Sparton' CEO Discusses F4Q12 Results - Earnings Call Transcript

| About: Sparton Corporation (SPA)

Sparton Corporation (NYSE: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

[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.

I think generally speaking, we feel like that would be the better place to deploy capital in the near-term. And it certainly wouldn’t preclude a discussion somewhere down the road if they didn’t happen sooner than later. That might otherwise authorize other actions i.e. dividend and/or buyback, long answer to your question, but your description is spot on.

Richard Whitman – Benchmark Capital

Okay. Thank you.

Cary B. Wood

Sure.

Operator

Our next question comes from the line of Andrew Shapiro with Lawndale Capital Management. Please proceed.

Andrew E. Shapiro – Lawndale Capital Management

Hi, thank you. A few follow-ups to Mr. Shaw’s initial question, and I have a few of my own here and I’ll jump back out in the queue. First half, when we talked about the Siemens, you also mentioned in the 10-K of expected continued adverse impact on the Ohio facilities. I’m sure it’s kept capacity utilization from the Siemens dual sourcing plan? I’m trying to get a handle, when does the impact of the Siemens dual sourcing anniversary itself, and then from that point just being out of the utilization (inaudible)?

Cary B. Wood

Great question, it’s a very – that’s a very meaty question, Andrew. First, I’d say I’ll tackle the timing issues first. That started to ramp up if you remember more towards the end of first quarter into the second quarter of last year’s calendar year. So, we’ve seen 2.5 quarters of impact and we certain saw $4 million of its leave us in our fourth quarter of this year. So, substantial amounts in the second half. So, I think we’re coming up on one year anniversary.

The deficit of capacity impact in Strongsville is being buffered and I’ve been really proud of it. We put some very strong leadership down there, and it is resulted in very positive and encouraging trends with new customer visits, with opportunities to quote new business. So, setting aside what we expect in future attrition from Siemens, we continue to be optimistic about our ability to whether that as we did this year. And we’re certainly pleased with the $20 million of growth this year net of the impact of Siemens otherwise this would have been an even stronger year.

So, I appreciate the question. I think we expect there to be some further softening. I can’t sit here and give you the exact quantity. But I don’t know by the time were finished with this that Siemens is not in consequential customer 12 to 18 months out.

Andrew E. Shapiro – Lawndale Capital Management

Yeah.

Cary B. Wood

But I’m also very pleased and optimistic with the trends we’re seeing down as strongest, when I don’t think the capacity utilization 12 and 18 months, how that’s going to be in Asia.

Andrew E. Shapiro – Lawndale Capital Management

Okay. Siemens has any RFPs for any new programs and have you participated in those proposals? Is there any evidence of the continuation of the relationship such as new programs or increased orders on existing programs?

Cary B. Wood

We have seen increased orders on existing program, which I was pleased to say. The relationship we have with them continues. It is not a bad relationship. It continues to be a favorable relationship. We have not as of recent have been involved in new product RFPs. But that’s not for lack of being involved in discussions.

Andrew E. Shapiro – Lawndale Capital Management

Okay. Further in medical on large customer is also Fenwal discussed on last conference call. In July, they were bought by presently if I pronounce it right at…

Cary B. Wood

Yes.

Andrew E. Shapiro – Lawndale Capital Management

Have you met with them and discussed current future business, do you currently do any business with Fresenius and how do they currently outsource with or do they have large internal manufacturing that they’re not outsourcing?

Cary B. Wood

Good question, as soon as that acquisition was made public, we certainly were in dialogue with Fenwal. As you probably are aware for Fresenius is a European based company. They do not have as we’re aware any real domestic U.S. presence outside of this acquisition. I think it presents an opportunity as opposed to a concern, but we cognizant that there has been a change.

I would say that our trend with Fenwal has been far exceedingly more positive then not in a last 12 to 18 months. But I don’t want to stand here and announce things that we’ve done with them openly, but I would say that our business relationship is very strong. I would say that a recent goes it along with them in Asia was very positive. And the opportunities to in source more of what they otherwise have proliferated across a variety of other supplier is a good thing for us in an opportunity.

We will have to eventually and we made a trip to Europe about this time last year with our business development leads to meet with the handful of customers, but Fresenius will now be somebody that will spend a little more time directly discussing and briefing them on how we do business today with Fenwal, what value proposition we can further provide them that Michael beyond just a Fenwal engagement and make its way through for Fresenius. We’re look at a more optimistically than skeptically.

Andrew E. Shapiro – Lawndale Capital Management

Okay. And just a follow-up and I’ll back out in the question queue. You mentioned about medical, this medical as well as maybe other medical out of Asia, your press release are mentioned that the Vietnam facility recently became FDA approved on medical. Can you give us a hand on when that is and during the fourth quarter, where there some inter company sales in the Complex Systems through Vietnam that involved medical in Q4 or is that something that is Q1 or even further down the road?

Cary B. Wood

There were some sales in Q4 associated with Sparton medical that was in Vietnam. It has been for a number of quarters to avail and advance that facility beyond its previous capability to include medical, and it was certified recently by the FDA to produce and manufacture certain medical products. And we are in the midst of transferring certain key accounts there that make sense. We are expanding current customer accounts that were not engaged with today that would include ramp up in Asia and we’ll have a number of products there that are full medical devices, not just low-end circuit cards or medical related harnesses there will be full devices.

And I think that that’s going to give us as we see it strategic inroads into regional end markets and customers and OEs that might not otherwise know that we are as capable as we assume going to be in Asia. So I think every bit of what you discussed and what I just give additional color to is more positive than that, but I would say that the material impact on our performances has only begun and certainly was only saw, but negligibly in our fourth quarter.

Andrew E. Shapiro – Lawndale Capital Management

So when was that FDA approval granted? Was it during the fourth quarter, before, or subsequent?

Cary B. Wood

It was recently issued in Q1 of this year.

Andrew E. Shapiro – Lawndale Capital Management

Okay.

Cary B. Wood

So you are talking the last 75 days.

Andrew E. Shapiro – Lawndale Capital Management

Okay. And when you do the inter company sales of medical through Vietnam that comes at the medical margin into complex systems?

Cary B. Wood

It is in the complex systems today. Correct.

Andrew E. Shapiro – Lawndale Capital Management

Okay. But the medical margins were in the past all of the margins that we assumed on intercompany sales were at even higher...

Cary B. Wood

Correct.

Andrew E. Shapiro – Lawndale Capital Management

Defense margins. So of the Q4 intercompany sales that obviously flow through complex systems, how much of that was through the medical in the medical margin?

Cary B. Wood

Again very negligible.

Andrew E. Shapiro – Lawndale Capital Management

Okay. I will back out. I have more questions, please come back to us if you got time.

Cary B. Wood

Sure, absolutely.

Operator

(Operator Instructions) And our next question comes from the line of Jimmy Baker. Please proceed with your question with B. Riley & Co.

Jimmy Baker – B. Riley & Co.

Hi, good morning. Great quarter.

Cary B. Wood

Thanks, Jim.

Jimmy Baker – B. Riley & Co.

At complex systems, can you offer us some insight as to maybe where you are running at today in terms of capacity utilization, and you’ve highlighted that you intend to increase utilization, i.e. you are seeing increased demand during FY13, so just kind of any color you could offer us in terms of where you see utilization going in 15?

Unidentified Company Representative

Yeah. I think it’s probably prudent to give a bit of a history lesson on that. As you recall we had a number of facilities that we had to close and consolidate down to the two that we now have one domestically outside Tampa, the second being at Vietnam. And I would say even of those two combined, we are still roughly targeting around 50%, one location higher than the other, but I want to spend a lot of time going through that split.

I do think and have been very, very pleased with the speed of what we are doing in Vietnam, and I think the certification to FDA is only going to further advance that. And so I would suggest that there is a ways to go in that business and absorption is a key element of that segment’s performance and has been and was obviously demonstrated in our Q4. So I think we go into our New Year with some level of optimism, but we do have a good amount of capacity still yet to backfill in that segment.

Jimmy Baker – B. Riley & Co.

Okay, that’s helpful. And maybe if I can give Greg a chance to talk, I just have a couple of questions here regarding the kind of the dynamics of inflows related to advanced billings…

Cary B. Wood

Sure.

Jimmy Baker – B. Riley & Co.

I mean, at first can you remind us if that’s exclusively for DSS? And then second, I think historically that liability has peaked in the September quarter and worked off through the balance of the year, but is there a little bit of a timing variance that work here, or how should we interpret the $6.2 million increase this quarter?

Cary B. Wood

Yeah. It is all about timing on that and it does fluctuate. You are correct, it typically in the past has picked up usually in the first quarter. We had a little bit of acceleration on some of the billings on the contracts that actually were build and actually the cash received a little bit in advance of what we had originally planned and they came in Q4. So clearly, you can see the big up-tick in the liability that we have related to the advanced billings as well. But typically, you are correct, first quarter is typically when they come in, we did have a little bit of acceleration this year, which cause the cash to jump up. At the end of the year and you are correct, it is all related to the DSS in the U.S. Navy

Jimmy Baker – B. Riley & Co.

Okay. And then just a follow-on to that, should I assume that your free cash flow then might lag net income for full-year fiscal year 2013 then?

Gregory A. Slome

Well, ultimately as we get into fiscal year 2013 with all the DSS advances coming in, we will need to ultimately work off that production, so yes.

Jimmy Baker – B. Riley & Co.

Okay, all right. That’s helpful. And lastly, and I will back out, your outlook that, second half will be stronger than the front half. Are you just kind of referring your typical seasonality, or are you actually suggesting that on a year-over-year growth basis that second half will be stronger?

Cary B. Wood

There is a couple of ways to slice that. First, generally speaking, we are optimistic that our year-over-year performance will be better in fiscal 2013, both at the top and bottom as we’ve seen in the last two years. I do think that is a degree of cyclicality, and I am reluctant to use seasonality, but I think frankly it’s a buying kind of pattern that influences our third and fourth quarter particularly with U.S. government-related engagements and a lot of what we do in sonobuoy, while all of what we do in sonobuoy who is government-related, and it’s a big portion of our overall revenue.

So I certainly expect that influence to continue in the third and fourth quarter, but I also suggest that there are some other pieces that at work too. We are optimistic around deal flow. And obviously, we don’t have anything to announce as we sit here today. But I would suspect that those types of things would layer in more in a third and fourth quarter than they would in the first or second even.

But I would say that there are, our final element is that, our business development effort that I continuously reference is no small deal. And that our backlog and our new opportunities and our close rates and our costs for prospecting all of those metrics are showing good momentum. So if we can close faster, or if we can ramp up as quick as I hope, I think we’ve got a really good second half expected.

Jimmy Baker – B. Riley & Co.

Okay, great. Well, I appreciate the color and the time. Thanks, guys.

Cary B. Wood

Thanks, Jim.

Operator

Our next question comes from the line of Ross Taylor with Somerset Capital. Please proceed.

Ross Taylor – Somerset Capital Management

Thank you, great quarter.

Cary B. Wood

Thanks, Ross.

Ross Taylor – Somerset Capital Management

And most of the questions I would have asked have been asked, but there are few that I would like to kind of go further in-depth on. First, you had 15% margins in medical, yet we are talking about Strongsville being substantially underutilized. In your answer to I believe Andrew’s question, you talked about getting that utilization up substantially to where we wouldn’t consider it underutilized over a foreseeable time horizon. Can you talk about both what that will do to overall medical margins when Strongsville is operating at a fuller level of capacity, and what it would do on the EBITDA side of things?

Gregory A. Slome

Well, first to be fair to the business and certainly the credit, the leadership in Strongsville, I mean they’ve extracted every bit of variable related cost as they could when there was a downturn in volume. And they did a nice job last year of managing that while we’ve ramped up new business and absorbed the offsets from the Siemens losses.

Now, we have a line of sight on exactly what our capacity utilization is, last quarter, up coming quarter, the next several quarters. We triangulate that back as best we can with the probability analysis we put to new business opportunities, and we project what we think the full year’s revenue stream will look like in the combined medical, but also specifically in Strongsville. A considerable portion of our overall COGS are tied to overhead. And obviously it should go without saying that with every bit of opportunities that layer in that facility without adding additional fixed costs, which that is the case predominately. You will start to see absorption, not to mentioned I think that we won’t add back some of the cost that we recently extracted, that hopefully on a variable basis we can more efficient as well.

So, a bit of a broad answer to question specific, I think we were optimistic around the next several quarter, the next full year and in think by the time you line up all the various moving part, so that facility will be a lesser concern on capacity utilization and that is a low point that it shown for the last several quarters.

Ross Taylor – Somerset Capital Management

If we look out a couple of years, is an 18% margin in medical achievable, is it 16.5%, 20% and when you’re looking at something just ballpark, but I’m trying to build a model of Strongsville, and they have done an excellent job and then in fact the whole medical space have done a great job over coming the hit fro Siemens to the point where in reality we don’t see it if we didn’t know it was gone.

Cary B. Wood

Right.

Ross Taylor – Somerset Capital Management

But what kind of margin should we be looking at as a benchmark the whole that you guys against for execution?

Cary B. Wood

Yeah, it’s a fair question. We’re going to maintain our guidance in the near-term. And obviously what that band is you cited it, and well our performance has been squarely in the middle of it. It has ebbed and flowed up and down. We do have a good amount of things that are unfolding that could cause us to revisit our guidance at a different time. But we don’t want to do that prematurely.

We’re going to make sure that that anything we do with making the way of guidance change is sustainable, and as it sets right now that the deal flow does includes some medical opportunities that could includes margin certainly if we would have consider how to utilize a combined number of assets. I mean there is a lot of moving parts there Ross, and I think generally speaking we’re going to maintain guidance for today, and it could be that we revisit that in the next several quarters.

Ross Taylor – Somerset Capital Management

Okay. And away from that in the defense space, we’ve seen a number of developments in the last few months really since your last call we’ve seen significant Chinese activity in the islands and in the Pacific Rim, where they’re kind of challenging U.S. allies. We’re seeing the Russians put in the queue about in the Gulf of Mexico for a month, which actually quite honestly is shocking then to sales around for a month and we don’t know what’s there.

You’re seeing Venezuela and talk about acquiring both from the Russia. And looking at all of the situation, we’re looking the situation where we’re seeing a fundamental of shift to where those are great going to be a greater need going forward, I mean antisubmarine warfare has taken in many ways of backseat since the fall of the Soviet Union, the sonobuoy consumption is down substantially from where it was when during the Cold War and the like. We would looking at something we’re in the next five years we should see an increase in just physical consumption to sonobuoy, because of these global geopolitical factors.

Cary B. Wood

Well, as I sit here today, I can’t announce a hard revision to outlook on volume, I can’t tell you that in all seriousness, we are very closely tied to constant dialogue with the certain personal of the Department of Defense, our purchasing officers in region that we negotiate our contracts through. I would say every bit of what you refer to is on the agenda and discussed openly, and I think we’re pretty comfortable with the product that we provide, the relationship we have, and that we’re firmly a part of future discussions. It’s nice to be the only U.S. guy. It’s nice to have all the in-roads through certain levels of clearance with the individuals that across the company have it.

And well I can’t speculate is to what the political economic environments going to be as a result of which you’ve described. I can’t tell you that the outlook on volume is intended to be up if you were to believe the DoD guidance. And it’s not up in any small way; it’s up in significant way. Now that’s also affected by the dynamics of the change from low altitude to high altitude. And how it is that they might for a period of time coexist, which is going to how you providing high altitude and low altitude sonobuoy to two different flying fleets.

I think the investment thesis looking forward is that the low altitude aircraft will make their way abroad to other foreign NATO countries, which could create additional end markets to buy foreign sonobuoy sales from where we are today. So I think there’s a lot there to be very optimistic, and as much as this is a difficult market to grow in, we been able to show growth of last several years, and we are optimistic about what 2014, 2015 and beyond looks to be.

Ross Taylor – Somerset Capital Management

Okay. And we would agree with you and that’s actually nice to see the stock finally trading at price roughly equal to what we’re told by people the ASW business itself is worth. That being said, I would also like to say we understand your thought process on the buyback, the board’s thought process that as you’ve talked in the past, we’d like to say, we do not see the buyback as an exclusionary set, and in fact believe that if the company were to devote simply it’s free cash flow expected free cash flow over the next couple of years. To a buyback that would both be substantial and would return substantial dividends to shareholders and we would be look at the company be able to generate $12 million, $14 million in free cash flow over the next two years potentially before an acquisition.

You’ve got such a strong balance sheet, you could easily fund an acquisition today that would for all intents and purposes double the size of the business without having to take on much more depth been about three times, EBITDA at the current level. So we actually we’d love to see at least some of the free cash flow return to shareholders, we think we’d help liquidity in the stock, we think we’re driving more investors, and we think long run it would create a substantially higher stock price for us should someone come knocking on the door?

Cary B. Wood

Yeah, every bit of what you said Ross, is not something that I can fundamentally disagree with, I think there’s just a variety of perspectives and timing by which you look at those things. I think first and foremost, we’re well aware of our cash circumstances. We’ve had very active widely regular discussions around how to deploy it, I would say that there are a variety of thoughts and school of thought around effects that would have on either the flow to liquidity and what the end price might look to be. I think frankly right now with the lack of a recent authorization in a buyback to view is that would be somewhat disingenuous to initiated by back with the idea being that we could just turn round and turn it off.

And I’d just didn’t feel right, and I think generally speaking it is a board and a management team that is significantly aware that it has a fiduciary obligation to run a public company in every aspect. And certainly the disingenuous nature of authorizing a buyback with what might be alternative use in a matter of months or weeks just didn’t feel right to us.

So we backed away from it for those reasons, but certainly something that’s on a regular discussion agenda item to discuss on the agenda, and we’ll revisit it. I think every bit of what you said is correct, the modeling that we’ve done on forward-looking opportunities that we could acquire, certainly has as well below three times combined EBITDA levers, I mean every bit of what you said we agree with, I think it’s more a matter of let sit tight for a period of time and reevaluate.

Ross Taylor – Somerset Capital Management

Okay. And we appreciate your buyback earlier this fiscal year, but we would – I’ll be quite on this until the next quarter, but I give you three more months, but there is a point in time in where you go from waiting for an acquisition to waiting for a good deal. And I don’t think we want to fall into that trap and we have so much cash in the balance sheet and honestly an asset that’s worked substantially more than it’s currently trading at. And the concern that I have had his conversation is that, the ASW business in particular, the other businesses are so attractive to larger players that the risk we run is that, while we are waiting to do a deal, someone comes in and puts the squeeze on us and gets the company for substantially less than its worth.

Cary B. Wood

True. Ross, I expected you to come out of your shoes today over the cash issue. I think we were concerned about it to be honest with you. In fact just as you said I think it is a fair evaluation to sit and let’s have a discussion in another quarter or two and open up the environments with what is going on with our cash and I think that’s the right thing for the near term but certainly appreciate exactly where you’re coming from.

Ross Taylor – Somerset Capital Management

Great; and I’m (inaudible) predictable.

Cary B. Wood

Thanks, Ross.

Ross Taylor – Somerset Capital Management

Thank you.

Operator

And our next question comes from the line of John Rolfe with Argand Capital. Please proceed with your question.

John Rolfe – Argand Capital Advisors LLC

Hi guys, a few questions for you. You addressed the guidance and margin issue, specifically with request to the medical segment earlier. If I could just re-ask the question with respect to complex systems, on a trailing 12 month basis now for the last five quarters, you guys have either been at or above that what I think was the last guided range of 7% to 10% gross margins.

Cary B. Wood

Right.

John Rolfe – Argand Capital Advisors LLC

I’m not asking you to update the guidance today, but I mean how should I be thinking about the mix of business. What you guys have done to move up the value chain, there is sustainable and kind of directionally again understanding that there is variability on a quarter-to-quarter basis around the gross margin. We’ve obviously seen a really consistent trend there in an upwards direction and to what extent is that sustainable and how should I be thinking about that going forward.

Cary B. Wood

Yeah, a lot there and I appreciate the question, John. I would say first that we are not prepared to make any changes in guidance in the near term and again I don’t want to make a guidance change and then have to discuss it in another 45, 90 days because of other dynamics and so the decision has been for now that we will maintain the guidance. We are very aware of how we finish the year on a consolidated basis compared to that guidance band. And we are certainly pleased to have outperformed it, but it certainly leaves us with the dilemmas do we change it?

We’ve upwardly revised our guidance not just within complex, but across the other segments twice in the last several years. And our view is that, it is as important to stay within it every single quarter as it is over the course of the full year. And our credibility is at stake here and that’s important to us.

And I think there have been quarterly anomalies particularly within complex that were tied to customer expectations and ramp ups and volume scenarios that didn’t materialize early last year that were frustrating to us. And I didn’t want to spend as much time explaining why I missed the band, as I spent last, first and second quarter about why customer ramp-ups didn’t happen as expected. So we are going to stay away from making any kind of guidance change on complex.

Now that said, and I think I’ve said earlier in our conversations, I’m very pleased with the progress. We’ve got a very strong leadership team down there that has turned that business around in the last 18 months. There is a ways to go and there is a better way and an endgame to deploy the assets that we do have. I think there is an expanded value proposition within that segment that we haven’t fully started to penetrate. I think its somewhat depending upon acquisition opportunities to accelerate that type of offering.

All of that is a part of our strategy, it’s a part of our M&A filtering and I think we are hard at work it. And it could very well be that over the course of the next several quarters, an acquisition, a new customer engagement, ramp-up of what we previously expected in larger ways than expected or not. But I think we are very optimistic around it and I leave the guidance at that.

John Rolfe – Argand Capital Advisors LLC

Okay. Let me ask one another question in regard to that, and then I will let it go. Just qualitatively in that segment, are you guys seeing increased sort of pricing or bidding pressure that would have an adverse impact on the margin in the near to medium term.

Cary B. Wood

We are very careful around how we get engaged with pricing or quote responses. We introduced some system sometime ago that institutionalize and standardize practices around how we quote, how we review pricing, how aggressive we get, certain minimum thresholds all of that.

Now that’d would be because of other pressures, whether it would because the industry has excess capacity or there are some alternatives out there, that don’t have to expand the kind of operating performance we do, whether it would delivery fill rate quality that people have chosen to go to that may offer a discount on performance, such we’re not in the business trying to match that. We are a high performing value proposition that is looking to expand that offering and we have very competitive pricing as a result of it, but we are probably not the cheapest guy in the block and don’t ever plan too big, given what we provide as an end result.

All of that said, I think it does have us waiting through a good amount of business opportunities and engaging with those that makes sense for us and them both, which I don’t know that I must concerned about pressures of the market in general as I am our own standards that keep us from getting engaged with every customer opportunity that comes along.

So we’ve been very careful about the guidance we’ve given on our top line growth, we’ve done that for a reason. They are contemporaries out there that are growing in a much higher percentage, and we never that here, I feel really good about how we finish as the consolidated company.

We show strength in every segment, we certainly saw strength in medical and we are moving all of those types of practices over to complex as well as helping out on (inaudible), but I would say that the deal flow on the organic side, we continue to be optimistic around, but our guidance on growth is fairly conservative and we said it openly before 3% to 5%, and we are comfortable with that.

John Rolfe – Argand Capital Advisors LLC

Okay, two other just quick questions, it look like on a consolidated GAAP basis you had about a 35% of reported tax rate, for the fiscal year, is that sort of a reasonable proxy to use going forward directionally is that going to be heading either up or down and any kind of maturity or manner and then secondly just any thoughts on sort of a CapEx expectations for the coming fiscal year.

Cary B. Wood

Right and the as far as the effective tax rate if you remember last year we were right around the 36% rate it came down a bit this year. We’ve got a little bit benefit out of Vietnam that brought the rate down somewhat. We are always looking for opportunities to ultimately try to reduce the rate. At this point if you’re trying to model out for next year, I would probably keep it pretty consistent with the 35%.

Gregory A. Slome

Okay, great. And then in terms of CapEx, we’re going to maintain our level of commitment on capital expenditures going into next year. Our full calendar year saw ending in December, we’ll probably bring to a close most of our ERP related investments which made up a substantial portion of the last two years CapEx commitments.

We’ll now shift what will come out of our overall CapEx budget that was previously allocated to ERP implementation, over to productivity investments. And that’s presence an opportunity, whereas in the last three years, we could have thrown 4% or 5% at this company, in a way that CapEx given how far behind it was in certain pieces of equipment and updates. We chose to allocate it more near term to the ERP and be careful about how we managed our cash and invested but we’ll stay right around that 1.9% to 2% into next year as well.

In the future that may change but I would also tell you that if you compared us across the 15 companies that we use as our comparables, we are on the low end. And two-thirds of our comparatives are well above 2% on a year-over-year basis. I think we’re managing it correctly, prudently and it’s having its effects but going into next year, I would model the same 2%.

John Rolfe – Argand Capital Advisors LLC

Okay. Great thanks very much guys.

Gregory A. Slome

Very good, thanks John.

Operator

And our next question comes from the line of – we’ll have follow-up question from line of Andrew Shapiro with Lawndale Capital Management. Please proceed.

Andrew E. Shapiro – Lawndale Capital Management

Hi, I appreciate we are on a very tight window now, and I’d hope next conference call you will allocate additional time, because it looks like we have a lot of questions here but I’ll limit just a few because I know, you got to get of here. One of the things that I want to understand here is on the DSS, all your contract wins announced by the deal, depressed office to-date right now, reflected in your Q4 backlog or does your Q4 backlog miss any of the DoD announced (inaudible).

Unidentified Company Representative

Yes, the backlog is fully inclusive at this point.

Andrew E. Shapiro – Lawndale Capital Management

And to what extend are your foreign sales in this Q4 DSS backlog versus last quarters and last year’s backlog or is it mostly now it’s just domestic.

Unidentified Company Representative

We are careful about giving that split, I would say it’s diminished as you move forward for sure. And you expected going into Q1, 2 of last year, it was certainly much, much larger. If I look at it fourth quarter of fiscal year ‘12 will in our foreign it was a larger portion of our overall backlog then what it is this time. At the same time last year.

Andrew E. Shapiro – Lawndale Capital Management

Okay your backlogs up, U.S Navy sonobuoy sales this last year were down and you offset with foreign sales, and if your backlogs up and that is an indication as foreign is our smaller portion of the backlog that’s an indication that the Navy is back and that last year’s lower sales level of Navy sonobuoy sales should be exceeded in the coming year. Is that a correct assumption?

Unidentified Company Representative

I understand you’re math.

Andrew E. Shapiro – Lawndale Capital Management

And can you affirm that math?

Unidentified Company Representative

I think that what we set around the foreign mix being down and our performance guidance on DSS and what we’ve not given formal guidance on revenue in the past, we continue to be optimistic around it, and I think by the time you get triangulating all of that every bit of what you said probably stands to make sense.

Andrew E. Shapiro – Lawndale Capital Management

Okay. So move on from that I understand sensitive. Any increase in the Navy’s advanced billings your cash is up as looks like almost $10 million from prior year. It increased cost that’s for sure there cash flow growth, okay. So which the board’s focused and your focus having a strong balance sheet I want to (inaudible) losses concerns as well as the buyback for small dividend won’t interfere with your balance sheet be coming even stronger, even its not a mutually exclusive issue, and you’re out there looking for an acquisition that’s going to generate certain returns. And I do appreciate if you are looking for an acquisition that will help you achieve that’s $500 million revenue goal, okay and increased margins.

But at some point our stock price lags with the overall performance of the non-cash portion of this business that investing in Sparton’s stocks and just buying into assets and business of Sparton generates a rate of return equal is not an excess of what you’re looking for as a rate of return albeit doesn’t increase your revenue line. And so I kind of want to emphasize or you have that point shared with the board that along with Ross, the patience for building this up is mutually exclusive activity is limited. And it’s just not appropriate much longer, and I don’t want to rush out and do an acquisition just to get that issue of the play.

Andrew E. Shapiro – Lawndale Capital Management

Understood. Okay on the backlog decline on complex systems, which is the only segment that had a backlog decline? Are your business development efforts there and your business pipeline keeping pace at least with shipments, because I know that’s the – that’s a segment that has a shorter products program life cycle that there isn’t a lot of backlog visibility, but the backlog with decline be only segment whereas happen certain. So I’m trying to give little bit more insight into the likelihood of our backlog either refilling or that division continuing its much improved pace last quarter.

Unidentified Company Representative

It’s down slightly you’re right, and I think generally the takeaway here it is that go back to quarter ended 330, 2012 it was 32 it’s down now probably 5% its not closer to 10%. And its ebbs and flows close is the best way for me to put it, I mean I know the pattern of orders, I know the timing of them there is nothing about the forward-looking revenue that I’m comfortable with. But again let me may reemphasize the question just earlier around performance expectations this year. Our back half will be much stronger than our first half. You say it again, our back half will be much stronger than our first half predictably speaking. So where we talk about backlog and we talk about the patterns and we talk expectations things will from a timing perspective have been flow, and they will leave you wondering about our performance, but we are very optimistic around our back half compared to our first, and I think backlog is at least reflecting that as CS and that’s more term anomaly.

Andrew E. Shapiro – Lawndale Capital Management

Okay. I know you are out of time. Please allot more time on the next call. I look forward to your West Coast visit, I hope you put us on the calendar, and I’m sure we’ll have a much more robust discussions about the dividend and buyback at that lunch.

Cary B. Wood

I can’t wait Andrew, thank you.

Andrew E. Shapiro – Lawndale Capital Management

Bye.

Operator

There are no further questions at this time. I’ll turn the call back over to you for you to continue to presentation or any closing remarks.

Cary B. Wood

I’d like to thank all the participants in today’s call, we apologize we cannot get to all the questions. Again today’s call included the question-and-answer period has been recorded and really posted to our website under Investor Relations later today. Thank you.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation. And please disconnect your lines.

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