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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 MARCH 31, 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
(Exact Name of Registrant as Specified in its Charter)

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).      [  ] Yes [X] No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

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INDEX              

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SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 2004 and June 30, 2003

See accompanying notes.

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SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
For the Three-Month and Nine-Month Periods ended March 31, 2004 and 2003

See accompanying notes.

(1) All share and per share information have been adjusted to reflect the impact of the 5% stock dividends declared in January and October 2003.

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SPARTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine-Month Periods ended March 31, 2004 and 2003

See accompanying notes.

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SPARTON CORPORATION & SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)

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 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 for complete financial statements. All significant intercompany transactions and accounts have been eliminated. The Condensed Consolidated Balance Sheet at March 31, 2004, and the related Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended March 31, 2004 and 2003, and cash flows for the nine-month periods ended March 31, 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 reclassifications of prior period amounts have been made to conform to the current presentation. Operating results for the three-month and nine-month periods ended March 31, 2004, are not necessarily indicative of the results that may be expected for the fiscal year ended June 30, 2004.

The balance sheet at June 30, 2003, 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 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, 2003.

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 after market 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 telecommunications, medical/scientific instrumentation, electronics, 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 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 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 have not been significant. The Company does not consider the market risk exposure relating to currency exchange to be material.

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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 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 132 Revised (SFAS No.132 (R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, which amends SFAS Nos. 87, 88, and 106. The revised Statement retains the disclosure requirements contained in SFAS No. 132, which it replaces, and requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS No. 132 (R) is effective for financial statements with fiscal years ending after December 15, 2003. The interim-period disclosures required by this Statement are effective for interim periods beginning after December 15, 2003. The adoption of this statement did not have a material effect on the Company’s disclosure requirements.

Periodic benefit cost - The Company follows the disclosure requirements of SFAS No. 132 (R). For the nine months ended March 31, 2004, $545,000 of expense had been recorded. Total net periodic benefit cost for fiscal 2004 is expected to be $727,000. The components of net periodic pension expense for each of the periods presented were as follows:

Stock options - The Company follows Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (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, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.”

At March 31, 2004, the per share weighted average exercise price of options outstanding was $6.06. The weighted average remaining contractual life of those options was approximately 3 years. At March 31, 2004, there were 321,047 options exercisable at the weighted average per share price of $5.60. Remaining shares available for grant under the plan were 183,741 at March 31, 2004.

The following sets forth a reconciliation of net income (loss) and earnings (loss) per share information for the three months and nine months ended March 31, 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.

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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:

Work in progress and finished goods inventories include $1.3 and $1.1 million of completed, but not yet accepted, sonobuoys at March 31, 2004 and June 30, 2003, respectively. Inventories are reduced by progress billings to the U.S. government of approximately $4,538,000 and $8,317,000 at March 31, 2004 and June 30, 2003, respectively.

3) EARNINGS (LOSS) PER SHARE - On October 21, 2003, Sparton’s Board of Directors approved a 5% stock dividend. Eligible shareowners of record on November 21, 2003, received the stock dividend on December 19, 2003. Cash was paid in lieu of fractional shares of stock. An amount equal to the fair market value of the common stock issued was transferred from retained earnings ($4,589,000) to common stock ($496,000) and capital in excess of par value ($4,089,000) to record the stock dividend. Accordingly, all share and per share information for fiscal 2004 and 2003 have been adjusted to reflect the impact of all stock dividends declared for the periods shown.

Due to the Company’s fiscal 2004 reported net loss, 139,203 share equivalents from stock options outstanding were excluded from the computation of diluted earnings per share during the nine months ended March 31, 2004, because their inclusion would have been anti-dilutive for the period. For the three months and nine months ended March 31, 2003, options to purchase 103,635 and 3,308 shares of common stock were not included in the computation of diluted earnings per share, respectively, as the options’ exercise prices were greater than the average market price of the Company’s common stock and, therefore, would be anti-dilutive. Basic and diluted earnings per share were computed on the following:

4) COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) includes net income (loss) as well as unrealized gains and losses, net of tax, 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 and nine-month periods ended March 31:

At March 31, 2004 and June 30, 2003, shareowners’ equity includes accumulated other comprehensive income of $484,000 and $359,000, respectively, net of tax. These balances include $315,000 and $471,000 for unrealized gains on investment securities owned, and unrealized gains and (losses) of $169,000 and $(112,000) for investment securities held by an investee accounted for by the equity method, as of March 31, 2004 and June 30, 2003, 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 14 years. A daily market

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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. 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 March 31, 2004, the Company had net unrealized gains of $501,000. At that date, the net after-tax effect of these gains was $315,000, which is included in accumulated other comprehensive income within shareowners’ equity. For the nine months ended March 31, 2004 and 2003, purchases of investments totaled $1,509,000 and $7,746,000, and sales of investment securities totaled $7,353,000 and $1,176,000, respectively.

Sparton owns a 14% interest in Cybernet Systems Corporation (Cybernet). This investment, with a carrying value of $1,861,000 and $1,400,000 at March 31, 2004 and June 30, 2003, respectively, is accounted for under the equity method and is included in other assets on the condensed consolidated balance sheet. Sparton’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 Sparton’s balance sheet.

The contractual maturities of debt securities, and total equity securities, as of March 31, 2004, are as follows:

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 March 31, 2004, Sparton has accrued $7,307,000 as its estimate of the minimum future undiscounted financial liability, of which $705,000 is classified as a current liability and included in accrued liabilities. Amounts charged to operations, principally legal and consulting fees, for the nine months ended March 31, 2004 and 2003 were $240,000 and $277,000, 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.

During the first quarter of 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 $4,850,000 from the DOE and others in fiscal 2003, plus an additional $1,000,000, which was received during the first quarter of fiscal 2004. In addition, the DOE has agreed to reimburse Sparton for 37.5% of certain future environmental expenses in excess of $8,400,000 incurred from the date of settlement. The financial impact of the settlement was recorded in the first quarter of fiscal 2003 with $5,500,000 recorded as income.

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.

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SPARTON CORPORATION AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

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, and News Releases, as well as various corporate charters. 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, aerospace and industrial markets. This includes 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 that lend themselves to 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, 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, 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 or 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.

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RESULTS OF OPERATIONS

Three-Month Periods

Sales for the three-month period ended March 31, 2004, totaled $43,566,000, an increase of $2,725,000 (7%) from the same quarter last year. Government sales increased $4,223,000 (43%) to $14,061,000. This increase is principally due to the successful passage of several sonobuoy drop tests during March, as well as the resolution of previous technical difficulties related to one sonobuoy contract. Industrial market sales of $11,169,000 showed a significant decline, down $3,967,000 (26%) from the same period last year. Industrial sales have been adversely impacted by the reduced demand for detection equipment for U.S. airports. Medical/scientific instrumentation sales were consistent with third quarter sales in fiscal 2003 ($4,451,000 versus $4,485,000 last year). Sales to the aerospace markets were $13,885,000, versus $11,383,000 last year, an increase of $2,502,000 (22%). This increase was mainly attributable to increased orders from existing customers.

An operating profit of $133,000 was reported for the three months ended March 31, 2004, compared to $801,000 for the three months ended March 31, 2003. Gross margin for the three months ended March 31, 2004, was 8%, up from 4% for the previous three months ended December 31, 2003. The improved margin reflects the conclusion of the start-up phase of several programs, as well as the completion of one sonobuoy contract that had experienced technical problems. The 8% gross margin for the three months ended March 31, 2004, was down from 10% in fiscal 2003. The decrease was partially due to a less favorable product mix. In addition, the provision for pension costs was adjusted by $481,000 to reflect the revised annual estimate of such costs, most of which are carried in cost of goods sold. The costs have increased due to depressed market conditions and lower than expected rate of return on pension assets. The Company is focused on continuing to improve margins through cost reductions and/or recoupment of unplanned expenses from several customers. There were no significant cost to complete adjustments on long term contracts for the three months ended March 31, 2004. Gross profit varies from period to period and is affected by a number of factors, including product mix, production efficiencies, component costs, capacity utilization, and new product introduction. In addition, as many of the Company’s costs and operating expenses are fixed, a reduction in customer demand depresses gross profit and operating income. Selling and administrative expenses were consistent with the prior year period.

Interest and Investment Income decreased $31,000 to $157,000 in 2004. This reduction was due to the reduced funds available for investment. Other Expense-Net in 2004 was $65,000 versus $61,000 in 2003. Translation adjustments, along with gains and losses from foreign currency transactions, are included in current earnings and, in the aggregate, amounted to a loss of $10,000 during the three months ended March 31, 2004.

Due to factors described above, the Company reported net income of $156,000 ($0.02 per share, basic and diluted) for the three months ended March 31, 2004, versus $671,000 ($0.08 per share, basic and diluted) for the corresponding period last year.

Nine-Month Periods

Sales for the nine-month period ended March 31, 2004, totaled $113,231,000, a decline of $7,658,000 (6%), compared to the same period last year. All markets, with the exception of aerospace, are down from the same period last year. Government sales were $30,746,000 for the nine months ended March 31, 2004, down slightly from prior year’s sales of $32,715,000, a decline of 6%. Medical/scientific instrumentation sales were $13,497,000 for the nine months ended March 31, 2004, compared to $14,274,000 for the prior year period, a decline of 5%. Industrial sales also declined from the prior year, with sales of $29,089,000 for the nine months ended March 31, 2004, compared to $41,157,000 for the prior year period, a decline of 29%. While other markets have declined, aerospace sales increased by $7,155,000 (22%) to $39,899,000 from the prior year period, primarily due to increased orders from existing customers. Government sales declined from last year in part due to the overall decline in sonobuoy sales to the U.S. Navy and delayed foreign sonobuoy sales. Technical difficulties have also adversely impacted sales and margins on several current sonobuoy contracts. Industrial sales have declined sharply due to reduced sales for homeland security. Prior year’s sales benefited from strong demand for homeland security products, principally driven by the demand for detection equipment in U.S. and Canadian airports. These sales totaled approximately $2 million in fiscal 2004 compared to approximately $22 million last year. This decline in the industrial market was partially offset by increased sales to other existing industrial customers.

The majority of our sales come from a small number of customers. Sales to our 6 largest customers, including government sales, accounted for approximately 75% of net sales in both periods. Four of the customers, including government, were the same both years. One of these customers, with 24% and 16% of the sales as of March 31, 2004 and 2003, respectively, is comprised of several separate facilities.

An operating loss of $5,358,000 was reported for the nine months ended March 31, 2004, versus an operating profit of $8,826,000 for the same period last year. Included in prior year’s operating income was a $5,500,000 recovery ($3,630,000 net

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