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EXAC > SEC Filings for EXAC > Form 10-Q on 31-Jul-2013All Recent SEC Filings

Show all filings for EXACTECH INC

Form 10-Q for EXACTECH INC


31-Jul-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report.
Overview of the Company
We develop, manufacture, market and sell orthopaedic implant devices, related surgical instrumentation, supplies and biologic materials to hospitals and physicians in the United States and internationally. Our revenues are principally derived from sales of knee, hip, and extremity joint replacement systems and spinal fusion products. Our continuing research and development projects will enable us to continue the introduction of new, advanced biologic materials, joint replacement product line extensions and other products and services.
Our operating expenses consist of sales and marketing expenses, general and administrative expenses, research and development expenses, and depreciation expenses. The largest component of operating expenses, sales and marketing expenses, primarily consists of payments made to independent sales representatives for their services to hospitals and surgical facilities on our behalf. These expenses tend to be variable in nature and related to sales growth. Research and development expenses primarily consist of expenditures on projects concerning knee, extremities, spine and hip implant product lines and biologic materials and services.
In marketing our products, we use a combination of traditional targeted media marketing together with our primary marketing focus, direct customer contact and service to orthopaedic surgeons. Because surgeons are important decision makers when it comes to the choice of products and services that best meet the needs of their patients, our marketing strategy is focused on meeting the needs of the orthopaedic surgeon community. In addition to surgeon's preference, hospitals and buying groups, as the economic customers, are actively participating with physicians in the choice of implants and services. Overview of the Three and Six Months Ended June 30, 2013 During the quarter ended June 30, 2013, sales increased 10% to $60.6 million from $55.2 million in the quarter ended June 30, 2012, as a result of 13% growth in our domestic sales, as well as 4% growth in our international sales. Gross margins remained flat at 69%. Operating expenses increased 8% from the quarter ended June 30, 2012, and, as a percentage of sales, operating expenses decreased to 58% during the second quarter of 2013 as compared to 59% for the same quarter in 2012. This decrease, as a percentage of sales, was primarily due to our continued efforts to manage operating costs. Net income for the quarter ended June 30, 2013 increased 23%, and diluted earnings per share were $0.27 as compared to $0.23 last year, which was primarily a result of sales growth and our cost reduction efforts.
During the six months ended June 30, 2013, sales increased 5% to $119.9 million from $113.8 million in the six months ended June 30, 2012, as a result of our domestic sales growth, partially offset by 2% reduction in our six month international sales. Gross margins remained flat at 69%. Operating expenses increased 3% from the six months ended June 30, 2012, and, as a percentage of sales, operating expenses decreased to 58% during the first half of 2013 as compared to 60% for the same period in 2012. This decrease, as a percentage of sales, was primarily due to our continued efforts to manage operating costs. Net income for the six months ended June 30, 2013 increased 20%, and diluted earnings per share were $0.56 as compared to $0.48 for the first six months of 2012, which was primarily a result of sales growth and our cost reduction efforts.
During the six months ended June 30, 2013, we acquired $9.4 million in property and equipment, including new production equipment and surgical instrumentation. Net cash flow from operations was $3.9 million for the six months ended June 30, 2013, as compared to a net cash flow from operations of $14.9 million during the six months ended June 30, 2012, primarily due to the increase in inventory and accounts receivable.


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The following table includes the net sales and percentage of net sales, as well as a comparison of net sales change to net sales change calculated on a constant currency basis, for each of our product lines for the three and six month periods ended June 30, 2013 and June 30, 2012:

                                             Sales by Product Line
                                                 ($ in 000's)

                                      Three Months Ended                                Inc (decr)
                            June 30, 2013             June 30, 2012          2013- 2012      Constant Currency
Knee                   $  21,045        34.7 %   $  21,002        38.1 %         0.2  %              1.7  %
Hip                       10,582        17.5        10,266        18.6           3.1                 5.3
Biologics and Spine        6,793        11.2         5,927        10.7          14.6                14.6
Extremity                 16,282        26.9        11,996        21.7          35.7                35.9
Other                      5,857         9.7         5,994        10.9          (2.3 )              (1.3 )
Total                  $  60,559       100.0 %   $  55,185       100.0 %         9.7  %             10.9  %

                                       Six Months Ended                                 Inc (decr)
                            June 30, 2013             June 30, 2012          2013- 2012      Constant Currency
Knee                   $  41,547        34.7 %   $  42,458        37.3 %        (2.1 )%             (0.9 )%
Hip                       21,022        17.5        21,220        18.7          (0.9 )               0.9
Biologics and Spine       12,850        10.7        12,088        10.6           6.3                 6.2
Extremity                 31,965        26.7        24,973        21.9          28.0                28.0
Other                     12,476        10.4        13,074        11.5          (4.6 )              (4.0 )
Total                  $ 119,860       100.0 %   $ 113,813       100.0 %         5.3  %              6.2  %

The following table includes items from the unaudited condensed consolidated statements of income for the three and six months ended June 30, 2013 as compared to the three and six months ended June 30, 2012, the dollar and percentage change from period to period and the percentage relationship to net sales (dollars in thousands):

                                          Comparative Statement of Income Data

                                  Three Months Ended June 30,        2013 - 2012 Inc (decr)            % of Sales
                                    2013               2012              $             %           2013          2012
Net sales                     $      60,559       $      55,185          5,374          9.7        100.0  %      100.0  %
Cost of goods sold                   19,075              17,200          1,875         10.9         31.5          31.2
Gross profit                         41,484              37,985          3,499          9.2         68.5          68.8
Operating expenses:
Sales and marketing                  21,483              19,968          1,515          7.6         35.5          36.2
General and administrative            5,321               4,735            586         12.4          8.8           8.6
Research and development              4,605               4,160            445         10.7          7.6           7.5
Depreciation and amortization         3,854               3,813             41          1.1          6.4           6.9
Total operating expenses             35,263              32,676          2,587          7.9         58.3          59.2
Income from operations                6,221               5,309            912         17.2         10.2           9.6
Other income (expense), net            (385 )              (445 )           60        (13.5 )       (0.6 )        (0.8 )
Income before taxes                   5,836               4,864            972         20.0          9.6           8.8
Provision for income taxes            2,108               1,841            267         14.5          3.4           3.3
Net income                    $       3,728       $       3,023            705         23.3          6.2           5.5


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                                 Six Months Ended June 30,        2013 - 2012 Inc (decr)           % of Sales
                                    2013             2012             $              %          2013         2012
Net sales                     $     119,860       $ 113,813          6,047             5.3     100.0  %     100.0  %
Cost of goods sold                   37,665          35,296          2,369             6.7      31.4         31.0
Gross profit                         82,195          78,517          3,678             4.7      68.6         69.0
Operating expenses:
Sales and marketing                  43,007          41,788          1,219             2.9      35.9         36.7
General and administrative           10,417          10,383             34             0.3       8.7          9.1
Research and development              8,455           8,264            191             2.3       7.1          7.3
Depreciation and amortization         8,029           7,605            424             5.6       6.7          6.7
Total operating expenses             69,908          68,040          1,868             2.7      58.4         59.8
Income from operations               12,287          10,477          1,810            17.3      10.2          9.2
Other income (expense), net          (1,100 )          (657 )         (443 )          67.4      (0.9 )       (0.6 )
Income before taxes                  11,187           9,820          1,367            13.9       9.3          8.6
Provision for income taxes            3,602           3,512             90             2.6       3.0          3.1
Net income                    $       7,585       $   6,308          1,277            20.2       6.3          5.5

Three and Six Months Ended June 30, 2013 Compared to Three and Six Months Ended June 30, 2012
Sales
For the quarter ended June 30, 2013, sales increased 10% to $60.6 million from $55.2 million in the quarter ended June 30, 2012, principally as a result of strong domestic sales growth and an increase in international sales, which was partially due to the rebounding of the Latin American markets. Sales of knee implant products remained flat at $21.0 million for each of the quarters ended June 30, 2013 and 2012, as we experienced sluggish knee sales in Europe. Sales of our extremity products were up 36% to $16.3 million as compared to $12.0 million for the same period in 2012, as we continued to gain market share with our Equinoxe® reverse shoulder system. Hip implant sales of $10.6 million during the quarter ended June 30, 2013 increased 3% from the $10.3 million in sales during the quarter ended June 30, 2012, as a result of improvements in international markets. Sales from biologics and spine increased 15% during the quarter ended June 30, 2013 to $6.8 million, from $5.9 million in the comparable quarter in 2012, primarily as a result of acceptance of new spinal products. Sales of all other products decreased to $5.9 million as compared to $6.0 million in the same quarter last year, primarily as a result of reduction of third party distributed product revenues in France. Domestically, sales increased 13% to $39.9 million, or 66% of total sales, during the quarter ended June 30, 2013, up from $35.2 million, which represented 64% of total sales, in the comparable quarter last year. Internationally, sales increased 4% to $20.7 million, representing 34% of total sales, for the quarter ended June 30, 2013, as compared to $19.9 million, which was 36% of total sales, for the same quarter in 2012. On a constant currency basis, international sales increased approximately 7% during the quarter ended June 30, 2013, compared to the same quarter in 2012.
For the six months ended June 30, 2013, sales increased 5% to $119.9 million from $113.8 million in the six months ended June 30, 2012, as a result of domestic sales growth that was partially offset by foreign currency deterioration and pricing pressures internationally. Sales of knee implant products decreased 2% to $41.5 million for the six months ended June 30, 2013 compared to $42.5 million for the six months ended June 30, 2012, as we experienced a slowdown of international sales from Latin America in the first quarter, as well as government mandated price reductions in Japan beginning in the second quarter of 2012. Sales of our extremity products were up 28% to $32.0 million as compared to $25.0 million for the same period in 2012, due to the success of our Equinoxe® reverse shoulder system. Hip implant sales of $21.0 million during the six months ended June 30, 2013 decreased 1% from the $21.2 million in sales during the six months ended June 30, 2012, as a result of the price reductions in Japan and lower sales in other international markets during the first quarter. Sales from biologics and spine increased 6% during the six months ended June 30, 2013 to $12.9 million, from $12.1 million in the comparable period in 2012, primarily as a result of our spine product expansion, offset partially by pricing pressure in our biologics revenues. Sales of all other products decreased to $12.5 million as compared to $13.1 million in the same six month period last year. Domestically, sales increased 9% to $78.8 million, or 66% of total sales, during the six months ended June 30, 2013, up from $72.0 million, which represented 63% of total sales, in the comparable six months last year. Internationally, sales decreased 2% to $41.0 million, representing 34% of total sales, for the six months ended June 30, 2013, as compared to $41.8 million, which was


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37% of total sales, for the same six months in 2012. On a constant currency basis, international sales increased approximately 1% during the six months ended June 30, 2013, compared to the same period in 2012. Gross Profit
Gross profit increased to $41.5 million in the quarter ended June 30, 2013 from $38.0 million in the quarter ended June 30, 2012. As a percentage of sales, gross profit remained flat at 69% during each of the quarters ended June 30, 2013 and 2012. Gross profit increased to $82.2 million in the six months ended June 30, 2013 from $78.5 million in the six months ended June 30, 2012. As a percentage of sales, gross profit remained flat at 69% during each of the six month periods ended June 30, 2013 and 2012, as a result of higher domestic sales growth, which generally carries higher margins, offset by the impact of the implementation of the medical device excise tax enacted as part of the health care legislation signed into law in 2010. Looking forward to the remainder of the fiscal year, we expect gross profit, as a percentage of sales, to be lower by 1.0 to 1.5% compared to prior year quarters on a comparative quarter basis due to the impact of the medical device excise tax, and pricing pressure. Operating Expenses
Total operating expenses increased 8% to $35.3 million in the quarter ended June 30, 2013 from $32.7 million in the quarter ended June 30, 2012, primarily due to increased variable costs in association with our increase in sales. As a percentage of sales, total operating expenses decreased to 58% for the quarter ended June 30, 2013, as compared to 59% for the quarter ended June 30, 2012. Total operating expenses increased 3% to $69.9 million in the six months ended June 30, 2013 from $68.0 million in the six months ended June 30, 2012, primarily due to increased variable selling costs, partially offset by a reduction in compliance expenses. As a percentage of sales, total operating expenses decreased to 58% for the six months ended June 30, 2013, as compared to 60% for the six months ended June 30, 2012.
Sales and marketing expenses, the largest component of total operating expenses, increased 8% for the quarter ended June 30, 2013 to $21.5 million from $20.0 million in the same quarter last year. The increase was primarily related to additional variable selling costs as a result of our sales growth. Sales and marketing expenses, as a percentage of sales decreased to 35% for the quarter ended June 30, 2013 from 36% for the quarter ended June 30, 2012. Sales and marketing expenses increased 3% for the six months ended June 30, 2013 to $43.0 million from $41.8 million in the same period last year. The increase was primarily related to variable selling costs as a result of our sales growth, partially offset by our focus on cost management. Sales and marketing expenses, as a percentage of sales decreased to 36% for the six months ended June 30, 2013, from 37% for the six months ended June 30, 2012. Looking forward, sales and marketing expenditures, as a percentage of sales, are expected to be in the range of 35% to 36% for the remainder of 2013.
General and administrative expenses increased to $5.3 million in the quarter ended June 30, 2013 from $4.7 million in the same quarter in 2012. As a percentage of sales, general and administrative expenses remained flat at 9% for each of the quarters ended June 30, 2013 and 2012. General and administrative expenses remained unchanged at $10.4 million in each of the six months ended June 30, 2013 and 2012, due to cost containment efforts. As a percentage of sales, general and administrative expenses remained at 9% for each of the six months ended June 30, 2013, and 2012. General and administrative expenses for the balance of the year ending December 31, 2013 are expected to be in the range of 8% to 9% of sales.
Research and development expenses increased 11% for the quarter ended June 30, 2013 to $4.6 million from $4.2 million in the same quarter last year, as we incurred increased testing and prototyping costs. As a percentage of sales, research and development expenses remained flat at 8% for each of the quarters ended June 30, 2013 and 2012. Research and development expenses increased 2% for the six months ended June 30, 2013 to $8.5 million from $8.3 million in the same period last year. As a percentage of sales, research and development expenses remained at 7% for each of the six months ended June 30, 2013 and 2012. We anticipate growth in research and development expenditures, as a percent of sales, to outpace sales growth for the balance of 2013, with total research and development expenses ranging from 7.5% to 8.5% of sales.
Depreciation and amortization increased 1% to $3.9 million for the quarter ended June 30, 2013 from $3.8 million during the same quarter in 2012. As a percentage of sales, depreciation and amortization decreased to 6% during the quarter ended June 30, 2013 from 7% during the quarter ended June 30, 2012. Depreciation and amortization increased 6% to $8.0 million for the six months ended June 30, 2013 from $7.6 million during the same period in 2012. As a percentage of sales, depreciation and amortization remained at 7% during each of the six months ended June 30, 2013 and 2012. We placed $8.1 million of surgical instrumentation in service and spent approximately $0.2 million for product licenses and designs during the first six months of 2013.


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Income from Operations
Our income from operations increased 17% to $6.2 million, or 10% of sales in the quarter ended June 30, 2013 from $5.3 million, or 10% of sales in the quarter ended June 30, 2012. Our income from operations increased 17% to $12.3 million, or 10% of sales in the six months ended June 30, 2013 from $10.5 million, or 9% of sales in the six months ended June 30, 2012. The increase in our income from operations for both the quarter and the six months year to date was a result of our sales growth, continued efforts to reduce our overall expenses and leverage our existing cost structures. Looking forward, we expect operating expenses for the year to increase more slowly than sales growth, therefore anticipating income from operations to be in the range of 9% to 10% of sales for the remainder of 2013.
Other Income and Expenses
We had other expenses, net of other income, of $0.4 million during the quarter ended June 30, 2013, virtually the same, $0.4 million as in the quarter ended June 30, 2012. Included in other expenses are foreign currency transaction losses of $121,000, compared to foreign currency losses of $88,000 for the same quarter of 2012. Currency losses were partially offset by a decrease in net interest expense to $0.3 million for the quarter ended June 30, 2013 compared to $0.4 million for the quarter ended June 30, 2012. We had other expenses, net of other income, of $1.1 million during the six months ended June 30, 2013, as compared to other expenses, net of other income, of $0.7 million in the six months ended June 30, 2012, due to foreign currency transaction losses of $0.6 million, compared to foreign currency gains of $0.1 million for the same six months of 2012. Currency losses were partially offset by a decrease in net interest expense to $0.6 million for the six months ended June 30, 2013 compared to $0.8 million for the six months ended June 30, 2012. Taxes and Net Income
Income before provision for income taxes increased 20% to $5.8 million in the quarter ended June 30, 2013 from $4.9 million in the quarter ended June 30, 2012. The effective tax rate, as a percentage of income before taxes, was 36% for the quarter ended June 30, 2013 as compared to 38% for the quarter ended June 30, 2012. The decrease in the effective tax rate for the second quarter of 2013 was primarily due to the renewal of the credit for research and development activities in 2013 that had expired in the comparable period in 2012. Partially as a result of the foregoing, we realized net income of $3.7 million in the quarter ended June 30, 2013, an increase of 23% from $3.0 million in the quarter ended June 30, 2012. As a percentage of sales, net income increased to 6.2% for the quarter ended June 30, 2013 from 5.5% for the quarter ended June 30, 2012. Earnings per share, on a diluted basis, increased to $0.27 for quarter ended June 30, 2013, from $0.23 for the quarter ended June 30, 2012.
Income before provision for income taxes increased 14% to $11.2 million in the six months ended June 30, 2013 from $9.8 million in the six months ended June 30, 2012. The effective tax rate, as a percentage of income before taxes, was 32% for the six months ended June 30, 2013 as compared to 36% for the six months ended June 30, 2012. The decrease in the effective tax rate for the first six months of 2013 was primarily due to the retroactive renewal of the 2012 research and development tax credit that was enacted on January 2, 2013, and as such, the entire credit of $0.6 million was recognized in the first quarter of 2013. As a result of the foregoing, we realized net income of $7.6 million in the six months ended June 30, 2013, an increase of 20% from $6.3 million in the six months ended June 30, 2012. As a percentage of sales, net income increased to 6.3% for the six months ended June 30, 2013 from 5.5% for the six months ended June 30, 2012. Earnings per share, on a diluted basis, increased to $0.56 for the six months ended June 30, 2013, from $0.48 for the six months ended June 30, 2012. We expect our effective tax rates to range from 33% to 35% for the remainder of 2013.
Liquidity and Capital Resources
We have financed our operations primarily through a combination of commercial debt financing and cash flows from our operating activities. At June 30, 2013, we had working capital of $107.2 million, an increase of 9% from $98.7 million at the end of 2012. Working capital in 2013 increased primarily as a result of an increase in our accounts receivable and current inventory balance, and was partially offset by increases in our accounts payable. Inventory and surgical instrumentation increases were impacted by the $0.8 million paid for the medical device excise tax in the first six months of 2013.
We expect that cash flows from operating activities, borrowings under our line of credit, and the issuance of equity securities, in connection with both stock purchases under the 2009 ESPP and stock option exercises will be sufficient to meet our commitments and cash requirements in the next twelve months. If not, we will seek additional funding through any number of possible combinations of additional debt, additional issuance of equity or convertible debt.


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Operating Activities - Operating activities provided net cash of $3.9 million in the six months ended June 30, 2013, as compared to net cash from operations of $14.9 million during the six months ended June 30, 2012. A primary contributor to this decrease related to the increase in accounts receivable experienced in the first six months of 2013, which used cash of $7.6 million for the six months ended June 30, 2013, in contrast to a reduction in accounts receivable providing net cash $1.1 million for the six months ended June 30, 2012. A major contributor to the increase in total accounts receivable is due to our distribution operation in Spain, which continues to experience increases in total accounts receivable due to government payment levels. Our allowance for doubtful accounts and sales returns increased to $1.1 million at June 30, 2013 from $1.0 million at December 31, 2012, principally as a result of the slow aging increase of the accounts receivable at our distribution operation in Spain. The total days sales outstanding (DSO) ratio, based on average accounts receivable balances, was 77 for the six months ended June 30, 2013, up from a ratio of 72 for the six months ended June 30, 2012. As we continue to expand our operations internationally, our DSO ratio could increase, due to the fact that credit terms outside the U.S. tend to be relatively longer than those in the U.S. Inventory increased by $7.3 million during the first six months ended June 30, 2013, compared to an increase of $7.6 million during the same period ended June 30, 2012, as a result of our continued product line and continued growth within existing markets.
Investing Activities - Investing activities used net cash of $9.7 million in the six months ended June 30, 2013, as compared to $10.8 million in the six months ended June 30, 2012. Our cash outlays for surgical instrumentation and manufacturing equipment were $9.4 million, and $0.3 million for the aggregated purchases of product licenses, trademarks and patents during the six month period ended June 30, 2013, as compared to cash outlays of $10.1 million for purchases of surgical instrumentation and manufacturing equipment, and $0.7 million for purchases of trademarks and patents during the same period of 2012. License technology
Our Taiwanese subsidiary, Exactech Taiwan, has entered into a license agreement with the Industrial Technology Research Institute (ITRI) and the National Taiwan University Hospital (NTUH) for the rights to technology and patents related to the repair of cartilage lesions. As of June 30, 2013, we had paid approximately $2.1 million for the licenses, patents, equipment related to this license agreement, and prepaid expenses, and we will make royalty payments when the technology becomes marketable. Using the technology, we plan to launch a cartilage repair program that will include a device and method for the treatment and repair of cartilage in the knee joint. It is expected that the project will require us to complete human clinical trials under the guidance of the Food & Drug Administration in order to obtain pre-market approval for the device in the United States. The agreement terms include a license fee based on the . . .

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