EXAC

Exactech, Inc. (EXAC)

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Exactech, Inc. (EXAC)

Q2 2011 Earnings Call

August 3, 2011 10:00 AM ET

Executives

Bill Petty – Chairman and CEO

David Petty – President

Joel Phillips – CFO

Analysts

James Sidoti – Sidoti & Company

William Plovanic – Canaccord Genuity

Jeff Johnson – Robert W. Baird

Jim Quentin – Barrett & Company

Presentation

Operator

Welcome to the ExacTech, Incorporated Second Quarter 2011 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Dr. Bill Petty, CEO of ExacTech. Please, go ahead.

Bill Petty

Thank you, Doug, and welcome everyone to our ExacTech Conference Call. I will begin by reading the SEC disclaimer. This release contains various forward-looking statements in 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, among others, 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, and the effects of government regulation. Results actually achieved may differ from the expected results included in these statements.

For the second quarter of 2011, ExacTech’s revenue was $51.7 million which represents a 9% increase over $47.6 million in the second quarter of 2010. The net income decreased 9% to $2.7 million which represents $0.21 per diluted share compared to $3 million or $0.23 per share in the same quarter last year. Excluding the compliance expenses of $1.5 million, net income for the quarter increased 13% to $3.7 million or $0.28 per share.

The segment performance for the quarter is as follows our Other Products revenue remained flat at $7 million. Just as a reminder, our Other Products includes our cement line, instrument sales; things of that type.

Our Knee Implant revenue was up 7% to $20.7 million. Hip Implant up 15% to $8.4 million. Biologics and Spine revenue was down 13% to $6 million and Extremity Implant revenue increased 36% to $9.7 million.

Now to look at the picture for the first half of the year. In the first six months, the revenue was $105.1 million which is an increase of 9% over the $96.7 million for the first six months of the previous year.

Net income for the first six months was down 9% to $5.7 million or $0.43 per share compared to $6.3 million and $0.48 per share for the first six months of 2010. Again, excluding the compliance expenses of $2.7 million, the net income for the first six months increased 12% to $7.4 million or $0.56 per share.

The Product segment revenues for the first six months were $13 million for Biologics and Spine which is a decrease of 8%; $42 million for Knees, an increase of 4%; $16.4 million for Hips, an increase of 18%; and $19.1 million for Extremities which is an increase of 35%.

Our Biologics-Spine lines remain in the doldrums with the main challenge being in Biologics. We are initiating new programs to better educate the market regarding the value equation for ExacTech’s bone growth and cell therapy product.

We have abundant documented excellent clinical effectiveness data related to these products and our plan is to use that more effectively in convincing our customers that those products provide excellent results for their patient.

We are pleased that in what remains a challenging environment, revenues for our other product lines continued to grow with Knees up 7% for the quarter, Hips up 15%. Our Extremities product line continued to lead the market with 36% growth for the quarter.

I’m now going to turn it over to David Petty, who will give a little more information about the comparison between domestic and outside the U.S.

David Petty

Again, happy with the results of the second quarter, and I just want to point out that we have been taking advantage of the investment that we made. We began discussing investments in the channel outside the United States about six quarters ago. We made those investments throughout 2010 and the first half of this year.

And we’re pleased to report that in fact those investments are paying off, particularly in the European market and also in the Japanese market where we are now starting to realize results with the clearances of some of our hip products in second half of last year and are really starting to do very well in the Japanese market.

Now, Jody Philips is going to give some more information about the operational and financial results.

Joel Phillips

Good morning, everyone, and thanks for joining us for the second quarter call.

The second quarter results were largely in line with our expectations as we entered the quarter. Our gross margins continued to expand on a year-over-year basis to 68% during the quarter as compared to 65.5% in the second quarter of last year.

As was the case in the first quarter, the expansion in the gross margin was primarily due to a larger percentage of our outside the U.S. sales being in direct market and is therefore somewhat offset by higher operating expenses, specifically in our sales and marketing expense area.

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