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Symmetry Medical Inc. Reports Operating Results (10-Q)

November 10, 2009 | About:
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10qk

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Symmetry Medical Inc. (SMA) filed Quarterly Report for the period ended 2009-10-03.

Symmetry Medical products and services extend into medical device markets, such as orthopedic, spinal, trauma, dental, cardiovascular, ophthalmology, etc. They offer trusted brands Jet, Othy, PolyVac, Thornton and UltreXX. Symmetry Medical Inc. has a market cap of $279.3 million; its shares were traded at around $7.8 with a P/E ratio of 10.8 and P/S ratio of 0.7.

Highlight of Business Operations:

The $24.9 million decrease in revenue resulted from challenging business conditions due to the overall economic environment that has resulted in reduced demand of 23.8% for our five largest OEM customers as they work down inventory levels and their timing of various product launches. We also experienced unfavorable foreign currency exchange rate fluctuations of $2.7 million. Instrument revenue decreased $7.4 million. This decrease was driven primarily by lower demand from our major OEM customers due to the timing of their various product launch activity and worked down their inventory levels. Foreign currency exchange rate fluctuations compounded the decrease in instrument revenues as they had an unfavorable impact of $0.4 million. Implant revenue decreased $7.3 million primarily driven by our major OEM customers working down inventory and unfavorable foreign currency exchange rate fluctuations of $1.4 million. Case revenue decreased $6.6 million due to lower demand from our major OEM customers associated with product launch activity timing and worked down their inventory levels as well as lower customer demand from our non-orthopedic medical customers as they react to the current economic environment. Case revenue also experienced a $0.3 million reduction driven by unfavorable foreign currency exchange rate fluctuations. Other product revenue decreased $3.6 million driven primarily by a reduction of customer demand due to our largest customer in the aerospace industry reacting to deteriorating market conditions in that sector, in addition to unfavorable foreign currency exchange rate fluctuations of $0.6 million.

Other (Income) Expense. Interest expense for the three month period ended October 3, 2009 decreased $1.0 million, or 37.9%, to $1.7 million from $2.7 million for the comparable period in 2008. This decrease reflects the reduction in the interest rate on our debt due to our improved financial ratios, as well as the general decline in the interest rate market in the third quarter 2009 as compared to 2008. Additionally, aggregate outstanding indebtedness has decreased $44.8 million, or 28.9% as compared to October 4, 2008. The net derivatives gain in third quarter 2009 consists of a gain on interest rate swap valuation of $0.2 million related to our interest rate swap that has not been designated as a hedge under the provisions of the applicable FASB statement as compared to a loss of $0.3 million for the comparable period in 2008 that was more than offset by a gain of $1.3 million on foreign currency forwards. The interest rate swaps are used to convert our variable rate long-term debt to fixed rates. During 2008, the Corporation held foreign currency forwards to mitigate fluctuations in foreign currency on the statement of operations. A gain on the foreign currency valuation of $1.3 million was recorded in derivative valuation gain in the third quarter 2008 and was partially offset $3.3 million of losses on foreign currency fluctuations that were included within other expense.

The $34.2 million decrease in revenue primarily resulted from reduced demand of 5.1% from the five largest OEM customers as they work down inventory levels and their timing of various product launches as well as continued lower demand from other customers as they react to the current economic environment. Revenue also decreased due to unfavorable foreign currency exchange rate fluctuations of $15.9 million. Instrument revenue increased $1.6 million driven by an increase in customer demand of $1.4 million due to $2.2 million from our New Bedford acquisition which was completed at the end of January 2008. Foreign currency exchange rate fluctuations partially offset the increases in instrument revenues as they had an unfavorable impact of $2.0 million. Implant revenue decreased $9.8 million driven by unfavorable foreign currency exchange rate fluctuations of $7.9 million and decreased customer demand of $2.4 million, partially offset by the additional sales from our New Bedford acquisition of $0.5 million. Case revenue decreased $14.2 million due to a $12.2 million decrease in customer demand primarily from our non-orthopedic medical customers as they react to the current economic environment as well as lower orthopedic customer demand in the third quarter of 2009 as they used excess inventory and due to the timing of their various product. Case revenue also experienced $2.0 million of unfavorable foreign currency exchange rate fluctuations. Other product revenue decreased $11.9 million driven by both a reduction in customer demand of $7.9 million due to our largest customer in the aerospace industry reacting to deteriorating market conditions in that sector and unfavorable foreign currency exchange rate fluctuations of $4.0 million.

Selling, General and Administrative Expenses. For the nine month period ended October 3, 2009, selling, general and administrative expenses (“SG&A”) were $37.4 million compared with the nine month period ended October 4, 2008 of $44.5 million. The decrease was primarily driven by a reduction in professional fees and expenses incurred in the first three quarters of 2008 of $4.5 million from the review of accounting irregularities at our Sheffield, UK operating unit. The improvement also reflects a decrease in employee compensation costs, including headcount reductions, taken in response to lower revenue levels and our continued cost control efforts. Additionally, performance based compensation and non-cash restricted stock compensation expense decreased $1.2 million due to lower financial results.

Other (Income) Expense. Interest expense for the nine month period ended October 3, 2009 decreased $3.2 million, or 39.2%, to $5.1 million from $8.3 million for the comparable period in 2008. This decrease reflects the reduction in our interest rate margin above LIBOR due to improved financial ratios, as well as the general decline in the interest rate market in the three quarters of 2009 as compared to 2008. Additionally, aggregate outstanding indebtedness has decreased $44.8 million, or 28.9% as compared to October 4, 2008. In 2009, the Corporation entered into a forward swap contract to manage interest rate risk related to a portion of its current variable rate senior secured term loan. The Corporation has hedged the future interest payments related to $64.1 million of the total outstanding term loan indebtedness due in 2011 pursuant to this forward swap contract. This swap contract is designated as a cash flow hedge of the future payment of variable rate interest with three-month LIBOR fixed at 1.34% per annum in 2009, 2010 and 2011, respectively. The net derivatives gain for the nine month period ended October 3, 2009 consists of a gain on interest rate swap valuation of $0.7 million related to our interest rate swap that has not been designated as a hedge the provisions of the applicable FASB statement as compared to a loss of $0.4 million for the comparable period in 2008. The interest rate swaps are used to convert our variable rate long-term debt to fixed rates. During 2008, the Corporation also held foreign currency forwards to mitigate fluctuations in foreign currency on the statement of operations. A gain on the foreign currency valuation of $1.4 million was recorded in derivative valuation gain for the nine months ended October 4, 2008 and partially offset $2.9 million of losses on foreign currency fluctuations that were included within other expense.

As of October 3, 2009, we had an aggregate of $110.2 million of outstanding indebtedness, which consisted of $93.8 million of term loan borrowings outstanding under our Senior Credit Agreement, $7.4 million of borrowings outstanding under our revolving credit facility, $3.7 million of borrowings under our UK short-term credit facility, $1.8 million of borrowings under our Malaysia short-term credit facility, and $3.5 million of capital lease obligations. We had one outstanding letter of credit as of October 3, 2009 for $3.5 million. Subsequent to October 3, 2009, we increased the line of credit by $0.2 million.

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