Hanger Inc (HNGR) 2011 Q4 法說會逐字稿

Good morning. My name is Steve and I will be your conference operator today. At this time I would like to welcome everyone to the Hanger Orthopedic Group fourth-quarter and end of year 2011 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I will now turn the call over to Tom Kirk, CEO of Hanger.

Thank you, Steve. Good morning to all of you and welcome to Hanger's discussion of our fourth-quarter results. By the way, as a result of our new branding initiative Hanger Orthopedic Group will now be referred to as Hanger and Hanger Prosthetics and Orthotics will now be referred to as Hanger Clinic so you'll hear those terms in place of the ones that we have been using for decades.

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

Thank you, Tom. During this call the 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 relating to future results of operations during this call reflect the views of management. However, various risks and uncertainties, contingencies could cause actual results or performance to differ materially from those expressed in or implied by these statements. These include but are not limited to the Company's ability to enter into and derive benefits from managed care contracts, the demands for the Company's products and services and other factors identified in the Company's periodic reports on Form 10-K, 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.

Thanks, Tom. Overall the quarter contained several noteworthy points. Despite a difficult operating environment, we met our fourth-quarter guidance with consolidated sales growth of 9.5% over the fourth quarter of last year. This sales performance combined with effective cost management yielded an adjusted EPS of $0.54 per share. This is an increase of 3.8% compared to the $0.52 in the fourth quarter of last year.

Our operating cash flow for the quarter increased 46% contributing to a strong cash flow for the year of almost $62 million. This cash flow fully funded our CapEx needs for the year as well as the cash portion of our Patient Care Center acquisitions and it enabled us to strengthen our financial position at the end of 2011 compared with the end of 2010.

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

Thank you, Tom. Good morning, everyone. Thank you for joining us today. I will address my comments to the quarter and the year on the P&L first and move on to the balance sheet and the cash flow and then finally guidance.

Q4 was a strong quarter for Hanger. We increased sales and earnings against strong comps in 2010, meeting Street expectations and announced guidance for solid growth in 2012. The important takeaways are as follows -- adjusted EPS for the quarter excluding one-time tax benefits of $0.04 this year and $0.06 in 2010 was $0.50, representing 8.7% growth over the prior year mark of $0.46. These results are in line with Street consensus estimates.

Overall sales increased by 9.5% or $22 million to $248 million for the quarter which was $1 million above our revised guidance. Patient Care made up $5 million of the increase with a 2.2% increase in same center sales which was impressive when you consider that the Company was performing against strong 6.2% comps that we generated in 2010.

Acquisitions accounted for $6 million of the increase and the balance was contributed by ACP, which was in our results for the full quarter in 2011. Our Distribution segment reported a 3.9% increase. Therapeutic Services contributed a $10 million increase in sales and ACP accounted for this increase. Their revenues were flat year over year during the quarter on a pro forma basis but, remember, we only owned them for one month in 2010.

You should remember this is a run rate business and as we move on to guidance we expect ACP to grow quarter over quarter throughout 2012 and year over year by the time we get to the fourth quarter. So we believe they are moving in the right direction.

Our [COM] rate was 28.9% for the quarter which was 1% below last year due to a positive book to physical adjustment and the impact of ACP. Personnel costs were lower than we expected as we had a good quarter in terms of medical claims and our payroll taxes were seasonally lower, as more employees hit the [FICO] limits. Adjusted EBITDA leverage increased by 60 basis points in Q4. ACP was responsible for the increase. Our core business margins declined in part due to about $1 million related to a combination of increased bad debt expense related to the pilot businesses that we identified in Q3 and a higher-than-expected incentive compensation calculation for our practitioners.

We made substantial progress during the quarter in improving billings and collections in that pilot business and we expect to have this business operating efficiently by the end of second quarter, which was the outlook we gave you when we spoke about it last quarter.

D&A increased by $2.5 million compared to 2010, principally due to the acquisition of ACP.

Moving on to the year. Consolidated sales increased by 12.4% for the year, comp sales in our core Patient Care segment increased by 2.6%, which is just below our expected range. Our Distribution segment reported a 5.1% increase. Therapeutic Services including the new ACP acquisition contributed $57.4 million increase in sales. For the full year, ACP was up 10.5% on a pro forma basis compared to 2010.

Our COM rate of 29.1% was 1.2% below last year due to both that positive book to [physical] adjustment and the impact of ACP. When you combine our 12.4% sales growth and effective expense control we were able to leverage our sales growth into 22.8% growth in adjusted EBITDA and a 140 basis point improvement in EBITDA margin. ACP added 120 basis points of that increase and our core business added 20 basis points.

D&A increased by $12.2 million compared to 2010, principally due to the acquisition of ACP. Adjusted EPS excluding one-time tax benefits of $0.05 for the year and $0.06 for all of 2010 was $1.59, which represents 16.9% growth compared to the prior year results of $1.36. These results are in line with Street estimates.

Moving onto the balance sheet and the cash flow. Our AR balance was $138.8 million. DSOs were 54 days which is slightly higher than last year. This increase was due principally to a combination of O&P acquisitions and the collection issues at the pilot business that I discussed previously.

Inventory increased by $15.8 million to $114.1 million at year end and that's compared to $98.3 million at the end of 2010. The increase was principally at our Distribution segment and due to the same acquisitions I mentioned a second ago. Inventory turns were slightly slower than a year ago. CapEx was $6.4 million for the quarter compared to $10.9 million in 2010. That is a $4.5 million decrease for the year, capital additions were $28.1 million compared to $30.6 million last year, a decrease of $2.5 million.

Cash flow provided from operating activities for the quarter was $24.7 million, that's a $7.9 million increase compared to $16.8 million in the prior year. For the full year cash flow provided from operating activities stands at $61.8 million compared to 60 -- I'm sorry, $54.2 million in 2010. That is an increase of $7.6 million for the year. Free cash flow excluding acquisitions was $33 million for the year which was approximately $7 million less than the midpoint of the guidance we gave you at the end of Q3. The principal reason for this shortfall was we made some late purchasing of inventory in order to take advantage of favorable pricing and we expect that that inventory will get used in the first half of 2012.

Liquidity for the Company is strong. We had total liquidity of $139.5 million and that is comprised of $42.9 million in cash and $96.6 million in availability on our revolver. Total leverage for our bank calculation improved to just under 3 times which was our goal to get to by year end. We were actually at 2.99 times and that is against a covenant of 5 times. So we have made substantial improvement during 2011 in that regard.

Moving onto guidance for 2012. The Company expects full year 2012 revenues of between $970 million and $990 million, resulting from a comparable store sales increase in Patient Care Services and Distribution in the 3% to 5% range. We expect flat to slightly higher revenues in our Therapeutic Services segment for the year with sales in the first half of the year down and then trending up in the second half, and that is compared to the prior year as the rate of new contracts accelerates.

The Company anticipates diluted earnings per share of between $1.72 and $1.79, excluding approximately $2.8 million in one-time pretax costs which are primarily training costs related to the implementation of Janus, the Company's new practice management and billing system. We are going to be building all our training programs in 2012 and then implementing them in 2013 as we begin to roll out. So it is a one-time cost.

This represents EP -- projected EPS growth of between 8.2% and 12.6%, off a base 2011 EPS of $1.59. As in past years the Company's goal is to increase operating margins by 20 to 40 basis points. The Company anticipates generating cash flow from operations of between $70 million and $80 million in 2012 and investing a total of between $40 million and $50 million in capital additions.

Finally, during 2012 the Company will continue its acquisition program with the goal of closing acquisitions that total approximately $20 million in annualized revenues. In 2011, we actually exceeded our goal and closed deals that were worth $28 million in annualized revenues.

That concludes my comments and I am now going to turn the call back over to Tom Kirk, our CEO.

Thanks, George. I will add a little color on the business conditions, drivers, and results from an operations perspective.

Overall, our Patient Care segment sales increased by $10.6 million or 5.4%. Our Patient Care same center sales increased by $4.4 million or 2.2% for the quarter, compared to Q4 in 2010. This is despite of not receiving a fee schedule increase from CMS for 2011 and also we have to keep in mind that we are comparing against some pretty strong comps in 2010.

In addition, some states have been restricting segments of their population from receiving care, due to their budget cuts and/or reducing reimbursement levels. As we well know, our challenge is to find ways to regain those revenues by taking share, offering new products, and helping our patients find alternative sources of funding and we'll talk about those as we progress through the call.

During our last call we discussed two pilots that are in our Patient Care segment and these are delivering care and products in alternative venues. We experienced some process-related growing pains in these businesses last year. After going out and listening to our customers on the positive aspects of their value propositions, we put teams to work on developing process improvements relative to these problems. We began implementing the solutions through a combination of operations, systems, finance, and HR personnel.

We should see improvements over the next three to five months which will permit us to intensify our marketing and sales efforts in these businesses by the end of Q2. One welcome piece of news is that we did receive a 2.4% fee schedule increase for 2012 from CMS. We will see a little less than 1% of this in 2012 with the balance benefiting us in 2013 and 2014 as it rolls through our third-party contracts.

During the quarter, we stressed the programs that help us increase revenues and capture market share. These are the continued improvement in Linkia's book business. Have to remind you again that Hanger Clinic is the primary vehicle for the delivery of a substantial majority of the services under the Linkia contracts. On an overall basis our revenue from the Linkia designated contracts was up 3.9% for the year.

Second point is educating our referral sources on the enhanced lifelike features of our high-performing products, such as our advanced suction suspension systems, microprocessor, prosthetic arms, hands, knees and feet components. For Q4 the revenues from these product lines were up about 14% compared with Q4 of 2010 and about 12% year over year.

Third avenue of increase comes from our patient education clinics in which we call our patients in for an education session on the technology developments as well as their fit and function. This is a good example of outstanding patient care that provides revenue. Revenues from this source provided about $4.2 million for the quarter and almost $20 million for the year.

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

In that regard, we have expanded our Amputee Empowerment program, Peer Mentors, to almost 600 nationwide. And we have almost 3,000 members in our AmputeeEmpowerment.org online networking community. With these two tools we can reach out to new or existing amputees very quickly.

Some patients have difficulty in identifying other sources of assistance on their reimbursement, coinsurance, and co-pay. Our clinicians continue to work with these patients to secure alternative funding including financial assistance.

At the end of Q4 2011, the unemployment rate was down to 8.3% from the 9.1% at the end of Q3 that was in 2011 and 9.7% at the end of Q4 2010. Additional good news is that the rate of job creation was the fastest paced in nine months. Now it will take several months for these new wage earners to enter and fully participate in the health care system but we welcome that piece of good news.

We still have some patients who have been out of work for a sustained period of time, and this imposes a hardship on these patients. We will continue to do everything in our power to help these patients get through this sluggish economy and obtain reimbursement.

On the legislative front we continue to advocate for our patients and for fair regulations. We were successful in having the Federal Parity Bill now referred to as the Insurance Fairness for Amputees Act reintroduced into the Senate and we are continuing to line up sponsors in the House. 20 states have passed state-based parity.

We have also been successful in reintroducing the Medicare Improvement Act into the House and we are close to securing sponsorship in the Senate. It is our goal to have both of these in both Houses by our Policy Forum meeting which will take place in mid- to late April.

We believe that the Medicare Improvement Act can save $250 million over 10 years by reducing or eliminating fraud and abuse. And this certainly is the goal of CMS.

The Veterans Bill of Rights has been introduced into the House and we have been working with the Amputee Coalition, the American Orthotics and Prosthetics Association, the National Association For The Advancement of O&P, the O&P Alliance and member advocate associations such as MS, diabetes, et cetera, to advance these bills and we are gaining traction.

At the state Medicaid level, healthcare providers are facing challenges as these states struggle to balance their budgets. At present, we are working with each date on an individual basis in terms of education, communication, and public relations that support our patients. Here again, we are working very closely with all of the patients, advocacy associations to ensure that they receive the care they deserve. We have had some success in California, Nevada, Minnesota, but Arizona, Texas, and Florida have implemented fee schedule reductions or included -- excuse me -- excluded portions of their population from coverage.

The Amputee Coalition supported by AOPA and Hanger has launched a comprehensive study of patient data to quantitatively document the cost-effectiveness of the services we provide. After completion of this study the results will be married with a strong advocacy program to make certain that the policymakers understand the significance of our findings.

One specific target that we are focusing on is the restoration of coverage for orthotic patients over 21 years of age in Arizona. And we talked about that specific issue during our Q3 call.

Now let's discuss SPS. Their outside sales were up approximately $900,000 or 3.9% compared to the fourth quarter of 2010. Independent O&P providers are still laboring under low patient volumes. However, SPS did line up some new customers near the end of Q4 and these will provide benefits throughout 2012. SPS is seeing continued ramp-up on the ordering software system that we installed during Q3. Their Midwest distribution center continues to grow in volume.

In 2012, SPS in concert with Hanger Clinic is initiating a materials cost reduction program which we are getting started on right now. The SPS SureFit shoe and insert business continues to gain traction with Hanger Clinic practitioners, independent practitioners and podiatrists. They have been promoting their new Scanning Solution as an easier and less expensive way to capture an image compared to old-fashioned crush boxes. For the year to date, their revenues are up about 9% over the same period in 2010, and they have lined up some new business at the end of Q4 which will provide a boost to sales in 2012.

Let's turn to Linkia. They continue to execute their dual mission of building volume while negotiating a fair price for the services and the value they provide to their customers. Their book of business as I mentioned before is up about 3.9% for the year. Linkia continues to advance their two emerging offerings in post-mastectomy services and prosthetic and orthotics claim review and these continue to gain traction. The 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 in the base business as well as these new services.

On the marketing side, they are continuing discussions and negotiations with key national and large regional healthcare management companies for their commercial and state Medicaid book of business as well as the firms in the workmen's comp segment.

Now let's discuss the Therapeutics Solutions segment, which consists of Accelerated Care Plus and Innovative Neurotronics. Sales for this segment were up $10 million compared to Q4 of 2010 due principally to the acquisition of ACP. ACP continues to market their unique value proposition and to emphasize the chemical and technology sides (technical difficulty) offerings.

As we discussed on the last call the skilled nursing facilities experienced a reduction in their reimbursement rates for certain physical therapy services. This came as an edict from CMS at the end of the first quarter. The SNFs are all trying to determine where this could end up and how best to manage their business. ACP has been working very closely with the SNFs in order to customize their product and service offerings to accommodate the SNFs' needs.

In spite of these reimbursement challenges ACP grew their revenues in 2011 by about 10%, and they signed some long-term contracts with several of the SNFs which, obviously, will help us in terms of our revenue generation in 2012 and beyond. Their new service offering combined with these long-term contracts and moving into some alternative venues are expected to have a very positive impact on sales, especially in the second half of 2012. And I might add that ACP was very quick to react in making these changes and modifications in their marketing program and also reviewing their staffing levels to ensure that they were aligned with the revenue generation.

Additionally, the pilots that we launched to determine the best method to capture the synergy between our Patient Care business and ACP have been successful, and we have now moved them into a national rollout and have assigned teams and leadership to those. And we expect to see those certainly contribute to the business revenue cycle in 2012 and well beyond.

Innovative Neurotronics launched their new pediatric FES system with the new WalkAide Pediatric System in a revised version of their original WalkAide with higher reliability and greater simplicity back in Q2. We talked about that. These are both gaining acceptance and traction. They were good introductions into the marketplace.

Two positive independent WalkAide clinical studies, one at NIH and one at Marshfield, were also presented during the quarter involving pediatric patients with CP. Both were successful. And two additional investigator studies are planned for completion in 2012 in MS and CP patients. Now we are continuing to work with the clinical sites to go through the IRB and the contracting process for our pivotal InStride clinical trial.

In total, we are working with 30 institutions which I am happy to say are now all contracted. And through our efforts in working with CMS on protocol, the number of subjects that they now require for our test has been reduced to 496 from over 1,000. We anticipate hitting that level of enrollment in Q2 of this year. The last patients to enter should be complete by early Q4 through that matriculation process and following completion we will analyze the data and submit the CMS in Q4, early Q1 2013 for coverage decision.

At the same time, we continue to work with third-party payers to gain authorizations for our patients. The number of the reimbursement claims open during this quarter increased by 13% compared to Q3 of this year, so the trend is in the right direction. And the number of claims approved increased by 100% compared to Q3 of this year. We continue to see about a 70% success rate.

Finally, a few words on our acquisition program. We completed acquisitions in 2011 which will generate annual revenues of approximately $28 million. So we exceeded our target and at the same time we added some great clinicians to the Hanger family. For 2012 we are guiding to our normal target of $20 million to $22 million of annualized sales for the year. As we have said in the past, our strategy is to look for tuck-in candidates that have strategic value to us in the form of location, quality, favorable practitioners and good product service mix.

In conclusion we operate in a changing and challenging environment and I am proud of what our employees accomplished in 2011 and we all look forward to 2012. We have established a new brand identity which we will offer integrated rehabilitation services to our patients, referral sources and payers. We are making investments in systems, people, and processes that we believe will solidify our position as the provider of choice in the field.

We know there are still challenges out there, but we are working diligently as a team to continue to grow to increase our profits. Thank you.

I will now open up the line for questions. Steve, do you want to take over, please?

(Operator Instructions). Larry Solow from CJS Securities.

Good morning. One thing, just give a little more color maybe dissect a little bit of your [saw your] outlook on the same-store basis. So you slowed to the 2% range the last couple of quarters and I could see if you hold the status quo and add a little bit of price you can get to the 3 but -- percent growth. What kind of gives you some confidence that you can reach that 5% level? Is it just that you're lapping some of the Medicaid cuts and some of the comps get easier or are you actually seeing some underlying improvement in the base business?

And maybe also second thing sort of look at the regions that you discussed last quarter. Your 16 regions and how they fared in Q4 and how they look going forward?

Sure. Be happy to. I think our range of growth is 3% to 5% as we look to the future. Certainly, our acquisition program is one that will help us in our overall growth, it won't be on the same-store sales growth. But with respect to same-store sales growth these marketing programs that we spoke about are gaining traction and are having an impact.

In addition to that, we talked a bit about continued use of our patient education clinics and continued reinforcement of some of the higher tech products that have a greater functionality. We have rolled out a new vacuum suction system this year that our clinicians are much more comfortable with. We didn't see that kind of penetration we expected last year and that is why we went back in and made some modifications with that. The patients love it.

So, when we put all of those things together we think we are going to be able to get that level of growth, sales growth as well as our same-store sales, and we think that the base business is healthy. Obviously it is going through changes on the reimbursement side and we are out there doing the one thing that will matter most, and that is working with our trade associations and helping sponsor the Amputee Coalition Study that really defines the efficacy of what we have done. Preliminary information is very positive so we are expanding that study.

The ability to walk into a state legislator or federal legislator and present this kind of information that there actually is a payoff and there is a cost if you don't do it that (technical difficulties) is invaluable and that is why we have decided to move forward and expand that. We think that that is going to really help us in our advocacy areas and really help us try to get some of these situations out there reversed, because people can look at them and say, you know, this isn't paying off. Here is the evidence. And so we have expanded it to the entire Medicare database and we will have a lot of points. This will be statistically significant when we get the results.

Larry, I would -- keep in mind the situation in Arizona has anniversaried as of October 1. That is in our prior year so we won't be facing that headwind in 2012. Also, we expect to see some sales growth from our ownership of ACP. We have a program that is going live that will benefit Hanger Clinic in terms of sales to the SNFs. So we think all of these things together are going to end up in the price that we get, the price increase we get this year will help us get to that 3% to 5% range.

And just quick by switching gears real fast just on the CapEx. I do remember last quarter you cut your -- and I think originally you had a $40 million outlook for 2011 and I know you cut it last quarter. Could you just refresh my memory on some of the projects I guess you deferred into 2012 or what led to the lower CapEx in 2011 and what, I guess some of the higher expense in 12 is related to the electronic filings of [your pieces].

In 2012 we will have first of all talking about 2011 the Janus project as we call it was -- had some payments that were scheduled to happen late in fourth quarter and it became obvious that that wasn't going to occur exactly as we expected. That was going to occur in the first half of 2012 instead of the last quarter of 2011. And frankly, we held down our CapEx purposely. We saved money wherever we can. That's kind of a normal situation for us.

And finally ACP, their CapEx which was estimated to be $14 million in our original estimates was only about $2.5 million because of the fact that they didn't grow as much as expected. Their CapEx is their cost of materials. Keep that in mind (multiple speakers) in that, also the reason that -- so instead of $2.5 million in 2012 that's about $12 million to $14 million again in 2000 -- I'm sorry, in 2011 that's about a $10 million increase in 2012 and then the Janus project will be about $8 million to $10 million of CapEx in 2012.

Great. Thanks very much.

David McDonald from SunTrust.

Good morning. A few questions. First on ACP. Could you give us some sense of the monthly trends within the quarter and even what January looks like? It sounds like you guys are seeing some reasons for optimism but can you put a little bit of color around that? And then secondly with regards to some of these long-term deals that they have signed can you give a sense of what percentage of their book is now in a multiyear contract as opposed to just 12 months? And then I had a couple of follow-ups.

Sure. Well, what we are saying is you are exactly right is the build in the number of agreements that ACC -- ACP, excuse me, is signing. Some of these are pretty much standard in keeping with what our traditional contracts are like, some other ones are longer-term contracts. And then some other ones, the third category are -- I'd call them customized contracts because perhaps a facility wants to modify its approach to physical therapy, doesn't feel that it needs quite as much training as before or not as frequent. And so we will come up with a modified customized contract for that firm.

We are in double-digit increases of signing new agreements on a monthly basis and we have seen that flow into the month of January. So, as we look at this, we say this is a run rte business, there is interest in the product. There's interest in the service.

We are rolling out the OmniVR. I think we have talked about that in the past. That was delayed and reintroduced at the end of Q3 of last year. So it is really starting to get some traction now. We are putting some special folks on that just to make sure that we get the word out to all the SNFs.

So the combination of longer term contracts, customized contracts and some new technology/products enables us to look into the crystal ball and say, while this appears to be a little bit flat because of some of the changes in the revenue side, as this builds once we get past Q2 and we project out the numbers that is where we start to see some of this build on overall year-to-year revenue. So all three of those things combine to allow us to see that in the crystal ball.

So, Tom, it is fair to say that if I look from September 30 through January 31 the monthly trends were improving sequentially. That is fair, correct?

And you are talking about 2011?

No -- yes, for ACP since the end of third quarter through the end of January of 2012 the monthly trends have been improving.

While we were going through that adjustment period and I would say it would be more appropriate to say that they were flat to slightly increasing, but not to the rate that we see them increasing in the second half of 2012 when that build really takes over. So I think we are in this sort of the doldrums period here of six to nine months so to speak, where there is a readjustment going through that entire industry. And that is what we are slugging through right now but we think it is going to get better based on the trends we see.

Okay. Secondly, on the WalkAide could you just run -- I caught that all the centers are signed up in early 1Q 2013 for data submission. You talked about the number of patients being enrolled, I think, being around 500. And I think the original number was 1,200. Can you just walk us through why they came to that decision, what should we read into that? I would imagine that that's certainly a positive data point. Was it they had seen enough and then didn't need as many patients? Can you just walk us through how that decision was made?

Sure, our [NE] team had several meetings with CMS. CMS had the original view based upon the initial data that was presented that in fact about the 1,100+ patients would be required to reach statistical significance. We ran a number of scenarios which were quantitative analysis and simulations that went back and demonstrated that, given this population with a smaller number and we had projected out half of what they had, we could still get to the level of significance that would be required to demonstrate efficacy. And so they analyzed that data. It took them a while. Then we went back and talked to them again. I think we have actually made three trips there.

And finally they agreed that it would be ridiculous to hold out for the higher number when we could get the same kind of significance, statistical significance with a lower number. Why keep the product sort of abeyance during this entire period when it could be out there providing benefit to people? So they, through their statistical analysis, concurred with what we came up with and they excepted the 496. And so it was really a demonstration through simulation of alternative scenarios based upon the insights of the sample.

Just a couple more questions. First of all on SPS and SureFit, I think you said that both of those had added some customers in the fourth quarter which should help 2012. Can you give us any sense in terms of how material those customer adds were? How much of a tail wind it provides for 2012? Anything around that?

I want to be a little bit careful simply because I don't want to be releasing some competitive information. Suffice to say on the SPS side I think what we said was that their growth was about $900,000, and the magnitude of these new customers would exceed that.

So that's a big boost and it would be material for the SureFit business as well with the customers that they have online and, remember, they are trying to go through different channels right now that that could actually be in double-digit growth all this materials the way we see it now happening. So it would certainly be a boost to both of them.

Okay and then just last question, Tom, you gave some numbers around the growth in the advanced technology products. I was wondering if you could repeat those for both the quarter and for the year?

Sure. I am happy to do that.

14 and up -- was it [14 and 12]? Did I get those numbers right?

You did get those right. It was 14 for the quarter and 12 for the year.

Okay. Thanks very much.

Brian Tanquilut from Jefferies.

Good morning. Congratulations.

Thank you, Brian, good morning to you.

George, just a question on the incentive comp that you alluded to for the quarter. Is that a one-time thing or how should we think about that?

Well, I wouldn't characterize the incentive comp as a one-time thing. The plan for our practitioners has a number of measures that are not tied directly to our financial results. For example, cash receipts is a big component. They collected more cash than we expected in the fourth quarter which is a good thing. It resulted in about a $0.5 million higher accrual than we expected. That -- you can only collect that cash once so we could -- it should be nonrecurring quarter over quarter, but it is kind of inherent in the design of the plan. It is smart for us to have these guys focused on collecting cash.

Okay and then on the AR component of that increase during the quarter. That's something that should go away gradually over the course of this year, right?

Yes. We expect the AR and the pilot business to go down throughout 2012 and we actually expect our working capital needs to be less in 2012 than they were in 2011.

Then, Tom, you talked about SPS and how you've got a material cost reduction program that you are working on. And I was just wondering as we think about George guiding to 20 to 40 basis points of margin improvement for the year, are we factoring in any contributions from that? And what exactly does that entail when you work on trying to improve material sourcing from that side of the business and how it accrues to the clinic business?

Let's start maybe in the reverse order and talk about the program and what it means. We have an extraordinarily high number of SKUs and sometimes when we get down to the individual category, take something like casting tape or certain kinds of prosthetic devices in terms of feet, [tylons], then you look on the orthotics side. What you end up seeing is that there's a huge number of choices out there.

Now a few years ago going back to 2001 we tackled the same beast on a program we called Best Value. So what we really did was list out all of the componentry that we had in inventory and we worked with our clinicians to say which are the most dependable, which are the highest quality, which gives you the best bang for the dollar of cost. That entire analysis was put together and we came down with recommendations which limited choice and we took that out to our practitioners and they could immediately see that participating in this program could provide benefits to them while still continuing to provide good patient care. So the program is very similar.

We are going to go through where we have got an excessive number. We are going to analyze those using clinical input, skinny that number down and obviously this is a blame price game. It is our believe that when we can load volume onto a specific supplier that is going to enable us to get best terms and conditions, and that is what we are going after here. So this is find the ones that are most clinically appropriate, the ones that represent the best bang for the dollar of cost. Load volume onto a fewer number of suppliers and reduce your cost as we go along without jeopardizing patient care. So that is the essence of the program.

This program as you can imagine from that description is more weighted toward the back end part of the year, simply because it is going to take a while to do all that work and get those inputs. But the President of SPS and the President of Hanger Clinic are dedicated to this. I would go so far as to say it is part of their personal objective for this year, is to get this thing done in a manner that respects the patient. So we anticipate that it's going to report and provide benefit to us.

In terms of the second part of your question I think we hedged a little bit because we have a number in mind and we didn't put all of that into the plan. We held back a little bit of a contingency here just to see how this program worked. So I think the fair answer to your question about how much of it is in the margin improvement, there is a part of it, maybe about 50%, 60% that is factored in. But the other part we are looking at, the hard push we could even do better.

George, last question for you. We talked about doing about $20 million worth of revenue acquired this year. Just wondering how much of that is baked into the guidance? You can maybe you can say all or half or something like that if you are not willing to quantify it.

There is roughly $8 million of revenue from new acquisitions baked into our guidance [for service] (multiple speakers).

Okay. Got it. Thank you.

Brian Sekino with Barclays Capital.

Good morning. A follow-up on that last question. George, you mentioned $8 million. Is that representative of the full $20 million getting completed like in the middle to the back half of the year?

Right. If you just do the math, that would say that we are expecting that if we do the full $20 million that more than half will be done in the second half of the year so we will get -- and that is pretty normal for us. We normally get more deals done in the second half as our team lines up the transactions.

So as I look at your guidance, I guess, on cash flow it looks like you are expecting roughly $30 million in free cash and I think, George, in the past you've mentioned you have 50% going to the term debt. So looks like you have got some availability on your revolver. Just wanted to get a sense of your appetite for some more leverage if the acquisition environment continues to stay favorable.

If we are talking about the kind of O&P transactions we have done in the past we have a tremendous appetite for those. They are very good transactions from a standpoint of return and value for our shareholders and I would like to do 40 instead of 20 if we can but we have to be patient to make sure we don't drive the price up too much. And that wouldn't incur a lot of leverage for us. I mean we can probably still do something in that range and not reduce the -- not increase our leverage or operate from a standpoint of our bank agreements.

If you are talking about a bigger deal, we are not really focusing on that right now. We are really focusing on this new system is real important to us. The investments Tom talked about. We are focusing on running the business that we have and improving our profitability.

Thanks. And then, Tom, just a follow-up on your question -- in your comments on the legislation representing, roughly, I guess $250 million of savings. Is there any thought that you could get that attached to like a [doc fix] or something over the next month?

That's -- you are reading our minds. That is exactly where we have gone with that doc fix hanging out there that only had that two months holiday on it. We have proposed this, be part of the overall if you remember of the $1.5 trillion debt reduction program. Try to get it attached to that as a way to reduce the amount necessary for sequestration. Obviously that didn't come off as planned.

There were a lot of changes in that and that is why we did get into sequestration. But as we look at it, the folks that we talked to in Congress are looking for any kind of device that they can see that can save money. So the doc fix is a major expense and this is one that we pitched it to say, let this be part of it. And so, the receptivity has been pretty good on that.

Okay. Great. Thanks a lot.

(Operator Instructions). Mike Petusky from Noble Financial.

Good morning. Few questions. George, could you talk about -- you talked about you took advantage of some favorable pricing inventory. Could you size that up as far as what the purchase was late in the quarter?

We bought about $4 million of inventory to stock up for next year to take advantage of some good pricing that was out there.

Then, jumping over to Linkia. Tom, do you have, or George, do you have the figure for Linkia Q4 versus last year's Q4? I mean was that roughly flat for -- on a comparable basis?

Yes it was. Year over year, we had this 4% increase in but if we just look at Q4 versus Q4 it is relatively flat.

Okay. Did you lose any customers or was there any issue there or was it just one of those things?

I think if you look at the slowdown that occurred across the overall business, it manifests itself within the Linkia contracts as well. We haven't lost any of those contracts and frankly we are in some pretty good negotiations to try and get fee schedule increases for this year and maybe pick up some smaller ones along the way. I just think this was indicative as we are seeing even in the newspaper on a daily basis that people are not going out because of the economic situation and not spending the money that they used to with the doctors and hospitals. And so they are sort of slowing this down. That is why we all were so positive when we saw this new economic news saying, this is great. Now people are going to get back to work, they are going to have insurance coverage and we will see restoration of normal flow.

But Linkia is still solid. We've met with all of the principals of the major health plans that we work with. Very much interested in the program.

And we were up against big comps last year in Linkia as well as the overall Hanger Clinic business.

Okay, all right. Great. And then a clarifying question I guess. You threw me a little bit in the language used, Tom, on Therapeutic Solutions. You said ACP and IN. Does Therapeutic Solutions include domestic Innovative Neurotronics as well?

Yes it does. Yes it does.

Okay. So then essentially that $64 million or so for the year may be only $57 million of it or $58 million of it is actually ACP with the balance being WalkAide. Correct?

The only piece that is reported in through the Innovative Neurotronics is, remember, when for purposes of this segment we treat them as a manufacturer. So they sell that product through several different channels. One, they sell to SPS who resells it; two, they could sell it directly to Hanger Clinic; or three, they could take it through the international channel. All three of those have different price points.

So the only thing that is in the Therapeutic Solutions business is I will call it almost like the wholesale or the discounted price list through those three different channels. The retail piece -- let's look at Hanger Clinic. When Hanger Clinic goes out and fits one of these devices and then bills for it, that revenue reports into Hanger Clinic and so we are just looking at -- naturally part of that comes out in consolidation but when we report the segment we are just looking at what I call the discounted price level that goes into Therapeutic Solutions. So that delta is not quite as big as the numbers that you are having.

Okay, so let me just try and clarify. Sorry for this, but I really do want to understand this for sure. So and I understand this is my number, you guys didn't disclose that the IN number but if I wanted to use the IN number of $7 million, what percentage of that is flowing through Therapeutic Solutions? Roughly?

Probably about 60% (multiple speakers). I am looking at all the channels. Remember they are out in the international world where they are selling at a little different price point so in the neighborhood of 50% to 60% would be in the international -- I mean in the Innovative Neutronics (multiple speakers).

Okay. All right so literally a little bit of this is showing up everywhere?

Yes. Correct.

We sell it through our practices. We sell it through SPS. We sell it internationally.

Okay but you are saying 60 -- whatever number I want to use on that 60% of that flows through Therapeutic Solutions?

50 to 60. You know if we average it, it will change from year to year depending on the weight you assign to each of those three channels.

Okay. And then just one final question around WalkAide. So you guys said, I just want to make sure this is what you're saying. You are saying you will have 496 patients enrolled by the end of Q2 or having been through the trial?

That would be enrolled by the end of Q2. Now that we have all 30 sites contracted it gives us a much bigger map to use in terms of sites, and we can build more quickly. That was the goal all along, was to get these guys up. The last ones to go in will take about six months to matriculate through the process working both arms back and forth, the AFO versus the WalkAide. So we anticipate them -- the last ones coming out in Q4. Probably about the middle of Q4.

Are you saying going into the trial or finishing the trial?

Finishing the trial.

Okay but the 496 is (multiple speakers).

Going in part is Q2 and the coming-out part is Q4.

Okay. All right. Then when you submit the data, I think you said either end of Q4 or early Q1. What would -- and I know you can't pinpoint this. You are not on the CMS side. But I made what would be your expectation for a turnaround on that data decision essentially?

Really tough to estimate but based on the current facts as we know them and just trying to observe the process, it could be nine months. Probably the longest it would be would be 12 months. But if we were able to obtain some sort of expedited treatment may be as short as six months.

Okay. So they don't have to necessarily wait until the following January to give you a decision. They could make a decision earlier than that is what you're saying. It's not --

That's right. It really depends on how much is in the Q and how quickly they decide they want to move. But there's no guarantee time limit nor is there a trigger point on the calendar where they have to respond or have to wait.

Thank you.

David McDonald with SunTrust.

Just had one quick follow-up. On the WalkAide, was wondering if you could give us an update on the private pay side in terms of if you are seeing increased appetite for these folks to actually contract, give you a rate and all this stuff given the high percentage that your winning, if it goes to an arbitration or whatever? I was wondering if you could just give us a quick update there.

Yes, we are. What we're seeing is that the cost of going through all the iteration both on our side and on the insurance company side gets to be an annoyance and a financial burden. And so we are in detailed discussions with one insurance payer right now and what I would call preliminary discussions with some others. Because we are ramping up that volume. We are seeing success.

As I said we are getting about a 70% success rate. So everyone that actually comes out the back end, 70% we are getting authorized versus 30% of being rejected. So I think that is a heck of a hit rate when we look at it. Because we always have to remember that each one of these has to almost stand on -- it has to, has to stand on its own merit of what the patient's condition, what's the medical necessity and so you get a lot of people involved and the costs are pretty high. But we are starting to see some discussions around that.

And, Tom, on the one that you guys it sounds like you are a little further along with, would this payer potentially be a head turner where it's a bellwether name out there where if you were able to get a contract with them, it may create a halo effect with some other folks willing to sign up right behind it?

I think we would get some halo effect but I don't want to mislead you. It is -- if we were to characterize who were the big 4 or something like that it is not one of those but this is certainly a very solid middle bucket kind of company. So I think people would take note.

Thank you.

There are no further questions at this time. I will turn it back over to Tom Kirk for any closing comments.

I would like to thank you all for being good supporters throughout 2011 and as we look to 2012, I think many of these things that we are making investments in, many of the projects that we are working on and many of the process improvements in some of our emerging businesses are going to pay off in a handsome way. And we will get through that work as quickly as possible. And as I mentioned in my remarks, going out and talking to the customers of these businesses we were reassured that the value proposition is one that they are indeed interested in.

So I look at a very strong core base business, very solid, good cash generator in our Hanger Clinic business, SPS always dependable, and I think we have got an array of high potential growth businesses scattered around the perimeter. And the other thing that gets quite exciting and I know I mentioned that but I just want to bring it back again and that is the synergy between ACP and Hanger Clinic. We talked about that when the acquisition went down but our confidence has been reaffirmed in that as a result of two pilots that we launched and so we are going national this year and ramping up. And that is where we can really get some additional leverage on the entire system.

So as we look at 2012 we know there's going to be some challenges but there are some bright spots of excitement out there. We are feeling pretty good about it.

Thank you very much and look forward to talking to you at the end of Q1.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.