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With New Methodologies and Systems of Metrics in Place, the New Management Team has Completed the Turnaround of Sparton Corporation Achieving a Debt/Equity Ratio of Less Than 3% with $30 Million in Cash on its Balance Sheet
Jr. Oil & Gas
Jr. Gold CCD
Medical Device COO
Health & Wellness
Corporation (NYSE: SPA)
is a provider of complex and sophisticated medical devices and
instrumentation, anti- submarine warfare technology, and other electronic
related products to leading edge companies in diverse markets. The Company
breaks out its operations into three reporting segments: Medical Devices,
Defense & Security Systems, and Electronic Manufacturing Services (EMS).
Headquartered in Schaumburg, IL, the company started in 1900 and offers its
customers development, design, manufacturing, and distribution capabilities
in a highly collaborative environment.
Mr. Wood has over 20 years experience in both public and private company settings and began his career with General Motors, spending nearly 10 years there. United Technologies recruited him to initially serve as a plant manager and then, ultimately, as general manager with full profit and loss responsibility. He executed an operating turnaround in a division that included stamping, molding, assembly and distribution operations.
In the private company
sector, Mr. Wood has worked with companies such as Formica Corporation and
Elkay Manufacturing and has led closures, consolidations, divestitures,
merger and acquisition integration efforts, and Greenfield site development
as well as lean deployment, Six Sigma and the implementation of growth
strategies. He joined Citation Corporation in late 2004 as the Chief
Operating Officer and oversaw the company’s financial and operational
reorganization. Because of that reorganization effort, the balance sheet was
substantially deleveraged, cash management and working capital was
significantly improved, capacity utilization improved, and the management
team was upgraded. Additionally, the corporation achieved growth in spite of
Interview conducted by: Lynn Fosse, Senior Editor, CEOCFOinterviews.com, Published - April 15, 2011
How has Sparton changed under your leadership?
CEOCFO: What is Sparton all about today?
Mr. Wood: We are a contract manufacturer of electromechanical devices. That is the general description or types of products that we design and manufacture for our customers. Although the electromechanical device market is broad, we are predominantly involved in four spaces: medical, defense (particularly in Anti-Submarine Warfare), Aerospace, and Industrial. As a public company, we have segmented ourselves into three distinct financial and operational segments: Medical, Defense & Security, and Complex Systems.
Starting with the Medical segment, we manufacture products on behalf of a number of partners needing our help to bring their idea to market. We work with them in the early phases to materialize concepts using our engineering and manufacturing resources to bring their ideas to reality. We also have the capability to test their products in an environment using live specimens to ensure the product is ready for the end user. Some of our customers are better suited and positioned to focus their resources on marketing, product development, and distribution and not on manufacturing - which is our area of expertise.
We are clearly a leader in Defense, primarily in the area of Anti-Submarine Warfare, as we are one of only a handful of sonobuoy providers globally and the only U.S.-owned organization that produces this proprietary product. The U.S. Navy highly depends upon these products to be used out in front of every fleet to make sure of a safe arrival to port as well as to passively or actively monitor the waters for submarines or other underwater threats.
Our last business segment is Complex Systems. We provide engineering and manufacturing support in a number of aerospace and industrial applications from heads-up displays, instrumentation, cargo-hold electronics, and fuel systems, to name a few. Our research has shown that these markets are in the early stages of outsourcing, so we certainly believe that they play well to our future. We have certain niche capabilities as well as having secured facility designations that differentiate us from our competition. These are highly regulated spaces based on defense related restrictions or with the FDA. Further, we have contemporized every bit of our operations allowing us to provide solutions to our customers faster and cheaper than our competition by utilizing our rapid prototyping, engineering, and low cost country capabilities, to name a few.
CEOCFO: Given Sparton’s long history, do most of your customers come to you or do you still have to beat the drum and go out and find them?
I would be surprised if there was a company out there that is able to sit on
its hands and not pursue customers. By definition, we are a contract
manufacturer, which means that our business generally ebbs and flows. We
have to consider that when it comes to our mission of continued profitable
growth on a year over year basis. Generally, we are comfortable with many of
our partnerships as we do have longstanding, loyal customers. However, given
our growth ambitions, which are different today from the company’s previous
111 years, we are aggressively out there pursuing new sectors, new
customers, and new opportunities. We are reintroducing who we are in a way
that some of them have never seen us and we expect that it is going to lead
to significant organic growth.
CEOCFO: Would you tell us about the Delphi Medical System’s acquisition and what other acquisitions may be in the future?
We are certainly pleased with this acquisition. It was not Delphi’s core
business and I do not think it played to their strengths. Delphi, having its
own liquidity issues over the past few years, certainly put the medical
device segment of a predominantly automotive company on the back burner. You
could see that in the way it was operating and our view was that by managing
it differently, by embracing the same contemporary methods we used for the
Sparton turnaround, it would be a great addition. Within one hundred days,
we closed and consolidated the Delphi operation, went through a significant
head-count reduction to concentrate on improving the facility’s
efficiencies, and started to talk to customers about expanding opportunities
to serve them better. In addition, within 5 months after we closed on buying
the business, it went from being a break-even enterprise to one of the most
profitable facilities in our company’s portfolio. It is surprising just how
quickly its performance has improved, so we are very pleased with it.
As far as what else we have on tap, we have a three-legged stool to our growth ambitions – new business development, investing in internal research and development, and M&A. I talked a bit about our organic growth and the new business development effort earlier, but we have not had a chance yet to talk about what it is we are doing in the way of product line extensions. We are making investment on internal R&D opportunities by taking advantage of our internally developed intellectual property in ways that we have not applied them before in existing and new markets. The third leg of that stool is M&A and we are certainly ambitious. We have the debt capacity with a certain amount of cash available and there are many opportunities to evaluate. In addition, the flow of M&A opportunities has substantially improved and the credit market is going to lend itself well to companies with circumstances like ours. We have a willing and interested Board of Directors and we are well suited for opportunities that could range in size from a Byers Peak to a Delphi, if not larger. We have certainly expressed that we have a long-term ambition by 2015 to take this company to a $500 million top-line organization and M&A is very much a part of the way to get there from here.
CEOCFO: Do you see a consolidation in the industry, and do you see more opportunity because of the current and recent financial situation?
Mr. Wood: I do see opportunities for consolidation. We have done a good job understanding the markets that we serve. We have come to conclude that there is a degree of fragmentation that could become part of an industry roll-up. We do understand that along with that fragmentation, there are a lot of smaller organizations that probably went through one of the more turbulent economic times, which has a lot of them now stepping back from what would at one point been viewed as the abyss. They may be asking themselves, “Do I have it in me to go through another cycle and survive that, or do I want to start to evaluate what the opportunities that partnering with somebody like Sparton might bring me personally from a financial or professional perspective?” We see that probably more now than I have ever seen it before in my professional career. Therefore, there are a great number of potential opportunities for Sparton out there. However, the right opportunity is very difficult to find and we are certainly not going to get involved in paying a premium for organizations. We like the idea of finding organizations that synergize and finding all the right ingredients for a good deal is easier said than done. The economic times of the past several years have lent themselves well to interested parties in the way of divesting that leaves opportunities for us to buy. We are just going to have to hold out for the next year or two to find out how all that plays out.
CEOCFO: Would you tell me about the R&D and where you see great opportunities in newer areas?
Mr. Wood: We have disclosed in a variety of venues, particularly in our quarterly financial analyst calls that we are investing in a way that this company has never invested in its 111 year history. We have appropriated up to about one percentage point of our company’s annual revenue in new product development efforts. At one time, we were looking at five different distinct products within our company’s portfolio that could be extended to applications and markets beyond where they are used today. A good example is that the company owns the outright intellectual property on a digital compass that is a component in our sonobuoy, one of our Anti-Submarine Warfare devices. It is a multi-access compass with many capabilities and we are providing a considerable amount of investment to repackage it to increase its durability and accuracy in a way that it will not be rivaled by any other product at the moment. We are in conversations with potential end users, particularly in the defense arena, that we can ultimately provide the product to new customers we have not even thought of working with before now. Sparton has cash availability and it has to find the proper uses of it to advance shareholder value, and, if not as a growth investment, it certainly begs the question of things like dividends or stock buy-backs. We think the better use of the cash today is in product line extensions, M&A activity, and organic growth endeavors - and that is where we are certainly focused.
Sparton has facilities worldwide; where is your manufacturing located, and
do you see the need for additional facilities?
CEOCFO: Is having facilities in the U.S. a factor for your customers?
Mr. Wood: In the primary markets we serve, the answer is yes - without a doubt. The fact that we are in defense products and the majority of the technology you are dealing with cannot be produced anywhere other than within the U.S. is certainly a barrier to producing it offshore. Medical device manufacturing is not exactly the same, but similar in the way that it is regulated by the FDA. The FDA is not interested in regulating medical device production in offshore facilities as it brings about a degree of complexity that we do not even have to discuss. Sparton’s employees are very professional and capable of effectively servicing these highly regulated environments - whether it is ITAR in the defense industry, the FDA in the medical device industry, or other regulatory environments and/or requirements within the electromechanical device design and manufacturing spectrum. These regulated markets present opportunities for us to continue to effectively and affordably produce domestically and that is why we have paid attention them.
CEOCFO: In closing, why should potential investors pay attention to Sparton?
Mr. Wood: I have spoken to about 1,000 funds over the course of the last 18 months and I have personally had face-to-face meetings with over 100 of them. I always take a degree of pride in meeting with a fund for the second time when the first thing that comes out of their mouth is woulda, coulda, shoulda. Sparton’s stock and market cap has more than doubled in the last year and a half and it had almost quadrupled since the prior year. That kind of movement and market cap comes from only one thing - the company’s operating performance, its improved balance sheet, and its guidance about where the company is strategically expecting to be headed in the next several years. We have had those discussions with all those various funds and explained the fact that we have a $500 million top line ambition and it does not take much to figure out what that translates to in the way of compounded annual growth objectives. We have given some level of expectation about what we plan to do with the company’s earnings as well as some guidance on the company’s debt to equity ambitions, which is almost nothing today. Many of our benchmarks are well above the 1 to 1 ratio and we do not believe that even over the course of the next five years, we will have to take it up to that level. In addition, a great many of our comparatives are trading at up to 16 times earnings and we are trading currently at 7 to 9 times earnings. Therefore, if you stand back and you objectively look at where we are from an investor’s perspective, it appears as though we are undervalued while performing better as compared to many of our peers. As an electromechanical device manufacturer, we have a number of unique capabilities to offer our customers coupled with a very strong management team that has turned around the company. The balance sheet has been wiped clean giving us an opportunity to grow which all translates into an opportunity that, if I were an investor, I would grab onto as quickly as I could and I personally have, as have my management team. That being said, it is important to note that a third of our investor base is new to Sparton over the course of the proceeding twelve months and they have been very pleased with our vision, the ability to quickly execute on our plans, and the return on their investment.
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There is an important piece to add to this discussion and that is this company had almost gone into bankruptcy, as it was facing serious liquidity issues in late 2008. However, we turned the corner, paid down all of the debt and extracted every bit of working capital we could out of the company, transforming it to cash to invest in the restructuring. We now have a debt/equity ratio of less than 3% and almost had $30 million of cash on hand as of our last quarter end. Because of these actions, Sparton is able to move forward in the way of new business development, internal research and development, and mergers and acquisitions… We have a bit of a handicap when it comes to our organic growth efforts, but that is starting to be behind us now. More importantly, our operating performance, our pricing, the breadth of our capabilities, and the rebranding of the company has certainly turned many heads and, generally, folks are starting to realize we are somebody to join as opposed to avoid. - Cary Wood
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