Symmetry Medical Gains Despite Q1 Earnings Miss - Analyst Blog

Shares of Symmetry Medical Inc. SMA climbed 1.7% till the last reported session as the company posted adjusted earnings per share of 7 cents for the 2014-first-quarter ended Mar 29, 2014, which were up 75% from 4 cents reported in the same quarter of 2013. However, earnings per share fell shy of the Zacks Consensus Estimate by 2 cents.

Adjusted net earnings rose 68.4% to $2.7 million from $1.6 million in the year-ago quarter. On a reported basis, SMA posted net earnings of $1.3 million or 3 cents per share in contrast to net loss of $0.3 million or one cent in the year-ago quarter.

Revenues

Revenues came in at $101.3 million, up 2.4% year over year, inching past the Zacks Consensus Estimate of $100.0 million. Revenues were primarily driven by higher sales in the company's OEM Solutions segment, partially offset by a decrease in the Symmetry Surgical segment.

Segment Results

Revenues from the core OEM Solutions segment stood at $80.6 million, reflecting a rise of 5.2% from $76.7 million in the year-earlier quarter. The increase was driven by higher revenues in the Implants, Instruments and Other segments, partly hurt by lower revenues in the Cases segment. Revenues included a benefit of 1.4% due to the favorable impact of foreign currency exchange rates during the quarter.

Revenues from the smaller Symmetry Surgical segment dropped 7.0% to $20.7 million from $22.2 million in the first quarter of 2013 owing to a continued sluggish hospital spending environment as well as the impact of severe weather conditions. Revenues included a 0.3% benefit from the favorable impact of foreign currency exchange rates.

Margins

Gross profit dipped 4.8% to $23.9 million from $25.1 million in the same period last year. Gross margin contracted 180 basis points (bps) to 23.6%, compared with 25.4% in the year-earlier quarter.

The decrease in gross margin can be attributed to lower year-over-year revenues from the company's higher margin Symmetry Surgical segment. Additionally, gross margin in the OEM Solutions segment was pressurized by inefficiencies associated with inclement weather as well as labor and healthcare inflation.

Adjusted operating earnings improved 4.3% to $6.7 million from $6.4 million in the first quarter of 2013. Adjusted operating margin rose marginally 10 bps to 6.6% from 6.5% a year ago.

The upside in adjusted operating earnings was primarily driven by lower operating expenses, partially negated by decreased revenues from the Symmetry Surgical segment.

Financial Position

SMA exited the quarter with cash and cash equivalents of $14.9 million which more than doubled from $7.4 million as of Dec 28, 2013. Long-term debt increased 3.9% to $177.0 million as of Mar 29, 2014 from $172.0 million as of Dec 28, 2013. Long-term debt to capitalization ratio expanded 50 bps to 38.2% from 37.7% as of Dec 28, 2013.

2014 Outlook

SMA reiterated its earnings and revenues guidance for 2014. SMA anticipates adjusted earnings per share between 42 and 48 cents for the year, including stock based compensation expense. The current Zacks Consensus Estimate of 50 cents per share lies above the guided range.

SMA projects 2014 revenues in the band of $408–$418 million. The present Zacks Consensus Estimate of $410 million lies within the projected band.

Our Take

Despite an impressive year-over-year growth, earnings missed our estimates for the quarter. Revenues during the quarter were impacted by a sudden drop in revenues in the Symmetry Surgical segment.

We remain concerned as SMA continues to face a soft hospital spending environment and adverse weather conditions, in addition to labor and healthcare inflation. Nevertheless, SMA maintained its earnings and revenue projections for 2014, which restores some confidence on the stock.

SMA presently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the medical products industry include Cardica Inc. CRDC, Enzymotec Ltd. ENZY and Mead Johnson Nutrition Company MJN. All these stocks retain a Zack Rank #2 (Buy).