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Spectrum Control, Inc. (NASDAQ:SPEC)

F2Q10 (Qtr End 05/31/10) Earnings Call Transcript

June 23, 2010 4:45 pm ET

Executives

Dick Southworth – President & CEO

John Freeman – SVP & CFO

Analysts

Ted Kuntz – Needham & Company

Fred Buonocore – CJS Securities

Gerard Heffernan – Lord Abbett & Company

Operator

Greetings, ladies and gentlemen, and welcome to Spectrum Control Inc. 2010 second quarter conference call. Representing the Company today, we have Dick Southworth, President and Chief Executive Officer and Jack Freeman, Senior Vice President and Chief Financial Officer.

A discussion of the company’s operating performance for the second quarter ended May 31, 2010 should take about 20 minutes; they will then try to answer as many questions as reasonably possible. We expect to conclude this conference call at approximately 5.30 P.M. Eastern Time.

As a reminder, the following discussion will include certain forward-looking statements, which reflects management’s current views with respect to future market conditions and operating performance. These forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from historical results or those anticipated. These risks and uncertainties are described in detail in the Company’s most recent quarterly and annual SEC filings.

The words “believe,” “expect,” “anticipate,” and similar expressions identify forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements. Such forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of this call.

I would now like to introduce Mr. Dick Southworth, President and Chief Executive Officer of Spectrum Control.

Dick Southworth

Thank you, Kim. Thank you for joining us today and we welcome you to Spectrum Control’s 2010 Second Quarter Conference Call. I will briefly review some of the key operating and financial highlights for the period. After which Jack Freeman will review our financial performance in more detail. We will then be happy to take any questions that you may have after that.

For the second quarter of 2010, we reported net income of $3.3 million or $0.25 per diluted share on sales of $39.7 million. For the comparable period of 2009, we had net income of $2.2 million or $0.18 per share on sales of $33.6 million.

For the first half of 2010, we generated net income of $5.7 million or $0.44 per diluted share on sales of $77.6 million. And for the same period last year, we had net income of $4.4 million or $0.35 per share on sales of $66.7 million.

We are very pleased to report the current quarter financial results and they had exceeded our previous guidance. During the second quarter of 2010, total customer orders received amounted to $45.7 million. That’s an increase of $9.6 million or 27% from the comparable quarter of last year and up 29% from the first quarter of this year.

This record level of customer orders reflects the continued strength of our military and defense business, combined with a partial rebound of our commercial business as general economic conditions continue to improve. With this strong customer order rate, our book-to-bill ratio in the current quarter was 1.15 to 1.00 with all four of our major operating segments generating a positive book-to-bill.

During the current quarter, we also achieved record revenues of $39.7 million, primarily driven by the improvement in our commercial markets and the impact of our acquisition late last year of Micro Networks.

Just as importantly, our operating margins improved significantly during the current quarter, as we leveraged our fixed manufacturing cost over greater sales volume and continued to successfully integrate the operations of Micro Networks into our Microwave Components and Systems business. As a result, our quarterly earnings grew to $0.25 per share. That’s an increase of 39% from the same period last year and up 32% from the first quarter of this year.

With our strong second quarter operating performance and growing demand for virtually all of our product capabilities and custom solutions, we are very optimistic about the remainder of fiscal 2010.

Now these are just some of the highlights and the accomplishments of the second quarter. At this point, I’d like to introduce Jack Freeman, our Chief Financial Officer and ask Jack to review our second quarter results in much greater detail. And when Jack has completed his presentation, I will conclude with some final comments and we will open the floor to questions. Jack?

John Freeman

Thanks, Dick. Our consolidated net sales were $39.7 million in the second quarter of fiscal 2010. That’s an increase of $6.1 million or 18% from the comparable period last year. This increase reflects $3.1 million of Micro Networks product shipments and increased demand for our products used in communications equipments and other commercial applications, as general economic conditions continue to improve.

Excluding the impact of our current period Micro Networks product sales of $3.1 million, sales of our microwave products were relatively comparable to the same quarter of last year.

However, demand remains strong for our Microwave products, which are used in numerous military and defense programs, including applications in secure communications, radar systems and counter measures for improvised explosive devices.

Total customer orders for our Microwave products were $21.7 million in the second quarter of fiscal 2010. That’s up $5.9 million or 37% from a year ago.

Sales of our Advanced Specialty Products were $12.4 million in the current quarter compared to $10.2 million in the second quarter of fiscal 2009, representing an increase of 21%.

Our Advanced Specialty Products were used in numerous industries, including military and defense, medical equipment, instrumentation, industrial controls and communications equipment.

Shipments for our Advanced Specialty Products to customers and virtually all of our key commercial markets were up from a comparable period of last year, reflecting a partial rebound from the global recession.

Sales of our Power Management Systems also increased by over $800,000 or about 40% with sales of $2.9 million in the current quarter. Shipments for these advanced systems were particularly strong in applications for data storage and networking systems.

Sales of our Sensors and Controls amounted to about $5 million in the second quarter of fiscal 2010. That’s down slightly from the same period a year ago.

In the second quarter of 2010, shipments of our custom position sensors were negatively impacted by certain delays in order releases for certain military and defense as well as some commercial aerospace programs.

Total customer orders received in the second quarter of fiscal 2010 were $45.7 million, up $9.6 million or 27% from the $36.1 million received in the second quarter of fiscal 2009.

In addition to the significant increase in demand for our Microwave products, customer orders for our Sensors and Controls amounted to $6.7 million in the current quarter. That’s an increase of $1.9 million or 40% from a year ago.

Overall, our average selling prices remained relatively stable throughout all of our major product lines.

In the second quarter of fiscal 2010, our gross margin was $11.1 million or nearly 28% of sales compared to $8.9 million or 26.6% of sales for the same quarter last year. The increase in gross margin percentage principally reflects improved direct labor efficiencies and changes in sales mix as well as better leveraging of certain fixed overhead costs over greater sales volume.

At the end of the current period, we had a total workforce of just under 1,500 employees. That’s up about 12% from the end of last fiscal year reflecting our additional sales volume and related production requirements.

As always we expect to continuously review our organization and cost structure to enhance our efficiencies while maintaining flexibility for additional production requirements.

During the current quarter, our selling expense amounted to about $3 million or 7.7% of sales compared to $3 million or 8.8% of sales for the same period last year.

The reduction in our selling expense as a percentage of sales primarily reflects changes in sales mix and related decreases to our effective sales commission rate.

Our aggregate general and administrative expenses were $2.9 million in the second quarter of 2010. That compares to $2.5 million in the same period of fiscal 2009.

The growth in our G&A expense primarily reflects increased provision for bad debt expense with greater sales volume, along with higher amortization expense associated with the intangible assets that we acquired as part of our Micro Networks acquisition.

With lower interest rates and reduced bank borrowings, our interest rate decreased during the first half of fiscal 2010 when compared to the same period of last year.

During the six-month period ended May 31st of this year, our weighted average borrowings under our domestic line of credit amounted to about $5 million with a weighted average interest rate of 1.24%.

During the six-month period ended May 31st of last year, our weighted average borrowings under our domestic line of credit were about $6.8 million with an average interest rate of about 2.14%.

For the first six months of fiscal 2010 and 2009, our effective income tax rate was 35.8% and 35.2% respectively compared to an applicable federal and state average statutory income tax rate of about 40%. Differences between our effective tax rate and the statutory tax rates primarily continued to arise from domestic production activities, deductions, state tax provisions as well as foreign income tax rates.

Our net cash provided by operating activities was $6.4 million in the first six months of fiscal 2010. Our positive operating cash flow and our existing cash balances enabled us to repay $6 million of our short-term bank borrowings, as well as fund capital expenditures of $3.5 million during the first half of this year.

At the end of the current second quarter, our ratio of current assets to current liabilities was more than 5 to 1 and our total bank borrowings were down to only $1.5 million in total.

As of May 31 of this year, our total stockholders’ equity was just under $120 million, reflecting a book value of about $9.34 per share. We continue to believe that our strong cash flow and financial position provide a solid foundation for our future growth and for enhanced shareholder value.

Last week on June 18th, we completed the acquisition of Sage Laboratories, which continued our strategic expansion of microwave capabilities and technologies. The total purchase price of the acquisition was approximately $6.5 million, which was substantially funded by borrowings under our domestic line of credit.

Current annualized revenues of Sage Labs products were approximately $12 million. In its first partial quarter, we currently expect Sage Labs product shipments of about $2 million to be included in our third quarter consolidated sales.

With its initial integration into our Microwave Components and Systems Business along with acquisition-related costs of approximately $350,000 that were incurred and charged to expense in the third quarter, we anticipate that the Sage Labs acquisition will not have a significant effect on our third quarter earnings, with the acquisition that will be coming accretive during our fiscal fourth quarter of this year.

Now with that Dick will now make some concluding comments.

Dick Southworth

Thanks, Jack. Based on our projections regarding Sage Labs and our current assessments of overall business conditions and customer demand, we presently anticipate our 2010 third quarter sales to be $42 million to $43 million with earnings of $0.27 per share to $0.28 per share. If this operating performance is achieved, it would represent an increase of 33% to 37% in sales and 69% to 75% in earnings per share from the comparable period of a year ago.

With our positive performance in the first half of 2010, commercial marketplace there continues to show signs of rebounding from the global recession and operating margins that should improve during the second half of the year, as we continue to leverage our fixed operating cost and consolidate our recent acquisitions, we remain very confident about the future of our Company.

And with that, I would like to open the discussion for any questions that you may have.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of Ted Kuntz with Needham & Company. Please proceed with your question.

Ted Kuntz – Needham & Company

Thank you. Good afternoon, Dick and Jack. It was a very nice quarter. You guys are very consistent here.

Dick Southworth

Thank you, Ted.

Ted Kuntz – Needham & Company

Could you talk a little bit about what you’re seeing in terms of current bookings and any thoughts you would have on the booking outlook for the third quarter?

Dick Southworth

And I think your question means where the bookings are so far this quarter?

Ted Kuntz – Needham & Company

Correct. And what your expectations could be?

Dick Southworth

The bookings this quarter are at about the same level of strength as last quarter and we would expect that probably by the end of the quarter that they will be a duplicate of last quarter.

Ted Kuntz – Needham & Company

That’s great because generally your second quarter is your highest and you think this could replicate in the second quarter bookings?

Dick Southworth

We will have an acquisition in there.

Ted Kuntz – Needham & Company

That’s true. That is helping you a bit, right.

John Freeman

We have about nine weeks of that.

Ted Kuntz – Needham & Company

Right. Good point. Okay. But, underlying business looks very healthy to you across all business sectors.

Dick Southworth

Yes. Yes.

Ted Kuntz – Needham & Company

And what about the commercial, could you elaborate a little bit more on that?

Dick Southworth

The commercial markets I would say specifically the communications and the medical are stronger than what we had expected the rebound to bring. And we see that continuing right now. We have nothing to indicate that there would be any regression or softening you get in that area.

Ted Kuntz – Needham & Company

And is your outlook for the Crew program still roughly $14.5 million or so of revenue for this year?

Dick Southworth

Definitely.

Ted Kuntz – Needham & Company

Okay. Then that still looks very doable number to you guys.

Dick Southworth

Yes.

Ted Kuntz – Needham & Company

Is the bookings there in hand yet or where is it? Could you give us a little color on that?

Dick Southworth

Well I don’t have the exact number in the second quarter, but I am going to say our bookings in the second quarter were probably in excess of $5.5 million.

Ted Kuntz – Needham & Company

Okay. Terrific. That was tracking nicely.

Dick Southworth

Yes.

Ted Kuntz – Needham & Company

Jack, a few questions for you. Could you go over a little bit more detail on the Sage Labs acquisition, what are the gross margins in that business and maybe some sense of what the operating expenses are there?

John Freeman

Sure. Historically, their gross margins have been slightly lower than our average gross margins, particularly, within our Microwave Group, but we expect that one of the attractive portions of this acquisition is that we think we bring some real significant benefits from our vertically integrated manufacturing that can reduce their costs so that in a short period of time, meaning that by the beginning of next fiscal year, we would expect their margins to be very comparable to our average margins.

So in the initial quarter, for the third quarter and that partial quarter, the gross margins maybe are there running right now just close to 28% on average. Our expectation for them would be maybe at around the 24% gross margin, but slightly better than that in the fourth quarter and then getting up to our more normal gross margins when all of the cost savings that we can bring to that business start to kick in next year.

So, as we indicated in the news release, as a result of about $350,000 of non-recurring acquisition related expenses that we will charge to expense and charge against our income statement in the third quarter, the impact of Sage in the third quarter should be very, very modest.

We expect it to be very modestly positive, but basically close to a breakeven impact on our operating margins and earnings, but significantly better than that in the fourth quarter when we get a full quarters benefit of shipments and as we start to generate some of those anticipated savings, it will become accretive both in terms of dollars and in terms of operating margin in our fourth quarter. That’s our current expectation.

Ted Kuntz – Needham & Company

Okay. Terrific. Can you give us any sense of what the SG&A is running there for that?

John Freeman

On an incremental basis going forward and once you exclude those non-recurring type acquisition-related costs, their total SG&A costs will be less than 10% of sales on an incremental basis.

Ted Kuntz – Needham & Company

All right. I saw your total number was up a little bit. Your SG&A number were up around 14.9% in the quarter. I know your targets are a little bit lower than that. Any thoughts on where that could trend as a total number?

John Freeman

We would expect it going forward and again, excluding any non-recurring type acquisition-related expenses anywhere between 14.5% and 15% of sales would be within our range of what we expect our SG&A to be going forward in the next couple of quarters.

Ted Kuntz – Needham & Company

Last question was what are you paying for on the debt there? You borrowed 6.5 million to buy it. What’s your interest expense on that?

John Freeman

Currently, it’s a little bit under 1.5% on those borrowings.

Ted Kuntz – Needham & Company

Is it?

John Freeman

That’s it.

Ted Kuntz – Needham & Company

Terrific. (inaudible). Okay. Thanks, guys. Great quarter.

John Freeman

Thank you, Ted.

Operator

Thank you. Our next question comes from Fred Buonocore with CJS Securities. Please proceed with your question.

Fred Buonocore – CJS Securities

Yes, good evening, gentlemen. Nice quarter.

John Freeman

Thanks, Fred.

Dick Southworth

Thanks, Fred.

Fred Buonocore – CJS Securities

Just to clarify backlog, the current level there now, would that be around $76 million or so?

Dick Southworth

You’re saying with Sage or without Sage?

Fred Buonocore – CJS Securities

With and without. And that would lead me to my next question in terms of how much Sage is contributing?

Dick Southworth

Good question. I think you’re pretty close and that would be without any of the transferred or assumed backlog of orders that were acquired with the Sage acquisition.

Fred Buonocore – CJS Securities

So with roughly few million more or you’d be tweaking this?

Dick Southworth

Actually in round numbers, the acquired backlog from Sage would be close to $10 million.

Fred Buonocore – CJS Securities

Okay. And then just on the core backlog and with Sage, can you give us a sense for the breakout of commercial versus military?

Dick Southworth

On the backlog?

Fred Buonocore – CJS Securities

Yes, please.

Dick Southworth

I don’t have that detail here, Fred, but typically it’s about two to one being military to commercial.

Fred Buonocore – CJS Securities

How about with respect to sales, what would that backlog look like in the quarter?

Dick Southworth

The total backlog?

Fred Buonocore – CJS Securities

In terms of sales, what the breakout would be between commercial and military?

Dick Southworth

For Q2.

Fred Buonocore – CJS Securities

Please.

Dick Southworth

Q2 was 57% military and 43% commercial. And that’s improved. Last year, we were up to 64% military because of the overall impact on the commercial markets.

Fred Buonocore – CJS Securities

And ultimately what do you see that balance moving towards more of a 50-50?

Dick Southworth

That’s our objective. With the acquisition that we just picked up, their revenue stream is 85% military and 15% commercial. So as the commercial markets rebound, it will still keep it more heavier military and probably in the 53% to 55% range I would guess.

Fred Buonocore – CJS Securities

Okay. Now with respect to profitability in the quarters, were margins impacted at all by acquisition-related expenses from your Micro Networks acquisition? I know you incurred most of them last quarter, but I think there were some remaining for this quarter.

John Freeman

You are right. In the first quarter the impact on our gross margins was about approximately $575,000. In the second quarter it was down to $125,000 or approximately and so in total it’s had an impact of about $700,000 on our year-to-date margins and that really now is entirely behind us. That impact which related to the markup of the acquired Micro Networks inventory to fair value, that inventory at the time of the acquisition was either in the form of work-in-process or finished goods, those inventories now have been completed, shipped to customers and so that impact now has concluded.

Fred Buonocore – CJS Securities

Right. And you quantified Sage’s impact in Q3. Would there have been any impact in Q2 from Sage or will you see any residual impact in Q4?

John Freeman

There was no impact in Q2 from Sage, and we would not expect at this point in time any residual impact on Q4. The impact and all of the acquisition-related cost, except for some write-up of similar inventories, would build outside of the third quarter. Apart from that, substantially all of those non-recurring acquisition-related costs will have been incurred and will be charged against our operations in the third quarter.

Fred Buonocore – CJS Securities

Now your operating margin has shown some very impressive improvement in this quarter both sequentially and year-over-year and just trying to get a sense it’s certainly running ahead of where we had thought, just trying to get a sense for the second half operating margin relative to Q2 or relative to the first half what we should be thinking about?

John Freeman

As we had indicated earlier this year that we expect with the leveraging of our fixed manufacturing overhead as our sales volume increases and with some of the consolidations that we’re doing in connection with our most recent acquisitions, we expect our gross margin by the fourth quarter to be up in the 28.5% range or in that area and we are well on course for that.

As I had mentioned earlier because of Sage in the third quarter, their gross margins will be a little bit less than what our other gross margins will be. But even with that we would still expect our gross margins to be equal to or show some modest improvement over the Q2 level and then continuing to show improvement and getting close to that 28.5% gross margin in the fourth quarter.

Fred Buonocore – CJS Securities

Got it. So, we see improvement over the 13% in Q2, so we kind of think of 13% plus as our new base?

John Freeman

As we look forward, we expect to be able to build upon that performance in the second quarter. Correct.

Fred Buonocore – CJS Securities

Very good. I’ll jump back in the queue.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Gerry Heffernan with Lord Abbett & Co. Please proceed with your question.

Gerard Heffernan – Lord Abbett & Company

Good afternoon, gentlemen.

Dick Southworth

Hi, Gerry. Good afternoon.

Gerard Heffernan – Lord Abbett & Company

I expect we’re real strong in the quarter. Now, we’ve talked for a long time now. I have a pretty good idea of your products, but I’m going to ask kind of a sharp and dark question here just because such a topic with so many people I’ve spoken to. Jabil Circuit reported today and they indicated they’re still experiencing component shortages. Many of the other electronics manufacturing companies have also say that there is a smattering of components all around that they are experiencing shortages enough. I know that nearly all of your products are specialty type products, but are you benefiting from this at all? Is there anything that people are scrambling for pieces or parts that somehow you are benefiting from and we’re seeing in some additive aspects in your results here?

Dick Southworth

Jerry, this is Dick. Not at all. Everything that we make is custom application-specific and it’s engineered to order. And we don’t get any benefits from the commodity type of products or even the specialties that are outside of our arena. So I guess the real answer to that is not at all.

Gerard Heffernan – Lord Abbett & Company

So what we’re seeing here is just down and middle of the road, core business, these are the results.

Dick Southworth

Yes, straight and strength of our business, yes.

Gerard Heffernan – Lord Abbett & Company

That’s great. Now you made the comment in your press release the partial return of the commercial business. Yet I’d say during the phone call, it seem like your commentary on the commercial business was a little bit stronger than that was wording and am I picking up on something here or am I just misguided?

Dick Southworth

No, I think in reality we had expected, if the initial part of the return in the second half of 2010, and we’ve actually seen a return in the second quarter and we expect that to continue at least at that rate in the second half of the year. So overall, we think our commercial return is going to be stronger and should there be any weakness in the defense market, it will certainly offset that. And if there is not anything in the defense markets, then it will just be additive.

Gerard Heffernan – Lord Abbett & Company

Okay. And in regards to the acquisition of Sage, just want to make sure I am putting pieces of discussion together here properly. You spoke of Sage having gross margins and I am just using round numbers, in the 24 range, we’re currently in 27, pushing 28 here and you see over a two quarter to four quarter period bringing that gross margin up. But I think you also said that kind of off the bat here that the SG&A contribution from Sage will be approximately 10% of the revenue that we bring on?

John Freeman

What I intended to say was that in responding based historically and yes, I guess in total going forward that on an incremental basis we would expect the incremental SG&A from their revenue to be 10% or less. So, I think your statement was correct.

Gerard Heffernan – Lord Abbett & Company

Okay. So even on the initial gross margin level of a 24% plus or minus and a 10% ongoing SG&A, the operating margin of that current business is going to be pretty close on par to what we just reported here, which is a very good period. So that kind of would get us to at the operating income line no dilution or actually even a positive hit from the beginning here. I don’t mean to put you on a spot here, but there should be some pretty good contribution coming from this as this acquisition rolls in over the next four quarters.

John Freeman

That is correct and I guess the only thing I would emphasize again is that you are right that by the fourth quarter when we have a full quarters benefit from Sage and we have the vast majority at least, if not all of the acquisition-related cost behind us and expense during the third quarter that in terms of both absolute dollars and as a percentage of sales they should be accretive to our operating performance starting in the fourth quarter.

Gerard Heffernan – Lord Abbett & Company

Okay. And any idea what the additional goodwill to be booked is going to be from this acquisition?

John Freeman

Have not gone through that calculation yet. In round numbers with the total acquisition price of about $6.5 million and tangible net assets of about $3.5 million to $4 million, there’s going to be about $2.5 million of goodwill and identifiable intangible assets, and at this point I can’t break it down any further than that.

Gerard Heffernan – Lord Abbett & Company

Okay. Not to sound greedy, but I guess I am supposed to be just part of my peer group here. What’s the prognosis for additional acquisitions?

Dick Southworth

Gerry, we’re very active. It becomes almost our weekly routine in talking, reviewing and pulling over the opportunities. I guess maybe the only way to categorize it. I’m not ready to close on yet, but we’ll probably be disappointed if we don’t have one at least by the end of the year or the early part of 2011.

John Freeman

And to maybe supplement that a little bit, even with the Sage acquisition and some borrowings to fund that, we still have approximately $30 million of borrowing capability under our domestic line of credit and we’re in the process of renegotiating that line of credit and believe that shortly before the end of the year we’ll have even additional borrowing capability under that facility.

Gerard Heffernan – Lord Abbett & Company

If you renegotiate that at a rate any better I think you’d be paying less than the U.S. government (inaudible). Okay, guys. Thank you very much.

Dick Southworth

Thank you.

John Freeman

Thank you.

Operator

Thank you. Our next question is a follow-up from Ted Kuntz with Needham & Company. Please proceed with your question.

Ted Kuntz – Needham & Company

Just two quick ones. One, the estimate you gave for earnings for the quarter, does that include this non-recurring expense or not?

John Freeman

Yes, it does.

Ted Kuntz – Needham & Company

It includes that?

John Freeman

Yes.

Ted Kuntz – Needham & Company

That’s probably a penny or two?

Dick Southworth

Pretty close.

John Freeman

Pretty close, right.

Ted Kuntz – Needham & Company

You mentioned that data storage and networking business being very strong. It was strong in the first quarter as well. Can you comment a little more on that, what’s happening there and any particular end markets that you’re hitting particularly or particular customers that are driving that?

John Freeman

Ted, I don’t want to get into the particular customers at all. But I would say the customers that we are working with are ones that are experienced in the growth in that marketplace.

Ted Kuntz – Needham & Company

It just looks like it’s just going to continue to be strong, because it has been –?

John Freeman

The orders are continuing to be strong.

Ted Kuntz – Needham & Company

Okay. Just trying to get a little bit more color on that particular area. And last one, Dick, probably for you, where there any kind of large potential activity, large programs out there that you’re looking at other than the Crew program I know which is your probably your biggest though. Are there other large potential programs out there that the military is looking at that you could be involved in?

Dick Southworth

We’re just involved in so many –

Ted Kuntz – Needham & Company

I know that. That’s true.

Dick Southworth

Various levels and we are now heavily involved in the LAMPS and the different programs in that marketplace. So I would say none that we would want to specifically point out, but just great programs that we’re in and real diversity of customers on those programs and we really haven’t seen any pointed weakness in any one area.

Ted Kuntz – Needham & Company

So would you say, your business is becoming more diverse, broader number of programs?

Dick Southworth

Yes, definitely.

Ted Kuntz – Needham & Company

Or less?

Dick Southworth

And it is with every acquisition.

Ted Kuntz – Needham & Company

Probably that’s true. The acquisitions help you do that.

Dick Southworth

Yes, very much so.

Ted Kuntz – Needham & Company

Are the customers of Sage’s very similar? I assume they are very similar to what you’ve (inaudible).

Dick Southworth

Very similar to ours and with the integration of Sage, we still have no customers that are greater than 10%, any one customer.

Ted Kuntz – Needham & Company

And is this all new product capability that you have with them?

Dick Southworth

Pretty much. The greatest focus and one of the main reasons why we were so interrupted in Sage is, it now brings us into a whole family of digital frequency discriminators, whole new line of passive components, and in the technologies for suspended substrates, which we tried to dabble in, but we didn’t have that overall capability that brings it to us.

Ted Kuntz – Needham & Company

Terrific. Thanks very much.

Dick Southworth

Sure.

Operator

Thank you. Our next question is a follow-up from Fred Buonocore from CJS. Please proceed with your question.

Fred Buonocore – CJS Securities

Yes, just wanted to quickly ask about capacity utilization and what kind of capacity you are looking at across your various facilities at this point?

Dick Southworth

Fred, I can tell you, it’s not that we aren’t at capacity in some of our vertical integration, but we keep adding equipment, but I would have to say overall as a company, across all of our facilities, we are probably running at 50%. We have a lot of growth opportunity.

Fred Buonocore – CJS Securities

Absolutely. What about average selling prices, what kind of trends are you seeing there?

Dick Southworth

Flat. We don’t see any changes. We never experienced changes in selling prices. If anything, there are increases in the years to come.

John Freeman

Because of the custom nature of our products, we historically don’t see any price erosion.

Fred Buonocore – CJS Securities

Very good. That’s helpful. Thanks.

Operator

Thank you. Ladies and gentlemen, at this time there are no further questions. I would like to turn the floor back to management for any closing comments.

Dick Southworth

Well, we thank all of you for joining us today and with that we’ll terminate the conference call. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Spectrum Control, Inc. F2Q10 (Qtr End 05/31/10) Earnings Call Transcript
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