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EX-32.2 - EXHIBIT - EXACTECH INCexac20140630exhibit322.htm
EX-32.1 - EXHIBIT - EXACTECH INCexac20140630exhibit321.htm
EX-31.2 - EXHIBIT - EXACTECH INCexac20140630exhibit312.htm
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EX-31.1 - EXHIBIT - EXACTECH INCexac20140630exhibit311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________ 
FORM 10-Q
 _________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
For the quarterly period ended June 30, 2014
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
Commission File Number 0-28240
 _________________________________
EXACTECH, INC.
(Exact name of registrant as specified in its charter)
_________________________________
FLORIDA
59-2603930
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
2320 NW 66TH COURT
GAINESVILLE, FL 32653
(Address of principal executive offices)
(352) 377-1140
(Registrant’s telephone number, including area code)
_________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x   No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x   No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
o
Accelerated Filer
x
Non-Accelerated Filer
o
Smaller Reporting Company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o   No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at August 1, 2014
Common Stock, $.01 par value
 
13,754,015



EXACTECH, INC.
INDEX
 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Item 1. Financial Statements
EXACTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
(unaudited)
 
(audited)
 
June 30,
 
December 31,
 
2014
 
2013
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
11,041

 
$
6,011

Accounts receivable, net of allowances of $726 and $993
49,420

 
59,109

Prepaid expenses and other assets, net
4,161

 
2,865

Income taxes receivable
777

 
1,331

Inventories – current
73,921

 
71,590

Deferred tax assets – current
1,723

 
1,653

Total current assets
141,043

 
142,559

PROPERTY AND EQUIPMENT:
 
 
 
Land
2,214

 
2,215

Machinery and equipment
33,859

 
35,439

Surgical instruments
102,014

 
95,902

Furniture and fixtures
4,359

 
4,200

Facilities
19,241

 
19,187

Projects in process
1,222

 
852

Total property and equipment
162,909

 
157,795

Accumulated depreciation
(81,856
)
 
(76,127
)
Net property and equipment
81,053

 
81,668

OTHER ASSETS:
 
 
 
Deferred financing and deposits, net
892

 
870

Non-current inventories
14,479

 
11,100

Product licenses and designs, net
8,978

 
9,457

Patents and trademarks, net
1,853

 
2,005

Customer relationships, net
438

 
669

Goodwill
13,461

 
13,514

Total other assets
40,101

 
37,615

TOTAL ASSETS
$
262,197

 
$
261,842

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
17,378

 
$
16,254

Income taxes payable

 
39

Accrued expenses and other liabilities
11,206

 
10,974

Other current liabilities
250

 
250

Current portion of long-term debt
3,000

 
3,000

Total current liabilities
31,834

 
30,517

LONG-TERM LIABILITIES:
 
 
 
Deferred tax liabilities
3,942

 
4,200

Line of credit

 
10,732

Long-term debt, net of current portion
21,750

 
23,250

Other long-term liabilities
598

 
719

Total long-term liabilities
26,290

 
38,901

Total liabilities
58,124

 
69,418

SHAREHOLDERS’ EQUITY:
 
 
 
Common stock
137

 
136

Additional paid-in capital
72,948

 
69,175

Accumulated other comprehensive loss
(4,385
)
 
(3,902
)
Retained earnings
135,373

 
127,015

Total shareholders’ equity
204,073

 
192,424

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
262,197

 
$
261,842

See notes to condensed consolidated financial statements

2


EXACTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
 
Three Month Periods Ended June 30,
 
Six Month Periods Ended June 30,
 
2014
 
2013
 
2014
 
2013
NET SALES
$
63,919

 
$
60,559

 
$
127,177

 
$
119,860

COST OF GOODS SOLD
19,565

 
19,075

 
38,199

 
37,665

Gross profit
44,354

 
41,484

 
88,978

 
82,195

OPERATING EXPENSES:
 
 
 
 
 
 
 
Sales and marketing
22,885

 
21,483

 
46,598

 
43,007

General and administrative
5,667

 
5,321

 
11,452

 
10,417

Research and development
4,864

 
4,605

 
9,057

 
8,455

Depreciation and amortization
4,124

 
3,854

 
8,446

 
8,029

Total operating expenses
37,540

 
35,263

 
75,553

 
69,908

INCOME FROM OPERATIONS
6,814

 
6,221

 
13,425

 
12,287

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest income
5

 
2

 
8

 
3

Other income
26

 
22

 
50

 
51

Interest expense
(260
)
 
(288
)
 
(607
)
 
(571
)
Foreign currency (loss) gain, net
(113
)
 
(121
)
 
200

 
(583
)
Total other income (expense)
(342
)
 
(385
)
 
(349
)
 
(1,100
)
INCOME BEFORE INCOME TAXES
6,472

 
5,836

 
13,076

 
11,187

PROVISION FOR INCOME TAXES
2,312

 
2,108

 
4,718

 
3,602

NET INCOME
$
4,160

 
$
3,728

 
$
8,358

 
$
7,585

BASIC EARNINGS PER SHARE
$
0.30

 
$
0.28

 
$
0.61

 
$
0.57

DILUTED EARNINGS PER SHARE
$
0.30

 
$
0.27

 
$
0.60

 
$
0.56

See notes to condensed consolidated financial statements




3


EXACTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
 
Three Month Periods Ended June 30,
 
Six Month Periods Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net Income
$
4,160

 
$
3,728

 
$
8,358

 
$
7,585

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in fair value of cash flow hedge
(10
)
 
153

 
50

 
172

Change in currency translation
(241
)
 
353

 
(533
)
 
(1,330
)
Other comprehensive income (loss), net of tax
(251
)
 
506

 
(483
)
 
(1,158
)
Comprehensive income
$
3,909

 
$
4,234

 
$
7,875

 
$
6,427

See notes to condensed consolidated financial statements

4


EXACTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Six Month Periods Ended June 30,
 
2014
 
2013
OPERATING ACTIVITIES:
 
 
 
Net income
$
8,358

 
$
7,585

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Provision for allowance for doubtful accounts and sales returns
267

 
86

Inventory allowance
(12
)
 
1,650

Depreciation and amortization
9,214

 
8,763

Restricted common stock issued for services
199

 
172

Compensation cost of stock awards
732

 
913

Loss on disposal of equipment
414

 
436

Loss on disposal of intangible assets
13

 

Foreign currency exchange (gain) loss
(200
)
 
583

Deferred income taxes
(373
)
 
(368
)
Changes in assets and liabilities which provided (used) cash:
 
 
 
Accounts receivable
9,186

 
(7,583
)
Prepaids and other assets
(1,303
)
 
(210
)
Inventories
(5,663
)
 
(7,320
)
Accounts payable
1,403

 
1,913

Income taxes receivable/payable
515

 
(1,450
)
Accrued expense & other liabilities
(206
)
 
(1,311
)
Net cash provided by operating activities
22,544

 
3,859

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(7,932
)
 
(9,441
)
Proceeds from sale of property and equipment
3

 
1

Purchase of intangible assets
(138
)
 
(284
)
Net cash used in investing activities
(8,067
)
 
(9,724
)
FINANCING ACTIVITIES:
 
 
 
Net (repayments) borrowings on line of credit
(10,732
)
 
5,117

Principal payments on debt
(1,500
)
 
(1,125
)
Payments on capital leases
(40
)
 
(40
)
Debt issuance costs
(15
)
 
(15
)
Proceeds from issuance of common stock
2,856

 
1,972

Net cash (used in) provided by financing activities
(9,431
)
 
5,909

Effect of foreign currency translation on cash and cash equivalents
(16
)
 
(193
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
5,030

 
(149
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
6,011

 
5,838

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
11,041

 
$
5,689

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
628

 
$
502

Income taxes
4,626

 
4,604

Non-cash investing and financing activities:
 
 
 
Cash flow hedge gain, net of tax
50

 
172

Capitalized lease additions

 
6

Purchase of equipment payable
176

 

See notes to condensed consolidated financial statements

5


EXACTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2014 AND 2013
(Unaudited)
1.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Exactech, Inc. and its subsidiaries (the “Company” or “Exactech”), which are for interim periods, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission relating to interim financial statements. These unaudited condensed consolidated financial statements do not include all disclosures provided in the annual financial statements. The condensed financial statements should be read in conjunction with the financial statements and notes contained in Exactech's Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included, consisting of normal recurring adjustments. Our subsidiaries, Exactech Asia, Exactech UK, Exactech Japan, Exactech France, Exactech Taiwan, Exactech Deutschland, Exactech Ibérica, Exactech International Operations, and Exactech U.S., are consolidated for financial reporting purposes, and all intercompany balances and transactions have been eliminated. Results of operations for the three and six month periods ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.
Certain amounts reported for prior periods have been reclassified to be consistent with the current period presentation.
2.
NEW ACCOUNTING PRONOUNCEMENTS AND STANDARDS
In May 2014, the Financial Accounting Standards Board, or FASB, issued new revenue recognition guidance that supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. The new guidance is based on the principle that revenue is recognized upon the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, and clarify guidance for multiple-element arrangements. The guidance is effective for annual and interim periods beginning after December 15, 2016, including interim periods within that reporting period and early application is not permitted. We are currently assessing the impact of adopting this guidance on our financial statements.
In April 2014, the FASB issued new guidance related to the definition and criteria of a discontinued operation and modifying the related disclosure requirements for both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The guidance applies prospectively to new disposals and new classifications of assets as held for sale after the effective date and is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted. We do not expect adoption of this standard will have a material impact on our financial statements.
In July 2013, the FASB issued guidance to require an unrecognized tax benefit, or portion of an unrecognized tax benefit, to be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. If an applicable deferred tax asset is not available or a company does not expect to use the applicable deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with an unrelated deferred tax asset. This new guidance was effective for annual reporting periods beginning after December 15, 2013. The adoption of this guidance did not have a significant impact on our condensed consolidated financial statements.
3.
FAIR VALUE MEASURES
Our financial instruments include cash and cash equivalents, trade receivables, debt, and cash flow hedges. The carrying amounts of cash and cash equivalents, and trade receivables approximate fair value due to their short maturities. The carrying amount of debt approximates fair value due to the variable rate associated with the debt. The fair value of cash flow hedges are based on dealer quotes.

6


Certain financial assets and liabilities are accounted for at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant.
The table below provides information on our liabilities that are measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
(In Thousands)
Total Fair Value at June 30, 2014
 
Quoted Prices in Active Markets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Interest rate swap
$
391

 
$

 
$
391

 
$

 
 
 
 
 
 
 
 
The fair value of our interest rate swap agreement is based on dealer quotes, and is recorded as accumulated other comprehensive loss and other long-term liabilities in the condensed consolidated balance sheets. We analyze the effectiveness of our interest rate swap on a quarterly basis, and, for the period ended June 30, 2014, we have determined that the interest rate swap was effective.
4.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill – The following table provides the changes to the carrying value of goodwill for the six month period ended June 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Knee
 
Hip
 
Biologics
and Spine
 
Extremities
 
Other
 
Total
Balance as of December 31, 2013
$
3,830

 
$
670

 
$
7,553

 
$
459

 
$
1,002

 
$
13,514

Foreign currency translation effects
(24
)
 
(9
)
 

 
(6
)
 
(14
)
 
(53
)
Balance as of June 30, 2014
$
3,806

 
$
661

 
$
7,553

 
$
453

 
$
988

 
$
13,461

 
 
 
 
 
 
 
 
 
 
 
 
We test goodwill for impairment annually as of the 1st of October. Our impairment analysis as of October 1, 2013 indicated no impairment of goodwill.
Other Intangible Assets – The following table summarizes the carrying values of our other intangible assets at June 30, 2014 and December 31, 2013:
 
 
 
 
 
 
 
 
(in thousands)
Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
Weighted Avg Amortization Period
Balance at June 30, 2014
 
 
 
 
 
 
 
Product licenses and designs
$
15,385

 
$
6,407

 
$
8,978

 
9.9
Patents and trademarks
4,706

 
2,853

 
1,853

 
14.0
Customer relationships
3,152

 
2,714

 
438

 
6.9
 
 
 
 
 
 
 
 
Balance at December 31, 2013
 
 
 
 
 
 
 
Product licenses and designs
$
15,522

 
$
6,065

 
$
9,457

 
10.1
Patents and trademarks
4,777

 
2,772

 
2,005

 
14.0
Customer relationships
3,168

 
2,499

 
669

 
6.9
 
 
 
 
 
 
 
 

7


5.
HEDGING ACTIVITIES AND FOREIGN CURRENCY TRANSLATION
Foreign Currency Transactions
The following table provides information on the components of our foreign currency activities recognized in the unaudited condensed consolidated statements of income:
 
 
 
 
 
 
 
 
(in thousands)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Foreign currency transactions (loss) gain
$
(113
)
 
$
(121
)
 
$
200

 
$
(583
)
 
 
 
 
 
 
 
 
Foreign Currency Transactions Gains and losses resulting from our transactions and our subsidiaries’ transactions, which are made in currencies different from their own, are included in income as they occur and as other income (expense) in the condensed consolidated statements of income.
Foreign Currency Translation
We are exposed to market risk related to changes in foreign currency exchange rates. The functional currency of substantially all of our international subsidiaries is their local currency. Transactions are translated into U.S. Dollars (USD), and exchange gains and losses arising from translation are recognized in “Other comprehensive income (loss)”. Fluctuations in exchange rates affect our financial position and results of operations. The majority of our foreign currency exposure is to the Euro (EUR), British Pound (GBP), and Japanese Yen (JPY). During the six months ended June 30, 2014, translation losses were $0.5 million, which were primarily due to the weakening of the JPY, offset partially by the strengthening of the EUR and GBP against the USD. During the six months ended June 30, 2013, translation losses were $1.3 million, which were primarily due to the weakening of the EUR. We may continue to experience translation gains and losses during the year ending December 31, 2014; however, these gains and losses are not expected to have a material effect on our financial position, results of operations, or cash flows.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) is composed of unrealized gains or losses from the change in fair value of certain derivative instruments that qualify for hedge accounting, and for foreign currency translation effects. The following table provides information on the components of our other comprehensive loss:
 
 
 
 
 
 
(in thousands)
Cash Flow Hedge
 
Foreign Currency Translation
 
Total
Balance December 31, 2013
$
(284
)
 
$
(3,618
)
 
$
(3,902
)
2014 adjustments, net of tax
50

 
(533
)
 
(483
)
Balance June 30, 2014
$
(234
)
 
$
(4,151
)
 
$
(4,385
)
 
 
 
 
 
 
We do not enter into or hold derivative instruments for trading or speculative purposes. We entered into our interest rate swap to eliminate variability in future cash flows by converting LIBOR-based variable-rate interest payments into fixed-rate interest payments. The fair value of our interest rate swap agreement is based on dealer quotes, and the change in fair value is recorded as accumulated other comprehensive loss in the consolidated balance sheets. We do not expect the change in fair value of our interest rate swap to have a material impact on our results of operations, financial position or cash flows.
6.
INVENTORIES
Inventories are valued at the lower of cost or market and include implants consigned to customers and agents. We also loan a significant amount of implant inventory to non-distributor customers. The consigned or loaned inventory remains our inventory until we are notified of the implantation. We are also required to maintain substantial levels of inventory as it is necessary to maintain all sizes of each component to fill customer orders. The size of the component to be used for a specific patient is typically not known with certainty until the time of surgery. Due to this uncertainty, a minimum of one of each size of each component in the system to be used must be available to each sales representative at the time of surgery. As a result of the need to maintain substantial levels of inventory, we are subject to the risk of inventory obsolescence. In the event that a substantial portion of our inventory becomes obsolete, it would

8


have a material adverse effect on the Company. Allowance charges for obsolete and slow moving inventories are recorded based upon an analysis of specific identification of obsolete inventory items and quantification of slow moving inventory items. For slow moving inventory, this analysis compares the quantity of inventory on hand to the historical sales of such inventory items. As a result of this analysis, we record an estimated allowance for slow moving inventory. Due to the nature of the slow moving inventory, this allowance may fluctuate up or down, as a charge or recovery. Allowance recoveries for the three and six months ended June 30, 2014 were $0.3 million and $12,000, respectively. Allowance charges for the three and six months ended June 30, 2013 were $0.7 million and $1.7 million respectively. We also test our inventory levels for the amount of inventory that we expect to sell within one year. At certain times, such as when we stock new subsidiaries, add consignment locations, and launch new products, the level of inventory can exceed the forecasted level of cost of goods expected to be sold for the next twelve months. We classify such inventory as non-current.
The following table summarizes our classifications of inventory as of June 30, 2014 and December 31, 2013:
 
 
 
 
(in thousands)
June 30,
2014
 
December 31,
2013
Raw materials
$
18,879

 
$
19,668

Work in process
1,521

 
1,178

Finished goods on hand
30,616

 
26,474

Finished goods on loan/consignment
37,384

 
35,370

Inventory total
88,400

 
82,690

Non-current inventories
14,479

 
11,100

Inventories, current
$
73,921

 
$
71,590

 
 
 
 
7.
INCOME TAX
At June 30, 2014, net operating loss carry forwards of our foreign and domestic subsidiaries totaled $25.6 million, some of which begin to expire in 2020. For accounting purposes, the estimated tax effect of this net operating loss carry forward results in a deferred tax asset. The deferred tax asset associated with these losses was $8.3 million with a valuation allowance of $5.5 million charged against this deferred tax asset assuming these losses will not be fully realized. At December 31, 2013, these net operating loss carry forwards totaled $25.9 million, and the deferred tax asset was $8.4 million with a valuation allowance of $5.2 million charged against this deferred tax asset assuming these losses will not be fully realized.
Our income tax returns are subject to examination in numerous state, federal and foreign jurisdictions due to the multiple income tax jurisdictions in which we operate. On March 25, 2013, the United States Internal Revenue Service, or IRS, completed an income tax audit for the 2009 through 2011 tax years. Audit adjustments were recorded prior to 2013. As of June 30, 2014, we have no liability recorded as an uncertain tax benefit.
The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013. This law retroactively reinstated the Internal Revenue Code Section 41, Credit for Increasing Research Activities, for the year ended December 31, 2012. As a result of this reinstatement, we were allowed a research credit of $0.6 million for 2012, which we recorded during the quarter ended March 31, 2013. The Credit for Increasing Research Activities expired for the year ending December 31, 2014, and for the six months ended June 30, 2014, we have not recorded a research credit.

9


8.
DEBT
Debt consisted of the following at June 30, 2014 and December 31, 2013:
 
 
 
 
(in thousands)
June 30,
2014
 
December 31,
2013
Term loan payable in quarterly principal installments of $750, from June 2013 to December 2016. Interest based on adjustable rate as determined by three month LIBOR (1.65% as of 6/30/2014)
$
24,750

 
$
26,250

Business line of credit payable on a revolving basis, plus interest based on adjustable rate as determined by one month LIBOR based on our ratio of funded debt to EBITDA

 
10,732

Total debt
24,750

 
36,982

Less current portion
(3,000
)
 
(3,000
)
 
$
21,750

 
$
33,982

 
 
 
 
The following is a schedule of future debt maturities as of June 30, 2014, for the years ending December 31 (in thousands):
 
 
2014
$
1,500

2015
3,000

2016
3,000

2017
17,250

2018

Thereafter

 
$
24,750

 
 
During the quarter ended March 31, 2014, we terminated an interest rate swap agreement we had entered into during 2005 to fix the interest rate on our debt, and as a result, we recorded a loss of $38,000.
9.
COMMITMENTS AND CONTINGENCIES
Litigation
There are various claims, lawsuits, and disputes with third parties and pending actions involving various allegations against us incident to the operation of our business, principally product liability cases. While we believe that the various claims are without merit, we are unable to predict the ultimate outcome of such litigation. We therefore maintain insurance, subject to self-insured retention limits, for all such claims, and establish accruals for product liability and other claims based upon our experience with similar past claims, advice of counsel and the best information reasonably available. At June 30, 2014 and December 31, 2013, we had $110,000 and $135,000 accrued, respectively, for product liability claims. These product liability claims are subject to various uncertainties, and it is possible that they may be resolved unfavorably to us. While it is not possible to predict with certainty the outcome of the various cases, it is the opinion of management that, upon ultimate resolution, the cases will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Our insurance policies covering product liability claims must be renewed annually. Although we have been able to obtain insurance coverage for product liability claims at a cost and on other terms and conditions that have been acceptable to us, we may not be able to procure acceptable policies in the future.
Purchase Commitments
At June 30, 2014, we had outstanding commitments for the purchase of inventory, raw materials and supplies of $15.5 million and outstanding commitments for the purchase of capital equipment of $7.9 million. Purchases under our distribution agreements were $2.7 million during the six months ended June 30, 2014.

10


Our Taiwanese subsidiary, Exactech Taiwan, has 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 have paid approximately $2.1 million for the licenses, patents, and equipment related to this license agreement, 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.
10.
SEGMENT INFORMATION
We evaluate our operating segments by our major product lines: knee implants, hip implants, biologics and spine, extremity implants and other products. The “other products” segment includes miscellaneous sales categories, such as surgical instruments held for sale, bone cement, instrument rental fees, shipping charges, and other implant product lines. Evaluation of the performance of operating segments is based on their respective incomes from operations before taxes, interest income and expense, and nonrecurring items. Intersegment sales and transfers are not significant. The accounting policies of the reportable segments are the same as those described in Note 2 of the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
Total assets not identified with a specific segment are listed as “corporate” and include cash and cash equivalents, accounts receivable, income taxes receivable, deposits and prepaid expenses, deferred tax assets, land, facilities, office furniture and computer equipment, notes receivable, and other investments. Depreciation and amortization on corporate assets is allocated to the product segments for purposes of evaluating the income (loss) from operations, and capitalized surgical instruments are allocated to the appropriate product line supported by those assets.
Summarized information concerning our reportable segments is shown in the following table (in thousands):
 
 
 
 
 
 
 
 
Three Months Ended June 30,
Knee
Hip
Biologics & Spine
Extremity
Other
Corporate
Total
2014
 
 
 
 
 
 
 
Net sales
$
21,047

$
11,196

$
6,470

$
19,006

$
6,200

$

$
63,919

Segment profit (loss)
1,901

1,169

370

4,639

(1,265
)
(342
)
6,472

Total assets, net
67,635

33,774

24,858

26,990

13,417

95,523

262,197

Capital expenditures
1,128

804

222

1,059

190

1,191

4,594

Depreciation and Amortization
1,881

699

300

519

181

964

4,544

2013
 
 
 
 
 
 
 
Net sales
$
21,045

$
10,582

$
6,793

$
16,282

$
5,857

$

$
60,559

Segment profit (loss)
2,211

623

(200
)
3,617

(30
)
(385
)
5,836

Total assets, net
65,483

32,209

25,125

23,341

13,877

97,849

257,884

Capital expenditures
1,692

512

621

915

54

473

4,267

Depreciation and Amortization
1,748

650

315

427

81

1,007

4,228

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
Knee
Hip
Biologics & Spine
Extremity
Other
Corporate
Total
2014
 
 
 
 
 
 
 
Net sales
$
41,614

$
22,000

$
12,292

$
38,677

$
12,594

$

$
127,177

Segment profit (loss)
3,839

2,111

404

9,146

(2,075
)
(349
)
13,076

Total assets, net
67,635

33,774

24,858

26,990

13,417

95,523

262,197

Capital expenditures
2,114

1,512

515

1,978

545

1,582

8,246

Depreciation and Amortization
3,894

1,405

603

1,051

332

1,929

9,214

2013
 
 
 
 
 
 
 
Net sales
$
41,547

$
21,022

$
12,850

$
31,965

$
12,476

$

$
119,860

Segment profit (loss)
4,121

1,467

(6
)
7,346

(641
)
(1,100
)
11,187

Total assets, net
65,483

32,209

25,125

23,341

13,877

97,849

257,884

Capital expenditures
4,891

1,064

653

1,349

181

1,592

9,730

Depreciation and Amortization
3,642

1,326

652

855

197

2,091

8,763

 
 
 
 
 
 
 
 

11


Geographic distribution of our long-lived assets and inventory is shown in the following table (in thousands):
 
 
 
 
 
 
 
 
As of:
June 30, 2014
 
December 31, 2013
 
Domestic
 
International
 
Domestic
 
International
Long lived assets, gross
$
141,541

 
$
44,611

 
$
139,406

 
$
41,857

Accumulated depreciation and amortization
(78,061
)
 
(15,769
)
 
(73,876
)
 
(13,588
)
Long lived assets, net
63,480

 
28,842

 
65,530

 
28,269

 
 
 
 
 
 
 
 
Inventory
$
59,589

 
$
28,811

 
$
56,960

 
$
25,730

 
 
 
 
 
 
 
 
Geographic distribution of our sales is summarized in the following table (in thousands):
 
 
 
 
 
 
Three Months Ended June 30,
2014
 
2013
 
% Inc/Decr
Domestic sales
$
42,199

 
$
39,853

 
5.9
International sales
21,720

 
20,706

 
4.9
Total sales
$
63,919

 
$
60,559

 
5.5
 
 
 
 
 
 
Six Months Ended June 30,
2014
 
2013
 
% Inc/Decr
Domestic sales
$
83,807

 
$
78,818

 
6.3
International sales
43,370

 
41,042

 
5.7
Total sales
$
127,177

 
$
119,860

 
6.1
 
 
 
 
 
 
11.
SHAREHOLDERS’ EQUITY
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for net income and net income available to common shareholders:
 
 
 
 
 
 
 
 
 
Income (Numerator)
Shares (Denominator)
Per Share
 
Income (Numerator)
Shares (Denominator)
Per Share
 
Three Months Ended
 
Three Months Ended
(in thousands, except per share amounts)
June 30, 2014
 
June 30, 2013
Net income
$
4,160

 
 
 
$
3,728

 
 
Basic EPS:
 
 
 
 
 
 
 
Net income available to common shareholders
$
4,160

13,694

$
0.30

 
$
3,728

13,449

$
0.28

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options
 
292

 
 
 
182

 
Diluted EPS:
 
 
 
 
 
 
 
Net income available to common shareholders plus assumed conversions
$
4,160

13,986

$
0.30

 
$
3,728

13,631

$
0.27

 
 
 
 
 
 
 
 
 
Six Months Ended
 
Six Months Ended
(in thousands, except per share amounts)
June 30, 2014
 
June 30, 2013
Net income
$
8,358

 
 
 
$
7,585

 
 
Basic EPS:
 
 
 
 
 
 
 
Net income available to common shareholders
$
8,358

13,646

$
0.61

 
$
7,585

13,403

$
0.57

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options
 
300

 
 
 
184

 
Diluted EPS:
 
 
 
 
 
 
 
Net income available to common shareholders plus assumed conversions
$
8,358

13,946

$
0.60

 
$
7,585

13,587

$
0.56

 
 
 
 
 
 
 
 

12


For the three months ended June 30, 2014, weighted average options to purchase 130,422 shares of common stock were outstanding but were not included in the computation of diluted EPS because the options were antidilutive under the treasury stock method. For the three months ended June 30, 2013, weighted average options to purchase 521,373 shares of common stock were outstanding but were not included in the computation of diluted EPS because the options were antidilutive under the treasury stock method.
For the six months ended June 30, 2014, weighted average options to purchase 83,917 shares of common stock were outstanding but were not included in the computation of diluted EPS because the options were antidilutive under the treasury stock method. For the six months ended June 30, 2013, weighted average options to purchase 446,639 shares of common stock were outstanding but were not included in the computation of diluted EPS because the options were antidilutive under the treasury stock method.
Changes in Shareholders’ Equity:
The following is a summary of the changes in shareholders’ equity for the six months ended June 30, 2014: 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
(in thousands)
Shares
 
Amount
 
Balance December 31, 2013
13,577

 
$
136

 
$
69,175

 
$
127,015

 
$
(3,902
)
 
$
192,424

Net income

 

 

 
8,358

 

 
8,358

Other comprehensive income (loss), net of tax

 

 

 

 
(483
)
 
(483
)
Exercise of stock options
142

 
1

 
2,535

 

 

 
2,536

Issuance of restricted common stock for services
9

 

 
199

 

 

 
199

Issuance of common stock under Employee Stock Purchase Plan
16

 

 
320

 

 

 
320

Compensation cost of stock options

 

 
732

 

 

 
732

Tax impact on stock awards

 

 
(13
)
 

 

 
(13
)
Balance June 30, 2014
$
13,744

 
$
137

 
$
72,948

 
$
135,373

 
$
(4,385
)
 
$
204,073

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based Compensation Awards:
We sponsor an Executive Incentive Compensation Plan, which provides for the award of stock-based compensation, including options, stock appreciation rights, restricted stock and other stock-based incentive compensation awards to key employees, directors and independent agents and consultants. We implemented a comprehensive, consolidated incentive compensation plan upon shareholder approval at our Annual Meeting of Shareholders on May 7, 2009, referred to as the 2009 Plan, which was amended and restated at our 2014 Annual Meeting of Shareholders, held on May 8, 2014, to increase the maximum number of shares issuable under the 2009 Plan by 500,000. The maximum number of common shares issuable under the amended and restated 2009 Plan is 1,500,000 plus (a) the number of shares with respect to awards previously granted under our preexisting plans that terminate without being exercised, expire, are forfeited or canceled, plus (b) the number of shares that remain available for future issuance under our preexisting plans plus (c) the number of shares that are surrendered in payment of any awards or any tax withholding with respect thereto. Common stock issued upon exercise of stock options is settled with authorized but unissued shares available. Under the 2009 Plan, the exercise price of option awards equals the market price of our common stock on the date of grant, and each award has a maximum term of ten years. As of June 30, 2014, there were 505,362 total shares remaining issuable under the 2009 Plan.
The aggregate compensation cost charged against income for the 2009 Plan and the 2009 Employee Stock Purchase Plan, referred to as the 2009 ESPP, was $0.7 million and $0.9 million for the six months ended June 30, 2014 and 2013, respectively. Income tax benefit on exercises of non-qualified stock options was $0.2 million and $0.1 million for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, total unrecognized compensation cost related to unvested awards was $2.1 million and is expected to be recognized over a weighted-average period of 2.26 years.

13


Stock Options:
A summary of the status of stock option activity under our stock-based compensation plans as of June 30, 2014 and changes during the year to date is presented below:
 
 
 
 
 
 
 
 
 
2014
 
Options    
 
Weighted Avg Exercise Price
 
Weighted Avg Remaining Contractual Term
 
Aggregate Intrinsic Value (In thousands)
Outstanding - January 1
1,317,678

 
$
16.78

 
 
 
 
Granted
201,217

 
20.90

 
 
 
 
Exercised
(142,155
)
 
17.83

 
 
 
$
665

Forfeited or Expired
(8,800
)
 
17.84

 
 
 
 
Outstanding - June 30
1,367,940

 
$
17.27

 
3.65
 
$
10,883

Exercisable - June 30
811,143

 
$
16.28

 
2.18
 
$
7,260

 
 
 
 
 
 
 
 
Outstanding options, consisting of five-year to ten-year incentive and non-qualified stock options, vest and become exercisable ratably over a three to five year period from the date of grant. The outstanding options expire from five to ten years from the date of grant or upon termination of employment with Exactech, and are contingent upon continued employment during the applicable option term. Certain non-qualified stock options are granted to non-employee sales agents and consultants, and they typically vest ratably over a period of three to four years from the date of grant and expire in five years or less from the date of grant, or upon termination of the agent's or consultant’s contract with Exactech. Stock options for 201,217 shares of common stock were granted during the six months ended June 30, 2014, compared to stock options for 241,000 shares of common stock granted during the six months ended June 30, 2013.
Restricted Stock Awards:
Under the 2009 Plan, we may grant restricted stock awards to eligible employees, directors, and independent agents and consultants. Restrictions on transferability, risk of forfeiture and other restrictions are determined by the Compensation Committee of the Board of Directors, or the Committee, at the time of the award. During February 2014, the Committee approved equity compensation to the five outside members of the Board of Directors for their service on the Board of Directors. The annual compensation for each director consists of the grant of stock awards with an aggregate market value of $75,000, payable in four equal quarterly grants of common stock based on the market price of our common stock on the respective dates of grant. The summary information of the restricted stock grants for the first six months of 2014 is presented below: 
 
 
 
Grant date
February 28, 2014

May 31, 2014

Aggregate shares of restricted stock granted
4,020

4,502

Grant date fair value
$
94,000

$
105,000

Weighted average fair value per share
$
23.30

$
23.29

 
 
 
During February 2013, the Committee approved equity compensation to the five outside members of the Board of Directors for their service on the Board of Directors. The annual compensation for each director consisted of the grant of stock awards with an aggregate market value of $69,000, payable in four equal quarterly grants of common stock based on the market price of our common stock on the respective dates of grant. The summary information of the restricted stock grants for the first six months of 2013 is presented below:
 
 
 
Grant date
February 28, 2013

May 31, 2013

Aggregate shares of restricted stock granted
4,685

4,735

Grant date fair value
$
86,000

$
86,000

Weighted average fair value per share
$
18.41

$
18.20

 
 
 
 
All of the restricted stock awards in 2014 and 2013 were fully vested at each of the grant dates. The restricted stock awards require no service period and thus contain no risk of, or provision for, forfeiture.

14


Employee Stock Purchase Plan:
On February 18, 2009, our board of directors adopted the 2009 ESPP, and our shareholders approved the 2009 ESPP at our Annual Meeting of Shareholders on May 7, 2009. Under the 2009 ESPP, employees are able to purchase shares of our common stock at a fifteen percent (15%) discount via payroll deduction, up to a maximum number of shares issuable under the 2009 ESPP of 300,000. There are four offering periods during an annual period. As of June 30, 2014, 101,863 shares remained available for purchase under this 2009 ESPP. The fair value of the employees' purchase rights is estimated using the Black-Scholes model. Purchase information and fair value assumptions are presented in the following table:
 
 
 
 
Six Months Ended June 30,
2014
 
2013
Shares purchased
16,428
 
21,282
Dividend yield
 
Expected life
1 year
 
1 year
Expected volatility
27%
 
33%
Risk free interest rates
0.1%
 
0.2%
Weighted average per share fair value
$4.71
 
$3.92
 
 
 
 

15


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.

16


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
 %
 
 
 
 
 
 
 
 
 
 
 
 

17


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.

18


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

19


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,

20


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

21


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
On February 24, 2012, we entered into a revolving credit and term loan agreement for a maximum aggregate principal amount of $100.0 million, referred to as the Credit Agreement, with SunTrust Bank, as Administrative Agent, issuing bank and swingline lender, and a syndicate of other lenders. The Credit Agreement is composed of a $30.0 million term loan facility and revolving credit line in an aggregate principal amount of up to $70.0 million, of which, a portion is a $5.0 million swingline facility. Interest on loans outstanding under the Credit Agreement is based, at our election, on a base rate, a Eurodollar Rate or an index rate, in each case plus an applicable margin. The Credit Agreement expires on February 24, 2017. Additionally, the Credit Agreement contains financial covenants requiring that we maintain a leverage ratio of not greater than 2.50 to 1.00 and a fixed charge coverage ratio (as defined in the Credit Agreement) of not less than 2.00 to 1.00. As of June 30, 2014, we were in compliance with all financial covenants. For additional information regarding the Credit Agreement, please see note 6 - Debt to our audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2013.
Other Commitments and Contingencies
At June 30, 2014, we had outstanding commitments for the purchase of inventory, raw materials and supplies of $15.5 million and outstanding commitments for the purchase of capital equipment of $7.9 million. Purchases under our distribution agreements were $2.7 million during the six months ended June 30, 2014.


22


CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
This report contains various “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which represent the Company’s expectations or beliefs concerning future events, including, but not limited to, statements regarding growth in sales of the Company’s products, profit margins and the sufficiency of the Company’s cash flow for its future liquidity and capital resource needs. When used in this report, the terms “anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases of similar import, as they relate to the Company or its subsidiaries or its management, are intended to identify forward-looking statements. 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, without limitation, the effect of competitive pricing, the Company’s dependence on the ability of its third-party suppliers to produce components on a cost-effective basis to the Company, significant expenditures of resources to maintain high levels of inventory, market acceptance of the Company’s products, the impact of the medical device excise tax, the outcome of litigation, the effects of governmental regulation, potential product liability risks and risks of securing adequate levels of product liability insurance coverage, and the availability of reimbursement to patients from health care payers for procedures in which the Company’s products are used. Results actually achieved may differ materially from expected results included in these statements as a result of these or other factors, including those factors discussed under “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2013 and each quarterly report on Form 10-Q we filed after this annual report. Exactech undertakes no obligation to update, and the Company does not have a policy of updating or revising, these forward-looking statements. Except where the context otherwise requires, the terms, “we”, “us”, “our”, “the Company,” or “Exactech” refer to the business of Exactech, Inc. and its consolidated subsidiaries.

23


Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to market risk from interest rates. For our cash and cash equivalents, a change in interest rates affects the amount of interest income that can be earned. For our debt instruments, changes in interest rates affect the amount of interest expense incurred. If our variable rates of interest increased by 1%, our debt service would increase by approximately $0.1 million for the remainder of 2014.
At June 30, 2014, we had one interest-rate swap agreement outstanding that converts variable-rate interest to fixed-rate interest based on three-month LIBOR. We entered into our interest rate swap to eliminate variability in future cash flows by converting LIBOR-based variable-rate interest payments into fixed-rate interest payments. We do not expect our interest rate swap will have a material impact on our results of operations, financial position or cash flows.
The table that follows provides information about our financial instruments that are sensitive to changes in interest rates, including debt obligations and the interest rate swap. The table presents principal cash flow by expected maturity dates and weighted average interest rates for our debt obligations and interest rate swap. We believe that the amounts presented reasonably approximate the financial instrument's respective fair market value as of June 30, 2014, and the weighted average interest rate is that experienced during the six months ended June 30, 2014:
 
 
 
 
 
 
 
(in thousands, except percentages)
2014
2015
2016
2017
Thereafter
Total
Liabilities
 
 
 
 
 
 
Term loan at variable interest rate
$
1,500

$
3,000

$
3,000

$
17,250

$

$
24,750

Weighted average interest rate
1.9
%
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
 
 
 
 
 
Notional amount
 
 
 
27,000

 
 
Fixed rate interest
 
 
 
1.5
%
 
 
 
 
 
 
 
 
 
Foreign Currency Risk
We are exposed to market risk related to changes in foreign currency exchange rates. The functional currency of substantially all of our international subsidiaries is their local currency. Transactions are translated into U.S. Dollars (USD), and exchange gains and losses arising from translation are recognized in “Other comprehensive income (loss)”. Fluctuations in exchange rates affect our financial position and results of operations. The majority of our foreign currency exposure is to the Euro (EUR), British Pound (GBP), and Japanese Yen (JPY). During the six months ended June 30, 2014, translation losses were $0.5 million, which were primarily due to the weakening of the JPY, offset partially by the strengthening of the EUR and GBP against the USD. During the six months ended June 30, 2013, translation losses were $1.3 million, which were primarily due to the weakening of the EUR.
The U.S. dollar is our primary currency, and transactions that are completed in a foreign currency are translated into U.S. dollars and recorded in the financial statements. We recognized currency transaction gains of $0.2 million for the six months ended June 30, 2014, due to the strengthening of the EUR and GBP as compared to the USD, and currency transaction losses of $0.6 million during the same period in 2013, which was due to the effect of amounts payable to us from our distribution offices in Japan and the UK and the weakening of the JPY and GBP as compared to the U.S. dollar. We currently believe that our exchange rate risk exposure is not material to our operations.

24


Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures, or “disclosure controls,” pursuant to Exchange Act Rule 13a-15(b). Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls include some, but not all, components of our internal control over financial reporting. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2014.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 during the three months ended June 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

25


PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
There are various claims, lawsuits, and disputes with third parties and pending actions involving various allegations against us incident to the operation of our business, principally product liability cases. While we believe that the various claims are without merit, we are unable to predict the ultimate outcome of such litigation. We therefore maintain insurance, subject to self-insured retention limits, for all such claims, and establish accruals for product liability and other claims based upon our experience with similar past claims, advice of counsel and the best information reasonably available. At June 30, 2014 and December 31, 2013, we had $110,000 and $135,000 accrued, respectively, for product liability claims. These product liability claims are subject to various uncertainties, and it is possible that they may be resolved unfavorably to us. While it is not possible to predict with certainty the outcome of the various cases, it is the opinion of management that, upon ultimate resolution, the cases will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Our insurance policies covering product liability claims must be renewed annually. Although we have been able to obtain insurance coverage for product liability claims at a cost and on other terms and conditions that have been acceptable to us, we may not be able to procure acceptable policies in the future.
Item 1A. Risk Factors
There have been no material changes to the risk factors set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2013.

26


Item 6. Exhibits
(a) Exhibit
 
Description
10.1
 
Exactech, Inc. 2009 Amended and Restated 2009 Executive Incentive Compensation Plan, filed with the SEC on March 27, 2014 as Exhibit A to the Company's Definitive Proxy Statement on Schedule 14A and incorporated by reference herein.
31.1
 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification of Chief Executive Officer pursuant to 18 USC Section 1350.
32.2
 
Certification of Chief Financial Officer pursuant to 18 USC Section 1350.
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase


27


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
  
 
Exactech, Inc.
 
 
 
 
Date:
August 6, 2014
By:
/s/ David Petty                                               
 
 
 
David Petty
 
 
 
Chief Executive Officer (principal executive officer) and President
 
 
 
 
Date:
August 6, 2014
By:
/s/ Joel C. Phillips                                             
 
 
 
Joel C. Phillips
 
 
 
Chief Financial Officer (principal financial officer and principal accounting officer) and
 
 
 
Treasurer

28