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Hanger Inc. posted flat adjusted earnings per share of 54 cents for the fourth quarter of 2013 compared with the same quarter of 2012 but beat the Zacks Consensus Estimate by a penny. Net adjusted earnings inched up 1.1% to $19.0 million from $18.8 million in the fourth quarter of 2012. Adjusted earnings exclude non-recurring tax expenses, costs related to acquisitions as well as implementation of Hanger’s new clinic management system, known as “Janus”.

For full year 2013, adjusted earnings per share rose 8.3% to $1.95 from $1.80 a year ago and were in line with the Zacks Consensus Estimate. Net adjusted earnings increased 10.2% to $69.0 million from $62.7 million in 2012.

Adjusted earnings exclude non-recurring tax benefits, costs related to acquisitions and the implementation of Janus, and debt issuance cost associated with the refinancing of the Hanger’s bank credit facilities in Jun 2013.

Revenues

Revenues in the quarter increased 3.2% year over year to $278.2 million but lagged the Zacks Consensus Estimate of $284 million. The increase was mainly driven by growth in the Patient Care segment, partially offset by soft sales in the Products and Services segment.

The increase ($11.1 million or about 5%) in Patient Care segment revenues comprised of a $2.8 million, or 1.3%, rise in same center sales, with the remaining $8.3 million growth driven by acquisitions.

The fall ($2.5 million) in Products & Services segment revenues was driven by the impact of acquisitions of O&P companies, made by the Patient Care segment in 2012 and 2013, on Hanger’s distribution business, and lower demand for higher priced prosthetic devices (such as micro processor-controlled knees) from independent O&P practices.

For the full year, revenues grew 7.4% to $1,046.4 million, missing the Zacks Consensus Estimate of $1,059 million. The increase in revenues was attributable to an $18.8 million, or 2.4%, increase in same center sales in the Patient Care segment, a $51.1 million rise from acquired entities, as well as a $2.1 million, or 1.2%, increase in sales in the Products & Services segment.  

Margins

Adjusted operating income ebbed 5.7% to $35.3 million in the quarter from $37.4 million in the year-ago quarter. Consequently, adjusted operating margin fell 120 basis points (bps) to 12.7% from 13.9% in the fourth quarter of 2012. The decline was attributable to higher material costs and accounts receivable reserves related to operational issues experienced at a small non-clinic unit within the Patient Care segment

Adjusted operating income for the year improved 3.9% to $136.2 million from $131.0 million a year ago. However, adjusted operating margin fell 40 bps to 13.0% from 13.4% in 2012.

Financial Position

Hanger ended the year with cash and cash equivalents of $9.9 million, significantly down from $19.2 million at the end of 2012. Total debt decreased 10.1% to $468.3 million as of Dec 31, 2013 from $520.6 million as of Dec 31, 2012. As a result, debt-to-capitalization ratio dipped 620 bps to 44.7% from 50.9% a year ago.

Cash flow from operations increased 8.5% to $88.3 million in 2013. Capital expenditure for the year went up 15.9% to $38.4 million.

2014 Guidance

For 2014, Hanger anticipates revenues in the range of $1,110 to $1,130 million, which is higher than the Zacks Consensus Estimate of $1,103 million. Expected 2014 revenues implies a 6 to 8% rise from the prior year driven by 3 to 5% growth in same center sales in Patient Care segment, and a marginal decline in Products & Services segment revenues.

The decrease in Products & Services revenues reflects the carry-over impact of a large one-time sale during 2013, continued acquisition of O&P distribution customers by the Patient Care business, and increasing pressure on independent O&P customers owing to continuing Medicare audits.  

Hanger also expects adjusted earnings per share to grow 8% to 13% to $2.10–$2.20, excluding the impact of 5 cents for training and implementation costs of Janus. The Zacks Consensus Estimate of $2.17 for the year lies within the guided range.

The expected rise in earnings includes an $11 million, or 19 cents per share impact for investment to be made by Hanger in its back-office operations, including centralization of its billing and processing activities and improvements in its finance, accounting and information technology functions.  Operational improvements and costs savings related to these investments are expected to be realized beginning in late 2014.  

Despite these large investments, Hanger expects to maintain its adjusted operating margins at a level similar to 2013 and generate cash flow from operations between $90 and $100 million.  The company will also make capital expenditures of $40 to $50 million in the year.  

Last month, Hanger acquired O&P practices with annualized sales of approximately $20 million. This acquisition made Hanger to set a goal to acquire $35 to $45 million of O&P annualized revenues in 2014.

Our Take

We are impressed by Hanger’s confidence to set higher top and bottom-line guidance for 2014. However, macroeconomic headwinds like reimbursement uncertainties, sequestration, and RAC audits are likely to reduce the bottom line.  

Currently, Hanger carries a Zacks Rank #4 (Sell). Some better-ranked medical product stocks include NuVasive, Inc. , Baxter International Inc. , and Covidien plc . NuVasive carries a Zacks Rank #1 (Strong Buy), while both Baxter International and Covidien carry a Zacks Rank #2 (Buy).
 

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