Hanger Inc (HNGR) 2003 Q3 法說會逐字稿

My name is Teresa and I will be your conference facilitator. At this time I would like to welcome everyone to Hanger Orthopedic Group third-quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS)

Thank you. Good morning to everyone. I am joined here in Bethesda with Tom Kirk, our President and Chief Operating Officer, George McHenry, our Chief Financial Officer, and Glenn Lohrmann and Jason Owen. Thank you for joining us this morning. As you all know at the close of the market yesterday we announced third-quarter net income per diluted share of 33 cents, a 10 percent increase over the same period in the prior year. We increased sales by $6 million overall or about 4.5 percent to 140 million from last year's 134 million. That sales growth was primarily the result of about 2.1 million or 1.7 percent increase in our same center sales growth at our company's patient care practices and a very healthy 1.6 percent million or 19.8 percent increase, again in the sales of our SPS distribution segment with the net balance coming primarily from some few practices that we acquired in the third quarter.

Income from operations increased by about 1.5 million in the third quarter to 24.6 million. Last year it was 23.1 million. And those increases came primarily again through increased sales and that was slightly offset by about 1.2 million increase in SG&A expenses associated primarily with the operating expenses of those practices we acquired, and of course the investments we are making with the rollout of our new billing system and a substantial increase in spending in our marketing and corporate development activities. During the third quarter we were able to generate that 10 percent growth even with that additional investment. Our EBITDA margins continue to improve from 19 percent in the period last year to 19.6 percent this year, and we were able to increase our EPS by 10 percent, as I said, over the prior year, while reducing our SG&A to about 34.2 percent of sales this year compared to 34.8 percent in the 2002 period.

All of this while we were making significant investments in our marketing systems and corporate development that Tom is going to talk about in his presentation that will certainly set us up and benefit us for the future quarters to come. I am also very pleased and excited to report, as I'm sure you all know the successful tender and refinance of our 11.25 subordinated notes that closed in early October and the term B facility was extremely well-received by the market. We oversold it several times. That gives us 150 million now in prepayable debt with our substantial cash generation, we continue to want to deleverage the company. And in addition to that it is going to save us approximately 6 million in annual interest costs. So net-net we're very pleased with what we are reporting this quarter. We did face a little bit of a challenge here in our same-store sales growth. We are going to talk a little bit about that, Tom will talk about that in his operations report. We believe that most of that is starting to be behind us.

There were some onetime events and we look forward to getting back to some of our historical rates as we move into the '04 year. At this point, let me turn it over to George, who will highlight and walk you through the numbers, and then he will turn it to Tom, who will go through an operational review for you and then we will be happy to answer any of your questions.

Thank you, Van. For the quarter on the income statement Ivan already mentioned what happened with regard to sales. Cost of sales was essentially the same as last year and therefore our margins were right in line with last year's results. SG&A, to give you some more color, it was $1.2 million higher than last year, but it decreased by 60 basis points as a percentage of sales as we continued to leverage our platform. And to give you more breakdown on the $1.2 million increase, 800,000 of that was due to operating expenses of the three acquisitions we have made so far this year. We also spent over $1 million in marketing, corporate development and support for the rollout of our new billing system as well as Insignia, our digital scanning system. And therefore when you continue those two things, we spent roughly $2 million in those two areas and obviously that means that our core operating expenses went down this quarter. So they remain under good control.

EBITDA, as Van mentioned, $27.4 million for the quarter that is a 1.9 million increase over the prior year. The depreciation increased by $400,000, which is principally due to increased CAPEX and the acquisitions we have made so far that I just mentioned. Our interest was 84,000 lower than last year. As Van mentioned, we completed in early October the refinance of our sub notes. In connection with that on September 10th we closed our interest rate swap. We had a $100 million interest rate swap from fixed to variable on our senior notes. We received $3 million in proceeds in connection with that, which will be amortized over the remaining life of the senior notes as a reduction of interest expense. The short-term effect of that is that it increased our interest expense in the quarter by about $200,000. Next quarter what you'll see is the savings from the replacement of the sub notes will start to kick in and our interest expense will go down.

EPS at 33 cents was a 10 percent increase over last year, when we reported 30 cents. For the year, again Van already went through the sales. Cost of sales was 47.1 percent for the year, as compared to 47.3 percent in the prior year. The slight improvement was really evenly spread between materials and labor. SG&A increased by $2.2 million, but again a slightly higher decrease as a percentage of sales. We reduced that by 70 basis points over the prior year and the same factors played into that, 1.2 million of that 2.2 million increase was due to the acquisitions that we made and we spent close to $3 million on those areas that I discussed a minute ago. That is exclusive of the investment we have been making in the labor component. Our EBITDA margins, our dollars improved by 6 million from 69.9 to 75.9 and the margins improved to 18.7 percent from 17.9 last year. Depreciation change was the same as the quarter. Interest was down $700,000 compared to last year due to lower interest rates, continued paydown of our debt, and the favorable impact of the interest rate swap that I just discussed.

Our EPS at 88 cents was a 13 cent increase over the prior year or 17.6 percent. On the balance sheet, our accounts receivable increased net by $3.3 million, which is 3.1 percent of sales, and that is really comparable with our 3.7 percent growth in sales overall. Our DSOs were 75 days, which is consistent with where they have been recently. We continue to have strong collections and we reduced our AR over 120 days down to 23.6 percent, which is a low watermark for Hanger since the Nova Care acquisition, so we're pleased with where that is going.

Our inventory was up by $2.2 million from 12/31 and the terms remain pretty consistent at 2.5 times. The increase is principally due to an increase at SPS to support their higher outside sales and to support the new product lines that they have put in place. CAPEX for the quarter was 4.8 million. We are at 13 million for the year. Lastly cash flow from operations was strong at 19.2 million as compared to $25.3 million last year. That is a $6.1 million decrease and the reason for the decrease is last year -- every year we make an advance payment on our practitioner’s bonus plan. Last year that approximately 10 to $11 million payment was made in the first week of October. This year it was made in September, so that slipped into this quarter and actually if you pro forma that, we had stronger cash flow this quarter than we did last year. That is it for my analysis of operations. I'm going to turn it over to Tom.

Thank you, George and good morning, everyone. I will address some of the operating conditions and operating activities that we have had through the quarter and as they roll into a full nine-month period. First is the concept of continuing to leverage the initiatives that we have had in place. We reported to you several quarters ago that they are processes by which we use to manage the business. That is enabling us to continue to maintain a firm control on our costs. Under our cost of goods sold our labor and our materials on an absolute and on a percentage basis are still consistent (technical difficulty) percent of sales is within 1/10 of a percent, and that is owing to good cost, good process controls, and at the same time leveraging our technological position in that we continue to make productivity improvements throughout our system.

HPO, which is our patient care division, is facing some challenges on its sales increase and I will hold those to maybe the end and we can touch upon some of the things that we are doing in that area. But on an overall basis was up about 3.6 percent for the quarter, 1.7 percent on a same-store sales basis. FDS continues on its sales side to rack up very good accomplishments. They are continuing to leverage their new line some of which are exclusive, taking full advantage of a larger sales force and the overall marketing plan that we have discussed with you in the past continues to be rolled out, emphasizing service, emphasizing productivity to all of our customers. So on a consolidated EBITDA basis, what we have seen because we've been able to leverage that platform is about a 7.5 percent increase in our consolidated EBITDA on about a 4.5 percent increase in sales.

During the quarter, George has talked to you a bit about some of our G&A expenses. I would like to talk about some of the operational and staff investments that we have made in this area. We have restarted the roll out on the field side of our billing and collections system right after Labor Day. We are currently operating at a rate of bringing about 55 of our patient care centers online per month. We think that this is not only going to enhance our productivity but it is also going to enhance our ability to analyze our data. Obviously from a point of view of compiling and analyzing our financial statement, we are okay on that score. This is going to give us enhanced capabilities beyond that.

Our Insignia digital imaging system, which we reported to you during the second quarter as in pilot stage, began a rollout in July. We now have slightly more than 40 units out in the hands of our practitioners. The initial results have been very, very favorable on two fronts. One is the technological capability of the unit has been confirmed by the practitioners that have them in its ability to provide accurate, fast images. It has also been confirmed in its ability to provide a digital data record for use by insurance companies and doctors. Lastly, it has been confirmed as a distinct advantage in trying to go out and market the company in terms of its technological capabilities and advancements in the field. So I will have a few comments on that at the end, but we're quite pleased with that. We have been making an investment in that score.

Right in lockstep with that is our employee development efforts. We have piloted and now rolling out a training effort that will reach all corners of our company in terms of computer-based training, allowing our people to have the skills necessary to do their job in a digitally connected way. And we piloted that in one area and what we're finding is that it is improving our ability to communicate. It is improving our ability to move data. And in general it is enhancing our productivity. On SPS, we have talked about their product lines, but one of the ways we have implemented our marketing plan is by putting in on a trial basis an e-commerce system that is currently being tested and we expect that to be operational by the year end, which is going to enable us to have connectivity both to our customers and to our suppliers.

And the final thing that we have done during this quarter is we have talked to you in the past about our marketing, sales and business development efforts. We have the full complement of field force in place. We have spent some time revising their methodology in terms of how they work, the methodology in terms of the way that they are compensated, and we have just held a three-day meeting in Chicago to bring everybody up to speed to report on the results of some pilots that we have had out there in certain geographic areas with this new realignment. Pilots have been very successful in that they have on these targeted bases been able to increase sales at higher levels than we traditionally have been accustomed to through this concentrated focused effort. That is being rolled out in the beginning of the year and obviously is aimed at attacking the top line slow growth issue.

Last thing that we have done during the quarter was to bring our inventory recording system to the next level so that the inventory that was performed on October 1 was much more efficient, went off without a hitch and our practitioners reported great success on that score, taking a lot of the manual element out of it. On an overall basis for the nine months, what we have seen is SPS, as Dan mentioned to you is up almost $5 million as a result of some of the product lines, sales force, the marketing plan, all the things we have talked about. HPO same-store is up about $4.5 million and this is an area of focus for us. One of the things we have looked at in a very careful way is what we can do about this. We recognize that it is not an across-the-board issue. Certain portions of the company with certain economic trends are seeing a little more challenges than others. We have also gone through some onetime impacts that we believe after this quarter will be behind us. And just to ensure that, we have put into place some projects that are going to be emphasizing the top line.

The first one is this marketing project that we just completed during the third quarter, early fourth quarter that will be rolled out beginning next year. We think that is going to have an impact with 26 focused individuals on the contract and on the sales development side. Because of the success that we have seen with our Insignia system, we are going to double the pace of our rollout so that by the end of the first quarter next year we're going to have double the number of units out there backed with a media campaign and a comprehensive advertising program to announce the system, to facilitate our in-service and our direct contact with our referral source effort, and thirdly to take this directly to the patients so that they can see some of the advantages. We did a trial of this in the Midwest and it was very successful.

The other point that we are looking at is bringing on some new technology. We recognize that technology is one of the keys to our future. We are negotiating with some technology vendors for some enhanced products that we can bring into the mix right away and some that will impact our mix on a longer-term basis. Lastly through our marketing and contracting effort, we are continuing to have discussions in this area because we believe that Hangers' position makes it unique in trying to partner with these folks while they are going through a period of extreme consolidation in their industry, and looking at ways that they can either lower their administrative costs or reduce some of the hassle in their systems. So we think good handle on the costs, good process initiative continuance, with some upside to technology and marketing to help restore us to traditional levels of same-store growth. With that, I will turn it back over to Van.

Thank you. Teresa, we can open it up to questions and answers at this point.

(OPERATOR INSTRUCTIONS) David MacDonald of Leerink Swann.

One on the distribution business. The distribution growth was very strong again this quarter and I know that you had indicated that you would expect those growth trends to moderate. With some of the new products and some of the things you got going on, would you expect to be able to maintain these growth levels in that business? And then I got a couple of follow-ups.

We think third and fourth quarter this year certainly by comparison to last year when we didn't have some of these products in the expanded force are going to stay at about the same level. As we go forward into next year, we will be coming off of a higher base. We do not expect that we're going to be able to sustain this 20 percent level. We think its going to moderate and come down a bit.

Okay. Can you talk about the billing system? You are saying 55 centers per month being implemented. How many centers across the organization are currently implemented in running on that system?

Today we have roughly about 70.

Okay. George, I was wondering if you could give us some sense in terms of what you would expect for cash from operations and free cash flow in 2004, basically cash from operations and CAPEX for '04?

Looking at the model, with the lower interest rate with the term loan B, we should be in the $35 million free cash flow from operations line. Using that to predominantly pay down the term loan B.

Jason, what is the CAPEX expectation for '04?

We thought we would be running right around 15 million this year. Year-to-date we're 13 million. That goes hand in glove with what George and Tom have been talking about with increased rollout of Insignia, increased rollout of OPS. Next year is probably going to be a little higher than 15, probably 16, 17 million.

And wondering also if you could -- you talked about some of the onetime issues. I was wondering if you could quantify some of those, give us a sense of some of those and also a sense of which of those onetime things would go away as we move forward into 2004?

David, on your question about the OPS system, that 70 cents we restarted, which was right after Labor Day, we had about 30 or 35 that were out there as part of our large beta test. So those are all running fine. We used that to get smart on, so if you want to add them all up, it is about 100. And going forward with that, the end game plan is to have this in by the end of Q2 next year.

Across the company from a rollout point of view.

In terms of some of these walk away, what we are looking at is there is no silver bullet here and there is no one cause, but let me give you some examples of what we have seen. First off on the state level we have seen them withdraw certain kinds of funding and closed certain facilities, and we have gone through and added that up and that is about $2.5 to 3 million. Those states are now down to a position that they are really not going to change. In addition to that, we have looked at the mix of our business and we have recognized where the government is going to go with some of the competitive bidding etc., etc. and we have decided that in some cases we had some lines that were not profitable, we had some lines that were diluting local attention, so we called those the commodity products. They are things such as some DNE, some shoes, some masectomy, in certain areas on certain products, and we have walked away from those. And that is about $2.5 million. In some cases we have looked at operations that we did not feel were worth the sustained effort to try and make them successful in a region due to competitive conditions. In some cases just due to the economic climate, we felt it was better to close and consolidate those, move onto where we can put efforts and get a better return on our investment. So our closed operations account for about $1.5 million that we have moved away from.

Probably the final area is on the insurance area, where insurance companies are going through a pretty aggressive period these days. We have looked at some of these contracts and decided from a strategic position as well as from a tactical moneymaking proposition, you cannot make money at the levels that some of these people wanted us to take them on, so we have walked away from some of that business. That is about $3 million. The feeling is, as I gave in my comments, that we think that there may be another way around this and that we would number one be jeopardizing our P&L and number two be jeopardizing our longer-term negotiating position, so we felt it prudent to move away from this. So when you total them up, we are looking at about 12 or $13 million. Yes, they are going to reset the level, but we think they are behind us and we can grow off of that platform and put our efforts on some areas were we can get better return and better sales.

If you just took those onetime things and put them back in the till, are we talking same-store growth of 3 or 4 percent just on that alone?

Yes, that's right.

Okay, thank you.

David Fishback of Lehman Brothers.

It's actually Farouk Amin from Lehman. I have a question on the -- actually on selling, general and administrative expenses as a percentage of sales. You have noted that $800,000 were related to acquisition and about another $1 million were related to billing system, yet we see SG&A as a percentage of sales going down. What are some of the factors that contributed to that?

The real factor there is that we are continuing to grow our sales so by virtue of the fact that we are growing our comp, and keeping those other costs that we have, the day-to-day costs either level or we're reducing them, that is bringing our percentage down. And as I mentioned previously, we have some expenses that are going down. Our telephone is going down. Just because we have put programs in place to control those, and in some cases get better discounts or write a little better bad debt expense experience. We have capped off our outsourced labor, which was a source of temporary labor in the past and made more positions full-time in order to control that cost. And just across the board we have continued to work on the programs that Tom is so involved when he first came on board and was helping us when he was with Jay Alex. (ph)

Okay, thank you.

Will Seton (ph) of J. S. Securities. (ph)

I noticed you seem to be making earnings estimates this year even though you are getting a little bit less revenue growth and you have got additional spending (inaudible). Can you tell us how these investments you are making, which lines they will affect going forward and help us quantify a little bit how that will affect your EBITDA margins going forward?

Sure. One of the key areas that I have talked about is in G&A account, which is really our marketing and business development area. And there we have made investment in bringing additional people on, providing them additional training, and it is not as if they have been just sitting in a classroom. Obviously they have been out working with referral sources, doing in services, and so we are seeing some of that spill over into the travel and entertainment accounts as well. So that is one key area and we are putting together our business plans for next year. And obviously now that these people have been assigned to specific accounts and territory, we would expect to get some payback on that. Otherwise it is not going to be a good investment, and so we will take the appropriate action. We have not tallied up precisely what kind of extra return we are going to get on the costs, but we would measure that as additional sales and additional same-store sales growth coming out of those efforts. Obviously to do something like this and get a return we would like to see ourselves generating an additional 1, 2, or even 3 percent coming out of that. But that is all part of our budgeting process as we go forward. That is one key area.

We are continuing to make some investments in the area that is called professional services or corporate development, and that is putting in some programs to (technical difficulty) and offset and take advantage of some opportunities that are in the marketplace. I do not want to going into too much detail on that, simply because of some competitive reasons, but in that area we are looking at additional ways to increase sales to make us more valuable to the insurance companies and the referral sources.

And the third area where we are making the investment is in the technology area, and that is going to happen two ways. One is through our process technology improvement, which is what our Insignia imaging system is all about. We are seeing that come back in terms of two ways, productivity and marketing, and we want to double the pace of that rollout. And then the other area of technology is in some new products. We have signed and we are close to signing another one where we are going to be bringing some technology into the company, doing the classic kind of product development, and as you are aware, in our industry its not only product development but it is staying in lockstep with the regulators, so you have to make investments to build either FDA or the reimbursement files that are necessary to secure the proper reimbursement for this. And that all takes manpower and efforts and a little bit of outside professional services on the legal side. So it is a combination of all of those three areas that we think is going to be able to help us with our top line. In terms of what does that mean on our EBITDA or EBITDA ratios, we know that we are working off of pretty much fixed labor platform, so that benefits us in leverage and we know the reductions are primarily just materials that go into those, and the gained shares that we have with all of our practitioners in their incentive plan. So it is about a 50 percent fall through rate that we can get from every dollar of sales that we put up there.

Great, thank you. And one last question, now that you have replaced the (indiscernible) term loan, what are your plans for starting to use your free cash to begin to pay down that term loan? Can you start that pretty much this quarter?

We still have about $7 million outstanding on our revolver, so our first goal will be to pay that down to zero. And once we have done that, we'll start looking at the term loan B and obviously the reason we put that on the books was to have that source of prepayable debt, so we will immediately start looking at that.

Got it. Thank you very much.

(OPERATOR INSTRUCTIONS) Derek Dobecki of Ironwood Capital Management.

Just a quick housekeeping item first, I missed it. What were the cash, AR, and payable balances at the end of the quarter?

The cash balance was $12 million. AR was 111 -- I'm sorry, what the last item?

Payables, Accounts Payable?

Payables was 11.6.

And inventory?

Inventory 58.7.

Just a follow up on the billing system. Could you quantify the dollars you have spent this year both call it CAPEX and income statement hits so far that you plan to spend this year as it relates to the billing system?

From a CAPEX standpoint, we are going to be in the $6 to $7 million range when we are done this year. We are rolling out now and as you roll it out you find out about equipment needs that you do not expect to some degree, so it is going to be in that range this year and obviously there will be some more CAPEX next year mostly in the hardware side. The training, the travel that is associated with rolling the system out which you can't capitalize this year is probably going to be $1 million. And perhaps a little less than that next year.

And you said that you are hopeful for the rollout to be done at the end of the second quarter?

Correct.

Thanks, that was a good quarter.

Mike Petusky of Thompson Davis & Co.

Quick question on the HPO 1.7 percent same-store sales you said that it wasn't really across-the-board. I would like to know does that have more to do with the region these shops are in or does it really drill down to the specific shop and on that, if it does have more to do with the specific facility, aside from the marketing project that you are going to try to gear up next year, is there any additional rationalization that needs to be done there?

It’s probably a combination of both. Two regions seem to be the hardest hit in our portfolio, and actually if you take those two out you see that the remainder of the Company operates at near historic levels. Those two regions, number one, one of the regions had a couple of the single onetime issues that I referred to such as the closed operations. I think it is much more of a regional issue in this case, where economic conditions and some site closures are driving that. The other region is in a more remote part of the U.S. where, frankly, our market share is even higher. And both of these regions last year were growing at about our historic levels, and I think the second reason is just what we do see from time to time is after a year of pretty high growth there is a digestion period and it plateaus off and then goes back up again.

And what we think we can do in the second region is we are going to be bringing in some of the marketing help that we have talked about in terms of focus marketing to bringing in some of those business development people and actually in that region we selected that as one of the areas for heavy penetration of Insignia to try and boost that up, to try and take it to higher levels in spite of high market share. As we look to the future, we're not anticipating anymore rationalization of sites. Obviously it is something we continuously look at, particularly as we make these small, focused acquisitions, as we densify up in an area, if we see that there is some opportunity we will rationalize a couple of them close together, but we are not looking at the present time going into any of the regions on a specific area and closing down operations as I mentioned, where he had the $1.5 million hit from a couple of those. I think we are okay on that score. We expect these things to come back next year. Discussions with our regional VPs in those areas indicate that this should be behind us.

I just want to add one other thing to Tom's. I don't think you mentioned this, Tom, of the two regions that seem to be down the most, they are coming off of two years of pretty good growth, so there is a little bit to be taken into consideration.

And one other thing. If you mentioned this I missed it. Did you give the practitioner attrition number as far as (inaudible)?

One of the things that we are doing, we didn't give that. We have a study underway. We have gone back. We made some changes in the HR side and we decided that the basis of calculation in the past really looked at a very disciplined, narrow definition, certified practitioner. Which was not representative of the revenue generating capability of the Company, in that the number of our middle managers and our top managers and some of our staff support are all certified practitioners but they are not on the revenue generating side. At the same time, we have people that are in the process and ready to sit for their certification and some others that are out seeing patients that do not conform to that discipline definition. We thought that that was a bit misleading, and so what we want to do, particularly with Insignia coming on, we know that is going to change the world dramatically for us, was to go get a real accurate count of just how many practitioners or near practitioners and practitioner ready or certificate ready practitioners do we have in the system that are generating revenue?

So we are (indiscernible) through on a practice by practice getting all of those numbers, and it is our expectation that our final number will go up, we will take out maybe 20 or so execs that are non revenue producing. But by the time we bring our residents in and some of the other folks that are seeing patients, net-net we will be within the 5 percent change in our number, but we are going to have that number by year-end for you. And we think in terms of metrics and productivity analysis, this is the one that really matters. But our attrition rate has been no more than it has been running for the last 18, 24 months. It is very stable. We just came off of our traditional town hall meetings. Tom, myself and Rick spent about six weeks out in the field this fall were we do our each regional town hall meeting. We did about 18 of those so far and I can tell that I think the (indiscernible) and the stability in the organization is certainly as high as sit has ever been.

Okay, thank you.

Andrea Bici of Salomon Smith Barney.

Just a quick question. Can you comment on the recent consolidation in managed care that is going on and the level of business you have with each of the companies and how you expect that to change due to the new consolidated landscape?

Andrea, we actually view as very positive for Hanger, as the managed care industry continues to consolidate, they are going to be looking for greater synergies in the provision of services and products to their beneficiaries. As you know, I sit on the MAMSI mid-Atlantic board and was involved in that transaction with United. That is very positive for us. We did last year about -- it is reported in the MAMSI proxy I believe it's a small number, $250,000 in the MAMSI business here in the mid-Atlantic. Just so you know, the MAMSI mid-Atlantic business for O&P was won not an exclusive contract because they couldn't obviously do that with Mike sitting on their board. And two the benefit at MAMSI for O&P is not in all candor a great benefit. It is 50 percent co-pay on the part of the patient. That is very different under the United programs, so I anticipate that as MAMSI integrates into United, that will be an uptick for us. With the Anthem Wellpoint, we do business with both of those organizations. I anticipate that again the synergy of our being able to bring a large regional or national presence as these folks continue to consolidate will only continue to put us in a positive position in terms of capturing additional contractual relationships. So the consolidation effort on that part I believe plays right into our consolidation strategy going forward and will only benefit us.

One last quick question. With respect to the timing of your cash bonus payments for practitioners, can you give us a little bit more color on that and do you think in 1Q you'll have to dip into your revolver to make the cash payments or bonuses?

I am going to answer two ways. One, what we have already paid. In 2002, I want everybody to think about this when you see the cash flow statement, we did not make the midyear payout until October 1. So on the cash flow, the cash flow looks better Q3 of '02 as compared to Q3 of '03, but we made a $9 million payment the day after quarter end last year. So the comparison is really we improved about $3 million year-over-year for the third quarter. For year-end, we expect to make the bonus payment in a similar timeframe, probably on or by March 15. We will definitely have the revolver paid out by year-end and we will start to accumulate cash during the first quarter to be used for the term loan B. Depending on how strong the cash flow is, and remember first quarter is always seasonably weak for us, we might have to pull into the revolver a tad bit, but we expect to fully get out of that by either quarter end or midway through the second quarter.

Finally unless there's anything otherwise legislated, are you slated to get a 2.1 percent increase on your Medicare portion of your business, which is roughly 33 percent?

That is correct, Andrea.

And that was versus 1 percent last year, in '02?

I think it was 1.1 percent.

Great, thanks.

I am showing no further questions at this time. Mr. Sabel, do you have any closing remarks?

Thank you, Teresa. Thank you all for joining us this morning and continuing to have an interest in Hanger. We will be obviously updating you as we finish out the year and I wish everybody a happy Halloween. Take care. Have a good day.

This concludes today's Hanger Orthopedic conference call. You may now disconnect.