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Symmetry 1Q Earnings Disappoint

Zacks Equity Research

Symmetry Medical’s (SMA) first-quarter 2013 adjusted earnings per share (EPS) of 4 cents missed the Zacks Consensus Estimate of 15 cents. Adjusted earnings exclude one-time items other than stock-based compensation. It was also lower than the year-ago adjusted EPS by 42.8%.

In the quarter under review, the company reported net loss of $0.3 million (or a loss of 1 cent a share) versus a net income of $0.8 million (or 2 cents a share) in the year-ago quarter.

Revenues

Revenues dropped 2% year over year to $98.9 million in the first quarter on account of double-digit decline in Symmetry Surgical sales, offset by decent gains in the Original Equipment Manufacturer (“OEM”) Solutions business. Revenues were lower than the Zacks Consensus Estimate of $106 million.

Segment Review

Revenues from the core OEM Solutions segment grew 4% to $76.7 million, led by higher sales in all of the 3 categories viz. Instruments, Implants and Cases versus the year-ago quarter. However, sales growth was partially offset by 3% decline in Other (Aerospace) category. Foreign currency exchange rates lowered total revenues of the OEM segment by 0.2%.

Among the sub-categories, Instruments sales grew 4% year over year to $28.2 million due to healthy capital spending. The Implants business also posted a growth of 5% to $26.0 million. However, on a positive note, Cases sales increased 3% in the quarter to $16.4 million on the back of new products.

Revenues from the smaller Symmetry Surgical unit unexpectedly dropped 16.9% to $22.2 million in the quarter, due to sales disruptions associated with integration of Codman surgical instruments business into Symmetry Surgical.

Margins

Gross margin inched up to 25.4% from 25.0% a year ago, led by margin improvement in the OEM Solutions franchise, largely dampened by lower percentage of revenue contribution from higher margin Symmetry Surgical segment. Increased margin in the OEM Solutions business was driven by the company’s cost control measures with respect to labor, consumables and scrap.

Selling, marketing, general and administrative (SG&A) charges, as a percentage of sales, were 20.2% compared with 17.7% in the prior-year quarter. SG&A expenses were higher because of higher infrastructure costs in the Surgical business along with increased healthcare and acquisition related cost. The new Medical Devices Excise Tax also pushed up expenses by $0.3 million, partially offset by lower amortization expenses.

Adjusted operating margin was 6.5% versus 8.9% a year ago, mainly due to lower revenues from Symmetry Surgical.

Balance Sheet

Symmetry exited the first quarter of 2013 with cash and cash equivalents of roughly $14.9 million, down 35.8% year over year. Total long-term debt (including current portion) decreased 17.3% to $209.9 million with a leverage ratio of 3:3. The company generated operating cash flow of $11.4 million in the quarter.

Guidance

Despite the sales disruption in the Surgical business, Symmetry reiterated its guidance for 2013, taking into account the present market situation and currency fluctuations. The company expects sales in a band of $420 million and $440 million for the full year.

The earnings per share (on a reported basis) target has been set in a range of 35 cents to 47 cents for 2013. Adjusted earnings are expected to be in the range of 64 cents to 76 cents. This includes a negative impact of the Medical Devices excise tax of 3 cents. The adjusted earnings forecast excludes one-time items such as facility closure/severance, acquisition and amortization-related charges, which are expected to dilute 2013 earnings by roughly 29 cents a share.

The Zacks Consensus Estimate for 2013 revenues and adjusted earnings are $434 million and 73 cents, respectively.

Our Take

We were disappointed with the first quarter results, which missed estimates by a large margin. Symmetry needs to resolve integration issues related to its latest acquisitions to avoid wastage of resources. Additionally, fluctuations in foreign exchange rates remain a cause of concern. However, we are impressed that Symmetry’s larger OEM Solutions business is growing at a healthy pace.

Following the earnings release, Symmetry’s share price declined 11.6% on Thursday to close at $10.47.

Symmetry carries a Zacks Rank #3 (Hold). While we remain on the sidelines regarding Symmetry, companies such as Conceptus (CPTS), LeMaitre Vascular (LMAT) and NuVasive (NUVA) warrants a look. While Conceptus and LeMaitre carry a Zacks Rank #1 (Strong Buy), NuVasive carry Zacks Rank #2 (Buy).
 

Read the Full Research Report on SMA

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