Hanger Inc.’s adjusted earnings per share (EPS) of 28 cents for the first quarter of 2013 beat the Zacks Consensus Estimate of 25 cents. It also exceeded the year-ago first quarter 2012 adjusted EPS by 12%. Adjusted earnings exclude one-time items such as acquisition costs and expenses associated with the company’s clinic management system Janus.
Profit of this orthotic and prosthetic (O&P) company was up 10.5% to $9.5 million (or 27 cents a share), primarily led by strong sales and accretive acquisitions.
Revenues increased 7.1% year over year to $233.5 million in the quarter, marginally beating the Zacks Consensus Estimate of $233 million. It led to record sales of above $1 billion for the company, trailing 12 months.
Effective from 2013, the company has realigned its reporting segments into two groups viz, Patient Care and Products and Services. The former will now include Linkia, which was earlier reported in the “Other” segment. The latter has merged the Distribution and Therapeutic Solutions segments to effectively meet end-market demands as well as enhance operating efficiency.
The Patient-care and Products and Services segments represented 82.7% and 17.3% of total sales, respectively, in the first quarter. Sales from Hanger’s Patient-Care segment grew 9.5%, which includes 1.7% increase in same-center sales and a higher contribution of $13.7 million from acquisitions. The segment was adversely affected by severe weather conditions in the quarter along with difficult year-over-year comparison in same center sales.
However, revenues from the Products and Services segment dropped 3% year over year, on account of soft sales from the distribution business, partially offset by gains in the rehabilitative solutions franchise. Sales at the distribution wing declined due to transfer of a number of large independent O&P customers to the Patient Care segment in 2012 and adverse weather conditions. Moreover, continuation of the CMS Recovery Audit Contractor (RAC) program put additional pressure on independent O&P customers.
Gross margin increased to 71.0% from 69.4% a year ago. Operating margin was 9.7% compared with 9.9% in the prior-year quarter. Adjusted operating margin was 9.9% in the quarter, roughly flat year over year.
Hanger ended the first quarter of 2013 with cash and cash equivalents of $15.0 million, down 53.4% year over year. Operating cash flow was $1.7 million in the quarter. Total debt increased 2.5% year over year to $518.8 million.
Hanger reiterated its financial guidance for 2013. The company expects revenues in the band of $1.06 billion and $1.08 billion. It projects same center sales from its Patient Care Services segment to grow 3% to 5%. Products & Services sales are also projected to increase 3% to 5% in 2013.
On the earnings front, Hanger expects adjusted earnings per share in the range of $2.02 to $2.09 (up 11.6%–15.5%) in 2013. Adjusted earnings exclude one-time costs of 5 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 in 2013 are $1,070 million and $2.06, respectively.
In addition, Hanger expects to generate operating cash flows of $80 million to $100 million in 2013 and aims to increase adjusted operating margins by 30–50 basis points. The company anticipates capital expenditure of $40 million to $50 million.
Hanger, in its first quarter call, noted that it will continue its acquisition program in 2013 with a target of completing acquisitions, with aggregate annualized sales of roughly $20 million.
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. We are impressed by the company’s ability to grow its top as well as bottom line despite the exposure to reimbursement uncertainties and its aggressive acquisition strategy.
The company needs to improve performance of its sluggish Distribution business on the back of the recent reorganizing efforts. Headwinds from sequestration is likely to reduce bottom line by 3 cents but the company is working on strategies to lower its impact.
Hanger currently carries a Zacks Rank #3 (Hold). Other medical products companies such as Conceptus , LeMaitre Vascular (LMAT - Snapshot Report) and NuVasive (NUVA - Analyst Report) appear impressive. While Conceptus and LeMaitre carry a Zacks Rank #1 (Strong Buy), NuVasive carry Zacks Rank #2 (Buy).