Exactech's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Exactech, Inc. (EXAC)

Q2 2012 Earnings Call

August 1, 2012 10:00 am ET

Executives

Bill Petty - CEO

Jody Phillips - CFO

David Petty - President

Analysts

Bill Plovanic - Canaccord

Jeff Johnson - Robert W. Baird

Jim Sidoti - Sidoti & Company

Presentation

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Exactech Inc. Second Quarter 2012 Results 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)

At this time, I would like to turn the conference over to Bill Petty, Chief Executive Officer. Please go ahead sir.

Bill Petty

Thank you, Vince, and good morning and welcome to Exactech 2012 second quarter conference call. As we specifically do, I will make the opening comments, and Jody Phillips will give some more details about the financial report. And then Jody, and David Petty and I will participate in the question-and-answer session.

Before we begin, the disclaimer. The release contains various forward-looking statements within the meaning of Section 27A and 21E of the Securities Act of 1933 and 1934 respectively. They represent the company's expectations or beliefs concerning future events of the company's performance. These forward-looking statements are 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, market acceptance of the company's products, compliance cost, the effects of government regulations, and other potential effects. Results actually achieved may differ materially from expected results included in these statements.

Now, to go into my comments about our second quarter. First of all the highlights top-line revenue for Q2 2012 was $55.2 million compared to $51.7 million in the second quarter of 2011, this is a 7% increase.

Net income was up 11% to $3 million or $0.23 per diluted share compared to $2.7 million or $0.21 in Q2 of 2011.

For the Q1 segment performance knee implant revenue was up 1% to $21 million. Extremity implant revenue up 24% to $12 million. Hip implant up 22% to $10.3 million. Biologic and spine revenue decreased down slightly 1% to $5.9 million. And our other products revenue, and just as a reminder that's instrument sales to distributors and also our cement product that was down 14% to $6 million.

If we look at our U.S. versus outside the U.S. for Q1, our U.S. sales increased 8% to $35.2 million compared to $32.6 million in 2011. And the international sales were up 5% to $19.9 million, primarily due to strength in Asian and Latin America markets. Though we experienced weakness in some European markets, other sales were going well. International sales represented 36% of total sales for the second quarter.

Our six month highlights, for the first six months of 2012 the revenue was $113.8 million, which is an increase of 8% over $105.1 million for the first six months of 2011.

Net income for the first six months of 2012 were $6.3 million or $0.48 per diluted share compared to $5.7 million or $0.43 per share for the first six months of 2011. This is an increase of 11% in net income for the first six months in 2012.

The segment performance for six months again knee implant revenue was up 1% and that rose to $42.5 million, extremity implant up 31% to $25 million, hip up 29% to $21.2 million, biologic and spine down 7% to $12.1 million, and other products down 10% to $13.1 million.

For the first six months the U.S. sales rose 7% to $72 million compared to $67.6 million in 2011. International sales increased 12% to $41.8 million from $47.5 million in 2011 and represented 37% of the total for the first six months.

Though we're never completely satisfied with our results or our progress, we are pleased with our performance so far for 2012. We have led with hip and extremity revenues and our largest segment knee has held its own. The biologic and spine segment was near flat in Q2 suggesting stabilization there. We continued to see a somewhat unsettled market and not unlike the general worldwide economy. We at Exactech, so I believe, we can continue to maintain some share going forward despite the general uncertainty. Jody?

Jody Phillips

Good morning everyone and thanks for joining us for the second quarter conference call. We feel the second quarter sales and earnings results were largely within the balance of our expectations albeit there were a few moving parts that I'll touch on in my comment.

In order to review our second quarter operating performance, I'll review the major elements of the income statements and then make a few comments related to the balance sheet.

Our gross margin percentage expansion during the quarter from 68% to 68.8% was consistent with our expectations and as we look to the balance of 2012 we continue to expect probably a 50 basis point increase in gross margin percentage on a quarter-over-quarter basis, as we expect internal manufacturing cost reductions to continue to offset modest pricing pressure.

From a sales and marketing expense perspective the 4% increase was lower than sales growth, primarily due to lower bad debt expense, as a result of large Spanish government payments received during the second quarter. We expect sales and marketing expense growth to be in line with sales growth for the balance of 2012.

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