Hanger Inc (HNGR) 2007 Q3 法說會逐字稿

Good morning. My name is Lori and I will be your conference operator. At this time, I would like to welcome everyone to the Hanger's third-quarter results 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 section sessions. (OPERATOR INSTRUCTIONS). Thank you. I will now turn the call over to Ivan Sabel, Chief Executive Officer. Please go ahead, sir.

Good morning and thank you very much, Lori. Good morning, everyone, and thank you for joining us for our third-quarter 2007 earnings conference call.

Before we get started, I need to read our Safe Harbor statement. During this call, management will make forward-looking statements relating to the Company's results of operations. United States Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements. Statements relating to future results of operations in this document reflect the current views of management. However, various risks, uncertainties, and contingencies could cause actual results or performance to differ materially from those expressed in or implied by these statements including the Company's ability to enter into and derive benefits from managed care contracts, the demand for the Company's orthotic and prosthetics services and products and the other factors identified in the Company's periodic reports on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934. The Company disclaims any intent or obligation to update publicly these forward-looking statements whether as a result of new information, future events, or otherwise. Now onto the results of our third quarter.

I'm very pleased to report solid financial performance with net income of $5.4 million and 7.1% revenue growth for the quarter ended September 30, 2007. Our reported EPS increased by over 150% from $0.07 per share to $0.18 per share. If we pro forma the results of the refinancing last year, EPS still increased by 20% from $0.15 per share to $0.18 per share. This earnings performance represents the seventh consecutive quarter in which we have met or exceeded First Call consensus estimates.

Of note was the robust 5.1 same-store center growth of our patient care business, which resulted in an increase of $6.9 million over last year. Additionally, sales in our distribution segment accelerated with growth of $1.6 million or a 10.9% increase over the prior year. We also continue to make progress with our WalkAide system by earning the da Vinci award from the National Multiple Sclerosis Society. This award honors outstanding achievements in adaptive and assisted technology that provide solutions to accessibility issues for people with disabilities. We are expanding the opportunities for WalkAide and in just over a year, we have been able to sell more than 1,000 units even though it has been primarily private patient paid to date. Additionally, we are continuing our discussions with CMS and have had a long going positive dialogue. Tom will provide more detail regarding WalkAide in his presentation.

Now I'd like to turn the call over to George McHenry, our Chief Financial Officer.

Thank you, Van. First, I'll address my comments to the quarter.

The income statement on sales, to give you a little more color, increased by $10.8 million or 7.1%. The comp sales in our patient care centers increased by $6.9 million or 5.1%, the strongest results this year. And to give you some more color there, the Linkia Health, we were up 8% in Linkia, so that was additive to our comp and we sold over $1 million in WalkAides, which also helped our comp and frankly helped our margins as well. SPS had a strong quarter reporting a $1.6 million or 10.9% increase. The balance of the increase was from acquired entities, principally the acquisition of SureFit, which was completed on July 1st.

Gross margin increased by 1% to 50.7% compared to 49.7% in 2006, due principally to the impact of a sales increase on a relatively fixed labor cost. Labor costs increased by $800,000 in the quarter due principally to annual merit increases. But as I mentioned a minute ago, that small dollar increase led to a decrease in the margin effect of the labor. Our material costs increased by $2.9 million due to the sales increase, but decreased by 0.3 of a percentage point as a percentage of sales compared to 2006 due principally to a slight change in product mix and the WalkAide sales also helped, as I mentioned a minute ago.

Our SG&A increased by $5.3 million in Q3 due to a combination of $2.6 million increase in wages and variable compensation, principally caused by annual merit increases. $0.5 million of the increase was related to the acquisitions that I talked about and the sales increase. $800,000 of the increase was an incremental increase in our investment in Linkia and Innovative Neurotronics, our growth strategies. We had a $2.1 million increase in other operating costs, principally rent, travel, and advertising. And all of these increases were offset by a $700,000 reduction in bad debt expense. As a result, our EBITDA for the quarter increased by $1.8 million to $22.5 million from $20.8 million last year.

Interest was down by $500,000 in this quarter, principally due to 25 basis point reduction in the adder on our Term B that was granted for an upgrade we received from the rating agencies in Q1 2007, and also an increase in our cash balances led to higher interest income during the quarter.

Our income tax rate was 41.5% for the quarter as compared to 48.6% last year. Last year was impacted by the refinance that we completed at that point.

As a result, we reported EPS increase of 20% for the quarter to $0.18 compared to the $0.15 pro forma EPS that we reported last year. If you compare to our GAAP earnings last year, our EPS increased by over 150%. We reported $0.07 last year on a GAAP basis.

For the nine months, our sales increased by $21.7 million or 4.9%. Comp sales and patient care increased by 4% or $16 million. SPS external sales increased by $2.5 million in the first nine months; that's a 5.8% increase. And the balance of the increase again was due to the acquired entities.

Our gross margin improved to 50.4% of sales compared to 50.1% in 2006 due again to a decrease in the labor costs as a percentage of sales. Labor costs increased by only $500,000 compared to last year and thus decreased as a percentage of sales due to the sales increase.

Our material costs increased by $9.2 million versus 2006 due principally to that sales increase. SG&A increased by $6.8 million for the year due to a $3.9 million increase in labor costs, principally associated with merit increases. And annual -- an additional $1.9 million investment in our Linkia and Innovative Neurotronics growth strategies, $500,000 from acquisitions, a $1.7 million increase in operating costs, such as travel, rent and advertising, and these costs were offset by a $1.2 million decrease in our bad debts due to improved collections.

EBITDA as a result was $60.4 million, a $5.2 million increase or a 9.5% compared to last year's 55.1 million. Interest is $1.5 million less than last year, principally for the same reasons that I mentioned when I talked about the quarter. Again, the income tax rate for the quarter was 41.5%. And reported EPS for the first nine months of $0.41 compared to $0.31 last year.

On the balance sheet, our cash balance at 9/30/2007 was $23.4 million, which was a $9.5 million increase compared to $13.9 million last year, and that led to the additional interest income we've earned this year on the P&L. Strong collections are the principal reason for that increase, and this is despite spending $12.6 million on acquisitions so far this year.

A/R decreased by 900,000 compared to year end despite a $21.7 million sales increase. And our DSOs decreased to 57 days compared to 59 days a year ago. The aging also improved so the quality of our receivables continues to improve, with A/R over 120 at 14.3% of total A/R compared to 17.6% a year ago and 16.3% at year end.

Our inventory is up by $1.2 million to $77 million compared with the year-end balance of $75.8 million, principally due to an increase in the number of patient care centers we have and we think we have adequate inventory balances to support our business.

Our CapEx for the second quarter was $4.3 million compared to $2.7 million in the prior year. For the year, our CapEx was $13.4 million compared to $7.9 million in the prior year. The spend through nine months is in line with management's expectations.

Cash flow from operations was $10.1 million in Q3 compared to $15.9 million in 2006, a decrease of $5.8 million. It's the first quarter this year that we've trailed the prior year's cash flow. It's principally because of a $6 million tax benefit that we realized in the third quarter of last year that was tied into our refinance. So if you factor that out, we were pretty much comparable to the prior year's performance.

For nine months, we're still well ahead of last year. Our cash flow from operations was $30.3 million; that's a $17.4 million increase compared to $12.9 million last year and that's excluding the impact of the refinance.

Final comment, as far as guidance is concerned, we believe when you look our steady financial performance in Q3 and for the first nine months of 2007, that reinforces our guidance of $620 million and $630 million in sales and EPS in the range of $0.59 to $0.61. We do believe at this point that given our performance so far that we will be above the midpoint of the range in terms of our sales guidance somewhere between $625 million and $630 million and we should be in the upper end of our range from an EPS standpoint. That's all my comments for the quarter. I'm going to turn the call over to our COO, Tom Kurt.

Thanks, George, and thank you all for being with us this morning. I will review the events impacting our operations for this third quarter and then update you on some of our growth initiatives.

First let's take a look at HPO, our patient care division. It achieved a $6.9 million increase for the quarter compared to the comparable quarter of last year, which equates to a same-store sales growth rate of 5.1%. This performance is partially attributable to the impact of the rollout on January 1st of this year of the CMS 4.3% CPIU increase, which impacts about 35% of our book of business for this year. Now this translates to about 1.4% of the 5.1% with the balance of 3.7% attributable to volume and mix. Now this indicates that our programs that we've had underway for sometime continue to gain traction and continue to add value.

Let's take a look at some of the volume and mix programs and see how they played out for the quarter. These programs consisted of four major areas. First is the continuing improvement in our Linkia book of business. Please keep in mind that HPO is the primary vehicle for the delivery of services under the Linkia contracts. On an overall basis, the revenue from Linkia for this quarter was up about 8% and about 4.5% for the year to date compared with the comparable periods of last year.

The second area is our continuing emphasis on our high performing products, such as the microprocessor prosthetic componentry. For this quarter, these product lines are up almost 30% in terms of approvals and deliveries and 29% for the year to date.

The third area is our patient evaluation clinic program, which has produced approximately 33% more revenue than the comparable quarter last year. These are an excellent opportunity to expose our patients to the latest products and to ensure that their current devices are correct in terms of fit and function. And the last area are our sales, marketing and public relations efforts to support our practitioners on a day-by-day basis in identifying opportunities in initiating the events to capture these sales opportunities and thereby increase our market share.

Now, we recognize that the changing dynamics of our health-care service field demand that we spend resources with our industry and trade associations to differentiate our profession from others that are not as qualified to perform this work. In addition, we're monitoring the new Congress and conducting educational meetings with these policy makers to make absolutely certain that they understand the value of the services we provide and how important they are to the long-term viability of the reimbursement system. To date, we have not been informed of any change in the status of our fee schedule increase for 2008. And if maintained through the Congressional hearings on Medicare, we expect that the full CPIU for 2008 is estimated to be at 2.3%. Haven't seen any signs that this is going to come off-track as we sit here today.

And we're still working with the associations on the details of qualified provider quality standards and the enforcement provisions for these standards. Our long-term goal is to make certain that CMS and the other payors are following the laws and the regulations by reimbursing only the qualified providers of course, which Hanger is, for this work.

Now, on a different front, with respect to parity, we're working with the Amputee Coalition of America on educating state legislatures on the issues involved with reimbursement caps and how these deprive patients of long-term quality care. Six states passed parity in 2006 and one has passed it in 2007. We've been working with the state associations who are active in moving this legislation forward in 2007 and three other states and we're also performing advanced planning in almost 20 states for 2008 and 2009.

On the national front, we, along with other patient and provider groups in the industry have taken the lead in finding sponsorship for a prosthetic parity bill.

Now, let's turn our attention to SPS, our distribution company. Their outside sales are up approximately $1.6 million or 10.9% compared to the third quarter of '06. Now we have to keep in mind that the third quarter of last year presents a difficult period for comparison because their sales grew in excess of 23% compared to the third quarter of 2005. Their success in continuing to build sales is attributable to three major areas.

First, it's their new warehouse, which was opened in July in Harrisburg, Pennsylvania and it has permitted better service into the Northeast corridor. Second, their superior customer service has been the impetus for gaining some new large customers. And third, that they have enjoyed a shift in their product portfolio to some higher-value technology products.

We announced the acquisition of SureFit on January 1st, a custom foot orthotics business, early in the quarter and have begun its subsequent integration into SPS. We anticipate three resources of benefit from this acquisition. First will be a broadening of SPS's product line. Second, it will extend the Company's relationships -- that's the overall Company, into the podiatry market. And third will be enhancement of the Company's technological tools for automating the fitting of patients with custom foot orthotics.

Okay, now let's move on to the next division and talk about Linkia. As I mentioned before, they are up 8% for the quarter and 4.5% for the year. Linkia is continuing its dual mission of building share from the key health-care companies' book of business and negotiating a fair price for the services provided by all of the providers within its network. The network continues to grow and today it consists of over 250 independent patient care centers in addition to the Hanger centers. It continues to increase. During 2007, they have successfully obtained fee schedule increases from three of our payor companies. And on the marketing side, we're continuing our discussions and negotiations with the key national and large regional health-care management companies as well as with firms in the workman's compensation segment.

Okay, now to the fourth division, an update on WalkAide, or Innovative Neurotronics. And as you know, WalkAide is the product that's being introduced by Innovative Neurotronics. And as you remember from our earlier discussions, there are three stages in obtaining the CMS reimbursement. I know this is vitally of interest to all, particularly in light of Van's comments early on, that the accomplishments we've been able to make in the absence of having this reimbursement, but we do look forward to gaining this in the longer term. Those three steps are code, coverage, and then reimbursement.

We filed for a unique code with Medicare at the end of 2006, and we expect to hear back from CMS on our appeal of their decision on this unique code. And as you can imagine, uniqueness is key as well as volume. Our volumes have been building, and we expect to hear back by the end of November on whether we will get that unique code.

Now concerning coverage, we continue to recruit patients into our clinical trial, which are going to be the basis for our coverage application, and we are continuing to do work on our help economics studies, which will be necessary for the final determination of reimbursement, that is the amount. We believe that the current progress on our clinical trials places us on schedule to apply for coverage and reimbursement with CMS about the middle of 2008.

Now let me provide some color on their accomplishments during the quarter. The early clinical trials resulting from some of the work that was done at the University of Alberta have been submitted to a peer review journal in the UK for publication. This will be the first manifestation of the early results and our clinical trials here in the States are continuing, and, as I mentioned, are on track for a mid next year submission there.

Innovative, as Van had mentioned, has had its best quarter to date in terms of number of units and revenues. To date, they continue training and have trained over 1100 orthotists. This includes those within Hanger and the independents through SPS. Additional training sessions will be continuing.

We're also continuing to penetrate the rehabilitation service market with good results. We have hired additional sales personnel for our field efforts in this rehab market and these folks are also working in support of our orthotic clinicianers that are throughout the U.S. And finally, IN, Inc. continues to expand its international presence with representatives from five European and one Middle Eastern company on board and that's in addition to Teijin, which is a major health care life sciences company that has signed up as a distributor in Japan, and we made a separate announcement on that several months ago.

Last but not least, a few words on acquisitions and our other developmental projects. As I've mentioned, we closed on SureFit earlier in the quarter and with respect to O&P, we continue to have discussions with candidates that have favorable strategic positioning for us in form of location, quality practitioners, and/or favorable products service mix.

On the development front, we're pleased with our beta tests involving new channels to deliver our products and services and these have been ongoing now for a little over a year. We've made the decision to advance these into the rollout phase in Q4 and then subsequently into 2008.

In closing, the results of the quarter validate that the projects that have been put into place last year are correct, and, most importantly, our personnel are using them in generating positive results. We all recognize that there's more work to be done and we have to maintain our focus on measuring our progress against our established metrics. Thank you.

I'll now turn it over to Van to manage our question-and-answer period.

Thank you, Tom. Lori, we can open it up for Q&A.

(OPERATOR INSTRUCTIONS). Brendan Strong, Lehman Brothers.

Just curious if you could provide some additional details around the very strong same-store revenue growth this quarter. How much of that was volume growth?

Well, as I mentioned in my remarks, about 1.4% out of the 5.1% we attribute to price. And then, the balance is about 3.7% we attribute to volume and mix. And those two go hand-in-hand. For example, I had given some stats around the microprocessor knee and ankle program. That's both an increase in volume and it's also a mix change because we are applying a higher piece of technology for that functionality. So it's pretty hard to pull them apart, but if you look at the combined total of the two, it's about 3.7%. And if I had to really just grab a number, I would say it's probably about 50% volume and 50% mix because I also mentioned about our PEC, which are patient evaluation clinics and the great results that we have achieved for this year. And as you know, that is just bringing people back in and increasing volume by having clinics to examine their fit and function. So it's probably a finger in the wind would be about 50-50.

Okay. And then are you guys seeing any benefit at this point from the better Medicare reimbursement so far this year rolling into the managed care contracts?

Oh, yes. We naturally achieved the benefit immediately coming from the Medicare contracts. Then, as our contracts come up for renewal and renegotiation, which on average it's about every three years, about one-third of our private book of business, which is attributable to about 55, 50%, 55 or 56% of overall reimbursement; about one-third of that clicks through this year. And so we have been gaining some momentum on that price increase. If you remember during the last call we talked about price increase. It wasn't at the 1.3% level. It was down about 1 to 1.1. So we are actually building through the year and that will continue to roll over the two next years until it's completely baked into our whole book of business, so it's an ongoing process that these things come up for renewal.

And you had mentioned a 2.3% Medicare increase for 2008, assuming nothing changes. Is that right?

That's right. That's what we're looking at.

So that will also continue to build and play a role as contracts come up for renewal as well?

That's correct. We'll get the immediate, again coming directly from Medicare and then about a third, a third, a third on the third-party pay.

And when will we know more about Medicare reimbursement? When will we kind of know for sure that that's what it's going to be?

If we knew that, (multiple speakers) newspaper.

As you know, the good folks inside the beltway are sort of aggressively debating two key things, and one is the child health care bill and the second is what they're going to do about the physicians, who are scheduled to get a 10% reduction. That's for '07, '08 and another 5% in '09. And obviously they don't want that to happen, so they are juggling all the pieces on the chessboard. And so our fate and the announcement of what happens here are pretty much contingent on the outcomes of all those discussions. And so our expectation is this one is going to go down to the wire.

If you could maybe just update me on that specifically; has there been any specific commentary that you have heard of where members of Congress are thinking about targeting your reimbursement?

No. As a matter of fact, the discussions that we've heard seem to be looking to things like Medicare advantage programs and a reduction there, and maybe some of the other health care. But our dollars are pretty small on an overall basis relative to theirs. So if they are looking for money, they are only going to get pennies if they come after us.

Remember the total Medicare reimbursement, Brendan, in O&P is about $1 billion. So we would obviously anticipate and hope that we would get our increase. We believe that after the three-year freeze, certainly we can justify that, but that remains to be seen. And we've, I think, demonstrated through a number of these reimbursement changes, that we are able to continue to maintain pace. So irrespective of what happens, obviously we would like to have it; but irrespective of what happens, we will be able to pretty much maintain our pace.

Thank you. Maybe just one last question on pricing or same-store revenue growth. Do you think, given the fact -- to the extent you've got the 2.3% update and to the extent that this pricing continues to roll in and growth in WalkAide, do you think same-store growth, even further accelerates from here?

Well if you do the math, there's no reason to assume that that wouldn't happen. But remember if we look at the driver on our same-store sales growth for this quarter, about one-third of it is in the area of price and two-thirds is in the area of our programs. Now we have seen a very nice track record and pickup and we are having a record year on microprocessors and a record year on our patient evaluation clinics. And we believe that this is sort of a cyclic thing and can keep going for several more years, but we all know that it's not an inexhaustive supply of people that we can fit with microprocessors. So we just have to, as you've pointed out, we have got to rely on other things like IN, Inc. and WalkAide. And at the tail end if my comments, I talked about some of the new distribution things that we are looking at. So we want to constantly infuse the business with some new things so that we're not just dependent upon yesterday's projects. So that's our anticipation.

Thank you very much.

Matt Ripperger, Citigroup.

This is [Glenn Yosef] for Matt. We have a couple of questions and I'm sorry if we missed any of this questions, but there are three conference calls going on right now and we are sort of juggling them all.

But can you give us an update on the next major milestone for WalkAide, I heard you say that it was submitted for a peer review. Anything else there?

Yes, the next major will be a decision of our appeal -- of the decision by CMS to give us a unique code. And basically they didn't see the volume because our application was made at the end of last year. When we went back and resubmitted our volumes were up substantially, so we think we are on firmer ground. And they seem, by the amount of time they dedicated to us, to be quite interested in the technology and what it could do.

And the value of the code, as we see it, which would be a unique L code, would mean that it would be reserved for certified orthotists or prosthetists to install the device as opposed to just using a miscellaneous code or an E code, which could be accessed by other parts of the health-care profession, like DME. So we are expecting that in November.

Obviously we expect to have some positive results when the clinical trial that I mentioned in the peer reviewed article come out. That should be a very favorable thing, leading to more positive things coming out of our clinical studies for the second phase, which is then coverage. And then finally, we take that data, coverage just means that it determines the efficacy of the device. That is mid of next year. And we will also take the stats coming out of the clinical trials and compile them into a help economics study, which will be focused on two major areas. What is the dollar value in terms of cost avoidance plus the dollar value in terms of benefit for the patients. And CMS will put those through a model and will come out with reimbursement.

Each of those three steps is separate so even if we are awarded a unique code, it does not necessarily mean that we would get coverage. And then, of course, coverage and reimbursement sort of go hand-in-hand if your data is strong enough. So we are expecting those things to come about mid next year and the code decision to come about before the end of November.

Before the end of November of this year?

This year, yes, on the code decision.

All right. Also, would it be possible to get the same-store growth for Linkia business?

Yes. We announced that Linkia is up 8% for the quarter, 4.5% for the year.

This is -- okay. And also, the last thing that maybe you can give us some color on, do you have any projections on CapEx and [C4] outlook for the next year?

We are still working through our budget process for this year and we don't have firm CapEx numbers for next year yet. We expect the range will probably be somewhere in the 17 to $20 million area, but we don't have a firm number as of this point.

Okay great. Thank you for your help.

Michael Petusky, Noble Research.

Nice quarter. Just a few quick ones, clarifications. You described this as your best quarter ever in terms of unit sales with WalkAide. If I do the math on $1 million divided by a $4500 sales price it looks like minimally it was 225 units. Was that number closer to 250, greater than 250? Can we just dial that in a little bit?

Without giving away competitive information, one of the things that you have to keep in mind, Mike, is that we sell now we are well-established in three channels. We have materials that are moving through -- sorry about the sirens here and the emergency vehicles. We have WalkAides that move through innovation, Neurotronics, into SPS and then they are sold to the independents. We have WalkAides that go out the door from Innovative Neurotronics and directly into the rehab market and then we have product that moves from innovation through SPS and into our patient care centers. So when George has made the comment about the incremental sales, he was referring to the impact at HPO. My comments were looking across the spectrum of all three outlets in terms of the revenue. And each one of those has a little different price points. So that's where I was coming from on a Company-wide basis as opposed to the kick that HPO had from selling those units through that internal orthotist channel.

Okay. All right. Tom, did you say that there was 900 trained orthotists now on the product?

1100.

1100.

And of course about half of those, around 550 to 600 are Hanger folks and then we've got people that are external in the States, and then we've done trainings now in Europe.

Okay. And just one other clarification. It sounded like you guys -- you said that there were five European -- did you say agreements, similar to Teijin or was that some other --?

No, they are distributorship agreements.

Okay. Can you --

They have come for training -- five European and one in the Mideast.

Okay. Can you identify those at all?

Until we make a public announcement, we can't.

Okay. Will that be coming at some point?

Yes, it will.

Okay. And finally, when CMS comes back to you on the unique code decision, is that a press releasable event also?

Yes. It probably would -- because it is not necessarily tied to coverage and reimbursement. As we mentioned before, we would view it as a milestone; I don't know if it would rise to the level of a separate press release, but we certainly will let you know because there are a number of analysts out there that are tracking this event, so --.

And keep in mind that the unique code, which is ultimately what we would hope to get, really is dependent upon CMS's determination that we have enough volume and the anticipated volume will justify their cost of creating a unique code for this. So we've already been given a code in effect by using the miscellaneous code. They have already said this falls now under a miscellaneous code. We've gone back to ask -- sorry for the sirens here. We've gone back now to reaffirm with new updated sales numbers, unit numbers, again a request -- let that pass. Again a request for a unique L code. So it really is in large part dependent on not just their recognizing the technology as being a good modality for our patients, or for their patients, but it also, it really depends on whether or not there is enough volume to justify their administrative costs to put a unique code in place at this time.

If not, at this time, perhaps we have the right to keep resubmitting and updating new numbers, which we will continue to do, to show them the volumes are increasing. And the volumes have increased substantially from the end of '06 when we submitted the initial application.

Van, would you suspect that if give -- based on your dialogue, I guess, do you have any sense that if they don't come back with a favorable ruling on the unique code this time, that they would give you essentially a target, hey, get unit growth up to this level, get volumes up to this level and you've got it? Do they get that specific?

No, they don't work that way.

It's up to you to submit and then they decide.

They would just tell us that if at this point they don't feel the volumes justify it yet, they would say come back and talk to us perhaps six months from now or whatever.

But again, I want to make it clear, and I think Tom articulated it accurately, a code does not infer reimbursement. They are two separate items. And technically, we already have been given the green light on the miscellaneous code. We just keep pushing the issue on a specific code.

Sure, sure.

And that will differentiate who is allowed, if you will, let me use that word -- who is allowed to go ahead and apply the device and bill for it.

Terrific. Thanks, guys. Great quarter.

Larry Solow, CJS Securities.

Last quarter you actually provided a regional update on your -- I think you said like 11 to 13 regions had shown positive revenue growth. Can you give us an update on that for this quarter?

It's reasonably consistent, Larry, this quarter in terms of what we've seen. We have three of our divisions are what I would call underperforming. These are our market areas -- are underperforming in terms of the metrics that we have set for them. One we know is a very regional issue. And I think I had mentioned the last time that we've changed management, and as a result, we are working with that management. And we've already begun to see quite a turnaround and actually we've just completed a tour of all of our market areas. And so that gave us the opportunity to see firsthand motivation, etc., etc. So they are turning around and their results in those three areas are improving over the last quarter. So we are anticipating that by the time we get to year end, that they will be back up nearly to the level where they should be.

Okay, great. And then just a quick question on SG&A, you've actually, despite your growth initiatives, you've managed to kind of keep it around 37% of revenues. Do you think that's kind of a good run rate going forward?

We don't think of it as a percentage of sales. Frankly, the SG&A is -- was up in this quarter but it's pretty much for the year right where we expected it to be. You can't really just -- you can't cookie cutter SG&A and say it's going to be 25% of the whole every quarter because we do things in -- we try to save SG&A in Q1 when our sales are down. There's things we do in Q3 and Q4 that we don't do in other quarters. We advertise more. We have the PEC clinics that Tom talked about before, which increases our travel expense and other expenses. We have management meetings during those quarters because you can do them less expensively than you can other times of the year. And so what I say to you is our G&A is right where we expect it to be. We're right where we expect to be from a guidance standpoint in order to get towards the higher end of our EPS number. And we think we're right on track.

Okay, great. And then lastly, I think last quarter you said you had to actually give an actual number for Linkia. I think you added 200 or you're up to 250 practitioners. Do you have an actual number now or I think you just said over 250.

We're just slightly north of 250.

Yes, and it's not practitioners. That is actual facilities that have joined the Linkia network, so it represents a much higher number of practitioners.

Got it, got it. Great. Thank you very much.

Just let me make one quick comment on that. It's not a race to see how many. We build these networks in close alliance with the provider's network strategy. So the number itself shows you how many people are willing to join into the network, recognizing the value that Linkia brings. But we are very careful to make sure that we adhere to payor's network strategy because we don't want to overpopulate and on the other hand, we don't want to deprive anyone of access. So it is a managed number. It's not something that if you have 500 you are better off. In fact, if you had 500, you may be worse off. You would be worse off.

Yes.

Absolutely. Okay great. Thank you.

Rebecca Durnbach, Prides Capital.

Good morning; how are you? I'm going to ask a question again that's already been asked, but I just wanted to make sure because it's so complex, the path to reimbursement with WalkAide that I keep getting lost in the details. But so the milestones are that at the end of November you have the L code decision and that's not really related to coverage or reimbursement. And then you have two clinical trials -- one for coverage and one that's the help economics study. Is that correct? And if -- and what are the dates that you expect those to conclude? It must be prior to mid 2008 when you would file for reimbursement. But I was just wondering if you have any estimates on how those -- the timeline for those two milestones.

Sure. We have numerous -- you are right about the code, and we are expecting to get a decision back from Medicare by the end of November, and they typically have a web site, but it's been down recently. So normally you can go in there and sort of monitor what is going on in terms of it's either there or it's not. So, that's sort of the code thing.

Now in terms of the studies, there's two buckets of studies. The first one is work that was conducted by the inventor, Dr. Stein at the University of Alberta, where they've been doing extensive tests through the early days of the WalkAide and they've even gone so far as to try and monitor brain activity for the demonstration of neuroplasticity. Those studies have largely been concluded. They are tying those up and some of the results have already been submitted to a journal for peer review based upon the work that was done under Dr. Stein's direction up in Canada. So that is under peer review. We obviously can't talk about that during this period, but it's anticipated that they are going to be published. So that is sort of the prior work.

Now our bucket of clinical studies is occurring at major healthcare facilities around the country, such as [Tier], University of Pittsburgh, the National Rehabilitation Center here, Johns Hopkins, etc. etc. And we've had discussions with these people all over. Barnes Jewish in St. Louis. And so we are admitting patients into the protocol. Not all the patients complete the work.

One of the issues is we have to remember we're dealing with some populations that don't travel well and they have to come back and forth. And also since you can't provide an inducement, some of the patients get a device and then the protocols insist that they go with a device for a while and then they go off the device and some of them, frankly, are just not willing to go off the device. So we are running those trials around the United States in about eight different centers.

And patients are going in. We're tracking the results. We are compiling the results. With the end goal of establishing a critical mass of data such that we would expect by the mid of next year, to be able to compile all that data and submit it to CMS to demonstrate the efficacy on a number of different dimensions that are all embodied in the protocols of the studies. And that's basically to demonstrate improvement on a number of different measures so that we can get coverage, i.e. CMS says yes, it works, we are convinced. We see the benefit.

Then we also take that data, we analyze it a different way in terms of the help economics, and that is, what is the benefit that is provided here to the payor and to the patient? One is cost avoidance. The other is improvement in functionality. And those have value. And through a series of complex formulas, those things render down into what is the prospective value of the device going forward. We submit that to CMS. They scrutinize, scrub that down, they examine it and then they come out with a decision on the reimbursement amount. And that would certainly follow on the heels of the clinical trials that we are doing, so therefore it's going to be targeted for about mid next year also.

Keep in mind, Rebecca, that we are talking about CMS and Medicare. This does not necessarily portray the timetable for other reimbursement, i.e. workman's comp the private payors, etc. Once some peer review published articles are out there, traditionally, when you compare this to other devices that have taken this same course, which you're required to take, in terms of the CMS resume, got reimbursed under private pay long before the CMS pay reimbursement.

So what we've been referring to is the regimen or the procedures that we need to follow for CMS reimbursement. And as the studies get published and as the results show the relative efficacy of the product, then we can turn to private insurance and establish reimbursement there, perhaps prior to CMS, not necessarily, but perhaps.

Okay, got it. And along the -- so related to the peer review, the article in the peer review journal, is that something that I think he said we could access it publicly. Could you tell us the name of it or --?

No, what I had mentioned was the Medicare web site provides updates on the decisions they make on a post-decision basis. The peer review journal is a private medical journal that is essentially that; it's peer reviewed. Anything that gets into it --

When [that's] published, it will be published.

Yes, which means hopefully we'd see early next year.

Okay, okay. And I was just wondering if you give out the dollar value of the Linkia sales. I know you gave out the growth. Have you given out the dollar value historically? I think you did once before, but --

Let's see if we have it. Of Linkia, right?

Right.

We were, for the quarter, at $16.2 million.

16.2 million. Okay. And my last question, Tom, is on the distribution, the new distribution channels that you mentioned that you completed the beta test and you are going to roll those out in Q4 of this year. Do you have any more color on what those are, what you are expecting from them, what the business models look like at all?

These are two separate betas that we've been running, two different areas of delivering product and service. And we are very reluctant to speak about them at this time, Rebecca, simply because we think we are onto some real interesting things. And once we are up and rolling with them and we put resources, more resources, behind them, we will be making an announcement around them. But right now we don't want to give away any type of competitive insights into what we're doing.

Okay. So if you are rolling it out in Q4, it could be that we will sort of see some of this by the end of the year?

You certainly might see some announcements around it. It will probably be premature. And you know with any of these new things, and we're pretty careful about this, we try to meter the resources in to meet the demand as opposed to lead with a bunch of spending. So we are judicious in how we spend. So I wouldn't expect to see anything impact our financial results. But to the extent that we've had the resources and we have, some of these during the beta test, they were in our SG&A numbers as well.

Got you. Okay. Well, thank you. That's it.

(OPERATOR INSTRUCTIONS). Henry Reukauf, Deutsche Bank.

Very nice quarter. On Linkia, you said 16.2 for the quarter. What is that for the -- do you have it year to date?

Year to date, we are -- bear with me. I'm trying to look this up. We are at 47.1.

Okay. And on the L code, in terms of volume, and just in your study, is there any sort of threshold where you usually break through? I know you've gone through this pretty extensively on the call already. But is there an average volume that they kind of say, okay, this is it, or is it just --

You actually have to submit a pretty comprehensive review of the market. The number of potential people that are out there and you give them all the stats around it and then they decide how big it possibly could be. And you try to tell them what you think the penetration into the market would be on sort of a forecast basis, and then they decide. They do not set thresholds. It's all more of a prospective view of the future because they recognize once they bring this up, they are going to live with it for a very long time. So they decide based upon market potential, penetration rates, competition, etc. just how much of saturation will occur. And they don't tell you how that works.

Okay. So there's really no benchmark historically that you can look to and say we're about there.

No.

Okay. And just the last one, I noticed cash was down a little. Maybe debt was up. Did you make the payment for the -- the bonus payment in the third quarter?

We do make an advance during Q3 that relates to the first half of the year, but cash was also down because we made the SureFit acquisition.

SureFit acquisition. Okay.

If you look at our -- when you see our cash flow, we spent about $12 million I had mentioned previously on acquisitions this year.

And we funded all of that from existing cash.

Yes, so we actually had -- our cash has recovered quite nicely when you consider the fact that that is out of our cash as well as the payment that you just mentioned, plus we funded more tax liability this year than we did last year.

Okay. All right. Well things are looking good. Good job, guys.

At this time, there are no further questions. Are there any closing remarks?

Yes, thank you, Lori, and thank you all for joining us for today's call and we look forward to talking to you with Q4 results and year-end results. Have a good one, guys. Thanks.

Thank you. That does conclude today's Hanger's third-quarter results conference call. You may now disconnect.

Good job, guys.