NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015
(Unaudited)
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 Company's audited annual financial statements. The condensed financial statements should be read in conjunction with the audited financial statements and notes contained in Exactech's Annual Report on Form 10-K for the year ended December 31, 2015, 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, Blue Ortho, Exactech Australia 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 month period ended March 31, 2016 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.
During the first quarter of 2016, we changed the classification of surgical instrumentation not yet placed in service, from non-current inventory in the other assets category to surgical instrumentation in the property, plant and equipment category. In order to present comparable financial statements, we reclassified $14.4 million of non-current inventory in the December 31, 2015 balance sheet to property, plant and equipment. We also reclassified the effect of the classification change on the cash flow statement for the three months ended March 31, 2015 by reducing cash used for inventory by $1.2 million in cash flow from operations and increasing the cash used for property, plant and equipment in cash flow from investing. The prior period reclassification had no impact on our condensed consolidated statements of income or equity in the condensed consolidated balance sheets.
2.
|
NEW ACCOUNTING PRONOUNCEMENTS AND STANDARDS
|
In March 2016, the Financial Accounting Standards Board (“FASB”) issued updated guidance related to accounting for employee share-based payments. The guidance simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2016, and early adoption is permitted. We are currently assessing the impact of adopting this guidance on our financial statements.
In February 2016, the FASB issued updated guidance on leases. The new standard requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. A modified retrospective approach should be applied for leases existing at the beginning of the earliest comparative period presented in the financial statements. The guidance is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. We are currently assessing the impact of adopting this guidance on our financial statements.
In November 2015, the FASB issued amended guidance on income taxes, which simplifies the classification of deferred income tax liabilities and assets in a classified statement of financial position. The amendment requires entities that present a classified balance sheet to classify all deferred tax liabilities and assets as a noncurrent amount. The amendment is effective for fiscal years and interim periods within those years beginning after December 15, 2016, and may be early adopted on a prospective basis or on a retrospective
6
basis to all periods presented. In the curren
t quarter we adopted the amended guidance on a retrospective basis, and reclassified $1.7 million of current deferred tax assets to non-current deferred tax liabilities as of December 31, 2015.
In September 2015, the FASB issued guidance on business combination provisional adjustments during the measurement period. The new standard requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The guidance is effective for annual and interim periods beginning on or after December 15, 2017, and early application is permitted. We are currently assessing the impact of adopting this guidance on our financial statements; however, we do not expect the adoption of this guidance to have a material impact on our financial position or results of operations.
In May 2014, the 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. In July 2015, the FASB delayed the effective date of this guidance by one year. The guidance is effective for the first fiscal quarter of 2018, and early application is not permitted earlier than January 1, 2015. We are currently assessing the impact of adopting this guidance on our financial statements.
Our financial instruments include cash and cash equivalents, trade receivables, debt, and foreign currency 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 values of foreign currency hedges are based on dealer quotes.
The table below provides information on our liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Total Fair Value
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
8,844
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,844
|
|
Total:
|
|
$
|
8,844
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
6,222
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,222
|
|
Total:
|
|
$
|
6,222
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of our contingent consideration liability is management's best estimate based on the present value of estimated payment scenarios, which is determined based on inputs not observable in the market. We use assumptions we believe would be made by a market participant. We evaluate our estimates on a quarterly basis, as additional data impacting the assumptions is obtained, and will recognize any changes in the unaudited condensed consolidated statements of income. See Note 12, Business Acquisition, for further discussion on the contingent consideration.
7
4.
|
GOODWILL A
ND OTHER INTANGIBLE ASSETS
|
Goodwill –
The following table provides the changes to the carrying value of goodwill for the three month period ended March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Extremities
|
|
|
Knee
|
|
|
Hip
|
|
|
Biologics
and Spine
|
|
|
Other
|
|
|
Total
|
|
Balance as of December 31, 2015
|
|
$
|
4,461
|
|
|
$
|
5,132
|
|
|
$
|
904
|
|
|
$
|
7,553
|
|
|
$
|
800
|
|
|
$
|
18,850
|
|
Acquired goodwill
|
|
|
927
|
|
|
|
1,545
|
|
|
|
463
|
|
|
|
—
|
|
|
|
154
|
|
|
|
3,089
|
|
Foreign currency translation effects
|
|
|
249
|
|
|
|
254
|
|
|
|
76
|
|
|
|
—
|
|
|
|
43
|
|
|
|
622
|
|
Balance as of March 31, 2016
|
|
$
|
5,637
|
|
|
$
|
6,931
|
|
|
$
|
1,443
|
|
|
$
|
7,553
|
|
|
$
|
997
|
|
|
$
|
22,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We test goodwill for impairment annually as of the 1
st
of October. Our impairment analysis as of October 1, 2015 indicated no impairment to goodwill.
Other Intangible Assets –
The following table summarizes the carrying values of our other intangible assets at March 31, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Carrying Value
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Value
|
|
|
Weighted Avg
Amortization
Period
|
|
Balance at March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses and designs
|
|
$
|
16,949
|
|
|
$
|
5,902
|
|
|
$
|
11,047
|
|
|
|
11.0
|
|
Patents and trademarks
|
|
|
4,678
|
|
|
|
3,318
|
|
|
|
1,360
|
|
|
|
14.2
|
|
Customer relationships
|
|
|
3,542
|
|
|
|
2,898
|
|
|
|
644
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product licenses and designs
|
|
$
|
16,675
|
|
|
$
|
5,554
|
|
|
$
|
11,121
|
|
|
|
11.0
|
|
Patents and trademarks
|
|
|
4,678
|
|
|
|
3,252
|
|
|
|
1,426
|
|
|
|
14.2
|
|
Customer relationships
|
|
|
2,923
|
|
|
|
2,831
|
|
|
|
92
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Foreign currency transactions gain (loss)
|
|
$
|
726
|
|
|
$
|
(608
|
)
|
Foreign currency option (loss) gain
|
|
|
(232
|
)
|
|
|
406
|
|
Foreign currency gain (loss), net
|
|
$
|
494
|
|
|
$
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
Foreign Currency Transactions
–
Gains and losses resulting from our transactions and our subsidiaries’ transactions that are made in currencies different from our and their own are included in income as they occur and as other income (expense) in the condensed consolidated statements of income.
Foreign Currency Options
–
During the first quarter of 2016, we entered into foreign currency forward contracts as economic hedges against the continued strengthening of the U.S. Dollar (USD) against the Euro (EUR) and the Japanese Yen (JPY). During the three months ended March 31, 2016, we recognized losses of $0.2 million related to these instruments. The recognized losses are recorded in other income (expense) in the unaudited condensed consolidated statements of income related to the fair value of these currency options based upon a dealer's quotes.
8
During the first quarter of 2015, we entered into foreign currency forward contracts as economic hedges against the continued strengthening of the USD against the EUR and the JPY.
During the quarter ended March 31, 2015, we recognized a gain of $0.4 millio
n on the condensed consolidated statements of income related to the fair value of these currency options based upon a dealer's quotes.
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 USD, and translation gains and losses 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 EUR, British Pound (GBP), Australian Dollar (AUD) and JPY. During the three months ended March 31, 2016, translation gains were $2.6 million, which were primarily due to the strengthening of the JPY and the AUD against the USD. During the three months ended March 31, 2015, translation losses were $3.3 million, which were primarily due to the weakening of the JPY against the USD, offset partially by the strengthening of the EUR and GBP against the USD. While we may experience translation gains and losses during the balance of the year ending December 31, 2016, these gains and losses are not expected to have a material adverse effect on our financial position, results of operations or cash flows.
Hedging Activities
We do not enter into or hold derivative instruments for trading or speculative purposes. During December 2015, we terminated our interest rate swap, which we had entered into 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 was based on dealer quotes. The change in fair value during the three months ended March 31, 2015 of $18,000 was recorded as accumulated other comprehensive loss in the consolidated balance sheets.
Inventories are valued at the lower of cost or net realizable value 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 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 this 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 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. 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 charges for the three months ended March 31, 2016 and 2015 were $1,355,000 and $38,000, respectively; which increased as a result of our inventory builds for new and existing product. 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.
9
The following table summarizes our classifications of inventory
as of March 31, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Raw materials
|
|
$
|
21,088
|
|
|
$
|
19,481
|
|
Work in process
|
|
|
2,130
|
|
|
|
1,633
|
|
Finished goods on hand
|
|
|
17,522
|
|
|
|
14,497
|
|
Finished goods on loan/consignment
|
|
|
44,196
|
|
|
|
44,813
|
|
Inventory total
|
|
|
84,936
|
|
|
|
80,424
|
|
Non-current inventories
|
|
|
12,359
|
|
|
|
8,995
|
|
Inventories, current
|
|
$
|
72,577
|
|
|
$
|
71,429
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016, net operating loss carry forwards of our foreign and domestic subsidiaries totaled $26.9 million, some of which begin to expire in 2020. For accounting purposes, the estimated tax effect of these net operating loss carry forwards results in a deferred tax asset. The deferred tax asset associated with these losses was $8.2 million with a valuation allowance of $4.4 million charged against this deferred tax asset assuming these losses will not be fully realized. At December 31, 2015, these net operating loss carry forwards totaled $27.3 million, and the deferred tax asset was $8.5 million with a valuation allowance of $4.3 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. We are not currently aware of any open examinations by the various government jurisdictions. As of March 31, 2016, we had no liability recorded as an uncertain tax benefit.
Debt consisted of the following as of March 31, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
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, 2.2% as of March 31, 2016.
|
|
|
16,000
|
|
|
|
16,000
|
|
Total debt
|
|
$
|
16,000
|
|
|
$
|
16,000
|
|
|
|
|
|
|
|
|
|
|
The following is a schedule of future debt maturities as of March 31, 2016, for the years ending December 31 (in thousands):
|
|
|
|
|
2016
|
|
$
|
—
|
|
2017
|
|
|
—
|
|
2018
|
|
|
—
|
|
2019
|
|
|
—
|
|
2020
|
|
|
16,000
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
16,000
|
|
|
|
|
|
|
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
10
believe that the various claims are wi
thout 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 expe
rience with similar past claims, advice of counsel and the best information reasonably available. At March 31, 2016 and December 31, 2015, we had $125,000 and $100,000 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 March 31, 2016, we had outstanding commitments for the purchase of inventory, raw materials and supplies of $20.8 million and outstanding commitments for the purchase of capital equipment of $18.5 million. Purchases under our distribution agreements were $0.8 million during the three months ended March 31, 2016.
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 March 31, 2016, 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.
We evaluate our operating segments by our major product lines: extremity implants, knee implants, hip implants, biologics and spine, 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 audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.
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.
11
Summarized information concerning our reportable segments is shown in the following table (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Extremity
|
|
|
Knee
|
|
|
Hip
|
|
|
Biologics
& Spine
|
|
|
Other
|
|
|
Corporate
|
|
|
Total
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
24,160
|
|
|
$
|
19,387
|
|
|
$
|
11,335
|
|
|
$
|
5,394
|
|
|
$
|
5,022
|
|
|
$
|
—
|
|
|
$
|
65,298
|
|
Segment profit (loss)
|
|
|
4,924
|
|
|
|
988
|
|
|
|
213
|
|
|
|
129
|
|
|
|
49
|
|
|
|
276
|
|
|
|
6,579
|
|
Total assets, net
|
|
|
40,933
|
|
|
|
73,144
|
|
|
|
38,818
|
|
|
|
23,857
|
|
|
|
11,713
|
|
|
|
102,264
|
|
|
|
290,729
|
|
Capital expenditures
|
|
|
1,252
|
|
|
|
1,208
|
|
|
|
1,002
|
|
|
|
264
|
|
|
|
4,139
|
|
|
|
1,456
|
|
|
|
9,321
|
|
Depreciation and Amortization
|
|
|
712
|
|
|
|
1,988
|
|
|
|
669
|
|
|
|
262
|
|
|
|
172
|
|
|
|
857
|
|
|
|
4,660
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
21,080
|
|
|
$
|
18,438
|
|
|
$
|
10,951
|
|
|
$
|
5,140
|
|
|
$
|
5,767
|
|
|
$
|
—
|
|
|
$
|
61,376
|
|
Segment profit (loss)
|
|
|
4,537
|
|
|
|
1,216
|
|
|
|
536
|
|
|
|
140
|
|
|
|
(363
|
)
|
|
|
(474
|
)
|
|
|
5,592
|
|
Total assets, net
|
|
|
33,337
|
|
|
|
68,748
|
|
|
|
33,502
|
|
|
|
22,564
|
|
|
|
13,676
|
|
|
|
100,715
|
|
|
|
272,542
|
|
Capital expenditures
|
|
|
1,052
|
|
|
|
2,062
|
|
|
|
917
|
|
|
|
66
|
|
|
|
238
|
|
|
|
649
|
|
|
|
4,984
|
|
Depreciation and Amortization
|
|
|
707
|
|
|
|
2,050
|
|
|
|
725
|
|
|
|
283
|
|
|
|
138
|
|
|
|
939
|
|
|
|
4,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic distribution of our long-lived assets and inventory is shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Domestic
|
|
|
International
|
|
|
Domestic
|
|
|
International
|
|
Long lived assets, gross
|
|
$
|
168,128
|
|
|
$
|
58,556
|
|
|
$
|
161,672
|
|
|
$
|
53,859
|
|
Accumulated depreciation and amortization
|
|
|
(91,698
|
)
|
|
|
(21,004
|
)
|
|
|
(88,958
|
)
|
|
|
(19,391
|
)
|
Long lived assets, net
|
|
|
76,430
|
|
|
|
37,552
|
|
|
|
72,714
|
|
|
|
34,468
|
|
Inventory
|
|
$
|
47,124
|
|
|
$
|
37,812
|
|
|
$
|
43,725
|
|
|
$
|
36,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic distribution of our sales is summarized in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
|
2015
|
|
|
% Inc/Decr
|
|
Domestic sales
|
|
$
|
44,573
|
|
|
$
|
41,248
|
|
|
|
8.1
|
|
International sales
|
|
|
20,725
|
|
|
|
20,128
|
|
|
|
3.0
|
|
Total sales
|
|
$
|
65,298
|
|
|
$
|
61,376
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
Net income
|
|
$
|
4,402
|
|
|
|
|
|
|
|
|
|
|
$
|
4,112
|
|
|
|
|
|
|
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
4,402
|
|
|
|
14,057
|
|
|
$
|
0.31
|
|
|
$
|
4,112
|
|
|
|
13,916
|
|
|
$
|
0.30
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
258
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders plus assumed conversions
|
|
$
|
4,402
|
|
|
|
14,173
|
|
|
$
|
0.31
|
|
|
$
|
4,112
|
|
|
$
|
14,174
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2016, weighted average options to purchase 503,978 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 March 31, 2015,
12
weighted average options to purchase 201,668 shares of common stock 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 three months ended March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional Paid-
|
|
|
Common Stock Held in
|
|
|
Retained
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
|
(in thousands)
|
|
Shares
|
|
|
Amount
|
|
|
In
Capital
|
|
|
Treasury
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
Balance December 31, 2015
|
|
|
14,154
|
|
|
$
|
142
|
|
|
$
|
81,963
|
|
|
$
|
—
|
|
|
$
|
158,270
|
|
|
$
|
(11,986
|
)
|
|
$
|
228,389
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,402
|
|
|
|
—
|
|
|
|
4,402
|
|
Other comprehensive income (loss), net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,572
|
|
|
|
2,572
|
|
Exercise of stock options
|
|
|
88
|
|
|
|
1
|
|
|
|
1,493
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,494
|
|
Issuance of restricted common stock for services
|
|
|
5
|
|
|
|
—
|
|
|
|
97
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
97
|
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
11
|
|
|
|
—
|
|
|
|
178
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
178
|
|
Repurchase of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,042
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,042
|
)
|
Compensation cost of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
617
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
617
|
|
Tax impact on stock awards
|
|
|
—
|
|
|
|
—
|
|
|
|
(419
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(419
|
)
|
Balance March 31, 2016
|
|
|
14,258
|
|
|
$
|
143
|
|
|
$
|
83,929
|
|
|
$
|
(3,042
|
)
|
|
$
|
162,672
|
|
|
$
|
(9,414
|
)
|
|
$
|
234,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock:
In December 2015, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock over a two year period. During the first quarter of 2016, we reacquired 163,529 shares of our common stock at an average price of $18.60 per share, or an aggregate of $3.0 million.
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, 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. We refer to this plan, as amended, as the 2009 Plan. The maximum number of common shares issuable under the 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 March 31, 2016, there were 438,644 total shares remaining issuable under the 2009 Plan.
The aggregate compensation cost charged against income with respect to awards issued under the 2009 Plan and the 2009 Employee Stock Purchase Plan, referred to as the 2009 ESPP, was $0.6 million and $0.5 million for the three months ended March 31, 2016 and 2015, respectively. Income tax benefit on exercises of non-qualified stock options was $0.2 million and $0.1 million for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, total unrecognized compensation cost related to unvested awards was $1.5 million and is expected to be recognized over a weighted-average period of 1.7 years.
13
Stock Options:
A summary of the status of stock option activity under our stock-based compensation plans as of March 31, 2016 and changes during the year to date is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
Options
|
|
|
Weighted
Avg Exercise
Price
|
|
|
Weighted Avg
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic Value
(In thousands)
|
|
Outstanding - January 1
|
|
|
1,217,003
|
|
|
$
|
18.70
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(87,774
|
)
|
|
|
17.02
|
|
|
|
|
|
|
$
|
182
|
|
Forfeited or Expired
|
|
|
(138,106
|
)
|
|
|
17.61
|
|
|
|
|
|
|
|
|
|
Outstanding - March 31
|
|
|
991,123
|
|
|
$
|
19.01
|
|
|
|
3.86
|
|
|
$
|
1,882
|
|
Exercisable - March 31
|
|
|
512,183
|
|
|
$
|
17.35
|
|
|
|
2.83
|
|
|
$
|
1,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. No stock options for the purchase of common stock were granted during either of the three month periods ended March 31, 2016 or 2015.
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 2016, the Committee approved equity compensation to the 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 $77,500, payable in four equal quarterly grants of common stock based on the market prices of our common stock on the respective dates of grant. The summary information of the restricted stock grants for the first three months of 2016 is presented below:
|
|
|
|
|
Grant date
|
|
February 29, 2016
|
|
Aggregate shares of restricted stock granted
|
|
|
5,190
|
|
Grant date fair value
|
|
$
|
97,000
|
|
Weighted average fair value per share
|
|
$
|
18.65
|
|
|
|
|
|
|
During February 2015, the Committee approved equity compensation to the 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 $77,500, payable in four equal quarterly grants of common stock based on the market prices of our common stock on the respective dates of grant. The summary information of the restricted stock grants for the first three months of 2015 is presented below:
|
|
|
|
|
Grant date
|
|
February 27, 2015
|
|
Aggregate shares of restricted stock granted
|
|
|
4,974
|
|
Grant date fair value
|
|
$
|
116,000
|
|
Weighted average fair value per share
|
|
$
|
23.35
|
|
|
|
|
|
|
All of the restricted stock awards in 2016 and 2015 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. During February 2016, our Board of Directors adopted an amendment to the 2009 ESPP, to increase the maximum number of shares issuable under the 2009 ESPP to 450,000, which is subject to shareholder approval at our Annual Meeting of Shareholders to be held on May 2, 2016. There are four offering periods during an annual period. As of March 31, 2016, 27,641 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:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
|
2015
|
|
Shares purchased
|
|
|
11,538
|
|
|
|
10,102
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Expected life
|
|
1 year
|
|
|
1 year
|
|
Expected volatility
|
|
|
33
|
%
|
|
|
31
|
%
|
Risk free interest rates
|
|
|
0.7
|
%
|
|
|
0.2
|
%
|
Weighted average per share fair value
|
|
$
|
3.91
|
|
|
$
|
4.80
|
|
|
|
|
|
|
|
|
|
|
Exactech Australia
On February 1, 2016, we completed the acquisition of all of the outstanding capital stock of Exactech Australia Pty Ltd, an Australia-based company. Exactech Australia has been our independent importer and distribution partner in Australia for the past four years. The acquisition was accomplished to further the partnership between us and the team at Exactech Australia and to further service customers in the Asia Pacific area.
The aggregate purchase price for Exactech Australia will range from $3.1 million AUD to $7.6 million AUD, of which $1.6 million AUD, or $1.1 million USD at a 0.7034 AUD:USD exchange rate, was paid to the Exactech Australia shareholders in cash at the closing of the acquisition, and the remainder will be paid to such shareholders contingent on the achievement of certain future milestones. We expect the contingent payment to be paid over the next two years. Consideration also included $2.0 million USD in forgiven accounts receivable that were owed to us as of February 1, 2016. We are currently awaiting finalization of Exactech Australia’s closing balance sheet to complete purchase accounting. The estimated fair value of the contingent consideration was determined using the following assumptions: discount rates of 3.7%, probability levels of milestone range of outcomes, and expected timing of achievement of contingent consideration earn-out amounts. We financed the acquisition from our operating cash flows.
Upon completion of the acquisition, we effectively concluded a pre-existing distribution agreement for the distribution of our products, which was stated at fair value therefore no impact to the statement of income was recognized. The accounting for our acquisition of Exactech Australia is preliminary, pending final results of operations and deferred tax liability determination. The preliminary goodwill is determined as the excess of the consideration over the fair value of the net assets acquired, and was due to the synergies we obtained in the extended service in the Asia Pacific area. Goodwill was allocated to the knee, extremity and hip segments based on expected sales for the segments. Pro forma revenue and earnings for the business combination have not been presented because the effects, both individually and in the aggregate, were not material to our results of operations.
15
The following t
able summarizes the preliminary purchase price allocation and determination of goodwill, which is not deductible for tax purposes, as of February 1, 2016 (in thousands):
|
|
|
|
|
|
|
Amounts at
Acquisition
|
|
Consideration:
|
|
|
|
|
Cash
|
|
$
|
1,152
|
|
Fair value of contingent consideration
|
|
|
2,435
|
|
Total Purchase Price
|
|
|
3,587
|
|
Forgiveness of pre-existing debt
|
|
|
2,006
|
|
|
|
|
5,593
|
|
Acquisition related expenses - incurred as of
March 31, 2016
|
|
$
|
131
|
|
Preliminary identifiable assets acquired and liabilities
assumed:
|
|
|
|
|
Current assets acquired
|
|
|
1,616
|
|
Property and equipment
|
|
|
722
|
|
Current liabilities assumed
|
|
|
(208
|
)
|
Deferred tax liability assumed
|
|
|
(161
|
)
|
Identifiable intangible assets
|
|
|
535
|
|
|
|
|
2,504
|
|
Goodwill
|
|
|
3,089
|
|
Net assets acquired
|
|
$
|
5,593
|
|
|
|
|
|
|
The identifiable intangible assets are being amortized using the straight-line method using estimated ten year useful lives, and are recorded net of accumulated amortization in Customer relationships on the unaudited condensed consolidated balance sheet.
Blue Ortho
On January 15, 2015, we completed the acquisition of all of the outstanding capital stock of Blue Ortho SAS, a France-based company. Blue Ortho is the computer-assisted surgical technology development and manufacturing firm that partnered with the Company to develop the ExactechGPS
®
Guided Personalized Surgery system. We acquired Blue Ortho to further the partnership between us and the team at Blue Ortho and expand the development of ExactechGPS to other segments of our portfolio.
The aggregate purchase price for Blue Ortho is a maximum of €10.0 million, of which €2.0 million, or $2.3 million at a 1.16 USD exchange rate at closing, was paid to the Blue Ortho shareholders in cash at the closing of the acquisition, and the remainder will be paid to such shareholders contingent on the achievement of certain future surgical case milestones. The estimated fair value of the contingent consideration was determined using the following assumptions: discount rates of 4.5-6.5%, probability levels of milestone range of outcomes, and expected timing of achievement of contingent consideration earn-out amounts. We expect the contingent consideration to be paid over the next five to ten years. We financed the acquisition from our operating cash flows.
Upon completion of the acquisition, we effectively terminated a pre-existing development agreement for the development of the ExactechGPS. We acquired tangible assets of $1.5 million, assumed liabilities of $2.9 million, intangible assets, comprising product licenses and designs, of $7.5 million, and goodwill of $6.5 million. Pro forma revenue and earnings for the business combination have not been presented because the effects, both individually and in the aggregate, were not material to our results of operations.
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The following table summarizes the contingent consideration balance and activity for the period ended March 31, 2016 (in thousands):
|
|
|
|
|
Beginning fair value of contingent liability, December 31, 2015
|
|
$
|
6,222
|
|
Period change in valuation
|
|
|
48
|
|
Payments
|
|
|
(327
|
)
|
Foreign currency translation effects
|
|
|
217
|
|
Contingent liability balance, March 31, 2016
|
|
|
6,160
|
|
Current liability
|
|
|
(1,403
|
)
|
Non-current liability
|
|
$
|
4,757
|
|
|
|
|
|
|
Due to our expected timing of earn-out payments, a portion of the contingent consideration is classified in other current liabilities on our unaudited condensed consolidated balance sheets. The remainder is classified as other non-current liabilities. The change in the contingent consideration during the three months ended March 31, 2016 was recognized as interest expense in the unaudited condensed consolidated statements of income.
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