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We reiterated our Neutral recommendation on Symmetry Medical (SMA - Analyst Report) following its second quarter results. In the reported quarter, adjusted earnings of 12 cents a share were lower than the Zacks Consensus Estimate by a penny. 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).

However, revenues grew 8% year over year to $102.3 million in the second quarter but were 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.

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

Symmetry Medical has created a distinct competitive position in the orthopedic device market with its broad range of products and services. The company has significant presence even in areas outside orthopedics like dental, osteobiologic, and endoscopy. The company also sells products to the aerospace industry. Though the company’s sales from these non-core areas are under pressure due to the weak economy, we believe these areas can make meaningful sales contribution once the economic scenario improves.

Symmetry Medical regularly introduces new products to boost its top-line growth. Recently launched products such as the Staggs Uterine Compression Clamp, additional neurosurgical line extensions for the Micro Instruments product portfolio and the additions made to the Quad-Lock Sterilization Container Portfolio (which includes the Rongeur Instrument Holders) are expected to generate solid revenues in the near-term.

Symmetry Medical, in December 2011, completed its takeover of the surgical instruments business of Codman & Shurtleff Inc., a Johnson & Johnson enterprise. Besides diversifying its revenue base, the acquisition has allowed Symmetry Medical to broaden its global presence. The company expects that the combined product line will offer one of the widest arrays of offerings in the $1 billion business of general surgical instruments.

According to management, the integration process is progressing smoothly. However, we remain cautious of the integration-related risks. Changes in distribution agreements might cause disruption to sales during the remainder of 2012 and also 2013.

Additionally, the company’s dependence on acquisitions has resulted in an increase in its debt. In the reported quarter, total long-term debt (including current portion) increased almost three-fold year over year to $232.5 million. The company is prioritizing on cash generation to pay off its debt. However, the current weakness in the economic environment makes us cautious about how the company would embark on de-leveraging.

Moreover, Symmetry Medical’s core OEM Solutions business has been reporting double-digit losses for some time now. The division continues to face declining capital spending, procedural and pricing pressure from the weak global orthopedic market. The company is focused on improvement of gross margin in the soft OEM business. We believe that the company needs to improve its operational efficiency to overcome these macroeconomic challenges.

We currently have a Neutral recommendation on Symmetry Medical, which carries a short-term Zacks #3 Rank (Hold rating).
 

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