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Symmetry Medical’s (SMA - Analyst Report) third-quarter 2013 adjusted earnings per share of 7 cents beat the Zacks Consensus Estimate by 3 cents. However, earnings were significantly lower than the year-ago adjusted earnings of 16 cents per share. The decline resulted from soft revenues as well as various internal issues. Adjusted net earnings significantly declined 54.7% to $26.2 million.

In the quarter under review, the company reported net loss of $34.5 million or 95 cents per share compared to a net income of $3.7 million or 10 cents earned in the year-ago quarter.

Revenues declined 3% year over year to $98.0 million, falling short of the Zacks Consensus Estimate of $101 million. Weak sales in both the Original Equipment Manufacturer (OEM) Solutions and the Symmetry Surgical businesses led to the downfall.

Gross margin in the quarter was 25.0%, down by a whopping 300 basis points (bps) from 28.0% a year ago. The decline was attributable to lower percentage of revenue contribution from the high- margin Symmetry Surgical segment. The decline in revenues in the OEM Solutions franchise further hurt margins.

Selling, marketing, general and administrative (SG&A) charges increased 6.0% to $17.8 million. Research and Development (R&D) expenses declined 13.3% to $1.1 million. Operating loss was $46.5 million, compared to operating income of $10.2 million in the comparable period last year.

Segment Review

Revenues from the core OEM Solutions segment dropped 5% to $75.8 million, owing to sales decline in Instruments and operational issue at the company’s subsidiary, Clamonta Ltd., which services the Aerospace industry and is reported in the Other category.

Moreover, fire in the Acid Shop at the U.K. implant manufacturing facility also dampened OEM sales growth. However, this underperformance was offset by higher revenues in the Case and Implant categories. Foreign currency exchange rates benefited total revenues in the OEM segment by $0.3 million, or 0.4%.

Among the sub-categories, Instruments revenues dipped 8% year over year to $27.2 million, while the Implants business posted a 2% rise in revenues to $26.1 million. Cases revenues surged 20.0% in the quarter to $17.0 million on the back of new products. Other revenues were $5.5 million, down 18.0%, mainly due to sales reduction in the aerospace category.

Revenues from the smaller Symmetry Surgical unit continues to fall due to sales disruptions associated with integration of Codman surgical instruments business into Symmetry Surgical. Revenues dropped 10.0% to $22.2 million in the quarter.

Balance Sheet

SMA exited the third quarter of 2013 with cash and cash equivalents of $4.9 million compared with $9.8 million at the end of 2012. Long-term debt (including current portion) decreased to $108.3 million versus $211.2 million at the end of 2012. The company generated solid operating cash flow of $14.7 million and used $1.0 million for capital expenditures in the quarter.

Guidance

SMA’s dismal performance in the third quarter, coupled with difficult macroeconomic conditions in the OEM market and foreign exchange rates, induced management to lower its 2013 guidance. The company has reduced expected sales to the band of $398–$402 million from $400–$415 million for the full year. The Zacks Consensus Estimate for 2013 revenues of $408 million lies above the guided range.

Moreover, the company expects to incur losses, on a reported basis, in 2013. The company expects reported loss per share in the range of 94 cents to 90 cents compared with the earlier guided range of earnings of 14–24 cents for 2013.

Adjusted earnings are now anticipated in the range of 28 cents to 32 cents, down from the earlier guided 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 Zacks Consensus Estimate for 2013 earnings of 25 cents lies below the guided range.

The adjusted earnings forecast excludes one-time items such as facility closure/severance, debt issuance costs, asset impairment charges, acquisition and amortization-related charges, which are expected to dilute 2013 earnings by roughly $1.22 a share (earlier 26 cents).

Our Take

Although adjusted earnings beat the Zacks Consensus Estimate, we remain concerned about Symmetry’s dwindling revenue growth. The sudden drop in the core OEM business due to lower-than-anticipated instrument volume, along with internal issues at the Aerospace category and the unexpected fire in the U.K. facility, posed serious causes of concern.

Moreover, the high-margin Surgical business continues to face headwinds from the integration of the Codman business. All these factors have led management to significantly lower its outlook for the rest of the year, which is indeed disappointing.

Symmetry presently carries a Zacks Rank #4 (Sell). While we recommend avoiding this stock until the company’s performance improves, other companies such as Bio-Rad Laboratories, Inc. (BIO - Snapshot Report), INSYS Therapeutics Inc. (INSY) and Hill-Rom Holdings, Inc. (HRC - Snapshot Report) warrant a look. All these stocks carry a Zacks Rank #1 (Strong Buy).
 

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