Hanger Comes in a Penny Ahead

Hanger Orthopedic (HGR) announced adjusted earnings per share of 37 cents for second quarter fiscal 2010, which edged past the Zacks Consensus Estimate of 36 cents and was also above the year-ago earnings of 31 cents.
 
The adjusted earnings exclude a charge of $4.2 million related to the relocation (announced in February 2010) of the company’s headquarters from Bethesda, Maryland, to Austin, Texas. Net income dipped 2.8% year over year to $9.8 million (or 30 cents a share) on account of relocation costs.
 
Revenue & Margins
 
Net sales leapt 6.4% year over year to $205.8 million on the back of higher sales from same-center at patient-care segment (up 4%), the company’s distribution segments (up 10.4%) and acquisitions. However, revenue trailed the Zacks Consensus Estimate of $208 million. Patient-care services and distribution segments contributed 88% and 11.8% to total revenue, respectively. Adjusted (excluding the office relocation cost) operating margin increased to 13.3% from 12.5% a year-ago.
 
Balance Sheet & Cash Flow
 
Hanger exited the first-half fiscal 2010 with cash and cash equivalents of roughly $72.1 million, representing an annualized decline of 5.6%. However, total debt decreased 4% year over year to approximately $409.2 million. Hanger generated $19.6 million in cash from operations in the quarter, down 20% year over year, attributable to the hefty relocation expenses.
 
Outlook
 
Hanger has reaffirmed its earlier revenue and earnings guidance for fiscal 2010. The company continues to expect total revenue between $815 million and $825 million, a 7.2%-8.5% year-over-year increase. Adjusted earnings per share are projected in the range of $1.27 to $1.29, a 12.4%-14.2% year-over-year growth.
 
The company aims to complete the relocation by the end of the third-quarter. Hanger spent $6.2 million in severance and relocation costs in the first-half and expects to incur an additional cost of roughly $4-$6 million in the third-quarter. The company expects the relocation to offer annual savings of approximately $2.5-$3.5 million in operating expanses.
 
Hanger is a premier provider of orthotic and prosthetic patient care services, operating through 678 patient care centers in the U.S. The company operates four business units: patient care, distribution, Linkia and Innovative Neurotronics. Hanger competes with Orthofix International (OFIX), Conmed Corp. (CNMD), Exactech Inc. (EXAC) and Owens & Minor Inc. (OMI) in the orthotic and prosthetic market.
 
As the market leader, Hanger has economies of scale unmatched by its competitors. The company continues to explore acquisitions to boost its geographic presence. However, Hanger’s back-to-back acquisitions could lead to substantial integration risk.