##### 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, 2008
 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
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ
  Shares outstanding atClass of Common Stock
    
    October 31, 2008$1.25 Par Value
    
    9,811,507




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##### 



TABLE OF CONTENTS
 Part I. Financial InformationItem 1. Financial Statements (Interim, Unaudited)Condensed Consolidated Balance Sheets
at September 30, 2008 and June 30, 2008
    
    
    3Condensed Consolidated Statements of Operations
for the three months ended September 30, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 2008 and 2007
    
    
    5Condensed Consolidated Statements of Shareowners Equity
for the three months ended September 30, 2008 and 2007
    
    
    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
    
    
    25Item 4T. Controls and Procedures
    
    
    26Part II. Other InformationItem 1. Legal Proceedings
    
    
    26Item 1(a). Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29Signatures
    
    
    29EX-31.1EX-31.2EX-32.1
  2




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Part I. Financial Information
 
 Item 1. Financial Statements (Interim, Unaudited)
  
  September 30, 2008
    
    
    June 30, 2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,858,765
    
    
    $
    2,928,433Accounts receivable
    
    
    28,223,306
    
    
    
    30,219,070Inventories and costs of contracts in progress
    
    
    61,615,256
    
    
    
    63,443,221Deferred income taxes
    
    
    251,545
    
    
    
    251,545Prepaid expenses and other current assets
    
    
    432,668
    
    
    
    844,130Total current assets
    
    
    92,381,540
    
    
    
    97,686,399Property, plant and equipment  net
    
    
    17,593,960
    
    
    
    17,278,713Deferred income taxes  non current
    
    
    1,024,534
    
    
    
    1,044,987Goodwill
    
    
    17,434,724
    
    
    
    17,434,804Other intangibles  net
    
    
    5,642,084
    
    
    
    5,762,397Other non current assets
    
    
    3,512,021
    
    
    
    3,519,092Total assets
    
    $
    137,588,863
    
    
    $
    142,726,392LIABILITIES AND SHAREOWNERS EQUITYCurrent liabilities:Short-term bank borrowings
    
    $
    15,500,000
    
    
    $
    13,500,000Current portion of long-term debt
    
    
    4,032,257
    
    
    
    4,029,757Accounts payable
    
    
    21,905,003
    
    
    
    23,503,857Salaries and wages
    
    
    4,420,270
    
    
    
    5,642,302Accrued health benefits
    
    
    1,450,117
    
    
    
    1,479,729Other accrued liabilities
    
    
    7,428,683
    
    
    
    7,949,470Total current liabilities
    
    
    54,736,330
    
    
    
    56,105,115Pension liability
    
    
    2,663,973
    
    
    
    2,564,438Long-term debt  non current portion
    
    
    7,530,844
    
    
    
    8,058,497Environmental remediation  non current portion
    
    
    5,069,393
    
    
    
    5,138,588Total liabilities
    
    
    70,000,540
    
    
    
    71,866,638Shareowners 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, 2008
    
    
    12,264,384
    
    
    
    12,264,384Capital in excess of par value
    
    
    19,701,241
    
    
    
    19,650,481Retained earnings
    
    
    40,230,458
    
    
    
    43,592,351Accumulated other comprehensive loss
    
    
    (4,607,760
    )
    
    
    (4,647,462
    )Total shareowners equity
    
    
    67,588,323
    
    
    
    70,859,754Total liabilities and shareowners equity
    
    $
    137,588,863
    
    
    $
    142,726,392
  3




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Three months ended September 30,2008
    
    
    2007Net sales
    
    $
    53,995,534
    
    
    $
    58,851,863Costs of goods sold
    
    
    51,613,372
    
    
    
    57,236,317Gross profit
    
    
    2,382,162
    
    
    
    1,615,546Selling and administrative expenses
    
    
    5,116,575
    
    
    
    4,476,963Amortization of intangibles
    
    
    120,313
    
    
    
    120,313EPA related  net environmental remediation
    
    
    500
    
    
    
    (145
    )Net gain on sale of property, plant and equipment
    
    
    (2,108
    )
    
    
    (927,822
    )5,235,280
    
    
    
    3,669,309Operating loss
    
    
    (2,853,118
    )
    
    
    (2,053,763
    )Other income (expense):Interest and investment income
    
    
    13,417
    
    
    
    26,718Interest expense
    
    
    (368,738
    )
    
    
    (305,092
    )Equity income (loss) in investment
    
    
    3,000
    
    
    
    (124,000
    )Other  net
    
    
    64,546
    
    
    
    482,365(287,775
    )
    
    
    79,991Loss before income taxes
    
    
    (3,140,893
    )
    
    
    (1,973,772
    )Provision (credit) for income taxes
    
    
    221,000
    
    
    
    (553,000
    )Net loss
    
    $
    (3,361,893
    )
    
    $
    (1,420,772
    )Loss per share  basic and diluted
    
    $
    (0.34
    )
    
    $
    (0.14
    )
  4




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Three months ended September 30,2008
    
    
    2007Cash Flows From Operating Activities:Net loss
    
    $
    (3,361,893
    )
    
    $
    (1,420,772
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation, amortization and accretion
    
    
    498,673
    
    
    
    567,170Deferred income tax credit
    
    
    
    
    
    
    (611,000
    )Equity (income) loss in investment
    
    
    (3,000
    )
    
    
    124,000Pension expense
    
    
    159,690
    
    
    
    124,242Share-based compensation
    
    
    50,760
    
    
    
    20,086Gain on sale of property, plant and equipment
    
    
    (2,108
    )
    
    
    (927,822
    )Other, NRTC litigation loss
    
    
    
    
    
    
    1,643,396Changes in operating assets and liabilities:Accounts receivable
    
    
    1,995,764
    
    
    
    (865,147
    )Inventories, prepaid expenses and other current assets
    
    
    2,239,427
    
    
    
    592,116Accounts payable and accrued liabilities
    
    
    (3,440,400
    )
    
    
    (1,314,187
    )Net cash used in operating activities
    
    
    (1,863,087
    )
    
    
    (2,067,918
    )Cash Flows From Investing Activities:Purchases of property, plant and equipment
    
    
    (697,004
    )
    
    
    (283,041
    )Proceeds from sale of property, plant and equipment
    
    
    5,505
    
    
    
    1,071,818Other, principally noncurrent other assets
    
    
    10,071
    
    
    
    (15,022
    )Net cash (used in) provided by investing activities
    
    
    (681,428
    )
    
    
    773,755Cash Flows From Financing Activities:Net short-term bank borrowings
    
    
    2,000,000
    
    
    
    3,500,000Repayment of long-term debt
    
    
    (525,153
    )
    
    
    (536,667
    )Net cash provided by financing activities
    
    
    1,474,847
    
    
    
    2,963,333Increase (decrease) in cash and cash equivalents
    
    
    (1,069,668
    )
    
    
    1,669,170Cash and cash equivalents at beginning of period
    
    
    2,928,433
    
    
    
    3,982,485Cash and cash equivalents at end of period
    
    $
    1,858,765
    
    
    $
    5,651,655
  5




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Three months ended September 30, 2008Capital
    
    
    
    
    
    
    Accumulated otherCommon Stock
    
    
    in excess
    
    
    Retained
    
    
    comprehensiveShares
    
    
    Amount
    
    
    of par value
    
    
    earnings
    
    
    income (loss)
    
    
    TotalBalance at July 1, 2008
    
    
    9,811,507
    
    
    $
    12,264,384
    
    
    $
    19,650,481
    
    
    $
    43,592,351
    
    
    $
    (4,647,462
    )
    
    $
    70,859,754Share-based compensation
    
    
    
    
    
    
    
    
    
    
    50,760
    
    
    
    
    
    
    
    
    
    
    
    50,760Comprehensive income (loss), net of tax:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,361,893
    )
    
    
    
    
    
    
    (3,361,893
    )Amortization of unrecognized pension costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,702
    
    
    
    39,702Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,322,191
    )Balance at September 30, 2008
    
    
    9,811,507
    
    
    $
    12,264,384
    
    
    $
    19,701,241
    
    
    $
    40,230,458
    
    
    $
    (4,607,760
    )
    
    $
    67,588,323
 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
  6




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NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of presentation 
  Operations 
 Use of estimates 
 Revenue recognition 
 7




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Accounts receivable, credit practices, and allowance for probable losses 
  Fair value of financial instruments 
 Other investment 
 Market risk exposure
  Long-lived assets 
 Other assets 
 Common stock repurchases 
 8




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Deferred income taxes 
 Supplemental cash flows information 
 2008
    
    
    2007Net cash paid (refunded) during the period for:Income taxes
    
    $
    289,000
    
    
    $
    Interest
    
    $
    310,000
    
    
    $
    231,000
 
 NOTE:
    1)
    Income taxes consist primarily of the U.S. dollar equivalent of taxes paid to the Canadian
government related to our Canadian operations.2)

    Interest includes $1,000 of capitalized interest in fiscal 2009. 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
 9




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NOTE 2. INVENTORIES AND COSTS OF CONTRACTS IN PROGRESS
   September 30, 2008
    
    
    June 30, 2008Raw materials
    
    $
    47,241,000
    
    
    $
    48,237,000Work in process and finished goods
    
    
    14,374,000
    
    
    
    15,206,000$
    61,615,000
    
    
    $
    63,443,000
  NOTE 3. DEFINED BENEFIT PENSION PLAN
 Periodic benefit cost 
 Three months ended2008
    
    
    2007Service cost
    
    $
    135,000
    
    
    $
    123,000Interest cost
    
    
    152,000
    
    
    
    158,000Expected return on plan assets
    
    
    (187,000
    )
    
    
    (213,000
    )Amortization of prior service cost
    
    
    25,000
    
    
    
    26,000Amortization of unrecognized net actuarial loss
    
    
    35,000
    
    
    
    30,000Net periodic benefit cost
    
    $
    160,000
    
    
    $
    124,000
  10




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NOTE 4. GOODWILL AND OTHER INTANGIBLES
 Business Combinations Goodwill and
Other Intangible Assets Accounting for the Impairment or Disposal
of Long-lived Assets
 Amortizable
    
    
    TotalGoodwill
    
    
    Intangibles
    
    
    IntangiblesBalance at July 1, 2007
    
    $
    16,378,000
    
    
    $
    6,244,000
    
    
    $
    22,622,000Goodwill addition
    
    
    1,057,000
    
    
    
    
    
    
    
    1,057,000Amortization
    
    
    
    
    
    
    (482,000
    )
    
    
    (482,000
    )Balance at June 30, 2008
    
    $
    17,435,000
    
    
    $
    5,762,000
    
    
    $
    23,197,000Amortization
    
    
    
    
    
    
    (120,000
    )
    
    
    (120,000
    )Balance at September 30, 2008
    
    $
    17,435,000
    
    
    $
    5,642,000
    
    
    $
    23,077,000
 Goodwill 
 Other intangibles 
 NOTE 5. BORROWINGS
 Short-term debt maturities and line of credit 
  11




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Long-term debt 
 September 30, 2008
    
    
    June 30, 2008Industrial Revenue bonds, face value
    
    $
    2,239,000
    
    
    $
    2,266,000Less unamortized purchase discount
    
    
    129,000
    
    
    
    131,000Industrial Revenue bonds, carrying value
    
    
    2,110,000
    
    
    
    2,135,000Bank loan
    
    
    5,500,000
    
    
    
    6,000,000Notes payable
    
    
    3,953,000
    
    
    
    3,953,000Total long-term debt
    
    
    11,563,000
    
    
    
    12,088,000Less current portion
    
    
    4,032,000
    
    
    
    4,030,000Long-term debt, net of current portion
    
    $
    7,531,000
    
    
    $
    8,058,000
     NOTE 6. COMMITMENTS AND CONTINGENCIES
 Environmental Remediation
  12




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Customer Relationships
    Product Issues
   13




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NOTE 7. COMMON STOCK OPTIONS
 Share-Based Payment
  
  Three months ended2008
    
    2007Share-based compensation expense
    
    $
    51,000
    
    
    $
    20,000Related tax benefit
    
    
    
    
    
    
    
   Wtd. Avg. RemainingTotal Shares
    
    Wtd. Avg.
    
    Contractual
    
    AggregateUnder Option
    
    Exercise Price
    
    Term (years)
    
    Intrinsic ValueOutstanding at July 1, 2008
    
    
    223,385
    
    
    $
    8.22
    
    
    
    6.65
    
    
    
    Granted
    
    
    Exercised
    
    
    Forfeited or expired
    
    
    Outstanding at September 30, 2008
    
    
    223,385
    
    
    $
    8.22
    
    
    
    6.40
    
    
    
    Exercisable at September 30, 2008
    
    
    170,708
    
    
    $
    8.13
    
    
    
    6.25
    
    
    
    
  14




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NOTE 8. EARNINGS (LOSS) PER SHARE
   Three months ended2008
    
    2007Weighted average shares outstanding
    
    
    9,811,507
    
    
    
    9,811,507Basic and diluted loss per share
    
    $
    (0.34
    )
    
    $
    (0.14
    )
 NOTE 9. COMPREHENSIVE INCOME (LOSS)
  Three months ended2008
    
    
    2007Net loss
    
    $
    (3,362,000
    )
    
    $
    (1,421,000
    )Other comprehensive income (loss), net of taxAmortization of unrecognized pension costs
    
    
    40,000
    
    
    
    37,000Comprehensive loss
    
    $
    (3,322,000
    )
    
    $
    (1,384,000
    )
   15




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NOTE 10. PLANT CLOSURE
 Albuquerque, New Mexico 
   September
    
    
    JuneCurrent assets
    
    $
    4,930,000
    
    
    $
    8,837,000Long term assets
    
    
    
    
    
    
    Property, plant and equipment (net)
    
    
    5,975,000
    
    
    
    6,121,000Total assets
    
    $
    10,905,000
    
    
    $
    14,958,000Current liabilities
    
    $
    2,010,000
    
    
    $
    2,814,000Long term liabilities (EPA, see Note 6)
    
    
    5,069,000
    
    
    
    5,139,000Total liabilities
    
    $
    7,079,000
    
    
    $
    7,953,000
 Deming, New Mexico 
  16




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
     17




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EXECUTIVE SUMMARY
  Net loss first quarter 2008
    
    $
    (1.4
    )Deferred
asset write-off in 2008
    
    
    1.6Gain on
Deming, NM sale in 2008
    
    
    (0.9
    )New program starts
    
    
    (1.1
    )Increased tax expense
    
    
    (0.8
    )Increased legal and consulting expense
    
    
    (0.7
    )Albuquerque, NM severance
    
    
    (0.3
    )Other, net
    
    
    0.2Net loss first quarter 2009
    
    $
    (3.4
    )
  
    
    Consistent and successful sonobuoy drop tests contributing to sales and improved
margins. There were no minimal or no margin contracts in fiscal 2009.
    
    Improved sales in the Aerospace market, an increase in sales volume over prior year of $4.5
million.
    
    Significant non-recoverable new program start-up costs totaling $1.2 million, related to hiring staff,
training personnel and the costs of ordering material in advance of production, compounded by
customer delays which led to further unexpected cost growth, an increase of $1.1 million from
prior year.
    
    Increased administrative expenses primarily related to consulting and legal fees, $0.7
million above prior year first quarter.
    
    Closing costs incurred for the Albuquerque, New Mexico facility related to severance benefits reduced gross margins by approximately $0.3 million in the first quarter of fiscal 2009.
    
    Tax expense of $0.2 million in the first quarter of
fiscal 2009, compared to a tax benefit of $0.6 million in the same period last year.
  RESULTS OF OPERATIONS  :
 2008
    
    
    2007MARKETS
    
    Sales
    
    
    % of Total
    
    
    Sales
    
    
    % of Total
    
    
    % ChangeAerospace
    
    $
    19,029,000
    
    
    
    35
    %
    
    $
    14,531,000
    
    
    
    25
    %
    
    
    31
    %Medical/Scientific Instrumentation
    
    
    15,589,000
    
    
    
    29
    
    
    
    19,203,000
    
    
    
    33
    
    
    
    (19
    )Industrial/Other
    
    
    11,180,000
    
    
    
    21
    
    
    
    11,385,000
    
    
    
    19
    
    
    
    (2
    )Government
    
    
    8,198,000
    
    
    
    15
    
    
    
    13,733,000
    
    
    
    23
    
    
    
    (40
    )Totals
    
    $
    53,996,000
    
    
    
    100
    %
    
    $
    58,852,000
    
    
    
    100
    %
    
    
    (8
    )%
  18




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2008
    
    2007Net sales
    
    
    100.00
    %
    
    
    100.0
    %Costs of goods sold
    
    
    95.6
    
    
    
    97.3Gross profit
    
    
    4.4
    
    
    
    2.7Selling and administrative expenses
    
    
    9.5
    
    
    
    7.6Other operating (income) expense  net
    
    
    0.2
    
    
    
    (1.4
    )Operating loss
    
    
    (5.3
    )
    
    
    (3.5
    )Other income (expense)  net
    
    
    (0.5
    )
    
    
    0.1Loss before income taxes
    
    
    (5.8
    )
    
    
    (3.4
    )Provision (credit) for income taxes
    
    
    0.4
    
    
    
    (1.0
    )Net loss
    
    
    (6.2
    )%
    
    
    (2.4
    )%
     19




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LIQUIDITY AND CAPITAL RESOURCES
      20




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CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  21




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Environmental Contingencies
  Government Contract Cost Estimates
  Commercial Inventory Valuation Allowances
   Allowance for Probable Losses on Receivables
  22




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Pension Obligations
 Employers Accounting for Pensions
  Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
 Business Combinations
  23




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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. Accounting for the Impairment or Disposal of
Long-lived Assets
  Deferred Costs and Claims for Reimbursement
  24




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##### Table of Contents



Income Taxes
  OTHER
 Litigation
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 MARKET RISK EXPOSURE
   25




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##### Table of Contents



Item 4T. Controls and Procedures
     
 Part II. Other Information
 
 Item 1. Legal Proceedings
  Environmental Remediation
   26




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##### Table of Contents



Customer Relationships
    Product Issues
  27




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##### Table of Contents



Item 1(a). Risk Factors
     28




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 5. Other Information
  
 Item 6. Exhibits
 3.1
    
    By-Laws of the Registrant as amended and incorporated herein by reference to Exhibit 3.1
to the Companys Form 8-K, filed November 3, 2008.3.2
    
    Amended Articles of Incorporation of the Registrant were filed on Form 8-K for the
three-month period ended September 30, 2004, and are incorporated herein by reference.3.3
    
    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.10.1
    
    Agreement dated as of September 17, 2008, by and among the registrant, Lawndale Capital
Management, LLC, Diamond A. Partners, L.P., and Diamond A. Investors, L.P., filed as
Exhibit 10.1 to the Form 8-K filed on September 19, 2008, and 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
  SPARTON CORPORATIONDate: November 7, 2008
    /s/ RICHARD L. LANGLEYRichard L. Langley, Chief Executive OfficerDate: November 7, 2008
    /s/ JOSEPH S. LERCZAKJoseph S. Lerczak, Chief Financial Officer 29