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Executives

Bill Petty – Chairman, CEO

David Petty – President

Jody Phillips - CFO

Analysts

William Plovanic – Canaccord Genuity

Jeff Johnson – Robert W. Baird

James Sidoti – Sidoti & Company

Chris Vicini – Eagle Asset Management

Mike (Lande) – Summer Street Research

Jim Quentin – Barrett & Company

Exactech, Inc. (EXAC) Q3 2011 Earnings Call November 2, 2011 10:00 AM ET

Operator

Welcome to the Exactech Third Quarter 2011 Earnings Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions).

Today’s conference is being recorded November 2, 2011.

I would now like to turn the conference over to Dr. Bill Petty, CEO. Please, go ahead.

Bill Petty

Thank you, and welcome to all of you to the Exactech quarter three conference call. As I always do, I will begin with the forward-looking statements statement.

This release contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

They represent the company’s expectations or beliefs concerning future events of the company’s financial performance. These forward-looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements.

These factors, include the effect of competitive pricing, the company’s dependence on the ability of third-party manufacturers to produce components on a basis which is cost effective to the company, market acceptance of the company’s products, effects of government regulation, and other probable effects. Results actually achieved may differ from the expected results included in these statements.

For the third quarter Exactech's revenue were 47.3 million, which is a 13% increase is over the 42 million in the third quarter of 2010. Net income however, was down 12% to 1.3 million, or $0.10 per diluted share compared to 1.5 million or $0.11 per diluted share last year. Excluding the compliances expense of 1 million, the net income increased to 19% to 1.9 million or $0.15 per share.

Specifically related to our different product platforms, our Knee Implant revenue for the quarter increased 15% to 17.9 million, Extremity revenue increase 34% to 9.8 million. Hip Implant revenue increased 22% to 8 million. Biologics and Spine revenue however decreased 15% to 5.4 million, and other products were flat at 6.2 million.

Now to discuss just briefly the nine-month 2011 performance. For the first nine months, revenue was 152.3 million, which is an increase of 10% compared to the same period last year. Net income for the first nine months was down 10% to 7 million, or $0.53 per-share, compared to 7.8 million or $0.59 per-share in 2010. Excluding the compliance expense, the compliance expense of 3.7 million, net income increased 13% to 9.4 million or $0.71 a share.

For the segments for the first nine months, Knee Implant revenue increased 7%, or 59.9 million. Extremity Implant revenue increased 34% to 28.9 million. Hip Implant revenue increased 19% or 24.4 million, and Biologics and Spine revenue decreased 10% to 18.4 million. Our other product revenue increased 2% to 20.7 million.

Certainly, we are pleased with our top line performance as we continue to advance our market share. We are not as pleased with the bottom-line performance. Jody will comment a little further on that in a few minutes. These issues were related primarily to shift between domestic and international business, and also some non-recurring expenses, which impacted this to some extent.

So I’m now going to turn it over to Jody, and let Jody give some of the operational and financial information.

Joel Phillips

Good morning everyone, and thanks for joining us for the third quarter 2011 conference call. The third quarter results were in line with our expectations at the revenue line, but were below our expectations in net income, primarily due to the OUF mix as compared to the U.S. sales, coupled with an increase in cost in our European direct operation.

I know that many of you are interested in the currency impact, so I’m going to outline some of those numbers as they relate to the Q3 revenues. When we look at revenues on a constant currency basis for the third quarter, the total revenues were 10% growth versus the reported 13. When we look at knee revenues, that was a 12% constant currency growth versus a reported 15. Hip revenues were 19% constant currency versus a reported 22. Extremity revenues were 33% versus a constant currency 34%. Biospine revenues were down 16% on a constant currency basis versus the reported down of 15%.

Our versed margins expanded during the quarter by 110 basis points to 68.5, primarily due to a higher mix of OUF business that was conducted through our direct channels as compared to our traditional distributor base business.

As we now begin to annualize the sales ramp up through these direct channels, we expect lower quarter-over-quarter gross margin percentage increases, likely in the neighborhood of 50 to 100 basis points for the fourth quarter of 2011, as well as the first half of 2012.

The total operating expense increase of 20% to 30.3 million for the third quarter was impacted by currency conversion as well. Approximately 900,000 of this increase was due to currency on a constant currency basis. The operating expenses increased 17%. The largest driver of the sales and marketing increase was the ramp up of cost in our direct operations in Spain, Germany, and Japan, which accounted for 1.8 million of the $2.3 million increase in sales and marketing expenses for the third quarter.

The 32% in G&A expenses during the quarter was primarily due to the $1 million in compliance spending, that compared to the 200,000 that we had in compliance spending in the third quarter of last year.

We are currently projecting $1 million in compliance spending for the fourth quarter, and have updated our full-year 2011 estimate to 4.6 million for compliance cost for 2011.

During the third quarter, we returned to increases in R&D spending of 17%, which was more along the lines of what we expected for the full-year. One of the components of this increase is the additional design and development cost from surgeon input, as our processes under the monitor shift are functioning better than they were in the first half of the year.

As a result of these operating activities, our operating profit dropped to 1.8 million from 3.8 million in the third quarter of 2010. As we look to our updated guidance, we have largely maintained our revenue guidance and decrease our full-year EPS projections, based on the third quarter actual performance as well as a slightly lower outlook for the fourth quarter based on anticipated US versus OUF mix and current market trend.

Specifically in the fourth quarter, we are projecting a 1 to 6% growth in revenues with a total revenue guidance of 52 to 55 million, a 21 to 23% fully diluted GAAP EPS number, and 25 to $0.27 on fully diluted EPS on a non-GAAP basis which equates to approximately a 12 to 19% increase in our non-GAAP basis net income for the fourth quarter.

From a balance sheet perspective, we feel that we have now reached a reflection point in the cash flow burn that we have been projecting for a number of quarters. Total inventories actually decreased by 900,000 during the third quarter to a total of 74.7 million. And our total debt increase was significantly lower during the third quarter at less than 1 million.

These were largely consistent with our expectations, and as we look forward, we are projecting for the next two or three quarters for inventories to be relatively stable, and for our credit line to basically remain at the levels that it is currently – as it currently exist.

Those are all of the prepared comments that I have at this time. And again, thanks for joining us this morning and we look forward to your questions.

Unidentified Company Representative

Okay, Operator, we’re ready for questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from the line of Bill Polovanic with Canaccord. Please go ahead.

William Plovanic – Canaccord Genuity

Great, thank you. Good morning. Can you hear me okay?

Bill Petty

Hi, Bill.

William Plovanic – Canaccord Genuity

Hi, guys. So a couple of questions here. First, on just OUF, how much this quarter was direct versus distributive?

Bill Petty

It’s probably in the neighborhood of 65% that is direct business.

William Plovanic – Canaccord Genuity

So that’s a pretty significant change.

Bill Petty

That is correct.

William Plovanic – Canaccord Genuity

And then can you just give us some color, I mean, so obviously, that’s having very positive impact in driving the top line, but we’re just not seeing the positive drop through to the bottom line at this point in time. How much more infrastructure do you have to build? When do we finally get to see kind of the benefits of this shift to direct OUF in terms of cash flow and earnings?

Bill Petty

I think it’s somewhat baked into our guidance there for the fourth quarter, Bill, and that’s why I alluded to the 12 to 19% increase to non-GAAP income, that’s implicit in our guidance for the fourth quarter.

One thing that maybe we didn’t fully gage was the traditional seasonal downturn that you have in July and August and with a larger percentage of our OUF business now being in these direct operations, yet having full-blown operations that, as you know, we’re probably going to have – continue to have more of a seasonal impact in the third quarter. But if we then look sequentially to the fourth quarter, it’s a pretty significantly different profit picture. And so, I think in the, you know, what we’re implicitly saying there is in the fourth quarter, we are beginning to see improvement in terms of the net income impact from those operations.

William Plovanic – Canaccord Genuity

I know, but if you look at your previously guidance, you know, and just looking at my numbers, it looks like you did bring Q4 earnings down, you know, a couple of pennies, maybe $0.03 to $0.05. So what’s really driving that because I don’t think revenues came down much.

Bill Petty

That’s fair. I think part of the issue is the change in our outlook on the mix. The mix, were expecting to be a little more heavier outside the U.S. than what we had previously projected and that’s somewhat a function of where our domestic revenue growth was in the third quarter and what we’re looking at in terms of the market. So if we look at our previously guidance, I think what we’re implicitly saying there is we’re expecting a little bit higher OUF mix than what we previously predicted. And as you know, that carries a little bit lower profitability. So that’s just the biggest thing that moved in terms of the profit profile for the fourth quarter.

William Plovanic – Canaccord Genuity

Okay. And then two questions and I’ll jump off. The monitor is Q4, is that the last of the costs we’re going to see for this?

Bill Petty

Bill, I can’t comment full on that. We’re doing everything we can for our monitorship to end on December 7th. We, of course, will have ongoing costs because, like all the other companies, Exactech does have a corporate integrity agreement, which will be under the supervision of the Office of Inspector General. So we will certainly have ongoing cost. My personal expectation is that yes, those will begin to decrease after the current quarter.

William Plovanic – Canaccord Genuity

So, but as we roll into 2012 and it’s under the corporate integrity agreement, I would just assume that those costs will no longer be called out due the [inaudible] of doing business? Is that fair?

Bill Petty

That is our plan.

William Plovanic – Canaccord Genuity

Okay. And then the last question I had was, you know, R&D has jumped back up a little, it was 3.5 million, kind of more normalized. Is this the rate we should be thinking about going forward, or is there any projects or one-time things you’re working on that is bulking it up a bit?

Bill Petty

No, that’s more of the rate that we would expect on kind of a going-forward basis.

William Plovanic – Canaccord Genuity

Great. Thank you very much.

Bill Petty

Thank you.

Operator

Thank you. Our next question comes from the line of Jeff Johnson with Robert W. Baird. Please go ahead.

Jeff Johnson – Robert W. Baird

Thank you. Good morning, guys. How are you?

Bill Petty

Good, Jeff.

Jeff Johnson – Robert W. Baird

Good morning. So Dr, Petty, or Jody, I guess for either of you, could you help me at all, I think the same thing Bill’s trying to get it, but maybe if we tried to normalize Q3, if you took out the ASP benefit you get from converting to direct in some markets, but then take out the additional costs as well, is there any way to try to normalize Q3 and say, if it weren’t for some of those moving parts, kind of how revenue growth in international market, or just kind of company-wide margin might have looked?

Jody Phillips

You know, there are a lot of moving parts there, Jeff, and I don’t think I can probably create you a reconciliation that will get exactly where you want it to be.

The one thing I will point out is that we did we have sales return allowance in the third quarter of last year related to our transition in the European market. And so while we look at a 13% growth for the quarter, if you really take that out of play and more normalize that number, it’s more like a 9% growth in terms of revenues on an apples-to-apples type of basis. And I think as we move forward, when we get in the next three or four quarters, we can see some pretty clean comparisons. I think we’ve had a couple of moving parts in the third quarter of last year and third quarter this year. But that’s part of the reason for my comment on the seasonality in the third quarter compared to our prior model where we had a higher percentage of distributor operations, we will, in the future, see that the third quarter is a more significantly lower net income profile as we experienced this year.

Jeff Johnson – Robert W. Baird

That’s helpful. Thank, Jody. And then qualitatively then, I guess, I mean, do you feel like you’re – where are in the game as far as ahead of the game or behind where you thought you’d be at this point from a revenue standpoint on this conversion direct, but also on the cost side?

David Petty

I’d say, Jeff, it’s David. I would say that, of course, the biggest one is in Spain. There we are – we’re happy with where we are with respect to the revenue, and I would say about a quarter behind where we would like to be in terms of the cost. The third quarter was a little bit more pressure than we expected. So we are looking for a consecutive quarter, substantial improvement on the cost. And the, of course, the operation in Japan has been a real bright spot all year long, both with respect to revenue growth and also profit contribution. So we’re – it’s a big endeavor in the Spanish market and I think what we’ve accomplished is remarkable.

I’ll point out that the fixed cost, which is almost all employees, is a fixed cost that should support substantially higher revenue.

Jeff Johnson – Robert W. Baird

All right, and David, following up on your Japanese comments, I think there’s some potential upcoming catalyst in that market. Could you just remind me maybe how you see Japan playing out over the next 6 to 12 months, or maybe 12 to 24 months as well?

David Petty

Sure. We have, of course, gained approval for a hip stem late last year, which helped us get into the hip market in a moderate way. But there are additional product lines notably an [inaudible] shell to allow us to do total hip replacements. We’re essentially doing bipolar hip in Japan and so we don’t have access to a meaningful piece of the hip market. As soon as we get those clearances, we expect to have a little bit more impact on the hip side.

Jeff Johnson – Robert W. Baird

And remind me, bipolar hips are what percent of the Japanese market? I think if I remember correctly.

David Petty

It’s a substantial part of the hip market in Japan, but it’s also – it’s also – to not be doing total hip replacements leaves us out of a big piece of the market as well.

Jeff Johnson – Robert W. Baird

All right, that’s helpful. And then last question, just on the U.S. number, either Jody or David, I guess. I was surprised to see U.S. numbers down 1% presumably with good growth in the extremities side. So what would maybe your U.S. knee business and my guess is I back some of those things out. It sounds to me like you probably lost share in the U.S., which I’m surprised to hear. So how to think about your share opportunities in the U.S. over the next few quarters?

David Petty

We don’t believe we lost share in the U.S. in hip and knee. The disappointment to us with hip and knee was that we were more in alignment with the market itself, which means maybe we held our own, but we intended to do better than that. I’ll make one comment about that. July and August were tough and that started to come back at the end of the quarter. And so, we actually worked very hard on that during July and August and I think started to see some traction as we exited the quarter.

The real pressure and perhaps where you have an argument that we lost share is in biologic. And that one, I think I’ve commented in the last conference call, that we are seeing pressure maybe on the economic side for a hospital administration about adding our biologics, notably DBM and self-therapy products to procedures that in the view of the hospital, it just adds cost. And in fact, we’ve been able to demonstrate and articulate to the economic buyer, the hospital administration, that in addition to the clinical benefits of our self-therapy part and our DBM bone paste, there are clear economic advantages as well.

So our intention is to go back and make those arguments with the data and begin to recover business where we’ve lost business in biologics. In the spine, that’s down too. Recall that a year ago we purchased the Silverbolt system from Vertaflex and as often happens in transitions like that, some of that business got away from us as we expected. So that put a little pressure on us.

Prospectively, though, with the launch of the Proliant system this year and the Octane P Cervical Inner body system as well as the Silverbolt cervical system, we’re expecting prospectively to see real growth out of the spine business unit for Exactech going forward.

Jeff Johnson – Robert W. Baird

And just to confirm, David, then your U.S. hip and knee business was flat plus or minus a few points, but somewhere within that range?

David Petty

That is correct. Again, noting as we exited the quarter, it was getting better than that.

Jeff Johnson – Robert W. Baird

Fair enough. Thanks, guys.

David Petty

Thank you, Jeff.

Operator

Thank you. Our next question comes from the line of James Sidoti with Sidoti and Company. Please go ahead.

James Sidoti – Sidoti & Company

Good morning. Can you hear me, gentlemen?

Bill Petty

Yes, sir. Good morning, Jim.

James Sidoti – Sidoti & Company

Hey, Dr. Petty, we didn’t get our weather report as typical. I assume it must be raining in Gainesville, huh?

Bill Petty

Holy cow, it’s beautiful here today. It’s going to be about 74, sunny, clear blue sky. I got up this morning to 53 degrees. You should wish you were here.

James Sidoti – Sidoti & Company

Okay.

Bill Petty

But we hear the snow is melting in Manhattan.

James Sidoti – Sidoti & Company

No, it’s all gone here. So can you repeat the comment you made about gross margin in the fourth quarter and first half. I didn’t catch that.

Bill Petty

Sure. On a year-to-date basis, you know, a couple of the quarters we’ve been up 150, 200 basis points. A lot of that was driven by the conversation to direct operations in Europe and now that that is beginning to annualize, we have direct same-type pricing comps, and so for the fourth quarter we’re projecting something like a 50 to 100 basis point improvement in gross margin and think that will kind of continue through the first or second quarter of next year as well.

James Sidoti – Sidoti & Company

Okay, and that’s year over year?

Bill Petty

That’s correct.

James Sidoti – Sidoti & Company

Okay. And then as the international sales force goes, I know you made a lot of comments to day on the cost related to that and how it impacted the quarter. But looking ahead, are you happy with the size of the sales force or will you continue to add people in Spain and possibly other regions?

David Petty

Prospectively, that sales force growth should be much slower than what we’ve experienced. We’re in a start-up business. We’re now effectively sitting here today about 13 months into it from an operational perspective where we’re out there in the market selling, we had to build that sales force ahead of the revenue and so that’s where they pain was. That’s the short-term pain for the long-term gain and we are planning to deliver a lot more revenue with the team we have and then modestly grow the sales force as appropriate.

James Sidoti – Sidoti & Company

So no plans to add 20 or 30 people in a particular region?

David Petty

No, sir. No, Sir.

James Sidoti – Sidoti & Company

Okay. All right, great. And then just – can you just give us an update on where you are as far as R&D and new product launches through the fourth quarter and into 2012?

David Petty

Yes. So we continued to do well with the Logic PS system on the knee and just this last quarter, we started with the Logic [inaudible] retaining knee, which has been very warmly received here, and I’m talking domestically now, with that system. We also, you’ll recall, launched the Logic Fit Tibula tray earlier this year and continue, along with the Logic system to have really good response to that. We have two tibula inserts that stabilized constrained, which is out there now in full launch mode. In the first half of next year, we’ll be launching the retaining constraint insert as well. So – and one major market in Europe has launched the Logic rotating bearing knee system. [Inaudible]. More importantly, the Vision Intigrip is in pilot launch right now. We’ve done a handful of cases and are expecting to expand the pilot launch in the first half of the year and then the full launch of that system in the third quarter of 2012.

What we call the LPI Prime, which is a short stem for anterior pro chip surgery, was actually rejected by the FDA and we’re going to resubmit that in December hoping for a 90-day typical 510-K review, but we have no idea how that will go. On the shoulder, the – of course, we continue the release of the Equinox platform fracture stem along with the proximal [inaudible] plate and the reverse line extensions. Those are all ongoing. And we’re anticipating a limited release of a CTA hemo head pusher augmented glenoid and augmented reverse base place in the first quarter of next year. And with biologics, we have our therapy, our self-therapy system. We’re going to be launching a new surgical technique that we call ART 2 – Accelerated Recovery Technique. And then I’ve already mentioned the spine launches in the previously question.

James Sidoti – Sidoti & Company

Okay, now, are those shoulder products all available internationally or are those U.S. only?

David Petty

It’s a mixture, but when I’m giving these dates, they basically being the launch in the U.S. and then roll that outside the U.S. over time, though I know in some key markets outside the U.S. we have already made the Equinox platform fracture stem and the Proximal fracture plate system available.

James Sidoti – Sidoti & Company

Okay. All right, thank you.

David Petty

Sure.

Operator

Thank you. Our next question comes from the line of Chris Vicini with Eagle Asset Management. Please go ahead.

Chris Vicini – Eagle Asset Management

Yes, I was wondering if any of you could quantify at this point how many direct reps you now have in Europe and how many reps you have in the U.S.?

David Petty

So the direct reps in Europe, I don’t have that number in front me but something on the order of 75. Bear in mind, that’s a guess. We can get that detailed information together, I think, readily. And our rep count in the U.S. is 255.

Chris Vicini – Eagle Asset Management

Okay. All right, and my other question was, when you look at what’s been happening in – with your U.S. sales, are – it sounds as though there was perhaps a stronger-than-expected seasonal slowdown in the third quarter. But that you’re not – you don’t seem to be too concerned that you’re losing share or anything like that.

Jody Phillips

Yes. I agree with that. Again, July and August was disappointing and it got better as we exited the quarter. But note that we do believe we’ve lost share in biologics and we’re – I think we understand what’s going on there fundamentally and we’re taking steps to correct that. You know, our goal is to substantially outpace market growth in everything we do. The thing that disappointed us in the third quarter is that for hips and knees, we were more as, you know, you add the whole quarter together, we were more in alignment with market growth and we’re taking specific steps to get back to outpacing the market.

Chris Vicini – Eagle Asset Management

And typically, the outpacing of the market is you’re still in that 2X range?

Jody Phillips

Well, you know, when the market goes negative, we don’t want to be 2X.

Chris Vicini – Eagle Asset Management

Right.

Jody Phillips

I think over 14 years, our compound average growth rate is 17% and the market during that time was, at best, half that.

Chris Vicini – Eagle Asset Management

Okay. Thank you.

Bill Petty

I’ll just add to that. You kow, when the industry growth rate is zero plus or minus, then the 2X kind of becomes meaningless. So we’re trying to set some different standards here. We are setting some different standards, and we believe that Exactech, even in a flat market, should be able to, and will grow let’s say, substantially. I just don’t know how to quantitatively relate it to the industry when the industry is zero.

And I’ll go ahead and comment. I don’t know when the industry thing is going to turn around. A lot of people smarter than I am write about this, but there is no question that there is a decrease in volume per surgeon. I won’t say all of our surgeon customers, but we certainly know a number of them where that exists. So a lot of this, at least to me, relates to the general economic environment in the U.S. and probably other parts of the world as well. And your prediction as to when that is going to turn around is probably better than mine. I will say that people who have pain and disability due to hip pain, knee pain, shoulder pain, even with the bad economic environment will often eventually end up having surgery so the demographics still very much favor hip replacement, knee replacement, shoulder replacement. But the current economic environment is not condusive to people being excited about going in and having elected procedures unless they have to.

Chris Vicini – Eagle Asset Management

Okay. And how, you know, you had always said there’s a limit beyond which it becomes very difficult for people to delay surgery. So how are all these patients able to do that, they’re just dealing with the pain?

Bill Petty

Well, sure. That’s exactly what they’re doing and I think we’re now talking about – we would have to talk about individual situations on how much pain a person is willing to put up with in their need based on their circumstances, being worried about losing their job, having lost their job, whatever. So I think those are very hard to predict. My only comment is that the demographic indicates that there should be, even now, substantial growth in hip and knee replacement in the United States and elsewhere, and it is not occurring. Does that mean there’s a backlog that we hope to enjoy at some point in the future? We would like to think so, but it’s very hard to know when that might be.

Chris Vicini – Eagle Asset Management

Okay, thank you.

Bill Petty

Having said all that, we believe that Exactech’s market share is placed in the market place, flat industry growth, Exactech should have substantial growth in the areas we’re talking about.

Chris Vicini – Eagle Asset Management

Right, thanks.

Operator

(Operator Instructions). Our next question comes from the line of Mark (Lande) with Summer Street Research Partners. Please go head.

Mike (Lande) – Summer Street Research Partners

Good morning, folks, and thank you for taking my questions.

Bill Petty

Morning, Mike.

Mike (Lande) – Summer Street Research Partners

Just probably more of strategic question. As you look at budgeting growth for all those development dollars, [inaudible] spine has proven to be challenging over the last few year, 18 months. Is that still the place to really be putting those dollars in terms of marginal return? And I suppose, the follow on from that is, how much more patients, you know, do you have in time to turn that around?

Bill Petty

First of all, this is Bill speaking, first of all, related to spine, we have invested substantially in new product development in spine over the past 2, 2 ½ years. And we are just in the early launch phases of those products and we do expect those to provide increasing market share for us as well as profitability. From the standpoint of the biologics situation, Exactech’s commitment to biologics is a long-term commitment. We believe that in the future, over time, biologics will be an increasingly important part of treatment methodologies for musculoskeletal problems. And we think it would be a big mistake to not participate in that.

We even believe that the time will come when there will be fewer hip and knee replacements, maybe shoulder replacements as those biologic technologies improve. Now, when I say fewer, I don’t mean in absolute numbers, I mean in percentage because we strongly believe all of them will go up based on the demographics.

But to me, this is a little bit like what happened to the railroads back in the 40s and 50s and 60s for transportation when the airlines took all their business. They thought they were in the railroad business, they were really in the transportation business. Exactech, from the biologics standpoint, we believe we are in the business of helping surgeons treat musculoskeletal condition and we want to be in the forefront of providing the products to do that whether they’re made from metals and plastics or whether they’re biologic.

Mike (Lande) – Summer Street Research Partners

Well put. Thanks, Bill. Good answer.

Operator

Our next question comes from the line of Jim Quentin with Barrett & Company. Please go ahead.

Jim Quentin – Barrett & Company

Hi, Jody, how you doing?

Jody Phillips

Been well.

Jim Quentin – Barrett & Company

I come on the call a little bit late. I was wondering if you could give me the breakdown of – for the quarter of U.S. sales versus international?

Jody Phillips

Okay. I think the mix was around 35-65, 35% of that being outside the U.S. and 65% being in the U.S. and that was a little higher than we anticipated going into the quarter.

Jim Quentin – Barrett & Company

Okay, and also on the lower guidance going forward, is that primarily due to some increased DoJ costs, or is that just – because the gross volumes are getting better. I was just trying to figure out why the guidance would be lower.

Jody Phillips

It’s primarily due to the fact that for the fourth quarter, we are projecting a higher OUF mix than we had previously projected due to the softness in the U.S. marketplace. So that’s the primary driver

Jim Quentin – Barrett & Company

Okay. Thanks very much.

Jody Phillips

No problem.

Operator

Thank you. I show no further questions in the queue. At this time, I’d like to turn the conference back to management for closing remarks.

Bill Petty

Thank you, Alisha, and thanks to all of you for your interest in Exactech and we look forward to rewarding your interest in the company. Have a great day.

Operator

Ladies and gentlemen, this concludes the Exactech, Inc. Third Quarter 2011 earnings conference call. Thank you for your participation, you may now disconnect.

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