Sparton Corporation (SPA)

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Sparton Corporation (SPA)

F2Q2011 Earnings Call Transcript

February 15, 2011 12:00 pm ET

Executives

Cary Wood – President & CEO

Greg Slome – CFO

Mike Osborne – SVP, Business Development

Analysts

John Roth [ph] – Argon Cap [ph]

Andrew Shapiro – Lawndale Capital Management

Jonathan Haynes – Private Investor

Question-and-Answer Session

Operator

And our first question comes from the line of John Roth [ph] with Argon Cap [ph]. Please proceed with your question.

John RothArgon Cap

Hey, guys, its John with Argon. Good quarter. Just was hoping you could provide maybe a little bit more color in terms of what the opportunities that looks like on the M&A side? Are you guys seeing assets that you think are attractive there, first of all? And secondly, from a pricing perspective, do you think sellers are being reasonable in terms of their expectations? Just I guess any color in regard to either of those issues will be great? Thank you.

Cary Wood

John, thanks for the question. The deal flow volume has substantially increased. I think it's fair to say that there are a great many of sellers out there that saw themselves in a place they didn’t expect to be say a year or year and a half ago that has been now reevaluating whether or not they want to keep a hand on those businesses.

I think that we represent to some folks a just large enough company and opportunities that somebody might be enticed to want to be a part of, but not so large that say an entrepreneurial manager who might want to stay involved, would get lost in the shuffle of a larger company, so I think we represent an enticing partnership for a lot of folks.

We’re looking at a good amount of volume, but I think as you’ve seen us in the most recent deal with the Delphi acquisition in August, we’re very careful, we’re very thorough in a way we assess the opportunity, and we very, very carefully put our cash to work in a way that is both accretive and is quickly a return on the cash that we lay out there.

So, yes, there’s a lot of deals, but we want to prioritize the right things, we want to prioritize the things that are accretive. We’re certainly looking at a funnel on a constant basis. We’re in constant conversation. It is seemingly a part of our everyday life to be looking at opportunities. Beyond that it's awful difficult to give you much more color about what it is you might see out of us in the coming months.

I do feel confident that there are opportunities that will come sooner than later. And my hope is that we can see eye-to-eye on those things with potential source. I don't think that the level of selling multiples are currently at the levels they were several years ago, but you don't know what the traffic is going to be on those things either and how confident they get in those selling multiples with time.

So I think long answer to your question, I think we're deeply involved, I think we're careful, I think we're looking at things that are more immediately accretive and good returns on the cash outlay. The deal flow is up. We’re highly engaged. I do think that we’re trying to be a little less involved in go big quick, and we're probably being more careful to be slow and methodical and incremental albeit very much in line with the $500 million outlook we have by our fiscal 2015 that we've previously communicated, so, hopefully that gives you a little bit of insight, John.

John RothArgon Cap

Yes, that’s helpful. Thanks very much.

Cary Wood

Sure.

Operator

(Operator instructions) Our next question comes from the line of Andrew Shapiro with Lawndale Capital Management. Please proceed with your question.

Andrew ShapiroLawndale Capital Management

Good morning. Two questions here on the (inaudible) 26:16 then I will back out into the queue (inaudible). Delphi's excess second facility lease you said stopped at November 1st

Cary Wood

Correct.

Andrew ShapiroLawndale Capital Management

And that’s why you had cost efficiencies thereafter. Do those efficiencies flow through cost to goods sold or through SG&A and what is or was the timing this quarter or this past quarter, if any other consolidation activities that enhance cash flow?

Cary Wood

When you ask that, are you taking specifically within the context of the Delphi acquisition?

Andrew ShapiroLawndale Capital Management

Correct.

Cary Wood

Yes, we spoke to the closure, as of November 1st, that's all an impact on COGS, so it's more a cost of goods issue. We mentioned the reduction in workforce, which was pretty much in line with that November 1st date as well, and so that was not insignificant, 18% reduction in head count. I think we’ve done a nice job of not just executing a closure and consolidation, but the beginnings in the front end of floor realignment and floor space utilization, those are all things that are a continuous improvement opportunity for us. I think for that reasons it's something I can say confidently, I would not rule continued level of performance enhancement out of Delphi.

We've been very, very pleased with the speed of the progress. It's exceeded both our timing and our performer state in terms of the gross margin, but generally I think that the two big issues there were the reduction in workforce, the closure consolidation. All of that had its impacts on COGS. It wasn't a whole lot of expense otherwise involved in those efforts, but I don't believe that that whole business unit has frankly hit full stride either. I think it still has upside to come and I wouldn't rule out enhanced performance over the coming quarters.

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