Sparton Corporation Reports Fourth Quarter and Fiscal Year 2016 Financial Results

SCHAUMBURG, Ill.--(BUSINESS WIRE)--

Sparton Corporation SPA today announced financial results for its fourth quarter and fiscal year ended July 3, 2016.

Fourth Quarter Financial Results:

• Net sales of $107.0 million
• Gross profit margin of 20.0%
• SG&A expenses of $13.5 million, 12.6% of sales; $12.4 million, 11.6% on an adjusted basis
• Adjusted operating income of $5.9 million, a 5.5% adjusted operating margin
• Recognized an impairment of MDS Segment goodwill of $64.2 million
• Loss per share of ($4.30); Earnings per share of $0.50 on an adjusted basis
• Adjusted EBITDA of $10.0 million, 9.4% adjusted EBITDA margin
• Free cash flow of $26.0 million
• Borrowings under Credit Facility reduced $26.2 million from Q3 to $97.2 million

Fourth Quarter Highlights

• Announced the exploration of a potential sale of the Company
• Amended Credit Facility to provide additional flexibility
• 66 new program wins in the MDS Segment with expected annual revenue of $15 million when fully ramped up into production
• Total new program wins in the MDS Segment in fiscal 2016 of $61 million of expected annual revenue when fully ramped up into production
• $54 million award for the production of domestic sonobuoys
• $11 million in awards for the production of foreign sonobuoys
• Backlog of:
  • $138 million in the MDS Segment
  • $142 million in the ECP Segment principally including:
    • $117 million in domestic sonobouys
    • $6 million in foreign sonobouys
    • $14 million in ruggedized displays

Fiscal Year 2016 Financial Results:

• Net sales of $419.4 million
• Gross profit margin of 19.1%
• SG&A expenses of $55.2 million, 13.2% of sales; $51.9 million, 12.4% on an adjusted basis
• Adjusted operating income of $16.3 million, a 3.9% adjusted margin
• Loss per share of ($3.91); Earnings per share of $1.56 on an adjusted basis
• Adjusted EBITDA of $33.5 million, adjusted EBITDA margin of 8.0%
• Free cash flow of $42.0 million

Joseph J. Hartnett, Interim President & CEO, commented, "Our fourth quarter has been a very active one with the ongoing exploration of a potential sale of the Company as well as continuing to implement operational and financial improvements. Our sales pipeline and new program wins continue to show traction as a result of our focus on organic growth initiatives. Additionally, we believe the Company is well on its way to building a business model that supports profitable revenue growth through new business development and improved operating performance. "

Joe McCormack, Senior Vice President and CFO, commented, "We recognized an impairment of goodwill in our MDS Segment as a result of the underperformance of our Hunter Technology acquisition and our inability to achieve sufficient organic revenue growth to offset the loss of a large customer as well as revenue declines due to fluctuation in customer demand across the segment. While we are disappointed in the need for a goodwill write-off, we continue to have positive developments in our financial performance including continued quarter over quarter improvements in our revenues, continued reductions in our SG&A footprint, and strong free cash flows."

SELECTED FINANCIAL DATA
			For the Quarters Ended															For Fiscal Year
			Q4 FY16					Q3 FY16					Q4 FY15					2016					2015
			(Dollars in thousands, except per share data)
Consolidated:
Net sales			$	106,967				$	102,175				$	126,393				$	419,362				$	382,125
Gross profit			21,422					19,067					28,090					80,148					74,814
Selling and administrative expenses			13,460					13,727					16,220					55,151					46,969
Impairment of goodwill			64,174					—					—					64,174					—
Operating income (loss)			(59,417		)			2,676					8,809					(51,789		)			17,252
Adjusted operating income (non-GAAP)			5,875					3,740					11,604					16,329					21,760
Earnings (loss) per share-diluted			(4.30		)			0.12					0.51					(3.91		)			1.10
Adjusted Earnings (loss) per share (non-GAAP)			0.50					0.34					0.81					1.56					1.74
EBITDA (non-GAAP)			(55,594		)			6,546					12,398					(36,021		)			28,647
Adjusted EBITDA (non-GAAP)			10,019					7,865					15,361					33,542					34,307
Adjusted EBITDA margin (non-GAAP)			9.4		%			7.7		%			12.2		%			8.0		%			9.0		%
Free cash flow			$	25,953				$	6,235				$	1,296				$	42,034				$	8,950
MDS Segment:
Gross sales			$	72,346				$	68,187				$	84,749				$	282,076				$	263,940
Intercompany sales			(3,627		)			(3,532		)			(6,592		)			(17,028		)			(17,756		)
Net sales			68,719					64,655					78,157					265,048					246,184
Gross profit			9,732					7,771					13,094					34,788					36,461
Selling and administrative expenses			3,155					3,608					6,744					14,621					11,934
Allocation of corporate expenses			2,281					2,242					1,886					9,192					6,681
Impairment of goodwill			64,174					—					—					64,174					—
Operating Income (loss)			(61,861		)			231					2,663					(61,813		)			9,535
Segment EBITDA, excluding goodwill impairment charge			7,597					5,235					7,244					24,424					25,335
ECP Segment:
Gross sales			$	38,262				$	37,566				$	48,305				$	154,559				$	136,315
Intercompany sales			(14		)			(46		)			(69		)			(245		)			(374		)
Net sales			38,248					37,520					48,236					154,314					135,941
Gross profit			11,690					11,296					14,961					45,360					38,353
Selling and administrative expenses			3,115					2,837					2,513					11,128					8,107
Allocation of corporate expenses			1,168					1,061					981					4,354					2,931
Operating Income			6,196					6,424					10,286					25,880					25,033
Segment EBITDA			8,009					8,140					12,027					32,821					29,602

Liquidity and Capital Resources

During the fourth quarter of 2016, the Company entered into Amendment #3 to its Credit Facility. This Amendment, among other things, reduced the facility from $275 million to $175 million and changed certain financial covenants to provide additional flexibility. As of July 3, 2016, the Company had $97 million borrowed and $77 million available under the facility.

Outlook

Mr. Hartnett concluded, "Looking forward, we expect the first quarter of fiscal year 2017 revenues to be in the range of $97 million to $101 million with a gross profit margin of approximately 18%. Segment revenues are expected to provide a similar relationship to this quarter's operating results."

Conference Call

The Company will host a conference call on Wednesday, September 7, 2016 at 10:00 a.m. CDT/11:00 a.m. EDT to discuss its fourth quarter and fiscal year 2016 financial results. To participate, callers should dial (888) 222-5602. Participants should dial in at least 5 minutes prior to the start of the call. A Web presentation link, including the slide presentation which will accompany the call, will also be available at: http://tinyurl.com/gpa8376. A replay of the call will be available on Sparton's Web site: http://www.sparton.com in the "Investors" section.

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

About Sparton Corporation

Sparton Corporation SPA, now in its 117th 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 10K and Form 10Q. Sparton assumes no obligation to update the forward-looking information contained in this press release.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
			Three Months Ended (Unaudited)																	For Fiscal Years
			July 3, 2016									June 30, 2015								July 3, 2016									June 30, 2015
			(Dollars in thousands, except per share data)
Net sales			$	106,967				100.0	%			$	126,393			100.0	%			$	419,362				100.0	%			$	382,125				100.0	%
Cost of goods sold			85,545					80.0	%			98,303				77.8	%			339,214					80.9	%			307,311					80.4	%
Gross profit			21,422					20.0	%			28,090				22.2	%			80,148					19.1	%			74,814					19.6	%
Selling and administrative expenses			13,460					12.6	%			16,220				12.8	%			55,151					13.2	%			46,969					12.3	%
Impairment of goodwill			64,174					60.0	%			—				—	%			64,174					15.3	%			—					—	%
Other operating expenses			3,205					3.0	%			3,061				2.4	%			12,612					3.0	%			10,593					2.8	%
Operating income (loss)			(59,417		)			(55.5	)%			8,809				7.0	%			(51,789		)			(12.3	)%			17,252					4.5	%
Interest expense and other			(1,101		)			(1.0	)%			(865		)		(0.7	)%			(3,710		)			(0.9	)%			(2,297		)			(0.6	)%
Income (loss) before income taxes			(60,518		)			(56.6	)%			7,944				6.3	%			(55,499		)			(13.2	)%			14,955					3.9	%
Income taxes			(18,437		)			(17.2	)%			2,846				2.3	%			(17,216		)			(4.1	)%			3,966					1.0	%
Net income (loss)			$	(42,081	)			(39.3	)%			$	5,098			4.0	%			$	(38,283	)			(9.1	)%			$	10,989				2.9	%
Income (Loss) per share of common stock:
Basic			$	(4.30	)							$	0.52							$	(3.91	)							$	1.10
Diluted			(4.30		)							0.51								(3.91		)							1.10
Weighted average shares of common stock outstanding:
Basic			9,791,212									9,792,873								9,786,315									9,874,441
Diluted			9,791,212									9,794,603								9,786,315									9,885,961

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
			For fiscal years
			2016					2015
			($ in thousands)
Cash Flows from Operating Activities, net of
changes in working capital			$	22,084				$	26,161
Net changes in working capital			26,048					(21,624		)
Cash Flows from Operating Activities			48,132					4,537
Cash Flows from Investing Activities:
Business acquisitions			178					(97,319		)
Capital expenditures			(6,098		)			(5,802		)
Other investing activities			1,078					(986		)
Cash Flows from Investing Activities			(4,842		)			(104,107		)
Cash Flows from Financing Activities:
Net change in Credit Facility			(57,294		)			113,500
Other financing activities			(778		)			(7,044		)
Cash Flows from Financing Activities			(58,072		)			106,456
Change in Cash and Cash Equivalents			(14,782		)			6,886
Cash and Cash Equivalents - Beginning			14,914					8,028
Cash and Cash Equivalents - Ending			$	132				$	14,914

CONDENSED CONSOLIDATED BALANCE SHEETS
			July 3, 2016					June 30, 2015
			($ in thousands)
Assets
Cash and cash equivalents			$	132				$	14,914
Accounts receivable, net			46,759					70,974
Inventories			77,871					79,503
Prepaid and other current assets			5,844					5,488
Property, plant and equipment, net			33,320					32,608
Goodwill			12,663					74,175
Other intangible assets, net			36,933					45,825
Other assets			32,476					14,064
Total assets			$	245,998				$	337,551
Liabilities and Shareholders' Equity
Accounts payable			$	38,290				$	29,948
Accrued expenses			11,512					12,355
Other current liabilities			12,637					16,328
Credit facility			97,206					154,500
Capital lease obligations			332					—
Environmental			6,117					7,117
Pension			1,276					424
Shareholders' Equity			78,628					116,879
Total Liabilities and Shareholders' Equity			$	245,998				$	337,551

RECONCILIATION OF NON-GAAP MEASURES
ADJUSTED EPS (NON-GAAP)			For the Quarters Ended															For the Fiscal Year Ended
			Q4 FY16					Q3 FY16					Q4 FY15					2016					2015
			(Dollars in thousands, except per share data)
Earnings per share-diluted, as reported			$	(4.30	)			$	0.12				$	0.51				$	(3.91	)			$	1.10
Nonrecurring items			4.65					0.06					0.14					4.83					0.21
Amortization of intangible assets			0.15					0.16					0.16					0.64					0.43
Adjusted earnings per share			$	0.50				$	0.34				$	0.81				$	1.56				$	1.74
Adjustments, net of tax:
Impairment of goodwill			$	44,766				$	—				$	—				$	44,766				$	—
Costs related to potential sale of the Company			436					280					—					716					—
Restructuring costs			107					73					—					2,070					—
Other nonrecurring adjustments, net			184					301					1,376					(222		)			2,077
Total nonrecurring			45,493					654					1,376					47,330					2,077
Amortization of intangible assets			1,474					1,535					1,548					6,235					4,284
Total adjustments			$	46,967				$	2,189				$	2,924				$	53,565				$	6,361

ADJUSTED EBITDA (NON-GAAP)				For the Quarters Ended															For the Fiscal Year Ended
				Q4 FY16					Q3 FY16					Q4 FY15					2016					2015
				(Dollars in thousands)
Net income (loss)				$	(42,081	)			$	1,136				$	5,098				$	(38,283	)			$	10,989
Interest expense				1,059					956					894					3,803					2,456
Income taxes				(18,437		)			612					2,846					(17,216		)			3,966
Depreciation and amortization				3,865					3,842					3,560					15,675					11,236
EBITDA				(55,594		)			6,546					12,398					(36,021		)			28,647
Adjustments:
Impairment of goodwill				64,174					—					—					64,174					—
Costs related to potential sale of Company				671					430					—					1,101					—
Restructuring charges				164					113					—					3,185					—
Stock-based compensation				321					255					167					1,445					1,885
Other non-recurring adjustments, net				283					521					2,796					(342		)			3,775
Total adjustments				65,613					1,319					2,963					69,563					5,660
Adjusted EBITDA				$	10,019				$	7,865				$	15,361				$	33,542				$	34,307
Adjusted EBITDA margin				9.4		%			7.7		%			12.2		%			8.0		%			9.0		%

ADJUSTED SG&A AND OPERATING INCOME (NON-GAAP)
			For the Quarters Ended
			Q4 FY16										Q3 FY16										Q4 FY15
								Operating										Operating										Operating
			SG&A					Income					SG&A					Income					SG&A					Income
			(dollars in thousands)
As reported			$	13,460				$	(59,417	)			$	13,727				$	2,676				$	16,220				$	8,809
Percentage of sales			12.6		%			(55.5		)%			13.4		%			2.6		%			12.8		%			7.0		%
Adjustments:
Impairment of goodwill			—					64,174					—					—					—					—
Costs related to potential sale of the Company			671					671					430					430					—					—
Restructuring costs			60					164					371					113					—					—
Other nonrecurring adjustments, net			283					283					321					521					252					2,795
Total adjustments			1,014					65,292					1,122					1,064					252					2,795
As adjusted			$	12,446				$	5,875				$	12,605				$	3,740				$	15,968				$	11,604
Adjusted percentage of sales			11.6		%			5.5		%			12.3		%			3.7		%			12.6		%			9.2		%

			For the Fiscal Year Ended
			July 3, 2016										June 30, 2015
								Operating										Operating
			SG&A					Income					SG&A					Income
			(dollars in thousands)
As reported			$	55,151				$	(51,789	)			$	46,969				$	17,252
Percentage of sales			13.2		%			(12.3		)%			12.3		%			4.5		%
Adjustments:
Impairment of goodwill			—					64,174					—					—
Costs related to potential sale of the Company			1,101					1,101					—					—
Restructuring costs			979					3,185					—					152
Other nonrecurring adjustments, net			1,188					(342		)			1,322					4,356
Total adjustments			3,268					68,118					1,322					4,508
As adjusted			$	51,883				$	16,329				$	45,647				$	21,760
Adjusted percentage of sales			12.4		%			3.9		%			11.9		%			5.7		%

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