Hanger Orthopedic Group, Inc. (Hanger) has reported net sales of $703.1 million for the full year of 2008, up 10.3%, compared with the net sales of $637.4 million, in the previous year-end. It has also reported a net income applicable to common stock of $21.1 million, or $0.78 per diluted share, for the full year of 2008, compared with net income applicable to common stock of $17.7 million, or $0.64 per diluted share, in the previous year-end.
The company announced net sales of $185.5 million for the fourth 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 against 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 against $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 against 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 against 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 growth for the year 2008, 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, against $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, against 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, against $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 against $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 projects revenues to be between $750 million and $760 million which would result in growth of 6.7% to 8.1% against 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. 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.”