Hanger Orthopedic Group Inc. (HGR)

Q2 2010 Earnings Call

July 28, 2010 09:00 am ET

Executives

Tom Kirk - President & CEO

Tom Hofmeister - VP, Finance and CAO

George McHenry - EVP, CFO & Secretary

Analysts

David MacDonald - SunTrust

Bryan Sekino - Barclays Capital

Larry Solow - CJS Securities

Dawn Brock - Kaufman Brothers

Michael Petusky - Noble Research

Daniel Owczarski - Avondale Partners

Presentation

Operator

Good morning. My name is Beth and I will be your conference operator today. At this time I would like to welcome everyone to the Hanger Orthopedic Group second quarter results. 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. Mr. Tom Kirk, Chief Executive Officer, you may begin your conference.

Tom Kirk

Good morning and welcome to Hanger Orthopedic Group’s discussion of our second quarter results. Before starting the discussion, let me ask Tom Hofmeister who is with us today along with George McHenry, our Chief Financial Officer. Tom is our Chief Accounting Officer and IR Director 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 during this call 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 demand for the company's orthotic and prosthetic services and products, and 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 and 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 back over to Tom.

Tom Kirk

Thanks Tom. Overall the second quarter contained several noteworthy points. Let me touch on a few of them. We grew consolidated sales of over second quarter of last year by 6.4% and I am happy to say that revenue growth occurred in all portions of our business. The sales performance combined with cost management yielded $0.37 earning per share, that’s excluding the cost associated with our relocation. This equates to a 15.2% growth over last year’s second quarter. I’d also like to add that our relocation is tracking on plan schedule wise and within budget. This performance makes the 18th consecutive quarter where we’ve meet or exceeded first call estimates.

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

George McHenry

Thank you Tom and good morning everyone. Q2 was an excellent quarter for Hanger, the important takeaways are as follow. As Tom mentioned we meet Street estimates for 18th consecutive quarter. Our pro forma EPS of $0.37 represented 19.4% growth over the prior year. We increased operating leverage excluding relocation expense by 80 basis points through a combination of healthy sales growth and judicious controlled spending.

We experienced growth in all lines of our business. Overall sales growth accelerated from Q1 to 6.4% from 5.4% in the previous quarter. Our comp sales and patient care accelerated to a 4% increase which was an improvement over the 3.6% growth that they had in Q1 and our distribution segment reported a healthy 10.4% increase. Our comp rate of 30.5% is comparable to the prior year, but slightly higher than the rate we expect for the full year. We attribute this change to mix and expect that the rate will decline somewhat in the second half.

We continue to do a credible job of managing expenses. Personal costs were below budgeted amounts. Operating expenses were below budget across the board and in some cases below the prior year. We could not continue this trend without the commitment of all our employees and we commend them for their efforts.

As discussed in our Q1 call, we are in the process of moving the corporate headquarters from Bethesda, Maryland to Austin, Texas. In this quarter, we incurred $4.2 million, principally comprised of either employee severance or a move expenses for the employees who are reallocating. These expenses are non-incurring and are shown on a separate line in our income statement. I’ll talk more about the move in a couple of minutes.

Our D&A increased by $600,000 which is commensurate with the capital expenditures over the last 12 months. Our interest approximated the prior years, there was no significant change in variable interest rates. Our tax rate of 37.5% benefited from approximately $300,000 in one-time release of FIN 48 reserve. So we did have a benefit there of $0.01.

We anticipate our full-year rate will be in the 39.5% to 40% range for the remainder of the year. All the factors I’ve just discussed led to the 19.4% increase in pro forma EPS for the quarter.

Moving onto the first six months, our overall performance from the first half is in line with our expectations in terms of sales and profits. Operating leverage improved slightly more than we expected and we’re pretty pleased with that.

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