Hanger, Austin, Texas, announced net sales of $271.1 million for the third quarter (3Q) ended September 30, 2013, an increase of $28.6 million, or 11.8 percent, from net sales of $242.5 million for 3Q 2012. Adjusted diluted earnings per share (EPS), which excludes certain tax benefits, costs related to acquisitions, and costs related to implementation of a new clinic management system, increased 24 percent to $0.62 for 3Q 2013 from $0.50 for the 3Q 2012. Diluted EPS increased 22 percent to $0.61 for 3Q 2013 compared to $0.50 for 3Q 2012.
“We are pleased with our revenue and earnings momentum in the third quarter,” said Vinit K. Asar, president and CEO of Hanger. “We delivered strong same center sales growth of 3.8 percent in our patient care segment and started to gain traction from our materials management initiatives. In addition, the number of RAC [Recovery Audit Contractor] and other Medicare audits stabilized in the quarter, as did our overall Medicare audit success rate; although the time required to resolve these audits has increased due to a backlog of appeals in the administrative laws system. Our continued growth is a direct reflection of the efforts of our talented employees around the country and the strength of our underlying business.”
During 3Q, Hanger corrected an error in the classification of certain components of bad debt expense, according to a company press release. Hanger’s previous practice had been to classify the reserves related to the write-off of older accounts receivable balances due from commercial and government payers as bad debt expense, which was reported as other operating expense in its financial statements, instead of a reduction of sales. All prior periods will be revised to report on a comparable basis. This revision has no impact on reported earnings; it lowers sales and reduces other operating expenses by equal and offsetting amounts. The revision is reflected in the 3Q 2013 results.
The 3Q net sales increase of $28.6 million was the result of a $21.6 million, or 10.8 percent, increase in the patient care segment, and a $7 million, or 16.2 percent, increase in the products and services segment. The $21.6 million increase in the patient care segment comprised a $7.4 million, or 3.8 percent, increase in same center sales, with the remaining $14.2 million increase driven by acquisitions. The 16.2 percent increase in the products and services segment was the result of stronger sales results against weaker results in 3Q 2012, as well as the impact of a one-time sale within the segment.
Income from operations for 3Q 2013 was $39.9 million, compared to $35.4 million in the prior year. Adjusted income from operations for 3Q, which excludes costs related to acquisitions and the implementation of the new clinic management system, was $40.7 million, compared to $35.8 million in the prior year. Adjusted income from operations as a percentage of revenue was 15 percent for the 3Q 2013, which is a 0.3 percent increase compared to 3Q 2012.
Net sales for the nine months ended September 30, 2013, increased $63.4 million, or 9 percent, to $768.2 million from $704.8 million in the same period of 2012. The sales increase was driven by a $15.9 million, or 2.8 percent, increase in same center sales in the patient care segment; a $42.9 million increase from acquired entities; as well as a $4.6 million, or 3.6 percent, increase in sales in the products and services segment. Diluted EPS were $1.28 for the first nine months of 2013 compared to $1.25 for the same period of 2012. Adjusted diluted EPS, which excludes certain tax benefits, costs related to acquisitions and the implementation of the clinic management system, and debt issuance cost associated with the June 2013 refinancing of Hanger’s bank credit facilities, increased 12.7 percent to $1.42 for the first nine months of 2013 compared to adjusted diluted EPS of $1.26 for the first nine months of 2012.
Cash flow from operations increased by $9.5 million to $68.5 million for the nine months ended September 30, 2013, compared to a $59 million cash inflow for the same period in 2012. As of September 30, 2013, the company had $177.6 million in total liquidity, including $7.2 million of cash and $170.4 million available under its revolving credit facility, net of approximately $26 million of borrowings and $3.6 million in letters of credit. Hanger’s leverage ratio, as defined in its credit facilities, improved to 2.5. Hanger reported that it has reduced its total debt by approximately $50 million since December 31, 2012.
For 2013, Hanger is updating its net sales guidance to a range between $1.045 and $1.055 billion, which represents growth of between 7 and 8 percent compared to 2012. This range reflects the estimated effect of the previously mentioned revision on full year 2013 net sales. The net sales guidance assumes 3 percent to 4 percent same center sales growth in the patient care segment for the year. Hanger expects full year 2013 net sales in its products and services segment to increase slightly for the year, notwithstanding the segment’s strong net sales growth in 3Q 2013. As previously mentioned, the segment’s strong 3Q 2013 net sales results included the benefit of an accelerated one-time sale that Hanger anticipated would occur across the third and fourth quarters of 2013. The company is also narrowing its range of guidance for adjusted diluted EPS to between $2.08 and $2.11 for 2013, excluding certain tax benefits, costs related to the implementation of the clinic management system of approximately $0.03, acquisition costs and debt issuance cost associated with the June 2013 refinancing of bank credit facilities. Hanger said it expects that adjusted operating margin expansion for the year will be in the range of 20 to 40 basis points. Hanger anticipates generating cash flow from operations of between $90-$100 million in 2013 and investing a total of $35-$40 million in capital additions. The company will continue its acquisition program with a goal of closing acquisitions that total approximately $20 million in annualized revenues in 2013.
A conference call was held on October 30 to discuss these results. A replay of the call will be available through November 6, by dialing 1.855.859.2056 and referencing conference identification number 74378609.
