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Symmetry Medical (SMA) recorded second-quarter 2012 adjusted earnings of 12 cents a share, lower than the Zacks Consensus Estimate by a penny. Adjusted earnings exclude facility consolidation expenses, acquisitions, debt issuance and legal costs, impairment and amortization of intangibles, severance costs and management transition charges.

Profit in the reported quarter was $1.6 million (or 5 cents a share), down 61% year over year, partially due to higher interest expenses (up more than fivefold year over year).

Revenues

Revenues grew 8% year over year to $102.3 million in the second quarter, marginally lower than the Zacks Consensus Estimate of $103 million. Growth was led by higher sales across the company’s Symmetry Surgical business, partially dampened by lower sales in the Original Equipment Manufacturer (“OEM”) Solutions division.

Revenues from the core OEM Solutions segment dropped 13% to $75 million due to decline in sales to major orthopedic OEM customers on account of weak procedure growth and currency fluctuation.

Among the sub-segments, Symmetry witnessed yet another fall across its implants, instruments and surgical cases businesses in the reported quarter, which fell 5%, 8% and 36% to $25.1 million, $28.5 million and $14.5 million, respectively.

Revenues from the smaller Symmetry Surgical unit increased more than threefold to $27.3 million in the quarter, buoyed by the Olsen Medical and Codman & Shurtleff, Inc. acquisition, which contributed roughly $16.7 million to the division’s sales. 

Margins

Gross margin increased to 26.2% from 23.5% a year ago, led by higher margin in the Surgical business and was partially offset by lofty production and manufacturing costs associated with the OEM business. However, this did not have much of an impact as the company has regularly undertaken cost controlling measures with respect to labor, consumables and scrap.

Adjusted operating margin was 11.8% versus 11% a year ago. Selling, general and administrative charges, as a percentage of sales, were higher at 17.9% compared with 13.7% in the prior-year quarter due to acquisitions-related expenses.

Balance Sheet

Symmetry exited the second quarter of 2012 with cash and cash equivalents of roughly $9.6 million, down 41.7% year over year. Total long-term debt (including current portion) increased almost three-fold year over year to $232.5 million.

Guidance and Recommendation

Symmetry has retained itsguidance for 2012. The company continues to expect sales in a band of $410 million and $425 million for the full year.

The earnings per share (on a reported basis) target has been set in a range of 30 cents to 40 cents for 2012. Adjusted earnings per share are expected between 55 cents and 65 cents. The forecast excludes one-time items such as facility closure/severance, acquisition, impairment, amortization and legal charges, which are expected to dilute 2012 earnings by roughly 25 cents a share.

Symmetry is the largest OEM provider of implants and related surgical instruments and cases to orthopedic devices manufacturers. Its major customers include Johnson & Johnson’s DePuy, Stryker (SYK - Analyst Report) and Zimmer Holdings (ZMH - Analyst Report).

The company has created a distinct competitive niche in the orthopedic devices market with its “Total Solutions Approach.” The company is investing in revamping its management structure and enhancing customer collaboration, which should push growth moving forward.

Symmetry, in December 2011, completed its $165 million takeover of the surgical instruments business of Codman. Besides diversifying its revenue base, the acquisition enables the company to broaden its global presence.

However, Symmetry still faces price and procedure volume pressure on the orthopedic front. Also, the company’s high spending may continue to weigh on its bottom line. Currently, we have a Neutral recommendation on the stock, which retains a short-term Zacks #4 Rank (Sell).

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