Zacks_Analysts' Blog : Hanger Beats but Profit Slides - Analyst Blog

Hanger Orthopedic (HGR) posted adjusted earnings per share of 37 cents for third quarter fiscal 2010, beating the Zacks Consensus Estimate of 35 cents and exceeding the year-ago earnings of 30 cents.

The adjusted earnings exclude costs (of $8 million) associated with the relocation of the company’s corporate headquarters and charges (of $0.6 million) related to the recently announced acquisition of Nevada-based rehabilitation technologies provider Accelerated Care Plus ("ACP"). Net income slid 28% year-over-year to $6.9 million (or 21 cents a share) largely on account of the hefty relocation costs. 

Revenues & Margins

Net sales rose 7.5% year-over-year to $206.7 million, modestly trailing the Zacks Consensus Estimate of $207 million. Sales improved on the back of higher revenues from same-center at patient-care segment (up 4.1%), company’s distribution segments (up 10.5%) and acquisitions. Patient-care services and distribution segments contributed 87.4% and 12.3% to total revenues, respectively. Adjusted operating margin increased to 13% from 12.4% a year-ago.

Balance Sheet & Cash Flow

Hanger exited the quarter with cash and cash equivalents of roughly $95.6 million, representing an annualized increase of 22%. Total debt decreased 1% year-over-year to approximately $405.3 million. Hanger generated $32.5 million in cash from operations in the quarter, up 28% year-over-year.

Outlook

Hanger has reaffirmed its earlier revenues guidance for fiscal 2010 while lifting its earnings target. The company continues to expect total revenues between $815 million and $825 million, a 7.2%-8.5% year-over-year increase. Adjusted earnings per share forecast have been raised to a band of $1.29 to $1.31 from the earlier guidance of $1.27 to $1.29. The current Zacks Consensus Estimate is $1.29.

The company completed the relocation of its headquarters from Bethesda, Maryland, to Austin, Texas in the third-quarter. Hanger spent $14.2 million in severance and relocation costs during nine months (ended September 30) on account of the move. The company continues to expect the relocation to offer annual savings of approximately $2.5−$3.5 million in operating expenses.

Hanger is the market leader in the orthotic and prosthetic (O&P) patient care services market, operating through 678 patient care centers across the U.S. The company operates four business units: patient care, distribution, Linkia and Innovative Neurotronics. Linkia, the first managed care organization dedicated solely to the O&P market, remains a significant growth engine for Hanger.

Hanger’s economies of scale are unmatched by its competitors, which include notable players in the O&P space such as Orthofix International (OFIX), Conmed Corp. (CNMD), Exactech Inc. (EXAC) and Owens & Minor Inc. (OMI).

To expand its geographic presence, Hanger continues to pursue small tuck-in acquisitions. It recently inked a definitive agreement to acquire ACP for $155 million in cash. The acquisition will add a fresh avenue of growth for Hanger and complement its healthcare offerings. Hanger anticipates the deal to be earnings-neutral to slightly positive in 2010 and accretive in 2011. However, the company’s back-to-back acquisitions could lead to substantial integration risk.