Hanger Inc (HNGR) 2010 Q2 法說會逐字稿

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 Orthopedics Group's 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.

Good morning, and welcome to Hanger Orthopedics Groups' 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.

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 10K and Form 10Q 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.

Thanks, Tom. Overall, the second quarter contained several noteworthy points. Let me touch on a few of them. We grew consolidated sales over first-- second quarter of last year by 6.4%, and I'm happy to say that revenue growth occurred in all portions of our business. The sales performance, combined with cost management, yielded $0.37 earnings per share, and that's excluding the costs associated with our relocation.

This equates to a 15.2% growth over last year's second quarter. I would 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 have met 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.

Thank you, Tom, and good morning, everyone. Q2 was an excellent quarter for Hanger. The important takeaways are as follows. As Tom mentioned, we met street estimates for the 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 control of 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 [com] 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. Personnel 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 move expenses for the employees who are relocating.

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. Our D&A increased by $600,000, which is commensurate with the capital expenditures over the last twelve months. Our interest approximated the prior year, as there was no significant change in variable interest rates.

Our tax rate of 37.5% benefitted from approximately $300,000 in one-time release of FIN 48 reserves, so we did have a benefit there of about a penny. 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 just discussed led to the 19.4% increase in pro forma EPS for the quarter. Moving on to the first six months, our overall performance in 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. Our revenue growth was 5.9% in the middle of our expected range, with HPO same-center sales up about 3.9%, and our distribution business increasing 7.4%. Our com rate of 30.3% is comparable to the prior year, and is in line with our internal expectations.

Excluding the relocation cost, income from operations increased by 11.3%, a 60 basis point improvement over the prior year. Year-to-date, we incurred $6.2 million of relocating cost, which is in line with our internal expectations.

D&A and interest was about $500,000 higher than last year due to slightly higher capital visions, and our tax rate, year-to-date, is approximately 38.3%, again, benefitting from that release of FIN 48 reserves that I mentioned a minute ago. Pro forma diluted EPS was $0.53, a 15.2% increase over the prior year.

Now, let's move on to the balance sheet. Our AR balance was $106.3 million. We continue to do a good job of collecting cash. Our DSOs were 49 days, so they stabilized in a range that we expect to see in the future. The quality of our receivables remains excellent, and we are comfortable with our reserve for (inaudible) accounts.

Our inventory increased by $3.7 million to $95 million from $91.3 million at the end of the year. Inventory turns were consistent with past experience at 4.2 times. Our sales backlog remains strong at quarter end, and we believe that our inventory is at an appropriate level to serve our patients.

Our CapEx was $5.8 million for the quarter and $13.7 million for the year, which is $5.1 million higher than last year. During Q1 of 2010, we accelerated some equipment purchases in order to take advantage of special pricing, and that's a large reason why the CapEx is up over the prior year.

We still anticipate that our capital additions for the full year will be in the $28 million to $30 million range, depending on the status of the development of our new building system. Cash flow provided from operations for the quarter was $19.6 million, which was $4.9 million less than the prior year, and that's due to the payment of relocation cost, and a slight-- we had a slight increase in working capital.

Our liquidity remains strong. The Company currently has total liquidity of $135.6 million, comprised of $72.1 million in cash, and $63.5 million in availability on a revolver. Our total leverage per our bank calculation decreased to 2.77 times, which is a historic low.

Moving on the Austin relocation, we are really in the middle of that right now, and it's on schedule. Our new office space is scheduled to open on August 16th. Our temporary space has been in operation since March, and we continue to add staff. We expect to record the charges that were discussed in the press release, principally through the third quarter of 2010, and then you should see very little in the way of charges in Q4.

Moving on to guidance, we are reaffirming our guidance for 2010. We expect net sales in a range of $815 million to $825 million. That's a growth rate of 7.2% to 8.5%. Our goal is to improve EBITDA leverage by 20 to 40 basis points. As I mentioned before, we're a little bit ahead of that goal. For all of 2010, our full-year EPS guidance remains $1.27 to $1.29. That's a growth rate of up to 14%.

That concludes my comments, and now I'm going to turn the call back over to Tom, our CEO.

Thanks, George. Let me add a little color on the business drivers from an operations perspective. Our patient cure segment achieved a $6.8 million increase, or 4% same center sales growth for this quarter compared to Q2 of '09. We estimate that approximately 1% to 1.5% of this increase can be attributed to price resulting from the rollout of the C-schedule increases from the 2008 and 2009 period, with a balance attributable to volume and mix, and that's about a 50/50 split, and you'll recall that CMS did not give us a fee schedule increase, so this pricing driver that you're seeing is resulting form the flowthrough on our Linkia contract, plus the ability to negotiate some little stronger pricing in other portions of our business.

Now, the other programs that are impacting net volume and mix are the following. First, the continued improvement in the Linkia book of business. Let me again remind you that HPO is the primary vehicle for the delivery of most of the services under the Linkia contracts. On an overall basis, the revenue from the Linkia-designated contracts is up by 11.5% for the quarter, and 11% for the year, compared to the comparable periods in 2009.

The second driver is educating our referral sources on the enhanced, lifelike features of our high-performing products, such as our advanced suction suspension systems, microprocessor prosthetic arms, hands, knees and feet components.

For Q2, the revenues from these product lines were up by 12% compared with Q2 of '09, and I'm happy to report that our practitioners are extraordinarily satisfied with the launch of our new V-Hold vacuum suction system for prosthetic patients.

The third driver are our patients' evaluation clinics, and this is where we call our patients in for an education system on their fit and function. This is not only an example of good patient care, it also provides incremental revenues. Revenues from these kinds of activities were up by 5% over the comparable period in 2009.

And fourth are our sales, marketing and public relations efforts by our practitioners and those that support them in identifying opportunities specific to their local businesses, such as the opening of satellite offices and the launching of marketing programs.

Just to comment on the overall environment, and a little bit about healthcare now. We're seeing that the percentage of unemployment currently stands at 9.5%, which is equal to the 9.5% we had at the end of Q2 of '09. But the good news is that the Administration and Congress have extended unemployment benefits and health insurance, so that is a big help to our patients.

In the meanwhile, our practitioners and administrators are working with our patients to identify other sources of assistance which would take care of their co-insurance and their co-pays.

On the legislative front, we have been working very hard to educate the lawmakers on the impact of the recently-passed healthcare legislation, both from an overall cost-to-the-industry perspective and the potential downside to patient care. Our efforts have been in concert with the Amputee Coalition of America and the American Orthotics and Prosthetics Associations.

As you're aware, there are serious plusses and minuses associated with this new legislation. On the positive side, it does admit over 30 new potential patients into the system without rejection for pre-existing conditions, which is a huge positive. On the other side of the equation, we're still trying to understand the interpretation and the potential implementation of some of the provisions of the new law that go to the reimbursement and go to the competitive conditions.

I'm happy to report that at present, there are House and Senate versions of the Custom Orthotics and Prosthetics Parity bill, and we are working very hard to build broader support in the base line of the Congress. Okay, let's turn our attention to SPS. Their outside sales were up approximately $2.3 million, or 10.4%, compared to the second quarter of '09.

During Q2, SPS added a new salesperson to the SPS sales team, a new sales manager to Surefit, and a new general manager for our fabrication business. We're already seeing the positive impact from these actions. Now, let's take a look at Linkia.

They continue to execute their dual mission of building volume while negotiating a fair price for their services and the value they provide to their customers. Payers tell us they recognize the value that Linkia brings to them in helping them control costs while ensuring good clinical care and high levels of customer satisfaction. Their sales, as I mentioned before, are up by 11.5% for the quarter, clearly a validation of their offering.

In addition, during the quarter, Linkia is advancing the piloting of other services that they can incorporate into their model to provide benefit to payers. These are services that payers have requested in the way of invoice review in other types of networks going to mastectomy and other indications, and these pilots are looking very positive at the present time. On the marketing side, they are continuing discussions and negotiations with key national and large regional healthcare management companies, as well as the firms in the workmans' compensation segment.

Okay, now let's talk a little bit about Innovative Neurotronics. Their sales were above those of 2009 by 15% for the quarter and 27% for the year. We're continuing to work with the clinical sites to go through the IRB and contracting process for our pivotal clinical trials. In total, we're working with 30 institutions, and have begun enrolling patients. I mentioned during our last call, this pivotal study, which we call InStride, will be a much larger multi-center randomized clinical trial.

We continue to work closely with the FDA and CMS to ensure that the InStride trial proceeds appropriately, supports reimbursement, and provides meaningful clinical influence. The InStride trial is an FDA/IDE-approval trial to enroll 1100 patients in 30 sites in the US. We've also retained an outside firm to assist us in patient recruitment. In terms of a timeline, we anticipate complete patient enrollment in 2011, but obviously, we'll be dependent upon site enrollment on a specific site-by-site basis to see at what point during the year we hit that target.

Once the study is complete, we will submit to the appropriate regulatory agencies and expect the data to be published in several peer publications. We anticipate 2012 submission of data to the FDA and CMS, and at the same time, we continue to work with third-party payers through our reimbursement desk where we've added additional resources to gain authorizations for our patients.

This dual-track public and private is the same progression that we went through to gain reimbursement on MPKs and other O&P devices. We continue to be optimistic about our prospects for obtaining regulatory clearance on this.

And a few words on our acquisition program. In 2010, we are targeting to complete acquisitions which would have about $20 million in annualized sales. This is comparable to the prior years, and as we've said in the past, our strategy is to look for tuck-in candidates that have strategic value to us in the form of location, quality practitioners and/or favorable product/service mix.

Finally, in closing, let me just say that we operate in a changing and challenging environment. With issues like states trying to close budget gaps, dealing with federal regulations concerning healthcare change, and, of course, some of our patients, or their family members, looking for work.

Through it all, we know that the mobility of our patients is a lower-cost alternative and a higher quality of life premise than being denied a critical device. I'm proud of our ability to grow the top line despite the challenging environment. In addition, we've continued and, in some cases, reduced cost without sacrificing clinical and operational excellence, and I expect that these efforts will continue throughout the year.

Thank you. Let me turn it over to Beth for questions at this time.

(Operator Instructions). Your first question comes from the line of Dawn Brock, Kaufmann Brothers. Your line is open.

Good morning, Dawn. Dawn, are you there?

Hello?

Hi, Dawn?

Good morning, how are you?

Great, thanks.

Thank you for taking my questions. The first thing I wanted to ask about is if you could drill down just a little bit into the mix of sales in HPO? And particularly, I--

Beth, there seems to be some difficulty here. Can you verify that we can come back to Dawn if it's coming from her side?

This is the Operator. I apologize. There will be a slight delay in today's conference. Her line has disconnected.

Then move on to the next question, please.

Yes. Your next question comes from the line of David MacDonald, SunTrust. Your line is open.

Yeah, guys, just a couple questions, I think, probably the same question that was about to be asked, but you can talk about just some of the specific programs that you guys are talking about in terms of driving some of these higher-technology products and with just contributing to the mix that's helping the revenue growth here? Anything specific that you guys are doing there under that quote "educating referral sources" mantra?

Sure. It's a three-point program, Dave. Point one is the education and training of our practitioners on how to utilize the new devices. As I mentioned, the V-Hold has put on a large training at the education fair, and we have now been active in going out and training our people so they know how to fit and, of course, what are the appropriate patient protocols, so that we can identify the key patients to put them on. That's number one.

Two is working with the practitioners and our sales force, that's so they set up end-services to go out to the referral community, that's PTs and docs, and explain these new devices and what are the added advantages of those devices in terms of either safety, security, or functionality.

We have almost 30 what we call business development managers that are out there talking about those technologies, and then the third point is through our patient evaluation clinics. Now, as you heard my mention, this is an educational forum for our patients. They come in, we examine fit and functionality, and determine if their existing devices are still working appropriately.

At the same time, we take the opportunity to explain the new technology to them and how it could help them if, in fact, they are a candidate. Let's assume for the moment that they are. We then would give them the appropriate paperwork to take back to their doctor who we have already seen through our in-service activities, recommending that patient be seen by the doctor, with the view in mind that they could upgrade their device and get a higher-functioning device that could be closer to what they've lost.

So, it's a three-point program that is constantly being refreshed as new products come on the market, whether we are the developer and supplier of those ourselves, or whether this is an outside supplier that's bringing in a new product.

Okay, and then just, guys, two question n capital deployment. Can you talk about what the pipeline looks like in terms of the acquisitions? You've obviously done a fairly sizeable one already this year, but should we be expecting kind of smaller folks or are there a couple of decent-sized guys still out there?

Second of all, George I know, there is some potential opportunities in terms of capital structure and just what plans, if any are there and then I got one follow up.

Sure. I'll take the acquisition one right away. The pipeline remains to be a mix. We always look for those little tuck-in mom-and-pops where people are looking for an exit strategy. When I'm talking about those, this is more in the under $10 million range and predominantly even under $5 million and we've got numerous opportunities in that area.

At the same time, from time to time, some of the larger ones, of which there are not too many, come to us and say "is there is some way we can put some deal together, perhaps our senior partners want to exit, well the juniors want to remain active?"

We engage in those discussions. I think, they are of longer-term nature, but we have made some of those in the past and we think overtime, that we do provide a viable alternative and exit to some of these folks for getting out of their sort of partnership relationships. But for the moment, I would expect to see a series of the smaller ones getting us up to the $20 million range.

On the-- David, on the question on our capital structure, if you go back to June when the call was first available on our existing bonds, we had a bank group together to look at our refi, and when the market hiccupped, we decided to sit back and wait. We are not pressured to do a deal right now, and in fact if we were to wait until June of next year, it will be a step down in the premium we will pay on taking out the bonds on a call.

So we are waiting for the market to come back. It has been coming back. We-- there is definitely a possibility that we could do something in the third or fourth quarter. I would say it would be later in the third quarter, but the market clearly has improved, and we are looking at it on a weekly basis and consulting our partners and if we think the rates make sense, we will act. So, there's still a very good possibility that we will do something this year.

And then just last question on the WalkAide. I know you guys have talked about kind of getting folks enrolled, all the 30 sites and all that stuff kind of late 2010 early 2011, that sounds like it's still a pretty good number.

Yes, we've got-- three of the sites are up and operational, three are in the final --four, excuse me, are in the final stages and unfortunately each of these institutions moves at their own speed, their internal IRB, for the internal review boards have their own little processes, but we are working with an outside company not only to help populate those trials but to also facilitate the review-- the internal review and make sure all the paper and documentation is appropriate. So, that's our game plan as to try and get these things up this year, get them populated, get people through the trials, collect that data by-- at the end of 2011 and then submit in 2012.

Okay and then Tom is it fair to say that you know because these things all move in some cases at a fairly glacial pace, you guys will be working with kind of all of the remaining facilities in parallel and a lot of these could start breaking at the same time, just a little further down the road?

Yes, and frankly that's one of the reasons that we thought it was prudent to bring in some outside resources that help in this regard, because not only do we want to get them up, we want to make sure that the protocols are right, that they are collecting the data the appropriate way and recognizing that a couple of them could break out of that glacier progression, we want to make sure we had sufficient resources on board to handle them.

Okay, thanks, guys.

Thank you.

Our next question comes from the line of Brian Sekino with Barclays Capital. Your line is open.

Hi, good morning. Good morning, guys. Just want to follow up on the last comment about the patient evaluation clinics and as you talk about the revenue being up 5% from these clinics, is this-- are these existing patients who would normally, I guess come in for I guess a lower-end replacement device and basically you are educating them to get one of the higher end, higher cost devices?

It's twofold, Brian. Number one, they are our existing patients, so it's a bit like your dentist bringing you back for periodic kinds of treatments when he sends that little postcard out to you, and the revenue that we attach to this is that we try to go through an estimate and then this is a bit of a guesstimate but over time, we've been able to at least refine this estimate, what procedures they have picked up specifically as a result of the PEC clinic itself. So, we know that if they had a device and it breaks, we're going to see them anyways because this is their mobility and they're going to come back in.

So, this is our ability to acquaint them with the condition and the functionality of their device and to make sure that they're getting good patient care. Now maybe they might go three years, but by trying to get them back in every year, we prevent that catastrophic failure. Now, if in fact, during that visit, we educate them on a new higher-end device that has higher functionality, then that doesn't go into the incremental revenue category of 5% that I spoke about, it then would go into the value of the higher-end device, which is where talk about volume and mix and the high techs products that are in that mix.

So, we try to separate the two out and based upon our billing codes and the understanding that our practitioners have about what's normal wear and tear, what we've picked up on the incremental basis versus--clearly we know when we move them from a safety knee up to a microprocessor knee or from a locked-in suspension system to a vacuum suspension system. That's a little easier to grab that revenue. So it's a validation. By taking good care of the patients, not only do you help them, but you can pick up some incremental revenue.

Got it, got it. And then another follow up on the WalkAide comments, I know you mentioned getting to a thousand patient enrollment and your last comments about the sites. Is that really, I guess, the bottleneck to getting the enrollment to thousand is having the sites finalized through the final stages?

It certainly is the key one. The second one, I wouldn't call it a bottleneck, is to just get those sites populated. We're very encouraged. We're working with a company out there that focuses on getting patients into sites and I mean, they ran some radio ads down in the Carolinas and we've managed to pick seven potential people by just letting them know that this technology was available and that they could come into a sponsored site like this. So, bottleneck one, get the IRBs approved in the research institutions up and going and then second thing is to get them populated.

Okay, great, and then one last here, I know just on the guidance here as it relates to your acquisitions, you've already made, I guess, roughly $14 million in revenue like you put out a press release a couple of months ago and I think about the guidance, the revenue guidance for the remainder of the year, do you assume that getting to that $20 million of acquisitions happens on the fourth quarter and that anything you do before then could potentially be upside?

Not necessarily. We like to see them scattered through the quarter. We just closed on a small one the other day that was just a single practice. But we would like to see them scattered throughout rather than come bunched up at the end of the fourth quarter.

I said we probably have an opportunity this year, I would say $20 million is probably a lot for this year and we could end up doing $25 just because we've been pretty successful in the first half, but I think Tom's right. It will be spread throughout the year.

Okay, great. Thanks a lot, guys.

You're welcome.

Your next question comes from the line of Larry Solow, CJS Securities.

Good morning, Larry.

Hi. Good morning, guys. Can you maybe just talk about a little bit more color on business trends and are you seeing any meaningful change of business flow over the last year? I mean, obviously, unemployment there is maybe a little bit of delay which is when people go of COBRA and the government maybe helping that, prolong that, but just any underlying trends? And then a follow-up to that is I guess if you sort of do the math on your guidance it implies that your revenue growth midpoint would be more like 10% in the second half. So that's a pretty good acceleration from the first half, so any thoughts for that?

Let's talk about the business trends, number one. It's pretty stable. I think for the most part, we have seen the sorting out of some of the patient population, particularly on the low-end, perhaps I might even call it discretionary, devices, but I think what we are now dealing with are the custom orthoses and the prosthetics and that really goes right at the heart of mobility.

In the latest jobs bill that was just passed, there were extensions and benefits that certainly does help out and I think once the healthcare bill-- as I mentioned, we don't understand all the provisions because they are not written yet. These are privileges that have been granted to the Secretary to decide how these things are going to be enacted, they are privileges granted to the Secretary on CMS trial that haven't even been constructed yet and there have been implications that have been passed to the Treasury Department to figure out how certain taxes and other things could work.

So, we are trying to make sure everybody understands the implications of wrong actions in this area and they are not necessarily hitting business conditions today, but they certainly could impact business conditions in the future, as could the addition of 30 million new patients.

Once that kicks in, we expect to be seeing more people that have been denied, don't have insurance, that have been denied conditions such as diabetes care, amputations and other thing. So, absent that uncertainty, I would say our business conditions are pretty stable and that's why you are seeing our revenue growth in the middle of the range as opposed to either going down or a big pickup going up right now.

But right now I think we are sort of just stable, solid performance, same kinds of trends as we've seen over the last 6 to 12 months.

Right, and then total revenue growth in the second half should accelerate specially with the acquisitions that we did in the first half and should be certainly high single digits.

Keep in mind that our first quarter is always our lowest, too, simply because of the weather.

Okay, and then I'd like to see the price increase for next year. Obviously we're just sort of going into the early stages of looking out, but I guess the CPI-U is 12 months ending in June, so that number is probably somewhere around 1.5% to 2%, so I mean, you--

It's actually 1.1%

Ok it was 1.1%. So you're expecting sort of low single digit increase for next year?

They haven't shown their cards yet, but that, based upon historical precedent would be appropriate to see.

Okay. Great. Thanks.

You're welcome. Thank you for joining.

Your next question comes from the line of Dawn Brock, Kaufman Brothers. Your line is now open.

Good morning. Can you hear me?

We can hear you fine, yes.

Excellent. So, first I wanted to maybe piggyback up a question that's already been asked and see if we can just dig a little bit deeper into the mix of sales or characterize the sales in HPO this quarter as far as the prosthetics versus orthotics?

Right now we're seeing a pretty even balance between the O&P side of the business in terms of the overall increase. Of course, as you know, we are primarily focused on the higher end of the orthotics business as opposed to the off the shelf. So it's not as much in that area, but it's pretty balanced.

Okay, that's great. And, Tom, could you talk a little bit-- in the first quarter you put up very impressive numbers considering the inclement weather you saw. Was there any pent-up demands that actually came through into second quarter that you were able to capture?

Not of any significant amount, Dawn, because if we think about how this works, if that weather occurs near the end of the quarter, then you would get flow over into the next quarter, but normally we try to get those patients back in and get them rescheduled as quickly as possible and where-- we were slammed with a lot of bad weather.

February was a disaster on East Coast. We managed to get most of that into March, so I don't think, we are seeing any measurable amount, there was a little bit of bad weather that came in toward the end of March, but no significant amount I would attribute to the second quarter performance coming from the first quarter weather.

Okay, that's actually great, and then I kind of want to go out on a limb here and ask a question. On the PEC side, on the patient evaluation clinics, Tom, is there any sort of trade-in value if the patient moves from a safety need to a higher-functioning device early i.e. giving the managed-care companies an incentive to have the upgrade covered?

There really isn't. Each of these stands on a fixed-fee schedule basis and under federal law you can't reuse a device on someone else. In some cases, they've been packaged up and sent to distant places where they can be used, but within the United States, there's no trade-in value like with your car or something else.

So, we would never put a device on someone if it, A, wasn't necessary or, B, that they couldn't either be more stable or have higher performance, so that they could function better in their activities of daily living, so it's usually not a real discretionary choice. It's one that's primarily made by the doctor and we might make recommendations, but the doc is the one that has the final decision-making power on whether that a device that could be of value to a patient when they need it.

That's helpful. I mean, I understood the fact that you can't trade in and actually have it reused. I think that my questioning was more around whether or not there is pushback from the insurance company. If somebody tries to actually upgrade early or whether or not because you've got that prescription from the physician, that's enough?

We from time to time, and I think you probably have seen it on public broadcast, you occasionally will see an insurance company trying to push back on a patient claiming that they don't need a device. So it would be naive and would be inaccurate for me to tell you think this is never pushback because we have all seen it. What is the rule and more of the norm is that once the doctor decides and makes the recommendation, then it would flow through. In some cases depending upon if it gets snagged somewhere, there may be a hearing.

And we from time to time will be on those hearings to explain to whoever the reviewer is along with the patient's doctor why we think the device is necessary and useful to the patient and of course, if that doesn't work, there is appeals and sometimes these things will go three or four levels before they are finally approved. But it's a rare case, when you look at the value of some of these microprocessor devices, and CMSs get thousands of these things and they wouldn't be putting them out there unless there was value, the insurance company have paid for thousands of them.

So, we normally hit that up in the beginning of the process when you are introducing a new product where you go through a series of appeals and pushbacks and that's usually an education process.

Taking a bit of a comment that you just made about maybe the media. Your charitable organization has actually been cited a number of times in the media over the last month. I think I'm looking at the Today Show announcement that you guys put out. Did you see any, as you often do, upswing or uptick in your kind of interest level that you're seeing for WalkAide based on this media attention?

Certainly we have benefited from the goodwill that has been created by the Hanger Ivan R. Sabel Foundation and the mission as we are currently involved in Haiti, it aims towards some of the victims of the earthquake down there, and job one was to get them into prostheses, and job two is-- it looks like there's going to be some need for some custom orthoses, and by soliciting funds from the outside, we've been able to fulfill that mission very successfully with over 400 patients treated.

So, we do get a little bit of goodwill carryover, but nothing that I could go to the level of specificity to say because of the foundation's work in Haiti on prosthetic patients, we've had benefit on WalkAide, other than to say, our name is better known and what we stand for.

Excellent. Thank you very much, guys.

Thank you, Dawn, for joining.

Your next question comes from the line of Mike Petusky, Noble Research. Your line is now open.

Good morning, Mike.

Good morning. Handful of questions. Actually, Q3 revenues, traditionally, or at least the last couple of years sequentially are down a bit versus Q2. Do you guys see any change in that or is it going to be kind of a traditional seasonality there?

I think that's a traditional vacation/seasonality phenomenon and the way we've set up our budgets, we are expecting the same kind of performance.

Then, To me, it seems like you are obviously going to then really expect a pretty big fourth quarter to kind of get into that revenue guidance I guess.

Fourth is always our largest, yes.

Okay. I guess in terms of the-- Tom, some of the data you sometimes provide on the WalkAide are kind of claims and process date on the commercial side. do you have that data handy by any chance, updated data on that?

On an overall basis, we've put through about 1600 claims so far. This past quarter we've put 226 new wins in and as you are well aware, it's an iterative process, so some of them are in the sausage grinder for a period of time until they get authorized.

In some cases, we find out the ones that have been submitted have to go back and we've got to put more documentation on it, but if we look at those that have been approved versus those that have been denied and say, well what is the final denial. That after a number of iterations we are running about 70% approval rate as the ones that are coming out, approved over total coming out.

So, that's sort of history and it's always dangerous to manage out of a rearview mirror. We might do better on a go-forward basis, but we do believe that we are making some progress in convincing insurance companies that this is a viable modality to take care of their numbers.

I guess, jumping over to Linkia real quick, you guys-- and I don't know how many quarters this has been kind of in the preamble language, but you are always kind of talking to workers' comp or other regional national payers. Is there anything material that you would say is in the final negotiation stage? I mean is there anything there that could kind of pop in the next quarter or two in your view, or is this stuff just move very, very slowly and who the heck knows?

It has moved very slowly. However, without disclosing the names of the folks, we do have some that are in that I would call the final stage of negotiation, that could add-- I mean Linkia is not going to double its book of business, but they could bring an incremental to where we are today. Each of these could bring anywhere from an incremental 5% to 10% to Linkia if we were to get them.

Alright, great, and just a last question. I can't remember exactly how long ago, maybe two three years ago you guys added, I believe a Chief Growth Officer, and I'm just wondering, there any initiatives, maybe senior-related products or DMA, or other interesting products that could fuel, I guess, additional growth and leverage the distribution assets you have in your facilities.

We have some works in progress and might add that he's doing a great job and on the technology as well as on the new business front, his name is Vinit Asar, we've got a couple of pilots that are underway that are picking up some momentum. Don't want to talk about those just yet for a number of reasons as I am sure you can imagine.

But we are quiet pleased with the potential return on investment as well as the synergistic value of having those operations working out in the field and being able to enhance the Hanger name and perhaps even allow for opportunities for cross-selling.

Alright, great. Thank you.

Thank you, Mike.

Your next question comes from the line of Daniel Owczarski. Your line is now open.

Good morning. Hi, Tom, Hi, George. I got disconnected during the Q&A, so I apologize if someone has asked this already, but Tom, in your prepared comments, you mentioned custom Orthotics Parity Bill and I was wondering if you could explain a little bit what that was?

Yes if you remember, we've got 19 states that have passed Parity, that's in a general sense. But half of those states have customer orthotics as well as prosthetics in their Parity Bill. We had originally introduced into the Congress at the end of 2008 a Prosthetic Parity Bill that was introduced into the House of Representatives by Senator Andrews in New Jersey.

At the end, of course, the whole Congress shifted over at the end of that with the new administration. We have the new Congress in place. So we went back and redid the bill recognizing-- because we had a number of groups, 22 of them, associations like CP and MS come to us and say we have members that have chronic conditions and we have a lot of difficulty with caps and limits on getting custom orthotics for our members, so we hear what you are saying about prosthetics. Why can't we make this a joint bill?

So we worked with ACA and these associations and had them all sign on and went back and reintroduced that new bill into the House that was reintroduced by Andrews, and it was very successful and then we recognized that we had to have a parallel bill in the Senate.

So, we've been working through '09 and of course, everything sort of ground to a halt during the last six months of '09 because of healthcare reforms to work with Senators Harkin and Snowe and we did get introduced into the Senate their version of the Custom Orthotics and Parity Bill.

So we've got two out there that have yet to be reconciled and basically the thrust of this is, we are not saying that it's a mandate because that doesn't fly in DC that somebody-- a third party payer has to provide coverage.

That's totally up to them, but what we are saying is if you provide coverage on prosthetics, and custom orthotics, it should be under the same terms and conditions as other healthcare benefits. It shouldn't have $2,500 per life limit or, like, one limb per life because that just doesn't work, we know, with these chronic patients.

So it doesn't mandate coverage, it just says that you can't artificially cap it and limit it, and so even Senator Harkin told this at a meeting, if in fact we have an American Disabilities Act and we are trying to ensure quality for all the disabled, it's a bit ridiculous not to have a bill such as this that allows them the financial wherewithal to be able to capture that benefit. So, that's where we are going with that, and we are trying to build broader support and getting-- we are additional representatives and Senators to sign on the bill.

So, what should we, we would be watching for, what would be the next step? Would it be some kind of reconciliation between those bills?

Yes and it probably would not fly, it's too small to go through on it own, it probably would be attached to another bill

And then you spoke on just kind of overall market which you are seeing, but specifically, I was wondering if you are seeing any kind of contraction in the market as far as the number of practitioners that are out there? If some of the independents are starting just to give it up, or is that number of competitors or the independents still level or is that moving one way or another?

It's pretty constant. Of course, we, through our acquisition program manage to take out 5 to 10 of them a year and then as opposed to being independent and in some of the smaller operations, they may come over with 15 to 17, midsize, I should say, 15 to 17 practitioners.

They are still there, but they are now operating under the Hanger slate instead of the independence, but it's reasonably constant. If you look at the number of students graduating, and that has increased because the couple of other schools have come online, like St. Petersburg College, University of Pittsburg, talking about bringing college on board, but it is reasonably in balance with those that are retiring and those that are coming into the field, and we pick up 55 to 75 graduating students that we bring in for their residency program in the hope that gives them a chance to know us and we know them and then we just keep them on board.

But the total university graduation is up around 200 a year or something like that, and we are very active in sponsoring universities. We've got one of our own at the university of Connecticut and we did put forth a pledge and grants to St. Petersburg College up and going, because we recognize that's the lifeline, but thus far, supply and demand are roughly in balance and we get our fair share.

Thank you.

Thank you.

(Operator Instructions). Our last question comes from the line of Larry Solow, CJS Securities. Your line is open.

A housekeeping follow-up, do you actually have the number from the WalkAide sales in the quarter?

We don't report those because there is a competitor out there, and we don't want to disclose what our sales our and it's still a growing business for us, we don't treat it as-- it's far too small to treat as a segment.

Okay, is it fair to say you still expect about $10 million this year in total, I mean, you had given that a number at some point?

Yes, that's a good number as a target.

Okay, and then, you-- I think, on the last call, you said about the enrollment, it seems like-- the target seems like it's sort of in flux, but you had said that you expect to be about 50% enrolled by year-end calendar 2010, is that still achievable, or?

It's depending on how fast we can get these institutions up. It's still achievable, and certainly that's one of the reasons we've brought in some outside resources to help us.

It sounds like it's going maybe-- I know you often are a little slower than expected, but maybe a little slower than expected?

I think that's a fair statement

And then, just lastly, strictly housekeeping question. The stock comp expense for the quarter, do you happen to have that number, George?

Sure. I think I should have that right here. $2.4 million.

$2.4 million. Okay, great. Thanks a lot.

Thank you.

There are no further questions.

Well, seeing no further questions, let me thank you all for taking the time to join us and I'd again like to reinforce that from our perspective, we think we've got a good solid business. As I said the last time, we didn't take some of the big dips that others have, therefore we're not reporting the 81% increase in profits, that some of them are capable of doing, but we think our HPO business is solid and knows how to manage through our acquisition program, satellite program, products we will continue to grow, good, solid distribution business.

Linkia continues to provide value, Innovative Neurotronics is growing on a year-over-year, quarter-over-quarter basis and we will proceed through this clinical trial and hopefully see relief at the end-- by 2012. So, as you consider your portfolio of potential investors, please think of us as a good solid performer that will continue to perform through sales increases and very effective cost control. Thank you all, have a good summer.

This concludes today's conference call. You may now disconnect. Thank you.