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Hanger Orthopedic Group, Inc. Announces Record Revenue of $162.3 Million and 20% Growth in Earnings Per Share for the Quarter Ended September 30, 2007
Date:10/29/2007

BETHESDA, Md., Oct. 29 /PRNewswire-FirstCall/ -- Hanger Orthopedic Group, Inc. (NYSE: HGR) announces record revenue of $162.3 million and net income of $5.4 million, or $0.18 per diluted share, for the quarter ended September 30, 2007. The results for the quarter included a 7.1% increase in net sales, a 24.6% increase in net income, and a 20% increase in earnings per share compared to pro-forma results for the third quarter of 2006. The pro-forma results for the third quarter of 2006 reflect the impact of the refinancing completed in May 2006 and assume that the resulting new capital structure was in place on January 1, 2006 as illustrated in the attached table.

Net sales for the quarter ended September 30, 2007 increased by $10.8 million, or 7.1%, to $162.3 million from $151.5 million in the prior year's comparable quarter. The sales growth was the result of a $6.9 million, or 5.1%, increase in same-center sales in our patient care business, a $1.6 million, or 10.9%, increase in sales of the Company's distribution segment, a $1.8 million increase related to acquired entities, and a $0.5 million increase in non-core activities. Gross profit for the third quarter of 2007 increased by $7.1 million, to $82.4 million, or 50.7% of net sales compared to $75.3 million, or 49.7% of net sales in the third quarter of 2006. The increase in gross margin was due principally to the increase in sales, which caused our relatively fixed labor costs to decrease as a percentage of sales.

Income from operations of $18.6 million in the third quarter of 2007 was $1.5 million higher than that of the same period of the prior year, principally due to the aforementioned increase in gross profit. Selling, general and administrative expenses increased by $5.3 million due principally to a $2.6 million increase in wages and variable compensation accruals, a $0.8 million increase in the investments in the Company's growth initiatives, $0.5 million from acquired entities, and a $2.1 million increase in general overhead, offset by a $0.7 million decrease in bad debt expense.

Net income for the third quarter of 2007 was $5.4 million compared to the prior year's pro-forma net income of $4.3 million. Earnings per share for the quarter ended September 30, 2007 was $0.18 per diluted share compared to the prior year's pro-forma earnings per share of $0.15 per diluted share, an increase of 20%. Including the costs of the refinancing, net income applicable to common stock was $1.5 million, or $0.07 per diluted share, for the quarter ended September 30, 2006.

Net sales for the nine months ended September 30, 2007 increased by $21.8 million, or 4.9%, to $466.6 million from $444.8 million in the prior year. The sales growth was principally the result of a $16.0 million, or 4.0%, increase in same-center sales in our patient care business, a $2.5 million, or 5.8%, increase in sales of the Company's distribution segment, and a $1.8 million increase related to acquired entities. Gross profit for the nine months ended September 30, 2007 increased by $12.0 million to $235.1 million, or 50.4% of net sales, compared to $223.1 million, or 50.1% of net sales, in the first nine months of the prior year. The increase in gross margin was due principally to the increase in sales, which caused our relatively fixed labor costs to decrease as a percentage of sales.

Income from operations increased by $4.8 million in the first nine months of 2007 to $48.8 million from $44.0 million in the same period of the prior year due to the increased gross profit, offset by a $6.8 million increase in selling, general and administrative expenses. Selling, general and administrative expenses increased due principally to a $3.9 million increase in labor costs related primarily to annual merit increases, a $1.9 million increase in the investments in our growth initiatives, $0.5 million from acquired entities and a $1.7 million increase in overhead, offset by a $1.2 million decrease in bad debt expense.

Net income for the nine months ended September 30, 2007 was $12.3 million compared to the prior year's pro-forma net income of $9.1 million. Earnings per share for the nine months ended September 30, 2007 was $0.41 per diluted share compared to the prior year's pro-forma earnings per share of $0.31 per diluted share, an increase of 32%. Including the costs of the refinancing, the net loss applicable to common stock was $8.5 million, or a loss of $0.39 per diluted share, for the first nine months of 2006.

Cash flow from operations was $10.1 million in the third quarter of 2007 compared to the prior year's pro-forma results of $15.9 million. Cash flow from operations for the nine months ended September 30, 2007 was $30.2 million compared to the prior year's pro-forma of $12.9 million. The year-to-date increase was due principally to increased earnings and a reduction in working capital.

Commenting on the results, Ivan R. Sabel, Chairman and Chief Executive Officer of Hanger Orthopedic Group, remarked, "Our third quarter performance represents the seventh consecutive quarter in which we have met or exceeded First Call consensus estimates. The strong results are a reflection of our continued investment in infrastructure and growth initiatives which will enable us to deliver sustainable growth and to maintain and enhance the growth trends we have demonstrated thus far in 2007. Our patient care business continued its robust performance with same-center sales increases of 4% for the first nine months and exceeding 5% for the third quarter. Our distribution business also accelerated its sales growth with an increase of over 10% in the third quarter. Additionally, Innovative Neurotronics continues to make progress with the WalkAide(R) System by selling more than 1,000 units in just over one year, virtually all through patient pay, and earning the 2007 da Vinci Award, which honors outstanding engineering achievements in adaptive and assistive technology."

Hanger Orthopedic Group, Inc., headquartered in Bethesda, Maryland, is the world's premier provider of orthotic and prosthetic patient care services. Hanger is the market leader in the United States, owning and operating 629 patient care centers in 45 states and the District of Columbia, with over 3,500 employees including 1060 practitioners (as of 9/30/07). Hanger is organized into four units. The two key operating units are patient care which consists of nationwide orthotic and prosthetic practice centers and distribution which consists of distribution centers managing the supply chain of orthotic and prosthetic componentry to Hanger and third party patient care centers. The third is Linkia which is the first and only provider network management company for the orthotics and prosthetics industry. The fourth unit, Innovative Neurotronics, introduces emerging neuromuscular technologies developed through independent research in a collaborative effort with industry suppliers worldwide. For more information on Innovative Neurotronics, Inc. or the WalkAide(R), visit http://www.ininc.us. For more information on Hanger, visit http://www.hanger.com.

This document contains 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 in this document reflect the current views of management. However, various risks, uncertainties and contingencies could cause actual results or performance to differ materially from those expressed in, or implied by, these statements, including the Company's ability to enter into and derive benefits from managed care contracts, the demand for the Company's orthotic and prosthetic services and products and the other factors identified in the Company's periodic reports on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934. The Company disclaims any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise.

Hanger Orthopedic Group, Inc.

(Dollars in thousands, except share and per share amounts)

(unaudited)

Three Months Ended Nine Months Ended

Income Statement: September 30, September 30,

2007 2006 2007 2006

Net sales $162,343 $151,549 $466,560 $444,849

Cost of goods sold

(exclusive of depreciation

and amortization) 79,962 76,229 231,456 221,790

Selling, general and

administrative 59,872 54,569 174,744 167,947

Depreciation and

amortization 3,943 3,630 11,569 11,077

Income from operations 18,566 17,121 48,791 44,035

Interest expense, net 9,318 9,852 27,783 29,266

Extinguishment of debt - 537 - 16,953

Income (Loss) before taxes 9,248 6,732 21,008 (2,184)

Provision (benefit) for

income taxes 3,838 3,274 8,722 (747)

Net income (Loss) 5,410 3,458 12,286 (1,437)

Less preferred stock

dividends declared

and accretion-7%

Redeemable Preferred

Stock - - - 2,752

Less preferred stock

dividends declared and

accretion-Series A

3.33% Convertible

Preferred Stock 416 416 1,249 583

Less beneficial

conversion feature

accretion-Series A

Convertible Preferred

Stock - 1,544 - 3,768

Net income (Loss) applicable

to common stock $4,994 $1,498 $11,037 $(8,540)

Basic Per Share Data:

Net income (Loss) $0.22 $0.07 $0.49 $(0.39)

Shares used to compute

basic per common share

amounts 22,606,453 22,030,207 22,399,221 21,937,865

Diluted Per Share Data:

Net income (Loss) $0.18 $0.07 $0.41 $(0.39)

Shares used to compute

diluted per common share

amounts 30,353,947 29,331,813 30,069,695 21,937,865

Cash Flow Data:

Cash flow from operations $10,143 $15,182 $30,249 $8,108

Capital expenditures 4,316 2,733 13,410 7,911

Increase (decrease) in cash (6,729) 1,243 218 6,013

Balance Sheet Data: September 30, September 30,

2007 2006

Cash balance $23,357 $13,934

Days Sales Outstanding

(DSO's) 57 59

Working Capital $162,168 $153,557

Total Debt $410,884 $412,377

Shareholders' Equity $181,819 $162,474

Income Statement as

a % of Net Sales: Three Months Ended Nine Months Ended

September 30, September 30,

2007 2006 2007 2006

Net sales 100.0% 100.0% 100.0% 100.0%

Cost of goods sold

(exclusive of

depreciation and

amortization) 49.3% 50.3% 49.6% 49.8%

Selling, general and

administrative 36.9% 36.0% 37.4% 37.8%

Depreciation and

amortization 2.4% 2.4% 2.5% 2.5%

Income from operations 11.4% 11.3% 10.5% 9.9%

Interest expense, net 5.7% 6.5% 6.0% 6.6%

Extinguishment of debt 0.0% 0.3% 0.0% 3.8%

Income (loss) before taxes 5.7% 4.5% 4.5% -0.5%

Provision for income taxes 2.4% 2.2% 1.9% -0.2%

Net income (loss) 3.3% 2.3% 2.6% -0.3%

Hanger Orthopedic Group, Inc.

(Dollars in thousands, except share and per share amounts)

(unaudited)

Set forth below is a reconciliation of the non-GAAP pro-forma results of operations and the historical GAAP results of operations as well as the non- GAAP pro-forma cash flow from operations and the historical GAAP cash flow from operations. The Company believes the presentation of the pro-forma results, adjusted for the effects of the recent refinancing, is more reflective of the Company's current core operating results and provides investors with additional useful information to measure the Company's on-going performance.

Three Months Nine Months

Ended Ended

September 30, 2006

Income from operations, GAAP basis $17,121 $44,035

Interest expense, net (1) 9,782 28,663

Income before taxes 7,339 15,372

Provision for income taxes 2,998 6,279

Net income, pro-forma $4,341 $9,093

Diluted Per Share Data:

Net income, pro-forma $0.15 $0.31

Shares used to compute diluted per

common share amounts, for GAAP basis 22,030,207 21,937,865

Effects of dilutive options and

restricted stock 687,849 702,369

Effects of conversion of Redeemable

preferred 6,613,757 6,613,757

Shares used to compute diluted per

common share amounts 29,331,813 29,253,991

(1) Assumes debt refinancing occurred effective January 1, 2006.

Three Months Nine Months

Ended Ended

September 30, 2006

Cash flow from operations, GAAP basis $15,182 $8,108

Premium paid on extinguishment of debt (1) 473 11,866

Tax benefit (cost) of debt extinguishment 276 (7,026)

Cash flow from operations, pro-forma $15,931 $12,948

(1) Assumes debt refinancing occurred effective January 1, 2006.

Hanger Orthopedic Group, Inc.

Three Months Ended Nine Months Ended

Statistical Data: September 30, September 30,

2007 2006 2007 2006

Patient-care centers 629 619 629 619

Number of Practitioners 1,060 1,032 1,060 1,032

Number of states (including D.C.) 46 46 46 46

Payor mix:

Private pay and other 58.9% 58.7% 59.2% 58.6%

Medicare 29.9% 30.6% 29.7% 30.7%

Medicaid 6.1% 6.1% 6.2% 6.3%

VA 5.1% 4.6% 4.9% 4.4%

Percentage of net sales from:

Patient-care services 88.7% 90.3% 89.8% 90.5%

Distribution 11.3% 9.7% 10.2% 9.5%


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SOURCE Hanger Orthopedic Group, Inc.
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