Hanger Q2 Earnings Lag, View Up - Analyst Blog

By Zacks Equity Research,

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Hanger Inc. 's ( HGR ) 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.

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 quarter.


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 Services unit..

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 2012.

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 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. 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 prosthetic devices.


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 costs.

Financial Position

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 $18.0 million.

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 million.


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.

Our Take

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 LeMaitre Vascular ( LMAT ), Alere ( ALR ) and Boston Scientific ( BSX ) appear impressive. While LeMaitre carries a Zacks Rank #1 (Strong Buy), the other two stocks carry a Zacks Rank #2 (Buy).

ALERE INC (ALR): Free Stock Analysis Report

BOSTON SCIENTIF (BSX): Free Stock Analysis Report

HANGER ORTHOPED (HGR): Free Stock Analysis Report

LEMAITRE VASCLR (LMAT): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Earnings , Stocks
Referenced Stocks: ALR , BSX , EPS , HGR , LMAT

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