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| 8-K - 8-K - SPARTON CORP | q4fy2018er-8k.htm |
Media Contact: | Joe McCormack | |||
Sparton Corporation | ||||
Email: ir@sparton.com | ||||
Office: (847) 762-5800 | ||||
FOR IMMEDIATE RELEASE
Sparton Corporation Reports Fiscal 2018 Fourth Quarter Results
SCHAUMBURG, IL. - September 13, 2018 - 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.
1
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 | ||||||||||||||
2
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, 2018 | July 2, 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 | |||
3
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 | % | |||||||||||||
4
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 | |||||||
5
Adjusted SG&A and Operating Income (Non-GAAP)
For the Quarters Ended | |||||||||||||||
Q4 FY18 | Q4 FY17 | ||||||||||||||
SG&A | Operating Income | SG&A | Operating 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 | ||||||||||||||
SG&A | Operating Income | SG&A | Operating 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 | % | |||||||
6