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Hanger Inc.’s (HGR - Analyst Report) reported earnings of 50 cents per share for third quarter of 2012 were in line with the Zacks Consensus Estimate. However, it exceeded the year-ago adjusted earnings of 46 cents a share (up 8.7%). Adjusted earnings exclude one-time items such as acquisition costs and expenses associated with the relocation of the company’s headquarters in 2011.

Profit in the reported quarter was up 12.3% to $17.3 million (or 50 cents a share), primarily led by higher revenues along with controlled expenses.

Revenues

Revenues increased 3.5% year over year to $243.5 million in the quarter, missing the Zacks Consensus Estimate of $250 million.

Patient-care services, Distribution and Therapeutic solutions segments represented 82.3%, 11.2% and 6.5% of total sales, respectively, in the third quarter. Sales from Hanger’s Patient-Care Services segment grew 4%, which includes 1% increase in same- center sales and a higher contribution of $5.8 million from acquisitions. Revenues from the Distribution segment grew 3.5% year over year. However, Therapeutic sales dipped $0.4 million in the reported quarter.

Margins

Gross margin inched down to 70% from 70.5% a year ago. Adjusted operating margin in the quarter was 14.7% versus 13.5% in the prior-year quarter.

Balance Sheet

Hanger ended the third quarter of 2012 with cash and cash equivalents of $55.6 million, up 77% year over year. Total debt edged up 0.3% to $509 million.

Guidance

Hanger reiterated its revenue guidance for fiscal 2012 despite reimbursement and regulatory headwinds. The company expects revenues in the band of $970 million and $990 million. It projects sales from its Patient Care Services segment to grow 3% to 5% and Distribution to increase 3% to 7% (earlier 3%—5%) for 2012.

On the earnings front, Hanger reiterated its bottom-line guidance and expects adjusted earnings per share in the range of $1.75 to $1.79 for 2012. Adjusted earnings exclude one-time costs of 1 cent a share related to the deployment of the company’s new patient management system.

The current Zacks Consensus Estimates for revenues and earnings per share for 2012 are $984 million and $1.78, respectively.

In addition, Hanger expects to generate operating cash flows of $70 million to $80 million in 2012 and aims to increase operating margins by 20–40 basis points in its core business. It anticipates capital expenditure of $35 million to $45 million (earlier $40 million to $50 million).

Further, Hanger reported that till October 2012, it had made year-to-date small tuck-in acquisitions generating annualized revenues of $35.6 million. This exceeded the company’s previously announced goal to generate revenues of $20 million through acquisitions by year end.

Texas-based Hanger leads the orthotic and prosthetic (“O&P”) patient care services market, operating across more than 730 patient care centers in the U.S. The company’s economies of scale are unmatched by competition, which includes notable players in the O&P space such as Orthofix International (OFIX - Snapshot Report), Conmed Corp. (CNMD - Analyst Report) and Exactech Inc. (EXAC - Snapshot Report).

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’ recommendation on the stock, which carries a short-term Zacks #2 Rank (Buy rating).
 

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