Hanger Q1 Earnings and Revs Miss Ests, Shares Down - Analyst Blog

Hanger Inc. HGR posted adjusted earnings per share of 19 cents for the first quarter of 2014 compared with 27 cents in the same quarter of 2013, reflecting a year over year drop of 29.6%.  Earnings also lagged the Zacks Consensus Estimate of 23 cents.

Net adjusted earnings fell 30.0% to $6.7 million from $9.6 million a year ago. Adjusted earnings exclude non-recurring tax expenses, costs related to acquisitions as well as implementation of Hanger's new clinic management system, known as “Janus”.

Revenues in the quarter inched up 2.7% to $235.6 million from $229.4 million in the prior-year quarter. However, revenues fell short of the Zacks Consensus Estimate of $242 million.

Shares of Hanger tumbled significantly by 12.3% after it reported disappointing first-quarter results owing to adverse weather conditions across the U.S. during the quarter and costs associated with the company's delayed 10-K filing.

Segment Results

Revenues from the Patient Care segment stood at $195.6 million, an increase of 3.5% from the year-ago quarter. The upside was driven by a $10.0 million increase in sales from acquisitions, offset by a $3.5 million decline in same center revenues.

The deterioration in same center revenues can be attributed to inclement weather in eastern and central U.S. throughout the first quarter which resulted in about 1,000 closed clinic days in the segment under review.

Revenues from the Products & Services segment declined $0.8% to $40.1 million in the first quarter of 2014. The downside reflects the impact of adverse weather conditions on Hanger's distribution customers, partially offset by a modest rise in ACP sales.

Margins

Gross profit improved 4.1% to $168.3 million while gross margin expanded 90 basis points (bps) to 71.4% from 70.5% in the prior-year quarter.

Adjusted operating earnings ebbed 27.4% to $16.8 million from $23.2 million in the year-ago quarter. Consequently, adjusted operating margin fell 300 bps to 7.1% from 10.1% in the year-earlier quarter. Adjusted operating margin was impacted by lower-than-expected sales and increased costs.

Financial Position

Hanger exited the quarter with cash and cash equivalents of $55.6 million, which more than tripled from $18.2 million as of Mar 31, 2013. Total debt increased 8.4% to $561.9 million as of Mar 31, 2014 from $518.5 million as of Mar 31, 2013. Conversely, the debt-to-capitalization ratio dipped 130 bps to 48.8% from 50.1% a year ago due to an increase in the number of average outstanding shares.

Hanger reported $10.0 million in cash outflow from operations for the first quarter of 2014, versus a cash flow of $2.2 million in the same period of 2013. Lower operating income and increased working capital requirements led to the reduction in operating cash flow. Capital expenditures escalated 64.2% to $8.9 million from $5.4 million in the year-ago quarter.

2014 Guidance

For 2014, Hanger lowered its adjusted earnings per share guidance to a range of $2.01 to $2.11 from the prior range of $2.10 to $2.20. The slashed guidance represents a rise of 3.1 to 8.2% over 2013. The current Zacks Consensus Estimate of $2.16 for the year lies above the guided range.

Hanger lowered its 2014 revenue guidance to a range of $1,100–$1,120 million from the previous range of $1,110 to $1,130 million. The current Zacks Consensus Estimate of $1,107 million lies within the guided range. Hanger expects same center sales growth between 2 and 4% in 2014 compared with the prior growth expectation of 3 to 5%.

Accelerated acquisitions are expected to drive incremental revenues for the rest of the year despite a lowered same center sales growth expectation. However, the takeovers are not likely to boost earnings significantly over the period owing to the initial integration costs.

Reflecting the lackluster first-quarter results and the reimbursement environment, Hanger anticipates cash flow from operations between $80 and $90 million in 2014, which is lower than the earlier range of $90 to $100 million.

Hanger maintains its expectation of acquiring O&P operations in 2014 with annualized net sales between $35 and $45 million. The company plans to incur capital expenditures between $40 and $50 million during the year.

Our Take

We are disappointed with Hanger's first-quarter results, which lagged estimates at both fronts. Moreover, Hanger also revised its 2014 outlook downward to reflect the challenging quarter marked by the impact of severe winter weather on earnings and revenues.

Hanger continues to face macroeconomic headwinds like reimbursement uncertainties, sequestration, and RAC audits that are likely to pressurize the top line.  

Currently, Hanger carries a Zacks Rank #4 (Sell). Some better-ranked medical product stocks include Cardica Inc. CRDC, Enzymotec Ltd. ENZY and Mead Johnson Nutrition Company MJN. All the three stocks carry a Zacks Rank #2 (Buy).