Hanger, Inc.
Q2 2013 Earnings Call Transcript

Published: 1 Aug 2013

[Operator:]

Good morning. My name is Staph and I will be your conference operator. At this time, I would like to welcome everyone to the Hanger, Inc.’s Second Quarter 2013 Results. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Russell Allen, Treasurer of Hanger, Inc., you may begin your conference.

[Russell Allen:]

Good morning, and welcome everyone to Hanger’s discussion of our second quarter 2013 results. Before we start our discussion, I’ll review with you our declaration of forward-looking statements. During this call, management will make forward-looking statements regarding the company’s results of operations. The United States Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements. Statements relating 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 and/or implied by these statements. These include, but are not limited to the company’s ability to enter into and drive benefits for managed care contracts, demands for the company’s products and services, the impact of reviews, audits and 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, further events, or otherwise. Now, I will turn the call over to our Chief Executive Officer, Vinit Asar.

[Vinit Asar:]

Thanks, Russell, and thank you all for joining us on our second quarter earnings call. I’ll begin my comments by taking you through the two aspects of the story this quarter. First is the continued success we have shown in our largest asset our Patient Care segment both organically and through strategic acquisitions. And second, a discussion of some cost pressures that we faced during this quarter and how we see those play out over the remainder of the year. Hanger’s total revenues continued to gain momentum in the second quarter with a total growth of 8.7%, driven by a combination of organic growth as well as growth from our O&P acquisitions. However, our adjusted earnings per share grew 2% from $0.51 last year to $0.52 this year. The challenges we faced during this quarter included the continued increase in RAC audit activity and an uptick in our benefit cost as it relates to our health plans. As a reminder even though we expected it, this was also the first period that we saw the impact of sequestration on our numbers. Sales in our Patient Care segment increased 11.1%, with same center sales up 3.9% compared to the prior year showing a healthy increase in our sales momentum. Sales in our Products and Services segment were down 2.6% compared to the same period last year. This decline in year-over-year growth was driven by the continued and increased pressure on our independent O&P customers due to the ongoing RAC audits across the county. In addition and only just as a reminder, our O&P acquisition program and Patient Care segment does affect revenues in this Products and Services segment. As you may remember, we acquired independent O&P companies with aggregate annual revenues of approximately $60 million in 2012, and these companies made substantial purchases from our distribution businesses independents. After acquisition, those purchases became internal intercompany sales on a consolidated basis and therefore negatively impacted the distribution businesses external sales. If we adjust our prior year sales for the impact of these acquisitions, revenues in our Products and Services segment were actually slightly up, primarily as a result of our continued growth in our rehabilitative solutions business, ACP, which delivered another quarter of mid single-digit growth. We fully expect that our strong sales trajectory in Patient Care combined with the continued execution on our cost savings and efficiency initiatives will allow us to offset a good portion of the cost challenges we have experienced so far this year. This will enable us to deliver margin expansion and greater earnings growth in the back half of the year. Before I get into the operational details on all of this, let me turn the call over to George McHenry, our Chief Financial Officer to review our financials in more detail.

[George McHenry:]

Thank you, Vinit. Before I begin my analysis of the Q2 results, I’d like to read for you a disclosure that was made in the 8-K that we filed last night. As you may have seen, the Form 8-K we filed in connection with our earnings press release also disclosed that in late May of this year, we received a letter from the staff of the SEC’s Division of Enforcement informing us that it was conducting an investigation of the company and requesting that we voluntarily provide documents and information regarding our calculations of bad debt expense and allowance for doubtful accounts. We are fully cooperating with the SEC staff. Because of the nature of this matter, we will not be able to answer any questions or provide any additional information regarding the investigation, and we ask for your understanding in that regard. Now, moving on to my remarks about the Q2 and results for the first six months, since Vinit will give you color around our sales performance in the quarter, I’ll focus on the cost and bottom line results. Adjusted EPS of $0.52 represents 2% growth over the prior year. Adjusted operating leverage decreased by 80 basis points in Q2. As explained in the press release, sequestration, the impact of the RAC audits and increased employee benefit cost had the effect of reducing our operating margins by 100 basis points. Our COM rate of 29% was equal to last year. We expect the rate to drop in the second half due to the projected increase in sales in our Patient Care segment, which carries a low material cost rate and distribution. The impact of some recently signed supply agreements and our continued efforts to streamline our SKU complexity, which will ultimately reduce our cost of materials. Personnel cost increased by $9.7 million compared to 2012, $5.5 million of the change was due to acquisitions. Approximately $1.8 million of the change was due to annual merit increases as well as increased employee benefit cost. The balance is due principally to additions to our infrastructure to support the overall growth of our business. Other operating expense for the quarter decreased as a percentage of sales despite an increase in professional fees and the impact of RAC program audits on bad debt expense. Bad debt expense was 3.2% in the quarter compared to 3% in 2012. If you adjusted the current period for the impact of the RAC audits on expense, it would be reduced to 2.9%. I will discuss the current status of RACs in more detail when I review accounts receivable. Our effective tax rate for the quarter improved to 36.8% in Q2 as compared to 38% in 2012. Moving on to our results for the year, adjusted EPS of $0.80 represents 5.3% growth over the prior year. Consolidated sales increased by 8% for the first six months. Comp sales in our core Patient Care segment increased by 2.8%. Sales in our Products and Services segment decreased by 2.8% in the first half. Our COM rate of 29% was 0.007% lower than last year principally due to a change in the mix of sales favoring the Patient Care segment, which has a lower COM rate as well as our efforts to reduce cost. Personnel cost increased by $18.5 million for the year, $11.2 million of that increase was due to the impact of acquisitions and $3.5 million was due to the impact of merit increases and other benefit changes. The balance of the change was due to growth in our business. Other operating costs were flat as a percentage of sales. They increased by $7.4 million for the year. Again, approximately $3.4 million of that increase was due to acquisitions and the balance was due to inflation in our fixed cost. Depreciation and amortization increased by $2.1 million compared to 2012 principally due to a combination of the impact of acquisitions on a slightly higher rate of expenditures in our capital additions. Our effective tax rate for the first half improved to 36.7% compared to 38% in 2012. Our core rate estimate for the year is 37.1%. Moving on to the balance sheet and cash flow, our accounts receivable was $170.6 million as of June 30. DSOs were 59 days, which is 1 day higher than Q4 of 2012. If you were to exclude the outstanding RAC audits from the calculation for both periods, DSOs were 56 days in Q2 of 2013. That’s a decrease of 1 day compared to 57 days in Q4 of 2012. Based on our experience through June 30, 2013, we have approximately 90% success rate on RAC audits, which had been settled compared to our estimate earlier in the year of 95%. We did settle a number of appeals in Q2 and we find our reserves estimates on the approximate $9.8 million in RAC audits still outstanding as of June 30, 2013. Write-offs and reserve changes had an approximate $1 million negative impact on the quarter’s results. Inventory was $137.6 million at June 30. Inventory turns were 4.2 times, which is a half a turn faster than a year ago. CapEx was $12.6 million for the quarter compared to $10.7 million in the prior. For the first half CapEx was $18 million compared to $16 million in the first half of 2012. Cash flow provided by operating activities for the quarter was $24.5 million, that’s a $1.2 million decline compared to $25.7 million in 2012. For the first six months cash flow provided by operating activities was $26.7 million that’s a $300,000 decrease compared to 2012. Now if you factored out the $5.9 million impact of the increase in RAC receivables on working capital as I mentioned before they were $9.8 million at the end of this quarter compared to $3.9 million at the end of the year. Cash flow from operations for the first six months would have increased by $5.6 million. So, when you remove the impact of RACs on working capital our cash flow was healthy. Moving on to liquidity, the company currently has total liquidity of $150.4 million comprised of $5.8 million in cash and $144.6 million in availability on our revolver. Total leverage per our bank calculation was 2.8 times, well below our covenant of four times. And finally guidance, we are revising our guidance for 2013 to reflect the benefit of the refinance as well as the impact of increased cost. We are increasing our EPS guidance and narrowing the range to $2.07 to $2.13 for fiscal 2013. This reflects both an approximate $0.06 benefit from the refinance and a small decrease in the range due to a slightly less aggressive view of our margin expansion for the year. We expect Patient Care to grow 3% to 5% for 2013 and Products and Services to be slightly positive for the full year. We are adjusting our estimate of operating margin growth to 20 to 40 basis points. All other elements of guidance remain unchanged. So, in summary our revised represents 15% to 18% growth in earnings over 2012 and absorbs most of the cost increases that we encountered in Q2. That concludes my remarks and now I’m going to turn the call back over to Vinit Asar, our CEO.

[Vinit Asar:]

Thanks George. Let me provide a little more color on our business operations for the quarter. Clearly, while we were pleased to see our overall revenue results we were not happy with our earnings for the quarter. Let me start on the topic of our revenue growth. As we think about Hanger’s opportunities for growth, we expect our Patient Care segment to continue to be the primary engine for that growth in the near term. We remain optimistic about the attractive growth dynamics that support the fundamental strength of this business. Our proven ability to produce consistent same store growth of 3% to 5% in an industry growing at approximately 2% demonstrates the strength of our business model and supports our long-term goals for growth in this $4.3 billion market. I will say that especially in the last two quarter the industry may not have shown any growth based on what we hear anecdotally from people in the industry. Despite this macro-environment which included the effect of sequestration for the first time, our team in the Patient Care segment delivered a strong 3.9% same center revenue growth which is almost over 4% if you exclude the impact of sequestration. And when you combine that with the impact of acquisitions, the segment generated an 11.1% total revenue growth compared to the same quarter last year. If you get a little more granular about our revenues in this segment, we believe that these results not only reflect the continued focused on demonstrating excellent patient care to our patients, referral sources and our peers, but also the pilot initiatives in which we have invested in previous years are beginning to bear fruit. Our acquisition program remains on track to meet or exceed our goal of approximately $20 million in annualized revenues with healthy pipeline of interested sellers. Our team at Linkia is spending time staying current with various opportunities that will bear fruit in the coming months and years. One of those opportunities relates to the evolution of the healthcare exchanges and we are making sure that Hanger will be well represented in those settings as they evolve and grow. Switching over to the Products and Services segment, this segment is focused on services that we provide to the caregiver serving people in need of O&P and rehabilitative products and services. Overall, this segment showed a decline of 2.6% in revenues during the quarter compared to the previous year and in a sense is a tale of two cities. Our distribution business continued to face the same challenges it did in the first quarter driven largely by the macro environment I talked about earlier within O&P. As a result of the increased RACs their customers appear to be reducing their purchases of higher technology devices in exchange for lower technology devices especially on the prosthetic side of the business. We’re also hearing stories that the financial position of some of these independent O&P providers has been severely and adversely impacted as a result of the increase in RAC audits. Separately, our rehabilitation business ACP continued its revenue growth trajectory in the mid-single digits over the prior year despite some of the lingering challenges facing the snip industry which is its primary customer base. Let me switch gears and talk a little more about our earnings for the quarter as well as our full year expectations. While we were disappointed in our quarterly earnings number, we know we have the ability to rebound from most of the issues we faced during the quarter. With regards to sequestration, while we’re not happy at being given a 2% across the board cut in our Medicare revenues, we were certainly expecting it. And this was our first quarter where we were hit with it. We’re going forward assuming this will be the new normal at least in the near-term. The regulatory environment with the increased RAC audits is a challenge, more so perhaps for the independent O&P providers than us. But yet it is a challenge and did have an impact on our second quarter results by about $1 million or $0.02 per share as George has indicated. We continued to be successful in our appeals in these audits and are in the range of a 90% success rate with final adjudication in our favor. As a reminder on the process here, when we get notification of a RAC audit we have to get through two levels of appeals with the RAC that initiated the audit before we’re able to appeal to the appeals level judge. While we’re pleased with our success rate we’re continuing to look for ways to even more successful by further tightening our processes. However, there is no question that the number of RAC audits faced by us and the industry increased during the first half of the year. To that point, as we look ahead in the year, CMS did come out with an announcement very recently that they will limiting the number of RAC audits per tax ID number. While we did not see this fully implemented in Q2, we do expect to see the benefits of this during the second half of the year. Overall, however, as we think about our earnings on a go forward basis, we feel confident in our ability to continue to show consistent up and bottom line growth. Our confidence comes from the fundamentals of our business which we believe are strong and have not changed. Additionally, a number of initiatives that we have previously talked about are expected to begin to bear fruit. Our efforts to strengthen our materials purchase practices by partnering with key strategic suppliers has been very successful and we expect to begin seeing the benefits of this effort during the second half of the year. For the longer term, our Janus project which is our next generation clinic management system has completed the pilot phase and we are in the process of beginning our national rollout. In addition to these initiatives, we remain very vigilant in our overall spending levels particularly our labor and overhead as a general practice. Overall, we believe that the business fundamentals remain strong, our balance sheet remains strong and with a projected $80 million to $100 million in operating cash flow this year we have the financial flexibility to conduct our operations, make the appropriate acquisitions and continue to invest for growth. All of these factors despite headwinds like sequestration and RAC audits reinforce our commitment to deliver quality care for our patients, profitable growth and shareholder value. In summary, for the year as George outlined for us as well, we took a look at all these factors and have revised our guidance to a range that shows a healthy 15% to 18% earnings per share growth for the year. This concludes our prepared remarks. Now, operator please can you open the call for questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Larry Solow, CJS Securities. Your line is open.

[Larry Solow:]

Hi, good morning. Something, if you could just discuss, so it sounds like the environment, at least your competitors are impacted by the RAC audits and whatnot, and perhaps at the expense of their patients, sales of some of these higher margin products are down. But in terms of what you guys are seeing in terms of volume of patients and whatnot what’s your feel for sort of the environment over the last few months?

[Vinit Asar:]

Yes, the volume of patients, clearly we saw an uptick in the second quarter compared to first quarter. So, we are not seeing any slowdown in volume of patients or the work that we have in process. So, that trajectory continues and that’s reflected in the same-store sales growth number.

[Larry Solow:]

Alright. So, it sounds like you guys are significantly outperforming your competitors too, is it fair to say?

[Vinit Asar:]

We believe that.

[Larry Solow:]

And in terms of sort of the slight deviation in the miss or whatever you want to call it, partial miss, small miss, so clearly I guess the RAC audits were a little bit, the acceleration of them or the burden of them partly a little more than expected? And sequestration, I imagined it was sort of baked into your guidance, I guess, the piece that I am just trying to figure out is the employee benefit side of it and the higher cost there, where that show up and is that something you can improve upon or it sounds like you are going to offset some of that with lower material cost initiatives in the back half of the year, but can you just touch on the employee benefits piece? That will be great.

[George McHenry:]

Sure. When we were talking about the employees benefits in my comments, Larry, what we are trying to explain there was the change in leverage, the margin decline year-over-year. Those costs were up year-over-year. They weren’t entirely unanticipated in terms of what we expected in the quarter. We were actually in terms of our employee cost under our internal budget if we were making some investments there we were. We knew that we had a large bolus of acquisitions that generally come on the books at higher personnel cost as you work on staffing and integration etcetera. Where we expected to do better was on the material cost side and some of this timing we believe, some of these new contracts that we sign don’t take effect until the second half and some of the – we had some very good results of the SKU optimization that we have been working on, but the benefits of those changes that we made generally are going to be seen mostly in the second half. So, from a standpoint of results really the two issues were the RACs and the material cost in terms of our own internal expectations.

[Larry Solow:]

Okay. Could you just any update, anything you could comment on in terms of WalkAide potential publication, I think we had sort of targeted maybe sometime in the summer anything you could comment on there will be great?

[Vinit Asar:]

Sure, Larry. Like we said the last time, we remain on track to submit to CMS later this year. We are currently in the peer review process. So, we are hopeful that in the next couple of months we will have the peer review done and the publication out there and we will submit to CMS right after that. So, really it’s right in the middle of the peer review dialogue.

[Larry Solow:]

Got it, great. Okay, thanks so much.

[Vinit Asar:]

Can you prompt for our next question, please?

[Operator:]

Your next question comes from the line of (indiscernible) Stevens. Your line is open.

[Unidentified Analyst:]

Good morning and thank you. Vinit, you mentioned that you might get some relief on the RAC audits with limiting the number per ID. We heard too that CMS maybe rescinding any RAC audits on prosthetics prior to August 11. Have you guys heard anything on that?

[Vinit Asar:]

We did hear anecdotal things and we would love for that to happen, but we have not got anything official from anybody. So, right now, we are going under the assumption that, that is not true until we heard something official.

[Unidentified Analyst:]

Okay.

[Vinit Asar:]

2011, I think yes.

[Unidentified Analyst:]

Right. And that’s, I mean, the George the $9.8 million that you have I mean would a lot of that be related to prior to August of 2011.

[George McHenry:]

Between about $3 million and $4 million.

[Unidentified Analyst:]

Okay.

[George McHenry:]

Is for that time period.

[Unidentified Analyst:]

So, it’s a big number then. Okay. And then on the same-store growth, you are nearly 4% it’s really good, I think we have heard others talking about the trade down in prosthetic devices. I am guessing you guys are not doing that, that’s the first part. The second part is are you seeing an increase of referrals from maybe from doctors that were sending patients elsewhere that are coming your way now, because you are not trading down?

[Vinit Asar:]

Yes, let me try and address both those questions. In terms of the trading down, at Hanger, we are not trading down. We are fitting our patients based on what we believe is appropriate prosthetic for the patient. So, we are not trading yet down just because of the RAC audits. For two reasons, one is we believe we have to provide the right care for the patient. And secondly, we have confidence in our documentation that we have the appropriate documentation and the processes. If we do get audited down the road, we’ll have the documentation. So, we are not trading down. With regards to the referral sources, we haven’t seen a huge bolus yet of those patients coming over to us from the competition. That remains to be seen. But we do know that lot of the independents are buying lower price, lower technology products for their patients. So, that I think remains to be seen how that affects us.

[Unidentified Analyst:]

Okay, alright. And on the Products and Services, you are now assuming flat revenue for the year, so that implies we should see some growth in the second half of the year. Is that on the distribution and obviously ACP or do you expect ACP is going to accelerate distribution should be still flat to negative in the second half?

[Vinit Asar:]

Yes. We expect distribution to come in flat to slightly up in the second half. So, the distribution business should help on that guidance. And ACP, we expect that trajectory to just continue for the second half of the year.

[Unidentified Analyst:]

Okay. On the distribution, I know you’d be lapping some of those acquisitions, is there anything else that gives you confidence that picks up?

[Vinit Asar:]

Yes. The distribution business has implemented a couple of key programs for their customers in the first half of the year are marketing type programs that assist them in running their business. So, you are right, we will see some of the lapping of the acquisitions the second part of the second half, but we will also see the effect of the implementation of the distribution businesses marketing programs kick in.

[Unidentified Analyst:]

Okay. Last one from me George, you have got some – that 7% debt, I think you are going to have the ability to do something with that, I think maybe in November. Any preliminary thoughts on that?

[George McHenry:]

Actually that the bonds you are referring to open up in November of 2014. So, we will be looking at that probably first or second quarter or next quarter.

[Unidentified Analyst:]

Okay, great. Thanks.

[George McHenry:]

Thank you.

[Operator:]

Your next question comes from the line of Brian (indiscernible), Jefferies. Your line is open.

[Unidentified Analyst:]

Hey, good morning guys. Just wanted to ask again, just to piggyback on Dan’s questions, your guidance basically assumes that things will definitely improve in the back half of the year. So, George or Vinit just wanted to hear where your confidence is coming from for the back half and if you can elaborate of that both in the top line and the different initiatives and cost strategies that you have in place?

[Vinit Asar:]

Sure. Let me give you some color, and then George if I miss something just weigh in, but look typically the second half of the year is if you look at our history of second half of the year generally on the top line is stronger than the first half of the year or the fourth quarter as you know is generally the strongest quarter for revenues, especially in the Patient Care segment. So, that piece is ahead of us. As George mentioned on the cost side, we also have the impact of the work we are doing with our strategic suppliers for Patient Care and SPS. We have signed some contracts that should give us favorable pricing and the COM rate should get better in the second half. We expected some of that to happen in the second quarter. We just think it got pushed out a bit. So, we will start seeing some of that in the third and fourth quarters in terms of our COM rate. And we are also clamping down on some non-essential spending for the second half of the year just to be sure that the results do pick up in the second half. So, the confidence level is pretty good for the second half both in the top line and on the bottom line.

[George McHenry:]

Yes. And I think the important thing to keep in mind when you think about our guidance in the second half is that we are performing very well from the sales perspective at our core business Patient Care and as Vinit mentioned the fourth quarter is always our best quarter. So, that’s when we’re going to show a lot of leverage from an operating margin standpoint. And obviously we’ve been very good in the past in managing our expenses and making sure that we are doing the right things there and obviously we’ll have – we’ll be looking at that very closely.

[Unidentified Analyst:]

And George from an M&A perspective it seems like anecdotally we are hearing that the RAC audits are really squeezing the smaller guys. So what’s your strategic view on that right now? I mean do you wait until the sidelines and just hope to pick up free market share or do you try to be opportunistic and step in as soon or pretty quickly to buy these assets at distressed levels?

[George McHenry:]

Yeah, Brian great question and you look at the combination of a couple of things, first of all there are markets that we are picking up market share and those markets we don’t feel the need to get into these strategic acquisitions. However, even in those markets if we see strong leadership within those targets then we might still go ahead and acquire those businesses because of the leadership that we see. In other markets we are being opportunistic and going to looking at making the acquisitions. The biggest criteria for us when we make these acquisitions is I guess it’s a combination of things. One is we’ve got to make sure that the business that we’re acquiring the O&P business that we’re acquiring has the correct elements of compliance embedded with them, the right culture embedded with them. And if that matches with the opportunity then we go ahead and make the acquisitions. So Brian, it’s a combination of both that you outlined.

[Unidentified Analyst:]

Okay, got it. Alright. Thanks guys.

[George McHenry:]

Thanks Brian.

[Operator:]

Your next question comes from the line of Mike Petusky. Please state your business name prior to asking your question. Your line is open.

[Mike Petusky:]

Thanks. Mike Petusky, Noble. I was wondering if you could comment on ACP obviously had a good quarter and since you don’t specifically break that out, I was just wondering if you could comment our margins when you guys acquired that business were considerably better than company averages. I mean, can you just comment is that still the case or essentially pricing coming a little bit on that business?

[George McHenry:]

Sure, yeah. The ACP team and I think we mentioned in our previous calls has done a nice job of navigating through all the environmental issues over the last couple of years and the margins have steadily increased not dramatically but steadily increased. So, they have clearly adjusted their offering to these snips over the last couple of years based on the pressures that the snips have had. And as a result they are able to slightly better manage their headcount in this environment by trading off the amount of services that they do provide to some of these customers. So they have managed their P&L very well.

[Mike Petusky:]

Okay, great. I guess I was wondering, so last year was such a strong year for M&A and this year between the RAC audits maybe seeing that as an opportunity for M&A related to your last answer of your question, as well as just the fact that the Products and Services is coming in weaker than maybe you guys had anticipated six months ago. I am just wondering last year you guided to $20 plus million ended up coming in $60 million I mean is there a reasonable chance that maybe the second half truly – it really ramps it up and maybe that number comes in meaningfully above $20 million.

[Vinit Asar:]

Mike, right now we’re still guiding to the $20 million, chances of us meeting that, we feel confident of meeting that goal. Chances of us exceeding that are certainly possible. But until we get to that, we’re sticking with our $20 million goal and I think we should assume that we’ll definitely meet it and there is a change we would exceed it. Beyond that, how the deals work, until it’s done, until the deal is done its not really done. So, we’re just taking a wait and see as the year progresses.

[Mike Petusky:]

Okay. But let me just kind of dial that in that a little bit, the pipeline, the potential pipeline of opportunities out there could theoretically support a material upside relative to your guidance, is that fair to say or is the pipeline maybe not quite as robust as it’s been in the years past?

[Vinit Asar:]

Look, the pipeline is pretty healthy and I leave it at that for now.

[Mike Petusky:]

Okay, alright fair enough. And this isn’t a typical question, I think that gets out but I am just curious given the fact that this quarter was all disappointing in some respects, any commentary around July’s business booked, I guess July at this point.

[Vinit Asar:]

We’re, things are moving along fine, there has been no change in our business. We’re, it’s really very consistent with Q2.

[Mike Petusky:]

Okay, alright, great. Thanks guys.

[Operator:]

(Operator Instructions) Your next question comes from the line of Gregory Macosko, Lord Abbett. Your line is open.

[Gregory Macosko:]

Yes. Thank you. Just a couple of brief questions, with regard to the sort of the same store growth was pretty strong, pretty high in the patient side. Could you just give us a little more color I mean any sense of how much of that might be share gain versus just general growth?

[George McHenry:]

I would say, good morning Greg by the way, I would say that most of it is likely share gain because if we think about, we step back and think about the market itself, the fact that it’s under a significant distress, a 3.9% same store growth most of it I would imagine is share gain for the second quarter. Now as you know this industry there is much, much granular data on the independence out there, so it’s based on assumption but we feel good about getting some – a fair amount of share gain this quarter.

[Gregory Macosko:]

Okay, good.

[Vinit Asar:]

Greg, there wasn’t a lot of price increase in the quarter. We estimated about 10 to 20 basis points, so that’s mostly volume.

[Gregory Macosko:]

Okay and then the other one would, you mentioned briefly Linkia relative to the healthcare exchanges that are obviously an opportunity. Could you give us any, how you’re preparing for that and how do you see yourselves working into that?

[George McHenry:]

Yeah, the Linkia team is in conversations with all the folks that, there are folks that are associated with these healthcare exchanges across the different states. We’re in pretty significant dialogue with a few different states. And so as we get more confirmed data we’ll share that with the group, but the Linkia team, the strength that it’s demonstrated with private peers over the last few years is just kind of flowing into the whole healthcare exchange group.

[Gregory Macosko:]

Okay thank you.

[Operator:]

Your next question comes from the line of (indiscernible), The Boston Company. Your line is open.

[Unidentified Analyst:]

Good morning. Just since we are receiving little more attention on the RAC audits I’m just wondering if you can give us a little more color on, I know what they are, but just how they work, what the process you go through is, how they, you set up receivables for them and then the appeals process and what happens after, just, I mean understanding all the logistics and mechanics of what’s going on in the costs and accounting treatment etcetera?

[George McHenry:]

Sure. The RAC audits are randomly completed by contractors that work for the government. They look at claims and if they challenge a claim either because of medical necessity or some other reason that they see in the paper works supporting the claim, then we are required to immediately refund the value of the claim and certainly the entire value of what we were paid by CMS to the government. And then we go through a – so we are issuing a refund check and we’re putting that receivable back on our books at the original date of service. So if we turn to that patient in 2011 it would be immediately aged out over a year. We then go through appeals process which has been setup with three levels of appeal, the first two levels are with the contractors who challenge the claims. So, frankly we sell them windows. The third level of appeal is with an administrative law judge and that’s similar to the process that we have with other appeals because there are also are other types of audits that are being done by the government prepayment audits and others. And its at that level that the claim is generally finalized and adjudicated and that’s what we’re showing this our 90% winning of the claim and getting the cash back. So, when you win the claim, you get the cash back, if you don’t win the claim, then we take a write-off of whatever the amount on the receivable balance is. So, we have a reserve on our books for the 10% that we have been losing based on our most recent experience and you know that keeps the record straight with regard to that.

[Unidentified Analyst:]

And so the amount of receivables you said I think is $9 million?

[George McHenry:]

$9.8 million.

[Unidentified Analyst:]

Excuse me.

[George McHenry:]

$9.8 million.

[Unidentified Analyst:]

$9.8 million okay. And so that would be I am just trying to put this in some kind of perspective that would be on all Medicare receivables that you or revenues you have booked over the period of how long?

[George McHenry:]

Well, those claims go back into 2011, I’d say the bulk of them are 2011 to the present.

[Unidentified Analyst:]

Okay.

[George McHenry:]

I think I mentioned during my comments that about between $3 million and $4 million date back prior to August of 2011.

[Unidentified Analyst:]

Okay.

[George McHenry:]

So, that’s roughly 40% of the claims.

[Unidentified Analyst:]

Okay. So, you had a $9.8 million cash outflow over some period of time related to these, because you are paying back.

[George McHenry:]

Yes, over about a year’s period of time, we had $3.9 million in RACs on the books at the end of last year that has grown to $9.8 million at the end of June. So, there is obviously been a fair amount of activity in the first half of this year. And we settled roughly $8 million in claims that have been – they have been adjudicated 90% in our favor.

[Unidentified Analyst:]

Okay. So, the $9.8 million is net of the amount that you have settled?

[George McHenry:]

Well, it’s the $9.8 million is what’s outstanding today….

[Unidentified Analyst:]

Right …

[George McHenry:]

We settled roughly $8 million so in total.

[Unidentified Analyst:]

Yes.

[George McHenry:]

That would be about $17 million, that…

[Unidentified Analyst:]

Alright, okay.

[George McHenry:]

In the claims that you have either settled or still outstanding?

[Unidentified Analyst:]

Right. And outside of the comment that was made earlier about maybe some talk about limiting the time period that, the RAC auditors can look at is going to look at, what’s the end here, this part or is this going to be part of your business on an ongoing basis?

[Vinit Asar:]

Well, I think one of the things that I mentioned also was that they are going to be limiting the amount of audits per tax ID number.

[Unidentified Analyst:]

Okay.

[Vinit Asar:]

So, that should help us a bit. In the past, the numbers were pretty high. So, we are expecting and hoping to see that settle down a bit for the rest of this year.

[Unidentified Analyst:]

Okay. I mean, these guys are essentially bounty hunters, so there is no downside for them to go out and challenge everything is my sense of what they do, is that correct?

[Vinit Asar:]

Well, they do get compensated for every audit they perform.

[Unidentified Analyst:]

Every win or every audit they perform?

[George McHenry:]

Yes, I think it’s net, it’s I think if they lose an appeal then they lose their commission, but we don’t know exactly how that works.

[Unidentified Analyst:]

Okay, okay, I’ll leave at that. Thank you.

[Vinit Asar:]

Thanks.

[Operator:]

Your next question comes from the line of Mike Petusky, follow-up. Your line is open.

[Mike Petusky:]

Thanks. Yes, just a quick question and forgive if I missed this earlier. Did you guys talk at all about just the current state, I know you guys have been trying to integrate your sales efforts between ACP and the core business, and I don’t know if you talked about that, but if you could just kind of give a sense of how that’s going?

[Vinit Asar:]

Sure, yes, we haven’t really planned to integrate sales efforts through an ACP in the core business, but we continue to look at ways by which our core business can call on snips to provide O&P services. And that’s just having a slow but steady growth and that’s reflective in our revenues numbers in the Patient Care segment.

[Mike Petusky:]

Okay great. Thanks.

[Vinit Asar:]

Thanks.

[Operator:]

Our next question is a follow up question from the line (indiscernible) Stevens. Your line is open.

[Unidentified Analyst:]

Thanks. Back on the RAC audits, George is there, have you changed the way you're accounting for bad debt since you started dealing with the RAC audits or have you just kind of implemented that into the way you always calculated bad debts and the allowance for doubtful accounts?

[George McHenry:]

With regard to the RACs themselves the only, the methodology is exactly the same the only things that’s changed is we changed our assessment of how much reserve we needed in the second quarter that’s because we got additional information.

[Unidentified Analyst:]

So, you moved from 95% to 90%?

[George McHenry:]

Right. We put additional reserves on the books because we had a fair amount of claim settled in Q2 and that pushed our success rate down to 90 now. We put some new processes in place because when we looked at those claims we saw we were, had a fair number of timing out. They only give five days to file that final appeal and its gets a little tricky sometimes to get it filed on time. So we put some new processes in place to plug that leak, maybe you want to call it that and also beefed up our documentation around the medical necessity to make sure that we were in a good place there. So we think we're going to get better as time moves forward and we do think based on the limitations that Vinit was talking about that this balance shouldn’t grow materially going forward that it's probably crescendo at this point.

[Unidentified Analyst:]

Great, thank you.

[Operator:]

No further questions at this time. I will turn the call back to our presenters.

[Vinit Asar:]

Folks, thanks. As we close out this call, I just want to reiterate a few points in the quarter and the year. Like I said, we are pleased with the revenue growth in the quarter and the revenue outlook for the remainder of the year. The fundamentals of our business and growth opportunities do remain strong. Now, we had a set of challenges that affected our earnings for the quarter. However, we feel that the plan for the remainder of the year is solid and when we combine all the challenges and the opportunities for the year along with the impact of our recent debt refi, we are guidance towards an EPS increase in the range of 15% to 18% for the year. So, I just wanted to recap that. So, thanks very much for your time on the call today. Appreciate it.

[Operator:]

This concludes today’s conference call. You may now disconnect. Thank you.