Edgar Filing: SPARTON CORP

SPARTON CORPORATION

Dated: September 13, 2018

/s/ Joseph J. Hartnett

Joseph J. Hartnett, Interim President

and Chief Executive Officer

8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): September 7, 2018

SPARTON CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Ohio

1-1000

38-1054690

(State or other jurisdiction

of incorporation)

(Commission File Number)

(IRS Employer

Identification No.)

425 N. Martingale Road

Suite 1000

Schaumburg, Illinois

60173-2213

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s telephone number, including area code: (800) 772-7866

N/A

(Former Name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter)

☐ Emerging growth company

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 pursuant to Section 13(a) of the Exchange Act. ☐

Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.

On September 7, 2018, the audit committee of the board of directors (the “Audit Committee”) and management of Sparton Corporation (“Sparton” or the “Company”), after discussions with BDO USA, LLP (“BDO”), the Company’s independent registered public accounting firm, concluded that the consolidated financial statements for the quarterly periods ended October 1, 2017, December 31, 2017, and April 1, 2018 (the “Restated Quarters”) which were issued in the Company’s previously filed Quarterly Reports on Forms 10-Q for such periods should no longer be relied upon and will be restated.

The restatement of the Company’s consolidated financial statements for the Restated Quarters is set forth below in the tabular presentation. The effect of the restatement is to increase our reported gross profit and net income or reduced net loss for the Restated Quarters. The restatement arose as a result of the implementation of a new enterprise resource planning system (“ERP system”) at our DeLeon Springs, FL location at the beginning of fiscal 2018. The new ERP system was implemented, in large part, to address the needs of the U.S. Navy, the Defense Contract Management Agency (“DCMA”) and the Defense Contract Audit Agency (“DCAA”) in our reporting and management of our government contracts. To meet these needs, the ERP system capitalized certain allowable general and administrative expenses to inventory in accordance with Defense Federal Acquisition Regulations (“DFARs”). In order to properly account for these expenses under generally accepted accounting principles, the Company, during its monthly financial close process, reversed these capitalized expenses as an adjustment in our consolidation and financial reporting tool. As this reversal entry was reflected in our consolidation and financial reporting tool but not in the ERP system, the Company did not properly account for cost of goods sold when inventory was shipped, resulting in an understatement of inventory and a corresponding overstatement of cost of goods sold. We believe this is an isolated matter as this was the only adjustment to the consolidation and financial reporting tool that was not also recorded in the ERP systems of the operating entities (other than reclassification entries for reporting purposes) during the Restated Quarters. The correction only impacted the Company’s Engineered Components & Products reportable business segment.

In connection with the restatement, the Company re-evaluated its conclusions regarding the effectiveness of the Company’s disclosure controls and procedures and internal controls over financial reporting for the Restated Quarters and determined that a material weakness existed for the periods covered by the Restated Quarters. We will report this material weakness in our fiscal year 2018 Form 10-K in Item 9A, Controls and Procedures – Management Report on Internal Control over Financial Reporting. To remediate the material weakness over the interim reporting periods, we no longer allow adjustments to be made in our consolidation and financial reporting tool (other than reclassification entries for reporting purposes) that are not also reflected in the ERP systems of the operating entities. In addition, we will increase our quarterly oversight of our consolidation and financial reporting tool. We believe that the additional controls over our interim reporting periods will mitigate this matter.

The effects of this error on our previously reported fiscal year 2018 quarterly statements of operations are as follows:


	Originally Reported									Adjustments									Restated
	Ql			Q2			Q3			Ql			Q2			Q3			Ql			Q2			Q3
Net sales	$	82,763		$	97,819		$	93,938		$	—		$	—		$	—		$	82,763		$	97,819		$	93,938
Cost of goods sold		68,175			77,390			76,262			(1,336	)		(1,320	)		(2,051	)		66,839			76,070			74,211

Gross profit		14,588			20,429			17,676			1,336			1,320			2,051			15,924			21,749			19,727
Operating expense:
Selling and administrative		15,205			14,074			13,253			—			—			—			15,205			14,074			13,253
Internal research & development		572			669			307			—			—			—			572			669			307
Amortization of intangible assets		1,923			1,893			1,802			—			—			—			1,923			1,893			1,802

Total operating expense		17,700			16,636			15,362			—			—			—			17,700			16,636			15,362

Operating income (loss)		(3,112	)		3,793			2,314			1,336			1,320			2,051			(1,776	)		5,113			4,365
Other expense:		(1,276	)		(1,494	)		(1,460	)		—			—			—			(1,276	)		(1,494	)		(1,460	)

Income (loss) before income taxes		(4,388	)		2,299			854			1,336			1,320			2,051			(3,052	)		3,619			2,905
Income taxes		(1,536	)		11,333			239			468			370			574			(1,068	)		11,703			813

Net income (loss)	$	(2,852	)	$	(9,034	)	$	615		$	868		$	950		$	1,477		$	(1,984	)	$	(8,084	)	$	2,092

EPS	$	(0.29	)	$	(0.92	)	$	0.06											$	(0.20	)	$	(0.82	)	$	0.21

The effects of this error on our previously reported fiscal year 2018 quarterly statements of operations on a year-to-date basis are as follows:


	Originally Reported									Adjustments									Restated
	YTD Q1			YTD Q2			YTD Q3			YTD Q1			YTD Q2			YTD Q3			YTD Q1			YTD Q2			YTD Q3
Net sales	$	82,763		$	180,582		$	274,520		$	—		$	—		$	—		$	82,763		$	180,582		$	274,520
Cost of goods sold		68,175			145,565			221,827			(1,336	)		(2,656	)		(4,707	)		66,839			142,909			217,120

Gross profit		14,588			35,017			52,693			1,336			2,656			4,707			15,924			37,673			57,400
Operating expense:
Selling and administrative		15,205			29,279			42,532			—			—			—			15,205			29,279			42,532
Internal research & development		572			1,241			1,548			—			—			—			572			1,241			1,548
Amortization of intangible assets		1,923			3,816			5,618			—			—			—			1,923			3,816			5,618

Total operating expense		17,700			34,336			49,698			—			—			—			17,700			34,336			49,698

Operating income (loss)		(3,112	)		681			2,995			1,336			2,656			4,707			(1,776	)		3,337			7,702
Other expense:		(1,276	)		(2,770	)		(4,230	)		—			—			—			(1,276	)		(2,770	)		(4,230	)

Income (loss) before income taxes		(4,388	)		(2,089	)		(1,235	)		1,336			2,656			4,707			(3,052	)		567			3,472
Income taxes		(1,536	)		9,797			10,036			468			838			1,412			(1,068	)		10,635			11,448

Net income (loss)	$	(2,852	)	$	(11,886	)	$	(11,271	)	$	868		$	1,818		$	3,295		$	(1,984	)	$	(10,068	)	$	(7,976	)

EPS	$	(0.29	)	$	(1.21	)	$	(1.15	)										$	(0.20	)	$	(1.02	)	$	(0.81	)

The effects of this error on our previously reported fiscal year 2018 quarterly balance sheets are as follows:


	Originally Reported									Adjustments						Restated
	Q1			Q2			Q3			Q1		Q2		Q3		Q1			Q2			Q3
Assets
Cash and cash equivalents	$	319		$	1,104		$	792		$	—	$	—	$	—	$	319		$	1,104		$	792
Accounts receivable		53,933			54,466			65,730			—		—		—		53,933			54,466			65,730
Inventory		68,646			62,767			65,448			1,336		2,656		4,707		69,982			65,423			70,155
Prepaids and other current assets		4,443			4,177			3,639			—		—		—		4,443			4,177			3,639

Total current assets		127,341			122,514			135,609			1,336		2,656		4,707		128,677			125,170			140,316
Property, plant and equipment		33,374			34,484			33,760			—		—		—		33,374			34,484			33,760
Goodwill		12,663			12,663			12,663			—		—		—		12,663			12,663			12,663
Other intangible assets		26,522			24,629			22,827			—		—		—		26,522			24,629			22,827
Deferred income taxes		24,874			14,771			14,760			—		—		—		24,874			14,771			14,760
Other non-current assets		5,670			5,177			4,988			—		—		—		5,670			5,177			4,988

Total assets		230,444			214,238			224,607		$	1,336	$	2,656	$	4,707		231,780			216,894			229,314

Liabilities and Shareholders’ Equity
Accounts payable	$	30,278		$	38,210		$	28,401		$	—	$	—		—	$	30,278		$	38,210		$	28,401
Accrued liabilities		8,802			10,417			10,869			—		—		—		8,802			10,417			10,869
Other current liabilities		8,228			10,390			11,730			468		838		1,412		8,697			11,228			13,142

Total current liabilities		47,308			59,017			51,000			468		838		1,412		47,777			59,855			52,412
Credit facility		97,600			78,900			96,800			—		—		—		97,600			78,900			96,800
Other long-term liabilities		6,273			6,060			5,896			—		—		—		6,273			6,060			5,896

Total liabilities		151,181			143,977			153,696			468		838		1,412		151,650			144,815			155,108
Common Stock		30,388			30,399			30,405			—		—		—		30,388			30,399			30,405
Retained earnings		50,116			41,081			41,696			868		1,818		3,295		50,983			42,899			44,991
Accumulated other comprehensive loss		(1,241	)		(1,219	)		(1,190	)		—		—		—		(1,241	)		(1,219	)		(1,190	)

Total shareholders’ equity		79,263			70,261			70,911			868		1,818		3,295		80,130			72,079			74,206

Total liabilities and shareholders’ equity		230,444			214,238			224,607		$	1,336	$	2,656	$	4,707		231,780			216,894			229,314

The Company intends to file, as soon as practicable, financial information for the Restated Fiscal 2018 Quarters through amendments to the previously filed fiscal year 2018 Quarterly Reports on Forms 10-Qs.

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 hereunto duly authorized.