Sparton Corp. Reports Operating Results (10-Q)

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Feb 06, 2009
Sparton Corp. (SPA, Financial) filed Quarterly Report for the period ended 2008-12-31.

SPARTON CORP. 's continuing operations are principally in one line of business the development and manufacture of electronic parts and assemblies. SPARTON CORP.'s products and services include microprocessor-based systems transducers printed circuit boards and assemblies sensors and electronic and electromechanical contract manufacturing for the telecommunications medical electronics and other industries. Sparton Corp. has a market cap of $19.33 million; its shares were traded at around $1.52 with and P/S ratio of 0.08.

Highlight of Business Operations:

Sales for the three months ended December 31, 2008, totaled $54,516,000, a decrease of $435,000 (1%) from the same quarter last year. Aerospace sales increased from the prior year by $9,715,000, primarily due to increased sales volume to three existing customers, who had a combined increase of $5,604,000. In addition, sales to a new customer contributed another $1,666,000. Medical/Scientific Instrumentation sales decreased $3,614,000 (19%) from the same quarter last year. This decrease was primarily due to reduced sales for one program, with sales $1,962,000 below prior year, as well as delayed starts of new customer programs. We anticipate the Medical/Scientific Instrumentation customer base and sales will improve during future quarters, both from increased orders from existing customers and new program start-ups. Government sales were below prior year, however, prior years sales of $10,798,000 included $6,833,000 of no or minimal margin jobs. Due to successful sonobuoy drop tests during the current fiscal year, while total government sales have decreased, the margins associated with those sales have significantly improved as additional rework and related costs have not been incurred. Industrial/Other sales declined $3,495,000 (37%). This decrease was primarily due to lower sales volume to two existing customers, which accounted for a combined decrease of $2,436,000 during the quarter ended December 31, 2008. We are uncertain at this time as to the level of future sales to these two customers.

An operating loss of $1,227,000 was reported for the three months ended December 31, 2008, compared to an operating loss of $1,469,000 for the three months ended December 31, 2007. The gross profit percentage for the three months ended December 31, 2008, was 7.1%, an increase from 6.7% 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. Successful passage of sonobuoys during drop tests have contributed to the improved gross profit, due to labor efficiencies and the absence of rework costs compared to the prior year. During the quarter ended December 31, 2008, there were cost to complete adjustments related to sonobuoys totaling approximately $200,000 of income, which compares to approximately $20,000 of expense for the same period last year. Included in the three months ended December 31, 2008 and 2007, were results from the Companys Vietnam facility, which favorably impacted gross profit by $89,000 during the quarter ended December 31, 2008, as compared to adversely impacting gross margin for the same period last year by $298,000. During the three months ended December 31, 2008, approximately $235,000 was incurred and expensed in set-up related costs for approximately 10 new customer programs at several facilities compared to $857,000 in the same period last year. Translation adjustments related to inventory and costs of goods sold, in the aggregate, amounted to a gain of $709,000 and a loss of $306,000 for the three months ended December 31, 2008 and 2007, respectively. Also included in costs of goods sold during the quarter ended December 31, 2008, is approximately $294,000 of pension expense, an increase of $136,000 from the same period last year. For a further discussion of pension expense see Note 3 of the Condensed Consolidated Financial Statements.

Other expense-net in the second quarter of fiscal 2009 was $1,090,000, versus other income-net of $111,000 in fiscal 2008. Translation adjustments, not related to inventory or costs of goods sold, along with gains and losses from foreign currency transactions, in the aggregate, was included in other income/expense and amounted to a loss of $1,090,000 and a gain of $111,000 for the three months ended December 31, 2008 and 2007, respectively. Translation adjustments related to inventory and costs of goods sold are included in costs of goods sold and, in the aggregate, amounted to a gain of $709,000 and a loss of $306,000 for the three months ended December 31, 2008 and 2007, respectively. The net of the translation and transaction impact was a loss of $381,000 and $195,000 for the three months ended December 31, 2008 and 2007, respectively. Translation and transaction adjustments are primarily due to changes in the currency exchange rate between Canada and the United States. For further discussion of market risk exposure see Note 1 to the Condensed Consolidated Financial Statements.

Sales for the six months ended December 31, 2008, totaled $108,512,000, a decrease of $5,291,000 (5%) from the same period last year. Aerospace sales increased $14,213,000. This increase was primarily due to increased sales volume to three existing customers, with a combined increase of $8,602,000 from prior year. In addition, one new customer contributed to increased sales by $2,144,000. Medical/Scientific Instrumentation sales decreased $7,255,000, or (19%), for the six months ended December 31, 2008 compared to the same period last year. Again, this decrease is primarily due to decreased sales volume on one customer program, with sales $5,797,000 below prior year, as well as delayed starts of new customer programs. Medical/Scientific Instrumentation sales are expected to improve during future quarters, both from increased orders from existing customers and new customer program start-ups. Government sales were below prior year, however, prior years sales of $24,531,000 included $19,047,000 of no or minimal margin jobs. While total government sales have decreased, the margins associated with these sales have significantly improved as rework and related costs have not been incurred as a result of successful sonobuoy drop testing during the current fiscal year. Industrial/Other sales declined $3,700,000 (18%). This decrease was primarily due to decreased sales volume to the aforementioned two customers, which accounted for a combined decrease of $3,518,000.

An operating loss of $4,081,000 was reported for the six months ended December 31, 2008, compared to an operating loss of $3,522,000 for the six months ended December 31, 2007. The gross profit percentage for the six months ended December 31, 2008, was 5.8%, an increase from 4.7% 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 fiscal 2009s performance. During the six months ended December 31, 2008, gross profit was favorably impacted by improved margins on several customers, a result of pricing increases and improved performance. In addition, successful sonobuoy drop tests allowed for significantly improved margins associated with government sales due to labor efficiencies and the absence of rework costs compared to the prior year. During the six months ended December 31, 2008, there were cost to complete adjustments related to sonobuoys totaling approximately $342,000 of income, which compares to approximately $24,000 of expense for the same period last year. However, improved governmental margins were offset by reduced margins experienced with three aerospace customers on existing programs of $535,000 when compared to similar sales in the prior year. The causes of these reduced margins, which included labor inefficiencies and excessive scrap, as well as other areas of margin improvements for other programs are being addressed. Negatively impacting gross profit in fiscal 2008 was $19.0 million of government sonobuoy sales with no or minimal margin. In addition, reduced margins due to reduced sales volume from one medical program adversely impacted gross margin for the six months ended December 31, 2008 by $771,000 compared to the same period in the prior year. Included in the six months ended December 31, 2008 and 2007 were results from the Companys Vietnam facility, which has adversely impacted gross profit by $168,000 and $407,000, respectively. In addition, we have incurred and expensed approximately $1,461,000 in start-up related costs for approximately 10 new customer programs at several facilities for the six months ended December 31, 2008, compared to $978,000 in the same period last year. Translation adjustments related to inventory and costs of goods sold, in the aggregate, amounted to a gain of $1,011,000 and a loss of $534,000 for the six months ended December 31, 2008 and 2007, respectively. Also included in costs of goods sold is approximately $430,000 of pension expense, an increase of $160,000 from the same period in the prior year. For a further discussion of pension expense see Note 3 of the Condensed Consolidated Financial Statements.

Other expense-net for the six months ended December 31, 2008 was $1,026,000, versus other income-net of $594,000 in fiscal 2008. Translation adjustments, not related to costs of goods sold, along with gains and losses from foreign currency transactions, are included in other income and, in the aggregate, amounted to a loss of $1,031,000 and a gain $590,000 for the six months ended December 31, 2008 and 2007, respectively. Translation adjustments related to inventory and costs of goods sold are included within costs of goods sold and, in the aggregate, amounted to a gain of $1,011,000 and a loss of $534,000 for the six months ended December 31, 2008 and 2007, respectively. The net of the translation and transaction impact was a $20,000 loss and $56,000 gain for the six months ended December 31, 2008 and 2007, respectively.

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