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Exactech Inc.Q1 2010 Earnings Call Transcript

Exactech Inc.Q1 2010 Earnings Call Transcript

Exactech Inc. (EXAC)

Q1 2010 Earnings Call

April 28, 2010 10:00 pm ET


Bill Petty - Chairman, CEO

Jody Phillips - CFO

David Petty - President, Director


Jeff Johnson - Robert W. Baird

Bill Plovanic - Canaccord Wealth Management

Robert Gold – Brigantine Advisors

James Terwilliger - Duncan Williams Incorporated

James Sidoti – Sidoti & Company


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» Exactech Inc. Q2 2009 Earnings Call Transcript

Good day ladies and gentlemen, thank you for standing by. Welcome to the Exactech Incorporated First Quarter 2010 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Wednesday, April 28, 2010.

I would now like to turn the conference over to Chief Executive Officer, Bill Petty, please go ahead sir.

Bill Petty

Thank you, Elisa good morning from Exactech. Spring has arrived in Gainesville finally and it has where you are or will soon. We will begin with the usual disclaimer. This release contains various forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. They represent the company’s expectations or beliefs concerning future events of the company’s financial performance.

These forward-looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. These factors include the effect of competitive pricing, the company’s dependence on the ability of third-party manufacturers to produce components on a basis, which is cost-effective to the company, and market acceptance of the company’s products, and the effects of government regulations and other factors. Results actually achieved may differ materially from the expected results included in the statements.

Exactech’s revenue for the first quarter of 2010 was $49.1 million, this is compared to $43.3 million in the first quarter of 2009 and that represent a 13% increase. Net income was $3.3 million which is $0.25 per diluted share, compared to $2.5 million or $0.19 per diluted share in the first quarter of 2009, this is an increase of 32%.

Excluding the expenses of $200,000 by the Department of Justice to inquire net income was $3.4 million or $0.26 earnings per share. Just a little bit about the different segments, the revenue for our largest product segment knee implants was up 13% to $20.9 million for the first quarter, compared to $18.5 million in the first quarter 2009. Hip implant sales for the first quarter was $6.6 million, which was only a 1% increase from the $6.5 million in the first quarter of ‘09.

Biologic Spine revenue was up 4% to $7.4 million from $7.1 million in the same quarter last year. Extremity revenues increased to $7.1 million which is a 22% increase from last year’s revenue of $5.8 million. Our other product sales increased substantially by 31% or $7.1 million and this largely represents strength and estimate product line.

Now going to turn it over to Jody for some more details from the operational standpoint.

Jody Phillips

Good morning everyone and thanks for joining us. The first quarter represented another quarter of re-bond from the lower growth rates that we experienced in the first-half of 2009, specifically on sales outside the US where we experienced a 30% increase. The higher mix of outside the US business that’s 33% of total sales versus 29% in the first quarter of 2009 is the primary reason behind the drop in our gross percentage to 64% in Q1 of ‘10 versus 66.5% in Q1 ‘09. Although I will point out that this comparative gross margin of 66.5 during the first quarter of last year was by far the highest gross percentage we had during 2009. And actually if you look at the comparatives for the balance of 2009 the average gross margin percentage was 62.4%.

Therefore on a go forward basis through the balance of 2010, we are confident that we can deliver the 50-100 basis point improvement that we have previously targeted. In reviewing our operating expenses for the first quarter, clearly the most notable item is the $1.2 million reduction and compliance than legal cost to 200,000 for the quarter. And neither is a pre tax number that’s compared to what was in the press release.

We currently expect around 1.8 million in total cost for 2010, related to compliance and legal cost. But again, we should reiterate that these are rough estimates based on timing and implementation factors related to DOJ enquiry. And these cost are difficult to project with [austerity]. The first quarter sales and marketing expense increase of only 5% serves as an offset to the gross margin impact of the higher international sales mix. And there is a result of the gross in our independent distributor business with relatively strict sales and marketing cost.

As we progressed through the next two quarters, we expect higher growth in our sales and marketing expenditures likely in the neighborhood of 15% to 20% type growth rate as we continue to start up various distribution operations outside the US. The research and development expenditure increased during the first quarter of 20%, while higher than our sales growth was consistent with our expectations and demonstrates our commitment to maintain a full product pipeline.

As a result of this P&L activity, operating profits increased 38% to $5.6 million and net income increased 33% to $3.3 million or $0.25 per diluted share during the first quarter. This result was approximately $0.02 better than the upper end of our guidance going into the quarter and it was largely a reflection of the higher than expected international sales growth.

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