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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 28, 2014
 
Commission File Number: 001-32374
 
SYMMETRY MEDICAL INC.
(Exact name of registrant as specified in its charter)
 
Delaware
35-1996126
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
3724 North State Road 15, Warsaw, Indiana
46582
(Address of principal executive offices)
(Zip Code)
 
 
(574) 268-2252
 
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        ý Yes ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (S232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
ý Yes  ¨ No
 
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer ¨
 
Accelerated filer   ý
 
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      ¨ Yes  ý  No
 
The number of shares outstanding of the registrant’s common stock as of August 4, 2014 was 37,550,850 shares.
 




TABLE OF CONTENTS
 
PART I FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1
Financial Statements:
 
 
 
 
 
 
Condensed Consolidated Balance Sheets: As of June 28, 2014 and December 28, 2013
 
 
 
 
 
 
Condensed Consolidated Statements of Operations: Three and Six Months Ended June 28, 2014 and June 29, 2013
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income: Three and Six Months Ended June 28, 2014 and June 29, 2013
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows: Six Months Ended June 28, 2014 and June 29, 2013
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
 
Item 4
Controls and Procedures
 
 
 
 
 
PART II OTHER INFORMATION
 
 
 
 
 
 
Item 1A
Risk Factors
 
 
 
 
 
Item 2 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
Item 6
Exhibits 
 
 
 
 
 
Signatures
 
  




Cautionary Note Regarding Forward-Looking Statements
 
Throughout this Quarterly Report on Form 10-Q or in other reports or registration statements filed from time to time with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended, or under the Securities Act of 1933, as amended, as well as in documents we incorporate by reference or in press releases or oral statements made by our officers or representatives, we may make statements that express our opinions, expectations or projections regarding future events or future results, in contrast with statements that reflect historical facts. These predictive statements, which we generally precede or accompany by such typical conditional words such as “anticipate,” “intend,” “believe,” “estimate,” “plan,” “seek,” “project,” “potential,” or “expect,” or by the words “may,” “will,” “could,” or “should,” and similar expressions or terminology are intended to operate as “forward-looking statements” of the kind permitted by the Private Securities Litigation Reform Act of 1995. That legislation protects such predictive statements by creating a “safe harbor” from liability in the event that a particular prediction does not turn out as anticipated.
 
Forward-looking statements convey our current expectations or forecast future events. While we always intend to express our best judgment when we make statements about what we believe will occur in the future, and although we base these statements on assumptions that we believe to be reasonable when made, these forward-looking statements are not a guarantee of performance, and you should not place undue reliance on such statements. Forward-looking statements are subject to many uncertainties and other variable circumstances, many of which are outside of our control, that could cause our actual results and experience to differ materially from those we thought would occur.
 
We also refer you to, and believe that you should carefully read, the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” portions of our Annual Report for fiscal 2013 on Form 10-K, as well as in other reports which we file with the Securities and Exchange Commission, to better understand the risks and uncertainties that are inherent in our business and in owning our securities. These reports are available publicly on the SEC website, www.sec.gov, and on our website, www.symmetrymedical.com.
 
Any forward-looking statements which we make in this report or in any of the documents that are incorporated by reference herein speak only as of the date of such statement, and we undertake no ongoing obligation to update such statements. Comparisons of results between current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
 




PART I FINANCIAL INFORMATION
 
ITEM I. FINANCIAL STATEMENTS
 
SYMMETRY MEDICAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
 
 
June 28, 2014
 
December 28, 2013
 
 
(unaudited)
 

ASSETS:
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
17,307

 
$
7,362

Accounts receivable, net
 
57,961

 
51,813

Inventories
 
58,386

 
58,879

Refundable income taxes
 
3,917

 
5,784

Deferred income taxes
 
5,975

 
5,439

Other current assets
 
5,906

 
4,900

Total current assets
 
149,452

 
134,177

Property and equipment, net
 
88,485

 
89,993

Goodwill
 
171,563

 
182,178

Intangible assets, net of accumulated amortization
 
101,249

 
105,004

Other assets
 
3,395

 
4,484


 


 

Total Assets
 
$
514,144

 
$
515,836


 

 

LIABILITIES AND SHAREHOLDERS' EQUITY:
 
 
 
 
Current Liabilities:
 

 
 
Accounts payable
 
$
32,143

 
$
28,837

Accrued wages and benefits
 
10,896

 
9,656

Other accrued expenses
 
7,117

 
7,138

Accrued income taxes
 
293

 
53

Derivative valuation liability
 
434

 
283

Revolving line of credit
 
953



Current portion of capital lease obligations
 
500

 
465

Current portion of long-term debt
 

 
6,531


 


 

Total current liabilities
 
52,336

 
52,963

Accrued income taxes
 
1,524

 
2,126

Deferred income taxes
 
4,491

 
7,536

Derivative valuation liability
 
2,499

 
1,104

Other liabilities
 
948

 
886

Capital lease obligations, less current portion
 
708

 
974

Long-term debt, less current portion
 
170,000

 
165,450


 


 

Total Liabilities
 
232,506

 
231,039


 

 

Commitments and contingencies
 

 


 

 

Shareholders' Equity:
 
 
 
 
Common Stock, $.0001 par value; 75,000 shares authorized; shares issued June 28, 2014-37,555; December 28, 2013-37,209
 
4

 
4

Additional paid-in capital
 
290,994

 
289,257

Accumulated deficit
 
(14,828
)
 
(9,531
)
Accumulated other comprehensive income
 
5,468

 
5,067


 


 

Total Shareholders' Equity
 
281,638

 
284,797


 


 

Total Liabilities and Shareholders' Equity
 
$
514,144

 
$
515,836

See accompanying notes to condensed consolidated financial statements.

2



SYMMETRY MEDICAL INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except per Share Data; Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
 
 
 
 
 
 
 
 
Revenue
$
101,251


$
99,015


$
198,152


$
194,826

Cost of revenue
73,086


72,368


146,253


143,293

Gross profit
28,165


26,647


51,899


51,533

Research and development expenses
1,277


1,174


2,399


2,338

Sales and marketing expenses
6,268


6,807


12,943


13,919

General and administrative expenses
12,268


10,730


22,892


23,264

Asset impairment
10,500




10,500



Facility closure and severance
428


794


767


907

Operating income (loss)
(2,576
)

7,142


2,398


11,105













Other (income) expense:
 


 


 


 

Interest expense
2,109


4,554


4,332


9,171

Loss on debt extinguishment




503



Derivatives valuation gain


44




237

Other
(160
)

419


(96
)

101

Income (loss) from continuing operations before income taxes
(4,525
)

2,125


(2,341
)

1,596

Income tax expense (benefit)
(1,911
)

630


(1,122
)

337

Income (loss) from continuing operations
(2,614
)

1,495


(1,219
)

1,259

Loss from discontinued operations, net of taxes
(3,937
)

(318
)

(4,078
)

(376
)
Net income (loss)
(6,551
)

1,177


(5,297
)

883













Income (loss) per share from continuing operations:
 


 


 


 

Basic
$
(0.07
)

$
0.04


$
(0.03
)

$
0.03

Diluted
$
(0.07
)

$
0.04


$
(0.03
)

$
0.03













Income (loss) per share:
 


 


 


 

Basic
$
(0.18
)

$
0.03


$
(0.14
)

$
0.02

Diluted
$
(0.18
)

$
0.03


$
(0.14
)

$
0.02

 
 
 
 
 
 
 
 
Weighted average common shares and equivalent shares outstanding:
 


 


 


 

Basic
36,584


36,314


36,576


36,295

Diluted
36,584


36,843


36,576


36,803

 
See accompanying notes to condensed consolidated financial statements.

3



SYMMETRY MEDICAL INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands; Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
 
 
 
 
 
 
 
 
Net income (loss)
$
(6,551
)
 
$
1,177

 
$
(5,297
)
 
$
883

 
 
 
 
 
 
 
 
Foreign currency adjustments:
 

 
 

 
 

 
 

     Intra-entity foreign currency transaction adjustment
584


118


774


(1,367
)
     Foreign currency translation adjustments
567

 
608

 
590


(1,651
)
Net unrealized gains on derivative instruments:
 
 
 

 



 

Unrealized holding gains (losses), net of taxes
(653
)

1,239


(1,202
)

1,488

     Reclassification adjustment for realized losses included in net income
121


46


240


101

Comprehensive income (loss)
$
(5,932
)

$
3,188


$
(4,895
)

$
(546
)
 
See accompanying notes to condensed consolidated financial statements.

4



SYMMETRY MEDICAL INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands; Unaudited)

Six Months Ended

June 28, 2014

June 29, 2013
Operating activities
 


 

Net income (loss)
$
(5,297
)
 
$
883

Adjustments to reconcile net income to net cash provided by operating activities:
 


 

Depreciation
8,115


8,327

Amortization of intangible assets
3,793


3,550

Amortization of debt issuance costs
515


1,095

Interest paid in kind


669

Net loss on sale of assets
100


266

Loss on sale of business
4,117



Asset impairment
10,500



Deferred income tax provision
(3,611
)

679

Loss on debt extinguishment
503



Excess tax benefit from stock-based compensation
(61
)
 

Stock-based compensation
1,795


1,254

Derivative valuation loss


237

Foreign currency transaction (gain) loss
(613
)

224

Change in operating assets and liabilities:



 

Accounts receivable
(7,546
)

6,773

Other assets
(990
)

(1,395
)
Inventories
(1,737
)

(1,268
)
Current income taxes
2,106


(1,411
)
Accounts payable
4,129


2,830

Accrued expenses and other
1,840


(3,042
)
 





Net cash provided by operating activities
17,658


19,671

 





Investing activities
 


 

Purchases of property and equipment
(6,927
)

(6,173
)
Proceeds from sale of property and equipment and other
807


26

 





Net cash used in investing activities
(6,120
)

(6,147
)
 





Financing activities
 


 

Proceeds from Bank Revolver
63,880


74,180

Payments on Bank Revolver
(48,880
)

(55,180
)
Proceeds on short term borrowings
15,260



Payments on short term borrowings
(14,330
)


Payments on bank term loans and capital lease obligations
(17,212
)

(29,206
)
Proceeds from the issuance of common stock, net
(119
)

(409
)
Excess tax benefit from stock-based compensation
61



 





Net cash used in financing activities
(1,340
)

(10,615
)
Effect of exchange rate changes on cash
(253
)

(218
)
 





Net increase in cash and cash equivalents
9,945


2,691

Cash and cash equivalents at beginning of period
7,362


9,815

 





Cash and cash equivalents at end of period
$
17,307


$
12,506

 





Supplemental disclosure of cash flow information:
 


 

Cash paid for interest
$
3,936


$
8,945

Cash paid for income taxes
$
17


$
838

 
 
 
 
Supplemental disclosure of non-cash investing activities:





Non-cash property, plant and equipment additions
$
1,130


$


5



See accompanying notes to condensed consolidated financial statements.

6



SYMMETRY MEDICAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data; Unaudited)
 
1. Basis of Presentation
 
The condensed consolidated financial statements include the accounts of Symmetry Medical Inc. and its wholly-owned subsidiaries (collectively referred to as the Corporation), which operates in two reportable segments: (1) Original Equipment Manufacturer (“OEM”) Solutions and (2) Symmetry Surgical.  The Corporation is a global supplier of integrated products consisting primarily of surgical implants, instruments and cases to orthopedic and other medical device companies. OEM Solutions primarily designs, develops and manufactures implants and related surgical instruments and cases for orthopedic device markets. Symmetry Surgical is the Corporation’s hospital direct business which sells a broad range of reusable stainless steel and titanium surgical hand-held instruments and retractor systems, sterile disposable surgical products, and sterilization containers.
 
The condensed consolidated financial statements of the Corporation have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments of a normal recurring nature considered necessary to present fairly the consolidated financial position of the Corporation, its results of operations and cash flows. The Corporation’s results are subject to seasonal fluctuations. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements included herein should be read in conjunction with the fiscal year 2013 consolidated financial statements and the notes thereto included in the Corporation’s Annual Report on Form 10-K for fiscal year 2013.
 
The Corporation’s fiscal year is the 52 or 53 week period ending on the Saturday closest to December 31. Fiscal year 2014 is a 53 week year ending January 3, 2015.  The Corporation’s interim quarters for 2014 are 13 weeks long, except for the fourth quarter which will be 14 weeks long and quarter-end dates have been set as March 29, 2014, June 28, 2014 and September 27, 2014. Fiscal year 2013 was a 52 week year (ending December 28, 2013). The Corporation’s interim quarters for 2013 were 13 weeks long, ending March 30, 2013, June 29, 2013 and September 28, 2013. References in these condensed consolidated financial statements to the three months ended refer to these financial periods, respectively.  

 
2. New Accounting Pronouncements

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists: In July 2013, the Financial Accounting Standards Board ("FASB"), issued Accounting Standards Update ("ASU") 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, ("ASU 2013-11"). ASU 2013-11 requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain instances. ASU 2013-11 is effective for the first reporting period after December 15, 2013 with either prospective or retrospective adoption permitted. The Corporation prospectively adopted ASU 2013-11 on December 29, 2013, resulting in $363 of unrecognized tax benefits presented as a reduction to tax credit carryforwards.


3. Discontinued operations

The results of operations for a business unit that the Corporation has sold are classified in discontinued operations for all periods presented.

On May 21, 2014, the Corporation completed the sale of its subsidiary, Clamonta Ltd. for $1,350. Symmetry believed the sale would better enable the Corporation to focus its efforts on its core markets and reduce its manufacturing footprint. In connection with the sale, Symmetry recorded a loss on the sale of assets of approximately $4,117.




7



The operations of Clamonta Ltd. has historically been included in the OEM Solutions segment. The following table summarizes certain operating results of Clamonta for all periods presented:

 
 
Three Months Ended

Six Months Ended
 
 
June 28, 2014

June 29, 2013

June 28, 2014

June 29, 2013
 
 
 
 
 
 
 
 
 
Revenue
 
$
2,431

 
$
2,933

 
$
6,798

 
$
5,986

Cost of revenue
 
$
2,275

 
$
3,010

 
$
6,436

 
$
5,805

Sales and marketing expenses
 
$
7

 
$
8

 
$
18

 
$
15

General and administrative expenses
 
$
216

 
$
334

 
$
560

 
$
640

Facility closure and severance costs
 
$

 
$

 
$

 
$
16

Other (income) expense
 
$
4,116

 
$
(3
)
 
$
4,108

 
$
1

Income tax expense (benefit)
 
$
(246
)
 
$
(98
)
 
$
(246
)
 
$
(115
)
Loss from discontinued operations, net of tax
 
$
(3,937
)
 
$
(318
)
 
$
(4,078
)
 
$
(376
)

Summary of Assets and Liabilities of Discontinued Operations:
 
 
December 28, 2013
 
 
 
Cash and cash equivalents
 
$
213

Accounts receivable
 
$
2,041

Inventory
 
$
2,905

Other current assets
 
$
44

Property and equipment, net
 
$
2,231

Total assets
 
$
7,434

 
 
 
Accounts payable
 
$
3,060

Accrued wages and benefits
 
$
275

Other accrued expenses
 
$
122

Total liabilities
 
$
3,457


4. Inventories
 
Inventories consist of the following:  
 
June 28,
2014
 
December 28,
2013
 
(unaudited)
 


Raw material and supplies
$
10,340


$
10,249

Work-in-process
19,465


23,315

Finished goods
28,581


25,315







 
$
58,386


$
58,879

 




8




5. Property and Equipment
 
Property and equipment, including depreciable lives, consists of the following:
 
 
June 28,
2014

December 28,
2013
 
(unaudited)



Land
$
5,832


$
6,046

Buildings and improvements (20 to 40 years)
42,412


42,519

Machinery and equipment (5 to 15 years)
161,940


161,734

Office equipment (3 to 5 years)
22,260


21,619

Construction-in-progress
7,032


4,061







 
239,476


235,979

Less accumulated depreciation
(150,991
)

(145,986
)
 



 
$
88,485


$
89,993

 

6. Goodwill and Other Intangible Assets
 
The Corporation has multiple operating segments which are comprised of multiple components that represent the lowest level for which discrete financial information is available and the operating results of that component are regularly reviewed by management. The Corporation aggregates certain components that share similar economic similarities and that are vertically integrated within the same operating segment into reporting units

In the second quarter of fiscal 2014, the Corporation determined that the expected operating results for one of its reporting units was projected to be substantially lower than previous forecasts. Given this information, the Corporation conducted an interim impairment test and determined that impairment existed. The impairment is $10,500 for goodwill and has been recorded in the condensed consolidated statements of operations within Asset Impairment. The Corporation recorded a pre-tax non-cash charge during the second quarter of fiscal 2014 related to the Symmetry Surgical segment and was primarily driven by lower revenue due to sluggish hospital spending environment in the U.S. and previously disclosed integration challenges related to the 2011 acquisition of the Codman surgical instruments business from which we have not recovered as quickly as previously expected.

The Corporation determines the fair value of intangible assets using an income-based approach. The approach calculates fair value by estimating the after-tax cash flows attributable to the asset and then discounting these after-tax cash flows to a present value using a risk-adjusted discount rate. The calculated fair value is compared to the carrying value to determine if any impairment exists.

To derive the fair value of the reporting unit, as required in step one of the impairment test, the Corporation used the income approach, specifically the discounted cash flow method, to determine the fair value of each reporting unit and the associated amount of the impairment charge. This approach calculates fair value by estimating the after-tax cash flows attributable to a reporting unit and then discounting these after-tax cash flows to a present value using a risk-adjusted discount rate. This methodology is consistent with how the Corporation estimates the fair value of its reporting units during its annual goodwill and indefinite lived intangible asset impairment tests. Inputs used to determine the fair value of the Corporation's reporting units are considered Level 3 inputs of the fair value hierarchy and include the following:

The Corporation's financial projections for this reporting unit are based on management's assessment of macroeconomic variables, industry trends and market opportunities, as well as the Corporation's strategic objectives and future growth plans. Revenue growth rates assumed for the Corporation’s reporting unit where impairment was recognized was approximately 4-6% for 2015 and beyond.
The discount rate used to measure the present value of the projected future cash flows is set using a weighted-average cost of capital method that considers market and industry data, as well as the Corporation's specific risk factors that are likely to be considered by a market participant.  The weighted-average cost of capital is the Corporation's estimate

9



of the overall after-tax rate of return required by equity and debt holders of a business enterprise. The discount rate used for the Corporation’s reporting unit where impairment was recognized was approximately 12.0%.

For Level 3 measurements, significant increases or decreases in long-term growth rates or discount rates in isolation or in combination could result in a significantly lower or higher fair value measurement.

In the second step, the Corporation assigned the reporting unit's fair value to all of its assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment charge. This allocation process was performed only for purposes of measuring the goodwill impairment and not to adjust the carrying values of the recognized assets and liabilities.
Prior to performing the annual goodwill impairment test for the reporting unit that failed step 1, the Corporation tested long-lived assets to be held and used for impairment on an undiscounted cash flow basis. Based on the results of this testing, no intangible assets were deemed impaired.
The reconciliation of the beginning and ending carrying amounts of goodwill are as follows:
Balance as of December 29, 2012
$
229,134

 
Impairment of goodwill
(47,450
)
 
Effects of foreign currency
494

Balance as of December 28, 2013
$
182,178

 
Impairment of goodwill
(10,500
)
 
Effects of foreign currency
(115
)
Balance as of June 28, 2014
$
171,563


7. Derivatives
 
The Corporation utilizes derivative instruments to minimize the volatility of cash flows and statement of operations impacts associated with interest rate payments on its variable rate debt and the impact of fluctuations in foreign currency. The Corporation recognizes all derivative instruments as either assets or liabilities at fair value on the consolidated balance sheets. Derivative asset and liability amounts with the same counterparty are netted against each other for financial reporting purposes. The Corporation utilizes third party valuations to assist in the determination of the fair value of these derivatives. The Corporation considered its derivative instrument valuations to be Level 2 fair value measurements.
 
To the extent a derivative instrument was designated effective as a cash flow hedge of an exposure to changes in the fair value of a future transaction, the change in fair value of the derivative was deferred in accumulated other comprehensive income, a component of shareholders' equity in the consolidated balance sheets, until the underlying transaction hedged was recognized in the consolidated statements of operations. The Corporation accounts for certain derivatives hedging the payment of interest as cash flow hedges and the impact of the hedge was reclassified to interest expense in the consolidated statements of operations upon payment of interest.
 
The Corporation's profitability and cash flows are affected by changes in interest rates, specifically LIBOR. The primary purpose of the Corporation's interest rate risk management activities is to hedge its exposure to changes in interest rates. In March, 2012, the Corporation entered into two forward swap contracts to manage interest rate risk related to its Bank Term Loan and a portion of its Bank Revolver. The notional amount on the swap contracts is $99,628 as of June 28, 2014 and is reduced to $37,500 by December 2022 in line with expected reductions in the related debt instruments. The fixed per annum interest rate on the swap contracts is 0.99% in 2014 that incrementally increase to 3.81% by 2022. These swap contracts, which were a fair value liability of $2,933 and $1,387 as of June 28, 2014 and December 28, 2013, respectively, were designated as cash flow hedges of the future payments of variable rate interest with one-month LIBOR. For the three and six months ended June 28, 2014, the Corporation recorded gain/(loss) of ($854) and ($1,546), respectively, attributable to these cash flow hedges included in other comprehensive income. Of the total cumulative loss, $434 will be reclassified into earnings in the next twelve months.

In June and July 2012, the Corporation entered into forward swap contracts to mitigate the impact of fluctuations in foreign currency on the statement of operations. As of June 28, 2014 and December 28, 2013, the Corporation had settled all of its outstanding forward swap contracts. As of June 29, 2013, the Corporation had remaining contracts for the sale of 71 Euros,

10



which were settled in equal amounts over the twelve month period which began July 2012. These swap contracts were not designated as cash flow hedges and therefore the change in the fair value was immediately recorded in derivatives valuation (gain) loss in the consolidated statements of operations.

  
8. Fair Value of Financial Instruments
 
As of June 28, 2014, the Corporation held certain assets and liabilities that are required to be measured at fair value on a recurring basis. These included the Corporation's cash equivalents and derivative instruments in the form of interest rate swaps and foreign currency forward contracts. The Corporation's cash equivalents include highly liquid financial instruments that are readily convertible with maturities of 90 days or less. The Corporation’s derivative instruments consist of contracts that are not traded on a public exchange. The fair values of interest rate derivative instruments and foreign currency forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Corporation has categorized these derivative instruments as Level 2 in accordance with the FASB Standard on fair value measurement.
 
On a recurring basis management measures the fair value of its interest rate swaps using the market approach based on projections of the one-month LIBOR rate over the life of each swap. Also on a recurring basis, management measures the fair value of its foreign currency forward contracts using the market approach based on the projections of the Euro rate over the life of each forward contract. The fair value and carrying value of the Corporation’s assets and liabilities measured at fair value on a recurring basis were as follows:
 
 
June 28, 2014

December 28, 2013
 
Fair Value Measurements

Fair Value Measurements
 
Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total
 
(unaudited)

 

 

 

 
Assets
 


 


 


 


 


 


 




Cash equivalents
$


$
4,829


$


$
4,829


$


$
35


$


$
35

Total assets
$


$
4,829


$


$
4,829


$


$
35


$


$
35

























Liabilities
 


 


 


 


 


 


 


 

Interest rate swaps
$


$
(2,933
)

$


$
(2,933
)

$


$
(1,387
)

$


$
(1,387
)
Total liabilities
$


$
(2,933
)

$


$
(2,933
)

$


$
(1,387
)

$


$
(1,387
)
 
 
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. Assets and liabilities acquired in business combinations are recorded at their fair value as of the date of acquisition.
 
The Corporation reviews for goodwill impairment annually on the first day of the fourth fiscal quarter and more frequently if circumstances indicate its carrying value may not be recoverable. The fair value of the reporting units is determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, corporate tax structure and product offerings. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation and risks associated with the reporting unit. These assets would generally be classified within Level 3, in the event that the Corporation were required to measure and record such assets at fair value within its consolidated financial statements, as discussed in Note 6, Goodwill and Other Intangible Assets.

The Corporation periodically evaluates the carrying value of long-lived assets to be held and used, including definite-lived intangible assets and property plant and equipment, when events or circumstances warrant such a review. Fair value is determined primarily using anticipated cash flows assumed by a market participant, discounted at a rate commensurate with the risk involved and these assets would generally be classified within Level 3, in the event that the Corporation were required to measure and record such assets at fair value within its consolidated financial statements.
 
Additionally, financial instruments also consist of cash, accounts receivable, accounts payable and long-term debt.  The carrying value of long-term debt materially approximates fair value. Additionally, the fair value of cash and net accounts

11



receivable and payable was estimated by management to approximate fair value due to the relatively short period of time to maturity for these instruments. 

 
9. Debt Arrangements
 
The Corporation’s Amended Credit Agreement currently provides for a $200,000 revolving line of credit (Bank Revolver) and a $50,000 bank term loan (Bank Term Loan). The Amended Credit Agreement also includes an accordion feature, which permits the Corporation to borrow up to an additional $50,000 in the form of additional term loans or an increase in the Bank Revolver subject to the terms and conditions set forth in the Amended Credit Agreement. The Amended Credit Agreement, which is senior and secured, has an aggregate of $170,000 outstanding as of June 28, 2014.

Borrowings under the Amended Credit Agreement bear interest at a rate per annum based upon LIBOR, the Federal Funds rate or the Lenders' prime rate, in each case plus an applicable margin, at the Corporation's option. The Bank Term Loan was to be repaid in quarterly installments of $2,778, could be prepaid, in whole or in part, at the option of the Corporation, and was required to be prepaid using all or a portion of the net cash proceeds of certain asset sales, recovery events, and issuances of new debt or equity and, depending on the Corporation's Total Leverage Ratio (as defined in the Amended Credit Agreement), using a portion of the Corporation's Excess Cash Flow (as defined in the Amended Credit Agreement) (the "Excess Cash Flow Prepayment"). The Excess Cash Flow Prepayment was required to be made within 90 days of the end of the fiscal year in which the Excess Cash Flow is generated. As of December 28, 2013, the Excess Cash Flow calculation required the Corporation to prepay the bank term loan payable in full prior to March 29, 2014. The payment was made with capacity on the Bank Revolver. The Bank Revolver matures on November 3, 2015.

 The Amended Credit Agreement contains various financial covenants, including covenants imposing a maximum ratio of total debt to EBITDA (as defined in the Amended Credit Agreement) and prescribing a minimum ratio of EBITDA to fixed charges (as defined in the Amended Credit Agreement). The Amended Credit Agreement also contains covenants restricting certain corporate actions, including asset dispositions, acquisitions, payment of dividends and certain other restricted payments, changes of control, incurring indebtedness, incurring liens, making loans and investments and transactions with affiliates. The Amended Credit Agreement is secured by substantially all of the assets of the Corporation (and its U.S. subsidiaries) and also contains customary events of default.
 
On December 27, 2013, the Corporation amended its Amended Credit Agreement to allow for the prepayment of the senior subordinated term notes (referred to as "Term Notes" or "Mezzanine Debt") and to modify certain financial covenants. In connection with the amendment, the Corporation paid off the outstanding principal and interest of the Term Notes that were to mature on December 29, 2017. The outstanding principal balance of the Term Notes bore interest at a rate of 14% per annum.

As of June 28, 2014, the most restrictive financial covenants per the Corporation’s lending arrangements included the debt to EBITDA covenant ratio to be less than 3.75:1. The Corporation's ratio as of June 28, 2014 was approximately 3.01:1. The minimum interest coverage ratio is required to be greater than 1.25:1, and the Corporation's ratio at June 28, 2014 was approximately 2.25:1. The Corporation was in compliance with all covenants as of June 28, 2014. The debt to EBITDA covenant ratio will become more restrictive throughout 2014, which will be required to be less than 3.50:1, as of January 3, 2015.
 

















12




10. Other Comprehensive Income
 
Amounts reclassified from accumulated other comprehensive income (loss) to earnings during the three and six months ended June 28, 2014 and June 29, 2013 were as follows:
   
Details about accumulated other comprehensive income components
 
Amount reclassified from accumulated other
comprehensive income

Affected line item in the statement where net income is presented
 
Three Months Ended

Six Months Ended

 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013

 
 
(unaudited)

(unaudited)

 
Realized losses on derivative instruments
 
$
193


$
82


$
381


$
180


Interest expense
Tax benefit
 
(72
)

(36
)

(141
)

(79
)

Income tax expense (benefit)
Net of tax
 
$
121


$
46


$
240


$
101


 
  

11. Income Taxes

Income (loss) from continuing operations before income taxes consisted of:


Three Months Ended

Six Months Ended

June 28, 2014

June 29, 2013

June 28, 2014

June 29, 2013

(unaudited)

(unaudited)
Domestic
(6,730)

770

(6,309)

(843)
Foreign
2,205

1,355

3,968

2,439

(4,525)

2,125

(2,341)

1,596

The provision for income taxes differs from that computed at the Federal statutory rate of 35% in 2014 and 2013, respectively, as follows: 

Three Months Ended

Six Months Ended

June 28, 2014

June 29, 2013

June 28, 2014

June 29, 2013

(unaudited)

(unaudited)
Tax at Federal statutory rate
$
(1,584
)

$
744


$
(819
)

$
559

State income taxes
(363
)

36


(291
)

20

State tax credits
(14
)

7


(16
)

4

Foreign income taxes
(408
)

(140
)

(505
)

(115
)
Qualified production activities deduction
120


(6
)

81


(14
)
Research and development credits--current year
(66
)

(11
)

(75
)

(18
)
Valuation allowance
(45
)

(20
)

31


(39
)
Goodwill impairment
186




186



Reserve for uncertain tax positions
97


11


40


57

Other
166


9


246


(117
)

$
(1,911
)
 
$
630

 
$
(1,122
)
 
$
337

 

12. Segment Reporting 
 

13



The Corporation has two reportable segments: OEM Solutions and Symmetry Surgical. OEM Solutions primarily designs, develops and manufactures implants and related surgical instruments and cases for orthopedic device companies and companies in other medical device markets such as arthroscopy, dental, laparoscopy, osteobiologic and endoscopy. OEM Solutions also manufactures specialized non-healthcare products, primarily in the aerospace industry. OEM Solutions manages its business in multiple operating segments. Because of the similar economic characteristics of these operations, including the nature of the products, comparable level of FDA regulations, and same or similar customers, those operations have been aggregated for segment reporting purposes. Symmetry Surgical is the Corporation’s hospital direct business which sells a broad range of reusable stainless steel and titanium surgical hand-held instruments and retractor systems, sterile disposable surgical products (vein strippers, SECTO dissectors, tonsil sponges and surgical marker pens), and sterilization containers. These products are typically used in the surgical specialties of spine, general/OB-GYN, microsurgery/neurosurgery, orthopedics, laparoscopy, cardiovascular, thoracic and general surgery in the hospital setting as well as surgery centers and in select physician offices.
 
The Corporation is a multi-national company with operations in the U.S., United Kingdom, France, Ireland, Malaysia, Germany and Switzerland. As a result, the Corporation's financial results can be impacted by currency exchange rates in the foreign markets in which the Corporation sells its products. Revenues are attributed to geographic locations based on the location to which we ship our products.
 
The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Corporation’s 2013 Form 10-K, except that the Corporation evaluates segment performance based on income from operations. The Corporation allocates certain administrative corporate charges to the OEM Solutions and Symmetry Surgical reportable segments. Other Corporation charges, such as interest, income taxes and remaining unallocated administrative charges have not been allocated to the OEM Solutions or Symmetry Surgical reportable segments. The Corporation generally accounts for intersegment sales and transfers at cost plus a specified mark-up.
 
Reportable segment information is as follows:
 
Three Months Ended June 28, 2014
 
OEM
Solutions

Symmetry
Surgical

Unallocated

Combined
segments

Eliminations

Consolidated
Total
 
(unaudited)
Revenues
 


 


 


 


 


 

External revenues
$
80,880


$
20,371




$
101,251




$
101,251

Intersegment revenues
1,995


96




2,091


$
(2,091
)


Total revenues
82,875


20,467




103,342


(2,091
)

101,251



















Depreciation and amortization
4,203


1,577


$
74


5,854




5,854



















Operating income (loss)
9,796


(9,020
)

(3,233
)

(2,457
)

(119
)

(2,576
)
Interest expense
 


 


 


 


 


2,109

Other
 


 


 


 


 


(160
)
Loss before income taxes
 


 


 


 


 


(4,525
)
 

14



 
Three Months Ended June 29, 2013
 
OEM
Solutions

Symmetry
Surgical

Unallocated

Combined
segments

Eliminations

Consolidated
Total
 
(unaudited)
Revenues
 


 


 


 


 


 

External revenues
$
76,698


$
22,317




$
99,015




$
99,015

Intersegment revenues
1,590


28




1,618


$
(1,618
)


Total revenues
78,288


22,345




100,633


(1,618
)

99,015



















Depreciation and amortization
4,250


1,513


$
52


5,815




5,815



















Operating income (loss)
8,934


639


(2,361
)

7,212


(70
)

7,142

Interest expense
 


 


 


 


 


4,554

Derivatives valuation loss
 


 


 


 


 


44

Other
 


 


 


 


 


419

Income before income taxes
 

 

 

 

 

2,125


 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 28, 2014
 
OEM
Solutions

Symmetry
Surgical

Unallocated

Combined
segments

Eliminations

Consolidated
Total
 
(unaudited)
Revenues
 


 


 


 


 


 

External revenues
$
157,144


$
41,008




$
198,152




$
198,152

Intersegment revenues
3,508


165




3,673


$
(3,673
)


Total revenues
160,652


41,173




201,825


(3,673
)

198,152



















Depreciation and amortization
8,462


3,148


$
146


11,756




11,756



















Operating income (loss)
16,097


(8,675
)

(4,903
)

2,519


(121
)

2,398

Interest expense
 


 


 


 


 


4,332

Loss on debt extinguishment
 

 
 

 
 

 
 

 
 

 
503

Other
 


 


 


 


 


(96
)
Loss before income taxes
 

 

 

 

 

(2,341
)



15



 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 29, 2013
 
OEM
Solutions

Symmetry
Surgical

Unallocated

Combined
segments

Eliminations

Consolidated
Total
 
(unaudited)
Revenues
 


 


 


 


 


 

External revenues
$
150,325


$
44,501




$
194,826




$
194,826

Intersegment revenues
2,471


35




2,506


$
(2,506
)


Total revenues
152,796


44,536




197,332


(2,506
)

194,826



















Depreciation and amortization
8,512


2,998


$
102


11,612




11,612



















Operating income (loss)
14,549


1,960


(5,407
)

11,102


3


11,105

Interest expense
 


 


 


 


 


9,171

Derivatives valuation loss
 


 


 


 


 


237

Other
 


 


 


 


 


101

Income before income taxes
 

 

 

 

 

1,596


Revenues to External Customers:  
 
Three Months Ended

Six Months Ended

June 28, 2014

June 29, 2013

June 28, 2014

June 29, 2013
 
(unaudited)

(unaudited)
United States
$
74,623


$
76,419


$
144,934


$
149,957

Ireland
8,473


7,948


16,782


15,642

United Kingdom
4,490


3,514


8,367


7,123

Other foreign countries
13,665


11,134


28,069


22,104













Total revenues
$
101,251


$
99,015


$
198,152


$
194,826

 
Concentration of Credit Risk:
  
A substantial portion of the Corporation's net revenues is derived from a limited number of customers. Net revenue from customers of the Corporation which individually account for 10% or more of the Corporation's net revenue is as follows:
 
Three months ended June 28, 2014 - Two customers represented approximately 29.8% and 11.3%, respectively, of revenue.

Three months ended June 29, 2013 - Two customers represented approximately 32.3% and 10.8%, respectively, of revenue.

Six Months Ended June 28, 2014 - Two customers represented approximately 31.0% and 11.7%, respectively, of revenue.

Six Months Ended June 29, 2013 - One customer represented approximately 33.5% of revenue.











16



Following is a summary of the composition by segment and product category of the Corporation's net revenues to external customers.
 
 
Three Months Ended

Six Months Ended
Sales by product
June 28, 2014

June 29, 2013

June 28, 2014

June 29, 2013
 
(unaudited)

(unaudited)
OEM Solutions Revenue
 


 


 


 

Instruments
$
29,760


$
28,078


$
58,690


$
56,245

Implants
29,405


28,138


57,788


54,105

Cases
17,271


17,088


32,948


33,473

Other
4,444


3,394


7,718


6,502

Total OEM Solutions Revenue
80,880


76,698


157,144


150,325













Total Symmetry Surgical Revenue
20,371


22,317


41,008


44,501













Total Revenue
$
101,251


$
99,015


$
198,152


$
194,826



13. Net Income Per Share
 
The following table sets forth the computation of earnings per share. 

17



 
Three Months Ended

Six Months Ended

June 28, 2014

June 29, 2013

June 28, 2014

June 29, 2013
 
(unaudited)

(unaudited)
Net income (loss) for basic earnings per share:
 

 

 

 
Continuing operations
$
(2,614
)

$
1,495


$
(1,219
)

$
1,259

Discontinued operations
$
(3,937
)

$
(318
)

$
(4,078
)

$
(376
)
Income available to common shares - basic
$
(6,551
)

$
1,177


$
(5,297
)

$
883

Basic weighted average common shares outstanding
36,584


36,314


36,576


36,295









Basic net income (loss) per share attributable to common shareholders:







Continuing operations
$
(0.07
)

$
0.04


$
(0.03
)

$
0.03

Discontinued operations, net of tax
$
(0.11
)

$
(0.01
)

$
(0.11
)

$
(0.01
)
Net income attributable to common shareholders
$
(0.18
)

$
0.03


$
(0.14
)

$
0.02













Net income (loss) for diluted earnings per share:







Continuing operations
$
(2,614
)

$
1,495


$
(1,219
)

$
1,259

Discontinued operations
$
(3,937
)

$
(318
)

$
(4,078
)

$
(376
)
Income available to common shares - basic
$
(6,551
)

$
1,177


$
(5,297
)

$
883

Basic weighted average common shares outstanding
36,584


36,314


36,576


36,295

Effect of dilution


529




508

Diluted weighted average common shares outstanding
36,584


36,843


36,576


36,803

 







Diluted net income (loss) per share attributable to common shareholders:











Continuing operations
$
(0.07
)

$
0.04


$
(0.03
)

$
0.03

Discontinued operations, net of tax
$
(0.11
)

$
(0.01
)

$
(0.11
)

$
(0.01
)
Net income attributable to common shareholders
$
(0.18
)

$
0.03


$
(0.14
)

$
0.02

 
The diluted weighted average share calculations for the three and six month periods ended June 28, 2014 did not include 465 and 453, respectively, of dilutive shares due to the net loss incurred for these periods. In addition, performance based restricted stock awarded in 2014 totaling 259 shares has not been included in the diluted shares, due to the respective measurement period not being completed.

14. Accounts Receivable Factoring
 
The Corporation has an agreement with an unrelated third-party for the factoring of specific accounts receivable in the U.K. to reduce the amount of working capital required to fund such receivables. The factoring of accounts receivable under this agreement is accounted for as a sale in accordance with ASC 860, Transfers and Servicing. Proceeds on the transfer reflect the face value of the account less a discount. The discount is recorded as a charge in general and administrative expenses in the consolidated statement of operations in the period of the sale. Net funds received reduced accounts receivable outstanding while increasing cash. The Corporation has no significant retained interests, nor any continuing involvement or servicing liabilities related to the accounts receivable that have been sold. For the three months ended June 28, 2014 and June 29, 2013, the Corporation sold $1,438 and $1,081, respectively, and $4,458 and $2,009 for the six months then ended, of accounts receivable pursuant to this agreement, which represents the face amount of total outstanding receivables at the time the receivables are sold. Fees paid pursuant to this agreement were $5 and $8 for the three months ended June 28, 2014 and June 29, 2013, respectively, and $27 and $15 for the six months then ended.

 
15. Commitments and Contingencies
 

18



Legal & Environmental Matters.  The Corporation is involved, from time to time, in various contractual, product liability, patent (or intellectual property) and other claims and disputes incidental to its business. Currently, there is no environmental or other litigation pending or, to the knowledge of the Corporation, threatened, that the Corporation expects to have a material adverse effect on its financial condition, results of operations or liquidity. While litigation is subject to uncertainties and the outcome of litigated matters is not predictable with assurance, the Corporation currently believes that the disposition of all pending or, to the knowledge of the Corporation, threatened claims and disputes, individually or in the aggregate, should not have a material adverse effect on the Corporation’s consolidated financial condition, results of operations or liquidity.
 
Unconditional Purchase Obligations.  The Corporation has contracts to purchase minimum quantities of cobalt chrome, nickel and titanium through July 2017.  Based on contractual pricing at June 28, 2014, the minimum purchase obligations total $20,229.  Purchases under cobalt chrome, nickel and titanium contracts total approximately $5,982 for the six months ended June 28, 2014.  These purchases are not in excess of our forecasted requirements. Additionally, as of June 28, 2014, the Corporation has $3,541 of commitments to complete capital projects in progress.

16.    Facility Closure and Severance Costs
 
Results of operations include pre-tax charges of $428 and $794 for the three months ended June 28, 2014 and June 29, 2013, respectively and $767 and $907 for the six months then ended, respectively. The segment composition of these charges includes OEM Solutions for the three months ended June 28, 2014 and June 29, 2013 of $342 and $154, respectively, Symmetry Surgical of $10 and $274, respectively and Unallocated of $76 and $366, respectively. As of June 28, 2014 and December 28, 2013, severance accruals related to these cost reduction actions totaled $477 and $361, respectively, and are included in other accrued expenses in the consolidated balance sheets. The increase in the accrual since December 28, 2013 represents severance charges incurred but not paid during the first two quarters of fiscal 2014. These costs are expected to be paid through September 2014.  

On February 21, 2014, the Corporation announced that the consultation processes that began with its employees on January 30, 2014 had concluded with an agreement that the facility in Cheltenham, United Kingdom should cease production within calendar 2014. The Cheltenham plant is engaged primarily in the manufacture of medical instruments and employs approximately 40 people. The Corporation estimates costs of approximately $1,600 will be incurred in 2014 primarily related to lease termination costs, employee severance, stay bonuses, moving and transition costs in connection with the plant closure. As of June 28, 2014, $443 in severance costs have been recorded and are reflected above.




19



17. Subsequent Event

On August 4, 2014, the Corporation announced that it has entered a definitive agreement to sell all of its common stock to Tecomet and concurrently transfer to Symmetry Medical, Inc.'s shareholders ownership in a new company holding its Symmetry Surgical business. Tecomet, which is owned by Genstar Capital, is a contract manufacturing, engineering and metal fabrication technology company based in Wilmington, Massachusetts.
Under terms of the agreement, Symmetry Medical will transfer its Symmetry Surgical business to its shareholders, immediately followed by the acquisition of the remaining OEM Solutions business by Tecomet for $450 million in cash.
These transactions are conditioned on, among other things, the approval and adoption of the definitive agreement by the Company’s stockholders and the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Company and Tecomet have each agreed to use reasonable best efforts and, subject to certain limitations, take actions required in connection with obtaining such approvals.

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 hospital-direct medical distribution business is complementary to 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 second quarter 2014, Symmetry’s OEM Solutions business revenue increased $4,182, or 5.5%, compared to the second quarter 2013. This increase is primarily driven by stable-to-slightly-improving orthopedic procedural growth, along with the incremental benefit from our top five customer inventory being at a multi-year low exiting 2013. During the second quarter 2014, our combined five largest OEM customers increased revenue by 4.3% compared to the second quarter 2013, primarily driven by an increase in their new product launch volume as well as stable-to-slightly-improving orthopedic procedural growth. Our overall OEM Solutions revenue in the second quarter 2014 increased by $4,616 from the first quarter 2014 resulting from increased demand across all product lines.
 
During the second quarter 2014, Symmetry Surgical revenue decreased $1,946, or 8.7%, compared to the second quarter 2013. This decrease was primarily due to the New Wave Surgical product line, which was acquired by Covidien in the first quarter and no longer sold by Symmetry Surgical after April 30, 2014, resulting in a partial quarter of sales in the second quarter, continued supplier disruption issues along with ongoing sluggish hospital spending environment in the U.S. and the ongoing year one transition of distributorships outside of the U.S.

In the U.S., Symmetry Surgical continues to improve execution through the salesforce and improve service levels. During the second quarter of 2014, Symmetry Surgical continued to experience growth of the newly launched global e-commerce site to serve customers.

Outside of the U.S., Symmetry Surgical continues to work to increase business with our distributor network. 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.

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. However, we plan to continue to expand coverage and product portfolio to serve our hospital and surgery center direct customers consistently with our strategic principles.
 

20



On August 4, 2014, the Corporation announced that it has entered a definitive agreement to sell all of its common stock to Tecomet and concurrently transfer to Symmetry Medical, Inc.'s shareholders ownership in a new company holding its Symmetry Surgical business. Tecomet, which is owned by Genstar Capital, is a contract manufacturing, engineering and metal fabrication technology company based in Wilmington, Massachusetts. Under terms of the agreement, Symmetry Medical will transfer its Symmetry Surgical business to its shareholders, immediately followed by the acquisition of the remaining OEM Solutions business by Tecomet for $450 million in cash. These transactions are conditioned on, among other things, the approval and adoption of the definitive agreement by the Company’s stockholders and the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Company and Tecomet have each agreed to use reasonable best efforts and, subject to certain limitations, take actions required in connection with obtaining such approvals. 

 
Second Quarter Results of Operations
 
Revenue.   Revenue for the three months ended June 28, 2014 increased $2,236, or 2.3%, to $101,251 from $99,015 for the comparable 2013 period.  Revenue for each of our segments and principal product categories in these periods was as follows:
 
 
Three Months Ended
 
 
 
 
Sales by product
June 28, 2014

June 29, 2013
 
Dollar Change
 
Percent Change
 
(unaudited)
OEM Solutions Revenue
 


 

 
 
 
 
Instruments
$
29,760


$
28,078

 
$
1,682

 
6.0
 %
Implants
29,405


28,138

 
1,267

 
4.5
 %
Cases
17,271


17,088

 
183

 
1.1
 %
Other
4,444


3,394

 
1,050

 
30.9
 %
Total OEM Solutions Revenue
80,880


76,698

 
4,182

 
5.5
 %






 


 


Total Symmetry Surgical Revenue
20,371


22,317

 
(1,946
)
 
(8.7
)%






 


 


Total Revenue
$
101,251


$
99,015

 
$
2,236

 
2.3
 %
 
The $4,182 increase in OEM Solutions revenue resulted from increased demand in all of our product lines as well as favorable foreign currency exchange rate fluctuations of $1,421.  Overall, we experienced increased revenues of 4.3% from our five largest OEM customers which drove the increase in instruments revenue and a portion of the increase in cases and implants revenue. OEM Solutions Instruments revenue increased $1,682 driven by the positive trend that began in the first quarter following the softness we experienced in the second half of 2013. We continue to see a relatively stable capital spending environment from OEM customers on Instruments, with no new significant ramp in firmed purchase orders, except for customer investments in larger product launches, which have been deliberate in nature, as well as the favorable foreign exchange rate fluctuation of $126.  OEM Solutions Implant revenue increased $1,267 in-line with the procedural growth rate as compared to the strong growth in the first quarter of the year driven by customer inventory restocking. Implants revenue also included a favorable foreign exchange rate fluctuation of $879. Cases revenue increased $183 reflecting a relatively stable capital spending, as well as favorable currency exchange fluctuation of $188.  OEM Solutions Other product revenue increased $1,050 compared to second quarter 2013 primarily driven by strong customer demand at our Lansing, MI as well as Sheffield, UK facilities, as well as favorable foreign currency exchange rate fluctuations of $228.
 
The $1,946 decrease in Symmetry Surgical revenue in the second quarter 2014 as compared to 2013 was primarily driven by the New Wave Surgical product line, which was acquired by Covidien in the first quarter and no longer sold by Symmetry Surgical, resulting in partial quarter of sales in the second quarter, continued supplier disruption issues along with ongoing sluggish hospital spending environment in the U.S. and the ongoing transition to distributorships outside of the U.S.

Gross Profit.  Gross profit for the three months ended June 28, 2014 increased $1,518, or 5.7%, to $28,165 from $26,647 for the comparable 2013 period. Gross margin as a percentage of revenue increased 0.9%, to 27.8% for the second quarter 2014 from 26.9% for the comparable 2013 period.  
 

21




Three Months Ended June 28, 2014

Dollars

As a %
of Revenue
 
(unaudited)
2013 period reported gross profit
$
26,647


26.9
 %
Change in organic revenue and mix
(325
)

(0.3