SAB 108 Heals Matria Healthcare

Apr. 2.07 | About: Alere Inc. (ALR)

Third installment in a trilogy of healthcare providers booking SAB 108 charges; the first two were Apria (AHG) and Lincare (NASDAQ:LNCR). This installment is about Matria Healthcare (NASDAQ:MATR).

(Why do health care companies pick the weirdest, most synthetic-sounding names? They could be used by Japanese automakers, who do a pretty good job of picking weird, synthetic-sounding names themselves: Prius. Camry. Altima. Et cetera. Wait a minute - “et cetera” could be the name of a new Japanese car! Or a home healthcare provider.)

Matria’s correction is not quite in the same vein as the first two. Its errors didn’t have to do with early revenue recognition. Rather, its errors related to understated obligations and overstated property. From its 10-K:

… We identified two uncorrected misstatements for consideration under SAB 108, each of which was considered immaterial to our results of operations in any reporting period when using only the income statement approach we historically used to assess the materiality of unrecorded errors:

1. An unrecorded liability for drugs and supplies from a major vendor, which is included in “Accounts payable” on the consolidated balance sheets, resulted from an accumulation of unrecorded costs over several periods prior to 2003. This misstatement was identified in 2003 The amount required at January 1, 2006, to correct the liability balance would result in a $600,000 charge to our results of operations in 2006.

2. During 2006, we discovered that our medical device inventory, which is included in “Property and equipment” on the consolidated balance sheets, was overstated due to improper recording of disposed and lost medical devices and the related depreciation expense. The misstatement originated in 2003 and accumulated over subsequent periods. The amount required to correct the medical device inventory balance at January 1, 2006, would result in a $731,000 charge to our results of operations in 2006.

Under the balance sheet approach and the income statement approach, or the dual approach, we determined that correcting the above misstatements would be material to our 2006 financial statements and recorded a cumulative effect adjustment to our January 1, 2006, consolidated balance sheet upon our initial application of SAB 108.

Different causes, same effects: Matria Healthcare whacked equity by $.813 million when it adjusted its accumulated deficit for the errors. It also sounds like the Matri-archs had been noting the errors all along and assessing its materiality periodically - which is the kind of errors SAB 108 intended to be corrected with the “prior period treatment.”

MATR 1-yr chart