Sparton 2Q FY2016 Sales Up 21%

"The second quarter $0.25 adjusted earnings per share, as compared to $0.27 adjusted earnings per share in the prior year, was the result of continued MDS legacy business revenue challenges. Gross margins for the quarter remained consistent with those of the prior year quarter. Total revenue in the quarter was up 21% from the prior year quarter; legacy business revenues decreased by 5%. Legacy business growth continues to be strong in the ECP segment, up 35% from the prior year, primarily driven by increased sonobuoy sales to foreign governments. In the MDS segment, legacy business revenues decreased by 26% due to fluctuations in customer demand as well as product insourcing," commented Cary Wood, president and CEO. "As disappointing as the results in the MDS segment have been in recent quarters, we continue to see momentum from new business development activities and anticipate 36 new program launches starting the second half of fiscal 2016 and continuing into the following fiscal year and, barring any customer related delays, these new programs could add over $30 million of new revenues in fiscal 2017. Our selling and administrative expenses increased $3.5 million and, as a percent of sales, was 13.9% as compared to 12.6% of sales in the prior year quarter. The increase in selling and administrative expense was due to the selling and administrative expenses of acquired companies, as well as expenses associated with a corporate reorganization, and additional legal, insurance and other costs related to prior periods. In addition to the recently announced closures and consolidations of the Lawrenceville manufacturing facility and the Irvine Design Engineering Center, we continue to evaluate our overhead structure within the MDS segment. These actions will continue to increase the capacity utilization and reduce overhead expense, which will result in increasing our bottom line earnings once restructuring efforts are complete.”

The decrease in legacy business sales was due to declines in overall customer demand, including certain programs going end-of-life, customer insourcing, customer delays and customers managing their working capital to match end-market demands. MDS backlog was approximately $144.4 million at the end of second quarter of fiscal year 2016 compared to $121.2 million at the end of second quarter of fiscal year 2015 and $156.6 million at the end of first quarter of fiscal 2016. Commercial orders, in general, may be rescheduled or canceled without significant penalty, and, as a result, may not be a meaningful measure of future sales. A majority of the second quarter fiscal 2016 MDS backlog is currently expected to be realized in the next 12 months.

Gross profit percentage on MDS sales was negatively affected in the current quarter by increased overhead as a result of decreased volume and a shift in product mix as compared to the second quarter of the prior year. The increase in selling and administrative expense is due to the selling and administrative expenses of acquired businesses, as well as final costs related to a previously settled legal matter.

The increase in amortization of intangible assets is due to the amortization of customer relationships and non-compete agreements acquired in the acquisitions of Hunter Technology Corp. and Real-Time Enterprises Inc. Restructuring charges relate to the previously discussed closing of the company's Lawrenceville, Georgia manufacturing operations and consolidation of its Irvine, California design center into its Irvine, California manufacturing operations.

Previously accrued contingent purchase price consideration related to the Hunter Technology and Real-Time Enterprises acquisitions was reversed in the second quarter of fiscal 2016 based on the company's determination that the required performance thresholds necessary to earn the contingent considerations would not be achieved.

ECP legacy business sales increased $10.1 million as a result of increased sonobuoy sales to foreign governments of $8.5 million, increased engineering revenue of $2.4 million, increased revenue in the Rugged Electronics platform of $1.9 million and increased revenue in the Precision Sensing & Measurements platform of $0.6 million as offset by decreased sonobuoy sales to the U.S. Navy of $3.3 million. Total sales to the U.S. Navy in the second quarters of fiscal years 2016 and 2015 were approximately $22.1 million and $23 million, respectively. For the second quarters of fiscal years 2016 and 2015, sales to the U.S. Navy accounted for 21% and 27%, respectively, of consolidated Company net sales and 54% and 80%, respectively, of ECP segment net sales. ECP backlog was approximately $119.1 million at the end of second quarter of fiscal year 2016 compared to $105.4 million at the end of second quarter of fiscal year 2015. A majority of the second quarter fiscal year 2016 ECP backlog is currently expected to be realized in the next 18 months.

Gross profit percentage on ECP sales was positively affected in the current year quarter by increased volume as well as product mix as compared to the prior year quarter. The increase in selling and administrative expense is due to the acquired selling and administration expenses of Stealth.com as well as professional service expenses associated with governmental audits and compliance.

The increase in amortization of intangible assets is due to the amortization of customer relationships, non-compete agreements, trademarks/tradenames and unpatented technology acquired in the acquisitions of Stealth.com, KEP Marine and IED.

Internal research and development expenses reflect costs incurred for the internal development of technologies for use in navigation, oil and gas exploration and flat panel display technology. These costs include salaries and related expenses, contract labor and consulting costs, materials and the cost of certain research and development specific equipment.

"We are pleased with the progress the ECP segment has made with its increased foreign sonobuoy sales, as well as increased engineering revenue to the U.S. Navy and positive effects related to its acquisition integrations. Although the Company's overall legacy business sales pipeline continues to grow, the revenue softening we have been experiencing in the MDS legacy business is a concern that we are closely monitoring. We continue to work towards minimizing this effect through our new business development activities, which is evidenced by the launch of 36 new programs in the MDS segment over the next few quarters. Customer-facing enhancements have also been identified and will be implemented in the coming months to drive a focused increase in new business wins from our existing customer base within both segments. We continue to drive the earnings performance in the MDS segment by capitalizing on the synergies from our most recent acquisitions as well as other cost savings initiatives taking place across the entire Company including the recent decision to close and consolidate the Lawrenceville manufacturing facility and the Irvine Engineering Center into other existing assets. In the coming quarters, we will continue to monitor the serviceable end-markets and current customers and will determine if any other operational adjustments and control actions are required to mitigate any near-term margin challenges," Wood concluded.