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 3, 2009





Commission
File Number: 001-32374





SYMMETRY
MEDICAL INC.


(Exact
name of registrant as specified in its charter)





Delaware
            
            35-1996126(State
      or other jurisdiction of incorporation or organization)
              
              3724
      North State Road 15, Warsaw, Indiana
            
            (I.R.S.
      Employer Identification No.)
              
              46582(Address
      of principal executive offices)
              
              (574)
      268-2252
            
            (Zip
      Code)(Registrant’s
      telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.        þ  Yes ̈
    No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (S232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


 ̈ Yes  ̈ No





Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
      accelerated filer ̈
            
            Accelerated
      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).       ̈ Yesþ No





The
number of shares outstanding of the registrant’s common stock as of November 3,
2009 was 35,805,951 shares.







TABLE
OF CONTENTS





PART I
      FINANCIAL INFORMATIONItem 1
                  Financial
      Statements:Condensed
      Consolidated Balance Sheets: As of October 3, 2009 and January 3,
      2009
                  
                  
                  4Condensed
      Consolidated Statements of Operations: Three and Nine Months Ended
      October 3, 2009 and October 4, 2008
                  
                  
                  5Condensed
      Consolidated Statements of Cash Flows: Nine Months Ended October 3, 2009
      and October 4, 2008
                  
                  
                  6Notes
      to Condensed Consolidated Financial Statements
                  
                  
                  7Item 2
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  
                  14Item 3
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  
                  
                  19Item 4
                  Controls
      and Procedures
                  
                  
                  19PART II
      OTHER INFORMATIONItem
      1
                  Legal
      Proceedings
                  
                  
                  20Item 1A
                  Risk
      Factors
                  
                  
                  20Item 5
                  Other
      Information
                  
                  
                  20Item 6
                  Exhibits
                  
                  
                  20Signatures
                  
                  
                  
                  21


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 2008 on Form 10-K, as well as in other reports which we file
with the Securities and Exchange Commission, to better understand the risks and
uncertainties that are inherent in our business and in owning our
securities.  These reports are available publicly on the SEC website,
www.sec.gov, and on our website, www.symmetrymedical.com .





Any
forward-looking statements which we make in this report or in any of the
documents that are incorporated by reference herein speak only as of the date of
such statement, and we undertake no ongoing obligation to update such
statements. Comparisons of results between current and any prior periods are not
intended to express any future trends or indications of future performance,
unless expressed as such, and should only be viewed as historical
data.


3





PART
I FINANCIAL INFORMATION


ITEM
I. FINANCIAL STATEMENTS





Symmetry
Medical Inc.


Condensed
Consolidated Balance Sheets


(in
thousands)





October
      3,
                
                
                January
      3,2009
                
                
                2009(unaudited)Assets:Current
      Assets:Cash
      and cash equivalents
                
                $
                16,432
                
                
                $
                10,191Accounts
      receivable, net
                
                
                43,205
                
                
                
                52,845Inventories
                
                
                65,697
                
                
                
                61,111Refundable
      income taxes
                
                
                2,884
                
                
                
                6,610Deferred
      income taxes
                
                
                5,493
                
                
                
                3,993Other
      current assets
                
                
                2,710
                
                
                
                3,154Total
      current assets
                
                
                136,421
                
                
                
                137,904Property
      and equipment, net
                
                
                116,933
                
                
                
                115,045Goodwill
                
                
                153,721
                
                
                
                153,521Intangible
      assets, net of accumulated amortization
                
                
                43,387
                
                
                
                45,039Other
      assets
                
                
                1,260
                
                
                
                1,728Total
      Assets
                
                $
                451,722
                
                
                $
                453,237Liabilities
      and Shareholders' Equity:Current
      Liabilities:Accounts
      payable
                
                $
                20,074
                
                
                $
                26,929Accrued
      wages and benefits
                
                
                7,764
                
                
                
                12,784Other
      accrued expenses
                
                
                4,808
                
                
                
                5,186Income
      tax payable
                
                
                574
                
                
                
                2,637Deferred
      income taxes
                
                
                115
                
                
                
                -Revolving
      line of credit
                
                
                5,479
                
                
                
                2,495Current
      portion of capital lease obligations
                
                
                558
                
                
                
                1,034Current
      portion of long-term debt
                
                
                19,525
                
                
                
                16,900Total
      current liabilities
                
                
                58,897
                
                
                
                67,965Deferred
      income taxes
                
                
                23,848
                
                
                
                18,131Derivative
      valuation liability
                
                
                3,458
                
                
                
                3,771Capital
      lease obligations, less current portion
                
                
                2,983
                
                
                
                3,356Long-term
      debt, less current portion
                
                
                81,678
                
                
                
                107,600Total
      Liabilities
                
                
                170,864
                
                
                
                200,823Shareholders'
      Equity:Common
      Stock, $.0001 par value; 75,000 shares authorized; shares issued October
      3, 2009—35,806; January 3, 2009—35,801
                
                
                4
                
                
                
                4Additional
      paid-in capital
                
                
                278,031
                
                
                
                275,890Accumulated
      deficit
                
                
                (277
                )
                
                
                (21,507
                )Accumulated
      other comprehensive income (loss)
                
                
                3,100
                
                
                
                (1,973
                )Total
      Shareholders' Equity
                
                
                280,858
                
                
                
                252,414Total
      Liabilities and Shareholders' Equity
                
                $
                451,722
                
                
                $
                453,237





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
      3,
                                  
                                  
                                  October
      4,
                                  
                                  
                                  October
      3,
                                  
                                  
                                  October
      4,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008Revenue
                                  
                                  $
                                  87,164
                                  
                                  
                                  $
                                  112,095
                                  
                                  
                                  $
                                  289,540
                                  
                                  
                                  $
                                  323,744Cost
      of Revenue
                                  
                                  
                                  65,917
                                  
                                  
                                  
                                  86,445
                                  
                                  
                                  
                                  216,964
                                  
                                  
                                  
                                  246,733Gross
      Profit
                                  
                                  
                                  21,247
                                  
                                  
                                  
                                  25,650
                                  
                                  
                                  
                                  72,576
                                  
                                  
                                  
                                  77,011Selling,
      general and administrative expenses
                                  
                                  
                                  10,813
                                  
                                  
                                  
                                  15,165
                                  
                                  
                                  
                                  37,395
                                  
                                  
                                  
                                  44,474Operating
      Income
                                  
                                  
                                  10,434
                                  
                                  
                                  
                                  10,485
                                  
                                  
                                  
                                  35,181
                                  
                                  
                                  
                                  32,537Other
      (income)/expense:Interest
      expense
                                  
                                  
                                  1,666
                                  
                                  
                                  
                                  2,683
                                  
                                  
                                  
                                  5,050
                                  
                                  
                                  
                                  8,300Derivatives
      valuation gain
                                  
                                  
                                  (178
                                  )
                                  
                                  
                                  (972
                                  )
                                  
                                  
                                  (746
                                  )
                                  
                                  
                                  (1,041
                                  )Other
                                  
                                  
                                  687
                                  
                                  
                                  
                                  3,079
                                  
                                  
                                  
                                  379
                                  
                                  
                                  
                                  2,581Income
      before income taxes
                                  
                                  
                                  8,259
                                  
                                  
                                  
                                  5,695
                                  
                                  
                                  
                                  30,498
                                  
                                  
                                  
                                  22,697Income
      tax expense
                                  
                                  
                                  2,851
                                  
                                  
                                  
                                  3,162
                                  
                                  
                                  
                                  9,268
                                  
                                  
                                  
                                  9,995Net
      income
                                  
                                  $
                                  5,408
                                  
                                  
                                  $
                                  2,533
                                  
                                  
                                  $
                                  21,230
                                  
                                  
                                  $
                                  12,702Net
      income per share:Basic
                                  
                                  $
                                  0.15
                                  
                                  
                                  $
                                  0.07
                                  
                                  
                                  $
                                  0.60
                                  
                                  
                                  $
                                  0.36Diluted
                                  
                                  $
                                  0.15
                                  
                                  
                                  $
                                  0.07
                                  
                                  
                                  $
                                  0.59
                                  
                                  
                                  $
                                  0.36Weighted
      average common shares and equivalent shares outstanding:Basic
                                  
                                  
                                  35,326
                                  
                                  
                                  
                                  35,174
                                  
                                  
                                  
                                  35,301
                                  
                                  
                                  
                                  35,161Diluted
                                  
                                  
                                  35,620
                                  
                                  
                                  
                                  35,402
                                  
                                  
                                  
                                  35,498
                                  
                                  
                                  
                                  35,354





See
accompanying notes to condensed consolidated financial statements.





5





Symmetry
Medical Inc.


Condensed
Consolidated Statements of Cash Flows


(in
thousands; unaudited)





Nine
      Months EndedOctober
      3,
                                    
                                    
                                    October
      4,2009
                                    
                                    
                                    2008Operating
      activitiesNet
      income
                                    
                                    $
                                    21,230
                                    
                                    
                                    $
                                    12,702Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                                    
                                    
                                    14,281
                                    
                                    
                                    
                                    14,151Amortization
                                    
                                    
                                    2,203
                                    
                                    
                                    
                                    2,207Net
      (gain) loss on sale of assets
                                    
                                    
                                    139
                                    
                                    
                                    
                                    (460
                                    )Deferred
      income tax provision
                                    
                                    
                                    4,491
                                    
                                    
                                    
                                    (1,074
                                    )Excess
      tax benefit from stock-based compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (273
                                    )Stock-based
      compensation
                                    
                                    
                                    2,035
                                    
                                    
                                    
                                    1,743Derivative
      valuation gain
                                    
                                    
                                    (746
                                    )
                                    
                                    
                                    (895
                                    )Foreign
      currency transaction losses
                                    
                                    
                                    204
                                    
                                    
                                    
                                    4,483Change
      in operating assets and liabilities:Accounts
      receivable
                                    
                                    
                                    11,109
                                    
                                    
                                    
                                    (18,035
                                    )Other
      assets
                                    
                                    
                                    1,419
                                    
                                    
                                    
                                    (480
                                    )Inventories
                                    
                                    
                                    (3,434
                                    )
                                    
                                    
                                    (11,906
                                    )Current
      income taxes
                                    
                                    
                                    1,715
                                    
                                    
                                    
                                    4,448Accounts
      payable
                                    
                                    
                                    (8,511
                                    )
                                    
                                    
                                    690Accrued
      expenses and other
                                    
                                    
                                    (6,197
                                    )
                                    
                                    
                                    (2,355
                                    )Net
      cash provided by operating activities
                                    
                                    
                                    39,938
                                    
                                    
                                    
                                    4,946Investing
      activitiesPurchases
      of property and equipment
                                    
                                    
                                    (13,453
                                    )
                                    
                                    
                                    (16,813
                                    )Proceeds
      from the sale of fixed assets
                                    
                                    
                                    67
                                    
                                    
                                    
                                    1,215Acquisitions,
      net of cash received
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (46,546
                                    )Net
      cash used in investing activities
                                    
                                    
                                    (13,386
                                    )
                                    
                                    
                                    (62,144
                                    )Financing
      activitiesProceeds
      from bank revolver
                                    
                                    
                                    76,005
                                    
                                    
                                    
                                    89,049Payments
      on bank revolver
                                    
                                    
                                    (83,943
                                    )
                                    
                                    
                                    (73,226
                                    )Issuance
      of long-term debt
                                    
                                    
                                    -
                                    
                                    
                                    
                                    60,000Payments
      on long-term debt and capital lease obligations
                                    
                                    
                                    (13,586
                                    )
                                    
                                    
                                    (12,923
                                    )Proceeds
      from the issuance of common stock
                                    
                                    
                                    106
                                    
                                    
                                    
                                    355Excess
      tax benefit from stock-based compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    273Net
      cash provided by (used in) financing activities
                                    
                                    
                                    (21,418
                                    )
                                    
                                    
                                    63,528Effect
      of exchange rate changes on cash
                                    
                                    
                                    1,107
                                    
                                    
                                    
                                    (628
                                    )Net
      increase in cash and cash equivalents
                                    
                                    
                                    6,241
                                    
                                    
                                    
                                    5,702Cash
      and cash equivalents at beginning of period
                                    
                                    
                                    10,191
                                    
                                    
                                    
                                    12,089Cash
      and cash equivalents at end of period
                                    
                                    $
                                    16,432
                                    
                                    
                                    $
                                    17,791Supplemental
      disclosures:Cash
      paid for interest
                                    
                                    $
                                    5,475
                                    
                                    
                                    $
                                    8,730Cash
      paid for income taxes
                                    
                                    $
                                    3,022
                                    
                                    
                                    $
                                    6,354Assets
      acquired under capital leases
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    639





See
accompanying notes to condensed consolidated financial
statements.


6





Symmetry
Medical Inc.


Notes
to Condensed Consolidated Financial Statements


(Unaudited)


(In
Thousands, Except Per Share Data)





1.
Basis of Presentation





The
condensed consolidated financial statements include the accounts of Symmetry
Medical Inc. and its wholly-owned subsidiaries (collectively referred to as
the Corporation), Symmetry Medical USA Inc., Jet Engineering, Inc.,
Ultrexx, Inc., Riley Medical Inc., Symmetry Medical Switzerland SA
(formerly known as Riley Medical Europe, SA), Symmetry Medical Everest LLC,
Everest Metal International Limited, Symmetry Medical Cheltenham Limited,
Symmetry Medical PolyVac, SAS, Thornton Precision Components Limited, Symmetry
Medical Malaysia SDN, Clamonta Limited, Specialty Surgical Instrumentation,
Inc., UCA, LLC, TNCO, Inc. and Symmetry Medical New Bedford, LLC.  The
Corporation is a global supplier of integrated products consisting primarily of
surgical implants, instruments and cases to orthopedic and other medical device
companies.





The
condensed consolidated financial statements of the Corporation have been
prepared without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the accompanying
condensed consolidated financial statements contain all adjustments of a normal
recurring nature considered necessary to present fairly the consolidated
financial position of the Corporation, its results of operations and cash flows.
The Corporation’s results are subject to seasonal fluctuations. Interim results
are not necessarily indicative of results for a full year. The condensed
consolidated financial statements included herein should be read in conjunction
with the fiscal year 2008 consolidated financial statements and the notes
thereto included in the Corporation’s Annual Report on Form 10-K for fiscal
year 2008.





The
Corporation’s fiscal year is the 52 or 53 week period ending on the Saturday
closest to December 31. Fiscal year 2009 is a 52 week year ending January
2, 2010.  The Corporation’s interim quarters for 2009 are 13 weeks
long and quarter-end dates have been set as April 4, 2009, July 4, 2009 and
October 3, 2009. Fiscal year 2008 was a 53 week year (ending January 3, 2009).
The Corporation’s first two interim quarters for 2008 were 13 weeks long ending
the Saturday closest to March 31 and June 30 and the third quarter was 14 weeks
long, ending Saturday, October 4, 2008. References in these condensed
consolidated financial statements to the three months ended refer to these
financial periods, respectively.





2.
Inventories





Inventories
consist of the following:





October
      3,
                  
                  
                  January
      3,2009
                  
                  
                  2009(unaudited)Raw
      material and supplies
                  
                  $
                  15,733
                  
                  
                  $
                  12,502Work-in-process
                  
                  
                  29,775
                  
                  
                  
                  31,420Finished
      goods
                  
                  
                  20,189
                  
                  
                  
                  17,189$
                  65,697
                  
                  
                  $
                  61,111





3.
Property and Equipment





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





October
      3,
                    
                    
                    January
      3,2009
                    
                    
                    2009(unaudited)Land
                    
                    $
                    6,863
                    
                    
                    $
                    6,473Buildings
      and improvements (20 to 40 years)
                    
                    
                    41,817
                    
                    
                    
                    40,183Machinery
      and equipment (5 to 15 years)
                    
                    
                    134,399
                    
                    
                    
                    127,716Office
      equipment (3 to 5 years)
                    
                    
                    12,561
                    
                    
                    
                    10,859Construction-in-progress
                    
                    
                    7,596
                    
                    
                    
                    4,227203,236
                    
                    
                    
                    189,458Less
      accumulated depreciation
                    
                    
                    (86,303
                    )
                    
                    
                    (74,413
                    )$
                    116,933
                    
                    
                    $
                    115,045


7





4.
Intangible Assets





Intangible
assets were acquired in connection with our business acquisitions. As of October
3, 2009, 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
                              
                              $
                              2,333
                              
                              
                              $
                              (943
                              )
                              
                              $
                              1,390Acquired
      customers
                              
                              18
      years
                              
                              
                              42,554
                              
                              
                              
                              (8,522
                              )
                              
                              
                              34,032Non-compete
      agreements
                              
                              5
      years
                              
                              
                              686
                              
                              
                              
                              (351
                              )
                              
                              
                              335Intangible
      assets subject to amortization
                              
                              17
      years
                              
                              
                              45,573
                              
                              
                              
                              (9,816
                              )
                              
                              
                              35,757Proprietary
      processes
                              
                              Indefinite
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              3,553Trademarks
                              
                              Indefinite
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              4,077Indefinite-lived
      intangible assets, other than goodwill
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              7,630Total
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              43,387





As of
January 3, 2009, 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
                    
                    $
                    2,295
                    
                    
                    $
                    (713
                    )
                    
                    $
                    1,582Acquired
      customers
                    
                    18 years
                    
                    
                    42,330
                    
                    
                    
                    (6,596
                    )
                    
                    
                    35,734Non-compete
      agreements
                    
                    5 years
                    
                    
                    559
                    
                    
                    
                    (243
                    )
                    
                    
                    316Intangible
      assets subject to amortization
                    
                    17 years
                    
                    
                    45,184
                    
                    
                    
                    (7,552
                    )
                    
                    
                    37,632Proprietary
      processes
                    
                    Indefinite
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,428Trademarks
                    
                    Indefinite
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,979Indefinite-lived
      intangible assets, other than goodwill
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,407Total
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    45,039





5.
New Accounting Pronouncements





Business
Combinations.The Corporation adopted the provisions of the
FASB Statement on Business Combinations on January 4, 2009.  This
Statement amends the previously issued Statement on Business Combinations and
provides revised guidance for recognizing and measuring identifiable assets and
goodwill acquired, liabilities assumed, and any non-controlling interest in the
acquiree. It also provides disclosure requirements to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The adoption of the Statement had an immaterial impact on
the Corporation’s financial position and results of
operations.





Disclosures about Derivative
Instruments and Hedging Activities. The Corporation adopted the
provisions of the FASB Statement on disclosures relating to derivative
instruments and hedging on January 4, 2009.   This Statement
requires entities to provide enhanced disclosures about how and why an entity
uses derivative instruments, how derivative instruments and related hedged items
are accounted, and how derivative instruments and related hedged items affect an
entity’s financial position, results of operations, and cash
flows.  The adoption of this Statement had no impact on the
Corporation’s financial position or results of operations.  These
disclosures are included in Note 11.





Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities.The Corporation adopted the provisions of the FASB
Staff Position (FSP) relating to determining whether instruments granted in
share-based payment transactions are participating securities on January 4,
2009, with retrospective application.   This FSP was issued to clarify
that unvested share-based payment awards with a right to receive non-forfeitable
dividends are participating securities.  This FSP also provides
guidance on how to allocate earnings to participating securities and compute
basic earnings per share (EPS) using the two-class method.  The
adoption of this standard did not have a material impact on our results of
operations.


8





5.
New Accounting Pronouncements (Continued)





Subsequent
Events.On July 4, 2009, the Corporation adopted the
provisions of the FASB Statement on subsequent events providing additional
disclosure requirements for material events occurring subsequent to the balance
sheet date and prior to the issuance of the financial
statements.  This Statement also modifies the definition of subsequent
events and defines the two types of subsequent events as recognized and
non-recognized.  The Corporation issued its financial statements by
filing with the Securities Exchange Commission on November 9, 2009, for the
quarter ended October 3, 2009. The Corporation evaluated subsequent events
up through the time of the filing.





Accounting Standards
Codification.  On October 3, 2009, the Corporation adopted
provisions of the FASB Statement on accounting standards
codification.  The Statement establishes the Codification as the
single official source of authoritative United States accounting and reporting
standards for all non-governmental entities (other than guidance issued by the
Securities Exchange Commission (the “SEC”)) and changes the referencing and
organization on financial standards.  As Codification is not intended
to change the existing accounting guidance, its adoption has not had an impact
on the Corporation’s financial position, results of operations or cash
flows.





6.
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 have not
been disclosed separately as it does not meet the quantitative disclosure
requirements.





The
Corporation is a multi-national Corporation with operations in the United
States, United Kingdom, France, Ireland and Malaysia. As a result, the
Corporation's financial results can be impacted by currency exchange rates in
the foreign markets in which the Corporation sells its products. Revenues are
attributed to geographic locations based on the location to which we ship our
products.





Revenue
from External Customers:





Three
      Months Ended
                  
                  
                  Nine
      Months EndedOctober
      3,
                  
                  
                  October
      4,
                  
                  
                  October
      3,
                  
                  
                  October
      4,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008(unaudited)
                  
                  
                  (unaudited)United
      States
                  
                  $
                  63,207
                  
                  
                  $
                  81,208
                  
                  
                  $
                  214,527
                  
                  
                  $
                  226,388United
      Kingdom
                  
                  
                  7,313
                  
                  
                  
                  14,330
                  
                  
                  
                  22,674
                  
                  
                  
                  45,633Ireland
                  
                  
                  9,234
                  
                  
                  
                  7,597
                  
                  
                  
                  28,532
                  
                  
                  
                  24,569Other
      foreign countries
                  
                  
                  7,410
                  
                  
                  
                  8,960
                  
                  
                  
                  23,807
                  
                  
                  
                  27,154Total
      net revenues
                  
                  $
                  87,164
                  
                  
                  $
                  112,095
                  
                  
                  $
                  289,540
                  
                  
                  $
                  323,744





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 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.





Three
months ended October 4, 2008 – Two customers represented approximately 31.7% and
12.6% of revenue, respectively.





Nine
months ended October 4, 2008 – Two customers represented approximately 32.1% and
11.3% of revenue, respectively.


9





6.
Segment Reporting (Continued)





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
      3,
                  
                  
                  October
      4,
                  
                  
                  October
      3,
                  
                  
                  October
      4,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008(unaudited)
                  
                  
                  (unaudited)Instruments
                  
                  $
                  41,327
                  
                  
                  $
                  48,687
                  
                  
                  $
                  134,679
                  
                  
                  $
                  133,075Implants
                  
                  
                  24,237
                  
                  
                  
                  31,558
                  
                  
                  
                  83,255
                  
                  
                  
                  92,992Cases
                  
                  
                  16,353
                  
                  
                  
                  22,971
                  
                  
                  
                  53,725
                  
                  
                  
                  67,916Other
                  
                  
                  5,247
                  
                  
                  
                  8,879
                  
                  
                  
                  17,881
                  
                  
                  
                  29,761Total
      net revenues
                  
                  $
                  87,164
                  
                  
                  $
                  112,095
                  
                  
                  $
                  289,540
                  
                  
                  $
                  323,744





7.
Net Income Per Share





The
following table sets forth the computation of earnings per share.





Three
      Months Ended
                  
                  
                  Nine
      Months EndedOctober
      3,
                  
                  
                  October
      4,
                  
                  
                  October
      3,
                  
                  
                  October
      4,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008(unaudited)
                  
                  
                  (unaudited)Numerator:Net
      income
                  
                  $
                  5,408
                  
                  
                  $
                  2,553
                  
                  
                  $
                  21,230
                  
                  
                  $
                  12,702Denominator:Weighted-average
      shares outstanding:Basic
                  
                  
                  35,326
                  
                  
                  
                  35,174
                  
                  
                  
                  35,301
                  
                  
                  
                  35,161Effect
      of dilutive stock options, restricted stock and stock
    warrants
                  
                  
                  294
                  
                  
                  
                  228
                  
                  
                  
                  197
                  
                  
                  
                  193Diluted
                  
                  
                  35,620
                  
                  
                  
                  35,402
                  
                  
                  
                  35,498
                  
                  
                  
                  35,354Net
      income per share:Basic
                  
                  $
                  0.15
                  
                  
                  $
                  0.07
                  
                  
                  $
                  0.60
                  
                  
                  $
                  0.36Diluted
                  
                  $
                  0.15
                  
                  
                  $
                  0.07
                  
                  
                  $
                  0.59
                  
                  
                  $
                  0.36





The
diluted weighted average share calculations do not include performance based
restricted stock awarded July 1, 2009, totaling 119,925 shares because the
measurement period is not complete.





8.
Commitments and Contingencies





Legal &
Environmental.The Corporation is involved, from time to time,
in various contractual, product liability, patent (or intellectual property) and
other claims and disputes incidental to its business. Currently, there is no
environmental or other litigation pending or, to the knowledge of the
Corporation, threatened, that the Corporation expects to have a material adverse
effect on its financial condition, results of operations or liquidity. While
litigation is subject to uncertainties and the outcome of litigated matters is
not predictable with assurance, the Corporation currently believes that the
disposition of all pending or, to the knowledge of the Corporation, threatened
claims and disputes, individually or in the aggregate, should not have a
material adverse effect on the Corporation’s consolidated financial condition,
results of operations or liquidity.





Unconditional Purchase
Obligations.The Corporation has contracts to purchase minimum
quantities of plastic, cobalt chrome and titanium through December
2011.  Based on contractual pricing at October 3, 2009, the minimum
purchase obligations totaled $34,141.  Purchases under 2009 contracts
totaled approximately $13,936 as of October 3, 2009.  These purchases
are not in excess of our forecasted requirements.


10





8.
Commitments and Contingencies (Continued)





Other.Following
the discovery of certain accounting irregularities at our Sheffield, UK
operating unit (as further described in this Form 10-Q at Part II, Item 1), the
Audit Committee self-reported the matter to the staff of the Securities and
Exchange Commission (SEC) in October 2007. Thereafter, the SEC commenced an
informal inquiry into this matter. The Corporation has fully cooperated with the
SEC in its investigation. At this time, the Corporation is unable to predict the
timing of the ultimate resolution of this investigation or the impact
thereof.





9.
Comprehensive Income





Comprehensive
income is comprised of net income, gains (losses) resulting from currency
translations of foreign entities and unrealized losses on our derivative
designated as a hedge. Comprehensive income consists of the
following:





Three
      Months Ended
                  
                  
                  Nine
      Months EndedOctober
      3,
                  
                  
                  October
      4,
                  
                  
                  October
      3,
                  
                  
                  October
      4,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008(unaudited)
                  
                  
                  (unaudited)Net
      Income
                  
                  $
                  5,408
                  
                  
                  $
                  2,533
                  
                  
                  $
                  21,230
                  
                  
                  $
                  12,702Foreign
      currency translation adjustments
                  
                  
                  320
                  
                  
                  $
                  (5,644
                  )
                  
                  
                  5,338
                  
                  
                  $
                  (3,164
                  )Derivative,
      net of tax benefit (1)
                  
                  
                  (160
                  )
                  
                  
                  -
                  
                  
                  
                  (260
                  )
                  
                  
                  -Comprehensive
      income (loss)
                  
                  $
                  5,568
                  
                  
                  $
                  (3,111
                  )
                  
                  $
                  26,308
                  
                  
                  $
                  9,538





(1)
            Derivative
      losses are reported net of income tax benefits of $106 and $173 for the
      three and nine month periods ended October 3, 2009,
      respectively.





10.
Acquisition





Results
of the following acquisition are included in the Statement of Operations from
the date of acquisition.





On
January 25, 2008, the Corporation acquired substantially all the assets and real
property of DePuy Orthopaedics, Inc.’s (“DePuy”) New Bedford, Massachusetts
instrument manufacturing facility (“New Bedford”) for $45,246 in cash. This
facility manufactures orthopedic instruments as well as general surgical
instruments and small implants.





The
aggregate purchase price was allocated to the opening balance sheet as
follows:





Current
      assets
                  
                  $
                  7,819PP&E
                  
                  
                  22,101Acquired
      customers (amortized over 15 years)
                  
                  
                  5,130Goodwill
                  
                  
                  10,196Purchase
      price, net
                  
                  $
                  45,246





11.
Derivatives





The Corporation
utilizes derivative instruments to minimize the volatility of cash flows and
income statement impacts associated with interest rate payments on its variable
rate debt.  The Corporation recognizes all derivative instruments as
either assets or liabilities at fair value on the consolidated balance sheets.
The Corporation utilizes third party valuations to assist in the determination
of the fair value of these derivatives. The Corporation considers its derivative
instrument valuations to be Level 2 fair value measurements under the provision
of the FASB Statement on fair value measurements (See Note 12).





To the
extent a derivative instrument is designated effective as a cash flow hedge of
an exposure to changes in the fair value of a future transaction, the change in
fair value of the derivative is deferred in accumulated other comprehensive
loss, a component of shareholders’ equity in the condensed consolidated balance
sheets, until the underlying transaction hedged is recognized in the 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 consolidated statements
of operations upon payment of interest.




11




11.
Derivatives (Continued)





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 ($433) at October 3, 2009, is
designated as a cash flow hedge of the future payment of variable rate interest
with three-month LIBOR fixed at 1.34% per annum in 2009, 2010 and 2011,
respectively.





In 2006,
the Corporation entered into a forward swap contract to manage interest rate
risk related to a portion of its then existing variable rate senior secured
first lien term loan. This swap contract, which had a fair value of ($3,025) at
October 3, 2009, was not designated as a cash flow hedge of the future variable
rate payment of interest.  The entire change in the fair value of this
interest rate swap is recorded to derivative valuation gain in the condensed
consolidated statements of operations. For the nine months ended October 3, 2009
and October 4, 2008, the Corporation recorded a gain of $746 and a loss of $371,
respectively.





12.
Fair Value of Financial Instruments





Financial
instruments consist of cash and cash equivalents, accounts receivable, and
long-term debt, including interest-rate swap agreements.  The carrying
value of these financial instruments approximates fair value.





As of
October 3, 2009 and January 3, 2009, the Corporation held interest rate
derivative instruments that are required to be measured at fair value on a
recurring basis. 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 3, 2009 and
January 3, 2009 for assets and liabilities measured at fair value on a recurring
basis.





October
      3, 2009
                                                          
                                                          
                                                          January
      3, 2009Fair
      Value Measurements
                                                          
                                                          
                                                          Fair
      Value MeasurementsLevel
      1
                                                          
                                                          
                                                          Level
      2
                                                          
                                                          
                                                          Level
      3
                                                          
                                                          
                                                          Total
                                                          
                                                          
                                                          Level
      1
                                                          
                                                          
                                                          Level
      2
                                                          
                                                          
                                                          Level
      3
                                                          
                                                          
                                                          TotalLiabilitiesInterest
      rate swaps
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          (3,458
                                                          )
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          (3,458
                                                          )
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          (3,771
                                                          )
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          (3,771
                                                          )$
                                                          -
                                                          
                                                          
                                                          $
                                                          (3,458
                                                          )
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          (3,458
                                                          )
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          (3,771
                                                          )
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          (3,771
                                                          )





13. Income Taxes





The
provision for income taxes differs from that computed at the Federal statutory
rate of 34% and 35% in 2009 and 2008, respectively, as follows:





Quarter
      Ended
                    
                    
                    Nine
      Months EndedOctober
      3,
                    
                    
                    October
      4,
                    
                    
                    October
      3,
                    
                    
                    October
      4,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Tax
      at Federal statutory rate
                    
                    $
                    2,891
                    
                    
                    $
                    1,993
                    
                    
                    $
                    10,674
                    
                    
                    $
                    7,944State
      income taxes
                    
                    
                    266
                    
                    
                    
                    403
                    
                    
                    
                    1,026
                    
                    
                    
                    1,018State
      tax credits
                    
                    
                    (38
                    )
                    
                    
                    (42
                    )
                    
                    
                    (83
                    )
                    
                    
                    (103
                    )Foreign
      income taxes
                    
                    
                    (457
                    )
                    
                    
                    265
                    
                    
                    
                    (1,983
                    )
                    
                    
                    (41
                    )Qualified
      production activities deduction
                    
                    
                    104
                    
                    
                    
                    (167
                    )
                    
                    
                    (94
                    )
                    
                    
                    (426
                    )Research
      and development credits—current year
                    
                    
                    (89
                    )
                    
                    
                    (362
                    )
                    
                    
                    (195
                    )
                    
                    
                    (414
                    )Valuation
      allowance
                    
                    
                    -
                    
                    
                    
                    1,064
                    
                    
                    
                    -
                    
                    
                    
                    1,146Reserve
      for uncertain tax positions
                    
                    
                    191
                    
                    
                    
                    16
                    
                    
                    
                    (118
                    )
                    
                    
                    690Other
                    
                    
                    (17
                    )
                    
                    
                    (8
                    )
                    
                    
                    41
                    
                    
                    
                    181$
                    2,851
                    
                    
                    $
                    3,162
                    
                    
                    $
                    9,268
                    
                    
                    $
                    9,995





The
Corporation’s policy with respect to interest and penalties associated with
reserves for uncertain tax positions is to classify such interest and penalties
in income tax expense in the Statements of Operations. As of October 3, 2009,
the total amount of unrecognized income tax benefits computed under FIN 48
was approximately $6,423, all of which, if recognized, would impact the
effective income tax rate of the Corporation. As of October 3, 2009, the
Corporation had recorded a total of $127 of accrued interest and penalties
related to uncertain tax positions. The Corporation foresees possible changes in
its reserves for uncertain income tax positions as reasonably possible during
the next 12 months that could result in an increase or decrease in the
reserves of $149 or $575, respectively, due to R&D credits. As of October 3,
2009, the Corporation is subject to unexpired statutes of limitation for U.S.
federal income taxes for the year 2008. The Corporation is also subject to
unexpired statutes of limitation for various states including most significantly
Indiana, Michigan, and New Hampshire generally for the years
2001-2008.


12





13.
Income Taxes (Continued)





A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:





Balance
      at January 3, 2009
                    
                    $
                    8,695Additions
      based on tax positions—current year
                    
                    
                    374Additions
      for tax positions—prior years
                    
                    
                    -Settlements
                    
                    
                    (2,646
                    )Balance
      at October 3, 2009
                    
                    $
                    6,423


13





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 the 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 that this
capability will continue to 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 2009, our revenue decreased $24.9 million, or 22.2%, compared
to the third quarter 2008. This reduction was driven largely by reduced customer
demand across all product lines as well as an unfavorable foreign currency
exchange rate impact of $2.7 million.   We are experiencing very
challenging business conditions due to the overall economic environment which
have resulted in reduced demand of 23.8% during the third quarter from our
combined five largest OEM customers as they continue to work down inventory
levels and the timing of their various product launches.  We cannot be
certain as to the timing of when this downward trend will reverse.





Despite
our current demand, we are optimistic about the future as the larger OEMs are
increasingly focused on improving their supply chains.  This will
result in fewer suppliers who in turn will be expected to provide a wider range
of services coupled with high quality and reduced overall costs.  We
believe that we are well positioned to benefit from increased OEM
outsourcing.





Recently
we have been engaged in more active and positive discussions with our customers
to provide enhanced services.  While these changes do not happen
overnight, we continue to believe that we are in a favorable position to emerge
as a supplier of choice for our major customers.  We believe our
global capacity and competitive strengths will benefit us when the order volume
and large project launches return, particularly within the dynamic and aging US
population.





We have
been focused on cost reduction and cash conservation for some time and are
confident that further cost savings can be achieved. We are reviewing all
aspects of our operations to achieve these further cost reductions.





Over the
last four years, we have completed six acquisitions which have enabled us to
assemble and offer a comprehensive line of implants, surgical instruments and
cases for orthopedic device manufacturers and other medical markets on a global
basis, as well as specialized parts into the aerospace industry.





Our focus
remains on being a leader in our core orthopedic business, while capitalizing on
our leadership to extend our Total Solutions® approach into other medical
markets.  We continue to see a favorable customer response to our offerings
as more and more of our customers are impacted by an increased quality and
regulatory requirements.  Many of our customers are reducing their
number of suppliers and consolidating purchases with larger strategic providers.
We are able to leverage 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.





Third
Quarter Results of Operations





Revenue.   Revenue
for the three month period ended October 3, 2009 decreased $24.9 million, or
22.2%, to $87.2 million from $112.1 million for the comparable 2008
period.  Revenue for each of our principal product categories in these
periods was as follows:




Product Category
                    
                    Three Months EndedOctober
      3,
                    
                    
                    October
      4,2009
                    
                    
                    2008(unaudited)Instruments
                    
                    $
                    41.3
                    
                    
                    $
                    48.7Implants
                    
                    
                    24.2
                    
                    
                    
                    31.5Cases
                    
                    
                    16.4
                    
                    
                    
                    23.0Other
                    
                    
                    5.3
                    
                    
                    
                    8.9Total
                    
                    $
                    87.2
                    
                    
                    $
                    112.1




14


The $24.9
million decrease in revenue resulted from challenging business conditions due to
the overall economic environment that has resulted in reduced demand of 23.8%
for our five largest OEM customers as they work down inventory levels and their
timing of various product launches.  We also experienced unfavorable
foreign currency exchange rate fluctuations of $2.7
million.  Instrument revenue decreased $7.4 million. This decrease was
driven primarily by lower demand from our major OEM customers due to the timing
of their various product launch activity and worked down their inventory
levels.  Foreign currency exchange rate fluctuations compounded the
decrease in instrument revenues as they had an unfavorable impact of $0.4
million. Implant revenue decreased $7.3 million primarily driven by our major
OEM customers working down inventory and unfavorable foreign currency exchange
rate fluctuations of $1.4 million. Case revenue decreased $6.6 million due to
lower demand from our major OEM customers associated with product launch
activity timing and worked down their inventory levels as well as lower customer
demand from our non-orthopedic medical customers as they react to the current
economic environment.  Case revenue also experienced a $0.3 million
reduction driven by unfavorable foreign currency exchange rate
fluctuations.  Other product revenue decreased $3.6 million driven
primarily by a reduction of customer demand due to our largest customer in
the aerospace industry reacting to deteriorating market conditions in that
sector, in addition to unfavorable foreign currency exchange rate fluctuations
of $0.6 million.





Gross
Profit.  Gross profit for the three month period ended October
3, 2009 decreased $4.4 million, or 17.2%, to $21.2 million from $25.7 million
for the comparable 2008 period.  This decrease was primarily due to the
22.2% decline in revenue.  Despite experiencing declining revenues,
the Corporation increased the gross margin percentage to 24.4% in the third
quarter of 2009 from 22.9% in the comparable 2008 period.  This improvement
was driven primarily by aggressive actions to manage labor and other costs at
all facilities and improved operational performance at our Sheffield, UK
operating unit due to the favorable impacts of our headcount reduction
initiatives, improved manufacturing processes and reduced material costs from
the renegotiation of a key supply agreement.





Selling, General and Administrative
Expenses.  For the three month period ended October 3, 2009,
selling, general and administrative expenses (“SG&A”) were $10.8 million
compared with the three month period ended October 4, 2008 of $15.2 million. The
improvement reflects a decrease in employee compensation costs, including
headcount reductions, taken in response to offset the lower revenue levels and
our continued cost control efforts.  Additionally, performance based
compensation and non-cash restricted stock compensation expense decreased
$1.6 million due to the decline in our financial
performance.  The decrease also resulted from professional fees and
expenses incurred in the third quarter 2008 of $0.9 million from the review of
accounting irregularities at our Sheffield, UK operating
unit.




Other (Income)
Expense.    Interest expense for the three month
period ended October 3, 2009 decreased $1.0 million, or 37.9%, to $1.7
million from $2.7 million for the comparable period in 2008. This decrease
reflects the reduction in the interest rate on our debt due to our improved
financial ratios, as well as the general decline in the interest rate market in
the third quarter 2009 as compared to 2008.  Additionally, aggregate
outstanding indebtedness has decreased $44.8 million, or 28.9% as compared to
October 4, 2008.  The net derivatives gain in third quarter 2009
consists of a gain on interest rate swap valuation of $0.2 million related to
our interest rate swap that has not been designated as a hedge under the
provisions of the applicable FASB statement as compared to a loss of $0.3
million for the comparable period in 2008 that was more than offset by a
gain of $1.3 million on foreign currency forwards. The interest rate swaps are
used to convert our variable rate long-term debt to fixed rates. During 2008,
the Corporation held foreign currency forwards to mitigate fluctuations in
foreign currency on the statement of operations. A gain on the foreign currency
valuation of $1.3 million was recorded in derivative valuation gain in the third
quarter 2008 and was partially offset $3.3 million of losses on foreign currency
fluctuations that were included within other expense.





Provision for Income
Taxes. Our effective tax rate was 34.5% for the three month period
ended October 3, 2009 as compared to 55.5% for the three month period ended
October 4, 2008. Provision for income taxes decreased by $0.3 million, or 9.8%,
to $2.9 million for the three month period ended October 3, 2009 from $3.2
million for the comparable 2008 period.  The third quarter 2008 rate
differed from the US Federal statutory rate of 35% primarily due to a valuation
reserve for uncertain tax positions related to our Sheffield, UK
unit.





Nine
Months Results of Operations





Revenue.   Revenue
for the nine month period ended October 3, 2009 decreased $34.2 million, or
10.6%, to $289.5 million from $323.7 million for the comparable 2008
period.  Revenue for each of our principal product categories in these
periods was as follows:





Product Category
                        
                        Nine Months EndedOctober
      3,
                        
                        
                        October
      4,2009
                        
                        
                        2008(unaudited)Instruments
                        
                        $
                        134.7
                        
                        
                        $
                        133.1Implants
                        
                        
                        83.2
                        
                        
                        
                        93.0Cases
                        
                        
                        53.7
                        
                        
                        
                        67.9Other
                        
                        
                        17.9
                        
                        
                        
                        29.8Total
                        
                        $
                        289.5
                        
                        
                        $
                        323.7




15


The $34.2
million decrease in revenue primarily resulted from reduced demand of 5.1% from
the five largest OEM customers as they work down inventory levels and their
timing of various product launches as well as continued lower demand from other
customers as they react to the current economic environment.  Revenue
also decreased due to unfavorable foreign currency exchange rate fluctuations of
$15.9 million. Instrument revenue increased $1.6 million driven by an
increase in customer demand of $1.4 million due to $2.2 million from our New
Bedford acquisition which was completed at the end of January 2008. Foreign
currency exchange rate fluctuations partially offset the increases in instrument
revenues as they had an unfavorable impact of $2.0 million. Implant revenue
decreased $9.8 million driven by unfavorable foreign currency exchange rate
fluctuations of $7.9 million and decreased customer demand of $2.4 million,
partially offset by the additional sales from our New Bedford acquisition of
$0.5 million. Case revenue decreased $14.2 million due to a $12.2 million
decrease in customer demand primarily from our non-orthopedic medical customers
as they react to the current economic environment as well as lower orthopedic
customer demand in the third quarter of 2009 as they used excess inventory and
due to the timing of their various product.  Case revenue also
experienced $2.0 million of unfavorable foreign currency exchange rate
fluctuations.  Other product revenue decreased $11.9
million driven by both a reduction in customer demand of $7.9 million
due to our largest customer in the aerospace industry reacting to deteriorating
market conditions in that sector and unfavorable foreign currency exchange rate
fluctuations of $4.0 million.





Gross
Profit.  Gross profit for the nine month period ended October
3, 2009 decreased $4.4 million, or 5.8%, to $72.6 million from $77.0 million for
the comparable 2008 period primarily due to the decline in revenue of
10.6%.  Despite experiencing declining revenues, the Corporation was able
to increase the gross margin percentage to 25.1% in 2009 from 23.8% in the
comparable 2008 period.  This improvement was primarily due to
aggressive actions to manage labor and other costs at all facilities and
improved operational performance at our Sheffield, UK operating unit driven by
the favorable impacts of our headcount reduction initiatives, improved
manufacturing processes and reduced material costs from the renegotiation of a
key supply agreement.





Selling, General and Administrative
Expenses.  For the nine month period ended October 3, 2009,
selling, general and administrative expenses (“SG&A”) were $37.4 million
compared with the nine month period ended October 4, 2008 of $44.5 million. The
decrease was primarily driven by a reduction in professional fees and expenses
incurred in the first three quarters of 2008 of $4.5 million from the review of
accounting irregularities at our Sheffield, UK operating unit.  The
improvement also reflects a decrease in employee compensation costs, including
headcount reductions, taken in response to lower revenue levels and our
continued cost control efforts.  Additionally, performance based
compensation and non-cash restricted stock compensation expense decreased $1.2
million due to lower financial results.




Other (Income)
Expense.    Interest expense for the nine month
period ended October 3, 2009 decreased $3.2 million, or 39.2%, to $5.1
million from $8.3 million for the comparable period in 2008. This decrease
reflects the reduction in our interest rate margin above LIBOR due to improved
financial ratios, as well as the general decline in the interest rate market in
the three quarters of 2009 as compared to 2008.  Additionally,
aggregate outstanding indebtedness has decreased $44.8 million, or 28.9% as
compared to October 4, 2008. 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 $64.1 million of the total outstanding term
loan indebtedness due in 2011 pursuant to this forward swap
contract.  This swap contract is designated as a cash flow hedge of
the future payment of variable rate interest with three-month LIBOR fixed at
1.34% per annum in 2009, 2010 and 2011, respectively.  The net
derivatives gain for the nine month period ended October 3, 2009 consists of a
gain on interest rate swap valuation of $0.7 million related to our interest
rate swap that has not been designated as a hedge the provisions of the
applicable FASB statement as compared to a loss of $0.4 million for the
comparable period in 2008. The interest rate swaps are used to convert our
variable rate long-term debt to fixed rates. During 2008, the Corporation also
held foreign currency forwards to mitigate fluctuations in foreign currency on
the statement of operations. A gain on the foreign currency valuation of $1.4
million was recorded in derivative valuation gain for the nine months ended
October 4, 2008 and partially offset $2.9 million of losses on foreign currency
fluctuations that were included within other expense.





Provision for Income
Taxes. Our effective tax rate was 30.4% for the nine month period
ended October 3, 2009 as compared to 44.0% for the nine month period ended
October 4, 2008. Provision for income taxes decreased by $0.7 million, or 7.3%,
to $9.3 million for the nine month period ended October 3, 2009 from $10.0
million for the comparable 2008 period and differed from the US Federal rate of
35% primarily due to the settlement of issues in a tax audit and a reduction in
estimated taxes payable in foreign jurisdictions related to 2008
activities.





Liquidity
and Capital Resources





Current
Market Conditions





We are
experiencing very challenging business conditions due to the overall economic
environment that has resulted in reduced demand from our major OEM
customers.  Our major OEM customers continue to work down inventory
levels and experienced fluctuated timing of their various product launch
activity.





Current
global economic conditions have resulted in increased volatility in the
financial markets. During the first three quarters of Fiscal 2009, 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.


16


Liquidity





Our
principal sources of liquidity in the nine month period ended October 3, 2009
were cash generated from operations and borrowings under our senior revolving
credit facility.  Principal uses of cash in the nine month period ended
October 3, 2009 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.  In order to sustain profitability and cash
flow during these current economic conditions, we have reduced our work force,
decreased the amount of overtime, renegotiated a key supply agreement for
reduced material costs, implemented other cost control measures and began to
consolidate operating facilities.





Operating
Activities. Operating activities generated cash of $39.9
million in the nine month period ended October 3, 2009 compared to $4.9 million
for the nine month period ended October 4, 2008, an increase of $35.0
million.  The increase in cash from operations is primarily a result of
improved net income due to reduced SG&A costs, lower interest and lower
taxes, in addition to decreased working capital requirements.





Cash used
for working capital fluctuations was $3.9 million in the nine month period ended
October 3, 2009 as compared to a use of $27.6 million in the comparable 2008
period.  In the nine month period ended October 3, 2009, the primary
sources of cash for working capital came from a decrease in accounts receivable
and a cash refund for income taxes, offset by increases in inventory and
reductions in accounts payable and accrued expenses.  In the nine
month period ended October 4, 2008, the primary uses of cash for working capital
were driven by increases in accounts receivable and inventory as a result of our
post-acquisition production activity at New Bedford and a significant increase
in organic revenue growth.





Investing Activities. 
Capital expenditures of $13.5 million were $3.4 million lower in the nine month
period ended October 3, 2009 compared to the nine month period ended October 4,
2008.  The acquisition of New Bedford used $45.2 million of cash in the
nine month period ended October 4, 2008.





Financing
Activities. Financing activities used $21.4 million of
cash in the nine month period ended October 3, 2009 due primarily to payments on
long-term debt, capital leases and our revolving line of
credit.  During 2008, the incremental $60.0 million of borrowings
under our senior credit loan facility was used to fund the New Bedford
acquisition, in addition to payments on long-term debt and capital
leases.





Capital
Expenditures





Capital
expenditures totaled $13.5 million for the nine months ended October 3, 2009,
compared to $16.8 million for the nine month period ended October 4, 2008.
Expenditures were primarily for expansion and capability enhancement efforts in
our Malaysia facility, software and hardware system improvements at our US and
Sheffield, UK operating units as well as continued spending on automation and
replacement of equipment.




Debt
and Credit Facilities





As of
October 3, 2009, we had an aggregate of $110.2 million of outstanding
indebtedness, which consisted of $93.8 million of term loan borrowings
outstanding under our Senior Credit Agreement, $7.4 million of borrowings
outstanding under our revolving credit facility, $3.7 million of borrowings
under our UK short-term credit facility, $1.8 million of borrowings under our
Malaysia short-term credit facility, and $3.5 million of capital lease
obligations. We had one outstanding letter of credit as of October 3, 2009 for
$3.5 million.  Subsequent to October 3, 2009, we increased the line of
credit by $0.2 million.





Our
Senior Credit Agreement contains various financial covenants, including
covenants requiring a maximum total debt to EBITDA ratio, minimum EBITDA to
interest ratio and a minimum EBITDA to fixed charges ratio. We were in
compliance with these covenants under the senior credit facility as of October
3, 2009.





We
believe that cash flow from operating activities and borrowings under our Senior
Credit Agreement will be sufficient to fund currently anticipated working
capital, planned capital spending and debt service requirements for the next
twelve months. We also review technology, manufacturing and other strategic
acquisition opportunities regularly, which may require additional debt or equity
financing.


17





Contractual
Obligations and Commercial Commitments





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)
                  
                  $
                  101.2
                  
                  
                  $
                  4.2
                  
                  
                  $
                  97.0
                  
                  
                  $
                  -
                  
                  
                  $
                  -Capital
      lease obligations
                  
                  
                  6.3
                  
                  
                  
                  0.3
                  
                  
                  
                  2.9
                  
                  
                  
                  1.7
                  
                  
                  
                  1.4Operating
      lease obligations
                  
                  
                  4.4
                  
                  
                  
                  0.5
                  
                  
                  
                  3.1
                  
                  
                  
                  0.8
                  
                  
                  
                  -Purchase
      obligations (2)
                  
                  
                  37.0
                  
                  
                  
                  6.5
                  
                  
                  
                  30.5
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  148.9
                  
                  
                  $
                  11.5
                  
                  
                  $
                  133.5
                  
                  
                  $
                  2.5
                  
                  
                  $
                  1.4




* Less
than 1 year is defined as the remainder of fiscal 2009. Following periods are
whole fiscal years.


** Liabilities for unrecognized tax
benefits of$6.4
millionare excluded as
reasonable estimates could not be made regarding the timing of future cash
outflows associated with those liabilities.




(1)
Represents principal maturities only and, therefore, excludes the effects of
interest and interest rate swaps.  Scheduled payments for our
Revolving Credit Facility exclude interest payments as rates are variable.
 Borrowings under the Revolving Credit Facility bear interest at a variable
rate based on the London Interbank Offer Rate (LIBOR) or a base rate determined
by the lender’s prime rate plus an applicable margin, as defined in the
agreement.  The applicable margin for borrowings under the Amendment ranges
from 0.25% to 1.25% for base rate borrowings and 1.25% to 2.25% for LIBOR
borrowings, subject to adjustment based on the average availability under the
Revolving Credit Facility.





(2)
Primarily represents purchase agreements to buy minimum quantities of plastic,
titanium and cobalt chrome through December 2011.





Off-Balance
Sheet Arrangements





Our
off-balance sheet arrangements include our operating leases and letters of
credit, which are available under the senior credit facility. As of November 9,
2009, we had two letters of credit outstanding in the amount of $3.5 million and
$0.2 million.





Environmental





Our
facilities and operations are subject to extensive federal, state, local and
foreign environmental and occupational health and safety laws and regulations.
These laws and regulations govern, among other things, air emissions; wastewater
discharges; the generation, storage, handling, use and transportation of
hazardous materials; the handling and disposal of hazardous wastes; the cleanup
of contamination; and the health and safety of our employees. Under such laws
and regulations, we are required to obtain permits from governmental authorities
for some of our operations. If we violate or fail to comply with these laws,
regulations or permits, we could be fined or otherwise sanctioned by regulators.
We could also be held responsible for costs and damages arising from any
contamination at our past or present facilities or at third-party waste disposal
sites. We cannot completely eliminate the risk of contamination or injury
resulting from hazardous materials, and we may incur material liability as a
result of any contamination or injury.





We
incurred approximately $0.4 million in capital expenditures for environmental,
health and safety related projects in the nine month period ended October 3,
2009 compared to $0.2 million for the comparable 2008 period.





In
connection with our prior acquisitions, we completed Phase I assessments and did
not identify any significant issues that need to be remediated.  We cannot
be certain that environmental issues will not be discovered or arise in the
future related to these acquisitions.





In
conjunction with the New Bedford acquisition in January 2008, we purchased $5.0
million of environmental insurance coverage for this facility. This policy
expires January 25, 2013. In 2000, we purchased pollution legal liability
insurance that covers certain environmental liabilities that may arise at our
Warsaw, Indiana facility, at a former facility located in Peru, Indiana, and at
certain non-owned locations that we use for the disposal of waste. The insurance
has a $5.0 million aggregate limit and is subject to a deductible and certain
exclusions. The policy period expires in 2010. While the insurance may mitigate
the risk of certain environmental liabilities, we cannot guarantee that a
particular liability will be covered by this insurance.





Based on
information currently available, we do not believe that we have any material
environmental liabilities.





Critical
Accounting Policies and Estimates





The
preparation of our financial statements requires management to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses during the periods presented. Our Annual
Report on Form 10-K for fiscal year ended January 3, 2009 includes a
summary of the critical accounting policies we believe are the most important to
aid in understanding our financial results. There have been no material changes
to these critical accounting policies that impacted our reported amounts of
assets, liabilities, revenues or expenses during the three months ended October
3, 2009.


18


New
Accounting Pronouncements





Business
Combinations.The Corporation adopted the provisions of the
FASB Statement on Business Combinations on January 4, 2009.  This
Statement amends the previously issued Statement on Business Combinations and
provides revised guidance for recognizing and measuring identifiable assets and
goodwill acquired, liabilities assumed, and any non-controlling interest in the
acquiree. It also provides disclosure requirements to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The adoption of the Statement had an immaterial impact on
the Corporation’s financial position and results of
operations.





Disclosures about Derivative
Instruments and Hedging Activities. The Corporation adopted the
provisions of the FASB Statement on disclosures relating to derivative
instruments and hedging on January 4, 2009.   This Statement
requires entities to provide enhanced disclosures about how and why an entity
uses derivative instruments, how derivative instruments and related hedged items
are accounted, and how derivative instruments and related hedged items affect an
entity’s financial position, results of operations, and cash
flows.  The adoption of this Statement had no impact on the
Corporation’s financial position or results of operations.  These
disclosures are included in Note 11.





Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities.The Corporation adopted the provisions of the FASB
Staff Position (FSP) relating to determining whether instruments granted in
share-based payment transactions are participating securities on January 4,
2009, with retrospective application. This FSP was
issued to clarify that unvested share-based payment awards with a right to
receive non-forfeitable dividends are participating securities.  This
FSP also provides guidance on how to allocate earnings to participating
securities and compute basic earnings per share (EPS) using the two-class
method.  The adoption of this standard did not have a material impact
on our results of operations.





Subsequent
Events.On July 4, 2009, the Corporation adopted the
provisions of the FASB Statement on subsequent events providing additional
disclosure requirements for material events occurring subsequent to the balance
sheet date and prior to the issuance of the financial
statements.  This Statement also modifies the definition of subsequent
events and defines the two types of subsequent events as recognized and
non-recognized.  The Corporation issued its financial statements by
filing with the Securities Exchange Commission on November 9, 2009, for the
quarter ended October 3, 2009. The Corporation evaluated subsequent events
up through the time of the filing.





Accounting Standards
Codification.  On October 3, 2009, the Corporation adopted
provisions of the FASB Statement on accounting standards
codification.  The Statement establishes the Codification as the
single official source of authoritative United States accounting and reporting
standards for all non-governmental entities (other than guidance issued by the
Securities Exchange Commission (the “SEC”)) and changes the referencing and
organization on financial standards.  As Codification is not intended
to change the existing accounting guidance, its adoption has not had 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 3, 2009. Our exposure to these risks, at the end of the third
quarter as covered by this report, has not changed materially since January 3,
2009.





ITEM 4.
CONTROLS AND PROCEDURES





This
Report includes the certifications of our Chief Executive Officer and Chief
Financial Officer required by Rule 13a-14 of the Securities Exchange Act of 1934
(the “Exchange Act”).  See Exhibits 31.1 and 31.2.  This
Item 4 includes information concerning the controls and control evaluations
referred to in those certifications.




Evaluation
of Disclosure Controls and Procedures




Disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) are designed to ensure that information required to be disclosed
in reports filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC rules and
forms and that such information is accumulated and communicated to management,
including the chief executive officer and the chief financial officer, to allow
timely decisions regarding required disclosures.




In
connection with the preparation of this Report, our management, under the
supervision and with the participation of the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures as of the end of the
fiscal quarter covered by this report on Form 10-Q.  Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were effective as of
October 3, 2009.





19


Changes
in Internal Control over Financial Reporting




There
have been no changes in our “internal control over financial reporting” (as
defined in Rule 13a-15(f) of the Exchange Act) that occurred during the
fiscal quarter covered by this report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.





PART II
OTHER INFORMATION





ITEM
1.    LEGAL PROCEEDINGS





SEC
Inquiry





Following
the discovery of the accounting irregularities at our Sheffield, UK operating
unit, the Audit Committee self-reported the matter to the staff of the SEC in
October 2007.  Thereafter, the SEC commenced an informal inquiry
regarding this matter.





We have
fully cooperated with the SEC in its investigation.  At this time we
are unable to predict the time period necessary to resolve the investigation or
the ultimate resolution thereof.  To date, considerable legal, tax and
accounting expenses have been incurred in connection with our Audit Committee’s
investigation into this matter and expenditures may continue to be incurred in
the future with regard to the SEC’s investigation.  It is also
possible that the investigation may continue to require management’s time and
attention and accounting and legal resources, which could otherwise be devoted
to the operation of our business.  Moreover, any action by the SEC
against us, or members of our management, may cause us to be subject to
injunctions, fines or other penalties or sanctions or result in private civil
actions, loss of key personnel or other adverse consequences and may require us
to devote additional time and resources to these matters.  The
investigation may adversely affect our ability to obtain and/or increase the
cost of obtaining directors’ and officers’ liability insurance and/or other
types of insurance, which could have a materially adverse effect 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 3,
2009, which could materially affect our business, financial condition or future
results.





A new
potential risk may exist associated with the uncertainties of a potential health
care reform legislation and its impact on our Corporation.




ITEM 6.
EXHIBITS





31.1
              
              Certification
      of Chief Executive Officer required by Item 307 of Regulation S-K as
      promulgated by the Securities and Exchange Commission and pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.**31.2
              
              Certification
      of Chief Financial Officer required by Item 307 of Regulation S-K as
      promulgated by the Securities and Exchange Commission and pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.**32.1
              
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.**


** Filed
concurrently herewith




20




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
9, 2009


21