##### 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, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File number 1-1000
 SPARTON CORPORATION
  OHIO
  38-1054690
  2400 East Ganson Street, Jackson, Michigan 49202
  (517) 787-8600
  þ o
 o þ
 o þ
  Shares Outstanding atOctober 31, 2005Class of Common Stock
    
    
    (Unadjusted for October 25, 2005, Stock dividend)$1.25 Par Value
    
    
    8,906,789




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TABLE OF CONTENTS
 Part I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets
At September 30, 2005 and at June 30, 2005
    
    
    3Condensed Consolidated Statements of Operations
Three Months ended September 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows
Three Months ended September 30, 2005 and 2004
    
    
    5Condensed Consolidated Statements of Shareowners Equity
Three Months ended September 30, 2005 and 2004
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    18Part II. Other InformationItem 1. Legal Proceedings
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20Item 6. Exhibits
    
    
    20Signatures
    
    
    20EX-31.1 CERTIFICATIONEX-31.2 CERTIFICATIONEX-32.1 CERTIFICATION
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##### Table of Contents



PART I
 
 Item 1. Financial Statements
 SPARTON CORPORATION AND SUBSIDIARIES
 
  At September 30, 2005
    
    At June 30, 2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    7,363,567
    
    
    $
    9,368,120Investment securities
    
    
    22,638,980
    
    
    
    20,659,621Accounts receivable
    
    
    22,721,767
    
    
    
    26,004,945Environmental settlement receivable
    
    
    
    
    
    
    5,455,000Income taxes recoverable
    
    
    685,706
    
    
    
    Inventories and costs on contracts in progress
    
    
    36,018,276
    
    
    
    36,847,385Deferred taxes
    
    
    2,683,862
    
    
    
    2,640,561Prepaid expenses and other current assets
    
    
    490,048
    
    
    
    631,132Total current assets
    
    
    92,602,206
    
    
    
    101,606,764Pension asset
    
    
    4,848,392
    
    
    
    4,968,507Other assets
    
    
    6,507,696
    
    
    
    6,454,526Property, plant and equipment, net
    
    
    16,131,081
    
    
    
    16,430,989Total assets
    
    $
    120,089,375
    
    
    $
    129,460,786Liabilities and Shareowners EquityCurrent liabilities:Accounts payable
    
    $
    8,755,604
    
    
    $
    12,694,057Salaries and wages
    
    
    3,496,199
    
    
    
    4,435,089Accrued health benefits
    
    
    1,065,084
    
    
    
    1,041,850Other accrued liabilities
    
    
    5,450,697
    
    
    
    5,518,920Income taxes payable
    
    
    
    
    
    
    2,414,294Total current liabilities
    
    
    18,767,584
    
    
    
    26,104,210Environmental remediation  noncurrent portion
    
    
    6,115,424
    
    
    
    6,184,590Shareowners equity:Preferred stock, no par value; 200,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock, $1.25 par value; 15,000,000 shares authorized, 9,340,627
and 8,830,428 shares outstanding at September 30 and June 30, 2005
    
    
    11,675,784
    
    
    
    11,038,035Capital in excess of par value
    
    
    14,607,786
    
    
    
    10,558,757Accumulated other comprehensive loss
    
    
    (144,833
    )
    
    
    (44,198
    )Retained earnings
    
    
    69,067,630
    
    
    
    75,619,392Total shareowners equity
    
    
    95,206,367
    
    
    
    97,171,986Total liabilities and shareowners equity
    
    $
    120,089,375
    
    
    $
    129,460,786
 See accompanying notes.
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SPARTON CORPORATION AND SUBSIDIARIES
 
  Three Months Ended September 30,2005
    
    2004Net sales
    
    $
    37,306,118
    
    
    $
    45,188,315Costs of goods sold
    
    
    35,611,558
    
    
    
    38,721,599Gross profit
    
    
    1,694,560
    
    
    
    6,466,716Selling and administrative expenses
    
    
    4,014,271
    
    
    
    3,387,053EPA related  net environmental remediation
    
    
    (29,198
    )
    
    
    84,000Loss on sale of property, plant and equipment
    
    
    11,156
    
    
    
    Operating income (loss)
    
    
    (2,301,669
    )
    
    
    2,995,663Other income (expense):Interest and investment income
    
    
    264,448
    
    
    
    215,473Equity income (loss) in investment
    
    
    17,000
    
    
    
    (20,000
    )Other  net
    
    
    109,275
    
    
    
    358,462390,723
    
    
    
    553,935Income (loss) before income taxes
    
    
    (1,910,946
    )
    
    
    3,549,598Provision (credit) for income taxes
    
    
    (612,000
    )
    
    
    1,136,000Net income (loss)
    
    $
    (1,298,946
    )
    
    $
    2,413,598Basic and diluted earnings (loss) per share (1)
    
    
    $(0.14
    )
    
    
    $0.26
 (1)
    
    All share and per share information have been adjusted to reflect the impact of the 5%
stock dividends declared in November 2004 and October 2005.
 See accompanying notes.
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SPARTON CORPORATION AND SUBSIDIARIES
 
  Three Months Ended September 30,2005
    
    2004Cash flows provided by Operating Activities:Net income (loss)
    
    $
    (1,298,946
    )
    
    $
    2,413,598Add (deduct) noncash items affecting operations:Depreciation, amortization and accretion
    
    
    484,270
    
    
    
    388,557Deferred income taxes
    
    
    14,000
    
    
    
    Change in pension asset
    
    
    120,115
    
    
    
    132,017Stock-based compensation expense
    
    
    65,229
    
    
    
    Loss on sale of property, plant & equipment
    
    
    11,156
    
    
    
    Loss on sale of investment securities
    
    
    2,151
    
    
    
    5,244Equity (income) loss on investment
    
    
    (17,000
    )
    
    
    20,000Other, primarily changes in customer and vendor claims
    
    
    (26,694
    )
    
    
    Add (deduct) changes in operating assets and liabilities:Accounts receivable
    
    
    3,283,178
    
    
    
    1,775,005Environmental settlement receivable
    
    
    5,455,000
    
    
    
    Income taxes recoverable
    
    
    (685,706
    )
    
    
    559,706Inventories and prepaid expenses
    
    
    970,193
    
    
    
    678,450Accounts payable, salaries and wages, accrued
liabilities and income taxes
    
    
    (7,405,793
    )
    
    
    (674,165
    )Net cash provided by operating activities
    
    
    971,153
    
    
    
    5,298,412Cash flows used by Investing Activities:Purchases of investment securities
    
    
    (2,855,879
    )
    
    
    (2,260,706
    )Proceeds from sale of investment securities
    
    
    538,167
    
    
    
    2,094,884Proceeds from maturity of investment securities
    
    
    178,047
    
    
    
    200,000Purchases of property, plant and equipment, net
    
    
    (195,298
    )
    
    
    (1,062,991
    )Other, principally noncurrent other assets
    
    
    (9,476
    )
    
    
    (81,888
    )Net cash used by investing activities
    
    
    (2,344,439
    )
    
    
    (1,110,701
    )Cash flows provided (used) by Financing Activities:Proceeds from exercise of stock options
    
    
    258,142
    
    
    
    6,145Cash dividends
    
    
    (889,409
    )
    
    
    Net cash provided (used) by financing activities
    
    
    (631,267
    )
    
    
    6,145Increase (decrease) in cash and cash equivalents
    
    
    (2,004,553
    )
    
    
    4,193,856Cash and cash equivalents at beginning of period
    
    
    9,368,120
    
    
    
    10,820,461Cash and cash equivalents at end of period
    
    $
    7,363,567
    
    
    $
    15,014,317Supplemental disclosures of cash paid during the period:Income taxes  net
    
    $
    2,509,000
    
    
    $
    
 See accompanying notes.
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SPARTON CORPORATION AND SUBSIDIARIES
 
  Three Months Ended September 30, 2005Accumulated otherCapital
    
    comprehensiveCommon Stock
    
    in excess
    
    income (loss)
    
    RetainedShares
    
    Amount
    
    of par value
    
    net of tax
    
    earnings
    
    TotalBalance at June 30, 2005
    
    
    8,830,428
    
    
    $
    11,038,035
    
    
    $
    10,558,757
    
    
    $
    (44,198
    )
    
    $
    75,619,392
    
    
    $
    97,171,986Cash dividend ($0.10 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (889,409
    )
    
    
    (889,409
    )Stock options exercised
    
    
    65,407
    
    
    
    81,759
    
    
    
    176,383
    
    
    
    
    
    
    
    
    
    
    
    258,142Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    65,229
    
    
    
    
    
    
    
    
    
    
    
    65,229Stock dividend (5% declared
October 25, 2005)
    
    
    444,792
    
    
    
    555,990
    
    
    
    3,807,417
    
    
    
    
    
    
    
    (4,363,407
    )
    
    
    Comprehensive income (loss), net
of tax:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,298,946
    )
    
    
    (1,298,946
    )Net unrealized loss on investment
securities owned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (116,055
    )
    
    
    
    
    
    
    (116,055
    )Reclassification adjustment for
net loss
realized and reported in net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,420
    
    
    
    
    
    
    
    1,420Net unrealized gain on equity
investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,000
    
    
    
    
    
    
    
    14,000Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,399,581
    )Balance at September 30, 2005
    
    
    9,340,627
    
    
    $
    11,675,784
    
    
    $
    14,607,786
    
    
    $
    (144,833
    )
    
    $
    69,067,630
    
    
    $
    95,206,367
 Three Months Ended September 30, 2004Accumulated otherCapital
    
    comprehensiveCommon Stock
    
    in excess
    
    income (loss)
    
    RetainedShares
    
    Amount
    
    of par value
    
    net of tax
    
    earnings
    
    TotalBalance at June 30, 2004
    
    
    8,351,538
    
    
    $
    10,439,423
    
    
    $
    7,134,149
    
    
    $
    62,368
    
    
    $
    71,230,159
    
    
    $
    88,866,099Stock options exercised
    
    
    814
    
    
    
    1,017
    
    
    
    5,128
    
    
    
    
    
    
    
    
    
    
    
    6,145Comprehensive income, net of
tax:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,413,598
    
    
    
    2,413,598Net unrealized gain
on investment
securities owned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,699
    
    
    
    
    
    
    
    42,699Reclassification adjustment
for net loss
realized and
reported in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,461
    
    
    
    
    
    
    
    3,461Net unrealized gain on
equity investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    20,000Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,479,758Balance at September 30, 2004
    
    
    8,352,352
    
    
    $
    10,440,440
    
    
    $
    7,139,277
    
    
    $
    128,528
    
    
    $
    73,643,757
    
    
    $
    91,352,002
 See accompanying notes.
 6




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SPARTON CORPORATION & SUBSIDIARIES
 
  1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -
 Basis of presentation -
  Operations -
 Use of estimates -
 Revenue recognition -
 Investment securities -
 Market
risk exposure -
 7




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New accounting standards -
     Periodic benefit cost -
 Three Months Ended September 30,2005
    
    
    2004Service cost
    
    $
    137,000
    
    
    $
    151,000Interest cost
    
    
    166,000
    
    
    
    182,000Expected return on plan assets
    
    
    (245,000
    )
    
    
    (269,000
    )Amortization of prior service cost
    
    
    24,000
    
    
    
    27,000Amortization of net loss
    
    
    38,000
    
    
    
    41,000Net periodic benefit cost
    
    $
    120,000
    
    
    $
    132,000
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Stock options -
  Three Months Ended September 30, 2004Net income, as reported
    
    
    $2,414,000Deduct:Total stock-based compensation expense determined under the fair value method
for all awards, net of tax effects
    
    
    (41,000)Pro forma net income
    
    
    $2,373,000Pro forma basic and diluted earnings per share
    
    

$0.25
   Options Outstanding
    
    Options ExercisableRange of
    
    
    
    
    
    Wtd. Avg. Remaining
    
    Wtd. Avg.
    
    
    
    
    
    Wtd. Avg.Exercise Prices
    
    Number Outstanding
    
    Contractual Life (years)
    
    Exercise Price
    
    Number Exercisable
    
    Exercisable Price$3.50 to $5.96
    
    
    330,327
    
    
    
    1.07
    
    
    $
    5.38
    
    
    
    330,327
    
    
    $
    5.38$6.85 to $9.00
    
    
    310,000
    
    
    
    6.79
    
    
    $
    8.03
    
    
    
    98,389
    
    
    $
    6.96
  2. INVENTORIES -
 September 30, 2005
    
    
    June 30, 2005Raw materials
    
    
    $24,391,000
    
    
    $
    23,463,000Work in process and finished goods
    
    
    11,627,000
    
    
    
    13,384,000$36,018,000
    
    
    $
    36,847,000
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3. EARNINGS (LOSS) PER SHARE -
  Three Months Ended September 30,2005
    
    
    2004Basic  weighted average shares outstanding
    
    
    8,847,761
    
    
    
    8,769,588Estimated weighted additional shares to be issued for the 5% common stock
dividend declared October 25, 2005
    
    
    442,388
    
    
    
    438,4799,290,149
    
    
    
    9,208,067Effect of dilutive stock options
    
    
    
    
    
    
    120,750Weighted average diluted shares outstanding
    
    
    9,290,149
    
    
    
    9,328,817Basic and diluted earnings (loss) per share  after stock dividend
    
    
    $(0.14
    )
    
    
    $0.26
  4. COMPREHENSIVE INCOME (LOSS) -
  September 30, 2005
    
    
    June 30, 2005Accumulated other comprehensive income (loss), net of tax:Investment securities owned
    
    
    $(206,000
    )
    
    
    $(91,000
    )Investment securities held by investee accounted for by the equity method
    
    
    61,000
    
    
    
    47,000Accumulated other comprehensive loss
    
    
    $(145,000
    )
    
    
    $(44,000
    )
 5. INVESTMENT SECURITIES -
  10




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YearsWithin 1
    
    
    1 to 5
    
    
    5 to 10
    
    
    Over 10
    
    
    TotalDebt securities:Corporate  primarily U.S.
    
    $
    806,000
    
    
    $
    3,207,000
    
    
    $
    
    
    
    $
    277,000
    
    
    $
    4,290,000U.S. government and federal agency
    
    
    1,598,000
    
    
    
    3,822,000
    
    
    
    1,758,000
    
    
    
    2,361,000
    
    
    
    9,539,000State and municipal
    
    
    969,000
    
    
    
    2,832,000
    
    
    
    710,000
    
    
    
    
    
    
    
    4,511,000Bond fund
    
    
    4,299,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,299,000Total debt securities
    
    $
    7,672,000
    
    
    $
    9,861,000
    
    
    $
    2,468,000
    
    
    $
    2,638,000
    
    
    $
    22,639,000
 6. COMMITMENTS AND CONTINGENCIES -
   11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
       12




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RESULTS OF OPERATIONS
 Three Months Ended September 302005


    

    
    
    2004%
    
    
    
    
    
    
    %
    
    
    %Sales
    
    
    of Total
    
    
    Sales
    
    
    of Total
    
    
    ChangeGovernment
    
    $
    9,366,000
    
    
    
    25.1
    %
    
    $
    10,922,000
    
    
    
    24.2
    %
    
    
    (14.2
    )%Industrial/Other
    
    
    12,534,000
    
    
    
    33.6
    
    
    
    11,883,000
    
    
    
    26.3
    
    
    
    5.5Aerospace
    
    
    12,398,000
    
    
    
    33.2
    
    
    
    18,677,000
    
    
    
    41.3
    
    
    
    (33.6
    )Medical/Scientific Instrumentation
    
    
    3,008,000
    
    
    
    8.1
    
    
    
    3,706,000
    
    
    
    8.2
    
    
    
    (18.8
    )Totals
    
    $
    37,306,000
    
    
    
    100.0
    %
    
    $
    45,188,000
    
    
    
    100.0
    %
    
    
    (17.4
    )%
    2005
    
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %Costs of goods sold
    
    
    95.5
    
    
    
    85.7Gross profit
    
    
    4.5
    
    
    
    14.3Selling and administrative expenses
    
    
    10.7
    
    
    
    7.5Other operating expenses
    
    
    
    
    
    
    0.2Operating income (loss)
    
    
    (6.2
    )
    
    
    6.6Other income  net
    
    
    1.1
    
    
    
    1.2Income (loss) before income taxes
    
    
    (5.1
    )
    
    
    7.8Provision (credit) for income taxes
    
    
    (1.6
    )
    
    
    2.5Net income (loss)
    
    
    (3.5
    )%
    
    
    5.3
    %
  13




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LIQUIDITY AND CAPITAL RESOURCES
       14




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CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Environmental Contingencies
  Government Contract Cost Estimates
  15




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Commercial Inventory Valuation Allowances
   Allowance for Possible Losses on Receivables
  Pension Obligations
  16




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OTHER
 LITIGATION
     
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   17




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Item 4. CONTROLS AND PROCEDURES
  
 PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
      18




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19




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Item 4. Submission of Matters to a Vote of Security Holders
   Name
    
    
    Votes FOR
    
    
    Votes WITHHELDRichard J. Johns, MD
    
    
    8,266,316
    
    
    
    321,808Richard L. Langley
    
    
    8,029,787
    
    
    
    558,337William I. Noecker
    
    
    7,451,239
    
    
    
    1,136,885
  
 Item 6. Exhibits
 3.1
    
    Amended Articles of Incorporation of the Registrant were filed on Form 10-Q for the
three-month period ended
September 30, 2004, and are incorporated herein by reference.3.2
    
    Amended Code of Regulation of the Registrant were filed on Form 10-Q for the
three-month period ended September 30, 2004, and are incorporated herein by reference.3.3
    
    The amended By-Laws of the Registrant were filed on Form 10-Q for the nine-month
period ended March 31, 2004,
and are incorporated herein by reference.31.1
    
    Chief Executive Officer certification under Section 302 of the Sarbanes-Oxley Act
of 2002.31.2
    
    Chief Financial Officer certification under Section 302 of the Sarbanes-Oxley Act
of 2002.32.1
    
    Chief Executive Officer and Chief Financial Officer certification pursuant to 18
U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 SIGNATURES
  Date: November 8, 2005
    
    /s/ DAVID W. HOCKENBROCHTDavid W. Hockenbrocht, Chief Executive OfficerDate: November 8, 2005
    
    /s/ RICHARD L. LANGLEYRichard L. Langley, Chief Financial Officer
 20