Hanger Inc (HNGR) 2002 Q4 法說會逐字稿

Good morning. My name is Judy and I will be your conference facilitator. At this time, I would like to welcome everyone to the Hanger Orthopedic Group year-end financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time simply press star and then the number one on your telephone key pad. If you would like to withdraw your question, press star and then the number two on your telephone key pad. Thank you. I will now turn the call over to your host, Ivan Sabel, Chairman and Chief Executive Officer of Hanger Orthopedic Group. Sir you may begin.

Thank you. Good morning, everyone. I'm sure all of you have seen our press release that we released after the market closed last night. I will go through it with you. Hanger Orthopedic Group today announce record sales and net income and net earnings per share before extraordinary items 99 cents for Dec. 31, 2002. Net sales for the fourth quarter Dec. 31, 2002, increased to $135m from $128.7m in the prior year, an increase of $ 6.3m or 4.9%.

The sales growth of the quarter was primarily the result of a 3.7% increase in same center sales in the company's O&P practices as well as a 21.5% increase in outside sales of the company's distribution business. Gross profit for the quarter is not comparable to the prior year due to a $4.2m favorable inventory adjustment recorded in the fourth quarter of 2001 as a result of the annual physical inventory. The company reported net income of $6.5m for the fourth quarter ended Dec. 31, 2002 compared to a net loss of $4.3m in the prior year, an improvement of $10.8m.

The company reported net income applicable to common stock of $5.2m for the fourth quarter of 2002 or 24 cents per diluted share compared to a net loss of $5.5m or 29 cents per diluted share in the prior year. Net sales for the year ended Dec. 31, 2002, reach a record $525.5m, an increase of $17.5m or 3.4% over the prior year's net sales of $508.1m. The sales growth was primarily due to a 4.6% increase in same center sales in the company's O&P practices and a 7/10% increase in outside sales by the company's distribution business. Offset by a 9/10% reduction in sales due to the sale of our soggy division, the company's manufacturing operations in October of 2001. Gross profit for the year ended Dec. 31, 2002, improved by $17m or 6.4% to $284.2m or 54.1% of net sales compared to $267.2m or 52.6% of net sales in the prior year.

The gross margin was favorably impacted by the increase in net sales along with a reduction in the cost of materials and labor due to increased productivity in the operation of the O&P practices. The company recorded net income of $23.6m for year ended Dec. 31, 2002, compared to a net loss of $8.9m in the prior year which represents an improvement of $32.5m. Net income applicable to common stock before extraordinary item for the year ended Dec. 31, 2002 was $26.4m or 99 cents per share diluted share, a $32.3m improvement over the $8.9m loss recorded in the prior year.

Hanger reported net income applicable to common stock of $18.4m or 86 cents per share diluted for the year ended Dec. 31, 2002, compared to a net loss of $13.7m or 73 cents per share diluted for the prior year. The unusual charges totaling $1.9m in 2002 included approximately $1.3m in payments made to a prior worker's compensation carrier related to claims for the '95 through '98 policy years and also a non-cash charge of approximately $.6m related to the write-off of abandon lease holds. The worker's compensation claims were related to the company's acquisition of [NovaCare] in 1999 and were not known at the time of the acquisition and were not provided for in the opening balance sheet.

Company believes no further payments will be required. The unusual charges totaling $24.4m in 2001 included a non-cash charges of approximately $4.8m related to stock compensation to J Alex and associates for services rendered, restructuring charges of $3.7m recorded in the second quarter of 2001, principally related to serving and lease termination, expenses and $8.1m loss on disposable of substantially all the manufacturing assets of soggy in 2001 and approximately $7.9m in other charges primarily related to fees paid to J Alex and association in connection with the development of the company's performance improvement plan. The $2.8m extraordinary loss on the early extinguishment of debt in the year ended Dec. 31, 2002, was recorded in this year's first quarter in connection with the company's refinancing of bank debt.

As reported in the company's annual report on form 10K for the year ended Dec. 31, 2001, [FAS 142] was adopted as of Jan. 1, 2002. Accordingly, amortization of goodwill ceased in the quarter ended Mar. 31, 2002. The company reported $3m in amortization for goodwill for the quarter ended Dec. 31, 2001, and $12.2m for the year ended Dec. 31, 2001. Therefore, net income and earnings per share for the quarter and year ended Dec. 31, 2002, was favorably impacted by this change. During 2002, the company's total debt -- excuse me, during 2002 the company reduced total debt by $22.9m exclusive of the interest rate swap including paying down its revolver by $21m from $36m at the time of the February 2002 refinancing to $15m at year-end. I was quoted as saying in 2002 we continued to improve our operations and generated strong cash flow. The company repaid $22.9m of debt during the year as well as consummated several strategic acquisitions.

The company will continue to utilize free cash flow to both reduce debt and grow the top line through strategic acquisitions. I am also proud to say that almost 80% of our practices will receive bonus payments from our practice level incentive program which rewards our practitioners for properly managing their practice and aliens our employees in the company for long term success. The hard work of management and all of our employees translated into a $32.5m increase in net income and a 118% increase in the market value of our stock. All of these accomplishments resulted in a 2002 that was definitely a win/win year for all of our stake holders. At this point I will turn it over to George McHenry. He will walk through the financials in detail for you.

Good morning, everyone, and thanks for joining us. I'll first discuss the income statement for the quarter. Sales, our comp sales were at 4.6% for the quarter. They were strong when you consider that in the fourth quarter of this year as was the case in the third quarter our Medicare CPI was back end loaded in '01 and that caused a mathematically for us to have actually a slightly lower reimbursement in the fourth quarter of '02.

When you do the math, it had about a 2% impact on reimbursement which would have -- that would have driven our sales, our comp sales up over 5% as opposed to 4.6% that we reported. So we're -- we were pleased with our sales results for the quarter. Cost of sales our material cost was adjusted in the fourth quarter this year as it was in the prior year for the impact of our physical inventory. Last year, that resulted in a $4.2m favorable increase in earnings. This year, as we put in better controls over our material cost, we had no adjustment so our material cost remained level throughout the year at approximately 27.1% and that was an improvement over the prior year but there's a comparability problem in the fourth quarter.

Our direct labor continued to run lower than budget and lower than last year's actual so there was good result there. Our SG&A was $2m lower than last year due to a decrease in the bonus accrual in 2002 versus 2001. On the unusual items that Van mentioned, there are really two items in there. One was a worker's compensation payment that related to the insurance policies that were held by NovaCare prior to the acquisition that actually applied to 1995 through 1998, and that was a large consolidated policy covering all their businesses. We had had no indication there were any claims out there that required payments prior to the beginning of fourth quarter and the $1.3m payment we made in the fourth quarter on those claims closes out everything except for one claim which we believe it has been inactive for sometime and we do not believe it will require any material payments, if any, going forward.

There are 600,000 related to lease holds from practices that it was determined should be merged back when the merger occurred in '99. It was a non-cash charge off this year as we cleaned up the fix the asset system. Our EBITDA for the quarter excluding the unusual item is $24.6m. Depreciation was $400,000 less than last year due to lower than expected capital additions. Also, the assets associated with our billing system are not in service yet. They won't go into service until second quarter this year as that system starts to roll out. Also, to a lesser degree our depreciation was favorably impacted by the implementation of FAS 142 which eliminated amortization on some intangibles that were included in that number last year.

Our interest was $900,000 less than last year as our borrowings are down and variable interest rates continued to be low. Our EPS was 24 cents. If you exclude the unusual charges and tax affected that we believe that will be closer to 29 cents. Sales for the year, again, the increase here was mostly due to our 4.6% same center sales growth in HPO for the year. Sales for the year were 45.9% compared to 47.4% in 2001, 150 basis points improvement, about 30 bips of the improvement came from the material costs and remainder came from reduction in labor cost. Our SD&A was $6.8m higher than last year due principally to the effect of the labor savings I just mentioned on the practitioner's incentive plan.

And the continued strong collections that we had this year we have been collected for 97% clip for two years now so we've had strong collections. Our EBITDA excluding the unusual item was $94.4m and our EBITDA margins at 18% is a record for the company. We've never been at that level before. Depreciation was $2.6m less than last year due to lower than expected capital additions and also as I mentioned before, it's roughly $3.5m of our CAPEX this year was related to the new billing system which as I mentioned won't go into service until second quarter of '03. Interest ended up the year $4.8m less than last year.

We were able to pay down our revolver to $50m by year-end from the $36m it was at when we did our notes deal in February and as I mentioned, we had lower interest rates and we also were benefited by the favorable impact of the interest rate swap we put in place to give us more variable interest rate component when we did our notes deal. EPS excluding the extraordinary item in 99 cents would be pegged at roughly $1.04 if you excluded the unusual item. On the balance sheet, our AOR increased by $3.6m which in view of our sales increase is a good result from the standpoint of the gross AOR. Our DSO's remained about at the 2001 level of 74.7 days.

There was a big improvement in our aging. Our over 120 was reduced to 25% which is the lowest percent our over 120's have been at since the merger. Another good result on the flip side of the aging our current category increased to 39.2% of total AR and that's the highest our current rate receivables have been since 1993. So our aging has improved away from the over 120 category and it's continuing to move -- improve in the current area.

Inventory was up slightly by a $.5m and the turns remain constant at about two-and-a-half times. Our CAPEX for the year was $9.1m and the quarter was $2.5m. And, lastly, our cash flow from operations was very strong this year at almost $44m or $43.8m, compared to $51.2m last year and, frankly, that's that is stronger than we expected it to be. Given the $25m benefit we got last year from the improvements in working capital. So we had very strong cash flow this year. With that, I will turn the microphone over to Tom.

Thanks, George. Good morning, pleasure to be with you. I am going to spend a few minutes talking about some of the activities that we were engaged in throughout the year and how those will be moving into 2003. And I think the ease yes, it is way to proceed is to think of these in terms of going down our income statement. As George had mentioned you are overall sales were up this year. The majority of that gain 4.6% occurred within our patients care business approximately $22m. That was attributable to an enhanced business development and sales effort coupled with further progression of new technologies and new products into our product mix.

We set a record year this year for sale and delivery of computerized legs and efforts in our miles electrics [Inaudible]. [Inaudible]. In 2003 we expect this same kind of activity to continue. Where we will be working with our key vendors to new technologically advanced products. On the prosthetic side new areas in [Inaudible] which we call [Inaudible] and [Inaudible] that we believe these can add to our ability to provide higher levels of clinical excellence for our practitioner. Our distribution business was up slightly for the year. You'll recall the back in the early quarters of the year we were encountering some problems in terms of competitive activity on the sales side.

We're happy to announce that group redoubled its efforts put into effect new marketing plan, expanded sales force and finished up the year flat coming back from what we originally thought might be a bit of a down year compared to 2001. So they're well positioned to go into 2003. Looking for some increase sales. The gross profit line, again, George had mentioned we were up overall about $17m, that's actually a bit higher if you account for the fact that we no longer have soggy in the portfolio. And about 85% of this occurred within our HPO business which was our patient care.

The key attributes of this improved performance occurred in two categories of materials and labor. Let's look at materials. Material costs as a percentage were down slightly in terms of overall numbers were up slightly owing to the higher sales level. Control and advance on the materials front is attributable to our increase use of our best value program which is one of the initiatives that the company began two years ago. To date we have reviewed over 3300 products which has generated almost 600 products within our best value program. Translating that to L codes which is the basis under which we perform our activities and bill for our activity, we reviewed almost 250L codes, 178 of those L codes are actively linked into our best value program.

So it is comprehensive in terms of our activity slate and it is comprehensive in terms of our ability to access the market to find products that are clinically acceptable and then negotiate most favorable cost and terms for those products. Another milestone this year within our best value pro program was initiation of private label products, Hanger select, custom manufactured to our specification. Allowing those products to perform the job that our practitioners deem necessary and giving us not only favorable tech know logical advantage but favorable pricing.

And, lastly, in the overall area that we've been able to establish some very good relationships with our key platinum vendors so we expect on a go forward basis this activity of identifying products to meet these clinical needs will be pro active in the future to our work with these vendors. I think the real success story in our enhancement of gross profit is in our labor line. As we have reported some of you through our health conference meetings, our labor line is a percentage of sales has been decreasing over the last two years. In December of 2000, labor accounted for 22.2% of our sales. We are now down to 18.8%. It is a continuous mark that reflects the productivity enhancement program that the company has underway. It reflects the implementation of several process changes that have now been inculpated into the actual fabric of how we do business.

This year we were very successful in rolling out to program that we call work flow which organizes and facilitates patient movement through the front end of our offices. It also allows us to be better prepared to discuss with the patient their responsibility for any co-pay and also helps to keep our books and records in a better fashion to facilitate the accounts receivable and billing and collection that George mentioned early.

On that same front this year we spent time developing in testing and billing software, OPS, 2003, beginning in the second quarter we will begin the actual implementation of that software which we think will begin be a productivity enhancer as well as boost on the working capital side. 2002 we also begin to test various methodologies in support of our practitioners for them to acquire data directly from our patients in terms of their images and in terms of their measurements. That data acquisition program is in test where we are marrying that with a design for the appropriate device and subsequent fabrication of that device. That we believe based on our early tests in some of our patients cases will result in productivity enhancements as well as our ability to deliver a computer designed prosthetic to our patients.

2002 we also took the time as parts of our OPS to go through our contract base examining our contracts to ensure that they were current, up to date, and as we go into 2003 we are going to make that electronically available to all of our practitioner bases and all of those contracts will be loaded into the new billing system so the look up will be greatly facilitated to ensure that the work that we are performing is in compliance and is reimbursed at the best possible levels for each of our contracts.

Finally, from a productivity enhancement in the year 2003, we did some process changes in the area of inventory in order to record and value our inventory we expect that work to continue in 2003 and to enhance those systems so that we'll even become a greater tool to our practitioners. Finally, in 2002, we installed the new budgeting system which will enable us throughout the year 2003 to perform the kinds of more detailed variance analysis so we can make the critical decisions necessary to drive the business. All of that plays down to the EBITDA line which was up about $8.5m this year, the majority of which was occurring within our HPO business, patient care again. With an additional compliment coming from FTS and the numbers here because of the sale of soggy are somewhat difficult for characterization on a comparable basis but the each of the operation units operational units of patients care and soggy contributed to higher levels of EBITDA.

I think the key topic in this area to touch upon is the SG&A which George mentioned. It is up this year on an absolute numbers basis but the driver on that has been the bonus for our practitioners which results from their sharing in the success that they they've brought to the company and to the shareholders. The good news our staff departments were reasonably flat this year in terms of overall dollars which is a further validation that the process improvement the company installed over the last 24 months are, in fact, taking hold in managing all of the costs necessary to provide the insularly support our patient care [SPS] businesses. This will be continuing on a go forward basis where were we are going to look at each of the areas. For example real estate, et cetera, to ensure that the information that we need to manage the business is available ahead of time and is in such a form that we can use it to reduce our costs or at a minimum to hold our cost flat.

As we stand back and look at the business, it's been two years since the implementation program has begun. We have accomplished the goals in terms of the process change in the financial metrics that we set out. It doesn't mean we are going to stop doing that work. I think we've learned a great deal from this, we've reorganized and restructured. We have the right people in the right place, continue to drive the productivity improvements.

Last but not least, on the probably the most critical dimension of our business is dealing with our practitioners and our people. We began this year at 876 practitioners and we finished the up the year 873 which is a net increase of six. You have to look at the pluses and minuses. We've lost from a voluntary basis which includes retirement 70 throughout the year and we were able to hire back 73 so that's just about a wash. In addition to that, we had some people that either through mutual agreement or at our decision left the company we were able to offset those leavings by having 44 new certificates. This is a correspond program within the company making sure we recruit the right people into the organization.

We have [Inaudible] our areas in the recruiting business because as we look to our future, we think that recruiting on all the geographic dimensions is key. As a result one of the things we're capable of doing is recruiting internationally, particularly in the other English speaking countries around the world so we've begun to probe into those areas with good success. Not only are we going to maintain and continue our focus domestically, find the best talent that we are expending it internationally. Also, we recognize the obligation to train our people and so as a result we are -- we have implemented with the result of the build out of our HR department training and development for additional skills in the areas of fundamental computer and IT skills all the way up to the skills that are necessary to advance and title. If you have one certification of prosthetic and you want to get the other.

Hanger is the first company to have that available on an off line basis through some web based training that we offer. Net web base training is going to be a key, whether we burn a CD or do it life on a streaming basis to deliver the skills and the training that are necessary for all of our people to ensure that we continue this March through process improvement. All of this is made possible by having a positive moral in environment within the company. We have finished an all company meeting which is an annual event. We sent out a little notice because we were so product of what were going on. Our people feel better now about this company than they have at any time in the near past. It's evident from their performance which translates into the higher levels of bonus and incentives that we have talked about before. And this is key.

Hanger is viewed as the place of choice to work because our people really work at will. They do not have employment contracts that hold them in to employment. We do have non-competes with certain key individuals but our ability to challenge them and our ability to help them grow professionally is one of the reasons that they do stay with us. As we have said for a number of years, these people do have the ability to pack it in and walk across the street. Our job to show them that they're much better off by staying with Hanger and we value them as being part of this company both professionally and financially. Certainly the metrics that we put in place and the pay outs that we've generated this year so a very long way towards making sure that that happens on an ongoing basis. So, with that, I'll turn it back over to Van. Thank you.

Thank you, Tom. Thank you, George. At this point we will open it up for Q and A.

At this time I would like to remind everyone if you would like to ask a question please press star and then the number one on your telephone key pad. Pause for just a moment to compile the Q and A roster. Your first question comes from David MacDonald of Leeric Swawn.

Good morning, guys. Congratulations. A couple questions questions. Tom or Van, whoever, can you remind us in terms of the roll out of the billing system the timing, regionally, you know, exactly how that's going to roll out throughout the company.

Yes. What we have on the schedule now is that we've been doing all the internal testing which we're calling alpha testing to make sure all the systems function in a controlled environment. We will be implementing what we call the beta testing within selected sites during the month of March, to make certain that in a real world environment that they're actually working. Our implementation plan then calls for a [Rampa], I think the key thing here is to remember that the OCS system is a derivative of a system that is installed in over 50% of our patient care facilities.

So it is not going to be new in terms of structure usability to more than half of our personnel. We are going to begin in those areas beginning about April 1 and then roll this out. We are expecting about a six month implementation. We believe we can do it faster but we believe we want to be very cautious in making sure that we maintain visibility to our receivables and of course part of this project demands that we convert the existing data over into this system so that critical items such as patient care data and receivables information can be tracked within the system so it'll be a six month roll out beginning in April and beginning with those practices that are currently on the top systems so that we will ensure success by learning in the area where there is some familiarity and of course that all has a marching front end in terms of training.

Okay. Can you guys talk a little bit about managed care pricing. I assumed that you've had some contracts that have renewed for January 1 and can you just talk about, you know, what you're seeing on the managed care side in terms of, you know, pricing neutral, maybe modest increases, modest decreases, et cetera.

Sure, Dave, basically, it's pretty much the way it has been. It's pretty much pricing neutral. There's some contracts where we have been successful in getting increases. Some of these were older contracts. In particular contracts that we had inherited in the NovaCare transaction. We've been able to go back and renegotiate them. There are other contracts in all candor we have chosen not to participate in because they expected reimbursement was far below what we considered to be acceptable and in those areas we'd rather concentrate on finding new opportunities.

Again, that's very isolated. There's been less than two or three of those types of contracts. That we simply will not participant in. Experience has shown us when we walked away from a contract that has asked for very steep discount that ultimately they do come back to us because anyone who bids these contracts at a below market level has difficulty, obviously, in servicing them and making a bottom line. So we've seen in a number of occasions those re-circle on us and come back at much more reasonable terms.

Generally speaking, I would say HMO and managed care contracting is flat to slightly up on some of those older contracts that we were able to go back and renegotiate from the NovaCare acquisition.

Can you talk about just kind of expectations. 4-6% same store number in 2003 still a good number and were you guys negatively impacted to any degree in the quarter just due to how brutal the winter has been?

One, we are comfortable with that 4-6% that you just outlined. Two, of course, we've been impacted in those areas where there's been severe snow and ice. I also, though, would point out that that really we have 18 markets in this company. The material effect has only been on two markets at this point. The other 16 markets, of course, enjoy a much better weather condition than those two particular markets.

So at this point we certainly are comfortable with those numbers and we'll continue to monitor, obviously, the weather as it transpires through the month of March. The month of March, traditionally for us, is an extremely strong month in our first quarter and, again, dependent upon what March brings from a weather standpoint, in particular in the two markets that have been affected by the weather, we'll see how that goes and we'll keep you posted on it. It's important, just comment, it is important to understand that our services and products are not a something that's needed one day and not needed the next day. So anyone who needs our products and services will, obviously, when available when the weather conditions are such that they're able to get into us we'll come in for those devices.

And it is not like they're able to get into our competition and not into us. So we haven't lost business in those two markets to our competition. It's simply a delayed revenue event that will occur, hopefully, during the month of March and make up for what, you know, the weather effect has been.

Okay. Thanks, guys.

Next question comes from Kevin Fischbeck of Lehman Brothers.

Hello, thank you. I was wondering if you could provide or if you were willing to provide some guidance for 2003 I guess specifically I am looking for EBITDA margin expansion and where you thought the best opportunities were here.

Hey, Kevin, this is Jason Owen. We are going to guide, again terms or conditions 5% revenue growth, that exclusive of any acquisitions during the year. Speak to organic numbers. The EBITDA margin we are expect being another 100 basis points expansion to 19% EBITDA margin. Interest expense probably will not have much of a lower tendency during the year. We're expecting live orders to start increasing this year. Debt levels will drop a little bit but assume offset by higher interest rates. The tax rate should be 40.5%. And you can work it down to the after tax line. The dividend is going to be increasing with the 7% dividend and the accretion and shares outstanding based on our stock price should increase a little bit over the year.

Okay. And then I guess the facts and revenue growth is that including acquisitions you closed in the fourth quarter.

That would be exclusive of the acquisitions closed in the fourth quarter.

Okay. And then it looks like you guys increased your year-over-year the number of practitioners but in the fourth quarter sequentially it looks like it went down, one practitioner despite the acquisition. Could you comment on turn over rates in the fourth quarter.

Yeah. Turn over rates the best way to look at the turn over rates isn't necessarily the fourth quarter. Let's look at the last four quarters ended on a trailing 12 month basis. Looking at the previous four quarters ended Dec. 31, 2001, net turn over was 7.4%. The 12 months ended 3/31/02 the net turn over was 2.6%. The trailing 12 months ended Jun. 30, 2002, with a net turn over was 1.6%. Trailing 12 months ended Sept. 30, 2002, net turn over was .1%. And the trailing 12 months ended December, 2002, was actually a negative .6 because it increased year-over-year.

Now, in this business you are going to lose people to retirement, you are going to lose some people to changing jobs and, quite honestly, you are going to lose people that aren't quite fit to run a practice or don't quite fit in the market they're in. Those decisions are going to be made throughout the year and throughout the months. Overall, we believe our attrition number is very much appropriate for this industry and we're seeing very good trends on a trailing four quarter basis. That's what we're focused on. Going back to the numbers Tom pointed out, revenue per practitioner increased again in the fourth quarter, labor as a percentage of sales continues to drop so we're very pleased with the firsts of our employee base and doing things like international recruiting to hope bolster our numbers to provide for the demanding going forward.

Okay. Great. And I guess my last question is about cash flow. It is looks pretty good in the fourth quarter. Could you go over how much in bonus payments you made during the quarter and anything else, working capital wise that might have affected the quarter.

There are no bonus payments made in the quarter. We make an advance payment in the third quarter and the final payment's made before March 15 in order to avail the company of the tax deduction. Oh, [Inaudible] we paid on 10/1 the advance which was roughly $60m including taxes? Sorry about that Kevin. I was off a day.

That's okay. Thanks lots.

Next question comes from Henin Rucall (ph) of Deutsche Bank.

Hey, guys. Continuing on with great quarters here, just a quick question on the bonus. You mentioned that it impacted expenses. How much relative, you know, year-over-year did your bonuses go up in total?

Year-over-year. Year-over-year it went up by roughly $6.3m.

$6.3m do you have the total that was paid out?

Roughly $32m is going to be paid out this year.

and that was all accrued for. And in the fourth quarter do you have a similar number?

Fourth quarter, accrual.

Yeah, the accrual, year-over-year increase.

The fourth quarter accrual was $11m. Last year was $14m. I had mentioned in my comments that the accrual was actually about $3m less this year.

Okay. Just then I guess a couple others. Material accrual rate, your audit’s done, I guess. Any change in that level from last year?

Yes. Improved by about 300 basis points -- I'm sorry, 30 basis points.

Thirty basis points. Okay. And then I guess just on the guidance, the CAPEX, you know, non- -- just non-acquisition in total you were thinking about this year.

Probably in the neighborhood of $13-15m in conjunction with the roll out of the new OPS system we will have to replace some of the hardware in the field. It’s probably going to be about $10m of maintenance CAPEX and 3 to 5 on hardware depending on the need in the field.

Okay. Any developments on the reimbursement front from the Medicare? I think it is pretty -- anyway, any just comments about the future increase or --

Yeah. We got a CPI increase this year. We are expecting a CPI increase next year also. And it sort of status quo in terms of the competitive bidding environment. It's still appears that there may be some form of competitive bidding for non-custom made off the shelf or [Inaudible] items which is a very nature narrow band of L codes that the government may choose to competitively bid. It is somewhere between $3-5m total. This is really not our business as I've said to you all in the past.

These are the types of items you could walk into any Wall Greens or CVS and find sort of generic items like this on the shelf. And, so, it really isn't our business. Our business is the custom made items in both the prosthetic and/or [Inaudible] field. Prosthetic isn't a part of this and/or [Inaudible] a very narrow band of L codes that are considered to be non-custom off the shelf, require no practitioner expertise in fitting those devices.

Okay. Thanks very much and congratulations on a good quarter.

Thank you very much.

Our next question comes from Rob Crystal (ph) from Brant Point Capital.

Hey I guess my question was in terms of revenue you said it was 5-7 that you are targeting, Jason. Is that right.

Revenue growth.

Yeah, exactly. The other question I had you talked about the two markets where weather was an impact. Can you quantify, I guess, what you think, you know, the percentage of total practices or reference are in those two regions.

t this point, Rob, we haven't, you know, seen the final figures, obviously, on February yet, so as we compile those over the next couple days, we'll have a little better visibility into that.

Right. I guess what I was asking was what percentage of total reference are those two regions or how many percentage --

Okay. Jason.

Bear for one second--

Sir, you can go to somebody else if you want. That was my last question.

Once again, to ask a question please press star one on your telephone key pad. Your next question comes from Route Upton (ph) of SG [Inaudible].

Couple quick questions. First of all, I am sorry if I missed it. The cash balance for the year-end.

What was that again?

The cash balance.

Cash flow.

The balance of cash.

I'm sorry. Balance.

Year-end cash balance is $6.6m.

Okay. And, also, can you update us on what our -- is our outlook for acquisition spending continuing about $20-25 million this year.

That would be on the high side, Ruth. We are being very selective I think would be the proper way to term it in our acquisition program. Again, we are under absolutely no pressure. There's no one even close to being number two, so to speak, so we are under no pressure to do any acquisition other than those that are strategic in nature, will help either intense file an existing market from a strategic stand point or open a new market for on us from a strategic stand standpoint.

I would say that number is probably going to be something less than on an annualized basis probably less than $20m right in that range there. We're not being aggressive at all on that. We're going to fund these out of our free cash flow and only choose those practices that really have a significant impact. They're all accretive, every acquisition we do is immediately accretive to the company. We will not do an acquisition that will not accrete immediately to our operations.

Okay. Thank you.

Going back to Rob's question, it is about 12%. 12% of our revenue comes from those couple of markets but as Tom and George and Van have discussed, we don't really know what the impact is in those markets until we get into March.

Next question comes from Andrea Bici of Solomon Smith Barney.

Good morning couple things. First just sort of walking through our cash it looks like with the bonus accrual and do you have a tax payment in the first quarter that you may have to dip into your revolver, right?

No. Actually, we may have to dip into a revolver for the payment on the bonus, however, we are not going to have a tax payment as we reduced our [Inaudible] allowance, that slipped some deferred taxes and also got a deduction from the unqualified options that use to pay [Inaudible] and that totally eliminated our current tax liability for this year and should be getting a quick refund of $8.5m for the year so that should add to cash flow and offset the amount we are going to need bonus.

[Inaudible]. Andrea last year we did the note seal on February 15th, we had $36m drawn at the close of that transaction. By the end of the first quarter we had increased to $42.5m because first quarter are always poorest cash flow quarter so many outflows during the fourth quarter. Now this year we are standing at $15m but we will be substantially lower than the $42.5m from last year but we will have to dip into that to make the bonus payment. Second and third quarter forecasting to get almost entirely out of the revolver.

And then after you pass your revolver, do you just foresee stock piling cash? Obviously, you will have selected acquisitions. What is your maintenance CAPEX forecast for the year?

About $10m and maybe another $5m in project CAPEX.

Thanks.

At this time, there are no further questions.

Okay. Thank you. We want to thank all of you again for your continued support and interest in Hanger. We look forward to talking to all of you in the near future. Have a good day, everybody.

This concludes today's conference call. You may disconnect at this time.