Exactech fourth quarter total revenue increases 7% to $51.8 million

Exactech, Inc. (Nasdaq:EXAC), a developer and producer of bone and joint restoration products for hip, knee, extremities, spine and biologic materials, announced today that revenue for 2010 increased 7% to $190.5 million from $177.3 million in 2009. Diluted earnings per share for the year was $0.80 based on net income of $10.5 million. This compares with net income of $8.3 million or $0.65 diluted EPS a year ago. Net income for 2010 and 2009 included pre-tax legal expenses and compliance costs of $1.3 million and $7.0 million, respectively, related to the Department of Justice (DOJ) inquiry and settlement. Excluding the impact of these expenses, 2010 net income was $11.3 million or $0.86 diluted EPS compared with $13.2 million or $1.03 diluted EPS in 2009.

“During the fourth quarter, sales rose 7% in both domestic and international operations. U.S. sales were $34.5 million, and international sales reached $17.3 million. International sales represented 33% of total sales for the fourth quarter in both 2010 and 2009.”

2010 Fourth Quarter Highlights and Segment Performance

• Total revenue for the quarter increased 7% to $51.8 million

• Knee implant revenue decreased 2% to $20.6 million

• Hip implant revenue increased 21% to $8.2 million

• Biologic & spine segment revenues increased 7% to $7.4 million

• Extremity implant revenue increased 32% to $8.6 million

• Other revenues remained flat at $7.0 million

2010 Full Year Highlights and Segment Performance

• Revenue for the year increased 7% to $190.5 million

• Knee implant revenue increased 1% to $76.5 million

• Hip implant revenue increased 7% to $28.7 million

• Biologic & spine segment revenues increased 2% to $28.0 million

• Extremity implant revenue increased 32% to $30.0 million

• Other revenues increased 12% to $27.2 million

For the fourth quarter of 2010, revenue was $51.8 million, an increase of 7% over $48.3 million for the fourth quarter last year. Net income for the fourth quarter of 2010 was $2.7 million compared to $0.5 million for the same quarter of 2009. Diluted EPS was $0.21 for the fourth quarter of 2010 compared to $0.04 in the fourth quarter of 2009. Excluding legal and compliance costs of $0.5 million associated with the DOJ inquiry, diluted EPS for the fourth quarter of 2010 was $0.23, compared with $3.6 million in DOJ related costs and $0.25 of adjusted diluted EPS for the fourth quarter of 2009. A reconciliation of the adjusted net income and adjusted diluted EPS is included at the end of the attached financial statements.

Exactech Chairman and CEO Bill Petty said, "Exactech showed solid performance in 2010 with a number of important developments. Revenue for the year was up 7% to $190.5 million. Diluted earnings per share was $0.80 based on net income of $10.5 million. This compared with net income of $8.3 million or $0.65 diluted EPS in 2009.

"We were particularly pleased with the performance of our extremities and hip operating segments, which finished the year with strong numbers. Our shoulder business is the fastest growing extremities business in the industry and has become an increasingly important part of our operations with segment sales reaching $30 million in 2010, making it our second largest business segment. Knee business, our largest operating segment, was up only 1% during the year, reflecting industry softness as well as the impact of sales and marketing transitions in several overseas markets. We are confident these changes are going to provide us with improved results for the future. In the fourth quarter, the 2% decrease in knee sales also reflected challenging comparisons with the fourth quarter of 2009 when knee sales rose 24%.

"We reached a resolution of the Department of Justice investigation. We are pleased to finally have this phase of this issue behind us. There will be ongoing expense in 2011 related to government-required monitors, compliance activities, and associated legal fees.

"Exactech introduced a number of important new products in 2010. In the first quarter we received 510(k) clearance from the U.S. Food and Drug Administration (FDA) to market the Equinoxe^® Platform Fracture Stem, the latest addition to our shoulder arthroplasty line. Full market launch began in the second half. Innovative new products like this have provided strong 32% growth for the Equinoxe line resulting in capture of over 5% of the shoulder market in just five years.

"On the acquisition front, we acquired several innovative spine product lines and related technology from VertiFlex, a leading developer of minimally invasive spinal surgery technologies. The VertiFlex technologies add a range of products that fit well with the current Exactech spine product portfolio and will help attract a higher quality sales organization to build our spine business. We also acquired Brighton Partners, the sole source supplier of the net compression molded polyethylene bearings used exclusively in Exactech's Optetrak^® knee replacement system. The strategic acquisition of the supply chain helps protect our proprietary technology.

"We were granted approval to market the Novation^® primary hip replacement system in Japan, a robust orthopaedics market where hip replacement surgeries outnumber knee replacement procedures. The addition of the Novation hip line in Japan allows us to further leverage our investment into our Japanese distribution operation," Petty said.

Exactech President David Petty said, "During the fourth quarter, sales rose 7% in both domestic and international operations. U.S. sales were $34.5 million, and international sales reached $17.3 million. International sales represented 33% of total sales for the fourth quarter in both 2010 and 2009.

"For the full year 2010, U.S. sales increased 8% to $132.0 million, and international sales were up 7% to $58.5 million. International sales represented 31% of total sales for both 2010 and 2009.

"We are continuing to build our direct operations in Germany and Spain that began in 2010, resulting in an international sales organization with direct operations in eight markets. Our investments in international sales organizations are being complemented with investments in our domestic sales channels as well, as we continue to increase the quality of our sales teams and increase the sales per rep," Petty said.

Exactech CFO Jody Phillips said, "Gross margin percentage for the year increased to 66.4% compared to 63.3% for last year, primarily due to growth in the domestic market and transition of certain international distributors to higher margin direct sales operations. Total operating expenses in 2010 were $108.1 million, up 11% from $97.6 million in the comparable period last year. The increase in operating expenses was primarily due to variable expenses related to our sales growth and startup expenses incurred with our direct operations transitions during 2010. Fourth quarter 2010 operating expenses increased 13% to $31.1 million, which included $0.7 million in bad debt expenses as a result of our international direct transitions."

Looking forward, the company released its 2011 revenue guidance of $202 - $210 million and diluted EPS of $0.86 - $0.94 on a GAAP basis and diluted EPS of $1.10 - $1.18 excluding the impact of the company's projection of $5.0 million in compliance expenses for 2011. For the first quarter of 2011, the company said it anticipates revenues of $50.5 - $52.5 million and diluted EPS of $0.19 - $0.21 on a GAAP basis and diluted EPS of $0.26 - $.28 excluding the impact of $1.4 million in projected compliance related expenses. The foregoing statements regarding targets are forward-looking and actual results may differ materially. These are the company's targets, not predictions of actual performance.