Hanger Inc (HNGR) 2013 Q4 法說會逐字稿

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

I would now like to turn the call over to your host, Mr. Russell Allen, Treasurer of Hanger, Inc. You may begin your conference.

Thank you, Melissa. Good morning, everyone, and welcome to Hanger's discussion of our 2013 fourth-quarter and full-year results. Before we start our discussion, I will review with you our declaration of forward-looking statements.

During this call, management will make forward-looking statements related to the Company's results of operations. The United States Private Securities Litigations Reform Act of 1995 provides a safe harbor for certain forward-looking statements. Statements relating to future results of operation during this call reflect the views of management. However, various risks, uncertainties and contingencies could cause actual results to -- or performance to differ material from those expressed or implied by these statements.

These include, but are not limited to, the Company's ability to enter into or derive benefits from managed care contracts; demand for the Company's products and services; the impact of reviews, audits and investigations conducted from time to time by governmental agencies; and other factors identified in the Company's periodic reports on Form 10-K and 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 over to our Chief Executive Officer, Vinit Asar.

Thank you, Russell. Welcome, everyone, and thank you for joining us on our fourth-quarter earnings call. Let me begin by saying that, as a result of our early read on the disappointing Q4 results, we made the decision to pre-release our earnings on January 30th. Following that, for our full earnings release yesterday, we finished the year growing our revenues 7.4% to $1,046,000,000 from $974.4 million last year. For the year, we grew our adjusted diluted earnings per share 8.3% to $1.95 from $1.80 the prior year.

As we reflect on the quarter and the full year, it is safe to say that 2013 proved to be a challenging year for our industry, yet we were able to navigate a fair amount of headwinds successfully at Hanger. We also had some milestones we crossed during the course of the year. We crossed the $1 billion mark in revenues for the first time in our history. We served well over 1 million patients, and we began the national rollout of our Janus Clinic Management System, among other things.

We began the past year with challenges, such as sequestration, followed by a pretty dramatic increase in the number of Medicare audits, both of which had a financial impact on our business. Sequestration caused us to lose $2.7 million in revenues, which fell straight to the bottom line to the tune of almost $0.05 of earnings for the year. The increase in the number of Medicare audits, which spiked in Q2 of the year, began to decrease slightly throughout the remainder of the year. These audits, and the very slow process of appeals to deal with these audits, have had a major impact on the entire O&P industry.

AOPA, the Industry Association for O&P, recently sent a letter appealing to HHS to revisit this process. One of the catalysts in sending this letter was the latest news that there has now been a two-year suspension of new cases being assigned to ALJ hearings because of the lack of funding within the ALJ system. As mentioned in our pre-release, in connection with our fourth-quarter closed process, we became aware of some operational issues at a unit, which is part of our Patient Care segment referred to as Dosteon. Needless to say, we have taken a hard look at this business and put in motion an aggressive plan to rectify the issues that we saw.

I will provide more color on this and the rest of our business as it relates to 2013, as well as the outlook for 2014 later in the call. But first, let me turn the call over to George McHenry, our Chief Financial Officer.

Thank you, Vinit, and good morning, everyone. My analysis of the Q4 results is as follows. Net sales increased by $8.6 million or 3.2%. The Patient Care segment generated a $11.1 million or 4.9% increase. And the Products & Services segment reported a decline of $2.5 million in sales. The Patient Care increase was comprised of $8.3 million in acquisitions and a comparable-store sales increase of $2.8 million, which is a 1.3% increase. As disclosed in the press release, comparable-store sales would have been $2.7 million under the previous classification of bad debts.

Products & Services sales declined by $2.5 million, due principally to the impact of the acquisition of independent O&P companies by the Patient Care segment. Many companies that we have acquired were past customers of SPS. We also continue to see a decline in the purchase of high-end devices by independent O&P providers due to Medicare audit activities.

Adjusted EPS of $0.54 for the quarter was equal to the prior year's results. Adjusted operating leverage decreased by 120 basis points, due principally to increases in material costs and personnel cost. Our com rate of 33.2% was 220 basis points or $6.1 million higher than last year. Principal reasons for the increase were the following. Our Dosteon business had a book-to-physical adjustment in higher com rate in the fourth quarter that, combined, had a $4.6 million or 160 basis point impact. We discovered this increase when we completed the valuation of the 12/31/13 physical inventory in the third week of January. Prior to this discovery, the com rate for both 2011 and 2012 had remained very consistent at just under 30%.

We have determined that the principal reasons for the variance were a combination of the impact of poor collections on sales, which effectively increased the com rate, and efficiencies in the billing process, and a change in the sales mix. We believe that we can reverse the change in the mix of sales, improve collections, and correct the issues we have discovered in the billing process. These issues occurred principally at two of the five Dosteon locations, and a number of fixes are already in place. So it goes without saying that we will watch the performance of this business very closely.

Now let's move on to the clinic cost of materials. Our clinics reported a $1 million net pickup from the book-to-physical, which was completed as recorded in the fourth quarter. The impact of the adjustment related to the WIP was a benefit to labor, and a charge to overhead and material cost, that in total, netted to the $1 million benefit. The year-over-year impact on material costs for the quarter was $3.1 million or 110 basis points. This change in the change in Dosteon together explained the increase in the com rate. You can get a better read on the trends in material costs by looking at our year-to-date results, which I will talk about in a few minutes.

Personnel cost increased by $5.2 million compared to Q4 of 2012. Labor capitalized in the WIP resulted in a $3.7 million benefit to personnel cost. Excluding this benefit, personnel cost increased by $8.9 million. Approximately $4.4 million of the increase was due to acquisitions; $1.3 million was due to annual merit increases; and $2.8 million was due to increased employee benefit costs and payroll-related taxes, with the balance related to additions to our infrastructure that support the growth of our business.

Other operating expense for the quarter decreased by $4 million to $49.9 million in 2013. Bonus expense declined by $6.6 million due to the impact of the Q4 results on the management in general bonus pool. We also reported a $3.5 million in savings in our general liability insurance, professional fees, personal property, and franchise taxes. The remaining $6.1 million increase was comprised principally of a $1.7 million reduction of capitalized cost in our WIP; a $1.2 million increase related to acquisitions; and a $2.9 million increase in bad debt expense, principally at the Dosteon unit Patient Care. Our tax rate was 38% in Q4 compared to 28.8% in 2012, and that rate would be 36.1% if you excluded $2.1 million in nonrecurring benefits that we called out last year.

Moving on to the year's results. On the income statement, net sales increased by $72 million or 7.4% in 2013. Patient Care segment generated a $69.9 million or 8.7% increase. And the Products & Services segment recorded an increase of $2.1 million. The Patient Care increase was comprised of $51.1 million in acquisitions, and a comparable-store sales increase of $18.8 million or 2.4%. Again, that would have been 3.4% under the previous classification of bad debts. Products & Services sales increased $2 million due to a combination of a $9.4 million increase in sales of ACP, fueled in part by a large equipment sale in the third quarter, offset by a $7.4 million sales decline in our distribution business, due to the impact of -- again, of acquisitions of O&P companies by the Patient Care segment, as well as a decline in purchase of high-end devices by the independent providers who purchased from SBS.

Adjusted EPS of $1.95 represents 8.3% growth compared to $1.80 in 2012. Adjusted operating leverage decreased by 40 basis points, due principally to increased personnel costs. Our com rate of 30.5% was 10 basis points or $1 million higher than last year. If you exclude the $5 million increase in com caused by the Dosteon business for the full year, the cost of materials in the rest of our business improved by $4.4 million or 40 basis points. And that is despite the approximate $3 million impact of sequestration on sales, which would have reduced the com rate by a further 10 basis points. So, com was going down in the rest of our business.

Personnel cost increased by $34.4 million compared to 2012. Labor capitalized in the WIP resulted in a $1.6 million benefit to personnel cost. Therefore, the personnel cost increased by $36 million excluding that change. Approximately $21.5 million of the change was due to acquisitions; $5.2 million was due to annual merit increases; $6.1 million was due to increased employee benefit and payroll-related taxes. The remaining $3.2 million increase is due principally to additions to our infrastructure to support the overall growth in our business.

Other operating expense for the year increased by $7.4 million to $186.3 million in 2013. Bonus expense again decreased by $6.3 million, and we realized $4.7 million in savings in general liability insurance, personal property and franchise taxes. The remaining $18.4 million increase was attributable to $6.5 million related to acquisitions, $3.3 million due to increased rent, a $4.1 million increase in bad debts, a $1.7 million increase in professional fees, a $1.9 million reduction in overhead capitalized into WIP, and then the balance was principally increased cost associated with our growth.

D&A increased by $2.8 million compared to 2012, due principally to a combination of the impact of acquisitions and a slightly higher rate of capital additions. Our tax rate for the full year were 36.9% compared to 35.1% in 2012. And again, that rate would have been 37.2% if you excluded that same $2 million nonrecurring benefit. Our core rate for the year is 37.1% and that's down from 37.4% in 2012.

Moving on to the balance sheet, our net AR balance was $185.8 million at December 31. DSOs were 65 days, which is a five-day increase compared to Q4 of 2012. Total receivables related to Medicare audits -- that's RAC, prepaid and cert audits -- increased by $11.3 million to $15.2 million. $13.2 million of that balance was over 120 days old. And that's compared to $3.9 million at the end of last year. And the entire balance at that point was over 120 days old. If you eliminate Medicare audits from the calculation of DSOs, DSOs were 60 days in 2013, compared to 59 in 2012. Our success rate on appeals of Medicare audits remains at 90%.

Reserves for disallowed sales were $20.6 million in 2013, and that's compared to $13.9 million at the end of 2012. We have reserve for bad debts as well, which was $10 million at 12/31/13 compared to $7.4 million at the end of prior-year. We believe the combined $9.2 million increase in these two reserves during 2013 is appropriate when you consider the growth in receivables overall in our aging, which shows an increase in AR over 120 days old, which is fueled in part by the Medicare audits that I just talked about. We will be adding additional disclosures about the activity of these two separate reserves when we file our 10-K to make sure everybody understands the activity for each period.

Inventory was $141.5 million at the end of December. Inventory turns were 4.9 times, which is about three-quarters of a turn faster than last year, when we reported 4.2 times. CapEx was $11 million for the quarter compared to $8.3 million in 2012. That's a $2.7 million increase. For the year, CapEx was $38.4 million; that's compared to $33.2 million in 2012, an increase of $5.2 million. The increase in both periods is due principally to expenditures related to the rollout of the Janus project.

Cash flow provided from operating activities for the quarter was $19.7 million. That's a $2.6 million decrease compared to 2012. For the year, cash flow provided by operating activities increased by $7 million to $88.3 million compared to $81.3 million in 2012. If we factored out the $11.4 million increase in the Medicare audit receivables on working capital, cash flow from operations for the full year would have increased by over $18 million. So our cash flow remains very strong.

Moving on to liquidity. The Company, at the end of Q4, had total liquidity of $181.3 million, comprised of $9.9 million in cash and $171.4 million in availability on the revolver. Hanger has paid down debt over $50 million in 2013. Total leverage for our bank calculation remains at 2.5 times, which is well below the covenant of four times.

Moving on to guidance for 2014, we expect 2014 revenues of between $1,110,000,000 and $1,130,000,000, resulting from a 3% to 5% same-center sales growth in our Patient Care segment and a slight decline in Product & Services segment sales. We anticipate adjusted diluted earnings per share to rise to a range of between $2.10 and $2.20, which represents between an 8% and 13% increase, excluding approximately $0.05 for training and implementation costs related to the Janus rollout. The earnings growth includes an $11 million or $0.19 per diluted share investment we are making in our back office operations, including centralization of our billing and processing activities, and improvements in our finance, accounting, and information technology functions.

The most significant investment is in a project called Revenue Cycle Management, which will redirect all cash to central lockboxes, convert our payers to electronic invoicing and payment, automate posting of receipts, and give us much more ability to analyze our relationship with payers and improve our realization on claims. We will be investing in the infrastructure and headcount upfront, and expect to start seeing savings from this project beginning in the fourth quarter of 2014.

We are also making investments in our Financial Reporting group, embedding a Finance Group in our clinics, and have allocated funds in 2014 to develop an ERP strategy for the Company. Finally, we are investing in our IT infrastructure and software to support our growth. Given the significant investments that the Company is making in 2014 in improving its operations, our goal in 2014 is to maintain our margins at the same level as 2013. We expect to generate cash flow from operations of between $90 million and $100 million, and will invest between $40 million and $50 million in capital additions.

In the month of January 2014, we acquired O&P practices with annualized sales of approximately $20 million. In view of this level of acquisitions in January, our goal for 2014 is to acquire between $35 million and $45 million of O&P annualized revenue.

That concludes my comments. And I'm now turning the call over to Vinit Asar, our President and Chief Executive Officer.

Thank you, George. Let me start off by providing more color on 2013. Beginning with our Patient Care segment, we grew our revenues almost 5% to $238 million in the fourth quarter, and almost 9% to $873 million for the full-year 2013. The impact of sequestration, which was approximately $2.7 million, began in Q2 of 2013. We expect sequestration to continue to impact our year-over-year comparison in Q1 of 2014, after which we lap the event going forward.

Our core O&P business remains strong despite the headwinds of Medicare audits and the increasingly delayed appeals process. We ended the year with a same-store sales number of 1.3% for Q4 and 2.4% for the full-year. Embedded in these two numbers was the impact of a reclassification of certain bad debts up to the sales line. This reclass had no impact on earnings but reduced the net sales line. Under the previous classification, the Q4 number was 2.7% for Q4 and 3.4% for the year.

Another driver to our growth in the Patient Care segment is acquisitions. As George also mentioned, I am pleased to report that we closed 2013 with approximately $20 million in annualized revenues for the year. Having said that, as I mentioned throughout 2013, our pipeline for acquisition had remained strong. And now, in 2014, we have already closed acquisitions with approximately $20 million of annualized revenues. 2013 also saw two of our major operational initiatives within the segment get underway.

Firstly, I'm pleased to report that Janus, our new Clinic Management project, continues to roll out nationally. At the current time, we have almost 70 sites that are live on Janus, and we expect to have almost 300 sites live by the end of the year. We believe that Janus will allow us to more effectively embrace the Electronic Health Records environment, and also provide more efficiencies and transparency in our Revenue Cycle Management processes. As a reminder, this is a multiyear $35 million investment in our infrastructure that will continue to strengthen our process and systems capabilities.

Our other major initiative in the Patient Care segment is our Materials Management initiative, which began early in 2013, and we expect to continue to roll out in 2014. This initiative has now enabled us to have strategic conversations with our supplier community about balancing clinical efficacy of their products with the appropriate pricing and volume agreements with us. As a result of this initiative, we have seen a more focused approach by our clinicians to use products that have that appropriate balance. We now have products that are officially part of the program, and are seeing increased usage compared to products that are not on the program. In 2013, we saw savings of almost $5 million in our material costs that allowed us to better manage the impact of sequestration, and prepare for a more efficient cost of materials number going forward as a result of this initiative.

Now let me spend a few minutes on the issues we referred to in our pre-release that occurred in our non-clinic unit within the Patient Care segment. This is our Dosteon unit, and is a relatively small unit that supplements our Hanger Clinic business by focusing on post-injury, post-operative products and services for physician offices, urgent care facilities, surgery centers, and hospitals. The business includes the sale of orthopedic software, custom bracing, and the rental of rehabilitation equipment to patients.

Let me begin by saying that the magnitude of issues we faced in Q4 related to this unit caught us by surprise, and is not something we want to see occur again. George touched on the issues already, but from my perspective, this is not a long-term issue. From an operational perspective, I believe that the investigation we conducted on the issue and the subsequent action plans already in place by leaders within this unit should get this operation back on track by the end of Q2.

I also want to be clear that we understand the difference between efforts and results. And by that I mean, despite all the efforts on these corrective actions within Dosteon, if we do not see significant progress and improve results during Q2, we plan on taking additional action at that time to ensure that any lingering issues do not drag on. We have learned from these issues and will grow stronger as a result.

Let me now switch gears and talk a little bit about the Medicare audit environment. As a reminder, I think it's important to note that Medicare audits come in many forms -- RAC audits being one of them that appeared to spike heavily in 2013. Our position at Hanger has stayed the same, in that we appeal virtually all audits through multiple levels of appeals because of our approximately 90% success rate at final adjudication. When we aggregate all the Medicare audits that occur in general for us, post-payment RAC and prepayment audits, we saw the overall number of new audits slow down in Q4 compared to Q3.

During our Q3 conference call, I referenced a slowdown in the appeals process at the administrative law judge level because of the severe backlog at that time. Over the last few weeks, the healthcare community -- sorry -- the healthcare provider community was disappointed to see a letter from the Department of Health and Human Services that announced the temporary suspension of the assignment of new cases to ALJ's for hearings for at least 24 months. HHS states in that letter that the number of weekly notices for appeals grew from 1250 per week in January 2012 to 15,000 per week at the end of December 2013.

As you can imagine, our Industry Association as well as other provider associations have taken this issue very seriously, and have sent letters back to HHS expressing concerns. We will continue to monitor and assist the Association as needed in helping to resolve the situation.

For my final comment on Patient Care, I want to touch on the continuing progress that our team at Linkia is making. Very recently, we signed an agreement with United Healthcare. Linkia will become UHC's strategic provider for orthotic and prosthetic services with the goal of optimizing savings for UHC by targeting their out-of-network services. This agreement will also allow a streamlining of UHC's local O&P network over time. As mentioned before, this is yet another example of Linkia demonstrating our O&P network value proposition to payers.

Let me switch gears and talk about our Products & Services segment. First of all, it's important to note that all the environment issues around Medicare audits and sequestration also had a significant adverse impact on the independent O&P clinics, which are predominantly the customers for SBS unit within the segment. Per a letter that our Association sent to HHS recently to highlight the adverse impact that the suspensions of these appeals process is having, it was pointed out that 100 independent O&P clinics have gone out of business. Certainly, this is unfortunate for those businesses and for the patients that count on them for treatment, but it also illustrates the struggles that SPS's customers have had on an ongoing basis.

For Q4 and the full-year 2013, the Products & Services segment was relatively flat. When you analyze the results in this segment, it comes down to the O&P environment we have talked about already for the independents, combined with the continued acquisition of SPS customers by the Patient Care segment. All this partially offset by the one-time sale that occurred in Q3, along with the relative stabilization of the ACP business.

Now let me update you on the WalkAide. Earlier this morning, we put out a press release announcing the results of our INSTRIDE clinical trial and the status of WalkAide. We were pleased to be able to have the trial accepted for publication and submit the data to CMS as part of our approval process. While we remain guarded about the opportunity, given the reimbursement environment, we are pleased to be in the position of having submitted peer-reviewed data for a 495-patient trial to CMS for reimbursement consideration for stroke patients. I should mention that, during the last few weeks, we have been monitoring the publication of the trial results on a daily basis, so we could share this information with you. And we finally got the notification early this morning that it had been published. We are glad that it is out there now.

Now let's spend some time on 2014. Overall, we're looking at 2014 as a year that allows us to continue to grow our top-line and bottom-line for the guidance that George laid out, and simultaneously make some key investments in our infrastructure. As mentioned, we expect 6% to 8% total revenue growth; 3% to 5% same-store growth in our Patient Care segment; and an 8% to 13% growth in our adjusted diluted EPS for 2014. While we do not give quarterly guidance, I want to mention that we are dealing with three particular issues in Q1 of this year -- the last quarter of sequestration that begins to lap in April; the stabilization of Dosteon; and then we're keeping a watchful on the current adverse weather patterns that do affect patient flow.

Our core O&P business remains strong, and the demographics that have allowed us to grow in the recent past continue to remain very relevant. While we do anticipate continued pressure from Medicare audits and the slow appeals process, we believe the strength of our fundamentals and our people will help us navigate the year well. Our projected same-store growth of 3% to 5%, combined with a slightly higher acquisition outlook of between $35 million and $45 million, reinforces our confidence in our core business.

Our Products & Services segment will be slightly declining, given the continued regulatory and reimbursement pressures in the O&P industry, combined with the continued acquisition activity within our Patient Care segment. In addition, we will be up against the one-time sale in the segment that occurred in Q3 of 2013 that will not repeat.

Overall, in 2014, we are making a significant investment in some of our back office operations that will assist us as we continue to grow. As a growth-oriented company, we believe that now is the time to be investing in finance, accounting, IT, and Revenue Cycle Management, and that these investments will position us to successfully continue to generate profitable growth in the coming years.

Let me summarize my longer-than-normal prepared remarks by saying that, while 2013 was challenging for us, I believe we weathered quite a few of these challenges well during the year. Our Q4 results, impacted by the Dosteon business, were disappointing, but we have a plan to address the issues that drove the miss. We also have the conviction to address the issue more definitively if we don't see adequate positive progress by the end of Q2 this year. As we enter 2014, we remain confident in our plan to drive continued growth while making necessary investments in our infrastructure at the same time. We believe that our core business remains strong and will only get stronger as Janus, how Materials Management initiatives, and other investments we are making to drive efficiencies, continue to take hold and provide value for our shareholders.

This concludes my prepared remarks. Operator, please, can you open the call for questions?

(Operator Instructions) Dave MacDonald, SunTrust.

Had a couple of questions. First, can you be a little more specific when you talked about fixes have been put in place at Dosteon? Can you give us a little bit more detail specifically on what's been done on both the AR and the inventory side? I assume you guys will be doing more frequent physical checks? Or -- you know, just a little bit of detail there.

Well, first of all, on the AR, we've moved the collections -- you know, this is pretty much confined to two of the five units that we have within that business. And we've moved our collections to different areas of the country in different units, and have already seen improvement in collections as a result of that. And we've only done that in the last few weeks.

The other thing is, on the com issue, we will do multiple inventories this year to make sure that we don't get surprised. We'll do three inventories instead of one. And we also believe that changes that we have made in the process, as we saw some things that indicated there were some holes in the process of replenishing these clauses, and getting the billing information, we believe that will be effective. But the inventories will be the doublecheck on that to make sure that those process changes are being effective.

Okay. And then, guys, could (multiple speakers) --

Dave, one other thing that --

Yes.

-- caused the issues in the fourth quarter was the mix between our rental business and our closet business. And the sales team is certainly focused on getting that rental business back on track and back growing, which will help the overall com rate.

Okay. And then, guys, can you provide a little bit more detail on UNH? I assume this was a national agreement. When did it start? How big an opportunity -- just any additional detail you can give on that.

Sure, Dave. Yes, it's UHC, United Healthcare. And we signed it very late last year. We expect -- as UHC internally addresses their constituents, we expect that to take hold during the year in 2014. Now, because this is an agreement between us and UHC, we won't provide color in terms of the whole dollar opportunity. But it is baked into our guidance for 2014, and we're very excited about it.

Okay. But then is it safe to assume that it's going to take at least a couple of quarters before this is at full run rate? I mean, I assume if you signed it late last year, it will take a little bit of time to ramp up. So, when we think about the 2015 opportunity relative to 2014, I would assume it's more significant, just because you're on a higher run rate exiting 2014? Is that fair?

I think that's exactly the way to look at it. It will probably take the full-year this year to get everything sorted out, and make sure the communications go out and the provider network is streamlined.

Okay. And then, guys, just two other areas I'd like a little bit more detail, one on the acquisitions. Can you give us a sense of how many locations? Were there any chunky ones in there?

Secondly, on the WalkAide, I know it's been a while since you guys have commented on potential timing after it was submitted, but should roughly 12 months be ballpark what we are thinking about before we'd probably get some type of answer one way or the other out of CMS?

Yes, Dave. I'll start with the acquisition question. The $20 million that we did in January was -- two-thirds of that was across two acquisitions. We had two smaller acquisitions. In total, it was about 18 offices we added to our group, and over 150 employees. This happened mid-January, so we'll get the benefit from that for the year. Now, as we mentioned in the past, often when we initially acquire these operations, they start off dragging margins down, as we start integrating and we have some charges associated with that. And we integrate their procurement, and their backup software is just to get the synergies we're looking for.

Okay. And Dave, with regards to the acquisitions, as you can imagine, these are acquisitions we've worked on throughout 2013, and they just spilled over into 2014. So just -- it goes back to my comment that, last year, the pipeline was strong and it remains strong right now.

With regards to the -- your question on WalkAide, it's difficult to really say how long it will take for CMS to process all of this in the current environment. In the past, it would have taken nine months to a year; but given all the slowdown that we are seeing across different government entities, we'll just kind of watch and wait. And we'll keep you updated with anything we do find out.

Okay, thanks. That's helpful, guys. One last question. Vinit, in terms of the first quarter, you called out Dosteon, weather and sequestration. I guess two other things I'd want to ask -- one, I would assume, as you just touched on, the acquisitions are a bit of a drag, and become more profitable as you move throughout the year. And is it also safe to assume that the investment spend is front-end loaded, so those are also things to think about in 1Q? Is that fair?

That's exactly right. The investment spend is front-end-loaded, and we'll only start seeing some of the efficiencies in those investments toward the fourth quarter or early in 2015. So you're absolutely right.

Okay. Thanks very much, guys.

Thanks, David.

Thanks, Dave.

Brian Tanquilut, Jefferies.

Hey, good morning, guys, and congrats on finally getting WalkAide done. First question, yes, just to piggyback on David's question -- George, do you mind just walking us through your views on seasonality this year? Usually Q1 is weak, and Q3 is your -- Q3 and Q4 are your strong quarters. But given the investments and when you think you're going to realize the benefits from that, how should we think about the way your quarters shake out this year?

Well, this year, given the weather patterns we are seeing, it's -- I guess we got another Northeastern going up the Coast. And the investments we're making in Revenue Cycle Management, the other things we talked about, we think we'd be doing an excellent job to be flat or slightly down from a EPS standpoint in the first quarter.

It doesn't affect our view of the guidance for the entire year, obviously, but it's going to be skewed a little bit more towards the next three quarters. And we would expect to see kind of our normal seasonality in those three quarters, with fourth-quarter being our best, and second and third being pretty much comparable to each other.

Okay. And then, Vinit, you touched on the purchasing initiatives and how you are seeing some benefits from that already. So where you sit today, what inning do you think we are in, in terms of realizing the benefits from the rationalization of the SKUs in your CAM line?

Sure. I'd say we are about 50% at a ballpark, halfway through the product portfolio to look at in terms of which SKUs are rationalizing. And I'd say we've gotten a large part of the higher end products behind us during 2013. So we will see the effect of those products in 2014. And then the second part of the portfolio will start hitting in 2014 and early 2015.

Got it. And then, George, last one for you. As we think about these investments that you're making, you've made a comment that you're expecting the benefits to start accruing in the back half of this year, later this year. So how should we think about the baseline earnings to use as we -- without talking about 2015 guidance, what's the right baseline to think of for earnings as we exit 2014 and as we think about 2015?

Well, in general, I'd say you should expect to see us, after this -- we make this investment, we'll start seeing benefit from Revenue Cycle Management. The other investments that we talked about will be in our base expenses. I would expect to see us going back to our normal profitability and margin improvement that you've seen in the past, when you go into 2015.

And George, just to touch on that quickly, the revenue cycle portion of the $0.19 -- would that be around half, give or take?

It's just slightly more. I think it's about $0.10 of the $0.19.

Got it. Okay. All right. Thanks, guys.

Thanks, Brian.

You're welcome.

Dana Hambly, Stephens.

Well, Dana? Operator, can we go to the next call, please? Next question?

Mike Petusky, Noble Financial.

Hey, can I just a clear -- I just want to absolutely make sure I understand what you said on United Healthcare. So, you guys were a preferred provider for them within Linkia prior to this, and now, essentially, you're managing the network. Is that essentially the -- what you're announcing today?

Yes, we're helping them managing their -- of course, their in-network, but also we're going to target their out-of-network providers services as well.

Okay. Okay, all right. And then, I guess, George, given what you guys have gotten back from HHS on the RAC audits, I mean, would you expect some level, I guess, of further upward pressure on DSOs? Or I mean, how are you -- what does success look like, I guess, in 2014? Kind of 65 to 68? Or, like, how are you thinking about that?

You know, it's -- Mike, it's hard to put a number on that. There are a lot of appeals that are already in the queue to get settled. The problem that's hard to have oversight on right now, after this announcement of not giving any new ones, is how many of these audits will build -- and then, of course, not get settled. So my gut is there's going to be more pressure on DSOs to go up this year than to go down. We're hoping, obviously, that Revenue Cycle Management has some positive impact on that. But I think, knowing what I know right now, we probably will see a few days increase in DSOs over the course of the year.

Okay. All right, great. And then I guess, back to Vinit. On the Dosteon, that business, it looks like roughly costs you, say, $0.035 a quarter in EPS. Is it fair to say, given that you've already seen some, I guess, improvements in the operations there, that even in the first quarter or the second quarter, it should be less of an impact or, hopefully, materially less of an impact on the bottom line than it was last year?

It should be. I'll let George give a little more color about the actual numbers, but clearly, as I said earlier, we've already taken some decisive action. We're expecting to see the results of those actions already in the first quarter. But I will let George provide color on the actual numbers.

We think in our guidance, our anticipation is that we will get back more than half of that. We -- obviously, it will take some time. Obviously, we want to get it all back over time. But these changes in processes, we know will take some period of time. But to go back to Vinit's comment, we're going to be very -- going to be watching this very closely. And if we don't see what we consider a acceptable recovery, then we're going to take other actions.

Okay. So -- and I'm not holding you to this; I'm sure nobody else will -- but if I were kind of sketching out maybe it's a $0.01 or $0.02 drag in the first quarter, and then at somewhere close to breakeven-ish in the second quarter, if all goes well, I mean, that would be -- would that be within the realm of reality?

Well, I mean, all I can really do for you is go back to the kind of directional conversation we had about the Company as a whole, with what we expect in terms of results for the -- for 2014. We can't -- this is a small unit within a segment, and we don't have that kind of visibility on that. We think we have to focus on the segment as a whole.

Okay. By any chance, are you guys going to have a link on your website or anywhere else in terms of that whole article on WalkAide? Or are we on our own going to find that thing?

No, it's in a journal called the Neurorehabilitation and Neural Repair Journal. So if you go to their website, you should be able to find it. I think you can get the abstract. It's in public domain. And if you wanted the detailed paper, I think you've got to register for the Journal or something like that. That's online. And then within three or four weeks, the Journal will be in print.

Got you. Okay, perfect. All right, thanks, guys.

Thanks.

Thanks.

Dana Hambly, Stephens.

Hello, Dana?

It sounds like Dana has a phone issue.

There are no further questions in queue. I turn the call back to our presenters.

Thank you.

Well, folks, thanks very much for your time. We appreciate you taking the time this morning. And we'll talk to you next quarter. Thanks very much.

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