##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File number 1-1000
 SPARTON CORPORATION
  OHIO
 38-1054690
 2400 East Ganson Street, Jackson, Michigan 49202
 (517) 787-8600
 þ o
  o o þ
 o þ
  Shares Outstanding atClass of Common Stock
    
    October 31, 2007$1.25 Par Value
    
    9,811,507




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##### 



2  
 TABLE OF CONTENTS
 Part I. Financial InformationItem 1. Financial Statements (Interim, Unaudited)Condensed Consolidated Balance Sheets
at September 30, 2007 and June 30, 2007
    
    
    3Condensed Consolidated Statements of Operations
for the three months ended September 30, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 2007 and 2006
    
    
    5Condensed Consolidated Statements of Shareowners Equity
for the three months ended September 30, 2007 and 2006
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    25Part II. Other InformationItem 1. Legal Proceedings
    
    
    25Item 1(a). Risk Factors
    
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27Item 6. Exhibits
    
    
    28Signatures
    
    
    28EX-31.1EX-31.2EX-32.1




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3 
 Part I. Financial Information
 
 Item 1. Financial Statements (Interim, Unaudited)
  
  September 30, 2007
    
    
    June 30, 2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,651,655
    
    
    $
    3,982,485Accounts receivable
    
    
    25,431,251
    
    
    
    24,566,104Inventories and costs of contracts in progress
    
    
    53,025,775
    
    
    
    53,520,533Income taxes recoverable
    
    
    485,074
    
    
    
    485,074Deferred income taxes
    
    
    2,287,438
    
    
    
    2,287,438Prepaid expenses and other current assets
    
    
    707,738
    
    
    
    949,092Total current assets
    
    
    87,588,931
    
    
    
    85,790,726Property, plant and equipment  net
    
    
    17,560,344
    
    
    
    17,721,812Deferred income taxes  non current
    
    
    5,222,730
    
    
    
    4,630,819Goodwill
    
    
    16,377,805
    
    
    
    16,378,327Other intangibles  net
    
    
    6,123,333
    
    
    
    6,243,647Other non current assets
    
    
    4,490,093
    
    
    
    6,242,467Total assets
    
    $
    137,363,236
    
    
    $
    137,007,798LIABILITIES AND SHAREOWNERS EQUITYCurrent liabilities:Short-term bank borrowings
    
    $
    4,500,000
    
    
    $
    1,000,000Current portion of long-term debt
    
    
    3,913,184
    
    
    
    3,922,350Accounts payable
    
    
    15,683,598
    
    
    
    15,781,046Salaries and wages
    
    
    3,927,715
    
    
    
    4,806,724Accrued health benefits
    
    
    1,318,906
    
    
    
    1,359,844Other accrued liabilities
    
    
    5,713,412
    
    
    
    5,931,638Total current liabilities
    
    
    35,056,815
    
    
    
    32,801,602Pension liability
    
    
    80,593
    
    
    
    12,495Long-term debt  non current portion
    
    
    11,563,101
    
    
    
    12,088,254Environmental remediation  non current portion
    
    
    5,546,687
    
    
    
    5,625,776Total liabilities
    
    
    52,247,196
    
    
    
    50,528,127Shareowners equity:Preferred stock, no par value; 200,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock, $1.25 par value; 15,000,000 shares authorized,
9,811,507 shares outstanding at September 30 and June 30, 2007
    
    
    12,264,384
    
    
    
    12,264,384Capital in excess of par value
    
    
    19,494,183
    
    
    
    19,474,097Retained earnings
    
    
    55,309,871
    
    
    
    56,730,643Accumulated other comprehensive loss
    
    
    (1,952,398
    )
    
    
    (1,989,453
    )Total shareowners equity
    
    
    85,116,040
    
    
    
    86,479,671Total liabilities and shareowners equity
    
    $
    137,363,236
    
    
    $
    137,007,798




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4  
  Three months ended September 30,2007
    
    
    2006Net sales
    
    $
    58,851,863
    
    
    $
    48,316,771Costs of goods sold
    
    
    57,236,317
    
    
    
    47,576,005Gross
profit
    
    
    1,615,546
    
    
    
    740,766Selling and administrative expenses
    
    
    4,476,963
    
    
    
    4,321,232Amortization of intangibles
    
    
    120,313
    
    
    
    121,424EPA related  net environmental remediation
    
    
    (145
    )
    
    
    9,577Net gain on sale of property, plant and equipment
    
    
    (927,822
    )
    
    
    (203,675
    )3,669,309
    
    
    
    4,248,558Operating loss
    
    
    (2,053,763
    )
    
    
    (3,507,792
    )Other income (expense):Interest and investment income
    
    
    26,718
    
    
    
    150,931Interest expense
    
    
    (305,092
    )
    
    
    (296,999
    )Equity income (loss) in investment
    
    
    (124,000
    )
    
    
    12,000Other  net
    
    
    482,365
    
    
    
    18,71779,991
    
    
    
    (115,351
    )Loss before income taxes
    
    
    (1,973,772
    )
    
    
    (3,623,143
    )Credit for income taxes
    
    
    (553,000
    )
    
    
    (1,159,000
    )Net loss
    
    $
    (1,420,772
    )
    
    $
    (2,464,143
    )Loss per share  basic and diluted
    
    $
    (0.14
    )
    
    $
    (0.25
    )




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5  
  Three months ended September 30,2007
    
    
    2006Cash Flows From Operating Activities:Net loss
    
    $
    (1,420,772
    )
    
    $
    (2,464,143
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation, amortization and accretion
    
    
    567,170
    
    
    
    748,422Deferred income taxes (credit)
    
    
    (611,000
    )
    
    
    145,000Loss on sale of investment securities
    
    
    
    
    
    
    52,846Equity loss (income) in investment
    
    
    124,000
    
    
    
    (12,000
    )Pension expense
    
    
    124,242
    
    
    
    136,894Share-based compensation
    
    
    20,086
    
    
    
    66,710Gain on sale of property, plant and equipment
    
    
    (927,822
    )
    
    
    (5,000
    )Gain from sale of non-operating land
    
    
    
    
    
    
    (198,675
    )Other, NRTC litigation loss
    
    
    1,643,396
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (865,147
    )
    
    
    (78,462
    )Income taxes recoverable
    
    
    
    
    
    
    (987,434
    )Inventories, prepaid expenses and other current assets
    
    
    592,116
    
    
    
    (2,663,065
    )Accounts payable and accrued liabilities
    
    
    (1,314,187
    )
    
    
    112,179Net cash used in operating activities
    
    
    (2,067,918
    )
    
    
    (5,146,728
    )Cash Flows From Investing Activities:Proceeds from sale of investment securities
    
    
    
    
    
    
    4,806,900Proceeds from maturity of investment securities
    
    
    
    
    
    
    150,000Purchases of property, plant and equipment
    
    
    (283,041
    )
    
    
    (1,244,161
    )Proceeds from sale of non-operating land
    
    
    
    
    
    
    811,175Proceeds from sale of property, plant and equipment
    
    
    1,071,818
    
    
    
    5,000Other, principally noncurrent other assets
    
    
    (15,022
    )
    
    
    15,276Net cash provided by investing activities
    
    
    773,755
    
    
    
    4,544,190Cash Flows From Financing Activities:Net short-term bank borrowings
    
    
    3,500,000
    
    
    
    Repayment of long-term debt
    
    
    (536,667
    )
    
    
    (518,333
    )Proceeds from the exercise of stock options
    
    
    
    
    
    
    24,552Tax effect from stock transactions
    
    
    
    
    
    
    3,248Repurchases of common stock
    
    
    
    
    
    
    (211,182
    )Net cash provided by (used in) financing activities
    
    
    2,963,333
    
    
    
    (701,715
    )Increase (decrease) in cash and cash equivalents
    
    
    1,669,170
    
    
    
    (1,304,253
    )Cash and cash equivalents at beginning of period
    
    
    3,982,485
    
    
    
    7,503,438Cash and cash equivalents at end of period
    
    $
    5,651,655
    
    
    $
    6,199,185




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6  
 
 Three months ended September 30, 2007Capital
    
    
    
    
    
    
    Accumulated otherCommon Stock
    
    
    in excess
    
    
    Retained
    
    
    comprehensiveShares
    
    
    Amount
    
    
    of par value
    
    
    earnings
    
    
    income (loss)
    
    
    TotalBalance at July 1, 2007
    
    
    9,811,507
    
    
    $
    12,264,384
    
    
    $
    19,474,097
    
    
    $
    56,730,643
    
    
    $
    (1,989,453
    )
    
    $
    86,479,671Share-based compensation
    
    
    
    
    
    
    
    
    
    
    20,086
    
    
    
    
    
    
    
    
    
    
    
    20,086Comprehensive income (loss), net of tax:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,420,772
    )
    
    
    
    
    
    
    (1,420,772
    )Amortization of unrecognized pension costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,055
    
    
    
    37,055Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,383,717
    )Balance at September 30, 2007
    
    
    9,811,507
    
    
    $
    12,264,384
    
    
    $
    19,494,183
    
    
    $
    55,309,871
    
    
    $
    (1,952,398
    )
    
    $
    85,116,040
   Three months ended September 30, 2006Capital
    
    
    
    
    
    
    Accumulated otherCommon Stock
    
    
    in excess
    
    
    Retained
    
    
    comprehensiveShares
    
    
    Amount
    
    
    of par value
    
    
    earnings
    
    
    income (loss)
    
    
    TotalBalance at July 1, 2006
    
    
    9,392,305
    
    
    $
    11,740,381
    
    
    $
    15,191,990
    
    
    $
    70,183,104
    
    
    $
    (265,097
    )
    
    $
    96,850,378Stock dividend (5% declared October 25, 2006)
    
    
    468,623
    
    
    
    585,779
    
    
    
    3,420,951
    
    
    
    (4,006,730
    )
    
    
    
    
    
    
    Stock options exercised
    
    
    4,255
    
    
    
    5,319
    
    
    
    19,233
    
    
    
    
    
    
    
    
    
    
    
    24,552Repurchases of common stock as part
of share repurchase program
    
    
    (24,092
    )
    
    
    (30,115
    )
    
    
    (38,112
    )
    
    
    (142,955
    )
    
    
    
    
    
    
    (211,182
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    66,710
    
    
    
    
    
    
    
    
    
    
    
    66,710Tax effect of stock transactions
    
    
    
    
    
    
    
    
    
    
    3,248
    
    
    
    
    
    
    
    
    
    
    
    3,248Comprehensive income (loss), net of tax:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,464,143
    )
    
    
    
    
    
    
    (2,464,143
    )Net unrealized loss on investment
securities owned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,067
    
    
    
    88,067Reclassification adjustment for net gain
realized and reported in net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,878
    
    
    
    34,878Net unrealized gain on equity investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,000
    
    
    
    11,000Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,330,198
    )Balance at September 30, 2006
    
    
    9,841,091
    
    
    $
    12,301,364
    
    
    $
    18,664,020
    
    
    $
    63,569,276
    
    
    $
    (131,152
    )
    
    $
    94,403,508




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NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of presentation 
  Business Acquisition  Business Combinations
 Operations 
 Use of estimates 
 Revenue recognition 




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8  Accounts receivable, credit practices, and allowance for probable losses 
  Fair value of financial instruments 
 Investment securities 
  Other investment 
 Market risk exposure 




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9 Long-lived assets 
 Other assets 
 Common stock repurchases 
 Deferred income taxes 
 Supplemental cash flows information 
 2007
    
    
    2006Net cash paid during the period for:Income taxes
    
    $
    
    
    
    $
    3,000Interest
    
    $
    231,000
    
    
    $
    184,000
 New accounting standards  The Fair Value Option for Financial Assets and
Financial Liabilities. Fair Value Measurements
 Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans,




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10  Accounting for Uncertainty in Income Taxes Accounting for Income Taxes. Definition of Settlement in FASB
Interpretation No. 48
  NOTE 2. INVENTORIES AND COSTS OF CONTRACTS IN PROGRESS
   September 30, 2007
    
    
    June 30, 2007Raw materials
    
    $
    36,052,000
    
    
    $
    36,627,000Work in process and finished goods
    
    
    16,974,000
    
    
    
    16,894,000$
    53,026,000
    
    
    $
    53,521,000




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NOTE 3. DEFINED BENEFIT PENSION PLAN
 Periodic benefit cost 
 2007
    
    
    2006Service cost
    
    $
    123,000
    
    
    $
    128,000Interest cost
    
    
    158,000
    
    
    
    163,000Expected return on plan assets
    
    
    (213,000
    )
    
    
    (227,000
    )Amortization of prior service cost
    
    
    26,000
    
    
    
    24,000Amortization of unrecognized net actuarial loss
    
    
    30,000
    
    
    
    49,000Net periodic pension expense
    
    $
    124,000
    
    
    $
    137,000
  NOTE 4. GOODWILL AND OTHER INTANGIBLES
 Business Combinations Goodwill
and Other Intangible Assets
 Amortizable
    
    
    TotalGoodwill
    
    
    Intangibles
    
    
    IntangiblesBalance at July 1, 2006
    
    $
    15,744,000
    
    
    $
    6,726,000
    
    
    $
    22,470,000Goodwill additions
    
    
    634,000
    
    
    
    
    
    
    
    634,000Amortization
    
    
    
    
    
    
    (482,000
    )
    
    
    (482,000
    )Balance at June 30, 2007
    
    $
    16,378,000
    
    
    $
    6,244,000
    
    
    $
    22,622,000Amortization
    
    
    
    
    
    
    (121,000
    )
    
    
    (121,000
    )Balance at September 30, 2007
    
    $
    16,378,000
    
    
    $
    6,123,000
    
    
    $
    22,501,000
 Goodwill 
 Other intangibles 
 NOTE 5. BORROWINGS
 Short-term debt maturities and line of credit 




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12  Long-term debt
 September 30, 2007
    
    
    June 30, 2007Industrial Revenue bonds, face value
    
    $
    2,339,000
    
    
    $
    2,376,000Less unamortized purchase discount
    
    
    139,000
    
    
    
    141,000Industrial Revenue bonds, carrying value
    
    
    2,200,000
    
    
    
    2,235,000Bank loan
    
    
    7,500,000
    
    
    
    8,000,000Notes payable
    
    
    5,776,000
    
    
    
    5,776,000Total long-term debt
    
    
    15,476,000
    
    
    
    16,011,000Less current portion
    
    
    3,913,000
    
    
    
    3,922,000Long-term debt, net of current portion
    
    $
    11,563,000
    
    
    $
    12,089,000
  June 30,
2007,
   NOTE 6. COMMITMENTS AND CONTINGENCIES
 Environmental Remediation




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13  Customer Relationships
    Product Issues




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14 NOTE 7. COMMON STOCK OPTIONS
 Share-Based Payment,
    2007
    
    2006Share-based compensation expense
    
    $
    20,000
    
    
    $
    67,000Related tax benefit
    
    
    
    
    
    $
    400Share-based compensation expense impacted basic and diluted per share
amounts by approximately
    
    $
    0.00
    
    
    $
    0.01
   Wtd. Avg. RemainingTotal Shares
    
    Wtd. Avg.
    
    Contractual
    
    AggregateUnder Option
    
    Exercise Price
    
    Term (years)
    
    Intrinsic ValueOutstanding at July 1, 2007
    
    
    300,303
    
    
    $
    7.82
    
    
    
    5.74
    
    
    $
    66,000Granted
    
    
    Exercised
    
    
    Forfeited or expired
    
    
    (76,918
    )Outstanding at September 30, 2007
    
    
    223,385
    
    
    $
    8.22
    
    
    
    7.40
    
    
    
    Exercisable at September 30, 2007
    
    
    123,813
    
    
    $
    7.97
    
    
    
    7.05
    
    
    
    




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15   NOTE 8. EARNINGS (LOSS) PER SHARE
   2007
    
    2006Weighted average shares outstanding
    
    
    9,811,507
    
    
    
    9,854,835Basic and diluted loss per share
    
    $
    (0.14
    )
    
    $
    (0.25
    )
 NOTE 9. COMPREHENSIVE INCOME (LOSS)
  2007
    
    
    2006Net loss
    
    $
    (1,421,000
    )
    
    $
    (2,464,000
    )Other comprehensive income (loss), net of taxInvestment securities owned
    
    
    
    
    
    
    123,000Investment securities held by investee accounted for by the equity method
    
    
    
    
    
    
    11,000Amortization of unrecognized pension costs
    
    
    37,000
    
    
    
    37,000
    
    
    
    134,000Comprehensive loss
    
    $
    (1,384,000
    )
    
    $
    (2,330,000
    )




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16  NOTE 10. PLANT CLOSURE
    Current assets  net of assets held for sale
    
    $
    9,000Property and plant (net), held for sale
    
    
    29,000Total assets (all current)
    
    $
    38,000Liabilities (all current)
    
    $
    136,000




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




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18  RESULTS OF OPERATIONS
 Three months ended September 30:2007
    
    
    2006MARKET
    
    Sales
    
    
    % of Total
    
    
    Sales
    
    
    % of Total
    
    
    % ChangeMedical/Scientific
Instrumentation
    
    $19,203,000
    
    
    32.6
    %
    
    $
    14,848,000
    
    
    
    30.7
    %
    
    
    29.3
    %Aerospace
    
    
    14,531,000
    
    
    
    24.7
    
    
    
    14,631,000
    
    
    
    30.3
    
    
    
    (0.7
    )Industrial/Other
    
    
    11,385,000
    
    
    
    19.4
    
    
    
    14,084,000
    
    
    
    29.2
    
    
    
    (19.2
    )Government
    
    
    13,733,000
    
    
    
    23.3
    
    
    
    4,754,000
    
    
    
    9.8
    
    
    
    188.9Totals
    
    $
    58,852,000
    
    
    
    100.0
    %
    
    $
    48,317,000
    
    
    
    100.0
    %
    
    
    21.8
    2007
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %Costs of goods sold
    
    
    97.3
    
    
    
    98.5Gross profit
    
    
    2.7
    
    
    
    1.5Selling and administrative expenses
    
    
    7.6
    
    
    
    8.9Other operating income  net
    
    
    (1.4
    )
    
    
    (0.1
    )Operating loss
    
    
    (3.5
    )
    
    
    (7.3
    )Other income (expense)  net
    
    
    0.1
    
    
    
    (0.2
    )Loss before income taxes
    
    
    (3.4
    )
    
    
    (7.5
    )Credit for income taxes
    
    
    (1.0
    )
    
    
    (2.4
    )Net loss
    
    
    (2.4
    )%
    
    
    (5.1
    )%




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19




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20 LIQUIDITY AND CAPITAL RESOURCES




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21   CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Environmental Contingencies
  Government Contract Cost Estimates




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22 Commercial Inventory Valuation Allowances
   Allowance for Probable Losses on Receivables
  Pension Obligations
 Employers Accounting for Pensions
 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans




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23  Business Combinations
   Valuation of Property, Plant and Equipment
 Accounting for the Impairment or Disposal of Long-lived Assets,
 Goodwill and Customer Relationships
 Goodwill and Other Intangible Assets.




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##### Table of Contents



24  Income Taxes
  OTHER
 Litigation
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 MARKET RISK EXPOSURE




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##### Table of Contents



25 
 Item 4. Controls and Procedures
   
 Part II. Other Information
 
 Item 1. Legal Proceedings
  Environmental Remediation




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##### Table of Contents



26    Customer Relationships
    Product Issues




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##### Table of Contents



27  
 Item 1(a). Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 4. Submission of Matters to a Vote of Security Holders
   Votes FOR
    
    Votes WITHHELDDavid P. Molfenter
    
    
    6,732,817
    
    
    
    2,857,743W. Peter Slusser
    
    
    6,800,165
    
    
    
    2,790,395Bradley O. Smith
    
    
    6,805,789
    
    
    
    2,784,771Lynda J.-S. Yang
    
    
    8,476,070
    
    
    
    1,114,490




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##### Table of Contents



28 
 Item 6. Exhibits
 3.1
    
    Amended Articles of Incorporation of the Registrant were filed on Form 10-Q for the
three-month period ended September 30, 2004, and are incorporated herein by reference.3.2
    
    Amended Code of Regulation of the Registrant were filed on Form 10-Q for the
three-month period ended September 30, 2004, and are incorporated herein by reference.3.3
    
    The amended By-Laws of the Registrant were filed on Form 10-Q for the nine-month
period ended March 31, 2004, and are incorporated herein by reference.31.1
    
    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
    
    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.
 
 SIGNATURES
  Date: November 9, 2007
    /s/ DAVID W. HOCKENBROCHTDavid W. Hockenbrocht, Chief Executive OfficerDate: November 9, 2007
    /s/ RICHARD L. LANGLEYRichard L. Langley, Chief Financial Officer