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Symmetry Medical Inc. (SMA)

Q2 2013 Earnings Call

August 01, 2013 08:00 AM ET

Executives

Carol Ruth - IR

Tom Sullivan - President and CEO

Fred Hite - SVP and CFO

Analysts

Matt Miksic - Piper Jaffray

Kayla Crum - William Blair

Jim Sidoti - Sidoti & Company

Presentation

Operator

Welcome to the Second Quarter, 2013 Symmetry Medical Incorporated Earnings Conference Call. My name is Cliff and I will be your operator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now like to turn the call over to Ms. Carol Ruth. Ms. Ruth, you may begin.

Carol Ruth

Thank you, operator. Joining us on the call today are Tom Sullivan, President and Chief Executive Officer, and Fred Hite, Senior Vice President and Chief Financial Officer.

Statements in this conference call regarding Symmetry Medical’s business which are not historical facts may be forward-looking statements that involve risks and uncertainties within the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are predictive in nature and are frequently identified by the use of terms such as “may,” “will,” “should,” “expect,” “believe,” “anticipate,” “plan,” “estimate,” “intend,” and similar words indicating possible future expectations, events or actions.

Such predictive statements are not guarantees of future performance and actual results and outcomes could differ materially from our current expectations. Factors that could cause or contribute to such differences include, but are not limited to, the loss of one or more customers, the development of new products or product innovation by our competitors, product liability, changes in management, changes in conditions affecting the economy, orthopedic device manufacturers, or the medical device industry in general and changes in government regulation of medical devices and third party reimbursement practices.

We refer you to the risks in the forward-looking statements section of the company’s most recent annual report on Form 10-K, filed with the Securities and Exchange Commission, as well as the company’s other filings with the SEC, which are available on the SEC’s website at www.sec.gov.

Before turning the call over to Tom Sullivan, President and Chief Executive Officer, I'd like to emphasize Symmetry Medical’s policy of not commenting or discussing individual customers or programs. Tom?

Tom Sullivan

During the second quarter we continued our focus on our four key areas, with a special emphasis on two items. One stabilizing the integration issues at Symmetry Surgical and two, improving operational efficiency in the OEM solutions segment. We made good progress in both of these areas. Our financial results came in slightly ahead of our expectations primarily as a result of the timing of orders related to customer implant inventory in the OEM segment. We remain on track to achieve our updated guidance for the year; I will begin today's call with a quick review of the financial highlights for the second quarter and then provide an operational update.

Total revenue for the second quarter was $101.9 million, down 0.4% year-over-year, but up 3% sequentially. Reported revenue in our OEM solutions business was up 6% year-over-year and 4% sequentially. Sequential increase reflects the stable orthopedic procedural growth reported by our customers, higher implant sales driven by the timing of stocking orders and the inventory adjustments and some increased capital spending by customers on cases and instruments to support new product launches.

Excluding the impact of a former Symmetry Surgical customer to direct purchases from Symmetry Medical OEM solutions in 2013. OEM solutions revenue was up 4% year-over-year. Symmetry Surgical reported sales decreased 18% year-over-year against a strong second quarter in 2012. And as a result of the transition related sales disruptions that we discussed on last quarter's call.

On a sequential basis Symmetry Surgical sales were up slightly reflecting progress in the stabilization of the issues and the corrective actions we have implemented. Excluding the previously mentioned customer who moved to direct purchases from Symmetry Medical OEM solutions in 2013. Symmetry Surgical sales decreased 14% year-over-year.

Gross margin in the second quarter of 2013 was 26.1%, about flat but 26.2% in the second quarter of last year. The margin reflects the reduced contribution from Symmetry Surgical almost entirely offset by improvements in OEM solutions gross margin related to increased volume and the implementation of the Symmetry business system.

On a sequential basis, second quarter gross margin was up from 25.4% in the first quarter 2013, as a result of improved gross margin in OEM solutions. As adjusted EPS was $0.09, down from $0.14 in the same period last year, but up from $0.06 in the first quarter. This places us on the right trajectory for continued improvement in the second half. We generated $8.3 million in cash flow from operations during the quarter and reduced our debt by $8 million. And our leverage ratio ended at 3.35 times.

I would now like to provide some additional detail on the OEM solutions in Symmetry Surgical segments, beginning with OEM solutions. Sales in our OEM solutions business were up year-over-year sequentially, driven by growth in implants in cases. The 12% year-over-year and 8% sequential implant reflects the stable hip and knee procedure market as reported by our customers. We also saw some stocking orders and inventory adjustments by certain of our customers. We believe these purchases were the result of some fine tuning of inventory levels, following a prolonged period of conservative purchasing, we do not believe that they are indicative of a more positive outlook for procedural growth.

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