**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

**(MarkOne)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

 

**For thequarterly period ended September 30, 2006**

 

**OR**

 

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe****transition period from             to            **

**CommissionFile Number 001-32374**

**SYMMETRYMEDICAL INC.**

 (Exact name of registrant as specified in itscharter)

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

 

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

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bysection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes   xNo   o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check One)

Large accelerated filer   o           Acceleratedfiler   x            Non-acceleratedfiler   o

Indicate by check markwhether the registrant is a shell company (as defined in Exchange ActRule 12b-2). Yes oNo x

The number of sharesoutstanding of the registrant’s common stock as of October 10, 2006 was35,099,971.

 

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**TABLE OF CONTENTS**
| **PART I FINANCIAL INFORMATION**      |
|--------------------------------------------|
|                                       |   |
| Item 1     - | Financial Statements: |
|                                       |   |
|                                       | Condensed Consolidated Balance Sheets: As of  September 30, 2006 and December 31, 2005 |
|                                       |   |
|                                       | Condensed Consolidated Statements of  Operations: Three and Nine Months Ended September 30, 2006 and October  1, 2005 |
|                                       |   |
|                                       | Condensed Consolidated Statements of Cash Flows: Nine  Months Ended September 30, 2006 and October 1, 2005 |
|                                       |   |
|                                       | Notes to Condensed Consolidated Financial Statements |
|                                       |   |
| Item 2                                | Management’s  Discussion and Analysis of Results of Operations and Financial Condition |
|                                       |   |
| Item 3                                | Quantitative  and Qualitative Disclosures about Market Risks |
|                                       |   |
| Item 4                                | Controls and Procedures |
|                                       |   |
| **PART II  OTHER INFORMATION**        |
|                                       |   |
| Item 1                                | Legal  Proceedings |
|                                       |   |
| Item 1A                               | Risk  Factors |
|                                       |   |
| Item 2                                | Recent Sales  of Unregistered Securities; Use of Proceeds from Registered Securities |
|                                       |   |
| Item 5                                | Other  Information |
|                                       |   |
| Item 6                                | Exhibits |
|                                       |   |
| Signatures                                 |

 

2

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**Symmetry Medical Inc.**

**Condensed Consolidated Balance Sheets**
| ** **                                                                                                                                | ** ** | **     September 30,     ** | ** ** | **     December 31,     ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                | ** ** | **2006**                                                                           | ** ** | **2005**                                                                          | ** ** |
| ** **                                                                                                                                | ** ** | **(In Thousands, Except Per Share Data)**                 | ** ** |
| ** **                                                                                                                                | ** ** | **(unaudited)**                                                                    | ** ** | ** **                                                                        | ** ** |
| **Assets:**                                                                                                                               |       |                                                                               |       |                                                                              |       |
| Current Assets:                                                                                                                           |       |                                                                               |       |                                                                              |       |
| Cash and cash  equivalents                                                                                                                |       | $                                                                                  | 9,616      |                                                                              | $          | 12,471 |   |
| Accounts receivables,  net                                                                                                                |       | 48,278                                                                             |       | 44,908                                                                            |       |
| Inventories                                                                                                                               |       | 44,867                                                                             |       | 38,783                                                                            |       |
| Refundable income taxes                                                                                                                   |       | 221                                                                                |       | 185                                                                               |       |
| Deferred income taxes                                                                                                                     |       | 2,345                                                                              |       | 1,867                                                                             |       |
| Derivative valuation  asset                                                                                                               |       | —                                                                             |       | 414                                                                               |       |
| Other current assets                                                                                                                      |       | 2,893                                                                              |       | 4,032                                                                             |       |
|                                                                                                                                      |       |                                                                               |       |                                                                              |       |
| Total current assets                                                                                                                      |       | 108,220                                                                            |       | 102,660                                                                           |       |
| Property and equipment,  net                                                                                                              |       | 103,350                                                                            |       | 93,106                                                                            |       |
| Derivative valuation  asset                                                                                                               |       | —                                                                             |       | 170                                                                               |       |
| Goodwill                                                                                                                                  |       | 154,037                                                                            |       | 124,518                                                                           |       |
| Intangible assets, net  of accumulated amortization                                                                                       |       | 33,574                                                                             |       | 16,327                                                                            |       |
| Other assets                                                                                                                              |       | 1,061                                                                              |       | 864                                                                               |       |
|                                                                                                                                      |       |                                                                               |       |                                                                              |       |
| Total Assets                                                                                                                              |       | $                                                                                  | 400,242    |                                                                              | $          | 337,645 |   |
|                                                                                                                                      |       |                                                                               |       |                                                                              |       |
| **Liabilities and Shareholders’  Equity:**                                                                                           |       |                                                                               |       |                                                                              |       |
| Current Liabilities:                                                                                                                      |       |                                                                               |       |                                                                              |       |
| Accounts payable                                                                                                                          |       | $                                                                                  | 16,494     |                                                                              | $          | 18,983 |   |
| Accrued wages and  benefits                                                                                                               |       | 8,815                                                                              |       | 10,997                                                                            |       |
| Derivative valuation  liability                                                                                                           |       | 496                                                                                |       | —                                                                            |       |
| Other accrued expenses                                                                                                                    |       | 3,105                                                                              |       | 2,696                                                                             |       |
| Income tax payable                                                                                                                        |       | —                                                                             |       | 1,241                                                                             |       |
| Deferred income taxes                                                                                                                     |       | 112                                                                                |       | —                                                                            |       |
| Revolving line of  credit                                                                                                                 |       | 4,682                                                                              |       | —                                                                            |       |
| Current portion of  capital lease obligations                                                                                             |       | 2,846                                                                              |       | 3,239                                                                             |       |
| Current portion of  long-term debt                                                                                                        |       | 3,700                                                                              |       | 1,313                                                                             |       |
|                                                                                                                                      |       |                                                                               |       |                                                                              |       |
| Total current  liabilities                                                                                                                |       | 40,250                                                                             |       | 38,469                                                                            |       |
| Deferred income taxes                                                                                                                     |       | 11,743                                                                             |       | 11,139                                                                            |       |
| Derivative valuation  liability                                                                                                           |       | 600                                                                                |       | —                                                                            |       |
| Capital lease  obligations, less current portion                                                                                          |       | 6,196                                                                              |       | 8,532                                                                             |       |
| Long-term debt, less  current portion                                                                                                     |       | 60,500                                                                             |       | 26,250                                                                            |       |
|                                                                                                                                      |       |                                                                               |       |                                                                              |       |
| Total Liabilities                                                                                                                         |       | 119,289                                                                            |       | 84,390                                                                            |       |
|                                                                                                                                      |       |                                                                               |       |                                                                              |       |
| Commitments and  contingencies (Note 11)                                                                                                  |       | —                                                                             |       | —                                                                            |       |
|                                                                                                                                      |       |                                                                               |       |                                                                              |       |
| Shareholders’ Equity:                                                                                                                |       |                                                                               |       |                                                                              |       |
| Common Stock, $.0001  par value; 72,410 shares authorized; shares issued (September 30,  2006—35,100; December 31, 2005—34,704) |       | 4                                                                                  |       | 3                                                                                 |       |
| Additional paid-in  capital                                                                                                               |       | 271,022                                                                            |       | 268,973                                                                           |       |
| Retained earnings  (deficit)                                                                                                              |       | 1,670                                                                              |       | (17,378                                                                           | )          |
| Accumulated other  comprehensive income                                                                                                   |       | 8,257                                                                              |       | 1,657                                                                             |       |
|                                                                                                                                      |       |                                                                               |       |                                                                              |       |
| Total Shareholders’  Equity                                                                                                          |       | 280,953                                                                            |       | 253,255                                                                           |       |
|                                                                                                                                      |       |                                                                               |       |                                                                              |       |
| Total Liabilities and Shareholders’ Equity                                                                                           |       | $                                                                                  | 400,242    |                                                                              | $          | 337,645 |   |

 

See accompanying notes to condensed consolidatedfinancial statements*.*

3

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**Symmetry Medical Inc.**

**CondensedConsolidated Statements of Operations**
| ** **                                                         | ** ** | **Three Months Ended**                                   | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **September 30,**                                             | ** ** | **October 1,**             | ** ** | **September 30,** | ** ** | **October 1,** | ** ** |
| ** **                                                         | ** ** | **2006**                                                           | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                         | ** ** | **(In Thousands, Except Per Share Data)** | ** ** |
| ** **                                                         | ** ** | **(unaudited)**                                                    | ** ** | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Revenue                                                            |       | $                                                                  | 60,740     |                            | $          | 67,228 |   | $ | 195,113 |   | $ | 201,165 |   |
| Cost of Revenue                                                    |       | 47,093                                                             |       | 47,486                          |       | 144,239 |   | 140,593 |   |
|                                                               |       |                                                               |       |                            |       |   |   |   |   |
| Gross Profit                                                       |       | 13,647                                                             |       | 19,742                          |       | 50,874 |   | 60,572 |   |
| Selling, general, and  administrative expenses                     |       | 7,410                                                              |       | 7,455                           |       | 21,341 |   | 21,157 |   |
|                                                               |       |                                                               |       |                            |       |   |   |   |   |
| Operating Income                                                   |       | 6,237                                                              |       | 12,287                          |       | 29,533 |   | 39,415 |   |
| Other (income) expense:                                            |       |                                                               |       |                            |       |   |   |   |   |
| Interest expense                                                   |       | 1,350                                                              |       | 635                             |       | 2,936 |   | 2,347 |   |
| Derivatives valuation  (gain)/loss                                 |       | 1,273                                                              |       | (65                             | )          | 1,680 |   | (172 | ) |
| Other                                                              |       | (203                                                               | )          | 927                             |       | (2,482 | ) | 1,811 |   |
|                                                               |       |                                                               |       |                            |       |   |   |   |   |
| Income before income  taxes                                        |       | 3,817                                                              |       | 10,790                          |       | 27,399 |   | 35,429 |   |
| Income tax expense                                                 |       | 826                                                                |       | 2,567                           |       | 8,351 |   | 10,922 |   |
|                                                               |       |                                                               |       |                            |       |   |   |   |   |
| Net income applicable  to common shareholders                      |       | $                                                                  | 2,991      |                            | $          | 8,223 |   | $ | 19,048 |   | $ | 24,507 |   |
|                                                               |       |                                                               |       |                            |       |   |   |   |   |
| Net income applicable  to common shareholders per share:           |       |                                                               |       |                            |       |   |   |   |   |
| Basic                                                              |       | $                                                                  | 0.09       |                            | $          | 0.24 |   | $ | 0.55 |   | $ | 0.73 |   |
|                                                               |       |                                                               |       |                            |       |   |   |   |   |
| Diluted                                                            |       | $                                                                  | 0.09       |                            | $          | 0.24 |   | $ | 0.54 |   | $ | 0.71 |   |
|                                                               |       |                                                               |       |                            |       |   |   |   |   |
| Weighted average common  shares and equivalent shares outstanding: |       |                                                               |       |                            |       |   |   |   |   |
| Basic                                                              |       | 34,841                                                             |       | 34,310                          |       | 34,796 |   | 33,575 |   |
| Diluted                                                            |       | 35,171                                                             |       | 34,987                          |       | 35,162 |   | 34,526 |   |

 

See accompanying notes to condensed consolidatedfinancial statements*.*

4

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**Symmetry Medical Inc.**

**Condensed Consolidated Statements ofCash Flows**
| ** **                                                                                   | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **September 30,**          | ** ** | **October 1,** | ** ** |
| ** **                                                                                   | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| ** **                                                                                   | ** ** | **(In Thousands)**         | ** ** |
| ** **                                                                                   | ** ** | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** |
| **Operating activities**                                                                     | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net Income                                                                                   |       | $                               | 19,048     |   | $ | 24,507 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                            |       |   |   |
| Depreciation                                                                                 |       | 11,786                          |       | 9,504 |   |
| Amortization                                                                                 |       | 780                             |       | 456 |   |
| Net gain (loss) on sale  of assets                                                           |       | (1,219                          | )          | 71 |   |
| Deferred income tax  provision                                                               |       | 125                             |       | 374 |   |
| Excess tax benefit from  stock-based compensation                                            |       | (1,062                          | )          | — |   |
| Income tax benefits  from exercise of stock options                                          |       | —                          |       | 1,199 |   |
| Stock-based  compensation                                                                    |       | 431                             |       | — |   |
| Derivative valuation  change                                                                 |       | 1,680                           |       | (172 | ) |
| Change in operating  assets and liabilities:                                                 |       |                            |       |   |   |
| Accounts receivable                                                                          |       | 973                             |       | (6,449 | ) |
| Other assets                                                                                 |       | 2,165                           |       | 2,212 |   |
| Inventories                                                                                  |       | (1,708                          | )          | (2,761 | ) |
| Accounts payable                                                                             |       | (2,644                          | )          | 2,441 |   |
| Accrued expenses and  other                                                                  |       | (4,908                          | )          | 3,173 |   |
|                                                                                         |       |                            |       |   |   |
| Net cash provided by  operating activities                                                   |       | 25,447                          |       | 34,555 |   |
|                                                                                         |       |                            |       |   |   |
| **Investing activities**                                                                     | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Purchases of property  and equipment                                                         |       | (15,825                         | )          | (31,354 | ) |
| Proceeds from the sale  of fixed assets                                                      |       | 2,434                           |       | — |   |
| Acquisitions, net of  cash received                                                          |       | (54,542                         | )          | — |   |
|                                                                                         |       |                            |       |   |   |
| Net cash used in  investing activities                                                       |       | (67,933                         | )          | (31,354 | ) |
|                                                                                         |       |                            |       |   |   |
| **Financing activities**                                                                     | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Proceeds from bank  revolver                                                                 |       | 63,038                          |       | 37,065 |   |
| Payments on bank  revolver                                                                   |       | (58,595                         | )          | (34,695 | ) |
| Issuance of long-term  debt                                                                  |       | 40,000                          |       | — |   |
| Payments on long-term  debt and capital lease obligations                                    |       | (6,250                          | )          | (6,452 | ) |
| Proceeds from the  issuance of common and preferred stock, net of expenses                   |       | 555                             |       | 11,707 |   |
| Excess tax benefit from  stock-based compensation                                            |       | 1,062                           |       | — |   |
| Debt issuance costs  paid                                                                    |       | (355                            | )          | — |   |
|                                                                                         |       |                            |       |   |   |
| Net cash provided by  financing activities                                                   |       | 39,455                          |       | 7,625 |   |
| Effect of exchange rate  changes on cash                                                     |       | 176                             |       | (200 | ) |
|                                                                                         |       |                            |       |   |   |
| Net increase (decrease)  in cash and cash equivalents                                        |       | (2,855                          | )          | 10,626 |   |
| Cash and cash  equivalents at beginning of period                                            |       | 12,471                          |       | 4,849 |   |
|                                                                                         |       |                            |       |   |   |
| Cash and cash  equivalents at end of period                                                  |       | $                               | 9,616      |   | $ | 15,475 |   |
|                                                                                         |       |                            |       |   |   |
| Supplemental  disclosures:                                                                   |       |                            |       |   |   |
| Cash paid for interest                                                                       |       | $                               | 3,057      |   | $ | 1,837 |   |
|                                                                                         |       |                            |       |   |   |
| Cash paid for income  taxes                                                                  |       | $                               | 8,783      |   | $ | 6,964 |   |
|                                                                                         |       |                            |       |   |   |
| Assets acquired under  capital leases                                                        |       | $                               | —     |   | $ | 283 |   |

 

See accompanying notes to condensed consolidatedfinancial statements*.*

5

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**Symmetry Medical Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(InThousands, Except Per Share Data)**

**1.  Basis of Presentation**

The condensedconsolidated financial statements include the accounts of SymmetryMedical, Inc. and its wholly-owned subsidiaries (collectively referred toas the Corporation), Symmetry Medical USA Inc., Jet Engineering, Inc.,Ultrexx, Inc., Riley Medical Inc., Symmetry Medical Everest LLC, EverestMetal International Limited, Symmetry Medical Switzerland SA. (previously namedRiley Medical Europe S.A.), Symmetry Medical Cheltenham Limited, SymmetryMedical Polyvac, SAS and Thornton Precision Components Limited. The Corporationis a global supplier of integrated products and services consisting primarilyof surgical implants, instruments and cases to orthopedic and other medicaldevice companies.

The condensedconsolidated financial statements of the Corporation have been prepared withoutaudit, pursuant to the rules and regulations of the Securities andExchange Commission. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles have been condensed or omitted pursuant to suchrules and regulations. In the opinion of management, the accompanyingcondensed consolidated financial statements contain all material adjustments(consisting only of normal recurring adjustments) necessary to present fairlythe consolidated financial position of the Corporation, its results of operationsand cash flows. The Corporation’s results are subject to seasonal fluctuations.Interim results are not necessarily indicative of results for a full year. Thecondensed consolidated financial statements included herein should be read inconjunction with the consolidated financial statements and the notes theretoincluded in the Corporation’s Annual Report on Form 10-K for fiscal year2005.

Certain prior yearamounts have been reclassified to conform to the current-year presentation.These reclassifications had no impact on our results of operations or financialposition.

The Corporation’syear end is the 52 or 53 week period ending the Saturday closest toDecember 31. Fiscal year 2006 and 2005 are 52 week years. As such, interimquarters are 13 weeks long ending the Saturday closest toMarch 31, June 30, or September 30. References in theseconsolidated financial statements to the three months ended refer to thesefinancial periods, respectively.

On May 1, 2006,the Corporation acquired all of the stock of Riley Medical, Inc., aprivately owned company based in Auburn, Maine, and Riley Medical Europe S.A.,its Swiss subsidiary (collectively “Riley Medical”).  Refer to note 13 for further discussion.

On August 31,2006, the Corporation acquired certain assets of Everest Metal Finishing,LLC.  The Corporation also acquired allof the stock of Everest Metal International, Limited.  Collectively Symmetry Medical Everest, LLCand Everest Metal International, Limited are referred to as “Everest Metal.”  Refer to note 13 for further discussion.

**2.  Inventories**

Inventoriesconsist of the following:
|                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Raw material and  supplies |       | $                      | 11,369     |                  | $          | 7,325 |   |
| Work-in-process            |       | 22,624                 |       | 23,418                |       |
| Finished goods             |       | 10,874                 |       | 8,040                 |       |
|                       |       |                   |       |                  |       |
|                       |       | $                      | 44,867     |                  | $          | 38,783 |   |

 

6

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**3.  Property and Equipment**

Property andequipment, including depreciable lives, consists of the following:
|                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Land                                         |       | $                      | 1,507      |                  | $          | 1,283 |   |
| Buildings and  improvements (20 to 40 years) |       | 28,399                 |       | 24,128                |       |
| Machinery and  equipment (5 to 15 years)     |       | 116,296                |       | 101,437               |       |
| Office equipment  (3 to 5 years)             |       | 6,572                  |       | 5,421                 |       |
| Construction-in-progress                     |       | 4,948                  |       | 5,695                 |       |
|                                         |       |                   |       |                  |       |
|                                         |       | 157,722                |       | 137,964               |       |
| Less accumulated  depreciation               |       | (54,372                | )          | (44,858               | )          |
|                                         |       |                   |       |                  |       |
|                                         |       | $                      | 103,350    |                  | $          | 93,106 |   |

 

**4.  Intangible Assets**

Intangible assetssubject to amortization consist of technology, non-compete and customer relatedintangible assets acquired in connection with our acquisitions of Mettis (UK)Limited on June 11, 2003, Riley Medical on May 1, 2006 and Everest Metalon August 31, 2006. These assets ($28,468, net, at September 30, 2006 and$12,656, net, at December 31, 2005) are being amortized using thestraight-line method over 4 to 25 years.  The Corporation has $5,106 and$3,671 of indefinite lived intangible assets as September 30, 2006 and December31, 2005, respectively.

**5.  Long-term Debt**

In conjunctionwith the Riley Medical acquisition, the Corporation’s lending arrangements wereamended in June 2006 to provide for a new term loan of $40 million, whichrequires annual principal payments of $300, $400, $400, $11,400 and $27,200over the next five fiscal years, respectively. Principal payments have been prepaid through March 2007 on the termloans  In addition, the Corporation’s $40 million revolving creditfacility maturity was extended from December 2009 to June 2011.  Thefinancial loan covenants remain unchanged and the Corporation is in compliancewith these covenants as of September 30, 2006.
|                                                                                                                                            | ** ** | **   September 30,   ** | ** ** | **   December 31,   ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2006**                                                   | ** ** | **2005**                                                  | ** ** |
| Bank term loan  payable in quarterly installments, plus interest at a variable rate (6.625%  at September 30, 2006), through December 2009 |       | $                                                          | 24,500     |                                                      | $          | 27,563 |   |
| Bank term loan  payable in quarterly installments, plus interest at a variable rate (6.625%  at September 30, 2006), through June 2011     |       | 39,700                                                     |       | —                                                    |       |
| Revolving line  of credit, due June 2011                                                                                                   |       | —                                                     |       | —                                                    |       |
|                                                                                                                                       |       |                                                       |       |                                                      |       |
|                                                                                                                                       |       | 64,200                                                     |       | 27,563                                                    |       |
| Less current  portion                                                                                                                      |       | (3,700                                                     | )          | (1,313                                                    | )          |
|                                                                                                                                       |       |                                                       |       |                                                      |       |
|                                                                                                                                       |       | $                                                          | 60,500     |                                                      | $          | 26,250 |   |

 

**6.  New Accounting Pronouncements**

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

In July 2006, theFASB issued FASB Interpretation No. (FIN) 48,*Accounting for Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109*, which clarifies the accounting for uncertainty in taxpositions. This Interpretation requires the recognition of a tax position whenit is more likely than not that the tax position will be sustained uponexamination by relevant taxing authorities, based on the technical merits ofthe position. The provisions of FIN 48 are effective for the Company on January1, 2007, with the cumulative effect of the change in accounting principlerecorded as an adjustment to opening retained earnings. The Corporation is currentlyevaluating the impact of adopting FIN 48 on its financial statements.

7

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**7.  Stock-Based Compensation**

The Corporationadopted SFAS 123 (revised 2004), Share-Based Payment on January 1, 2006(SFAS 123R). SFAS 123R, which revised SFAS 123, Accounting for Stock-BasedCompensation, superseded APB Opinion No. 25, Accounting for Stock Issuedto Employees, and amends SFAS 95, Statement of Cash Flows. Statement 123Rrequires that all share-based payments to employees, including grants ofemployee stock options be recognized in the financial statements based upontheir fair value. The Corporation had previously followed APB No. 25 inaccounting for its stock options and accordingly, no compensation cost had beenpreviously recognized.

The Corporationhas adopted SFAS 123R using the modified prospective method. Compensation costhas been recognized for all share-based payments in the consolidated financialstatements in 2006 based upon the fair value of the stock or option grant.Prior period results have not been restated.

As a result ofadopting SFAS 123R, the Corporation’s income before income taxes and net incomefor the nine months ended September 30, 2006 are $92 and $55 lower,respectively, than if it had continued to account for share-based compensation underOpinion 25. Basic and diluted earnings per share for the nine months endedSeptember 30, 2006 would not have changed from $0.55 and $0.54, respectively,if the Corporation had not adopted SFAS 123R.

Prior to theadoption of SFAS 123R, the Corporation presented all tax benefits of deductionsresulting from the exercise of stock options as operating cash flows in theConsolidated Statements of Cash Flows. SFAS 123R requires the cash flowsresulting from the tax benefits resulting from tax deductions in excess of thecompensation cost recognized for those options (excess tax benefits) to beclassified as financing cash flows. The $1,062 excess tax benefit for the ninemonths ended September 30, 2006 that is classified as a financing cashinflow would have been classified as an operating cash inflow if theCorporation had not adopted SFAS 123R.

Statement 123, asamended, required pro forma presentation as if compensation costs had beenexpensed under the fair value method. For purpose of pro forma disclosure, theestimated fair value of stock options at the grant date is amortized to expenseover the vesting period. The following table illustrates the effect on netincome and net income per share as if compensation expense had been recognized(in thousands, except for per share amounts):
|                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                               | ** ** | **October 1, 2005**         | ** ** | **October 1, 2005**        | ** ** |
| Reported net  income applicable to common shareholders   |       | $                                | 8,223      |                            | $          | 24,507 |   |
| Pro forma  stock-based compensation expense (net of tax) |       | (62                              | )          | (161                            | )          |
| Stock-based  employee compensation recorded (net of tax) |       | 36                               |       | 54                              |       |
|                                                     |       |                             |       |                            |       |
| Adjusted net  income                                     |       | $                                | 8,197      |                            | $          | 24,400 |   |
|                                                     |       |                             |       |                            |       |
| Basic net income  per share applicable to common:        |       |                             |       |                            |       |
| Reported net  income per share                           |       | $                                | 0.24       |                            | $          | 0.73 |   |
| Stock-based  compensation expense (net of tax) per share |       | —                           |       | —                          |       |
|                                                     |       |                             |       |                            |       |
| Adjusted net  income per share                           |       | $                                | 0.24       |                            | $          | 0.73 |   |
|                                                     |       |                             |       |                            |       |
| Diluted net  income per share applicable to common:      |       |                             |       |                            |       |
| Reported net  income per share                           |       | $                                | 0.24       |                            | $          | 0.71 |   |
| Stock-based  compensation expense (net of tax) per share |       | (0.01                            | )          | —                          |       |
|                                                     |       |                             |       |                            |       |
| Adjusted net income per  share                           |       | $                                | 0.23       |                            | $          | 0.71 |   |

 

The compensationcost related to non-vested awards not yet recognized is approximately $33, net,and the weighted average period over which it is expected to be recognized isless than 1 year.  During the nine month period ended September 30, 2006,the Corporation issued 145 shares of common stock through the exercise of stockoptions, 117 shares of common stock through the exercise of warrants and 10 sharesof common stock were issued under the Employee Stock Savings Plan.

**8.  Income Taxes**

The Corporation’seffective tax rate was 30.5% for the nine month period ended September 30, 2006as compared to 30.8% for the same periods in 2005. The decrease in the ratefrom the 2005 effective tax rate was primarily due to recognizing stateeconomic development credits and other tax credits in the second quarter of2006 and a higher percentage of income coming from lower tax jurisdictionsoutside of the United States. The 2006 rate would have been lower had theexpiration of the Federal research tax credit on December 31, 2005 notoccurred.  The United States government has not yet reinstated this taxcredit.

8

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**9.  Segment Reporting**

The Corporationprimarily designs, develops and manufactures implants and related surgicalinstruments and cases for orthopedic device companies and companies in othermedical device markets such as dental, osteobiologic and endoscopy. TheCorporation also has a special services business serving primarily aerospacecustomers, which does not meet the quantitative disclosure requirements of SFAS131. The Corporation manages its business and operates in a single reportablebusiness segment. Because of the similar economic characteristics of theoperations, including the nature of the products, comparable level of FDAregulations, same or similar customers, those operations have been aggregatedfollowing the provisions of SFAS 131 for segment reporting purposes.

The Corporation isa multi-national corporation with operations in the United States, the UnitedKingdom, Ireland, Switzerland and France. As a result, the Corporation’sfinancial results can be impacted by currency exchange rates in the foreignmarkets in which the Corporation sells its products. While exposure tovariability in foreign currency exists, the Corporation does not believe it issignificant to its operations and any variability is somewhat offset throughthe location of its manufacturing facilities. Revenue is attributed togeographic locations based on the location to which we ship our products.

*Revenuefrom External Customers:*
|                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **September 30,**           | ** ** | **October 1,**             | ** ** | **September 30,** | ** ** | **October 1,** | ** ** |
| ** **               | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| United States            |       | $                                | 36,080     |                            | $          | 43,631 |   | $ | 123,253 |   | $ | 131,060 |   |
| Ireland                  |       | 6,237                            |       | 7,998                           |       | 19,593 |   | 24,288 |   |
| United Kingdom           |       | 10,340                           |       | 8,843                           |       | 29,922 |   | 23,713 |   |
| Other foreign  countries |       | 8,083                            |       | 6,756                           |       | 22,345 |   | 22,104 |   |
|                     |       |                             |       |                            |       |   |   |   |   |
| Total net revenues       |       | $                                | 60,740     |                            | $          | 67,228 |   | $ | 195,113 |   | $ | 201,165 |   |

 

*Concentrationof Credit Risk:*

A substantialportion of the Corporation’s revenue is derived from a limited number ofcustomers. The Corporation’s revenue includes revenue from customers of theCorporation which individually account for 10% or more of revenue as follows:

Quarter endedSeptember 30, 2006—Three customers representing approximately 18%, 14% and 10%of revenue, respectively.

Quarter endedOctober 1, 2005—Two customers representing approximately 37% and 14% ofrevenue, respectively.

Following is asummary of the composition by product category of the Corporation’s revenue toexternal customers. Revenue of the specialty services business is included inthe “other” category.
|                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **         | ** ** | **September 30,**           | ** ** | **October 1,**             | ** ** | **September 30,** | ** ** | **October 1,** | ** ** |
| ** **         | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Implants           |       | $                                | 23,324     |                            | $          | 28,164 |   | $ | 73,033 |   | $ | 76,578 |   |
| Instruments        |       | 14,497                           |       | 20,020                          |       | 54,107 |   | 67,867 |   |
| Cases              |       | 16,623                           |       | 14,217                          |       | 47,782 |   | 43,822 |   |
| Other              |       | 6,296                            |       | 4,827                           |       | 20,191 |   | 12,898 |   |
|               |       |                             |       |                            |       |   |   |   |   |
| Total net revenues |       | $                                | 60,740     |                            | $          | 67,228 |   | $ | 195,113 |   | $ | 201,165 |   |

 

9

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**10.  Net Income Per Share**

The followingtable sets forth the computation of earnings per share.
|                                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **September 30,**           | ** ** | **October 1,**             | ** ** | **September 30,** | ** ** | **October 1,** | ** ** |
| ** **                                                          | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income  available to common shareholders                        |       | $                                | 2,991      |                            | $          | 8,223 |   | $ | 19,048 |   | $ | 24,507 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Weighted-average  common shares outstanding basic                   |       | 34,841                           |       | 34,310                          |       | 34,796 |   | 33,575 |   |
| Effect of stock  options, restricted stock and stock warrants       |       | 330                              |       | 677                             |       | 366 |   | 951 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Weighted-average  common shares outstanding and assumed conversions |       | 35,171                           |       | 34,987                          |       | 35,162 |   | 34,526 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Net income per  share available to common shareholders:             |       |                             |       |                            |       |   |   |   |   |
| Basic                                                               |       | $                                | 0.09       |                            | $          | 0.24 |   | $ | 0.55 |   | $ | 0.73 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Diluted                                                             |       | $                                | 0.09       |                            | $          | 0.24 |   | $ | 0.54 |   | $ | 0.71 |   |

 

**11.  Commitments and Contingencies**

The Corporation isinvolved, from time to time, in various contractual, product liability, patent(or intellectual property) and other claims and disputes incidental to itsbusiness. Currently, there is no environmental or other litigation pending or,to the knowledge of the Corporation, threatened, that the Corporation expectsto have a material adverse affect on its financial condition, results ofoperations or liquidity. While litigation is subject to uncertainties and theoutcome of litigated matters is not predictable with assurance, the Corporationcurrently believes that the disposition of all pending or, to the knowledge ofthe Corporation threatened, claims and disputes, individually or in theaggregate, should not have a material adverse effect on the Corporation’sconsolidated financial condition, results of operations or liquidity.

**12.  Comprehensive Income**

Comprehensiveincome is comprised of net income and gains and losses resulting from currencytranslations of foreign entities. Comprehensive income consists of thefollowing:
|                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **September 30,**           | ** ** | **October 1,**             | ** ** | **September 30,** | ** ** | **October 1,** | ** ** |
| ** **                                | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net Income                                |       | $                                | 2,991      |                            | $          | 8,223 |   | $ | 19,048 |   | $ | 24,507 |   |
| Foreign currency  translation adjustments |       | 670                              |       | (13                             | )          | 6,600 |   | (6,054 | ) |
|                                      |       |                             |       |                            |       |   |   |   |   |
| Comprehensive income                      |       | $                                | 3,661      |                            | $          | 8,210 |   | $ | 25,648 |   | $ | 18,453 |   |

 

**13.  Acquisitions**

On May 1,2006, the Corporation completed the acquisition of Riley Medical, aprivately-owned company based in Auburn, Maine, for approximately $45,740 innet cash, subject to adjustment. Riley Medical is a manufacturer of standardand custom cases, trays and containers for the medical device industry withlocations in the United States and Switzerland.  The acquisition expandsthe Corporation’s geographic footprint in Europe and the case product line,including several new patents and trademarks.  Results of Riley Medicalare included in the statement of operations from the acquisition date.

The aggregatepurchase price is preliminary, subject to adjustment and expected to befinalized in the fourth fiscal quarter. As of September 30, 2006, the aggregatepurchase price of $45,740 was allocated to the opening balance sheet asfollows:

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| Current assets                                                  |   | $      | 6,551  |   |
|-----------------------------------------------------------------|--------|--------|--------|--------|
| PP&E                                                        |   | 3,577  |   |
| Acquired  technology (amortized over average weighted 13 years) |   | 1,050  |   |
| Acquired  customers (amortized over 15 years)                   |   | 9,810  |   |
| Non-compete  agreements (amortized over 5 years)                |   | 110    |   |
| Trademarks  (indefinite-lived)                                  |   | 1,300  |   |
| Goodwill                                                        |   | 25,360 |   |
| Current  liabilities                                            |   | (2,018 | )      |
|                                                            |   |   |   |
| Purchase price, net                                             |   | $      | 45,740 |   |

 

*Unaudited Proforma Results*  Thefollowing table represents the pro forma results of the Corporation’soperations had the acquisition of Riley Medical been completed as of thebeginning of the periods presented.
|                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **September 30,**           | ** ** | **October 1,**             | ** ** | **September 30,** | ** ** | **October 1,** | ** ** |
| ** **                               | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue                                  |       | $                                | 60,740     |                            | $          | 72,981 |   | $ | 202,226 |   | $ | 218,115 |   |
| Income available  to common shareholders |       | 2,991                            |       | 8,365                           |       | 18,721 |   | 25,955 |   |
| Earnings per  share—basic           |       | $                                | 0.09       |                            | $          | 0.24 |   | $ | 0.54 |   | $ | 0.77 |   |
| Earnings per  share—diluted         |       | $                                | 0.09       |                            | $          | 0.24 |   | $ | 0.53 |   | $ | 0.75 |   |

 

On August 31,2006, the Corporation completed the acquisition of Everest Metal, aprivately-owned company, for approximately $8,802 in net cash, subject toadjustment and an earn-out provision. The earn-out provision may requirepayments of up to $400 at the end of 2006 and $1,000 at the end of 2007 ifcertain sales targets are met.  EverestMetal is an implant finishing operation with locations in the United States andIreland. Everest Metal’s core competencies will accelerate the Corporation’sstated plan of growing its implant finishing operations and strengthening itslocal presence near its customers. Results of Everest Metal are included in thestatement of operations from the acquisition date.

The aggregatepurchase price is preliminary, subject to adjustment and an earn-out provision,and expected to be finalized in the fourth quarter. As of September 30, 2006,the aggregate purchase price of $8,802 was allocated to the opening balancesheet as follows:

| Current assets                                   |   | $      | 774    |   |
|--------------------------------------------------|--------|--------|--------|--------|
| PP&E                                         |   | 659    |   |
| Acquired  customers (amortized over 15 years)    |   | 5,280  |   |
| Non-compete  agreements (amortized over 5 years) |   | 180    |   |
| Goodwill                                         |   | 2,047  |   |
| Current  liabilities                             |   | (138   | )      |
|                                             |   |   |   |
| Purchase price, net                              |   | $      | 8,802  |   |

 

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**ITEM 2.****     MANAGEMENT’S DISCUSSION ANDANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION**

**Overview**

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

We offer our customersTotal Solution® for complete implant systems—implants,instruments and cases. While our revenue to date has been derived primarilyfrom the sale of implants, instruments and cases separately, or instruments andcases together, our ability to provide Total Solutions for complete implantsystems has already proven to be attractive to our customers, and we expectthis capability will provide us with growth opportunities. In addition, weexpect that our Total Solutions capability will increase the relativepercentage of value added products that we supply to our customers. Theexpansion of our Design & Development Centers provides better TotalSolutions management, increased prototyping capacity and increased engineeringresources to drive our own product development and expand design services. Weview our Design & Development Centers as a strategic competitive advantage.

Our Annual Reporton Form 10-K for the fiscal year ended December 31, 2005, providesadditional information about our business, operations and financial condition.

On May 1,2006, we completed the acquisition of Riley Medical, a privately-owned companybased in Auburn, Maine, for $45.7 million in net cash, subject to adjustment.Riley Medical is a manufacturer of standard and custom cases, trays andcontainers for the medical device industry with locations in the United Statesand Switzerland. Riley Medical’s innovative case products, such as theFlashpakTM, have been well received by our customers.  Riley Medical’sproducts have allowed us to realize a number of cross-selling synergies andadditional market reach into markets such as spine and endoscopy.

On August 31,2006, we completed the acquisition of Everest Metal, a privately-owned company,for approximately $8.8 million in net cash, subject to adjustment and anearn-out provision. The earn-out provision may require payments of up to $0.4million at the end of 2006 and $1.0 million at the end of 2007 if certain salestargets are met.  Everest Metal is animplant finishing operation with locations in the United States and Ireland. Everest Metal’s core competencies will accelerate our stated plan ofgrowing our implant finishing operations and strengthening the local presencenear our customers.

During the third quarter2006, our revenue was impacted by the slowdown in demand for major orthopedicjoints throughout the industry.  The orthopedic environment, from ourperspective, went through a strong year of revenue growth in 2005 driven by alarge volume of new customer product launches.  Procedure volumes andproduct mix were also favorable for our customers during this period.  Inthe first nine months of 2006, we saw a reduction in new product launches fromour customers and slower growth on procedure volume for reconstructive joints.

As a key supplierto the original equipment manufactures in the orthopedic industry for thesejoints, we believe that we are disproportionately affected by these industrydevelopments.  As our customers’ growth accelerates, we tend to growfaster and when their growth decelerates, we tend to slow down morerapidly.  These results were further impacted by a reduction in ourcustomers’ product launches.  Fewer customer launches disproportionatelyimpact our sales of instrument and cases as demand for these products isrelated to launches of new products.  While the current market conditionsimpact the entire supply chain, we remain confident that we will continue asthe leading provider to the orthopedic market with implants, instruments andcases.  Further, we believe we remain well positioned to respond to anupturn in demand of the supply chain for the orthopedic industry.

We believe it isimportant to continue with the main strategic intent of our business and useour strength and market position.  We are taking advantage of this slowerperiod to increase the productivity of our manufacturing sites and to extendour Total Solutions approach into other markets.  In particular, wecontinue to expand our engineering resources that produce and provide closerand critical customer relationships on the development of new products. In addition, our focus on increasing revenue of finished implants to ourcurrent customers progressed in the quarter, aided by our acquisition ofEverest Metal. We are developing our activities in Switzerland through theRiley Medical acquisition and are exploring opportunities in Asia to supportour global expansion initiative. This local presence in the global marketplaceallows us to be closer to our customer base, provide quicker response times andincrease our value added services.

**ThirdQuarter Results of Operations**

*Revenue.*  Revenue for the three month period ended September 30, 2006 decreased $6.5million, or 9.7%, to $60.7 million from $67.2 million for the comparable 2005period.  Revenue for each of our principal product categories in these 

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periods was as follows:

 
|                           | ** ** | **Three Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **September 30,**           | ** ** | **October 1,** | ** ** |
| **Product Category** | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(in millions)**           | ** ** |
| Implants                  |       | $                                | 23.3       |   | $ | 28.2 |   |
| Instruments               |       | 14.5                             |       | 20.0 |   |
| Cases                     |       | 16.6                             |       | 14.2 |   |
| Other                     |       | 6.3                              |       | 4.8 |   |
|                      |       |                             |       |   |   |
| Total                     |       | $                                | 60.7       |   | $ | 67.2 |   |

 

The $6.5 millionreduction in revenue resulted from lower implant and instrument revenue of $4.9million and $5.5 million respectively, as a result of the slowdown in demandfor major orthopedic joints throughout the industry and major customersadjusting inventory levels of our products.  Because of our position inthe supply chain for these joints, we are disproportionately affected by theseindustry developments.  These results were further impacted by a reductionin our customers’ product launches.  These reductions were partiallyoffset by increased case sales of $2.4 million due to $5.4 million of salesfrom the Riley Medical acquisition. The Other category increase of $1.5 millionwas driven by the continued strength in the aerospace industry.

*GrossProfit.*   Gross profit for the three month periodended September 30, 2006 decreased $6.1 million, or 30.9%, to $13.6 millionfrom $19.7 million for the comparable 2005 period. Gross margin was 22.5% forthe three month period ended September 30, 2006 compared to 29.4% for the comparable2005 period. The decline in gross margin as a percentage of sales was primarilydriven by higher fixed costs from our significant investment in 2005 capacityexpansion across our global facilities and a more pronounced sales reduction inour higher margin products within several of our product segments.  Weview our global infrastructure as a competitive strength, and we have made adeliberate decision to keep our infrastructure in place, enabling us to respondquickly to our customers’ needs and produce high volume orders on short notice.

*Selling,General and Administrative Expenses.*   Selling,general and administrative expenses for the three month period ended September30, 2006 decreased $0.1 million, or 0.6%, to $7.4 million from $7.5 million forthe comparable 2005 period.  The 2006 period includes additional expensesof Riley Medical for the full quarter and Everest Metal expenses for one month,as well as $0.2 million of additional intangible asset amortization and anincrease in expenses from costs related to additional stock compensationexpenses. Despite these increased expenses, we were able to reduce costs acrossour global facilities so that total expenses decreased.  As a percentage of revenue, selling, generaland administrative expenses still increased to 12.2% of revenue for the threemonth period ended September 30, 2006 from 11.1% of revenue for the comparable2005 period due to the reduction in revenue.

*OtherExpense.*   Interest expense for the three monthperiod ended September 30, 2006 increased $0.7 million, or 112.6%, to $1.3million from $0.6 million for the comparable 2005 period. This increasereflects the additional $40 million senior term debt related to the acquisitionof Riley Medical.  This increase was partially offset by the reduction inoutstanding capital lease obligations and existing senior term debt throughnormal amortization.  No additional borrowingswere needed to complete the Everest Metal acquisition.

The derivativesvaluation (gains) losses consist of interest rate swap valuations used tomitigate the effect of changing interest rates on net income and foreigncurrency forward contracts used to mitigate the effect of changes in theforeign exchange rates on net income. The increase in the loss of $1.3 millionfor the three month period ended September 30, 2006 versus the comparable 2005period is due to market fluctuations in these contracts, which are notdesignated as hedges under SFAS 133. $1.2 million of this loss related to the interest rate swap valuation.

*Provisionfor Income Taxes.*   Our effective tax rate was21.6% for the three month period ended September 30, 2006 as compared to 23.8%for the comparable 2005 period. Provision for income taxes decreased by $1.8million, or 67.8%, to $0.8 million for the three month period ended September30, 2006 from $2.6 million for the comparable 2005 period. This decrease inrate was primarily due to a higher percentage of income coming from lower tax jurisdictionsoutside of the United States.  We did not record a Federal research anddevelopment tax credit in 2006 since the United States government has not yetreinstated Section 41 of the U.S. tax code.

**NineMonths Results of Operations**

*Revenue.*  Revenue for the nine month period ended September 30, 2006 decreased $6.1million, or 3.0%, to $195.1 million from $201.2 million for the comparable 2005period. Revenue for each of our principal product categories in these 

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periods was as follows:

 
|                           | ** ** | **Nine Months Ended** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **September 30,**          | ** ** | **October 1,** | ** ** |
| **Product Category** | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(in millions)**          | ** ** |
| Implants                  |       | $                               | 73.0       |   | $ | 76.6 |   |
| Instruments               |       | 54.1                            |       | 67.9 |   |
| Cases                     |       | 47.8                            |       | 43.8 |   |
| Other                     |       | 20.2                            |       | 12.9 |   |
|                      |       |                            |       |   |   |
| Total                     |       | $                               | 195.1      |   | $ | 201.2 |   |

 

The $6.1 milliondecrease in revenue resulted from decreased implant and instrument revenue of$3.6 million and $13.8 million, respectively, due to slower demand fromcustomers as discussed in the Overview section. These decreases were partially offset by increased case and otherrevenue.  Case revenue increased $4.0million including $8.8 million from the Riley Medical acquisition. The otherrevenue increased $7.3 million due to continued strength in the aerospaceindustry.

*GrossProfit.*   Gross profit for the nine month periodended September 30, 2006 decreased $9.7 million, or 16.0%, to $50.9 millionfrom $60.6 million for the comparable 2005 period. Gross margin was 26.1% forthe nine month period ended September 30, 2006 compared to 30.1% for thecomparable 2005 period. The decline in gross margin of 4.0% was primarilydriven by higher fixed costs across our global facilities and a more pronouncedsales reduction in our higher margin products within several of our productsegments.  We view our globalinfrastructure as a competitive strength, and we have made a deliberatedecision to keep our infrastructure in place, enabling us to respond quickly toour customers’ needs and produce high volume orders on short notice.

*Selling,General and Administrative Expenses.*   Selling,general and administrative expenses for the nine month period ended September30, 2006 increased $0.1 million, or 0.9%, to $21.3 million from $21.2 millionfor the comparable 2005 period. While a number of initiatives to cut costsacross our global facilities resulted in a reduction of costs, the addition ofexpenses related to the acquisitions of Riley Medical (for five months) andEverest Metal (for one month) drove a slight increase in our SG&A costs forthe nine months.  We also had an increase in expenses primarily resultingfrom costs related to additional stock compensation expenses. As a percentageof revenue, selling, general and administrative expenses increased to 10.9% ofrevenue for the nine month period ended September 30, 2006 from 10.5% ofrevenue for the comparable 2005 period. This 0.4% increase as a percentage ofrevenue was attributable to the addition of Riley Medical and Everest Metalacquisitions partially offset by controlled spending on slightly lower sales.

*OtherExpense.*   Interest expense for the nine monthperiod ended September 30, 2006 increased $0.6 million, or 25.1%, to $2.9million from $2.3 million for the comparable 2005 period. This increaseprimarily reflects the increase of interest from our $40 million new seniorterm debt from the Riley Medical acquisition offset by a decrease inoutstanding capital lease obligations and previously held senior term debt.

The derivativesvaluation (gains) losses consist of interest rate swap valuations used tomitigate the effect of changing interest rates on net income and foreigncurrency forward contracts used to mitigate the effect of changes in theforeign exchange rates on net income. The decrease in the gain for the ninemonth period ended September 30, 2006 versus the comparable 2005 period is dueto market fluctuations in these contracts, which are not designated as hedgesunder SFAS 133.

Also included inOther is a $1.2 million gain on the sale of surplus land adjacent to ourSheffield, UK facility.  This resulted in an after tax gain of $0.8million.

*Provisionfor Income Taxes.*   Provision for income taxesdecreased by $2.5 million, or 23.5%, to $8.4 million for the nine month periodended September 30, 2006 from $10.9 million for the comparable 2005 period. Oureffective tax rate was 30.5% for the nine month period ended September 30, 2006as compared to 30.8% for the comparable 2005 period. This decrease of 0.3% wasdue primarily to the addition of the Indiana EDGE tax credit of $0.3, recordedin the second quarter of 2006, and a higher percentage of income coming fromlower tax jurisdictions outside of the United States.

**Liquidityand Capital Resources**

Our principalsources of cash in the nine month period ended September 30, 2006 were cashgenerated from operations, borrowings under our senior credit term loanfacility and U.K. revolving credit facility, proceeds from the sale of fixedassets (mainly sale of surplus land adjacent to our Sheffield, U.K. facility)and proceeds from the exercise of common stock options. 

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Principal uses of cash inthe nine month period ended September 30, 2006 included working capital,capital expenditures, acquisitions and debt service. We expect that ourprincipal uses of cash in the future will be to finance working capital, to payfor capital expenditures, to service debt and to fund potential mergers andacquisitions.

We completed theacquisition of Riley Medical on May 1, 2006 for $45.7 million, subject toadjustment, through the use of the existing cash balances and a$40.0 million senior debt facility. We also completed the acquisition of Everest Metal on August 31, 2006for $8.8 million, subject to adjustment and an earn-out provision, through theuse of existing cash balances.

*OperatingActivities  * We generated cash from operations of$25.4 million in the nine month period ended September 30, 2006 compared to $34.6 millionfor the nine month period ended October 1, 2005, which is a decrease of $10.2million. The decrease in cash from operations is primarily a result of thedecrease in net income of $5.5 million combined with the decrease cash flowfrom working capital of $4.7 million for the comparable periods. Cash providedby operating activities in the nine month period ended September 30, 2006 isprimarily the result of a $31.5 million in net income, adjusted fornon-cash items, such as depreciation expense and the derivative valuationchange, offset by increases in net working capital.

Uses of cash dueto changes in working capital were $6.1 million in the nine month periodended September 30, 2006.  The primary uses of cash for working capitalcame from an increase in inventory of $1.7 million and decreases in accountspayable and accrued expenses of $7.6 million. A portion of the decrease inaccounts payable was due to lower volume and lower capital expenditurepurchases and a portion of the decrease in accrued expenses was due toreduction of performance bonus accruals.

*InvestingActivities  * Capital expenditures decreased by$15.5 million, or 49.5%, in the nine month period ended September 30, 2006compared to the nine month period ended October 1, 2005.  The RileyMedical and Everest Metal acquisitions accounted for a $54.5 million use ofcash in 2006.  We also sold a portion of land that was not needed forexpansion near our Sheffield, United Kingdom facility for approximately $2.4million in the second quarter of 2006.

*FinancingActivities  * Financing activities generated $39.5million of cash due primarily to the $40.0 million term loan obtained inconjunction with the Riley Medical acquisition.

***Capital Expenditures***

Capitalexpenditures totaled $15.8 million for the nine months ended September 30,2006, compared to $31.4 million for the nine month period ended October 1,2005. Expenditures were primarily used to complete our new design anddevelopment facility in Warsaw, Indiana, expand our Sheffield, U.K. facilityfor increased forge and machining capacity for the aerospace products, andmaintain production capacity in all of our production facilities.

***Debt and Credit Facilities***

In connection withour May 2006 acquisition of Riley Medical, we entered into a $40.0 million seniorsecured five-year term loan. As part of an amendment and restatement of oursenior credit facility, we negotiated a 25 basis point interest rate reductionfor all of our outstanding senior debt.

As of September30, 2006, we had an aggregate of $77.9 million of outstanding indebtedness,which consisted of $64.2 million of term loan borrowings outstanding under oursenior credit facility, no borrowings outstanding under our revolving creditfacility, $4.7 million of borrowings under our U.K. short-term credit facilityand $9.0 million of capital lease obligations. We had no outstanding letters ofcredit as of September 30, 2006.  We haveprepaid our scheduled senior term loan payments through the first quarter of2007.

Our senior creditagreement contains various financial covenants, including covenants requiring amaximum total debt to EBITDA ratio, minimum EBITDA to interest ratio and aminimum EBITDA to fixed charges ratio. We were in compliance with our financialand restrictive covenants under the senior credit facility as of September 30,2006.

We believe thatcash flow from operating activities and borrowings under our senior creditfacility will be sufficient to fund currently anticipated working capital,planned capital spending, debt service requirements for the foreseeable future,including at least the next twelve months. We also review technology,manufacturing and other strategic acquisition opportunities regularly, whichmay require additional debt or equity financing.

**ContractualObligations and Commercial Commitments**

The followingtable reflects our contractual obligations as of September 30, 2006:

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|                                 | ** ** | **Payments due by period** | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **Total**                                 | ** ** | **Less than  1 year*** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More  than 5  years** | ** ** |
| ** **                      | ** ** | **(in millions)**                    | ** ** |
| Long-term debt  obligations (1) |       | $                                         | 64.2       |   | $ | — |   | $ | 14.7 |   | $ | 22.3 |   | $ | 27.2 |   |
| Capital lease  obligations      |       | 13.7                                      |       | 1.0 |   | 6.0 |   | 2.1 |   | 4.6 |   |
| Operating lease  obligations    |       | 5.1                                       |       | 0.4 |   | 2.4 |   | 1.4 |   | 0.9 |   |
| Purchase  obligations (2)       |       | 37.2                                      |       | 5.7 |   | 15.7 |   | 10.5 |   | 5.3 |   |
|                            |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                           |       | $                                         | 120.2      |   | $ | 7.1 |   | $ | 38.8 |   | $ | 36.3 |   | $ | 38.0 |   |

 

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*                 Lessthan 1 year is defined as the remainder of fiscal 2006. Following periods arewhole fiscal years.

(1)        Represents principal maturities only and,therefore, excludes the effects of interest and interest rate swaps.  Wehave prepaid $3.3 million in term debt as of September 30, 2006.

(2)        Represents purchase agreements to buy minimumquantities of titanium and cobalt chrome through December 2007.  Thetitanium contract disclosed in our Annual Report on Form 10-K has been modifiedand additional titanium and cobalt chrome contracts have been entered into inthe second quarter of 2006.  Alsorepresents a purchase agreement to buy Radel® R, a specialized plastic used incases, through December 2011.

**Off-BalanceSheet Arrangements**

Our off-balancesheet arrangements and contractual obligations include our operating leases andletters of credit. There have been no material changes from the informationprovided in our Annual Report on Form 10-K for fiscal year endedDecember 31, 2005.

**Environmental**

There have been nomaterial changes from the information provided in our Annual Report onForm 10-K for fiscal year ended December 31, 2005.

**CriticalAccounting Policies and Estimates**

The preparation ofour financial statements requires management to make estimates, judgments andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses during the periods presented. Our Annual Report on Form 10-Kfor fiscal year ended December 31, 2005 includes a summary of the criticalaccounting policies we believe are the most important to aid in understandingits financial results. There have been no material changes to these criticalaccounting policies that impacted our reported amounts of assets, liabilities,revenues or expenses during the nine months ended September 30, 2006.

**NewAccounting Pronouncements**

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

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

As a result ofadopting SFAS 123R, our income before income taxes and net income for the ninemonths ended September 30, 2006 are $92 and $55 lower, respectively, than if wehad continued to account for share-based compensation under Opinion 25. Basicand diluted earnings per share for the nine months ended September 30, 2006would not have changed from $0.55 and $0.54, respectively, if we had notadopted SFAS 123R.

Prior to theadoption of SFAS 123R, we presented all tax benefits of deductions resultingfrom the exercise of stock options as operating cash flows in the ConsolidatedStatements of Cash Flows. SFAS 123R requires the cash flows resulting from thetax benefits resulting from tax deductions in excess of the compensation costrecognized for those options (excess tax

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benefits) to beclassified as financing cash flows. The $1.1 million excess tax benefitclassified as a financing cash inflow would have been classified as anoperating cash inflow if we had not adopted SFAS 123R.

Statement 123, asamended, required pro forma presentation as if compensation costs had beenexpensed under the fair value method. For purpose of pro forma disclosure, theestimated fair value of stock options at the grant date is amortized to expenseover the vesting period.

In July 2006, theFASB issued FASB Interpretation No. (FIN) 48,*Accounting for Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109*, which clarifies the accounting for uncertainty in taxpositions. This Interpretation requires the recognition of a tax position whenit is more likely than not that the tax position will be sustained uponexamination by relevant taxing authorities, based on the technical merits ofthe position. The provisions of FIN 48 are effective for us on January 1, 2007,with the cumulative effect of the change in accounting principle recorded as anadjustment to opening retained earnings. We are currently evaluating the impactof adopting FIN 48 on the financial statements.

**CautionaryNotice Regarding Forward-Looking Statements**

Certain statementscontained in this Quarterly Report on Form 10-Q and other written and oralstatements made from time to time by the Corporation do not relate strictly tohistorical or current facts. As such they are considered “forward-lookingstatements” that provide current expectations or forecasts of future events.Forward-looking statements typically are identified by the use of terms such as“may,” “will,” “should,” “expect,” “anticipate,” “believe,” “could,” “estimate,”“intend” and similar words, although some forward-looking statements areexpressed differently. Factors that could cause the Corporation’s actualresults to differ materially from the expectations expressed in ourforward-looking statements include, but are not limited to, the following:changes in general economic conditions in the United States and Europe; ourability to retain existing customers, particularly our key customers, andattract new customers; the timing of significant orders and shipments,including the effects of changes in inventory management practices by ourcustomers; the competitive nature of the orthopedic device market; the pursuitof strategic acquisitions or encountering unforeseen difficulties inintegrating acquisitions; the degree to which we are leveraged and oursignificant debt service obligations; the impact of work stoppages andother labor matters; general economic or business conditions affecting theorthopedic device market being less favorable than expected; our ability toanticipate changes in technology and regulatory standards and to successfullydevelop and introduce new and enhanced products on a timely basis; theunpredictability of intellectual property protection and maintenance and otherintellectual property issues; any future changes in management or loss of keypersonnel; unforeseen problems associated with international sales andoperations, including gains and losses from foreign currency exchange; productliability lawsuits brought against us or our customers; implementation of orchanges in laws, regulations or policies that could negatively affect theorthopedic device market; and other uncertainties and factors discussed in the “RiskFactors” section of the Corporation’s Annual Report on Form 10-K filed onFebruary 27, 2006, elsewhere in this Quarterly Report on Form 10-Qand in the Corporation’s other filings with the Securities and ExchangeCommission.

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

**ITEM 3.****                          QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

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

**ITEM 4.****                          CONTROLSAND PROCEDURES**

(a)   Evaluation of disclosure controls and procedures.

Our ChiefExecutive Officer and Chief Financial Officer, after evaluating theeffectiveness of our “disclosure controls and procedures” (as defined inRule 13a-15(e) of the Securities Exchange Act of 1934), haveconcluded that, as of the end of the fiscal quarter covered by this report onForm 10-Q, our disclosure controls and procedures were adequate anddesigned to ensure that material information relating to the Corporation and itsconsolidated subsidiaries would be made known to them by others within thoseentities.

(b)   Changes in internal control over financial reporting.

During thequarter, there have been no changes in our “internal control over financialreporting” (as defined in Rule 13a-15(f)

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of the SecuritiesExchange Act of 1934) that occurred during the fiscal quarter covered by thisreport on Form 10-Q that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting, exceptthat we are still in the process of integrating the Riley Medical and EverestMetal operations and will be incorporating these operations as part of ourinternal controls. For purposes of this evaluation, the impact of theseacquisitions on our internal controls over financial reporting has beenexcluded. See Note 13 to the condensed consolidated financial statementsincluded in Item 1 for a discussion of the Riley Medical and Everest Metalacquisitions.

**PART II  OTHER INFORMATION**

**ITEM 1****                             LEGALPROCEEDINGS**

None.

**ITEM 1A****                    RISK FACTORS**

In addition to theother information set forth in this report, you should carefully consider thefactors discussed in Part I, Item 1A “Risk Factors” contained in ourAnnual Report on Form 10-K for the fiscal year ended December 31,2005, which could materially affect our business, financial condition or futureresults. The Risk Factors included in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2005 have notmaterially changed.

**ITEM 2****                             RECENTSALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES**

On September 29,2006, Olympus Growth Fund III, L.P. converted warrants to purchase 88,282shares of the Corporation’s common stock into 88,223 shares of the Corporation’scommon stock.

The above issuanceof shares of the Corporation’s common stock upon the conversion or exercise ofwarrants on September 29, 2006 was made in reliance on the exemptions providedby Section 3(a)(9) and 4(2) of the Securities Act of 1933.

**ITEM 5****                             OTHERINFORMATION**

(b)       There have been no material changes to theprocedures by which security holders may recommend nominees to our Board ofDirectors since our Schedule 14A filed March 21, 2006.

**ITEM 6****                             EXHIBITS**
| 10.24  |   | Asset Purchase Agreement, dated August 31, 2006,  between Symmetry Medical USA Inc. and Everest Metal Finishing LLC and  Christopher W. Huntington, Phillip Milidantri, and Levi Citarella  (incorporated by reference to Exhibit 10.1 from our Form 8-K filed on  September 9, 2006). |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.25  |   | Stock Purchase Agreement, dated August 31, 2006,  between Symmetry Medical International Inc. and Christopher W. Huntington,  Phillip Milidantri, and Levi Citarella (incorporated by reference to Exhibit  10.2 from our Form 8-K, filed September 9, 2006).                          |
|   |   |                                                                                                                                                                                                                                                                                   |
| 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.                                                                                             |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|   |     | SYMMETRY MEDICAL INC. |                                                 |   |
|--------|----------|-----------------------|------------------------------------------------------|--------|
|   |     |                  |                                                 |   |
|   |     |                  |
|   |     | By                    | /s/ BRIAN MOORE                                      |
|   |     |                  | Brian Moore,                                         |
|   | * * |                  | *President and Chief Executive  Officer*             |
|   | * * |                  | *(Principal Executive Officer)*                      |
|   |     |                  |                                                 |
|   |     |                  |                                                 |
|   |     | By                    | /s/ FRED HITE                                        |
|   |     |                  | Fred Hite,                                           |
|   | * * |                  | *Senior Vice President and Chief  Financial Officer* |
|   | * * |                  | *(Principal Financial and  Accounting Officer)*      |
|   |     |                  |                                                 |   |   |

 

November 8, 2006

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