Hanger Announces Q2 Results

Hanger Orthopedic Group Inc., Bethesda, Maryland, (NYSE:HGR) announced revenue of $152.9 million and pro-forma net income of $3.7 million, or $0.13 per diluted share, for the quarter ended June 30, 2006, adjusted for the effects of its recent refinancing. As previously announced in May 2006, Hanger refinanced all of its outstanding bank and bond indebtedness and convertible preferred stock utilizing the proceeds from a $50 million private placement of 3.33 percent convertible perpetual preferred stock, a new $230 million senior secured term loan and a private offering of $175 million of senior unsecured notes. The company also established a $75 million revolving credit facility at the close of the transaction that remains fully available. The pro-forma results exclude the $16.4 million cost of extinguishment of the debt and assumes that the new capital structure was in place on January 1, 2006.

Net sales for the quarter ended June 30, 2006, increased by $3.2 million, or 2.1 percent, to $152.9 million from $149.7 million in the prior year's comparable quarter. The sales growth was the result of a $0.2 million, or 0.1 percent, increase in same-center sales in its patient care business and a $3.4 million, or 31.0 percent, increase in sales of the company's distribution segment. The increases were offset by a $0.3 million decrease as a result of closed patient care centers primarily due to the effects of the hurricanes in 2005. Gross profit for the second quarter of 2006 decreased by $0.4 million to $77.5 million, or 50.7 percent of net sales, compared to $77.9 million, or 52.1 percent of net sales, in the second quarter of the prior year due to a $4.1 million increase in the cost of materials. "The increase in external sales of the company's distribution segment accounted for $2.8 million of this increase, as they have significantly higher material costs than in our patient care segment, and the balance related to a shift in the sales mix," Hanger stated.

Income from operations of $16.0 million in the second quarter of 2006 was equal to that of the same period of the prior year, principally due to the decrease in gross profit, offset by a decrease in selling, general, and administrative expenses. Selling, general, and administrative expenses decreased by $0.7 million due to a $0.9 million reduction in bad debt and a $0.5 million reduction in labor costs, offset by a $0.7 million increase in the investments in the company's growth initiatives.

Net income applicable to common stock, on a pro-forma basis, for the second quarter of 2006 was $3.7 million, or $0.13 per diluted share, compared to $2.4 million, or $0.11 per diluted share, in the prior year. Including the costs of the recent refinancing, the net loss applicable to common stock was ($9.3) million or a loss of ($0.42) per diluted share for the quarter ended June 30, 2006, compared to a net income applicable to common stock of $2.4 million, or $0.11 per diluted share, in the prior year's comparable quarter.

Net sales for the six months ended June 30, 2006 increased by $10.6 million, or 3.7 percent, to $293.3 million from $282.7 million in the prior year. The sales growth was principally the result of a $5.0 million, or 1.9 percent, increase in same-center sales in our patient care business, and a $6.6 million, or 31.0 percent, increase in sales of the Company's distribution segment. The increases were offset by a $0.7 million decrease as a result of closed patient care centers primarily due to the effects of the hurricanes in 2005. Gross profit for the first six months of 2006, increased by $4.2 million to $147.7 million, or 50.4 percent of net sales, compared to $143.5 million, or 50.8 percent of net sales, in the first six months of the prior year due to the sales increase offset by a $5.7 million increase in the cost of materials due primarily to the increase in external sales of the Company's distribution segment.

Income from operations decreased by $0.2 million in the first six months of 2006 to $26.9 million from $27.1 million in the same period of the prior year due to an increase in selling, general and administrative expenses, offset by an increase in gross profit. Selling, general and administrative expenses increased by $3.9 million due to a $3.4 million increase in labor costs, from merit increases and increased health insurance costs, a $1.6 million increase in the investments in our growth initiatives and a $0.6 million increase in professional fees, offset by a $1.7 million decrease in bad debts.

Net income applicable to common stock, on a pro forma basis, for the first six months of 2006 was $4.7 million, or $0.16 per diluted share, compared to $2.3 million, or $0.10 per diluted share, in the prior year. Including the costs of the recent refinancing, the net loss applicable to common stock was ($10.0) million or a loss of ($0.46) per diluted share for the first six months of 2006, compared to a net income applicable to common stock of $2.3 million, or $0.10 per diluted share, in the prior year.

Cash flow from operations was $17.1 million in the second quarter of 2006 compared to $23.7 million in the prior year. The decrease in cash flow from operations was primarily due to $6.0 million in accelerated interest expense payments related to the recent refinancing.

Hanger Announces Q2 Results

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