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Sparton Corp. Reports Operating Results (10-Q)

May 13, 2009 | About:

Sparton Corp. (SPA) filed Quarterly Report for the period ended 2009-03-31.

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 $21.4 million; its shares were traded at around $2.15 with and P/S ratio of 0.1.

Highlight of Business Operations:

Sales for the three months ended March 31, 2009, totaled $54,592,000, a decrease of $3,547,000 (6%) from the same quarter last year. Aerospace sales increased from the prior year by $5,228,000, primarily due to increased sales volume to three existing customers, who had a combined increase of $3,953,000. Medical/Scientific Instrumentation sales decreased $797,000 (4%) from the same quarter last year. This decrease was primarily due to reduced sales for one program, with sales $1,498,000 below prior year. While Sparton no longer produces product for this program, the decrease in sales was offset by additional sales to new and existing programs. Government sales were below prior year, due to timing of production and drop test schedules. While government sales have decreased, the margin associated with these sales has improved, as rework and related costs have not been incurred as a result of successful sonobuoy drop tests, as well as improved pricing on new contracts. Industrial/Other sales declined $2,788,000 (28%). This decrease was primarily due to lower sales volume to one existing customer, with sales $3,418,000 below prior year. This program will not continue.

Operating income of $73,000 was reported for the three months ended March 31, 2009, compared to an operating loss of $424,000 for the three months ended March 31, 2008. The gross profit percentage for the three months ended March 31, 2009, was 9.2%, an increase from 8.1% 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. The Company experienced improved margin with one aerospace customer with whom we are disengaging, as previously discussed. In addition, successful passage of sonobuoys during drop tests have contributed to the improved gross profit, as a result of labor efficiencies and the absence of rework costs compared to the prior year. Included in the three months ended March 31, 2009 and 2008, were results from the Companys Vietnam facility, which adversely impacted gross profit by $419,000 and $216,000, respectively. During the three months ended March 31, 2009, approximately $43,000 was incurred and expensed in start-up related costs for approximately 10 new customer programs at several facilities compared to $355,000 in the same period last year. Translation adjustments related to inventory and costs of goods sold, in the aggregate, amounted to a loss of $521,000 and a gain of $228,000 for the three months ended March 31, 2009 and 2008, respectively. Also included in costs of goods sold during the quarter ended March 31, 2009, is approximately $1,063,000 of pension expense, an increase of $927,000 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 third quarter of fiscal 2009 was $219,000, versus other expense-net of $284,000 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, were included in other income/expense and amounted to a loss of $224,000 and $277,000 for the three months ended March 31, 2009 and 2008, 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 loss of $521,000 and a gain of $228,000 for the three months ended March 31, 2009 and 2008, respectively. The net of the translation and transaction impact was a loss of $745,000 and $49,000 for the three months ended March 31, 2009 and 2008, respectively. The primary factor influencing translation in fiscal 2009 was the reduction of inventory levels and accounts receivable at the Canadian facility related to their current disengagement with one customer. 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 nine months ended March 31, 2009, totaled $163,104,000, a decrease of $8,838,000 (5%) from the same period last year. Aerospace sales increased $19,441,000. This increase was primarily due to increased sales volume to three existing customers, with a combined increase of $13,396,000 from prior year. In addition, one new customer contributed to increased sales by $5,284,000. Medical/Scientific Instrumentation sales decreased $8,052,000, or (14%), for the nine months ended March 31, 2009 compared to the same period last year. Again, this decrease is primarily due to decreased sales volume on one customer program, with sales $5,354,000 below prior year, as well as delayed starts of new customer programs. Government sales were below prior year, however, prior years sales of $37,378,000 included $19,026,000 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 $6,488,000 (21%). This decrease was primarily due to decreased sales volume of $5,908,000 to one customer.

An operating loss of $4,007,000 was reported for the nine months ended March 31, 2009, compared to an operating loss of $3,946,000 for the nine months ended March 31, 2008. The gross profit percentage for the nine months ended March 31, 2009, was 6.9%, an increase from 5.8% 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 nine months ended March 31, 2009, gross profit was favorably impacted by improved margins on several customers, a result of pricing increases and improved performance. Successful sonobuoy drop tests also allowed for significantly improved margins associated with government sales due to labor efficiencies and minimal rework costs, totaling improved margin of $0.5 million above prior year. Negatively impacting gross profit in fiscal 2008 was $19.0 million of government sonobuoy sales with no or minimal margin. The Company experienced improved margin with one aerospace customer with whom we are disengaging, as previously discussed. In addition, an existing aerospace customer also had improved margins due to improved job performance and increased sales, allowing $465,000 of additional margin compared to what was received on similar sales in the prior year. We have incurred and expensed approximately $1,504,000 in start-up related costs for approximately 10 new customer programs at several facilities for the nine months ended March 31, 2009, compared to $1,333,000 in the same period last year. Included in the nine months ended March 31, 2009 and 2008 were results from the Companys Vietnam facility, which has adversely impacted gross profit by $588,000 and $622,000, respectively. Translation adjustments related to inventory and costs of goods sold, in the aggregate, amounted to a gain of $490,000 and a loss of $305,000 for the nine months ended March 31, 2009 and 2008, respectively. Also included in costs of goods sold is approximately $1,492,000 of pension expense, an increase of $1,085,000 from the same period in the prior year. For a further discussion of pension expense see Note 3 of the Condensed Consolidated Financial Statements.

Pension expense and restructuring charges, as previously discussed, of $194,000 and $660,000, respectively, were incurred during the nine months ended March 31, 2009, compared to $72,000 and $0, respectively, for the same period last year. Net gain of $977,000 on sale of property, plant and equipment in fiscal 2008 resulted from the sale of the property, plant and equipment of the Deming facility located in New Mexico. For a further discussion of this sale see Note 11 of the Condensed Consolidated Financial Statements.

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