Hanger Orthopedic Group Inc. (HGR)

Q1 2010 Earnings Call

April 27, 2010; 09:00am ET

Executives

Tom Kirk - President and Chief Executive Officer

George McHenry - Executive Vice President, Chief Financial Officer & Secretary

Tom Hofmeister - Chief Accounting Officer & Director of Investor Relations

Analysts

David Macdonald - Suntrust Robinson Humphrey

Bryan Sekino - Barclays Capital

Fred Buonocore - CJS Securities

Dawn Brock - Kaufman Bros.

Daniel Owczarski - Avondale Partners

Michael Petusky - Noble Research

Presentation

Operator

Good morning. My name is Christopher and I will be your conference operator today. At this time I would like to welcome everyone to the Hanger Orthopedic Group, first 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)

I’d now like to turn the call over to Tom Kirk, President and CEO of Hanger Orthopedic. You may begin your conference.

Tom Kirk

Good morning, and welcome to Hanger Orthopedic Group’s discussion of our first quarter results. Before starting the discussion, let me ask Tom Hofmeister, our Chief Accounting Officer and Director of Investor Relations, to review with you our declaration on forward-looking statements.

Tom Hofmeister

Thank you Tom. During this call management will make forward-looking statements relating to the company’s results of operations. The United States Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements.

Statements relating to future results of operations reflect the views of management. However, various risks, uncertainties and contingencies could cause actual results or performance to differ materially from those expressed in or implied by these statements, including the company's ability to enter into and derive benefits from managed care contracts, the demands 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.

Now I’ll turn the call back over to Tom.

Tom Kirk

Thanks Tom. Overall the first quarter contained several noteworthy points. We grew consolidated sales over the first quarter of last year by 5.4%, in spite of some difficulties due to adverse weather and the continuing unemployment conditions.

This sales performance combined with cost management yielded $0.16 earnings per share, excluding the cost associated with our relocation. This equates to a 14.3% growth over last years first quarter, and I’d like to add that the relocation is tracking on plan and we still anticipate a move-in date of about mid August. This quarter makes the 17 th consecutive quarter, where we have met or exceeded first call estimates.

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

George McHenry

Thank you Tom. Good morning everyone and thank you for joining us. I’ll comment on the income statement first. Q1 was another solid quarter for the company. The important take away is on our operations are as possible.

We met estimates as Tom mentioned, recording $0.16 excluding relocation cost. Our operation income increased by 7.5%, and our margin improved by 20 basis points, excluding the relocation cost.

You may recall that our operating margin actually declined 10 basis points last year in the first quarter, so we are pleased with these results, and it puts us in good position for the balance of the year.

Our sales increased by 5.4%. Patient Care made up a significant potion of the increase, with a 3.6% increase in same-center sales, and our distributing segment reported a 4.3% increase.

Our comp rate of 30.1% is comparable to the prior quarter, and the rate for the full year after the fiscal inventory adjustment, so we are in good shape there. We continue to do an incredible job of managing our expenses, personnel and other operating costs, are in-line are below our budgeted expectations. Operating expenses only increased $900,000 in Q1 of 2009 in fact, and that’s including cost associated with some acquisitions that were made late in the year.

As discussed in our year-end call, we are in the process of moving the corporate headquarters from the Bethesda, Maryland to Austin, Texas. In this quarter we incurred $2.1 million of employee termination and other relocation related expenses. These expenses are non-recurring and are shown on a separate line in our income statement. I’ll talk more about the move in a couple of minutes.

D&A and interest was about $200,000 below last year. Our tax rate was consistent with prior periods at 40%. All the factors I’ve just discussed led to a 14% increase in pro-forma EPS for the quarter, so we are happy with our results.

Moving on to the balance sheet; our AR decreased $6.2 million from year-end and our DSO’s dropped to 46 days, a four-day improvement compared to year-end; that’s the lowest we’ve ever reported. The quality of our receivables is excellent and we are comfortable with our reserve for doubtful accounts. Our collections remained strong.

Our inventory increased by $1.8 million to $93.1 million, from $91.3 million at the end of last year. Inventory turns improved slightly to 4.3 times from 4.2 times a year ago. Our sales backlog remains strong at quarter end, and our inventor is at appropriate levels to serve our patients.

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