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MarketScreener Homepage  >  Equities  >  Nyse  >  Sparton Corporation    SPA

SPARTON CORPORATION (SPA)
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SPARTON : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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09/14/2018 | 08:52pm CEST
The following is an analysis of the Company's results of operations, liquidity
and capital resources and should be read in conjunction with the Consolidated
Financial Statements and notes related thereto included in this Form 10-K. To
the extent that the following Management's Discussion and Analysis contains
statements which are not of a historical nature, such statements are
forward-looking statements which involve risks and uncertainties. These risks
include, but are not limited to the risks and uncertainties discussed in "Item
1A Risk Factors" in this Annual Report on Form 10-K. The following discussion
and analysis should be read in conjunction with the "Forward Looking Statements"
and "Item 1A Risk Factors" each included in this Annual Report on Form 10-K.
Business Overview
General
Sparton Corporation and subsidiaries (the "Company" or "Sparton") has been in
continuous existence since 1900. It was last reorganized in 1919 as an Ohio
corporation. The Company is a provider of design, development and manufacturing
services for complex electromechanical devices, as well as sophisticated
engineered products complementary to the same electromechanical value stream.
The Company serves the Medical & Biotechnology, Military & Aerospace and
Industrial & Commercial markets through two reportable business segments;
Manufacturing & Design Services ("MDS") and Engineered Components & Products
("ECP").
Reportable segments are defined as components of an enterprise for which
separate financial information is available and is evaluated regularly by the
chief operating decision maker ("CODM") in assessing performance and allocating
resources. The Company's CODM is its Senior Vice President of Operations. In the
MDS segment, the Company performs contract manufacturing and design services
utilizing customer-owned intellectual property. In the ECP segment, the Company
performs manufacturing and design services using the Company's intellectual
property.
The Company uses an internal management reporting system, which provides
important financial data to evaluate performance and allocate the Company's
resources on a segment basis. Net sales are attributed to the segment in which
the product is manufactured or service is performed. A segment's performance is
evaluated based upon its operating income, contribution margin, gross margin and
a variety of other factors. A segment's operating income includes its gross
profit on sales less its selling and administrative expenses, including
allocations of certain corporate operating expenses. Certain corporate operating
expenses are allocated to segment results based on the nature of the service
provided. Other corporate operating expenses, including certain administrative,
financial and human resource activities as well as items such as interest
expense, interest income, other income (expense) and income taxes, are not
allocated and are excluded from segment profit. These costs are not allocated to
the segments, as management excludes such costs when assessing the performance
of the segments. Inter-segment transactions are generally accounted for at
amounts that approximate arm's length transactions. Identifiable assets by
segments are those assets that are used in each segment's operations. The
accounting policies for each of the segments are the same as for the Company
taken as a whole.
All of the Company's facilities are certified to one or more of the ISO/AS
standards, including ISO 9001, AS9100 and ISO 13485, with most having additional
certifications based on the needs of the customers they serve. The majority of
the Company's customers are in highly regulated industries where strict
adherence to regulations such as the International Tariff and Arms Regulations
("ITAR") is necessary. The Company's products and services include offerings for
Original Equipment Manufacturers ("OEM") and Emerging Technology ("ET")
customers that utilize microprocessor-based systems which include transducers,
printed circuit boards and assemblies, sensors and electromechanical components,
as well as development and design engineering services relating to these product
sales. Sparton also develops and manufactures sonobuoys, anti-submarine warfare
("ASW") devices used by the United States Navy as well as by foreign governments
that meet Department of State licensing requirements. Additionally, Sparton
manufactures rugged flat panel display systems for military panel PC
workstations, air traffic control and industrial applications, as well as high
performance industrial grade computer systems and peripherals. Many of the
physical and technical attributes in the production of these proprietary
products are similar to those required in the production of the Company's other
electrical and electromechanical products and assemblies.
On July 7, 2017, Sparton Corporation (the "Company" or "Sparton"), Ultra
Electronics Holdings plc, ("Ultra"), and Ultra Electronics Aneira Inc., ("Merger
Sub") entered into an Agreement and Plan of Merger (the "Merger Agreement") that
provided for Ultra to acquire the Company by merging Merger Sub into the Company
(such transaction referred to as the "Merger"), subject to the terms and
conditions set forth in the Merger Agreement.
On October 5, 2017, at a special meeting of holders of shares of common stock of
the Company, shareholders voted to adopt the Merger Agreement. Although the
Merger Agreement had been adopted by the Company's shareholders,

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consummation of the Merger remained subject to other closing conditions,
including the expiration or termination of the applicable waiting period (or any
extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act (the
"HSR Act").
On March 5, 2018, Sparton announced the termination by Sparton and Ultra of the
Merger Agreement as a result of the staff of the United States Department of
Justice (the "DOJ") informing the parties that it intended to recommend that the
DOJ block the Merger. Under a Merger Termination Agreement entered into by
Sparton, Ultra and Merger Sub, the parties agreed to release each other from
certain claims and liabilities arising out of or related to the Merger Agreement
or the transactions contemplated therein or thereby, including any termination
fees. The parties also agreed that certain agreements with confidentiality
obligations will continue in full force and effect.
Also on March 5, 2018, Sparton announced that, during the DOJ's review of
Sparton's proposed Merger with Ultra, the United States Navy (the "Navy")
expressed the view that instead of the parties proceeding with the Merger, each
of Sparton and Ultra should enhance its ability to independently develop,
produce and sell sonobuoys and over time work toward the elimination of their
use of Sparton's and Ultra's joint venture for such activities. Since that time,
Sparton has been in communication with the Navy to better understand its
expectations with respect to the timing, funding and terms of current and future
sonobuoy IDIQ production contracts. While no deadlines have been established nor
funding decisions agreed upon, we believe the Navy would find it desirable if
Sparton and Ultra were in a position to eliminate the use of the ERAPSCO joint
venture for the sale of sonobuoys to the Navy by September 2024, which is the
end of the GFY19-GFY23 IDIQ contract. Due to the significance of the effort and
expenditures required, there can be no assurance that Sparton, or both of the
ERAPSCO joint venture partners, will be able to independently develop, produce
and sell fully qualified sonobuoys by that time, or at an earlier date if so
required by the Navy. The GFY19-GFY23 IDIQ contract is currently under
evaluation, and we anticipate that an award will be made by the Navy in GFY19
and that final delivery will be scheduled to occur in 2024. Additionally, we
understand that there will be no impact on the existing GFY14-GFY18 IDIQ
contract which provides for final delivery to occur in 2019.
On July 9, 2018, the Company announced the filing of a bid protest by ERAPSCO
with the United States Government Accountability Office ("GAO") challenging the
competitive range exclusion of ERAPSCO under the United States Navy ("Navy")
Solicitation No. N00019-19-R-0002 for the GFY 19-23 AN/SSQ-125A (the "Q-125A" )
production sonobuoy. The protest challenged on a number of bases the Navy's
decision to exclude ERAPSCO from the solicitation process and requested that GAO
restore ERAPSCO's ability to participate in the process. On August 30, 2018, the
Navy issued a notice that it had taken corrective action to reopen the
competitive range regarding the Q-125A production sonobuoy and include ERAPSCO
in that competitive range. This allows ERAPSCO to again participate in the bid
process. As a result of the Navy's decision to restore ERAPSCO's ability to
participate in the bid process, on September 4, 2018 the GAO dismissed the
protest.
As a result of the termination of the Merger Agreement, the Company announced
that it would seek to re-engage with parties that previously expressed an
interest in acquiring all or a part of Sparton and that are in a position to
expeditiously proceed to effect such a transaction. There can be no assurance
that any such process will result in the execution of a definitive agreement or
the completion of a transaction.
MDS Segment
MDS segment operations are comprised of contract design, manufacturing and
aftermarket repair and refurbishment of sophisticated printed circuit card
assemblies, sub-assemblies, full product assemblies and cable/wire harnesses for
customers seeking to bring their intellectual property to market. Additionally,
Sparton is a developer of embedded software and software quality assurance
services in connection with medical devices and diagnostic equipment. Customers
include OEM and ET customers serving the Medical & Biotechnology, Military &
Aerospace and Industrial & Commercial markets. In engineering and manufacturing
for its customers, this segment adheres to very strict military and aerospace
specifications, Food and Drug Administration ("FDA") guidelines and approvals,
in addition to product and process certifications.
ECP Segment
ECP segment operations are comprised of design, development and production of
proprietary products for both domestic and foreign defense as well as commercial
needs. ECP designs and manufactures ASW devices known as sonobuoys for the U.S.
Navy and foreign governments that meet Department of State licensing
requirements. This segment also performs an engineering development function for
the United States military and prime defense contractors for advanced
technologies, ultimately leading to future defense products, as well as
replacements for existing products. The sonobuoy product line is built to
stringent military specifications. These products are restricted by
International Tariff and Arms Regulations ("ITAR") and qualified by the U.S.
Navy, which limits opportunities for competition. Sparton is also a provider of
rugged flat panel display systems for military panel PC workstations, air
traffic control and industrial and commercial marine applications, as well as
high performance industrial grade computer systems and peripherals. Rugged
displays are manufactured for prime contractors,

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in some cases to specific military grade specifications. Additionally, this
segment internally develops and markets commercial products for underwater
acoustics and microelectromechanical ("MEMS")-based inertial measurement.
Risks and Uncertainties
Sparton, as a high-mix, low to medium volume supplier, provides rapid product
turnaround for customers. High-mix describes customers needing multiple product
types with generally low to medium volume manufacturing runs. As a contract
manufacturer with customers in a variety of markets, the Company has
substantially less visibility of end user demand and, therefore, forecasting
sales can be problematic. Customers, particularly in our MDS segment, may cancel
their orders, change production quantities and/or reschedule production for a
number of reasons. Depressed economic conditions may result in customers
delaying delivery of product, or the placement of purchase orders for lower
volumes than previously anticipated. Unplanned cancellations, reductions or
delays by customers may negatively impact the Company's results of operations.
As many of the Company's costs and operating expenses are relatively fixed
within given ranges of production, a reduction in customer demand can
disproportionately affect the Company's gross margins and operating income. The
majority of the Company's sales have historically come from a limited number of
customers. Significant reductions in sales to, or a loss of, one of these
customers could materially impact our operating results if the Company were not
able to replace those sales with new business.
Other risks and uncertainties that may affect our operations, performance,
growth forecasts and business results include, but are not limited to, timing
and fluctuations in U.S. and/or world economies, sharp volatility of world
financial markets over a short period of time, competition in the overall
contract manufacturing business, global trade relations and tariffs,
availability and price of key product components and raw materials, availability
of production labor and management services under terms acceptable to the
Company, congressional budget outlays for sonobuoy development and production,
congressional legislation, uncertainties associated with the outcome of
litigation, changes in the interpretation of environmental laws and the
uncertainties of environmental remediation and customer labor and work strikes.
Further risk factors are the availability and cost of materials, as well as
non-cancelable purchase orders we have committed to in relation to customer
forecasts that can be subject to change. A number of events can impact these
risks and uncertainties, including potential escalating utility and other
related costs due to natural disasters, as well as global and domestic political
uncertainties. Additional trends, risks and uncertainties include dependence on
key personnel, uncertainties surrounding the global and domestic economies and
U.S. Government budgets and the effects of those uncertainties on OEM behavior,
including heightened inventory management, product development cycles and
outsourcing strategies. A further discussion of the Company's risk factors has
been included in Part I, Item 1A, "Risk Factors", of this Annual Report on Form
10-K. Management cautions readers not to place undue reliance on forward-looking
statements, which are subject to influence by the enumerated risk factors as
well as unanticipated future events.
Consolidated Results of Operations
Presented below are more detailed comparative data and discussions regarding our
consolidated and reportable segment results of operations for fiscal year 2018
compared to fiscal year 2017, and fiscal year 2017 compared to fiscal year 2016.

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For fiscal year 2018 compared to fiscal year 2017
CONSOLIDATED
The following table presents selected consolidated statements of operations data
(dollars in thousands):
                                                                For fiscal years
                                   2018       % of Sales       2017       % of Sales       $ Chg        % Chg
Net sales                       $ 374,990        100.0  %   $ 397,562        100.0  %   $ (22,572 )      (5.7 )%
Cost of goods sold                295,592         78.8        325,663         81.9        (30,071 )      (9.2 )
Gross profit                       79,398         21.2         71,899         18.1          7,499        10.4
Selling and administrative
expenses                           58,137         15.5         54,110         13.7          4,027         7.4
Internal research and
development expenses                2,745          0.7          1,670          0.4          1,075        64.4
Amortization of intangible
assets                              7,337          2.0          8,498          2.1         (1,161 )     (13.7 )
Legal settlements                   1,648          0.5              -            -          1,648           -
Operating income                    9,531          2.5          7,621          1.9          1,910        25.1
Interest and other expense, net    (6,373 )       (1.7 )       (4,377 )       (1.1 )       (1,996 )      45.6
Income before income taxes          3,158          0.8          3,244          0.8            (86 )      (2.7 )
Income taxes                       11,412          3.0          1,927          0.5          9,485       492.2
Net income (loss)               $  (8,254 )       (2.2 )%   $   1,317          0.3  %   $  (9,571 )    (726.7 )%


The decrease in net sales was a result of reduced MDS segment sales of $26.6
million, which were partially offset by increased ECP segment sales of $4.0
million.
The increase in gross margin was due to a sales mix shift from lower gross
margin MDS sales to higher margin ECP sales and improvements in ECP gross
margin. The increase in selling and administrative expense was due to higher
legal, advisory and employee retention costs associated with the potential sale
of the Company, as well as other legal costs, which were partially offset by
lower performance-based cash and stock bonuses and the continued focused effort
on cost containment in reaction to sales declines.
Interest expense consists of interest and fees on the Company's outstanding debt
and revolving credit facility, including amortization of financing costs.
Interest expense was $6.4 million and $4.4 million for fiscal years 2018 and
2017, respectively. The comparative interest expense reflects increased interest
rates, as well as higher amortization of loan financing fees, as fiscal year
2018 included accelerated amortization of loan financing fees in relation to
amendments to the Company's credit facility. See Note 9, Debt, of the "Notes to
Consolidated Financial Statements" in this Form 10-K for a further discussion of
debt.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("Tax Act") was signed
into law. The Tax Act made significant changes to U.S. tax laws including, but
not limited to, lowering the federal income tax rate for U.S. corporations from
a maximum of 35% to a fixed 21%, revising certain corporate income tax
deductions, implementing a territorial tax system and imposing a repatriation
tax on unrepatriated earnings of foreign subsidiaries. The new tax rate is
effective January 1, 2018. For corporations that report on a fiscal year basis,
the Tax Act requires the use of a full-year blended income tax rate based on the
new and old rates. Based on a federal rate of 35% for the first two quarters of
fiscal year 2018 and 21% for the last two quarters of fiscal year 2018, as well
as other factors, the Company's income tax rate for fiscal year 2018 was 28%,
exclusive of any discrete tax events. During the second quarter of fiscal year
2018, as a result of the Tax Act, the Company recorded income tax expense of
$10.1 million for a provisional reduction in its net deferred tax assets and
$0.4 million for a provisional liability related to unrepatriated earnings and
profits of foreign subsidiaries, recognizing these impacts of the Tax Act as
discrete income tax events. In the fourth quarter of fiscal year 2018, the
$10,100 provisional reduction in net deferred tax assets and the provisional
liability related to the unrepatriated earnings and profits of foreign
subsidiaries were revised downward to $9,040 and $157, respectively. The
Company's income tax rate for fiscal year 2017 was 35%, exclusive of any
discrete tax events.
The Company recorded an income tax expense of $11.4 million, or (361.4%) of the
income before income taxes in fiscal year 2018, compared to income tax expense
of $1.9 million, or 59.4% of income before income taxes in fiscal year 2017. The
tax rate for fiscal year 2018 was primarily driven by the effects of the tax
rate change in the Tax Act and the recording of a $1.3 million valuation
allowance against Canadian tax assets. Our tax rate is affected by recurring
items, such as rates in foreign jurisdictions and the relative amounts of income
or loss we earn in those jurisdictions, state income taxes and the domestic
production activities deduction. Discrete items impacting our effective tax rate
include legislative tax rate changes, return to

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provision adjustments, certain jurisdictional audit adjustments and changes in
state apportionment factors. See Note 11, Income Taxes, of the "Notes to
Consolidated Financial Statements" in this Form 10-K for a further discussion of
income taxes.
Due to the factors described above, the Company reported net loss of $8.3
million, or $0.84 loss per share for fiscal year 2018, compared to net income of
$1.3 million, or $0.13 income per share for fiscal year 2017.
MDS
The following table presents selected consolidated statements of operations data
(dollars in thousands):
                                                                   For fiscal years
                                       2018       % of Sales       2017       % of Sales       $ Chg        % Chg
Gross sales                         $ 235,985        100.0  %   $ 260,514        100.0  %   $ (24,529 )     (9.4 )%
Intercompany sales                    (12,085 )       (5.1 )      (10,074 )       (3.9 )       (2,011 )     20.0
  Net sales                           223,900         94.9        250,440         96.1        (26,540 )    (10.6 )
Gross profit                           27,178         11.5         31,441         12.1         (4,263 )    (13.6 )
Selling and administrative expenses    22,808          9.7         23,123          8.9           (315 )     (1.4 )

Amortization of intangible assets 6,025 2.5 7,011

       2.7           (986 )    (14.1 )
Legal settlements                         448          0.2              -            -            448          -
Operating income (loss)             $  (2,103 )       (0.9 )%   $   1,307          0.5  %   $  (3,410 )   (260.9 )%


The $26.6 million decrease in net sales was due to (i) the prior year insourcing
of a large customer in our medical end-market ($9.3 million) and the loss of a
large customer in our industrial end-market ($9.3 million) as well as other less
individually significant customer disengagements ($9.7 million) reducing sales
by $28.3 million and (ii) volume reductions and program delays of $45.3 million.
These losses were offset by revenues from increased volumes and new program wins
with other individually customers of $47.0 million.
Gross margin on MDS sales was negatively impacted in the current year by an
unfavorable shift in product mix as compared to the prior year and unfavorable
fixed overhead absorption due to the sales decline, partially offset by cost
mitigation due to sales declines. Selling and administrative expenses decreased
slightly due to cost containment in reaction to the sales declines.
MDS backlog was $148.1 million at July 1, 2018 compared to $124.8 million at
July 2, 2017. The 18.7% increase in MDS backlog was due to new contract wins
resulting from our business development efforts. Commercial orders, in general,
may be rescheduled or canceled without significant penalty, and as a result, our
backlog may not be a meaningful measure of future sales. A majority of the
July 1, 2018 MDS backlog is currently expected to be realized in the next 12
months.
ECP
The following table presents selected consolidated statements of income data
(dollars in thousands):
                                                                For fiscal years
                                    2018       % of Sales       2017       % of Sales      $ Chg        % Chg
Gross sales                      $ 151,144        100.0  %   $ 147,259        100.0  %   $  3,885        2.6  %
Intercompany                           (54 )          -           (137 )       (0.1 )          83      (60.6 )
  Net sales                        151,090        100.0        147,122         99.9         3,968        2.7
Gross profit                        52,220         34.5         40,458         27.5        11,762       29.1
Selling and administrative
expenses                            16,061         10.6         15,708         10.7           353        2.2
Internal research and
development expenses                 2,745          1.8          1,670          1.1         1,075       64.4
Amortization of intangible
assets                               1,312          0.9          1,487          1.0          (175 )    (11.8 )
Operating income                 $  32,102         21.2  %   $  21,593

14.7 % $ 10,509 48.7 %



The increase in sales of $4.0 million is primarily from increased foreign
sonobuoy sales of $5.3 million, and U.S. sonobuoy sales of $3.9 million offset
by a reduction in Rugged Electronics sales of $3.1 million and reduced US
engineering sales of $2.1 million. Total sales to the U.S. Navy in the fiscal
years of 2018 and 2017 were approximately $92.8 million and $91.0 million,
respectively. For the fiscal years 2018 and 2017, sales to the U.S. Navy
accounted for 25% and 23%, respectively, of consolidated Company net sales and
61% and 62%, respectively, of ECP segment net sales. ECP backlog was

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$171.5 million at July 1, 2018 compared to $148.0 million at July 2, 2017. A
majority of the July 1, 2018 ECP backlog is currently expected to be realized in
the next 18 months.
Gross margin was positively impacted in the current year by favorable foreign
sonobuoy sales mix and lower overhead as the prior year was negatively impacted
by unabsorbed fixed overhead costs due to new program launch activity. The
selling and administrative expenses were essentially flat.
Internal research and development expenses reflect costs incurred for the
internal development of technologies for use in undersea warfare, navigation,
handheld targeting applications as well as rugged computer and display devices.
These costs include salaries and related expenses, contract labor and consulting
costs, materials and the cost of certain research and development specific
equipment. In fiscal year 2018, ECP increased internal research and development
spending $1.1 million as compared to the same period in fiscal year 2017, due in
part to spending on the GFY19-23 AN/SSQ-125A Production Sonobuoy.
Eliminations and Corporate Unallocated
The following table presents selected consolidated statements of operations data
(dollars in thousands):
                                                                 For fiscal years
                                                    2018          2017         $ Chg       % Chg
Intercompany sales elimination                   $ (12,139 )$ (10,211 )

$ (1,928 ) 18.9 %

Selling and administrative expenses unallocated 19,268 15,279

    3,989       26.1
Legal settlements                                    1,200             -        1,200          -


Total corporate selling and administrative expenses before allocation to
operating segments were $32.6 million and $29.8 million for fiscal years 2018
and 2017, respectively, or 8.7% and 7.5% of consolidated sales, respectively. Of
these costs, $13.3 million and $14.5 million, respectively, were allocated to
segment operations in each of these periods. Allocations of corporate selling
and administrative expenses are based on the nature of the service provided and
can fluctuate from period to period. The increase in unallocated selling and
administrative expenses was a result of higher legal, advisory and employee
retention costs associated with the potential sale of the Company, as well as
other legal costs, which were partially offset by lower performance-based cash
and stock bonuses.
For fiscal year 2017 compared to fiscal year 2016
CONSOLIDATED
The following table presents selected consolidated statements of operations data
(dollars in thousands):
                                                                For fiscal years
                                    2017       % of Sales       2016       % of Sales      $ Chg        % Chg
Net sales - legacy business      $ 397,562        100.0  %   $ 338,776         80.8  %   $ 58,786       17.4  %
Net sales - acquired business            -            -         80,586         19.2       (80,586 )   (100.0 )
Net sales                          397,562        100.0        419,362        100.0       (21,800 )     (5.2 )
Cost of goods sold                 325,663         81.9        339,214         80.9       (13,551 )     (4.0 )
Gross profit                        71,899         18.1         80,148         19.1        (8,249 )    (10.3 )
Selling and administrative
expenses                            54,110         13.6         55,151         13.2        (1,041 )     (1.9 )
Internal research and
development expenses                 1,670          0.4          2,344          0.5          (674 )    (28.8 )
Amortization of intangible
assets                               8,498          2.2          9,592          2.3        (1,094 )    (11.4 )
Restructuring charges                    -            -          2,206          0.5        (2,206 )   (100.0 )
Reversal of accrued contingent
consideration                            -            -         (1,530 )       (0.4 )       1,530     (100.0 )
Impairment of goodwill                   -            -         64,174         15.3       (64,174 )   (100.0 )
Operating income (loss)              7,621          1.9        (51,789 )      (12.3 )      59,410     (114.7 )
Interest and other expense, net     (4,377 )       (1.1 )       (3,710 )       (0.9 )        (667 )     18.0
Income (loss) before income
taxes                                3,244          0.8        (55,499 )      (13.2 )      58,743     (105.8 )
Income taxes                         1,927          0.5        (17,216 )       (4.1 )      19,143     (111.2 )
Net income (loss)                $   1,317          0.3  %   $ (38,283 )       (9.1 )%   $ 39,600     (103.4 )%



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The decrease in net sales was a result of reduced sales of $14.6 million and
$7.2 million in our MDS segment and ECP segment, respectively.
Gross profit was negatively impacted in the current year by lower sales volumes
in both the ECP and MDS segments as well as shift in product mix slightly offset
by favorable overhead in the MDS segment. The decrease in selling and
administrative expense is due to the continued focused effort on cost
containment in both the ECP and MDS segment offset slightly by higher costs at
the corporate office.
Restructuring charges relate to the closing of the Company's Lawrenceville, GA
manufacturing operations and consolidation of its Irvine, CA design center into
its Irvine, CA manufacturing operations.
Accrued contingent consideration related to Hunter of $1.2 million and RTEmd of
$0.3 million, both in the MDS segment, was reversed in fiscal year 2016 as these
acquired companies did not meet the required performance thresholds necessary to
earn their respective contingent considerations.
Interest expense consists of interest and fees on the Company's outstanding debt
and revolving credit facility, including amortization of financing costs.
Interest expense was $4.4 million and $3.8 million for fiscal years 2017 and
2016, respectively. The comparative interest expense reflects increased interest
rates, partially offset by average borrowings under the Company's credit
facility between the two periods. See Note 9, Debt, of the "Notes to
Consolidated Financial Statements" in this Form 10-K for a further discussion of
debt.
The decline in value in the MDS reporting unit in fiscal year 2016 was as a
result of the underperformance of the Company's most recent acquisition (Hunter
Technology Corporation), and the inability to achieve sufficient organic growth
to offset the loss of a large customer due to insourcing, as well as revenue
declines due to fluctuations in customer demand across the MDS reporting unit.
It was determined that goodwill within this reporting unit was fully impaired.
As such, the Company recorded an impairment of goodwill charge of $64.2 million.
The fair value of the Company's ECP reporting unit was in excess of its carrying
value and, as such, indicated no impairment of goodwill.
The Company recorded an income tax expense of $1.9 million, or 59.4% of income
before income taxes in fiscal year 2017. Our tax rate is affected by recurring
items, such as tax rates in foreign jurisdictions and the relative amounts of
income or loss we earn in those jurisdictions, state income taxes and the
domestic production activities deduction. Discrete items impacting our effective
tax rate include return to provision adjustments, certain jurisdictional audit
adjustments and changes in state apportionment factors. See Note 11, Income
Taxes, of the "Notes to Consolidated Financial Statements" in this Form 10-K for
a further discussion of income taxes.
Due to the factors described above, the Company reported net income of $1.3
million, or $0.13 income per share for fiscal year 2017, compared to net loss of
$38.3 million, or $3.91 loss per share for the fiscal year 2016.
MDS
The following table presents selected consolidated statements of operations data
(dollars in thousands):
                                                                For fiscal years
                                    2017       % of Sales       2016       % of Sales       $ Chg        % Chg
Net sales:
Legacy business                  $ 260,514        100.0  %   $ 282,076        100.0  %   $ (21,562 )     (7.6 )%
Intercompany                       (10,074 )       (3.9 )      (17,028 )       (6.0 )        6,954      (40.8 )
  Total net sales                  250,440         96.1        265,048         94.0        (14,608 )     (5.5 )
Gross Profit                        31,441         12.1         34,788         12.3         (3,347 )     (9.6 )
Selling and administrative
expenses                            23,123          8.9         23,813          8.4           (690 )     (2.9 )
Amortization of intangible
assets                               7,011          2.7          7,938          2.8           (927 )    (11.7 )
Restructuring charges                    -            -          2,206          0.8         (2,206 )        -
Reversal of accrued contingent
consideration                            -            -         (1,530 )       (0.5 )        1,530          -
Impairment of goodwill                   -            -         64,174         22.7        (64,174 )        -
Operating income (loss)          $   1,307          0.5  %   $ (61,813 )      (21.9 )%   $  63,120     (102.1 )%


The $14.6 million decrease in net sales was due to the continued insourcing of a
large customer in our medical end-market, the loss of a customer in our
industrial end-market, the closure of our Lawrenceville facility as well as
other volume reductions. These losses were partially offset by new revenue wins
and increased volumes with other customers. Gross profit

                                       27
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was negatively affected in fiscal year 2017 by the lower sales volumes. The
selling and administrative expense decrease is primarily due to lower
compensation and facility costs.
Gross margin on MDS sales was negatively impacted in the current year by an
unfavorable shift in product mix as compared to the prior year.
MDS backlog was $124.8 million at July 2, 2017 compared to $138.5 million at
July 3, 2016. The decrease in backlog is primarily associated with customers
that have executed previously reported insourcing strategies, which has been
partially offset by backlog growth from new customers. Commercial orders, in
general, may be rescheduled or canceled without significant penalty, as a
result, our backlog may not be a meaningful measure of future sales. A majority
of the July 2, 2017 MDS backlog is currently expected to be realized in the next
12 months.
Restructuring charges relate to the previously discussed closing of the
Company's Lawrenceville, GA manufacturing operations and consolidation of its
Irvine, CA design center into its Irvine, CA manufacturing operations. The
reversal of accrued contingent consideration related to Hunter and RTEmd, as
previously discussed.
The decline in value in the MDS reporting unit in fiscal year 2016 was as a
result of the underperformance of the Company's most recent acquisition (Hunter
Technology Corporation), and the inability to achieve sufficient organic growth
to offset the loss of a large customer due to insourcing, as well as revenue
declines due to fluctuations in customer demand across the MDS reporting unit.
It was determined that goodwill within this reporting unit was fully impaired.
As such, the Company recorded an impairment of goodwill charge of $64.2 million.
ECP
The following table presents selected consolidated statements of operations data
(dollars in thousands):
                                                                For fiscal years
                                    2017       % of Sales       2016       % of Sales      $ Chg        % Chg
Net sales:
Legacy business                  $ 147,259        100.0  %   $ 154,559        100.0  %   $ (7,300 )     (4.7 )%
Intercompany                          (137 )       (0.1 )         (245 )       (0.2 )         108      (44.1 )
  Total net sales                  147,122         99.9        154,314         99.8        (7,192 )     (4.7 )
Gross profit                        40,458         27.5         45,360         29.3        (4,902 )    (10.8 )
Selling and administrative
expenses                            15,708         10.7         15,482         10.0           226        1.5
Internal research and
development expenses                 1,670          1.1          2,344          1.5          (674 )    (28.8 )
Amortization of intangible
assets                               1,487          1.0          1,654          1.1          (167 )    (10.1 )
Operating income                 $  21,593         14.7  %   $  25,880

16.7 % $ (4,287 ) (16.6 )%



The decrease in sales is primarily from reduced engineering sales of $11.7
million to the U.S. Navy, foreign sonobuoy sales of $2.5 million and $1.9
million in Rugged Electronic sales, partially offset by increased sales in
domestic sonobuoys of $9.3 million. Total sales to the U.S. Navy in the fiscal
years of 2017 and 2016 were approximately $91.0 million and $93.5 million,
respectively. For the fiscal years 2017 and 2016, sales to the U.S. Navy
accounted for 23% and 22%, respectively, of consolidated Company net sales and
62% and 61%, respectively, of ECP segment net sales. ECP backlog was $148.0
million at July 2, 2017 compared to $142.2 million at July 3, 2016. A majority
of the July 2, 2017 ECP backlog is currently expected to be realized in the next
18 months.
Gross profit was negatively impacted in the current year by lower sales volumes,
unfavorable product mix and unabsorbed fixed overhead costs due to new program
launch activity compared to the previous year. The increase in selling and
administrative expense is due to higher corporate allocated costs.
Internal research and development expenses reflect costs incurred for the
internal development of technologies for use in undersea warfare, navigation,
handheld targeting applications as well as rugged computer and display devices.
These costs include salaries and related expenses, contract labor and consulting
costs, materials and the cost of certain research and development specific
equipment.

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Eliminations and Corporate Unallocated
The following table presents selected consolidated statements of operations data
(dollars in thousands):
                                                                  For fiscal years
                                                   2017          2016          $ Chg        % Chg
Intercompany sales eliminations                 $ (10,211 )$ (17,273 )$   7,062       (40.9 )%
Selling and administrative expenses unallocated    15,279        15,856     

(577 ) (3.6 )



Total corporate selling and administrative expenses before allocation to
operating segments were $29.8 million and $27.0 million for fiscal years 2017
and 2016, respectively, or 7.5% and 7.0% of consolidated sales, respectively. Of
these costs, $14.5 million and $13.5 million, respectively, were allocated to
segment operations in each of these periods. Allocations of corporate selling
and administrative expenses are based on the nature of the service provided and
can fluctuate from period to period. The decrease in unallocated selling and
administrative expenses was a result of ongoing efforts to reduce corporate
selling, general and administrative expenses.
Liquidity and Capital Resources
As of July 1, 2018, the Company had $31.5 million available under its $120.0
million credit facility, reflecting borrowings of $84.5 million, certain letters
of credit outstanding of $3.8 million and capital leases of $0.2 million.
Additionally, the Company had available cash and cash equivalents of $1.2
million, as of such date.
On September 11, 2014, the Company entered into a revolving line-of-credit
facility with a group of banks (the "Credit Facility"). The Company amended the
Credit Facility on March 16, 2015, April 13, 2015, June 27, 2016, June 30, 2017
and again on May 3, 2018. As of July 1, 2018, the Company is permitted to borrow
up to $120,000 under the Credit facility. The Credit facility is secured by
substantially all assets of the Company and its subsidiaries and expires on
September 11, 2019.
On June 30, 2017, the Company entered into Amendment No.4 ("Amendment 4") to the
Credit Facility. As a result of Amendment 4, the Company reduced the revolving
credit facility from $175.0 million to $125.0 million, increased the permitted
total funded debt to EBITDA ratio through the fiscal quarter ending March 2018
and provided for further restrictions on business acquisitions.
On May 3, 2018, the Company entered into Amendment No.5 ("Amendment 5") to the
Credit Facility. As a result of Amendment 5, the Company reduced the revolving
credit facility from $125.0 million to $120.0 million, increased the permitted
total funded debt to EBITDA ratio for the fiscal quarters ending April 1, 2018
and July 1, 2018 and increased the interest rates to either LIBOR, plus 3.50% to
4.50%, or the bank's base rate, as defined, plus 2.50% to 3.50%.
Costs incurred of $1.2 million and $0.8 million related to amendments, which
were determined to be debt modifications, were recorded as deferred financing
costs in other long-term assets in fiscal years 2018 and 2017, respectively.
During fiscal year 2018, $0.6 million of deferred financing costs were written
off due to amendments and were reported as interest expense in the statement of
operations and as amortization of deferred financing costs in the statement of
cash flows.
Outstanding borrowings under the Credit Facility will bear interest, at the
Company's option, at either LIBOR, fixed for interest periods of one, two, three
or six month periods, plus 3.50% to 4.50%, or at the bank's base rate, as
defined, plus 2.50% to 3.50%, based upon the Company's Total Funded Debt/EBITDA
Ratio, as defined. The Company is also required to pay commitment fees on unused
portions of the Credit Facility at 0.50%. The Credit Facility includes
representations, covenants and events of default that are customary for
financing transactions of this nature. The effective interest rate on the
outstanding borrowings under the Credit Facility was 6.85% at July 1, 2018.
As a condition of the Credit Facility, the Company is subject to certain
customary covenants, with which it was in compliance with at July 1, 2018.
We have a revolving line-of-credit facility with a group of banks which is
secured by substantially all the assets of the Company that expires in September
2019. This credit facility is a component of our ongoing working capital
funding. Available borrowings against this facility are limited by, among other
things, an EBITDA (as determined under the agreement) to debt ratio. Over the
term of this agreement, the facility has been modified several times to allow
for increases in this ratio, as well as other relief, to provide flexibility
during the Company's exploration of a sale transaction. The most recent
amendment to the facility provides for an increase to the leverage ratio through
September 30, 2018. We intend to restructure this facility upon its expiration
in September 2019, or sooner as conditions dictate, to provide for appropriate
ongoing liquidity. Renegotiating this facility will very likely require
restructuring our long term debt and will increase the interest rates we pay on
our long term debt. Additionally, we may require a further amendment or waiver
to our facility after September 30, 2018 to provide for

                                       29
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liquidity through the closing of a potential sale transaction or through our
negotiation of a new debt structure if no sale transaction is consummated. We
believe that we will be able to secure the appropriate debt structure for the
Company if no sale transaction is consummated and that our bank group will
provide for the necessary amendments or waivers while such a structure is
negotiated.
The Company currently expects to meet its liquidity needs through a combination
of sources including, but not limited to, operations, existing cash balances,
its revolving line-of-credit and anticipated continuation of performance based
billings on certain ECP contracts. With the above sources providing the expected
cash flows, the Company currently believes that it will have sufficient
liquidity for its anticipated needs over the next 12 months, but no assurances
regarding liquidity can be made.
Certain of the Company's ECP contracts with the U.S. Navy allow for billings to
occur when certain milestones under the applicable program are reached,
independent of the amount shipped by Sparton as of such date. These performance
based billings reduce the amount of cash that would otherwise be required during
the performance of these contracts. As of July 2, 2017, $1.7 million of proceeds
from billings in excess of costs were received and were reported in the
Consolidated Balance Sheets as other accrued expenses. There were no such
proceeds recorded as of July 1, 2018.
A portion of our operating income is earned outside of the United States. As of
our most recent income tax filing for fiscal year 2017, earnings in Vietnam are
deemed to be indefinitely reinvested in foreign jurisdictions while earnings in
Canada are not deemed to be indefinitely reinvested. We are currently assessing
the impact of the Tax Act on the repatriation of funds from foreign
subsidiaries. We currently do not intend or foresee a need to repatriate funds
from jurisdictions for which we assert indefinite reinvestment. We expect
existing domestic cash and cash flows of operations to continue to be sufficient
to fund our domestic operating activities and cash commitments for investing and
financing activities, such as debt repayment and capital expenditures, for at
least the next 12 months and thereafter for the foreseeable future. The Company
has recorded no liability related to Canada earnings as that entity has not had
positive cumulative earnings and profits.
                                                              For fiscal 

years

CASH FLOWS                                           2018           2017    

2016

Operating activities, excluding changes in
working capital                                  $   14,246$   18,293$   22,084
Net changes in working capital                      (18,355 )       13,175         26,048
Operating activities                                 (4,109 )       31,468         48,132
Investing activities                                 (4,213 )       (6,874 )       (4,842 )
Financing activities                                  8,494        (23,738 )      (58,072 )
Net change in cash                               $      172$      856$  (14,782 )


Cash flows from operating activities, excluding changes in working capital, for
fiscal years 2018, 2017 and 2016 reflect the Company's relative operating
performance during those periods. Fiscal year 2018 working capital related cash
flows primarily reflect increased accounts receivable and inventories, partially
offset by increased liabilities. Fiscal year 2017 working capital related cash
flows primarily reflect decreased inventory, partially offset by a decrease in
accounts payable. Fiscal year 2016 working capital related cash flows primarily
reflect decreased accounts receivable as well as a decrease in accounts payable.

Cash flows from investing activities include net capital expenditures of $4.2
million, $6.9 million and $6.1 million in fiscal years 2018, 2017 and 2016,
respectively. Additionally, cash flows from investing activities in fiscal year
2016 reflects a sale of marketable equity securities, as well as cash received
in relation to a 2015 acquisition.
Cash flows from financing activities reflect net (borrowings) and net repayments
of $(10.0) million, $22.7 million and $57.3 million for 2018, 2017 and 2016,
respectively, under the Company's Credit Facility. Amendments to the Company's
Credit Facility resulted in payments of debt financing costs of $1.2 million,
$0.8 million and $0.7 million in fiscal years 2018, 2017 and 2016, respectively.
There were no stock options exercised in fiscal years 2018, 2017 or 2016.

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Commitments and Contingencies
See Note 13, Commitments and Contingencies, of the "Notes to Consolidated
Financial Statements" in this Form 10-K.
Contractual Obligations
Future minimum contractual cash obligations for the next five years and in the
aggregate at July 1, 2018, are as follows (in thousands):
                                                            Payments Due By Period
                                                  Less than                                       More than
                                     Total         1 Year         2-3 Years       4-5 Years        5 Years
Contractual obligations:
Debt                              $  84,500     $         -     $    84,500     $         -     $         -
Cash interest (1)                     7,391           6,117           1,274               -               -
Operating leases (2)                 12,301           2,759           4,671           2,740           2,131
Legal settlement                      1,000           1,000               -               -               -
Environmental liabilities             5,508             642             829             972           3,065
Non-current employee compensation     1,078               -           1,078               -               -
Non-cancelable purchase orders       58,963          58,963               -               -               -
Total                             $ 170,741$    69,481$    92,352$     3,712$     5,196

(1) Cash interest reflects interest payments on the Company's Credit Facility

discussed previously and consists of interest on outstanding borrowings,

letters of credit fees of 4.5% and the unused line commitment fee of 0.5%.

The effective interest rate on the outstanding borrowing under the credit

facility was 6.85% at July 1, 2018.

(2) Does not include payments due under future renewals to the original lease

terms.



Debt - Debt consists of amounts owed under the Company's Credit Facility. See
Note 9, Debt, of the "Notes to Consolidated Financial Statements" in this Form
10-K for a summary of the Company's banking arrangements.
Operating leases - See Note 13, Commitments and Contingencies, of the "Notes to
Consolidated Financial Statements" in this Form 10-K for discussion of operating
leases.
Environmental liabilities - See Note 13, Commitments and Contingencies, of the
"Notes to Consolidated Financial Statements" in this Form 10-K for a description
of the accrual for environmental remediation. Of the $5.5 million total, $0.6
million is classified as a current liability and $4.9 million is classified as a
long-term liability, both of which are included on the balance sheet as of
July 1, 2018.
Non-current employee compensation - Employee retention payments payable in
September of 2019, which are cancelable in the event of a sale of the Company.
Non-cancelable purchase orders - Binding orders the Company has placed with
suppliers that are subject to quality and performance requirements.
Off-Balance Sheet Arrangements
The Company has standby letters of credit outstanding of $3.8 million at July 1,
2018, principally to support an operating lease agreement. Other than these
standby letters of credit and the operating lease commitments included above, we
have no off-balance sheet arrangements that would have a current or future
material effect on our financial condition, changes in financial condition,
revenue, expense, results of operations, liquidity, capital expenditures or
capital resources.
Inflation
We believe that inflation has not had a significant impact in the past and is
not likely to have a significant impact in the foreseeable future on our results
of operations.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates, judgments and assumptions that
affect the amounts reported as assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. Estimates are regularly
evaluated and are based on historical experience and on various other
assumptions believed to be reasonable under the circumstances. Actual results
could differ from those estimates. In many cases, the accounting treatment of a
particular transaction is specifically dictated by GAAP and does not require
management's judgment in application. There are also areas in which management's
judgment in selecting among available alternatives would not produce a
materially different result. See Note 2, Summary of Significant Accounting
Policies, of the "Notes to Consolidated Financial Statements" in this Form 10-K
for a further discussion of significant accounting policies. Senior management
has reviewed these critical accounting policies and related disclosures with the
audit committee of Sparton's Board of Directors.
Environmental Contingencies
Sparton has been involved with ongoing environmental remediation since the early
1980's related to one of its former manufacturing facilities, located in
Albuquerque, New Mexico ("Coors Road"). Although the Company entered into a
long-term lease of the Coors Road property that was accounted for as a sale of
property during fiscal year 2010, it remains responsible for the remediation
obligations related to its past operation of this facility. During the fourth
quarter of each fiscal year, Sparton performs a review of its remediation plan,
which includes remediation methods currently in use, desired outcomes, progress
to date, anticipated progress and estimated costs to complete the remediation
plan by fiscal year 2030, following the terms of a March 2000 Consent Decree
with the United States Environmental Protection Agency ("EPA"). The Company's
minimum cost estimate is based upon existing technology and excludes certain
legal costs, which are expensed as incurred. The Company's estimate includes
equipment and operating and maintenance costs for onsite and offsite pump and
treatment containment systems, as well as continued onsite and offsite
monitoring. It also includes periodic reporting requirements. The review
performed in the fourth quarters of fiscal years 2018, 2017 and 2016 did not
result in material changes to the related liability. As of July 1, 2018 and
July 2, 2017, Sparton has accrued $5.5 million and $6.0 million, respectively,
as its estimate of the remaining minimum future undiscounted financial liability
with respect to this matter, of which $0.6 million and $0.6 million was
classified as a current liability and included on the balance sheet in other
accrued expenses.
As of the end of each fiscal year, the Company is required to certify compliance
with EPA financial assurance requirements. If the Company is not in compliance,
funds for the remediation must be set aside. The Company does not expect to be
in compliance as of the end of fiscal year 2018 as a result of $9.2 million of
income tax expense related to tax law changes from the Tax Cuts and Jobs Act of
2017 recorded in fiscal year 2018. The Company was in compliance with these
requirements as of the end of fiscal year 2017. However, the Company was not in
compliance with these requirements as of the end of fiscal year 2016 as a result
of the goodwill write-off of $64.2 million in fiscal year 2016. In order to meet
the EPA's financial assurance requirements related to the Coors Road
environmental remediation liability as of the end of fiscal year 2016, the
Company established the Sparton Corporation Standby Financial Assurance Trust on
October 3, 2016 which was funded by a standby letter of credit in the amount of
$3.1 million. As the Company was again in compliance with these requirements as
of the end of fiscal year 2017, the Company dissolved the trust and canceled the
letter of credit. In order to address the non-compliance as of the end of fiscal
year 2018, the Company expects to establish a new trust which will be funded
with cash, or a new standby letter of credit, in the amount of approximately
$2.5 million.
In fiscal year 2003, Sparton reached an agreement with the United States
Department of Energy ("DOE") and others to recover certain remediation costs.
Under the settlement terms, Sparton received cash and obtained some degree of
risk protection as the DOE agreed to reimburse Sparton for 37.5% of certain
future environmental expenses in excess of $8.4 million incurred from the date
of settlement, of which $7.6 million has been expended as of July 1, 2018 toward
the $8.4 million threshold. It is expected that the DOE reimbursements will
commence in the years after fiscal year 2019. At July 1, 2018 and at July 2,
2017, the Company recognized $1.6 million in long-term assets in relation to
these expected reimbursements which are considered collectible and are included
in other non-current assets on the balance sheet. Uncertainties associated with
environmental remediation contingencies are pervasive and often result in wide
ranges of reasonably possible outcomes. Estimates developed in the early stages
of remediation can vary significantly. Normally a finite estimate of cost does
not become fixed and determinable at a specific point in time. Rather, the costs
associated with environmental remediation become estimable over a continuum of
events and activities that help to frame and define a liability. Factors which
cause uncertainties for the Company include, but are not limited to, the
effectiveness of the current work plans in achieving targeted results and
proposals of regulatory agencies for desired methods and outcomes. It is
possible that cash flows and results of operations could be materially affected
by the impact of changes associated with the ultimate resolution of this
contingency. At July 1, 2018, the Company estimates that it is reasonably
possible, but not probable, that future environmental remediation costs
associated with the Company's past operations at the Coors Road property, in
excess of amounts already

                                       32
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recorded, could be up to $2.3 million before income taxes over the next twelve
years, with this amount expected to be offset by related reimbursement from the
DOE for a net amount of $1.4 million.
The Company and its subsidiaries are also involved in certain existing
compliance issues with the EPA and various state agencies, including being named
as a potentially responsible party at several sites. Potentially responsible
parties ("PRPs") can be held jointly and severally liable for the clean-up costs
at any specific site. The Company's past experience, however, has indicated that
when it has contributed relatively small amounts of materials or waste to a
specific site relative to other PRPs, its ultimate share of any clean-up costs
has been minor. Based upon available information, the Company believes it has
contributed only small amounts to those sites in which it is currently viewed as
a PRP and that reasonably possible losses related to these compliance issues are
immaterial.
Revenue Recognition
The Company's net sales are comprised primarily of product sales, with
supplementary revenues earned from engineering and design services. Standard
contract terms are FOB shipping point. Revenue from product sales is generally
recognized upon shipment of the goods; service revenue is recognized as the
service is performed or under the percentage of completion method, depending on
the nature of the arrangement.
Long-term contracts related to ECP sonobuoy sales to the U.S. Navy and foreign
government customers that require lot acceptance testing recognize revenue under
the units-of-production percentage of completion method (whereby revenue is
recognized when production and internal testing of each lot of sonobuoys is
completed and a lot sample is shipped to the U.S. Navy (or foreign customer) or
a subassembly lot is shipped to our joint venture partner for further production
and eventual testing, acceptance, and shipment to the customer). For sonobuoy
sales that do not require lot acceptance testing, the Company recognizes revenue
on a units-shipped percentage of completion basis.
The Company additionally has certain other long-term contracts that are
accounted for under the percentage-of-completion method of accounting, whereby
contract revenues are recognized on a pro-rata basis based upon the ratio of
costs incurred compared to total estimated contract costs. Contract costs
include labor and material placed into production, as well as allocation of
indirect costs.
Losses for the entire amount of long-term contracts are recognized in the period
when such losses are determinable. Significant judgment is exercised in
determining estimated total contract costs including, but not limited to, cost
experience to date, estimated length of time to contract completion, costs for
materials, production labor and support services to be expended and known issues
on remaining units to be completed. In addition, estimated total contract costs
can be significantly affected by changing test routines and procedures,
resulting design modifications and production rework from these changing test
routines and procedures and limited range access for testing these design
modifications and rework solutions. Estimated costs developed in the early
stages of contracts can change, sometimes significantly, as the contracts
progress and events and activities take place. Changes in estimates can also
occur when new designs are initially placed into production. The Company
formally reviews its costs incurred-to-date and estimated costs to complete on
all significant contracts at least quarterly and revised estimated total
contract costs are reflected in the financial statements. Depending upon the
circumstances, it is possible that the Company's financial position, results of
operations and cash flows could be materially affected by changes in estimated
costs to complete one or more significant government contracts.
Commercial Inventory Valuation
Valuation of commercial customer inventories requires a significant degree of
judgment. These valuations are influenced by the Company's experience to date
with both customers and other markets, prevailing market conditions for raw
materials, contractual terms and customers' ability to satisfy these
obligations, environmental or technological materials obsolescence, changes in
demand for customer products and other factors resulting in acquiring materials
in excess of customer product demand. Contracts with some commercial customers
may be based upon estimated quantities of product manufactured for shipment over
estimated time periods. Raw material inventories are purchased to fulfill these
customer requirements. Within these arrangements, customer demand for products
frequently changes, sometimes creating excess and obsolete inventories.
The Company regularly reviews raw material inventories by customer for both
excess and obsolete quantities. Wherever possible, the Company attempts to
recover its full cost of excess and obsolete inventories from customers or, in
some cases, through other markets. When it is determined that the Company's
carrying cost of such excess and obsolete inventories cannot be recovered in
full, a charge is taken against income for the difference between the carrying
cost and the estimated realizable amount. These cost adjustments for excess and
obsolete inventory create a new cost basis for the inventory. The Company
recorded inventory write-downs totaling $0.9 million, $0.5 million and $1.7
million for fiscal years 2018, 2017 and 2016, respectively. These charges are
included in cost of goods sold for the periods presented. If inventory that has
previously been impaired is subsequently sold, the amount of reduced cost basis
is reflected as cost of goods sold. The Company experienced

                                       33
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minimal subsequent sales of excess and obsolete inventory during fiscal years
2018, 2017 and 2016 that resulted in higher gross margins due to previous
write-downs. Such sales and the impact of those sales on gross margin were not
material to the years presented. If assumptions the Company has used to value
its inventory deteriorate in the future, additional write-downs may be required.
Allowance for Probable Losses on Receivables
The accounts receivable balance is recorded net of allowances for amounts not
expected to be collected from customers. The allowance is estimated based on
historical experience of write-offs, the level of past due amounts, information
known about specific customers with respect to their ability to make payments
and future expectations of conditions that might impact the collectability of
accounts. Accounts receivable are generally due under normal trade terms for the
industry. Credit is granted and credit evaluations are periodically performed,
based on a customer's financial condition and other factors. Although the
Company does not generally require collateral, cash in advance or letters of
credit may be required from customers in certain circumstances, including some
foreign customers. When management determines that it is probable that an
account will not be collected, it is charged against the allowance for doubtful
accounts. The Company reviews the adequacy of its allowance monthly. The
allowance for doubtful accounts considered necessary was $0.2 million and $0.4
million at July 1, 2018 and July 2, 2017, respectively. If the financial
condition of customers were to deteriorate, resulting in an impairment of their
ability to make payment, additional allowances may be required. Given the
Company's significant balance of government receivables and in some cases
letters of credit from foreign customers, collection risk is considered minimal.
Historically, uncollectible accounts have generally been insignificant, have
generally not exceeded management's expectations and the allowance is deemed
adequate.
Pension Obligations
The Company calculates the cost of providing pension benefits under the
provisions of FASB Accounting Standards Codification ("ASC") Topic 715,
"Compensation - Retirement Benefits", ("ASC Topic 715"). The key assumptions
required within the provisions of ASC Topic 715 are used in making these
calculations. The most significant of these assumptions are the discount rate
used to value the future obligations and the expected return on pension plan
assets. The discount rate is consistent with market interest rates on
high-quality, fixed income investments. The expected return on assets is based
on long-term returns and assets held by the plan, which is influenced by
historical averages. If actual interest rates and returns on plan assets
materially differ from the assumptions, future adjustments to the financial
statements would be required. While changes in these assumptions can have a
significant effect on the pension benefit obligation and the unrecognized gain
or loss accounts, the effect of changes in these assumptions is not expected to
have the same relative effect on net periodic pension expense in the near term.
While these assumptions may change in the future based on changes in long-term
interest rates and market conditions, there are no known expected changes in
these assumptions as of July 1, 2018. As indicated above, to the extent the
assumptions differ from actual results, there would be a future impact on the
financial statements. The extent to which this will result in future expense is
not determinable at this time as it will depend upon a number of variables,
including trends in interest rates and the actual return on plan assets. The
annual actuarial valuation of the pension plan is completed at the end of each
fiscal year. Based on these valuations, net periodic pension expense for fiscal
years 2018, 2017 and 2016 was calculated to be $0.2 million, $0.3 million and
$0.3 million, respectively.
Effective April 1, 2009, participation and the accrual of benefits in the
Company's pension plan were frozen, at which time all participants became fully
vested and all remaining prior service costs were recognized. Lump-sum benefit
distributions during fiscal years 2018 and 2017 exceeded plan service and
interest costs, resulting in lump-sum settlement charges of $0.2 million and
$0.2 million also being recognized during the respective years. See Note 12,
Employee Retirement Benefit Plans, of the "Notes to Consolidated Financial
Statements" in this Form 10-K for further details regarding the Company's
pension plan.
GoodwillGoodwill resulting from business combinations represents the excess of purchase
price over the fair value of the net assets of the businesses acquired. Goodwill
is not amortized, but rather tested for impairment annually, as well as whenever
there are events or changes in circumstances (triggering events) which suggest
that the carrying value of goodwill may not be recoverable. The Company performs
its annual goodwill impairment testing in the fourth quarter based on its
historical financial results through the third quarter end. The goodwill
impairment test is performed at the reporting unit level, which is the lowest
level at which goodwill is evaluated for management purposes. The Company has
identified reporting units to be its two reportable business segments - MDS and
ECP for fiscal years 2018, 2017 and 2016.
The Company may elect to perform a qualitative assessment for its annual
goodwill impairment test. If the qualitative assessment indicates that it is
more likely than not that the fair value of a reporting unit is less than its
carrying amount, or if Sparton elects to not perform a qualitative assessment,
then the Company would be required to perform a quantitative impairment test for
goodwill.

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The quantitative impairment analysis is a two-step process. First, the Company
determines the fair value of the reporting unit and compares it to its carrying
value. The fair value of reporting units is determined based on a weighting of
both projected discounted future results and comparative market multiples. The
projected discounted future results (discounted cash flow approach) is based on
assumptions that are consistent with the Company's estimates of future growth
and the strategic plan used to manage the underlying business. Factors requiring
significant judgment include assumptions related to future revenue growth rates,
operating margins, terminal growth rates and discount factors, amongst other
considerations. If the carrying value of the reporting unit exceeds the fair
value in the first step, a second step is performed to measure the amount of an
impairment loss. In the second step, an impairment loss is recognized for any
excess of the carrying value of the reporting unit's goodwill over its implied
fair value. The implied fair value of goodwill is determined by allocating the
fair value of the reporting unit using a residual fair value allocation. The
residual fair value allocated to goodwill is the implied fair value of the
reporting unit's goodwill. The Company's fair value estimates related to its
goodwill impairment analyses are based on Level 3 inputs within the fair value
hierarchy as described in Note 2, Summary of Significant Accounting Policies, of
the "Notes to Consolidated Financial Statements" in this Form 10-K. Determining
the fair value of any reporting unit and intangible asset is judgmental in
nature and involves the use of significant estimates and assumptions. The
Company bases its fair value estimates on assumptions believed to be reasonable,
but which are unpredictable and inherently uncertain. Actual future results may
differ from those estimates. Circumstances that may lead to future impairment of
goodwill include, but are not limited to, unforeseen decreases in future
performance or industry demand, a further loss of a significant customer or the
inability to achieve sufficient organic revenue growth to offset fluctuations in
customer demand.
In fiscal year 2018, as part of its evaluation of intangible assets, the Company
engaged a third party to assist with performing Step 1 of the goodwill
impairment test. The result of the test was that the fair value of the Company's
ECP reporting unit was in excess of its carrying value at the end of fiscal year
2018 and, as such, indicated no impairment of goodwill. The MDS reporting unit
has no goodwill at July 1, 2018 and July 2, 2017. In fiscal year 2017, the
Company elected to perform the optional qualitative assessment of goodwill and
concluded that it was more likely than not that the fair value of goodwill in
its ECP reporting unit was in excess of its respective carrying amount and
therefore, no further testing was required. In fiscal year 2016, the Step 1
impairment testing of goodwill was performed and resulted in the carrying values
of its MDS reporting unit in excess of its fair value indicating potential
impairment. The decline in value in the MDS reporting unit was a result of the
underperformance of the Company's most recent acquisition (Hunter Technology
Corporation), and the inability to achieve sufficient organic growth to offset
the loss of a large customer due to insourcing, as well as revenue declines due
to fluctuations in customer demand across the MDS reporting unit. The Company
performed Step 2 of the goodwill impairment test for this reporting unit and
based on the valuation of the reporting unit, as well as the fair value of the
reporting unit's individual tangible and intangible assets, it was determined
that goodwill within this reporting unit was fully impaired. As such, the
Company recorded an impairment of goodwill charge of $64.2 million. Prior to the
fourth quarter of fiscal year 2016, no triggering events or other facts and
circumstances were identified that indicated that it was more likely than not
that the fair value of the MDS segment was less than its carrying value. The
impairment recognized in the fourth quarter of fiscal year 2016 was a result of
the continued underperformance of the acquired Hunter Technology Corporation
operations and the inability of the Company to achieve sufficient organic
revenue growth to offset fluctuations in customer demands. The fair value of the
Company's ECP reporting unit was in excess of its carrying value at the end of
fiscal year 2016 and, as such, indicated no impairment of goodwill.
Other Intangible Assets
The Company's intangible assets other than goodwill represent the values
assigned to acquired customer relationships, acquired non-compete agreements,
acquired trademarks/tradenames and acquired unpatented technology and patents.
At July 1, 2018, the remaining balance of customer relationships and non-compete
agreements totaling $16.0 million and $0.6 million, respectively, are included
in the MDS segment, while the remaining balance of customer relationships,
non-compete agreements, trademarks/trade names, unpatented technology and
patents totaling $3.1 million, $0.1 million, $1.0 million and $0.3 million,
respectively, are included in the ECP segment. The impairment test for these
intangible assets is conducted when impairment indicators are present. The
Company continually evaluates whether events or circumstances have occurred that
would indicate the remaining estimated useful lives of its intangible assets
warrant revision or that the remaining balance of such assets may not be
recoverable. The Company uses an estimate of the related undiscounted cash flows
over the remaining life of the asset in measuring whether the asset is
recoverable. If the carrying amount of an asset exceeds its estimated
undiscounted future cash flows, an impairment charge would be recognized for the
amount that the carrying amount of the asset exceeds the fair value of the
asset. The Company's fair value estimates related to its intangible assets
impairment analyses are based on Level 3 inputs within the fair value hierarchy
as described in Note 2, Summary of Significant Accounting Policies, of the
"Notes to Consolidated Financial Statements" in this Form 10-K. The Company
engaged a third party to assist with the valuation of the recoverability of
intangible assets in the fourth quarters of fiscal years 2018 and 2016 and
performed an

                                       35
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internal valuation in the fourth quarter of fiscal year 2017. It was determined
for all periods that the assets were fully recoverable and no write-down of such
assets was necessary.
Acquired customer relationships are being amortized using an accelerated
methodology over periods of seven to fifteen years. Acquired non-compete
agreements are being amortized on a straight-line basis over periods of two to
five years as the ratable decline in value over time is most consistent with the
contractual nature of these assets. Acquired trademarks/trade names are being
amortized on a straight-line basis over periods of one to ten years and acquired
unpatented technology is being amortized using an accelerated methodology over
seven years. Patents are being amortized using an accelerated methodology over
three years.
Other long-lived assets
The Company reviews other long-lived assets, including property, plant and
equipment that are not held for sale, for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment is determined by comparing the carrying value of the
assets to their estimated future undiscounted cash flows. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset group exceeds the fair value of
the asset group. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
Income Taxes
We recognize federal, state and foreign current tax liabilities or assets based
on our estimate of taxes payable or refundable in the current fiscal year by tax
jurisdiction. We also recognize federal, state and foreign deferred tax assets
or liabilities, as appropriate, for our estimate of future tax effects
attributable to temporary differences and carryforwards.
We recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the consolidated financial statements from such positions
are measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate resolution. Management must also
assess whether uncertain tax positions as filed could result in the recognition
of a liability for possible interest and penalties if any. Our estimates are
based on the information available to us at the time we prepare the income tax
provisions. Our income tax returns are subject to audit by federal, state and
local governments, generally years after the returns are filed. These returns
could be subject to material adjustments or differing interpretations of the tax
laws. We recognize interest and penalties related to unrecognized tax benefits
on the income tax expense line in the accompanying consolidated statements of
operations. Accrued interest and penalties are included on the related tax
liability line in the consolidated balance sheets.
Our calculation of current and deferred tax assets and liabilities is based on
certain estimates and judgments and involves dealing with uncertainties in the
application of complex tax laws. Our estimates of current and deferred tax
assets and liabilities may change based, in part, on added certainty or finality
to an anticipated outcome, changes in accounting or tax laws in the United
States and overseas, or changes in other facts or circumstances. In addition, we
recognize liabilities for potential United States tax contingencies based on our
estimate of whether, and the extent to which, additional taxes may be due. If we
determine that payment of these amounts is unnecessary, or if the recorded tax
liability is less than our current assessment, we may be required to recognize
an income tax benefit, or additional income tax expense, respectively, in our
consolidated financial statements.
In preparing our consolidated financial statements, management assesses the
likelihood that our deferred tax assets will be realized from future taxable
income. In evaluating our ability to recover our deferred income tax assets,
management considers all available positive and negative evidence, including
operating results, ongoing tax planning and forecasts of future taxable income
on a jurisdiction by jurisdiction basis. A valuation allowance is established if
we determine that it is more likely than not that some portion or all of the net
deferred tax assets will not be realized.
In December 2017, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 118 which addresses how a company recognizes provisional amounts
when a company does not have the necessary information available, prepared or
analyzed (including computations) in reasonable detail to complete the
accounting for certain tax effects of the Tax Act and provides a one-year
measurement period. The ultimate impact of the Tax Act may differ from the
provisional amounts the Company recorded due to additional analysis, changes in
interpretations and assumptions the Company has made and additional regulatory
guidance that may be issued. See Note 11, Income Taxes, of the "Notes to
Consolidated Financial Statements" in this Form 10-K for further discussion of
the Tax Act.

                                       36
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Stock-Based Compensation
ASC Topic 718, "Share-Based Payment", requires significant judgment and the use
of estimates in the assumptions for the model used to value the share-based
payment awards, including stock price volatility and expected option terms. In
addition, expected forfeiture rates for the share-based awards are estimated.
Because of our small number of option grants during our history, we are limited
in our historical experience to use as a basis for these assumptions. While we
believe that the assumptions and judgments used in our estimates are reasonable,
actual results may differ from these estimates under different assumptions or
conditions.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting
Standards Update ("ASU") No. 2014-09 ("ASU 2014-09"), Revenue from Contracts
with Customers, which amends guidance for revenue recognition. Under the new
standard, revenue will be recognized when control of the promised goods or
services is transferred to customers in an amount that reflects the
consideration to which the Company expects to be entitled in exchange for those
goods and services. The standard creates a five-step model that will generally
require companies to use more judgment and make more estimates than under
current guidance when considering the terms of contracts along with all relevant
facts and circumstances. These include the identification of customer contracts
and separating performance obligations, the determination of transaction price
that potentially includes an estimate of variable consideration, allocating the
transaction price to each separate performance obligation, and recognizing
revenue in line with the pattern of transfer. In August 2015, the FASB issued an
amendment to defer the effective date for all entities by one year. The new
standard will become effective for annual reporting periods beginning after
December 15, 2017, including interim periods within that reporting period.
Companies have the option of using either a full or modified retrospective
approach in applying this standard. During fiscal years 2016 and 2017, the FASB
issued four additional updates which further clarify the guidance provided in
ASU 2014-09. The Company has identified significant contracts with customers and
the promised goods and/or services associated with the revenue streams for each
segment. The Company has evaluated the distinct performance obligations and the
pattern of revenue recognition of these significant contracts. It has also
identified the impact of adopting the standard on its control framework and
introduced changes to its systems and other controls process. The Company has
determined that the new revenue standard will primarily result in a change to
the timing of the Company's revenue recognition for ECP sales in which Sparton
starts the production of sonobuoys and ships completed subassemblies to its
ERAPSCO related party for additional processing before being delivered to
customers. The Company has determined that the transitional adjustment will not
be material. The Company will use a modified retrospective adoption effective
July 2, 2018.  Under this approach, prior financial statements presented will
not be restated.
In July 2015, the FASB issued ASU No. 2015-11 ("ASU 2015-11"), Simplifying the
Measurement of Inventory. ASU 2015-11 clarifies that inventory should be held at
the lower of cost or net realizable value. Net realizable value is defined as
the estimated selling price, less the estimated costs to complete, dispose and
transport such inventory. ASU 2015-11 was effective for fiscal years and interim
periods beginning after December 15, 2016. ASU 2015-11 is required to be applied
prospectively and early adoption is permitted. There was no significant impact
on the Company's financial statements as a result of the adoption in the first
quarter of fiscal year 2018.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 ("ASU
2016-02"), Leases (Topic 842). ASU 2016-02 establishes a right-of-use (ROU)
model that requires a lessee to record a ROU asset and a lease liability on the
balance sheet for all leases with terms longer than 12 months. Leases will be
classified as either finance or operating, with classification affecting the
pattern of expense recognition in the income statement. ASU 2016-02 is effective
for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. A modified retrospective transition approach is
required for capital leases and operating leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the
financial statements, with certain practical expedients available. The Company
has made progress on assessing its portfolio of leases and compiling a central
repository of all active leases. The Company is in the process of assessing the
design of the future lease process and drafting a policy to address the new
standard requirements. While the Company has not yet completed its evaluation of
the impact the new lease accounting standard will have on its Consolidated
Financial Statements, the Company expects to recognize right of use assets
and lease liabilities for its operating leases in the Consolidated Balance Sheet
upon adoption.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09 ("ASU
2016-09"), Compensation - Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting. ASU 2016-09 will directly impact the
tax administration of equity plans. ASU 2016-09 is effective for fiscal years
beginning after December 15, 2016, including interim periods within those fiscal
years. Early adoption is permitted and any adjustments should be reflected as of
the beginning of the fiscal year that includes that interim period. The Company
elected to early adopt ASU 2016-09 as of July 4,

                                       37
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2016 on a prospective basis. There was no significant impact on the Company's
financial statements as a result of the adoption in fiscal year 2017.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 ("ASU
2016-13"), Financial Instruments-Credit Losses (Topic 326). ASU 2016-13 requires
the measurement of all expected credit losses for financial assets held at the
reporting date based on historical experience, current conditions, and
reasonable and supportable forecasts. ASU 2016-13 is effective for fiscal years
beginning after December 15, 2019 and early adoption is permitted. The Company
is currently in the process of evaluating the impact of adoption on its
consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15 ("ASU
2016-15"), Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments. ASU 2016-15 will make eight targeted changes to how
cash receipts and cash payments are presented and classified in the statement of
cash flows. ASU 2016-15 is effective for fiscal years beginning after December
15, 2017. The new standard will require adoption on a retrospective basis unless
it is impracticable to apply, in which case it would be required to apply the
amendments prospectively as of the earliest date practicable. The Company is
currently in the process of evaluating the impact of adoption on its
consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16 ("ASU 2016-16"), Income Taxes -
Intra-Entity Transfers of Assets Other Than Inventory, which requires entities
to recognize the income tax consequences of an intra-entity transfer of an asset
other than inventory when the transfer occurs. ASU 2016-16 is effective for
fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. Early adoption is permitted as of the beginning of a fiscal
year. ASU 2016-16 must be adopted using a modified retrospective transition
method which is a cumulative-effective adjustment to retained earnings as of the
beginning of the first effective reporting period. The Company is currently in
the process of evaluating the impact of adoption on its consolidated financial
statements.
In November 2016, the FASB issued ASU No. 2016-18 ("ASU 2016-18"), Restricted
Cash, which addresses classification and presentation of changes in restricted
cash on the statement of cash flows. ASU 2016-18 requires an entity's
reconciliation of the beginning-of-period and end-of-period total amounts shown
on the statement of cash flows to include in cash and cash equivalents amounts
generally described as restricted cash and restricted cash equivalents. ASU
2016-18 does not define restricted cash or restricted cash equivalents, but an
entity will need to disclose the nature of the restrictions. ASU 2016-18 is
effective for public business entities for annual and interim periods in fiscal
years beginning after December 15, 2017. Early adoption is permitted, including
adoption in an interim period. If an entity early adopts the amendments in an
interim period, adjustments should be reflected at the beginning of the fiscal
year that includes that interim period. Entities should apply this ASU using a
retrospective transition method to each period presented. The Company is
currently in the process of evaluating the impact of adoption on its
consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04 ("ASU 2017-04"), Simplifying
the Test for Goodwill Impairment. ASU 2017-04 eliminates step 2 from the
goodwill impairment test. As amended, the goodwill impairment test will consist
of one step comparing the fair value of a reporting unit with its carrying
amount. An entity should recognize a goodwill impairment charge for the amount
by which the carrying amount exceeds the reporting unit's fair value. An entity
may still perform the optional qualitative assessment for a reporting unit to
determine if it is more likely than not that goodwill is impaired. ASU 2017-04
will be effective for fiscal years and interim periods beginning after December
15, 2019. ASU 2017-04 is required to be applied prospectively and early adoption
is permitted for interim or annual goodwill impairment tests performed on
testing dates after January 1, 2017. The Company is currently in the process of
evaluating the impact of adoption on its consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, ("ASU 2017-07"), Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost. ASU 2017-07 requires that the service cost component be
disaggregated from the other components of net benefit cost and provides
guidance for separate presentation in the income statement. ASU 2017-07 also
changes the rules for capitalization of costs such that only the service cost
component of net benefit cost may be capitalized rather than total net benefit
cost. ASU 2017-07 will be effective for fiscal years and interim periods
beginning after December 15, 2017. ASU 2017-07 is required to be applied
retrospectively for the income statement presentation and prospectively for the
capitalization of the service cost component of net periodic pension cost. The
Company is currently in the process of evaluating the impact of adoption on its
consolidated financial statements.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09 ("ASU
2017-09"), Scope of Modification Accounting. ASU 2017-09 clarifies when to
account for a change to the terms or conditions of a share-based payment award
as a modification. Under the new guidance, modification accounting is required
only if the fair value, the vesting conditions, or the classification of the
award (as equity or liability) changes as a result of the change in terms or
conditions. ASU 2017-09 is effective for all entities for fiscal years beginning
after December 15, 2017, including interim periods within those years. Early

                                       38
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adoption is permitted, including adoption in an interim period. The Company is
currently in the process of evaluating the impact of adoption on its
consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02 ("ASU 2018-02"), Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02
permits the reclassification of certain "stranded tax effects" resulting from
the recent U.S. tax reform from accumulated other comprehensive income to
retained earnings. ASU 2018-02 is effective for all entities for fiscal years
beginning after December 15, 2018, including interim periods within those years.
Entities have the option to record the reclassification either retrospectively
to each period in which the income tax effects of tax reform are recognized, or
at the beginning of the annual or interim period in which the amendments are
adopted. Early adoption is permitted, including adoption in an interim period.
The Company is currently in the process of evaluating the impact of adoption on
its consolidated financial statements.

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