Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
EXAC > SEC Filings for EXAC > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for EXACTECH INC

Form 10-Q for EXACTECH INC


6-Aug-2014

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 vary and generally relate to our 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, we focus our marketing strategy on meeting the needs of the orthopaedic surgeon community. In addition to surgeon's preference, hospitals and buying groups, as the economic customers, actively participate with physicians in the choice of implants and services. Overview of the Three and Six Months Ended June 30, 2014 During the quarter ended June 30, 2014, sales increased 6% to $63.9 million from $60.6 million in the quarter ended June 30, 2013, as a result of 6% growth in our domestic sales, and 5% growth in our international sales. Gross margins increased to 69.4% in the second quarter of 2014 from 68.5% for the same quarter in 2013, primarily due to growth in the higher margin U.S. Extremity segment. Operating expenses increased 6% when compared to the quarter ended June 30, 2013, and, as a percentage of sales, operating expenses increased to 59% during the second quarter of 2014 as compared to 58% for the same quarter in 2013. This increase, as a percentage of sales, was primarily due to our increased global compliance costs. Net income for the quarter ended June 30, 2014 increased 12%, and diluted earnings per share was $0.30 as compared to $0.27 in the same quarter last year, which was a result of sales growth and improvements in gross margins.
During the six months ended June 30, 2014, sales increased 6% to $127.2 million from $119.9 million in the quarter ended June 30, 2013, as a result of 6% growth in both our domestic and international sales. Gross margins increased to 70% in the first six months of 2014 from 69% for the same period in 2013, primarily due to continued growth in the higher margin U.S. Extremity segment. Operating expenses increased 8% when compared to the six months ended June 30, 2013, and, as a percentage of sales, operating expenses increased to 59% during the first six months of 2014 as compared to 58% for the same period in 2013. Net income for the six months ended June 30, 2014 increased 10%, and diluted earnings per share was $0.60 as compared to $0.56 in the same period last year.
During the six months ended June 30, 2014, we acquired $8.1 million in property and equipment, including new production equipment and surgical instrumentation. Net cash flow from operations was $22.5 million for the six months ended June 30, 2014, as compared to net cash flow from operations of $3.9 million during the six months ended June 30, 2013. The increase was primarily due to the reduction in accounts receivable and lower inventory increases.


Table of Contents

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, which are also our reportable segments, for the three and six month periods ended June 30, 2014 and June 30, 2013:

                                             Sales by Product Line
                                                 ($ in 000's)

                                      Three Months Ended                                Inc (decr)
                            June 30, 2014             June 30, 2013         2014 - 2013      Constant Currency
Knee                   $  21,047        32.9 %   $  21,045        34.7 %           -  %             (0.6 )%
Extremity                 19,006        29.8        16,282        26.9          16.7                16.0
Hip                       11,196        17.5        10,582        17.5           5.8                 5.2
Biologics and Spine        6,470        10.1         6,793        11.2          (4.8 )              (6.1 )
Other                      6,200         9.7         5,857         9.7           5.9                 4.7
Total                  $  63,919       100.0 %   $  60,559       100.0 %         5.5  %              4.8  %

                                       Six Months Ended                                 Inc (decr)
                            June 30, 2014             June 30, 2013          2014- 2013      Constant Currency
Knee                   $  41,614        32.7 %   $  41,547        34.7 %         0.2  %              0.1  %
Extremity                 38,677        30.4        31,965        26.7          21.0                20.4
Hip                       22,000        17.3        21,022        17.5           4.7                 5.0
Biologics and Spine       12,292         9.7        12,850        10.7          (4.3 )              (5.4 )
Other                     12,594         9.9        12,476        10.4           0.9                 0.3
Total                  $ 127,177       100.0 %   $ 119,860       100.0 %         6.1  %              5.8  %


Table of Contents

The following table includes items from the unaudited condensed consolidated statements of income for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013, 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,        2014 - 2013 Inc (decr)            % of Sales
                             2014               2013              $             %           2014          2013
Net sales              $      63,919       $      60,559          3,360          5.5        100.0  %      100.0  %
Cost of goods sold            19,565              19,075            490          2.6         30.6          31.5
Gross profit                  44,354              41,484          2,870          6.9         69.4          68.5
Operating expenses:
Sales and marketing           22,885              21,483          1,402          6.5         35.8          35.5
General and
administrative                 5,667               5,321            346          6.5          8.9           8.8
Research and
development                    4,864               4,605            259          5.6          7.6           7.6
Depreciation and
amortization                   4,124               3,854            270          7.0          6.5           6.4
Total operating
expenses                      37,540              35,263          2,277          6.5         58.8          58.3
Income from operations         6,814               6,221            593          9.5         10.6          10.2
Other income
(expense), net                  (342 )              (385 )           43         11.2         (0.5 )        (0.6 )
Income before taxes            6,472               5,836            636         10.9         10.1           9.6
Provision for income
taxes                          2,312               2,108            204          9.7          3.6           3.4
Net income             $       4,160       $       3,728            432         11.6          6.5           6.2

                            Six Months Ended June 30,         2014 - 2013 Inc (decr)            % of Sales
                             2014               2013              $             %           2014          2013
Net sales              $     127,177       $     119,860          7,317          6.1        100.0  %      100.0  %
Cost of goods sold            38,199              37,665            534          1.4         30.0          31.4
Gross profit                  88,978              82,195          6,783          8.3         70.0          68.6
Operating expenses:
Sales and marketing           46,598              43,007          3,591          8.3         36.6          35.9
General and
administrative                11,452              10,417          1,035          9.9          9.0           8.7
Research and
development                    9,057               8,455            602          7.1          7.1           7.1
Depreciation and
amortization                   8,446               8,029            417          5.2          6.7           6.7
Total operating
expenses                      75,553              69,908          5,645          8.1         59.4          58.4
Income from operations        13,425              12,287          1,138          9.3         10.6          10.2
Other income
(expense), net                  (349 )            (1,100 )          751        (68.3 )       (0.3 )        (0.9 )
Income before taxes           13,076              11,187          1,889         16.9         10.3           9.3
Provision for income

taxes 4,718 3,602 1,116 31.0 3.7 3.0 Net income $ 8,358 $ 7,585 773 10.2 6.6 6.3

Three and Six Months Ended June 30, 2014 Compared to Three and Six Months Ended June 30, 2013
Sales
For the quarter ended June 30, 2014, sales increased 6% to $63.9 million from $60.6 million in the quarter ended June 30, 2013, principally as a result of a 6% domestic sales growth and 5% increase in international sales, partially due to an improved European market. Sales of knee implant products remained flat at $21.0 million for each of the quarters ended June 30, 2014 and 2013. Sales of our extremity products were up 17% to $19.0 million as compared to $16.3 million for the same period in 2013, as we continued to gain global market share with our Equinoxe® reverse shoulder system. Hip implant sales of $11.2 million during the quarter ended June 30, 2014 increased 6% from the $10.6 million during the quarter ended June 30, 2013, as a result of improvements both domestically and internationally.


Table of Contents

Sales from biologics and spine decreased 5% during the quarter ended June 30, 2014 to $6.5 million from $6.8 million in the comparable quarter in 2013, primarily as a result of competitive pricing pressures in the domestic biologics market. Sales of all other products increased to $6.2 million as compared to $5.9 million in the same quarter last year. Domestically, sales increased 6% to $42.2 million, or 66% of total sales, during the quarter ended June 30, 2014, up from $39.9 million, which also represented 66% of total sales, in the comparable quarter last year. Internationally, sales increased 5% to $21.7 million, representing 34% of total sales, for the quarter ended June 30, 2014, as compared to $20.7 million, which was also 34% of total sales, for the same quarter in 2013. On a constant currency basis, international sales increased approximately 3% during the quarter ended June 30, 2014, compared to the same quarter in 2013.
For the six months ended June 30, 2014, sales increased 6% to $127.2 million from $119.9 million during the six months ended June 30, 2013, as a result of sales growth of 6% both domestically and internationally. Sales of knee implant products remained relatively flat at $41.6 million for the six months ended June 30, 2014 as compared to $41.5 million for the same six months in 2013. Sales of our extremity products were up 21% to $38.7 million as compared to $32.0 million for the same period in 2013, primarily due to the continued growth with our Equinoxe® reverse shoulder system. Hip implant sales of $22.0 million during the six months ended June 30, 2014 increased 5% from the $21.0 million in sales during the six months ended June 30, 2013. Sales from biologics and spine decreased 4% during the six months ended June 30, 2014 to $12.3 million, from $12.9 million in the comparable period in 2013, primarily as a result of continued competitive pricing pressures in the domestic biologics market. Sales of all other products increased to $12.6 million as compared to $12.5 million in the same six months last year. Domestically, sales increased 6% to $83.8 million, or 66% of total sales, during the six months ended June 30, 2014, up from $78.8 million, which also represented 66% of total sales, in the comparable period last year. Internationally, sales increased 6% to $43.4 million, representing 34% of total sales, for the six months ended June 30, 2014, as compared to $41.0 million, which was also 34% of total sales, for the same six months in 2013. On a constant currency basis, international sales increased approximately 5% during the six months ended June 30, 2014, compared to the same period in 2013.
Gross Profit
Gross profit increased to $44.4 million in the quarter ended June 30, 2014 from $41.5 million in the quarter ended June 30, 2013. As a percentage of sales, gross profit increased to 69.4% during the quarter ended June 30, 2014 from 68.5% for the quarter ended June 30, 2013, primarily as a result of growth in the higher margin U.S. Extremities segment.
Gross profit increased to $89.0 million in the six months ended June 30, 2014 from $82.2 million in the six months ended June 30, 2013. As a percentage of sales, gross profit increased to 70.0% during the six months ended June 30, 2014 from 68.6% for the six months ended June 30, 2013, primarily as a result of growth in the higher margin U.S. Extremities segment. Looking forward to the remainder of the year, we expect gross profit, as a percentage of sales, to be flat to down 0.50% as compared to prior year quarters due to anticipated higher international sales mix.
Operating Expenses
Total operating expenses increased 6% to $37.5 million in the quarter ended June 30, 2014 from $35.3 million in the quarter ended June 30, 2013. As a percentage of sales, total operating expenses increased to 59% for the quarter ended June 30, 2014, as compared to 58% for the quarter ended June 30, 2013. Total operating expenses increased 8% to $75.6 million in the six months ended June 30, 2014 from $69.9 million in the six months ended June 30, 2013, primarily due to increased compliance expenses and research and development spending. As a percentage of sales, total operating expenses increased to 59% for the six months ended June 30, 2014, as compared to 58% for the six months ended June 30, 2013.
Sales and marketing expenses, the largest component of total operating expenses, increased 7% for the quarter ended June 30, 2014 to $22.9 million from $21.5 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, were 36% for the quarter ended June 30, 2014 and 35% for the quarter ended June 30, 2013. Sales and marketing expenses increased 8% for the six months ended June 30, 2014 to $46.6 million from $43.0 million in the same period last year, which was primarily related to the global compliance expenditures, as well as additional variable selling costs as a result of our sales growth. Sales and marketing expenses, as a percentage of sales, were 37% for the six months ended June 30, 2014 and 36% for the six months ended June 30, 2013. Looking forward, sales and marketing expenditures, as a percentage of sales, are expected to be in the range of 36% to 37% for the remainder of 2014.
General and administrative expenses increased to $5.7 million in the quarter ended June 30, 2014 from $5.3 million in the same quarter in 2013. As a percentage of sales, general and administrative expenses remained at 9% for each


Table of Contents

of the quarters ended June 30, 2014 and 2013. General and administrative expenses increased to $11.5 million in the six months ended June 30, 2014 from $10.4 million during the same six months in 2013, primarily due to additional regulatory and compliance expenditures. As a percentage of sales, general and administrative expenses remained at 9% for each of the six month periods ended June 30, 2014 and 2013. General and administrative expenses for the remainder of 2014 are expected to be in the range of 8.5% to 9.5% of sales.
Research and development expenses increased 6% for the quarter ended June 30, 2014 to $4.9 million from $4.6 million in the same quarter last year, as we incurred increased testing and product development expenses. As a percentage of sales, research and development expenses remained at 8% for each of the quarters ended June 30, 2014 and 2013. Research and development expenses increased 7% for the six months ended June 30, 2014 to $9.1 million from $8.5 million in the same six months last year. As a percentage of sales, research and development expenses remained at 7% for each of the six month periods ended June 30, 2014 and 2013. As a number of product development projects reach prototype and testing phases, we anticipate growth in research and development expenditures, as a percentage of sales, to outpace sales growth for the remainder of 2014, with total research and development expenses ranging from 7% to 8% of sales. Depreciation and amortization increased 7% to $4.1 million for the quarter ended June 30, 2014 from $3.9 million during the same quarter in 2013. As a percentage of sales, depreciation and amortization remained flat at 6% during each of the quarters ended June 30, 2014 and 2013. Depreciation and amortization increased 5% to $8.4 million for the six months ended June 30, 2014 from $8.0 million during the same period in 2013. As a percentage of sales, depreciation and amortization remained flat at 7% during each of the six month periods ended June 30, 2014 and 2013. We placed $7.1 million of surgical instrumentation and $0.6 million of equipment in service during the first six months of 2014. Income from Operations
Our income from operations increased 10% to $6.8 million, or 11% of sales in the quarter ended June 30, 2014 from $6.2 million, or 10% of sales in the quarter ended June 30, 2013. The increase in our income from operations for the quarter was a result of our sales growth, coupled with expanding gross margins. Our income from operations increased 9% to $13.4 million, or 11% of sales during the six months ended June 30, 2014 from $12.3 million, or 10% of sales in the six months ended June 30, 2013. Looking forward, we expect operating expenses for the remainder of the year to increase more slowly than sales growth, therefore we anticipate income from operations, as a percentage of sales, to increase by 0.25% to 0.50% for the remainder of 2014. Other Income and Expenses
We had other expenses, net of other income, of $0.3 million during the quarter ended June 30, 2014, compared to other expenses, net of other income of $0.4 million in the quarter ended June 30, 2013. Included in other expenses were foreign currency transaction losses of $0.1 million, which were also $0.1 million for the same quarter of 2013. Net interest expense was $0.3 million for each of the quarters ended June 30, 2014 and 2013. We had other expenses, net of other income, of $0.3 million during the six months ended June 30, 2014, compared to other expenses, net of other income of $1.1 million in the six months ended June 30, 2013. Included in other expenses were foreign currency transaction gains of $0.2 million, compared to foreign currency transaction losses of $0.6 million for the same six month period of 2013. The impact of currency transaction gains and losses was partially offset by net interest expense of $0.6 million for each of the six month period ended June 30, 2014 and 2013.
Taxes and Net Income
Income before provision for income taxes increased 11% to $6.5 million in the quarter ended June 30, 2014 from $5.8 million in the quarter ended June 30, 2013. The effective tax rate, as a percentage of income before taxes, was 36% for each of the quarters ended June 30, 2014 and 2013. As a result of the foregoing, we realized net income of $4.2 million in the quarter ended June 30, 2014, an increase of 12% from $3.7 million in the quarter ended June 30, 2013. As a percentage of sales, net income increased to 6.5% for the quarter ended June 30, 2014 from 6.2% for the same quarter in 2013. Earnings per share, on a diluted basis, increased to $0.30 for the quarter ended June 30, 2014, from $0.27 for the quarter ended June 30, 2013.
Income before provision for income taxes increased 17% to $13.1 million in the six months ended June 30, 2014 from $11.2 million in the six months ended June 30, 2013. The effective tax rate, as a percentage of income before taxes, was 36% for the six months ended June 30, 2014 as compared to 32% for the six months ended June 30, 2013. The increase in the effective tax rate for the first half of 2014 was due primarily to the expiration in 2014 of the credit for research and development activities that reduced the comparative 2013 effective tax rate. As a result of the foregoing,


Table of Contents

we realized net income of $8.4 million in the six months ended June 30, 2014, an increase of 10% from $7.6 million in the six months ended June 30, 2013. As a percentage of sales, net income increased to 6.6% for the six months ended June 30, 2014, compared to 6.3% in the same period of 2013. Earnings per share, on a diluted basis, increased to $0.60 for the six months ended June 30, 2014, from $0.56 for the six months ended June 30, 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, 2014, we had working capital of $109.2 million, a decrease of 3% from $112.0 million at the end of 2013. Working capital in 2014 decreased primarily as a result of the reduction in our accounts receivable balance, partially offset by an increase in our cash and inventory balances. Inventory and capitalized surgical instrumentation increases were impacted by the $1.1 million paid for the medical device excise tax in the first six months of 2014.
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 the exercise of stock option awards under the 2009 Plan 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.
Operating Activities - Operating activities provided net cash of $22.5 million in the six months ended June 30, 2014, as compared to net cash from operations of $3.9 million during the six months ended June 30, 2013. A primary contributor to this increase related to the decrease in accounts receivable experienced in the first six months of 2014, which provided cash of $9.2 million for the six months ended June 30, 2014, in contrast to an increase in accounts receivable using net cash of $7.6 million for the six months ended June 30, 2013. A major contributor to the decrease in total accounts receivable was the payment of government receivables in February to our distribution operation in Spain, aggregating approximately €9.4 million, or approximately $12.9 million at an exchange rate of $1.37 per Euro. Our allowance for doubtful accounts and sales returns decreased to $0.7 million at June 30, 2014 from $1.0 million at December 31, 2013. The total days sales outstanding (DSO) ratio, based on average accounts receivable balances, was 77 for each of the six month periods ended June 30, 2014 and 2013. However, as we continue to see improvement in the international accounts receivable payment terms, the DSO for the quarter ended June 30, 2014, of 68 improved from a DSO of 78 for the quarter ended June 30, 2013. As we continue to expand our operations internationally, our DSO ratio could continue to 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 $5.7 million during the first six months ended June 30, 2014, compared to an increase of $7.3 million during the same period ended June 30, 2013, as we prepare for a number of new product launches.
Investing Activities - Investing activities used net cash of $8.1 million in the six months ended June 30, 2014, as compared to $9.7 million in the six months ended June 30, 2013. The primary contributor to the decrease in investing activities cash outflow was our reduced cash outlays for surgical instrumentation and manufacturing equipment were $7.5 million during the six month period ended June 30, 2014, as compared to cash outlays of $9.4 million for purchases of surgical instrumentation and manufacturing equipment during the same period of 2013.
License technology
Our Taiwanese subsidiary, Exactech Taiwan, 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, 2014, we had paid approximately $2.1 million for the licenses, patents, and equipment related to this license agreement, as well as 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 achievement of specific, regulatory milestones and a royalty arrangement based on sales once regulatory clearances are established.
Financing Activities - Financing activities used net cash of $9.4 million in the six months ended June 30, 2014, as compared to $5.9 million in net cash provided for the six months ended June 30, 2013. In the first six months of 2014, we had net debt repayments of $12.2 million, due to the repayment of our line of credit balance, as compared to net borrowings of $4.0 million in the first six months of 2013. Proceeds from the exercise of stock options provided cash


Table of Contents

of $2.9 million during the six months ended June 30, 2014, as compared to $2.0 million during the six months ended June 30, 2013, with the proceeds used to fund general working capital.
Long-term Debt . . .

  Add EXAC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for EXAC - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.