##### 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 December 31, 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 oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ
  Shares outstanding atClass of Common Stock
    
    January 31, 2009$1.25 Par Value
    
    9,931,507




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##### 



TABLE OF CONTENTS
 Part I. Financial InformationItem 1.
    
    Financial Statements (Interim, Unaudited)Condensed Consolidated Balance Sheets at December 31, 2008 and June 30, 2008
    
    
    3Condensed Consolidated Statements of Operations for the three months and six months
 ended December 31, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended December
 31, 2008 and 2007
    
    
    5Condensed Consolidated Statements of Shareowners Equity for the six months ended
 December 31, 2008 and 2007
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4T.
    
    Controls and Procedures
    
    
    30Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    31Item 1(a).
    
    Risk Factors
    
    
    33Item 4.
    
    Submission of Matter to a Vote of Security Holders
    
    
    34Item 5.
    
    Other Information
    
    
    34Item 6.
    
    Exhibits
    
    
    35Signatures
    
    
    35EX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements (Interim, Unaudited)
 
 
 December 31, 2008
    
    
    June 30, 2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,546,847
    
    
    $
    2,928,433Accounts receivable
    
    
    30,189,993
    
    
    
    30,219,070Inventories and costs of contracts in progress
    
    
    55,681,130
    
    
    
    63,443,221Deferred income taxes
    
    
    
    
    
    
    251,545Prepaid expense and other current assets
    
    
    2,335,500
    
    
    
    844,130Assets held for sale
    
    
    5,808,773
    
    
    
    Total current assets
    
    
    99,562,243
    
    
    
    97,686,399Property, plant and equipment  net
    
    
    11,757,886
    
    
    
    17,278,713Deferred income taxes  non current
    
    
    1,182,643
    
    
    
    1,044,987Goodwill
    
    
    16,664,724
    
    
    
    16,664,804Other intangibles  net
    
    
    5,521,772
    
    
    
    5,762,397Other non current assets
    
    
    2,236,904
    
    
    
    4,289,092Total assets
    
    $
    136,926,172
    
    
    $
    142,726,392LIABILITIES AND SHAREOWNERS EQUITYCurrent liabilities:Short-term bank borrowings
    
    $
    15,500,000
    
    
    $
    13,500,000Current portion of long-term debt
    
    
    4,086,815
    
    
    
    4,029,757Accounts payable
    
    
    27,421,583
    
    
    
    23,503,857Salaries and wages
    
    
    4,703,941
    
    
    
    5,642,302Accrued health benefits
    
    
    1,389,241
    
    
    
    1,479,729Other accrued liabilities
    
    
    5,855,066
    
    
    
    7,949,470Total current liabilities
    
    
    58,956,646
    
    
    
    56,105,115Pension liability
    
    
    2,651,652
    
    
    
    2,564,438Long-term debt  non current portion
    
    
    5,401,688
    
    
    
    8,058,497Environmental remediation  non current portion
    
    
    4,999,642
    
    
    
    5,138,588Total liabilities
    
    
    72,009,628
    
    
    
    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, 9,931,507 and 9,811,507
shares outstanding at December 31 and June 30, 2008, respectively
    
    
    12,414,384
    
    
    
    12,264,384Capital in excess of par value
    
    
    19,615,396
    
    
    
    19,650,481Retained earnings
    
    
    37,439,554
    
    
    
    43,592,351Accumulated other comprehensive loss
    
    
    (4,552,790
    )
    
    
    (4,647,462
    )Total shareowners equity
    
    
    64,916,544
    
    
    
    70,859,754Total liabilities and shareowners equity
    
    $
    136,926,172
    
    
    $
    142,726,392
  3




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Three months ended
    
    
    Six months ended2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    54,516,566
    
    
    $
    54,950,927
    
    
    $
    108,512,100
    
    
    $
    113,802,790Costs of goods sold
    
    
    50,650,880
    
    
    
    51,264,690
    
    
    
    102,264,252
    
    
    
    108,479,154Gross profit
    
    
    3,865,686
    
    
    
    3,686,237
    
    
    
    6,247,848
    
    
    
    5,323,636Selling and administrative expenses
    
    
    4,954,796
    
    
    
    5,037,612
    
    
    
    10,071,371
    
    
    
    9,536,428Amortization of intangibles
    
    
    120,312
    
    
    
    120,312
    
    
    
    240,625
    
    
    
    240,625EPA related  net environmental remediation
    
    
    1,501
    
    
    
    1,073
    
    
    
    2,001
    
    
    
    928Net (gain) loss on sale of property, plant and equipment
    
    
    16,545
    
    
    
    (4,200
    )
    
    
    14,437
    
    
    
    (932,022
    )5,093,154
    
    
    
    5,154,797
    
    
    
    10,328,434
    
    
    
    8,845,959Operating loss
    
    
    (1,227,468
    )
    
    
    (1,468,560
    )
    
    
    (4,080,586
    )
    
    
    (3,522,323
    )Other income (expense):Interest and investment income
    
    
    16,233
    
    
    
    51,528
    
    
    
    29,650
    
    
    
    78,246Interest expense
    
    
    (489,258
    )
    
    
    (295,248
    )
    
    
    (857,996
    )
    
    
    (600,340
    )Equity loss in investment
    
    
    (23,000
    )
    
    
    (76,000
    )
    
    
    (20,000
    )
    
    
    (200,000
    )Other  net
    
    
    (1,090,411
    )
    
    
    111,440
    
    
    
    (1,025,865
    )
    
    
    593,805(1,586,436
    )
    
    
    (208,280
    )
    
    
    (1,874,211
    )
    
    
    (128,289
    )Loss before income taxes
    
    
    (2,813,904
    )
    
    
    (1,676,840
    )
    
    
    (5,954,797
    )
    
    
    (3,650,612
    )Provision (credit) for income taxes
    
    
    (23,000
    )
    
    
    188,000
    
    
    
    198,000
    
    
    
    (365,000
    )Net loss
    
    $
    (2,790,904
    )
    
    $
    (1,864,840
    )
    
    $
    (6,152,797
    )
    
    $
    (3,285,612
    )Loss per share  basic and diluted
    
    $
    (0.28
    )
    
    $
    (0.19
    )
    
    $
    (0.63
    )
    
    $
    (0.33
    )
  4




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Six months ended December 31,2008
    
    
    2007Cash Flows From Operating Activities:Net loss
    
    $
    (6,152,797
    )
    
    $
    (3,285,612
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    968,292
    
    
    
    1,131,366Deferred income tax credit
    
    
    144,000
    
    
    
    (154,596
    )Equity loss in investment
    
    
    20,000
    
    
    
    200,000Pension expense
    
    
    514,622
    
    
    
    319,381Share-based compensation
    
    
    114,915
    
    
    
    72,342Net (gain) loss on sale of property, plant and equipment
    
    
    14,437
    
    
    
    (932,022
    )Other, deferred assets
    
    
    600,000
    
    
    
    1,643,396Changes in operating assets and liabilities:Accounts receivable
    
    
    29,077
    
    
    
    (4,032,154
    )Inventories, prepaid expenses and other current assets
    
    
    7,706,875
    
    
    
    (96,434
    )Accounts payable and accrued liabilities
    
    
    271,294
    
    
    
    5,500,903Net cash provided by operating activities
    
    
    4,230,715
    
    
    
    366,570Cash Flows From Investing Activities:Purchases of property, plant and equipment
    
    
    (1,015,613
    )
    
    
    (573,903
    )Proceeds from sale of property, plant and equipment
    
    
    7,029
    
    
    
    1,076,018Other, principally noncurrent other assets
    
    
    (3,966
    )
    
    
    107,477Net cash (used in) provided by investing activities
    
    
    (1,012,550
    )
    
    
    609,592Cash Flows From Financing Activities:Net short-term bank borrowings
    
    
    2,000,000
    
    
    
    3,500,000Repayment of long-term debt
    
    
    (2,599,751
    )
    
    
    (1,953,515
    )Net cash (used in) provided by financing activities
    
    
    (599,751
    )
    
    
    1,546,485Increase in cash and cash equivalents
    
    
    2,618,414
    
    
    
    2,522,647Cash and cash equivalents at beginning of period
    
    
    2,928,433
    
    
    
    3,982,485Cash and cash equivalents at end of period
    
    $
    5,546,847
    
    
    $
    6,505,132
  5




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Six months ended December 31, 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
    )
    
    $
    70,859,754Restricted stock grant issued
    
    
    120,000
    
    
    
    150,000
    
    
    
    (150,000
    )
    
    
    
    
    
    
    
    
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    114,915
    
    
    
    
    
    
    
    
    
    
    
    114,915Comprehensive income (loss), net of tax:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,152,797
    )
    
    
    
    
    
    
    (6,152,797
    )Amortization of unrecognized pension costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,672
    
    
    
    94,672Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,058,125
    )Balance at December 31, 2008
    
    
    9,931,507
    
    
    $
    12,414,384
    
    
    $
    19,615,396
    
    
    $
    37,439,554
    
    
    $
    (4,552,790
    )
    
    $
    64,916,544
 Six months ended December 31, 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
    
    
    
    
    
    
    
    
    
    
    72,342
    
    
    
    
    
    
    
    
    
    
    
    72,342Comprehensive income (loss), net of tax:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,285,612
    )
    
    
    
    
    
    
    (3,285,612
    )Amortization of unrecognized pension costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,406
    
    
    
    79,406Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,206,206
    )Balance at December 31, 2007
    
    
    9,811,507
    
    
    $
    12,264,384
    
    
    $
    19,546,439
    
    
    $
    53,445,031
    
    
    $
    (1,910,047
    )
    
    $
    83,345,807
  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
    
    $
    290,000
    
    
    $
    (46,000
    )Interest
    
    $
    777,000
    
    
    $
    601,000
 
 Notes to supplemental cash flows information: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 $2,000 and $4,000 of capitalized interest in fiscals 2009 and 2008. New
accounting standards Employers Disclosures about Pensions and Other Postretirement
Benefits
 Business Combinations
 The Fair Value Option for Financial Assets and
Financial Liabilities Fair
Value Measurements
 9




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Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans
 NOTE 2. INVENTORIES AND COSTS OF CONTRACTS IN PROGRESS
   December 31, 2008
    
    
    June 30, 2008Raw materials
    
    $
    42,921,000
    
    
    $
    48,237,000Work in process and finished goods
    
    
    12,760,000
    
    
    
    15,206,000$
    55,681,000
    
    
    $
    63,443,000
  NOTE 3. DEFINED BENEFIT PENSION PLAN
 Periodic benefit cost 
 Three months ended
    
    
    Six months ended2008
    
    
    2007
    
    
    2008
    
    
    2007Service cost
    
    $
    129,000
    
    
    $
    146,000
    
    
    $
    264,000
    
    
    $
    269,000Interest cost
    
    
    176,000
    
    
    
    145,000
    
    
    
    328,000
    
    
    
    303,000Expected return on plan assets
    
    
    (101,000
    )
    
    
    (160,000
    )
    
    
    (288,000
    )
    
    
    (373,000
    )Amortization of prior service cost
    
    
    26,000
    
    
    
    25,000
    
    
    
    52,000
    
    
    
    51,000Amortization of unrecognized net actuarial loss
    
    
    125,000
    
    
    
    39,000
    
    
    
    159,000
    
    
    
    69,000Net periodic benefit cost
    
    $
    355,000
    
    
    $
    195,000
    
    
    $
    515,000
    
    
    $
    319,000
 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
    
    $
    15,608,000
    
    
    $
    6,244,000
    
    
    $
    21,852,000Goodwill addition
    
    
    1,057,000
    
    
    
    
    
    
    
    1,057,000Amortization
    
    
    
    
    
    
    (482,000
    )
    
    
    (482,000
    )Balance at June 30, 2008
    
    
    16,665,000
    
    
    
    5,762,000
    
    
    
    22,427,000Amortization
    
    
    
    
    
    
    (241,000
    )
    
    
    (241,000
    )Balance at December 31, 2008
    
    $
    16,665,000
    
    
    $
    5,521,000
    
    
    $
    22,186,000
 Goodwill 
 Other intangibles 
 TotalNon-compete
    
    
    Customer
    
    
    AmortizableAgreements
    
    
    Relationships
    
    
    IntangiblesBalance at July 1, 2007, net
    
    $
    120,000
    
    
    $
    6,124,000
    
    
    $
    6,244,000Amortization
    
    
    (41,000
    )
    
    
    (441,000
    )
    
    
    (482,000
    )Balance at June 30, 2008, net
    
    
    79,000
    
    
    
    5,683,000
    
    
    
    5,762,000Amortization
    
    
    (21,000
    )
    
    
    (220,000
    )
    
    
    (241,000
    )Balance at December 31, 2008, net
    
    $
    58,000
    
    
    $
    5,463,000
    
    
    $
    5,521,000Accumulated amortization as of December 31, 2008
    
    $
    106,000
    
    
    $
    1,137,000
    
    
    $
    1,243,000
 11




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NOTE 5. BORROWINGS
 Short-term debt maturities and line of credit 
  Long-term debt 
 December 31, 2008
    
    
    June 30, 2008Industrial Revenue bonds, face value
    
    $
    2,210,000
    
    
    $
    2,266,000Unamortized purchase discount
    
    
    (126,000
    )
    
    
    (131,000
    )Industrial Revenue bonds, carrying value
    
    
    2,084,000
    
    
    
    2,135,000Bank loan
    
    
    4,400,000
    
    
    
    6,000,000Notes payable
    
    
    3,005,000
    
    
    
    3,953,000Total long-term debt
    
    
    9,489,000
    
    
    
    12,088,000Current portion long-term debt
    
    
    (4,087,000
    )
    
    
    (4,030,000
    )Long-term debt, net of current portion
    
    $
    5,402,000
    
    
    $
    8,058,000
    12




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NOTE 6. COMMITMENTS AND CONTINGENCIES
 Environmental Remediation
   Customer Relationships
    13




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Product Issues
   Employment Agreements
  NOTE 7. COMMON STOCK
  Share-Based Payment
  Three months ended
    
    
    Six months ended2008
    
    
    2007
    
    
    2008
    
    
    2007Share-based compensation expense:Stock options
    
    $
    42,000
    
    
    $
    52,000
    
    
    $
    93,000
    
    
    $
    72,000Restricted stock
    
    
    22,000
    
    
    
    
    
    
    
    22,000
    
    
    
    $
    64,000
    
    
    $
    52,000
    
    
    $
    115,000
    
    
    $
    72,000Related tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 14




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Unrecognized
    
    
    Remaining weighted-averagecompensation costs
    
    
    number of years to expenseNonvested stock options
    
    $
    101,000
    
    
    
    0.80Nonvested restricted stock
    
    
    248,000
    
    
    
    1.01Total nonvested awards
    
    $
    349,000
    
    
    
    0.95
 Common Stock Options:
    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
    
    
    (3,126
    )
    
    $
    8.08
    
    
    
    
    
    
    
    Outstanding at December 31, 2008
    
    
    220,259
    
    
    $
    8.23
    
    
    
    6.16
    
    
    
    Exercisable at December 31, 2008
    
    
    167,582
    
    
    $
    8.12
    
    
    
    6.01
    
    
    
    
   15




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Restricted Stock Award:
    Number
    
    Wtd. Avg.of Shares
    
    Fair ValueNonvested at July 1, 2008
    
    
    
    
    
    
    Granted and issued
    
    
    120,000
    
    
    $
    2.25Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Nonvested at December 31, 2008
    
    
    120,000
    
    
    $
    2.25
  NOTE 8. EARNINGS (LOSS) PER SHARE
    Three months ended
    
    Six months ended2008
    
    2007
    
    2008
    
    2007Weighted average shares outstanding
    
    
    9,811,507
    
    
    
    9,811,507
    
    
    
    9,811,507
    
    
    
    9,811,507Basic and diluted income (loss) per share
    
    $
    (0.28
    )
    
    $
    (0.19
    )
    
    $
    (0.63
    )
    
    $
    (0.33
    )
 NOTE 9. COMPREHENSIVE INCOME (LOSS)
  16




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Three months ended
    
    Six months ended2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (2,791,000
    )
    
    $
    (1,865,000
    )
    
    $
    (6,153,000
    )
    
    $
    (3,286,000
    )Amortization of unrecognized pension costs
    
    
    55,000
    
    
    
    42,000
    
    
    
    95,000
    
    
    
    79,000Comprehensive loss
    
    $
    (2,736,000
    )
    
    $
    (1,823,000
    )
    
    $
    (6,058,000
    )
    
    $
    (3,207,000
    )
  Three months ended
    
    Six months ended2008
    
    
    2007
    
    
    2008
    
    
    2007Prior service cost  net of tax
    
    $
    17,000
    
    
    $
    17,000
    
    
    $
    35,000
    
    
    $
    34,000Net actuarial (loss) gain  net of tax
    
    
    38,000
    
    
    
    25,000
    
    
    
    60,000
    
    
    
    45,000Total
    
    $
    55,000
    
    
    $
    42,000
    
    
    $
    95,000
    
    
    $
    79,000
  NOTE 10. PLANT CLOSURES
 Albuquerque, New Mexico 
  17




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##### Table of Contents



December
    
    
    JuneCurrent assets
    
    $
    5,941,000
    
    
    $
    8,837,000Property, plant and equipment (net)
    
    
    108,000
    
    
    
    6,121,000Total assets
    
    $
    6,049,000
    
    
    $
    14,958,000Current liabilities
    
    $
    841,000
    
    
    $
    2,814,000Long term liabilities (EPA, see Note 6)
    
    
    5,000,000
    
    
    
    5,139,000Total liabilities
    
    $
    5,841,000
    
    
    $
    7,953,000
 Deming, New Mexico 
  NOTE 11. SUBSEQUENT EVENT
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   18




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19




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EXECUTIVE SUMMARY
  Net loss year-to-date fiscal 2008
    
    
    
    
    
    $
    (3.3
    )Deferred asset write-off in fiscal 2008
    
    $
    1.6Gain on Deming, NM plant sale in fiscal 2008
    
    
    (0.9
    )0.7New customer program starts
    
    
    (0.5
    )Reduced margin on one medical program
    
    
    (0.8
    )Increased interest expense
    
    
    (0.3
    )Increased income tax expense
    
    
    (0.6
    )Improved sonobuoy completion costs
    
    
    0.4Increased legal and consulting expense
    
    
    (1.2
    )Reduced margin on three aerospace customers
    
    
    (0.5
    )Increased pension expense
    
    
    (0.2
    )Albuquerque NM severance
    
    
    (0.3
    )Other, net
    
    
    0.4(3.6
    )Net change
    
    
    
    
    
    
    (2.9
    )Net loss year-to-date fiscal 2009
    
    
    
    
    
    $
    (6.2
    )
  
    
    Consistent and successful sonobuoy drop tests contributing to
sales and improved margins. Margins improved due to improved labor efficiencies and less rework cost. There
were no minimal or no margin contracts in sales in fiscal 2009.
    
    Higher sales in the Aerospace market of $9.7 million over the same period last year.
    
    Reduced margin on one medical program, due to lower sales volume, of $0.8 million compared
to the same period last year.
    
    Significant non-recovered new program start-up costs totaling $1.5 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
$0.5 million from the same six month period in the prior year. Costs also grew due to
operating inefficiencies in reaching on-going production status.
    
    Increased administrative expenses primarily related to consulting fees totaling $1.0
million above prior year.
    
    Closing costs incurred for the Albuquerque, New Mexico facility
related to severance benefits reduced gross margins by approximately $0.3 million in fiscal
2009.
    
    Income tax expense of $0.2 million in fiscal 2009, compared to a tax benefit of $0.4
million in the same six month period last year.
  20




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RESULTS OF OPERATIONS  :
 2008
    
    
    2007MARKET
    
    Net Sales
    
    
    % of Total
    
    
    Net Sales
    
    
    % of Total
    
    
    % ChangeAerospace
    
    $
    24,879,000
    
    
    
    46
    %
    
    $
    15,164,000
    
    
    
    27
    %
    
    
    64
    %Medical/Scientific Instrumentation
    
    
    15,910,000
    
    
    
    29
    
    
    
    19,551,000
    
    
    
    36
    
    
    
    (19
    )Government
    
    
    7,784,000
    
    
    
    14
    
    
    
    10,798,000
    
    
    
    20
    
    
    
    (28
    )Industrial/Other
    
    
    5,943,000
    
    
    
    11
    
    
    
    9,438,000
    
    
    
    17
    
    
    
    (37
    )Totals
    
    $
    54,516,000
    
    
    
    100
    %
    
    $
    54,951,000
    
    
    
    100
    %
    
    
    (1
    )%
   2008
    
    2007Net sales
    
    
    100.00
    %
    
    
    100.0
    %Costs of goods sold
    
    
    92.9
    
    
    
    93.3Gross profit
    
    
    7.1
    
    
    
    6.7Selling and administrative expenses
    
    
    9.1
    
    
    
    9.2Other operating expense  net
    
    
    0.3
    
    
    
    0.2Operating loss
    
    
    (2.3
    )
    
    
    (2.7
    )Other income (expense)  net
    
    
    (2.9
    )
    
    
    (0.4
    )Loss before income taxes
    
    
    (5.2
    )
    
    
    (3.1
    )Provision (credit) for income taxes
    
    
    (0.1
    )
    
    
    0.3Net loss
    
    
    (5.1
    )%
    
    
    (3.4
    )%
  21




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RESULTS OF OPERATIONS  :
 2008
    
    
    2007MARKET
    
    Net Sales
    
    
    % of Total
    
    
    Net Sales
    
    
    % of Total
    
    
    % ChangeAerospace
    
    $
    43,908,000
    
    
    
    40
    %
    
    $
    29,695,000
    
    
    
    26
    %
    
    
    48
    %Medical/Scientific Instrumentation
    
    
    31,499,000
    
    
    
    29
    
    
    
    38,754,000
    
    
    
    34
    
    
    
    (19
    )Government
    
    
    15,982,000
    
    
    
    15
    
    
    
    24,531,000
    
    
    
    22
    
    
    
    (35
    )Industrial/Other
    
    
    17,123,000
    
    
    
    16
    
    
    
    20,823,000
    
    
    
    18
    
    
    
    (18
    )Totals
    
    $
    108,512,000
    
    
    
    100
    %
    
    $
    113,803,000
    
    
    
    100
    %
    
    
    (5
    )%
  22




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2008
    
    2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %Costs of goods sold
    
    
    94.2
    
    
    
    95.3Gross profit
    
    
    5.8
    
    
    
    4.7Selling and administrative expenses
    
    
    9.3
    
    
    
    8.4Other
operating expense (income)  net
    
    
    0.3
    
    
    
    (0.6
    )Operating loss
    
    
    (3.8
    )
    
    
    (3.1
    )Other expense  net
    
    
    (1.7
    )
    
    
    (0.1
    )Loss before income taxes
    
    
    (5.5
    )
    
    
    (3.2
    )Provision (credit) for income taxes
    
    
    0.2
    
    
    
    (0.3
    )Net loss
    
    
    (5.7
    )%
    
    
    (2.9
    )%
    23




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LIQUIDITY AND CAPITAL RESOURCES
    24




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25




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##### Table of Contents



CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Environmental Contingencies
  Government Contract Cost Estimates
  26




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##### Table of Contents



Commercial Inventory Valuation Allowances
   Allowance for Probable Losses on Receivables
  Pension Obligations
 Employers Accounting for Pensions
 27




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##### Table of Contents



Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
 Business Combinations
   Valuation of Property, Plant and Equipment
 Accounting for the Impairment or Disposal of Long-lived Assets
 Goodwill and Customer Relationships
 Goodwill and Other Intangible Assets. The
Equity Method of Accounting for Investments in Common Stock
 28




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##### Table of Contents



Accounting for the
Impairment or Disposal of Long-lived Assets
  Deferred Costs and Claims for Reimbursement
  Income Taxes
 
 29




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OTHER
 Change of Executive Officers
  Litigation
    
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 MARKET RISK EXPOSURE
   
 Item 4T. Controls and Procedures
  30




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##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
  Environmental Remediation
     31




---



##### Table of Contents



Customer Relationships
    Product Issues
   32




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##### Table of Contents



Item 1(a). Risk Factors
  The tightened credit market, both nationally and world-wide, may adversely affect the availability
of funds to the Company for working capital, liquidity requirements, and other purposes, which may
adversely affect the Companys cash flows and financial condition.
  Current market volatility may have an adverse impact on the Companys pension costs associated with
the defined benefit plan.
  Possible delisting from the New York Stock Exchange (NYSE) could affect the liquidity of our
common stock.
    33




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
   Votes FOR
    
    Votes WITHHELDJoseph J. Hartnett
    
    
    9,354,566
    
    
    
    101,926Richard L. Langley
    
    
    8,703,970
    
    
    
    752,522William I. Noecker
    
    
    8,316,080
    
    
    
    1,140,412Douglas R. Schrank
    
    
    9,274,968
    
    
    
    181,524
  FOR AGAINST ABSTAINED BROKER NON VOTES.
  
 Item 5. Other Information
   34




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##### Table of Contents



Item 6. Exhibits
 3.1
    
    By-Laws of the Registrant as amended, incorporated herein by reference from Exhibit 3.1
to the Registrants Current Report on Form 8-K, filed with the SEC on November 3, 2008.3.2
    
    Amended Articles of Incorporation of the Registrant, incorporated herein by reference
from the Registrants Quarterly Report on Form 10-Q for the three-month period ended
September 30, 2004.3.3
    
    Amended Code of Regulations of the Registrant, incorporated herein
by reference from the Registrants Quarterly Report on Form 10-Q for the three-month period
ended September 30, 2004.10.1
    
    Employment agreement dated November 6, 2008, between the Registrant and Cary B. Wood,
incorporated herein by reference from Exhibit 10.2 to the Registrants Current Report on
Form 8-K filed with the SEC on November 13, 2008.10.2
    
    Employee agreement dated November 22, 2008, between the Registrant and Richard L.
Langley, incorporated herein by reference from Exhibit 10.2 to the Registrants Current
Report on Form 8-K filed with the SEC on November 26, 2008.10.3
    
    Employment Agreement, effective as of January 5, 2009, between the Registrant and
Gordon Madlock, incorporated herein by reference from the Registrants Current Report on
Form 8-K filed with the SEC on January 29, 2009.10.4
    
    Fourth Master Amendment to Loan Documents, dated as of January 20, 2009, by and between
the Registrant, Sparton Medical Systems, Inc., Sparton Technology, Inc, Spartronics, Inc.,
Sparton Electronics Florida, Inc., Sparton of Canada, Limited and National City Bank,
incorporated herein by reference from Exhibit 10.1 to the Registrants Current Report on
Form 8-K filed with the SEC on January 28, 2009.10.5
    
    Third Master Amendment to Loan Documents, dated as of November 12, 2008, by and between
the Registrant, Sparton Medical Systems, Inc., Sparton Technology, Inc, Spartronics, Inc.,
Sparton Electronics Florida, Inc., Sparton of Canada, Limited and National City Bank,
incorporated herein by reference from Exhibit 10.2 to the Registrants Current Report on
Form 8-K filed with the SEC on January 28, 2009.10.6
    
    Second Master Amendment to Loan Documents, dated as of July 31, 2008, by and between
the Registrant, Sparton Medical Systems, Inc., Sparton Technology, Inc, Spartronics, Inc.,
Sparton Electronics Florida, Inc., Sparton of Canada, Limited and National City Bank,
incorporated herein by reference from Exhibit 10.3 to the Registrants Current Report on
Form 8-K filed with the SEC on January 28, 2009.10.7
    
    First Master Amendment to Loan Documents, dated as of April 21, 2008, by and between
the
Registrant, Sparton Medical Systems, Inc., Sparton Technology, Inc, Spartronics, Inc.,
Sparton Electronics Florida, Inc., Sparton of Canada, Limited and National City Bank,
incorporated herein by reference from Exhibit 10.4 to the Registrants Current Report on
Form 8-K filed with the SEC on January 28, 2009.10.8
    
    Promissory Note, dated as of January 22, 2008, by and between Sparton Corporation and
National City Bank and guaranteed by Sparton Medical Systems, Inc., Sparton Technology, Inc,
Spartronics, Inc., Sparton Electronics Florida, Inc., and Sparton of Canada, Limited,
incorporated herein by reference from Exhibit 10.5 to the Registrants Current Report on
Form 8-K filed with the SEC on January 28, 2009.31.1
    
    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: February 6, 2009
    /s/ CARY B. WOODCary B. Wood, Chief Executive OfficerDate: February 6, 2009
    /s/ JOSEPH S. LERCZAKJoseph S. Lerczak, Chief Financial Officer 35