UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD ENDED —For the quarterly period endedSeptember 30, 20032004

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIODFromFor the transition period from                   to                   

Commission File number1-1000

SPARTON CORPORATION

Ohio
(State or Other Jurisdiction of Incorporation or Organization)

38-1054690
(I.R.S. Employer Identification No.)

2400 East Ganson Street, Jackson, Michigan 49202
(Address of Principal Executive Offices, Zip Code)

(517) 787- 8600
(Registrant’s Telephone Number, Including Area Code)

Indicate by checkmark 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.                                                                                                                     [X] YesX [  ] No

Indicate by check markcheckmark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act.)Act).

Common Stock, $1.25 Par Value —7,947,608Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as ofOctober 31, 2003.

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the latest practical date.

INDEX

Part I.
Financial Information

Part II. Other Information

The Company has financial instruments that are subject to interest rate risk, principally short-term investments. Historically, the Company has not experienced material gains or losses due to such interest rate changes. Based on the current holdings of short-term investments, the interest rate risk is not considered to be material.

Stock optionsNew accounting standards —In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS No. 148), which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company followsamendment permits two additional transition methods for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures about the effects of stock-based compensation. SFAS No. 148 was effective for the Company’s fiscal year end June 30, 2003. SFAS No. 123, as amended by SFAS No. 148, permits companies to (i) recognize as expense the fair value of stock-based awards, or (ii) continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”Employees,” and related Interpretations (APB 25), and provide pro forma net income and earnings per share disclosures for employee stock compensation as if the fair-value-based method defined in SFAS No. 123 had been applied.

If the Company were to start expensing stock options immediately, the applicable accounting rules would be those prescribed by SFAS 123, which require the use of fair value to report stock option expense. However, the FASB has proposed new rules that would replace SFAS 123, and those new rules, if adopted as proposed, would require companies to expense stock options and, for the Company, would be effective beginning in the first quarter of fiscal 2006. The Company will fully comply once final rules are published and effective. It is expected that these new rules will be different than SFAS 123. Differences between the two rules could include the tax accounting for stock options, the pattern and timing of recording each stock option’s expense, accounting for option plan modifications and share cancellations. Given that these new rules are not final, the Company believes that expensing stock options using SFAS 123 and then changing to the FASB’s new rules when finalized would confuse users of our financial statements. Therefore, given the changes under consideration by the FASB, the Company believes it is appropriate to await the official pronouncement of the FASB before changing its formal accounting method on this subject. The Company does not expect the final pronouncement to have a significant impact on results of operations or financial position.

Periodic benefit cost —The Company follows the disclosure requirements of SFAS No. 132 (R). For the three months ended September 30, 2004, $132,000 of expense had been recorded. Total net periodic benefit cost for fiscal 2005 is expected to be $528,000. The components of net periodic pension expense for each of the periods presented were as follows:

Stock options —The Company follows APB 25 and related Interpretations in accounting for its employee stock options. Under APB 25, no compensation expense is recognized as the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant. The Company follows the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,”SFAS No.123 as amended by SFAS No. 148, “Accounting148.

The Company has an incentive stock option plan under which 760,000 common shares were reserved for Stock-Based Compensation-Transitionoption grants to key employees and Disclosure.”directors at the fair market value of the stock at the date of the grant. As of September 30, 2004, there were 558,136 shares under option outstanding with prices ranging from $3.40 to $9.35, a weighted contracted life of 2.60 years, and a weighted average exercise price of $6.10. The following table summarizes information about stock options outstanding and exercisable at September 30, 2004:

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At September 30, 2003, the2004 exercisable options and per share weighted-averageweighted average exercise price of options outstanding was $6.35. The weighted-average remaining contractual life of those options was approximately 3 years.were 307,136 and $5.72, respectively. At September 30, 2003, there were 240,040 options exercisable at the weighted-average per share price of $5.77. Remaining2004, remaining shares available for grant under the plan were 211,312 at September 30, 2003.186,472.

The following sets forth a reconciliation of net income (loss) and earnings (loss) per share information for the three months ended September 30, 20032004 and 2002,2003, as if the Company had recognized compensation expense based on the fair value at the grant date for awards under the plan.

2. INVENTORIES

—Inventories are valued at the lower of cost (first-in, first-out basis) or market and include costs related to long-term contracts. Inventories, other than contract costs, are principally raw materials and supplies. The following are the major classifications of inventory:

Work in progressprocess and finished goods inventories include $3.0$1.9 and $1.1$4.3 million of completed, but not yet accepted, sonobuoys at September 30, 20032004 and June 30, 2003,2004, respectively. Inventories are reduced by progress billings to the U.S. government of approximately $5,166,000 and $2,125,000 at September 30, 2004 and June 30, 2004, respectively.

3. EARNINGS (LOSS) PER SHARE

All share and per share information for 2002 have been adjusted to reflect the impact of the 5% stock dividend declared in January 2003. —For the three months ended September 30, 2002,2004, options to purchase 2,700 shares of common stock were not included in the computation of diluted earnings per share, as the options’ exercise price for all stock options granted was lessprices were greater than the average market price of the Company’s common stock and, therefore, theywould be anti-dilutive.

Due to the Company’s fiscal 2004 reported net loss, 148,558 outstanding stock option share equivalents were included inexcluded from the computation for weighted averageof diluted shares outstanding. Stock options were not considered inearnings per share during the three months ended September 30, 2003, calculation as the effectbecause their inclusion would be anti-dilutive due to the current period loss. have been anti-dilutive.

Basic and diluted earnings (loss) per share were computed on the following:

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On October 21, 2003, Sparton’s Board of Directors approved a 5% stock dividend. Eligible shareowners of record on November 21, 2003, will receive the stock dividend. The dividend distribution or payment date was established as December 19, 2003. Cash will be paid in lieu of fractional shares of stock. This is a continuation of a process the Company began last fiscal year. The effect of this stock dividend will be reflected in the Company’s shareowners’ equity in the quarter ending December 31, 2003. Per share data will also be restated for all periods presented to give effect to the stock dividend beginning in that quarter.

Pro forma earnings (loss) per share after October 2003 stock dividend:

4. COMPREHENSIVE INCOME (LOSS)

—Comprehensive income (loss) includes net income (loss) as well as unrealized gains and losses, net of tax, which are excluded from net income. They are, however, reflected as a direct charge or credit to shareowners’ equity. Total comprehensive income (loss) is as follows for the three months ended September 30:

At September 30, 2003, shareowners’ equity includes accumulated other comprehensive income of $368,000 and $106,000, which relate to unrealized gains, net of tax, on investment securities owned and investment securities held by an investee accounted for by the equity method, respectively. which are excluded from net income. Unrealized gains and losses, net of tax, are reflected as a direct charge or credit to shareowners’ equity. Total comprehensive income (loss) is as follows for the three-month periods ended September 30, 2004 and 2003, respectively:

At September 30, 2004 and June 30, 2003, these amounts were $471,0002004, shareowners’ equity includes accumulated other comprehensive income of $129,000 and $(112,000)$62,000, respectively, net of tax. These balances include $63,000 and $16,000 for unrealized gains on investment securities owned, and unrealized gains of $66,000 and $46,000 for investment securities held by an investee accounted for by the equity method, as of September 30, 2004 and June 30, 2004, respectively.

5. INVESTMENT SECURITIES

—The fair value of cash and cash equivalents, accounts receivable, and accounts payable approximate their carrying value. Cash and cash equivalents consist of demand deposits and other highly liquid investments with an original term of three months or less.

Investments in debt securities that are not cash equivalents and marketable equity securities have been designated as available for sale. Those securities are reported at fair value, with net unrealized gains and losses included in accumulated other comprehensive income, net of applicable taxes. Unrealized losses that are other than temporary are recognized in earnings. Realized gains and losses on investments are determined using the specific identification method. The Company’s investment in Cybernet Systems Corporation is accounted for under the equity method.

Cash and cash equivalents consist of demand deposits and other highly liquid investments. The investment portfolio has various maturity dates up to 2524 years. A daily market exists for all investment securities. The Company believes that the impact of fluctuations in interest rates on its investment portfolio should not have a material impact on financial position or results of operations. Investments in debt securities that are not cash equivalents and marketable equity securities have been designated as available-for-sale. Those securities are reported at fair value, with net unrealized gains and losses included in accumulated other comprehensive income, net of applicable taxes. Unrealized losses that are other than temporary are recognized in earnings. The Company does not believe there are any significant individual unrealized losses as of September 30, 2004, which would represent other than temporary losses, and there are no unrealized losses with a duration of one year or more. Realized gains and losses on investments are determined using the specific identification method. It is the Company’s intention to use these investment securities to provide working capital and fund the expansion of its business and for other business purposes.

At September 30, 2003,2004, the Company had net unrealized gains of $584,000.$100,000. At that date, the net after-tax effect of these gains was $368,000,$63,000, which amount is included in accumulated other comprehensive income within shareowners’ equity. For the three months ended September 30, 20032004 and 2002,2003, purchases of investmentsinvestment securities totaled $909,000$2,261,000 and $3,034,000,$909,000, and sales of investment securities totaled $400,000$2,295,000 and $450,000,$400,000, respectively.

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SpartonThe Company owns a 14% interest in Cybernet which was purchased for $3,000,000 in June 1999.Systems Corporation (Cybernet), 12% on a fully diluted basis. This investment, which amounted to $1,778,000 and $1,490,000with a carrying value of $1,677,000 at September 30 2003 and 2002, respectively,June 30, 2004, represents the Company’s equity interest in Cybernet’s net assets plus $770,000 of goodwill (no longer being amortized in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”). The investment in Cybernet is accounted for under the equity method, and is included in other assets on the condensed consolidated balance sheet. Sparton’sThe Company’s share of unrealized gains (losses) on available-for-sale securities held by Cybernet is carried in accumulated other comprehensive income (loss) within the Shareowners’ Equityshareowners’ equity section of Sparton’sthe Company’s balance sheet.

The contractual maturities of debt securities, and total equity securities as of September 30, 2003,2004, are as follows:

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6. COMMITMENTS AND CONTINGENCIES

—One of Sparton’s former manufacturing facilities, located in Albuquerque, New Mexico (Coors Road), has been involved with ongoing environmental remediation since the early 1980’s.

At September 30, 2003,2004, Sparton has a remaining accrual of $7,397,000accrued $7,072,000 as its estimate of the minimum future undiscounted financial liability, with respect to this matter, of which $643,000$599,000 is classified as a current liability and included on the balance sheet in accrued liabilities. Amounts charged to operations, principally legal and consulting fees, for the three months ended September 30, 2004 and 2003 were $84,000 and $74,000, respectively. These costs were generally incurred in pursuit of various claims for reimbursement/recovery. The Company’s minimum cost estimate is based upon existing technology and excludes legal and related consulting costs, which are expensed as incurred. The Company’s estimate includes equipment, operating, and operatingcontinued monitoring costs for onsite and offsite pump and treat containment systems, a soil vapor extraction program and continued onsite and offsite monitoring.systems.

During the first quarter ofIn fiscal 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 $4,850,000 fromcash and the DOE and others in fiscal 2003, plus an additional $1,000,000, which was received during the first quarter of fiscal 2004. In addition, the DOE has agreed to reimburse Sparton for 37.5% of certain future environmental expenses in excess of $8,400,000 incurred atfrom the site. The settlement concluded a very lengthy negotiation process and two court actions, one in the Federal Courtdate of Claims and one in the Federal District Court in Albuquerque, New Mexico. With the settlement, Sparton received cash and gained some degree of risk protection, with the DOE agreeing to reimburse future costs incurred above the established level. The financial impact of the settlement was recorded in the first quarter of fiscal 2003 with $5,500,000 recorded as income.

settlement. 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 significantly affected by the impact of changes associated with the ultimate resolution of this contingency.

Amounts charged to operations, principally legal and consulting, for the three months ended September 30, 2003 and 2002 were $74,000 and $153,000, respectively. These costs were generally incurred in pursuit of various claims for reimbursement/recovery.10

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of certain significant events affecting the Company’s earnings and financial condition during the periods included in the accompanying financial statements. Additional information regarding the Company can be accessed via Sparton’s website at www.sparton.com. Information provided at the website includes, among other items, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Quarterly Earnings Releases, News Releases, and the Code of Business Conduct and Ethics, as well as the various committee charters of the Board of Directors. These items are also available, free of charge, by contacting the Company’s Shareowners Relations department. The Company’s operations are in one line of business, electronic contract manufacturing services (EMS). This includesSparton’s capabilities range from product design and development through aftermarket support, specializing in total business solutions for government, medical/scientific instrumentation, aerospace and industrial/other markets. These include the design, development and/or manufacture of electronic parts and assemblies for both government and commercial customers worldwide. Governmental sales are mainly sonobuoys. Commercial customers are in general industrial markets, as well as the regulated aerospace and medical markets.

The Private Securities Litigation Reform Act of 1995 reflects Congress’ determination that the disclosures of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by corporate management. The following discussion about the Company’s results of operations and financial conditionThis report on Form 10-Q contains forward-looking statements that involve riskwithin the scope of the Securities Act of 1933 and uncertainty.the Securities Exchange Act of 1934. The words “expects,” “anticipates,” “believes,” “intends,” “plans,” and similar expressions, and the negatives of such expressions, are intended to identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The Company undertakes no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission (SEC). These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed below. Accordingly, Sparton’s future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. The Company notes that a variety of factors could cause the actual results and experience to differ materially from anticipated results or other expectations expressed in the Company’s forward-looking statements.

Sparton, as a high-mix, low to medium-volume supplier, provides rapid product turnaround for customers. High-mix pertains to customers needing multiple product types with generally lower 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 business if the Company were not able to replace those sales with new business.

Other risks and uncertainties that may affect the operations, performance, growth forecasts and business results of the Company’s business include, but are not limited to, timing and fluctuations in U.S. and/or world economies, customer demand for products, competition in the overall EMS business, availability of production labor and management services under terms acceptable to the Company, Congressional budget outlays for sonobuoy development and production, Congressional legislation, foreign currency exchange rate risk, uncertainties associated with the costs and benefits of new facilities and the closing of others, uncertainties associated with the outcome of litigation, changes in the interpretation of environmental laws and the uncertainties of environmental remediation. An additionalA further risk factor is the availability and cost of materials. The Company has encountered availability and extended lead time issues on some electronic components in the past when market demand has been strong, which have resulted in higher prices and late deliveries. Finally,Additionally, the timing of sonobuoy sales to the U.S. Navy is dependent upon access to the test range and successful passage of product tests performed by the U.S. Navy. Reduced governmental budgets have made access to the test range less predictable and less frequent than in the past. Finally, the Sarbanes-Oxley Act of 2002 has required changes in, and formalization of, some of the Company’s corporate governance and compliance practices. The SEC and New York Stock Exchange have also passed new rules and regulations requiring additional compliance activities. Compliance with these rules has increased administrative costs, and it is expected that certain of these costs will continue indefinitely. 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.

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto.

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RESULTS OF OPERATIONS

Sales for the three-month period ended September 30, 2003,2004, totaled $36,425,000, comparable with$45,188,000, an increase of $8,763,000 (24.1%) from the same quarter last year. Government sales increased slightly, and included $4.7 million of a delayed sonobuoy sale originally anticipated to ship in fiscal 2003. Overall,2004. Government sales were belowlower than anticipated due to production interruptions at the Company’s expectations, but do reflect the continued depressed economic environment. A modest declineFlorida facilities, as several tropical storms disrupted operations in government EMS sales to $10,300,000 was offset by an increase in other markets. Sales included $9,025,000, $12,087,000 and $5,013,000 of industrial, aerospace and medical/scientific instrumentation sales, respectively. Sales in these areas in fiscal 2003 were $10,456,000, $10,449,000, and $5,034,000, respectively. Government sales declined slightly from last year, in part due to very limited access to the test range. In addition, the Company has encountered technical difficulties in the production of one of its current sonobuoy contracts which has resulted in minimal margin and further depressed sales. Also, two additional sonobuoy contracts encountered difficulties. Increased cost to complete estimates on these two sonobuoys further reduced operating margin by $518,000. Sonobuoy sales are subject to the passage of testing. During the first quarter of fiscal 2005. Industrial market sales also increased from the same period last year. This increase was attributed to increased demand from three existing customers. Sales to the aerospace markets continue to grow, increasing 54.5% from the prior year. In general, this reflects stronger demand in the commercial aerospace market. A large component of this increased demand was due to higher sales of products related to collision avoidance systems. The increased demand for the collision avoidance products is not anticipated to continue throughout the year. $6.0 million of the aerospace increase was attributable to increased orders from one customer, to which the Company supplies product to six manufacturing facilities. Medical/scientific instrumentation sales declined from the prior year. This decrease resulted from overall lower demand from existing customers in this market area. While the Company has added several new customers, and/or products in this area, the volume of new business has not been as much as previously anticipated.

During the month of October the Company, did not have access to the Navy’s test range; and access in November is also unlikely. If the Company does not have sufficient access during December, with resulting successful passage of product tests, government sales in the second quarter would be negatively impacted.

The following table presents income statement data as a percentage of net sales for the quarters ended September 30, 2004 the testing facility was unavailable until mid-September. In late September eight lots were tested. Two sonobuoy lots passed and four failed testing, but were later accepted. However, two other lots, with sales totaling $2.3 million, failed and require rework. These lots will be shipped and the associated sales recognized in future periods.2003, respectively:

An operating loss of $3,399,000 versus an operating profit of $5,587,000$2,996,000 was reported for the three months ended September 30, 2003,2004, compared to an operating loss of $3,389,000 for the three months ended September 30, 2003. Gross profit percentage for the three months ended September 30, 2004, was 14.3%, up from 1.2% for the same period last year. While the recent tropical storms largely bypassed the Company’s two Florida facilities, extensive preparations were undertaken to prepare for the storms. This unexpected activity, along with the minor damage that was experienced and 2002, respectively. The current period results include several start-up contracts which had negative or minimal gross margins. While improvements have been made on these contracts, sales of $5,533,000unproductive wages, resulted in a grosscosts of approximately $500,000 being charged in the first quarter of fiscal 2005. The prior year’s depressed margin reflects the inclusion of only $115,000.costs on the start-up phase of several major programs, as well as final charges incurred at the completion of one sonobuoy

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contract that had experienced technical problems. In addition, the prior year’s margin included a redesign effort on an existing product line, which resulted in a charge to operations of $496,000. This effort is projected to be completed by December 2003. GivenThe majority of the on-going reduced level of sales, the Company continues to experience underutilized capacity. Sellinglowered selling and administrative expenses, as a percentage of sales, increased slightly from last year, 10.3% in 2003 and 9.6% in 2002. Most of this increase was due to higherthe significant increase in sales for the first quarter of fiscal 2005, compared to the same period last year, without a related increase in these expenses. In addition, bid and proposal and unreimbursed research and development activities, primarily related to government contracts, which further reduced

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current earnings. Included in 2003 operating income was a $5,500,000 ($3,630,000 net of tax) recovery of certain remediation costs. It reflects Sparton’s settlement withexpenses for fiscal 2005 declined $340,000 from the DOE and others regarding reimbursement of costs incurred at the Company’s Sparton Technology Coors Road facility. Also included were charges related to the New Mexico environmental remediation effort, principally litigation, of $74,000 in 2003 and $153,000 in 2002.same period last year.

Interest and Investment Income increased $113,000investment income decreased $15,000 to $231,000$215,000 in 2003,2004. This reduction was due to increaseddecreased funds available funds for investment. Other Expense-Netincome-net in 2004 was $358,000, versus expense of $69,000 in 2003. Translation adjustments, along with gains and losses from foreign currency transactions, are included in other income and, in the aggregate, amounted to a gain of $361,000 and a loss of $10,000 during the three months ended September 30, 2004 and 2003, was $59,000 versusrespectively. Other Income-Net of $14,000 in 2002. Other Expense-Netexpense-net in 2003 includes $60,000 of adjustmentscharges for Sparton’sthe Company’s previously owned automotive segment.

TheDue to factors described above, the Company reported a lossnet income of $2,180,000$2,414,000 ($0.270.29 per share)share, basic and diluted) for the three months ended September 30, 2003,2004, versus net incomea loss of $3,578,000$2,180,000 ($0.47(0.26) per share)share, basic and diluted) for the corresponding period last year.

LIQUIDITY AND CAPITAL RESOURCES

For the three-month period ended September 30, 2003,2004, Cash and Cash Equivalents increased $2,807,000$4,194,000 to $13,369,000. Overall, Cash and Investments increased by $3,082,000 from June 30, 2003.$15,014,000. Operating activities provided $3,494,000$5,298,000 in net cash flows. The primary source of cash was from operations, compared to a loss in fiscal 2004 resulting in a use of cash, and a reduction in accounts receivable. The primary use of cash was a decrease in accounts payable. The primary source of cash in fiscal 2004 was a decrease in accounts receivable, reflective of receipt of payment for thea large volume of sales recognized in June 2003. The primary use ofchange in cash was anflow from prior year due to inventory and prepaid expenses reflected a large increase in inventories. A portion of this increase in inventories is reflective offiscal 2004 inventory due to delayed customer delivery schedules. An additionalschedules, as well as increased inventory increase reflects material for new customer contracts. Cash provided by operating activities in 2002 was less than net income because the $5.8 million related to the environmental settlement with the DOE and others had not been received as of September 30, 2002.

Cash flows used by investing activities totaled $702,000, principally for the purchasethree-month period ended September 30, 2004, totaled $1,111,000, primarily for purchases of investment securities. Cash flow provided by financing activities totaled $15,000 from stock options exercised.property, plant and equipment, which is discussed below.

The Company’s market risk exposure to foreign currency exchange and interest rates are not considered to be material, principally due to their short term nature and minimal receivables and payables designated in foreign currency. The Company has had no short-term bank debt since December 1996, and currently has an unused informal line of credit totaling $20 million.

At September 30, 2003,2004 and June 30, 2002,2004, the aggregate government EMS backlog was approximately $45$37 million and $51$41 million, respectively. A majority of the September 30, 2003,2004, backlog is expected to be realized in the next 8-1012-15 months. Commercial EMS orders are not included in the backlog. The Company does not believe the amount of commercial activity covered by firm purchase orders is a meaningful measure of future sales, as such orders may be rescheduled or cancelled without significant penalty.

The Company has had no short-term debt since December 1996, and currently has an unused informal line of credit totaling $20 million from one bank.

Sparton is continuing to pursueconstructing a joint venture operationnew facility in Vietnam, with Texatronics, our Alliance Partnerwhich is expected to provide increased growth opportunities. As the Company has not previously done business in Richardson, Texas. Meetings have been held with architectsthis emerging market, there are many uncertainties and contractors to investigaterisks inherent in this potential venture. It is estimated that the typeCompany will invest approximately $5-$7 million, which includes land, building, and design of the building.initial operating expenses. The actual joint venture continues in a discussion phase. If an agreement is finalized, the new joint ventureoperation will carry the name Spartronics.Spartronics, Inc. The Company is also exploring the possible purchasecontinuing a program of a new facility in the Albuquerque, New Mexico area to replace an existing facility, as well as identifying and evaluating potential acquisition candidates in both the defense and medical markets.

The Company has purchased a manufacturing facility in Albuquerque, New Mexico. This facility will replace an existing plant in Rio Rancho, New Mexico. The facility was purchased in December 2003 for approximately $4.5 million. Estimated additional costs totaling approximately $2.0 million are anticipated to be incurred as the Company completes its transition between facilities. At September 30, 2004, $5.5 million of cost for the new facility was included as construction in progress in the property, plant and equipment section of the condensed consolidated balance sheet. The existing Rio Rancho plant was sold in June 2004. The Company will continue to lease the Rio Rancho facility until the transition to the new facility is completed. The transition between facilities is anticipated to be completed by December 31, 2004.

No cash dividends were declared in either period presented. At September 30, 2003,2004, the Company had $89,117,000$91,352,000 in recorded shareowners’ equity ($11.2110.94 per share), $75,758,000$74,140,000 in working capital, and a 5.25:5.03:1.00 working capital ratio. For the foreseeable future (12-18 months), the Company believes it has sufficient liquidity for its anticipated needs, unless a significant business acquisition is identified and completed for cash.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended June 30, 2004. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported of 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 these estimates. The Company believes that of its significant accounting policies, the following involve a higher degree of judgment and complexity.

OTHEREnvironmental Contingencies

One of Sparton’s former manufacturing facilities, located in Albuquerque, New Mexico (Coors Road), has been the subject of ongoing investigations and remediation efforts conducted with the Environmental Protection Agency (EPA) under the Resource Conservation and Recovery Act (RCRA). Sparton has accrued its estimate of the minimum future non-discounted financial liability. The estimate was developed using existing technology and excludes legal and related consulting costs. The minimum cost estimate includes equipment, operating and monitoring costs for both onsite and offsite remediation. Sparton recognizes legal and consulting services in the periods incurred and reviews its EPA accrual activity quarterly. Uncertainties associated with environmental remediation contingencies are pervasive and often result in wide ranges of reasonably possible outcomes. It is possible that cash flows and results of operations could be materially affected by the impact of changes in these estimates.

Government Contract Cost Estimates

Government production contracts are accounted for based on completed units accepted with respect to revenue recognition and their estimated average cost per unit regarding costs. Losses for the entire amount of a contract 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. Estimated costs developed in the early stages of contracts can change significantly as the contracts progress, and events and activities take place. Significant 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 on a quarterly basis 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 on one or more significant contracts.

Commercial Inventory Valuation Allowances

Inventory valuation allowances for commercial customer inventories require a significant degree of judgment and are influenced by the Company’s experience to date with both customers and other markets, prevailing market conditions for raw materials, contractual terms and customers’ ability to satisfy these obligations, environmental or technological materials obsolescence, changes in demand for customer products, and other factors resulting in acquiring materials in excess of customer product demand. Contracts with some commercial customers may be based upon estimated quantities of product manufactured for shipment over estimated time periods. Raw material inventories are purchased to fulfill these customer requirements. Within these arrangements, customer demand for products frequently changes, sometimes creating excess and obsolete inventories.

The Company regularly reviews raw material inventories by customer for both excess and obsolete quantities, with adjustments made accordingly. 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 and a valuation allowance is established for the difference between the carrying cost and the estimated realizable amount. Conversely, should the disposition of adjusted excess and obsolete inventories result in recoveries in excess of these reduced carrying values, the remaining portion of the valuation allowances are reversed and taken into income when such determinations are made. It is possible that the Company’s financial position, results of operations and cash flows could be materially affected by changes to inventory valuation allowances for commercial customer excess and obsolete inventories.

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Allowance for Possible 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 collectibility 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 customers’ 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 possible losses. The Company reviews the adequacy of its allowance monthly. The allowance for doubtful accounts was $125,000 and $46,000 at September 30, 2004 and June 30, 2004, respectively. If the financial conditions 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 letters of credit from foreign customers, collection risk is considered minimal. Historically, uncollectible accounts have been insignificant and the minimal allowance is deemed adequate.

Pension Obligations

The Company calculates the cost of providing pension benefits under the provisions of Statement of Financial Accounting Standards (SFAS) No. 87. The key assumptions required within the provisions of SFAS No. 87 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 obligations reported in the Condensed Consolidated Balance Sheets 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 September 30, 2004. 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. For example, an increase in the return on the plan assets due to improved market conditions would reduce the unrecognized loss account and thus reduce future expense. While net periodic pension expense has increased during the past two years, no cash payments are expected to be required for the next several years due to the plan’s funded status.

OTHER

LITIGATION

One of Sparton’s facilities, located in Albuquerque, New Mexico, has been the subject of ongoing investigations conducted with the Environmental Protection Agency (EPA) under the Resource Conservation and Recovery Act (RCRA). The investigation began in the early 1980’s and involved a review of onsite and offsite environmental impacts.

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At September 30, 2003,2004, Sparton has an accrual of $7,397,000accrued $7,072,000 as its estimate of the future undiscounted minimum financial liability with respectrelated to this matter.site. The Company’s cost estimate is based upon existing technology and excludes legal and related consulting costs, which are expensed as incurred. The Company’s estimate includes equipment and operating costs for onsite and offsite operations and is based on existing methodology. 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. It is possible that cash flows and results of operations could be affected by the impact of the ultimate resolution of this contingency.

In 1995, Sparton Corporation and Sparton Technology, Inc. (STI) filed a Complaint in the Circuit Court of Cook County, Illinois, against Lumbermens Mutual Casualty Company and American Manufacturers Mutual Insurance Company demanding reimbursement of expenses incurred in connection with its remediation efforts at the Coors Road facility based on various primary and excess comprehensive general liability policies in effect between 1959 and 1975. In 1999, the Complaint was amended to add various other excess insurers, including certain London market insurers and Fireman’s Fund Insurance Company. The case remains in pretrial activity.

In September 2002, STI filed an action in the U.S. District Court for the Eastern District of Michigan to recover certain unreimbursed costs incurred as a result of a manufacturing relationshipis currently involved with two entities, Util-Link, LLC (Util-Link)legal actions, which are disclosed in Part II - “Other Information, Item 1. Legal Proceedings” of Delaware and National Rural Telecommunications Cooperative (NRTC) of the District of Columbia. On or about October 21, 2002, the defendants filed a counterclaim seeking money damages, alleging that STI breached its duties in the manufacture of products for the defendants. The defendant Util-Link has asked for damages in the amount of $25,000,000 for lost profits. The defendant NRTC has asked for damages in the amount $20,000,000 for the loss of its investment in and loans to Util-Link. Sparton believes that the damages sought by NRTC are included in Util-Link’s claim for damages and as such, are duplicative. Sparton also believes the counterclaim to be without merit and intends to vigorously defend against it. This case is in the initial stages of discovery.

this report. At this time, the Company is unable to predict the amountoutcome of recovery, if any, that may result from the pursuiteither of these two before-mentioned claims.

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Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK EXPOSURE

The Company manufactures its products in the United States and Canada. Sales of the Company’s products are made into the U.S. and Canada, as well as other foreign markets. The Company is potentially 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. Also, adjustments related to the translation of the Company’s Canadian 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 weak 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, historically, foreign currency gains and losses related to intercompany activity and balances have not been significant. The Company does not consider the market risk exposure relating to currency exchange to be material.

The Company has financial instruments that are subject to interest rate risk, principally short-term investments. Historically, the Company has not experienced material gains or losses due to such interest rate changes. Based on the current holdings of short-term investments, the interest rate risk is not considered to be material.

Item 4. CONTROLS AND PROCEDURES

The Company maintains internal controls over financial reporting intended to provide reasonable assurance at appropriate cost, that all material transactions are executed in accordance with Company authorization, and are properly recorded and reported in the financial statements, and that assets are adequately safeguarded. The Company also maintains a

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system of disclosure controls and procedures to ensure that information required to be disclosed in Company reports, filed or submitted under the Securities Exchange Act of 1934, is properly reported in the Company’s periodic and other reports.

As of September 30, 2003,2004, an evaluation was updated by the Company’s management, including the CEO and CFO, on the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures continue to be effective as of September 30, 2003.2004. There have been no significant changes in the Company’s internal controls over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 1. LEGAL PROCEEDINGSLegal Proceedings

One of Sparton’s former manufacturing facilities, located in Albuquerque, New Mexico (Coors Road), has been involved with ongoing environmental remediation since the early 1980’s.

In December 1999, the Company increased its accrual for the cost of addressing environmental impacts associated with its Coors Road facility by $10,000,000 pre-tax. This increase was in response to a Consent Decree settling lawsuits, as well as a related administrative enforcement action, and covered costs expected to be incurred over the next thirty years.

At September 30, 2003,2004, Sparton has a remaining accrual of $7,397,000accrued $7,072,000 as its estimate of the minimum future undiscounted financial liability, with respect to this matter, of which $643,000$599,000 is classified as a current liability and included on the balance sheet in accrued liabilities. The Company’s minimum cost estimate is based upon existing technology and excludes legal and related consulting costs, which are expensed as incurred. The Company’s estimate includes equipment, operating, and operatingcontinued monitoring costs for onsite and offsite pump and treat containment systems, a soil vapor extraction program and continued onsite and offsite monitoring.systems.

Factors which cause uncertainties forwith respect to the CompanyCompany’s estimate 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 significantly affected by the impact of changes associated with the ultimate resolution of this contingency. 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. It is possible that cash flows and results of operations could be materially affected by the impact of the ultimate resolution of this contingency.

During the first quarter ofIn fiscal 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 $4,850,000 fromcash and the DOE and others in fiscal 2003, plus an additional $1,000,000, which was received during the first quarter of fiscal 2004. In addition, the DOE has agreed to reimburse Sparton for 37.5% of certain future environmental expenses in excess of $8,400,000 incurred atfrom the site. The settlement concluded a very lengthy negotiation process and two court actions, one in the Federal Courtdate of Claims and one in the Federal District Court in Albuquerque, New Mexico. With the settlement, Sparton received cash and gained some degree of risk protection, with the DOE agreeing to reimburse future costs incurred above the established level. The financial impact of the settlement was recorded in the first quarter of fiscal 2003 with $5,500,000 recorded as operating income.settlement.

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In 1995, Sparton Corporation and Sparton Technology, Inc. (STI) filed a Complaint in the Circuit Court of Cook County, Illinois, against Lumbermens Mutual Casualty Company and American Manufacturers Mutual Insurance Company demanding reimbursement of expenses incurred in connection with its remediation efforts at the Coors Road facility

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based on various primary and excess comprehensive general liability policies in effect between 1959 and 1975. In 1999, the Complaint was amended to add various other excess insurers, including certain London market insurers and Fireman’s Fund Insurance Company. The case remains in pretrial activity.

In September 2002, Sparton Technology, Inc. (STI) filed an action in the U.S. District Court for the Eastern District of Michigan to recover certain unreimbursed costs incurred as a result of a manufacturing relationship with two entities, Util-Link, LLC (Util-Link) of Delaware and National Rural Telecommunications Cooperative (NRTC) of the District of Columbia. On or about October 21, 2002, the defendants filed a counterclaim seeking money damages, alleging that STI breached its duties in the manufacture of products for the defendants. The defendant Util-Link has asked for damages in the amount of $25,000,000 for lost profits. The defendant NRTC has asked for damages in the amount $20,000,000 for the loss of its investment in and loans to Util-Link. Sparton has had an opportunity to fully review the respective claims and believes that the damages sought by NRTC are included in Util-Link’s claim for damages and, as such, are duplicative. Sparton also believes the counterclaim to be without merit and intends to vigorously defend against it. This case isThese claims are now in the initial stages of discovery.pretrial stage.

At this time, the Company is unable to predict the amountoutcome of recovery, if any, that may result from the pursuiteither of these two before-mentioned claims.

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Item 4. Submission of Matters to a Vote of Security Holders

At the October 15, 2004, Special Meeting of Shareholders of Sparton Corporation, a continuation of the September 24, 2004, meeting, a total of 7,958,235 of the Company’s shares were present or represented by proxy at the meeting. This represented more than 95% of the Company’s shares outstanding. Total shares outstanding and eligible to vote were 8,351,538, of which 393,303 did not vote.

•		The proposal to eliminate cumulative voting in the election of directors was approved, with 5,607,704 shares voting for, 2,335,140 shares voting against, and 15,391 shares abstaining.
•		The proposal to require timely written notice of shareholder nominations for the election of directors was approved, with 5,783,636 shares voting for, 2,162,807 shares voting against, and 11,792 shares abstaining.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

	•		On July 29, 2003, the Company filed on Form 8-K, Item 5. Other Events; the Company issued a press release announcing it is in the exploratory stages of developing a plan to expand its manufacturing operations in Southeast Asia.
	•		On August 29, 2003, the Company filed on Form 8-K, Item 12. Results of Operation and Financial Condition; the Company issued a press release announcing the financial results of the fourth quarter and fiscal year ended June 30, 2003.

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SIGNATURES

Pursuant to the requirements 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.