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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 PERIOD ENDED **** December 31,
    2003 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  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.
Yes þ No o Indicate by checkmark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
Yes o No þ Common Stock, $1.25 Par Value  8,345,303shares outstanding as of January 31, 2004. 1




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TABLE OF CONTENTS  Part I. Financial InformationItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets December 31 and June 30, 2003Condensed Consolidated Statements of Operations Three-Month and Six-Month Periods ended December 31, 2003 and 2002Condensed Consolidated Statements of Cash Flows Six-Month Periods ended December 31, 2003 and 2002Notes to Condensed Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 6. Exhibits and Reports on Form 8-KSignaturesEX-31.1  CEO CertificationEX-31.2  CFO CertificationEX-32.1  CEO and CFO Certification    Table of Contents  SPARTON CORPORATION AND SUBSIDIARIES INDEX Part I. Financial InformationItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets December 31 and June 30, 2003
    
    
    3Condensed Consolidated Statements of OperationsThree-Month and Six-Month Periods ended December 31, 2003 and 2002
    
    
    4Condensed Consolidated Statements of Cash FlowsSix-Month Periods ended December 31, 2003 and 2002
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4.
    
    Controls and Procedures
    
    
    15Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    15Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    16Signatures
    
    
    16
 2




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SPARTON CORPORATION AND SUBSIDIARIES 
 
 
 Condensed Consolidated Balance Sheets (Unaudited)
December 31 and June 30, 2003 Assets December 31
    
    June 30Current assets:Cash and cash equivalents
    
    $
    10,198,364
    
    
    $
    10,562,222Investment securities
    
    
    17,745,606
    
    
    
    23,214,783Accounts receivable
    
    
    18,665,856
    
    
    
    29,236,904Income taxes recoverable
    
    
    1,268,706
    
    
    
    Inventories and costs on contracts in progress
    
    
    36,903,406
    
    
    
    31,809,088Prepaid expenses
    
    
    1,405,113
    
    
    
    1,174,618Total Current assets
    
    
    86,187,051
    
    
    
    95,997,615Pension asset
    
    
    6,112,069
    
    
    
    6,176,085Other assets
    
    
    5,746,528
    
    
    
    5,583,577Property, plant and equipment, net
    
    
    12,573,436
    
    
    
    8,256,593Total Assets
    
    $
    110,619,084
    
    
    $
    116,013,870
 Liabilities and Shareowners Equity Current liabilities:Accounts payable
    
    $
    8,755,380
    
    
    $
    8,893,348Salaries and wages
    
    
    2,944,814
    
    
    
    3,879,947Accrued liabilities
    
    
    4,761,534
    
    
    
    4,532,795Income taxes payable
    
    
    
    
    
    
    709,443Total Current liabilities
    
    
    16,461,728
    
    
    
    18,015,533Environmental remediation
    
    
    6,678,607
    
    
    
    6,830,131Shareowners equity:Preferred stock, no par value; 200,000 shares authorized, none
outstanding
    
    
    
    
    
    
    Common stock, $1.25 par value; 15,000,000 shares authorized, 8,345,303
and 7,943,671 shares outstanding at December 31 and June 30,
respectively
    
    
    10,431,629
    
    
    
    9,929,589Capital in excess of par value
    
    
    7,118,606
    
    
    
    3,015,989Accumulated other comprehensive income
    
    
    351,596
    
    
    
    359,486Retained earnings
    
    
    69,576,918
    
    
    
    77,863,142Total Shareowners equity
    
    
    87,478,749
    
    
    
    91,168,206Total Liabilities and Shareowners equity
    
    $
    110,619,084
    
    
    $
    116,013,870
 See accompanying notes. 3




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**SPARTON CORPORATION AND SUBSIDIARIES** 
 Condensed Consolidated Statements
    of Operations (Unaudited)
    For the Three-Month and Six-Month Periods ended December 31, 2003 and
    2002 Three-Month Periods
    
    Six-Month Periods2003
    
    2002
    
    2003
    
    2002Net sales
    
    $
    33,239,772
    
    
    $
    43,279,295
    
    
    $
    69,664,573
    
    
    $
    80,047,202Costs of goods sold
    
    
    31,799,271
    
    
    
    37,514,228
    
    
    
    67,790,114
    
    
    
    70,517,8731,440,501
    
    
    
    5,765,067
    
    
    
    1,874,459
    
    
    
    9,529,329Selling and administrative (income) expenses:Selling and administrative expenses
    
    
    3,470,064
    
    
    
    3,209,415
    
    
    
    7,229,068
    
    
    
    6,733,629EPA related  net environmental remediation
    
    
    62,947
    
    
    
    117,438
    
    
    
    136,947
    
    
    
    (5,229,562
    )3,533,011
    
    
    
    3,326,853
    
    
    
    7,366,015
    
    
    
    1,504,067Operating income (loss)
    
    
    (2,092,510
    )
    
    
    2,438,214
    
    
    
    (5,491,556
    )
    
    
    8,025,262Other income (expense):Interest and investment income
    
    
    122,704
    
    
    
    184,360
    
    
    
    353,246
    
    
    
    301,657Equity income (loss) in investment
    
    
    (9,000
    )
    
    
    (18,000
    )
    
    
    12,000
    
    
    
    (57,000
    )Other  net
    
    
    (250,440
    )
    
    
    (61,141
    )
    
    
    (309,425
    )
    
    
    (46,651
    )(136,736
    )
    
    
    105,219
    
    
    
    55,821
    
    
    
    198,006Income (loss) before income taxes
    
    
    (2,229,246
    )
    
    
    2,543,433
    
    
    
    (5,435,735
    )
    
    
    8,223,268Provision (credit) for income taxes
    
    
    (713,000
    )
    
    
    365,000
    
    
    
    (1,739,000
    )
    
    
    2,467,000Net income (loss)
    
    $
    (1,516,246
    )
    
    $
    2,178,433
    
    
    $
    (3,696,735
    )
    
    $
    5,756,268Earnings (loss) per share (1) :Basic
    
    $
    (0.18
    )
    
    $
    0.26
    
    
    $
    (0.44
    )
    
    $
    0.69Diluted
    
    $
    (0.18
    )
    
    $
    0.26
    
    
    $
    (0.44
    )
    
    $
    0.68
 See accompanying notes. (1) All share and per share information have been adjusted to reflect the impact of the 5% stock dividends declared in January and October 2003. 4




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SPARTON CORPORATION AND SUBSIDIARIES 
 Condensed Consolidated Statements
    of Cash Flows (Unaudited)
    For the Six-Month Periods ended December 31, 2003 and 2002 2003
    
    2002Cash flows provided (used) by Operating Activities:Net income (loss)
    
    $
    (3,696,735
    )
    
    $
    5,756,268Add (deduct) noncash items affecting operations:Depreciation, amortization and accretion
    
    
    848,755
    
    
    
    659,035Change in pension asset
    
    
    64,016
    
    
    
    64,016Loss on sale of investments
    
    
    70,254
    
    
    
    17,979Equity (gain) loss on investment
    
    
    (12,000
    )
    
    
    57,000Add (deduct) changes in operating assets and liabilities:Accounts receivable
    
    
    10,571,048
    
    
    
    (2,241,026
    )Income taxes recoverable
    
    
    (1,268,706
    )
    
    
    1,055,965Inventories and prepaid expenses
    
    
    (5,324,813
    )
    
    
    4,382,033Accounts payable, salaries and wages, accrued liabilities & income
taxes
    
    
    (1,705,329
    )
    
    
    440,420(453,510
    )
    
    
    10,191,690Cash flows provided (used) by Investing Activities:Purchases of investment securities
    
    
    (908,720
    )
    
    
    (3,360,933
    )Proceeds from sale of investment securities
    
    
    5,845,761
    
    
    
    600,339Purchases of property, plant and equipment, net
    
    
    (5,044,814
    )
    
    
    (599,913
    )Other, principally noncurrent other assets
    
    
    182,255
    
    
    
    162,72474,482
    
    
    
    (3,197,783
    )Cash flows provided (used) by Financing Activities:Proceeds from exercise of stock options
    
    
    18,857
    
    
    
    15,312Stock dividends  cash in lieu of fractional shares
    
    
    (3,687
    )
    
    
    15,170
    
    
    
    15,312Increase (decrease) in cash and cash equivalents
    
    
    (363,858
    )
    
    
    7,009,219Cash and cash equivalents at beginning of period
    
    
    10,562,222
    
    
    
    8,687,873Cash and cash equivalents at end of period
    
    $
    10,198,364
    
    
    $
    15,697,092Supplemental disclosures of cash paid (refunded) during the period:Income taxes  net
    
    $
    244,000
    
    
    $
    871,000
 See accompanying notes. 5




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SPARTON CORPORATION & SUBSIDIARIES 
 Notes to Condensed Consolidated Financial Statements 1. ACCOUNTING POLICIES The following is a summary of the Companys accounting policies not discussed
elsewhere within this report. Basis of presentation The accompanying unaudited Condensed Consolidated
Financial Statements of Sparton Corporation and all active subsidiaries have
been prepared in accordance with accounting principles generally accepted in
the United States for interim financial information and with the instructions
to Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. All significant
intercompany transactions and accounts have been eliminated. The Condensed
Consolidated Balance Sheet at December 31, 2003, and the related Condensed
Consolidated Statements of Operations for the three-month and six-month periods
ended December 31, 2003 and 2002, and cash flows for the six-month periods
ended December 31, 2003 and 2002, are unaudited, but include all adjustments
(consisting of normal recurring accruals) which the Company considers necessary
for a fair presentation of such financial statements. Certain
reclassifications of prior period amounts have been made to conform to the
current presentation. Operating results for the three-month and six-month
periods ended December 31, 2003, are not necessarily indicative of the results
that may be expected for the fiscal year ended June 30, 2004. The balance sheet at June 30, 2003, has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. For further information, refer to
the Consolidated Financial Statements and footnotes thereto included in the
Companys Annual Report on Form 10-K for the year ended June 30, 2003. Operations The Company provides design and electronic manufacturing services,
which include a complete range of engineering, pre-manufacturing and
post-manufacturing services. Capabilities range from product design and
development through after market support. Facilities are registered to ISO
9001. The Companys operations are in one line of business, electronic
contract manufacturing services (EMS). Products and services include complete
Box Build products for Original Equipment Manufacturers, microprocessor-based
systems, transducers, printed circuit boards and assemblies, sensors and
electromechanical devices. Markets served are in the telecommunications,
medical/scientific instrumentation, electronics, aerospace, and other
industries, with a focus on regulated markets. The Company also develops and
manufactures sonobuoys, anti-submarine warfare (ASW) devices, used by the U.S.
Navy and other free-world countries. Many of the physical and technical
attributes in the production of sonobuoys are the same as those required in the
production of the Companys other electromechanical products and assemblies. Use of estimates Accounting principles generally accepted in the United
States require management to make estimates and assumptions that affect the
disclosure of assets and liabilities and the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Revenue recognition The Companys net sales are comprised primarily of
product sales, with supplementary revenues earned from engineering and design
services. Standard contract terms are FOB shipping point. Revenue from
product sales is generally recognized upon shipment of the goods; service
revenue is recognized as the service is performed or under the percentage of
completion method, depending on the nature of the arrangement. Long-term
contracts relate principally to government defense contracts. These contracts
are accounted for based on completed units accepted and their estimated average
contract cost per unit. Development contracts are accounted for based on
percentage of completion. Costs and fees billed under cost-reimbursement-type
contracts are recorded as sales. A provision for the entire amount of a loss
on a contract is charged to operations as soon as the loss is determinable.
Shipping and handling costs are included in costs of goods sold. Market risk exposure The Company manufactures its products in the United
States and Canada. Sales of the Companys products are in 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, 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 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 have not been
significant. The Company does not consider the market risk exposure relating
to currency exchange to be material. 6




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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. New accounting standards In December 2003, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 132 Revised
(SFAS No. 132(R)), Employers Disclosures about Pensions and Other
Postretirement Benefits, which amends SFAS Nos. 87, 88, and 106. The revised
Statement retains the disclosure requirements contained in SFAS No. 132, which
it replaces, and requires additional disclosures to those in the original SFAS
No. 132 about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. SFAS No. 132(R) is effective for financial statements with fiscal
years ending after December 15, 2003. The interim-period disclosures required
by this Statement are effective for interim periods beginning after December
15, 2003. The Company will follow the disclosure requirements of SFAS No. 132(R), which is effective for the Company beginning in the third quarter of
fiscal 2004, which ends March 31, 2004. Stock options The Company follows Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (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 SFAS No.123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure. At December 31, 2003, the per share weighted average exercise price of options
outstanding was $6.04. The weighted average remaining contractual life of
those options was approximately 3 years. At December 31, 2003, there were
280,996 options exercisable at the weighted average per share price of $5.52.
Remaining shares available for grant under the plan were 186,441 at December
31, 2003. The following sets forth a reconciliation of net income (loss) and earnings
(loss) per share information for the three months and six months ended December
31, 2003 and 2002, as if the Company had recognized compensation expense based
on the fair value at the grant date for awards under the plan. For purposes of
computing pro forma net income (loss), the fair value of each option grant is
estimated on the date of grant using the Black-Scholes options pricing model. Three Months Ended
        
        Six Months EndedDecember 31
        
        December 312003
        
        2002
        
        2003
        
        2002Net income (loss),
            as reported
        
        $
        (1,516,246
        )
        
        $
        2,178,433
        
        
        $
        (3,696,735
        )
        
        $
        5,756,268Deduct:Total stock-based
            compensation expense determined under fair value based method for
            all awards, net of tax effects
        
        
        47,880
        
        
        
        43,312
        
        
        
        95,760
        
        
        
        86,625Pro forma net income
            (loss)
        
        $
        (1,564,126
        )
        
        $
        2,135,121
        
        
        $
        (3,792,495
        )
        
        $
        5,669,643Pro forma earnings
            (loss) per share:Basic earnings (loss) per
            share  after stock dividends
        
        $
        (0.19
        )
        
        $
        0.26
        
        
        $
        (0.45
        )
        
        $
        0.68Diluted earnings
            (loss) per share  after stock dividends
        
        $
        (0.19
        )
        
        $
        0.25
        
        
        $
        (0.45
        )
        
        $
        0.67
 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: December 31, 2003
        
        June 30, 2003Raw materials
        
        $
        22,481,000
        
        
        $
        20,157,000Work in process and
            finished goods
        
        
        14,422,000
        
        
        
        11,652,000$
        36,903,000
        
        
        $
        31,809,000
 Work in progress and finished goods inventories include $5.9 and $1.1 million
of completed, but not yet accepted, sonobuoys at December 31 and June 30, 2003,
respectively. Inventories are reduced by progress billings to the U.S.
government of approximately $8,751,000 and $8,317,000 at December 31 and June
30, 2003, respectively. 7




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3. EARNINGS (LOSS) PER SHARE On October 21, 2003, Spartons Board of Directors approved a 5% stock dividend.
This is a continuation of a practice the Company began last fiscal year.
Eligible shareowners of record on November 21, 2003, received the stock
dividend on December 19, 2003. Cash was paid in lieu of fractional shares of
stock. An amount equal to the fair market value of the common stock issued was
transferred from retained earnings ($4,589,000) to common stock ($496,000) and
capital in excess of par value ($4,089,000) to record the stock dividend.
Accordingly, all share and per share information for fiscal 2004 and 2003 have
been adjusted to reflect the impact of all stock dividends declared for the
periods shown. Due to the Companys fiscal 2004 reported net loss, the share equivalents from
stock options outstanding were excluded from the computation of diluted
earnings per share during the three months and six months ended December 31,
2003, because the inclusion would have been anti-dilutive for the periods. For
the three months and six months ended December 31, 2002, options to purchase
103,636 shares of common stock were not included in the computation of diluted
earnings per share. Such options exercise prices were greater than the average
market price of the Companys common stock and, therefore, would be
anti-dilutive. Basic and diluted earnings per share were computed on the
following: Three Months Ended
        
        Six Months Ended2003
        
        2002
        
        2003
        
        2002Basic  weighted
            average shares outstanding
        
        
        8,344,993
        
        
        
        8,338,803
        
        
        
        8,344,406
        
        
        
        8,338,563Effect of dilutive
            stock options
        
        
        
        
        
        
        77,398
        
        
        
        
        
        
        
        82,441Weighted average
            diluted shares outstanding
        
        
        8,344,993
        
        
        
        8,416,201
        
        
        
        8,344,406
        
        
        
        8,421,004Basic earnings (loss) per
            share  after stock dividends
        
        $
        (0.18
        )
        
        $
        0.26
        
        
        $
        (0.44
        )
        
        $
        0.69Diluted earnings
            (loss) per share  after stock dividends
        
        $
        (0.18
        )
        
        $
        0.26
        
        
        $
        (0.44
        )
        
        $
        0.68
 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-month and six-month
periods ended December 31: Three Months Ended
        
        Six Months Ended2003
        
        2002
        
        2003
        
        2002Net income (loss)
        
        $
        (1,516,000
        )
        
        $
        2,178,000
        
        
        $
        (3,697,000
        )
        
        $
        5,756,000Other comprehensive
            income (loss), net of tax:Net unrealized gains
            (losses)  investment securities owned
        
        
        (111,000
        )
        
        
        10,000
        
        
        
        (214,000
        )
        
        
        209,000Net unrealized gains
            (losses)  investment securities held by investee accounted for
            by the equity method
        
        
        (11,000
        )
        
        
        (119,000
        )
        
        
        207,000
        
        
        
        95,000Comprehensive income
            (loss)
        
        $
        (1,638,000
        )
        
        $
        2,069,000
        
        
        $
        (3,704,000
        )
        
        $
        6,060,000
 At December 31 and June 30, 2003, shareowners equity includes accumulated
other comprehensive income of $352,000 and $359,000, respectively, net of tax.
These balances include $257,000 and $471,000 for unrealized gains on investment
securities owned, and $95,000 and $(112,000) for investment securities held by
an investee accounted for by the equity method, as of December 31 and June 30,
2003, 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. The investment portfolio has various maturity dates up
to 14 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.
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. 8




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At December 31, 2003,
the Company had net unrealized gains of $407,000. At
that date, the net after-tax effect of these gains was $257,000, which amount
is included in accumulated other comprehensive income within shareowners
equity. For the six months ended December 31, 2003 and 2002, purchases of
investments totaled $909,000 and $3,361,000, and sales of investment securities
totaled $5,846,000 and $600,000, respectively. Sparton owns a 14% interest in Cybernet Systems Corporation (Cybernet). This
investment, with a carrying value of $1,746,000 and $1,400,000 at December 31
and June 30, 2003, respectively, is accounted for under the equity method and
is included in other assets on the condensed consolidated balance sheet.
Sparton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 Equity section of Spartons balance sheet. The contractual maturities of debt securities, and total equity securities, as
of December 31, 2003, are as follows: YearsWithin 1
        
        1 to 5
        
        5 to 10
        
        Over 10
        
        TotalDebt securities:Corporate 
            primarily U.S.
        
        $
        1,257,036
        
        
        $
        5,826,112
        
        
        $
        
        
        
        $
        
        
        
        $
        7,083,148U.S. government and
            federal agency
        
        
        611,314
        
        
        
        3,312,312
        
        
        
        1,073,735
        
        
        
        510,315
        
        
        
        5,507,676State and municipal
        
        
        101,469
        
        
        
        3,078,828
        
        
        
        1,474,485
        
        
        
        
        
        
        
        4,654,782Total debt securities
        
        
        1,969,819
        
        
        
        12,217,252
        
        
        
        2,548,220
        
        
        
        510,315
        
        
        
        17,245,606Equity securities
             primarily preferred stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        500,000Total investment
            securities
        
        $
        1,969,819
        
        
        $
        12,217,252
        
        
        $
        2,548,220
        
        
        $
        510,315
        
        
        $
        17,745,606
 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 December 31, 2003, Sparton has accrued $7,372,000
as its estimate of the minimum future undiscounted financial liability, of
which $693,000 is classified as a current liability and included in accrued
liabilities. Amounts charged to operations, principally legal and consulting,
for the six months ended December 31, 2003 and 2002 were $137,000 and $270,000,
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 continued monitoring costs for onsite and offsite pump and treat
containment systems. During the first quarter of 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 from
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 from the date of settlement. The financial
impact of the settlement was recorded in the first quarter of fiscal 2003 with
$5,500,000 recorded as income. 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. 9




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SPARTON CORPORATION AND
SUBSIDIARIES
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. The Companys
operations are in one line of business, electronic contract manufacturing
services (EMS). Spartons capabilities range from product design and
development through aftermarket support, specializing in total business
solutions for government, medical, aerospace and industrial markets. This
includes the design, development and/or manufacture of electronic parts and
assemblies for both government and commercial customers worldwide.
Governmental sales are mainly sonobuoys. 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. This report on Form 10-Q
contains forward-looking statements within the scope of the Securities Act
Exchange of 1933 and 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 and mid-volume supplier provides rapid product turnaround
for customers. Customers 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 negatively, within
certain ranges, impact the Companys results of operations. As many of the
Companys costs and operating expenses are relatively fixed, 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 operations, performance, growth
forecasts and business results include, but are not limited to, timing and
fluctuations in U.S. and/or world economies, 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, changes in the
interpretation of environmental laws and the uncertainties of environmental
remediation. A 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, which have resulted in higher prices and
late deliveries. Additionally, the timing of sonobuoy sales to the U.S. Navy
is dependent upon access to, 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 some of the Companys
Corporate governance and compliance practices. The SEC and New York Stock
Exchange also have passed new rules requiring additional compliance activities.
Compliance with these rules has increased legal and accounting 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. RESULTS OF OPERATIONS Three-Month Periods Sales for the three-month period ended December 31, 2003, totaled $33,240,000,
a decrease of $10,039,000 (23%) from the same quarter last year. Government
sales declined $5,662,000 (47%) to $6,385,000. This decline is principally due
to technical difficulties with one sonobuoy contract. Additional information
regarding issues affecting government sales is included in the Companys
discussion of operations for the six-month period ended December 31, 2003,
which follows. 10




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Industrial market sales of $8,895,000 also showed a significant decline, down $6,670,000 (43%) from the same period last year. Industrial
sales have been adversely impacted by the reduced demand for detection
equipment in U.S. airports. Medical/scientific instrumentation sales, while
down slightly, were consistent with second quarter sales in fiscal 2003
($4,033,000 in fiscal 2004 and $4,755,000 last year.) Sales to the aerospace
markets were $13,927,000, versus $10,912,000 last year, an increase of
$3,015,000 (28%). This increase was mainly attributable to increased orders
from existing customers. An operating loss of $2,093,000 was reported for the three months ended
December 31, 2003, compared to an operating profit of $2,438,000 for the three
months ended December 31, 2002. While sales for the second quarter ended
December 31, 2003, were below the first quarter sales, gross margin for the
three months ended December 31, 2003, was 4%, up from 1% for the previous three
months. The improved margin reflects the conclusion of the start-up phase of
several new programs. During the second quarter of fiscal 2004, three major
programs continued in start-up mode. These contracts reported sales of
$2,295,000, with a gross margin loss of $615,000. The Company is focused on
improving these margins through cost reductions and/or recoupment of expenses
from the customer. There were no significant cost to complete adjustments for
the three months ended December 31, 2003. Gross profit varies from period to
period and is affected by a number of factors, including product mix,
production efficiencies, component costs, capacity utilization, and new product
introduction. In addition, as many of the Companys costs and operating
expenses are fixed, a reduction in customer demand, as evidenced above,
depresses gross profit and operating income. Selling and administrative
expenses have increased slightly from the prior year period. Most of this
increase was due to higher bid and proposal and research and development
activities, primarily related to government programs. While these expenses have
shown a larger increase as a percentage of sales from the prior year, many
expenses in this area are generally fixed, within ranges, and do not fluctuate
directly based on sales volume. Interest and Investment Income decreased $62,000 to $123,000 in 2003. This
reduction was due to reduced funds available for investment, as well as $56,000
of realized losses which occurred upon the sale of securities in December 2003.
Proceeds from the sale of securities were used to purchase a new facility in
Albuquerque, New Mexico (see Liquidity and Capital Resources). Other
Expense-Net in 2003 was $250,000 versus $61,000 in 2002. Other Expense-Net in
2003 includes a charge of $418,000 for insurance charges related to Spartons
previously owned automotive segment. These charges are for the settlement of a
previously disputed claim. Translation adjustments, along with gains and
losses from foreign currency transactions, are included in current earnings and
in the aggregate, amounted to income of $184,000 during the three months ended
December 31, 2003. Due to factors described above, the Company reported a loss of $1,516,000
($(0.18) per share) for the three months ended December 31, 2003, versus net
income of $2,178,000 ($0.26 per share, basic and diluted) for the corresponding
period last year. Six-Month Periods Sales for the six-month period ended December 31, 2003, totaled $69,665,000, a
decline of $10,382,000 (13%), as compared to the same period in the prior year.
All markets, with the exception of aerospace, are down from the same period
last prior year. Government sales were $16,685,000 for the six months ended
December 31, 2003, as compared to $22,876,000 for the prior year period, a
decline of 27%. Medical/scientific instrumentation sales were $9,046,000 for
the six months ended December 31, 2003, as compared to $9,789,000 for the prior
year period, a decline of 8%. Industrial sales were $17,920,000 for the six
months ended December 31, 2003, as compared to $26,021,000 for the prior year
period, a decline of 31%. While other markets have declined, aerospace sales
have increased by $4,653,000 (22%) to $26,014,000 from the prior year period.
Government sales declined from last year in part due to limited test range
availability, and the resulting decline in sonobuoy sales to the U.S. Navy.
The limited access to test facilities in the first quarter of the year, along
with technical and production issues, resulted in reduced sales through
December 31, 2003. Technical difficulties have resulted in reduced sales and
margins in the production of a current sonobuoy contract. Two additional
sonobuoy contracts also encountered difficulties, with the resulting delays
further depressing sales. Increased costs on these two sonobuoys contracts
adversely impacted operating margins by $597,000. Industrial sales have
declined sharply due to reduced sales for homeland security. Prior years
sales benefited from strong demand for homeland security products, principally
driven by the installation of detection equipment in U.S. and Canadian
airports. These sales totaled approximately $.8 million in fiscal 2004
compared to approximately $15 million last year. This decrease in the
industrial market was partially offset by increased sales to existing
customers. The majority of our sales come from a small number of customers. Sales to our
6 largest customers, including government sales, accounted for approximately
75% of net sales in both periods. Four of the customers, including government,
were the same both years. One of these customers, with 25% and 16% of the
sales as of December 31, 2003 and 2002, respectively, is comprised of six
separate facilities. 11




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An operating loss of $5,492,000 was reported for the six months ended December
31, 2003, versus an operating profit of $8,025,000 for the same period last
year. Several programs were in start-up mode during the six months ended
December 31, 2003, and so contributed minimal or negative margins. An
engineering redesign on an existing proprietary product line resulted in
charges of $455,000. Selling and administrative expenses have increased
slightly from the prior year. Most of this increase was due to higher bid and
proposal and research and development activities, primarily related to
government contracts. While these expenses have shown a larger increase as a
percentage of sales over the prior year, many expenses in this area are fixed
and do not fluctuate directly based on sales volume. Included in prior years operating income was a $5,500,000 ($3,630,000 net of
tax) recovery of certain environmental remediation costs. It reflects
Spartons settlement with the DOE and others regarding the reimbursement of
costs incurred at the Companys Sparton Technology Coors Road property. Also
included were charges related to the New Mexico environmental remediation
effort, principally litigation, of $137,000 in 2003 and $270,000 in 2002. Interest and Investment Income increased $52,000 to $353,000 in 2003, due to
increased funds available for investment during a majority of the six-month
period. Other Expense-Net in 2003 was $309,000 versus $47,000 in 2002. Other
Expense-Net in 2003 includes a charge of $478,000 for insurance adjustments
related to Spartons previously owned automotive segment. Translation
adjustments, along with gains and losses from foreign currency transactions,
are included in current earnings and in the aggregate, amounted to income of
$173,000 during the six months ended December 31, 2003. Due to the factors described above, the Company reported a loss of $3,697,000
($(0.44) per share) for the six months ended December 31, 2003, versus net
income of $5,756,000 ($0.69 per share basic, $0.68 per share diluted) for the
corresponding period last year. LIQUIDITY AND CAPITAL RESOURCES For the six-month period ended December 31, 2003, Cash and Cash Equivalents
decreased $364,000 to $10,198,000. Operating activities used $454,000 in
net cash flows. The primary source of cash was a decrease in accounts
receivable, reflective of receipts for the unusually large balance in
receivables at June 30, 2003. The primary use of cash was an increase in
inventories, along with operating losses. A portion of the increase in
inventories is reflective of delayed customer delivery schedules and material
for new program start-ups. Cash flows provided by investing activities totaled $74,000. Purchases of
property, plant and equipment (net) were principally for the purchase of a new
manufacturing facility in Albuquerque, New Mexico. This new facility will
replace the Companys existing facility in Rio Rancho, New Mexico. The
transition between facilities is anticipated to be completed in the next 6-8
months, during which time the Company will lease the facility to the former
owner. The new facility, which was purchased for approximately $4.5 million,
is included in property, plant, and equipment within the asset section of the
balance sheet as of December 31, 2003. The building was funded through the
sale of investment securities. The existing facility will continue in use
through the transition, at which point the Company plans to sell it at an
anticipated gain. With the new facility, the Company anticipates additional
contract opportunities that were previously unavailable to it. Cash flow provided by financing activities totaled $15,000, primarily from
stock options exercised. 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 December 31 and June 30, 2003, the aggregate government EMS backlog was
approximately $46 million and $51 million, respectively. A majority of the
December 31, 2003, backlog is expected to be realized in the next 12-15 months.
Current government backlog excludes any amounts for the 2004 government
contract year. These awards are expected to be announced in February or March
of 2004. 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. Sparton is continuing to pursue a joint venture operation in Vietnam with
Texatronics, Spartons Alliance Partner in Richardson, Texas, which would
provide even greater expansion and growth opportunities. As the Company has
not previously done business in this emerging market, there are many
uncertainties and risks inherent in this potential venture. The actual joint
venture continues in a discussion phase. If an agreement is finalized, the new
joint venture will carry the name Spartronics. Meetings have been held with
architects and contractors to investigate the type and design of the building.
It is estimated that Sparton will invest approximately $5-$6 million, including
land and building. The Company is also continuing an aggressive program of
identifying and evaluating potential acquisition candidates in both the defense
and medical markets. 12




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No cash dividends were declared in either period presented. In October 2003,
the Company approved a 5% stock dividend. This stock dividend was distributed
December 19, 2003, to owners of record on November 21, 2003. At December 31,
2003, the Company had $87,479,000 in shareowners equity ($10.48 per share),
$69,725,000 in working capital, and a 5.24:1.00 working capital ratio. The
Company feels there is sufficient liquidity for its anticipated future needs. 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, 2003. The preparation
of these financial statements requires estimates, assumptions, and judgements
that affect the amounts reported of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. Estimates are
regularly evaluated, including those related to allowance for doubtful
accounts, inventories and contingencies. Estimates are based on historical
experience and on various other assumptions believed to be reasonable under the
circumstances. Actual results may differ from these estimates. The following
critical accounting policies affect the more significant judgements and
estimates used in the preparation of the Companys consolidated financial
statements. Environmental 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.
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 The establishment of inventory valuation allowances for commercial customer
inventories requires a significant degree of judgment and is 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 13




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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. 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 Company maintains an allowance
for possible estimated losses on receivables. 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 $825,000 and
$739,000 at December 31 and June 30, 2003, 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. 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
Consolidated Balance Sheets and the unrecognized gain or loss accounts, the
effect of changes in these assumptions is not expected to have a significant
effect on net periodic pension costs 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 December 31, 2003. 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. 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. At December 31, 2003, Sparton has accrued $7,372,000 as its estimate of the
future undiscounted minimum financial liability related to this 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. Sparton is currently involved with two legal actions, which are disclosed in
Part II  Other Information, Item 1. Legal Proceedings of this report. At
this time, the Company is unable to predict the amount of recovery, if any,
that may result from the pursuit of these claims. 14




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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
are to 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 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 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 that all material transactions are executed in
accordance with proper authorization and are properly recorded and reported in
the financial statements, and that assets are adequately safeguarded. The
Company also maintains a 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 December 31, 2003, 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
December 31, 2003. 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. 
 PART II
OTHER INFORMATION 
 Item 1. LEGAL 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. At December 31, 2003, Sparton has accrued $7,372,000
as its estimate of the minimum future undiscounted financial liability, of
which $693,000 is classified as a current liability and included 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
continued monitoring costs for onsite and offsite pump and treat containment
systems. 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. 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 of 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
from 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 from the date of settlement. The financial
impact of the settlement was recorded in the first quarter of fiscal 2003 with
$5,500,000 recorded as operating income. 15




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##### Table of Contents



In 1995, Sparton Corporation and Sparton Technology, Inc. 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, 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 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 discovery stage.

At this time, the Company is unable to predict the amount of recovery, if any,
that may result from the pursuit of these two claims.




Item 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits
| | --- |  | --------



| | 3 & 4 |  | Amended Articles of Incorporation of the Registrant were filed on Form 10-Q for the three-month period ended September 30, 2002, and are incorporated herein by reference. 
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |       |  | Amended By-laws of the Registrant were filed on Form 10-Q for the three-month period ended December 31, 2000, and are incorporated herein by reference.                    
|
| |       |  | Amended Code of Regulation of the Registrant were filed with Form 10-Q for the three-month period ended September 30, 1982, 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.



| | (b) |  | Reports on Form 8-K filed in the second quarter of fiscal 2004:
| | --- |  | ---------------------------------------------------------------



| |  |  |  | On October 23, 2003, the Company filed a report on Form 8-K disclosing
under Item 5. Other Events; that the Company issued a press release,
dated October 21, 2003, announcing a stock dividend, among other items.
| | - |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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.

SPARTON CORPORATION
RegistrantDate: February 13, 2004
    
    /s/ DAVID W. HOCKENBROCHT
David W. Hockenbrocht, Chief Executive OfficerDate: February 13, 2004
    
    /s/ RICHARD L. LANGLEY
Richard L. Langley, Chief Financial Officer


16