UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended March 31, 2019
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from
to
Commission File Number 1-10670
HANGER, INC.
(Exact name of registrant as specified in its charter.)
|
Delaware
|
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84-0904275
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10910 Domain Drive, Suite 300, Austin, TX
|
|
78758
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Registrant’s phone number, including area code: (512) 777-3800
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer o |
Accelerated filer x |
Non-accelerated filer o |
Smaller reporting company o |
Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol |
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Name of each exchange on which registered |
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Common Stock, par value $0.01 per share |
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HNGR |
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New York Stock Exchange |
As of April 30, 2019 the registrant had 37,239,511 shares of its Common Stock outstanding.
HANGER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except par value and share amounts)
(Unaudited)
|
|
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As of March 31, |
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As of December 31, |
|
||
|
|
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2019 |
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2018 |
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||
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ASSETS |
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|
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|
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Current assets: |
|
|
|
|
|
||
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Cash and cash equivalents |
|
$ |
20,511 |
|
$ |
95,114 |
|
|
Accounts receivable, net |
|
136,891 |
|
143,986 |
|
||
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Inventories |
|
70,036 |
|
67,690 |
|
||
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Income taxes receivable |
|
734 |
|
379 |
|
||
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Other current assets |
|
17,058 |
|
18,731 |
|
||
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Total current assets |
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245,230 |
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325,900 |
|
||
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Non-current assets: |
|
|
|
|
|
||
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Property, plant and equipment, net |
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81,951 |
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89,489 |
|
||
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Goodwill |
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226,632 |
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198,742 |
|
||
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Other intangible assets, net |
|
16,415 |
|
15,478 |
|
||
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Deferred income taxes |
|
69,738 |
|
65,635 |
|
||
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Operating lease right-of-use assets |
|
103,676 |
|
— |
|
||
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Other assets |
|
8,392 |
|
7,766 |
|
||
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Total assets |
|
$ |
752,034 |
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$ |
703,010 |
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TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT |
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|
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Current liabilities: |
|
|
|
|
|
||
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Current portion of long-term debt |
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$ |
8,677 |
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$ |
8,583 |
|
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Accounts payable |
|
50,173 |
|
55,797 |
|
||
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Accrued expenses and other current liabilities |
|
53,311 |
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51,783 |
|
||
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Accrued compensation related costs |
|
22,228 |
|
55,111 |
|
||
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Current portion of operating lease liabilities |
|
33,675 |
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— |
|
||
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Total current liabilities |
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168,064 |
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171,274 |
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||
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Long-term liabilities: |
|
|
|
|
|
||
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Long-term debt, less current portion |
|
490,623 |
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502,090 |
|
||
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Operating lease liabilities |
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83,693 |
|
— |
|
||
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Other liabilities |
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40,259 |
|
51,570 |
|
||
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Total liabilities |
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782,639 |
|
724,934 |
|
||
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Commitments and contingencies (Note R) |
|
|
|
|
|
||
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Shareholders’ deficit: |
|
|
|
|
|
||
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Common stock, $0.01 par value; 60,000,000 shares authorized; 37,413,845 shares issued and 37,271,024 shares outstanding in 2019, and 37,063,995 shares issued and 36,921,174 shares outstanding in 2018 |
|
374 |
|
371 |
|
||
|
Additional paid-in capital |
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343,591 |
|
343,955 |
|
||
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Accumulated other comprehensive loss |
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(7,461 |
) |
(4,531 |
) |
||
|
Accumulated deficit |
|
(366,413 |
) |
(361,023 |
) |
||
|
Treasury stock, at cost; 142,821 shares at 2019 and 2018, respectively |
|
(696 |
) |
(696 |
) |
||
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Total shareholders’ deficit |
|
(30,605 |
) |
(21,924 |
) |
||
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Total liabilities and shareholders’ deficit |
|
$ |
752,034 |
|
$ |
703,010 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HANGER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share amounts)
(Unaudited)
|
|
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For the Three Months Ended
|
|
||||
|
|
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2019 |
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2018 |
|
||
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Net revenues |
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$ |
236,419 |
|
$ |
233,995 |
|
|
Material costs |
|
78,377 |
|
76,356 |
|
||
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Personnel costs |
|
86,711 |
|
86,108 |
|
||
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Other operating costs |
|
33,555 |
|
31,096 |
|
||
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General and administrative expenses |
|
28,282 |
|
25,636 |
|
||
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Professional accounting and legal fees |
|
2,700 |
|
4,846 |
|
||
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Depreciation and amortization |
|
8,773 |
|
9,330 |
|
||
|
(Loss) income from operations |
|
(1,979 |
) |
623 |
|
||
|
Interest expense, net |
|
8,538 |
|
12,263 |
|
||
|
Loss on extinguishment of debt |
|
— |
|
16,998 |
|
||
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Non-service defined benefit plan expense |
|
173 |
|
176 |
|
||
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Loss before income taxes |
|
(10,690 |
) |
(28,814 |
) |
||
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Benefit for income taxes |
|
(3,739 |
) |
(6,196 |
) |
||
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Net loss |
|
$ |
(6,951 |
) |
$ |
(22,618 |
) |
|
|
|
|
|
|
|
||
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Basic and Diluted Per Common Share Data: |
|
|
|
|
|
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Basic and diluted loss per share |
|
$ |
(0.19 |
) |
$ |
(0.62 |
) |
|
Weighted average shares used to compute basic and diluted earnings per common share |
|
37,001,977 |
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36,498,482 |
|
||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HANGER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(dollars in thousands)
(Unaudited)
|
|
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For the Three Months Ended
|
|
||||
|
|
|
2019 |
|
2018 |
|
||
|
Net loss |
|
$ |
(6,951 |
) |
$ |
(22,618 |
) |
|
|
|
|
|
|
|
||
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Other comprehensive loss: |
|
|
|
|
|
||
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Unrealized loss on cash flow hedges (net of tax benefit of $924 for three months ended March 31, 2019 and tax benefit of $702 for three months ended March 31, 2018) |
|
$ |
(2,936 |
) |
$ |
(2,290 |
) |
|
Unrealized gain (loss) on defined benefit plan (net of tax provision of $2 for three months ended March 31, 2019 and tax benefit of $105 for three months ended March 31, 2018) |
|
6 |
|
(292 |
) |
||
|
Total other comprehensive loss |
|
(2,930 |
) |
(2,582 |
) |
||
|
Comprehensive loss |
|
$ |
(9,881 |
) |
$ |
(25,200 |
) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HANGER, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIT
(dollars and share amounts in thousands)
(Unaudited)
|
|
|
Common
|
|
Common
|
|
Additional
|
|
Accumulated
|
|
Accumulated
|
|
Treasury
|
|
Total |
|
||||||
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Balance, December 31, 2018 |
|
36,921 |
|
$ |
371 |
|
$ |
343,955 |
|
$ |
(4,531 |
) |
$ |
(361,023 |
) |
$ |
(696 |
) |
$ |
(21,924 |
) |
|
Cumulative effect of a change in accounting for leases (Note A) |
|
— |
|
— |
|
— |
|
— |
|
1,561 |
|
— |
|
1,561 |
|
||||||
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Balance, January 1, 2019 |
|
36,921 |
|
371 |
|
343,955 |
|
(4,531 |
) |
(359,462 |
) |
(696 |
) |
(20,363 |
) |
||||||
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
(6,951 |
) |
— |
|
(6,951 |
) |
||||||
|
Shares based compensation expense |
|
— |
|
— |
|
3,265 |
|
— |
|
— |
|
— |
|
3,265 |
|
||||||
|
Issuance of common stock upon vesting of restricted stock units |
|
350 |
|
3 |
|
(3 |
) |
— |
|
— |
|
— |
|
— |
|
||||||
|
Effect of shares withheld to cover taxes |
|
— |
|
— |
|
(3,626 |
) |
— |
|
— |
|
— |
|
(3,626 |
) |
||||||
|
Total other comprehensive loss |
|
— |
|
— |
|
— |
|
(2,930 |
) |
— |
|
— |
|
(2,930 |
) |
||||||
|
Balance, March 31, 2019 |
|
37,271 |
|
$ |
374 |
|
$ |
343,591 |
|
$ |
(7,461 |
) |
$ |
(366,413 |
) |
$ |
(696 |
) |
$ |
(30,605 |
) |
|
|
|
Common
|
|
Common
|
|
Additional
|
|
Accumulated
|
|
Accumulated
|
|
Treasury
|
|
Total |
|
||||||
|
Balance, December 31, 2017 |
|
36,372 |
|
$ |
365 |
|
$ |
333,738 |
|
$ |
(1,686 |
) |
$ |
(359,772 |
) |
$ |
(696 |
) |
$ |
(28,051 |
) |
|
Cumulative effect of a change in accounting for revenue recognition |
|
— |
|
— |
|
— |
|
— |
|
(759 |
) |
— |
|
(759 |
) |
||||||
|
Balance, January 1, 2018 |
|
36,372 |
|
365 |
|
333,738 |
|
(1,686 |
) |
(360,531 |
) |
(696 |
) |
(28,810 |
) |
||||||
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
(22,618 |
) |
— |
|
(22,618 |
) |
||||||
|
Shares based compensation expense |
|
— |
|
— |
|
2,585 |
|
— |
|
— |
|
— |
|
2,585 |
|
||||||
|
Issuance of common stock upon vesting of restricted stock units |
|
372 |
|
4 |
|
(4 |
) |
— |
|
— |
|
— |
|
— |
|
||||||
|
Effect of shares withheld to cover taxes |
|
— |
|
— |
|
(2,150 |
) |
— |
|
— |
|
— |
|
(2,150 |
) |
||||||
|
Total other comprehensive loss |
|
— |
|
— |
|
— |
|
(2,582 |
) |
— |
|
— |
|
(2,582 |
) |
||||||
|
Balance, March 31, 2018 |
|
36,744 |
|
$ |
369 |
|
$ |
334,169 |
|
$ |
(4,268 |
) |
$ |
(383,149 |
) |
$ |
(696 |
) |
$ |
(53,575 |
) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HANGER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
|
|
|
For the Three Months Ended
|
|
||||
|
|
|
2019 |
|
2018 |
|
||
|
Cash flow used in operating activities: |
|
|
|
|
|
||
|
Net loss |
|
$ |
(6,951 |
) |
$ |
(22,618 |
) |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
||
|
Depreciation and amortization |
|
8,773 |
|
9,330 |
|
||
|
Amortization of right-of-use assets |
|
9,161 |
|
— |
|
||
|
Benefit for doubtful accounts |
|
(20 |
) |
(94 |
) |
||
|
Stock-based compensation expense |
|
3,265 |
|
2,585 |
|
||
|
Deferred income taxes |
|
(3,749 |
) |
(6,355 |
) |
||
|
Amortization of debt discounts and issuance costs |
|
375 |
|
1,701 |
|
||
|
Loss on extinguishment of debt |
|
— |
|
16,998 |
|
||
|
Gain on sale and disposal of fixed assets |
|
(481 |
) |
(594 |
) |
||
|
Changes in operating assets and liabilities (Note T) |
|
(43,173 |
) |
(9,426 |
) |
||
|
Net cash used in operating activities |
|
(32,800 |
) |
(8,473 |
) |
||
|
Cash flows used in investing activities |
|
|
|
|
|
||
|
Purchase of property, plant and equipment |
|
(6,897 |
) |
(4,388 |
) |
||
|
Purchase of therapeutic program equipment leased to third parties under operating leases |
|
(1,429 |
) |
(2,034 |
) |
||
|
Acquisitions, net of cash acquired |
|
(27,679 |
) |
— |
|
||
|
Purchase of company-owned life insurance investment |
|
— |
|
(598 |
) |
||
|
Proceeds from sale of property, plant and equipment |
|
980 |
|
840 |
|
||
|
Net cash used in investing activities |
|
(35,025 |
) |
(6,180 |
) |
||
|
Cash flows (used in) provided by financing activities |
|
|
|
|
|
||
|
Borrowings under term loan, net of discount |
|
— |
|
501,467 |
|
||
|
Repayment of term loan |
|
(1,263 |
) |
(431,875 |
) |
||
|
Borrowings under revolving credit agreement |
|
— |
|
3,000 |
|
||
|
Repayments under revolving credit agreement |
|
— |
|
(8,000 |
) |
||
|
Payment of employee taxes on stock-based compensation |
|
(3,626 |
) |
(2,150 |
) |
||
|
Payment on seller notes |
|
(1,773 |
) |
(1,749 |
) |
||
|
Payment of financing lease obligations |
|
(116 |
) |
(364 |
) |
||
|
Payment of debt issuance costs |
|
— |
|
(6,757 |
) |
||
|
Payment of debt extinguishment costs |
|
— |
|
(8,436 |
) |
||
|
Net cash (used in) provided by financing activities |
|
(6,778 |
) |
45,136 |
|
||
|
(Decrease) increase in cash, cash equivalents and restricted cash |
|
(74,603 |
) |
30,483 |
|
||
|
Cash, cash equivalents, and restricted cash, at beginning of period |
|
95,114 |
|
4,779 |
|
||
|
Cash, cash equivalents, and restricted cash, at end of period |
|
$ |
20,511 |
|
$ |
35,262 |
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Cash, Cash Equivalents, and Restricted Cash: |
|
|
|
|
|
||
|
Cash and cash equivalents, at beginning of period |
|
$ |
95,114 |
|
$ |
1,508 |
|
|
Restricted cash, at beginning of period |
|
— |
|
3,271 |
|
||
|
Cash, cash equivalents, and restricted cash, at beginning of period |
|
$ |
95,114 |
|
$ |
4,779 |
|
|
|
|
|
|
|
|
||
|
Cash and cash equivalents, at end of period |
|
$ |
20,511 |
|
$ |
32,913 |
|
|
Restricted cash, at end of period |
|
— |
|
2,349 |
|
||
|
Cash, cash equivalents, and restricted cash, at end of period |
|
$ |
20,511 |
|
$ |
35,262 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HANGER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Hanger, Inc. (“we,” “our,” or “us”) is a leading national provider of products and services that assist in enhancing or restoring the physical capabilities of patients with disabilities or injuries. We provide orthotic and prosthetic (“O&P”) services, distribute O&P devices and components, and provide therapeutic solutions to patients and businesses in acute, post-acute, and clinic settings. We operate through two segments: Patient Care and Products & Services.
Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”), as previously filed with the Securities and Exchange Commission (“SEC”).
In our opinion, the information contained herein reflects all adjustments necessary for a fair statement of our results of operations, financial position, and cash flows. All such adjustments are of a normal, recurring nature. The results of operations for the interim periods are not necessarily indicative of those to be expected for the full year.
A detailed description of our significant accounting policies and management judgments is contained in our 2018 Form 10-K.
Recent Accounting Pronouncements Adopted
Leases
We lease a majority of our patient care clinics and warehouses under lease arrangements, certain of which contain renewal options, rent escalation clauses, and/or landlord incentives. Rent expense for noncancellable leases with scheduled rent increases and/or landlord incentives is recognized on a straight-line basis over the lease term, including any applicable rent holidays, beginning on the lease commencement date. We exclude leases with a term of one year or less from our balance sheet, and do not separate non-lease components from our real estate leases. Our leases may include variable payments for maintenance, which are expensed as incurred.
In addition, we are the lessor of therapeutic program equipment to patients and businesses in acute, post-acute, and clinic settings. The therapeutic program equipment and related services revenue are recognized over the applicable term the customer has the right to use the equipment and as the services are provided. These operating lease agreements are typically for twelve months and have a 30-day cancellation policy. We do not separate non-lease components, consisting primarily of training, for these leases.
Effect of Adoption of ASC 842
We adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (ASC 842), and related clarifying standards, as of January 1, 2019, using the modified retrospective approach. This approach allows us to apply the standard as of the adoption date and record a cumulative-effect adjustment to the opening balance of Accumulated deficit at January 1, 2019. The new lease standard requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for all leases (with the exception of short-term leases, defined as leases with a term of 12 months or less) at the lease commencement date and recognize expenses on the consolidated statement of income on a straight-line basis.
In addition, we elected the package of practical expedients available under the transition provisions of the new lease standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) carrying forward lease classification under legacy guidance, and (iii) not revaluing initial direct costs for existing leases. By electing the modified retrospective approach on adoption date, prior period results will continue to be presented under legacy guidance based on the accounting standards originally in effect for such period. We have elected to keep leases with an initial term of 12 months or less off of the balance sheet and recognize those lease payments in the consolidated statements of income on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component for real estate and therapeutic program equipment, from both a lessee and lessor perspective. From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease. The accounting for our finance leases and leases where we are the lessor remained substantially unchanged.
The lease liability was measured as the present value of the unpaid lease payments and the right-of-use asset was derived from the calculation of the lease liability. As the rate implicit in the lease is generally not readily determinable for our operating leases, the discount rates used to determine the present value of our lease liability are based on our incremental borrowing rate at the lease commencement date and commensurate with the remaining lease term. Our incremental borrowing rate for a lease is the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Our lease term may include options to extend or terminate if the exercise of that option is reasonably certain to occur. We rent or sublease certain real estate to third parties. Our sublease portfolio consists mainly of operating leases on small medical office locations.
The most significant impact of the new lease standard will be on the balance sheet, where values have been added for real estate operating leases, which increases both assets and liabilities. The capital leases associated with equipment were already reflected on our balance sheet and did not add any incremental assets or liabilities under the new lease standard. The adoption of the new lease standard did not have an impact on our compliance with existing debt covenants because the impact of changes in accounting standards is excluded from debt covenant calculations. The impact of applying the new lease standard to our results of operations and cash flows is not significant.
Additionally, we have determined that the leases previously identified as build-to-suit leasing arrangements under legacy lease accounting were to be derecognized pursuant to the transition guidance provided for build-to-suit leases in ASC 842. Accordingly, these leases have been reassessed as operating leases as of January 1, 2019. The legacy guidance was based on a risks and rewards model which contained several prescriptive provisions designed to assess lessee ownership during construction. The ASC 842 model has eliminated these prescriptive rules and replaced them with a model based on control. Under ASC 842, we did not demonstrate control as the lessee and therefore the leases were derecognized at January 1, 2019. The resulting cumulative effect recognized at adoption to Accumulated deficit was $1.6 million, net of tax.
Upon adoption of ASC 842, the cumulative effect of the changes made to our condensed consolidated balance sheet as of January 1, 2019 was as follows:
|
|
|
December 31, 2018 |
|
Effects of |
|
January 1, 2019 |
|
|||
|
(in thousands) |
|
As reported |
|
adoption |
|
After adoption |
|
|||
|
Assets |
|
|
|
|
|
|
|
|||
|
Other current assets |
|
$ |
18,731 |
|
$ |
(3,987 |
) |
$ |
14,744 |
|
|
Total current assets |
|
325,900 |
|
(3,987 |
) |
321,913 |
|
|||
|
Property, plant and equipment, net |
|
89,489 |
|
(8,068 |
) |
81,421 |
|
|||
|
Other intangible assets, net |
|
15,478 |
|
(220 |
) |
15,258 |
|
|||
|
Deferred income taxes |
|
65,635 |
|
(570 |
) |
65,065 |
|
|||
|
Operating lease right-of-use assets |
|
— |
|
103,378 |
|
103,378 |
|
|||
|
Other assets |
|
7,766 |
|
538 |
|
8,304 |
|
|||
|
Total assets |
|
703,010 |
|
91,071 |
|
794,081 |
|
|||
|
Liabilities |
|
|
|
|
|
|
|
|||
|
Current liabilities: |
|
|
|
|
|
|
|
|||
|
Current portion of long-term debt |
|
8,583 |
|
(619 |
) |
7,964 |
|
|||
|
Accrued expenses and other current liabilities |
|
51,783 |
|
(1,352 |
) |
50,431 |
|
|||
|
Current portion of operating lease liabilities |
|
— |
|
33,393 |
|
33,393 |
|
|||
|
Total current liabilities |
|
171,274 |
|
31,422 |
|
202,696 |
|
|||
|
Long-term liabilities: |
|
|
|
|
|
|
|
|||
|
Long-term debt, less current portion |
|
502,090 |
|
(12,493 |
) |
489,597 |
|
|||
|
Operating lease liabilities |
|
— |
|
83,662 |
|
83,662 |
|
|||
|
Other liabilities |
|
51,570 |
|
(13,081 |
) |
38,489 |
|
|||
|
Total liabilities |
|
724,934 |
|
89,510 |
|
814,444 |
|
|||
|
Shareholders’ deficit: |
|
|
|
|
|
|
|
|||
|
Accumulated deficit |
|
(361,023 |
) |
1,561 |
|
(359,462 |
) |
|||
|
Total shareholders’ deficit |
|
(21,924 |
) |
1,561 |
|
(20,363 |
) |
|||
|
Total liabilities and shareholders’ deficit |
|
$ |
703,010 |
|
$ |
91,071 |
|
$ |
794,081 |
|
Recent Accounting Pronouncements, Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , and related clarifying standards, which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This new standard is effective for us beginning December 15, 2019, with early adoption permitted. We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements and the related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) , which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements and the related disclosures.
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715) . This ASU modifies the disclosure requirements for defined benefit and other postretirement plans. This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs; while other disclosures have been added to address significant gains and losses related to changes in benefit obligations. This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations. The amendments in this ASU are effective for fiscal years ending after December 15, 2020 and for interim periods therein with early adoption permitted. We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements and the related disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 220) . The ASU is intended to improve the recognition and measurement of financial instruments. The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effects that the adoption of this guidance will have on our 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 the diluted earnings per share were zero as of March 31, 2019 and 208,510 as of March 31, 2018.
Our credit agreement restricts the payment of dividends or other distributions to our shareholders with respect to Hanger, Inc., or any of its subsidiaries.
The reconciliation of the numerators and denominators used to calculate basic and diluted net loss per share are as follows:
|
|
|
For the Three Months Ended
|
|
||||
|
(in thousands except per share data) |
|
2019 |
|
2018 |
|
||
|
Net loss |
|
$ |
(6,951 |
) |
$ |
(22,618 |
) |
|
|
|
|
|
|
|
||
|
Weighted average shares outstanding - basic |
|
37,001,977 |
|
36,498,482 |
|
||
|
Effect of potentially dilutive restricted stock units and options (1) |
|
— |
|
— |
|
||
|
Weighted average shares outstanding - diluted |
|
37,001,977 |
|
36,498,482 |
|
||
|
|
|
|
|
|
|
||
|
Basic and diluted loss per share |
|
$ |
(0.19 |
) |
$ |
(0.62 |
) |
(1) In accordance with ASC 260 - Earnings Per Share, during periods of a net loss, shares used to compute diluted per share amounts exclude potentially dilutive shares related to unvested restricted stock units and unexercised options. For the three months ended March 31, 2019, shares excluded were 889,093. For the three months ended March 31, 2018, shares excluded were 537,497.
NOTE C — REVENUE RECOGNITION
Patient Care Segment
Revenue in our Patient Care segment is primarily derived from contracts with third party payors for the provision of O&P devices and is recognized upon the transfer of control of promised products or services to the patient at the time the patient receives the device. At, or subsequent to delivery, we issue an invoice to the third party payor, which primarily consists of commercial insurance companies, Medicare, Medicaid, the U.S. Department of Veterans Affairs, and private or patient pay (“Private Pay”) individuals. We recognize revenue for the amounts we expect to receive from payors based on expected contractual reimbursement rates, which are net of estimated contractual discounts and implicit price concessions. These revenue amounts are further revised as claims are adjudicated, which may result in additional disallowances.
The following table disaggregates revenue from contracts with customers in our Patient Care segment for the three months ended March 31, 2019 and 2018:
|
|
|
For the Three Months Ended March 31, |
|
||||
|
(in thousands) |
|
2019 |
|
2018 |
|
||
|
Patient Care Segment |
|
|
|
|
|
||
|
Medicare |
|
$ |
57,776 |
|
$ |
57,531 |
|
|
Medicaid |
|
30,147 |
|
29,711 |
|
||
|
Commercial Insurance/ Managed Care (excluding Medicare and Medicaid Managed Care) |
|
70,218 |
|
70,582 |
|
||
|
Veterans Administration |
|
18,322 |
|
16,731 |
|
||
|
Private Pay |
|
14,138 |
|
13,952 |
|
||
|
Total |
|
$ |
190,601 |
|
$ |
188,507 |
|
The impact to revenue related to prior period performance obligations was not material for the three months ended March 31, 2019.
Products & Services Segment
Revenue in our Products & Services segment is derived from the distribution of O&P components and the leasing and sale of rehabilitation equipment and ancillary consumable supplies combined with equipment maintenance, education, and training.
The following table disaggregates revenue from contracts with customers in our Product & Services segment for the three months ended March 31, 2019 and 2018:
|
|
|
For the Three Months Ended March 31, |
|
||||
|
(in thousands) |
|
2019 |
|
2018 |
|
||
|
Products & Services Segment |
|
|
|
|
|
||
|
Distribution services, net of intersegment revenue eliminations |
|
$ |
33,195 |
|
$ |
31,351 |
|
|
Therapeutic solutions |
|
12,623 |
|
14,137 |
|
||
|
Total |
|
$ |
45,818 |
|
$ |
45,488 |
|
NOTE D — ACCOUNTS RECEIVABLE, NET
Accounts receivable, net represents outstanding amounts we expect to collect from the transfer of our products and services. Principally, these amounts are comprised of receivables from Medicare, Medicaid, and commercial insurance plans. Our accounts receivable represent amounts outstanding from our gross billings, net of contractual discounts and other implicit price concessions including estimates for payor disallowances, sales returns, and patient non-payments.
An allowance for doubtful accounts is also recorded for our Products & Services segment which is deducted from gross accounts receivable to arrive at “Accounts receivable, net.” Accounts receivable, net as of March 31, 2019 and December 31, 2018 is comprised of the following:
|
|
|
As of March 31, 2019 |
|
As of December 31, 2018 |
|
||||||||||||||
|
(in thousands) |
|
Patient Care |
|
Products &
|
|
Consolidated |
|
Patient Care |
|
Products &
|
|
Consolidated |
|
||||||
|
Accounts receivable, before allowances |
|
$ |
176,705 |
|
$ |
24,981 |
|
$ |
201,686 |
|
$ |
182,338 |
|
$ |
24,542 |
|
$ |
206,880 |
|
|
Allowances for estimated implicit price concessions arising from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Payor disallowances |
|
(55,385 |
) |
— |
|
(55,385 |
) |
(53,378 |
) |
— |
|
(53,378 |
) |
||||||
|
Patient non-payments |
|
(7,245 |
) |
— |
|
(7,245 |
) |
(7,244 |
) |
— |
|
(7,244 |
) |
||||||
|
Accounts receivable, gross |
|
114,075 |
|
24,981 |
|
139,056 |
|
121,716 |
|
24,542 |
|
146,258 |
|
||||||
|
Allowance for doubtful accounts |
|
— |
|
(2,165 |
) |
(2,165 |
) |
— |
|
(2,272 |
) |
(2,272 |
) |
||||||
|
Accounts receivable, net |
|
$ |
114,075 |
|
$ |
22,816 |
|
$ |
136,891 |
|
$ |
121,716 |
|
$ |
22,270 |
|
$ |
143,986 |
|
NOTE E — INVENTORIES
Our inventories are comprised of the following:
|
|
|
As of March 31, |
|
As of December 31, |
|
||
|
(in thousands) |
|
2019 |
|
2018 |
|
||
|
Raw materials |
|
$ |
20,401 |
|
$ |
19,632 |
|
|
Work in process |
|
12,711 |
|
9,278 |
|
||
|
Finished goods |
|
36,924 |
|
38,780 |
|
||
|
Total inventories |
|
$ |
70,036 |
|
$ |
67,690 |
|
NOTE F — PROPERTY PLANT AND EQUIPMENT, NET
Property, plant, and equipment, net were comprised of the following:
|
|
|
As of March 31, |
|
As of December 31, |
|
||
|
(in thousands) |
|
2019 |
|
2018 |
|
||
|
Land |
|
$ |
634 |
|
$ |
644 |
|
|
Buildings (1) |
|
3,979 |
|
24,558 |
|
||
|
Furniture and fixtures |
|
13,273 |
|
13,121 |
|
||
|
Machinery and equipment |
|
26,568 |
|
27,452 |
|
||
|
Equipment leased to third parties under operating leases |
|
29,402 |
|
30,093 |
|
||
|
Leasehold improvements |
|
125,280 |
|
111,247 |
|
||
|
Computers and software |
|
69,579 |
|
69,173 |
|
||
|
Total property, plant, and equipment, gross |
|
268,715 |
|
276,288 |
|
||
|
Less: accumulated depreciation |
|
(186,764 |
) |
(186,799 |
) |
||
|
Total property, plant, and equipment, net |
|
$ |
81,951 |
|
$ |
89,489 |
|
(1) As discussed in Note A - “ Organization and Summary of Significant Accounting Policies ”, the new lease standard resulted in the removal of assets associated with build-to-suit leases.
Total depreciation expense was approximately $7.5 million and $7.4 million for the three months ended March 31, 2019 and 2018, respectively.
NOTE G — ACQUISTIONS
2019 Acquisition Activity
On January 28, 2019, we acquired all of the outstanding equity interests of an O&P business for a total aggregate purchase price of $32.5 million, of which $27.7 million was cash consideration, net of cash acquired, $4.5 million was issued in the form of notes to the shareholders at fair value, and $0.3 million of estimated additional consideration expected to be paid in the second quarter of 2019. The notes to shareholders are unsecured and payable in quarterly installments over a period of three years. The primary reason for the acquisition was to expand our continuum of patient care through the acquisition of high quality O&P providers in new geographic markets.
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. The estimated fair values of intangible assets was based on an income approach utilizing primarily discounted cash flow techniques for non-compete agreements and an income approach utilizing the excess earnings method for customer relationships. The income approach utilizes management’s estimates of future operating results and cash flows using a weighted average cost of capital that reflects market participant assumptions. Other significant judgments used in the valuation of tangible assets acquired in the acquisition include estimated selling price of inventory and estimated replacement 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. The excess of the fair value of the consideration transferred in the acquisition over the fair value of net assets acquired was recorded as goodwill. The goodwill reflects our expectations of favorable future growth opportunities, anticipated synergies through the scale of our O&P operations, and the assembled workforce. We expect that substantially all of the Goodwill, which has been assigned to our Patient Care reporting unit, will be deductible for federal income tax purposes.
Acquisition-related costs of $0.2 million for the three months ended March 31, 2019 related to the acquisition are included in General and administrative expenses in our consolidated statement of operations.
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
The Company has performed a preliminary valuation analysis of the fair market value of the assets and liabilities acquired in the acquisition. The final purchase price allocation will be determined when we have completed and fully reviewed the detailed valuation and could differ materially from the preliminary allocation. The final allocation 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:
|
|
|
For the Three Months Ended |
|
|
|
(in thousands) |
|
March 31, 2019 |
|
|
|
Cash paid, net of cash acquired |
|
$ |
27,679 |
|
|
Issuance of seller notes |
|
4,451 |
|
|
|
Additional consideration (1) |
|
345 |
|
|
|
Aggregate purchase price |
|
32,475 |
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
3,318 |
|
|
|
Inventories |
|
1,466 |
|
|
|
Customer relationships (Useful life of 3.0 years) |
|
1,963 |
|
|
|
Non-compete agreements (Weighted average useful life of 4.9 years) |
|
349 |
|
|
|
Other assets |
|
329 |
|
|
|
Accounts payable |
|
(1,191 |
) |
|
|
Accrued expenses and other liabilities |
|
(1,649 |
) |
|
|
Net assets acquired |
|
4,585 |
|
|
|
Goodwill |
|
$ |
27,890 |
|
(1) Represents additional consideration payable to the seller in the second quarter of 2019, subject to agreement of certain tax elections with the seller.
2018 Acquisition Activity
In the fourth quarter of 2018, we acquired two O&P businesses for an aggregate purchase price of $3.1 million, net of cash acquired. These acquisitions were accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at fair value on the date of the transaction.
The aggregate purchase price for these acquisitions was allocated as follows:
|
(in thousands) |
|
For The Year Ended
|
|
|
|
Cash paid, net of cash acquired |
|
$ |
1,978 |
|
|
Issuance of seller notes |
|
1,120 |
|
|
|
Aggregate purchase price |
|
3,098 |
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
256 |
|
|
|
Inventories |
|
302 |
|
|
|
Customer relationships (Weighted average useful life of 4.0 years) |
|
260 |
|
|
|
Non-compete agreements (Weighted average useful life of 4.6 years) |
|
214 |
|
|
|
Other assets |
|
90 |
|
|
|
Accounts payable |
|
(59 |
) |
|
|
Accrued expenses and other liabilities |
|
(364 |
) |
|
|
Net assets acquired |
|
699 |
|
|
|
Goodwill |
|
$ |
2,399 |
|
NOTE H — GOODWILL AND OTHER INTANGIBLE ASSETS
We assess goodwill and indefinite-lived intangible assets for impairment annually on October 1st, and between annual tests if an event occurs, or circumstances change, that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value.
The following table summarizes the activity in goodwill for the periods indicated:
|
|
|
For the Year Ended December 31, 2018 |
|
|||||||||||||||||||||||||
|
|
|
Patient Care |
|
Products & Services |
|
Consolidated |
|
|||||||||||||||||||||
|
(in thousands) |
|
Goodwill,
|
|
Accumulated
|
|
Goodwill,
|
|
Goodwill,
|
|
Accumulated
|
|
Goodwill,
|
|
Goodwill,
|
|
Accumulated
|
|
Goodwill,
|
|
|||||||||
|
As of December 31, 2017 |
|
$ |
625,011 |
|
$ |
(428,668 |
) |
$ |
196,343 |
|
$ |
139,299 |
|
$ |
(139,299 |
) |
$ |
— |
|
$ |
764,310 |
|
$ |
(567,967 |
) |
$ |
196,343 |
|
|
Additions from acquisitions |
|
2,399 |
|
— |
|
2,399 |
|
— |
|
— |
|
— |
|
2,399 |
|
— |
|
2,399 |
|
|||||||||
|
As of December 31, 2018 |
|
$ |
627,410 |
|
$ |
(428,668 |
) |
$ |
198,742 |
|
$ |
139,299 |
|
$ |
(139,299 |
) |
$ |
— |
|
$ |
766,709 |
|
$ |
(567,967 |
) |
$ |
198,742 |
|
The balances related to intangible assets as of March 31, 2019 and December 31, 2018 are as follows:
|
|
|
As of March 31, 2019 |
|
||||||||||
|
(in thousands) |
|
Gross Carrying
|
|
Accumulated
|
|
Accumulated
|
|
Net Carrying
|
|
||||
|
Customer lists |
|
$ |
27,420 |
|
$ |
(19,443 |
) |
$ |
— |
|
$ |
7,977 |
|
|
Trade name |
|
255 |
|
(132 |
) |
— |
|
123 |
|
||||
|
Patents and other intangibles |
|
9,238 |
|
(5,040 |
) |
— |
|
4,198 |
|
||||
|
Definite-lived intangible assets |
|
36,913 |
|
(24,615 |
) |
— |
|
12,298 |
|
||||
|
Indefinite-lived trade names |
|
9,070 |
|
— |
|
(4,953 |
) |
4,117 |
|
||||
|
Total other intangible assets |
|
$ |
45,983 |
|
$ |
(24,615 |
) |
$ |
(4,953 |
) |
$ |
16,415 |
|
|
|
|
As of December 31, 2018 |
|
||||||||||
|
(in thousands) |
|
Gross Carrying
|
|
Accumulated
|
|
Accumulated
|
|
Net Carrying
|
|
||||
|
Customer lists |
|
$ |
26,036 |
|
$ |
(19,051 |
) |
$ |
— |
|
$ |
6,985 |
|
|
Trade name |
|
255 |
|
(125 |
) |
— |
|
130 |
|
||||
|
Patents and other intangibles |
|
9,391 |
|
(5,145 |
) |
— |
|
4,246 |
|
||||
|
Definite-lived intangible assets |
|
35,682 |
|
(24,321 |
) |
— |
|
11,361 |
|
||||
|
Indefinite-lived trade names |
|
9,070 |
|
— |
|
(4,953 |
) |
4,117 |
|
||||
|
Total other intangible assets |
|
$ |
44,752 |
|
$ |
(24,321 |
) |
$ |
(4,953 |
) |
$ |
15,478 |
|
Total intangible amortization expense was approximately $1.2 million and $2.0 million for the three months ended March 31, 2019 and 2018, respectively.
Estimated aggregate amortization expense for definite-lived intangible assets for each of the next five years ended December 31st and thereafter is as follows:
|
(in thousands) |
|
|
|
|
|
2019 (remainder of the year) |
|
$ |
3,652 |
|
|
2020 |
|
4,601 |
|
|
|
2021 |
|
1,118 |
|
|
|
2022 |
|
964 |
|
|
|
2023 |
|
855 |
|
|
|
Thereafter |
|
1,108 |
|
|
|
Total |
|
$ |
12,298 |
|
NOTE I — OTHER CURRENT ASSETS AND OTHER ASSETS
Other current assets consist of the following:
|
|
|
As of March 31, |
|
As of December 31, |
|
||
|
(in thousands) |
|
2019 |
|
2018 |
|
||
|
Non-trade receivables |
|
$ |
8,561 |
|
$ |
7,848 |
|
|
Prepaid rent |
|
657 |
|
4,442 |
|
||
|
Prepaid maintenance |
|
3,554 |
|
3,330 |
|
||
|
Prepaid insurance |
|
1,723 |
|
258 |
|
||
|
Prepaid other |
|
994 |
|
1,101 |
|
||
|
Prepaid purchase orders |
|
934 |
|
998 |
|
||
|
Prepaid education and training |
|
518 |
|
597 |
|
||
|
Prepaid benefits |
|
117 |
|
157 |
|
||
|
Total other current assets |
|
$ |
17,058 |
|
$ |
18,731 |
|
Other assets consist of the following:
|
|
|
As of March 31, |
|
As of December 31, |
|
||
|
(in thousands) |
|
2019 |
|
2018 |
|
||
|
Cash surrender value of company owned life insurance |
|
$ |
3,045 |
|
$ |
2,918 |
|
|
Non-trade receivables |
|
1,822 |
|
1,904 |
|
||
|
Deposits |
|
1,753 |
|
1,698 |
|
||
|
Surety bond collateral |
|
1,000 |
|
1,000 |
|
||
|
Finance lease right-of-use assets |
|
541 |
|
— |
|
||
|
Other |
|
231 |
|
246 |
|
||
|
Total other assets |
|
$ |
8,392 |
|
$ |
7,766 |
|
NOTE J — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES AND OTHER LIABILITIES
Accrued expenses and other current liabilities consist of:
|
|
|
As of March 31, |
|
As of December 31, |
|
||
|
(in thousands) |
|
2019 |
|
2018 |
|
||
|
Patient prepayments, deposits and refunds payable |
|
$ |
24,187 |
|
$ |
24,563 |
|
|
Insurance and self-insurance accruals |
|
8,610 |
|
8,886 |
|
||
|
Accrued sales taxes and other taxes |
|
7,283 |
|
6,810 |
|
||
|
Accrued professional fees |
|
3,685 |
|
3,751 |
|
||
|
Education expenses |
|
2,315 |
|
— |
|
||
|
Derivative liability |
|
1,205 |
|
724 |
|
||
|
Accrued interest payable |
|
487 |
|
332 |
|
||
|
Other current liabilities |
|
5,539 |
|
6,717 |
|
||
|
Total accrued expenses and other current liabilities |
|
$ |
53,311 |
|
$ |
51,783 |
|
Other liabilities consist of:
|
|
|
As of March 31, |
|
As of December 31, |
|
||
|
(in thousands) |
|
2019 |
|
2018 |
|
||
|
Supplemental executive retirement plan obligations |
|
$ |
18,661 |
|
$ |
20,195 |
|
|
Long-term insurance accruals |
|
8,437 |
|
8,713 |
|
||
|
Derivative liability |
|
6,515 |
|
3,134 |
|
||
|
Unrecognized tax benefits, and related interest and penalties |
|
5,523 |
|
5,458 |
|
||
|
Asset retirement obligations |
|
1,113 |
|
980 |
|
||
|
Deferred tenant improvement allowances |
|
— |
|
8,570 |
|
||
|
Deferred rent |
|
— |
|
4,455 |
|
||
|
Other |
|
10 |
|
65 |
|
||
|
Total other liabilities |
|
$ |
40,259 |
|
$ |
51,570 |
|
NOTE K — INCOME TAXES
We recorded a benefit from income tax of $3.7 million and $6.2 million for the three months ended March 31, 2019 and 2018, respectively. The effective tax rate was 35.0% and 21.5% for the three months ended March 31, 2019 and 2018, respectively.
The increase in the effective tax rate for the three months ended March 31, 2019 compared with the three months ended March 31, 2018 is primarily attributable to the change from the discrete method in the three months ended March 31, 2018 to the annual effective tax rate for the three months ended March 31, 2019, an increased estimated annual income, and the windfall from stock-based compensation recorded as a discrete item during the period. Our effective tax rate for the three months ended March 31, 2019 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses and the windfall from stock-based compensation recorded as a discrete item during the period. Our effective tax rate for the three months ended March 31, 2018 differed from the federal statutory tax rate of 21% primarily due to non-deductible expenses and the shortfall from stock-based compensation recorded as a discrete item during the period.
NOTE L — LEASES
The information pertaining to leases on the condensed consolidated balance sheet is as follows:
|
|
|
|
|
As of March 31, |
|
|
|
(in thousands) |
|
Classification |
|
2019 |
|
|
|
Assets |
|
|
|
|
|
|
|
Operating lease right-of-use assets |
|
Operating lease right-of-use assets |
|
$ |
103,676 |
|
|
Finance lease right-of-use assets |
|
Other assets |
|
541 |
|
|
|
Total lease assets |
|
|
|
$ |
104,217 |
|
|
Liabilities |
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
Operating |
|
Current portion of operating lease liabilities |
|
$ |
33,675 |
|
|
Finance |
|
Current portion of long-term debt |
|
246 |
|
|
|
Noncurrent |
|
|
|
|
|
|
|
Operating |
|
Operating lease liabilities |
|
83,693 |
|
|
|
Finance |
|
Long-term debt, less current portion |
|
321 |
|
|
|
Total lease liabilities |
|
|
|
$ |
117,935 |
|
The components of lease cost recognized in the condensed consolidated statement of operations are as follows:
|
(in thousands) |
|
For the Three Months Ended
|
|
|
|
Operating lease cost |
|
$ |
10,836 |
|
|
Finance lease cost |
|
|
|
|
|
Amortization of right-of-use assets |
|
75 |
|
|
|
Interest on lease liabilities |
|
6 |
|
|
|
Sublease income |
|
(33 |
) |
|
|
Short-term lease cost |
|
368 |
|
|
|
Variable lease cost |
|
1,217 |
|
|
|
Total lease cost |
|
$ |
12,469 |
|
Future minimum rental payments, by year and in the aggregate, under operating and financing obligations with terms of one year or more at March 31, 2019 are as follows:
|
(in thousands) |
|
Finance
|
|
Operating
|
|
Total Leases |
|
|||
|
2019 (remainder of year) |
|
$ |
206 |
|
$ |
29,609 |
|
$ |
29,815 |
|
|
2020 |
|
208 |
|
35,411 |
|
35,619 |
|
|||
|
2021 |
|
136 |
|
26,294 |
|
26,430 |
|
|||
|
2022 |
|
50 |
|
18,741 |
|
18,791 |
|
|||
|
2023 |
|
2 |
|
12,019 |
|
12,021 |
|
|||
|
2024 |
|
— |
|
5,826 |
|
5,826 |
|
|||
|
Thereafter |
|
— |
|
4,593 |
|
4,593 |
|
|||
|
Total future minimum lease payments |
|
602 |
|
132,493 |
|
133,095 |
|
|||
|
Imputed interest |
|
(35 |
) |
(15,125 |
) |
(15,160 |
) |
|||
|
Total |
|
$ |
567 |
|
$ |
117,368 |
|
$ |
117,935 |
|
The lease term and discount rates are as follows:
|
|
|
For the Three Months Ended
|
|
|
Weighted average remaining lease term (years) |
|
|
|
|
Operating leases |
|
3.98 |
|
|
Finance leases |
|
2.60 |
|
|
Weighted average discount rate |
|
|
|
|
Operating leases |
|
5.73 |
% |
|
Finance leases |
|
4.20 |
% |
Supplemental cash flow information related to leases is as follows:
|
(in thousands) |
|
For the Three Months Ended
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
11,787 |
|
|
Operating cash flows from finance leases |
|
6 |
|
|
|
Financing cash flows from finance leases |
|
80 |
|
|
|
Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
Operating leases |
|
10,394 |
|
|
|
Finance leases |
|
76 |
|
|
Future minimum rental payments, by year and in the aggregate, under operating and financing obligations with terms of one year or more at December 31, 2018 are as follows:
|
(in thousands) |
|
Operating
|
|
Capital
|
|
||
|
2019 |
|
$ |
39,378 |
|
$ |
249 |
|
|
2020 |
|
29,641 |
|
175 |
|
||
|
2021 |
|
21,303 |
|
109 |
|
||
|
2022 |
|
14,479 |
|
28 |
|
||
|
2023 |
|
9,193 |
|
— |
|
||
|
Thereafter |
|
10,008 |
|
— |
|
||
|
|
|
$ |
124,002 |
|
$ |
561 |
|
NOTE M — DEBT AND OTHER OBLIGATIONS
Debt consists of the following:
|
|
|
As of March 31, |
|
As of December 31, |
|
||
|
(in thousands) |
|
2019 |
|
2018 |
|
||
|
Debt: |
|
|
|
|
|
||
|
Term Loan B |
|
$ |
499,950 |
|
$ |
501,213 |
|
|
Seller notes |
|
7,402 |
|
4,506 |
|
||
|
Financing leases and other |
|
1,212 |
|
14,361 |
|
||
|
Total debt before unamortized discount and debt issuance costs |
|
508,564 |
|
520,080 |
|
||
|
Unamortized discount and debt issuance costs, net |
|
(9,264 |
) |
(9,407 |
) |
||
|
Total debt |
|
$ |
499,300 |
|
$ |
510,673 |
|
|
|
|
|
|
|
|
||
|
Current portion of long-term debt: |
|
|
|
|
|
||
|
Term Loan B |
|
$ |
5,050 |
|
$ |
5,050 |
|
|
Seller notes |
|
3,288 |
|
2,513 |
|
||
|
Financing leases and other |
|
339 |
|
1,020 |
|
||
|
Total current portion of long-term debt |
|
8,677 |
|
8,583 |
|
||
|
Long-term debt: |
|
$ |
490,623 |
|
$ |
502,090 |
|
Refinancing of Credit Agreement and Term B Borrowings
On March 6, 2018, we entered into a $605.0 million Senior Credit Facility (the “Credit Agreement”). The Credit Agreement provides for (i) a revolving credit facility with an initial maximum aggregate amount of availability of $100.0 million that matures in March 2023 and (ii) a $505.0 million Term Loan B facility due in quarterly principal installments commencing June 29, 2018, with all remaining outstanding principal due at maturity in March 2025. Availability under the revolving credit facility is reduced by outstanding letters of credit, which were approximately $5.2 million as of March 31, 2019. We may (a) increase the aggregate principal amount of any outstanding tranche of term loans or add one or more additional tranches of term loans under the loan documents, and/or (b) increase the aggregate principal amount of revolving commitments or add one or more additional revolving loan facilities under the loan documents by an aggregate amount of up to the sum of (1) $125.0 million and (2) an amount such that, after giving effect to such incurrence of such amount (but excluding the cash proceeds of such incremental facilities and certain other indebtedness, and treating all commitments in respect of revolving indebtedness as fully drawn), the consolidated first lien net leverage ratio is equal to or less than 3.80 to 1.00, if certain conditions are satisfied, including the absence of a default or an event of default under the Credit Agreement at the time of the increase and that we obtain the consent of each lender providing any incremental facility.
Our obligations under the Credit Agreement are currently guaranteed by our material domestic subsidiaries and will from time to time be guaranteed by, subject in each case to certain exceptions, any domestic subsidiaries that may become material in the future. Subject to certain exceptions, the Credit Agreement is secured by first-priority perfected liens and security interests in substantially all of our personal property and each subsidiary guarantor.
Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, or (ii) the base rate (which is the highest of (a) Bank of America, N.A.’s prime rate, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin. For the three months ended March 31, 2019, the weighted average interest rate on outstanding borrowings under our Term Loan B facility was approximately 6.0%. We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note O - “ Derivative Financial Instruments .”
We must also pay (i) an unused commitment fee ranging from 0.375% to 0.500% per annum of the average daily unused portion of the aggregate revolving credit commitments under the Credit Agreement, and (ii) a per annum fee equal to (a) for each performance standby letter of credit outstanding under the Credit Agreement with respect to nonfinancial contractual obligations, 50% of the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn under such letter of credit, and (b) for each other letter of credit outstanding under the Credit Agreement, the applicable margin over LIBOR under the revolving credit facility in effect from time to time multiplied by the daily amount available to be drawn for such letter of credit.
The Credit Agreement contains various restrictions and covenants, including: i) requirements that we maintain certain financial ratios at prescribed levels, ii) a prohibition on payment of dividends and other distributions and iii) restrictions on our ability and certain of our subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, or consummate acquisitions outside the healthcare industry. The Credit Agreement includes the following financial covenants applicable for so long as any revolving loans and/or revolving commitments remain outstanding under the Credit Agreement: (i) a maximum consolidated first lien net leverage ratio (defined as, with certain adjustments and exclusions, the ratio of consolidated first-lien indebtedness to consolidated net income before interest, taxes, depreciation, amortization, non-cash charges and certain other items (“EBITDA”) for the most recently ended period of four fiscal quarters for which financial statements are available) of 5.00 to 1.00 for the fiscal quarter ended March 31, 2019; 4.75 to 1.00 for the fiscal quarters ended June 30, 2019 through March 31, 2020; 4.50 to 1.00 for the fiscal quarters ended June 30, 2020 through March 31, 2021; 4.25 to 1.00 for the fiscal quarters ended June 30, 2021 through March 31, 2022; and 3.75 to 1.00 for the fiscal quarter ended June 30, 2022 and the last day of each fiscal quarter thereafter; and (ii) a minimum interest coverage ratio (defined as, with certain adjustments, the ratio of our EBITDA to consolidated interest expense to the extent paid or payable in cash) of 2.75 to 1.00 as of the last day of any fiscal quarter. We were in compliance with all covenants at March 31, 2019.
The Credit Agreement also contains customary events of default. If an event of default under the Credit Agreement occurs and is continuing, then the lenders may declare any outstanding obligations under the Credit Agreement to be immediately due and payable; provided, however, that the occurrence of an event of default as a result of a breach of a financial covenant under the Credit Agreement does not constitute a default or event of default with respect to any term facility under the Credit Agreement unless and until the required revolving lenders shall have terminated their revolving commitments and declared all amounts outstanding under the revolving credit facility to be due and payable. In addition, if we or any subsidiary guarantor becomes the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency, or similar law, then any outstanding obligations under the Credit Agreement will automatically become immediately due and payable. Loans outstanding under the Credit Agreement will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate (i) upon acceleration of such loans, (ii) while a payment event of default exists or (iii) upon the lenders’ request, during the continuance of any other event of default.
Seller Notes
We typically issue subordinated promissory notes (“Seller Notes”) as a part of the consideration transferred when making acquisitions. The Seller Notes are unsecured and are presented net of unamortized discount of $0.3 million and $0.2 million as of March 31, 2019 and December 31, 2018, respectively. We measure these instruments at their estimated fair values as of the respective acquisition dates. The stated interest rates on these instruments range from 2.00% to 3.00%. Principal and interest are payable in monthly, quarterly, or annual installments and mature through November 2023.
Scheduled maturities of debt at March 31, 2019 were as follows:
|
(in thousands) |
|
|
|
|
|
2019 (remainder of year) |
|
$ |
5,974 |
|
|
2020 |
|
8,220 |
|
|
|
2021 |
|
7,193 |
|
|
|
2022 |
|
5,849 |
|
|
|
2023 |
|
5,329 |
|
|
|
Thereafter |
|
475,999 |
|
|
|
Total debt before unamortized discount and debt issuance costs, net |
|
508,564 |
|
|
|
Unamortized discount and debt issuance costs, net |
|
(9,264 |
) |
|
|
Total debt |
|
$ |
499,300 |
|
NOTE N — FAIR VALUE MEASUREMENTS
Financial Instruments
In March 2018, we refinanced our credit facilities with the Credit Agreement. The carrying value (excluding unamortized discounts and debt issuance costs of $9.3 million) of our outstanding term loan as of March 31, 2019 was $500.0 million compared to its fair value of $498.7 million. The carrying value of our outstanding term loan as of December 31, 2018 (excluding unamortized discounts and debt issuance costs of $9.4 million) was $501.2 million compared to its fair value of $491.2 million. Our estimates of fair value are based on a discounted cash flow model and indicative quote using unobservable inputs, primarily, our risk-adjusted credit spread, which represents a Level 3 measurement.
As of March 31, 2019 and December 31, 2018, we had no amounts outstanding on our revolving credit facility.
In March 2018, we entered into interest rate swap agreements with notional values of $325.0 million at inception, which reduces $12.5 million annually until the swaps mature on March 6, 2024. The notional value outstanding as of March 31, 2019 was $312.5 million. The interest rate swap agreements are designated as cash flow hedges and are measured at fair value based on inputs other than quoted market prices that are observable, which represents a Level 2 measurement. See Note M - “ Debt ” and Note O - “ Derivative Financial Instruments ” for further information.
The carrying value of our Seller Notes as of March 31, 2019 and December 31, 2018 was $7.4 million and $4.5 million, respectively. We believe that the carrying value of the Seller Notes approximates their fair values based on a discounted cash flow model using unobservable inputs, primarily, our credit spread for subordinated debt, which represents a Level 3 measurement.
NOTE O — DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to certain risks arising from both our business operations and economic conditions. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash payments principally related to our borrowings.
Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk
management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counter-party in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The change in the fair value of derivatives designated and that qualify as cash flow hedges is recorded on our consolidated balance sheet in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
As of March 31, 2019, our swaps had a notional value outstanding of $312.5 million. As of December 31, 2018, our swaps had a notional value outstanding of $325.0 million.
Change in Net Loss on Cash Flow Hedges Including Accumulated Other Comprehensive Loss
The following table presents the activity of cash flow hedges included in accumulated other comprehensive loss for the three months ended March 31, 2019 and March 31, 2018:
|
(in thousands) |
|
Cash Flow Hedges |
|
|
|
Balance as of December 31, 2018 |
|
$ |
2,936 |
|
|
Unrealized loss recognized in other comprehensive loss, net of tax |
|
3,151 |
|
|
|
Reclassification to interest expense, net |
|
(215 |
) |
|
|
Balance as of March 31, 2019 |
|
$ |
5,872 |
|
|
|
|
|
|
|
|
Balance as of December 31, 2017 |
|
$ |
— |
|
|
Unrealized loss recognized in other comprehensive loss, net of tax |
|
2,538 |
|
|
|
Reclassification to interest expense, net |
|
(248 |
) |
|
|
Balance as of March 31, 2018 |
|
$ |
2,290 |
|
The following table presents the fair value of derivative assets and liabilities within the condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018:
|
|
|
As of March 31, 2019 |
|
As of December 31, 2018 |
|
||||||||
|
(in thousands) |
|
Assets |
|
Liabilities |
|
Assets |
|
Liabilities |
|
||||
|
Derivatives designated as cash flow hedging instruments: |
|
|
|
|
|
|
|
|
|
||||
|
Accrued expenses and other current liabilities |
|
$ |
— |
|
$ |
1,205 |
|
$ |
— |
|
$ |
724 |
|
|
Other liabilities |
|
— |
|
6,515 |
|
— |
|
3,134 |
|
||||
NOTE P — STOCK - BASED COMPENSATION
The Hanger, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”), as amended by our Board of Directors (the “Board”) in May 2018 authorizes the issuance of up to 2,625,000 shares of Common Stock, plus (i) the number of shares available for issuance under our prior equity incentive plan, the Hanger, Inc. 2010 Omnibus Incentive Plan (the “2010 Plan”), that had not been made subject to outstanding awards as of the effective date of the 2016 Plan and (ii) any shares that would have become available again for new grants under the terms of the 2010 Plan if such plan were still in effect.
We recognized a total of approximately $3.3 million and $2.6 million, respectively, of stock-based compensation expense for the three months ended March 31, 2019 and 2018. Stock compensation expense, net of forfeitures, relates to restricted stock units, performance-based restricted stock units, and stock options.
NOTE Q — SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
Defined Benefit Supplemental Executive Retirement Plan
Effective January 2004, we implemented an unfunded noncontributory defined benefit plan (“DB SERP”) for certain senior executives. The DB SERP, which we administer, calls for fifteen annual payments upon retirement with the payment amount based on years of service and final average salary. Benefit costs and liability balances are calculated based on certain assumptions including benefits earned, discount rates, interest costs, mortality rates, and other factors. Actual results that differ from the assumptions are accumulated and amortized over future periods, affecting the recorded obligation and expense in future periods.
We believe the assumptions used are appropriate; however, changes in assumptions or differences in actual experience may affect our benefit obligation and future expenses. The DB SERP’s change in net benefit cost and obligation during the three months ended March 31, 2019 and 2018 is as follows:
Change in Benefit Obligation:
|
(in thousands) |
|
2019 |
|
2018 |
|
||
|
Benefit obligation as of December 31, 2018 and 2017, respectively |
|
$ |
18,927 |
|
$ |
20,793 |
|
|
Service cost |
|
84 |
|
92 |
|
||
|
Interest cost |
|
165 |
|
150 |
|
||
|
Payments |
|
(1,877 |
) |
(1,877 |
) |
||
|
Benefit Obligation as of March 31 |
|
$ |
17,299 |
|
$ |
19,158 |
|
Amounts Recognized in the Condensed Consolidated Balance Sheets:
|
|
|
As of March 31, |
|
As of December 31, |
|
||
|
(in thousands) |
|
2019 |
|
2018 |
|
||
|
Accrued expenses and other current liabilities |
|
$ |
1,913 |
|
$ |
1,913 |
|
|
Other liabilities |
|
15,386 |
|
17,014 |
|
||
|
Total accrued liabilities |
|
$ |
17,299 |
|
$ |
18,927 |
|
Defined Contribution Supplemental Executive Retirement Plan
In 2013, we established a defined contribution plan (“DC SERP”) that covers certain of our senior executives. Each participant is given a notional account to manage his or her annual distributions and allocate the funds among various investment options (e.g. mutual funds). These accounts are tracking accounts only for the purpose of calculating the participant’s benefit. The participant does not have ownership of the underlying mutual funds. When a participant initiates or changes the allocation of his or her notional account, we will generally make an allocation of our investments to match those chosen by the participant. While the allocation of our sub accounts is generally intended to mirror the participant’s account records (i.e. the distributions and gains or losses on those funds), the employee does not have legal ownership of any funds until payout upon retirement. The underlying investments are owned by the insurance company with which we own an insurance policy.
As of March 31, 2019 and December 31, 2018, the estimated accumulated obligation benefit is $3.1 million and $3.0 million, respectively, of which $3.0 million and $2.4 million is funded and $0.1 million and $0.6 million is unfunded at March 31, 2019 and December 31, 2018, respectively.
In connection with the DC SERP benefit obligation, we maintain a company owned life insurance policy (“COLI”). The carrying value of the COLI is measured at its cash surrender value and is presented within “Other assets” in our consolidated balance sheets. See Note I - “ Other Current Assets and Other Assets ” for additional information.
NOTE R — COMMITMENTS AND CONTINGENCIES
Guarantees and Indemnification
In the ordinary course of our business, we may enter into service agreements with service providers in which we agree to indemnify or limit the service provider against certain losses and liabilities arising from the service provider’s performance of the agreement. We have reviewed our existing contracts containing indemnification or clauses of guarantees and do not believe that our liability under such agreements is material.
Legal Proceedings
Securities and Derivative Litigation
In November 2014, a securities class action complaint, City of Pontiac General Employees’ Retirement System v. Hanger, et al. , C.A. No. 1:14-cv-01026-SS, was filed against us in the United States District Court for the Western District of Texas. The complaint named us and certain of our current and former officers for allegedly making materially false and misleading statements regarding, inter alia, our financial statements, RAC audit success rate, the implementation of new financial systems, same-store sales growth, and the adequacy of our internal processes and controls. The complaint alleged violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The complaint sought unspecified damages, costs, attorneys’ fees, and equitable relief.
On April 1, 2016, the court granted our motion to dismiss the lawsuit for failure to state a claim upon which relief can be granted, and permitted plaintiffs to file an amended complaint. On July 1, 2016, plaintiffs filed an amended complaint. On September 15, 2016, we and certain of the individual defendants filed motions to dismiss the lawsuit. On January 26, 2017, the court granted the defendants’ motions and dismissed with prejudice all claims against all defendants for failure to state a claim. On February 24, 2017, plaintiffs filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit. On August 6, 2018, the Court of Appeals affirmed in part and reversed in part. The Court of Appeals affirmed the dismissal of the case against individual defendants Vinit Asar, our current President and Chief Executive Officer, and Thomas Kirk, our former President and Chief Executive Officer, but reversed the dismissal of the case against George McHenry, our former Chief Financial Officer, and Hanger, Inc. On August 20, 2018, Hanger, Inc. and George McHenry filed a petition for panel rehearing and a petition for rehearing en banc with the Court of Appeals. On April 10, 2019 the Court of Appeals granted the petition for panel rehearing, withdrew its previous panel decision, and substituted a new panel decision in its place that affirmed the District Court’s dismissal with prejudice of all claims against all the defendants for failure to state a claim. Plaintiffs did not petition the Court of Appeals for a panel rehearing or a rehearing en banc. Should plaintiffs decide to continue the litigation, their sole remaining option is to petition the United States Supreme Court to review the new Fifth Circuit panel decision issued on April 10, 2019. The deadline for such petition is July 9, 2019.
In February and August of 2015, two separate shareholder derivative suits were filed in Texas state court against us related to the announced restatement of certain of our financial statements. The cases were subsequently consolidated into Judy v. Asar, et. al., Cause No. D-1-GN-15-000625. On October 25, 2016, plaintiffs in that action filed an amended complaint, and the case is currently pending before the 459th Judicial District Court of Travis County, Texas.
The amended complaint in the consolidated derivative action names us and certain of our current and former officers and directors as defendants. It alleges claims for breach of fiduciary duty based, inter alia, on the defendants’ alleged failure to exercise good faith to ensure that we had in place adequate accounting and financial controls and that disclosures regarding our business, financial performance and internal controls were truthful and accurate. The complaint seeks unspecified damages, costs, attorneys’ fees, and equitable relief.
As disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on June 6, 2016, the Board of Directors appointed a Special Litigation Committee of the Board (the “Special Committee”). The Board delegated to the Special Committee the authority to (1) determine whether it is in our best interests to pursue any of the allegations made
in the derivative cases filed in Texas state court (which cases were consolidated into the Judy case discussed above), (2) determine whether it is in our best interests to pursue any remedies against any of our current or former employees, officers or directors as a result of the conduct discovered in the Audit Committee investigation concluded on June 6, 2016 (the “Investigation”), and (3) otherwise resolve claims or matters relating to the findings of the Investigation. The Special Committee retained independent legal counsel to assist and advise it in carrying out its duties and reviewed and considered the evidence and various factors relating to our best interests. In accordance with its findings and conclusions, the Special Committee determined that it is not in our best interest to pursue any of the claims in the Judy derivative case. Also in accordance with its findings and conclusions, the Special Committee determined that it is not in our best interests to pursue legal remedies against any of our current or former employees, officers, or directors.
On April 14, 2017, we filed a motion to dismiss the consolidated derivative action based on the resolution by the Special Committee that it is not in our best interest to pursue the derivative claims. Counsel for the derivative plaintiffs opposed that motion and moved to compel discovery. In a hearing held on June 12, 2017, the Travis County court denied plaintiffs’ motion to compel, and held that the motion to dismiss would be considered only after appropriate discovery was concluded.
The plaintiffs subsequently subpoenaed counsel for the Special Committee, seeking a copy of the full report prepared by the Special Committee and its independent counsel. Counsel for the Special Committee, as well as our counsel, took the position that the full report is not discoverable under Texas law. Plaintiffs’ counsel filed a motion to compel the Special Committee’s counsel to produce the full report. We opposed the motion. On July 20, 2018, the Travis County court ruled that only a redacted version of the report is discoverable, and counsel for the Special Committee provided a redacted version of the report to plaintiffs’ counsel. Plaintiffs objected to the redacted version of the report, and on February 4, 2019, the Travis County court appointed a Special Master to review plaintiffs’ objections to the redacted report. On March 22, 2019, the Special Master submitted a report to the Travis County Court recommending that the Court order that the entire Special Committee report be produced. On April 2, 2019 we filed an objection to the Special Master’s report and recommendation, and requested a hearing on the matter. The Travis County Court scheduled a hearing for May 15, 2019 regarding our objection. Upon completion of discovery, we intend to file a motion to dismiss the consolidated derivative action.
Management intends to continue to vigorously defend against the shareholder derivative action. At this time, if the derivative action were to go to trial, we cannot predict how the Travis County Court would rule on the merits of the claims and/or the scope of the potential loss in the event of an adverse outcome. Should we ultimately be found liable, the resulting damages could have a material adverse effect on our consolidated financial position, liquidity or our results of operations.
Other Matters
From time to time we are subject to legal proceedings and claims which arise in the ordinary course of our business, and are also subject to additional payments under business purchase agreements. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a materially adverse effect on our consolidated financial position, liquidity or results of our operations.
We operate in a highly regulated industry and receive regulatory agency inquiries from time to time in the ordinary course of our business, including inquiries relating to our billing activities. No assurance can be given that any discrepancies identified during a regulatory review will not have a material adverse effect on our consolidated financial statements.
NOTE S — SEGMENT AND RELATED INFORMATION
We have identified two operating segments and both performance evaluation and resource allocation decisions are determined based on each operating segment’s income from operations. The operating segments are described further below:
Patient Care - This segment consists of our owned and operated patient care clinics. The patient care clinics provide services to design and fit O&P devices to patients. These clinics also instruct patients in the use, care and maintenance of the devices. The principal reimbursement sources for our services are:
· Commercial private payors and other, which consist of individuals, rehabilitation providers, commercial insurance companies, health management organizations (“HMOs”), preferred provider organizations (“PPOs”), hospitals, vocational rehabilitation, workers’ compensation programs, and similar sources;
· Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain disabled persons, which provides reimbursement for O&P products and services based on prices set forth in published fee schedules with 10 regional pricing areas for prosthetics and orthotics and by state for durable medical equipment;
· Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons in financial need, regardless of age, which may supplement Medicare benefits for financially needy persons aged 65 or older; and
· U.S. Department of Veterans Affairs.
Our contract and network management business, known as Linkia, is the only network management company dedicated solely to serving the O&P market and is focused on managing the O&P services of national and regional insurance companies. We partner with healthcare insurance companies by securing a national or regional contract either as a preferred provider or to manage their O&P network of providers.
Products & Services - This segment consists of our distribution services business, which distributes and fabricates O&P products and components to sell to both the O&P industry and our own patient care clinics, and our therapeutic solutions business. The therapeutic solutions business provides and sells rehabilitation equipment and ancillary consumable supplies combined with equipment maintenance, education, and training. This segment also develops emerging neuromuscular technologies for the O&P and rehabilitation markets.
Corporate & Other - This consists of corporate overhead and includes unallocated expenses such as personnel costs, professional fees, and corporate offices expenses.
The accounting policies of the segments are the same as those described in Note A - “ Organization and Summary of Significant Accounting Policies ” in our 2018 Form 10-K.
Intersegment revenue primarily relates to sales of O&P components from the Products & Services segment to the Patient Care segment. The sales are priced at the cost of the related materials plus overhead.
Summarized financial information concerning our reporting segments is shown in the following tables. Total assets for each of the segments has not materially changed from December 31, 2018.
|
|
|
Patient Care |
|
Products & Services |
|
||||||||
|
|
|
For the Three Months Ended
|
|
For the Three Months Ended
|
|
||||||||
|
(in thousands) |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
||||
|
Net revenues |
|
|
|
|
|
|
|
|
|
||||
|
Third party |
|
$ |
190,601 |
|
$ |
188,507 |
|
$ |
45,818 |
|
$ |
45,488 |
|
|
Intersegments |
|
— |
|
— |
|
44,879 |
|
42,522 |
|
||||
|
Total net revenue |
|
190,601 |
|
188,507 |
|
90,697 |
|
88,010 |
|
||||
|
Material costs |
|
|
|
|
|
|
|
|
|
||||
|
Third party suppliers |
|
53,355 |
|
52,175 |
|
25,022 |
|
24,181 |
|
||||
|
Intersegments |
|
5,795 |
|
5,724 |
|
39,084 |
|
36,798 |
|
||||
|
Total material costs |
|
59,150 |
|
57,899 |
|
64,106 |
|
60,979 |
|
||||
|
Personnel expenses |
|
73,709 |
|
73,613 |
|
13,002 |
|
12,495 |
|
||||
|
Other expenses |
|
37,433 |
|
35,004 |
|
6,948 |
|
6,155 |
|
||||
|
Depreciation & amortization |
|
4,552 |
|
4,898 |
|
2,543 |
|
2,502 |
|
||||
|
Segment income from operations |
|
$ |
15,757 |
|
$ |
17,093 |
|
$ |
4,098 |
|
$ |
5,879 |
|
A reconciliation of the total of the reportable segments’ income (loss) from operations to consolidated loss from operations is as follows:
|
|
|
For the Three Months Ended
|
|
||||