10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2020

OR

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

For the transition period from

to

Commission File Number 1-10670

HANGER, INC.

(Exact name of registrant as specified in its charter)

Delaware	84-0904275
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

10910 Domain Drive, Suite 300, Austin, TX	78758
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone 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 ⌧ No ◻

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 ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ◻ Accelerated filer ⌧ Non-accelerated filer ◻ Smaller reporting company ☐ Emerging growth company ☐

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. ◻

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

As of October 27, 2020, the registrant had 38,109,387 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’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3. Quantitative and Qualitative Disclosures About Market Risk	49
Item 4. Controls and Procedures	49
Part II  Other Information
Item 1.  Legal Proceedings	51
Item 1A.  Risk Factors	51
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.  Defaults Upon Senior Securities	52
Item 4.  Mine Safety Disclosures	52
Item 5.  Other Information	52
Item 6. Exhibits	52
Exhibits Index	53
Signatures	54

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,
	2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	147,510	$	74,419
Accounts receivable, net		121,409		159,359
Inventories		74,108		68,204
Income taxes receivable		5,945		—
Other current assets		14,489		13,673
Total current assets		363,461		315,655
Non-current assets:
Property, plant, and equipment, net		86,637		84,057
Goodwill		271,701		232,244
Other intangible assets, net		19,106		17,952
Deferred income taxes		70,489		70,481
Operating lease right-of-use assets		125,577		110,559
Other assets		15,710		11,305
Total assets	$	952,681	$	842,253
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	27,791	$	8,752
Accounts payable		63,630		48,477
Accrued expenses and other current liabilities		72,434		55,825
Accrued compensation related costs		63,511		61,010
Current portion of operating lease liabilities		32,932		34,342
Total current liabilities		260,298		208,406
Long-term liabilities:
Long-term debt, less current portion		493,600		490,121
Operating lease liabilities		106,405		88,418
Other liabilities		60,077		45,804
Total liabilities		920,380		832,749
Commitments and contingencies (Note Q)
Shareholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 38,277,423 shares issued and 38,134,602 shares outstanding at 2020, and 37,602,873 shares issued and 37,460,052 shares outstanding at 2019, respectively		383		376
Additional paid-in capital		363,082		354,326
Accumulated other comprehensive loss		(20,400)		(12,551)
Accumulated deficit		(310,068)		(331,951)
Treasury stock, at cost;142,821 shares at 2020 and 2019, respectively		(696)		(696)
Total shareholders’ equity		32,301		9,504
Total liabilities and shareholders’ equity	$	952,681	$	842,253

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				For the Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Net revenues	$	256,637	$	279,638	$	723,810	$	797,155
Material costs		81,462		92,034		228,675		261,810
Personnel costs		89,727		94,594		252,734		272,795
Other operating costs		29,935		32,771		74,098		100,067
General and administrative expenses		31,371		29,834		91,618		87,474
Professional accounting and legal fees		2,264		3,629		7,409		9,576
Depreciation and amortization		8,803		9,373		26,513		26,906
Income from operations		13,075		17,403		42,763		38,527
Interest expense, net		8,013		8,954		24,918		25,973
Non-service defined benefit plan expense		158		173		474		519
Income before income taxes		4,904		8,276		17,371		12,035
(Benefit) provision for income taxes		(1,911)		2,585		(4,750)		3,260
Net income	$	6,815	$	5,691	$	22,121	$	8,775
Basic and Diluted Per Common Share Data:
Basic income per share	$	0.18	$	0.15	$	0.58	$	0.24
Weighted average shares used to compute basic earnings per common share		38,133,598		37,349,144		37,878,753		37,218,234
Diluted income per share	$	0.18	$	0.15	$	0.57	$	0.23
Weighted average shares used to compute diluted earnings per common share		38,637,536		37,986,860		38,491,965		37,921,767

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				For the Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Net income	$	6,815	$	5,691	$	22,121	$	8,775
Other comprehensive income (loss):
Unrealized gain (loss) on cash flow hedges, net of tax provision (benefit) of $488, ($516), ($2,509), and ($2,916), respectively	$	1,542	$	(1,641)	$	(7,933)	$	(9,265)
Unrealized gain on defined benefit plan, net of tax provision of $9, $2, $27, and $6, respectively		28		7		84		19
Total other comprehensive income (loss)		1,570		(1,634)		(7,849)		(9,246)
Comprehensive income (loss)	$	8,385	$	4,057	$	14,272	$	(471)

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

3

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

For the Nine Months Ended September 30, 2020

(dollars and share amounts in thousands)

(Unaudited)

		Common				Accumulated
	Common	Stock,		Additional		Other
	Shares,	Par		Paid-in		Comprehensive		Accumulated		Treasury
	Balance	Value		Capital		Loss		Deficit		Stock		Total
Balance, December 31, 2019	37,460	$	376	$	354,326	$	(12,551)	$	(331,951)	$	(696)	$	9,504
Cumulative effect of a change in accounting for credit losses	—		—		—		—		(238)		—		(238)
Balance, January 1, 2020	37,460		376		354,326		(12,551)		(332,189)		(696)		9,266
Net loss	—		—		—		—		(15,748)		—		(15,748)
Share-based compensation expense	—		—		3,501		—		—		—		3,501
Issuance of common stock upon vesting of restricted stock units	354		4		(4)		—		—		—		—
Effect of shares withheld to cover taxes	—		—		(4,146)		—		—		—		(4,146)
Total other comprehensive loss	—		—		—		(8,873)		—		—		(8,873)
Balance, March 31, 2020	37,814	$	380	$	353,677	$	(21,424)	$	(347,937)	$	(696)	$	(16,000)
Net income	—		—		—		—		31,054		—		31,054
Share-based compensation expense	—		—		8,984		—		—		—		8,984
Issuance in connection with the exercise of stock options	3		—		38		—		—		—		38
Issuance of common stock upon vesting of restricted stock units	316		3		(3)		—		—		—		—
Effect of shares withheld to cover taxes	—		—		(2,682)		—		—		—		(2,682)
Total other comprehensive loss	—		—		—		(546)		—		—		(546)
Balance, June 30, 2020	38,133	$	383	$	360,014	$	(21,970)	$	(316,883)	$	(696)	$	20,848
Net income	—		—		—		—		6,815		—		6,815
Share-based compensation expense	—		—		3,081		—		—		—		3,081
Issuance in connection with the exercise of stock options	—		—		—		—		—		—		—
Issuance of common stock upon vesting of restricted stock units	2		—		—		—		—		—		—
Effect of shares withheld to cover taxes	—		—		(13)		—		—		—		(13)
Total other comprehensive income	—		—		—		1,570		—		—		1,570
Balance, September 30, 2020	38,135	$	383	$	363,082	$	(20,400)	$	(310,068)	$	(696)	$	32,301

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

4

HANGER, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

For the Nine Months Ended September 30, 2019

(dollars and share amounts in thousands)

(Unaudited)

		Common				Accumulated
	Common	Stock,		Additional		Other
	Shares,	Par		Paid-in		Comprehensive		Accumulated		Treasury
	Balance	Value		Capital		Loss		Deficit		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	—		—		—		—		1,547		—		1,547
Balance, January 1, 2019	36,921		371		343,955		(4,531)		(359,476)		(696)		(20,377)
Net loss	—		—		—		—		(6,951)		—		(6,951)
Share-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)	$	(366,427)	$	(696)	$	(30,619)
Net income	—		—		—		—		10,035		—		10,035
Share-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)	$	(356,392)	$	(696)	$	(21,844)
Net income	—		—		—		—		5,691		—		5,691
Share-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)	$	(350,701)	$	(696)	$	(14,220)

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,
	2020		2019
Cash flows provided by operating activities:
Net income	$	22,121	$	8,775
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		26,513		26,906
Provision for doubtful accounts		629		284
Share-based compensation expense		15,565		10,089
Deferred income taxes		2,067		(723)
Amortization of debt discounts and issuance costs		1,564		1,202
Gain on sale and disposal of fixed assets		(729)		(1,200)
Changes in operating assets and liabilities:
Accounts receivable, net		39,531		1,914
Inventories		(3,834)		(6,310)
Other current assets and other assets		(3,115)		(1,769)
Income taxes		(6,814)		2,613
Accounts payable		12,912		(1,751)
Accrued expenses and other current liabilities		6,914		(2,144)
Accrued compensation related costs		2,339		(15,583)
Other liabilities		8,016		(1,736)
Operating lease liabilities, net of amortization of right-of-use assets		1,559		(622)
Changes in operating assets and liabilities:		57,508		(25,388)
Net cash provided by operating activities		125,238		19,945
Cash flows used in investing activities:
Acquisitions, net of cash acquired		(16,854)		(31,585)
Purchase of property, plant, and equipment		(19,352)		(20,262)
Purchase of therapeutic program equipment leased to third parties under operating leases		(3,194)		(5,165)
Proceeds from sale of property, plant, and equipment		1,578		2,181
Purchase of company-owned life insurance investment		(250)		—
Net cash used in investing activities		(38,072)		(54,831)
Cash flows used in financing activities:
Borrowings under revolving credit agreement		79,000		—
Repayment of borrowings under revolving credit agreement		(79,000)		—
Repayment of term loan		(3,788)		(3,788)
Payment of employee taxes on share-based compensation		(6,841)		(3,710)
Payment on seller notes		(2,200)		(2,688)
Payments of financing lease obligations		(521)		(344)
Payments under vendor financing arrangements		(550)		—
Payment of debt issuance costs		(214)		—
Proceeds from the exercise of options		39		249
Net cash used in financing activities		(14,075)		(10,281)
Increase (decrease) in cash and cash equivalents		73,091		(45,167)
Cash and cash equivalents at beginning of period		74,419		95,114
Cash and cash equivalents at end of period	$	147,510	$	49,947
Non-cash financing and investing activities:
Seller notes, deferred payment obligations and additional consideration related to acquisitions	$	29,420	$	5,053
Purchase of property, plant, and equipment in accounts payable at period end		4,299		3,492
Purchase of property, plant, and equipment through vendor financing		—		2,200
Right-of-use assets obtained in exchange for finance lease obligations		1,975		282

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, manage O&P networks, and provide therapeutic solutions to patients and businesses in acute, post-acute, and clinic settings. We operate through two segments, Patient Care and Products & Services.

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements.  These financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”), as previously filed with the Securities and Exchange Commission (the “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 2019 Form 10-K.

Recent Developments Regarding COVID-19

We are subject to risks and uncertainties as a result of the outbreak of the novel coronavirus (“COVID-19”) pandemic (“COVID-19 pandemic”).  The extent and duration of the impact of the COVID-19 pandemic on our operations and financial condition are highly uncertain and difficult to predict, as viral infections continue to increase and information is rapidly evolving.  We believe that our patients are deferring visits to our O&P clinics as well as elective surgical procedures, both of which impact our business volumes through decreased patient encounters and physician referrals. Furthermore, capital markets and the economy have been disrupted by the COVID-19 pandemic, and it still remains possible that it could cause a recessionary environment impacting the healthcare industry generally, including the O&P industry.  The continuing economic disruption has had and could have a  continuing material adverse effect on our business, as the duration and extent of state and local government restrictions impacting our patients’ ability or willingness to visit our O&P clinics and those of our customers, is unknown.  The United States government has responded with fiscal policy measures intended to support the healthcare industry and economy as a whole, including the passage of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in March 2020.  We continue to monitor the provisions of the CARES Act and their application to us, as well as future governmental policies and their impact on our business; however, the magnitude and overall effectiveness of such policies to us and the economy as a whole remains uncertain.

CARES Act

The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $175.0 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid- enrolled suppliers and institutional providers.  The purpose of these funds is to reimburse providers for lost revenue and health-care related expenses that are attributable to the COVID-19 pandemic. In April 2020, the U.S. Department of Health and Human Services (“HHS”) began making payments to healthcare providers from the $175.0 billion appropriation.  These are payments, rather than loans, to healthcare providers, and will not need to be repaid.

7

During the second and third quarters of 2020, we recognized a total benefit of $20.6 million in our condensed consolidated statement of operations within Other operating costs for a portion of the grant proceeds we received under the CARES Act (“Grants”) from HHS. We recognize income related to grants on a systematic and rational basis when it becomes probable that we have complied with the terms and conditions of the grant and in the period in which the corresponding costs or income related to the grant are recognized. We recognized the benefit from the Grants within Other operating costs in our Patient Care segment. As of September 30, 2020, we have recorded a liability of $3.4 million within Accrued expenses and other liabilities in the condensed consolidated balance sheet related to proceeds from the Grants for amounts that have not met the recognition criteria in accordance with our accounting policy.

The CARES Act also provides for a deferral of the employer portion of payroll taxes incurred during the COVID-19 pandemic through December 2020. The provisions allow us to defer half of such payroll taxes until December 2021 and the remaining half until December 2022. We deferred $7.1 million of payroll taxes within Other liabilities in the condensed consolidated balance sheet as of September 30, 2020.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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.  The adoption of this standard on January 1, 2020 resulted in a cumulative effect adjustment to accumulated deficit of $0.2 million.

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.  There was no material impact on our condensed consolidated financial position, results of operations, or cash flows due to the adoption on January 1, 2020.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. Among other provisions, this ASU removes the exception that limited the income tax benefit recognized in the interim period in cases when the year-to-date loss exceeds the anticipated loss for the year.  Adoption of this standard is effective beginning January 1, 2021, but as early adoption is permitted, we have selected to adopt this standard effective January 1, 2020. There was no material impact on our condensed consolidated financial position, results of operations, or cash flows due to the adoption.

Recent Accounting Pronouncements, Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.  The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform.  The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.  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 34,379 and 20,202 for the three and nine months ended September 30, 2020, and 10 and zero for the three and nine months ended September 30, 2019.

8

Our Credit Agreement (as defined below) restricts the payment of dividends or other distributions to our shareholders by us or any of our subsidiaries. See Note L - “Debt and Other Obligations” within these condensed consolidated financial statements.

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

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands except share and per share amounts)	2020		2019		2020		2019
Net income	$	6,815	$	5,691	$	22,121	$	8,775
Weighted average shares outstanding - basic		38,133,598		37,349,144		37,878,753		37,218,234
Effect of potentially dilutive restricted stock units and options		503,938		637,716		613,212		703,533
Weighted average shares outstanding - diluted		38,637,536		37,986,860		38,491,965		37,921,767
Basic income per share	$	0.18	$	0.15	$	0.58	$	0.24
Diluted income per share	$	0.18	$	0.15	$	0.57	$	0.23

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 (the “VA”), 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, 2020 and 2019:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Patient Care Segment
Medicare	$	68,135	$	72,879	$	194,052	$	206,295
Medicaid		34,541		36,140		96,612		103,631
Commercial Insurance / Managed Care (excluding Medicare and Medicaid Managed Care)		75,966		83,384		213,234		232,410
Veterans Administration		19,339		23,816		54,057		64,635
Private Pay		14,683		14,712		40,751		45,729
Total	$	212,664	$	230,931	$	598,706	$	652,700

The impact to revenue related to prior period performance obligations was not material for the three and nine months ended September 30, 2020 and 2019.

Products & Services Segment

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

9

The following table disaggregates revenue from contracts with customers in our Product & Services segment for the three and nine months ended September 30, 2020 and 2019:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Products & Services Segment
Distribution services, net of intersegment revenue eliminations	$	32,711	$	36,653	$	90,928	$	107,510
Therapeutic solutions		11,262		12,054		34,176		36,945
Total	$	43,973	$	48,707	$	125,104	$	144,455

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 represents amounts outstanding from our gross charges, net of contractual discounts, sales returns, and other implicit price concessions including estimates for payor disallowances and patient non-payments.

We are exposed to credit losses primarily through our accounts receivable. These receivables are short in nature because their due date varies between due upon receipt of invoice and 90 days. We assess our receivables, divide them into similar risk pools, and monitor our ongoing credit exposure through active review of our aging buckets. Our activities include timely account reconciliations, dispute resolution, and payment confirmations.  We also employ collection agencies and legal counsel to pursue recovery of defaulted receivables.

As part of the new accounting standard discussed in Note A - “Organization and Summary of Significant Accounting Policies,” our expected loss methodology is developed using historical liquidation rates, current and future economic and market conditions, and a review of the current status of our patients and customers' trade accounts receivable balances. We also grouped our receivables into similar risk pools to better measure the risks for each pool. After evaluating the risk for each pool, we determined that additional credit loss risk was immaterial for the Patient Care segment.  For the Products & Services segment, an allowance for doubtful accounts is recorded, which is deducted from gross accounts receivable to arrive at “Accounts receivable, net.”  As of September 30, 2020, we have considered the current and future economic and market conditions resulting in an increase to the allowance for doubtful accounts by approximately $0.7 million since December 31, 2019.

Accounts receivable, net as of September 30, 2020 and December 31, 2019 is comprised of the following:

	As of September 30, 2020						As of December 31, 2019
			Products &						Products &
(in thousands)	Patient Care		Services		Consolidated		Patient Care		Services		Consolidated
Gross charges before estimates for implicit price concessions	$	157,191	$	21,765	$	178,956	$	202,132	$	27,551	$	229,683
Less estimates for implicit price concessions:
Payor disallowances		(47,314)		—		(47,314)		(58,094)		—		(58,094)
Patient non-payments		(6,916)		—		(6,916)		(9,589)		—		(9,589)
Accounts receivable, gross		102,961		21,765		124,726		134,449		27,551		162,000
Allowance for doubtful accounts		—		(3,317)		(3,317)		—		(2,641)		(2,641)
Accounts receivable, net	$	102,961	$	18,448	$	121,409	$	134,449	$	24,910	$	159,359

10

Note E — Inventories

Our inventories are comprised of the following:

	As of September 30,		As of December 31,
(in thousands)	2020		2019
Raw materials	$	20,047	$	20,574
Work in process		15,575		10,165
Finished goods		38,486		37,465
Total inventories	$	74,108	$	68,204

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)	2020		2019
Land	$	554	$	634
Buildings		3,756		4,110
Furniture and fixtures		14,747		13,835
Machinery and equipment		25,826		25,438
Equipment leased to third parties under operating leases		27,510		29,217
Leasehold improvements		138,450		131,617
Computers and software		79,484		75,540
Total property, plant, and equipment, gross		290,327		280,391
Less: accumulated depreciation and amortization		(203,690)		(196,334)
Total property, plant, and equipment, net	$	86,637	$	84,057

Total depreciation expense was approximately $7.0 million and $21.4 million for the three and nine months ended September 30, 2020 and $7.7 million and $22.8 million for the three and nine months ended September 30, 2019, respectively. Total amortization of finance right-of-use assets was approximately $0.2 million and $0.5 million for the three and nine months ended September 30, 2020 and $0.1 million and $0.2 million for the three and nine months ended September 30, 2019, respectively.

Note G — Acquisitions

2020 Acquisition Activity

In the second quarter of 2020, we acquired all of the outstanding equity interests of an O&P business for total consideration of $46.1 million at fair value, of which $16.8 million was cash consideration, net of cash acquired, $21.9 million was issued in the form of notes to the former shareholders, $3.5 million in the form of a deferred payment obligation to the former shareholders and $4.0 million in additional consideration.  Of the $21.9 million in notes issued to the former shareholders, approximately $18.1 million of the notes were paid in October 2020 in a lump sum payment and the remaining $3.8 million of the notes are payable in annual installments over a period of three years on the anniversary date of the acquisition. Payments totaling $3.5 million under the deferred payment obligation are due in annual installments beginning in the fourth year following the acquisition and for three years thereafter.  Additional consideration includes approximately $3.6 million in liabilities incurred to the shareholders as part of the business combination payable in October 2020 and is included in Accrued expenses and other liabilities in the condensed consolidated balance sheet. The remaining $0.4 million in additional consideration represents the effective settlement of amounts due to us from the acquired O&P business as of the acquisition date. We completed the acquisition with the intention of expanding the geographic footprint of our patient care offerings through the acquisition of high quality O&P providers.

11

We accounted for this transaction under the acquisition method of accounting and have reported the results of operations of the acquisition as of the date of the acquisition. We based the estimated fair values of intangible assets 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 cost 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. We recorded the excess of the fair value of the consideration transferred in the acquisition over the fair value of net assets acquired 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 not be deductible for federal income tax purposes.

Acquisition-related costs are included in general and administrative expenses in our consolidated statements of operations. Total acquisition-related costs incurred during the three and nine months ended September 30, 2020 were $0.1 million and $0.6 million, respectively, which includes those costs for transactions that are in progress or were not completed during the respective period. Acquisition-related costs incurred for the acquisitions completed during the three and nine month periods ended September 30, 2020 were $0.0 million and $0.4 million, respectively.

We have not presented pro forma combined results for this acquisition  because the impact on previously reported statements of operations would not have been material.

Purchase Price Allocation

We have performed a preliminary valuation analysis of the fair market value of the assets acquired and liabilities assumed in the acquisition. The final purchase price allocation 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 this acquisition was allocated on a preliminary basis as follows:

(in thousands)
Cash paid, net of cash acquired	$	16,762
Issuance of seller notes at fair value		21,941
Deferred payment obligation at fair value		3,468
Additional consideration, net		3,975
Aggregate purchase price		46,146
Accounts receivable		3,182
Inventories		2,021
Customer relationships (Weighted average useful life of 5.0 years)		5,600
Non-compete agreements (Weighted average useful life of 5.0 years)		200
Other assets and liabilities, net		(4,301)
Net assets acquired		6,702
Goodwill	$	39,444

Right-of-use assets and lease liabilities related to operating leases recognized in connection with the acquisition completed during the nine months ended September 30, 2020 were $4.7 million.

12

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.  We completed each acquisition with the intention of expanding the geographic footprint of our patient care offerings through the acquisitions of high quality O&P providers.

● In the first quarter of 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 was additional consideration.

● In the second quarter of 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 the third quarter of 2019, we completed the acquisition of all the outstanding equity interests of one O&P business and acquired the assets of another O&P business 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.

● In the fourth quarter of 2019, we completed the acquisition of all the outstanding equity interests of one O&P business and acquired the assets of another O&P business for total consideration of $7.8 million, of which $5.0 million was cash consideration, net of cash acquired, and $2.8 million was issued in the form of notes to shareholders at fair value.

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

(in thousands)
Cash paid, net of cash acquired	$	35,909
Issuance of seller notes at fair value		7,835
Additional consideration, net(1)		626
Aggregate purchase price		44,370
Accounts receivable		4,128
Inventories		2,081
Customer relationships (Weighted average useful life of 4.7 years)		7,038
Non-compete agreements (Weighted average useful life of 4.9 years)		350
Other assets and liabilities, net		(2,983)
Net assets acquired		10,614
Goodwill	$	33,756

(1) Approximately $0.7 million of additional consideration represents payments made during the third quarter related to certain tax elections with the seller, offset by an immaterial amount of favorable working capital adjustments.

Right-of-use assets and lease liabilities related to operating leases recognized in connection with acquisitions completed for the year ended December 31, 2019 was $5.2 million.

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.

13

The following table summarizes the activity in goodwill for the periods indicated:

	For the Nine Months Ended September 30, 2020
	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, 2019	$	660,912	$	(428,668)	$	232,244	$	139,299	$	(139,299)	$	—	$	800,211	$	(567,967)	$	232,244
Additions from acquisitions		39,386		—		39,386		—		—		—		39,386		—		39,386
Measurement period adjustments (1)		71		—		71		—		—		—		71		—		71
As of September 30, 2020	$	700,369	$	(428,668)	$	271,701	$	139,299	$	(139,299)	$	—	$	839,668	$	(567,967)	$	271,701

(1) Measurement period adjustments relate to 2020 and 2019 acquisitions and are primarily attributable to adjustments to the preliminary allocations of customer relationship intangibles.

	For the Year Ended December 31, 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		35,926		—		35,926		—		—		—		35,926		—		35,926
Measurement period adjustments (1)		(2,424)		—		(2,424)		—		—		—		(2,424)		—		(2,424)
As of December 31, 2019	$	660,912	$	(428,668)	$	232,244	$	139,299	$	(139,299)	$	—	$	800,211	$	(567,967)	$	232,244

(1) Measurement period adjustments relate to 2019 and 2018 acquisitions of approximately $2.1 million and $0.3 million, respectively, and are primarily attributable to adjustments to the preliminary allocations of customer relationship intangibles.

The balances related to intangible assets as of September 30, 2020 and December 31, 2019 are as follows:

	As of September 30, 2020
	Gross Carrying		Accumulated		Accumulated		Net Carrying
(in thousands)	Amount		Amortization		Impairment		Amount
Customer lists	$	38,372	$	(26,844)	$	—	$	11,528
Trade name		255		(170)		—		85
Patents and other intangibles		9,011		(5,635)		—		3,376
Definite-lived intangible assets		47,638		(32,649)		—		14,989
Indefinite-lived trade name		9,070		—		(4,953)		4,117
Total other intangible assets	$	56,708	$	(32,649)	$	(4,953)	$	19,106

	As of December 31, 2019
	Gross Carrying		Accumulated		Accumulated		Net Carrying
(in thousands)	Amount		Amortization		Impairment		Amount
Customer lists	$	32,772	$	(22,726)	$	—	$	10,046
Trade name		255		(151)		—		104
Patents and other intangibles		9,188		(5,503)		—		3,685
Definite-lived intangible assets		42,215		(28,380)		—		13,835
Indefinite-lived trade name		9,070		—		(4,953)		4,117
Total other intangible assets	$	51,285	$	(28,380)	$	(4,953)	$	17,952

Amortization expense related to other intangible assets was approximately $1.6 million and $4.6 million for the three and nine months ended September 30, 2020 and $1.6 million and $3.9 million for the three and nine months ended September 30, 2019.

14

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

(in thousands)
2020 (remainder of the year)	$	1,406
2021		3,735
2022		3,668
2023		3,424
2024		1,941
Thereafter		815
Total	$	14,989

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)	2020		2019
Non-trade receivables	$	7,540	$	6,711
Prepaid maintenance		3,277		2,767
Prepaid insurance		909		264
Other prepaid assets		2,763		3,931
Total other current assets	$	14,489	$	13,673

Other assets consist of the following:

	As of September 30,		As of December 31,
(in thousands)	2020		2019
Implementation costs for cloud computing arrangements	$	4,694	$	1,964
Cash surrender value of company-owned life insurance		3,811		3,253
Finance lease right-of-use assets		2,795		1,488
Deposits		2,145		1,893
Non-trade receivables		1,791		2,398
Other		474		309
Total other assets	$	15,710	$	11,305

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)	2020		2019
Patient prepayments, deposits, and refunds payable	$	26,969	$	24,183
Accrued sales taxes and other taxes		10,240		8,543
Insurance and self-insurance accruals		7,786		8,033
Derivative liability		7,704		3,516
Liabilities incurred to seller in acquisitions		3,656		—
Accrued professional fees		1,547		2,533
Accrued interest payable		747		266
Other current liabilities		13,785		8,751
Total	$	72,434	$	55,825

15

Other liabilities consist of:

	As of September 30,		As of December 31,
(in thousands)	2020		2019
Supplemental executive retirement plan obligations	$	19,461	$	20,851
Derivative liability		16,075		9,821
Unrecognized tax benefits		7,910		5,296
Long-term insurance accruals		7,539		7,424
Deferred payroll taxes		7,118		—
Other		1,974		2,412
Total	$	60,077	$	45,804

Note K — Income Taxes

We recorded a benefit for income taxes of $1.9 million and $4.8 million for the three and nine months ended September 30, 2020. The effective tax rate was -39.0% and -27.3% for the three and nine months ended September 30, 2020.  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.

The decrease in the effective tax rate for the three months ended September 30, 2020 compared with the three months ended September 30, 2019 is primarily attributable to a tax benefit resulting from the loss carryback provisions granted under the CARES Act. Our effective tax rate for the three months ended September 30, 2020 differed from the federal statutory tax rate of 21% primarily due to the net tax benefit of the loss carryback claim and non-deductible expenses. Our effective tax rate for the three months ended September 30, 2019 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, 2020 compared with the nine months ended September 30, 2019 is primarily attributable to the recognition of research and development tax credits for the current and prior years and a tax benefit resulting from the loss carryback provisions granted under the CARES Act, partially offset by a shortfall from share-based compensation. Our effective tax rate for the nine months ended September 30, 2020 differed from the federal statutory tax rate of 21% primarily due to research and development tax credits, the net tax benefit of the loss carryback claim, and non-deductible expenses. Our effective tax rate for the nine months ended September 30, 2019 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses.

During the second quarter of 2020, we completed a study of qualifying research and development expenses resulting in the recognition of tax benefits of $2.2 million, net of tax reserves, related to the current year and $6.3 million, net of tax reserves, related to the prior years as of the third quarter of 2020. We recorded the tax benefit, before tax reserves, as a deferred tax asset.

The CARES Act, which was enacted on March 27, 2020, includes changes to certain tax laws related to the deductibility of interest expense and depreciation, as well as the provision to carryback net operating losses to five preceding years. ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. As a result of the CARES Act provisions, in the third quarter of 2020 we recognized a tax benefit of $4.0 million resulting from the loss carryback claim to a prior period with a higher statutory rate, which also decreased our current income taxes payable by $9.5 million as of September 30, 2020.

16

Note L — Debt and Other Obligations

Debt consists of the following:

(in thousands)	As of September 30, 2020		As of December 31, 2019
Debt:
Term Loan B	$	492,375	$	496,163
Seller notes		29,208		9,005
Deferred payment obligation		4,000		—
Finance lease liabilities and other		3,606		2,033
Total debt before unamortized discount and debt issuance costs		529,189		507,201
Unamortized discount and debt issuance costs, net		(7,798)		(8,328)
Total debt	$	521,391	$	498,873
Current portion of long-term debt:
Term Loan B	$	5,050	$	5,050
Seller notes		21,893		3,175
Finance lease liabilities and other		848		527
Total current portion of long-term debt		27,791		8,752
Long-term debt	$	493,600	$	490,121

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, 2020.  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.

In March 2020, we borrowed $79.0 million under our revolving credit facility, which was due in March 2023.  In June 2020, we repaid $57.0 million in borrowings under this revolving credit facility, and in September 2020, we repaid the remaining $22.0 million in borrowings under the facility. We had approximately $94.8 million in available borrowing capacity under our $100.0 million revolving credit facility as of September 30, 2020.

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, 2020, the weighted average interest rate on outstanding borrowings under our Term Loan B facility was approximately 3.6%.  We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note N – “Derivative Financial Instruments.”

17

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 (some of which were amended in May 2020 by the Amendment (as defined and described below)): (i) a maximum consolidated first lien net leverage ratio (“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  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.

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.

In May 2020, we entered into an amendment to the Credit Agreement (the "Amendment") that provided for, amongst other things, an increase in the maximum Net Leverage Ratio to 5.25 to 1.00 for the fiscal quarters ended June 30, 2020 through March 31, 2021; 5.00 to 1.00 for the fiscal quarters ended June 30, 2021 through September 30, 2021; and 4.75 to 1.00 for the quarter ended December 31, 2021 and the last day of each fiscal quarter thereafter. In addition, the Amendment changed the definition of EBITDA used in the Net Leverage Ratio and minimum interest coverage ratio to adjust for declines in net revenue attributable to the COVID-19 pandemic. Borrowings under the revolving credit facility will bear interest at a variable rate equal to the greater of LIBOR or 1%, plus 3.75%. In addition, the Amendment contained certain restrictions and covenants that further limit our ability, and certain of our subsidiaries' ability, to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions not financed with the proceeds of an equity offering, except that certain acquisitions are permitted after September 30, 2020, in the event we maintain certain leverage and liquidity thresholds. We capitalized debt issuance costs of $0.2 million in connection with the Amendment, which were recorded in Other assets.

We were in compliance with all covenants at September 30, 2020.

Seller notes and the deferred payment obligation

We typically issue subordinated promissory notes (“Seller notes”) as a part of the consideration transferred when making acquisitions. We measure these instruments at their estimated fair values as of the respective acquisition dates. The stated interest rates on these instruments range from 2.50% to 3.00%. The Seller notes are unsecured and are presented net of unamortized discount of $0.9 million and $0.4 million as of September 30, 2020 and December 31, 2019, respectively. Principal and interest are payable in quarterly or annual installments and mature through October 2024.

18

Amounts due under the deferred payment obligation to the former shareholders of an acquired O&P business are unsecured and presented net of unamortized discount of $0.5 million as of September 30, 2020. The deferred payment obligation was measured at its estimated fair value as of the acquisition date and accrues interest at a rate of 3.0%. Principal and interest payments under the deferred payment obligation are due in annual installments beginning in 2024 and for three years thereafter.

Scheduled Maturities of Total Debt

Scheduled maturities of debt at September 30, 2020 were as follows:

(in thousands)
2020 (remainder of year)	$	21,023
2021		9,759
2022		8,494
2023		8,049
2024		7,337
Thereafter		474,527
Total debt before unamortized discount and debt issuance costs, net		529,189
Unamortized discount and debt issuance costs, net		(7,798)
Total debt	$	521,391

Note M — Fair Value Measurements

Financial Instruments

The carrying value of our outstanding term loan as of September 30, 2020 (excluding unamortized discounts and debt issuance costs of $6.9 million) was $492.4 million compared to its fair value of $487.5 million. The carrying value of our outstanding term loan as of December 31, 2019 (excluding unamortized discounts and debt issuance costs of $7.9 million) was $496.2 million compared to its fair value of $497.4 million.  Our estimates of fair value are based on a discounted cash flow model and an indicative quote using unobservable inputs, primarily, our risk-adjusted credit spread, which represents a Level 3 measurement.

We have interest rate swap agreements 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 L - “Debt and Other Obligations” and Note N - “Derivative Financial Instruments” for further information.

We believe that the carrying value of the Seller notes and the deferred payment obligation 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. The carrying value of our outstanding Seller notes and the deferred payment obligation issued in connection with past acquisitions as of September 30, 2020 was $32.3 million, net of unamortized discounts of $0.9 million.

Note N — Derivative Financial Instruments

Cash Flow Hedges of Interest Rate Risk

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.  As of September 30, 2020 and December 31, 2019, our swaps had a notional value outstanding of $300.0 million and $312.5 million, respectively.

19

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

The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the three months ended September 30, 2020 and 2019, respectively:

(in thousands)	Cash Flow Hedges
Balance as of June 30, 2020	$	(19,612)
Unrealized loss recognized in other comprehensive loss, net of tax		(455)
Reclassification to interest expense, net		1,997
Balance as of September 30, 2020	$	(18,070)
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)

The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the nine months ended September 30, 2020 and 2019, respectively:

(in thousands)	Cash Flow Hedges
Balance as of December 31, 2019	$	(10,137)
Unrealized loss recognized in other comprehensive loss, net of tax		(12,518)
Reclassification to interest expense, net		4,585
Balance as of September 30, 2020	$	(18,070)
Balance as of December 31, 2018	$	(2,936)
Unrealized loss recognized in other comprehensive loss, net of tax		(10,135)
Reclassification to interest expense, net		870
Balance as of September 30, 2019	$	(12,201)

The following table presents the fair value of derivative assets and liabilities within the condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019:

	As of September 30, 2020				As of December 31, 2019
(in thousands)	Assets		Liabilities		Assets		Liabilities
Derivatives designated as cash flow hedging instruments:
Accrued expenses and other current liabilities	$	—	$	7,704	$	—	$	3,516
Other liabilities		—		16,075		—		9,821

Note O — Share-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.

On May 19, 2017, the Board of Directors approved the Hanger, Inc. Special Equity Plan (the “Special Equity Plan”).  The Special Equity Plan authorized up to 1.5 million shares of Common Stock and operates completely independent from our 2016 Omnibus Incentive Plan.  All awards under the Special Equity Plan were made on May 19, 2017, which consisted of 0.8 million stock options and 0.3 million performance-based stock awards.  No further grants of awards will be authorized or issued under the Special Equity Plan.

20

As of September 30, 2020, there were 1,564,081 unvested restricted stock awards outstanding. This was comprised of 1,126,361 employee service-based awards with a weighted average grant date fair value of $19.23 per share, 367,097 employee performance-based awards with a weighted average grant date fair value of $18.94 per share, and 70,623 director service-based awards with a weighted average grant date value of $17.08 per share.  As of September 30, 2020, there were 520,105 outstanding options exercisable with a weighted average exercise price of $12.77 and average remaining contractual term of 6.6 years.

The 2017 Special Equity Plan was amended in May 2020 to modify the performance period ending date for purposes of the compounded annual growth rate calculation to February 20, 2020, shortening the performance period to approximately 33 months, representing a reduction of three months. This adjustment was considered a modification per Accounting Standards Codification 718, Compensation - Stock Compensation, and, therefore, any incremental fair value arising from the modification of an award with market conditions would be recognized over the remaining service period.  As a result of the modification, we recognized an additional $5.9 million in share-based compensation expense during the second quarter of 2020.

We recognized a total of approximately $3.1 million and $15.6 million of share-based compensation expense for the three and nine  months ended September 30, 2020 and a total of approximately $3.4 million and $10.1 million for the three and nine months ended September 30, 2019, respectively. Share-based compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and stock options.

Note P — 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, 2020 and 2019 is as follows:

Change in Benefit Obligation:

(in thousands)	2020		2019
Benefit obligation as of June 30	$	17,763	$	17,535
Service cost		98		84
Interest cost		121		164
Payments		(12)		(12)
Benefit obligation as of September 30	$	17,970	$	17,771
Benefit obligation as of December 31, 2019 and 2018, respectively	$	19,214	$	18,927
Service cost		294		251
Interest cost		363		494
Payments		(1,901)		(1,901)
Benefit obligation as of September 30	$	17,970	$	17,771

21

Amounts Recognized in the Condensed Consolidated Balance Sheets:

	As of September 30,		As of December 31,
(in thousands)	2020		2019
Current accrued expenses and other current liabilities	$	1,913	$	1,913
Non-current other liabilities		16,057		17,301
Total accrued liabilities	$	17,970	$	19,214

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, 2020 and December 31, 2019, the estimated accumulated obligation benefit is $4.2 million and $3.9 million, of which $3.8 million and $3.3 million is funded and $0.4 million and $0.6 million is unfunded at September 30, 2020 and December 31, 2019, 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 condensed consolidated balance sheets.  See Note I - “Other Current Assets and Other Assets” for additional information.

Note Q — 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

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 sought unspecified damages, costs, attorneys’ fees, and equitable relief.

22

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 unredacted. 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, the parties entered into a definitive settlement agreement in late December 2019, and in January 2020 the Travis County court issued an order providing preliminary approval of the settlement and ordering that notice of the settlement be made to the Company’s shareholders.  On March 10, 2020, the Travis County court issued an order providing final approval of the settlement and dismissing with prejudice the consolidated derivative action.

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 R — Segment and Related Information

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

23

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

● Commercial private payors and other, which consist of individuals, rehabilitation providers, commercial insurance companies, 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 persons with disabilities, which provides reimbursement for O&P products and services based on prices set forth in published fee schedules (generally with either 10 regional pricing areas or state level prices) for prosthetics and orthotics and by state for durable medical equipment (DMEPOS);

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

● the VA.

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 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 leases and sells rehabilitation equipment and ancillary consumable supplies combined with equipment maintenance, education, and training.  

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 2019 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.

24

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, 2019.

	Patient Care				Products & Services
	For the Three Months Ended				For the Three Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Net revenues
Third party	$	212,664	$	230,931	$	43,973	$	48,707
Intersegments		—		—		50,011		53,670
Total net revenues		212,664		230,931		93,984		102,377
Material costs
Third party suppliers		56,599		65,055		24,863		26,979
Intersegments		7,339		6,284		42,672		47,386
Total material costs		63,938		71,339		67,535		74,365
Personnel expenses		76,989		81,274		12,738		13,320
Other expenses		34,713		37,245		5,957		6,858
Depreciation & amortization		4,786		4,943		2,633		2,723
Segment income from operations	$	32,238	$	36,130	$	5,121	$	5,111

	Patient Care				Products & Services
	For the Nine Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Net revenues
Third party	$	598,706	$	652,700	$	125,104	$	144,455
Intersegments		—		—		138,899		150,245
Total net revenues		598,706		652,700		264,003		294,700
Material costs
Third party suppliers		160,212		181,358		68,463		80,452
Intersegments		18,639		18,268		120,260		131,977
Total material costs		178,851		199,626		188,723		212,429
Personnel expenses		216,910		233,402		35,824		39,393
Other expenses		86,462		112,014		18,614		20,883
Depreciation & amortization		14,089		13,997		7,883		7,862
Segment income from operations	$	102,394	$	93,661	$	12,959	$	14,133

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

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Income from operations
Patient Care	$	32,238	$	36,130	$	102,394	$	93,661
Products & Services		5,121		5,111		12,959		14,133
Corporate & other		(24,284)		(23,838)		(72,590)		(69,267)
Income from operations		13,075		17,403		42,763		38,527
Interest expense, net		8,013		8,954		24,918		25,973
Non-service defined benefit plan expense		158		173		474		519
Income before income taxes		4,904		8,276		17,371		12,035
(Benefit) provision for income taxes		(1,911)		2,585		(4,750)		3,260
Net income	$	6,815	$	5,691	$	22,121	$	8,775

25

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)	2020		2019		2020		2019
Net revenues
Patient Care	$	212,664	$	230,931	$	598,706	$	652,700
Products & Services		93,984		102,377		264,003		294,700
Corporate & other		—		—		—		—
Consolidating adjustments		(50,011)		(53,670)		(138,899)		(150,245)
Consolidated net revenues	$	256,637	$	279,638	$	723,810	$	797,155

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)	2020		2019		2020		2019
Material costs
Patient Care	$	63,938	$	71,339	$	178,851	$	199,626
Products & Services		67,535		74,365		188,723		212,429
Corporate & other		—		—		—		—
Consolidating adjustments		(50,011)		(53,670)		(138,899)		(150,245)
Consolidated material costs	$	81,462	$	92,034	$	228,675	$	261,810

26

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

Forward-Looking Statements

This report contains statements that are forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include information concerning our liquidity and our possible or assumed future results of operations, including descriptions of our business strategies. These statements often include words such as “believe,” “expect,” “project,” “potential,” “anticipate,” “intend,” “plan,” “estimate,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecasts,” or similar words. These statements are based on certain assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments, and other factors we believe are appropriate in these circumstances. We believe these assumptions 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. These uncertainties include, but are not limited to, the financial and business impacts of the COVID-19 pandemic on our operations and the operations of our customers, suppliers, governmental and private payers, and others in the healthcare industry and beyond; federal laws governing the health care industry; governmental policies affecting O&P operations, including with respect to reimbursement; failure to successfully implement a new enterprise resource planning system or other disruptions to information technology systems; the inability to successfully execute our acquisition strategy, including integration of recently acquired O&P clinics into our existing business; changes in the demand for our O&P products and services, including additional competition in the O&P services market; disruptions to our supply chain; our ability to enter into and derive benefits from managed-care contracts; our ability to successfully attract and retain qualified O&P clinicians; 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, 2019 (the “2019 Form 10-K”) and in this Quarterly Report on Form 10-Q, 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 this 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 2019 Form 10-K and in this Quarterly Report on Form 10-Q, or by other unknown risks and uncertainties.

Non-GAAP Measures

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

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.

27

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, and we and our predecessor companies have provided O&P services for nearly 160 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 704 patient care clinics and 110 satellite locations in 46 states and the District of Columbia as of September 30, 2020. 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 engage in the distribution of a broad catalog of O&P parts, componentry, and devices to independent O&P providers nationwide. The other business in our Products & Services segment is our therapeutic solutions business, which develops specialized rehabilitation technologies and provides evidence-based clinical programs for post-acute rehabilitation to patients at approximately 4,000 skilled nursing and post-acute providers nationwide.

For the three and nine months ended September 30, 2020, our net revenues were $256.6 million and $723.8 million, respectively, and we recorded net income of $6.8 million and $22.1 million, respectively.  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.

Industry Overview

We estimate that approximately $4.3 billion is spent in the United States each year for prescription-based O&P products and services through O&P clinics. We believe our Patient Care segment currently accounts for approximately 21% of the market, providing a comprehensive portfolio of orthotic, prosthetic, and post-operative solutions to patients in acute, post-acute, and patient care clinic settings.

The O&P patient care services market is highly fragmented and is characterized by regional and local independent O&P businesses operated predominantly by independent operators, but also including two O&P product manufacturers with international patient care services operations. We do not believe that any single competitor accounts for more than approximately 2% of the nation’s total estimated O&P 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 supplies 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 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.

28

Business Description

Patient Care

Our Patient Care segment employs approximately 1,600 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;

● Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain persons with disabilities;

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

● the VA.

29

We typically enter into contracts with third party payors that allow us to perform O&P services for a referred patient and to be reimbursed for our services. These contracts usually have a stated term of one to three years and 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 VA. 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 known as 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, Supplemental Medical Review Contractor (“SMRC”) audits, and Universal Payment Identification Code (“UPIC”) audits. TPE audits are generally pre-payment audits, while RAC, CERT, ZPIC, and SMRC audits are generally post-payment audits. UPIC audits can be both pre- or post-payment audits, with a majority currently being pre-payment. 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 wholly-owned subsidiary, Accelerated Care Plus Corp., our therapeutic solutions business is a leading provider of rehabilitation technologies and integrated clinical programs to skilled nursing and post-acute 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 consultative education and training. Our services support increasingly advanced treatment options for a broader patient population and more medically complex conditions. We currently serve approximately 4,000 skilled nursing and post-acute providers nationwide. 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.

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 (ceased operations as of September 30, 2020), 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.

Our supply chain organization enables us to:

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

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

● improve inventory quality control;

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

● coordinate new product development efforts with key vendors.

30

Effects of the COVID-19 Pandemic

Beginning in the last weeks of March 2020, our business volumes began to be adversely affected by the COVID-19 pandemic. As federal, state, and local authorities implemented social distancing and suppression measures to respond to an increasing number of nationwide COVID-19 infections, we experienced a decrease in our patient appointments and general business volumes. In response, during the last week of March 2020, we made certain changes to our operations, implemented a broad number of cost reduction measures, and delayed certain capital investment projects. Although our business volumes have shown gradual improvement from their initial significant decline, the adverse impact of the COVID-19 pandemic on our business has continued through the third quarter and into the fourth quarter. These volume effects and our operating responses are discussed further in this section, and the effects of COVID-19 on our financial condition is discussed in the “Financial Condition, Liquidity and Capital Resources” section below.

Effect on Business Volumes

During the months of July, August and September 2020, patient appointments in our Patient Care Clinics declined by approximately 18%, 17%, and 13%, respectively, as compared with the same period in 2019.  This constituted an approximate average decrease of 16% in patient appointments during the three months ended September 30, 2020.  During the quarter, we experienced a relatively lower decline in prosthetic patient volumes as compared with orthotic patient volumes, although our orthotic volumes did improve as compared to the second quarter. Given the higher relative price of prosthetic devices that resulted in a more favorable product mix, same-clinic revenues within our Patient Care segment declined at a lower rate than patient appointments, reflecting a decrease of 10.3%, on a per day basis, as compared with the comparable period last year.  As of the end of September 2020, we had temporarily closed 22 patient care clinics and another 84 clinics were open for reduced hours or by appointment only.  We believe the generally more acute nature of conditions that lead to the need for prosthetics, the patient age demographics and the relatively greater impact that the absence of access to these devices can have on a patient’s daily life were the primary reasons that led to the relatively lower decline in prosthetic patients as compared with orthotic patients in our Patient Care Segment during the period.  Billings for componentry delivered to independent providers of orthotics and prosthetics by our distribution services business decreased by approximately 10% during the quarter ended September 30, 2020 as compared to the same period in 2019.  Our business volumes associated with therapeutic solutions have also been adversely affected due to access restrictions our skilled nursing facility clients have implemented at their facilities in response to the COVID-19 pandemic. Due to significant geographic product mix and timing differences, there can be no assurance that these volumes or billing amounts will be reflective of our future results and are solely provided for the purposes of giving context to the magnitude of the effect of the COVID-19 pandemic on our business during the third quarter.

Given that the development of a clearly effective medical treatment approach for treating COVID-19 does not appear imminent and that the vast majority of the general population of the United States has not developed natural immunity, we believe that the adverse effects of the COVID-19 pandemic will continue to affect our business volumes for the duration of 2020, and likely into 2021. These adverse effects will primarily be the result of anticipated continuing governmental measures to suppress the virus to address periods and locations of virus re-emergence, the adverse economic consequences to our patients, and the general lack of normalcy in the willingness of individuals to engage in activities that might increase their likelihood of their exposure to the virus.

Nevertheless, we do believe that the overall adverse impact will diminish over time, and that  our patient appointment and other business volumes will gradually improve as the prevalence of the virus decreases and social distancing, masking and testing measures become more routine, and the perception of infection risks subside. Additionally, we believe that if a patient is initially unable or unwilling to come to one of our clinics to receive their prosthetic or orthotic device then their ultimate need for that device is not likely to change, and that we could accordingly have some favorable volume recovery effect in future periods as the impacts of the COVID-19 pandemic subsides.

Operating and Cost Reduction Responses

Throughout the periods affected by the COVID-19 pandemic, given that our services are considered essential, we have continued to operate our businesses.  However, due to the risks posed to our clinicians, other employees, and patients, we have made certain changes to our operating practices in order to promote safety and to minimize the risk of virus transmission.  These have included the implementation of certain patient screening protocols and the relocation of certain administrative and support personnel to a “work at home” environment.  We have also changed the operating days and hours of certain of our clinics to adapt to changes in patient volumes.

31

Normally, only our material costs and portions of our incentive compensation expenses vary directly with changes in our business volumes from one period to the next.  This has been due in part to our historical practice of maintaining full-time staffing levels for clinicians and non-exempt employees in our clinic and support operations.  This operating practice has been necessitated by our desire to provide high levels of accessibility and service to our patients.

As a result of the COVID-19 pandemic, we have found it necessary to reduce our personnel costs in response to significant decreases in business volumes.  Commencing at the start of April 2020, personnel cost reductions were implemented through (i) an average 32% decrease in the salaries of all of our exempt employees, the percentage of which varies to lower amounts for lower salaried employees up to reduction amounts ranging from 47% to 100% for our senior leadership team; (ii) the furloughing of certain employees on a voluntary and involuntary basis; (iii) the reduction of work hours for non-exempt employees; (iv) modification of bonus, commission, and other variable incentive plans; (v) the reduction of overtime expenses; (vi) the elimination of certain open positions; (vii) a reduction in the use of contract employees, and (viii) the temporary suspension of certain auto allowances.  We communicated to our employees that reductions of exempt employee salaries could continue for up to a six month period ending on October 2, 2020 of this year (the “Reduction Period”).  Due to the trends in our business volumes discussed in the Effect on Business Volumes section, on June 8, 2020, we announced we had reinstated a portion of the salary reduction for our exempt employees.  Effective July 11, 2020, we reinstated an additional portion of the salary reduction for our exempt employees, resulting in an average 11% decrease in salaries for the remainder of the Reduction Period and, finally, effective September 19, 2020, we reinstated the remainder of the salary reduction for our exempt employees. Throughout the Reduction Period, the salary reductions of our senior leadership team ranged from 15% to 100%, depending on the individual, and prior to the full reinstatement of all exempt employees' salaries in September 2020.  Our decision to reduce employee wages rather than to implement a more permanent reduction in force was based on our preference to collectively share in the financial hardships caused by the COVID-19 pandemic rather than to subject portions of our workforce to the full financial burden. Additionally, this approach has allowed us to retain as many employees as possible to preserve the experience, culture, and patient service capabilities of our workforce for periods subsequent to the COVID-19 pandemic.  We have not implemented changes to employee benefits, nor do we currently intend to suspend our annual employer 401(k) match for 2020, which we would typically expect to pay in March of 2021.

We have undertaken other reductions to our other operating expenses. However, our largest category of operating expense, rent, utilities, and facilities maintenance, which amounted to $17.0 million and $49.9 million during the three and nine months ended September 30, 2020, respectively, has proven difficult to meaningfully reduce in the short term.

Excluding reductions in componentry costs, which varied in a corresponding fashion with decreases in revenue, these cost reduction measures provided savings in the approximate amount of $16 million in operating expenses for the three month period ended September 30, 2020.  We believe these expense reductions are temporary in nature, and are not sustainable during periods of normal operation.  Due to the fact that as of September 2020, we have reinstated the salary reductions and reduced the number of employees on furlough, our personnel costs will increase to normal levels in the fourth quarter of 2020.

In addition to these reductions in operating expenses, we have elected to temporarily delay the implementation of our supply chain and financial systems, further discussed in the “New Systems Implementations” section.  We have not established a date for recommencement of this systems initiative, but currently believe it is likely that the project will not recommence until at least early 2021. We have also suspended construction of our new fabrication facility in Tempe, Arizona, and other projects related to the reconfiguration of our distribution facilities.  These actions will correspondingly delay our achievement of the financial benefits expected from them into future periods.

We believe these and other related measures will reduce our capital expenditures for the full year, which are comprised of purchases of property, plant and equipment, as well as therapeutic program equipment, to the approximate range of $30 million to $35 million, which compares to the approximately $45 million we originally planned to expend in 2020.

While we have endeavored to rapidly reduce our expenses in response to decreases in patient and business volumes, given that a substantial portion of our operating expenses are nevertheless fixed in nature, and the ongoing interest costs associated with our indebtedness, we do not currently believe we will fully offset the adverse earnings effect associated with lost revenue during the remainder of 2020.  Nevertheless, as discussed in the “Financial Condition, Liquidity and Capital Resources” section below, we do believe that our operating expense and capital project reductions, when accompanied by additional cash sources, cost mitigation and liquidity management strategies, will enable us to maintain positive liquidity throughout the remainder of 2020 and the foreseeable future.

32

CARES Act

The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $175.0 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid- enrolled suppliers and institutional providers.  The purpose of these funds is to reimburse providers for lost revenue attributable to the COVID-19 pandemic, such as lost revenues attributable to canceled procedures, as well as to provide support for health-care related expenses.  In April 2020, HHS began making payments to healthcare providers from the $175.0 billion appropriation.  These are payments, rather than loans, to healthcare providers, and will not need to be repaid.

During the second and third quarters of 2020, we recognized a total benefit of $20.6 million in our condensed consolidated statement of operations within Other operating costs for a portion of the grant proceeds we received under the CARES Act (“Grants”) from HHS.  In addition, as of September 30, 2020, we have recorded a liability of $3.4 million within Accrued expenses and other liabilities in the condensed consolidated balance sheet for Grant proceeds that have not met the recognition criteria for income.

Other Products & Services Performance Considerations

As discussed in our 2019 Form 10-K, under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, several of the larger independent O&P providers we served through the distribution of componentry encountered financial difficulties during the nine months ended September 30, 2020 which resulted in our discontinuing distribution services to these customers.  Generally, we believe our distribution customers encounter reimbursement pressures similar to those we experience in our own Patient Care segment 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, in addition to the adverse effects of the COVID-19 pandemic discussed above, 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, have been discontinuing 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. Within this portion of our business, we have and continue to respond to these historical trends through the expansion of our products and services offerings.

33

Reimbursement Trends

In our Patient Care segment, we are reimbursed primarily through employer-based plans offered by commercial insurance carriers, Medicare, Medicaid, and the VA. The following is a summary of our payor mix, expressed as an approximate percentage of net revenues for the periods indicated:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Medicare	32.0	%	31.6	%	32.4	%	31.6	%
Medicaid	16.2	%	15.6	%	16.1	%	15.9	%
Commercial Insurance / Managed Care (excluding Medicare and Medicaid Managed Care)	35.7	%	36.1	%	35.6	%	35.6	%
Veterans Administration	9.1	%	10.3	%	9.0	%	9.9	%
Private Pay	7.0	%	6.4	%	6.9	%	7.0	%
Patient Care	100.0	%	100.0	%	100.0	%	100.0	%

Patient Care constituted 82.9% and 82.7% of our net revenues for the three and nine months ended September 30, 2020 and 82.6% and 81.9% for the three and nine months ended September 30, 2019. Our remaining net revenues were provided by our Products & Services segment, which derives its net revenues from commercial transactions with independent O&P providers, healthcare facilities, and other customers. In contrast to net revenues from our Patient Care segment, payment for these products and services are not directly subject to third party reimbursement from health care payors.

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

To receive reimbursement for our work, we must ensure that our clinical, administrative, and billing personnel receive and verify certain medical and health plan information, record detailed documentation regarding the services we provide, and accurately and timely perform a number of claims submission and related administrative tasks. 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, and 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 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) the resolution of 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.

34

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 revenues. These amounts recorded in net revenues within the Patient Care segment for the three and nine months ended September 30, 2020 and 2019 are as follows:

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(dollars in thousands)	2020			2019			2020			2019
Gross charges	$	222,950		$	245,267		$	625,440		$	689,969
Less estimated implicit price concessions arising from:
Payor disallowances		9,369			11,051			24,020			29,309
Patient non-payments		917			3,285			2,714			7,960
Payor disallowances and patient non-payments		10,286			14,336			26,734			37,269
Net revenues	$	212,664		$	230,931		$	598,706		$	652,700
Payor disallowances	$	9,369		$	11,051		$	24,020		$	29,309
Patient non-payments		917			3,285			2,714			7,960
Payor disallowances and patient non-payments	$	10,286		$	14,336		$	26,734		$	37,269
Payor disallowances %		4.2	%		4.5	%		3.8	%		4.2	%
Patient non-payments %		0.4	%		1.3	%		0.4	%		1.2	%
Percent of gross charges		4.6	%		5.8	%		4.2	%		5.4	%

Acquisitions

In the second quarter of 2020, we acquired all of the outstanding equity interests of an O&P business for total consideration of $46.1 million at fair value, of which $16.8 million was cash consideration, net of cash acquired, $21.9 million was issued in the form of notes to the former shareholders, $3.5 million in the form of a deferred payment obligation to the former shareholders and $4.0 million in additional consideration.  Of the $21.9 million in notes issued to the former shareholders, approximately $18.1 million of the notes were paid in October 2020 in a lump sum payment and the remaining $3.8 million of the notes are payable in annual installments over a period of three years on the anniversary date of the acquisition. Payments totaling $3.5 million under the deferred payment obligation are due in annual installments beginning in the fourth year following the acquisition and for three years thereafter.  Additional consideration includes approximately $3.6 million in liabilities incurred to the shareholders as part of the business combination payable in October 2020 and is included in Accrued expenses and other liabilities in the condensed consolidated balance sheet.  The remaining $0.4 million in additional consideration represents the effective settlement of amounts due to us from the acquired O&P business as of the acquisition date.  We completed the acquisition with the intention of expanding the geographic footprint of our patient care offerings through the acquisition of high quality O&P providers.

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:

· In the first quarter of 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 was additional consideration.

· In the second quarter of 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 the third quarter of 2019, we completed the acquisition of all the outstanding equity interests of one O&P business and acquired the assets of another O&P business 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.

35

· In fourth quarter of 2019, we completed the acquisition of all the outstanding equity interests of one O&P business and acquired the assets of another O&P business for total consideration of $7.8 million, of which $5.0 million was cash consideration, net of cash acquired, and $2.8 million was issued in the form of notes to shareholders at fair value.

Acquisition-related costs are included in general and administrative expenses in our consolidated statements of operations. Total acquisition-related costs incurred during the three and nine months ended September 30, 2020 were $0.1 million and $0.6 million, respectively, which includes those costs for transactions that are in progress or not completed during the respective period. Acquisition-related costs incurred for acquisitions completed during the three and nine month periods ended September 30, 2020 were $0.0 million and $0.4 million, respectively.  Total acquisition-related costs incurred during the year ended December 31, 2019 were $1.5 million, which includes those costs for transactions that are in progress or not completed during the respective period.  Acquisition-related costs incurred for acquisitions completed during the year ended December 31, 2019 were $1.0 million.

In response to the expected economic impact of the COVID-19 pandemic, we implemented certain cost mitigation and liquidity management strategies, including the temporary delay of our acquisitions of O&P providers, subject to certain conditions and thresholds in the first amendment to our Credit Agreement entered into in May 2020, except that certain acquisitions are permitted after September 30, 2020, in the event we maintain certain leverage and liquidity thresholds.  During the fourth quarter of 2020, we recommenced our acquisition of O&P providers. Refer to the “Financial Condition, Liquidity and Capital Resources” section for additional discussion.

New Systems Implementations

During 2019, we commenced the design, planning, and initial implementation of new financial and supply chain systems (“New Systems Implementations”), and planned to invest in new servers and software that operate as a part of our technology infrastructure. In connection with our new financial and supply chain systems, for the three and nine month period ended September 30, 2020, we have expensed $0.5 million and $2.0 million, respectively, and for the year ended December 31, 2019, we expensed $2.9 million.  We currently anticipate that we will spend $2.7 million for the full year  2020 on these systems.

As discussed in the “Effects of the COVID-19 Pandemic” section, we have elected to temporarily delay our New Systems Implementations as part of our efforts to preserve liquidity. We have not set a date for recommencement of these systems initiatives, but currently believe it likely that the project will not recommence until at least early next year. This delay will correspondingly push our achievement of the financial benefits expected from the New Systems Implementations into subsequent periods.

As of September 30, 2020, we capitalized $4.9 million of implementation costs for cloud computing arrangements, net of accumulated amortization, and recorded in other current assets and other assets in the consolidated balance sheet.

Effect of Delay in Financial Filings

As discussed in our 2019 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 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, 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
December 31, 2019		3,018		(2,451)		2,487
March 31, 2020		1,639		(2,819)		1,307
June 30, 2020		—		(1,307)		—

36

During the first quarter of 2020, we incurred approximately $1.6 million in excess professional fees in connection with the completion of our remediation activities related to our material weaknesses. Given that we completed the remediation of our material weaknesses in financial statement controls effective with the filing of our 2019 Form 10-K, we do not currently anticipate that we will incur further excess third party professional fees for these purposes in future periods.

Seasonality

We believe our business is affected by the degree to which patients have otherwise met the deductibles for which they are responsible in their medical plans during the course of the year.  The first quarter is normally our lowest relative net revenue quarter, followed by the second and third quarters, which are somewhat higher and consistent with one another.  Due to the general fulfillment by patients of their health plan co-payments and deductible requirements towards year’s end, our fourth quarter is normally our highest revenue producing quarter. However, historical seasonality may be impacted by the COVID-19 pandemic and historical seasonal patterns may not be reflective of our prospective financial results and operations for the remainder of 2020.  Please refer to the “Effects of the COVID-19 Pandemic” section for further discussion.

Our results are also affected, to a lesser extent, by our holding of an education fair in the first quarter of each year. This event is conducted to assist our clinicians in maintaining their training and certification requirements and to facilitate a national meeting with our clinical leaders. We also invite manufacturers of the componentry for the devices we fabricate to these annual events so they can demonstrate their products and otherwise assist in our training process. During the first quarter of 2020 and 2019, we spent approximately $2.3 million in each of these two years, on travel and other costs associated with this 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 which this event occurs, which contributes to the lower seasonal revenue level we experience during the first quarter of each year.

Critical Accounting Policies

Our analysis and discussion of our financial condition and results of operations is based upon the consolidated financial statements that have been prepared 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 2019 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.

37

Results of Operations

Our results of operations for the three months ended September 30, 2020 and 2019 were as follows (unaudited):

	For the Three Months Ended
	September 30,				Percent Change
(dollars in thousands)	2020		2019		2020 vs 2019
Net revenues	$	256,637	$	279,638	(8.2)	%
Material costs		81,462		92,034	(11.5)	%
Personnel costs		89,727		94,594	(5.1)	%
Other operating costs		29,935		32,771	(8.7)	%
General and administrative expenses		31,371		29,834	5.2	%
Professional accounting and legal fees		2,264		3,629	(37.6)	%
Depreciation and amortization		8,803		9,373	(6.1)	%
Operating expenses		243,562		262,235	(7.1)	%
Income from operations		13,075		17,403	(24.9)	%
Interest expense, net		8,013		8,954	(10.5)	%
Non-service defined benefit plan expense		158		173	(8.7)	%
Income before income taxes		4,904		8,276	(40.7)	%
(Benefit) provision for income taxes		(1,911)		2,585	(173.9)	%
Net income	$	6,815	$	5,691	19.8	%

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

	For the Three Months Ended
	September 30,
	2020		2019
Material costs	31.7	%	32.9	%
Personnel costs	35.0	%	33.8	%
Other operating costs	11.7	%	11.7	%
General and administrative expenses	12.2	%	10.7	%
Professional accounting and legal fees	0.9	%	1.3	%
Depreciation and amortization	3.4	%	3.4	%
Operating expenses	94.9	%	93.8	%

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

Relevance of Third Quarter Results to Comparative and Future Periods.  As discussed in “Effects of the COVID-19 Pandemic” above, commencing late in the first quarter, our revenues and operating results began to be adversely affected by the COVID-19 pandemic, a trend which continued through September 2020 and into the fourth quarter.  The effects of this public health emergency on our revenues and earnings in the three months ended September 30, 2020 impacted the comparison to our historical financial results.  Due to the uncertainty surrounding the future economic and social impacts of the COVID-19 pandemic, such comparison may not be indicative of future results.  Please refer to the “Effects of the COVID-19 Pandemic” section above and the “Financial Condition, Liquidity and Capital Resources” section below for additional forward-looking information concerning our current expectations regarding the effect of the COVID-19 pandemic on our prospective results and financial condition.

38

Net revenues. Net revenues for the three months ended September 30, 2020 were $256.6 million, a decrease of $23.0 million, or 8.2%, from $279.6 million for the three months ended September 30, 2019.  Net revenues by operating segment, after elimination of intersegment activity, were as follows:

		For the Three Months Ended
	September 30,						Percent
(dollars in thousands)	2020		2019		Change		Change
Patient Care	$	212,664	$	230,931	$	(18,267)	(7.9)	%
Products & Services		43,973		48,707		(4,734)	(9.7)	%
Net revenues	$	256,637	$	279,638	$	(23,001)	(8.2)	%

Patient Care net revenues for the three months ended September 30, 2020 were $212.7 million, a decrease of $18.3 million, or 7.9%, from $230.9 million for the same period in the prior year.  Same clinic revenues decreased $22.5 million for the three months ended September 30, 2020 compared to the same period in the prior year, reflecting a decrease of 10.3% on a per-day basis.  Net revenues from acquired clinics and consolidations increased $4.4 million, and revenues from other services decreased $0.2 million.

Prosthetics constituted approximately 56% of our total Patient Care revenues for the three months ended September 30, 2020 and 55% for the same period in 2019, excluding the impact of acquisitions.  Prosthetic revenues for the three months ended September 30, 2020 were 8.9% lower, on a per-day basis, than the same period in the prior year, excluding the impact of acquisitions.  Orthotics, shoes, inserts, and other products decreased by 11.8% on a per-day basis compared to the same comparative prior periods, excluding the impact of acquisitions. Revenues were adversely affected during the period due to a decline in patient appointment volumes beginning in the last weeks of March and continuing through the third quarter of 2020 as a result of the continuing spread of COVID-19 viral infections, governmental suppression measures implemented in response to the COVID-19 pandemic,  and other factors impacting our business volumes discussed in the “Effects of the COVID-19 Pandemic” section.

Products & Services net revenues for the three months ended September 30, 2020 were $44.0 million, a decrease of $4.7 million, or 9.7% from the same period in the prior year.  This was primarily attributable to a decrease of $3.9 million, or 10.8%, in the distribution of O&P componentry to independent providers stemming from lower volumes due to the COVID-19 pandemic, as discussed in the “Effects of the COVID-19 Pandemic” section above, and to a lesser extent from a change in the business mix.  In addition, net revenues from therapeutic solutions decreased $0.8 million, or 6.6%, primarily as a result of the impact of historical customer lease cancellations, partially offset by lease installations in the third quarter of 2020.

Beginning in the latter half of March 2020 and continuing throughout the third quarter of 2020, our business volumes were adversely affected by the COVID-19 pandemic.  We believe that the decline in net revenues during the three months ended September 30, 2020 was primarily due to the continuing spread of COVID-19 viral infections, state and local government restrictions, social distancing and suppression measures adopted by our patients and customers, and the deferral of elective surgical procedures, all of which we believe to have contributed to a decline in physician referrals and patient appointments.  These adverse volume effects continued throughout the third quarter of 2020.  For additional discussion, refer to the “Effects of the COVID-19 Pandemic” section.

39

Material costs.  Material costs for the three months ended September 30, 2020 were $81.5 million, a decrease of $10.6 million or 11.5%, from the same period in the prior year.  Total material costs as a percentage of net revenues decreased to 31.7% in the three months ended September 30, 2020 from 32.9% in the three months ended September 30, 2019 primarily due to changes in our Product & Services segment business and product mix.  Material costs by operating segment, after elimination of intersegment activity, were as follows:

	For the Three Months Ended
	September 30,						Percent
(dollars in thousands)	2020		2019		Change		Change
Patient Care	$	63,938	$	71,339	$	(7,401)	(10.4)	%
Products & Services		17,524		20,695		(3,171)	(15.3)	%
Material costs	$	81,462	$	92,034	$	(10,572)	(11.5)	%

Patient Care material costs decreased $7.4 million, or 10.4%, for the three months ended September 30, 2020 compared to the same period in the prior year as a result of the reduction in segment net sales, offset by our acquisitions and changes in the segment product mix. Patient Care material costs as a percent of segment net revenues decreased to 30.1% for the three months ended September 30, 2020 from 30.9% for the three months ended September 30, 2019.

Products & Services material costs decreased $3.2 million, or 15.3%, for the three months ended September 30, 2020 compared to the same period in the prior year. As a percent of net revenues in the Products & Services segment, material costs were 39.9% for the three months ended September 30, 2020 as compared to 42.5% in the same period of 2019. The decrease in material as a percent of segment net revenues was due to a change in business and product mix within the segment.

Personnel costs. Personnel costs for the three months ended September 30, 2020 were $89.7 million, a decrease of $4.9 million, or 5.1%, from $94.6 million for the same period in the prior year. Personnel costs by operating segment were as follows:

	For the Three Months Ended
	September 30,						Percent
(dollars in thousands)	2020		2019		Change		Change
Patient Care	$	76,989	$	81,274	$	(4,285)	(5.3)	%
Products & Services		12,738		13,320		(582)	(4.4)	%
Personnel costs	$	89,727	$	94,594	$	(4,867)	(5.1)	%

Personnel costs for the Patient Care segment were $77.0 million for the three months ended September 30, 2020, a decrease of $4.3 million, or 5.3%, from $81.3 million compared to the same period in the prior year.  The decrease in Patient Care personnel costs during the three months ended September 30, 2020 was primarily related to a decrease in salary expense of $7.2 million due to cost mitigation efforts implemented as a result of the COVID-19 pandemic, payroll taxes of $0.2 million, and commissions of $0.1 million, offset by increases in incentive compensation and benefits of $2.2 million and severance costs of $1.0 million, compared to the three months ended September 30, 2019.

Personnel costs in the Products & Services segment were $12.7 million for the three months ended September 30, 2020, a decrease of $0.6 million compared to the same period in the prior year.  Salary expense decreased $0.8 million due to cost mitigation efforts implemented as a result of the COVID-19 pandemic, offset by bonus, commissions, and other personnel cost increases of $0.2 million for the three months ended September 30, 2020 compared to the same period in the prior year.

Other operating costs.  Other operating costs for the three months ended September 30, 2020 were $29.9 million, a decrease of $2.8 million, or 8.7%, from $32.8 million for the same period in the prior year. Travel and other expenses decreased $3.4 million due to cost mitigation efforts as a result of the COVID-19 pandemic, and bad debt expense decreased $0.4 million primarily due to a moderation of forecast assumptions used in the estimate. The decreases were offset by a $1.0 million increase in rent expense from new, renewed, and acquired leases as compared to the same period in the prior year.

40

General and administrative expenses.  General and administrative expenses for the three months ended September 30, 2020 were $31.4 million, an increase of $1.5 million, or 5.2%, from the same period in the prior year. The increase was primarily attributable to $2.5 million of qualified disaster relief payments to employees, additional severance costs of $1.9 million, and increases in other personnel-related costs of $1.2 million, offset by decreases in salary expense of $2.1 million and other expenses of $2.0 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, 2020 were $2.3 million, a decrease of $1.4 million, or 37.6%, from $3.6 million for the same period in the prior year primarily due to targeted efforts to remediate material weaknesses in our internal controls over financial reporting that occurred in the three months ended September 30, 2019 that did not recur in the same period of 2020.

Depreciation and amortization. Depreciation and amortization for the three months ended September 30, 2020 was $8.8 million, a decrease of $0.6 million, or 6.1%, from the same period in the prior year. Depreciation expense decreased $0.8 million and amortization expense increased $0.2 million when compared to the same period in the prior year.

Interest expense, net. Interest expense for the three months ended September 30, 2020 decreased 10.5% to $8.0 million from $9.0 million for the same period in the prior year.

(Benefit) provision for income taxes. The benefit for income taxes for the three months ended September 30, 2020 was $1.9 million, or -39.0% of income before income taxes, compared to a provision of $2.6 million, or 31.2% of income before income taxes for the three months ended September 30, 2019.  The effective tax rate for the three months ended September 30, 2020 consisted principally of the 21% federal statutory tax rate, the tax benefit from the loss carryback claim, the rate impact from state income taxes, and permanent tax differences.  The decrease in the effective tax rate for the three months ended September 30, 2020 compared with the three months ended September 30, 2019 is primarily attributable to the tax benefit from the loss carryback claim to a prior period with a higher statutory rate granted under the CARES Act.

We evaluate our deferred tax assets quarterly to determine whether adjustments to the valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in expected future pre-tax earnings, tax law, interactions with taxing authorities, and developments in case law. Our material assumptions include forecasts of future pre-tax earnings and the nature and timing of future deductions and income represented by the deferred tax assets and liabilities, all of which involve the exercise of significant judgment.  As of September 30, 2020, our valuation allowance was approximately $2.1 million.

The CARES Act, which was enacted on March 27, 2020, includes changes to certain tax laws related to the deductibility of interest expense and depreciation.  ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted.  As a result of the CARES Act provisions, in the third quarter of 2020 we recognized a tax benefit of $4.0 million resulting from the loss carryback claim to a prior period with a higher statutory rate, which also decreased our current income taxes payable by $9.5 million as of September 30, 2020.

41

Our results of operations for the nine months ended September 30, 2020 and 2019 were as follows (unaudited):

	For the Nine Months Ended				Percent
	September 30,				Change
(dollars in thousands)	2020		2019		2020 vs 2019
Net revenues	$	723,810	$	797,155	(9.2)	%
Material costs		228,675		261,810	(12.7)	%
Personnel costs		252,734		272,795	(7.4)	%
Other operating costs		74,098		100,067	(26.0)	%
General and administrative expenses		91,618		87,474	4.7	%
Professional accounting and legal fees		7,409		9,576	(22.6)	%
Depreciation and amortization		26,513		26,906	(1.5)	%
Operating expenses		681,047		758,628	(10.2)	%
Income from operations		42,763		38,527	11.0	%
Interest expense, net		24,918		25,973	(4.1)	%
Non-service defined benefit plan expense		474		519	(8.7)	%
Income before income taxes		17,371		12,035	44.3	%
(Benefit) provision for income taxes		(4,750)		3,260	(245.7)	%
Net income	$	22,121	$	8,775	152.1	%

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

	For the Nine Months Ended
	September 30,
	2020		2019
Material costs	31.6	%	32.8	%
Personnel costs	34.9	%	34.2	%
Other operating costs	10.2	%	12.6	%
General and administrative expenses	12.7	%	11.0	%
Professional accounting and legal fees	1.0	%	1.2	%
Depreciation and amortization	3.7	%	3.4	%
Operating expenses	94.1	%	95.2	%

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

Relevance of Nine Months Ended Results to Comparative and Future Periods.  As discussed in “Effects of the COVID-19 Pandemic” above, commencing late in the first quarter, our revenues and operating results began to be adversely affected by the COVID-19 pandemic, a trend which continued through September 2020.  The effects of this public health emergency on our revenues and earnings in the nine months ended September 30, 2020 impacted the comparison to our historical financial results.  Due to the uncertainty surrounding the future economic and social impacts of the COVID-19 pandemic, the comparison may not be indicative of future results.  Please refer to the “Effects of the COVID-19 Pandemic” section above and the “Financial Condition, Liquidity and Capital Resources” section below for additional forward-looking information concerning our current expectations regarding the effect of the COVID-19 pandemic on our prospective results and financial condition.

42

Net revenues.  Net revenues for the nine months ended September 30, 2020 were $723.8 million, a decrease of $73.3 million, or 9.2%, from $797.2 million for the nine months ended September 30, 2019.  Net revenues by operating segment, after elimination of intersegment activity, were as follows:

	For the Nine Months Ended
	September 30,						Percent
(dollars in thousands)	2020		2019		Change		Change
Patient Care	$	598,706	$	652,700	$	(53,994)	(8.3)	%
Products & Services		125,104		144,455		(19,351)	(13.4)	%
Net revenues	$	723,810	$	797,155	$	(73,345)	(9.2)	%

Patient Care net revenues for the nine months ended September 30, 2020 were $598.7 million, a decrease of $54.0 million, or 8.3%, from $652.7 million for the same period in the prior year.  Same clinic revenues decreased $66.8 million for the nine months ended September 30, 2020 compared to the same period in the prior year, reflecting a decrease of 11.2% on a per-day basis.  Net revenues from acquired clinics and consolidations increased $13.4 million, and revenues from other services decreased $0.6 million.

Prosthetics constituted approximately 56% of our total Patient Care revenues for the nine months ended September 30, 2020 and 54% for the same period in 2019, excluding the impact of acquisitions.  Prosthetic revenues for the nine months ended September 30, 2020 were 6.6% lower, on a per-day basis, than the same period in the prior year, excluding the impact of acquisitions.  Orthotics, shoes, inserts, and other products decreased by 16.3% on a per-day basis compared to the same comparative prior periods, excluding the impact of acquisitions. Revenues were adversely affected during the period due to a decline in patient appointment volumes beginning in the last weeks of March and continuing through the third quarter of 2020 as a result of the continuing spread of COVID-19 viral infections, governmental suppression measures implemented in response to the COVID-19 pandemic, and other factors impacting our business volumes discussed in the “Effects of the COVID-19 Pandemic” section.

Products & Services net revenues for the nine months ended September 30, 2020 were $125.1 million, a decrease of $19.4 million, or 13.4% from the same period in the prior year.  This was primarily attributable to a decrease of $16.6 million, or 15.4%, in the distribution of O&P componentry to independent providers stemming from lower volumes due to the COVID-19 pandemic, as discussed in the “Effects of the COVID-19 Pandemic” section above, and a $2.8 million, or 7.5%, decrease in net revenues from therapeutic solutions as a result of the impact of historical customer lease cancellations, partially offset by lease installations.

Beginning in the latter half of March 2020, our business volumes began to be adversely affected by the COVID-19 pandemic, and business volumes were adversely impacted throughout the second and third quarter of 2020.  We believe that the decline in net revenues in the nine months ended September 30, 2020 was primarily due to the continuing spread of COVID-19 viral infections, state and local government restrictions, social distancing and suppression measures adopted by our patients and customers, and deferral of elective surgical procedures, all of which resulted in a decline in physician referrals and patient appointments.  These adverse volume effects have continued into October 2020.  For additional discussion, refer to the “Effects of the COVID-19 Pandemic” section.

Material costs.  Material costs for the nine months ended September 30, 2020 were $228.7 million, a decrease of $33.1 million or 12.7%, from the same period in the prior year.  Total material costs as a percentage of net revenues decreased to 31.6% in the nine months ended September 30, 2020 from 32.8% in the nine months ended September 30, 2019 primarily due to changes in our Product & Services segment business and product mix. Material costs by operating segment, after elimination of intersegment activity, were as follows:

	For the Nine Months Ended
	September 30,						Percent
(dollars in thousands)	2020		2019		Change		Change
Patient Care	$	178,851	$	199,626	$	(20,775)	(10.4)	%
Products & Services		49,824		62,184		(12,360)	(19.9)	%
Material costs	$	228,675	$	261,810	$	(33,135)	(12.7)	%

Patient Care material costs decreased $20.8 million, or 10.4%, for the nine months ended September 30, 2020 compared to the same period in the prior year as a result of the reduction in segment net sales, offset by our acquisitions and changes in the segment product mix. Patient Care material costs as a percent of segment net revenues increased to 29.9% for the three months ended September 30, 2020 from 30.6% for the nine months ended September 30, 2019.

43

Products & Services material costs decreased $12.4 million, or 19.9%, for the nine months ended September 30, 2020 compared to the same period in the prior year. As a percent of net revenues in the Products & Services segment, material costs were 39.8% for the nine months ended September 30, 2020 as compared to 43.0% in the same period of 2019. The decrease in material as a percent of segment net revenues was due to a change in business and product mix within the segment.

Personnel costs.  Personnel costs for the nine months ended September 30, 2020 were $252.7 million, a decrease of $20.1 million, or 7.4%, from $272.8 million for the same period in the prior year. Personnel costs by operating segment were as follows:

	For the Nine Months Ended
	September 30,						Percent
(dollars in thousands)	2020		2019		Change		Change
Patient Care	$	216,910	$	233,402	$	(16,492)	(7.1)	%
Products & Services		35,824		39,393		(3,569)	(9.1)	%
Personnel costs	$	252,734	$	272,795	$	(20,061)	(7.4)	%

Personnel costs for the Patient Care segment were $216.9 million for the nine months ended September 30, 2020, a decrease of $16.5 million, or 7.1%, from $233.4 million compared to the same period in the prior year.  The decrease in Patient Care personnel costs during the nine months ended September 30, 2020 was primarily related to a decrease in salary expense of $20.7 million due to cost mitigation efforts implemented as a result of the COVID-19 pandemic, and a decrease in benefits costs of $1.7 million due to reduced claims experience, payroll taxes of $0.9 million, and commissions by $0.3 million, offset by increases in incentive compensation and other personnel costs of $6.1 million and severance costs of $1.0 million compared to the nine months ended September 30, 2019.

Personnel costs in the Products & Services segment were $35.8 million for the nine months ended September 30, 2020, a decrease of $3.6 million compared to the same period in the prior year.  Salary expense decreased $3.5 million due to cost mitigation efforts as a result of the COVID-19 pandemic, and bonus, commissions, and other personnel costs decreased $0.1 million for the nine months ended September 30, 2020 compared to the same period in the prior year.

Other operating costs.  Other operating costs for the nine months ended September 30, 2020 were $74.1 million, a decrease of $26.0 million, or 26.0%, from $100.1 million for the same period in the prior year.  Other expenses decreased by $20.3 million due to the benefit associated with the recognition of $20.6 million in proceeds from Grants under the CARES Act included in Other operating costs, as discussed in the “Effects of the COVID-19 Pandemic” section.  Travel and other expenses decreased $9.0 million due to cost mitigation efforts as a result of the COVID-19 pandemic.  The decreases are offset by a $3.0 million increase in rent expense from new, renewed, and acquired leases and a $0.3 million increase in bad debt expense as compared to the same period in the prior year.

General and administrative expenses.  General and administrative expenses for the nine months ended September 30, 2020 were $91.6 million, an increase of $4.1 million, or 4.7%, from the same period in the prior year.  The increase was primarily the result of an increase in share-based compensation of $4.9 million, due to the modification recognized in the second quarter of certain equity awards granted in 2017, and from an increase of $4.5 million in incentive compensation and other personnel-related costs, $2.5 million of qualified disaster relief payments to employees, and additional severance costs of $1.9 million, offset by decreases in salary expense of $5.6 million and other expenses of $4.1 million.

Professional accounting and legal fees.  Professional accounting and legal fees for the nine months ended September 30, 2020 were $7.4 million, a decrease of $2.2 million, or 22.6%, from $9.6 million for the same period in the prior year primarily due to targeted efforts to remediate material weaknesses in our internal controls over financial reporting that occurred in the nine months ended September 30, 2019 that did not recur in the same period of 2020.

Depreciation and amortization.  Depreciation and amortization for the nine months ended September 30, 2020 was $26.5 million, a decrease of $0.4 million, or 1.5%, from the same period in the prior year. Depreciation expense decreased $1.5 million and amortization expense increased $1.1 million when compared to the same period in the prior year.

Interest expense, net.  Interest expense for the nine months ended September 30, 2020 decreased 4.1% to $24.9 million from $26.0 million for the same period in the prior year.

44

(Benefit) provision for income taxes.  The benefit for income taxes for the nine months ended September 30, 2020 was $4.8 million, or -27.3% of income before income taxes, compared to a provision of $3.3 million, or 27.1% of income before income taxes for the nine months ended September 30, 2019.  The effective tax rate in 2020 consisted principally of the 21% federal statutory tax rate, the recognition of research and development tax credits, the tax benefit from the loss carryback claim, the rate impact from state income taxes, the shortfall from share-based compensation, and permanent tax differences.  The decrease in the effective tax rate for the nine months ended September 30, 2020 compared with the nine months ended September 30, 2019 is primarily attributable to the recognition of research and development tax credits for the current and prior years and a tax benefit from the loss carryback claim to a prior period with a higher statutory rate granted under the CARES Act, partially offset by a shortfall from share-based compensation.

We evaluate our deferred tax assets quarterly to determine whether adjustments to the valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in expected future pre-tax earnings, tax law, interactions with taxing authorities, and developments in case law. Our material assumptions include forecasts of future pre-tax earnings and the nature and timing of future deductions and income represented by the deferred tax assets and liabilities, all of which involve the exercise of significant judgment.  As of September 30, 2020, our valuation allowance approximated $2.1 million.

During the second quarter of 2020, we completed a study of qualifying research and development expenses resulting in the recognition of tax benefits of $2.2 million, net of tax reserves, related to the current year and $6.3 million, net of tax reserves, related to prior years as of the third quarter of 2020. We recorded the tax benefit, before tax reserves, as a deferred tax asset.

The CARES Act, which was enacted on March 27, 2020, includes changes to certain tax laws related to the deductibility of interest expense and depreciation. ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted.  As a result of the CARES Act provisions, in the third quarter of 2020 we recognized a tax benefit of $4.0 million resulting from the loss carryback claim to a prior period with a higher statutory rate, which also decreased our current income taxes payable by $9.5 million as of September 30, 2020.

Financial Condition, Liquidity, and Capital Resources

Liquidity

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

At September 30, 2020, we had total liquidity of $242.3 million, which reflected an increase of $73.1 million from the $169.2 million in liquidity we had as of December 31, 2019.  Our liquidity at September 30, 2020 was comprised of cash and cash equivalents of $147.5 million and $94.8 million in available borrowing capacity under our $100.0 million revolving credit facility.  This increase in liquidity primarily related to an increase in cash of $73.1 million, comprised of net cash provided by operations of $125.2 million, which includes approximately $24.0 million in Grants from the federal government under the CARES Act, partially offset by investing cash flows for purchases of property plant and equipment, and purchases of therapeutic program equipment, of $22.5 million, cash paid for acquisitions, net of cash acquired, of $16.9 million, and net cash used in financing activities of $14.1 million.  As of September 30, 2020, we have repaid in full all $79.0 million in borrowings under our revolving credit facility.

Our Credit Agreement contains customary representations and warranties, as well as financial covenants, including that we maintain compliance with certain leverage and interest coverage ratios.  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.  Due to the additional borrowings under our revolving credit facility in March 2020, which were repaid in full during the third quarter of 2020, and in anticipation of the potential economic impact of the COVID-19 pandemic, we entered into an amendment to the Credit Agreement that provided for, among other things, increases in the allowable level of indebtedness we may carry relative to our earnings, changes in the definition of EBITDA used to compute certain financial ratios, certain restrictions regarding investments and payments we may make until the completion of the first quarter of 2021 and increases in the interest costs associated with borrowings under our revolving credit facility.  We were in compliance with our debt covenants as of September 30, 2020.

45

For additional discussion, please refer to the Liquidity Outlook section below.

Working Capital and Days Sales Outstanding

At September 30, 2020, we had working capital of $103.2 million compared to working capital of $107.2 million at December 31, 2019.  Our working capital decreased $4.0 million during the nine months ended September 30, 2020 due to an increase in current liabilities of $51.9 million, only partially offset by an increase in current assets of $47.8 million.

The increase in current liabilities of $51.9 million was primarily attributable to an increase of i) $19.0 million in the Current portion of long-term debt primarily related to $19.6 million in Seller Notes issued in connection with the acquisition of an O&P business in the second quarter of 2020, of which $18.4 million was paid in October 2020, ii) $16.6 million in Accrued expenses and other current liabilities, of which $4.2 million relates to changes in the fair value of our interest rate swap, $3.7 million relates to liabilities incurred in the acquisition of an O&P business in the second quarter of 2020, $3.4 million relates to deferred grant income under the CARES Act, $2.8 million relates to increases in patient prepayments and deposits and $2.5 million in other activity and iii) $15.2 million in Accounts payable. The increase also reflects $2.5 million in additional Accrued compensation related costs attributable to current year increases in incentive compensation, severance and accrued vacation liabilities, partially offset by the payment of $34.2 million in annual incentive compensation and the employer 401(k) matching contribution made during the first quarter of 2020.

The increase in current assets of $47.8 million was primarily attributable to an increase in Cash and cash equivalents of $73.1 million discussed in the “Liquidity” section above, an increase in Income taxes receivable of $5.9 million, which relates to income tax relief under the CARES Act, an increase in Inventories of $5.9 million and approximately $0.8 million in Other current assets.  These increases were offset by decreases in Accounts receivable, net of $38.0 million.

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, 2020, our DSO was 43 days, which compares favorably to a DSO of 47 days as of September 30, 2019.  We believe that one-time administrative billing changes and the impact of implementing our patient management and electronic health system in certain of our largest operating regions contributed to collection delays impacting our comparative prior year DSO as of September 30, 2019 by approximately two days. The remainder of the reduction is attributable to improved collections experience due to the targeted efforts of our centralized revenue cycle management function.

Sources and Uses of Cash for the Nine Months Ended September 30, 2020 Compared to September 30, 2019

Net cash flows provided by operating activities increased $105.3 million to $125.2 million for the nine months ended September 30, 2020 from net cash provided by operating activities of $19.9 million for the nine months ended September 30, 2019.  The most significant increase in cash provided by operating activities was due to a $37.6 million increase in cash provided by Accounts receivable, net which is largely attributable to the effect of decreases in our revenue on the related amount of accounts receivable we would otherwise carry associated with those billings, as well as improvements in our collection activities, consistent with the decrease in DSO to 43 days as of September 30, 2020, compared to a DSO of 47 days as September 30, 2019. In addition, we recognized approximately $20.6 million in proceeds from the Grants received under the CARES Act within Net income.  The remaining increase in cash flows provided by operations is primarily attributable to favorable changes in working capital in Accrued compensation and related costs, Accounts payable, Accrued expenses and other current liabilities, Other liabilities and Inventories of $53.8 million. Increases in Accrued compensation and related costs is primarily attributable to higher levels of accrued incentive compensation relative to the annual payout of the prior year accrual in the nine months ended September 30 2020 when compared to the same period in 2019, as well as higher levels of accrued vacation and accrued severance expenses.   Increases in Accounts payable include the temporary benefit of approximately $9.3 million associated with more lenient credit terms provided to us by vendors.  Other liability increases include $7.1 million in deferred payroll tax liabilities associated with the CARES Act.  These increases in cash flows provided by operating activities were partially offset by changes in Income taxes of approximately $9.4 million, primarily due to the temporary relief provided under the CARES Act and changes in Other current assets and other assets of $1.3 million.

46

We believe the favorable working capital trends experienced in the second and third quarter to be largely temporary, as they related primarily to a reduction in the amount of our required working capital resulting from decreases in our business volumes associated with the onset of the COVID-19 pandemic, and, to a lesser extent, our temporary actions to further reduce our net working capital through reductions in inventory and negotiated changes in payment terms. Given these factors, we are unlikely to experience similar favorable contributions to operating cash flow from working capital improvements in the fourth quarter of 2020 and early 2021. Further, as the COVID-19 pandemic subsides and our business volumes return to more normal levels, we anticipate the favorable working capital trends observed in the third quarter to reverse in the form of increases to our accounts receivable, inventory, and cash paid to vendors as our credit terms return to previous arrangements, as well as further reductions as other temporary working capital benefits subside.   For these reasons, and the reasons discussed in the “Liquidity Outlook” section below, we currently believe that we will experience a net consumption of cash during at least the next six month period.

Cash flows used in investing activities decreased $16.8 million to $38.1 million for the nine months ended September 30, 2020, from $54.8 million for the nine months ended September 30, 2019.  The decrease in cash used in investing activities was primarily due to lower cash outflows of $14.7 million for acquisitions, net of cash acquired, and lower capital expenditures of $2.9 million during the nine months ended September 30, 2020, partially offset by $0.6 million less in proceeds from the sale of property, plant and equipment.

Cash flows used in financing activities increased $3.8 million to $14.1 million for the nine months ended September 30, 2020, from cash used in financing activities of $10.3 million for the nine months ended September 30, 2019.  The increase in cash used financing activities was primarily due to higher cash outflows of $3.1 million related to employee taxes on stock-based compensation and $0.6 million in payments under vendor financing arrangements that occurred solely in 2020.

Effect of Indebtedness

On March 6, 2018, we entered into a $605.0 million Credit Agreement, which 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. For additional discussion surrounding the Credit Agreement, see Note L - “Debt and Other Obligations,” in the notes to the condensed consolidated financial statements contained elsewhere in this report.  Cash paid for interest totaled $22.2 million and $22.4 million for the nine months ended September 30, 2020 and 2019, respectively.

In May 2020, we entered into an amendment to the Credit Agreement (the “Amendment”) that provided for, amongst other things, an increase in the maximum Net Leverage Ratio to 5.25 to 1.00 for the fiscal quarters ended June 30, 2020 through March 31, 2021; 5.00 to 1.00 for the fiscal quarters ended June 30, 2021 through September 30, 2021; and 4.75 to 1.00 for the quarter ended December 31, 2021 and the last day of each fiscal quarter thereafter.  In addition, the Amendment changed the definition of EBITDA used in the Net Leverage Ratio and minimum interest coverage ratio to adjust for declines in net revenue attributable to the COVID-19 pandemic.  Borrowings under the revolving credit facility will bear interest at a variable rate equal to the greater of LIBOR or 1.00%, plus 3.75%.  In addition, the Amendment contained certain restrictions and covenants that further limit our ability, and certain of our subsidiaries’ ability, to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions not financed with the proceeds of an equity offering, except that certain acquisitions are permitted after September 30, 2020, in the event we maintain certain leverage and liquidity thresholds. During the fourth quarter of 2020, we recommenced our acquisition of O&P providers.

Scheduled maturities of debt as of September 30, 2020 were as follows:

(in thousands)
2020 (remainder of year )	$	21,023
2021		9,759
2022		8,494
2023		8,049
2024		7,337
Thereafter		474,527
Total debt before unamortized discount and debt issuance costs, net		529,189
Unamortized discount and debt issuance costs, net		(7,798)
Total debt	$	521,391

47

Liquidity Outlook

Our Credit Agreement has a term loan facility with $492.4 million in principal outstanding at September 30, 2020, 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, as of September 30, 2020, a revolving credit facility with no borrowings and available borrowing capacity of $94.8 million that matures in March 2023.  We chose to borrow $79.0 million from our revolving credit facility in March 2020 to preserve access to these funds in the event of further instability in financial markets due to the COVID-19 pandemic, all of which has been repaid as of September 30, 2020.

Historically, our primary sources of liquidity are cash and cash equivalents, and available borrowings under our revolving credit facility.  Due to the economic and social activity impacts outlined in the “Effects of the COVID-19 Pandemic” section above, we expect the continuing disruption to have an adverse impact on our operations, financial condition, and results of operations.  While we believe the business disruption will be temporary, we cannot predict the extent or duration of the COVID-19 pandemic, when state and local restrictions will be lifted, the impact of increasing viral infections, or when patients will resume their normal healthcare treatment activities.  In response to the expected decline in cash flows from operations, in March 2020, we implemented certain cost mitigation and liquidity management strategies including, but not limited to, reductions in componentry purchases, salary reductions for all exempt employees, the furloughing of certain employees, reductions in non-exempt employee hours, reductions in bonus and commission expenses, the temporary reduction in operating hours and days of clinics, reducing other operating expenses, deferring the implementation of our New Systems Implementations, temporarily delaying our acquisition of O&P providers, and extending the payment terms for certain vendors.  These measures were taken in an effort to preserve liquidity in a manner sufficient to provide for our ability to respond to the adverse cash flow pressures likely to be caused by the COVID-19 pandemic.  While some of our cost mitigation and liquidity strategies remain in place, as of the start of the fourth quarter, we have fully reinstated the salary reductions for exempt employees and have eliminated all but a small number of employee furloughs. Further, we recommenced our acquisition of O&P providers in the fourth quarter of 2020.  Please refer to the “Effects of the COVID-19 Pandemic” section above for our current estimates of the amounts of operating and capital expenditure reductions provided through these measures.

In connection with an acquisition we completed in April of 2020, we paid $18.4 million in short term seller notes and $3.6 million in liabilities incurred in the transaction in October 2020.  Additionally, as discussed above, the favorable working capital trends we experienced in the third quarter are largely temporary.  As our business volumes return to more normal levels, we will experience a consumption of cash associated with the funding of accounts receivable and componentry inventories associated with those increases in revenue.  Additionally, as our credit terms with vendors return to normal, we would expect to consume approximately $9.3 million in additional cash associated with a reduction of accounts payable. In addition to these amounts, we anticipate other uses of cash to fund the reduction of increases in accrued compensation associated with employee bonus, commissions, and payroll taxes.

While we currently do not anticipate the need to do so, if the COVID-19 pandemic causes adverse cash flow and liquidity trends greater than those we currently expect and have planned for, we may find it necessary to seek additional borrowings to fund our operations. If we were to do so, given current credit market conditions, we may find that such additional borrowings are not available at that time, and if they are available, that the interest costs of such borrowings and effects on the costs of our existing borrowings could be significantly higher than the costs we currently pay under our existing Credit Agreement. Additionally, while we do not currently have the need or intention to do so, if necessary, we may extend our accounts payable and payment of other obligations to address any such funding shortage. While we cannot forecast with certainty the ultimate extent of the impacts from or the duration of the COVID-19 pandemic, we believe that our operating expense and capital project reductions, when accompanied by additional cash sources, cost mitigation and liquidity management strategies, will enable us to maintain positive liquidity throughout the remainder of 2020 and the foreseeable future.

CARES Act

The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $175.0 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid- enrolled suppliers and institutional providers.  The purpose of these funds is to reimburse providers for lost revenue and health-care related expenses that are attributable to the COVID-19 pandemic.  In April 2020, the U.S. Department of Health and Human Services (“HHS”) began making payments to healthcare providers from the $175.0 billion appropriation.  These are payments, rather than loans, to healthcare providers, and will not need to be repaid.

48

During the second and third quarters of 2020, we recognized a total benefit of $20.6 million in our condensed consolidated statement of operations within Other operating costs for a portion of the Grants from HHS.  We recognize income related to grants on a systematic and rational basis when it becomes probable that we have complied with the terms and conditions of the grant and in the period in which the corresponding costs or income related to the grant are recognized.  We recognized the benefit from the Grants within Other operating costs in our Patient Care segment.  As of September 30, 2020, we have recorded a liability of $3.4 million within Accrued expenses and other liabilities in the condensed consolidated balance sheet related to proceeds from the Grants for amounts that have not met the recognition criteria in accordance with our accounting policy.

The CARES Act also provides for a deferral of the employer portion of payroll taxes incurred during the COVID-19 pandemic through December 2020. The provisions allow us to defer half of such payroll taxes until December 2021 and the remaining half until December 2022.  We deferred $7.1 million of payroll taxes within Other liabilities in the condensed consolidated balance sheet as of September 30, 2020.

Going Concern Evaluation

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 considering the financial and operational effects of the COVID-19 pandemic 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.

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, 2020, we had a combined principal amount of $492.4 million of variable rate debt under our Term Loan B and revolving credit facility and a notional amount of $300.0 million of fixed to variable interest rate swap agreements.  Based on our hedged and unhedged positions, a hypothetical increase or decrease in interest rates of 1.0% would impact our annual interest expense by $2.5 million.

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, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2020.

49

Changes in Internal Control over Financial Reporting

There have been no material changes to our internal controls over financial reporting during the three month period ended September 30, 2020.

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 three month period ended September 30, 2020.

50

PART II.   OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition or results of operations.  We have also identified the following additional risk factor, which supplements those discussed in our Form 10-K:

The Company’s financial condition and results of operations for fiscal year 2020 and beyond may continue to be materially adversely affected by the ongoing coronavirus (“COVID-19”) outbreak.

The outbreak of COVID-19 evolved into a global pandemic in the first quarter of 2020.  The full extent to which the COVID-19 outbreak will continue to impact our business and operating results will depend on future developments that are highly uncertain and cannot be accurately predicted, including new medical and other information that may emerge concerning COVID-19 and the actions by governmental entities or others to contain it or mitigate its impact.

The COVID-19 pandemic continued to have a significant negative impact on our business and results of operations in the third quarter of 2020.  We experienced a continued reduction in revenue due to a decline in the number of patients that we treated in our patient care clinics, as well as a reduction in sales to independent O&P clinics by our distribution business.  A significant portion of this decline was due to O&P patients determining voluntarily to wait for various reasons, including concerns regarding their own health and safety, for appointments and procedures, both with us and with their referring physicians, that the patient deems to be non-urgent or otherwise able to be deferred or postponed.  Although we have seen some recovery in patient volume since April of 2020, and sequentially since the second quarter of 2020, the progress of the COVID-19 pandemic has been erratic, with infection rates fluctuating and recently continuing to rise significantly in many regions throughout the United States, and we are unable to predict when the COVID-19 pandemic will no longer significantly impact our patient volumes, both in our own clinics and at independent O&P providers.

Nevertheless, we continue to believe that these patient volume declines primarily reflect a deferral of healthcare services utilization to a later period, rather than a permanent reduction in demand for our services.  Given the general necessity of the services that our patient care clinics provide, we anticipate that this deferral of services may create a backlog of demand in the future, in addition to the resumption of historically normal levels of patient activity; however, there is no assurance that either will occur.  To date, we have not experienced significantly extended billing and collection cycles as a result of displaced employees, delayed reimbursement by governmental or private payers, or delayed revenue cycle management procedures; however, we cannot predict the impact the ongoing COVID-19 pandemic may have on these areas of our operations in future periods. We may also face a shortage in products within our supply chain in the future, which could impact our ability to service our patients in our clinics on a timely basis or at all.

Our management of the impact of COVID-19 has and will continue to require significant investment of time from our management and employees, as well as resources across our enterprise. The focus on managing and mitigating the impacts of COVID-19 on our business may cause us to divert or delay the application of our resources toward existing or new initiatives or investments, which could have a material adverse impact on our results of operations.

Further, the impacts of COVID-19 have caused significant uncertainty and volatility in the credit markets. If our access to capital were to become significantly constrained, or if costs of capital increased significantly due the impact of COVID-19 including, volatility in the capital markets, a reduction in our credit ratings or other factors, then our financial condition, results of operations and cash flows could be materially adversely affected.

The foregoing and other continued disruptions to our business as a result of COVID-19 has had, and is expected to continue to have, a material adverse effect on our business, results of operations, and financial condition during the remainder of 2020, and potentially into 2021 and beyond.

51

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, 2020.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

There have been no defaults upon senior securities during the three months ended September 30, 2020.

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.

52

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.)
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.)

53

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 4, 2020	By:	/s/ THOMAS E. KIRALY
		Thomas E. Kiraly
		Executive Vice President and Chief Financial Officer
Dated: November 4, 2020	By:	/s/ GABRIELLE B. ADAMS
		Gabrielle B. Adams
		Vice President and Chief Accounting Officer

54

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 4, 2020	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 4, 2020	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, 2020 (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 4, 2020

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2020	Oct. 27, 2020
Document and Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Transition Report	false
Document Period End Date	Sep. 30, 2020
Entity File Number	1-10670
Entity Registrant Name	HANGER, INC.
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	84-0904275
Entity Address, Address Line One	10910 Domain Drive, Suite 300
Entity Address, City or Town	Austin
Entity Address, State or Province	TX
Entity Address, Postal Zip Code	78758
City Area Code	512
Local Phone Number	777-3800
Title of 12(b) Security	Common Stock, par value $0.01 per share
Trading Symbol	HNGR
Security Exchange Name	NYSE
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		38,109,387
Entity Central Index Key	0000722723
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Current assets:
Cash and cash equivalents	$ 147,510	$ 74,419
Accounts receivable, net	121,409	159,359
Inventories	74,108	68,204
Income taxes receivable	5,945
Other current assets	14,489	13,673
Total current assets	363,461	315,655
Non-current assets:
Property, plant and equipment, net	86,637	84,057
Goodwill	271,701	232,244
Other intangible assets, net	19,106	17,952
Deferred income taxes	70,489	70,481
Operating lease right-of-use assets	125,577	110,559
Other assets	15,710	11,305
Total assets	952,681	842,253
Current liabilities:
Current portion of long-term debt	27,791	8,752
Accounts payable	63,630	48,477
Accrued expenses and other current liabilities	72,434	55,825
Accrued compensation related costs	63,511	61,010
Current portion of operating lease liabilities	32,932	34,342
Total current liabilities	260,298	208,406
Long-term liabilities:
Long-term debt, less current portion	493,600	490,121
Operating lease liabilities	106,405	88,418
Other liabilities	60,077	45,804
Total liabilities	920,380	832,749
Commitments and contingencies (Note Q)
Shareholders' equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 38,277,423 shares issued and 38,134,602 shares outstanding at 2020, and 37,602,873 shares issued and 37,460,052 shares outstanding at 2019, respectively	383	376
Additional paid-in capital	363,082	354,326
Accumulated other comprehensive loss	(20,400)	(12,551)
Accumulated deficit	(310,068)	(331,951)
Treasury stock, at cost; 142,821 shares at 2020 and 2019, respectively	(696)	(696)
Total shareholders' equity	32,301	9,504
Total liabilities and shareholders' equity	$ 952,681	$ 842,253

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Sep. 30, 2020	Dec. 31, 2019
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	38,277,423	37,602,873
Common stock, shares outstanding	38,134,602	37,460,052
Treasury stock, shares	142,821	142,821

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Net revenues	$ 256,637	$ 279,638	$ 723,810	$ 797,155
Material costs	81,462	92,034	228,675	261,810
Personnel costs	89,727	94,594	252,734	272,795
Other operating costs	29,935	32,771	74,098	100,067
General and administrative expenses	31,371	29,834	91,618	87,474
Professional accounting and legal fees	2,264	3,629	7,409	9,576
Depreciation and amortization	8,803	9,373	26,513	26,906
Income from operations	13,075	17,403	42,763	38,527
Interest expense, net	8,013	8,954	24,918	25,973
Non-service defined benefit plan expense	158	173	474	519
Income before income taxes	4,904	8,276	17,371	12,035
(Benefit) provision for income taxes	(1,911)	2,585	(4,750)	3,260
Net income	$ 6,815	$ 5,691	$ 22,121	$ 8,775
Basic and Diluted Per Common Share Data:
Basic income per share	$ 0.18	$ 0.15	$ 0.58	$ 0.24
Weighted average shares used to compute basic earnings per common share	38,133,598	37,349,144	37,878,753	37,218,234
Diluted income per share	$ 0.18	$ 0.15	$ 0.57	$ 0.23
Weighted average shares used to compute diluted earnings per common share	38,637,536	37,986,860	38,491,965	37,921,767

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income	$ 6,815	$ 5,691	$ 22,121	$ 8,775
Other comprehensive income (loss):
Unrealized gain (loss) on cash flow hedges, net of tax provision (benefit) of $488, ($516), ($2,509), and ($2,916), respectively	1,542	(1,641)	(7,933)	(9,265)
Unrealized gain on defined benefit plan, net of tax provision of $9, $2, $27, and $6, respectively	28	7	84	19
Total other comprehensive income (loss)	1,570	(1,634)	(7,849)	(9,246)
Comprehensive income (loss)	$ 8,385	$ 4,057	$ 14,272	$ (471)

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Parenthetical) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on cash flow hedges tax	$ 488	$ (516)	$ (2,509)	$ (2,916)
Unrealized gain on defined benefit plan tax	$ 9	$ 2	$ 27	$ 6

XML

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) - USD ($) $ in Thousands	Common Stock Adjusted Balance	Common Stock	Additional Paid-in Capital Adjusted Balance	Additional Paid-in Capital	Accumulated Other Comprehensive Loss Adjusted Balance	Accumulated Other Comprehensive Loss	Accumulated Deficit Cumulative effect of a change in accounting	Accumulated Deficit Adjusted Balance	Accumulated Deficit	Treasury Stock Adjusted Balance	Treasury Stock	Cumulative effect of a change in accounting	Adjusted Balance	Total
Balance (ASU 2016-02) at Dec. 31, 2018							$ 1,547					$ 1,547
Balance at Dec. 31, 2018	$ 371	$ 371	$ 343,955	$ 343,955	$ (4,531)	$ (4,531)		$ (359,476)	$ (361,023)	$ (696)	$ (696)		$ (20,377)	$ (21,924)
Balance (in shares) at Dec. 31, 2018	36,921	36,921
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
Effect of shares withheld to cover taxes				(3,626)										(3,626)
Total other comprehensive loss						(2,930)								(2,930)
Balance at Mar. 31, 2019		$ 374		343,591		(7,461)			(366,427)		(696)			(30,619)
Balance (in shares) at Mar. 31, 2019		37,271
Balance (ASU 2016-02) at Dec. 31, 2018							1,547					1,547
Balance at Dec. 31, 2018	$ 371	$ 371	343,955	343,955	(4,531)	(4,531)		(359,476)	(361,023)	(696)	(696)		(20,377)	(21,924)
Balance (in shares) at Dec. 31, 2018	36,921	36,921
Increase (Decrease) in Stockholders' Equity
Net income (loss)														8,775
Total other comprehensive loss														(9,246)
Balance at Sep. 30, 2019		$ 375		350,579		(13,777)			(350,701)		(696)			(14,220)
Balance (in shares) at Sep. 30, 2019		37,362
Balance at Mar. 31, 2019		$ 374		343,591		(7,461)			(366,427)		(696)			(30,619)
Balance (in shares) at Mar. 31, 2019		37,271
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
Effect of shares withheld to cover taxes				(28)										(28)
Total other comprehensive loss						(4,682)								(4,682)
Balance at Jun. 30, 2019		$ 375		347,012		(12,143)			(356,392)		(696)			(21,844)
Balance (in shares) at Jun. 30, 2019		37,335
Increase (Decrease) in Stockholders' Equity
Net income (loss)									5,691					5,691
Share based compensation expense				3,374										3,374
Issuance in connection with the exercise of stock options				249										249
Issuance in connection with the exercise of stock options (in shares)		20
Issuance of common stock upon vesting of restricted stock units (in shares)		7
Effect of shares withheld to cover taxes				(56)										(56)
Total other comprehensive loss						(1,634)								(1,634)
Balance at Sep. 30, 2019		$ 375		350,579		(13,777)			(350,701)		(696)			(14,220)
Balance (in shares) at Sep. 30, 2019		37,362
Balance (ASU 2016-13) at Dec. 31, 2019							(238)					(238)
Balance at Dec. 31, 2019	$ 376	$ 376	354,326	354,326	(12,551)	(12,551)		(332,189)	(331,951)	(696)	(696)		9,266	$ 9,504
Balance (in shares) at Dec. 31, 2019	37,460	37,460												37,460,052
Increase (Decrease) in Stockholders' Equity
Net income (loss)									(15,748)					$ (15,748)
Share based compensation expense				3,501										3,501
Issuance of common stock upon vesting of restricted stock units		$ 4		(4)
Issuance of common stock upon vesting of restricted stock units (in shares)		354
Effect of shares withheld to cover taxes				(4,146)										(4,146)
Total other comprehensive loss						(8,873)								(8,873)
Balance at Mar. 31, 2020		$ 380		353,677		(21,424)			(347,937)		(696)			(16,000)
Balance (in shares) at Mar. 31, 2020		37,814
Balance (ASU 2016-13) at Dec. 31, 2019							$ (238)					$ (238)
Balance at Dec. 31, 2019	$ 376	$ 376	$ 354,326	354,326	$ (12,551)	(12,551)		$ (332,189)	(331,951)	$ (696)	(696)		$ 9,266	$ 9,504
Balance (in shares) at Dec. 31, 2019	37,460	37,460												37,460,052
Increase (Decrease) in Stockholders' Equity
Net income (loss)														$ 22,121
Total other comprehensive loss														(7,849)
Balance at Sep. 30, 2020		$ 383		363,082		(20,400)			(310,068)		(696)			$ 32,301
Balance (in shares) at Sep. 30, 2020		38,135												38,134,602
Balance at Mar. 31, 2020		$ 380		353,677		(21,424)			(347,937)		(696)			$ (16,000)
Balance (in shares) at Mar. 31, 2020		37,814
Increase (Decrease) in Stockholders' Equity
Net income (loss)									31,054					31,054
Share based compensation expense				8,984										8,984
Issuance in connection with the exercise of stock options				38										38
Issuance in connection with the exercise of stock options (in shares)		3
Issuance of common stock upon vesting of restricted stock units		$ 3		(3)
Issuance of common stock upon vesting of restricted stock units (in shares)		316
Effect of shares withheld to cover taxes				(2,682)										(2,682)
Total other comprehensive loss						(546)								(546)
Balance at Jun. 30, 2020		$ 383		360,014		(21,970)			(316,883)		(696)			20,848
Balance (in shares) at Jun. 30, 2020		38,133
Increase (Decrease) in Stockholders' Equity
Net income (loss)									6,815					6,815
Share based compensation expense				3,081										3,081
Issuance of common stock upon vesting of restricted stock units (in shares)		2
Effect of shares withheld to cover taxes				(13)										(13)
Total other comprehensive loss						1,570								1,570
Balance at Sep. 30, 2020		$ 383		$ 363,082		$ (20,400)			$ (310,068)		$ (696)			$ 32,301
Balance (in shares) at Sep. 30, 2020		38,135												38,134,602

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019
Cash flows provided by operating activities:
Net income	$ 22,121	$ 8,775
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	26,513	26,906
Provision for doubtful accounts	629	284
Share-based compensation expense	15,565	10,089
Deferred income taxes	2,067	(723)
Amortization of debt discounts and issuance costs	1,564	1,202
Gain on sale and disposal of fixed assets	(729)	(1,200)
Changes in operating assets and liabilities:
Accounts receivable, net	39,531	1,914
Inventories	(3,834)	(6,310)
Other current assets and other assets	(3,115)	(1,769)
Income taxes	(6,814)	2,613
Accounts payable	12,912	(1,751)
Accrued expenses and other current liabilities	6,914	(2,144)
Accrued compensation related costs	2,339	(15,583)
Other liabilities	8,016	(1,736)
Operating lease liabilities, net of amortization of right-of-use assets	1,559	(622)
Changes in operating assets and liabilities:	57,508	(25,388)
Net cash provided by operating activities	125,238	19,945
Cash flows used in investing activities
Acquisitions, net of cash acquired	(16,854)	(31,585)
Purchase of property, plant, and equipment	(19,352)	(20,262)
Purchase of therapeutic program equipment leased to third parties under operating leases	(3,194)	(5,165)
Proceeds from sale of property, plant, and equipment	1,578	2,181
Purchase of company-owned life insurance investment	(250)
Net cash used in investing activities	(38,072)	(54,831)
Cash flows used in financing activities:
Borrowings under revolving credit agreement	79,000
Repayment of borrowings under revolving credit agreement	(79,000)
Repayment of term loan	(3,788)	(3,788)
Payment of employee taxes on share-based compensation	(6,841)	(3,710)
Payment on seller notes	(2,200)	(2,688)
Payment of financing lease obligations	(521)	(344)
Payments under vendor financing arrangements	(550)
Payment of debt issuance costs	(214)
Proceeds from the exercise of options	39	249
Net cash used in financing activities	(14,075)	(10,281)
Increase (decrease) in cash and cash equivalents	73,091	(45,167)
Cash and cash equivalents at beginning of period	74,419	95,114
Cash and cash equivalents at end of period	147,510	49,947
Non-cash financing and investing activities:
Seller notes, deferred payment obligations and additional consideration related to acquisitions	29,420	5,053
Purchase of property, plant, and equipment in accounts payable at period end	4,299	3,492
Purchase of property, plant, and equipment through vendor financing		2,200
Right-of-use assets obtained in exchange for finance lease obligations	$ 1,975	$ 282

XML

Organization and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2020

Organization and Summary of Significant Accounting Policies

Organization and Summary of Significant Accounting Policies

Note A — Organization and Summary of Significant Accounting Policies

Description of Business

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

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements.  These financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”), as previously filed with the Securities and Exchange Commission (the “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 2019 Form 10-K.

Recent Developments Regarding COVID-19

We are subject to risks and uncertainties as a result of the outbreak of the novel coronavirus (“COVID-19”) pandemic (“COVID-19 pandemic”).  The extent and duration of the impact of the COVID-19 pandemic on our operations and financial condition are highly uncertain and difficult to predict, as viral infections continue to increase and information is rapidly evolving.  We believe that our patients are deferring visits to our O&P clinics as well as elective surgical procedures, both of which impact our business volumes through decreased patient encounters and physician referrals. Furthermore, capital markets and the economy have been disrupted by the COVID-19 pandemic, and it still remains possible that it could cause a recessionary environment impacting the healthcare industry generally, including the O&P industry.  The continuing economic disruption has had and could have a  continuing material adverse effect on our business, as the duration and extent of state and local government restrictions impacting our patients’ ability or willingness to visit our O&P clinics and those of our customers, is unknown.  The United States government has responded with fiscal policy measures intended to support the healthcare industry and economy as a whole, including the passage of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in March 2020.  We continue to monitor the provisions of the CARES Act and their application to us, as well as future governmental policies and their impact on our business; however, the magnitude and overall effectiveness of such policies to us and the economy as a whole remains uncertain.

CARES Act

The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $175.0 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid- enrolled suppliers and institutional providers.  The purpose of these funds is to reimburse providers for lost revenue and health-care related expenses that are attributable to the COVID-19 pandemic. In April 2020, the U.S. Department of Health and Human Services (“HHS”) began making payments to healthcare providers from the $175.0 billion appropriation.  These are payments, rather than loans, to healthcare providers, and will not need to be repaid.

During the second and third quarters of 2020, we recognized a total benefit of $20.6 million in our condensed consolidated statement of operations within Other operating costs for a portion of the grant proceeds we received under the CARES Act (“Grants”) from HHS. We recognize income related to grants on a systematic and rational basis when it becomes probable that we have complied with the terms and conditions of the grant and in the period in which the corresponding costs or income related to the grant are recognized. We recognized the benefit from the Grants within Other operating costs in our Patient Care segment. As of September 30, 2020, we have recorded a liability of $3.4 million within Accrued expenses and other liabilities in the condensed consolidated balance sheet related to proceeds from the Grants for amounts that have not met the recognition criteria in accordance with our accounting policy.

The CARES Act also provides for a deferral of the employer portion of payroll taxes incurred during the COVID-19 pandemic through December 2020. The provisions allow us to defer half of such payroll taxes until December 2021 and the remaining half until December 2022. We deferred $7.1 million of payroll taxes within Other liabilities in the condensed consolidated balance sheet as of September 30, 2020.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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.  The adoption of this standard on January 1, 2020 resulted in a cumulative effect adjustment to accumulated deficit of $0.2 million.

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.  There was no material impact on our condensed consolidated financial position, results of operations, or cash flows due to the adoption on January 1, 2020.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. Among other provisions, this ASU removes the exception that limited the income tax benefit recognized in the interim period in cases when the year-to-date loss exceeds the anticipated loss for the year.  Adoption of this standard is effective beginning January 1, 2021, but as early adoption is permitted, we have selected to adopt this standard effective January 1, 2020. There was no material impact on our condensed consolidated financial position, results of operations, or cash flows due to the adoption.

Recent Accounting Pronouncements, Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.  The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform.  The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.  We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements and the related disclosures.

XML

Earnings Per Share

9 Months Ended

Sep. 30, 2020

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 34,379 and 20,202 for the three and nine months ended September 30, 2020, and 10 and zero for the three and nine months ended September 30, 2019.

Our Credit Agreement (as defined below) restricts the payment of dividends or other distributions to our shareholders by us or any of our subsidiaries. See Note L - “Debt and Other Obligations” within these condensed consolidated financial statements.

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

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands except share and per share amounts)	2020		2019		2020		2019
Net income	$	6,815	$	5,691	$	22,121	$	8,775
Weighted average shares outstanding - basic		38,133,598		37,349,144		37,878,753		37,218,234
Effect of potentially dilutive restricted stock units and options		503,938		637,716		613,212		703,533
Weighted average shares outstanding - diluted		38,637,536		37,986,860		38,491,965		37,921,767
Basic income per share	$	0.18	$	0.15	$	0.58	$	0.24
Diluted income per share	$	0.18	$	0.15	$	0.57	$	0.23

XML

Revenue Recognition

9 Months Ended

Sep. 30, 2020

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 (the “VA”), 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, 2020 and 2019:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Patient Care Segment
Medicare	$	68,135	$	72,879	$	194,052	$	206,295
Medicaid		34,541		36,140		96,612		103,631
Commercial Insurance / Managed Care (excluding Medicare and Medicaid Managed Care)		75,966		83,384		213,234		232,410
Veterans Administration		19,339		23,816		54,057		64,635
Private Pay		14,683		14,712		40,751		45,729
Total	$	212,664	$	230,931	$	598,706	$	652,700

The impact to revenue related to prior period performance obligations was not material for the three and nine months ended September 30, 2020 and 2019.

Products & Services Segment

Revenue in our Products & Services segment is derived from the distribution of O&P components and from therapeutic solutions, which includes 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, 2020 and 2019:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Products & Services Segment
Distribution services, net of intersegment revenue eliminations	$	32,711	$	36,653	$	90,928	$	107,510
Therapeutic solutions		11,262		12,054		34,176		36,945
Total	$	43,973	$	48,707	$	125,104	$	144,455

XML

Accounts Receivable, Net

9 Months Ended

Sep. 30, 2020

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 represents amounts outstanding from our gross charges, net of contractual discounts, sales returns, and other implicit price concessions including estimates for payor disallowances and patient non-payments.

We are exposed to credit losses primarily through our accounts receivable. These receivables are short in nature because their due date varies between due upon receipt of invoice and 90 days. We assess our receivables, divide them into similar risk pools, and monitor our ongoing credit exposure through active review of our aging buckets. Our activities include timely account reconciliations, dispute resolution, and payment confirmations.  We also employ collection agencies and legal counsel to pursue recovery of defaulted receivables.

As part of the new accounting standard discussed in Note A - “Organization and Summary of Significant Accounting Policies,” our expected loss methodology is developed using historical liquidation rates, current and future economic and market conditions, and a review of the current status of our patients and customers' trade accounts receivable balances. We also grouped our receivables into similar risk pools to better measure the risks for each pool. After evaluating the risk for each pool, we determined that additional credit loss risk was immaterial for the Patient Care segment.  For the Products & Services segment, an allowance for doubtful accounts is recorded, which is deducted from gross accounts receivable to arrive at “Accounts receivable, net.”  As of September 30, 2020, we have considered the current and future economic and market conditions resulting in an increase to the allowance for doubtful accounts by approximately $0.7 million since December 31, 2019.

Accounts receivable, net as of September 30, 2020 and December 31, 2019 is comprised of the following:

	As of September 30, 2020						As of December 31, 2019
			Products &						Products &
(in thousands)	Patient Care		Services		Consolidated		Patient Care		Services		Consolidated
Gross charges before estimates for implicit price concessions	$	157,191	$	21,765	$	178,956	$	202,132	$	27,551	$	229,683
Less estimates for implicit price concessions:
Payor disallowances		(47,314)		—		(47,314)		(58,094)		—		(58,094)
Patient non-payments		(6,916)		—		(6,916)		(9,589)		—		(9,589)
Accounts receivable, gross		102,961		21,765		124,726		134,449		27,551		162,000
Allowance for doubtful accounts		—		(3,317)		(3,317)		—		(2,641)		(2,641)
Accounts receivable, net	$	102,961	$	18,448	$	121,409	$	134,449	$	24,910	$	159,359

XML

Inventories

9 Months Ended

Sep. 30, 2020

Inventories

Inventories

Note E — Inventories

Our inventories are comprised of the following:

	As of September 30,		As of December 31,
(in thousands)	2020		2019
Raw materials	$	20,047	$	20,574
Work in process		15,575		10,165
Finished goods		38,486		37,465
Total inventories	$	74,108	$	68,204

XML

Property, Plant and Equipment, Net

9 Months Ended

Sep. 30, 2020

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)	2020		2019
Land	$	554	$	634
Buildings		3,756		4,110
Furniture and fixtures		14,747		13,835
Machinery and equipment		25,826		25,438
Equipment leased to third parties under operating leases		27,510		29,217
Leasehold improvements		138,450		131,617
Computers and software		79,484		75,540
Total property, plant, and equipment, gross		290,327		280,391
Less: accumulated depreciation and amortization		(203,690)		(196,334)
Total property, plant, and equipment, net	$	86,637	$	84,057

Total depreciation expense was approximately $7.0 million and $21.4 million for the three and nine months ended September 30, 2020 and $7.7 million and $22.8 million for the three and nine months ended September 30, 2019, respectively. Total amortization of finance right-of-use assets was approximately $0.2 million and $0.5 million for the three and nine months ended September 30, 2020 and $0.1 million and $0.2 million for the three and nine months ended September 30, 2019, respectively.

XML

Acquisitions

9 Months Ended

Sep. 30, 2020

Acquisitions

Acquisitions

Note G — Acquisitions

2020 Acquisition Activity

In the second quarter of 2020, we acquired all of the outstanding equity interests of an O&P business for total consideration of $46.1 million at fair value, of which $16.8 million was cash consideration, net of cash acquired, $21.9 million was issued in the form of notes to the former shareholders, $3.5 million in the form of a deferred payment obligation to the former shareholders and $4.0 million in additional consideration.  Of the $21.9 million in notes issued to the former shareholders, approximately $18.1 million of the notes were paid in October 2020 in a lump sum payment and the remaining $3.8 million of the notes are payable in annual installments over a period of three years on the anniversary date of the acquisition. Payments totaling $3.5 million under the deferred payment obligation are due in annual installments beginning in the fourth year following the acquisition and for three years thereafter.  Additional consideration includes approximately $3.6 million in liabilities incurred to the shareholders as part of the business combination payable in October 2020 and is included in Accrued expenses and other liabilities in the condensed consolidated balance sheet. The remaining $0.4 million in additional consideration represents the effective settlement of amounts due to us from the acquired O&P business as of the acquisition date. We completed the acquisition with the intention of expanding the geographic footprint of our patient care offerings through the acquisition of high quality O&P providers.

We accounted for this transaction under the acquisition method of accounting and have reported the results of operations of the acquisition as of the date of the acquisition. We based the estimated fair values of intangible assets 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 cost 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. We recorded the excess of the fair value of the consideration transferred in the acquisition over the fair value of net assets acquired 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 not be deductible for federal income tax purposes.

Acquisition-related costs are included in general and administrative expenses in our consolidated statements of operations. Total acquisition-related costs incurred during the three and nine months ended September 30, 2020 were $0.1 million and $0.6 million, respectively, which includes those costs for transactions that are in progress or were not completed during the respective period. Acquisition-related costs incurred for the acquisitions completed during the three and nine month periods ended September 30, 2020 were $0.0 million and $0.4 million, respectively.

We have not presented pro forma combined results for this acquisition  because the impact on previously reported statements of operations would not have been material.

Purchase Price Allocation

We have performed a preliminary valuation analysis of the fair market value of the assets acquired and liabilities assumed in the acquisition. The final purchase price allocation 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 this acquisition was allocated on a preliminary basis as follows:

(in thousands)
Cash paid, net of cash acquired	$	16,762
Issuance of seller notes at fair value		21,941
Deferred payment obligation at fair value		3,468
Additional consideration, net		3,975
Aggregate purchase price		46,146
Accounts receivable		3,182
Inventories		2,021
Customer relationships (Weighted average useful life of 5.0 years)		5,600
Non-compete agreements (Weighted average useful life of 5.0 years)		200
Other assets and liabilities, net		(4,301)
Net assets acquired		6,702
Goodwill	$	39,444

Right-of-use assets and lease liabilities related to operating leases recognized in connection with the acquisition completed during the nine months ended September 30, 2020 were $4.7 million.

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.  We completed each acquisition with the intention of expanding the geographic footprint of our patient care offerings through the acquisitions of high quality O&P providers.

● In the first quarter of 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 was additional consideration.

● In the second quarter of 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 the third quarter of 2019, we completed the acquisition of all the outstanding equity interests of one O&P business and acquired the assets of another O&P business 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.

● In the fourth quarter of 2019, we completed the acquisition of all the outstanding equity interests of one O&P business and acquired the assets of another O&P business for total consideration of $7.8 million, of which $5.0 million was cash consideration, net of cash acquired, and $2.8 million was issued in the form of notes to shareholders at fair value.

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

(in thousands)
Cash paid, net of cash acquired	$	35,909
Issuance of seller notes at fair value		7,835
Additional consideration, net(1)		626
Aggregate purchase price		44,370
Accounts receivable		4,128
Inventories		2,081
Customer relationships (Weighted average useful life of 4.7 years)		7,038
Non-compete agreements (Weighted average useful life of 4.9 years)		350
Other assets and liabilities, net		(2,983)
Net assets acquired		10,614
Goodwill	$	33,756

(1) Approximately $0.7 million of additional consideration represents payments made during the third quarter related to certain tax elections with the seller, offset by an immaterial amount of favorable working capital adjustments.

Right-of-use assets and lease liabilities related to operating leases recognized in connection with acquisitions completed for the year ended December 31, 2019 was $5.2 million.

XML

Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2020

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, 2020
	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, 2019	$	660,912	$	(428,668)	$	232,244	$	139,299	$	(139,299)	$	—	$	800,211	$	(567,967)	$	232,244
Additions from acquisitions		39,386		—		39,386		—		—		—		39,386		—		39,386
Measurement period adjustments (1)		71		—		71		—		—		—		71		—		71
As of September 30, 2020	$	700,369	$	(428,668)	$	271,701	$	139,299	$	(139,299)	$	—	$	839,668	$	(567,967)	$	271,701

(1) Measurement period adjustments relate to 2020 and 2019 acquisitions and are primarily attributable to adjustments to the preliminary allocations of customer relationship intangibles.

	For the Year Ended December 31, 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		35,926		—		35,926		—		—		—		35,926		—		35,926
Measurement period adjustments (1)		(2,424)		—		(2,424)		—		—		—		(2,424)		—		(2,424)
As of December 31, 2019	$	660,912	$	(428,668)	$	232,244	$	139,299	$	(139,299)	$	—	$	800,211	$	(567,967)	$	232,244

(1) Measurement period adjustments relate to 2019 and 2018 acquisitions of approximately $2.1 million and $0.3 million, respectively, and are primarily attributable to adjustments to the preliminary allocations of customer relationship intangibles.

The balances related to intangible assets as of September 30, 2020 and December 31, 2019 are as follows:

	As of September 30, 2020
	Gross Carrying		Accumulated		Accumulated		Net Carrying
(in thousands)	Amount		Amortization		Impairment		Amount
Customer lists	$	38,372	$	(26,844)	$	—	$	11,528
Trade name		255		(170)		—		85
Patents and other intangibles		9,011		(5,635)		—		3,376
Definite-lived intangible assets		47,638		(32,649)		—		14,989
Indefinite-lived trade name		9,070		—		(4,953)		4,117
Total other intangible assets	$	56,708	$	(32,649)	$	(4,953)	$	19,106

	As of December 31, 2019
	Gross Carrying		Accumulated		Accumulated		Net Carrying
(in thousands)	Amount		Amortization		Impairment		Amount
Customer lists	$	32,772	$	(22,726)	$	—	$	10,046
Trade name		255		(151)		—		104
Patents and other intangibles		9,188		(5,503)		—		3,685
Definite-lived intangible assets		42,215		(28,380)		—		13,835
Indefinite-lived trade name		9,070		—		(4,953)		4,117
Total other intangible assets	$	51,285	$	(28,380)	$	(4,953)	$	17,952

Amortization expense related to other intangible assets was approximately $1.6 million and $4.6 million for the three and nine months ended September 30, 2020 and $1.6 million and $3.9 million for the three and nine months ended September 30, 2019.

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

(in thousands)
2020 (remainder of the year)	$	1,406
2021		3,735
2022		3,668
2023		3,424
2024		1,941
Thereafter		815
Total	$	14,989

XML

Other Current Assets and Other Assets

9 Months Ended

Sep. 30, 2020

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)	2020		2019
Non-trade receivables	$	7,540	$	6,711
Prepaid maintenance		3,277		2,767
Prepaid insurance		909		264
Other prepaid assets		2,763		3,931
Total other current assets	$	14,489	$	13,673

Other assets consist of the following:

	As of September 30,		As of December 31,
(in thousands)	2020		2019
Implementation costs for cloud computing arrangements	$	4,694	$	1,964
Cash surrender value of company-owned life insurance		3,811		3,253
Finance lease right-of-use assets		2,795		1,488
Deposits		2,145		1,893
Non-trade receivables		1,791		2,398
Other		474		309
Total other assets	$	15,710	$	11,305

XML

Accrued Expenses and Other Current Liabilities and Other Liabilities

9 Months Ended

Sep. 30, 2020

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)	2020		2019
Patient prepayments, deposits, and refunds payable	$	26,969	$	24,183
Accrued sales taxes and other taxes		10,240		8,543
Insurance and self-insurance accruals		7,786		8,033
Derivative liability		7,704		3,516
Liabilities incurred to seller in acquisitions		3,656		—
Accrued professional fees		1,547		2,533
Accrued interest payable		747		266
Other current liabilities		13,785		8,751
Total	$	72,434	$	55,825

Other liabilities consist of:

	As of September 30,		As of December 31,
(in thousands)	2020		2019
Supplemental executive retirement plan obligations	$	19,461	$	20,851
Derivative liability		16,075		9,821
Unrecognized tax benefits		7,910		5,296
Long-term insurance accruals		7,539		7,424
Deferred payroll taxes		7,118		—
Other		1,974		2,412
Total	$	60,077	$	45,804

XML

Income Taxes

9 Months Ended

Sep. 30, 2020

Income Taxes

Income Taxes

Note K — Income Taxes

We recorded a benefit for income taxes of $1.9 million and $4.8 million for the three and nine months ended September 30, 2020. The effective tax rate was -39.0% and -27.3% for the three and nine months ended September 30, 2020.  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.

The decrease in the effective tax rate for the three months ended September 30, 2020 compared with the three months ended September 30, 2019 is primarily attributable to a tax benefit resulting from the loss carryback provisions granted under the CARES Act. Our effective tax rate for the three months ended September 30, 2020 differed from the federal statutory tax rate of 21% primarily due to the net tax benefit of the loss carryback claim and non-deductible expenses. Our effective tax rate for the three months ended September 30, 2019 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, 2020 compared with the nine months ended September 30, 2019 is primarily attributable to the recognition of research and development tax credits for the current and prior years and a tax benefit resulting from the loss carryback provisions granted under the CARES Act, partially offset by a shortfall from share-based compensation. Our effective tax rate for the nine months ended September 30, 2020 differed from the federal statutory tax rate of 21% primarily due to research and development tax credits, the net tax benefit of the loss carryback claim, and non-deductible expenses. Our effective tax rate for the nine months ended September 30, 2019 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses.

During the second quarter of 2020, we completed a study of qualifying research and development expenses resulting in the recognition of tax benefits of $2.2 million, net of tax reserves, related to the current year and $6.3 million, net of tax reserves, related to the prior years as of the third quarter of 2020. We recorded the tax benefit, before tax reserves, as a deferred tax asset.

The CARES Act, which was enacted on March 27, 2020, includes changes to certain tax laws related to the deductibility of interest expense and depreciation, as well as the provision to carryback net operating losses to five preceding years. ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. As a result of the CARES Act provisions, in the third quarter of 2020 we recognized a tax benefit of $4.0 million resulting from the loss carryback claim to a prior period with a higher statutory rate, which also decreased our current income taxes payable by $9.5 million as of September 30, 2020.

XML

Debt and Other Obligations

9 Months Ended

Sep. 30, 2020

Debt and Other Obligations

Debt and Other Obligations

Note L — Debt and Other Obligations

Debt consists of the following:

(in thousands)	As of September 30, 2020		As of December 31, 2019
Debt:
Term Loan B	$	492,375	$	496,163
Seller notes		29,208		9,005
Deferred payment obligation		4,000		—
Finance lease liabilities and other		3,606		2,033
Total debt before unamortized discount and debt issuance costs		529,189		507,201
Unamortized discount and debt issuance costs, net		(7,798)		(8,328)
Total debt	$	521,391	$	498,873
Current portion of long-term debt:
Term Loan B	$	5,050	$	5,050
Seller notes		21,893		3,175
Finance lease liabilities and other		848		527
Total current portion of long-term debt		27,791		8,752
Long-term debt	$	493,600	$	490,121

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, 2020.  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.

In March 2020, we borrowed $79.0 million under our revolving credit facility, which was due in March 2023.  In June 2020, we repaid $57.0 million in borrowings under this revolving credit facility, and in September 2020, we repaid the remaining $22.0 million in borrowings under the facility. We had approximately $94.8 million in available borrowing capacity under our $100.0 million revolving credit facility as of September 30, 2020.

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, 2020, the weighted average interest rate on outstanding borrowings under our Term Loan B facility was approximately 3.6%.  We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note N – “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 (some of which were amended in May 2020 by the Amendment (as defined and described below)): (i) a maximum consolidated first lien net leverage ratio (“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  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.

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.

In May 2020, we entered into an amendment to the Credit Agreement (the "Amendment") that provided for, amongst other things, an increase in the maximum Net Leverage Ratio to 5.25 to 1.00 for the fiscal quarters ended June 30, 2020 through March 31, 2021; 5.00 to 1.00 for the fiscal quarters ended June 30, 2021 through September 30, 2021; and 4.75 to 1.00 for the quarter ended December 31, 2021 and the last day of each fiscal quarter thereafter. In addition, the Amendment changed the definition of EBITDA used in the Net Leverage Ratio and minimum interest coverage ratio to adjust for declines in net revenue attributable to the COVID-19 pandemic. Borrowings under the revolving credit facility will bear interest at a variable rate equal to the greater of LIBOR or 1%, plus 3.75%. In addition, the Amendment contained certain restrictions and covenants that further limit our ability, and certain of our subsidiaries' ability, to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions not financed with the proceeds of an equity offering, except that certain acquisitions are permitted after September 30, 2020, in the event we maintain certain leverage and liquidity thresholds. We capitalized debt issuance costs of $0.2 million in connection with the Amendment, which were recorded in Other assets.

We were in compliance with all covenants at September 30, 2020.

Seller notes and the deferred payment obligation

We typically issue subordinated promissory notes (“Seller notes”) as a part of the consideration transferred when making acquisitions. We measure these instruments at their estimated fair values as of the respective acquisition dates. The stated interest rates on these instruments range from 2.50% to 3.00%. The Seller notes are unsecured and are presented net of unamortized discount of $0.9 million and $0.4 million as of September 30, 2020 and December 31, 2019, respectively. Principal and interest are payable in quarterly or annual installments and mature through October 2024.

Amounts due under the deferred payment obligation to the former shareholders of an acquired O&P business are unsecured and presented net of unamortized discount of $0.5 million as of September 30, 2020. The deferred payment obligation was measured at its estimated fair value as of the acquisition date and accrues interest at a rate of 3.0%. Principal and interest payments under the deferred payment obligation are due in annual installments beginning in 2024 and for three years thereafter.

Scheduled Maturities of Total Debt

Scheduled maturities of debt at September 30, 2020 were as follows:

(in thousands)
2020 (remainder of year)	$	21,023
2021		9,759
2022		8,494
2023		8,049
2024		7,337
Thereafter		474,527
Total debt before unamortized discount and debt issuance costs, net		529,189
Unamortized discount and debt issuance costs, net		(7,798)
Total debt	$	521,391

XML

Fair Value Measurements

9 Months Ended

Sep. 30, 2020

Fair Value Measurements

Fair Value Measurements

Note M — Fair Value Measurements

Financial Instruments

The carrying value of our outstanding term loan as of September 30, 2020 (excluding unamortized discounts and debt issuance costs of $6.9 million) was $492.4 million compared to its fair value of $487.5 million. The carrying value of our outstanding term loan as of December 31, 2019 (excluding unamortized discounts and debt issuance costs of $7.9 million) was $496.2 million compared to its fair value of $497.4 million.  Our estimates of fair value are based on a discounted cash flow model and an indicative quote using unobservable inputs, primarily, our risk-adjusted credit spread, which represents a Level 3 measurement.

We have interest rate swap agreements 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 L - “Debt and Other Obligations” and Note N - “Derivative Financial Instruments” for further information.

We believe that the carrying value of the Seller notes and the deferred payment obligation 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. The carrying value of our outstanding Seller notes and the deferred payment obligation issued in connection with past acquisitions as of September 30, 2020 was $32.3 million, net of unamortized discounts of $0.9 million.

XML

Derivative Financial Instruments

9 Months Ended

Sep. 30, 2020

Derivative Financial Instruments

Derivative Financial Instruments

Note N — Derivative Financial Instruments

Cash Flow Hedges of Interest Rate Risk

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.  As of September 30, 2020 and December 31, 2019, our swaps had a notional value outstanding of $300.0 million and $312.5 million, respectively.

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

The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the three months ended September 30, 2020 and 2019, respectively:

(in thousands)	Cash Flow Hedges
Balance as of June 30, 2020	$	(19,612)
Unrealized loss recognized in other comprehensive loss, net of tax		(455)
Reclassification to interest expense, net		1,997
Balance as of September 30, 2020	$	(18,070)
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)

The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the nine months ended September 30, 2020 and 2019, respectively:

(in thousands)	Cash Flow Hedges
Balance as of December 31, 2019	$	(10,137)
Unrealized loss recognized in other comprehensive loss, net of tax		(12,518)
Reclassification to interest expense, net		4,585
Balance as of September 30, 2020	$	(18,070)
Balance as of December 31, 2018	$	(2,936)
Unrealized loss recognized in other comprehensive loss, net of tax		(10,135)
Reclassification to interest expense, net		870
Balance as of September 30, 2019	$	(12,201)

The following table presents the fair value of derivative assets and liabilities within the condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019:

	As of September 30, 2020				As of December 31, 2019
(in thousands)	Assets		Liabilities		Assets		Liabilities
Derivatives designated as cash flow hedging instruments:
Accrued expenses and other current liabilities	$	—	$	7,704	$	—	$	3,516
Other liabilities		—		16,075		—		9,821

XML

Share-Based Compensation

9 Months Ended

Sep. 30, 2020

Share-Based Compensation

Share-Based Compensation

Note O — Share-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.

On May 19, 2017, the Board of Directors approved the Hanger, Inc. Special Equity Plan (the “Special Equity Plan”).  The Special Equity Plan authorized up to 1.5 million shares of Common Stock and operates completely independent from our 2016 Omnibus Incentive Plan.  All awards under the Special Equity Plan were made on May 19, 2017, which consisted of 0.8 million stock options and 0.3 million performance-based stock awards.  No further grants of awards will be authorized or issued under the Special Equity Plan.

As of September 30, 2020, there were 1,564,081 unvested restricted stock awards outstanding. This was comprised of 1,126,361 employee service-based awards with a weighted average grant date fair value of $19.23 per share, 367,097 employee performance-based awards with a weighted average grant date fair value of $18.94 per share, and 70,623 director service-based awards with a weighted average grant date value of $17.08 per share.  As of September 30, 2020, there were 520,105 outstanding options exercisable with a weighted average exercise price of $12.77 and average remaining contractual term of 6.6 years.

The 2017 Special Equity Plan was amended in May 2020 to modify the performance period ending date for purposes of the compounded annual growth rate calculation to February 20, 2020, shortening the performance period to approximately 33 months, representing a reduction of three months. This adjustment was considered a modification per Accounting Standards Codification 718, Compensation - Stock Compensation, and, therefore, any incremental fair value arising from the modification of an award with market conditions would be recognized over the remaining service period.  As a result of the modification, we recognized an additional $5.9 million in share-based compensation expense during the second quarter of 2020.

We recognized a total of approximately $3.1 million and $15.6 million of share-based compensation expense for the three and nine  months ended September 30, 2020 and a total of approximately $3.4 million and $10.1 million for the three and nine months ended September 30, 2019, respectively. Share-based compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and stock options.

XML

Supplemental Executive Retirement Plans

9 Months Ended

Sep. 30, 2020

Supplemental Executive Retirement Plans

Supplemental Executive Retirement Plans

Note P — 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, 2020 and 2019 is as follows:

Change in Benefit Obligation:

(in thousands)	2020		2019
Benefit obligation as of June 30	$	17,763	$	17,535
Service cost		98		84
Interest cost		121		164
Payments		(12)		(12)
Benefit obligation as of September 30	$	17,970	$	17,771
Benefit obligation as of December 31, 2019 and 2018, respectively	$	19,214	$	18,927
Service cost		294		251
Interest cost		363		494
Payments		(1,901)		(1,901)
Benefit obligation as of September 30	$	17,970	$	17,771

Amounts Recognized in the Condensed Consolidated Balance Sheets:

	As of September 30,		As of December 31,
(in thousands)	2020		2019
Current accrued expenses and other current liabilities	$	1,913	$	1,913
Non-current other liabilities		16,057		17,301
Total accrued liabilities	$	17,970	$	19,214

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, 2020 and December 31, 2019, the estimated accumulated obligation benefit is $4.2 million and $3.9 million, of which $3.8 million and $3.3 million is funded and $0.4 million and $0.6 million is unfunded at September 30, 2020 and December 31, 2019, 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 condensed consolidated balance sheets.  See Note I - “Other Current Assets and Other Assets” for additional information.

XML

Commitments and Contingencies

9 Months Ended

Sep. 30, 2020

Commitments and Contingencies

Commitments and Contingencies

Note Q — 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

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 sought 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 unredacted. 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, the parties entered into a definitive settlement agreement in late December 2019, and in January 2020 the Travis County court issued an order providing preliminary approval of the settlement and ordering that notice of the settlement be made to the Company’s shareholders.  On March 10, 2020, the Travis County court issued an order providing final approval of the settlement and dismissing with prejudice the consolidated derivative action.

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

Segment and Related Information

9 Months Ended

Sep. 30, 2020

Segment and Related Information

Segment and Related Information

Note R — Segment and Related Information

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

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

● Commercial private payors and other, which consist of individuals, rehabilitation providers, commercial insurance companies, 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 persons with disabilities, which provides reimbursement for O&P products and services based on prices set forth in published fee schedules (generally with either 10 regional pricing areas or state level prices) for prosthetics and orthotics and by state for durable medical equipment (DMEPOS);

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

● the VA.

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 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 leases and sells rehabilitation equipment and ancillary consumable supplies combined with equipment maintenance, education, and training.  

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 2019 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, 2019.

	Patient Care				Products & Services
	For the Three Months Ended				For the Three Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Net revenues
Third party	$	212,664	$	230,931	$	43,973	$	48,707
Intersegments		—		—		50,011		53,670
Total net revenues		212,664		230,931		93,984		102,377
Material costs
Third party suppliers		56,599		65,055		24,863		26,979
Intersegments		7,339		6,284		42,672		47,386
Total material costs		63,938		71,339		67,535		74,365
Personnel expenses		76,989		81,274		12,738		13,320
Other expenses		34,713		37,245		5,957		6,858
Depreciation & amortization		4,786		4,943		2,633		2,723
Segment income from operations	$	32,238	$	36,130	$	5,121	$	5,111

	Patient Care				Products & Services
	For the Nine Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Net revenues
Third party	$	598,706	$	652,700	$	125,104	$	144,455
Intersegments		—		—		138,899		150,245
Total net revenues		598,706		652,700		264,003		294,700
Material costs
Third party suppliers		160,212		181,358		68,463		80,452
Intersegments		18,639		18,268		120,260		131,977
Total material costs		178,851		199,626		188,723		212,429
Personnel expenses		216,910		233,402		35,824		39,393
Other expenses		86,462		112,014		18,614		20,883
Depreciation & amortization		14,089		13,997		7,883		7,862
Segment income from operations	$	102,394	$	93,661	$	12,959	$	14,133

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

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Income from operations
Patient Care	$	32,238	$	36,130	$	102,394	$	93,661
Products & Services		5,121		5,111		12,959		14,133
Corporate & other		(24,284)		(23,838)		(72,590)		(69,267)
Income from operations		13,075		17,403		42,763		38,527
Interest expense, net		8,013		8,954		24,918		25,973
Non-service defined benefit plan expense		158		173		474		519
Income before income taxes		4,904		8,276		17,371		12,035
(Benefit) provision for income taxes		(1,911)		2,585		(4,750)		3,260
Net income	$	6,815	$	5,691	$	22,121	$	8,775

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)	2020		2019		2020		2019
Net revenues
Patient Care	$	212,664	$	230,931	$	598,706	$	652,700
Products & Services		93,984		102,377		264,003		294,700
Corporate & other		—		—		—		—
Consolidating adjustments		(50,011)		(53,670)		(138,899)		(150,245)
Consolidated net revenues	$	256,637	$	279,638	$	723,810	$	797,155

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)	2020		2019		2020		2019
Material costs
Patient Care	$	63,938	$	71,339	$	178,851	$	199,626
Products & Services		67,535		74,365		188,723		212,429
Corporate & other		—		—		—		—
Consolidating adjustments		(50,011)		(53,670)		(138,899)		(150,245)
Consolidated material costs	$	81,462	$	92,034	$	228,675	$	261,810

XML

Organization and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2020

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, 2019 (the “2019 Form 10-K”), as previously filed with the Securities and Exchange Commission (the “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 2019 Form 10-K.

Recent Developments Regarding COVID-19

Recent Developments Regarding COVID-19

We are subject to risks and uncertainties as a result of the outbreak of the novel coronavirus (“COVID-19”) pandemic (“COVID-19 pandemic”).  The extent and duration of the impact of the COVID-19 pandemic on our operations and financial condition are highly uncertain and difficult to predict, as viral infections continue to increase and information is rapidly evolving.  We believe that our patients are deferring visits to our O&P clinics as well as elective surgical procedures, both of which impact our business volumes through decreased patient encounters and physician referrals. Furthermore, capital markets and the economy have been disrupted by the COVID-19 pandemic, and it still remains possible that it could cause a recessionary environment impacting the healthcare industry generally, including the O&P industry.  The continuing economic disruption has had and could have a  continuing material adverse effect on our business, as the duration and extent of state and local government restrictions impacting our patients’ ability or willingness to visit our O&P clinics and those of our customers, is unknown.  The United States government has responded with fiscal policy measures intended to support the healthcare industry and economy as a whole, including the passage of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in March 2020.  We continue to monitor the provisions of the CARES Act and their application to us, as well as future governmental policies and their impact on our business; however, the magnitude and overall effectiveness of such policies to us and the economy as a whole remains uncertain.

CARES Act

The CARES Act established the Public Health and Social Services Emergency Fund, also referred to as the Cares Act Provider Relief Fund, which set aside $175.0 billion to be administered through grants and other mechanisms to hospitals, public entities, not-for-profit entities and Medicare- and Medicaid- enrolled suppliers and institutional providers.  The purpose of these funds is to reimburse providers for lost revenue and health-care related expenses that are attributable to the COVID-19 pandemic. In April 2020, the U.S. Department of Health and Human Services (“HHS”) began making payments to healthcare providers from the $175.0 billion appropriation.  These are payments, rather than loans, to healthcare providers, and will not need to be repaid.

During the second and third quarters of 2020, we recognized a total benefit of $20.6 million in our condensed consolidated statement of operations within Other operating costs for a portion of the grant proceeds we received under the CARES Act (“Grants”) from HHS. We recognize income related to grants on a systematic and rational basis when it becomes probable that we have complied with the terms and conditions of the grant and in the period in which the corresponding costs or income related to the grant are recognized. We recognized the benefit from the Grants within Other operating costs in our Patient Care segment. As of September 30, 2020, we have recorded a liability of $3.4 million within Accrued expenses and other liabilities in the condensed consolidated balance sheet related to proceeds from the Grants for amounts that have not met the recognition criteria in accordance with our accounting policy.

The CARES Act also provides for a deferral of the employer portion of payroll taxes incurred during the COVID-19 pandemic through December 2020. The provisions allow us to defer half of such payroll taxes until December 2021 and the remaining half until December 2022. We deferred $7.1 million of payroll taxes within Other liabilities in the condensed consolidated balance sheet as of September 30, 2020.

Recent Accounting Pronouncements, Adopted and Not Yet Adopted

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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.  The adoption of this standard on January 1, 2020 resulted in a cumulative effect adjustment to accumulated deficit of $0.2 million.

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.  There was no material impact on our condensed consolidated financial position, results of operations, or cash flows due to the adoption on January 1, 2020.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. Among other provisions, this ASU removes the exception that limited the income tax benefit recognized in the interim period in cases when the year-to-date loss exceeds the anticipated loss for the year.  Adoption of this standard is effective beginning January 1, 2021, but as early adoption is permitted, we have selected to adopt this standard effective January 1, 2020. There was no material impact on our condensed consolidated financial position, results of operations, or cash flows due to the adoption.

Recent Accounting Pronouncements, Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.  The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform.  The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.  We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements and the related disclosures.

XML

Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2020

Earnings Per Share

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

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands except share and per share amounts)	2020		2019		2020		2019
Net income	$	6,815	$	5,691	$	22,121	$	8,775
Weighted average shares outstanding - basic		38,133,598		37,349,144		37,878,753		37,218,234
Effect of potentially dilutive restricted stock units and options		503,938		637,716		613,212		703,533
Weighted average shares outstanding - diluted		38,637,536		37,986,860		38,491,965		37,921,767
Basic income per share	$	0.18	$	0.15	$	0.58	$	0.24
Diluted income per share	$	0.18	$	0.15	$	0.57	$	0.23

XML

Revenue Recognition (Tables)

9 Months Ended

Sep. 30, 2020

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)	2020		2019		2020		2019
Patient Care Segment
Medicare	$	68,135	$	72,879	$	194,052	$	206,295
Medicaid		34,541		36,140		96,612		103,631
Commercial Insurance / Managed Care (excluding Medicare and Medicaid Managed Care)		75,966		83,384		213,234		232,410
Veterans Administration		19,339		23,816		54,057		64,635
Private Pay		14,683		14,712		40,751		45,729
Total	$	212,664	$	230,931	$	598,706	$	652,700

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)	2020		2019		2020		2019
Products & Services Segment
Distribution services, net of intersegment revenue eliminations	$	32,711	$	36,653	$	90,928	$	107,510
Therapeutic solutions		11,262		12,054		34,176		36,945
Total	$	43,973	$	48,707	$	125,104	$	144,455

XML

Accounts Receivable, Net (Tables)

9 Months Ended

Sep. 30, 2020

Accounts Receivable, Net

Schedule of accounts receivable, net

	As of September 30, 2020						As of December 31, 2019
			Products &						Products &
(in thousands)	Patient Care		Services		Consolidated		Patient Care		Services		Consolidated
Gross charges before estimates for implicit price concessions	$	157,191	$	21,765	$	178,956	$	202,132	$	27,551	$	229,683
Less estimates for implicit price concessions:
Payor disallowances		(47,314)		—		(47,314)		(58,094)		—		(58,094)
Patient non-payments		(6,916)		—		(6,916)		(9,589)		—		(9,589)
Accounts receivable, gross		102,961		21,765		124,726		134,449		27,551		162,000
Allowance for doubtful accounts		—		(3,317)		(3,317)		—		(2,641)		(2,641)
Accounts receivable, net	$	102,961	$	18,448	$	121,409	$	134,449	$	24,910	$	159,359

XML

Inventories (Tables)

9 Months Ended

Sep. 30, 2020

Inventories

Schedule of inventories

	As of September 30,		As of December 31,
(in thousands)	2020		2019
Raw materials	$	20,047	$	20,574
Work in process		15,575		10,165
Finished goods		38,486		37,465
Total inventories	$	74,108	$	68,204

XML

Property, Plant and Equipment, Net (Tables)

9 Months Ended

Sep. 30, 2020

Property, Plant and Equipment, Net

Schedule of property, plant and equipment, net

	As of September 30,		As of December 31,
(in thousands)	2020		2019
Land	$	554	$	634
Buildings		3,756		4,110
Furniture and fixtures		14,747		13,835
Machinery and equipment		25,826		25,438
Equipment leased to third parties under operating leases		27,510		29,217
Leasehold improvements		138,450		131,617
Computers and software		79,484		75,540
Total property, plant, and equipment, gross		290,327		280,391
Less: accumulated depreciation and amortization		(203,690)		(196,334)
Total property, plant, and equipment, net	$	86,637	$	84,057

XML

Acquisitions (Tables)

9 Months Ended

Sep. 30, 2020

2020 Acquisition activity, O&P business

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

(in thousands)
Cash paid, net of cash acquired	$	16,762
Issuance of seller notes at fair value		21,941
Deferred payment obligation at fair value		3,468
Additional consideration, net		3,975
Aggregate purchase price		46,146
Accounts receivable		3,182
Inventories		2,021
Customer relationships (Weighted average useful life of 5.0 years)		5,600
Non-compete agreements (Weighted average useful life of 5.0 years)		200
Other assets and liabilities, net		(4,301)
Net assets acquired		6,702
Goodwill	$	39,444

2019 Acquisition Activity, prosthetic and orthotic business

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

(in thousands)
Cash paid, net of cash acquired	$	35,909
Issuance of seller notes at fair value		7,835
Additional consideration, net(1)		626
Aggregate purchase price		44,370
Accounts receivable		4,128
Inventories		2,081
Customer relationships (Weighted average useful life of 4.7 years)		7,038
Non-compete agreements (Weighted average useful life of 4.9 years)		350
Other assets and liabilities, net		(2,983)
Net assets acquired		10,614
Goodwill	$	33,756

(1) Approximately $0.7 million of additional consideration represents payments made during the third quarter related to certain tax elections with the seller, offset by an immaterial amount of favorable working capital adjustments.

XML

Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2020

Goodwill and Other Intangible Assets

Schedule of goodwill allocated to the Company's reportable segments

	For the Nine Months Ended September 30, 2020
	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, 2019	$	660,912	$	(428,668)	$	232,244	$	139,299	$	(139,299)	$	—	$	800,211	$	(567,967)	$	232,244
Additions from acquisitions		39,386		—		39,386		—		—		—		39,386		—		39,386
Measurement period adjustments (1)		71		—		71		—		—		—		71		—		71
As of September 30, 2020	$	700,369	$	(428,668)	$	271,701	$	139,299	$	(139,299)	$	—	$	839,668	$	(567,967)	$	271,701

(1) Measurement period adjustments relate to 2020 and 2019 acquisitions and are primarily attributable to adjustments to the preliminary allocations of customer relationship intangibles.

	For the Year Ended December 31, 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		35,926		—		35,926		—		—		—		35,926		—		35,926
Measurement period adjustments (1)		(2,424)		—		(2,424)		—		—		—		(2,424)		—		(2,424)
As of December 31, 2019	$	660,912	$	(428,668)	$	232,244	$	139,299	$	(139,299)	$	—	$	800,211	$	(567,967)	$	232,244

(1) Measurement period adjustments relate to 2019 and 2018 acquisitions of approximately $2.1 million and $0.3 million, respectively, and are primarily attributable to adjustments to the preliminary allocations of customer relationship intangibles.

Schedule of balances related to finite-lived intangible assets

	As of September 30, 2020
	Gross Carrying		Accumulated		Accumulated		Net Carrying
(in thousands)	Amount		Amortization		Impairment		Amount
Customer lists	$	38,372	$	(26,844)	$	—	$	11,528
Trade name		255		(170)		—		85
Patents and other intangibles		9,011		(5,635)		—		3,376
Definite-lived intangible assets		47,638		(32,649)		—		14,989
Indefinite-lived trade name		9,070		—		(4,953)		4,117
Total other intangible assets	$	56,708	$	(32,649)	$	(4,953)	$	19,106

	As of December 31, 2019
	Gross Carrying		Accumulated		Accumulated		Net Carrying
(in thousands)	Amount		Amortization		Impairment		Amount
Customer lists	$	32,772	$	(22,726)	$	—	$	10,046
Trade name		255		(151)		—		104
Patents and other intangibles		9,188		(5,503)		—		3,685
Definite-lived intangible assets		42,215		(28,380)		—		13,835
Indefinite-lived trade name		9,070		—		(4,953)		4,117
Total other intangible assets	$	51,285	$	(28,380)	$	(4,953)	$	17,952

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

(in thousands)
2020 (remainder of the year)	$	1,406
2021		3,735
2022		3,668
2023		3,424
2024		1,941
Thereafter		815
Total	$	14,989

XML

Other Current Assets and Other Assets (Tables)

9 Months Ended

Sep. 30, 2020

Other Current Assets and Other Assets

Schedule of other current assets

	As of September 30,		As of December 31,
(in thousands)	2020		2019
Non-trade receivables	$	7,540	$	6,711
Prepaid maintenance		3,277		2,767
Prepaid insurance		909		264
Other prepaid assets		2,763		3,931
Total other current assets	$	14,489	$	13,673

Schedule of other assets

	As of September 30,		As of December 31,
(in thousands)	2020		2019
Implementation costs for cloud computing arrangements	$	4,694	$	1,964
Cash surrender value of company-owned life insurance		3,811		3,253
Finance lease right-of-use assets		2,795		1,488
Deposits		2,145		1,893
Non-trade receivables		1,791		2,398
Other		474		309
Total other assets	$	15,710	$	11,305

XML

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

9 Months Ended

Sep. 30, 2020

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)	2020		2019
Patient prepayments, deposits, and refunds payable	$	26,969	$	24,183
Accrued sales taxes and other taxes		10,240		8,543
Insurance and self-insurance accruals		7,786		8,033
Derivative liability		7,704		3,516
Liabilities incurred to seller in acquisitions		3,656		—
Accrued professional fees		1,547		2,533
Accrued interest payable		747		266
Other current liabilities		13,785		8,751
Total	$	72,434	$	55,825

Schedule of other liabilities

	As of September 30,		As of December 31,
(in thousands)	2020		2019
Supplemental executive retirement plan obligations	$	19,461	$	20,851
Derivative liability		16,075		9,821
Unrecognized tax benefits		7,910		5,296
Long-term insurance accruals		7,539		7,424
Deferred payroll taxes		7,118		—
Other		1,974		2,412
Total	$	60,077	$	45,804

XML

Debt and Other Obligations (Tables)

9 Months Ended

Sep. 30, 2020

Debt and Other Obligations

Schedule of debt

(in thousands)	As of September 30, 2020		As of December 31, 2019
Debt:
Term Loan B	$	492,375	$	496,163
Seller notes		29,208		9,005
Deferred payment obligation		4,000		—
Finance lease liabilities and other		3,606		2,033
Total debt before unamortized discount and debt issuance costs		529,189		507,201
Unamortized discount and debt issuance costs, net		(7,798)		(8,328)
Total debt	$	521,391	$	498,873
Current portion of long-term debt:
Term Loan B	$	5,050	$	5,050
Seller notes		21,893		3,175
Finance lease liabilities and other		848		527
Total current portion of long-term debt		27,791		8,752
Long-term debt	$	493,600	$	490,121

Schedule of maturities of debt

(in thousands)
2020 (remainder of year)	$	21,023
2021		9,759
2022		8,494
2023		8,049
2024		7,337
Thereafter		474,527
Total debt before unamortized discount and debt issuance costs, net		529,189
Unamortized discount and debt issuance costs, net		(7,798)
Total debt	$	521,391

XML

Derivative Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2020

Derivative Financial Instruments

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

(in thousands)	Cash Flow Hedges
Balance as of June 30, 2020	$	(19,612)
Unrealized loss recognized in other comprehensive loss, net of tax		(455)
Reclassification to interest expense, net		1,997
Balance as of September 30, 2020	$	(18,070)
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)

The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the nine months ended September 30, 2020 and 2019, respectively:

(in thousands)	Cash Flow Hedges
Balance as of December 31, 2019	$	(10,137)
Unrealized loss recognized in other comprehensive loss, net of tax		(12,518)
Reclassification to interest expense, net		4,585
Balance as of September 30, 2020	$	(18,070)
Balance as of December 31, 2018	$	(2,936)
Unrealized loss recognized in other comprehensive loss, net of tax		(10,135)
Reclassification to interest expense, net		870
Balance as of September 30, 2019	$	(12,201)

Schedule of fair value of derivative liabilities within the consolidated balance sheets

	As of September 30, 2020				As of December 31, 2019
(in thousands)	Assets		Liabilities		Assets		Liabilities
Derivatives designated as cash flow hedging instruments:
Accrued expenses and other current liabilities	$	—	$	7,704	$	—	$	3,516
Other liabilities		—		16,075		—		9,821

XML

Supplemental Executive Retirement Plans (Tables)

9 Months Ended

Sep. 30, 2020

Supplemental Executive Retirement Plans

Schedule of Change in Benefit Obligation

(in thousands)	2020		2019
Benefit obligation as of June 30	$	17,763	$	17,535
Service cost		98		84
Interest cost		121		164
Payments		(12)		(12)
Benefit obligation as of September 30	$	17,970	$	17,771
Benefit obligation as of December 31, 2019 and 2018, respectively	$	19,214	$	18,927
Service cost		294		251
Interest cost		363		494
Payments		(1,901)		(1,901)
Benefit obligation as of September 30	$	17,970	$	17,771

Schedule of Amounts Recognized in the Consolidated Balance Sheets

	As of September 30,		As of December 31,
(in thousands)	2020		2019
Current accrued expenses and other current liabilities	$	1,913	$	1,913
Non-current other liabilities		16,057		17,301
Total accrued liabilities	$	17,970	$	19,214

XML

Segment and Related Information (Tables)

9 Months Ended

Sep. 30, 2020

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)	2020		2019		2020		2019
Net revenues
Third party	$	212,664	$	230,931	$	43,973	$	48,707
Intersegments		—		—		50,011		53,670
Total net revenues		212,664		230,931		93,984		102,377
Material costs
Third party suppliers		56,599		65,055		24,863		26,979
Intersegments		7,339		6,284		42,672		47,386
Total material costs		63,938		71,339		67,535		74,365
Personnel expenses		76,989		81,274		12,738		13,320
Other expenses		34,713		37,245		5,957		6,858
Depreciation & amortization		4,786		4,943		2,633		2,723
Segment income from operations	$	32,238	$	36,130	$	5,121	$	5,111

	Patient Care				Products & Services
	For the Nine Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Net revenues
Third party	$	598,706	$	652,700	$	125,104	$	144,455
Intersegments		—		—		138,899		150,245
Total net revenues		598,706		652,700		264,003		294,700
Material costs
Third party suppliers		160,212		181,358		68,463		80,452
Intersegments		18,639		18,268		120,260		131,977
Total material costs		178,851		199,626		188,723		212,429
Personnel expenses		216,910		233,402		35,824		39,393
Other expenses		86,462		112,014		18,614		20,883
Depreciation & amortization		14,089		13,997		7,883		7,862
Segment income from operations	$	102,394	$	93,661	$	12,959	$	14,133

Schedule of reconciliation of reportable segments

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

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Income from operations
Patient Care	$	32,238	$	36,130	$	102,394	$	93,661
Products & Services		5,121		5,111		12,959		14,133
Corporate & other		(24,284)		(23,838)		(72,590)		(69,267)
Income from operations		13,075		17,403		42,763		38,527
Interest expense, net		8,013		8,954		24,918		25,973
Non-service defined benefit plan expense		158		173		474		519
Income before income taxes		4,904		8,276		17,371		12,035
(Benefit) provision for income taxes		(1,911)		2,585		(4,750)		3,260
Net income	$	6,815	$	5,691	$	22,121	$	8,775

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)	2020		2019		2020		2019
Net revenues
Patient Care	$	212,664	$	230,931	$	598,706	$	652,700
Products & Services		93,984		102,377		264,003		294,700
Corporate & other		—		—		—		—
Consolidating adjustments		(50,011)		(53,670)		(138,899)		(150,245)
Consolidated net revenues	$	256,637	$	279,638	$	723,810	$	797,155

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)	2020		2019		2020		2019
Material costs
Patient Care	$	63,938	$	71,339	$	178,851	$	199,626
Products & Services		67,535		74,365		188,723		212,429
Corporate & other		—		—		—		—
Consolidating adjustments		(50,011)		(53,670)		(138,899)		(150,245)
Consolidated material costs	$	81,462	$	92,034	$	228,675	$	261,810

XML

Organization and Summary of Significant Accounting Policies - Description of Business (Details)	9 Months Ended
	Sep. 30, 2020 segment
Organization and Summary of Significant Accounting Policies
Number of operating segments	2

XML

Organization and Summary of Significant Accounting Policies (Details) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2020	Jun. 30, 2020	Jan. 01, 2020	Dec. 31, 2019
New Accounting Pronouncements or Change in Accounting Principle
Proceeds received from grant	$ 20,600	$ 20,600
Liability related to proceeds received from grant	3,400
Deferred payroll taxes under CARES Act	7,100
Cumulative effect on accumulated deficit	$ (310,068)			$ (331,951)
ASU 2016-13 | Restatement Adjustments
New Accounting Pronouncements or Change in Accounting Principle
Cumulative effect on accumulated deficit			$ 200

XML

Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2020	Sep. 30, 2019
Earnings Per Share
Total anti-dilutive shares (in shares)	34,379			10			20,202	0
Net income	$ 6,815	$ 31,054	$ (15,748)	$ 5,691	$ 10,035	$ (6,951)	$ 22,121	$ 8,775
Weighted average shares outstanding - basic	38,133,598			37,349,144			37,878,753	37,218,234
Effect of potentially dilutive restricted stock units and options	503,938			637,716			613,212	703,533
Weighted average shares outstanding - diluted	38,637,536			37,986,860			38,491,965	37,921,767
Basic and diluted:
Basic income per share	$ 0.18			$ 0.15			$ 0.58	$ 0.24
Diluted income per share	$ 0.18			$ 0.15			$ 0.57	$ 0.23

XML

Revenue Recognition (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Revenue Recognition
Net revenues	$ 256,637	$ 279,638	$ 723,810	$ 797,155
Patient Care
Revenue Recognition
Net revenues	212,664	230,931	598,706	652,700
Patient Care | Medicare
Revenue Recognition
Net revenues	68,135	72,879	194,052	206,295
Patient Care | Medicaid
Revenue Recognition
Net revenues	34,541	36,140	96,612	103,631
Patient Care | Commercial Insurance / Managed Care (excluding Medicare and Medicaid Managed Care)
Revenue Recognition
Net revenues	75,966	83,384	213,234	232,410
Patient Care | Veterans Administration
Revenue Recognition
Net revenues	19,339	23,816	54,057	64,635
Patient Care | Private Pay
Revenue Recognition
Net revenues	14,683	14,712	40,751	45,729
Patient Care | Operating segments
Revenue Recognition
Net revenues	212,664	230,931	598,706	652,700
Products & Services
Revenue Recognition
Net revenues	93,984	102,377	264,003	294,700
Products & Services | Operating segments
Revenue Recognition
Net revenues	43,973	48,707	125,104	144,455
Products & Services | Operating segments | Distribution services, net of intersegment revenue eliminations
Revenue Recognition
Net revenues	32,711	36,653	90,928	107,510
Products & Services | Operating segments | Therapeutic solutions
Revenue Recognition
Net revenues	$ 11,262	$ 12,054	$ 34,176	$ 36,945

XML

Accounts Receivable, Net (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2020	Dec. 31, 2019
Accounts Receivable, net
Gross charges before estimates for implicit price concessions	$ 178,956	$ 229,683
Less estimates for implicit price concessions:
Payor disallowances	(47,314)	(58,094)
Patient non-payments	(6,916)	(9,589)
Accounts receivable, gross	124,726	162,000
Allowance for doubtful accounts	(3,317)	(2,641)
Accounts receivable, net	121,409	159,359
Additional allowance for doubtful account	700
Patient Care
Accounts Receivable, net
Gross charges before estimates for implicit price concessions	157,191	202,132
Less estimates for implicit price concessions:
Payor disallowances	(47,314)	(58,094)
Patient non-payments	(6,916)	(9,589)
Accounts receivable, gross	102,961	134,449
Accounts receivable, net	102,961	134,449
Products & Services
Accounts Receivable, net
Gross charges before estimates for implicit price concessions	21,765	27,551
Less estimates for implicit price concessions:
Accounts receivable, gross	21,765	27,551
Allowance for doubtful accounts	(3,317)	(2,641)
Accounts receivable, net	$ 18,448	$ 24,910

XML

Inventories (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Inventories
Raw materials	$ 20,047	$ 20,574
Work in process	15,575	10,165
Finished goods	38,486	37,465
Total inventories	$ 74,108	$ 68,204

XML

Property, Plant and Equipment, Net (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019	Dec. 31, 2019
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	$ 290,327		$ 290,327		$ 280,391
Less: accumulated depreciation and amortization	(203,690)		(203,690)		(196,334)
Total property, plant, and equipment, net	86,637		86,637		84,057
Depreciation expense	7,000	$ 7,700	21,400	$ 22,800
Amortization of finance right-of-use assets	200	$ 100	500	$ 200
Land
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	554		554		634
Buildings
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	3,756		3,756		4,110
Furniture and fixtures
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	14,747		14,747		13,835
Machinery and equipment
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	25,826		25,826		25,438
Equipment leased to third parties under operating leases
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	27,510		27,510		29,217
Leasehold improvements
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	138,450		138,450		131,617
Computers and software
Property, Plant and Equipment, Net
Total property, plant, and equipment, gross	$ 79,484		$ 79,484		$ 75,540

XML

Acquisitions (Details) - USD ($) $ in Thousands	3 Months Ended						9 Months Ended		12 Months Ended
	Sep. 30, 2020	Jun. 30, 2020	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2020	Sep. 30, 2019	Dec. 31, 2019
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Cash paid, net of cash acquired							$ 16,854	$ 31,585
Acquisition-related costs	$ 0						400
General and administrative expenses
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Acquisition-related costs	100						600
2020 Acquisition activity, O&P business
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Cash paid, net of cash acquired		$ 16,762
Issuance of seller notes at fair value		21,941
Deferred payment obligations		3,468
Additional consideration		3,975
Aggregate purchase price		46,146
Accounts receivable		3,182
Inventories		2,021
Other assets and liabilities, net		(4,301)
Net assets acquired		6,702
Goodwill		39,444
Operating right-of-use assets	4,700						4,700
Operating lease liabilities	$ 4,700						$ 4,700
Consideration through settlement of amounts due from acquiree		400
2020 Acquisition activity, O&P business | Customer Relationships
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Other intangible assets, net		$ 5,600
Weighted average useful life		5 years
2020 Acquisition activity, O&P business | Non-compete agreements
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Other intangible assets, net		$ 200
Weighted average useful life		5 years
2020 Acquisition activity, O&P business | Payable in lump sum payment due in October 2020
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Issuance of seller notes at fair value		$ 18,100
Additional consideration		3,600
2020 Acquisition activity, O&P business | Payable in annual installments over a period of 3 years
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Issuance of seller notes at fair value		3,800
Deferred payment obligations		$ 3,500
Beginning period for the deferred payment obligations payable		4 years
Thereafter period for payable deferred payment obligations		3 years
2019 Acquisition Activity, prosthetic and orthotic business
Aggregate purchase price of this acquisition was allocated on a preliminary basis
Cash paid, net of cash acquired			$ 5,000	$ 3,000	$ 200	$ 27,700			$ 35,909
Issuance of seller notes at fair value			2,800	300	300	4,400			7,835
Additional consideration				700		700			626
Aggregate purchase price			7,800	$ 3,300	$ 500	$ 32,800			44,370
Accounts receivable			4,128						4,128
Inventories			2,081						2,081
Other assets and liabilities, net			(2,983)						(2,983)
Net assets acquired			10,614						10,614
Goodwill									33,756
Operating right-of-use assets			5,200						5,200
Operating lease liabilities			5,200						5,200
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			7,038						$ 7,038
Weighted average useful life									4 years 8 months 12 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			$ 350						$ 350
Weighted average useful life									4 years 10 months 24 days

XML

Goodwill and Other Intangible Assets - Goodwill (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2020	Dec. 31, 2019	Dec. 31, 2018
Goodwill
Measurement period adjustments related to acquisitions		$ 2,100	$ 300
Goodwill allocated
Goodwill, Net as of beginning of the year	$ 232,244
Goodwill, Net as of end of the year	271,701	232,244
Patient Care
Goodwill allocated
Goodwill, Gross as of beginning of the year	660,912	627,410
Goodwill, Accumulated Impairment	(428,668)	(428,668)	(428,668)
Goodwill, Net as of beginning of the year	232,244	198,742
Additions from acquisitions	39,386	35,926
Measurement period adjustments	71	(2,424)
Goodwill, Gross as of end of the year	700,369	660,912	627,410
Goodwill, Net as of end of the year	271,701	232,244	198,742
Products & Services
Goodwill allocated
Goodwill, Gross as of beginning of the year	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	139,299
Consolidated
Goodwill allocated
Goodwill, Gross as of beginning of the year	800,211	766,709
Goodwill, Accumulated Impairment	(567,967)	(567,967)	(567,967)
Goodwill, Net as of beginning of the year	232,244	198,742
Additions from acquisitions	39,386	35,926
Measurement period adjustments	71	(2,424)
Goodwill, Gross as of end of the year	839,668	800,211	766,709
Goodwill, Net as of end of the year	$ 271,701	$ 232,244	$ 198,742

XML

Goodwill and Other Intangible Assets - Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019	Dec. 31, 2019
GOODWILL AND OTHER INTANGIBLE ASSETS
Definite-lived, Gross Carrying Amount	$ 47,638		$ 47,638		$ 42,215
Definite-lived, Accumulated Amortization	(32,649)		(32,649)		(28,380)
Definite-lived, Net Carrying Amount	14,989		14,989		13,835
Total other intangible assets, Gross Carrying Amount	56,708		56,708		51,285
Total other intangible assets, Accumulated Amortization	(32,649)		(32,649)		(28,380)
Accumulated Impairment	(4,953)		(4,953)		(4,953)
Total other intangible assets, Net Carrying Amount	19,106		19,106		17,952
Amortization expense	1,600	$ 1,600	4,600	$ 3,900
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	38,372		38,372		32,772
Definite-lived, Accumulated Amortization	(26,844)		(26,844)		(22,726)
Definite-lived, Net Carrying Amount	11,528		11,528		10,046
Trade name
GOODWILL AND OTHER INTANGIBLE ASSETS
Definite-lived, Gross Carrying Amount	255		255		255
Definite-lived, Accumulated Amortization	(170)		(170)		(151)
Definite-lived, Net Carrying Amount	85		85		104
Patents and other intangibles
GOODWILL AND OTHER INTANGIBLE ASSETS
Definite-lived, Gross Carrying Amount	9,011		9,011		9,188
Definite-lived, Accumulated Amortization	(5,635)		(5,635)		(5,503)
Definite-lived, Net Carrying Amount	$ 3,376		$ 3,376		$ 3,685

XML

Goodwill and Other Intangible Assets - Estimated Amortization (Details) $ in Thousands	Sep. 30, 2020 USD ($)
Estimated aggregate amortization expense for definite-lived intangible assets
2020 (remainder of the year)	$ 1,406
2021	3,735
2022	3,668
2023	3,424
2024	1,941
Thereafter	815
Total	$ 14,989

XML

Other Current Assets and Other Assets - Other Current Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Other Current Assets and Other Assets
Non-trade receivables	$ 7,540	$ 6,711
Prepaid maintenance	3,277	2,767
Prepaid insurance	909	264
Other prepaid assets	2,763	3,931
Total other current assets	$ 14,489	$ 13,673

XML

Other Current Assets and Other Assets - Other Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Other Current Assets and Other Assets
Implementation costs for cloud computing arrangements	$ 4,694	$ 1,964
Cash surrender value of company-owned life insurance	3,811	3,253
Finance lease right-of-use assets	2,795	1,488
Deposits	2,145	1,893
Non-trade receivables	1,791	2,398
Other	474	309
Total other assets	$ 15,710	$ 11,305

XML

Accrued Expenses and Other Current Liabilities and Other Liabilities - Accrued expenses and other current liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Accrued Expenses and Other Current Liabilities and Other Liabilities
Patient prepayments, deposits, and refunds payable	$ 26,969	$ 24,183
Accrued sales taxes and other taxes	10,240	8,543
Insurance and self-insurance accruals	7,786	8,033
Derivative liability	7,704	3,516
Liabilities incurred to seller in acquisitions	3,656
Accrued professional fees	1,547	2,533
Accrued interest payable	747	266
Other current liabilities	13,785	8,751
Total	$ 72,434	$ 55,825

XML

Accrued Expenses and Other Current Liabilities and Other Liabilities - Other liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Accrued Expenses and Other Current Liabilities and Other Liabilities
Supplemental executive retirement plan obligations	$ 19,461	$ 20,851
Derivative liability	16,075	9,821
Unrecognized tax benefits	7,910	5,296
Long-term insurance accruals	7,539	7,424
Deferred payroll taxes	7,118
Other	1,974	2,412
Total	$ 60,077	$ 45,804

XML

Income Taxes - (Details) - USD ($) $ in Thousands	3 Months Ended			9 Months Ended		12 Months Ended
	Sep. 30, 2020	Jun. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019	Dec. 31, 2019
Income Taxes
(Benefit) provision for income taxes	$ (1,911)		$ 2,585	$ (4,750)	$ 3,260
Effective tax rate	(39.00%)		31.20%	(27.30%)	27.10%
Federal statutory tax rate (as a percent)	21.00%		21.00%	21.00%	21.00%
Recognition of tax benefits, Current year		$ 2,200
Recognition of tax benefits, Prior years						$ 6,300
Deferred taxes due to CARES Act	$ 9,500			$ 9,500
Recognition of tax benefits, Prior years due to CARES Act				$ 4,000

XML

Debt and Other Obligations (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Debt and Other Obligations
Total debt before unamortized discount and debt issuance costs	$ 529,189	$ 507,201
Unamortized discount and debt issuance costs, net	(7,798)	(8,328)
Total debt	521,391	498,873
Total current portion of long-term debt	27,791	8,752
Long-term debt	493,600	490,121
Term Loan B
Debt and Other Obligations
Total debt before unamortized discount and debt issuance costs	492,375	496,163
Total 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	29,208	9,005
Total current portion of long-term debt	21,893	3,175
Deferred payment obligation
Debt and Other Obligations
Total debt before unamortized discount and debt issuance costs	4,000
Finance lease liabilities and other
Debt and Other Obligations
Total debt before unamortized discount and debt issuance costs	3,606	2,033
Total current portion of long-term debt	$ 848	$ 527

XML

Debt and Other Obligations - Refinancing of Credit Agreement and Term B Borrowings (Details) $ in Thousands		1 Months Ended				9 Months Ended
	Mar. 06, 2018 USD ($)	Sep. 30, 2020 USD ($)	Jun. 30, 2020 USD ($)	May 31, 2020	Mar. 31, 2020 USD ($)	Sep. 30, 2020 USD ($)	Dec. 31, 2019 USD ($)
Debt and Other Obligations
Outstanding amount of debt		$ 529,189				$ 529,189	$ 507,201
Letters of credit outstanding amount		$ 5,200				5,200
Debt issuance costs						$ 214
LIBOR | Minimum
Debt and Other Obligations
Minimum interest base				1.00%
LIBOR | Maximum
Debt and Other Obligations
Increase in margin(as a percent)				3.75%
Fiscal quarters ended June 30, 2020 through March 31, 2021
Debt and Other Obligations
Consolidated leverage ratio				5.25%
Fiscal quarters ended June 30, 2021 through September 30, 2021
Debt and Other Obligations
Consolidated leverage ratio				5.00%
December 31, 2021 and the last day of each fiscal quarter thereafter
Debt and Other Obligations
Consolidated leverage ratio				4.75%
Credit Agreement, dated March 6, 2018, Term Loan B
Debt and Other Obligations
Outstanding amount of debt	$ 505,000
Weighted average interest rate		3.60%				3.60%
Revolving credit facility
Debt and Other Obligations
Borrowing		$ 22,000	$ 57,000		$ 79,000
Available borrowing capacity		94,800				$ 94,800
Maximum borrowing capacity	605,000
Letters of credit outstanding amount		$ 100,000				$ 100,000
Increase in additional borrowing capacity	$ 125,000
Leverage ratio to increase credit commitment	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 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

Debt and Other Obligations - Seller Notes (Details) - USD ($) $ in Millions	Sep. 30, 2020	Dec. 31, 2019
Seller Notes
Debt and Other Obligations
Unamortized discount	$ 0.9	$ 0.4
Seller Notes | Minimum
Debt and Other Obligations
Interest rate stated percentage	2.50%
Seller Notes | Maximum
Debt and Other Obligations
Interest rate stated percentage	3.00%
Deferred payment obligation
Debt and Other Obligations
Unamortized discount	$ 0.5
Interest rate stated percentage	3.00%

XML

Debt and Other Obligations - Maturities of Debt (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Maturities of debt
2020 (remainder of year)	$ 21,023
2021	9,759
2022	8,494
2023	8,049
2024	7,337
Thereafter	474,527
Total debt before unamortized discount and debt issuance costs, net	529,189	$ 507,201
Unamortized discount and debt issuance costs, net	(7,798)	(8,328)
Total debt	$ 521,391	$ 498,873

XML

Fair Value Measurements - Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
FAIR VALUE MEASUREMENTS
Unamortized discount and debt issuance costs, net	$ 7,798	$ 8,328
Credit Agreement, dated March 6, 2018, Term Loan B
FAIR VALUE MEASUREMENTS
Unamortized discount and debt issuance costs, net	6,900	7,900
Credit Agreement, dated March 6, 2018, Term Loan B | Carrying Value
FAIR VALUE MEASUREMENTS
Debt	492,400	496,200
Credit Agreement, dated March 6, 2018, Term Loan B | Recurring basis | Level 3 | Fair Value
FAIR VALUE MEASUREMENTS
Debt	487,500
Credit Agreement, dated March 6, 2018, Term Loan B | Revolving credit facility | Recurring basis | Level 3 | Fair Value
FAIR VALUE MEASUREMENTS
Debt		497,400
Seller Notes | Carrying Value
FAIR VALUE MEASUREMENTS
Debt	$ 32,300	$ 900

XML

Derivative Financial Instruments - Cash Flow Hedge (Details) - Interest rate swap agreements - Cash flow hedges - USD ($) $ in Millions	Sep. 30, 2020	Dec. 31, 2019	Mar. 31, 2018
DERIVATIVE FINANCIAL INSTRUMENTS
Notional amount of derivative instrument	$ 300.0	$ 312.5	$ 325.0
Annual reduction in notional amount of derivative			$ 12.5

XML

Derivative Financial Instruments - Changes in Net Loss on Cash Flow Hedges Included in Accumulated Other Comprehensive Income (Loss) (Details) - Interest rate swap agreements - Cash flow hedges - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Changes in Net Gain or Loss on Cash Flow Hedges Included in Accumulated Other Comprehensive Income (Loss)
Balance at the beginning of the period	$ (19,612)	$ (10,560)	$ (10,137)	$ (2,936)
Unrealized loss recognized in other comprehensive loss, net of tax	(455)	(2,060)	(12,518)	(10,135)
Reclassification to interest expense, net	1,997	419	4,585	870
Balance at the end of the period	$ (18,070)	$ (12,201)	$ (18,070)	$ (12,201)

XML

Derivative Financial Instruments - Fair Value of Derivative Assets and Liabilities (Details) - Cash flow hedges - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Accrued expenses and other current liabilities
Derivatives designated as cash flow hedging instruments:
Liabilities	$ 7,704	$ 3,516
Other liabilities
Derivatives designated as cash flow hedging instruments:
Liabilities	$ 16,075	$ 9,821

XML

Share-Based Compensation (Details) - USD ($) $ / shares in Units, $ in Millions		1 Months Ended	3 Months Ended			9 Months Ended
	May 19, 2017	May 31, 2020	Sep. 30, 2020	Jun. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019	May 17, 2019
Share Based Compensation
Options outstanding and exercisable (in share)			520,105			520,105
Weighted average exercise price of options exercisable (in dollars per share)			$ 12.77			$ 12.77
Average remaining contractual term of options exercisable						6 years 7 months 6 days
Stock-based compensation expense			$ 3.1		$ 3.4	$ 15.6	$ 10.1
Special Equity Plan
Share Based Compensation
Shares of common stock authorized for issuance under the share-based compensation plan	1,500,000
2019 Omnibus Incentive Plan
Share Based Compensation
Shares of common stock authorized for issuance under the share-based compensation plan								2,025,000
2016 Omnibus Incentive Plan
Share Based Compensation
Available for issuance (in shares)								243,611
Stock Options | Special Equity Plan
Share Based Compensation
Issued (in shares)	800,000
Performance-based stock awards
Share Based Compensation
Shares outstanding			367,097			367,097
Weighted average grant date fair value			$ 18.94			$ 18.94
Performance-based stock awards | Special Equity Plan
Share Based Compensation
Issued (in shares)	300,000
Performance period		33 months
Reduction in performance period		3 months
Incremental fair value				$ 5.9
Unvested restricted stock
Share Based Compensation
Shares outstanding			1,564,081			1,564,081
Employee Service Based Awards
Share Based Compensation
Shares outstanding			1,126,361			1,126,361
Weighted average grant date fair value			$ 19.23			$ 19.23
Director Service Based Awards
Share Based Compensation
Shares outstanding			70,623			70,623
Weighted average grant date fair value			$ 17.08			$ 17.08

XML

Supplemental Executive Retirement Plans - Plan Details and Change in Benefit Obligation (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020 USD ($)	Sep. 30, 2019 USD ($)	Sep. 30, 2020 USD ($) payment	Sep. 30, 2019 USD ($)	Dec. 31, 2019 USD ($)
Supplemental Executive Retirement Plans
Number of annual payments | payment			15
Change in Benefit Obligation
Benefit obligation at the beginning of the period	$ 17,763	$ 17,535	$ 19,214	$ 18,927
Service cost	98	84	294	251
Interest cost	121	164	363	494
Payments	(12)	(12)	(1,901)	(1,901)
Benefit obligation at the end of the period	17,970	$ 17,771	17,970	$ 17,771
Amounts Recognized in the Condensed Consolidated Balance Sheets:
Current accrued expenses and other current liabilities	1,913		1,913		$ 1,913
Non-current other liabilities	16,057		16,057		17,301
Total accrued liabilities	$ 17,970		$ 17,970		$ 19,214

XML

Supplemental Executive Retirement Plans - DC SERP (Details) - USD ($) $ in Millions	Sep. 30, 2020	Dec. 31, 2019
Supplemental Executive Retirement Plans
Estimated accumulated benefit obligation	$ 4.2	$ 3.9
Funded estimated accumulated benefit obligation	3.8	3.3
Unfunded estimated accumulated benefit obligation	$ 0.4	$ 0.6

XML

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

XML

Segment and Related Information - Paragraphs (Details)	9 Months Ended
	Sep. 30, 2020 segment
Segment and Related Information
Number of operating segments	2

XML

Segment and Related Information - Financial Information (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Segment and Related Information
Net revenues	$ 256,637	$ 279,638	$ 723,810	$ 797,155
Material costs	81,462	92,034	228,675	261,810
Personnel expenses	89,727	94,594	252,734	272,795
Depreciation & amortization	8,803	9,373	26,513	26,906
Segment income from operations	13,075	17,403	42,763	38,527
Purchase of property, plant and equipment			19,352	20,262
Patient Care
Segment and Related Information
Net revenues	212,664	230,931	598,706	652,700
Material costs	63,938	71,339	178,851	199,626
Personnel expenses	76,989	81,274	216,910	233,402
Other expenses	34,713	37,245	86,462	112,014
Depreciation & amortization	4,786	4,943	14,089	13,997
Segment income from operations	32,238	36,130	102,394	93,661
Patient Care | Operating segments
Segment and Related Information
Net revenues	212,664	230,931	598,706	652,700
Material costs	56,599	65,055	160,212	181,358
Patient Care | Intersegments
Segment and Related Information
Material costs	7,339	6,284	18,639	18,268
Products & Services
Segment and Related Information
Net revenues	93,984	102,377	264,003	294,700
Material costs	67,535	74,365	188,723	212,429
Personnel expenses	12,738	13,320	35,824	39,393
Other expenses	5,957	6,858	18,614	20,883
Depreciation & amortization	2,633	2,723	7,883	7,862
Segment income from operations	5,121	5,111	12,959	14,133
Products & Services | Operating segments
Segment and Related Information
Net revenues	43,973	48,707	125,104	144,455
Material costs	24,863	26,979	68,463	80,452
Products & Services | Intersegments
Segment and Related Information
Net revenues	50,011	53,670	138,899	150,245
Material costs	$ 42,672	$ 47,386	$ 120,260	$ 131,977

XML

Segment and Related Information - Reconciliation of the Reportable Segments (Details) - USD ($) $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2020	Sep. 30, 2019	Dec. 31, 2019
Segment and Related Information
Income from operations	$ 13,075			$ 17,403			$ 42,763	$ 38,527
Interest expense, net	8,013			8,954			24,918	25,973
Non-service defined benefit plan expense	158			173			474	519
Income before income taxes	4,904			8,276			17,371	12,035
(Benefit) provision for income taxes	(1,911)			2,585			(4,750)	3,260
Net income	6,815	$ 31,054	$ (15,748)	5,691	$ 10,035	$ (6,951)	22,121	8,775
Consolidated net revenues	256,637			279,638			723,810	797,155
Consolidated material costs	81,462			92,034			228,675	261,810
Consolidated purchase of property, plant and equipment							19,352	20,262
Consolidated assets	952,681						952,681		$ 842,253
Corporate & other
Segment and Related Information
Income from operations	(24,284)			(23,838)			(72,590)	(69,267)
Consolidating adjustments
Segment and Related Information
Consolidated net revenues	(50,011)			(53,670)			(138,899)	(150,245)
Consolidated material costs	(50,011)			(53,670)			(138,899)	(150,245)
Patient Care
Segment and Related Information
Income from operations	32,238			36,130			102,394	93,661
Consolidated net revenues	212,664			230,931			598,706	652,700
Consolidated material costs	63,938			71,339			178,851	199,626
Patient Care | Operating segments
Segment and Related Information
Consolidated net revenues	212,664			230,931			598,706	652,700
Consolidated material costs	56,599			65,055			160,212	181,358
Products & Services
Segment and Related Information
Income from operations	5,121			5,111			12,959	14,133
Consolidated net revenues	93,984			102,377			264,003	294,700
Consolidated material costs	67,535			74,365			188,723	212,429
Products & Services | Operating segments
Segment and Related Information
Consolidated net revenues	43,973			48,707			125,104	144,455
Consolidated material costs	$ 24,863			$ 26,979			$ 68,463	$ 80,452