BETHESDA, Md., Oct. 27 /PRNewswire-FirstCall/ -- Hanger Orthopedic Group, Inc. today announced net income per diluted share of $0.11 excluding a non-cash goodwill impairment charge for the three-month period ended September 30, 2004, compared to net income per diluted share of $0.32 in the prior year’s comparable quarter.
Net sales for the quarter ended September 30, 2004 increased by $6.1 million, or 4.3%, to $146.1 million from $140.0 million in the prior year’s comparable quarter. The sales growth was primarily the result of a $7.2 million, or 5.1%, increase from acquired practices and $1.1 million, or 11.1%, increase in sales of the Company’s distribution segment. These increases were offset by a $1.5 million, or 1.2%, decline in same-center sales in the Company’s O&P practices. The sales were in line with our expectations for the quarter despite a $1.0 million shortfall in the Southeast due to the effects of the hurricanes. Gross profit for the third quarter of 2004 was $75.9 million, or 51.9% of net sales, compared to $75.2 million, or 53.7% of net sales, in the third quarter of the prior year. The gross profit margin declined due to a 130 basis point increase in material costs and a 60 basis point increase in labor costs. The material cost increase was driven by a change in the mix of sales and continued pressure on reimbursement. Labor costs increased principally due to increased headcounts from acquired practices and annual salary increases.
At the beginning of fiscal year 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” under which goodwill and other intangible assets with indefinite lives are not amortized. The decline in our Company’s stock price in August of 2004 triggered an interim valuation of the goodwill and other intangibles as of August 31, 2004. This interim valuation resulted in a $45.8 million goodwill impairment charge. This charge is non- cash and reflects management’s best estimate of the impairment as if a fully completed annual review was performed. An annual review will be finalized in the fourth quarter, but we do not expect our estimate to change materially. Despite the impairment of goodwill charge, the company is in compliance with all financial covenants as of September 30, 2004.
Income from operations excluding the non-cash goodwill impairment charge decreased by $9.3 million in the third quarter of 2004 to $15.0 million from $24.3 million in the same period of the prior year due to the combination of the reduction in gross profit margin and higher selling, general and administrative expenses which increased principally due to: i) $2.4 million in additional labor and bonus expense, ii) $2.1 million of business development and marketing expenses, iii) $1.6 million in higher health and liability insurance, iv) $1.6 million from the fixed costs of acquired practices, and v) $1.1 million related to Sarbanes-Oxley Section 404 compliance work and the investigation of the West Hempstead billing allegations. The balance of the increase was caused by inflationary pressures on our fixed expenses.
Based on the above, net loss applicable to common stock for the third quarter of 2004 was $36.3 million, or approximately $1.68 per diluted share. Excluding the non-cash goodwill impairment charge and related tax effect, net income applicable to common stock for the third quarter of 2004 was $2.4 million or approximately $0.11 per diluted share. In the corresponding period of the prior year, Hanger had net income applicable to common stock of $7.3 million, or approximately $0.32 per diluted share.
Net sales for the nine months ended September 30, 2004 increased by $17.8 million, or 4.4%, to $422.9 million from $405.1 million in the prior year’s comparable period. The sales growth was primarily the result of a $20.4 million, or 5.0%, increase from acquired practices and $3.5 million, or 13.1%, increase in sales of the Company’s distribution segment. These increases were offset by a $4.5 million, or 1.2%, decline in same-center sales in the Company’s O&P practices. Gross profit for the first nine months of 2004 was $215.3 million, or 50.9% of net sales, compared to $214.2 million, or 52.9% of net sales, in the comparable period of the prior year. The gross profit margin declined due to a 130 basis point increase in material costs and a 60 basis point increase in labor costs. The material cost increase was driven by a change in the mix of sales and continued pressure on reimbursement. Labor costs increased principally due to increased headcounts from acquired practices and annual salary increases.
Income from operations excluding the non-cash goodwill impairment charge decreased by $22.4 million in the first nine months of 2004 to $44.8 million from $67.2 million in the same period of the prior year. The decrease in income from operations is the result of a combination of the reduction in gross profit margin and higher selling, general and administrative expenses principally due to: i) $5.1 million of business development and marketing expenses, ii) $4.7 million from the fixed costs of acquired practices, iii) $4.3 million in additional labor and bonus expense, iv) $2.6 million in higher health and liability insurance, and v) $2.2 million related to Sarbanes-Oxley Section 404 compliance work and the investigation of the West Hempstead billing allegations. The balance of the increase was caused by inflationary pressures on our fixed expenses.
Based on the above, net loss applicable to common stock for the first nine months of 2004 was $30.5 million, or approximately $1.42 per diluted share. Excluding the non-cash goodwill impairment charge and related tax effect, net income applicable to common stock for the first nine months of 2004 was $8.1 million or approximately $0.36 per diluted share. In the corresponding period of the prior year, Hanger had net income applicable to common stock of $19.1 million, or approximately $ 0.87 per diluted share.
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 625 patient-care centers in 44 states and the District of Columbia, with 3,258 employees including 1,022 practitioners. Hanger is organized into four business segments. 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 managed care organization for the orthotics and prosthetics industry. The fourth segment is Innovative Neutronics which introduces emerging neuromuscular technologies developed through independent research in a collaborative effort with industry suppliers worldwide.
This document contains forward-looking statements relating to the Company’s revenues, contracts and operations. The United States Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. Statements relating to future revenues, contracts and 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. (In Thousands, Except Share and Per Share Data) Three Months Ended Nine Months Ended Income Statement: September 30, September 30, 2004 2003 2004 2003 Net sales $ 146,133 $ 140,045 $ 422,867 $ 405,109 Cost of goods sold 70,248 64,799 207,590 190,905 Gross profit 75,885 75,246 215,277 214,204 Selling, general and administrative 57,560 48,110 160,495 139,093 Depreciation and amortization 3,311 2,810 9,986 7,883 Impairment of Goodwill 45,808 - 45,808 - Income (loss) from operations (30,794) 24,326 (1,012) 67,228 Interest expense, net 9,054 9,786 25,650 28,236 Income (loss) before taxes (39,848) 14,540 (26,662) 38,992 Provision for income taxes (1) (4,946) 5,863 684 15,771 Net income (loss) (34,902) 8,677 (27,346) 23,221 Less preferred stock dividends declared and accretion 1,351 1,404 3,202 4,142 Net income (loss) applicable to common stock $(36,253) $ 7,273 $ (30,548) $ 19,079 Basic Per Share Data: Net income (loss) applicable to common stock $ (1.68) $ 0.35 $ (1.42) $ 0.92 Net Income (Excluding Impairment of Goodwill) $ 0.11 $ 0.36 Basic Shares Outstanding 21,548,925 20,658,239 21,437,443 20,690,950 Diluted Per Share Data: Net income $ (1.68) $ 0.32 $ (1.42) $ 0.87 Net Income (Excluding Impairment of Goodwill) $0.11 $0.36 Weighted average number of diluted common shares outstanding 21,548,925 27,090,296 21,437,443 26,824,410 September 30, September 30, Balance Sheet Data: 2004 2003 Working Capital $135,335 $134,302 Total Debt 411,063 368,784 Shareholders’ Equity 149,244 186,866 (1) Includes $7,165 tax benefit related to the Impairment of Goodwill Hanger Orthopedic Group, Inc. Three Months Ended Nine Months Ended Statistical Data: September 30, September 30, 2004 2003 2004 2003 Patient-care centers 625 588 625 588 Number of Practitioners 1,022 953 1,022 953 Number of states (including D.C.) 45 45 45 45 Payor mix: Private pay and other 55.8% 54.9% 55.4% 55.3% Medicare 31.6% 33.5% 32.1% 33.0% Medicaid 8.5% 9.3% 8.7% 9.3% VA 4.1% 2.3% 3.8% 2.4% Percentage of net sales from: Patient-care services 92.7% 93.2% 92.9% 93.5% Distribution 7.3% 6.8% 7.1% 6.5% Operating Margin (Excluding Impairment of Goodwill) 10.3% 17.4% 10.6% 16.6%
Hanger Orthopedic Group, Inc.
CONTACT: Ivan R. Sabel, or George E. McHenry, or Jason P. Owen, all ofHanger Orthopedic Group, Inc., +1-301-986-0701
Web site: http://www.hanger.com/
