Sparton Corporation (SPA)

SPA 
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Sparton Corporation (SPA)

F4Q 2011 Earnings Call

September 8, 2011 11:00 AM ET

Executives

Michael Osborne - SVP, Business Development and Supply Chain

Cary Wood - President and CEO

Greg Slome - CFO

Analysts

Mark Jordan - Noble Financial

Andrew Shapiro - Lawndale Capital Management

Jimmy Baker - B. Riley & Company

John Curti - Singular Research

Jonathan Haynes - Private Investor

Presentation

Mike Osborne

Thank you operator. Good morning and thank you for participating in Sparton’s fiscal 2011 fourth quarter and full year financial results conference call.

Before we begin the discussion, I will take a few minutes to read the forward-looking statement. Certain statements in this conference call constitute forward-looking statements within the meaning of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended. When used in this conference call, words such as “believe,” “expect,” “anticipate,” “project,” “plan,” “estimate,” “will” or “intend” and similar words or expressions as they relate to the Company or its management constitute forward-looking statements. These forward-looking statements reflect our current views with respect to future events and are based on currently available financial, economic and competitive data and our current business plans. The Company is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements whether as a result of such changes, new information, subsequent events or otherwise. Actual results could vary materially depending on risks and uncertainties that may affect our operations, markets, prices and other factors. Important factors that could cause actual results to differ materially from those forward-looking statements include those contained under the heading of risk factors and in the management’s discussion and analysis contained from time-to-time in the Company’s filings with the Securities and Exchange Commission.

Adjusted operating income, adjusted net income and adjusted income per share – basic and diluted are non-GAAP financial measures that exclude or add the effect of certain gains and charges, including imputing income taxes at a 36% effective rate. Sparton believes that the presentation of non-GAAP financial information provides useful supplemental information to management and investors regarding financial and business trends relating to the Company’s financial results. More detailed information, including period over period segment comparisons, non-GAAP reconciliation tables and the reasons management believes non-GAAP measures provide useful information to investors, is included in the Fiscal 2011 Fourth Quarter and Full Year Results press release and 8-K dated September 7, 2011.

Today, Cary Wood, our President and CEO, and Greg Slome, our CFO, will report our fiscal 2011 fourth quarter and full year financial results, provide an update on the status of our liquidity and capital resources, review the progress made with our growth initiatives in the past year, and provide a brief update on the outlook going into fiscal 2012. At the end of the narrative, we will allow our investors and other interested parties to ask questions related to the Company’s financial performance and operations. In fairness to all participants, we will ask that one question be asked at a time with the call ending at approximately 12:00pm EDT.

I would now like to turn the call over to Cary.

Cary Wood

Thanks Mike. Good morning and welcome to our fiscal 2011 year-end conference call. Today, we will begin by reviewing our fiscal 2011 fourth quarter and full year consolidated performance. As most of you are aware, Sparton has gone through a financial and operational turnaround the last few years as well as completing two acquisitions in fiscal 2011. As a result of these actions, there have been a number of one-time gains and charges, restructuring costs, and impairments recognized in our financial statements in the past three fiscal years. In addition, the Company reinstated its deferred tax assets in the fourth quarter of fiscal 2011. Considering the magnitude of the impact these actions have had on our reported financial results, we have provided within our Earnings Release certain non-GAAP disclosures related to Operating Income, Net Income and Earnings per Share that exclude or add the effect of certain gains and charges, including imputing income taxes at a 36% effective rate. We believe that the presentation of such non-GAAP financial information produces useful supplemental information to management and our investors regarding financial and business trends relating to the Company’s financial results.

For the fiscal year 2011 fourth quarter, our consolidated net sales were $60.9 million compared to $40.0 million in fiscal 2010, an increase of 52% from the prior year quarter. The increase was primarily driven by the incremental sales from the Delphi and Buyers Peak acquisitions and a significant increase in U.S. Navy sonobuoy sales within the current year quarter.

Our gross profit in the fiscal 2011 fourth quarter was $10.4 million compared to $5.5 million in the prior year quarter. The consolidated gross profit percentage in the fourth quarter was 17% in fiscal 2011 compared to 14% in fiscal 2010. The increased margin reflects improved results from the Company’s Complex Systems segment, partially offset by the unfavorable impact of the decreased volume of foreign sonobuoy sales from the Company’s DSS segment.

Restructuring charges were approximately $0.1 million and $2.0 million for the quarters ended June 30, 2011 and 2010, respectively. Additionally, impairments of goodwill and customer relationship intangible assets of $13.2 million and $3.7 million, respectively, were recognized in fiscal 2011 fourth quarter related to the 2006 acquisition of the Company’s Ohio Medical business. These impairment charges are reflective of recent downward trends in volume within the Company’s Ohio reporting unit, including the impact of a customer disengagement and Siemens’ fiscal 2011 fourth quarter notification of its intent to dual source certain programs with us as part of an overall dual sourcing strategy for certain of its critical programs.

Our consolidated fiscal 2011 fourth quarter reported operating loss was $12.3 million with adjusted operating income of $4.5 million compared to reported operating income of $2.3 million with adjusted operating income of $1.1 million in the prior year quarter. The improvement in adjusted operating income is reflective of the impact of the increased revenue and improved margins, partially offset by the increased selling and administrative expenses from the Colorado acquisitions and the increase in internal research and development expenses in the current year quarter.

On a reported basis, the fiscal 2011 fourth quarter includes an $11.6 million tax benefit compared to tax expense of $0.1 million in the prior year quarter. The fiscal 2011 income tax benefit reflects the June 30, 2011 reinstatement of approximately $11.7 million of deferred tax assets, as the Company now believes that it will be able to utilize these tax benefits in future periods.

Our consolidated fiscal 2011 fourth quarter reported net loss was $0.7 million or $0.07 per share with adjusted net income of $2.9 million or $0.28 per share compared to reported net income of $2.1 million or $0.21 per share with adjusted net income of $0.7 million or $0.07 per share in the prior year.

For the full fiscal year ended June 30, 2011, our consolidated fiscal 2011 revenue was $203.4 million, increasing 17% or $29.4 million from the prior year. The overall increase in revenue reflects additional sales in the current year from the acquisitions of Delphi Medical and Byers Peak, and increased U.S. Navy sonobuoy sales from our DSS segment, partially offset by decreased sales from our Complex Systems segment and decreased Medical sales from our Ohio facility.

Our gross profit in fiscal 2011 was $33.2 million compared to $26.6 million in fiscal 2010. The consolidated gross profit percentage for the year ended June 30, 2011 increased to 16% compared to 15% in the prior year. The increased margin reflects improved results from the Company’s Complex Systems segment, partially offset by the unfavorable impact of the decreased volume of foreign sonobuoy sales from the Company’s DSS segment.

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