Sparton Corporation (SPA)

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Sparton Corporation (SPA)

F2Q13 Earnings Call

February 7, 2013 11:00 am ET

Executives

Michael W. Osborne – Senior Vice President - Corporate Development

Cary Wood – President, Chief Executive Officer, Board Member, Executive Committee Member

Mark Schlei – Chief Financial Officer

Analysts

Arnold Ursaner – CJS Securities

Kevin Casey – Casey Capital

Andrew Shapiro – Lawndale Capital Management

Steve Shaw – Sidoti & Company

Ross Taylor – Somerset Capital

Presentation

[No presentation session for this event]

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Arnie Ursaner with CJS Securities. Please proceed with your question.

Arnold Ursaner – CJS Securities

Hi, good morning. First I have a mechanical math question for Mark, if I can. You had mentioned in the prepared remarks, you had an inventory mark up impact on the gross margin from the Onyx acquisition that would not impact future quarters. And I believe in your prepared remarks you indicated that Onyx had $900,000 of gross profit or 14% to margin but had $200,000 of kind of one-time items. So first my question is the inventory, is that reflected in the $200,000 one-time item?

Mark Schlei

No, the inventory is reflected in the adjusted gross profit.

Arnold Ursaner – CJS Securities

So the $900,000 already reflects the impact from the inventory mark up or that has been adjusted to take that out?

Mark Schlei

It has been adjusted to take that out.

Arnold Ursaner – CJS Securities

Got it, okay. So what are some of the elements of the $200,000 because if I add that back, it’s almost 19% margin, not the 14% we had.

Mark Schlei

Yes that’s correct. Obviously, there are going to be some questions around the first six weeks performance at gross margin being somewhat less than we advertised. And it comes in at roughly where we said it would about 17.5% of their balance.

Arnold Ursaner – CJS Securities

I think the bigger question investors are grappling with today Cary, is your comments regarding the medical space. So the facts are I guess your backlog X to Onyx was down 10% sequentially in the quarter in the legacy medical business. And what you’re saying, it sounds like trends have gotten more challenging, pay at the end of the quarter or post the quarter. Can you kind of reconcile both of those and maybe publish what you’re actually seeing when you talk to customers?

Cary Wood

Yeah, first I would say there is really not disconnect between the backlog you’re seeing and what I’m foreshadowing. Foreshadowing is as a result of that softening. Now, these are conversations, I can tell you that I anticipate that this will be reconciled sooner than later. There just generally is a concern and nervousness in the space that I can hear. Just in the last few days you’ve heard Smith & Nephew, you’ve heard Vetronic, you’ve heard Covidein, you’ve heard Boston Scientific; all make substantial lay offs and attributed to in part the excise tax as well as concerns for federally funded programs and the concerns for this frustration is impact.

It’s not just in the medical space but also the defense space. We’re hearing it in both spaces. I think it’s more a matter in my view of coming to the near term milestone of action or lack of action and the potential implication. So my guess is as good as anybody else, but I think generally we’re optimistic on our fourth quarter. We maintain conversations around what that order pattern might look like. But I think there’s going to be potentially a deferral on things from third to four.

Arnold Ursaner – CJS Securities

Excellent, thank you...

Cary Wood

Thanks.

Operator

And our next question comes from the line of Kevin Casey with Casey Capital. Please proceed with your question.

Kevin Casey – Casey Capital

On the slow down in the [Nano clinic] you talk about the – is it slowing down the pace to new wins, is it slowing down the ramp up of new wins? And then longer-term, could this actually be a positive because the company with the reduced cost, they might actually outsourcer them in the medical space?

Unidentified Company Representative

Yeah, I mean your thesis there is, as we talked about, Kevin, a number of times that the outsourcing traffic is going to be more opportunistic for us as a contract manufacturer with specialty capabilities. I think that’s going to play well to us over time. This is not a one or two quarter investment thesis. This is a multi-year plan and we’ve suggested as much for a good number of years.

Now that said, to go back to the first half of your question, it’s hard to discern whether or not this is more about ramp up of new product or legacy product. It’s a mixed bag. We had a number of upticks in medical demands from customers in our second quarter. Our largest customer by example, but we also had a number of vacancies and hold off even in our second quarters.

So we saw some of it traffic its way into Q2. And I’m not so sure that that’s not going to have implications for Q3. And that’s really what I’m kind of tipping my hat towards. And that is that I think there are going to be some softening in Q3 that will be deferred into Q4. And I think more the conversation is around, let’s wait and over the next several weeks and find out what happens with these various issues and how we’re going to work through. I think that’s the crux of it.

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