Hanger Inc (HNGR) 2014 Q2 法說會逐字稿

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to Hanger's second quarter results conference call.

(Operator Instructions)

Thank you. I would now like to turn the call over to Mr. Russell Allen, VP and Treasurer. You may begin your conference.

Thanks, Melissa. Good morning, and welcome, everyone, to Hanger's discussion of our 2014 second quarter results.

Before we start our discussion, I'd like to review with your declaration of forward-looking statements. During this call, management will make forward-looking statements related to the Company's results of operations. United States Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements. Statements related to future results of operations during this call reflect the views of management. However, various risks, uncertainties, and contingencies could cause actual results or performance to differ materially from those expressed or implied by these statements.

These include, but are not limited to, the Company's ability to enter into or derive benefits from managed care contracts, demand for the Company's products and services, the impact of reviews, audits, and other investigations conducted from time to time by governmental agencies, and other factors identified in the Company's periodic reports on Forms 10-K and 10-Q which are filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934. The Company disclaims any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events, or otherwise.

Now, I'll turn the call over to our Chief Executive Officer, Vinit Asar.

Thank you, Russell. Good morning, and thank you all for joining our Q2 earnings call.

Let me begin by acknowledging the disappointment in our results so far this year. Total revenues for the quarter came in at $275.9 million, an increase of $8.1 million or 3% from the second quarter 2013. Adjusted diluted earnings per share were $0.40 for the quarter. 2014 is proving to be one of the more challenging years for us in a long time, and during this call we will talk about these challenges and also spend time taking you through our plan to address them.

It is important to note that some of these challenges we believe are near term and are specific to the entire O&P industry given the nature of the services that we provide. As we emerge from a weak Q1, which was compounded by the weather issues we mentioned in our last earnings call, our patient care segment continues to see increased pressure and a slowdown in payment authorizations from both government and commercial payers.

Our products and services segment once again performed largely in line with our expectations during the quarter. I will provide more color on all of this and the rest of our operations shortly, but first let me turn the call over to George McHenry, our CFO, to take you through the financials.

Thank you, Vinit.

As Vinit just touched on, both the second quarter and the year-to-date results were impacted by negative market conditions that impacted sales and collections. Vinit will discuss the market forces that are impacting the patient care segment in particular and more detail in a minute, and I'll discuss the impact on our results as follows.

Adjusted EPS for the quarter was $0.40 compared to $0.52 in 2013, a decline of $0.12. The principal driver of the change in earnings was the 1.5% decline in same-center sales in the patient care segment. The sales decline caused a reduction in operating margins, which were 9.6% in 2014, compared to 13.7% in 2013. Our com rate of 30.5% was 80 basis points higher than last year. The increase was due to a change in net realizable value of sales, due to higher discounts, partially offset by savings from our efforts to reduce product costs via the our new clinic procurement system, Hanger Direct.

Personnel costs increased by $8.8 million compared to 2013. Approximately $5.2 million of the change was due to acquisitions, and the remaining $3.6 million change was due principally to annual merit increases, as well as increased employee benefit cost. Other operating expense for the quarter increased by $2.1 million. The increase was principally due to the impact of acquisitions.

[D&A] increased by $2.6 million compared to the prior year, due to the impact of acquisitions, a $1.4 million write-off of demo equipment, and a higher rate of expenditures on capital additions. Our effective tax rate for the quarter was 37.4% of pretax income in 2014 compared to 36.8% in 2013. The rate increased, principally due to the expiration of the federal R&D credit in 2014.

Moving on to the first six months, adjusted EPS was $0.59 compared to $0.80 in the prior year, a decrease of $0.21. Earnings were affected principally by the decline in same-center sales in the patient care segment. Consolidated sales increased by 2.9% for the first six months. Comp sales in our patient care segment decreased by 1.5% for the first six months. The decline in same-center sales was offset by the impact of acquisitions which added $20.6 million in sales for the first six months.

Sales in our product and services segment increased by 1.2% in the first half. Our com rate of 29.6% was equal to last year. Discounts reduced the net realizable value of sales, but the impact was offset by savings generated by the Hanger Direct program, which I discussed previously. Personnel cost increased by $15.3 million for the year. $9.7 million of that increase was due to the impact of acquisitions, and $5.6 million was due to annual merit increases and other benefit changes.

Other operating cost increased by $8 million for the year. Approximately $2.8 million of the increase was due to acquisitions, $4.2 million of the increase was due to an increase in bad debts, and the balance was due to a decline in other income. [D&A] increased by $3.5 million compared to 2013 through the impact of acquisitions to previously mentioned write-off of demo equipment and a higher rate of expenditures on CapEx. Again, the effective tax rate for the first half was 38.2% compared to 36.8% in 2013, and as for the quarter, the increase was due to the elimination of the federal R&D credit.

Moving on to the balance sheet and the cash flow, our AR balance was $205.3 million as of June 30. DSOs were 72 days compared to 65 days at year end and 59 days a year ago. The increase is due to a combination of factors. Medicare audits are still a significant driver of the increase in our AR balances.

Based on our experience through June 30, 2014, we are holding steady at an 88% success rate on appeals, but CMS audits continue to impact our receivable balance. We show $19 million in our system marked as CMS audits. We expect the actual amount outstanding is considerably larger, given that $29.3 million in outstanding Medicare receivables are over 120 days old.

We have also seen an approximate $13.4 million bill-to-receivables in the practices that have been converted to Janus. Learning the new system and work flows temporarily reduces the amount of time available for collection activities, which inflates AR balances at the practices that have recently been converted. Our inventory was $159 million at June 30 compared to $137.6 million a year ago. The increase was due principally to acquisitions, growth in WIP at patient care, as well as increased inventory in our distribution business to support new products. Despite the increase in inventory, our turns were 3.9 times compared to 4.1 times a year ago.

CapEx was $12.8 million for the quarter compared to $12.7 million in the prior year. For the first half, we spent $21.7 million compared to $18 million in the prior year. Cash flow provided by operating activities for the quarter was $2.5 million, a $23 million decrease compared to $25.5 million at 2013. For the first six months, cash used by operating activities was $7.5 million compared to $35.1 million provided from operating activities in 2013.

Reduction in cash flow was principally due to the increase in working capital, due principally to the increase in the AR and inventory balances that I previously discussed. The Company's liquidity at June 30 was $111.3 million, comprised of $4.9 million in cash and $106.4 million in availability in our revolver. Total leverage per our bank calculation was 3.1 times which is well below our covenant of 4 times.

Moving onto remediation, the Company continues to work with Protiviti and our auditors to remediate the material weaknesses that we reported in our audit report for the year ended December 31, 2013. We believe we have made good progress in our remediation efforts to date, but frankly we still have a lot of work to do throughout the remainder of the year. We have added substantial resources to our effort, and Protiviti will remain on the job to assist us through the remainder of the year. We remain dedicated to remediating all the material weaknesses previously reported.

Moving on to guidance, the Company lowered its 2014 full year adjusted diluted EPS guidance to a range of between $1.60 and $1.70. Based on the results of the second quarter, the Company now believes that the conditions that resulted in lower same-center sales in the second quarter will continue to impact its sales and operations for the remainder of 2014, resulting in lower sales and earnings projections for the year. The Company now expects that same-center sales for the second half of 2014 will be flat to down 2%. Consequently, the Company is revising its same-center sales estimate for the full year to a decline of 1% to 2%.

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 Janus rollout, costs incurred to remediate the material weaknesses reported in 2013, and investments the Company is making in its processes and control environment. The Company lowered 2014 full year net sales guidance to a range of between $1.05 billion and $1.08 billion. The expectation that 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.

Affecting the lower-than-expected first half results, the impact of the reimbursement environment on working capital, the Company has adjusted its expectations of 2014 cash flow from operations to a range of between $30 million of $40 million. The Company now anticipates acquiring O&P operations in 2014 with annualized sales of between $50 million and $60 million, and plans to invest between $40 million and $50 million in capital additions during the year. The potential impact of any restructuring of the Company's Dosteon and CARES businesses is not included in the Company's 2014 guidance.

That concludes my comments, and now I'm going to turn the call back over to Vinit Asar, our CEO.

Thank you, George.

Let me now take the opportunity to provide some color on our results. As mentioned earlier, our patient care segment has experienced a very challenging year. During Q1, we talked about the weather as the major factor that affected our results, but we also talked about the increase in Medicare audit activity that was affecting our accounts receivables.

As we entered Q2, we began to see a rebuilding of our patient pipeline, or WIP, as we refer to it. Our patient pipeline currently appears to be at more normal levels as a result of our continued focus to rebuild the WIP from the effects of Q1. However, we see factors other than our patient WIP that are having an adverse impact on our revenues.

Before we talk about the specifics of Q2 results, it's important to understand the impact of healthcare reform and how it relates to our O&P industry. This will help frame our business growth opportunities in the years to come.

During the last few years, since healthcare reform began to take shape including the Affordable Care Act, our expectation was and remains that we will likely see an increased number of patients needing our services that may have been previously uninsured but perhaps at a slightly lower revenue per patient. The net expected impact to our business will be flat to slightly positive, as the increased number of new patients is partially offset by lower price per patient. In addition, we believe that the demographics of an aging baby boomer population that strives to remain physically active for longer, combined with the pandemic of diabetes will continue to drive increased patient volume.

What we're seeing at this stage of the new era of healthcare reform are a few things that have clearly evolved in the recent past. The increased Medicare audit activity, which initially began with a spike in the RAC audits, and then a spike in the Medicare prepay audits is an effort to ensure that fraud and abuse in the healthcare system is reduced.

At Hanger, we fully support initiatives to curb fraud and abuse especially around services provided by unlicensed clinicians. However, we remain concerned about how these initiatives are executed. As we now know, the impact of how these audits are administered, combined with the limited resources to deal with the appeals process, can have a very detrimental impact on healthcare providers large and small, and is certainly being affected across the O&P industry.

Separately from these phenomena of audits, we are also beginning to sense the impact of the increased number of individuals that are signing up for high deductible health insurance plans. Data that we have clearly indicates that these plans are becoming more popular and more prevalent among employer sponsored plan offerings.

In fact, many of our large payer customers have reported better-than-expected MLR, medical loss ratios, which is driven by patient utilization of services. As a result of this, patients appear to be holding off any high dollar healthcare spending until they meet their higher deductible. In our case, these phenomena would apply to our existing patient base that would typically come in for replacement prosthetic devices.

When we look at all these market dynamics combined, in the context of where the O&P industry is headed and how this impacts Hanger, there are fundamental growth drivers that do not change. The aging of the baby boomers combined with their need to remain active for longer will increase the demand for our services. New technologies and approaches to clinical solutions will have both a positive and negative impact to the number of amputations needing treatment annually.

The new era of healthcare reform requires services to be provided at a lower cost, with a higher quality, and focused on patient satisfaction. This requirement will benefit companies that have the scale and the depth to be able to provide all this while keeping up with the increased regulations in healthcare.

Our O&P industry is evolving as a result of these environmental changes. At Hanger, we have a lot of respect and admiration for the strong, local independent providers of O&P. However, we believe that there will be further consolidation of local independence into regional players in order to keep up with these requirements.

In addition, the need for lower-cost delivery of healthcare is forcing providers like us to take a critical look at the strategic value of the entire portfolio of offerings that we provide. Through all of this, we believe we are best positioned not only to weather the environment today, but also emerge as a stronger provider of O&P services as the dust on all of this settles.

Keeping all of this as a backdrop, let me spend a few minutes providing you more color on the quarter. First, let me focus on the results of our patient care segment. Our revenues came in at $231.9 million for Q2 which is an increase of $6.8 million or 3% from Q2 2013. These results also include a decline in same-center sales of approximately 1.5%. As we look at our results, we categorize the issues we face into three broad buckets, first, treatment authorizations, second, cash collections, and third, patient volumes.

First, on treatment authorizations, we did see a slowdown in the number of patients treated for the quarter driven by a slowdown in these authorizations by both commercial and government payers, the beginning of a trend we had pointed to during the last quarter. Second, on cash collections, the impact of Medicare audits continues to lock up our funds until the appeals process at the ALJ level gets sorted out, as we pointed out in the last quarter earnings call. These audits have no doubt slowed down our overall collections rates and increased our AR. The increase in AR will continue to be burdened by the frozen appeals process for these audits.

I should also add here that the slowdown in collections rates has been temporarily amplified against the backdrop of our implementation of Janus, our new clinic management system, where those clinics that are on Janus are working on two collection systems until they work off the AR balances from the old system as they transition to Janus. We believe this to be a temporary situation within each clinic has work down the AR specific to each clinic on the old system.

Finally on patient volumes, we believe that an increased number of existing patients enrolling in high deductible and health insurance plans have had an impact on us as they potentially seek to postpone paying the high deductible for any replacement prosthetic devices. We believe they may be pushing some of the spending off for a period.

Finally, on the issues we face, I believe it is important to frame up our patient care segment's performance against the backdrop of how the overall O&P market is doing. It is our strong belief that the O&P market is facing the environmental issues that I outlined and attempting to work through them as current challenges.

For example, we've observed to our Linkia network that independent provider volumes are down year-to-date for the first time since we implemented the program. Our touch points with the industry associations and other owners confirm that the market dynamics are changing and that some of these headwinds will continue in the immediate future.

Now let me spend a few minutes sharing with you some actions we are taking and some plans we are considering. During the second quarter, we increased our business development activities to continue to build the patient pipeline. We also initiated cost reduction measures, including a reduction in our labor force that has eliminated labor costs within certain regions at Hanger Clinic amounting to $3 million to $4 million in the current calendar year.

On the accounts receivable and collections front, we continue to look for and institutionalize best practices and how to expeditiously respond to all Medicare audits. With regards to the impact of Janus, our rollout continues to progress well. However, as mentioned our clinics have to work on collections in the old system as they pick up and focus on Janus. While we see this affecting collections temporarily, we are evaluating various alternatives that will allow our teams to be more effective on this front shortly. Alternatives include the acceleration of centralization of some activities.

In addition, as you may recall, operational issues that emerged in the fourth quarter last year relating to our Dosteon discuss. This included a book-to-physical write-down adjustment of inventory that was large relative to this business and also deteriorating collections trends. These trends have not improved significantly since then which has led us to more closely evaluate the operational and strategic opportunities for Dosteon as well as our similar business, CARES, which functions under a similar model as Dosteon, but services hospitals.

After carefully evaluating the results of both these businesses, we have determined that some parts of these businesses may not provide strategic long term value. We are in the process of evaluating restructuring alternatives for these businesses and anticipate making a final decision in the third quarter.

Implementing a restructuring plan will focus on reducing risks in these businesses and help refocus our organization on our core clinic business. In addition, given that a large part of the product portfolio in these two businesses is off-the-shelf orthotics, any restructuring would lower our exposure to any potential competitive bidding that may occur in this off-the-shelf orthotics space in future years. We will keep investors informed of our plans as they materialize in the third quarter.

Overall our confidence in the long-term prospects of the core O&P business is solid, as I said earlier. As we work through the evolving environment, we expect to come out stronger on the other end of changes. To that end, we continue to see a strong acquisition pipeline in 2014 and plan to acquire between $50 million and $60 million worth of acquisitions in annualized revenues in O&P acquisitions this year. Our acquisition focus remains on strong O&P businesses with strategic and geographic value.

Let me switch gears and talk about our products and services segment. Q2 revenues for this segment came in at $43.9 million, an increase of $1.3 million or 3.1% over the prior year. The segment has seen a nice turnaround from a year ago where the distribution business was seeing a significant decline in revenues to its independent O&P customers. After retooling its sales and marketing strategies, increasing its presence with online revenues, and new channels like podiatry, the business is showing signs of stability. Our rehabilitation services business continues to stabilize its recurring lease revenue business, which showed another quarter of modest growth.

Let me now take a moment and comment on the revised guidance that George has already shared. Our assumptions for the revised guidance are based on the fact that many of the trends will likely continue for the remainder of the year. We are actively pursuing solutions and alternative approaches to mitigating and getting ahead of some of these challenges as the year progresses.

I'd like to conclude my prepared remarks by summarizing the key drivers in our Q2 results and also the assumptions for the remainder of the year. First, some of the consequences of healthcare reform are having a near term adverse impact on the O&P industry, and we have classified them in three broad drivers, treatment authorizations, cash collections, and patient volumes.

We're taking appropriate steps to mitigate each of these issues. Our actions include increasing business development activities which will continue to enhance our patient volumes, cost reduction efforts to ensure our costs stay in line with planned volume, and focusing resources in our core O&P business, which we are convinced is where our shareholders will get the highest returns. We also believe that as these environmental changes settle, we will emerge as a stronger market leader in providing O&P care to a growing demographic of patients that will need our services.

That includes my prepared remarks. Operator, please can you open the line for questions?

(Operator Instructions)

Brian Tanquilut, Jefferies.

Vinit or George, if you don't mind helping us out understand the volume issue, I know you've explained a lot of that. As we think about the number of patients showing up, if you don't mind just helping us understand where that is? If you can help us get a sense of is this really just a payer delay, or a payer bottleneck versus a broad based decline in demand or volumes?

There's probably three different ways to look at this. First of all, yes, we believe that the payer authorization piece is slowing down how many patients we treat every month just because they're taking time to get the authorizations. When we get the authorizations, we can begin the work on fitting these patients, so that's one piece of it. I think we're also seeing volumes slow down especially in the last, I'd say this last quarter, in the last few months. We attribute some of that to the pool of patients that we believe are likely in these high deductible plans. More importantly, we're seeing the slowdown more in the prosthetic side of the business, and more in our existing patient base which causes us to believe that this is driven by these higher deductible plans and issues like that, that patients are likely putting off the replacement cycles.

The way to think of this is if a patient would likely come in every 3, 3.5 years for a replacement prosthetic device, they're probably pushing that off by either a few months or a few quarters. We're trying to determine now how much time it's going to take before some of these existing patients come back and dip into these deductibles. It's a combination of both, Brian, the impact of the authorizations as well as patient volume, existing patients coming back for prosthetic devices.

Vinit, the second question for me, as we think about what kinds of discussions you're having with the payers on trying to expedite the approval process, at the end of the day patient care is obviously still on the line. I can imagine that the advocacy groups are up in arms over this. What are the payers saying? What are those discussions like with the payers right now?

Good question. I think it is two-fold, Brian. One, we're absolutely having these discussions with payers, especially our Linkia group is having these discussions with the payers. They've acknowledged two things. One is they themselves are seeing a decline in O&P volumes on the prosthetics side, so they've acknowledged which corroborates our thinking that some of these patients are pushing out the spend.

They've also acknowledged that they have been taking slightly longer for authorizations. The discussions we've had lead us to believe that they're looking at that seriously. We're hoping that turns around sooner versus later. I think time will tell, and what we've assumed in our guidance that these trends will continue for the rest of year. We believe that's a prudent way to look at it.

Last question for me, Vinit, obviously this is a transition year for you guys. As we think about your balance sheet, how open are you and/or the Board to pursue ways to optimize either the capital structure or to look for different options to maximize shareholder value at this point? (multiple speakers) I'm thinking whether it's a big share repurchase or any other options there potentially on the table?

We will certainly with what we're seeing now in terms of our prospects for this year, we'll certainly consider looking at a share buyback. Frankly, as we look at improving shareholder value, we think something like really pushing our M&A program which has been successful this year provides in the long term more shareholder value than what comes out of a buyback program. We want to retain our liquidity in order to be able to take those opportunities as they come.

Brian, we're very open to all the alternatives. You're right. This is a transition year, and we have important investments we're making as well as these issues we've just outlined. We're absolutely open to it. We're having the discussions around what the best alternatives, but as George said, we believe right now the best return for shareholders on the use of our cash is the M&A pipeline. We're considering all alternatives.

Larry Solow, CJS Securities.

A couple questions on the visibility and why you think that the slowness is happening, if more and more patients have gone to a higher deductible, wouldn't most of them be annualized deductibles, so they're just shifting out a few months until they meet that detectable? That would be more of a temporary thing. Then on the flip side of it, you sound like there should be some optimism inevitably, but if we're at the beginning of a trend which you refer to in terms of slowdown in payments from both the commercial and the public side, might this type of thing get worse before it gets better?

I think both your points are I think well stated. First off, what we want to do is wait for another quarter, get some more data to determine how long these patients will take before coming back. We're keenly focused on the existing patient base. I should mention that about 60% of our prosthetics, or maybe closer to 70%, are existing patients. We're keenly focused on the numbers. Just within one quarter, it's hard to determine when they'll come back.

Your hypothesis is probably accurate, but it's a hypothesis that we want to monitor that they will come back during some period, whether it's a quarter out or two quarters out. That upside could be there, but we've also looked at the other side which you accurately mentioned, the trends on the other issues may continue for another couple of quarters. We balance both those, the positive and negative, out and bake that into our guidance.

Just playing devil's advocate, could it be measured in a quarter, or could it be where there's pressure and slowness continues with the delay? Basically the cut off at the DOJ, nothing's happening for two years there. Could this actually take multiple quarters, even a year or two? It seems like it's a possibility, right?

Larry, absolutely it's a possibility. As you know, we did not give outer year guidance. We're just focusing on the remainder of the year, but absolutely. We believe we should watch the next couple of quarters, and then come up with a more educated estimate of what happens beyond that.

You spoke about some actions to increase business activity and build patient pipeline. Can you give us a little color on examples of what those might be?

One of the things that we do very well is our patient evaluation clinics. Our plan and what we've started in this past quarter and going into this current quarter is continuing that activity of patient evaluations, just talking to patients more, reaching out to patients, talking to our existing patients to see what their needs are, talking to referral sources. Those are the activities that we've amped up over the last couple of months.

Last question just to clarify, the miss in the quarter and the reduced outlook, is basically all of it from the miss in same-store sales, or is there just a small amount in the other two buckets meaning increased expenses for remediation and losses in Dosteon? Is that fair to say?

I'd say large portion of it is the miss in same-store sales growth. Certainly, there are some of the investments in our remediation efforts and Dosteon. Some of the Dosteon issues we had baked into guidance, when we gave previous guidance. A large part of it is a same-store. That's why we are focused on trying to increase our business development and watching our costs.

Mike Petusky, Noble.

Before you mentioned it, I was going to ask about had you guys continued full force with the patient evaluation clinics? I know that was one of the things that was cited in years past as driving volumes. Had you guys ramped that down in the recent quarters, or was that always full force?

We never amped it down. We're just adding more time to these patient evaluation clinics now. We're trying to do more and more regionally and nationally.

Essentially, you guys know when a patient is typically due for a replacement. Are you guys doing active outreach patient to patient, essentially saying you're due for a replacement, or is that beyond what you would do?

We absolutely do. We refer to these more as patient education clinics, so we make sure that we ensure that the patients do understand that this is what they can get at the right time, at the appropriate time. We absolutely do that.

Essentially, are you saying when someone's anniversarying, where they can get a replacement, are they getting a notification or a call or a flyer or something from you guys, or is it more informal than that?

It's a little of both because you've got to remember a lot of these patients come back to us regularly for adjustments. They come back to us throughout, even if they don't get a replacement device for three years. We're still seeing them. We're always in dialogue with them.

Then on the M&A goal, how far along are you so far this year in terms of M&A acquired revenue?

We're slightly north of about $40 million at the current time of acquired revenue.

On the Janus AR issue, I didn't catch it if you mentioned it, how many facilities are actually in that transition to Janus at this point? What are the plans going forward there?

About one-third of our practices are converted, and what we're seeing is the ones that are most recently converted are the ones that are spending all this time on training and learning the new work flow. The ones that have been on it for a while have begun to reduce their balances. As we rolled this out, we'll have some issues with the newer ones until we complete the rollout.

Does the fact that you guys are dealing with the Medicare audits and all the rest of it change the timetable for how quickly you rolled this out?

Great question, Mike. We absolutely have been having a discussion. We've gone both ends of the spectrum. Should we slow down the rollout? Should we accelerate the rollout, given all of that? Currently, our plan is to continue on the same track to get to about 300 clinics or so by the end of this year. We'll keep evaluating. If something does change, we'll either slow down or accelerate it. It's an important dialogue that we have on this topic.

Quickly, on the Dosteon and CARES, when you guys do make a decision, is that they press releasable event, or would you just update on the next conference call?

Depending on the timing, if it's really close to the end of the quarter, we'll just update on the call. It also depends on what we do, depending on the scale of what we do.

Dana Hambly, Stephens.

Vinit, just trying to understand on the commercial preauthorizations, how long had it typically been taking previously? How long is it taking now? I'm just curious of your thoughts, why is this happening all of the sudden? Why is it just such a recent phenomenon? Is it widespread across all payers, or is it focused to certain payers, any thoughts on that?

First of all, it's across all the payers and to different degrees. I wouldn't be able to tell you exactly how many days it takes, but I'll tell you that they started asking more questions, to get clarifications, et cetera, and sometimes it takes them a while to get back to us on any follow-ups.

If we were to guess maybe it's adding a few more days to the whole process, but it's hard to pin down by payer which payer is taking four days more versus two days more. The questions have certainly increased. If you ask us why, we've had the conversations with the payers as well, by the way. They're looking at that phenomenon as well to see if they can shorten that duration back to normal levels. I think they're asking the same questions that they see maybe CMS, et cetera, are asking in terms of details.

When you mentioned why we are just seeing it now, if you recall in first quarter, the weather drove our [WIP] down, so it masked the problem. As we built it back in second quarter, we started seeing that it was taking longer and longer for authorizations to occur. It is really something we just started noticing in the second quarter.

We're still getting the authorizations, Dana. (inaudible) getting the authorizations. It's just taking a little longer.

It just seems like the patient backlog should be building, and we should see that revenue come. I know fourth quarter seasonal you're strongest anyway. I don't know. It seems like you could be being a little conservative on the same-store outlook for the rest of the year, if that's the case, if you're going to get these patients in at some point.

I would say that we baked in the trends that we've seen in the first couple of quarters, and we're being prudent. Until we see something change, we like to plan on what we've provided guidance on.

That's fair. On the patient volumes at the patient center level, there's a large manufacture that reported strong prosthetic sales in the US. I think your comments on your distribution unit sounds like they're seeing stabilization in the independents. I'm just trying to rectify that with your decline. Those couple of items could suggest that you are losing some market share, but you truly feel like you're not at this point?

We're pretty confident we're not losing market share. Remember, we get data points through our Linkia network. We get data points when we talk to acquisition candidates. Certainly, we get data points from SPS as well. SPS' increase in revenues comes also from new customers that they've gotten, not just from existing customers. There's a combination of factors that we're very confident we're not losing share on a national basis.

Okay. Then you talked about with the ACA getting lower revenue per patient, are you seeing that yet? George, maybe could you break out on the same-store decline the volume versus pricing in that?

We had just below a 1% price increase in Q2 when we anniversaried on the sequestration. That wasn't a drag, so it's mostly volume. We saw growth in orthotics. The issue was around prosthetics. There also is some impact on the numbers because our AR built for the reasons I discussed, I have to put reserves, [$0.14] of reserves on every dollar I put on the balance sheet in AR. Since that goes against sales for the most part, that has some impact as well on the sales decline.

Dana, to answer the first part of your question, we haven't seen a significant change in the payer mix yet, in terms of more increased patients in Medicaid. That's what we expect to see in the longer term. We haven't seen that big shift yet, but that was my comment on the future.

I want go back to your comment on what the large manufacturers may see in terms of increased sales in prosthetics. Some these large manufacturers are coming out with some new products, and they've come out with new products. They might be taking share from other manufacturers, and I think that's a really important point that is playing out from what we see.

Okay. That's very helpful. Last from me, in the past you've talked about this investment spend that you're making this year. Then a portion of that you'd expect to come back in to EPS in 2015. Could you update me on what you expect to get back in 2015?

Sure, Dana. This is Russell. To remind the group of what we've talked about historically, at the beginning of the year, we talked about investing about $0.19 in a combination of a revenue cycle management investments and investments around remediation and other finance investments. Today that sitting around maybe $0.28. We took it up a little bit back in May, and we've had to reset a little bit as we're going through remediation, add a few pennies this quarter in our projection to support professional fees and personnel around remediation.

All that together is maybe around a $0.28 investment this year in the calendar year. The pieces that will flow back next year are obviously things like professional fees and special assessments like that maybe $0.05 to $0.06 will naturally come back next year. We also talked about the fact that our investment in RCM, revenue cycle management, was to get payback coming in the future years. We expect some amount of return on that investment to start building in 2015 and 2016 as we complete the Janus rollout. How much, we're still evaluating, but we feel like that'll be a little bit of a reversal of that RCM investment.

Brian Tanquilut, Jefferies.

Just one follow-up for you, Vinit, in the past you've talked about UnitedHealth relationship. I wanted to see where that stands right now, or if that has been a tailwind just yet as it relates to the volumes?

Great question. We spoke with United as well over the last month or so, to figure out what was going on with some of these phenomena. They also see the same thing that I talked about earlier just like some of the other payers. They are seeing a lower utilization in O&P services overall, but we are pretty bullish on that relationship once this does settle as they start seeing more patients come back for services. We continue to work closely with them to look at their out-of-network spent, so we should see some of the benefits of that in the long term as well.

Vinit, just to follow-up on that are we seeing more narrow network strategies from the larger national payers, or is that a few years down the road from here?

We're certainly starting to get the inquiries. We believe that's definitely going to happen. Again, this is the story and the advantage we have with the Linkia network. It's one of the best and the largest narrow network offering that a payer could ask for in O&P. That's why we believe we're well-positioned for the future. We're seeing the inquiries increase right now, and the conversations are definitely happening.

Larry Solow, CJS securities.

Vinit, you mentioned some cost cuts. I think you said $3 million to $4 million. Did I catch that?

That's correct. What we did is we took us some labor costs from various regions within Hanger Clinic locally, across the country.

Do you expect, not the front runner, maybe you don't some people hearing that, but do you expect maybe more? Are you incorporating more into your guidance?

We haven't incorporated more, a lot more, into our guidance. Like any other business, we're going to continue to watch what happens with volumes. If we need to take action in certain parts of the country or certain businesses, we will. Right now, we don't anticipate that as we sit here today.

The issues with Janus and exacerbating the slowdown in collections, can you remind us how much, what percentage of clinics have implemented Janus? I think it's still a pretty small piece so maybe the slowness will continue for a while, and maybe even accelerate on the part of the Janus impacts for little bit, for the next few quarters?

Larry, today we have about a third of our practices on Janus. The rollout will continue through 2016, but my anticipation since the rollout is happening at a pretty even pace is that this won't get noticeably worse. (inaudible) a couple million dollars either way from where it is today.

Maybe it even gets a little better from experience. Who knows? I know the clinics are independent from one another, but you still maybe help that a little bit, that process.

We're beginning to refine our training and how we roll it out. We're hoping that would be the case.

Last question, I think you said you've completed $40 million, and you're targeting $50 million to $60 million in acquisition sales. Considering the industry's under more pressure now, are you getting lower prices for this? If not, wouldn't it be prudent to wait and see how things shake out before you accelerate acquisition activity?

Great question. Again, this is an important dialog that we have internally. Our focus on O&P acquisitions has always been and will remain on just the strong O&P businesses that are out there. We don't focus on the businesses that may not be doing well, or that may have a weak balance sheet or P&L, or don't show growth, or don't have strong clinicians.

To the point, we definitely don't see an increase in the multiples that we're paying. We see the multiples remaining flat maybe slightly down, but we'll continue to focus on the stronger acquisitions as opposed to trying to look for the weaker ones at a cheaper price. We believe that ties into our strategy that when the dust settles, we will be a stronger provider of O&P services.

Dana Hambly, Stephens.

Just following up on the M&A, can you remind us what the revenue or EBITDA multiples you're typically paying for these acquisitions?

In the past, we have paid 5 to 6 times pre-synergies, and it usually comes down by a turn when you incorporate synergies, so 4 to 5 times. It's still very attractive, and we're seeing a good pipeline right now.

I'm sorry. Vinit, you said those aren't really changing, maybe down a little bit?

Maybe down a little bit, yes.

There are no further questions in queue at this time. I like to turn the call back to Vinit Asar, President and Chief Executive Officer, for any closing comments.

Thanks. We appreciate everyone's time and interest, especially in an important quarter like we just went through, and we'll continue to focus on what's important to our business and to our shareholders in terms of the return on the investments and our focus on the core clinical business. We'll look forward to talking to you all at the end of the third quarter where I'm certain we'll know more about some of these trends and talk more then. Thanks again for your time.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.