Hanger Orthopedic (HGR) posted fourth-quarter fiscal 2010 adjusted earnings per share of 52 cents, outstripping the Zacks Consensus Estimate of 40 cents and the year-ago adjusted earnings of 37 cents. However, profit (as reported) for the quarter was pulled down by hefty charges.
Fourth quarter profit plummeted nearly 94% year over year to $0.75 million (or 2 cents a share) as charges offset a double-digit growth in revenues. For fiscal 2010, adjusted earnings per share of $1.42 also outperformed the Zacks Consensus Estimate of $1.30 and surpassed the year-ago earnings of $1.13. Profit skid 41% year over year to $21.4 million (or 65 cents a share).
The adjusted earnings for both periods exclude one-time items including the costs associated with the relocation of the company’s corporate headquarters, charges related to the acquisition of rehabilitation technologies provider Accelerated Care Plus (“ACP”) and cost of extinguishment of debt.
Revenues & Margins
Net sales for the quarter leaped 10.4% year over year to $226.5 million, modestly beating the Zacks Consensus Estimate of $225 million. The growth was led by higher revenues from same-center at patient-care segment (up 6.2%) and the company’s distribution segment (up 8.7%).
Patient-care services and distribution segments contributed 87% and 10.6% to total revenues for the fourth quarter, respectively. For the full year, revenues rose 7.5% to $817.4 million, a tad higher than the Zacks Consensus Estimate of $816 million. Adjusted operating margin for the quarter and the fiscal year improved to 14.5% and 12.6%, respectively, from 13.4% and 11.9%, respectively, a year-ago.
Balance Sheet & Cash Flow
Hanger exited fiscal 2010 with cash and cash equivalents of roughly $36.3 million, down 57% year over year, as the company partly funded the ACP acquisition with cash. Total debt increased roughly 24% year over year to approximately $508.7 million. Hanger generated $70.1 million in cash from operations in fiscal 2010, down roughly 4% year over year.
Outlook
Moving forward, Hanger envisions total revenues for fiscal 2011 between $945 million and $955 million and earnings per share in a band of $1.63 to $1.68. The current corresponding Zacks Consensus Estimates are $909 million and $1.64. Hanger expects to generate operating cash flows of $85-$95 million for the full year and aims to increase operating margins by 20-40 basis points in its core business.
The company has nearly completed the relocation of its headquarters from Bethesda, Maryland, to Austin, Texas. Hanger spent $16.4 million in severance, lease termination and relocation costs during fiscal 2010 on account of the move. The company expects to incur additional costs of $1.5-$2.5 million in first-half 2011 as the final phase of the relocation concludes.
Hanger leads in the orthotic and prosthetic (O&P) patient care services market, operating through 678 patient care centers across the U.S. The company’s economies of scale are unmatched by competition, which include notable players in the O&P space such as Orthofix International (OFIX), Conmed Corp. (CNMD), Exactech Inc. (EXAC) and Owens & Minor Inc. (OMI).
To expand its geographic presence, Hanger continues to pursue small tuck-in acquisitions. The company bought ACP in December 2010 for $155 million in cash. The acquisition adds a fresh avenue of growth for Hanger and complements its healthcare offerings. Hanger anticipates the transaction to be accretive in 2011.
However, the company’s back-to-back acquisitions could lead to substantial integration risk. We are currently Neutral on Hanger. The stock currently retains a Zacks #2 Rank, which translates into a short-term Buy recommendation.
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