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Home Diagnostics Reports 2008 Results

Home Diagnostics, Inc. (Home Diagnostics), a diabetes care devices company, has reported total revenues of $123.6 million for the full year of 2008, up 6.9%, compared with the total revenues of $115.6 million in the previous year-end. It has reported a net income of $9.64 million, or $0.51 per diluted share, for the full year of 2008, compared with the net income of $9.62 million, or $0.49 per diluted share, in the previous year-end.

Fourth Quarter and Recent Highlights

Board appointed Joseph H. Capper president and Chief executive officer (CEO) on February 23, 2009

Total revenue of $29.5 million, an increase of 6.4% over prior year

Net income of $1.7 million, or $0.09 per diluted share

Expanded TRUEtrack distribution into all 3,600 Walmart pharmacies

Launched private-label no-code meter with Liberty Medical

Announced additional $5 million share repurchase program

Total revenue for the fourth quarter was $29.5 million, an increase of 6.4% from $27.8 million in the fourth quarter of 2007. Retail channel sales were up 14.6%, driven by the continued nationwide launch of the new TRUEresult and TRUE2go blood glucose monitoring systems with Walgreens and Rite Aid. Retail channel results also benefitted from the nationwide roll out of TRUEtrack into all Walmart pharmacy stores. Mail service channel sales increased 5.6%, including the initial launch of the private label, no-coding blood glucose monitoring system with Liberty Medical. This was offset by lower sales to a customer due to an inventory build in the third quarter. Distribution channel sales increased 2.7% as a result of higher volume from certain national wholesale distribution customers. International sales increased 3.1% driven by continued success in Latin America and Australia, offset by lower sales in Germany. International sales faced a difficult comparison to the fourth quarter of 2007, which included strong sales in Germany from a distributor that increased purchases to meet their minimum volume commitment.

Gross profit for the fourth quarter of 2008 was $15.1 million, compared to $16.4 million in the fourth quarter of 2007. As a percentage of sales, gross margin decreased to 51.2% compared to 59.0% in the prior year period. The decreased gross profit margin was attributable primarily to the launch of the company’s new TRUE2go and TRUEresult systems, which lowered the fourth quarter gross margin by 640 basis points. Other contributing factors were lower pricing primarily in the mail service channel and with certain durable medical equipment distribution customers driven by achievement of volume based pricing tiers.

Selling, general and administrative expenses were $12.5 million for the fourth quarter of 2008, compared with $11.7 million in the fourth quarter of 2007. The majority of the increase was due to higher sales and marketing expenses, including approximately $1.2 million of costs associated with the continued launch of the new products during the quarter.

Research and development expenses were $1.8 million for the fourth quarter of 2008, compared with $2.4 million in the fourth quarter of 2007. The decrease in research and development is primarily due to lower new product development costs following the launch of the TRUE2go and TRUEresult systems.

Operating income for the fourth quarter of 2008 was $0.8 million, compared to an operating loss of $1.2 million for the fourth quarter of 2007. The operating loss for the fourth quarter of 2007 included a litigation settlement expense of $3.5 million related to a patent infringement suit with Roche. Operating margin for the fourth quarter of 2008 was 2.8%, compared to a negative (4.4%) in the fourth quarter of 2007.

For the three-month period ended December 31, 2008, the company reported net income of $1.7 million and diluted earnings per share of $0.09 based on weighted average shares outstanding of 18.3 million. Fourth quarter 2008 net income benefitted from a $0.6 million, or $0.03 per share, reduction in the company’s tax provision reflecting reduced tax reserves following the expiration of tax statutes of limitation. Net income for the three-month period ended December 31, 2007 was $0.1 million or $0.01 per diluted share based on 19.6 million weighted average shares outstanding. Net income for the fourth quarter 2007 included a $3.5 million patent litigation settlement charge, or approximately $0.10 per share after income taxes.

Operating income for the full year 2008 and 2007 was $11.2 million. Net income for the year 2008 was $9.6 million, or $0.51 per diluted share, based on 18.8 million weighted average shares outstanding. Full year 2008 net income benefitted from a $1.5 million, or $0.08 per share, reduction in the company’s tax provision related primarily to the resolution of IRS audits. Net income for the year ended December 31, 2007, was $9.6 million or $0.49 per diluted share based on 19.6 million weighted average shares outstanding. Net income for 2007 included a $3.1 million litigation settlement charge, net of recoveries, or approximately $0.09 per share after income taxes.

On February 23, 2009, the Board of Directors announced the appointment of Joseph H. Capper as President and Chief Executive Officer following an executive search initiated in November 2008.

“I am extremely excited to join the Home Diagnostics team,” said Joseph Capper, president and chief executive officer of Home Diagnostics. “I believe the company is poised to benefit from recent strategic investments including the new TRUEtest product platform, manufacturing capacity expansion for the new products, and increased distribution in all channels. I look forward to leveraging my experience in the diabetes industry to help build on these investments and accelerate the growth and expansion of our business.”

Separately, the company said it and other leading blood glucose strip manufacturers have been in discussions with the Food and Drug Administration (FDA) regarding the risk of inaccurate blood glucose readings in GDH-PQQ systems for certain groups of patients who are undergoing maltose based therapies. The company currently uses this enzyme in its TRUEtest strips and the FDA has requested that the company develop a plan to further mitigate the risk for these patients.

Guidance

The company said that it will provide full year 2009 financial guidance with its first quarter 2009 results in order to allow newly appointed President and CEO, Joseph Capper, to complete his evaluation of the business plan. However, the company is providing directional commentary on its outlook for 2009 stating that it expects revenue growth to be in the mid single digit range. For the full year 2009, the company expects gross margins to be in the low 50% range reflecting continued investment in the distribution of its new no code products. The company expects earnings per share for the full year in 2009 to be relatively flat to slightly lower as compared to 2008 earnings, excluding the $0.08 per share contribution from the tax reserve adjustments in 2008.

The company expects revenue in the first quarter of 2009 to be down mid single digits compared to the first quarter of 2008, reflecting the anticipated reduction in inventory days supply at wholesale distribution customers. This, combined with continued investment in the distribution of its new no code products, is expected to result in gross margins for the first quarter of 2009 slightly below the company’s expectations for the full year 2009. These factors, as well as severance and other costs associated with the CEO transition, are expected to result in a net loss for the first quarter in the range of $3 million.