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, 2019

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

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

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	HNGR	New York Stock Exchange

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 every Interactive Data File required to be submitted 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 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 October 29, 2019 the registrant had 37,337,840 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	34
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	53
	Item 4. Controls and Procedures	54
Part II Other Information
	Item 1. Legal Proceedings	55
	Item 1A. Risk Factors	57
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	57
	Item 3. Defaults Upon Senior Securities	57
	Item 4. Mine Safety Disclosures	57
	Item 5. Other Information	57
	Item 6. Exhibits	57
Exhibits Index		58
Signatures		59

ii

PART 1.FINANCIAL INFORMATION

HANGER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except par value and share amounts)

(Unaudited)

	As of September 30,			As of December 31,
	2019			2018
ASSETS
Current assets:
Cash and cash equivalents	$	49,947		$	95,114
Accounts receivable, net	145,378			143,986
Inventories	75,693			67,690
Income taxes receivable	—			379
Other current assets	14,615			18,731
Total current assets	285,633			325,900
Non-current assets:
Property, plant and equipment, net	84,490			89,489
Goodwill	226,348			198,742
Other intangible assets, net	17,985			15,478
Deferred income taxes	68,581			65,635
Operating lease right-of-use assets	109,838			—
Other assets	8,537			7,766
Total assets	$	801,412		$	703,010
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Current portion of long-term debt	$	8,619		$	8,583
Accounts payable	53,831			55,797
Accrued expenses and other current liabilities	55,908			51,783
Accrued compensation related costs	39,633			55,111
Current portion of operating lease liabilities	32,437			—
Total current liabilities	190,428			171,274
Long-term liabilities:
Long-term debt, less current portion	488,620			502,090
Operating lease liabilities	88,719			—
Other liabilities	47,851			51,570
Total liabilities	815,618			724,934
Commitments and contingencies (Note R)
Shareholders’ deficit:
Common stock, $0.01 par value; 60,000,000 shares authorized; 37,504,755 shares issued and 37,361,934 shares outstanding in 2019, and 37,063,995 shares issued and 36,921,174 shares outstanding in 2018	375			371
Additional paid-in capital	350,579			343,955
Accumulated other comprehensive loss	(13,777		)	(4,531		)
Accumulated deficit	(350,687		)	(361,023		)
Treasury stock, at cost; 142,821 shares at 2019 and 2018, respectively	(696		)	(696		)
Total shareholders’ deficit	(14,206		)	(21,924		)
Total liabilities and shareholders’ deficit	$	801,412		$	703,010

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

1

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except share and per share amounts)

(Unaudited)

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Net revenues	$	279,638	$	262,946	$	797,155	$	763,907
Material costs	92,034		84,805		261,810		247,677
Personnel costs	94,594		90,853		272,795		266,515
Other operating costs	32,771		30,999		100,067		92,631
General and administrative expenses	29,834		28,308		87,474		80,467
Professional accounting and legal fees	3,629		3,107		9,576		12,189
Depreciation and amortization	9,373		8,950		26,906		27,552
Income from operations	17,403		15,924		38,527		36,876
Interest expense, net	8,954		8,939		25,973		28,519
Loss on extinguishment of debt	—		—		—		16,998
Non-service defined benefit plan expense	173		176		519		528
Income (loss) before income taxes	8,276		6,809		12,035		(9,169		)
Provision (benefit) for income taxes	2,585		2,440		3,260		(3,848		)
Net income (loss)	$	5,691	$	4,369	$	8,775	$	(5,321	)
Basic and Diluted Per Common Share Data:
Basic income (loss) per share	$	0.15	$	0.12	$	0.24	$	(0.14	)
Weighted average shares used to compute basic earnings per common share	37,349,144		36,856,881		37,218,234		36,716,568
Diluted income (loss) per share	$	0.15	$	0.12	$	0.23	$	(0.14	)
Weighted average shares used to compute diluted earnings per common share	37,986,860		37,556,594		37,921,767		36,716,568

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

2

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(Unaudited)

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2019			2018		2019			2018
Net income (loss)	$	5,691		$	4,369	$	8,775		$	(5,321	)
Other comprehensive (loss) income:
Unrealized (loss) gain on cash flow hedges, net of tax (benefit) provision of ($516), $533, ($2,916), and $541, respectively	$	(1,641	)	$	1,738	$	(9,265	)	$	1,762
Unrealized gain (loss) on defined benefit plan, net of tax provision (benefit) of $2, $0, $6, and ($105), respectively	7			26		19			(240		)
Total other comprehensive (loss) income	(1,634		)	1,764		(9,246		)	1,522
Comprehensive income (loss)	$	4,057		$	6,133	$	(471	)	$	(3,799	)

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

3

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

For the Nine Months Ended September 30, 2019

(dollars and share amounts 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, 2018	36,921	$	371	$	343,955		$	(4,531	)	$	(361,023	)	$	(696	)	$	(21,924	)
Cumulative effect of a change in accounting for leases (Note A)	—	—		—			—			1,561			—			1,561
Balance, January 1, 2019	36,921	371		343,955			(4,531		)	(359,462		)	(696		)	(20,363		)
Net loss	—	—		—			—			(6,951		)	—			(6,951		)
Shares based compensation expense	—	—		3,265			—			—			—			3,265
Issuance of common stock upon vesting of restricted stock units	350	3		(3		)	—			—			—			—
Effect of shares withheld to cover taxes	—	—		(3,626		)	—			—			—			(3,626		)
Total other comprehensive loss	—	—		—			(2,930		)	—			—			(2,930		)
Balance, March 31, 2019	37,271	$	374	$	343,591		$	(7,461	)	$	(366,413	)	$	(696	)	$	(30,605	)
Net income	—	—		—			—			10,035			—			10,035
Shares based compensation expense	—	—		3,450			—			—			—			3,450
Issuance of common stock upon vesting of restricted stock units	64	1		(1		)	—			—			—			—
Effect of shares withheld to cover taxes	—	—		(28		)	—			—			—			(28		)
Total other comprehensive loss	—	—		—			(4,682		)	—			—			(4,682		)
Balance, June 30, 2019	37,335	$	375	$	347,012		$	(12,143	)	$	(356,378	)	$	(696	)	$	(21,830	)
Net income	—	—		—			—			5,691			—			5,691
Shares based compensation expense	—	—		3,374			—			—			—			3,374
Issuance in connection with the exercise of stock options	20	—		249			—			—			—			249
Issuance of common stock upon vesting of restricted stock units	7	—		—			—			—			—			—
Effect of shares withheld to cover taxes	—	—		(56		)	—			—			—			(56		)
Total other comprehensive loss	—	—		—			(1,634		)	—			—			(1,634		)
Balance, September 30, 2019	37,362	$	375	$	350,579		$	(13,777	)	$	(350,687	)	$	(696	)	$	(14,206	)

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

4

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

For the Nine Months Ended September 30, 2018

(dollars and share amounts 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	—	—		—			—			(759		)	—			(759		)
Balance, January 1, 2018	36,372	365		333,738			(1,686		)	(360,531		)	(696		)	(28,810		)
Net loss	—	—		—			—			(22,618		)	—			(22,618		)
Shares based compensation expense	—	—		2,585			—			—			—			2,585
Issuance of common stock upon vesting of restricted stock units	372	4		(4		)	—			—			—			—
Effect of shares withheld to cover taxes	—	—		(2,150		)	—			—			—			(2,150		)
Total other comprehensive loss	—	—		—			(2,582		)	—			—			(2,582		)
Balance, March 31, 2018	36,744	$	369	$	334,169		$	(4,268	)	$	(383,149	)	$	(696	)	$	(53,575	)
Net income	—	—		—			—			12,928			—			12,928
Shares based compensation expense	—	—		3,320			—			—			—			3,320
Issuance of common stock upon vesting of restricted stock units	106	1		(1		)	—			—			—			—
Effect of shares withheld to cover taxes	—	—		(313		)	—			—			—			(313		)
Total other comprehensive income	—	—		—			2,340			—			—			2,340
Balance, June 30, 2018	36,850	$	370	$	337,175		$	(1,928	)	$	(370,221	)	$	(696	)	$	(35,300	)
Net income	—	—		—			—			4,369			—			4,369
Shares based compensation expense	—	—		3,668			—			—			—			3,668
Issuance of common stock upon vesting of restricted stock units	18	—		—			—			—			—			—
Effect of shares withheld to cover taxes	—	—		(105		)	—			—			—			(105		)
Total other comprehensive income	—	—		—			1,764			—			—			1,764
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.

5

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

	For the Nine Months Ended September 30,
	2019			2018
Cash flows provided by operating activities:
Net income (loss)	$	8,775		$	(5,321	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	26,906			27,552
Amortization of right-of-use assets	27,657			—
Provision (benefit) for doubtful accounts	284			(578		)
Stock-based compensation expense	10,089			9,573
Deferred income taxes	(723		)	(4,114		)
Amortization of debt discounts and issuance costs	1,202			2,453
Loss on extinguishment of debt	—			16,998
Gain on sale and disposal of fixed assets	(1,200		)	(2,537		)
Changes in operating assets and liabilities (Note T)	(53,045		)	(6,867		)
Net cash provided by operating activities	19,945			37,159
Cash flows used in investing activities
Purchase of property, plant, and equipment	(20,262		)	(16,435		)
Purchase of therapeutic program equipment leased to third parties under operating leases	(5,165		)	(6,390		)
Acquisitions, net of cash acquired	(31,585		)	—
Purchase of company-owned life insurance investment	—			(598		)
Proceeds from sale of property, plant and equipment	2,181			3,583
Net cash used in investing activities	(54,831		)	(19,840		)
Cash flows (used in) provided by financing activities
Borrowings under term loan, net of discount	—			501,467
Repayment of term loan	(3,788		)	(434,400		)
Borrowings under revolving credit agreement	—			3,000
Repayments under revolving credit agreement	—			(8,000		)
Payment of employee taxes on stock-based compensation	(3,710		)	(2,568		)
Payment on seller notes	(2,688		)	(2,116		)
Payment of financing lease obligations	(344		)	(942		)
Payment of debt issuance costs	—			(6,757		)
Payment of debt extinguishment costs	—			(8,436		)
Proceeds from exercise of options	249			—
Net cash (used in) provided by financing activities	(10,281		)	41,248
(Decrease) increase in cash, cash equivalents, and restricted cash	(45,167		)	58,567
Cash, cash equivalents, and restricted cash, at beginning of period	95,114			4,779
Cash, cash equivalents, and restricted cash, at end of period	$	49,947		$	63,346
Reconciliation of Cash, Cash Equivalents, and Restricted Cash:
Cash and cash equivalents, at beginning of period	$	95,114		$	1,508
Restricted cash, at beginning of period	—			3,271
Cash, cash equivalents, and restricted cash, at beginning of period	$	95,114		$	4,779
Cash and cash equivalents, at end of period	$	49,947		$	61,035
Restricted cash, at end of period	—			2,311
Cash, cash equivalents, and restricted cash, at end of period	$	49,947		$	63,346

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

6

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, 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, 2018 (the “2018 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 2018 Form 10-K.

Recently Adopted Accounting Pronouncements

Leases

We lease a majority of our patient care clinics and warehouses under lease arrangements, certain of which contain renewal options, rent escalation clauses, and/or landlord incentives.  Rent expense for noncancellable leases with scheduled rent increases and/or landlord incentives is recognized on a straight-line basis over the lease term, including any applicable rent holidays, beginning on the lease commencement date.  We exclude leases with a term of one year or less from our balance sheet, and do not separate non-lease components from our real estate leases.  Our leases may include variable payments for maintenance, which are expensed as incurred.

In addition, we are the lessor of therapeutic program equipment to patients and businesses in acute, post-acute, and clinic settings.  The 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.  These operating lease agreements are typically for twelve months and have a 30-day cancellation policy.  We do not separate non-lease components, consisting primarily of training, for these leases.

7

Effect of Adoption of ASC 842

We adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (ASC 842), and related clarifying standards, as of January 1, 2019, using the modified retrospective approach.  This approach allows us to apply the standard as of the adoption date and record a cumulative-effect adjustment to the opening balance of accumulated deficit at January 1, 2019.  The new lease standard requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for all leases (with the exception of short-term leases, defined as leases with a term of 12 months or less) at the lease commencement date and recognize expenses on the consolidated statements of operations on a straight-line basis.

In addition, we elected the package of practical expedients available under the transition provisions of the new lease standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) carrying forward lease classification under legacy guidance, and (iii) not revaluing initial direct costs for existing leases.  By electing the modified retrospective approach on adoption date, prior period results will continue to be presented under legacy guidance based on the accounting standards originally in effect for such period.  We have elected to keep leases with an initial term of 12 months or less off the balance sheet and recognize those lease payments in the consolidated statements of operations on a straight-line basis over the lease term.  We have lease agreements with lease and non-lease components, and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component for real estate and therapeutic program equipment, from both a lessee and lessor perspective.  From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease.  The accounting for our finance leases and leases where we are the lessor remained substantially unchanged.

The lease liability was measured as the present value of the unpaid lease payments and the right-of-use asset was derived from the calculation of the lease liability.  As the rate implicit in the lease is generally not readily determinable for our operating leases, the discount rates used to determine the present value of our lease liability are based on our incremental borrowing rate at the lease commencement date and commensurate with the remaining lease term.  Our incremental borrowing rate for a lease is the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.  Our lease term may include options to extend or terminate if the exercise of that option is reasonably certain to occur.  We rent or sublease certain real estate to third parties.  Our sublease portfolio consists mainly of operating leases on small medical office locations.

The most significant impact of the new lease standard was to the balance sheet, where values were added for real estate operating leases, which increased both assets and liabilities.  The capital leases associated with equipment were already reflected on our balance sheet and did not add any incremental assets or liabilities under the new lease standard.  The adoption of the new lease standard did not have an impact on our compliance with existing debt covenants because the impact of changes in accounting standards is excluded from debt covenant calculations.  The impact of applying the new lease standard to our results of operations and cash flows is not significant.

Additionally, we have determined that the leases previously identified as build-to-suit leasing arrangements under legacy lease accounting were to be derecognized pursuant to the transition guidance provided for build-to-suit leases in ASC 842.  Accordingly, these leases have been reassessed as operating leases as of January 1, 2019.  The legacy guidance was based on a risks and rewards model which contained several prescriptive provisions designed to assess lessee ownership during construction.  The ASC 842 model has eliminated these prescriptive rules and replaced them with a model based on control.  Under ASC 842, we did not demonstrate control as the lessee and therefore the leases were derecognized at January 1, 2019.  The resulting cumulative effect recognized at adoption to accumulated deficit was $1.6 million, net of tax.

8

Upon adoption of ASC 842, the cumulative effect of the changes made to our condensed consolidated balance sheet as of January 1, 2019 was as follows:

	December 31, 2018			Effects of			January 1, 2019
(in thousands)	As reported			adoption			After adoption
Assets
Other current assets	$	18,731		$	(5,770	)	$	12,961
Total current assets	325,900			(5,770		)	320,130
Property, plant and equipment, net	89,489			(8,068		)	81,421
Other intangible assets, net	15,478			(220		)	15,258
Deferred income taxes	65,635			(570		)	65,065
Operating lease right-of-use assets	—			103,378			103,378
Other assets	7,766			538			8,304
Total assets	703,010			89,288			792,298
Liabilities
Current liabilities:
Current portion of long-term debt	8,583			(619		)	7,964
Accrued expenses and other current liabilities	51,783			(1,352		)	50,431
Current portion of operating lease liabilities	—			31,479			31,479
Total current liabilities	171,274			29,508			200,782
Long-term liabilities:
Long-term debt, less current portion	502,090			(12,493		)	489,597
Operating lease liabilities	—			83,662			83,662
Other liabilities	51,570			(12,950		)	38,620
Total liabilities	724,934			87,727			812,661
Shareholders’ deficit
Accumulated deficit	(361,023		)	1,561			(359,462		)
Total shareholders’ deficit	(21,924		)	1,561			(20,363		)
Total liabilities and shareholders’ deficit	$	703,010		$	89,288		$	792,298

Cloud Computing Arrangements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.  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).  Effective July 1, 2019, we elected to early adopt the requirements of the standard on a prospective basis.  As of September 30, 2019, we capitalized $0.3 million of implementation costs for cloud computing arrangements, net of accumulated amortization, which is recorded in other current assets and other assets in the condensed consolidated balance sheet.

9

Recent Accounting Pronouncements, Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related clarifying standards, 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 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 consolidated financial statements and the related disclosures.

In August 2018, the 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 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 public entities 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 consolidated financial statements and the related disclosures.

Note B — Earnings Per Share

Basic earnings per common share is computed using the weighted average number of common shares outstanding during the period.  Diluted earnings per common 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 diluted earnings per share were 10 and zero for the three and nine months ended September 30, 2019, and zero and 48,502 for the three and nine months ended September 30, 2018.

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

10

The reconciliation of the numerators and denominators used to calculate basic and diluted net loss 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)	2019		2018		2019		2018
Net income (loss)	$	5,691	$	4,369	$	8,775	$	(5,321	)
Weighted average shares outstanding - basic	37,349		36,857		37,218		36,717
Effect of potentially dilutive restricted stock units and options (1)	638		700		704		—
Weighted average shares outstanding - diluted	37,987		37,557		37,922		36,717
Basic income (loss) per share	$	0.15	$	0.12	$	0.24	$	(0.14	)
Diluted income (loss) per share	$	0.15	$	0.12	$	0.23	$	(0.14	)

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

Note C — Revenue Recognition

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.

The following table disaggregates revenue from contracts with customers in our Patient Care segment for the three and nine months ended September 30, 2019 and 2018:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Patient Care Segment
Medicare	$	72,879	$	69,724	$	206,295	$	197,461
Medicaid	36,140		33,597		103,631		96,993
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)	83,384		78,333		232,410		226,761
Veterans Administration	23,816		19,317		64,635		56,873
Private Pay	14,712		13,109		45,729		42,657
Total	$	230,931	$	214,080	$	652,700	$	620,745

11

The impact to revenue related to prior period performance obligations was not material for the three and nine months ended September 30, 2019.

Products & 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.

The following table disaggregates revenue from contracts with customers in our Product & Services segment for the three and nine months ended September 30, 2019 and 2018:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Products & Services Segment
Distribution services, net of intersegment revenue eliminations	$	36,653	$	34,666	$	107,510	$	100,700
Therapeutic solutions	12,054		14,200		36,945		42,462
Total	$	48,707	$	48,866	$	144,455	$	143,162

Note D — 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.  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.

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, 2019 and December 31, 2018 is comprised of the following:

	As of September 30, 2019									As of December 31, 2018
(in thousands)	Patient Care			Products & Services			Consolidated			Patient Care			Products & Services			Consolidated
Accounts receivable, before allowances	$	185,659		$	27,381		$	213,040		$	182,338		$	24,542		$	206,880
Allowances for estimated implicit price concessions arising from:
Payor disallowances	(56,564		)	—			(56,564		)	(53,378		)	—			(53,378		)
Patient non-payments	(8,820		)	—			(8,820		)	(7,244		)	—			(7,244		)
Accounts receivable, gross	120,275			27,381			147,656			121,716			24,542			146,258
Allowance for doubtful accounts	—			(2,278		)	(2,278		)	—			(2,272		)	(2,272		)
Accounts receivable, net	$	120,275		$	25,103		$	145,378		$	121,716		$	22,270		$	143,986

12

Note E — Inventories

Our inventories are comprised of the following:

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Raw materials	$	20,908	$	19,632
Work in process	14,287		9,278
Finished goods	40,498		38,780
Total inventories	$	75,693	$	67,690

Note F — Property, Plant and Equipment, Net

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

	As of September 30,			As of December 31,
(in thousands)	2019			2018
Land	$	634		$	644
Buildings (1)	4,046			24,558
Furniture and fixtures	13,332			13,121
Machinery and equipment	26,603			27,452
Equipment leased to third parties under operating leases	29,943			30,093
Leasehold improvements	129,029			111,247
Computers and software	74,897			69,173
Total property, plant and equipment, gross	278,484			276,288
Less: accumulated depreciation	(193,994		)	(186,799		)
Total property, plant and equipment, net	$	84,490		$	89,489

(1) As discussed in Note A - “Organization and Summary of Significant Accounting Policies”, the new lease standard resulted in the removal of assets associated with build-to-suit leases.

Total depreciation expense was approximately $7.8 million and $23.0 million for the three and nine months ended September 30, 2019 and $7.5 million and $22.3 million for the three and nine months ended September 30, 2018.

Note G — Acquisitions

2019 Acquisition Activity

During 2019, we completed the following acquisitions of O&P clinics, none of which were individually material to our financial position, results of operations, or cash flows.  Each acquisition is intended to expand our continuum of patient care through the acquisitions of high quality O&P providers in new geographic markets.

·In January 2019, we completed the acquisition of all the outstanding equity interests of an O&P business for total consideration of $32.8 million, of which $27.7 million was cash consideration, net of cash acquired, $4.4 million was issued in the form of notes to shareholders at fair value, and $0.7 million in additional consideration.

13

·In May 2019, we completed the acquisition of all the outstanding equity interests of an O&P business for total consideration of $0.5 million, of which $0.2 million was cash consideration, net of cash acquired, and $0.3 million was issued in the form of notes to shareholders at fair value.

·In July 2019, we completed the acquisition of two O&P businesses for total consideration of $3.3 million, of which $3.0 million was cash consideration, net of cash acquired, and $0.3 million was issued in the form of notes to shareholders at fair value.

The notes issued to shareholders are unsecured and payable in installments over a period of 3 to 5 years.

We accounted for these transactions under the acquisition method of accounting and have reported the results of operations of each acquisition as of the respective dates of the acquisitions.  The estimated fair values of intangible assets were based on an income approach utilizing primarily discounted cash flow techniques for non-compete agreements and an income approach utilizing the excess earnings method for customer relationships.  The income approach utilizes management’s estimates of future operating results and cash flows using a weighted average cost of capital that reflects market participant assumptions.  Other significant judgments used in the valuation of tangible assets acquired in the acquisition include estimated selling price of inventory and estimated replacement costs for acquired property, plant and equipment.  For all other assets acquired and liabilities assumed, the fair value reflects the carrying value of the asset or liability due to their short maturity.  The excess of the fair value of the consideration transferred in the acquisition over the fair value of net assets acquired was recorded as goodwill.  The goodwill reflects our expectations of favorable future growth opportunities, anticipated synergies through the scale of our O&P operations, and the assembled workforce.  We expect that substantially all of the goodwill, which has been assigned to our Patient Care reporting unit, will be deductible for federal income tax purposes.

Acquisition-related costs for the transactions completed above for the three and nine months ended September 30, 2019 were $0.3 million and $0.8 million, respectively, and are included in general and administrative expenses in our consolidated statement of operations.

We have not presented pro forma combined results for these acquisitions because the impact on previously reported statements of operations would not have been material individually and in the aggregate.

Purchase Price Allocation

We have performed a preliminary valuation analysis of the fair market value of the assets acquired and liabilities assumed in the acquisitions.  The final purchase price allocations will be determined when we have completed and fully reviewed the detailed valuations and could differ materially from the preliminary allocations.  The final allocations may include changes in allocations of acquired intangible assets as well as goodwill and other changes to assets and liabilities including deferred taxes.  The estimated useful lives of acquired intangible assets are also preliminary.

14

The aggregate purchase price of these acquisitions was allocated on a preliminary basis as follows:

(in thousands)
Cash paid, net of cash acquired	$	30,926
Issuance of seller notes at fair value	5,053
Additional consideration	659
Aggregate purchase price	36,638
Accounts receivable, net	3,630
Inventories	1,693
Customer relationships (Weighted average useful life of 4.9 years)	5,791
Non-compete agreements (Weighted average useful life of 4.9 years)	349
Other assets	(2,687		)
Net assets acquired	8,776
Goodwill	$	27,862

Right-of-use assets and lease liabilities related to operating leases recognized in connection with acquisitions completed during the three and nine month periods ending September 30, 2019 were $0.6 million and $2.0 million, respectively.

2018 Acquisition Activity

In the fourth quarter of 2018, we acquired two O&P businesses for an aggregate purchase price of $3.1 million, net of cash acquired.  These acquisitions were accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at fair value on the date of the transaction.

The aggregate purchase price for these acquisitions was allocated as follows:

(in thousands)
Cash paid, net of cash acquired	$	1,978
Issuance of seller notes	1,120
Aggregate purchase price	3,098
Accounts receivable, net	256
Inventories	302
Customer relationships (Weighted average useful life of 4.0 years)	260
Non-compete agreements (Weighted average useful life of 4.6 years)	214
Other assets	90
Accounts payable	(59		)
Accrued expenses and other liabilities	(364		)
Net assets acquired	699
Goodwill	$	2,399

15

Note H — Goodwill and Other Intangible Assets

We assess goodwill and indefinite-lived intangible assets for impairment annually as of 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 following table summarizes the activity in goodwill for the periods indicated:

	For the Nine Months Ended September 30, 2019
	Patient Care									Products & Services							Consolidated
(in thousands)	Goodwill, Gross			Accumulated Impairment			Goodwill, Net			Goodwill, Gross		Accumulated Impairment			Goodwill, Net		Goodwill, Gross			Accumulated Impairment			Goodwill, Net
As of December 31, 2018	$	627,410		$	(428,668	)	198,742			$	139,299	$	(139,299	)	—		$	766,709		$	(567,967	)	198,742
Additions from acquisitions	30,112			—			30,112			—		—			—		30,112			—			30,112
Measurement period adjustments (1)	(2,506		)	—			(2,506		)	—		—			—		(2,506		)	—			(2,506		)
As of September 30, 2019	$	655,016		$	(428,668	)	$	226,348		$	139,299	$	(139,299	)	$	—	$	794,315		$	(567,967	)	$	226,348

(1) Measurement period adjustments relate to 2019 and 2018 acquisitions of approximately $2.2 million and $0.3 million, respectively, and are primarily attributable to adjustments to the preliminary allocations of customer relationship intangibles.

	For the Year Ended December 31, 2018
	Patient Care							Products & Services							Consolidated
(in thousands)	Goodwill, Gross		Accumulated Impairment			Goodwill, Net		Goodwill, Gross		Accumulated Impairment			Goodwill, Net		Goodwill, Gross		Accumulated Impairment			Goodwill, Net
As of December 31, 2017	$	625,011	$	(428,668	)	$	196,343	$	139,299	$	(139,299	)	$	—	$	764,310	$	(567,967	)	$	196,343
Additions from acquisitions	2,399		—			2,399		—		—			—		2,399		—			2,399
As of December 31, 2018	$	627,410	$	(428,668	)	$	198,742	$	139,299	$	(139,299	)	$	—	$	766,709	$	(567,967	)	$	198,742

The balances related to intangible assets as of September 30, 2019 and December 31, 2018 are as follows:

	As of September 30, 2019
(in thousands)	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment			Net Carrying Amount
Customer lists	$	31,525	$	(21,622	)	$	—		$	9,903
Trade name	255		(145		)	—			110
Patents and other intangibles	9,238		(5,383		)	—			3,855
Definite-lived intangible assets	41,018		(27,150		)	—			13,868
Indefinite-lived trade names	9,070		—			(4,953		)	4,117
Total other intangible assets	$	50,088	$	(27,150	)	$	(4,953	)	$	17,985

16

	As of December 31, 2018
(in thousands)	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment			Net Carrying Amount
Customer lists	$	26,036	$	(19,051	)	$	—		$	6,985
Trade name	255		(125		)	—			130
Patents and other intangibles	9,391		(5,145		)	—			4,246
Definite-lived intangible assets	35,682		(24,321		)	—			11,361
Indefinite-lived trade names	9,070		—			(4,953		)	4,117
Total other intangible assets	$	44,752	$	(24,321	)	$	(4,953	)	$	15,478

Total intangible amortization expense was approximately $1.6 million and $3.9 million for the three and nine months ended September 30, 2019 and $1.5 million and $5.3 million for the three and nine months ended September 30, 2018.

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)
2019 (remainder of the year)	$	1,229
2020	4,836
2021	2,252
2022	2,185
2023	2,036
Thereafter	1,330
Total	$	13,868

Note I — Other Current Assets and Other Assets

Other current assets consist of the following:

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Non-trade receivables	$	6,624	$	7,848
Prepaid maintenance	3,471		3,330
Prepaid other	1,509		1,101
Prepaid rent	840		4,442
Prepaid purchase orders	839		998
Prepaid insurance	744		258
Prepaid education and training	379		597
Other	209		157
Total other current assets	$	14,615	$	18,731

17

Other assets consist of the following:

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Cash surrender value of company-owned life insurance	$	3,132	$	2,918
Non-trade receivables	2,116		1,904
Deposits	1,955		1,698
Finance lease right-of-use assets	613		—
Prepaid cloud implementation costs	314		—
Surety bond collateral	—		1,000
Other	407		246
Total other assets	$	8,537	$	7,766

Note J — Accrued Expenses and Other Current Liabilities and Other Liabilities

Accrued expenses and other current liabilities consist of:

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Patient prepayments, deposits, and refunds payable	$	25,979	$	24,563
Accrued sales taxes and other taxes	8,646		6,810
Insurance and self-insurance accruals	8,234		8,886
Derivative liability	3,413		724
Accrued professional fees	503		3,751
Accrued interest payable	344		332
Other current liabilities	8,789		6,717
Total accrued expenses and other current liabilities	$	55,908	$	51,783

Other liabilities consist of:

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Supplemental executive retirement plan obligations	$	19,370	$	20,195
Derivative liability	12,627		3,134
Long-term insurance accruals	8,058		8,713
Unrecognized tax benefits, and related interest and penalties	5,457		5,458
Deferred tenant improvement allowances	—		8,570
Deferred rent	—		4,455
Other	2,339		1,045
Total other liabilities	$	47,851	$	51,570

18

Note K — Income Taxes

We recorded a provision for income taxes of $2.6 million and $3.3 million for the three and nine months ended September 30, 2019.  The effective tax rate was 31.2% and 27.1% for the three and nine months ended September 30, 2019.  We recorded a provision for income tax of $2.4 million and a benefit from income tax of $3.8 million for the three and nine months ended September 30, 2018.  The effective rate was 35.8% and 42.0% for the three and nine months ended September 30, 2018.

The decrease in the effective tax rate for the three months ended September 30, 2019 compared with the three months ended September 30, 2018 is primarily attributable to an increased estimated annual income and an increase in pre-tax book income for the three months ended September 30, 2019.  Our effective tax rate for the three months ended September 30, 2019 and September 30, 2018 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses.

The decrease in the effective tax rate for the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018 is primarily attributable to an increased estimated annual income, an increase in pre-tax book income for the nine months ended September 30, 2019, and the windfall from stock-based compensation during the period.  Our effective tax rate for the nine months ended September 30, 2019 and September 30, 2018 differed from the federal statutory tax rate of 21% primarily due to the windfall and shortfall from stock-based compensation expense in the respective periods, as well as non-deductible expenses.

Note L — Leases

The information pertaining to leases on the condensed consolidated balance sheet is as follows:

(in thousands)	Classification	As of September 30, 2019
Assets
Operating lease right-of-use assets	Operating lease right-of-use assets	$	109,838
Finance lease right-of-use assets	Other assets	613
Total lease assets		$	110,451
Liabilities
Current
Operating	Current portion of operating lease liabilities	$	32,437
Finance	Current portion of long-term debt	261
Noncurrent
Operating	Operating lease liabilities	88,719
Finance	Long-term debt, less current portion	365
Total lease liabilities		$	121,782

19

The components of lease cost recognized in the condensed consolidated statement of operations are as follows:

(in thousands)	For the Three Months Ended September 30, 2019			For the Nine Months Ended September 30, 2019
Operating lease cost	$	11,238		$	32,868
Finance lease cost
Amortization of right-of-use assets	75			225
Interest on lease liabilities	6			18
Sublease income	(117		)	(196		)
Short-term lease cost	46			460
Variable lease cost	1,551			4,581
Total lease cost	$	12,799		$	37,956

Future minimum rental payments, by year and in the aggregate, under operating and financing obligations with terms of one year or more at September 30, 2019 are as follows:

(in thousands)	Finance Leases			Operating Leases			Total Leases
2019 (remainder of year)	$	77		$	5,900		$	5,977
2020	263			41,500			41,763
2021	191			32,093			32,284
2022	106			24,128			24,234
2023	26			16,181			16,207
2024	—			8,963			8,963
Thereafter	—			7,271			7,271
Total future minimum lease payments	663			136,036			136,699
Imputed interest	(37		)	(14,880		)	(14,917		)
Total	$	626		$	121,156		$	121,782

The lease term and discount rates are as follows:

	September 30, 2019
Weighted average remaining lease term (years)
Operating leases	4.01
Finance leases	2.70
Weighted average discount rate
Operating leases	5.45	%
Finance leases	4.22	%

20

Supplemental cash flow information related to leases is as follows:

(in thousands)	For the Nine Months Ended September 30, 2019
Cash flows for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	33,523
Operating cash flows from finance leases	18
Financing cash flows from finance leases	233
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	34,355
Finance leases	282

Future minimum rental payments, by year and in the aggregate, under operating and financing obligations as of December 31, 2018 are as follows:

(in thousands)	Operating Leases		Capital Leases
2019	$	39,378	$	249
2020	29,641		175
2021	21,303		109
2022	14,479		28
2023	9,193		—
Thereafter	10,008		—
	$	124,002	$	561

In August 2019, we entered into a lease agreement for a distribution facility in Georgia.  The commencement date of the lease is expected to be in April 2020.  The initial term of the lease is 127 months, with the option to extend the lease for up to two consecutive 60-month terms.  The lease provides for annual base rent of approximately $1.0 million in the first year after a seven-month rent-free period following the lease commencement date, with subsequent annual increases of approximately 2%.  In connection with the lease, the landlord has provided a tenant improvement allowance of $2.2 million to build-out certain improvements to the distribution facility.

21

Note M — Debt and Other Obligations

Debt consists of the following:

	As of September 30,			As of December 31,
(in thousands)	2019			2018
Debt:
Term Loan B	$	497,425		$	501,213
Seller notes	7,138			4,506
Financing leases and other	1,192			14,361
Total debt before unamortized discount and debt issuance costs	505,755			520,080
Unamortized discount and debt issuance costs, net	(8,516		)	(9,407		)
Total debt	$	497,239		$	510,673
Current portion of long-term debt:
Term Loan B	$	5,050		$	5,050
Seller notes	3,152			2,513
Financing leases and other	417			1,020
Total current portion of long-term debt	8,619			8,583
Long-term debt:	$	488,620		$	502,090

Refinancing of Credit Agreement and Term B Borrowings

On March 6, 2018, we entered into a $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 $5.2 million as of September 30, 2019.  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.

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, 2019, the weighted average interest rate on outstanding borrowings under our Term Loan B facility was approximately 5.7%.  We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note O - “Derivative Financial Instruments.”

22

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 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, 2019.

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.

Seller Notes

We typically issue subordinated promissory notes (“Seller Notes”) as a part of the consideration transferred when making acquisitions.  The Seller Notes are unsecured and are presented net of unamortized discount of $0.3 million and $0.2 million as of September 30, 2019 and December 31, 2018, respectively.  We measure these instruments at their estimated fair values as of the respective acquisition dates.  The stated interest rates on these instruments range from 2.00% to 3.00%.  Principal and interest are payable in quarterly or annual installments and mature through July 2024.

23

Scheduled maturities of debt at September 30, 2019 were as follows:

(in thousands)
2019 (remainder of year)	$	2,318
2020	8,428
2021	7,372
2022	6,032
2023	5,489
Thereafter	476,116
Total debt before unamortized discount and debt issuance costs, net	505,755
Unamortized discount and debt issuance costs, net	(8,516		)
Total debt	$	497,239

Note N — Fair Value Measurements

Financial Instruments

In March 2018, we refinanced our credit facilities with the Credit Agreement.  The carrying value (excluding unamortized discounts and debt issuance costs of $8.5 million) of our outstanding term loan as of September 30, 2019 approximates the fair value at $497.4 million.  The carrying value of our outstanding term loan as of December 31, 2018 (excluding unamortized discounts and debt issuance costs of $9.4 million) was $501.2 million compared to its fair value of $491.2 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, 2019 and December 31, 2018, we had no amounts outstanding on our revolving credit facility.

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 notional value outstanding as of September 30, 2019 was $312.5 million.  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 M - “Debt” and Note O - “Derivative Financial Instruments” for further information.

The carrying value of our Seller Notes as of September 30, 2019 and December 31, 2018 was $7.1 million and $4.5 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 O — 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.

24

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 counterparty 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 loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

As of September 30, 2019, our swaps had a notional value outstanding of $312.5 million.  As of December 31, 2018, our swaps had a notional value outstanding of $325.0 million.

Change in Net Loss on Cash Flow Hedges Including Accumulated Other Comprehensive Loss

The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the three months ended September 30, 2019 and September 30, 2018:

(in thousands)	Cash Flow Hedges
Balance as of June 30, 2019	$	(10,560	)
Unrealized loss recognized in other comprehensive (loss) income, net of tax	(2,060		)
Reclassification to interest expense, net	419
Balance as of September 30, 2019	$	(12,201	)
Balance as of June 30, 2018	$	24
Unrealized gain recognized in other comprehensive (loss) income, net of tax	1,171
Reclassification to interest expense, net	567
Balance as of September 30, 2018	$	1,762

The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the nine months ended September 30, 2019 and September 30, 2018:

(in thousands)	Cash Flow Hedges
Balance as of December 31, 2018	$	(2,936	)
Unrealized loss recognized in other comprehensive (loss) income, net of tax	(10,135		)
Reclassification to interest expense, net	870
Balance as of September 30, 2019	$	(12,201	)
Balance as of December 31, 2017	$	—
Unrealized gain recognized in other comprehensive (loss) income, net of tax	251
Reclassification to interest expense, net	1,511
Balance as of September 30, 2018	$	1,762

25

The following table presents the fair value of derivative assets and liabilities within the condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018:

	As of September 30, 2019				As of December 31, 2018
(in thousands)	Assets		Liabilities		Assets		Liabilities
Derivatives designated as cash flow hedging instruments:
Accrued expenses and other current liabilities	$	—	$	3,413	$	—	$	724
Other liabilities	—		12,627		—		3,134

Note P — Stock-Based Compensation

On May 17, 2019, the shareholders approved the Hanger, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”).  The 2019 Plan authorizes the issuance of (a) up to 2,025,000 shares of Common Stock, plus (b) 243,611 shares available for issuance under the Hanger, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”).

Upon approval of the 2019 Plan, the 2016 Plan was no longer available for future awards.

As of September 30, 2019, there were 1,904,747 unvested restricted stock awards outstanding.  This was comprised of 1,201,476 employee service-based awards with a weighted average grant date fair value of $15.77 per share, 647,519 employee performance-based awards with a weighted average grant date fair value of $17.90 per share, and 55,752 director service-based awards with a weighted average grant date value of $20.10 per share.  As of September 30, 2019, there were 662,322 outstanding options not-yet exercisable with a weighted average exercise price of $12.77 and average remaining contractual term of 7.6 years.

We recognized a total of approximately $3.4 million and $10.1 million of stock-based compensation expense for the three and nine months ended September 30, 2019, respectively, and a total of approximately $3.7 million and $9.6 million for the three and nine months ended September 30, 2018, respectively.  Stock compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and stock options.

Note Q — Supplemental Executive Retirement Plans

Defined Benefit Supplemental Executive Retirement Plan

Effective January 2004, we implemented an unfunded noncontributory defined benefit plan (“DB SERP”) for certain senior executives.  The DB SERP, which we administer, calls for fifteen annual payments upon retirement with the payment amount 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.

26

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 change in net benefit cost and obligation during the three and nine months ended September 30, 2019 and 2018 is as follows:

Change in Benefit Obligation:

(in thousands)	2019			2018
Benefit obligation as of June 30	$	17,535		$	19,388
Service cost	84			92
Interest cost	164			150
Payments	(12		)	(13		)
Benefit obligation as of September 30	$	17,771		$	19,617
Benefit obligation as of December 31, 2018 and 2017, respectively	$	18,927		$	20,793
Service cost	251			275
Interest cost	494			450
Payments	(1,901		)	(1,901		)
Benefit obligation as of September 30	$	17,771		$	19,617

Amounts Recognized in the Condensed Consolidated Balance Sheets:

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Accrued expenses and other current liabilities	$	1,913	$	1,913
Other liabilities	15,858		17,014
Total accrued liabilities	$	17,771	$	18,927

Defined Contribution Supplemental Executive Retirement Plan

In 2013, we established 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 with which we own an insurance policy.

As of September 30, 2019 and December 31, 2018, the estimated accumulated obligation benefit is $3.5 million and $3.0 million, respectively, of which $3.0 million and $2.4 million is funded and $0.5 million and $0.6 million is unfunded at September 30, 2019 and December 31, 2018, respectively.

In connection with the DC SERP benefit obligation, we maintain a company-owned life insurance policy (“COLI”).  The carrying value of the COLI is measured at its cash surrender value and is presented within other assets in our consolidated balance sheets.  See Note I - “Other Current Assets and Other Assets” for additional information.

27

Note R — Commitments and Contingencies

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 Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder.  The complaint sought unspecified damages, costs, attorneys’ fees, and equitable relief.

On January 26, 2017, the court granted the defendants’ motions to dismiss for failure to state a claim upon which relief can be granted and dismissed with prejudice all claims against all defendants.  On February 24, 2017, plaintiffs filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit.  On August 6, 2018, the Court of Appeals affirmed in part and reversed in part.  On August 20, 2018, Hanger, Inc. and the remaining individual defendant filed a petition for panel rehearing and a petition for rehearing en banc with the Court of Appeals.  On April 10, 2019, the Court of Appeals granted the petition for panel rehearing, withdrew its previous panel decision, and substituted a new panel decision in its place that affirmed the District Court’s dismissal with prejudice of all claims against all the defendants for failure to state a claim.  Plaintiffs did not petition the Court of Appeals for a panel rehearing or a rehearing en banc, and did not file a writ of certiorari with the United States Supreme Court.  Therefore, the April 10, 2019 Court of Appeals ruling affirming the dismissal of all claims with prejudice against all defendants is now final.

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 345th 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

28

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 counsel for the Special Committee provided a redacted version of the report to plaintiffs’ counsel.  Plaintiffs objected to the redacted version of the report, and on February 4, 2019, the Travis County Court appointed a Special Master to review plaintiffs’ objections to the redacted report.  On March 22, 2019, the Special Master submitted a report to the Travis County Court recommending that the court order that the entire Special Committee report be produced.  On April 2, 2019 we filed an objection to the Special Master’s report and recommendation, and requested a hearing on the matter.  On June 25, 2019, the Travis County Court rejected the recommendation of the Special Master, and instead ordered that only a limited additional portion of the Special Committee report should be made available to plaintiffs.  On July 10, 2019, the updated redacted Special Committee report was provided to plaintiffs through their counsel.

In late October 2019, a non-binding agreement in principle was reached by the parties to settle the consolidated derivative action, subject to finalization and execution of a definitive settlement agreement by the parties, and subsequent final approval of the settlement by the Travis County Court.  The amount of any payment to be made by Hanger pursuant to the non-binding agreement in principle is expected to be covered under our directors & officers insurance.

Management intends to continue to vigorously defend against the shareholder derivative action.  At this time, if the derivative action were to go to trial, we cannot predict how the Travis County Court would 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, and are also subject to 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.

Note S — 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 our owned and operated patient care clinics.  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:

29

·Commercial private payors and other, which consist of individuals, rehabilitation providers, commercial insurance companies, health management organizations (“HMOs”), preferred provider organizations (“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 persons aged 65 or older in financial need; 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 A - “Organization and Summary of Significant Accounting Policies” in our 2018 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.

30

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, 2018.

	Patient Care				Products & Services
	For the Three Months Ended September 30,				For the Three Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Net revenues
Third party	$	230,931	$	214,080	$	48,707	$	48,866
Intersegments	—		—		53,670		48,945
Total net revenues	230,931		214,080		102,377		97,811
Material costs
Third party suppliers	65,055		58,395		26,979		26,410
Intersegments	6,284		6,300		47,386		42,645
Total material costs	71,339		64,695		74,365		69,055
Personnel expenses	81,274		77,806		13,320		13,047
Other expenses	37,245		34,426		6,858		6,306
Depreciation & amortization	4,943		4,651		2,723		2,564
Segment income from operations	$	36,130	$	32,502	$	5,111	$	6,839

	Patient Care				Products & Services
	For the Nine Months Ended September 30,				For the Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Net revenues
Third party	$	652,700	$	620,745	$	144,455	$	143,162
Intersegments	—		—		150,245		141,302
Total net revenues	652,700		620,745		294,700		284,464
Material costs
Third party suppliers	181,358		170,559		80,452		77,118
Intersegments	18,268		17,944		131,977		123,358
Total material costs	199,626		188,503		212,429		200,476
Personnel expenses	233,402		228,211		39,393		38,304
Other expenses	112,014		104,869		20,883		17,944
Depreciation & amortization	13,997		14,547		7,862		7,569
Segment income from operations	$	93,661	$	84,615	$	14,133	$	20,171

31

A reconciliation of the total of the reportable segments’ income from operations to consolidated net income (loss) is as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Income from operations
Patient Care	$	36,130		$	32,502		$	93,661		$	84,615
Products & Services	5,111			6,839			14,133			20,171
Corporate & other	(23,838		)	(23,417		)	(69,267		)	(67,910		)
Income from operations	17,403			15,924			38,527			36,876
Interest expense, net	8,954			8,939			25,973			28,519
Loss on extinguishment of debt	—			—			—			16,998
Non-service defined benefit plan expense	173			176			519			528
Income (loss) before income taxes	8,276			6,809			12,035			(9,169		)
Provision (benefit) for income taxes	2,585			2,440			3,260			(3,848		)
Net income (loss)	$	5,691		$	4,369		$	8,775		$	(5,321	)

A reconciliation of the reportable segment net revenues to consolidated net revenues is as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Net revenues
Patient Care	$	230,931		$	214,080		$	652,700		$	620,745
Products & Services	102,377			97,811			294,700			284,464
Corporate & other	—			—			—			—
Consolidating adjustments	(53,670		)	(48,945		)	(150,245		)	(141,302		)
Consolidated net revenues	$	279,638		$	262,946		$	797,155		$	763,907

A reconciliation of the reportable segment material costs to consolidated material costs is as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Material costs
Patient Care	$	71,339		$	64,695		$	199,626		$	188,503
Products & Services	74,365			69,055			212,429			200,476
Corporate & other	—			—			—			—
Consolidating adjustments	(53,670		)	(48,945		)	(150,245		)	(141,302		)
Consolidated material costs	$	92,034		$	84,805		$	261,810		$	247,677

32

Note T — 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)	2019			2018
Accounts receivable, net	$	1,914		$	14,464
Inventories	(6,310		)	(3,463		)
Other current assets and other assets	(1,769		)	1,770
Income taxes	2,613			11,356
Accounts payable	(1,751		)	5,680
Accrued expenses and other current liabilities	(2,144		)	(13,061		)
Accrued compensation related costs	(15,583		)	(20,650		)
Other liabilities	(1,736		)	(2,963		)
Operating lease liabilities	(28,279		)	—
Changes in operating assets and liabilities on cash flows from operating activities	$	(53,045	)	$	(6,867	)

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

	For the Nine Months Ended September 30,
(in thousands)	2019		2018
Issuance of seller notes in connection with acquisitions	$	5,053	$	—
Purchase of property, plant and equipment in accounts payable at period end	3,492		2,419
Purchase of property, plant and equipment through vendor financing	2,200		—
Additions to property, plant and equipment acquired through financing obligations	—		1,509
Retirements of financed property, plant and equipment and related obligations	—		3,558

Note U — Subsequent Events

In October 2019, we completed the acquisition of one O&P business for a total purchase price of $8.1 million, of which $5.1 million was cash consideration and $3.0 million was issued in the form of an unsecured note to the seller.  The note is payable in annual installments over a period of five years.  Due to the proximity of the completion of the acquisitions to the filing of this Form 10-Q, it is not practicable to provide a preliminary purchase price allocation of the fair value of the assets purchased and liabilities assumed in the transactions.

33

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, 2018 (the “2018 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 2018 Form 10-K or by other unknown risks and uncertainties.

34

Effect of Delay in Financial Filings

As discussed in our 2018 Form 10-K, due to prior restatements and related issues, we were 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, 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
December 31, 2018	3,591	(3,561	)	3,195
March 31, 2019	1,649	(2,621	)	2,223
June 30, 2019	1,745	(2,016	)	1,952
September 30, 2019	2,136	(2,168	)	1,920

We currently estimate that during 2019, we will expend a total of approximately $8.0 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.

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.

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.

35

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 695 patient care clinics and 106 satellite locations in 46 states and the District of Columbia as of September 30, 2019.  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 4,100 skilled nursing and post-acute providers nationwide.

For the three and nine months ended September 30, 2019, our net revenues were $279.6 million and $797.2 million, respectively, and we recorded net income of $5.7 million and $8.8 million, respectively.  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.

Industry Overview

We estimate that approximately $4.2 billion is spent in the United States each year for O&P 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).

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

36

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 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 our clinicians in the performance of their duties.  Through this segment, we additionally provide network contracting services to independent providers of O&P.

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 selection 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, HMOs, PPOs, hospitals, vocational rehabilitation centers, workers’ compensation programs, third party administrators, and similar sources;

37

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

·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 persons aged 65 or older in financial need; 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, Zone Program Integrity Contractor (“ZPIC”) audits, and Supplemental Medical Review Contractor (“SMRC”) audits.  TPE audits are generally pre-payment audits, while RAC, CERT, ZPIC, and SMRC audits are generally post-payment audits.  TPE audits replaced the previous Medicare Administrative Contractor 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 450,000 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;

38

·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 currently serve approximately 4,100 skilled nursing and post-acute providers nationwide.

Reimbursement Trends

In our Patient Care segment, we are reimbursed primarily through employer-based plans offered by commercial insurance carriers, Medicare, Medicaid, and the U.S. Department of Veterans Affairs.  Patient Care constituted 82.6% and 81.9% of our net revenue for the three and nine months ended September 30, 2019 and 81.4% and 81.3% for the three and nine months ended September 30, 2018.  Our remaining net revenue was 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 following is a summary of our net revenue by payor mix for the Patient Care segment expressed as a percentage of net revenues for the periods indicated:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Patient Care Segment
Medicare	31.6	%	32.6	%	31.6	%	31.8	%
Medicaid	15.6	%	15.7	%	15.9	%	15.6	%
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)	36.1	%	36.6	%	35.6	%	36.5	%
Veterans Administration	10.3	%	9.0	%	9.9	%	9.2	%
Private Pay	6.4	%	6.1	%	7.0	%	6.9	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

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.  It is our belief the increased nationwide efforts to reduce health care costs has driven changes in industry trends with 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.

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

39

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, or that we filed or appealed the payor’s determination timely, as well as on the basis of our coding, failure by certain classes of patients to pay their portion of a claim, or 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.

Commencing in late 2014 and continuing through today, we have taken a number of actions to manage disallowed revenue trends.  These initiatives included: (i) the 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.

Disallowed revenue is considered an adjustment to the transaction price.  Estimated uncollectible amounts due to us by patients are generally considered implicit price concessions and are presented as a reduction of net revenue.  These amounts recorded in net revenues within the Patient Care segment for the three and nine months ended September 30, 2019 and 2018 are as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(dollars in thousands)	2019			2018			2019			2018
Net revenues	$	230,931		$	214,080		$	652,700		$	620,745
Estimated implicit price concessions arising from:
Payor disallowances	11,051			10,584			29,309			29,306
Patient non-payments	3,285			736			7,960			2,937
Adjusted gross revenues	$	245,267		$	225,400		$	689,969		$	652,988
Payor disallowances	$	11,051		$	10,584		$	29,309		$	29,306
Patient non-payments	3,285			736			7,960			2,937
Payor disallowances and patient non-payments	$	14,336		$	11,320		$	37,269		$	32,243
Payor disallowances %	4.5		%	4.7		%	4.2		%	4.5		%
Patient non-payments %	1.3		%	0.3		%	1.2		%	0.4		%
Percent of adjusted gross revenues	5.8		%	5.0		%	5.4		%	4.9		%

Growth Rates and Earnings Effects

Patient Care

During the three and nine month periods ending September 30, 2019, approximately 55% and 54% of our net revenues were derived from the provision of prosthetic devices to our patients.  These devices have a significantly higher relative reimbursement as compared with the orthotic devices and other related prosthetic supplies that we provide patients.  The volume of prosthetic patients we see from one period to the next varies greatly, and this has a significant effect on our relative rate of net revenue growth we experience.  Additionally, with the exception of materials costs and certain incentive compensation amounts, our staffing levels, operating costs, lease costs, depreciation and amortization expenses, and interest costs are essentially fixed in nature.  As a result, increases or decreases in our revenue from one period to the next can have a significant effect on our comparative reported earnings for those periods.

40

Products & Services

As discussed in our 2018 Form 10-K, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, in 2017, several of the larger independent O&P providers we served through the distribution of componentry encountered financial difficulties which resulted in our discontinuing distribution services to them.  Generally, we believe our distribution customers encounter reimbursement pressures similar to those we experience in our own Patient Care services and, depending on their ability to adapt to the increased claims documentation standards that have emerged in our industry, this may either limit the rate of growth of some of our customers, or otherwise affect the rate of growth we experience in our distribution of O&P componentry to independent providers.  During future periods, we currently believe our rate of revenue growth in this segment may decrease as we choose to limit the extent to which we distribute certain low-margin orthotic products.  Additionally, to the extent that we acquire independent O&P providers who are pre-existing customers of our distribution services, our revenue growth in this segment would be adversely affected as we would no longer recognize external revenue from the components we provide them.

Within our Products & Services segment, in addition to our distribution of products, we provide therapeutic equipment and services to patients at SNFs and other healthcare provider locations.  Since 2016, a number of our clients, including several of our larger SNF clients, began to discontinue their use of our therapeutic services.  We believe these discontinuances relate primarily to their overall efforts to reduce the costs they bear for therapy-related services within their facilities.  As a part of those terminations of service, in a number of cases, we elected to sell terminating clients the equipment that we had utilized for their locations.  In 2019, we anticipate a further decline of approximately $7.0 million in revenue from these services associated with customer discontinuances.  Within this portion of our business, we have responded to these trends through increases in our marketing programs which convey the value we believe our services provide to patients at SNFs and other adjacent health services provider markets.

Acquisitions

In the three months ending September 2019, we completed the acquisitions of two businesses with four O&P clinics similar to those we operate through our Patient Care segment for an aggregate purchase price of $3.3 million.  The purchase price consisted of $3.0 million cash consideration, net of cash acquired, and $0.3 million of unsecured notes issued to the sellers at fair value.

In the three months ending June 2019, we completed the acquisition of one business with three O&P clinics similar to those we operate through our Patient Care segment for an aggregate purchase price of $0.5 million.  The purchase price consisted of $0.2 million cash consideration, net of cash acquired, and $0.3 million of unsecured notes issued to the sellers at fair value.

In the first three months of 2019, we completed the acquisition of one business with 25 O&P clinics for an aggregate purchase price of $32.8 million.  The purchase price consisted of $27.7 million cash consideration, net of cash acquired, $4.4 million of unsecured notes issued to the sellers at fair value, and $0.7 million in additional consideration.

In the last three months of 2018, we completed the acquisition of two O&P businesses for an aggregate purchase price of $3.1 million.  The purchase price consisted of $2.0 million in cash consideration, net of cash acquired, and $1.1 million was issued in unsecured notes to the seller.  We made no acquisitions in the first nine months of 2018.

Total acquisition-related costs incurred during the three and nine months ended September 30, 2019 were $0.5 million and $1.4 million, respectively, and are included in general and administrative expenses in our consolidated statement of operations.  Acquisition-related costs incurred for acquisitions completed during the three and nine month periods ended September 30, 2019 were $0.3 million and $0.8 million, respectively.

41

New Systems Implementations

In recent years, we have been undertaking the implementation of a new patient management and electronic health record system at our patient care clinics.  In the first quarter of 2019, we completed this multi-year implementation.  For the three month period ended March 31, 2019, we expensed $0.8 million in training, travel, and related implementation costs.  For the years ended December 31, 2018 and 2017, we expensed $4.4 million and $4.3 million, respectively, for these implementation expenses.  As we undertake acquisitions of independent O&P providers, we intend to convert these acquired clinics to this system in the ordinary course of our business.

During 2019, we have commenced the design, implementation planning, and initial implementation of new financial and supply chain systems, and plan to invest in new servers and software that operate as a part of our technology infrastructure.  During 2019, in connection with our new financial and supply chain systems, for the nine months ended September 30, 2019, we have expensed $2.5 million and we currently anticipate that we will spend $3.8 million for the full year.  We are additionally incurring increased capital expenditures in connection with improvements to our systems’ infrastructure.  In 2020 and 2021, we currently expect to continue to incur operating expense for the financial and supply chain projects of approximately $5.0 million in each year in connection with this implementation, and to incur further significant cash outlays and capital expenditures in connection with our supply chain, financial systems, and technology infrastructure initiatives.  For a further discussion of our current outlook for capital expenditures and systems implementation expenditures, refer to the Financial Condition, Liquidity and Capital Resources section below.

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.  Effective July 1, 2019, we elected to early adopt the requirements of the standard on a prospective basis.  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).  Under the new standard, certain of the implementation costs of our new financial and supply chain system will be capitalized.  As of September 30, 2019, we capitalized $0.3 million of implementation costs for cloud computing arrangements, net of accumulated amortization, and recorded in other current assets and other assets in the condensed consolidated balance sheet.

Seasonality

We believe our business is affected by the degree to which patients have otherwise met the annual co-payment and 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 and earnings 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 quarters of 2019 and 2018, we spent approximately $2.3 million in each of these two years, 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 period in and around the timing of this event, which contributes to the lower seasonal revenue level we experience during the first quarter of each year.

42

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 2018 Form 10-K, 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, 2019 and 2018 were as follows (unaudited):

	For the Three Months Ended September 30,				Percent Change
(dollars in thousands)	2019		2018		2019 vs 2018
Net revenues	$	279,638	$	262,946	6.3	%
Material costs	92,034		84,805		8.5	%
Personnel costs	94,594		90,853		4.1	%
Other operating costs	32,771		30,999		5.7	%
General and administrative expenses	29,834		28,308		5.4	%
Professional accounting and legal fees	3,629		3,107		16.8	%
Depreciation and amortization	9,373		8,950		4.7	%
Operating expenses	262,235		247,022		6.2	%
Income from operations	17,403		15,924		9.3	%
Interest expense, net	8,954		8,939		0.2	%
Non-service defined benefit plan expense	173		176		(1.7	)%
Income before income taxes	8,276		6,809		21.5	%
Provision for income taxes	2,585		2,440		5.9	%
Net income	$	5,691	$	4,369	30.3	%

43

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

	For the Three Months Ended September 30,
	2019		2018
Material costs	32.9	%	32.3	%
Personnel costs	33.8	%	34.6	%
Other operating costs	11.7	%	11.6	%
General and administrative expenses	10.7	%	10.8	%
Professional accounting and legal fees	1.3	%	1.2	%
Depreciation and amortization	3.4	%	3.4	%
Operating expenses	93.8	%	93.9	%

For the Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018

Net revenues.  Net revenues for the three months ended September 30, 2019 were $279.6 million, an increase of $16.7 million, or 6.3%, from $262.9 million for the three months ended September 30, 2018.  Net revenues by operating segment, after elimination of intersegment activity, were as follows:

	For the Three Months Ended September 30,				Change			Percent Change
(dollars in thousands)	2019		2018		2019 vs 2018			2019 vs 2018
Patient Care	$	230,931	$	214,080	$	16,851		7.9	%
Products & Services	48,707		48,866		(159		)	(0.3	)%
Net revenues	$	279,638	$	262,946	$	16,692		6.3	%

Patient Care net revenues for the three months ended September 30, 2019 were $230.9 million, an increase of $16.9 million, or 7.9%, from $214.1 million for the same period in the prior year.  Same clinic revenues increased $7.9 million for the three months ended September 30, 2019 compared to the same period in the prior year, reflecting an increase of 2.1% on a per-day basis.  Net revenues from acquired clinics and consolidations, net of closures, increased $8.5 million, and growth from other services was $0.5 million.

Prosthetics constituted approximately 55% of our total Patient Care revenues for the three months ended September 30, 2019 and 54% for the same period in 2018, excluding the impact of acquisitions.  Prosthetic revenues for the three months ended September 30, 2019 were 4.0% higher, on a per-day basis, than the same period in the prior year, excluding the impact of acquisitions.  Orthotics, shoes, inserts, and other products remained generally consistent on a per-day basis with those of the same comparative prior periods, excluding the impact of acquisitions.

Products & Services net revenues for the three months ended September 30, 2019 were $48.7 million, a decrease of $0.2 million, or 0.3% from $48.9 million for the same period in the prior year.  This decrease was comprised of a $2.1 million, or 15.1%, decrease in net revenues from therapeutic solutions as a result of continued net client cancellations, offset by $1.9 million, or 5.7%, growth from the distribution of O&P componentry to independent providers as the result of new products added to the portfolio and an increase in volume.  In future periods, we anticipate moderation of near-term Products & Services segment growth due primarily to a continuation of these therapeutic solutions revenue trends and secondarily due to anticipated declines in the rate of growth of our distribution business.

44

Material costs.  Material costs for the three months ended September 30, 2019 were $92.0 million, an increase of $7.2 million or 8.5%, from $84.8 million for the same period in the prior year.  Total material costs as a percentage of net revenues increased to 32.9% in the three months ended September 30, 2019 from 32.3% in the three months ended September 30, 2018 primarily due to changes in our Product & Services segment business mix.  Material costs by operating segment, after elimination of intersegment activity, were as follows:

	For the Three Months Ended September 30,				Change		Percent Change
(dollars in thousands)	2019		2018		2019 vs 2018		2019 vs 2018
Patient Care	$	71,339	$	64,695	$	6,644	10.3	%
Products & Services	20,695		20,110		585		2.9	%
Material costs	$	92,034	$	84,805	$	7,229	8.5	%

Patient Care material costs increased $6.6 million, or 10.3%, for the three months ended September 30, 2019 compared to the same period in the prior year as a result of acquisitions.  Patient Care material costs as a percent of segment net revenues increased to 30.9% for the three months ended September 30, 2019 from 30.2% for the three months ended September 30, 2018.

Products & Services material costs increased $0.6 million, or 2.9%, for the three months ended September 30, 2019 compared to the same period in the prior year.  As a percent of net revenues in the Products & Services segment, material costs were 42.5% for the three months ended September 30, 2019 as compared to 41.2% in the same period of 2018.  The increase in material as a percent of segment net revenues was due to a change in distribution customer and business mix within the segment.

Personnel costs.  Personnel costs for the three months ended September 30, 2019 were $94.6 million, an increase of $3.7 million, or 4.1%, from $90.9 million for the same period in the prior year.  Personnel costs by operating segment were as follows:

	For the Three Months Ended September 30,				Change		Percent Change
(dollars in thousands)	2019		2018		2019 vs 2018		2019 vs 2018
Patient Care	$	81,274	$	77,806	$	3,468	4.5	%
Products & Services	13,320		13,047		273		2.1	%
Personnel costs	$	94,594	$	90,853	$	3,741	4.1	%

Personnel costs for the Patient Care segment were $81.3 million for the three months ended September 30, 2019, an increase of $3.5 million, or 4.5%, from $77.8 million compared to the same period in the prior year.  The increase in Patient Care personnel costs during the three months ended September 30, 2019 was primarily related to an increase in salary expense of $1.9 million, an increase in benefits of $0.6 million, an increase in bonus and commissions of $0.6 million, and an increase in payroll taxes of $0.4 million when compared to the three months ended September 30, 2018.

Personnel costs in the Products & Services segment were $13.3 million for the three months ended September 30, 2019, an increase of $0.3 million compared to the same period in the prior year.  Salary expense increased $0.5 million and bonuses decreased $0.2 million for the three months ended September 30, 2019 as compared to the same period in the prior year primarily as a result of the transfer of personnel between segments.

Other operating costs.  Other operating costs for the three months ended September 30, 2019 were $32.8 million, an increase of $1.8 million, or 5.7%, from $31.0 million for the same period in the prior year.  Professional fees increased $0.6 million due to investments made in certain revenue cycle management initiatives, rent expense increased $0.5 million from new, renewed, and acquired leases and $0.3 million as a result of the adoption of ASC 842, further described in Note A — “Organization and

45

Summary of Significant Accounting Policies”, and other expenses increased $0.4 million as compared to the same period in the prior year.

General and administrative expenses.  General and administrative expenses for the three months ended September 30, 2019 were $29.8 million, an increase of $1.5 million, or 5.4%, from the same period in the prior year.  Salary expense increased $0.8 million, personnel-related costs increased $0.3 million, advertising & selling and other expenses increased $0.8 million, and equity-based compensation decreased $0.4 million as compared to the same period in the prior year.

Professional accounting and legal fees.  Professional accounting and legal fees for the three months ended September 30, 2019 were $3.6 million, an increase of $0.5 million, or 16.8%, from $3.1 million for the same period in the prior year primarily attributable to targeted efforts during the third quarter to remediate material weaknesses in our internal controls over financial reporting.

Depreciation and amortization.  Depreciation and amortization for the three months ended September 30, 2019 was $9.4 million, an increase of $0.4 million, or 4.7%, from $9.0 million for the same period in the prior year.  Depreciation expense increased $0.4 million when compared to the prior period as a result of additions to certain fixed assets.

Interest expense, net.  Interest expense for the three months ended September 30, 2019 increased 0.2% to $9.0 million from $8.9 million for the same period in the prior year.

Provision for income taxes.  The provision for income taxes for the three months ended September 30, 2019 was $2.6 million, or 31.2% of income before income taxes, compared to a provision of $2.4 million, or 35.8% of income before income taxes for the three months ended September 30, 2018.  The effective tax rate in 2019 consisted principally of the 21% federal statutory tax rate, the rate impact from state income taxes, the windfall from stock-based compensation, and permanent tax differences.  The increase in the effective tax rate for the three months ended September 30, 2019 compared with the three months ended September 30, 2018 was primarily attributable to an increased estimated annual income and an increase in pre-tax book income for the three months ended September 30, 2019.

On a quarterly basis, we assess the likelihood of realization of our deferred tax assets considering all available evidence, both positive and negative.  Our most recent operating performance, the scheduled reversal of temporary differences, our forecast of taxable income in future periods, and the availability of prudent tax planning strategies are important considerations in our assessment.  While we recognize our recent earnings history is an example of positive evidence to be considered in our assessment, at this time, management continues to believe it is more-likely-than-not we will not realize a portion of our deferred tax assets due to our consideration of all positive and negative evidence available.  Adjustments to the valuation allowance may be made in future periods if there is a change in management’s assessment of the amount of deferred income tax assets that is realizable.  As of September 30, 2019, our valuation allowance approximated $8.6 million.

46

Our results of operations for the nine months ended September 30, 2019 and 2018 were as follows (unaudited):

	For the Nine Months Ended September 30,					Percent Change (1)
(dollars in thousands)	2019		2018			2019 vs 2018
Net revenues	$	797,155	$	763,907		4.4	%
Material costs	261,810		247,677			5.7	%
Personnel costs	272,795		266,515			2.4	%
Other operating costs	100,067		92,631			8.0	%
General and administrative expenses	87,474		80,467			8.7	%
Professional accounting and legal fees	9,576		12,189			(21.4	)%
Depreciation and amortization	26,906		27,552			(2.3	)%
Operating expenses	758,628		727,031			4.3	%
Income from operations	38,527		36,876			4.5	%
Interest expense, net	25,973		28,519			(8.9	)%
Loss on extinguishment of debt	—		16,998			(100.0	)%
Non-service defined benefit plan expense	519		528			(1.7	)%
Income (loss) before income taxes	12,035		(9,169		)	NM
Provision (benefit) for income taxes	3,260		(3,848		)	NM
Net income (loss)	$	8,775	$	(5,321	)	NM

(1) NM - Not Meaningful

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

	For the Nine Months Ended September 30,
	2019		2018
Material costs	32.8	%	32.4	%
Personnel costs	34.2	%	34.9	%
Other operating costs	12.6	%	12.2	%
General and administrative expenses	11.0	%	10.5	%
Professional accounting and legal fees	1.2	%	1.6	%
Depreciation and amortization	3.4	%	3.6	%
Operating expenses	95.2	%	95.2	%

For the Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018

Net revenues.  Net revenues for the nine months ended September 30, 2019 were $797.2 million, an increase of $33.3 million, or 4.4%, from $763.9 million for the nine months ended September 30, 2018.  Net revenues by operating segment, after elimination of intersegment activity, were as follows:

	For the Nine Months Ended September 30,				Change		Percent Change
(dollars in thousands)	2019		2018		2019 vs 2018		2019 vs 2018
Patient Care	$	652,700	$	620,745	$	31,955	5.1	%
Products & Services	144,455		143,162		1,293		0.9	%
Net revenues	$	797,155	$	763,907	$	33,248	4.4	%

47

Patient Care net revenues for the nine months ended September 30, 2019 were $652.7 million, an increase of $32.0 million, or 5.1%, from $620.7 million for the same period in the prior year.  Net revenues from acquired clinics and consolidations, net of closures, increased $19.1 million.  Same clinic revenues increased $11.3 million for the nine months ended September 30, 2019 compared to the same period in the prior year, reflecting an increase in same clinic revenues of 1.8% on a per-day basis.  Patient care revenues from other services contributed to $1.6 million in growth.

Prosthetics constituted approximately 54% of our total Patient Care revenues for the nine months ended September 30, 2019 and 53% for the same period in 2018, excluding the impact of acquisitions.  Prosthetic revenues for the nine months ended September 30, 2019 were 2.7% higher, on a per-day basis, than the same period in the prior year, excluding the impact of acquisitions.  Orthotics, shoes, inserts, and other products increased by 0.7% on a per-day basis for the same comparative periods, excluding the impact of acquisitions.

Products & Services net revenues for the nine months ended September 30, 2019 were $144.5 million, an increase of $1.3 million, or 0.9%, from $143.2 million for the same period in the prior year.  This increase was comprised of $6.8 million from the distribution of O&P componentry to independent providers as the result of new products added to the portfolio, and an increase in volume, offset by a $5.5 million decrease in net revenues 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 and anticipate a decrease in the rate of growth of our distribution business.

Material costs.  Material costs for the nine months ended September 30, 2019 were $261.8 million, an increase of $14.1 million or 5.7%, from $247.7 million for the same period in the prior year.  Total material costs as a percentage of net revenues increased to 32.8% in the nine months ended September 30, 2019 from 32.4% in the nine months ended September 30, 2018, primarily due to changes in our Product & Services segment business mix.  Material costs by operating segment, after elimination of intersegment activity, were as follows:

	For the Nine Months Ended September 30,				Change		Percent Change
(dollars in thousands)	2019		2018		2019 vs 2018		2019 vs 2018
Patient Care	$	199,626	$	188,503	$	11,123	5.9	%
Products & Services	62,184		59,174		3,010		5.1	%
Material costs	$	261,810	$	247,677	$	14,133	5.7	%

Patient Care material costs increased $11.1 million, or 5.9%, for the nine months ended September 30, 2019 compared to the same period in the prior year as a result of acquisitions.  Patient Care material costs as a percent of segment net revenues is 30.6% for the nine months ended September 30, 2019 and 30.4% for the nine months ended September 30, 2018.

Products & Services material costs increased $3.0 million, or 5.1%, for the nine months ended September 30, 2019 compared to the same period in the prior year.  As a percent of net revenues in the Products & Services segment, material costs were 43.0% for the nine months ended September 30, 2019 as compared to 41.3% for the same period 2018.  The increase in material costs as a percentage of segment net revenues was due to a change in the distribution customer and business mix within the segment.

48

Personnel costs.  Personnel costs for the nine months ended September 30, 2019 were $272.8 million, an increase of $6.3 million, or 2.4%, from $266.5 million for the same period in the prior year.  Personnel costs by operating segment were as follows:

	For the Nine Months Ended September 30,				Change		Percent Change
(dollars in thousands)	2019		2018		2019 vs 2018		2019 vs 2018
Patient Care	$	233,402	$	228,211	$	5,191	2.3	%
Products & Services	39,393		38,304		1,089		2.8	%
Personnel costs	$	272,795	$	266,515	$	6,280	2.4	%

Personnel costs for the Patient Care segment were $233.4 million for the nine months ended September 30, 2019, an increase of $5.2 million, or 2.3%, from $228.2 million for the same period in the prior year.  The increase in Patient Care personnel costs for the nine months ended September 30, 2019 was primarily related to an increase of $1.9 million in benefits expense relating to higher health claims experience and higher 401(k) match, an increase of $1.8 million in salary expense, an increase of $1.3 million in bonus expense, and an increase of other personnel costs of $0.6 million, offset by $0.4 million in lower commission expense, when compared to the nine months ended September 30, 2018.

Personnel costs for the Products & Services segment were $39.4 million for the nine months ended September 30, 2019, an increase of $1.1 million compared to the same period in the prior year.  Salary expense increased $1.0 million, benefits expense increased $0.3 million, and bonus expense decreased $0.2 million for the nine months ended September 30, 2019 as compared to the same period in the prior year.

Other operating costs.  Other operating costs for the nine months ended September 30, 2019 were $100.1 million, an increase of $7.5 million, or 8.0%, from $92.6 million for the same period in the prior year.  Rent expense increased an additional $1.4 million from new, renewed, and acquired leases and $0.9 million as a result of the adoption of ASC 842, further described in Note A — “Organization and Summary of Significant Accounting Policies”.  In addition, professional fees increased $1.5 million for the nine months ended September 30, 2019 due to investments made in certain revenue cycle management initiatives.  Other operating expenses increased $1.5 million from higher sales and use tax, and additional costs from acquisitions.  Bad debt expense increased by $0.9 million due to recoveries in the same period of the prior year.  Other occupancy costs and all other operating costs increased $1.3 million for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018.

General and administrative expenses.  General and administrative expenses for the nine months ended September 30, 2019 were $87.5 million, an increase of $7.0 million, or 8.7%, from the same period in the prior year.  This includes a $2.3 million increase in other expenses, largely due to favorable settlements in the prior year, a $2.4 million increase in salary expense, a $0.9 million increase in benefits related to higher claim costs, and a $0.5 million increase in equity-based compensation, and a $0.9 million increase in office and other expenses.

Professional accounting and legal fees.  Professional accounting and legal fees for the nine months ended September 30, 2019 were $9.6 million, a decrease of $2.6 million, or 21.4%, from $12.2 million for the same period in the prior year.  Advisory and other fees decreased primarily due to decreased utilization of professional services as compared to the same period in 2018.  This change related primarily to reductions in the use of third-party professionals to assist us in the remediation of our material weaknesses, to regain our timely filing status in August of 2018, and to undertake related activities.

Depreciation and amortization.  Depreciation and amortization for the nine months ended September 30, 2019 was $26.9 million, a decrease of $0.6 million, or 2.3%, from $27.6 million for the same period in the prior year.  Amortization expense decreased $1.5 million when compared to the prior period as a result of certain intangible assets becoming fully amortized.  Depreciation expense increased $0.7 million when compared to the prior period as a result of additions to certain fixed assets, and finance lease amortization increased $0.2 million.

49

Interest expense, net.  Interest expense for the nine months ended September 30, 2019 was $26.0 million, a decrease of $2.5 million, or 8.9%, from $28.5 million for the same period in the prior year.  This decrease was primarily due to lower interest rates on outstanding borrowings as a result of our debt refinancing in March 2018.

Provision for income taxes.  The provision for income taxes for the nine months ended September 30, 2019 was $3.3 million, or 27.1% of income before income taxes, compared to a benefit of $3.8 million, or 42.0% of loss before income taxes for the nine months ended September 30, 2018.  The effective tax rate in 2019 consisted principally of the 21% federal statutory tax rate, the rate impact from state income taxes, the windfall from stock-based compensation, and permanent tax differences.  The decrease in the effective tax rate for nine months ended September 30, 2019 compared with the nine months ended September 30, 2018 is primarily attributable to an increased estimated annual income, an increase in pre-tax book loss for the nine months ended September 30, 2018 to pre-tax book income for the nine months ended September 30, 2019, and the windfall from stock-based compensation recorded as a discrete item during the period.

On a quarterly basis, we assess the likelihood of realization of our deferred tax assets considering all available evidence, both positive and negative.  Our most recent operating performance, the scheduled reversal of temporary differences, our forecast of taxable income in future periods, and the availability of prudent tax planning strategies are important considerations in our assessment.  While we recognize our recent earnings history is an example of positive evidence to be considered in our assessment, at this time, management continues to believe it is more-likely-than-not we will not realize a portion of our deferred tax assets due to our consideration of all positive and negative evidence available.  Adjustments to the valuation allowance may be made in future periods if there is a change in management’s assessment of the amount of deferred income tax assets that is realizable.  As of September 30, 2019, our valuation allowance approximated $8.6 million.

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, 2019, we had total liquidity of $144.8 million, which reflected a decrease of $44.4 million from the $189.2 million in liquidity we had as of December 31, 2018.  Our liquidity at September 30, 2019 was comprised of cash and cash equivalents of $49.9 million and $94.8 million in available borrowing capacity under our $100.0 million revolving credit facility.  This decrease in liquidity primarily related to our use of $31.6 million in cash for the purposes of acquisitions, and secondarily due to capital expenditures of $25.4 million exceeding our operating cash flows of $19.9 million by $5.5 million.  We have also utilized $6.1 million of our liquidity in the reduction of our net indebtedness and outstanding letters of credit.  Other investing and financing activities resulted in a net use of $1.2 million to our liquidity.

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 under our revolving credit facility.

Working Capital and Days Sales Outstanding

At September 30, 2019, we had working capital of $95.2 million compared to working capital of $154.6 million at December 31, 2018.  Our working capital decreased $59.4 million for the nine months ended September 30, 2019 due to a decrease in current assets of $40.3 million and an increase in current liabilities of $19.2 million.

The decrease in current assets was primarily attributable to a decrease in cash and cash equivalents of $45.2 million and the reclassification of prepaid rent of $3.8 million to the current portion of long-term debt upon adoption of ASC 842, historically recorded in other current assets.  The decrease in cash primarily relates to the uses of cash discussed in the liquidity section above.  The decreases were offset by an increase in inventory of $8.0 million, which was partially attributable to acquisitions, and other individually immaterial changes in current assets.

50

The increase in current liabilities was primarily attributable to the adoption of ASC 842 and the resulting recognition of operating lease liabilities of $32.4 million at September 30, 2019, partially offset by a net decrease in accrued incentive compensation related costs of $15.5 million due to the payment of annual inventive compensation, tax payments on stock vesting, and the employer 401(k) matching contribution made during the first quarter of the year, offset by current year incentive compensation accruals.  The remainder of the increase is attributable to other changes in current liabilities.

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.  Clinics acquired during the past 90-day period are excluded from the calculation.  As of September 30, 2019, our DSO was 47 days, compared to a DSO of 45 days as of September 30, 2018.  We believe administrative changes to our collections operations made in the first quarter of this year, increases in the rates of initial Medicare claim denials, and the impact of implementing our patient management and electronic health system in certain of our largest operating regions in the first quarter have contributed to collection delays and the increase in our DSO.  As of March 31, 2019, the implementation of the new patient management and electronic health record system was complete.

Sources and Uses of Cash for the Nine Months Ended September 30, 2019 Compared to September 30, 2018

Net cash flows provided by operating activities decreased $17.2 million to $19.9 million for the nine months ended September 30, 2019 from net cash provided by operating activities of $37.2 million for the nine months ended September 30, 2018.  This comparative decrease was primarily due to a $12.6 million reduction in cash provided by net accounts receivable.  During 2018, we benefited from an improvement in our collections experience, particularly during the first quarter of the prior year.  This year, in addition to not having a similar benefit in collections experience, we have also experienced some increased difficulties in collections as discussed above.  Our operating cash flows have also decreased on a comparative basis due to our receipt of a $12.3 million tax refund in the first quarter of 2018 and due to $7.4 million in timing effect related to our payments of accounts payables which benefited our comparative cash flows in 2018 and has created an offsetting decrease to our current year cash flows from operations.  These factors were partially offset by a beneficial reduction of $10.9 million in cash used for the satisfaction of accrued expenses and other liabilities, as well as a $4.2 million net reduction relating primarily to the payment of accrued compensation and secondarily to the net effect of other factors.  These changes are further discussed in the Working Capital and Days Sales Outstanding section above.

Cash flows used in investing activities increased $35.0 million to $54.8 million for the nine months ended September 30, 2019, from $19.8 million for the nine months ended September 30, 2018.  The increase in cash used in investing activities was due to $31.6 million in cash consideration for acquisitions, net of cash acquired, and a $3.8 million increase in purchases of property, plant and equipment.

Cash flows used in financing activities increased by $51.5 million to a use of cash of $10.3 million for the nine months ended September 30, 2019, from cash provided by financing activities of $41.2 million for the nine months ended September 30, 2018.  Cash flows provided by financing activities during the nine months ended September 30, 2018 included $46.9 million related to the refinancing of our indebtedness, net of payment of $15.2 million in debt issuance and extinguishment costs, whereas in the nine months ended September 30, 2019, cash flows used in debt financing activities was $3.8 million.

Effect of Indebtedness

On March 6, 2018 we entered into a new Credit Agreement in order to refinance our indebtedness, as disclosed in Note M - “Debt,” in the notes to the condensed consolidated financial statements contained elsewhere in this report.  Our indebtedness bears reduced rates of interest compared with the indebtedness under our prior credit agreement, and as such, interest expense was lower for the nine months ended September 30, 2019 as compared to the same period in the prior year.  Cash paid for interest totaled $22.4 million and $23.7 million for the nine months ended September 30, 2019 and 2018, respectively.

51

Scheduled maturities of debt as of September 30, 2019 were as follows:

(in thousands)
2019 (remainder of year)	$	2,318
2020	8,428
2021	7,372
2022	6,032
2023	5,489
Thereafter	476,116
Total debt before unamortized discount and debt issuance costs, net	505,755
Unamortized discount and debt issuance costs, net	(8,516		)
Total debt	$	497,239

Liquidity Outlook and Going Concern Evaluation

Our Credit Agreement has a term loan facility with $497.4 million in principal outstanding at September 30, 2019, due in quarterly principal installments equal to 0.25% of the original aggregate principal amount of $505.0 million, 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 $100.0 million at September 30, 2019 that matures in March 2023.

We currently anticipate that, in connection with our planned reconfiguration of distribution facilities in 2020 and related implementation of supply chain and financial systems, we will incur an increase in capital expenditures and deferred systems implementation expenditures during 2020.  The amounts of these expenditures have not been firmly established at this time.  However, we preliminarily believe that we could expend approximately $13 million to $15 million in increased capital expenditures and $9 million to $12 million in incremental expenditures related to the implementation of the supply chain and financial systems during 2020.  We anticipate that these incremental systems related expenses will be deferred in accordance with ASU 2018-15 and included in future expense over the periods of operation of the systems.  These expenditures are also anticipated to be separate from and additional to the approximately $5 million in expenses we believe we will incur related to this project during 2020.  With the exception of an additional $6 million to $8 million of similar capital and incremental expenditures in 2021, these rates of expenditure are currently anticipated to subside and return to levels similar to those of the current year during 2022.

Nevertheless, based on our range of estimates of the costs for our reconfiguration of distribution facilities and our financial and supply chain systems implementations, as well as our estimates of potential expenditures for the acquisition of O&P providers, we currently believe that our anticipated operating trends when combined with available borrowings under our revolving credit facility 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.

52

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, 2019, we had a combined principal amount of $497.4 million of variable rate debt and a notional amount of $312.5 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.

53

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, 2019.  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, 2019 because of the material weaknesses in our internal control over financial reporting described in Item 9A., “Controls and Procedures” of our Annual Report on Form 10-K for the year ending December 31, 2018, our “2018 Form 10-K.”

Although we have not fully remediated the material weaknesses described in our 2018 Form 10-K, we believe that we have made substantial progress on the remediation plans described in our 2018 Form 10-K, under Item 9A., “Controls and Procedures.”

During the period ending September 30, 2019, we continued to make improvements to controls in the areas of inventory; accounts payable; information technology general controls; revenue; and accounts receivable and are continuing our evaluation of 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.

Changes in Internal Control over Financial Reporting

With the exception of ongoing remediation activities, there have been no material changes to our internal controls over financial reporting.

Therefore, in accordance with Rule 13a-15(d) of the Exchange Act and with the participation of our Chief Executive Officer and our Chief Financial Officer, management determined there have been no material changes to our internal control over financial reporting during the period ended September 30, 2019.

54

PART II.OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Derivative Litigation

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 345th 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 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 counsel for the Special Committee provided a redacted version of the report to plaintiffs’ counsel.  Plaintiffs objected to the redacted version of the report, and on February 4, 2019, the Travis County Court appointed a Special Master to review plaintiffs’ objections to the redacted report.  On March 22, 2019, the Special Master submitted a report to the Travis County Court recommending that the court order that the entire Special Committee report be produced.  On April 2, 2019 we filed an objection to the Special Master’s report and recommendation, and requested a hearing on the matter.  On June 25, 2019, the Travis County Court rejected the recommendation of the Special Master, and instead ordered that only a limited additional portion of the Special Committee report should be made available to plaintiffs.  On July 10, 2019, the updated redacted Special Committee report was provided to plaintiffs through their counsel.

In late October 2019, a non-binding agreement in principle was reached by the parties to settle the consolidated derivative action, subject to finalization and execution of a definitive settlement agreement by the parties, and subsequent final approval

55

of the settlement by the Travis County Court.  The amount of any payment to be made by Hanger pursuant to the non-binding agreement in principle is expected to be covered under our directors & officers insurance.

Management intends to continue to vigorously defend against the shareholder derivative action.  At this time, if the derivative action were to go to trial, we cannot predict how the Travis County Court 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.  In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a materially adverse effect on our consolidated financial position, liquidity or results of our operations.

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

56

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., “Risk Factors”, in our 2018 Form 10-K, 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 three months ended September 30, 2019.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

There have been no defaults upon senior securities during the three months ended September 30, 2019.

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.

57

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.)

58

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 7, 2019	By:	/s/ THOMAS E. KIRALY
		Thomas E. Kiraly
		Executive Vice President and Chief Financial Officer
Dated: November 7, 2019	By:	/s/ GABRIELLE B. ADAMS
		Gabrielle B. Adams
		Vice President and Chief Accounting Officer

59

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 7, 2019	By:	/s/ VINIT K. ASAR
		Vinit K. Asar
		Chief Executive Officer (Principal Executive Officer)

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 7, 2019	By:	/s/ THOMAS E. KIRALY
		Thomas E. Kiraly
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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 period ended September 30, 2019 (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)

Dated: November 7, 2019

XML

Commitments and Contingencies

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies

Commitments and Contingencies

Note R — Commitments and Contingencies

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 Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder.  The complaint sought unspecified damages, costs, attorneys’ fees, and equitable relief.

On January 26, 2017, the court granted the defendants’ motions to dismiss for failure to state a claim upon which relief can be granted and dismissed with prejudice all claims against all defendants.  On February 24, 2017, plaintiffs filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit.  On August 6, 2018, the Court of Appeals affirmed in part and reversed in part.  On August 20, 2018, Hanger, Inc. and the remaining individual defendant filed a petition for panel rehearing and a petition for rehearing en banc with the Court of Appeals.  On April 10, 2019, the Court of Appeals granted the petition for panel rehearing, withdrew its previous panel decision, and substituted a new panel decision in its place that affirmed the District Court’s dismissal with prejudice of all claims against all the defendants for failure to state a claim.  Plaintiffs did not petition the Court of Appeals for a panel rehearing or a rehearing en banc, and did not file a writ of certiorari with the United States Supreme Court.  Therefore, the April 10, 2019 Court of Appeals ruling affirming the dismissal of all claims with prejudice against all defendants is now final.

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 345th 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 counsel for the Special Committee provided a redacted version of the report to plaintiffs’ counsel.  Plaintiffs objected to the redacted version of the report, and on February 4, 2019, the Travis County Court appointed a Special Master to review plaintiffs’ objections to the redacted report.  On March 22, 2019, the Special Master submitted a report to the Travis County Court recommending that the court order that the entire Special Committee report be produced.  On April 2, 2019 we filed an objection to the Special Master’s report and recommendation, and requested a hearing on the matter. On June 25, 2019, the Travis County Court rejected the recommendation of the Special Master, and instead ordered that only a limited additional portion of the Special Committee report should be made available to plaintiffs. On July 10, 2019, the updated redacted Special Committee report was provided to plaintiffs through their counsel.

In late October 2019, a non-binding agreement in principle was reached by the parties to settle the consolidated derivative action, subject to finalization and execution of a definitive settlement agreement by the parties, and subsequent final approval of the settlement by the Travis County Court.  The amount of any payment to be made by Hanger pursuant to the non-binding agreement in principle is expected to be covered under our directors & officers insurance.

Management intends to continue to vigorously defend against the shareholder derivative action.  At this time, if the derivative action were to go to trial, we cannot predict how the Travis County Court would 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, and are also subject to 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.

XML

Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Fair Value Measurements

Fair Value Measurements

Note N — Fair Value Measurements

Financial Instruments

In March 2018, we refinanced our credit facilities with the Credit Agreement.  The carrying value (excluding unamortized discounts and debt issuance costs of $8.5 million) of our outstanding term loan as of September 30, 2019 approximates the fair value at $497.4 million.  The carrying value of our outstanding term loan as of December 31, 2018 (excluding unamortized discounts and debt issuance costs of $9.4 million) was $501.2 million compared to its fair value of $491.2 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, 2019 and December 31, 2018, we had no amounts outstanding on our revolving credit facility.

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 notional value outstanding as of September 30, 2019 was $312.5 million.  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 M - “Debt” and Note O - “Derivative Financial Instruments” for further information.

The carrying value of our Seller Notes as of September 30, 2019 and December 31, 2018 was $7.1 million and $4.5 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

Leases - Before adoption of ASC 842 (Details) $ in Thousands	1 Months Ended
	Aug. 31, 2019 USD ($) item	Dec. 31, 2018 USD ($)
Operating Leases
2019		$ 39,378
2020		29,641
2021		21,303
2022		14,479
2023		9,193
Thereafter		10,008
Total		124,002
Capital Leases
2019		249
2020		175
2021		109
2022		28
Total		$ 561
Lease agreement for a distribution facility in Georgia
Term of the lease	127 months
Number of consecutive months in the extension period of the lease | item	2
Extension period of the lease	60 months
Annual base rent	$ 1,000
Rent-free period	7 months
Annual increase (as a percent)	2.00%
Tenant improvement allowance	$ 2,200

XML

Leases - Lease Cost (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2019
Leases
Operating lease cost	$ 11,238	$ 32,868
Finance lease cost
Amortization of right-of-use assets	75	225
Interest of lease liabilities	6	18
Sublease income	(117)	(196)
Short-term lease cost	46	460
Variable lease cost	1,551	4,581
Total lease cost	$ 12,799	$ 37,956

XML

Accrued Expenses and Other Current Liabilities and Other Liabilities - Accrued expenses and other current liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
Accrued Expenses and Other Current Liabilities and Other Liabilities
Patient prepayments, deposits and refunds payable	$ 25,979		$ 24,563
Accrued sales taxes and other taxes	8,646		6,810
Insurance and self-insurance accruals	8,234		8,886
Derivative liability	3,413		724
Accrued professional fees	503		3,751
Accrued interest payable	344		332
Other current liabilities	8,789		6,717
Total accrued expenses and other current liabilities	$ 55,908	$ 50,431	$ 51,783

XML

Derivative Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2019

Derivative Financial Instruments

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

(in thousands)	Cash Flow Hedges
Balance as of Balance as of June 30, 2019	$	(10,560)
Unrealized loss recognized in other comprehensive loss, net of tax		(2,060)
Reclassification to interest expense, net		419
Balance as of September 30, 2019	$	(12,201)
Balance as of Balance as of June 30, 2018	$	24
Unrealized gain recognized in other comprehensive loss, net of tax		1,171
Reclassification to interest expense, net		567
Balance as of September 30, 2018	$	1,762

(in thousands)	Cash Flow Hedges
Balance as of December 31, 2018	$	(2,936)
Unrealized loss recognized in other comprehensive income, net of tax		(10,135)
Reclassification to interest expense, net		870
Balance as of September 30, 2019	$	(12,201)
Balance as of December 31, 2017	$	—
Unrealized loss recognized in other comprehensive 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 liabilities within the consolidated balance sheets

	As of September 30, 2019				As of December 31, 2018
(in thousands)	Assets		Liabilities		Assets		Liabilities
Derivatives designated as cash flow hedging instruments:
Accrued expenses and other current liabilities	$	—	$	3,413	$	—	$	724
Other liabilities		—		12,627		—		3,134

XML

Organization and Summary of Significant Accounting Policies - Description of Business (Details)	9 Months Ended
	Sep. 30, 2019 segment
Organization and Summary of Significant Accounting Policies
Number of operating segments	2

XML

CONDENSED CONSOLIDATED STATEMENTS 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
Increase (Decrease) in Stockholders' Equity
Cumulative effect of a change in accounting | 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
Increase (Decrease) in Stockholders' Equity
Net income (loss)						(5,321)
Total other comprehensive (loss) income						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
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
Increase (Decrease) in Stockholders' Equity
Net income (loss)				(22,618)		(22,618)
Share-based compensation expense		2,585				2,585
Issuance of common stock upon vesting of restricted stock units	$ 4	(4)
Issuance of common stock upon vesting of restricted stock units (in shares)	372,000
Effect of shares withheld to cover taxes		(2,150)				(2,150)
Total other comprehensive (loss) income			(2,582)			(2,582)
Balance at Mar. 31, 2018	$ 369	334,169	(4,268)	(383,149)	(696)	(53,575)
Balance (in shares) at Mar. 31, 2018	36,744,000
Increase (Decrease) in Stockholders' Equity
Net income (loss)				12,928		12,928
Share-based compensation expense		3,320				3,320
Issuance of common stock upon vesting of restricted stock units	$ 1	(1)
Issuance of common stock upon vesting of restricted stock units (in shares)	106,000
Effect of shares withheld to cover taxes		(313)				(313)
Total other comprehensive (loss) income			2,340			2,340
Balance at Jun. 30, 2018	$ 370	337,175	(1,928)	(370,221)	(696)	(35,300)
Balance (in shares) at Jun. 30, 2018	36,850,000
Increase (Decrease) in Stockholders' Equity
Net income (loss)				4,369		4,369
Share-based compensation expense		3,668				3,668
Issuance of common stock upon vesting of restricted stock units (in shares)	18,000
Effect of shares withheld to cover taxes		(105)				(105)
Total other comprehensive (loss) income			1,764			1,764
Balance at Sep. 30, 2018	$ 370	340,738	(164)	(365,852)	(696)	(25,604)
Balance (in shares) at Sep. 30, 2018	36,868,000
Balance at Dec. 31, 2018	$ 371	343,955	(4,531)	(361,023)	(696)	$ (21,924)
Balance (in shares) at Dec. 31, 2018	36,921,000					36,921,174
Increase (Decrease) in Stockholders' Equity
Cumulative effect of a change in accounting | ASU 2016-02				1,561		$ 1,561
Balance at Jan. 01, 2019	$ 371	343,955	(4,531)	(359,462)	(696)	(20,363)
Balance (in shares) at Jan. 01, 2019	36,921,000
Balance at Dec. 31, 2018	$ 371	343,955	(4,531)	(361,023)	(696)	$ (21,924)
Balance (in shares) at Dec. 31, 2018	36,921,000					36,921,174
Increase (Decrease) in Stockholders' Equity
Net income (loss)						$ 8,775
Total other comprehensive (loss) income						(9,246)
Balance at Sep. 30, 2019	$ 375	350,579	(13,777)	(350,687)	(696)	$ (14,206)
Balance (in shares) at Sep. 30, 2019	37,362,000					37,361,934
Balance at Jan. 01, 2019	$ 371	343,955	(4,531)	(359,462)	(696)	$ (20,363)
Balance (in shares) at Jan. 01, 2019	36,921,000
Increase (Decrease) in Stockholders' Equity
Net income (loss)				(6,951)		(6,951)
Share-based compensation expense		3,265				3,265
Issuance of common stock upon vesting of restricted stock units	$ 3	(3)
Issuance of common stock upon vesting of restricted stock units (in shares)	350,000
Effect of shares withheld to cover taxes		(3,626)				(3,626)
Total other comprehensive (loss) income			(2,930)			(2,930)
Balance at Mar. 31, 2019	$ 374	343,591	(7,461)	(366,413)	(696)	(30,605)
Balance (in shares) at Mar. 31, 2019	37,271,000
Increase (Decrease) in Stockholders' Equity
Net income (loss)				10,035		10,035
Share-based compensation expense		3,450				3,450
Issuance of common stock upon vesting of restricted stock units	$ 1	(1)
Issuance of common stock upon vesting of restricted stock units (in shares)	64,000
Effect of shares withheld to cover taxes		(28)				(28)
Total other comprehensive (loss) income			(4,682)			(4,682)
Balance at Jun. 30, 2019	$ 375	347,012	(12,143)	(356,378)	(696)	(21,830)
Balance (in shares) at Jun. 30, 2019	37,335,000
Increase (Decrease) in Stockholders' Equity
Net income (loss)				5,691		5,691
Share-based compensation expense		3,374				3,374
Issuance of common stock upon vesting of restricted stock units (in shares)	7,000
Issuance of common stock in connection with the exercise of stock options		249				249
Issuance in connection with the exercise of stock options (in shares)	20,000
Effect of shares withheld to cover taxes		(56)				(56)
Total other comprehensive (loss) income			(1,634)			(1,634)
Balance at Sep. 30, 2019	$ 375	$ 350,579	$ (13,777)	$ (350,687)	$ (696)	$ (14,206)
Balance (in shares) at Sep. 30, 2019	37,362,000					37,361,934

XML

Debt and Other Obligations - Seller Notes (Details) - Seller Notes - USD ($) $ in Millions	Sep. 30, 2019	Dec. 31, 2018
DEBT AND OTHER OBLIGATIONS
Unamortized discount	$ 0.3	$ 0.2
Minimum
DEBT AND OTHER OBLIGATIONS
Interest rate stated percentage	2.00%
Maximum
DEBT AND OTHER OBLIGATIONS
Interest rate stated percentage	3.00%

XML

Segment and Related Information - Paragraphs (Details)	9 Months Ended
	Sep. 30, 2019 segment area
SEGMENT AND RELATED INFORMATION
Number of operating segments | segment	2
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

XML

Subsequent Events (Details) - USD ($) $ in Thousands	1 Months Ended	9 Months Ended
	Oct. 31, 2019	Sep. 30, 2019
SUBSEQUENT EVENTS
Issuance of seller notes in connection with acquisitions		$ 5,053
Subsequent Events
SUBSEQUENT EVENTS
Aggregate purchase price	$ 8,100
Consideration paid in cash	5,100
Issuance of seller notes in connection with acquisitions	$ 3,000
Notes payable to share holders in quarterly installments period	5 years

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, 2019	Sep. 30, 2018	Sep. 30, 2019	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	$ (10,560)	$ 24	$ (2,936)
Unrealized (loss) gain recognized in other comprehensive (loss) income, net of tax	(2,060)	1,171	(10,135)	$ 251
Reclassification to interest expense, net	419	567	870	1,511
Balance at the end of the period	$ (12,201)	$ 1,762	$ (12,201)	$ 1,762

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Sep. 30, 2019	Dec. 31, 2018
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	37,504,755	37,063,995
Common stock, shares outstanding	37,361,934	36,921,174
Treasury stock, shares	142,821	142,821

XML

Supplemental Executive Retirement Plans - Defined Contribution Supplemental Executive Retirement Plan (Details) - USD ($) $ in Millions	Sep. 30, 2019	Dec. 31, 2018
Supplemental Executive Retirement Plans
Estimated accumulated benefit obligation	$ 3.5	$ 3.0
Funded estimated accumulated benefit obligation	3.0	2.4
Unfunded estimated accumulated benefit obligation	$ 0.5	$ 0.6

XML

Goodwill and Other Intangible Assets - Intangibles (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
GOODWILL AND OTHER INTANGIBLE ASSETS
Definite-lived, Gross Carrying Amount	$ 41,018		$ 41,018		$ 35,682
Definite-lived, Accumulated Amortization	(27,150)		(27,150)		(24,321)
Definite-lived, Net Carrying Amount	13,868		13,868		11,361
Total other intangible assets, Gross Carrying Amount	50,088		50,088		44,752
Total other intangible assets, Accumulated Impairment	(4,953)		(4,953)		(4,953)
Total other intangible assets, Net Carrying Amount	17,985		17,985		15,478
Amortization expense	1,600	$ 1,500	3,900	$ 5,300
Trade name
GOODWILL AND OTHER INTANGIBLE ASSETS
Indefinite lived, Gross Carrying Amount	9,070		9,070		9,070
Indefinite lived, Accumulated Impairment	(4,953)		(4,953)		(4,953)
Indefinite lived, Net Carrying Amount	4,117		4,117		4,117
Customer lists
GOODWILL AND OTHER INTANGIBLE ASSETS
Definite-lived, Gross Carrying Amount	31,525		31,525		26,036
Definite-lived, Accumulated Amortization	(21,622)		(21,622)		(19,051)
Definite-lived, Net Carrying Amount	9,903		9,903		6,985
Trade name
GOODWILL AND OTHER INTANGIBLE ASSETS
Definite-lived, Gross Carrying Amount	255		255		255
Definite-lived, Accumulated Amortization	(145)		(145)		(125)
Definite-lived, Net Carrying Amount	110		110		130
Patents and other intangibles
GOODWILL AND OTHER INTANGIBLE ASSETS
Definite-lived, Gross Carrying Amount	9,238		9,238		9,391
Definite-lived, Accumulated Amortization	(5,383)		(5,383)		(5,145)
Definite-lived, Net Carrying Amount	$ 3,855		$ 3,855		$ 4,246

XML

Inventories (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Inventories
Raw materials	$ 20,908	$ 19,632
Work in process	14,287	9,278
Finished goods	40,498	38,780
Total inventories	$ 75,693	$ 67,690

XML

Revenue Recognition (Tables)

9 Months Ended

Sep. 30, 2019

Patient Care

REVENUE RECOGNITION

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)	2019		2018		2019		2018
Patient Care Segment
Medicare	$	72,879	$	69,724	$	206,295	$	197,461
Medicaid		36,140		33,597		103,631		96,993
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)		83,384		78,333		232,410		226,761
Veterans Administration		23,816		19,317		64,635		56,873
Private Pay		14,712		13,109		45,729		42,657
Total	$	230,931	$	214,080	$	652,700	$	620,745

Products & Services

REVENUE RECOGNITION

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)	2019		2018		2019		2018
Products & Services Segment
Distribution services, net of intersegment revenue eliminations	$	36,653	$	34,666	$	107,510	$	100,700
Therapeutic solutions		12,054		14,200		36,945		42,462
Total	$	48,707	$	48,866	$	144,455	$	143,162

XML

Acquisitions (Tables)

9 Months Ended

Sep. 30, 2019

2019 Acquisition Activity, prosthetic and orthotic business

Schedule of aggregate purchase price of acquisition allocated on a preliminary basis

(in thousands)
Cash paid, net of cash acquired	$	30,926
Issuance of seller notes at fair value		5,053
Additional consideration		659
Aggregate purchase price		36,638
Accounts receivable, net		3,630
Inventories		1,693
Customer relationships (Weighted average useful life of 4.9 years)		5,791
Non-compete agreements (Weighted average useful life of 4.9 years)		349
Other assets		(2,687)
Net assets acquired		8,776
Goodwill	$	27,862

2018 Acquisition Activity, two O&P businesses

Schedule of aggregate purchase price of acquisition allocated on a preliminary basis

(in thousands)
Cash paid, net of cash acquired	$	1,978
Issuance of seller notes		1,120
Aggregate purchase price		3,098
Accounts receivable, net		256
Inventories		302
Customer relationships (Weighted average useful life of 4.0 years)		260
Non-compete agreements (Weighted average useful life of 4.6 years)		214
Other assets		90
Accounts payable		(59)
Accrued expenses and other liabilities		(364)
Net assets acquired		699
Goodwill	$	2,399

XML

Accrued Expenses and Other Current Liabilities and Other Liabilities

9 Months Ended

Sep. 30, 2019

Accrued Expenses and Other Current Liabilities and Other Liabilities

Accrued Expenses and Other Current Liabilities and Other Liabilities

Note J — Accrued Expenses and Other Current Liabilities and Other Liabilities

Accrued expenses and other current liabilities consist of:

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Patient prepayments, deposits, and refunds payable	$	25,979	$	24,563
Accrued sales taxes and other taxes		8,646		6,810
Insurance and self-insurance accruals		8,234		8,886
Derivative liability		3,413		724
Accrued professional fees		503		3,751
Accrued interest payable		344		332
Other current liabilities		8,789		6,717
Total accrued expenses and other current liabilities	$	55,908	$	51,783

Other liabilities consist of:

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Supplemental executive retirement plan obligations	$	19,370	$	20,195
Derivative liability		12,627		3,134
Long-term insurance accruals		8,058		8,713
Unrecognized tax benefits, and related interest and penalties		5,457		5,458
Deferred tenant improvement allowances		—		8,570
Deferred rent		—		4,455
Other		2,339		1,045
Total other liabilities	$	47,851	$	51,570

XML

Property, Plant and Equipment, Net

9 Months Ended

Sep. 30, 2019

Property, Plant and Equipment, Net

Property, Plant and Equipment, Net

Note F — Property, Plant and Equipment, Net

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

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Land	$	634	$	644
Buildings (1)		4,046		24,558
Furniture and fixtures		13,332		13,121
Machinery and equipment		26,603		27,452
Equipment leased to third parties under operating leases		29,943		30,093
Leasehold improvements		129,029		111,247
Computers and software		74,897		69,173
Total property, plant and equipment, gross		278,484		276,288
Less: accumulated depreciation		(193,994)		(186,799)
Total property, plant and equipment, net	$	84,490	$	89,489

(1) As discussed in Note A - “Organization and Summary of Significant Accounting Policies”, the new lease standard resulted in the removal of assets associated with build-to-suit leases.

Total depreciation expense was approximately $7.8 million and $23.0 million for the three and nine months ended September 30, 2019 and $7.5 million and $22.3 million for the three and nine months ended September 30, 2018.

XML

Earnings Per Share

9 Months Ended

Sep. 30, 2019

Earnings Per Share

Earnings Per Share

Note B — Earnings Per Share

Basic earnings per common share is computed using the weighted average number of common shares outstanding during the period.  Diluted earnings per common 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 diluted earnings per share were 10 and zero  for the three and nine months ended September 30, 2019, and zero and 48,502  for the three and nine months ended September 30, 2018.

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 net loss 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)	2019		2018		2019		2018
Net income (loss)	$	5,691	$	4,369	$	8,775	$	(5,321)
Weighted average shares outstanding - basic		37,349		36,857		37,218		36,717
Effect of potentially dilutive restricted stock units and options (1)		638		700		704		—
Weighted average shares outstanding - diluted		37,987		37,557		37,922		36,717
Basic income (loss) per share	$	0.15	$	0.12	$	0.24	$	(0.14)
Diluted income (loss) per share	$	0.15	$	0.12	$	0.23	$	(0.14)

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

XML

Supplemental Executive Retirement Plans - Plan Details and Change in Benefit Obligation (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) payment	Sep. 30, 2018 USD ($)	Dec. 31, 2018 USD ($)
Supplemental Executive Retirement Plans
Number of annual payments | payment			15
Change in Benefit Obligation
Benefit obligation at the beginning of the period	$ 17,535	$ 19,388	$ 18,927	$ 20,793
Service cost	84	92	251	275
Interest cost	164	150	494	450
Payments	(12)	(13)	(1,901)	(1,901)
Benefit obligation at the end of the period	17,771	$ 19,617	17,771	$ 19,617
Amounts Recognized in the Condensed Consolidated Balance Sheets:
Accrued expenses and other current liabilities	1,913		1,913		$ 1,913
Other liabilities	15,858		15,858		17,014
Total accrued liabilities	$ 17,771		$ 17,771		$ 18,927

XML

Debt and Other Obligations - Refinancing of Credit Agreement and Term B Borrowings (Details) - USD ($) $ in Thousands	Mar. 06, 2018	Sep. 30, 2019	Dec. 31, 2018
DEBT AND OTHER OBLIGATIONS
Outstanding amount of debt		$ 505,755	$ 520,080
Letters of credit outstanding amount		$ 5,200
Credit Agreement, dated March 6, 2018, Term Loan B
DEBT AND OTHER OBLIGATIONS
Outstanding amount of debt	$ 505,000
Weighted average interest rate		5.70%
Revolving Credit Facility
DEBT AND OTHER OBLIGATIONS
Maximum borrowing capacity	605,000
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%
Interest rate in excess of applicable rate upon acceleration and default ( as a percent)	2.00%
Revolving Credit Facility | Minimum
DEBT AND OTHER OBLIGATIONS
Unused commitment fee (as a percent)	0.375%
Revolving Credit Facility | Maximum
DEBT AND OTHER OBLIGATIONS
Unused commitment fee (as a percent)	0.50%
Revolving Credit Facility | LIBOR
DEBT AND OTHER OBLIGATIONS
Interest rate margin (as a percent)	1.00%
Revolving Credit Facility | Federal funds rate
DEBT AND OTHER OBLIGATIONS
Interest rate margin (as a percent)	0.50%
Revolving Credit Facility | Fiscal quarter ended March 31, 2019
DEBT AND OTHER OBLIGATIONS
Consolidated leverage ratio	5.00%
Revolving Credit Facility | Fiscal quarters ended June 30, 2019 through March 31, 2020
DEBT AND OTHER OBLIGATIONS
Consolidated leverage ratio	4.75%
Revolving Credit Facility | Fiscal quarters ended June 30, 2020 through March 31, 2021
DEBT AND OTHER OBLIGATIONS
Consolidated leverage ratio	4.50%
Revolving Credit Facility | Fiscal quarters ended June 30, 2021 through March 31, 2022
DEBT AND OTHER OBLIGATIONS
Consolidated leverage ratio	4.25%
Revolving Credit Facility | Fiscal quarters ended June 30, 2022 and the last day of each fiscal quarter thereafter
DEBT AND OTHER OBLIGATIONS
Consolidated leverage ratio	3.75%
Revolving Credit Facility | Last day of any fiscal quarter
DEBT AND OTHER OBLIGATIONS
Consolidated leverage ratio	2.75%
Revolving Credit Facility | Revolving Credit Facility
DEBT AND OTHER OBLIGATIONS
Maximum borrowing capacity	$ 100,000

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Parenthetical) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Unrealized (loss) gain on cash flow hedges tax	$ (516)	$ 533	$ (2,916)	$ 541
Unrealized gain (loss) on defined benefit plan tax	$ 2	$ 0	$ 6	$ (105)

XML

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

XML

Supplemental Cash Flow Information (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Changes in operating assets and liabilities
Accounts receivable, net	$ 1,914	$ 14,464
Inventories	(6,310)	(3,463)
Other current assets and other assets	(1,769)	1,770
Income taxes	2,613	11,356
Accounts payable	(1,751)	5,680
Accrued expenses and other current liabilities	(2,144)	(13,061)
Accrued compensation related costs	(15,583)	(20,650)
Other liabilities	(1,736)	(2,963)
Operating lease liabilities	(28,279)
Changes in operating assets and liabilities on cash flows from operating activities	(53,045)	(6,867)
Non-cash financing and investing activities:
Issuance of seller notes in connection with acquisitions	5,053
Purchase of property, plant and equipment in accounts payable at period end	3,492	2,419
Purchase of property, plant and equipment through vendor financing	$ 2,200
Additions to property, plant and equipment acquired through financing obligations		1,509
Retirements of financed property, plant and equipment and related obligations		$ 3,558

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Current assets:
Cash and cash equivalents	$ 49,947	$ 95,114
Accounts receivable, net	145,378	143,986
Inventories	75,693	67,690
Income taxes receivable		379
Other current assets	14,615	18,731
Total current assets	285,633	325,900
Non-current assets:
Property, plant and equipment, net	84,490	89,489
Goodwill	226,348	198,742
Other intangible assets, net	17,985	15,478
Deferred income taxes	68,581	65,635
Operating lease right-of-use assets	109,838
Other assets	8,537	7,766
Total assets	801,412	703,010
Current liabilities:
Current portion of long-term debt	8,619	8,583
Accounts payable	53,831	55,797
Accrued expenses and other current liabilities	55,908	51,783
Accrued compensation related costs	39,633	55,111
Current portion of operating lease liabilities	32,437
Total current liabilities	190,428	171,274
Long-term liabilities:
Long-term debt, less current portion	488,620	502,090
Operating lease liabilities	88,719
Other liabilities	47,851	51,570
Total liabilities	815,618	724,934
Commitments and contingencies (Note R)
Shareholders' deficit:
Common stock, $0.01 par value; 60,000,000 shares authorized; 37,504,755 shares issued and 37,361,934 shares outstanding in 2019, and 37,063,995 shares issued and 36,921,174 shares outstanding in 2018	375	371
Additional paid-in capital	350,579	343,955
Accumulated other comprehensive loss	(13,777)	(4,531)
Accumulated deficit	(350,687)	(361,023)
Treasury stock, at cost; 142,821 shares at 2019 and 2018, respectively	(696)	(696)
Total shareholders' deficit	(14,206)	(21,924)
Total liabilities and shareholders' deficit	$ 801,412	$ 703,010

XML

Derivative Financial Instruments - Cash Flow Hedge (Details) - USD ($) $ in Millions	Sep. 30, 2019	Dec. 31, 2018	Mar. 31, 2018
Interest rate swap agreements | Cash flow hedges
DERIVATIVE FINANCIAL INSTRUMENTS
Notional amount of derivative instrument	$ 312.5	$ 325.0	$ 325.0

XML

Goodwill and Other Intangible Assets - Estimated Amortization (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Estimated aggregate amortization expense for definite-lived intangible assets
2019 (remainder of the year)	$ 1,229
2020	4,836
2021	2,252
2022	2,185
2023	2,036
Thereafter	1,330
Total	$ 13,868

XML

Property, Plant and Equipment, Net (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Jan. 01, 2019	Dec. 31, 2018
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	$ 278,484		$ 278,484			$ 276,288
Less: accumulated depreciation and amortization	(193,994)		(193,994)			(186,799)
Total property, plant, and equipment, net	84,490		84,490		$ 81,421	89,489
Depreciation expense	7,800	$ 7,500	23,000	$ 22,300
Land
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	634		634			644
Buildings
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	4,046		4,046			24,558
Furniture and fixtures
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	13,332		13,332			13,121
Machinery and equipment
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	26,603		26,603			27,452
Equipment leased to third parties under operating leases
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	29,943		29,943			30,093
Leasehold improvements
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	129,029		129,029			111,247
Computers and software
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	$ 74,897		$ 74,897			$ 69,173

XML

Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2019

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)	2019		2018		2019		2018
Net income (loss)	$	5,691	$	4,369	$	8,775	$	(5,321)
Weighted average shares outstanding - basic		37,349		36,857		37,218		36,717
Effect of potentially dilutive restricted stock units and options (1)		638		700		704		—
Weighted average shares outstanding - diluted		37,987		37,557		37,922		36,717
Basic income (loss) per share	$	0.15	$	0.12	$	0.24	$	(0.14)
Diluted income (loss) per share	$	0.15	$	0.12	$	0.23	$	(0.14)

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

XML

Property, Plant and Equipment, Net (Tables)

9 Months Ended

Sep. 30, 2019

Property, Plant and Equipment, Net

Schedule of property, plant and equipment, net

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Land	$	634	$	644
Buildings (1)		4,046		24,558
Furniture and fixtures		13,332		13,121
Machinery and equipment		26,603		27,452
Equipment leased to third parties under operating leases		29,943		30,093
Leasehold improvements		129,029		111,247
Computers and software		74,897		69,173
Total property, plant and equipment, gross		278,484		276,288
Less: accumulated depreciation		(193,994)		(186,799)
Total property, plant and equipment, net	$	84,490	$	89,489

(1) As discussed in Note A - “Organization and Summary of Significant Accounting Policies”, the new lease standard resulted in the removal of assets associated with build-to-suit leases.

XML

Acquisitions

9 Months Ended

Sep. 30, 2019

Acquisitions

Acquisitions

Note G — Acquisitions

2019 Acquisition Activity

During 2019, we completed the following acquisitions of O&P clinics, none of which were individually material to our financial position, results of operations, or cash flows.  Each acquisition is intended to expand our continuum of patient care through the acquisitions of high quality O&P providers in new geographic markets.

· In January 2019, we completed the acquisition of all the outstanding equity interests of an O&P business for total consideration of $32.8 million, of which $27.7 million was cash consideration, net of cash acquired, $4.4 million was issued in the form of notes to shareholders at fair value, and $0.7 million in additional consideration.

· In May 2019, we completed the acquisition of all the outstanding equity interests of an O&P business for total consideration of $0.5 million, of which $0.2 million was cash consideration, net of cash acquired, and $0.3 million was issued in the form of notes to shareholders at fair value.

· In July 2019, we completed the acquisition of two O&P businesses for total consideration of $3.3 million, of which $3.0 million was cash consideration, net of cash acquired, and $0.3 million was issued in the form of notes to shareholders at fair value.

The notes issued to shareholders are unsecured and payable in installments over a period of 3 to 5 years.

We accounted for these transactions under the acquisition method of accounting and have reported the results of operations of each acquisition as of the respective dates of the acquisitions.  The estimated fair values of intangible assets were based on an income approach utilizing primarily discounted cash flow techniques for non-compete agreements and an income approach utilizing the excess earnings method for customer relationships.  The income approach utilizes management's estimates of future operating results and cash flows using a weighted average cost of capital that reflects market participant assumptions.  Other significant judgments used in the valuation of tangible assets acquired in the acquisition include estimated selling price of inventory and estimated replacement costs for acquired property, plant and equipment.  For all other assets acquired and liabilities assumed, the fair value reflects the carrying value of the asset or liability due to their short maturity.  The excess of the fair value of the consideration transferred in the acquisition over the fair value of net assets acquired was recorded as goodwill.  The goodwill reflects our expectations of favorable future growth opportunities, anticipated synergies through the scale of our O&P operations, and the assembled workforce.  We expect that substantially all of the goodwill, which has been assigned to our Patient Care reporting unit, will be deductible for federal income tax purposes.

Acquisition-related costs for the transactions completed above for the three and nine months ended September 30, 2019 were $0.3 million and $0.8 million, respectively, and are included in general and administrative expenses in our consolidated statement of operations.

We have not presented pro forma combined results for these acquisitions because the impact on previously reported statements of operations would not have been material individually and in the aggregate.

Purchase Price Allocation

We have performed a preliminary valuation analysis of the fair market value of the assets acquired and liabilities assumed in the acquisitions. The final purchase price allocations will be determined when we have completed and fully reviewed the detailed valuations and could differ materially from the preliminary allocations. The final allocations may include changes in allocations of acquired intangible assets as well as goodwill and other changes to assets and liabilities including deferred taxes. The estimated useful lives of acquired intangible assets are also preliminary.

The aggregate purchase price of these acquisitions was allocated on a preliminary basis as follows:

(in thousands)
Cash paid, net of cash acquired	$	30,926
Issuance of seller notes at fair value		5,053
Additional consideration		659
Aggregate purchase price		36,638
Accounts receivable, net		3,630
Inventories		1,693
Customer relationships (Weighted average useful life of 4.9 years)		5,791
Non-compete agreements (Weighted average useful life of 4.9 years)		349
Other assets		(2,687)
Net assets acquired		8,776
Goodwill	$	27,862

Right-of-use assets and lease liabilities related to operating leases recognized in connection with acquisitions completed during the three and nine month periods ending September 30, 2019 were $0.6 million and $2.0 million, respectively.

2018 Acquisition Activity

In the fourth quarter of 2018, we acquired two O&P businesses for an aggregate purchase price of $3.1 million, net of cash acquired. These acquisitions were accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at fair value on the date of the transaction.

The aggregate purchase price for these acquisitions was allocated as follows:

(in thousands)
Cash paid, net of cash acquired	$	1,978
Issuance of seller notes		1,120
Aggregate purchase price		3,098
Accounts receivable, net		256
Inventories		302
Customer relationships (Weighted average useful life of 4.0 years)		260
Non-compete agreements (Weighted average useful life of 4.6 years)		214
Other assets		90
Accounts payable		(59)
Accrued expenses and other liabilities		(364)
Net assets acquired		699
Goodwill	$	2,399

XML

Revenue Recognition

9 Months Ended

Sep. 30, 2019

Revenue Recognition

Revenue Recognition

Note C — Revenue Recognition

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.

The following table disaggregates revenue from contracts with customers in our Patient Care segment for the three and nine months ended September 30, 2019 and 2018:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Patient Care Segment
Medicare	$	72,879	$	69,724	$	206,295	$	197,461
Medicaid		36,140		33,597		103,631		96,993
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)		83,384		78,333		232,410		226,761
Veterans Administration		23,816		19,317		64,635		56,873
Private Pay		14,712		13,109		45,729		42,657
Total	$	230,931	$	214,080	$	652,700	$	620,745

The impact to revenue related to prior period performance obligations was not material for the three and nine months ended September 30, 2019.

Products & 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.

The following table disaggregates revenue from contracts with customers in our Product & Services segment for the three and nine months ended September 30, 2019 and 2018:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Products & Services Segment
Distribution services, net of intersegment revenue eliminations	$	36,653	$	34,666	$	107,510	$	100,700
Therapeutic solutions		12,054		14,200		36,945		42,462
Total	$	48,707	$	48,866	$	144,455	$	143,162

XML

Income Taxes

9 Months Ended

Sep. 30, 2019

Income Taxes

Income Taxes

Note K — Income Taxes

We recorded a provision for income taxes of $2.6 million and $3.3 million for the three and nine months ended September 30, 2019. The effective tax rate was 31.2% and 27.1% for the three and nine months ended September 30, 2019. We recorded a provision for income tax of $2.4 million and a benefit from income tax of $3.8 million for the three and nine months ended September 30, 2018. The effective rate was 35.8% and 42.0% for the three and nine months ended September 30, 2018.

The decrease in the effective tax rate for the three months ended September 30, 2019 compared with the three months ended September 30, 2018 is primarily attributable to an increased estimated annual income and an increase in pre-tax book income for the three months ended September 30, 2019.  Our effective tax rate for the three months ended September 30, 2019 and September 30, 2018 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses.

The decrease in the effective tax rate for the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018 is primarily attributable to an increased estimated annual income, an increase in pre-tax book income for the nine months ended September 30, 2019, and the windfall from stock-based compensation during the period. Our effective tax rate for the nine months ended September 30, 2019 and September 30, 2018 differed from the federal statutory tax rate of 21% primarily due to the windfall and shortfall from stock-based compensation expense in the respective periods, as well as non-deductible expenses.

XML

Segment and Related Information

9 Months Ended

Sep. 30, 2019

Segment and Related Information

Segment and Related Information

Note S — 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 our owned and operated patient care clinics. 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, health management organizations (“HMOs”), preferred provider organizations (“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 persons aged 65 or older in financial need; 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 A - “Organization and Summary of Significant Accounting Policies” in our 2018 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, 2018.

	Patient Care				Products & Services
	For the Three Months Ended				For the Three Months Ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Net revenues
Third party	$	230,931	$	214,080	$	48,707	$	48,866
Intersegments		—		—		53,670		48,945
Total net revenues		230,931		214,080		102,377		97,811
Material costs
Third party suppliers		65,055		58,395		26,979		26,410
Intersegments		6,284		6,300		47,386		42,645
Total material costs		71,339		64,695		74,365		69,055
Personnel expenses		81,274		77,806		13,320		13,047
Other expenses		37,245		34,426		6,858		6,306
Depreciation & amortization		4,943		4,651		2,723		2,564
Segment income from operations	$	36,130	$	32,502	$	5,111	$	6,839

	Patient Care				Products & Services
	For the Nine Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Net revenues
Third party	$	652,700	$	620,745	$	144,455	$	143,162
Intersegments		—		—		150,245		141,302
Total net revenues		652,700		620,745		294,700		284,464
Material costs
Third party suppliers		181,358		170,559		80,452		77,118
Intersegments		18,268		17,944		131,977		123,358
Total material costs		199,626		188,503		212,429		200,476
Personnel expenses		233,402		228,211		39,393		38,304
Other expenses		112,014		104,869		20,883		17,944
Depreciation & amortization		13,997		14,547		7,862		7,569
Segment income from operations	$	93,661	$	84,615	$	14,133	$	20,171

A reconciliation of the total of the reportable segments’ income from operations to consolidated net income (loss) is as follows:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Income from operations
Patient Care	$	36,130	$	32,502	$	93,661	$	84,615
Products & Services		5,111		6,839		14,133		20,171
Corporate & other		(23,838)		(23,417)		(69,267)		(67,910)
Income from operations		17,403		15,924		38,527		36,876
Interest expense, net		8,954		8,939		25,973		28,519
Loss on extinguishment of debt		—		—		—		16,998
Non-service defined benefit plan expense		173		176		519		528
Income (loss) before income taxes		8,276		6,809		12,035		(9,169)
Provision (benefit) for income taxes		2,585		2,440		3,260		(3,848)
Net income (loss)	$	5,691	$	4,369	$	8,775	$	(5,321)

A reconciliation of the reportable segment net revenues to consolidated net revenues is as follows:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Net revenues
Patient Care	$	230,931	$	214,080	$	652,700	$	620,745
Products & Services		102,377		97,811		294,700		284,464
Corporate & other		—		—		—		—
Consolidating adjustments		(53,670)		(48,945)		(150,245)		(141,302)
Consolidated net revenues	$	279,638	$	262,946	$	797,155	$	763,907

A reconciliation of the reportable segment material costs to consolidated material costs is as follows:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Material costs
Patient Care	$	71,339	$	64,695	$	199,626	$	188,503
Products & Services		74,365		69,055		212,429		200,476
Corporate & other		—		—		—		—
Consolidating adjustments		(53,670)		(48,945)		(150,245)		(141,302)
Consolidated material costs	$	92,034	$	84,805	$	261,810	$	247,677

XML

Derivative Financial Instruments

9 Months Ended

Sep. 30, 2019

Derivative Financial Instruments

Derivative Financial Instruments

Note O — 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 counterparty 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 loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

As of September 30, 2019, our swaps had a notional value outstanding of $312.5 million.  As of December 31, 2018, our swaps had a notional value outstanding of $325.0 million.

Change in Net Loss on Cash Flow Hedges Including Accumulated Other Comprehensive Loss

The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the three months ended September 30, 2019 and September 30, 2018:

(in thousands)	Cash Flow Hedges
Balance as of June 30, 2019	$	(10,560)
Unrealized loss recognized in other comprehensive (loss) income, net of tax		(2,060)
Reclassification to interest expense, net		419
Balance as of September 30, 2019	$	(12,201)
Balance as of June 30, 2018	$	24
Unrealized gain recognized in other comprehensive (loss) income, net of tax		1,171
Reclassification to interest expense, net		567
Balance as of September 30, 2018	$	1,762

The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the nine months ended September 30, 2019 and September 30, 2018:

(in thousands)	Cash Flow Hedges
Balance as of December 31, 2018	$	(2,936)
Unrealized loss recognized in other comprehensive (loss) income, net of tax		(10,135)
Reclassification to interest expense, net		870
Balance as of September 30, 2019	$	(12,201)
Balance as of December 31, 2017	$	—
Unrealized gain recognized in other comprehensive (loss) income, 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, 2019 and December 31, 2018:

	As of September 30, 2019				As of December 31, 2018
(in thousands)	Assets		Liabilities		Assets		Liabilities
Derivatives designated as cash flow hedging instruments:
Accrued expenses and other current liabilities	$	—	$	3,413	$	—	$	724
Other liabilities		—		12,627		—		3,134

XML

Leases - Future minimum rental payments (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Leases
2019 (remainder of year)	$ 77
2020	263
2021	191
2022	106
2023	26
Total future minimum lease payments	663
Imputed interest	(37)
Total	626
2019 (remainder of year)	5,900
2020	41,500
2021	32,093
2022	24,128
2023	16,181
2024	8,963
Thereafter	7,271
Total future minimum lease payments	136,036
Imputed interest	(14,880)
Operating Lease, Liability, Total	121,156
2019 (remainder of year)	5,977
2020	41,763
2021	32,284
2022	24,234
2023	16,207
2024	8,963
Thereafter	7,271
Total future minimum lease payments	136,699
Imputed interest	(14,917)
Total	$ 121,782

XML

Accrued Expenses and Other Current Liabilities and Other Liabilities - Other liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
Accrued Expenses and Other Current Liabilities and Other Liabilities
Supplemental executive retirement plan obligations	$ 19,370		$ 20,195
Derivative liability	12,627		3,134
Long-term insurance accruals	8,058		8,713
Unrecognized tax benefits, and related interest and penalties	5,457		5,458
Deferred tenant improvement allowances			8,570
Deferred rent			4,455
Other	2,339		1,045
Total other liabilities	$ 47,851	$ 38,620	$ 51,570

XML

Debt and Other Obligations (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
DEBT AND OTHER OBLIGATIONS
Total debt before unamortized discount and debt issuance costs	$ 505,755		$ 520,080
Unamortized discount and debt issuance costs, net	(8,516)		(9,407)
Total debt	497,239		510,673
Current portion of long-term debt	8,619	$ 7,964	8,583
Long-term debt	488,620	$ 489,597	502,090
Term Loan B
DEBT AND OTHER OBLIGATIONS
Total debt before unamortized discount and debt issuance costs	497,425		501,213
Current portion of long-term debt	5,050		5,050
Seller Notes
DEBT AND OTHER OBLIGATIONS
Total debt before unamortized discount and debt issuance costs	7,138		4,506
Current portion of long-term debt	3,152		2,513
Financing leases and other
DEBT AND OTHER OBLIGATIONS
Total debt before unamortized discount and debt issuance costs	1,192		14,361
Current portion of long-term debt	$ 417		$ 1,020

XML

Debt and Other Obligations (Tables)

9 Months Ended

Sep. 30, 2019

Debt and Other Obligations

Schedule of debt

(in thousands)	As of September 30, 2019		As of December 31, 2018
Debt:
Term Loan B	$	497,425	$	501,213
Seller notes		7,138		4,506
Financing leases and other		1,192		14,361
Total debt before unamortized discount and debt issuance costs		505,755		520,080
Unamortized discount and debt issuance costs, net		(8,516)		(9,407)
Total debt	$	497,239	$	510,673
Current portion of long-term debt:
Term Loan B	$	5,050	$	5,050
Seller notes		3,152		2,513
Financing leases and other		417		1,020
Total current portion of long-term debt		8,619		8,583
Long-term debt:	$	488,620	$	502,090

Schedule of maturities of debt

(in thousands)
2019 (remainder of year)	$	2,318
2020		8,428
2021		7,372
2022		6,032
2023		5,489
Thereafter		476,116
Total debt before unamortized discount and debt issuance costs, net		505,755
Unamortized discount and debt issuance costs, net		(8,516)
Total debt	$	497,239

XML

Supplemental Cash Flow Information (Tables)

9 Months Ended

Sep. 30, 2019

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)	2019		2018
Accounts receivable, net	$	1,914	$	14,464
Inventories		(6,310)		(3,463)
Other current assets and other assets		(1,769)		1,770
Income taxes		2,613		11,356
Accounts payable		(1,751)		5,680
Accrued expenses and other current liabilities		(2,144)		(13,061)
Accrued compensation related costs		(15,583)		(20,650)
Other liabilities		(1,736)		(2,963)
Operating lease liabilities		(28,279)		—
Changes in operating assets and liabilities on cash flows from operating activities	$	(53,045)	$	(6,867)

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

	For the Nine Months Ended
	September 30,
(in thousands)	2019		2018
Issuance of seller notes in connection with acquisitions	$	5,053	$	—
Purchase of property, plant and equipment in accounts payable at period end		3,492		2,419
Purchase of property, plant and equipment through vendor financing		2,200		—
Additions to property, plant and equipment acquired through financing obligations		—		1,509
Retirements of financed property, plant and equipment and related obligations		—		3,558

XML

Other Current Assets and Other Assets - Other Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
Other Current Assets and Other Assets
Cash surrender value of company owned life insurance	$ 3,132		$ 2,918
Non-trade receivables	2,116		1,904
Deposits	1,955		1,698
Finance lease right-of-use assets	613
Prepaid cloud implementation costs	314
Surety bond collateral			1,000
Other	407		246
Total other assets	$ 8,537	$ 8,304	$ 7,766

XML

Goodwill and Other Intangible Assets - Goodwill (Details) - USD ($) $ in Thousands	9 Months Ended		12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018	Dec. 31, 2017
Goodwill
Goodwill, Gross as of beginning of the year	$ 766,709	$ 764,310	$ 764,310
Goodwill, Accumulated Impairment	(567,967)		(567,967)	$ (567,967)
Goodwill, Net as of beginning of the year	198,742	196,343	196,343
Additions from acquisitions	30,112		2,399
Measurement period adjustments	(2,506)
Goodwill, Gross as of end of the year	794,315		766,709
Goodwill, Net as of end of the year	226,348		198,742
Measurement period adjustments related to acquisitions	2,200	300
Patient Care
Goodwill
Goodwill, Gross as of beginning of the year	627,410	625,011	625,011
Goodwill, Accumulated Impairment	(428,668)		(428,668)	(428,668)
Goodwill, Net as of beginning of the year	198,742	196,343	196,343
Additions from acquisitions	30,112		2,399
Measurement period adjustments	(2,506)
Goodwill, Gross as of end of the year	655,016		627,410
Goodwill, Net as of end of the year	226,348		198,742
Products & Services
Goodwill
Goodwill, Gross as of beginning of the year	139,299	$ 139,299	139,299
Goodwill, Accumulated Impairment	(139,299)		(139,299)	$ (139,299)
Goodwill, Gross as of end of the year	$ 139,299		$ 139,299

XML

Accounts Receivable, Net - (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Accounts Receivable, net
Accounts receivable, before allowances	$ 213,040	$ 206,880
Allowances for estimated implicit price concessions arising from:
Payor disallowances	(56,564)	(53,378)
Patient non-payments	(8,820)	(7,244)
Accounts receivable, gross	147,656	146,258
Allowance for doubtful accounts	(2,278)	(2,272)
Accounts receivable, net	145,378	143,986
Patient Care
Accounts Receivable, net
Accounts receivable, before allowances	185,659	182,338
Allowances for estimated implicit price concessions arising from:
Payor disallowances	(56,564)	(53,378)
Patient non-payments	(8,820)	(7,244)
Accounts receivable, gross	120,275	121,716
Accounts receivable, net	120,275	121,716
Products & Services
Accounts Receivable, net
Accounts receivable, before allowances	27,381	24,542
Allowances for estimated implicit price concessions arising from:
Accounts receivable, gross	27,381	24,542
Allowance for doubtful accounts	(2,278)	(2,272)
Accounts receivable, net	$ 25,103	$ 22,270

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Cash flows provided by operating activities:
Net income (loss)	$ 5,691	$ 4,369	$ 8,775	$ (5,321)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	9,373	8,950	26,906	27,552
Amortization of right-of-use assets			27,657
Provision (benefit) for doubtful accounts			284	(578)
Stock-based compensation expense			10,089	9,573
Deferred income taxes			(723)	(4,114)
Amortization of debt discounts and issuance costs			1,202	2,453
Loss on extinguishment of debt				16,998
Gain on sale and disposal of fixed assets			(1,200)	(2,537)
Changes in operating assets and liabilities (Note T)			(53,045)	(6,867)
Net cash provided by operating activities			19,945	37,159
Cash flows used in investing activities
Purchase of property, plant, and equipment			(20,262)	(16,435)
Purchase of therapeutic program equipment leased to third parties under operating leases			(5,165)	(6,390)
Acquisitions, net of cash acquired			(31,585)
Purchase of company-owned life insurance investment				(598)
Proceeds from sale of property, plant and equipment			2,181	3,583
Net cash used in investing activities			(54,831)	(19,840)
Cash flows (used in ) provided by financing activities
Borrowings under term loan, net of discount				501,467
Repayment of term loan			(3,788)	(434,400)
Borrowings under revolving credit agreement				3,000
Repayments under revolving credit agreement				(8,000)
Payment of employee taxes on stock-based compensation			(3,710)	(2,568)
Payment on seller notes			(2,688)	(2,116)
Payment of financing lease obligations			(344)	(942)
Payment of debt issuance costs				(6,757)
Payment of debt extinguishment costs				(8,436)
Proceeds from exercise of options			249
Net cash (used in) provided by financing activities			(10,281)	41,248
(Decrease) increase in cash, cash equivalents, and restricted cash			(45,167)	58,567
Cash, cash equivalents, and restricted cash, at beginning of period			95,114	4,779	$ 4,779
Cash, cash equivalents, and restricted cash, at end of period	49,947	63,346	49,947	63,346	95,114
Reconciliation of Cash, Cash Equivalents, and Restricted Cash:
Cash and cash equivalents, at beginning of period			95,114	1,508	1,508
Restricted cash, at beginning of period				3,271	3,271
Cash, cash equivalents, and restricted cash, at beginning of period			95,114	4,779	4,779
Cash and cash equivalents, at end of period	49,947	61,035	49,947	61,035	95,114
Restricted cash, at end of period		2,311		2,311
Cash, cash equivalents, and restricted cash, at end of period	$ 49,947	$ 63,346	$ 49,947	$ 63,346	$ 95,114

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Net revenues	$ 279,638	$ 262,946	$ 797,155	$ 763,907
Material costs	92,034	84,805	261,810	247,677
Personnel costs	94,594	90,853	272,795	266,515
Other operating costs	32,771	30,999	100,067	92,631
General and administrative expenses	29,834	28,308	87,474	80,467
Professional accounting and legal fees	3,629	3,107	9,576	12,189
Depreciation and amortization	9,373	8,950	26,906	27,552
Income from operations	17,403	15,924	38,527	36,876
Interest expense, net	8,954	8,939	25,973	28,519
Loss on extinguishment of debt				16,998
Non-service defined benefit plan expense	173	176	519	528
Income (loss) before income taxes	8,276	6,809	12,035	(9,169)
Provision (benefit) for income taxes	2,585	2,440	3,260	(3,848)
Net income (loss)	$ 5,691	$ 4,369	$ 8,775	$ (5,321)
Basic and Diluted Per Common Share Data:
Basic income (loss) per share	$ 0.15	$ 0.12	$ 0.24	$ (0.14)
Weighted average shares used to compute basic earnings per common share	37,349,144	36,856,881	37,218,234	36,716,568
Diluted income (loss) per share	$ 0.15	$ 0.12	$ 0.23	$ (0.14)
Weighted average shares used to compute diluted earnings per common share	37,986,860	37,556,594	37,921,767	36,716,568

XML

Debt and Other Obligations - Maturities of Debt (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Maturities of debt
2019 (remainder of year)	$ 2,318
2020	8,428
2021	7,372
2022	6,032
2023	5,489
Thereafter	476,116
Total debt before unamortized discount and debt issuance costs, net	505,755	$ 520,080
Unamortized discount and debt issuance costs, net	(8,516)	(9,407)
Total debt	$ 497,239	$ 510,673

XML

Segment and Related Information - Financial Information (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
SEGMENT AND RELATED INFORMATION
Net revenues	$ 279,638	$ 262,946	$ 797,155	$ 763,907
Material costs	92,034	84,805	261,810	247,677
Personnel expenses	94,594	90,853	272,795	266,515
Depreciation & amortization	9,373	8,950	26,906	27,552
Segment income from operations	17,403	15,924	38,527	36,876
Patient Care
SEGMENT AND RELATED INFORMATION
Net revenues	230,931	214,080	652,700	620,745
Material costs	71,339	64,695	199,626	188,503
Personnel expenses	81,274	77,806	233,402	228,211
Other expenses	37,245	34,426	112,014	104,869
Depreciation & amortization	4,943	4,651	13,997	14,547
Segment income from operations	36,130	32,502	93,661	84,615
Patient Care | Operating segments
SEGMENT AND RELATED INFORMATION
Net revenues	230,931	214,080	652,700	620,745
Material costs	65,055	58,395	181,358	170,559
Patient Care | Intersegments
SEGMENT AND RELATED INFORMATION
Material costs	6,284	6,300	18,268	17,944
Products & Services
SEGMENT AND RELATED INFORMATION
Net revenues	102,377	97,811	294,700	284,464
Material costs	74,365	69,055	212,429	200,476
Personnel expenses	13,320	13,047	39,393	38,304
Other expenses	6,858	6,306	20,883	17,944
Depreciation & amortization	2,723	2,564	7,862	7,569
Segment income from operations	5,111	6,839	14,133	20,171
Products & Services | Operating segments
SEGMENT AND RELATED INFORMATION
Net revenues	48,707	48,866	144,455	143,162
Material costs	26,979	26,410	80,452	77,118
Products & Services | Intersegments
SEGMENT AND RELATED INFORMATION
Net revenues	53,670	48,945	150,245	141,302
Material costs	$ 47,386	$ 42,645	$ 131,977	$ 123,358

XML

Derivative Financial Instruments - Fair Value of Derivative Assets and Liabilities (Details) - Cash flow hedges - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Accrued expenses and other current liabilities
Derivatives designated as cash flow hedging instruments:
Liabilities	$ 3,413	$ 724
Other liabilities
Derivatives designated as cash flow hedging instruments:
Liabilities	$ 12,627	$ 3,134

XML

Other Current Assets and Other Assets

9 Months Ended

Sep. 30, 2019

Other Current Assets and Other Assets

Other Current Assets and Other Assets

Note I — Other Current Assets and Other Assets

Other current assets consist of the following:

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Non-trade receivables	$	6,624	$	7,848
Prepaid maintenance		3,471		3,330
Prepaid other		1,509		1,101
Prepaid rent		840		4,442
Prepaid purchase orders		839		998
Prepaid insurance		744		258
Prepaid education and training		379		597
Other		209		157
Total other current assets	$	14,615	$	18,731

Other assets consist of the following:

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Cash surrender value of company-owned life insurance	$	3,132	$	2,918
Non-trade receivables		2,116		1,904
Deposits		1,955		1,698
Finance lease right-of-use assets		613		—
Prepaid cloud implementation costs		314		—
Surety bond collateral		—		1,000
Other		407		246
Total other assets	$	8,537	$	7,766

XML

Inventories

9 Months Ended

Sep. 30, 2019

Inventories

Inventories

Note E — Inventories

Our inventories are comprised of the following:

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Raw materials	$	20,908	$	19,632
Work in process		14,287		9,278
Finished goods		40,498		38,780
Total inventories	$	75,693	$	67,690

XML

Organization and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2019

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, 2018 (the “2018 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 2018 Form 10-K.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Leases

We lease a majority of our patient care clinics and warehouses under lease arrangements, certain of which contain renewal options, rent escalation clauses, and/or landlord incentives.  Rent expense for noncancellable leases with scheduled rent increases and/or landlord incentives is recognized on a straight-line basis over the lease term, including any applicable rent holidays, beginning on the lease commencement date. We exclude leases with a term of one year or less from our balance sheet, and do not separate non-lease components from our real estate leases. Our leases may include variable payments for maintenance, which are expensed as incurred.

In addition, we are the lessor of therapeutic program equipment to patients and businesses in acute, post-acute, and clinic settings.  The 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.  These operating lease agreements are typically for twelve months and have a 30-day cancellation policy. We do not separate non-lease components, consisting primarily of training, for these leases.

Effect of Adoption of ASC 842

We adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (ASC 842), and related clarifying standards, as of January 1, 2019, using the modified retrospective approach.  This approach allows us to apply the standard as of the adoption date and record a cumulative-effect adjustment to the opening balance of accumulated deficit at January 1, 2019. The new lease standard requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for all leases (with the exception of short-term leases, defined as leases with a term of 12 months or less) at the lease commencement date and recognize expenses on the consolidated statements of operations on a straight-line basis.

In addition, we elected the package of practical expedients available under the transition provisions of the new lease standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) carrying forward lease classification under legacy guidance, and (iii) not revaluing initial direct costs for existing leases.  By electing the modified retrospective approach on adoption date, prior period results will continue to be presented under legacy guidance based on the accounting standards originally in effect for such period.  We have elected to keep leases with an initial term of 12 months or less off the balance sheet and recognize those lease payments in the consolidated statements of operations on a straight-line basis over the lease term.  We have lease agreements with lease and non-lease components, and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component for real estate and therapeutic program equipment, from both a lessee and lessor perspective.  From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease.  The accounting for our finance leases and leases where we are the lessor remained substantially unchanged.

The lease liability was measured as the present value of the unpaid lease payments and the right-of-use asset was derived from the calculation of the lease liability.  As the rate implicit in the lease is generally not readily determinable for our operating leases, the discount rates used to determine the present value of our lease liability are based on our incremental borrowing rate at the lease commencement date and commensurate with the remaining lease term.  Our incremental borrowing rate for a lease is the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.  Our lease term may include options to extend or terminate if the exercise of that option is reasonably certain to occur.  We rent or sublease certain real estate to third parties.  Our sublease portfolio consists mainly of operating leases on small medical office locations.

The most significant impact of the new lease standard was to the balance sheet, where values were added for real estate operating leases, which increased both assets and liabilities.  The capital leases associated with equipment were already reflected on our balance sheet and did not add any incremental assets or liabilities under the new lease standard.  The adoption of the new lease standard did not have an impact on our compliance with existing debt covenants because the impact of changes in accounting standards is excluded from debt covenant calculations. The impact of applying the new lease standard to our results of operations and cash flows is not significant.

Additionally, we have determined that the leases previously identified as build-to-suit leasing arrangements under legacy lease accounting were to be derecognized pursuant to the transition guidance provided for build-to-suit leases in ASC 842.  Accordingly, these leases have been reassessed as operating leases as of January 1, 2019. The legacy guidance was based on a risks and rewards model which contained several prescriptive provisions designed to assess lessee ownership during construction.  The ASC 842 model has eliminated these prescriptive rules and replaced them with a model based on control.  Under ASC 842, we did not demonstrate control as the lessee and therefore the leases were derecognized at January 1, 2019. The resulting cumulative effect recognized at adoption to accumulated deficit was $1.6 million, net of tax.

Upon adoption of ASC 842, the cumulative effect of the changes made to our condensed consolidated balance sheet as of January 1, 2019 was as follows:

	December 31, 2018		Effects of		January 1, 2019
(in thousands)	As reported		adoption		After adoption
Assets
Other current assets	$	18,731	$	(5,770)	$	12,961
Total current assets		325,900		(5,770)		320,130
Property, plant and equipment, net		89,489		(8,068)		81,421
Other intangible assets, net		15,478		(220)		15,258
Deferred income taxes		65,635		(570)		65,065
Operating lease right-of-use assets		—		103,378		103,378
Other assets		7,766		538		8,304
Total assets		703,010		89,288		792,298
Liabilities
Current liabilities:
Current portion of long-term debt		8,583		(619)		7,964
Accrued expenses and other current liabilities		51,783		(1,352)		50,431
Current portion of operating lease liabilities		—		31,479		31,479
Total current liabilities		171,274		29,508		200,782
Long-term liabilities:
Long-term debt, less current portion		502,090		(12,493)		489,597
Operating lease liabilities		—		83,662		83,662
Other liabilities		51,570		(12,950)		38,620
Total liabilities		724,934		87,727		812,661
Shareholders' deficit
Accumulated deficit		(361,023)		1,561		(359,462)
Total shareholders' deficit		(21,924)		1,561		(20,363)
Total liabilities and shareholders' deficit	$	703,010	$	89,288	$	792,298

Cloud Computing Arrangements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.  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).  Effective July 1, 2019, we elected to early adopt the requirements of the standard on a prospective basis.  As of September 30, 2019, we capitalized $0.3 million of implementation costs for cloud computing arrangements, net of accumulated amortization, which is recorded in other current assets and other assets in the condensed consolidated balance sheet.

Recent Accounting Pronouncements, Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related clarifying standards, 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 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 consolidated financial statements and the related disclosures.

In August 2018, the 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 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 public entities 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 consolidated financial statements and the related disclosures.

Leases

Leases

We lease a majority of our patient care clinics and warehouses under lease arrangements, certain of which contain renewal options, rent escalation clauses, and/or landlord incentives.  Rent expense for noncancellable leases with scheduled rent increases and/or landlord incentives is recognized on a straight-line basis over the lease term, including any applicable rent holidays, beginning on the lease commencement date. We exclude leases with a term of one year or less from our balance sheet, and do not separate non-lease components from our real estate leases. Our leases may include variable payments for maintenance, which are expensed as incurred.

In addition, we are the lessor of therapeutic program equipment to patients and businesses in acute, post-acute, and clinic settings.  The 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.  These operating lease agreements are typically for twelve months and have a 30-day cancellation policy. We do not separate non-lease components, consisting primarily of training, for these leases.

Effect of Adoption of ASC 842

We adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (ASC 842), and related clarifying standards, as of January 1, 2019, using the modified retrospective approach.  This approach allows us to apply the standard as of the adoption date and record a cumulative-effect adjustment to the opening balance of accumulated deficit at January 1, 2019. The new lease standard requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for all leases (with the exception of short-term leases, defined as leases with a term of 12 months or less) at the lease commencement date and recognize expenses on the consolidated statements of operations on a straight-line basis.

In addition, we elected the package of practical expedients available under the transition provisions of the new lease standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) carrying forward lease classification under legacy guidance, and (iii) not revaluing initial direct costs for existing leases.  By electing the modified retrospective approach on adoption date, prior period results will continue to be presented under legacy guidance based on the accounting standards originally in effect for such period.  We have elected to keep leases with an initial term of 12 months or less off the balance sheet and recognize those lease payments in the consolidated statements of operations on a straight-line basis over the lease term.  We have lease agreements with lease and non-lease components, and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component for real estate and therapeutic program equipment, from both a lessee and lessor perspective.  From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease.  The accounting for our finance leases and leases where we are the lessor remained substantially unchanged.

The lease liability was measured as the present value of the unpaid lease payments and the right-of-use asset was derived from the calculation of the lease liability.  As the rate implicit in the lease is generally not readily determinable for our operating leases, the discount rates used to determine the present value of our lease liability are based on our incremental borrowing rate at the lease commencement date and commensurate with the remaining lease term.  Our incremental borrowing rate for a lease is the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.  Our lease term may include options to extend or terminate if the exercise of that option is reasonably certain to occur.  We rent or sublease certain real estate to third parties.  Our sublease portfolio consists mainly of operating leases on small medical office locations.

The most significant impact of the new lease standard was to the balance sheet, where values were added for real estate operating leases, which increased both assets and liabilities.  The capital leases associated with equipment were already reflected on our balance sheet and did not add any incremental assets or liabilities under the new lease standard.  The adoption of the new lease standard did not have an impact on our compliance with existing debt covenants because the impact of changes in accounting standards is excluded from debt covenant calculations. The impact of applying the new lease standard to our results of operations and cash flows is not significant.

Additionally, we have determined that the leases previously identified as build-to-suit leasing arrangements under legacy lease accounting were to be derecognized pursuant to the transition guidance provided for build-to-suit leases in ASC 842.  Accordingly, these leases have been reassessed as operating leases as of January 1, 2019. The legacy guidance was based on a risks and rewards model which contained several prescriptive provisions designed to assess lessee ownership during construction.  The ASC 842 model has eliminated these prescriptive rules and replaced them with a model based on control.  Under ASC 842, we did not demonstrate control as the lessee and therefore the leases were derecognized at January 1, 2019. The resulting cumulative effect recognized at adoption to accumulated deficit was $1.6 million, net of tax.

Upon adoption of ASC 842, the cumulative effect of the changes made to our condensed consolidated balance sheet as of January 1, 2019 was as follows:

	December 31, 2018		Effects of		January 1, 2019
(in thousands)	As reported		adoption		After adoption
Assets
Other current assets	$	18,731	$	(5,770)	$	12,961
Total current assets		325,900		(5,770)		320,130
Property, plant and equipment, net		89,489		(8,068)		81,421
Other intangible assets, net		15,478		(220)		15,258
Deferred income taxes		65,635		(570)		65,065
Operating lease right-of-use assets		—		103,378		103,378
Other assets		7,766		538		8,304
Total assets		703,010		89,288		792,298
Liabilities
Current liabilities:
Current portion of long-term debt		8,583		(619)		7,964
Accrued expenses and other current liabilities		51,783		(1,352)		50,431
Current portion of operating lease liabilities		—		31,479		31,479
Total current liabilities		171,274		29,508		200,782
Long-term liabilities:
Long-term debt, less current portion		502,090		(12,493)		489,597
Operating lease liabilities		—		83,662		83,662
Other liabilities		51,570		(12,950)		38,620
Total liabilities		724,934		87,727		812,661
Shareholders' deficit
Accumulated deficit		(361,023)		1,561		(359,462)
Total shareholders' deficit		(21,924)		1,561		(20,363)
Total liabilities and shareholders' deficit	$	703,010	$	89,288	$	792,298

Cloud Computing Arrangements

Cloud Computing Arrangements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.  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).  Effective July 1, 2019, we elected to early adopt the requirements of the standard on a prospective basis.  As of September 30, 2019, we capitalized $0.3 million of implementation costs for cloud computing arrangements, net of accumulated amortization, which is recorded in other current assets and other assets in the condensed consolidated balance sheet.

XML

Accounts Receivable, Net (Tables)

9 Months Ended

Sep. 30, 2019

Accounts Receivable, Net

Schedule of accounts receivable, net

	As of September 30, 2019						As of December 31, 2018
			Products &						Products &
(in thousands)	Patient Care		Services		Consolidated		Patient Care		Services		Consolidated
Accounts receivable, before allowances	$	185,659	$	27,381	$	213,040	$	182,338	$	24,542	$	206,880
Allowances for estimated implicit price concessions arising from:
Payor disallowances		(56,564)		—		(56,564)		(53,378)		—		(53,378)
Patient non-payments		(8,820)		—		(8,820)		(7,244)		—		(7,244)
Accounts receivable, gross		120,275		27,381		147,656		121,716		24,542		146,258
Allowance for doubtful accounts		—		(2,278)		(2,278)		—		(2,272)		(2,272)
Accounts receivable, net	$	120,275	$	25,103	$	145,378	$	121,716	$	22,270	$	143,986

XML

Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2019

Goodwill and Other Intangible Assets

Schedule of goodwill allocated to the Company's reportable segments

	For the Nine Months Ended September 30, 2019
	Patient Care						Products & Services						Consolidated
	Goodwill,		Accumulated		Goodwill,		Goodwill,		Accumulated		Goodwill,		Goodwill,		Accumulated		Goodwill,
(in thousands)	Gross		Impairment		Net		Gross		Impairment		Net		Gross		Impairment		Net
As of December 31, 2018	$	627,410	$	(428,668)		198,742	$	139,299	$	(139,299)		—	$	766,709	$	(567,967)		198,742
Additions from acquisitions		30,112		—		30,112		—		—		—		30,112		—		30,112
Measurement period adjustments (1)		(2,506)		—		(2,506)		—		—		—		(2,506)		—		(2,506)
As of September 30, 2019	$	655,016	$	(428,668)	$	226,348	$	139,299	$	(139,299)	$	—	$	794,315	$	(567,967)	$	226,348

(1) Measurement period adjustments relate to 2019 and 2018 acquisitions of approximately $2.2 million and $0.3 million, respectively, and are primarily attributable to adjustments to the preliminary allocations of customer relationship intangibles.

	For the Year Ended December 31, 2018
	Patient Care						Products & Services						Consolidated
	Goodwill,		Accumulated		Goodwill,		Goodwill,		Accumulated		Goodwill,		Goodwill,		Accumulated		Goodwill,
(in thousands)	Gross		Impairment		Net		Gross		Impairment		Net		Gross		Impairment		Net
As of December 31, 2017	$	625,011	$	(428,668)	$	196,343	$	139,299	$	(139,299)	$	—	$	764,310	$	(567,967)	$	196,343
Additions from acquisitions		2,399		—		2,399		—		—		—		2,399		—		2,399
As of December 31, 2018	$	627,410	$	(428,668)	$	198,742	$	139,299	$	(139,299)	$	—	$	766,709	$	(567,967)	$	198,742

Schedule of balances related to intangible assets

	As of September 30, 2019
	Gross Carrying		Accumulated		Accumulated		Net Carrying
(in thousands)	Amount		Amortization		Impairment		Amount
Customer lists	$	31,525	$	(21,622)	$	—	$	9,903
Trade name		255		(145)		—		110
Patents and other intangibles		9,238		(5,383)		—		3,855
Definite-lived intangible assets		41,018		(27,150)		—		13,868
Indefinite-lived trade names		9,070		—		(4,953)		4,117
Total other intangible assets	$	50,088	$	(27,150)	$	(4,953)	$	17,985

	As of December 31, 2018
	Gross Carrying		Accumulated		Accumulated		Net Carrying
(in thousands)	Amount		Amortization		Impairment		Amount
Customer lists	$	26,036	$	(19,051)	$	—	$	6,985
Trade name		255		(125)		—		130
Patents and other intangibles		9,391		(5,145)		—		4,246
Definite-lived intangible assets		35,682		(24,321)		—		11,361
Indefinite-lived trade names		9,070		—		(4,953)		4,117
Total other intangible assets	$	44,752	$	(24,321)	$	(4,953)	$	15,478

Schedule of estimated aggregate amortization expense for definite-lived intangible assets

(inthousands)
2019 (remainder of the year)	$	1,229
2020		4,836
2021		2,252
2022		2,185
2023		2,036
Thereafter		1,330
Total	$	13,868

XML

Subsequent Events

9 Months Ended

Sep. 30, 2019

Subsequent Events

Subsequent Events

Note U — Subsequent Events

In October 2019, we completed the acquisition of one O&P business for a total purchase price of $8.1 million, of which $5.1 million was cash consideration and $3.0 million was issued in the form of an unsecured note to the seller. The note is payable in annual installments over a period of five years.  Due to the proximity of the completion of the acquisitions to the filing of this Form 10-Q, it is not practicable to provide a preliminary purchase price allocation of the fair value of the assets purchased and liabilities assumed in the transactions.

XML

Supplemental Executive Retirement Plans

9 Months Ended

Sep. 30, 2019

Supplemental Executive Retirement Plans

Supplemental Executive Retirement Plans

Note Q — Supplemental Executive Retirement Plans

Defined Benefit Supplemental Executive Retirement Plan

Effective January 2004, we implemented an unfunded noncontributory defined benefit plan (“DB SERP”) for certain senior executives.  The DB SERP, which we administer, calls for fifteen annual payments upon retirement with the payment amount 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 change in net benefit cost and obligation during the three and nine months ended September 30, 2019 and 2018 is as follows:

Change in Benefit Obligation:

(in thousands)	2019		2018
Benefit obligation as of June 30	$	17,535	$	19,388
Service cost		84		92
Interest cost		164		150
Payments		(12)		(13)
Benefit obligation as of September 30	$	17,771	$	19,617
Benefit obligation as of December 31, 2018 and 2017, respectively	$	18,927	$	20,793
Service cost		251		275
Interest cost		494		450
Payments		(1,901)		(1,901)
Benefit obligation as of September 30	$	17,771	$	19,617

Amounts Recognized in the Condensed Consolidated Balance Sheets:

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Accrued expenses and other current liabilities	$	1,913	$	1,913
Other liabilities		15,858		17,014
Total accrued liabilities	$	17,771	$	18,927

Defined Contribution Supplemental Executive Retirement Plan

In 2013, we established 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 with which we own an insurance policy.

As of September 30, 2019 and December 31, 2018, the estimated accumulated obligation benefit is $3.5 million and $3.0 million, respectively, of which $3.0 million and $2.4 million is funded and $0.5 million and $0.6 million is unfunded at September 30, 2019 and December 31, 2018, respectively.

In connection with the DC SERP benefit obligation, we maintain a company-owned life insurance policy (“COLI”).  The carrying value of the COLI is measured at its cash surrender value and is presented within other assets in our consolidated balance sheets.  See Note I - “Other Current Assets and Other Assets” for additional information.

XML

Debt and Other Obligations

9 Months Ended

Sep. 30, 2019

Debt and Other Obligations

Debt and Other Obligations

Note M — Debt and Other Obligations

Debt consists of the following:

(in thousands)	As of September 30, 2019		As of December 31, 2018
Debt:
Term Loan B	$	497,425	$	501,213
Seller notes		7,138		4,506
Financing leases and other		1,192		14,361
Total debt before unamortized discount and debt issuance costs		505,755		520,080
Unamortized discount and debt issuance costs, net		(8,516)		(9,407)
Total debt	$	497,239	$	510,673
Current portion of long-term debt:
Term Loan B	$	5,050	$	5,050
Seller notes		3,152		2,513
Financing leases and other		417		1,020
Total current portion of long-term debt		8,619		8,583
Long-term debt:	$	488,620	$	502,090

Refinancing of Credit Agreement and Term B Borrowings

On March 6, 2018, we entered into a $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 $5.2 million as of September 30, 2019.  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.

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, 2019, the weighted average interest rate on outstanding borrowings under our Term Loan B facility was approximately 5.7%.  We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note O – “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 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, 2019.

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.

Seller Notes

We typically issue subordinated promissory notes (“Seller Notes”) as a part of the consideration transferred when making acquisitions. The Seller Notes are unsecured and are presented net of unamortized discount of $0.3 million and $0.2 million as of September 30, 2019 and December 31, 2018, respectively. We measure these instruments at their estimated fair values as of the respective acquisition dates. The stated interest rates on these instruments range from 2.00% to 3.00%. Principal and interest are payable in quarterly or annual installments and mature through July 2024.

Scheduled maturities of debt at September 30, 2019 were as follows:

(in thousands)
2019 (remainder of year)	$	2,318
2020		8,428
2021		7,372
2022		6,032
2023		5,489
Thereafter		476,116
Total debt before unamortized discount and debt issuance costs, net		505,755
Unamortized discount and debt issuance costs, net		(8,516)
Total debt	$	497,239

XML

Accrued Expenses and Other Current Liabilities and Other Liabilities (Tables)

9 Months Ended

Sep. 30, 2019

Accrued Expenses and Other Current Liabilities and Other Liabilities

Schedule of accrued expenses and other current liabilities

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Patient prepayments, deposits, and refunds payable	$	25,979	$	24,563
Accrued sales taxes and other taxes		8,646		6,810
Insurance and self-insurance accruals		8,234		8,886
Derivative liability		3,413		724
Accrued professional fees		503		3,751
Accrued interest payable		344		332
Other current liabilities		8,789		6,717
Total accrued expenses and other current liabilities	$	55,908	$	51,783

Schedule of other liabilities

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Supplemental executive retirement plan obligations	$	19,370	$	20,195
Derivative liability		12,627		3,134
Long-term insurance accruals		8,058		8,713
Unrecognized tax benefits, and related interest and penalties		5,457		5,458
Deferred tenant improvement allowances		—		8,570
Deferred rent		—		4,455
Other		2,339		1,045
Total other liabilities	$	47,851	$	51,570

XML

Supplemental Executive Retirement Plans (Tables)

9 Months Ended

Sep. 30, 2019

Supplemental Executive Retirement Plans

Schedule of Change in Benefit Obligation

(in thousands)	2019		2018
Benefit obligation as of June 30	$	17,535	$	19,388
Service cost		84		92
Interest cost		164		150
Payments		(12)		(13)
Benefit obligation as of September 30	$	17,771	$	19,617
Benefit obligation as of December 31, 2018 and 2017, respectively	$	18,927	$	20,793
Service cost		251		275
Interest cost		494		450
Payments		(1,901)		(1,901)
Benefit obligation as of September 30	$	17,771	$	19,617

Schedule of Amounts Recognized in the Consolidated Balance Sheets

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Accrued expenses and other current liabilities	$	1,913	$	1,913
Other liabilities		15,858		17,014
Total accrued liabilities	$	17,771	$	18,927

XML

Organization and Summary of Significant Accounting Policies - Leases (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Jan. 01, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Jan. 01, 2018	Dec. 31, 2017
New Accounting Pronouncements or Change in Accounting Principle
Package of practical expedients	true
Assets
Other current assets	$ 14,615			$ 12,961	$ 18,731
Total current assets	285,633			320,130	325,900
Property, plant and equipment, net	84,490			81,421	89,489
Other intangible assets, net	17,985			15,258	15,478
Deferred income taxes	68,581			65,065	65,635
Operating lease right-of-use assets	109,838			103,378
Other assets	8,537			8,304	7,766
Total assets	801,412			792,298	703,010
Current liabilities:
Current portion of long-term debt	8,619			7,964	8,583
Accrued expenses and other current liabilities	55,908			50,431	51,783
Current portion of operating lease liabilities	32,437			31,479
Total current liabilities	190,428			200,782	171,274
Long-term liabilities:
Long-term debt, less current portion	488,620			489,597	502,090
Operating lease liabilities	88,719			83,662
Other liabilities	47,851			38,620	51,570
Total liabilities	815,618			812,661	724,934
Shareholders' deficit:
Accumulated deficit	(350,687)			(359,462)	(361,023)
Total shareholders' deficit	(14,206)	$ (21,830)	$ (30,605)	(20,363)	(21,924)	$ (25,604)	$ (35,300)	$ (53,575)	$ (28,810)	$ (28,051)
Total liabilities and shareholders' deficit	801,412			792,298	$ 703,010
Capitalized implementation costs	$ 314
ASU 2016-02 | Restatement Adjustments
Assets
Other current assets				(5,770)
Total current assets				(5,770)
Property, plant and equipment, net				(8,068)
Other intangible assets, net				(220)
Deferred income taxes				(570)
Operating lease right-of-use assets				103,378
Other assets				538
Total assets				89,288
Current liabilities:
Current portion of long-term debt				(619)
Accrued expenses and other current liabilities				(1,352)
Current portion of operating lease liabilities				31,479
Total current liabilities				29,508
Long-term liabilities:
Long-term debt, less current portion				(12,493)
Operating lease liabilities				83,662
Other liabilities				(12,950)
Total liabilities				87,727
Shareholders' deficit:
Accumulated deficit				1,561
Total shareholders' deficit				1,561
Total liabilities and shareholders' deficit				$ 89,288

XML

Leases - Supplemental cash flow information (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($)
Leases
Operating cash flows from operating leases	$ 33,523
Operating cash flows from finance leases	18
Financing cash flows from finance leases	233
Operating leases	34,355
Finance leases	$ 282

XML

Leases - Condensed Consolidated balance sheet information (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019
Balance sheet information related to leases
Operating lease right-of-use assets	$ 109,838	$ 103,378
Finance lease right-of-use assets	613
Total lease assets	110,451
Operating	32,437	31,479
Finance	261
Operating	88,719	$ 83,662
Finance	365
Total lease liabilities	$ 121,782

XML

Stock-Based Compensation

9 Months Ended

Sep. 30, 2019

Stock-Based Compensation

Stock-Based Compensation

Note P — Stock-Based Compensation

On May 17, 2019, the shareholders approved the Hanger, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”).  The 2019 Plan authorizes the issuance of (a) up to 2,025,000 shares of Common Stock, plus (b) 243,611 shares available for issuance under the Hanger, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”).

Upon approval of the 2019 Plan, the 2016 Plan was no longer available for future awards.

As of September 30, 2019, there were 1,904,747 unvested restricted stock awards outstanding.  This was comprised of  1,201,476 employee service-based awards with a weighted average grant date fair value of $15.77 per share, 647,519 employee performance-based awards with a weighted average grant date fair value of $17.90 per share, and 55,752 director service-based awards with a weighted average grant date value of $20.10 per share.  As of September 30, 2019, there were 662,322 outstanding options not-yet exercisable with a weighted average exercise price of $12.77 and average remaining contractual term of 7.6 years.

We recognized a total of approximately $3.4 million and $10.1 million of stock-based compensation expense for the three and nine months ended September 30, 2019, respectively, and a total of approximately $3.7 million and $9.6 million for the three and nine months ended September 30, 2018, respectively. Stock compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and stock options.

XML

Leases

9 Months Ended

Sep. 30, 2019

Leases

Leases

Note L — Leases

The information pertaining to leases on the condensed consolidated balance sheet is as follows:

		As of September 30,
(in thousands)	Classification	2019
Assets
Operating lease right-of-use assets	Operating lease right-of-use assets	$	109,838
Finance lease right-of-use assets	Other assets		613
Total lease assets		$	110,451
Liabilities
Current
Operating	Current portion of operating lease liabilities	$	32,437
Finance	Current portion of long-term debt		261
Noncurrent
Operating	Operating lease liabilities		88,719
Finance	Long-term debt, less current portion		365
Total lease liabilities		$	121,782

The components of lease cost recognized in the condensed consolidated statement of operations are as follows:

	For the Three Months Ended		For the Nine Months Ended
(in thousands)	September 30, 2019		September 30, 2019
Operating lease cost	$	11,238	$	32,868
Finance lease cost
Amortization of right-of-use assets		75		225
Interest on lease liabilities		6		18
Sublease income		(117)		(196)
Short-term lease cost		46		460
Variable lease cost		1,551		4,581
Total lease cost	$	12,799	$	37,956

Future minimum rental payments, by year and in the aggregate, under operating and financing obligations with terms of one year or more at September 30, 2019 are as follows:

	Finance		Operating
(in thousands)	Leases		Leases		Total Leases
2019 (remainder of year)	$	77	$	5,900	$	5,977
2020		263		41,500		41,763
2021		191		32,093		32,284
2022		106		24,128		24,234
2023		26		16,181		16,207
2024		—		8,963		8,963
Thereafter		—		7,271		7,271
Total future minimum lease payments		663		136,036		136,699
Imputed interest		(37)		(14,880)		(14,917)
Total	$	626	$	121,156	$	121,782

The lease term and discount rates are as follows:

	September 30, 2019
Weighted average remaining lease term (years)
Operating leases	4.01
Finance leases	2.70
Weighted average discount rate
Operating leases	5.45	%
Finance leases	4.22	%

Supplemental cash flow information related to leases is as follows:

	For the Nine Months Ended
(in thousands)	September 30, 2019
Cash flows for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	33,523
Operating cash flows from finance leases		18
Financing cash flows from finance leases		233
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		34,355
Finance leases		282

Future minimum rental payments, by year and in the aggregate, under operating and financing obligations as of December 31, 2018 are as follows:

	Operating		Capital
(in thousands)	Leases		Leases
2019	$	39,378	$	249
2020		29,641		175
2021		21,303		109
2022		14,479		28
2023		9,193		—
Thereafter		10,008		—
	$	124,002	$	561

In August 2019, we entered into a lease agreement for a distribution facility in Georgia.  The commencement date of the lease is expected to be in April 2020. The initial term of the lease is 127 months, with the option to extend the lease for up to two consecutive 60-month terms.  The lease provides for annual base rent of approximately $1.0 million in the first year after a seven-month rent-free period following the lease commencement date, with subsequent annual increases of approximately 2%.  In connection with the lease, the landlord has provided a tenant improvement allowance of $2.2 million to build-out certain improvements to the distribution facility.

XML

Supplemental Cash Flow Information

9 Months Ended

Sep. 30, 2019

Supplemental Cash Flow Information

Supplemental Cash Flow Information

Note T — 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)	2019		2018
Accounts receivable, net	$	1,914	$	14,464
Inventories		(6,310)		(3,463)
Other current assets and other assets		(1,769)		1,770
Income taxes		2,613		11,356
Accounts payable		(1,751)		5,680
Accrued expenses and other current liabilities		(2,144)		(13,061)
Accrued compensation related costs		(15,583)		(20,650)
Other liabilities		(1,736)		(2,963)
Operating lease liabilities		(28,279)		—
Changes in operating assets and liabilities on cash flows from operating activities	$	(53,045)	$	(6,867)

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

	For the Nine Months Ended
	September 30,
(in thousands)	2019		2018
Issuance of seller notes in connection with acquisitions	$	5,053	$	—
Purchase of property, plant and equipment in accounts payable at period end		3,492		2,419
Purchase of property, plant and equipment through vendor financing		2,200		—
Additions to property, plant and equipment acquired through financing obligations		—		1,509
Retirements of financed property, plant and equipment and related obligations		—		3,558

XML

Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Earnings Per Share
Net income (loss)	$ 5,691	$ 10,035	$ (6,951)	$ 4,369	$ 12,928	$ (22,618)	$ 8,775	$ (5,321)
Weighted average shares outstanding - basic	37,349,144			36,856,881			37,218,234	36,716,568
Effect of potentially dilutive restricted stock units and options	638,000			700,000			704,000
Weighted average shares outstanding - diluted	37,986,860			37,556,594			37,921,767	36,716,568
Total anti-dilutive shares (in shares)	10			0			0	48,502
Basic and diluted:
Basic income (loss) per share	$ 0.15			$ 0.12			$ 0.24	$ (0.14)
Diluted income (loss) per share	$ 0.15			$ 0.12			$ 0.23	$ (0.14)
Unvested restricted stock units and unexercised options
Earnings Per Share
Total anti-dilutive shares (in shares)								680,444

XML

Leases (Tables)

9 Months Ended

Sep. 30, 2019

Leases

Schedule of Balance sheet information related to leases

		As of September 30,
(in thousands)	Classification	2019
Assets
Operating lease right-of-use assets	Operating lease right-of-use assets	$	109,838
Finance lease right-of-use assets	Other assets		613
Total lease assets		$	110,451
Liabilities
Current
Operating	Current portion of operating lease liabilities	$	32,437
Finance	Current portion of long-term debt		261
Noncurrent
Operating	Operating lease liabilities		88,719
Finance	Long-term debt, less current portion		365
Total lease liabilities		$	121,782

Schedule of lease expense

	For the Three Months Ended		For the Nine Months Ended
(in thousands)	September 30, 2019		September 30, 2019
Operating lease cost	$	11,238	$	32,868
Finance lease cost
Amortization of right-of-use assets		75		225
Interest on lease liabilities		6		18
Sublease income		(117)		(196)
Short-term lease cost		46		460
Variable lease cost		1,551		4,581
Total lease cost	$	12,799	$	37,956

Schedule of future minimum rental payments

	Finance		Operating
(in thousands)	Leases		Leases		Total Leases
2019 (remainder of year)	$	77	$	5,900	$	5,977
2020		263		41,500		41,763
2021		191		32,093		32,284
2022		106		24,128		24,234
2023		26		16,181		16,207
2024		—		8,963		8,963
Thereafter		—		7,271		7,271
Total future minimum lease payments		663		136,036		136,699
Imputed interest		(37)		(14,880)		(14,917)
Total	$	626	$	121,156	$	121,782

Schedule of weighted average lease term and discount rates

	September 30, 2019
Weighted average remaining lease term (years)
Operating leases	4.01
Finance leases	2.70
Weighted average discount rate
Operating leases	5.45	%
Finance leases	4.22	%

Schedule of supplemental cash flow information

	For the Nine Months Ended
(in thousands)	September 30, 2019
Cash flows for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	33,523
Operating cash flows from finance leases		18
Financing cash flows from finance leases		233
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		34,355
Finance leases		282

Schedule of future minimum rental payments, by year and in the aggregate, under operating and financing obligations

	Operating		Capital
(in thousands)	Leases		Leases
2019	$	39,378	$	249
2020		29,641		175
2021		21,303		109
2022		14,479		28
2023		9,193		—
Thereafter		10,008		—
	$	124,002	$	561

XML

Segment and Related Information (Tables)

9 Months Ended

Sep. 30, 2019

Segment and Related Information

Summary of financial information concerning the Company's reporting segments

	Patient Care				Products & Services
	For the Three Months Ended				For the Three Months Ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Net revenues
Third party	$	230,931	$	214,080	$	48,707	$	48,866
Intersegments		—		—		53,670		48,945
Total net revenues		230,931		214,080		102,377		97,811
Material costs
Third party suppliers		65,055		58,395		26,979		26,410
Intersegments		6,284		6,300		47,386		42,645
Total material costs		71,339		64,695		74,365		69,055
Personnel expenses		81,274		77,806		13,320		13,047
Other expenses		37,245		34,426		6,858		6,306
Depreciation & amortization		4,943		4,651		2,723		2,564
Segment income from operations	$	36,130	$	32,502	$	5,111	$	6,839

	Patient Care				Products & Services
	For the Nine Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Net revenues
Third party	$	652,700	$	620,745	$	144,455	$	143,162
Intersegments		—		—		150,245		141,302
Total net revenues		652,700		620,745		294,700		284,464
Material costs
Third party suppliers		181,358		170,559		80,452		77,118
Intersegments		18,268		17,944		131,977		123,358
Total material costs		199,626		188,503		212,429		200,476
Personnel expenses		233,402		228,211		39,393		38,304
Other expenses		112,014		104,869		20,883		17,944
Depreciation & amortization		13,997		14,547		7,862		7,569
Segment income from operations	$	93,661	$	84,615	$	14,133	$	20,171

Schedule of reconciliation of reportable segments

A reconciliation of the total of the reportable segments’ income from operations to consolidated net income (loss) is as follows:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Income from operations
Patient Care	$	36,130	$	32,502	$	93,661	$	84,615
Products & Services		5,111		6,839		14,133		20,171
Corporate & other		(23,838)		(23,417)		(69,267)		(67,910)
Income from operations		17,403		15,924		38,527		36,876
Interest expense, net		8,954		8,939		25,973		28,519
Loss on extinguishment of debt		—		—		—		16,998
Non-service defined benefit plan expense		173		176		519		528
Income (loss) before income taxes		8,276		6,809		12,035		(9,169)
Provision (benefit) for income taxes		2,585		2,440		3,260		(3,848)
Net income (loss)	$	5,691	$	4,369	$	8,775	$	(5,321)

A reconciliation of the reportable segment net revenues to consolidated net revenues is as follows:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Net revenues
Patient Care	$	230,931	$	214,080	$	652,700	$	620,745
Products & Services		102,377		97,811		294,700		284,464
Corporate & other		—		—		—		—
Consolidating adjustments		(53,670)		(48,945)		(150,245)		(141,302)
Consolidated net revenues	$	279,638	$	262,946	$	797,155	$	763,907

A reconciliation of the reportable segment material costs to consolidated material costs is as follows:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Material costs
Patient Care	$	71,339	$	64,695	$	199,626	$	188,503
Products & Services		74,365		69,055		212,429		200,476
Corporate & other		—		—		—		—
Consolidating adjustments		(53,670)		(48,945)		(150,245)		(141,302)
Consolidated material costs	$	92,034	$	84,805	$	261,810	$	247,677

XML

Leases - Lease term and discount rates information (Details)	Sep. 30, 2019
Leases
Operating leases (in years)	4 years 4 days
Finance leases (in years)	2 years 8 months 12 days
Operating leases (as a percent)	5.45%
Finance leases (as a percent)	4.22%

XML

Income Taxes - (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Income Taxes
Provision (benefit) for income taxes	$ 2,585	$ 2,440	$ 3,260	$ (3,848)
Effective tax rate	31.20%	35.80%	27.10%	42.00%
Federal statutory tax rate (as a percent)	21.00%	21.00%	21.00%	21.00%

XML

Acquisitions (Details) $ in Thousands			1 Months Ended	3 Months Ended		9 Months Ended	12 Months Ended
	May 31, 2019 USD ($)	Jan. 31, 2019 USD ($)	Jul. 31, 2019 USD ($) item	Sep. 30, 2019 USD ($)	Dec. 31, 2018 USD ($) item	Sep. 30, 2019 USD ($)	Dec. 31, 2018 USD ($)	Dec. 31, 2017 USD ($)
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Cash paid, net of cash acquired						$ 31,585
Issuance of seller notes at fair value						5,053
Goodwill				$ 226,348	$ 198,742	226,348	$ 198,742	$ 196,343
Goodwill						30,112	2,399
2019 Acquisition Activity, prosthetic and orthotic business
Acquisitions
Acquisition-related costs				300		800
Number of businesses acquired | item			2
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Cash paid, net of cash acquired	$ 200	$ 27,700	$ 3,000			30,926
Issuance of seller notes at fair value	300	4,400	300			5,053
Additional consideration				700		659
Aggregate purchase price	$ 500	$ 32,800	$ 3,300			36,638
Accounts receivable, net				3,630		3,630
Inventories				1,693		1,693
Other Assets				(2,687)		(2,687)
Net assets acquired				8,776		8,776
Goodwill				27,862		27,862
Operating right-of-use assets				600		600
Operating lease liabilities				2,000		2,000
2019 Acquisition Activity, prosthetic and orthotic business | Customer Relationships
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Other intangible assets, net				5,791		$ 5,791
Useful life						4 years 10 months 24 days
2019 Acquisition Activity, prosthetic and orthotic business | Non-compete agreements
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Other intangible assets, net				$ 349		$ 349
Useful life						4 years 10 months 24 days
2019 Acquisition Activity, prosthetic and orthotic business | Minimum
Acquisitions
Notes payable to share holders in quarterly installments period						3 years
2019 Acquisition Activity, prosthetic and orthotic business | Maximum
Acquisitions
Notes payable to share holders in quarterly installments period						5 years
2018 Acquisition Activity, two O&P businesses
Acquisitions
Number of businesses acquired | item					2
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Cash paid, net of cash acquired							1,978
Issuance of seller notes at fair value							1,120
Aggregate purchase price							3,098
Accounts receivable, net					$ 256		256
Inventories					302		302
Other assets					90		90
Accounts payable					(59)		(59)
Accrued expenses and other liabilities					(364)		(364)
Net assets acquired					699		699
Goodwill					2,399		2,399
2018 Acquisition Activity, two O&P businesses | Customer Relationships
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Other intangible assets, net					260		$ 260
Useful life							4 years
2018 Acquisition Activity, two O&P businesses | Non-compete agreements
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Other intangible assets, net					$ 214		$ 214
Useful life							4 years 7 months 6 days

XML

Revenue Recognition (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
REVENUE RECOGNITION
Net revenues	$ 279,638	$ 262,946	$ 797,155	$ 763,907
Patient Care
REVENUE RECOGNITION
Net revenues	230,931	214,080	652,700	620,745
Patient Care | Medicare
REVENUE RECOGNITION
Net revenues	72,879	69,724	206,295	197,461
Patient Care | Medicaid
REVENUE RECOGNITION
Net revenues	36,140	33,597	103,631	96,993
Patient Care | Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care)
REVENUE RECOGNITION
Net revenues	83,384	78,333	232,410	226,761
Patient Care | Veterans Administration
REVENUE RECOGNITION
Net revenues	23,816	19,317	64,635	56,873
Patient Care | Private Pay
REVENUE RECOGNITION
Net revenues	14,712	13,109	45,729	42,657
Patient Care | Operating segments
REVENUE RECOGNITION
Net revenues	230,931	214,080	652,700	620,745
Products & Services
REVENUE RECOGNITION
Net revenues	102,377	97,811	294,700	284,464
Products & Services | Operating segments
REVENUE RECOGNITION
Net revenues	48,707	48,866	144,455	143,162
Products & Services | Operating segments | Distribution services, net of intersegment revenue eliminations
REVENUE RECOGNITION
Net revenues	36,653	34,666	107,510	100,700
Products & Services | Operating segments | Therapeutic solutions
REVENUE RECOGNITION
Net revenues	$ 12,054	$ 14,200	$ 36,945	$ 42,462

XML

Other Current Assets and Other Assets - Other Current Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019	Dec. 31, 2018
Other Current Assets and Other Assets
Non-trade receivables	$ 6,624		$ 7,848
Prepaid maintenance	3,471		3,330
Prepaid other	1,509		1,101
Prepaid rent	840		4,442
Prepaid purchase orders	839		998
Prepaid insurance	744		258
Prepaid education and training	379		597
Other	209		157
Total other current assets	$ 14,615	$ 12,961	$ 18,731

XML

Fair Value Measurements - Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018	Mar. 31, 2018
FAIR VALUE MEASUREMENTS
Unamortized discount and debt issuance costs, net	$ 8,516	$ 9,407
Interest rate swap agreements | Cash flow hedges
FAIR VALUE MEASUREMENTS
Notional amount of derivative instrument	312,500	325,000	$ 325,000
Annual reduction in notional amount of derivative			$ 12,500
Revolving Credit Facility
FAIR VALUE MEASUREMENTS
Outstanding amount	0	0
Credit Agreement, dated March 6, 2018, Term Loan B
FAIR VALUE MEASUREMENTS
Unamortized discount and debt issuance costs, net	8,500	9,400
Credit Agreement, dated March 6, 2018, Term Loan B | Carrying Value
FAIR VALUE MEASUREMENTS
Debt		501,200
Credit Agreement, dated March 6, 2018, Term Loan B | Recurring basis | Level 3 | Fair Value
FAIR VALUE MEASUREMENTS
Debt	497,400	491,200
Seller Notes | Carrying Value
FAIR VALUE MEASUREMENTS
Debt	$ 7,100	$ 4,500

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$ 5,691	$ 4,369	$ 8,775	$ (5,321)
Other comprehensive (loss) income:
Unrealized (loss) gain on cash flow hedges, net of tax (benefit) provision of ($516), $533, ($2,916), and $541, respectively	(1,641)	1,738	(9,265)	1,762
Unrealized gain (loss) on defined benefit plan, net of tax provision (benefit) of $2, $0, $6, and ($105), respectively	7	26	19	(240)
Total other comprehensive (loss) income	(1,634)	1,764	(9,246)	1,522
Comprehensive income (loss)	$ 4,057	$ 6,133	$ (471)	$ (3,799)

XML

Segment and Related Information - Reconciliation of the Reportable Segments (Details) - USD ($) $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
SEGMENT AND RELATED INFORMATION
(Loss) income from operations	$ 17,403			$ 15,924			$ 38,527	$ 36,876
Interest expense, net	8,954			8,939			25,973	28,519
Loss on extinguishment of debt								16,998
Non-service defined benefit plan expense	173			176			519	528
Income (loss) before income taxes	8,276			6,809			12,035	(9,169)
Provision (benefit) for income taxes	2,585			2,440			3,260	(3,848)
Net income (loss)	5,691	$ 10,035	$ (6,951)	4,369	$ 12,928	$ (22,618)	8,775	(5,321)
Consolidated net revenues	279,638			262,946			797,155	763,907
Consolidated material costs	92,034			84,805			261,810	247,677
Corporate & other
SEGMENT AND RELATED INFORMATION
(Loss) income from operations	(23,838)			(23,417)			(69,267)	(67,910)
Consolidating adjustments
SEGMENT AND RELATED INFORMATION
Consolidated net revenues	(53,670)			(48,945)			(150,245)	(141,302)
Consolidated material costs	(53,670)			(48,945)			(150,245)	(141,302)
Patient Care
SEGMENT AND RELATED INFORMATION
(Loss) income from operations	36,130			32,502			93,661	84,615
Consolidated net revenues	230,931			214,080			652,700	620,745
Consolidated material costs	71,339			64,695			199,626	188,503
Patient Care | Operating segments
SEGMENT AND RELATED INFORMATION
Consolidated net revenues	230,931			214,080			652,700	620,745
Consolidated material costs	65,055			58,395			181,358	170,559
Products & Services
SEGMENT AND RELATED INFORMATION
(Loss) income from operations	5,111			6,839			14,133	20,171
Consolidated net revenues	102,377			97,811			294,700	284,464
Consolidated material costs	74,365			69,055			212,429	200,476
Products & Services | Operating segments
SEGMENT AND RELATED INFORMATION
Consolidated net revenues	48,707			48,866			144,455	143,162
Consolidated material costs	$ 26,979			$ 26,410			$ 80,452	$ 77,118

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2019	Oct. 29, 2019
Document and Entity Information
Entity Registrant Name	HANGER, INC.
Entity Central Index Key	0000722723
Document Type	10-Q
Document Period End Date	Sep. 30, 2019
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 Shell Company	false
Entity Common Stock, Shares Outstanding		37,337,840
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3

XML

Stock-Based Compensation - (Details) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	May 17, 2019
STOCK BASED COMPENSATION
Options outstanding and exercisable (in share)	662,322		662,322
Weighted average exercise price of options exercisable (in dollars per share)	$ 12.77		$ 12.77
Average remaining contractual term of options exercisable			7 years 7 months 6 days
Stock-based compensation expense	$ 3.4	$ 3.7	$ 10.1	$ 9.6
2019 Omnibus Incentive Plan
STOCK BASED COMPENSATION
Shares of common stock authorized for issuance under the share-based compensation plan					2,025,000
2016 Omnibus Incentive Plan
STOCK BASED COMPENSATION
Available for issuance (in shares)					243,611
Performance-based stock awards
STOCK BASED COMPENSATION
Shares outstanding	647,519		647,519
Weighted average grant date fair value	$ 17.90		$ 17.90
Nonvested restricted stock awards
STOCK BASED COMPENSATION
Shares outstanding	1,904,747		1,904,747
Employee Service Based Awards
STOCK BASED COMPENSATION
Shares outstanding	1,201,476		1,201,476
Weighted average grant date fair value	$ 15.77		$ 15.77
Director Service Based Awards
STOCK BASED COMPENSATION
Shares outstanding	55,752		55,752
Weighted average grant date fair value	$ 20.10		$ 20.10

XML

Organization and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2019

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, 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, 2018 (the “2018 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 2018 Form 10-K.

Recently Adopted Accounting Pronouncements

Leases

We lease a majority of our patient care clinics and warehouses under lease arrangements, certain of which contain renewal options, rent escalation clauses, and/or landlord incentives.  Rent expense for noncancellable leases with scheduled rent increases and/or landlord incentives is recognized on a straight-line basis over the lease term, including any applicable rent holidays, beginning on the lease commencement date. We exclude leases with a term of one year or less from our balance sheet, and do not separate non-lease components from our real estate leases. Our leases may include variable payments for maintenance, which are expensed as incurred.

In addition, we are the lessor of therapeutic program equipment to patients and businesses in acute, post-acute, and clinic settings.  The 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.  These operating lease agreements are typically for twelve months and have a 30-day cancellation policy. We do not separate non-lease components, consisting primarily of training, for these leases.

Effect of Adoption of ASC 842

We adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (ASC 842), and related clarifying standards, as of January 1, 2019, using the modified retrospective approach.  This approach allows us to apply the standard as of the adoption date and record a cumulative-effect adjustment to the opening balance of accumulated deficit at January 1, 2019. The new lease standard requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for all leases (with the exception of short-term leases, defined as leases with a term of 12 months or less) at the lease commencement date and recognize expenses on the consolidated statements of operations on a straight-line basis.

In addition, we elected the package of practical expedients available under the transition provisions of the new lease standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) carrying forward lease classification under legacy guidance, and (iii) not revaluing initial direct costs for existing leases.  By electing the modified retrospective approach on adoption date, prior period results will continue to be presented under legacy guidance based on the accounting standards originally in effect for such period.  We have elected to keep leases with an initial term of 12 months or less off the balance sheet and recognize those lease payments in the consolidated statements of operations on a straight-line basis over the lease term.  We have lease agreements with lease and non-lease components, and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component for real estate and therapeutic program equipment, from both a lessee and lessor perspective.  From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease.  The accounting for our finance leases and leases where we are the lessor remained substantially unchanged.

The lease liability was measured as the present value of the unpaid lease payments and the right-of-use asset was derived from the calculation of the lease liability.  As the rate implicit in the lease is generally not readily determinable for our operating leases, the discount rates used to determine the present value of our lease liability are based on our incremental borrowing rate at the lease commencement date and commensurate with the remaining lease term.  Our incremental borrowing rate for a lease is the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.  Our lease term may include options to extend or terminate if the exercise of that option is reasonably certain to occur.  We rent or sublease certain real estate to third parties.  Our sublease portfolio consists mainly of operating leases on small medical office locations.

The most significant impact of the new lease standard was to the balance sheet, where values were added for real estate operating leases, which increased both assets and liabilities.  The capital leases associated with equipment were already reflected on our balance sheet and did not add any incremental assets or liabilities under the new lease standard.  The adoption of the new lease standard did not have an impact on our compliance with existing debt covenants because the impact of changes in accounting standards is excluded from debt covenant calculations. The impact of applying the new lease standard to our results of operations and cash flows is not significant.

Additionally, we have determined that the leases previously identified as build-to-suit leasing arrangements under legacy lease accounting were to be derecognized pursuant to the transition guidance provided for build-to-suit leases in ASC 842.  Accordingly, these leases have been reassessed as operating leases as of January 1, 2019. The legacy guidance was based on a risks and rewards model which contained several prescriptive provisions designed to assess lessee ownership during construction.  The ASC 842 model has eliminated these prescriptive rules and replaced them with a model based on control.  Under ASC 842, we did not demonstrate control as the lessee and therefore the leases were derecognized at January 1, 2019. The resulting cumulative effect recognized at adoption to accumulated deficit was $1.6 million, net of tax.

Upon adoption of ASC 842, the cumulative effect of the changes made to our condensed consolidated balance sheet as of January 1, 2019 was as follows:

	December 31, 2018		Effects of		January 1, 2019
(in thousands)	As reported		adoption		After adoption
Assets
Other current assets	$	18,731	$	(5,770)	$	12,961
Total current assets		325,900		(5,770)		320,130
Property, plant and equipment, net		89,489		(8,068)		81,421
Other intangible assets, net		15,478		(220)		15,258
Deferred income taxes		65,635		(570)		65,065
Operating lease right-of-use assets		—		103,378		103,378
Other assets		7,766		538		8,304
Total assets		703,010		89,288		792,298
Liabilities
Current liabilities:
Current portion of long-term debt		8,583		(619)		7,964
Accrued expenses and other current liabilities		51,783		(1,352)		50,431
Current portion of operating lease liabilities		—		31,479		31,479
Total current liabilities		171,274		29,508		200,782
Long-term liabilities:
Long-term debt, less current portion		502,090		(12,493)		489,597
Operating lease liabilities		—		83,662		83,662
Other liabilities		51,570		(12,950)		38,620
Total liabilities		724,934		87,727		812,661
Shareholders' deficit
Accumulated deficit		(361,023)		1,561		(359,462)
Total shareholders' deficit		(21,924)		1,561		(20,363)
Total liabilities and shareholders' deficit	$	703,010	$	89,288	$	792,298

Cloud Computing Arrangements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.  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).  Effective July 1, 2019, we elected to early adopt the requirements of the standard on a prospective basis.  As of September 30, 2019, we capitalized $0.3 million of implementation costs for cloud computing arrangements, net of accumulated amortization, which is recorded in other current assets and other assets in the condensed consolidated balance sheet.

Recent Accounting Pronouncements, Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related clarifying standards, 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 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 consolidated financial statements and the related disclosures.

In August 2018, the 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 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 public entities 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 consolidated financial statements and the related disclosures.

XML

Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2019

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

Note H — Goodwill and Other Intangible Assets

We assess goodwill and indefinite-lived intangible assets for impairment annually as of 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 following table summarizes the activity in goodwill for the periods indicated:

	For the Nine Months Ended September 30, 2019
	Patient Care						Products & Services						Consolidated
	Goodwill,		Accumulated		Goodwill,		Goodwill,		Accumulated		Goodwill,		Goodwill,		Accumulated		Goodwill,
(in thousands)	Gross		Impairment		Net		Gross		Impairment		Net		Gross		Impairment		Net
As of December 31, 2018	$	627,410	$	(428,668)		198,742	$	139,299	$	(139,299)		—	$	766,709	$	(567,967)		198,742
Additions from acquisitions		30,112		—		30,112		—		—		—		30,112		—		30,112
Measurement period adjustments (1)		(2,506)		—		(2,506)		—		—		—		(2,506)		—		(2,506)
As of September 30, 2019	$	655,016	$	(428,668)	$	226,348	$	139,299	$	(139,299)	$	—	$	794,315	$	(567,967)	$	226,348

(1) Measurement period adjustments relate to 2019 and 2018 acquisitions of approximately $2.2 million and $0.3 million, respectively, and are primarily attributable to adjustments to the preliminary allocations of customer relationship intangibles.

	For the Year Ended December 31, 2018
	Patient Care						Products & Services						Consolidated
	Goodwill,		Accumulated		Goodwill,		Goodwill,		Accumulated		Goodwill,		Goodwill,		Accumulated		Goodwill,
(in thousands)	Gross		Impairment		Net		Gross		Impairment		Net		Gross		Impairment		Net
As of December 31, 2017	$	625,011	$	(428,668)	$	196,343	$	139,299	$	(139,299)	$	—	$	764,310	$	(567,967)	$	196,343
Additions from acquisitions		2,399		—		2,399		—		—		—		2,399		—		2,399
As of December 31, 2018	$	627,410	$	(428,668)	$	198,742	$	139,299	$	(139,299)	$	—	$	766,709	$	(567,967)	$	198,742

The balances related to intangible assets as of September 30, 2019 and December 31, 2018 are as follows:

	As of September 30, 2019
	Gross Carrying		Accumulated		Accumulated		Net Carrying
(in thousands)	Amount		Amortization		Impairment		Amount
Customer lists	$	31,525	$	(21,622)	$	—	$	9,903
Trade name		255		(145)		—		110
Patents and other intangibles		9,238		(5,383)		—		3,855
Definite-lived intangible assets		41,018		(27,150)		—		13,868
Indefinite-lived trade names		9,070		—		(4,953)		4,117
Total other intangible assets	$	50,088	$	(27,150)	$	(4,953)	$	17,985

	As of December 31, 2018
	Gross Carrying		Accumulated		Accumulated		Net Carrying
(in thousands)	Amount		Amortization		Impairment		Amount
Customer lists	$	26,036	$	(19,051)	$	—	$	6,985
Trade name		255		(125)		—		130
Patents and other intangibles		9,391		(5,145)		—		4,246
Definite-lived intangible assets		35,682		(24,321)		—		11,361
Indefinite-lived trade names		9,070		—		(4,953)		4,117
Total other intangible assets	$	44,752	$	(24,321)	$	(4,953)	$	15,478

Total intangible amortization expense was approximately $1.6 million and $3.9 million for the three and nine months ended September 30, 2019 and $1.5 million and $5.3 million for the three and nine months ended September 30, 2018.

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)
2019 (remainder of the year)	$	1,229
2020		4,836
2021		2,252
2022		2,185
2023		2,036
Thereafter		1,330
Total	$	13,868

XML

Accounts Receivable, Net

9 Months Ended

Sep. 30, 2019

Accounts Receivable, Net

Accounts Receivable, Net

Note D — 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.  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.

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, 2019 and December 31, 2018 is comprised of the following:

	As of September 30, 2019						As of December 31, 2018
			Products &						Products &
(in thousands)	Patient Care		Services		Consolidated		Patient Care		Services		Consolidated
Accounts receivable, before allowances	$	185,659	$	27,381	$	213,040	$	182,338	$	24,542	$	206,880
Allowances for estimated implicit price concessions arising from:
Payor disallowances		(56,564)		—		(56,564)		(53,378)		—		(53,378)
Patient non-payments		(8,820)		—		(8,820)		(7,244)		—		(7,244)
Accounts receivable, gross		120,275		27,381		147,656		121,716		24,542		146,258
Allowance for doubtful accounts		—		(2,278)		(2,278)		—		(2,272)		(2,272)
Accounts receivable, net	$	120,275	$	25,103	$	145,378	$	121,716	$	22,270	$	143,986

XML

Other Current Assets and Other Assets (Tables)

9 Months Ended

Sep. 30, 2019

Other Current Assets and Other Assets

Schedule of other current assets

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Non-trade receivables	$	6,624	$	7,848
Prepaid maintenance		3,471		3,330
Prepaid other		1,509		1,101
Prepaid rent		840		4,442
Prepaid purchase orders		839		998
Prepaid insurance		744		258
Prepaid education and training		379		597
Other		209		157
Total other current assets	$	14,615	$	18,731

Schedule of other assets

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Cash surrender value of company-owned life insurance	$	3,132	$	2,918
Non-trade receivables		2,116		1,904
Deposits		1,955		1,698
Finance lease right-of-use assets		613		—
Prepaid cloud implementation costs		314		—
Surety bond collateral		—		1,000
Other		407		246
Total other assets	$	8,537	$	7,766

XML

Organization and Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2019

ASU 2016-02

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Schedule of impact of adoption on our condensed consolidated balance sheet

	December 31, 2018		Effects of		January 1, 2019
(in thousands)	As reported		adoption		After adoption
Assets
Other current assets	$	18,731	$	(5,770)	$	12,961
Total current assets		325,900		(5,770)		320,130
Property, plant and equipment, net		89,489		(8,068)		81,421
Other intangible assets, net		15,478		(220)		15,258
Deferred income taxes		65,635		(570)		65,065
Operating lease right-of-use assets		—		103,378		103,378
Other assets		7,766		538		8,304
Total assets		703,010		89,288		792,298
Liabilities
Current liabilities:
Current portion of long-term debt		8,583		(619)		7,964
Accrued expenses and other current liabilities		51,783		(1,352)		50,431
Current portion of operating lease liabilities		—		31,479		31,479
Total current liabilities		171,274		29,508		200,782
Long-term liabilities:
Long-term debt, less current portion		502,090		(12,493)		489,597
Operating lease liabilities		—		83,662		83,662
Other liabilities		51,570		(12,950)		38,620
Total liabilities		724,934		87,727		812,661
Shareholders' deficit
Accumulated deficit		(361,023)		1,561		(359,462)
Total shareholders' deficit		(21,924)		1,561		(20,363)
Total liabilities and shareholders' deficit	$	703,010	$	89,288	$	792,298

XML

Inventories (Tables)

9 Months Ended

Sep. 30, 2019

Inventories

Schedule of inventories

	As of September 30,		As of December 31,
(in thousands)	2019		2018
Raw materials	$	20,908	$	19,632
Work in process		14,287		9,278
Finished goods		40,498		38,780
Total inventories	$	75,693	$	67,690