AUSTIN, Texas, June 9, 2015 /PRNewswire/ -- Hanger, Inc. (NYSE: HGR) today announced that it will restate certain previously issued financial information. The restatement is due to errors identified in connection with the Company’s previously disclosed implementation of new inventory valuation estimation methods, processes and controls, and other previously disclosed errors. The restated financial periods will include the fiscal years ended December 31 of 2009, 2010, 2011, 2012, and 2013; all interim periods for 2012 and 2013; and the interim periods ended March 31 and June 30, 2014.
As previously disclosed in its Current Report on Form 8-K filed on March 23, 2015, the Company implemented new inventory valuation estimation methods, processes and controls in the fourth quarter of 2014 that resulted in a material difference in the carrying value of its inventories. The Company has now preliminarily established the estimated impact of the inventory valuation adjustments on these prior periods. Due to the size of these adjustments, management has determined them to be material errors requiring restatements. Additionally, the restatements will include other corrections of lease accounting errors and other errors previously disclosed in the Company’s press release and Current Report on Form 8-K filed on February 17, 2015.
“Given the complexity of the inventory accounting issues and magnitude of the amounts involved, this has been one of the more demanding areas the Company has had to address,” President and CEO Vinit Asar said. “While we recognize how difficult this period has been for our investors, we believe we are making significant progress in resolving the Company’s financial reporting and accounting challenges.”
The Company’s Audit Committee made the decision to restate these prior periods in consultation with management. Investors should no longer rely upon the Company’s previously issued financial information for these periods and any press releases or other shareholder communications that relate to that information.
The Company intends to file restated financial information as soon as practicable. The following provides additional detail regarding the inventory valuation, lease accounting, and other adjustments.
Inventory Valuation Adjustments
As previously reported, the Company implemented new inventory estimation methods, processes and controls in the fourth quarter of 2014 to refine the manner in which it values raw materials and work-in-process inventory at Hanger Clinic. This was done in connection with ongoing remediation efforts the Company had undertaken to address previously identified material weaknesses related to inventory. In March 2015, the Company reported that it had completed a preliminary calculation of its raw materials and work-in-process inventory using the new estimation methods, processes and controls; that the preliminary, unaudited estimated value was materially less than the carrying value for that inventory calculated under the previous estimation method; and that the resulting inventory valuation adjustment was expected to have a material adverse effect on the value of the Company’s overall inventory at December 31, 2014 and on the Company’s reported earnings and financial results for the quarter and year ended December 31, 2014. The Company also reported that it was determining the impact of the resulting inventory valuation adjustment on prior periods. The Company has now established the impact of the inventory valuation adjustment for the non-reliance periods and, in each case, the preliminary, unaudited estimated value of the inventory is materially less than the carrying value for that inventory calculated under the previous estimation method due to errors summarized below. The resulting inventory valuation adjustments in each of the non-reliance periods have also had material impacts on the Company’s reported earnings and other financial results for the non-reliance periods in the approximate estimated aggregate amount of $50.7 million as disclosed in the tables below. The inventory valuation adjustments did not affect operating cash flows for any historical period. The Company’s estimates are based on currently available and evaluated information and are preliminary, unaudited and subject to change.
The Company’s prior method of estimating its work-in-process inventory value involved the application of its aggregate estimate of the materials, labor and overhead costs of its products on a percent of sales basis to the amount of sales represented by unbilled work-in-process devices within its clinic locations. The computed amounts were adjusted to reflect estimates, provided by clinicians, as to the degree of completion of the unbilled work-in-process devices at the time of the physical inventory count. To allow for time necessary to aggregate results for its year-end reporting, physical inventory counts were performed annually in October of each year, and the calculated inventory values were rolled forward to reflect the Company’s estimates of changes that would have occurred between the October physical inventory and December 31 of each fiscal year.
In the course of completing the December 31, 2014 inventory valuation work, the Company identified certain errors in the design and operation of the prior method of estimating the value of work-in-process inventory. These errors primarily relate to overcapitalization of costs into inventory. In addition, work-in-process inventory in prior periods erroneously included amounts attributed to devices for which the fabrication process had not yet commenced, as well as devices that had already been delivered to the patient. The prior method of rolling forward inventory valuation from the physical inventory date to subsequent periods also did not sufficiently relieve work-in-process inventory valuation amounts in certain periods.
The Company’s new method of estimating work-in-process inventory involves the classification of in-process devices into different classes based on the type of device and the application of representative “bills of materials” for each individual device class to determine their value for inventory purposes. These representative bills of materials reflect the estimated value of the underlying componentry, direct labor hours and applicable overhead necessary for construction of the device based upon its classification. The Company’s estimates also consider the degree of completion of the work-in-process device, provided by the applicable clinician at the time of the physical inventory count. Additionally, the Company’s policy was revised in 2014 such that it now performs its physical inventories as of December 31 of each fiscal year. The Company also commenced in 2015 the performance of physical inventories at the end of each fiscal quarter.
In addition to the inventory valuation adjustments discussed above, the Company previously identified other inventory accounting adjustments related to accounting errors reported in the Company’s Current Report on Form 8-K filed on February 17, 2015. The impact of these other inventory adjustments is included in the Other Adjustments category discussed below.
Lease Adjustments
In addition to the impacts of the inventory valuation adjustments for the non-reliance periods, the tables below also reflect, for certain of the non-reliance periods, estimated adjustments related to the Company’s lease accounting. In particular, in various periods there were errors related to the classification of the Company’s property leases as either operating or capital leases, the failure to properly evaluate leases for “build-to-suit” accounting, the recognition of deferred rent, leasehold improvements and tenant improvement allowance amounts, and in the expensing of lease transactions over the appropriate lease term under GAAP. The estimated impact of these errors is aggregated in each applicable period. Preliminary information regarding the material lease adjustments was disclosed in the Company’s Current Report on Form 8-K filed on February 17, 2015.
Other Adjustments
In addition to the impacts of the inventory valuation adjustments and lease adjustments for the non-reliance periods, the tables below also reflect other adjustments impacting the Company’s financial statements and other financial data for such periods. Preliminary information regarding these material adjustments was disclosed in the Company’s Current Report on Form 8-K filed on February 17, 2015. These previously disclosed material adjustments caused the Company to conclude that certain of its historical financial statements could not be relied upon. The errors underlying these adjustments related to, among other things, the timing of the recognition of expenses relating to the Company’s annual Education Fair training event, the Company’s computation of cost of materials, and the timing of the commencement of depreciation expense relating to the Company’s new patient management system. Unless otherwise identified by a footnote, the data contained within the line item “Other Adjustments” for these previously identified errors in each of the tables below has not materially changed from the data presented by the Company for such period in its Current Report on Form 8-K filed on February 17, 2015.
In the course of its review of its historical financial statements, the Company has also identified certain less significant accounting errors impacting the non-reliance periods, including certain inventory-related errors, the individual and aggregate effects of which have not been deemed by management to be material.
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