Hanger Inc (HNGR) 2007 Q2 法說會逐字稿

Good morning. My name is Tierra, and I will be your conference operator today. At this time, I would like to welcome everyone to Hanger Orthopedic's second-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). Mr. Sabel, you may begin your conference.

Thank you very much, Tierra. Good morning, everyone, and thank you for joining us for our second-quarter 2007 earnings conference call. Before we get started, I need to read our Safe Harbor statement.

During this call, management will make forward-looking statements relating to the Company's results of operations. 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.

Now onto the results of our second quarter. This actually is our sixth consecutive quarter where we have either met or exceeded the consensus analyst expectations, and I'm pleased to report solid financial performance with net income of $4.7 million and 4.9% revenue growth for the quarter ended June 30, 2007. Our reported EPS grew from a loss of $0.42 per share to an income of $0.17 per share. However, if we pro forma the results for the refinancing last year, we grew EPS by over 30% from a pro forma $0.13 per share to the current $0.17 per share.

Of note was that revenue of $160 million for this quarter was the highest ever for Hanger. In addition, the sales growth in our first quarter was primarily the result of $5.8 million or a 4.2% increase in same center sales at our patient care business, which was in line with our expectations.

Sales in our distribution segment continued to make progress with growth of $1.1 million or a 7.5% increase over the prior year even though it was a very difficult comparison to the second quarter of last year, where we actually grew by over 30%. We also continue to demonstrate strong cash flow performance as we ended the second quarter with a little over $30 million on our balance sheet, a sequential growth of $10.6 million despite making the bond payment in that quarter.

Also, we have made steady progress in our acquisition program with the acquisition of Paris O&P, a multi-site provider of orthotic and prosthetic service, that enables us to densify the northeastern Texas market. And also most recently in early July, the acquisition of SureFit, a leading manufacturer and distributor of diabetic footwear in the podiatric market, which will provide us with very interesting opportunities to leverage our core capabilities into new growth channels. We do expect both acquisitions to be accretive to earnings in 2008 and I would like to take this opportunity to welcome the employees of both companies into our Hanger family.

Now I'd like to turn the call over to our Chief Financial Officer, George McHenry.

Thank you, Van, and good morning, everyone. I will start off with an analysis of the quarter from the income statement.

Sales, as Van mentioned, increased by $7.5 million or 4.9% in total and our comp at 4.2% or $5.8 million was in line with our expectations of between 3 and 5% growth. I will talk about our guidance when I finish my remarks. SPS had a strong quarter reporting $1.1 million in growth in their outside sales, a 7.5% increase, which is strong when you consider the fact that they were performing against almost a -- over a 30% increase last year.

Cost of goods sold as a percentage of sales was 49.2% or 1/10 of 1% less than the prior year. Our labor costs increased by $800,000 in the current quarter due to a slight increase in headcount, the impact of merit increases on our existing employee base and an increase in commissions offset by a decrease in health care costs. As a percentage of sales, labor costs decreased by 4/10 of a percent to 19.2% of sales, due principally to the sales increase that I just mentioned.

Material costs increased by $2.8 million compared to the same quarter last year. Approximately $2.2 million of the increase was due to the $7.5 million increase in sales and the balance was due to a slight change in the mix.

SG&A increased by $2 million in Q2 due principally to a $1.1 million increase in labor, an additional $500,000 invested in our Linkia and Innovative Neurotronics group strategies.

As a result of these changes, EBITDA was $21.7 million for the quarter, an increase of $1.9 million compared to the prior year.

Interest was $800,000 less than last year due principally to the impact of the repricing that we completed in Q1. Due to both our improved results for the trailing 12 quarters and the reduction in interest, our total leverage now stands at 4.4 times trailing EBITDA, down from close to 6 times prior to our refinance in 2006.

Income taxes -- our provision for the quarter was 41.5% of pretax income. And based on that and the results I just discussed, our EPS for the quarter was $0.17 compared to a loss of $0.42 in 2006. As Dan mentioned a minute ago, when you take into consideration the refi that we did in 2006, pro forma EPS would have been $0.13, so we improved our EPS by $0.04 or 30.8% in the current quarter.

In summary, the quarter's results from both a sales and earnings perspective were in line with management's expectations.

For the year, our sales increased by $10.9 million or 3.7%. Comp sales in our patient care centers increased by 3.5% or $9.1 million for the year, again, in line with our expectations. SPS outside sales are up by $800,000 or 3% compared to last year.

Cost of goods sold for the first six months as a percentage of sales increased by 2/10 of a percent due principally to an increase in our cost of materials. Our labor costs actually decreased by $400,000 during the first six months due to a combination of reduced health care costs and the impact of the sales increase.

The material costs increased by $6.3 million versus 2006. Roughly half of that or $3 million of the increase was attributable to the sales increase and the balance was due to a combination of mix and inflation.

SG&A increased by $1.5 million for the year due to a $1.3 million increase in labor costs. Again, primarily due to our merit increases, a $1 million investment in Linkia and Innovative Neurotronics and that growth strategy, and that was all offset by about a $400,000 decrease in our bad debts.

EBITDA at $37.9 million increased by $3.5 million compared to the prior year. Interest was $1 million lower than last year again due to the impact of the repricing.

We recorded a tax provision of $4.9 million for the first six months of this year compared to a benefit last year due to the loss last year that was tied into the refi. The effective tax rate for the year was the same as the quarter at 41.5%. Based on all those changes, our fully diluted EPS for the first six months was $0.23 versus a loss of $0.46 last year.

On the balance sheet, our A/R decreased by $3.2 million since the end of the year despite an almost $11 million increase in sales. And our DSOs decreased to 57 days compared to 60 days a year ago. That's slightly up versus Q1, in which we had reported 56 days. Very good results when you consider the fact that our sales are normally low in the first quarter.

Our bad debt expense remained constant at less than 3% of sales and our A/R over 120 days old, a measure of the quality of our receivables, was at 13.9%, which is the lowest it's ever been.

Our inventory decreased by $700,000 to $75.1 million compared to the year-end balance of $75.8 million. The inventory balance makes sense compared to all our business trends, and we feel that's under control.

Moving on to the cash flow, our CapEx for the second quarter was $5 million compared to $2.6 million in the prior year. For the year, we've spent $9.1 million to date versus $5.2 million in the prior year. Both of these numbers are in line with our expectations. Our budget for the year is between 17 and $18 million for CapEx.

Cash flow from operations was strong at $18 million in Q2 compared to $5.6 million in the prior year, an increase of $12.3 million. For the first six months, cash flow from operations was $20.1 million compared to use of $7 million last year. When you factor out the $11.5 million impact on last year's cash flow, that was tied into our refinance, we still had an improvement of $15.8 million for the year.

The best way to evaluate our cash flow is to look at that first six months because it also factors out timing differences and how we pay our interest on the new bonds that we put in place in 2006. We are now paying our interest in Q2 and Q4 instead of Q1 and Q3. So when you look at those two periods, a $15.8 million increase definitely exceeded our expectations, so we are happy with that. Most of the improvement came from improved working capital.

My final comment involves guidance. We believe that our steady financial performance in Q2 and for the first six months of 2007, reinforces our guidance of between 620 and $630 million in sales. We see ourselves coming in solidly in the middle of those projections. And our EPS guidance remains at $0.59 to $0.61.

I'd like to turn the call over now to Tom Kirk, our Chief Operating Officer, to give you some more color on the results.

Thanks, George. It's good to be with you this morning and thank you for joining us. I will take a few moments to review the events that are impacting our operations, first off, for the quarter we just finished, and then I will give you an update on some of our growth initiatives for the second half of this year.

First, let's take a look at Hanger Prosthetics & Orthotics, that's HPO, our patient care division. They achieved a $5.8 million increase, which equates to a same center sales growth rate of about 4.2% for the quarter. This performance is partially attributable to the impact of the rollout on January 1 of the 4.3% CPIU increase, which impacts about 40% of our book of business. We've talked about that in the past, but this translates to about 1% of the 4.2% of our growth. So the balance or 3.2% is attributable to volume and mix. Now this gives us a clear indication that some of the programs that we've been working on last year and first part of this year are gaining additional traction. Let's take a look at those.

For the second quarter, these programs consisted of the following four areas. First is the continuing improvement in our Linkia book of business. We have to keep in mind that HPO is the primary vehicle for the delivery of services under the Linkia contracts. On an overall basis, the revenue from the Linkia designated contracts are up about 3.2% for this quarter.

Now the second program is the continuing emphasis on our high performing products, such as microprocessor knee and ankle marketing and education efforts. For the quarter, these product lines are up almost 18% in terms of approvals and deliveries and 25% for the year.

Third set of programs are our patient evaluation clinics, which have produced almost 7% more revenue when compared with the comparable quarter last year. As you know, these are an excellent opportunity to bring our patients back, expose them to the latest products and to ensure that their current devices are correct in terms of fit and function.

And the last of the four areas are our sales, marketing and public relations efforts that are designed to support our practitioners by identifying opportunities and initiating those events that capture those opportunities and we will talk about those in a little bit more detail later on. These typically result in increased exposure, which translates into increased volume.

We also recognize the changing dynamics of the health-care service field. In order to strengthen our long-term position in the field, we continue to work with our industry and trade associations to differentiate our profession from others that are not as qualified to perform this work. In addition, we're monitoring the new Congress and conducting educational meetings with those policymakers to make certain that they understand that the valuable service that we provide is critical to our patients and how important the long-term viability of the reimbursement system is. And as you well know, there are a number of discussions ongoing inside Washington and we certainly are monitoring and trying to influence those.

And we're still working with our associations on the details of the qualified provider quality standards and the enforcement provisions for these standards. Our long-term goal in this area is to make absolutely certain that CMS and the other payors are following the existing regulations and reimbursing only the qualified providers for that work that's performed.

At the state level, we continue to work with the Amputee Coalition of America on educating legislatures on the issues involved with reimbursement caps and how these caps deprive patients of quality care. Six states passed parity in '06 and we are working with state associations and moving legislation forward in '07 and we're also doing some advanced planning in almost 20 states in '08 and '09. The long-term goal is to get sufficient number of states passing the parity act and then move toward a national parity act under ARISA to cover all of those other plans that are excluded at the state levels.

In terms of back onto our operations again, we still see differences across the slate of our market regions, which reflect the economic conditions of each region and our unique position within that region. For example, only two of our 13 did not reach the level of Q2 revenue that they achieved in the comparable quarter of last year. We recognize this. We have been working to improve the performance in all of our markets over the past several quarters with the goal to make certain that they overcome regional issues and generate positive same-store sales growth. And we have programs underway in each of our regions to either improve their operations or to make the necessary changes to get them positive.

Now let's turn our attention to SPS; that's Southern Prosthetic Supply. It is our warehousing and distribution business. Their outside sales were up approximately $1.1 million or 7.5% compared to the second quarter of '06. We have to keep in mind that the second quarter of last year was a difficult comp period because they grew in excess of 30% compared to the second quarter of '05. They continue to offer superior customer service, a full product portfolio and multi-site warehousing with effective delivery. This absolutely differentiates them from their competitors and adds value to their customers. During the first half of this year, they were planning to open a fourth distribution center and I'm pleased to tell you that as of early July, SPS commenced operation in a new facility in Harrisburg, which -- that's Harrisburg, Pennsylvania, which will permit them to better serve their customers in the Northeast.

We are also finding that as the Linkia network grows, and we will talk about the growth of that network in a minute, SPS is in a premier position to increase their position with these high quality and valued independent partners. And on the subject of Linkia, we're building our share with some of the key health companies that we have under contract. We have already talked about the revenue increase. To support that growth of our full Linkia contracts, we've built out our network to almost 250 independent providers. That's about a 25% increase from what we had at the end of last quarter. And on the marketing side, we are continuing our discussions and negotiations with the key national and large regional health-care management companies as well as the firms in the workman compensation section.

Now, let's turn our attention to WalkAide and Innovative Neurotronics and provide an upgrade on that product being introduced, which we have underway now for the past several quarters. You will remember during our last call, Van updated you on the process for obtaining coverage and reimbursement from CMS. We are continuing to conduct our clinical trials, which will be the basis for our coverage application and the health economic studies, which will be the basis for our reimbursement. So those are underway. We are continuing in those processes and we have had meetings with CMS to discuss our status and also talk about our application for a unique code and all is going according to schedule.

Now I will provide a few notes on some of the key accomplishments that they have attained during this past quarter.

Two new institutions, one in the state of Washington and the other in the state of New Jersey, have requested to join our clinical trial efforts. These are premier rehabilitation and hospital institutions. They are currently preparing their clinical trial protocols and they will be submitting those to their internal review boards in order to launch the new trials. These will be supplementary to our existing venues and they are in addition to the institutions that we mentioned last time. So we're really growing in the ability to attract quality institutions into the clinical arena.

Innovative had its best quarter in terms of number of units and revenues to date, but keep in mind that the product really did not go onto the shelves until June of last year, so we are continuing to see traction in those areas in spite of the fact of not having reimbursement.

To date, they've trained almost 750 orthotists. This includes those within Hanger as well as independents, which have been trained by SPS. And additional training sessions are planned for the second half of this year.

We are continuing to penetrate the rehabilitation sales market with good results. For example, the July addition of Advanced magazine, which is a magazine for the directors in rehabilitation, contains a product feature article on the success physical therapists had in using WalkAide. Continues to gain great support simply because of its performance.

And as Van mentioned, IN, Inc. has had an additional success with the execution of an agreement with Teijin. Teijin is the major health-care life sciences company in Japan and this agreement will cover Teijin as the exclusive representative of Innovative Neurotronics in the development and commercialization of the WalkAide unit in Japan.

Finally, I'm pleased to announce that the WalkAide was awarded the 2007 da Vinci award for exceptional design and engineering achievements in accessibility in universal design that empower people of all abilities. This award was made by the National MS Society, the Michigan Chapter. It's a very prestigious award, and we will be receiving that at the end of September, but a further testimonial as to the efficacy of the WalkAide.

Finally, just a few wrap-up words on acquisitions. As Van mentioned, we made two acquisitions at the end of the quarter -- one at the end of the quarter and one in early July. And as we have stated previously, we are only considering candidates that have strategic value to us in the form of location, quality practitioners, and/or favorable product service mix. And we have ongoing discussions with other candidates that meet these criteria.

In closing, the results of the quarter validate that our projects that we've put into place over the last year are correct and, most importantly, our personnel are using them and getting positive results. We all recognize that there is more work to be done and we must maintain our focus on measuring our progress against our established metrics and our guidance, as George has described to you. As we look to the second half of this year, we're concentrating on delivering our additional revenues from HPO, SPS, Linkia gaining additional contracts and the WalkAide in terms of building its volume and its international outreach. At the same time, we continue to invest other very interesting opportunities in some new delivery channels and products.

Thank you very much and I'll now turn it over to Van to manage our questions.

Thank you, Tom. Tierra, we can now open it up for Q&A.

(OPERATOR INSTRUCTIONS). Adam Feinstein.

Thank you. Good morning, everyone. Just a few questions here and I apologize; I got on a few minutes late. There's a few calls going on here today. Just wanted to see if you could break out -- the same-store growth looked very strong. Looks like some of the best growth we've seen ever. So just wanted to get a better sense in terms of the pricing relative to the volume there and just in terms of, as you think about the same-store growth outlook going forward, just wanted to get some updated thoughts there and I have a couple of follow-up questions.

Sure. Good morning, Adam. Happy that you are with us.

In terms of breaking that 4.2% same-store sales growth within HPO down into its components, our analysis indicates that about 1% of the 4.2 is directly attributable to price and that the remaining 3.2 is attributable to volume and mix. And of the -- we don't get much more granular than that. But just to give you sort of an indication, on an almost a qualitative basis, we would say probably two-thirds of the 4.3 is attributable to volume and one-third would be attributable to mix. And that mix, of course, is a shift to some of the higher products and we spoke about some of the success, continued success that we have had in our microprocessor knees and ankles and some of the work that we've been doing in upper extremity as a good indication of that mix shift.

Okay. Thanks for the details, Tom. Just a follow-up question. So as we think about just the cost of goods sold, that moved around a little bit here relative to what we were looking for. Just wanted to get some clarity in terms of just some of the drivers in the current quarter.

Well, so good results in our labor. Our labor is under control. Our health-care costs for the first time in recent memory are down, so we're seeing good trends there. We're managing our headcount well, and we would expect that our cost of goods sold in total labor and materials should run at about the range it has in the first six months. So, I would expect our -- from a margin standpoint, that we should be in that same range.

Okay. And then did you give any Linkia revenue number in your prepared comments?

We didn't give an overall revenue number, Adam, but we did talk about the overall increase. What we saw for the quarter was approximately a 3.2% increase, which translates -- it goes against the book of roughly about $15 million on an overall basis for the quarter. It's actually a little bit shy of that. It's in about the low $14 million for the quarter for all of the Linkia designated contracts. And that was up roughly 3.2 over the prior -- comparable quarter last year. But we are seeing sort of this consecutive build quarter over quarter, so it continues to build up a bit.

Great. Okay. And then lastly, and then I'll get back in the queue. I just wanted to see -- maybe just provide a quick update in terms of what's going on in Washington. Van, you usually have good perspective there. Just any sense in terms of just thoughts in terms of competitive bidding as well as just any updates. So I just wanted to get a quick overview in terms of some of the drivers in Washington.

Sure. I've had I don't know three or four meetings with congressional and senatorial leaders. You know, obviously they're doing with the issue of the physician cuts and my sense is I don't think those physician cuts have a lot of likelihood of happening, so they're going to have to find the money not to make those cuts. We, so far, have not been a topic of discussion within those arenas. They're looking more toward tobacco tax and tobacco settlements, some other issues that they have shared with me, and it's, as usual, it's going to be a wait-and-see. But as of this point, we have certainly not surfaced high on their radar screen.

On the other hand, competitive bidding, as you well know, is, we've been excluded from that currently and they are in the midst of rolling that out to the 10 MSAs. And that also, as we go forward in the next year or two will be somewhat of a wait-and-see. I think you know our feelings about competitive bidding is that we may very well find that to be an attractive advantage for Hanger because of not only Hanger's geographic reach and scope, but now the 250 Linkia associates, the independents that have joined Linkia. So it's puts us in an ideal position to give a very comprehensive geographic footprint for competitive bidding if, in fact, that comes around. And keep in mind, competitive bidding in the orthotic area is limited currently, if it were to ever happen, to about three dozen or so lower-end off -- what we would refer to as off-the-shelf items.

So I think in summation, it's a little bit of wait-and-see. The good news is that we are slated unless otherwise legislatively overturned, to receive the CPIU increase, which we would hope we would get and we will wait and see.

Okay. Thank you very much. Good quarter.

Matt Ripperger.

You commented on the microprocessor knee growth. I just wanted to see if you could give a sense of what the revenues were from that in the quarter and how that is trending year-over-year and maybe some qualitative commentary on what you think is really starting to drive that product line growth.

Good morning, Matt. Hope all is well with you. Sure, I'd be happy to. One is, there's a natural cycle for our prosthetic patients, and so if you look at when the microprocessor knee was first introduced, it was back in the beginning part, the end of the 1990s, beginning of the early 2000. So as a result, on that five-year cycle, some of them are coming back around and they are mechanical, even though they've got an electronic component to them so they do wear out. So in addition to the new patients that are moving into this area, we are also seeing that we are seeing some replacements.

At the same time, I think the insurance companies are beginning to understand that this is a good insurance policy for them. And by that, I mean that this enables them to be more stable, to walk in uneven terrain, and it becomes almost cost avoidance, so insurance companies have become more willing. In the early days, they tended to reject these as experimental. Now we're finding that insurance companies have adopted and actually have licensed from us on a royalty-free basis -- a very comprehensive evaluation tool, which we call the PAVET. We've patented that, and that PAVET is such that anyone that puts that knee on and scores high on the PAVET is going to have increased functionality. And so when you score high, it's almost automatic that you would get a microprocessor knee.

So I think it's the combinations of reimbursement cycle teaming up with the new patients coming in plus a better understanding and education on the insurance company that has enabled this growth.

On an overall basis for this year, we're targeting a little north of 1000 microprocessor knee units. Now compare that to last year, that's up almost 25%. Because we did slightly north of 800 last year. This year we're going to do about 1000 plus. So we are seeing that trend fold over into our numbers. And overall, what we are seeing is that that 1000 units, a good rule of thumb for complete knee including socket is in the neighborhood of 35,000. Now we can look back and say if we compare that to a safety knee, then what is the incremental improvement? It's probably about half of that. So when we characterize the growth that we have experienced so far and we've said that we were up for the year roughly about 25%, we are performing on spec and you can just easily do that math and see what that can add into our revenue stream.

But we think there are some real positive forces behind this plus the fact that the manufacturers -- and we work closely with all of them -- have developed a family of products. So what we are seeing is where there was just one product in the early days, we now have two or three to select from, depending upon the activity level of the patient, the weight of the patient. So heretofore in prior days, maybe there were patients that couldn't get a microprocessor knee because they didn't have the right activity level or their weight was too high. And now, given that there is a family, we're able to fit more people into microprocessor knees. Some are called [compacts]. Some are called [brios]. Some are called [C-legs], but that's enabling us to service a greater portion of our population. So some real strong forces there and I think it's just the wave of the future on these above-knee amputations.

Thank you for all the detail. Second question is just related to the WalkAide rollout. Can you give a sense of sort of what the growth profile is in that product and how the growth profile could change and the market could expand when and if you do get a specific Medicare code for it next year?

Sure. We have to keep in mind that the market for the WalkAide product is very, very big, even if we would just within the United States, roughly 500,000 patients a year that survive stroke. And of those, we estimate that 20 to 25% could be a candidate for a WalkAide. So we keep the numbers small. I mean that's 100,000. There is an existing group of people out there, which we call the legacy market, that numbers several million. And of those, you would have several hundred thousand that could be candidates for the WalkAide. And that is just in the area of stroke. When you add MS, an MS, typical MS patient tends to be younger, more active and can actually better use the WalkAide, CP, some trauma, some spine, and brain injury, the numbers get vast. They actually get so big that they can almost become unrealistic. but anyway, that is the market segment that we're targeting. So our sales to date have begun to tap into the MS market, the stroke market and bit into the CP market. That's the work that we have done. We mentioned last time, we were on the Montel Williams show during national MS week because the device works very well with an MS patient.

So as we look to this ramp-up that you mentioned, to date, we're getting traction. I guess it's good news/bad news situation. While we're working very hard to get reimbursement, patients recognize the value of the device and in some sense, they may even be opting to wait a year or a year and a half till all the reimbursement issues are settled and then come back and get it reimbursed.

So we sell the product for about $4500. It carries the usual and customary of about 6000, but normally discount for cash brings it back down to about $4500. There's a competitor out there that priced higher, but for some reason, that price point is above what people seem to be willing to pay.

Under reimbursement, all of those thousands of people would end up being candidates. As we look at the profile of a stroke patient, usually a senior person covered by Medicare, so when Medicare approves this, we would expect that a significant number of those that are clinically qualified would be coming back in for WalkAides.

The good news, too, is that we've made a lot of inroads into the rehab market, so even though maybe some patients are not getting the device upon discharge from rehab center, it's part of their protocol. So we're getting the device introduced early on and improving their results.

So what we look to, since there is nothing out there of this type, is the history that we have had with the Microprocessor Knee and working to get it reimbursed and some other technology diffusion curves that typically follow these. But if we look at the history of our Microprocessor Knees, we went from when we first introduced that, we sold 50; then the next year we were up to about 200. Then suddenly reimbursement came in and we went up to 500. Then it went up to the 800, and this year we're seeing it go up to over 1000.

So we feel that it's probably on line with that that we're going to see about a two-year period, where we will continue gaining notoriety, publicity while we're conducting our clinical trials and then we hope to see exponential growth as we would enter that third year.

Just as a quick follow-up to that, Matt, we keep seeing sequentially quarter over quarter sales grow, and remember these are all private sales, private-party sales where someone is producing $4500 on a credit card or cash. So the demand is there. We're getting much better traction as we go forward quarter over quarter.

Great, thank you. And then the last question I had is with $30 million of cash, George, when you look at sort of debt paydown versus acquisition opportunities going forward, can you just give us a sense of how to prioritize those? And is there a limit from a covenant standpoint as to how much you can spend on acquisitions per year?

Sure. Matt, we look at that issue every quarter. We did spend about a third of that cash balance after the end of the quarter on the SureFit acquisition. So, and we obviously felt that from a return standpoint, that transaction made a lot more sense than doing a paydown of debt with that cash at this point.

Our acquisition pipeline is starting to fill; it takes some time for that to happen and we are taking the position as every quarter we will take a look at where we stand with acquisitions and make a decision whether we should pay down debt.

At this point we are not -- we don't feel it would be appropriate. Our limitation on an annual basis is $50 million and there's a carryover, so effectively we have about a $75 million limit for this year.

And our total leverage has come down nicely.

Yes, and the other point is when we look at the issue of what to do with the cash, we have leverage down to 4.4 times. We think the risk profile has changed significantly.

Great. Thanks very much.

Arnie Ursaner.

It's actually Larry Solow filling in for Arnie. How are you guys doing? Good. Just to play a little devil's advocate, I know the first Q1 '07 was impacted somewhat by weather. Did potentially some of those sales actually slip into Q2?

It's very difficult to really know that for sure. I mean I imagine maybe perhaps some of it did. But this was consistent with the trends that we've been building over the last several years. And second quarter typically, obviously, is better than first quarter. We are affected first quarter by some weather conditions in certain areas of the country. There's many areas of the country that we don't have those issues. It's mostly in the Northeast. But I suspect some of that may have spilled over, people who couldn't get out and got appointments and deliveries that occurred in the second quarter as opposed to the first quarter.

But Larry, we didn't see a big blip in the first month of the second quarter, which probably would have happened if that was the case. It was a pretty even keel quarter.

Yes.

Okay. And then on Linkia, you had a pretty dramatic acceleration from about 200 to 250 providers, just in the 600 one quarter. Can you give a little more color on that?

Sure. They have certainly been under study and underway for some time. Don't want to indicate that we initiated and closed on their joining the network. We have been working with each of the key insurance companies, where we have an exclusive contract for some time on fine-tuning this network in accordance with their network strategy. So I think some people might have been Doubting Thomases, holding off just for a little bit to see if it was all going to work and was it real. And then, too, I think a deciding factor might have been some of the interesting negotiations that we had with one major carrier in the first part -- in the first quarter that convinced people that they should come on board. And certainly, as we mentioned, the ability to take Linkia, the independent providers in SPS and make that a win-win for everyone in terms of improved service, access to technology, etc., I think also helped to convince some of the people to come on board. Those programs were all designed during the first quarter, and as I mentioned, have been rolled out end of the first quarter and into the second quarter. So a lot of positives to join.

Yes, and also, what's occurring there is that the independents that we are seeking to have join the network or what we refer to as the primetime players. They are the quality players in each one of the areas that we're supplementing with independents. And I think that there's a growing recognition that this is going to be a network of high-quality, high-standard providers and people that fit that profile want to be a part of that.

Right. Okay. And lastly, did you or can you provide an actual WalkAide revenue number for the quarter?

At this point, Larry, we're not at the level where it would merit segment type accounting yet. So we are -- it's building and when we get to that level, we will bring it out and disclose it for as an independent.

Fair enough. Okay, thanks a lot, guys.

(OPERATOR INSTRUCTIONS). Mike Petusky.

Good morning, fellows. Nice quarter. One quick clarification then a couple of questions. George, at the beginning of the call, you said that you guys are kind of right in the middle of the 620 to $630 million in revs. That excludes the recent acquisitions, correct?

Correct. That is without the two acquisitions we just did.

Okay, great. In terms of WalkAide traction via SPS, is there any way you can quantify or roughly quantify how many of your competitors, how many people outside of Hanger have actually purchased and fitted the WalkAide product?

We do track that. We track how many outside of Hanger we have trained and we track the sales. We have to keep in mind that the sales coming out of Innovative Neurotronics can go down one of four paths. First, they can come into HPO and be sold. Secondly, one of our rehabilitation sales specialists that work -- they're PT's that work in the rehab area can sell the device into the rehab market. Thirdly, it can go from SPS into an independent. And then lastly, it can be sold from Innovative through an international distributor and go out. So we are tracking all of those four distribution channels.

You also have to keep in mind that the SPS channel really opened up only in January of this year. Prior to that, it was exclusively HPO. HPO had it for the first six or seven months. So the majority of the sales to date have come out of the HPO, overwhelming majority, have come through HPO. But we expect that as more and more independents, and we are planning more training sessions, and they become comfortable with it, then one of the things that SPS has done is to bring in some additional clinical support. Because what we are finding is, if you train someone on this device, typically if they wait a month or two before they fit a patient, they're going to have some need for clinical backup as they are going through the first or the second one they fit. So just to make sure that we've got that back-stocked, we're bringing on additional clinical help within SPS. But short answer to your question is the vast majority is within HPO.

Mike, a follow-up on that question on the sales. It does not include the acquisitions, as I mentioned. But I also wanted to mention that on the EPS side, we don't expect there to be an impact on the current year. We do expect there to be impact on '08.

Right. Yes, I understood. They turn accretive next year.

Yes.

In terms of just trying to drill down on this issue, Tom, out of the 750 [orthogists] that have been trained, how many of those folks are Hanger folks and how many of those folks are outside?

About two-thirds are Hanger.

Okay. Got it. One of the things that I think you guys have mentioned maybe once or twice on calls and when I've done some checks outside of Hanger, I've heard about this neural plasticity effect that WalkAide can have and functional electrical stimulation can have. Can you guys just kind of remind me and remind everyone what's actually occurring there when you're seeing that?

Absolutely. Sort of the unfound treasure in all of this when we got into it and started to see what happened. The device has an immediate impact on the patient's ability to walk by dorsi flexing their foot, which means every time they go through their normal swing phase, it fires and it lifts the foot. What we're finding is that not only does that send the message down to the foot to dorsi flex, the neural pathways are opened such that it also sends a message back into the brain. And neural plasticity quite -- just simply is the ability of other parts of the brain to learn what the dead part no longer can do. So as you walk in this device and you get several months worth of experience with that, not only do you get more comfortable physically, but your brain, other parts of your brain start to readapt, such that we have now had patience that have been walking with the device for six or eight months have found that they can get up in the middle of the night and walk across the floor and go to the bathroom and don't have to put their device on and their foot is dorsi-flexing because that retrained portion of the brain is providing the stimulus to dorsi-flex the foot. We have one patient who has been in the device for several years and he can actually go a day without wearing his device. He prefers not to do that.

So it is a very nice thing that we are beginning to see as part of our clinical trials to measure that. It will never get to the point where you could go permanently without your device because the effect seems to wear off over time, but it is a benefit that we want to study further, and it's a great one for a patient in those occasions where they just don't have the time or forget to slip their device on.

Okay. Terrific. And just last question. It was a great announcement a few weeks ago on the Teijin deal. Are there other deals in the works either individual countries or perhaps Europe as far as distribution agreements you guys are working on?

Absolutely. The Japanese one is actually the third one we have. We've got two other in Europe, so we are beginning to build some momentum. We are having discussions with folks all over the world really. It's even into far Asia in terms of talking to some folks in Korea and Vietnam.

What we're finding is that the incidence of stroke is not limited by geographic barriers. So we are having discussions with others in Europe. Middle East, we attended a conference over there. It turns out that the incidence of stroke and diabetes in some countries over there is actually higher. And obviously if you are into one of those countries that provides the benefit of health-care, the $4500 doesn't mean much.

So, yes, there are others and as they come up and certainly are material, we will announce them.

Terrific, thanks, guys.

At this time, there are no further questions. Mr. Sabel, are there any closing remarks?

Yes, I just wanted to thank everyone for joining us. We look forward to talking to you at obviously the end of third quarter. I hope everybody has a good day. Take care.

This concludes today's Hanger Orthopedic second-quarter results conference call. You may now disconnect.