Exactech Inc. Reports Operating Results (10-Q)
Exactech Inc. has a market cap of $248.2 million; its shares were traded at around $19.29 with a P/E ratio of 18.9 and P/S ratio of 1.4. Exactech Inc. had an annual average earning growth of 8.6% over the past 10 years. GuruFocus rated Exactech Inc. the business predictability rank of 5-star.EXAC is in the portfolios of Chuck Royce of Royce& Associates, Chuck Royce of Royce& Associates.
Highlight of Business Operations: During the quarter ended March 31, 2010, sales increased 13% to $49.1 million from $43.3 million in the comparable quarter ended March 31, 2009, as we continued to gain market share. Gross margins decreased to 64.0% from 66.5% as a result of a larger mix of international sales where we generally experience lower margin sales. Operating expenses increased 4% from the quarter ended March 31, 2009, and as a percentage of sales, operating expenses decreased to 53% during the first quarter of 2010 as compared to 57% for the same quarter in 2009. This decrease, as a percentage of sales, was primarily due to a reduction in compliance and legal costs to $200,000 from $1.4 million in first quarter 2009 as a result of lower costs associated with the Department of Justice, or DOJ, inquiry. Net income for the quarter ended March 31, 2010 increased 33% and diluted earnings per share were $0.25 as compared to $0.19 last year.
For the quarter ended March 31, 2010, total sales increased 13% to $49.1 million from $43.3 million in the comparable quarter ended March 31, 2009. Sales of knee implant products increased 13% to $20.9 million for the quarter ended March 31, 2010 compared to $18.5 million for the quarter ended March 31, 2009, as we continued the introduction of our PS Logic knee system. Hip implant sales of $6.6 million during the quarter ended March 31, 2010 were an increase of 1% over the $6.5 million in sales during the quarter ended March 31, 2009. Sales from biologics and spine increased 4% during the quarter ended March 31, 2010 to $7.4 million, up from $7.1 million in the comparable quarter in 2009, due to growth contributions from our Optecure® service and the Accelerate platelet concentrating system. Sales of our extremity products were up 22% to $7.1 million as compared to $5.8 million for the same period in 2009, as we continue to see increasing market acceptance of our Equinoxe® reverse shoulder system. Sales of all other products increased to $7.1 million as compared to $5.4 million in the same quarter last year. Domestically, total sales increased 7% to $32.8 million, or 67% of total sales, during the quarter ended March 31, 2010, up from $30.8 million, which represented 71% of total sales, in the comparable
Excluding the impact of the pre-tax expenses of $200,000 and $1.4 million for the management of our enhanced Health Care Professional, or HCP, Compliance Program related to the DOJ inquiry recognized during the first quarters of 2010 and 2009, respectively, income from operations for the quarter ended March 31, 2010, increased 6% to $5.8 million from $5.5 million adjusted income from operations during the first quarter of 2009. Adjusted net income for the quarter ended March 31, 2010, increased 2% to $3.4 million, as compared to an adjusted 2009 net income of $3.3 million, adjusted also for the DOJ inquiry expenses incurred. Adjusted diluted earnings per share for 2010 and 2009 remained flat at $0.26.
Operating Activities - Operating activities provided net cash of $1.9 million in the three months ended March 31, 2010, as compared to net cash from operations of $4.4 million during the three months ended March 31, 2009. A primary contributor to this change related to increases in our accounts receivable and inventory outpacing our increases in accounts payable during the first quarter of 2010 as compared to the first quarter of 2009 as a result of inventory build-up related to new product lines and geographic expansion. Our allowance for doubtful accounts and sales returns increased to $1.5 million at March 31, 2010 from $835,000 at December 31, 2009, principally as a result of an estimated sales return, net of cost of goods sold, of $561,000 related to the nonrenewal of our agreement with our Spanish independent distributor. The total days sales outstanding (DSO) ratio, based on average accounts receivable balances, was 67 for the three months ended March 31, 2010, down from a ratio of 68 for the three months ended March 31, 2009, as a result of our collections efforts after a year of our customers stretching their payment terms during the economic downturn. There have not been any significant changes in our credit terms and policies and we anticipate accounts receivable to continue to increase based on sales growth. Inventory used cash of $3.3 million during the first three months ended March 31, 2010, compared to net cash used of $1.9 million during the same period ended March 31, 2009. The increase in accounts payable and income tax payable for the three months ended March 31, 2010 provided aggregate net cash of $6.8 million, in contrast to net cash provided of $2.0 million for the three months ended March 31, 2009.
Effective April 1, 2008, we completed the acquisition of our French distributor, France Medica. A portion of the purchase price was a contingent purchase price supplement of between 1.2 million EUR and 1.7 million EUR, or $1.8 million and $2.7 million, payable to certain shareholders of France Medica, over a two year period, if certain sales results were achieved in each of the annual periods. If the conditional terms are not met, the supplemental payment to some shareholders can be reduced by up to 50%. In July 2008, we paid $1.5 million of the supplement payments. During 2009, we paid an additional $386,000 of supplement payments, of which $234,000 was previously held in escrow. In May 2009 we transferred an additional 180,000 EUR, or $248,000, of supplement payments, into an escrow fund in lieu of transferring the funds directly to the former shareholder, which will be used to fulfill the terms of one of the guarantees discussed below. In March 2010, we recorded an additional 153,000 EUR, or $207,000 for the final supplement payment. During April 2010, we paid the final supplement payment of $404,000, which was recorded as a current liability as of March 31, 2010. In addition to the purchase price supplement, two former shareholders of France Medica made guarantees against future claims for damages resulting from certain events prior to the acquisition date. Under these guarantees, 570,000 EUR, or $890,000, was withheld from the cash purchase price and an escrow fund was established. An additional escrow fund of 180,000 EUR, or $248,000, was established in May 2009 upon disbursement of contingent price supplement funds discussed above. The funds in the escrow agreements will be distributed in three annual installments on July 1, 2009, 2010 and 2011, less any deductions for damages. We have paid the first installment of the guarantee from the escrow funds for a total of $234,000. As of March 31, 2010, the escrow funds are recorded at the translated amount of $788,000, based on the exchange rate as of the end of March of $1.35 per 1.00 EUR. The escrows are recorded as a long-term asset on our consolidated balance sheets, until the obligation to the former shareholder is determined beyond a reasonable doubt. Amounts paid out under these contingencies were added to the cost of acquisition when they were determinable with certainty.
During the quarter ended March 31, 2010, we recorded $207,000 for additional purchase price supplements payable, offset by a foreign currency translation effect of $111,000, for a first quarter 2010 adjustment to goodwill of $96,000. As of March 31, 2010, we have recognized additional goodwill of $686,000 for the purchase price supplement liability based on terms of the agreement and currency translation effect of $254,000, for adjustment to goodwill of $432,000.
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