Symmetry Medical Inc. Another Sheffield Fire; No Material Impact Expected to Full Year 2014 Estimates

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Friday afternoon, Symmetry confirmed that a minor fire had occurred at its Sheffield, United Kingdom, manufacturing plant on Saturday, March 8, 2014. The company indicated that the financial impact of the fire would be minimal beyond a delay in revenue from the first quarter 2014 to second quarter 2014 of about $1 million. Fundamentally, nothing has changed with our long-term view, though the issue represents a minor near-term hurdle.

The company experienced a fire at this facility in September 2013 that destroyed the facility; the event announced Monday was not as damaging as the one in September, because this one was confined to only three tanks (out of nine tanks) at the company’s Acid Shop. The company is working to repair and validate the new tanks, and it anticipates that the line will be operational in early April.

Beyond the Acid Shop, no other operation at the Sheffield Plant was materially affected, including the machining centers, the forging equipment, the casting foundry, administrative functions, and data center. None of the company’s employees were harmed during the incident.

While we believe that the company could outsource the Acid Shop function, this would require customer validation of the process, which typically takes several weeks to complete depending on the product. Because the issue is expected to be resolved relatively quickly (in a matter of weeks, according to the press release), outsourcing, in our view, is unlikely.

We expect issues here to linger beyond first-quarter results; however, we will lower our first-quarter revenue estimate by $1 million and lift our second-quarter revenue estimate by the same amount, to adjust for the expected delay in revenue. Our full year 2014 revenue and EPS estimates will therefore remain the same at $413 million in revenue and $0.51 in EPS.

With only a slight change to the cadence of sales this year, this event seems transient to us, and we believe that investors should focus on the longer-term initiatives that management has instituted at the company, which should steadily improve results in the coming years. Despite our confidence in the long-term potential, we continue to wait on the sidelines until we see evidence of a sustained improvement in the core business. We rate the stock Market Perform.

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