**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

----

**FORM 10-Q**

**(Mark One)**
| x                                                      | ** ** | **QUARTERLY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| **For the quarterly period ended  April 1, 2006** |
| **OR**                                                 |
| o                                                      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition** period from             to            Commission File Number 001-32374

**Symmetry Medical Inc.**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                  | **35-1996126**                      |
|---------------------------------------------------------------|-------------------------------------|
| (State or other jurisdiction ofincorporation or organization) | (I.R.S. EmployerIdentification No.) |
| **220 W. Market Street, Warsaw,  Indiana**                    | **46580**                           |
| (Address of principal executive offices)                      | (Zip code)                          |

 

**Registrants telephone number, including area code(574) 268-2252**

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yesx No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check One)

| Large accelerated filer o | Accelerated filer  x | Non-accelerated  filer o |
|---------------------------|----------------------|--------------------------|

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Exchange Act Rule 12b-2).Yeso No x

The number of sharesoutstanding of the registrant’s common stock as of April 1, 2006 was34,880,329.

 

----

**TABLEOF CONTENTS**

| ** **                            |                                                                                                                     | ** ** | **Page** |
|---------------------------------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I FINANCIAL INFORMATION** |                                                                                                                |       |
| Item 1                           | Financial Statements:                                                                                               |       |     |
|                                  | Condensed Consolidated Balance Sheets: As of April 1, 2006 and  December 31, 2005                    |       |  1  |
|                                  | Condensed Consolidated Statements of Operations: Three Months Ended  April 1, 2006 and April 2, 2005 |       |  2  |
|                                  | Condensed Consolidated Statements of Cash Flows: Three Months Ended  April 1, 2006 and April 2, 2005 |       |  3  |
|                                  | Notes to Condensed Consolidated Financial Statements                                                                |       |  4  |
| Item 2                           | Management’s Discussion and Analysis of Results of  Operations and  Financial Condition                        |       | 10       |
| Item 3                           | Quantitative and Qualitative Disclosures about Market  Risks                                                        |       | 14       |
| Item 4                           | Controls and Procedures                                                                                             |       | 14       |
| **PART II OTHER INFORMATION**    |                                                                                                                |       |
| Item 1                           | Legal  Proceedings                                                                                                  |       | 14       |
| Item 1A                          | Risk  Factors                                                                                                       |       | 14       |
| Item 2                           | Unregistered Sales of Equity Securities and Use of  Proceeds                                                        |       | 14       |
| Item 5                           | Other  Information                                                                                                  |       | 14       |
| Item 6                           | Exhibits                                                                                                            |       | 15       |
| Signatures                            |                                                                                                                | 16         |

 

----

**Symmetry Medical Inc.Condensed Consolidated Balance Sheets**

| ** **                                                                                                                                     | ** ** | **April 1,**                                              | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                     | ** ** | **2006**                                                       | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                     | ** ** | **(In Thousands, Except  Per Share Data)** | ** ** |
| ** **                                                                                                                                     | ** ** | **(unaudited)**                                                | ** ** | ** **            | ** ** |
| **Assets:**                                                                                                                                    | ** ** |                                                           | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current Assets:                                                                                                                                |       |                                                           |       |                  |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                     |       |                                                           | $          | 10,916                |       |   |   | $ | 12,471 |   |   |
| Accounts  receivables, net                                                                                                                     |       |                                                           | 51,020     |                  |       |   | 44,908 |   |   |
| Inventories                                                                                                                                    |       |                                                           | 39,625     |                  |       |   | 38,783 |   |   |
| Refundable income  taxes                                                                                                                       |       |                                                           | 147        |                  |       |   | 185 |   |   |
| Deferred income  taxes                                                                                                                         |       |                                                           | 2,003      |                  |       |   | 1,867 |   |   |
| Other current  assets                                                                                                                          |       |                                                           | 3,998      |                  |       |   | 4,032 |   |   |
| Total current assets                                                                                                                           |       |                                                           | 107,709    |                  |       |   | 102,246 |   |   |
| Property and  equipment, net                                                                                                                   |       |                                                           | 94,895     |                  |       |   | 93,106 |   |   |
| Derivative  valuation asset                                                                                                                    |       |                                                           | 585        |                  |       |   | 584 |   |   |
| Goodwill                                                                                                                                       |       |                                                           | 124,877    |                  |       |   | 124,518 |   |   |
| Intangible  assets, net of accumulated amortization                                                                                            |       |                                                           | 16,217     |                  |       |   | 16,327 |   |   |
| Other assets                                                                                                                                   |       |                                                           | 815        |                  |       |   | 864 |   |   |
| Total Assets                                                                                                                                   |       |                                                           | $          | 345,098               |       |   |   | $ | 337,645 |   |   |
| **Liabilities  and Shareholders’ Equity:**                                                                                                | ** ** |                                                           | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current Liabilities:                                                                                                                           |       |                                                           |       |                  |       |   |   |   |   |
| Accounts payable                                                                                                                               |       |                                                           | $          | 16,533                |       |   |   | $ | 18,983 |   |   |
| Accrued wages and  benefits                                                                                                                    |       |                                                           | 9,213      |                  |       |   | 10,997 |   |   |
| Other accrued  expenses                                                                                                                        |       |                                                           | 2,768      |                  |       |   | 2,696 |   |   |
| Income tax  payable                                                                                                                            |       |                                                           | 2,811      |                  |       |   | 1,241 |   |   |
| Revolving line of  credit                                                                                                                      |       |                                                           | 1,601      |                  |       |   | — |   |   |
| Current portion  of capital lease obligations                                                                                                  |       |                                                           | 3,194      |                  |       |   | 3,239 |   |   |
| Current portion  of long-term debt                                                                                                             |       |                                                           | 1,750      |                  |       |   | 1,313 |   |   |
| Total current liabilities                                                                                                                      |       |                                                           | 37,870     |                  |       |   | 38,469 |   |   |
| Deferred income  taxes                                                                                                                         |       |                                                           | 11,042     |                  |       |   | 11,139 |   |   |
| Capital lease  obligations, less current portion                                                                                               |       |                                                           | 7,539      |                  |       |   | 8,532 |   |   |
| Long-term debt,  less current portion                                                                                                          |       |                                                           | 24,500     |                  |       |   | 26,250 |   |   |
| Total Liabilities                                                                                                                              |       |                                                           | 80,951     |                  |       |   | 84,390 |   |   |
| Commitments and contingencies (Note 10)                                                                                                        |       |                                                           | —     |                  |       |   | — |   |   |
| Shareholders’  Equity:                                                                                                                    |       |                                                           |       |                  |       |   |   |   |   |
| Common Stock,  $.0001 par value; 72,410 shares authorized; shares issued (April 1,  2006—34,880; December 31, 2005—34,704) |       |                                                           | 3          |                  |       |   | 3 |   |   |
| Additional  paid-in capital                                                                                                                    |       |                                                           | 270,546    |                  |       |   | 268,973 |   |   |
| Retained earnings  (deficit)                                                                                                                   |       |                                                           | (9,001     | )                     |       |   | (17,378 | ) |   |
| Accumulated other  comprehensive income                                                                                                        |       |                                                           | 2,599      |                  |       |   | 1,657 |   |   |
| Total Shareholders’ Equity                                                                                                                |       |                                                           | 264,147    |                  |       |   | 253,255 |   |   |
| Total Liabilities  and Shareholders’ Equity                                                                                               |       |                                                           | $          | 345,098               |       |   |   | $ | 337,645 |   |   |

 

See accompanying notes to condensed consolidated financial statements.

1

----

**Symmetry Medical Inc.Condensed Consolidated Statements of Operations**

| ** **                                                         | ** ** | **Three Months Ended**                                   | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **April 1,**                                                  | ** ** | **April 2,** | ** ** |
| ** **                                                         | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| ** **                                                         | ** ** | **(In Thousands, Except Per Share Data)** | ** ** |
| ** **                                                         | ** ** | **(unaudited)**                                                    | ** ** | **(unaudited)** | ** ** |
| Revenue                                                            |       |                                                               | $          | 69,613 |   |   |   | $ | 63,760 |   |   |
| Cost of Revenue                                                    |       |                                                               | 49,272     |   |   |   | 44,373 |   |   |
| Gross Profit                                                       |       |                                                               | 20,341     |   |   |   | 19,387 |   |   |
| Selling, general,  and administrative expenses                     |       |                                                               | 7,040      |   |   |   | 6,948 |   |   |
| Operating Income                                                   |       |                                                               | 13,301     |   |   |   | 12,439 |   |   |
| Other (income) expense:                                            |       |                                                               |       |   |   |   |   |   |   |
| Interest expense                                                   |       |                                                               | 661        |   |   |   | 939 |   |   |
| Derivatives  valuation (gain)/loss                                 |       |                                                               | (1         | ) |   |   | (296 | ) |   |
| Other                                                              |       |                                                               | (219       | ) |   |   | 202 |   |   |
| Income before income taxes                                         |       |                                                               | 12,860     |   |   |   | 11,594 |   |   |
| Income tax  expense                                                |       |                                                               | 4,483      |   |   |   | 3,930 |   |   |
| Net income applicable to common shareholders                       |       |                                                               | $          | 8,377 |   |   |   | $ | 7,664 |   |   |
| Net income (loss)  applicable to common shareholders per share:    |       |                                                               |       |   |   |   |   |   |   |
| Basic                                                              |       |                                                               | $          | 0.24 |   |   |   | $ | 0.23 |   |   |
| Diluted                                                            |       |                                                               | $          | 0.24 |   |   |   | $ | 0.22 |   |   |
| Weighted average  common shares and equivalent shares outstanding: |       |                                                               |       |   |   |   |   |   |   |
| Basic                                                              |       |                                                               | 34,717     |   |   |   | 33,175 |   |   |
| Diluted                                                            |       |                                                               | 35,137     |   |   |   | 34,116 |   |   |

 

See accompanying notes to condensed consolidated financial statements*.*

2

----

**Symmetry Medical Inc.Condensed Consolidated Statements of Cash Flows**

* *

| ** **                                                                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                   | ** ** | **April 1,**                | ** ** | **April 2,** | ** ** |
| ** **                                                                                   | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                                                                   | ** ** | **(In Thousands)**          | ** ** |
| ** **                                                                                   | ** ** | **(unaudited)**                  | ** ** | **(unaudited)** | ** ** |
| **Operating activities**                                                                     | ** ** |                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net Income                                                                                   |       |                             | $          | 8,377 |   |   |   | $ | 7,664 |   |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |       |                             |       |   |   |   |   |   |   |
| Depreciation                                                                                 |       |                             | 3,704      |   |   |   | 3,003 |   |   |
| Amortization                                                                                 |       |                             | 151        |   |   |   | 153 |   |   |
| Loss from sale of  assets                                                                    |       |                             | 13         |   |   |   | 1 |   |   |
| Deferred income  tax provision                                                               |       |                             | (233       | ) |   |   | — |   |   |
| Excess tax benefit  from stock-based compensation                                            |       |                             | (1,062     | ) |   |   | — |   |   |
| Income tax  benefits from exercise of stock options                                          |       |                             | —     |   |   |   | 55 |   |   |
| Stock-based  compensation                                                                    |       |                             | 108        |   |   |   | — |   |   |
| Derivative  valuation change                                                                 |       |                             | (1         | ) |   |   | (296 | ) |   |
| Change in operating  assets and liabilities:                                                 |       |                             |       |   |   |   |   |   |   |
| Accounts  receivable                                                                         |       |                             | (4,406     | ) |   |   | (7,306 | ) |   |
| Other assets                                                                                 |       |                             | 108        |   |   |   | 414 |   |   |
| Inventories                                                                                  |       |                             | (620       | ) |   |   | (1,543 | ) |   |
| Accounts payable                                                                             |       |                             | (4,109     | ) |   |   | 336 |   |   |
| Accrued expenses  and other                                                                  |       |                             | 697        |   |   |   | 2,900 |   |   |
| Net cash provided by operating activities                                                    |       |                             | 2,727      |   |   |   | 5,381 |   |   |
| **Investing  activities**                                                                    | ** ** |                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Purchases of  property and equipment                                                         |       |                             | (5,085     | ) |   |   | (8,933 | ) |   |
| Net cash used in investing activities                                                        |       |                             | (5,085     | ) |   |   | (8,933 | ) |   |
| **Financing  activities**                                                                    | ** ** |                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Proceeds from  bank revolver                                                                 |       |                             | 4,641      |   |   |   | 5,643 |   |   |
| Payments on bank  revolver                                                                   |       |                             | (3,028     | ) |   |   | (1,864 | ) |   |
| Payments on  long-term debt and capital lease obligations                                    |       |                             | (2,384     | ) |   |   | (2,305 | ) |   |
| Proceeds from the  issuance of common and preferred stock, net of expenses                   |       |                             | 404        |   |   |   | 2 |   |   |
| Excess tax  benefit from stock-based compensation                                            |       |                             | 1,062      |   |   |   | — |   |   |
| Net cash provided  by financing activities                                                   |       |                             | 695        |   |   |   | 1,476 |   |   |
| Effect of  exchange rate changes on cash                                                     |       |                             | 108        |   |   |   | (69 | ) |   |
| Net increase (decrease) in cash and cash equivalents                                         |       |                             | (1,555     | ) |   |   | (2,145 | ) |   |
| Cash and cash  equivalents at beginning of period                                            |       |                             | 12,471     |   |   |   | 4,849 |   |   |
| Cash and cash equivalents at end of period                                                   |       |                             | $          | 10,916 |   |   |   | $ | 2,704 |   |   |
| Supplemental  disclosures:                                                                   |       |                             |       |   |   |   |   |   |   |
| Cash paid for  interest                                                                      |       |                             | $          | 512 |   |   |   | $ | 610 |   |   |
| Cash paid for  income taxes                                                                  |       |                             | $          | 2,034 |   |   |   | $ | 563 |   |   |

 

See accompanying notes to condensed consolidated financial statements*.*

3

----

**Symmetry Medical Inc.Notes to Condensed Consolidated Financial Statements(In Thousands, Except Per Share Data)**

**1.**   Basis ofPresentation

The condensed consolidatedfinancial statements include the accounts of Symmetry Medical, Inc. andits wholly-owned subsidiaries (collectively referred to as the Corporation),Symmetry Medical USA Inc., Jet Engineering, Inc., Ultrexx, Inc., OthyLimited, Poly-Vac S.A. and Thornton Precision Components Limited. TheCorporation is a global supplier of integrated products and services consistingprimarily of surgical implants, instruments and cases to orthopedic and othermedical device companies.

The condensed consolidatedfinancial statements of the Corporation have been prepared without audit,pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted pursuant to such rules andregulations. In the opinion of management, the accompanying condensedconsolidated financial statements contain all material adjustments (consistingonly of normal recurring adjustments) necessary to present fairly theconsolidated financial position of the Corporation, its results of operationsand cash flows. The Corporation’s results are subject to seasonal fluctuations.Interim results are not necessarily indicative of results for a full year. Thecondensed consolidated financial statements included herein should be read inconjunction with the consolidated financial statements and the notes theretoincluded in the Corporation’s Annual Report on Form 10-K for fiscalyear 2005.

Certain prior year amountshave been reclassified to conform to the current-year presentation. Thesereclassifications had no impact on our results of operations or financialposition.

TheCorporation’s year end is the 52 or 53 week period ending the Saturday closestto December 31. Fiscal year 2006 and 2005 are 52 week years. As such,interim quarters are 13 weeks long ending the Saturday closest to March 31, June 30,or September 30. References in these consolidated financial statements tothe three months ended refer to these financial periods, respectively.

**2.**   Inventories

Inventories consist of the following:

| ** **                 | ** ** | **April 1,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Raw material and  supplies |       | $                 | 6,726      |                  |       | $ | 7,325 |   |   |
| Work-in-process            |       | 24,388            |       |                  | 23,418     |   |   |
| Finished goods             |       | 8,511             |       |                  | 8,040      |   |   |
|                       |       | $                 | 39,625     |                  |       | $ | 38,783 |   |   |

 

4

----

**Symmetry Medical Inc. Notes to Condensed Consolidated Financial Statements—Continued (In Thousands, Except Per Share Data)**

**3.**   Property andEquipment

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

| ** **                                   | ** ** | **April 1,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Land                                         |       | $                 | 1,288      |                  |       | $ | 1,283 |   |   |
| Buildings and  improvements (20 to 40 years) |       | 24,609            |       |                  | 24,128     |   |   |
| Machinery and  equipment (5 to 15 years)     |       | 103,630           |       |                  | 101,437    |   |   |
| Office equipment  (3 to 5 years)             |       | 5,778             |       |                  | 5,421      |   |   |
| Construction-in-progress                     |       | 5,741             |       |                  | 5,695      |   |   |
|                                         |       | 141,046           |       |                  | 137,964    |   |   |
| Less accumulated  depreciation               |       | (46,151           | )          |                  | (44,858    | ) |   |
|                                         |       | $                 | 94,895     |                  |       | $ | 93,106 |   |   |

 

**4.**   IntangibleAssets

Intangibleassets subject to amortization consist of technology and customer relatedintangible assets acquired in connection with our acquisition of Mettis (UK)Limited on June 11, 2003. These assets ($12,528, net, at April 1,2006 and $12,656, net, at December 31, 2005) are being amortized using thestraight-line method over 9 to 25 years. The Corporation has $3,689 and $3,671of indefinite lived intangible assets at April 1, 2006 and December 31,2005, respectively.

**5.**   NewAccounting Pronouncements

InNovember 2004, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting (SFAS) No. 151, Inventory Costs—anamendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4. TheStatement clarifies that abnormal amounts of idle facility expense, freight,handling costs and wasted materials should be recognized as current-periodexpenses regardless of how abnormal the circumstances. In addition, thisStatement requires that the allocation of fixed overheads to the costs ofconversion be based upon normal production capacity levels. The Statement iseffective for inventory costs incurred during fiscal years beginning after June 15,2005. This Statement did not have a material effect on our financial position,results of operations or cash flows.

**6.**   Stock-BasedCompensation

The Corporation adopted SFAS123 (revised 2004), Share-Based Payment on January 1, 2006 (SFAS 123R). SFAS123R, which revised SFAS 123, Accounting for Stock-Based Compensation,superseded APB Opinion No. 25, Accounting for Stock Issued to Employees,and amends SFAS 95, Statement of Cash Flows. Statement 123R requires that allshare-based payments to employees, including grants of employee stock optionsbe recognized in the financial statements based upon their fair value. TheCorporation had previously followed APB No. 25 in accounting for its stockoptions and accordingly, no compensation cost had been previously recognized.

The Corporation has adoptedSFAS 123R using the modified prospective method. Compensation cost has beenrecognized for all share-based payments in the consolidated financialstatements in 2006 based upon the fair value of the stock or option grant.Prior period results have not been restated.

5

----

**Symmetry Medical Inc. Notes to Condensed Consolidated Financial Statements—Continued (In Thousands, Except Per Share Data)**

**6.**   Stock-Based Compensation (Continued)

As a result of adopting SFAS123R, the Corporation’s income before income taxes and net income for thequarter ended April 1, 2006 are $37 and $22 lower, respectively, than ifit had continued to account for share-based compensation under Opinion 25. Basicand diluted earnings per share for the quarter ended April 1, 2006 wouldnot have changed from $0.24 if the Corporation had not adopted SFAS 123R.

Prior to the adoption of SFAS123R, the Corporation presented all tax benefits of deductions resulting fromthe exercise of stock options as operating cash flows in the ConsolidatedStatements of Cash Flows. SFAS 123R requires the cash flows resulting from thetax benefits resulting from tax deductions in excess of the compensation costrecognized for those options (excess tax benefits) to be classified asfinancing cash flows. The $1,062 excess tax benefit classified as a financingcash inflow would have been classified as an operating cash inflow if theCorporation had not adopted SFAS 123R.

Statement 123, as amended, required pro formapresentation as if compensation costs had been expensed under the fair valuemethod. For purpose of pro forma disclosure, the estimated fair value of stockoptions at the grant date is amortized to expense over the vesting period. Thefollowing table illustrates the effect on net income and net income per shareas if compensation expense had been recognized in the first quarter of 2005 (inthousands, except for per share amounts):

| Reported net  income applicable to common shareholders   |   | $      | 7,664  |   |
|----------------------------------------------------------|--------|--------|--------|--------|
| Pro forma  stock-based compensation expense (net of tax) |   | (46    | )      |
| Stock-based  employee compensation recorded (net of tax) |   | 4      |   |
| Adjusted net  income                                     |   | $      | 7,622  |   |
| Basic net income  per share applicable to common:        |   |   |   |
| Reported net  income per share                           |   | $      | 0.23   |   |
| Stock-based  compensation expense (net of tax) per share |   | — |   |
| Adjusted net  income per share                           |   | $      | 0.23   |   |
| Diluted net  income per share applicable to common:      |   |   |   |
| Reported net  income per share                           |   | $      | 0.22   |   |
| Stock-based  compensation expense (net of tax) per share |   | — |   |
| Adjusted net income per  share                           |   | $      | 0.22   |   |

 

Duringthe three month period ended April 1, 2006, the Corporation issued 145shares of common stock through the exercise of stock options and 29 shares ofcommon stock through the exercise of warrants. The compensation cost related tonon-vested awards not yet recognized is approximately $66, net, and theweighted average period over which it is expected to be recognized isapproximately two years.

**7.**   Income Taxes

TheCorporation’s effective tax rate was 34.9% for the three month period ended April 1,2006 as compared to 33.9% for the same periods in 2005. The increase in therate from the 2005 effective tax rate was primarily due to the expiration of theresearch tax credit on December 31, 2005 and other tax benefits. TheUnited States government has not yet reinstated this tax credit bill.

6

----

**Symmetry Medical Inc. Notes to Condensed Consolidated Financial Statements—Continued (In Thousands, Except Per Share Data)**

**8.**   SegmentReporting

The Corporation primarilydesigns, develops and manufactures implants and related surgical instrumentsand cases for orthopedic device companies and companies in other medical devicemarkets such as dental, osteobiologic and endoscopy. The Corporation also has aspecial services business serving primarily aerospace customers, which does notmeet the quantitative disclosure requirements of SFAS 131. The Corporationmanages its business and operates in a single reportable business segment.Because of the similar economic characteristics of the operations, includingthe nature of the products, comparable level of FDA regulations, same orsimilar customers, those operations have been aggregated following theprovisions of SFAS 131 for segment reporting purposes.

The Corporation is amulti-national corporation with operations in the United States, the UnitedKingdom and France. As a result, the Corporation’s financial results can beimpacted by currency exchange rates in the foreign markets in which theCorporation sells its products. While exposure to variability in foreigncurrency exists, the Corporation does not believe it is significant to itsoperations and any variability is somewhat offset through the location of itsmanufacturing facilities. Revenue is attributed to geographic locations basedon the location to which we ship our products.

*Revenue from ExternalCustomers:*

| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **April 1,**                | ** ** | **April 2,** | ** ** |
| ** **               | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| United States            |       | $                                | 46,347     |   | $ | 41,981 |   |
| Ireland                  |       | 7,728                            |       | 8,317 |   |
| United Kingdom           |       | 9,525                            |       | 6,670 |   |
| Other foreign  countries |       | 6,013                            |       | 6,792 |   |
| Total net revenues       |       | $                                | 69,613     |   | $ | 63,760 |   |

 

*Concentration of Credit Risk:*

A substantial portion of theCorporation’s revenue is derived from a limited number of customers. TheCorporation’s revenue includes revenue from customers of the Corporation whichindividually account for 10% or more of revenue as follows:

Quarter ended April 1,2006—Two customers representing approximately 30% and 17% of revenue,respectively.

Quarter ended April 2,2005—Three customers representing approximately 29%, 14% and 14% of revenue,respectively.

7

----

**Symmetry Medical Inc. Notes to Condensed Consolidated Financial Statements—Continued (In Thousands, Except Per Share Data)**

**8.**   Segment Reporting (Continued)

Followingis a summary of the composition by product category of the Corporation’srevenue to external customers. Revenue of the specialty services business isincluded in the “other” category.

| ** **         | ** ** | **Three Months Ended** | ** ** |
|--------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **April 1,**                | ** ** | **April 2,** | ** ** |
| ** **         | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Implants           |       | $                                | 26,591     |   | $ | 22,957 |   |
| Instruments        |       | 21,578                           |       | 23,350 |   |
| Cases              |       | 14,671                           |       | 13,844 |   |
| Other              |       | 6,773                            |       | 3,609 |   |
| Total net revenues |       | $                                | 69,613     |   | $ | 63,760 |   |

 

**9.**   Net Income(Loss) Per Share

The following table sets forth the computation ofearnings per share.

| ** **                                                          | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **April 1,**                | ** ** | **April 2,** | ** ** |
| ** **                                                          | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Net income  available to common shareholders                        |       | $                                | 8,377      |   | $ | 7,664 |   |
|                                                                |       |                             |       |   |   |
| Weighted-average  common shares outstanding basic                   |       | 34,717                           |       | 33,175 |   |
| Effect of stock  options, restricted stock and stock warrants       |       | 420                              |       | 941 |   |
| Weighted-average  common shares outstanding and assumed conversions |       | 35,137                           |       | 34,116 |   |
| Net income per  share available to common shareholders:             |       |                             |       |   |   |
| Basic                                                               |       | $                                | 0.24       |   | $ | 0.23 |   |
| Diluted                                                             |       | $                                | 0.24       |   | $ | 0.22 |   |

 

**10.**   Commitmentsand Contingencies

TheCorporation is involved, from time to time, in various contractual, productliability, patent (or intellectual property) and other claims and disputesincidental to its business. Currently, there is no environmental or otherlitigation pending or, to the knowledge of the Corporation, threatened, thatthe Corporation expects to have a material adverse affect on its financialcondition, results of operations or liquidity. While litigation is subject touncertainties and the outcome of litigated matters is not predictable withassurance, the Corporation currently believes that the disposition of allpending or, to the knowledge of the Corporation threatened, claims and disputes,individually or in the aggregate, should not have a material adverse effect onthe Corporation’s consolidated financial condition, results of operations orliquidity.

8

----

**Symmetry Medical Inc. Notes to Condensed Consolidated Financial Statements—Continued (In Thousands, Except Per Share Data)**

**11.**   ComprehensiveIncome

Comprehensive income is comprised of net income andgains and losses resulting from currency translations of foreign entities.Comprehensive income consists of the following:

| ** **                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **April 1,**           | ** ** | **April 2,** | ** ** |
| ** **                                | ** ** | **2006**                    | ** ** | **2005** | ** ** |
| Net Income                                |       | $                           | 8,377      |   | $ | 7,664 |   |
| Foreign currency  translation adjustments |       | 942                         |       | (1,576 | ) |
| Comprehensive income                      |       | $                           | 9,319      |   | $ | 6,088 |   |

 

**12.**   SubsequentEvent

On May 2, 2006, theCorporation completed the acquisition of Riley Medical Inc., a privately-ownedcompany based in Auburn, Maine, for approximately $45 million in cash, subjectto adjustment. Riley Medical Inc. is a manufacturer of standard and customcases, trays and containers for the medical device industry with locations inthe United States and Switzerland.

9

----

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFRESULTS OF OPERATIONS AND FINANCIAL CONDITION**

**Overview**

We are the world’s largestindependent provider of implants and related instruments and cases toorthopedic device manufacturers. We also design, develop and produce theseproducts for companies in other segments of the medical device market,including dental, osteobiologic and endoscopy sectors, and provide limitedspecialized products and services to non-healthcare markets.

We offer our customers Total SolutionsTM forcomplete implant systems—implants, instruments and cases. While our revenue todate has been derived primarily from the sale of implants, instruments andcases separately, or instruments and cases together, our ability to provideTotal Solutions for complete implant systems has already proven to beattractive to our customers and we expect this capability will provide us withgrowth opportunities. In addition, we expect that our Total Solutionscapability will increase the relative percentage of value added products thatwe supply to our customers.

Our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2005, provide additionalinformation about our business, operations and financial condition.

OnMay 2, 2006, we completed the acquisition of Riley Medical Inc., aprivately-owned company based in Auburn, Maine, for $45 million in cash,subject to adjustment. Riley Medical Inc. is a manufacturer of standard andcustom cases, trays and containers for the medical device industry with locationsin the United States and Switzerland.

**First Quarter Results of Operations**

*Revenue.*   Revenue for the three month period endedApril 1, 2006 increased $5.8 million, or 9.2%, to $69.6 million from $63.8million for the comparable 2005 period. On a constant currency basis, revenuesgrew 11.6% for the three month period ended April 1, 2006 over thecomparable 2005 period. Revenue for each of our principal product categories inthese periods was as follows:

| ** **                | ** ** | **Three Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **April 1,**                | ** ** | **April 2,** | ** ** |
| **Product Category** | ** ** | ** **                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(in millions)**           | ** ** |
| Implants                  |       |                             | $          | 26.6 |   |   |   | $ | 23.0 |   |   |
| Instruments               |       |                             | 21.6       |   |   |   | 23.4 |   |   |
| Cases                     |       |                             | 14.7       |   |   |   | 13.8 |   |   |
| Other                     |       |                             | 6.7        |   |   |   | 3.6 |   |   |
| Total                     |       |                             | $          | 69.6 |   |   |   | $ | 63.8 |   |   |
|                           |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

The $5.8 million increase inrevenue resulted from increased implant, case, and non-healthcare/other salesof $3.6 million, $0.8 million, and $3.2 million, respectively, as a result ofincreased implant finishing volume and increased demand from customers dueprimarily to continued industry growth and their launches of new systems. Theseincreases were partially offset by decreased instrument sales of $1.8 milliondue to slower demand from customers. All of the Other category increase wasdriven by the strength in the aerospace industry.

*GrossProfit.*   Grossprofit for the three month period ended April 1, 2006 increased $0.9million, or 4.9%, to $20.3 million from $19.4 million for the comparable 2005period. This increase in gross profit was driven primarily by increasedrevenues as gross margin was 29.2% for the three month period ended April 1,2006 compared to 30.4% for the comparable 2005 period. The decline in grossmargin as a percentage of sales of 1.2% was primarily driven by material inflationand higher facility related expenses.

10

----

*Selling,General and Administrative Expenses.*   Selling, general and administrativeexpenses for the three month period ended April 1, 2006 increased $0.1million, or 1.3%, to $7.0 million from $6.9 million for the comparable 2005period. This increase in expenses primarily resulted from costs related toadditional stock compensation expenses related from the adoption of SFAS 123Rand restricted stock awards granted since the second quarter of 2005. As apercentage of revenue, selling, general and administrative expenses decreasedto 10.1% of revenue for the three month period ended April 1, 2006 from10.9% of revenue for the comparable 2005 period. This 0.8% decrease as apercentage of revenue was attributable to controlled spending.

*OtherExpense.*   Interestexpense for the three month period ended April 1, 2006 decreased $0.3million, or 29.6%, to $0.7 million from $0.9 million for the comparable 2005period. This decrease primarily reflects the decrease in outstanding capitallease obligations and senior term debt through normal amortization.

The derivatives valuation(gains) losses consist of interest rate swap valuations used to mitigate theeffect of changing interest rates on net income and foreign currency forwardcontracts used to mitigate the effect of changes in the foreign exchange rateson net income. The decrease in the gain for the three month period ended April 1,2006 versus the comparable 2005 period is due to market fluctuations in thesecontracts, which are not designated as hedges under SFAS 133.

*Provision for IncomeTaxes.*   Oureffective tax rate was 34.9% for the three month period ended April 1,2006 as compared to 33.9% for the comparable 2005 period. Provision for incometaxes increased by $0.6 million, or 14.1%, to $4.5 million for the three monthperiod ended April 1, 2006 from $3.9 million for the comparable 2005period, due primarily to higher pre-tax earnings and the expiration of theresearch tax credit on December 31, 2005 and other tax benefits. TheUnited States government has not yet reinstated this tax credit bill.

**Liquidity and Capital Resources**

Our principal sources of cashin the three month period ended April 1, 2006 were cash generated fromoperations, borrowings under our revolving credit facility, income tax benefitsand proceeds from the exercise of common stock options. Principal uses of cashin the three month period ended April 1, 2006 included working capital,capital expenditures and debt service. We expect that our principal uses ofcash in the future will be to finance working capital, to pay for capitalexpenditures, to service debt and to fund potential mergers and acquisitions. Wecompleted an acquisition of Riley Medical Inc. on May 2, 2006 for $45million, subject to adjustment, through the use of the existing cash balancesand capacity on the revolving credit facility.

*Operating Activities  *We generated cash from operations of $2.7 million inthe three month period ended April 1, 2006 compared to $5.4 millionfor the three month period ended April 2, 2005. Cash provided by operatingactivities in the three month period ended April 1, 2006 is primarily theresult of a $11.1 million increase in net income, adjusted for non-cashitems, such as depreciation expense, offset by increases in net working capital.  

Uses of cash due to changes inworking capital were $8.3 million in the three month period ended April 1,2006.  The primary uses of cash forworking capital came from an increase in accounts receivable of $4.4 millioncoupled with a decrease in accounts payable of $4.1 million. A portion ofthe decrease in accounts payable was due to the early payment of invoices inorder to secure price concessions on material purchases.

*Investing Activities  *Capital expenditures comprise our investing activitiesin the three month periods ended April 1, 2006 and April 2, 2005.

11

----

*Financing Activities**  *With the adoption of Statement 123R on January 1,2006, the income tax benefits from the exercise of stock options have beenreclassified from Operating activities to Financing activities. These incometax benefits totaled $1.1 million in the three month period ended April 1,2006.

***Capital Expenditures***

Capitalexpenditures totaled $5.1 million for the three month ended April 1, 2006,compared to $8.9 million for the three month period ended April 2, 2005.Expenditures were primarily used to complete our new design and developmentfacility in Warsaw, Indiana and maintain and enhance production capacity in allof our production facilities.

***Debt and Credit Facilities***

In connection with our initialpublic offering of common stock in the fourth quarter of fiscal 2004, weentered into a $75.0 million senior secured credit facility, consisting of a$35.0 million five-year term loan and a $40.0 million five-year revolvingcredit facility.

As of April 1, 2006, wehad an aggregate of $38.6 million of outstanding indebtedness, which consistedof $26.3 million of term loan borrowings outstanding under its senior creditfacility, no borrowings outstanding under its revolving credit facility, $1.6million of borrowings under its U.K. short-term credit facility and $10.7million of capital lease obligations. We had no outstanding letters of creditas of April 1, 2006.

Our senior credit agreementcontains various financial covenants, including covenants requiring a maximumtotal debt to EBITDA ratio, minimum EBITDA to interest ratio and a minimumEBITDA to fixed charges ratio. We were in compliance with our financial andrestrictive covenants under the senior credit facility as of April 1,2006.

We believe that cash flow fromoperating activities and borrowings under our senior credit facility will besufficient to fund currently anticipated working capital, the acquisition ofRiley Medical Inc. for approximately $45 million, planned capital spending anddebt service requirements for the foreseeable future, including at least the nexttwelve months. We regularly review acquisitions and other strategicopportunities, which may require additional debt or equity financing.

Ouracquisition of Riley Medical Inc. on May 2, 2006 for $45 million wasfunded through the use of the existing cash balances and capacity on ourrevolving credit facility. We currently anticipate obtaining additional longterm debt to pay down the revolving credit facility, drawn upon for theacquisition, during the second quarter of 2006.

**Off-Balance Sheet Arrangements**

Ouroff-balance sheet arrangements and contractual obligations include ouroperating leases and letters of credit. There have been no material changesfrom the information provided in our Annual Report on Form 10-K forfiscal year ended December 31, 2005.

**Environmental**

Therehave been no material changes from the information provided in the our AnnualReport on Form 10-K for fiscal year ended December 31, 2005.

**Critical Accounting Policies and Estimates**

Thepreparation 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 AnnualReport on Form 10-K for fiscal year ended December 31, 2005includes a 

12

----

summary of the critical accounting policies we believeare the most important to aid in understanding its financial results. Therehave been no material changes to these critical accounting policies thatimpacted our reported amounts of assets, liabilities, revenues or expensesduring the three months ended April 1, 2006.

**New Accounting Pronouncements**

We adopted SFAS 123 (revised2004), Share-Based Payment on January 1, 2006 (SFAS 123R). SFAS 123R,which revised SFAS 123, Accounting for Stock-Based Compensation, superseded APBOpinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS95, Statement of Cash Flows. Statement 123R requires that all share-basedpayments to employees, including grants of employee stock options be recognizedin the financial statements based upon their fair value. We had previouslyfollowed APB No. 25 in accounting for its stock options and accordingly,no compensation cost had been previously recognized.

We have adopted SFAS 123Rusing the modified prospective method. Compensation cost has been recognizedfor all share-based payments in the consolidated financial statements in 2006based upon the fair value of the stock or option grant. Prior period resultshave not been restated.

As a result of adopting SFAS123R, our income before income taxes and net income for the quarter ended April 1,2006 are $37 and $22 lower, respectively, than if it had continued to accountfor share-based compensation under Opinion 25. Basic and diluted earnings pershare for the quarter ended April 1, 2006 would not have changed from$0.24 if we had not adopted SFAS 123R.

Prior to the adoption of SFAS123R, we presented all tax benefits of deductions resulting from the exerciseof stock options as operating cash flows in the Consolidated Statements of CashFlows. SFAS 123R requires the cash flows resulting from the tax benefitsresulting from tax deductions in excess of the compensation cost recognized forthose options (excess tax benefits) to be classified as financing cash flows. The$1,062 excess tax benefit classified as a financing cash inflow would have beenclassified as an operating cash inflow if we had not adopted SFAS 123R.

Statement123, as amended, required pro forma presentation as if compensation costs hadbeen expensed under the fair value method. For purpose of pro forma disclosure,the estimated fair value of stock options at the grant date is amortized toexpense over the vesting period.

**Cautionary Notice Regarding Forward-Looking Statements**

Certain statements containedin this Quarterly Report on Form 10-Q and other written and oralstatements made from time to time by the Corporation do not relate strictly tohistorical or current facts. As such they are considered “forward-lookingstatements” that provide current expectations or forecasts of future events.Forward-looking statements typically are identified by the use of terms such as“may,” “will,” “should,” “expect,” “anticipate,” “believe,” “could,” “estimate,”“intend” and similar words, although some forward-looking statements areexpressed differently. Factors that could cause the Corporation’s actualresults to differ materially from the expectations expressed in ourforward-looking statements include, but are not limited to, the following:changes in general economic conditions in the United States and Europe; ourability to retain existing customers, particularly our key customers, andattract new customers; the timing of significant orders and shipments,including the effects of changes in inventory management practices by ourcustomers; the competitive nature of the orthopedic device market; the pursuitof strategic acquisitions or encountering unforeseen difficulties inintegrating acquisitions; the degree to which we are leveraged and oursignificant debt service obligations; the impact of work stoppages andother labor matters; general economic or business conditions affecting theorthopedic device market being less favorable than expected; our ability toanticipate changes in technology and regulatory standards and to successfullydevelop and introduce new and enhanced products on a timely basis; theunpredictability of intellectual property protection and maintenance and otherintellectual property issues; any future changes 

13

----

inmanagement or loss of key personnel; unforeseen problems associated withinternational sales and operations, including gains and losses from foreigncurrency exchange; product liability lawsuits brought against us or ourcustomers; implementation of or changes in laws, regulations or policies thatcould negatively affect the orthopedic device market; and other uncertaintiesand factors discussed in the “Risk Factors” section of the Corporation’s AnnualReport on Form 10-K filed on February 27, 2006, elsewhere inthis Quarterly Report on Form 10-Q and in the Corporation’s otherfilings with the Securities and Exchange Commission.

Forward-lookingstatements relate only to events as of the date on which the statements aremade. Except as required by law, the Corporation’s undertakes no obligation toupdate any forward-looking statement to reflect events or circumstances afterthe date on which the statement is made or to reflect the occurrence ofunanticipated events, even if new information becomes available in the future.

**ITEM 3.     QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

For financial market risksrelated to changes in interest rates, foreign currency exchange rates,commodity prices and the effects of inflation, reference is made toItem 7a “Quantitative and Qualitative Disclosures About Market Risk”contained in Part II of our Annual Report on Form 10-K for the fiscal yearended December 31, 2005. Our exposure to these risks has not changed materiallysince December 31, 2005.

**ITEM 4.     CONTROLS ANDPROCEDURES**

(a)   Evaluation of disclosure controls and procedures.

Our Chief Executive Officer and Chief Financial Officer, afterevaluating the effectiveness of our “disclosure controls and procedures” (asdefined in Rule 13a-15(e) of the Securities Exchange Act of1934), have concluded that, as of the end of the fiscal quarter covered by thisreport on Form 10-Q, our disclosure controls and procedures wereadequate and designed to ensure that material information relating to theCorporation and its consolidated subsidiaries would be made known to them byothers within those entities.

(b)   Changes in internal control over financial reporting.

Therewas no change in our “internal control over financial reporting” (as defined inRule 13a-15(f) of the Securities Exchange Act of 1934) thatoccurred during the fiscal quarter covered by this report on Form 10-Qthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

**PART II   OTHER INFORMATION**

**ITEM 1      LEGAL PROCEEDINGS**

None.

**ITEM 1A    RISK FACTORS**

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, Item 1A. Risk Factorsin our Annual Report on Form 10-K for the fiscal year ended December 31,2005, which could materially affect our business, financial condition or futureresults. The Risk Factors included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2005 have not materially changed.

14

----

**ITEM 2      UNREGISTERED SALESOF EQUITY SECURITIES AND USE OF PROCEEDS**

On February 22, 2006, Olympus Growth Co-Investment FundIII, L.P. converted warrants to purchase 27,349 shares of the Corporation’scommon stock into 27,339 shares of the Corporation’s common stock.

On February 22, 2006, Olympus Executive Fund, L.P.converted warrants to purchase 1,518 shares of the Corporation’s common stockinto 1,516 shares of the Corporation’s common stock.

Each of the aboveissuances of shares of the Corporation’s common stock upon the conversion orexercise of warrants on February 22, 2006 was made in reliance on theexemptions provided by Section 3(a)(9) and 4(2) of the Securities Act of 1933.

**ITEM 5      OTHERINFORMATION**

Therehave been no material changes to the procedures by which security holders mayrecommend nominees to our Board of Directors since our Schedule 14A filedMarch, 21, 2006.

**ITEM 6      EXHIBITS**

10.22*  Stock PurchaseAgreement by and among Symmetry Medical USA Inc., Edward D. Riley and RussellP. Holmes.

 

31.1                Certificationof Chief Executive Officer required by Item 307 of Regulation S-K aspromulgated by the Securities and Exchange Commission and pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.

31.2                Certificationof Chief Financial Officer required by Item 307 of Regulation S-K aspromulgated by the Securities and Exchange Commission and pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.

32.1                Certificationof Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

----

*           Schedulesomitted pursuant to Item 601(b)(2) of regulation S-X but will be furnishedto staff upon request.

15

----

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

|        | SYMMETRY MEDICAL INC. |
|--------|-----------------------|
|   |                  |   |   |
|   |                  |   |   |
|   | By                    |   | /s/ BRIAN MOORE |
|   |                  |   | Brian Moore, |
|   |                  |   | *President and Chief Executive  Officer* |
|   |                  |   | *(Principal Executive Officer)* |
|   |                  |   |   |
|   |                  |   |   |
|   | By                    |   | /s/ FRED HITE |
|   |                  |   | Fred Hite, |
|   |                  |   | *Senior Vice President and Chief  Financial Officer* |
|   |                  |   | *(Principal Financial and  Accounting Officer)* |

 

May 10, 2006

16

----