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SMA > SEC Filings for SMA > Form 10-Q on 8-Aug-2013All 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.


8-Aug-2013

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 implants, instruments and sterilization cases and trays. Symmetry Surgical, our hospital direct medical distribution business is complementary to core competencies, not competitive with our OEM customers, and 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 second quarter 2013, Symmetry's OEM Solutions business revenue increased $4,576, or 6.1%, compared to the second quarter 2012. This increase reflects the stable orthopedic procedure growth reported by our customers, higher implant sales driven by the timing of stocking orders and inventory adjustments, and increased capital spending by customers on cases to support new product launches. During the second quarter 2013, our combined five largest OEM customers increased revenue by 12.0% compared to the second quarter 2012, primarily driven by an increase in their capital expenditures and increased launch volume. Our overall OEM Solutions revenue in the second quarter 2013 increased by $2,951 from the first quarter 2013.

During the second quarter 2013, Symmetry Surgical revenue decreased $4,963, or 18.2%, compared to the second quarter 2012. This decrease was primarily due to sales disruptions with certain U.S. customers and transitions to distributorships in the rest of the world related to the integration of the Codman surgical instruments business into Symmetry Surgical. These disruptions were primarily driven by the need of customers to change their internal ordering procedures to direct purchase orders to Symmetry Surgical (or our international distributors) for the acquired Codman surgical instruments business as well as the transfer of regulatory authorizations from Johnson & Johnson to Symmetry Surgical. With regard to the US business, we have harmonized the sales force relative to territory coverage and bolstered its effectiveness with comprehensive training on our complete product portfolio. We also launched a comprehensive Symmetry Surgical product catalog - highlighting the significant breadth of our product portfolio - to reinforce to customers the scope and breadth of our offerings. We believe these actions have helped to stabilize the business, as evidenced by the slight sequential increase in sales in the second quarter.

Outside of the U.S., we continue to work with our distribution partners to transfer the required regulatory authorizations for the legacy Codman surgical instrument products and increase business with both new and existing distributors. We have successfully transferred regulatory approvals for product labeled in legacy graphics in the vast majority of countries and are in the process of registering the new Symmetry Surgical labeling of these products in all countries as well. We are also engaged in a similar process for the former SSI and Olsen product lines, which previously had only been in very limited international distribution, so that we may offer these products to customers throughout the world. While this will take considerable time, and will likely not impact our international business during 2013, we believe that this action will create longer-term growth opportunities. We have also opened a global supply chain and international customer service center in Schaffhausen, Switzerland to strengthen our relationships with our international distributors. We expect this investment and our other efforts to help regain our momentum in international markets and improve overall performance.

We believe that the Symmetry Surgical business is operating in an environment with temporary impediments to market growth. The most significant of these was the trend of flat to negative general surgical procedure rates in the U.S. and Europe during the first half of 2013.

Overall, we believe our corrective actions are having a positive impact on the Symmetry Surgical business segment, although continuing initiatives are required to fully address the challenges identified above. We expect continued pressure in this business for the remainder of 2013 and will be looking closely at realizing cost efficiencies post integration to improve profitability. That said, we are encouraged that we are now on a track of improved execution to grow the business.

The sluggish U.S. economy, high unemployment rates and lower than historical levels of surgical implant procedure growth continued to adversely impact customer demand. We continue to be optimistic about the 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, in turn, will be expected to 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. With regard to the Symmetry Surgical segment, we plan to continue to expand coverage and product portfolio to serve our hospital and surgery center direct customers consistently 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.

Second Quarter Results of Operations

Revenue.  Revenue for the three months ended June 29, 2013 decreased $387, or
0.4%, to $101,948 from $102,335 for the comparable 2012 period.  Revenue for
each of our segments and principal product categories in these periods was as
follows:

                                                   Three Months Ended
Sales by product                            June 29, 2013       June 30, 2012      Dollar Change    Percent Change
                                                                         (unaudited)
OEM Solutions Revenue
Instrument                                $        28,078     $        28,530     $        (452 )         (1.6 )%
Implant                                            28,138              25,057             3,081           12.3  %
Cases                                              17,088              14,510             2,578           17.8  %
Other                                               6,327               6,958              (631 )         (9.1 )%
Total OEM Solutions Revenue                        79,631              75,055             4,576            6.1  %

Total Symmetry Surgical Revenue                    22,317              27,280            (4,963 )        (18.2 )%

Total Revenue                             $       101,948     $       102,335     $        (387 )         (0.4 )%

The $4,576 increase in OEM Solutions revenue resulted from increased customer demand within our implants and cases product lines, offset by decreased demand in our instrument and other product lines and unfavorable foreign currency exchange rate fluctuations of $174. Overall, we experienced increased revenues of 12.0% from our five largest OEM customers which drove the increase in revenue and was offset by a reduction in aerospace and other medical customers. OEM Solutions Instrument revenue decreased $452 driven by decreased customer launch demand. OEM Solutions Implant revenue increased $3,081 due to an increase in consumption demand as well as the timing of stocking orders and inventory adjustments at our customers. Case revenue increased $2,578 due primarily to higher capital spending related to increased customer launch volume. OEM Solutions Other product revenue decreased $631 compared to a particularly strong second quarter 2012 and was impacted by unfavorable foreign currency exchange rate fluctuations of $145.

The $4,963 decrease in Symmetry Surgical revenue in the second quarter 2013 as compared to 2012 was primarily the result of sales disruptions with certain U.S. customers and transitions to distributorships in the rest of the world related to the integration of the Codman surgical instruments business into Symmetry Surgical. These disruptions were primarily driven by the need of customers to change their internal ordering procedures to direct purchase orders to Symmetry Surgical (or our international distributors) for the acquired Codman surgical instruments business as well as the transfer of regulatory authorizations from


Johnson & Johnson to Symmetry Surgical. We also believe that a flat trend in the first half of 2013 with regard to surgical procedures in both the US and internationally adversely impacted potential growth in this segment.

Gross Profit. Gross profit for the three months ended June 29, 2013 decreased $200, or 0.7%, to $26,571 from $26,771 for the comparable 2012 period. Gross margin as a percentage of revenue decreased 0.1%, to 26.1% for the second quarter 2013 from 26.2% for the comparable 2012 period.

                                                                Three Months Ended June 29,
                                                                           2013
                                                                                   As a %
                                                                  Dollars        of Revenue
                                                                        (unaudited)
2012 period reported gross profit                             $    26,771           26.2  %
Change in organic revenue and mix                                  (1,315 )         (1.3 )%
Foreign currency impact                                               (10 )            -  %
Manufacturing costs and other                                       1,125            1.2  %
2013 period reported gross profit                             $    26,571           26.1  %

Gross margin was favorably impacted by efficiencies resulting from the OEM Solutions increase in revenue as well as lean initiatives. However, this improvement was more than offset by a lower percentage of revenue from the Corporation's higher margin Symmetry Surgical segment as compared to the same period last year.

Research and Development Expenses. For the three months ended June 29, 2013, research and development expenses increased $363 or 44.8% to $1,174 from $811 in the comparable period in 2012, primarily due to incremental projects, increased project expense, and costs associated with maintaining patents.

Sales and Marketing Expenses. For the three months ended June 29, 2013, sales and marketing expenses increased $198 or 3.0% to $6,815 from $6,617 in the comparable period in 2012, primarily due to increased OEM Solutions sales requiring higher commission as well as changes made to the Symmetry Surgical sales compensation programs during the second quarter 2013 which resulted in higher expenses on the lower sales.

General and Administrative Expenses. For the three months ended June 29, 2013, general and administrative expenses increased $136 or 1.2%, to $11,066 from $10,930 in the comparable period in 2012. Significant items which impacted general and administrative expenses included:

                                                              Three Months Ended June 29, 2013
                                                                                     As a %
                                                                  Dollars          of Revenue
                                                                        (unaudited)
2012 period reported General &Administrative expenses         $    10,930               10.7 %
Symmetry Surgical infrastructure additional costs                     649
Employee compensation and benefit costs paid in cash                  673
Change in amortization of intangible assets                          (234 )
Change in stock compensation                                         (711 )
Medical device excise tax expense                                     246
Other                                                                (487 )
2013 period reported General & Administrative expenses             11,066               10.9 %

During second quarter 2013, we incurred incremental costs for salaries, technology and professional fees associated with increased infrastructure to support the Symmetry Surgical segment. Employee compensation and benefit costs paid in cash increased due to an increase in salaries and benefit expense as well as significant medical claims incurred during the quarter under the Corporation's U.S. based medical plan. Other primarily relates to decreased expenses relating to tax planning initiatives as well as decreased professional service fees for acquisition related expenses.


Facility Closure and Severance Costs. Results of Operations include pre-tax charges of $794 and $299 for the three months ended June 29, 2013 and June 30, 2012, respectively. As of June 29, 2013, severance accruals related to these cost reduction actions totaled $535 and were included in other accrued liabilities in the consolidated balance sheets.

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