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 first quarter 2014, Symmetry's OEM Solutions business revenue increased $3,950, or 5.2%, compared to the first 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 as well as a new commercial agreement at the Corporation's Clamonta Ltd.subsidiary at year-end 2013. During the first quarter 2014, our combined five largest OEM customers increased revenue by 7.0% compared to the first 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 first quarter 2014 increased by $1,993from the fourth quarter 2013 as strong implant revenue driven by the timing of stocking orders and inventory adjustments as well as a new commercial agreement at the Corporation's Clamonta Ltd.subsidiary at year-end 2013. During the first quarter 2014, Symmetry Surgical revenue decreased $1,547, or 7.0%, compared to the first quarter 2013. This decrease was primarily due to supplier disruption issues along with softness in the hospital purchasing environment in the U.S. and the ongoing transition to distributorships outside of the U.S.
In the U.S., Symmetry Surgical continues to integrate the salesforce and improve service levels. During the first quarter of 2014, Symmetry Surgical also launched a global e-commerce site to serve customers world-wide.
Outside of the U.S., Symmetry Surgical continues to work to 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. We expect this investment and new international customer service center in
Switzerlandto 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. 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 and will be looking closely at realizing cost efficiencies post integration to improve profitability. We continue to be optimistic about the long-term future as the larger OEMs are increasingly focused on improving their supply chains. 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 and in fact have realized some minor benefit with one customer in the first quarter.
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.
First Quarter Results of Operations
Revenue. Revenue for the three months ended
March 29, 2014increased $2,403, or 2.4%, to $101,267from $98,864for 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 March 29, 2014 March 30,
2013 Dollar Change Percent Change
(unaudited) OEM Solutions Revenue Instruments $ 28,930
$ 28,167$ 763 2.7 % Implants 28,383 25,967 2,416 9.3 % Cases 15,677 16,385 (708 ) (4.3 )% Other 7,640 6,161 1,479 24.0 % Total OEM Solutions Revenue 80,630 76,680 3,950 5.2 % Total Symmetry Surgical Revenue 20,637 22,184 (1,547 ) (7.0 )% Total Revenue $ 101,267 $ 98,864 $ 2,4032.4 % The $3,950increase in OEM Solutions revenue resulted from increased demand in our instruments, implants and other product lines partially offset by decreased customer demand within our cases product line and favorable foreign currency exchange rate fluctuations of $1,104. Overall, we experienced increased revenues of 7.0% from our five largest OEM customers which drove the increase in instruments and implants revenue and a portion of the decrease in cases revenue. OEM Solutions Instrument revenue increased $763driven by slightly stronger customer launch demand. OEM Solutions Implant revenue increased $2,416due to stable-to slightly-improving orthopedic procedural growth, along with the incremental benefit from our top five customers' inventory being at a multi-year low exiting 2013, as well as the favorable foreign exchange rate fluctuation of $561. Cases revenue decreased $708due primarily to unplanned machine shut downs during the quarter which are now up and running, partially offset by favorable currency exchange fluctuation of $148. OEM Solutions Other product revenue increased $1,479compared to first quarter 2013 driven by a new commercial agreement at the Corporation's Clamonta Ltd.subsidiary at year-end 2013 as well as impacted by favorable foreign currency exchange rate fluctuations of $356. The $1,547decrease in Symmetry Surgical revenue in the first quarter 2014 as compared to 2013 was primarily driven by supplier disruption issues along with softness in the hospital purchasing environment in the U.S. and the ongoing transition to distributorships outside of the U.S. The supplier disruption as well as the outside U.S. transition is expected to continue to impact the second quarter of 2014. 15
-------------------------------------------------------------------------------- Gross Profit. Gross profit for the three months ended
March 29, 2014decreased $1,205, or 4.8%, to $23,939from $25,144for the comparable 2013 period. Gross margin as a percentage of revenue decreased 1.8%, to 23.6% for the first quarter 2014 from 25.4% for the comparable 2013 period. Three Months Ended March 29, 2014 As a % Dollars of Revenue (unaudited) 2013 period reported gross profit $ 25,14425.4 % Change in organic revenue and mix (276 ) (0.3 )% Foreign currency impact 189 0.2 % Manufacturing costs and other (1,118 ) (1.7 )% 2014 period reported gross profit $ 23,939
Gross margin was driven by a lower percentage of revenue from the Corporation's higher margin Symmetry Surgical segment as compared to the same period last year, along with gross margin pressure in the OEM Solutions segment. Production costs were higher than normal in the fourth quarter of 2013, primarily as a result of inefficiencies associated with severe weather, labor and healthcare inflation and holidays. These costs were capitalized into inventory in the fourth quarter, resulting in higher costs reflected in cost of sales as this inventory turned in the first quarter 2014. The first quarter 2014 was also impacted by severe weather, labor and healthcare inflation. This was partially offset by continued Symmetry Business System continued incremental improvements and a
$402gain on insurance proceeds received related to the Sheffield fire during 2013. Research and Development Expenses. For the three months ended March 29, 2014, research and development expenses decreased $42or 3.6% to $1,122from $1,164in the comparable period in 2013, primarily due to lower costs associated with maintaining patents. Sales and Marketing Expenses. For the three months ended March 29, 2014, sales and marketing expenses decreased $434or 6.1% to $6,686from $7,120in the comparable period in 2013, primarily due to a reduction in Symmetry Surgical employee compensation and benefits as a result of lower sales in 2014. In addition, cost controls were implemented in the second half of 2013. General and Administrative Expenses. For the three months ended March 29, 2014, general and administrative expenses decreased $1,871or 14.6%, to $10,967from $12,838in the comparable period in 2013. Significant items which impacted general and administrative expenses included: Three Months Ended March 29, 2014As a % Dollars of Revenue (unaudited)
2013 period reported General &Administrative expenses
13.0 % Employee compensation and benefit costs paid in cash (505 ) Change in amortization of intangible assets 123 Change in stock compensation (128 ) Medical device excise tax expense (184 ) Foreign currency impact 92 Other (1,269 ) 2014 period reported General & Administrative expenses 10,967 10.8 % During 2014, employee compensation and benefit costs paid in cash decreased due to a decrease for self-insurance medical claims incurred during 2014 as compared to 2013 under the Corporation's U.S. based medical plan. Other primarily relates to decreased professional service fees for acquisition related expenses, less tax planning initiatives and cost controls at Symmetry Surgical. 16
Facility Closure and Severance Costs. Results of Operations include pre-tax charges of
$339and $129for the three months ended March 29, 2014and March 30, 2013, respectively. As of March 29, 2014, severance accruals related to these cost reduction actions totaled $405and were included in other accrued liabilities in the consolidated balance sheets. Operating Income (loss). On a consolidated basis, operating income (loss) increased $932, or 23.9% for the three months ended March 29, 2014as compared to the 2013 period due to an increase in OEM Solutions operating income of $607and a decline in Symmetry Surgical operating income of $976partially offset by a decline in Unallocated loss of $1,301. Operating income (loss) for each of our segments in these periods was as follows: