Hanger Announces 2006 4Q Revenue, Sales Growth

Hanger Orthopedic Group Inc. (NYSE: HGR), Bethesda, Maryland, announced its 2006 fourth quarter results February 13. The company announced revenue of $153.9 million, a 3.2 percent increase from $149.2 million in the prior year's comparable quarter, and net income of $4.9 million, or $0.17 per diluted share, for the quarter ended December 31, 2006. In 2006, revenue grew by 3.6 percent to $598.8 million compared to $578.2 million in the prior year. Pro-forma net income was $14.5 million, or $0.49 per diluted share, for the year ended December 31, 2006, adjusted for the effects of its refinancing, compared to $8.1 million of net income applicable to common stock in the prior year, or $0.37 per diluted share, excluding the impact of $3.7 million in net operating loss carry-forwards in various states, net of certain discrete tax items.

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. In connection with the transaction, the company also established a $75 million revolving credit facility at the close of the transaction that remains fully available. The pro-forma results for the year ended December 31, 2006, exclude the $17 million cost of extinguishment of 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 December 31, 2006, increased by $4.7 million, or 3.2 percent, to $153.9 million from $149.2 million in the prior year's comparable quarter. The sales growth was principally the result of a $3.9 million, or 2.9 percent, increase in same-center sales in Hanger's patient care business. Cost of goods sold for the fourth quarter of 2006 increased by $8.5 million to $78.3 million, or 50.9 percent of net sales, compared to $69.8 million or 46.8 percent of net sales, in the fourth quarter of the prior year. The increase was principally due to an increase in material costs, due to the sales increases in both the patient care and distribution segments, and adjustments related to the company's annual physical inventory.

Income from operations of $18.4 million in the fourth quarter of 2006 was $1 million higher than that of the same period in the prior year principally due to a reduction in selling, general, and administrative expenses. Selling, general, and administrative expenses decreased by $4.8 million due primarily to a $3.8 million decrease in labor costs, primarily from decreases in variable compensation accruals, and a $0.8 million decrease in bad debts, offset by a $0.9 million increase in the investments in Hanger's growth initiatives.

Net income applicable to common stock for the fourth quarter of 2006 was $4.5 million, or $0.17 per diluted share, compared to the prior year's net income applicable to common stock of $3 million, or $0.14 per diluted share, excluding the impact of $3.7 million in net operating loss carry-forwards in various states, net of certain discrete tax items.

Net sales for the year ended December 31, 2006, increased by $20.6 million, or 3.6 percent, to $598.8 million from $578.2 million in the prior year. The sales growth was principally the result of an $11.8 million, or 2.2 percent, increase in same-center sales in the company's patient care business, and a $10 million, or 22 percent, increase in sales of the company's distribution segment. The sales increases were offset by a $1.4 million decrease as a result of closed patient care centers primarily due to the effects of the hurricanes in 2005. Cost of goods sold for the year increased by $16.5 million to $300.1 million, or 50.1 percent of net sales, compared to $283.6 million, or 49 percent of net sales, in the prior year principally due to the sales increases, inflationary factors, and a slight change in sales mix at Hanger's patient care centers.

Income from operations increased by $1.1 million for the year ended December 31, 2006, to $62.4 million from $61.3 million in the same period of the prior year due principally to the sales increase, offset by an increase in selling, general and administrative expenses. Selling, general, and administrative expenses increased by $2.1 million due primarily to a $2.7 million increase in labor costs from merit increases and increased health insurance costs, and a $3.6 million increase in the investments in company growth initiatives offset by a $3.7 million decrease in bad debts.

Net income, on a pro-forma basis, for the year ended December 31, 2006, was $14.5 million, or $0.49 per diluted share, compared to the prior year's net income applicable to common stock of $8.1 million, or $0.37 per diluted share, excluding the impact of $3.7 million in net operating loss carry-forwards in various states, net of certain discrete tax items. Including the costs of the refinancing, the net loss applicable to common stock was $4.1 million, or $0.18 per diluted share, for the year ended December 31, 2006, compared to a net income applicable to common stock of $8.1 million, or $0.37 per diluted share, in the prior year, excluding the impact of $3.7 million in net operating loss carry-forwards in various states, net of certain discrete tax items.

In the fourth quarter of 2006, cash flow from operations was $15.9 million, compared to the prior year's $12.3 million. Cash flow from operations for the year ended December 31, 2006, excluding the impact of the refinancing was $29.3 million compared to the prior year's actual of $25.7 million. Including the effect of the refinancing, cash flow from operations for the year ended December 31, 2006, was $24.0 million compared to the prior year's $25.7 million.

"We are pleased with the continued improved performance of our businesses in 2006," commented Chairman and CEO Ivan R. Sabel, CPO. "Our patient care centers were able to increase same center sales growth by over 2 percent in a challenging reimbursement environment and our distribution business was able to generate over 22 percent sales growth for the year. In addition, our growth initiatives reached important milestones with Linkia rolling out its full network management service solution for two significant national insurance providers, and with Innovative Neurotronics successfully launching the FDA approved WalkAide ® product. Combined, these efforts resulted in annual earnings per share growth of 32 percent, pro-forma for the refinancing and excluding the 2005 impact of $3.7 million in net operating loss carry-forwards in various states, net of certain discrete tax items. Finally, we enter 2007 with a solid foundation for growth, having completed a successful refinancing and having been granted our first Medicare price increase in three years."

For more information, visit www.hanger.com

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