Sparton Corp. Reports Operating Results (10-Q)
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 $41 million; its shares were traded at around $4.12 with and P/S ratio of 0.18. Highlight of Business Operations:Net sales for the three months ended September 30, 2009 totaled $48,104,000, a decrease of $5,892,000 (or 11%) from the same quarter last year. Medical sales increased $5,454,000 from the same quarter last year. This increase in sales was primarily due to increased sales volume to one customer, with several programs, whose sales increased $3,721,000 from the same period in the prior year, as this customer continued to expand its overall market. A second customer contributed $2,767,000 of sales above the same period in the prior year, as they acquired product and resumed production from a developer that was in bankruptcy. EMS decreased from the prior year by $15,318,000, primarily due to decreased sales to three customers, whose combined decrease totaled $12,987,000 from the prior year. Sparton disengaged with two of these customers as of June 30, 2009. The third customer, Honeywell, is in the process of disengagement. DSS sales were significantly above the first quarter of last year, showing an increase of $5,169,000 due to higher U.S. Navy product volume and successful sonobuoy lot acceptance testing in the current fiscal year. Sonobuoy sales to foreign governments, which were $1,195,000 above those for the same period in the prior year, also contributed to the increase. Eliminating sales result primarily from the production of intercompany circuit boards (EMS sales) that are then utilized in DSS product sales.
The gross profit percentage for the three months ended September 30, 2009 was 15%, a significant increase from 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 costs associated with new program introduction. The gross profit percentage on Medical sales increased to 15% from 9% for the three months ended September 30, 2009 and 2008, respectively. This improvement in margins on Medical sales was due to improved pricing on several existing products. In addition, favorable product mix and new product sales in fiscal 2010 included several new contracts with higher margins. Finally, changes from the recent consolidation of manufacturing operations allowed for the realization of greater operating efficiencies. The gross profit percentage on EMS sales increased to 5% from 2% for the three months ended September 30, 2009 and 2008, respectively. The improvement in gross profit was mainly attributable to the reduced overhead costs associated with the plant closings and the consolidation of EMS operations. In addition, margin was favorably impacted by improved performance and price increases to certain customers, including Honeywell, a customer with whom we are disengaging. Margin on Honeywell contracts increased by $288,000, while sales to this customer decreased $6,010,000 compared to the same three month period in the prior year. In addition, margin for the three months ended September 30, 2008 was favorably impacted by translation adjustments related to inventory and costs of goods sold, in the aggregate, amounting to a gain of $838,000. There were no translation adjustments related to inventory and costs of goods sold for the three months ended September 30, 2009. Plant closures and restructuring activities are discussed further in Note 10 of the Condensed Consolidated Financial Statements. The gross profit percentage on DSS sales increased to 26% from 9% for the three months ended September 30, 2009 and 2008, respectively. The improvement in gross margin was attributable to minimal rework as a result of successful sonobuoy drop tests. Based on the successful sonobuoy drop tests, the Company adjusted its reserve for estimated cost of rework in the quarter ended September 30, 2009, resulting in an increase to gross profit of $567,000 above the same period in prior year. In addition, margin was favorably impacted by increased foreign sonobuoy sales which generate increased margins due to an improved pricing structure.
Due to the factors described above, the Company reported net income of $1,405,000 ($0.14 per share, basic and diluted) for the three months ended September 30, 2009, compared to a net loss of $3,362,000 ($(0.34) per share, basic and diluted) for the corresponding period last year.
Cash flows used in financing activities in fiscal 2010 were $19,671,000. Cash flows provided by financing activities in fiscal 2009 were $1,475,000. The primary uses of cash from financing activities in fiscal 2010 and 2009 was the repayment of debt. The primary source of cash from financing activities in 2009 was from increased borrowings on the Companys bank line-of-credit facility. In the three months ended September 30, 2009, the Company paid off the existing balance on its line-of-credit facility totaling $15,500,000 and the remaining balance on its term loan with National City Bank of $3,400,000.
At September 30 and June 30, 2009, the aggregate DSS funded backlog was approximately $63 million and $69 million, respectively. Commercial backlog as of September 30 and June 30, 2009, totaled $48 million and $55 million, respectively. Commercial orders, in general, may be rescheduled or cancelled without significant penalty, and, as a result, may not be a meaningful measure of future sales. A majority of the September 30, 2009 backlog is expected to be realized in the next 12-15 months.
Both the closure of the Jackson, Michigan and London, Ontario, Canada facilities, as well as a second reduction in force in April 2009 in addition to the earlier reduction in force in February, resulted in significant restructuring costs in fiscal 2009. Restructuring and impairment costs in fiscal 2009 totaled $7,008,000. Costs include employee severance, transfer of production to other facilities, facility closure costs, contract termination costs, impairment charges, and other associated costs and expenses. Additional costs of approximately $404,000 for the closure of the Jackson facility and $51,000 for the London facility were recorded during the first quarter of fiscal 2010, which amounts include $113,000 and $37,000 of impairment charges, respectively. For further discussion of these closures and the range of the estimated restructuring costs, see Note 10 to the Condensed Consolidated Financial Statements.
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