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SMA > SEC Filings for SMA > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for SYMMETRY MEDICAL INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SYMMETRY MEDICAL INC.


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

Symmetry Medical Inc. is a leading global source of medical device solutions, including surgical instruments, orthopedic implants, and sterilization cases and trays. We employ over 2,500 teammates around the world who are dedicated to being the trusted global source of innovative medical device solutions and surgical instruments for today's needs and tomorrow's growth.

In our OEM Solutions segment, we offer our original equipment manufacturer (OEM) customers instruments, implants and sterilization cases and trays. Symmetry Surgical, our growing hospital direct medical distribution business, is complementary to our core competencies and is not competitive with our OEM customers. Our salespeople call on hospital personnel in the operating room, materials management and central sterile departments. Our goal is to offer best-in-class quality and regulatory systems as well as customer innovation through Total Solutions® collaborations.

During the third quarter 2012, Symmetry's OEM Solutions business revenue increased $2,594, or 3.5%, compared to the third quarter 2011. This increase was primarily driven by increased customer demand in instruments compared to an unusually weak demand and smaller customer launch volume in the third quarter of 2011. Additionally, other product revenue increased as a result of continued strong customer demand in the aerospace industry. These increases were partially offset by foreign currency exchange rates negatively impacting revenue by $1,429 for all products. During the third quarter 2012, our combined five largest OEM customers increased revenue by 9.8% compared to third quarter 2011, primarily driven by increased demand and greater customer launch volume. Our overall OEM Solutions revenue in the third quarter 2012 increased by $1,077 from the second quarter 2012.

During the third quarter 2012, Symmetry Surgical revenue increased $14,296, or 136.1%, compared to the third quarter 2011. This increase was primarily driven by our acquisitions of Codman surgical instruments and Olsen Medical during 2011.

In August, 2011, we acquired the assets of PSC's Olsen Medical division (Olsen Medical) for $11,000 in cash. Olsen Medical manufactures a full line of single-use and reusable bipolar and monopolar forceps, cords, electrosurgical pens/pencils, electrodes, and accessories. Olsen Medical's products are primarily sold in the U. S. and internationally through distributors.

On December 29, 2011, we acquired the surgical instruments product portfolio from Codman & Shurtleff, Inc., a Johnson & Johnson Company for $165,687 in cash. Codman distributes surgical instruments and sterile disposable surgical products directly to hospitals. The addition of Olsen Medical and Codman surgical instruments allows us to offer an expanded array of medical instruments and related products, expand our intellectual property, trademarks, and regulatory approvals, and provides an instrument procurement center and personnel located in Tuttlingen, Germany. Codman's products are sold primarily in the U.S. and internationally through distributors.

The sluggish U.S. economy, high unemployment rates and lower than historical levels of surgical implant procedure growth continued to adversely impact customer demand. However, we continue to be optimistic about our long-term future as the larger OEMs are increasingly focused on improving their supply chains and plan to launch new products with large programs over the next three years. We believe this will result in fewer suppliers who will provide a wider range of services coupled with high quality and reduced overall costs. We believe that we are well positioned to benefit from increased OEM outsourcing and the consolidation of suppliers. In Symmetry Surgical, we plan to continue to expand coverage and product portfolio to serve our hospital direct customers, consistent with our strategic principles.

Our strategic plan is focused on four distinct but synergistic areas:

· Being the trusted, industry leading orthopedic OEM supplier positioned to gain share in long-term growth segment;

· Diversifying our revenue base with our strategic, growing hospital direct medical device distribution business;

· Utilizing resources to pursue growth opportunities and acquisitions in appropriate Medical Device OEM adjacencies and add to hospital solutions portfolio; and

· Developing a robust intellectual property portfolio with a dedicated R&D team to drive future growth through innovation.

Using this strategy, we are striving to provide the best possible customer experience by offering superior value; the highest-quality new technology; customized services; superior support; and the combination of our products and services into our Total Solutions® offering. Historically, our growth has been driven organically from our core businesses as well as acquisitions designed to augment select areas of our business with more products, services, and technology.

Third Quarter Results of Operations

Revenue. Revenue for the three month period ended September 29, 2012 increased $16,890, or 20.1%, to $100,929 from $84,039 for the comparable 2011 period. Revenue for each of our segments and principal product categories in these periods was as follows:

                                         Three Months Ended
                                   September 29,       October 1,       Dollar      Percent
Sales by product                       2012               2011          Change       Change
                                                         (unaudited)
OEM Solution Revenue
Instrument                        $        29,633     $     24,802     $  4,831         19.5 %
Implant                                    25,632           26,735       (1,103 )       -4.1 %
Cases                                      14,209           15,853       (1,644 )      -10.4 %
Other                                       6,658            6,148          510          8.3 %
Total OEM Solution Revenue                 76,132           73,538        2,594          3.5 %

Total Symmetry Surgical Revenue            24,797           10,501       14,296        136.1 %

Total Revenue                     $       100,929     $     84,039     $ 16,890         20.1 %

The $2,594 increase in OEM Solutions revenue resulted from increased customer demand within our instruments and other product lines. These increases were offset by reduced customer demand within our implant and cases product lines, in addition to unfavorable foreign currency exchange rate fluctuations of $1,429. Overall, we experienced increased revenues of 9.8% from our five largest OEM customers which drove the increase in revenue. OEM Solutions Instrument revenue increased $4,831. This increase was driven by higher revenue from our top five largest OEM customers of $4,310 related to new customer launches compared to an unusually weak demand and smaller customer launch volume in the third quarter of 2011. OEM Solutions Implant revenue decreased $1,103 driven partially by unfavorable foreign currency exchange rate fluctuations of $614 as well as decreased demand from other customers. These reductions were offset by slightly increased demand from our top five largest OEM customers of $365. Case revenue decreased $1,644 due to both unfavorable foreign currency exchange rate fluctuations of $569 as well as soft customer demand across other medical industries while sales to our top five customers were flat year over year. Increase in OEM Solution Other product revenue was driven by increased demand, which was offset by unfavorable foreign currency exchange rate fluctuations of $107.

The $14,296 increase in Symmetry Surgical revenue for the third quarter 2012 as compared to 2011 was primarily the result of the acquisition of Codman surgical instruments in December 2011 and Olsen Medical in August 2011, which added $13,699 of revenue in 2012 compared to the same period 2011. Excluding the contributions of the acquired businesses, revenue increased $597 due to broader product offerings as compared to the prior year period.

Gross Profit. Gross profit for the three month period ended September 29, 2012 increased $12,472, or 79.2%, to $28,226 from $15,754 for the comparable 2011 period. Gross margin as a percentage of revenue increased 9.3%, to 28.0% for the third quarter 2012 from 18.7% for the comparable 2011 period.

                                         Three Months Ended
                                         September 29, 2012
                                                        As a %
                                      Dollars         of Revenue
                                             (unaudited)

2011 period reported gross profit   $    15,754              18.7 %
Change in organic sales                     866               0.0 %
Impact of acquisitions                    8,439               5.9 %
Foreign currency impact                    (266 )             0.0 %
Manufacturing costs and other             3,433               3.4 %
2012 period reported gross profit   $    28,226              28.0 %

Gross profit was favorably impacted by $8,439 due to the acquisitions of Olsen Medical and Codman surgical instruments within our Symmetry Surgical segment. Olsen Medical was acquired during third quarter 2011 therefore contributed slightly to gross profit in the prior year period. The Codman surgical instruments business was acquired subsequent to October 1, 2011, therefore did not contribute to gross profit in the prior year period. Excluding the impact of newly acquired businesses and the change in foreign exchange rates, organic revenue improved by $4,620 which positively impacted gross profit by approximately $866. Further, there were improvements to our gross profit from manufacturing costs related primarily to our increased leveraging of overhead costs resulting from higher OEM Solution sales volume, improvements in scrap and consumables, and efficiencies resulting from our lean initiatives.

Research and Development Expenses. For the three month period ended September 29, 2012, research and development expenses increased $327 or 33.9%, to $1,293 from $966 in the comparable period in 2011. This increase was most significantly attributable to the timing of project costs incurred during the third quarter of 2012 compared to the same period in 2011.

Sales and Marketing Expenses. For the three month period ended September 29, 2012, sales and marketing expenses increased $1,967 or 47.5%, to $6,107 from $4,140 in the comparable period in 2011. Significant items which impacted sales and marketing expenses included:

                                                          Three Months Ended
                                                          September 29, 2012
                                                                         As a %
                                                      Dollars          of Revenue
                                                             (unaudited)

2011 period reported Sales and Marketing expenses   $     4,140                4.9 %
Impact of acquisitions                                    2,516
Other                                                      (549 )
2012 period reported Sales and Marketing expenses   $     6,107                6.1 %

The impact of acquisitions reflects higher costs from the acquisitions of Olsen Medical and Codman surgical instruments business, related primarily to employee compensation in our Symmetry Surgical segment.

General and Administrative Expenses. For the three month period ended September 29, 2012, general and administrative expenses increased $1,997 or 22.9%, to $10,730 from $8,733 in the comparable period in 2011. Significant items which impacted general and administrative expenses included:

                                                                    Three Months Ended
                                                                    September 29, 2012
                                                                                   As a %
                                                                 Dollars         of Revenue
                                                                        (unaudited)

2011 period reported General &Administrative expenses          $     8,733              10.4 %
Impact due to acquired businesses                                      926
Change in amortization of intangible assets                          1,295
Management transition expenses                                        (419 )
Change in stock compensation                                           819
Foreign currency impact                                                  -
Other                                                                 (624 )
2012 period reported General & Administrative expenses         $    10,730              10.6 %

The impact due to acquired businesses reflects higher costs from the acquisitions of Olsen Medical and Codman surgical instruments business, related primarily to employee compensation in our Symmetry Surgical segment. Additionally, intangible assets were acquired with both Olsen Medical and Codman which resulted in an increase of amortization expense. Management transition expenses of $477, which primarily consist of stock and incentive compensation, were incurred in the 2011 period related to the appointment of our new CEO with minimal comparable expenses incurred in 2012. Other expenses were reduced primarily as a result of $356 of SEC-related legal costs incurred in 2011.

Facility Closure and Severance. Results of Operations include pre-tax charges of ($76) and $253 for the three months ended September 29, 2012 and October 1, 2011, respectively, associated with employee cost efficiency actions and employee severance costs. As of September 29, 2012, severance accruals related to these cost reduction and efficiency actions totaled $208 and were included in other accrued liabilities in the condensed consolidated balance sheets.

Operating Income (loss). For the three month period ended September 29, 2012, operating income (loss) was as follows:

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