Hanger Orthopedic Group Inc. ( HGR - Analyst Report ) reported first quarter 2012 adjusted earnings of 22 cents per share, beating the Zacks Consensus Estimate of 20 cents per share and exceeding the year-ago adjusted earnings of 19 cents a share. The adjusted earnings exclude the cost of a penny associated with relocation of the company’s corporate headquarters from Bethesda, Maryland to Austin, Texas.

Profit in the reported quarter was up 21.6% to $7.6 million (or 22 cents a share), driven by healthy sales.

Revenues

Revenues rose 8.8% year over year to $218.1 million in the quarter, beating the Zacks Consensus Estimate of $213 million. Growth was triggered by higher sales across the company’s Distribution and Patient-Care Services divisions along with acquisitions (worth $4.4 million). This was, however, partially offset by lower Therapeutic Solutions sales.

Patient-care services, Distribution and Therapeutic solutions segments represented 81%, 12% and 7% of total sales, respectively, in the first quarter. Sales from Hanger’s same center Patient-Care Services and Distribution segments grew 7.1% and 11.9%, respectively, but Therapeutic sales dropped by $0.9 million in the reported quarter.

Margins

Gross margin slipped to 70.6% from 71% a year ago. Adjusted operating margin in the quarter was 9.2% versus 9.4% in the prior-year quarter. Adjusted operating margin excludes relocation charges of $0.4 million.

Balance Sheet

Hanger ended the first quarter 2012 with cash and cash equivalents of $32.2 million, up 64% year over year. Total debt was down 2.3% to $506.1 million.

Guidance

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

On the earnings front, Hanger expects adjusted earnings per share in the range of $1.72 to $1.79 for fiscal 2012. Adjusted earnings exclude costs related to the deployment of the company’s new billing system and practice management. The current Zacks Consensus Estimates for revenues and earnings per share for 2012 are $968 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 orthotic and prosthetic (“O&P”) patient care services market, operating across more than 700 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 for 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 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 #2 Rank (Buy).