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Orthotic and prosthetic (O&P) company Hanger Orthopedic’s (HGR - Analyst Report) third-quarter fiscal 2011 adjusted earnings of 46 cents a share beat the Zacks Consensus Estimate by a penny and surpassed the year-ago adjusted earnings of 37 cents. The adjusted earnings exclude the costs associated with acquisitions and the relocation of the company’s corporate headquarters from Bethesda, Maryland, to Austin, Texas.

Profit (as reported) more than doubled year over year to $15.4 million (or 45 cents a share), powered by a double-digit expansion in sales. The year ago quarter’s profit was hit by a hefty (roughly $8 million) relocation charge. Hanger recorded modest relocation expenses in the third quarter.

Revenues & Margins

Net sales surged 13.8% year over year to $235.3 million, just missing the Zacks Consensus Estimate of $236 million. Revenue growth was led by higher sales from Hanger’s therapeutic solutions division, powered by the Accelerated Care Plus (“ACP”) acquisition. Higher same center sales in the Patient Care Services division also contributed to the growth.

Patient-care services, distribution and therapeutic solutions segments represented 81.9%, 11.2% and 6.9% of total sales, respectively. Adjusted operating margin rose to 13.5% from 13% a year-ago, benefiting from contributions of the ACP acquisition. Hanger saw greater pressure on sales volumes and operating margin in the quarter.

Balance Sheet and Cash Flows

Hanger exited the quarter with cash and cash equivalents of roughly $31.4 million, down 67% year over year. Total debt increased roughly 25% year over year to $507.7 million. Cash flow from operations decreased roughly 24% year over year to $24.5 million.

Guidance Trimmed

Hanger has slashed its revenues and earnings forecasts for fiscal 2011 given the prevailing difficult operating backdrop. The company now expects adjusted earnings per share in the range of $1.59 to $1.62, down from its earlier forecast of $1.66 to $1.71.

Revenue target for the fiscal has been lowered to $914 million-$918 million from the prior projection of $945 million-$955 million. The current Zacks Consensus Estimates for revenues and earnings per share for 2011 are $924 million and $1.61, respectively.

For the fourth quarter, the company forecast adjusted earnings in the range of 49 cents to 52 cents a share on revenues of $243 million-$247 million. The current corresponding Zacks Consensus Estimates are $252 million and 50 cents, respectively.

Hanger now expects to generate operating cash flows of $70 million-$75 million (versus earlier view of $85 million-$95 million) for the full year and aims to increase operating margins by 20-40 basis points in its core business.

Hanger leads in the O&P patient care services market, operating across more than 680 patient care centers in 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.

Moreover, the company is poised to achieve meaningful cost synergies from its corporate relocation. However, we are cautious about the company’s exposure to reimbursement uncertainties and its aggressive acquisition strategy which has inherent risks. We currently have a Neutral rating on the stock.

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