Hanger Announces 3Q Results

Hanger Orthopedic Group Inc. (NYSE:HGR), Bethesda, Maryland, announced revenue of $151.5 million and pro-forma net income of $4.3 million, or $0.15 per diluted share, for the quarter ended September 30, 2006, adjusted for the effects of its recent refinancing.

In May 2006, Hanger refinanced all of its outstanding bank, 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 $0.5 million cost of extinguishment of the debt incurred in connection with the refinancing and assumes that the new capital structure was in place on January 1, 2006.

Net sales for the quarter ended September 30, 2006, increased by $5.1 million, or 3.5 percent, to $151.5 million from $146.4 million in the prior year's comparable quarter. The sales growth was the result of a $2.1 million, or 1.6 percent, increase in same-center sales in its patient care business, a $2.7 million, or 22.8 percent, increase in sales of the company's distribution segment, and a $0.3 million increase in non-core activities. The increase in same-center sales was accomplished despite the fact that there was one less business day in the third quarter of 2006 compared to 2005. Gross profit for the third quarter of 2006 increased by $3.5 million to $75.3 million, or 49.7 percent of net sales, compared to $71.8 million, or 49.0 percent of net sales, in the third quarter of the prior year. The increase was due principally to the increase in sales as well as a $0.6 million decrease in labor compared to 2005 as there was one less workday in the current quarter.

Income from operations of $17.1 million in the third quarter of 2006 was $0.4 million higher than that of the same period of the prior year principally due to the aforementioned increase in gross profit. Selling, general, and administrative expenses increased by $3.0 million. due principally to a $1.8 million increase in variable compensation accruals and $1.0 million increase in the investments in the company's growth initiatives.

Net income applicable to common stock, on a pro-forma basis, for the third quarter of 2006 was $4.3 million, or $0.15 per diluted share, compared to the prior year's actual $2.8 million, or $0.13 per diluted share. Including the costs of the recent refinancing, the net income applicable to common stock was $1.5 million, or $0.07 per diluted share, for the quarter ended September 30, 2006, compared to a net income applicable to common stock of $2.8 million, or $0.13 per diluted share, in the prior year's comparable quarter.

Net sales for the nine months ended September 30, 2006, increased by $15.8 million, or 3.7 percent, to $444.8 million from $429.0 million in the prior year. The sales growth was principally the result of a $7.2 million, or 1.8 percent, increase in same-center sales in its patient care business, and a $9.3 million, or 28.0 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 nine months increased by $7.9 million to $223.1 million, or 50.2 percent of net sales, compared to $215.2 million, or 50.2 percent of net sales, in the first nine months of the prior year due to the sales increase offset by a $7.9 million increase in the cost of materials due primarily to the increase in external sales of the company's distribution segment.

Income from operations increased by $0.2 million in the first nine months of 2006 to $44.0 million from $43.8 million in the same period of the prior year due to an increase in gross profit, offset by an increase in selling, general and administrative expenses. Selling, general and administrative expenses increased by $6.9 million due primarily to a $5.7 million increase in labor costs from merit increases and increased health insurance costs, a $2.7 million increase in the investments in its growth initiatives and a $0.5 million increase in professional fees, offset by a $2.9 million decrease in bad debts.

Net income applicable to common stock, on a pro-forma basis, for the first nine months of 2006 was $9.1 million, or $0.31 per diluted share, compared to the prior year's actual $5.1 million, or $0.23 per diluted share. Including the costs of the recent refinancing, the net loss applicable to common stock was $8.5 million, or $0.39 per diluted share, for the first nine months of 2006, compared to a net income applicable to common stock of $5.1 million, or $0.23 per diluted share, in the prior year.

Cash flow from operations was $15.9 million in the third quarter of 2006, excluding the impact of the refinancing, compared to the prior year's actual of $9.6 million. Including the effect of the refinancing, cash flow from operations for the third quarter was $15.2 million, compared to the prior year's $9.6 million. Cash flow from operations for the nine months ended September 30, 2006, excluding the impact of the refinancing, was $12.9 million compared to the prior year's actual of $13.4 million. Including the effect of the refinancing, cash flow from operations for the nine month period ended September 30, 2006, was $8.1 million compared to the prior year's $13.4 million.

For more information, visit www.hanger.com

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