Hanger Inc.’s (HGR) adjusted earnings rose 24% year over year to 62 cents per share for the third quarter of 2013, comfortably beating the Zacks Consensus Estimate of 58 cents. Adjusted net earnings surged 24.4% to $21.9 million in the quarter from $17.6 million in the year-ago quarter.
Net income of this orthotic and prosthetic (O&P) company increased to $21.7 million or 61 cents a share from $17.3 million or 50 cents in the year-ago period. Solid revenue gains coupled with operating efficiency accelerated bottom-line growth. Moreover, management claimed that the issues concerning the CMS Recovery Audit Contractor (RAC) and other Medicare audits have stabilized in the reported quarter.
Revenues increased 11.8% to $271.1 million, surpassing the Zacks Consensus Estimate of $270 million. The increase was mainly driven by growth in both the Patient Care, and Products and Services segments.
Gross margin improved 80 basis points (bps) to 70.7% in the third quarter. Operating margin was 14.7%, slightly higher than the prior-year figure of 14.6%. Adjusted operating margin grew 30 bps to 15.0% in the quarter. We note that on a sequential basis, adjusted operating margin improved by a solid 150 bps.
Segment Details
During the third quarter, the company corrected an error in the classification of certain components of bad debt expense. However, it did not impact the third quarter earnings, because lower sales as a result of the adjustment completely offset reduced Other Operating Expenses.
The Patient Care, and Products and Services segments represented 81.6% and 18.4% of total sales, respectively, in the third quarter. Sales from Hanger’s Patient Care segment grew 10.8%, owing to a 3.8% increase in same-center sales and a higher contribution of $14.2 million from acquisitions.
Moreover, revenues from the Products and Services segment increased 16.2% on the back of soft year-over-year comparisons coupled with benefits from a one-time sale. We note that this segment has improved sequentially. Revenues in the last two quarters had declined on account of soft sales from the distribution business, partially offset by modest gains in the rehabilitative solutions franchise.
Financial Position
Hanger ended the third quarter with cash and cash equivalents of $7.2 million, down 62.5% compared with $19.2 million at the end of 2012. However, total debt decreased to $471.1 million as of Sep 30, 2013 from $520.6 million at the end of 2012.
Cash flow from operations was $68.5 million in the first nine months of 2013, up 16.1% from the year-ago level of $59.0 million. Capital expenditure for the same period went up 10.4% to $27.5 million.
Guidance
HGR lowered its financial guidance for 2013. The company has lowered its revenue expectation from the range of $1.06 billion to $1.08 billion to $1.045 billion to $1.055 billion. This represents a year-over-year growth of 7% to 8%. The Zacks Consensus Estimate for 2013-revenues is pegged at $1.07 billion, which lies above the guided range.
It projects same center sales from its Patient Care Services segment to grow 3% to 4% (earlier 3% to 5%). However, based on strong revenue results in the third quarter, Products & Services sales are now expected to improve slightly compared to the earlier flat year-over-year guidance.
Hanger narrowed its adjusted earnings per share guidance to the range of $2.08– $2.11 from the earlier range of $2.07– $2.13 for 2013. Adjusted earnings exclude one-time costs of 3 cents a share related to the deployment of Hanger’s new patient management system. The Zacks Consensus Estimate for 2013-earnings per share is $2.10, which lies toward the higher end of the guided range. Moving on, management reiterated its forecast for adjusted operating margin, which is expected to expand 20–40 bps for the year.
In addition, Hanger now expects operating cash flow of $90 million to $100 million (compared with the earlier guidance of $80 million to $100 million) and capital expenditure of $35 million to $40 million (compared with the earlier outlook of $40 million to $50 million) in 2013. Management noted that it will continue its acquisition program in 2013 aiming at completion of acquisitions, with aggregate annualized sales of roughly $20 million.
Our Take
Despite top- as well as bottom-line beats in the third quarter, Hanger’s conservative outlook for the rest of the year is a cause of concern. Although the smaller Products & Services segment is benefiting from reorganization efforts, outlook for the core Patient Care Services unit appears to be soft. We note that management has tweaked the top end of the projected same center sales by 1%.
However, we note the company’s ability to enhance its top line by way of acquisitions amid macroeconomic headwinds like reimbursement uncertainties. Moreover, the company’s economies of scale are unmatched by competition.
HGR currently carries a Zacks Rank #3 (Hold). While we choose to remain on the sidelines regarding HGR, other medical product companies such as Bio-Rad Laboratories, Inc. (BIO), INSYS Therapeutics, Inc. (INSY) and ZELTIQ Aesthetics, Inc. (ZLTQ) appear impressive. All these stocks carry a Zacks Rank #1 (Strong Buy).
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