Symmetry Medical Inc (SMA)

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Symmetry Medical Inc. (SMA)

Q3 2013 Earnings Call

October 31, 2013 08:00 am ET

Executives

Tom Sullivan – President & Chief Executive Officer

Fred Hite – Senior Vice President & Chief Financial Officer

Carol Ruth – The Ruth Group (IR)

Analysts

Young Li – Piper Jaffray

Matthew O’Brien – William Blair

Jim Sidoti – Sidoti & Company

Presentation

Operator

Welcome to the Q3 2013 Symmetry Medical Inc. Earnings Conference Call. My name is Larissa and I’ll be your operator for today’s call. (Operator instructions.) Please note this conference is being recorded. I’ll now turn the call over to Carol Ruth of The Ruth Group. You may begin.

Carol Ruth

Thank you, Operator. Joining us on the call 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,” “impends,” 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 expectation. Factors that could cause or contribute to such differences include but are not limited to the loss of one of our customers; the development of new products or product innovations by our competitors; product liability; changes in management; changes in conditions effecting 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 follows a policy of not commenting or discussing individual customers or programs. Tom?

Tom Sullivan

Thank you, Carol, and thank you everyone for joining us today for Symmetry Medical’s Q3 2013 Conference Call. I would like to begin today’s call with an expression of gratitude to our Symmetry teammates and first responders who were called upon during the fire at our Sheffield, United Kingdom facility during September, 2013. We are thankful that no one was injured and grateful for their efforts to combine the damage to the assets shop. Thank you.

We had a challenging Q3 that was impacted by several unexpected factors and revenue weakness. In the OEM Solutions segment these included operational issues at our dedicated aerospace subsidiary in the United Kingdom, Clamonta Ltd.; lower than anticipated instrument volume; and the fire at our Sheffield manufacturing plant. In the Symmetry Surgical segment we have not yet realized an anticipated return to growth in the United States following the completion of the operational transition of the Codman surgical instruments business during Q3 2012. As we outlined in our preliminary release press release (inaudible) in the quarter. The entire Symmetry team is focused on addressing these issues along with our ongoing commitment to providing a high level of quality, customer service and operational excellence.

I will begin today’s call with a quick review of our results followed by an operational update, our progress driving growth in Symmetry Surgical and operational improvements including the ongoing implementation of the Symmetry business system.

Total revenue for Q3 was $98 million, down 3% year-over-year and down 4% sequentially. Revenue in our OEM Solutions business was down 0.5% year-over-year and down 5.0% sequentially reflecting the issues I’ve previously summarized partially offset by higher sales of cases. Normalized for these anomalies and our strong Q2 implant sales we believe our results reflected a stabilized and possible signs of improved orthopedic procedure volume which we’re also seeing in our customers’ results.

Symmetry Surgical sales decreased 10% year-over-year and were off less than 1% on a sequential basis, reflecting a stabilization of performance but not a return to growth as we had anticipated. Excluding the impact of a former Symmetry Surgical customer to direct purchases from Symmetry Medical OEM Solutions in 2013, OEM Solutions revenue was down 2% year-over-year and Symmetry Surgical revenue was down 6% year-over-year.

Gross margin in Q3 2013 was 25% compared to 28% in Q3 last year. The decrease in gross margin reflects a lower proportion of our revenue from our higher-margin Symmetry Surgical business, the operational issues at Clamonta Ltd., lower instrument revenue, OEM Solutions’ customer cost reduction efforts and eight days of facility downtime during September, and continued forging impact as a result of the fire at our Sheffield plant.

Sequentially gross margin is down from 26.1% in Q2 driven by the Clamonta operational issues, the Sheffield fire, and lower revenue. We are encouraged however by the continued positive contribution of our Symmetry business system improvements year-over-year to help offset other gross margin pressures.

Together, the lower revenue and gross margin had a meaningful impact on our profitability in the quarter. Adjusted earnings per share was $0.08, down from $0.18 in the same period last year. We expect a continued impact in Q4. Nonetheless we generated $14.7 million in cash flow from operations during the quarter, reduced our debt by $21.8 million and our leverage ratio ended at 3.28x LTM EBITDA.

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