Sparton Corporation (SPA)

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Sparton Corporation (SPA)

F4Q12 Earnings Call

September 6, 2012 11:00 am ET

Executives

Cary B. Wood – President and Chief Executive Officer

Gregory A. Slome – Senior Vice President and Chief Financial Officer

Michael W. Osborne – Senior Vice President - Corporate Development

Analysts

Steve Shaw – Sidoti & Company

Richard Whitman – Benchmark Capital

Jimmy Baker – B. Riley & Co.

Andrew E. Shapiro – Lawndale Capital Management

Ross Taylor – Somerset Capital Management

John Rolfe – Argand Capital Advisors LLC

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 Steve Shaw with Sidoti & Company. Please proceed with your question.

Steve Shaw – Sidoti & Company

Hi, guys. Regarding the product mix as a whole for the quarter and the gross margin, was that sort of a perfect storm or is that you guys capable of continuing that in 2013?

Cary B. Wood

Well, you can’t look at any one quarter in isolation. I preferred to look at the year in totality. We had a shift in the timing of certain sonobuoy deliveries in the fourth quarter and we saw that same pattern last year. That certainly strengthened our fourth quarter. But we also started to see the ramp up of new business opportunities within our Complex Systems that that we had previously been discussing had been delayed, and they started to ramp up in quantities that we were hoping for much earlier, so that certainly helped there.

And I would say that the progress of Sparton medical systems business segment has continued to show quarter-over-quarter performance as we had expected. So, hard pressed to call it a perfect storm, if you stand back and look at it on a year-over-year basis, I wouldn’t discounted as an anomaly. I think generally speaking there is a buying pattern that seems to influence the back half of the year, particularly the fourth quarter and we saw that once again this years, and frankly we expect to see very similar results next year.

Steve Shaw – Sidoti & Company

Okay. And then I guess what’s the latest on the Complex Systems, what’s the plan for that?

Cary B. Wood

Well, we talked about it for two years and starting back in the late ‘09, early ‘10 timeframe, we put it on basically an eight quarter recovery path and our end metric was the double-digit gross margins improvements in working capital, positive cash flow and new business opportunities and a funnel that also suggested that it had a promising future and I think using that barometer, every bit of what we’ve asked for out of it, setting aside quarter over quarter consistency has started to materialize.

I think it’s time for us to now view our thoughts of divesting any time soon as being probably chatter of the past. A lot of our deal flow appears to be very complementary to that business. I would discounted from being a simple EMS type of low-end commodity circuit card business and we’ve migrated away from that substantially and acquisition targets would advance that further. So, we’re not giving you a direct answer on what a future looks to become I think it’s more promising even this quarter compared to where it was last quarter.

Steve Shaw – Sidoti & Company

Okay. And then Cary, what was the total decline in the Siemens order was that right around $13 million for the year, the exact number for the year?

Gregory A. Slome

In the fourth quarter it went down $4.2 million and for the year we’re right around $13 million.

Cary B. Wood

So it was just pretty much as expected other than we saw strengths in some other orders and business that will continue with us. So, it was probably right as expected maybe slightly softer.

Steve Shaw – Sidoti & Company

Okay. And the decrease in sonobuoy sales in the fourth quarter that was primarily domestic?

Cary B. Wood

Yeah, and that was also if you remember back Steve, we gave that outlook as early as this time last year.

Steve Shaw – Sidoti & Company

Right.

Cary B. Wood

We expected there would be a trade up for foreign sonobuoys from domestic and that’s exactly what we saw.

Steve Shaw – Sidoti & Company

Okay. All right, thanks guys.

Cary B. Wood

Sure, thanks Steve.

Operator

Our next question comes from the line of Richard Whitman with Benchmark Capital. Please proceed.

Richard Whitman – Benchmark Capital

Cary, your cash position obviously is outsized relative to your market cap and understands your comments about the uncertain environment out there. But clearly your cash position would buffet you against almost anything. So given the fact that you’re not utilizing that in terms of returning the capital, can we infer for that that there are opportunities you see out there to deploy that cash over the near to intermediate term?

Cary B. Wood

Yeah, with that question first I appreciate the perspective and we agree with it frankly, and that’s shared by the board as well. We have not recently reauthorized any kind of action in the form of either a dividend or buyback any (inaudible) and certainly have any insight perspective of all our activity. I think that’s the right decision for now, and I think that’s exactly what you can infer is that we didn’t do a deal over the last 12 months. This company is experienced and didn’t have some success with it. And we’re very cognizant of what our internal average cost of capital is and how we would best deploy it and we’re certainly cognizant of the risks associated with M&A.

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