Quarterly Report (10-q)

Date : 08/09/2018 @ 4:12PM
Source : Edgar (US Regulatory)
Stock : Hanger, Inc. (PN) (HNGR)
Quote : 16.55  -0.32 (-1.90%) @ 5:00PM
Hanger, Inc. share price Chart

Quarterly Report (10-q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x                     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the Quarterly Period Ended June 30, 2018

 

OR

 

o                        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period from

 

to

 

Commission File Number 1-10670

 

HANGER, INC.

(Exact name of registrant as specified in its charter.)

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

84-0904275
(I.R.S. Employer
Identification No.)

 

 

 

10910 Domain Drive, Suite 300, Austin, TX
(Address of principal executive offices)

 

78758
(Zip Code)

 

Registrant’s phone number, including area code: (512) 777-3800

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of class

 

Name of exchange on which registered

Common Stock, par value $0.01 per share

 

OTC Pink (operated by OTC Markets Group Inc.)

 

Securities registered pursuant to Section 12(g) of the Act: None.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   x No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                                 Yes  x   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,  a non-accelerated filer,  smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o

Accelerated filer  x

Non-accelerated filer  o

Smaller reporting company  o

Emerging growth company  o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x

 

As of August 1, 2018 the registrant had 36,799,320 shares of its Common Stock outstanding.

 

 

 




Table of Contents

 

PART 1.                     FINANCIAL INFORMATION

 

HANGER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and per share amounts)

(Unaudited)

 

 

 

As of June 30,

 

As of December 31,

 

 

 

2018

 

2017

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

48,792

 

$

1,508

 

Accounts receivable, net

 

134,079

 

146,346

 

Inventories

 

66,439

 

69,138

 

Income taxes receivable

 

1,389

 

13,079

 

Other current assets

 

21,415

 

20,888

 

Total current assets

 

272,114

 

250,959

 

 

 

 

 

 

 

Non-current assets:

 

 

 

 

 

Property, plant and equipment, net

 

91,378

 

93,615

 

Goodwill

 

196,343

 

196,343

 

Other intangible assets, net

 

18,145

 

21,940

 

Deferred income taxes

 

74,897

 

68,126

 

Other assets

 

11,482

 

9,440

 

Total assets

 

$

664,359

 

$

640,423

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ DEFICIT

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

10,384

 

$

4,336

 

Accounts payable

 

50,313

 

48,269

 

Accrued expenses and other current liabilities

 

54,258

 

66,308

 

Accrued compensation related costs

 

31,082

 

53,380

 

Total current liabilities

 

146,037

 

172,293

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

Long-term debt, less current portion

 

504,157

 

445,928

 

Other liabilities

 

49,465

 

50,253

 

Total liabilities

 

699,659

 

668,474

 

 

 

 

 

 

 

Commitments and contingencies (Note O)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ deficit:

 

 

 

 

 

Common stock, $0.01 par value; 60,000,000 shares authorized; 36,992,892 shares issued and 36,850,071 shares outstanding in 2018, and 36,515,232 shares issued and 36,372,411 shares outstanding in 2017

 

370

 

365

 

Additional paid-in capital

 

337,175

 

333,738

 

Accumulated other comprehensive loss

 

(1,928

)

(1,686

)

Accumulated deficit

 

(370,221

)

(359,772

)

Treasury stock, at cost; 142,821 shares at 2018 and 2017, respectively

 

(696

)

(696

)

Total shareholders’ deficit

 

(35,300

)

(28,051

)

Total liabilities and shareholders’ deficit

 

$

664,359

 

$

640,423

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

 

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Net revenues

 

$

266,966

 

$

263,386

 

$

500,961

 

$

497,067

 

Material costs

 

86,516

 

83,657

 

162,872

 

158,062

 

Personnel costs

 

89,554

 

87,831

 

175,662

 

175,786

 

Other operating costs

 

30,536

 

31,861

 

61,632

 

64,550

 

General and administrative expenses

 

26,523

 

25,227

 

52,159

 

50,613

 

Professional accounting and legal fees

 

4,236

 

8,521

 

9,082

 

21,171

 

Depreciation and amortization

 

9,272

 

9,825

 

18,602

 

19,962

 

Income from operations

 

20,329

 

16,464

 

20,952

 

6,923

 

Interest expense, net

 

7,317

 

14,091

 

19,580

 

28,100

 

Loss on extinguishment of debt

 

 

 

16,998

 

 

Non-service defined benefit plan expense

 

176

 

184

 

352

 

368

 

Income (loss) before income taxes

 

12,836

 

2,189

 

(15,978

)

(21,545

)

(Benefit) provision for income taxes

 

(92

)

552

 

(6,288

)

(5,448

)

Net income (loss)

 

$

12,928

 

$

1,637

 

$

(9,690

)

$

(16,097

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gain on cash flow hedges (net of tax provision of $710 and $8 for the three and six months ended June 30, 2018, respectively)

 

$

2,314

 

$

 

$

24

 

$

 

Unrealized gain (loss) on defined benefit plan (net of tax benefit of $0 and $0 for the three months and $105 and $0 for the six months ended June 30, 2018 and 2017, respectively)

 

26

 

(17

)

(266

)

(34

)

Total other comprehensive income (loss)

 

2,340

 

(17

)

(242

)

(34

)

Comprehensive income (loss)

 

$

15,268

 

$

1,620

 

$

(9,932

)

$

(16,131

)

 

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

0.35

 

$

0.05

 

$

(0.26

)

$

(0.44

)

Weighted average shares outstanding - basic

 

36,790,401

 

36,286,528

 

36,645,248

 

36,187,340

 

Diluted earnings (loss) per share

 

$

0.35

 

$

0.04

 

$

(0.26

)

$

(0.44

)

Weighted average shares outstanding - diluted

 

37,404,360

 

36,543,740

 

36,645,248

 

36,187,340

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

 

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIT

For the Six Months Ended June 30, 2018

(In thousands)

(Unaudited)

 

 

 

Common
Shares, 
Balance

 

Common
Stock, 
Par 
Value

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Loss

 

Accumulated
Deficit

 

Treasury
Stock

 

Total

 

Balance, December 31, 2017

 

36,372

 

$

365

 

$

333,738

 

$

(1,686

)

$

(359,772

)

$

(696

)

$

(28,051

)

Cumulative effect of a change in accounting for revenue recognition (Note A)

 

 

 

 

 

(759

)

 

(759

)

Balance, January 1, 2018

 

36,372

 

365

 

333,738

 

(1,686

)

(360,531

)

(696

)

(28,810

)

Net loss

 

 

 

 

 

(9,690

)

 

(9,690

)

Employee related equity activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares based compensation expense

 

 

 

5,905

 

 

 

 

5,905

 

Issuance of common stock upon vesting of restricted stock units

 

478

 

5

 

(5

)

 

 

 

 

Effect of shares withheld to cover taxes

 

 

 

(2,463

)

 

 

 

(2,463

)

Total other comprehensive loss

 

 

 

 

(242

)

 

 

(242

)

Balance, June 30, 2018

 

36,850

 

370

 

337,175

 

(1,928

)

(370,221

)

(696

)

(35,300

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

 

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Six Months Ended
June 30,

 

 

 

2018

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(9,690

)

$

(16,097

)

Adjustments to reconcile net loss to net cash from operating activities:

 

 

 

 

 

Depreciation and amortization

 

18,602

 

19,962

 

(Benefit) provision for doubtful accounts

 

(602

)

4,517

 

Stock-based compensation expense

 

5,906

 

5,080

 

Deferred income taxes

 

(6,511

)

(5,548

)

Amortization of debt issuance costs

 

2,186

 

3,874

 

Loss on extinguishment of debt

 

16,998

 

 

Gain on sale and disposal of fixed assets

 

(1,349

)

(1,196

)

Changes in operating assets and liabilities (Note Q)

 

(8,632

)

(16,925

)

Net cash provided by (used in) operating activities

 

16,908

 

(6,333

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of property, plant and equipment

 

(11,322

)

(6,433

)

Purchase of therapeutic program equipment leased to third parties under operating leases

 

(3,822

)

(1,333

)

Purchase of company-owned life insurance investment

 

(598

)

(555

)

Proceeds from sale of property, plant and equipment

 

1,682

 

3,216

 

Net cash used in investing activities

 

(14,060

)

(5,105

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowings under term loan, net of discount

 

500,204

 

 

Repayment of term loan

 

(431,875

)

(11,250

)

Borrowings under revolving credit agreement

 

3,000

 

110,000

 

Repayments under revolving credit agreement

 

(8,000

)

(85,000

)

Payment of employee taxes on stock-based compensation

 

(2,463

)

(1,339

)

Payment on seller notes

 

(1,765

)

(3,808

)

Payment of capital lease obligations

 

(682

)

(572

)

Payment of debt issuance costs

 

(6,487

)

(2,863

)

Payment of debt extinguishment costs

 

(8,436

)

 

Net cash provided by financing activities

 

43,496

 

5,168

 

 

 

 

 

 

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

46,344

 

(6,270

)

Cash, cash equivalents and restricted cash, at beginning of period

 

4,779

 

9,412

 

Cash, cash equivalents and restricted cash, at end of period

 

$

51,123

 

$

3,142

 

 

 

 

Six Months Ended
June 30,

 

Reconciliation of Cash, Cash Equivalents and Restricted Cash

 

2018

 

2017

 

Cash and cash equivalents, at beginning of period

 

$

1,508

 

$

7,157

 

Restricted cash, at beginning of period

 

3,271

 

2,255

 

Cash, cash equivalents, and restricted cash, at beginning of period

 

$

4,779

 

$

9,412

 

 

 

 

 

 

 

Cash and cash equivalents, at end of period

 

$

48,792

 

$

911

 

Restricted cash, at end of period

 

2,331

 

2,231

 

Cash, cash equivalents, and restricted cash, at end of period

 

$

51,123

 

$

3,142

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

 

HANGER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE A — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

Hanger, Inc. (“we,” “our,” or “us”) is a leading national provider of products and services that assist in enhancing or restoring the physical capabilities of patients with disabilities or injuries.  We provide orthotic and prosthetic (“O&P”) services, distribute O&P devices and components, manage O&P networks and provide therapeutic solutions to patients and businesses in acute, post-acute and clinic settings.  We operate through two segments: Patient Care and Products & Services.

 

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements.  These financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”), as previously filed with the Securities and Exchange Commission (“SEC”).

 

In our opinion, the information contained herein reflects all adjustments necessary for a fair statement of our results of operations, financial position and cash flows.  All such adjustments are of a normal, recurring nature.  The results of operations for the interim period are not necessarily indicative of those to be expected for the full year.

 

A detailed description of our significant accounting policies and management judgments is contained in our 2017 Form 10-K.

 

Reclassifications

 

We have reclassified certain amounts in the prior year consolidated financial statements to be consistent with the current year presentation.  These relate to classifications within both the condensed consolidated statements of operations and condensed consolidated statement of cash flows; see “ Adoption of New Accounting Standards ” for additional information.

 

Recent Accounting Pronouncements

 

Adoption of New Accounting Standards

 

On January 1, 2018, we adopted the following:

 

·                   Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and related clarifying standards (“ASC 606”), on revenue recognition using the modified retrospective method for all contracts in place at January 1, 2018.  This new accounting standard outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers.  This standard supersedes existing revenue recognition requirements.  The core principle of the revenue recognition standard is to require an entity to recognize as revenue the amount that reflects the consideration to which it expects to be entitled in exchange for goods or services as it transfers control to its customers.

 

The majority of our contracts are generally short term in nature.  Revenue is recognized at the point of time when we transfer control of the good or service to the patient.  Under ASC 606, estimated uncollectible amounts due from self-pay patients, as well as co-pays, co-insurance and deductibles owed to us by patients with insurance are generally considered implicit price concessions and are now presented as a reduction of net revenue.  Under prior guidance, these amounts were recognized as bad debt expense and were included in other operating costs.  When estimating the variable consideration, we use historical collection experience to estimate amounts not expected to be collected.  Conversely, subsequent changes in collectability due to a change in financial condition (i.e. bankruptcy) continues to be recognized as bad debt expense.

 

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Table of Contents

 

The adoption of this standard did not have a material impact on our results of operations.  The cumulative effect of implementing this guidance resulted in an increase of $0.8 million to the opening balance of accumulated deficit from establishing a contract liability of $1.0 million for certain performance obligations that must be recognized over time and an increase in deferred tax assets in the amount of $0.3 million - see “ Revenue Recognition ” below for additional information.

 

·                   ASU No. 2016-18 , Statement of Cash Flows (Topic 230): Restricted Cash and ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments in the statement of cash flows on a retrospective basis.  As a result of adoption:

 

·                   Amounts generally described as restricted cash and restricted cash equivalents are now presented with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.

 

·                   We added a reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated statements of cash flows.  Restricted cash balances are included in “Other Current Assets” in our condensed consolidated balance sheets - see Note G - “ Other Current Assets and Other Assets .”

 

·                   ASU No. 2016-16,  Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory , which requires the recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.  It was applied on a modified retrospective basis through a cumulative-effect adjustment directly to accumulated deficit as of the beginning of the period of adoption.  As a result of adoption, there was no material impact on our condensed consolidated financial statements.

 

·                   ASU No. 2017-01 , Business Combinations (Topic 805): Clarifying the Definition of a Business , which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  As a result of adoption, there was no material impact on our condensed consolidated financial statements and we will apply the guidance to any future acquisitions should they occur.

 

·                   ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting , which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of the share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification (“ASC”) 718.  The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date.  As a result of adoption, there was no material impact on our condensed consolidated financial statements and we will apply the guidance to any future changes to the terms or conditions of stock-based payment awards should they occur.

 

·                   ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which amends ASC Topic 715.  The amendments in this update require that an employer disaggregate the service cost component from the other components of net benefit cost for an entity’s defined benefit pension and other postretirement plans.  The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement.  The amendments in this update require that an employer report the service cost component in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside of income from operations.  Accordingly, we have made certain reclassifications from “General and administrative expenses” to “Non-service pension expense” of $0.2 million and $0.2 million for the three months ended June 30, 2018 and 2017, respectively and $0.4 million and $0.4 million for the six months ended June 30, 2018 and 2017, respectively.  Such reclassifications did not have a material effect on our consolidated statement of operations.

 

·                   ASU 2017-12,  Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities .  The objective of this new guidance is to improve the financial reporting of hedging relationships by, among other things, eliminating the requirement to separately measure and record hedge ineffectiveness.  ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted.  We adopted this guidance effective January 1, 2018.  The adoption did not have a material impact on our condensed consolidated financial statements or disclosures.

 

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Table of Contents

 

New Accounting Standards Issued, Not Yet Adopted

 

In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-02,  Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income  (ASU 2018-02), which allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which was signed into law on December 22, 2017, from accumulated other comprehensive income to retained earnings.  This new standard is effective for us beginning January 1, 2019, with early adoption permitted.  We are currently evaluating the effects that the adoption of this guidance will have on our condensed consolidated financial statements and the related disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  This new standard is effective for us beginning December 15, 2019, with early adoption permitted.  We are currently evaluating the effects that the adoption of this guidance will have on our condensed consolidated financial statements and the related disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) .  The amendments in ASU 2016-02, and related clarifying standards, revise the accounting for leases.  Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases that extend beyond 12 months.  The asset and liability will initially be measured at the present value of the lease payments.  The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.  The amendments in this ASU are effective for fiscal year 2019 and will be applied using a cumulative effect adjustment transition approach at the adoption date which includes a number of practical expedients for leases existing at, or entered into after, the adoption date.  Early adoption is permitted.  We have not yet concluded how the new standard will impact our condensed consolidated financial statements.  Nonetheless, we anticipate that there will be a material increase to assets and lease liabilities for existing property leases representing our nationwide retail locations that are not already included on our consolidated balance sheet.

 

Revenue Recognition

 

Effect of Adoption of ASC 606

 

On January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to all contracts which were not completed as of January 1, 2018.  As a practical expedient, we adopted a portfolio approach in evaluating our sources of revenue for implications of adoption.  In accordance with the modified retrospective method, results of operations for the reporting periods after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605, Revenue Recognition (“ASC 605”).

 

We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit.  Upon adoption of ASC 606, the cumulative effect of the changes made to our condensed consolidated balance sheet as of January 1, 2018 was as follows:

 

 

 

December 31, 2017

 

Effects of

 

January 1, 2018

 

(in thousands)

 

As reported

 

Adoption

 

After adoption

 

Assets

 

 

 

 

 

 

 

Deferred income taxes

 

$

68,126

 

$

268

 

$

68,394

 

Liabilities

 

 

 

 

 

 

 

Accrued expenses and other current liabilities

 

$

66,308

 

$

1,027

 

$

67,335

 

Shareholders’ Deficit

 

 

 

 

 

 

 

Accumulated deficit

 

$

(359,772

)

$

(759

)

$

(360,531

)

 

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our condensed consolidated statement of operations and condensed consolidated balance sheet is as follows:

 

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As of and for the Three Months Ended June 30, 2018

 

(in thousands)

 

As Reported

 

Effects of Adoption

 

Proforma balance
without the
adoption of
ASC 606

 

Condensed Consolidated Statement of Operations

 

 

 

 

 

 

 

Net revenues

 

$

266,966

 

$

1,322

 

$

268,288

 

Other operating costs

 

30,536

 

1,332

 

31,868

 

Income from operations

 

20,329

 

(10

)

20,319

 

Income (loss) before income taxes

 

12,836

 

(10

)

12,826

 

Net income (loss)

 

12,928

 

(10

)

12,918

 

Comprehensive income (loss)

 

15,268

 

(10

)

15,258

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Deferred income taxes

 

$

74,897

 

$

3

 

$

74,900

 

Total assets

 

664,359

 

3

 

664,362

 

Liabilities

 

 

 

 

 

 

 

Accrued expenses and other current liabilities

 

54,258

 

9

 

54,267

 

Total current liabilities

 

146,037

 

9

 

146,046

 

Total liabilities

 

699,659

 

9

 

699,668

 

Shareholders’ Deficit

 

 

 

 

 

 

 

Accumulated deficit

 

(370,221

)

(6

)

(370,227

)

Total shareholders’ deficit

 

(35,300

)

(6

)

(35,306

)

 

 

 

As of and for the Six Months Ended June 30, 2018

 

(in thousands)

 

As Reported

 

Effects of Adoption

 

Proforma balance 
without the 
adoption of
ASC 606

 

Condensed Consolidated Statement of Operations

 

 

 

 

 

 

 

Net revenues

 

$

500,961

 

$

2,220

 

$

503,181

 

Other operating costs

 

61,632

 

2,200

 

63,832

 

Income from operations

 

20,952

 

20

 

20,972

 

Income (loss) before income taxes

 

(15,978

)

20

 

(15,958

)

Net income (loss)

 

(9,690

)

20

 

(9,670

)

Comprehensive income (loss)

 

(9,932

)

20

 

(9,912

)

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Deferred income taxes

 

$

74,897

 

$

(273

)

$

74,624

 

Total assets

 

664,359

 

(273

)

664,086

 

Liabilities

 

 

 

 

 

 

 

Accrued expenses and other current liabilities

 

54,258

 

(1,048

)

53,210

 

Total current liabilities

 

146,037

 

(1,048

)

144,989

 

Total liabilities

 

699,659

 

(1,048

)

698,611

 

Shareholders’ Deficit

 

 

 

 

 

 

 

Accumulated deficit

 

(370,221

)

775

 

(369,446

)

Total shareholders’ deficit

 

(35,300

)

775

 

(34,525

)

 

The adoption of ASC 606 resulted in deferring $1.0 million of net revenue from our Patient Care segment as of June 30, 2018 and recognizing deferred revenue of $1.0 million from satisfying performance obligations from the previous period.  Estimated uncollectible amounts due from self-pay patients for the three and six months ended June 30, 2018 were $1.3 million and $2.2 million, respectively, and are considered implicit price concessions under ASC 606 and are recorded as a reduction to net revenue.

 

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Table of Contents

 

Patient Care Segment

 

Revenue in our Patient Care segment is primarily derived from contracts with third party payors for the provision of O&P devices and is recognized upon the transfer of control of promised products or services to the patient at the time the patient receives the device.  At, or subsequent to delivery, we issue an invoice to the third party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid, the U.S. Department of Veterans Affairs and private or patient pay (“Private Pay”) individuals.  We recognize revenue for the amounts we expect to receive from payors based on expected contractual reimbursement rates, which are net of estimated contractual discounts and implicit price concessions.  These revenue amounts are further revised as claims are adjudicated, which may result in additional disallowances.  As such, these adjustments do not relate to an inability to pay, but to contractual allowances, our failure to ensure that a patient was currently eligible under a payor’s health plan, that the plan provides full O&P benefits, that we received prior authorization, that we filed or appealed the payor’s determination timely, on the basis of our coding, failure by certain classes of patients to pay their portion of a claim or other administrative issues which are considered as part of the transaction price and recorded as a reduction of revenues.

 

Our products and services are sold with a 90-day labor and 180-day warranty for fabricated components.  Warranties are not considered a separate performance obligation.  We estimate warranties based on historical trends and include them in accrued expenses and other current liabilities in the condensed consolidated balance sheet.

 

A portion of our O&P revenue comes from the provision of cranial devices.  In addition to delivering the cranial device, there are patient follow up visits where we assist in treating the patient’s condition by adjusting or modifying the cranial device.  We conclude that, for these devices, there are two performance obligations and use the expected cost plus margin approach to estimate for the standalone selling price of each performance obligation.  The allocated portion associated with the patient’s receipt of the cranial device is recognized when the patient receives the device while the portion of revenue associated with the follow up visits is initially recorded as deferred revenue.  On average, the cranial device follow up visits occur within 90 days after the patient receives the device and the deferred revenue is recognized on a straight line basis over this period.

 

Medicare and Medicaid regulations and the various agreements we have with other third party payors, including commercial healthcare payors under which these contractual adjustments and disallowed revenue are calculated, are complex and are subject to interpretation and adjustment and may include multiple reimbursement mechanisms for different types of services.  Therefore, the particular O&P devices and related services authorized and provided, and the related reimbursement, are subject to interpretation and adjustment that could result in payments that differ from our estimates.  Additionally, updated regulations and reimbursement schedules, and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.  As a result, there is a reasonable possibility that recorded estimates could change and any related adjustments will be recorded as adjustments to net revenue when they become known.

 

The following table disaggregates revenue from contracts with customers in our Patient Care segment for the three and six months ended June 30, 2018 and 2017:

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

(in thousands)

 

2018

 

2017

 

2018

 

2017

 

Patient Care Segment

 

 

 

 

 

 

 

 

 

Medicare

 

$

70,469

 

$

65,737

 

$

127,781

 

$

120,872

 

Medicaid

 

33,648

 

34,788

 

63,400

 

62,964

 

Commercial Insurance/Managed Care (excluding Medicare and Medicaid Managed Care)

 

77,621

 

80,631

 

148,432

 

155,053

 

Veterans Administration

 

20,904

 

18,814

 

37,547

 

34,340

 

Private Pay

 

15,516

 

16,251

 

29,505

 

30,629

 

Total

 

$

218,158

 

$

216,221

 

$

406,665

 

$

403,858

 

 

Products & Services Segment

 

The adoption of ASC 606 did not have a material impact on our Product & Services segment.

 

Revenue in our Products & Services segment is derived from the distribution of O&P components and the leasing and sale of rehabilitation equipment and ancillary consumable supplies combined with equipment maintenance, education, and training.

 

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Distribution services revenues are recognized when obligations under the terms of a contract with our customers are satisfied, which occurs with the transfer of control of our products.  This occurs either upon shipment or delivery of goods, depending on whether the terms are FOB Origin or FOB Destination.  Payment terms are typically between 30 to 90 days.  Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products to a customer (“transaction price”).

 

To the extent that the transaction price includes variable consideration, such as prompt payment discounts, list price discounts, rebates, and volume discounts, we estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method.  Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.  Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available.

 

We reduce revenue by estimates of potential future product returns and other allowances.  Provisions for product returns and other allowances are recorded as a reduction to revenue in the period sales are recognized.  We make estimates of the amount of sales returns and allowances that will eventually be incurred.  Management analyzes sales programs that are in effect, contractual arrangements, market acceptance and historical trends when evaluating the adequacy of sales returns and allowance accounts.

 

Therapeutic program equipment and related services revenue are recognized over the applicable term the customer has the right to use the equipment and as the services are provided.  Equipment sales revenue is recognized upon delivery, with any related services revenue deferred and recognized as the services are performed.  Sales of consumables are recognized upon delivery.

 

In addition, we estimate amounts recorded to bad debt expense using historical trends and these are presented as a bad debt expense under the operating expense section of our condensed consolidated financial statements.

 

The following table disaggregates revenue from contracts with customers in our Product & Services segment for the three and six months ended June 30, 2018 and 2017:

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

(in thousands)

 

2018

 

2017

 

2018

 

2017

 

Products & Services Segment

 

 

 

 

 

 

 

 

 

Distribution services, net of intersegment revenue eliminations

 

$

34,684

 

$

31,967

 

$

66,035

 

$

62,590

 

Therapeutic solutions

 

14,124

 

15,198

 

28,261

 

30,619

 

Total

 

$

48,808

 

$

47,165

 

$

94,296

 

$

93,209

 

 

NOTE B — EARNINGS PER SHARE

 

Basic earnings per share is computed using the weighted average number of common shares outstanding during the period.  Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus any potentially dilutive common shares, such as stock options, restricted stock units and performance-based units calculated using the treasury stock method.  Total anti-dilutive shares excluded from the diluted earnings per share were 54,467 and 119,881 for the three and six months ended June 30, 2018 and 449,602 and 312,790 for the three and six months ended June 30, 2017.

 

Our credit agreement restricts the payment of dividends or other distributions to our shareholders with respect to Hanger, Inc., or any of its subsidiaries.

 

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The reconciliation of the numerators and denominators used to calculate basic and diluted earnings per share are as follows:

 

 

 

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

 

(in thousands except per share data)

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

12,928

 

$

1,637

 

$

(9,690

)

$

(16,097

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

36,790

 

36,287

 

36,645

 

36,187

 

Effect of potentially dilutive restricted stock units and options (1)

 

614

 

257

 

 

 

Weighted average shares outstanding - diluted

 

37,404

 

36,544

 

36,645

 

36,187

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share

 

$

0.35

 

$

0.05

 

$

(0.26

)

$

(0.44

)

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share

 

$

0.35

 

$

0.04

 

$

(0.26

)

$

(0.44

)

 


(1) As we are recognizing a loss for the six months periods ended June 30, shares used to compute diluted per share amounts excludes 669,641 shares for 2018 and 330,195 shares for 2017 of potentially dilutive shares related to unvested restricted stock units and unexercised options in accordance with ASC 260 - Earnings Per Share.

 

NOTE C — ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net represent outstanding amounts we expect to collect from the transfer of our products and services.  Principally, these amounts are comprised of receivables from Medicare, Medicaid and commercial insurance plans.  Under ASC 606, our accounts receivables represent amounts outstanding from our gross billings, net of contractual discounts and other implicit price concessions including estimates for payor disallowances, sales returns and patient non-payments.

 

Under both ASC 606 and ASC 605, disallowed revenue is considered an adjustment to the transaction price.  However, upon adoption of ASC 606, estimated uncollectible amounts due to us by patients are generally considered implicit price concessions and are now presented as a reduction of net revenue.  Under prior guidance, these amounts were recognized as bad debt expense in other operating expenses.

 

An allowance for doubtful accounts is also recorded for our Products & Services segment which is deducted from gross accounts receivable to arrive at “Accounts receivable, net.”  Accounts receivable, net as of June 30, 2018, and December 31, 2017 is comprised of the following:

 

 

 

As of June 30, 2018

 

As of December 31, 2017

 

(in thousands)

 

Patient Care

 

Products & 
Services

 

Consolidated

 

Patient Care

 

Products & 
Services

 

Consolidated

 

Accounts receivable, before allowances

 

$

173,268

 

$

25,316

 

$

198,584

 

$

193,150

 

$

23,494

 

$

216,644

 

Allowances for estimated implicit price concessions arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

Payor disallowances

 

(52,428

)

 

(52,428

)

(56,233

)

 

(56,233

)

Patient non-payments

 

(8,335

)

 

(8,335

)

 

 

 

Accounts receivable, gross

 

112,505

 

25,316

 

137,821

 

136,917

 

23,494

 

160,411

 

Allowance for doubtful accounts

 

 

(3,742

)

(3,742

)

(9,894

)

(4,171

)

(14,065

)

Accounts receivable, net

 

$

112,505

 

$

21,574

 

$

134,079

 

$

127,023

 

$

19,323

 

$

146,346

 

 

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NOTE D — INVENTORIES

 

Our inventories are comprised of the following:

 

(in thousands)

 

As of June 30, 2018

 

As of December 31, 2017

 

Raw materials

 

$

20,455

 

$

19,929

 

Work in process

 

12,125

 

8,996

 

Finished goods

 

33,859

 

40,213

 

Total inventories

 

$

66,439

 

$

69,138

 

 

NOTE E — PROPERTY PLANT AND EQUIPMENT, NET

 

Property, plant and equipment, net were comprised of the following:

 

(in thousands)

 

As of June 30, 2018

 

As of December 31, 2017

 

Land

 

$

644

 

$

644

 

Buildings

 

26,535

 

28,180

 

Furniture and fixtures

 

13,876

 

12,968

 

Machinery and equipment

 

27,405

 

26,838

 

Therapeutic program equipment leased to third parties under operating leases

 

29,355

 

31,100

 

Leasehold improvements

 

105,396

 

100,999

 

Computers and software

 

67,377

 

65,455

 

Total property, plant, and equipment, gross

 

270,588

 

266,184

 

Less: accumulated depreciation

 

(179,210

)

(172,569

)

Total property, plant, and equipment, net

 

$

91,378

 

$

93,615

 

 

Total depreciation expense was approximately $7.5 million and $7.4 million for the three months ended June 30, 2018 and 2017, respectively and $14.8 million and $15.1 million for the six months ended June 30, 2018 and 2017, respectively.

 

NOTE F — GOODWILL AND OTHER INTANGIBLE ASSETS

 

We assess goodwill and indefinite lived intangible assets for impairment annually on October 1st, and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying value.

 

The carrying value of goodwill at June 30, 2018 and December 31, 2017 was $196.3 million and related to our Patient Care segment.

 

The balances related to intangible assets as of June 30, 2018 and December 31, 2017 are as follows:

 

 

 

As of June 30, 2018

 

As of December 31, 2017

 

(in thousands)

 

Gross 
Carrying 
Amount

 

Accumulated
Amortization

 

Accumulated
Impairment

 

Net 
Carrying 
Amount

 

Gross 
Carrying 
Amount

 

Accumulated
Amortization

 

Accumulated
Impairment

 

Net 
Carrying
Amount

 

Customer lists

 

$

30,976

 

$

(21,914

)

$

 

$

9,062

 

$

36,439

 

$

(24,267

)

$

 

$

12,172

 

Other intangible assets

 

15,005

 

(10,222

)

 

4,783

 

15,820

 

(10,352

)

 

5,468

 

Definite-lived intangible assets

 

45,981

 

(32,136

)

 

13,845

 

52,259

 

(34,619

)

 

17,640

 

Indefinite life - trade name

 

9,070

 

 

(4,770

)

4,300

 

9,070

 

 

(4,770

)

4,300

 

Total other intangible assets

 

$

55,051

 

$

(32,136

)

$

(4,770

)

$

18,145

 

$

61,329

 

$

(34,619

)

$

(4,770

)

$

21,940

 

 

Total intangible amortization expense was approximately $1.8 million and $2.4 million for the three months ended June 30, 2018 and 2017, respectively and $3.8 million and $4.9 million for the six months ended June 30, 2018 and 2017, respectively.

 

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Table of Contents

 

Estimated aggregate amortization expense for definite lived intangible assets for each of the next five years ended December 31st and thereafter is as follows:

 

(in thousands)

 

 

 

2018 (remainder of year)

 

$

2,944

 

2019

 

3,762

 

2020

 

3,509

 

2021

 

927

 

2022

 

860

 

Thereafter

 

1,843

 

Total

 

$

13,845

 

 

 

NOTE G — OTHER CURRENT ASSETS AND OTHER ASSETS

 

Other current assets consist of the following:

 

(in thousands)

 

As of June 30, 2018

 

As of December 31, 2017

 

Non-trade receivables

 

$

8,130

 

$

7,668

 

Prepaid rent

 

4,410

 

4,248

 

Prepaid maintenance

 

2,805

 

3,134

 

Restricted cash

 

2,331

 

3,271

 

Prepaid insurance

 

1,124

 

271

 

Prepaid benefits

 

901

 

368

 

Other

 

1,714

 

1,928

 

Total other current assets

 

$

21,415

 

$

20,888

 

 

Other assets consist of the following:

 

(in thousands)

 

As of June 30, 2018

 

As of December 31, 2017

 

Cash surrender value of company owned life insurance

 

$

3,003

 

$

2,340

 

Non-trade receivables

 

2,314

 

2,407

 

Surety bond

 

2,500

 

2,500

 

Deposits

 

2,141

 

2,193

 

Derivative asset

 

1,255

 

 

Other

 

269

 

 

Total other assets

 

$

11,482

 

$

9,440

 

 

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NOTE H — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES AND OTHER LIABILITIES

 

Accrued expenses and other current liabilities consist of:

 

(in thousands)

 

As of June 30, 2018

 

As of December 31, 2017

 

Patient prepayments, deposits and refunds payable

 

$

25,242

 

$

30,194

 

Accrued professional fees

 

4,260

 

11,612

 

Insurance and self-insurance accruals

 

8,894

 

8,901

 

Accrued sales taxes and other taxes

 

6,055

 

6,335

 

Derivative liability

 

1,222

 

 

Accrued interest payable

 

400

 

845

 

Other current liabilities

 

8,185

 

8,421

 

Total accrued expenses and other current liabilities

 

$

54,258

 

$

66,308

 

 

Other liabilities consist of:

 

(in thousands)

 

As of June 30, 2018

 

As of December 31, 2017

 

Supplemental executive retirement plan obligations

 

$

20,325

 

$

21,842

 

Long-term insurance accruals

 

9,620

 

9,531

 

Deferred tenant improvement allowances

 

8,363

 

7,361

 

Unrecognized tax benefits

 

5,337

 

5,219

 

Deferred rent

 

4,673

 

4,909

 

Other

 

1,147

 

1,391

 

Total other liabilities

 

$

49,465

 

$

50,253

 

 

NOTE I — INCOME TAXES

 

We recorded a benefit from income tax of $0.1 million and a provision of $0.6 million for the three months ended June 30, 2018 and 2017, respectively.  The effective tax rate was (0.7)% and 25.2% for the three months ended June 30, 2018 and 2017, respectively.  We recorded a benefit from income tax of $6.3 million and a benefit of $5.4 million for the six months ended June 30, 2018 and 2017, respectively.  The effective tax rate was 39.4% and 25.3% for the six months ended June 30, 2018 and 2017, respectively.

 

The decrease in the effective tax rate for the three months ended June 30, 2018 compared with the three months ended June 30, 2017 is primarily attributable to the changes enacted by the Tax Act and the change from the discrete method for interim reporting used for the three months ended March 31, 2018 to using the annualized effective tax rate method for the six months ended June 30, 2018.  Our effective tax rate for the three months ended June 30, 2018 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses and the windfall from stock-based compensation recorded as a discrete item during the period.  Our effective tax rate for the three months ended June 30, 2017 differed from the federal statutory tax rate of 35% primarily due to non-deductible expenses and the windfall from stock-based compensation recorded as a discrete item during the period.

 

The increase in the income tax benefit for the six months ended June 30, 2018 compared with six months ended June 30, 2017 is largely driven by the increased estimated annual effective tax rate applied to the quarter, partially offset by decreased loss from continuing operations before taxes for the period.  The increase in estimated annual effective tax rate was driven by increased estimated permanent differences and decreased estimated loss from continuing operations before taxes.  Our effective tax rate for the six months ended June 30, 2018 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses and the shortfall from stock based compensation recorded as discrete item during the period.  Our effective tax rate for the six months ended June 30, 2017 differed from the federal statutory tax rate of 35% primarily due to non-deductible expenses and the shortfall from stock based compensation recorded as a discrete item during the period.

 

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in

 

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reasonable detail to complete the accounting for certain income tax effects of the Tax Act.  In the fourth quarter of 2017, we recorded a provisional amount of $35.0 million of tax expense related to re-measurement of our deferred tax assets and liabilities.

 

For the six months ended June 30, 2018, there were no significant adjustments to this amount although it remains provisional.  Additional work is still necessary for a more detailed analysis of our deferred tax assets and liabilities.  The future issuance of U.S. Treasury Regulations, administrative interpretations or court decisions interpreting the Tax Act may require further adjustments and changes in our estimate.  Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

 

NOTE J — LONG-TERM DEBT

 

Long-term debt consists of the following:

 

(in thousands)

 

As of June 30, 2018

 

As of December 31, 2017

 

Credit Agreement, dated March 6, 2018

 

 

 

 

 

Revolving credit facility

 

$

 

$

 

Term loan B

 

503,738

 

 

Prior Credit Agreement, dated August 1, 2016

 

 

 

 

 

Term loan B

 

 

280,000

 

Prior Credit Agreement, dated June 17, 2013

 

 

 

 

 

Revolving credit facility

 

 

5,000

 

Term loan

 

 

151,875

 

Seller notes

 

4,148

 

5,912

 

Financing leases and other

 

16,738

 

18,169

 

Total debt before unamortized discount and debt issuance costs

 

524,624

 

460,956

 

Unamortized discount and debt issuance costs, net

 

(10,083

)

(10,692

)

Total debt

 

514,541

 

450,264

 

Current portion of long-term debt

 

10,384

 

4,336

 

Long-term debt

 

$

504,157

 

$

445,928

 

 

Refinancing of Credit Agreement and Term B Borrowings

 

On March 6, 2018, we entered into a new $605.0 million Senior Credit Facility (the “Credit Agreement”).

 

The Credit Agreement provides for (i) a revolving credit facility with an initial maximum aggregate amount of availability of $100.0 million that matures in March 2023 and (ii) a $505.0 million Term loan B facility due in quarterly principal installments commencing June 29, 2018, with all remaining outstanding principal due at maturity in March 2025.  Availability under the revolving credit facility is reduced by outstanding letters of credit, which were approximately $5.9 million as of June 30, 2018.  We may (a) increase the aggregate principal amount of any outstanding tranche of term loans or add one or more additional tranches of term loans under the loan documents, and/or (b) increase the aggregate principal amount of revolving commitments or add one or more additional revolving loan facilities under the loan documents by an aggregate amount of up to the sum of (1) $125.0 million and (2) an amount such that, after giving effect to such incurrence of such amount (but excluding the cash proceeds of such incremental facilities and certain other indebtedness, and treating all commitments in respect of revolving indebtedness as fully drawn), the consolidated first lien net leverage ratio is equal to or less than 3.80 to 1.00, if certain conditions are satisfied, including the absence of a default or an event of default under the Credit Agreement at the time of the increase and that we obtain the consent of each lender providing any incremental facility.

 

Net proceeds from our initial borrowings under the Credit Agreement, which totaled approximately $501.5 million, were used in part to repay in full all previously existing loans outstanding under our previous credit agreement and Term B credit agreement.  Proceeds were also used to pay various transaction costs including fees paid to respective lenders and accrued and unpaid interest.  The remainder of the proceeds are being used to provide ongoing working capital and capital for other general corporate purposes.

 

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In connection with the Credit Agreement, we paid debt issuance costs of approximately $6.8 million.  As part of the repayment of amounts outstanding under our prior credit agreements, we paid a call premium totaling approximately $8.4 million and expensed outstanding unamortized discount and debt issuance costs totaling approximately $8.6 million.  The call premium and unamortized debt issuance costs on the prior credit agreements are included in “Loss on Extinguishment of Debt” in the condensed consolidated statements of operations for the six months ended June 30, 2018.

 

Our obligations under the Credit Agreement are currently guaranteed by our material domestic subsidiaries and will from time to time be guaranteed by, subject in each case to certain exceptions, any domestic subsidiaries that may become material in the future.  Subject to certain exceptions, the Credit Agreement is secured by first-priority perfected liens and security interests in substantially all of our personal property and each subsidiary guarantor.

 

Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, or (ii) the base rate (which is the highest of (a) Bank of America, N.A.’s prime rate, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin.  For the three months ended June 30, 2018, the weighted average interest rate on outstanding borrowings under our Term loan B facility was approximately 5.4%.  We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note L - “ Derivative Financial Instruments .”

 

We must also pay (i) an unused commitment fee ranging from 0.375% to 0.500% per annum of the average daily unused portion of the aggregate revolving credit commitments under the Credit Agreement, and (ii) a per annum fee equal to (a) for each performance standby letter of credit outstanding under the Credit Agreement with respect to nonfinancial contractual obligations, 50% of the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn under such letter of credit, and (b) for each other letter of credit outstanding under the Credit Agreement, the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn for such letter of credit.

 

The Credit Agreement contains various restrictions and covenants, including requirements that we maintain certain financial ratios at prescribed levels and restrictions on our ability and certain of our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, consummate acquisitions, make investments and pay dividends and other distributions.  The Credit Agreement includes the following financial covenants applicable for so long as any revolving loans and/or revolving commitments remain outstanding under the Credit Agreement: (i) a maximum consolidated first lien net leverage ratio (defined as, with certain adjustments and exclusions, the ratio of consolidated first-lien indebtedness to consolidated net income before interest, taxes, depreciation, amortization, non-cash charges and certain other items (“EBITDA”) for the most recently ended period of four fiscal quarters for which financial statements are available) of 5.00 to 1.00 for the fiscal quarters ended June 30, 2018, September 30, 2018, December 31, 2018 and March 31, 2019; 4.75 to 1.00 for the fiscal quarters ended June 30, 2019 through March 31, 2020; 4.50 to 1.00 for the fiscal quarters ended June 30, 2020 through March 31, 2021; 4.25 to 1.00 for the fiscal quarters ended June 30, 2021 through March 31, 2022; and 3.75 to 1.00 for the fiscal quarter ended June 30, 2022 and the last day of each fiscal quarter thereafter; and (ii) a minimum interest coverage ratio (defined as, with certain adjustments, the ratio of our EBITDA to consolidated interest expense to the extent paid or payable in cash) of 2.75 to 1.00 as of the last day of any fiscal quarter.  We were in compliance with all covenants at June 30, 2018.

 

The Credit Agreement also contains customary events of default.  If an event of default under the Credit Agreement occurs and is continuing, then the lenders may declare any outstanding obligations under the Credit Agreement to be immediately due and payable; provided, however, that the occurrence of an event of default as a result of a breach of a financial covenant under the Credit Agreement does not constitute a default or event of default with respect to any term facility under the Credit Agreement unless and until the required revolving lenders shall have terminated their revolving commitments and declared all amounts outstanding under the revolving credit facility to be due and payable.  In addition, if we or any subsidiary guarantor becomes the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Credit Agreement will automatically become immediately due and payable.  Loans outstanding under the Credit Agreement will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate (i) upon acceleration of such loans, (ii) while a payment event of default exists or (iii) upon the lenders’ request, during the continuance of any other event of default.

 

Scheduled maturities of debt at June 30, 2018 were as follows (in thousands):

 

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2018 (remainder of year)

 

$

5,999

 

2019

 

8,356

 

2020

 

7,275

 

2021

 

5,936

 

2022

 

6,053

 

Thereafter

 

491,005

 

Total debt before unamortized discount and debt issuance costs, net

 

524,624

 

Unamortized discount and debt issuance costs, net

 

(10,083

)

Total debt

 

$

514,541

 

 

NOTE K — FAIR VALUE MEASUREMENTS

 

Fair Value Measurements

 

We follow the authoritative guidance for financial assets and liabilities, which establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements.  The authoritative guidance requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy by which these assets and liabilities must be categorized, based on significant levels of inputs as follows:

 

Level 1 consists of securities for which there are quoted prices in active markets for identical securities;

 

Level 2 consists of securities for which observable inputs other than Level 1 inputs are used, such as quoted prices for similar securities in active markets or quoted prices for identical securities in less active markets and model-derived valuations for which the variables are derived from, or corroborated by, observable market data; and

 

Level 3 consists of securities for which there are no observable inputs to the valuation methodology that are significant to the measurement of the fair value.

 

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

Financial Instruments

 

We hold investments in money market funds which are measured at fair value on a recurring basis.  As of June 30, 2018 and December 31, 2017, $2.3 million and $3.3 million, respectively, of money market funds which are restricted from general use are presented within “Other current assets.”  The fair values of our money market funds are based on Level 1 observable market prices and are equivalent to one dollar per share.  The carrying value of accounts receivable and accounts payable approximate their fair values based on the short-term nature of these instruments.

 

In March 2018, we refinanced our credit facilities with the Credit Agreement.  The carrying value of our outstanding term loan as of June 30, 2018 was $503.7 million compared to its fair value of $501.8 million.  The carrying value of our outstanding term loan as of December 31, 2017 was $151.9 million compared to its fair value of $149.4 million.  The carrying value of our outstanding Term Loan B as of December 31, 2017 was $280.0 million compared to its fair value of $283.5 million.  Our estimates of fair value are based on a discounted cash flow model and indicative quote using unobservable inputs, primarily, our risk-adjusted credit spread, which represents a Level 3 measurement.

 

As of June 30, 2018, we had no amounts outstanding on our revolving credit facility.  The carrying value of the amount outstanding on our revolving credit facilities as of December 31, 2017 was $5.0 million compared to the fair value $4.9 million.  Our estimates of fair value are based on a discounted cash flow model using unobservable inputs, primarily, our risk-adjusted credit spread, which represents a Level 3 measurement.

 

In March 2018, we entered into interest rate swap agreements with notional values of $325.0 million, at inception, which reduces $12.5 million annually until the swaps mature on March 6, 2024.  The interest rate swap agreements are designated as cash flow hedges and are measured at fair value based on inputs other than quoted market prices that are observable, which represents a Level 2 measurement.  See Note J - “ Long-Term Debt ” and Note L - “Derivative Financial Instruments” for further information.

 

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The carrying value of our outstanding subordinated promissory notes issued in connection with acquisitions (“Seller Notes”) as of June 30, 2018 and December 31, 2017 was $4.1 million and $5.9 million, respectively.  We believe that the carrying value of the Seller Notes approximates their fair values based on a discounted cash flow model using unobservable inputs, primarily, our credit spread for subordinated debt, which represents a Level 3 measurement.

 

NOTE L — DERIVATIVE FINANCIAL INSTRUMENTS

 

We are exposed to certain risks arising from both our business operations and economic conditions.  We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments.  Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash payments principally related to our borrowings.

 

Cash Flow Hedges of Interest Rate Risk

 

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements.  To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counter-party in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  The change in the fair value of derivatives designated and that qualify as cash flow hedges is recorded on our consolidated balance sheet in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

 

During the three months ended June 30, 2018, such derivatives were used to hedge certain variable cash flows associated with existing variable-rate debt.  As of June 30, 2018, our swaps had a notional value outstanding of $325.0 million.  We had no swaps outstanding as of December 31, 2017.

 

Changes in Net Gain or Loss on Cash Flow Hedges Included in Accumulated Other Comprehensive Loss

 

The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss (“AOCI”) for the three and six months ended June 30, 2018:

 

(in thousands)

 

Cash Flow Hedges

 

Balance as of March 31, 2018

 

$

2,290

 

Unrealized gain recognized in other comprehensive income (loss), net of tax

 

(1,618

)

Reclassification to interest expense, net

 

(696

)

Balance as of June 30, 2018

 

$

(24

)

 

 

 

 

Balance as of December 31, 2017

 

$

 

Unrealized loss recognized in other comprehensive income (loss), net of tax

 

920

 

Reclassification to interest expense, net

 

(944

)

Balance as of June 30, 2018

 

$

(24

)

 

The following table presents the fair value of derivative assets and liabilities within the condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017:

 

 

 

As of June 30, 2018

 

As of December 31, 2017

 

(in thousands)

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

Derivatives designated as cash flow hedging instruments:

 

 

 

 

 

 

 

 

 

Accrued expenses and other current liabilities

 

$

 

$

1,222

 

$

 

$

 

Other assets

 

1,255

 

 

 

 

 

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NOTE M — STOCK - BASED COMPENSATION

 

The Hanger, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”) as amended by our Board of Directors (the “Board”) in May 2018 authorizes the issuance of up to 2,625,000 shares of Common Stock, plus (1) the number of shares available for issuance under our prior equity incentive plan, the Hanger, Inc. 2010 Omnibus Incentive Plan (the “2010 Plan”), that had not been made subject to outstanding awards as of the effective date of the 2016 Plan and (2) any shares that would have become available again for new grants under the terms of the 2010 Plan if such plan were still in effect.

 

We recognized a total of approximately $3.3 million and $2.9 million, respectively, of stock-based compensation expense for the three months ended June 30, 2018 and 2017 and a total of approximately $5.9 million and $5.1 million for the six months ended June 30, 2018 and 2017.  Stock compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and stock options.

 

NOTE N — SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS

 

Defined Benefit Supplemental Executive Retirement Plan

 

Our unfunded noncontributory defined benefit plan (“DB SERP”) covers certain senior executives, is administered by us and calls for annual payments upon retirement based on years of service and final average salary.  Benefit costs and liability balances are calculated based on certain assumptions including benefits earned, discount rates, interest costs, mortality rates and other factors.  Actual results that differ from the assumptions are accumulated and amortized over future periods, affecting the recorded obligation and expense in future periods.

 

We believe the assumptions used are appropriate; however, changes in assumptions or differences in actual experience may affect our benefit obligation and future expenses.  The DB SERP’s change in net benefit cost and obligation during the three and six months ended June 30, 2018 and 2017 is as follows:

 

Change in Benefit Obligation

 

(in thousands)

 

2018

 

2017

 

Benefit obligation as of March 31

 

$

19,158

 

$

19,745

 

Service cost

 

92

 

85

 

Interest cost

 

150

 

167

 

Payments

 

(12

)

(12

)

Benefit Obligation as of June 30

 

$

19,388

 

$

19,985

 

 

 

 

 

 

 

Benefit obligation as of December 31, 2017 and 2016, respectively

 

$

20,793

 

$

21,304

 

Service cost

 

184

 

170

 

Interest cost

 

300

 

334

 

Payments

 

(1,889

)

(1,823

)

Benefit obligation as of June 30

 

$

19,388

 

$

19,985

 

 

Amounts Recognized in the Condensed Consolidated Balance Sheets:

 

(in thousands)

 

June 30, 2018

 

December 31, 2017

 

Accrued expenses and other current liabilities

 

$

1,913

 

$

1,913

 

Other liabilities

 

17,474

 

18,880

 

Total accrued liabilities

 

$

19,387

 

$

20,793

 

 

Defined Contribution Supplemental Executive Retirement Plan

 

We have a defined contribution plan (“DC SERP”) that covers certain of our senior executives.  Each participant is given a notional account to manage his or her annual distributions and allocate the funds among various investment options (e.g. mutual

 

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funds).  These accounts are tracking accounts only for the purpose of calculating the participant’s benefit.  The participant does not have ownership of the underlying mutual funds.  When a participant initiates or changes the allocation of his or her notional account, we will generally make an allocation of our investments, to match those chosen by the participant.  While the allocation of our sub accounts is generally intended to mirror the participant’s account records (i.e. the distributions and gains or losses on those funds), the employee does not have legal ownership of any funds until payout upon retirement.  The underlying investments are owned by the insurance company (and we own an insurance policy).

 

As of June 30, 2018 and 2017, the estimated accumulated obligation benefit is $2.7 million and $2.3 million, respectively, of which $2.5 million and $2.1 million is funded and $0.2 million and $0.2 million is unfunded at June 30, 2018 and 2017, respectively.

 

In connection with the DC SERP benefit obligation, we maintain a company owned policy which is measured at its cash surrender value and is presented within “Other assets” in our consolidated balance sheets.  See Note G - “ Other Current Assets and Other Assets ” for additional information.

 

NOTE O — COMMITMENTS AND CONTINGENCIES

 

Commitments

 

In April 2014, in connection with the settlement of a patent infringement dispute, our wholly-owned subsidiary, Southern Prosthetic Supply, Inc. (“SPS”), entered into a non-cancellable agreement to purchase a total of $4.5 million of prosthetic gel liners in five installments.  We determined that a portion of the prosthetic gel liners should be reserved as excess and slow-moving inventory, and we accrued a liability and expensed $3.4 million in 2014.  As of June 30, 2018, $1.0 million of the non-cancellable purchase commitment was outstanding and is due and payable by April of 2019.  As of June 30, 2018, our reserve associated with the non-cancellable purchase commitment was $2.6 million.

 

Guarantees and Indemnification

 

In the ordinary course of our business, we may enter into service agreements with service providers in which we agree to indemnify or limit the service provider against certain losses and liabilities arising from the service provider’s performance of the agreement.  We have reviewed our existing contracts containing indemnification or clauses of guarantees and do not believe that our liability under such agreements is material.

 

Legal Proceedings

 

Securities and Derivative Litigation

 

In November 2014, a securities class action complaint, City of Pontiac General Employees’ Retirement System v. Hanger, et al., C.A. No. 1:14-cv-01026-SS, was filed against us in the United States District Court for the Western District of Texas.  The complaint named us and certain of our current and former officers for allegedly making materially false and misleading statements regarding, inter alia, our financial statements, RAC audit success rate, the implementation of new financial systems, same-store sales growth, and the adequacy of our internal processes and controls.  The complaint alleged violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder.  The complaint sought unspecified damages, costs, attorneys’ fees, and equitable relief.

 

On April 1, 2016, the court granted our motion to dismiss the lawsuit for failure to state a claim upon which relief can be granted, and permitted plaintiffs to file an amended complaint.  On July 1, 2016, plaintiffs filed an amended complaint.  On September 15, 2016, we and certain of the individual defendants filed motions to dismiss the lawsuit.  On January 26, 2017, the court granted the defendants’ motions and dismissed with prejudice all claims against all defendants for failure to state a claim.  On February 24, 2017, plaintiffs filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit.  Appellate briefing was completed on August 18, 2017 and the Court of Appeals held oral argument for the appeal on March 5, 2018.  On August 6, 2018, the Court of Appeals affirmed in part and reversed in part.  The Court of Appeals affirmed the dismissal of the case against individual defendants Vinit Asar, our current President and Chief Executive Officer, and Thomas Kirk, our former President and Chief Executive Officer, but reversed the dismissal of the case against George McHenry, our former Chief Financial Officer, and Hanger, Inc.  The case has been remanded back to the United States District Court for the Western District of Texas for further proceedings with respect to the remaining claims.  We believe the remaining claims are without merit, and intend to continue to vigorously defend against these claims.

 

In February and August of 2015, two separate shareholder derivative suits were filed in Texas state court against us related to the announced restatement of certain of our financial statements.  The cases were subsequently consolidated into Judy v. Asar, et. al., Cause No. D-1-GN-15-000625.  On October 25, 2016, plaintiffs in that action filed an amended complaint, and the case is currently pending before the 459th Judicial District Court of Travis County, Texas.

 

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The amended complaint in the consolidated derivative action names us and certain of our current and former officers and directors as defendants.  It alleges claims for breach of fiduciary duty based, inter alia, on the defendants’ alleged failure to exercise good faith to ensure that we had in place adequate accounting and financial controls and that disclosures regarding our business, financial performance and internal controls were truthful and accurate.  The complaint seeks unspecified damages, costs, attorneys’ fees, and equitable relief.

 

As disclosed in our Current Report on Form 8-K filed with the SEC on June 6, 2016, the Board of Directors appointed a Special Litigation Committee of the Board (the “Special Committee”).  The Board delegated to the Special Committee the authority to (1) determine whether it is in our best interests to pursue any of the allegations made in the derivative cases filed in Texas state court (which cases were consolidated into the Judy case discussed above), (2) determine whether it is in our best interests to pursue any remedies against any of our current or former employees, officers or directors as a result of the conduct discovered in the Audit Committee investigation concluded on June 6, 2016 (the “Investigation”), and (3) otherwise resolve claims or matters relating to the findings of the Investigation.  The Special Committee retained independent legal counsel to assist and advise it in carrying out its duties and reviewed and considered the evidence and various factors relating to our best interests.  In accordance with its findings and conclusions, the Special Committee determined that it is not in our best interest to pursue any of the claims in the Judy derivative case.  Also in accordance with its findings and conclusions, the Special Committee determined that it is not in our best interests to pursue legal remedies against any of our current or former employees, officers, or directors.

 

On April 14, 2017, we filed a motion to dismiss the consolidated derivative action based on the resolution by the Special Committee that it is not in our best interest to pursue the derivative claims.  Counsel for the derivative plaintiffs opposed that motion and moved to compel discovery.  In a hearing held on June 12, 2017, the Travis County court denied plaintiffs’ motion to compel, and held that the motion to dismiss would be considered only after appropriate discovery was concluded.

 

The plaintiffs have since subpoenaed counsel for the Special Committee, seeking a copy of the full report prepared by the Special Committee and its independent counsel.  Counsel for the Special Committee, as well as our counsel, took the position that the full report is not discoverable under Texas law.  Plaintiffs’ counsel filed a motion to compel the Special Committee’s counsel to produce the full report.  We opposed the motion.  On July 20, 2018, the Travis County court ruled that only a redacted version of the report is discoverable.  Upon completion of discovery we intend to file a motion to dismiss the consolidated derivative action.

 

Management intends to continue to vigorously defend against the securities class action and the shareholder derivative action.  At this time, we cannot predict how the Courts will rule on the merits of the claims and/or the scope of the potential loss in the event of an adverse outcome.  Should we ultimately be found liable, the resulting damages could have a material adverse effect on our consolidated financial position, liquidity or results of our operations.

 

Other Matters

 

From time to time we are subject to legal proceedings and claims which arise in the ordinary course of our business, including additional payments under business purchase agreements.  In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a materially adverse effect on our consolidated financial position, liquidity or results of our operations.

 

We are in a highly regulated industry and receive regulatory agency inquiries from time to time in the ordinary course of our business, including inquiries relating to our billing activities.  No assurance can be given that any discrepancies identified during a regulatory review will not have a material adverse effect on our consolidated financial statements.

 

Favorable Settlements

 

For the three months ended June 30, 2018, our results of operations and net income benefited from the favorable resolution of two matters.

 

On May 15, 2018, we received a net favorable settlement of $1.7 million in connection with our long standing damage claims relating to the “Deepwater Horizon” disaster, and the prior adverse effect which it had on our clinic operations along the Gulf Coast in April of 2010.  We anticipate the receipt of no further payments in connection with this matter as this settlement constituted a full and final satisfaction of our claims.  The benefit of this settlement has been recognized as a reduction to our general and administrative expenses for the three months and six months ended June 30, 2018.

 

On June 28, 2018, we entered into an agreement with the State of Delaware, and made payment, to satisfy all of the State’s abandoned or unclaimed property claims transactions represented within the period of January 1, 2001 through December 31, 2012 which were reportable through December 31, 2017 in the amount of $2.2 million.  This agreed upon payment amount was

 

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favorable by $0.5 million to the amount we had previously estimated for these liabilities and had the effect of reducing our general and administrative expenses by this amount for the quarter and year-to-date.  Additionally, under the terms of the agreement, we were not required to pay interest on the previously un-remitted cumulative abandoned or unclaimed property relating to this twelve year period in the amount of $1.5 million, which had the effect of lowering our interest expense in the quarter and for the year-to-date periods ending June 30, 2018 by this accrued interest amount.

 

NOTE P — SEGMENT AND RELATED INFORMATION

 

We have identified two operating segments and both performance evaluation and resource allocation decisions are determined based on each operating segment’s income from operations.  The operating segments are described further below:

 

Patient Care - This segment consists of (i) our owned and operated patient care clinics, and (ii) our contracting and network management business.  The patient care clinics provide services to design and fit O&P devices to patients.  These clinics also instruct patients in the use, care and maintenance of the devices.  The principal reimbursement sources for our services are:

 

·                   Commercial private payors and other, which consist of individuals, rehabilitation providers, commercial insurance companies, HMOs, PPOs, hospitals, vocational rehabilitation, workers’ compensation programs and similar sources;

 

·                   Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain disabled persons, which provides reimbursement for O&P products and services based on prices set forth in published fee schedules with 10 regional pricing areas for prosthetics and orthotics and by state for durable medical equipment;

 

·                   Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons in financial need, regardless of age, which may supplement Medicare benefits for financially needy persons aged 65 or older; and

 

·                   U.S. Department of Veterans Affairs.

 

Our contract and network management business, known as Linkia, is the only network management company dedicated solely to serving the O&P market and is focused on managing the O&P services of national and regional insurance companies.  We partner with healthcare insurance companies by securing a national or regional contract either as a preferred provider or to manage their O&P network of providers.

 

Products & Services - This segment consists of our distribution services business, which distributes and fabricates O&P products and components to sell to both the O&P industry and our own patient care clinics, and our therapeutic solutions business.  The therapeutic solutions business provides and sells rehabilitation equipment and ancillary consumable supplies combined with equipment maintenance, education, and training.  This segment also develops emerging neuromuscular technologies for the O&P and rehabilitation markets.

 

Corporate & Other - This consists of corporate overhead and includes unallocated expense such as personnel costs, professional fees and corporate offices expenses.

 

The accounting policies of the segments are the same as those described in Note B - “ Significant Accounting Policies ” in our 2017 Form 10-K.

 

Intersegment revenue primarily relates to sales of O&P components from the Products & Services segment to the Patient Care segment.  The sales are priced at the cost of the related materials plus overhead.

 

Summarized financial information concerning our reporting segments is shown in the following tables.

 

Total assets for each of the segments has not materially changed from December 31, 2017.

 

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(in thousands)

 

Patient Care

 

Products &
Services

 

Corporate &
Other

 

Consolidating
Adjustments

 

Total

 

Three Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

 

 

 

 

 

 

 

 

 

 

Third party

 

$

218,158

 

$

48,808

 

$

 

$

 

$

266,966

 

Intersegments

 

 

49,835

 

 

(49,835

)

 

Total net revenue

 

218,158

 

98,643

 

 

(49,835

)

266,966

 

Material costs

 

 

 

 

 

 

 

 

 

 

 

Third party suppliers

 

59,989

 

26,527

 

 

 

86,516

 

Intersegments

 

5,920

 

43,915

 

 

(49,835

)

 

Total material costs

 

65,909

 

70,442

 

 

(49,835

)

86,516

 

Personnel expenses

 

76,792

 

12,762

 

 

 

89,554

 

Other expenses

 

35,439

 

5,483

 

20,373

 

 

61,295

 

Depreciation & amortization

 

4,998

 

2,503

 

1,771

 

 

9,272

 

Income (loss) from operations

 

35,020

 

7,453

 

(22,144

)

 

20,329

 

Interest expense, net

 

6,456

 

3,247

 

(2,386

)

 

7,317

 

Loss on extinguishment of debt

 

 

 

 

 

 

Non-service defined benefit plan expense

 

 

 

176

 

 

176

 

Income (loss) before income taxes

 

28,564

 

4,206

 

(19,934

)

 

12,836

 

Benefit for income taxes

 

 

 

(92

)

 

(92

)

Net income (loss)

 

$

28,564

 

$

4,206

 

$

(19,842

)

$

 

$

12,928

 

 

(in thousands)

 

Patient Care

 

Products &
Services

 

Corporate &
Other

 

Consolidating
Adjustments

 

Total

 

Three Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

 

 

 

 

 

 

 

 

 

 

Third Party

 

$

216,221

 

$

47,165

 

$

 

$

 

$

263,386

 

Intersegments

 

 

45,169

 

 

(45,169

)

 

Total net revenue

 

216,221

 

92,334

 

 

(45,169

)

263,386

 

Material costs

 

 

 

 

 

 

 

 

 

 

 

Third party suppliers

 

58,322

 

25,335

 

 

 

83,657

 

Intersegments

 

5,923

 

39,246

 

 

(45,169

)

 

Total material costs

 

64,245

 

64,581

 

 

(45,169

)

83,657

 

Personnel expenses

 

75,906

 

11,925

 

 

 

87,831

 

Other expenses

 

35,546

 

6,061

 

24,002

 

 

65,609

 

Depreciation & amortization

 

5,370

 

2,592

 

1,863

 

 

9,825

 

Income (loss) from operations

 

35,154

 

7,175

 

(25,865

)

 

16,464

 

Interest expense, net

 

8,124

 

3,300

 

2,667

 

 

14,091

 

Loss on extinguishment of debt

 

 

 

 

 

 

Non-service defined benefit plan expense

 

 

 

184

 

 

184

 

Income (loss) before income taxes

 

27,030

 

3,875

 

(28,716

)

 

2,189

 

Provision for income taxes

 

 

 

552

 

 

552

 

Net income (loss)

 

$

27,030

 

$

3,875

 

$

(29,268

)

$

 

$

1,637

 

 

23



Table of Contents

 

(in thousands)

 

Patient Care

 

Products &
Services

 

Corporate &
Other

 

Consolidating
Adjustments

 

Total

 

Six Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

 

 

 

 

 

 

 

 

 

 

Third party

 

$

406,665

 

$

94,296

 

$