SMA-2014.9.27-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 27, 2014
 
Commission File Number: 001-32374
 
SYMMETRY MEDICAL INC.
(Exact name of registrant as specified in its charter)
 
Delaware
35-1996126
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
3724 North State Road 15, Warsaw, Indiana
46582
(Address of principal executive offices)
(Zip Code)
 
 
(574) 268-2252
 
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        ý Yes ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (S232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
ý Yes  ¨ No
 
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer ¨
 
Accelerated filer   ý
 
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      ¨ Yes  ý  No
 
The number of shares outstanding of the registrant’s common stock as of November 3, 2014 was 37,550,850 shares.
 




TABLE OF CONTENTS
 
PART I FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1
Financial Statements:
 
 
 
 
 
 
Condensed Consolidated Balance Sheets: As of September 27, 2014 and December 28, 2013
 
 
 
 
 
 
Condensed Consolidated Statements of Operations: Three and Nine Months Ended September 27, 2014 and September 28, 2013
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income: Three and Nine Months Ended September 27, 2014 and September 28, 2013
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows: Nine Months Ended September 27, 2014 and September 28, 2013
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
 
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 6
Exhibits 
 
 
 
 
 
Signatures
 





Cautionary Note Regarding Forward-Looking Statements
 
Throughout this Quarterly Report on Form 10-Q or in other reports or registration statements filed from time to time with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended, or under the Securities Act of 1933, as amended, as well as in documents we incorporate by reference or in press releases or oral statements made by our officers or representatives, we may make statements that express our opinions, expectations or projections regarding future events or future results, in contrast with statements that reflect historical facts. These predictive statements, which we generally precede or accompany by such typical conditional words such as “anticipate,” “intend,” “believe,” “estimate,” “plan,” “seek,” “project,” “potential,” or “expect,” or by the words “may,” “will,” “could,” or “should,” and similar expressions or terminology are intended to operate as “forward-looking statements” of the kind permitted by the Private Securities Litigation Reform Act of 1995. That legislation protects such predictive statements by creating a “safe harbor” from liability in the event that a particular prediction does not turn out as anticipated.
 
Forward-looking statements convey our current expectations or forecast future events. While we always intend to express our best judgment when we make statements about what we believe will occur in the future, and although we base these statements on assumptions that we believe to be reasonable when made, these forward-looking statements are not a guarantee of performance, and you should not place undue reliance on such statements. Forward-looking statements are subject to many uncertainties and other variable circumstances, many of which are outside of our control, that could cause our actual results and experience to differ materially from those we thought would occur.
 
We also refer you to, and believe that you should carefully read, the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” portions of our Annual Report for fiscal 2013 on Form 10-K, as well as in other reports which we file with the Securities and Exchange Commission, to better understand the risks and uncertainties that are inherent in our business and in owning our securities. These reports are available publicly on the SEC website, www.sec.gov, and on our website, www.symmetrymedical.com.
 
Any forward-looking statements which we make in this report or in any of the documents that are incorporated by reference herein speak only as of the date of such statement, and we undertake no ongoing obligation to update such statements. Comparisons of results between current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
 




PART I FINANCIAL INFORMATION
 
ITEM I. FINANCIAL STATEMENTS
 
SYMMETRY MEDICAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
 
 
September 27, 2014
 
December 28, 2013
 
 
(unaudited)
 

ASSETS:
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
27,175

 
$
7,362

Accounts receivable, net
 
53,180

 
51,813

Inventories
 
56,661

 
58,879

Refundable income taxes
 
3,198

 
5,784

Deferred income taxes
 
6,193

 
5,439

Other current assets
 
4,800

 
4,900

Total current assets
 
151,207

 
134,177

Property and equipment, net
 
87,357

 
89,993

Goodwill
 
170,674

 
182,178

Intangible assets, net of accumulated amortization
 
99,246

 
105,004

Other assets
 
2,839

 
4,484


 


 

Total Assets
 
$
511,323

 
$
515,836


 

 

LIABILITIES AND SHAREHOLDERS' EQUITY:
 
 
 
 
Current Liabilities:
 

 
 
Accounts payable
 
$
28,831

 
$
28,837

Accrued wages and benefits
 
12,909

 
9,656

Other accrued expenses
 
9,144

 
7,138

Accrued income taxes
 
989

 
53

Derivative valuation liability
 
416

 
283

Current portion of capital lease obligations
 
507

 
465

Current portion of long-term debt
 

 
6,531


 


 

Total current liabilities
 
52,796

 
52,963

Accrued income taxes
 
685

 
2,126

Deferred income taxes
 
4,768

 
7,536

Derivative valuation liability
 
2,311

 
1,104

Other liabilities
 
923

 
886

Capital lease obligations, less current portion
 
563

 
974

Long-term debt, less current portion
 
170,000

 
165,450


 


 

Total Liabilities
 
232,046

 
231,039


 

 

Commitments and contingencies
 

 


 

 

Shareholders' Equity:
 
 
 
 
Common Stock, $.0001 par value; 75,000 shares authorized; shares issued September 27, 2014-37,550; December 28, 2013-37,209
 
4

 
4

Additional paid-in capital
 
291,893

 
289,257

Accumulated deficit
 
(13,511
)
 
(9,531
)
Accumulated other comprehensive income
 
891

 
5,067


 


 

Total Shareholders' Equity
 
279,277

 
284,797


 


 

Total Liabilities and Shareholders' Equity
 
$
511,323

 
$
515,836

See accompanying notes to condensed consolidated financial statements.

2



SYMMETRY MEDICAL INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except per Share Data; Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
 
 
 
 
 
 
 
 
Revenue
$
95,935


$
95,667


$
294,087


$
290,493

Cost of revenue
70,223


70,429


216,476


213,722

Gross profit
25,712


25,238


77,611


76,771

Research and development expenses
1,261


1,121


3,660


3,459

Sales and marketing expenses
6,292


6,509


19,235


20,428

General and administrative expenses
14,939


10,899


37,831


34,163

Asset impairment


46,548


10,500


46,548

Facility closure and severance
161


454


928


1,360

Operating income (loss)
3,059


(40,293
)

5,457


(29,187
)












Other (income) expense:
 


 


 


 

Interest expense
2,051


4,337


6,383


13,509

Loss on debt extinguishment




503



Derivatives valuation loss


5




242

Other
(710
)

829


(806
)

931

Income (loss) from continuing operations before income taxes
1,718


(45,464
)

(623
)

(43,869
)
Income tax expense (benefit)
401


(16,447
)

(721
)

(16,110
)
Income (loss) from continuing operations
1,317


(29,017
)

98


(27,759
)
Loss from discontinued operations, net of taxes


(5,507
)

(4,078
)

(5,882
)
Net income (loss)
1,317


(34,524
)

(3,980
)

(33,641
)












Income (loss) per share from continuing operations:
 


 


 


 

Basic
$
0.04


$
(0.80
)

$


$
(0.76
)
Diluted
$
0.04


$
(0.80
)

$


$
(0.76
)












Income (loss) per share:
 


 


 


 

Basic
$
0.04


$
(0.95
)

$
(0.11
)

$
(0.93
)
Diluted
$
0.04


$
(0.95
)

$
(0.11
)

$
(0.93
)
 
 
 
 
 
 
 
 
Weighted average common shares and equivalent shares outstanding:
 


 


 


 

Basic
36,594


36,345


36,582


36,312

Diluted
37,094


36,345


37,051


36,312

 
See accompanying notes to condensed consolidated financial statements.

3



SYMMETRY MEDICAL INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands; Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
 
 
 
 
 
 
 
 
Net income (loss)
$
1,317

 
$
(34,524
)
 
$
(3,980
)
 
$
(33,641
)
 
 
 
 
 
 
 
 
Foreign currency adjustments:
 

 
 

 
 

 
 

     Intra-entity foreign currency transaction adjustment
(1,124
)

1,333


(350
)

(33
)
     Foreign currency translation adjustments
(3,580
)
 
2,310

 
(2,991
)

657

Net unrealized gains on derivative instruments:
 
 
 

 



 

Unrealized holding gains (losses), net of taxes
(3
)

(109
)

(1,205
)

1,581

     Reclassification adjustment for realized losses included in net income
131


47


371


148

Comprehensive income (loss)
$
(3,259
)

$
(30,943
)

$
(8,155
)

$
(31,288
)
 
See accompanying notes to condensed consolidated financial statements.

4



SYMMETRY MEDICAL INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands; Unaudited)

Nine Months Ended

September 27, 2014

September 28, 2013
Operating activities
 


 

Net loss
$
(3,980
)
 
$
(33,641
)
Adjustments to reconcile net income to net cash provided by operating activities:
 


 

Depreciation
12,048


12,476

Amortization of intangible assets
5,687


5,343

Amortization of debt issuance costs
741


1,569

Interest paid in kind


1,006

Net loss on sale of assets
142


675

Loss on sale of business
4,117



Asset impairment
10,500


51,646

Deferred income tax provision
(4,457
)

(16,522
)
Loss on debt extinguishment
503



Excess tax benefit from stock-based compensation
(61
)
 
(57
)
Stock-based compensation
2,716


1,934

Derivative valuation loss


242

Foreign currency transaction (gain) loss
(1,306
)

1,391

Change in operating assets and liabilities:





Accounts receivable
(3,841
)

5,005

Other assets
301


245

Inventories
(442
)

3,853

Current income taxes
3,552


370

Accounts payable
1,787


(1,036
)
Accrued expenses and other
5,826


(110
)
 





Net cash provided by operating activities
33,833


34,389

 





Investing activities
 


 

Purchases of property and equipment
(11,404
)

(7,786
)
Proceeds from sale of property and equipment and other
1,603


655

 





Net cash used in investing activities
(9,801
)

(7,131
)
 





Financing activities
 


 

Proceeds from Bank Revolver
79,838


82,687

Payments on Bank Revolver
(64,838
)

(85,687
)
Proceeds on short term borrowings
20,638



Payments on short term borrowings
(20,638
)


Payments on bank term loans and capital lease obligations
(17,350
)

(29,328
)
Proceeds from the issuance of common stock, net
(142
)

(458
)
Excess tax benefit from stock-based compensation
61


57

 





Net cash used in financing activities
(2,431
)

(32,729
)
Effect of exchange rate changes on cash
(1,788
)

553

 





Net increase (decrease) in cash and cash equivalents
19,813


(4,918
)
Cash and cash equivalents at beginning of period
7,362


9,815

 





Cash and cash equivalents at end of period
$
27,175


$
4,897

 





Supplemental disclosure of cash flow information:
 


 

Cash paid for interest
$
5,200


$
11,381

Cash paid (received) for income taxes
$
413


$
(966
)
 
 
 
 
Supplemental disclosure of non-cash investing activities:





Non-cash property, plant and equipment additions
$
1,129


$

See accompanying notes to condensed consolidated financial statements.

5



SYMMETRY MEDICAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data; Unaudited)
 
1. Basis of Presentation
 
The condensed consolidated financial statements include the accounts of Symmetry Medical Inc. and its wholly-owned subsidiaries (collectively referred to as the Corporation), which operates in two reportable segments: (1) Original Equipment Manufacturer (“OEM”) Solutions and (2) Symmetry Surgical.  The Corporation is a global supplier of integrated products consisting primarily of surgical implants, instruments and cases to orthopedic and other medical device companies. OEM Solutions primarily designs, develops and manufactures implants and related surgical instruments and cases for orthopedic device markets. Symmetry Surgical is the Corporation’s hospital direct business which sells a broad range of reusable stainless steel and titanium surgical hand-held instruments and retractor systems, sterile disposable surgical products, and sterilization containers.
 
The condensed consolidated financial statements of the Corporation have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments of a normal recurring nature considered necessary to present fairly the consolidated financial position of the Corporation, its results of operations and cash flows. The Corporation’s results are subject to seasonal fluctuations. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements included herein should be read in conjunction with the fiscal year 2013 consolidated financial statements and the notes thereto included in the Corporation’s Annual Report on Form 10-K for fiscal year 2013.
 
The Corporation’s fiscal year is the 52 or 53 week period ending on the Saturday closest to December 31. Fiscal year 2014 is a 53 week year ending January 3, 2015.  The Corporation’s interim quarters for 2014 are 13 weeks long, except for the fourth quarter which will be 14 weeks long and quarter-end dates have been set as March 29, 2014, June 28, 2014 and September 27, 2014. Fiscal year 2013 was a 52 week year (ending December 28, 2013). The Corporation’s interim quarters for 2013 were 13 weeks long, ending March 30, 2013, June 29, 2013 and September 28, 2013. References in these condensed consolidated financial statements to the three months ended refer to these financial periods, respectively.  
 
2. New Accounting Pronouncements

Revenue from Contracts with Customers:   In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date will be the first quarter of fiscal year 2017 using one of two retrospective application methods. The Corporation is currently assessing the potential impact of the adoption of ASU 2014-09 on its financial statements and related disclosures.

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists :  In July 2013, the FASB issued ASU 2013-11 Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The new guidance is effective for fiscal year and interim periods beginning after December 15, 2013. The adoption of this ASU did not have an impact on the Corporation’s financial position, results of operations and cash flows.

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity :  In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update modifies the requirements for reporting discontinued operations. Under the amendments in ASU 2014-08, the definition of discontinued operation has been modified to only include those disposals of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. This update also expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information

6



about disposals of individually significant components that do not meet the definition of discontinued operations. This update is effective for annual and interim periods beginning after December 15, 2014. The Corporation does not expect this ASU to have an impact on its financial position, results of operations or cash flows.

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. In June, 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This new guidance states that a performance target that affects vesting of a share-based payment and that could be achieved after the requisite service period is a performance condition under ASC 718. This update is effective for annual and interim periods beginning after December 15, 2015. The Corporation does not believe this ASU will have an impact on the Corporation’s financial statements.

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. In August, 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This new guidance requires management to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and, if so, disclose that fact. Management will also be required to evaluate and disclose whether its plans alleviate that doubt. The standard is effective for annual periods ending after December 15, 2016 with early adoption permitted. The Corporate does not believe this ASU will have an impact on the Corporation’s financial statements.

3. Discontinued operations

The results of operations for a business unit that the Corporation has sold are classified in discontinued operations for all periods presented.

On May 21, 2014, the Corporation completed the sale of its subsidiary, Clamonta Ltd. for $1,350. Symmetry believed the sale would better enable the Corporation to focus its efforts on its core markets and reduce its manufacturing footprint. In connection with the sale, Symmetry recorded a loss on the sale of assets of approximately $4,117.

The operations of Clamonta Ltd. has historically been included in the OEM Solutions segment. The following table summarizes certain operating results of Clamonta for all periods presented:
 
 
Three Months Ended

Nine Months Ended
 
 
September 28, 2013

September 27, 2014

September 28, 2013
 
 
 
 
 
 
 
Revenue
 
$
2,336

 
$
6,798

 
$
8,322

Cost of revenue
 
$
3,045

 
$
6,436

 
$
8,850

Sales and marketing expenses
 
$
7

 
$
18

 
$
23

General and administrative expenses
 
$
351

 
$
560

 
$
991

Asset impairment
 
$
5,098

 
$

 
$
5,098

Facility closure and severance costs
 
$
54

 
$

 
$
70

Other expense
 
$
2

 
$
4,108

 
$
1

Income tax benefit
 
$
714

 
$
246

 
$
829

Loss from discontinued operations, net of tax
 
$
(5,507
)
 
$
(4,078
)
 
$
(5,882
)










7



Summary of Assets and Liabilities of Discontinued Operations:
 
 
December 28, 2013
 
 
 
Cash and cash equivalents
 
$
213

Accounts receivable
 
$
2,041

Inventory
 
$
2,905

Other current assets
 
$
44

Property and equipment, net
 
$
2,231

Total assets
 
$
7,434

 
 
 
Accounts payable
 
$
3,060

Accrued wages and benefits
 
$
275

Other accrued expenses
 
$
122

Total liabilities
 
$
3,457


4. Inventories
 
Inventories consist of the following:  
 
September 27,
2014
 
December 28,
2013
 
(unaudited)
 


Raw material and supplies
$
9,650


$
10,249

Work-in-process
16,508


23,315

Finished goods
30,503


25,315







 
$
56,661


$
58,879

 
5. Property and Equipment
 
Property and equipment, including depreciable lives, consists of the following:
 
 
September 27,
2014

December 28,
2013
 
(unaudited)



Land
$
5,664


$
6,046

Buildings and improvements (20 to 40 years)
41,818


42,519

Machinery and equipment (5 to 15 years)
161,904


161,734

Office equipment (3 to 5 years)
22,042


21,619

Construction-in-progress
8,688


4,061







 
240,116


235,979

Less accumulated depreciation
(152,759
)

(145,986
)
 



 
$
87,357


$
89,993

 
6. Goodwill and Other Intangible Assets
 
The Corporation has multiple operating segments which are comprised of multiple components that represent the lowest level for which discrete financial information is available and the operating results of that component are regularly reviewed by management. The Corporation aggregates certain components that share similar economic similarities and that are vertically integrated within the same operating segment into reporting units.

8




In the second quarter of fiscal 2014, the Corporation determined that the expected operating results for one of its reporting units was projected to be substantially lower than previous forecasts. Given this information, the Corporation conducted an interim impairment test and determined that impairment existed. The impairment is $10,500 for goodwill and has been recorded in the condensed consolidated statements of operations within Asset Impairment. The Corporation recorded a pre-tax non-cash charge during the second quarter of fiscal 2014 related to the Symmetry Surgical segment and was primarily driven by lower revenue due to sluggish hospital spending environment in the U.S. and previously disclosed integration challenges related to the 2011 acquisition of the Codman surgical instruments business from which we have not recovered as quickly as previously expected.

The Corporation determines the fair value of intangible assets using an income-based approach. The approach calculates fair value by estimating the after-tax cash flows attributable to the asset and then discounting these after-tax cash flows to a present value using a risk-adjusted discount rate. The calculated fair value is compared to the carrying value to determine if any impairment exists.

To derive the fair value of the reporting unit, as required in step one of the impairment test, the Corporation used the income approach, specifically the discounted cash flow method, to determine the fair value of each reporting unit and the associated amount of the impairment charge. This approach calculates fair value by estimating the after-tax cash flows attributable to a reporting unit and then discounting these after-tax cash flows to a present value using a risk-adjusted discount rate. This methodology is consistent with how the Corporation estimates the fair value of its reporting units during its annual goodwill and indefinite lived intangible asset impairment tests. Inputs used to determine the fair value of the Corporation's reporting units are considered Level 3 inputs of the fair value hierarchy and include the following:

The Corporation's financial projections for this reporting unit are based on management's assessment of macroeconomic variables, industry trends and market opportunities, as well as the Corporation's strategic objectives and future growth plans. Revenue growth rates assumed for the Corporation’s reporting unit where impairment was recognized was approximately 4-6% for 2015 and beyond.
The discount rate used to measure the present value of the projected future cash flows is set using a weighted-average cost of capital method that considers market and industry data, as well as the Corporation's specific risk factors that are likely to be considered by a market participant.  The weighted-average cost of capital is the Corporation's estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise. The discount rate used for the Corporation’s reporting unit where impairment was recognized was approximately 12.0%.

For Level 3 measurements, significant increases or decreases in long-term growth rates or discount rates in isolation or in combination could result in a significantly lower or higher fair value measurement.

In the second step, the Corporation assigned the reporting unit's fair value to all of its assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment charge. This allocation process was performed only for purposes of measuring the goodwill impairment and not to adjust the carrying values of the recognized assets and liabilities.
Prior to performing the annual goodwill impairment test for the reporting unit that failed step 1, the Corporation tested long-lived assets to be held and used for impairment on an undiscounted cash flow basis. Based on the results of this testing, no intangible assets were deemed impaired.
The reconciliation of the beginning and ending carrying amounts of goodwill are as follows:
Balance as of December 29, 2012
$
229,134

 
Impairment of goodwill
(47,450
)
 
Effects of foreign currency
494

Balance as of December 28, 2013
$
182,178

 
Impairment of goodwill
(10,500
)
 
Effects of foreign currency
(1,004
)
Balance as of September 27, 2014
$
170,674




9



7. Derivatives
 
The Corporation utilizes derivative instruments to minimize the volatility of cash flows and statement of operations impacts associated with interest rate payments on its variable rate debt and the impact of fluctuations in foreign currency. The Corporation recognizes all derivative instruments as either assets or liabilities at fair value on the consolidated balance sheets. Derivative asset and liability amounts with the same counterparty are netted against each other for financial reporting purposes. The Corporation utilizes third party valuations to assist in the determination of the fair value of these derivatives. The Corporation considered its derivative instrument valuations to be Level 2 fair value measurements.
 
To the extent a derivative instrument was designated effective as a cash flow hedge of an exposure to changes in the fair value of a future transaction, the change in fair value of the derivative was deferred in accumulated other comprehensive income, a component of shareholders' equity in the consolidated balance sheets, until the underlying transaction hedged was recognized in the consolidated statements of operations. The Corporation accounts for certain derivatives hedging the payment of interest as cash flow hedges and the impact of the hedge was reclassified to interest expense in the consolidated statements of operations upon payment of interest.
 
The Corporation's profitability and cash flows are affected by changes in interest rates, specifically LIBOR. The primary purpose of the Corporation's interest rate risk management activities is to hedge its exposure to changes in interest rates. In March, 2012, the Corporation entered into two forward swap contracts to manage interest rate risk related to its Bank Term Loan and a portion of its Bank Revolver. The notional amount on the swap contracts is $98,239 as of September 27, 2014 and is reduced to $37,500 by December 2022 in line with expected reductions in the related debt instruments. The fixed per annum interest rate on the swap contracts is 0.99% in 2014 that incrementally increase to 3.81% by 2022. These swap contracts, which were a fair value liability of $2,727 and $1,387 as of September 27, 2014 and December 28, 2013, respectively, were designated as cash flow hedges of the future payments of variable rate interest with one-month LIBOR. For the three and nine months ended September 27, 2014, the Corporation recorded a gain (loss) of $206 and ($1,340), respectively, attributable to these cash flow hedges which was included in other comprehensive income. Of the total cumulative loss, $416 will be reclassified into earnings in the next twelve months.

In June and July 2012, the Corporation entered into forward swap contracts to mitigate the impact of fluctuations in foreign currency on the statement of operations. As of September 27, 2014 and December 28, 2013, the Corporation had settled all of its outstanding forward swap contracts. As of June 29, 2013, the Corporation had remaining contracts for the sale of 71 Euros, which were settled in equal amounts over the twelve month period which began July 2012. These swap contracts were not designated as cash flow hedges and therefore the change in the fair value was immediately recorded in derivatives valuation loss in the consolidated statements of operations.
  
8. Fair Value of Financial Instruments
 
As of September 27, 2014, the Corporation held certain assets and liabilities that are required to be measured at fair value on a recurring basis. These included the Corporation's cash equivalents and derivative instruments in the form of interest rate swaps and foreign currency forward contracts. The Corporation's cash equivalents include highly liquid financial instruments that are readily convertible with maturities of 90 days or less. The Corporation’s derivative instruments consist of contracts that are not traded on a public exchange. The fair values of interest rate derivative instruments and foreign currency forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Corporation has categorized these derivative instruments as Level 2 in accordance with the FASB Standard on fair value measurement.
 
On a recurring basis management measures the fair value of its interest rate swaps using the market approach based on projections of the one-month LIBOR rate over the life of each swap. Also on a recurring basis, management measures the fair value of its foreign currency forward contracts using the market approach based on the projections of the Euro rate over the life of each forward contract. The fair value and carrying value of the Corporation’s assets and liabilities measured at fair value on a recurring basis were as follows:
 

10



 
September 27, 2014

December 28, 2013
 
Fair Value Measurements

Fair Value Measurements
 
Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total
 
(unaudited)

 

 

 

 
Assets
 


 


 


 


 


 


 




Cash equivalents
$


$
14,959


$


$
14,959


$


$
35


$


$
35

Total assets
$


$
14,959


$


$
14,959


$


$
35


$


$
35

























Liabilities
 


 


 


 


 


 


 


 

Interest rate swaps
$


$
(2,727
)

$


$
(2,727
)

$


$
(1,387
)

$


$
(1,387
)
Total liabilities
$


$
(2,727
)

$


$
(2,727
)

$


$
(1,387
)

$


$
(1,387
)
 
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. Assets and liabilities acquired in business combinations are recorded at their fair value as of the date of acquisition.
 
The Corporation reviews for goodwill impairment annually on the first day of the fourth fiscal quarter and more frequently if circumstances indicate its carrying value may not be recoverable. The fair value of the reporting units is determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, corporate tax structure and product offerings. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation and risks associated with the reporting unit. These assets would generally be classified within Level 3, in the event that the Corporation were required to measure and record such assets at fair value within its consolidated financial statements, as discussed in Note 6, Goodwill and Other Intangible Assets.

The Corporation periodically evaluates the carrying value of long-lived assets to be held and used, including definite-lived intangible assets and property plant and equipment, when events or circumstances warrant such a review. Fair value is determined primarily using anticipated cash flows assumed by a market participant, discounted at a rate commensurate with the risk involved and these assets would generally be classified within Level 3, in the event that the Corporation were required to measure and record such assets at fair value within its consolidated financial statements.
 
Additionally, financial instruments also consist of cash, accounts receivable, accounts payable and long-term debt.  The carrying value of long-term debt materially approximates fair value. Additionally, the fair value of cash and net accounts receivable and payable was estimated by management to approximate fair value due to the relatively short period of time to maturity for these instruments. 
 
9. Debt Arrangements
 
The Corporation’s Amended Credit Agreement currently provides for a $200,000 revolving line of credit (Bank Revolver) and a $50,000 bank term loan (Bank Term Loan). The Amended Credit Agreement also includes an accordion feature, which permits the Corporation to borrow up to an additional $50,000 in the form of additional term loans or an increase in the Bank Revolver subject to the terms and conditions set forth in the Amended Credit Agreement. The Amended Credit Agreement, which is senior and secured, has an aggregate of $170,000 outstanding as of September 27, 2014.

Borrowings under the Amended Credit Agreement bear interest at a rate per annum based upon LIBOR, the Federal Funds rate or the Lenders' prime rate, in each case plus an applicable margin, at the Corporation's option. The Bank Term Loan was to be repaid in quarterly installments of $2,778, could be prepaid, in whole or in part, at the option of the Corporation, and was required to be prepaid using all or a portion of the net cash proceeds of certain asset sales, recovery events, and issuances of new debt or equity and, depending on the Corporation's Total Leverage Ratio (as defined in the Amended Credit Agreement), using a portion of the Corporation's Excess Cash Flow (as defined in the Amended Credit Agreement) (the "Excess Cash Flow Prepayment"). The Excess Cash Flow Prepayment was required to be made within 90 days of the end of the fiscal year in which the Excess Cash Flow is generated. As of December 28, 2013, the Excess Cash Flow calculation required the Corporation to prepay the bank term loan payable in full prior to March 29, 2014. The payment was made with capacity on the Bank Revolver. The Bank Revolver matures on November 3, 2015.

 The Amended Credit Agreement contains various financial covenants, including covenants imposing a maximum ratio of total debt to EBITDA (as defined in the Amended Credit Agreement) and prescribing a minimum ratio of EBITDA to fixed charges

11



(as defined in the Amended Credit Agreement). The Amended Credit Agreement also contains covenants restricting certain corporate actions, including asset dispositions, acquisitions, payment of dividends and certain other restricted payments, changes of control, incurring indebtedness, incurring liens, making loans and investments and transactions with affiliates. The Amended Credit Agreement is secured by substantially all of the assets of the Corporation (and its U.S. subsidiaries) and also contains customary events of default.
 
On December 27, 2013, the Corporation amended its Amended Credit Agreement to allow for the prepayment of the senior subordinated term notes (referred to as "Term Notes" or "Mezzanine Debt") and to modify certain financial covenants. In connection with the amendment, the Corporation paid off the outstanding principal and interest of the Term Notes that were to mature on December 29, 2017. The outstanding principal balance of the Term Notes bore interest at a rate of 14% per annum.

As of September 27, 2014, the most restrictive financial covenants per the Corporation’s lending arrangements included the debt to EBITDA covenant ratio to be less than 3.50:1. The Corporation's ratio as of September 27, 2014 was approximately 3.02:1. The minimum interest coverage ratio is required to be greater than 1.25:1, and the Corporation's ratio at September 27, 2014 was approximately 2.00:1. The Corporation was in compliance with all covenants as of September 27, 2014.

10. Other Comprehensive Income
 
Amounts reclassified from accumulated other comprehensive income (loss) to earnings during the three and nine months ended September 27, 2014 and September 28, 2013 were as follows:
   
Details about accumulated other comprehensive income components
 
Amount reclassified from accumulated other
comprehensive income

Affected line item in the statement where net income is presented
 
Three Months Ended

Nine Months Ended

 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013

 
 
(unaudited)

(unaudited)

 
Realized losses on derivative instruments
 
$
208


$
84


$
590


$
264


Interest expense
Tax benefit
 
(77
)

(37
)

(219
)

(116
)

Income tax expense (benefit)
Net of tax
 
$
131


$
47


$
371


$
148


 
  
11. Income Taxes

Income (loss) from continuing operations before income taxes consisted of:

Three Months Ended

Nine Months Ended

September 27, 2014

September 28, 2013

September 27, 2014

September 28, 2013

(unaudited)
 
(unaudited)
Domestic
(1,315)

(45,069)

(7,625)

(45,912)
Foreign
3,033

(395)

7,002

2,043

1,718

(45,464)

(623)

(43,869)












12



The provision for income taxes differs from that computed at the Federal statutory rate of 35% in 2014 and 2013, respectively, as follows: 
 
Three Months Ended

Nine Months Ended
 
September 27, 2014

September 28, 2013

September 27, 2014

September 28, 2013
 
(unaudited)
 
(unaudited)
Tax at Federal statutory rate
$
601


$
(15,912
)

$
(218
)

$
(15,354
)
State income taxes
(21
)

(2,015
)

(311
)

(1,996
)
State tax credits
11


(72
)

(4
)

(68
)
Foreign income taxes
(383
)

(595
)

(888
)

(709
)
Qualified production activities deduction
(30
)

14


51



Research and development credits--current year
15


(195
)

(60
)

(212
)
Valuation allowance
(31
)

579




540

Goodwill impairment


6,581


186


6,581

Reserve for uncertain tax positions
(893
)

(4,970
)

(854
)

(4,914
)
Non-deductible transaction costs
1,029




1,029



Other
103


138


348


22

 
$
401

 
$
(16,447
)
 
$
(721
)
 
$
(16,110
)
 
The Corporation's policy with respect to interest and penalties associated with reserves for uncertain tax positions is to classify such interest and penalties in income tax expense in the statements of operations.  As of September 27, 2014, the total amount of unrecognized income tax benefits computed under ASC 740 was approximately $1,003, all of which, if recognized, would impact the effective income tax rate of the Corporation.  As of September 27, 2014, the Corporation had recorded a total of $45 in accrued interest and penalties related to uncertain tax positions.  The Corporation does not foresee material changes in its reserves for uncertain income tax positions as reasonably possible during the next 12 months. During 2014, certain reserves relating to federal income tax positions expired due to the statutes of limitations. As such, the consolidated statement of operations was benefited $838 through a reduction in income tax expense and associated interest expense. As of September 27, 2014, the Corporation is subject to unexpired statutes of limitations for U.S. federal income taxes for the year 2011.  The Corporation is also subject to unexpired statutes of limitations for Indiana generally for the years 2011-2013.
Balance at December 29, 2012
6,179

Additions based on tax positions--current year
82

Additions for tax positions--prior years
932

Lapses of statutes of limitations
(5,231
)
Balance at December 28, 2013
1,962

Additions based on tax positions--current year

Additions for tax positions--prior years

Settlements
(720
)
Lapses of statutes of limitations
(239
)
Balance at September 27, 2014
$
1,003


12. Segment Reporting 
 
The Corporation has two reportable segments: OEM Solutions and Symmetry Surgical. OEM Solutions primarily designs, develops and manufactures implants and related surgical instruments and cases for orthopedic device companies and companies in other medical device markets such as arthroscopy, dental, laparoscopy, osteobiologic and endoscopy. OEM Solutions also manufactures specialized non-healthcare products, primarily in the aerospace industry. OEM Solutions manages its business in multiple operating segments. Because of the similar economic characteristics of these operations, including the nature of the products, comparable level of FDA regulations, and same or similar customers, those operations have been aggregated for segment reporting purposes. Symmetry Surgical is the Corporation’s hospital direct business which sells a broad range of reusable stainless steel and titanium surgical hand-held instruments and retractor systems, sterile disposable surgical products (vein strippers, SECTO dissectors, tonsil sponges and surgical marker pens), and sterilization containers. These products are

13



typically used in the surgical specialties of spine, general/OB-GYN, microsurgery/neurosurgery, orthopedics, laparoscopy, cardiovascular, thoracic and general surgery in the hospital setting as well as surgery centers and in select physician offices.
 
The Corporation is a multi-national company with operations in the U.S., United Kingdom, France, Ireland, Malaysia, Germany and Switzerland. As a result, the Corporation's financial results can be impacted by currency exchange rates in the foreign markets in which the Corporation sells its products. Revenues are attributed to geographic locations based on the location to which we ship our products.
 
The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Corporation’s 2013 Form 10-K, except that the Corporation evaluates segment performance based on income from operations. The Corporation allocates certain administrative corporate charges to the OEM Solutions and Symmetry Surgical reportable segments. Other Corporation charges, such as interest, income taxes and remaining unallocated administrative charges have not been allocated to the OEM Solutions or Symmetry Surgical reportable segments. The Corporation generally accounts for intersegment sales and transfers at cost plus a specified mark-up.
 
Reportable segment information is as follows:
 
Three Months Ended September 27, 2014
 
OEM
Solutions

Symmetry
Surgical

Unallocated

Combined
segments

Eliminations

Consolidated
Total
 
(unaudited)
Revenues
 


 


 


 


 


 

External revenues
$
75,898


$
20,037




$
95,935




$
95,935

Intersegment revenues
2,080


278




2,358


$
(2,358
)


Total revenues
77,978


20,315




98,293


(2,358
)

95,935



















Depreciation and amortization
4,180


1,577


$
71


5,828




5,828



















Operating income (loss)
8,826


511


(6,125
)

3,212


(153
)

3,059

Interest expense
 


 


 


 


 


2,051

Other
 


 


 


 


 


(710
)
Income before income taxes
 


 


 


 


 


1,718

 
 
Three Months Ended September 28, 2013
 
OEM
Solutions

Symmetry
Surgical

Unallocated

Combined
segments

Eliminations

Consolidated
Total
 
(unaudited)
Revenues
 


 


 


 


 


 

External revenues
$
73,449


$
22,218




$
95,667




$
95,667

Intersegment revenues
1,575


13




1,588


$
(1,588
)


Total revenues
75,024


22,231




97,255


(1,588
)

95,667



















Depreciation and amortization
4,222


1,523


$
62


5,807




5,807



















Operating income (loss)
(19,489
)

(18,290
)

(2,558
)

(40,337
)

44


(40,293
)
Interest expense
 


 


 


 


 


4,337

Derivatives valuation loss
 


 


 


 


 


5

Other
 


 


 


 


 


829

Loss before income taxes
 

 

 

 

 

(45,464
)

14



 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 27, 2014
 
OEM
Solutions

Symmetry
Surgical

Unallocated

Combined
segments

Eliminations

Consolidated
Total
 
(unaudited)
Revenues
 


 


 


 


 


 

External revenues
$
233,042


$
61,045




$
294,087




$
294,087

Intersegment revenues
5,588


443




6,031


$
(6,031
)


Total revenues
238,630


61,488




300,118


(6,031
)

294,087



















Depreciation and amortization
12,641


4,725


$
217


17,583




17,583



















Operating income (loss)
24,922


(8,164
)

(11,028
)

5,730


(273
)

5,457

Interest expense
 


 


 


 


 


6,383

Loss on debt extinguishment
 

 
 

 
 

 
 

 
 

 
503

Other
 


 


 


 


 


(806
)
Loss before income taxes
 

 

 

 

 

(623
)

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 28, 2013
 
OEM
Solutions

Symmetry
Surgical

Unallocated

Combined
segments

Eliminations

Consolidated
Total
 
(unaudited)
Revenues
 


 


 


 


 


 

External revenues
$
223,774


$
66,719




$
290,493




$
290,493

Intersegment revenues
4,046


48




4,094


$
(4,094
)


Total revenues
227,820


66,767




294,587


(4,094
)

290,493



















Depreciation and amortization
12,734


4,520


$
164


17,418




17,418



















Operating income (loss)
(4,940
)

(16,330
)

(7,965
)

(29,235
)

48


(29,187
)
Interest expense
 


 


 


 


 


13,509

Derivatives valuation loss
 


 


 


 


 


242

Other
 


 


 


 


 


931

Loss before income taxes
 

 

 

 

 

(43,869
)

Revenues to External Customers:  
 
Three Months Ended

Nine Months Ended

September 27, 2014

September 28, 2013

September 27, 2014

September 28, 2013
 
(unaudited)

(unaudited)
United States
$
68,880


$
73,449


$
213,810


$
223,406

Ireland
10,010


7,311


26,792


22,953

United Kingdom
3,712


3,129


12,083


10,252

Other foreign countries
13,333


11,778


41,402


33,882













Total revenues
$
95,935


$
95,667


$
294,087


$
290,493


15



 Concentration of Credit Risk:
  
A substantial portion of the Corporation's net revenues is derived from a limited number of customers. Net revenue from customers of the Corporation which individually account for 10% or more of the Corporation's net revenue is as follows:
 
Three months ended September 27, 2014 - Two customers represented approximately 29.5% and 13.3%, respectively, of revenue.

Three months ended September 28, 2013 - Two customers represented approximately 32.2% and 10.3%, respectively, of revenue.

Nine Months Ended September 27, 2014 - Two customers represented approximately 30.5% and 12.2%, respectively, of revenue.

Nine Months Ended September 28, 2013 - Two customers represented approximately 33.0% and 10.0%, respectively, of revenue.

Following is a summary of the composition by segment and product category of the Corporation's net revenues to external customers.
 
 
Three Months Ended

Nine Months Ended
Sales by product
September 27, 2014

September 28, 2013

September 27, 2014

September 28, 2013
 
(unaudited)

(unaudited)
OEM Solutions Revenue
 


 


 


 

Instruments
$
28,391


$
27,200


$
87,081


$
83,445

Implants
27,130


26,108


84,918


80,213

Cases
16,269


16,959


49,217


50,432

Other
4,108


3,182


11,826


9,684

Total OEM Solutions Revenue
75,898


73,449


233,042


223,774













Total Symmetry Surgical Revenue
20,037


22,218


61,045


66,719













Total Revenue
$
95,935


$
95,667


$
294,087


$
290,493


13. Net Income Per Share
 
The following table sets forth the computation of earnings per share. 

16



 
Three Months Ended

Nine Months Ended

September 27, 2014

September 28, 2013

September 27, 2014

September 28, 2013
 
(unaudited)

(unaudited)
Net income (loss) for basic earnings per share:
 

 

 

 
Continuing operations
$
1,317


$
(29,017
)

$
98


$
(27,759
)
Discontinued operations
$


$
(5,507
)

$
(4,078
)

$
(5,882
)
Income available to common shares - basic
$
1,317


$
(34,524
)

$
(3,980
)

$
(33,641
)
Basic weighted average common shares outstanding
36,594


36,345


36,582


36,312









Basic net income (loss) per share attributable to common shareholders:







Continuing operations
$
0.04


$
(0.80
)

$


$
(0.76
)
Discontinued operations, net of tax
$


$
(0.15
)

$
(0.11
)

$
(0.17
)
Net income attributable to common shareholders
$
0.04


$
(0.95
)

$
(0.11
)

$
(0.93
)












Net income (loss) for diluted earnings per share:







Continuing operations
$
1,317


$
(29,017
)

$
98


$
(27,759
)
Discontinued operations
$


$
(5,507
)

$
(4,078
)

$
(5,882
)
Income available to common shares - basic
$
1,317


$
(34,524
)

$
(3,980
)

$
(33,641
)
Basic weighted average common shares outstanding
36,594


36,345


36,582


36,312

Effect of dilution
500




469



Diluted weighted average common shares outstanding
37,094


36,345


37,051


36,312

 







Diluted net income (loss) per share attributable to common shareholders:











Continuing operations
$
0.04


$
(0.80
)

$


$
(0.76
)
Discontinued operations, net of tax
$


$
(0.15
)

$
(0.11
)

$
(0.17
)
Net income attributable to common shareholders
$
0.04


$
(0.95
)

$
(0.11
)

$
(0.93
)
 
The diluted weighted average share calculations for the three and nine month periods ended September 28, 2013 did not include 548 and 485, respectively, of dilutive shares due to the net loss from continuing operations incurred for these periods. In addition, performance based restricted stock awarded in 2014 totaling 240 shares has not been included in the diluted shares, due to the respective measurement period not being completed.

14. Accounts Receivable Factoring
 
The Corporation had an agreement with an unrelated third-party for the factoring of specific accounts receivable in its subsidiary, Clamonta Ltd. to reduce the amount of working capital required to fund such receivables. This agreement was terminated in conjunction with the sale of Clamonta in May 2014.

The factoring of accounts receivable under this agreement were accounted for as a sale in accordance with ASC 860, Transfers and Servicing. Proceeds on the transfer reflect the face value of the account less a discount. The discount has been recorded as a charge in loss from discontinued operations in the consolidated statement of operations in the period of the sale. Net funds received reduced accounts receivable outstanding while increasing cash. The Corporation has no significant retained interests, nor any continuing involvement or servicing liabilities related to the accounts receivable that have been sold. For the three months ended September 28, 2013, the Corporation sold $948 and $4,458 and $2,958 for the nine months ended September 27, 2014 and September 28, 2013, respectively, of accounts receivable pursuant to this agreement, which represents the face amount of total outstanding receivables at the time the receivables are sold. Fees paid pursuant to this agreement were $6 for the three months ended September 28, 2013 and $27 and $21 for the nine months ended September 27, 2014 and September 28, 2013, respectively.
 
15. Commitments and Contingencies

17



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

On September 29, 2014, a purported class action complaint challenging the Merger and Separation Transaction (as defined below) was filed on behalf of Resolution Partners, an alleged stockholder of the Corporation, and all others similarly situated, in the Kosciusko Circuit Court in the state of Indiana. The complaint generally alleges, among other things, that the members of the SMI board of directors breached their fiduciary duties to Resolution Partners and SMI stockholders during merger negotiations and by entering into the Merger Agreement and approving the Merger, and that Genstar and Tecomet allegedly aided and abetted such alleged breaches of fiduciary duties. The complaint further alleges that the joint proxy statement/prospectus filed by Symmetry Surgical with the SEC on September 5, 2014, which contained the preliminary proxy statement of SMI, was misleading or omitted certain allegedly material information. The complaint seeks, among other relief, injunctive relief enjoining consummation of the Merger, compensatory and/or rescissory damages in an unspecified amount and costs and fees. The defendants believe that the claims asserted against them in the lawsuit are without merit, but express no view on the possible outcomes of the litigation. 

Unconditional Purchase Obligations.  The Corporation has contracts to purchase minimum quantities of cobalt chrome, nickel and titanium through July 2017.  Additionally, the Corporation has a contract to purchase finished instruments through August 2019. Based on contractual pricing at September 27, 2014, the minimum purchase obligations total $19,817.  Purchases under the respective contracts total approximately $8,781 for the nine months ended September 27, 2014.  These purchases are not in excess of our forecasted requirements. Additionally, as of September 27, 2014, the Corporation has $3,823 of commitments to complete capital projects in progress.

16.    Facility Closure and Severance Costs
 
Results of operations include pre-tax charges of $161 and $454 for the three months ended September 27, 2014 and September 28, 2013, respectively and $928 and $1,360 for the nine months then ended, respectively. The segment composition of these charges includes OEM Solutions for the three months ended September 27, 2014 and September 28, 2013 of $155 and $0, respectively, Symmetry Surgical of $6 and $454, respectively. As of September 27, 2014 and December 28, 2013, severance accruals related to these cost reduction actions totaled $199 and $361, respectively, and are included in other accrued expenses in the consolidated balance sheets. The decrease in the accrual since December 28, 2013 represents severance charges paid during the first three quarters of fiscal 2014. These costs are expected to be paid through December 2014.  

On February 21, 2014, the Corporation announced that the consultation processes that began with its employees on January 30, 2014 had concluded with an agreement that the facility in Cheltenham, United Kingdom should cease production within calendar 2014. The Cheltenham plant is engaged primarily in the manufacture of medical instruments and employs approximately 40 people. As of September 27, 2014, Cheltenham was no longer producing instruments and is completing the final procedures to vacate the facility. The Corporation estimates additional costs of approximately $500 will be incurred in 2014 primarily related to lease termination costs, moving and transition costs in connection with the plant closure. For the nine months ended September 27, 2014, $598 in severance and stay bonus costs have been recorded and are reflected in the condensed consolidated statements of operations.

17. Merger and Separation

On August 4, 2014, the Corporation announced that it has entered a definitive agreement to sell all of its common stock to Tecomet and concurrently transfer to Symmetry Medical, Inc.'s shareholders ownership in a new company holding its Symmetry Surgical business (merger and Separation Transaction). Tecomet, which is owned by Genstar Capital, is a contract manufacturing, engineering and metal fabrication technology company based in Wilmington, Massachusetts.
Under terms of the agreement, Symmetry Medical will transfer its Symmetry Surgical business to its shareholders, immediately followed by the acquisition of the remaining OEM Solutions business by Tecomet for $450 million in cash.
These transactions are conditioned on, among other things, the approval and adoption of the definitive agreement by the Company’s shareholders. The Company and Tecomet have each agreed to use reasonable best efforts and, subject to certain limitations, take actions required in connection with obtaining such approvals.

18




If the agreement is terminated in certain circumstances described within the agreement, the Corporation may be obligated to pay Tecomet a termination fee of $13,500; the Corporation may be obligated to reimburse up to $1,000 of Tecomet's expenses in connection with the sale; or Tecomet may be obligated to pay the Corporation a termination fee of $27,000.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Business Overview
 
Symmetry Medical Inc. is a leading global source of medical device solutions, including surgical instruments, orthopedic implants, and sterilization cases and trays. We employ over 2,400 teammates around the world who are dedicated to being the trusted global source of innovative medical device solutions and surgical instruments for today’s needs and tomorrow’s growth.
 
In our OEM Solutions segment, we offer our original equipment manufacturer (OEM) customers instruments, implants and sterilization cases and trays. Symmetry Surgical, our hospital-direct medical distribution business is complementary to core competencies and is not competitive with our OEM customers. Our salespeople call on hospital personnel in the operating room, materials management and central sterile departments. Our goal is to offer best-in-class quality and regulatory systems as well as customer innovation through Total Solutions® collaborations.
 
During the third quarter 2014, Symmetry’s OEM Solutions business revenue increased $2,449, or 3.3%, compared to the third quarter 2013. This increase is primarily driven by stable-to-slightly-improving orthopedic procedural growth. During the third quarter 2014, our combined five largest OEM customers increased revenue by 3.1% compared to the third quarter 2013, primarily driven by stable-to-slightly-improving orthopedic procedural growth. Our overall OEM Solutions revenue in the third quarter 2014 decreased by $4,982 from the second quarter 2014 resulting from decreased demand across all product lines, primarily driven by seasonality.
 
During the third quarter 2014, Symmetry Surgical revenue decreased $2,181, or 9.8%, compared to the third quarter 2013. This decrease was primarily due to the New Wave Surgical product line, which was acquired by Covidien in the first quarter and no longer sold by Symmetry Surgical after April 30, 2014, resulting in a partial quarter of sales in the second quarter, continued supplier disruption issues along with ongoing sluggish hospital spending environment in the U.S.

In the U.S., Symmetry Surgical continues to focus on salesforce execution and customer service levels. During the third quarter of 2014, Symmetry Surgical continued to experience growth of the newly launched global e-commerce site to serve customers.

Outside of the U.S., Symmetry Surgical continues to work to increase business with our distributor network. We have successfully transferred regulatory approvals for product labeled in legacy graphics in the vast majority of countries and continue the process of registering the new Symmetry Surgical labeling of these products in all countries as well. We also continue a similar process for the former SSI and Olsen product lines, which previously had only been in very limited international distribution, so that we may offer these products to customers throughout the world.

We believe that the Symmetry Surgical business is operating in an environment with temporary impediments to market growth. The most significant of these was the trend of flat to negative general surgical procedure rates in the U.S. and Europe. However, we plan to continue to expand coverage and product portfolio to serve our hospital and surgery center direct customers consistently with our strategic principles.
 
On August 4, 2014, the Corporation announced that it has entered a definitive agreement to sell all of its common stock to Tecomet and concurrently transfer to Symmetry Medical, Inc.'s shareholders ownership in a new company holding its Symmetry Surgical business. Tecomet, which is owned by Genstar Capital, is a contract manufacturing, engineering and metal fabrication technology company based in Wilmington, Massachusetts. Under terms of the agreement, Symmetry Medical will transfer its Symmetry Surgical business to its shareholders, immediately followed by the acquisition of the remaining OEM Solutions business by Tecomet for $450 million in cash. These transactions are conditioned on, among other things, the approval and adoption of the definitive agreement by the Corporation's shareholders. The Corporation and Tecomet have each agreed to use reasonable best efforts and, subject to certain limitations, take actions required in connection with obtaining such approvals. If the agreement is terminated in certain circumstances described within the agreement, the Corporation may be obligated to pay Tecomet a termination fee of $13,500; the Corporation may be obligated to reimburse up to $1,000 of Tecomet's expenses in connection with the sale; or Tecomet may be obligated to pay the Corporation a termination fee of $27,000.


19



Since announcing the proposed Merger and Separation Transaction on August 4 steady progress has been made towards a timely closing of the transaction. This includes:
Receiving Hart-Scott-Rodino anti-trust clearance from the FTC in early September;
Filing a preliminary registration statement on form S-4 with the SEC for Symmetry Surgical in early September and have subsequently responded to two rounds of questions from the SEC with the most recent amended version filed on Thursday, October 23, 2014.

After filing the definitive proxy and shareholder vote, which is the final approval required to complete the process, the Corporation continues to expect to close the transaction by the end of 2014.
 
Third Quarter Results of Operations
 
Revenue.   Revenue for the three months ended September 27, 2014 increased $268, or 0.3%, to $95,935 from $95,667 for the comparable 2013 period.  Revenue for each of our segments and principal product categories in these periods was as follows:
 
 
Three Months Ended
 
 
 
 
Sales by product
September 27, 2014

September 28, 2013
 
Dollar Change
 
Percent Change
 
(unaudited)
OEM Solutions Revenue
 


 

 
 
 
 
Instruments
$
28,391


$
27,200

 
$
1,191

 
4.4
 %
Implants
27,130


26,108

 
1,022

 
3.9
 %
Cases
16,269


16,959

 
(690
)
 
(4.1
)%
Other
4,108


3,182

 
926

 
29.1
 %
Total OEM Solutions Revenue
75,898


73,449

 
2,449

 
3.3
 %






 


 


Total Symmetry Surgical Revenue
20,037


22,218

 
(2,181
)
 
(9.8
)%






 


 


Total Revenue
$
95,935


$
95,667

 
$
268

 
0.3
 %
 
The $2,449 increase in OEM Solutions revenue resulted from increased demand in all of our product lines, except cases, as well as favorable foreign currency exchange rate fluctuations of $761.  Overall, we experienced increased revenues of 3.1% from our five largest OEM customers which drove the increase in instruments revenue and a portion of the increase in implants revenue. OEM Solutions Instruments revenue increased $1,191 driven by the positive trend that began in the first quarter following the softness we experienced in the second half of 2013. We continue to see a relatively stable capital spending environment from OEM customers on Instruments, with no new significant ramp in firmed purchase orders, except for customer investments in larger product launches, which have been deliberate in nature, as well as the favorable foreign exchange rate fluctuation of $72.  OEM Solutions Implant revenue increased $1,022 in-line with the procedural growth rate as compared to the strong growth in the first quarter of the year driven by customer inventory restocking. Implants revenue also included a favorable foreign exchange rate fluctuation of $499. Cases revenue decreased $690 reflecting timing of customer demand as compared to prior year offset by relatively stable capital spending as well as favorable currency exchange fluctuation of $23.  OEM Solutions Other product revenue increased $926 compared to third quarter 2013 primarily driven by strong aerospace customer demand at our Lansing, MI as well as Sheffield, UK facilities, as well as favorable foreign currency exchange rate fluctuations of $167.
 
The $2,181 decrease in Symmetry Surgical revenue in the third quarter 2014 as compared to 2013 was primarily driven by a $1,743 reduction in the New Wave Surgical product line, which was acquired by Covidien in the first quarter and stopped being sold by Symmetry Surgical beginning at the end of April in the second quarter. Third quarter 2014 revenue was also negatively impacted by share loss to competition, a sluggish hospital spending environment in the U.S., and product backorders resulting from the consumption of available inventory and our inability to source certain product from a new or incremental supplier promptly. While we did see improvement during the third quarter as we utilize new suppliers or collaborated with our existing supplier base to improve performance, late deliveries have negatively impacted revenue.

Gross Profit.  Gross profit for the three months ended September 27, 2014 increased $474, or 1.9%, to $25,712 from $25,238 for the comparable 2013 period. Gross margin as a percentage of revenue increased 0.4%, to 26.8% for the third quarter 2014 from 26.4% for the comparable 2013 period.  

20



 

Three Months Ended September 27, 2014

Dollars

As a %
of Revenue
 
(unaudited)
2013 period reported gross profit
$
25,238


26.4
 %
Change in organic revenue and mix
(739
)

(0.8
)%
Foreign currency impact
204


0.2
 %
Manufacturing costs and other
1,009


1.0
 %
2014 period reported gross profit
$
25,712


26.8
 %
 
Gross margin was driven by increased volume across all product lines of the OEM Solutions segment, except cases, while maintaining fixed overhead structure as well as favorable manufacturing efficiencies in the Instruments and Implants product lines. Improved efficiencies are as a result of Symmetry Business Systems continued incremental improvements. OEM Solutions was also favorably impacted by insurance proceeds of $756 related to the Sheffield fire that occurred in 2013. The increase in OEM Solutions gross margin was partially offset by lower percentage of revenue from the Corporation’s higher margin Symmetry Surgical segment as compared to the same period last year.

Research and Development Expenses.  For the three months ended September 27, 2014, research and development expenses increased $140 or 12.5% to $1,261 from $1,121 in the comparable period in fiscal 2013, primarily due to increased employee compensation and benefit costs as well as costs associated with maintaining patents.
 
Sales and Marketing Expenses.  For the three months ended September 27, 2014, sales and marketing expenses decreased $217 or 3.3% to $6,292 from $6,509 in the comparable period in 2013, primarily due to a reduction in Symmetry Surgical catalog expenses as the Corporation launched a global distribution of the updated and comprehensive catalog in third quarter 2013, partially offset by an increase bad debt expense.
 
General and Administrative Expenses.  For the three months ended September 27, 2014, general and administrative expenses increased $4,040 or 37.1%, to $14,939 from $10,899 in the comparable period in fiscal 2013. Significant items which impacted general and administrative expenses included: 

Three Months Ended September 27, 2014

Dollars

As a %
of Revenue
 
(unaudited)
2013 period reported General &Administrative expenses
$
10,899

 
11.4
%
Transaction related costs
3,434

 
 
Employee compensation and benefit costs paid in cash
(652
)

 

Change in amortization of intangible assets
155


 

Change in stock compensation
241

 
 
Foreign currency impact
67




Other
795


 

2014 period reported General & Administrative expenses
$
14,939


15.6
%
 
Transaction related costs are primarily a result of increased professional services fees associated with the Merger and Separation Transaction as previously discussed. During the three months ended September 27, 2014, employee compensation and benefit costs paid in cash decreased due to a decrease for self-insurance medical claims incurred during that period as compared to the comparable period in fiscal 2013 under the Corporation's U.S. based medical plan.

Facility Closure and Severance Costs.  Results of Operations include pre-tax charges of $161 and $454 for the three months ended September 27, 2014 and September 28, 2013, respectively.   Fiscal 2014 expenses are primarily related to the previously announced closure of our Cheltenham, UK facility, which is expected to be completed later this year. As of September 27, 2014, severance accruals related to these cost reduction actions totaled $199 and were included in other accrued liabilities in the consolidated balance sheets.

21



 
Operating Income (loss). On a consolidated basis, operating income (loss) increased $43,352, or 107.6% for the three months ended September 27, 2014 as compared to the 2013 period due to an increase in OEM Solutions operating income of $28,315 as well as an increase in Symmetry Surgical operating income of $18,801 offset by an increase in Unallocated loss of $3,764. Operating income (loss) for each of our segments in these periods was as follows:
 
OEM Solutions

Symmetry Surgical

Unallocated
 
Consolidated Total

Dollars

As a %
of Revenue

Dollars

As a %
of Revenue

Dollars
 
As a %
of Revenue
 
Dollars
 
As a %
of Revenue
 
(unaudited)
2013 period reported operating income (loss)
$
(19,489
)

(26.0
)%

$
(18,290
)

(82.3
)%

$
(2,514
)
 
(2.6
)%
 
$
(40,293
)
 
(42.1
)%
Impact of gross profit and SG&A
1,731


3.2
 %

(1,456
)

(14.9
)%

(3,764
)
 
(3.8
)%
 
(3,489
)
 
(3.5
)%
Impact of asset impairment
26,739

 
34.3
 %
 
19,809

 
97.5
 %
 

 
 %
 
46,548

 
48.5
 %
Facility closure and severance
(155
)

(0.2
)%

448


2.2
 %


 
 %
 
293

 
0.3
 %
2014 period reported operating income (loss)
$
8,826


11.3
 %

$
511


2.5
 %

$
(6,278
)
 
(6.4
)%
 
$
3,059

 
3.2
 %

OEM Solutions operating income improved by $28,315 and was 11.3% of segment revenue during the three month period ended September 27, 2014 as compared to (26.0)% in the comparable prior year period primarily due to the 2013 asset impairment charge as well as increased revenue and gross margin. Symmetry Surgical operating income increased by $18,801 and was 2.5% of segment revenue in the 2014 period as compared to (82.3)% in 2013 primarily due to the 2013 asset impairment charge offset by a reduction in revenue discussed above. The increase in the Unallocated loss is primarily related to increased professional service fees for transaction related expenses.
 
Other (Income) Expense.  Interest expense for the three months ended September 27, 2014 decreased $2,286, or 52.7%, to $2,051 from $4,337 for the comparable period in 2013. This decrease is most significantly attributable to the extinguishment of our Mezzanine Debt during December 2013, which bore interest at 14%, as well as the decrease in debt outstanding by $10,775 as of September 2014 as compared to September 2013.

Derivatives valuation consists of foreign currency forward contracts which were used to mitigate the effect of changes in the foreign exchange rates on net income. As of December 28, 2013, we had settled all of our outstanding forward swap contracts. We recorded a loss of $5 for the three months ended September 28, 2013, which was a result of fluctuation in the Euro versus the US Dollar.
 
Other income for the three months ended September 27, 2014 and September 28, 2013 represents foreign currency exchange rate fluctuations on transactions denominated in foreign currencies.
 
Income Tax Expense. Our effective tax rate was an expense of 23.3% for the three months ended September 27, 2014 as compared to a benefit of 36.2% for the three months ended September 28, 2013. Provision for income taxes increased by $16,848, or 102.4%, to $401 for the three months ended September 27, 2014 from $(16,447) for the comparable 2013 period primarily due to a $47,182 increase in pre-tax income and the impact of non-deductible professional fees occurred in third quarter 2014 related to the pending Merger and Separation Transaction. The rate in third quarter 2013 was impacted by non-deductible goodwill impairment of $6,581.

Nine Months Results of Operations
 
Revenue.   Revenue for the nine months ended September 27, 2014 increased $3,594, or 1.2%, to $294,087 from $290,493 for the comparable fiscal 2013 period.  Revenue for each of our segments and principal product categories in these periods was as follows:
 

22



 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
Sales by product
September 27, 2014

September 28, 2013
 
Dollar Change
 
Percent Change
 
(unaudited)
OEM Solutions Revenue
 


 

 
 
 
 
Instruments
$
87,081


$
83,445

 
$
3,636

 
4.4
 %
Implants
84,918


80,213

 
4,705

 
5.9
 %
Cases
49,217


50,432

 
(1,215
)
 
(2.4
)%
Other
11,826


9,684

 
2,142

 
22.1
 %
Total OEM Solutions Revenue
233,042


223,774

 
9,268

 
4.1
 %






 


 


Total Symmetry Surgical Revenue
61,045


66,719

 
(5,674
)
 
(8.5
)%






 


 


Total Revenue
$
294,087


$
290,493

 
$
3,594

 
1.2
 %
 
The $9,268 increase in OEM Solutions revenue resulted from increased customer demand within our instruments, implants and other product lines, partially offset by decreased demand in our cases product line.  Overall, we experienced increased revenues of 4.8% from our five largest OEM customers.  OEM Solutions Instruments revenue increased $3,636 due to as 8.0% increase from our five largest OEM customers as well as favorable foreign currency exchange rate fluctuations of $236, partially offset by lower demand from other medical customers. OEM Solutions Implants revenue increased $4,705 driven by slightly improved procedure rates along with increased customer consumption demand as well as the timing of stocking orders and inventory adjustments at our customers as well as favorable foreign currency exchange rate fluctuations of $1,942. Cases revenue decreased $1,215 due primarily to lower capital spending by our customers to support launch volumes, partially offset by favorable foreign currency exchange rate fluctuations of $352.  OEM Solutions Other product revenue increased $2,142 driven by increased aerospace customer demand at our Lansing, MI and Sheffield, UK facilities as well as favorable foreign currency exchange rate fluctuations of $472.
 
The $5,674 decrease in Symmetry Surgical revenue in the nine months ended September 27, 2014 as compared to 2013 was tied to a $2,343 decrease in revenue driven by the New Wave Surgical product line, which was acquired by Covidien in the first quarter and stopped being sold by Symmetry Surgical beginning at the end of April in the second quarter. Additionally, revenue has continued to be negatively impacted by a decline in sales of products which were acquired in a late 2011 acquisition from Johnson & Johnson (“J&J”) due to continued supplier disruption issues along with ongoing sluggish hospital spending environment in the U.S. and the ongoing transition to distributorships outside of the U.S. Revenue was favorably impacted by foreign currency exchange rate fluctuations of $145.
 
Gross Profit.  Gross profit for the nine months ended September 27, 2014 increased $840, or 1.1%, to $77,611 from $76,771 for the comparable fiscal 2013 period. Gross margin as a percentage of revenue remained flat at 26.4% for the nine months ended September 27, 2014 and the comparable fiscal 2013 period.  
 

Nine Months Ended September 27, 2014

Dollars

As a %
of Revenue
 
(unaudited)
2013 period reported gross profit
$
76,771


26.4
 %
Change in organic revenue and mix
(1,538
)

(0.5
)%
Foreign currency impact
610


0.2
 %
Manufacturing costs and other
1,768


0.3
 %
2014 period reported gross profit
$
77,611


26.4
 %
 
Gross margin was driven by increased volume across all product lines of the OEM Solutions segment, except cases, while maintaining fixed overhead structure as well as favorable manufacturing efficiencies in the instruments and implants product lines. Improved efficiencies are a result of Symmetry Business Systems continued incremental improvements. OEM Solutions

23



was also favorably impacted by insurance proceeds of $1,311 related to the Sheffield fire that occurred in 2013. The increase in OEM Solutions gross margin was partially offset by lower percentage of revenue from the Corporation's higher margin Symmetry Surgical segment as compared to the same period last year.
 
Research and Development Expenses.  For the nine months ended September 27, 2014, research and development expenses increased $201 or 5.8% to $3,660 from $3,459 in the comparable period in fiscal 2013, primarily due to increased employee compensation and benefit costs.
 
Sales and Marketing Expenses.  For the nine months ended September 27, 2014, sales and marketing expenses decreased $1,193 or 5.8% to $19,235 from $20,428 in the comparable period in fiscal 2013, primarily due to a reduction in Symmetry Surgical employee compensation and benefits as a result of lower sales in 2014. In addition, during third quarter 2013 Symmetry Surgical incurred catalog expenses associated with the global distribution of an updated and comprehensive catalog, which did not repeat in 2014.
 
General and Administrative Expenses.  For the nine months ended September 27, 2014, general and administrative expenses increased $3,668 or 10.7%, to $37,831 from $34,163 in the comparable period in fiscal 2013. Significant items which impacted general and administrative expenses included: 

Nine Months Ended September 27, 2014

Dollars

As a %
of Revenue
 
(unaudited)
2013 period reported General &Administrative expenses
$
34,163

 
11.8
%
Transaction related costs
3,768

 
 
Employee compensation and benefit costs paid in cash
(1,341
)

 

Change in amortization of intangible assets
506


 

Change in stock compensation
782




Foreign currency impact
219




Other
(266
)

 

2014 period reported General & Administrative expenses
$
37,831


12.9
%
 
Transaction related costs are primarily a result of increased professional services fees associated with the Merger and Separation Transaction as previously discussed. During the first nine months of fiscal 2014, employee compensation and benefit costs paid in cash decreased due to a decrease for self-insurance medical claims incurred during 2014 as compared to 2013 under the Corporation's U.S. based medical plan. Increase in amortization of intangibles resulted from determining that unamortizing intangibles should become amortizing as of the fourth quarter 2013 and future. Medical device excise tax is driven by lower sales in Symmetry Surgical while stock compensation increase is driven by incremental restricted stock issuance.
 
Asset Impairment. During the second quarter of fiscal 2014, we recorded a pre-tax non-cash charge in the amount of $10,500 in the Symmetry Surgical segment. This impairment is primarily driven by lower revenue due to sluggish hospital spending environment in the U.S. and previously disclosed integration challenges related to the 2011 acquisition of the Codman surgical instruments business from which we have not recovered as quickly as previously expected.

Facility Closure and Severance Costs.  Results of Operations include pre-tax charges of $928 and $1,360 for the nine months ended September 27, 2014 and September 28, 2013, respectively.   Fiscal 2014 expenses are primarily related to the previously announced closure of our Cheltenham, UK facility which is expected to be completed later this year. As of September 27, 2014, severance accruals related to these cost reduction actions totaled $199 and were included in other accrued liabilities in the consolidated balance sheets.
 
Operating Income (loss). On a consolidated basis, operating income (loss) increased $34,644, or 118.7% for the nine months ended September 27, 2014 as compared to the 2013 period due to an improvement in OEM Solutions operating income of $29,862 and Symmetry Surgical operating income of $8,166 offset by an increased Unallocated loss of $3,384. Operating income (loss) for each of our segments in these periods was as follows: 

24



 
OEM Solutions

Symmetry Surgical

Unallocated

Consolidated Total

Dollars

As a %
of Revenue

Dollars

As a %
of Revenue

Dollars

As a %
of Revenue

Dollars

As a %
of Revenue
 
(unaudited)
2013 period reported operating income (loss)
$
(4,940
)

(2.2
)%

$
(16,330
)

(24.5
)%

$
(7,917
)

(2.7
)%

$
(29,187
)

(10.0
)%
Impact of gross profit and SG&A
3,512


1.6
 %

(1,674
)

(4.8
)%

(3,674
)

(1.2
)%

(1,836
)

(0.5
)%
Impact of asset impairment
26,739

 
11.2
 %
 
9,309

 
15.1
 %
 

 
 %
 
36,048

 
12.3
 %
Facility closure and severance
(389
)

(0.2
)%

531


0.9
 %

290


0.1
 %

432


0.1
 %
2014 period reported operating income (loss)
$
24,922


10.4
 %

$
(8,164
)

(13.3
)%

$
(11,301
)

(3.8
)%

$
5,457


1.9
 %
 
OEM Solutions operating income improved by $29,862 and was 10.4% of segment revenue in the 2014 period as compared to (2.2)% in the prior fiscal year period due to the 2013 impact of the asset impairment as well as increases in revenue and gross margin offset by increased impacts of facility closure and severance costs due to the closure of our Cheltenham, U.K. facility. Symmetry Surgical operating income increased by $8,166 and was (13.3)% of segment revenue in the 2014 fiscal period as compared to (24.5)% in the fiscal 2013 period primarily due to a net decrease in asset impairment charges of $9,309 as well as decreased impacts of facility closure and severance costs. This improvement was offset by a reduction in revenue as discussed above. The increase in the Unallocated operating costs is primarily related to increased transaction costs.
 
Other (Income) Expense.  Interest expense for the nine months ended September 27, 2014 decreased $7,126, or 52.8%, to $6,383 from $13,509 for the comparable fiscal period in 2013. This decrease is most significantly attributable to the decrease in debt outstanding by $10,775 as compared to the third quarter 2013.

During March 2014, we fully repaid our Bank Term Loan that was scheduled to mature in December 2016, resulting in a loss on debt extinguishment of $503.
 
Derivatives valuation consists of foreign currency forward contracts which were used to mitigate the effect of changes in the foreign exchange rates on net income. As of June 28, 2014, we had settled all of our outstanding forward swap contracts. We recorded a loss of $242 for the nine months ended September 28, 2013, which is a result of fluctuation in the Euro versus the US Dollar.
 
Other income for the nine months ended September 27, 2014 and September 28, 2013 represents foreign currency exchange rate fluctuations on transactions denominated in foreign currencies.
 
Income Tax Expense. Our effective tax rate was a benefit of 115.7% for the nine months ended September 27, 2014 as compared to a benefit of 36.7% for the nine months ended September 28, 2013. Provision for income taxes increased by $15,389, or 95.5%, to $(721) for the nine months ended September 27, 2014 from $(16,110) for the comparable 2013 period primarily due to a $43,246 increase in pre-tax income and the impact of non-deductible professional fees occurred in the third quarter 2014 related to the Merger and Separation Transaction.





Liquidity and Capital Resources
 
Liquidity
 
Our principal sources of liquidity in the nine months ended September 27, 2014 were cash generated from operations and borrowings under our Amended Credit Agreement.  Principal uses of cash in the nine months ended September 27, 2014 included capital expenditures and debt service. Cash flows from discontinued operations are included with cash flows from continuing operations. The absence of these cash flows will not significantly impact future sources of liquidity. We expect that our principal uses of cash in the future will be to finance working capital, to pay for capital expenditures to service debt and to pay Merger and Separation Transaction related expenses.
 
Operating Activities.  Operating activities generated cash of $33,833 in the nine months ended September 27, 2014 compared to $34,389 for the nine months ended September 28, 2013, a decrease of $556.  The decrease in cash from operations is

25



primarily a result of a reduction in working capital and non-cash items partially offset by an increase net income.  Net cash provided by working capital for the nine months ended September 27, 2014 was $1,144 lower than the comparable 2013 period. Aggregate adjustments for non-cash items positively impacted operating cash flows by $30,630, a $29,073 decrease from the comparable prior year period, primarily due to the asset impairment of $41,146 and a loss on sale of business of $4,117 partially offset by a decrease in our deferred income tax provision of $12,065.
 
Investing Activities.  Capital expenditures of $11,404 were $3,618 higher in the nine months ended September 27, 2014 compared to the nine months ended September 28, 2013. This increase is due to the timing of cash payments as well as the replacement of our permanent acid shop building which was destroyed by fire in September 2013.
 
Financing Activities.  Financing activities used $2,431 of cash in the nine months ended September 27, 2014 compared to usage of $32,729 in the nine months ended September 28, 2013. This decrease in cash used by financing activities is due primarily to an $18,000 increase in net borrowings on the revolving credit agreement and short term borrowings, partially offset by decreases in net payments on bank term loans and capital lease obligations of $11,978.
 
Capital Expenditures
 
Capital expenditures totaled $11,404 for the nine months ended September 27, 2014, compared to $7,786 for the nine months ended September 28, 2013. Expenditures were primarily for the replacement of our permanent acid shop building which was destroyed by fire in September 2013 as well as a few key process improvement equipment investments in our cases and tray and instruments plants.
 
Debt and Credit Facilities

The Corporation's Amended Credit Agreement, which is senior and secured, currently provides for a $200,000 revolving line of credit (Bank Revolver) and a $50,000 bank term loan (Bank Term Loan). The Amended Credit Agreement also includes an accordion feature, which permits us to borrow up to an additional $50,000 in the form of additional term loans or an increase in the Bank Revolver subject to the terms and conditions set forth in the Amended Credit Agreement. Borrowings under the Amended Credit Agreement bear interest at a rate per annum based upon LIBOR, the Federal Funds rate or the Lenders' prime rate, in each case plus an applicable margin, at the Corporation's option. The Bank Term Loan was to be repaid in quarterly installments of $2,778, could be prepaid, in whole or in part, at the option of the Corporation, and was required to be prepaid using all or a portion of the net cash proceeds of certain asset sales, recovery events, and issuances of new debt or equity and, depending on the Corporation's Total Leverage Ratio (as defined in the Amended Credit Agreement), using a portion of the Corporation's Excess Cash Flow (as defined in the Amended Credit Agreement) (the "Excess Cash Flow Prepayment"). The Excess Cash Flow Prepayment was required to be made within 90 days of the end of the fiscal year in which the Excess Cash Flow is generated. As of December 28, 2013, the Excess Cash Flow calculation required the Corporation to prepay the bank term loan payable in full prior to March 29, 2014. The payment was made with capacity on the Bank Revolver. The Bank Revolver matures on November 3, 2015.

As of September 27, 2014, we had an aggregate of $171,070 of outstanding indebtedness, which consisted of $170,000 of borrowings on our Bank Revolver and $1,070 of capital lease obligations. We had one outstanding letter of credit as of September 27, 2014, in the amount of $25.
 
The Amended Credit Agreement contains various financial covenants, including covenants imposing a maximum ratio of total debt to EBITDA (as defined in the Amended Credit Agreement) and prescribing a minimum ratio of EBITDA to fixed charges (as defined in the Amended Credit Agreement). The Amended Credit Agreement also contains covenants restricting certain corporate actions, including asset dispositions, acquisitions, payment of dividends and certain other restricted payments, changes of control, incurring indebtedness, incurring liens, making loans and investments and transactions with affiliates. The Amended Credit Agreement is secured by substantially all of the assets of the Corporation (and its U.S. subsidiaries) and also contains customary events of default.
 
On December 27, 2013, the Corporation amended its Amended Credit Agreement to allow for the prepayment of the senior subordinated term notes (referred to as "Term Notes" or "Mezzanine Debt") and to modify certain financial covenants. In connection with the amendment, the Corporation paid off the outstanding principal and interest of the Term Notes that were to mature on December 29, 2017. The outstanding principal balance of the Term Notes bore interest at a rate of 14% per annum.

As of September 27, 2014, the most restrictive financial covenants per the Corporation’s lending arrangements required the debt to EBITDA covenant ratio to be less than 3.50:1. The Corporation's ratio as of September 27, 2014 was approximately 3.02:1. The minimum interest coverage ratio is required to be greater than 1.25:1, and the Corporation's ratio at September 27,

26



2014 was approximately 2.00:1. The Corporation was in compliance with all covenants as of September 27, 2014. We intend to closely monitor our revenues, cost of revenues and selling, general and administrative expenses to manage our ability to meet our debt covenant requirements.

We believe that cash flow from operating activities and borrowings on our Bank Revolver will be sufficient to fund currently anticipated working capital, planned capital spending and debt service requirements for the foreseeable future, including at least the next twelve months.
  
Off-Balance Sheet Arrangements
 
Our off-balance sheet arrangements include our operating leases and letters of credit, which are available under the Amended Credit Agreement. We had one letter of credit outstanding as of September 27, 2014 in the amount of $25.
 
Environmental
 
Our facilities and operations are subject to extensive federal, state, local and foreign environmental and occupational health and safety laws and regulations. These laws and regulations govern, among other things, air emissions; wastewater discharges; the generation, storage, handling, use and transportation of hazardous materials; the handling and disposal of hazardous wastes; the cleanup of contamination; and the health and safety of our employees. Under such laws and regulations, we are required to obtain permits from governmental authorities for some of our operations. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. We could also be held responsible for costs and damages arising from any contamination at our past or present facilities or at third-party waste disposal sites. We cannot completely eliminate the risk of contamination or injury resulting from hazardous materials, and we may incur material liability as a result of any contamination or injury.
 
We incurred minimal capital expenditures for environmental, health and safety in the nine months ended September 27, 2014 and September 28, 2013.
 
In connection with past acquisitions, we completed Phase I environmental assessments and did not find any significant issues that we believe needed to be remediated. We updated those Phase I assessments in conjunction with providing security for financing for the Codman acquisition and found no issues at that time either. Based on information currently available, we do not believe that we have any material environmental liabilities. We cannot be certain, however, that environmental issues will not be discovered or arise in the future related to these acquisitions. 

Critical Accounting Policies and Estimates
 
The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. Our Annual Report on Form 10-K for fiscal year ended December 28, 2013, includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no material changes to these critical accounting policies that impacted our reported amounts of assets, liabilities, revenues or expenses during the nine months ended September 27, 2014




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
For financial market risks related to changes in interest rates, foreign currency exchange rates, commodity prices and the effects of inflation, reference is made to Item 7a “Quantitative and Qualitative Disclosures About Market Risk” contained in Part II of our Annual Report on Form 10-K for the fiscal year ended December 28, 2013. Our exposure to these risks, at the end of the third quarter covered by this report, has not changed materially since December 28, 2013.
 
ITEM 4. CONTROLS AND PROCEDURES 
 
This Report includes the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”).  See Exhibits 31.1 and 31.2.  This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.
 

27



(a)  Evaluation of Disclosure Controls and Procedures
 
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
 
In connection with the preparation of this Report, our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal quarter covered by this report on Form 10-Q.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 27, 2014.
  
(b)   Changes in Internal Control over Financial Reporting
 
There have been no changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fiscal quarter covered by this report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS

On September 29, 2014, a purported class action complaint challenging the Merger and Separation Transaction was filed on behalf of Resolution Partners, an alleged stockholder of the Corporation, and all others similarly situated, in the Kosciusko Circuit Court in the state of Indiana. The complaint generally alleges, among other things, that the members of the SMI board of directors breached their fiduciary duties to Resolution Partners and SMI stockholders during merger negotiations and by entering into the Merger Agreement and approving the Merger, and that Genstar and Tecomet allegedly aided and abetted such alleged breaches of fiduciary duties. The complaint further alleges that the joint proxy statement/prospectus filed by Symmetry Surgical with the SEC on September 5, 2014, which contained the preliminary proxy statement of SMI, was misleading or omitted certain allegedly material information. The complaint seeks, among other relief, injunctive relief enjoining consummation of the Merger, compensatory and/or rescissory damages in an unspecified amount and costs and fees.

On October 15, 2014, the plaintiff filed a Motion for a Preliminary Injunction, Expedited Discovery and a Hearing Date to Continue the Preliminary Injunction Pending Trial. On October 23, 2014, the parties agreed to a compromise on expedited discovery, mooting that aspect of plaintiff’s motion, and stipulated to a briefing schedule on plaintiff’s motion for a preliminary injunction. The Court has set a hearing for the plaintiff’s motion, which is currently scheduled for December 1, 2014.

The defendants believe that the claims asserted against them in the lawsuit are without merit, but express no view on the possible outcomes of the litigation.





ITEM 1A. RISK FACTORS
 
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, which could materially affect our business, financial condition or future results. 
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following information is provided pursuant to Item 703 of Regulation S-K:

28



Issuer Purchases of Equity Securities
 
 
 
 
 
 
 
 
 
Period
 
(a) Total
Number of
Shares (or
Units)
Purchased
 
(b) Average
Price paid per
Share (or Unit)
 
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
 
(d) Maximum Number (or
Approximate Dollar Value) of
Shares (or Units) that May Yet Be
Purchased Under the Plans or
Programs
July 2014
 
2,449

 
$
9.30

 

 


(1) The shares repurchased represent shares of our common stock that employees elected to surrender to the Corporation to satisfy their tax withholding obligations upon the vesting of shares of restricted stock. We do not consider this a share buyback program.

ITEM 6. EXHIBITS  
31.1
 
Certification of Chief Executive Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
 
 
 
31.2
 
Certification of Chief Financial Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
 
 
 
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS
XBRL Instance Document~
101.SCH
XBRL Taxonomy Extension Schema Document~
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document~
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document~
101.LAB
XBRL Taxonomy Extension Label Linkbase Document~
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document~
 
* Filed concurrently herewith.
~ In accordance with Rule 406T under Regulation S-T, the XBRL-related information in Exhibit 101 shall be deemed “furnished” and not “filed.”

29



SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
SYMMETRY MEDICAL INC.
 
 
 
 
By
/s/ Thomas J. Sullivan
 
 
Thomas J. Sullivan,
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
By
/s/ Fred L. Hite
 
 
Fred L. Hite,
 
 
Senior Vice President and Chief Financial Officer
 
 
(Principal Financial Officer)
 
 
 
November 6, 2014
 
 
 


30