Symmetry Medical Inc. F4Q07 (Qtr End 12/31/07) Earnings Call Transcript

May. 9.08 | About: Symmetry Medical (SMA)

Symmetry Medical Inc (NYSE:SMA)

F4Q07 (Qtr End 12/31/07) Earnings Call

April 24, 2008 8:00 am ET

Executives

Brian Moore - President and CEO

Fred Hite - SVP and CFO

John Hynes - COO of Europe

Nick Laudico - VP, IR; The Ruth Group

Analysts

Ben Andrew - William Blair

Mark Mullikin - Piper Jaffray

Steven Lichtman - Banc of America Securities

Vincent Ricci - Wachovia

Sean McMahon - Kennedy Capital

Operator

Good day, ladies and gentlemen, and welcome to the Symmetry Medical Full Year 2007 Financial Results Conference Call. My name is Heather, and I will be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today’s conference, Mr. Nick Laudico of The Ruth Group. Please proceed sir.

Nick Laudico

Thank you, operator. 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, the investigation of accounting irregularities at our Sheffield, UK operating unit or related restatements, 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 such terms as “may,” “will,” “should,” “expect,” “believe,” “anticipate,” “plan,” “estimate,” “intend,” and similar words indicating possible future expectations, events or actions. Such predictive 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; 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 practices.

We refer you to the "Risk Factors" and "Forward Looking Statements" 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 website at www.sec.gov.

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

Brian Moore

Thanks Nick, and thank you to everyone for joining us on our conference call today. While we are pleased and very relieved to have the financial restatement behind us, despite this distraction, I believe we have made excellent progress in building the business, expanding into Asia and providing our customers with excellent service and support. Everyone on the Symmetry team should be applauded for their commitment, time and hard work to get these issues resolved, especially a big thank you to our finance team who have worked tirelessly to complete the required work.

I will now provide top line comments and then turn the call over to Fred to go over the financials, and we are prepared on this call to spend as much time as we need to answer your questions. Most important is that the review of our Audit Committee following the discovery of accounting irregularities at our Sheffield, UK operating unit has concluded, and the company has completed the restatement of its financial statements.

We are gratified that the matters identified for restatement as a result of the review were localized to our Sheffield operating unit. As we will discuss, the company has implemented a variety of remedial measures and improved controls which we believe will strengthen the company going forward. And while these irregularities have been unfortunate, we are pleased to report that the effect to our customers has been minimal.

Turning to the Symmetry business, we are extremely pleased with the return of the overall orthopedic market in the latter portion of 2007 underlined by our achievement of top line 2007 revenue growth of $45.9 million or an increase of 18.7%.

The increase in customer demand has also accelerated in 2008. Symmetry was and is very well positioned to take advantage of this upturn given our decision to maintain our global infrastructure over the last two years. Our customers receive the same level of attention and total solution service that they have come to expect from Symmetry through the difficult accounting review period. We believe this has deepened our relationships with them and provided us with an even greater competitive advantage in 2008.

Turning to our recent acquisitions, which are an important part of our strategy, we made substantial progress during 2007 and early 2008 on further integrating Clamonta, TNCO, SSI and UCA as well as the former DePuy manufacturing facility in New Bedford, Massachusetts which we acquired in January 2008.

The acquisition of Clamonta in January 2007 further strengthened our aerospace business. As a well-known leader in the industry for producing quality engineering products for aircraft engines, Clamonta’s products have helped develop the Symmetry’s Total Solutions business model within our aerospace business.

The acquisition of TNCO in April 2007 expanded our specialty medical instruments offering for arthroscopic, laparoscopic, sinus and other minimally invasive procedures. TNCO’s strong intellectual product portfolio and customer relationships have extended Symmetry Medical's product range and has also increased our number of customers.

The acquisition of SSI and UCA in August 2007 was another key achievement of our diversification efforts that offers us distribution and marketing capabilities in a broad range of new medical instruments in areas such as neurological, cardiovascular and laparoscopy. SSI provides us with the opportunity to increase our penetration directly into hospitals and to create additional cross-selling opportunities for other Symmetry products and services that will benefit these new customers.

Symmetry is well positioned to take advantage of this upturn. The acquisition of SSI has also doubled our US sales force and increased our customers by over 1,000, and SSI has also added over 10,000 new products to our portfolio.

In January 2008, we closed on the acquisition of DePuy’s orthopedic manufacturing facility in New Bedford, Massachusetts. New Bedford further strengthens our position as a leading supplier to the orthopedic industry by reinforcing an already well-established customer relationship and provides a major increase in capacity to meet continued customer demand.

In connection with this acquisition, we entered into a supply agreement which requires DePuy to make a minimum purchase from this facility of $106 million over a four-year period. Most importantly, it has provided with a major increase in capacity, which will benefit all of our customers just as the market growth is accelerating. So the timing would appear to be ideal. The fact that we are able to obtain financing for this acquisition during the accounting investigation shows an enormous amount of support from our lenders, which we believe provides further confidence on the strength of our business.

We remain very encouraged with the progress and integration of all of our acquisitions completed in 2007 and so far in 2008 and look forward to their further contribution to our growth. The synergistic effects of these acquisitions have begun to flow through our business and have helped to produce both new customer and new contract wins, and we expect to realize even greater synergies of these acquisitions going forward.

Turning to our Asian strategy, our Malaysian operations continue to play an important role in our global expansion strategy to create an Asian presence. We have committed to a $20 million investment program in Malaysia over the next three years, and further progress is being made towards our objective to establish a full service Symmetry medical facility in Malaysia capable of providing our Total Solutions offering to the Asian market in 2009.

Case production has been successfully established and is already scheduled to move into larger premises later this year. This new building will also house our development team and the instrument manufacturing facility in addition to acting as the regional headquarters.

Sales specialists and product development engineers have been recruited in Malaysia and trained in the US and are now in place to provide a regional service. We consequently believe that we are on schedule to achieve our objective of achieving a full regional Symmetry operation in Asia. This will include a design and development center with prototype facilities, forging and finishing implant capability, plus an instrument manufacturing capability, all supported by a regional logistics team to handle Total Solution projects.

Our global activity is not only limited to sales activities and establish a nation presence, we are also active in worldwide procurement, and have established a specialized team that will develop the major supply chain management function based in Nashville. We are buying and selling on a global basis, a trend which we expect to accelerate over the next few years.

Turning to the first quarter of 2008, we are pleased to be conducting business as usual across all of our operating units, and have seen the overall orthopedic market strengthen further as we progress into the year. We remain encouraged by the order flow at all of our facilities and believe that we continue to be well positioned to meet the increasing demand from our orthopedic customers.

Overall, we continue to expand our capabilities to generate new customer relationships and to grow Symmetry Medical’s global presence. Order volumes continue to increase as most of the large orthopedic OEMs further develop larger projects and new product launches. We believe that our strategic decision to not only maintain core capacity, but to also invest in further niche capacity throughout the slow growth period, will provide us with increased leverage in 2008 as we respond to the return of the stronger growth market.

To support our growth plans, we have strengthened our executive team, and are very pleased with the several new team members that have been hired in 2007. In addition, the Board has been strengthened by adding two additional independent directors in January 2008. The expansion of our Board should provide more valuable input to meet the strategic development of our business.

We particularly look forward to working with Craig Reynolds and John Krelle, as they bring direct relevant industry experience and considerable international operational knowledge, particularly in Asia, which will be most useful to strengthen and develop our global strategy.

Now, let me turn the call over to Fred to discuss the financials.

Fred Hite

Thanks Brian. First, let me underscore Brian’s statement that we are extremely pleased to have completed the restatement process and filed our financial statements. We filed our 10-K for 2007, which reflects the restatement of previously issued consolidated financial statements for the fiscal year 2005 and 2006. The 10-K also includes selected restated financial statements for fiscal year 2003, ‘04, ‘05 and ‘06. We also filed our amended 10-QA for the first quarter and second quarter of fiscal 2007 and our delayed 10-Q for the third quarter of fiscal 2007. I will focus my comments on our 2007 financial results compared to our restated full year 2006 results and then discuss the restatement.

For the full year 2007, revenue was 290.9 million, up 45.9 million or 18.7% from the total restated revenue of 2006 of 245.0 million. This includes 11.3 million of contribution from Clamonta, which was acquired in January of 2007; 4.7 million contribution from TNCO, which was acquired in April of 2007 and 7.5 million contribution from SSI and UCA, which was acquired in August of 2007.

As Brian mentioned earlier, we are very pleased with the recovery of the orthopedic market in the latter portion of 2007 and what we are seeing in 2008.

Full year 2007 revenue by business segment was as follows. Implant revenue was 96.8 million, up 5.4% from the restated full year 2006 implant revenue of 91.9 million. Implant revenue includes $500,000 from our TNCO acquisition. Instrument revenue was 79.1 million, up 18.3% from the restated full year 2006 instrument revenue of 66.9 million. Instrument revenue includes a contribution of 7.5 million from SSI and 4.2 million from TNCO.

Case revenue was 77.2 million, up 24.1% from the restated full year 2006 case revenue of 62.2 million. Other revenue was 37.8 million, up 57.1% from the restated full year 2006 other revenue of 24.1 million and the other revenue includes a contribution of 11.3 million from the Clamonta acquisition.

Segmented by geography, full year 2007 revenue breaks down as follows. Revenue to the United States was 177.8 million, up 13.9% from the restated full year 2006. Revenue to the United Kingdom was up 65.3% to 54.7 million compared to restated full year 2006, and this was driven by the inclusion of 11.3 million from the Clamonta acquisition. Revenue to Ireland was 26.4 million, up 6.0% compared to the restated full year 2006. And revenue to other foreign countries increased 3.4% to 32.1 million.

Turning to customer mix in 2007, we sold products to over 1,850 customers. Approximately 850 of those customers were direct OEMs and approximately 1,000 of those customers were hospitals. Our top ten customers represented 66.9% of our revenues for full year 2007, down from 71.9% in restated 2006. Our two largest customers accounted for 17.9% and 11.7% of our 2007 revenue, while they accounted for 22.9% and 12.6% of our restated 2006 revenue.

Gross profits for the full year of 2007 was 52.6 million, a 6.8% decrease from gross profits of 56.4 million from the restated full year 2006 results. Gross margin for the full year of 2007 was 18.1% compared to a gross margin of 23.0% for the restated full year of 2006. Gross margin was possibly impacted by the 45.9 million increase in revenue, primarily driven by our ‘06 and ‘07 acquisitions. However, this positive impact was more than offset by the decline in gross profit as a percentage of revenue of 4.9%.

This decline was driven by higher raw material costs at several of our operations. Also impacting our gross margin was a reduced leverage of fixed cost at our US operations, which experienced a decline in revenue during the period while maintaining cost structures to be prepared for the anticipated ramp up in production experienced in the latter half of 2007 and into 2008.

Finally and probably most importantly, our Sheffield, UK operations experienced significant higher costs as a percentage of revenue driven by many unusual factors; the first being higher fixed costs related to depreciation, the adverse impacts of a flood during the second quarter of the year and other increased costs of manufacturing related to poor operational output.

We have commenced a full and complete review of the Sheffield’s operations and anticipate significant improvements in 2008. For the full year 2007, selling, general and administrative expenses were 39.5 million compared with restated full year 2006 cost of 28.3 million. The year-over-year increase was primarily impacted by the inclusion of 6.5 million of expenses relating from our new acquisitions. It also includes 3.5 million in professional fees and expenses incurred to complete the Sheffield investigation and related restatement.

Operating income for the full year 2007 was 13.1 million compared with total restated full year 2006 operating income of 28.2 million. Operating income was negatively impacted by the lower gross margin rate as well as the increase in SG&A that I just outlined. Income before income taxes for the full year of 2007 was 4.9 million compared with income before income taxes of 25.1 million for the restated full year 2006.

The company’s effective tax rate in fiscal 2007 was significantly impacted by a valuation allowance on the net operating loss carry-forward at our Sheffield UK subsidiary, which was $1.8 million. It was also impacted by a 1.4 million estimated reserve for prior year tax positions.

Also affecting our overall tax rate was a net loss in Malaysia with no tax benefit due to the current tax holiday we have there. Excluding these items, the tax rate was 33.2% in fiscal 2007 compared to 26.2% in fiscal 2006.

For the full year 2007, we reported a net loss of 0.1 million or zero per share of diluted EPS. This compares to restated full year 2006 net income of 18.5 million or $0.53 per diluted share.

We also experienced an impact from foreign exchange in fiscal 2007. As a result of the fluctuation in currency rates, full year 2007 total revenue increased by 7.6 million, full year 2007 gross margin increased by 0.1 million, and full year 2007 net loss decreased by 0.7 million. In 2007, we generated 24.7 million of cash from operations compared to 32.6 million in 2006. This reduction was primarily driven by lower net income.

In 2007, we invested 8.8 million in capital expenditures, down 56.5% from the restated full year 2006 time period when we invested 20.3 million. The weighted average number of diluted shares outstanding during the full year 2007 was 35.268 million.

Now, let me turn to the financial restatements. Please refer to the footnote number 3 to our consolidated financial statements included in our 2007 Annual Report filed on Form 10-K for additional details.

In summary, we have quantified the impact of the issues identified at our Sheffield, UK operating unit and are restating our financial statements to correct those issues. The restatements correcting misstatements within accounts receivables, inventory, accounts payable, property, plant and equipment, and the corresponding tax impact as well as the profit and loss impact.

Approximately 8.2 million of the restatement relates to periods prior to our acquisition of Sheffield, UK in June of 2003. This adjustment is reflected as a change to the opening balance sheet related to that acquisition and increases goodwill by 8.2 million. The impact of the restatements on the income statement reduced net income by 1.5 million or $0.12 of EPS in 2003, 3.3 million or $0.18 of EPS in 2004, 8.1 million or $0.23 of EPS in 2005 and by 5.6 million or $0.16 of EPS in 2006.

In light of the revised operational results, we revisited our 2005 goodwill impairment test, which now indicates the carrying value of our goodwill and an intangible asset exceeded fair value. Therefore, we recognized a 33.6 million non-cash impairment charge to write off the goodwill and the intangible asset related to our Sheffield, UK operating unit in the period ending December 31st, 2005. This charge resulted in a non-cash charge of $0.97 of EPS in 2005.

The average restatement from 2003 to 2006 reduced EPS by approximately $0.17 per year excluding the 2005 goodwill write-off. During this period, Sheffield’s performance on a restated basis shows approximately zero net income. However, in 2007, Sheffield reported an unusually large net loss of approximately $14 million. This is related to the disruption caused by many one-time unusual events such as the summer flood, material inflation, extremely high expenses, other disruptions at the facility and a 1.8 million tax valuation allowance.

For 2008, we are targeting Sheffield to return to their restated historical levels of profitability. As you should expect, we have a focused team working diligently to bring Sheffield’s performance in line with the entire group. While we do have a long ways to go, we are very pleased to report that we have made some positive financial and operational improvements during the first quarter of 2008.

Lastly, we are extremely pleased to have the continued support of our lender group. We have entered into an amendment to our credit agreement that provided the time required to deliver our 2007 audited financial results. Our lenders have also amended our credit agreement to extend the time by which we are required to deliver our financial statements for the first quarter of fiscal 2008 from May 15th, 2008 until June 30th, 2008.

Over the past several months, the US and UK finance and accounting teams have been a 110% focused on completing the restatement. We anticipate that we will not have enough time to completely close our records, complete the audit review and file the first quarter of 2008 10-Q before May 15th, 2008. Our lenders have also agreed to allow a one-time adjustment add back to EBITDA up to $11.4 million for the Sheffield related financial impact in 2007 and 3.5 million of external professional fees related to Sheffield investigation in 2007 and another $3.5 million in 2008.

Further, our lenders have also provided additional flexibility to our covenants and provided us with the ability to borrow additional $10 million under a revolver credit facility. This cash will be used to support the continued growth of the business through working capital expansion and incremental targeted capital expenditures required to support customer demand.

Now, I will briefly discuss our guidance for full year 2008. Based on the current order flow and the customer demand that we are seeing at our facilities, we expect our business will continue to strengthen during 2008.

As stated in our press release, we are reconfirming full year revenue guidance between 350 million and 360 million. We will issue total year 2008 EPS guidance when we announce our first quarter 2008 results. We plan to release first quarter 2008 financial results as soon as possible, but no later than June 30th.

With that said, I would like to add that we still feel very confident our gross margins can achieve around 27%, as we increase our volume, grow the business and continue to improve the performance at the Sheffield operation. Going forward, we will be back on our normal reporting schedule and plan to announce second quarter 2008 financial results in August.

I will now turn the call back over to Brian for comments on the outlook of 2008.

Brian Moore

Thanks Fred. Now that you have an idea of the impact of the restatement to our historical results, let me discuss the corrective remedial measures we have established. As a result of the management’s review of the audit committee’s independent investigation and the company’s review in connection with the restatement, we have initiated a wide range of remedial activities to prevent any future accounting irregularities.

These actions include the removal and replacement of senior management of the Sheffield facility. In addition, we have expanded the companywide internal audit function and have added a European internal audit manager, which is currently in the process of being filled.

We have also changed the reporting structure for the finance personnel at operating subsidiaries to ensure that they no longer report directly to local operations management, but they will report through a regional Vice President of Finance and directly into the Chief Financial Officer. We believe this change in reporting structure will enhance oversight of subsidiary accounting practices and provide a direct line of communication for internal control and accounting matters to our CFO.

To ensure that these new processes are fully understood and adhered to, we have widened the role of our Compliance Officer who will be organizing an internal communication program throughout the company. The Compliance Officer will also be responsible for the direction and of a representation process, which will be executed quarterly to ensure senior - subsidiaries understand and formally conform that they have complied with Symmetry’s internal control policies and procedures.

We are pleased to report that the recent addition of John Hynes as Chief Operating Officer of Europe and Mark Brooks as Finance Director of Europe have further enhanced the timing of operating and financial controls at all of our European operating units. We are confident that we have secured leadership in Europe that should ensure that this part of our business can now grow and prosper. Under their direction we will continue to provide improved service to our European customers and to our US customers that have operations in Europe. We believe that the steps we have taken will ensure stronger financial controls and a more robust management of the financial reporting.

So just to summarize where we are; we are extremely pleased to have completed and filed our financial results, and that during this process, we have continued to achieve our goal of ensuring that our customers receive the same high level of service and product quality that our Symmetry is known for. We are also very encouraged with the order flows and new product development activity we are experiencing across the whole orthopedic industry.

We are extremely pleased that our decision to retain core capacity and to continue with an acquisition program during this slower growth period has placed Symmetry Medical in a very strong position to effectively respond to the higher growth market we are currently experiencing. So we are very consequently confident that 2008 will be a very robust year for our business.

In closing, can I just say that we are looking forward to meeting with as many investors as possible at the Bank of America Health Care Conference in Las Vegas on May, the 15th.

And with that, I would like to hand over the call for questions. Just in terms of logistics, can I say that Fred is sitting in Fort Wayne, Indiana and I am actually sitting in Sheffield, UK with John Hynes and Mark Brooks. So if you have any questions directly related to Sheffield at some point, we may ask John to comment on that. So over to you, any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from the line of Ben Andrew with William Blair. Please proceed.

Ben Andrew - William Blair

Good morning, Brain. I guess good afternoon to you guys.

Brian Moore

Oh, yeah, that is true.

Ben Andrew - William Blair

Couple of questions about the UK and maybe John can jump in. Can you talk about how you look at the contribution overall from a revenue standpoint for that facility and particularly this year, and how substantial the changes in operations are that are required to get back to a more normalized gross margin there?

Brian Moore

Okay. Fred, do you want to deal with the financials and then I am going to talk about the operational improvements.

Fred Hite

Yeah. So the size of that facility is approximately 60 million on an annualized basis.

Ben Andrew - William Blair

Right. And so, is that likely to continue on this year as a rate or do you think it grows with the overall business because you have got Clamonta there?

Fred Hite

Well, that 60 million of Sheffield alone. It is not - that does not include Clamonta and we do absolutely see revenue growth from that facility continuing in 2008 with the rest of our business.

Ben Andrew - William Blair

So you do not need to make any changes to Clamonta separately, these are results of the Sheffield issues that you are…

Brian Moore

Clamonta is almost completely standalone operation. It has dedicated parts on engines. It is under the management umbrella of Sheffield. We have a new operations guy, going now in who is actually looking after operations here and there. And what we have done here in terms of operational improvement is, John has got a very distinguished background in operational management improvement. He has been working with some of the best companies in the world, Rolls-Royce and automotive and large company in the UK in particular, and he is particularly a global supply chain specialist.

So he brought already into the play a lot of good manufacturing improvement processes and practices. And we have just had a major customer visit literally this morning, where they have said, it is night and day from what they saw pre-John's time. So, John, do you want to add anything to what you found and the way you are thinking….

John Hynes

Yeah, I mean just briefly, I mean we have taken the view that we needed a broad strategy of improvement, no single area. So we are sort of going across the base.

And our strategy really has been looking at cost control and reduction, organizational change both at the personnel level and the structural level, management capability which is all important, and we have been giving full management assessment needs, and we have established some very clear time-bounded objectives for everybody.

The focus has been on customer delivery performance. Output, output is growing and customer confidence in us is growing. Process and control, that is statements across throughputs, expenditure and productivity, the culture morale of the site is particularly important, and we have now got a very data-driven decision making culture.

We have got the application of Lean principles in Sheffield now coming into line with other areas of Symmetry, and we have got some very strong inventory control and management in place.

So in summary, I would say we have clear evidence that Sheffield is responding well to these changes and strategies and the customers Brian has just mentioned, is expressing extreme confidence in what we have done so far and in what we have showed and we will be doing in the future.

Brian Moore

Thanks John. And I have been here for fairly intensive review for the last two or three days, and I am entirely confident that output levels, margins and efficiencies are already improving this year and will gradually improve throughout the rest of this year.

Ben Andrew - William Blair

Okay. And one other question and I will let somebody else on the call, but the, is it possible for you to isolate out the impact on gross margin of inflation and acquisition costs and maybe perhaps labor costs as well, but primarily I would assume materials costs?

Fred Hite

Well material is clearly the biggest piece of it. And actually the majority of that showed up in the Sheffield facility. Globally for the business, it probably was around 4 million, maybe a little more in 2007. Other than that, we had some utility inflation for the business, which everybody is experiencing. That was probably about $0.5 million in 2007 and then just normal labor costs, nothing unusual on the labor inflation side.

Ben Andrew - William Blair

Okay. And then I guess last question is you think about the gross margin getting back to 27%, is that, we should not think of that as an ‘08 target, but more of a longer-term target?

Fred Hite

No, that is definitely 2008. It is not going to be there overnight, but there is absolute plans to deliver that in 2008. Obviously coming from 18.1 for total year ‘07, it is not going to happen overnight, but we definitely see that in 2008. It is not a ‘09 target.

Ben Andrew - William Blair

So that is exiting the year as opposed to full year basis?

Fred Hite

We will be achieving those levels in the second half of this year.

Ben Andrew - William Blair

Okay, great. Thank you.

Operator

Your next question comes from the line of Mark Mullikin with Piper Jaffray. Please proceed.

Mark Mullikin - Piper Jaffray

Good morning. I guess I would just like to work down from the top to the bottom of the income statement here as far as the ‘07 restated results and guidance is concerned. Fred, can you tell us how much Riley and Everest contributed to the first half acquired revenue in 2007?

Fred Hite

I can tell you that the carryover impact of Riley 2007 compared to 2006 was approximately $16 million.

Mark Mullikin - Piper Jaffray

Okay.

Fred Hite

That you know...

Mark Mullikin - Piper Jaffray

Yeah, and then Everest.

Fred Hite

And if we look at Everest, the impact for Everest, carryover impact is -- hang-on one second and I can tell you, is about $6.5 million.

Mark Mullikin - Piper Jaffray

Okay. So if we include those in the acquired revenue in ‘07, it seems that organic growth in ‘07 was maybe in the low single digits? Is that accurate?

Fred Hite

Yes, that is absolutely accurate. I mean if you recall back in the latter half of 2006 and particularly in the first half of 2007, our core business excluding the acquisitions was down year-over-year. And in fact even with the acquisitions, first quarter of 2007 revenue was negative 5% compared to first quarter 2006.

So, we had negative core growth in the first half of the year, and then we started getting some of that growth back in the second half of the year and it started and it is accelerated in 2008.

Mark Mullikin - Piper Jaffray

Okay. So, where would you say organic growth was as you exited the year?

Fred Hite

As we exited the year, it probably was a modest number, I would say, around less than 10%, maybe 8 to 10%.

Mark Mullikin - Piper Jaffray

8 to 10% organic growth?

Fred Hite

Right.

Mark Mullikin - Piper Jaffray

Okay. And, I guess, I am having a little bit of trouble frankly understanding how you would get from an 18% restated gross margin to 27% by the end of the year. Back in the second quarter when you had the flooding in Sheffield, you had said that the impact of that was maybe a few hundred thousand dollars.

What else is one-time in nature in there that would go away, that would allow you to get up to 27%? I mean, the material inflation cost does not seem like that is going to subside anytime soon. The utility inflation, I do not see what is going to change that? What is the delta that gets you from 18 to 27, what are the factors that get you there?

Fred Hite

Again, a lot of it is not repeating some of the things that impacted our ‘07 results, number one, and number 2, is incremental volume that we are experiencing in the incremental leverage that we get from that, and number 3 is the improved performance out of our Sheffield operating unit.

As I mentioned, historically, they were a break-even type of a business. In 2007, they lost $14 million of net income and in 2008 we see them absolutely breaking even and have plans in place that they would be profitable in 2008. So that is the single biggest difference in that gross margin rate.

Mark Mullikin - Piper Jaffray

I guess, could either you or John comment on, what gets you from a loss of 14 million to break-even or even better, I mean are you going to be reducing head count in that facility?

Fred Hite

There is a couple of things. Number one, the biggest thing is, the flood is not going be repeated. And while it was a couple of hundred thousand dollars in the second quarter of 2007, it had carryover effect into the rest of the year as our supply base was, there is a heat-treating facilities that were months without operation and that delayed a lot of things. So that is the single biggest thing.

The second thing is that we have increased output quite a bit at that facility, and as output increases, we get leverage on the fixed costs and that will continue into 2008.

Mark Mullikin - Piper Jaffray

Okay.

Brian Moore

The other factor is that we have just brought on line a fairly massive investment in this facility. We opened a brand new forge, which has just started to be fully operational in the last two to three months and that alone is capable of shipping something like 15 to $20 million extra sales that we have capacity for.

Mark Mullikin - Piper Jaffray

Okay, so on top of the 60 million that, that facility could go to 80 million now?

Brian Moore

Yes that is entirely possible, it would not be this year. But we are doing all the things that you would expect us to, but one of the things that has happened, is that we have now got this extra plant and equipment. So, we have two absolute wins. We not only have the extra capacity that is being brought on, but we are making the capacity we have more effective and more efficient by all the measures that the new guys, John and Gordon are bringing in.

Mark Mullikin - Piper Jaffray

Okay, good. And I guess on the ‘08 number, how much do you expect from acquisitions in ‘08, specifically the DePuy acquisition?

Fred Hite

Yes, we have not disclosed that number Mark, and probably we are not going to do that on this call.

Mark Mullikin - Piper Jaffray

Okay.

Fred Hite

What has been stated about the DePuy facility is that the four year commitment for them is 106 million.

Mark Mullikin - Piper Jaffray

Okay.

Fred Hite

So that gives you some indication of what that would be for a year.

Mark Mullikin - Piper Jaffray

Okay, and...

Brian Moore

And we can say that the DePuy facility is proving to be very successful and is already ahead of our expectations.

Mark Mullikin - Piper Jaffray

Okay. And should we be modeling a 33% tax rate then in ‘08 based on….

Fred Hite

Yes. That is a good assumption.

Mark Mullikin - Piper Jaffray

Okay. And then finally, it looks like market growth this quarter, just given the numbers Zimmer put up this morning and Stryker and DePuy and Biomed that, that industry growth slowed considerably this quarter. Are you seeing any of that in your order flow?

Brian Moore

No, we are seeing the exact opposite at the moment. We are being told by our large customers, particularly on new product launches, but they see a continuing trend throughout the whole of this year and into next year. And we are, at all of our orthopedic facilities worldwide, extremely busy, and lead times are going out, demand is increasing. So we are expecting to, for that to accelerate and we see no visibility.

Also interestingly, one of the advantages of having SSI in the portfolio is that they have a closer link to surgical procedure and hospitals are now reporting back that procedures in the hospitals in the orthopedic sector seem to be unaffected by current recessionary type problems.

Mark Mullikin - Piper Jaffray

Okay. Thank you.

Brian Moore

You are welcome.

Operator

Your next question comes from the line of Steven Lichtman with Banc of America Securities. Please proceed.

Steven Lichtman - Banc of America Securities

Hi, thanks guys. Just some clarification on Sheffield, the negative 14 million on net income, how does that connect with your 11.4 million that you are able to write back to EBITDA, what is the connection there?

Fred Hite

Well, the 11.4 is EBITDA obviously contributing to net income. The other thing is we have the $1.8 million of valuation allowance which is just tax impact.

Steven Lichtman - Banc of America Securities

And the 11.4 million, can you elaborate a little bit on that Fred.

Fred Hite

Hope so.

Steven Lichtman - Banc of America Securities

Why are you able to add that back that you mentioned for the bank covenants?

Fred Hite

It is all of the unusual, unfavorable financial impact in 2007.

Steven Lichtman - Banc of America Securities

Okay, and that is related broadly to the restatements that we have seen?

Fred Hite

Well it is related to all of the pieces, the flood, the disruption and the restatement, everything is included in there, yes.

Steven Lichtman - Banc of America Securities

Okay. Is it fair to say that the 11.4 million is truly one-time or a non-recurring into ‘08?

Fred Hite

Yes, in our mind, it is one-time events and that is not going to repeat in ‘08.

Steven Lichtman - Banc of America Securities

Okay, and the overall majority of that 11.4 is related to the restatements, is that fair, or restated activities?

Fred Hite

That 11.4 includes all of those factors above.

Steven Lichtman - Banc of America Securities

Okay. So, so again, just to be clear because we are talking about 14 million versus zero prior years, the, 11.4 that the bank is allowing you to write back is truly one-time as well as though what you say one point over the 1 million of the tax issue?

Fred Hite

Yes, there is a $1.8 million charge of tax expense in the income statement for a valuation allowance.

Steven Lichtman - Banc of America Securities

Okay, okay. So, just trying to get a sense of the jumping off point here, it seems to me that its not negative 14, but something much less than that if you kind of add back that 11.4 and think of that as truly one-time, is that fair?

Fred Hite

Yes, absolutely.

Steven Lichtman - Banc of America Securities

Okay, all right that is very important. Can you also talk to the gross margin of SSI relative to the rest of the business, directionally broadly, what is that - what does that bring you on a gross margin line?

Fred Hite

Yes, as we have talked about on the calls in the past SSI, because they are a distributor they have approximately 25 - over 25 direct sales force that sells into the hospitals. Their business in about $21 million on an annualized basis and that those numbers compared to our prior business, without SSI we had above 25 sales people globally for over 275 million in revenue.

So, their SG&A as a percentage of sales is much higher than ours, obviously just doing the math. So, that is the bad news. The good news is that their gross margin is also higher than ours. So, they do have a higher gross margin rate. Net-net on an operating income level, they are consistent with our business, but it does have a little bit of a different mix between our - the other business.

Steven Lichtman - Banc of America Securities

Okay. And Brian, can you talk to broadly how your visibility has improved for the - in terms of order flow versus where you were a year ago?

Brian Moore

Yes, a year ago we had visibility at best within the current quarter and as I have said many times on course on that. As the market gets busier, the visibility improves and when it gets weaker it diminishes, which is exactly opposite to how we like it as managers, but that is the reality. And the reason for that is that, as the customers realize that all of the supply base is getting busy, they actually place longer term orders in order to ensure that the capacity is available to meet their needs.

So, some of our facilities are already talking about 25, 30 weeks lead time on some products and some of them where we are in a very close need to be responsive to customers, we are down to 4 to 6 six weeks. So, we are pretty confident we can see well into Q3 at the moment and we have reasonable good visibility throughout the rest of the year.

The only caveat I would put on that of course, is that when a large OEM, if they do come to a hard stop for whatever reason which we can not say at the moment, than that visibility closes off very quickly and these visibilities we see now may at that time be sort of moved to the right.

But we are seeing good visibility across the board and our lead times are going out except in some areas where we are using improved efficiencies and the fact that during the slower period we feel like did not respond to aggressive price competition. We kept facilities in place that has resulted, us having quite small lead times.

Now we are going to competition in certain parts of the business and we are using that to considerable advantage to take market share and most importantly give some of our important customers a better service than they are receiving elsewhere.

Steven Lichtman - Banc of America Securities

Okay and then just two more clarifications. On the 11.4 million Fred, you mentioned to EBITDA, but in the P&L, where would that fall mostly, cost of goods?

Fred Hite

Yes, absolutely.

Steven Lichtman - Banc of America Securities

Okay. And then so again, again to the clear that 18 versus the 27, the jumping off point is different then perhaps on face value. And then the last thing you mentioned 3.5 million, you can add back in’08, but I thought you mentioned that it was 3 million in terms of expenses this year.

Fred Hite

Yes, we estimate that our expenses in ‘08 will be 3 million and the point is they will allow up 2, 3.5 million.

Steven Lichtman - Banc of America Securities

Okay.

Fred Hite

There is some cushion there. And to your point Steve, I mean you are absolutely right. I mean when we look at our first quarter gross margin rate, obviously it has not been finalized yet because we have not closed all of our books, but I mean it is in the, in the 25% range.

Steven Lichtman - Banc of America Securities

Oh okay, that is good, good to hear. That is great. You are already there.

Fred Hite

So, while we are not at 27% yet, we absolutely have that in our sights.

Steven Lichtman - Banc of America Securities

And the order, the project sizes are getting larger as well, right Brian?

Brian Moore

Yes absolutely, deeper and larger. And some of the hidden benefits is that, the larger OEM’s are starting to respond to the message we have been assigned for some time on Total Solutions. Total Solutions is not just putting three or four products in the sign box. It is a cultural sales mission, mantra if you like, and it means that when you are talking to both large and small customers, we are talking about a total collaborative arrangement with them. And what that means is that we create the facilities and the mechanism for doing it and what the customers have to do to use it is understand that they have to think ahead and think large packages and get us involved at the early design stages and trust us to take over the quality and the regulatory arrangements. And we are seeing a lot more of that across the board from large and small companies, which is very encouraging.

And while -- some on that subject, there has been, particularly some of the large OEMs contact with the FDA recently, there has been a major pushdown into the supply base of a much more stringent quality and regulatory environment and we are of a size and we have a very highly competent and capable Q&A type of operation.

So the large customers are increasingly signed to us. We have to deal with the company of the size of Symmetry because we cannot take the risk of any issues with the FDA or CA issues or worldwide and that has given us recently and we expect it to get more inclusive in terms of positive factors into our business, a very distinct competitive advantage.

Steven Lichtman - Banc of America Securities

Okay great. Thanks guys.

Fred Hite

You are welcome.

Operator

Your next question comes from the line of Vincent Ricci with Wachovia. Please proceed.

Vincent Ricci - Wachovia

Hi guys, can you give us a little insight into what you think your true peak margins are since the IPO because if you go back and look at your restatements, there were around 25.7% in 2005 which had been a lot higher. So we are just curious where can they go and what are kind of the stress factors on that?

Fred Hite

Well clearly, the stress factors on that is volume, which we obviously saw back in 2000 -- some of the prior periods. Where we think it can go is exactly what I talked about earlier on the call on that 27% rate that is getting Sheffield performing where they should be. That does include SSI which does have a little bit of higher gross margin rate and with some increasing volume we are confident we can get it to there. And from there it depends on what our product mix is and what our volume is.

Volume is really the key for us as we get more volume going through the capacity we get better utilization and we can leverage our fixed costs.

Vincent Ricci - Wachovia

Okay and if volume is the most sensitive factor, have acquisitions had a positive or negative effect on your gross margin?

Fred Hite

So the acquisitions do not really bring incremental volumes through our facilities, a ton of it. They bring some of it through with synergies which is helpful from all the facilities, but the acquisitions themselves have consistent gross margins with our core business, excluding SSI which we talked about which is higher than our other businesses.

Vincent Ricci - Wachovia

Okay. And you guys talked about this pretty much at length but I am just curious, I mean the Sheffield facility is about 21% of your revenues based on that 60 million run rate you gave us, how does a business that is, down to flat become positive and have a positive impact on your P&L?

Fred Hite

We have a great facility at Sheffield. It is got a lot of new equipment and it is got a brand new forge as Brian was just talking about earlier. We need to get more volume out of that facility and when we do that we will get -- leveraging the fixed costs we will get profit that we need.

We have tremendous customer support right now with all the changes that John is putting in place and the teams are really responding over there and with that increased volume will come the profitability that we need out of that facility.

Vincent Ricci - Wachovia

Okay. And then my last question, based on the issues that you have had in Sheffield have there been efforts put into place to increase communications between your various facilities and can you give us a little -- shed a little light on that for us?

Fred Hite

So as Brian discussed on the call there has been a lot of actions that have then put in place. Communications from Brian and myself, the Compliance Officer across all the facilities relating to this, there is now quarterly sign-offs on employee controls and code of conduct. We have now reporting all of the finance team up directly into myself, we are having monthly and weekly conference calls as required to make sure they all understand the critical aspect of this and the avenue of communicating any concerns they would have up to me as opposed to through their General Mangers. And there has been a lot of other things that we have put in place that we feel have strengthened the business.

Vincent Ricci - Wachovia

Okay, great. Thanks for taking my questions.

Fred Hite

Thank you.

Brian Moore

Thank you.

Operator

(Operator Instructions). And your next is from the line of Sean McMahon with Kennedy Capital. Please proceed.

Sean McMahon - Kennedy Capital

Hi guys, how are you?

Brian Moore

Hi Shaun.

Sean McMahon - Kennedy Capital

Just quickly, I just positive I missed this but the 14 million or 11 million. Is that 14 million of net income, 11 million as one-time is that how you think about that?

Fred Hite

The 14 million is net income and the 11.4 is EBITDA.

Sean McMahon - Kennedy Capital

Is EBITDA, okay. And just looking back you guys are kind of talking about 25% gross margin possibly in Q1, I think the highest you were in Q1 ‘07 was 22 point, approximately 22 to 23% is that - am I right, am I thinking about that correctly, Fred?

Fred Hite

You are looking at it correctly for 2007 that is right. If you go back prior to that there are absolutely have been times when we generated gross margins higher than that. First quarter of 2006 was 27.3% and that was kind of before the slowdown in all of this volume and then it dipped down in the latter part of 2006 and the first half of 2007.

So, as I mentioned earlier, right now we have not finalized first quarter results, but we were in the range of 25% for first quarter 2008, a lot of that is driven by the incremental revenue.

Sean McMahon - Kennedy Capital

Okay. Thank you.

Fred Hite

Thank you.

Operator

As there are no further questions, I would like to turn the call back over to Mr. Brian Moore for closing remarks.

Brian Moore

Okay. Well, thank you very much. Can I just say thank you to our investors for supporting us and just make the point that the company or the move to culturing the company we have had this problem that we have dealt with. We believe we have dealt with it quickly, effectively. We like to think it is largely behind us and whilst we have effectively lost the services of our finance team in terms of the business management for the last few months.

The operations team led by Mike Curtis in the United States and John over here have carried on and have done an absolutely outstanding job in responding to the - keeping the show on the road if you like. And so you know, I am sitting in two worlds. On the one-hand we have got this issue which we think we have largely put behind us. On the other hand we are actually facing a very heavy demand in the market with a lot of excitement.

We have a very highly motivated management team and as I said right earlier on we expect 2008 to be a very good year for Symmetry Medical.

We obviously would normally take calls after this on a one-by-one basis. Any investors who want to do that, we are very happy to do that, but just a logistics point, Freddy is on the road in America, I am on the road in Europe. So, if you do have difficulty getting through bear with us. We will get to you and meet any private questions that we are able to answer, when we can.

Thank you again for your support.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a Great day.

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