Amedisys Inc (AMED) 2008 Q4 法說會逐字稿

Good day and welcome to the Amedisys fourth quarter 2008 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Kevin LeBlanc. Please go ahead.

Thank you, Laura. Good morning and thank you for joining the Amedisys investor conference call to discuss this morning's fourth-quarter 2008 earnings announcement and related matters. By now you should have received a copy of our earnings press release. If you have not received the press release, you may access it on the investor relations page on our website at www.Amedisys.com.

Joining me on today's call from Amedisys are Bill Borne, Chairman and Chief Executive Officer; Larry Graham, President and Chief Operating Officer; and Dale Redman, Chief Financial Officer.

Before we get started with our call, I would like to remind everyone that any statements made on this conference call today or in our press releases that express a belief, expectation or intent as well as those that are not historical facts are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to Amedisys today, and the Company assumes no obligation to update these statements as circumstances change. These forward-looking statements may involve a number of risks and uncertainties which may cause the Company's results to differ materially from such statements. These risks and uncertainties include factors detailed in our SEC filings, including our Forms 10-K and 10-Q.

Also, the Company urges caution in considering any current trends or guidance that may be discussed on this conference call. The home health and hospice industry is highly competitive, and trends and guidance are subject to numerous factors, risks and influences which are described in the Company's reports and registration statements filed with the SEC. The company disclaims any obligations to update information on trends or targets other than in its periodic filings with the SEC.

Our Company Web site address is www.Amedisys.com. We use our website as a channel of distribution for important Company information. Important information including press releases, analyst presentations and financial information regarding the Company is routinely on and accessible on the investor relations sub-page of our website which is accessible by clicking on the tab labeled, investors, on our website homepage. We also use our website to expedite public access to time-critical information regarding the Company in advance or in lieu of distributing a press release or a filing with the Securities and Exchange Commission disclosing the same information. Therefore, investors should look to the investor relations sub-page of our website for important and time-critical information. Visitors to our website can also register to receive automatic e-mail and other notifications alerting them when new information is made available on the investor relations sub-page of our website.

In addition, as required by SEC Regulation G, a reconciliation of any non-GAAP measures mentioned during our call today to the most comparable GAAP measures will be available on our website on the Investor Relations page under press releases. Thank you, and now I will turn the call over to Bill Borne. Please go ahead, Mr. Borne.

Thank you, Kevin, and good morning. First let me welcome each of you to this call. We appreciate the opportunity to update you regarding the Company's performance and share our vision for Amedisys.

We had another year of outstanding results. For the fourth quarter we recorded net revenue of $340 million and adjusted earnings per share of $0.98. Growth was 75% and 56%, respectively, over the fourth quarter of '07.

For the full year we recorded net revenue of $1,187,000,000 and adjusted earnings per share of $3.31, up from $697 million and $2.32 per diluted share in '07, net of the Alliance gain, which was growth of 70% and 43%, respectively.

In addition to these financial results, several accomplishments in 2008 furthered our progress towards being the leading provider of high-quality home health services to the chronic co-morbid aging populations. We completed six acquisitions, adding 131 home health locations, 14 hospice locations and over $365 million in annualized revenue. We started 35 new home health agencies and five new hospice agencies over the course of the year. We now operate in 37 states, Washington D.C. and Puerto Rico. We continued the rollout of our Specialty Division. We concluded the largest acquisition in our Company's history and completed the integration in six months. We arranged a new $500 million unsecured credit facility and an initial draw of $395 million in connection with the TLC acquisition. We successfully adjusted our clinical care coordination platform for the new payment system.

Finally, through cash flow from operations we have reduced the debt incurred with the TLC acquisition by $87 million or 22%.

During the quarter we opened 15 new home health agencies as a result of de novo growth and acquisitions in previous quarters. We ended the year with 480 home health locations, 155 more agencies in the fourth quarter of '07; in addition, one new hospice agency in the fourth quarter. As a result of de novo growth and acquisitions in previous quarters, we ended the year with 48 hospice agencies, 19 more hospice agencies than the previous year. So far in '09 we have closed on one acquisition that added two home health agencies in Arizona, and announced that we have signed a purchase agreement for three home health agencies and one hospice agency located in Arkansas. We expect to close on this transaction in March.

In the spirit of full transparency, over the last few months we have been posting relevant information about our clinical profile, quality controls, compliance procedures and IT infrastructure to our Investor Relations page on our website. We have also posted white papers prepared by independent consultants and organizations. We will continue to update this site with relevant facts and information that will help investors in their decision-making process. So, we encourage you to routinely visit this section to learn more about our Company.

As a health care company providing services to the most fragile, vulnerable and costly patients, our mission is to provide services as needed to our target population. Our focus is to care for the complex patients in our nation, providing appropriate care for their condition. In our efforts to be the most transparent health care company in the nation, I want to remind our investors that there is a distinct difference in our interpretation of patient care metrics as they relate to financial metrics versus the market's. Our clinical metrics are reflective of needs of our patients, including such considerations as acuity, research and visits per episode, which will vary and will not always been in alignment with the typical trends expected by the financial markets for its targets.

The trends of these methods are referencing patient needs and not free market trends. In many instances, from our clinical perspective there is no correlation between the two, and our care is prioritized toward the needs of our patients and not driving financial performance trends. Our focus is to leverage our core competency infrastructure and position the Company to care for the most complex of the Medicare population. This is where we believe the best long-term opportunities lie for Amedisys.

Thus, you will witness trends that are indicative of our mission and focus. An example such is increased visits per patient episode, which is more indicative of increased acuity, a clinical metric, is not necessarily a negative financial metric indicating higher direct costs. Patients' conditions vary. Care is patient-specific, so an investor can expect to see constant variation in clinical care metrics and not fixed trends.

Americans today are living longer than any previous generation. The aging of the population has created a silver tsunami that has led this country to a health care crisis. In addition, our nation has experienced a substantial increase in the number of Americans living with chronic conditions. Today 133 million people, almost half of all Americans, live with a chronic condition. This number is anticipated to increase by an additional 20 million people over the next 11 years.

In the Medicare population the average beneficiary sees seven different positions and fills upwards of 20 prescriptions in a year. 96% of Medicare program spending is consumed by chronic diseases, and a closer look at the data reveals that two-thirds of the Medicare dollars are spent on beneficiaries who have five or more chronic conditions. A typical Amedisys patient is approximately 80 to 85 years of age. They have multiple chronic conditions and are on an average of 13 medications. Moving forward, delivering care to the elderly individuals with chronic conditions will disproportionately dominate our nation's health care expenditures and must be considered carefully as our whole health care delivery system is reexamined by the new administration. We're positioning our organization to be a solution to the problems identified by this reexamination as a scalable, high-quality, evidence-based provider for an ever-growing chronically ill elderly population.

Our system is designed to deliver cost-effective care to the most complex chronic and costly patient population, in the comfort of their own home. This model combines our existing home care infrastructure, which includes comprehensive in-home assessments, patient-centric plan of care development, multidisciplinary in-home care delivery, coordinated chronic-care management and in-home, end-of-life care. This infrastructure, combined with advanced information and communication technologies as well as clinical capabilities, will allow us to provide intensive home-based health care.

Amedisys is well-positioned to take advantage of these trends. There are several initiatives currently evolving that will allow us to capitalize on our position in the market. We believe both the political and the administrative environment is ready and is in need of this critical change that could position us as a leader in care management for our target population. I view our care capabilities from the perspective of clinical design and scale as one that is unmatched in today's market. I am excited about what the future holds for Amedisys.

I would like to extend a warm welcome to all of our new employees of the agencies that we have acquired since our last earnings call. We are very excited that you are part of the Amedisys family.

In conclusion, we're grateful to the talented employees of Amedisys who provide our competitive advantage of cost-effective quality health care services to the patients entrusted in our care. Our passion for servicing our patients, a commitment to our core values and the culture of hard work are the intangibles that separate us from our competition. I will now pass this call to Dale for his financial overview.

Thank you, Bill. The fourth quarter of 2008 was another excellent quarter for Amedisys, which ended a tremendous year in both financial performance and acquisition integration. All phases of our growth strategy played an important role as we saw growth in our internal episodic-based revenue, we opened 35 new home health and five hospice agencies, we integrated 145 newly acquired agencies and had continual operational efficiencies.

Revenue grew 75% over the fourth quarter of 2007 to $340 million and for the year grew 70% to $1.2 billion. Our net income for the fourth quarter was $26.3 million or $0.97 per share compared to $16.7 million or $0.63 per share for the fourth quarter of 2007. Net income for the year increased $86.7 million or $3.22 per share compared to $65.1 million or $2.48 per share.

After adjusting for TLC integration costs and the non-cash gain on the settlement of the Alliance matter in 2007, our earnings per share increased 43% to $3.31 in 2008 from $2.32 last year, and they were $0.98 for the fourth quarter of 2008. TLC integration costs totaled $200,000 during the fourth quarter and $4 million or $0.09 per share for the year. These costs were limited primarily to severance costs.

Our gross margin in 2008 was 52.6% versus 52.9% in 2007. EBITDA after adjustments I mentioned earlier was $51.7 million or 15.2% of revenue for the fourth quarter versus $30.4 million or 15.7% of revenue for the fourth quarter of 2007, and $181 million or 15.3% of revenue for 2008 versus $110 million or 15.7% of revenue for 2007.

As we've discussed in our previous calls, our days revenue outstanding through the first three quarters of 2008 increased from 51.3 days to 56.7 days. We stated that our significant acquisition activity had impacted this metric and that we anticipated improvement by year end. We are pleased that we have seen this improvement during the fourth quarter, resulting in a two-day reduction in DSO, which brings our DSO to 54.4 days. This improvement is primarily the result of our strong cash collections in the fourth quarter.

Additionally, if we had not had a Medicare intermediary payment processing issue which I will discuss in a moment, our DSO would have decreased by another two days to 52.3 days. In the future we will measure our DSO performance net of allowance for doubtful accounts. On a net basis DSO was 47.2 days at December 31, 2008, which is down from 51 days at the end of the third quarter of 2008 and up from 45 days at the end of 2007.

We will continue to focus on reducing our days revenue outstanding, and there are several factors which will help us lower this metric during 2009. First, at December 31, 2008, we had $7.8 million in Medicare payments delayed since November of 2008, due to a CMS financial intermediary system issue. This issue is an industry-wide problem and was not corrected until this month. Last week we received payment on these claims, which will have approximately a two-day improvement in our DSO.

Second, we continue to receive the regulatory approvals needed to bill our acquisition receivables.

Finally, as our 145 agencies acquired and converted during 2008 continue to become more proficient with our operational systems, we anticipate continued improvement.

As we discussed in our last call, there are two components of our receivables reserving process. We adjust our Medicare, home health and hospice revenue for amounts we do not expect to collect for Medicare through an estimated revenue adjustment that reduces both revenue and accounts receivable.

For our non-Medicare receivables we record an expense for doubtful accounts that reduces our gross patient accounts receivable. Together these amounts total $30.4 million, or 2.6% of net service revenue for the year ended December 31, 2008, compared to $17.1 million or 2.5% of net service revenue for 2007. When we estimate our accounts receivable reserves, we evaluate both the collection history of our revenues and the aging of our accounts receivable. At year end we have very few accounts receivable older than 360 days, and we have fully reserved all of these claims.

Our allowance for doubtful accounts at year end was $27 million or 37% of our private and Medicaid accounts receivable versus $13 million or 37.7% in 2007. Our estimated revenue adjustments were $7.2 million or 5.3% of Medicare accounts receivable at year end compared to $3.6 million or 4.6% in the prior year.

Our collection percentages remain over 99% for Medicare revenue, and at present in the range of approximately 87% for non-Medicare. Our combined collection rate is over 97.5%. Our Medicare collection percentage continues to be reasonably stable, and we have seen improvement over the last year in non-Medicare. Factors that can affect our collection percentages during any period include the impact of large acquisitions and changes in and disruptions of Medicare and non-Medicare payment systems.

We have continued our cash management strategy of using all available free cash flow to fund acquisitions and to reduce our outstanding debt. As you may recall, we borrowed $395 million when we closed the TLC acquisition in March. Over the past three quarters we have paid down this debt by $87 million. Accordingly, our outstanding debt at the year end was $329 million, of which $20 million was seller notes from our non-TLC acquisitions. We've reduced our leverage from 2.4 times EBITDA at March 31, 2008 to 1.6 times at year end. This has resulted in a 50 basis point reduction in our interest rate on our variable-rate debt. Our weighted average interest rate on our TLC debt was 4.8% for all of 2008 and 3.8% at year end.

We began 2008 with $56 million in cash on our balance sheet and generated cash flow from operations of $151 million. We spent $28 million on capital expenditures, $76 million on acquisitions net of borrowings and paid down our debt by $99 million, which includes $12 million on non-TLC debt, leaving us with approximately $3 million in cash on the balance sheet at year end.

From a liquidity standpoint we have $160 million available under our revolving credit facility at year end, and we anticipate continued strong cash flow from operations, which, after deducting required debt payments and CapEx, we estimate will be in the range of $140 million for 2009.

We are today confirming our revenues and earnings guidance per-share for 2009. Net service revenue is anticipated to be in the range of $1,425,000,000 to $1,475,000,000, excluding the effects of any future acquisitions, if we make them. Diluted earnings per share is expected to be in the range of $4.10 to $4.30, based on estimated 27.5 million shares outstanding, also excluding the effect of any future acquisitions, if we make them.

Now I will turn the call over to Larry for his operational comments.

Thank you, Dan. I will begin my comments by focusing on our internal, episodic-based revenue growth rate. This growth rate consists of both the dollar impact of increases in the volume of patient admissions and recertifications for the period and the dollar impact of the rate we are paid for our services applied to the volume of patients we serve.

For the quarter, our internal, episodic-based revenue growth rate was 30% with 16% related to volume and 14% related to rate. For the full year, our internal episodic-based revenue growth rate was 28% with 19% related to volume and 9% related to rate. The volume increase during the quarter and full year related to increases in the total number of admissions and recertifications with internal-based episodic admissions growing 11% for both periods and internal episodic-based recertifications growing 20% in the quarter four and 25% for the full year.

The rate increase for both periods was primarily driven by the rollout of our clinical programs. As a reminder, we told the market we would launch approximately 160 specialty locations by year end. We completed the year ahead of schedule, bringing 178 locations live. Some new acquisition markets were operationally ready for clinical program introduction.

For 2009 we're projecting that our episodic-based internal revenue growth will be in the 15% range. This is lower than what we achieved in 2008 as TLC, which included 103 agencies, will be included in our base agencies beginning in April of 2009. It is not unusual for acquired agencies to experience a slower same-store revenue growth even in the second year after an acquisition, as they are just solidifying their new processes. Further, the 103 TLC agencies were converted over a six-month period with the later converted agencies still solidifying their new processes.

Shifting back to our specialty program, we intend to continue with your strategy and roll out approximately 40 locations per quarter in 2009. The Balance for Life program focuses on reducing fall risk in the elderly populations by applying advanced treatment modalities related to the rebalancing of the inner ear or the vestibular system, the visual system and the muscular system. This program is strategic for us in that it addresses the leading cause of injury deaths and hospitalizations for trauma in the elderly. Balance for Life is one of our 14 evidence-based clinical programs aimed at improving the health of our senior population.

Regarding our start-up program, we opened 15 new home health locations during the fourth quarter. We currently have approximately 150 start-ups in various stages in the pipeline. Of these, approximately 45 are incurring expenses but have not yet opened, and our 2009 target is 40 new home health locations compared to the 35 that we did in 2008.

For hospice, we opened one new agency in the quarter and five for all of 2008, and we are targeting five hospice start-ups for 2009.

Moving to external growth, as we mentioned last quarter, we closed two acquisitions on October 1. We acquired six agencies from Home Health Corporation, which consisted of two agencies each in the states of Pennsylvania, Maryland and Delaware. The second acquisition we closed was a regional home health and hospice business located in the state of Washington, consisting of three home health and three hospice agencies. After the end of the year we announced the acquisition of the home health and hospice business of White River System in Arkansas, which has three home health and one hospice location and is expected to close in March.

Additionally, we announced the acquisition of two agencies located in Yuma, Arizona, which closed on February 1. I would like to welcome to Amedisys all of the new employees you have just joined us from Yuma and those who will, from White River. We have a healthy pipeline of acquisition candidates, and we continue to analyze potential opportunities as they become available.

Turning to the results from operations, our quarterly revenue and contribution margin are broken down as follows -- contribution margin is pre-tax and pre corporate overhead; $226 million in home health revenue related to agencies we have owned longer than 12 months with a contribution margin of 31%; $6 million in home health and hospice start-up revenue related to start-ups opened less than 12 months with a negative 4% contribution margin. Also in the quarter, we incurred approximately $3 million in costs associated with home health and hospice agencies we plan to open in the future. $13 million in hospice revenue related to agencies we have owned longer than 12 months with a contribution margin of 16%. $94 million in home health and hospice acquisition revenue associated with acquisitions completed during the last 12 months with a contribution margin of 22%.

As I stated last quarter, the system integration of the agency locations and corporate office for TLC is complete. Over the next 12 months we will continue to introduce our clinical programs to these agencies. We anticipate over time that the contribution margin of the TLC agencies will approach our mature agency margins. As a reminder, the TLC home health agencies had a contribution margin in the fourth quarter of 20% versus our mature home health agencies, which had a contribution margin of 31% in the same period.

On a quarterly basis CMS publishes information on how home health agencies compare on 12 measured patient outcomes. This information is presented on a rolling 12-month basis. The latest data published shows that Amedisys exceeded or met 10 out of the 12 outcomes when compared to national averages. The organization improved or met its scores in 11 out of the 12 outcomes when compared to the previous quarterly reporting.

We're very pleased with how well we compare to national averages, especially given the fact that our acuity is higher than the typical home care provider. We will continue to focus very hard on improving our clinical outcomes and strive to exceed the national averages in all 12 outcomes measured.

On the regulatory front, MedPAC recently came out with their recommendation on home health rates for 2010. They recommended moving the 2.71% case creep for 2011 to 2010 and adding it to the 2.75% cut that is scheduled to go into effect that year, essentially making a 5.4% cut for 2010. They also recommended not giving the scheduled market basket increase for 2010.

Although we cannot guarantee -- we cannot be certain what changes will occur, after speaking with various regulatory experts knowledgeable of the home health industry, we believe the conservative scenario is the 2010 cut will remain, and it is possible that the industry could receive no market basket for 2010. We also believe that if the full MedPAC recommended cuts are implemented, it would place a serious a strain on the industry, which would in turn facilitate more industry consolidation. As a reminder, MedPAC has recommended cuts over the past few years, and Congress has typically not followed their recommendation.

In conclusion, you will see Amedisys continue to focus on our three-pronged business strategy of providing superior clinical outcomes to our patients, growing the business aggressively and becoming as operationally efficient as possible. I would like to express our appreciation for the support of our shareholders, customers, employees and vendors.

At this time we will open the call up to your questions. Please limit yourselves to two questions so that we may allow question time for everyone. Time permitting, we will allow for follow-up questions. Operator, please go ahead.

(OPERATOR INSTRUCTIONS) Art Henderson, Jefferies & Company.

Two quick questions -- your guidance of $4.10 to $4.30 -- could you remind us what the delta is there between the low end the high end? Dale, I guess that goes to you.

You mean between the $4.10 and the $4.30?

Yes, sir.

The revenue differential is about $50 million. I'm not sure I'm understanding your question.

Well, I'm just wondering what the components are that gets you to $4.10 versus what gets you to $4.30.

Well, a big piece of it is revenue. The other piece of it is obviously we have anticipated enhancements to our efficiency going into 2009, and those we're not going to speculate on at this point.

In my comments I mentioned that TLC has a contribution margin of 20%, and during the year they should approach 31%. Some of that delta is when that will happen.

And remind me, Larry, how many locations those are.

There was 133 total locations. Some of those were hospice, but a majority of them were home care.

Okay, great. On the follow-up question, just on the uses of you're free cash flow, Larry, as I recall, this was maybe not a year when you were pursuing big acquisitions. You were going after smaller stuff. So, Dale, I don't know if you could break out what you are expecting for debt repayments or those components you were discussing in your portion of the script.

As you know, in our situation we end up being opportunistic when we see acquisitions, so it's difficult for us to predict the actual uses of free cash flow. They are substantial. We have $160 million available under our line of credit and we're projecting cash flow from operations after required debt payments and CapEx of about $140 million. So we have available capital resources to be opportunistic from an acquisition standpoint, and our strategy is simply, because we have the flexibility to do that, is we are going to use any free cash flow that we don't use for acquisitions to pay down debt. So we would anticipate, absent substantial acquisitions, we would continue to see an improvement in our ratios related to debt.

Larry, one last question and I'll jump back in the queue. The de novo's -- are you still experiencing delays from the fiscal intermediaries?

That's an ongoing process, but I am encouraged that we were able to open 15 up during the quarter. And it was important to note that I stated that we had 150 in the pipeline, about 45 or so we are incurring costs on. So we are still aggressive on our end and as they open up, we will open them, obviously.

Whit Mayo, Robert Baird.

My first question is really a two-part question on receivables. Dale, do you have handy what the unbilled receivable number was for the quarter? I may have missed that, if you provided that. And, also, could you tell us how much of that is actually coming from Medicare?

The unbilled receivable number is $46 million -- no, I'm sorry, it's $48 million, at the end of the year, and that's down from $56 million at the end of September. I haven't broken that out in terms of how much of that is Medicare.

Is it just safe to say that the majority of that is, though?

Yes.

Also, on just your deferred revenue liability -- I don't know if you have that handy. And just for the record, if we could get the breakdown of that by aging category. I don't know if that's something you have handy, or do you plan on putting that in the Q?

I understand the request.

Do you have your deferred revenue liability number for the quarter?

I don't know that we have disclosed that. We haven't disclose that, Whit. I would be happy to talk to you about it off-line.

We'll talk off-line about that.

We don't disclose what the deferred revenue liability is because we don't calculate it that way. For us, it's an unearned revenue number.

Yes, exactly, exactly. We'll talk about it off-line.

I guess second question, just as it pertains to your guidance again, you reported 30% organic growth this quarter. That's the highest we've seen probably in my recollection. I guess Larry mentioned that, I guess interpolated within the guidance is for internal-based episodic-based revenue of 15%, just any sense for how to think of the components of that between the admin growth and research and revenue per episode? Just any more granularity you can give us around that assumption?

That's a good question. What I am stating now is we will forecast, if you will, the revenue growth in terms of percentages, and that's where we articulate the 15%. At the end of every quarter we will break that growth down for you in terms of rate and volume, but we are not going to get into predicting admissions or recertification or rate growth. We will just articulate those at the end of the quarter. The 15% is an all-in number.

As a reminder, we grew 11% in admissions last year. Around the 10% category is what we have been targeting.

Kevin Ellich, RBC Capital Markets.

Dale, just following up on Whit's question and maybe asking it a different way. Do you have the allowance for your doubtful accounts and the bad debt handy? Or, did you provide that in your prepared remarks? I might have missed that.

I'm sorry; ask the question again.

Sorry -- the allowance for your doubtful accounts?

Did we have an allowance for doubtful accounts against our non-Medicare -- sorry?

The dollar amount.

The dollar amount is $27 million.

$27 million, okay, that's what I thought you said. And then, was the provision for your bad debt -- was that $7.2 million? Did I catch that on the call?

No, the $7.2 million is the estimated revenue adjustment against Medicare revenue, and that's the cumulative number at the end of the year. So the combination of those two numbers is about $34 million.

Excellent. And then, D&A expense was a little bit lower than I was expecting. Is there anything significant going on there? I was just wondering why D&A ticked down sequentially.

It went down about $900,000 or $1 million because -- due to the true-up of our purchase accounting balance sheet on TLC. And going forward it will be more reflective of what that number will be.

Just one last question, Larry. I don't know if you can talk about the -- you did talk about the acquisition pipeline and what not. But are there any large deals that you guys are looking at? Are you contemplating everything, or is it really focused on one area?

As a reminder, we look at acquisitions as they come available. We like to target areas of the country that have high Medicare population growth, so we kind of know where we want to be.

On the large scale, at any given time there are two, three or four of them out there being circulated, talked about. But typically, when we do a large acquisition like we did in TLC, we tend to integrate that before we jump into another large acquisition. But again, if something became available and everything was right in terms of financing and what we thought we could you with it, we would take a serious look at it.

John Ransom, Raymond James.

Could you give us the Medicare receivable balance in the fourth quarter?

The Medicare receivable balance in the fourth quarter is $129.6 million net (multiple speakers) of the $7 million estimated revenue adjustment.

So $129.6 million, and then we would add back the gross of $7.6 million?

That's correct. It's actually $7.2 million, John, but okay.

Okay, I'm sorry, $7.2 million. And then second question I have is, as you look forward to the March quarter, it sounds like your DSOs will be down, all other things being equal, a couple of days. Do you expect any further moves in that direction, or would that be a good estimate for the end of the quarter?

No. We are optimistic that we will get additional positive impact on DSO in the first quarter over and above the two days that we received last week.

Are the TLC receivables is still in the 60-day, 60-plus-day range?

Some of them are. It's all over the place. We are collecting those, and we have done a pretty good job of collecting the accounts receivable that we got when we made the acquisition; that was about $40 million of receivables. We've done a pretty good job of collecting those.

Okay, and did the goodwill balance change as you did your year-end true-ups? Did your sequential goodwill balance change between third and fourth quarter?

We added about -- in addition to what we're talking about with depreciation and amortization, we added about $1.7 million to our allowance for doubtful accounts on the TLC accounts receivable, and that went to goodwill.

So those are receivables that you bought that you have subsequently deemed uncollectible; right?

That's simply our reserve against it, in truing up that balance sheet. And that is almost done. We are going to take another look at it because we have one year from the date of the acquisition to finish the true-up, which would be the end of March of '09. But we are pretty close to being finished with that.

Okay. Last question, your cash flow, what was in the quarter? There didn't seem to be a huge receivable change, but what drove such strong cash flow in the quarter? Was there some current liabilities that increased or something else we need to think about?

No, it was basically, John, the change in AR. If you look at it from the third quarter to the fourth quarter, it was a very positive impact on AR. But at the same time, our revenue went up and therefore our AAR increased. So it was a combination of those two things. But the cash flow from operations was primarily the change in net working capital, which was largely focused on accounts receivable.

Newton Juhng, BB&T Capital Markets.

I was just curious about the half a visit sequential increase in the visits per episode, is that purely a function of dealing with the more patients, or could you provide us with a little bit more insight into what other factors might be driving up that number?

The utilization has more to do with the acuity level, so you hit that, and that's going to vary from quarter to quarter, based on the mix of stroke, cardiac, wound patients and the type of patients you're caring for.

So versus last quarter, was there any one of those particular areas where the impact was seen more?

Over the last year, all three of those we have seen an increase. Over the last year we have seen our acuity level increased.

So similar to what we talked about on the last quarterly call. In your prepared remarks you talked a little bit about second-year agencies could see just a general slowdown, and the internal growth and so on. And I was just curious as to, is it just a function of the -- you've got TLC coming and anniversarying, and the number of agencies that you are talking about there versus what you are going to be adding on in this year -- is that really what's driving that particular slowdown there?

There's a couple of things. We converted those agencies over a six-month period, and some of the higher-revenue agencies we converted on the back end of that six month. So, stated another way, the first quarter we owned them, April, May and June of last year, their admission volume was probably pretty strong and we weren't upsetting, if you will, by converting the larger agencies. So the larger agencies didn't convert until September-October. So, comparing to the second quarter of last year, I am anticipating a little slowdown in same-store growth, and then we'll build that by quarter from there.

David MacDonald, SunTrust.

Larry, I missed the number in terms of next year on the specialty programs. Did you say you guys are looking to do about 40 a quarter in 2009, so 160 for the year? Is that a good number?

That's correct.

Given the environment, are you seeing any increased receptivity from some of the private equity folks, some of the people who actually own maybe some of the larger properties? And have you seen any movement in what you think you're going to have to pay for these things at all, just given the financing market out there?

A couple of things on that front. We have seen a few private equity-backed deals come to market. I don't know if that's indicative that we'll see more as the year goes on. We do believe we are one of a handful of people that might have the capital to do acquisitions, so we do believe that it may impact terms and pricing. Haven't seen enough to articulate what that would be or say that that's factual. But we just know that there's not a lot of buyers on sizable deals out there.

Tony Perkins, First Analysis.

You had 15 de novo locations in Q4, and I think you said you expect 40 in '09. Is that correct?

That's correct.

Should we expect that number to drop off in Q1 and then grow throughout the year?

It's impossible for me to predict which quarter these start-ups are going to land, based on regulatory approval. If you look at last year, it went around, it bounced around from seven to 15. But I did say that we have 45 that we're actively incurring expenses on, so that means they are close. And then we've got 150, in total, in the pipeline.

But if you were going to model out, I would always be conservative and model more towards the back end of the year than the front of the year.

One quick question on the new accounting rule, 141-R, where you have to expense dealer-related costs on an acquisition as they are incurred. I know your guidance doesn't include any acquisitions, but as we go forward, just curious if you expect to pro forma out those expenses, or are you going to keep those in?

We would disclose those -- if we did an acquisition that that had an impact on, then we would disclose what those expenses were, as we essentially do now.

Ralph Giacobbe, Credit Suisse.

Can you give us the case mix numbers for the quarter and then maybe how that compares to a year ago and sequentially?

You can look for that possibly in the 10-K, but we don't typically go over case mix numbers on a quarterly basis.

What percentage of admissions have therapy visits tied to them, and maybe how that compares to a year ago?

The percentage of patients that have therapy in an episode has always been around 55% to 60% of our patient population. That has been consistent for the last three or four years.

Can you talk about the economy and maybe benefits on the nursing side, your ability to recruit, and maybe benefits to wage growth, again given the economic backdrop?

Yes. First of all, we believe our business is fairly recession-proof. We also believe that we have a recruiting advantage, given the nature of our business, that nurses get to provide care independently, differently than in a hospital, working 12-hour shifts. We have not seen to date where it's going to impact the dollar amount we pay for nursing. I do believe it will increase the nursing pool, meaning a lot of maybe retired nurses may reenter the workforce. But we haven't been able to quantify that today.

Just to clarify what you said around the reimbursement environment for 2010, I think you said what you thought would be a conservative way to think about it would be a freeze of the market basket and the negative 2.75% [count] for 2010. Is that fair?

That's correct. The 2.75% is already part of CMS' four-year case creep, so that's there. And if you look at (multiple speakers) --

So you are saying no pull forward of the 2011 and a freeze of the market basket?

That's correct, and last year I said the same thing about a market basket, anticipate a zero. That's how we operate. If you were modeling out, I would anticipate a zero. There is a probability we'll get a rural add-on or some percentage of that market basket increase. But for modeling purposes, that's what I would do.

So just to be clear, on a net-net basis, negative 2.75%?

You are correct.

At this time I would like to turn the conference back over to our presenters for any additional comments.

I'd like to think everyone for taking the time today to join our fourth-quarter results. We're excited and passionate about the Company and the prospects for the future. We look forward to speaking to everyone again in just a few months as we move forward. Thank you.

This concludes today's conference call. Thank you for your participation and have a wonderful day.