Symmetry Medical Inc. (SMA) posted a 60.0% rise in adjusted earnings per share to 16 cents in the 2014-second-quarter ended Jun 28, 2014, from 10 cents reported in the same quarter of 2013. Adjusted earnings per share also surpassed the Zacks Consensus Estimate of 12 cents by 33.3%.
Adjusted net earnings rose 60.0% to $5.7 million from $3.6 million in the year-ago quarter. On a reported basis, SMA posted a net loss of $2.6 million or 7 cents per share in contrast to net earnings of $1.5 million or 4 cents in the year-ago quarter.
Following the announcement of the impressive earnings figures, shares of SMA climbed nearly 9.1% to close at $9.61 in the last reported session.
Revenues
Second-quarter revenues totaled $101.3 million, up 2.3% year over year, edging past the Zacks Consensus Estimate of $99.0 million. Revenues were primarily driven by higher sales in the company's OEM Solutions segment, partially mitigated by a decrease in revenues at the Symmetry Surgical segment.
Segment Results
Revenues from the core OEM Solutions segment stood at $80.9 million, a rise of 5.5% from $76.7 million in the year-earlier quarter. The increase was driven by higher revenues across all OEM segments – Implants, Instruments, Cases and Other. Also, revenues included a benefit of 1.9% from favorable foreign currency exchange rates. The OEM Solutions segment continues to experience steady end-market demand with procedural growth consistent with the company’s guidance assumptions.
Revenues from the smaller Symmetry Surgical segment slid 8.5% to $20.4 million from $22.3 million in the second quarter of 2013 owing to persistent weakness in the hospital spending environment. Neutralized for the loss of distribution rights for the alliance New Wave product line, revenues declined 4.9% year over year. Revenues included a 0.4% benefit from the favorable impact of foreign currency exchange rates.
OEM Solutions Divestment
SMA announced the sale of its OEM Solutions business to privately-held Tecomet for $450 million in cash or $7.50 per share after fees and elimination of outstanding debt, shortly before its second-quarter earnings announcement.
Under the terms of the agreement, SMA will transfer its remaining Symmetry Surgical business to its shareholders in a newly traded standalone public company. Shareholders will receive one share in the new company for every four Symmetry Medical shares held.
Subject to customary regulations, SMA expects the transaction to be completed by the end of 2014. According to the company, the proposed sale will recognize the value of the OEM Solutions business and enhance the growth potential of Symmetry Surgical, in addition to providing liquidity to shareholders.
Margins and Expenses
Gross profit increased 5.7% to $28.2 million from $26.6 million in the same quarter last year on the back of improved efficiencies in the OEM Solutions segment, partly hurt by lower revenues at the company’s higher margin Symmetry Surgical segment. Meanwhile, gross margin expanded 90 basis points (bps) to 27.8% from 26.9% in the year-earlier quarter.
Research and development expenses rose 8.8% to $1.3 million while general and administrative (G&A) expenses spiked 14.3% to $12.3 million. The hike in G&A expenses was led by higher transaction related costs and amortization expenses, partially offset by a decrease in specific healthcare related costs and net gain on insurance proceeds. Meanwhile, selling and marketing expenses deteriorated 7.9% to $6.3 million owing to successful cost-control initiatives.
Adjusted operating earnings improved 12.8% to $11.0 million from $9.7 million in the second quarter of 2013 while adjusted operating margin rose 100 bps to 10.8% from 9.8% a year ago.
The upside in adjusted operating earnings was primarily supported by higher gross margin and 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 $17.3 million which soared 135.1% from $7.4 million as of Dec 28, 2013. Long-term debt declined 1.2% to $170.0 million as of Jun 28, 2014 from $172.0 million as of Dec 28, 2013. Consequently, the long-term debt to capitalization ratio fell 10 bps to 37.6% from 37.7% as of Dec 28, 2013.
2014 Outlook
Following the divestiture of The Clamonta Ltd. subsidiary business on May 22, 2014, SMA updated its outlook for 2014.
SMA anticipates the divestiture to negatively impact 2014 earnings by approximately 16 cents. However, on the brighter side, adjusted earnings per share will likely include a favorable impact to the tune of 2 cents as Clamonta Ltd. was projected to have a negative impact on earnings in full-year 2014.
Adjusted earnings per share, including stock-based compensation, are projected between 44 and 50 cents compared to the earlier range of 42–48 cents. The current Zacks Consensus Estimate of 50 cents per share coincides with the upper end of the guidance.
On the other hand, SMA lowered its revenue guidance to reflect the divestment of Clamonta Ltd. which was projected to generate approximately $15 million in 2014.
For 2014, SMA expects revenues in the band of $393–$403 million as compared to the prior range of $408–$418 million. The present Zacks Consensus Estimate of $398 million lies within the projected band.
Our Take
We are encouraged by SMA’a impressive year-over-year improvement in earnings and revenues which surpassed expectations in the quarter under review. Higher sales at the company’s core OEM Solutions business boosted second-quarter revenues. Though performance at the Symmetry Surgical segment was weak, the segment represents a continued opportunity for growth, improved margins and cash flow.
SMA’s strategic decision to sell its OEM Solutions business represents an upside potential for its Symmetry Surgical business, positioning the latter as a standalone company focused on the global market for surgical instruments.
Currently, SMA carries a Zacks Rank #1 (Strong Buy). Other well-placed medical product stocks that are worth considering include Abaxis, Inc. (ABAX), Alere Inc. (ALR) and AtriCure, Inc. (ATRC). All these stocks carry a Zacks Rank #2 (Buy).
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