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Symmetry Medical Inc.’s (SMA - Analyst Report) fourth-quarter 2012 adjusted earnings of 15 cents a share missed the Zacks Consensus Estimate of 19 cents. Adjusted earnings exclude one-time items other than stock-based compensation. The year-ago earnings was 3 cents a share.

In the quarter under review, the company reported profit of $2.9 million (or 8 cents a share) versus a net loss of $3.2 million (or loss of 9 cents a share) in the year-ago quarter.

For the full year, adjusted earnings of 50 cents a share also trailed the Zacks Consensus Estimate of 59 cents. However, reported profit surged more than three fold to $9.1 million (or 25 cents per share) in 2012.

Revenues

Revenues jumped 26% year over year to $106.6 million in the fourth quarter, led by strong sales in the Original Equipment Manufacturer (“OEM”) Solutions and Symmetry Surgical businesses. However, reported revenues were lower than the Zacks Consensus Estimate of $109 million.

For the full year, sales increased 14% year over year at $410.5 million, but were below the Zacks Consensus Estimate of $413 million.

Segment Review

Revenues from the core OEM Solutions segment grew 7% to $78.1 million, on the back of higher implant sales and lesser impact of the prior year’s unfavorable inventory reductions. Foreign currency exchange rates did not have any impact on the quarterly results. On a sequential basis, revenues increased 2.6%, reflecting increased demand for implants offerings as a result of improved procedural growth.

Among the sub-segments, Instruments sales climbed 10% year over year to $30.0 million due to healthy capital spending. The Implants business also posted a growth of 16% to $26.5 million. Symmetry witnessed yet another fall across its surgical cases businesses in the reported quarter, which fell 12% to $13.9 million, indicating weak demand and a loss of market share.

Revenues from the smaller Symmetry Surgical unit jumped 154% to $28.5 million in the quarter, buoyed by the Codman & Shurtleff, Inc. acquisition, which contributed roughly $13.1 million to the division’s sales. Revenues also include a one-time purchase of an OEM Solutions client worth $2.9 million. Excluding the acquisition and the one-time purchase, sales increased 10.4% year over year in the quarter.

Margins

Gross margin increased to 27.1% from 16.4% a year ago, led by higher margin in the Surgical business as well as margin improvement in the OEM Solutions franchise. Increased margin in the OEM Solutions business was driven by the company’s cost controlling measures with respect to labor, consumables and scrap.

Selling, marketing, general and administrative charges, as a percentage of sales, were 17.8% compared with 18.0% in the prior-year quarter. Adjusted operating margin was 11.9% versus 2.7% a year ago, mainly due to acquisitions and higher gross margin in the OEM Solutions division.

Balance Sheet

Symmetry exited the fourth quarter of 2012 with cash and cash equivalents of roughly $9.8 million, down 48.1% year over year. Total long-term debt (including current portion) decreased 20.3% to $211.2 million. The company generated strong operating cash flow of $10.7 million.

Guidance

Symmetry divulged 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 revenues and adjusted earnings are $440 million and 80 cents, respectively.

Our Take

We were disappointed with the fourth quarter results, which missed estimates by a large margin. Symmetry’s high spending and declining case sale may continue to weigh on its bottom line. Additionally, fluctuations in foreign exchange rates remain a cause of concern.

However, we are impressed by the successful integration of the acquired Codman surgical instruments business with the Symmetry Surgical unit. Symmetry is the largest OEM provider of implants, and related surgical instruments and cases to orthopedic devices manufacturers. The company should take advantage of the improving orthopedic market trends to get back on track.

Symmetry carries a Zacks Rank  #3 (Hold). While we remain on the sidelines regarding Symmetry, companies such as Nuvasive Inc. (NUVA - Snapshot Report), ResMed Inc. (RMD - Analyst Report) and Alkermes plc (ALKS - Analyst Report), each carrying a Zacks Rank #1 (Strong Buy) warrant a look.

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