Symmetry 2Q Earnings Beat
Symmetry Medical’s (SMA) second-quarter 2013 adjusted earnings per share (EPS) of 8 cents beat the Zacks Consensus Estimate of 5 cents. However, it was flat year over year.
In the quarter under review, the company reported net income of $1.2 million (or 3 cents a share), down 25.0% from $1.6 million (or 5 cents) in the year-ago quarter.
Revenues
Revenues were roughly flat year over year at $101.9 million in the second 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 higher than the Zacks Consensus Estimate of $99 million.
Segment Review
Revenues from the core OEM Solutions segment grew 6.1% to $79.6 million, led by higher sales of Implants and Cases, partially offset by sales decline in Instruments and Other (Aerospace) category. Foreign currency exchange rates lowered total revenues in the OEM segment by 0.2%.
Among the sub-categories, Instruments revenues dipped 1% year over year to $28.1 million. The Implants business posted a rise of 12.3% in revenues to $28.1 million, driven by stable procedure volumes and a benefit from the timing of stocking orders and inventory adjustments by certain customers.
Cases revenues surged 17.8% in the quarter to $17.1 million on the back of new products. Other revenues were $6.3 million, down 9.1% as compared to $6.9 million in the year-ago quarter.
Revenues from the smaller Symmetry Surgical unit declined for the second time due to sales disruptions associated with integration of Codman surgical instruments business into Symmetry Surgical. Revenues dropped 18.2% to $22.3 million in the quarter, however, it was up 0.6% on a sequential basis.
Margins
Gross margin inched down 10 basis points (bps) to 26.1% in the second quarter, from 26.2% a year ago, due to lower percentage of revenue contribution from higher margin Symmetry Surgical segment. It was further dampened by margin improvement in the OEM Solutions franchise. Increased margin in the OEM Solutions business was driven by higher volumes and efficiencies resulting from the Symmetry business system.
Selling, marketing, general and administrative (SG&A) charges increased 2.3% to $17.9 million. Research and Development (R&D) expenses climbed 44.8% to $1.2 million in the reported quarter. Operating margin declined 130 bps to 6.6% from 7.9% a year ago.
Balance Sheet
SMA exited the second quarter of 2013 with cash and cash equivalents of $12.5 million compared with $9.8 million at the end of 2012. Long-term debt decreased to $202.0 million versus $211.2 million at the end of 2012. The company generated solid operating cash flow of $8.3 million and used $2.8 million for capital expenditures in the quarter.
Guidance
Management reiterated its 2013 revenue guidance, provided in June. The company expects sales in a band of $400–$415 million for the full year. The Zacks Consensus Estimate for 2013 revenues of $409 million lies within the guided range.
However, earnings per share (on a reported basis) target has been raised to a range of 14 cents–24 cents from the earlier range of 11 cents–21 cents for 2013 while adjusted earnings are expected to be in the range of 40 cents to 50 cents for the year. This includes a negative impact of the Medical Devices excise tax of 2 cents.
The adjusted earnings forecast excludes one-time items such as facility closure/severance, debt issuance costs, acquisition and amortization-related charges, which are expected to dilute 2013 earnings by roughly 26 cents a share (earlier 29 cents). The Zacks Consensus Estimate for 2013 earnings of 40 cents was pegged at the bottom end of the guided range.
Our Take
We are encouraged by SMA’s second quarter results which beat the Zacks Consensus Estimate on both fronts. However, the sudden turn of events in the high-margin Surgical business from the start of 2013 is a cause of concern and the company needs to resolve integration related issues of its latest acquisitions to avoid wastage of resources. Despite this, we are optimistic about Symmetry’s larger OEM Solutions business, which is growing at a healthy pace.
Symmetry carries a Zacks Rank #3 (Hold). While we remain on the sidelines regarding SMA, companies such as Hanger (HGR), Alere (ALR) and Boston Scientific (BSX) warrants a look. Hanger carries a Zacks Rank #1 (Strong Buy), while the other two stocks carry Zacks Rank #2 (Buy).
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