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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 or [  ]
    
    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
(State or Other Jurisdiction of Incorporation or Organization) 38-1054690
(I.R.S. Employer Identification No.) 2400 East Ganson Street, Jackson, Michigan 49202
(Address of Principal Executive Offices, Zip Code) (517) 787- 8600
(Registrants Telephone Number, Including Area Code) 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.
        
                       
                       
                       
                       
           [X]
Yes [  ] No Indicate by checkmark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).  Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practical date. Shares Outstanding atClass of Common Stock
    
    October 31, 2004$1.25 Par Value
    
    8,352,352




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INDEX Part I.
Financial Information Item 1. Financial StatementsCondensed Consolidated Balance Sheets
September 30, 2004 and June 30, 2004
    
    
    3Condensed Consolidated Statements of Operations
Three-Month Periods ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows
Three-Month Periods ended September 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Qualitative and Quantitative Disclosures About Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    16Part
II.  Other InformationItem 1. Legal Proceedings
    
    
    16Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 6. Exhibits
    
    
    18Signatures
    
    
    18Exhibit 3.1 Amended Articles of IncorporationExhibit 3.2 Amended Code of RegulationExhibit 31.1 Chief Executive Officer Under Section 302Exhibit 31.2 Chief Financial Officer Under Section 302Exhibit 32.1 Certifications Under Section 1350
  2




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Item 1. Financial Statements SPARTON CORPORATION AND SUBSIDIARIES 
   September 30
    
    June 30AssetsCurrent assets:Cash and cash equivalents
    
    $
    15,014,317
    
    
    $
    10,820,461Investment securities
    
    
    18,675,642
    
    
    
    18,641,792Accounts receivable
    
    
    19,492,454
    
    
    
    21,267,459Income taxes recoverable
    
    
    
    
    
    
    559,706Inventories and costs on contracts in progress
    
    
    36,735,785
    
    
    
    37,210,259Prepaid expenses
    
    
    2,627,928
    
    
    
    2,859,016Total current assets
    
    
    92,546,126
    
    
    
    91,358,693Pension asset
    
    
    5,316,951
    
    
    
    5,448,968Other assets
    
    
    5,652,661
    
    
    
    5,570,773Property, plant and equipment, net
    
    
    12,715,496
    
    
    
    12,041,062Total assets
    
    $
    116,231,234
    
    
    $
    114,419,496Liabilities and Shareowners EquityCurrent liabilities:Accounts payable
    
    $
    8,946,250
    
    
    $
    10,052,854Salaries and wages
    
    
    3,097,341
    
    
    
    3,387,490Accrued health benefits
    
    
    942,206
    
    
    
    1,044,810Other accrued liabilities
    
    
    4,844,188
    
    
    
    4,526,234Income taxes payable
    
    
    576,294
    
    
    
    Total current liabilities
    
    
    18,406,279
    
    
    
    19,011,388Environmental remediation - noncurrent portion
    
    
    6,472,953
    
    
    
    6,542,009Shareowners equity:Preferred stock, no par value; 200,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock, $1.25 par value; 15,000,000 shares authorized, 8,352,352
and 8,351,538 shares outstanding at September 30 and June 30, respectively
    
    
    10,440,440
    
    
    
    10,439,423Capital in excess of par value
    
    
    7,139,277
    
    
    
    7,134,149Accumulated other comprehensive income
    
    
    128,528
    
    
    
    62,368Retained earnings
    
    
    73,643,757
    
    
    
    71,230,159Total shareowners equity
    
    
    91,352,002
    
    
    
    88,866,099Total liabilities and shareowners equity
    
    $
    116,231,234
    
    
    $
    114,419,496
 See accompanying notes. 3




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SPARTON CORPORATION AND SUBSIDIARIES 
   2004
    
    2003Net sales
    
    $
    45,188,315
    
    
    $
    36,424,801Costs of goods sold
    
    
    38,721,599
    
    
    
    35,980,6006,466,716
    
    
    
    444,201Selling and administrative expenses:Selling and administrative expenses
    
    
    3,387,053
    
    
    
    3,759,004EPA related - net environmental remediation
    
    
    84,000
    
    
    
    74,0003,471,053
    
    
    
    3,833,004Operating income (loss)
    
    
    2,995,663
    
    
    
    (3,388,803
    )Other income (expense):Interest and investment income
    
    
    215,473
    
    
    
    230,542Equity income (loss) in investment
    
    
    (20,000
    )
    
    
    21,000Other - net
    
    
    358,462
    
    
    
    (69,228
    )553,935
    
    
    
    182,314Income (loss) before income taxes
    
    
    3,549,598
    
    
    
    (3,206,489
    )Provision (credit) for income taxes
    
    
    1,136,000
    
    
    
    (1,026,000
    )Net income (loss)
    
    $
    2,413,598
    
    
    $
    (2,180,489
    )Basic and diluted earnings (loss) per
share(1)
    
    $
    0.29
    
    
    $
    (0.26
    )
  (1)
    
    All share and per share information have been adjusted to reflect the impact of the 5% stock dividend declared in October 2003. See accompanying notes. 4




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SPARTON CORPORATION AND SUBSIDIARIES 
   2004
    
    2003Cash flows provided (used) by Operating Activities:Net income (loss)
    
    $
    2,413,598
    
    
    $
    (2,180,489
    )Add (deduct) noncash items affecting operations:Depreciation, amortization and accretion
    
    
    388,557
    
    
    
    365,273Change in pension asset
    
    
    132,017
    
    
    
    32,008Loss on sale of investment securities
    
    
    5,244
    
    
    
    13,880Equity (income) loss on investment
    
    
    20,000
    
    
    
    (21,000
    )Other
    
    
    
    
    
    
    54,050Add (deduct) changes in operating assets and liabilities:Accounts receivable
    
    
    1,775,005
    
    
    
    9,434,873Income taxes recoverable
    
    
    559,706
    
    
    
    (616,557
    )Inventories and prepaid expenses
    
    
    678,450
    
    
    
    (3,313,134
    )Accounts payable, salaries and wages, accrued liabilities and income taxes
    
    
    (674,165
    )
    
    
    (274,597
    )Net cash provided by operating activities
    
    
    5,298,412
    
    
    
    3,494,307Cash flows provided (used) by Investing Activities:Purchases of investment securities
    
    
    (2,260,706
    )
    
    
    (908,720
    )Proceeds from sale of investment securities
    
    
    2,294,884
    
    
    
    400,000Purchases of property, plant and equipment, net
    
    
    (1,062,991
    )
    
    
    (343,538
    )Other, principally noncurrent other assets
    
    
    (81,888
    )
    
    
    149,852Net cash used by investing activities
    
    
    (1,110,701
    )
    
    
    (702,406
    )Cash flows provided (used) by Financing Activities:Proceeds from exercise of stock options
    
    
    6,145
    
    
    
    14,685Increase in cash and cash equivalents
    
    
    4,193,856
    
    
    
    2,806,586Cash and cash equivalents at beginning of period
    
    
    10,820,461
    
    
    
    10,562,222Cash and cash equivalents at end of period
    
    $
    15,014,317
    
    
    $
    13,368,808Supplemental disclosures of cash paid during the period:Income taxes
- net
    
    $
    13,000
    
    
    $
    300,000
 See accompanying notes. 5




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SPARTON CORPORATION & SUBSIDIARIES 
  1. SUMMARY OF SIGNIFICANT 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 of America 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 of America for complete financial
statements. All significant intercompany transactions and accounts have been
eliminated. The Condensed Consolidated Balance Sheet at September 30, 2004, and
the related Condensed Consolidated Statements of Operations and Cash Flows for
the three-month periods ended September 30, 2004 and 2003, 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 reclassification of prior period amounts have been made to conform to
the current presentation. Operating results for the three-month period ended
September 30, 2004, are not necessarily indicative of the results that may be
expected for the fiscal year ended June 30, 2005. The balance sheet at June 30, 2004, 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 of America 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, 2004. 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 aftermarket support. All facilities are registered to ISO
9001, with many having additional certifications. 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 medical/scientific instrumentation, 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 electrical and electromechanical products and
assemblies. Use of estimates Accounting principles generally accepted in the United
States of America 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
domestic and 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 related to intercompany
activity and balances 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 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based
Compensation - Transition and Disclosure (SFAS No. 148), which amends SFAS No.
123, Accounting for Stock-Based Compensation. The amendment permits two
additional transition methods for a voluntary change to the fair value based
method of accounting for stock-based compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require more prominent
and frequent disclosures about the effects of stock-based compensation. SFAS
No. 148 was effective for the Companys fiscal year end June 30, 2003. SFAS No.
123, as amended by SFAS No. 148, permits companies to (i) recognize as expense
the fair value of stock-based awards, or (ii) continue to apply the provisions
of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations (APB 25), and provide pro forma net
income and earnings per share disclosures for employee stock compensation as if
the fair-value-based method defined in SFAS No. 123 had been applied. If the Company were to start expensing stock options immediately, the
applicable accounting rules would be those prescribed by SFAS 123, which
require the use of fair value to report stock option expense. However, the FASB
has proposed new rules that would replace SFAS 123, and those new rules, if
adopted as proposed, would require companies to expense stock options and, for
the Company, would be effective beginning in the first quarter of fiscal 2006.
The Company will fully comply once final rules are published and effective. It
is expected that these new rules will be different than SFAS 123. Differences
between the two rules could include the tax accounting for stock options, the
pattern and timing of recording each stock options expense, accounting for
option plan modifications and share cancellations. Given that these new rules
are not final, the Company believes that expensing stock options using SFAS 123
and then changing to the FASBs new rules when finalized would confuse users of
our financial statements. Therefore, given the changes under consideration by
the FASB, the Company believes it is appropriate to await the official
pronouncement of the FASB before changing its formal accounting method on this
subject. The Company does not expect the final pronouncement to have a
significant impact on results of operations or financial position. Periodic benefit cost The Company follows the disclosure requirements of SFAS
No. 132 (R). For the three months ended September 30, 2004, $132,000 of expense
had been recorded. Total net periodic benefit cost for fiscal 2005 is expected
to be $528,000. The components of net periodic pension expense for each of the
periods presented were as follows: Three Months EndedSeptember 302004
    
    2003Service cost
    
    $
    151,000
    
    
    $
    24,000Interest cost
    
    
    172,000
    
    
    
    30,000Expected return on plan assets
    
    
    (253,000
    )
    
    
    (38,000
    )Amortization of prior service cost
    
    
    24,000
    
    
    
    4,000Amortization of net loss
    
    
    38,000
    
    
    
    12,000Net periodic benefit cost
    
    $
    132,000
    
    
    $
    32,000
 Stock options The Company follows 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 as amended by
SFAS No. 148. The Company has an incentive stock option plan under which 760,000 common
shares were reserved for option grants to key employees and directors at the
fair market value of the stock at the date of the grant. As of September 30,
2004, there were 558,136 shares under option outstanding with prices ranging
from $3.40 to $9.35, a weighted contracted life of 2.60 years, and a weighted
average exercise price of $6.10. The following table summarizes information
about stock options outstanding and exercisable at September 30, 2004: Options Outstanding
    
    Options ExercisableRange of
    
    Number Outstanding
    
    Wtd. Avg. Remaining
    
    Wtd. Avg.
    
    Number Exercisable
    
    Wtd. Avg.Exercise Prices
    
    at 9/30/04
    
    Contractual Life (years)
    
    Exercise Price
    
    at 9/30/04
    
    Exercise Price$3.40 to $6.36
    
    
    409,324
    
    
    
    1.9
    
    
    $
    5.49
    
    
    
    244,009
    
    
    $
    5.23$6.58 to $9.35
    
    
    148,812
    
    
    
    4.5
    
    
    $
    7.67
    
    
    
    63,127
    
    
    $
    7.67
 7




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At September 30, 2004 exercisable options and per share weighted average
exercise price were 307,136 and $5.72, respectively. At September 30, 2004,
remaining shares available for grant under the plan were 186,472. The following sets forth a reconciliation of net income (loss) and earnings
(loss) per share information for the three months ended September 30, 2004 and
2003, 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 option pricing model. September 30,2004
    
    2003Net income (loss), as reported
    
    $
    2,414,000
    
    
    $
    (2,180,000
    )Deduct:Total stock-based compensation expense determined
under the fair value based method for all awards, net of tax effects
    
    
    41,000
    
    
    
    48,000Pro forma net income (loss)
    
    $
    2,373,000
    
    
    $
    (2,228,000
    )Pro forma earnings (loss) per share:Basic and diluted earnings (loss) per share
    
    $
    0.28
    
    
    $
    (0.27
    )
 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: September 30, 2004
    
    June 30, 2004Raw materials
    
    $
    25,490,000
    
    
    $
    23,641,000Work in process and
finished goods
    
    
    11,246,000
    
    
    
    13,569,000$
    36,736,000
    
    
    $
    37,210,000
 Work in process and finished goods inventories include $1.9 and $4.3 million of
completed, but not yet accepted, sonobuoys at September 30, 2004 and June 30,
2004, respectively. Inventories are reduced by progress billings to the U.S.
government of approximately $5,166,000 and $2,125,000 at September 30, 2004 and
June 30, 2004, respectively. 3. EARNINGS (LOSS) PER SHARE For the three months ended September 30, 2004,
options to purchase 2,700 shares of common stock were not included in the
computation of diluted earnings per share, as the options exercise prices were
greater than the average market price of the Companys common stock and,
therefore, would be anti-dilutive. Due to the Companys fiscal 2004 reported net loss, 148,558 outstanding stock
option share equivalents were excluded from the computation of diluted earnings
per share during the three months ended September 30, 2003, because their
inclusion would have been anti-dilutive. Basic and diluted earnings per share were computed on the following: September 30,2004
    
    2003Basic - weighted average shares outstanding
    
    
    8,351,989
    
    
    
    8,343,820Effect of dilutive stock options
    
    
    109,524
    
    
    
    Weighted average diluted shares outstanding
    
    
    8,461,513
    
    
    
    8,343,820Basic and diluted earnings (loss) per share
    
    $
    0.29
    
    
    $
    (0.26
    )
 8




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4. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) includes net
income (loss) as well as unrealized gains and losses, net of tax, on investment
securities owned and investment securities held by an investee accounted for by
the equity method, which are excluded from net income. Unrealized gains and
losses, net of tax, are reflected as a direct charge or credit to shareowners
equity. Total comprehensive income (loss) is as follows for the three-month
periods ended September 30, 2004 and 2003, respectively: September 30,2004
    
    2003Net income (loss)
    
    $
    2,414,000
    
    
    $
    (2,180,000
    )Other comprehensive income (loss), net of tax:Net unrealized gains (losses)- investment securities owned
    
    
    63,000
    
    
    
    (103,000
    )Net unrealized gains- investment securities held by investee
accounted for by the equity method
    
    
    20,000
    
    
    
    218,000Comprehensive income (loss)
    
    $
    2,497,000
    
    
    $
    (2,065,000
    )
 At September 30, 2004 and June 30, 2004, shareowners equity includes
accumulated other comprehensive income of $129,000 and $62,000, respectively,
net of tax. These balances include $63,000 and $16,000 for unrealized gains on
investment securities owned, and unrealized gains of $66,000 and $46,000 for
investment securities held by an investee accounted for by the equity method,
as of September 30, 2004 and June 30, 2004, 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 24 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. The Company does not believe there
are any significant individual unrealized losses as of September 30, 2004,
which would represent other than temporary losses, and there are no unrealized
losses with a duration of one year or more. 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. At September 30, 2004, the Company had net unrealized gains of $100,000. At
that date, the net after-tax effect of these gains was $63,000, which is
included in accumulated other comprehensive income within shareowners equity.
For the three months ended September 30, 2004 and 2003, purchases of investment
securities totaled $2,261,000 and $909,000, and sales of investment securities
totaled $2,295,000 and $400,000, respectively. The Company owns a 14% interest in Cybernet Systems Corporation (Cybernet), 12%
on a fully diluted basis. This investment, with a carrying value of $1,677,000
at September 30 and June 30, 2004, represents the Companys equity interest in
Cybernets net assets plus $770,000 of goodwill (no longer being amortized in
accordance with SFAS No. 142, Goodwill and Other Intangible Assets). The
investment in Cybernet is accounted for under the equity method, and is
included in other assets on the condensed consolidated balance sheet. The
Company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 the Companys balance sheet. The contractual maturities of debt securities, and total equity securities as
of September 30, 2004, are as follows: YearsWithin 1
    
    1 to 5
    
    5 to 10
    
    Over 10
    
    TotalDebt securities:Corporate - primarily U.S.
    
    $
    1,405,601
    
    
    $
    3,828,928
    
    
    $
    
    
    
    $
    
    
    
    $
    5,234,529U.S. government and federal agency
    
    
    317,967
    
    
    
    3,133,539
    
    
    
    1,473,811
    
    
    
    1,485,767
    
    
    
    6,411,084State and municipal
    
    
    100,037
    
    
    
    3,171,381
    
    
    
    1,315,239
    
    
    
    
    
    
    
    4,586,657Total debt securities
    
    
    1,823,605
    
    
    
    10,133,848
    
    
    
    2,789,050
    
    
    
    1,485,767
    
    
    
    16,232,270Equity
securities - primarily preferred stock
    
    
    2,443,372
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,443,372Total investment securities
    
    $
    4,266,977
    
    
    $
    10,133,848
    
    
    $
    2,789,050
    
    
    $
    1,485,767
    
    
    $
    18,675,642
 9




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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 September 30,
2004, Sparton has accrued $7,072,000 as its estimate of the minimum future
undiscounted financial liability, of which $599,000 is classified as a current
liability and included in accrued liabilities. Amounts charged to operations,
principally legal and consulting fees, for the three months ended September 30,
2004 and 2003 were $84,000 and $74,000, 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. In 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 cash and the DOE agreed to reimburse Sparton
for 37.5% of certain future environmental expenses in excess of $8,400,000
incurred from the date of settlement. 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. 10




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##### Table of Contents



Item 2. 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. Additional
information regarding the Company can be accessed via Spartons website at
www.sparton.com. Information provided at the website includes, among other
items, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Quarterly Earnings Releases, News Releases, and the Code of Business Conduct
and Ethics, as well as the various committee charters of the Board of
Directors. These items are also available, free of charge, by contacting the
Companys Shareowners Relations department. 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/scientific instrumentation, aerospace and industrial/other markets.
These include 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 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, low to medium-volume supplier, provides rapid product
turnaround for customers. High-mix pertains to customers needing multiple
product types with generally lower volume manufacturing runs. As a contract
manufacturer with customers in a variety of markets, the Company has
substantially less visibility of end user demand and, therefore, forecasting
sales can be problematic. Customers may 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 may negatively
impact the Companys results of operations. As many of the Companys costs and
operating expenses are relatively fixed within given ranges of production, 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, foreign currency
exchange rate risk, uncertainties associated with the costs and benefits of new
facilities and the closing of others, uncertainties associated with the outcome
of litigation, 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 when
market demand has been strong, 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 the test range 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, and formalization of,
some of the Companys corporate governance and compliance practices. The SEC
and New York Stock Exchange have also passed new rules
and regulations requiring additional compliance activities. Compliance with
these rules has increased administrative 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. 11




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RESULTS OF OPERATIONS Three Months Ended September 302004
    
    2003%of
    
    
    
    
    
    %of
    
    %Sales
    
    Total
    
    Sales
    
    Total
    
    ChangeGovernment
    
    $
    10,922,000
    
    
    
    24.2
    %
    
    $
    10,300,000
    
    
    
    28.3
    %
    
    
    6.0
    %Industrial / Other
    
    
    11,883,000
    
    
    
    26.3
    
    
    
    9,025,000
    
    
    
    24.8
    
    
    
    31.7Aerospace
    
    
    18,677,000
    
    
    
    41.3
    
    
    
    12,087,000
    
    
    
    33.2
    
    
    
    54.5Medical/Scientific Instrumentation
    
    
    3,706,000
    
    
    
    8.2
    
    
    
    5,013,000
    
    
    
    13.7
    
    
    
    (26.1
    )Totals
    
    $
    45,188,000
    
    
    
    100.0
    %
    
    $
    36,425,000
    
    
    
    100.0
    %
    
    
    24.1
 Sales for the three-month period ended September 30, 2004, totaled $45,188,000,
an increase of $8,763,000 (24.1%) from the same quarter last year. Government
sales increased slightly, and included $4.7 million of a delayed sonobuoy sale
originally anticipated to ship in fiscal 2004. Government sales were lower
than anticipated due to production interruptions at the Companys Florida
facilities, as several tropical storms disrupted operations in the first
quarter of fiscal 2005. Industrial market sales also increased from the same
period last year. This increase was attributed to increased demand from three
existing customers. Sales to the aerospace markets continue to grow, increasing
54.5% from the prior year. In general, this reflects stronger demand in the
commercial aerospace market. A large component of this increased demand was
due to higher sales of products related to collision avoidance systems. The
increased demand for the collision avoidance products is not anticipated to
continue throughout the year. $6.0 million of the aerospace increase was
attributable to increased orders from one customer, to which the Company
supplies product to six manufacturing facilities. Medical/scientific
instrumentation sales declined from the prior year. This decrease resulted from
overall lower demand from existing customers in this market area. While the
Company has added several new customers, and/or products in this area, the
volume of new business has not been as much as previously anticipated. During the month of October the Company, did not have access to the Navys test
range; and access in November is also unlikely. If the Company does not have
sufficient access during December, with resulting successful passage of product
tests, government sales in the second quarter would be negatively impacted. The following table presents income statement data as a percentage of net sales
for the quarters ended September 30, 2004 and 2003, respectively: 2004
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %Costs of goods sold
    
    
    85.7
    
    
    
    98.8Gross profit
    
    
    14.3
    
    
    
    1.2Selling and administrative
    
    
    7.7
    
    
    
    10.5Operating income (loss)
    
    
    6.6
    
    
    
    (9.3
    )Other income
- net
    
    
    1.2
    
    
    
    .5Income (loss) before income taxes
    
    
    7.8
    
    
    
    (8.8
    )Provision (credit) for income taxes
    
    
    2.5
    
    
    
    (2.8
    )Net income (loss)
    
    
    5.3
    %
    
    
    (6.0
    )%
 An operating profit of $2,996,000 was reported for the three months ended
September 30, 2004, compared to an operating loss of $3,389,000 for the three
months ended September 30, 2003. Gross profit percentage for the three months
ended September 30, 2004, was 14.3%, up from 1.2% for the same period last
year. While the recent tropical storms largely bypassed the Companys two
Florida facilities, extensive preparations were undertaken to prepare for the
storms. This unexpected activity, along with the minor damage that was
experienced and unproductive wages, resulted in costs of approximately $500,000
being charged in the first quarter of fiscal 2005. The prior years depressed
margin reflects the inclusion of costs on the start-up phase of several major
programs, as well as final charges incurred at the completion of one sonobuoy 12




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contract that had experienced technical problems. In addition, the prior years
margin included a redesign effort on an existing product line, which resulted
in a charge to operations of $496,000. The majority of the lowered selling and
administrative expenses, as a percentage of sales, was due to the significant
increase in sales for the first quarter of fiscal 2005, compared to the same
period last year, without a related increase in these expenses. In addition,
bid and proposal and unreimbursed research and development expenses for fiscal
2005 declined $340,000 from the same period last year. Interest and investment income decreased $15,000 to $215,000 in 2004. This
reduction was due to decreased funds available for investment. Other income-net
in 2004 was $358,000, versus expense of $69,000 in 2003. Translation
adjustments, along with gains and losses from foreign currency transactions,
are included in other income and, in the aggregate, amounted to a gain of
$361,000 and a loss of $10,000 during the three months ended September 30, 2004
and 2003, respectively. Other expense-net in 2003 includes $60,000 of charges
for the Companys previously owned automotive segment. Due to factors described above, the Company reported net income of $2,414,000
($0.29 per share, basic and diluted) for the three months ended September 30,
2004, versus a loss of $2,180,000 ($(0.26) per share, basic and diluted) for
the corresponding period last year. LIQUIDITY AND CAPITAL RESOURCES For the three-month period ended September 30, 2004, Cash and Cash Equivalents
increased $4,194,000 to $15,014,000. Operating activities provided $5,298,000
in net cash flows. The primary source of cash was from operations, compared to
a loss in fiscal 2004 resulting in a use of cash, and a reduction in accounts
receivable. The primary use of cash was a decrease in accounts payable. The
primary source of cash in fiscal 2004 was a decrease in accounts receivable,
reflective of receipt of payment for a large volume of sales recognized in June
2003. The change in cash flow from prior year due to inventory and prepaid
expenses reflected a large increase in fiscal 2004 inventory due to delayed
customer delivery schedules, as well as increased inventory for new customer
contracts. Cash flows used by investing activities for the three-month period ended
September 30, 2004, totaled $1,111,000,
primarily for purchases of property, plant and equipment, which is discussed
below. 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 September 30, 2004 and June 30, 2004, the aggregate government EMS backlog
was approximately $37 million and $41 million, respectively. A majority of the
September 30, 2004, backlog is expected to be realized in the next 12-15
months. 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. The Company is constructing a new facility in Vietnam, which is expected to
provide increased 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. It is estimated that the Company will
invest approximately $5-$7 million, which includes land, building, and initial
operating expenses. The new operation will carry the name Spartronics, Inc. The
Company is also continuing a program of identifying and evaluating potential
acquisition candidates in both the defense and medical markets. The Company has purchased a manufacturing facility in Albuquerque, New Mexico.
This facility will replace an existing plant in Rio Rancho, New Mexico. The
facility was purchased in December 2003 for approximately $4.5 million.
Estimated additional costs totaling approximately $2.0 million are anticipated
to be incurred as the Company completes its transition between facilities. At
September 30, 2004, $5.5 million of cost for the new facility was included as
construction in progress in the property, plant and equipment section of the
condensed consolidated balance sheet. The existing Rio Rancho plant was sold in
June 2004. The Company will continue to lease the Rio Rancho facility until
the transition to the new facility is completed. The transition between
facilities is anticipated to be completed by December 31, 2004. No cash dividends were declared in either period presented. At September 30,
2004, the Company had $91,352,000 in shareowners equity ($10.94 per share),
$74,140,000 in working capital, and a 5.03:1.00 working capital ratio. For the
foreseeable future (12-18 months), the Company believes it has sufficient
liquidity for its anticipated needs, unless a significant business acquisition
is identified and completed for cash. 13




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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, 2004. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the amounts reported of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. Estimates are
regularly evaluated and are based on historical experience and on various other
assumptions believed to be reasonable under the circumstances. Actual results
could differ from these estimates. The Company believes that of its significant
accounting policies, the following involve a higher degree of judgment and
complexity. 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
and 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 Inventory valuation allowances for commercial customer inventories require a
significant degree of judgment and are 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
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. 14




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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 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 $125,000 and $46,000 at September 30, 2004 and June 30, 2004,
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. Given the Companys significant balance of
government receivables and letters of credit from foreign customers, collection
risk is considered minimal. Historically, uncollectible accounts have been
insignificant and the minimal allowance is deemed adequate. 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 Condensed
Consolidated Balance Sheets and the unrecognized gain or loss accounts, the
effect of changes in these assumptions is not expected to have the same
relative effect on net periodic pension expense 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 September 30, 2004. 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. While net periodic pension expense has increased during the past two
years, no cash payments are expected to be required for the next several years
due to the plans funded status. 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 September 30, 2004, Sparton has accrued $7,072,000 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 outcome of either of these
claims. 15




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##### Table of Contents



Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK 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 domestic and 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 related to intercompany activity and balances 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 Company authorization, 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 September 30, 2004, 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
September 30, 2004. There have been no changes in the Companys internal
controls over financial reporting 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 IIOTHER 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 September 30, 2004, Sparton has accrued $7,072,000
as its estimate of the minimum future undiscounted financial liability, of
which $599,000 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 with respect to the Companys estimate
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. In 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 cash and the DOE agreed to reimburse Sparton
for 37.5% of certain future environmental expenses in excess of $8,400,000
incurred from the date of
settlement. 16




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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 has had an opportunity to fully review the respective claims and
believes that the damages sought by NRTC are included in Util-Links claim for
damages and, as such, are duplicative. Sparton believes the counterclaim to be
without merit and intends to vigorously defend against it. These claims are now
in the pretrial stage. At this time, the Company is unable to predict the outcome of either of these
two claims. 17




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders At the October 15, 2004, Special Meeting of Shareholders of Sparton
Corporation, a continuation of the September 24, 2004, meeting, a total of
7,958,235 of the Companys shares were present or represented by proxy at the
meeting. This represented more than 95% of the Companys shares outstanding.
Total shares outstanding and eligible to vote were 8,351,538, of which 393,303
did not vote.  
    
    The proposal to eliminate cumulative voting in the election of
directors was approved, with 5,607,704 shares voting for, 2,335,140
shares voting against, and 15,391 shares abstaining.
    
    The proposal to require timely written notice of shareholder
nominations for the election of directors was approved, with 5,783,636
shares voting for, 2,162,807 shares voting against, and 11,792 shares
abstaining. 
 Item 6. Exhibits  3.1
    
    Amended Articles of Incorporation of the
Registrant are filed herewith and attached.3.2
    
    Amended Code of Regulation of the
Registrant are filed herewith and attached.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 herewith 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 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. Date: November 12, 2004
    
    /s/ DAVID W. HOCKENBROCHTDavid W. Hockenbrocht, Chief Executive OfficerDate: November 12, 2004
    
    /s/ RICHARD L. LANGLEYRichard L. Langley, Chief Financial Officer
 18