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