Back From The Brink

Unlike many instances of economic decline in the Rust Belt, this small manufacturer managed to come back from the brink of bankruptcy to a period of both profit and growth. But the town where it was founded more than a century ago hasn’t been so lucky.

Two armed guards—a former Navy Seal and a retired Secret Service agent—were escorting people into a board meeting for Sparton Corp. on a rainy June day in 2009. On the agenda was a resolution to move the troubled manufacturer’s headquarters from Jackson, Michigan, where it had been for 109 years, to the Chicago suburbs.

The reaction from longtime employees and others in town had been vicious. President and CEO Cary Wood got a voice mail telling him he “would pay the price.” An anonymous blogger noted where his daughter was attending college.

“It got ugly fast,” Mr. Wood recalls. “Every night you worried, ‘Am I going to walk out to a car with no tires on it?’ “

He had been brought in eight months earlier to help the foundering company avoid bankruptcy. Mr. Wood had been a turnaround guy for nearly two decades, mainly in the auto industry, and chose Sparton from among other offers because “it was the smallest and worst of them all,” he says.

Sparton Corp. CEO Cary Wood Photo: Andrew Nelles

The defense and medical manufacturer had reported losses for two years straight, totaling more than $13 million in 2008 alone. Its largest independent investor, Lawndale Capital Management LLC, had come close to launching a proxy fight with the previous management over its missteps. The New York Stock Exchange, where Sparton had been listed since 1929, was threatening to delist it. And the company’s primary lender, National City Bank of Cleveland, told Mr. Wood it was reducing Sparton’s credit line to $2 million—enough for about two months of operations.

“Unless something dramatic happens in the next 30 to 60 days, you’re bankrupt,” he recalls the bank telling him.

More than five years later, Sparton’s headquarters occupy two floors in a nondescript office building near O’Hare International Airport. But unlike many stories of manufacturing decline in the Rust Belt, Mr. Wood has led the company through a turnaround of epic proportions: Sparton’s stock has surged by nearly 2,000 percent, from $1.35 on April 30, 2009, to $27.28 on July 11. Sales were up more than 20 percent from 2009 to 2013, and what started as a slash-and-burn strategy has morphed into one of growth. Sparton has acquired eight companies and is looking to nearly double 2013 revenue of $266 million to $500 million by 2015.

One part of the story remains the same, though. Jackson, the town it left behind, is still reeling.

SPARTON IS BORN

Sparton’s roots in Jackson, a town of 33,000 located 80 miles west of Detroit, date to 1900, when it made garden hoes and farming tools under the name Sparks-Withington Co. The company pivoted with the birth of the auto industry, making the first electric car horn and radios, supplying Ford Motor Co. and Chrysler Corp. By 1929, Sparton employed 1 in every 15 workers in Jackson.

Sparton’s co-founder, William Sparks, was a three-term mayor of Jackson. During the Great Depression, he embarked on his own version of the Works Progress Administration by employing hundreds to build a 465-acre public park with a multi-tiered, illuminated waterfall. The jobs, first and foremost, went to men with families. Today, Cascades Park is Jackson’s crown jewel.

Former Sparton CEO David Hockenbrocht at the factory site in Jackson, Michigan. Photo: Andrew Nelles

Eventually, Sparton diversified beyond automotive work and began making circuit boards for aircraft and satellites and doing assembly and design work for medical devices. (Workers at the Jackson plant voted to decertify the United Automobile Workers union in 1968.) It is one of two companies that manufacture sonobuoys, submarine-tracking devices used during the Cuban missile crisis and more recently in the exhaustive search for Malaysia Airlines Flight 370.

In the new century, under David Hockenbrocht, Sparton expanded its high-volume/low-margin contract manufacturing of electrical components, acquiring plants in New Mexico, Ohio and Vietnam. But since the end of the Cold War, the sonobuoy business had contracted, and Sparton’s newer business lines, with slim margins and tough global competition, couldn’t make up the difference. This, along with underutilized facilities, was “bleeding them white,” says Ross Taylor, a Sparton investor and portfolio manager at New York-based Somerset Capital Advisors.

“They grew at all costs,” Mr. Wood says of Sparton’s strategy. “Taking on too many customers too quickly, poorly executing their ramp-up and effectively losing on every dollar they made at the top.”

What’s more, Sparton communicated only minimally with its outside shareholders, since more than a third of its stock was held by company insiders. It conducted no quarterly earnings calls and, save for Sparton’s annual meeting—a town affair that drew hundreds—shareholders knew little of the company’s dealings. “We pretty much did our own thing,” says Mr. Hockenbrocht, 79, who served as president and chief operating officer and eventually CEO from 1978 until 2008, when he left after suffering a stroke. “The board,” he adds, “they were not going to throw us out.”

That style did not sit well with Andrew Shapiro, president of Lawndale Capital Management, a small activist fund in Mill Valley, California. By 2008, Mr. Shapiro’s firm was Sparton’s largest independent shareholder, owning 9.9 percent of the company. And it had been a thorn in management’s side since 2004, when Mr. Hockenbrocht proposed ending cumulative voting rights, a process strengthening minority shareholders’ ability to elect board members. When the measure passed, Mr. Shapiro was livid. “That is when I went to war,” he recalls.

There were other problems, too, Mr. Shapiro says. In a letter filed in January 2008 with the U.S. Securities and Exchange Commission, he claimed Sparton was “stuffing employees’ pension plans” with its own devaluing stock, a la Enron Corp. andWorldCom Inc. In his letter, Mr. Shapiro claimed that by the end of the 2007 fiscal year, 44 percent of the company’s pension equity was in Sparton shares, far above the 10 percent outlined by the Employee Retirement Income Security Act. An outside law firm specializing in pension issues backed Mr. Shapiro’s claim.

In a letter to the board in August 2008, Mr. Shapiro demanded that it bring in an outside turnaround expert. (After Mr. Hockenbrocht’s departure in March 2008, Sparton was led by interim CEO Richard Langley, previously its chief financial officer.)

In the same letter, Mr. Shapiro advocated for a possible sale. It was the first time in his 15 years as an activist investor that he recommended putting a company in play. “Lawndale cannot sit idly by while a discredited board relies upon a discredited management team to extricate Sparton from a morass of their own creation,” Mr. Shapiro wrote.

If the board refused to settle with Lawndale, Mr. Shapiro would mount a proxy fight, he wrote. By September, a deal had been reached. Sparton would let go of one existing board member and add two new members from a list provided by Lawndale. Most important, though, it would swiftly find a new CEO.

THE TURNAROUND GUY

“I’m a type-A, hard-charge, run-hard, balance-a-lot-of-plates kind of guy. That’s just how I’m wired,” Mr. Wood says, leaning over his large wooden desk on the 20th floor of Sparton’s new headquarters in Schaumburg. Bald, he favors gray suits. His athletic build, from more than a dozen triathlons, shows in his broad shoulders.

Mr. Wood, 47, grew up in St. John, Indiana, and went to Purdue University for a degree in manufacturing technology. Despite his ascension up the ranks from General Motors Co. to United Technologies Corp. and then into private-equity firms, his origins are blue-collar. He is the son of a housewife and a steelworker. His father worked for U.S. Steel Corp. at the old South Works plant in Chicago. Mr. Wood’s first job was on the plant’s second-shift cleaning crew.

In the early 1980s, his father was forced into early retirement as the steelmaker staggered through the Rust Belt recession. The irony is not lost on Mr. Wood. Jackson often reminded him of the northwest Indiana town he grew up in. “The whole time I was there, I kind of thought, ‘This is how I grew up,’ “ he says. “I guess I felt like I understood why people could be mad.” Still, he never expected to have two armed guards shadow him for weeks—at work, at home, at a Detroit Tigers game.

When Mr. Wood arrived in Jackson in November 2008 with an annual compensation of $571,500, he says, “People were going, ‘Oh, thank God you’re here.’ “

At a Christmas party at a local country club just weeks after he was hired, the spirit was jovial, he recalls. But he’d been poring over Sparton’s balance sheets. He knew what needed to be done, and he knew Jackson was going to bear the brunt of it. When the evening wound down, Mr. Wood says he turned to his girlfriend, now his wife, and said: “These people have no idea what’s about to go down.”

CUTS TO CURE

Mr. Wood likes to compare the breakneck pace of stabilizing Sparton to a plane in a deep dive after an engine stall. If his strategy worked, Sparton would just nip the treetops.

Immediately, Mr. Wood stopped company contributions to the pension and 401(k) plans temporarily. He began laying off employees, purging unprofitable customers and renegotiating nearly every contract. He watched every dollar that went in and out of Sparton’s accounts, first at 7:30 a.m. and again at the end of the day. If a customer was late with a check, he would put someone from his team on a plane with one directive: “Go get it.”

In early March 2009, Mr. Wood walked into the lunchroom at the Jackson plant to deliver the news: Sparton would be closing the Jackson facility. Major production would cease June 30. The plant’s 206 employees would be out of a job unless they decided to follow the work to a plant in Brooksville, Florida, just north of Tampa. There was a job there for anyone who wanted it, and the company would help with moving expenses. (Only a few took the offer, Mr. Wood says.)

Despite recommendations from his team to let someone else handle the announcement, Mr. Wood was adamant about telling workers himself. “You can’t send someone else in there to deliver that kind of crap news,” he says.

Closing the plant would cost Sparton a little less than $4 million. The company had lost more than $20 million in the previous two fiscal years on annual revenue of $200.1 million in 2007 and $229.8 million in 2008. Since coming in, he’d tried to stem the tide by outlining $16.5 million in cost reductions—the Jackson plant, much to his dismay, was one of them. “It’s not lost on me that Jackson is the cradle of this company,” he told a reporter for the Jackson Citizen Patriot.

Regardless, the town was ready to fight back. “They’re not leaving without a dogfight. It’s that simple,” a local state representative told the paper.

Joe Loring

“It was a travesty closing Jackson. Sparton made Jackson. Jackson made Sparton,” says Joe Loring, 66, an employee for 25 years whose father had worked at the company for more than 40 years.

“It was a good example of those who wished to shoot the messenger shot the messenger,” Director James Fast says.

‘JUST LAY LOW’

In the weeks that followed, Mr. Wood told his team to steer clear of local restaurants and avoid talking about the company—”Just lay low, stay out of it.” He traded in his Mercedes E350 for a used 2008 Jeep Grand Cherokee. “I can’t be shutting down plants and driving a Mercedes,” he says.

By the end of March, Sparton had gone to 600 employees from 1,300—Mr. Wood also shuttered plants in London, Ontario, and Albuquerque—and its annual revenue had fallen to $156 million. What’s more, the company was sitting on $50 million in cash. By June, with Sparton’s stock trading at just under $3, the NYSE told the company it was no longer at risk for delisting.

On June 18, 2009, Sparton announced it was moving its headquarters to Schaumburg. “What a way to slap the American people in the face! . . . Shame on Sparton,” read an op-ed in the Citizen Patriot. In its own editorial, the paper was more understanding. “In the end, survival for the Sparton brand meant severing ties with the community that nurtured it for so long.”

Mr. Wood chose Schaumburg in part because it was close to several important customers and to the families of some of his senior management. Proximity to O’Hare also was a factor. But the decision went beyond economics. Detaching the headquarters from any of its manufacturing operations felt like a prudent move after what he had been through the previous year. “You knew the one thing you weren’t ever going to have to deal with again was the legacy stuff,” Mr. Wood says. “There was something about that that was clean.”

Today, all that is left of the Sparton plant in Jackson is rubble. In March 2011, an arson fire tore through the 350,000-square-foot plant, burning it to the ground. “In a sad, sad way it gave it some completion,” says Mr. Langley, Sparton’s former chief financial officer and interim CEO. “It’s almost ashes to ashes.”

What happened at Sparton is part of a larger story in Jackson and elsewhere in Michigan. Manufacturing, which once employed a quarter of the town, has been hit hard by the consequences of global competition and cheap overseas labor. Since the 1980s, companies such as Goodyear Tire & Rubber Co., Clark Equipment Co. and Harvard Industries Inc., among others, drifted away from Jackson, like geese headed south. The number of families living in poverty has doubled over the past decade to more than 30 percent, census data show.

Jackson’s recovery from what many call “Michigan’s lost decade” is rooted in its hospital, Allegiance Health, the county’s top employer, with roughly 3,700 people. Today, 23 percent of the town’s eligible workforce is in health care and education. Close behind the hospital is CMS Energy Corp.’s Consumers Energy electric and gas utility, which employs 2,400. The state prison, where former Detroit Mayor Kwame Kilpatrick served his sentence for perjury and obstruction of justice, offers about 2,000 jobs. Still, the month Sparton closed up shop, the county’s jobless rate rose to 14.9 percent, the highest rate since the early 1990s. In May, the most recent figure available, it was 7.3 percent.

In March 2011, an arson fire reduced the plant to rubble. Photo: Andrew Nelles

At Sparton, however, the rolls have grown to 1,500 employees, higher than when Mr. Wood arrived. “Some were acquired, but a lot were hired,” he says. The headquarters’ staff has grown to 45 people. Sparton is up to nine plants, two more than it had before Mr. Wood took over. It has replaced high-volume/low-margin work with precision products in lower volume. Today, half of Sparton’s revenue comes from medical devices.

As for Sparton’s hometown, Mr. Wood says, “I have absolutely no hard feeling, no ill will toward Jackson, Michigan. I am here to do a job and we’ve done it.” Sparton’s board hopes Mr. Wood, who now makes $1.3 million a year, won’t leave for something more exciting. “The board is very aware that if we don’t keep throwing meat in the door for this guy, he might get bored and move on,” Director Chuck Kummeth says.

But Mr. Wood says he has no intention of leaving anytime soon. Leaning farther over his desk, dropping his voice to its most-serious register, he gestures emphatically with each word:

“Five years from now this is a billion-dollar company. I have no plans of leaving. I am too connected to it now.”

Photography by Andrew Nelles