Orthotic and prosthetic (O&P) company Hanger Orthopedic’s ( HGR - Analyst Report ) fourth-quarter fiscal 2011 adjusted earnings of 54 cents a share topped the Zacks Consensus Estimate of 50 cents and exceeded the year-ago adjusted earnings of 52 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) for the quarter leapt manifold year over year to roughly $18 million (or 52 cents a share), paced by higher sales. Moreover, the year-ago quarter’s profit was hit by costs (of roughly $14 million) associated with extinguishment of debt. Hanger also recorded lower relocation and acquisition expenses in the reported quarter.

For the full year, adjusted earnings of $1.64 a share outpaced the Zacks Consensus Estimate of $1.60 and the year-ago earnings of $1.42. Profit (as reported) soared two and a half fold year over year to $55 million (or $1.61 a share).

Revenues & Margins

Net sales for the quarter climbed 9.5% year over year to $248.1 million, ahead of the Zacks Consensus Estimate of $245 million. For the full year, revenues jumped 12.4% year over year to $918.5 million, also beating the Zacks Consensus Estimate of $915 million.

The growth was fueled 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 segment also contributed to the growth.

Patient-care services, distribution and therapeutic solutions segments represented 83.6%, 10.1% and 6.3% of total sales, respectively, in the fourth quarter. Adjusted operating margin edged down to 14.2% from 14.5% a year-ago. Hanger faced reimbursement pressure across its Patient Care Services and Therapeutic Solutions divisions in the quarter.

Balance Sheet and Cash Flows

Hanger exited the fiscal with cash and cash equivalents of roughly $42.9 million, up 18% year over year. Total debt remained flat year over year at $508 million. Cash flow from operations increased roughly 14% year over year to $61.8 million.

Outlook and Recommendation

Moving ahead, Hanger expects revenues for fiscal 2012 in the band of $970 million to $990 million. The company foresees sales from its Patient Care Services and Distribution segments to grow 3%-5% in 2012. Moreover, it expects flat to modestly higher sales in its Therapeutic Services division.

On the earnings front, Hanger envisions adjusted earnings per share in the range of $1.72 to $1.79 for fiscal 2012. Adjusted earnings exclude the costs related to the deployment of the company’s new practice management and billing system dubbed “Janus”. The current Zacks Consensus Estimates for revenues and earnings per share for 2012 are $960 million and $1.76, respectively.

Hanger expects to generate operating cash flows of $70 million to $80 million in fiscal 2012 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. The company bought eight companies during the last fiscal for roughly $24.9 million and expects roughly $28 million in annual sales from these acquired entities.

Hanger, in its fourth quarter call, noted that it will continue its acquisition program in 2012 with a target of completing acquisitions with aggregate annualized sales of roughly $20 million.

Hanger 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, which is backed by a short-term Zacks #3 Rank (Hold).