Unassociated Document
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period
ended October 2, 2010
Commission File Number:
001-32374
(Exact name of registrant as
specified in its charter)
Delaware
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35-1996126
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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3724
North State Road 15, Warsaw, Indiana
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46582
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(Address
of principal executive offices)
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(Zip
Code)
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|
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(574)
268-2252
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(Registrant’s
telephone number, including area code)
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|
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).
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 ¨
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|
Accelerated
filerþ
|
|
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 November 10, 2010 was
35,941,988 shares.
PART I
FINANCIAL INFORMATION
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Item 1
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Financial
Statements:
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Condensed
Consolidated Balance Sheets: As of October 2, 2010 and January 2,
2010
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4
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Condensed
Consolidated Statements of Operations: Three and Nine Months Ended
October 2, 2010 and October 3, 2009
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5
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Condensed
Consolidated Statements of Cash Flows: Nine Months Ended October 2, 2010
and October 3, 2009
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6
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Notes
to Condensed Consolidated Financial Statements
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7
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Item 2
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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15
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Item 3
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Quantitative
and Qualitative Disclosures about Market Risk
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21
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Item 4
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Controls
and Procedures
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21
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PART II
OTHER INFORMATION
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Item
1
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Legal
Proceedings
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22
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Item 1A
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Risk
Factors
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22
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Item 6
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Exhibits
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23
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Signatures
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24
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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 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
CONDENSED CONSOLIDATED
BALANCE SHEETS
|
|
October
2,
|
|
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January
2,
|
|
|
|
2010
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|
|
2010
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|
ASSETS:
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(unaudited)
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|
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Current
Assets:
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|
|
|
|
|
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Cash
and cash equivalents
|
|
$ |
13,869 |
|
|
$ |
14,219 |
|
Accounts
receivable, net
|
|
|
48,322 |
|
|
|
38,221 |
|
Inventories
|
|
|
72,422 |
|
|
|
62,301 |
|
Refundable
income taxes
|
|
|
2,904 |
|
|
|
3,048 |
|
Deferred
income taxes
|
|
|
4,822 |
|
|
|
5,816 |
|
Other
current assets
|
|
|
3,922 |
|
|
|
3,648 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
146,261 |
|
|
|
127,253 |
|
Property
and equipment, net
|
|
|
108,068 |
|
|
|
113,369 |
|
Goodwill
|
|
|
153,983 |
|
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|
153,813 |
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Intangible
assets, net of accumulated amortization
|
|
|
40,418 |
|
|
|
42,729 |
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Other
assets
|
|
|
1,347 |
|
|
|
1,181 |
|
|
|
|
|
|
|
|
|
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Total
Assets
|
|
$ |
450,077 |
|
|
$ |
438,345 |
|
|
|
|
|
|
|
|
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LIABILITIES
AND SHAREHOLDERS' EQUITY:
|
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|
|
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Current
Liabilities:
|
|
|
|
|
|
|
|
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Accounts
payable
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$ |
27,765 |
|
|
$ |
19,494 |
|
Accrued
wages and benefits
|
|
|
7,863 |
|
|
|
7,607 |
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Other
accrued expenses
|
|
|
3,231 |
|
|
|
5,113 |
|
Accrued
income taxes
|
|
|
196 |
|
|
|
257 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
78 |
|
Revolving
line of credit
|
|
|
2,415 |
|
|
|
3,320 |
|
Derivative
valuation liability
|
|
|
1,893 |
|
|
|
- |
|
Current
portion of capital lease obligations
|
|
|
451 |
|
|
|
529 |
|
Current
portion of long-term debt
|
|
|
1,424 |
|
|
|
20,400 |
|
|
|
|
|
|
|
|
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Total
current liabilities
|
|
|
45,238 |
|
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|
56,798 |
|
Accrued
income taxes
|
|
|
6,534 |
|
|
|
6,362 |
|
Deferred
income taxes
|
|
|
17,211 |
|
|
|
17,646 |
|
Derivative
valuation liability
|
|
|
- |
|
|
|
2,982 |
|
Capital
lease obligations, less current portion
|
|
|
2,540 |
|
|
|
2,887 |
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Long-term
debt, less current portion
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|
|
86,675 |
|
|
|
69,200 |
|
|
|
|
|
|
|
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|
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Total
Liabilities
|
|
|
158,198 |
|
|
|
155,875 |
|
|
|
|
|
|
|
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Shareholders'
Equity:
|
|
|
|
|
|
|
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Common
Stock, $.0001 par value; 75,000 shares authorized; shares issued October
2, 2010--35,942; January 2, 2010--35,840
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|
4 |
|
|
|
4 |
|
Additional
paid-in capital
|
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|
278,985 |
|
|
|
278,176 |
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Retained
earnings
|
|
|
9,959 |
|
|
|
277 |
|
Accumulated
other comprehensive income (loss)
|
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|
2,931 |
|
|
|
4,013 |
|
|
|
|
|
|
|
|
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Total
Shareholders' Equity
|
|
|
291,879 |
|
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|
282,470 |
|
|
|
|
|
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|
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Total
Liabilities and Shareholders' Equity
|
|
$ |
450,077 |
|
|
$ |
438,345 |
|
See accompanying notes to
condensed consolidated financial statements.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(In Thousands, Except per
Share Data; Unaudited)
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Three
Months Ended
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Nine
Months Ended
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October
2,
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October
3,
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|
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October
2,
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|
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October
3,
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|
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2010
|
|
|
2009
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2010
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2009
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|
|
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Revenue
|
|
$ |
91,538 |
|
|
$ |
87,164 |
|
|
$ |
264,856 |
|
|
$ |
289,540 |
|
Cost
of Revenue
|
|
|
71,708 |
|
|
|
65,441 |
|
|
|
207,627 |
|
|
|
216,488 |
|
Gross
Profit
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|
|
19,830 |
|
|
|
21,723 |
|
|
|
57,229 |
|
|
|
73,052 |
|
Selling,
general and administrative expenses
|
|
|
12,248 |
|
|
|
10,587 |
|
|
|
37,124 |
|
|
|
37,007 |
|
Facility
closure and severance costs
|
|
|
57 |
|
|
|
702 |
|
|
|
917 |
|
|
|
864 |
|
Operating
Income
|
|
|
7,525 |
|
|
|
10,434 |
|
|
|
19,188 |
|
|
|
35,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other
(income)/expense:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
1,504 |
|
|
|
1,666 |
|
|
|
4,565 |
|
|
|
5,050 |
|
Derivatives
valuation gain
|
|
|
(389 |
) |
|
|
(178 |
) |
|
|
(1,177 |
) |
|
|
(746 |
) |
Other
|
|
|
715 |
|
|
|
687 |
|
|
|
796 |
|
|
|
379 |
|
Income
before income taxes
|
|
|
5,695 |
|
|
|
8,259 |
|
|
|
15,004 |
|
|
|
30,498 |
|
Income
tax expense
|
|
|
2,123 |
|
|
|
2,851 |
|
|
|
5,322 |
|
|
|
9,268 |
|
Net
income
|
|
$ |
3,572 |
|
|
$ |
5,408 |
|
|
$ |
9,682 |
|
|
$ |
21,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.10 |
|
|
$ |
0.15 |
|
|
$ |
0.27 |
|
|
$ |
0.60 |
|
Diluted
|
|
$ |
0.10 |
|
|
$ |
0.15 |
|
|
$ |
0.27 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares and equivalent shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35,456 |
|
|
|
35,326 |
|
|
|
35,449 |
|
|
|
35,301 |
|
Diluted
|
|
|
35,870 |
|
|
|
35,620 |
|
|
|
35,802 |
|
|
|
35,498 |
|
See accompanying notes to
condensed consolidated financial statements.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOW
(In Thousands;
Unaudited)
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
October
2,
|
|
|
October
3,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
9,682 |
|
|
$ |
21,230 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
Depreciation
|
|
|
13,576 |
|
|
|
14,281 |
|
Amortization
|
|
|
2,198 |
|
|
|
2,203 |
|
Net
loss on sale of assets
|
|
|
103 |
|
|
|
139 |
|
Deferred
income tax provision
|
|
|
666 |
|
|
|
4,491 |
|
Stock-based
compensation
|
|
|
693 |
|
|
|
2,035 |
|
Derivative
valuation gain
|
|
|
(1,177 |
) |
|
|
(746 |
) |
Foreign
currency transaction loss
|
|
|
566 |
|
|
|
204 |
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(10,288 |
) |
|
|
11,109 |
|
Other
assets
|
|
|
(506 |
) |
|
|
1,419 |
|
Inventories
|
|
|
(10,394 |
) |
|
|
(3,434 |
) |
Current
income taxes
|
|
|
112 |
|
|
|
1,715 |
|
Accounts
payable
|
|
|
9,093 |
|
|
|
(8,511 |
) |
Accrued
expenses and other
|
|
|
(2,400 |
) |
|
|
(6,197 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
11,924 |
|
|
|
39,938 |
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(9,592 |
) |
|
|
(13,453 |
) |
Proceeds
from the sale of property and equipment
|
|
|
611 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(8,981 |
) |
|
|
(13,386 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from bank revolver
|
|
|
43,275 |
|
|
|
76,005 |
|
Payments
on bank revolver
|
|
|
(32,693 |
) |
|
|
(83,943 |
) |
Issuance
of long-term debt
|
|
|
2,711 |
|
|
|
- |
|
Payments
on long-term debt and capital lease obligations
|
|
|
(16,383 |
) |
|
|
(13,586 |
) |
Proceeds
from the issuance of common stock
|
|
|
99 |
|
|
|
106 |
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(2,991 |
) |
|
|
(21,418 |
) |
Effect
of exchange rate changes on cash
|
|
|
(302 |
) |
|
|
1,107 |
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(350 |
) |
|
|
6,241 |
|
Cash
and cash equivalents at beginning of period
|
|
|
14,219 |
|
|
|
10,191 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
13,869 |
|
|
$ |
16,432 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
4,018 |
|
|
$ |
5,475 |
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$ |
3,728 |
|
|
$ |
3,022 |
|
See accompanying notes to
condensed consolidated financial statements.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per
Share Data; Unaudited)
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., Symmetry Medical Switzerland SA (formerly known as Riley
Medical Europe, SA), Symmetry Medical Everest LLC, Symmetry Medical Ireland
Limited (formerly known as Everest Metal International Limited), Symmetry
Medical Cheltenham Limited, Symmetry Medical PolyVac, SAS, Symmetry Medical
Sheffield Limited (formerly known as Thornton Precision Components Limited),
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 January 2, 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 October 2,
2010.
Inventories consist of the
following:
|
|
October
2,
|
|
|
January
2,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
|
|
Raw
material and supplies
|
|
$ |
16,194 |
|
|
$ |
15,099 |
|
Work-in-process
|
|
|
32,155 |
|
|
|
27,120 |
|
Finished
goods
|
|
|
24,073 |
|
|
|
20,082 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
72,422 |
|
|
$ |
62,301 |
|
3. Property and
Equipment
Property and equipment,
including depreciable lives, consists of the following:
|
|
October
2,
|
|
|
January
2,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
|
|
Land
|
|
$ |
6,673 |
|
|
$ |
6,965 |
|
Buildings
and improvements (20 to 40 years)
|
|
|
41,489 |
|
|
|
42,252 |
|
Machinery
and equipment (5 to 15 years)
|
|
|
141,951 |
|
|
|
138,182 |
|
Office
equipment (3 to 5 years)
|
|
|
13,957 |
|
|
|
13,194 |
|
Construction-in-progress
|
|
|
6,636 |
|
|
|
3,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
210,706 |
|
|
|
204,343 |
|
Less
accumulated depreciation
|
|
|
(102,638 |
) |
|
|
(90,974 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
108,068 |
|
|
$ |
113,369 |
|
4. Intangible
Assets
Intangible assets were
acquired in connection with our business acquisitions. As of October 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
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Acquired
technology and patents
|
|
10
years
|
|
$ |
2,332 |
|
|
$ |
(1,221 |
) |
|
$ |
1,111 |
|
Acquired
customers
|
|
18
years
|
|
|
42,550 |
|
|
|
(11,049 |
) |
|
|
31,501 |
|
Non-compete
agreements
|
|
5
years
|
|
|
591 |
|
|
|
(410 |
) |
|
|
181 |
|
Intangible
assets subject to amortization
|
|
17
years
|
|
|
45,473 |
|
|
|
(12,680 |
) |
|
|
32,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary
processes
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
3,551 |
|
Trademarks
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
4,074 |
|
Indefinite-lived
intangible assets, other than goodwill
|
|
|
|
|
|
|
|
|
|
|
7,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
$ |
40,418 |
|
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
|
|
On November 3, 2010, the
Corporation refinanced substantially all of its debt arrangements that were to
mature in June 2011 resulting in a loss on debt extinguishment of $833, which
will be recorded in the fourth quarter. Further, as a result of the
refinancing, as of October 2, 2010, the Corporation’s borrowings under its
Senior Credit Agreement, including the revolving credit facility with a balance
of $11,663, have been classified as long-term on the condensed consolidated
balance sheets.
The
Corporation's new arrangement is a senior-secured revolving credit facility with
a total capacity of up to $200 million and an additional expansion option that
may be exercised by the Corporation to allow additional funding of up to $100
million. The revolving credit facility
contains various financial covenants, including covenants requiring a maximum
total debt to EBITDA ratio and a minimum EBITDA to fixed charges
ratio. The revolving credit facility agreement also contains
covenants restricting certain corporate actions, including asset dispositions,
acquisitions, paying dividends and certain other restricted payments, changes of
control, incurring indebtedness, incurring liens, making loans and investments
and transactions with affiliates. The revolving credit facility is
secured by substantially all of the Corporation’s assets. The
Corporation’s revolving credit facility also contains customary events of
default. The Corporation was in compliance with its covenants as of
October 2, 2010.
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 October 2, 2010,
$2,136 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 $5,977 as of October 2, 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.
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.
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
|
|
|
Nine
Months Ended
|
|
|
|
October
2,
|
|
|
October
3,
|
|
|
October
2,
|
|
|
October
3,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
United
States
|
|
$ |
67,508 |
|
|
$ |
63,207 |
|
|
$ |
194,436 |
|
|
$ |
214,527 |
|
Ireland
|
|
|
8,544 |
|
|
|
9,234 |
|
|
|
25,058 |
|
|
|
28,532 |
|
United
Kingdom
|
|
|
6,906 |
|
|
|
7,313 |
|
|
|
20,649 |
|
|
|
22,674 |
|
Other
foreign countries
|
|
|
8,580 |
|
|
|
7,410 |
|
|
|
24,713 |
|
|
|
23,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net revenues
|
|
$ |
91,538 |
|
|
$ |
87,164 |
|
|
$ |
264,856 |
|
|
$ |
289,540 |
|
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 October 2,
2010 – Two customers represented approximately 30.7% and 12.4% of revenue,
respectively.
Nine months ended October 2,
2010 – Two customers represented approximately 31.9%
and 10.6% of
revenue, respectively.
Three months ended October 3,
2009 – Two customers represented approximately 36.2% and 10.1% of revenue,
respectively.
Nine months ended October 3,
2009 – One customer represented approximately 40.0% 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
|
|
|
Nine
Months Ended
|
|
|
|
October
2,
|
|
|
October
3,
|
|
|
October
2,
|
|
|
October
3,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Instruments
|
|
$ |
36,027 |
|
|
$ |
41,327 |
|
|
$ |
103,096 |
|
|
$ |
134,679 |
|
Implants
|
|
|
28,332 |
|
|
|
24,237 |
|
|
|
85,058 |
|
|
|
83,255 |
|
Cases
|
|
|
21,495 |
|
|
|
16,353 |
|
|
|
60,127 |
|
|
|
53,725 |
|
Other
|
|
|
5,684 |
|
|
|
5,247 |
|
|
|
16,575 |
|
|
|
17,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net revenues
|
|
$ |
91,538 |
|
|
$ |
87,164 |
|
|
$ |
264,856 |
|
|
$ |
289,540 |
|
8. Net Income Per
Share
The following table sets
forth the computation of earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
October
2,
|
|
|
October
3,
|
|
|
October
2,
|
|
|
October
3,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Earnings
per share - Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,572 |
|
|
$ |
5,408 |
|
|
$ |
9,682 |
|
|
$ |
21,230 |
|
Less: Undistributed
earnings allocated to nonvested stock
|
|
|
(33 |
) |
|
|
(69 |
) |
|
|
(89 |
) |
|
|
(277 |
) |
Income
available to common shares - Basic
|
|
|
3,539 |
|
|
|
5,339 |
|
|
|
9,593 |
|
|
|
20,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding - Basic
|
|
|
35,456 |
|
|
|
35,326 |
|
|
|
35,449 |
|
|
|
35,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - Basic
|
|
$ |
0.10 |
|
|
$ |
0.15 |
|
|
$ |
0.27 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,572 |
|
|
$ |
5,408 |
|
|
$ |
9,682 |
|
|
$ |
21,230 |
|
Less: Undistributed
earnings allocated to nonvested stock
|
|
|
- |
|
|
|
(24 |
) |
|
|
- |
|
|
|
(163 |
) |
Income
available to common shares - Diluted
|
|
|
3,572 |
|
|
|
5,384 |
|
|
|
9,682 |
|
|
|
21,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding - Basic
|
|
|
35,456 |
|
|
|
35,326 |
|
|
|
35,449 |
|
|
|
35,301 |
|
Effect
of dilution
|
|
|
414 |
|
|
|
294 |
|
|
|
353 |
|
|
|
197 |
|
Weighted-average
common shares outstanding - Diluted
|
|
|
35,870 |
|
|
|
35,620 |
|
|
|
35,802 |
|
|
|
35,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - Diluted
|
|
$ |
0.10 |
|
|
$ |
0.15 |
|
|
$ |
0.27 |
|
|
$ |
0.59 |
|
The diluted weighted average
share calculations for the three and nine month periods ended October 2, 2010 do
not include performance based restricted stock awarded March 24, 2010, totaling
324,550 shares because the measurement period is not complete. Restricted stock
awarded July 1, 2009, totaling 119,925 shares was not included in the diluted
weighted average share calculations for the three and nine month periods ended
October 3, 2009 because the measurement period was 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 October 2, 2010,
remaining minimum purchase obligations total $16,611. Purchases under
plastic, cobalt chrome and titanium contracts total approximately $15,549 for
the nine month period ended October 2, 2010. These purchases are not
in excess of our forecasted requirements.
Comprehensive income is
comprised of net income, gains (losses) resulting from currency translations of
foreign entities and unrealized gain and losses on our derivative designated as
a hedge under ASC 815, Hedging (formerly SFAS 133).
Comprehensive income consists of the following:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
October
2,
|
|
|
October
3,
|
|
|
October
2,
|
|
|
October
3,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
3,572 |
|
|
$ |
5,408 |
|
|
$ |
9,682 |
|
|
$ |
21,230 |
|
Foreign
currency translation adjustments
|
|
|
4,981 |
|
|
|
320 |
|
|
|
(1,032 |
) |
|
|
5,338 |
|
Derivative,
net of tax benefit (1)
|
|
|
14 |
|
|
|
(160 |
) |
|
|
(50 |
) |
|
|
(260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
8,567 |
|
|
$ |
5,568 |
|
|
$ |
8,600 |
|
|
$ |
26,308 |
|
(1)
|
Derivative
gains (losses) are reported net of income tax (expense)/benefit of
($9) and $106 for the three month periods ended October 2, 2010 and
October 3, 2009, respectively, and $35 and $173 for the nine month periods
ended October 2, 2010 and October 3, 2009,
respectively.
|
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 Corporation 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 ($472) at October 2, 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 ($1,421) at October 2, 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
October 2, 2010 and October 3, 2009, the Corporation recorded gains of $389 and
$178, respectively, and gains of $1,177 and $746 for the nine months then
ended.
In connection with the
refinancing of its debt, the Corporation terminated and settled both of its
outstanding forward interest rate swap agreements.
12. Fair Value of Financial
Instruments
As of October 2, 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.
The following table
summarizes certain fair value information at October 2, 2010 and January 2, 2010
for assets and liabilities measured at fair value on a recurring
basis.
|
|
October
2, 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
|
|
$ |
- |
|
|
$ |
(1,893 |
) |
|
$ |
- |
|
|
$ |
(1,893 |
) |
|
$ |
- |
|
|
$ |
(2,982 |
) |
|
$ |
- |
|
|
$ |
(2,982 |
) |
|
|
$ |
- |
|
|
$ |
(1,893 |
) |
|
$ |
- |
|
|
$ |
(1,893 |
) |
|
$ |
- |
|
|
$ |
(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
Closure and Severance Costs
Results of Operations include
pre-tax charges of $57 and $702 for the three months ended October 2, 2010 and
October 3, 2009, respectively, and $917 and $864 for the nine months then ended,
associated with employee cost reduction and efficiency actions and the
consolidation of our Whitman, MA and Auburn, ME facilities into other facilities
that produce similar products. For the three month period ended
October 2, 2010, these costs are comprised of $38 of severance costs and an
additional $19 of moving expenses compared to $432 of severance costs, plus $270
of moving expenses for the period ended October 3, 2009. For the nine
month period ended October 2, 2010, these costs are comprised of $628 of
severance costs and an additional $289 of moving expenses compared to $594 of
severance costs and an additional $270 of moving expenses for the period ended
October 3, 2009.
As of October 2, 2010 and
January 2, 2010, severance accruals related to these cost reduction and
efficiency actions totaled $56 and $836, respectively, and are
included in accrued and other liabilities in the condensed consolidated balance
sheets. The reduction in
the accrual from January 2, 2010 represents payments made during the first three
quarters of 2010 of $1,408, offset by additional
severance costs incurred of $628.
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 third quarter
2010, our revenue increased $4.3 million, or 5.0%, compared to the third
quarter 2009. This increase was primarily driven by increased demand
in cases and implants, offset by reduced
demand in instruments and unfavorable foreign currency exchange rate impacts of
$1.7 million. The overall economic environment continues to have an
unfavorable impact on our major customers’ growth rates and our major
customers also increased their inventory levels in the third quarter of
2010. However, we did experience a
3.1% increase in revenue in the
third quarter 2010 as compared to the second quarter 2010, primarily driven by
increased demand
in cases, and we believe we will
continue to see a sequential increase in revenue during the fourth quarter
2010.
Despite the current economic
impact on our customers, we continue to be optimistic about the long term future
as the larger OEMs are increasingly focused on improving their supply
chains. This focus should result in consolidation of suppliers who in
turn will be expected to provide a wider range of services, higher quality and
reduced overall costs. We believe that we are well positioned to
benefit from increased OEM outsourcing and consolidation of
suppliers.
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. 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
Item 1A of our Annual Report on Form 10-K for the year ended January 2,
2010, and Part II, Item 1A in this report.
Third Quarter Results of
Operations
Revenue. Revenue for the
three month period ended October 2, 2010 increased $4.3 million,
or 5.0%, to $91.5 million from $87.2 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
|
|
|
|
October
2,
|
|
|
October
3,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Instruments
|
|
$ |
36.0 |
|
|
$ |
41.3 |
|
Implants
|
|
|
28.3 |
|
|
|
24.2 |
|
Cases
|
|
|
21.5 |
|
|
|
16.4 |
|
Other
|
|
|
5.7 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
91.5 |
|
|
$ |
87.2 |
|
The $4.3
million, or 5.0%, increase in revenue resulted from increased demand within our
cases, implants, and other product lines partially offset by lower instrument
demand and unfavorable foreign currency exchange rate fluctuations of $1.7
million. We experienced higher revenues of 6.2% from our five largest OEM
customers which drove the overall increase in revenue. Instrument revenue
decreased $5.3 million. This decrease was primarily driven by lower revenue from
our five largest OEM customers as several large projects for our top customers
in the prior year were not repeated. Foreign currency exchange rate fluctuations
further impacted instrument revenues with an unfavorable impact of $0.1 million.
Implant revenue increased $4.1 million, driven by increased revenue from our
five largest OEM customers, partially offset by an unfavorable foreign currency
exchange rate fluctuations of $1.0 million. Case revenue increased $5.1 million
due to increased revenue from our five largest OEM customers with increases in
both the orthopedic and other medical device markets, partially offset by $0.4
million of unfavorable foreign currency exchange rate fluctuations. Other
product revenue increased $0.4 million primarily driven by increased customer
demand partially offset by unfavorable foreign currency exchange rate
fluctuations of $0.2 million.
Gross
Profit. Gross profit for
the three month period ended October 2, 2010 decreased $1.9 million, or
8.7%, to $19.8 million from $21.7 million for the comparable 2009
period due to a
decrease in gross margin partially offset by the
increase in revenue. Gross
margin as a percentage of revenue for the third quarter 2010 was 21.7% compared
to 24.9% in the same period last year. This 3.2% reduction
was primarily due to increased subcontracting and
labor costs related to headcount increases and compensation necessary to meet
customer order requirements during the quarter.
Selling,
General and Administrative Expenses. For the three
month period ended October 2, 2010, selling, general and administrative expenses
(“SG&A”) were $12.2 million compared with the three
month period ended October 3, 2009 of $10.6 million. The increase
was primarily driven by increased employee
compensation and benefits including higher healthcare
expenses. The increase in
employee compensation is partially attributable to an increases in
headcount related to research and development
and
direct sales activities.
Facility
Closure and
Severance Costs. Results of Operations include
pre-tax charges of $0.1 million and $0.7 million for
the three months
ended October 2, 2010 and October 3, 2009, respectively, associated with
employee cost reduction and efficiency actions and the consolidation of our
Whitman, MA and Auburn, ME facilities into other facilities that produce similar
products. For the three month period ended October 2, 2010, these
costs are comprised of $0.1 million of severance costs compared
to $0.4 million
of severance
costs in addition to $0.3 million associated with moving costs for the period
ended October 3, 2009. Costs charged to operations in the third
quarter of 2010 were paid during the third quarter. Included in
accrued and other liabilities in the consolidated balance sheet as of October 2,
2010 is $0.1
million of
severance 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 October 2, 2010 decreased
$0.2 million, or 9.7%, to $1.5 million
from $1.7 million for the comparable period in 2009. This decrease reflects the
reduction in aggregate outstanding indebtedness of $16.7 million, or 15.2% as
compared to October 3, 2009. The derivative gain in the third quarter
2010 consists of a gain on interest rate swap valuation of $0.4 million related
to our interest rate swap that has not been designated as a hedge as compared to a gain of
$0.2 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 income
for the three month period ended October 2, 2010 did not change from the
comparable period in 2009 and is primarily composed of exchange
rate gains and losses on transactions denominated in foreign
currencies.
Provision
for Income Taxes. Our effective tax rate
was 37.3% for the three month period ended October 2, 2010 as compared to 34.5%
for the three month period ended October 3, 2009. Provision for income taxes
decreased by $0.7 million, or 25.5%, to $2.1 million for the three month period
ended October 2, 2010 from $2.9 million for the comparable 2009 period primarily
due to a $2.6
million decrease in pre-tax income. Our effective tax rate in 2010 differed
from the U.S. Federal statutory rate of 35% primarily due to state
taxes. Additionally in 2010, we have been adversely impacted by the
absence of the research & development tax credit, which expired at the end
of 2009. Pending legislation would retroactively reinstate the R&D tax
credit to the beginning of 2010. This legislation, if enacted, would
positively impact the effective tax rate in the period that it is
enacted.
Nine Months Results of
Operations
Revenue. Revenue for the
nine month period ended October 2, 2010 decreased $24.6 million, or 8.5%, to $264.9
million from $289.5 million for the comparable 2009 period. Revenue for
each of our principal product categories in these
periods was as follows:
Product
Category
|
|
Nine
Months Ended
|
|
|
|
October
2,
|
|
|
October
3,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
Instruments
|
|
$ |
103.1 |
|
|
$ |
134.7 |
|
Implants
|
|
|
85.1 |
|
|
|
83.2 |
|
Cases
|
|
|
60.1 |
|
|
|
53.7 |
|
Other
|
|
|
16.6 |
|
|
|
17.9 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
264.9 |
|
|
$ |
289.5 |
|
The $24.6
million decrease in revenue resulted from a decline in revenue from our top five
OEM customers of 14.3% and unfavorable foreign currency exchange rate
fluctuations of $1.2 million. Instrument revenue decreased $31.6 million. This
decrease was driven entirely by decreased revenue from our top five OEM
customers due to the timing of launch activities and management of inventory
levels. Implant revenue increased $1.9 million, driven by increased revenues
from our top five OEM customers related to specific product launches and
management of inventory levels, partially offset by unfavorable foreign currency
exchange rate fluctuations of $0.7 million. Case revenue increased $6.4 million
due to increased revenues from our top five OEM customers with increases in both
the orthopedic and other medical device markets related to specific product
launches and management of inventory levels, partially offset by $0.4 million of
unfavorable foreign currency exchange rate fluctuations. Other product revenue
decreased $1.3 million driven by a reduction in customer demand of $1.2 million
in addition to unfavorable foreign currency exchange rate fluctuations of $0.1
million.
Gross
Profit. Gross profit for
the nine month period ended October 2, 2010 decreased $15.8
million, or
21.7%, to $57.2 million from $73.1 million for the comparable 2009 period due to the $24.6
million decline in revenue and a decline in gross margin. Gross margin as a
percentage of revenue for the nine month period ended October 2, 2010 was 21.6%
compared to 25.2% in the same period last year. This 3.6% reduction was primarily
due to the 8.5% decline in revenue which reduced our ability to leverage fixed
overhead costs, increased subcontracting costs and product
mix. The increase in
subcontracting costs related to our case product line and the consolidation
of our Auburn, ME facility as well as equipment break
downs.
Selling,
General and Administrative Expenses. For the nine
month period ended October 2, 2010, selling, general and administrative expenses
(“SG&A”) were $37.1 million compared with the nine month period ended
October 3, 2009 of $37.0 million.
Facility
Closure and Severance Costs. Results of Operations include
pre-tax charges of $0.9 million and $0.9 million for the nine months ended
October 2, 2010 and October 3, 2009, respectively, associated with employee
cost reduction and efficiency actions and the consolidation of our Whitman, MA
and Auburn, ME facilities into other facilities that produce similar
products. For the nine month period ended October 2, 2010, these
costs are comprised of $0.6 million of severance costs and an additional $0.3
million of moving expenses compared to $0.6 million of severance costs and an
additional $0.3 million of moving expenses for the period ended October 3,
2009. As of October 2, 2010 and January 2, 2010, severance accruals
related to these cost reduction and efficiency actions totaled $0.1 and
$0.8 million,
respectively, and are included in accrued and other liabilities in the condensed
consolidated balance sheets. The reduction in the accrual from
January 2, 2010 represents payments made during the first three quarters of 2010
of $1.4 million, offset by additional severance costs incurred of $0.6
million. Remaining costs are all expected to be paid during
2010.
Other
(Income) Expense. Interest
expense for the nine month period ended October 2, 2010 decreased
$0.5 million, or 9.6%, to $4.6 million from
$5.1 million for the comparable period in 2009.
This decrease reflects the reduction in aggregate outstanding indebtedness of
$16.7 million, or 15.2% as compared to October 3, 2009. The
derivatives gain for the first three quarters of 2010 consists of a gain on
interest rate swap valuation of $1.2 million related to our interest rate swap
that has not been designated as a hedge as compared to a gain of
$0.7 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 nine month
period ended October 2, 2010 increased $0.4 million from the comparable period
in 2009, from $0.4 million to $0.8 million, due to unfavorable foreign
currency exchange rate fluctuations on transactions denominated in foreign
currencies.
Provision
for Income Taxes. Our effective tax rate
was 35.5% for
the nine month period ended October 2, 2010 as compared to 30.4% for the nine
month period ended October 3, 2009. Provision for income taxes decreased by $3.9
million, or 42.6%, to $5.3 million for the nine month period ended October 2,
2010 from $9.3 million for the comparable 2009 period due to the decline in
pre-tax income. Our effective tax rate in 2010 differed from the US
Federal rate of 35% primarily due to state taxes. Additionally in 2010, we
have been adversely impacted by the absence of the research & development
tax credit, which expired at the end of 2009. Pending legislation would
retroactively reinstate the R&D tax credit to the beginning of 2010.
This legislation, if enacted, would positively impact the effective tax rate in
the period that it is enacted.
Liquidity and Capital
Resources
Current Market
Conditions
We continue to experience
challenging business conditions due to the overall economic environment and as
our major OEM customers manage the timing of their various product launch
activities.
Current global economic
conditions have resulted in increased volatility in the financial markets.
During the first three quarters 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 depending on current and expected market
developments.
Our principal sources of
liquidity in the nine month period ended October 2, 2010 were cash generated from
operations and borrowings under our senior revolving credit facility.
Principal uses of cash in the nine month period ended October 2, 2010 included
increased working capital and capital expenditures as well as 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 and
growing the business.
Operating
Activities. Operating activities generated cash of
$11.9 million in
the nine month period ended October 2, 2010 compared to $39.9 million for the
nine month period ended October 3, 2009, a decrease of $28.0 million. The decrease in cash
from operations for the nine month period ended October 2, 2010 is primarily a
result of a $11.5 reduction in net income and increased working capital
requirements for accounts receivable and inventory driven by increases in
revenue and production requirements in the second and third quarter of 2010 as
compared to the third and fourth quarters of 2009.
Investing
Activities. Capital expenditures
of $9.6 million were $3.9 million lower in
the nine month
period ended October 2, 2010 compared to the nine month period ended October 3,
2009.
Financing
Activities. Financing activities used $3.0 million
of cash in the nine month period ended October 2, 2010 compared to $21.4 million
for the nine month period ended October 3, 2009, due primarily to
payments on long-term debt and capital leases of $16.4 million, offset by cash
received from a new asset-based 24 month term note of $2.7 million at our
Sheffield, UK facility and net borrowings on our revolving line of credit of
$10.6 million. Amounts
outstanding on the revolving credit facility do materially fluctuate
each quarter due to normal changes in our working
capital. Specifically, our maximum amount borrowed during the third
quarter was $11.7 million.
Capital expenditures totaled
$9.6 million for the nine months ended October 2, 2010, compared to $13.5
million for the nine month period ended October 3, 2009. Capital expenditures have
been focused on areas strategically aligned to expand our capabilities to
further support our Spine customers, expand our Malaysia operations and continue to
increase efficiencies throughout our facilities.
Debt and Credit
Facilities
As of October 2, 2010, we had
an aggregate of $93.5 million of outstanding indebtedness, which consisted of
$74.3 million of term loan borrowings outstanding under our Senior Credit
Agreement, $11.7 million of borrowings outstanding under our revolving credit
facility, $2.1 million of borrowings under our new UK asset-based 24-month term
note, $2.4 million of borrowings under our Malaysia short-term credit facility,
and $3.0 million of capital lease obligations. We had two outstanding letters of
credit as of October 2, 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 October 2, 2010, $2.1 million 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 $6.0 million as of October 2,
2010.
On November 3, 2010, the
Corporation refinanced substantially all of its debt arrangements that were to
mature in June 2011 resulting in a loss on debt extinguishment of $0.8 million,
which will be recorded in the fourth quarter. As of October 2, 2010,
the Corporation’s borrowings under its Senior Credit Agreement, including the
revolving credit facility with a balance of $11.7 million, have been classified
as long-term on the condensed consolidated balance
sheets.
The Corporation’s new
arrangement is a senior-secured revolving credit facility with a total capacity
of up to $200 million. The revolving credit facility contains various
financial covenants, including covenants requiring a maximum total debt to
EBITDA ratio and a minimum EBITDA to fixed charges ratio. The
revolving credit facility agreement also contains covenants restricting certain
corporate actions, including asset dispositions, acquisitions, paying dividends
and certain other restricted payments, changes of control, incurring
indebtedness, incurring liens, making loans and investments and transactions
with affiliates. The revolving credit facility is secured by
substantially all of the Corporation’s assets. The Corporation’s
revolving credit facility also contains customary events of
default.
The Corporation was in
compliance with its financial and restrictive covenants as of October 2,
2010.
Contractual
Obligations and Commercial Commitments
The following table reflects
our contractual obligations as of October 2, 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)
|
|
$ |
88.1 |
|
|
$ |
1.4 |
|
|
$ |
0.7 |
|
|
$ |
86.0 |
|
|
$ |
- |
|
Capital
lease obligations
|
|
$ |
5.2 |
|
|
|
0.3 |
|
|
|
2.7 |
|
|
|
1.6 |
|
|
|
0.6 |
|
Operating
lease obligations
|
|
$ |
3.6 |
|
|
|
0.5 |
|
|
|
2.4 |
|
|
|
0.5 |
|
|
|
0.2 |
|
Purchase
obligations (2)
|
|
$ |
18.8 |
|
|
|
5.8 |
|
|
|
13.0 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
115.7 |
|
|
$ |
8.0 |
|
|
$ |
18.8 |
|
|
$ |
88.1 |
|
|
$ |
0.8 |
|
|
(1)
|
For
purposes of this table, the long-term debt obligations are based upon the
new agreement and represents principal and 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 agreement ranges from 0.75% to 1.75% for
base rate borrowings and 1.75% to 2.75% for LIBOR borrowings, subject to
the Corporation's Leverage Ratio applicable on such
date.
|
|
(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.
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This table does not include
liabilities for unrecognized tax benefits of $6.5 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 October 2, 2010 in the amounts of $3.5 million and $0.2
million.
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
$0.1 million in capital expenditures for environmental, health and safety in the
nine month period ended October 2, 2010 compared to $0.4 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 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.
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 October 2,
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 third 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.
(a) 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 October 2,
2010.
(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 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
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 as well as 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 effect on our business in the
future.
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 recently enacted federal legislation, including healthcare reform
legislation, remains uncertain.
On March
30, 2010, the Heath Care and Education Reconciliation Act of 2010 (the
Reconciliation Bill) was signed into law by President Obama. The Reconciliation
Bill amended the Patient Protection and Affordable Care Act (PPACA), which was
singed into law on March 23, 2010. The PPACA, as amended, includes funding
provisions to raise nearly $400 billion over 10 years through tax increases,
including an excise tax on manufacturers of certain medical devices equal to
2.3% of the sale price of specified medical devices sold by the manufacturer.
The excise tax applies to sales of certain products in the United States after
December 31, 2012. While the Company is still evaluating the impact of this tax
on our overall business, the excise tax will result in an increase in our tax
burden, which will have a negative impact on our results of operations and cash
flows beginning after December 31, 2012.
One of
the principal aims of the PPACA as currently enacted is to expand health
insurance coverage to approximately 32 million Americans who are currently
uninsured. The consequences of these significant coverage expansions on the sale
of our products are unknown at this point.
We cannot
predict the exact effect newly enacted laws or future legislation or regulations
will have on demand for our products or any other effects on our business from
this or other health care legislation that could be enacted at either the
federal or state level.
The
recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank”) institutes a wide range of reforms, some of which may impact the
Company. Among other things, Dodd-Frank contains significant corporate
governance and executive compensation related provisions that authorize or
require the SEC to adopt additional rules and regulations in these areas, such
as shareholder “say on pay” voting and proxy access. The impact of these
provisions on the Company’s business is uncertain.
10.1
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Credit
Agreement, dated November 3, 2010, among Symmetry Medical Inc. as
borrower, JPMorgan Chase Bank, N.A. as Administrative Agent, the lenders
identified on the signature pages thereto, Wells Fargo Bank, National
Association as Syndication Agent and Fifth Third Bank, Bank of America,
N.A. and PNC Bank National Association as Co-Documentation Agents
(incorporated by reference to EX-99.1 to our Form 8-K filed November 9,
2010).
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31.1
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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.*
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31.2
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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.*
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32.1
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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.*
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* Filed concurrently
herewith.
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.
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SYMMETRY MEDICAL INC.
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By
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/s/ Brian S. Moore
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Brian S. Moore,
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President and Chief Executive Officer
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(Principal Executive Officer)
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By
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/s/ Fred L. Hite
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Fred L. Hite,
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Senior Vice President and Chief Financial Officer
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(Principal Financial Officer)
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