
      Corporate   MDS   ECP   Total
Net income (loss) $ (4,171 ) $ (2,526 ) $ 6,965 $ 268
Interest expense, net 899 1 900
Income taxes (704 ) 24 (680 )
Amortization of intangible assets 2,037 422 2,459
Depreciation included in SG&A above 274 1,300 241 1,815
Selling and administrative - Corp allocations (3,580 ) 2,518   1,062    
EBITDA, excluding corporate allocation (7,282 ) 3,354 8,690 4,762
Adjustments for nonrecurring operating expenses:
Legal related expense 384 384
Stock-based compensation 438 438
Corporate reorganization 547 547
Restructuring charges 2,360 2,360
Reversal of accrued contingent consideration   (1,530 )   (1,530 )
Adjusted EBITDA, before corporate allocation $ (5,913 ) $ 4,184   $ 8,690   $ 6,961  
 
Adjusted EBITDA, after corporate allocation $ (2,333 ) $ 1,666 $ 7,628 $ 6,961
 
Adjusted EBITDA margin 6.7 %
 
 

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

 
    For the Quarters Ended
Q2 FY17   Q1 FY17   Q2 FY16
SG&A  

Operating
Income

SG&A  

Operating
Income

SG&A  

Operating
Income

(Dollars in thousands)
As reported $ 12,953 $ 221 $ 13,383 $ 1,332 $ 14,340 $ 454
Percentage of sales 13.3 % 0.2 % 13.3 % 1.4 % 13.9 % 0.4 %
Adjustments:
Amortization of intangible 2,191 2,219 2,459
Costs related to potential sale of Company 695 695 663 663
Restructuring costs 2,360
Reversal of accrued contingent consideration (1,530 )
Other nonrecurring adjustments     100   100   931   931  
Total adjustments 695   2,886   763   2,982   931   4,220  
As adjusted $ 12,258   $ 3,107   $ 12,620   $ 4,314   $ 13,409   $ 4,674  
 
Adjusted percentage of sales 12.6 % 3.2 % 12.6 % 4.3 % 13.0 % 4.5 %
 

For the First Two Quarters

2017 2016
SG&A

Operating
Income

SG&A

Operating
Income

(Dollars in thousands)
As reported $ 26,336 $ 1,553 $ 27,964 $ 4,952
Percentage of sales 13.3 % 0.8 % 13.3 % 2.4 %
Adjustments:
Amortization of intangible 4,410 4,962
Costs related to potential sale of Company 1,358 1,358
Restructuring costs 2,360
Reversal of accrued contingent consideration (1,530 )
Other nonrecurring adjustments 100   100   931   931  
Total adjustments 1,458   5,868   931   6,723  
As adjusted $ 24,878   $ 7,421   $ 27,033   $ 11,675  
 
Adjusted percentage of sales 12.6 % 3.8 % 12.9 % 5.6 %
 
 

Adjusted EPS (Non-GAAP)

 
    For the Quarters Ended   For the First Two Quarters
Q2 FY17   Q1 FY17   Q2 FY16 2017   2016
(Dollars in thousands, except per share data)
Earnings per share - diluted, as reported $ (0.09 ) $ 0.01 $ 0.03 $ (0.08 ) $ 0.27
Nonrecurring items 0.05 0.05 0.06 0.10 0.06
Amortization of intangible assets 0.14   0.14   0.16   0.29   0.33  
Adjusted earnings per share $ 0.10   $ 0.20   $ 0.25   $ 0.31   $ 0.66  
 
Adjustments, net of tax:
Costs related to potential sale of Company 452 431 883
Restructuring costs 1,534 1,534
Reversal of accrued contingent consideration (1,530 ) (1,530 )
Other nonrecurring adjustments   65   605   65   605  
Total nonrecurring 452 496 609 948 609
Amortization of intangible assets 1,424   1,442   1,598   2,866   3,225  
Total adjustments $ 1,876   $ 1,938   $ 2,207   $ 3,814   $ 3,834  
 

Source: Sparton Corporation

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





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