SECURITIES AND EXCHANGE COMMISSION
10-K/AAmendment No. 1
(Mark One)
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x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 1515(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: July 2, 2017
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 1515(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Numbers1-1000
(Exact name of registrant as specified in its charter)
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| Ohio | | 38-1054690 |
(State or other jurisdiction of incorporation or organization) | | |
425 N. Martingale Road, Suite 1000
Schaumburg, Illinois 60173
(Address of principal executive offices)
Registrant’s telephone number, including area code:(847) 762-5800
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Name of each exchange on which registered |
| Common Stock, par value $1.25 per share | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No x
☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨☐ No x ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes
x☒ No ¨ ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes
x☒ No ¨ ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K. ☐¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | o | ☐ | | Accelerated filer | ý | ☒ |
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| Non-accelerated filer | o (Do not check if a smaller reporting company)
| ☐ | | Smaller reporting company | o | ☐ |
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| | | | Emerging growth company | o | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o☐Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). Yes
¨☐ No x ☒The aggregate market value of the voting andnon-voting common equity held bynon-affiliates computed by reference to the price at which the common equity was last sold (based on the closing price on the New York Stock Exchange) as of December 30, 201629, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $227,525,000.$220,049,000. For purposes of this computation, affiliates of the registrant include the registrant’s executive officers and directors and their respective affiliates as of December 30, 2016.
29, 2017.As of September 8, 2017October 29, 2018 there were 9,860,6359,834,723 shares of common stock, $1.25 par value per share, outstanding.
Documents Incorporated by Reference
None.
Part III incorporates information by referenceEXPLANATORY NOTE
Sparton Corporation is filing this Amendment No. 1 on Form10-K/A (this “Form10-K/A”) to its Annual Report on Form10-K for the registrant’s definitive proxy statement for its 2017 Annual Meeting of Shareholders to befiscal year ended July 1, 2018 (the “Form10-K”), originally filed with the U.S. Securities and Exchange Commission within 120 dayson September 14, 2018, pursuant to General Instruction G(3) to Form10-K to incorporate the information required by Part III, and to amend Item 15.
No other changes have been made to the Form10-K other than those described above. This Form10-K/A does not reflect subsequent events occurring after the endoriginal filing date of the fiscal year.
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form10-K contains statements about future events and expectations that are “forward-looking statements.” We may also make forward-looking statements or modify or update in our other reports filed withany way disclosures made in the SEC, in materials delivered to ourForm10-K.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The following table sets forth information regarding each director. Each director holds office until his successor is elected at the next annual meeting of shareholders and in press releases. These statements relatequalified, subject, however, to future eventshis prior resignation, removal from office or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performancedeath. There are no family relationships among the directors or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Certain of these risks, uncertainties and other factors are described in Item 1A, “Risk Factors” of this report. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or the negative use of these terms or other comparable terminology that convey the uncertainty of future events or outcomes. Although we believe these forward-looking statements are reasonable, they are based on a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. These forward-looking statements are based on management’s views and assumptions at the time originally made, and we undertake no obligation to update these statements whether as a result of new information or future events. There can be no assurance that our expectations, projections or views will materialize and you should not place undue reliance on these forward-looking statements. Any statement in this report that is not a statement of historical fact may be deemed to be a forward-looking statement and subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995.
PART I
ITEM 1. BUSINESS
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”). Allexecutive officer of the
Company's facilities are certifiedCompany.Alan L. Bazaar, age 48
Director since: 2016
Independent
Mr. Bazaar serves as the Chief Executive Officer of Hollow Brook Wealth Management LLC, a full-service wealth management firm. Prior to one or moreHollow Brook, Mr. Bazaar was a Managing Director and Portfolio Manager at Richard L. Scott Investments, LLC (“RLSI”). Mr. Bazaar was with RLSI for over ten years where heco-managed the public equity portfolio. He was responsible for all aspects of the ISO/AS standards,investment decision-making process including ISO 9001, AS9100 and ISO 13485, with most having additional certifications based on the needsall elements of the customers they serve. The majority of the Company's customers are in highly regulated industries where strict adherence to regulations suchdue diligence.
Mr. Bazaar serves 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 DepartmentChair 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, the Company, an Ohio corporation, entered into an Agreement and Plan of Merger (the “Merger Agreement”) among the Company, Ultra Electronics Holdings plc, a company organized under the laws of England and Wales (“Parent" or "Ultra”), and Ultra Electronics Aneira Inc., an Ohio corporation and an indirect wholly owned subsidiary of Parent (“Merger Sub”). Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into the Company (the “Merger”) with the Company surviving the Merger as a wholly owned subsidiary of Parent.
At the effective time of the Merger, each issued and outstanding share of common stock, par value $1.25 per share, of the Company (each, a “Share”) (other than (i) Shares that immediately prior to the effective time of the Merger are owned by Parent, Merger Sub or any other wholly owned subsidiary of Parent or owned by the Company or any wholly owned subsidiary of the Company (including as treasury stock) and (ii) Shares that are held by any record holder who is entitled to demand and properly demands payment of the fair cash value of such Shares as a dissenting shareholder pursuant to, and who complies in all respects with, the provisions of Section 1701.85 of the Ohio General Corporation Law (the “OGCL”)) will be cancelled and converted into the right to receive $23.50 per Share in cash, without interest.
The Merger Agreement provides for certain other termination rights for both the Company and Ultra, and further provides that, upon termination of the Merger Agreement under certain specified circumstances, the Company will be required to pay Ultra a termination fee of $7.5 million or Ultra will be required to pay Company a termination fee of $7.5 million.
The Company's website address is www.sparton.com. Information contained on our website is not part of this Annual Report on Form 10-K. Our website provides public access to, among other items, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Quarterly Earnings Releases, News Releases, Governance Guidelines and the Code of Ethics, as well as various Board of Director committee charters. Upon request, the Company provides, free of charge, copies of its periodic and current reports (e.g., Forms 10-K, 10-Q and 8-K) and amendments to such reports that are filed with the Securities and Exchange Commission (“SEC”), as well as the Board of Director committee charters. Reports are available as soon as reasonably practicable after such reports are filed with or furnished to the SEC, either at the Company's website, through a link to the SEC's website or upon request through the Company's Shareholders Relations Department.
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 and Food and Drug Administration (“FDA”) guidelines and approvals, in addition to product and process certifications.
The segment strives to exceed customers’ expectations with high delivery and quality performance. Our market advantage is our enterprise-wide Sparton Business System, experience and knowledge of the market, breadth of services that we offer and the relationships that we have developed over the past several decades. The competition includes both foreign and domestic companies, in addition to the internal capabilities of some of our customers. Some of our competitors have substantially greater financial, manufacturing or marketing resources than we do. Sparton's MDS segment excels in providing low-volume, high-mix services to highly-regulated end markets. OEM's in our market segments are continually driving costs out of their respective businesses through outsourcing strategies, allowing opportunity for Sparton to capture additional value add opportunities.
The engineering and manufacturing of highly complex devices is a fairly fragmented industry with no dominant player in the market. In the past, large printed circuit board contract manufacturers have sold their “box build” capabilities and have been very successful. The industry has continued to grow with more companies developing printed circuit board assembly (“PCBA”) capabilities and others entering the market via mergers and acquisitions of smaller companies. This has led to stronger competition with larger companies that have the financial resources to offer the services that the customers are requiring. Customers will assume that quality will be 100% and will drive their decisions based on services offered that best fit their total solutions needs as well as on the overall cost of the these services.
The understanding of the market needs is critical for our success. We are well positioned with our capabilities to meet our current organic growth plans. Historically, acquisitions have been an important element of the growth strategy for the MDS segment. The segment recently had supplemented its organic growth by identifying, acquiring and integrating acquisition opportunities that resulted in broader, more sophisticated product and service offerings while diversifying and expanding the Company's customer base and markets. Today, the Company's focus is on organic growth.
Sparton acquired 3 companies in the MDS segment in fiscal 2015. On July 9, 2014, the Company acquired Electronic Manufacturing Technology, LLC. (“eMT”), a contract services business manufacturing electromechanical controls and electronic assemblies, for $22.1 million. On January 20, 2015, the Company acquired Real-Time Enterprises, Inc. ("RTEmd"), a developer of embedded software to operate medical devices and diagnostic equipment, for $2.3 million. On April 14, 2015, the Company acquired Hunter Technology Corporation, (“Hunter”) an electronic contract manufacturing provider specializing in military and aerospace applications and providing engineering design, new product introduction and full-rate production manufacturing solutions working with major defense and aerospace companies, test and measurement suppliers, secure networking solution providers, medical device manufacturers and a wide variety of industrial customers, for $55.0 million.
The Company does not believe that the MDS segment is substantially dependent on any individual contract or agreement with any customer and the significance of these large customers continues to be reduced through the Company's customer diversification as a result of growth. The Company's typical contractual arrangement with a customer is represented by a master agreement which includes certain master terms and conditions of Sparton's relationship with this customer. This agreement does not commit the customer to any specific volume of purchases. Moreover, these terms can be amended in appropriate circumstances. Thus, until this customer submits a purchase order to Sparton, there is no guarantee of any revenue to Sparton. The Company uses the purchase orders to determine volume and delivery requirements.
The majority of Sparton's MDS segment customers are in highly regulated industries where strict adherence to regulations such as ITAR, regulations issued by the FDA, the Federal Aviation Administration (“FAA”), the Environmental Protection Agency ("EPA") and similar foreign jurisdiction regulations such as the European Union RoHS (Restriction of Hazardous Substances) and REACH (Registration, Evaluation and Authorization of Chemicals) is necessary. Non-compliance risks range from variance notifications to production/shipping prevention depending upon the agency and form of non-compliance. These requirements are highly technical in nature and require strict adherence and documentation related to operational processes. Sparton's quality system provides us the ability to service such markets, differentiating Sparton from some potential competitors which lack such systems.
While overall sales can fluctuate during the year in each of our segments, revenues from our MDS segment are typically higher in the second half of the Company's fiscal year. Various factors can affect the distribution of our revenue between accounting periods, mainly the timing of customer demand.
ECP Segment
ECP segment operations are comprised of design, development and production of proprietary products for both domestic and foreign defense markets, as well as for commercial needs. ECP designs and manufactures ASW devices known as sonobuoys for the U.S. Navy and for 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, primarily in the Undersea Warfare space, ultimately leading to future defense products, as well as replacements for existing products. Specifically, 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. This segment 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, 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.
Sparton is a 50/50 joint venture (“JV”) partner with UnderSea Sensor Systems, Inc. (“USSI”), the only other major producer of U.S. derivative sonobuoys. USSI's parent company is Ultra Electronics Holdings plc, based in the United Kingdom. The JV operates under the name ERAPSCO and allows Sparton and USSI to combine their own unique and complementary backgrounds to jointly develop and produce U.S. derivative sonobuoy designs for the U.S. Navy as well as for foreign governments that meet Department of State licensing requirements. ERAPSCO maintains the DBA Sonobuoy TechSystems through which it conducts business directly with foreign governments. In concept, and in practice, ERAPSCO serves as a pass-through entity maintaining no funds or assets. While the JV provides the opportunity to maximize efficiencies in the design and development of the related sonobuoys, both of the joint venture partners function independently as subcontractors; therefore, there is no separate entity to be accounted for or consolidated. The Board of Directors of ERAPSCO has the responsibility for the overall management and operation of the JV. The six member board consists of equal representation (full time employees) from both JV partners for three year terms. Personnel necessary for the operation of ERAPSCO, specifically a president, vice president, general manager, contract administrator and financial manager, are similarly assigned by the JV partners for rotating three year terms and the costs of these assigned individuals are borne by the party assigning the personnel. In response to a customer request for proposal (“RFP”) that ERAPSCO will bid on, the Board of Directors of
ERAPSCO approves both the
compositionNYSE-traded Wireless Telecom Group, and is a member of
a response to the
RFP and the composite bid to be submitted to the customer based on financial thresholds set forth in the JV agreement. The Board of Directors of
ERAPSCO strivesNASDAQ-traded Hudson Global, Inc. Mr. Bazaar was formerly a director at LoJack Corporation (Nasdaq: LOJN) where he was a member of the Special Committee and a member of the Nominating and Governance Committee. LoJack was sold to
divideCalAmp Corp. (Nasdaq: CAMP) in March 2016. He was also on the
aggregate contract awardsBoard of NTS Inc. (Nasdaq: NTS) where he was the Chairman of the Audit Committee until the sale of the Company to Tower Three Partners LLC in June 2014, and on the Board of Media Sciences Inc. (NYSE: MSII) where he was Chairman of the Nominating and Governance Committee, a member of the Audit Committee and a member of the Compensation Committee at
different points in time during his tenure on the Board from June 2004 to April 2008. Mr. Bazaar was also on the Board of Airco Industries, Inc., a
50/50 share ratio. Each JVprivately held manufacturer of aerospace products until the sale of the Company to AbelConn Electronics in October 2010. He also is a member of the Investment Advisory Committee of G. Scott Capital Partners, LLC, a private equity firm.Mr. Bazaar received an undergraduate degree in History from Bucknell University and a MBA from the Stern School of Business at New York University. Mr. Bazaar is also a Certified Public Accountant.
James D. Fast, age 71
Director since: 2001
Independent
Retired since August 2008, formerly Chief Executive Officer, President and Director of Firstbank-West Michigan, Ionia, Michigan. Prior to joining Firstbank, Mr. Fast served as Group Vice President, Michigan National Bank-Michiana. Mr. Fast has forty years of experience in commercial banking and administration. Mr. Fast previously served as a Director of Volcor Finishing, a privately held company in Ionia, Michigan.
Joseph J. Hartnett, age 63
Director since: 2008
Management
Mr. Hartnett has been the Interim President and Chief Executive Officer of the Company since February 2016.
Mr. Hartnett has consulted with companies as aC-level executive since 2010. Mr. Hartnett previously served as President and Chief Executive Officer of Ingenient Technologies, Inc., a multimedia software development company located in Rolling Meadows, Illinois, from April 2008 through November 2010. He joined Ingenient as Chief Operating Officer in September 2007 and left Ingenient following the sale of the company and completion of post-sale transition activities. Prior to Ingenient, Mr. Hartnett served as President and Chief Executive Officer of U.S. Robotics Corporation, a global Internet communications product company headquartered in Schaumburg, Illinois, from May 2001 through October 2006. He was Chief Financial Officer of U.S. Robotics from June 2000 to May 2001. Prior to U.S. Robotics, Mr. Hartnett was a partner bearswith Grant Thornton LLP where he served for over 20 years in various leadership positions at the costs it incurs associated withregional, national, and international level.
1
Mr. Hartnett is a registered Certified Public Accountant in the preparationState of Illinois, and submissionholds a Bachelor of proposals. Each JV partner submitsScience degree in Accounting from the University of Illinois at Chicago.
Mr. Hartnett has served as a director of Garmin Ltd. (NASDAQ: GRMN) since June 7, 2013, is current chairman of its compensation committee, and serves as a member of its audit and nominating and corporate governance committees, and is a former director of Crossroads Systems, Inc. (NASDAQ: CRDS), U.S. Robotics Corporation and Ingenient Technologies, Inc.
Charles R. Kummeth, age 58
Director since: 2011
Independent
Mr. Kummeth has served as the Chief Executive Officer ofBio-Techne Corporation, a Minnesota corporation, since April 2013.Bio-Techne Corporation and its subsidiaries are engaged in the development, manufacture and sale of biotechnology products and hematology calibrators and controls. Mr. Kummeth served as President of the Mass Spectrometry and Chromatography division of Thermo Fisher Scientific, a Delaware corporation that provides services and products within the science industry, from April 2008 through March 2013. He previously served as President of the Medical Product Division of 3M, a Delaware corporation, beginning in 2006. From 2004 to ERAPSCO a proposal2006, Mr. Kummeth served as the Managing Director of 3M for the estimated priceUK and Ireland.
Mr. Kummeth has served on the board of performing that portionAvantor, Inc., a private global life sciences company since May 2016, and on the board of Gentherm Incorporated (NASDAQ: THRM), a public company which designs, develops and manufactures thermal management technologies, since August 2018. Mr. Kummeth served on the board of BSN Medical Inc., a private global medical device company, from March 2013 to July 2016.
Mr. Kummeth received a Bachelor of Science in Electrical Engineering from University of North Dakota in 1983, a Master of Science in Computer Science from University of St. Thomas in 1989, and a Master of Business Administration from the Carlson School of Business at the University of Minnesota in 1993.
James R. Swartwout, age 72
Director since: 2008
Independent
Mr. Swartwout has been an advisor to private equity groups since 2008. From October 2006 to September 2008, he was Chief Executive Officer and member of the RFP applicableBoard of Directors of Habasit Holding USA, the acquirer of Summa Industries, a California-based, publicly traded manufacturer of diversified plastic products for industrial and commercial markets. From October 1988 to it. Upon award of a contract toOctober 2006, Mr. Swartwout held the JV, separate subcontracts are generated between ERAPSCO and eachfollowing positions with Summa Industries (formerly NasdaqGM: SUMX): Chairman of the JV partners defining the responsibilitiesBoard of Directors, Chief Executive Officer and compensation. These subcontracts contain terms and conditions consistent with the prime contract. Each JV partner is responsible to ERAPSCO for the successful execution of its respective scope of work under its subcontract and each JV partner is individually accountable for the profit or losses sustained in the execution of the subcontract against its respective bid. In some instances, either Sparton or USSI handles the complete production and delivery of sonobuoys to ERAPSCO's customer. In other instances, either Sparton or USSI starts the production and ship completed subassemblies to the other party for additional processing before being delivered to the customers. Under ERAPSCO, individual contract risk exposures are reduced, while the likelihood of achieving U.S. Navy and other ASW objectives is enhanced. ERAPSCOChief Financial Officer. Mr. Swartwout has been in existence since 1987 and historically, the agreed upon products included under the JV were generally developmental sonobuoys. In 2007, the JV expanded to include all future sonobuoy development and substantially all U.S. derivative sonobuoy products for customers outside of the United States. The JV was further expanded three years later to include all sonobuoy products for the U.S. Navy beginning with U.S. Navy's 2010 fiscal year contracts.
While the ERAPSCO agreement provides certain benefits to Sparton as described above, the Company does not believe that it is substantially dependent upon this agreement to conduct its business. If in the future, Sparton determines that this commercial arrangement is no longer beneficial, the Company has the ability to terminate the joint venture in relation to future business awards and return to independent bidding for U.S. Navy and foreign government sonobuoy contracts.
New internally funded products are under development for sale as commercial products to the navigation, heading and positioning systems applications markets. Markets for these products include autonomous underwater and ground vehicles, handheld laser range finders, as well as unattended aerial vehicles as our product offerings grow. The principal example of such products is a family of precision inertial sensors for applications such as navigation or undersea petroleum exploration. Competition among companies that build these products is intense and dynamic. As such, development of our commercial products requires the identification of sustainable competitive advantages (“SCA”) prior to investment to ensure there is a viable market for our products. Each new product must advance the technology available to the market enough to overcome the inherent inertia preventing potential customers from switching from competitor's products. Likewise, existing products are evaluated periodically to ensure their SCA is still maintained and if not, either redesign or end-of-life occurs. The expansion of our commercial product lines leverages the intrinsic engineering talent at Sparton and capitalizesserved on the sonobuoy product volumes to provide technological as well as economiesboards of scale advantages. Pursuitdirectors of commercial marketsnumerous public and all salesprivate companies. He received a Bachelor of Science in Industrial Engineering from Lafayette College and profits from this endeavor are not a partMaster of the ERAPSCO JV.
During fiscal years 2017, 2016 and 2015, Sparton incurred internally funded research and development (“IR&D”) expenses of $1.7 million, $2.3 million and $1.5 million, respectively, for the internal development of technologies. Customer funded R&D costs, which are usually part of a larger production agreement, totaled $5.6 million, $16.7 million and $9.9 million for fiscal years 2017, 2016 and 2015, respectively.
Sonobuoy and related engineering services, including sales to the U.S. Navy and foreign governments, accounted for 29%, 28% and 29% of consolidated revenue for fiscal years 2017, 2016 and 2015, respectively. Sales to the U.S Navy accounted for 23%, 22% and 25% of consolidated revenue for fiscal years 2017, 2016 and 2015, respectively. The U.S. Navy issues multiple contracts annually for its sonobuoy and engineering requirements. The loss of U.S. Navy sonobuoy sales would have a material adverse financial effect on the Company. While the overall relationship with the U.S. Navy is important to Sparton, the Company does not believe that it is substantially dependent on any individual contract or agreement with the U.S. Navy, other than the Subcontract, effective December 4, 2014, between Sparton DeLeon Springs, LLC and ERAPSCO; the Subcontract, effective November 4, 2015, between Sparton DeLeon Springs, LLC and ERAPSCO; the Subcontract, effective January 19, 2017, between Sparton DeLeon Springs, LLC and ERAPSCO; the Subcontract, effective January 18, 2017, between Sparton DeLeon Springs, LLC and ERAPSCO; and the Subcontract, effective September 7, 2017, between Sparton DeLeon Springs, LLC and ERAPSCO (collectively, the “Material Subcontracts”). Each of the Material Subcontracts is filed as an exhibit to this Annual Report on Form 10-K, and each has been issued pursuant to a U.S. Navy one year Indefinite Delivery Indefinite Quantity contract with four option years (the “IDIQ Contract”). The IDIQ Contract is also considered a material contract to the Company and is filed as an exhibit to this Annual Report on Form 10-K. Pursuant to the currently effective subcontracts issued pursuant to the IDIQ, including certain of the Material Subcontracts, Sparton will supply sonobuoys to the U.S. Navy through ERAPSCO based on total subcontract awards received by Sparton DeLeon Springs, LLC in fiscal 2017 of approximately $88.6 million.
United States Navy contracts allow Sparton to submit performance based billings, which are then applied against inventories purchased and manufacturing costs incurred by the Company throughout its performance under these contracts. Inventories were reduced by performance based paymentsBusiness Administration from the
U.S. NavyUniversity of Southern California.Frank A. “Andy” Wilson, Age 60
Director since: 2015
Independent
Mr. Wilson retired in 2018 as the Senior Vice President and Chief Financial Officer at PerkinElmer, where he had served since 2009. Prior to joining PerkinElmer, Mr. Wilson held key financial and business management roles over 12 years at the Danaher Corporation, including Corporate Vice President of Investor Relations, Group Vice President of Business Development, Group Vice President of Finance for costs incurred related to long-term contracts, thereby establishing inventory to which the U.S. Navy then has title,Danaher Motion Group, President of $8.5 millionGems Sensors, and $9.0 million, respectively, at July 2, 2017 and July 3, 2016. At July 2, 2017 and July 3, 2016, current liabilities include performance based paymentsGroup Vice President of $1.7 million and $0.0 million, respectively, on Navy contracts. As these payments are in excess of cost, there is no inventory to which the government would claim title and, therefore, no offset to inventory has been made.
Acquisitions have been an element of the growth strategy for the ECP segment. The Segment has supplemented its organic growth by identifying, acquiring and integrating tangential technology products-based acquisition opportunities.
During fiscal year 2015, the Company acquired substantially all of the assets of Stealth.com ("Stealth"), a supplier of high performance rugged industrial grade computer systems and peripherals, for $16.0 CAD ($12.6 USD) million; certain assets of KEP Marine, a designer and manufacturer of industrial displays, industrial computers and HMI software for the Marine market, for $4.3 million; certain assets of Argotec, Inc. ("Argotec"), a business engaged in developing and manufacturing of sonar transducer products and components for the U.S. Navy, for $0.4 million and certain assets of Industrial Electronic Devices, Inc. ("IED"), a designer and manufacturer of rugged displaysFinance for the Industrial Controls Group. Previously, Mr. Wilson worked for several years at AlliedSignal Inc., now Honeywell International, where he last served as Vice President of Finance and Marine markets,Chief Financial Officer for $3.3 million.
See Note 3, Acquisitions,Commercial Avionics Systems. His earlier experience includes PepsiCo Inc. in financial and controllership positions of increasing responsibility, E.F. Hutton and Company, and KPMG Peat Marwick. He received a Bachelor of Business Administration, Accounting from Baylor University and is also a Certified Public Accountant. Mr. Wilson has served on the board of the “Notes to Consolidated Financial Statements” in this Form 10-K for additional information related to these acquisitions.
ECP business operations are affected by numerous lawsCabot Corporation (NYSE: CBT), a public specialty chemicals and
regulations relatingperformance materials company, since July 2018.There have been no material changes to the award, administration and performanceprocedures by which shareholders may recommend nominees to the Company’s Board of U.S. Navy contracts. The U.S. Navy generally has the ability to terminate ECP contracts, in whole or in part, without prior notice, for convenience or for default based on performance. If any of these contracts were terminated for convenience, Sparton would generally be protected by provisions covering reimbursement for costs incurred on the contracts and profit on those costs, but not the anticipated profit that wouldDirectors which have been earned hadimplemented since those procedures were last disclosed in the contract been completed.proxy statement for the Company’s 2017 annual meeting of shareholders dated October 30, 2017.
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Non-sonobuoy related manufacturingAudit Committee of the Board of Directors
The Company’s Audit Committee is currently comprised of Messrs. Frank A. Wilson (Chairman), Alan L. Bazaar, and services are sold primarily throughJames R. Swartwout. Each member of the Audit Committee is “independent,” as defined under the New York Stock Exchange listing standards. Mr. Wilson and Mr. Bazaar, in addition to being “independent,” each qualify as an “audit committee financial expert” as defined in the SEC RegulationS-K, Item 407(d)(5)(ii). Mr. Wilson’s relevant financial experience includes that he is a direct sales force. In addition, our divisionalCertified Public Accountant and executivehas a B.B.A, Accounting, from Baylor University. Mr. Wilson has served as the Senior Vice President and Chief Financial Officer of PerkinElmer since 2009 and recently retired in 2018. Previously, Mr. Wilson served in various financial management teams are an integral partroles over a period of our sales12 years at the Danaher Corporation. Mr. Bazaar’s relevant financial experience includes that he is a Certified Public Accountant and marketing teams.
Other
Materials for our operations are generally availablehas a MBA from a varietythe Stern School of worldwide sources, except for selected components. Access to competitively priced materials is critical to success in our businesses. In certain markets,Business at New York University. Mr. Bazaar serves as the volume purchasing power of our larger competitors creates a cost advantage for them. The Company has encountered availability and extended lead time issues on some electronic components due to strong market demand. This condition resulted in higher prices and late deliveries. However, the Company does not expect to encounter significant long-term problems in obtaining sufficient raw materials. The risk of material obsolescence in our businesses is less significant than that which exists in many other markets since raw materials and component parts are generally purchased only upon receiptChief Executive Officer of a customer's order. However, excess material resulting from order lead-time isfull-service wealth management firm, Hollow Brook Wealth Management LLC, and he has served as a risk factorManaging Director and Portfolio Manager in public equity, in investment decision-making roles and conducting financial and other due to potential order cancellation or design changes by customers.
While a significant portion of the Company's revenue is from customers based in the United States, the Company has sales to customers throughout the world. See Note 17, Business, Geographic and Sales Concentration, of the "Notes to
Consolidated Financial Statements" in this Form 10-K for financial information regarding the Company's geographic sales concentration and locations of long-lived assets.
At July 2, 2017, Sparton employed 1,710 people, including 156 contractors. None of the Company's employees are represented by a labor union. The Company considers employee relations to be good.
diligence.Executive Officers of the Registrant
Information with respect to executive officers of the RegistrantCompany is set forth in Part I, Item 1 of the Company’s Form10-K for the fiscal year ended July 1, 2018 filed on September 14, 2018 (the “2018 Form10-K”), and is hereby incorporated in this Part III, Item 10 by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and persons who own more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely upon a review of the copies of the forms furnished to the Company, and/or written representations from certain reporting persons, the Company believes that all filing requirements applicable to its officers and directors were met during the fiscal year ended July 1, 2018, except that Christopher Ratliff, the Company’s former Vice President of Information Technology, inadvertently filed a Form 4 upon his termination of employment which reported three transactions one date late.
Code of Business Conduct and Ethics
The Company’s Code of Business Conduct and Ethics sets forth the Company’s corporate values. The Code of Business Conduct and Ethics governs the actions and working relationships of the Company’s employees, officers and directors, and sets forth the standard of conduct of the Company’s business at the highest ethical level and in compliance with all applicable laws and regulations.
To the extent any waiver is granted with respect to the Code of Business Conduct and Ethics that requires disclosure under applicable SEC rules, such waiver will also be posted on the Company’s website, as will any amendment that may be adopted from time to time.
Additionally, the Company has established the following statement of its “Corporate Values”:
“We demand performance excellence in all that we do.”
“We demand integrity of ourselves, our products, and our services.”
“We foster growth and success in an environment of teamwork, collaboration, empowerment, and accountability.”
“We develop long term, trusting relationships to ensure mutually profitable growth.”
“We will maintain a safe and environmentally sound workplace.”
“We will be good corporate citizens in the communities in which we reside.”
Whistleblower Provisions
It is the Company’s policy to encourage its employees and other persons to disclose improper activities, and to address complaints alleging acts of reprisal or intimidation resulting from disclosure of improper activities. Individuals wishing to report improper activities may call the Company’s Whistleblower service at1-800-488-1933 (from within the United States) or1-800-4818 (from Vietnam). Activities may be reported anonymously if desired.
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| ITEM 11. | EXECUTIVE COMPENSATION |
Executive Summary
In this Part III, Item 11, we describe the material components of our executive compensation program for our Named Executive Officers, whose compensation is set forth in the 2018 Summary Compensation Table and other compensation tables contained in this Item:
Joseph J. Hartnett, Interim President and Chief Executive Officer;
Joseph G. McCormack, Senior Vice President, Chief Financial Officer;
Gordon B. Madlock, Senior Vice President, Operations;
Steven M. Korwin, Senior Vice President, Quality and Engineering;
Michael A. Gaul, Group Vice President, Manufacturing and Design Services; and
Joseph T. Schneider, former Senior Vice President, Sales and Marketing.
Mr. Schneider resigned as Senior Vice President, Sales and Marketing of the Company effective April 13, 2018, but is included as a Named Executive Officer in this Form10-K/A pursuant to the rules of the Securities and Exchange Commission.
We also provide an overview of our executive compensation philosophy and our executive compensation program. In addition, we explain how and why the Compensation Committee of our Board of Directors (the “Committee”) arrives at specific compensation policies and decisions involving the Named Executive Officers.
For a detailed discussion of our business, please see Part I, Item 1, “Business,” of our 2018 Form10-K.
2018 Key Compensation Highlights
The Committee identified our 14 key peer companies based on Committee-selected criteria.
The Committee continued alignment of short term and long term incentive plan goals with the achievement of specific annual and long term financial goals.
The Committee completed the annual review of the Compensation Committee Charter.
The Committee reviewed Named Executive Officer stock ownership progress.
The Committee actively worked with management to retain and motivate employees during the process of marketing the Company for sale.
The Committee recommended, and the Board of Directors approved, the issuance of (i) cash retention bonuses and (ii) discretionary bonuses to certain key employees.
The Committee conducts an annual review and approval of the Company’s compensation strategy, including a review of the Company’s compensation-related risk profile, to ensure that compensation-related risks are not reasonably likely to have a material adverse effect on the Company.
The Company maintains a clawback policy that provides that, in connection with any restatement of the Company’s financial statements due to materialnon-compliance with financial reporting requirements, it is the Company’s policy to require forfeiture by current and former executive officers of incentive-based compensation in accordance with applicable laws, rules and regulations.
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Consideration of Last Year’s “Say On Pay” Vote
Following our annual meeting of shareholders in November 2017, the Committee reviewed the results of the shareholder advisory vote on executive compensation that was held at the meeting with respect to the fiscal year 2017 compensation of the Named Executive Officers. 97.6 percent of the votes cast (excluding brokernon-votes) were voted in support of the compensation of our Named Executive Officers set forth in the Compensation Discussion and Analysis, the 2017 Summary Compensation Table and the related compensation tables and narratives in last year’s proxy statement.
After considering the results of the 2017 Say On Pay vote, which indicate that our shareholders overwhelmingly approve of our methodology for establishing compensation, as well as the other factors considered in determining executive compensation as described in this Compensation Discussion and Analysis, the Committee was encouraged to continue its practices in determining executive compensation.
Specific Compensation and Corporate Governance Policies and Practices
Our compensation philosophy and related governance features are complemented by several specific policies and practices that are designed to align our executive compensation with long-term shareholder interests, including:
We have stock ownership guidelines for our executive officers, including the Named Executive Officers and members of our Board of Directors, that are applicable within five years of eligibility under the LTIP for the Named Executive Officers and within five years of Board of Directors appointment for our directors. Each of the members of our Board of Directors has met his individual stock ownership level under the guidelines in effect for fiscal year 2018, except for Mr. Frank A. Wilson who joined the Board of Directors in fiscal year 2015, and Alan L. Bazaar who joined the Board of Directors in fiscal year 2016. Mr. Steven M. Korwin is the only Named Executive Officer who has met these guidelines for fiscal year 2017. Mr. Joseph J. Hartnett, as Interim President and Chief Executive Officer, is not eligible for the LTIP, Mr. Joseph G. McCormack was hired in fiscal year 2016, and Mr. Joseph T. Schneider was hired in fiscal year 2015 and resigned his position on April 13, 2018. The guidelines were revised in June of 2014, as described below. The positionsAs a result of the potential sale of the Company, executive officers and the Board of Directors have been prohibited from acquiring or disposing of Company stock.
We have a policy prohibiting all employees, including Named Executive Officers and members of our Board of Directors, from engaging in any hedging transactions with respect to our equity securities held by them.
Under our Insider Trading Policy, certain of our employees and consultants, including executive officers and members of our Board of Directors, are prohibited from pledging shares of our capital stock without first obtainingpre-clearance of the transaction from our Compliance Officer. None of these covered individuals have pledged their stock.
Our Executive Officers, including the Named Executive Officers, receive minimal perquisites or other personal benefits.
CEO Pay Ratio
The following information about the relationship of the annual total compensation of our employees and the annual total compensation of the CEO, Joseph Hartnett, for the periods noted.fiscal year ended June 30, 2018 is set forth below as required by Section 953(b) of Dodd-Frank and the applicable rules of the SEC.
The median of the annual total compensation of all of Sparton’s employees (other than Mr. Hartnett) was $41,413.
The annual total compensation of Mr. Hartnett as reported in the “Total” column of the Summary Compensation Table in this Form 10K/A which was calculated in accordance with Item 402(c) of RegulationS-K was $1,052,210.
The CEO’s annual total compensation is twenty-five times or 25:1 the median annual total compensation of all employees. The methodology used to establish the median employee was to compile the data from the Sparton payroll systems. The date selected for the purpose of median employee calculations was May 25, 2018. Sparton had a total of 1,400 U.S. employees and 171non-U.S. employees, including 155 employees in Vietnam and 16 employees in Canada as of such date. The only exclusion to the employee population in the calculation of the pay ratio was the Woodbridge Canada facility that employs a total of 16 employees who were excluded under the 5%de minimis exemption fornon-U.S. employees. All other employees except the CEO were included in the median population. The pay ratio reported by other companies may not be comparable to the pay ratio reported by us, as other companies may have different employment and compensation practices and may utilize different methodologies, exclusions, estimates and assumptions in calculating their pay ratios.
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Key Features of Our 2018 Executive Compensation Program
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What We Do Align CEO Pay with Company Performance: Our CEO’s direct compensation is aligned with revenue growth and profitability (other than base salary and retention bonus during the potential sale of the Company). Review Named Executive Officer Pay against Peers’ Executive Officer Pay: In fiscal year 2016, a reputable executive compensation consultant, Meridian Compensation Partners, LLC, was engaged to provide the Committee with broad market-based compensation data of peer group companies based on Committee-selected criteria to permit the Committee to analyze whether the total compensation of the Name Executive Officers is competitive. In fiscal year 2017, in light of the potential sale of the Company, the Committee did not engage Meridian, however, the committee continued to refer to data previously provided by Meridian. Use Long-Term Incentives to Link a Significant Portion of All Current Named Executive Officer Pay to Company Performance: Historically, 33% of annual pay for our Named Executive Officers has been linked to either our long term Valuation Index or stock options related to vesting of awards granted under our 2010 LTIP. The components and calculations of these programs correlate directly to the profitability growth of the Company. The Deferred Compensation Plan adopted in fiscal 2014, as amended, permits participants to defer certain aspects of their compensation, creating additional incentive to focus on long-term planning. In light of the potential sale of the Company, no LTIP awards were granted; rather, the Company paid retention bonuses to certain executives and key employees, including the Named Executive Officers. Balance Short-Term and Long-Term Incentives: The incentive programs provide an appropriate balance of annual and long-term incentives and include multiple measures of financial performance. Cap Short Term Incentive Awards: Awards under our annual Short Term Incentive Plan are capped at 200% of target. Mitigate Excessive Risk-taking Behaviors by Named Executive Officers: Our executive compensation program includes features that reduce the possibility of our Named Executive Officers, either individually or as a group, making excessively risky business decisions that could maximize short-term results at the expense of long-term value. | | What We Don’t Do Determine Named Executive Officer Pay based only on External Market Compensation Data: The Committee and Board of Directors have approved compensation for our Named Executive Officers both above and below the external market data points. These decisions are individually based upon job scope, job performance, years of related work experience, annual company performance, and our talent attraction and retention strategies. No Hedging of Company Stock: Our Named Executive Officers are prohibited from hedging their company stock. No Tax Gross Ups: We do not provide tax reimbursements unless they are provided pursuant to our standard relocation practices. |
Require Named Executive Officers to Maintain Stock Ownership: Under our guidelines, the Chief Executive Officer of the Company must attain stock ownership equal to 300% of base salary and the other Named Executive Officers must attain stock ownership equal to 150% of base salary, in each case within 5 years of LTIP eligibility. As a result of the potential sale of the Company, executive officers have been prohibited from acquiring or disposing of Company stock. In fiscal year 2018, Mr. Madlock did not meet the stock ownership guidelines. Authorize the Board of Directors to Recoup Executive Compensation: In connection with any restatement of the Company’s financial statements due to material noncompliance by the Company with any financial reporting requirements under applicable securities laws, it is the policy of the Board of Directors to require forfeiture by current and former executive officers of incentive based compensation in accordance with applicable laws, rules and regulations. Discourage Pledging of Company Stock: Under our Insider Trading Policy, certain of our employees and consultants, including executive officers, and members of our Board of Directors, are prohibited from pledging shares of our capital stock without first obtainingpre-clearance of the transaction from our Compliance Officer. None of these covered individuals have pledged their stock. | | |
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Provide Retention Bonuses to Retain Employees During the Merger Process The Company would pay certain executives and key employees, including the Company’s Principal Financial Officer and Named Executive Officers, a retention bonus, provided that the recipient remains continuously employed with the Company until the earliest of certain criteria. Retention bonuses would only be paid if a sale of the Company is not consummated. | | |
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Compensation Philosophy and Objectives
Guiding Principles
Our compensation philosophy has the objective of fair, competitive and performance-based compensation of our management team, including the Named Executive Officers. We believe that the total compensation of management should be aligned with our performance. While the specific programs may be modified from year to year, our compensation philosophy is consistent in aligning compensation to the attainment of our corporate strategy. The Committee seeks to reward performance with cost-effective compensation that aligns employee efforts with our corporate strategy through adherence to the following compensation policies:
Total compensation should strengthen the relationship between pay and performance by including and emphasizing variable,at-risk compensation that is dependent on achieving specific corporate, business function, and/or individual performance goals.
An element of pay should be long-term incentives to align management interests with those of our shareholders.
An element of pay should also be short-term incentives to reward performance in the subject fiscal year based on achievement of our annual performance goals.
Total compensation opportunities should enhance our ability to attract, retain and develop knowledgeable and experienced executives.
Total compensation should be competitive in the marketplace based on a review of similarly sized manufacturers and identified peer companies and the comparable compensation paid to executives of such similarly sized manufacturers and peer companies.
Our overall compensation philosophy is generally to pay our employees, including Named Executive Officers, competitively based on market data and commensurate with our performance. The market data includes information such as salary reports for the manufacturing industry generally and specifically for peer companies. The Committee and Board of Directors, with input from management, use the market data points to determine what fair and reasonable compensation would be based on our performance. The Committee also consults with management, and outside accounting and legal advisors as appropriate. The Committee and Board of Directors have approved compensation to our management both above and below the market data points. See the narrative discussion below for a detailed discussion of our long-term and short-term incentive plans.
Importance of Our Corporate Values
The Sparton Corporate Values guide us in fulfilling our responsibilities to our customers, employees, communities, and shareholders.
Sparton Corporate Values
Performance Excellence: We demand performance excellence in all that we do.
Integrity: We demand integrity of ourselves, our products, and our services.
Teamwork & Accountability: We foster growth and success in an environment of teamwork, collaboration, empowerment, and accountability.
Growth: We develop long term, trusting relationships to ensure mutually profitable growth.
Safety: We will maintain a safe and environmentally sound workplace.
Citizenship: We will be good corporate citizens in the communities in which we reside.
In assessing our Named Executive Officers’ contributions to Sparton’s performance, the Committee not only looks to results-oriented measures of performance, but also considers how those results were achieved – whether the decisions and actions leading to the results were consistent with the values embodied in our Corporate Values – and the long-term impact of a Named Executive Officer’s decisions. Corporate Values-based behavior is not something that can be precisely measured; thus, there is no formula for how Corporate Values-based behavior can, or will, impact an executive’s compensation. The Committee and the CEO use their judgment and experience to evaluate whether an executive’s actions were aligned with our Corporate Values.
How We Make Compensation Decisions
Role of the Compensation Committee
The Committee is comprised of three independent directors, as defined under the rules of the NYSE. The Committee is responsible for the review and approval of all aspects of our executive compensation program. Among its duties, the Committee is responsible for formulating the compensation recommendations for our CEO andnon-CEO executive officers. The recommendation of the Committee must be approved, with respect to the CEO, by the independent directors of the Board of Directors, and with respect to thenon-CEO executive officers, by the full Board of Directors. In addition, the Committee:
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Reviews our incentive and compensation plans and programs;
Evaluates annually the CEO’s andnon-Executive Officers’ compensation levels and payouts against various financial andnon-financial measures.
The Committee is supported in its work by our CEO and Compensation Consultants, as described below.
The Committee’s charter, which sets out its duties and responsibilities and addresses other matters, can be found on our website at www.sparton.com.
Role of the Chief Executive Officer
Each year our CEO makes recommendations with respect to the compensation of ournon-CEO executive officers and our Committee reviews these recommendations with the CEO and the appropriate human resources personnel. The CEO’s recommendations are based upon his assessment of each executive officer’s performance, the performance of the individual executive officer’s respective business or function, and employee retention considerations. Our Committee reviews the CEO’s recommendations, and approves any compensation changes affecting our executive officers as it determines in its sole discretion. Our CEO does not play any role with respect to any matter affecting his own compensation.
Peer Companies
Our executive compensation package is designed to be competitive in the market and commensurate with our performance. In making compensation decisions, we analyze executive compensation paid at selected peer companies. In fiscal year 2016, Meridian provided our Committee with a list of potential peer companies based on their 8 digit GICS codes, revenue, and market cap. The Committee reviewed this list and then selected the peer companies it believes are most comparable to us. The Committee then requested that Meridian provide it with compensation information, including incentive awards, from such peer companies. In fiscal year 2018, the Committee did not engage Meridian, but continued to use certain of the previously provided data and other appropriate compensation information in making compensation decisions. In reviewing such data, the Company revised the list of peer companies based on certain changes in the ownership and business focus of those companies since its prior assessment. The annual revenues of the peer companies during their most recent fiscal year ranged from $82 million to $1,462 million, with the median revenue being $377 million. Our annual revenue for fiscal year 2018 was $375 million.
The Committee uses the data obtained from Meridian, proxy statements of peer companies, and broad-based market driven compensation surveys published from time to time by national human resources consulting firms, together with other information, to assist it in determining the compensation of the Named Executive Officers. The Committee does not target compensation to any specific percentile paid by such peer or other companies, but rather considers compensation of peer and such other companies as one of the factors in making compensation decisions. As noted, the Committee approves compensation to the Named Executive Officers both above and below market data points.
For 2018 executive compensation, our peer companies were:
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• AeroVironment, Inc | | • Kimball Electronics, Inc. |
• AngioDynamics Inc | | • Maxwell Technologies, Inc. |
• Astronics Corporation | | • Raven Industries Inc. |
• CTS Corporation | | • Sigmatron International, Inc. |
• Ducommun Inc. | | • SMTC Corporation |
• Integer Holdings Corporation | | • Sypris Solutions, Inc. |
• Key Tronic Corporation | | • Universal Electronics Inc. |
Elements of Compensation
The key elements of our executive compensation program are base salary, short-term (annual) incentive and long-term (multi-year) incentive compensation. These elements are addressed separately below.
The Committee does not exclusively use mathematical formulas to determine compensation. In setting each element of compensation, the Committee considers all elements of an executive’s total compensation package, including base salary, incentive compensation, and the value of benefits.
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The following table includes various elements of our executive compensation program, the primary purpose of each element, and form of compensation for each element.
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Element | | Primary Purpose | | Form of Compensation |
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| Base Salary | | To provide base compensation for the day to day performance of job responsibilities | | Cash |
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| Short-Term Incentives | | To reward performance during the current fiscal year based on the achievement of annual performance goals | | Cash (STIP, described underSTIP Generally, below) |
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| Bonuses | | To reward individual performance based on evaluation by, and in discretion of, the Committee | | Cash |
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| Retention Bonuses | | To retain certain executives and key employees | | Cash and stock-based compensation |
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| Long-Term Incentives | | To reward improvement in our long term performance, thereby aligning with the financial interests of our shareholders | | Stock-based compensation, e.g., options, restricted stock awards and restricted stock units (2010 LTIP, described under2010 LTIP, below) |
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| Other Executive Benefits | | To provide a broad-based executive compensation program for executive attraction, retention, retirement and health | | Retirement programs, health and welfare programs, employee benefit plans, change of control provisions, programs and arrangements generally available to all employees and limited perquisites (see below). |
The following is a narrative description of each of the key elements of our executive compensation programs.
Base Salaries
A competitive base salary provides the foundation for a total compensation package required to attract, retain, and motivate executive officers and other members of management, including the Named Executive Officers, in alignment with our business strategies. The Committee reviews the proposed annual base salaries for executive officers and management (including the Named Executive Officers other than the Chief Executive Officer) with the Chief Executive Officer and the appropriate human resources personnel, and with modifications considered appropriate, provides a recommendation to the Board of Directors for its approval. The Committee independently reviews and sets base salary for the Chief Executive Officer, subject to the approval of the independent members of the Board of Directors.
Base salaries are initially premised upon the responsibilities of each Named Executive Officer and may be further adjusted based on market surveys and related data, including individual experience levels and performance judgments as to the past and expected future contributions of the applicable Named Executive Officer. The Committee reviews each Named Executive Officer’s base salary annually.
Short-Term Incentives
STIP Generally
On June 26, 2009, the Board of Directors approved and adopted the Sparton Short-Term Incentive Plan (the “STIP”). The STIP did not require shareholder approval. On April 28, 2016, the Board of Directors approved and adopted the First Amendment to the STIP, which provides for pro rata payment of awards to certain employees upon a change of control, as defined in the Amendment. The purpose of the STIP is to increase shareholder value and ensure our success by motivating participants to achieve all defined financial and operating goals and strategic objectives of the business in line with our corporate strategy. The STIP is further intended to attract and retain key employees essential to the success of the business and to provide competitive compensation programs consistent with market competitive pay practices.
The Committee has been appointed by the Board of Directors to administer the STIP. The Committee, with the approval of the Board of Directors, annually selects our executive or key employees, including Named Executive Officers, to be participants in the STIP. The first annual performance period for which awards under the STIP were made was fiscal year 2010.
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The Board of Directors, in its sole discretion, may amend or terminate the STIP, or any part thereof, at any time and for any reason. The amendment, suspension or termination of the STIP will not, without the consent of the participant, alter or impair any rights or obligations under any actual incentive award previously earned by such participant. No award may be granted during any period of suspension or after termination of the STIP. The STIP will remain in effect until terminated.
As discussed above, our overall compensation philosophy, including with respect to awards under the STIP, is generally to pay our employees competitively based on market data, and commensurate with our performance which is aligned to achieve our corporate strategy. Working together, the Committee along with the Chief Executive Officer and the appropriate human resources personnel, reviews the individual incentive plans and awards to be made to executives and key employees under the STIP (other than the Chief Executive Officer, whose awards are only reviewed by the Committee). The recommendations of the Committee are subject to approval of the Board of Directors.
How Awards Are Determined Under the STIP
The Committee, subject to approval by the Board of Directors, establishes an individual target award for each participant equal to a percentage of such participant’s salary. The Chief Executive Officer (other than with respect to himself) and the appropriate human resources personnel, recommend, and the Committee, in its sole discretion, considers, determines and approves the performance goals and objectives applicable to any actual incentive award. The performance goals and objectives are driven by achievement of our corporate strategy and may be on the basis of any performance factors the Committee determines relevant, including individual, business unit or Company-wide performance. Failure to meet the performance goals and objectives of the annual performance period will result in the participant’s failure to earn the actual incentive award, except as otherwise determined by the Committee. Actual incentive award payments will be determined, based on verified achievement levels of established performance goals and objectives for the annual performance period, by the Committee and approved by the Board of Directors.
For each annual performance period, the Committee, subject to approval by the Board of Directors, establishes an incentive award pool (the “STIP Pool”) based on achievement of the financial objectives. Payment of each actual incentive award is made as soon as practicable as determined by the Committee after the completion of the independent audit and filing of the Annual Report on Form10-K for the annual performance period during which the actual performance award was earned. Unless otherwise determined by the Committee, to receive payment of an actual incentive award, a participant must be employed by the Company or any affiliate on the last day of the annual performance period, and, subject to certain exceptions in the event of a participant’s death or disability, on the date of payment of the actual incentive award. Actual incentive awards are paid from the incentive award pool in cash in a single lump sum. The Committee may, in its sole discretion, grant an award for an extraordinary individual contribution which substantially benefits the Company but is not reflected in the achievement of a participant’s individual goals.
2018 STIP Awards
The Committee, with the approval of the Board of Directors, selected 87 key employees, including certain of the Named Executive Officers, to be participants in the STIP for the annual performance period ending July 1, 2018 and established target awards for that period in line with our corporate strategy based on EBITDA and Net Sales (each term as defined below) and personal objectives, the funding for which came from the STIP Pool. The individual target award percentages for these participants ranged from 10% to 45% of a participant’s base salary. These components were weighted separately for each participant. Awards were payable on a graduated scale ranging from a threshold of 50% of the target award for each component up to a maximum of 200% of the target award for that component, subject to availability of funds under the STIP Pool. No award for a component was payable if performance was below the threshold. The STIP Pool for fiscal year 2018 was set at $2,971,354, assuming achievement of 100% of the target financial objective described under “Target for Objectives under the STIP,” below. In addition, the Committee, with the approval of the Board of Directors, guaranteed STIP payments at 100% of targeted award for retention purposes. For the fiscal 2018 STIP awards, the Committee, with the approval of the Board of Directors, recommended and the Company granted a minimum STIP payout to participants equal to 100% of target, with the exception of Mr. Madlock for which this target was set at $120,000 (39% of base salary). In addition, the Committee, with the approval of the Board of Directors, recommended and the Company granted Mr. Hartnett a $450,000 discretionary bonus under the STIP.
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Target Awards as a Percentage of Base Salary under the STIP.The following table sets forth the target awards for each of the Named Executive Officers as a percentage of their base salaries for fiscal year 2018:
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| Named Executive Officer | | Target Award as a Percentage of Base Salary | |
Joseph J. Hartnett | | | — | |
Joseph G. McCormack | | | 45 | % |
Gordon B. Madlock | | | 45 | % |
Steven M. Korwin | | | 45 | % |
Michael A. Gaul | | | 40 | % |
Joseph T. Schneider (1) | | | 45 | % |
| (1) | Mr. Schneider resigned as Senior Vice President of Sales and Marketing of Sparton Corporation effective April 13, 2018 and as such, did not receive any fiscal 2018 STIP payments. |
Target for Objectives under the STIP. The following table sets forth the threshold, target, maximum and actual amounts, in thousands, for each of the objectives for fiscal year 2018:
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Objective | | Threshold | | | Target | | | Maximum | | | Actual | |
Company EBITDA (1) | | $ | 25,854 | | | $ | 28,411 | | | $ | 33,241 | | | $ | 22,704 | |
Company Net Sales (2) | | $ | 369,516 | | | $ | 389,169 | | | $ | 455,357 | | | $ | 374,990 | |
Group EBITDA (3) | | | 8,258 | | | | 8,903 | | | | 10,121 | | | | 9,871 | |
Group Sales (4) | | | 108,641 | | | | 114,419 | | | | 133,879 | | | | 114,473 | |
| (1) | “Company EBITDA” means consolidated earnings of the Company before interest, provision for income taxes, depreciation and amortization, as adjusted for fiscal 2018. |
| (2) | ”Net Sales” means total net sales of the Company generated during fiscal year 2018, as adjusted. |
| (3) | “Group EBITDA” means total earnings of the medical end market within the Manufacturing & Design Services Segment before interest, provision for income taxes, depreciation and amortization, as adjusted for fiscal 2018. |
| (4) | “Group Sales” means total gross sales generated by the medical end market within the Manufacturing & Design Services Segment the during fiscal year 2018, as adjusted. |
STIP Targets and Actual Awards. The following table sets forth the objectives for each Named Executive Officer under the STIP, the percentage of each objective as related to the total potential award under the STIP, and the threshold, target, maximum and actual STIP awards for each Named Executive Officer:
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| Named Executive Officer | | Objectives | | Percentage of Total
Award | | Threshold | | | Target | | | Maximum | | | Actual | |
Joseph J. Hartnett (1) | | | | — | | | — | | | | — | | | | — | | | $ | 450,000 | |
Joseph G McCormack (2) | | Company EBITDA | | 75% | | $ | 56,531 | | | | 113,062 | | | $ | 226,124 | | | | 150,000 | |
| | Company Net Sales | | 25% | | | 18,844 | | | | 37,688 | | | | 75,376 | | | | — | |
Gordon B. Madlock (2) | | Company EBITDA | | 75% | | | 51,483 | | | | 102,965 | | | | 205,930 | | | | 120,000 | |
| | Company Net Sales | | 25% | | | 17,161 | | | | 34,322 | | | | 68,644 | | | | — | |
Steven M. Korwin (2) | | Company EBITDA | | 75% | | | 44,669 | | | | 89,337 | | | | 178,674 | | | | 120,000 | |
| | Company Net Sales | | 25% | | | 14,890 | | | | 29,779 | | | | 59,558 | | | | — | |
Michael A. Gaul | | Company EBITDA | | 20% | | | 9,168 | | | | 18,335 | | | | 36,670 | | | | — | |
| | Group EBITDA | | 55% | | | 25,212 | | | | 50,423 | | | | 100,846 | | | | 90,956 | |
| | Group Sales | | 25% | | | 11,460 | | | | 22,920 | | | | 45,840 | | | | 23,099 | |
Joseph Schneider (3) | | Company Net Sales | | 75% | | | 44,719 | | | | 89,437 | | | | 178,874 | | | | N/A | |
| | Company EBITDA | | 25% | | | 14,907 | | | | 29,813 | | | | 59,626 | | | | N/A | |
| (1) | As Interim President and Chief Executive OfficerCEO, Mr. Hartnett does not participate in the STIP based on EBITDA and Net Sales targets. However, in fiscal year 2018 the independent directors on the Board of Sparton Corporation sinceDirectors approved a discretionary bonus of $450,000 under the STIP for Mr. Hartnett. |
| (2) | Messrs. McCormack, Madlock and Korwin earned $22,612, $20,593 and $17,867, respectively. Actual payouts were $150,000, $120,000 and $120,000, respectively due to guaranteed minimum STIP payments. |
| (3) | Mr. Schneider resigned as Senior Vice President of Sales and Marketing of the Company effective April 13, 2018 and as a result, did not earn any amount under the STIP. |
The actual payout for all fiscal 2018 STIP participants was $3,004,830. The actual payout was based upon the greater of (i) actual STIP earned or (ii) 100% of targeted STIP.
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Fiscal Year 2019 STIP Awards
On August 22, 2018, the Committee, with the approval of the Board of Directors, approved financial targets for awards for fiscal year 2019 under the STIP for the Named Executive Officers. The awards are based on achieving targets for EBITDA and Net Sales for fiscal year 2019. The STIP Pool for the Company for fiscal year 2019 was set at $2,539,139, assuming achievement of 100% of the targets by all participating key employees. For retention purposes, the participants, including named executive officers, are guaranteed a minimum payout of 100% of target if they remain employed by the Company in September 2019. Targets for Messrs. McCormack, Madlock and Korwin were set at $150,000, $120,000 and $120,000, respectively. Additionally, if the Company is sold during fiscal 2019, participants would be paid 50% of the targeted STIP if they are employed by the Company at the time of sale. Additional detail regarding such awards, including actual awards in fiscal year 2019, will be included in the next annual proxy statement.
Fiscal Year 2017 STIP Awards
For fiscal 2017 STIP awards,non-executive participants were paid 100% of the target awards as a retention measure. As a result, additional STIP awards in the amount of $745,000 were paid in fiscal 2018.
Bonuses
The Committee may recommend bonuses in addition to or in lieu of bonuses earned under the STIP based on the Committee’s evaluation of the individual performance and level of responsibility of the Named Executive Officers and other members of management. In determining discretionary annual incentive bonuses for the Named Executive Officers, the Committee evaluates the Chief Executive Officer’s recommendations based on individual performance. The Committee independently evaluates the individual performance of the Chief Executive Officer. The results of those evaluations are used by the Committee to recommend bonuses for the Named Executive Officers to the Board of Directors.
Retention Bonuses
On April 25, 2018, the Committee, with the approval of the Board of Directors, approved and adopted a cash retention bonus pool. Under the arrangement, the Company will pay certain executives and key employees a cash retention bonus, in the event that the participant remains continuously employed with the Company and there is no Change in Control (as defined in the 2010 LTIP) prior to September 14, 2019 or earlier in the event the participant is involuntarily terminated after June 30, 2018.
Participants employed on or after June 30, 2018 and involuntarily terminated prior to September 14, 2019 will be entitled to 50% of the approved cash retention bonus plus a pro rata portion of the remaining 50%. Each participant’s pro rata portion will be equal to the number of full calendar months that have elapsed during the period June 30, 2018 through August 31, 2019, including the calendar month in which the termination occurs, divided by 14 (which is the number of calendar months occurring during the period June 30, 2018 through August 31, 2019).
Participants who remain employed by the Company through September 14, 2019 will receive payment on that date or within 14 days of involuntary termination if termination occurs during the period June 30, 2018 through September 14, 2019.
Participants in the arrangement include the Principal Financial Officer and certain of the Named Executive Officers. For a description of the amounts of potential retention bonuses due to the Principal Financial Officer and certain of the Named Executive Officers, see “Employment Agreements and Potential Payments upon Termination or Change in Control”below.
Long-Term Incentives
Our long-term incentive program historically involved the grant of restricted stock. During fiscal year 2015, the Committee worked with Meridian to better align the types of equity awarded under the 2010 LTIP with the market, and recommended to the Board of Directors that future awards include a mix of restricted stock units and options. The grants are designed to (i) align the interest of our key employees with our shareholders through the employees’ ownership of equity, (ii) accomplish our corporate strategy by requiring the vesting of such awards to be tied to the achievement of certain performance goals, and (iii) encourage the long-term employment of key employees.
Due to the potential sale of the Company, no awards under the 2010 LTIP were made for the 2018 fiscal year.
The Company annually reviews the long-term incentive elements of its compensation package, including the beneficial and detrimental aspects of particular compensation components such as restricted stock awards and stock options, to determine the continuing efficacy of such programs.
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2010 LTIP
In keeping with our philosophy of providing a total compensation package that includes long-term incentives, the total compensation package of our key employees, including our Named Executive Officers, may include restricted stock, stock options, restricted stock units and/or cash under the Sparton Corporation 2010 Long-Term Stock Incentive Plan, as amended (the “2010 LTIP”). On August 20, 2014, the Board of Directors approved an amendment to the 2010 LTIP to permit awards of restricted stock units. The Company previously awarded long-term incentives under the Sparton Corporation Stock Incentive Plan, as amended in October 2001 (the “2001 SIP”), but as of October 2011 the Company was no longer permitted to make new awards under the 2001 SIP.
The total number of shares that may be awarded under the 2010 LTIP is 1,000,000 shares of common stock, 557,141 of which remain available for awards as of the date hereof. To the extent that any award is forfeited, terminates, expires or lapses without exercise or settlement under the 2010 LTIP, the shares subject to such awards forfeited or not delivered as a result thereof will again be available for awards under the 2010 LTIP.
As previously discussed during fiscal year 2018, we did not grant any awards under the 2010 LTIP.
The restricted stock units previously granted vest in four equal annual installments, with the first installment commencing one year after the awards are made, with the exception of a grant of 25,000 restricted stock units to Joseph Hartnett on August 8, 2016 that vested upon the earliest of (i) a change of control, (ii) Sparton’s appointment of a permanent chief executive officer, (iii) Sparton’s termination of Mr. Hartnett without cause, and (iv) March 1, 2017. Of the restricted stock unit awards that were granted in fiscal years 2015, 2016 and 2017, as of July 1, 2018 none of those units have vested, other than the award to Mr. Hartnett. Other than the award to Mr. Hartnett, the restricted stock unit awards are performance based in that vesting is dependent upon achievement of the Valuation Index. The stock options also vest in four equal annual installments, with the first installment commencing one year after the awards are made other than 24,808 stock options awarded in fiscal 2015 that vest in three equal annual installments, with the first installment commencing one year after the awards are made. Of the stock options that were granted in fiscal years 2015, 2016 and 2017, as of July 1, 2018, 175,233 of the option shares have been forfeited and 47,625 of the options have vested. The stock option awards are time-based only and are not based on achieving the Valuation Index.
Prior to fiscal year 2015, restricted stock awards (and no restricted stock units or stock options) were granted in fiscal years 2010, 2012, 2013 and 2014 under the 2010 LTIP and the 2001 SIP and, as of July 1, 2018, 199,805 of those shares have vested.
In order for the recipient’s restricted stock, restricted stock units and/or option shares to vest, he or she must be an employee when the Annual Report on Form10-K is filed for the applicable year. See footnote 1 under “Table – Potential Payments upon Termination or Change in Control,” for a description of acceleration of vesting under the 2010 LTIP upon a termination or change in control as determined at the discretion of the Committee.
The Valuation Index is based on a formula determined by the Committee in consultation with Meridian which incorporates various financial metrics which the Committee believes are critical to improving our long term enterprise value and increasing shareholder value, including EBITDA, cash, outstanding debt, dividends, and the weighted average of outstanding shares of our common stock. The target Valuation Index increases in each of the four annual vesting periods based on a growth rate determined by the Committee. Should we fail to achieve the required Valuation Index in any of the respective periods, the awards allow for vesting in subsequent years should we achieve certain future Valuation Index targets.
We designed the Valuation Index growth rates to reflect an aggressive, but reasonably achievable, increase in enterprise value over the previous fiscal year. Based upon the fiscal year 2018 financial results and resulting Valuation Index calculations, the following vesting has occurred in the LTIP program:
2014 – Valuation Index was not achieved and therefore the second, third and fourth installments of the awards that were granted in fiscal year 2014 did not vest, and were permanently forfeited.
2015 – Valuation Index was not achieved and therefore the first, second and third installments of the awards that were granted in fiscal year 2015 did not vest, and vesting for those installments was deferred. The second installment of the option awards did vest (note that they are time-based only and not based on achieving the Valuation Index).
2016 – Valuation Index was not achieved for restricted stock units awarded in 2016 and therefore the first and second installments of the restricted stock unit awards did not vest, and vesting for those installments was deferred. The first installment of the option awards did vest (note that they are time-based only and are not based on achieving the Valuation Index).
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2017 – Valuation index was not achieved for restricted stock units awarded in 2017 and therefore the first installment of the restricted stock units did not vest, and vesting for that installment was deferred. There were no option awards granted in 2017.
2018 – No awards granted.
Fiscal Year 2019 Awards under the 2010 LTIP
For the 2019 fiscal year, awards will be made under the 2010 LTIP only in the event of a termination of the exploration of a sale of the Company. Such awards would be time-based over a 2 year period with 50% earned in June 2019 and 50% in June 2020. The number of shares to be granted would be based on the fair market value of our shares determined two (2) days after an announcement of the termination of the sales process. The amount of the awards were determined by the Committee, with input from the Chief Executive Officer, and after taking into account market data, responsibilities and performance of an executive, our consolidated financial projections, business unit financial projections, and the potential sale of the Company, recommended, for Board of Directors approval, a dollar value award for certain executives which will be payable in restricted stock units.
Allocation of Compensation Components
We use a balanced approach in compensating company executives, combining fixed and performance-based compensation, annual and long-term compensation, and cash and equity compensation. The Committee determines the appropriate balance, as approved by the Board of Directors, based upon careful consideration, including consideration of market data provided by independent compensation consultants. We do not have a specific policy for allocation of compensation components. The following chart sets forth the allocation of compensation components for the Named Executive Officers for fiscal year 2018, using fixed salary, cash-based discretionary and retention awards, stock awards, incentive components at target, and grant date fair values of restricted stock units as of July 1, 2018:
For fiscal year 2018, 22% of the compensation components for the Named Executive Officers (other than the Interim Chief Executive Officer) were variable and tied to performance.
Mr. Schneider resigned as Senior Vice President, Sales and Marketing of the Company effective April 13, 2018.
Post-Employment Compensation
Retirement Plans
We maintain a 401(k) plan that is available to substantially all U.S. employees of the Company, including Named Executive Officers. The Company also maintains a defined benefit plan, however, participation in the plan was frozen effective April 1, 2009. None of the Named Executive Officers are participants in our defined benefit plan as it was frozen prior to the time that they would have become eligible to participate.
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Severance and Change in Control Arrangements
To enable us to offer competitive total compensation packages to our executive officers, as well as to ensure theon-going retention of these individuals when considering potential takeovers that may create uncertainty as to their future employment with us, we offer certain post-employment payments and benefits to our executive officers, including the Named Executive Officers, upon the occurrence of certain specified events.
A more detailed discussion of the retirement plans and severance and change in control arrangements are discussed under “Other Benefit Plans” and “Employment Agreements and Potential Payments Upon Termination or Change in Control” below.
Perquisites and Other Personal Benefits
We do not currently provide our executive officers, including the Named Executive Officers, with perquisites or other personal benefits including vehicle allowances. These are disclosed in the “2018 Summary Compensation Table” set forth below. We do not provide tax reimbursement or any other tax payments to any of our executive officers other than those pursuant to our standard relocation practices.
Other Compensation Policies
In addition to the other components of our executive compensation program, we maintain the compensation policies described below. These policies are consistent with evolving best practices.
Stock Ownership Guidelines
In fiscal year 2014, the Board of Directors approved target unrestricted common stock ownership guidelines for management, including Named Executive Officers, as follows: (i) the Chief Executive Officer must attain stock ownership equal to 300% of base salary within five years after eligibility under the LTIP; (ii) the other Named Executive Officers must attain stock ownership equal to 150% of base salary within five years after eligibility under the LTIP; and (iii) the other executive officers must attain stock ownership equal to 100% of base salary (until such time, 50% of all new stock grants, net of voluntary stock forfeitures, must be retained by the applicable executive officer). If any Named Executive Officer’s target is not met within five years, 50% of such Named Executive Officer’s payment under the STIP will be paid in common stock until the target is met. As a result of the potential sale of the Company, executive officers have been prohibited from acquiring or disposing of Company stock. As of fiscal year 2018 only Mr. Madlock has not met the stock ownership guidelines.
Policies on Hedging and Pledging
Under our Insider Trading Policy, all employees, including Named Executive Officers and members of our Board of Directors, are prohibited in engagement in any hedging transactions with respect to our securities. Also under our Insider Trading Policy certain of our employees and consultants, including executive officers and members of our Board of Directors, are prohibited from pledging shares of our securities without first obtainingpre-clearance from our Compliance Officer. None of these covered individuals have pledged their stock.
Clawback Policy
In connection with any restatement of the Company’s financial statements due to material noncompliance by the Company with any financial reporting requirements under applicable securities laws, it is the policy of the Board of Directors to require forfeiture by current and former executive officers of incentive-based compensation in accordance with applicable laws, rules and regulations. No amounts were required to be clawed back during fiscal year 2018.
Further, under the 2010 LTIP, an award of restricted stock or options may be cancelled or suspended under certain circumstances, including: (1) commission of fraud, embezzlement or a felony; (2) disclosure of confidential information or trade secrets; (3) termination for cause; (4) active engagement in a business that competes with the Company, a subsidiary or an affiliate; and (5) engaging in conduct that adversely affects the Company, a subsidiary or an affiliate.
Impact of Tax Policies
Deductibility of Executive Compensation
It is our policy to structure and administer our long-term incentive compensation plans for our Named Executive Officers to maximize the tax deductibility of the payments as “performance-based compensation” under Section 162(m) to the extent practicable. In 2018, all such performance-based compensation was deductible to the Company. The Committee may provide compensation that is not tax deductible to the Company if it determines that such action is appropriate.
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Compensation Committee Report
The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis section of this Form10-K/A (the “CD&A”) for the fiscal year ended July 1, 2018, which appears above. Based on the review and discussions referred to in the preceding sentence, the Compensation Committee recommended to the Board of Directors that the CD&A be included in this Form10-K/A and in the Proxy Statement to be distributed to shareholders in connection with the Company’s 2018 annual meeting.
The Compensation Committee
David P. Molfenter, Chairman
Charles R. Kummeth
Frank A. Wilson
Executive Compensation
2018 Summary Compensation Table
The following table contains information pertaining to the annual compensation of the Named Executive Officers for fiscal years 2018, 2017, and 2016:
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Name and Principal Position
of Named Executive Officer | | Fiscal
Year | | | Salary
($) | | | Bonus
($) | | | Stock Awards
($) (3) | | | Option Awards
($) (3) | | | Non-Equity
Incentive Plan
Compensation
($) (4) | | | All Other
Compensation
($) | | | Total
($) | |
Joseph J. Hartnett (1) Interim President and Chief Executive Officer | | | 2018 | | | | 600,000 | | | | — | | | | | | | | — | | | | | | | | — | | | | | | | | 450,000 | | | | (12 | ) | | | 2,210 | | | | (9 | ) | | | 1,052,210 | |
| | | 2017 | | | | 600,000 | | | | 200,000 | | | | | | | | 543,000 | | | | (5 | ) | | | — | | | | | | | | — | | | | | | | | 2,077 | | | | (9 | ) | | | 1,345,077 | |
| | | 2016 | | | | 221,538 | | | | — | | | | | | | | 75,007 | | | | (7 | ) | | | — | | | | | | | | — | | | | | | | | 63,833 | | | | (7 | ) | | | 360,378 | |
Joseph G. McCormack Senior Vice President and Chief Financial Officer | | | 2018 | | | | 335,000 | | | | 200,000 | | | | (11 | ) | | | — | | | | | | | | — | | | | | | | | 150,000 | | | | | | | | 6,530 | | | | (9 | ) | | | 691,530 | |
| | | 2017 | | | | 335,000 | | | | 170,964 | | | | | | | | 299,978 | | | | (6 | ) | | | — | | | | | | | | 29,036 | | | | | | | | 10,938 | | | | (9 | ) | | | 845,916 | |
| | | 2016 | | | | 264,135 | | | | — | | | | | | | | 267,999 | | | | (6 | ) | | | 131,989 | | | | (6 | ) | | | — | | | | | | | | 217,593 | | | | (8 | ) | | | 881,716 | |
Gordon B. Madlock Senior Vice President, Operations | | | 2018 | | | | 305,083 | | | | 195,000 | | | | (11 | ) | | | — | | | | | | | | — | | | | | | | | 120,000 | | | | | | | | 10,658 | | | | (9 | ) | | | 630,651 | |
| | | 2017 | | | | 305,083 | | | | 37,500 | | | | | | | | 112,480 | | | | (6 | ) | | | — | | | | | | | | 26,443 | | | | | | | | 9,418 | | | | (9 | ) | | | 490,924 | |
| | | 2016 | | | | 303,374 | | | | — | | | | | | | | 133,999 | | | | (6 | ) | | | 65,995 | | | | (6 | ) | | | — | | | | | | | | 9,769 | | | | (9 | ) | | | 513,137 | |
Joseph T. Schneider (2) Senior Vice President, Sales and Marketing | | | 2018 | | | | 219,135 | | | | — | | | | | | | | — | | | | | | | | — | | | | | | | | — | | | | | | | | 40,146 | | | | (9 | ) | | | 259,281 | |
| | | 2017 | | | | 265,000 | | | | 37,500 | | | | | | | | 112,480 | | | | (6 | ) | | | — | | | | | | | | 68,906 | | | | | | | | 9,043 | | | | (9 | ) | | | 492,929 | |
| | | 2016 | | | | 265,000 | | | | — | | | | | | | | 100,505 | | | | (6 | ) | | | 49,492 | | | | (6 | ) | | | — | | | | | | | | 8,940 | | | | (9 | ) | | | 423,937 | |
Steven M. Korwin Senior Vice President, Quality and Engineering | | | 2018 | | | | 264,702 | | | | 155,000 | | | | (11 | ) | | | — | | | | | | | | — | | | | | | | | 120,000 | | | | | | | | 9,598 | | | | (9 | ) | | | 549,300 | |
| | | 2017 | | | | 264,702 | | | | 37,500 | | | | | | | | 112,480 | | | | (6 | ) | | | — | | | | | | | | 22,943 | | | | | | | | 8,535 | | | | (9 | ) | | | 446,160 | |
| | | 2016 | | | | 263,219 | | | | — | | | | | | | | 119,267 | | | | (6 | ) | | | 58,736 | | | | (6 | ) | | | — | | | | | | | | 8,486 | | | | (9 | ) | | | 449,708 | |
Michael A. Gaul (10) Group Vice President, Manufacturing and Design Services | | | 2018 | | | | 229,196 | | | | 107,500 | | | | (11 | ) | | | | | | | | | | | | | | | | | | | 114,055 | | | | | | | | 7,109 | | | | (9 | ) | | | 457,860 | |
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| (1) | Mr. Hartnett’s employment with the Company began on February 5, 2016. Previously, Mr. HartnettPrior to that date, he served as the Chairman of the Board of Directors of the Company. Prior |
| (2) | Mr. Schneider resigned as Senior Vice President of Sales and Marketing of the Company effective April 13, 2018. Mr. Schneider was entitled to exercise any outstanding Company stock options previously awarded to him that were exercisable immediately prior to his resignation until the earlier of (i) the expiration of the 90 day period following his resignation, or (ii) the expiration of the stock option’s term. Mr. Schneider did not exercise any options. Under applicable provisions of the Company’s equity plans and Mr. Schneider’s award agreements, all unvested stock options, restricted stock, and restricted stock units held by Mr. Schneider were forfeited upon Mr. Schneider’s resignation. |
| (3) | The amounts set forth in this Form10-K/A are the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board Accounting Standards Topic 718, “Compensation—Stock Compensation” (“ASC Topic 718”), pursuant to Item 402 of RegulationS-K. For a discussion of the assumptions used to calculate these amounts, see Note 14, Stock-Based Compensation, of the “Notes to Consolidated Financial Statements” in this Form10-K/A. |
| (4) | The amounts shown in this column are awards under the Company’s STIP. |
| (5) | On August 8, 2016, the independent directors on the Board of Directors approved a grant of 25,000 restricted stock units to Mr. Hartnett servedunder the LTIP as President, Chief Executive Officer and Chief Operating Officera retention bonus. The 25,000 restricted stock units vested upon the earliest of Ingenient Technologies, Inc.(i) a multimedia software development company, from 2008 through 2010. Before that date,change of control, (ii) Sparton’s appointment of a permanent chief executive officer, (iii) Sparton’s termination of Mr. Hartnett heldwithout cause, and (iv) March 1, 2017. The 25,000 restricted stock units vested on March 1, 2017. |
| (6) | The restricted stock units vest in four equal installments commencing one year from the positionsdate of grant, subject to achievement of certain performance metrics that are based on the audited financial statements of the Company. No grants of restricted stock units were made in fiscal year 2018. |
| (7) | The amount represents compensation received by Mr. Hartnett as Chairman of the Board of Directors in fiscal year 2016 prior to his appointment as Interim President and Chief Executive OfficerCEO. Mr. Hartnett received no compensation for board services rendered after his appointment. Mr. Hartnett received $63,833 in cash compensation for his service on the board, and 3,284 shares of common stock of the Company, valued at $75,007. |
| (8) | The amount represents payments of $210,000 made to Mr. McCormack for consulting services provided to the Company during fiscal year 2016, prior to his employment as Chief Financial Officer with U.S. Robotics Corporation. (Age 61)
on September 7, 2016, and amounts for 401(k) Plan matching and life insurance premium payments. |
| (9) | The amount represents 401(k) Plan match, life insurance premium payments and cellphone stipends (for fiscal year 2018 only), except for Mr. Hartnett who did not receive life insurance premium payments. |
| (10) | |
Joseph G. McCormack | | Senior Vice President and Chief Financial Officer since September 2015. Previously, Mr. McCormack served as Senior Financial Consultant to the Company since June 2015. Prior to that Mr. McCormack was a senior financial consultant from May 2012 to June 2015 and was Chief Financial Officer of Ingenient Technologies from December 2005 to May 2012. (Age 54)
|
| | |
Gordon B. Madlock | | Senior Vice President, Operations since January 2009. Previously, Mr. Madlock held the position of Senior Vice President of Operations for Citation Corporation in Novi, MI since September 1999. (Age 59) |
| | |
Steven M. Korwin | | Senior Vice President, Quality and Engineering since September 2009. Previously, Mr. Korwin held the position of Group Vice President, Electronic Manufacturing Services since December 2008. Prior to that date, Mr. Korwin held the position of Vice President of Quality and Engineering for Citation Corporation in Novi, MI since October 2005. (Age 54) |
| | |
Joseph Schneider | | Senior Vice-President, Sales and Marketing, since May 2015. Previously, Mr. Schneider held the position of Vice President for Siemens Healthcare Diagnostics in the In Vitro Diagnostics segment since 2012. Prior to that, Mr. Schneider led sales and marketing efforts for newly acquired Siemens Industry, Inc. industrial businesses since 2010. (Age 50) |
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Michael A. Gaul | | Group Vice President, Medical Manufacturing and Design Services since January 2014. Prior to that, Mr. Gaul heldbecame a Named Executive Officer at the positionend of General Managerfiscal year 2018 upon Mr. Schneider’s resignation. |
| (11) | These bonus amounts are retention-related and were earned as of the Strongsville, Ohio medical manufacturing facility sinceend of fiscal year 2018, but cannot be paid until the earlier of (i) September 2011. Prior to that, Mr. Gaul held14, 2019 or (ii) the positions of Vice President, Operations and COO at SynCardia Systems since April 2005. Prior to that, Mr. Gaul held the position of Vice President of Manufacturing Operations for Ventana Medical since May 2003. His industry experience includes Medical Devices and Reagents, Complex Capital Automation Equipment, Public Safety Communication Systems and Industrial Controls and Instrumentation. (Age 63)
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James M. Lackemacher | | Group Vice President, Engineered Components and Products since January 2014. Previously, Mr. Lackemacher held the position of Vice President/General Manager, Defense and Security Systems Business Unit since April 2005. (Age 55) |
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James D. Shaddix II | | Group Vice President, Military & Aerospace Manufacturing Services since January 2014. Prior to that, Mr. Shaddix held the position of General Managerinvoluntary termination of the Frederick, Colorado medical manufacturing facility since August 2011. PriorNamed Executive Officer prior to that, Mr. Shaddix held various positions including General Manager for Citation Corporation since July 1999. (Age 53) |
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Christopher A. Ratliff | | Vice President, Information Technology since March 2014. Previously, Mr. Ratliff held the position of Information Technologies Director for Tootsie Roll Industries in Chicago, IL since May 2003. (Age 52)September 14, 2019. |
There are no family relationships among the persons named above. | (12) | This amount is a discretionary bonus awarded under the STIP. There is no performance to occur over a specified period in connection with the bonus award. |
Compensation Committee Interlocks and Insider Participation
All officers are elected annually and serve at the discretionmembers of the Board of Directors.
ITEM 1A. RISK FACTORS
We operateCompensation Committee during fiscal year 2018, namely Messrs. Molfenter, Kummeth and Wilson were independent directors under NYSE rules then in a changing economic, politicaleffect, and technological environment that presents numerous risks, many of which are driven by factors that we cannot controlno member was an officer or predict. The following discussion, as well as our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Critical Accounting Policies and Estimates” in Item 7, highlight some of these risks. The terms “Sparton,” “the Company,” “we,” “us,” and “our” refer to Sparton Corporation and subsidiaries.
The Company’s Board of Directors is exploring a potential sale of the Company, but there can be no assurances that any transaction will occur,employee, or if such a transaction does occur, the value of that transaction to the Companyformer officer or its shareholders.
The pending merger transaction with Ultra may not be completed on the terms or anticipated timeline or at all. The completion of the pending merger transaction with Ultra is subject to certain conditions, including (i) approval by our shareholders, (ii) approval of the transactions contemplated by the Merger Agreement for the purposes of Chapter 10 of the Listing Rules of the United Kingdom Listing Authority; (iii) the periods applicable to the consummation of the merger under the Investment Canada Act shall have expired, lapsed or been terminated and any applicable regulatory clearance shall have been obtained, (iv) the expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (v) all periods applicable to the consummation of the Merger under the antitrust or competition Laws of each applicable non-U.S. jurisdiction shall have expired, lapsed or been terminated and all antitrust or competition regulatory clearances applicable to the consummation of the merger in each such jurisdiction shall have been obtained or waived, (vi) approval from The Committee on Foreign Investment in the United States, (vii) approval from the Defense Security Service of the United States Department of Defense, (viii) expiration or waiver under ITAR; and (ix) other closing conditions set forth in the Merger Agreement. There can be no assurance that such conditions will be satisfied in a timely manner or at all, or that an effect, event, development or change will not occur that could delay or prevent the closing conditions from being satisfied.
The pending merger transaction may not be completed, which may adversely affect our business.
If the merger with Ultra is not completed, the trading price of our common stock may decline to the extent that the market price of the common stock reflects positive market assumptions that the merger will be completed and the related benefits will be realized. We could also be subject to other risks if the merger is not completed, including:
the requirement in the Merger Agreement that, under certain circumstances, we pay Ultra a termination fee of $7.5 million;
incurring costs related to the merger transaction, such as legal, accounting, financial advisory and other costs that have already been incurred or will continue to be incurred until closing of the transaction;
potential reputational harm due to any failure to successfully complete the merger transaction;
potential disruption to our business, such as distraction of our employees to pursue other opportunities that could be beneficial to the Company, without the merger transaction actually being completed; and
potential disruption to our ERAPSCO joint venture and/or potential difficulties negotiating a new merger transaction given a failed transaction with Ultra;
Uncertainties and disruption caused by potential plant closures and possible restructuring;
Need to renegotiate credit facility to provide for additional liquidity to meet working capital needs;
Potential disruption to our business to possible loss of customers and possible changes in vendor terms as a result of uncertainties.
If the pending merger transaction with Ultra is completed, our shareholders would not benefit from potential future appreciation in the value of the Company.
If the pending merger transaction with Ultra is consummated, shareholders will no longer hold shares in the Company and, therefore, will not be entitled to benefit from any potential future appreciation in the value of the Company. In addition, in the absence of the merger transaction, the Company could have various opportunities to enhance its value. Therefore, if the merger transaction is consummated, our shareholders will forgo any future appreciation in the value of the Company.
If the pending merger transaction with Ultra is not consummated by January 31, 2018 (unless extended under the Merger Agreement), eitheremployee of the Company or Ultra may terminate the Merger Agreement.
The Company or Ultra may terminate the Merger Agreement if the merger transaction has not closed by January 31, 2018 (subject to a two-month extension at the electionany of either Ultra or the Company, and a second extension for an additional four months in the sole discretion of Ultra, if certain conditions have not been satisfied). The Merger Agreement provides for certain other termination rights for both the Company and Ultra, and further provides that, upon termination of the Merger
Agreement under certain specified circumstances, the Company will be required to pay Ultra a termination fee of $7.5 million or Ultra will be required to pay Company a termination fee of $7.5 million.
The Merger Agreement contains provisions that could discourage a potential competing acquirer of the Company.
The Merger Agreement contains provisions that, subject to certain limited exceptions, restrict our ability to solicit, initiate, knowingly encourage or otherwise facilitateits subsidiaries. No Compensation Committee member had any merger transaction or acquisition proposals.
Those provisions could discourage a potential competing buyer that might have an interest in acquiring all or a part of the Company’s business from considering or making a competing acquisition proposal, even if the potential competing acquirer was prepared to pay consideration with a higher per share cash value than that market value proposed to be received or realized in the merger transaction. The provisions could also cause a potential competing buyer to propose to pay a lower price than it might otherwise have proposed to pay because of the expense of a termination fee that may become payable in certain circumstances under the Merger Agreement.
Our Board and executives have different interests in the Ultra merger than those of our shareholders.
The Company’s directors and executive officers have certain interests in the merger that may be different from, or in addition to, the interests of other Company shareholders. These interests include restricted stock, restricted stock units and stock options held by Company’s executive officers and by directors of the Company immediately prior to the closing that may be cancelled in exchange for a cash payment. Further, our officers are party to employment agreementsrelationship with the Company and may receive payments upon termination or changerequiring disclosure under Item 404 of control and could receive other additional payments, all as disclosed inRegulationS-K promulgated by the proxy statement.
An adverse judgment in a lawsuit challenging the pending Ultra transaction may prevent the transaction from becoming effective.
The Company and the membersSEC. During fiscal year 2018, none of our
executive officers served on the compensation committee (or its equivalent) or board of directors
were named as defendants in four federal securities class actions purportedly broughtof another entity whose executive officer served on
behalfour Compensation Committee or Board of
all holders ofDirectors.Common Stock Issuable Under Company Equity Compensation Plans
The following table gives information about the Company’s common stock challenging the pending merger transaction with Ultra. The lawsuits generally sought, among other things, to enjoin the defendants from proceeding with the shareholder vote on the merger at the special meeting or consummating the merger transaction unless and until the Company disclosed the allegedly omitted information. The complaints also sought damages allegedly suffered by the plaintiffs as a result of the asserted omissions, as well as related attorneys’ fees and expenses.
After discussions with counsel for the plaintiffs, the Company included certain additional disclosures in the proxy statement soliciting shareholder approval of the Merger. The Company believes the demands and complaints are without merit, there were substantial legal and factual defenses to the claims asserted, and the proxy statement disclosed all material information prior to the inclusion of the additional disclosures. The Company made the additional disclosures to avoid the expense and burden of litigation. On September 1, 2017, the court dismissed the lawsuits with prejudice with respect to lead plaintiffs in the lawsuits and without prejudice as to all other shareholders. The Company and plaintiffs must still attempt to resolve the appropriate amount of attorneys’ fees, if any, to be awarded to plaintiffs’ counsel.
Shareholders may file additional lawsuits challenging the Ultra merger transaction, which may name the Company, members of the board of directors or others as defendants. No assurance can be made as to the outcome of such lawsuits, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection withissued upon the litigationexercise of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the pending merger transaction on the agreed-upon terms, such an injunction may delay the completion of the transaction in the expected timeframe, or may prevent the transaction from being completed altogether. Whether or not any plaintiff’s claim is successful, this type of litigation may result in significant costsoptions, warrants and divert management’s attention and resources, which could adversely affect the operation of business.
The industry is extremely competitive and we depend on continued outsourcing by OEMs.
The Military and Aerospace and Medical and Biotechnology industries are highly fragmented and intensely competitive. Our contract manufacturing services are available from many sources and we compete with numerous domestic and foreign firms. Within the Company’s target market, the high-mix, low to medium volume sector of the MDS segment, there are substantially fewer competitors, but competition remains strong. Some competitors have substantially greater manufacturing, R&D, marketing or financial resources and, in some cases, have more geographically diversified international operations. The Company expects competition to intensify further as more companies enter our target markets and our customers consolidate. In the future, increased competition from large electronic component manufacturers that are selling, or may begin to sell, electronics manufacturing services may occur. Future growth will depend on our ability to win business from competitors, new
outsourcing opportunities and could be limited by OEMs performing such functions internally or delaying their decision to outsource.
In some cases, the Company may not be able to offer prices as low as some competitors for a host of reasons. For example, those competitors may have lower cost structures for their services, they may be willing to accept business at lower margins in order to utilize more of their excess capacity, or they may be willing to take on business at low or even zero gross margins to gain entry into the Company’s markets. Upon the occurrence of any of these events, our net sales would likely decline. Periodically, we may be operating at a cost disadvantage compared to some competitors with greater direct buying power. As a result, competitors may have a competitive advantage and obtain business from our customers.
Principal competitive factors in our targeted markets are believed to be quality, reliability, the ability to meet delivery schedules, customer service, technological sophistication, geographic location and price. During periods of recession in the Military and Aerospace and Medical and Biotechnology industries, our competitive advantages in the areas of adaptive manufacturing and responsive customer service may be of reduced importance due to increased price sensitivity. We also expect our competitors to continue to improve the performance of their current products or services, to reduce their current products or service sales prices and to introduce new products or services that may offer greater performance and improved pricing. Any of these could cause a decline in sales, loss of market acceptance of our products or services, profit margin compression or loss of market share.
Our operating results are subject to general economic conditions and may vary significantly from period to period due to a number of factors.
We are subject to inflation, interest rate changes, availability of capital markets, consumer spending rates, the effects of governmental plans to manage economic conditions and other national and global economic occurrences beyond our control. Such factors, economic weakness and constrained customer spending have resulted in the past and may result in the future, in decreased revenue, gross margin, earnings or growth rates.
We can experience significant fluctuations in our annual and quarterly results of operations. In addition to general economic conditions, other factors that contribute to these fluctuations are our effectiveness in managing manufacturing processes and costs, as well as the level of capacity utilization of our manufacturing facilities and associated fixed costs, in order to maintain or increase profitability. We rely on our customers’ demands, which can change dramatically, sometimes with little notice. Such factors also could affect our results of operations in the future.
Customer cancellations, reductions or delays could adversely affect our operating results.
We generally do not obtain long-term purchase commitments from our customers. Customers may cancel orders, delay the delivery of orders or release orders for fewer products than we previously anticipated for a variety of reasons, including decreases in demand for their products and services. Such changes by a significant customer, by a group of customers, or by a single customer whose production is material to an individual facility could seriously harm results of operations in that period. In addition, since much of our costs and operating expenses are relatively fixed, a reduction in customer demand would adversely affect our margins and operating income. Although we are always seeking new opportunities, we cannot be assured that we will be able to replace deferred, reduced or canceled orders.
Our inability to forecast the level of customer orders with much certainty makes it difficult to schedule production and maximize utilization of manufacturing capacity. Additionally, we are often required to place materials orders from vendors, some of which are non-cancelable, based on an expected level of customer volume. If actual demand is higher than anticipated, we may be required to increase staffing and other expenses in order to meet such demand of our customers. Alternatively, anticipated orders from our customers may be delayed or fail to materialize, thereby adversely affecting our results of operations. Such customer order fluctuations and deferrals have had a material adverse effect on us in the past and we may experience similar effects in the future.
Such order changes could cause a delay in the repayment to us for inventory expenditures we incurred in preparation for the customer’s orders or, in certain circumstances, require us to return the inventory to our suppliers, resell the inventory to another customer or continue to hold the inventory. In some cases, excess material resulting from longer order lead time is a risk due to the potential of order cancellation or design changes by customers. Additionally, dramatic changes in circumstances for a customer could also negatively impact the carrying value of our inventory for that customer.
We are dependent on a few large customers; the loss of such customers or reduction in their demand could substantially harm our business and operating results.
For fiscal year 2017, our ten largest customers, including the U.S. Navy, accounted for 50% of total net sales. The U.S. Navy, an ECP customer through the Company’s ERAPSCO agreement, represented 23% of our total net sales. We expect to
continue to depend upon a relatively small number of customers, but we cannot ensure that present or future large customers will not terminate, significantly change, reduce or delay their manufacturing arrangements with us. Because our major customers represent such a large part of our business, the loss of any of our major customers or reduced sales to these customers could negatively impact our business.
The U.S. Navy generally has the ability to terminate its contracts within the ECP segment, in whole or in part, without prior notice, for convenience or for default based on performance. If any of these U.S. Navy contracts were to be terminated, the Company would generally be protected by provisions covering reimbursement for costs incurred on the contracts and profit on those costs, but not the anticipated profit that would have been earned had the contract been completed.
We are partner to a 50/50 joint venture agreement with USSI, the only other major producer of U.S. derivative sonobuoys. If USSI were to terminate this joint venture, the Company would be required to return to independent bidding and production for the U.S. Navy and other foreign governments that meet Department of State licensing requirements for sonobuoy business. If this were to happen, it is possible that the Company’s future results could be negatively impacted. Starting with the 2014 U.S. government fiscal year, the U.S. Navy competitively bid sonobuoy contracts, potentially allowing additional competitors to vie for this business. The Company is aware that the U.S. Navy has funded a competitor for the qualification of one future sonobuoy variant that is currently not in production. While the Company believes that there are significant barriers to entry into the sonobuoy market, if a new competitor was able to successfully develop the necessary technical capabilities and gain entry into the market space, the Company’s future results could be negatively impacted.
We rely on the continued growth and financial stability of our customers. Adverse changes in the end markets they serve can reduce demand from our customers in those markets and/or make customers in these end markets more price sensitive. Furthermore, mergers or restructurings among our customers or our customers’ customers could increase concentration or reduce total demand as the combined entities rationalize their business and consolidate their suppliers. Future developments, particularly in those end markets which account for more significant portions of our revenues, could harm our business and our results of operations. If one or more of our customers experiences financial difficulty and is unable to pay for the services provided, our operating results and financial condition could be adversely affected. If our customers seek bankruptcy protection, they could act to terminaterights under all or a portion of their business with us, originate new business with our competitors and terminate or assign our long-term supply agreements. Any loss of revenue from our major customers, including the non-payment or late payment of our invoices, could materially adversely affect our business, results of operations and financial condition.
Congressional budgetary constraints or reallocations can reduce our government sales.
Our U.S. government contracts have many inherent risks that could adversely impact our financial results. Future governmental sales could be affected by a change in defense spending by the U.S. government, or by changes in spending allocation that could result in one or more of our programs being reduced, delayed or terminated, which could adversely affect our financial results. The Company’s U.S. governmental sales are funded by the federal budget. Changes in negotiations for program funding levels or unforeseen world events can interrupt the funding for a program or contract.
U.S. government audits and investigations could adversely affect our business.
Federal government agencies, including the Defense Contract Audit Agency and the Defense Contract Management Agency, routinely audit and evaluate government contracts and government contractors’ administrative processes and systems. These agencies review the Company’s performance on contracts, pricing practices, cost structure, financial capability and compliance with applicable laws, regulations and standards. They also review the adequacy of the Company’s internal control systems and policies, including the Company’s purchasing, accounting, estimating,equity compensation and management information processes and systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit or investigation of our business were to uncover improper or illegal activities, then we could be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. In addition, responding to governmental audits or investigations may involve significant expenses and divert management attention. If any of the forgoing were to occur, our financial condition and operating results could be materially and adversely affected.
Our current use of performance based billings within U.S. government contracts may not continue.
Our current contracts with the U.S. Navy include provisions for certain billing and collection of funds from the U.S. Government in advance of related inventory purchases and incurrence of manufacturing expenses. These contractual provisions are an integral part of our capital and liquidity profile. While we have other sources of liquidity including, but not limited to, our operations, existing cash balances and our revolving line-of-credit and we believe we have sufficient liquidity for our
anticipated needs over the next 12 months, no assurances regarding liquidity can be made. The discontinuance of performance based billing provisions from future U.S. Navy contracts would require us to fund the working capital requirements related to these contracts from other sources and otherwise could materially adversely impact our business, results of operations and financial condition.
The Company and its customers may be unable to keep current with technological changes.
Our customers participate in markets that have rapidly changing technology, evolving industry standards, frequent new product introductions and relatively short product life cycles. The introduction of products embodying new technologies or the emergence of new industry standards can render existing products obsolete or unmarketable. Our success depends upon our customers’ ability to enhance existing products and to develop and introduce new products, on a timely and cost-effective basis, that keep pace with technological developments and emerging standards and to address increasingly sophisticated customer requirements. There is no assurance that our customers will do so and any failure to do so could substantially harm our customers and us.
Additionally, our future success will depend upon our ability to maintain and enhance our own technological capabilities, develop and market manufacturing services and products which meet changing customer needs and to successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis. If we are unable to do so, business, financial condition and operating results could be materially adversely affected.
Start-up costs and inefficiencies related to new or transferred programs can adversely affect our operating results and may not be recoverable.
Start-up costs, the management of labor and equipment resources in connection with new programs and new customer relationships, and the need to estimate the extent and timing of required resources can adversely affect our profit margins and operating results. These factors are particularly evident with the introduction of new products and programs. The effects of these start-up costs and inefficiencies can also occur when new facilities are opened or programs are transferred from one facility to another.
If new programs or customer relationships are terminated or delayed, our operating results may be harmed, particularly in the near term. We may not be able to recoup our start-up costs or quickly replace these anticipated new program revenues.
We depend on limited or single source suppliers for some critical components; the inability to obtain components as required, with favorable purchase terms, could harm our business.
A significant portion of our costs are related to electronic components purchased to produce our products. In some cases our customers dictate that we purchase particular components from a single or limited number of suppliers. Supply shortages for a particular component can delay production and thus delay shipments to customers and the associated revenue of all products using that component. This could cause the Company to experience a reduction in sales, increased inventory levels and costs and could adversely affect relationships with existing and prospective customers. In the past, we have secured sufficient allocations of constrained components so that revenue was not materially impacted. The Company believes that alternative suppliers are available to provide the components, including unique components, necessary to manufacture our customers’ products. If, however, we are unable to procure necessary components under favorable purchase terms, including at favorable prices and with the order lead times needed for the efficient and profitable operation of our factories, our results of operations could suffer.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) contains provisions to improve the transparency and accountability concerning the supply of minerals originating from the conflict zones of the Democratic Republic of Congo (“DRC”) and adjoining countries. As a result, the SEC established new annual disclosure and reporting requirements for those companies who use “conflict” minerals mined from the DRC and adjoining countries in their products. These requirements could affect the sourcing and availability of minerals used in the manufacturing of our electrical components. As a result, we may not be able to obtain products at competitive prices. We have had additional costs associated with complying with the new due diligence procedures as required by the SEC. Also, since our supply chain is complex, we may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the due diligence procedures as we implement them. We may also encounter challenges to satisfy those customers who require that all of the components of our products are certified as conflict free. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier.
A tightened credit market, either nationally or globally, may adversely affect the availability of funds to us for working capital, liquidity requirements and other purposes, which may adversely affect our cash flows and financial condition.
We have a revolving line-of-credit facility with a group of banks which is secured by substantially all the assets of the Company. We anticipate that our credit facility will be a component of our available working capital during fiscal year 2018. However, there are no assurances that the line-of-credit will be sufficient for all purposes. Additionally, if vendors of electronic components restrict or reduce credit to us for the purchase of raw materials as a result of general market conditions, the vendor’s credit status, or our financial position, it could adversely affect liquidity, cash flows and results of operations. See “Liquidity and Capital Resources” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K for more information related to the Company’s credit facility.
Our stock price may be volatile, and the stock is thinly traded, which may cause investors to lose most or part of their investment in our common stock.
The stock market may experience volatility that is often unrelated to the operating performance of any particular company or companies. If market-sector or industry-based fluctuations occur, our stock price could decline regardless of our actual operating performance and investors could lose a substantial part of their investments. Moreover, if an active public market for our common stock is not sustained in the future, it may be difficult to resell such stock. Generally, our stock is thinly traded. When trading volumes are low, a relatively small buy or sell order can result in a relatively large change in the trading price of our common stock and investors may not be able to sell their securities at a favorable price.
Failure to attract and retain key personnel and skilled associates could hurt operations.
Our success depends to a large extent upon the continued services of key management personnel. While we have employment contracts in place with several of our executive officers, we nevertheless cannot be assured that we will retain our key employees and the loss of service of any of these officers or key management personnel could have a material adverse effect on our business growth and operating results.
Our future success will require an ability to attract and retain qualified employees. Competition for such key personnel is intense and we cannot be assured that we will be successful in attracting and retaining such personnel. We cannot make assurances that we will not have departures of key personnel in the future. Changes in the cost of providing pension and other employee benefits, including changes in health care costs, investment returns on plan assets and discount rates used to calculate pension and related liabilities, could lead to increased costs in any of our operations.
Certain of our U.S. government contracts require our employees to maintain various levels of security clearances and we are required to maintain certain facility security clearances complying with U.S. government requirements. If our employees are unable to obtain security clearances in a timely manner, or at all, or if our employees who hold security clearances are unable to maintain the clearances or terminate employment with us, then a customer requiring classified work could terminate the contract or decide not to renew it upon its expiration. In addition, we expect that many of the contracts on which we will bid will require us to demonstrate our ability to obtain facility security clearances and employ personnel with specified types of security clearances.
To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular contract, we may not be able to bid on or win new contracts, or effectively bid on expiring contracts.
Adverse regulatory developments could harm our business.
Our business operates and certain of our customers’ businesses operate, in heavily regulated environments. We must manage the risk of changes in or adverse actions under applicable law or in our regulatory authorizations, licenses and permits, governmental security clearances, government procurement regulations or other legal rights in order to operate our business, manage our work force or import and export goods and services as needed. We also face the risk of other adverse regulatory actions, compliance costs or governmental sanctions. The regulations and regulatory bodies include, but are not limited to, the following: the Federal Acquisition Regulations, the Truth in Negotiations Act, the False Claims Act and the False Statements Act, the Foreign Corrupt Practices Act, the Food and Drug Administration, the Federal Aviation Administration and the International Traffic in Arms Regulations.
Our failure to comply with applicable regulations, rules and approvals or misconduct by any of our employees could result in the imposition of fines and penalties, the loss of security clearances, the loss of our government contracts or our suspension or debarment from contracting with the U.S. government in general, any of which would harm our business, financial condition and results of operations. See also additional risk factors relating to U.S. government contract audits, securities laws regulations, environmental law regulations and foreign law regulations.
We are subject to a variety of environmental laws, which expose us to potential liability.
Our operations are regulated under a number of federal, state, provincial, local and foreign environmental laws and regulations, which govern, among other things, the discharge of hazardous materials into the air and water, as well as the handling, storage and disposal of such materials. These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource, Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act, as well as analogous state and foreign laws. Compliance with these environmental laws is a significant consideration for us because we use various hazardous materials in our manufacturing processes. We may be liable under environmental laws for the cost of cleaning up properties we own or operate if they are or become contaminated by the release of hazardous materials, regardless of whether we caused the release, even if we fully comply with applicable environmental laws. In the event of contamination or violation of environmental laws, we could be held liable for damages including fines, penalties and the costs of remedial actions and could also be subject to revocation of our discharge permits. Any such penalties or revocations could require us to cease or limit production at one or more of our facilities, thereby harming our business. In addition, such regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment, or to incur other significant expenses to comply with environmental regulations, including expenses associated with the recall of any non-compliant product.
The Company 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”). 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 2, 2017, 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 recorded, could be up to $2.5 million before income taxes over the next thirteen years, with this amount expected to be offset by related reimbursement from the United States Department of Energy for a net amount of $1.6 million.
The Company and its subsidiaries are also involved in certain other 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.
The occurrence of litigation in which we could be named as a defendant is unpredictable.
Our business activities expose us to risks of litigation with respect to our customers, suppliers, creditors, shareholders, product liability, intellectual property infringement or environmental-related matters. We may incur significant expense to defend or otherwise address current or future claims. Any litigation, even a claim without merit, could result in substantial costs and diversion of resources and could have a material adverse effect on our business and results of operations. Although we maintain insurance policies, we cannot make assurances that this insurance will be adequate to protect us from all material judgments and expenses related to potential future claims or that these levels of insurance will be available in the future at economical prices or at all.
If we are not able to protect our intellectual property and other proprietary rights, we may be adversely affected.
Our success can be impacted by our ability to protect our intellectual property and other proprietary rights. We rely primarily on patents, trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. However, a significant portion of our technology is not patented and we may be unable or may not seek to obtain patent protection for this technology. Moreover, existing U.S. legal standards relating to the validity, enforceability and scope of protection of intellectual property rights offer only limited protection, may not provide us with any competitive advantages and may be challenged by third parties. The laws of countries other than the United States may be even less protective of intellectual property rights. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property or otherwise gaining access to our technology. If we fail to protect our intellectual property and other proprietary rights, then our business, results of operations or financial condition could be negatively impacted.
Business disruptions could seriously harm our business and results of operations.
Increased international political instability, evidenced by threats and occurrence of terrorist attacks, conflicts in the Middle East and Asia and strained international relations arising from these conflicts, may hinder our ability to do business. The political environment in communist countries can contribute to the threat of instability. While we have not been adversely affected as yet due to this exposure, one of our facilities is based in Vietnam, which is a communist country. These events have had and may continue to have an adverse impact on the U.S. and world economies, particularly customer confidence and spending, which in turn could affect our revenue and results of operations. The impact of these events on the volatility of the U.S. and world financial markets could increase the volatility of our securities and may limit the capital resources available to us, our customers and our suppliers.
Our operations could be subject to natural disasters, disease and other business disruptions, including earthquakes, power shortages, telecommunications failures, water shortages, tsunamis, floods, hurricanes, fires, pandemic outbreaks and other natural or manmade disasters, which could seriously harm our financial condition and increase our expenses. In the past, hurricanes have adversely impacted the performance of two of our production facilities located in Florida. We have a production facility outside Ho Chi Minh City, Vietnam. This area, in the tropics and close to the sea, may be vulnerable to storms, floods and typhoons.
Operations outside of the United States may be affected by legal and regulatory risks and government reviews, inquiries or investigations could harm the Company’s business.
The Company’s operations in both Vietnam and Canada and the business it conducts outside the United States are subject to risks relating to compliance with legal and regulatory requirements in the United States as well as in local jurisdictions. Additionally, there is a risk of potentially higher incidence of fraud or corruption in certain foreign jurisdictions and greater difficulty in maintaining effective internal controls. From time to time, the Company may conduct internal investigations and compliance reviews to ensure that the Company is in compliance with applicable laws and regulations. Additionally, the Company could be subject to inquiries or investigations by government and other regulatory bodies. Any determination that the Company’s operations or activities are not in compliance with United States laws, including the Foreign Corrupt Practices Act, or various international laws and regulations could expose the Company to significant fines, penalties or other sanctions that may harm the business and reputation of the Company.
If we are unable to maintain effective internal control over our financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a reduction in the value of our common stock.
As required by Section 404 of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), the SEC adopted rules requiring public companies to include a report of management on the companies’ internal control over financial reporting in their annual reports on Form 10-K. The report must contain an assessment by management of the effectiveness of our internal control over financial reporting. In addition, the independent registered public accounting firm auditing a company’s financial statements must attest to and report on the effectiveness of the company’s internal control over financial reporting, if the company’s public equity float remains above certain thresholds.
We are continuing our comprehensive efforts to comply with Section 404 of the Sarbanes-Oxley Act. If we are unable to maintain effective internal control over financial reporting, this could lead us to issue a financial restatement or otherwise cause us to fail to meet our reporting obligations to the SEC, or could result in a finding by our independent auditors of a significant deficiency or material weakness in our controls over financial reporting, which, in turn, could result in an adverse reaction to our stock in the financial markets due to a loss of confidence in the reliability of our financial statements.
The efficiency of our operations could be adversely affected by disruptions to our information technology (IT) services and cyber incidents.
We rely in part on various IT systems to manage our operations and to provide analytical information to management. In addition, a significant portion of internal communications, as well as communication with customers and suppliers, depends on information technology. We are exposed to the risk of cyber incidents in the normal course of business and we have been the subject of such cyber incidents. Cyber incidents may be deliberate attacks for the theft of intellectual property, money or sensitive information (including our customers) or may be the result of unintentional events. Like most companies, the Company's information technology systems may be vulnerable to interruption due to a variety of events beyond the Company's control, including, but not limited to, natural disasters, terrorist attacks, power and/or telecommunications failures, computer viruses, hackers and other security issues. The Company has technology security initiatives and disaster recovery plans in place to mitigate the Company's risk to these vulnerabilities, but these measures may not be adequate or implemented properly to ensure that the Company's operations are not disrupted. Potential consequences of a material cyber incident include damage to our reputation, litigation, inefficiencies or production down-times, increased cyber security protection and remediation costs, including potential exposure to customers. Such consequences could have a negative impact on our ability to meet customers’ orders, resulting in a delay or decrease to our revenue and a reduction to our operating margins.
Our operating results may be subject to seasonality.
While overall sales can fluctuate during the year in each of our segments, revenues from our MDS segment are typically higher in the second half of the Company's fiscal year. Various factors can affect the distribution of our revenue between accounting periods, mainly timing of customer demand.
Fluctuations in foreign currency exchange rates could increase operating costs.
A portion of the Company’s operations and some customers are in foreign locations. While a significant portion of the Company's transactions are in U.S. dollars, some transactions occur in other currencies. Currency exchange rates fluctuate on a daily basis as a result of a number of factors and cannot be easily predicted. Volatility in the U.S. dollar could seriously harm our business, operating results and financial condition and could affect our ability to maintain or grow our revenues with international customers. Additionally, currency exchange fluctuations related to the remeasurement of the Company’s Canadian and Vietnamese financial statements into U.S. dollars could have a negative impact on our reported results. The Company currently does not use financial instruments to hedge foreign currency fluctuation and unexpected expenses could occur from future fluctuations in exchange rates.
Our growth strategies could be ineffective due to the risks of acquisitions and risks relating to integration.
Our growth strategy has included acquiring complementary businesses. If such a strategy was determined to be necessary in the future, we could fail to identify, finance or complete suitable acquisitions on acceptable terms and prices. Acquisitions and the related integration process could increase a number of risks, including diversion of operations personnel, financial personnel and management’s attention, difficulties in integrating systems and operations, potential loss of key employees and customers of the acquired companies and exposure to unanticipated liabilities. The price we pay for a business may exceed the value realized and we cannot provide any assurances of expected synergies and benefits of any acquisition. Our discovery of, or failure to discover, material issues during due diligence investigations of acquisition targets, either before closing with regard to potential risks of the acquired operations, or after closing with regard to the timely discovery of breaches of representations or warranties, could materially harm our business. Acquisitions also may result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial position and operating results. As a result of such integration risks, as well as other factors, the Company recognized an impairment of goodwill of $64.2 million in its MDS segment in fiscal 2016.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The following is a listing of Sparton’s principal properties as of July 2, 2017. As described below, Sparton owns some of these properties and leases others. These facilities provide a total of approximately 858,000 square feet of manufacturing and administrative space. There are manufacturing and office facilities at most locations. Sparton’s manufacturing facilities in aggregate are underutilized. Underutilized percentages vary by plant; however, ample space exists to accommodate expected growth. Sparton believes these facilities are suitable for its operations.1, 2018. | | | | | | | | | | | | | | | | | | | | |
| Plan Category | | (a) Number of
securities to be issued
upon exercise of
outstanding options,
warrants
and rights | | | | | | (b) Weighted- average
exercise price of
outstanding
options, warrants and
rights | | | | | | (c) Number of
securities remaining
available for future
issuance under equity
compensation plans
(excluding securities
reflected in column
(a)) | |
Equity compensation plans approved by security holders | | | 173,935 | | | | (1 | ) | | $ | 10.89 | | | | (2 | ) | | | 557,141 | |
Equity compensation plans not approved by security holders | | | — | | | | | | | | — | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total | | | 173,935 | | | | | | | $ | 10.89 | | | | | | | | 557,141 | |
| | | | | | | | | | | | | | | | | | | | |
| (1) | The amount represents shares of common stock to be issued upon exercise of options and restricted stock units issued by the Company. There are no other outstanding options, warrants or other rights pursuant to which capital stock of the Company may be issued. |
18
|
| (2) | | | | | | | | | |
Segment/Location | Square Feet | | Ownership | | Time remaining on existing lease term | | Additional lease terms at Company's option | |
Manufacturing & Design Services Segment: | | | | | | | | |
Strongsville, Ohio | 60,000 |
| | Owned | | — | | — | |
Frederick, Colorado | 65,000 |
| | Leased | | 5 years | | — | |
Watertown, South Dakota | 125,000 |
| | Owned | | — | | — | |
Plymouth, Minnesota | 10,000 |
| | Leased | | 4 years | | 5 years | |
Irvine, California | 30,000 |
| | Sub-leased | | 1 year | | 2 years | (a) |
Pittsford, New York | 12,000 |
| | Leased | | 3 years | | 5 years | |
Brooksville, Florida | 125,000 |
| | Owned | | — | | — | |
Thuan An District, Binh Duong Province, Vietnam (OutsideThis figure includes an exercise price of Ho Chi Minh City) | 55,000 |
| | Owned | | — | | — | |
Plaistow, New Hampshire | 20,000 |
| | Leased | | 3 years | | 3 years | |
Irvine, California | 24,000 |
| | Leased | | 5 months | | — | (d) |
Irvine, California | 33,000 |
| | Leased | | 8 years | | 5 years | (e) |
Milpitas, California | 62,000 |
| | Leased | | 3.5 years | | 5 years | |
Engineered Components$0 for outstanding restricted stock units, which are exercised for no consideration provided that certain performance criteria are met. The weighted-average exercise price of the outstanding options, warrants, and Products Segment: | | | | | | | | |
De Leon Springs, Florida | 183,000 |
| | Owned | | — | | — | |
Birdsboro, Pennsylvania | 41,000 |
| | Leased | | 1 year | | 5 years | (b) |
Woodbridge, Ontario, Canada | 21,000 |
| | Leased | | 3 years | (c) | 5 years | (c) |
Corporate Office: | | | | | | | | |
Schaumburg, Illinois | 22,000 |
| | Leased | | 8 years | | 5 years | |
| |
(a) Irvine, California location sub-lease terminates May 31, 2018. This facilityrights excluding the restricted stock units is not used for manufacturing or administrative purposes |
(b) Lease terms include two option periods of five years each |
(c) Lease terms include two leased facilities with identical lease termination and options to extend |
(d) Lease term terminates December 1, 2017; no renewal |
(e) Lease term began on April 28, 2017$24.29. |
WhilePlan-Based Compensation
Equity Compensation Plans Approved by Shareholders
The Company’s shareholders previously approved the 2001 SIP and the 2010 LTIP. The Company ownsuses the building and other assets in Vietnam, the land is occupied under a long-term lease covering forty years of which twenty-eight years remain. This lease is prepaid, with the cost amortized over the2010 LTIP for stock based incentive awards (the term of the lease2001 SIP is expired and carried in other long-term assets on our balance sheet.
no shares are available for issuance under such plan). See above for a description of the 2010 LTIP. As of July 2, 2017, substantially all of our assets, including real estate, are pledged as collateral to secure any potential borrowings under our revolving line-of-credit facility. See Note 8, Debt, of the “Notes to Consolidated Financial Statements” in this Form 10-K for further information related to our credit facility.
ITEM 3. LEGAL PROCEEDINGS
The Company and the members of our board of directors were named as defendants in four federal securities class actions purportedly brought on behalf of all holders of the Company’s common stock challenging the pending merger transaction with Ultra. The lawsuits generally sought, among other things, to enjoin the defendants from proceeding with the shareholder vote on the merger at the special meeting or consummating the merger transaction unless and until the Company disclosed the allegedly omitted information. The complaints also sought damages allegedly suffered by the plaintiffs as a result of the asserted omissions, as well as related attorneys’ fees and expenses.
After discussions with counsel for the plaintiffs, the Company included certain additional disclosures in the proxy statement soliciting shareholder approval of the Merger. The Company believes the demands and complaints are without merit, there were substantial legal and factual defenses to the claims asserted, and the proxy statement disclosed all material information prior to the inclusion of the additional disclosures. The Company made the additional disclosures to avoid the expense and burden of litigation. On September 1, 2017, the court dismissed the lawsuits with prejudice with respect to lead plaintiffs in the lawsuits and without prejudice as to all other shareholders. The Company and plaintiffs must still attempt to resolve the appropriate amount of attorneys’ fees, if any, to be awarded to plaintiffs’ counsel.
See Note 11, Commitments and Contingencies, of the “Notes to Consolidated Financial Statements”date of this Form 10-K10-K/A, 557,141 shares are available for information concerning legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information. Our common stock is traded on the New York Stock Exchange (“NYSE”)future awards under the symbol “SPA”.
2010 LTIP.Equity Compensation Plans Not Approved by Shareholders
The table below sets forth the high and low closing prices of our common stock as reported by the NYSE for each quarter during the last two years:
|
| | | | | | | | | | | | | | | |
| | Quarter |
| | 1st | | 2nd | | 3rd | | 4th |
| Fiscal year 2017 | | | | | | | |
| High | $ | 26.26 |
| | $ | 26.04 |
| | $ | 24.00 |
| | $ | 23.05 |
|
| Low | $ | 20.81 |
| | $ | 21.57 |
| | $ | 20.50 |
| | $ | 17.16 |
|
| Fiscal year 2016 | | | | | | | |
| High | $ | 26.91 |
| | $ | 25.31 |
| | $ | 21.64 |
| | $ | 22.45 |
|
| Low | $ | 21.21 |
| | $ | 19.03 |
| | $ | 12.46 |
| | $ | 17.71 |
|
Holders. As of September 12, 2017, there were 284 record holders of our common stock. The number of record holdersCompany does not include beneficial owners whose shares are held in the namesmaintain any equity compensation plans not approved by shareholders.Grants of banks, brokers, nominees or other fiduciaries.
Dividends. The Company has not declared or paid dividends on our common stock in fiscal years 2017 and 2016.
Securities Authorized for Issuance Under Equity Compensation Plans. See our disclosure below in “Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Performance Graph. The performance graph below compares the cumulative total shareholder return on our common stock for the past five fiscal years against the cumulative total return of a broad market index (Russell 2000 Index) and a peer group index, which is composed of AeroVironment, Inc., American Science and Engineering, Inc., Analogic Corporation, AngioDynamics, Inc., Astronics Corporation, CTS Corporation, Ducommun, Inc., Exactech, Inc., Integer Holdings Corporation (prior to July 1, 2016, known as Greatbatch, Inc.), Key Tronic Corporation, Kimball Electronics, Inc., Maxwell Technologies, Inc., Raven Industries, Inc., Sigmatron International Inc., SMTC Corp., Sypris Solutions, Inc., and Universal Electronics, Inc. The comparative peer group was selected based on a review of publicly available information about these companies and the Company’s determination that they are engaged in electronics manufacturing businesses similar to that of the Company or its reportable operating segments.
The graph assumes that $100.00 was invested in our common stock and in each index on June 30, 2012. The total return for the common stock and the indices used assumes the reinvestment of dividends, if any. The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
Comparison of Cumulative Total Return
Among Sparton Corporation,
Russell 2000 Index and Peer Group Index
|
| | | | | | | | | | | | | | | | | |
| | 6/30/2012 | | 6/30/2013 | | 6/30/2014 | | 6/30/2015 | | 7/3/2016 | | 7/2/2017 |
| Sparton Corporation | 100.00 |
| | 174.14 |
| | 280.20 |
| | 275.96 |
| | 226.77 |
| | 222.12 |
|
| Russell 2000 Index | 100.00 |
| | 124.21 |
| | 153.57 |
| | 163.53 |
| | 153.17 |
| | 190.05 |
|
| Peer Group | 100.00 |
| | 123.52 |
| | 149.62 |
| | 136.39 |
| | 124.63 |
| | 155.17 |
|
ITEM 6. SELECTED FINANCIAL DATA
Plan-Based Awards TableThe following table sets forth a summaryinformation concerningnon-equity incentive plan awards made to each of selected financial data for the last fiveNamed Executive Officers of the Company during fiscal years. This selected financial data should be readyear 2018. There were no equity awards made in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Audited Consolidated Financial Statements and, in each case, any related notes thereto included elsewhere in this report (dollars in thousands, except per share data).
|
| | | | | | | | | | | | | | | | | | | |
| | 2017 (a) | | 2016 (a) | | 2015 (a) | | 2014 (a) | | 2013 (a) (b) |
| Operating results: | | | | | | | | | |
| Net sales | $ | 397,562 |
| | $ | 419,362 |
| | $ | 382,125 |
| | $ | 336,501 |
| | $ | 265,003 |
|
| Cost of goods sold | 325,663 |
| | 339,214 |
| | 307,311 |
| | 271,551 |
| | 219,192 |
|
| Gross profit | 71,899 |
| | 80,148 |
| | 74,814 |
| | 64,950 |
| | 45,811 |
|
| Selling and administrative expenses | 54,110 |
| | 55,151 |
| | 46,969 |
| | 35,682 |
| | 26,464 |
|
| Internal research and development expenses | 1,670 |
| | 2,344 |
| | 1,502 |
| | 1,169 |
| | 1,300 |
|
| Amortization of intangible assets | 8,498 |
| | 9,592 |
| | 6,591 |
| | 3,422 |
| | 1,575 |
|
| Restructuring charges | — |
| | 2,206 |
| | — |
| | 188 |
| | 55 |
|
| Reversal of accrued contingent consideration | — |
| | (1,530 | ) | | — |
| | — |
| | — |
|
| Impairment of goodwill | — |
| | 64,174 |
| | — |
| | — |
| | — |
|
| Legal settlement | — |
| | — |
| | 2,500 |
| | — |
| | — |
|
| Environmental remediation | — |
| | — |
| | — |
| | 4,238 |
| | — |
|
| Operating income (loss) | 7,621 |
| | (51,789 | ) | | 17,252 |
| | 20,251 |
| | 16,417 |
|
| Total other expense, net | (4,377 | ) | | (3,710 | ) | | (2,297 | ) | | (649 | ) | | (245 | ) |
| Income (loss) before income taxes | 3,244 |
| | (55,499 | ) | | 14,955 |
| | 19,602 |
| | 16,172 |
|
| Income taxes | 1,927 |
| | (17,216 | ) | | 3,966 |
| | 6,615 |
| | 2,702 |
|
| Net income (loss) | $ | 1,317 |
| | $ | (38,283 | ) | | $ | 10,989 |
| | $ | 12,987 |
| | $ | 13,470 |
|
| Weighted average shares of common stock outstanding: | | | | | | | | | |
| Basic | 9,812,248 |
| | 9,786,315 |
| | 9,874,441 |
| | 10,109,915 |
| | 10,193,530 |
|
| Diluted | 9,812,273 |
| | 9,786,315 |
| | 9,885,961 |
| | 10,141,395 |
| | 10,228,687 |
|
| Income (loss) per share of common stock: | | | | | | | | | |
| Basic | $ | 0.13 |
| | $ | (3.91 | ) | | $ | 1.10 |
| | $ | 1.28 |
| | $ | 1.32 |
|
| Diluted | 0.13 |
| | (3.91 | ) | | 1.10 |
| | 1.28 |
| | 1.32 |
|
| Shareholders’ equity — per share | 8.34 |
| | 8.03 |
| | 11.82 |
| | 10.87 |
| | 9.52 |
|
| Cash dividends — per share | — |
| | — |
| | — |
| | — |
| | — |
|
| Other financial data: | | | | | | | | | |
| Total assets | 217,143 |
| | 245,998 |
| | 337,551 |
| | 198,980 |
| | 165,922 |
|
| Working capital | 56,182 |
| | 68,167 |
| | 116,962 |
| | 75,443 |
| | 51,184 |
|
| Working capital ratio | 2.04:1 |
| | 2.09:1 |
| | 2.99:1 |
| | 2.83:1 |
| | 1.92:1 |
|
| Debt (including capital leases) | $ | 74,936 |
| | $ | 97,755 |
| | $ | 154,500 |
| | $ | 41,000 |
| | $ | 11,539 |
|
| Shareholders’ equity | 81,868 |
| | 78,628 |
| | 116,879 |
| | 110,115 |
| | 96,072 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Estimated Future Payouts Under Non-Equity
Incentive Plan Awards (1) | | | Estimated Future
Payouts Under Equity
Incentive Plan
Awards Target (#)(2) | | | All Other Stock
Awards; Number of
Shares of Stock or
Units (#)(2) | | | Grant Date Fair
Value of Stock and
Option Awards
($)(2) | |
| Name | | Grant Date | | | Threshold ($) | | | Target ($) | | | Maximum ($) | |
Joseph J. Hartnett (3) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Joseph G McCormack (4) | | | 8/23/2017 | | | | 75,375 | | | | 150,750 | | | | 301,500 | | | | — | | | | — | | | | — | |
Gordon B. Madlock (4) | | | 8/23/2017 | | | | 68,644 | | | | 137,287 | | | | 274,574 | | | | — | | | | — | | | | — | |
Steven M. Korwin (4) | | | 8/23/2017 | | | | 59,559 | | | | 119,116 | | | | 238,232 | | | | — | | | | — | | | | — | |
Michael Gaul (4) | | | 8/23/2017 | | | | 45,840 | | | | 91,678 | | | | 183,356 | | | | — | | | | — | | | | — | |
Joseph Schneider (5) | | | 8/23/2017 | | | | 59,626 | | | | 119,250 | | | | 238,500 | | | | — | | | | — | | | | — | |
| (1) | |
(a) | Operating results of acquired businesses have been included inThe amounts represent the potential payouts under the Company’s consolidated financial results sinceSTIP for fiscal 2018 which were approved August 23, 2017 under the datesvarious levels. See “STIP Generally” above for a narrative description of respective acquisitions.the STIP and the performance based objectives upon which the actual STIP awards are based. See the“2018 Summary Compensation Table” for disclosure of the actual STIP awards. See also footnote (4) for a discussion of retention bonuses. |
| (2) | There were no equity awards granted in fiscal year 2018. |
(b)(3) | Fiscal years 2013 reflectsAs Interim President and CEO, Mr. Hartnett does not participate in the retroactive impactSTIP based on EBITDA and Net Sales targets. However, in fiscal year 2018 the independent directors on the Board of Directors approved a discretionary bonus of $450,000 under the STIP for Mr. Hartnett. |
| (4) | On April 25, 2018, the Board of Directors approved and adopted a cash retention bonus pool which is described under “Retention Bonuses.” Subject to the terms of this retention bonus arrangement, in the event of certain involuntary terminations, the Company will pay Mr. McCormack a retention bonus in the amount of up to $400,000, Mr. Madlock a retention bonus in the amount of up to $390,000, Mr. Korwin a retention bonus in the amount of up to $310,000, and Mr. Gaul’s retention bonus in the amount of up to $215,000. As of June 30, 2018, one half of these amounts had been earned by Messrs. McCormack, Madlock, Korwin, and Gaul, but cannot be paid until the earlier of (i) September 14, 2019 or (ii) the Named Executive Officer’s involuntary termination. These amounts are not reflected in the “Target” column above. |
| (5) | Mr. Schneider resigned as Senior Vice President, Sales and Marketing of the Company's fiscal year 2014 change in its revenue recognition policy related to its ECP sonobuoy sales.Company effective April 13, 2018. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is an analysisSee “Allocation of Compensation Components” above for detail regarding the Company’s resultsamount of operations, liquiditysalary and capital resources and should be readbonus 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 limitedproportion 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 fortotal compensation.Outstanding Equity Awards 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, the Company, an Ohio corporation, entered into an Agreement and Plan of Merger (the “Merger Agreement”) among the Company, Ultra Electronics Holdings plc, a company organized under the laws of England and Wales (“Parent” or "Ultra"), and Ultra Electronics Aneira Inc., an Ohio corporation and an indirect wholly owned subsidiary of Parent (“Merger Sub”). Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into the Company (the “Merger”) with the Company surviving the Merger as a wholly owned subsidiary of Parent.
At the effective time of the Merger, each issued and outstanding share of common stock, par value $1.25 per share, of the
Company (each, a “Share”) (other than (i) Shares that immediately prior to the effective time of the Merger are owned by Parent, Merger Sub or any other wholly owned subsidiary of Parent or owned by the Company or any wholly owned subsidiary of the Company (including as treasury stock) and (ii) Shares that are held by any record holder who is entitled to demand and properly demands payment of the fair cash value of such Shares as a dissenting shareholder pursuant to, and who complies in all respects with, the provisions of Section 1701.85 of the Ohio General Corporation Law (the “OGCL”)) will be cancelled and converted into the right to receive $23.50 per Share in cash, without interest.
The Merger Agreement provides for certain other termination rights for both the Company and Ultra, and further provides that, upon termination of the Merger Agreement under certain specified circumstances, the Company will be required to pay Ultra a termination fee of $7.5 million or Ultra will be required to pay Company a termination fee of $7.5 million.
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
ECP segment operations are comprised of design, development and production of proprietary products for both domestic and foreign defense as well as commercial needs. Sparton 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, 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 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, 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 political uncertainties such as the unrest in Africa and the Middle East and increased tension between Vietnam and China over oil rights in the South China Sea. Additional trends, risks and uncertainties include dependence on key personnel, risks surrounding acquisitions, uncertainties surrounding the global economy, U.S. healthcare legislation, U.S. budget sequestration and debt ceiling negotiations and the effects of those uncertainties on OEM behavior, including heightened inventory management, product development cycles and
outsourcing strategies. Finally, the Sarbanes-Oxley Act, and more recently the Dodd-Frank Act, have required or will require changes in, and formalization of, some of the Company's corporate governance and compliance practices. The SEC and the New York Stock Exchange have also passed or will pass related rules and regulations requiring additional compliance activities, including those implementing the conflict minerals provisions of the Dodd-Frank Act. Compliance with these rules has increased administrative costs and may increase these costs further in the future. 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.
Acquisitions
Fiscal Year 2015
Hunter Technology Corporation
On April 14, 2015, the Company acquired Hunter Technology Corporation ("Hunter"), with operations located in Milpitas, CA and Lawrenceville, GA, for $55.0 million. Hunter, which is part of the Company's MDS segment, provides electronic contract manufacturing in military and aerospace applications. Hunter provides engineering design, new product introduction and full-rate production manufacturing solutions working with major defense and aerospace companies, test and measurement suppliers, secure networking solution providers, medical device manufacturers and a wide variety of industrial customers.
Stealth.com
On March 16, 2015, the Company acquired substantially all of the assets of Stealth.com ("Stealth"), located in Woodbridge, ON, Canada, for $16.0 CAD ($12.6 USD) million. The acquired business, which is part of the Company's ECP segment, is a supplier of high performance rugged industrial grade computer systems and peripherals that include Mini PC/Small Form Factor Computers, Rackmount Server PCs, Rugged Industrial LCD Monitors, Rugged Portable PCs, Industrial Grade Keyboards and Rugged Trackballs and Mice.
KEP Marine
On January 21, 2015, the Company acquired certain assets of KEP Marine, a division of Kessler-Ellis Products, located in Eatontown, NJ, for $4.3 million. The acquired business, which is part of the Company's ECP segment, designs and manufactures industrial displays, industrial computers and HMI software for the Marine market. These product lines have been consolidated into the Aydin Displays facility, located in Birdsboro, PA.
Real-Time Enterprises, Inc.
On January 20, 2015, the Company acquired Real-Time Enterprises, Inc. ("RTEmd"), located in Pittsford, NY, for $2.3 million. RTEmd will continue to service its current and future customers out of its Pittsford, NY location. The acquired business, which is part of the Company's MDS segment, is a developer of embedded software to operate medical devices and diagnostic equipment through a disciplined approach to product development and quality/regulatory services with specific product experience such as patient monitoring, medical imaging, in-vitro diagnostics, electro-medical systems, surgical applications, ophthalmology, nephrology, infusion pumps and medical imaging.
Argotec, Inc.
On December 8, 2014, the Company acquired certain assets of Argotec, Inc. ("Argotec"), located in Longwood, FL, for $0.4 million. The acquired business, which is part of the Company's ECP segment, is engaged in developing and manufacturing sonar transducer products and components for the U.S. Navy and also provides aftermarket servicing. These products have been consolidated into the Company's DeLeon Springs, FL location.
Industrial Electronic Devices, Inc.
On December 3, 2014, the Company acquired certain assets of Industrial Electronic Devices, Inc. ("IED"), located in Flemington, NJ, for $3.3 million. The acquired business, which is part of the Company's ECP segment, designs and manufactures a full line of rugged displays for the Industrial and Marine markets. IED's catalog spans over 600 standard, semi-custom and custom configurations, incorporating some of the most advanced flat panel displays and touch screen technology available. These product lines have been consolidated into the Aydin Displays facility, located in Birdsboro, PA.
Electronic Manufacturing Technology, LLC.
On July 9, 2014, the Company acquired Electronic Manufacturing Technology, LLC. (“eMT”), located in Irvine, CA, for $22.1 million, which included $1.5 million of acquired cash. The acquired business, which is part of the Company's MDS segment, is engaged in the contract services business of manufacturing electromechanical controls and electronic assemblies. Their customer profile includes international Fortune 1000 manufacturers of highly reliable industrial excimer laser products, laser eye surgery sub-assemblies, target simulators for space and aviation systems, power modules for computerized tomography products, test systems for commercial aerospace OEMs and toll road antennas and control boxes.
|
| | | | | |
| | | Reporting period discussed as Legacy Business |
Company | Acquisition Date | Quarter Acquired | Quarterly | Quarterly, year-to-date | Annual |
Hunter Technology Corporation | 04/14/15 | Q4 2015 | Q1 2017 | Q2 2017 | 2017 |
Stealth.com | 03/16/15 | Q3 2015 | Q4 2016 | Q2 2017 | 2017 |
KEP Marine | 01/21/15 | * | — | — | — |
Real-Time Enterprises, Inc. | 01/20/15 | Q3 2015 | Q4 2016 | Q2 2017 | 2017 |
Argotec, Inc. | 12/08/14 | * | — | — | — |
Industrial Electronic Devices, Inc. | 12/03/14 | * | — | — | — |
Electronic Manufacturing Technology, LLC | 07/09/14 | Q1 2015 | Q1 2016 | Q2 2016 | 2016 |
Aubrey Group, Inc. | 03/17/14 | Q3 2014 | Q4 2015 | Q2 2016 | 2016 |
Beckwood Services, Inc. | 12/11/13 | Q2 2014 | Q3 2015 | Q2 2016 | 2016 |
Aydin Displays, Inc. | 08/30/13 | Q1 2014 | Q2 2015 | Q2 2016 | 2016 |
* Acquisition was treated as a "tuck in acquisition" and therefore is treated as legacy business as of the date of acquisition as stand-alone financial information is not available. |
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 2017 compared to fiscal year 2016, and fiscal year 2016 compared to fiscal year 2015.
For fiscal year 2017 compared to fiscal year 2016
CONSOLIDATED
EndThe following table presents selected consolidated statementssets forth certain information about the status of operations data (dollarsstock and option awards outstanding for the Named Executive Officers as of July 2, 2018:
19
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Option Awards | | | Stock Awards | |
Named Executive Officers | | Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable(1) | | | Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable(1) | | | Option Exercise
Price
($) | | | Option
Expiration Date | | | Equity incentive plan
awards: number of
unearned shares, units
or other rights that
have not vested (#) (2) | | | Equity incentive plan awards:
market orpay-out value of
unearned shares, units or other
rights that have not vested
($) (3) | |
Joseph J. Hartnett | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Joseph G. McCormack | | | 7,810 | | | | 7,810 | | | | 23.02 | | | | 9/10/2025 | | | | 23,886 | | | | 453,595 | |
Gordon B. Madlock | | | 5,726 | | | | 1,909 | | | | 26.86 | | | | 9/11/2024 | | | | 16,206 | | | | 307,752 | |
| | | 3,906 | | | | 3,904 | | | | 23.02 | | | | 9/10/2025 | | | | — | | | | — | |
Steven M. Korwin | | | 3,826 | | | | 1,276 | | | | 26.86 | | | | 9/11/2024 | | | | 13,644 | | | | 259,100 | |
| | | 3,476 | | | | 3,475 | | | | 23.02 | | | | 9/10/2025 | | | | — | | | | — | |
Michael A. Gaul | | | 2,125 | | | | 709 | | | | 26.86 | | | | 9/11/2024 | | | | 10,380 | | | | 197,116 | |
| | | 2,441 | | | | 2,440 | | | | 23.02 | | | | 9/10/2025 | | | | — | | | | — | |
Joseph T. Schneider (4) | | | 2,536 | | | | — | | | | 26.04 | | | | 7/12/2018 | | | | — | | | | — | |
| | | 2,929 | | | | — | | | | 23.02 | | | | 7/12/2018 | | | | — | | | | — | |
| (1) | The amounts represent awards of stock options granted in fiscal years 2015 and 2016, as follows: |
| (a) | 15,620 options issued to Mr. McCormack on September 10, 2015 under the 2010 LTIP, |
| (b) | 7,810 options issued to Mr. Madlock on September 10, 2015, and 7,635 options issued to Mr. Madlock on September 11, 2014, both under the 2010 LTIP, |
| (c) | 5,857 options issued to Mr. Schneider on September 10, 2015, and 5,071 options issued to Mr. Schneider on May 26, 2015, both under the 2010 LTIP. 5,463 unvested options were forfeited on April 13, 2018 upon Mr. Schneider’s resignation. The 5,465 exercisable options above were forfeited on July 12, 2018, and |
| (d) | 6,951 options issued to Mr. Korwin on September 10, 2015, and 5,102 options issued to Mr. Korwin on September 11, 2014, both under the 2010 LTIP. |
The options vest in thousands):
|
| | | | | | | | | | | | | |
| | For fiscal years |
| | 2017 | | 2016 |
| | Total | | % of Sales | | Total | | % of Sales |
| Net sales | $ | 397,562 |
| | 100.0 | % | | $ | 419,362 |
| | 100.0 | % |
| Cost of goods sold | 325,663 |
| | 81.9 |
| | 339,214 |
| | 80.9 |
|
| Gross profit | 71,899 |
| | 18.1 |
| | 80,148 |
| | 19.1 |
|
| Selling and administrative expenses | 54,110 |
| | 13.6 |
| | 55,151 |
| | 13.2 |
|
| Internal research and development expenses | 1,670 |
| | 0.4 |
| | 2,344 |
| | 0.5 |
|
| Amortization of intangible assets | 8,498 |
| | 2.2 |
| | 9,592 |
| | 2.3 |
|
| Restructuring charges | — |
| | — |
| | 2,206 |
| | 0.5 |
|
| Reversal of accrued contingent consideration | — |
| | — |
| | (1,530 | ) | | (0.4 | ) |
| Impairment of goodwill | — |
| | — |
| | 64,174 |
| | 15.3 |
|
| Operating income (loss) | 7,621 |
| | 1.9 |
| | (51,789 | ) | | (12.3 | ) |
| Other expense, net | (4,377 | ) | | (1.1 | ) | | (3,710 | ) | | (0.9 | ) |
| Income (loss) before income taxes | 3,244 |
| | 0.8 |
| | (55,499 | ) | | (13.2 | ) |
| Income taxes | 1,927 |
| | 0.5 |
| | (17,216 | ) | | (4.1 | ) |
| Net income (loss) | $ | 1,317 |
| | 0.3 | % | | $ | (38,283 | ) | | (9.1 | )% |
four equal installments commencing one year from the date of grant and are time-based only.| (2) | The amounts represent awards of restricted stock units granted in fiscal years 2014-2017, as follows: |
| (a) | 11,642 restricted stock units issued to Mr. McCormack on September 10, 2015, and 12,244 restricted stock units issued to Mr. McCormack on September 8, 2016, both under the 2010 LTIP, |
| (b) | 5,794 restricted stock units issued to Mr. Madlock on September 11, 2014, 5,821 restricted stock units issued to Mr. Madlock on September 10, 2015, and 4,591 restricted stock units issued to Mr. Madlock on September 8, 2016, all under the 2010 LTIP, |
| (c) | 3,872 restricted stock units issued to Mr. Korwin on September 11, 2014, 5,181 restricted stock units issued to Mr. Korwin on September 10 2015, and 4,591 restricted stock units issued to Mr. Korwin on September 8, 2016, all under the 2010 LTIP, and |
| (d) | 2,151 restricted stock units issued to Mr. Gaul on September 11, 2014, 3,638 restricted stock units issued to Mr. Gaul on September 10 2015, and 4,591 restricted stock units issued to Mr. Gaul on September 8, 2016, all under the 2010 LTIP. |
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, partially offset by lower amortization of loan financing fees, as fiscal year 2015 included accelerated amortization of loan financing fees in relation to the Company's old facility replaced during first quarter of fiscal year 2015. See Note 8, 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),restricted shares and the inabilityrestricted stock units vest in four equal installments commencing one year from the date of grant, subject 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 9, 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 |
| Gross sales | $ | 260,514 |
| | 100.0 | % | | $ | 282,076 |
| | 100.0 | % | | $ | (21,562 | ) | | (7.6 | )% |
| Intercompany sales | (10,074 | ) | | (3.9 | ) | | (17,028 | ) | | (6.0 | ) | | 6,954 |
| | (40.8 | ) |
| 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 |
| | 22.8 |
| | (64,174 | ) | | — |
|
| Operating income (loss) | $ | 1,307 |
| | 0.5 | % | | $ | (61,813 | ) | | (21.9 | )% | | $ | 63,120 |
| | N/A |
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 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, 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 income data (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | For fiscal years |
| | 2017 | | % of Sales | | 2016 | | % of Sales | | $ Chg | | % Chg |
| Gross sales | $ | 147,259 |
| | 100.0 | % | | $ | 154,559 |
| | 100.0 | % | | $ | (7,300 | ) | | (4.7 | )% |
| Intercompany | (137 | ) | | (0.1 | ) | | (245 | ) | | (0.2 | ) | | 108 |
| | (44.1 | ) |
| 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 costachievement of certain research and development specific equipment.
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 elimination | $ | (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 $29.4 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, $14.4 million and $13.5 million, respectively, were allocated to segment operations in each of these periods. Allocations of corporate selling and administrative expensesperformance metrics that are based on the natureaudited financial statements of the service providedCompany.| (3) | The market value is based on the closing market price of the Company as of June 29, 2018, being $18.99 per share. |
| (4) | Mr. Schneider resigned as Senior Vice President, Sales and Marketing of the Company effective April 13, 2018. All unvested stock options, restricted stock, and restricted stock units held by Mr. Schneider have been forfeited. |
Option Exercises and can fluctuate from period to period. The decreaseStock Vested
No options were exercised by the Named Executive Officers in unallocated selling and administrative expenses was a result of ongoing efforts to reduce corporate selling, general and administrative expenses
.
For fiscal year 2016 compared to2018 and no restricted stock or restricted stock units of the Named Executive Officers vested during fiscal year 2015
CONSOLIDATED
2018.Other Benefit Plans
401(k) Retirement Plan
The following table presents selected consolidated statements of income data (dollars in thousands):
|
| | | | | | | | | | | | | |
| | For fiscal years |
| | 2016 | | 2015 |
| | Total | | % of Sales | | Total | | % of Sales |
| Net sales - legacy business | $ | 338,776 |
| | 80.8 | % | | $ | 364,187 |
| | 95.3 | % |
| Net sales - acquired business | 80,586 |
| | 19.2 |
| | 17,938 |
| | 4.7 |
|
| Net sales | 419,362 |
| | 100.0 |
| | 382,125 |
| | 100.0 |
|
| Cost of goods sold | 339,214 |
| | 80.9 |
| | 307,311 |
| | 80.4 |
|
| Gross profit | 80,148 |
| | 19.1 |
| | 74,814 |
| | 19.6 |
|
| Selling and administrative expenses | 55,151 |
| | 13.2 |
| | 46,969 |
| | 12.3 |
|
| Internal research and development expenses | 2,344 |
| | 0.5 |
| | 1,502 |
| | 0.4 |
|
| Amortization of intangible assets | 9,592 |
| | 2.3 |
| | 6,591 |
| | 1.7 |
|
| Restructuring charges | 2,206 |
| | 0.5 |
| | — |
| | — |
|
| Reversal of accrued contingent consideration | (1,530 | ) | | (0.4 | ) | | — |
| | — |
|
| Impairment of goodwill | 64,174 |
| | 15.3 |
| | — |
| | — |
|
| Legal settlement | — |
| | — |
| | 2,500 |
| | 0.7 |
|
| Operating income (loss) | (51,789 | ) | | (12.3 | ) | | 17,252 |
| | 4.5 |
|
| Other expense, net | (3,710 | ) | | (0.9 | ) | | (2,297 | ) | | (0.6 | ) |
| Income (loss) before income taxes | (55,499 | ) | | (13.2 | ) | | 14,955 |
| | 3.9 |
|
| Income taxes | (17,216 | ) | | (4.1 | ) | | 3,966 |
| | 1.0 |
|
| Net income (loss) | $ | (38,283 | ) | | (9.1 | )% | | $ | 10,989 |
| | 2.9 | % |
The decrease in legacy business sales reflects the inabilityCompany maintains a 401(k) Plan that is available 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 and a reduction in sonobuoy revenues to thesubstantially all U.S. Navy as a resultemployees of the ramp-upCompany. The Company matches 50% of each participant’s voluntary contribution up to 6% of the participant’s compensation and: (i) for contributions prior to January 1, 2011, a new program, partially offset by increased sonobuoy sales to foreign governments and increased advanced engineering revenuesparticipant will vest ratably over a5-year period in the ECP segment.
The decrease in gross margin was due to an unfavorable shift in product mixmatching contributions and
(ii) for contributions as of and after January 1, 2011, the
facility closureparticipant vests immediately in the
MDS segment. The increasematching contributions. At the election of the participant, both employer and employee contributions may be invested in
selling and administrative expenses is due toany of the
expenses from companies acquired inavailable investment options under the
prior year, professional fees and other expenses associated withplan, which election options include the Company’s
strategic alternatives review and potential salecommon stock.20
Qualified Defined Benefit Plan
The pension plan is a defined benefit plan covering substantially all U.S. employees of the Company and investmentthat were eligible employees prior to the date that participation in the Company’s business development infrastructure.
The increase in amortization of intangible assets relates to certain intangible assets acquired as part of the acquisitions inplan was frozen (described below). In fiscal year 2015. Restructuring charges relate2013, the Company made contributions 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 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 $3.8 million and $2.5 million for fiscal years 2016 and 2015, respectively. The comparative interest expense reflects increased average borrowings under the Company’s credit facility between the two periods, partially offset by lower amortization of loan financing fees, as fiscal year 2015 included accelerated amortization of loan financing fees in relation to the Company's old facility replaced during first quarter of fiscal year 2015. See Note 8, 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 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 benefit of $17.2 million, or 31.0% of loss before income taxes in fiscal year 2016. 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. The Company recognized a number of discrete income tax items during fiscal year 2016, which also affects our tax rate, but are not consistent from year to year. In relation to an impairment analysis of goodwill, the Company recognized a discrete income tax benefit of $4.6 million for fiscal year 2016. In relation to an extensive research and development study for the current and prior three tax years for which a refund claim is anticipated, the Company recognized discrete income tax expense of $0.8 million. Additional discrete items include return to provision adjustments, certain jurisdictional audit adjustments and changes in state apportionment factors. Excluding these discrete tax items, the Company recorded an income tax benefit of $21.3 million, or 38.4%, of loss before income taxes, for fiscal year 2016. See Note 9, 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 $38.3 million, or $3.91 loss per share for fiscal year 2016, compared to net income of $11.0 million, or $1.10 per share for the fiscal year 2015.
MDS
The following table presents selected consolidated statements of income data (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | For fiscal years |
| | 2016 | | % of Sales | | 2015 | | % of Sales | | $ Chg | | % Chg |
| Net sales: | | | | | | | | | | | |
| Legacy business | $ | 191,408 |
| | 67.9 | % | | $ | 230,787 |
| | 87.5 | % | | $ | (39,379 | ) | | (17.1 | )% |
| Acquired business | 73,640 |
| | 26.1 |
| | 15,397 |
| | 5.8 |
| | 58,243 |
| | N/A |
| Intercompany | 17,028 |
| | 6.0 |
| | 17,756 |
| | 6.7 |
| | (728 | ) | | (4.1 | ) |
| Total net sales | 282,076 |
| | 100.0 |
| | 263,940 |
| | 100.0 |
| | 18,136 |
| | 6.9 |
|
| Gross Profit | 34,788 |
| | 12.3 |
| | 36,461 |
| | 13.8 |
| | (1,673 | ) | | (4.6 | ) |
| Selling and administrative expenses | 23,813 |
| | 8.4 |
| | 18,615 |
| | 7.1 |
| | 5,198 |
| | 27.9 |
|
| Amortization of intangible assets | 7,938 |
| | 2.7 |
| | 5,811 |
| | 2.2 |
| | 2,127 |
| | 36.6 |
|
| Restructuring charges | 2,206 |
| | 0.8 |
| | — |
| | — |
| | 2,206 |
| | — |
|
| Reversal of accrued contingent consideration | (1,530 | ) | | (0.5 | ) | | — |
| | — |
| | (1,530 | ) | | — |
|
| Impairment of goodwill | 64,174 |
| | 22.8 |
| | — |
| | — |
| | 64,174 |
| | — |
|
| Legal settlement | — |
| | — |
| | 2,500 |
| | 0.9 |
| | (2,500 | ) | | (100.0 | ) |
| Operating income (loss) | $ | (61,813 | ) | | (21.9 | )% | | $ | 9,535 |
| | 3.6 | % | | $ | (71,348 | ) | | N/A |
The decrease in legacy business sales was due to 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. These decreases were partially offset by increased sales from new and existing customer programs. MDS backlog was $138.5 million at July 3, 2016 compared to $170.1 million at June 30, 2015. Commercial orders, in general, may be rescheduled or canceled without significant penalty, as a result, may not be a meaningful measure of future sales.
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. The selling and administrative expense increase is primarily comprised of businesses acquired in the prior year.
The increase in amortization of intangible assets is due to the amortization of customer relationships and non-compete agreements from businesses acquired in the prior year. 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 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 income data (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | For fiscal years |
| | 2016 | | % of Sales | | 2015 | | % of Sales | | $ Chg | | % Chg |
| Net sales: | | | | | | | | | | | |
| Legacy business | $ | 147,368 |
| | 95.3 | % | | $ | 133,400 |
| | 97.8 | % | | $ | 13,968 |
| | 10.5 | % |
| Acquired business | 6,946 |
| | 4.5 |
| | 2,541 |
| | 1.9 |
| | 4,405 |
| | 173.4 |
|
| Intercompany | 245 |
| | 0.2 |
| | 374 |
| | 0.3 |
| | (129 | ) | | (34.5 | ) |
| Total net sales | 154,559 |
| | 100.0 |
| | 136,315 |
| | 100.0 |
| | 18,244 |
| | 13.4 |
|
| Gross profit | 45,360 |
| | 29.3 |
| | 38,353 |
| | 28.1 |
| | 7,007 |
| | 18.3 |
|
| Selling and administrative expenses | 15,482 |
| | 10.0 |
| | 11,038 |
| | 8.1 |
| | 4,444 |
| | 40.3 |
|
| Internal research and development expenses | 2,344 |
| | 1.5 |
| | 1,502 |
| | 1.1 |
| | 842 |
| | 56.1 |
|
| Amortization of intangible assets | 1,654 |
| | 1.1 |
| | 780 |
| | 0.5 |
| | 874 |
| | 112.1 |
|
| Operating income | $ | 25,880 |
| | 16.7 | % | | $ | 25,033 |
| | 18.4 | % | | $ | 847 |
| | 3.4 | % |
The increase in ECP legacy business sales reflects increased sonobuoy sales of $10.5 million to foreign governments, increased advanced engineering revenue of $3.9 million and increased rugged flat panel display sales of $3.7 million (includes tuck-in acquisitions sales) partially offset by decreased sonobuoy sales of $5.3 million to the U.S. Navy as a result of new sonobuoy program ramp-up. Total sales to the U.S. Navy for the fiscal years 2016 and 2015 were $93.5 million and $94.9 million, respectively. For the fiscal years 2016 and 2015, sales to the U.S. Navy accounted for 22% and 25%, respectively, of consolidated Company net sales and 61% and 70%, respectively, of ECP segment net sales. ECP backlog was $142.2 million at July 3, 2016 compared to $143.3 million at June 30, 2015.
The increase in gross margin is a result of the higher mix of foreign sonobuoy sales. The increase in selling and administrative expense was due to the prior year acquisition as well as professional service expenses associated with governmental audits and compliance.
The increase in amortization of intangible assets relates to intangible assets acquired in the Stealth, KEP Marine and IED transactions.
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.
Eliminations and Corporate Unallocated
The following table presents selected consolidated statements of income data (dollars in thousands):
|
| | | | | | | | | | | | | | |
| | For fiscal years |
| | 2016 | | 2015 | | $ Chg | | % Chg |
| Intercompany sales eliminations | $ | (17,273 | ) | | $ | (18,130 | ) | | $ | 857 |
| | (4.7 | )% |
| Selling and administrative expenses unallocated | 15,856 |
| | 17,316 |
| | (1,460 | ) | | (8.4 | ) |
Total corporate selling and administrative expenses before allocation to operating segments were $29.7 million and $29.4 million for fiscal years 2016 and 2015, respectively, or 7.0% and 7.1% of consolidated sales, respectively. Of these costs, $13.5 million and $9.6 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. Decrease in unallocated selling and administrative expenses was a result of the Company's ongoing efforts to reduce corporate selling, general and administrative footprint.
Liquidity and Capital Resources
As of July 2, 2017, the Company had $45.8 million available under its $125.0 million credit facility, reflecting borrowings of $74.5 million and certain letters of credit outstanding of $4.7 million. Additionally, the Company had available cash and cash equivalents of $1.0 million.
On June 27, 2016, the Company entered into Amendment No. 3 (“Amendment 3”) to the Credit Facility. As a result of Amendment 3, the Company reduced the revolving credit facility from $275.0 million to $175.0 million, reduced the optional increase in the Credit Facility from $100.0 million to $50.0 million, increased the permitted total funded debt to EBITDA ratio through the fiscal quarter ending September 2017, and provided for certain restrictions on business acquisitions, dividends and stock repurchases. Payments of $0.7 million related to Amendment 3 were recorded as deferred financing costs in other long-term assets.
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. Expenses of $0.8 million related to amendments were recorded as deferred financing costs in other long-term assets in fiscal year 2017. The facility is secured by substantially all assets of the Company and its subsidiaries and expires on September 11, 2019.
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 1.00% to 3.75%, or at the bank’s base rate, as defined, plus 0.00% to 2.75%, 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 ranging from 0.20% to 0.50%, based on the Company’s Total Funded Debt/EBITDA Ratio, as defined. The Credit Facility includes representations, covenants and events of default that are customary for financing transactions of this nature.
As a condition of the Credit Facility, the Company is subject to certain customary covenants, with which it was in compliance with at July 2, 2017.
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 and July 3, 2016, $1.7 million and $0.0 million, respectively, of proceeds from billings in excess of costs were received and were reported in the Consolidated Balance Sheets as other accrued expenses.
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.
A portion of our operating income is earned outside of the United States. Earnings in Vietnam are deemed to be indefinitely reinvested in foreign jurisdictions while earnings in Canada are not deemed to be indefinitely reinvested. We currently do not intend or foresee a need to repatriate these funds from jurisdictions for which we assert indefinite reinvestment. We expect existing domestic cash and short-term investments 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 dividends, debt repayment, 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 | 2017 | | 2016 | | 2015 |
| Operating activities, excluding changes in working capital | $ | 18,293 |
| | $ | 22,084 |
| | $ | 26,161 |
|
| Net changes in working capital | 13,175 |
| | 26,048 |
| | (21,624 | ) |
| Operating activities | 31,468 |
| | 48,132 |
| | 4,537 |
|
| Investing activities | (6,874 | ) | | (4,842 | ) | | (104,107 | ) |
| Financing activities | (23,738 | ) | | (58,072 | ) | | 106,456 |
|
Cash flows from operating activities, excluding changes in working capital, for fiscal years 2017, 2016 and 2015 reflect the Company's relative operating performance during those periods. Depreciation and amortization, had the most significant impact on cash flows from operating activities excluding changes in working capital for fiscal 2017. Fiscal 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. Fiscal year 2015 working capital related cash flows primarily reflect increased accounts receivable as well as an
increase in accounts payable and to a lesser degree, a decrease in advanced funding of production related to U.S. Navy contracts during the year in excess of performance based payments received.
Cash flows from investing activities include net capital expenditures of $6.9 million, $6.1 million and $5.8 million in fiscal years 2017, 2016 and 2015, 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. Fiscal year 2015 reflects a $97.3 million use of cash for the acquisitions of Hunter, eMT, Stealth, KEP Marine, IED, RTEmd and Argotec, net of acquired cash and net of a working capital adjustment receipt relating to the fiscal year 2014 acquisition of Aubrey. Fiscal year 2015 also reflects a $1.0 million purchase of marketable equity securities.
Cash flows from financing activities reflect net repayments of $22.7 million and $57.3 million for 2017 and 2016, respectively, under the Company's Credit Facility and fiscal year 2015 reflects $113.5 million of net borrowings. Amendments to the Company's Credit Facility resulted in payments of debt financing costs of $0.8 million, $0.7 million and $1.4 million in fiscal years 2017, 2016 and 2015, respectively.
Fiscal 2015 also includes the repurchase of $5.0 million of the Company's common stock under the Company's since-expired stock repurchase programs, $1.8 million of payments to satisfy income tax withholding requirements in relation to the vesting of executives' restricted stock in exchange for the surrender of a portion of the vesting shares and $1.0 million of tax benefits in excess of recorded stock based compensation. The Company received $0.2 million from the exercise of stock options during fiscal year 2015. There were no stock options exercised in fiscal years 2017 or 2016.
Commitments and Contingencies
See Note 11, 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 andpension plan in the aggregate at July 2, 2017, are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due By Period |
| | Total | | Less than 1 Year | | 2-3 Years | | 4-5 Years | | More than 5 Years |
| Contractual obligations: | | | | | | | | | |
| Debt | $ | 74,500 |
| | $ | — |
| | $ | 74,500 |
| | $ | — |
| | $ | — |
|
| Cash interest (1) | 7,195 |
| | 3,258 |
| | 3,937 |
| | — |
| | — |
|
| Operating leases (2) | 13,643 |
| | 2,606 |
| | 4,712 |
| | 3,174 |
| | 3,151 |
|
| Environmental liabilities | 6,036 |
| | 568 |
| | 784 |
| | 801 |
| | 3,883 |
|
| Non-cancelable purchase orders | 45,606 |
| | 45,606 |
| | — |
| | — |
| | — |
|
| Total | $ | 146,980 |
| | $ | 52,038 |
| | $ | 83,933 |
| | $ | 3,975 |
| | $ | 7,034 |
|
| |
(1) | Cash interest reflects interest payments on the Company's Credit Facility discussed below. The effective interest rate on the outstanding borrowing under the credit facility was 4.37% at July 2, 2017. |
| |
(2) | Does not include payments due under future renewals to the original lease terms. |
The Company's other non-current liabilities in the consolidated balance sheets include unrecognized tax benefits and related interest and penalties. Asamount of July 2, 2017, we had gross unrecognized tax benefits of less than $0.1 million classified as non-current liabilities with no additional amount recorded for interest and penalties. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligation table.
Debt — Debt consists of amounts owed under the Company's Credit Facility. See Note 8, 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 11, Commitments and Contingencies, of the “Notes to Consolidated Financial Statements” in this Form 10-K for discussion of operating leases.
Environmental liabilities — See Note 11, 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 $6.0 million total, $0.5 million is classified as a current liability and $5.5 million is classified as a long-term liability, both of which are included on the balance sheet as of July 2, 2017.
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 $4.7 million at July 2, 2017, 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.
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. 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 2017, 2016 and 2015 did not result in changes to the related liability. As of July 2, 2017 and July 3, 2016, Sparton has accrued $6.0 million and $6.7 million, respectively, as its estimate of the remaining minimum future undiscounted financial liability with respect to this matter, of which $0.5 million and $0.6 million was classified as a current liability and included on the balance sheet in other accrued expenses.
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 $7.1 million has been expended as of July 2, 2017 toward the $8.4 million threshold. It is expected that the DOE reimbursements will commence in the years after fiscal year 2019. At July 2, 2017 and at July 3, 2016, the Company recognized $1.6$0.2 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 2, 2017, 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
recorded, could be up to $2.5 million before income taxes over the next thirteen years, with this amount expected to be offset by related reimbursement from the DOE for a net amount of $1.6 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.
Percentage-of-Completion Accounting
In the first quarter of fiscal year 2014, the Company voluntarily changed its revenue recognition policy related to ECP sonobuoy sales to the U.S. Navy and foreign government customers under long-term contracts that require lot acceptance testing. The new policy continues to recognize revenue under the percentage of completion method, but changes the measurement of progress under these contracts from a completed units accepted basis (whereby revenue was recognized for each lot of sonobuoys produced when that lot was formally accepted by the customer) to a units-of-production basis (whereby revenue is recognized when production and internal testing of each lot of sonobuoys is completed). The Company now has significant experience in producing sonobuoys to customer specifications and internal testing to assess compliance with those specifications and, as such, now has an adequate history of continuous customer acceptance of all sonobuoys produced. Accordingly, the Company believes the new method is preferable primarily because it eliminates delays in revenue and related cost of goods sold recognition due to timing of customer testing and acceptance delays. Such delays commonly occur due to customer circumstances that are unrelated to the product produced. Under the new policy, the revenue and related costs of goods sold of these manufactured sonobuoy lots will more closely match the period in which the product was produced and the related revenue earned, thereby better reflecting the economic activity of the ECP segment. Additionally, this new method provides better matching of periodic operating expenses incurred during production. 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’ abilityorder 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 customerfunding 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 $0.5 million, $1.7 million and $0.9 million for fiscal years 2017, 2016 and 2015, 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 minimal subsequent sales of excess and obsolete inventory during fiscal years 2017, 2016 and 2015 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 $0.4 million and $0.4 million at July 2, 2017 and July 3, 2016, 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 2, 2017. 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 (income) for fiscal years 2017, 2016 and 2015 was calculated to be $0.3 million, $0.3 million and $(0.2) million, respectively.
Effective April 1, 2009,
the Company notified employees that it would freeze participation and the accrual of benefits in the
plan. The Named Executive Officers are not participants in the Company’s
pensiondefined benefit plan
because participation and the accrual of benefits were frozen
at whichas of April 1, 2009, prior to the time
all participants became fully vested and all remaining prior service costs were recognized. Lump-sum benefit distributions during fiscal years 2017 and 2016 exceeded plan service and interest costs, resulting in lump-sum settlement charges of $0.2 million and $0.3 million also being recognized during the respective years. See Note 10, Employee Retirement Benefitthat they would have become eligible to participate.Deferred Compensation Plans of the “Notes to Consolidated Financial Statements” in this Form 10-K for further details regarding the Company's pension plan.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations”. Accordingly,or AgreementsEffective January 1, 2014, the Company recognizes amounts for identifiable assets acquired and liabilities assumed equal to their estimated acquisition date fair values. Transaction and integration costs associated with business combinations are expensedestablished a Deferred Compensation Plan, as incurred. Any excess of the acquisition price over the estimated fair value of net assets acquired is recorded as goodwill while any excess of the estimated fair value of net assets acquired over the acquisition price is recorded in current earnings as a gain.
The Company makes various assumptions in estimating the fair values of assets acquired and liabilities assumed. As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use. The most significant assumptions typically relate to the estimated fair values of inventory and intangible assets, including customer lists and non-compete agreements. Management arrives at estimates of fair value based upon assumptions it believes to be
reasonable. These estimates are based on historical experience and information obtained from the management of the acquired business and is inherently uncertain. Critical estimates in valuing certain intangible assets include but are not limited to: future expected discounted cash flows from customer relationships and contracts assuming similar product platforms and completed projects; the acquired company’s market position, as well as assumptions about the period of time the acquired customer relationships will continue to generate revenue streams; and attrition and discount rates. Unanticipated events and circumstances may occuramended, which may affect the accuracy or validity of such assumptions, estimates or actual results, particularly with respect to amortization periods assigned to identifiable intangible assets.
Goodwill
Goodwill 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 2017, 2016 and 2015.
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.
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, Fair value measurements, 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 years 2017 and 2015, 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 reporting units 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 the Step 2 analysis of goodwill impairment 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 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 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, acquired unpatented technology and patents. At July 2, 2017, customer relationships and non-compete agreements totaling $21.4 million and $1.2 million, respectively, are included in the MDS segment, while customer relationships, non-compete agreements, trademarks/trade names, unpatented technology and patents totaling $4.0 million, $0.1 million, $1.2 million, $0.5 million and $0.01 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, Fair value measurements, of the "Notes to Consolidated Financial Statements" in this Form 10-K. The Company had a third-party valuation of the recoverability of intangible assets performed in the fourthquarter of fiscal 2016 and it was determined 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.
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 must be 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 FASB issued Accounting Standards Update No. 2014-09 ("ASU 2014-09"), Revenue from Contractswith 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 amendmentpermits selected individuals to defer the effective date for all entities by one year.certain types of compensation (“Eligible Pay Types”). The new standard will become effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted asplan applies to selected employees, members of annual reporting periods beginning after December 15, 2016. Companies have the option of using either a full or modified retrospective approach in applying this standard. During fiscal 2016, the FASB issued three additional updates which further clarify the guidance provided in ASU 2014-09. The Company has identified key personnel to evaluate the guidance and approve a transition method, while also formulating a time line to review the potential impact of the new standard on its existing revenue recognition policies and procedures.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11 ("ASU 2015-11"), Simplifying theMeasurement 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 will be 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. The Company does not expect ASU 2015-11 to have a material impact on its consolidated financial statements when it is adopted 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 is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09 ("ASU 2016-09"), Compensation - StockCompensation (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, 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 OtherThan 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 PeriodicPension 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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company manufactures its products in the United States, Canada and Vietnam. Sales of the Company’s products are in the U.S. and foreign markets. The Company is subject to foreign currency exchange rate risk relating to intercompany activity and balances and to receipts from customers and payments to suppliers in foreign currencies. Adjustments related to the remeasurement of the Company's Canadian and Vietnamese financial statements into U.S. dollars are included in current earnings. As a result, the Company's financial results could be affected by factors such as changes in foreign currency exchange rates or economic conditions in the domestic and foreign markets in which the Company operates. However, minimal third party receivables and payables are denominated in foreign currencies and the related market risk exposure is considered to be immaterial.
The Company's revolving credit line, when drawn upon, is subject to future interest rate fluctuations which could potentially have a negative impact on cash flows of the Company. The Company had $74.5 million outstanding under its Credit Facility at July 2, 2017. A prospective increase of 100 basis points in the interest rate applicable to the Company's outstanding borrowings under its Credit Facility would result in an increase of $0.7 million in our annual interest expense. The Company is not party to any currency exchange or interest rate protection agreements as of July 2, 2017.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements required by this item are submitted as a separate section of this Annual Report on Form 10-K. See “Index to Consolidated Financial Statements,” commencing on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Each of our Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) as of the end of the period covered by this Annual Report. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934) during the quarter ended July 2, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Any internal control system, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of July 2, 2017. This assessment was based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control — Integrated Framework (2013). Based on this assessment, management believes that, as of July 2, 2017, our internal control over financial reporting was effective.
BDO USA, LLP, our independent registered public accounting firm, issued an attestation report on the effectiveness of our internal control over financial reporting. Their report appears below.
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| | |
/S/ JOSEPH J. HARTNETT
| | /S/ JOSEPH G. MCCORMACK
|
Joseph J. Hartnett
Interim President and Chief Executive Officer
September 14, 2017
| | Joseph G. McCormack
Senior Vice President and Chief Financial Officer
September 14, 2017
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholdersmembers of
Sparton Corporation
Schaumburg, Illinois
We committees established by the Board of Directors. The following chart lists the Eligible Pay Types from which participants can elect to defer compensation. The chart also summarizes what percentage of each Eligible Pay Type a participant can defer for each year. | | | | |
| Eligible Pay Type | | Maximum Deferral Percentage | |
Base Salary | | | 80 | % |
Annual Bonus | | | 80 | % |
Annual Commissions | | | 80 | % |
Director Fees | | | 100 | % |
401(k) Refund | | | 100 | % |
Restricted Stock Units | | | 100 | % |
Once an individual is permitted to participate in the plan, the individual is permitted to elect how much, if any, of the Eligible Pay Types listed above will be deferred. Deferrals are only made prospectively and generally in the year before the year in which the deferred compensation is earned. As amounts are deferred, participants may suggest how those deferred amounts are invested. The investment choices are substantially similar to those options available under the 401(k) plan.
The plan may, but is not required to, purchase life insurance to fund the deferred compensation. The life insurance is intended to have audited Sparton Corporation’s internal control over financiala cash value that could be used to pay benefits that otherwise would come out of the Company’s general assets. If life insurance is obtained, it would be used to provide the compensation participants would receive on a future date. The investment choices and the payments under the plan are not altered by the purchase or failure to purchase a life insurance policy.
The amounts deferred under the plan remain subject to the general claims of creditors of the Company. In general, the Company tracks the amounts deferred and the investments directed by participants for accounting purposes and is not required to put aside assets or actually make the selected investment.
Employment Agreements and Potential Payments upon Termination or Change in Control
In June 2012 and August 2012, the Board of Directors, upon recommendation of the Compensation Committee, authorized management to review and amend the employment agreements of the Company executives reporting asdirectly to the Chief Executive Officer and the General Managers of July 2, 2017,each of the Company’s business units, including certain of the Named Executive Officers, with respect to severance packages. Any such amendments could include the following, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizationsa review of the Treadway Commission (the COSO criteria)facts and circumstances of each such employee (including the applicable compensation package payable to the employee): (i) up to nine months’ severance, (ii) certain COBRA costs, and (iii) outplacement program support not to exceed $25,000 (all subject to the individual executing an appropriate and comprehensive release, includingnon-disparagement,non-compete, andnon-solicitation). Sparton Corporation’s management is responsible The amended severance packages for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,Named Executive Officers (other than the Chief Executive Officer, whose severance package was not amended) are included in the accompanying Item 9A, Management Report on Internal Control Over Financial Reporting. Our responsibilitydescription of their employment agreements below, which amended packages also include severance upon a change in control if the Named Executive Officer is terminated within a year after a change in control.The following is a brief summary of employment agreements of Named Executive Officers and potential payments upon termination or change in control:
Joseph J. Hartnett
The Company entered into an employment agreement with Joseph J. Hartnett, as Interim President and Chief Executive Officer, effective February 5, 2016.
Mr. Hartnett’s employment agreement is forat-will employment without a set term. Pursuant to express an opinion onthe employment agreement, Mr. Hartnett is entitled to receive a salary at a rate of $50,000 per month. In addition, Mr. Hartnett is eligible for a bonus, payable in cash, shares of Company common stock, or a combination of cash and shares of Company common stock while employed by
21
the Company as Interim President and Chief Executive Officer or upon termination; any such bonus is payable at the sole discretion of the Board of Directors independent members. Mr. Hartnett is also eligible to participate in the Company’s internal control over financial reporting based on our audit.
We conducted our auditbenefit programs in accordance with
the standardstheir terms, including their eligibility provisions. While employed as Interim President and Chief Executive Officer, Mr. Hartnett does not receive any compensation for his service as a member of the
PublicBoard of Directors.Joseph G. McCormack
The Company Accounting Oversight Board (United States). Those standards requireentered into an employment agreement with Joseph G. McCormack, as Senior Vice President and Chief Financial Officer, effective September 7, 2015.
Mr. McCormack’s employment agreement provides for:(i) at-will employment; (ii) a current annual base salary of $335,000; (iii) eligibility for a performance bonus of 45% of his annual base salary, based upon the Company Short-Term Incentive Plan (the “STIP”), provided that wecertain target objectives are attained; (iv) eligibility for participation in the 2010 Long-Term Stock Incentive Plan (the “2010 LTIP”) with an annual grant target award of up to $400,000; (v) eligibility for participation in the Company’s employee benefits plans that are offered to salaried employees, including, without limitation, health insurance coverage, disability, participation in the Company’s 401(k) plan and any applicable incentive programs; (vi) certain severance detailed below; and (vii) covenants not to compete or solicit employees for eighteen months following termination or to disclose confidential information. The 2010 LTIP annual grant figure is a target, not a minimum.
If the Company terminates Mr. McCormack’s employment for any reason other than cause (as defined below), death, or disability, or if Mr. McCormack terminates his employment for good reason (as defined below), the Company will pay Mr. McCormack: (i) severance in an amount equal to nine months of his current base salary (or, if the termination is within twelve months of a change in control; he will be entitled to 145% of the greater of his base salary as of the date of termination and his base salary as of the date of such change in control), payable over a period of nine months (or twelve months in connection with change in control) as a part of the Company’s standard payroll; (ii) nine months of COBRA premiums for medical insurance for Mr. McCormack and/or his dependents if he so elects (or twelve months of COBRA premiums if the termination is within twelve months of a change in control); and (iii) outplacement services in an amount not to exceed $25,000. Mr. McCormack’s receipt of such benefits is subject to his delivery of a signed release of claims and the return of all property in his possession or control that belongs to the Company. In addition, if Mr. McCormack violates the confidentiality, nonsolicitation, and noncompetition covenants set forth in the employment agreement, the Company may terminate such benefits and Mr. McCormack will repay any such benefits he has received in excess of one month.
Under Mr. McCormack’s employment agreement, “cause” means any of the following: (a) personal dishonesty; (b) gross negligence; (c) violation of any law, rule or regulation; (d) breach of applicable confidentiality, nonsolicitation or noncompetition provisions to which he is subject, including such provisions under the employment agreement; (e) a breach of any material provision of the Company’s Code of Business Conduct and Ethics or other policies and procedures; (f) use of alcohol or drugs to the extent such use adversely affects his ability to perform his duties or adversely affects the auditbusiness reputation of Mr. McCormack or the Company; (g) use of illegal drugs; or (h) failure or refusal to obtainsubstantially perform his duties and responsibilities to the Company as reasonably determined from time to time by the President and Chief Executive Officer of the Company (or his designee). For any termination pursuant to subsections (d) or (h), the Company shall first give written notice of the breach to Mr. McCormack, and if the breach is susceptible to a cure, the Company shall give Mr. McCormack a reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understandingopportunity to promptly (within thirty days) cure the breach.
Under Mr. McCormack’s employment agreement, “good reason” means the occurrence of internal control over financial reporting, assessingany of the risk thatfollowing: (a) a material weakness exists, and testing and evaluatingadverse change in Mr. McCormack’s title, duties or responsibilities, including reporting responsibilities, other than temporarily while disabled or otherwise incapacitated; or (b) the design and operating effectiveness of internal control based onCompany otherwise materially breaches the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believeemployment agreement, provided that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to(i) Mr. McCormack shall provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertainwritten notice to the
maintenanceCompany of
recordsthe good reason in (a) or (b) above no more than ninety days after the initial existence of the good reason; and (ii) the Company is afforded thirty days to remedy the material change or breach; and (iii) if the Company fails to cure, Mr. McCormack terminates his employment within thirty days following the expiration of such cure period.Under Mr. McCormack’s employment agreement “change in control” means: (i) any one person, or more than one person acting as a group, acquires ownership of stock of the Company that, in reasonable detail, accurately and fairly reflecttogether with stock held by such person or group, constitutes more than fifty percent of the transactions and dispositionstotal fair market value or total voting power of the stock of the Company; (ii) any one person, or more than one person acting as a group, acquires (or has acquired during any twelve month period) ownership of stock of the Company possessing thirty percent or more of the total voting power of the stock of the Company; (iii) a majority of the members of the Board of Directors are replaced during any twelve month period by directors whose appointment is not endorsed by a majority of the members of the Board of Directors before the date of appointment or election; or (iv) any one person, or more than one person acting as a group, acquires (or has acquired during any twelve month period) assets from the Company that have a total gross fair market value equal to or more than forty percent of the total gross fair market value of all of the assets of the company; (2) provide reasonable assuranceCompany immediately before such acquisition or acquisitions.
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Under the employment agreement, Mr. McCormack agrees: (i) not to disclose Company confidential information during the term and at all times thereafter; (ii) not to compete with the Company during the term and for a period of eighteen months thereafter; and (iii) not to solicit employees or customers during the term and for a period of eighteen months thereafter.
On April 25, 2018, the Board of Directors approved and adopted a cash retention bonus pool, which is described in more detail under “Retention Bonuses.” Subject to the terms of this retention bonus arrangement, in the event of certain involuntary terminations, the Company will pay Mr. McCormack a retention bonus in the amount of up to $400,000.
Gordon B. Madlock
Effective January 5, 2009, the Company entered into an employment agreement with Gordon B. Madlock. Mr. Madlock’s agreement was amended effective August 22, 2012, and again on September 23, 2015.
Mr. Madlock’s employment agreement, as amended, provides for:(i) at-will employment; (ii) a current annual base salary of $305,083, subject to annual review by the Chief Executive Officer; (iii) eligibility for a performance bonus of 45% of his annual base salary, based upon the Company Short-Term Incentive Plan (the “STIP”), provided that transactionscertain target objectives set by the Chief Executive Officer are recordedattained; (iv) eligibility for participation in the 2010 LTIP with an annual grant target award of $200,000; (v) eligibility for participation in the Company’s employee benefits plans that are offered to salaried employees including, without limitation, health insurance coverage, disability, participation in the Company’s 401(k) plan and any applicable incentive programs; (vi) certain severance detailed below; and (vii) covenants not to compete or solicit employees for eighteen months following termination or to disclose confidential information. The 2010 LTIP annual grant figure is a target, not a minimum.
If Mr. Madlock’s employment is terminated for any reason other than “just cause” (as defined below), death or disability, or if his employment is involuntarily terminated within twelve months of a change in control (as defined below), the Company will pay Mr. Madlock: (i) severance equal to nine months’ salary (or 145% of his salary in connection with a change in control), payable over a period of nine months (or twelve months in connection with change in control) as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expendituresa part of the company are being made onlyCompany’s standard payroll; (ii) nine months of COBRA premiums (or twelve months in accordanceconnection with authorizationsa change in control); and (iii) outplacement services in an amount not to exceed $25,000. Mr. Madlock’s receipt of managementsuch benefits is subject to his delivery of a signed release of claims and directorsthe return of all property in his possession or control that belongs to the Company. In addition, if Mr. Madlock violates the confidentiality, nonsolicitation, and noncompetition covenants set forth in the employment agreement, the Company may terminate such benefits and Mr. Madlock will repay any such benefits he has received in excess of one month.
Under Mr. Madlock’s employment agreement, “just cause” means any of the company;following: (i) the commission of any illegal act; (ii) the commission of any act of dishonesty, fraud, gross negligence, or willful deceit in connection with his employment; (iii) the use of alcohol or drugs to the extent such use adversely affects his ability to perform his duties or adversely affects the business reputation of Mr. Madlock or the Company; (iv) a material and (3) provide reasonable assurance regarding preventionwillful failure to perform his assigned duties; (v) the use of illegal drugs or timely detectionconviction of unauthorized acquisition, use,a crime which is a felony or dispositionwhich involves theft, dishonesty, unethical conduct or moral turpitude; (vi) willful violation of any of the company’sprovisions of the Sarbanes-Oxley Act of 2002 that are applicable to him; (vii) willful and material violation of the Company’s written policies; or (viii) willful and material breach of his employment agreement.
Under Mr. Madlock’s employment agreement, “change in control” means: (i) any one person, or more than one person acting as a group, acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than fifty percent of the total fair market value or total voting power of the stock of the Company; (ii) any one person, or more than one person acting as a group, acquires (or has acquired during any twelve month period) ownership of stock of the Company possessing thirty percent or more of the total voting power of the stock of the Company; (iii) a majority of the members of the Board of Directors are replaced during any twelve month period by directors whose appointment is not endorsed by a majority of the members of the Board of Directors before the date of appointment or election; or (iv) any one person, or more than one person acting as group, acquires (or has acquired during any twelve month period) assets from the Company that have a total gross fair market value equal to or more than forty percent of the total gross fair market value of all of the assets of the Company immediately before such acquisition or acquisitions.
Under the employment agreement, Mr. Madlock agrees: (i) not to disclose Company confidential information during the term and at all times thereafter; (ii) not to compete with the Company during the term and for a period of eighteen months thereafter; and (iii) not to solicit employees or customers during the term and for a period of eighteen months thereafter.
On April 25, 2018, the Board of Directors approved and adopted a cash retention bonus pool, which is described in more detail under “Retention Bonuses.” Subject to the terms of this retention bonus arrangement, in the event of certain involuntary terminations, the Company will pay Mr. Madlock a retention bonus in the amount of up to $390,000.
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Steven M. Korwin
Effective December 8, 2008, the Company entered into an employment agreement with Steven M. Korwin. Mr. Korwin’s agreement was amended effective August 22, 2012, and again on September 23, 2015.
Mr. Korwin’s employment agreement provides for:(i) at-will employment; (ii) a current annual base salary of $264,702 subject to annual review by the Chief Executive Officer; (iii) eligibility for a performance bonus of 45% of his annual base salary, based upon the STIP, provided that certain target objectives set by the Chief Executive Officer are attained; (iv) eligibility for participation in the 2010 LTIP with an annual grant target award of $178,000; (v) eligibility for participation in the Company’s employee benefits plans that are offered to salaried employees including without limitation health insurance coverage, disability, participation in the Company’s 401(k) plan and any applicable incentive programs; (vi) certain severance detailed below; and (vii) covenants not to compete or solicit employees for eighteen months following termination or to disclose confidential information. The 2010 LTIP annual grant figure is a target, not a minimum.
The provisions regarding Mr. Korwin’s termination of employment are generally the same as those of Mr. Madlock.
Under the employment agreement, Mr. Korwin agrees: (i) not to disclose Company confidential information during the term and at all times thereafter; (ii) not to compete with the Company during the term and for a period of eighteen months thereafter; and (iii) not to solicit employees or customers during the term and for a period of eighteen months thereafter.
On April 25, 2018, the Board of Directors approved and adopted a cash retention bonus pool, which is described in more detail under “Retention Bonuses.” Subject to the terms of this retention bonus arrangement, in the event of certain involuntary terminations, the Company will pay Mr. Korwin a retention bonus in the amount of up to $310,000.
Michael A. Gaul
Effective April 28, 2016, the Company entered into an executive employment agreement with Michael Gaul.
Mr. Gaul’s employment agreement provides for:(i) at-will employment; (ii) a current annual base salary of $241,119 subject to annual review by the SVP, Operations; (iii) eligibility for a performance bonus of 40% of his annual base salary, based on the STIP, provided that certain target objectives set by the SVP, Operations, have been attained; (iv) eligibility for participation in the 2010 LTIP with an annual grant target award of $125,000; (v) eligibility for participation in the Company’s employee benefits plans that are offered to salaried employees, including, without limitation, health insurance coverage, disability, 401(k) plan,Non-Qualified Deferred Compensation Plan and any applicable incentive programs; (vi) certain severence detailed below; and (vii) covenants not to compete or solicit employees for eighteen months following termination or to disclose confidential information.
If Mr. Gaul’s employment is terminated for any reason other than “cause” (as defined below), death or disability, or if his employment is involuntarily terminated within twelve months of a change in control (as defined below), the Company will pay Mr. Gaul: (i) severance equal to nine months’ salary (or 140% of his annual base salary in connection with a change in control), payable over a period of nine months (or twelve months in connection with change in control) as a part of the Company’s standard payroll; (ii) nine months of COBRA premiums (or twelve months in connection with a change in control); and (iii) outplacement services in an amount not to exceed $25,000. Mr. Gaul’s receipt of such benefits is subject to his delivery of a signed release of claims and the return of all property in his possession or control that belongs to the Company. In addition, if Mr. Gaul violates the confidentiality, nonsolicitation, and noncompetition covenants set forth in the employment agreement, the Company may terminate such benefits and Mr. Gaul will repay any such benefits he has received in excess of one month.
Under Mr. Gaul’s employment agreement, “cause” means any of the following: (a) personal dishonesty; (b) gross negligence; (c) violation of any law, rule or regulation; (d) breach of applicable confidentiality, nonsolicitation or noncompetition provisions to which he is subject, including such provisions under the employment agreement; (e) a breach of any material provision of the Company’s Code of Business Conduct and Ethics or other policies and procedures; (f) use of alcohol or drugs to the extent such use adversely affects his ability to perform his duties or adversely affects the business reputation of Mr. Gaul or the Company; (g) use of illegal drugs; or (h) failure or refusal to substantially perform his duties and responsibilities to the Company as reasonably determined from time to time by the SVP, Operations of the Company (or his designee).
Under Mr. Gaul’s employment agreement “change in control” means: (i) any one person, or more than one person acting as a group, acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than fifty percent of the total fair market value or total voting power of the stock of the Company; (ii) any one person, or more than one person acting as a group, acquires (or has acquired during any twelve month period) ownership of stock of the Company possessing thirty percent or more of the total voting power of the stock of the Company; (iii) a majority of the members of the Board of Directors are replaced during any twelve month period by directors whose appointment is not endorsed by a majority of the members of the Board of Directors before the date of appointment or election; or (iv) any one person, or more than one person acting as a group, acquires (or has acquired during any twelve month period) assets from the Company that have a total gross fair market value equal to or more than forty percent of the total gross fair market value of all of the assets of the Company immediately before such acquisition or acquisitions.
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Under the employment agreement, Mr. Gaul agrees: (i) not to disclose Company confidential information during the term and at all times thereafter; (ii) not to compete with the Company during the term and for a period of eighteen months thereafter; and (iii) not to solicit employees or customers during the term and for a period of twelve months thereafter.
On April 25, 2018, the Board of Directors approved and adopted a cash retention bonus pool, which is described in more detail under “Retention Bonuses.” Subject to the terms of this retention bonus arrangement, in the event of certain involuntary terminations, the Company will pay Mr. Gaul a retention bonus in the amount of up to $215,000.
Joseph T. Schneider
Effective May 26, 2015, the Company entered into an employment agreement with Joseph T. Schneider, which was amended September 23, 2015. As described above, Mr. Schneider has resigned.
Mr. Schneider’s employment agreement, as amended, provides for:(i) at-will employment; (ii) annual base salary of $265,000, subject to annual review by the Chief Executive Officer; (iii) eligibility for a performance bonus of 45% of Mr. Schneider’s annual base salary, based upon the STIP, provided that certain target objectives set by the Chief Executive Officer are attained; (iv) eligibility for participation in the 2010 LTIP with an annual grant target award of $150,000; (v) eligibility for participation in the Company’s employee benefits plans that are offered to salaried employees including, without limitation, health insurance coverage, disability, participation in the Company’s 401(k) plan and any applicable incentive programs; (vi) certain severance detailed below; and (vii) covenants not to compete or solicit employees for twelve months following termination or to disclose confidential information. The 2010 LTIP annual grant figure is a target, not a minimum, and the retention bonus discussed below was counted towards the targeted figure for fiscal year 2017.
If Mr. Schneider’s employment is terminated for any reason other than “cause” (as defined below), death or disability, or if his employment is involuntarily terminated within twelve months of a change in control (as defined below), the Company will pay Mr. Schneider: (i) severance equal to nine months’ salary (or 145% of his annual base salary in connection with a change in control), payable over a period of nine months (or twelve months in connection with change in control) as a part of the Company’s standard payroll; (ii) nine months of COBRA premiums (or twelve months in connection with a change in control); and (iii) outplacement services in an amount not to exceed $25,000. Mr. Schneider’s receipt of such benefits is subject to his delivery of a signed release of claims and the return of all property in his possession or control that belongs to the Company. In addition, if Mr. Schneider violates the confidentiality, nonsolicitation, and noncompetition covenants set forth in the employment agreement, the Company may terminate such benefits and Mr. Schneider will repay any such benefits he has received in excess of one month.
Under Mr. Schneider’s employment agreement, “cause” means any of the following: (a) personal dishonesty; (b) gross negligence; (c) violation of any law, rule or regulation; (d) breach of applicable confidentiality, nonsolicitation or noncompetition provisions to which he is subject, including such provisions under the employment agreement; (e) a breach of any material provision of the Company’s Code of Business Conduct and Ethics or other policies and procedures; (f) use of alcohol or drugs to the extent such use adversely affects his ability to perform his duties or adversely affects the business reputation of Mr. Schneider or the Company; (g) use of illegal drugs; or (h) failure or refusal to substantially perform his duties and responsibilities to the Company as reasonably determined from time to time by the President and Chief Executive Officer of the Company (or his designee).
Under Mr. Schneider’s employment agreement “change in control” means: (i) any one person, or more than one person acting as a group, acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than fifty percent of the total fair market value or total voting power of the stock of the Company; (ii) any one person, or more than one person acting as a group, acquires (or has acquired during any twelve month period) ownership of stock of the Company possessing thirty percent or more of the total voting power of the stock of the Company; (iii) a majority of the members of the Board of Directors are replaced during any twelve month period by directors whose appointment is not endorsed by a majority of the members of the Board of Directors before the date of appointment or election; or (iv) any one person, or more than one person acting as a group, acquires (or has acquired during any twelve month period) assets from the Company that have a total gross fair market value equal to or more than forty percent of the total gross fair market value of all of the assets of the Company immediately before such acquisition or acquisitions.
Under the employment agreement, Mr. Schneider agrees: (i) not to disclose Company confidential information during the term and at all times thereafter; (ii) not to compete with the Company during the term and for a period of twelve months thereafter; and (iii) not to solicit employees or customers during the term and for a period of twelve months thereafter.
Mr. Schneider resigned as Senior Vice President of Sales and Marketing of the Company effective April 13, 2018. Under the terms of his employment agreement, upon his voluntary resignation, the Company was required to pay Mr. Schneider his base salary on apro-rata basis that accrued up to the effective date of his resignation. Mr. Schneider remains subject to his existing restrictive covenants under the employment agreement, including a covenant not to compete for 12 months following the date of his termination.
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Table – Potential Payments upon Termination or Change in Control
The following is a table showing estimated payments and benefits to the Named Executive Officers upon termination without cause or change in control, assuming the event triggering payment occurred on July 1, 2018. Other than as set forth below, all contracts, agreements, plans or arrangements arenon-discriminatory in scope, term and operation and are generally available to all salaried employees (including without limitation payments upon death, disability and retirement).
| | | | | | | | | | | | | | | | |
Named Executive Officer | | Termination | | | Change in Control | |
Joseph J. Hartnett | | | | | | | | | | | | | | | | |
Salary | | $ | — | | | | | | | $ | — | | | | | |
Bonus | | | | | | | | | | | | | | | | |
Value Realized Upon Vesting of Equity-Based Awards (1) | | | — | | | | | | | | — | | | | | |
COBRA Premium | | | — | | | | | | | | — | | | | | |
| | | | | | | | | | | | | | | | |
Total | | $ | — | | | | | | | $ | — | | | | | |
| | | | | | | | | | | | | | | | |
Joseph G. McCormack(2) | | | | | | | | | | | | | | | | |
Salary | | $ | 251,250 | | | | | | | $ | 485,750 | | | | (7 | ) |
Bonus | | | 400,000 | | | | (5 | ) | | | 75,000 | | | | (6 | ) |
Value Realized Upon Vesting of Equity-Based Awards (1) | | | — | | | | | | | | 453,595 | | | | | |
Outplacement Services | | | 25,000 | | | | | | | | 25,000 | | | | (7 | ) |
COBRA Premium | | | 15,398 | | | | | | | | 20,531 | | | | (7 | ) |
| | | | | | | | | | | | | | | | |
Total | | $ | 691,648 | | | | | | | $ | 1,059,876 | | | | | |
| | | | | | | | | | | | | | | | |
Gordon B. Madlock(3) | | | | | | | | | | | | | | | | |
Salary | | $ | 228,812 | | | | | | | $ | 442,370 | | | | (7 | ) |
Bonus | | | 390,000 | | | | (5 | ) | | | 60,000 | | | | (6 | ) |
Value Realized Upon Vesting of Equity-Based Awards (1) | | | — | | | | | | | | 307,752 | | | | | |
Outplacement Services | | | 25,000 | | | | | | | | 25,000 | | | | (7 | ) |
COBRA Premium | | | 11,803 | | | | | | | | 15,738 | | | | (7 | ) |
| | | | | | | | | | | | | | | | |
Total | | $ | 655,615 | | | | | | | $ | 850,860 | | | | | |
| | | | | | | | | | | | | | | | |
Steven M. Korwin(3) | | | | | | | | | | | | | | | | |
Salary | | $ | 198,527 | | | | | | | $ | 383,818 | | | | (7 | ) |
Bonus | | | 310,000 | | | | (5 | ) | | | 60,000 | | | | (6 | ) |
Value Realized Upon Vesting of Equity-Based Awards (1) | | | — | | | | | | | | 259,100 | | | | | |
Outplacement Services | | | 25,000 | | | | | | | | 25,000 | | | | (7 | ) |
COBRA Premium | | | 11,803 | | | | | | | | 15,738 | | | | (7 | ) |
| | | | | | | | | | | | | | | | |
Total | | $ | 545,330 | | | | | | | $ | 743,656 | | | | | |
| | | | | | | | | | | | | | | | |
Michael A. Gaul(4) | | | | | | | | | | | | | | | | |
Salary | | $ | 171,897 | | | | | | | $ | 320,874 | | | | (7 | ) |
Bonus | | | 215,000 | | | | (5 | ) | | | 45,839 | | | | (6 | ) |
Value Realized Upon Vesting of Equity-Based Awards (1) | | | — | | | | | | | | 197,116 | | | | | |
Outplacement Services | | | 25,000 | | | | | | | | 25,000 | | | | (7 | ) |
COBRA Premium | | | 15,398 | | | | | | | | 20,531 | | | | (7 | ) |
| | | | | | | | | | | | | | | | |
Total | | $ | 427,295 | | | | | | | $ | 609,360 | | | | | |
| | | | | | | | | | | | | | | | |
| (1) | The restricted stock and restricted stock units awarded under the 2010 LTIP, including the awards to the Named Executive Officers in fiscal years 2013 through 2017, inclusive, provide that the awards automatically become fully vested upon a Change in Control. Under the 2010 LTIP, upon termination of employment (as determined under criteria established by the Compensation Committee, including upon death or disability) or upon a Change in Control, the Compensation Committee may in its discretion waive any remaining restrictions applicable to any of the awards issued to the Named Executive Officers. Under the 2010 LTIP, “Change in Control” means: (i) any one person, or more than one person acting as a group, acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than fifty percent of the total fair market value or total voting power of the stock of the Company; (ii) any one person, or more than one person acting as a group, acquires (or has acquired during any twelve month period) ownership of stock of the company possessing thirty percent or more of the total voting power of the stock of the Company; (iii) a majority of the members of the Board of Directors is replaced during any twelve month period by directors whose appointment is not endorsed by a majority of the members of the Board of Directors before the date of appointment or election; or (iv) any one person, or more than one person acting as a group, acquires (or has acquired during any twelve month period) assets from the Company that have a total gross fair market value equal to or more than forty percent of the total gross fair market value of all of the assets of the Company immediately before such acquisition or acquisitions. |
In the event of acceleration of the vesting of the option awards, no value would be ascribed to the Named Executive Officers, as the option strike prices are all greater than the closing market price of the Company’s common stock as of June 29, 2018, being $18.99 per share.
The amounts reflect an acceleration of vesting of all awards of restricted stock and restricted stock units of the Named Executive Officers under the 2010 LTIP upon a change of control, based on the closing market price of the Company’s Common stock as of June 29, 2018, being $18.99 per share.
| (2) | The potential payments to Mr. McCormack (except as provided in footnote 5) are payable upon termination by the Company other than “Cause” (as such term is defined above under the description of his employment agreement), death, or disability, or if Mr. McCormack terminates his employment for good reason, as such terms are defined above under the description of Mr. McCormack’s employment agreement. The amount includes: (i) monthly salary payable for nine months after termination (or, if the termination is within twelve months of a change of control, he will be entitled to 145% of the greater of his base salary as of the date of termination and his base salary as of the date of such change of control); (ii) nine months of COBRA premiums for medical insurance for Mr. McCormack and/or his dependents (or twelve months of COBRA premiums if the termination is within twelve months of a change of control); and (iii) outplacement services for Mr. McCormack in an amount not to exceed $25,000. |
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| (3) | The potential payment to Messrs. Madlock and Korwin (except as provided in footnote 6) are only payable if the Company terminates employment for any reason other than “just cause” (as such term is defined above under the respective description of their employment agreements), death or disability. The amount includes (i) nine months’ salary payable over nine months as part of the Company standard payroll (or, if the termination is within twelve months of a change of control, he will be entitled to 145% of the greater of his base salary as of the date of termination and his base salary as of the date of such change of control), (ii) nine months of COBRA premiums for medical insurance for Messrs. Madlock and Korwin and/or their dependents (twelve months for a Change in Control), and (iii) up to $25,000 for outplacement services. |
| (4) | The potential payments to Mr. Gaul (except as provided in footnote 6) are only payable if the Company terminates employment for any reason other than “just cause” (as such term is defined above under the description of his employment agreement), death or disability. The amount includes (i) nine months’ salary payable over nine months as part of the Company standard payroll (or, if the termination is within twelve months of a change of control, he will be entitled to 140% of the greater of his base salary as of the date of termination and his base salary as of the date of such change of control), (ii) nine months of COBRA premiums for medical insurance for Mr. Gaul his dependents (twelve months for a Change in Control), and (iii) up to $25,000 for outplacement services. |
| (5) | On April 25, 2018, the Board of Directors approved and adopted a cash retention bonus pool, which is described in more detail under “Retention Bonuses.” Subject to the terms of this retention bonus arrangement, in the event of certain involuntary terminations, the Company will pay Mr. McCormack a retention bonus in the amount of up to $400,000, Mr. Madlock a retention bonus in the amount of up to $390,000, Mr. Korwin a retention bonus in the amount of up to $310,000 and Mr. Gaul a retention bonus in the amount of up to $215,000. |
| (6) | The 2019 STIP awards provide for payment of 50% of the target upon a Change in Control of the Company. |
| (7) | These amounts are only payable in the event of the applicable officer’s involuntary termination within twelve months of a Change in Control. |
Target Stock Ownership for Management
In fiscal year 2015, the Board of Directors approved target unrestricted common stock ownership guidelines for management, including Named Executive Officers, as follows: (i) the Chief Executive Officer must attain stock ownership equal to 300% of base salary within five years after eligibility under the LTIP; (ii) the other Named Executive Officers must attain stock ownership equal to 150% of base salary within five years after eligibility under the LTIP; and (iii) the other executive officers must attain stock ownership equal to 100% of base salary (until such time, 50% of all new stock grants, net of voluntary stock forfeitures, must be retained by the applicable executive officer). If any Named Executive Officer’s target is not met within five years, 50% of such Named Executive Officer’s payment under the STIP will be paid in common stock until the target is met. Prior to approval of such targets, the target was 250% of base salary in excess of $100,000 to be attained within five years. As a result of the potential sale of the Company, executive officers have been prohibited from acquiring or disposing of Company stock. In fiscal 2018 only Mr. Madlock did not meet stock ownership guidelines for the Named Executive Officers.
Monitoring Risks Related to Compensation Policies and Practices
Our Compensation Committee and our Board of Directors believes that our compensation programs are appropriately designed to attract and retain talent and properly incentivize our employees. We have compared our compensation policies and programs to those of other similar companies in making our determination. Our Compensation Committee and Board of Directors are aware that if the programs are not carefully designed, the programs could incentivize executives to take imprudent business risks. Although our programs are generally based onpay-for-performance and provide incentive-based compensation, our programs also include mitigation factors to help ensure that our employees and executives are not incentivized to take risks that could adversely affect our business. We believe that the following features of our compensation program help to mitigate risks:
Oversight by the Compensation Committee and the Board of Directors and frequent reporting on compensation matters by management to the Compensation Committee and the Board of Directors;
| • | | A large portion of each employee’s compensation is base salary, so we do not believe our employees are dependent on achieving high incentive compensation to satisfy their basic financial needs (see“Allocation of Compensation Components” for the percentages that each element of compensation bears to total compensation); |
Careful consideration of plan targets and final payout amounts with targets focusing on reportable financial metrics;
Significant ownership goals by key executives in our common stock;
Inclusion of both short-term (such as incentive pay based upon the profitability and financial health of the Company) and long-term goals (such as using restricted stock and vesting over time based upon achieving specific performance goals);
Providing for a mixture of both cash and equity-based compensation;
The short-term incentive opportunities under the STIP are capped at two times the applicable target;
27
The measures for both the short-term and long-term incentive plans are aligned with achievable operating and strategic plans for the Company, and the payouts at threshold, target and maximum are at reasonable levels such that management is not incentivized to achieve short-term goals that are adverse to the long-term well-being of the Company;
The long-term incentive opportunities under the Company’s LTIP are based upon achieving specific measurable performance goals over time (i.e., the participants do not receive the benefit of the awards simply by virtue of employment with the Company);
| • | | We have adopted a clawback policy in accordance with applicable laws and regulations (see a description under“Clawback Policy”). |
After review of our various compensation policies and programs, the Company does not believe that its compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subjectCompany.Director Compensation
General
Effective November 4, 2015, the annual retainer payable to the risk that controls may become inadequate because of changesindependent directors is as follows: (i) to the independent directors other than the Chairman, $90,000, being $40,000 in conditions, or thatcash payable quarterly and $50,000 as an annual stock grant; and (ii) to the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Sparton Corporation maintained,Chairman, $145,000, being $70,000 in all material respects, effective internal control over financial reportingcash payable quarterly and $75,000 as of July 2, 2017,an annual stock grant. The increases in director compensation were based on the COSO criteria.
We also have audited, in accordance withCommittee’s review of data published by the
standardsNational Association of
Corporate Directors (“NACD”) regarding director compensation.In addition, directors serving on the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sparton Corporation as of July 2, 2017 and July 3, 2016,Compensation Committee and the related consolidated statementsNominating & Corporate Governance Committee are paid $1,000 for each regularly scheduled committee meeting. Directors serving on the Audit Committee are paid $1,100 for each regularly scheduled meeting. The higher Audit Committee fees reflect the additional time the committee spends on Company matters. Directors serving on the Process Committee receive a monthly stipend of operations, comprehensive income (loss), cash flows$2,000. This monthly stipend reflects the additional time the committee spends on exploring and shareholders’ equity forevaluating strategic alternatives and other Company matters. An annual retainer in the amount of $10,000, $6,000 and $6,000 is paid in quarterly installments to the Chairman of each of the three yearsAudit Committee, Compensation Committee and Nominating and Corporate Governance Committee, respectively.
The number of shares of stock granted pursuant to the annual stock grant to independent directors is determined based on fair market value two (2) days after the later of: (i) the date of the annual shareholder meeting and (ii) the date of the earnings release for the first quarter. The annual stock grants for fiscal year 2017 were granted under the 2010 LTIP and are described in the period“Director Compensation” table below.
In fiscal 2018, the Board of Directors approved payment of the independent directors’ annual retainer entirely in cash, rather than a mix of cash and equity, related in part to restrictions on issuing new shares of common stock contained in the Merger Agreement. The retainer payments are paid quarterly to directors. Other than the payment of the retainer in cash rather than equity, the director compensation remained the same for fiscal year 2018.
Target Stock Ownership for Directors
In addition to the compensation described above, under guidelines approved by the Board of Directors, the directors are required to achieve a Company common stock ownership target, within five years, of a market value of three times the annual board retainer (consisting of cash and the value of stock grants). The target ownership includes shares paid as a portion of the Board of Directors retainer. All of our directors have achieved the target, other than Frank A. Wilson who joined the Board in fiscal 2015 and Alan L. Bazaar who joined the Board of Directors in fiscal 2016.
Director Compensation Table
Members of the Board of Directors of the Company who are not Named Executive Officers received the following compensation during the fiscal year ended July 2, 2017,1, 2018. Mr. Joseph J. Hartnett, the Interim President and our report dated September 15, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Grand Rapids, Michigan
September 14, 2017
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated herein by reference fromChief Executive Officer, did not receive compensation in fiscal year 2018 in his capacity as a member of the
Company’s Proxy Statement for the 2017 Annual MeetingBoard of
Shareholders. Information concerning executive officers is set forth in Part I, Item 1 of this Annual Report on Form 10-K.Directors.28
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference from the Company’s Proxy Statement for the 2017 Annual Meeting of Shareholders.
| | | | | | | | | | | | |
| Name | | Fees Earned or
Paid in Cash | | | Stock Grants (7) | | | Total | |
Alan L. Bazaar (1) | | $ | 101,333 | | | $ | — | | | $ | 101,333 | |
James D. Fast (2) | | | 81,833 | | | | — | | | | 81,833 | |
Charles R. Kummeth (3) | | | 77,333 | | | | — | | | | 77,333 | |
David P. Molfenter (4) | | | 103,333 | | | | — | | | | 103,333 | |
James R. Swartwout (5) | | | 141,500 | | | | — | | | | 141,500 | |
Frank A. Wilson (6) | | | 89,833 | | | | — | | | | 89,833 | |
| | | | | | | | | | | | |
Total | | $ | 595,165 | | | $ | — | | | $ | 595,165 | |
| | | | | | | | | | | | |
| (1) | The cumulative number of shares of common stock issued to Mr. Bazaar as compensation in all years prior to fiscal year 2018 outstanding as of 2018 fiscal year end is 3,349. |
| (2) | The cumulative number of shares of common stock issued to Mr. Fast as compensation in all years prior to fiscal year 2018 outstanding as of 2018 fiscal year end is 17,779. |
| (3) | The cumulative number of shares of common stock issued to Mr. Kummeth as compensation in all years prior to fiscal year 2018 outstanding as of 2018 fiscal year end is 12,197. |
| (4) | The cumulative number of shares of common stock issued to Mr. Molfenter as compensation in all years prior to fiscal year 2018 outstanding as of 2018 fiscal year end is 19,582. |
| (5) | Mr. Swartwout is the current Chairman of the Board of Directors, and was elected to that position on February 5, 2016. The cumulative number of shares of common stock issued to Mr. Swartwout as compensation in all years prior to fiscal year 2018 outstanding as of 2018 fiscal year end is 21,938. |
| (6) | The cumulative number of shares of common stock issued to Mr. Wilson as compensation in all years prior to fiscal year 2018 outstanding as of 2018 fiscal year end is 6,472. |
| (7) | The Directors did not receive common stock of the Company in fiscal year 2018 as compensation for their services. All compensation was in the form of cash. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Director and Executive Officer Beneficial Ownership
The information requiredfollowing table shows the shares of the Company’s common stock beneficially owned (except as noted) by the Named Executive Officers, the members of our Board of Directors, and all executive officers and directors of the Company as a group as of July 1, 2018. “Named Executive Officers,” consistent with Item 402(a) of RegulationS-K promulgated under the Exchange Act, include: (i) the Company’s Chief Executive Officer and individuals acting in a similar capacity during fiscal year 2018, regardless of compensation level; (ii) all individuals serving as the Company’s Chief Financial Officer or acting in a similar capacity during fiscal year 2018, regardless of compensation level; (iii) the Company’s three most highly compensated executive officers other than the Chief Executive Officer and the Chief Financial Officer who were serving as executive officers at the end of fiscal year 2018; and (iv) up to two additional individuals who would have been included under (iii) above but for the fact that the applicable individual was not serving as an executive officer of the Company at the end of fiscal year 2018.
| | | | | | | | | | | | | | | | |
Name of Beneficial Owner | | Number of Shares | | | Shares Underlying
Options (1) | | | Total Number of
Shares Beneficially
Owned | | | Percent of
Class (2) | |
Alan L. Bazaar | | | 3,349 | | | | — | | | | 3,349 | | | | * | |
James D. Fast (3) | | | 38,307 | | | | — | | | | 38,307 | | | | * | |
Michael A. Gaul | | | 2,524 | | | | 4,566 | | | | 7,090 | | | | * | |
Joseph J. Hartnett | | | 48,580 | | | | — | | | | 48,500 | | | | * | |
Charles R. Kummeth | | | 16,197 | | | | — | | | | 16,197 | | | | * | |
David P. Molfenter | | | 41,056 | | | | — | | | | 41,056 | | | | * | |
James R. Swartwout (4) | | | 43,466 | | | | — | | | | 43,466 | | | | * | |
Frank A. “Andy” Wilson | | | 7,972 | | | | — | | | | 7,972 | | | | * | |
Joseph G. McCormack | | | 2,000 | | | | 7,810 | | | | 9,810 | | | | * | |
Gordon B. Madlock | | | 18,353 | | | | 9,632 | | | | 27,985 | | | | * | |
Joseph T. Schneider (5) | | | — | | | | 5,465 | | | | 5,465 | | | | * | |
Steven M. Korwin | | | 30,167 | | | | 7,302 | | | | 37,469 | | | | * | |
All Directors and executive officers as a group | | | 292,267 | | | | 41,020 | | | | 333,287 | | | | 3.37 | % |
| * | denotes a percentage of less than 1% |
| (1) | Amounts reflect shares under options held by executive officers and directors exercisable as of August 31, 2018. |
| (2) | Calculation is based on total shares outstanding as of July 1, 2018, being 9,834,723 shares of common stock, plus shares deemed to be beneficially owned by virtue of options to purchase those shares, if any, held by the applicable person or group for which the calculation is made. |
| (3) | Includes 25,663 shares over which Mr. Fast’s spouse shares voting and investment control. |
| (4) | Includes 26,953 shares over which Mr. Swartwout’s spouse shares voting and investment control. |
29
| (5) | Mr. Schneider’s employment terminated April 13, 2018 at which point all his unvested options and restricted stock options were forfeited. On July 12, 2018 (90 days after Mr. Schneider’s termination) his 5,465 unvested options were forfeited. |
The table under the caption “Common Stock Issuable Under Company Equity Compensation Plans” in Part III, Item 11 of this Form10-K/A is hereby incorporated herein by reference frominto this Part III, Item 12.
Principal Shareholders
As of July 1, 2018, unless otherwise described in the footnotes below, the persons named in the following table were known by management to be the beneficial owners of more than 5% of the Company’s Proxy Statementoutstanding common stock. Certain of the beneficial owners listed below share voting and investment power over their respective shares of Company common stock, as detailed in the footnotes below. As a result, certain of the share amounts and percentages stated below are held by multiple beneficial owners.
| | | | | | | | |
Name and Address of Beneficial Owner | | Amount and Nature of
Beneficial Ownership | | | Percent of Class | |
BlackRock, Inc. | | | 534,776 | (1) | | | 5.43 | % |
55 East 52nd Street | | | | | | | | |
New York, NY 10055 | | | | | | | | |
Dimensional Fund Advisors LP | | | 680,984 | (2) | | | 6.92 | % |
Building One 6300 Bee Cave Road Austin, TX 78746 | | | | | | | | |
GAMCO Investors, Inc.,et al. | | | 811,458 | (3) | | | 8.25 | % |
One Corporate Center. | | | | | | | | |
Rye, New York 10580-1435 | | | | | | | | |
Renaissance Technologies, LLC | | | 555,435 | (4) | | | 5.64 | % |
800 Third Ave. | | | | | | | | |
New York, NY 10022 | | | | | | | | |
The Vanguard Group | | | 701,650 | (5) | | | 7.13 | % |
100 Vanguard Blvd. | | | | | | | | |
Malvern, PA 19355 | | | | | | | | |
| (1) | The shares presented are according to information included in the Form 13F filed August 9, 2018 by BlackRock, Inc. (“BlackRock”) for the quarter ending June 30, 2018. BlackRock, a parent holding company or control person, is deemed to have beneficial ownership of 534,776 shares of common stock, with sole voting power over 519,193 shares and sole investment power over 534,776 shares. |
| (2) | The shares presented are according to information included in the Form 13F filed on August 10, 2018 by Dimensional Fund Advisors LP (“Dimensional”) for the quarter ending June 30, 2018. Dimensional, an investment adviser, is deemed to have beneficial ownership of 680,984 shares of common stock, with sole voting power over 660,597 shares and shared investment power over 680,984 shares. |
| (3) | The shares presented are according to information in the Schedule 13D/A filed on July 13, 2018, by Mario J. Gabelli and various entities which he directly or indirectly controls or for which he acts as chief investment officer (the “Reporting Persons”). That Schedule 13D/A reported that the Reporting Persons beneficially own shares of common stock as follows as of such date: |
| | | | | | | | |
Name | | Number of Shares | | | Percent of Class | |
GAMCO Asset Management Inc. | | | 202,462 | | | | 2.06 | % |
Gabelli Funds, LLC | | | 225,748 | | | | 2.30 | % |
Gabelli & Company Investment Advisers, Inc. | | | 190,261 | | | | 1.93 | % |
Teton Advisors, Inc. | | | 192,987 | | | | 1.96 | % |
Mario Gabelli is deemed to have beneficial ownership of the shares owned beneficially by each of the foregoing persons. Gabelli & Company Investment Advisers, Inc. is deemed to have beneficial ownership of the shares owned beneficially by G.research, LLC. Associated Capital Group, Inc. (“AC”), GAMCO Investors, Inc. (“GBL”) and GGCP, Inc. (“GGCP”) are deemed to have beneficial ownership of the shares owned beneficially by each of the foregoing persons other than Mario Gabelli and the Gabelli Foundation, Inc. Each of the Reporting Persons and their executive officers and directors and other related persons has the sole power to vote or direct the vote and sole power to dispose or to direct the disposition of the shares reported for it, either for its own benefit or for the 2017 Annual Meetingbenefit of Shareholders.its investment clients or its partners, as the case may be, except that (i) Gabelli Funds, LLC has sole dispositive and voting power with respect to the shares of the Company held by the The Gabelli Equity Trust Inc., The Gabelli Asset Fund, The GAMCO Growth Fund, The Gabelli Convertible and Income Securities Fund Inc., The Gabelli Value 25 Fund Inc., The Gabelli Small Cap Growth Fund, The Gabelli Equity Income Fund, The Gabelli ABC Fund, The GAMCO Global Telecommunications Fund, The Gabelli Gold Fund, Inc., The Gabelli Multimedia Trust Inc., The Gabelli Global Rising Income & Dividend Fund, The Gabelli Capital Asset Fund, The GAMCO International Growth Fund, Inc., The GAMCO Global Growth Fund, The Gabelli Utility Trust, The GAMCO Global Opportunity Fund, The Gabelli Utilities Fund, The Gabelli Dividend Growth Fund, The GAMCO Mathers Fund, The Gabelli Focus Five Fund, The Comstock Capital Value Fund, The Gabelli Dividend and Income Trust, The Gabelli Global Utility & Income Trust, The GAMCO Global Gold, Natural Resources, & Income Trust, The GAMCO Natural Resources Gold & Income Trust, The GDL Fund, Gabelli Enterprise Mergers & Acquisitions Fund, The Gabelli ESG Fund, Inc., The Gabelli Healthcare & Wellness Rx Trust, The Gabelli Global Small and Mid Cap Value Trust, Gabelli Value Plus+ Trust, The Gabelli Go Anywhere Trust, Bancroft Fund Ltd. and Ellsworth Growth & Income Fund Ltd. (each a “Fund”), which are registered investment companies, so long as the aggregate voting interest of all joint filers does not exceed 25% of their total voting interest in the Company and, in that event, the Proxy Voting Committee of each Fund shall respectively vote that Fund’s shares, (ii) at any time, the Proxy Voting Committee of each such Fund may take and exercise in its sole discretion the entire voting power with respect to the shares held by such fund under special circumstances such as regulatory considerations, and (iii) the power of Mario Gabelli, AC, GBL, and GGCP is indirect with respect to shares beneficially owned directly by other Reporting Persons.
30
| (4) | The shares presented are according to information included in the Form 13F/A filed on August 13, 2018 by Renaissance Technologies, LLC (“Renaissance”) for the quarter ending June 30, 2018. Renaissance is deemed to have beneficial ownership of 555,435 shares, with sole voting power over 555,435 shares and sole investment power over 555,435 shares. |
| (5) | The shares presented are according to information included in the Form 13F filed on August 14, 2018 by The Vanguard Group (“Vanguard”) for the quarter ending June 30, 2018. Vanguard is deemed to have beneficial ownership of 701,650 shares, with sole power to vote 13,850 shares, sole investment power 687,800 shares, and shared investment power over 13,850 shares. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
During fiscal year 2018, the Company was not a participant in any transaction in which any related person had or will have a direct or indirect material interest (nor is the Company a participant in any such transaction that is currently proposed).
Review and Approval of Related Person Transactions
The informationCompany reviews all relationships and transactions in which the Company and the directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. As required by Item 13 is incorporated herein by reference fromunder SEC rules, transactions that are determined to be directly or indirectly material to the Company or a related person are disclosed in the Company’s Proxy Statement forSEC filings. In addition, the 2017 Annual MeetingNominating and Corporate Governance Committee reviews and approves or ratifies any related person transaction that is required to be disclosed. Any member of Shareholders.the Nominating and Corporate Governance Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote respecting approval or ratification of the transaction, provided, however, that such director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction. Any review of such relationships and transactions is conducted in accordance with the Company’s Code of Business Conduct and Ethics, the Corporate Governance Guidelines, and the Charter of the Nominating and Corporate Governance Committee, as applicable.
Director Independence
Independence criteria and determination
The listing requirements under Section 303A.01 of the NYSE Listed Company Manual (the “Manual”) provide that a majority of the members of a listed company’s board of directors must be independent. The question of independence is determined with respect to each director pursuant to standards set forth in the Manual. The Manual also requires that certain committees be composed entirely of independent directors. The committees covered by this requirement are the Audit, Compensation, and Nominating and Corporate Governance Committees. Based upon the standards set forth in the Manual, as of the date of this Form10-K/A, six of the Board of Director’s seven members, being more than a majority of the Board of Directors, are independent. All current members of the Audit, Compensation, and Nominating and Corporate Governance Committees are independent in that those directors do not have a material relationship with the Company directly or as a partner, shareholder or affiliate of an entity that has a relationship with the Company.
In making such determinations, the Board considered (i) whether a director had, within the last three years, any of the relationships under Section 303A.02(b) of the Manual with the Company that would disqualify a director from being considered independent, (ii) whether the director had any disclosable transaction or relationship with the Company under Item 404 of RegulationS-K of the Securities Exchange Act of 1934, as amended (“Exchange Act”), which relates to transactions and relationships between directors and their affiliates, on the one hand, and the Company and its affiliates (including management), on the other, and (iii) the factors suggested in the NYSE’s Commentary to Section 303A.02, such as commercial, industrial, banking, consulting, legal, accounting, charitable or familial relationships, among other relationships, or other interactions with management that do not meet the absolute thresholds under Section 303A.02 or Item 404(a) but which, nonetheless, could reflect upon a director’s independence from management. In considering the materiality of any transactions or relationships that do not require disqualification under Section 303A.02(b), the Board of Directors considered the materiality of the transaction or relationship to the director, the director’s business organization and the Company and whether the relationship between (i) the director’s business organization and the Company, (ii) the director and the Company and (iii) the director and his or her business organization interfered with the relevant director’s business judgment.
Based on the foregoing, the Company has determined that the following directors are independent: Alan L. Bazaar, James D. Fast, Charles R. Kummeth, David P. Molfenter, James R. Swartwout and Frank A. Wilson.
31
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Relationship with Independent Registered Public Accountants
The information required by Item 14 is incorporated herein by reference fromAudit Committee appoints the independent registered public accounting firm to serve as the Company’s Proxy Statementindependent registered public accountant. BDO USA, LLP (“BDO USA”) is currently the independent registered public accountant for the Company. In addition to performing the audit of the Company’s consolidated financial statements, BDO USA provided various other services during fiscal year 2018. The Audit Committee has considered the provision of allnon-audit services performed by BDO USA during fiscal year 2018 with respect to maintaining auditor independence. The Audit Committee reviewed andpre-approved all professional services requested of, and performed by, BDO USA. The aggregate fees billed for fiscal year 2018 and 2017 Annual Meetingfor each of Shareholders.the following categories of services are set forth below.
Pursuant to thePre-Approval Policy, the Audit Committee annually reviews andpre-approves the services that may be provided by the independent registered public accountant, and such services are considered approved through the next annual review. The Audit Committee revises the list ofpre-approved services from time to time based on subsequent determinations. The Audit Committee may delegatepre-approval authority to its Chairman. The Chairman shall report anypre-approval decisions to the Audit Committee at its next scheduled meeting. ThePre-Approval Policy for audit andnon-audit services is available on the Company’s website at www.sparton.com.
Fees
The following table presents fees for services provided by BDO USA for the years ended July 1, 2018 and July 2, 2017:
| | | | | | | | |
| (In thousands) | | Year Ended | |
| | | July 1, 2018 | | | July 2, 2017 | |
Audit Fees | | $ | 496 | | | $ | 521 | |
Audit-Related Fees | | | 32 | | | | 34 | |
Tax Fees | | | 317 | | | | 356 | |
All Other Fees | | | — | | | | — | |
| | | | | | | | |
Total | | $ | 845 | | | $ | 911 | |
| | | | | | | | |
Audit Fees
These fees relate to the audit of the consolidated financial statements, including segment work, and for other attest services.
Audit-Related Fees
These fees primarily relate to audits of employee benefit plans.
Tax Fees
These fees relate to tax compliance, tax advice and tax planning and tax consultation for contemplated transactions.
All Other Fees
These fees are fornon-audit related government contract consulting services.
32
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| (a) | The following documents are filed as part of this Annual Report on Form10-K: |
See the Index to Consolidated Financial Statements on pageF-1.
| |
| 2. | Financial Statement Schedules |
See the Index to Consolidated Financial Statements on pageF-1.
| |
| 3. | See the Exhibit Index following the financial statements.below. |
| |
| (b) | See the Exhibit Index following the financial statements.below. |
| |
| (c) | Financial Statement Schedules. See (a) 2 above. |
33
ITEM 16. FORM 10-K SUMMARY
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INDEX TO EXHIBITS
|
| |
Sparton Corporation |
By: | /S/ JOSEPH J. HARTNETT
|
| Joseph J. Hartnett
Interim President and Chief Executive Officer
|
| Date: September 14, 2017 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
NameExhibit
Number | | Title | | Date |
| | | | |
/S/ JAMES R. SWARTWOUT | | Director, Chairman of the Board of Directors | | September 14, 2017 |
James R. Swartwout | | |
| | | | |
/S/ JOSEPH J. HARTNETT | | Director, Interim President and
Chief Executive Officer,
(Principal Executive Officer)
| | September 14, 2017 |
Joseph J. Hartnett | | |
| | | | |
/S/ ALAN L. BAZAAR | | Director | | September 14, 2017 |
Alan L. Bazaar | | |
| | | | |
/S/ JAMES D. FAST | | Director | | September 14, 2017 |
James D. Fast | | |
| | | | |
/S/ JOHN A. JANITZ | | Director | | September 14, 2017 |
John A. Janitz | | |
| | | | |
/S/ CHARLES R. KUMMETH | | Director | | September 14, 2017 |
Charles R. Kummeth | | |
| | | | |
/S/ DAVID P. MOLFENTER | | Director | | September 14, 2017 |
David P. Molfenter | | |
| | | | |
/S/ FRANK A. WILSON | | Director | | September 14, 2017 |
Frank A. Wilson | | |
| | | | |
/S/ JOSEPH G. MCCORMACK | | Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
| | September 14, 2017 |
Joseph G. McCormack | | |
SPARTON CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Sparton Corporation
Schaumburg, Illinois
We have audited the accompanying consolidated balance sheets of Sparton Corporation and subsidiaries as of July 2, 2017 and July 3, 2016, and the related consolidated statements of operations, comprehensive income (loss), cash flows and shareholders’ equity for each of the three years in the period ended July 2, 2017. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sparton Corporation and subsidiaries as of July 2, 2017 and July 3, 2016, and their results of operations and cash flows for each of the three years in the period ended July 2, 2017, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sparton Corporation’s internal control over financial reporting as of July 2, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated September 14, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Grand Rapids, Michigan
September 14, 2017
SPARTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
|
| | | | | | | |
| | July 2,
2017 | | July 3,
2016 |
| Assets | | | |
| Current Assets: | | | |
| Cash and cash equivalents | $ | 988 |
| | $ | 132 |
|
| Accounts receivable, net of allowance for doubtful accounts of $429 and $407, respectively | 45,347 |
| | 46,759 |
|
| Inventories and cost of contracts in progress, net | 60,248 |
| | 77,871 |
|
| Prepaid expenses and other current assets | 3,851 |
| | 5,844 |
|
| Total current assets | 110,434 |
| | 130,606 |
|
| Property, plant and equipment, net | 34,455 |
| | 33,320 |
|
| Goodwill | 12,663 |
| | 12,663 |
|
| Other intangible assets, net | 28,445 |
| | 36,933 |
|
| Deferred income taxes | 24,893 |
| | 25,784 |
|
| Other non-current assets | 6,253 |
| | 6,692 |
|
| Total assets | $ | 217,143 |
| | $ | 245,998 |
|
| Liabilities and Shareholders’ Equity | | | |
| Current Liabilities: | | | |
| Accounts payable | $ | 27,672 |
| | $ | 38,290 |
|
| Accrued salaries and wages | 11,453 |
| | 10,609 |
|
| Accrued health benefits | 1,150 |
| | 903 |
|
| Performance based payments on customer contracts | 1,749 |
| | — |
|
| Current portion of capital lease obligations | 269 |
| | 217 |
|
| Other accrued expenses | 11,959 |
| | 12,420 |
|
| Total current liabilities | 54,252 |
| | 62,439 |
|
| Credit facility | 74,500 |
| | 97,206 |
|
| Capital lease obligations, less current portion | 167 |
| | 332 |
|
| Environmental remediation | 5,468 |
| | 6,117 |
|
| Pension liability | 888 |
| | 1,276 |
|
| Total liabilities | 135,275 |
| | 167,370 |
|
| Commitments and contingencies |
| |
|
| Shareholders’ Equity: | | | |
| Preferred stock, no par value; 200,000 shares authorized; none issued | — |
| | — |
|
| Common stock, $1.25 par value; 15,000,000 shares authorized, 9,860,635 and 9,845,469 shares issued and outstanding, respectively | 12,326 |
| | 12,307 |
|
| Capital in excess of par value | 17,851 |
| | 16,407 |
|
| Retained earnings | 52,967 |
| | 51,650 |
|
| Accumulated other comprehensive loss | (1,276 | ) | | (1,736 | ) |
| Total shareholders’ equity | 81,868 |
| | 78,628 |
|
| Total liabilities and shareholders’ equity | $ | 217,143 |
| | $ | 245,998 |
|
See Notes to consolidated financial statements.
SPARTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
|
| | | | | | | | | | | |
| | For fiscal years |
| | 2017 | | 2016 | | 2015 |
| Net sales | $ | 397,562 |
| | $ | 419,362 |
| | $ | 382,125 |
|
| Cost of goods sold | 325,663 |
| | 339,214 |
| | 307,311 |
|
| Gross profit | 71,899 |
| | 80,148 |
| | 74,814 |
|
| Operating expense: | | | | | |
| Selling and administrative expenses | 54,110 |
| | 55,151 |
| | 46,969 |
|
| Internal research and development expenses | 1,670 |
| | 2,344 |
| | 1,502 |
|
| Amortization of intangible assets | 8,498 |
| | 9,592 |
| | 6,591 |
|
| Restructuring charges | — |
| | 2,206 |
| | — |
|
| Reversal of accrued contingent consideration | — |
| | (1,530 | ) | | — |
|
| Impairment of goodwill | — |
| | 64,174 |
| | — |
|
| Legal settlement | — |
| | — |
| | 2,500 |
|
| Total operating expense | 64,278 |
| | 131,937 |
| | 57,562 |
|
| Operating income (loss) | 7,621 |
| | (51,789 | ) | | 17,252 |
|
| Other income (expense): | | | | | |
| Interest expense, net | (4,437 | ) | | (3,803 | ) | | (2,456 | ) |
| Other, net | 60 |
| | 93 |
| | 159 |
|
| Total other expense, net | (4,377 | ) | | (3,710 | ) | | (2,297 | ) |
| Income (loss) before income taxes | 3,244 |
| | (55,499 | ) | | 14,955 |
|
| Income tax expense (benefit) | 1,927 |
| | (17,216 | ) | | 3,966 |
|
| Net income (loss) | $ | 1,317 |
| | $ | (38,283 | ) | | $ | 10,989 |
|
| Income (loss) per share of common stock: | | | | | |
| Basic | $ | 0.13 |
| | $ | (3.91 | ) | | $ | 1.10 |
|
| Diluted | $ | 0.13 |
| | $ | (3.91 | ) | | $ | 1.10 |
|
| Weighted average shares of common stock outstanding: | | | | | |
| Basic | 9,812,248 |
| | 9,786,315 |
| | 9,874,441 |
|
| Diluted | 9,812,273 |
| | 9,786,315 |
| | 9,885,961 |
|
See Notes to consolidated financial statements.
SPARTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
|
| | | | | | | | | | | |
| | For fiscal years |
| | 2017 | | 2016 | | 2015 |
| Net income (loss) | $ | 1,317 |
| | $ | (38,283 | ) | | $ | 10,989 |
|
| Other comprehensive income (loss), net: | | | | | |
| Pension experience gain (loss), net of tax benefit | 143 |
| | 100 |
| | (458 | ) |
| Pension amortization of unrecognized net actuarial loss, net of tax | 157 |
| | (682 | ) | | 54 |
|
| Pension pro rata recognition of lump-sum settlements, net of tax | 160 |
| | 218 |
| | — |
|
| Unrecognized gain (loss) on marketable equity securities, net of tax | — |
| | 85 |
| | (85 | ) |
| Other comprehensive income (loss), net | 460 |
| | (279 | ) | | (489 | ) |
| Comprehensive income (loss) | $ | 1,777 |
| | $ | (38,562 | ) | | $ | 10,500 |
|
See Notes to consolidated financial statements.
SPARTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | For fiscal years |
| | 2017 | | 2016 | | 2015 |
| Cash Flows from Operating Activities: | | | | | |
| Net income (loss) | $ | 1,317 |
| | $ | (38,283 | ) | | $ | 10,989 |
|
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Depreciation | 5,894 |
| | 6,083 |
| | 4,645 |
|
| Amortization of intangible assets | 8,498 |
| | 9,592 |
| | 6,591 |
|
| Deferred income taxes | 630 |
| | (18,562 | ) | | (873 | ) |
| Stock-based compensation expense | 1,463 |
| | 289 |
| | 1,885 |
|
| Amortization of deferred financing costs | 498 |
| | 298 |
| | 1,169 |
|
| Loss (gain) on sale of property, plant and equipment, net | (7 | ) | | 56 |
| | — |
|
| Loss on sale of securities available for sale | — |
| | 129 |
| | — |
|
| Impairment of goodwill | — |
| | 64,174 |
| | — |
|
| Reversal of accrued contingent consideration | — |
| | (1,530 | ) | | — |
|
| Excess tax benefit from stock-based compensation | — |
| | (162 | ) | | (1,044 | ) |
| Legal settlement | — |
| | — |
| | 2,500 |
|
| Gross profit effect of capitalized profit in inventory from acquisition | — |
| | — |
| | 299 |
|
| Changes in operating assets and liabilities, net of business acquisitions: | | | | | |
| Accounts receivable | 1,412 |
| | 23,829 |
| | (7,040 | ) |
| Inventories and cost of contracts in progress | 17,622 |
| | (3,419 | ) | | 501 |
|
| Prepaid expenses and other assets | 2,690 |
| | (609 | ) | | (2,319 | ) |
| Performance based payments on customer contracts | 1,749 |
| | (1,756 | ) | | (1,440 | ) |
| Accounts payable and accrued expenses | (10,298 | ) | | 8,003 |
| | (11,326 | ) |
| Net cash provided by operating activities | 31,468 |
| | 48,132 |
| | 4,537 |
|
| Cash Flows from Investing Activities: | | | | | |
| Acquisition of businesses, net of cash acquired | — |
| | 178 |
| | (97,319 | ) |
| Proceeds from sale of securities available for sale | — |
| | 857 |
| | — |
|
| Purchases of property, plant and equipment | (6,896 | ) | | (6,098 | ) | | (5,802 | ) |
| Proceeds from sale of property, plant and equipment | 22 |
| | 221 |
| | — |
|
| Purchase of securities available for sale | — |
| | — |
| | (986 | ) |
| Net cash used in investing activities | (6,874 | ) | | (4,842 | ) | | (104,107 | ) |
| Cash Flows from Financing Activities: | | | | | |
| Borrowings from credit facility | 130,082 |
| | 128,050 |
| | 215,835 |
|
| Repayments against credit facility | (152,788 | ) | | (185,344 | ) | | (102,335 | ) |
| Payment of debt financing costs | (765 | ) | | (692 | ) | | (1,423 | ) |
| Repurchase of stock | — |
| | (140 | ) | | (6,830 | ) |
| Payments under capital lease agreements | (267 | ) | | (108 | ) | | — |
|
| Excess tax benefit from stock-based compensation | — |
| | 162 |
| | 1,044 |
|
| Proceeds from the exercise of stock options | — |
| | — |
| | 165 |
|
| Net cash (used in) provided by financing activities | (23,738 | ) | | (58,072 | ) | | 106,456 |
|
| Net increase (decrease) in cash and cash equivalents | 856 |
| | (14,782 | ) | | 6,886 |
|
| Cash and cash equivalents at beginning of year | 132 |
| | 14,914 |
| | 8,028 |
|
| Cash and cash equivalents at end of year | $ | 988 |
| | $ | 132 |
| | $ | 14,914 |
|
| Supplemental disclosure of cash flow information: | | | | | |
| Cash paid for interest | $ | 3,828 |
| | $ | 3,506 |
| | $ | 1,747 |
|
| Cash paid for income taxes | 1,115 |
| | 766 |
| | 7,190 |
|
| Machinery and equipment financed under capital leases | 148 |
| | 656 |
| | — |
|
| Supplemental disclosure of non-cash investing activities: | | | | | |
| Adjustments to acquired companies' opening balance sheets | — |
| | 3,412 |
| | 603 |
|
See Notes to consolidated financial statements.
SPARTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Capital In Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
| | Shares | | Amount | |
| Balance at June 30, 2014 | 10,129,031 |
| | 12,661 |
| | 19,478 |
| | 78,944 |
| | (968 | ) | | 110,115 |
|
| Issuance of stock | 26,793 |
| | 34 |
| | (34 | ) | | — |
| | — |
| | — |
|
| Forfeiture of restricted stock | (39,031 | ) | | (49 | ) | | 49 |
| | — |
| | — |
| | — |
|
| Repurchase of stock | (249,420 | ) | | (312 | ) | | (6,518 | ) | | — |
| | — |
| | (6,830 | ) |
| Exercise of stock options | 19,245 |
| | 24 |
| | 141 |
| | — |
| | — |
| | 165 |
|
| Stock-based compensation expense | — |
| | — |
| | 1,885 |
| | — |
| | — |
| | 1,885 |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | 1,044 |
| | — |
| | — |
| | 1,044 |
|
| Comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | 10,989 |
| | (489 | ) | | 10,500 |
|
| Balance at June 30, 2015 | 9,886,618 |
| | 12,358 |
| | 16,045 |
| | 89,933 |
| | (1,457 | ) | | 116,879 |
|
| Issuance of stock | 17,245 |
| | 22 |
| | (22 | ) | | — |
| | — |
| | — |
|
| Forfeiture of restricted stock | (52,303 | ) | | (65 | ) | | 65 |
| | — |
| | — |
| | — |
|
| Repurchase of stock | (6,091 | ) | | (8 | ) | | (132 | ) | | — |
| | — |
| | (140 | ) |
| Stock-based compensation expense | — |
| | — |
| | 289 |
| | — |
| | — |
| | 289 |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | 162 |
| | — |
| | — |
| | 162 |
|
| Comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | (38,283 | ) | | (279 | ) | | (38,562 | ) |
| Balance at July 3, 2016 | 9,845,469 |
| | $ | 12,307 |
| | $ | 16,407 |
| | $ | 51,650 |
| | $ | (1,736 | ) | | $ | 78,628 |
|
| Issuance of stock | 41,905 |
| | 52 |
| | (52 | ) | | — |
| | — |
| | — |
|
| Forfeiture of restricted stock | (26,739 | ) | | (33 | ) | | 33 |
| | — |
| | — |
| | — |
|
| Stock-based compensation expense | — |
| | — |
| | 1,463 |
| | — |
| | — |
| | 1,463 |
|
| Comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | 1,317 |
| | 460 |
| | 1,777 |
|
| Balance at July 2, 2017 | 9,860,635 |
| | $ | 12,326 |
| | $ | 17,851 |
| | $ | 52,967 |
| | $ | (1,276 | ) | | $ | 81,868 |
|
See Notes to consolidated financial statements.
SPARTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
(1) Business
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”). See Note 16, Business Segments, of the "Notes to Consolidated Financial Statements" in this form 10-K for a further discussion of business segments. 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 and 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.
In fiscal year 2016, the Company changed from a calendar year to a 52-53 week year (5-4-4 basis) ending on the
Sunday closest to June 30. Therefore, the financial results of certain fiscal years and the associated 14 week quarters, will not
be exactly comparable to the prior and subsequent 52 week fiscal years and the associated quarters having only 13 weeks. The
change was not deemed a change in fiscal year for purposes of reporting subject to Rule 13a-10 or 15d-10; hence, no transition
reports are required. The Company made the change in fiscal years on a prospective basis and thus the change did not
impact the Company’s financial statements as of and for fiscal year 2016 or any interim period therein. The Company believes the change in fiscal years will provide numerous benefits, including more consistency between reported periods and to better align its reporting periods with the Company’s peer group.
On July 7, 2017, the Company, an Ohio corporation, entered into an Agreement and Plan of Merger (the “Merger Agreement”) among the Company, Ultra Electronics Holdings plc, a company organized under the laws of England and Wales ("Parent" or “Ultra”), and Ultra Electronics Aneira Inc., an Ohio corporation and an indirect wholly owned subsidiary of Parent (“Merger Sub”). Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into the Company (the “Merger”) with the Company surviving the Merger as a wholly owned subsidiary of Parent.
At the effective time of the Merger, each issued and outstanding share of common stock, par value $1.25 per share, of the Company (each, a “Share”) (other than (i) Shares that immediately prior to the effective time of the Merger are owned by Parent, Merger Sub or any other wholly owned subsidiary of Parent or owned by the Company or any wholly owned subsidiary of the Company (including as treasury stock) and (ii) Shares that are held by any record holder who is entitled to demand and properly demands payment of the fair cash value of such Shares as a dissenting shareholder pursuant to, and who complies in all respects with, the provisions of Section 1701.85 of the Ohio General Corporation Law (the “OGCL”)) will be cancelled and converted into the right to receive $23.50 per Share in cash, without interest.
The Merger Agreement provides for certain other termination rights for both the Company and Ultra, and further provides that, upon termination of the Merger Agreement under certain specified circumstances, the Company will be required to pay Ultra a termination fee of $7.5 million or Ultra will be required to pay Company a termination fee of $7.5 million.
(2) Summary of Significant Accounting Policies
Basis of presentation and principles of consolidation — The consolidated financial statements include the accounts of Sparton Corporation and subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications of prior year amounts have been made to conform to the current year presentation.
Use of estimates — Management of the Company has made a number of estimates, judgments and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities at the dates of the consolidated balance sheets and revenue and expense during the reporting periods to prepare these consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates.
Cash and cash equivalents — Cash and cash equivalents include cash on hand, demand deposits and money market funds with original maturities of three months or less. Cash equivalents are stated at cost which approximates fair value.
Accounts receivable, credit practices and allowances for doubtful accounts — Accounts receivable are customer obligations generally due under normal trade terms for the industry. Credit terms are granted and periodically revised based on evaluations of the customers’ financial condition. The Company performs ongoing credit evaluations of its customers and although the Company does not generally require collateral, letters of credit or cash advances may be required from customers in order to support accounts receivable in certain circumstances. The Company maintains an allowance for doubtful accounts on receivables for estimated losses resulting from the inability of its customers to make required payments. The allowance is estimated primarily based on 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. When management determines that it is probable that an account will not be collected, all or a portion of the amount is charged against the allowance for doubtful accounts.
Inventories and costs of contracts in progress — Inventories are valued at the lower of cost (first-in, first-out basis) or market and include costs related to long-term contracts as disclosed below. Inventories, other than contract costs, are principally raw materials and supplies. Certain United States government contracts allow Sparton to submit performance based billings, which are then applied against inventories purchased and manufacturing costs incurred by the Company throughout its performance under these contracts. Inventories were reduced by performance based payments from the U.S. government for costs incurred related to long-term contracts, thereby establishing inventory to which the U.S. government then has title, of $8,541 and $8,963 respectively, at July 2, 2017 and July 3, 2016. At July 2, 2017 and July 3, 2016, current liabilities include performance based payments of $1,749 and $0, respectively, on government contracts. As these payments were in excess of cost, there is no inventory to which the government would claim title and, therefore, no offset to inventory has been made.
Customer orders are based upon forecasted quantities of product manufactured for shipment over defined periods. Raw material inventories are purchased to fulfill these customer requirements. Within these arrangements, customer demands for products frequently change, 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 $544, $1,653 and $927 for fiscal years 2017, 2016 and 2015, 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 minimal subsequent sales of excess and obsolete inventory during fiscal years 2017, 2016 and 2015 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.
Property, plant and equipment, net — Property, plant and equipment are stated at cost less accumulated depreciation. Major improvements and upgrades are capitalized while ordinary repair and maintenance costs are expensed as incurred. Depreciation is provided over estimated useful lives on both straight-line and accelerated methods. Estimated useful lives generally range from twelve to thirty-nine years for buildings and improvements, twelve years for machinery and equipment and five years for test equipment.
Goodwill — Goodwill 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 2017, 2016 and 2015.
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.
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 below in this note under “Fair value measurements.” 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 years 2017 and 2015, 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 reporting units was in excess of its respective carrying amount and therefore, no further testing was required. In fiscal 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 revenue 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 the Step 2 analysis of goodwill impairment 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 $64,174. Prior to the fourth quarter of fiscal 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 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 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/trade names, acquired unpatented technology and patents. At July 2, 2017, customer relationships and non-compete agreements totaling $21,416 and $1,222, respectively, are included in the MDS segment, while customer relationships, non-compete agreements, trademarks/trade names, unpatented technology and patents totaling $3,961, $123, $1,221, $494 and $8 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 below in this note under “Fair value measurements.” The Company had a third party evaluation performed in the fourth quarter of fiscal year 2016 and performed an internal evaluation in the fourth quarter of fiscal 2017. It was determined for both 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.
Stock-based compensation — The Company measures the cost of employee and director services received in exchange for an award of equity-based securities using the fair value of the award on the date of the grant. The Company recognizes that cost on a straight-line basis over the period that the award recipient is required to provide service to the Company in exchange for the award and, for certain awards, subject to the probability that related performance targets will be met.
Net earnings (loss) per share — Basic earnings (loss) per share is based on the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings or loss per share include the dilutive effect of additional potential common shares issuable under our stock-based compensation plans and are determined using the treasury stock method. Unvested restricted stock awards, which contain non-forfeitable rights to dividends whether paid or unpaid, are included in the number of shares outstanding for both basic and diluted earnings or loss per share calculations. Unvested contingently issuable participating restricted shares are excluded from basic earnings (loss) per share. In the event of a net loss, unvested restricted stock awards are excluded from the calculation of both basic and diluted loss per share.
Income taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced through the establishment of a valuation allowance at the time, based upon available evidence, it becomes more likely than not that the deferred tax assets will not be realized.
The Company recognizes 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 a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Management also assesses whether uncertain tax positions, as filed, could result in the recognition of a liability for possible interest and penalties. The Company's policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense.
ERAPSCO Agreement — Sparton is a 50/50 joint venture (“JV”) partner with UnderSea Sensor Systems, Inc. (“USSI”), the only other major producer of U.S. derivative sonobuoys. USSI’s parent company is Ultra Electronics Holdings plc, based in the United Kingdom. The JV operates under the name ERAPSCO and allows Sparton and USSI to combine their own unique and complementary backgrounds to jointly develop and produce U.S. derivative sonobuoy designs for the U.S. Navy as well as foreign governments that meet Department of State licensing requirements. ERAPSCO maintains the DBA Sonobuoy TechSystems through which it conducts business directly with foreign governments. In concept, and in practice, ERAPSCO serves as a pass-through entity maintaining no funds or assets. While the JV provides the opportunity to maximize efficiencies in the design and development of the related sonobuoys, both of the joint venture partners function independently as subcontractors; therefore, there is no separate entity to be accounted for or consolidated. The Board of Directors of ERAPSCO has the responsibility for the overall management and operation of the JV. The six member board consists of equal representation (full time employees) from both JV partners for three year terms. Personnel necessary for the operation of ERAPSCO, specifically a president, vice president, general manager, contract administrator and financial manager, are similarly assigned by the JV partners for rotating three year terms and the costs of these assigned individuals are borne by the party assigning the personnel. In response to a customer request for proposal (“RFP”) that ERAPSCO will bid on, the Board of Directors of ERAPSCO approves both the composition of a response to the RFP and the composite bid to be submitted to the customer. The Board of Directors strives to divide the aggregate contract awards at a 50/50 share ratio. Each JV partner bears the costs it incurs associated with the preparation and submission of proposals. Each JV partner submits to ERAPSCO a
proposal for the estimated price of performing that portion of the RFP applicable to it. Upon award of a contract to the JV, separate subcontracts are generated between ERAPSCO and each of the JV partners defining the responsibilities and compensation. These subcontracts contain terms and conditions consistent with the prime contract. Each JV partner is responsible to ERAPSCO for the successful execution of its respective scope of work under its subcontract and each JV partner is individually accountable for the profit or losses sustained in the execution of the subcontract against its respective bid. In some instances, either Sparton or USSI handles the complete production and delivery of sonobuoys to ERAPSCO's customer. In other instances, either Sparton or USSI starts the production and ship completed subassemblies to the other party for additional processing before being delivered to the customers. Under ERAPSCO, individual contract risk exposures are reduced, while the likelihood of achieving U.S. Navy and other ASW objectives is enhanced. ERAPSCO has been in existence since 1987 and historically, the agreed upon products included under the JV were generally developmental sonobuoys. In 2007, the JV expanded to include all future sonobuoy development and substantially all U.S. derivative sonobuoy products for customers outside of the United States. The JV was further expanded three years later to include all sonobuoy products for the U.S. Navy beginning with U.S. Navy's 2010 fiscal year contracts.
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. The Company additionally has certain other long-term contracts that are accounted for under the units shipped percentage-of-completion method. Certain upfront engineering costs in relation to certain of these long-term contracts are capitalized and recognized over the life of the contract. At July 2, 2017 and July 3, 2016, current liabilities include payments in excess of costs of $1,749 and $0, respectively, on government contracts. As noted above, sales related to these billings are recognized based upon units completed and are not recognized at the time of billings. A provision for the entire amount of a loss on a contract is charged to operations as soon as the loss is identified and the amount is reasonably determinable. Shipping and handling costs are included in cost of goods sold.
Advertising Costs — The Company expenses advertising costs as they are incurred. Advertising expense was $25, $106 and $160 for fiscal years 2017, 2016 and 2015, respectively.
Research and development expenditures — Internal research and development expenses reflect costs incurred for the internal development of technologies for use in undersea warfare, navigation, handheld targeting applications as wells 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. The Company incurred $1,670, $2,344 and $1,502 of internally funded research and development expenses during fiscal years 2017, 2016 and 2015, respectively. Customer funded research and development costs, which are usually part of a larger production agreement, totaled $5,610, $16,736 and $9,944 for the fiscal years 2017, 2016 and 2015, respectively.
Fair value measurements — Fair value estimates and assumptions and methods used to estimate the fair value of the Company’s assets and liabilities are made in accordance with the requirements of the Financial Accounting Standards Board (the “FASB”), Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”).
ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1 are observable inputs such as quoted prices in active markets; Level 2 are inputs other than the quoted prices in active markets that are observable either directly or indirectly; and Level 3 are unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data when available and to minimize the use of unobservable inputs when determining fair value. As of July 2, 2017 and July 3, 2016, the Company had no assets or liabilities which it measures and carries on its balance sheet at fair value on a recurring basis.
The fair value of the Company's Credit Facility (as defined below) debt at July 2, 2017 approximated its carrying value of $74,500, as the rates on these borrowings are variable in nature. In the event of an acquisition, the Company estimates the fair value of the assets acquired and liabilities assumed at acquisition date. See Note 3, Acquisitions, of the "Notes to Consolidated Financial Statements" in this form 10-K for a further discussion of these estimated fair values.
At June 30, 2015, the Company established liabilities for accrued contingent consideration related to the acquisition of RTE ($350) and Hunter ($1,180). In fiscal year 2016, these liabilities were reversed to income as the contingent consideration was not achieved.
Market risk exposure — The Company manufactures its products in the United States, Canada and Vietnam. Sales of the Company’s products are in the U.S. and foreign markets. The Company is subject to foreign currency exchange rate risk relating to intercompany activity and balances and to receipts from customers and payments to suppliers in foreign currencies. Adjustments related to the remeasurement of the Company's Canadian and Vietnamese financial statements into U.S. dollars are included in current earnings. As a result, the Company's financial results could be affected by factors such as changes in foreign currency exchange rates or economic conditions in the domestic and foreign markets in which the Company operates. However, minimal third party receivables and payables are denominated in foreign currency and the related market risk exposure is considered to be immaterial.
The Company's revolving credit line, when drawn upon, is subject to future interest rate fluctuations which could potentially have a negative impact on cash flows of the Company. The Company had $74,500 outstanding under its credit facility at July 2, 2017. A prospective increase of 100 basis points in the interest rate applicable to the Company's outstanding borrowings under its Credit Facility would result in an increase of $745 in its annual interest expense. The Company is not party to any currency exchange or interest rate protection agreements as of July 2, 2017. See Note 8, Debt, of the "Notes to Consolidated Financial Statements" in this form 10-K for a further description on Sparton’s debt.
New accounting standards — In May 2014, the FASB issued Accounting Standards Update 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. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. Companies have the option of using either a full or modified retrospective approach in applying this standard. During fiscal 2016, the FASB issued three additional updates which further clarify the guidance provided in ASU 2014-09. The Company has identified key personnel to evaluate the guidance and approve a transition method, while also formulating a time line to review the potential impact of the new standard on its existing revenue recognition policies and procedures.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11 ("ASU 2015-11"), Simplifying theMeasurement 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 will be 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. The Company does not expect ASU 2015-11 to have a material impact on its consolidated financial statements when it is adopted 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 is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
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, 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 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.
(3) Acquisitions
Fiscal Year 2015
The following table represents the allocation of the total consideration to assets acquired and liabilities assumed in the 2015 acquisitions based on Sparton’s estimate of their respective fair values at the acquisition date:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Hunter | | Stealth | | KEP Marine | | RTEmd | | Argotec | | IED | | eMT |
| Total purchase consideration: | | | | | | | | | | | | | |
| Cash | $ | 55,194 |
| | $ | 12,558 |
| | $ | 4,300 |
| | $ | 2,332 |
| | $ | 350 |
| | $ | 3,000 |
| | $ | 20,000 |
|
| Common stock | 673 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Section 338 gross-up payable | 572 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Working capital adjustment | — |
| | — |
| | (147 | ) | | 103 |
| | 75 |
| | 292 |
| | 1,600 |
|
| Income tax adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | (271 | ) | | 469 |
|
| Total purchase consideration | $ | 56,439 |
| | $ | 12,558 |
| | $ | 4,153 |
| | $ | 2,435 |
| | $ | 425 |
| | $ | 3,021 |
| | $ | 22,069 |
|
| Assets acquired and liabilities assumed: | | | | | | | | | | | | | |
| Cash | $ | 687 |
| | $ | — |
| | $ | — |
| | $ | 206 |
| | $ | — |
| | $ | — |
| | $ | 1,505 |
|
| Accounts receivable | 10,455 |
| | 360 |
| | — |
| | 273 |
| | — |
| | — |
| | 4,444 |
|
| Inventories | 15,683 |
| | 562 |
| | 1,203 |
| | 134 |
| | 55 |
| | 450 |
| | 4,090 |
|
| Other assets | 682 |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | 56 |
|
| Property, plant and equipment | 3,195 |
| | — |
| | — |
| | 7 |
| | 118 |
| | — |
| | 584 |
|
| Goodwill | 29,277 |
| | 6,718 |
| | 1,570 |
| | 1,930 |
| | 232 |
| | 1,962 |
| | 6,959 |
|
| Other intangibles | 15,820 |
| | 5,415 |
| | 1,380 |
| | 800 |
| | 20 |
| | 880 |
| | 8,760 |
|
| Accounts payable and other liabilities | (19,360 | ) | | (497 | ) | | — |
| | (925 | ) | | — |
| | (271 | ) | | (4,329 | ) |
| Total assets acquired and liabilities assumed | $ | 56,439 |
| | $ | 12,558 |
| | $ | 4,153 |
| | $ | 2,435 |
| | $ | 425 |
| | $ | 3,021 |
| | $ | 22,069 |
|
Hunter Technology Corporation— On April 14, 2015, the Company acquired Hunter Technology Corporation ("Hunter"), with operations located in Milpitas, CA and Lawrenceville, GA, for $55,000. Hunter, which is part of the Company's MDS segment, provides electronic contract manufacturing in military and aerospace applications. Hunter provides engineering design, new product introduction and full-rate production manufacturing solutions working with major defense and aerospace companies, test and measurement suppliers, secure networking solution providers, medical device manufacturers and a wide variety of industrial customers.
Included in the Company’s Consolidated Statements of Income for fiscal year 2015 are net sales of $14,288 and net loss before income taxes $656, since the April 14, 2015 acquisition of Hunter.
Stealth.com — On March 16, 2015, the Company acquired substantially all of the assets of Stealth.com ("Stealth"), located in Woodbridge, ON, Canada, for $16,000 CAD ($12,558 USD). The acquired business, which is part of the Company's ECP segment, is a supplier of high performance rugged industrial grade computer systems and peripherals that include Mini PC/Small Form Factor Computers, Rackmount Server PCs, Rugged Industrial LCD Monitors, Rugged Portable PCs, Industrial Grade Keyboards and Rugged Trackballs and Mice.
Included in the Company’s Consolidated Statements of Income for fiscal year 2015 are net sales of $2,541 and income before income taxes of $384, since the March 16, 2015 acquisition of Stealth.
KEP Marine — On January 21, 2015, the Company acquired certain assets of KEP Marine, a division of Kessler-Ellis Products, located in Eatontown, NJ, for $4,300. The acquired business, which is part of the Company's ECP segment, designs and manufactures industrial displays, industrial computers and HMI software for the Marine market. These product lines have been consolidated into the Aydin Displays facility, located in Birdsboro, PA.
Real-Time Enterprises, Inc. — On January 20, 2015, the Company acquired Real-Time Enterprises, Inc. ("RTEmd"), located in Pittsford, NY, for $2,332. RTEmd will continue to service its current and future customers out of its Pittsford, NY location. The acquired business, which is part of the Company's MDS segment, is a developer of embedded software to operate medical devices and diagnostic equipment through a disciplined approach to product development and quality/regulatory
services with specific product experience such as patient monitoring, medical imaging, in-vitro diagnostics, electro-medical systems, surgical applications, ophthalmology, nephrology, infusion pumps and medical imaging.
Included in the Company’s Consolidated Statements of Income for fiscal year 2015 are net sales of $1,173 and loss before income taxes of $182, since the July 9, 2014 acquisition of eMT.
Argotec, Inc. — On December 8, 2014, the Company acquired certain assets of Argotec, Inc. ("Argotec"), located in Longwood, FL, for $350. The acquired business, which is part of the Company's ECP segment, is engaged in developing and manufacturing sonar transducer products and components for the U.S. Navy and also provides aftermarket servicing. These products have been consolidated into the Company's DeLeon Springs, FL location.
Industrial Electronic Devices, Inc. — On December 3, 2014, the Company acquired certain assets of Industrial Electronic Devices, Inc. ("IED"), located in Flemington, NJ, for $3,292. The acquired business, which is part of the Company's ECP segment, designs and manufactures a full line of rugged displays for the Industrial and Marine markets. IED's catalog spans over 600 standard, semi-custom and custom configurations, incorporating some of the most advanced flat panel displays and touch screen technology available. These product lines have been consolidated into the Aydin Displays facility, located in Birdsboro, PA.
Electronic Manufacturing Technology, LLC. — On July 9, 2014, the Company acquired Electronic Manufacturing Technology, LLC. (“eMT”), located in Irvine, CA, for $22,069, which included $1,505 of acquired cash. The acquired business, which is part of the Company's MDS segment, is engaged in the contract services business of manufacturing electromechanical controls and electronic assemblies. Their customer profile includes international Fortune 1000 manufacturers of highly reliable industrial excimer laser products, laser eye surgery sub-assemblies, target simulators for space and aviation systems, power modules for computerized tomography products, test systems for commercial aerospace OEMs and toll road antennas and control boxes.
Included in the Company’s Consolidated Statements of Income for fiscal year 2015 are net sales of $23,503 and income before income taxes of $2,452, since the July 9, 2014 acquisition of eMT.
The following table summarizes, on a pro forma basis, the combined results of operations of the Company and the acquired businesses of Hunter, Stealth, KEP, RTEmd, Argotec, IED and eMT, as though the acquisitions had occurred as of July 1, 2014. The pro forma amounts presented are not necessarily indicative of either the actual consolidated results had the acquisitions occurred as of July 1, 2014 or of future consolidated operating results (unaudited):
|
| | | |
| | Fiscal Year 2015 |
| Net sales | $ | 461,734 |
|
| Income before income taxes | 19,345 |
|
| Net income | 15,219 |
|
| Net income per share — basic | 1.54 |
|
| Net income per share — diluted | 1.54 |
|
The unaudited pro forma results presented above reflect: (1) incremental depreciation relating to fair value adjustments to property, plant and equipment; (2) amortization adjustments relating to fair value estimates of intangible assets; (3) elimination of interest expense relating to debt paid off in conjunction with the transaction; (4) incremental interest expense on assumed indebtedness and amortization of capitalized financing costs incurred in connection with the transactions; and (5) additional cost of goods sold relating to the capitalization of gross profit recognized in the year of acquisition as part of purchase accounting recognized for purposes of the pro forma as if it was recognized during the preceding year. The unaudited pro forma adjustments described above have been tax effected using Sparton's effective rate during the respective periods.
During fiscal 2016, the Company elected to adopt Accounting Standards Update No. 2015-16, Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustment. As a result, during fiscal year 2016, the Company recorded adjustments to the opening balance sheets of Hunter and RTEmd as follows:
|
| | | | |
| Changes to goodwill: | |
| | Inventory | $ | 5,052 |
|
| | Accounts receivable | 386 |
|
| | Property, plant and equipment | (974 | ) |
| | Intangible assets - customer relationships | (700 | ) |
| | Other assets and liabilities, net | (352 | ) |
| | Non-cash adjustments | 3,412 |
|
| | Adjustment to purchase consideration | (750 | ) |
| | Total | $ | 2,662 |
|
For fiscal year 2016, the Company recorded depreciation expense of $362 in cost of goods sold and amortization of intangible assets of $26 that would have otherwise been recorded in prior periods.
Certain of the acquisitions included escrow accounts based on final working capital adjustments and other performance criteria. During fiscal year 2016, the Company received $750 in adjustments to the purchase price under the terms of an acquisition agreement, as reflected in the table above.
During fiscal year 2016, the Company recorded an adjustment to Goodwill of $428 which reduced certain tax liabilities related to the Company’s purchase of Hunter.
(4) Inventories and Cost of Contracts in Progress, net
The following are the major classifications of inventory, net of interim billings:
|
| | | | | | | |
| | July 2,
2017 | | July 3,
2016 |
| Raw materials | $ | 31,353 |
| | $ | 40,914 |
|
| Work in process | 19,098 |
| | 23,626 |
|
| Finished goods | 18,338 |
| | 22,294 |
|
| Total inventory and cost of contracts in progress, gross | 68,789 |
| | 86,834 |
|
| Inventory to which the U.S. government has title due to interim billings | (8,541 | ) | | (8,963 | ) |
| Total inventory and cost of contracts in progress, net | $ | 60,248 |
| | $ | 77,871 |
|
(5) Property, Plant and Equipment, net
Property, plant and equipment, net consists of the following:
|
| | | | | | | |
| | July 2,
2017 | | July 3,
2016 |
| Land and land improvements | $ | 1,439 |
| | $ | 1,429 |
|
| Buildings and building improvements | 28,121 |
| | 27,660 |
|
| Machinery and equipment | 46,502 |
| | 43,134 |
|
| Construction in progress | 4,463 |
| | 1,372 |
|
| Total property, plant and equipment | 80,525 |
| | 73,595 |
|
| Less accumulated depreciation | (46,070 | ) | | (40,275 | ) |
| Property, plant and equipment, net | $ | 34,455 |
| | $ | 33,320 |
|
(6) Other Non-current Assets
Other non-current assets consist of the following:
|
| | | | | | | |
| | July 2,
2017 | | July 3,
2016 |
| Deferred engineering and design costs - non-current | $ | 1,116 |
| | $ | 2,263 |
|
| Environmental remediation - indemnification asset | 1,606 |
| | 1,606 |
|
| Favorable lease, net | 138 |
| | 256 |
|
| Deferred financing fees, net | 1,887 |
| | 1,563 |
|
| Other | 1,506 |
| | 1,004 |
|
| Total other non-current assets | $ | 6,253 |
| | $ | 6,692 |
|
Engineering and design costs on long-term contracts not otherwise immediately reimbursed are deferred and recognized ratably over related revenue streams. For fiscal years 2017 and 2016, respectively, deferred engineering and design costs totaled $1,536 and $3,263 of which $420 and $1,000 were reflected in prepaid expenses and other current assets.
See Note 11, Commitments and Contingencies, of the "Notes to Consolidated Financial Statements" in this Form 10-K for a discussion of the Company's environmental remediation - indemnification asset.
The Company acquired a favorable leasehold in relation to its acquisition of Aydin Displays. The favorable leasehold is being amortized on a straight-line basis over the five year life of the lease and related amortization is reflected primarily within cost of goods sold on the consolidated statement of operations.
Costs incurred in connection with the Company’s current Credit Facility of $2,869 were deferred and amortized to interest expense over the five year term of the facility on a straight-line basis. Amortization of $498, $298 and $631 for these loan costs, as well as the previous revolving-credit facility's loan costs, were recognized and reported as interest expense for fiscal years 2017, 2016 and 2015, respectively.
The investment in securities available for sale was sold during fiscal year 2016 at a loss of $129.
(7) Goodwill and Other Intangible Assets
Changes in the carrying value of goodwill and ending composition of goodwill are as follows:
|
| | | | | | | | | | | |
| | July 3, 2016 |
| | Manufacturing & Design Services | | Engineered Components & Products | | Total |
| Goodwill, beginning of period | $ | 61,512 |
| | $ | 12,663 |
| | $ | 74,175 |
|
| Additions to goodwill | 2,662 |
| | — |
| | 2,662 |
|
| Impairment of goodwill | (64,174 | ) | | — |
| | $ | (64,174 | ) |
| Goodwill, end of period | $ | — |
| | $ | 12,663 |
| | $ | 12,663 |
|
There were no changes to the carrying value of goodwill during the fiscal year ended July 2, 2017.
The amortization periods, gross carrying amounts, accumulated amortization, accumulated impairments and net carrying values of intangible assets are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | July 2, 2017 |
| | Original Amortization Period in Months | | Gross Carrying Amount | | Accumulated Amortization | | Accumulated Impairments | | Net Carrying Value |
| Amortized intangible assets: | | | | | | | | | | | |
| Non-compete agreements | 24 | - | 60 | | $ | 4,229 |
| | $ | (2,884 | ) | | $ | — |
| | $ | 1,345 |
|
| Customer relationships | 84 | - | 180 | | 57,295 |
| | (28,255 | ) | | (3,663 | ) | | 25,377 |
|
| Trademarks/tradenames | 12 | - | 120 | | 1,696 |
| | (475 | ) | | — |
| | 1,221 |
|
| Patents and unpatented technology | | | 84 | | 1,351 |
| | (849 | ) | | — |
| | 502 |
|
| | | | | | $ | 64,571 |
| | $ | (32,463 | ) | | $ | (3,663 | ) | | $ | 28,445 |
|
| | | | | | | | | | | | |
| | July 3, 2016 |
| | Original Amortization Period in Months | | Gross Carrying Amount | | Accumulated Amortization | | Accumulated Impairments | | Net Carrying Value |
| Amortized intangible assets: | | | | | | | | | | | |
| Non-compete agreements | 24 | - | 60 | | $ | 4,229 |
| | $ | (2,036 | ) | | $ | — |
| | $ | 2,193 |
|
| Customer relationships | 84 | - | 180 | | 57,295 |
| | (21,007 | ) | | (3,663 | ) | | 32,625 |
|
| Trademarks/tradenames | 12 | - | 120 | | 1,696 |
| | (314 | ) | | — |
| | 1,382 |
|
| Unpatented technology | | | 84 | | 1,341 |
| | (608 | ) | | — |
| | 733 |
|
| | | | | | $ | 64,561 |
| | $ | (23,965 | ) | | $ | (3,663 | ) | | $ | 36,933 |
|
The Company did not incur any significant costs to renew or alter the terms of its intangible assets during fiscal year 2017. Amortization expense for fiscal years 2017, 2016 and 2015 were $8,498, $9,592 and $6,591, respectively. Aggregate amortization expense relative to existing intangible assets for the periods shown is currently estimated to be as follows:
|
| | | |
| For fiscal years | |
| 2018 | $ | 7,337 |
|
| 2019 | 6,306 |
|
| 2020 | 4,775 |
|
| 2021 | 3,729 |
|
| 2022 | 2,776 |
|
| 2023 and thereafter | 3,522 |
|
| Total | $ | 28,445 |
|
(8) Debt
The Company had $74,500 and $97,206 borrowed against its Credit Facility at July 2, 2017 and July 3, 2016, respectively, which is classified as long-term on the Company's Consolidated Balance Sheets.
On June 27, 2016, the Company entered into Amendment No. 3 (“Amendment 3”) to the Credit Facility. As a result of Amendment 3, the Company reduced the revolving credit facility from $275,000 to $175,000, reduced the optional increase in the Credit Facility from $100,000 to $50,000, increased the permitted total funded debt to EBITDA ratio through the fiscal quarter ending September 2017, and provided for certain restrictions on business acquisitions, dividends and stock repurchases. Payments of $692 related to Amendment 3 were recorded as deferred financing costs in other long-term assets.
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 $175,000 to $125,000, increased the permitted total funded debt to EBITDA ratio through the fiscal quarter ending March 2018 and provided for further restrictions on business acquisitions. Expenses of $822 related to amendments were recorded as deferred financing costs in other long-term assets in fiscal year 2017. The facility is secured by substantially all assets of the Company and its subsidiaries and expires on September 11, 2019.
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 1.00% to 3.75%, or at the bank’s base rate, as defined, plus 0.00% to 2.75%, 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 ranging from 0.20% to 0.50%, based on the Company’s Total Funded Debt/EBITDA Ratio, as defined. The Credit Facility includes representations, covenants and events of default that are customary for financing transactions of this nature. The effective interest rate on outstanding borrowings under the Credit Facility was 4.37% at July 2, 2017.
As a condition of the Credit Facility, the Company is subject to certain customary covenants, with which it was in compliance at July 2, 2017.
As of July 2, 2017, the Company had $45,762 available under its $125,000 credit facility, reflecting borrowings of $74,500 and certain letters of credit outstanding of $4,738. Additionally, the Company had available cash and cash equivalents of $988.
The Company entered into capital leases of $148 and $656 in fiscal years 2017 and 2016. The remaining liability at the end of the fiscal year 2017 totaled $436, with $269 reflected as short term.
(9) Income Taxes
Income (loss) before income taxes by country consists of the following amounts:
|
| | | | | | | | | | | |
| | For fiscal years |
| | 2017 | | 2016 | | 2015 |
| United States | $ | 2,377 |
| | $ | (56,184 | ) | | $ | 14,533 |
|
| Vietnam | 1,124 |
| | 364 |
| | 38 |
|
| Canada | (257 | ) | | 321 |
| | 384 |
|
| | $ | 3,244 |
| | $ | (55,499 | ) | | $ | 14,955 |
|
Income taxes consists of the following components:
|
| | | | | | | | | | | |
| | For fiscal years |
| | 2017 | | 2016 | | 2015 |
| Current: | | | | | |
| United States | $ | 1,050 |
| | $ | 544 |
| | $ | 4,317 |
|
| Vietnam | 112 |
| | 130 |
| | 6 |
|
| Canada | — |
| | — |
| | 15 |
|
| State and local | 135 |
| | 672 |
| | 501 |
|
| | 1,297 |
| | 1,346 |
| | 4,839 |
|
| Deferred: | | | | | |
| United States | 60 |
| | (16,133 | ) | | 465 |
|
| Vietnam | — |
| | (8 | ) | | — |
|
| Canada | (32 | ) | | 141 |
| | (1,055 | ) |
| State and local | 602 |
| | (2,562 | ) | | (283 | ) |
| | 630 |
| | (18,562 | ) | | (873 | ) |
| | $ | 1,927 |
| | $ | (17,216 | ) | | $ | 3,966 |
|
The consolidated effective income tax rate differs from the statutory U.S. federal tax rate for the following reasons and by the following percentages:
|
| | | | | | | | |
| | For fiscal years |
| | 2017 | | 2016 | | 2015 |
| Statutory U.S. federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Significant increases (reductions) resulting from: | | | | | |
| Changes in valuation allowance | (8.1 | ) | | — |
| | (7.5 | ) |
| Expiration of capital loss | 8.1 |
| | — |
| | — |
|
| Domestic production activities deduction | (2.9 | ) | | 0.3 |
| | (2.7 | ) |
| Goodwill impairment | — |
| | (8.3 | ) | | — |
|
| Foreign tax rate differences | (4.9 | ) | | 0.2 |
| | (0.2 | ) |
| State and local income taxes, net of federal benefit | 14.5 |
| | 2.7 |
| | 2.7 |
|
| Research and development tax credit | (2.4 | ) | | 1.4 |
| | — |
|
| Audits | (2.2 | ) | | (0.3 | ) | | — |
|
| Provision to return true-up | 18.2 |
| | — |
| | — |
|
| Other | 4.1 |
| | — |
| | (0.8 | ) |
| Effective income tax rate | 59.4 | % | | 31.0 | % | | 26.5 | % |
Significant components of deferred income tax assets and liabilities are as follows:
|
| | | | | | | |
| | July 2,
2017 | | July 3,
2016 |
| Deferred tax assets: | | | |
| Goodwill | $ | 15,118 |
| | $ | 17,258 |
|
| Environmental remediation | 1,677 |
| | 1,953 |
|
| Inventories | 3,788 |
| | 4,553 |
|
| Employment and compensation accruals | 1,287 |
| | 1,595 |
|
| Capital loss carryover | — |
| | 263 |
|
| State tax carryovers | 212 |
| | 213 |
|
| Canadian tax carryovers | 898 |
| | 933 |
|
| Pension asset | 313 |
| | 450 |
|
| Intangible assets | 3,881 |
| | 2,042 |
|
| Other | 2,539 |
| | 1,866 |
|
| Deferred tax assets | 29,713 |
| | 31,126 |
|
| Less valuation allowance | — |
| | (263 | ) |
| Deferred tax assets, net | 29,713 |
| | 30,863 |
|
| Deferred tax liabilities: | | | |
| Property, plant and equipment | (3,091 | ) | | (2,935 | ) |
| Other | (1,729 | ) | | (2,144 | ) |
| Deferred tax liabilities | (4,820 | ) | | (5,079 | ) |
| Net deferred tax assets | $ | 24,893 |
| | $ | 25,784 |
|
In preparing the Company's consolidated financial statements, management has assessed the likelihood that its deferred income tax assets will be realized from future taxable income. In evaluating the ability to recover its deferred income tax assets, management considers all available evidence, positive and negative, including the Company's operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it is determined that it is more likely than not that some portion or all of the net deferred income tax assets will not be realized. Management exercises significant judgment in determining the Company's income tax expense, its deferred income tax assets and liabilities and its future taxable income for purposes of assessing its ability to utilize any future tax benefit from its deferred income tax assets.
Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business. As of each reporting date management considers new evidence, both positive and negative, that could impact management's view with regards to future realization of deferred tax assets.
The Company has deferred tax assets of $212 and $898 related to state net operating losses and Canadian net operating losses which will both expire beginning in 2029. For financial reporting purposes, valuation allowances related to capital loss carryovers and state income tax carryovers were $0 and $263 as of July 2, 2017 and July 3, 2016, respectively. The capital loss carryover expired in fiscal year 2017, and therefore, the balance and associated valuation allowance was removed from the total deferred tax assets as of July 2, 2017.
The Company's income tax returns are subject to audit by federal, state and local governments. These returns could be subject to material adjustments or differing interpretations of the tax laws. Fiscal years 2013 through 2017 remain open to examination by various tax authorities. The Company is currently undergoing an examination by the Internal Revenue Service, with any proposed adjustments not being anticipated to be material at this time.
A portion of our operating income is earned outside of the United States. Earnings in Vietnam are deemed to be indefinitely reinvested in foreign jurisdictions while earnings in Canada are not deemed to be indefinitely reinvested. The Company currently does not intend or foresee a need to repatriate these funds from jurisdictions for which it asserts indefinite reinvestment. We expect existing domestic cash and short-term investments 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 dividends, debt repayment, capital expenditures, for at least the next 12 months and thereafter for the foreseeable future.
(10) Employee Retirement Benefit Plans
Defined Benefit Pension Plan
As of July 2, 2017, 278 employees and retirees of the Company were covered by a defined benefit pension plan. Effective April 1, 2009, participation and the accrual of benefits in this pension plan were frozen, at which time all participants became fully vested and all remaining prior service costs were recognized. The components of net periodic pension expense were as follows:
|
| | | | | | | | | | | |
| | For fiscal years |
| | 2017 | | 2016 | | 2015 |
| Interest cost | 271 |
| | 336 |
| | 326 |
|
| Expected return on plan assets | (416 | ) | | (524 | ) | | (560 | ) |
| Amortization of unrecognized net actuarial loss | 218 |
| | 153 |
| | 81 |
|
| Net periodic income cost | 73 |
| | (35 | ) | | (153 | ) |
| Pro rata recognition of lump-sum settlements | 240 |
| | 333 |
| | — |
|
| Total periodic pension expense (income) | $ | 313 |
| | $ | 298 |
| | $ | (153 | ) |
Lump sum settlements in 2017 and 2016 were higher than certain statutory thresholds, thereby requiring portions of those settlements to be recognized in expense for those years.
The weighted average assumptions used to determine benefit obligations and net periodic benefit cost were as follows: |
| | | | | | | | | | | | | | | | | |
| | Benefit Obligation | | Benefit Cost |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Discount rate | 3.85 | % | | 3.70 | % | | 4.45 | % | | 3.70 | % | | 4.45 | % | | 4.35 | % |
| Rate of compensation increase | N/A |
| | N/A |
| | N/A |
| | — |
| | — |
| | — |
|
| Expected long-term rate on plan assets | N/A |
| | N/A |
| | N/A |
| | 7.00 | % | | 7.50 | % | | 7.50 | % |
The Company determines its assumption for the discount rate using market information as of the measurement date such as the Citigroup Pension Liability Index and Composite Corporate Bond Rates. The rate of compensation increase for calculation of the benefit obligation does not apply due to the freezing of the plan as of April 1, 2009. The expected long-term rate of return for plan assets is based on the Company’s expectation of future experience for trust asset returns and future market conditions, reflecting the plan trust’s current and expected future asset allocation.
At July 2, 2017 and July 3, 2016, as a result of the fiscal year 2009 plan curtailment, the accumulated benefit obligation is equal to the projected benefit obligation. The following tables summarize the changes in benefit obligations, plan assets and funded status of the plan:
|
| | | | | | | |
| | July 2,
2017 | | July 3,
2016 |
| Change in prepaid benefit cost: | | | |
| Prepaid benefit cost at beginning of fiscal year | $ | 1,413 |
| | $ | 1,711 |
|
| Net periodic benefit cost for fiscal year | (313 | ) | | (298 | ) |
| Prepaid benefit cost at end of fiscal year | $ | 1,100 |
| | $ | 1,413 |
|
| Change in projected benefit obligation: | | | |
| Projected benefit obligation at beginning of fiscal year | $ | 7,903 |
| | $ | 8,350 |
|
| Interest cost | 271 |
| | 336 |
|
| Actuarial experience and changes in assumptions | (91 | ) | | 554 |
|
| Benefits paid | (362 | ) | | (360 | ) |
| Settlements | (832 | ) | | (977 | ) |
| Projected benefit obligation at end of fiscal year | $ | 6,889 |
| | $ | 7,903 |
|
| Change in plan assets: | | | |
| Fair value of plan assets at beginning of fiscal year | $ | 6,627 |
| | $ | 7,926 |
|
| Actual return on plan assets | 568 |
| | 38 |
|
| Benefits paid | (362 | ) | | (360 | ) |
| Settlements | (832 | ) | | $ | (977 | ) |
| Fair value of plan assets at end of fiscal year | $ | 6,001 |
| | $ | 6,627 |
|
| Amounts recognized in the Consolidated Balance Sheets: | | | |
| Pension liability — non-current portion | (888 | ) | | (1,276 | ) |
| Funded status — total balance sheet liability | $ | (888 | ) | | $ | (1,276 | ) |
Plan participants receive retiree benefits from the plan through regular annuity payments (benefits paid) or through one-time, lump-sum distributions (settlements).
The Company’s policy is to fund the plan based upon legal requirements and tax regulations. For fiscal year 2017 and 2016, no cash contributions were required or made to the plan. Based upon current actuarial calculations and assumptions, no cash contributions are anticipated for fiscal year 2018. Anticipated contributions, if any, are reflected as a current portion of the pension liability.
Pension related amounts recognized in other comprehensive income (loss), excluding tax effects were as follows:
|
| | | | | | | | | | | |
| | For fiscal years |
| | 2017 | | 2016 | | 2015 |
| Amortization of unrecognized net actuarial loss | $ | 218 |
| | $ | 153 |
| | $ | 81 |
|
| Pro rata recognition of lump-sum settlements | 240 |
| | 333 |
| | — |
|
| Net actuarial gain (loss) | 244 |
| | (1,040 | ) | | (702 | ) |
| Total recognized in other comprehensive income (loss) | $ | 702 |
| | $ | (554 | ) | | $ | (621 | ) |
Net actuarial costs recorded in accumulated other comprehensive loss on the consolidated balance sheets, excluding tax effects, that have not yet been recognized as components of net periodic benefit cost as of July 2, 2017 and July 3, 2016 were $1,987 and $2,689, respectively.
The estimated amount that will be amortized from accumulated other comprehensive loss, pre-tax, into net periodic pension cost in fiscal year 2018 is expected to total approximately $150, consisting of amortization of unrecognized actuarial loss as well as lump sum settlement charges.
Expected benefit payments for the defined benefit pension plan for the next ten fiscal years are as follows:
|
| | | |
| For fiscal years | |
| 2018 | $ | 724 |
|
| 2019 | 588 |
|
| 2020 | 589 |
|
| 2021 | 547 |
|
| 2022 | 533 |
|
| 2023 – 2027 | 2,304 |
|
| Total | $ | 5,285 |
|
The Company’s investment policy related to pension plan assets is based on a review of the actuarial and funding characteristics of the plan. Capital market risk and return opportunities are also considered. The investment policy’s primary objective is to achieve a long-term rate of return consistent with the actuarially determined requirements of the plan, as well as maintaining an asset level sufficient to meet the plan’s benefit obligations. A target allocation range between asset categories has been established to enable flexibility in investment, allowing for a better alignment between the long-term nature of pension plan liabilities, invested assets and current and anticipated market returns on those assets.
Below is a summary of pension plan asset allocations by asset category:
|
| | | | | | | |
| | Weighted average allocation for fiscal years |
| | Target | | 2017 | | 2016 |
| Equity securities | 40%-70% | | 60 | % | | 59 | % |
| Fixed income (debt) securities | 30%-60% | | 36 | % | | 38 | % |
| Cash and cash equivalents | 0%-10% | | 4 | % | | 3 | % |
| | | | 100 | % | | 100 | % |
The fair value of all the defined benefit pension plan assets is based on quoted prices in active markets for identical assets which are considered Level 1 inputs within the fair value hierarchy described in Note 2, Summary of Significant Accounting Policies, of the "Notes to Consolidated Financial Statements" in this form 10-K. The total estimated fair value of plan assets by asset class were as follows:
|
| | | | | | | |
| | July 2,
2017 | | July 3,
2016 |
| Asset Class: | | | |
| Equity securities: | | | |
| Directly held corporate stock — Large Cap | $ | 599 |
| | $ | 2,408 |
|
| Registered investment companies — Large Cap | 2,752 |
| | 1,139 |
|
| Registered investment companies — Mid-Cap Growth | — |
| | — |
|
| Registered investment companies — Small-Cap | 85 |
| | 151 |
|
| Registered investment companies — International | 169 |
| | 205 |
|
| Fixed income (debt) securities: | | | |
| Registered investment companies — Intermediate Bond | 2,181 |
| | 2,520 |
|
| Cash and cash equivalents | 215 |
| | 204 |
|
| Total assets measured at fair value | $ | 6,001 |
| | $ | 6,627 |
|
During the fourth quarter of fiscal year 2016, the Company adopted Accounting Standards Update No. 2015-04 (“ASU 2015-04”), Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets. As a result, for pension reporting as of July 2, 2017 and July 3, 2016, the Company was able to calculate the pension plan assets and obligations using information as of June 30 of each year without the additional expense of adjusting the June 30 information for activity that occurred between June 30 and the end of each fiscal year.
Defined Contribution Plans
Substantially all of the Company’s U.S. employees are eligible to participate in the Company’s 401(k) defined contribution plan. The plan allows employees to contribute up to 100% of their eligible compensation up to a maximum amount allowed by law and provides that the Company may, at its discretion, make matching contributions, profit sharing contributions
or qualified non-elective contributions. During each of the fiscal years 2017, 2016 and 2015, the Company matched 50% of participants’ contributions up to 6% of their eligible compensation.
Under the plan, at the election of the participant, both employee and employer contributions may be invested in any of the available investment options, which include Sparton common stock. As of July 2, 2017, approximately 98,089 shares of Sparton common stock were held in the 401(k) plan. Amounts expensed related to the Company’s matching contributions and administrative expenses for the plan were $1,429, $1,475 and $1,233 for fiscal years 2017, 2016 and 2015, respectively.
(11) Commitments and Contingencies
Operating Leases — The Company is obligated under operating lease agreements for certain manufacturing and administrative facilities and a portion of its production machinery and data processing equipment. Such leases, some of which are non-cancelable and in many cases include purchase or renewal options, expire at various dates and typically provide for monthly payments over a fixed term in equal amounts. Some of these leases provide for escalating minimum monthly base rental payments. Generally, the Company is responsible for maintenance, insurance and property taxes relating to these leased assets. At July 2, 2017, the future minimum annual lease payments under these agreements are as follows:
|
| | | |
| For fiscal years | |
| 2018 | $ | 2,606 |
|
| 2019 | 2,406 |
|
| 2020 | 2,306 |
|
| 2021 | 1,717 |
|
| 2022 | 1,457 |
|
| Thereafter | 3,151 |
|
| Total | $ | 13,643 |
|
Rent expense was $2,645, $3,573 and $2,480 for fiscal years 2017, 2016 and 2015, respectively. Included in rent expense for fiscal years 2017, 2016 and 2015 was $275, $250 and $493, respectively, of contingent rent expense primarily relating to the Company’s corporate headquarters in Schaumburg, Illinois and its Frederick, Colorado facility. During fiscal year 2016, the Company entered into a sublease agreement related to its Irvine, CA design center, which extends through May of 2018. Amounts receivable under the sublease agreement total $0.3 million as of July 2, 2017.
Environmental Remediation — 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. 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 reviews performed in the fourth quarters of fiscal years 2017, 2016 and 2015 did not result in changes to the related liability. As of July 2, 2017 and July 3, 2016, Sparton has accrued $6,036 and $6,701, respectively, as its estimate of the remaining minimum future undiscounted financial liability with respect to this matter, of which $568 and $584, respectively, are classified as a current liability and included on the balance sheet in other accrued expenses.
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 $8,400 incurred from the date of settlement, of which $7,097 has been expended as of July 2, 2017 toward the $8,400 threshold. It is expected that the DOE reimbursements will commence in the years after fiscal year 2019. At July 2, 2017 and at July 3, 2016, the Company recognized $1,606 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 2, 2017, 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 recorded, could be up to $2,497 before income taxes over the next thirteen years, with this amount expected to be offset by related reimbursement from the DOE for a net amount of $1,561.
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.
Litigation — In addition to the foregoing, from time to time, the Company is involved in various legal proceedings relating to claims arising in the ordinary course of business. The Company and the members of our board of directors have been named as defendants in a federal securities class action purportedly brought on behalf of all holders of the Company’s common stock challenging the pending merger transaction with Ultra.
The Company and the members of our board of directors were named as defendants in four federal securities class actions purportedly brought on behalf of all holders of the Company’s common stock challenging the pending merger transaction with Ultra. The lawsuits generally sought, among other things, to enjoin the defendants from proceeding with the shareholder vote on the merger at the special meeting or consummating the merger transaction unless and until the Company disclosed the allegedly omitted information. The complaints also sought damages allegedly suffered by the plaintiffs as a result of the asserted omissions, as well as related attorneys’ fees and expenses.
After discussions with counsel for the plaintiffs, the Company included certain additional disclosures in the proxy statement soliciting shareholder approval of the Merger. The Company believes the demands and complaints are without merit, there were substantial legal and factual defenses to the claims asserted, and the proxy statement disclosed all material information prior to the inclusion of the additional disclosures. The Company made the additional disclosures to avoid the expense and burden of litigation. On September 1, 2017, the court dismissed the lawsuits with prejudice with respect to lead plaintiffs in the lawsuits and without prejudice as to all other shareholders. The Company and plaintiffs must still attempt to resolve the appropriate amount of attorneys’ fees, if any, to be awarded to plaintiffs’ counsel.
The Company is not currently a party to any other such legal proceedings, the adverse outcome of which, individually or in the aggregate, is expected to have a material adverse effect on our business, financial condition or results of operations.
U.S. Government Audits — Federal government agencies, including the Defense Contract Audit Agency and the Defense Contract Management Agency, routinely audit and evaluate government contracts and government contractors’ administrative processes and systems. These agencies review the Company’s performance on contracts, pricing practices, cost structure, financial capability and compliance with applicable laws, regulations and standards. They also review the adequacy of the Company’s internal control systems and policies, including the Company’s purchasing, accounting, estimating, compensation and management information processes and systems. The Company works closely with these agencies to ensure compliance. The Company is not currently aware of any issues of noncompliance that would have a material impact on the Company’s financial position or results of operations.
(12) Stock-Based Compensation
The Company has a long-term incentive plan. The Sparton Corporation 2010 Long-Term Incentive Plan (the “2010 Plan”) was approved by the Company’s shareholders on October 28, 2009. Under the 2010 Plan, the Company may grant to employees, officers and directors of the Company or its subsidiaries incentive and non-qualified stock options, stock appreciation rights, restricted stock or restricted stock units, performance awards and other stock-based awards, including grants of shares. Restricted stock awards granted to date to employees under the 2010 Plan vest annually over four years, subject to achievement of certain financial performance metrics in addition to the service requirements. Unrestricted stock awards granted to date under the 2010 Plan represent annual stock grants to directors as a component of their overall compensation. The 2010 Plan has a term of ten years. The total number of shares that may be awarded under the 2010 Plan is 1,000,000 shares of common stock, of which amount, 531,229 shares remain available for awards as of July 2, 2017.
The following table shows stock-based compensation expense (credit) by type of share-based award included in the consolidated statements of operations:
|
| | | | | | | | | | | |
| | For fiscal years |
| | 2017 | | 2016 | | 2015 |
| Fair value expense of stock option awards | $ | 154 |
| | $ | 286 |
| | $ | 352 |
|
| Restricted stock units | 1,422 |
| | 273 |
| | 518 |
|
| Restricted stock and unrestricted stock | (113 | ) | | (270 | ) | | 1,015 |
|
| Total stock-based compensation | $ | 1,463 |
| | $ | 289 |
| | $ | 1,885 |
|
Restricted stock-based compensation reflects a reduction in expense in fiscal years 2017 and 2016 as a result of the separation of certain executives from the Company and the reversal of previously recorded expense associated with certain stock-based compensation awards.
The following table shows the total remaining unrecognized compensation cost related to restricted stock grants, restricted stock units grants and the fair value expense of stock option awards, as well as the weighted average remaining required service period over which such costs will be recognized as of July 2, 2017:
|
| | | | | |
| | Total Remaining Unrecognized Compensation Cost | | Weighted Average Remaining Required Service Period (in years) |
| Fair value expense of stock option awards | $ | 150 |
| | 0.81 |
| Restricted stock units | 1,116 |
| | 1.89 |
| All awards | $ | 1,266 |
| | 1.75 |
Stock Options
No stock options were granted in fiscal year 2017. The following is a summary of activity for fiscal years 2017 and 2016 related to stock options granted under the Company’s 2010 plan:
|
| | | | | | |
| | Number of Options | | Weighted-Average Exercise Price |
| Options outstanding as of June 30, 2015 | 107,584 |
| | $ | 26.54 |
|
| Granted | 129,800 |
| | 23.02 |
|
| Forfeited | (121,969 | ) | | 24.68 |
|
| Options outstanding as of July 3, 2016 | 115,415 |
| | 24.11 |
|
| Forfeited | (15,393 | ) | | 25.05 |
|
| Options outstanding as of July 2, 2017 | 100,022 |
| | 24.29 |
|
The stock options outstanding at July 2, 2017 have exercise prices ranging from $22.09 to $26.86, a weighted average exercise price of $24.29 and a weighted average remaining contractual life of 7.90 years. Of the outstanding stock options, 35,097 of these options were exercisable at a weighted average exercise price of $24.94 and a weighted average remaining contractual life of 7.75 years.
Restricted Stock Units
The following is a summary of activity for fiscal years 2017 and 2016 related to restricted stock units granted under the Company’s 2010 plan:
|
| | | | | | |
| | Shares | | Weighted Average Fair Value |
| Restricted stock units at June 30, 2015 | 62,828 |
| | $ | 26.77 |
|
| Granted | 96,754 |
| | 23.02 |
|
| Forfeited | (80,308 | ) | | 24.74 |
|
| Restricted stock units at July 3, 2016 | 79,274 |
| | 24.25 |
|
| Granted | 79,889 |
| | 23.63 |
|
| Forfeited | (6,029 | ) | | 24.10 |
|
| Vested | (25,000 | ) | | 21.72 |
|
| Restricted stock units at July 2, 2017 | 128,134 |
| | 24.36 |
|
Restricted Stock
The following is a summary of activity for fiscal years 2017 and 2016 related to restricted stock granted under the Company’s 2010 plan:
|
| | | | | | |
| | Shares | | Weighted Average Fair Value |
| Restricted stock at June 30, 2015 | 132,299 |
| | $ | 14.58 |
|
| Vested | (27,346 | ) | | 7.88 |
|
| Forfeited | (52,302 | ) | | 15.92 |
|
| Restricted stock at July 3, 2016 | 52,651 |
| | 16.72 |
|
| Forfeited | (26,739 | ) | | 11.48 |
|
| Restricted stock at July 2, 2017 | 25,912 |
| | $ | 22.14 |
|
(13) Earnings (loss) Per Share Data
Earnings (loss) per share calculations, including weighted average number of shares of common stock outstanding used in calculating basic and diluted (loss) income per share are as follows:
|
| | | | | | | | | | | |
| | For fiscal years |
| | 2017 | | 2016 | | 2015 |
| Net income (loss) | $ | 1,317 |
| | $ | (38,283 | ) | | $ | 10,989 |
|
| Less net income (loss) allocated to contingently issuable participating securities | (4 | ) | | — |
| | (126 | ) |
| Net income (loss) available to common shareholders | $ | 1,313 |
| | $ | (38,283 | ) | | $ | 10,863 |
|
| Weighted average shares outstanding – Basic | 9,812,248 |
| | 9,786,315 |
| | 9,874,441 |
|
| Dilutive effect of stock options | 25 |
| | — |
| | 11,520 |
|
| Weighted average shares outstanding – Diluted | 9,812,273 |
| | 9,786,315 |
| | 9,885,961 |
|
| Net income (loss) available to common shareholders per share: | | | | | |
| Basic | $ | 0.13 |
| | $ | (3.91 | ) | | $ | 1.10 |
|
| Diluted | $ | 0.13 |
| | $ | (3.91 | ) | | $ | 1.10 |
|
For fiscal years 2017 and 2015, net income available to common shareholders was reduced by allocated earnings associated with unvested restricted shares of 25,912 and 132,299, respectively. No adjustment for net loss available to common shareholders was required for fiscal year 2016 as 52,651 unvested restricted shares did not participate in the net loss for the year.
There were 97,484 and 115,415 potential shares of common stock issuable upon exercise of stock options excluded from diluted income or loss per share computations for fiscal years 2017 and 2016, respectively, as they were anti-dilutive. For fiscal year 2017, they were anti-dilutive due to option exercise prices in excess of the average share prices and for fiscal year 2016, they were anti-dilutive due to the net loss. No potential shares of common stock issuable upon exercise of stock options were excluded from diluted income per share computations for fiscal year 2015, as none would have been anti-dilutive.
(14) Stock Repurchase Plan
On October 22, 2014, the Company’s Board of Directors approved a repurchase by the Company of up to $5,000 of shares of its common stock. The Company was authorized to purchase shares from time to time in open market, block and privately negotiated transactions. The stock repurchase program did not require the Company to repurchase any specific number of shares. Pursuant to this stock repurchase program, during fiscal year 2015, the Company purchased 181,278 shares of its common stock at an average price of $27.55 per share for approximately $5,000.
Shares purchased under the plan were canceled upon repurchase. As of July 2, 2017, all authorized funds under the stock repurchase program have been expended.
In fiscal years 2016 and 2015, shares were also purchased from employees for withholding tax purposes related to the vesting of restricted shares under the Company's compensation plan.
(15) Restructuring Activities
During the second quarter of fiscal year 2016, the Company announced the closing of its Lawrenceville, GA manufacturing operations and the consolidation of the Irvine, CA design center into the Irvine, CA manufacturing operations to optimize the Company’s manufacturing and design facility footprint and realize synergies from the Company’s acquisitions. The Company recorded restructuring expense of $2,206 in fiscal year 2016 and made payments of $90 and $2,085 in fiscal year 2017 and 2016, respectively. These restructuring activities were substantially complete as of the end of fiscal year 2016. The remaining reserve balance of $31, as of the end of fiscal year 2017, represents lease payments net of sublease income.
(16) Business Segments
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; MDS and 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.
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 to operations 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.
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 operations are comprised of design, development and production of proprietary products for both domestic and foreign defense as well as commercial needs. Sparton 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. This segment 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, 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.
Operating results and certain other financial information about the Company’s two reportable segments were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal year 2017 |
| | Manufacturing & Design Services | | Engineered Components & Products | |
Unallocated | | Eliminations | | Total |
| Net sales | $ | 260,514 |
| | $ | 147,259 |
| | $ | — |
| | $ | (10,211 | ) | | $ | 397,562 |
|
| Gross profit | 31,441 |
| | 40,458 |
| | — |
| | — |
| | 71,899 |
|
| Selling and administrative expenses (incl. depreciation) | 23,123 |
| | 15,708 |
| | 15,279 |
| | — |
| | 54,110 |
|
| Internal research and development expenses | — |
| | 1,670 |
| | — |
| | — |
| | 1,670 |
|
| Depreciation and amortization | 10,300 |
| | 2,312 |
| | 1,780 |
| | — |
| | 14,392 |
|
| Operating income | 1,307 |
| | 21,593 |
| | (15,279 | ) | | — |
| | 7,621 |
|
| Capital expenditures | 2,118 |
| | 1,203 |
| | 3,575 |
| | — |
| | 6,896 |
|
| Total assets at July 2, 2017 | $ | 142,513 |
| | $ | 64,694 |
| | $ | 9,936 |
| | $ | — |
| | $ | 217,143 |
|
| | Fiscal year 2016 |
| | Manufacturing & Design Services | | Engineered Components & Products | |
Unallocated | | Eliminations | | Total |
| Net sales | $ | 282,076 |
| | $ | 154,559 |
| | $ | — |
| | $ | (17,273 | ) | | $ | 419,362 |
|
| Gross profit | 34,788 |
| | 45,360 |
| | — |
| | — |
| | 80,148 |
|
| Selling and administrative expenses (incl. depreciation) | 23,813 |
| | 15,482 |
| | 15,856 |
| | — |
| | 55,151 |
|
| Internal research and development expenses | — |
| | 2,344 |
| | — |
| | — |
| | 2,344 |
|
| Restructuring charges | 2,206 |
| | — |
| | — |
| | — |
| | 2,206 |
|
| Depreciation and amortization | 11,826 |
| | 2,573 |
| | 1,276 |
| | — |
| | 15,675 |
|
| Operating income (loss) | (61,813 | ) | | 25,880 |
| | (15,856 | ) | | — |
| | (51,789 | ) |
| Capital expenditures | 2,182 |
| | 1,244 |
| | 2,672 |
| | — |
| | 6,098 |
|
| Total assets at July 3, 2016 | $ | 167,277 |
| | $ | 69,627 |
| | $ | 9,094 |
| | $ | — |
| | 245,998 |
|
| | Fiscal year 2015 |
| | Manufacturing & Design Services | | Engineered Components & Products | |
Unallocated | | Eliminations | | Total |
| Net sales | $ | 263,940 |
| | $ | 136,315 |
| | $ | — |
| | $ | (18,130 | ) | | $ | 382,125 |
|
| Gross profit | 36,461 |
| | 38,353 |
| | — |
| | — |
| | 74,814 |
|
| Selling and administrative expenses (incl. depreciation) | 18,615 |
| | 11,038 |
| | 17,316 |
| | — |
| | 46,969 |
|
| Internal research and development expenses | — |
| | 1,502 |
| | — |
| | — |
| | 1,502 |
|
| Depreciation and amortization | 8,875 |
| | 1,648 |
| | 713 |
| | — |
| | 11,236 |
|
| Operating income | 9,535 |
| | 25,033 |
| | (17,316 | ) | | — |
| | 17,252 |
|
| Capital expenditures | 1,599 |
| | 1,294 |
| | 2,909 |
| | — |
| | 5,802 |
|
(17) Business, Geographic and Sales Concentration
Sales to individual customers in excess of 10% of total net sales were as follows:
|
| | | | | | | | |
| | For fiscal years |
| | 2017 | | 2016 | | 2015 |
| U.S. Navy | 23 | % | | 22 | % | | 25 | % |
| Fenwal Blood Technologies | N/A |
| | N/A |
| | 10 | % |
Sales to the United States Navy, including those made through the Company’s ERAPSCO joint venture, are included in the results of the Company’s ECP segment. Sales to Fenwal Blood Technologies are included in the results of the Company’s MDS segment.
Net sales were made to customers located in the following countries:
|
| | | | | | | | | | | |
| | For fiscal years |
| | 2017 | | 2016 | | 2015 |
| United States | $ | 325,370 |
| | $ | 369,127 |
| | $ | 345,643 |
|
| Other foreign countries | 72,192 |
| | 50,235 |
| | 36,482 |
|
| Consolidated total | $ | 397,562 |
| | $ | 419,362 |
| | $ | 382,125 |
|
No other single country or currency zone accounted for 10% or more of export sales in the fiscal years 2017, 2016, or 2015.
ASW devices and related engineering contract services to the U.S. government and foreign countries contributed $114,354, (29%), $119,291, (28%) and $110,201, (29%), respectively, to total net sales for fiscal years 2017, 2016 and 2015.
The Company’s investment in property, plant and equipment, which are located in the United States, Canada and Vietnam, are summarized, net of accumulated depreciation, as follows:
|
| | | | | | | |
| | July 2, 2017 | | July 3, 2016 |
| United States | $ | 29,952 |
| | $ | 29,867 |
|
| Canada | 27 |
| | 23 |
|
| Vietnam | 4,476 |
| | 3,430 |
|
| Consolidated total | $ | 34,455 |
| | $ | 33,320 |
|
(18) Quarterly Results of Operations (Unaudited): |
| | | | | | | | | | | | | | | |
| | Quarter |
| | 1st | | 2nd | | 3rd | | 4th |
| Fiscal year 2017 | | | | | | | |
| Net sales | $ | 100,367 |
| | $ | 97,399 |
| | $ | 95,410 |
| | $ | 104,386 |
|
| Gross profit | 17,285 |
| | 15,898 |
| | 16,915 |
| | 21,801 |
|
| Net income (loss) | 108 |
| | (907 | ) | | 429 |
| | 1,687 |
|
| Income (loss) per share - Basic | 0.01 |
| | (0.09 | ) | | 0.04 |
| | 0.17 |
|
| Income (loss) per share - Diluted | 0.01 |
| | (0.09 | ) | | 0.04 |
| | 0.17 |
|
| Fiscal year 2016 | | | | | | | |
| Net sales | $ | 106,691 |
| | $ | 103,529 |
| | $ | 102,175 |
| | $ | 106,967 |
|
| Gross profit | 21,138 |
| | 18,521 |
| | 19,067 |
| | 21,422 |
|
| Net income (loss) | 2,394 |
| | 268 |
| | 1,136 |
| | (42,081 | ) |
| Income (loss) per share - Basic | 0.24 |
| | 0.03 |
| | 0.12 |
| | (4.30 | ) |
| Income (loss) per share - Diluted | 0.24 |
| | 0.03 |
| | 0.12 |
| | (4.30 | ) |
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Fiscal Years | Balance at Beginning of Period | | Additions Charged to Costs and Expenses | | Allowance for Losses Acquired | | Write-Offs/ Dispositions | | Balance at End of Period |
| 2017 | | | | | | | | | |
| Allowance for losses on accounts receivable | $ | 407 |
| | $ | 206 |
| | $ | — |
| | $ | (184 | ) | | $ | 429 |
|
| 2016 | | | | | | | | | |
| Allowance for losses on accounts receivable | $ | 173 |
| | $ | 583 |
| | $ | — |
| | $ | (349 | ) | | $ | 407 |
|
| 2015 | | | | | | | | | |
| Allowance for losses on accounts receivable | $ | 126 |
| | $ | 47 |
| | $ | 97 |
| | $ | (97 | ) | | $ | 173 |
|
INDEX TO EXHIBITS
|
| |
Exhibit Number | Description |
| Agreement and Plan of Merger dated July 7, 2017 between the Company, Ultra Electronics Holdings plc and Ultra Electronics Aneira, Inc., incorporated by reference from Exhibit 10.1 to the Registrant'sRegistrant’s Form8-K filed with the SEC on July 11, 2017. |
| |
| 2.2 | | Merger termination agreement dated March 4, 2018 between the Company, Ultra Electronics Holdings, plc and Ultra Electronics Aneira, incorporated by reference from Exhibit 10.1 to the Registrant’sForm8-K filed with the SEC on March 5, 2018. |
| |
| 3.1 | | Second Amended Articles of Incorporation of the Registrant, incorporated herein by reference from the Registrant’s Proxy Statement on Form DEF 14A filed with the SEC on September 21, 2010.
|
| |
| 3.2 | |
| Amended and Restated Code of Regulations of the Registrant, incorporated herein by reference from Exhibit 3.2 to the Registrant’s Current Report on Form8-K filed with the SEC on May 5, 2015. |
| |
| 3.3 | |
| Amendment to Amended and Restated Code of Regulations of the Registrant, incorporated by reference from Exhibit 99.1 to the Registrant’s current report on Form8-K filed with the SEC on June 15, 2017. |
| |
| 10.1 | |
| Amended and Restated Credit and Guaranty Agreement dated September 11, 2014, entered into between BMO Harris Bank N.A. and the Borrowers, incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed with the SEC on September 16, 2014. |
| |
| 10.2 | |
| Amendment No. 1 dated March 16, 2015 to the Amended and Restated Credit and Guaranty Agreement dated September 11, 2014, entered into between BMO Harris Bank N.A. and the Borrowers, incorporated by reference from Exhibit 10.1 to the Registrant’s Form10-Q filed with SEC on May 5, 2015. |
| |
| 10.3 | |
| Amendment No. 2 dated April 13, 2015 to the Amended and Restated Credit and Guaranty Agreement dated September 11, 2014, entered into between BMO Harris Bank N.A. and the Borrowers, incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed with the SEC on April 17, 2015. |
| |
| 10.4 | | Amendment No. 3 dated June 26, 2017 to the Amended and Restated Credit and Guaranty Agreement dated September 11, 2014, entered into between BMO Harris Bank N.A. and the Borrowers, incorporated by reference from Exhibit 10.1 to the Registrant’s Form8-K filed with the SEC on June 29, 2016. |
| |
| 10.5 | | Amendment No. 4 dated June 30, 2017 to the Amended and Restated Credit and Guaranty Agreement dated September 11, 2014, entered into between BMO Harris Bank N.A. and the Borrowers, incorporated by reference from Exhibit 10.1 to the Registrant’s Form8-K filed with the SEC on July 3, 2017. |
| |
| 10.6 | | Amendment No. 5 dated May 3, 2018 to the Amended and Restated Credit and Guaranty Agreement dated September 11, 2014, entered into between BMO Harris Bank N.A. and the Borrowers, incorporated by reference from Exhibit 10.1 to the Registrant’s Form8-K filed with the SEC on May 7, 2018. |
| |
| 10.7† | |
| Sparton Short-Term Incentive Plan, incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed with the SEC on July 1, 2009. |
| |
| 10.8† | |
| First Amendment to Sparton Short-Term Incentive Plan, incorporated by reference from Exhibit 10.1 to the Registrant’sForm 8-K filed with the SEC on May 4, 2016. |
| |
| 10.9† | |
| 2010 Long-Term Stock Option Incentive Plan, incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed with the SEC on September 11, 2009. |
| |
| 10.10† | |
| Amendment to the Sparton Corporation 2010 Long-Term Incentive Plan dated June 24, 2010, incorporated by reference from Exhibit 10.21 to the Registrant’s Annual Report on Form10-K filed with the SEC on September 7, 2011. |
| |
| 10.11† | |
| Second Amendment to the Sparton Corporation 2010 Long-Term Incentive Plan dated June 24, 2010, incorporated by reference from Exhibit 10.7 to the Registrant’s Annual Report on Form10-K filed with the SEC on September 9, 2014. |
34
| | |
Exhibit
Number | | Description |
| |
| 10.12† | | Form of Grant of Restricted Stock under Sparton Corporation’s Long-Term Incentive Plan, incorporated by reference from Exhibit 10.9 to the Registrant’s Annual Report on Form10-K filed with the SEC on September 5, 2012. |
| |
| 10.13† | |
| Executive Employment Agreement dated September 23, 2015 between the Company and Gordon Madlock, incorporated by reference from Exhibit 10.2 to the Registrant’s Current Report on Form8-K filed with the SEC on September 24, 2015. |
| |
| 10.14† | |
| Executive Employment Agreement dated September 23, 2015 between the Company and Steven Korwin, incorporated by reference from Exhibit 10.1 to the Registrant’s Report on Form8-K filed with the SEC on September 24, 2015. |
| |
| 10.15† | |
| Executive Employment Agreement effective as of September 8, 2015 between the Company and Joseph G. McCormack, incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed with the SEC on September 8, 2015. |
|
| |
Exhibit Number10.16† | Description |
| Employment Agreement dated February 5, 2016 between the Company and Joseph J. Hartnett, incorporated by reference from Exhibit 10.5 to the Registrant’s Form8-K filed with the SEC on February 8, 2016. |
| |
| 10.17** | |
| SeparationExecutive Employment Agreement dated February 5,as of April 28, 2016 between the RegistrantCompany and Cary B. Wood, incorporated by reference from Exhibit 10.1 to the Registrant’s Form 8-K filed with the SEC on February 8, 2016.Michael Gaul. |
| |
| 10.18 | |
| Lease Extension and Amendment Agreement dated May 1, 2010 between Sparton Technology, Inc. and 9621 Coors, L.L.C., guaranteed by Albuquerque Motor Company, Inc., incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed with the SEC on May 6, 2010. |
| |
| 10.19 | |
| Option Agreement dated May 1, 2010 by and between Sparton Technology, Inc. and 9621 Coors, L.L.C., guaranteed by Albuquerque Motor Company, Inc., incorporated by reference from Exhibit 10.2 to the Registrant’s Current Report onForm 8-K filed with the SEC on May 6, 2010. |
| |
| 10.201 | |
| Solicitation, Offer and Award with an effective date of July 16, 2014 issued by the Naval Warfare Center to ERAPSCO, incorporated by reference from Exhibit 10.20 to the Registrant’s Annual Report on Form10-K filed with the SEC on September 9, 2014. |
| |
| 10.211 | |
| Amendment of Solicitation/Modification of Contract with an effective date of July 28, 2014 issued by the Naval Warfare Center to ERAPSCO, incorporated by reference from Exhibit 10.21 to the Registrant’s Annual Report on Form10-K filed with the SEC on September 9, 2014. |
| |
| 10.22† | |
| Amendment of Solicitation/Modification of Contract with an effective date of August 5, 2014 2014 issued by the Naval Warfare Center to ERAPSCO, incorporated by reference from Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K filed with the SEC on September 9, 2014. |
| |
| Amendment of Solicitation/Modification of Contract with an effective date of August 25, 2014 issued by the Naval Warfare Center to ERAPSCO, incorporated by reference from Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K filed with the SEC on September 9, 2014. |
| |
| Order for Supplies or Services with an effective date of July 17, 2014 issued by the Naval Warfare Center to ERAPSCO, incorporated by reference from Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K filed with the SEC on September 9, 2014. |
| |
| Subcontract with an effective date of July 17, 2014 between Sparton DeLeon Springs, LLC and ERAPSCO, incorporated by reference from Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K filed with the SEC on September 9, 2014. |
| |
| Modification of Subcontract with an effective date of April 10, 2015 between Sparton DeLeon
Springs, LLC and ERAPSCO, incorporated by reference from Exhibit 10.26 to the Registrant's annual Report on Form 10-K filed with the SEC on September 8, 2015.
|
| |
| Form of Nonqualified Stock Option Agreement under Sparton Corporation’s Long-Term Incentive Plan, incorporated by reference from Exhibit 10.3 to the Registrant’s Form10-Q filed with the SEC on November 4, 2014. |
| |
| 10.23† | |
| Form of Grant of Restricted Stock Unit under Sparton Corporation’s Long Term Incentive Plan, incorporated by reference from Exhibit 10.4 to the Registrant’s Form10-Q filed with the SEC on November 4, 2014. |
| |
| 10.24† | |
| Form of Director and Officer Indemnification Agreement entered into as of May 1, 2014 with each of the Company’s directors and executive officers, incorporated herein by reference from Exhibit 10.1 to the Registrant’s Quarterly Report on Form10-Q filed with the SEC on February 3, 2014. |
| |
| 10.25† | |
| Adoption Agreement to Deferred Compensation Plan dated as of January 29, 2014, incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed with the SEC on February 4, 2014. |
| |
| 10.26† | |
| First Amendment to the Sparton Corporation Deferred Compensation Plan, incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed with the SEC on July 3, 2014. |
| |
|
| |
Exhibit Number10.27† | Description |
| Second Amendment to the Sparton Corporation Deferred Compensation Plan, incorporated by reference from Exhibit 10.2 to the Registrant’s Current Report on Form8-K filed with the SEC on July 3, 2014. |
| |
| 10.28† | |
| Engine Capital Agreement dated May 4, 2016 among the Company, Engine Capital, L.P., Engine Jet Capital, L.P., Engine Capital Management, LLC, Engine Investments, LLC, Arnaud Ajdler, Norwood Capital Partners, LP, Norwood Investment Partners, LP, Norwood Investment Partners GP, LLC, Charles H. Hoeveler, Alan L. Bazaar and John A. Janitz, incorporated by reference from Exhibit 10.1 to the Registrant’s Form 8-K filed with the SEC on May 4,10, 2016. |
| |
| Form of Retention Bonus Agreement, incorporated by reference from Exhibit 10.1 to the Registrant’s Form8-K filed with the SEC on July 19, 2016. |
35
| | |
Exhibit Number | |
| Modification of Subcontract with an effective date of September 23, 2015 between Sparton DeLeon Springs, LLC and ERAPSCO, incorporated by reference from Exhibit 10.33 to the Registrant’s Form 10-K filed with the SEC on September 6, 2016.Description |
| |
| 10.29† | |
| Modification of Subcontract with an effective date of April 11, 2016 between Sparton DeLeon Springs, LLC and ERAPSCO, incorporated by reference from Exhibit 10.34 to the Registrant’s Form 10-K filed with the SEC on September 6, 2016. |
| |
| Executive Employment Agreement dated as of September 23, 2015 between the Company and Joseph Schneider.Schneider, incorporated by reference from Exhibit 10.35 to the Registrant’s Form10-K filed with the SEC on September 14, 2017. |
| |
| 10.30*1 | |
| Subcontract with an effective date of January 18,October 26, 2017 between Sparton DeLeon Springs, LLC and ERAPSCO.
|
| |
| 10.31*1 | |
| Modification of Subcontract with an effective date of January 19,December 20, 2017 between Sparton DeLeon Springs, LLC and ERAPSCO. |
| |
| 10.32*1 | |
| Modification of Subcontract with an effective date of September 7, 2017March 15, 2018 between Sparton DeLeon Springs, LLC and ERAPSCO. |
| |
| 10.33*1 | | Modification of Subcontract with an effective date of April 11, 2018between Sparton DeLeon Springs, LLC and ERAPSCO. |
| |
| 21.1* | | Subsidiaries of Sparton Corporation. |
| |
| 23.1* | |
| Consent of BDO USA, LLP. |
| |
| 31.1** | |
| Interim Chief Executive Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 31.2** | |
| Chief Financial Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 32.1** | |
| Interim Chief Executive Officer and Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
| 101.INS*** | |
101.INS** | XBRL Instance Document. |
| |
| 101.SCH*** | | XBRL Taxonomy Extension Schema Document. |
| |
| 101.CAL*** | | XBRL Taxonomy Calculation Linkbase Document. |
| |
| 101.DEF*** | | XBRL Taxonomy Extension Definition Linkbase Document. |
| |
| 101.LAB*** | | XBRL Taxonomy Extension Label Linkbase Document. |
| |
| 101.PRE*** | | XBRL Taxonomy Extension Presentation Linkbase Document. |
* Filed herewith.
† | * | Incorporated by reference from the same numbered exhibit to the Registrant’s Annual Report on Form10-K filed with the SEC on September 14, 2018. |
| † | Indicates management contract or compensatory arrangement. |
| *** | XBRL (Extensible Business Reporting Language) information is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
| 1 | Confidential treatment has been requested with respect to the redacted portions of this exhibit. |
36
SIGNATURES
Pursuant to the requirements of Section 13 or compensatory arrangement.
** XBRL (Extensible Business Reporting Language) information is deemed not filed or part of a registration statement or
prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of
Section 1815(d) of the Securities Exchange Act of 1934, and otherwise is not subjectthe registrant has duly caused this report to liability under these sections.
1 Confidential treatment has been requested with respect tobe signed on its behalf by the redacted portions of this exhibit.undersigned, thereunto duly authorized. | | |
| Sparton Corporation |
| |
| By: | | /S/ JOSEPH J. HARTNETT |
| | Joseph J. Hartnett Interim President and Chief Executive Officer |
| |
| | Date: October 29, 2018 |
