Sparton Corporation (NYSE:SPA) today announced results for the fourth quarter of fiscal year 2018 ended July 1, 2018.

Fourth Quarter Financial Results and Highlights

Joseph J. Hartnett, Interim President & CEO, commented, "We are pleased to report that we closed the 2018 fiscal year with a total backlog of $320 million, made up of $148 million in our MDS segment and $172 million in our ECP segment. Gross margins also closed strong with consolidated gross margins reported at 21.9% for the quarter and 21.2% for the year. While this has been a year of significant challenges on a number of fronts, the management team remains committed to taking the steps necessary to improve our long-term operating performance."

Joseph G. McCormack, Senior Vice President & CFO, commented, “During the 2018 fiscal year, we reduced our total adjusted SG&A to $49.1 million from $50.9 million in the prior fiscal year. While we generated free cash flow of $13.8 million in the fourth quarter of fiscal 2018, we experienced a net outflow of cash for the year of $8.3 million as a result of working capital needs. Working capital was impacted in the current fiscal year by supply shortages in the marketplace of certain electronic components, resulting in higher prices and higher inventory levels caused by accelerated component purchases, and increased accounts receivables principally related to the timing of payments from the U.S. Navy for shipments near year-end.”

Consolidated:

  • Net sales of $100.5 million
  • Gross profit margin of 21.9%
  • SG&A expenses of $15.8 million or 15.7% of sales; adjusted SG&A of $12.4 million, 12.3% of sales
  • Earnings per share of $(0.03), adjusted earnings per share of $0.32
  • Adjusted EBITDA of $9.3 million, a 9.3% adjusted EBITDA margin

MDS Segment:

  • Gross sales of $62.5 million
  • Gross profit margin of 11.3%
  • Operating loss of $0.6 million
  • Adjusted EBITDA of $4.4 million, a 7.1% adjusted EBITDA margin
  • New program wins in Q4 have expected revenue of $12.5 million when fully ramped up into production
  • Trailing four quarter new program win revenue of $62.8 million, which continues to support our future organic growth
  • Backlog of $148 million

ECP Segment:

  • Gross sales of $41.1 million
  • Gross profit margin of 36.4%
  • Operating income of $8.0 million
  • Adjusted EBITDA of $9.8 million, a 23.9% adjusted EBITDA margin
  • Backlog of $172 million

SELECTED FINANCIAL DATA

 
  For the Quarters Ended   For the Fiscal Years
Q4 FY18   Q4 FY17 2018   2017
(Dollars in thousands, except per share data)
Consolidated:
Net sales $ 100,470 $ 104,386 $ 374,990 $ 397,562
Gross profit 21,998 21,801 79,398 71,899
Selling and administrative expenses 15,805 14,913 57,637 54,110
Operating income 1,829 4,538 9,531 7,621
Adjusted operating income (non-GAAP) 8,425 7,638 27,576 19,323
Earnings (loss) per share (0.03 ) 0.17 (0.84 ) 0.13
Adjusted earnings per share (non-GAAP) 0.32 0.38 1.42 0.91
EBITDA (non-GAAP) 4,953 7,978 22,704 22,074
Adjusted EBITDA (non-GAAP) 9,316 9,727 33,127 26,741
Adjusted EBITDA margin (non-GAAP) 9.3 % 9.3 % 8.8 % 6.7 %
Free cash flow (non-GAAP) $ 13,784 $ 13,895 $ (8,345 ) $ 24,572
 
MDS Segment:
Gross sales $ 62,538 $ 67,046 $ 235,985 $ 260,514
Intercompany sales (3,139 ) (2,887 ) (12,085 ) (10,074 )
Net sales 59,399 64,159 223,900 250,440
Gross profit 7,061 9,100 27,178 31,441
Selling and administrative expenses 3,296 3,446 13,609 13,545
Allocation of corporate expenses 2,011 2,456 8,699 9,578
Operating income (loss) (614 ) 1,557 (2,103 ) 1,307
Adjusted segment EBITDA (non-GAAP) $ 4,421 6,428 $ 15,978 $ 21,337
 
ECP Segment:
Gross sales $ 41,078 $ 40,264 $ 151,144 $ 147,259
Intercompany sales (7 ) (37 ) (54 ) (137 )
Net sales 41,071 40,227 151,090 147,122
Gross profit 14,937 12,701 52,220 40,458
Selling and administrative expenses 4,116 2,709 11,435 10,805
Allocation of corporate expenses 1,341 1,470 4,626 4,903
Operating income 7,984 7,813 32,102 21,593
Adjusted segment EBITDA (non-GAAP) 9,800 9,859 38,823 $ 28,805
 

Liquidity and Capital Resources

As of July 1, 2018, Sparton Corporation ("the Company") had $32 million available under its $120 million credit facility that expires in September 2019. On May 3, 2018, the Company entered into Amendment No. 5 to its credit facility which provided for, among other things, increased permitted total funded debt to EBITDA ratio to 4.5x and reduced the facility from $125 million to $120 million. The Company was in compliance with its covenants as of July 1, 2018. 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 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.

Potential Sale Transaction

On March 5, 2018, the Company announced the termination by the Company and Ultra Electronics Holdings plc (“Ultra”) of their July 7, 2017 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. At that time, the Company announced that it will seek to re-engage with parties that previously expressed an interest in acquiring all or a part of the Company 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.

Non-GAAP Financial Measures

In addition to reporting financial results in accordance with U.S. generally accepted accounting principles (“GAAP”), Sparton Corporation has provided certain non-GAAP financial measures as additional information for its operating results. These measures have not been prepared in accordance with GAAP and may be different from measures used by other companies. Whenever we use non-GAAP financial measures, we designate these measures, which exclude the effects of certain expenses and income, as “adjusted” and provide a reconciliation of non-GAAP financial measures to the most closely applicable GAAP financial measure. The non-GAAP financial measures eliminate or add certain items of expense and income from or to operating expense and income taxes. Management believes that this presentation is helpful to investors in evaluating the current operational and financial performance of our business and facilitates comparisons to historical results of operations. Management discloses this information along with a reconciliation of the comparable GAAP amounts to provide access to the detail and nature of adjustments made to GAAP financial results. While some of these excluded items have been periodically reported in our statements of operations, their occurrence in future periods depends on future business and economic factors, among other evaluation criteria, and the occurrence of such events and factors may frequently be beyond the control of management.

When we calculate adjusted earnings per share, adjusted EBITDA and other adjustments to the statements of income, we exclude certain expenses and income because we believe that they are not related directly to the underlying performance of our fundamental business operations. We exclude these measures when reviewing financial results and for business planning. Although these events are reflected in our GAAP financial statements, these transactions may limit the comparability of our fundamental operations with prior and future periods. We believe EBITDA and adjusted EBITDA are commonly used by financial analysts and others in the industries in which the Company operates and, thus, provides useful information to investors. The Company does not intend, nor should the reader consider, EBITDA or adjusted EBITDA to be an alternative to operating income, net income, net cash provided by operating activities or any other items calculated in accordance with GAAP. The Company's definition of adjusted EBITDA may not be comparable with other companies. Accordingly, the measurement has limitations depending on its use.

About Sparton Corporation

Sparton Corporation (NYSE:SPA), now in its 119th year, is a provider of complex and sophisticated electromechanical devices with capabilities that include concept development, industrial design, design and manufacturing engineering, production, distribution, field service and refurbishment. The primary markets served are Medical & Biotechnology, Military & Aerospace and Industrial & Commercial. Headquartered in Schaumburg, IL, Sparton currently has thirteen manufacturing locations and engineering design centers worldwide. Sparton's Web site may be accessed at www.sparton.com.

Safe Harbor and Fair Disclosure Statement

Safe Harbor statement under the Private Securities Litigation Reform Act of 1995: To the extent any statements made in this release contain information that is not historical, these statements are essentially forward-looking and are subject to risks and uncertainties, including the difficulty of predicting future results, the regulatory environment, fluctuations in operating results and other risks detailed from time to time in Sparton’s filings with the Securities and Exchange Commission (SEC). The matters discussed in this press release may also involve risks and uncertainties concerning Sparton’s services described in Sparton’s filings with the SEC. In particular, see the risk factors described in Sparton’s most recent Form 10-K and Form 10-Q. Sparton assumes no obligation to update the forward-looking information contained in this press release.

Filing of Sparton Fiscal 2018 Form 10-K

The Company intends to file its Form 10-K with the Securities Exchange Commission by September 14, 2018.

CONSOLIDATING FINANCIAL INFORMATION - Q4 FISCAL YEAR 2018

(Dollars in thousands, except per share data)

 
  Corporate   MDS   ECP   Total
Net sales $   —

$

 

59,399 $   41,071 $   100,470
Cost of goods sold —   52,338   26,134   78,472  
Gross profit — 7,061 14,937 $ 21,998
Operating expenses:
Selling and administrative 8,393 3,296 4,116 15,805
Selling and administrative - Corp allocations (3,352 ) 2,011 1,341 —
Internal research and development — — 1,197 1,197
Amortization of intangible assets — 1,420 299 1,719
Legal settlements 500   948   —   1,448  
Total operating expenses 5,541   7,675   6,953   20,169  
Income (loss) from operations (5,541 ) (614 ) 7,984 1,829
Interest expense, net (2,121 ) — — (2,121 )
Other income (expense) (4 ) (3 ) (15 ) (22 )
Income tax (expense) benefit 122   (86 ) —   36  
Net income (loss) $   (7,544 ) $   (703 ) $   7,969   $   (278 )
Income per share of common stock:
Basic $ (0.03 )
Diluted (0.03 )
Weighted average shares of common stock outstanding:
Basic 9,834,723
Diluted 9,834,723
 

CONSOLIDATING FINANCIAL INFORMATION - Q4 FISCAL YEAR 2017

(Dollars in thousands, except per share data)

 
  Corporate   MDS   ECP   Total
Net sales $   — $   64,159 $   40,227 $   104,386
Cost of goods sold —   55,059   27,526   82,585  
Gross profit — 9,100 12,701 21,801
Operating expenses:
Selling and administrative 8,758 3,446 2,709 14,913
Selling and administrative - Corp allocations (3,926 ) 2,456 1,470 —
Internal research and development — — 361 361
Amortization of intangible assets —   1,641   348   1,989  
Total operating expenses 4,832   7,543   4,888   17,263  
Income (loss) from operations (4,832 ) 1,557 7,813 4,538
Interest expense, net (1,113 ) 3 — (1,110 )
Other income (expense) (3 ) 16 18 31
Income tax (expense) benefit (1,692 ) (80 ) —   (1,772 )
Net income (loss) $   (7,640 ) $   1,496   $   7,831   $   1,687  
Income per share of common stock:
Basic $ 0.17
Diluted 0.17
Weighted average shares of common stock outstanding:
Basic 9,834,723
Diluted 9,834,723
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

 
  For the Fiscal Years
2018   2017
($ in thousands)
Cash Flows from Operating Activities:
Operating activities, net of working capital changes $   14,246 $   18,293
Net changes in working capital (18,355 ) 13,175  
Cash Flows from Operating Activities (4,109 ) 31,468
Cash Flows from Investing Activities:
Capital expenditures (4,236 ) (6,896 )
Other investing activities 23   22  
Cash Flows from Investing Activities (4,213 ) (6,874 )
Cash Flows from Financing Activities:
Net change in credit facility 10,000 (22,706 )
Other financing activities (1,506 ) (1,032 )
Cash Flows from Financing Activities 8,494   (23,738 )
Change in Cash and Cash Equivalents 172 856
 
Cash and Cash Equivalents - Beginning 988   132  
Cash and Cash Equivalents - Ending $   1,160   $   988  
 

CONDENSED CONSOLIDATED BALANCE SHEETS

 
 

July 1,

  

July 2,

2018

2017

($ in thousands)
Assets
Cash and cash equivalents $   1,160 $   988
Accounts receivable, net 60,454 45,347
Inventories 72,406 60,248
Prepaid and other current assets 8,444 3,851
Property, plant and equipment, net 32,790 34,455
Goodwill 12,663 12,663
Other intangible assets, net 21,108 28,445
Other assets 22,977   31,146  
Total assets $   232,002   $   217,143  
Liabilities and Shareholders’ Equity
Accounts payable $ 28,636 $ 27,672
Accrued expenses and other current liabilities 38,486 26,580
Credit facility 84,500 74,500
Environmental 4,866 5,468
Pension 690 888
Other non-current liabilities 1,220 167
Shareholders’ Equity 73,604   81,868  
Total Liabilities and Shareholders’ Equity $   232,002   $   217,143  
 

RECONCILIATION OF NON-GAAP MEASURES

 

EBITDA Reconciliation (Non-GAAP) - Q4 Fiscal Year 2018

(Dollars in thousands)

 
  Corporate   MDS   ECP   Total
Net income (loss) $   (7,544 ) $   (703 ) $   7,969 $   (278 )
Interest expense, net 2,121 — — 2,121
Income tax expense (benefit) (122 ) 86 — (36 )
Amortization of intangible assets — 1,420 299 1,719
Depreciation 587 649 191 1,427
Selling and administrative - Corp allocations (3,352 ) 2,011   1,341   —  
EBITDA, excluding corporate allocation (8,310 ) 3,463 9,800 4,953
Adjustments for nonrecurring operating expenses:
Stock-based compensation (514 ) — — (514 )
Costs related to potential sale of Company 2,960 — — 2,960
Legal and other settlements and related legal fees 959   958   —   1,917  
Adjusted EBITDA, before corporate allocation $   (4,905 ) $   4,421   $   9,800   $   9,316  
 
Adjusted EBITDA, after corporate allocation $ (1,553 ) $ 2,410 $ 8,459 $ 9,316
 
Adjusted EBITDA margin 9.3 %
 

EBITDA Reconciliation (Non-GAAP) - Q4 Fiscal Year 2017

(Dollars in thousands)

 
  Corporate   MDS   ECP   Total
Net income (loss) $   (7,640 ) $   1,496 $   7,831 $   1,687
Interest expense, net 1,113 (3 ) — 1,110
Income tax expense (benefit) 1,692 80 — 1,772
Amortization of intangible assets — 1,641 348 1,989
Depreciation 452 758 210 1,420
Selling and administrative - Corp allocations (3,926 ) 2,456   1,470   —  
EBITDA, excluding corporate allocation (8,309 ) 6,428 9,859 7,978
Adjustments for nonrecurring operating expenses:
Stock-based compensation 638 — — 638
Costs related to potential sale of company 1,111   —   —   1,111  
Adjusted EBITDA, before corporate allocation $   (6,560 ) $   6,428   $   9,859   $   9,727  
 
Adjusted EBITDA, after corporate allocation $ (2,634 ) $ 3,972 $ 8,389 $ 9,727
 
Adjusted EBITDA margin 9.3 %
 

Adjusted EPS (Non-GAAP)

 
  For the Quarters Ended   For the Fiscal Years
Q4 FY18   Q4 FY17 2018  

2017

(Dollars in thousands, except per share data)
Earnings (loss) per share - diluted, as reported $   (0.03 ) $   0.17 $   (0.84 ) $   0.13
Nonrecurring items 0.36 0.08 0.78 0.22
Amortization of intangible assets 0.12 0.13 0.54 0.56
Adjustments for Tax Act (0.13 ) —   0.94   —  
Adjusted earnings per share $   0.32   $   0.38   $   1.42   $   0.91  
 
Adjustments, net of tax:
Costs related to potential sale of Company 2,131 $ 722 $ 5,652 $ 2,017
Legal and other settlements and related legal fees 1,380 — 2,058 —
Other nonrecurring adjustments —   —   —   65  
Total nonrecurring, net of tax 3,511 722 7,710 2,082
Amortization of intangible assets, net of tax 1,238   1,293   5,283   5,524  
Total adjustments, net of tax 4,749 2,015 12,993 7,606
Adjustments for Tax Act (1,303 ) —   9,197   —  
Total adjustments $   3,446   $   2,015   $   22,190   $   7,606  
 

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

 
  For the Quarters Ended
Q4 FY18   Q4 FY17
 

Operating

  

Operating

SG&A

Income

SG&A

Income

(Dollars in thousands)
As reported $   15,805 $   1,829 $   14,913 $   4,538
Percentage of sales 15.7 % 1.8 % 14.3 % 4.3 %
Adjustments:
Amortization of intangible assets — 1,719 — 1,989
Costs related to potential sale of Company 2,960 2,960 1,111 1,111
Legal ad other settlements and related legal fees 469   1,917   —   —  
Total adjustments 3,429   6,596   1,111   3,100  
As adjusted $   12,376   $   8,425   $   13,802   $   7,638  
 
Adjusted percentage of sales 12.3 % 8.4 % 13.2 % 7.3 %
 
 
2018 2017

Operating

Operating

SG&A

Income

SG&A

Income

(Dollars in thousands)
As reported 57,637 9,531 $ 54,111 $ 7,621
Percentage of sales 15.4 % 2.5 % 13.6 % 1.9 %
Adjustments:
Amortization of intangible assets — 7,337 — 8,498
Costs related to potential sale of Company 7,850 7,850 3,104 3,104
Legal and other settlements and related legal fees 710 2,858 — —
Other nonrecurring adjustments —   —   100   100  
Total adjustments 8,560   18,045   3,204   11,702  
As adjusted $   49,077   $   27,576   $   50,907   $   19,323  
 
Adjusted percentage of sales 13.1 % 7.4 % 12.8 % 4.9 %