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Symmetry Medical Inc. (NYSE:SMA)

Q3 2010 Earnings Call Transcript

November 4, 2010 9:00 am ET

Executives

Carol Ruth – IR, The Ruth Group

Brian Moore – President and CEO

Fred Hite – SVP, CFO and IR Officer

Analysts

Matt Miksic – Piper Jaffray

Matthew O'Brien – William Blair

James Sidoti – Sidoti & Company

Robert Dunne – Viscogliosi Brothers

Operator

Good day, ladies and gentlemen and welcome to the third quarter 2010 Symmetry Medical Incorporated earnings conference call. My name is Shaquana and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator instructions)

I would now like to turn the presentation over to your host for today's call, Ms. Carol Ruth of the Ruth Group. Please proceed, ma'am.

Carol Ruth

Thank you, operator. Joining us on the call 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 provision 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 outcome could differ materially from our current expectations.

Factors that could cause or contribute to such differences include, but are not limited to, loss of one or more customers, the development of new products or product innovation by our competitors, product liability, changes in management, changes in conditions affecting the economy, orthopedic device manufacturers, or the medical device industry in general and changes in government regulation of medical devices and third-party reimbursement practices.

We refer you to the risks in the forward-looking statements sections of 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 website at www.sec.gov.

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

Brian Moore

Thank you, Carol and thank you everyone for joining us on our third quarter 2010 investor conference call. Revenue in the third quarter was ahead of our expectations, driven by strong product launch activity from our major OEM customers.

Our implant and instrument businesses were essentially flat with the second quarter of 2010, as procedure growth continues in the low-single digits. Our case business achieved a significant dollar and percentage growth over the second quarter as we continue to benefit from increased volume in both the orthopedic and other medical devices markets.

These additions combined with the growth from the other segments of our businesses resulted in overall revenue growth of 5% year-over-year and 3% sequentially. We are particularly pleased with order intake for the third quarter, which was up double digits as a percentage basis and greater than our third quarter sales.

While we were pleased with the continued sequential top line growth, our cost of sales was higher than anticipated during the quarter, which contributed to low gross margin and lower bottom line results. And while we are disappointed, we have to incur these additional costs. They were necessary to assure that we continue to provide the high quality and timely service that our customers have come to expect from Symmetry.

These additional costs include several customer projects that involve complex development work, and Fred will provide additional details on the cost of sales in his remarks. But generally, we believe we are back on track for return to margin expansion and expect to achieve our best quarter of the year for the top and bottom line in the fourth quarter. This will include revenue in the range of $95 million to $99 million and this guidance is based on our current backlog combined with the shipments of large quantities for recently launched customer products that we began producing in the third quarter.

We do expect to achieve improved profitability in the fourth quarter with EPS in the range of $0.14 to $0.18, as we leverage our increased operational efficiency and again start growing revenue base.

We see the financial and operating results in Q3 as indicative of a shift in marketplace. Customer demand for quality and regulatory support and services continues to increase, driven by a more involved FDA. And this has resulted in less flexibility and adding costs in addition to the constant pressure on pricing and the need to use global resources to be competitive in the market.

This has resulted in our customers paying closer attention to their inventory and procurement practices, which leads to an emphasis on smaller product purchase. We see this changing environment is playing into the Symmetry business model and our investment in quality and regulatory resources during the year has positioned us to offer competitive prices and leveraging our existing facilities, including operations in Malaysia and Ireland.

A new and innovative feature in our service offering, which we will believe will gain momentum is developing and manufacturing products for targeted markets with appropriate price points. And our strategy is to leverage our expertise in Malaysia for our Japanese customer in co-development and marketing to attract a wider OEM customer base.

Let me turn to what we see as a major strategic advantage. Yesterday, we announced the closing of a new $200 million credit facility with a $100 million accordion feature which gives us ample liquidity to continue our growth plans. We used a portion of the new facility to refinance our existing debt, but the balance of the facility is now available to support growth in multiple areas, along with providing capital for potential acquisitions.

We believe there are compelling opportunities to acquire assets that could develop and expand our business and/or further diversification into other areas of health care. As our core orthopedic and medical device businesses continue to stabilize, we will be able to dedicate more time and resources towards evaluating these opportunities with a focus on growth markets, diversification, and synergies and a strong return on invested capital for our shareholders.

Our spine business is approaching 10% of overall sales and despite a challenging market, we believe that our quality and regulatory expertise, coupled with our total solutions offering will provide us with opportunities for growth. As an example (inaudible), one of our spine customers, received favorable feedback on its new Class III artificial disc technology, for which Symmetry will be the total solutions provider of fully finished implants, instruments, and cases; and we expect this partner will receive regulatory approval to market this product in 2011 and look forward to supporting them in the launch and growth of their technology.

As I referenced on last quarter's call, our new product team continues to make progress and also continually evaluating the potential for new development of new technologies. And when these products are commercialized, they will contribute to growth of our direct instrument sales, channel SSI in Nashville, as well as provide our OEM customers with some innovative solutions.

SSI continues to do well is ahead of last year and budget. We are also leveraging SSI's strong U.S. sales force and recently launched dedicated product website to drive growth in existing product sales. The SSI team is partnering with other medical device companies to provide exclusive and non-exclusive distribution of their products, strengthening the SSI product offerings and adding new sales opportunities.

As an example, SSI recently signed an exclusive distribution agreement with a company that has developed a new suite of access instruments, scopes, and fluid management products for sports medicine applications, augmenting the SSI product portfolio and providing customers with access to the latest technology. And we will continue to work to leverage SSI's strong distribution capabilities by expanding our product catalog, offering the latest technology, and introduce our own proprietary high-margin products.

Our Malaysian facility has rapidly become one of our most comprehensive service providers and is rapidly becoming more strategic to our overall business. In fact, Malaysia operation is the only location where we can provide integrated on-site total solutions for our customers, as evidenced by the Class III implant product that we began shipping last quarter to our Japanese OEM customer.

We believe we are the only company in the Asia-Pacific market with this capability and intent to leverage this unique offering as we expand our regional customer base. Because of the strong regulatory controls and quality systems in our Malaysian facility, we can also utilize it for additional capacity to supplement production for our U.S. customers to meet growing demand. In summary, we are very pleased with the progress in Malaysia and remain excited about the potential it provides for us in the Asia-Pacific region.

Let me provide you with a brief update on Sheffield facility. We now have achieved nine consecutive months of profitable operations at Sheffield, with continued focus on improving margins as opposed to absolute volume growth.

In conclusion, despite the change in dynamics in the marketplace and the unexpected setbacks, we have increased operating costs during the third quarter. I believe our business remains healthy and that we are on track to deliver our strongest quarter of the year. And looking forward, we expect to continue to leverage our Total Solutions business model with our new financing in place and we are now ready to serve our customers more effectively.

And with that, I would like to hand the call over to Fred for a more detailed review of our financial performance.

Fred Hite

Thanks, Brian. Revenue for the third quarter of 2010 was $91.5 million, up 5% from $87.2 million in the same period of 2009 and up 3% on a sequential basis from $88.8 million in the second quarter 2010. Foreign exchange impacted revenue by a negative $1.7 million versus the prior year and a positive $0.7 million versus the second quarter of 2010. Excluding foreign exchange, revenue grew by 7.1% versus prior year.

As Brian mentioned, third quarter sales was driven by stronger product launch activity with our major OEM customers. We expect this trend to continue in the fourth quarter and we remain encouraged by the continued demand in our business, combined with the outlook for future product launches.

Third quarter 2010 revenue by business segment was as follows. Instrument revenue was $36 million, down 13% compared to the same period, by up 2% sequentially compared to the second quarter 2010. Instrument revenue in the third quarter of 2010 reflects lower new product launch activity compared to the third quarter of 2010 and stable activity compared to the second quarter of 2010. Foreign exchange had a minimal impact on the instrument revenue.

Implant revenue was $28.3 million, up 17% compared to the same period last year. The year-over-year growth was driven by procedure growth, stable inventory management trends, and increased product launch activity. On a sequential basis, implant revenue was down less than 1% compared to the second quarter of 2010, reflecting the low-single digit procedure growth for orthopedic procedures that has been reported in the marketplace. Foreign exchange impacted implant revenue by an unfavorable $1 million and excluding foreign exchange, revenue grew 22%.

Case revenue was $21.5 million, up 31% compared to the same period last year and 9% on a sequential basis from the second quarter of 2010. The year-over-year and sequential increase was driven by increased demand in both the orthopedic space, as well as the other medical markets. Foreign exchange impacted case revenue by an unfavorable $0.4 million and excluding that, case revenue grew by 35%.

Other revenue was $5.7 million, up 8% compared to the same period last year and 12% on a sequential basis. The year-over-year and sequential increase was a result of revenue growth in the U.S. segment of our aerospace business and the timing of our customer orders. This was partially offset by lower volume in our Sheffield aerospace business, which is direct result of our efforts to focus on higher-margin products as opposed to absolute volume growth at this facility. Foreign exchange impacted other revenue by an unfavorable $0.3 million and excluding foreign exchange, our other revenue grew by 14%.

Third quarter 2010 revenue by geography was as follows. $67.5 million in the United States, down 7% from the third quarter of 2009; $6.9 million in the U.K., down 5% from a year-ago period; $8.5 million in Ireland, down 8% compared to the third quarter of 2009; and $8.6 million in other foreign countries, up 16% compared to the same period last year.

Our top five customers represented 64.5% of our third quarter 2010 revenue, which is consistent with 63.8% in the year-ago period. Our largest two customers accounted for 30.7% and 12.4% of our third quarter 2010 revenue compared to 36.1% and 10.1% of our third quarter revenue in 2009.

Gross profit for the third quarter 2010 was $19.8 million compared to $21.7 million in the same period last year and $20.4 million in the second quarter 2010. Gross margin percentage for the third quarter of 2010 was 21.7% compared to 24.9% in the same period last year and 22.9% in the second quarter of 2010.

As Brian mentioned, the lower gross margin during the third quarter was primarily a result of additional manufacturing costs and a higher mix of smaller orders. Smaller orders were driven by the changing inventory and procurement practices that Brian described, along with an increased amount of highly complex new product projects.

Additional costs were necessary to meet our customers' project timelines and to support customer deliveries. We also are absorbing a higher percentage of the initial cots of our investments in providing unmatched quality and regulatory expertise to help our customers navigate increased pressures in this area.

While we are disappointed with our gross margin for the third quarter, we believe these issues were resolved during the quarter, putting us on track for margin expansion in the fourth quarter. We also expect to benefit in the fourth quarter from the shipment of larger quantities for recently launched customer products that we began producing in the third quarter.

Selling, general and administrative expenses for the third quarter 2010 were $12.2 million, up 15.7% compared to $10.6 million in the same period last year. Third quarter 2009 SG&A included the aggressive cost-cutting initiatives we implemented in the second half of 2009, along with a significant reduction in performance-based compensation and restricted stock expense.

In addition, third quarter of 2010 SG&A included approximately $900,000 of unexpected expenses primarily related to medical benefits. Since the third quarter of 2009, the company has also increased, as planned, our investment in the SSI distribution sales force and increased new product development expense.

On a sequential basis, SG&A was essentially flat from $12.3 million in the second quarter of 2010 and excluding the $900,000 of unexpected costs I just described, the sequential decrease in SG&A was driven by reduced performance-based compensation.

During the third quarter of 2010, we recorded a pretax charge of approximately $100,000 related to facility consolidation and severance costs. This compares to approximately $300,000 in the second quarter of 2010 and approximately $700,000 in the third quarter of 2009.

Operating income for the third quarter 2010 was $7.5 million compared to $10.4 million in the same period last year and $7.8 million in the second quarter 2010. Operating margin for the third quarter 2010 was 8.2% compared to 12% in the same period last year and 8.7% in the second quarter of 2010.

Excluding expenses related to the facility consolidation and employee severance costs, operating income for the third quarter 2010 was $7.6 million compared to $11.1 million in the same period last year and $8.1 million in the second quarter 2010. Lower GAAP and non-GAAP operating income in the third quarter of 2010 was primarily a result of lower gross margin realized during the quarter.

For the third quarter of 2010, Sheffield generated another quarter of positive operating income as they did in the second quarter of 2010. We expect to continue to gain efficiencies at Sheffield as we advance throughout the year, leading to further improvement in their results.

Third quarter 2010 included a non-cash gain of $400,000 for the mark to market of our interest rate derivative compared to a non-cash gain of $200,000 in the third quarter 2009.

Income taxes for the third quarter 2010 was $2.1 million compared to a tax expense of $2.9 million in the year-ago period.

Net income for the third quarter 2010 was $3.6 million or $0.10 per diluted share compared to $5.4 million or $0.15 per diluted share in the same period last year and $4.5 million or $0.13 per diluted share for the second quarter of 2010. Excluding the one-time facility consolidation and severance expenses in the third quarter of 2010, net income for the third quarter 2010 was $3.6 million or $0.10 per diluted share compared to $0.16 per diluted share last year and $0.13 per diluted share for the second quarter of 2010.

Earnings per share for the third quarter of 2010 reflected a weighted average of 35,869,760 shares outstanding compared to a weighted average of 35,620,317 shares outstanding in the year-ago period.

Turning to our balance sheet, cash at the end of the third quarter of 2010 remained very strong at $13.9 million and our outstanding debt decreased by $16.7 million or 15.2% compared to the year-ago period.

As Brian mentioned, we are very pleased to announce yesterday the successful refinancing of our debt with a new $200 million credit facility and a $100 million accordion feature. The new credit facility has a term of five years and the additive liquidity will be used to support generate corporate working capital requirements, international expansion, permitted acquisitions, and if we elect, potential share repurchase program.

I am also pleased to report that we are fully compliant with all of the terms in the agreement and I wanted to welcome J.P. Morgan as our new lead bank and thank Wells Fargo for their continued support of the business.

Turning to guidance, as Brian mentioned, we are expecting our strongest quarter of the year in the fourth quarter. We anticipate that the fourth quarter revenue will be in a range of $95 million to $99 million and that the fourth quarter earnings per share will be in a range of $0.14 to $0.18. This guidance is based on our current order backlog included, expected customer product launch activity, expected positive impact from foreign exchange rates, and an anticipated sequential improvement in gross margin compared to the third quarter 2010.

I will now turn the call over to the operator to answer any of your questions.

Question-and-Answer Session

Operator

(Operator instructions) And please standby while we compile our list. And your first question comes from the line of Matt Miksic, representing Piper Jaffray. Please proceed.

Matt Miksic – Piper Jaffray

Hi, Brian and Fred. Thanks for taking the questions.

Brian Moore

Good morning, Matt.

Matt Miksic – Piper Jaffray

So, why don't I just follow up, Fred, with you on these costs and the nature of, I guess, the orders that came in the quarter? It sounds like you are not expecting those to continue into Q4. Maybe if you could help us understand the order of magnitude, impact of the smaller orders and I guess, the less efficient cost structure that brings, why that wouldn't continue and if that's becoming a way that these customers are demanding and managing their own spend.

And then the other side of it, it sounded like there were some startup costs. Are those behind us, are those continuing into Q4? Just maybe some help on the proportions and the confidence in how this impact will flow into Q4.

Fred Hite

Yes, absolutely. We had about, I would say, $2 million of incremental costs that we incurred in the third quarter this year and that cost came in the form of additional outsourcing that we had to incur. We had some equipment breakdown and we also had to deliver product to the customer that they desperately needed, and so we outsourced some of our procedures, bringing those components in-house then and finishing them, drove up those the cost of those products. So that was a major driver in the third quarter.

We also, because of that, we were put in a backlog situation were past dues and had to work extra overtime to get those products through our facilities and deliver those product launches and products to our customers. So that was another piece of the additional expense.

The third piece of it was really around new product launches. We had a lot of very complex new products that flowed through the facilities in the third quarter and working through the complexity of those initial launch quantities drove incremental cost for us in the third quarter. We are primarily behind that, and in the fourth quarter, we have the advantage of now producing the higher quantities of those products and having the startup costs behind us in the third quarter.

Matt Miksic – Piper Jaffray

So the complex – the impact of the some new product startup costs, smaller than, about the size as some of the backlog related, outsourcing related expenses you mentioned?

Fred Hite

Yes. If you break it down, there is – it's probably a third, a third, a third of that $2 million and then sprinkled in there, which is more difficult to quantify is all the quality and regulatory requirements. So in the past, if we needed to outsource something, we typically had the flexibility to do that. Now, when we have equipment breakdown, we have to get the customer's approval before we do anything, which then delays that whole process, which then puts us in a tight position, we have to work extra overtime and spend the money to get the product back to the customer on time.

Matt Miksic – Piper Jaffray

So, just to be clear, the trends in the business mix of cases, implants, instruments not a factor in the hit to cost of goods in this quarter?

Fred Hite

Not at all.

Matt Miksic – Piper Jaffray

Great. And then just one follow-up on just the tone of the new product launches. I know you are not giving 2011 guidance, but are we in the third inning of this to use kind of tired analogy? Are we – is this something that you would expect to run through mid to end of next year as these companies roll out these new products and systems? And kind of color in terms of the broader cycle that you've talked about in the past?

Brian Moore

Yes, Matt, we are not able to fully read it, because as with all launches, we do the work for the product, but we don't know the volume and the aggression that the customer will ultimately apply to that product in terms of tackling the market. So we are seeing quite a bit of activity, but we are not yet seeing that translate through to order cover for next year in vast quantities.

And I think the orthopedic market is sort of a bit reflective of slowing down in the market. At the moment, we are seeing some procedure growth slowing up. We are seeing some inventory build in some of our customers. So we are watching that very carefully to see if this work we are doing now actually translates through into high volume coming through in 2011.

Matt Miksic – Piper Jaffray

And that's speaking both in terms of implants and instruments or –?

Brian Moore

Yes, that mainly applies to the instruments division and to a lesser degree the case division. The thing that drove the case and instrument division and to a less degree, implant, is that we set our stall out with a – what we thought was a pretty good plan and what, to be honest, caught us out a bit was the fact that a lot of our major customers ran their inventory down in 2009 very aggressively and then they did a replenishment exercise in Q2 and Q3. So they effectively created a false market for us in the – it was their inventory build rather than fundamentals of the marketplace.

So we've had to cope with dealing with that little blip as we – as the customers correct their inventory, but at the same time, not put too much what I'll call permanent resource in, because we would have to unravel it, because the fundamental market is not growing as fast as the inventory demand would indicate to us that it would be.

Matt Miksic – Piper Jaffray

Okay. So 2011 is kind of like it's kind of an open book?

Brian Moore

Yes, we haven’t done our guidance yet. We are in the process now of doing all our budgets and we are confident, there is good demand, we still think it's a good sector, we are seeing a lot of opportunities for our business around the world, and although we haven’t delivered some of this added volume through to bottom line, the good takeaway for us is that we are still for most of our customers the supplier of choice. And what we saw internally, it's a problem, but it's a good problem to have if you've got more demand that you can smoothly always convert to bottom line profit.

Matt Miksic – Piper Jaffray

Great. Thanks. I'll stop there. Thanks again.

Brian Moore

Thank you.

Fred Hite

Thanks, Matt.

Operator

Your next question comes from the line of Matthew O'Brien, representing William Blair.

Matthew O'Brien – William Blair

Good morning. Thanks for taking the questions. I was just curious, on the last call you mentioned that you expected Q4 revenue to be a bit below Q3. And now that Q3 has been pretty solid and you are expecting Q4 to be higher, is that really any indication of – potentially you talked about the implant slowdown, but is it a factor of just share-taking within the industry at this point?

Fred Hite

So, throughout 2010, we had always built into our guidance the possibility that our customers would be reducing their inventories to true up their year-end balances and what we've seen in years past is that would drive lower demand for our products in the fourth quarter. We had always built that into our forecast. As we've now moved through the third quarter and we are a third of the way done through the fourth quarter, there is little evidence of that occurring and in fact, we have more than enough product launch activities to more than offset any of that.

So the fourth quarter is always a little bit of an unknown for us, as we start the year and we move throughout the year and until we actually get through the third quarter and into fourth quarter, it's a bit of a wildcard for us. So now that we are sitting here at the beginning of November, we can obviously see all of the demand on the business in the fourth quarter and the revenue of $94 million to $99 million, obviously very strong, represents a 24% year-over-year growth up to a 29% year-over-year growth, and that is just continuing with primarily the product launch activity that's driving that.

Matthew O'Brien – William Blair

Okay. And would you say your visibility on that is better than historically as far as what you can see throughout the end of the year?

Fred Hite

So – yes, I mean, we basically can see the entire rest of the year, which is pretty typical once we get to this point. Some of it is just a matter of waiting till we get to this point before a highly confident on exactly what that fourth quarter volume is going to be.

Matthew O'Brien – William Blair

Okay. And then on the quality and regulatory side, I mean, you guys are pretty much towards the leading edge of that in the industry. But where are you at in terms of where you think you need to be and then compare to some of the bigger competitors within the outsourcing industry?

Brian Moore

Yes. You can never do too much in this area and we are constantly being challenged by customers and regulatory authorities to improve. We would like to think we are one of, if not the best, in the actual outsourcing group. We also believe that we are comparable with our major OEM customers in many areas. We obviously use them and their expertise to help us and learn from them and we work together on that. And we also are seeing that the FDA is signaling even more intrusive, invasive quality raising [ph] which ultimately should be for the benefit of the ultimate consumer and it should also benefit companies like Symmetry.

The challenge for us is that we've somehow got to find a way of recovering the cost of that on piece parts, which obviously we have those dual factors from our customers where on the one hand they want constant price pressure down and on the other hand, they want us to do a lot more of what we are doing. So that's the challenge that we are facing on a daily basis.

Matthew O'Brien – William Blair

Okay. And then finally, with the additional cash that you do have available, I mean, any sense for where you are going to allocate that in terms of internal versus external investments? And if you do go external, are you thinking of focusing with orthopedics or outside of orthopedics, specifically?

Brian Moore

We are just dealing with the first part. In terms of internal, we are – we have targeted areas like Malaysia and SSI for development. But we would typically do that out of cash flow being generated by the business and the big checks that – the dollars, if you like, that we would write out, would almost certainly be for acquisition targets. And we do have targets we are looking at, at the moment. We have nothing in what you might call final stages; we have got a few in early stages.

And what we are seeking is something that will add to the business, intellectual property, will give us some other areas to develop. We are at the moment focusing within the health care business, but not necessarily exclusively and limited to pure orthopedics. So we are just working with lots of banks and all the rest of it. Now, we have the financing in place and looking at many opportunities.

Matthew O'Brien – William Blair

Okay. Thank you.

Brian Moore

You're welcome. Thank you.

Operator

And your next question comes from the line of James Sidoti, representing Sidoti & Company. Please proceed.

James Sidoti – Sidoti & Company

Good morning. Can you hear me?

Brian Moore

Yes.

Fred Hite

Good morning, James.

Brian Moore

Good morning, James.

James Sidoti – Sidoti & Company

Hi. Two questions. I'm sorry, I joined the call late, I don't know if you said the – you talked about this or not. But what was the interest rate on the debt – on the current debt?

Fred Hite

So, we – a couple of – we had LIBOR plus 175 was our prior. We are now at LIBOR 225. So it's up a little higher. However, with the prior debt, we had two interest hedges in place and one of that was from many years ago and it was actually a 5.35%. So we had $40 million hedged at 5.35% and we had $60 million hedged at 1.63%. So the net impact of all of that was somewhere in the 5% range for the business and this will actually lower our overall interest expense for the business going forward.

James Sidoti – Sidoti & Company

Okay. All right – which is a lot better than you thought at the beginning of this year?

Fred Hite

Yes, it's probably about, I would say, 4 points better than what I thought it was going to be at the very beginning of this year.

James Sidoti – Sidoti & Company

Okay. And I'm sorry if I missed this also, but you talked about, I guess, improved – improving sales because of the new product launches. Can you just give us some sense of – is that primarily in hips and knees or is that across the board, hips, knee and spine? Is there any area where you have more product launches than another?

Brian Moore

Yes, the main complexity is in the instrument division, which is almost 100% focused on orthopedic implants and it's almost driven by launch activity. And there is some activity in cases, but our case business is only, what, 25%, 30% of orthopedics. The rest is more indicative of the general market conditions. But the main impact is in our instrument division.

There are some new launches going through on our implant division, but they are more typically larger programs, they are forging programs and although they can be difficult sometimes, they are not as complex as some of the instrument programs which could involve many, many instruments in one complete launch.

James Sidoti – Sidoti & Company

And the pickup in the instrument sales that's across the board hips, knees, spine?

Brian Moore

Absolutely, yes.

James Sidoti – Sidoti & Company

Okay. Thank you.

Brian Moore

Thank you.

Fred Hite

Thanks.

Operator

(Operator instructions) And your next question comes from the line of Robert Dunne, Viscogliosi Brothers.

Robert Dunne – Viscogliosi Brothers

Viscogliosi Brothers, a little hard to pronounce. Yes, I was just wondering if you could put a little more color on the manufacturing glitches. What sort of equipment here caused the problem? And is this related still to the Sheffield facility in some way or is this more than one facility that was involved?

Brian Moore

Basically, just to do the easy one, nothing at all to do with Sheffield, but they did on a small press breakdown, but that would not be on the radar for what we were talking about. The main breakdown problem we had was in Manchester where we had some sheet metal, very expensive, $1 million plus equipment down for several weeks. And that involved us going out to the marketplace and we had two issues. One was that we had to put it on less sophisticated equipment in the supply chain, which drove the cost up and the fact that we are outsourcing in itself drove the cost up as well.

That's all now sorted. We've – we have actually got another piece of equipment on order. We repaired the one that went down and we've got a piece of loan equipment in our facility in Manchester, that's now all firing in and (inaudible) working away quite happily touchwood. So those are the main – that was the main area. There was a small press breakdown in one of our implants, but the Manchester one was the one that did most of the cost damage to our operations.

Robert Dunne – Viscogliosi Brothers

Okay, good. Thank you.

Brian Moore

You are welcome.

Operator

At this time, there are no further audio questions. I would now like to turn the call over to Mr. Moore for closing remarks.

Brian Moore

Okay. Well, thank you, everyone for your support and we look forward to delivering the best quarter of the year in quarter four, and hopefully, we will be speaking to you along those lines in January. Thank you very much and if you feel the need or want to follow up with any calls to Fred and myself, we are around most of the day. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. And have a great day.

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