We reiterated our Neutral recommendation on
) 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
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
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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