UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended April 4, 2009
or
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF
1934
|
For the
transition period from
____________________________________ to___________________________________
Commission
File Number:
001-32374
(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)
|
|
(Former
name, former address and former fiscal year, if changed since last
report)
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.
þ
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).
¨ 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 þ
|
|
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 þ No
The
number of shares outstanding of the registrant’s common stock as of May 4, 2009
was 35,799,265.
TABLE
OF CONTENTS
PART I
FINANCIAL INFORMATION
|
|
|
|
|
|
|
Item 1
|
Financial
Statements:
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets: As of April 4, 2009 and January 3,
2009
|
|
4
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations: Three Months Ended April 4,
2009 and March 29, 2008
|
|
5
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows: Three Months Ended April 4, 2009
and March 29, 2008
|
|
6
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
7
|
|
|
|
|
Item 2
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
14
|
|
|
|
|
Item 3
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
17
|
|
|
|
|
Item 4
|
Controls
and Procedures
|
|
17
|
|
|
|
|
PART II
OTHER INFORMATION
|
|
|
|
|
|
|
Item
1
|
Legal
Proceedings
|
|
18
|
|
|
|
|
Item 1A
|
Risk
Factors
|
|
18
|
|
|
|
|
Item 6
|
Exhibits
|
|
18
|
|
|
|
|
Signatures
|
|
19
|
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
under the Securities Exchange Act of 1934, or under the Securities Act of 1933,
as well as in documents we incorporate by reference or in press releases or oral
statements made by our officers or representative, 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 2008 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
|
|
April
4,
|
|
|
January
3,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(In
Thousands)
|
|
|
|
(unaudited)
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
18,957 |
|
|
$ |
10,191 |
|
Accounts
receivable, net
|
|
|
52,510 |
|
|
|
52,845 |
|
Inventories
|
|
|
68,942 |
|
|
|
61,111 |
|
Refundable
income taxes
|
|
|
1,272 |
|
|
|
6,610 |
|
Deferred
income taxes
|
|
|
4,509 |
|
|
|
3,993 |
|
Other
current assets
|
|
|
4,253 |
|
|
|
3,154 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
150,443 |
|
|
|
137,904 |
|
Property
and equipment, net
|
|
|
115,737 |
|
|
|
115,045 |
|
Goodwill
|
|
|
153,003 |
|
|
|
153,521 |
|
Intangible
assets, net of accumulated amortization
|
|
|
44,414 |
|
|
|
45,039 |
|
Other
assets
|
|
|
1,558 |
|
|
|
1,728 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
465,155 |
|
|
$ |
453,237 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
30,254 |
|
|
$ |
26,929 |
|
Accrued
wages and benefits
|
|
|
8,757 |
|
|
|
12,784 |
|
Other
accrued expenses
|
|
|
4,606 |
|
|
|
5,186 |
|
Income
tax payable
|
|
|
3,969 |
|
|
|
2,637 |
|
Deferred
income taxes
|
|
|
105 |
|
|
|
- |
|
Revolving
line of credit
|
|
|
3,265 |
|
|
|
2,495 |
|
Current
portion of capital lease obligations
|
|
|
813 |
|
|
|
1,034 |
|
Current
portion of long-term debt
|
|
|
17,775 |
|
|
|
16,900 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
69,544 |
|
|
|
67,965 |
|
Deferred
income taxes
|
|
|
18,966 |
|
|
|
18,131 |
|
Derivative
valuation liability
|
|
|
3,377 |
|
|
|
3,771 |
|
Capital
lease obligations, less current portion
|
|
|
3,228 |
|
|
|
3,356 |
|
Long-term
debt, less current portion
|
|
|
110,500 |
|
|
|
107,600 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
205,615 |
|
|
|
200,823 |
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, $.0001 par value; 72,410 shares authorized; shares issued April 4,
2009—35,799; January 3, 2009—35,801
|
|
|
4 |
|
|
|
4 |
|
Additional
paid-in capital
|
|
|
276,629 |
|
|
|
275,890 |
|
Accumulated
deficit
|
|
|
(14,660 |
) |
|
|
(21,507 |
) |
Accumulated
other comprehensive loss
|
|
|
(2,433 |
) |
|
|
(1,973 |
) |
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
|
259,540 |
|
|
|
252,414 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$ |
465,155 |
|
|
$ |
453,237 |
|
See accompanying notes to
condensed consolidated financial statements.
Symmetry
Medical Inc.
Condensed
Consolidated Statements of Operations
|
|
Three Months Ended
|
|
|
|
April
4,
|
|
|
March
29,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
Thousands, Except Per Share Data)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
101,422 |
|
|
$ |
101,862 |
|
Cost
of Revenue
|
|
|
76,864 |
|
|
|
77,916 |
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
24,558 |
|
|
|
23,946 |
|
Selling,
general and administrative expenses
|
|
|
13,353 |
|
|
|
14,382 |
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
11,205 |
|
|
|
9,564 |
|
Other
(income)/expense:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
1,820 |
|
|
|
2,700 |
|
Derivatives
valuation (gain)/loss
|
|
|
(394 |
) |
|
|
1,165 |
|
Other
|
|
|
(296 |
) |
|
|
(162 |
) |
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
10,075 |
|
|
|
5,861 |
|
Income
tax expense
|
|
|
3,228 |
|
|
|
1,894 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
6,847 |
|
|
$ |
3,967 |
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.19 |
|
|
$ |
0.11 |
|
Diluted
|
|
$ |
0.19 |
|
|
$ |
0.11 |
|
See
accompanying notes to condensed consolidated financial statements.
Symmetry
Medical Inc.
Condensed
Consolidated Statements of Cash Flows
|
|
Three Months Ended
|
|
|
|
April
4,
|
|
|
March
29,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
Thousands)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
6,847 |
|
|
$ |
3,967 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,642 |
|
|
|
4,635 |
|
Amortization
|
|
|
727 |
|
|
|
712 |
|
Net
loss on sale of assets
|
|
|
38 |
|
|
|
40 |
|
Deferred
income tax provision
|
|
|
422 |
|
|
|
(500 |
) |
Excess
tax benefit from stock-based compensation
|
|
|
- |
|
|
|
(92 |
) |
Stock-based
compensation
|
|
|
739 |
|
|
|
140 |
|
Derivative
valuation change
|
|
|
(394 |
) |
|
|
1,191 |
|
Foreign
currency transaction (gains) losses
|
|
|
(24 |
) |
|
|
177 |
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
375 |
|
|
|
(19,185 |
) |
Other
assets
|
|
|
(921 |
) |
|
|
(1,832 |
) |
Inventories
|
|
|
(7,724 |
) |
|
|
(2,894 |
) |
Current
income taxes
|
|
|
6,811 |
|
|
|
2,710 |
|
Accounts
payable
|
|
|
3,138 |
|
|
|
2,567 |
|
Accrued
expenses and other
|
|
|
(5,189 |
) |
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
9,487 |
|
|
|
(8,450 |
) |
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(4,786 |
) |
|
|
(4,097 |
) |
Proceeds
from the sale of fixed assets
|
|
|
2 |
|
|
|
117 |
|
Acquisitions,
net of cash received
|
|
|
- |
|
|
|
(46,109 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(4,784 |
) |
|
|
(50,089 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from bank revolver
|
|
|
29,935 |
|
|
|
36,431 |
|
Payments
on bank revolver
|
|
|
(21,235 |
) |
|
|
(38,788 |
) |
Issuance
of long-term debt
|
|
|
- |
|
|
|
60,000 |
|
Payments
on long-term debt and capital lease obligations
|
|
|
(4,582 |
) |
|
|
(2,588 |
) |
Proceeds
from the issuance of common stock
|
|
|
- |
|
|
|
116 |
|
Excess
tax benefit from stock-based compensation
|
|
|
- |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
4,118 |
|
|
|
55,263 |
|
Effect
of exchange rate changes on cash
|
|
|
(55 |
) |
|
|
533 |
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
8,766 |
|
|
|
(2,743 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
10,191 |
|
|
12,089
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
18,957 |
|
|
9,346
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
2,396 |
|
|
$ |
2,027 |
|
|
|
|
|
|
|
|
|
|
Cash
received for income taxes
|
|
$ |
(4,209 |
) |
|
$ |
(329 |
) |
See
accompanying notes to condensed consolidated financial
statements.
Symmetry
Medical Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
(In
Thousands, Except Per Share Data)
The
condensed consolidated financial statements include the accounts of Symmetry
Medical Inc. and its wholly-owned subsidiaries (collectively referred to as
the Corporation), Symmetry Medical USA Inc., Jet Engineering, Inc.,
Ultrexx, Inc., Riley Medical, Inc., Symmetry Medical Switzerland SA
(formerly known as Riley Medical Europe, SA), Symmetry Medical Everest LLC,
Everest Metal International Limited, Symmetry Medical Cheltenham Limited,
Symmetry Medical PolyVac, SAS, Thornton Precision Components Limited, Symmetry
Medical Malaysia SDN, Clamonta Limited, Specialty Surgical Instrumentation,
Inc., UCA, LLC, TNCO, Inc. and Symmetry Medical New Bedford, LLC. The
Corporation is a global supplier of integrated products consisting primarily of
surgical implants, instruments and cases to orthopedic and other medical device
companies.
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 2008 consolidated financial statements and the notes
thereto included in the Corporation’s Annual Report on Form 10-K for fiscal
year 2008.
The
Corporation’s fiscal year is the 52 or 53 week period ending on the Saturday
closest to December 31. Fiscal year 2009 is a 52 week year ending January
2, 2010. The Corporation’s interim quarters for 2009 are 13 weeks
long and quarter-end dates have been set as April 4, 2009, July 4, 2009 and
October 3, 2009. Fiscal year 2008 was a 53 week year (ending January 3, 2009).
The Corporation’s first two interim quarters for 2008 were 13 weeks long ending
the Saturday closest to March 31, and June 30 and the third quarter was 14 weeks
long, ending Saturday October 4, 2008. References in these condensed
consolidated financial statements to the three months ended refer to these
financial periods, respectively.
On
January 25, 2008, the Corporation acquired substantially all the assets and real
estate of DePuy Orthopaedics, Inc.’s (“DePuy”) New Bedford, Massachusetts
instrument manufacturing facility (“New Bedford”), for $45,246 in cash. This
facility manufactures orthopedic instruments as well as general surgical
instruments and small implants.
Inventories
consist of the following:
|
|
April
4,
|
|
|
January
3,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Raw
material and supplies
|
|
$ |
16,433 |
|
|
$ |
12,502 |
|
Work-in-process
|
|
|
33,591 |
|
|
|
31,420 |
|
Finished
goods
|
|
|
18,918 |
|
|
|
17,189 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
68,942 |
|
|
$ |
61,111 |
|
3.
Property and Equipment
Property
and equipment, including depreciable lives, consists of the
following:
|
|
April
4,
|
|
|
January
3,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Land
|
|
$ |
6,565 |
|
|
$ |
6,473 |
|
Buildings
and improvements (20 to 40 years)
|
|
|
40,574 |
|
|
|
40,183 |
|
Machinery
and equipment (5 to 15 years)
|
|
|
129,073 |
|
|
|
127,716 |
|
Office
equipment (3 to 5 years)
|
|
|
11,215 |
|
|
|
10,859 |
|
Construction-in-progress
|
|
|
7,203 |
|
|
|
4,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
194,630 |
|
|
|
189,458 |
|
Less
accumulated depreciation
|
|
|
(78,893 |
) |
|
|
(74,413 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
115,737 |
|
|
$ |
115,045 |
|
Intangible
assets were acquired in connection with our business acquisitions. As of April
4, 2009, the balances of intangible assets, other than goodwill, were as
follows:
|
|
Weighted-average
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Amortization
|
|
Intangible
|
|
|
Accumulated
|
|
|
Intangible
|
|
|
|
Period
|
|
Assets
|
|
|
Amortization
|
|
|
Assets
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Acquired
technology and patents
|
|
10
years
|
|
$ |
2,304 |
|
|
$ |
(787 |
) |
|
$ |
1,517 |
|
Acquired
customers
|
|
18
years
|
|
|
42,383 |
|
|
|
(7,232 |
) |
|
|
35,151 |
|
Non-compete
agreements
|
|
5
years
|
|
|
561 |
|
|
|
(275 |
) |
|
|
286 |
|
Intangible
assets subject to amortization
|
|
17
years
|
|
|
45,248 |
|
|
|
(8,294 |
) |
|
|
36,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary
processes
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
3,458 |
|
Trademarks
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
4,002 |
|
Indefinite-lived
intangible assets, other than goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
7,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$ |
44,414 |
|
As of
January 3, 2009, the balances of intangible assets, other than goodwill, were as
follows:
|
|
Weighted-average
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Amortization
|
|
Intangible
|
|
|
Accumulated
|
|
|
Intangible
|
|
|
|
Period
|
|
Assets
|
|
|
Amortization
|
|
|
Assets
|
|
Acquired
technology and patents
|
|
10
years
|
|
$ |
2,295 |
|
|
$ |
(713 |
) |
|
$ |
1,582 |
|
Acquired
customers
|
|
18
years
|
|
|
42,330 |
|
|
|
(6,596 |
) |
|
|
35,734 |
|
Non-compete
agreements
|
|
5
years
|
|
|
559 |
|
|
|
(243 |
) |
|
|
316 |
|
Intangible
assets subject to amortization
|
|
17
years
|
|
|
45,184 |
|
|
|
(7,552 |
) |
|
|
37,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary
processes
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
3,428 |
|
Trademarks
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
3,979 |
|
Indefinite-lived
intangible assets, other than goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
7,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$ |
45,039 |
|
5.
New Accounting Pronouncements
Business
Combinations
The
Corporation adopted the provisions of the FASB Statement of Financial Accounting
Standards (SFAS) No. 141(R), Business Combinations, on
January 4, 2009. This Statement amends SFAS 141, Business Combinations, and
provides revised guidance for recognizing and measuring identifiable assets and
goodwill acquired, liabilities assumed, and any non-controlling interest in the
acquiree. It also provides disclosure requirements to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The adoption of SFAS No. 141(R) had an immaterial impact
on the Corporation’s financial position or results of operations.
Disclosures
about Derivative Instruments and Hedging Activities, an Amendment of SFAS No.
133
The
Corporation adopted the provisions of the FASB Statement of Financial Accounting
Standards (SFAS) No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of SFAS No. 133, on
January 4, 2009. The Statement
requires entities that utilize derivative instruments to provide qualitative
disclosures about their objectives and strategies for using such instruments, as
well as any details of credit-risk-related contingent features contained within
derivatives. SFAS 161 also requires entities to disclose additional
information about the amounts and location of derivatives located within the
financial statements, how the provisions of SFAS 133 have been applied, and
the impact that hedges have on an entity’s financial position, results of
operations, and cash flows. The adoption of SFAS No. 161 had no impact on the
Corporation’s financial position or results of operations.
Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities
The
Corporation adopted the provisions of the FASB Staff Position (FSP) No. EITF
03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities, on January 4, 2009,
with retrospective application. This FSP was
issued to clarify that unvested share-based payment awards with a right to
receive non-forfeitable dividends are participating securities. This
FSP also provides guidance on how to allocate earnings to participating
securities and compute basic earnings per share (EPS) using the two-class
method. The adoption of EITF 03-6-1 did not have a material impact to
EPS.
The
Corporation 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 dental, osteobiologic and endoscopy. The
Corporation also sells products to the aerospace industry. The Corporation
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, same or similar customers, those
operations have been aggregated following the provisions of SFAS 131 for
segment reporting purposes. The results of one segment which sells exclusively
to aerospace customers has not been disclosed separately as it does not meet the
quantitative disclosure requirements.
The
Corporation is a multi-national Corporation with operations in the United
States, United Kingdom, France, Ireland and Malaysia. 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.
Revenue
from External Customers:
|
|
Three Months Ended
|
|
|
|
April
4,
|
|
|
March
29,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
United
States
|
|
$ |
76,893 |
|
|
$ |
67,907 |
|
United
Kingdom
|
|
|
7,974 |
|
|
|
16,580 |
|
Ireland
|
|
|
9,502 |
|
|
|
8,597 |
|
Other
foreign countries
|
|
|
7,053 |
|
|
|
8,778 |
|
|
|
|
|
|
|
|
|
|
Total
net revenues
|
|
$ |
101,422 |
|
|
$ |
101,862 |
|
Concentration
of Credit Risk:
A
substantial portion of the Corporation’s revenue is derived from a limited
number of customers. The Corporation’s revenue includes revenue from customers
of the Corporation which individually account for 10% or more of revenue as
follows:
Three
months ended April 4, 2009— One customer represented approximately 41.9% of
revenue.
Three
months ended March 29, 2008— Two customers represented approximately 32.2% and
10.8% of revenue, respectively.
Following
is a summary of the composition by product category of the Corporation’s revenue
to external customers. Revenues from aerospace products are included in the
“other” category.
|
|
Three Months Ended
|
|
|
|
April
4,
|
|
|
March
29,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
Instruments
|
|
$ |
46,505 |
|
|
$ |
39,289 |
|
Implants
|
|
|
29,083 |
|
|
|
30,295 |
|
Cases
|
|
|
18,499 |
|
|
|
21,518 |
|
Other
|
|
|
7,335 |
|
|
|
10,760 |
|
|
|
|
|
|
|
|
|
|
Total
net revenues
|
|
$ |
101,422 |
|
|
$ |
101,862 |
|
The
following table sets forth the computation of earnings per share.
|
|
Three Months Ended
|
|
|
|
April
4,
|
|
|
March
29,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
Numerator:
|
|
|
|
Net
income
|
|
$ |
6,847 |
|
|
$ |
3,967 |
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35,286 |
|
|
|
35,153 |
|
Effect
of dilutive stock options, restricted stock and stock
warrants
|
|
|
95 |
|
|
|
182 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
35,381 |
|
|
|
35,335 |
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.19 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.19 |
|
|
$ |
0.11 |
|
Diluted
shares outstanding for the three month period ended April 4, 2009 exclude the
antidilutive effects of potentially dilutive restricted stock totaling
approximately 72 shares of common stock.
8.
Commitments and Contingencies
Environmental
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 and titanium through December
2011. Based on contractual pricing at April 4, 2009, the minimum
purchase obligations totaled $23,464. Purchases under 2009 contracts
totaled approximately $4,604 as of April 4, 2009. These purchases are
not in excess of our forecasted requirements.
Legal
Following
the discovery of certain accounting irregularities at our Sheffield, UK
operating unit (as further described in this Form 10-Q at Part II, Item 1), the
Audit Committee self-reported the matter to the staff of the Securities and
Exchange Commission (SEC). Thereafter, the SEC commenced an informal inquiry
into this matter. The Corporation has fully cooperated with the SEC in its
investigation. At this time, the Corporation is unable to predict the timing of
the ultimate resolution of this investigation or the impact
thereof.
Comprehensive
income is comprised of net income, gains (losses) resulting from currency
translations of foreign entities and unrealized losses on our derivative
designated as a hedge under SFAS 133. Comprehensive income consists of the
following:
|
|
Three
Months Ended
|
|
|
|
April
4,
|
|
|
March
29,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
6,847 |
|
|
$ |
3,967 |
|
Foreign
currency translation adjustments
|
|
|
(460 |
) |
|
$ |
2,742 |
|
Derivative,
net of tax benefit
|
|
|
(43 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
6,344 |
|
|
$ |
6,709 |
|
Results
of the following acquisition are included in the Statement of Operations from
the date of acquisition.
On
January 25, 2008, the Corporation acquired substantially all the assets and real
property of DePuy Orthopaedics, Inc.’s New Bedford, Massachusetts instrument
manufacturing facility for $45,246 in cash. This facility manufactures
orthopedic instruments as well as general surgical instruments and small
implants.
As of
April 4, 2009, the aggregate purchase price was allocated to the opening balance
sheet as follows:
Current
assets
|
|
$ |
7,819 |
|
PP&E
|
|
|
22,101 |
|
Acquired
customers (amortized over 15 years)
|
|
|
5,130 |
|
Goodwill
|
|
|
10,196 |
|
|
|
|
|
|
Purchase
price, net
|
|
$ |
45,246 |
|
Unaudited
Proforma Results The following table represents the proforma
results of the Corporation’s operations had the acquisition of New Bedford been
completed as of the beginning of the periods presented:
|
|
Three Months Ended
|
|
|
|
April 4,
|
|
|
March 29,
|
|
|
|
2009
|
|
|
2008
|
|
Revenue
|
|
$ |
101,422 |
|
|
$ |
104,539 |
|
Net
income
|
|
|
6,847 |
|
|
|
4,033 |
|
Earnings
per share—basic
|
|
$ |
0.19 |
|
|
$ |
0.11 |
|
Earnings
per share—diluted
|
|
$ |
0.19 |
|
|
$ |
0.11 |
|
11.
Derivatives
The Company utilizes derivative
instruments to minimize the volatility of cash flows and income statement
impacts associated with interest rate payments on its variable rate
debt. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, which was amended in June 2000
by SFAS No. 138 and in May 2003 by SFAS No. 149 (collectively
referred to as “SFAS 133”), the Company recognizes all derivative instruments as
either assets or liabilities at fair value on the consolidated balance sheets.
The Company utilizes third party valuations to determine the fair value of these
derivatives. The Company considers its derivative instrument valuations to be
Level 2 fair value measurements under SFAS 157 (see Note 12).
To the
extent a derivative instrument is 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 is deferred in accumulated other comprehensive
income, a component of shareholders’ equity in the condensed consolidated
balance sheets, until the underlying transaction hedged is recognized in the
unaudited condensed consolidated statements of operations. The Company accounts
for certain derivatives hedging the variable payment of interest as cash flow
hedges with the impact of the hedge being reclassified to interest expense in
the unaudited condensed consolidated statements of operations, upon payment of
interest.
The Corporations profitability and cash
flows are affected by changes in interest rates, specifically the LIBOR
rate. The primary purpose of the Corporation’s interest rate risk
management activities is to hedge its exposure to changes in interest
rates. In 2009, the Corporations 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 variable rate
interest payments related to $64,100 of the total outstanding term loan
indebtedness due in 2011 pursuant to this forward swap contract. This
swap contract, which had a fair value of $71 at April 4, 2009, 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.
In 2006,
the Corporation entered into a forward swap contract to manage interest rate
risk related to a portion of its then existing variable rate senior secured
first lien term loan. This swap contract, which had a fair value of $3,306 at
April 4, 2009, was not designated as a cash flow hedge of the future variable
rate payment of interest. The entire change in the fair value of this
interest rate swap is recorded to derivative valuation (gain) / loss in the
unaudited condensed consolidated statements of operations. For the three months
ended April 4, 2009 and March 29, 2008, the Corporation recorded a gain of $394
and a loss of $1,305, respectively.
12.
Fair Value of Financial Instruments
In
September 2006, the FASB issued statement No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
United States, and expands disclosures about fair value measurements. The
Corporation has adopted the provisions of SFAS 157 as of January 1, 2008 for
financial instruments. Although the adoption of SFAS 157 did not materially
impact its financial condition, results of operations, or cash flow, the
Corporation is now required to provide additional disclosures as part of its
financial statements.
SFAS 157
establishes a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value. These tiers include: Level 1, defined as observable
inputs such as quoted prices in active markets; Level 2, defined as inputs other
than quoted prices in active markets that are either directly or indirectly
observable, and Level 3, defined as unobservable inputs in which little or no
market data exists, therefore requiring an entity to develop its own
assumptions.
As of
April 4, 2009 the Corporation held interest rate derivative instruments that are
required to be measured at fair value on a recurring basis. These included the
Corporation’s interest rate derivative instruments.
The
Corporation’s derivative instruments consist of contracts that are not traded on
a public exchange. The fair values of interest rate derivative instruments 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 swap contracts as Level 2.
The
Corporation’s assets measured at fair value on a recurring basis subject to the
disclosure requirements of SFAS 157 at April 4, 2009 were as
follows:
|
|
April
4, 2009
|
|
|
January
3, 2009
|
|
|
|
Fair
Value Measurements
|
|
|
Fair
Value Measurements
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
- |
|
|
$ |
(3,377 |
) |
|
$ |
- |
|
|
$ |
(3,377 |
) |
|
$ |
- |
|
|
$ |
(3,771 |
) |
|
$ |
- |
|
|
$ |
(3,771 |
) |
Total
|
|
$ |
- |
|
|
$ |
(3,377 |
) |
|
$ |
- |
|
|
$ |
(3,377 |
) |
|
$ |
- |
|
|
$ |
(3,771 |
) |
|
$ |
- |
|
|
$ |
(3,771 |
) |
Additionally, financial instruments
also consist of cash and cash equivalents, accounts receivable, and long-term
debt, including interest-rate swap agreements and foreign exchange forward
contracts. The carrying value of these financial instruments
approximates fair value.
The
Corporation’s policy with respect to interest and penalties associated with
reserves for uncertain tax positions is to classify such interest and penalties
in income tax expense in the Statements of Operations. As of April 4, 2009, the
total amount of unrecognized income tax benefits computed under FIN 48 was
approximately $6,762, all of which, if recognized, would impact the effective
income tax rate of the Corporation. As of April 4, 2009, the Corporation had
recorded a total of $274 of accrued interest and penalties related to uncertain
tax positions. The Corporation foresees possible changes in its reserves for
uncertain income tax positions as reasonably possible during the next
12 months that could result in an increase or decrease in the reserves of
$574 or $1,212, respectively, due to R&D credits. As of April 4, 2009, the
Corporation is subject to unexpired statutes of limitation for U.S. federal
income taxes for the years 2006-2008. The Corporation is also subject to
unexpired statutes of limitation for various states including most significantly
Indiana, Michigan, and New Hampshire generally for the years
2001-2008.
13.
Income Taxes (Continued)
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):
Balance
at January 3, 2009
|
|
$ |
8,695 |
|
Additions
based on tax positions—current year
|
|
|
76 |
|
Settlements
|
|
|
(2,009 |
) |
|
|
|
|
|
Balance
at April 4, 2009
|
|
$ |
6,762 |
|
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We are a
leading independent provider of implants and related instruments and cases to
orthopedic device manufacturers and other medical markets. We also design,
develop and produce these products for companies in other segments of the
medical device market, including arthroscopy, dental, laparoscopy, osteobiologic
and endoscopy sectors, and provide limited specialized products to
non-healthcare markets, such as the aerospace industry.
We offer
our customers Total Solutions® for complete implant systems—implants,
instruments and cases. While our revenue to date has been derived primarily from
the sale of implants, instruments and cases separately, or instruments and cases
together, our ability to provide Total Solutions® for complete implant systems
has already proven to be attractive to our customers, and we expect this
capability will provide us with growth opportunities. In addition, we expect
that our Total Solutions® capability will increase the relative percentage of
value added products that we supply to our customers.
During
the first quarter 2009, our revenue decreased 0.4% compared to the first quarter
2008, which was largely driven by a $7.4 million unfavorable impact from foreign
currency exchange rate fluctuations. Our revenue from our top five
orthopedic customers increased 9.4% and represented 68.1% of total
revenues. We experienced revenue increases in instrument and implant
products as our core orthopedic customers continue to launch new
products. Our case revenue decreased from the first quarter 2008 as
our non-orthopedic medical customer reduced their requirements in response to
the current economic environment. We also experienced slightly lower
aerospace revenue as our customers respond to the current economic environment.
Excluding the impact of New Bedford, which was acquired at the end of January
2008, and foreign currency exchange rate fluctuations, our revenue grew by 4.2%
in the first quarter of 2009 compared to the first quarter 2008 and grew 3.1%
over the fourth quarter of 2008.
Over the
last four years, we have completed five acquisitions which have afforded us the
opportunity to offer a comprehensive line of implants, surgical instruments and
cases for orthopedic device manufacturers and other medical markets on a global
basis, as well as specialized parts into the aerospace industry.
In
January 2008, we acquired DePuy Orthopaedics, Inc.’s (“DePuy”) New Bedford,
Massachusetts instrument manufacturing facility (“New Bedford”). We purchased
substantially all of the assets and real estate of New Bedford for approximately
$45.2 million in cash. New Bedford produces orthopedic instruments, general
medical instruments and some small spine related implants. Historically, 100% of
the products produced at the facility were for DePuy. Commencing in the third
quarter of 2008, we began to utilize this facility to serve our other medical
customers, as we have a strategy to diversify and expand both product and
customer portfolio at this facility. In connection with the acquisition, we
entered into a supply agreement which requires DePuy to make minimum purchases
from New Bedford for a four year period. The agreement stipulates that these
purchases are incremental to other products we presently or previously produced
on DePuy’s behalf. The commitment from DePuy totals $106.0 million over the four
year period, with specific amounts in each year. Certain key members of New
Bedford’s pre-acquisition management team continue to lead this business unit.
We believe this acquisition strengthens our position as a leading provider to
the orthopedic industry and provides additional manufacturing capacity to better
serve our broad customer base, builds on our relationship with DePuy, expands
our East Coast presence and allows us to move forward with an existing skilled
workforce to service our growing market.
Our focus
remains on being a leader in our core orthopedic business, while capitalizing on
our leadership to extend our Total Solutions® approach into other medical
markets. We continue to see a favorable customer response to our offerings
and experience growth as more and more of our customers are impacted by an
increase quality and regulatory environment. Many of our customers
are reducing their number of suppliers and consolidating purchases with larger
strategic providers. By leveraging our global resources and yet providing a
local presence across the global marketplace, we become closer to our customers,
provide quicker response times and increase our value added
services.
First
Quarter Results of Operations
Revenue. Revenue
for the three month period ended April 4, 2009 decreased $0.5 million, or 0.4%,
to $101.4 million from $101.9 million for the comparable 2008 period.
Revenue for each of our principal product categories in these periods was as
follows:
Product Category
|
|
Three Months Ended
|
|
|
|
April
4,
|
|
|
March
29,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
Instruments
|
|
$ |
46.5 |
|
|
$ |
39.3 |
|
Implants
|
|
|
29.1 |
|
|
|
30.3 |
|
Cases
|
|
|
18.5 |
|
|
|
21.5 |
|
Other
|
|
|
7.3 |
|
|
|
10.8 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
101.4 |
|
|
$ |
101.9 |
|
The $0.5
million decrease in revenue resulted from unfavorable foreign currency exchange
rate fluctuations of $7.4 million mostly offset by increased volume within our
instrument and implant product lines. Instrument revenue increased $7.2 million.
This increase was driven by an increase in organic customer demand of $5.9
million due to the continuation of several large projects for our top customers.
In addition, 2009 instrument revenue increased $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 $0.9 million. Implant revenue decreased
$1.2 million driven by unfavorable foreign currency exchange rate fluctuations
of $2.9 million, mostly offset by organic growth of $1.2 million and the
additional sales from our New Bedford acquisition of $0.5 million. Case revenue
decreased $3.0 million due to a $2.2 million decrease in customer demand from
our non-orthopedic medical customers as they react to the current economic
environment and $0.8 million of unfavorable foreign currency exchange rate
fluctuations. Other product revenue decreased $3.5 million primarily
driven by unfavorable foreign currency exchange rate fluctuations of $2.8
million and a reduction in customer demand of $0.6 million.
Gross
Profit. Gross profit for the three month period ended April 4,
2009 increased $0.6 million, or 2.6%, to $24.6 million from $23.9 million for
the comparable 2008 period. Gross margin as a percentage of revenue for
the first quarter 2009 was 24.2% compared to 23.5% in the same period last
year. This increase was primarily driven by an increased number of
large volume projects from our top customers, which resulted in decreased
overhead costs as a percentage of revenue as well as more favorable product
mix.
Selling, General and Administrative
Expenses. For the three month period ended April 4, 2009,
selling, general and administrative expenses (“SG&A”) were $13.4 million
compared with the three month period ended March 29, 2008 of $14.4 million. The
decrease was primarily driven by a reduction in professional fees and expenses
incurred in first quarter 2008 of $2.2 million from the review of accounting
irregularities at our Sheffield, UK operating unit, partially offset by an
increase in non-cash, stock based compensation expense of $0.6 and the
additional costs incurred at New Bedford, which was acquired at the end of
January 2008.
Other (Income)
Expense. Interest expense for the three month
period ended April 4, 2009 decreased $0.9 million, or 32.6%, to $1.8
million from $2.7 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 first quarter 2009 as compared to 2008. The net derivatives gain
in first quarter 2009 consists of a gain on interest rate swap valuation of $394
related to our interest rate swap that has not been designated as a hedge under
SFAS 133 as compared to a loss of $1.3 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. The gain of the foreign currency valuation for fiscal 2008 offset
losses on foreign currency fluctuations that were included within other
expense.
Provision for Income
Taxes. Our effective tax rate was 32.0% for the three month period
ended April 4, 2009 as compared to 32.3% for the three month period ended March
29, 2008. Provision for income taxes increased by $1.3 million, or 70.4%, to
$3.2 million for the three month period ended April 4, 2009 from $1.9 million
for the comparable 2008 period due to higher levels of pre-tax
income.
Liquidity
and Capital Resources
Our
principal sources of liquidity in the three month period ended April 4, 2009
were cash generated from operations and borrowings under our senior revolving
credit facility. Principal uses of cash in the three month period ended
April 4, 2009 included increased working capital, capital expenditures and debt
service. We expect that our principal uses of cash in the future will be to
finance working capital, to pay for capital expenditures, to service debt and to
fund possible future acquisitions.
Operating
Activities Operating activities generated cash of $9.5
million in the three month period ended April 4, 2009 compared to a use of $8.5
million for the three month period ended March 29, 2008, an increase of $17.9
million. Net cash provided by working capital for the three month period
ended April 4, 2009 was $15.2 million higher than the comparable 2008
period. In addition to this improvement in the net change in working
capital, net income, adjusted for non-cash items, increased $2.7
million.
Cash used
for working capital fluctuations was $3.5 million in the three month period
ended April 4, 2009 as compared to a use of $18.7 million in the comparable 2008
period. In the three month period ended April 4, 2009, the primary
sources of cash for working capital came from an increase in accounts payable
and a cash refund for income taxes, offset by increases in inventory and
reductions in accrued expenses. In the three month period ended March
29, 2008, the primary uses of cash for working capital came from increases in
accounts receivable and inventory as a result of our post-acquisition production
activity at New Bedford and a significant increase in organic revenue
growth.
Investing Activities
Capital expenditures of $4.8 million were $0.7 million higher in the three month
period ended April 4, 2009 compared to the three month period ended March 29,
2008. The acquisition of New Bedford used $45.2 million of cash in the
three month period ended March 29, 2008.
Financing
Activities Financing activities generated $4.1 million
of cash in the three month period ended April 4, 2009 compared to the three
month period ended March 29, 2008 due primarily to use of our revolving line of
credit, partially offset by payments on long-term debt and capital
leases. During 2008, the incremental $60.0 million of borrowings
under our senior credit loan facility was used to fund the New Bedford
acquisition, in addition to payments on long-term debt and capital
leases.
Capital
expenditures totaled $4.8 million for the three months ended April 4, 2009,
compared to $4.1 million for the three month period ended March, 29, 2008.
Expenditures were primarily for increased automation as well as to replace
existing equipment. We expect to continue expansion and capability enhancement
efforts in our Malaysia facility during 2009.
Debt
and Credit Facilities
As of
April 4, 2009, we had an aggregate of $135.6 million of outstanding
indebtedness, which consisted of $102.3 million of term loan borrowings
outstanding under our Senior Credit Agreement, $26.0 million of borrowings
outstanding under our revolving credit facility, $2.8 million of borrowings
under our UK short-term credit facility, $0.5 million of borrowings under our
Malaysia short-term credit facility, and $4.0 million of capital lease
obligations. We had one outstanding letter of credit as of April 4, 2009 for
$2.5 million.
Our
Senior Credit Agreement contains various financial covenants, including
covenants requiring a maximum total debt to EBITDA ratio, minimum EBITDA to
interest ratio and a minimum EBITDA to fixed charges ratio. We were in
compliance with these covenants under the senior credit facility as of April 4,
2009.
We
believe that cash flow from operating activities and borrowings under our Senior
Credit Agreement will be sufficient to fund currently anticipated working
capital, planned capital spending and debt service requirements for the
foreseeable future, including at least the next 12 months. We also review
technology, manufacturing and other strategic acquisition opportunities
regularly, which may require additional debt or equity financing.
Contractual
Obligations and Commercial Commitments
|
|
Payments
due by period
|
|
|
|
Total
|
|
|
Less
than 1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than 5 years
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
Long-term
debt obligations (1)
|
|
$ |
128.3 |
|
|
$ |
12.7 |
|
|
$ |
115.6 |
|
|
$ |
- |
|
|
$ |
- |
|
Capital
lease obligations
|
|
|
7.1 |
|
|
|
1.1 |
|
|
|
2.0 |
|
|
|
2.6 |
|
|
|
1.4 |
|
Operating
lease obligations
|
|
|
5.4 |
|
|
|
1.6 |
|
|
|
2.5 |
|
|
|
1.3 |
|
|
|
- |
|
Purchase
obligations (2)
|
|
|
24.4 |
|
|
|
13.0 |
|
|
|
11.4 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
165.2 |
|
|
$ |
28.4 |
|
|
$ |
131.5 |
|
|
$ |
3.9 |
|
|
$ |
1.4 |
|
* Less
than 1 year is defined as the remainder of fiscal 2009. Following periods are
whole fiscal years.
**
Liabilities for unrecognized tax benefits of $6.8 million are excluded as
reasonable estimates could not be made regarding the timing of future cash
outflows associated with those liabilities.
(1)
Represents principal maturities only and, therefore, excludes the effects of
interest and interest rate swaps.
(2)
Primarily represents purchase agreements to buy minimum quantities of titanium
and cobalt chrome through December 2011.
Off-Balance
Sheet Arrangements
Our
off-balance sheet arrangements include our operating leases and letters of
credit, which are available under the senior credit facility. We had one letter
of credit outstanding as of April 4, 2009 in the amount of $2.5
million.
Environmental
Our
facilities and operations are subject to extensive federal, state, local and
foreign environmental and occupational health and safety laws and regulations.
These laws and regulations govern, among other things, air emissions; wastewater
discharges; the generation, storage, handling, use and transportation of
hazardous materials; the handling and disposal of hazardous wastes; the cleanup
of contamination; and the health and safety of our employees. Under such laws
and regulations, we are required to obtain permits from governmental authorities
for some of our operations. If we violate or fail to comply with these laws,
regulations or permits, we could be fined or otherwise sanctioned by regulators.
We could also be held responsible for costs and damages arising from any
contamination at our past or present facilities or at third-party waste disposal
sites. We cannot completely eliminate the risk of contamination or injury
resulting from hazardous materials, and we may incur material liability as a
result of any contamination or injury.
We
incurred approximately $0.2 million in capital expenditures for environmental,
health and safety in the three month period ended April 4, 2009 compared to $0.1
million for the comparable 2008 period.
In
connection with our recent acquisitions, we completed Phase I assessments and
did not identify any significant issues that need to be remediated. We
cannot be certain that environmental issues will not be discovered or arise in
the future related to these acquisitions.
In
conjunction with the New Bedford acquisition in January 2008, we purchased $5.0
million of environmental insurance coverage for this facility. This policy
expires January 25, 2013. In 2000, we purchased pollution legal liability
insurance that covers certain environmental liabilities that may arise at our
Warsaw, Indiana facility, at a former facility located in Peru, Indiana, and at
certain non-owned locations that we use for the disposal of waste. The insurance
has a $5.0 million aggregate limit and is subject to a deductible and certain
exclusions. The policy period expires in 2010. While the insurance may mitigate
the risk of certain environmental liabilities, we cannot guarantee that a
particular liability will be covered by this insurance.
Based on
information currently available, we do not believe that we have any material
environmental liabilities.
Critical
Accounting Policies and Estimates
The
preparation of our financial statements requires management to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses during the periods presented. Our Annual
Report on Form 10-K for fiscal year ended January 3, 2009, includes a
summary of the critical accounting policies we believe are the most important to
aid in understanding our financial results. There have been no material changes
to these critical accounting policies that impacted our reported amounts of
assets, liabilities, revenues or expenses during the three months ended April 4,
2009.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For
financial market risks related to changes in interest rates, foreign currency
exchange rates, commodity prices and the effects of inflation, reference is made
to Item 7a “Quantitative and Qualitative Disclosures About Market
Risk” contained in Part II of our Annual Report on Form 10-K for the fiscal
year ended January 3, 2009. Our exposure to these risks, at the end of the first
quarter covered by this report, has not changed materially since January 3,
2009.
ITEM 4.
CONTROLS AND PROCEDURES
(a)
Evaluation of disclosure controls and procedures.
Our Chief
Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of our “disclosure controls and procedures” (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934), have concluded
that, as of the end of the fiscal quarter covered by this report on
Form 10-Q, our disclosure controls and procedures were effective and
designed to ensure that material information relating to the Corporation and its
consolidated subsidiaries would be made known to them by others within those
entities.
(b)
Changes in internal control over financial reporting.
There
have been no changes in our “internal control over financial reporting” (as
defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) that
occurred during the fiscal quarter covered by this report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting, except that we are still in the
process of integrating the New Bedford operations and will be incorporating
these operations as part of our internal controls. For purposes of this
evaluation, the impact of this acquisition on our internal controls over
financial reporting has been excluded. See Note 10 to the condensed consolidated
financial statements included in Item 1 for a discussion of the New Bedford
acquisition.
PART II
OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
SEC
Inquiry
Following
the discovery of the accounting irregularities at our Sheffield, UK operating
unit, the Audit Committee self-reported the matter to the staff of the SEC in
October 2007. Thereafter, the SEC commenced an informal inquiry
regarding this matter.
We have
fully cooperated with the SEC in its investigation. At this time we
are unable to predict the time period necessary to resolve the investigation or
the ultimate resolution thereof. To date, considerable legal, tax and
accounting expenses have been incurred in connection with our Audit Committee’s
investigation into this matter and expenditures may continue to be incurred in
the future with regard to the SEC’s investigation. It is also
possible that the investigation may continue to require management’s time and
attention and accounting and legal resources, which could otherwise be devoted
to the operation of our business. Moreover, any action by the SEC
against us, or members of our management, may cause us to be subject to
injunctions, fines or other penalties or sanctions or result in private civil
actions, loss of key personnel or other adverse consequences and may require us
to devote additional time and resources to these matters. The
investigation may adversely affect our ability to obtain, and /or increase the
cost of obtaining, directors’ and officers’ liability insurance and/or other
types of insurance, which could have a material adverse affect on our business,
results of operations and financial condition. In addition, the SEC
investigation and the remedies applied may affect certain of our business
relationships and consequently may have an adverse affect on our business in the
future.
ITEM 1A.
RISK FACTORS
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A “Risk Factors” contained
in our Annual Report on Form 10-K for the fiscal year ended January 3,
2009, which could materially affect our business, financial condition or future
results.
ITEM 6.
EXHIBITS
31.1
|
|
Certification
of Chief Executive Officer required by Item 307 of Regulation S-K as
promulgated by the Securities and Exchange Commission and pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.**
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer required by Item 307 of Regulation S-K as
promulgated by the Securities and Exchange Commission and pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.**
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.**
|
|
|
|
** Filed
concurrently herewith
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
SYMMETRY
MEDICAL INC.
|
|
|
|
|
By
|
/s/ Brian S. Moore
|
|
|
Brian
S. Moore,
|
|
|
President
and Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
By
|
/s/ Fred L. Hite
|
|
|
Fred
L. Hite,
|
|
|
Senior
Vice President and Chief Financial Officer
|
|
|
(Principal
Financial Officer)
|
|
|
|
|
|
|
May
8, 2009 |
|
|