Competition
The Complex Systems and Medical industries in general are highly fragmented and intensely competitive. Our contract manufacturing
services are available from many sources, and we compete with numerous domestic and foreign firms. Within Sparton's target market,
the high-mix, low- to medium-volume sector of the Complex Systems and Medical industries, there are substantially fewer competitors,
but competition remains strong. Some competitors have substantially greater manufacturing, R&D, marketing or financial resources and,
in some cases, have more geographically diversified international operations. Sparton expects competition to intensify further as more
companies enter our target markets and our customers consolidate. In the future, increased competition from large electronic component
manufacturers that are selling, or may begin to sell, electronics manufacturing services may occur. Future growth will depend on new
outsourcing opportunities, and could be limited by OEMs performing such functions internally or delaying their decision to outsource.
DSS is partner to a 50/50 joint venture agreement with USSI, the only other major producer of sonobuoys to the free world. If USSI were to terminate
this joint venture, DSS would be required to return to independent bidding for U.S. Navy and other foreign country sonobuoy business. If this was to
happen, it is possible that the company's future results could be negatively impacted. Starting with the 2014 U.S. Government fiscal year,
the U.S. Navy will open up its sonobuoy contract bidding process potentially allowing additional competitors to vie for this business.
While the company believes that there are significant barriers to entry into the sonobuoy market, if a new competitor was able to successfully
develop the necessary technical capabilities and gain entry into the market space, the company's future results could be negatively impacted.
In some cases, Sparton may not be able to offer prices as low as some competitors for a host of reasons. For example, those competitors may have
lower cost structures for their services, they may be willing to accept business at lower margins in order to utilize more of their excess capacity,
or they may be willing to take on business at low or even zero gross margins to gain entry into the company's markets. Upon the occurrence of any of
these events, our net sales would likely decline. Periodically, we may be operating at a cost disadvantage compared to some competitors with
greater direct buying power. As a result, competitors may have a competitive advantage and obtain business from our customers.
Principal competitive factors in our targeted markets are believed to be quality, reliability, the ability to meet delivery schedules,
customer service, technological sophistication, geographic location and price. During periods of recession in the Complex Systems and Medical
industries, our competitive advantages in the areas of adaptive manufacturing and responsive customer service may be of reduced importance
due to increased price sensitivity. We also expect our competitors to continue to improve the performance of their current products or services,
to reduce their current products or service sales prices and to introduce new products or services that may offer greater performance
and improved pricing. Any of these could cause a decline in sales, loss of market acceptance of our products or services, profit margin
compression, or loss of market share.
The sonobuoy product line is built to the customer's demanding specifications. These products are ITAR restricted, which limits
opportunities for competition.
Competitors in our market segments are much larger in size and typically operate in a medium to higher volume sector.
These competitors, however, typically do not provide low-volume, high-mix legacy services that Sparton can provide, as this remains
our niche in the market. Other EMS providers of comparable size to Sparton's Complex Systems Business Unit are forecasted to modestly
grow by leading industry experts. OEM's in our market segments are continually driving costs out of their respective businesses through
outsourcing strategies, allowing opportunity for Sparton to capture additional value add opportunities.
The contract manufacturing of highly complex medical instrumentation is a fairly young industry with no dominate player in the market.
In the past, large Printed Circuit Board contract manufacturers have sold their "box build" capabilities and have been very successful.
The industry has continued to grow with more companies developing Printed Circuit Board Assembly (PCBA) capabilities and others
entering the market via mergers and acquisitions of smaller companies. This has led to stronger competition with larger companies that
have the financial resources to offer the services that the customers are requiring. Customers will assume that quality will be 100%
and will drive their decisions based on pricing and services offered that best fit their total solutions needs.
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