Unassociated Document
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 April 3, 2010
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)
3724
North State Road 15, Warsaw, Indiana
|
|
(I.R.S.
Employer Identification No.)
46582
|
(Address
of principal executive offices)
(574)
268-2252
|
|
(Zip
Code)
|
(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. 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 7, 2010
was 35,953,575 shares.
TABLE
OF CONTENTS
PART I
FINANCIAL INFORMATION
|
|
|
|
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Item 1
|
Financial
Statements:
|
|
4
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|
|
|
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Condensed
Consolidated Balance Sheets: As of April 3, 2010 and January 2,
2010
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|
4
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations: Three Months Ended April 3,
2010 and April 4, 2009
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5
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Condensed
Consolidated Statements of Cash Flows: Three Months Ended April 3, 2010
and April 4, 2009
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6
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|
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|
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|
Notes
to Condensed Consolidated Financial Statements
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|
7
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|
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|
Item 2
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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13
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Item 3
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Quantitative
and Qualitative Disclosures about Market Risk
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17
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Item 4
|
Controls
and Procedures
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17
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PART II
OTHER INFORMATION
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Item
1
|
Legal
Proceedings
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18
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Item 1A
|
Risk
Factors
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18
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Item 6
|
Exhibits
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18
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Signatures
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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
(SEC) 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 2009 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)
|
|
April
3,
|
|
|
January
2,
|
|
|
|
2010
|
|
|
2010
|
|
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|
(unaudited)
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|
|
|
|
ASSETS:
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
10,460 |
|
|
$ |
14,219 |
|
Accounts
receivable, net
|
|
|
46,139 |
|
|
|
38,221 |
|
Inventories
|
|
|
60,825 |
|
|
|
62,301 |
|
Refundable
income taxes
|
|
|
2,282 |
|
|
|
3,048 |
|
Deferred
income taxes
|
|
|
5,581 |
|
|
|
5,816 |
|
Other
current assets
|
|
|
4,644 |
|
|
|
3,648 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
129,931 |
|
|
|
127,253 |
|
Property
and equipment, net
|
|
|
109,997 |
|
|
|
113,369 |
|
Goodwill
|
|
|
153,191 |
|
|
|
153,813 |
|
Intangible
assets, net of accumulated amortization
|
|
|
41,708 |
|
|
|
42,729 |
|
Other
assets
|
|
|
1,160 |
|
|
|
1,181 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
435,987 |
|
|
$ |
438,345 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY:
|
|
|
|
|
|
|
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|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
22,711 |
|
|
$ |
19,494 |
|
Accrued
wages and benefits
|
|
|
8,749 |
|
|
|
7,607 |
|
Other
accrued expenses
|
|
|
4,354 |
|
|
|
5,113 |
|
Accrued
income taxes
|
|
|
24 |
|
|
|
257 |
|
Deferred
income taxes
|
|
|
76 |
|
|
|
78 |
|
Revolving
line of credit
|
|
|
1,216 |
|
|
|
3,320 |
|
Current
portion of capital lease obligations
|
|
|
485 |
|
|
|
529 |
|
Current
portion of long-term debt
|
|
|
21,770 |
|
|
|
20,400 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
59,385 |
|
|
|
56,798 |
|
Accrued
income taxes
|
|
|
6,419 |
|
|
|
6,362 |
|
Deferred
income taxes
|
|
|
17,063 |
|
|
|
17,646 |
|
Derivative
valuation liability
|
|
|
2,831 |
|
|
|
2,982 |
|
Capital
lease obligations, less current portion
|
|
|
2,758 |
|
|
|
2,887 |
|
Long-term
debt, less current portion
|
|
|
67,470 |
|
|
|
69,200 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
155,926 |
|
|
|
155,875 |
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
|
Common
Stock, $.0001 par value; 75,000 shares authorized; shares issued April 3,
2010—35,954; January 2, 2010—35,840
|
|
|
4 |
|
|
|
4 |
|
Additional
paid-in capital
|
|
|
278,475 |
|
|
|
278,176 |
|
Retained
earnings
|
|
|
1,908 |
|
|
|
277 |
|
Accumulated
other comprehensive income (loss)
|
|
|
(326 |
) |
|
|
4,013 |
|
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
|
280,061 |
|
|
|
282,470 |
|
|
|
|
|
|
|
|
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|
Total
Liabilities and Shareholders' Equity
|
|
$ |
435,987 |
|
|
$ |
438,345 |
|
See
accompanying notes to condensed consolidated financial
statements.
SYMMETRY
MEDICAL INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
Thousands, Except per Share Data; Unaudited)
|
|
Three Months Ended
|
|
|
|
April
3,
|
|
|
April
4,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
84,494 |
|
|
$ |
101,422 |
|
Cost
of Revenue
|
|
|
67,458 |
|
|
|
76,864 |
|
Gross
Profit
|
|
|
17,036 |
|
|
|
24,558 |
|
Selling,
general and administrative expenses
|
|
|
12,604 |
|
|
|
13,245 |
|
Facility
closure and severance costs
|
|
|
520 |
|
|
|
108 |
|
Operating
Income
|
|
|
3,912 |
|
|
|
11,205 |
|
|
|
|
|
|
|
|
|
|
Other
(income)/expense:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
1,563 |
|
|
|
1,820 |
|
Derivatives
valuation (gain)/loss
|
|
|
(308 |
) |
|
|
(394 |
) |
Other
|
|
|
181 |
|
|
|
(296 |
) |
Income
before income taxes
|
|
|
2,476 |
|
|
|
10,075 |
|
Income
tax expense
|
|
|
845 |
|
|
|
3,228 |
|
Net
income
|
|
$ |
1,631 |
|
|
$ |
6,847 |
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.05 |
|
|
$ |
0.19 |
|
Diluted
|
|
$ |
0.05 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares and equivalent shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35,442 |
|
|
|
35,286 |
|
Diluted
|
|
|
35,729 |
|
|
|
35,381 |
|
See
accompanying notes to condensed consolidated financial statements.
SYMMETRY
MEDICAL INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW
(In
Thousands; Unaudited)
|
|
Three Months Ended
|
|
|
|
April
3,
|
|
|
April
4,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,631 |
|
|
$ |
6,847 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,453 |
|
|
|
4,642 |
|
Amortization
|
|
|
733 |
|
|
|
727 |
|
Net
(gain) loss on sale of assets
|
|
|
(42 |
) |
|
|
38 |
|
Deferred
income tax provision
|
|
|
(265 |
) |
|
|
422 |
|
Stock-based
compensation
|
|
|
299 |
|
|
|
739 |
|
Derivative
valuation gain
|
|
|
(308 |
) |
|
|
(394 |
) |
Foreign
currency transaction (gain) loss
|
|
|
338 |
|
|
|
(24 |
) |
Accounts
receivable
|
|
|
(8,774 |
) |
|
|
375 |
|
Other
assets
|
|
|
(1,100 |
) |
|
|
(921 |
) |
Inventories
|
|
|
745 |
|
|
|
(7,724 |
) |
Current
income taxes
|
|
|
541 |
|
|
|
6,811 |
|
Accounts
payable
|
|
|
3,993 |
|
|
|
3,138 |
|
Accrued
expenses and other
|
|
|
434 |
|
|
|
(5,189 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
2,678 |
|
|
|
9,487 |
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(3,610 |
) |
|
|
(4,786 |
) |
Proceeds
from the sale of property and equipment
|
|
|
595 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(3,015 |
) |
|
|
(4,784 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from bank revolver
|
|
|
7,398 |
|
|
|
29,935 |
|
Payments
on bank revolver
|
|
|
(7,561 |
) |
|
|
(21,235 |
) |
Issuance
of long-term debt
|
|
|
2,711 |
|
|
|
- |
|
Payments
on long-term debt and capital lease obligations
|
|
|
(5,240 |
) |
|
|
(4,582 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
(2,692 |
) |
|
|
4,118 |
|
Effect
of exchange rate changes on cash
|
|
|
(730 |
) |
|
|
(55 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(3,759 |
) |
|
|
8,766 |
|
Cash
and cash equivalents at beginning of period
|
|
|
14,219 |
|
|
|
10,191 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
10,460 |
|
|
$ |
18,957 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
1,365 |
|
|
$ |
2,396 |
|
|
|
|
|
|
|
|
|
|
Cash
paid (received) for income taxes
|
|
$ |
573 |
|
|
$ |
(4,209 |
) |
See
accompanying notes to condensed consolidated financial statements.
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), 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
(“Thornton”), Symmetry Medical Malaysia SDN, Clamonta Limited, Specialty
Surgical Instrumentation Inc. and Symmetry Medical New Bedford Inc. 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 2009 consolidated financial statements and the notes
thereto included in the Corporation’s Annual Report on Form 10-K for fiscal
year 2009.
The
Corporation’s fiscal year is the 52 or 53 week period ending on the Saturday
closest to December 31. Fiscal year 2010 is a 52 week year ending January
1, 2011. The Corporation’s interim quarters for 2010 are
13 weeks long and quarter-end dates have been set as April 3, 2010, July 3, 2010
and October 2, 2010. Fiscal year 2009 was a 52 week year (ending January2,
2010). The Corporation’s interim quarters for 2009 were 13 weeks long, ending
April 4, 2009, July 4, 2009 and October 3, 2009. References in these condensed
consolidated financial statements to the three months ended refer to these
financial periods, respectively. The Corporation has evaluated
subsequent events up through the time of filing with the SEC for the quarter
ended April 3, 2010.
2.
Inventories
Inventories
consist of the following:
|
|
April
3,
|
|
|
January
2,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
|
|
Raw
material and supplies
|
|
$ |
13,927 |
|
|
$ |
15,099 |
|
Work-in-process
|
|
|
27,308 |
|
|
|
27,120 |
|
Finished
goods
|
|
|
19,590 |
|
|
|
20,082 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
60,825 |
|
|
$ |
62,301 |
|
3.
Property and Equipment
Property
and equipment, including depreciable lives, consists of the
following:
|
|
April
3,
|
|
|
January
2,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
|
|
Land
|
|
$ |
6,651 |
|
|
$ |
6,965 |
|
Buildings
and improvements (20 to 40 years)
|
|
|
40,998 |
|
|
|
42,252 |
|
Machinery
and equipment (5 to 15 years)
|
|
|
137,189 |
|
|
|
138,182 |
|
Office
equipment (3 to 5 years)
|
|
|
13,362 |
|
|
|
13,194 |
|
Construction-in-progress
|
|
|
5,851 |
|
|
|
3,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
204,051 |
|
|
|
204,343 |
|
Less
accumulated depreciation
|
|
|
(94,054 |
) |
|
|
(90,974 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
109,997 |
|
|
$ |
113,369 |
|
4.
Intangible Assets
Intangible
assets were acquired in connection with our business acquisitions. As of April
3, 2010, 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
|
|
$ |
2,316 |
|
|
$ |
(1,071 |
) |
|
$ |
1,245 |
|
Acquired
customers
|
18
years
|
|
|
42,455 |
|
|
|
(9,765 |
) |
|
|
32,690 |
|
Non-compete
agreements
|
5
years
|
|
|
691 |
|
|
|
(450 |
) |
|
|
241 |
|
Intangible
assets subject to amortization
|
17
years
|
|
|
45,462 |
|
|
|
(11,286 |
) |
|
|
34,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary
processes
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
3,498 |
|
Trademarks
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
4,034 |
|
Indefinite-lived
intangible assets, other than goodwill
|
|
|
|
|
|
|
|
|
|
|
|
7,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
$ |
41,708 |
|
As of
January 2, 2010, 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
|
|
$ |
2,343 |
|
|
$ |
(1,020 |
) |
|
$ |
1,323 |
|
Acquired
customers
|
18
years
|
|
|
42,613 |
|
|
|
(9,166 |
) |
|
|
33,447 |
|
Non-compete
agreements
|
5
years
|
|
|
691 |
|
|
|
(420 |
) |
|
|
271 |
|
Intangible
assets subject to amortization
|
17
years
|
|
|
45,647 |
|
|
|
(10,606 |
) |
|
|
35,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary
processes
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
3,586 |
|
Trademarks
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
4,102 |
|
Indefinite-lived
intangible assets, other than goodwill
|
|
|
|
|
|
|
|
|
|
|
|
7,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
$ |
42,729 |
|
In March
2010, our Sheffield, UK unit obtained a new £3,000 facility, comprised of a
24-month asset-based term note and short-term revolver facility. The
term note matures in March 2012 with monthly payments plus interest at 2.75% per
year. The short-term revolver is due on demand and accrues interest
at 3.50% per year. As of April 3, 2010, $2,740 was outstanding on the
term loan and there were no borrowings on the short-term
revolver. The term note and revolver are secured by certain assets of
our Sheffield, UK unit, which had a net book value of approximately $6,600 as of
April 3, 2010.
6.
New Accounting Pronouncements
Disclosures about Fair Value Measurements. In January 2010, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2010-06, “Improving Disclosures about Fair Value
Measurements.” ASU 2010-06 requires additional disclosures about fair
value measurements including transfers in and out of Levels 1 and 2 and a higher
level of disaggregation for the different types of financial instruments. For
the reconciliation of Level 3 fair value measurements, information about
purchases, sales, issuances and settlements are presented separately. This
standard is effective for interim and annual reporting periods beginning after
December 15, 2009 with the exception of revised Level 3 disclosure requirements
which are effective for interim and annual reporting periods beginning after
December 15, 2010. Comparative disclosures are not required in the year of
adoption. The Corporation adopted the provisions of the standard on January 3,
2010, which did not have an impact on the Corporation’s financial position,
results of operations or cash flows.
7.
Segment Reporting
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, and same or similar customers,
those operations have been aggregated 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.
7.
Segment Reporting (Continued)
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
to External Customers:
|
|
Three Months Ended
|
|
|
|
April
3,
|
|
|
April
4,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
United
States
|
|
$ |
60,710 |
|
|
$ |
76,893 |
|
United
Kingdom
|
|
|
7,179 |
|
|
|
7,974 |
|
Ireland
|
|
|
8,095 |
|
|
|
9,502 |
|
Other
foreign countries
|
|
|
8,510 |
|
|
|
7,053 |
|
|
|
|
|
|
|
|
|
|
Total
net revenues
|
|
$ |
84,494 |
|
|
$ |
101,422 |
|
Concentration
of Credit Risk:
A
substantial portion of the Corporation’s revenue is derived from a limited
number of customers. Revenue from customers of the Corporation which
individually account for 10% or more of the Corporation’s revenue is as
follows:
Three
months ended April 3, 2010— Two customers represented approximately 34.2% and
10.6% of revenue, respectively.
Three
months ended April 4, 2009— One customer represented approximately 41.9% of
revenue.
Revenue
by Product Category:
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
3,
|
|
|
April
4,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
Instruments
|
|
$ |
33,420 |
|
|
$ |
46,505 |
|
Implants
|
|
|
28,212 |
|
|
|
29,083 |
|
Cases
|
|
|
17,023 |
|
|
|
18,499 |
|
Other
|
|
|
5,839 |
|
|
|
7,335 |
|
|
|
|
|
|
|
|
|
|
Total
net revenues
|
|
$ |
84,494 |
|
|
$ |
101,422 |
|
8.
Net Income Per Share
The
following table sets forth the computation of earnings per share.
|
|
Three Months Ended
|
|
|
|
April
3,
|
|
|
April
4,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
Earnings
per share - Basic:
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,631 |
|
|
$ |
6,847 |
|
Less: Undistributed
earnings allocated to nonvested stock
|
|
|
(15 |
) |
|
|
(99 |
) |
Income
available to common shares - Basic
|
|
|
1,616 |
|
|
|
6,748 |
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding - Basic
|
|
|
35,442 |
|
|
|
35,286 |
|
|
|
|
|
|
|
|
|
|
Earnings
per share - Basic
|
|
$ |
0.05 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
Earnings
per share - Diluted:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,631 |
|
|
$ |
6,847 |
|
Less: Undistributed
earnings allocated to nonvested stock
|
|
|
(2 |
) |
|
|
(81 |
) |
Income
available to common shares - Diluted
|
|
|
1,629 |
|
|
|
6,766 |
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding - Basic
|
|
|
35,442 |
|
|
|
35,286 |
|
Effect
of dilution
|
|
|
287 |
|
|
|
95 |
|
Weighted-average
common shares outstanding - Diluted
|
|
|
35,729 |
|
|
|
35,381 |
|
|
|
|
|
|
|
|
|
|
Earnings
per share - Diluted
|
|
$ |
0.05 |
|
|
$ |
0.19 |
|
The
diluted weighted average share calculations do not include performance based
restricted stock awarded March 24, 2010, totaling 324,550 shares because the
measurement period is not complete.
9.
Commitments and Contingencies
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.
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) in October 2007. 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.
Unconditional Purchase
Obligations. The Corporation has contracts to purchase minimum
quantities of plastic, cobalt chrome and titanium through December
2012. Based on contractual pricing at April 3, 2010, the minimum
purchase obligations total $26,144. Purchases under plastic, cobalt
chrome and titanium contracts total approximately $5,454 for the period ended
April 3, 2010. These purchases are not in excess of our forecasted
requirements.
10.
Comprehensive Income
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 ASC 815, Hedging (formerly SFAS 133).
Comprehensive income consists of the following:
|
|
Three Months Ended
|
|
|
|
April
3,
|
|
|
April
4,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
1,631 |
|
|
$ |
6,847 |
|
Foreign
currency translation adjustments
|
|
|
(4,247 |
) |
|
|
(460 |
) |
Derivative,
net of tax benefit (1)
|
|
|
(92 |
) |
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
(2,708 |
) |
|
$ |
6,344 |
|
(1)
|
Derivative
losses are reported net of income tax benefits of $61 for the three month
period ended April 3, 2010.
|
11.
Derivatives
The Corporation
utilizes derivative instruments to minimize the volatility of cash flows and
income statement impacts associated with interest rate payments on its variable
rate debt. The Corporation recognizes all derivative instruments as
either assets or liabilities at fair value on the consolidated balance sheets.
The Corporation utilizes third party valuations to assist in the determination
of the fair value of these derivatives. The Corporation considers its derivative
instrument valuations to be Level 2 fair value measurements under the provision
of the FASB Statement on fair value measurements (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 / (loss), 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 payment of interest as cash
flow hedges and the impact of the hedge is reclassified to interest expense in
the unaudited condensed consolidated statements of operations upon payment of
interest.
The
Corporation’s 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 Corporation entered into a
forward swap contract to manage interest rate risk related to a portion of its
current variable rate senior secured term loan. The Corporation has hedged the
future interest payments related to $64,100 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 ($541) at April 3, 2010, 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.
In 2006,
the Corporation entered into a forward swap contract to manage interest rate
risk related to $40,000 of its then existing variable rate senior secured first
lien term loan to a fixed payment obligation of 5.45% per annum for the period
commencing July 3, 2006 and ending on June 10, 2011. This swap contract, which
had a fair value of ($2,290) at April 3, 2010, 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 3, 2010 and April 4, 2009, the
Corporation recorded gains of $308 and $394, respectively.
12.
Fair Value of Financial Instruments
As of
April 3, 2010 and January 2, 2010, the Corporation held certain assets 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 in accordance with
the FASB Statement on fair value measurement.
12.
Fair Value of Financial Instruments (Continued)
The
following table summarizes certain fair value information at April 3, 2010 and
January 2, 2010 for assets and liabilities measured at fair value on a recurring
basis.
|
|
April
3, 2010
|
|
|
January
2, 2010
|
|
|
|
Fair
Value Measurements
|
|
|
Fair
Value Measurements
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
- |
|
|
$ |
(2,831 |
) |
|
$ |
- |
|
|
$ |
(2,831 |
) |
|
$ |
- |
|
|
$ |
(2,982 |
) |
|
$ |
- |
|
|
$ |
(2,982 |
) |
|
|
$ |
- |
|
|
$ |
(2,831 |
) |
|
$ |
- |
|
|
$ |
(2,831 |
) |
|
$ |
- |
|
|
$ |
(2,982 |
) |
|
$ |
- |
|
|
$ |
(2,982 |
) |
Additionally,
financial instruments also consist of cash and cash equivalents, accounts
receivable, and long-term debt. The carrying value of these financial
instruments approximates fair value.
13. Facility
Consolidation and Severance Costs
Results
of Operations include net pre-tax charges of $520 and $108 for the three months
ended April 3, 2010 and April 4, 2009, respectively, associated with employee
cost reduction and efficiency actions and the consolidation of our Auburn, ME
facilities into other facilities that produce similar products. For
the period ended April 3, 2010, these costs are comprised of $333 of severance
costs and an additional $187 of moving expenses compared to $108 of severance
costs for the period ended April 4, 2009. As of April 3, 2010 and
January 2, 2010, severance accruals related to these cost reduction and
efficiency actions totaled $432 and $836, respectively, and are included in
accrued and other liabilities in the consolidated balance sheets. The
reduction in the accrual from January 2, 2010 represents payments made during
the first quarter of 2010 of $737, offset by additional severance costs incurred
of $333. These costs are expected to be paid during
2010.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In
millions)
Business
Overview
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 2010, our revenue decreased $16.9 million, or 16.7%, compared
to the first quarter 2009. This reduction was primarily driven by
reduced customer demand in the instrument product line, offset by favorable
foreign currency exchange rate impact of $1.8 million for all
products. We continue to experience challenging business conditions
due the overall economic environment which resulted in reduced revenue of 25.8%
during the first quarter from our combined five largest OEM customers as they
continue to work down inventory levels and the timing of their various product
launches. However, we did experience higher overall customer revenue
in the first quarter 2010 as compared to the fourth quarter 2009 and we believe
we will continue to see sequential increases in revenue throughout
2010.
We
continue to be optimistic about the future as the larger OEMs are increasingly
focused on improving their supply chains. 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
consolidation of suppliers.
Recently
we have been engaged in more active and positive discussions with our customers
to provide enhanced services. While these changes do not happen overnight, we
continue to believe that we are in a favorable position to emerge as a supplier
of choice for our major customers. In the first quarter of 2010, we were awarded
a large multi-year agreement for sterile packaging of disposable medical
products. Sterile packaging is a new product offering for us which will continue
to expand in the near future. We believe our global capacity and competitive
strengths will benefit us when the order volume and large project launches
return, particularly within the dynamic and aging US population.
Over the
past four years, we have completed several acquisitions which expanded our
customer base and enabled us to assemble and 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.
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
as more and more of our customers are impacted by increased quality and
regulatory requirements. Many of our customers are reducing their
number of suppliers and consolidating purchases with larger strategic providers.
We are increasingly able to use the leverage of our global resources while
providing a local presence across the global marketplace. This allows
us to be close to our customers, provide quicker response times, and increase
our value added services.
During
the first quarter of 2010, the U.S. Congress passed and the President
signed into law the Patient Protection and Affordable Care Act, as well as the
Health Care and Education Reconciliation Act of 2010, which represent a
significant change to the current U.S. healthcare system. A detailed
discussion of these risks and other factors is provided in Part I, Item 1A
of our Annual Report on Form 10-K for the year ended January 2, 2010, and
elsewhere in this report.
First
Quarter Results of Operations
Revenue. Revenue
for the three month period ended April 3, 2010 decreased $16.9 million, or
16.7%, to $84.5 million from $101.4 million for the comparable 2009
period. Revenue for each of our principal product categories in these
periods was as follows:
Product Category
|
|
Three Months Ended
|
|
|
|
April
3,
|
|
|
April
4,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
Instruments
|
|
$ |
33.4 |
|
|
$ |
46.5 |
|
Implants
|
|
|
28.2 |
|
|
|
29.1 |
|
Cases
|
|
|
17.0 |
|
|
|
18.5 |
|
Other
|
|
|
5.9 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
84.5 |
|
|
$ |
101.4 |
|
The $16.9
million decrease in revenue was primarily driven by lower instrument revenue as
our largest OEM customers reduced spending on their launch quantities compared
to strong demand in the first quarter of 2009. Across all product
lines we also experienced reduced demand as a result of continued challenging
business conditions due to the overall economic environment, which has resulted
in reduced overall revenue of 25.8% for our five largest OEM customers as they
work down inventory levels and adjust the timing of their various product
launches. The reduction in revenue from our five largest OEM
customers was partially offset by favorable foreign currency exchange rate
fluctuations of $1.8 million.
Instrument
revenue decreased $13.1 million. This decrease was driven primarily by lower
demand from our major OEM customers due to the timing of their various product
launch activity and their reduction in inventory levels. Foreign
currency exchange rate fluctuations slightly offset the decrease in instrument
revenues with a favorable impact of $0.1 million.
Implant
revenue decreased $0.9 million primarily driven by our major OEM customers
working down inventory levels, but was partially offset by favorable foreign
currency exchange rate fluctuations of $0.9 million.
Case
revenue decreased $1.5 million due to lower demand from our major OEM customers
associated with product launch activity timing and reductions in their inventory
levels as well as lower customer demand from our non-orthopedic medical
customers as they continue to react to the current economic
environment. Case revenue was positively impacted by $0.4 million of
favorable foreign currency exchange rate fluctuation.
Other
product revenue decreased $1.4 million driven primarily by a reduction of
customer demand due to our largest customer in the aerospace industry reacting
to deteriorating market conditions in that sector. Related foreign
currency exchange rate fluctuations were favorable by $0.4 million.
Gross
Profit. Gross profit for the three month period ended April 3,
2010 decreased $7.5 million, or 30.6%, to $17.0 million from $24.6 million for
the comparable 2009 period primarily due to the decline in revenue of
16.7%. Additionally, there was a decreased number of large volume projects
from our top customers, which resulted in increased overhead costs as a
percentage of revenue as well as unfavorable product mix. Gross margin as
a percentage of revenue for the first quarter 2010 was 20.2% compared to 24.2%
in the same period last year. Although consolidated gross profit as a
percentage of revenue for the first quarter 2010 was down compared to the same
period last year, we recognized improved operational performance at our
Sheffield, UK operating unit, as indicated by a 14.5% increase in its gross
margin due to the favorable impacts of our headcount reduction initiatives and
improved manufacturing processes.
Selling, General and Administrative
Expenses. For the three month period ended April 3, 2010,
selling, general and administrative expenses (“SG&A”) were $12.6 million
compared with the three month period ended April 4, 2009 of $13.2 million. The
improvement reflects a decrease in employee compensation costs, including
headcount reductions, taken in response to offset the lower revenue levels and
our continued cost control efforts. Additionally, performance based
compensation and non-cash restricted stock compensation expense decreased $0.4
million compared to the same three month period of 2009.
Facility Consolidation and Severance
Costs. Results of
Operations include net pre-tax charges of $0.5 million and $0.1 million for the
three months ended April 3, 2010 and April 4, 2009, respectively, associated
with employee cost reduction and efficiency actions and the consolidation of our
Auburn, ME facilities into other facilities that produce similar
products. For the period ended April 3, 2010, these costs are
comprised of $0.3 million of severance costs and an additional $0.2 million of
moving expenses compared to $0.1 million of severance costs for the period ended
April 4, 2009. Costs charged to operations in the first three months
of 2010 associated with severance of $0.3 million are included in accrued and
other liabilities in the consolidated balance sheet as of April 3, 2010, as well
as $0.1 million of costs incurred during fiscal 2009 that have not yet been
paid. These costs are all expected to be paid during
2010.
Other (Income)
Expense. Interest expense for the three month
period ended April 3, 2010 decreased $0.2 million, or 14.1%, to $1.6
million from $1.8 million for the comparable period in 2009. This decrease
reflects the general decline in the interest rate market in the first quarter
2010 as compared to 2009. Additionally, aggregate outstanding
indebtedness has decreased $41.9 million, or 30.9% as compared to April 4,
2009. The net derivatives gain in first quarter 2010 consists of a
gain on interest rate swap valuation of $0.3 million related to our interest
rate swap that has not been designated as a hedge as compared to a gain of
$0.4 million for the comparable period in 2009. The interest rate swaps are
used to convert our variable rate long-term debt to fixed rates. Other expense
for the three month period ended April 3, 2010 increased $0.5 million from the
comparable period in 2009, from a gain of $0.3 million to a loss of $0.2
million, due to unfavorable foreign exchange rate fluctuations on transactions
denominated in foreign currencies.
Provision for Income
Taxes. Our effective tax rate was 34.1% for the three month period
ended April 3, 2010 as compared to 32.0% for the three month period ended April
4, 2009. Provision for income taxes decreased by $2.4 million, or 73.8%, to $0.8
million for the three month period ended April 3, 2010 from $3.2 million for the
comparable 2009 period primarily due to lower levels of pre-tax
income. Our effective tax rate differed from the U.S. Federal
statutory rate of 35% primarily due to the favorable impact of foreign income
taxes as we benefited from an increase in income earned in foreign jurisdictions
in 2010 where the statutory tax rate is lower than the Federal statutory
rate.
Liquidity
and Capital Resources
Current
Market Conditions
We
continue to experience challenging business conditions due to the overall
economic environment that has resulted in reduced demand from our major OEM
customers. Our revenue is impacted by our major OEM customers
working down inventory levels and the timing of their various product
launch activity.
Current
global economic conditions have resulted in increased volatility in the
financial markets. During fiscal 2009 and the first quarter of fiscal 2010, we
actively monitored the financial health of our supplier base, tightened
requirements for customer credit, and increased spending controls across the
company. We will continue to monitor and manage these activities based on
current and expected market developments.
Liquidity
Our
principal sources of liquidity in the three month period ended April 3, 2010
were cash generated from operations and borrowings under our senior revolving
credit facility. Principal uses of cash in the three month period ended
April 3, 2010 included 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.
We
believe our cash resources will permit us to stay committed to our strategic
plan of increasing our share in the orthopedic market and expanding into other
medical device segments. In order to sustain profitability and cash
flow during these current economic conditions, we have reduced our work force,
decreased the amount of overtime, renegotiated a key supply agreement for
reduced material costs, implemented other cost control measures and began to
consolidate operating facilities.
Operating
Activities. Operating activities generated cash of $2.7
million in the three month period ended April 3, 2010 compared to $9.5 million
for the three month period ended April 4, 2009, a decrease of $6.8
million. The decrease in cash from operations is primarily a result of a
reduction in net income due to lower revenue. Net cash used by
working capital for the three month period ended April 3, 2010 was $0.7 million
higher than the comparable 2009 period.
Investing Activities.
Capital expenditures of $3.6 million were $1.2 million lower in the three month
period ended April 3, 2010 compared to the three month period ended April 4,
2009.
Financing
Activities. Financing activities used $2.7 million of
cash in the three month period ended April 3, 2010 compared to cash generated of
$4.1 million in the three month period ended April 4, 2009, due primarily to
payments on long-term debt, capital leases and our revolving line of credit,
partially offset by cash received from a new asset-based 24 month term note of
$2.7 million at our Sheffield, UK facility.
Capital
Expenditures
Capital
expenditures totaled $3.6 million for the three months ended April 3, 2010,
compared to $4.8 million for the three month period ended April 4, 2009.
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 and Ireland facilities during 2010.
Debt
and Credit Facilities
As of
April 3, 2010, we had an aggregate of $93.7 million of outstanding indebtedness,
which consisted of $84.5 million of term loan borrowings outstanding under our
Senior Credit Agreement, $2.0 million of borrowings outstanding under our
revolving credit facility, $2.7 million of borrowings under our new UK
asset-based 24-month term note, $1.2 million of borrowings under our Malaysia
short-term credit facility, and $3.3 million of capital lease obligations. We
had two outstanding letters of credit as of April 3, 2010 in the amounts of $3.5
million and $0.2 million.
In March,
2010, our Sheffield, UK unit obtained a new £3.0 million facility, comprised of
a 24-month asset-based term note and short-term revolver facility. The term
note matures in March 2012 with monthly payments plus interest at 2.75% per
year. The short-term revolver is due on demand and accrues interest
at 3.50% per year. As of April 3, 2010, $2,740 was outstanding on the
term loan and there were no borrowings on the short-term
revolver. The term note and revolver are secured by certain assets of
our Sheffield, UK unit, which had a net book value of approximately $6,600 as of
April 3, 2010.
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 3,
2010.
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. The Corporation’s
Senior Credit Agreement, including the revolving credit facility, which has a
balance of $86.5 million at April 3, 2010, matures in June 2011. We
have begun to explore refinancing alternatives to pay off the remaining balance
and to establish adequate funds for future expansion. At this time,
we believe that we will have multiple financing options and we anticipate
completing a refinancing in the second half of 2010.
Contractual
Obligations and Commercial Commitments
The
following table reflects our contractual obligations as of April 3,
2010.
|
|
Payments Due By Period
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
More than 5
years
|
|
|
|
(In
Millions)
|
|
Long-term
debt obligations
(1)
|
|
$ |
89.2 |
|
|
$ |
21.8 |
|
|
$ |
67.4 |
|
|
$ |
- |
|
|
$ |
- |
|
Capital
lease obligations
|
|
|
5.7 |
|
|
|
0.8 |
|
|
|
2.7 |
|
|
|
1.6 |
|
|
|
0.6 |
|
Operating
lease obligations
|
|
|
4.3 |
|
|
|
1.4 |
|
|
|
2.2 |
|
|
|
0.5 |
|
|
|
0.2 |
|
Purchase
obligations (2)
|
|
|
26.1 |
|
|
|
13.5 |
|
|
|
12.6 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
125.3 |
|
|
$ |
37.5 |
|
|
$ |
84.9 |
|
|
$ |
2.1 |
|
|
$ |
0.8 |
|
|
(1)
|
Represents
principal maturities only and, therefore, excludes the effects of interest
and interest rate swaps. Scheduled payments for our Revolving Credit
Facility exclude interest payments as rates are variable. Borrowings under
the Revolving Credit Facility bear interest at a variable rate based on
the London Interbank Offer Rate (LIBOR) or a base rate determined by the
lender’s prime rate plus an applicable margin, as defined in the
agreement. The applicable margin for borrowings under the Amendment ranges
from 0.25% to 1.25% for base rate borrowings and 1.25% to 2.25% for LIBOR
borrowings, subject to adjustment based on the average availability under
the Revolving Credit Facility.
|
|
(2)
|
For
the purposes of this table, contractual obligations for purchases of goods
or services are defined as agreements that are enforceable and legally
binding and that specify all significant terms, including: fixed or
minimum quantities, fixed, minimum or variable price provisions; and the
approximate timing of the transaction. Our purchase orders are normally
based on our current manufacturing needs and are fulfilled by our vendors
within a short time. We enter into blank orders with vendors that have
preferred pricing terms; however, these orders are normally cancelable by
us without penalty. Amounts predominantly represent purchase agreements to
buy minimum quantities of plastic, cobalt chrome and titanium through
December 2012.
|
This
table does not include liabilities for unrecognized tax benefits of
$6.2 million as reasonable estimates could not be made regarding the timing
of future cash outflows associated with those liabilities.
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 two letters
of credit outstanding as of April 3, 2010 in the amounts of $3.5 million and
$0.2 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 minimal capital expenditures for environmental, health and safety in
the three month period ended April 3, 2010 compared to $0.2 million for the
comparable 2009 period.
In
connection with past acquisitions, we completed Phase I environmental
assessments and did not identify any significant issues that we believe 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, we purchased $5.0 million of
environmental insurance coverage for this facility. This policy expires January
25, 2013. 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 2, 2010, 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 3,
2010.
New
Accounting Pronouncements
Disclosures about Fair Value Measurements. In January 2010, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements”. ASU
2010-06 requires additional disclosures about fair value measurements including
transfers in and out of Levels 1 and 2 and a higher level of disaggregation for
the different types of financial instruments. For the reconciliation of Level 3
fair value measurements, information about purchases, sales, issuances and
settlements are presented separately. This standard is effective for interim and
annual reporting periods beginning after December 15, 2009 with the exception of
revised Level 3 disclosure requirements which are effective for interim and
annual reporting periods beginning after December 15, 2010. Comparative
disclosures are not required in the year of adoption. The Corporation adopted
the provisions of the standard on January 3, 2010, which did not have an impact
on the Corporation’s financial position, results of operations or cash
flows.
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 2, 2010. Our exposure to these risks, at the end of the first
quarter covered by this report, has not changed materially since January 2,
2010.
ITEM 4.
CONTROLS AND PROCEDURES
This
Report includes the certifications of our Chief Executive Officer and Chief
Financial Officer required by Rule 13a-14 of the Securities Exchange Act of 1934
(the “Exchange Act”). See Exhibits 31.1 and 31.2. This
Item 4 includes information concerning the controls and control evaluations
referred to in those certifications.
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) are designed to ensure that information required to be disclosed
in reports filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC rules and
forms and that such information is accumulated and communicated to management,
including the Chief Executive Officer and the Chief Financial Officer, to allow
timely decisions regarding required disclosures.
In
connection with the preparation of this Report, our management, under the
supervision and with the participation of the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures as of the end of the
fiscal quarter covered by this report on Form 10-Q. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were effective as of April
3, 2010.
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 Exchange Act) 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.
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 2,
2010, which could materially affect our business, financial condition or future
results. Except as set forth below, there have been no material changes
from the risk factors disclosed in our Annual Report on Form 10-K.
The risk factor under “RISKS RELATED TO OUR INDUSTRY” entitled
“Recent discussion of US
Healthcare reform may impact our medical device customers or business
directly.” is replaced in its entirety by the following:
The impact of the
recently enacted federal healthcare reform legislation on our business remains
uncertain.
In
March 2010, the U.S. Congress adopted and President Obama signed into law
comprehensive health care reform legislation through the passage of the Patient
Protection and Affordable Health Care Act (H.R. 3590) and the Health Care and
Education Reconciliation Act (H.R. 4872). Among other initiatives, these
bills impose a 2.3% excise tax on domestic sales of medical devices following
December 31, 2012, which is estimated to contribute approximately
$27 billion to healthcare reform. Various healthcare reform proposals have
also emerged at the state level. The excise tax may impact results of operations
following December 31, 2012, however we cannot predict with certainty what
healthcare initiatives, if any, will be implemented at the state level, or what
the ultimate effect of federal health care reform or any future legislation or
regulation will have on us.
Many of
the details of the new law will be included in new and revised regulations,
which have not yet been promulgated, and require additional guidance and
specificity to be provided by the Department of Health and Human Services,
Department of Labor and Department of the Treasury. Accordingly, while it is too
early to understand and predict the ultimate impact of the new legislation on
our business, the legislation could have a material adverse effect on our
business, cash flows, financial condition and results of
operations.
ITEM 5.
DEPARTURE OF OFFICERS
On
May 9, 2010, the Corporation finalized discussions regarding John Hynes’
separation from the Corporation. The Corporation intends to adhere to the terms
of his employment agreement, which was entered into on October 17, 2007 and
filed on Form 8-K on November 8, 2007.
ITEM 6. EXHIBITS
10.45+
|
|
Amended
employment agreement, dated May 4, 2010, by and between Symmetry Medical
Inc. and Brian S. Moore*
|
|
|
|
10.46+
|
|
Severance
Agreement, dated May 4, 2010, by and between Symmetry Medical Inc. and
Fred Hite*
|
|
|
|
10.47+
|
|
Severance
Agreement, dated May 4, 2010, by and between Symmetry Medical Inc. and D.
Darin Martin and Michael Curtis*
|
|
|
|
10.48+
|
|
Form
of Restricted Stock Agreement (CEO) issued under Amendment No. 1 to the
Amended and Restated Equity Incentive Plan*
|
|
|
|
10.49+
|
|
Form
of Restricted Stock Agreement (Key Employees) issued under Amendment No. 1
to the Amended and Restated Equity Incentive Plan*
|
|
|
|
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.
+ Indicates
management contract or compensatory plans or arrangements required to be filed
as an exhibit.
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
10, 2010
|
|
|