Sparton Corporation Reports Fiscal 2019 Second Quarter Results

Sparton Corporation (NYSE:SPA) today announced results for the second quarter of fiscal year 2019 ended December 30, 2018.

Second Quarter Financial Results and Highlights

Consolidated:

¢ Net sales of $105.2 million; $97.8 million in prior year Q2

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¢ Gross profit margin of 21.9%; 22.2% in prior year Q2

¢ SG&A expenses of $14.7 million or 14.0% of sales; adjusted SG&A of $12.3 million, 11.7% of sales

¢ Earnings per share of $0.19, adjusted earnings per share of $0.51; adjusted earnings per share of $0.52 in prior year Q2

¢ Adjusted EBITDA of $10.7 million, a 10.1% adjusted EBITDA margin

MDS Segment:

¢ Gross sales of $65.4 million; $58.4 million in prior year Q2

¢ Gross profit margin of 13.5%; 11.9% in prior year Q2

¢ Operating income of $1.7 million; loss of $0.2 million in prior year Q2

¢ Adjusted EBITDA of $6.0 million, a 9.1% adjusted EBITDA margin

¢ New program wins in Q2 have expected revenue of $15.5 million when fully ramped up into production

¢ Trailing four quarter new program win revenue of $61.9 million, which continues to support our future organic growth

¢ Backlog of $154 million; prior year Q2 backlog of $142 million

ECP Segment:

¢ Gross sales of $43.0 million; $42.5 million in prior year Q2

¢ Gross profit margin of 33.1%; 34.8% in prior year Q2

¢ Operating income of $9.0 million; $10.2 million in prior year Q2

¢ Adjusted EBITDA of $10.6 million, a 24.6% adjusted EBITDA margin

¢ Backlog of $144 million; prior year Q2 backlog of $130 million

SELECTED FINANCIAL DATA

For the Second Quarter of Fiscal Year

For the First Two Quarters of Fiscal Year

2019201820192018
(Dollars in thousands, except per share data)
Consolidated:
Net sales$105,248$97,819$194,710$180,582
Gross profit23,07221,74940,71137,673
Gross margin21.9%22.2%20.9%20.9%
Selling and administrative expenses$14,734$14,074$27,104$29,279
Operating income5,2555,1137,5053,337
Adjusted operating income (non-GAAP)9,2858,37313,88610,871
Earnings (loss) per share0.19(0.82)0.22(1.02)
Adjusted earnings per share (non-GAAP)0.510.520.730.60
EBITDA (non-GAAP)8,2038,47313,51910,146
Adjusted EBITDA (non-GAAP)10,6529,85016,63614,085
Adjusted EBITDA margin (non-GAAP)10.1%10.1%8.5%7.8%
Free cash flow (non-GAAP)$9,182$19,711$20,760$(3,973)
MDS Segment:
Gross sales$65,402$58,353$124,696$113,661
Intercompany sales(3,137)(2,970)(6,281)(5,907)
Net sales62,26555,383118,415107,754
Gross profit8,8556,96016,06412,953
Gross margin13.5%11.9%12.9%11.4%
Selling and administrative expenses$3,457$3,513$6,792$6,967
Allocation of corporate expenses2,3012,1014,5104,547
Operating income (loss)1,746(208)2,036(1,693)
Adjusted segment EBITDA (non-GAAP)5,9574,15910,4477,409
ECP Segment:
Gross sales$42,983$42,468$76,295$72,867
Intercompany sales(32)(39)
Net sales42,98342,43676,29572,828
Gross profit14,21714,78924,64724,720
Gross margin33.1%34.8%32.3%33.9%
Selling and administrative expenses$2,347$2,533$4,903$5,122
Allocation of corporate expenses1,1501,0372,2772,028
Operating income8,98810,21114,09115,645
Adjusted segment EBITDA (non-GAAP)10,57311,77817,28518,792

Liquidity and Capital Resources

As of December 30, 2018, Sparton Corporation (“Sparton” or “the Company”) had $50 million available under its $120 million credit facility that expires in September 2019. The Company intends to restructure this facility upon its expiration in September 2019, or sooner as conditions dictate, to provide for appropriate ongoing liquidity. As of December 30, 2018, the Company was compliant with all covenants under its credit facility.

Pending Acquisition of the Company

On December 11, 2018, Sparton Corporation entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Striker Parent 2018, LLC (“Parent”), a Delaware limited liability company and affiliate of Cerberus Capital Management, L.P. (“Cerberus”), and Striker Merger Sub 2018, Inc. (“Merger Sub”), an Ohio corporation and a wholly owned subsidiary of Parent. Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into the Company (the “Merger”) with the Company surviving the Merger as a wholly owned subsidiary of Parent.

At the effective time of the Merger (the “Effective Time”), each issued and outstanding share of common stock, par value $1.25 per share, of the Company (each, a “Share”) (other than (i) Shares that immediately prior to the Effective Time are owned by Parent, Merger Sub or any other wholly owned subsidiary of Parent or owned by the Company or any wholly owned subsidiary of the Company (including as treasury stock) and (ii) Shares that are held by any record holder who is entitled to demand and properly demands payment of the fair cash value of such Shares as a dissenting shareholder pursuant to, and who complies in all respects with, the provisions of Section 1701.85 of the Ohio General Corporation Law) will be canceled and converted into the right to receive $18.50 per Share in cash, without interest.

Consummation of the Merger is subject to the satisfaction or (to the extent permitted by law) waiver of specified closing conditions, including (i) the adoption of the Merger Agreement by the affirmative vote of the holders of at least two-thirds of all the outstanding Shares entitled to vote thereon at a special meeting of the Company’s shareholders (the “Shareholders Meeting”) to be held on March 1, 2019, as more fully described in the proxy statement of the Company, filed with the SEC on January 23, 2019 (the “Proxy Statement”), (ii) the absence of any law, executive order, ruling, injunction or other order (“Orders”) that restrains, enjoins or otherwise prohibits the consummation of the Merger (the “No Order Condition”), (iii) the expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) which expired on January 22, 2019, (such condition, the “HSR Act Condition”), (iv) any agreement with a governmental authority not to consummate the Merger, which agreement shall have been entered into with the prior written consent of both the Company and Parent, shall have expired or been terminated (the “Governmental Authority Agreement Condition”) and (v) other customary closing conditions, including the accuracy of each party’s representations and warranties and each party’s compliance with its covenants and agreements contained in the Merger Agreement (subject in the case of this clause (v) to certain qualifications as to materiality). Consummation of the Merger is not subject to Parent obtaining any financing for or related to the transactions contemplated by the Merger Agreement.

The Company has called a special meeting on March 1, 2019, of holders of shares of common stock of the Company, at which time it is expected that the shareholders of record as of January 18, 2019, the record date for the special meeting, will vote on adoption of the Merger Agreement and the other related matters as described in the Proxy Statement.

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 or to 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 operations, 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, provide 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 119th 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 Spartons filings with the Securities and Exchange Commission (SEC). The matters discussed in this press release may also involve risks and uncertainties concerning Spartons services described in Spartons filings with the SEC. In particular, see the risk factors described in Spartons 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 – FOR THE SECOND QUARTER OF FISCAL YEAR 2019
(Dollars in thousands, except per share data)
CorporateMDSECPTotal
Net sales$$62,265$42,983$105,248
Cost of goods sold53,41028,76682,176
Gross profit8,85514,217$23,072
Operating expenses:
Selling and administrative8,9303,4572,34714,734
Selling and administrative – Corp allocations(3,451)2,3011,150
Internal research and development1,4421,442
Amortization of intangible assets1,3512901,641
Total operating expenses5,4797,1095,22917,817
Income from operations(5,479)1,7468,9885,255
Interest expense, net(1,800)91(1,790)
Other income (expense)(1)(6)(50)(57)
Income tax (expense)(1,404)(87)(1,491)
Net income$(8,684)$1,662$8,939$1,917
Income per share of common stock:
Basic$0.19
Diluted0.19
Weighted average shares of common stock outstanding:
Basic9,834,723
Diluted9,834,723
CONSOLIDATING FINANCIAL INFORMATION – FOR THE SECOND QUARTER OF FISCAL YEAR 2018
(Dollars in thousands, except per share data)
CorporateMDSECPTotal
Net sales$$55,383$42,436$97,819
Cost of goods sold48,42327,64776,070
Gross profit6,96014,78921,749
Operating expenses:
Selling and administrative8,0283,5132,53314,074
Selling and administrative – Corp allocations(3,138)2,1011,037
Internal research and development669669
Amortization of intangible assets1,5543391,893
Total operating expenses4,8907,1684,57816,636
Income (loss) from operations(4,890)(208)10,2115,113
Interest expense, net(1,507)(1,507)
Other income (expense)(1)19(5)13
Income tax (expense)(11,666)(37)(11,703)
Net income (loss)$(18,064)$(226)$10,206$(8,084)
Loss per share of common stock:
Basic$(0.82)
Diluted(0.82)
Weighted average shares of common stock outstanding:
Basic9,834,723
Diluted9,834,723

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

For the First Two Quarters of Fiscal Years

20192018
($ in thousands)
Cash Flows from Operating Activities:
Operating activities, net of working capital changes$11,989$7,709
Net changes in working capital10,724(8,583)
Cash Flows from Operating Activities22,713(874)
Cash Flows from Investing Activities:
Capital expenditures(1,953)(3,099)
Other investing activities14
Cash Flows from Investing Activities(1,953)(3,085)
Cash Flows from Financing Activities:
Net change in credit facility(20,400)4,400
Other financing activities(135)(325)
Cash Flows from Financing Activities(20,535)4,075
Change in Cash and Cash Equivalents225116
Cash and Cash Equivalents – Beginning1,160988
Cash and Cash Equivalents – Ending$1,385$1,104

CONDENSED CONSOLIDATED BALANCE SHEETS

December 30, 2018July 1, 2018
($ in thousands)
Assets
Cash and cash equivalents$1,385$1,160
Accounts receivable, net47,28060,454
Inventories86,29572,406
Legal settlements – insurance receivable4,500
Prepaid and other current assets8,1313,944
Property, plant and equipment, net31,96932,790
Goodwill12,66312,663
Other intangible assets, net17,79721,108
Other assets19,20222,977
Total assets$224,722$232,002
Liabilities and Shareholders Equity
Accounts payable$45,682$28,636
Accrued expenses and other current liabilities34,22332,986
Accrued legal settlements5,500
Credit facility64,10084,500
Environmental remediation4,5984,866
Pension liability633690
Other non-current liabilities1,220
Shareholders Equity75,48673,604
Total Liabilities and Shareholders Equity$224,722$232,002
RECONCILIATION OF NON-GAAP MEASURES
EBITDA Reconciliation (Non-GAAP) – For the Second Quarter of Fiscal Year 2019
(Dollars in thousands)
CorporateMDSECPTotal
Net income$(8,684)$1,662$8,939$1,917
Interest expense, net1,800(9)(1)1,790
Income tax expense1,404871,491
Amortization of intangible assets1,3512901,641
Depreciation6045651951,364
Selling and administrative – Corp allocations(3,451)2,3011,150
EBITDA, excluding corporate allocation(8,327)5,95710,5738,203
Adjustments for nonrecurring operating expenses:
Stock-based compensation6060
Costs related to potential sale of Company2,3892,389
Adjusted EBITDA, before corporate allocation$(5,878)$5,957$10,573$10,652
Adjusted EBITDA, after corporate allocation$(2,427)$3,656$9,423$10,652
Adjusted EBITDA margin10.1%
EBITDA Reconciliation (Non-GAAP) – For the Second Quarter of Fiscal Year 2018
(Dollars in thousands)
CorporateMDSECPTotal
Net income (loss)$(18,064)$(226)$10,206$(8,084)
Interest expense, net1,5071,507
Income tax expense11,6663711,703
Amortization of intangible assets1,5543391,893
Depreciation5656931961,454
Selling and administrative – Corp allocations(3,138)2,1011,037
EBITDA, excluding corporate allocation(7,464)4,15911,7788,473
Adjustments for nonrecurring operating expenses:
Stock-based compensation1010
Costs related to potential sale of company1,3671,367
Adjusted EBITDA, before corporate allocation$(6,087)$4,159$11,778$9,850
Adjusted EBITDA, after corporate allocation$(2,949)$2,058$10,741$9,850
Adjusted EBITDA margin10.1%

Adjusted EPS (Non-GAAP)

For the Second Quarter of Fiscal Year

For the First Two Quarters of Fiscal Year

2019201820192018
(Dollars in thousands, except per share data)
Earnings (loss) per share – diluted, as reported$0.19$(0.82)$0.22$(1.02)
Nonrecurring items0.190.120.250.27
Amortization of intangible assets0.130.150.260.28
Adjustments for Tax Act1.071.07
Adjusted earnings per share$0.51$0.52$0.73$0.60
Adjustments, net of tax (21% and 28%, respectively):
Costs related to potential sale of Company$1,887$1,149$2,425$2,677
Total nonrecurring, net of tax1,8871,1492,4252,677
Amortization of intangible assets, net of tax1,2961,4982,6152,748
Total adjustments, net of tax3,1832,6475,0405,425
Adjustments for Tax Act10,50010,500
Total adjustments$3,183$13,147$5,040$15,925

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

For the Second Quarter of Fiscal Year
20192018
SG&A

Operating Income

SG&A

Operating Income

(Dollars in thousands)
As reported$14,734$5,255$14,074$5,113
Percentage of sales14.0%5.0%14.4%5.2%
Adjustments:
Amortization of intangible assets1,6411,893
Costs related to potential sale of Company2,3892,3891,3671,367
Total adjustments2,3894,0301,3673,260
As adjusted$12,345$9,285$12,707$8,373
Adjusted percentage of sales11.7%8.8%13.0%8.6%
For the First Two Quarters of Fiscal Year
20192018
SG&A

Operating Income

SG&A

Operating Income

(Dollars in thousands)
As reported$27,104$7,505$29,279$3,337
Percentage of sales13.9%3.9%16.2%1.8%
Adjustments:
Amortization of intangible assets3,3113,816
Costs related to potential sale of Company3,0703,0703,7183,718
Total adjustments3,0706,3813,7187,534
As adjusted$24,034$13,886$25,561$10,871
Adjusted percentage of sales12.3%7.1%14.2%6.0%

Media:
Joe McCormack
Sparton Corporation
Email: [email protected]
Office:
(847) 762-5800