10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2018

OR

oTRANSITION 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

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 November 1, 2018 the registrant had 36,848,290 shares of its Common Stock outstanding.

TABLE OF CONTENTS

Hanger, Inc.
Part I Financial Information
	Item 1. Condensed Consolidated Financial Statements (unaudited)	1
	Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	42
	Item 4. Controls and Procedures	43
Part II Other Information
	Item 1. Legal Proceedings	44
	Item 1A. Risk Factors	46
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46
	Item 3. Defaults Upon Senior Securities	46
	Item 4. Mine Safety Disclosures	46
	Item 5. Other Information	46
	Item 6. Exhibits	46
Exhibits Index		47
Signatures		48

ii

PART 1.FINANCIAL INFORMATION

HANGER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

	As of September 30,			As of December 31,
	2018			2017
ASSETS
Current assets:
Cash and cash equivalents	$	61,035		$	1,508
Accounts receivable, net	132,446			146,346
Inventories	72,601			69,138
Income taxes receivable	1,723			13,079
Other current assets	20,742			20,888
Total current assets	288,547			250,959
Non-current assets:
Property, plant and equipment, net	89,424			93,615
Goodwill	196,343			196,343
Other intangible assets, net	16,637			21,940
Deferred income taxes	71,967			68,126
Other assets	12,711			9,440
Total assets	$	675,629		$	640,423
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Current portion of long-term debt	$	9,027		$	4,336
Accounts payable	52,325			48,269
Accrued expenses and other current liabilities	54,790			66,308
Accrued compensation related costs	32,730			53,380
Total current liabilities	148,872			172,293
Long-term liabilities:
Long-term debt, less current portion	502,966			445,928
Other liabilities	49,395			50,253
Total liabilities	701,233			668,474
Commitments and contingencies (Note O)
Shareholders’ deficit:
Common stock, $0.01 par value; 60,000,000 shares authorized; 37,011,135 shares issued and 36,868,314 shares outstanding in 2018, and 36,515,232 shares issued and 36,372,411 shares outstanding in 2017	370			365
Additional paid-in capital	340,738			333,738
Accumulated other comprehensive loss	(164		)	(1,686		)
Accumulated deficit	(365,852		)	(359,772		)
Treasury stock, at cost; 142,821 shares at 2018 and 2017, respectively	(696		)	(696		)
Total shareholders’ deficit	(25,604		)	(28,051		)
Total liabilities and shareholders’ deficit	$	675,629		$	640,423

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

1

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(Unaudited)

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2018		2017			2018			2017
Net revenues	$	262,946	$	257,966		$	763,907		$	755,033
Material costs	84,805		82,345			247,677			240,407
Personnel costs	90,853		90,065			266,515			265,851
Other operating costs	30,999		33,184			92,631			97,734
General and administrative expenses	28,308		25,356			80,467			75,969
Professional accounting and legal fees	3,107		7,844			12,189			29,015
Depreciation and amortization	8,950		9,632			27,552			29,594
Income from operations	15,924		9,540			36,876			16,463
Interest expense, net	8,939		15,097			28,519			43,197
Loss on extinguishment of debt	—		—			16,998			—
Non-service defined benefit plan expense	176		184			528			552
Income (loss) before income taxes	6,809		(5,741		)	(9,169		)	(27,286		)
Provision (benefit) for income taxes	2,440		(1,580		)	(3,848		)	(7,028		)
Net income (loss)	$	4,369	$	(4,161	)	$	(5,321	)	$	(20,258	)
Per share data:
Basic income (loss) per share	$	0.12	$	(0.11	)	$	(0.14	)	$	(0.56	)
Weighted average shares outstanding - basic	36,856,881		36,340,089			36,716,568			36,238,816
Diluted income (loss) per share	$	0.12	$	(0.11	)	$	(0.14	)	$	(0.56	)
Weighted average shares outstanding - diluted	37,556,594		36,340,089			36,716,568			36,238,816

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

2

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2018		2017			2018			2017
Net income (loss)	$	4,369	$	(4,161	)	$	(5,321	)	$	(20,258	)
Other comprehensive income (loss):
Unrealized gain on cash flow hedges, net of tax of $533, $0, $541, and $0, respectively	$	1,738	$	—		$	1,762		$	—
Unrealized gain (loss) on defined benefit plan, net of tax of $0, $0, $105, and $0 respectively	26		(17		)	(240		)	(51		)
Total other comprehensive income (loss)	1,764		(17		)	1,522			(51		)
Comprehensive income (loss)	$	6,133	$	(4,178	)	$	(3,799	)	$	(20,309	)

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

3

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIT

For the Nine Months Ended September 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	—	—		—			—			(5,321		)	—			(5,321		)
Employee related equity activity:
Shares based compensation expense	—	—		9,573			—			—			—			9,573
Issuance of common stock upon vesting of restricted stock units	496	5		(5		)	—			—			—			—
Effect of shares withheld to cover taxes	—	—		(2,568		)	—			—			—			(2,568		)
Total other comprehensive income	—	—		—			1,522			—			—			1,522
Balance, September 30, 2018	36,868	$	370	$	340,738		$	(164	)	$	(365,852	)	$	(696	)	$	(25,604	)

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

4

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For the Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities:
Net loss	$	(5,321	)	$	(20,258	)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization	27,552			29,594
(Benefit) provision for doubtful accounts	(578		)	6,850
Stock-based compensation expense	9,573			8,693
Deferred income taxes	(4,114		)	(7,179		)
Amortization of debt discounts and issuance costs	2,453			6,348
Loss on extinguishment of debt	16,998			—
Gain on sale and disposal of fixed assets	(2,537		)	(1,664		)
Changes in operating assets and liabilities (Note Q)	(6,867		)	(23,392		)
Net cash provided by (used in) operating activities	37,159			(1,008		)
Cash flows from investing activities:
Purchase of property, plant and equipment	(16,435		)	(11,237		)
Purchase of therapeutic program equipment leased to third parties under operating leases	(6,390		)	(3,714		)
Purchase of company-owned life insurance investment	(598		)	(555		)
Proceeds from sale of property, plant and equipment	3,583			4,185
Net cash used in investing activities	(19,840		)	(11,321		)
Cash flows from financing activities:
Borrowings under term loan, net of discount	501,467			—
Repayment of term loan	(434,400		)	(19,688		)
Borrowings under revolving credit agreement	3,000			140,965
Repayments under revolving credit agreement	(8,000		)	(105,965		)
Payment of employee taxes on stock-based compensation	(2,568		)	(1,367		)
Payment on seller notes	(2,116		)	(4,633		)
Payment of capital lease obligations	(942		)	(873		)
Payment of debt issuance costs	(6,757		)	(2,863		)
Payment of debt extinguishment costs	(8,436		)	—
Net cash provided by financing activities	41,248			5,576
Increase (decrease) in cash, cash equivalents and restricted cash	58,567			(6,753		)
Cash, cash equivalents and restricted cash, at beginning of period	4,779			9,412
Cash, cash equivalents and restricted cash, at end of period	$	63,346		$	2,659

	For the Nine Months Ended September 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	$	61,035	$	460
Restricted cash, at end of period	2,311		2,199
Cash, cash equivalents, and restricted cash, at end of period	$	63,346	$	2,659

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

5

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 interim unaudited 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 periods 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.

6

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 defined benefit plan expense” of $0.2 million and $0.2 million for the three months ended September 30, 2018 and 2017, respectively and $0.5 million and $0.6 million for the nine months ended September 30, 2018 and 2017, respectively.  Such reclassifications did not have a material effect on our condensed 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.

7

New Accounting Standards Issued, Not Yet Adopted

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 220).  The ASU is intended to improve the recognition and measurement of financial instruments.  The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).  This ASU is effective for public entities for fiscal years beginning after 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 August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715).  This ASU modifies the disclosure requirements for defined benefit and other postretirement plans.  This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs; while other disclosures have been added to address significant gains and losses related to changes in benefit obligations.  This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations.  The amendments in this ASU are effective for fiscal years ending after December 15, 2020 and for interim periods therein 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 August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers.  The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income.  The ASU is effective for public entities for fiscal years beginning after 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 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, 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 us  beginning January 1, 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.  We are evaluating how the new standard will impact our condensed consolidated financial statements, and currently anticipate that there will be a material increase to assets and lease liabilities for existing property leases representing our nationwide retail locations. In addition, we are evaluating the impact on presentation and timing of lease-related expenses for those leases which are currently recorded as financing leases on our balance sheet.

8

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:

	As of and for the Three Months Ended September 30, 2018
(in thousands)	As Reported			Effects of Adoption			Proforma balance without the adoption of ASC 606
Condensed Consolidated Statement of Operations
Net revenues	$	262,946		$	645		$	263,591
Other operating costs	30,999			736			31,735
Income from operations	15,924			(91		)	15,833
Income before income taxes	6,809			(91		)	6,718
Net income	4,369			(91		)	4,278
Comprehensive income	6,133			(91		)	6,042
Condensed Consolidated Balance Sheet
Assets
Deferred income taxes	$	71,967		$	24		$	71,991
Total assets	675,629			24			675,653
Liabilities
Accrued expenses and other current liabilities	54,790			92			54,882
Total current liabilities	148,872			92			148,964
Total liabilities	701,233			92			701,325
Shareholders’ Deficit
Accumulated deficit	(365,852		)	(68		)	(365,920		)
Total shareholders’ deficit	(25,604		)	(68		)	(25,672		)

9

	As of and for the Nine Months Ended September 30, 2018
(in thousands)	As Reported			Effects of Adoption			Proforma balance without the adoption of ASC 606
Condensed Consolidated Statement of Operations
Net revenues	$	763,907		$	2,866		$	766,773
Other operating costs	92,631			2,937			95,568
Income from operations	36,876			(71		)	36,805
Loss before income taxes	(9,169		)	(71		)	(9,240		)
Net loss	(5,321		)	(71		)	(5,392		)
Comprehensive loss	(3,799		)	(71		)	(3,870		)
Condensed Consolidated Balance Sheet
Assets
Deferred income taxes	$	71,967		$	(249	)	$	71,718
Total assets	675,629			(249		)	675,380
Liabilities
Accrued expenses and other current liabilities	54,790			(956		)	53,834
Total current liabilities	148,872			(956		)	147,916
Total liabilities	701,233			(956		)	700,277
Shareholders’ Deficit
Accumulated deficit	(365,852		)	707			(365,145		)
Total shareholders’ deficit	(25,604		)	707			(24,897		)

The adoption of ASC 606 resulted in deferring $1.0 million of net revenue from our Patient Care segment as of September 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 nine months ended September 30, 2018 were $0.6 million and $2.9 million, respectively, and are considered implicit price concessions under ASC 606 and are recorded as a reduction to net revenue.

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.

10

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 nine months ended September 30, 2018 and 2017:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	2018		2017		2018		2017
Patient Care Segment
Medicare	$	69,724	$	65,759	$	197,461	$	186,606
Medicaid	33,597		32,557		96,993		95,524
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)	78,333		79,804		226,761		234,866
Veterans Administration	19,317		18,662		56,873		52,995
Private Pay	13,109		13,855		42,657		44,504
Total	$	214,080	$	210,637	$	620,745	$	614,495

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.

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 nine months ended September 30, 2018 and 2017:

11

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	2018		2017		2018		2017
Products & Services Segment
Distribution services, net of intersegment revenue eliminations	$	34,666	$	32,439	$	100,700	$	95,030
Therapeutic solutions	14,200		14,890		42,462		45,508
Total	$	48,866	$	47,329	$	143,162	$	140,538

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 zero and 48,502 for the three and nine months ended September 30, 2018 and 867,930 and 475,905 for the three and nine months ended September 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.

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

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
(in thousands except per share data)	2018		2017			2018			2017
Net income (loss)	$	4,369	$	(4,161	)	$	(5,321	)	$	(20,258	)
Weighted average shares outstanding - basic	36,857		36,340			36,717			36,239
Effect of potentially dilutive restricted stock units and options (1)	700		—			—			—
Weighted average shares outstanding - diluted	37,557		36,340			36,717			36,239
Basic income (loss) per share	$	0.12	$	(0.11	)	$	(0.14	)	$	(0.56	)
Diluted income (loss) per share	$	0.12	$	(0.11	)	$	(0.14	)	$	(0.56	)

(1) In accordance with ASC 260 - Earnings Per Share, during periods of a net loss, shares used to compute diluted per share amount exclude potentially dilutive shares related to unvested restricted stock units and unexercised options.  For the three months ended September 30, 2017, 224,663 shares were excluded.  For the nine month periods ended September 30, 2018 and 2017, shares excluded were 680,444 and 295,089, respectively.

NOTE C — ACCOUNTS RECEIVABLE, NET

Accounts receivable, net represents 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 receivable 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.

12

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 September 30, 2018, and December 31, 2017 is comprised of the following:

	As of September 30, 2018									As of December 31, 2017
(in thousands)	Patient Care			Products & Services			Consolidated			Patient Care			Products & Services			Consolidated
Accounts receivable, before allowances	$	170,030		$	26,105		$	196,135		$	193,150		$	23,494		$	216,644
Allowances for estimated implicit price concessions arising from:
Payor disallowances	(52,267		)	—			(52,267		)	(56,233		)	—			(56,233		)
Patient non-payments	(7,716		)	—			(7,716		)	—			—			—
Accounts receivable, gross	110,047			26,105			136,152			136,917			23,494			160,411
Allowance for doubtful accounts	—			(3,706		)	(3,706		)	(9,894		)	(4,171		)	(14,065		)
Accounts receivable, net	$	110,047		$	22,399		$	132,446		$	127,023		$	19,323		$	146,346

NOTE D — INVENTORIES

Our inventories are comprised of the following:

(in thousands)	As of September 30, 2018		As of December 31, 2017
Raw materials	$	20,049	$	19,929
Work in process	12,649		8,996
Finished goods	39,903		40,213
Total inventories	$	72,601	$	69,138

NOTE E — PROPERTY PLANT AND EQUIPMENT, NET

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

(in thousands)	As of September 30, 2018			As of December 31, 2017
Land	$	644		$	644
Buildings	25,475			28,180
Furniture and fixtures	14,231			12,968
Machinery and equipment	27,551			26,838
Therapeutic program equipment leased to third parties under operating leases	29,059			31,100
Leasehold improvements	106,885			100,999
Computers and software	69,105			65,455
Total property, plant, and equipment, gross	272,950			266,184
Less: accumulated depreciation	(183,526		)	(172,569		)
Total property, plant, and equipment, net	$	89,424		$	93,615

Total depreciation expense was approximately $7.5 million and $7.3 million for the three months ended September 30, 2018 and 2017, respectively and $22.3 million and $22.4 million for the nine months ended September 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.

13

The carrying value of goodwill as of September 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 September 30, 2018 and December 31, 2017 are as follows:

	As of September 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	$	30,563	$	(22,671	)	$	—		$	7,892	$	36,439	$	(24,267	)	$	—		$	12,172
Other intangible assets	14,996		(10,551		)	—			4,445		15,820		(10,352		)	—			5,468
Definite-lived intangible assets	45,559		(33,222		)	—			12,337		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	$	54,629	$	(33,222	)	$	(4,770	)	$	16,637	$	61,329	$	(34,619	)	$	(4,770	)	$	21,940

Total intangible amortization expense was approximately $1.5 million and $2.3 million for the three months ended September 30, 2018 and 2017, respectively and $5.3 million and $7.2 million for the nine months ended September 30, 2018 and 2017, respectively.

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)	$	1,436
2019	3,762
2020	3,509
2021	927
2022	860
Thereafter	1,843
Total	$	12,337

NOTE G — OTHER CURRENT ASSETS AND OTHER ASSETS

Other current assets consist of the following:

(in thousands)	As of September 30, 2018		As of December 31, 2017
Non-trade receivables	$	7,582	$	7,668
Prepaid rent	4,454		4,248
Prepaid maintenance	3,548		3,134
Restricted cash	2,311		3,271
Prepaid insurance	739		271
Prepaid benefits	621		368
Other	1,487		1,928
Total other current assets	$	20,742	$	20,888

Other assets consist of the following:

14

(in thousands)	As of September 30, 2018		As of December 31, 2017
Cash surrender value of company owned life insurance	$	3,097	$	2,340
Non-trade receivables	2,451		2,407
Surety bond	2,000		2,500
Deposits	2,083		2,193
Derivative asset	2,819		—
Other	261		—
Total other assets	$	12,711	$	9,440

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

Accrued expenses and other current liabilities consist of:

(in thousands)	As of September 30, 2018		As of December 31, 2017
Patient prepayments, deposits and refunds payable	$	25,299	$	30,194
Accrued professional fees	4,585		11,612
Insurance and self-insurance accruals	9,136		8,901
Accrued sales taxes and other taxes	6,800		6,335
Derivative liability	515		—
Accrued interest payable	501		845
Other current liabilities	7,954		8,421
Total accrued expenses and other current liabilities	$	54,790	$	66,308

Other liabilities consist of:

(in thousands)	As of September 30, 2018		As of December 31, 2017
Supplemental executive retirement plan obligations	$	20,751	$	21,842
Long-term insurance accruals	9,291		9,531
Deferred tenant improvement allowances	8,265		7,361
Unrecognized tax benefits	5,404		5,219
Deferred rent	4,580		4,909
Other	1,104		1,391
Total other liabilities	$	49,395	$	50,253

NOTE I — INCOME TAXES

We recorded a provision from income tax of $2.4 million and a benefit from income tax of $1.6 million for the three months ended September 30, 2018 and 2017, respectively.  The effective tax rate was 35.8% and 27.5% for the three months ended September 30, 2018 and 2017, respectively.  We recorded a benefit from income tax of $3.8 million and a benefit of $7.0 million for the nine months ended September 30, 2018 and 2017, respectively.  The effective tax rate was 42.0% and 25.8% for the nine months ended September 30, 2018 and 2017, respectively.

The increase in the effective tax rate for the three months ended September 30, 2018 compared with the three months ended September 30, 2017 is primarily attributable to income before income tax for the three months ended September 30, 2018 compared to loss before income tax for the three months ended September 30, 2017, partially offset by the changes enacted by the Tax Act.  Our effective tax rate for the three months ended September 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 September 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.

15

The decrease in the income tax benefit for the nine months ended September 30, 2018 compared with the nine months ended September 30, 2017 is largely driven by the decreased loss before taxes for the period, partially offset by increased estimated annual effective tax rate applied to the quarter.  The increase in estimated annual effective tax rate was driven by increased estimated permanent differences and decreased estimated loss before taxes.  Our effective tax rate for the nine months ended September 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 a discrete item during the period.  Our effective tax rate for the nine months ended September 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 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 nine months ended September 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 ended December 31, 2018 when the analysis is complete.

NOTE J — LONG-TERM DEBT

Long-term debt consists of the following:

(in thousands)	As of September 30, 2018			As of December 31, 2017
Credit Agreement, dated March 6, 2018
Revolving credit facility	$	—		$	—
Term loan B	502,475			—
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	3,796			5,912
Financing leases and other	15,424			18,169
Total debt before unamortized discount and debt issuance costs	521,695			460,956
Unamortized discount and debt issuance costs, net	(9,702		)	(10,692		)
Total debt	511,993			450,264
Current portion of long-term debt	9,027			4,336
Long-term debt	$	502,966		$	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 September 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

16

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.

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 nine months ended September 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 September 30, 2018, the weighted average interest rate on outstanding borrowings under our Term loan B facility was approximately 5.6%.  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: i) requirements that we maintain certain financial ratios at prescribed levels, ii) a prohibition on payment of dividends and other distributions and iii) restrictions on our ability and certain of our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions outside the healthcare industry.  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 September 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

17

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 September 30, 2018 were as follows (in thousands):

2018 (remainder of year)	$	2,897
2019	8,480
2020	7,329
2021	6,497
2022	6,098
Thereafter	490,394
Total debt before unamortized discount and debt issuance costs, net	521,695
Unamortized discount and debt issuance costs, net	(9,702		)
Total debt	$	511,993

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 September 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 September 30, 2018 was $502.5 million compared to its fair value of $500.6 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.

18

As of September 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.

The carrying value of our outstanding subordinated promissory notes issued in connection with acquisitions (“Seller Notes”) as of September 30, 2018 and December 31, 2017 was $3.8 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 and nine months ended September 30, 2018, such derivatives were used to hedge certain variable cash flows associated with existing variable-rate debt, whereby we pay the counter-party a fixed rate of 2.77% and receive floating payments  based on the 1-month LIBOR.  As of September 30, 2018, our swaps had a notional value outstanding of $325.0 million. The remaining contractual term of the interest rate swap is 5.5 years. 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 Income (Loss)

The following table presents the activity of cash flow hedges included in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2018:

(in thousands)	Cash Flow Hedges
Balance as of June 30, 2018	$	24
Unrealized gain recognized in other comprehensive income (loss), net of tax	1,171
Reclassification to interest expense, net	567
Balance as of September 30, 2018	$	1,762
Balance as of December 31, 2017	$	—
Unrealized gain recognized in other comprehensive income (loss), net of tax	251
Reclassification to interest expense, net	1,511
Balance as of September 30, 2018	$	1,762

19

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

	As of September 30, 2018				As of December 31, 2017
(in thousands)	Assets		Liabilities		Assets		Liabilities
Derivatives designated as cash flow hedging instruments:
Other assets	$	2,819	$	—	$	—	$	—
Accrued expenses and other current liabilities	—		515		—		—

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 $3.7 million and $3.6 million, respectively, of stock-based compensation expense for the three months ended September 30, 2018 and 2017 and a total of approximately $9.6 million and $8.7 million for the nine months ended September 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 nine months ended September 30, 2018 and 2017 is as follows:

Change in Benefit Obligation

(in thousands)	2018			2017
Benefit Obligation as of June 30	$	19,388		$	19,985
Service cost	92			85
Interest cost	150			167
Payments	(13		)	(78		)
Benefit Obligation as of September 30	$	19,617		$	20,159
Benefit obligation as of December 31, 2017 and 2016, respectively	$	20,793		$	21,304
Service cost	275			255
Interest cost	450			501
Payments	(1,901		)	(1,901		)
Benefit obligation as of September 30	$	19,617		$	20,159

20

Amounts Recognized in the Condensed Consolidated Balance Sheets:

(in thousands)	September 30, 2018		December 31, 2017
Accrued expenses and other current liabilities	$	1,913	$	1,913
Other liabilities	17,704		18,880
Total accrued liabilities	$	19,617	$	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 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 September 30, 2018 and 2017, the estimated accumulated obligation benefit is $2.9 million and $2.5 million, respectively, of which $2.6 million and $2.2 million is funded and $0.3 million and $0.3 million is unfunded at September 30, 2018 and 2017, respectively.

In connection with the DC SERP benefit obligation, we maintain a company owned life insurance 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 September 30, 2018, $1.0 million of the non-cancellable purchase commitment was outstanding and is due and payable by April of 2019.  As of September 30, 2018, our reserve associated with the non-cancellable purchase commitment was $2.4 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.

21

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.  On August 20, 2018, Hanger, Inc. and George McHenry filed a petition for panel rehearing and a petition for rehearing en banc with the Court of Appeals.  On September 10, 2018 the Court of Appeals asked plaintiffs to file a response to the petition for rehearing en banc, and plaintiffs filed an opposition to the petition for rehearing en banc on September 17, 2018.  Both petitions are pending with the Court of Appeals.  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.

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 subsequently 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, and we have provided a redacted version of the report to plaintiff’s counsel.  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 our results of operations.

22

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 operate 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.

Settlements

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 do not anticipate receipt of 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 nine months ended September 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 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 in the year-to-date period September 30, 2018.  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 year-to-date period ended September 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.

23

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.

(in thousands)	Patient Care		Products & Services		Corporate & Other			Consolidating Adjustments			Total
Three Months Ended September 30, 2018
Net revenue
Third party	$	214,080	$	48,866	$	—		$	—		$	262,946
Intersegments	—		48,945		—			(48,945		)	—
Total net revenue	214,080		97,811		—			(48,945		)	262,946
Material costs
Third party suppliers	58,395		26,410		—			—			84,805
Intersegments	6,300		42,645		—			(48,945		)	—
Total material costs	64,695		69,055		—			(48,945		)	84,805
Personnel expenses	77,806		13,047		—			—			90,853
Other expenses	34,426		6,306		21,682			—			62,414
Depreciation & amortization	4,651		2,564		1,735			—			8,950
Income (loss) from operations	32,502		6,839		(23,417		)	—			15,924
Interest expense, net	7,984		3,233		(2,278		)	—			8,939
Non-service defined benefit plan expense	—		—		176			—			176
Income (loss) before income taxes	24,518		3,606		(21,315		)	—			6,809
Provision for income taxes	—		—		2,440			—			2,440
Net income (loss)	$	24,518	$	3,606	$	(23,755	)	$	—		$	4,369

(in thousands)	Patient Care		Products & Services		Corporate & Other			Consolidating Adjustments			Total
Three Months Ended September 30, 2017
Net revenue
Third party	$	210,637	$	47,329	$	—		$	—		$	257,966
Intersegments	—		45,114		—			(45,114		)	—
Total net revenue	210,637		92,443		—			(45,114		)	257,966
Material costs
Third party suppliers	56,748		25,597		—			—			82,345
Intersegments	5,997		39,117		—			(45,114		)	—
Total material costs	62,745		64,714		—			(45,114		)	82,345
Personnel expenses	78,161		11,904		—			—			90,065
Other expenses	35,861		6,251		24,272			—			66,384
Depreciation & amortization	5,324		2,429		1,879			—			9,632
Income (loss) from operations	28,546		7,145		(26,151		)	—			9,540
Interest expense, net	8,123		3,275		3,699			—			15,097
Non-service defined benefit plan expense	—		—		184			—			184
Income (loss) before income taxes	20,423		3,870		(30,034		)	—			(5,741		)
Benefit for income taxes	—		—		(1,580		)	—			(1,580		)
Net income (loss)	$	20,423	$	3,870	$	(28,454	)	$	—		$	(4,161	)

24

(in thousands)	Patient Care		Products & Services		Corporate & Other			Consolidating Adjustments			Total
Nine Months Ended September 30, 2018
Net revenue
Third party	$	620,745	$	143,162	$	—		$	—		$	763,907
Intersegments	—		141,302		—			(141,302		)	—
Total net revenue	620,745		284,464		—			(141,302		)	763,907
Material costs
Third party suppliers	170,559		77,118		—			—			247,677
Intersegments	17,944		123,358		—			(141,302		)	—
Total material costs	188,503		200,476		—			(141,302		)	247,677
Personnel expenses	228,211		38,304		—			—			266,515
Other expenses	104,869		17,944		62,474			—			185,287
Depreciation & amortization	14,547		7,569		5,436			—			27,552
Income (loss) from operations	84,615		20,171		(67,910		)	—			36,876
Interest expense, net	22,429		9,745		(3,655		)	—			28,519
Loss on extinguishment of debt	—		—		16,998			—			16,998
Non-service defined benefit plan expense	—		—		528			—			528
Income (loss) before income taxes	62,186		10,426		(81,781		)	—			(9,169		)
Benefit for income taxes	—		—		(3,848		)	—			(3,848		)
Net income (loss)	$	62,186	$	10,426	$	(77,933	)	$	—		$	(5,321	)

(in thousands)	Patient Care		Products & Services		Corporate & Other			Consolidating Adjustments			Total
Nine Months Ended September 30, 2017
Net revenue
Third party	$	614,495	$	140,538	$	—		$	—		$	755,033
Intersegments	—		131,484		—			(131,484		)	—
Total net revenue	614,495		272,022		—			(131,484		)	755,033
Material costs
Third party suppliers	165,680		74,727		—			—			240,407
Intersegments	17,743		113,741		—			(131,484		)	—
Total material costs	183,423		188,468		—			(131,484		)	240,407
Personnel expenses	229,582		36,269		—			—			265,851
Other expenses	107,124		19,205		76,389			—			202,718
Depreciation & amortization	16,123		7,691		5,780			—			29,594
Income (loss) from operations	78,243		20,389		(82,169		)	—			16,463
Interest expense, net	24,409		9,909		8,879			—			43,197
Non-service defined benefit plan expense	—		—		552			—			552
Income (loss) from operations	53,834		10,480		(91,600		)	—			(27,286		)
Benefit for income taxes	—		—		(7,028		)	—			(7,028		)
Net income (loss)	$	53,834	$	10,480	$	(84,572	)	$	—		$	(20,258	)

25

NOTE Q — SUPPLEMENTAL CASH FLOW INFORMATION

Changes in operating assets and liabilities on cash flows from operating activities is as follows:

	For the Nine Months Ended September 30,
(in thousands)	2018			2017
Accounts receivable, net	$	14,464		$	1,772
Inventories	(3,463		)	(5,870		)
Other current assets	1,770			1,510
Income taxes	11,356			(584		)
Accounts payable	5,680			(348		)
Accrued expenses and other current liabilities	(13,061		)	(9,690		)
Accrued compensation related costs	(20,650		)	(6,942		)
Other liabilities	(2,963		)	(3,240		)
Changes in operating assets and liabilities on cash flows from operating activities	$	(6,867	)	$	(23,392	)

The supplemental disclosure requirements for the statements of cash flows are as follows:

	For the Nine Months Ended September 30,
(in thousands)	2018		2017
Additions to property, plant and equipment acquired through financing obligations	$	1,509	$	1,299
Retirements of financed property, plant and equipment and related obligations	3,558		135
Purchase of property, plant and equipment in accounts payable at period end	2,419		865

26

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This report contains statements that are forward-looking statements within the meaning of the federal securities laws.  Forward-looking statements include information concerning our liquidity and our possible or assumed future results of operations, including descriptions of our business strategies.  These statements often include words such as “believe,” “expect,” “project,” “potential,” “anticipate,” “intend,” “plan,” “estimate,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecasts” or similar words.  These statements are based on certain assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate in these circumstances.  We believe these judgments are reasonable, but you should understand that these statements are not guarantees of performance or results, and our actual results could differ materially from those expressed in the forward-looking statements due to a variety of important factors, both positive and negative, that may be revised or supplemented in subsequent reports.

These statements involve risks, estimates, assumptions, and uncertainties that could cause actual results to differ materially from those expressed in these statements and elsewhere in this report, and any claims, investigations, or proceedings arising as a result, as well as our ability to remediate the material weaknesses in our internal control over financial reporting described in Item 4. “Controls and Procedures” contained elsewhere in this report, changes in the demand for our O&P products and services, uncertainties relating to the results of operations or our acquired O&P patient care clinics, our ability to enter into and derive benefits from managed-care contracts, our ability to successfully attract and retain qualified O&P clinicians, federal laws governing the health care industry, uncertainties inherent in investigations and legal proceedings, governmental policies affecting O&P operations, and other risks and uncertainties generally affecting the health care industry.

Readers are cautioned that all forward-looking statements involve known and unknown risks and uncertainties including, without limitation, those described in Item 1A. “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”), some of which are beyond our control.  Although we believe that the assumptions underlying the forward-looking statements contained therein are reasonable, any of the assumptions could be inaccurate.  Therefore, there can be no assurance that the forward-looking statements included in our Quarterly Report on Form 10-Q will prove to be accurate.  Actual results could differ materially and adversely from those contemplated by any forward-looking statement.  In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.  We undertake no obligation to publicly release any revisions to any forward-looking statements in this discussion to reflect events and circumstances occurring after the date hereof or to reflect unanticipated events.  Forward-looking statements and our liquidity, financial condition, and results of operations may be affected by the risks set forth in Item 1A. “Risk Factors” contained in our 2017 Form 10-K or by other unknown risks and uncertainties.

Non-GAAP Measures

We refer to certain financial measures and statistics that are not in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  We utilize these non-GAAP measures in order to evaluate the underlying factors that affect our business performance and trends.  These non-GAAP measures should not be considered in isolation and should not be considered superior to, or as a substitute for, financial measures calculated in accordance with GAAP.  We have defined and provided a reconciliation of these non-GAAP measures to their most comparable GAAP measures.  The non-GAAP measures used in this Management’s Discussion and Analysis are as follows:

Adjusted Gross Revenue and Disallowed Revenue - “Adjusted gross revenue” reflects our gross billings after their adjustment to reflect estimated discounts established in our contracts with payors of health care claims.  Pursuant to our contracts with payors, a portion of our adjusted gross billings may be disallowed based on factors including physician documentation, patient eligibility, plan design, prior authorization, timeliness of filings or appeal, coding selection, failure by certain patients to pay their portion of claims, computational errors associated with sequestration, and other factors.  We refer to these and other amounts as being “disallowed revenue” or “payor disallowances.”  Our net revenue reflects adjusted gross revenue after reduction for the estimated aggregate amount of disallowed revenue for the applicable period.  To facilitate analysis of the comparability of our results, we provide these non-GAAP measures due to the significant changes that we have experienced in recent years in disallowed revenue which are further discussed below.

27

Same Clinic Revenues Per Day - measures the year-over-year change in revenue from clinics that have been open a full calendar year or more.  Examples of clinics not included in the same center population are closures and acquisitions.  Day-adjusted growth normalizes sales for the number of days a clinic was open in each comparable period.

Overview

Business Overview

General

We are a leading national provider of products and services that assist in enhancing or restoring the physical capabilities of patients with disabilities or injuries.  Built on the legacy of James Edward Hanger, the first amputee of the American Civil War, we and our predecessor companies have provided O&P services for over 150 years.  We provide 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.

Our Patient Care segment is primarily comprised of Hanger Clinic, which specializes in the design, fabrication, and delivery of custom O&P devices through 677 patient care clinics and 109 satellite locations in 44 states and the District of Columbia as of September 30, 2018.  We also provide payor network contracting services to other O&P providers through this segment.

Our Products & Services segment is comprised of our distribution services and our therapeutic solutions businesses.  As a leading provider of O&P products in the United States, we coordinate, through our distribution services business, the procurement and distribution of a broad catalog of O&P parts, componentry, and devices to independent O&P providers nationwide.  To facilitate speed and convenience, we deliver these products through our five distribution facilities that are located in Nevada, Georgia, Illinois, Pennsylvania and Texas.  The other business in our Products & Services segment is our therapeutic solutions business, which develops specialized rehabilitation technologies and provides evidence-based clinical programs for post-acute rehabilitation to patients at approximately 4,000 skilled nursing and post-acute providers nationwide.

For the three and nine months ended September 30, 2018, our net revenues were $262.9 million and $763.9 million, respectively, and we recorded net income of $4.4 million and a net loss of $5.3 million, respectively.  For the three and nine months ended September 30, 2017, our net revenues were $258.0 million and $755.0 million, respectively, and we recorded net loss of $4.2 million and a net loss of $20.3 million, respectively.

Industry Overview

We estimate that approximately $4.1 billion is spent in the United States each year for orthotic and prosthetic products and services.  We estimate that our Patient Care segment currently accounts for approximately 20% of market share, providing a comprehensive portfolio of orthotic, prosthetic, and post-operative solutions to patients in acute, post-acute, and patient care clinic settings.

The traditional O&P patient care industry is highly fragmented and is characterized by local, independent O&P businesses.  We do not believe that any single competitor accounts for more than 2% of the country’s total estimated O&P patient care clinic revenues.

The industry is characterized by stable, recurring revenues, primarily resulting from new patients as well as the need for periodic replacement and modification of O&P devices.  We anticipate that the demand for O&P services will continue to grow as the nation’s population increases, and as a result of several trends, including the aging of the U.S. population, there will be an increase in the prevalence of disease-related disability and the demand for new and advanced devices.  We believe the typical replacement time for prosthetic devices is three to five years, while the typical replacement time for orthotic devices varies, depending on the device.

We estimate that approximately $1.7 billion is spent in the United States each year by providers of O&P patient care services for the O&P products, components, devices, and supplies used in their businesses.  Our Products & Services segment distributes to independent providers of O&P services and to our own patient care clinics.  We estimate that our distribution sales account for approximately 8% of the market for O&P products, components, devices, and supplies (excluding sales to our Patient Care segment).

28

We estimate the market for rehabilitation technologies, integrated clinical programs, and clinician training in skilled nursing facilities (“SNFs”) to be approximately $150 million annually.  We currently provide these products and services to approximately 25% of the estimated 15,000 SNFs located in the U.S.  We estimate the market for rehabilitation technologies, clinical programs, and training within the broader post-acute rehabilitation markets to be approximately $400 million annually.  We do not currently provide a meaningful amount of products and services to this broader market.

Business Description

Patient Care

Our Patient Care segment employs approximately 1,500 clinical prosthetists, orthotists, and pedorthists, which we refer to as clinicians, substantially all of which are certified by either the American Board for Certification (“ABC”) or the Board of Certification of Orthotists and Prosthetists, which are the two boards that certify O&P clinicians.  To facilitate timely service to our patients, we also employ technicians, fitters, and other ancillary providers to assist its clinicians in the performance of their duties.  Through this segment, we additionally provide network contracting services to independent providers of O&P through our “Linkia” business.

Patients are typically referred to Hanger Clinic by an attending physician who determines a patient’s treatment and writes a prescription.  Our clinicians then consult with both the referring physician and the patient with a view toward assisting in the design of an orthotic or prosthetic device to meet the patient’s needs.  O&P devices are increasingly technologically advanced and custom designed to add functionality and comfort to patients’ lives, shorten the rehabilitation process, and lower the cost of rehabilitation.

Based on the prescription written by a referring physician, our clinicians examine and evaluate the patient and either design a custom device or, in the case of certain orthotic needs, utilize a non-custom device, including, in appropriate circumstances, an “off the shelf” device, to address the patient’s needs.  When fabricating a device, our clinicians ascertain the specific requirements, componentry, and measurements necessary for the construction of the device.  Custom devices are constructed using componentry provided by a variety of third party manufacturers who specialize in O&P, coupled with sockets and other elements that are fabricated by our clinicians and technicians, to meet the individual patient’s physical and ambulatory needs.  Our clinicians and technicians typically utilize castings, electronic scans, and other techniques to fabricate items that are specialized for the patient.  After fabricating the device, a fitting process is undertaken and adjustments are made to ensure the achievement of proper alignment, fit, and patient comfort.  The fitting process often involves several stages to successfully achieve desired functional and cosmetic results.

Given the differing physical weight and size characteristics, location of injury or amputation, capability for physical activity and mobility, cosmetic and other needs of each individual patient, each fabricated prosthesis and orthosis is customized for each particular patient.  These custom devices are commonly fabricated at one of our regional or national fabrication facilities.

We have earned a reputation within the O&P industry for the development and use of innovative technology in our products, which has increased patient comfort and capability and can significantly enhance the rehabilitation process.  Frequently, our proprietary Insignia scanning system is used in the fabrication process.  The Insignia system scans the patient and produces an accurate computer-generated image, resulting in a faster turnaround for the patient’s device and a more professional overall experience.

In recent years, we have established a centralized revenue cycle management organization that assists our clinics in pre-authorization, patient eligibility, denial management, collections, payor audit coordination, and other accounts receivable processes.

The principal reimbursement sources for our services are:

·Commercial private payors and other non-governmental organizations, which consist of individuals, rehabilitation providers, commercial insurance companies, health management organizations (“HMOs”), preferred provider organizations (“PPOs”), hospitals, vocational rehabilitation centers, workers’ compensation programs, third party administrators, and similar sources;

·Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain disabled persons;

29

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

·the U.S. Department of Veterans Affairs.

We typically enter into contracts with third party payors that allow us to perform O&P services for a referred patient and to be paid under the contract with the third party payor.  These contracts usually have a stated term of one to three years.  These contracts generally may be terminated without cause by either party on 60 to 90 days’ notice or on 30 days’ notice if we have not complied with certain licensing, certification, program standards, Medicare or Medicaid requirements, or other regulatory requirements.  Reimbursement for services is typically based on a fee schedule negotiated with the third party payor that reflects various factors, including market conditions, geographic area, and number of persons covered.  Many of our commercial contracts are indexed to the commensurate Medicare fee schedule that relates to the products or services being provided.

Government reimbursement is comprised of Medicare, Medicaid, and the U.S. Department of Veterans Affairs.  These payors set maximum reimbursement levels for O&P services and products.  Medicare prices are adjusted each year based on the Consumer Price Index for All Urban Consumers (“CPI-U”) unless Congress acts to change or eliminate the adjustment.  The CPI-U is adjusted further by an efficiency factor (the “Productivity Adjustment” or the “Multi-Factor Productivity Adjustment”) in order to determine the final rate adjustment each year.  There can be no assurance that future adjustments will not reduce reimbursements for O&P services and products from these sources.

We, and the O&P industry in general, are subject to various Medicare compliance audits, including Recovery Audit Contractor (“RAC”) audits, Comprehensive Error Rate Testing (“CERT”) audits, Targeted Probe and Educate (“TPE”) audits, and Zone Program Integrity Contractor (“ZPIC”) audits.  TPE audits are generally pre-payment audits, while RAC, CERT, and ZPIC audits are generally post-payment audits.  The recently implemented TPE audits have replaced the previous Medicare Administrative Contractor (“MAC”) audits.  Adverse post-payment audit determinations generally require Hanger to reimburse Medicare for payments previously made, while adverse pre-payment audit determinations generally result in the denial of payment.  In either case, we can request a redetermination or appeal, if we believe the adverse determination is unwarranted, which can take an extensive period of time to resolve, currently up to six years or more.

Products & Services

Through our wholly-owned subsidiary, Southern Prosthetic Supply, Inc. (“SPS”), we distribute O&P components to independent O&P clinics and other customers.  Through our internal “supply chain” organization, we purchase, warehouse and distribute over 400,000 SKUs from more than 300 different manufacturers through SPS or directly to our own clinics within our Patient Care segment.  Our warehousing and distribution facilities in Nevada, Georgia, Illinois, Pennsylvania, and Texas, provide us with the ability to deliver products to the vast majority of our customers in the United States within two business days.  Through our SureFit subsidiary, we also manufacture and sell therapeutic footwear for diabetic patients in the podiatric market.  We also operate the Hanger Fabrication Network, which fabricates custom O&P devices for our patient care clinics as well as for independent O&P clinics.

Our distribution services business enables us to:

·centralize our purchasing and thus lower our material costs by negotiating purchasing discounts from manufacturers;

·better manage our patient care clinic inventory levels and improve inventory turns;

·improve inventory quality control;

·encourage our patient care clinics to use the most clinically appropriate products; and

·coordinate new product development efforts with key vendors.

Through our wholly-owned subsidiary, Accelerated Care Plus Corp., our therapeutic solutions business is a leading provider of rehabilitation technologies and integrated clinical programs to post-acute care and rehabilitation providers.  Our value proposition is to provide our customers with a full-service “total solutions” approach encompassing proven medical technology, evidence based clinical programs, and ongoing clinician education and training.  Our services support increasingly advanced treatment options for a broader patient population and more medically complex conditions.  We serve approximately 4,000 skilled nursing and post-acute providers nationwide.

30

Effect of Delay in Financial Filings

As discussed in our 2017 Form 10-K, due to prior restatements and related issues, we had been delayed in the preparation and filing of our financial statements in recent years.  In connection with our efforts to restate our prior financial statements, remediate our material weaknesses, regain our timely filing status, and undertake related activities, we have incurred third party professional fees in excess of the amounts we estimate that we would have otherwise incurred.  The estimated professional fees associated with these efforts are as follows:

(in thousands)					Balance to be Paid
For the Three Months Ended	Expensed		Paid		in Future Periods
March 31, 2017	$	11,537	$	14,766	$	19,672
June 30, 2017	7,567		13,765		13,474
September 30, 2017	6,839		6,430		13,883
December 31, 2017	6,358		9,956		10,285
March 31, 2018	3,700		7,755		6,230
June 30, 2018	2,940		5,938		3,232
September 30, 2018	2,230		2,297		3,165

We currently estimate that during 2018, we will expend a total of $13.0 million in excess professional fees.  We expect to continue to incur professional fees as we focus on the remediation of our continuing material weaknesses in internal controls over financial reporting.  Due to the ongoing material weaknesses in our controls over financial reporting, we currently undertake additional substantive procedures to test and verify financial statement amounts in connection with the preparation of our financial statements.

Reimbursement Trends

In our Patient Care segment, we are reimbursed primarily through employer-based plans offered by commercial insurance carriers, Medicare, Medicaid, and the VA.  Patient Care constitutes 81.3% and 81.4% of our net revenue for the nine months ended September 30, 2018 and 2017, respectively.  Our remaining net revenue is provided by our Products & Services segment which derives its net revenue from commercial transactions with independent O&P providers, healthcare facilities, and other customers.  In contrast to net revenues from our Patient Care segment, payment for these products and services are not directly subject to third party reimbursement from health care payors.

The amount of our reimbursement varies based on the nature of the O&P device we fabricate for our patients.  Given the particular physical weight and size characteristics, location of injury or amputation, capability for physical activity and mobility, cosmetic and other needs of each individual patient, each fabricated prostheses and orthoses is customized for each particular patient.  The nature of this customization and the manner by which our claims submissions are reviewed by payors makes our reimbursement process administratively difficult.

To receive reimbursement for our work, we must ensure that our clinical, administrative, and billing personnel receive and verify certain medical and health plan information, record detailed documentation regarding the services we provide, and accurately and timely perform a number of claims submission and related administrative tasks.  Traditionally, we have performed these tasks in a manual fashion and on a decentralized basis.  In recent years, due to increases in payor pre-authorization processes, documentation requirements, pre-payment reviews and pre- and post-payment audits, our ability to successfully undertake these tasks using our traditional approach has become increasingly challenging.  We believe these changes in industry trends have been brought about in part by increased nationwide efforts to reduce health care costs.

31

A measure of our effectiveness in securing reimbursement for our services can be found in the degree to which payors ultimately disallow payment of our claims.  Payors can deny claims due to their determination that a physician who referred a patient to us did not sufficiently document that a device was medically necessary or clearly establish the ambulatory (or “activity”) level of a patient.  Claims can also be denied based on 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 and for various other reasons.  If any portion of, or administrative factor within, our claim is found by the payor to be lacking, then the entirety of the claim amount may be denied reimbursement.  Due to the increasing demands of these processes, the level and capability of our staffing, as well as our material weaknesses and other considerations, our consolidated disallowed revenue and its relationship to consolidated adjusted gross revenue increased over historical levels to a peak level in 2014.

Commencing in late 2014 and continuing through today, we have taken a number of actions to halt and reverse these disallowed revenue trends.  These initiatives included: (i) the retention of consultants and creation of a central revenue cycle management function; (ii) addressing the issues identified in our patient management and electronic health record system; and (iii) the establishment of new clinic-level procedures and training regarding the collection of supporting documentation and the importance of diligence in our claims submission processes.  Through 2017, we saw significant improvements in these rates.  While we intend to continue to work towards further improvements in our procedures through the use of technology within our clinic and revenue cycle functions, we do not currently foresee that future reductions in disallowed revenue will be as achievable or substantial as the improvements realized during the three year period of 2015 through 2017.

Under both ASC 606 and the previous revenue recognition guidance ASC 605, Revenue Recognition, 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.

Implicit price concessions such as payor disallowances and patient non-payments for the Patient Care segment for the three and nine months ended September 30, 2018 and 2017 are as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(dollars in thousands)	2018			2017			2018			2017
Net revenue	$	214,080		$	210,637		$	620,745		$	614,495
Estimated implicit price concessions arising from:
Payor disallowances	10,584			9,557			29,306			28,251
Patient non-payments	736			—			2,937			—
Adjusted gross revenue	$	225,400		$	220,194		$	652,988		$	642,746
Payor disallowances	$	10,584		$	9,557		$	29,306		$	28,251
Patient non-payments	736			—			2,937			—
Bad debt expense	—			2,267			—			6,551
Payor disallowances, patient non-payments and bad debt expense	$	11,320		$	11,824		$	32,243		$	34,802
Payor disallowances %	4.7		%	4.3		%	4.5		%	4.4		%
Patient non-payments %	0.3		%	—		%	0.4		%	—		%
Bad debt expense %	—		%	1.1		%	—		%	1.0		%
Percent of adjusted gross revenue	5.0		%	5.4		%	4.9		%	5.4		%

Settlements

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 nine months ended September 30, 2018.

32

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 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 for the year-to-date period ended September 30, 2018 by this accrued interest amount.

New System Implementation

As discussed in our 2017 Form 10-K, in recent years we have been undertaking the implementation of a new patient management and electronic health record system at our patient care clinics.  As of September 30, 2018, we have completed the installation of this system in approximately 88% of our clinic locations.  We currently estimate that we will incur approximately $4.5 million in training, travel, and other implementation expense in 2018 related to this implementation.

Acquisitions

During the year-to-date period ending September 30, 2018, we have not completed any acquisitions, and have not undertaken any acquisitions for a period of time extending from early 2015 through the end of this most recent quarter.  However, we will recommence our acquisition of O&P clinics similar to those that we operate through our Patient Care segment during the fourth quarter of this year.  We do not believe initial acquisitions undertaken in the fourth quarter will have a material impact on our consolidated financial statements.

Seasonality

We believe our business is affected by the degree to which patients have otherwise met the deductibles for which they are responsible in their medical plans during the course of the year.  The first quarter is normally our lowest relative net revenue quarter, followed by the second and third quarters, which are somewhat higher and consistent with one another, and, due to the general fulfillment by patients of their health plan co-payments and deductible requirements towards the year’s end, our fourth quarter is normally our highest revenue producing quarter.

Our results are also affected, to a lesser extent, by our holding of an education fair in the first quarter of each year.  This one-week event is conducted to assist our clinicians in maintaining their training and certification requirements and to facilitate a national meeting with our clinical leaders.  We also invite manufacturers of the componentry for the devices we fabricate to these annual events so they can demonstrate their products and otherwise assist in our training process.  During the first quarter of 2018 and 2017, we spent approximately $2.3 million and $2.0 million, respectively, on travel and other costs associated with this one-week event.  In addition to the costs we incur associated with this annual event, we also lose the productivity of a significant portion of our clinicians during the one-week period in which this event occurs, which contributes to the lower seasonal revenue level we experience during the first quarter of each year.

Our first quarter cash flows from operations are also adversely affected as compared with other quarters due to the payment of our annual incentive compensation during that period.

33

Critical Accounting Policies

We prepare our financial statements in accordance with GAAP.  The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.  GAAP provides the framework from which to make these estimates, assumptions, and disclosures.  We have chosen accounting policies within GAAP that management believes are appropriate to fairly present, in all material respects, our operating results and financial position.  We believe the following accounting policies are critical to understanding our results of operations and the more significant judgments and estimates used in the preparation of our consolidated financial statements:

·Revenue recognition

·Accounts receivable, net

·Inventories

·Business combinations

·Goodwill and other intangible assets, net

·Income taxes

The use of different estimates, assumptions, or judgments could have a material effect on reported amounts of assets, liabilities, revenue, expenses, and related disclosures as of the date of the financial statements and during the reporting period.  These critical accounting policies are described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2017, under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note A - “Organization and Summary of Significant Accounting Policies” contained within these condensed consolidated financial statements.

Results of Operations

Our results of operations for the three months ended September 30, 2018 and 2017 were as follows (unaudited):

	For the Three Months Ended September 30,					Percent Change
(in thousands)	2018		2017			2018 v 2017
Net revenues	$	262,946	$	257,966		1.9	%
Material costs	84,805		82,345			3.0	%
Personnel costs	90,853		90,065			0.9	%
Other operating costs	30,999		33,184			(6.6	)%
General and administrative expenses	28,308		25,356			11.6	%
Professional accounting and legal fees	3,107		7,844			(60.4	)%
Depreciation and amortization	8,950		9,632			(7.1	)%
Operating expenses	247,022		248,426			(0.6	)%
Income from operations	15,924		9,540			66.9	%
Interest expense, net	8,939		15,097			(40.8	)%
Non-service defined benefit plan expense	176		184			(4.3	)%
Income (loss) before income taxes	6,809		(5,741		)	(218.6	)%
Provision (benefit) for income taxes	2,440		(1,580		)	(254.4	)%
Net income (loss)	$	4,369	$	(4,161	)	(205.0	)%

During these periods, our operating expenses as a percentage of net revenue were as follows:

34

	For the Three Months Ended September 30,
	2018		2017
Material costs	32.3	%	31.9	%
Personnel costs	34.6	%	34.9	%
Other operating costs	11.6	%	13.0	%
General and administrative expenses	10.8	%	9.8	%
Professional accounting and legal fees	1.2	%	3.0	%
Depreciation and amortization	3.4	%	3.7	%
Operating expenses	93.9	%	96.3	%

For the Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017

Net revenue.  Net revenue for the three months ended September 30, 2018 was $262.9 million, an increase of $5.0 million, or 1.9%, from $258.0 million for the three months ended September 30, 2017.  Net revenue by operating segment, after elimination of intersegment activity, was as follows:

	For the Three Months Ended September 30,						Percent
(in thousands)	2018		2017		Change		Change
Patient Care	$	214,080	$	210,637	$	3,443	1.6	%
Products & Services	48,866		47,329		1,537		3.2	%
Net revenue	$	262,946	$	257,966	$	4,980	1.9	%

Patient Care net revenue for the three months ended September 30, 2018 was $214.1 million, an increase of $3.4 million, or 1.6%, from $210.6 million for the same period in the prior year.  Same clinic revenue increased $4.3 million for the three months ended September 30, 2018 compared to the same period in the prior year, reflecting an increase in same clinic revenue of 2.1%, or 0.5% on a per day basis.  During the three months ended September 30, 2018 revenue from prosthetics increased by 3.1% and constituted approximately 54% of our total Patient Care revenue as compared with approximately 53% in the comparable prior year period.  In addition to the underlying growth in prosthetic revenue, the change in product mix was partially attributed to a comparatively lower increase in revenue related to certain of our orthotic and shoe products.  The increase in revenue was offset by a $0.2 million decrease in revenue associated with clinic closures.  Net revenue was also negatively impacted  compared to the same period in the prior year by $0.7 million from the adoption of the new revenue accounting standard on January 1, 2018.

Products & Services net revenue for the three months ended September 30, 2018 was $48.9 million, an increase of $1.5 million, or 3.2% from $47.3 million for the same period in the prior year.  This increase was comprised of $2.2 million from the distribution of O&P componentry to independent providers offset by a $0.7 million decrease in net revenue from therapeutic solutions, as a result of continued net client cancellations.  We anticipate moderation of near-term Products & Services segment growth due primarily to a continuation of these therapeutic solutions revenue trends.

Material costs.  Material costs for the three months ended September 30, 2018 were $84.8 million, an increase of $2.5 million or 3.0%, from $82.3 million for the same period in the prior year.  Total material costs as a percentage of net revenue increased to 32.3% in 2018 from 31.9% in 2017 due primarily to changes in our Patient Care segment product mix.  Material costs by operating segment, after elimination of intersegment activity, were as follows:

	For the Three Months Ended September 30,						Percent
(in thousands)	2018		2017		Change		Change
Patient Care	$	64,695	$	62,745	$	1,950	3.1	%
Products & Services	20,110		19,600		510		2.6	%
Material costs	$	84,805	$	82,345	$	2,460	3.0	%

35

Patient Care material costs increased $2.0 million, or 3.1%, for the three months ended September 30, 2018 compared to the same period in the prior year.  Excluding the $0.7 million effect on net revenue resulting from the adoption of the new revenue accounting standard, Patient Care material costs as a percent of revenue increased slightly to 30.1% in 2018 from 29.8% in 2017, primarily due to increases in sales of higher-cost prosthetic devices, when compared to orthotics.

Products & Services material costs increased $0.5 million, or 2.6%, for the three months ended September 30, 2018 compared to the same period in the prior year.  As a percent of revenue, material costs were 41.2% in the three months ended September 30, 2018 as compared to 41.4% in the same period 2017.

Personnel costs.  Personnel costs for the three months ended September 30, 2018 were $90.9 million, an increase of $0.8 million, or 0.9%, from $90.1 million for the same period in the prior year.  Personnel costs by operating segment were as follows:

	For the Three Months Ended September 30,							Percent
(in thousands)	2018		2017		Change			Change
Patient Care	$	77,806	$	78,161	$	(355	)	(0.5	)%
Products & Services	13,047		11,904		1,143			9.6	%
Personnel costs	$	90,853	$	90,065	$	788		0.9	%

Personnel costs for the Patient Care segment were $77.8 million for the three months ended September 30, 2018, a decrease of $0.4 million, or 0.5%, from $78.2 million compared to the same period in the prior year.  The decline in Patient Care personnel costs during the third quarter of 2018 was primarily related to a decrease of $0.6 million in benefits expense relating to lower health claims experience, as well as a $0.6 million decrease in bonus and commissions expense, and $0.2 million lower other personnel costs when compared to the prior period.  The decreases were offset by an increase in salary expense of $1.0 million.

Personnel costs in the Products & Services segment were $13.0 million for the three months ended September 30, 2018, an increase of $1.1 million, or 9.6% compared to the same period in the prior year.  The increase in Products and Services costs during the third quarter was primarily related to an increase in bonus and commissions expense of $0.8 million and an increase in salary expense of $0.3 million.

Other operating costs.  Other operating costs for the three months ended September 30, 2018 were $31.0 million, a decrease of $2.2 million, or 6.6% from $33.2 million for the same period in the prior year.  Bad debt expense decreased $2.3 million, primarily from the adoption of the new revenue accounting standard under which certain of these expenses were prospectively characterized as implicit price concessions within our Patient Care segment and are now reflected as an adjustment to net revenue.  Product and professional liabilities decreased $0.6 million.  Offsetting these decreases, was an increase of $0.7 million in professional fees.

General and administrative expenses.  General and administrative expenses for the three months ended September 30, 2018 were $28.3 million, an increase of $3.0 million, or 11.6%, from $25.4 million for the same period in the prior year.  This increase included $1.0 million in bonus expense, $0.9 million in salary expense, and $1.1 million in other expenses.

Professional accounting and legal fees.  Professional accounting and legal fees for the three months ended September 30, 2018 were $3.1 million, a decrease of $4.7 million, or 60.4%, from $7.8 million for the same period in the prior year.  Advisory and other fees decreased $4.1 million and audit related fees decreased by $0.6 million, primarily due to decreased utilization of professional fees to assist in the remediation of our material weaknesses, to regain our timely filing status and to undertake related activities.

Depreciation and amortization.  Depreciation and amortization for the three months ended September 30, 2018 was $9.0 million, a decrease of $0.7 million, or 7.1%, from $9.6 million for the same period in the prior year.  Certain intangible assets became fully amortized prior to the third quarter of 2018, resulting in a decrease in amortization of $0.8 million when compared to the prior period offset by a $0.1 million increase in leasehold improvement and other depreciation.

Interest expense, net.  Interest expense for the three months ended September 30, 2018 was $8.9 million, a decrease of $6.2 million, or 40.8%, from $15.1 million for the same period in the prior year.  This decrease was primarily due to lower interest rates on outstanding borrowings arising from our debt refinancing in March 2018.

36

Provision (benefit) for income taxes.  The provision for income taxes for the three months ended September 30, 2018 was $2.4 million, or 35.8% of income before income taxes, compared to a benefit of $1.6 million, or 27.5% of loss before income taxes for the three months ended September 30, 2017.  The effective tax rate in 2018 consists principally of the 21% federal statutory tax rate and the rate impact from state income taxes and permanent tax differences.  The federal statutory tax rate in 2017 was 35%.  The increase in the effective tax rate for the three months ended September 30, 2018 compared with the three months ended September 30, 2017 is primarily attributable to pre-tax income for the three months ended September 30, 2018 compared to pre-tax loss for the three months ended September 30, 2017, partially offset by the changes enacted by the Tax Act.

Our results of operations for the nine months ended September 30, 2018 and 2017 were as follows:

	For the Nine Months Ended September 30,						Percent Change
(in thousands)	2018			2017			2018 v 2017
Net revenues	$	763,907		$	755,033		1.2	%
Material costs	247,677			240,407			3.0	%
Personnel costs	266,515			265,851			0.2	%
Other operating costs	92,631			97,734			(5.2	)%
General and administrative expenses	80,467			75,969			5.9	%
Professional accounting and legal fees	12,189			29,015			(58.0	)%
Depreciation and amortization	27,552			29,594			(6.9	)%
Operating expenses	727,031			738,570			(1.6	)%
Income from operations	36,876			16,463			124.0	%
Interest expense, net	28,519			43,197			(34.0	)%
Loss on extinguishment of debt	16,998			—			100.0	%
Non-service defined benefit plan expense	528			552			(4.3	)%
Loss before income taxes	(9,169		)	(27,286		)	66.4	%
Benefit for income taxes	(3,848		)	(7,028		)	45.2	%
Net loss	$	(5,321	)	$	(20,258	)	73.7	%

During these periods, our operating expenses as a percentage of net revenue were as follows:

	For the Nine Months Ended September 30,
	2018		2017
Material costs	32.4	%	31.8	%
Personnel costs	34.9	%	35.2	%
Other operating costs	12.2	%	13.0	%
General and administrative expenses	10.5	%	10.1	%
Professional accounting and legal fees	1.6	%	3.8	%
Depreciation and amortization	3.6	%	3.9	%
Operating expenses	95.2	%	97.8	%

37

For the Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017

Net revenue.  Net revenue for the nine months ended September 30, 2018 was $763.9 million, an increase of $8.9 million, or 1.2%, from $755.0 million for the nine months ended September 30, 2017.  Net revenue by operating segment, after elimination of intersegment activity was as follows:

	For the Nine Months Ended September 30,						Percent
(in thousands)	2018		2017		Change		Change
Patient Care	$	620,745	$	614,495	$	6,250	1.0	%
Products & Services	143,162		140,538		2,624		1.9	%
Net revenue	$	763,907	$	755,033	$	8,874	1.2	%

Patient Care net revenue for the nine months ended September 30, 2018 was $620.7 million, an increase of $6.3 million, or 1.0%, from $614.5 million for the same period in the prior year.  Same clinic revenue increased $10.2 million for the nine months ended September 30, 2018 compared to the same period in the prior year, reflecting an increase in same clinic revenue of 1.7%, or 1.1% on a per day basis.  During the nine months ended September 30, 2018, our revenue from prosthetics increased by 3.9% and constituted approximately 53% of our total Patient Care revenue as compared with approximately 52% in the comparable prior year period In addition to the underlying growth in prosthetic revenue, the change in product mix was partially attributed to a comparatively lower increase in revenue related to certain of our orthotic and shoe products.  The increase in revenue was offset by a $1.0 million decrease in revenue associated with clinic closures.  Net revenue for the nine months ended September 30, 2018 was also negatively impacted  compared to the same period in the prior year by $2.9 million from the adoption of the new revenue accounting standard on January 1, 2018.

Products & Services net revenue for the nine months ended September 30, 2018 was $143.2 million, an increase of $2.6 million, or 1.9% from $140.5 million for the same period in the prior year.  Distribution of O&P componentry to independent providers increased $5.6 million offset by a $3.0 million decrease in net revenue from therapeutic solutions, as a result of continued net client cancellations.  We anticipate moderation of near-term Products & Services segment growth due primarily to a continuation of these therapeutic solutions revenue trends.

Material costs.  Material costs for the nine months ended September 30, 2018 were $247.7 million, an increase of $7.3 million or 3.0%, from $240.4 million for the same period in the prior year.  This underlying increase in cost of materials primarily related to changes in our Patient Care segment product mix, with total material costs as a percentage of net revenue increasing to 32.4% in 2018 from 31.8% in 2017.  Material costs by operating segment, after elimination of intersegment activity, were as follows:

	For the Nine Months Ended September 30,						Percent
(in thousands)	2018		2017		Change		Change
Patient Care	$	188,503	$	183,423	$	5,080	2.8	%
Products & Services	59,174		56,984		2,190		3.8	%
Material costs	$	247,677	$	240,407	$	7,270	3.0	%

Patient Care material costs increased $5.1 million, or 2.8%, for the nine months ended September 30, 2018 compared to the same period in the prior year.  Excluding the $2.9 million effect on net revenue resulting from the adoption of the new revenue accounting standard, Patient Care material costs as a percent of revenue increased slightly to 30.2% in 2018 from 29.8% in 2017, primarily due to increases in sales of higher-cost prosthetic devices, when compared to orthotics.

Products & Services material costs increased $2.2 million, or 3.8%, for the nine months ended September 30, 2018 compared to the same period in the prior year.  Material costs increased to 41.3% as a percent of net revenue in the nine months ended September 30, 2018 from 40.5% in the same period in 2017.

Personnel costs.  Personnel costs for the nine months ended September 30, 2018 were $266.5 million, an increase of $0.7 million, or 0.2%, from $265.9 million for the same period in the prior year.  Personnel costs by operating segment were as follows:

38

	For the Nine Months Ended September 30,							Percent
(in thousands)	2018		2017		Change			Change
Patient Care	$	228,211	$	229,582	$	(1,371	)	(0.6	)%
Products & Services	38,304		36,269		2,035			5.6	%
Personnel costs	$	266,515	$	265,851	$	664		0.2	%

Personnel costs for our Patient Care segment were $228.2 million for the nine months ended September 30, 2018, a decrease of $1.4 million, or 0.6%, from $229.6 million for the same period in the prior year.  Patient Care personnel costs decreased $1.9 million in benefits expense due to lower health claims experience, as well as $1.8 million in bonus and commissions expense when compared to the prior period.  The decreases were offset by an increase in salary expense of $2.3 million.

Personnel costs in the Products & Services segment were $38.3 million for the nine months ended September 30, 2018, an increase of $2.0 million, or 5.6% for the same period in the prior year.  The growth in Products and Services personnel costs for the nine month period related to an increase in salary expense of $1.0 million and an increase in bonus and commissions expense of $1.4 million.  Offsetting these increases is $0.4 million lower benefit costs.

Other operating costs.  Other operating costs for the nine months ended September 30, 2018 were $92.6 million, a decrease of $5.1 million, or 5.2% from $97.7 million for the same period in the prior year.  Bad debt expense decreased $7.4 million, primarily from the adoption of the new revenue accounting standard under which certain of these expenses were re-characterized as implicit price concessions within our Patient Care segment and are now reflected as an adjustment to net revenue.  This decrease was offset by a $1.2 million increase in travel and education related expenses and a $1.1 million increase in office related expenses.

General and administrative expenses.  General and administrative expenses for the nine months ended September 30, 2018 were $80.5 million, an increase of $4.5 million, or 5.9%, from $76.0 million for the same period in the prior year.  This increase included $2.5 million in personnel related costs, $1.9 million in other expenses, $1.6 million of professional expenses related primarily to growth, revenue cycle and other corporate initiatives, and $0.7 million in advertising costs.  Increases in general and administrative expenses for the year-to-date period were offset by a $1.7 million favorable settlement in connection with our long standing claim relating to the “Deepwater Horizon” disaster and $0.5 million in connection with our favorable resolution of outstanding abandoned and unclaimed property claims with the State of Delaware.

Professional accounting and legal fees.  Professional accounting and legal fees for the nine months ended September 30, 2018 were $12.2 million, a decrease of $16.8 million, or 58.0%, from $29.0 million for the same period in the prior year.  Advisory and other fees decreased $13.6 million, audit related fees decreased $2.7 million, and legal fees decreased $0.5 million, primarily due to decreased utilization of professional fees for assistance in the remediation of our material weaknesses, to regain our timely filing status and to undertake related activities.

Depreciation and amortization.  Depreciation and amortization for the nine months ended September 30, 2018 was $27.6 million, a decrease of $2.0 million, or 6.9%, from $29.6 million for the same period in the prior year.  The decrease was from lower amortization of $1.9 million as a result of fully amortized intangible assets and $0.1 million of other items.

Interest expense, net.  Interest expense for the nine months ended September 30, 2018 was $28.5 million, a decrease of $14.7 million, or 34.0%, from $43.2 million for the same period in the prior year.  This decrease related primarily to lower interest rates on outstanding borrowings arising from our debt refinancing in March 2018 and reflected a $1.5 million decrease related to our settlement of outstanding abandoned and unclaimed property claims with the State of Delaware in a manner that did not require us to pay interest we had previously accrued on long standing unpaid claim amounts.

Loss on extinguishment of debt.  Debt extinguishment costs for the nine months ended September 30, 2018 totaled $17.0 million and related to our debt refinancing on March 6, 2018 - see Note J - “Long-term Debt.”

Benefit for income taxes.  The benefit for income taxes for the nine months ended September 30, 2018 was $3.8 million, or 42.0% of loss before income taxes, compared to a benefit of $7.0 million, or 25.8% of loss before income taxes for the nine months ended September 30, 2017.  The effective tax rate in 2018 consists principally of the 21% federal statutory tax rate and the rate impact from state income taxes and permanent tax differences.  The federal statutory tax rate in 2017 was 35%.  The decrease in the income tax benefit was largely driven by decreased loss before taxes for the period, partially offset by increased estimated annual effective tax rate applied to the quarter.  The increase in estimated annual effective tax rate was driven by increased estimated permanent differences and decreased estimated loss before taxes.

39

Financial Condition, Liquidity and Capital Resources

Liquidity

To provide cash for our operations and capital expenditures, our immediate source of liquidity is our cash and cash equivalents and any amounts we have available for borrowing under our revolving credit facility.  We refer to the sum of these two amounts as our “liquidity.”

At September 30, 2018, we had total liquidity of $155.1 million, which reflected an increase of $67.2 million, from the $87.9 million in liquidity we had as of December 31, 2017.  Our liquidity at September 30, 2018 was comprised of cash and cash equivalents of $61.0 million and $94.1 million in available borrowing capacity under our $100.0 million revolving credit facility.  This increase in liquidity relates primarily to the net proceeds of $49.7 million from the refinancing of our indebtedness on March 6, 2018.

If we are not compliant with our debt covenants in any period, absent a waiver or amendment of our Credit Agreement, we may be unable to access funds in our revolving credit facility.

Working Capital and Days Sales Outstanding

At September 30, 2018, we had working capital of $139.7 million compared to working capital of $78.7 million at December 31, 2017.  Our working capital increased $61.0 million in 2018 compared to 2017 due to a decrease in current liabilities of $23.4 million and an increase in current assets of $37.6 million.

The decrease in current liabilities was primarily attributable to a reduction in accrued compensation related costs of $20.7 million, largely related to the timing of payment of annual bonuses during the first quarter of 2018, a $7.0 million decrease in accrued professional fees, and a $4.9 million decrease in patient refunds. This decrease was offset by a $4.7 million increase in the current portion of long term debt and a $4.1 million increase in accounts payable.  When comparing these outflows to the prior period, we paid $13.7 million less in annual bonuses and 401(k) matching contributions in the first three quarters of 2017 as compared to the amounts we paid in the first three quarters of 2018.  This was primarily due to attainment of lower incentive compensation targets based on performance for the year ended December 31, 2016 as compared to the year ended December 31, 2017.

The increase in current assets was primarily attributable to an increase in cash and cash equivalents and inventory of $59.5 million and 3.5 million, respectively.  The increase in current assets was offset by a decrease of $13.9 million in net accounts receivable and a reduction of $11.4 million of income tax receivables related to refunds from the IRS.  Cash received for income taxes was $11.4 million for the nine months ended September 30, 2018, compared to $0.6 million cash spent for the same period in the prior year.  We expect to generate limited pre-tax income through fiscal year 2018 and plan to utilize net operating loss carryforwards to offset our expected 2018 federal tax liability.  The decrease in accounts receivable primarily relates to the seasonality of our business which is affected by the degree to which patients have otherwise met their deductibles near the end of the year.  As a result, the fourth quarter has historically been our highest revenue producing quarter, resulting in a decline in accounts receivable in the first quarter of the following year.

Days sales outstanding (“DSO”) is a calculation that approximates the average number of days between the billing for our services and the date of our receipt of payment, which we estimate using a 90 day rolling period of net revenue.  This computation can provide a relative measure of the effectiveness of our billing and collections activities.  As of September 30, 2018, our DSO was 45 days, which compares to a DSO of 47 days as of September 30, 2017.  At December 31, 2017, our DSO was 46 days, which was unchanged from a DSO of 46 days reported as of December 31, 2016.

Sources and Uses of Cash for the Nine Months Ended September 30, 2018 Compared to September 30, 2017

Cash flows from operating activities increased $38.2 million to an inflow of $37.2 million for the nine months ended September 30, 2018 from a use of $1.0 million for the nine months ended September 30, 2017.  This was due primarily to the changes in working capital in 2018 compared to 2017 which are discussed in the Working Capital and Days Sales Outstanding section above.

40

Cash flows used in investing activities increased $8.5 million to $19.8 million for the nine months ended September 30, 2018 from $11.3 million for the nine months ended September 30, 2017.  The increase in cash used in investing activities included a $5.2 million increase in purchases of property, plant and equipment, a $2.7 million increase in purchases of therapeutic program equipment, and a $0.6 million decrease in proceeds of sale of property, plant and equipment.  We anticipate that we will continue to increase spending on capital expenditures through 2019.  In addition to general increases in technology and leasehold improvements, we also plan to increase our purchase of therapy equipment for use in our Products & Services segment.  We currently believe that our total capital expenditures related to property, plant and equipment, and therapeutic program equipment purchases will be approximately $30.0 to $35.0 million for the year ended December 31, 2018.

Cash flows provided by financing activities increased $35.7 million to $41.2 million for the nine months ended September 30, 2018 from $5.6 million for the nine months ended September 30, 2017.  This increase is due to higher net borrowings of $46.8 million under our term loan and revolving credit agreement, primarily related to the refinancing of our indebtedness, when compared to the prior year. The increase in our net borrowings is offset by debt issuance and extinguishment costs of $12.3 million, an increase of $1.2 million related to tax withholdings for employee stock based compensation, and an increase of $0.1 million for payment of capital lease obligations.

Effect of Indebtedness

Due to the then-pending June 17, 2018, maturity of our previous credit agreement, on March 6, 2018 we entered into the Credit Agreement in order to refinance our indebtedness.  These changes to our indebtedness are disclosed in Note J - “Long-Term Debt,” in the notes to the condensed consolidated financial statements (unaudited) elsewhere in this report.  Our new indebtedness bears reduced rates of interest compared with those under our prior indebtedness, and as such, for the year ended December 31, 2018, we anticipate that we will report interest expense of approximately $36.5 million compared with the $57.7 million we reported in 2017.  Cash paid for interest totaled $23.7 million and $33.6 million for the nine months ended September 30, 2018 and 2017, respectively.

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

2018 (remainder of year)	$	2,897
2019	8,480
2020	7,329
2021	6,497
2022	6,098
Thereafter	490,394
Total debt before unamortized discount and debt issuance costs, net	521,695
Unamortized discount and debt issuance costs, net	(9,702		)
Total debt	$	511,993

Liquidity Outlook and Going Concern Evaluation

Our Credit Agreement has a term loan facility with $502 million in principal outstanding at September 30, 2018, due in quarterly principal installments equal to 0.25% of the original aggregate principal amount of $505 million, commencing June 29, 2018, with all remaining outstanding principal due at maturity in March 2025 and a revolving credit facility with no borrowings and a maximum aggregate amount of availability of $100 million at September 30, 2018 that matures in March 2023.  We currently believe that our anticipated operating trends, when coupled with anticipated decreases in our payments of interest expense and professional fees, will provide us with sufficient liquidity to meet our financial obligations during the coming twelve months.

ASU 2014-15 Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern requires that we evaluate whether there is substantial doubt about our ability to meet our financial obligations when they become due during the twelve month period from the date these financial statements are available to be issued.  We have performed such an evaluation and, based on the results of that assessment, we are not aware of any relevant conditions or events that raise substantial doubt regarding our ability to continue as a going concern within one year of the date the financial statements are issued.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that may or could have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

41

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our future financial results are subject to a variety of risks, including interest rate risk.  Our interest expense is sensitive to changes in market interest rates.  To manage the impact of the interest rate risk associated with our Credit Agreement, we enter into interest rate swaps from time to time, effectively converting a portion of the cash flows related to variable-rate debt into fixed-rate cash flows.

As of September 30, 2018, we had a combined principal amount of $502.5 million of variable rate debt and a notional amount of $325.0 million of fixed to variable interest rate swap agreements.  Based on our hedged and unhedged positions, a hypothetical increase or decrease in interest rates by 1.0% would impact our annual interest expense by $1.8 million.

42

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and effectiveness of our disclosure controls and procedures as of September 30, 2018.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2018 because of the previously identified material weaknesses in our internal control over financial reporting described in Item 9A Controls and Procedures of the Form 10-K for the year-ending December 31, 2017.

Changes in Internal Control over Financial Reporting

Although we have not fully remediated the material weaknesses described in our Form 10-K for the year ended December 31, 2017, we believe that we have made substantial progress on the remediation plans described in our 2017 Form 10-K, Item 9A Controls and Procedures.

The following remediation steps were taken by the Company during the quarter:

Account Reconciliations

We have implemented a standard process, including templates, for account reconciliations across the Company, as well as controls to validate all accounts have been reconciled.

Plant, Property and Equipment and Depreciation

We have implemented new controls around the purchasing, sale, and disposal of fixed assets.  We have also improved controls related to the calculation of and accounting for depreciation expense.

Share-based Compensation

We have implemented new controls related to the accounting for share-based compensation expense and improved the coordination between our human resources and accounting departments.

Business Combinations

We have designed new processes for any potential acquisition the Company may engage in and have increased the communication between our acquisition and accounting organizations.

We have made improvements to controls in the areas of accounts payable and accruals; inventory; leases; goodwill and intangible assets; information technology general controls; and income taxes and are currently evaluating the design and operating effectiveness of these controls.  The material weaknesses cannot be considered remediated until the applicable remedial controls operate for a period of time sufficient for management to conclude, through testing, that these controls are operating effectively.

Additionally, we have implemented an annual enterprise risk assessment as part of our remediation of the material weakness related to risk assessment and are evaluating other factors that relate to this material weakness.

Therefore, in accordance with Rule 13a-15(d) of the Exchange Act, management, with the participation of our Chief Executive Officer and our Chief Financial Officer, determined that elements of the changes listed above to our internal control over financial reporting occurred during the period ended September 30, 2018 and have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

43

PART II.OTHER INFORMATION

ITEM 1.  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.  On August 20, 2018, Hanger, Inc. and George McHenry filed a petition for panel rehearing and a petition for rehearing en banc with the Court of Appeals.  On September 10, 2018 the Court of Appeals asked plaintiffs to file a response to the petition for rehearing en banc, and plaintiffs filed an opposition to the petition for rehearing en banc on September 17, 2018.  Both petitions are pending with the Court of Appeals.  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.

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.

44

The plaintiffs subsequently 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 report.  We opposed the motion.  On July 20, 2018, the Travis County court ruled that only a redacted version of the report is discoverable, and we have provided a redacted version of the report to plaintiff’s counsel.  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 our results of 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 condensed consolidated financial statements.

45

ITEM 1A.  RISK FACTORS

Our business and financial results are subject to numerous risks and uncertainties.  The risk and uncertainties have not changed materially from those reported in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2017, which are incorporated by reference.  For additional information regarding risks and uncertainties, see the information provided under the header “Forward Looking Statements” contained in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There has been no share repurchase activity during the quarter ended September 30, 2018.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

There have been no defaults upon senior securities during the quarter ended September 30, 2018.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

None to report.

ITEM 6.  EXHIBITS

The documents in the accompanying Exhibits Index are filed, furnished or incorporated by reference as part of this report and such Exhibits Index is incorporated herein by reference.

46

EXHIBITS INDEX

Exhibit No.	Document
31.1	Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
31.2	Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
32	Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. (Filed herewith.)
101.INS	XBRL Instance Document. (Filed herewith.)
101.SCH	XBRL Taxonomy Extension Schema. (Filed herewith.)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase. (Filed herewith.)
101.LAB	XBRL Taxonomy Extension Label Linkbase. (Filed herewith.)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase. (Filed herewith.)
101.DEF	XBRL Taxonomy Extension Definition Linkbase. (Filed herewith.)

47

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HANGER, INC.
Dated: November 8, 2018	By:	/s/ THOMAS E. KIRALY
	Thomas E. Kiraly
	Executive Vice President and Chief Financial Officer
Dated: November 8, 2018	By:	/s/ GABRIELLE B. ADAMS
	Gabrielle B. Adams
	Vice President and Chief Accounting Officer

48

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a- 14(a)

or 15d-14(a) under the Securities Exchange Act of 1934

I, Vinit K. Asar, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Hanger, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 8, 2018	By:	/s/ VINIT K. ASAR
	Vinit K. Asar
	Chief Executive Officer (Principal Executive Officer)

1

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a- 14(a)

or 15d-14(a) under the Securities Exchange Act of 1934

I, Thomas E. Kiraly, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Hanger, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 8, 2018	By:	/s/ THOMAS E. KIRALY
	Thomas E. Kiraly
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

1

EX-32

Exhibit 32

Written Statement of the Chief Executive Officer and Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350, as Adopted

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Solely for the purposes of complying with 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer and Chief Financial Officer of Hanger, Inc. (the “Company”), hereby certify, based on our knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2018 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ VINIT K. ASAR

Vinit K. Asar

Chief Executive Officer (Principal Executive Officer)

/s/ THOMAS E. KIRALY

Thomas E. Kiraly

Executive Vice President and Chief Financial Officer (Principal Financial Officer)

November 8, 2018

1

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2018	Nov. 01, 2018
Document and Entity Information
Entity Registrant Name	HANGER, INC.
Entity Central Index Key	0000722723
Document Type	10-Q
Document Period End Date	Sep. 30, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Common Stock, Shares Outstanding		36,848,290
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q3

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 61,035	$ 1,508
Accounts receivable, net	132,446	146,346
Inventories	72,601	69,138
Income taxes receivable	1,723	13,079
Other current assets	20,742	20,888
Total current assets	288,547	250,959
Non-current assets:
Property, plant and equipment, net	89,424	93,615
Goodwill	196,343	196,343
Other intangible assets, net	16,637	21,940
Deferred income taxes	71,967	68,126
Other assets	12,711	9,440
Total assets	675,629	640,423
Current liabilities:
Current portion of long-term debt	9,027	4,336
Accounts payable	52,325	48,269
Accrued expenses and other current liabilities	54,790	66,308
Accrued compensation related costs	32,730	53,380
Total current liabilities	148,872	172,293
Long-term liabilities:
Long-term debt, less current portion	502,966	445,928
Other liabilities	49,395	50,253
Total liabilities	701,233	668,474
Commitments and contingencies (Note O)
Shareholders' deficit:
Common stock, $0.01 par value; 60,000,000 shares authorized; 37,011,135 shares issued and 36,868,314 shares outstanding in 2018, and 36,515,232 shares issued and 36,372,411 shares outstanding in 2017	370	365
Additional paid-in capital	340,738	333,738
Accumulated other comprehensive loss	(164)	(1,686)
Accumulated deficit	(365,852)	(359,772)
Treasury stock, at cost; 142,821 shares at 2018 and 2017, respectively	(696)	(696)
Total shareholders' deficit	(25,604)	(28,051)
Total liabilities and shareholders' deficit	$ 675,629	$ 640,423

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Sep. 30, 2018	Dec. 31, 2017
CONDENSED CONSOLIDATED BALANCE SHEETS
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	60,000,000	60,000,000
Common stock, shares issued	37,011,135	36,515,232
Common stock, shares outstanding	36,868,314	36,372,411
Treasury stock, shares	142,821	142,821

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Net revenues	$ 262,946	$ 257,966	$ 763,907	$ 755,033
Material costs	84,805	82,345	247,677	240,407
Personnel costs	90,853	90,065	266,515	265,851
Other operating costs	30,999	33,184	92,631	97,734
General and administrative expenses	28,308	25,356	80,467	75,969
Professional accounting and legal fees	3,107	7,844	12,189	29,015
Depreciation and amortization	8,950	9,632	27,552	29,594
Income from operations	15,924	9,540	36,876	16,463
Interest expense, net	8,939	15,097	28,519	43,197
Loss on extinguishment of debt			16,998
Non-service defined benefit plan expense	176	184	528	552
Income (loss) before income taxes	6,809	(5,741)	(9,169)	(27,286)
Provision (benefit) for income taxes	2,440	(1,580)	(3,848)	(7,028)
Net income (loss)	$ 4,369	$ (4,161)	$ (5,321)	$ (20,258)
Per share data:
Basic income (loss) per share	$ 0.12	$ (0.11)	$ (0.14)	$ (0.56)
Weighted average shares outstanding - basic	36,856,881	36,340,089	36,716,568	36,238,816
Diluted income (loss) per share	$ 0.12	$ (0.11)	$ (0.14)	$ (0.56)
Weighted average shares outstanding - diluted	37,556,594	36,340,089	36,716,568	36,238,816

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$ 4,369	$ (4,161)	$ (5,321)	$ (20,258)
Other comprehensive income (loss):
Unrealized gain on cash flow hedges, net of tax of $533, $0, $541, and $0, respectively	1,738		1,762
Unrealized gain (loss) on defined benefit plan, net of tax of $0, $0, $105, and $0 respectively	26	(17)	(240)	(51)
Total other comprehensive income (loss)	1,764	(17)	1,522	(51)
Comprehensive income (loss)	$ 6,133	$ (4,178)	$ (3,799)	$ (20,309)

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Parenthetical) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Unrealized gain on cash flow hedges tax	$ 533	$ 0	$ 541	$ 0

XML

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT - USD ($) $ in Thousands	Common Stock	Additional Paid-in Capital	Accumulated Other Comprehensive Loss	Accumulated Deficit	Treasury Stock	Total
Balance at Dec. 31, 2017	$ 365	$ 333,738	$ (1,686)	$ (359,772)	$ (696)	$ (28,051)
Balance (in shares) at Dec. 31, 2017	36,372,000					36,372,411
Increase (Decrease) in Shareholders' Equity
Cumulative effect of a change in accounting for revenue recognition (Note A) | ASU 2014-09				(759)		$ (759)
Balance at Jan. 01, 2018	$ 365	333,738	(1,686)	(360,531)	(696)	(28,810)
Balance (in shares) at Jan. 01, 2018	36,372,000
Balance at Dec. 31, 2017	$ 365	333,738	(1,686)	(359,772)	(696)	$ (28,051)
Balance (in shares) at Dec. 31, 2017	36,372,000					36,372,411
Increase (Decrease) in Shareholders' Equity
Net loss				(5,321)		$ (5,321)
Shares based compensation expense		9,573				9,573
Issuance of common stock upon vesting of restricted stock units	$ 5	(5)
Issuance of common stock upon vesting of restricted stock units (in shares)	496,000
Effect of shares withheld to cover taxes		(2,568)				(2,568)
Total other comprehensive income			1,522			1,522
Balance at Sep. 30, 2018	$ 370	$ 340,738	$ (164)	$ (365,852)	$ (696)	$ (25,604)
Balance (in shares) at Sep. 30, 2018	36,868,000					36,868,314

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Cash flows from operating activities:
Net loss	$ (5,321)	$ (20,258)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization	27,552	29,594
(Benefit) provision for doubtful accounts	(578)	6,850
Stock-based compensation expense	9,573	8,693
Deferred income taxes	(4,114)	(7,179)
Amortization of discounts discounts and debt issuance costs	2,453	6,348
Loss on extinguishment of debt	16,998
Gain on sale and disposal of fixed assets	(2,537)	(1,664)
Changes in operating assets and liabilities (Note Q)	(6,867)	(23,392)
Net cash provided by (used in) operating activities	37,159	(1,008)
Cash flows from investing activities:
Purchase of property, plant and equipment	(16,435)	(11,237)
Purchase of therapeutic program equipment leased to third parties under operating leases	(6,390)	(3,714)
Purchase of company-owned life insurance investment	(598)	(555)
Proceeds from sale of property, plant and equipment	3,583	4,185
Net cash used in investing activities	(19,840)	(11,321)
Cash flows from financing activities:
Borrowings under term loan, net of discount	501,467
Repayment of term loan	(434,400)	(19,688)
Borrowings under revolving credit agreement	3,000	140,965
Repayments under revolving credit agreement	(8,000)	(105,965)
Payment of employee taxes on stock-based compensation	(2,568)	(1,367)
Payment on seller notes	(2,116)	(4,633)
Payment of capital lease obligations	(942)	(873)
Payment of debt issuance costs	(6,757)	(2,863)
Payment of debt extinguishment costs	(8,436)
Net cash provided by financing activities	41,248	5,576
Increase (decrease) in cash, cash equivalents and restricted cash	58,567	(6,753)
Cash, cash equivalents and restricted cash, at beginning of period	4,779	9,412
Cash, cash equivalents and restricted cash, at end of period	63,346	2,659
Reconciliation of Cash, Cash Equivalents and Restricted Cash
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	61,035	460
Restricted cash, at end of period	2,311	2,199
Cash, cash equivalents and restricted cash, at end of period	$ 63,346	$ 2,659

XML

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2018

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 interim unaudited 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 periods 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.

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 defined benefit plan expense" of $0.2 million and $0.2 million for the three months ended September 30, 2018 and 2017, respectively and $0.5 million and $0.6 million for the nine months ended September 30, 2018 and 2017, respectively.  Such reclassifications did not have a material effect on our condensed 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.

New Accounting Standards Issued, Not Yet Adopted

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 220). The ASU is intended to improve the recognition and measurement of financial instruments. The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for public entities for fiscal years beginning after 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 August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715).  This ASU modifies the disclosure requirements for defined benefit and other postretirement plans.  This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs; while other disclosures have been added to address significant gains and losses related to changes in benefit obligations.  This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations.  The amendments in this ASU are effective for fiscal years ending after December 15, 2020 and for interim periods therein 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 August 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The ASU is effective for public entities for fiscal years beginning after 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 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, 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 us  beginning January 1, 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.  We are evaluating how the new standard will impact our condensed consolidated financial statements, and currently anticipate that there will be a material increase to assets and lease liabilities for existing property leases representing our nationwide retail locations. In addition, we are evaluating the impact on presentation and timing of lease-related expenses for those leases which are currently recorded as financing leases on our 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:

	As of and for the Three Months Ended September 30, 2018
					Proformabalance
					without the
					adoption of
(in thousands)	As Reported		Effects of Adoption		ASC 606
Condensed Consolidated Statement of Operations
Net revenues	$	262,946	$	645	$	263,591
Other operating costs		30,999		736		31,735
Income from operations		15,924		(91)		15,833
Income before income taxes		6,809		(91)		6,718
Net income		4,369		(91)		4,278
Comprehensive income		6,133		(91)		6,042
Condensed Consolidated Balance Sheet
Assets
Deferred income taxes	$	71,967	$	24	$	71,991
Total assets		675,629		24		675,653
Liabilities
Accrued expenses and other current liabilities		54,790		92		54,882
Total current liabilities		148,872		92		148,964
Total liabilities		701,233		92		701,325
Shareholders' Deficit
Accumulated deficit		(365,852)		(68)		(365,920)
Total shareholders' deficit		(25,604)		(68)		(25,672)

	As of and for the Nine Months Ended September 30,2018
					Proforma balance
					without the
					adoption of
(in thousands)	As Reported		Effects of Adoption		ASC 606
Condensed Consolidated Statement of Operations
Net revenues	$	763,907	$	2,866	$	766,773
Other operating costs		92,631		2,937		95,568
Income from operations		36,876		(71)		36,805
Loss before income taxes		(9,169)		(71)		(9,240)
Net loss		(5,321)		(71)		(5,392)
Comprehensive loss		(3,799)		(71)		(3,870)
Condensed Consolidated Balance Sheet
Assets
Deferred income taxes	$	71,967	$	(249)	$	71,718
Total assets		675,629		(249)		675,380
Liabilities
Accrued expenses and other current liabilities		54,790		(956)		53,834
Total current liabilities		148,872		(956)		147,916
Total liabilities		701,233		(956)		700,277
Shareholders' Deficit
Accumulated deficit		(365,852)		707		(365,145)
Total shareholders' deficit		(25,604)		707		(24,897)

The adoption of ASC 606 resulted in deferring $1.0 million of net revenue from our Patient Care segment as of September 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 nine months ended September 30, 2018 were $0.6 million and $2.9 million, respectively, and are considered implicit price concessions under ASC 606 and are recorded as a reduction to net revenue.  

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 nine months ended September 30, 2018 and 2017:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2018		2017		2018		2017
Patient Care Segment
Medicare	$	69,724	$	65,759	$	197,461	$	186,606
Medicaid		33,597		32,557		96,993		95,524
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)		78,333		79,804		226,761		234,866
Veterans Administration		19,317		18,662		56,873		52,995
Private Pay		13,109		13,855		42,657		44,504
Total	$	214,080	$	210,637	$	620,745	$	614,495

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.

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 nine months ended September 30, 2018 and 2017:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2018		2017		2018		2017
Products & Services Segment
Distribution services, net of intersegment revenue eliminations	$	34,666	$	32,439	$	100,700	$	95,030
Therapeutic solutions		14,200		14,890		42,462		45,508
Total	$	48,866	$	47,329	$	143,162	$	140,538

XML

EARNINGS PER SHARE

9 Months Ended

Sep. 30, 2018

EARNINGS PER SHARE

EARNINGS PER SHARE

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 zero and 48,502 for the three and nine months ended September 30, 2018 and 867,930 and 475,905 for the three and nine months ended September 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.

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

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands except per share data)	2018		2017		2018		2017
Net income (loss)	$	4,369	$	(4,161)	$	(5,321)	$	(20,258)
Weighted average shares outstanding - basic		36,857		36,340		36,717		36,239
Effect of potentially dilutive restricted stock units and options (1)		700		—		—		—
Weighted average shares outstanding - diluted		37,557		36,340		36,717		36,239
Basic income (loss) per share	$	0.12	$	(0.11)	$	(0.14)	$	(0.56)
Diluted income (loss) per share	$	0.12	$	(0.11)	$	(0.14)	$	(0.56)

(1) In accordance with ASC 260 - Earnings Per Share, during periods of a net loss, shares used to compute diluted per share amount exclude potentially dilutive shares related to unvested restricted stock units and unexercised options.  For the three months ended September 30, 2017, 224,663 shares were excluded.  For the nine month periods ended September 30, 2018 and 2017, shares excluded were 680,444 and 295,089, respectively.

XML

ACCOUNTS RECEIVABLE, NET

9 Months Ended

Sep. 30, 2018

ACCOUNTS RECEIVABLE, NET

ACCOUNTS RECEIVABLE, NET

NOTE C — ACCOUNTS RECEIVABLE, NET

Accounts receivable, net represents 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 receivable 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 September 30, 2018, and December 31, 2017 is comprised of the following:

	As of September 30, 2018						As of December 31, 2017
			Products &						Products &
(in thousands)	PatientCare		Services		Consolidated		Patient Care		Services		Consolidated
Accounts receivable, before allowances	$	170,030	$	26,105	$	196,135	$	193,150	$	23,494	$	216,644
Allowances for estimated implicit price concessions arising from:
Payor disallowances		(52,267)		—		(52,267)		(56,233)		—		(56,233)
Patient non-payments		(7,716)		—		(7,716)		—		—		—
Accounts receivable, gross		110,047		26,105		136,152		136,917		23,494		160,411
Allowance for doubtful accounts		—		(3,706)		(3,706)		(9,894)		(4,171)		(14,065)
Accounts receivable, net	$	110,047	$	22,399	$	132,446	$	127,023	$	19,323	$	146,346

XML

INVENTORIES

9 Months Ended

Sep. 30, 2018

INVENTORIES

INVENTORIES

NOTE D — INVENTORIES

Our inventories are comprised of the following:

(in thousands)	As of September 30, 2018		As of December 31, 2017
Raw materials	$	20,049	$	19,929
Work in process		12,649		8,996
Finished goods		39,903		40,213
Total inventories	$	72,601	$	69,138

XML

PROPERTY PLANT AND EQUIPMENT, NET

9 Months Ended

Sep. 30, 2018

PROPERTY PLANT AND EQUIPMENT, NET

PROPERTY PLANT AND EQUIPMENT, NET

NOTE E — PROPERTY PLANT AND EQUIPMENT, NET

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

(in thousands)	As of September 30, 2018		As of December 31, 2017
Land	$	644	$	644
Buildings		25,475		28,180
Furniture and fixtures		14,231		12,968
Machinery and equipment		27,551		26,838
Therapeutic program equipment leased to third parties under operating leases		29,059		31,100
Leasehold improvements		106,885		100,999
Computers and software		69,105		65,455
Total property, plant, and equipment, gross		272,950		266,184
Less: accumulated depreciation		(183,526)		(172,569)
Total property, plant, and equipment, net	$	89,424	$	93,615

Total depreciation expense was approximately $7.5 million and $7.3 million for the three months ended September 30, 2018 and 2017, respectively and $22.3 million and $22.4 million for the nine months ended September 30, 2018 and 2017, respectively.

XML

GOODWILL AND OTHER INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2018

GOODWILL AND OTHER INTANGIBLE ASSETS

GOODWILL AND OTHER INTANGIBLE ASSETS

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 as of September 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 September 30, 2018 and December 31, 2017 are as follows:

	As of September 30, 2018								As of December 31, 2017
	Gross						Net		Gross						Net
	Carrying		Accumulated		Accumulated		Carrying		Carrying		Accumulated		Accumulated		Carrying
(in thousands)	Amount		Amortization		Impairment		Amount		Amount		Amortization		Impairment		Amount
Customer lists	$	30,563	$	(22,671)	$	—	$	7,892	$	36,439	$	(24,267)	$	—	$	12,172
Other intangible assets		14,996		(10,551)		—		4,445		15,820		(10,352)		—		5,468
Definite-lived intangible assets		45,559		(33,222)		—		12,337		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	$	54,629	$	(33,222)	$	(4,770)	$	16,637	$	61,329	$	(34,619)	$	(4,770)	$	21,940

Total intangible amortization expense was approximately $1.5 million and $2.3 million for the three months ended September 30, 2018 and 2017, respectively and $5.3 million and $7.2 million for the nine months ended September 30, 2018 and 2017, respectively.

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

(inthousands)
2018 (remainder of year)	$	1,436
2019		3,762
2020		3,509
2021		927
2022		860
Thereafter		1,843
Total	$	12,337

XML

OTHER CURRENT ASSETS AND OTHER ASSETS

9 Months Ended

Sep. 30, 2018

OTHER CURRENT ASSETS AND OTHER ASSETS

OTHER CURRENT ASSETS AND OTHER ASSETS

NOTE G — OTHER CURRENT ASSETS AND OTHER ASSETS

Other current assets consist of the following:

(in thousands)	Asof September 30, 2018		Asof December 31, 2017
Non-trade receivables	$	7,582	$	7,668
Prepaid rent		4,454		4,248
Prepaid maintenance		3,548		3,134
Restricted cash		2,311		3,271
Prepaid insurance		739		271
Prepaid benefits		621		368
Other		1,487		1,928
Total other current assets	$	20,742	$	20,888

Other assets consist of the following:

(in thousands)	As of September 30, 2018		AsofDecember 31, 2017
Cash surrender value of company owned life insurance	$	3,097	$	2,340
Non-trade receivables		2,451		2,407
Surety bond		2,000		2,500
Deposits		2,083		2,193
Derivative asset		2,819		—
Other		261		—
Total other assets	$	12,711	$	9,440

XML

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES AND OTHER LIABILITIES

9 Months Ended

Sep. 30, 2018

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES AND OTHER LIABILITIES

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES AND OTHER LIABILITIES

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

Accrued expenses and other current liabilities consist of:

(in thousands)	As of September 30, 2018		Asof December 31, 2017
Patient prepayments, deposits and refunds payable	$	25,299	$	30,194
Accrued professional fees		4,585		11,612
Insurance and self-insurance accruals		9,136		8,901
Accrued sales taxes and other taxes		6,800		6,335
Derivative liability		515		—
Accrued interest payable		501		845
Other current liabilities		7,954		8,421
Total accrued expenses and other current liabilities	$	54,790	$	66,308

Other liabilities consist of:

(inthousands)	As of September 30, 2018		As of December 31, 2017
Supplemental executive retirement plan obligations	$	20,751	$	21,842
Long-term insurance accruals		9,291		9,531
Deferred tenant improvement allowances		8,265		7,361
Unrecognized tax benefits		5,404		5,219
Deferred rent		4,580		4,909
Other		1,104		1,391
Total other liabilities	$	49,395	$	50,253

XML

INCOME TAXES

9 Months Ended

Sep. 30, 2018

INCOME TAXES

INCOME TAXES

NOTE I — INCOME TAXES

We recorded a provision from income tax of $2.4 million and a benefit from income tax of $1.6 million for the three months ended September 30, 2018 and 2017, respectively.  The effective tax rate was 35.8% and 27.5% for the three months ended September 30, 2018 and 2017,respectively. We recorded a benefit from income tax of $3.8 million and a benefit of $7.0 million for the nine months ended September 30, 2018 and 2017, respectively. The effective tax rate was 42.0% and 25.8% for the nine months ended September 30, 2018 and 2017, respectively.

The increase in the effective tax rate for the three months ended September 30, 2018 compared with the three months ended September 30, 2017 is primarily attributable to income before income tax for the three months ended September 30, 2018 compared to loss before income tax for the three months ended September 30, 2017, partially offset by the changes enacted by the Tax Act.  Our effective tax rate for the three months ended September 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 September 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.

The decrease in the income tax benefit for the nine months ended September 30, 2018 compared with the nine months ended September 30, 2017 is largely driven by the decreased loss before taxes for the period, partially offset by increased estimated annual effective tax rate applied to the quarter.  The increase in estimated annual effective tax rate was driven by increased estimated permanent differences and decreased estimated loss before taxes.  Our effective tax rate for the nine months ended September 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 a  discrete item during the period.  Our effective tax rate for the nine months ended September 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 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 nine months ended September 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 ended December 31, 2018 when the analysis is complete.

XML

LONG TERM DEBT

9 Months Ended

Sep. 30, 2018

LONG-TERM DEBT

LONG-TERM DEBT

NOTE J — LONG-TERM DEBT

Long-term debt consists of the following:

(in thousands)	As of September 30, 2018		As of December 31, 2017
Credit Agreement, dated March 6, 2018
Revolving credit facility	$	—	$	—
Term loan B		502,475		—
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		3,796		5,912
Financing leases and other		15,424		18,169
Total debt before unamortized discount and debt issuance costs		521,695		460,956
Unamortized discount and debt issuance costs, net		(9,702)		(10,692)
Total debt		511,993		450,264
Current portion of long-term debt		9,027		4,336
Long-term debt	$	502,966	$	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 September 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.

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 nine months ended September 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 September 30, 2018, the weighted average interest rate on outstanding borrowings under our Term loan B facility was approximately 5.6%.  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: i) requirements that we maintain certain financial ratios at prescribed levels, ii) a prohibition on payment of dividends and other distributions and iii) restrictions on our ability and certain of our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions outside the healthcare industry.  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 September 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 September 30, 2018 were as follows (in thousands):

2018 (remainder of year)	$	2,897
2019		8,480
2020		7,329
2021		6,497
2022		6,098
Thereafter		490,394
Total debt before unamortized discount and debt issuance costs, net		521,695
Unamortized discount and debt issuance costs, net		(9,702)
Total debt	$	511,993

XML

FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2018

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

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 September 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 September 30, 2018 was $502.5 million compared to its fair value of $500.6 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 September 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.

The carrying value of our outstanding subordinated promissory notes issued in connection with acquisitions ("Seller Notes") as of September 30, 2018 and December 31, 2017 was $3.8 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.

XML

DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2018

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

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 and nine months ended September 30, 2018, such derivatives were used to hedge certain variable cash flows associated with existing variable-rate debt, whereby we pay the counter-party a fixed rate of 2.77% and receive floating payments  based on the 1-month LIBOR.  As of September 30, 2018, our swaps had a notional value outstanding of $325.0 million. The remaining contractual term of the interest rate swap is 5.5 years. 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 Income (Loss)

The following table presents the activity of cash flow hedges included in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2018:

(inthousands)	CashFlow Hedges
Balance as of June 30, 2018	$	24
Unrealized gain recognized in other comprehensive income (loss), net of tax		1,171
Reclassification to interest expense, net		567
Balance as of September 30, 2018	$	1,762
Balance as of December 31, 2017	$	—
Unrealized gain recognized in other comprehensive income (loss), net of tax		251
Reclassification to interest expense, net		1,511
Balance as of September 30, 2018	$	1,762

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

	As of September 30, 2018				As of December 31, 2017
(in thousands)	Assets		Liabilities		Assets		Liabilities
Derivatives designated as cash flow hedging instruments:
Other assets	$	2,819	$	—	$	—	$	—
Accrued expenses and other current liabilities		—		515		—		—

XML

STOCK-BASED COMPENSATION

9 Months Ended

Sep. 30, 2018

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

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 $3.7 million and $3.6 million, respectively, of stock-based compensation expense for the three months ended September 30, 2018 and 2017 and a total of approximately $9.6 million and $8.7 million for the nine months ended September 30, 2018 and 2017.  Stock compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and stock options.

XML

SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS

9 Months Ended

Sep. 30, 2018

SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS

SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS

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 nine months ended September 30, 2018 and 2017 is as follows:

Change in Benefit Obligation

(in thousands)	2018		2017
Benefit Obligation as of June 30	$	19,388	$	19,985
Service cost		92		85
Interest cost		150		167
Payments		(13)		(78)
Benefit Obligation as of September 30	$	19,617	$	20,159
Benefit obligation as of December 31, 2017 and 2016, respectively	$	20,793	$	21,304
Service cost		275		255
Interest cost		450		501
Payments		(1,901)		(1,901)
Benefit obligation as of September 30	$	19,617	$	20,159

Amounts Recognized in the Condensed Consolidated Balance Sheets:

(in thousands)	September 30, 2018		December 31, 2017
Accrued expenses and other current liabilities	$	1,913	$	1,913
Other liabilities		17,704		18,880
Total accrued liabilities	$	19,617	$	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 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 September 30, 2018 and 2017, the estimated accumulated obligation benefit is $2.9 million and $2.5 million, respectively, of which $2.6 million and $2.2 million is funded and $0.3 million and $0.3 million is unfunded at September 30, 2018 and 2017, respectively.

In connection with the DC SERP benefit obligation, we maintain a company owned life insurance 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.

XML

COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2018

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

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 September 30, 2018,  $1.0 million of the non-cancellable purchase commitment was outstanding  and is due and payable by April of 2019.  As of September 30, 2018, our reserve associated with the non-cancellable purchase commitment was $2.4 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.  On August 20, 2018, Hanger, Inc. and George McHenry filed a petition for panel rehearing and a petition for rehearing en banc with the Court of Appeals.  On September 10, 2018 the Court of Appeals asked plaintiffs to file a response to the petition for rehearing en banc, and plaintiffs filed an opposition to the petition for rehearing en banc on September 17, 2018.  Both petitions are pending with the Court of Appeals.  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.

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 subsequently 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, and we have provided a redacted version of the report to plaintiff’s counsel.  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 our results of 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 operate 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.

Settlements

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 do not anticipate receipt of 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 nine months ended September 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 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 in the year-to-date period September 30, 2018. 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 year-to-date period ended September 30, 2018 by this accrued interest amount.

XML

SEGMENT AND RELATED INFORMATION

9 Months Ended

Sep. 30, 2018

SEGMENT AND RELATED INFORMATION

SEGMENT AND RELATED INFORMATION

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.

			Products &		Corporate &		Consolidating
(in thousands)	Patient Care		Services		Other		Adjustments		Total
Three Months Ended September 30, 2018
Net revenue
Third party	$	214,080	$	48,866	$	—	$	—	$	262,946
Intersegments		—		48,945		—		(48,945)		—
Total net revenue		214,080		97,811		—		(48,945)		262,946
Material costs
Third party suppliers		58,395		26,410		—		—		84,805
Intersegments		6,300		42,645		—		(48,945)		—
Total material costs		64,695		69,055		—		(48,945)		84,805
Personnel expenses		77,806		13,047		—		—		90,853
Other expenses		34,426		6,306		21,682		—		62,414
Depreciation & amortization		4,651		2,564		1,735		—		8,950
Income (loss) from operations		32,502		6,839		(23,417)		—		15,924
Interest expense, net		7,984		3,233		(2,278)		—		8,939
Non-service defined benefit plan expense		—		—		176		—		176
Income (loss) before income taxes		24,518		3,606		(21,315)		—		6,809
Provision for income taxes		—		—		2,440		—		2,440
Net income (loss)	$	24,518	$	3,606	$	(23,755)	$	—	$	4,369

			Products &		Corporate &		Consolidating
(in thousands)	Patient Care		Services		Other		Adjustments		Total
Three Months Ended September 30, 2017
Net revenue
Third party	$	210,637	$	47,329	$	—	$	—	$	257,966
Intersegments		—		45,114		—		(45,114)		—
Total net revenue		210,637		92,443		—		(45,114)		257,966
Material costs
Third party suppliers		56,748		25,597		—		—		82,345
Intersegments		5,997		39,117		—		(45,114)		—
Total material costs		62,745		64,714		—		(45,114)		82,345
Personnel expenses		78,161		11,904		—		—		90,065
Other expenses		35,861		6,251		24,272		—		66,384
Depreciation & amortization		5,324		2,429		1,879		—		9,632
Income (loss) from operations		28,546		7,145		(26,151)		—		9,540
Interest expense, net		8,123		3,275		3,699		—		15,097
Non-service defined benefit plan expense		—		—		184		—		184
Income (loss) before income taxes		20,423		3,870		(30,034)		—		(5,741)
Benefit for income taxes		—		—		(1,580)		—		(1,580)
Net income (loss)	$	20,423	$	3,870	$	(28,454)	$	—	$	(4,161)

			Products &		Corporate &		Consolidating
(in thousands)	Patient Care		Services		Other		Adjustments		Total
Nine Months Ended September 30, 2018
Net revenue
Third party	$	620,745	$	143,162	$	—	$	—	$	763,907
Intersegments		—		141,302		—		(141,302)		—
Total net revenue		620,745		284,464		—		(141,302)		763,907
Material costs
Third party suppliers		170,559		77,118		—		—		247,677
Intersegments		17,944		123,358		—		(141,302)		—
Total material costs		188,503		200,476		—		(141,302)		247,677
Personnel expenses		228,211		38,304		—		—		266,515
Other expenses		104,869		17,944		62,474		—		185,287
Depreciation & amortization		14,547		7,569		5,436		—		27,552
Income (loss) from operations		84,615		20,171		(67,910)		—		36,876
Interest expense, net		22,429		9,745		(3,655)		—		28,519
Loss on extinguishment of debt		—		—		16,998		—		16,998
Non-service defined benefit plan expense		—		—		528		—		528
Income (loss) before income taxes		62,186		10,426		(81,781)		—		(9,169)
Benefit for income taxes		—		—		(3,848)		—		(3,848)
Net income (loss)	$	62,186	$	10,426	$	(77,933)	$	—	$	(5,321)

			Products &		Corporate &		Consolidating
(in thousands)	Patient Care		Services		Other		Adjustments		Total
Nine Months Ended September 30, 2017
Net revenue
Third party	$	614,495	$	140,538	$	—	$	—	$	755,033
Intersegments		—		131,484		—		(131,484)		—
Total net revenue		614,495		272,022		—		(131,484)		755,033
Material costs
Third party suppliers		165,680		74,727		—		—		240,407
Intersegments		17,743		113,741		—		(131,484)		—
Total material costs		183,423		188,468		—		(131,484)		240,407
Personnel expenses		229,582		36,269		—		—		265,851
Other expenses		107,124		19,205		76,389		—		202,718
Depreciation & amortization		16,123		7,691		5,780		—		29,594
Income (loss) from operations		78,243		20,389		(82,169)		—		16,463
Interest expense, net		24,409		9,909		8,879		—		43,197
Non-service defined benefit plan expense		—		—		552		—		552
Income (loss) from operations		53,834		10,480		(91,600)		—		(27,286)
Benefit for income taxes		—		—		(7,028)		—		(7,028)
Net income (loss)	$	53,834	$	10,480	$	(84,572)	$	—	$	(20,258)

XML

SUPPLEMENTAL CASH FLOW INFORMATION

9 Months Ended

Sep. 30, 2018

SUPPLEMENTAL CASH FLOW INFORMATION

SUPPLEMENTAL CASH FLOW INFORMATION

NOTE Q — SUPPLEMENTAL CASH FLOW INFORMATION

Changes in operating assets and liabilities on cash flows from operating activities is as follows:

	For the Nine Months Ended
	September 30,
(in thousands)	2018		2017
Accounts receivable, net	$	14,464	$	1,772
Inventories		(3,463)		(5,870)
Other current assets		1,770		1,510
Income taxes		11,356		(584)
Accounts payable		5,680		(348)
Accrued expenses and other current liabilities		(13,061)		(9,690)
Accrued compensation related costs		(20,650)		(6,942)
Other liabilities		(2,963)		(3,240)
Changes in operating assets and liabilities on cash flows from operating activities	$	(6,867)	$	(23,392)

The supplemental disclosure requirements for the statements of cash flows are as follows:

	For the Nine Months Ended
	September 30,
(in thousands)	2018		2017
Additions to property, plant and equipment acquired through financing obligations	$	1,509	$	1,299
Retirements of financed property, plant and equipment and related obligations		3,558		135
Purchase of property, plant and equipment in accounts payable at period end		2,419		865

XML

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2018

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Basis of Presentation

The accompanying interim unaudited 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 periods 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

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

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.

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 defined benefit plan expense" of $0.2 million and $0.2 million for the three months ended September 30, 2018 and 2017, respectively and $0.5 million and $0.6 million for the nine months ended September 30, 2018 and 2017, respectively.  Such reclassifications did not have a material effect on our condensed 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.

New Accounting Standards Issued, Not Yet Adopted

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 220). The ASU is intended to improve the recognition and measurement of financial instruments. The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for public entities for fiscal years beginning after 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 August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715).  This ASU modifies the disclosure requirements for defined benefit and other postretirement plans.  This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs; while other disclosures have been added to address significant gains and losses related to changes in benefit obligations.  This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations.  The amendments in this ASU are effective for fiscal years ending after December 15, 2020 and for interim periods therein 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 August 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The ASU is effective for public entities for fiscal years beginning after 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 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, 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 us  beginning January 1, 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.  We are evaluating how the new standard will impact our condensed consolidated financial statements, and currently anticipate that there will be a material increase to assets and lease liabilities for existing property leases representing our nationwide retail locations. In addition, we are evaluating the impact on presentation and timing of lease-related expenses for those leases which are currently recorded as financing leases on our balance sheet.

Revenue Recognition

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:

	As of and for the Three Months Ended September 30, 2018
					Proformabalance
					without the
					adoption of
(in thousands)	As Reported		Effects of Adoption		ASC 606
Condensed Consolidated Statement of Operations
Net revenues	$	262,946	$	645	$	263,591
Other operating costs		30,999		736		31,735
Income from operations		15,924		(91)		15,833
Income before income taxes		6,809		(91)		6,718
Net income		4,369		(91)		4,278
Comprehensive income		6,133		(91)		6,042
Condensed Consolidated Balance Sheet
Assets
Deferred income taxes	$	71,967	$	24	$	71,991
Total assets		675,629		24		675,653
Liabilities
Accrued expenses and other current liabilities		54,790		92		54,882
Total current liabilities		148,872		92		148,964
Total liabilities		701,233		92		701,325
Shareholders' Deficit
Accumulated deficit		(365,852)		(68)		(365,920)
Total shareholders' deficit		(25,604)		(68)		(25,672)

	As of and for the Nine Months Ended September 30,2018
					Proforma balance
					without the
					adoption of
(in thousands)	As Reported		Effects of Adoption		ASC 606
Condensed Consolidated Statement of Operations
Net revenues	$	763,907	$	2,866	$	766,773
Other operating costs		92,631		2,937		95,568
Income from operations		36,876		(71)		36,805
Loss before income taxes		(9,169)		(71)		(9,240)
Net loss		(5,321)		(71)		(5,392)
Comprehensive loss		(3,799)		(71)		(3,870)
Condensed Consolidated Balance Sheet
Assets
Deferred income taxes	$	71,967	$	(249)	$	71,718
Total assets		675,629		(249)		675,380
Liabilities
Accrued expenses and other current liabilities		54,790		(956)		53,834
Total current liabilities		148,872		(956)		147,916
Total liabilities		701,233		(956)		700,277
Shareholders' Deficit
Accumulated deficit		(365,852)		707		(365,145)
Total shareholders' deficit		(25,604)		707		(24,897)

The adoption of ASC 606 resulted in deferring $1.0 million of net revenue from our Patient Care segment as of September 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 nine months ended September 30, 2018 were $0.6 million and $2.9 million, respectively, and are considered implicit price concessions under ASC 606 and are recorded as a reduction to net revenue.  

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 nine months ended September 30, 2018 and 2017:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2018		2017		2018		2017
Patient Care Segment
Medicare	$	69,724	$	65,759	$	197,461	$	186,606
Medicaid		33,597		32,557		96,993		95,524
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)		78,333		79,804		226,761		234,866
Veterans Administration		19,317		18,662		56,873		52,995
Private Pay		13,109		13,855		42,657		44,504
Total	$	214,080	$	210,637	$	620,745	$	614,495

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.

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 nine months ended September 30, 2018 and 2017:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2018		2017		2018		2017
Products & Services Segment
Distribution services, net of intersegment revenue eliminations	$	34,666	$	32,439	$	100,700	$	95,030
Therapeutic solutions		14,200		14,890		42,462		45,508
Total	$	48,866	$	47,329	$	143,162	$	140,538

XML

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

9 Months Ended

Sep. 30, 2018

ASU 2014-09

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Schedule of impact of adoption on our condensed consolidated balance sheet and condensed consolidated statement of operations

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:

	As of and for the Three Months Ended September 30, 2018
					Proformabalance
					without the
					adoption of
(in thousands)	As Reported		Effects of Adoption		ASC 606
Condensed Consolidated Statement of Operations
Net revenues	$	262,946	$	645	$	263,591
Other operating costs		30,999		736		31,735
Income from operations		15,924		(91)		15,833
Income before income taxes		6,809		(91)		6,718
Net income		4,369		(91)		4,278
Comprehensive income		6,133		(91)		6,042
Condensed Consolidated Balance Sheet
Assets
Deferred income taxes	$	71,967	$	24	$	71,991
Total assets		675,629		24		675,653
Liabilities
Accrued expenses and other current liabilities		54,790		92		54,882
Total current liabilities		148,872		92		148,964
Total liabilities		701,233		92		701,325
Shareholders' Deficit
Accumulated deficit		(365,852)		(68)		(365,920)
Total shareholders' deficit		(25,604)		(68)		(25,672)

	As of and for the Nine Months Ended September 30,2018
					Proforma balance
					without the
					adoption of
(in thousands)	As Reported		Effects of Adoption		ASC 606
Condensed Consolidated Statement of Operations
Net revenues	$	763,907	$	2,866	$	766,773
Other operating costs		92,631		2,937		95,568
Income from operations		36,876		(71)		36,805
Loss before income taxes		(9,169)		(71)		(9,240)
Net loss		(5,321)		(71)		(5,392)
Comprehensive loss		(3,799)		(71)		(3,870)
Condensed Consolidated Balance Sheet
Assets
Deferred income taxes	$	71,967	$	(249)	$	71,718
Total assets		675,629		(249)		675,380
Liabilities
Accrued expenses and other current liabilities		54,790		(956)		53,834
Total current liabilities		148,872		(956)		147,916
Total liabilities		701,233		(956)		700,277
Shareholders' Deficit
Accumulated deficit		(365,852)		707		(365,145)
Total shareholders' deficit		(25,604)		707		(24,897)

Patient Care

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Schedule of disaggregates of revenue from contracts with customers

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2018		2017		2018		2017
Patient Care Segment
Medicare	$	69,724	$	65,759	$	197,461	$	186,606
Medicaid		33,597		32,557		96,993		95,524
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)		78,333		79,804		226,761		234,866
Veterans Administration		19,317		18,662		56,873		52,995
Private Pay		13,109		13,855		42,657		44,504
Total	$	214,080	$	210,637	$	620,745	$	614,495

Products & Services

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Schedule of disaggregates of revenue from contracts with customers

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2018		2017		2018		2017
Products & Services Segment
Distribution services, net of intersegment revenue eliminations	$	34,666	$	32,439	$	100,700	$	95,030
Therapeutic solutions		14,200		14,890		42,462		45,508
Total	$	48,866	$	47,329	$	143,162	$	140,538

XML

EARNINGS PER SHARE (Tables)

9 Months Ended

Sep. 30, 2018

EARNINGS PER SHARE

Schedule of reconciliation of numerators and denominators used to calculate basic and diluted net loss per share

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands except per share data)	2018		2017		2018		2017
Net income (loss)	$	4,369	$	(4,161)	$	(5,321)	$	(20,258)
Weighted average shares outstanding - basic		36,857		36,340		36,717		36,239
Effect of potentially dilutive restricted stock units and options (1)		700		—		—		—
Weighted average shares outstanding - diluted		37,557		36,340		36,717		36,239
Basic income (loss) per share	$	0.12	$	(0.11)	$	(0.14)	$	(0.56)
Diluted income (loss) per share	$	0.12	$	(0.11)	$	(0.14)	$	(0.56)

(1) In accordance with ASC 260 - Earnings Per Share, during periods of a net loss, shares used to compute diluted per share amount exclude potentially dilutive shares related to unvested restricted stock units and unexercised options.  For the three months ended September 30, 2017, 224,663 shares were excluded.  For the nine month periods ended September 30, 2018 and 2017, shares excluded were 680,444 and 295,089, respectively.

XML

ACCOUNTS RECEIVABLE, NET (Tables)

9 Months Ended

Sep. 30, 2018

ACCOUNTS RECEIVABLE, NET

Schedule of accounts receivable allowances

	As of September 30, 2018						As of December 31, 2017
			Products &						Products &
(in thousands)	PatientCare		Services		Consolidated		Patient Care		Services		Consolidated
Accounts receivable, before allowances	$	170,030	$	26,105	$	196,135	$	193,150	$	23,494	$	216,644
Allowances for estimated implicit price concessions arising from:
Payor disallowances		(52,267)		—		(52,267)		(56,233)		—		(56,233)
Patient non-payments		(7,716)		—		(7,716)		—		—		—
Accounts receivable, gross		110,047		26,105		136,152		136,917		23,494		160,411
Allowance for doubtful accounts		—		(3,706)		(3,706)		(9,894)		(4,171)		(14,065)
Accounts receivable, net	$	110,047	$	22,399	$	132,446	$	127,023	$	19,323	$	146,346

XML

INVENTORIES (Tables)

9 Months Ended

Sep. 30, 2018

INVENTORIES

Schedule of inventories

(in thousands)	As of September 30, 2018		As of December 31, 2017
Raw materials	$	20,049	$	19,929
Work in process		12,649		8,996
Finished goods		39,903		40,213
Total inventories	$	72,601	$	69,138

XML

PROPERTY PLANT AND EQUIPMENT, NET (Tables)

9 Months Ended

Sep. 30, 2018

PROPERTY PLANT AND EQUIPMENT, NET

Schedule of property, plant and equipment, net

(in thousands)	As of September 30, 2018		As of December 31, 2017
Land	$	644	$	644
Buildings		25,475		28,180
Furniture and fixtures		14,231		12,968
Machinery and equipment		27,551		26,838
Therapeutic program equipment leased to third parties under operating leases		29,059		31,100
Leasehold improvements		106,885		100,999
Computers and software		69,105		65,455
Total property, plant, and equipment, gross		272,950		266,184
Less: accumulated depreciation		(183,526)		(172,569)
Total property, plant, and equipment, net	$	89,424	$	93,615

XML

GOODWILL AND OTHER INTANGIBLE ASSETS (Tables)

9 Months Ended

Sep. 30, 2018

GOODWILL AND OTHER INTANGIBLE ASSETS

Schedule of balances related to intangible assets

	As of September 30, 2018								As of December 31, 2017
	Gross						Net		Gross						Net
	Carrying		Accumulated		Accumulated		Carrying		Carrying		Accumulated		Accumulated		Carrying
(in thousands)	Amount		Amortization		Impairment		Amount		Amount		Amortization		Impairment		Amount
Customer lists	$	30,563	$	(22,671)	$	—	$	7,892	$	36,439	$	(24,267)	$	—	$	12,172
Other intangible assets		14,996		(10,551)		—		4,445		15,820		(10,352)		—		5,468
Definite-lived intangible assets		45,559		(33,222)		—		12,337		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	$	54,629	$	(33,222)	$	(4,770)	$	16,637	$	61,329	$	(34,619)	$	(4,770)	$	21,940

Schedule of estimated aggregate amortization expense for definite lived intangible assets

(inthousands)
2018 (remainder of year)	$	1,436
2019		3,762
2020		3,509
2021		927
2022		860
Thereafter		1,843
Total	$	12,337

XML

OTHER CURRENT ASSETS AND OTHER ASSETS (Tables)

9 Months Ended

Sep. 30, 2018

OTHER CURRENT ASSETS AND OTHER ASSETS

Schedule of other current assets

(in thousands)	Asof September 30, 2018		Asof December 31, 2017
Non-trade receivables	$	7,582	$	7,668
Prepaid rent		4,454		4,248
Prepaid maintenance		3,548		3,134
Restricted cash		2,311		3,271
Prepaid insurance		739		271
Prepaid benefits		621		368
Other		1,487		1,928
Total other current assets	$	20,742	$	20,888

Schedule of other assets

(in thousands)	As of September 30, 2018		AsofDecember 31, 2017
Cash surrender value of company owned life insurance	$	3,097	$	2,340
Non-trade receivables		2,451		2,407
Surety bond		2,000		2,500
Deposits		2,083		2,193
Derivative asset		2,819		—
Other		261		—
Total other assets	$	12,711	$	9,440

XML

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES AND OTHER LIABILITIES (Tables)

9 Months Ended

Sep. 30, 2018

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES AND OTHER LIABILITIES

Schedule of accrued expenses and other current liabilities

(in thousands)	As of September 30, 2018		Asof December 31, 2017
Patient prepayments, deposits and refunds payable	$	25,299	$	30,194
Accrued professional fees		4,585		11,612
Insurance and self-insurance accruals		9,136		8,901
Accrued sales taxes and other taxes		6,800		6,335
Derivative liability		515		—
Accrued interest payable		501		845
Other current liabilities		7,954		8,421
Total accrued expenses and other current liabilities	$	54,790	$	66,308

Schedule of other liabilities

(inthousands)	As of September 30, 2018		As of December 31, 2017
Supplemental executive retirement plan obligations	$	20,751	$	21,842
Long-term insurance accruals		9,291		9,531
Deferred tenant improvement allowances		8,265		7,361
Unrecognized tax benefits		5,404		5,219
Deferred rent		4,580		4,909
Other		1,104		1,391
Total other liabilities	$	49,395	$	50,253

XML

LONG TERM DEBT (Tables)

9 Months Ended

Sep. 30, 2018

LONG-TERM DEBT

Schedule of long-term debt

(in thousands)	As of September 30, 2018		As of December 31, 2017
Credit Agreement, dated March 6, 2018
Revolving credit facility	$	—	$	—
Term loan B		502,475		—
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		3,796		5,912
Financing leases and other		15,424		18,169
Total debt before unamortized discount and debt issuance costs		521,695		460,956
Unamortized discount and debt issuance costs, net		(9,702)		(10,692)
Total debt		511,993		450,264
Current portion of long-term debt		9,027		4,336
Long-term debt	$	502,966	$	445,928

Schedule of maturities of debt

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

2018 (remainder of year)	$	2,897
2019		8,480
2020		7,329
2021		6,497
2022		6,098
Thereafter		490,394
Total debt before unamortized discount and debt issuance costs, net		521,695
Unamortized discount and debt issuance costs, net		(9,702)
Total debt	$	511,993

XML

DERIVATIVE FINANCIAL INSTRUMENTS (Tables)

9 Months Ended

Sep. 30, 2018

DERIVATIVE FINANCIAL INSTRUMENTS

Schedule of activity of cash flow hedges included in accumulated other comprehensive income (loss)

(inthousands)	CashFlow Hedges
Balance as of June 30, 2018	$	24
Unrealized gain recognized in other comprehensive income (loss), net of tax		1,171
Reclassification to interest expense, net		567
Balance as of September 30, 2018	$	1,762
Balance as of December 31, 2017	$	—
Unrealized gain recognized in other comprehensive income (loss), net of tax		251
Reclassification to interest expense, net		1,511
Balance as of September 30, 2018	$	1,762

Schedule of fair value of derivative assets and liabilities within the condensed consolidated balance sheets

	As of September 30, 2018				As of December 31, 2017
(in thousands)	Assets		Liabilities		Assets		Liabilities
Derivatives designated as cash flow hedging instruments:
Other assets	$	2,819	$	—	$	—	$	—
Accrued expenses and other current liabilities		—		515		—		—

XML

SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (Tables)

9 Months Ended

Sep. 30, 2018

SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS

Schedule of Change in Benefit Obligation

(in thousands)	2018		2017
Benefit Obligation as of June 30	$	19,388	$	19,985
Service cost		92		85
Interest cost		150		167
Payments		(13)		(78)
Benefit Obligation as of September 30	$	19,617	$	20,159
Benefit obligation as of December 31, 2017 and 2016, respectively	$	20,793	$	21,304
Service cost		275		255
Interest cost		450		501
Payments		(1,901)		(1,901)
Benefit obligation as of September 30	$	19,617	$	20,159

Schedule of Amounts Recognized in the Consolidated Balance Sheets

(in thousands)	September 30, 2018		December 31, 2017
Accrued expenses and other current liabilities	$	1,913	$	1,913
Other liabilities		17,704		18,880
Total accrued liabilities	$	19,617	$	20,793

XML

SEGMENT AND RELATED INFORMATION (Tables)

9 Months Ended

Sep. 30, 2018

SEGMENT AND RELATED INFORMATION

Summary of financial information concerning the Company's reporting segments

			Products &		Corporate &		Consolidating
(in thousands)	Patient Care		Services		Other		Adjustments		Total
Three Months Ended September 30, 2018
Net revenue
Third party	$	214,080	$	48,866	$	—	$	—	$	262,946
Intersegments		—		48,945		—		(48,945)		—
Total net revenue		214,080		97,811		—		(48,945)		262,946
Material costs
Third party suppliers		58,395		26,410		—		—		84,805
Intersegments		6,300		42,645		—		(48,945)		—
Total material costs		64,695		69,055		—		(48,945)		84,805
Personnel expenses		77,806		13,047		—		—		90,853
Other expenses		34,426		6,306		21,682		—		62,414
Depreciation & amortization		4,651		2,564		1,735		—		8,950
Income (loss) from operations		32,502		6,839		(23,417)		—		15,924
Interest expense, net		7,984		3,233		(2,278)		—		8,939
Non-service defined benefit plan expense		—		—		176		—		176
Income (loss) before income taxes		24,518		3,606		(21,315)		—		6,809
Provision for income taxes		—		—		2,440		—		2,440
Net income (loss)	$	24,518	$	3,606	$	(23,755)	$	—	$	4,369

			Products &		Corporate &		Consolidating
(in thousands)	Patient Care		Services		Other		Adjustments		Total
Three Months Ended September 30, 2017
Net revenue
Third party	$	210,637	$	47,329	$	—	$	—	$	257,966
Intersegments		—		45,114		—		(45,114)		—
Total net revenue		210,637		92,443		—		(45,114)		257,966
Material costs
Third party suppliers		56,748		25,597		—		—		82,345
Intersegments		5,997		39,117		—		(45,114)		—
Total material costs		62,745		64,714		—		(45,114)		82,345
Personnel expenses		78,161		11,904		—		—		90,065
Other expenses		35,861		6,251		24,272		—		66,384
Depreciation & amortization		5,324		2,429		1,879		—		9,632
Income (loss) from operations		28,546		7,145		(26,151)		—		9,540
Interest expense, net		8,123		3,275		3,699		—		15,097
Non-service defined benefit plan expense		—		—		184		—		184
Income (loss) before income taxes		20,423		3,870		(30,034)		—		(5,741)
Benefit for income taxes		—		—		(1,580)		—		(1,580)
Net income (loss)	$	20,423	$	3,870	$	(28,454)	$	—	$	(4,161)

			Products &		Corporate &		Consolidating
(in thousands)	Patient Care		Services		Other		Adjustments		Total
Nine Months Ended September 30, 2018
Net revenue
Third party	$	620,745	$	143,162	$	—	$	—	$	763,907
Intersegments		—		141,302		—		(141,302)		—
Total net revenue		620,745		284,464		—		(141,302)		763,907
Material costs
Third party suppliers		170,559		77,118		—		—		247,677
Intersegments		17,944		123,358		—		(141,302)		—
Total material costs		188,503		200,476		—		(141,302)		247,677
Personnel expenses		228,211		38,304		—		—		266,515
Other expenses		104,869		17,944		62,474		—		185,287
Depreciation & amortization		14,547		7,569		5,436		—		27,552
Income (loss) from operations		84,615		20,171		(67,910)		—		36,876
Interest expense, net		22,429		9,745		(3,655)		—		28,519
Loss on extinguishment of debt		—		—		16,998		—		16,998
Non-service defined benefit plan expense		—		—		528		—		528
Income (loss) before income taxes		62,186		10,426		(81,781)		—		(9,169)
Benefit for income taxes		—		—		(3,848)		—		(3,848)
Net income (loss)	$	62,186	$	10,426	$	(77,933)	$	—	$	(5,321)

			Products &		Corporate &		Consolidating
(in thousands)	Patient Care		Services		Other		Adjustments		Total
Nine Months Ended September 30, 2017
Net revenue
Third party	$	614,495	$	140,538	$	—	$	—	$	755,033
Intersegments		—		131,484		—		(131,484)		—
Total net revenue		614,495		272,022		—		(131,484)		755,033
Material costs
Third party suppliers		165,680		74,727		—		—		240,407
Intersegments		17,743		113,741		—		(131,484)		—
Total material costs		183,423		188,468		—		(131,484)		240,407
Personnel expenses		229,582		36,269		—		—		265,851
Other expenses		107,124		19,205		76,389		—		202,718
Depreciation & amortization		16,123		7,691		5,780		—		29,594
Income (loss) from operations		78,243		20,389		(82,169)		—		16,463
Interest expense, net		24,409		9,909		8,879		—		43,197
Non-service defined benefit plan expense		—		—		552		—		552
Income (loss) from operations		53,834		10,480		(91,600)		—		(27,286)
Benefit for income taxes		—		—		(7,028)		—		(7,028)
Net income (loss)	$	53,834	$	10,480	$	(84,572)	$	—	$	(20,258)

XML

SUPPLEMENTAL CASH FLOW INFORMATION (Tables)

9 Months Ended

Sep. 30, 2018

SUPPLEMENTAL CASH FLOW INFORMATION

Schedule of changes in operating assets and liabilities on cash flows from operating activities and supplemental disclosure requirements for the statements of cash flows

Changes in operating assets and liabilities on cash flows from operating activities is as follows:

	For the Nine Months Ended
	September 30,
(in thousands)	2018		2017
Accounts receivable, net	$	14,464	$	1,772
Inventories		(3,463)		(5,870)
Other current assets		1,770		1,510
Income taxes		11,356		(584)
Accounts payable		5,680		(348)
Accrued expenses and other current liabilities		(13,061)		(9,690)
Accrued compensation related costs		(20,650)		(6,942)
Other liabilities		(2,963)		(3,240)
Changes in operating assets and liabilities on cash flows from operating activities	$	(6,867)	$	(23,392)

The supplemental disclosure requirements for the statements of cash flows are as follows:

	For the Nine Months Ended
	September 30,
(in thousands)	2018		2017
Additions to property, plant and equipment acquired through financing obligations	$	1,509	$	1,299
Retirements of financed property, plant and equipment and related obligations		3,558		135
Purchase of property, plant and equipment in accounts payable at period end		2,419		865

XML

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Description of Business (Details)	9 Months Ended
	Sep. 30, 2018 segment
Description of Business
Number of operating segments	2

XML

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Recent Accounting Pronouncements (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Jan. 01, 2018	Dec. 31, 2017
Recent Accounting Pronouncement
Accumulated deficit	$ (365,852)		$ (365,852)		$ (360,531)	$ (359,772)
Deferred tax assets	71,967		71,967		68,394	68,126
General and administrative expenses	28,308	$ 25,356	80,467	$ 75,969
Non-service defined benefit plan expense	176	184	528	552
ASU 2014-09 | Adjustments
Recent Accounting Pronouncement
Accumulated deficit	(68)		(68)		(759)	707
Contract liability	1,000		1,000
Deferred tax assets	24		24		$ 268	$ (249)
ASU 2017-07
Recent Accounting Pronouncement
General and administrative expenses	(200)	(200)	(500)	(600)
Non-service defined benefit plan expense	$ 200	$ 200	$ 500	$ 600

XML

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Effect of Topic 606 on Balance Sheet (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Jan. 01, 2018	Dec. 31, 2017
Assets
Deferred tax assets	$ 71,967	$ 68,394	$ 68,126
Total assets	675,629		640,423
Liabilities
Accrued expenses and other current liabilities	54,790	67,335	66,308
Total current liabilities	148,872		172,293
Total liabilities	701,233		668,474
Shareholders' Deficit
Accumulated deficit	(365,852)	(360,531)	(359,772)
Total shareholders' (deficit) equity	(25,604)	(28,810)	(28,051)
Before adoption of ASC 606 | ASU 2014-09
Assets
Deferred tax assets	71,991		71,718
Total assets	675,653		675,380
Liabilities
Accrued expenses and other current liabilities	54,882		53,834
Total current liabilities	148,964		147,916
Total liabilities	701,325		700,277
Shareholders' Deficit
Accumulated deficit	(365,920)		(365,145)
Total shareholders' (deficit) equity	(25,672)		(24,897)
Adjustments | ASU 2014-09
Assets
Deferred tax assets	24	268	(249)
Total assets	24		(249)
Liabilities
Accrued expenses and other current liabilities	92	1,027	(956)
Total current liabilities	92		(956)
Total liabilities	92		(956)
Shareholders' Deficit
Accumulated deficit	(68)	$ (759)	707
Total shareholders' (deficit) equity	$ (68)		$ 707

XML

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Effect of Topic 606 on Statement of Operations (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Condensed Consolidated Statement of Operations
Net revenues	$ 262,946	$ 257,966	$ 763,907	$ 755,033
Other operating costs	30,999	33,184	92,631	97,734
Income from operations	15,924	9,540	36,876	16,463
Income (loss) before income taxes	6,809	(5,741)	(9,169)	(27,286)
Net income (loss)	4,369	(4,161)	(5,321)	(20,258)
Comprehensive income (loss)	6,133	$ (4,178)	(3,799)	$ (20,309)
Before adoption of ASC 606 | ASU 2014-09
Condensed Consolidated Statement of Operations
Net revenues	263,591		766,773
Other operating costs	31,735		95,568
Income from operations	15,833		36,805
Income (loss) before income taxes	6,718		(9,240)
Net income (loss)	4,278		(5,392)
Comprehensive income (loss)	6,042		(3,870)
Adjustments | ASU 2014-09
Condensed Consolidated Statement of Operations
Net revenues	645		2,866
Other operating costs	736		2,937
Income from operations	(91)		(71)
Income (loss) before income taxes	(91)		(71)
Net income (loss)	(91)		(71)
Comprehensive income (loss)	$ (91)		$ (71)

XML

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Patient Care (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018 USD ($) item	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($) item	Sep. 30, 2017 USD ($)
Summary of Significant Accounting Policies
Net revenues	$ 262,946	$ 257,966	$ 763,907	$ 755,033
ASU 2014-09 | Before adoption of ASC 606
Summary of Significant Accounting Policies
Net revenues	$ 263,591		$ 766,773
Patient Care
Summary of Significant Accounting Policies
Labor warranty			90 days
Manufacturer warranty			180 days
Number of performance obligations | item	2		2
Maximum cranial device follow up visit period			90 days
Net revenues	$ 214,080	210,637	$ 620,745	614,495
Patient Care | Before adoption of ASC 606
Summary of Significant Accounting Policies
Net revenues		210,637		614,495
Patient Care | ASU 2014-09
Summary of Significant Accounting Policies
Net revenue deferred	1,000		1,000
Revenue recognized from satisfying performance obligations coming from previous period			1,000
Patient Care | Medicare
Summary of Significant Accounting Policies
Net revenues	69,724		197,461
Patient Care | Medicare | Before adoption of ASC 606
Summary of Significant Accounting Policies
Net revenues		65,759		186,606
Patient Care | Medicaid
Summary of Significant Accounting Policies
Net revenues	33,597		96,993
Patient Care | Medicaid | Before adoption of ASC 606
Summary of Significant Accounting Policies
Net revenues		32,557		95,524
Patient Care | Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)
Summary of Significant Accounting Policies
Net revenues	78,333		226,761
Patient Care | Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care) | Before adoption of ASC 606
Summary of Significant Accounting Policies
Net revenues		79,804		234,866
Patient Care | Veterans Administration
Summary of Significant Accounting Policies
Net revenues	19,317		56,873
Patient Care | Veterans Administration | Before adoption of ASC 606
Summary of Significant Accounting Policies
Net revenues		18,662		52,995
Patient Care | Private Pay
Summary of Significant Accounting Policies
Estimated uncollectible amounts	600		2,900
Net revenues	$ 13,109		$ 42,657
Patient Care | Private Pay | Before adoption of ASC 606
Summary of Significant Accounting Policies
Net revenues		$ 13,855		$ 44,504

XML

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Product & Services (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Summary of Significant Accounting Policies
Net revenues	$ 262,946	$ 257,966	$ 763,907	$ 755,033
Products & Services
Summary of Significant Accounting Policies
Net revenues	48,866	47,329	$ 143,162	140,538
Products & Services | Minimum
Summary of Significant Accounting Policies
Payment terms			30 days
Products & Services | Maximum
Summary of Significant Accounting Policies
Payment terms			90 days
Products & Services | Before adoption of ASC 606
Summary of Significant Accounting Policies
Net revenues		47,329		140,538
Products & Services | Distribution, net of intersegment revenue eliminations
Summary of Significant Accounting Policies
Net revenues	34,666		$ 100,700
Products & Services | Distribution, net of intersegment revenue eliminations | Before adoption of ASC 606
Summary of Significant Accounting Policies
Net revenues		32,439		95,030
Products & Services | Therapeutic solutions
Summary of Significant Accounting Policies
Net revenues	$ 14,200		$ 42,462
Products & Services | Therapeutic solutions | Before adoption of ASC 606
Summary of Significant Accounting Policies
Net revenues		$ 14,890		$ 45,508

XML

EARNINGS PER SHARE (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Earnings Per Share
Net income (loss)	$ 4,369	$ (4,161)	$ (5,321)	$ (20,258)
Weighted average shares outstanding - basic	36,856,881	36,340,089	36,716,568	36,238,816
Effect of potentially dilutive restricted stock units and options	700,000
Weighted average shares outstanding - diluted	37,556,594	36,340,089	36,716,568	36,238,816
Total anti-dilutive shares (in shares)	0	867,930	48,502	475,905
Basic and Diluted:
Basic income (loss) per share (in dollars per share)	$ 0.12	$ (0.11)	$ (0.14)	$ (0.56)
Diluted income (loss) per share (in dollars per share)	$ 0.12	$ (0.11)	$ (0.14)	$ (0.56)
Unvested restricted stock units and unexercised options
Earnings Per Share
Total anti-dilutive shares (in shares)		224,663	680,444	295,089

XML

ACCOUNTS RECEIVABLE, NET - (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Accounts Receivable, net
Accounts receivable, before allowances	$ 196,135	$ 216,644
Allowances for estimated implicit price concessions arising from:
Payor disallowances	(52,267)	(56,233)
Patient non-payments	(7,716)
Accounts receivable, gross	136,152	160,411
Allowance for doubtful accounts	(3,706)	(14,065)
Accounts receivable, net	132,446	146,346
Patient Care
Accounts Receivable, net
Accounts receivable, before allowances	170,030	193,150
Allowances for estimated implicit price concessions arising from:
Payor disallowances	(52,267)	(56,233)
Patient non-payments	(7,716)
Accounts receivable, gross	110,047	136,917
Allowance for doubtful accounts		(9,894)
Accounts receivable, net	110,047	127,023
Products & Services
Accounts Receivable, net
Accounts receivable, before allowances	26,105	23,494
Allowances for estimated implicit price concessions arising from:
Accounts receivable, gross	26,105	23,494
Allowance for doubtful accounts	(3,706)	(4,171)
Accounts receivable, net	$ 22,399	$ 19,323

XML

INVENTORIES (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Inventories
Raw materials	$ 20,049	$ 19,929
Work in process	12,649	8,996
Finished goods	39,903	40,213
Total inventories	$ 72,601	$ 69,138

XML

PROPERTY PLANT AND EQUIPMENT, NET (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	$ 272,950		$ 272,950		$ 266,184
Less: accumulated depreciation	(183,526)		(183,526)		(172,569)
Total property, plant, and equipment, net	89,424		89,424		93,615
Depreciation expense	7,500	$ 7,300	22,300	$ 22,400
Land
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	644		644		644
Buildings
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	25,475		25,475		28,180
Furniture and fixtures
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	14,231		14,231		12,968
Machinery and equipment
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	27,551		27,551		26,838
Therapeutic program equipment leased to third parties under operating leases
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	29,059		29,059		31,100
Leasehold improvements
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	106,885		106,885		100,999
Computers and software
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	$ 69,105		$ 69,105		$ 65,455

XML

GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Goodwill
Goodwill carrying value	$ 196,343	$ 196,343
Patient Care
Goodwill
Goodwill carrying value	$ 196,300	$ 196,300

XML

GOODWILL AND OTHER INTANGIBLE ASSETS - Intangibles (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
GOODWILL AND OTHER INTANGIBLE ASSETS
Definite-lived, Gross Carrying Amount	$ 45,559		$ 45,559		$ 52,259
Definite-lived, Accumulated Amortization	(33,222)		(33,222)		(34,619)
Definite-lived, Net Carrying Amount	12,337		12,337		17,640
Total other intangible assets, Gross Carrying Amount	54,629		54,629		61,329
Total other intangible assets, Accumulated Impairment	(4,770)		(4,770)		(4,770)
Total other intangible assets, Net Carrying Amount	16,637		16,637		21,940
Amortization expense	1,500	$ 2,300	5,300	$ 7,200
Trade Name
GOODWILL AND OTHER INTANGIBLE ASSETS
Indefinite life, Gross Carrying Amount	9,070		9,070		9,070
Indefinite life, Accumulated Impairment	(4,770)		(4,770)		(4,770)
Indefinite life, Net Carrying Amount	4,300		4,300		4,300
Customer lists
GOODWILL AND OTHER INTANGIBLE ASSETS
Definite-lived, Gross Carrying Amount	30,563		30,563		36,439
Definite-lived, Accumulated Amortization	(22,671)		(22,671)		(24,267)
Definite-lived, Net Carrying Amount	7,892		7,892		12,172
Other intangible assets
GOODWILL AND OTHER INTANGIBLE ASSETS
Definite-lived, Gross Carrying Amount	14,996		14,996		15,820
Definite-lived, Accumulated Amortization	(10,551)		(10,551)		(10,352)
Definite-lived, Net Carrying Amount	$ 4,445		$ 4,445		$ 5,468

XML

GOODWILL AND OTHER INTANGIBLE ASSETS - Estimated Amortization (Details) $ in Thousands	Sep. 30, 2018 USD ($)
Estimated aggregate amortization expense for definite-lived intangible assets
2018 (remainder of year)	$ 1,436
2019	3,762
2020	3,509
2021	927
2022	860
Thereafter	1,843
Total	$ 12,337

XML

OTHER CURRENT ASSETS AND OTHER ASSETS - Other Current Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017	Dec. 31, 2016
OTHER CURRENT ASSETS AND OTHER ASSETS
Non-trade receivables	$ 7,582	$ 7,668
Prepaid rent	4,454	4,248
Prepaid maintenance	3,548	3,134
Restricted cash	2,311	3,271	$ 2,199	$ 2,255
Prepaid insurance	739	271
Prepaid benefits	621	368
Other	1,487	1,928
Total other current assets	$ 20,742	$ 20,888

XML

OTHER CURRENT ASSETS AND OTHER ASSETS - Other Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
OTHER CURRENT ASSETS AND OTHER ASSETS
Cash surrender value of company owned life insurance	$ 3,097	$ 2,340
Non-trade receivables	2,451	2,407
Surety bond	2,000	2,500
Deposits	2,083	2,193
Derivative asset	2,819
Other	261
Total other assets	$ 12,711	$ 9,440

XML

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES AND OTHER LIABILITIES - Accrued expenses and other current liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Jan. 01, 2018	Dec. 31, 2017
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES AND OTHER LIABILITIES
Patient prepayments, deposits and refunds payable	$ 25,299		$ 30,194
Accrued professional fees	4,585		11,612
Insurance and self-insurance accruals	9,136		8,901
Accrued sales taxes and other taxes	6,800		6,335
Derivative liability	515
Accrued interest payable	501		845
Other current liabilities	7,954		8,421
Total accrued expenses and other current liabilities	$ 54,790	$ 67,335	$ 66,308

XML

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES AND OTHER LIABILITIES - Other liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES AND OTHER LIABILITIES
Supplemental executive retirement plan obligations	$ 20,751	$ 21,842
Long-term insurance accruals	9,291	9,531
Deferred tenant improvement allowances	8,265	7,361
Unrecognized tax benefits	5,404	5,219
Deferred rent	4,580	4,909
Other	1,104	1,391
Total other liabilities	$ 49,395	$ 50,253

XML

INCOME TAXES (Details) - USD ($) $ in Thousands	3 Months Ended			9 Months Ended
	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
INCOME TAXES
Provision (benefit) for income taxes	$ 2,440		$ (1,580)	$ (3,848)	$ (7,028)
Effective tax rate	35.80%		27.50%	42.00%	25.80%
Federal statutory rate	21.00%		35.00%
Provisional amount of tax expenses related to re-measurement of deferred tax assets and liabilities		$ 35,000

XML

LONG TERM DEBT (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Long-Term Debt
Total debt before unamortized discount and debt issuance costs	$ 521,695	$ 460,956
Unamortized discount and debt issuance costs, net	(9,702)	(10,692)
Total debt	511,993	450,264
Current portion of long-term debt	9,027	4,336
Long-term debt	502,966	445,928
Revolving Credit Facility | Prior Credit Agreement, dated June 17, 2013
Long-Term Debt
Total debt before unamortized discount and debt issuance costs		5,000
Term Loan B | Credit Agreement, dated March 6, 2018
Long-Term Debt
Total debt before unamortized discount and debt issuance costs	502,475
Term Loan B | Prior Credit Agreement, dated August 1, 2016
Long-Term Debt
Total debt before unamortized discount and debt issuance costs		280,000
Term Loan | Prior Credit Agreement, dated June 17, 2013
Long-Term Debt
Total debt before unamortized discount and debt issuance costs		151,875
Seller notes
Long-Term Debt
Total debt before unamortized discount and debt issuance costs	3,796	5,912
Financing leases and other
Long-Term Debt
Total debt before unamortized discount and debt issuance costs	$ 15,424	$ 18,169

XML

LONG-TERM DEBT - Refinancing of Credit Agreement and Term B Borrowings (Details) - USD ($) $ in Thousands		9 Months Ended
	Mar. 06, 2018	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Long-Term Debt
Outstanding amount of debt		$ 521,695		$ 460,956
Debt issuance costs		6,757	$ 2,863
Debt call premium		$ 8,436
Credit Agreement
Long-Term Debt
Maximum borrowing capacity	$ 605,000
Interest rate in excess of applicable rate upon acceleration and default ( as a percent)	2.00%
Credit Agreement | One-month LIBOR
Long-Term Debt
Interest rate margin (as a percent)	1.00%
Credit Agreement | Federal funds rate
Long-Term Debt
Interest rate margin (as a percent)	0.50%
Credit Agreement | Fiscal quarters ended June 30, 2018, September 30, 2018, December 31, 2018 and March 31, 2019
Long-Term Debt
Consolidated leverage ratio	5.00%
Credit Agreement | Fiscal quarters ended June 30, 2019 through March 31, 2020
Long-Term Debt
Consolidated leverage ratio	4.75%
Credit Agreement | Fiscal quarters ended June 30, 2020 through March 31, 2021
Long-Term Debt
Consolidated leverage ratio	4.50%
Credit Agreement | Fiscal quarters ended June 30, 2021 through March 31, 2022
Long-Term Debt
Consolidated leverage ratio	4.25%
Credit Agreement | Fiscal quarters ended June 30, 2022 and the last day of each fiscal quarter thereafter
Long-Term Debt
Consolidated leverage ratio	3.75%
Credit Agreement | Last day of any fiscal quarter
Long-Term Debt
Consolidated leverage ratio	2.75%
Credit Agreement | Term Loan
Long-Term Debt
Outstanding amount of debt	$ 505,000
Credit Agreement | Revolving Credit Facility
Long-Term Debt
Maximum borrowing capacity	100,000
Letters of credit outstanding amount	5,900
Increase in additional borrowing capacity	$ 125,000
Maximum leverage ratio to use maximum credit facility	3.80
Increase in margin(as a percent)	50.00%
Credit Agreement | Revolving Credit Facility | Minimum
Long-Term Debt
Unused commitment fee (as a percent)	0.375%
Credit Agreement | Revolving Credit Facility | Maximum
Long-Term Debt
Unused commitment fee (as a percent)	0.50%
Credit Agreement | Term Loan B
Long-Term Debt
Weighted average interest rate		5.60%
Credit Agreement, dated March 6, 2018
Long-Term Debt
Proceeds from borrowing	$ 501,500
Debt issuance costs	6,800
Credit Agreement, dated March 6, 2018 | Term Loan B
Long-Term Debt
Outstanding amount of debt		$ 502,475
Prior Credit Agreement, dated August 1, 2016
Long-Term Debt
Debt call premium	8,400
Unamortized discount and debt issuance costs expensed	$ 8,600
Prior Credit Agreement, dated August 1, 2016 | Term Loan B
Long-Term Debt
Outstanding amount of debt				280,000
Prior Credit Agreement, dated June 17, 2013 | Term Loan
Long-Term Debt
Outstanding amount of debt				151,875
Prior Credit Agreement, dated June 17, 2013 | Revolving Credit Facility
Long-Term Debt
Outstanding amount of debt				$ 5,000

XML

LONG-TERM DEBT - Maturities of Debt (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Maturities of long-term debt
2018 (remainder of year)	$ 2,897
2019	8,480
2020	7,329
2021	6,497
2022	6,098
Thereafter	490,394
Total debt before unamortized discount and debt issuance costs, net	521,695	$ 460,956
Unamortized discount and debt issuance costs, net	(9,702)
Total debt	$ 511,993	$ 450,264

XML

FAIR VALUE MEASUREMENTS - Financial Instruments (Details) - USD ($) $ in Millions	Sep. 30, 2018	Mar. 31, 2018	Dec. 31, 2017
Credit Agreement | Term Loan
FAIR VALUE MEASUREMENTS
Debt	$ 502.5		$ 151.9
Credit Agreement | Term Loan B | Carrying Value
FAIR VALUE MEASUREMENTS
Debt			280.0
Credit Agreement | Revolving Credit Facility | Carrying Value
FAIR VALUE MEASUREMENTS
Debt			5.0
Outstanding amount	0.0
Seller notes | Carrying Value
FAIR VALUE MEASUREMENTS
Debt	3.8		5.9
Recurring basis | Level 1 | Fair Value | Other current assets
FAIR VALUE MEASUREMENTS
Money market funds	2.3		3.3
Recurring basis | Level 3 | Credit Agreement | Term Loan | Fair Value
FAIR VALUE MEASUREMENTS
Debt	500.6		149.4
Recurring basis | Level 3 | Credit Agreement | Term Loan B | Fair Value
FAIR VALUE MEASUREMENTS
Debt			283.5
Recurring basis | Level 3 | Credit Agreement | Revolving Credit Facility | Fair Value
FAIR VALUE MEASUREMENTS
Debt			4.9
Interest rate swap agreements | Cash flow hedges
FAIR VALUE MEASUREMENTS
Notional amount of derivative instrument	$ 325.0	$ 325.0	$ 0.0
Annual reduction in notional amount of derivative		$ 12.5

XML

DERIVATIVE FINANCIAL INSTRUMENTS (Details) - Interest rate swap agreements - Cash flow hedges - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2018	Mar. 31, 2018	Dec. 31, 2017
DERIVATIVE FINANCIAL INSTRUMENTS
Interest fixed-rate pay	2.77%
Notional amount of derivative instrument	$ 325.0	$ 325.0	$ 0.0
Remaining contractual term	5 years 6 months

XML

DERIVATIVE FINANCIAL INSTRUMENTS - Changes in Net Gain or Loss on Cash Flow Hedges Included in Accumulated Other Comprehensive Loss (Details) - Interest rate swap agreements - Cash flow hedges - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2018
Changes in Net Gain or Loss on Cash Flow Hedges Included in Accumulated Other Comprehensive Loss
Balance at the beginning of the period	$ 24
Unrealized gain recognized in other comprehensive income (loss), net of tax	1,171	$ 251
Reclassification to interest expense, net	567	1,511
Balance at the end of the period	$ 1,762	$ 1,762

XML

DERIVATIVE FINANCIAL INSTRUMENTS - Fair Value of Derivative Assets and Liabilities (Details) - Cash flow hedges $ in Thousands	Sep. 30, 2018 USD ($)
Other assets
Derivatives designated as cash flow hedging instruments:
Assets	$ 2,819
Accrued expenses and other current liabilities
Derivatives designated as cash flow hedging instruments:
Liabilities	$ 515

XML

STOCK-BASED COMPENSATION (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	May 31, 2018
STOCK BASED COMPENSATION
Stock-based compensation expense	$ 3.7	$ 3.6	$ 9.6	$ 8.7
2016 Omnibus Incentive Plan
STOCK BASED COMPENSATION
Shares of common stock authorized for issuance under the share-based compensation plan					2,625,000

XML

SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Change in Benefit Obligation
Benefit obligation at the beginning of the period	$ 19,388	$ 19,985	$ 20,793	$ 21,304
Service cost	92	85	275	255
Interest cost	150	167	450	501
Payments	(13)	(78)	(1,901)	(1,901)
Benefit obligation at the end of the period	19,617	20,159	19,617	20,159
Amounts Recognized in the Consolidated Balance Sheets:
Accrued expenses and other current liabilities	1,913		1,913		$ 1,913
Other liabilities	17,704		17,704		18,880
Total accrued liabilities	19,617		19,617		$ 20,793
Estimated accumulated obligation benefit	2,900	2,500	2,900	2,500
Funded estimated accumulated obligation benefit	2,600	2,200	2,600	2,200
Unfunded estimated accumulated obligation benefit	$ 300	$ 300	$ 300	$ 300

XML

COMMITMENTS AND CONTINGENCIES - Commitments (Details) - USD ($) $ in Millions	1 Months Ended
	Apr. 30, 2014	Sep. 30, 2018	Dec. 31, 2014
COMMITMENTS AND CONTINGENCIES
Outstanding purchase commitments	$ 4.5	$ 1.0
Covered period of purchase commitment	5 years
Estimated loss on purchase commitment			$ 3.4
Reserve associated with non-cancellable purchase commitment		2.4
Due in April 2019		$ 1.0

XML

COMMITMENTS AND CONTINGENCIES - Contingencies (Details)	7 Months Ended
	Aug. 31, 2015 lawsuit
COMMITMENTS AND CONTINGENCIES
Number of law suits filed	2

XML

COMMITMENTS AND CONTINGENCIES - Favorable Settlements (Details) - USD ($) $ in Millions			9 Months Ended
	Jun. 28, 2018	May 15, 2018	Sep. 30, 2018
COMMITMENTS AND CONTINGENCIES
Net favorable settlement		$ 1.7
Payment for claims	$ 2.2
Favorable amount over previously estimated liabilities	$ 0.5
Period covered by unclaimed property claims	12 years
Interest of unclaimed properties settlement not required to be paid			$ 1.5

XML

SEGMENT AND RELATED INFORMATION - SEGMENT INFORMATION (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018 USD ($) area	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($) segment area	Sep. 30, 2017 USD ($)
SEGMENT AND RELATED INFORMATION
Number of operating segments | segment			2
Net revenues	$ 262,946	$ 257,966	$ 763,907	$ 755,033
Material costs	84,805	82,345	247,677	240,407
Personnel expenses	90,853	90,065	266,515	265,851
Other expenses	62,414	66,384	185,287	202,718
Depreciation & amortization	8,950	9,632	27,552	29,594
Income (loss) from operations	15,924	9,540	36,876	16,463
Interest expense, net	8,939	15,097	28,519	43,197
Loss on extinguishment of debt			16,998
Non-service defined benefit plan expense	176	184	528	552
Income (loss) before income taxes	6,809	(5,741)	(9,169)	(27,286)
Provision (benefit) for income taxes	2,440	(1,580)	(3,848)	(7,028)
Net income (loss)	4,369	(4,161)	(5,321)	(20,258)
Corporate & Other
SEGMENT AND RELATED INFORMATION
Other expenses	21,682	24,272	62,474	76,389
Depreciation & amortization	1,735	1,879	5,436	5,780
Income (loss) from operations	(23,417)	(26,151)	(67,910)	(82,169)
Interest expense, net	(2,278)	3,699	(3,655)	8,879
Loss on extinguishment of debt			16,998
Non-service defined benefit plan expense	176	184	528	552
Income (loss) before income taxes	(21,315)	(30,034)	(81,781)	(91,600)
Provision (benefit) for income taxes	2,440	(1,580)	(3,848)	(7,028)
Net income (loss)	(23,755)	(28,454)	(77,933)	(84,572)
Intersegments
SEGMENT AND RELATED INFORMATION
Net revenues	(48,945)	(45,114)	(141,302)	(131,484)
Material costs	(48,945)	(45,114)	(141,302)	(131,484)
Consolidating Adjustments
SEGMENT AND RELATED INFORMATION
Net revenues	(48,945)	(45,114)	(141,302)	(131,484)
Material costs	$ (48,945)	(45,114)	$ (141,302)	(131,484)
Patient Care
SEGMENT AND RELATED INFORMATION
Medicare reimbursement for O&P products and services based on prices set forth in fee schedules, number of regional pricing areas | area	10		10
Net revenues	$ 214,080	210,637	$ 620,745	614,495
Material costs	58,395	56,748	170,559	165,680
Personnel expenses	77,806	78,161	228,211	229,582
Other expenses	34,426	35,861	104,869	107,124
Depreciation & amortization	4,651	5,324	14,547	16,123
Income (loss) from operations	32,502	28,546	84,615	78,243
Interest expense, net	7,984	8,123	22,429	24,409
Income (loss) before income taxes	24,518	20,423	62,186	53,834
Net income (loss)	24,518	20,423	62,186	53,834
Patient Care | Operating segments
SEGMENT AND RELATED INFORMATION
Net revenues	214,080	210,637	620,745	614,495
Material costs	64,695	62,745	188,503	183,423
Patient Care | Intersegments
SEGMENT AND RELATED INFORMATION
Material costs	6,300	5,997	17,944	17,743
Products & Services
SEGMENT AND RELATED INFORMATION
Net revenues	48,866	47,329	143,162	140,538
Material costs	26,410	25,597	77,118	74,727
Personnel expenses	13,047	11,904	38,304	36,269
Other expenses	6,306	6,251	17,944	19,205
Depreciation & amortization	2,564	2,429	7,569	7,691
Income (loss) from operations	6,839	7,145	20,171	20,389
Interest expense, net	3,233	3,275	9,745	9,909
Income (loss) before income taxes	3,606	3,870	10,426	10,480
Net income (loss)	3,606	3,870	10,426	10,480
Products & Services | Operating segments
SEGMENT AND RELATED INFORMATION
Net revenues	97,811	92,443	284,464	272,022
Material costs	69,055	64,714	200,476	188,468
Products & Services | Intersegments
SEGMENT AND RELATED INFORMATION
Net revenues	48,945	45,114	141,302	131,484
Material costs	$ 42,645	$ 39,117	$ 123,358	$ 113,741

XML

SUPPLEMENTAL CASH FLOW INFORMATION (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Changes in operating assets and liabilities
Accounts receivable, net	$ 14,464	$ 1,772
Inventories	(3,463)	(5,870)
Other current assets	1,770	1,510
Income taxes	11,356	(584)
Accounts payable	5,680	(348)
Accrued expenses and other current liabilities	(13,061)	(9,690)
Accrued compensation related costs	(20,650)	(6,942)
Other liabilities	(2,963)	(3,240)
Changes in operating assets and liabilities on cash flows from operating activities	(6,867)	(23,392)
Non-cash financing and investing activities:
Additions to property, plant and equipment acquired through financing obligations	1,509	1,299
Retirements of financed property, plant and equipment and related obligations	3,558	135
Purchase of property, plant and equipment in accounts payable at period end	$ 2,419	$ 865