Customers
For the fiscal year ended June 30, 2011, Sparton's six largest customers, including the U.S. Navy, accounted for approximately
75% of total net sales. The U.S. Navy, a DSS Segment customer through the company's ERAPSCO agreement, represented 30% of total net sales
in the same period. Siemens Diagnostics and Fenwal Blood Technologies, both Medical customers, contributed 18% and 12%, respectively,
of total net sales in fiscal 2011. Sparton expects to continue to depend upon a relatively small number of customers, but cannot ensure
that present or future large customers will not terminate, significantly change, reduce, or delay their manufacturing arrangements.
Because Sparton's major customers represent such a large part of the company's business, the loss of any of the major customers or
reduced sales to these customers could negatively impact the company's business.
During the fourth quarter of fiscal 2011, Siemens notified the company that it intends to dual source two of its larger programs with Sparton
beginning in fiscal 2012. Annual sales related to these programs aggregated approximately $27.8 million in fiscal 2011.
While Sparton cannot estimate the ultimate impact that this dual sourcing will have on its future annual sales, unless overall sales related
to these programs increase, this dual sourcing is expected to have an adverse impact on fiscal 2012 sales from the company's Ohio facility.
Related in part to this event and in conjunction with the company's annual goodwill impairment analysis, Sparton recorded impairments of
$13.2 million and $3.7 million against its goodwill and customer relationships intangible asset, respectively, related to its Ohio reporting unit.
Additionally, the U.S. Navy generally has the ability to terminate DSS contracts, in whole or in part, without prior notice, for convenience
or for default based on performance. If any of these U.S. Navy contracts were to be terminated for convenience, Sparton would generally be
protected by provisions covering reimbursement for costs incurred on the contracts and profit on those costs, but not the anticipated profit
that would have been earned had the contract been completed.
The company relies on the continued growth and financial stability of its customers. Adverse changes in the end markets they serve can reduce
demand from our customers in those markets and/or make customers in these end markets more price sensitive. Furthermore, mergers or restructurings
among Sparton's customers or customers’ customers could increase concentration or reduce total demand as the combined entities rationalize their
business and consolidate their suppliers. Future developments, particularly in those end markets which account for more significant portions
of the company's revenues, could harm its business and results of operations.
Sparton also generates large accounts receivable in connection with electronic contract manufacturing.
If one or more of the company's customers experiences financial difficulty and is unable to pay for the services provided,
the company's operating results and financial condition could be adversely affected. If Sparton's customers seek bankruptcy protection,
they could act to terminate all or a portion of their business, originate new business with Sparton's competitors and terminate or assign
the company's long-term supply agreements. Any loss of revenue from a major customer, including the non-payment or late payment of invoices,
could materially adversely affect Sparton's business, results of operations and financial condition.
Specializing in the development and production of complex electromechanical equipment, DSS designs and manufactures sonobuoys,
anti-submarine warfare (ASW) devices used by the U.S. Navy and foreign governments. This business unit also performs an engineering
development function for the United States military and prime defense contractors on advanced technologies targeted as future defense
products as well as replacement of current systems. Sonobuoy and related engineering services, including sales to the U.S. Navy,
accounted for approximately 33%, 36% and 19% of consolidated revenue for the fiscal years ended June 30, 2011, 2010 and 2009,
respectively. Sales to the U.S Navy, including subcontract sales through ERAPSCO, accounted for 30%, 28% and 14% of consolidated revenue
for the fiscal years ended June 30, 2011, 2010 and 2009, respectively. The U.S. Navy issues multiple contracts annually for its
sonobuoy and engineering requirements. The loss of U.S. Navy sonobuoy sales would have a material adverse financial effect on the company.
While the overall relationship with the U.S. Navy is important to Sparton, the contracts with the U.S. Navy, including subcontracts
through ERAPSCO, are such as ordinarily accompany the kind of business conducted by Sparton and the company does not believe that
it is substantially dependent on any individual contract or agreement with this customer other than the Subcontract effective
June 20, 2011 between Sparton Electronics, Florida, Inc. and ERAPSCO. Pursuant to the Subcontract, DSS will supply sonobuoys to
the U.S. Navy through ERAPSCO for a total contract value of approximately $32.2 million to Sparton Electronics.
This business unit is a trusted source and supplier for low to medium volume/high complexity commercial and military aerospace applications,
medical devices, telecommunications, energy, and industrial controls. Current portfolio of product line applications include: flight controls,
cock pit displays, fuel system controls, secure communications, early warning detection, diagnostics systems, security systems, detection
systems, lighting, satellite communications, audio, nuclear detection, inventory control, and defense.
The majority of Sparton’s Complex Systems customers are in regulated industries where strict adherence to regulations is required such
as Federal Drug Administration (FDA), International Tariff and Arms Regulations (ITAR), Federal Aviation Administration (FAA).
These requirements are highly technical in nature and require strict adherence and documentation related to operational processes
and documentation. Sparton’s quality system provides us the ability to service such markets, differentiating Sparton from some potential
competitors which lack such systems.
This group specializes in systems and procedures targeted to the requirements of medical OEM and ET customers primarily
in the In Vitro Diagnostic and Therapeutic Device segments of the Medical Device market space. Medical sales to Siemens Diagnostics
accounted for 18%, 21% and 17% of consolidated revenue for the fiscal years ended June 30, 2011, 2010 and 2009, respectively.
Fenwal Blood Technologies, which became a customer with the Delphi acquisition, contributed 12% of consolidated revenue during the
year ended June 30, 2011. The loss of either Siemens Diagnostics or Fenwal Blood Technologies as a customer could have a material
adverse financial effect on the Company. While the overall relationships with the Siemens Diagnostics and Fenwal Blood Technologies
are important to Sparton, the contracts with these companies are such as ordinarily accompany the kind of business conducted by
Sparton and the Company does not believe that it is substantially dependent on any individual contract or agreement with these customers.
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