BETHESDA, Md., Aug. 16 /PRNewswire-FirstCall/ -- Hanger Orthopedic Group, Inc. today announced net income per diluted share of $0.10 for the three-month period ended June 30, 2004, compared to restated net income per diluted share of $0.34 in the prior year's comparable quarter.
Restatement of Accounts Receivable
The previously issued balance sheet as of December 31, 2003 and the statements of operations and cash flows for the six months ended June 30, 2003 have been restated to reflect a correction of an error that led to the overstatement of recorded accounts receivable and an equal understatement of bad debt expense. The error resulted in an understatement of selling, general and administrative expense of $0.3 million for the quarter ended March 31, 2004, $1.0 million for the year ended December 31, 2003 and $2.5 million for the years prior to 2003. In the year ended December 31, 2003, selling general and administrative expense for the three months ended June 30, 2003 and March 31, 2003 was restated and increased by $0.2 million and $0.3 million, respectively.
The discrepancy was discovered during the preparation of our June 30, 2004 financial statements. By June, we had substantially completed the roll-out of our new billing and cash collection system (OPS), which aided in the discovery of the discrepancy. The OPS system replaced more than 15 different billing and cash collection platforms previously utilized in our over 600 practices to bill and collect for our products and services. The new system provides the Company better visibility over its accounts receivable and improved controls over its inter-branch cash collection activity. After a successful pilot test, the Company commenced the installation of this system in September 2003 and by the end of June 2004 had installed the system in all practices except the patient care centers of two recent acquisitions and three central billing offices, which require an enhanced multi-user version of the system that has not yet completed testing.
The conversion to the OPS single billing and cash collection platform permitted reconciliation of inter-branch cash collection activity and we determined that certain receivables were uncollectible. The Company, with the concurrence of its independent registered public accounting firm, concluded that this adjustment should be reported as a correction of an error to previously issued financial statements. The release of our second quarter results and the filing of form 10-Q for the quarter and six months ended June 30, 2004 was delayed while we completed an analysis of the periods affected by the error. The Company also was delayed in filing because it was unable to complete the financial review of its quarterly results in a timely fashion due to the substantial time and efforts expended by management to cooperate with the independent investigation of the allegations concerning improper billing activities at our West Hempstead branch, discussed in our press release dated August 9, 2004. We intend to file within a reasonable period of time an amendment to our 2003 Form 10-K report.
Results of the quarter and six months ended June 30, 2004
Net sales for the quarter ended June 30, 2004 increased by $6.2 million, or 4.5%, to $145.1 million from $138.9 million in the prior year's comparable quarter. The sales growth was primarily the result of a $1.4 million, or 15.5%, increase in sales of the Company's distribution segment and $7.5 million, or 5.2%, increase from acquired practices. These increases were offset by a $2.1 million, or 1.6%, decline in same-center sales in the Company's O&P practices. Gross profit for the second quarter of 2004 was $73.2 million, or 50.4% of net sales, compared to $73.5 million, or 52.9% of net sales, in the second quarter of the prior year. The decline in gross profit dollars was due to a 1.8% increase in material costs as a percentage of sales due to a change in the mix of sales and continued pressure on reimbursement. Labor costs increased by 0.7% compared to the prior year principally due to modest salary increases and the fixed nature of the expense compared to the decline in same-center sales. Income from operations decreased by $10.6 million in the second quarter of 2004 to $14.3 million from restated income from operations of $24.9 million in the same period of the prior year due to the combination of the reduction in gross profit margin and higher selling, general and administrative expenses which increased principally due to: i) an increase of $2.1 million in variable compensation due to our practitioners, ii) $1.8 million in expenses related to acquired practices, and iii) $0.6 million in Sarbanes-Oxley Section 404 compliance work. The balance of the increase was caused by increased patient clinics, marketing salaries, and normal inflationary rent and salary increases.
Based on the above, net income applicable to common stock for the second quarter of 2004 decreased to $2.2 million, or approximately $0.10 per diluted share. In the corresponding period of the prior year, Hanger had restated net income applicable to common stock of $7.8 million, or approximately $0.34 per diluted share.
Net sales for the six months ended June 30, 2004 increased by $11.6 million, or 4.4%, to $276.7 million from $265.1 million in the prior year's comparable period. The sales growth was primarily the result of a $2.4 million, or 14.3%, increase in sales of the Company's distribution segment and $13.2 million, or 4.8%, increase from acquired practices. These increases were offset by a $3.0 million, or 1.2%, decline in same-center sales in the Company's O&P practices. Gross profit for the first six months of 2004 was $139.4 million, or 50.4% of net sales, compared to $139.0 million, or 52.4% of net sales, in the comparable period of the prior year. The improvement in gross profit dollars was due to acquired practices. The decrease in gross profit as a percentage of sales was due to a change in the mix of sales and continued pressure on reimbursement. Restated income from operations decreased by $13.1 million in the first six months of 2004 to $29.8 million from $42.9 million in the same period of the prior year. The decrease in income from operations is the result of a combination of the reduction in gross profit and higher selling, general and administrative expenses principally due to: i) $3.7 million in expenses related to acquired practices, ii) $1.1 million on Sarbanes-Oxley Section 404 compliance work and legal expenses, iii) $1.1 million increase in the cost of general liability insurance, iv) $0.9 million in travel, training, and set-up costs related to our new billing system, OPS, and vi) $0.7 million in selling expenses. The balance of the increase was caused by modest inflation based increases in salaries, rent increases and additional marketing costs discussed in the comments on the quarter.
Based on the above, restated net income applicable to common stock for the first six months of 2004 decreased to $5.7 million, or approximately $0.25 per diluted share. In the corresponding period of the prior year, Hanger had restated net income applicable to common stock of $11.8 million, or approximately $0.54 per diluted share.
Covenant violation
Based upon the results of operations for the trailing twelve months ending June 30, 2004, the Company is presently in violation of one of the financial covenants contained in the credit agreement related to our Revolving Credit Facility and Term Loan B. Management has met with the Administrative Agent of the Senior Credit Facilities and will schedule an August 18, 2004 meeting with the Syndicate of Lenders to propose a cure to the covenant violation, which it is believed will be ratified by the lending group. Until the amendment is obtained, the Company does not have access to its Revolving Credit Facility. In the interim, the Company has $18.3 million in cash available in its bank accounts on August 13, 2004. However, there can be no assurance that an agreement will be reached. If an agreement cannot be reached the Company may experience severe liquidity problems which would have a material adverse effect on the Company. As the Company was unable to cure the covenant violation before this earnings release, it is required to classify the outstanding obligations under the Revolving Credit Facility and Term Loan B as a current liability. In addition, the Senior Notes are also being classified as a current liability due to the cross default language in the Senior Note Indenture.
Hanger Orthopedic Group, Inc., headquartered in Bethesda, Maryland, is the world's premier provider of orthotic and prosthetic patient-care services. Hanger is the market leader in the United States, owning and operating 614 patient-care centers in 44 states and the District of Columbia, with 3,385 employees including 1,016 practitioners. Hanger is organized into four business segments. The two key operating units are patient-care which consists of nationwide orthotic and prosthetic practice centers and distribution which consists of distribution centers managing the supply chain of orthotic and prosthetic componentry to Hanger and third party patient-care centers. The third is Linkia which is first and only managed care organization for the orthotics and prosthetics industry. The fourth segment is Innovative Neutronics which introduces emerging neuromuscular technologies developed through independent research in a collaborative effort with industry suppliers worldwide.
This document contains forward-looking statements relating to the Company's revenues, contracts and operations. The United States Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. Statements relating to future revenues, contracts and operations in this document reflect the current views of management. However, various risks, uncertainties and contingencies could cause actual results or performance to differ materially from those expressed in, or implied by, these statements, including the Company's ability to enter into and derive benefits from managed care contracts, the demand for the Company's orthotic and prosthetic services and products and the other factors identified in the Company's periodic reports on Form 10-K and Form 10-Q 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.
Hanger Orthopedic Group, Inc. (In Thousands, Except Share and Per Share Data) Three Months Ended Six Months Ended Income Statement: June 30, June 30, 2004 2003 2004 2003 (unaudited) (unaudited- (unaudited- restated) restated) Net sales $145,125 $138,936 $276,734 $265,064 Cost of goods sold 71,942 65,416 137,342 126,106 Gross profit 73,183 73,520 139,392 138,958 Selling, general and administrative 55,543 45,977 102,935 90,983 Depreciation and amortization 3,361 2,620 6,675 5,073 Income from operations 14,279 24,923 29,782 42,902 Interest expense, net 8,523 9,354 16,596 18,450 Income before taxes 5,756 15,569 13,186 24,452 Provision for income taxes 2,590 6,367 5,631 9,908 Net income 3,166 9,202 7,555 14,544 Less preferred stock dividends declared and accretion 934 1,381 1,851 2,738 Net income applicable to common stock $2,232 $7,821 $5,704 $11,806 Diluted Per Share Data: Net income $0.10 $0.34 $0.25 $0.54 Weighted average number of diluted common shares outstanding 22,706,438 26,844,609 22,764,812 26,804,325 June 30, June 30, Balance Sheet Data: 2004 2003 (unaudited) (unaudited- restated) Working Capital(1) $143,452 $126,668 Total Debt 420,584 379,609 Shareholders' Equity 185,343 178,075 (1) excludes the effect of the reclassification of long term debt and bonds described in the press release totaling $390,243 Hanger Orthopedic Group, Inc. Three Months Ended Six Months Ended Statistical Data: June 30, June 30, 2004 2003 2004 2003 Patient-care centers 614 591 614 591 Number of Practitioners 1,016 952 1,016 952 Number of states (including D.C.) 45 45 45 45 Payor mix: Private pay and other 55.1% 55.1% 55.1% 55.4% Medicare 32.5% 33.6% 32.4% 32.9% Medicaid 8.3% 9.0% 8.8% 9.2% VA 4.1% 2.3% 3.7% 2.5% Percentage of net sales from: Patient-care services 93.0% 93.6% 93.0% 93.6% Distribution 7.0% 6.4% 7.0% 6.4% Operating Margin 7.6% 18.1% 9.7% 16.4%
Hanger Orthopedic Group, Inc.CONTACT: Ivan R. Sabel, George E. McHenry, or Jason P. Owen, all ofHanger Orthopedic Group, Inc., +1-301-986-0701
Web site: http://www.hanger.com/
