Hanger Inc (HNGR) 2007 Q4 法說會逐字稿

Good morning, my name is Andrea, and I will be your conference operator today. At this time I would like to welcome everyone to the Hanger's year end (inaudible) 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 answere session. (OPERATOR INSTRUCTIONS) Thank you. Mr. Sabel, you may begin your conference.

Thank you very much, Andrea, good morning everyone and thank you for joining us for our fourth 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 do company's results of operations. The United States Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements.

Statements relating to go future results of operations in this document reflect the current views of management. However, various risk,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 benefit from managed care contracts, the demands for the company's orthotic and prosthetic services and products and other identified in the company's periodic reports on Form 10K and Form 10Q filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

The company disclaims any intent or obligation up to date publicly these forward-looking statements whether as a result of new information, future events or otherwise. Now on to the results of our fourth quarter.

I'm pleased to report that we ended the year delivering strong financial performance with net income of $6.6 million, and 11% revenue growth for the quarter ended December 31, 2007. I reported EPS increased by 35% from $0.17 per share to $0.23 per share. This solid earning performance represents the eighth consecutive quarter in which the company has met or exceeded first call consensus estimates. Of note was the compelling 8% same-store store center growth of our patient care business which resulted in a sales increase of $11.2 million over last year.

Additionally sales in our distribution segment continued to accelerate with growth of $2.7 million or a 21.1% increase over the prior year. Now as many of you know we also announced that I will be stepping back from day-to-day operations and turning the CEO responsibilities over to Tom Kirk on March 1st. I will still remain as Chairman and continue to be active with the various clinical aspects of the company and certainly supportive of our strategic growth initiatives.

The board and I have a great deal of confidence that with Tom's passion, commitment to operational excellence and leadership skills he is the right person to take Hanger to its next level and given the robust performance in 2007, he has a solid foundation with which to execute on this growth strategy we have set in motion. Now I'd like to turn the call over to George McHenry our Chief Financial Officer.

Thank you, Ivan, good morning everyone. In reviewing the results let me first give you an overview of the quarter and the year. Overall, we had a great quarter, and year, surpassing our own and street expectations for sales and earnings. But, we know there has been some concern about our level of SG&A. Let me try to put that in perspective.

While a large part of that was incentive compensation in Q4 if you look at the year it was only one-third of the increase. Another third was caused by inflation. And another third was due to our investments in our continued investment in Linkia and IN, inc.. And due to acquisitions which were largely made in the second half of the year so they had more impact on the third and fourth quarter.

Let me first turn my attention to the incentive compensation to explain that and I will explain the other variances as I get into the more detailed analysis of the quarter and the year. All of our plans are formulaic and approach and are tied to performance. All of our employees suffered over the last three years during the freeze. And frankly there was an element of catch up in our accruals in Q4 that we do not expect to recure and which will result in better leverage over our future growth.

Concerning the 30% plan, if you look at our performance, the increased sales and collections caused us to accrue more incentive compensation principally for our practitioners because their plan is largely based on collections. The successful application of this plan, however, helped us end the year with over $34 million in cash on the balance sheet, reduce our DSOs to 56 days, bad debt expense to 2.5% and reduced overall leverage to 4.2 times trailing EBITDA.

A smaller part of the incentive compensation accrual related to the formula basis incentive compensation is payable for the rest of management and is payable only upon achieving our overall goals as we did in Q4. While this accrual has a higher SG&A cost, we did improve our EBITDA margins to 13.2% for the year, which was the 30 basis points improvement over 2006 and in line with our guidance. Due to also due to improved tax planning we saw an improvement in our tax rate for the year to 39% from our previous estimates of 41.5% which in conjunction with our improved EBITDA helped us exceed consensus and report EPS of $0.23 for the quarter and $0.64 for the year.

In summary we or exceeded our guidance as the sales EBITDA margins and EPS. Now I will discuss the quarter and the year in more detail as and we'll give guidance for 2008 as well. Our sales increased during the quarter by $16.9 million or 11%. Comp sales in our patient care centers increased 8% or $11.2 million for the quarter, exceeding our expectations of 3% to 5% growth. SPS had a strong quarter reporting $2.7 million in increased outside sales , a 21.1% increase. The balance of the increase was attributable to acquisitions.

Our cost of goods as a percent of sales of 44.8% for the quarter. Labor cost increased by $3.3 million, compared to 2006 due to the impact of start ups, the acquisitions, merit increases and increased benefit cost. As a percent of sales, labor costs was comparable to last year, material cost decreased by $5 million compared to the same quarter last year despite the sales increase. This decrease was due principally to the favorable impact of the Medicare rate increase and adjustments related to our annual physical inventory which is conducted in the fourth quarter.

SG&A increased by $17.1 million in the quarter due principally to a $9.4 million increase in incentive and variable compensation as we just discussed. As a result of the improved earnings and strong cash collections. Our salaries be increased by $3.7 million due to the impact of the annual merit increases. Increased commissions and healthcare cost. The balance of the increase in SG&A was due to a $2 million investment in our growth strategies, $800,000 in additional bad debts due to the sales increase, and the balance of $1.2 million was due mostly to travel and other cost. EBITDA at $23.5 million increased by $1.5 million compared to the prior year, due to to the factors I just mentioned. Our interest was $200,000 less than last year principally due to reduced variable interest rates.

Due to both our improved results for the trailing 12 quarters and the reduction in interest, our total leverage now stands at 4.2 times trailing EBIDTA as I mentioned a minute ago. Income taxes to understand the provision for the quarter and the year, for the quarter you need to understand the year. The income tax provision for the year was 37.8% of pretax income. It benefited by some one time tax benefits, which would bring our rate for the year to 39% compared to the first three quarters estimate of 41.5%.

The benefit of the reduced rate, which is sustainable in the future, along with one time benefits compared to the rate that we used for the first three quarters reduced our rate in Q4 to 30.4%. EPS, based on the results just discussed was $0.23 compared to $0.17 in 2006, a $0.06 or 35% increase. Our sales for the year increased by $38.6 million, or 6.4%. Comp sales in our patient care centers accounted for the bulk of the increase at 5% or 22 points, $27.2 million increase which was at the high-end of our expectations, as Ivan mentioned, and our best result since 2001.

SPS outside sales increased by $5.9 million or 9.3%, compared to the prior yea, and the balance of the increase came from acquisitions. Cost of goods sold, as a percent of sales, decreased by 1.8% of sales due to a decrease in both labor, that was 6 tenths of a percent materials and 1.2%, Our labor cost in absolute dollars however increased by $3.7 million due to the impact of annual merit increases on labor, the impact of acquisitions and increased healthcare cost. Our material cost increased by $4.2 million versus the prior yea, but decreased as a percent of sales as I mentioned a minute ago due to the impact of the Medicare rate increase and favorable avenue judgments related to the annual physical inventory.

SG&A increased by $23.9 million for the year due, to an$8.4 million increase in incentive and variable comp which I have already discussed. And $8.1 million increase in labor cost primarily due to merit increases, commissions and increased healthcare cost. A $4.3 million investment in our Linkia and innovative nuerotronics growth strategies. $1.4million in rent and $2.2 million in travel and other. This is all offset by a $400,000 decrease in bad debts expense dropped from 2.7% to 2.5% of sales. Based on these results we reported EBITDA of $83.9 million, an increase of 6.8%, or $6.8 million or 8.9 %, compared to $77.1 million in the prior year.

Our interest was $1.7 million lower than last year, due to a combination of higher interest income as a result of our strong cash flow and resulting in higher cash balances, the impact of repricing of our debt and lower variable interest rates. I already talked about the income tax provision based on the above or EPS for the year was 64%, compared to proforma EPS in 2006, of 49%,, a $0.15, or 31% increase. Moving on to the balance sheet, our AR decreased by $300,000, compared to 2006 despite a $38.6 million increase in sales and the impact of acquisitions which added $1.1 million to our AR. Our DSOs decreased to 56 days compared to 61 a year ago. AR over 120 days are measured in the quality of our receivables was 14.4% of total AR in 2007. Compared to 16.3% a year ago, so our balances were reduced and the quality of our AR increased.

At the same time when we reduced our bad debt as I mentioned before to 2.5% of sales. Our you inventory increased by $6.4 million to $82.2 million, compared to $75.8 million in 2006 due to a combination of acquisitions and balances need to do support our higher sales volume. CapEx for the quarter was $6.7 million, compared to $4.9 million in 2006 and for the year we spent $20.1 million on capital additions, compared to $12.8 million last year. Our cash flow from operations was $21.4 million for the fourth quarter, compared to $15.9 million in 2006, an increase of $5.5 million.

For the year cash flow from operations improved by $22.3 million to $51.7 million compared to proforma cash flow of $29.4 million in the prior year. Finally, I'd like to discuss guidance for 2008. As I mentioned before EPS for 2007 was $0.64. If you level set that by the one time benefits in income taxes we have a base of $0.62 going into 2008. We had $0.02 in the fourth quarter and one time benefits. With that in mind, from that base we expect our 2008 EPS to be in the range of $0.70 to $0.72 per share from sales in a range of $670 to $680 million. That would peg our sales growth for 2008 in a range of 5% to 7%, and our EPS growth in the range of 13% to 16%. Now I'm going to turn the call over to Tom Kirk to give you some more color on our

Thanks, George. Good to be with you this morning. I'll take a few moments to review the events and that impacted our operations for the quarter and the year and then I'll give you an update on some of our growth initiatives. First, let's take a look at HP O, our patient care division. They achieved an$11.2 million increase in sales or 8% same center sales growth for the quarter, and a $27.2 million increase, or a 5% same center sales growth rate for the year.

The performance in the quarter is partially attributable to the roll-out of the January 1, 2007, 4.3% CPIU increase which impacted about 35% of our book of business during the year of '07. This translates to about 1.5% of the 8% during the quarter is attributable to price. The balance or 6.5% is attributable to volume and mix. This increase, this strong increase of 6.5% indicates that the programs that we've been developing and employing over the past several quarters are continuing to gain traction.

Let's take a look at some of these programs for the quarter. While they are concentrated in four areas. The first is the continued improvement in our Linkia book of business. I want to remind everybody that HP O is the primary vehicle for the delivery of services under the Linkia contracts. And we'll speak a bit more about Linkia in a moment. But on an overall basis the bottom line for their revenue that came from the Linkia designated contracts was up 16% for the quarter compared to last year, and 7.4% for the overall year compared to 2006. Now, the second area of programs is our continued emphasis on our higher performing products such as microprocessor, prosthetic hands, knees and feet components. For the quarter the revenue from the delivery of these product lines was up about 45% compared to fourth quarter of last year and almost 40% year over year.

The third area of programs are patient evaluation clinics. And as you all will recall these are a series of national and local patient clinics where we invite the patients to come back into check on their fit and function and to ensure that their devices are working properly. These PECs as we call them have produced approximately 11% more revenue during the quarter compared to Q4 of last year, and 8% for the year. The good thing about these, these are an excellent opportunity totals expose our patients to the latest products, as well as confirming that fit and function are in order. A great opportunity for good patient care and also a good revenue opportunity.

The fourth area of our programs are sales, marketing and public relations efforts that support our practitioners by identifying local opportunities that are specific to their businesses and then they assist our practice in the implementation of the activities to translate those plans into results. Translation, it gets small local contracts, steal market share and that's one of the reason we have that 6% that we attributed to mix and volume.

Next point, we recognize that the changing dynamics of our healthcare system field demands that we continue to spend resources working with our industry and trade association partners to ensure that the policy makers understand the unique benefit that our profession can deliver and does deliver. In order to make proper decisions on reimbursement, it is important that all the policy makers view restoration of functionality as a net cost savings on a life cycle basis as well as a quality of life enhancements. As an example we are working with the Amputee Coalition of America on educating state legislators on the issues of reimbursement caps and how these deprive patients of quality care and doom them to lower levels of mobility. Six states past prosthetic parity in 2006, and two have passed in 2007. As we set here today almost 20 states are planning action for 2008 and 2009.

In addition Hanger has been supporting national patient advocacy groups in their quest to find sponsorship for a prosthetic parity bill, and to advance parity on the national front. As we've mentioned this is good for the patients because it's impossible that they can get care it's care that they need over their life time with these cap limits imposed upon them. And the success that we are seeing demonstrate that these patients are doing much better and they can enjoy the full suite of services that our profession can offer. We are still working with the association on the details of qualified provider quality standards and the enforcement provision for these standards. Our long-term goal is simply to make certain that CMS and other payers are following the laws and regulations by reimbursing only the qualified providers for the work that is performed. We believe it's in the practitioners best interests to reduced fraud and ensure that those payments are delivered to only those that are qualified to deliver the care.

Let's now turn our attention to SPS. Their outside sales are up approximately up $2.7 million, or roughly 21% a compared to the third quarter of '06, and $5.1 million or 9.3% for the full year. This is excluding the SureFit business, which as you know that we made an acquisition in the third quarter and I'll discuss that shortly. Going back to SPS's core business we must keep in mind that 2006 presents a very difficult period for comparison as they grew in excess of 22% during '06 compared to '05, so it's a difficult comp period.

Their success in continuing to build sales is attributable to three major areas. First, their new warehouse which opened in early July, located in eastern Pennsylvania, has permitted better service into the northeast market. Second, their superior customer service has been impetus for gaining some new large customers. And third though implemented their new e-catalog and are following this with an e-commerce module which has been well-received by their customers. Save time, save effort, make S PS the premiere company to do business with.

In July, I want to go back to SureFit for a moment , we announced the acquisition of SureFit, a custom foot orthotic company, and we have been integrating it into SPS since that acquisition. We anticipate three sources of benefit from this acquisition. First, it's a broadning of SPS's product line. Second, it's extending SPS's relationship into the podiatry market. And once SPS is established in this market we even see translation effect because podiatrist are a very variable referral resource for our custom business as well. So we see cross benefit in terms of custom as well as our distribution business. And the third benefit is enhancing the company, that is Hanger in general. Our technological tools for automating the fitting of patients for custom foot orthotics which are custom inserts, diabetic and functional, as well as custom shoes.

Let's move on now to a brief review of Linkia. Linkia continues in its dual mission of first off, building share in the key healthcare company's book of business. And second, negotiating a fair price for the services provided by the providers within the network. The network consists of the Hanger patient care centers as well as independent providers. And those independent providers have grown from 250 at the last call to 280 today. As I mentioned earlier, Linkia continues to increase their business as a provider network management and I'll quoted those which is about 17% for the fourth quarter and 7% for the year.

During 2007 they have also successfully attained fee increases from three of our payer companies. And for those of you who have followed Hanger for a while you know that that is the reversal of the trends that we saw in the early 2000s. On the marketing side they are cost continuing their discussions and negotiations with key national and large regional healthcare management companies as well as the firms in the Workman's Compensation segment.

They are continuing to gain ground on volume and price. Last division now, let's turn our attention to WalkAid, and innovation neurotronics. Will you recall WalkAid is a product that's being introduced by Innovation Neurotronics into certain kinds of disease indications such as stroke and MS. And you'll also remember that we have mentioned in the past that there are three stages in obtaining reimbursement or the CMS approval on reimbursement. They are code, coverage and, finally, reimbursement. The key and negating issue here is our able to get patients into our clinical trials so that we can make those filings on coverage and reimbursement. And that is front of mind for us and we are continuing to recruit patients into our clinical trials which are going to be the basis for our application on coverage and then of course the health economic studies that come from those clinical trials will be the data that we will use to submit for reimbursement. We believe that the current progress of our clinical trials places us on schedule to apply for coverage in reimbursement with CMS in about the hired to the middle to third quarter of 2008.

I did want to give you color on some of the accomplishments that Innovative Neurotronics has made during the fourth quarter. Early clinical trial results have been submitted to peer review journals in the U.S. as well as the UK. We have mentioned the one in the U.K. during the last call. And continuing support of our ability to public and view peer review articles. That's why we are continuing those clinical trials. Innovative neurotronics had its best year in terms of number of units and revenue and they grew revenue by over 250% for the total year. To date they have trained over 1200 Orthothists, this includes those within Hanger and the independents which are being trained by SPS. Additional training sessions are planned for 2008 and we are going to step up our efforts aimed at continuing training and expanding training into the physical therapy and rehabilitation markets.

We are continuing to penetration rehabilitation sales with good results. And because of those results we've hired additional sales personnel for our field efforts who's distinct mission is to manage a territory, supporting the the Orthothists, that's Hanger's and the independents, as well as going after that rehabilitation market in support of those therapeutic clinics. IN, inc. continues to expands its international presence now having representatives from six middle-eastern companies on board in addition to a major partner that is located in Japan, we identified them in the past through a press release and that is Teijin,a very large healthcare company in Japan. And they see a good market opportunity over there.

Interest in the WalkAid devices remains very strong. Year to date, this is through about the first five and a half weeks of this year, Innovative has had 4300 leads and we qualify a lead as someone who has taken the time to fill out our survey and quest information. So it's a level above just a phone call. At 4300 so far this year and compare that with 11,000 for all of 2007 and 7500 for all of 2006, so interest continues to mount. Two weeks ago a documentary story on Good Morning America which they described the WalkAide as "a brain in a box" in a medical miracle. The improvement which was demonstrated by one of our patients generated a great deal of interest and we are pursuing each of the contracts that that film spot has yielded.

Finally a few words on acquisitions and some of our other developmental projects. For 2007 we closed on SureFit early in the quarter as I mentioned and the integration was well underway. With respect to our O&P acquisitions we continue to have discussions with candidates that have strategic value to us in the form of location, quality practitioners and or favorable products and services mix. On the developmental front we are very pleased with the progress of our Beta test involving new products, and new channels to deliver our products and services. And have advanced these products during the quarter and they will enter the roll-out phase a little later in 2008.

In closing the results of the quarter and the year validate that the projects put in place last year are correct and, most importantly are, our personnel are using them in generating positive results. As we look to 2,008 we'll continue to leverage the existing products. We will enhance our businesses with some new products and we'll derive benefit from the previously announced CMS, CPIU fee schedule increase for 2008 of 2.7%. Finally we are renewing our efforts in managing our SG&A costs to ensure that they are commensurate with our needs and in line with our revenues. Thank you. I'll now turn it back over to Ivan to manage the

Thank you, Tom. Andrea, we can open it up for our Q&A session.

(OPERATOR INSTRUCTIONS) First question, Henry Reukauf.

Congratulations on a nice quarter, great same store sales growth.

Thanks.

Just a quick question, actually. Maybe for modeling purposes. As I look at the quarter and the gross margin and on the SG&A levels and there were some volatility and you went through that discussion. If I look to the end of the year, I see basically a little bit of growth in the SG&A and also some growth in the overall gross margin. Are those margin levels for the year end, are they sort of what we should be thinking about within some range of a point or so, on a go forward basis with, you had some exceptional stuff this quarter. What would you say is sort of that go forward range for gross profit margin and SG&A as a percentage of revenue?

Well, if you look at our EBITDA margins that might be the easiest way to look at it going forward. We improved by about 30 basis points this year. We expect to improve by 10 to 20 basis points next year. So that would mean overall that our margins are going to stay intact. We will have the normal inflation in SG&A, the line items should be, we will be making some investment in IN, inc. as we are completing the clinical trials. We do have a little bit of concern about foreign currency impact on our materials cost in OE. But we think we take all the factors that are impacting our results next year that we should have in total a slight improvement in our EBITDA margins and we should keep our other operating margins pretty much intact.

And the core growth in SG&A is around a 4% level would you say?

It's 3.5%. I'd say in that range.

Then just I haven't heard you talk about it much, parity and you talked about the advantages of that to you and what that could mean in terms of insurance coverage then sort of thing?

Sure, Henry. Well, we look at parity being primarily from the perspective of our patients. And that's why we have supported the ACA. because that's the group that represents our prosthetic patients. Some of the, to give you an idea of how ridiculous some of this could be, is they may take a young person who say has lost a limb because of trauma, or because of cancer and impose a limit of $2,500 as a lifetime cap on a prosthetic device and even a simple prosthetic device below knee could easily be double that. So coming right out of the gate they've imposed a severe restriction on them.

So what we like to look at is the able to offer them a complete suite of products over their lifetime, and depending upon if you look at the state level about half of the insurance companies are state chartered, and so if you look at what their prosthetic spend is, this is going to be a pick up for us. It's pretty difficult to come back in and estimate and give from you a modeling perspective that every time we rack up a state this is what you could expect to see in the increase in our prosthetic revenues. The other half is on the national side.

Because half of the insurance companies are nationally chartered and therefore they fall under the Erisa rules. But there is significant opportunity across the entire profession because this will affect everyone. Sometimes people that have these limits can go to church groups or other ways or even their employers will step up and make this benefit for them. So we don't put a number on it simply because we are not doing it for that, we recognize that of course there will be benefit for us as we take care of the patients but this is just good patient care and it's the kind of care that should be offered in the insurance plan. So we are not in it for the money. We are in it for patient care. But there will be a benefit coming back to us simply because we can add that care over their life.

You said there was parity already in the Federally chartered or nationally chartered insurance company?

No. To date there have been six states in '06, and two more in '07. So we have a total of eight states. Twenty states have it on the books or are in some stage of discussion. So if we could get all of those over the next two years we would have 28 or more than 50%. And at some point we hope that what the states are going through demonstrates to the Federal law maker that there really is interest in this benefit and as a result of that we are starting early, we are working with the ACA to get a national bill drafted and introduced into the Congress and find appropriate sponsors that will take the message forward, and in essence become the advocate for a national bill. Eight states have it. Twenty more are working on it and the national bill has been put together. And we are working with ACA to find sponsorship to advance the bill in the Congress. There is nothing on the national level other than we are trying to get it off the ground and bring it to the attention of the federal legislators.

I understand, thanks very much.

(OPERATOR INSTRUCTIONS). Next question, Larry Solow.

Could you quantify how much there was a true up in inventory at the end of the year? Is there a number you can give to that?

Surely. The benefit from the book to physical was roughly $4 million.

$4 million, and that was all in Q4?

Yes because the physical was actually taken in October. It was a fourth quarter adjustment.

And it seems like a pretty good quarter all around. Last quarter you talked about there was a couple of underperforming divisions and you had said that you expect them to kind of be back up to par by year end. Can you give us any update on that?

Sure, sure, we have made progress. As we told you we had identified a couple of those and we brought those up to a level where we are going to continue to work with them but they certainly are performing much better than they were in a couple of the prior quarters. As we sit here today I would say that the three that are targeted that are performing better but we still are going to continue to work. And in one case we put in a new manager and he's been active throughout the entire year and has restabilize the team and has moved forward.

We are certainly as we look out on the horizon well aware of the events that are occurring in the automotive and the industrial segments and so we are monitoring that closely. Certainly, individual loses their job, they lose their benefits and they start thinking twice when their cobra runs out. So we are monitoring those situations but haven't seen any of that impact show up yet. We are doing much better on a market by market basis.

Last question, do you have any, a guidance for or projection for Capex for 2008?

Sure. Capex should be in a range of 19 to $20 million.

Similar to '07.

Very similar.

Excellent. Thank you.

Next question, Mike Petusky

Good morning. A couple questions for George, and then I guess one probably for Tom. The sales guidance that you gave, does that include any, I didn't catch it if you said this, does that include any estimate for acquisition revenue?

No, it does not. Our internal target is to acquire in the $20 million range during the year but that's not built into our estimates for sales growth.

So potentially there's another $20 million potentially if you find the right deals on top of what you've guide to do?

That's annualized.

I'm sorry, annualized, okay.

$20 million is an annual number so the impact depends on the timing. Keep in mind though the 5 to 7% growth range does have in it the second half of the benefit of the acquisitions that we made in 2007, SureFit and then there was about roughly $5 million worth of O&P business we bought.

I was wondering if you could, George, drill down a little bit, you said obviously everybody notice that a big aspect of the incentive comp is formulaic but you said there was an element of catch up. Can you quantify it at all, to help people understand that?

I mean if you look at the practitioner incentive compensation plan it will pay out roughly $5 million more than it did last year so year over year increase you have that. That's based on metrics. And the part that does not 100% tie to our accrual based results is there was a cash component to the, to that compensation. But we, we expect that plan to pay out roughly the same levels that only a little higher in 2008. To the catch up in the other plans that only paid out over the last three years in the range of 30 to 50%. So the people in that pool which is the rest of, all the rest of management, they do qualify for 100% pay out this year. The catch up was probably a couple of a million dollars in terms of the overall accrual.

I'm sorry, I didn't catch that, the dollars, I didn't catch that?

It was roughly $2 million relative to the entire accrual so you had $5 million from the incentive comp, the favorable comp for the practitioners which is spread out over the entire company, and about $2 million which was all the other plans together. And as I pointed out during the overview, that's baked into our numbers for 2008. If we exceed those numbers we expect to see pretty good leverage from that because it shouldn't have much impact on the incentive comp.

Right. And then one other question and I think I caught this but I want to make sure. The additional salespeople, Tom, that you guys are hiring in terms of WalkAide, are those people targeted at the rehab markets? I mean you are going after and marketing to occupational therapists, physical therapists, is that how I should understand this?

What we've done is switch their focus a bit and what we've designated them as regional experts, and so they support the original test that is are out there. Frequently an Orthotist will have a relationship somewhere, maybe a hospital and ask for an in depth in service to go teach the hospital. They may have physical therapists, may have occupational therapists in the hospital, so they are supporting the Orthotists. Sometimes the Orthotists will have what we call clinics, like a WalkAide clinic, were just as we do on the prosthetic or orthotic side, they will call in from there legacy patient base people that they have foot with ankle fit orthotics, they may be MS, they could be stroke. Maybe 20, 30 people will show up, they'll bring in an RSS for support that's our code for the regional sales and service specialist. Or they may go out on their own and go into a rehabilitation hospital and carry the message forward.

And in that case what they are trying to do is to demonstrate to that hospital to the director of rehab, the PTs, the OTs, the nature of the device and how it can improve the outcome. And to try and get that facility to establish the WalkAide as their official protocol, which now means that everytime a new patient comes into that facility they are fit with a WalkAide. And that's used in their therapy, when it comes time to discharge them they then would want to have a WalkAide when they go home so the facility would call an orthotist who they have a relationship with to fit it.

So we look at those salespeople as being in charge of an overall territory, managing that territory in terms of all that needs to be done and that could be Hanger Orthotist, independent Orthotist, are going directly at the rehabs themselves. And they also sell independently. If that rehab facility wants to by a set of the tools and a supply of the devices, they are perfectly capable of making a sale. So they do both educational backup. They do on-site support for fitting on the clinical side, as well as they can conduct sales. And we have found that that reduces channel conflict and also puts an expert at the disposal of the Orthotist that are out there to help them as they grow knowledge. Now as with any new device, and this one is computer driven, this is a microprocessor smart device, so it involves set up, and it involves looking back over time. There's always a little bit of hesitancy on behalf of a practitioner to get into that without knowing for the first couple, without having the in depth knowledge and the RSS to back them up and to give them that kind of confidence. It's a different approach than we started off a year and a half ago. We found out it's worked well and gained traction and mid year we started to put more on and were all hired as of December. So we are going into '08 with a full fleet of these people now.

Is it fair to say your outreach to rehab facilities, I mean if this was a nine inning baseball game, it's early going, second or third inning. I'm assume the penetration is pretty modest at this point. Is that fair to say?

That is correct, yes.

Thanks.

Next question, Dawn Brock

There are two things that I wanted a little bit more color on, the first is how much do you currently have in NOL carry forwards?

Well, the only NOL carry forwards we have are at the state level.

Okay.

That's a hard question to answer because it's state by state we have NOLs. There is an asset on the books that represents mostly NOLs and I might have to have that question off-line. We have a $10.7 million asset on our books which is mostly NOLs at the state level. Some NOLs have reserves on them, some of them do not. Based on the accounting, what's appropriate from the standpoint of the accounting literature.

So they don't affect your tax rate in any one given period because the asset is already valued. If you are getting at why is our rate better, first of all it's hard to do effective tax planning. Last year we were hit by a pretty large charge relative to the refinancing. That make it hard to be efficient from a standpoint of your state taxes. We've just done some work, knowing that we were going to have those kind of charges in the past and we are doing a little better job of efficiently managing where, what state our income is in.

Okay. So is it fair.

A recurring benefit going forward.

Okay. I mean is it fair, George, to say that the kind of revised tack rate that we should be using for '08 of 40% includes some of those tax benefits on a state by state basis?

Yeah, the NOL are baked into that. If anything were to change with NOLs, Dawn, if any of our reserve NOL.s, which is possible become usable that will create a benefit but it's usual a one time benefit. You recognize it when you prove that the, to the world that you can utilize those inform NOLs it will be a specific discrete charge will come through at that point. It won't be something impacts your rate, your tax rate on a permanent basis. So that 40% rate, 39, 40% rate is what we expect our rate to be going forward exclusive of any impact of inform NOLs.

Understand, that's excellent. The second thing is are you open to giving us a little bit more information or color on the break down of revenue? In the past you've given us incremental Linkia and WalkAide as well as SPS kind of what you are looking for the year even if it's in kind of broad strokes?

Are you referring to, Dawn, to '07 or '08?

You gave it to us in '07 for '07, so I think I was just looking for little bit more guidance in '08 on a unit basis.

If we look to the unit revenues for Linkia, why don't we start there and talk about the increases we see going forward. Linkia year revenues for '07 and keep in mind that as I said most of this flows right through to HPO. There is a slide slip stream that goes off into the independents as well but Linkias overall revenue in flowed through their books was about $65 million. As we look on the horizon going forward we would expect to see that probably and I think we've reset that at at round 5%, 6% increase for next year combination of some continuing to get some more volume and obviously we know that as we've mentioned to you in the past, as we renegotiate those contracts we then reach back and grab the current Medicare fee schedule. So that gives us a little bit of pop as well.

Can I stop you for one second? Just quickly is that what you would consider the consolidated revenue growth or are you talking all of Linkia?

That's all of Linkia.

So from an incremental perspective if we looked at the contribution kind of the HPO contribution that would be consolidated from Linkia for '07, what would that be?

That's kind of baked into our overall numbers, Dawn. To try to simplify the answer, I mean, we are expecting if you look at SPS the distribution company , we are expecting that to generate about 4%4 to $5 million in growth. Most of the rest of the growth is coming from HPO. And there's a little bit coming from the SureFit acquisition as well. There's about 3.5 to $4 million from SureFit which will benefit SPS. That's over and above the, let's say $4 million in comp growth. And then the rest of the growth is coming from HPO and its comp sales growth. It has the Linkia thing that Tom is talked about baked into

And the continued, we keep trying to push some new products. And we have done an outstanding job as you can tell from the percentages of 40% and 45% of moving microprocessors into the field. And that's because they function so much better on patients that I think our insurance companies are recognizing more and more that these are not experimental devices. So it makes it easier for to us provide them the increased stability, they improve cardiovascular because people walk on them better. So there is some of that growth in there as well. We have some of the Linkia growth. You have a piece of the price increase, the 2.7%. We will get the first year of that and the second year of the 4.3% that we have that the government gave us in '07. That's all baked right into that overall number.

Good enough. Maybe I will try to get something more from you off-line. Thank you so much, guys.

You're welcome.

Next question, Brandon Osten

Hi, guys, congratulations. Good there. Want to do just delve into the DSOs. It looks like you guys had a really strong quarter for collections. I was curious, how much of your SG&A in Q4 was related to incentives for collections, or collections of what might have been previously considered allowance for doubtful, stuff like that?

Well, the incentive compensation plan for the practitioners, the principal metric for that is collections. And we frankly normally the fourth quarter our collections trail off a little bit because it's a really good sales period. But with collected in the fourth quarter over 100%. I mean they just collected the hell out of cash which is why we had $34 million in cash on the books and our AR in absolute dollars went down year over year even when you factor in acquisitions. So that was a large factor in why their plan went up by $5 million year over year, because that great activity happened in fourth quarter many not very much of it related to things that were previously charged off. During a whole year last, year we probably collected about $1 million of previously charged off receivables. This is just good, nuts and bolts day to day collection of their AR. And obviously they can't continue to do that as a 100% going forward so we expect that there is only going to be a marginal increase on the pay out of that plan next year.

Is there like a catch up effect on this? Is there in a sense of well, it was a bit higher in Q4 because our collection was so good so it might be a bit less than what we would normally expect to put out in compensation in Q1, since so much of it was taken care of in Q4, is that a fair assessment of whether to catch up in Q3?

It's an annual plan and in the, so it's only, it's paid out in the first quarter based on the prior year's activity. So, you really have to, you have to make estimates in the first three quarters of what you think your collection rate is going to be. And we frankly this year exceeded what our historic collection rate had been. And our collection rate wasn't too bad the past few years because we've been steadily beginning down our DSOs. Trying to answer your question we would expect the first couple quarters of next year to be a little higher than the prior year because we do expect to be paying out a higher level commensurate with '07 in '08 but it shouldn't be substantially higher than prior years. Keep in mind Q1 is a seasonally low sales quarter for us. So accruals will be less in Q1 just because of that.

Let me ask you, has there been any, just delving into the SG&A, have there been any changes in the way you guys compensate on that line over the last 12 months? Or was Q4 just sort of like a perfect storm where all the kind of things where you guys compensate for at exceptional levels just happen to be exceptional characteristics of the quarter?

There haven't been any substantial changes in how we compensate people in three years. So it's way more than 12 months. It was I think if you want to call it a perfect storm, there clearly was a case over the last three years while we were in a freeze that people got paid less. And there was because the way our plans work is they are tied to earnings and we put the shareholders first and we can't accrue it and meet our goals it doesn't get paid.

And the practitioners plan is tied to collections and the control of labor and materials. And the fact that we ended up with almost $35 million on our balance sheet is a by product of the wonderful collections history that they had this year. So, you know, one leads to the other. I mean they are incented to manage their receivables and manage their collections and they did a spectacular job of that and they are being rewarded for that but so is the company. We closed out the quarter of the year with record cash on our balance sheet.

I fully appreciate that, but I mean if your DSOs go from 64 days to 54 days, that's ten days that you paid for this year, that presumably you wouldn't necessarily being paying for next year, unless they go to 44 days DSO, right?

Yeah, I agree, I agree, we don't expect to see the same level of increase next year that we had this year.

Okay. And I guess on, you talked about leverage so the idea I guess going forward is that if you guys beat those numbers that you've given up by 10% that hopefully will you beat your earnings estimates by 8% or something like that, does that sound about right?

Beat our leverage numbers, we will beat our earnings estimates?

Right if you beat your revenues by 10 percent, obviously (inaudible).

Yeah, if we beat our revenues, yes.

A percentage on the top line is roughly a percentage beat on the bottom line take it roughly plus or minus a few points.

I think that correlates.

Excellent. And the last question, can I get just sort of a, just want to talk about WalkAide a bit and some clarifications of points you made. Can I get you guys to repeat those numbers on the prospects for '06, '07 and the first two months of '08?

Sure. What I had mentioned is these are in terms of leads. And as I mentioned we get a lot of calls, thousands of calls, but an individual or care give take the time to take out a survey and they can go on line and do that or go to one of the agencies that we have out there, we classify that as a lead and the numbers that I had just mentioned was we have 4300 leads so far this year. And if we compare that to all the '07 we had 11,000 leads and all of '06 is 7500 leads. There's a tremendous amount of interest in the product and part of that is the word is getting out. People are beginning to recognize what it does and we believe the conversion rate of those leads will continue to improve as the word gets out and people can see the efficacy of the device.

The second thing that will help in the conversion rate, no question about it is getting reimbursement by the Federal Government and that's why we are so focused on the clinical trials that we can come back and get that reimbursement. Part of the interest generation is its been picked up on a couple of networks, local and the national on Good Morning America where they went and saw an MS patient and did the before and after. It wasn't a life changing event. She's responded very well to the treatment. And as a result Diane Sawyer, and I think it's Deborah Roberts, have taken the time and brought one of our clinical specialists into their studios to demonstrate the device on Deborah. And as a result that has stimulated a tremendous amount of interest in the product and that has been one of the leading reasons that we've had all the boost in terms of the number of leads.

And my point in the discussion was that now we've got the leads we are putting in much more sophisticated systems to track the leads to get people following up appropriately and to get them in for that fitting to find out if in fact they are a candidate. It's a multiple step process. We bring them in, got to make sure that they have the nerve pathways to make sure it works, to make sure that the disease indication is such that the device can produce the desired results. We are very pleased with the amount of interest and amount of leads that we have and that is the first step as you well recognize to getting a sale.

Is that good morning America clip going to be put up on your Web site at any time soon?

We are obviously we don't own that clip. We are talking to them, but for a period and I don't know if it's still there you could go right on to the ABC Good Morning America and it was up on their website. You can.

[inaudible] You can probably provide a link to their website. They probably wouldn't mind the free exposure.

Probably not. That's right.

The 4300, I mean that's a monster number for two months, does that, does that play into your Medicare process there, is that something that you guys can put in your literature that goes out to them?

Certainly that influences the number that they like to see and the number that they are most interested in is in how many devices have you fit? And as it's the first step in the process it could be a pre-indicator of interest and ultimately higher levels of sales. Let's keep in mine that the 4300 was just generated over the month of January and a week and a half in February here. So we are very optimistic about that. But what Medicare looks at for that individual code, code coverage and reimbursement, three steps, is the treatment unique and how large is the assaulted patient population. We told you in the past our numbers were low, set that Medicare sets it's not worth the bother for a unique code. But we still have a code. It is an E code rather that an L code.

Last question, on the schedule, when you said basically late Fall, were you talking about reimbursements to have everything said and done on the reimbursements, can you sort of layout the schedule for the three stages of Medicare there? I wasn't sure if it was reimbursement or if it was recognition or whatever the second category was.

When I said late fall it was to take the clinical trial transform them into articles have them peer reviewed which is a necessary step and make filings with Medicare. Then would be for coverage. And what we are going for there is a demonstration and that's why peer review is so important of the efficacy of the device. And coverage means that the device works for its intended purpose on the intended patient population. And at the same time we would take the data of the clinical trials and we will analyze it in terms of cost avoidance, Whoever the payers is, government, insurance company, whatever, and at the same time, that we would also analyze it in terms of quality of life improvement. And we would make those filings in the late fall.

And then it's in the governments hands and now we are in the queue, the good news it's not one of those government filings you can only make once a year when the data is available. You can go ahead and on a quarterly filing basis and then work to satisfy whatever questions Medicare would have. And in the meantime we are also trying to gather that data and go out to the private insurance companies to make the compelling argument to them as well. But they move on their timetable, not on ours, so when I said late fall, I was talking about our submissions to them.

Thanks, guys.

Next question, Rebecca Durnbach.

Hi, guys, how are you?

How are you?

Great now that had you such a great quarter. Very happy about it. My questions are I think you guys are getting pump pummeled about the WalkAide, I just had a few more questions about it. I know, Tom, you were saying that you are going to make some submissions to the private insurance companies. Have you seen at all with some of the patients that are already buying the device themselves and then going and trying to get reimbursed by the insurance companies, have any of them made any traction?

We need to gather the data first before we can go sit in front and as I mentioned to you our clinical trials are still underway. Until, we've had preliminary discussions but have not been able to go in and make the compelling argument based on data which is what they respond to. Some of the patients have applied for insurance, very few in number. And it really depends on the nature of their individual insurance coverage. So that has not been the norm, and I don't want to give the misleading impression that all the private insurance companies are out there lining up and reimbursing for this. I think the key to swing this matter over is get those clinical trials done and we will go out private and CMS and try to make the compelling argument.

Okay. Thanks. And you had put out some numbers when you passed the 1,000 unit market. Are you substantially beyond that at this point? Have you units just buy people buying it themselves been picking up at all?

Yes, units have continued to go up as well, as we see unit sales into two major outlets. One, are the individuals, and second second because of the nature of the work of the RSSs they have sold units to rehab centers as well as part of their protocol installation. And we have seen improvement in both of those regards. Year over year you are looking at revenues, it's almost 280% over last year.

Great. Well that's it, and congratulations, Tom, on taking the CEO spot. That's really encouraging and Ivan, sad to see you go, but glad to see Tom being the person to take your place.

I'll be here as Chairman, Rebecca, you won't get rid of me all together.

A follow-up question from the line of Mike Petusky.

Real quick, Tom, wanted to follow up on Brandon's question. I thought I had taken a note earlier that you were talking about third quarter for submission for reimbursement for WalkAide and then when I hear late fall, I mean technically late fall goes as late as December 19. I want to dial that in. Are you making a submission somewhere after mid year third quarter, or it could be late November, early December before you make a submission?

We are looking at third quarter and the key to that, Mike, is that focusing on what we can control looks like third quarter but trying to get those articles out for peer review, and as we all know it depends where you sends them and how many comments their editors have, and how quickly you can get it through that gin mill to get it out but that's our target, third quarter.

Great. Thanks.

At this time there are no further questions.

Thank you, Andrea. Thank you all for joining us. We look forward to talking to you with the Q1 results. Have a good day.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.