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 October 2, 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)
            (I.R.S.
      Employer Identification No.)3724
      North State Road 15, Warsaw, Indiana
            46582(Address
      of principal executive offices)
            (Zip
      Code)(574)
      268-2252(Registrant’s
      telephone number, including area code)





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.þYes ̈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
      filerþNon-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). ̈YesþNo





The number of shares
outstanding of the registrant’s common stock as ofNovember10, 2010 was
35,941,988shares.




TABLE OF
CONTENTS





PART I
      FINANCIAL INFORMATIONItem 1
            Financial
      Statements:Condensed
      Consolidated Balance Sheets: As of October 2, 2010 and January 2,
      2010
            
            4Condensed
      Consolidated Statements of Operations: Three and Nine Months Ended
      October 2, 2010 and October 3, 2009
            
            5Condensed
      Consolidated Statements of Cash Flows: Nine Months Ended October 2, 2010
      and October 3, 2009
            
            6Notes
      to Condensed Consolidated Financial Statements
            
            7Item 2
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            15Item 3
            Quantitative
      and Qualitative Disclosures about Market Risk
            
            21Item 4
            Controls
      and Procedures
            
            21PART II
      OTHER INFORMATIONItem
      1
            Legal
      Proceedings
            
            22Item 1A
            Risk
      Factors
            
            22Item 6
            Exhibits
            
            23Signatures
            
            
            24


2





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.
  3





PART I FINANCIAL
INFORMATION


ITEMI.FINANCIAL
STATEMENTS





SYMMETRY MEDICAL
INC.





CONDENSED CONSOLIDATED
BALANCE SHEETS


(In
Thousands)


October
      2,
                
                
                January
      2,2010
                
                
                2010ASSETS:
                
                (unaudited)Current
      Assets:Cash
      and cash equivalents
                
                $
                13,869
                
                
                $
                14,219Accounts
      receivable, net
                
                
                48,322
                
                
                
                38,221Inventories
                
                
                72,422
                
                
                
                62,301Refundable
      income taxes
                
                
                2,904
                
                
                
                3,048Deferred
      income taxes
                
                
                4,822
                
                
                
                5,816Other
      current assets
                
                
                3,922
                
                
                
                3,648Total
      current assets
                
                
                146,261
                
                
                
                127,253Property
      and equipment, net
                
                
                108,068
                
                
                
                113,369Goodwill
                
                
                153,983
                
                
                
                153,813Intangible
      assets, net of accumulated amortization
                
                
                40,418
                
                
                
                42,729Other
      assets
                
                
                1,347
                
                
                
                1,181Total
      Assets
                
                $
                450,077
                
                
                $
                438,345LIABILITIES
      AND SHAREHOLDERS' EQUITY:Current
      Liabilities:Accounts
      payable
                
                $
                27,765
                
                
                $
                19,494Accrued
      wages and benefits
                
                
                7,863
                
                
                
                7,607Other
      accrued expenses
                
                
                3,231
                
                
                
                5,113Accrued
      income taxes
                
                
                196
                
                
                
                257Deferred
      income taxes
                
                
                -
                
                
                
                78Revolving
      line of credit
                
                
                2,415
                
                
                
                3,320Derivative
      valuation liability
                
                
                1,893
                
                
                
                -Current
      portion of capital lease obligations
                
                
                451
                
                
                
                529Current
      portion of long-term debt
                
                
                1,424
                
                
                
                20,400Total
      current liabilities
                
                
                45,238
                
                
                
                56,798Accrued
      income taxes
                
                
                6,534
                
                
                
                6,362Deferred
      income taxes
                
                
                17,211
                
                
                
                17,646Derivative
      valuation liability
                
                
                -
                
                
                
                2,982Capital
      lease obligations, less current portion
                
                
                2,540
                
                
                
                2,887Long-term
      debt, less current portion
                
                
                86,675
                
                
                
                69,200Total
      Liabilities
                
                
                158,198
                
                
                
                155,875Shareholders'
      Equity:Common
      Stock, $.0001 par value; 75,000 shares authorized; shares issued October
      2, 2010--35,942; January 2, 2010--35,840
                
                
                4
                
                
                
                4Additional
      paid-in capital
                
                
                278,985
                
                
                
                278,176Retained
      earnings
                
                
                9,959
                
                
                
                277Accumulated
      other comprehensive income (loss)
                
                
                2,931
                
                
                
                4,013Total
      Shareholders' Equity
                
                
                291,879
                
                
                
                282,470Total
      Liabilities and Shareholders' Equity
                
                $
                450,077
                
                
                $
                438,345





See accompanying notes to
condensed consolidated financial statements.
  4


SYMMETRY MEDICAL
INC.





CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS


(In Thousands, Except per
Share Data; Unaudited)


Three
      Months Ended
                
                
                Nine
      Months EndedOctober
      2,
                
                
                October
      3,
                
                
                October
      2,
                
                
                October
      3,2010
                
                
                2009
                
                
                2010
                
                
                2009Revenue
                
                $
                91,538
                
                
                $
                87,164
                
                
                $
                264,856
                
                
                $
                289,540Cost
      of Revenue
                
                
                71,708
                
                
                
                65,441
                
                
                
                207,627
                
                
                
                216,488Gross
      Profit
                
                
                19,830
                
                
                
                21,723
                
                
                
                57,229
                
                
                
                73,052Selling,
      general and administrative expenses
                
                
                12,248
                
                
                
                10,587
                
                
                
                37,124
                
                
                
                37,007Facility
      closure and severance costs
                
                
                57
                
                
                
                702
                
                
                
                917
                
                
                
                864Operating
      Income
                
                
                7,525
                
                
                
                10,434
                
                
                
                19,188
                
                
                
                35,181Other
      (income)/expense:Interest
      expense
                
                
                1,504
                
                
                
                1,666
                
                
                
                4,565
                
                
                
                5,050Derivatives
      valuation gain
                
                
                (389
                )
                
                
                (178
                )
                
                
                (1,177
                )
                
                
                (746
                )Other
                
                
                715
                
                
                
                687
                
                
                
                796
                
                
                
                379Income
      before income taxes
                
                
                5,695
                
                
                
                8,259
                
                
                
                15,004
                
                
                
                30,498Income
      tax expense
                
                
                2,123
                
                
                
                2,851
                
                
                
                5,322
                
                
                
                9,268Net
      income
                
                $
                3,572
                
                
                $
                5,408
                
                
                $
                9,682
                
                
                $
                21,230Net
      income per share:Basic
                
                $
                0.10
                
                
                $
                0.15
                
                
                $
                0.27
                
                
                $
                0.60Diluted
                
                $
                0.10
                
                
                $
                0.15
                
                
                $
                0.27
                
                
                $
                0.59Weighted
      average common shares and equivalent shares outstanding:Basic
                
                
                35,456
                
                
                
                35,326
                
                
                
                35,449
                
                
                
                35,301Diluted
                
                
                35,870
                
                
                
                35,620
                
                
                
                35,802
                
                
                
                35,498


See accompanying notes to
condensed consolidated financial statements.
  5





SYMMETRY MEDICAL
INC.





CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOW


(In Thousands;
Unaudited)


Nine
      Months EndedOctober
      2,
                
                
                October
      3,2010
                
                
                2009Operating
      activitiesNet
      income
                
                $
                9,682
                
                
                $
                21,230Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                
                
                13,576
                
                
                
                14,281Amortization
                
                
                2,198
                
                
                
                2,203Net
      loss on sale of assets
                
                
                103
                
                
                
                139Deferred
      income tax provision
                
                
                666
                
                
                
                4,491Stock-based
      compensation
                
                
                693
                
                
                
                2,035Derivative
      valuation gain
                
                
                (1,177
                )
                
                
                (746
                )Foreign
      currency transaction loss
                
                
                566
                
                
                
                204Change
      in operating assets and liabilities:Accounts
      receivable
                
                
                (10,288
                )
                
                
                11,109Other
      assets
                
                
                (506
                )
                
                
                1,419Inventories
                
                
                (10,394
                )
                
                
                (3,434
                )Current
      income taxes
                
                
                112
                
                
                
                1,715Accounts
      payable
                
                
                9,093
                
                
                
                (8,511
                )Accrued
      expenses and other
                
                
                (2,400
                )
                
                
                (6,197
                )Net
      cash provided by operating activities
                
                
                11,924
                
                
                
                39,938Investing
      activitiesPurchases
      of property and equipment
                
                
                (9,592
                )
                
                
                (13,453
                )Proceeds
      from the sale of property and equipment
                
                
                611
                
                
                
                67Net
      cash used in investing activities
                
                
                (8,981
                )
                
                
                (13,386
                )Financing
      activitiesProceeds
      from bank revolver
                
                
                43,275
                
                
                
                76,005Payments
      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
                
                
                
                106Net
      cash used in financing activities
                
                
                (2,991
                )
                
                
                (21,418
                )Effect
      of exchange rate changes on cash
                
                
                (302
                )
                
                
                1,107Net
      increase (decrease) in cash and cash equivalents
                
                
                (350
                )
                
                
                6,241Cash
      and cash equivalents at beginning of period
                
                
                14,219
                
                
                
                10,191Cash
      and cash equivalents at end of period
                
                $
                13,869
                
                
                $
                16,432Supplemental
      disclosures:Cash
      paid for interest
                
                $
                4,018
                
                
                $
                5,475Cash
      paid for income taxes
                
                $
                3,728
                
                
                $
                3,022





See accompanying notes to
condensed consolidated financial statements.


6





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., 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.





2.
Inventories





Inventories consist of the
following:


October
      2,
                
                
                January
      2,2010
                
                
                2010(unaudited)Raw
      material and supplies
                
                $
                16,194
                
                
                $
                15,099Work-in-process
                
                
                32,155
                
                
                
                27,120Finished
      goods
                
                
                24,073
                
                
                
                20,082$
                72,422
                
                
                $
                62,301
  3. Property and
Equipment





Property and equipment,
including depreciable lives, consists of the following:
  7





October
      2,
                
                
                January
      2,2010
                
                
                2010(unaudited)Land
                
                $
                6,673
                
                
                $
                6,965Buildings
      and improvements (20 to 40 years)
                
                
                41,489
                
                
                
                42,252Machinery
      and equipment (5 to 15 years)
                
                
                141,951
                
                
                
                138,182Office
      equipment (3 to 5 years)
                
                
                13,957
                
                
                
                13,194Construction-in-progress
                
                
                6,636
                
                
                
                3,750210,706
                
                
                
                204,343Less
      accumulated depreciation
                
                
                (102,638
                )
                
                
                (90,974
                )$
                108,068
                
                
                $
                113,369
  8
  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
                
                
                
                
                
                NetAmortization
                
                Intangible
                
                
                Accumulated
                
                
                IntangiblePeriod
                
                Assets
                
                
                Amortization
                
                
                Assets(unaudited)
                
                (unaudited)
                
                
                (unaudited)
                
                
                (unaudited)Acquired
      technology and patents
                
                10
      years
                
                $
                2,332
                
                
                $
                (1,221
                )
                
                $
                1,111Acquired
      customers
                
                18
      years
                
                
                42,550
                
                
                
                (11,049
                )
                
                
                31,501Non-compete
      agreements
                
                5
      years
                
                
                591
                
                
                
                (410
                )
                
                
                181Intangible
      assets subject to amortization
                
                17
      years
                
                
                45,473
                
                
                
                (12,680
                )
                
                
                32,793Proprietary
      processes
                
                Indefinite
                
                
                
                
                
                
                
                
                
                
                3,551Trademarks
                
                Indefinite
                
                
                
                
                
                
                
                
                
                
                4,074Indefinite-lived
      intangible assets, other than goodwill
                
                
                
                
                
                
                
                
                
                
                7,625Total
                
                
                
                
                
                
                
                
                
                
                
                $
                40,418





As of January 2, 2010, the
balances of intangible assets, other than goodwill, were as
follows:





Weighted-Average
            
            Gross
            
            
            
            
            
            NetAmortization
            
            Intangible
            
            
            Accumulated
            
            
            IntangiblePeriod
            
            Assets
            
            
            Amortization
            
            
            AssetsAcquired
      technology and patents
            
            10
      years
            
            $
            2,343
            
            
            $
            (1,020
            )
            
            $
            1,323Acquired
      customers
            
            18
      years
            
            
            42,613
            
            
            
            (9,166
            )
            
            
            33,447Non-compete
      agreements
            
            5
      years
            
            
            691
            
            
            
            (420
            )
            
            
            271Intangible
      assets subject to amortization
            
            17
      years
            
            
            45,647
            
            
            
            (10,606
            )
            
            
            35,041Proprietary
      processes
            
            Indefinite
            
            
            
            
            
            
            
            
            
            
            3,586Trademarks
            
            Indefinite
            
            
            
            
            
            
            
            
            
            
            4,102Indefinite-lived
      intangible assets, other than goodwill
            
            
            
            
            
            
            
            
            
            
            
            
            7,688Total
            
            
            
            
            
            
            
            
            
            
            
            $
            42,729





5. Debt
Arrangements





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.


9





In March, 2010, our
Sheffield,UKunit 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,UKunit, which had a net book
value of approximately $5,977 as of October 2, 2010.





6. New Accounting
Pronouncements





Disclosures
aboutFair
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.





The Corporation is a
multi-national Corporation with operations in theUnited States,United Kingdom,France,IrelandandMalaysia. 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 EndedOctober
      2,
                
                
                October
      3,
                
                
                October
      2,
                
                
                October
      3,2010
                
                
                2009
                
                
                2010
                
                
                2009(unaudited)
                
                
                
                
                
                (unaudited)United
      States
                
                $
                67,508
                
                
                $
                63,207
                
                
                $
                194,436
                
                
                $
                214,527Ireland
                
                
                8,544
                
                
                
                9,234
                
                
                
                25,058
                
                
                
                28,532United
      Kingdom
                
                
                6,906
                
                
                
                7,313
                
                
                
                20,649
                
                
                
                22,674Other
      foreign countries
                
                
                8,580
                
                
                
                7,410
                
                
                
                24,713
                
                
                
                23,807Total
      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 approximately30.7% and 12.4% of revenue,
respectively.
  10





Nine months ended October 2,
2010 – Two customers representedapproximately 31.9%
and10.6% 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 EndedOctober
      2,
                
                
                October
      3,
                
                
                October
      2,
                
                
                October
      3,2010
                
                
                2009
                
                
                2010
                
                
                2009(unaudited)
                
                
                
                
                
                (unaudited)Instruments
                
                $
                36,027
                
                
                $
                41,327
                
                
                $
                103,096
                
                
                $
                134,679Implants
                
                
                28,332
                
                
                
                24,237
                
                
                
                85,058
                
                
                
                83,255Cases
                
                
                21,495
                
                
                
                16,353
                
                
                
                60,127
                
                
                
                53,725Other
                
                
                5,684
                
                
                
                5,247
                
                
                
                16,575
                
                
                
                17,881Total
      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 EndedOctober
      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
                
                
                $
                21,230Less:  Undistributed
      earnings allocated to nonvested stock
                
                
                (33
                )
                
                
                (69
                )
                
                
                (89
                )
                
                
                (277
                )Income
      available to common shares - Basic
                
                
                3,539
                
                
                
                5,339
                
                
                
                9,593
                
                
                
                20,953Weighted-average
      common shares outstanding - Basic
                
                
                35,456
                
                
                
                35,326
                
                
                
                35,449
                
                
                
                35,301Earnings
      per share - Basic
                
                $
                0.10
                
                
                $
                0.15
                
                
                $
                0.27
                
                
                $
                0.60Earnings
      per share - Diluted:Net
      income
                
                $
                3,572
                
                
                $
                5,408
                
                
                $
                9,682
                
                
                $
                21,230Less:  Undistributed
      earnings allocated to nonvested stock
                
                
                -
                
                
                
                (24
                )
                
                
                -
                
                
                
                (163
                )Income
      available to common shares - Diluted
                
                
                3,572
                
                
                
                5,384
                
                
                
                9,682
                
                
                
                21,067Weighted-average
      common shares outstanding - Basic
                
                
                35,456
                
                
                
                35,326
                
                
                
                35,449
                
                
                
                35,301Effect
      of dilution
                
                
                414
                
                
                
                294
                
                
                
                353
                
                
                
                197Weighted-average
      common shares outstanding - Diluted
                
                
                35,870
                
                
                
                35,620
                
                
                
                35,802
                
                
                
                35,498Earnings
      per share - Diluted
                
                $
                0.10
                
                
                $
                0.15
                
                
                $
                0.27
                
                
                $
                0.59
  11





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,UKoperating 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.





10. Comprehensive
Income





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 EndedOctober
      2,
                
                
                October
      3,
                
                
                October
      2,
                
                
                October
      3,2010
                
                
                2009
                
                
                2010
                
                
                2009(unaudited)
                
                
                
                
                
                (unaudited)Net
      Income
                
                $
                3,572
                
                
                $
                5,408
                
                
                $
                9,682
                
                
                $
                21,230Foreign
      currency translation adjustments
                
                
                4,981
                
                
                
                320
                
                
                
                (1,032
                )
                
                
                5,338Derivative,
      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.





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).
  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, 2010Fair
      Value Measurements
                
                
                Fair
      Value MeasurementsLevel
      1
                
                
                Level
      2
                
                
                Level
      3
                
                
                Total
                
                
                Level
      1
                
                
                Level
      2
                
                
                Level
      3
                
                
                TotalLiabilitiesInterest
      rate swaps
                
                $
                -
                
                
                $
                (1,893
                )
                
                $
                -
                
                
                $
                (1,893
                )
                
                $
                -
                
                
                $
                (2,982
                )
                
                $
                -
                
                
                $
                (2,982
                )$
                -
                
                
                $
                (1,893
                )
                
                $
                -
                
                
                $
                (1,893
                )
                
                $
                -
                
                
                $
                (2,982
                )
                
                $
                -
                
                
                $
                (2,982
                )
  13


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.


14





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 third quarter
2010, our revenueincreased $4.3million, or 5.0%, compared to the third
quarter 2009.  This increase was primarily driven by increased demand
in casesandimplants, 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 ourmajor 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
increaseddemand
incases, 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 currentU.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:
  15





Product
      Category
                
                Three
      Months EndedOctober
      2,
                
                
                October
      3,2010
                
                
                2009(unaudited)Instruments
                
                $
                36.0
                
                
                $
                41.3Implants
                
                
                28.3
                
                
                
                24.2Cases
                
                
                21.5
                
                
                
                16.4Other
                
                
                5.7
                
                
                
                5.3Total
                
                $
                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, 2010decreased $1.9 million, or
8.7%, to $19.8 million from$21.7millionfor the comparable 2009period due to a
decrease in gross marginpartially 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 toincreased 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 $12.2millioncompared with the three
month period ended October 3, 2009 of $10.6 million. The increase
was primarily driven byincreased employee
compensation and benefits including higherhealthcare
expenses.  The increase in
employee compensation  is partially attributable to an increases in
headcount related to research and developmentand
direct salesactivities.





Facility
Closureand
Severance Costs.Results of Operations include
pre-tax charges of $0.1millionand $0.7million forthe 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 $0.1millionof severance costs compared
to $0.4million
ofseverance
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 $0.1million ofseverance 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
$0.2million,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 ascompared 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, 2010did not change from the
comparable period in 2009 and is primarily composed of exchange
rate gains and losses on transactions denominated in foreign
currencies.
  16





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 effectivetax rate in 2010 differed
from the U.S. Federal statutory rate of35% 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 $24.6million, or 8.5%, to $264.9
million from $289.5 million for the comparable 2009 period.  Revenue for
each of our principalproduct categories in these
periods was as follows:





Product
      Category
                
                Nine
      Months EndedOctober
      2,
                
                
                October
      3,2010
                
                
                2009(unaudited)Instruments
                
                $
                103.1
                
                
                $
                134.7Implants
                
                
                85.1
                
                
                
                83.2Cases
                
                
                60.1
                
                
                
                53.7Other
                
                
                16.6
                
                
                
                17.9Total
                
                $
                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 2009period 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.  This3.6% 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 productline and the consolidation
of ourAuburn,MEfacilityas 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.
  17





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 $4.6million from
$5.1 million for thecomparable 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. Theinterest rate swaps are used
to convert our variable rate long-term debt to fixed rates. Other expense forthe 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, dueto 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 perioddue 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.





Liquidity





Our principal sources of
liquidity in the nine month period ended October 2, 2010 werecash 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.
  18





Operating
Activities.Operatingactivities generated cash of
$11.9 millionin
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 incomeand 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 $9.6million were $3.9million lower in
thenine month
period ended October 2, 2010 compared to the nine month period ended October 3,
2009.





Financing
Activities.Financingactivities 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 October3, 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
$10.6million.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





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 ourMalaysiaoperations and continue to
increase efficiencies throughout our facilities.





Debt andCredit
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,UKunit 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,UKunit, 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.
  19





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 PeriodTotal
                
                
                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
                
                
                
                0.6Operating
      lease obligations
                
                $
                3.6
                
                
                
                0.5
                
                
                
                2.4
                
                
                
                0.5
                
                
                
                0.2Purchase
      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.





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.





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.
  20





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 theNew
Bedfordacquisition in January 2008, we purchased $5.0million 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
aboutFair
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
  21





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





SEC
Inquiry





Following the discovery of
the accounting irregularities at our Sheffield,UKoperating 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.





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 ofUSHealthcare reform may impact our medical device customers or business
directly.” is
replaced in its entirety by the following:


22





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.





ITEM 6.
EXHIBITS


10.1
            
            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).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.
  23





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. MooreBrian S. Moore,President and Chief Executive Officer(Principal Executive Officer)By
            /s/ Fred L. HiteFred L. Hite,Senior Vice President and Chief Financial Officer(Principal Financial Officer)





November
10, 2010
  24