Symmetry Medical, Inc., Q3 2008 Earnings Call Transcript

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 |  About: Symmetry Medical Inc. (SMA)
by: SA Transcripts

Operator

Good day ladies and gentlemen, and welcome to the second quarter 2008 Symmetry Medical Incorporated earnings conference call. My name is Anne, and I will be your coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today’s call, Ms. Carol Ruth, with Investor Relations.

Carol Ruth

Joining us on the call today are Brian Moore, President and Chief Executive Officer, and Fred Hite, Senior Vice President and Chief Financial Officer. Statements in this conference call regarding Symmetry Medical's business which are not historical facts may be forward-looking statements that involve risks and uncertainties within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are predictive in nature and are frequently identified by the use of terms such as “may,” “will,” “should,” “expect,” “believe,” “anticipate,” “plan,” “estimate,” “intend,” and similar words indicating possible future expectations, events or actions.

Such predicative statements are not guarantees of future performance, and actual results and outcomes could differ materially from our current expectations. Factors that could cause or contribute to such differences include, but are not limited to, the loss of one or more customers, the development of new products or product innovations by our competitors, our product liability, changes in management, changes in conditions affecting the economy, orthopedic device manufacturers, or the medical device industry generally and changes in government regulation of medical devices and third party reimbursement practices.

We refer you to the risk factors and the forward-looking statement sections in the company's most recent annual report on Form 10-K, filed with the Securities and Exchange Commission, as well as the company's other filings with the SEC, which are available on the SEC's web site at www.sec.gov.

Before turning the call over to President and Chief Executive Officer, Brian Moore, I would like to emphasize the Symmetry Medical's policy of not commenting or discussing individual customers or their programs.

Brian Moore

We’re very pleased to report another record quarter of strong topline performance. Our fourth consecutive quarter of record revenues was driven by a robust orthopedic environment and sustained momentum in demand from our major customers. We are seeing continued supply consolidation, a continued focus on quality and regulatory as well as strong [inaudible] quantities.

Third quarter revenues grew 47.8% to $112.1 million, with 23.2% organic growth. This is leading us to raise our full year revenue guidance to $417 million to $422 million. With that said, Sheffield has been slower to recover than we expected, and the losses, fees, and large FX losses are primarily responsible for lowering our 2008 EPS by as much as $0.41, which is reflected in our latest EPS guidance. While this is discouraging in 2008, given our record topline growth, we are encouraged by the expected reversal of this impact in 2009, particularly given the volatile and uncertain economic climate.

Symmetry’s global strength and total solutions approach continues to position us extremely well with our OEM customers, and we expect to continue to benefit from this premier position. Our major customers are consolidating their supply base, and this is leading Symmetry to receive a greater percentage of long-term orders. The large OEMs in particular are extending their order time horizon in order to secure capacity and guarantee supply. For example, we are seeing an increase in the number of 1-year blanket orders versus short-term POs. These customers are looking for confidence in their supply chain and assurance that they have the right resources to deliver major product launches in a timely manner with less regulatory and quality risks.

In these times, the major orthopedic companies are carefully scrutinizing their supply partners, and symmetry provides the quality assurance and financial strength they require. Our comprehensive global capabilities, design and development expertise, combined with our financial strength is becoming something that our customers are increasingly relying on, and we believe that this is providing us with a distinct competitive advantage in these challenging economic circumstances. In fact, just within the last few days, we have received two orders from two large OEMs totaling $11 million. Given the challenging economic environment, our customers are telling us that they expect things to remain at the present levels for the remainder of this year and into 2009. We continue to see strong order flow and a strong start well into next year.

Our bottomline was impacted by Sheffield not returning to profitability as quickly as expected, and I will discuss this operation in more detail in a moment. We also experienced some one-time items that also affected our bottomline, and Fred will discuss these in detail later. The effect of these items did reduce our net income and consequently the EPS. Our gross margin for the third quarter was 22.9% versus 14.9% for the same period in 2007. However, this 22.9% does represent a slight decline from the second quarter of 2008 due to one-time expenses affecting the quarter. These include the closure of our Switzerland facility and the costs related to our reduction of headcount in our Sheffield, UK, facility, plus we had a large press breakdown in our USA forge. Given the slower than expected recovery at Sheffield, we are now forecasting gross margins will reach 25% to 26% in the fourth quarter of 2008 and reach 27% in the first half of 2009.

Let me quickly discuss Switzerland and just mentions that we did close the facility and consolidated the operation into our case facility in Lyon, France, to achieve improved operational efficiencies and other cost benefits. We do not anticipate any impact to our current customer base in Europe and expect to generate over $1.5 million of annual savings from this move beginning full year 2009.

Now turning to Sheffield operations, we are very pleased with the success of the initiatives that are driving this facility’s return to profitability, but are disappointed that the results have been slower than we originally expected. We narrowed the operating loss at Sheffield from a second quarter loss of $3.9 million to a third quarter loss of $2.6 million. We expect further improvements in the fourth quarter, and encouragingly the unit did record a profit in the month of September. The fourth quarter will benefit from the full impact of our increased selling prices, improved operating efficiencies, and reduced personnel costs, but will not include the full impact of the material cost savings.

One of the major reasons for the day at Sheffield relates to our inability to achieve the full material cost savings as quickly as we would like due to having to terminate a long-term material contract. The termination of this contract has to be managed carefully and with integrity which will prevent us from realizing the full savings we expect until April 2009. Once completed, this will not only provide us with reduced materials spend down to true market prices but would also provide additional operating efficiencies as we’re moving some material-related processes in house.

A further significant benefit arising from the Sheffield situation is that it has significance spare forging capacity as a result of our recent capital investments and increasing efficiencies. We plan to utilize this capacity to handle increased demand from our US operation with a consequent benefit of deferring CapEx and providing $6 to $8 million of additional sales to Sheffield in 2009. Last quarter we also mentioned that we were install a new ERP system at Sheffield. This has now been fully designed and piloted and our employees fully trained, and we plan to go live at the start of the new year which will also help improve efficiencies.

Turning to our New Bedford facility which we acquire DePuy in January, we continue to experience excellent performance at this facility. Product demand has been robust, and we value the relationship we have strengthened with DePuy. As you know, we have an agreement with DePuy that includes a $106 million commitment over 4 years with annual commitments. As of today, we see no indication of any slowdown at New Bedford, and in fact our forecast for next year is to achieve sales higher than 2008.

I would like to discuss how we see China impacting Symmetry and in particular our New Bedford facility. We expect China to be a major market and create opportunities for the total orthopedic industry including Symmetry. Our feedback on the activities of our large customers is that nearly all have a presence in China which they plan to expand, in order to address what is a considerable market potential. Most OEMs, however, are being very cautious about the transfer of high-quality, high-precision work to China just to achieve cost savings. We are being advised that the type of work that Symmetry produces, particularly launches where quick lead times are required and often have valuable IP, have the lowest risk of being transferred, specifically the New Bedford work. Our major customer has indicated that it has no plans to transfer work, traditionally handled at New Bedford to China in the foreseeable future. It’s also important to note that while the main role of New Bedford is to serve the demands of our largest customer, we do have a strategy to diversify and expand both its product and customer portfolio.

Malaysia continues to progress, and we are now installing capabilities to produce instruments as well as cases. We have also won a new Total Solution contract for a customer in Asia to supply the local market.

Before I had over to Fred to discuss the financial performance in more detail, I’d like to outline how we are dealing with the current economic situation. Our main focus is, of course, to meet the demands of our customers, and we still expect to experience fairly strong demand from them for at least the next two quarters. Common sense would, however, indicate that the orthopedic market will not be totally immune from the economic slowdown, and with that in mind, we have three central strategies to ensure that if we do see a slowdown, Symmetry will strength and hopefully gain market share without any extensive investment.

First, we are taking all the prudent actions necessary to preserve cash. This will result in several internal actions but also result in a slowing down of some of our acquisition activities. Secondly, we are developing a more extensive supple chain which when coupled with our existing capacity, we believe will give us the operational capability and capacity to achieve sales in the order of $500 million per annum without any major investment. Lastly, we are looking to significantly improve our bottomline even if sales become softer. We can achieve this with a reversal of the Sheffield operation losses and the elimination of professional fees resulting from the Sheffield restatement plus some other restructuring initiatives we have in mind. We have identified between $10 and $15 million of bottomline improvements that could be generated next year from the existing sales revenues. With that, I’d now like to hand over to Fred.

Fred Hite

As Brian stated, we are very encouraged with our continued strong topline performance for the third quarter and the demand that we are seeing from all our customers. We look forward to increasing profit in the in the future as Sheffield recovers and as we eliminate the year-to-date investigation costs which reached $4.5 million, also as we leverage our favorable tax position in the UK and as the true operational performance hits the bottomline.

During the third quarter of 2008, we achieved our fourth consecutive quarter of record revenue reporting $112.1 million, up $36.3 million or 47.8% from the third quarter of 2007 revenue which was $75.8 million. This includes incremental revenue of $4.7 million from SSI and UCA which we acquired in August of 2007 and $14 million from the New Bedford manufacturing facility, which we acquired from DePuy in January 2008.

Excluding these recent acquisitions, revenue grew by $17.6 million during the third quarter representing an organic growth rate of 23.2% year over year. This growth is attributable to large projects and increased demand that we are experiencing from Symmetry’s products and our total solutions approach from our large orthopedic customers and the continued trend of supplier consolidation at our major OEM customers.

Third quarter 2008 revenue by business segment was as follows. Implant revenue was $31.5 million, up 32.3% from the third quarter 2007 revenue of $23.8 million. Implant revenue does include $2 million from the New Bedford acquisition. Instrument revenue was $48.7 million, up 144.4% from the third quarter of 2007 revenue of $19.9 million. Instrument revenue includes $11.9 million from New Bedford and $4.7 million of incremental revenue from SSI. Excluding acquisitions, we achieved 62.2% organic growth in our instrument division. Case revenue was $23.0 million, up 6.4% from the third quarter of 2007 revenue of $21.6 million, and this was all organic growth. Other revenue was $8.9 million, down 15.1% from the third quarter of 2007 of $10.5 million. This reduction was driven by unfavorable impact from foreign exchange and lower customer demand.

Segmented by geography, third quarter 2008 revenue breaks down as follows. Revenue to the United States was $81.2 million, up 74.9% from the third quarter of 2007. Revenue to the United Kingdom was $14.3 million, down 4.0% from the third quarter of 2007. Revenue to Ireland was $7.6 million, down 4.6% compared to the third quarter of 2007, and revenue to other foreign countries increased 37.5% to $9.0 million. Our top five customers represented 65.1% of our revenue for the third quarter of 2008, up from 54.0% in 2007, primarily as a result of the New Bedford acquisition. Our two largest customers accounted for 31.7% and 12% our third quarter 2008 revenue, while they accounted for 19.3% and 12.0% of our third quarter 2007 revenue. This is also primarily a result of the New Bedford acquisition.

Gross profit for the third quarter 2008 was $25.7 million, a 126.8% increase from the gross profit of $11.3 million in the third quarter of 2007. Gross margin for the third quarter 2008 was 22.9% compared to 14.9% for the third quarter of 2007. As Brian mentioned, gross profit for the third quarter of 2008 was impacted by several events. The first amounting to $700,000 relates to the closure of our Switzerland facility. Looking forward, we believe the closure of this facility will provide us approximately $1.5 million in annualized cost savings. The second amounted $500,000, and it relates to the Sheffield’s head count reduction. We also experienced a $400,000 reduction in our USA forging operation as a result of a major press breakdown. Sheffield had a gross loss in the third quarter of $1.3 million, down from the $2.1 million of a loss that we saw in the second quarter of 2008.

Third quarter 2008 selling, general, and administrative expenses were $15.2 million compared with third quarter 2007 SG&A of $9.0 million. This year over year increase was due to the addition of our recent acquisitions which added $2.3 million and increased sales commission across the business due to the strong revenue performance. Also impacting third quarter SG&A was a $700,000 increase in employee-related expense of non-cash stock based compensation that was previously discussed on last quarter’s call. The increased SG&A also included the remaining professional fees and expenses related to the review of accounting problems at Sheffield UK operating unit which amounted to $900,000 during the quarter. Year to date investigation-related costs totaled $4.5 million.

Operating income for the third quarter 2008 was $10.5 million, a 359.9% increase over operating income of $2.3 million for the third quarter of 2007. Operating income was impacted by several one-time items as well as the operating loss at Sheffield which was $2.6 million. However, this compares to $3.9 million of a loss during the second quarter of 2008, so we did see an improvement.

For the third quarter of 2008 we reported net income of $2.5 million or $0.07 per diluted shared compared to a net loss of $1.1 million or $0.03 per diluted share for the third quarter of 2007.  The third quarter 2008 net income was impacted by several unfavorable items, many of which were non-cash. In addition to the unfavorable $1.6 million or $0.03 of EPS I discussed earlier related to gross profit, a net unfavorable foreign exchange translation impact of $2.1 million or $0.04 of EPS was the result of the British pound moving from 1.99 to 1.77. We also recorded an unfavorable tax expense related to Sheffield UK operating unit of $1.1 million or $0.03 of EPS.  This is due to the continued loss at Sheffield, and we have fully reserved for the tax benefit of current year losses and the year-to-date losses now carrying with no tax benefits and the remaining Sheffield investigation expenses which amounted to $900,000 or $0.02 of EPS.  These items add up to an unfavorable $0.12 of EPS. 

For the third quarter compared to prior year, FX reduced our sales by $400,000, and our net income was increased by $200,000.  The third quarter compared to the second quarter FX reduced our sales by $1.5 million and increased our net income by $100,000.  Given the current FX rate, we expect fourth quarter sales to be hurt by $3.8 million and a slight net income help of $100,000 compared to the fourth quarter of 2007. 

We do have two FX hedges in place; one is at 2.00 and another at 1.85.  These are both good positions; however, they are not enough to overcome the non-cash translation impact on our UK books.  With the British pound around 1.55, we anticipate experiencing another loss in the fourth quarter of over $2 million unless the dollar weakens before year end.  Again, this is a non-cash valuation allowance, but it will still impact EPS. 

As Brian mentioned, we are pleased with the progress made on initiatives to improve the operating performance of Sheffield, although the result of our initiatives are not materializing as quickly as we had originally anticipated.  As I previously mentioned, the operating loss for Sheffield in the third quarter was $2.6 million, down from $3.9 million of a loss in the second quarter.  Unfortunately, with the British pound moving from 1.99 to 1.77 at the end of third quarter, they had to record a non-cash translation of foreign currency and it drove their net loss to $4.7 million compared to $3.2 million loss in the second quarter.  On top of that, given the current pound rate of around 1.55, we still have over $2 million of non-cash impact in the fourth quarter. 

On the operation side of things, we expect further improvement on our profitability initiatives in the fourth quarter and narrowing the loss even further.  Sales at Sheffield for the quarter were $13.9 million, up from $13.8 million in the second quarter of 2008, and we expect that Sheffield will reach breakeven operating income as we exit the fourth quarter. 

Given the current banking environment, we did put $10 million of cash on our balance sheet at the end of the third quarter, which we pulled down from our line of credit.  We’re pleased to report that the $10 million came down the same day without any issues.  We have since paid back the $10 million and reestablished the amount in our line of credit.  We currently have cash on hand and have immediate access to an additional $20 million from our line of credit. 

As many of you know, Wachovia is our lead bank.  We also have 10 other banks in our banking group which includes Wells Fargo.  We continue to have an excellent relationship with Wachovia and Wells Fargo and have been assured by both of the entities that the combination will not have any negative impact on us.  We are also pleased to report that we remain fully compliant with our latest banking covenants. 

In the third quarter of 2008, we generated $7.8 million of cash from operations as compared to $5.6 million of cash generated from operations in the second quarter of 2008.  Speaking of cash, we are currently exploring all of our cash options due to the losses at Sheffield, which we estimate could result in up to $5 million of favorable cash and reduced taxes on our books before year end 2008.  We estimate this could result in up to $0.14 of EPS in the fourth quarter and this is not included in our recent guidance.  This is a direct result of the net operating losses we’ve incurred at our Sheffield facility.  The $5 million would provide cash which will further strengthen our already strong financial position in this difficult banking environment. 

The weighted average number of diluted shares outstanding during the second quarter of 2008 was 35,402,097. 

Now, I will briefly discuss our guidance for the full year of 2008.  Our guidance is based on our current order flow and the customer demand that we are seeing at our facilities as well as the current currency rates.  As stated in our press release, we are increasing full-year revenue guidance to a range of $417 to $422 million from the previously stated range of $410 to $420 million.  On the bottomline, we are adjusting expected full year 2008 diluted earnings per share to between $0.41 and $0.43.  This reflects our third quarter results, continued unfavorable impact of currency, a higher tax rate given the limit on tax benefits at Sheffield this year, and a delay in our Sheffield profitability.  Again, we hope to offset some of this third and fourth quarter non-cash valuation issues such as the currency translation with the fourth quarter tax project I discussed earlier.  However, we have not included that $0.14 of EPS in our guidance. 

Let me now discuss 2009.  As we work to finalize our 2009 budgets, we will plan on very modest sales growth and make sure that we have the cost controls in place to react to any future slow-down in demand.  We plan to provide full year 2009 guidance during our next earnings conference call.  However, we wanted to take a minute to highlight some benefits we anticipate in 2009 compared to 2008. 

First, as Sheffield turns profitable, we will no longer have the negative pre-tax profit with no tax benefits.  Year-to-date they have $9 million of net loss or a negative $0.25 of EPS.  They will also have a zero tax rate going forward as we begin to utilize an NOL that are on the books.  Second, by eliminating the investigation costs associated with the Sheffield restatement, we will see improved profits of approximately $5 million on a pre-tax basis or $0.09 of EPS.  Third, we are putting plans in place to avoid currency translations impact, which will save us approximately $4 million of pre-tax or $0.07 of EPS.  This short list adds to over $0.41 of incremental EPS for 2009. 

I’ll now turn the call back over to Brian for some additional comments. 

Brian Moore 

So, before handing over to questions I would just like to summarize how we view Symmetry and intermediate prospects. 

We are continuing to see and experience good strong short-term demand.  Our capability and financial strategy is providing a competitive advantage in the current economic climate.  Sheffield is improving and we expect to see the full benefit in 2009, and our current operational mode is one of prudence and cash flow conservation and to focus on bottomline improvements in case we experience market softness in 2009. 

With that, I’m pleased to take any questions. 

Question-and-Answer Session 

Operator 

(Operator Instructions).  And the first question comes from the line of Benjamin Andrew with William Blair. 

Benjamin Andrew - William Blair 

A couple of quick questions; Brian, I think I counted three or four times that you guys said “if we were to experience softness next year,” is that a hypothetical or is that a projection? And it’s another way of asking how far into ’09 does your visibility on orders go in terms of your thoughts on revenue growth. 

Brian Moore 

If we didn’t read the newspapers and the media, we would not be aware of any issues economically from what our customers are telling us, what our plants are saying, and what the facilities are actually producing.  Obviously, we do read the media and the newspaper and we do realize that the economy, everybody is forecasting that at some point it would recover clearly, but it’s likely to get worse before it gets better, and estimates range from 1 year to maybe 2.  So, we’re just being prudent businessmen in saying, “look, we can’t just carry on as though the world is immune from these economic factors,” so, we’re basically saying, “let us assume there will be some impact, let us prepare for it,” but meanwhile we’ll just react to our customers and carry on as we are. 

Benjamin Andrew - William Blair 

Okay that’s helpful in terms of understanding that.  You identified I think it was $10 to $15 million of potential cost savings in operations in ’09, do you want to give any more detail on that? 

Fred L. Hite 

Yes, those are the items I went through, Ben, on my list for 2009 including the loss at Sheffield which carried no tax benefits in ’08.  As that turns profitable in 2009, obviously that eliminates a huge net loss and it will have no tax expense in 2009 going forward as we can use up our net operating loss.  It also includes eliminating the $5 million of Sheffield restatement costs that we incurred this year as well as these $4 million of unfavorable non-cash translation impact and then some other actions we have internally. 

Benjamin Andrew - William Blair 

Okay, it wasn’t clear that those were the same.  So then, thinking about the UK taxes, why the uncertainty about the Q4 benefit on the NOL, is that a ruling you’ve got to get or what’s the likelihood you do get that $0.14? 

Fred L. Hite 

That’s right.  So, obviously we did not include that in our estimates, in our guidance.  We have started a project just several weeks ago.  We have a lot more work to do to get that completed.  All signs are positive at this point, but obviously with these things until you get through all of the details and work through all of the impact across the globe, it’s not certain, but, I’m confident that we can get that completed and booked here in the fourth quarter of 2008. 

Benjamin Andrew - William Blair 

So, as we look into ’09, last question, what tax rate should we use for the company, if you know at this point? 

Fred L. Hite 

Yes exactly.  So, obviously it’s going to depend a large amount on this project, because this will help our ’09 tax rate in the USA as well as in the UK.  So, assuming the project gets completed, we could be in kind of the 30%, 31% range.  If it does not happen, if it does not get completed, it’s going to be more around the 34%, 35% type of a range. 

Benjamin Andrew - William Blair 

So, when you say the project is completed that means the UK then kicks in, starts in Q4, and runs through ’09 and beyond, those are the two scenarios, plus or minus? 

Fred L. Hite 

That’s right. 

Operator 

And the next question comes from the line of Michael Matson with Wachovia Capital Markets. 

Michael Matson - Wachovia Capital Markets 

I was wondering if you could give us a little more detail on the contract with DePuy for the new Bedford facility.  I know there are annual minimums, but are those equally spread out through the four years or are they front-end loaded or back-end loaded? And if you could actually give us the numbers, that would help a great deal in our modeling. 

Brian Moore 

That’s more or less equal with a slight front-end loading, but I think since DePuy did that agreement, they have changed their views in some ways and the load on this facility now has no resemblance to that which was envisaged when the agreement was signed.  We are already under quite a bit of positive good pressure from DePuy to actually increase our capacity of that facility, and they understand that that comes with commitments and long-term arrangements, and we are in discussions to do just that at the moment.  So, we understand your concerns, Mike, and we have the same concerns to be honest, but it’s been a very pleasant surprise to us and we’re very pleased with this performance, and we can see nothing in the short-term, and that means we’re going well into ’09 with a good result and high demand and higher sales. 

Michael Matson - Wachovia Capital Markets 

Then, the Sheffield profitability is suppose to get better in the fourth quarter, but yet looking at your implied guidance for the fourth quarter, it’s basically in line to slightly behind what you did in the third quarter, I’m coming up with $0.05 to $0.07, I understand there’s that tax benefit that Fred talked about, but what all is in that guidance, and what are your assumptions about Sheffield for right now on Q4 based on where you’re guiding? 

Fred L. Hite 

We do see Sheffield improving, continuing to improve in the fourth quarter, and on an operating income basis, that is getting better.  The problem again is this FX, non-cash translation impact of the FX, the pound was at 1.77 as of the end of the third quarter, today I think it’s at 1.52, and that is going to continue to have a negative impact on the net income at that location, and the problem is that we get no tax benefits for that loss in the UK this year and so that will drop straight through to the bottomline and you see that reflected in our EPS. 

Michael Matson - Wachovia Capital Markets 

And then, I noted that the other segment was down pretty substantially, what’s the outlook for that business.  Obviously, it does seem like the aerospace sector is not doing as well these days as it was in the past, and can we continue to expect that to be negative in the future? 

Brian Moore 

We’re not too sure what’s happening in aerospace next year.  We just had the Boeing strike.  Rolls Royce is looking at the engine programs.  So, on the negative side, we’re being a bit cautious about the demand in the UK and the machining.  The positive side of that sector though is that in the US we have signed up recently jet new customers including Rolls Royce and Boeing, and we expect tooling and other areas to grow.  So, we have two factors; we’re not quite sure how they’re going to pan out, but one is a bit uncertain in the UK on current volumes, and the other is very positive in terms of growth in the United States. 

Operator 

And the next question is from the line of Ilan Chaitowitz with Redburn Partners. 

Ilan Chaitowitz - Redburn Partners 

What I have to ask does relate to comments you made earlier in the conference call and in terms of the market and the economic situation, can you give us some sort of feel as to how things are played out in previous cycles where your business has been impacted and may be what has driven that from a business demand perspective? 

Brian Moore 

There are basically two cycles in the industry and the first one is what we see every 3 or 4 years and that’s largely driven by the activities of the large OEMs and their marketing activities, and that cycle finished round about the middle of ’06, going into ’07, and we’ve had a pretty good rise in ’08, and that cycle would normally say that we would be going full bull for at least another 2 years.  However, the second thing that has impacted potentially and it hasn’t yet potentially is, if you like the macroeconomic world situation which is the one that’s likely to have an impact on ’09, and we are unaware at the moment of the impact of that clearly.  We’re not seeing any direct evidence, but common sense would tell us that we have to be prepared for it.  So, what we’re talking about now is the larger worldwide economic slowdown rather than cyclical factors within the orthopedic industry. 

Ilan Chaitowitz - Redburn Partners  

Based on historical records or experience, where there has been a macroeconomic downturn, your business has been impacted in the past?

Brian Moore 

Typically, the orthopedic industry has been fairly immune or relatively immune from what you call economic cycles. I’ve been in business for 40 years, and I have never seen anything quite like this, but I’ve seen something pretty close, so I think we’re in new territory on this one, but who am I to know, and we’ll have to wait and see. Typically, people’s knees and joints are still wearing out, they are still in pain, and they do need to get them fixed. We’re behind a life-changing experience in terms of quality of life, and if you look at the fundamentals, even in difficult economic times, people will try and find the money to fix their major joints, so they can have a much better quality of life, and that’s the ultimate thing that’s driving our business. We will be in London on a roadshow in a couple of weeks, if you want to just pop in and see us.

Ilan Chaitowitz - Redburn Partners  

That would be fantastic. Maybe we can talk after the call.

Operator

The next question comes from the line of [inaudible]. Please proceed.

Unidentified Analyst

I just want to follow up on an earlier question on order visibility into 2009. I don’t know if you completely answered that, but how far forward is your order visibility into 2009?

Brian Moore

We do not have total visibility into 2009, but as I said on the call, we are starting to see blanket orders which are long-term 12-month and ahead sort of stuff coming in. What we are discussing with customers we are already starting to build and construct our budget based on some reasonably good intelligence. We do the next quarter call, we will of course talk in a lot more detail about this, and by then, we believe that our customers will have a much better visibility of their prospects for 2009, and we will of course build that into our forecast.

Unidentified Analyst

Is there anyway that maybe you can talk about a percentage of your 2009 revenues that you already have in backlog or that you’ve already planned for? Is it like 50%, is it 75%, 90%?

Brian Moore

We don't actually go into that area for two reasons. We don't have the actual numbers readily available. The other thing is that they are not as accurate as indicators we would like them to be because at this stage it is intent rather than firm contractual orders. Our larger customers are telling us what they would like to do, but it would be subject for to change within the year.

Unidentified Analyst

Just to understand your guidance for 2008 a little bit clearer. What were the swing factors that led from the 75% to 41 to 43 in Q4? Is it the $0.14 that you thought you were going to get and now you are not sure you are going to get? I just want to understand clearly what were the swing factors that were in your guidance previously and are not in your guidance now.

Fred Hite

Yeah, that's a good question. The $0.14 that I talked about was never in our guidance. That is a new project that has materialized here in the last several weeks and is a potential upside to the current guidance that we gave $0.41 to $0.43, so it was not a factor in the $0.77 earlier. The single biggest change from the $0.77 to the $0.43 was related to FX. It's a non-cash translation impact that comes as we bring the balance sheets back into US dollars from the UK, and that impact both third quarter, which I talked about, as well as the fourth quarter given where the rate is today and obviously when we gave our guidance at $0.77, the pound was at 2.0, and who would have guessed that here 6 to 8 weeks later the pound would be sitting at 1.52. So, that obviously has a major impact unfortunately on our EPS, but again it's all non-cash translation adjustments that is flowing through, and it's masking the performance of the operations.

Unidentified Analyst

So, FX is the biggest hit in Q4, and how does that relate to the Sheffield impact? Are you expecting anything in Q4 or the lack of the Sheffield benefit that you thought you were going to get in Q4 but now is going to be in 2009?

Fred Hite

We are experiencing a little bit of a slower recovery at Sheffield as Brian mentioned because of the material contract. That is very minor in size compared to multimillion dollars of a loss due to translation impact from that Sheffield UK facility. The TX unfavorability that I talked about just happens to also show up at the Sheffield UK facility because of where it is located and because of their balance sheet, but it is unrelated to the operational performance of that facility.

Unidentified Analyst

The Sheffield impact is minor in Q4?

Fred Hite

The Sheffield operating profits, the delay in that may be $500,000 to maybe $1 million less than we had expected, but again this unfavorable FX if over $2 million in the fourth quarter, and it’s hurting us and the same in the third quarter.

Operator

There are no further questions at this time. I will now turn the conference back over to Brian for closing remarks.

Brian Moore

Thanks again, and appreciate your support, and as I said earlier, Fred and I both are in the office for the rest of the day if anybody needs to call and follow up on anything. Thank you.

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