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Hanger Inc. (HGR - Analyst Report) posted adjusted earnings per share of 40 cents for the second quarter of 2014, down 23.1% from 52 cents in the same quarter of 2013.  With this, adjusted earnings significantly lagged the Zacks Consensus Estimate of 53 cents.

Net adjusted earnings fell 23.3% to $14.2 million from $18.5 million a year ago. Adjusted earnings exclude non-recurring tax expenses, costs related to acquisitions as well as implementation of Hanger’s new clinic management system, Janus.

On a reported basis, net earnings stood at $12.6 million, reflecting a decline of 10.4% from $14.1 million reported a year ago. Reported net earnings per share slid 12.5% to 35 cents from 40 cents in the second quarter of 2013.

Revenues in the quarter inched up 3% to $275.9 million from $267.8 million in the prior-year quarter. However, revenues fell short of the Zacks Consensus Estimate of $285 million.

Segment Results

Revenues from the Patient Care segment stood at $232.0 million, an increase of 3% from the year-ago quarter. The upside was driven by a $10.6 million increase in sales from acquisitions, offset by a $3.2 million decline in same center revenues.

The deterioration in same center revenues can be attributed to a slowdown in prosthetic patient flow resulting from delays in authorizations from payors and postponement of discretionary spending decisions by patients.

Revenues at the Products & Services segment edged up 3% to $43.9 million in the second quarter of 2014.

Margins

Gross profit improved 1.7% to $191.6 million but gross margin contracted 80 basis points (bps) to 69.5% from 70.3% in the prior-year quarter.

Adjusted operating earnings ebbed 33.8% to $28.9 million from $43.7 million in the year-ago quarter. Consequently, adjusted operating margin fell 580 bps to 10.5% from 16.3% in the year-earlier quarter. Adjusted operating margin was impacted by lower-than-expected sales and increased costs.

Financial Position

Hanger exited the quarter with cash and cash equivalents of $4.9 million, down 50.3% from $9.7 million as of Dec 31, 2013. Total debt increased 15.3% to $539.9 million as of Jun 30, 2014 from $468.3 million as of Dec 31, 2013. Consequently, the debt-to-capitalization ratio expanded 240 bps to 47.1% from 44.7% a year ago.

Hanger reported $7.5 million of cash outflow from operations for the first six months ended Jun 30, 2014, versus a cash flow of $27.6 million in the same period of 2013. Lower operating income and increased working capital requirements led to the reduction in operating cash flow. Capital expenditures spiked 20.2% to $21.7 million from $18.0 million in the first half of 2013.

2014 Guidance

For 2014, Hanger lowered its adjusted earnings per share guidance to a range of $1.60 to $1.70 from the prior range of $2.01 to $2.11. The current Zacks Consensus Estimate of $2.04 for the year exceeds the guided range.

Also, Hanger trimmed its 2014 revenue guidance to a band of $1,050–$1,080 million from the previous range of $1,100–$1,120 million. The current Zacks Consensus Estimate of $1,101 million lies above the guided range. Hanger expects same center sales to decline 1–2% in 2014 as against the prior growth expectation of 2–4%.

Accelerated acquisitions are expected to drive incremental revenues for the rest of the year despite lowered same center sales growth expectation. However, the takeovers are not likely to boost earnings significantly over the period owing to the initial integration costs.

Reflecting the lackluster first-half results and the reimbursement environment, Hanger anticipates cash flow from operations between $40 and $50 million in 2014, lower than the earlier range of $80–$90 million.

Hanger now intends to acquire O&P operations in 2014 with expectations of annualized net sales between $50 and $60 million. Also, the company plans to incur capital expenditures between $40 and $50 million during the year.

Our Take

We are disappointed with Hanger’s second-quarter results which lagged estimates at both fronts. Moreover, Hanger revised its 2014 outlook downward to reflect a challenging quarter marked by persistent pressure on authorizations, collections and patient flow.

Hanger continues to face macroeconomic headwinds like reimbursement uncertainties, sequestration, and RAC audits that are likely to pressurize the top line further.  

Currently, Hanger carries a Zacks Rank #3 (Hold). Better-ranked medical product stocks include OraSure Technologies, Inc. (OSUR - Snapshot Report), Abaxis, Inc. (ABAX - Analyst Report) and AtriCure, Inc. (ATRC - Snapshot Report). While OraSure Technologies sports a Zacks Rank #1 (Strong Buy), both Abaxis and AtriCure carry a Zacks Rank #2 (Buy).

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