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Hanger Orthopedic Group, Inc. Beats First Call Q2 EPS Estimates by $0.05 on 13% Sales Growth and 57.2% Growth in Net Income
Date:7/29/2008

Raises 2008 Annual Sales and Pro Forma EPS Guidance

BETHESDA, Md., July 29 /PRNewswire-FirstCall/ -- Hanger Orthopedic Group, Inc. (NYSE: HGR) announces net sales of $181.2 million for the quarter ended June 30, 2008 an increase of 13.0% from $160.4 million in the prior year's comparable quarter. Net income increased by $2.9 million, or 57.2%, to $8.0 million in the second quarter 2008 from $5.1 million in same quarter last year.

Pro forma net income applicable to common stock was $8.0 million, or $0.25 per diluted share (a 47% increase), for the quarter ended June 30, 2008 compared to net income applicable to common stock of $5.0 million, or $0.17 per diluted share, in the second quarter of last year. The pro forma results for the second quarter 2008 assume that a one-time, in-kind preferred stock dividend occurred and the preferred stock was converted to common stock at the beginning of the period. The preferred stock dividend and conversion are explained in greater detail later in this press release. Net income applicable to common stock on a GAAP basis, which includes the full impact of the $5.3 million one-time non-cash dividend, was $2.8 million, or $0.11 per diluted share, for the quarter ended June 30, 2008.

Net sales for the quarter ended June 30, 2008 increased by $20.8 million, or 13%, to $181.2 million from $160.4 million in the prior year's comparable quarter. The sales growth was the result of a $12.7 million, or 8.9%, increase in same-center sales in our patient care business, a $3.2 million, or 20.6%, increase in sales of the Company's distribution segment, and a $4.9 million increase related to acquired entities. Gross profit for the second quarter of 2008 increased by $11.5 million, to $93.0 mx Months Ended

June 30, June 30,

Percentage of net sales from: 2008 2007 2008 2007

Patient-care services 88.1% 90.0% 87.8% 90.4%

Distribution 11.6% 9.7% 11.8% 9.4%

Payor mix:

Private pay and other 60.2% 58.9% 60.3% 59.3%

Medicare 28.3% 30.1% 28.2% 29.7%

Medicaid 6.0% 6.0% 6.1% 6.2%

VA 5.5% 5.0% 5.4% 4.8%

illion, or 51.3% of net sales compared to $81.4 million, or 50.8% of net sales in the second quarter of 2007. The increase in gross margin was due principally to the increase in sales, which allowed us to leverage our relatively fixed labor costs.

Income from operations of $21.4 million in the second quarter of 2008 was $3.6 million, or 20.0% higher than that of the same period of the prior year, principally due to the aforementioned increase in gross profit, offset by $7.6 million of higher selling, general and administrative expenses. Selling, general and administrative expenses increased due to a $2.6 million increase in variable compensation accruals, $1.8 million of increased personnel costs related primarily to employee benefits, a $1.4 million increase related to acquisitions, a $1.0 million increase in professional fees and other expenses (some of which are one time expenses), $0.8 million in merit increases, and $0.6 million of additional investment in growth initiatives, offset by a $0.6 million decrease in bad debt expense.

Net interest expense for the second quarter 2008 was $1.1 million less than the same quarter last year primarily due to lower variable rates. In May 2008, the Company entered into two $75.0 million swap contracts that fixed $150.0 million of floating rate debt and locked in LIBOR at 3.4% for three years. As of June 30, 2008, $73.0 million, or 18.0%, of the Company's total debt of $406.4 million was subject to variable interest rates.

Net sales for the six months ended June 30, 2008 increased by $34.6 million, or 11.4%, to $338.8 million from $304.2 million for the same period in the prior year. The sales growth was principally the result of a $18.2 million, or 6.7%, increase in same-center sales in our patient care business, a $6.7 million, or 23.5%, increase in sales of the Company's distribution segment, and a $9.1 million increase related to acquired entities. Gross profit for the six months ended June 30, 2008 increased by $18.8 million to $171.5 million, or 50.6% of net sales, compared to $152.7 million, or 50.2% of net sales, in the first six months of the prior year. The increase in gross margin was due principally to the increase in sales, which allowed us to leverage our relatively fixed labor costs.

Income from operations increased by $5.4 million, or 17.7%, in the first six months of 2008 to $35.6 million from $30.2 million in the same period of the prior year due to the increased gross profit, offset by a $12.6 million increase in selling, general and administrative expenses. Selling, general and administrative expenses increased due to $3.3 million of increased personnel costs related principally to employee benefits, a $2.9 million increase related to acquisitions, a $2.8 million increase in variable compensation accruals, $2.0 million of additional investment in growth initiatives, $1.6 million in merit increases, a $0.8 million increase in advertising, and a $0.3 million increase in general overhead, offset by a $1.1 million decrease in bad debt expense.

Net interest expense for the six months ended June 30, 2008 decreased $2.2 million, or 11.7%, from the same period in the prior year, primarily due to lower variable rates. Net income for the six months ended June 30, 2008 increased $4.7 million, or 68.3%, to $11.6 million from $6.9 million for the prior year's period.

Pro forma net income applicable to common stock for the six months ended June 30, 2008 was $11.6 million, or $0.37 per diluted share, a 60.9% increase, compared to net income applicable to common stock of $6.0 million, or $0.23 per diluted share, in the prior year. The pro forma results for the six months ended June 30, 2008 assume that the previously described one-time, in- kind preferred stock dividend occurred and the preferred stock was converted to common stock at the beginning of the period. Net income applicable to common stock on a GAAP basis was $5.9 million, or $0.24 per diluted share, for the six months ended June 30, 2008.

Cash flow from operations was $20.0 million in the second quarter of 2008 compared to the prior year period of $18.0 million. For the six months ended June 30, 2008 cash flow from operations was $12.6 million compared to the prior period of $20.1 million. The decrease in cash flow from operations for the six months ended June 30, 2008 of $7.5 million was principally due to an $11.3 million change in cash payments related to the 2007 incentive compensation plans. The first quarter 2008 payout increased due to a combination of the elimination of two interim payments related to the practitioners' incentive compensation plan and improved performance in 2007.

The Company is also confirming existing guidance for the second half of 2008 and is increasing its full year sales guidance to a range of $680 million to $690 million and full year pro forma EPS guidance by $0.5 per diluted share to a range of $0.80 to $0.82 per diluted share, representing 25% to 28% growth compared to 2007 reported EPS.

In June 2008, the Company's common stock performance triggered an acceleration of preferred stock dividends once the Company's average closing price of its common stock price exceeded the Company's forced conversion price of the Series A Convertible Preferred Stock by 200% for a 20-trading day period. This event triggered acceleration of the payment of Series A Convertible Preferred Stock dividends due from the time of the event through May 26, 2011. The accelerated dividends were paid in the form of increased stated value of preferred stock, in lieu of cash. As a result, the Company recorded an in-kind dividend on its preferred stock of $5.3 million in the quarter ended June 30, 2008, which represents 0.7 million additional common shares on an as converted basis. In connection with the acceleration event, the Company has decided to exercise its right to force conversion of the preferred stock into common stock and has notified the holder of its intention.

Commenting on the results, Thomas F. Kirk, President and Chief Executive Officer of Hanger Orthopedic Group, remarked, "I am extremely pleased with our second quarter results, the tenth consecutive quarter in meeting or exceeding First Call consensus estimates. Same-center growth in our patient care division continues to drive a large portion of our business with sales growth of 8.9%. Our distribution business also accelerated its sales growth with an increase of 20.6% in the second quarter, and now it represents 11.6% of our total sales for the quarter. We continue to gain leverage on our infrastructure costs due to our business model and our ongoing efforts to monitor expenses. As a result, operating margins improved this quarter by 70 basis points to 11.8%. Finally, the strong performance of our common stock triggered acceleration of the preferred stock dividend. This occurred earlier than expected, but highlights the value we have been able to create for all our shareholders over the last two years. By forcing conversion of the preferred stock we will simplify our capital structure, eliminate a preference that will benefit our common shareholders and eliminate all future dividend obligations related to the preferred stock. We are all energized on carrying the momentum of our operating focus and our growth projects into the second half of the year."

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 661 patient care centers in 45 states and the District of Columbia, with over 3,500 employees including 1,060 practitioners (as of June 30, 2008). 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 Six Months Ended

June 30, June 30,

Income Statement: 2008 2007 2008 2007

Net sales $181,184 $160,366 $338,840 $304,217

Cost of goods sold

(exclusive of depreciation

and amortization) 88,223 78,945 167,292 151,494

Selling, general and

administrative 67,285 59,714 127,492 114,872

Depreciation and

amortization 4,289 3,878 8,470 7,626

Income from operations 21,387 17,829 35,586 30,225

Interest expense 8,045 9,125 16,303 18,465

Income before taxes 13,342 8,704 19,283 11,760

Provision for income taxes 5,337 3,612 7,713 4,884

Net income 8,005 5,092 11,570 6,876

Less preferred stock

dividend - Series A

Convertible Preferred

Stock 5,254 416 5,670 833

Net income applicable to

common stock $2,751 $4,676 $5,900 $6,043

Basic Per Common Share Data:

Net income $0.12 $0.21 $0.26 $0.27

Shares used to compute

basic per common share

amounts 23,017,282 22,399,292 22,949,127 22,295,606

Diluted Per Common Share Data:

Net income $0.11 $0.17 $0.24 $0.23

Shares used to compute

diluted per common share

amounts 24,208,631 30,049,735 24,121,834 29,908,304

Three Months Ended Six Months Ended

Pro-forma: June 30, 2008 June 30, 2008

Net income applicable to

common stock 2,751 5,900

Preferred stock dividend -

Series A Convertible

Preferred Stock 5,254 5,670

Pro-forma net income

applicable to common stock $8,005 $11,570

Diluted Per Share Data:

Pro-forma net income per

diluted common share $0.25 $0.37

Shares used to compute

diluted per common share

amounts 24,208,631 24,121,834

Effects of conversion of

convertible preferred

stock (1) 7,308,730 7,308,730

Shares used to compute

diluted per common share

amounts, Pro-forma basis 31,517,361 31,430,564

(1) Assumes Preferred Stock dividend acceleration event occurred January

1, 2008. The Company believes the presentation of the pro-forma

results, adjusted for the effects of the acceleration of the Preferred

Stock dividend at the beginning of the period, is more reflective of

the Company's current diluted operating results and provides investors

with additional useful information to measure the Company's on-going

performance.

Three Months Ended Six Months Ended

June 30, June 30,

Income Statement as a % of Net Sales: 2008 2007 2008 2007

Net sales 100.0% 100.0% 100.0% 100.0%

Cost of goods sold (exclusive of

depreciation and amortization) 48.7% 49.2% 49.4% 49.8%

Selling, general and administrative 37.1% 37.2% 37.6% 37.8%

Depreciation and amortization 2.4% 2.5% 2.5% 2.5%

Income from operations 11.8% 11.1% 10.5% 9.9%

Interest expense 4.4% 5.7% 4.8% 6.1%

Income before taxes 7.4% 5.4% 5.7% 3.8%

Provision for income taxes 3.0% 2.2% 2.3% 1.6%

Net income 4.4% 3.2% 3.4% 2.2%

Hanger Orthopedic Group, Inc.

(Dollars in thousands)

(Unaudited)

Three Months Ended Six Months Ended

June 30, June 30,

Cash Flow Data: 2008 2007 2008 2007

Cash flow from operations $20,026 $17,950 $12,569 $20,106

Capital expenditures $4,750 $4,969 $7,840 $9,094

Increase (decrease) in cash $11,007 $10,632 $(2,984) $6,947

Balance Sheet Data: June 30, Dec. 31, June 30, Dec. 31,

2008 2007 2007 2006

Cash and cash equivalents $23,954 $26,938 $30,086 $23,139

Days Sales Outstanding (DSO's) 52 56 57 60

Working Capital $176,123 $165,794 $165,422 $157,208

Total Debt $406,425 $410,892 $409,184 $410,624

Shareholders' Equity $200,052 $190,538 $175,879 $167,677

Statistical Data:

June 30, June 30,

2008 2007 2008 2007

Patient-care centers 661 621 661 621

Number of practitioners 1,060 1,029 1,060 1,029

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

Three Months Ended Si
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SOURCE Hanger Orthopedic Group, Inc.
Copyright©2008 PR Newswire.
All rights reserved

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