Sparton Corpora*on Fourth Quarter and Fiscal Year 2016 Financial Results September 7, 2016
Safe Harbor Statement Certain statements herein cons.tute forward-looking statements within the meaning of the Securi.es Act of 1933, as amended and the Securi.es Exchange Act of 1934, as amended. When used herein, words such as believe, expect, an.cipate, project, plan, es.mate, will or intend and similar words or expressions as they relate to the Company or its management cons.tute forward-looking statements. These forward-looking statements reflect our current views with respect to future events and are based on currently available financial, economic and compe..ve data and our current business plans. The Company is under no obliga.on to, and expressly disclaims any obliga.on to, update or alter its forwardlooking statements whether as a result of such changes, new informa.on, subsequent events or otherwise. Actual results could vary materially depending on risks and uncertain.es that may affect our opera.ons, markets, prices and other factors. Important factors that could cause actual results to differ materially from those forward-looking statements include those contained under the heading of risk factors and in the management s discussion and analysis contained from.me-to-.me in the Company s filings with the Securi.es and Exchange Commission. When we calculate adjusted earnings per share, adjusted EBITDA and other adjustments to the statements of income, we exclude certain expenses and income, including discrete tax benefits, because we believe that they are not related directly to the underlying performance of our fundamental business opera.ons. We exclude these measures when reviewing financial results and for business planning. Although these events are reflected in our GAAP financial statements, these transac.ons may limit the comparability of our fundamental opera.ons with prior and future periods. We believe EBITDA and adjusted EBITDA are commonly used by financial analysts and others in the industries in which the Company operates and, thus, provide useful informa.on to investors. The Company does not intend, nor should the reader consider, EBITDA or adjusted EBITDA to be an alterna.ve to opera.ng income, net income, net cash provided by opera.ng ac.vi.es or any other items calculated in accordance with GAAP. The Company's defini.on of adjusted EBITDA may not be comparable with other companies. Accordingly, the measurement has limita.ons depending on its use. 2
Today s Agenda Overview of Recent Developments Fourth Quarter and Fiscal Year 2016 Financial Results! Consolidated! EBITDA! MDS Segment! ECP Segment! Liquidity & Capital Resources Other Fourth Quarter Highlights and Outlook Q & A 3
Overview of Recent Developments Fourth quarter financial and opera.ng performance Con.nued improvement in SG&A footprint Amendment to Credit Facility Strong free cash flow in Q4 and FY 2016 Strengthening pipeline and New Program wins in MDS Segment Write-off of impaired goodwill in MDS Segment 4
Consolidated Financial Results SELECTED FINANCIAL DATA For the Quarters Ended For the Fiscal Year Ended Q4 FY16 Q3 FY16 Q4 FY15 2016 2015 (Dollars in thousands) Net sales $ 106,967 $ 102,175 $ 126,393 $ 419,362 $ 382,125 Gross profit 21,422 19,067 28,090 80,148 74,814 Gross profit margin 20.0% 18.7% 22.2% 19.1% 19.6% Selling and administrative expenses $ 13,460 $ 13,727 $ 16,220 $ 55,151 $ 46,969 Adjusted selling and administrative expenses (non-gaap) 12,446 12,605 15,968 51,883 45,647 Adjusted selling and administrative expenses, % of sales (non-gaap) 11.6% 12.3% 12.6% 12.4% 11.9% Impairment of goodwill $ 64,174 $ - $ - $ 64,174 $ - Operating income (loss) (59,417) 2,676 8,809 (51,789) 17,252 Adjusted operating income (non GAAP) 5,875 3,740 11,604 16,329 21,760 Earnings (loss) per share - diluted (4.30) 0.12 0.51 (3.91) 1.10 Adjusted earnings per share (non GAAP) 0.50 0.34 0.81 1.56 1.74 EBITDA (non-gaap) (55,594) 6,546 12,398 (36,021) 28,647 Adjusted EBITDA (non GAAP) 10,019 7,865 15,361 33,542 34,307 Adjusted EBITDA margin (non GAAP) 9.4% 7.7% 12.2% 8.0% 9.0% Free cash flow $ 25,953 $ 6,235 $ 1,296 $ 42,034 $ 8,950 5
Q4 Consolida*ng Financial Informa*on Corporate MDS ECP Total Net Sales $ - $ 68,719 $ 38,248 $ 106,967 Cost of goods sold - 58,987 26,558 85,545 Gross profit - 9,732 11,690 21,422 Operating expenses: Selling and administrative 7,199 3,155 3,106 13,460 Selling and administrative - Corp allocations (3,449) 2,281 1,168 - Internal research and development - - 832 832 Amortization of intangible assets - 1,879 390 2,269 Restructuring charges - 104-104 Impairment of goodwill - 64,174-64,174 Total operating expenses 3,751 71,593 5,495 80,839 Income (loss) from operations (3,751) (61,861) 6,195 (59,417) Interest expense, net (1,059) - - (1,059) Other income (126) 52 32 (43) Income taxes 18,498 (61) - 18,437 Net income (loss) $ 13,563 $ (61,870) $ 6,226 $ (42,082) Depreciation, included in SG&A above $ 402 $ 968 $ 226 $ 1,596 EBITDA, excluding corporate allocation $ (6,922) $ (56,681) $ 8,009 $ (55,594) Adjustments for nonrecurring operating expenses (NON-GAAP): Impairment of goodwill - 64,174-64,174 Costs related to potential sale of Company 671 - - 671 Restructuring costs 60 104-164 Other nonrecurring costs, net 329-275 604 Adjusted EBITDA, before corporate allocation $ (5,862) $ 7,597 $ 8,284 $ 10,019 Adjusted EBITDA, after corporate allocation $ (2,414) $ 5,316 $ 7,117 $ 10,019 6
FY 2016 Consolida*ng Financial Informa*on Corporate MDS ECP Total Net Sales $ - $ 265,048 $ 154,314 $ 419,362 Cost of goods sold - 230,260 108,954 339,214 Gross profit - 34,788 45,360 80,148 Operating expenses: Selling and administrative 29,379 14,621 11,151 55,151 Selling and administrative - Corp allocations (13,523) 9,192 4,331 - Internal research and development - - 2,344 2,344 Amortization of intangible assets - 7,938 1,654 9,592 Restructuring charges - 2,206-2,206 Reversal of contingent consideration (1,530) - (1,530) Impairment of goodwill - 64,174-64,174 Total operating expenses 15,856 96,601 19,480 131,937 Income (loss) from operations (15,856) (61,813) 25,880 (51,789) Interest expense (3,808) 5 - (3,803) Other income (113) 168 38 93 Income taxes 17,301 (85) - 17,216 Net income (loss) $ (2,476) $ (61,725) $ 25,918 $ (38,283) Depreciation included in SG&A above $ 1,276 $ 3,888 $ 919 $ 6,083 EBITDA, excluding corporate allocation $ (28,214) $ (40,627) $ 32,821 $ (36,021) Adjustments for nonrecurring operating expenses (NON-GAAP): Impairment of goodwill - 64,174-64,174 Costs related to potential sale of Company 1,101 - - 1,101 Restructuring costs 979 2,206-3,185 Other nonrecurring adjustments, net 1,453 (946) 596 1,103 Adjusted EBITDA, before corporate allocation $ (24,681) $ 24,808 $ 33,417 $ 33,542 Adjusted EBITDA, after corporate allocation $ (11,158) $ 15,616 $ 29,086 $ 33,542 7
Adjusted EBITDA (non-gaap) For the Quarters Ended For the Fiscal Year Ended Q4 FY16 Q3 FY16 Q4 FY15 2016 2015 (Dollars in thousands) Net income (loss) $ (42,081) $ 1,136 $ 5,098 $ (38,283) $ 10,989 Interest expense 1,059 956 894 3,803 2,456 Income taxes (18,437) 612 2,846 (17,216) 3,966 Depreciation and amortization 3,865 3,842 3,560 15,675 11,236 EBITDA (55,594) 6,546 12,398 (36,021) 28,647 Adjustments Impairment of goodwill 64,174 - - 64,174 - Costs related to potential sale of the Company 671 430-1,101 - Restructuring charges 164 113-3,185 - Stock-based compensation 321 255 167 1,445 1,885 Other nonrecurring adjustments, net 283 521 2,796 (342) 3,775 Total adjustments 65,613 1,319 2,963 69,563 5,660 Adjusted EBITDA $ 10,019 $ 7,865 $ 15,361 $ 33,542 $ 34,307 Adjusted EBITDA margin 9.4% 7.7% 12.2% 8.0% 9.0% 8
Reconcilia*on of EBITDA For the Quarters Ended For the Fiscal Year Ended Q4 FY16 Q3 FY16 Q4 FY15 2016 2015 EBITDA, before corporate allocations: MDS $ 7,597 $ 5,235 $ 7,244 $ 24,424 $ 25,335 ECP 8,009 8,140 12,027 32,821 29,602 Total segment EBITDA 15,606 13,375 19,271 57,245 54,937 Less: Corporate selling and administrative (7,428) (7,213) (7,077) (30,368) (27,004) Plus: Corporate depreciation 402 384 204 1,276 714 Plus: Stock-based compensation 321 255 167 1,445 1,885 EBITDA before nonrecurring items 8,901 6,801 12,565 29,598 30,532 Nonrecurring items 1,118 1,064 2,796 3,944 3,775 Adjusted EBITDA - CONSOLIDATED $ 10,019 $ 7,865 $ 15,361 $ 33,542 $ 34,307 9
MDS Segment Financial Results SELECTED FINANCIAL DATA For the Quarters Ended For the Fiscal Year Ended Q4 FY16 Q3 FY16 Q4 FY15 2016 2015 (Dollars in thousands) Gross sales $ 72,346 $ 68,187 $ 84,749 $ 282,076 $ 263,940 Intercompany sales (3,627) (3,532) (6,592) (17,028) (17,756) Net sales 68,719 64,655 78,157 265,048 246,184 Gross profit 9,732 7,771 13,094 34,788 36,461 Gross profit margin 14.2% 12.0% 16.8% 13.1% 14.8% Selling and administrative expenses $ 3,155 $ 3,608 $ 6,744 $ 14,621 $ 11,934 Allocation of corporate expenses 2,281 2,242 1,886 9,192 6,681 Total selling and administrative expenses, % of net sales 7.9% 9.0% 11.0% 9.0% 7.6% Amortization of intangible assets 1,879 1,948 1,801 7,938 5,811 Impairment of goodwill 64,174 - - 64,174 - Operating income (loss) $ (61,861) $ 231 $ 2,663 $ (61,813) $ 9,535 Segment EBITDA, excludes corporate allocation and goodwill impairment 7,597 5,235 7,244 24,424 25,335 10
ECP Segment Financial Results SELECTED FINANCIAL DATA For the Quarters Ended For the Fiscal Year Ended Q4 FY16 Q3 FY16 Q4 FY15 2016 2015 (Dollars in thousands) Gross sales: Domestic sonobuoys $ 20,753 $ 19,639 $ 23,159 $ 76,094 $ 81,437 Foreign sonobuoys 5,811 6,313 10,070 25,839 15,298 Engineering 2,764 3,760 4,639 17,358 13,466 Rugged and other 8,934 7,854 10,437 35,268 26,114 Gross sales 38,262 37,566 48,305 154,559 136,315 Intercompany sales (14) (46) (69) (245) (374) Net sales 38,248 37,520 48,236 154,314 135,941 Gross profit 11,690 11,296 14,961 45,360 38,353 Gross profit margin 30.6% 30.1% 31.0% 29.4% 28.2% Selling and administrative expenses $ 3,115 $ 2,837 $ 2,513 $ 11,128 $ 8,107 Allocation of corporate expenses 1,168 1,061 981 4,354 2,931 Total selling and administrative expenses, % of net sales 11.2% 10.4% 7.2% 10.0% 8.1% Amortization of intangible assets $ 390 $ 413 $ 438 $ 1,654 $ 780 Operating income 6,196 6,424 10,286 25,880 25,033 Segment EBITDA, excludes corporate allocation 8,009 8,140 12,027 32,821 29,602 11
Liquidity & Capital Resources 300,000 1.50 Cash Availability 275,000 250,000 225,000 Debt-to-EBITDA Leverage 1 = 3.0x ($ in '000) FY15Q4 FY16Q1 FY16Q2 FY16Q3 FY16Q4 Cash and equivalents 14,914 2,187 4,830 834 132 Credit Availability* 119,800 135,800 140,700 150,700 76,939 Total 134,714 137,987 145,530 151,534 77,071 Net Debt ($ '000) 200,000 175,000 150,000 125,000 100,000 139,586 97,623 1.00 0.50 Debt-to-Equity Ratio Debt ($ in '000) FY15Q4 FY16Q1 FY16Q2 FY16Q3 FY16Q4 Credit Revolver 154,500 138,800 133,800 123,400 97,206 Lease Obligations - - - 604 549 75,000 50,000 32,972 25,000 1,796 1,669 11,539 0 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 (1) As calculated under the Credit Revolver Agreement. - Inventory ($ in '000) FY15Q4 FY16Q1 FY16Q2 FY16Q3 FY16Q4 Net Inventory 79,503 86,589 76,717 79,959 77,871 Net Inventory Turns 4.8 4.6 4.5 4.4 4.2 * As of June 2015, includes Letters of Credit. 12
Other Fourth Quarter Highlights and Outlook 66 new program wins in the MDS Segment with expected annual revenue of $15 million when fully ramped up into produc.on Total new program wins in the MDS Segment in fiscal 2016 of $61 million of expected annual revenue when fully ramped up into produc.on $54 million award for the produc.on of domes.c sonobuoys $11 million in awards for the produc.on of foreign sonobuoys Backlog of: " $138 million in the MDS Segment " $142 million in the ECP Segment principally including: " $117 million in domes.c sonobuoys " $6 million in foreign sonobuoys " $14 million in rugged displays Q1 FY 2016 Guidance: " Revenues of $97 to $101 million " Gross profit margin of approximately 18% " Segment revenues to provide a similar rela.onship to Q4 opera.ng results Poten.al sale of the Company 13
Q&A 14