Consolidated results for the three and nine months ended March 31, 2010 and 2009:
| ($ in 000’s, except per share) | Third Quarter | Nine Months | ||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Net Sales | $ | 38,637 | $ | 54,592 | $ | 133,964 | $ | 163,104 | ||||||||
| Gross Profit | 5,515 | 4,699 | 21,076 | 11,257 | ||||||||||||
| Restructuring / Impairment Charges | 238 | 350 | 2,121 | 660 | ||||||||||||
| Operating Income (Loss) | 324 | 74 | 3,466 | (4,007 | ) | |||||||||||
| Income Tax Expense (Benefit) | (132 | ) | 183 | (2,027 | ) | 381 | ||||||||||
| Net Income (Loss) | 689 | (763 | ) | 5,342 | (6,916 | ) | ||||||||||
| Income (Loss) Per Share, Basic and Diluted | 0.07 | (0.08 | ) | 0.54 | (0.70 | ) | ||||||||||
Highlights for the fiscal 2010 third quarter are summarized below:
- Fiscal 2010 third quarter net income of $0.7 million, Sparton’s third consecutive profitable quarter
- Fiscal 2010 third quarter gross profit of $5.5 million, compared to $4.7 million in the same period in fiscal 2009, despite a decrease in net sales of $16.0 million
- Defense & Security Systems business unit experienced an 87% increase in sales in the third quarter of fiscal 2010 compared to the same period in fiscal 2009
- Substantial completion of restructuring activities in the third quarter of fiscal 2010, resulting in charges of $0.2 million
- Gain on sale of partial interest in Cybernet Systems Corporation of $0.2 million
Sparton President and CEO Cary Wood commented, “While earnings for the quarter were below those achieved in the first and second quarters of fiscal 2010, third quarter results exceeded our internal plan. Our DSS business unit continues to excel, experiencing significant growth over the prior year quarter while continuing to achieve improved margins. Although we experienced an expected drop in sales to foreign governments compared to the first two quarters of fiscal 2010, we continued to experience minimal rework costs resulting from improvements in operating performance leading to successful sonobuoy drop tests. In our Medical business unit, consistent with our previous guidance, we experienced an anticipated softening in volume which negatively impacted overall margins. We continue to review our cost structure to align it with expected future volume levels. Performance within our EMS business unit continues to reflect the effects of the significant changes implemented during the past eighteen months while maintaining consistent margin levels with the first two quarters. Through our continued implementation of Lean Enterprise, we are confident that we will ultimately be successful in increasing our EMS gross margins to acceptable levels.”
As previously reported, beginning in fiscal 2010, Sparton has segmented its financial reporting into three distinct business units: Medical Device (“Medical”), Electronic Manufacturing Services (“EMS”), and Defense & Security Systems (“DSS”).
Third Quarter Consolidated Results
Net sales for the three months ended March 31, 2010 were $38.6 million, a decrease of 29% from the same prior year period, reflecting the full disengagement from several significant customer contracts within our EMS business unit during the second half of fiscal 2009 and the first quarter of fiscal 2010 and a quarter over quarter decrease in sales to one Medical customer, partially offset by increased volume from the DSS business unit.
The gross profit percentage for the three months ended March 31, 2010 was 14%, a significant increase from 9% for the same period last year. The increase in gross profit in the quarter ended March 31, 2010 was driven by favorable product mix, continued elevated margins in our DSS business unit and the Company’s ongoing implementation of Lean Enterprise, partially offset by the overall decrease in sales volume. Additionally, gross profit was positively impacted from reduced overhead costs associated with the consolidation of manufacturing operations and workforce reductions which took place in the second half of fiscal 2009.
Selling and administrative expenses for the three months ended March 31, 2010 remained relatively flat with the prior year quarter.
Restructuring and impairment charges were $0.2 million and $0.4 million for the three months ended March 31, 2010 and 2009, respectively, as the Company has substantially completed its restructuring activities.
Interest expense was $0.2 million for the third quarter of fiscal 2010 compared to $0.4 million for the third quarter of fiscal 2009. The decrease in interest expense primarily reflects the repayment of the Company’s outstanding bank debt in August 2009.
The Company recorded an income tax benefit of approximately $0.1 million for the quarter ended March 31, 2010, compared to an expense of $0.2 million for the same period in the prior year. The fiscal 2010 benefit reflects the additional release of $0.2 million of the Company’s deferred tax asset valuation allowance due to recent tax regulation changes.
Net income of $0.7 million, or $0.07 per share, basic and diluted, was reported for the three months ended March 31, 2010, compared to a net loss of $0.8 million or a loss of $(0.08) per share, basic and diluted, for the corresponding period of fiscal 2009.
Segment results for the three and nine months ended March 31, 2010 and 2009:
Sales:
| ($ in 000’s) | Third Quarter | Nine Months | ||||||||||||||||||||
| SEGMENT | 2010 | 2009 | % Chg | 2010 | 2009 | % Chg | ||||||||||||||||
| Medical | $ | 14,228 | $ | 17,619 | (19 | %) | $ | 51,142 | $ | 46,980 | 9 | % | ||||||||||
| EMS | 13,076 | 34,076 | (62 | %) | 45,003 | 101,829 | (56 | %) | ||||||||||||||
| DSS | 14,293 | 7,657 | 87 | % | 46,660 | 23,617 | 98 | % | ||||||||||||||
| Eliminations | (2,960 | ) | (4,760 | ) | (38 | %) | (8,841 | ) | (9,322 | ) | (5 | %) | ||||||||||
| Totals | $ | 38,637 | $ | 54,592 | (29 | %) | $ | 133,964 | $ | 163,104 | (18 | %) | ||||||||||
Gross profit:
| ($ in 000’s) | Third Quarter | Nine Months | ||||||||||||||||||||||
| SEGMENT | 2010 | GP % | 2009 | GP % | 2010 | GP % | 2009 | GP % | ||||||||||||||||
| Medical | $ | 1,420 | 10 | % | $ | 2,430 | 14 | % | $ | 6,871 | 13 | % | $ | 5,353 | 11 | % | ||||||||
| EMS | 620 | 5 | % | 1,321 | 4 | % | 2,349 | 5 | % | 3,360 | 3 | % | ||||||||||||
| DSS | 3,475 | 24 | % | 948 | 12 | % | 11,856 | 25 | % | 2,544 | 11 | % | ||||||||||||
| Totals | $ | 5,515 | 14 | % | $ | 4,699 | 9 | % | $ | 21,076 | 16 | % | $ | 11,257 | 7 | % | ||||||||
Operating income (loss):
| ($ in 000’s) | Third Quarter | Nine Months | ||||||||||||||||||||||||||
| SEGMENT | 2010 | % of Sales | 2009 | % of Sales | 2010 | % of Sales | 2009 | % of Sales | ||||||||||||||||||||
| Medical | $ | 273 | 2 | % | $ | 1,321 | 7 | % | $ | 3,733 | 7 | % | $ | 2,142 | 5 | % | ||||||||||||
| EMS | (426 | ) | (3 | %) | 87 | 0 | % | (1,189 | ) | (3 | %) | (526 | ) | (1 | %) | |||||||||||||
| DSS | 2,784 | 19 | % | (30 | ) | (0 | %) | 9,861 | 21 | % | (100 | ) | (0 | %) | ||||||||||||||
| Other Unallocated | (2,307 | ) | - | (1,304 | ) | - | (8,939 | ) | - | (5,523 | ) | - | ||||||||||||||||
| Totals | $ | 324 | 1 | % | $ | 74 | 0 | % | $ | 3,466 | 3 | % | $ | (4,007 | ) | (2 | %) | |||||||||||
Third Quarter Segment Results
Medical Device (“Medical”)
Medical sales decreased $3.4 million in the three months ended March 31, 2010 as compared with the same quarter last year. This decrease in sales was primarily due to $3.0 million of reduced sales to one customer, as it suspended production of one of its lines to make product enhancement modifications. Additionally, this customer exhibited elevated purchasing in the fiscal 2009 third quarter as it returned to normal inventory levels after ending a worldwide inventory reduction program at the end of calendar 2008.
The gross profit percentage on Medical sales decreased to 10% from 14% for the three months ended March 31, 2010 and 2009, respectively. This decline in margin on Medical sales reflects the overall decrease in sales volume as well as unfavorable product mix between the two periods, partially offset by greater operating efficiencies from consolidation of manufacturing operations and the Company’s continued implementation of Lean Enterprise.
Electronic Manufacturing Services (“EMS”)
EMS sales for the three months ended March 31, 2010 decreased $21.0 million as compared with the same quarter last year. This decrease primarily reflects decreased sales to three customers, whose combined decrease totaled $19.6 million from the prior year quarter. Sparton disengaged with one of these customers as of June 30, 2009 and completed its disengagement with another customer, Honeywell, during the three months ended December 31, 2009. The decrease in sales to the third customer reflects the quarter over quarter loss of certain programs with this customer. Partially offsetting these decreases were sales to another customer which increased by $1.5 million.
The gross profit percentage on EMS sales increased to 5% for the three months ended March 31, 2010 compared to 4% for the three months ended March 31, 2009. The quarter over quarter comparison reflects improvement in gross profit mainly attributable to the reduced overhead costs associated with the plant closings and the consolidation of EMS operations, partially offset by the overall decrease in sales volume. Margin was also favorably impacted by improved performance and price increases to certain customers.
Defense & Security Systems (“DSS”)
DSS sales for the three months ended March 31, 2010 improved significantly compared to the third quarter of last year, showing an increase of $6.6 million. This increase reflected higher
The gross profit percentage on DSS sales increased to 24% from 12% for the three months ended March 31, 2010 and 2009, respectively. The improvement in gross margin reflects a significant increase in overall sales volume from the prior year quarter. Additionally, gross profit percentage was favorably affected by the incurrence of minimal rework costs as a result of successful sonobuoy drop tests in the current year, reflecting improvement in operating performance, due in part to the Company’s continued implementation of Lean Enterprise.
Liquidity and Capital Resources
Mr. Wood stated, “Sparton remains committed to improving its working capital position and overall liquidity.” During the third quarter of fiscal year 2010, the Company generated $4.1 million in cash from operating activities, reflecting cash generated from positive operating results, receipt of tax refunds, collection of our Electropac receivable and the successful management of working capital requirements to support sales volumes. These cash inflows were partially offset by cash outlays during the period related to the production of
As of March 31, 2010, the Company had no outstanding borrowings against available funds on its $20 million revolving credit facility provided in August 2009 by PNC Bank, National Association. The credit facility is subject to certain customary covenants which were met at March 31, 2010.
Outlook
Mr. Wood further commented, “We remain focused on sustained profitability and we are pleased to have delivered positive results through the first three quarters of fiscal 2010. We anticipate that fourth quarter sales volumes will be relatively consistent with that of the third quarter. Accordingly, we will continue to analyze our cost structure to ensure it is aligned with our forecasted sales volumes. In addition, we expect the ongoing implementation of our lean and quality efforts to lead to improvements in operating performance. As we move forward, we continue to monitor the health of our businesses and remain vigilant for events or trends that could impede our success as we look to implement organic and inorganic growth strategies to increase future earnings.”
Conference Call
Sparton will host a conference call with investors and analysts on May 18, 2010 at 10:00am EST to discuss its fiscal year 2010 third quarter financial results, provide a general business update, and respond to investor questions. To participate, callers should dial (800) 682-8593. Participants should dial in at least 15 minutes prior to the start of the call. A Web presentation link is also available for the conference call:https://www.livemeeting.com/cc/gc_min_pro_usa/join?id=R5N4QC&role=attend. Investors and financial analysts are invited to ask questions after the presentation is made. The presentation and a replay of the call will be available on Sparton’s Web site: http://www.sparton.com in the “Investor Relations” section for up to two years after the conference call.
About Sparton Corporation
Sparton Corporation (
Safe Harbor and Fair Disclosure Statement
Certain statements described in this press release are forward-looking statements within the scope of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements may be identified by the words “believe,” “expect,” “anticipate,” “project,” “plan,” “estimate,” “will” or “intend” and similar words or expressions. These forward-looking statements reflect Sparton’s current views with respect to future events and are based on currently available financial, economic and competitive data and its current business plans. Actual results could vary materially depending on risks and uncertainties that may affect Sparton’s operations, markets, prices and other factors. Important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, Sparton’s financial performance and the implementations and results of its ongoing strategic initiatives. For a more detailed discussion of these and other risk factors, see Part I, Item 1A, Risk Factors and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Sparton’s Form 10-K for the year ended June 30, 2009, and its other filings with the Securities and Exchange Commission. Sparton undertakes no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
Contact:
Analysts:
Sparton Corporation
Greg Slome, 847-762-5812
gslome@sparton.com
or
Media:
Sparton Corporation
Mike Osborne, 847-762-5814
mosborne@sparton.com
or
Investors:
Institutional Marketing Services
John Nesbett/Jennifer Belodeau, 203-972-9200
jnesbett@institutionalms.com
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