Hanger, Austin, Texas, announced its preliminary second quarter (2Q) 2014 financial results, for the period ended June 30, 2014, on August 7. Net sales were $275.9 million for the quarter ended June 30, 2014, an $8.1 million increase from net sales of $267.8 million for 2Q 2013. Adjusted diluted earnings per share (EPS) were $0.40 for the second quarter of 2014, compared to 2Q 2013 adjusted diluted EPS of $0.52. Adjusted EPS excludes nonrecurring tax costs, costs related to acquisitions, debt issuance costs associated with the June 2013 refinancing of the company’s bank credit facilities, severance costs related to a reduction in force, costs related to executive management changes, and costs related to the implementation of the company’s new clinic management system. Diluted EPS were $0.35 for 2Q 2014 compared to $0.40 for the same period of 2013.
- The $8.1 million net sales increase, or 3 percent, was the result of a $6.8 million, or 3 percent, increase in the patient care segment, and a $1.3 million, or 3.1 percent, increase in the products and services segment. The $6.8 million increase in patient care segment sales primarily comprised a $10.6 million increase in sales from acquisitions, partially offset by a $3.2 million, or 1.5 percent, decline in same-center sales. Hanger attributes the reduction in same-center sales largely to a slowdown in prosthetic patient flow driven by a slowdown in authorizations from payers and postponement of discretionary spending decisions by patients, and a slowdown in payments, which requires increased accounts receivable reserves and lowers net sales.
- Income from operations for 2Q 2014 was $26.4 million, compared to $36.6 million in the prior year. Adjusted income from operations for 2Q 2014, which excludes nonrecurring tax costs, costs related to acquisitions, severance costs related to a reduction in force, costs related to executive management changes, and the implementation of the company’s new clinic management system, was $28.9 million, compared to $43.7 million in the prior year. The decline in adjusted income from operations was driven principally by the decline in same-center sales in the patient care segment, continued losses in the company’s post-injury O&P patient services business (Dosteon, Bethesda, Maryland), and investments the company has made in its finance and revenue cycle management operations to improve processes and controls.
- Net sales for the six months ended June 30,2014 increased $14.4 million, or 2.9 percent, to $511.5 million from $497.1 million in 2013. The sales increase was driven primarily by a $13.4 million increase in the patient care segment, which consisted of a $20.6 million increase from acquired O&P entities partially offset by a decline in same-center sales of $6.1 million, or 1.5 percent, and an increase of $1 million, or 1.2 percent, in the products and services segment. Diluted EPS were $0.52 for the first six months of 2014 compared to $0.67 for the first six months of 2013. Adjusted diluted EPS, was $0.59 for the first six months of 2014 compared to adjusted diluted EPS of $0.80 for the first six months of 2013. This figure excludes costs related to acquisitions, the implementation of the company’s new clinic management system, and debt issuance cost associated with the June 2013 refinancing of the company’s bank credit facilities.
- For the six months ended June 30, 2014, Hanger reported a $7.5 million net outflow of cash from operations, compared to a $27.6 million cash inflow from operations for the same period in 2013. The reduction in cash flow from operations compared to the previous year is primarily the result of lower net income and $46.7 million of increased working capital. The increase in working capital was primarily due to an increase in accounts receivable (AR) and inventory balances. The AR increase included the impact of increased Medicare audits, which caused the company’s Medicare receivables over 120 days old to increase by $14 million year-over-year. AR was also impacted by the rollout of the company’s new clinic management system, which impacted receivable collection efforts in patient care centers as employees were trained and adapted to the new workflow associated with the system. Inventory balances increased as work in process grew due to a combination of the impact of acquisitions and a slowdown in the payer authorization process, which has increased the average length of time it takes to deliver a patient’s device. As of June 30, 2014, Hanger had $111.3 million in total liquidity, including $4.9 million of cash and $106.4 million available under its revolving credit facility, net of $90 million of borrowings and $3.6 million in letters of credit. The company’s leverage ratio, as defined in its credit facilities, was 3.1 times as of June 30, 2014.
“We are clearly disappointed with our second quarter results and are revising our outlook for the year,” said Vinit Asar, president and CEO. “The continuing pressure on authorizations, collections, and patient flow has had a significant impact on our top and bottom line to date, and will continue to pressure our earnings growth at least through the remainder of this year. We have already begun meeting these challenges head on by increasing our focus on business development and implementing cost reductions, including a reduction in force, and the rationalization of certain investments and other cost-savings measures. While this is certainly a difficult environment today, we remain confident that the fundamental growth prospects of our market and our strategy and execution capabilities will deliver significant long-term returns for our shareholders. Over the past two quarters we’ve been carefully evaluating the results of our Dosteon and CARES, Austin, businesses and have determined that parts of these businesses may not provide strategic long-term value. We are in the process of evaluating restructuring alternatives for these businesses.”
2014 Full-year Guidance
- Hanger lowered its full-year 2014 adjusted diluted EPS guidance to $1.60-$1.70. Based on the 2Q results, the company said it now believes that the conditions that resulted in lower same-center 2Q sales will continue to impact its sales and operations for the remainder of 2014, resulting in lower sales and earnings projections for the year.
- Hanger expects same-center sales for the second half of 2014 will be flat to down 2 percent. Consequently, the company is revising its same-center sales for the full year to a decline of 1-2 percent. The reduction in earnings projections principally reflects lower same-center sales in the patient care segment, and to a lesser degree the impact on sales and collections of the new clinic management system rollout, costs incurred to remediate the company’s previously reported material weaknesses and investments it is making in its processes and control environment.
- Hanger lowered 2014 full-year net sales guidance to $1.05-$1.08 billion. The expectation of negative same-center sales will be partially offset by additional acquisitions, which will drive incremental revenues for the remainder of the year, but will not provide significant earnings over that period due to their initial integration costs.
- Reflecting the lower than expected 2Q results, the impact of the reimbursement environment on working capital, Hanger has also lowered its expectation of 2014 cash flow from operations to $40-$50 million.
- Hanger said it anticipates acquiring O&P operations in 2014 with annualized net sales of $50-$60 million, and plans to invest $40-$50 million in capital additions during the year. Hanger’s previous full-year 2014 guidance issued on May 5, 2014, was to achieve revenues of $1.1-$1.12 billion, adjusted diluted EPS of $2.01 and $2.11, patient care same-center sales of 2-4 percent, and cash flow from operations of $80-$90 million. The potential impact of any restructuring of the company’s Dosteon or CARES businesses is not included in this 2014 guidance.