**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**Washington, D.C. 20549

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**FORM 10-Q**

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

 

**For the transition** period from             to            

**Commission File Number 001-32374**

**SYMMETRY MEDICAL INC.**(Exact name of registrant as specified in itscharter)
| **Delaware**                                                  | ** ** | **35-1996126**                      |
|---------------------------------------------------------------|------------|-------------------------------------|
| (State or other jurisdiction ofincorporation or organization) |       | (I.R.S. EmployerIdentification No.) |
|                                                          |       |                                |
| **220 W. Market Street, Warsaw, Indiana**                     | ** ** | **46580**                           |
| (Address of principal executive offices)                      |       | (Zip code)                          |

 

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

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes xNo o

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

 

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

The number of sharesoutstanding of the registrant’s common stock as of July 1, 2006 was34,894,106.

 

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**TABLE OF CONTENTS**
| **PART I FINANCIAL  INFORMATION** |   |                                                                                                                      |
|----------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|
| ** **                             |   |                                                                                                                      |
| Item 1                            |   | Financial Statements:                                                                                                     |   |   |
|                                   |   |                                                                                                                      |   |   |
|                                   |   | Condensed Consolidated Balance Sheets: As  of July 1, 2006 and December 31, 2005                           |   |   |
|                                   |   |                                                                                                                      |   |   |
|                                   |   | Condensed Consolidated Statements of Operations: Three  and Six Months Ended July 1, 2006 and July 2, 2005 |   |   |
|                                   |   |                                                                                                                      |   |   |
|                                   |   | Condensed Consolidated Statements of Cash Flows: Six  Months Ended July 1, 2006 and July 2, 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                            |   | Unregistered Sales of Equity Securities and Use of  Proceeds                                                              |   |   |
|                                   |   |                                                                                                                      |   |   |
| Item 4                            |   | Submission of Matters to a Vote of Security Holders                                                                       |   |   |
|                                   |   |                                                                                                                      |   |   |
| Item 5                            |   | Other  Information                                                                                                        |   |   |
|                                   |   |                                                                                                                      |   |   |
| Item 6                            |   | Exhibits                                                                                                                  |   |   |
|                                   |   |                                                                                                                      |   |   |
| Signatures                             |   |                                                                                                                      |

 

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**Symmetry Medical Inc.**

**Condensed Consolidated Balance Sheets**
| ** **                                                                                                                          | ** ** | **July 1,**                                                                                       | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**                                                                                               | ** ** | **2005**              | ** ** |
| ** **                                                                                                                          | ** ** | **(In Thousands, Except Per Share Data)      ** | ** ** |
| ** **                                                                                                                          | ** ** | **(unaudited)**                                                                                        | ** ** | ** **            | ** ** |
| **Assets:**                                                                                                                         | ** ** | ** **                                                                                             | ** ** | ** **            | ** ** |
| Current Assets:                                                                                                                     |       |                                                                                                   |       |                  |       |
| Cash and cash  equivalents                                                                                                          |       | $                                                                                                      | 10,686     |                  | $          | 12,471 |   |
| Accounts receivables,  net                                                                                                          |       | 49,667                                                                                                 |       | 44,908                |       |
| Inventories                                                                                                                         |       | 43,942                                                                                                 |       | 38,783                |       |
| Refundable income taxes                                                                                                             |       | 145                                                                                                    |       | 185                   |       |
| Deferred income taxes                                                                                                               |       | 2,166                                                                                                  |       | 1,867                 |       |
| Derivative valuation  asset                                                                                                         |       | —                                                                                                 |       | 414                   |       |
| Other current assets                                                                                                                |       | 4,119                                                                                                  |       | 4,032                 |       |
|                                                                                                                                |       |                                                                                                   |       |                  |       |
| Total current assets                                                                                                                |       | 110,725                                                                                                |       | 102,660               |       |
| Property and equipment,  net                                                                                                        |       | 101,688                                                                                                |       | 93,106                |       |
| Derivative valuation  asset                                                                                                         |       | 477                                                                                                    |       | 170                   |       |
| Goodwill                                                                                                                            |       | 153,392                                                                                                |       | 124,518               |       |
| Intangible assets, net  of accumulated amortization                                                                                 |       | 27,537                                                                                                 |       | 16,327                |       |
| Other assets                                                                                                                        |       | 1,066                                                                                                  |       | 864                   |       |
|                                                                                                                                |       |                                                                                                   |       |                  |       |
| Total Assets                                                                                                                        |       | $                                                                                                      | 394,885    |                  | $          | 337,645 |   |
|                                                                                                                                |       |                                                                                                   |       |                  |       |
| **Liabilities and Shareholders’  Equity:**                                                                                     | ** ** | ** **                                                                                             | ** ** | ** **            | ** ** |
| Current Liabilities:                                                                                                                |       |                                                                                                   |       |                  |       |
| Accounts payable                                                                                                                    |       | $                                                                                                      | 16,219     |                  | $          | 18,983 |   |
| Accrued wages and  benefits                                                                                                         |       | 8,567                                                                                                  |       | 10,997                |       |
| Derivative valuation  liability                                                                                                     |       | 300                                                                                                    |       | —                |       |
| Other accrued expenses                                                                                                              |       | 3,606                                                                                                  |       | 2,696                 |       |
| Income tax payable                                                                                                                  |       | 725                                                                                                    |       | 1,241                 |       |
| Revolving line of  credit                                                                                                           |       | 2,371                                                                                                  |       | —                |       |
| Current portion of  capital lease obligations                                                                                       |       | 3,017                                                                                                  |       | 3,239                 |       |
| Current portion of  long-term debt                                                                                                  |       | 2,150                                                                                                  |       | 1,313                 |       |
|                                                                                                                                |       |                                                                                                   |       |                  |       |
| Total current  liabilities                                                                                                          |       | 36,955                                                                                                 |       | 38,469                |       |
| Deferred income taxes                                                                                                               |       | 11,691                                                                                                 |       | 11,139                |       |
| Capital lease  obligations, less current portion                                                                                    |       | 6,826                                                                                                  |       | 8,532                 |       |
| Long-term debt, less  current portion                                                                                               |       | 62,350                                                                                                 |       | 26,250                |       |
|                                                                                                                                |       |                                                                                                   |       |                  |       |
| Total Liabilities                                                                                                                   |       | 117,822                                                                                                |       | 84,390                |       |
|                                                                                                                                |       |                                                                                                   |       |                  |       |
| Commitments and  contingencies (Note 11)                                                                                            |       | —                                                                                                 |       | —                |       |
|                                                                                                                                |       |                                                                                                   |       |                  |       |
| Shareholders’ Equity:                                                                                                          |       |                                                                                                   |       |                  |       |
| Common Stock, $.0001  par value; 72,410 shares authorized; shares issued (July 1, 2006—34,894;  December 31, 2005—34,704) |       | 3                                                                                                      |       | 3                     |       |
| Additional paid-in  capital                                                                                                         |       | 270,794                                                                                                |       | 268,973               |       |
| Retained earnings  (deficit)                                                                                                        |       | (1,321                                                                                                 | )          | (17,378               | )          |
| Accumulated other  comprehensive income                                                                                             |       | 7,587                                                                                                  |       | 1,657                 |       |
|                                                                                                                                |       |                                                                                                   |       |                  |       |
| Total Shareholders’  Equity                                                                                                    |       | 277,063                                                                                                |       | 253,255               |       |
|                                                                                                                                |       |                                                                                                   |       |                  |       |
| Total Liabilities and  Shareholders’ Equity                                                                                    |       | $                                                                                                      | 394,885    |                  | $          | 337,645 |   |

 

See accompanying notes to condensed consolidated financial statements*.*

3

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**Symmetry Medical Inc.**

**Condensed Consolidated Statements of Operations**
| ** **                                                         | ** ** | **Three Months Ended**                                   | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                         | ** ** | **July 1,**                                                   | ** ** | **July 2,**               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| ** **                                                         | ** ** | **2006**                                                           | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                         | ** ** | **(In Thousands, Except Per Share Data)** | ** ** |
| ** **                                                         | ** ** | **(unaudited)**                                                    | ** ** | **(unaudited)**                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                            |       | $                                                                  | 64,760     |                           | $          | 70,177 |   | $ | 134,373 |   | $ | 133,937 |   |
| Cost of Revenue                                                    |       | 47,873                                                             |       | 48,735                         |       | 97,145 |   | 93,108 |   |
|                                                               |       |                                                               |       |                           |       |   |   |   |   |
| Gross Profit                                                       |       | 16,887                                                             |       | 21,442                         |       | 37,228 |   | 40,829 |   |
| Selling,  general, and administrative expenses                     |       | 6,892                                                              |       | 6,754                          |       | 13,932 |   | 13,702 |   |
|                                                               |       |                                                               |       |                           |       |   |   |   |   |
| Operating Income                                                   |       | 9,995                                                              |       | 14,688                         |       | 23,296 |   | 27,127 |   |
| Other (income)  expense:                                           |       |                                                               |       |                           |       |   |   |   |   |
| Interest expense                                                   |       | 925                                                                |       | 773                            |       | 1,586 |   | 1,712 |   |
| Derivatives  valuation (gain)/loss                                 |       | 408                                                                |       | 189                            |       | 407 |   | (107 | ) |
| Other                                                              |       | (2,059                                                             | )          | 681                            |       | (2,280 | ) | 883 |   |
|                                                               |       |                                                               |       |                           |       |   |   |   |   |
| Income before  income taxes                                        |       | 10,721                                                             |       | 13,045                         |       | 23,583 |   | 24,639 |   |
| Income tax  expense                                                |       | 3,042                                                              |       | 4,426                          |       | 7,526 |   | 8,356 |   |
|                                                               |       |                                                               |       |                           |       |   |   |   |   |
| Net income  applicable to common shareholders                      |       | $                                                                  | 7,679      |                           | $          | 8,619 |   | $ | 16,057 |   | $ | 16,283 |   |
|                                                               |       |                                                               |       |                           |       |   |   |   |   |
| Net income  (loss) applicable to common shareholders per share:    |       |                                                               |       |                           |       |   |   |   |   |
| Basic                                                              |       | $                                                                  | 0.22       |                           | $          | 0.26 |   | $ | 0.46 |   | $ | 0.49 |   |
| Diluted                                                            |       | $                                                                  | 0.22       |                           | $          | 0.25 |   | $ | 0.46 |   | $ | 0.47 |   |
|                                                               |       |                                                               |       |                           |       |   |   |   |   |
| Weighted average  common shares and equivalent shares outstanding: |       |                                                               |       |                           |       |   |   |   |   |
| Basic                                                              |       | 34,830                                                             |       | 33,239                         |       | 34,774 |   | 33,207 |   |
| Diluted                                                            |       | 35,177                                                             |       | 34,477                         |       | 35,157 |   | 34,296 |   |

 

See accompanying notes to condensed consolidated financial statements*.*

4

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**Symmetry Medical Inc.**

**CondensedConsolidated Statements of Cash Flows**
| ** **                                                                                   | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                   | ** ** | **July 1,**               | ** ** | **July 2,** | ** ** |
| ** **                                                                                   | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| ** **                                                                                   | ** ** | **(In Thousands)**        | ** ** |
| ** **                                                                                   | ** ** | **(unaudited)**                | ** ** | **(unaudited)** | ** ** |
| **Operating  activities**                                                                    | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net Income                                                                                   |       | $                              | 16,057     |   | $ | 16,283 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                           |       |   |   |
| Depreciation                                                                                 |       | 7,677                          |       | 6,191 |   |
| Amortization                                                                                 |       | 424                            |       | 305 |   |
| Net gain on sale  of assets                                                                  |       | (1,233                         | )          | (2 | ) |
| Deferred income  tax provision                                                               |       | 253                            |       | — |   |
| Excess tax  benefit from stock-based compensation                                            |       | (1,062                         | )          | — |   |
| Income tax  benefits from exercise of stock options                                          |       | —                         |       | 57 |   |
| Stock-based  compensation                                                                    |       | 212                            |       | — |   |
| Derivative  valuation change                                                                 |       | 407                            |       | (107 | ) |
| Change in  operating assets and liabilities:                                                 |       |                           |       |   |   |
| Accounts  receivable                                                                         |       | 1,614                          |       | (5,494 | ) |
| Other assets                                                                                 |       | 834                            |       | 1,614 |   |
| Inventories                                                                                  |       | (1,034                         | )          | 446 |   |
| Accounts payable                                                                             |       | (5,730                         | )          | 1,070 |   |
| Accrued expenses  and other                                                                  |       | (3,855                         | )          | 2,668 |   |
|                                                                                         |       |                           |       |   |   |
| Net cash  provided by operating activities                                                   |       | 14,564                         |       | 23,031 |   |
|                                                                                         |       |                           |       |   |   |
| **Investing  activities**                                                                    | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Purchases of  property and equipment                                                         |       | (11,783                        | )          | (20,834 | ) |
| Proceeds from  the sale of fixed assets                                                      |       | 2,434                          |       | — |   |
| Acquisition, net  of cash received                                                           |       | (45,629                        | )          | — |   |
|                                                                                         |       |                           |       |   |   |
| Net cash used in  investing activities                                                       |       | (54,978                        | )          | (20,834 | ) |
|                                                                                         |       |                           |       |   |   |
| **Financing  activities**                                                                    | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Proceeds from  bank revolver                                                                 |       | 47,598                         |       | 22,241 |   |
| Payments on bank  revolver                                                                   |       | (45,373                        | )          | (18,085 | ) |
| Issuance of  long-term debt                                                                  |       | 40,000                         |       | — |   |
| Payments on  long-term debt and capital lease obligations                                    |       | (5,130                         | )          | (4,558 | ) |
| Proceeds from  the issuance of common and preferred stock, net of expenses                   |       | 547                            |       | 643 |   |
| Excess tax  benefit from stock-based compensation                                            |       | 1,062                          |       | — |   |
| Debt issuance  costs paid                                                                    |       | (322                           | )          | — |   |
|                                                                                         |       |                           |       |   |   |
| Net cash  provided by financing activities                                                   |       | 38,382                         |       | 241 |   |
| Effect of  exchange rate changes on cash                                                     |       | 247                            |       | (188 | ) |
|                                                                                         |       |                           |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                        |       | (1,785                         | )          | 2,250 |   |
| Cash and cash  equivalents at beginning of period                                            |       | 12,471                         |       | 4,849 |   |
|                                                                                         |       |                           |       |   |   |
| Cash and cash  equivalents at end of period                                                  |       | $                              | 10,686     |   | $ | 7,099 |   |
|                                                                                         |       |                           |       |   |   |
| Supplemental  disclosures:                                                                   |       |                           |       |   |   |
| Cash paid for  interest                                                                      |       | $                              | 1,284      |   | $ | 1,370 |   |
|                                                                                         |       |                           |       |   |   |
| Cash paid for  income taxes                                                                  |       | $                              | 6,996      |   | $ | 5,115 |   |

 

See accompanying notes to condensed consolidated financial statements*.*

5

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**Symmetry Medical Inc.**

**Notes to CondensedConsolidated Financial Statements**

**(In Thousands, Except Per Share Data)**

**1.**   Basis of Presentation

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

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

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

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

During May 2006, theCorporation acquired all of the stock of Riley Medical, Inc., a privatelyowned company based in Auburn, Maine, and Riley Medical Europe S.A., its Swisssubsidiary (collectively “Riley Medical”). Refer to note 13 for further discussion.

**2.**   Inventories

Inventories consist of the following:
|                            | ** ** | **July 1,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| Raw material and  supplies |       | $                | 8,734      |                  | $          | 7,325 |   |
| Work-in-process            |       | 24,886           |       | 23,418                |       |
| Finished goods             |       | 10,322           |       | 8,040                 |       |
|                       |       | $                | 43,942     |                  | $          | 38,783 |   |

 

6

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**3.**   Property and Equipment

Property and equipment, including depreciable lives, consists of thefollowing:
|                                              | ** ** | **July 1,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| Land                                         |       | $                | 1,500      |                  | $          | 1,283 |   |
| Buildings and  improvements (20 to 40 years) |       | 25,857           |       | 24,128                |       |
| Machinery and  equipment (5 to 15 years)     |       | 111,417          |       | 101,437               |       |
| Office equipment  (3 to 5 years)             |       | 6,400            |       | 5,421                 |       |
| Construction-in-progress                     |       | 6,894            |       | 5,695                 |       |
|                                         |       |             |       |                  |       |
|                                         |       | 152,068          |       | 137,964               |       |
| Less accumulated  depreciation               |       | (50,380          | )          | (44,858               | )          |
|                                         |       | $                | 101,688    |                  | $          | 93,106 |   |

 

**4.**   Intangible Assets

Intangible assets subject toamortization consist of technology, non-compete and customer related intangibleassets acquired in connection with our acquisitions of Mettis (UK) Limited onJune 11, 2003 and Riley Medical on May 2, 2006. These assets ($22,451,net, at July 1, 2006 and $12,656, net, at December 31, 2005) arebeing amortized using the straight-line method over 4 to 25 years.  The Corporation has $5,086 and $3,671 ofindefinite lived intangible assets as July 1, 2006 and December 31, 2005,respectively.

**5.**   Long-term Debt

Inconjunction with the Riley Medical acquisition, the Corporation’s lendingarrangements were amended in June 2006 to provide for a new term loan of $40million, which requires annual principal payments of $200 in the remainder offiscal 2006 and $400, $400, $400, $11,400 and $27,200 over the next five fiscalyears, respectively.  In addition, theCorporation’s $40 million revolving credit facility maturity was extended fromDecember 2009 to June 2011.  Thefinancial loan covenants remain unchanged and the Corporation is in compliancewith these covenants as of July 1, 2006.
| ** **                                                                                                                          | ** ** | **July 1,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| Bank term loan  payable in quarterly installments, plus interest at a variable rate (6.25% at  July 1, 2006), through December 2009 |       | $                | 24,500     |                  | $          | 27,563 |   |
| Bank term loan  payable in quarterly installments, plus interest at a variable rate (6.625%  at July 1, 2006), through June 2011    |       | 40,000           |       | —                |       |
| Revolving line  of credit, due June 2011                                                                                            |       | —           |       | —                |       |
|                                                                                                                                |       |             |       |                  |       |
|                                                                                                                                |       | 64,500           |       | 27,563                |       |
| Less current  portion                                                                                                               |       | (2,150           | )          | (1,313                | )          |
|                                                                                                                                |       | $                | 62,350     |                  | $          | 26,250 |   |

 

7

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**6.**   New Accounting Pronouncements

In November 2004, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting (SFAS) No. 151, Inventory Costs—an amendment of AccountingResearch Bulletin (ARB) No. 43, Chapter 4. The Statement clarifies thatabnormal amounts of idle facility expense, freight, handling costs and wastedmaterials should be recognized as current-period expenses regardless of howabnormal the circumstances. In addition, this Statement requires that theallocation of fixed overheads to the costs of conversion be based upon normalproduction capacity levels. The Statement is effective for inventory costsincurred during fiscal years beginning after June 15, 2005. This Statementdid not have a material effect on the Corporation’s financial position, resultsof operations or cash flows.

In July 2006, the FASB issued FASB Interpretation No.(FIN) 48, *Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109*, whichclarifies the accounting for uncertainty in tax positions. This Interpretationrequires the recognition of a tax position when it is more likely than not thatthe tax position will be sustained upon examination by relevant taxingauthorities, based on the technical merits of the position. The provisions ofFIN 48 are effective for the Company on January 1, 2007, with the cumulativeeffect of the change in accounting principle recorded as an adjustment toopening retained earnings. The Corporation is currently evaluating the impactof adopting FIN 48 on its financial statements.

**7.**   Stock-Based Compensation

The Corporation 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. The Corporationhad previously followed APB No. 25 in accounting for its stock options andaccordingly, no compensation cost had been previously recognized.

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

As a result of adopting SFAS123R, the Corporation’s income before income taxes and net income for the sixmonths ended July 1, 2006 are $72 and $43 lower, respectively, than if ithad continued to account for share-based compensation under Opinion 25. Basicand diluted earnings per share for the six months ended July 1, 2006 wouldnot have changed from $0.46 if the Corporation had not adopted SFAS 123R.

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

8

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Statement 123, as amended, required pro forma presentation as ifcompensation costs had been expensed under the fair value method. For purposeof pro forma disclosure, the estimated fair value of stock options at the grantdate is amortized to expense over the vesting period. The following tableillustrates the effect on net income and net income per share as ifcompensation expense had been recognized (in thousands, except for per shareamounts):

|                                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                               | ** ** | **July 2,**                 | ** ** | **July 2,**               | ** ** |
| ** **                                               | ** ** | **2005**                         | ** ** | **2005**                       | ** ** |
| Reported net  income applicable to common shareholders   |       | $                                | 8,619      |                           | $          | 16,283 |   |
| Pro forma  stock-based compensation expense (net of tax) |       | (54                              | )          | (99                            | )          |
| Stock-based  employee compensation recorded (net of tax) |       | 15                               |       | 19                             |       |
|                                                     |       |                             |       |                           |       |
| Adjusted net  income                                     |       | $                                | 8,580      |                           | $          | 16,203 |   |
|                                                     |       |                             |       |                           |       |
| Basic net income  per share applicable to common:        |       |                             |       |                           |       |
| Reported net  income per share                           |       | $                                | 0.26       |                           | $          | 0.49 |   |
| Stock-based  compensation expense (net of tax) per share |       | —                           |       | —                         |       |
|                                                     |       |                             |       |                           |       |
| Adjusted net  income per share                           |       | $                                | 0.26       |                           | $          | 0.49 |   |
|                                                     |       |                             |       |                           |       |
| Diluted net  income per share applicable to common:      |       |                             |       |                           |       |
| Reported net  income per share                           |       | $                                | 0.25       |                           | $          | 0.47 |   |
| Stock-based  compensation expense (net of tax) per share |       | —                           |       | —                         |       |
|                                                     |       |                             |       |                           |       |
| Adjusted net income per  share                           |       | $                                | 0.25       |                           | $          | 0.47 |   |

 

The compensation cost relatedto non-vested awards not yet recognized is approximately $44, net, and theweighted average period over which it is expected to be recognized isapproximately one year.  During the sixmonth period ended July 1, 2006, the Corporation issued 145 shares ofcommon stock through the exercise of stock options, 29 shares of common stockthrough the exercise of warrants and 10 shares of common stock were issuedunder the Employee Stock Savings Plan.

**8.**   Income Taxes

The Corporation’s effectivetax rate was 31.9% for the six month period ended July 1, 2006 as comparedto 33.9% for the same periods in 2005. The decrease in the rate from the 2005effective tax rate was primarily due to recognizing state economic developmentcredits and other tax credits in the second quarter of 2006. The 2006 ratewould have been lower had the expiration of the Federal research tax credit onDecember 31, 2005 not occurred.  TheUnited States government has not yet reinstated this tax credit bill.

9

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**9.**   Segment Reporting

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

The Corporation is amulti-national corporation with operations in the United States, the UnitedKingdom, Switzerland and France. As a result, the Corporation’s financialresults can be impacted by currency exchange rates in the foreign markets inwhich the Corporation sells its products. While exposure to variability inforeign currency exists, the Corporation does not believe it is significant toits operations and any variability is somewhat offset through the location ofits manufacturing facilities. Revenue is attributed to geographic locationsbased on the location to which we ship our products.

*Revenue from ExternalCustomers:*

|                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **July 1,**                 | ** ** | **July 2,**               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| ** **               | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| United States            |       | $                                | 40,825     |                           | $          | 45,447 |   | $ | 87,173 |   | $ | 87,428 |   |
| Ireland                  |       | 5,627                            |       | 7,974                          |       | 13,356 |   | 16,291 |   |
| United Kingdom           |       | 10,057                           |       | 8,199                          |       | 19,582 |   | 14,869 |   |
| Other foreign  countries |       | 8,251                            |       | 8,557                          |       | 14,262 |   | 15,349 |   |
|                     |       |                             |       |                           |       |   |   |   |   |
| Total net revenues       |       | $                                | 64,760     |                           | $          | 70,177 |   | $ | 134,373 |   | $ | 133,937 |   |

 

*Concentration of Credit Risk:*

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

Quarter ended July 1,2006—Four customers representing approximately 24%, 12%, 12% and 10% ofrevenue, respectively.

Quarter ended July 2,2005—Two customers representing approximately 30% and 15% of revenue,respectively.

Following is a summary of thecomposition by product category of the Corporation’s revenue to externalcustomers. Revenue of the specialty services business is included in the “other”category.

10

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|                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **         | ** ** | **July 1,**                 | ** ** | **July 2,**               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| ** **         | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Implants           |       | $                                | 23,118     |                           | $          | 25,457 |   | $ | 49,709 |   | $ | 48,414 |   |
| Instruments        |       | 18,032                           |       | 24,497                         |       | 39,610 |   | 47,847 |   |
| Cases              |       | 16,489                           |       | 15,762                         |       | 31,160 |   | 29,606 |   |
| Other              |       | 7,121                            |       | 4,461                          |       | 13,894 |   | 8,070 |   |
|               |       |                             |       |                           |       |   |   |   |   |
| Total net revenues |       | $                                | 64,760     |                           | $          | 70,177 |   | $ | 134,373 |   | $ | 133,937 |   |

 

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

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

|                                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                          | ** ** | **July 1,**                 | ** ** | **July 2,**               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| ** **                                                          | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                                     |       | $                                | 7,679      |                           | $          | 8,619 |   | $ | 16,057 |   | $ | 16,283 |   |
| Preferred stock  dividends                                          |       | —                           |       | —                         |       | — |   | — |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Net income  available to common shareholders                        |       | $                                | 7,679      |                           | $          | 8,619 |   | $ | 16,057 |   | $ | 16,283 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Weighted-average  common shares outstanding basic                   |       | 34,830                           |       | 33,239                         |       | 34,774 |   | 33,207 |   |
| Effect of stock  options, restricted stock and stock warrants       |       | 347                              |       | 1,238                          |       | 383 |   | 1,089 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Weighted-average  common shares outstanding and assumed conversions |       | 35,177                           |       | 34,477                         |       | 35,157 |   | 34,296 |   |
|                                                                |       |                             |       |                           |       |   |   |   |   |
| Net income per  share available to common shareholders:             |       |                             |       |                           |       |   |   |   |   |
| Basic                                                               |       | $                                | 0.22       |                           | $          | 0.26 |   | $ | 0.46 |   | $ | 0.49 |   |
| Diluted                                                             |       | $                                | 0.22       |                           | $          | 0.25 |   | $ | 0.46 |   | $ | 0.47 |   |

 

**11.**   Commitments and Contingencies

The Corporation is involved,from time to time, in various contractual, product liability, patent (orintellectual 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 

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anddisputes, individually or in the aggregate, should not have a material adverseeffect on the Corporation’s consolidated financial condition, results ofoperations or liquidity.

**12.**   Comprehensive Income

Comprehensive income is comprised of net income and gains and lossesresulting from currency translations of foreign entities. Comprehensive incomeconsists of the following:

|                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **July 1,**                 | ** ** | **July 2,**               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| ** **                                | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net Income                                |       | $                                | 7,679      |                           | $          | 8,619 |   | $ | 16,057 |   | $ | 16,283 |   |
| Foreign currency  translation adjustments |       | 4,988                            |       | (4,465                         | )          | 5,930 |   | (6,039 | ) |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Comprehensive income                      |       | $                                | 12,667     |                           | $          | 4,154 |   | $ | 21,987 |   | $ | 10,244 |   |

 

**13.**   Acquisition

OnMay 2, 2006, the Corporation completed the acquisition of Riley Medical, aprivately-owned company based in Auburn, Maine, for approximately $45,629 in netcash, subject to adjustment. Riley Medical is a manufacturer of standard andcustom cases, trays and containers for the medical device industry withlocations in the United States and Switzerland. The acquisition expands the Corporation’s geographic footprint in Europeand the case product line, including several new patents and trademarks.  Results of Riley Medical are included in thestatement of operations from the acquisition date.

Theaggregate purchase price is preliminary, subject to adjustment and expected tobe finalized in the third fiscal quarter. As of July 1, 2006, the aggregatepurchase price of $45,629 was allocated to the opening balance sheet asfollows:
| Current assets                                                  |   | $      | 6,411  |   |
|-----------------------------------------------------------------|--------|--------|--------|--------|
| PP&E                                                        |   | 2,944  |   |
| Acquired  technology (amortized over average weighted 13 years) |   | 1,050  |   |
| Acquired  customers (amortized over 15 years)                   |   | 8,920  |   |
| Non-compete  agreements (amortized over 5 years)                |   | 110    |   |
| Trademarks  (indefinite-lived)                                  |   | 1,300  |   |
| Goodwill                                                        |   | 26,912 |   |
| Current  liabilities                                            |   | (2,018 | )      |
|                                                            |   |   |   |
| Purchase price, net                                             |   | $      | 45,629 |   |

 

*Unaudited Proforma Results*

|                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **July 1,**                 | ** ** | **July 2,**               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| ** **                               | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue                                  |       | $                                | 66,037     |                           | $          | 75,860 |   | $ | 141,134 |   | $ | 145,134 |   |
| Income available to  common shareholders |       | 7,478                            |       | 9,236                          |       | 15,606 |   | 17,589 |   |
| Earnings per share—basic            |       | $                                | 0.21       |                           | $          | 0.28 |   | $ | 0.45 |   | $ | 0.53 |   |
| Earnings per share—diluted          |       | $                                | 0.21       |                           | $          | 0.27 |   | $ | 0.44 |   | $ | 0.51 |   |

* *

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**ITEM 2.**          MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTSOF OPERATIONS AND FINANCIALCONDITION

**Overview**

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

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

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

On May 2, 2006, wecompleted the acquisition of Riley Medical Inc., a privately-owned companybased in Auburn, Maine, for $45.6 million in cash, subject to adjustment. RileyMedical Inc. is a manufacturer of standard and custom cases, trays andcontainers for the medical device industry with locations in the United Statesand Switzerland. Riley Medical innovative case products, such as the FlashpakTM,have been well received by our customers. Riley Medical products have allowed us to realize a number ofcross-selling synergies and additional market reach into markets such as spineand endoscopy.

During the second quarter2006, our revenue was impacted by the slowdown in demand for major orthopedicjoints throughout the industry.  Theorthopedic environment, from our perspective, went through a strong year ofrevenue growth in 2005 with a large volume of new customer productlaunches.  Procedure volumes were strongand product mix was favorable for our customers.  In the first half of 2006, we saw a reductionin new product launches from our customers and slower growth on procedurevolume for reconstructive joints.

As a key supplier to theoriginal equipment manufactures in the orthopedic industry for these joints, webelieve that we are disproportionately affected by these industrydevelopments.  As our customers’ growthaccelerates, we tend to grow faster and when their growth decelerates, we tendto slow down more rapidly.  These resultswere further impacted by a reduction in our customer product launches.  Fewer customer launches disproportionately impactour sales of instrument and cases as demand for these products is related tolaunches of new products.  While thecurrent market conditions impact the entire supply chain, we remain confidentthat we will continue as the leading provider to the orthopedic market withimplants, instruments and cases.  Further,we believe we remain well positioned to respond to an upturn.

We believe it isimportant to continue with the main strategic intent of our business and use ourstrength and market position.  We aretaking advantage of this slower period to extend our Total Solutions approachinto other markets, as well as to increase acquisition activity.  In particular we continue to expand ourengineering resources that produce and provide closer and critical customerrelationships on the development of new products.  In addition, our focus to increase revenue offinished implants to our current customers progressed in the quarter to over10% of implant revenue in the quarter. We are developing our activities inSwitzerland through the Riley Medical acquisition and are exploringopportunities in Asia to support our global expansion initiative. This localpresence in the global marketplace allows us to be closer to our customer base,provide quicker response times and increase our value added services.

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**Second Quarter Results of Operations**

*Revenue.*   Revenue for the three month period endedJuly 1, 2006 decreased $5.4 million, or 7.7%, to $64.8 million from $70.2million for the comparable 2005 period. Revenue for each of our principal product categories in these periodswas as follows:
| Product Category | ** ** | **Three Months Ended** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **July 1,**                 | ** ** | **July 2,** | ** ** |
| ** **            | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **            | ** ** | **(in millions)**           | ** ** |
| Implants              |       | $                                | 23.1       |   | $ | 25.5 |   |
| Instruments           |       | 18.0                             |       | 24.5 |   |
| Cases                 |       | 16.5                             |       | 15.8 |   |
| Other                 |       | 7.2                              |       | 4.4 |   |
|                  |       |                             |       |   |   |
| Total                 |       | $                                | 64.8       |   | $ | 70.2 |   |

 

The $5.4 million reduction inrevenue resulted from lower instrument and implant revenue of $6.5 million and$2.4 million respectively, as a result of the slowdown in demand for majororthopedic joints throughout the industry. Because of our position in the supply chain for these joints, we aredisproportionately affected by these industry developments.  These results were further impacted by areduction in our customer product launches. These reductions were partially offset by increased case sales of $0.7million as a result of $3.4 million of sales from the Riley Medicalacquisition. The Other category increase of $2.8 million was driven by thecontinued strength in the aerospace industry.

*GrossProfit.*   Grossprofit for the three month period ended July 1, 2006 decreased $4.5million, or 21.2%, to $16.9 million from $21.4 million for the comparable 2005period. This decrease in gross profit was driven primarily by reduced  gross margin rate as the gross margin was26.1% for the three month period ended July 1, 2006 compared to 30.6% forthe comparable 2005 period. The decline in gross margin as a percentage ofsales was primarily driven by higher fixed costs from our significantinvestment in 2005 capacity expansion across our global facilities and a morepronounced sales reduction in our higher margin products within several of ourproduct segments.  We view our globalinfrastructure as a competitive strength, enabling us to respond quickly to ourcustomers’ high volume demand on short notice.

*Selling,General and Administrative Expenses.*   Selling, general and administrativeexpenses for the three month period ended July 1, 2006 increased $0.1million, or 2.0%, to $6.9 million from $6.8 million for the comparable 2005period.  While a number of initiatives tocut costs across our global facilities did result in a reduction of costs, theaddition of the acquisition of Riley Medical resulted in a slight increase inour SG&A costs for the quarter.  Wealso had an increase in expenses from costs related to additional stockcompensation expenses related from the adoption of SFAS 123R and restrictedstock awards granted since the second quarter of 2005. As a percentage ofrevenue, selling, general and administrative expenses increased to 10.6% ofrevenue for the three month period ended July 1, 2006 from 9.6% of revenuefor the comparable 2005 period.

*OtherExpense.*   Interestexpense for the three month period ended July 1, 2006 increased $0.2million, or 19.7%, to $0.9 million from $0.8 million for the comparable 2005period. This increase  reflects the $40million senior term debt addition related to the acquisition of RileyMedical.  This increase was partialyoffset by the reduction in outstanding capital lease obligations and existingsenior term debt through normal amortization.

The derivatives valuation(gains) losses consist of interest rate swap valuations used to mitigate theeffect of changing interest rates on net income and foreign currency forwardcontracts used to mitigate the effect of changes in the foreign exchange rateson net income. The increase in the loss for the three month period ended July1, 2006 versus the comparable 2005 period is due to market fluctuations inthese contracts, which are not designated as hedges under SFAS 133.

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Also included in Other is a$1.2 million gain on the sale of surplus land adjacent to our Sheffield, UKfacility.  This resulted in an after taxgain of $0.8 million.

*Provisionfor Income Taxes.*   Oureffective tax rate was 28.4% for the three month period ended July 1, 2006as compared to 33.9% for the comparable 2005 period. Provision for income taxesdecreased by $1.4 million, or 31.3%, to $3.0 million for the three month periodended July 1, 2006 from $4.4 million for the comparable 2005 period. Thisdecrease was primarily due to an Indiana state EDGE tax credit of $0.3 millionrealized in the second quarter of 2006. This credit, is part of a $1.5 million overall grant that is availablethrough 2013.  We did not record aFederal research and development tax credit in the second quarter 2006 sincethe United States government has not yet reinstated Section 41 of the U.S. taxcode.  

**Six Months Results of Operations**

*Revenue.*   Revenue for the six month period endedJuly 1, 2006 increased $0.5 million, or 0.3%, to $134.4 million from$133.9 million for the comparable 2005 period. Revenue for each of ourprincipal product categories in these periods was as follows:
| Product Category | ** ** | **Six Months Ended** | ** ** |
|-----------------------|------------|--------------------------------|------------|
| ** **            | ** ** | **July 1,**               | ** ** | **July 2,** | ** ** |
| ** **            | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| ** **            | ** ** | **(in millions)**         | ** ** |
| Implants              |       | $                              | 49.7       |   | $ | 48.4 |   |
| Instruments           |       | 39.6                           |       | 47.8 |   |
| Cases                 |       | 31.2                           |       | 29.6 |   |
| Other                 |       | 13.9                           |       | 8.1 |   |
|                  |       |                           |       |   |   |
| Total                 |       | $                              | 134.4      |   | $ | 133.9 |   |

 

The $0.5 million increase in revenueresulted from increased implant, case, and non-healthcare/other revenue of $1.3million, $1.6 million, and $5.8 million, respectively. These increases are aresult of increased implant finishing volume, the addition of $3.4 million fromthe Riley Medical acquisition and the continued strength in the aerospaceindustry.  These increases were partiallyoffset by decreased instrument revenue of $8.2 million due to slower demandfrom customers as discussed in the Overview section.

*Gross Profit.*   Gross profit for the six month periodended July 1, 2006 decreased $3.6 million, or 8.8%, to $37.2 million from$40.8 million for the comparable 2005 period. This decrease in gross profit wasdriven primarily by a reduced gross margin as the gross margin was 27.7% forthe three month period ended July 1, 2006 compared to 30.5% for thecomparable 2005 period. The decline in gross margin as a percentage of sales of2.8% was primarily driven by higher fixed costs from our 2005 expansion acrossour global facilities and a more pronounced sales reduction in our highermargin products within several of our product segments.

*Selling, General and Administrative Expenses.*   Selling, general and administrativeexpenses for the six month period ended July 1, 2006 increased $0.2 million,or 1.7%, to $13.9 million from $13.7 million for the comparable 2005 period.While a number of initiatives to cut costs across our global facilitiesresulted in a reduction of costs, the addition of the acquisition of RileyMedical drove a slight increase in our SG&A costs for the quarter.  We also had an increase in expenses primarilyresulted from costs related to additional stock compensation expenses relatedfrom the adoption of SFAS 123R and restricted stock awards granted since thesecond quarter of 2005. As a percentage of revenue, selling, general andadministrative expenses increased to 10.4% of revenue for the six month periodended July 1, 2006 from 10.2% of revenue for the comparable 2005 period.This 0.2% increase  as a percentage of revenuewas attributable to the addition of Riley Medical acquisition partially offsetby controlled spending.

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*OtherExpense.*   Interestexpense for the six month period ended July 1, 2006 decreased $0.1million, or 7.4%, to $1.6 million from $1.7 million for the comparable 2005period. This decrease primarily reflects the decrease in outstanding capitallease obligations and previously held senior term debt through normalamortization but was partially offset by the increase of interest from our $40million new senior term debt from the Riley Medical acquisition.

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

Also included in Other is a$1.2 million gain on the sale of surplus land adjacent to our Sheffield, UKfacililtiy.  This resulted in an aftertax gain of $0.8 million.

*Provisionfor Income Taxes.*   Oureffective tax rate was 31.9% for the six month period ended July 1, 2006as compared to 33.9% for the comparable 2005 period. Provision for income taxesdecreased by $0.8 million, or 9.9%, to $7.5 million for the six month periodended July 1, 2006 from $8.4 million for the comparable 2005 period, dueprimarily to lower pre-tax earnings and the addition of the Indiana EDGE taxcredit of $0.3, recorded in the second quarter of 2006.

**Liquidity and Capital Resources**

Our principal sources of cashin the six month period ended July 1, 2006 were cash generated fromoperations, borrowings under our revolving credit facility, income tax benefitsand proceeds from the exercise of common stock options. Principal uses of cashin the six month period ended July 1, 2006 included working capital,capital expenditures and debt service. We expect that our principal uses ofcash in the future will be to finance working capital, to pay for capitalexpenditures, to service debt and to fund potential mergers and acquisitions.We completed an acquisition of Riley Medical Inc. on May 2, 2006 for $45.6million, subject to adjustment, through the use of the existing cash balancesand a new $40.0 million senior debt facility.

*Operating Activities  *We generated cash from operations of $14.6 million inthe six month period ended July 1, 2006 compared to $23.0 million forthe six month period ended July 2, 2005. Cash provided by operatingactivities in the six month period ended July 1, 2006 is primarily theresult of a $22.7 million increase in net income, adjusted for non-cashitems, such as depreciation expense, which was more than offset by increases innet working capital.

Uses of cash due to changes inworking capital were $8.2 million in the six month period endedJuly 1, 2006.  The primary uses ofcash for working capital came from a decrease in accounts payable and accruedexpenses of $9.6 million. A portion of the decrease in accounts payable wasdue to lower volume and lower capital expenditure purchases.

*Investing Activities  *Capital expenditures were $9.0 million lower in thesix month period ended July 1, 2006 compared to the six month period endedJuly 2, 2005.  However, the RileyMedical acquisition accounted for a $45.6 million use of cash in 2006.  We also sold a portion of land that was notneeded for expansion near our Sheffield, United Kingdom facility forapproximately $2.4 million

*FinancingActivities**  *Financing activites generated $38.4 million of cashdue primarily to the $40.0 millionterm loan obtained in conjunction with the Riley Medical acquisition.

***Capital Expenditures***

Capital expenditures totaled$11.8 million for the six month ended July 1, 2006, compared to $20.8million for the six month period ended July 2, 2005. Expenditures wereprimarily used to complete our new design and development facility in Warsaw,Indiana and maintain production capacity in all of our production facilities.

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***Debt and Credit Facilities***

In connection with our May2006 acquisition of Riley Medical, we entered into a $40.0 million seniorsecured credit facility five-year term loan. As part of an amendment andrestatement of our senior credit facility, we negotiated a 25 basis point interestrate reduction for all of our outstanding senior debt.

As of July 1, 2006, wehad an aggregate of $76.7 million of outstanding indebtedness, which consistedof $64.5 million of term loan borrowings outstanding under our senior creditfacility, no borrowings outstanding under our revolving credit facility, $2.4million of borrowings under our U.K. short-term credit facility and $9.8million of capital lease obligations. We had no outstanding letters of creditas of July 1, 2006.

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

We believe that cash flow fromoperating activities and borrowings under our senior credit facility will besufficient to fund currently anticipated working capital, the debt associatedwith the acquisition of Riley Medical Inc. for approximately $45.6 million,planned capital spending and debt service requirements for the foreseeablefuture, 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.

**Contractural Obligations and Commercial Commitments**

The following table relects our contractural obligations as of July 1,2006:

|                                 | ** ** | **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) |       | $                                         | 64.5       |   | $ | 0.2 |   | $ | 14.8 |   | $ | 22.3 |   | $ | 27.2 |   |
| Capital lease  obligations      |       | 13.6                                      |       | 2.0 |   | 5.8 |   | 1.9 |   | 3.9 |   |
| Operating lease  obligations    |       | 5.0                                       |       | 0.7 |   | 2.3 |   | 1.2 |   | 0.8 |   |
| Purchase  obligations (2)       |       | 20.7                                      |       | 15.6 |   | 5.1 |   | — |   | — |   |
|                            |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                           |       | $                                         | 103.8      |   | $ | 18.5 |   | $ | 28.0 |   | $ | 25.4 |   | $ | 31.9 |   |

 

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* Less than 1 yearis defined as the remainder of fiscal 2006. Following periods are whole fiscalyears.

(1)  Representsprincipal maturities only and , therefore, excludes the effects of interest andinterest rate swaps.  We have prepaid$4.4 million in term debt as of July 1, 2006.

(2)  Representspurchase agreements to buy minimum quantities of titanium and cobalt chromethrough December 2007.  The titaniumcontract disclosed in our Annual Report on Form 10-K has been modified andadditional titanium and cobalt chrome contracts have been entered into in thesecond quarter of 2006.

**Off-Balance Sheet Arrangements**

Our off-balance sheetarrangements 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.

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**Environmental**

There have been no materialchanges from the information provided in the our Annual Report on Form 10-Kfor fiscal year ended December 31, 2005.

**Critical Accounting Policies and Estimates**

The preparation of ourfinancial 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 six months ended July 1, 2006.

**New Accounting Pronouncements**

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

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

As a result of adopting SFAS123R, our income before income taxes and net income for the six months endedJuly 1, 2006 are $72 and $43 lower, respectively, than if it had continuedto account for share-based compensation under Opinion 25. Basic and dilutedearnings per share for the six months ended July 1, 2006 would not havechanged from $0.46 if we had not adopted SFAS 123R.

Prior to the adoption of SFAS123R, we presented all tax benefits of deductions resulting from the exerciseof stock options as operating cash flows in the Consolidated Statements of CashFlows. SFAS 123R requires the cash flows resulting from the tax benefitsresulting from tax deductions in excess of the compensation cost recognized forthose options (excess tax benefits) to be classified as financing cash flows.The $1.1 million excess tax benefit classified as a financing cash inflow wouldhave been classified as an operating cash inflow if we had not adopted SFAS123R.

Statement 123, as amended,required pro forma presentation as if compensation costs had been expensedunder the fair value method. For purpose of pro forma disclosure, the estimatedfair value of stock options at the grant date is amortized to expense over thevesting period.

In July 2006, the FASB issued FASB Interpretation No.(FIN) 48, *Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109*, whichclarifies the accounting for uncertainty in tax positions. This Interpretationrequires the recognition of a tax position when it is more likely than not thatthe tax position will be sustained upon examination by relevant taxingauthorities, based on the technical merits of the position. The provisions ofFIN 48 are effective for the Company on January 1, 2007, with the cumulativeeffect of the change in accounting principle recorded as an adjustment toopening retained earnings. The Corporation is currently evaluating the impactof adopting FIN 48 on its financial statements.

**Cautionary Notice Regarding Forward-Looking Statements**

Certain statements containedin this Quarterly Report on Form 10-Q and other written and oralstatements made from time to time by the Corporation do not relate strictly tohistorical or current facts. As such they are considered “forward-lookingstatements” that provide current expectations or forecasts of future events.Forward-

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lookingstatements typically are identified by the use of terms such as “may,” “will,” “should,”“expect,” “anticipate,” “believe,” “could,” “estimate,” “intend” and similarwords, although some forward-looking statements are expressed differently.Factors that could cause the Corporation’s actual results to differ materiallyfrom the expectations expressed in our forward-looking statements include, butare not limited to, the following: changes in general economic conditions inthe United States and Europe; our ability to retain existing customers,particularly our key customers, and attract new customers; the timing ofsignificant orders and shipments, including the effects of changes in inventorymanagement practices by our customers; the competitive nature of the orthopedicdevice market; the pursuit of strategic acquisitions or encountering unforeseendifficulties in integrating acquisitions; the degree to which we are leveragedand our significant debt service obligations; the impact of workstoppages and other labor matters; general economic or business conditionsaffecting the orthopedic device market being less favorable than expected; ourability to anticipate changes in technology and regulatory standards and tosuccessfully develop and introduce new and enhanced products on a timely basis;the unpredictability of intellectual property protection and maintenance andother intellectual property issues; any future changes in management or loss ofkey personnel; 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-Kfiled on February 27, 2006, elsewhere in this Quarterly Report onForm 10-Q and in the Corporation’s other filings with the Securitiesand Exchange Commission.

Forward-looking statementsrelate only to events as of the date on which the statements are made. Exceptas required by law, the Corporation’s undertakes no obligation to update anyforward-looking statement to reflect events or circumstances after the date onwhich the statement is made or to reflect the occurrence of unanticipatedevents, even if new information becomes available in the future.

**ITEM 3.**                    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISKS

For financial market risks related to changes ininterest rates, foreign currency exchange rates, commodity prices and theeffects of inflation, reference is made to Item 7a “Quantitative andQualitative Disclosures About Market Risk” contained in Part II ofour Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Ourexposure to these risks has not changed materially since December 31,2005.

**ITEM 4.**                    CONTROLS AND PROCEDURES

(a)    Evaluation of disclosure controls and procedures.

Our Chief Executive Officer and Chief Financial Officer, after evaluatingthe effectiveness 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 andits consolidated subsidiaries would be made known to them by others withinthose entities.

(b)    Changes in internal control over financial reporting.

During the quarter, there havebeen no changes in our “internal control over financial reporting” (as definedin Rule 13a-15(f) of the Securities Exchange Act of 1934) thatoccurred during the fiscal quarter covered by this report on Form 10-Qthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting, except that in connection with theacquisition of Riley Medical, Inc. (See Note 13 to the condensed consolidatedfinancial statements included in Item 1 for discussion of the acquisition andrelated financial data), we are still are in the process of integrating theRiley Medical operations and will be incorporating these operations as part ofour internal controls. However, for purposes of this evaluation, the impact ofthis acquisition on our internal controls over financial reporting has beenexcluded.

**PART II   OTHERINFORMATION**

**ITEM 1**                       LEGAL PROCEEDINGS

None.

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**ITEM 1A**              RISK FACTORS

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, Item 1A “Risk Factors” contained in our Annual Reporton Form 10-K for the fiscal year ended December 31, 2005, whichcould materially affect our business, financial condition or future results.The Risk Factors included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2005 have not materially changed.

**ITEM 2**                       UNREGISTERED SALES OF EQUITY SECURITIES AND USEOF PROCEEDS

None

**ITEM 4**                    SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

Our Annual Meeting ofShareholders was held April 27, 2006. Proxies were solicited for the Annual Meeting in accordance with therequirements of The Securities Exchange Act 1934.  At the Annual Meeting, the followingoccurred:

·                  Withrespect to Item 1 in our Proxy Statement (Election of Directors), Stephen B.Oresman and Frank Turner were elected to serve as Class I Directors and JamesS. Burns was elected to serve as a Class II Director.  The newly-elected Class I Directors willserve three-year terms, expiring at the annual shareholder meeting in 2009.  The newly-elected Class II Director willcomplete a term that expires at the annual shareholder meeting in 2007.  The Class III Directors, Brian S. Moore andFrancis T. Nusspickel are continuing Directors serving three-year terms thatexpire at the annual shareholder meeting in 2008.  The voting results for the two Class IDirectors and the one Class II Director were as follows:
|                                                | ** ** | **Shares Voted   For** | ** ** | **Shares   Voted   Against** | ** ** | **Abstentions** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|-----------------|------------|
| Class I Directors                    | ** ** | ** **                       | ** ** | ** **                             | ** ** | ** **      | ** ** |
| Stephen B.  Oresman                            |       | 24,773,299                       |       | 0                                      |       | 745,535         |       |
|                                           |       | 97.08                            | %          |                                   |       | 2.92            | %          |
| **       ** |       |                             |       |                                   |       |            |       |
| Frank Turner                                   |       | 24,782,164                       |       | 0                                      |       | 736,670         |       |
|                                           |       | 97.11                            | %          |                                   |       | 2.89            | %          |
| Class  II Director                             |       |                             |       |                                   |       |            |       |
| James S. Burns                                 |       | 25,104,839                       |       | 0                                      |       | 413,995         |       |
|                                           |       | 98.38                            | %          |                                   |       | 1.62            | %          |

 

·                  Withrespect to Item 2 in our Proxy Statement (Approval of Ernst & Young LLP asAuditors for the Year 2006), Ernst & Young LLP was approved as ourindependent auditors for the year 2006:
| Shares Voted For     |   | 25,502,728 |   |
|----------------------|--------|------------|--------|
|                      |   | 99.94      | %      |
|                 |   |       |   |
| Shares Voted Against |   | 10,907     |   |
|                      |   | .04        | %      |
|                 |   |       |   |
| Abstentions          |   | 5,199      |   |
|                      |   | .02        | %      |
|                 |   |       |   |
| Broker Non-Votes     |   | 0          |   |

 

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·                  Withrespect to Item 3 in our Proxy Statement (Approval of the Symmetry Medical Inc.UK Share Incentive Plan 2006) the Symmetry Medical Inc. UK Share Incentive Plan2006 was approved:

| Shares Voted For     |   | 22,286,859 |   |
|----------------------|--------|------------|--------|
|                      |   | 99.06      | %      |
|                 |   |       |   |
| Shares Voted Against |   | 199,779    |   |
|                      |   | .89        | %      |
|                 |   |       |   |
| Abstentions          |   | 10,380     |   |
|                      |   | .05        | %      |
|                 |   |       |   |
| Broker Non-Votes     |   | 3,021,816  |   |

 

**ITEM 5**                       OTHER INFORMATION

(b)  There have been no material changes to the procedures by whichsecurity holders may recommend nominees to our Board of Directors since ourSchedule 14A filed March 21, 2006.

**ITEM 6**                       EXHIBITS
| 10.22  |   | Stock Purchase Agreement by  and among Symmetry Medical USA Inc., Edward D. Riley and Russell P. Holmes  (incorporated by reference to Exhibit 10.22 from our Form 10-Q filed on May  10, 2006).                                                                                                                                                                                                                                                                     |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.23  |   | Amended and Restated Credit  Agreement, dated June 13, 2006, among Symmetry Medical Inc. as borrower,  Wachovia Bank, National Association as Administrative Agent, the lenders  identified on the signature pages thereto, General Electric Capital  Corporation as Syndication Agent and CIT Lending Services Corporation and  Charter One Bank, N.A. as Documentation Agents (incorporated by reference to  Exhibit 10.1 from our Form 8-K, filed June 14, 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 the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|        |     | SYMMETRY MEDICAL INC.                                |            |   |
|--------|----------|------------------------------------------------------|-----------------|--------|
|   |     |                                                 |            |   |
|   |     |                                                 |
|   |     | By                                                   | /s/ BRIAN MOORE |
|   |     |                                                 | Brian Moore,    |
|   | * * | *President and Chief Executive  Officer*             |
|   | * * | *(Principal Executive Officer)*                      |
|   |     |                                                 |
|   |     |                                                 |
|   |     | By                                                   | /s/ FRED HITE   |
|   |     | Fred Hite,                                           |
|   | * * | *Senior Vice President and Chief  Financial Officer* |
|   | * * | *(Principal Financial and Accounting  Officer)*      |
|        |          |                                                      |                 |        |  |

 

August 9, 2006

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