Hanger Inc (HNGR) 2009 Q3 法說會逐字稿

Good morning. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanger Orthopedic Group's third-quarter earnings 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 session. (Operator Instructions).

Thank you. I would now like to turn the conference over to Mr. Tom Kirk, President and CEO of Hanger Orthopedic Group. Sir, you may begin your conference.

Thank you, Chelsea. Good morning to all of you, and welcome to Hanger Orthopedic Group's discussion of our third-quarter results.

Before starting the discussion, let me ask Tom Hofmeister, our Chief Accounting Officer and Investor Relations Director, to review with you our declaration on forward-looking statements.

Thank you, Tom. During this call, management will make forward-looking statements relating to the 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 related to future results of operations reflect the 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.

These include the Company's ability to enter into and derive benefits from managed care contracts; the demand for the Company's orthotic and prosthetic services and products; and other factors identified in the Company's periodic reports on Form 10-K and Form 10-Q, which are 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 I will turn the call back over to Tom.

Thanks, Tom. Well, we are very pleased with the third quarter, and let me just touch on a couple of noteworthy points. We grew consolidated sales over the third quarter of last year by 7.6% in spite of the challenging economic climate and increasing unemployment conditions. This sales performance, combined with cost management, yielded $0.30 earnings per share, which equates to a 30.4% growth over last year's third quarter. This makes the 15th consecutive quarter where we've met or exceeded First Call estimates.

The performance of our business is also the basis for our increasing EPS guidance for the year, and George will have more to say about this in a few moments.

During the quarter, we focused on the following areas. One, marketing the value of all of our services. Two, educating our referral sources on the functional benefits of the new products that are in the market. Three, demonstrating how Linkia can provide value to our third-party payors. Four, expanding the customer and product bases in our distribution business. Five, pursuing reimbursement for WalkAide. And six, interacting with the legislators to ensure our message is understood in these new proposed healthcare reforms.

Now I will turn it over to George, who will review our financial results and our balance sheet changes in detail.

Thank you, Tom, and thank you, everyone, for joining us this morning. Q3 was an excellent quarter from a number of perspectives. The important takeaways are as follows.

For the second quarter in succession we beat Street estimates and our internal budget by $0.03, both of which called for $0.27 for the quarter. Sales growth accelerated at 7.6% compared to 6.8% in Q2, and we controlled our expenses, delivering a 70 basis point increase in EBITDA margins and a 100 basis point improvement in our operating margins, both significant improvements.

Our [com] rate increased compared to prior year by 70 basis points, principally due to a higher ratio of distribution sales, which average a higher approximate 80% com rate.

Other operating expenses remained under control. We were considerably below our internal budget and only $1.6 million higher than last year's actual, thus generating the leverage I mentioned in my previous comment.

Bad debt expense trended down to 1.9% for the quarter compared to 2.3% for the year, and we expect that trend to continue into the fourth quarter. The quality of the asset has improved, and our expenses also decreased. We are proud of our track record of collections. I will talk more about AR in a moment.

Our compensation accruals are right where they should be, given our performance. As I mentioned during the Q2 call, we didn't expect any spike in the accruals in the second half of the year, and Q3 came in right where we expected it to. D&A and interest was about $600,000 below last year, and our tax rate remained consistent with prior quarters at 40%.

All of the factors I have just discussed led to a $0.07, or 30%, increase in EPS for the quarter. We have raised our guidance for the year based on Q3's results. I will discuss the guidance change at the end of my comments.

Moving on to the year-to-date results, the trends continue on the income statement for the nine months are very similar to the quarter. Our cost of materials at 30.4% of sales for the first nine months was 40 basis points higher than last year, due principally to higher distribution sales, same issue as in first quarter. So it is just a mix change.

Our rate at patient care was the same as last year, so that is holding constant. Personnel costs in total have decreased as a percentage of sales by 50 basis points, from 35.9% last year to 35.4% this year. So we are getting excellent leverage out of our workforce. Other operating expenses declined as a percentage of sales, as well, by 30 basis points. So we've done a good job of keeping the lid on expenses.

Moving on to the balance sheet, our AR, despite the $13.6 million increase in sales this quarter, the balance actually decreased by $4.1 million compared to year-end. Our DSOs dropped to 47 days. That is a three-day improvement compared to a year ago, and it is a one-day improvement compared to last quarter. Our AR over 120 days was $13.8 million. That is a $400,000 decrease compared to a year ago.

The quality of our receivables has improved, and we are comfortable with our reserved for doubtful accounts. Our collections remain strong. We have not encountered any material slowdown in collections related to the downturn in our economy.

Our inventory increased by $2.7 million to $88.7 million from $86 million at the end of the year. Our sales backlog remains strong at quarter-end, and our inventory is at an appropriate level to serve our patients.

Capital additions for the quarter was $6.6 million, which is a $2.4 million increase over the prior year. Year-to-date, we have expended $12.6 million compared to $11.9 million in the first nine months of 2008.

Cash flow from operations in Q3 was $25.4 million. That is a $3.1 million improvement over last year. For the year, we now stand at $46.1 million, or $11.2 million higher than last year. The improvement was due to a combination of our earnings growth and working capital management. Keep in mind during the quarter that we repaid the $15.3 million draw on our revolver early in the quarter, and we would still increase our ending cash balance by $2 million. So we had excellent cash flow.

From a liquidity standpoint, the Company currently has total liquidity of $141.2 million, and that is comprised of $78.4 million in cash and $62.8 million in availability on our revolver, now that Barclays Bank has taken a position in that revolver. As a result of this excellent performance, we will be adjusting our cash flow guidance, as well.

We are proud that 2009 is shaping up to be one of our best years in terms of generating cash. Total leverage per our bank calculation decreased to 3.02 times, the lowest it has ever been since the NovaCare acquisition.

From a guidance standpoint, we are reiterating sales guidance that was established during our February 11 conference call, which calls for sales in a range of $750 million to $760 million; that's a growth rate of between 6.7% and 8.1%.

Our guidance to improved EBITDA leverage also stays the same at 20 to 40 basis points, as we have achieved 30 basis points after nine months. We are increasing our full-year EPS guidance for the second time this year by another $0.03 to $1.05 to $1.07. That is a growth rate of up to 24%.

And finally, we are increasing our guidance on cash flow from operations by $15 million from a range of $40 million to $50 million to the new range of $55 million to $65 million.

That concludes my comments, and I am now going to turn the call over to our CEO and President, Tom Kirk, to give you more color on the results.

Thanks, George. Let's dig into the quarter's results on a division-by-division basis. First, let's take a look at HPO. That's Hanger Prosthetics and Orthotics; that's our patient care division. That division achieved a $6.7 million increase, or 4.3% same-center sales growth for the quarter, compared to Q3 2008. I think sometimes we tend to forget about the consistency and the reliability of this good, solid performing business.

Overall, we estimate that approximately 2% to 2.5% of that 4.3% increase can be attributed to price, which really results from the rollout of the fee schedule increases that we've had back in 2007 and 2008 and most recently in 2009. The balance of the increase is attributable to a combination of volume and mix, and we estimate that that is about 75% volume and 25% mix.

The programs that we have in place to impact the volume and mix are the following ones. First, the continued improvement in our Linkia book of business. I always like to remind ourselves here that HPO is really the primary vehicle of the delivery of most of the services under the Linkia contracts. On an overall basis, the revenue from the Linkia-designated contracts is up almost 10% for the quarter and 9.7% for the first nine months of the year, very strong performance.

Second, educating our referral sources on the enhanced lifelike features of our high-performing products, such as microprocessor prosthetic arms, hands, knees and feet components. Through Q3 and for the first nine months of the year, the revenues from these higher-performing product lines were up almost 20% compared to the comparable period last year.

Third are our patient's evaluation clinics, which have produced an incremental increase in revenue of 80% for the quarter and 40% year-to-date as compared to the first nine months of last year. Just outstanding performance, and as you'll recall, those patient evaluation clinics are our vehicle for bringing our patients back in to ensure that their fit and functionality are appropriate. And it also provides an opportunity for us to educate them on new products.

And fourth are our sales, marketing and public relations efforts by our practitioners and those that support them in identifying opportunities specific to their local businesses, such as the opening of new satellite offices and the launching of certain specific marketing programs.

One of the things that I want to point out that is certainly a part of the economic times in which we are currently operating is the percentage of unemployment currently stands at 9.8%. That is up from 9.5%, which we saw during the second quarter of '09. And by comparison to Q3 of last year, we had 6.2%.

Now this in and of itself is very telling, because what we are seeing is that some of our patients, as they come in, even if they have insurance, they have difficulties meeting some of their co-pay and co-insurance financial responsibilities. We have been successful thus far in working with our patients to ensure that they can still get their device, and we work with them to find alternative sources of funding, such as vocational rehab or other charitable institutions. But it certainly does stress the system, and we feel for our patients and we do try to work with them on that.

We've been staying very close to the proposed legislative changes on healthcare, in conjunction with a couple sister organizations out there, such as the Amputee Coalition of America and the American Orthotics and Prosthetics Association. And in conjunction with these two associations, we've sponsored about 40 amputees that came into Washington, D.C., to visit with their senators and their representatives. And they were also present for the Finance Committee markup on September 16, and they were here to reinforce their message, that limbs are not a luxury.

Senator Baucus, through one of his staff members, acknowledged their presence and recognized their mission. So we think that our message is getting through.

Let's now turn our attention to SPS. Their outside sales are up approximately $2.1 million, or 10%, compared to the third quarter of '08. SPS has added a new product line to its product portfolio on an exclusive basis, and this one-stop shopping, combined with their outstanding customer service, restored them to double-digit growth rates compared to Q2 of this year.

SureFit continues to make progress on improving their marketing, sales and infrastructure processes. We've added new field sales and marketing personnel to increase their penetration into the podiatry market and to introduce a new line of shoe design.

Now let's turn our attention to Linkia. It continues to execute its dual mission of building volume while negotiating a fair price for services provided by the providers within its network. Payors tell us that they recognize the value that Linkia brings to them in helping them control costs, while ensuring good clinical care and high levels of customer satisfaction. Their sales, as I mentioned a little earlier, are up over 10% through the quarter and about 9.7% for the year, clearly a validation of their offering. And currently, their external network of O&P providers has held constant at about 310.

In addition, Linkia is advancing the piloting of other services they could incorporate into their model to provide benefit to those third-party payors. On the marketing side, they are continuing discussions and negotiations with the key national and large regional healthcare management companies, as well as the firms in the Workman's Compensation segment.

Now let's talk about Innovative Neurotronics. In Inc.'s sales were up above those of Q3 of 2008 by 4.4% after a disappointing first half. Sales for Q3 ramped up due largely to another patient-featured documentary on The Early Show, as well as stepped-up operation of our reimbursement desk, which to date has filed about 730 claims. Of those that have completed the iterative appeal process, all but one have been approved.

We have begun to test alternative media, including television and social media, to deliver the WalkAide message, and we're currently running infomercials in three test markets and getting great results.

We continued working with CMS and the FDA on the protocols and the endpoints for our new clinical trials. During the quarter, we reached agreement with these entities, and as a result, we have been assigned an IDE number and CMS has agreed to be the sponsor of the study.

Recently, we've turned our attention to now working with the 32 research and clinical centers that will be conducting the trials. And we are supporting them as they compile their IRBs and as they begin to launch their studies. And we will be working with them on this effort for the balance of this year.

And we are also continuing to work with certain patient advocate groups and research hospitals, such as NIH, who have expressed interest in launching new study on other indications that are germane to their membership. I want to remind you that this dual track of public and private reimbursement is the same progression that we went through to gain reimbursement on the microprocessor knees and other high-performing O&P devices.

And finally, a few words on our acquisition program. In 2009, we are targeting to complete acquisitions which would have about $20 million in annualized sales. I'm proud to report that we are on track to meet this goal in 2009. As we've said in the past, the strategy is to look for tuck-in acquisition candidates that have strategic value to us in the form of location, the quality of the practitioners and/or favorable product/service mix.

Overall, I am proud of our ability to grow the top line despite this challenging environment. In addition, we have contained, and in some cases reduced, costs without sacrificing clinical and operational excellence. We expect these efforts to continue into the fourth quarter.

So at this time, let me open up the line for questions, and I will turn it back over to Chelsea. Thank you very much.

(Operator Instructions) [Bryan Sekino], Barclays Capital.

Thanks for taking my questions today. Just wanted to get an update from you on the cost of materials. I know in the past you had mentioned that this may be a potential savings, that maybe some of the mix shift has caused a bit of the increase in the quarter. I just wanted to see if you're still seeing the potential for that lower cost of materials going forward.

Well, Bryan, we think the cost of materials is going to stay stable in our patient care centers, which is most of our business. That's 85% of our business.

But there has been higher growth in distribution, and just because of the fact that they are a distributor have 80% cost of sales, that should cause our com rate to go up a bit. So it is just strictly a mix issue. We haven't seen any really significant change in our costs, but we don't anticipate that to be a source of savings either for this year or necessarily going into 2010. Our efforts will be aimed really at keeping that at the current levels.

Got it. And on the -- on I guess the higher-end products, like the microprocessing knees and hips, do you still see the potential for that to maintain this kind of high teens, maybe low 20s growth going forward?

Yes, we do, Brian. The mechanisms that we have in place through our PEC clinics, and as you probably know, we have advanced the evaluative stage by bringing out some templates, such that each patient now gets a full, comprehensive quantitative review to determine whether or not they would be a candidate, based upon their doctors' declared functionality level and the kind of life they lead.

So by having the patient evaluation clinics and these templates, which actually the insurance companies all recognize, and a number of them have licensed those templates, we believe it gives us a very fair opportunity to look at each patient to decide which product is best for that patient. So we've taken the speculation out of it and it is no longer just based on opinion; it is based on fact.

And so by conducting the evaluation in this fashion, we believe that as the patients come in, we will continue to put them in the right device, which continues to drive the higher-performing products, because these patients really deserve to have products that can help them more than some of the -- what I'd say the low-performing products. So armed with those two mechanisms, we believe that we can continue in the high teens or (inaudible) the 20% range.

Got it. Now just if I could shift slightly here to the bad debt expense. You guys came down quite a bit, to like below 2%. And I know you had given previous guidance of 2.5%, 2.2%, maybe after the past couple quarters.

And you mentioned there is difficulty with co-pays. Can you just tell us a little about what you are doing to keep that cost low? And can we also expect somewhat of a similar run rate going forward?

I'll take it; then George can jump in here. In terms of the co-pays, I believe this is a matter of discipline. And we have just completed -- or nearly completed a tour of going around the country and stopping in 17 of our locations and talking to our people about the conditions they are seeing.

What they report to us is that some of the folks are having some difficulties with the co-pay. They further report that they are prepared and they are proactive in this regard to work with them in finding outside sources of money.

So what we've been able to do is by proactively identifying alternative sources, we are not in a position to either deny the patients care or to take excessive write-offs. It's a matter of being prepared. It's a matter of knowing what is available in your area. And so our folks have taken the extra time to go out and do this. And that is one of the things that has helped us in this regard.

Plus, I'm sure George will have some comments just on the discipline of the overall collection process.

Bryan, I would say that what we've done -- first of all, we give some tools to our people. We have available zero-percent financing for our patients for significant co-pays that they might have to deal with. And I would say that we've done a very good job from a process standpoint in terms of really drilling into the field -- the importance of process from a standpoint of collections, and dealing with co-pay responsibilities before the (inaudible) are delivered.

So I would say when you take the tools that we gave them, as well as the documentational process and the consistent message there, I think that has helped mitigate the external forces that we are dealing with. And we do expect to see similar results in fourth quarter.

Got it. Okay. Thanks for taking my questions.

Larry Solow, CJS Securities.

Good morning, guys. Just a quick follow-up to that. In your travels within the 17 regions, are there areas that have, perhaps, been hit even harder by the economy that are seeing, perhaps, more of an impact from the economy? I know things lag, so as you look out, can you maybe look at certain areas that have been more impacted and what that might [portend] for the rest of your business as we look out?

Sure, you're absolutely correct. Some areas are having a more difficult time than others. California, Nevada, South Carolina, Michigan, but we've got a very small representation in Michigan. Their unemployment statistics are up.

What we've seen by going out is that -- and certainly we don't set ourselves up as being economic prognosticators here. But our folks are telling us that they believe it has pretty much bottomed, that they've seen some resurgence in the housing market. Attitudes of people seem to be a little bit better. So in some of those pockets where the depression has been worse, we are starting to see some signs of optimism.

We saw this coming, and actually have talked about this for some time, of the need to get out in front of these, and we've been talking with our employees such that they can be ready. And as you noted from the statistics that I gave on our patient evaluation clinics, we held more PECs during this quarter, trying to provide better service to our patients, recognizing that this was not the time to sit back and just wait for the patients to comment on their own.

This was the time to ring them up, to bring them back in, show them the new technology. Also to determine if their devices were fitting and to be ready with alternative sources of funding or suggestions to help them. That is why we had so much incremental revenue, because we wanted to get out in front of this whole thing.

And through these town hall meetings that we really launched right after Labor Day and just concluded last week, it is our feeling while the economy is not going to jolt off the launch pad here, certainly it seems to be mellowing. And our people, because of their proactivity, I think have really gotten out in front and done a great job, just in terms of taking care of our patients and making sure that we didn't see any decreases in our revenue growth.

Okay. In terms of the patient evaluation clinics, that was sort of my next question. I know some of those small numbers or the 80% may sound a little bit skewed, but it's a pretty big increase. Are these increased clinics, does it cost more for you to run them? It doesn't seem to be impacting the expense line, so any comments on that? And are these increases sustainable?

Well, it is a bit like your dentist. The dentist ensures that he gets you back in for routine treatments on a regular schedule. And as you come back in, he tries to identify your needs and book you into a program that then continues forward.

What we have seen in these clinics and the way they operate, what the protocols are, we use the local staff. We will bring in -- if it is a national clinic and the only designation is where we bring in an outside expert from. If it's a national clinic, we will bring in someone like our vice president of prosthetics, and he will come in and he will spend time with the 30 to 60 patients that may come in over the day, looking at their condition, working with the local practitioner to determine what is best for them. And then of course, if they need follow-on care, they will give a referral back to a physician, because the physician is ultimately the one that specifies that.

So we are using existing facilities and existing people. If it is a patient evaluation clinic local, then -- let's say we are in Greenville, South Carolina. We may bring in another practitioner from Columbia. It is a second set of eyes to ensure that the patients are getting good care. So the cost is minimal. And as I said, we are using existing facilities. And it really provides a lot of value to our patients.

At some point, you can't continue to grow your incremental revenues at 80%, because what we are doing is really mining our database of existing patients. Perhaps it is better to look at more typical kinds of incremental revenue increases period over period, and being in the mid-teens to the 20%. But we really moved that sharply here for Q3.

We are going to continue that into Q4, because this is not the time that we want our patients sitting back, waiting for care. We want to proactively get them in, expose them to the alternative sources of funding that we've worked to set up, and also to expose them to the latest technology and make sure their fit and functionality are correct.

So it would be disingenuous to say we are going to quarter-over-quarter keep doing 80%, but certainly, we don't see a problem in the mid-teens to the 20% range as typical kinds of performance.

Got it. And Tom, obviously on healthcare reform, there are still a lot of balls in the air. But the current bill at the House and proposal at the Senate level, there is not a lot of mention of the O&P industry specifically. But any thoughts you care to share and where we stand today, where you guys see pricing as we head out into 2010?

Sure. We are bunched in -- if you look at the Senate health bill that is out there, and also over on the House side -- they used words such as rehabilitative and abilitative services and devices. The current Finance Committee bill does not include that kind of language. It would be absurd -- at least, I would think it is absurd -- to think that a bill could pass and it would exclude O&P and rehabilitative services. So this is the key part. That is why we brought those amputees in, just to make sure that those folks that were marking it up really recognized their current situation.

So we are working -- this is with the ACA and with AOPA -- to have that language inserted into whatever the final bill will be. We do want to become specifically called out as a covered benefit. We recognize that is important.

The current bill in the Finance Committee does not call for any reductions in our fee schedule. Some of the others, the pharmaceuticals and the insurance and the hospitals, have offered up some money to "bend" the curve. What we have offered up, and we think it is very timely, particularly in view of the program that aired over the weekend on 60 Minutes, that if they would look at our House Bill 2479 that Representative Berkeley has introduced, it provides a mechanism to really reduce fraud and abuse.

We've had is scored by an outside agency, and we're trying to get it scored, but they are a little busy down there right now by the CBO. But it provides almost $250 million of savings by taking some of the bad operators out. And these are people that are not in the professions. They are not certified and they are not licensed.

As 60 Minutes revealed, particularly in some parts of the country -- and they focused on southeastern Florida -- it is actually easier to bilk Medicare than it is to be in the illegal drug business. One fellow that they had arrested and sending to jail for 12 years said in his career he probably hit Medicare for more than $20 million, never provided one service, never provided one device. It's just theft.

And so we think it is very timely. We are working with CMS to alert them to the possibilities of what 2479 can do. They certainly seem to be getting the message. And we are also making an appeal directly into the Senate and into the House that this is a very easy fix. All they have to do is tie payments to certification and licensure, because all of the reputable people in our profession are certified and licensed.

So it is a great fix. And so rather than have them give us fee schedule reductions, we're saying, we can offer over $2 billion worth of savings by taking the bad guys out.

Now we have not heard with respect to our fee schedule increase for 2010 -- we have not heard what direction that is going to go. We know the CPIU went down by minus 1.4%. It is our belief that -- I guess the mechanism would be MedPAC -- cannot adjust the fee schedule down. But that is yet to be determined. So we are looking at zero or a modest increase. That is certainly what most of the folks in our industry would tell you. Zero or something very modest for 2010.

And I think we can also take some insight from what the President has done with those people that are on Social Security, where he first came out and said there would be no cost-of-living increase for this year, because the CPI went down. Now most recently, he has come back and offered a $250 payment as I guess a token to try to offset potential cost increases. So I think all of the signs are lining up for something zero to modest. I don't think we are going to go -- that they would go negative on us. But we play this one day by day, Larry.

Absolutely.

Just trying to stay current with it.

Okay, great. That's very helpful. And then just last question, and then I'll move on. Just on the -- just for clarification on the WalkAide trials, that is -- those are fully going to be funded by CMS?

They are sponsored by CMS, which means that they are taking oversight and control of the -- the lead agency that will be doing the research will be at the Cleveland Clinic. And as a result, they're being sponsored. It currently appears that patients that go into those trials will be able to get reimbursed for their devices, since they are sponsoring it and it's not a manufacturer-sponsored study. So now the trick is to get these IRBs up and get the study loaded.

Is there any timeline on that? I know it is a difficult, probably moving type target. But timeline relative to other trials -- should it be sooner, about the same time, a 12-month type horizon? Any kind of ranges you are looking at?

In terms of the patients themselves and their time in the trial, that is probably going to be a six -to 12-month period, depending upon the results and what we begin to see. I think we all believe that when you look empirically at a patient walking with and without it, no question that it works and the efficacy is well-defined.

But getting the trials loaded and getting the patients inducted, that is the first part of it. And in terms of an overall timeline, it is pretty hard to make any forecast right now without having visibility into how this process is going to unfold. But certainly, as soon as we are in a position to have that transparency in working with all these agencies, we would be in a much better position to set some definitive timeline out there.

Okay, great. Thank you very much.

Greg Williams, Sidoti & Company.

Good morning, guys, and thank you for taking my call. Most of my questions has been answered. I just had one quick question. I looked at the last few quarter press releases, and noticing your number of practitioners is going up over the last two or three quarters. Yet the number of patient centers are going down. And I was wondering is there a consolidation effort here or a response to the economy or what dynamic is going on here?

It's a couple of things there, Greg. One is, as we mentioned, we continue to make acquisitions. And we pulled those in. Preferred methodology is what we call densification or tuck-in acquisitions. We like to put them in areas where we can really gain some leverage on the fixed costs. And so, as a result of that very intentional mechanism, the number of practitioners go up. But if we have two facilities, perhaps we can see our way to combine them into one. Or if one is large, we close down the smaller one and move the folks over.

So we are constantly working to leverage the fixed costs, while still maintaining access for our patients and still providing good patient care through the number of practitioners. So it is simply the rationalization process resulting from acquisitions.

Sounds good. Thanks, guys.

Mike Petusky, Noble Research.

A couple questions. Tom, could you talk about the acquisition pipeline, just in terms of deals you're seeing out there, in terms of any pricing trends? Are you guys getting a shot at basically everything you'd want? I guess I'm looking more over the next two, three years, do you foresee any issues in terms of, I guess, meeting your -- making your annual goals there?

None that are apparent, Mike. Our pipeline is full. We continue to work with people. What we say internally is probably somewhere between one out of every two, or perhaps one out of every three, we actually complete, and that is for a variety of reasons. Maybe we can't reach agreement on valuation or maybe there is some compliance issues. But we like to think that we are working with the cream of the crop here.

Our phone continues to be very busy. These are uncertain times. So there are a number of folks in this industry that don't want to cope with all the hassles of the economy, etc. They are more interested in just doing quality patient care, and we welcome those people to contact us, and so we can bring them into the Hanger family. And we believe there is a number of direct and indirect benefits to their being in the family, as well as we do provide an exit strategy for those that don't want to be in the ownership side of the business.

So full pipeline, working with people. We haven't seen any significant change in valuation. What we like to say is it's been -- historically, we have looked at 4.5 to 5.5 times. We've made that statement public. But it really comes down to the independent situation, just what is the value short- and long-term of each of the companies that we look at. And so those valuations could be lower if required, or if we believe there is great strategic value, they could actually be a bit higher. So we haven't seen anything to take us off stride in terms of either the valuation or the volume of potential candidates. And believe that that is going to hold for the next couple of years, too.

Tom, let me just get a clarification. You said something earlier that seemed to indicate that you were on pace to meet your acquisition goals for 2009. If I do the math, I look at three press releases that essentially add up to about $24.9 million in annualized revenue. So by my calculations really, the way I am thinking about what you said there, that means you already surpassed that goal or you guys think about this in a different way?

Perhaps -- I mean, I'm thinking of one that we made right after the first quarter ended, and that was worth about $5.3 million. And then we've recently made one at $10.7 million.

Okay. There was an $8.9 million annualized released in early January --.

That was referring to (multiple speakers) calendar year '08, when those were actually executed.

Okay, I see.

But kind of the way to think about that, there is always the spillover effect when you compare one year to the other. But we always look at what was the date that they were executed and what are their annualized sales, not realized sales. So we target for about $20 million of annualized sales during the 12-month period.

Okay. So I guess by your calculation, we are probably going to have maybe one more really somewhere before the end of the year then?

Sure, one or a couple -- in combination with a couple of small ones. And just as we showed last year, I think last year we were up around 22 or 23. That doesn't bother us at all. But that is the sweet spot for us, easily managed, certainly from an integration perspective, and also managed well on our balance sheet.

Got you. In terms of the Linkia growth, is that all from existing contracts or have you guys actually signed any new ones in the past several months? Or is that just all organic growth and better penetration?

It is a combination of both. We haven't signed any big new ones, like some of the large regionals or the nationals that we've reported to you on a historic basis. But we continue to sign smaller contracts, as well as -- that's what we mean the validation of the value proposition. The payors like the service that they receive, so they are picking up incremental or organic growth. And at the same time, we are also picking up a little bit of price increase from some of these folks as we move along. So it is really the combination of all three.

Last question, jumping over to WalkAide, you made a statement 730 claims. All but one that have gone through the whole appeals process have been approved. I don't think that number -- that one is referring to 730. What is the one against? Is that against a couple hundred or --?

Sure. Let me describe what that is. We've put about 730 of them into the process. We've received more claims than that, but some of them we pushed back because the documentation is not complete or someone hasn't attached the doctor's certificate. So we are excluding those.

But of the 730, roughly, that we've put into the system, when we talk about putting them in the system means we submit the claim. Sometimes that claim -- most often that claim is rejected. So we will appeal it as many as three times, taking it all the way through the appeal process. And really the appeal process in our mind is really an education process, of trying to explain to, beginning with an insurance administrator, then case manager, then all the way up to the chief medical officer, if need be, what the value of that device is on that specific patient.

We have -- by going through that process, we have been able to get about 170 of those approved for payments, and only one has been disapproved. And the other, if you do the math, are still in that appeal process. And that can take as long as six or seven months, to have two or three appeals and to string it out.

I think the lesson learned and what I was trying to point out is that these are the third-party payors. We've been receiving payments from all of the third-party payors across all of the various patient indications. And I think that in itself is a validation of the efficacy of the device and the kind of benefit that it can bring to the various patient populations. And the insurance companies are beginning to realize that.

As we've seen with the microprocessor knees, it takes time. They just don't roll over and say, okay, since we've approved one, they are all approved. They will continue to make us demonstrate the efficacy of the device on their specific patient. So it is a one by one. But the good news is ever since having that noncoverage decision overturned last year, we are now having conversations with these folks, and we are now getting paid.

So I think it is taking some time. We will build our way through it. We are putting more resources on that reimbursement desk, because, as you could imagine, as the number of claims goes up and we have to go through two or three iterations here, it is very time-consuming. But it is well worth the effort, because we are really becoming advocates to our patients and demonstrating that across all of the indications there is value in the device.

And I'll wrap up and let somebody else ask questions, but are you noticing now after you've gotten a couple, two, three approvals with an insurer, that it is at least getting somewhat easier or somewhat quicker to get decisions? Or is it basically every time is like the first time, trying to fight through the appeal process and all the rest?

It is a little bit of both. What we have seen is there is a process, so we haven't seen it pick up or reduce in terms of the number of days. But the easier part is the fact that they now understand the device, and they know the benefit it has.

Where we still have to spend the time is looking at all of the patient's specific indications in making the association that the device will work on that patient. But clearly, at least 50% of the problem through this education process is better understood.

Okay. All right, great. Thank you.

Scott Freeman, Avondale Partners.

Good morning. Thank you. Just a follow-up question on the WalkAide. Most of my other questions were answered. I guess you guys were looking for $10 million in WalkAide revenues for the second half of the year -- for the full year. Is that still a good number? Or I guess it kind of looks like you're going to have a big fourth quarter.

Yes, I think it is unrealistic at this point that we would get to that full 10. As we reported, our third quarter this year is better than our third quarter last year. But I think that the weak performance that we had in the first half of the year is going to prevent us from getting up to the 10.

I think we are going to be more in the seven to eight range overall, as we look at the quarter today, and continuing to build strength into next year.

I guess one follow-up to that is with these 730 claims submitted, are you receiving payment from the patient itself beforehand and then you will reimburse the patient later? How do you guys recognize revenue on the WalkAide claims that are being submitted?

In terms of the payment, we are filing the claim for the patient. So we are getting the reimbursement directly from the insurance companies.

Okay. Thank you.

Larry Solow, CJS Securities.

A couple follow-ups. George, on the capital expenditures, it looks like they've kind of re-accelerated after a slowdown in the first half of the year. Would -- we should expect this trend to sort of continue? And would that sort of drive D&A back up a little bit after it has sort of come down a little over the last few quarters?

We expect the full year to be probably about $19 million, and that shouldn't have a dramatic effect on D&A.

Okay. So D&A sort of in the same ballpark, $4 million run rate per quarter?

Yes, around (multiple speakers).

Got it. And it was nice to see you -- you paid down your revolver using your cash flow from operations, which is very strong. Any other opportunities to pay down further debt, or would it likely be more focused on acquisitions going forward?

Right now, we think the best course of action for the Company is to hold on to the cash, maintain our liquidity and be ready for any opportunities, be it that O&P acquisition or another opportunity going forward. And we will reevaluate that periodically. But right now, we are going to hold on to our cash.

Got it. And just that -- you said that your debt to EBITDA was at just above 3, right? 3.02 or 3.2?

3.02 (multiple speakers) net cash.

Got it.

Or net debt, rather. I'm sorry.

Right. On a trailing 12 month, got it. Great. Thanks, George.

(Operator Instructions) [Steve Anderson, Vintor Capital Management.]

Good morning. I guess this is more of a question for George, in referral to the last question. Actually, it's (inaudible) a follow-up. But you guys have some [10.25] debt, $175 million, and the next call date is June 1, 2010. Have you guys considered trying to roll that or possibly paying that down? That is a pretty extreme interest rate for your style company and profile company.

Well, I guess we've considered it, but the Term B does prevent us from paying down the bonds unless we got an amendment. And the amendment and the tender that we would have to do would be pretty expensive, since we are trading at [105], [106].

Sorry, but on the call date, your call option is at [105]. Am I correct there?

Oh, you are talking about waiting until June of next year?

Yes, wait until June next year. Is that something that you guys are exploring at this point? You are saving over $78 million in cash. You are paying 10.25 on that; even if you roll it to 7, you save $0.11 in earnings, right, after tax?

Not sure I agree with your calculation, but the -- because we would have the increase in interest. We can't just call the bonds because the Term B obligation requires us to pay the Term B first.

Oh, the Term B is -- yes, that's right. How much is the Term B?

How much is the Term B? It is $225 million.

So you got to pay that down first before you can pay down the 175, is that the way it works?

That's correct, once we got an amendment.

And can you pay them in -- kind of in equal ratios or not?

We have to pay the Term B first.

100%, okay. Okay, great. Thank you very much.

There are no further questions at this time.

Well, thank you all. It was a pleasure to be with you this morning. And we will focus on Q4, and we will be having our next call probably in February. So enjoy the holidays and look forward to speaking with you early next year. Thank you.

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