Hanger's (HGR) CEO Vinit Asar on Q2 2014 Results - Earnings Call Transcript

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 |  About: Hanger, Inc. (HGR)
by: SA Transcripts

Operator

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanger's Second Quarter Results Conference Call. 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.

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

Russell Allen

Thank you, Melissa. Good morning and welcome to Hanger's discussion of our 2014 second quarter results. Before we start our discussion, I'd like review with you our declaration of forward-looking statements.

During this call management we 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 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 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, and 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 Form 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.

Vinit Asar

Thank you Russell. And 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 it 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 increase pressure and a slowdown in payment authorizations from both government and commercial payors. Our products and services segments 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.

George McHenry

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 in more detail in a minute and I'll discuss the impact on our results as follows.

Adjusted EPS for the quarter $0.40 compared to $0.52 in 2013, a decline of $0.12. The principal driver of the change in earnings was 1.5% decline in the same center sales and 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 comp rate 30.5% was 80 basis points higher than last year, the increase was due to a change in the realizable value of sales due to higher discounts partially offset by savings from our efforts to reduce product cost for our new clinic procurement system Hanger Direct.

Personal cost 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 increase as well 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 for the quarter was 37.4% pretax income in 2014 compared to 36.8% in 2013. The rate increase 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. Decline in same center sales was offset by the impact of acquisitions which were $20.6 million in sales for the first six months.

Sales in our products and services segments increased by 1.2% in the first half. Our comp 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 in other benefit changes.

Other operating cost increased by $8 million for the year. Approximately $2.8 million on 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 incomes.

D&A increased by $3.5 million compared to 2013 through the impact of acquisitions to previously mention write-off of demo equipment and a higher rate of expenditures on CapEx. Again the fact, 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 onto the balance sheet in 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 experienced through June 30, 2014 we are holding steady at an 80% success rate on appeals, but CMS audit continue to impact our receivable balance. We show $19 million in our system marked to CMS audits. We suspect 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 billed and receivables in the practices that have been converted to Janus. Learning the new system and workflow temporarily reduces the amount of time available for collection activities which inflates AR balances of 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 to principally to acquisitions growth in WIP at Patient Care as well as increased inventory at 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 in 2013. The first six months cash used by operating activities was $7.5 million in 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 30, June was $111.3 million comprised of $4.9 million in cash and $106.4 million in availability on our revolver. Total leverage per our bank calculation was 3.1 times which is well below our covenant of four times.

Moving onto remediation, the Company continues to work with Protiviti and our auditors to remediate the material weakness that reported in our audit report for the year ended December 31, 2013. We believe, we have made good progress in our remediation effort 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 onto to guidance, the Company lowered its 2014 full year adjusted diluted EPS guidance to a range of between $1.16 and $1.17. Based on the results to the second quarter, the Company now believes that the conditions that resulted in a lower same center sales in second quarter, will continue to impact at 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 impacts on sales and collections of the Janus roll out, cost incurred to remediate the material weakness reported in 2013 and investments to company is making in its processes and control environment.

The company lowered 2014 full year net sales guidance to a range of between $1.50 billion and $1.80 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 cost.

Affecting the lower than expected first half results, the impact of the reimbursement environment on working capital. The company has adjusted it's expectation of 2014 cash flow from operations to range of between $30 million and $40 million.

The company now anticipates acquiring own pay [ph] 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 business is not included in the Company's 2014 guidance. That concludes my comments and I'm now going to turn the call back over to Vinit Asar, our CEO.

Vinit Asar

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 a see rebuilding 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 meeting 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 a lower price per patient. In addition, we believe that 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 are seeing at this stage of the new era of healthcare reform, are few things that are clearly evolved in the recent past. The increased Medicare audit activity, which initially with an 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 curve 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 a 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-sponsor plan offerings.

In fact, many of our large payor 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. Now 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 and the new era of health care reform require services to be provided at a lower cost, with a higher quality and focus 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 in all of this settles. Now keeping all of this as a backdrop. Let me spend a few minutes providing a more color on the quarter, first let me focus on the results of our Patient Care segment.

Our revenues came in a $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 authorization by both commercial and government payor s. 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 AOJ level get 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 burden 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 as we work down the AR, a specific to each clinic on the old system. And 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 device.

We believe, they may be pushing some of the spending for a period. Finally on the issues we face, I believe it is important to frame up our Patient Care segments 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 observe through our Lincare 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 let some of these headwinds will continue in the immediate future.

Now let me a 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 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 and institutionalize best practices and how to expeditiously respond to all Medicare audits. With regards to the impact of Janus, our roll out continues to progress. 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 effecting collections temporarily. We are evaluating various alternatives that will allow our teams to be more effective on this front shortly. I will turn it, 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 business. 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 lead 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 business 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 restricting plan will focus in reducing risks in these business 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 base 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 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. This segment has a seen a nice turnaround from a year ago, where the distribution business was seeing a significant decline in revenue to its independent O&P customers.

After retooling 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 year progress. I'll 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 in the O&P industry and we've classified them in three broad drivers; treatment authorizations, cash collections and patient volumes.

We are 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 cost 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 meet our services. That concludes my prepared remarks. Operator, please can you open the line for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian Tanquilut with Jefferies. Your line is open.

Brian Tanquilut – Jefferies

Vinit or George, if you mind just helping us out understand the volume issue again. I know you've explained a lot of it, but 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. Is this really just a payor delay or a payor bottleneck versus a broad based decline in demand or volumes?

Vinit Asar

Sure, I think there is probably three different ways to look at this. First of all yes, we believe that the payor authorization piece is slowing down, how many patients we treat every month just because they're taking time to get the authorization. When we get the authorizations, we can begin the work on fitting these patients. So that's one piece of it.

I think we are also seeing volumes slowdown especially in the last. I'd say, this past quarter in the last few months and we tribute some of that to the pool of patients that we believe are likely in this high deductible plans, but more importantly we are 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, patients are likely putting off the replacement cycles.

So the way to think of this is, if a patient would likely come in every 3 year and 3.5 years for replacement prosthetic device. They're probably pushing that off by either few months or few quarters and we are 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.

So it's a combination of both, Brian. The impact of the authorizations as well as existing patients coming back for prosthetic devices.

Brian Tanquilut – Jefferies

And then, Vinit second from me, as we think about what kinds of discussions you're having payors fund, trying to expedite the approval process or because at the end of the day Patient Care is obviously still underline and I can imagine that the advocacy groups are up in arms over this.

So what is a payors saying, what are those discussion like with the payors right now?

Vinit Asar

Good, great question. I think it's two-fold, Brian. One, we are absolutely having these discussion with payors especially our Lincare Group is having these discussions with the payors and they've acknowledged two things. One is, they themselves are seeing a decline in O&P volumes in the prosthetic side.

So they've acknowledged that, which kind of corroborates our thinking that some of these patients are pushing up the spend, but they've also acknowledge that they have been taking slightly longer for authorizations and the discussions we've had, lead us to believe that they're looking at that seriously and we are hoping that turns around sooner versus later, but I think time will tell and what we've assumed in our guidance that these trends will continue for the rest of the year and we believe that's a prudent way to look at it.

Brian Tanquilut – Jefferies

And then last question from me, Vinit. Obviously this is a transition year for you guys and as we think about your balance sheet. How open are you and or the board's pursue ways to optimize either the capital structure or just to look for different options to maximize shareholder value at this point?

And I'm thinking what are the big share repurchase or any other options that are potentially on the table?

George McHenry

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

Vinit Asar

Brian, we are very open to all the alternatives, you're right. This is a transition year and we have important investments we are making as well as these issues, we've just outlined. So we are absolutely open to it and we are having all sort, we 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, but we are considering all alternatives.

Brian Tanquilut – Jefferies

Got it, thanks guys.

Operator

Your next question comes from the line of Larry Solow with CJS Securities. Your line is open.

Larry Solow - CJS Securities

Couple of questions on sort of visibility, why you think that the slowness is happening. If the more and more patients are gone to a higher deductible, wouldn't most of them, the sort of annualized deductible, so they're just shifting out a few months until they meet that deductible so that it wouldn't be, that would be more of a temporary thing and then on a flipside of it.

You sound like, there should be some optimism inevitably, but if we are sort of at the beginning of a trend, which you refer to in terms of slowdown in payments from both the commercial and public side, might this type of thing get worse before it gets better.

Vinit Asar

Larry, both of your points are I think well stated. First off, what we want to do is wait for another quarter to get some more data to determine, how long these patients will take for coming back because we are keenly focused on the existing patient base and I should mention that, about 60% of our prosthetic or maybe even close to 70% or existing patient.

So we are keenly focused on that number and so just within one quarter, it's hard to determine when they'll come back, your hypothesis is probably accurate, but if the hypothesis that we want to monitor that they will come back during some period, whether it's a quarter out or two quarters out.

And so that upside could be there, but we've also look at the other side, which you accurately mentioned. The trends on the other issues, may continue for another couple of quarters. So we balanced both those the positive and the negative out and baked that into our guidance.

Larry Solow - CJS Securities

And you think it's only, I mean just planned out with advocate, could it mentioned in quarters or could it be where those pressures and slowness continues and with delay that basically the cut off the deal, nothing happening for two years there, I mean could this actually get take multiple quarters even a 1 years or 2 years. I mean that seems like a possibility, right?

Vinit Asar

Larry, absolutely it's a possibility and as you know, we don't outer year guidance. So we were just focusing on the remainder of the year, but absolutely and that's why. We believe, we should watch the next couple of quarters and then come up with a more educated estimate of what happens beyond that.

Larry Solow - CJS Securities

Okay and you told, you spoke about some actions sort of to increase business activity and build patient pipeline, can you maybe give us a little color on what those example of what those might be?

Vinit Asar

Sure, yes. One of the things that we do very well is our patient evaluation clinics and our plan and what we've started in this past and going into this current year, is continuing that activity of patient evaluation clinics, just talking to patients more, reaching out to patients, talking to our existing patients to see what their needs are, talking to our referrals sources.

So those are the activities that we've amped up over the last couple of months.

Larry Solow - CJS Securities

Okay just to clarify, did the miss in the quarter in the reduced outlook, is the majority of that from the or both 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?

Vinit Asar

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

Larry Solow - CJS Securities

Got it, okay, great. Thank you.

Operator

Your next question comes from the line of Mike Petusky with Noble. Your line is open.

Mike Petusky - Noble Financial

Good morning, so before you mentioned I was going to ask about, have you guys continued to kind of full force with the patient evaluation clinic, I know that was one of things that was cited in years passed, is driving volumes. Have you guys ramped that down in the recent quarters or was that kinds of always full force?

Vinit Asar

Yes, we never amped it down. We are just adding more time to these patient evaluation clinics now. We are trying to do more and more, I mean sorry regionally and nationally.

Mike Petusky - Noble Financial

Okay and then, I mean is there essentially you guys now when a patient is typically due for replacement. I mean, are you guys doing kind of active outreach patient-by-patient essentially saying you're due for replacement or is that beyond, what you would do?

Vinit Asar

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

Mike Petusky - Noble Financial

Okay, so essentially are you saying, when essentially when somebody is in anniversary [ph] 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 demand?

Vinit Asar

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

Mike Petusky - Noble Financial

Okay. All right and then on the M&A, goal. How far along are you, still far this year in terms of M&A acquired revenue?

Vinit Asar

Sure. We are slightly north of about $40 million at the current time of acquired revenue.

Mike Petusky - Noble Financial

Okay, and then on GNS AR issue, I guess how many I didn't catch it, if you mentioned. How many facilities are actually in that transition to Janus at this point and I guess what are plans going forward there?

George McHenry

About, a third of our practices are converted and what we are seeing the ones that are most recently converted to the ones that spend in all this time on training and learning the new workflow, the ones that have been out for a while or have begun to reduce to balances, so as we roll this out, it will have some issues with the newer ones, until they complete the roll out.

Mike Petusky - Noble Financial

Okay, does the fact that you guys are dealing with Medicare audits and all the rest of it change the timetable for how quickly you roll this out?

Vinit Asar

Great question, Mike. We absolutely have been having that discussion, we've gone both ends of the spectrum should we slow down the roll out, should we accelerate the roll out given all of that and currently, our plan is to continue on the same track to get about 300 clinics or so by the end of this year, but we will keep evaluating if something does change, it will either slowdown or accelerate it.

It's an important dialog that we have on this topic.

Mike Petusky - Noble Financial

Okay and then on and just real quickly on the Dosteon and Cares, when you guys do make a decision is a that press releasable event or you just update on the next conference call?

Vinit Asar

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

Mike Petusky - Noble Financial

Right. Okay. All right, thanks guys.

Operator

Your next question comes from the line of Dana Hambly with Stephens. Your line is open.

Dana Hambly – Stephens

Vinit on the, just trying to understand on the commercial pre-authorizations. How long had it typically been taking previously? How long is it taking now and I'm just curios to your thoughts, why is this happening all of a sudden? Why is it just such a recent phenomenon and kind of why is it, wide spread across all payors or is it focus to certain payors, just any thoughts on that?

Vinit Asar

Yes, good questions. It's first all of, it's across all the payors 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 clarification etc. and sometimes it just takes them a while to get back to us on any follow-ups.

So if you were to guess, maybe it's adding a few more days to the whole process, but it's hard to pin down by payor, which payor is taking four days more versus two days more, but the questions have certainly increased and if you ask us, why we believe we've had the conversations with the payors as well, by the way and they're looking at that phenomena as well to see if they can, shorten that duration back to normal levels.

But, I think they're asking the same questions that they see, maybe see a mess instead of asking, in terms of details.

George McHenry

When you mentioned, why we were just seeing it now, if you recall in first quarter. the weather kind of drove our WIP down, so it mass the problem and as we built it back in second quarter, we started seeing, which taken longer and longer for authorizations to occur. So it's really something we just started noticing in the second quarter.

Vinit Asar

We are still getting the authorizations, Dana. I think – was getting – it's just taking a little bit longer.

Dana Hambly – Stephens

Okay, I mean it just seems like the patient backlog should be building and we should see that revenue come, I know fourth quarter seasonally are strong if anyway. So but I don't know maybe, it seems like you could be a 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.

Vinit Asar

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

Dana Hambly – Stephens

Okay, now that's fair. And just on the patient volumes, at the patient center level and the large manufacture, the reported strong prosthetic sales in the US and I think your comments on your distribution unit sounds like, they're seeing stabilization in the independence. Well, I was just trying to rectify that with your decline rate [ph]?

Those couple of items could suggest, that you're losing some market share, but you truly feel like you're not at this point.

Vinit Asar

We are pretty confident, we are not losing market share. You know because remember, we get data points through our Lincare network, we get data points when we talk to acquisition candidates. Certainly, we get data points from SPS as well. SPS is increased in revenues comes also from new customers that they've gotten, not just from existing customers.

So there is a combination of factors, but we are very confident, we are not losing share on an actual basis.

Dana Hambly – Stephens

Okay and then you talked about, with the ACA getting lower revenue per patient. Are you seeing that yet and George maybe, could you breakout on the same store decline, the volume versus pricing in that?

George McHenry

Well, we had a just below a 1% price increase in Q2 and we [indiscernible] on the sequestration so that's wasn't dragged. So it's mostly volume, we saw a growth in orthotics. The issue was around prosthetics. There were certainly some impact on the numbers, but because our AR built for the reasons I've discussed, I have to put reserves on every $0.14 reserves and every $1 I put on the balance sheet in AR.

So, since that goes against sales for the most part that has some impact as well on the sales decline.

Vinit Asar

Dana and to answer the first part of your question, we haven't seen a significant change in the payor mix yet in terms of more increased patients in Medicaid, but that's kind of 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 to go back to your comment, on what the large manufacturers may see in terms of increased sales in prosthetics.

Dana Hambly – Stephens

Yes.

Vinit Asar

Some of these large manufacturers are coming out with some products and they've come out with new products. So 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.

Dana Hambly – Stephens

Okay, now that's very helpful. Last from me, on I think in the past you talked about this investment spend that you're making this year and then a portion of that, you'd expect to come back into EPS in 2015. Can you just update me on what you expect to get back in 2015?

Russell Allen

Sure, Dana this is Russell. Just to kind of remind the group, of what we've talked about historically. Beginning of the year, we talked about investing about $0.19 in a combination of our revenue cycle management investments and investments around remediation and other finance investments.

Today that's sitting around maybe 28, we took it up a little bit back in May and we've had an resettle a little bit as more through remediation, add up few pennies this quarter in our projection to support professional fees and personnel around remediation.

Now all that altogether is maybe around $0.28 investment this year and the calendar year. The pieces that will flow back next year or obviously things like professional fees and special assessments like that, maybe $0.05 to $0.06 will naturally come back next year, but we also talked about the fact that our investment in RCM, Revenue Cycle Management was to get pay back coming in the future.

So we expect, some amount of return on that investment to start building in 2015 and 2016 as we complete the Janus roll out. How much, we are still evaluating, but if you like that it will be a little bit of a reversible of net RCM investment.

Dana Hambly – Stephens

Got you. All right. Thanks very much.

Operator

Your next question comes from the line of Brian Tanquilut with Jefferies. Your line is open

Brian Tanquilut – Jefferies

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

Vinit Asar

Yes, great question. We spoke with United as well over the last month or so to figure what was going on, with some of these phenomena and they also see the same thing that I talked about earlier, just like some of the other payors. They're seeing, you know a lower utilization in O&P services overall, but we are pretty bullish on that relationship, once this dust 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 spend. So we should we see some of that, the benefits of that in the long-term as well.

Brian Tanquilut – Jefferies

Vinit, just a follow-up in that. Are we seeing more narrowing network strategies from the larger or national payors or is that, few years down the road from here?

Vinit Asar

We are certainly starting to get the increase. We believe that's definitely going to happen and again, this is story and the advantage we have with the Lincare network, it's one of the best and the largest narrow network offering that a peer could ask for in O&P and that's why we believe, we're well positioned and for the future.

So we are seeing the increase right now and the conversations are definitely happening.

Brian Tanquilut – Jefferies

Got it. Thank you.

Operator

Your next question comes from the line of Larry Solow with CJS Securities. Your line is open.

Larry Solow - CJS Securities

Great, thanks for taking the follow-up. Vinit, you mentioned I think some cost cuts. I think you said $3 million to $4 million, did that catch that?

Vinit Asar

That's correct, what we did is we took out some labor cost from various regions within Hanger Clinic locally across the country.

Larry Solow - CJS Securities

And do you expect, not the front run or maybe you know what some people hearing that, but do you expect maybe more and are you incorporating more into your guidance?

Vinit Asar

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

Larry Solow - CJS Securities

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

George McHenry

Well, Larry today we have about a third of our practices on Janus and the roll out will continue through 2016 and what we – my anticipation since the roll out, is happening at a pretty even pace is that, this won't get noticeably worse. I mean, of the way $2 million either way from what it's today.

Larry Solow - CJS Securities

Got it and maybe even get a little better from experience, you could help, I mean you know not the clinics are independent from another, but you can still maybe help that a little bit, that process.

George McHenry

We continue to refine our training and how we went without, we're hoping that would be the case overtime.

Larry Solow - CJS Securities

And just last question on the, so I think you said you completed $40 million and you're targeting $50 million to $60 million in acquisition sales. Considering the industry sort of under more pressure now, are you getting lower prices for this or is not, then wouldn't it be prudent maybe to wait and see how things shake out, before you accelerate acquisition activity?

Vinit Asar

A great question, I mean this again 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. So we don't focus on the businesses that may not be doing well or that may have a weak balance sheet or a P&L or don't show growth or don't have strong connection.

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

Larry Solow - CJS Securities

Okay, fair enough. Thanks.

Operator

Your next question comes from the line of Dana Hambly with Stephens. Your line is open.

Dana Hambly – Stephens

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

George McHenry

We in the past have paid, five times to six times pre-synergies and it usually that stand, it comes down by a term, when you incorporate synergy. So four times to five times. So it's still very attractive and we're seeing a good pipeline, right now.

Dana Hambly – Stephens

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

Vinit Asar

Yes, maybe down a little bit.

Dana Hambly – Stephens

All right. Thanks.

Operator

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

Vinit Asar

Thanks. We appreciate everyone's time and interest. Especially 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 clinic business and 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. So thanks again for your time.

Operator

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

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