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Hanger Orthopedic Group, Inc. Reports $0.26 Pro Forma EPS on 8.6% Sales Growth for the Fourth Quarter 2008
Date:2/10/2009

Provides 2009 Revenue and EPS Guidance

BETHESDA, Md., Feb. 10 /PRNewswire-FirstCall/ -- Hanger Orthopedic Group, Inc. (NYSE: HGR) announced net sales of $185.5 million for the quarter ended December 31, 2008, an increase of $14.7 million, or 8.6%, from $170.8 million in the prior year's comparable quarter. Pre-tax income increased $3.0 million, or 29.8%, to $13.0 million in the fourth quarter 2008 from $10.0 million in the same quarter last year.

Pro forma net income applicable to common stock for the quarter was $8.3 million, or $0.26 per diluted share, for the quarter ended December 31, 2008 compared to net income applicable to common stock of $6.6 million, or $0.23 per diluted share, in the fourth quarter of last year. The pro forma results for the fourth quarter 2008 exclude the impact of the non-cash mark-to-market adjustment of $0.7 million related to interest rate swaps. Net income applicable to common stock on a GAAP basis, which includes the full impact of the mark-to-market adjustment related to the interest rate swaps, was $7.8 million, or $0.24 per diluted share, for the quarter ended December 31, 2008.

The 8.6% sales growth was primarily the result of a $9.2 million, or 6.1%, increase in same-center sales in our patient care centers, a $3.5 million increase related to acquired entities and a $2.0 million, or 11.0%, increase in sales of the Company's distribution segment. Gross profit for the quarter increased by $2.7 million, or 2.9%, to $97.0 million compared to $94.3 million due to the sales increase. Gross margins decreased from 55.2% of net sales in the fourth quarter of 2007 to 52.3% in the fourth quarter of 2008, due to the impact of a favorable inventory adjustment in the prior year.

Income from operations in the fourth quarter of 2008 increased by $2.7 million, or 14.1%, to $21.9 million compared to the same period of the prior year, principally due to the sales increase and continued control of selling, general and administrative expenses. Selling, general and administrative expenses of $70.8 million for the fourth quarter of 2008 did not change compared to the prior year, despite a $1.3 million increase in costs related to acquisitions.

Interest expense for the fourth quarter of 2008 was $1.0 million less than last year due to lower variable rates. In May 2008, the Company entered into two $75.0 million swap contracts that fixed $150.0 million of floating rate debt and locked in LIBOR at 3.4% for three years. In the fourth quarter of 2008, the Company recorded a $0.7 million non-cash mark-to-market reserve related to the value of the swaps. The Company fully intends to hold the swaps until their maturity in May 2011, in which case the valuation reserve will over time reverse. As of December 31, 2008, $88.3 million, or 20.9%, of the Company's total debt of $422.3 million was subject to variable interest rates.

Net sales for the year ended December 31, 2008 increased by $65.7 million, or 10.3%, to $703.1 million from $637.4 million in the prior year. The sales growth was principally the result of a $41.3 million, or 7.3%, increase in same-center sales in our patient care business, an $11.9 million increase related to acquired entities, and an $11.5 million, or 19.1%, increase in sales of the Company's distribution segment. Gross profit for the year ended December 31, 2008 increased by $30.3 million, or 9.2%, to $359.7 million, or 51.2% of net sales, compared to $329.4 million, or 51.7% of net sales, in the prior year. The decrease in gross margin was due to the increase in sales of the distribution business which have higher material costs and increased shipping costs.

Income from operations increased by $9.7 million, or 14.3%, in 2008 to $77.7 million from $68.0 million in the prior year due principally to the sales increase. Selling, general and administrative expenses increased by $19.3 million primarily the result of $4.1 million of personnel costs, $2.9 million of merit pay increases to employees, $3.3 million of benefits costs, $3.7 million related to acquisitions, $3.1 million in variable compensation accruals, and $2.1 million of additional investment in growth initiatives.

Interest expense for the year ended December 31, 2008 decreased $4.4 million, or 12.0%, from the prior year due to lower variable rates. For the year ended December 31, 2008, pro forma net income applicable to common stock was $27.2 million, or $0.86 per diluted share, a 34.4% increase, compared to net income applicable to common stock of $17.6 million, or $0.64 per diluted share, last year. The pro forma results for the year ended December 31, 2008 assume that the one-time, in-kind preferred stock dividend, which occurred in the second quarter of 2008, occurred at the beginning of the period and excludes the impact of the $0.7 million non-cash mark-to-market adjustment related to interest rate swaps. Net income applicable to common stock on a GAAP basis, which includes the full impact of the $5.3 million one-time non-cash dividend, the $0.4 million of preferred stock dividends and the $0.7 million impact of the non-cash mark-to-market adjustment related to interest rate swaps, was $21.1 million, or $0.78 per diluted share, for the year ended December 31, 2008.

Cash flow from operations was $18.4 million in the fourth quarter of 2008, a $3.0 million decrease, compared to $21.4 million in the prior year. The decrease in cash flow for the fourth quarter of 2008 was primarily the result of an increase in working capital of $8.5 million, offset by higher net income and non-cash charges of $5.5 million. For the year ended December 31, 2008 cash flow from operations increased by $1.5 million to $53.2 million compared to $51.7 million in the prior year.

The Company had total liquidity of $96.6 million, comprised of $58.4 million of cash and $38.2 million available under its revolving credit facility at December 31, 2008. The Company believes that it has sufficient liquidity to conduct its normal operations and fund its acquisition plan in 2009.

For 2009, the Company expects revenues to be between $750 million and $760 million which would result in growth of 6.7% to 8.1% compared to 2008. The Company also expects diluted EPS for 2009 to be in the range of $0.96 to $0.98, which would represent an 11.6% to 14.0% increase over 2008 pro forma diluted EPS and a 23.1% to 25.6% increase over 2008 GAAP diluted EPS.

"The Hanger team had an outstanding year in 2008 and I am extremely pleased with our performance in the fourth quarter, since it marks the twelfth consecutive quarter of meeting or exceeding First Call consensus estimates," commented Thomas F. Kirk, President and Chief Executive Officer of Hanger Orthopedic Group. Mr. Kirk added, "All elements of our company improved on last year's results to enable us to achieve 34.4% EPS growth in 2008. Hanger has a stable capital structure, ample liquidity to grow and handle our needs, as well as strong cash flow. I am proud of our team's accomplishments in 2008, and while we are concerned about the economy, we are excited about our prospects in 2009 as evidenced by our guidance which reflects strong growth in sales and EPS."

Hanger Orthopedic Group, Inc., headquartered in Bethesda, Maryland, is the world's premier provider of orthotic and prosthetic patient care services. Hanger is the market leader in the United States, owning and operating 668 patient care centers in 45 states and the District of Columbia, with over 3,500 employees including 1,070 practitioners (as of December 31, 2008). Hanger is organized into four units. The two key operating units are patient care which consists of nationwide orthotic and prosthetic practice centers and distribution which consists of distribution centers managing the supply chain of orthotic and prosthetic componentry to Hanger and third party patient care centers. The third is Linkia which is the first and only provider network management company for the orthotics and prosthetics industry. The fourth unit, Innovative Neurotronics, introduces emerging neuromuscular technologies developed through independent research in a collaborative effort with industry suppliers worldwide. For more information on Innovative Neurotronics, Inc. or the WalkAide(R), visit http://www.ininc.us. For more information on Hanger, visit http://www.hanger.com.

This document contains 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 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.

-tables to follow-

                          Hanger Orthopedic Group, Inc.
            (Dollars in thousands, except share and per share amounts)
                                     (Unaudited)


                                      Three Months              Year
                                          Ended                 Ended
    Income Statement:                  December 31,          December 31,
    -----------------
                                        2008       2007       2008       2007
                                        ----       ----       ----       ----
    Net sales                       $185,547   $170,790   $703,129   $637,350
    Cost of goods sold
     (exclusive of depreciation
     and amortization)                88,507     76,496    343,421    307,952
    Selling, general and
     administrative                   70,758     70,797    264,797    245,542
    Depreciation and amortization      4,378      4,307     17,183     15,876
                                       -----      -----     ------     ------
    Income from operations            21,904     19,190     77,728     67,980
    Interest expense, net              8,241      9,204     32,549     36,987
    Unrealized loss from
     interest rate swap                  738          -        738          -
                                         ---        ---        ---        ---
    Income before taxes               12,925      9,986     44,441     30,993
    Provision for income taxes         5,089      3,004     17,695     11,726
                                       -----      -----     ------     ------
    Net income                         7,836      6,982     26,746     19,267
     Less preferred stock
      dividends - Series A
      Convertible Preferred Stock          -        416      5,670      1,665
                                         ---        ---      -----      -----
    Net income applicable to
     common stock                     $7,836     $6,566    $21,076    $17,602
                                      ======     ======    =======    =======

    Basic Per Share Data:
    ---------------------
    Net income                         $0.25      $0.29      $0.81      $0.78
                                       =====      =====      =====      =====
    Shares used to compute basic
     per common share amounts     30,817,549 22,704,389 25,930,096 22,475,513
                                  ========== ========== ========== ==========

    Diluted Per Share Data:
    -----------------------
    Net income                         $0.24      $0.23      $0.78      $0.64
                                       =====      =====      =====      =====
    Shares used to compute
     diluted per common share
     amounts                      32,057,689 30,721,859 27,090,817 30,257,021
                                  ========== ========== ========== ==========




                                  Three Months         Twelve Months
                                     Ended                 Ended
                                    December              December
    Pro-forma:                      31, 2008              31, 2008
    ----------
    Net income applicable to
     common stock                      7,836               21,076
    Preferred stock dividend -
     Series A Convertible
     Preferred Stock                       -                5,670
    Loss from Interest Rate Swap
     (net of $295 tax) (1)               443                  443
                                         ---                  ---
    Pro-forma net income
     applicable to common stock       $8,279              $27,189
                                      ======              =======

    Diluted Per Share Data:
    Pro-forma net income per
     diluted common share              $0.26                $0.86
                                       =====                =====

    Shares used to compute
     diluted per common share
     amounts                      32,057,689           27,090,817
    Effects of conversion of
     convertible preferred
     stock (2)                             -            4,567,956
                                         ---            ---------
    Shares used to compute
     diluted per common share
     amounts, Pro-forma basis     32,057,689           31,658,773
                                  ==========           ==========

    (1) The loss from interest rate swap results from ineffectiveness that
        occurred during the quarter and year ending December 31, 2008. The
        Company fully intends to hold the swap until its maturity in May
        2011, in which case the valuation reserve will over time reverse
        and result in our recording an equal amount of income.

    (2) Assumes Preferred Stock dividend acceleration event occurred January
        1, 2008.  The Company believes the presentation of the pro-forma
        results, adjusted for the effects of the acceleration of the
        Preferred Stock dividend at the beginning of the period, is more
        reflective of the Company's current diluted operating results and
        provides investors with additional useful information to measure the
        Company's on-going performance.



    Income Statement as a % of
     Net Sales:                       Three Months Ended        Year Ended
    --------------------------           December 31,          December 31,
                                       2008       2007       2008       2007
                                       ----       ----       ----       ----
    Net sales                         100.0%     100.0%     100.0%     100.0%
    Cost of goods sold
     (exclusive of depreciation
     and amortization)                 47.7%      44.8%      48.8%      48.3%
    Selling, general and
     administrative                    38.1%      41.5%      37.7%      38.5%
    Depreciation and amortization       2.4%       2.5%       2.4%       2.5%
                                        ---        ---        ---        ---
    Income from operations             11.8%      11.2%      11.1%      10.7%
    Interest expense, net               4.4%       5.4%       4.6%       5.8%
    Unrealized loss from
     interest rate swap                 0.4%       0.0%       0.4%       0.0%
                                        ---        ---        ---        ---
    Income before taxes                 7.0%       5.8%       6.1%       4.9%
    Provision for income taxes          2.7%       1.8%       2.5%       1.8%
                                        ---        ---        ---        ---
    Net income                          4.3%       4.0%       3.6%       3.1%
                                        ===        ===        ===        ===



                                  Hanger Orthopedic Group, Inc.
                                      (Dollars in thousands)
                                            (Unaudited)


                                   Three Months              Twelve Months
                                       Ended                    Ended
                                    December 31,              December 31,
    Cash Flow Data:               2008     2007           2008          2007
    ---------------               ----     ----           ----          ----

    Cash flow from operations  $18,367  $21,438        $53,220       $51,687
    Capital expenditures         7,317    6,720         19,330        20,129
    Increase in cash             4,888    3,581         31,475         3,799

    Balance Sheet Data:                          Dec. 31, 2008  Dec. 31, 2007
    -------------------                          -------------  -------------
    Cash                                               $58,413       $26,938
    Days Sales Outstanding (DSO's)                          51            56
    Working Capital                                   $200,248      $165,794
    Total Debt                                        $422,324      $410,892
    Shareholders' Equity                              $266,865      $190,538

    Percentage of net sales
     from:                        2008     2007           2008          2007
    -----------------------       ----     ----           ----          ----
      Patient-care services       89.2%    89.4%          88.2%         89.7%
      Distribution                10.6%    10.6%          11.5%         10.3%

    Payor mix:
      Private pay and other       61.1%    61.1%          60.3%         59.7%
      Medicare                    27.8%    27.9%          28.3%         29.2%
      Medicaid                     6.0%     5.8%           6.1%          6.1%
      VA                           5.1%     5.2%           5.3%          5.0%

    Statistical Data:
    -----------------

                                                   December 31,  December 31,
                                                          2008          2007
                                                          ----          ----
    Patient-care centers                                   668           636
    Number of practitioners                              1,070         1,060
    Number of states (including D.C.)                       46            46




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SOURCE Hanger Orthopedic Group, Inc.
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