) adjusted earnings per share (EPS) of 52 cents for the second
quarter of 2013 missed the Zacks Consensus Estimate of 56 cents.
However, it beat the year-ago adjusted EPS by a penny. Adjusted
earnings exclude one-time items such as debt issuance cost,
acquisition charges and expenses associated with the company's
clinic management system Janus. Adjusted net earnings increased
5.1% to $18.5 million in the quarter.
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Net income of this orthotic and prosthetic (O&P) company was
down 19.0% to $14.1 million (or 40 cents a share) from $17.4
million (or 50 cents per share) in the year-ago period. The
decline was mainly led by higher operating expenses in the
Revenues increased 8.7% year over year to $273.7 million in the
quarter, beating the Zacks Consensus Estimate of $271 million.
The increase was mainly driven by growth in the Patient Care
segment, partially mitigated by soft sales from the Products and
Effective from 2013, Hanger 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
84.4% and 15.6% of total sales, respectively, in the second
quarter. Sales from Hanger's Patient-Care segment grew 11.1%,
which include a 3.9% increase in same-center sales and a higher
contribution of $15.0 million from acquisitions completed in
However, revenues from the Products and Services segment dropped
2.6%, on account of soft sales from the distribution business,
SPS, partially offset by modest gains in the rehabilitative
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. Moreover, continuation of the CMS Recovery Audit
Contractor (RAC) program put additional pressure on independent
O&P customers, which led to sluggish sale of expensive
Gross margin remained flat at 71.0% compared with the year-ago
level. Operating margin was 13.4%, down from 14.2% in the
prior-year quarter. Adjusted operating margin also declined 80
basis points to 13.5% in the quarter, mainly due to the adverse
impact of sequestration, RAC audits and higher employee benefit
Hanger ended the second quarter with cash and cash equivalents of
$5.8 million compared with $19.2 million at the end of 2012.
Total debt decreased to $504.5 million as of Jun 30, 2013 from
$520.6 million at the end of 2012.
Cash flow from operations was $26.7 million in the first six
months of 2013, down 1.1% from the year-ago level of $27.0
million. Capital expenditure for the same period went up 12.5% to
HGR initiated a new 5-year credit agreement in June to refinance
its bank credit facility, thereby increasing its senior secured
facilities to an aggregate principal amount of up to $425
Hanger revised its financial guidance for 2013. The company
expects revenues in the band of $1.06 billion to $1.08 billion.
It projects same center sales from its Patient Care Services
segment to grow 3% to 5%. However, Products & Services sales
are now projected to be flat (earlier up 3% to 5%) in 2013. The
Zacks Consensus Estimate for 2013-revenues is pegged at $1.07
billion, which lies within the guided range.
Hanger raised its adjusted earnings per share guidance to the
range of $2.07- $2.13 from the earlier range of $2.02-$2.09 in
2013. The Zacks Consensus Estimate for 2013 earnings per share is
$2.09, which lies within the guided range.
Adjusted earnings exclude one-time costs of 3 cent a share
(earlier 5 cents) related to the deployment of Hanger's new
patient management system. Management raised its bottom-line
guidance on account of lower interest payment related to
refinancing of the company's bank credit facilities in June,
partially dampened by lower expansion of adjusted operating
margin. Hanger anticipates that adjusted operating margin will
expand 20-40 bps for the year compared with the earlier guidance
of 30-50 bps.
In addition, Hanger continues to expect operating cash flow of
$80 million to $100 million and capital expenditure of $40
million to $50 million in 2013. Management noted that it will
continue its acquisition program in 2013 with a target of
completing acquisitions, with aggregate annualized sales of
roughly $20 million.
Despite earnings missing estimates in the quarter mainly due to
higher operating expenses, we are impressed by Hanger's
confidence to raise the bottom-line guidance for the rest of the
year. Moreover, we note the company's ability to grow its top
line on the back of acquisitions amid macroeconomic headwinds
like reimbursement uncertainties. The company's economies of
scale are unmatched by competition.
Hanger's reorganizing efforts will likely improve the performance
of its sluggish Distribution business. Headwinds from
sequestration and RAC audits are likely to reduce bottom line but
the company is working on strategies to lower its impact.
HGR carries a Zacks Rank #2 (Buy). Other medical products
companies such as
) appear impressive. While LeMaitre carries a Zacks Rank #1
(Strong Buy), the other two stocks carry a Zacks Rank #2 (Buy).