Hanger EPS in Line, Backs Outlook

Orthotic and prosthetic (O&P) company Hanger Orthopedic’s (HGR - Analyst Report) second-quarter fiscal 2011 adjusted earnings per share of 45 cents were in line with the Zacks Consensus Estimate while above the year-ago adjusted earnings of 37 cents. The adjusted earnings exclude the costs associated with the relocation of the company’s corporate headquarters.

Profit (as reported) soared 58% year over year to $15.4 million (or 45 cents a share) on the heels of a double-digit growth in the top line. Moreover, profit in the year-ago quarter was dragged down by sizable (roughly $4.2 million) relocation charges. The company recorded modest relocation expenses in the reported quarter.

Revenues & Margins

Net sales shot up 14.1% year over year to $234.8 million, yet missed the Zacks Consensus Estimate of $240 million. Higher sales from Hanger’s therapeutic solutions division, powered by the Accelerated Care Plus (“ACP”) acquisition, and the distribution segment catalyzed revenue growth in the quarter.

Patient-care services, distribution and therapeutic solutions segments represented 82.2%, 10.9% and 6.9% of total sales, respectively. Adjusted operating margin rose to 14% from 13.3% a year-ago.

Balance Sheet and Cash Flows

Hanger exited the quarter with cash and cash equivalents of roughly $19.5 million, down 73% year over year. Total debt increased roughly 24% year over year to roughly $506.1 million. Cash flow from operations increased 13.2% year over year to $22.1 million.

Guidance Reaffirmed

Hanger has reiterated its revenues and earnings forecasts for fiscal 2011. The company continues to expect adjusted earnings per share in the range of $1.66 to $1.71.

While revenue target for the year remains between $945 million and $955 million, the company envisions sales to hit the bottom end of the band. The current corresponding Zacks Consensus Estimates are $944 million and $1.67.

Hanger continues to expect to generate operating cash flows of $85-$95 million for the full year and aims to increase operating margins by 20-40 basis points in its core business.

Hanger substantially completed the relocation of its headquarters from Bethesda, Maryland, to Austin, Texas. The company expects to incur additional costs of $0.5-$1.5 million in 2011 as the final phase of the relocation concludes.

Hanger leads in the O&P patient care services market, operating through more than 675 patient care centers across the U.S. The company’s economies of scale are unmatched by competition, which include notable players in the O&P space such as Orthofix International (OFIX - Snapshot Report), Conmed Corp. (CNMD - Analyst Report), Exactech Inc. (EXAC - Snapshot Report) and Owens & Minor Inc. (OMI - Snapshot Report).

To expand its geographic presence, Hanger continues to pursue small tuck-in acquisitions. The $155 million acquisition of ACP added a fresh avenue of growth. Hanger anticipates the transaction to be accretive in 2011.

Moreover, the company is poised to achieve meaningful cost synergies from its corporate relocation. However, Hanger’s back-to-back acquisitions could lead to substantial integration risk. We currently have a Neutral rating on the stock.

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