Sparton Corporation (SPA)

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Sparton Corporation (SPA)

Q3 2012 Earnings Call

November 7, 2012 11:00 AM ET

Executives

Cary Wood – President & CEO

Michael Osborne – SVP, Business Development

Gregory Slome – CFO

Steve Korwin – SVP, Quality & Engineering

Analysts

Steve Shaw – Sidoti

Jimmy Baker – B. Riley & Company

Kevin Casey – Casey Capital

Andrew Shapiro – Lawndale Capital Management

Ross Taylor – Somerset Capital

Jimmy Baker – B. Riley & Company

Presentation

[Presentation session will be updated shortly]

Question-and-Answer Session

Operator

Thank you ladies and gentlemen. (Operator Instructions). Our first question comes from the line of Steve Shaw with Sidoti. Please go ahead.

Steve Shaw – Sidoti

Can you guys provide some color on the (inaudible) loss sales?

Cary Wood

As conveyed, we had a combination of two lots that failed as well as a deferral on expected in the CS Complex segment of our business. Our total combined was right around $5 million total. Of that 3.2 million were domestic (inaudible) and twolots; they were tested in highest (ph) conditions which are outside of the testing specification that has been ordinarily adhered to. We have submitted to the captain on the program, a waiver request and we are highly confident that that will be acknowledged within the second quarter. In the near term, I think it’s important to say that we've already passed one of those two lots in the previous weeks, so it is already included as part of our Q2’s results and the second will either give to waiver granted and the revenue we recognized or we’ll put it back into for testing in the same quarter Q2, and so again, we’re highly confident that those things will be in our Q2 results which will shift obviously not just a revenue but earnings to a strong second quarter than what was originally planned.

Steve Shaw – Sidoti

The Complex customer that delayed the orders, any color on that and was that the same quarter who delayed last quarter?

Cary Wood

No it wasn’t. Last year, without going into customer names, we had a delay which was more than two quarters that ultimately started to ramp up. This is more of a delay with an ongoing customer and we fully expect it will be caught here sooner than later caught up. But no, they are very separate customers.

Operator

Our next question comes from the line of Jimmy Baker with B. Riley & Company. Please go ahead.

Jimmy Baker – B. Riley & Company

So just a follow up there, with regard to the impact on DSS in the quarter from the two lots, if that 3.5 million revenue had been recognized in the first quarter, can you talk about what the benefit would have been to DSS operating income?

Cary Wood

Yes, it’s hard for me to give you that kind of guidance without starting to get into pricing and those types of things but I would generally say that you know full well that our performance on a gross margin basis on that segment has been much more on scale of the 20 to 25%. More times than not being in the lower percentage of the 20s. We saw a significant dip; frankly it’s the lowest gross margin performance of DSS during my period of time here. And it’s more attributable to these two misses than anything. So I think if you were to take this $3.2 million and you were to generally apply similar margins, obviously you would get at least a good understanding of what could and should have dropped.

Jimmy Baker – B. Riley & Company

And I just want to ask a few questions on Onyx, you mentioned 18% gross margin during your fiscal year ’12; can you talk about your EBITDA margin during your fiscal year ’12?

Cary Wood

We’re restricted at this point given the fact that we haven't closed and we’ll obviously be filing all the detailed financials in the coming weeks, so at this point I am fairly restricted Jimmy from what I can talk about EBITDA is among them.

Jimmy Baker – B. Riley & Company

Then maybe you can tell us this, do you intend to book the Onyx revenue in your medical segment or will it be a combination of medical and DSS?

Cary Wood

Right now our expectation is that it will be in the medical segment reporting.

Jimmy Baker – B. Riley & Company

Okay and then can you maybe talk about relative contribution of medical and industrial end markets for that business and then also just where their capacity utilization stands?

Michael Osborne

Well we’re not prepared at this time to give the split on the actual end markets. We’ll follow that up once we close the business. From a capacity utilization standpoint, as of today, they are actually at 100% but they are just finishing off an expansion that will actually double the size of their facility. So very shortly they’ll be in a 50% utilization rate and that expansion was complete well before the process saw in the business based upon their customer interactions as well as their pipeline of opportunities that are coming up fairly quickly. So it’s reflecting what kind of future business they are seeing coming their way.

Jimmy Baker – B. Riley & Company

Is there any integration timeline that we should be kind of be modeling in terms of the realization of cost synergies and can you just….

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