) posted flat adjusted earnings per share of 54 cents for the
fourth quarter of 2013 compared with the same quarter of 2012 but
beat the Zacks Consensus Estimate by a penny. Net adjusted
earnings inched up 1.1% to $19.0 million from $18.8 million in
the fourth quarter of 2012. Adjusted earnings exclude
non-recurring tax expenses, costs related to acquisitions as well
as implementation of Hanger's new clinic management system, known
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For full year 2013, adjusted earnings per share rose 8.3% to
$1.95 from $1.80 a year ago and were in line with the Zacks
Consensus Estimate. Net adjusted earnings increased 10.2% to
$69.0 million from $62.7 million in 2012.
Adjusted earnings exclude non-recurring tax benefits, costs
related to acquisitions and the implementation of Janus, and debt
issuance cost associated with the refinancing of the Hanger's
bank credit facilities in Jun 2013.
Revenues in the quarter increased 3.2% year over year to $278.2
million but lagged the Zacks Consensus Estimate of $284 million.
The increase was mainly driven by growth in the Patient Care
segment, partially offset by soft sales in the Products and
The increase ($11.1 million or about 5%) in Patient Care segment
revenues comprised of a $2.8 million, or 1.3%, rise in same
center sales, with the remaining $8.3 million growth driven by
The fall ($2.5 million) in Products & Services segment
revenues was driven by the impact of acquisitions of O&P
companies, made by the Patient Care segment in 2012 and 2013, on
Hanger's distribution business, and lower demand for higher
priced prosthetic devices (such as micro processor-controlled
knees) from independent O&P practices.
For the full year, revenues grew 7.4% to $1,046.4 million,
missing the Zacks Consensus Estimate of $1,059 million. The
increase in revenues was attributable to an $18.8 million, or
2.4%, increase in same center sales in the Patient Care segment,
a $51.1 million rise from acquired entities, as well as a $2.1
million, or 1.2%, increase in sales in the Products &
Adjusted operating income ebbed 5.7% to $35.3 million in the
quarter from $37.4 million in the year-ago quarter. Consequently,
adjusted operating margin fell 120 basis points (bps) to 12.7%
from 13.9% in the fourth quarter of 2012. The decline was
attributable to higher material costs and accounts receivable
reserves related to operational issues experienced at a small
non-clinic unit within the Patient Care segment
Adjusted operating income for the year improved 3.9% to $136.2
million from $131.0 million a year ago. However, adjusted
operating margin fell 40 bps to 13.0% from 13.4% in 2012.
Hanger ended the year with cash and cash equivalents of $9.9
million, significantly down from $19.2 million at the end of
2012. Total debt decreased 10.1% to $468.3 million as of Dec 31,
2013 from $520.6 million as of Dec 31, 2012. As a result,
debt-to-capitalization ratio dipped 620 bps to 44.7% from 50.9% a
Cash flow from operations increased 8.5% to $88.3 million in
2013. Capital expenditure for the year went up 15.9% to $38.4
For 2014, Hanger anticipates revenues in the range of $1,110 to
$1,130 million, which is higher than the Zacks Consensus Estimate
of $1,103 million. Expected 2014 revenues implies a 6 to 8% rise
from the prior year driven by 3 to 5% growth in same center sales
in Patient Care segment, and a marginal decline in Products &
Services segment revenues.
The decrease in Products & Services revenues reflects the
carry-over impact of a large one-time sale during 2013, continued
acquisition of O&P distribution customers by the Patient Care
business, and increasing pressure on independent O&P
customers owing to continuing Medicare audits.
Hanger also expects adjusted earnings per share to grow 8% to 13%
to $2.10-$2.20, excluding the impact of 5 cents for training and
implementation costs of Janus. The Zacks Consensus Estimate of
$2.17 for the year lies within the guided range.
The expected rise in earnings includes an $11 million, or 19
cents per share impact for investment to be made by Hanger in its
back-office operations, including centralization of its billing
and processing activities and improvements in its finance,
accounting and information technology functions.
Operational improvements and costs savings related to these
investments are expected to be realized beginning in late 2014.
Despite these large investments, Hanger expects to maintain its
adjusted operating margins at a level similar to 2013 and
generate cash flow from operations between $90 and $100
million. The company will also make capital expenditures of
$40 to $50 million in the year.
Last month, Hanger acquired O&P practices with annualized
sales of approximately $20 million. This acquisition made Hanger
to set a goal to acquire $35 to $45 million of O&P annualized
revenues in 2014.
We are impressed by Hanger's confidence to set higher top and
bottom-line guidance for 2014. However, macroeconomic headwinds
like reimbursement uncertainties, sequestration, and RAC audits
are likely to reduce the bottom line.
Currently, Hanger carries a Zacks Rank #4 (Sell). Some
better-ranked medical product stocks include
Baxter International Inc.
). NuVasive carries a Zacks Rank #1 (Strong Buy), while both
Baxter International and Covidien carry a Zacks Rank #2 (Buy).