Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 


 

FORM 10-Q/A

Amendment No. 110-Q

 

(Mark One)

 

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

For the quarterly period ended June 30, 2013

OR

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

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

For the quarterly period ended March 31, 2012

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

 

84-0904275

(State or other jurisdiction of

 

(IRS Employer Identification No.)

incorporation or organization)

 

 

 

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

 

 

Formerly, Hanger Orthopedic Group, Inc.Former name, former address and former fiscal year, if changed since last report.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

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

 

As of April 27, 2012 34,117,244August 2, 2013 34,757,520 shares of common stock, $.01 par value per share, were outstanding.

 

 

 



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EXPLANATORY NOTE

We are filing this Amendment No. 1 on Form 10-Q/A (the “Amended Filing”) to our Quarterly Report on Form 10-Q for the period ended March 31, 2012 originally filed with the Securities and Exchange Commission (“SEC”) on May 4, 2012 (the “Original Filing”) to present a correction of an error related to calculating the value of work-in-process inventory (“WIP”), which results in a $0.03 and a $0.02 increase in earnings per diluted share, a $0.03 and $0.01 increase in basic earnings per share, and a $1.1 million and a $.5 million increase in net income for the first quarter of 2012 and 2011, respectively.  Corresponding adjustments to material costs, personnel costs, other operating expense, inventories, and the associated tax impacts have also been corrected herein.

In accordance with applicable SEC rules, this Amended Filing includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.

Except for the items noted above, the information included in Item 4 of Part I regarding the material weakness in our internal control over financial reporting and clarification of our inventory policy, no other information included in the Original Filing is being amended by this Amended Filing. The Amended Filing continues to speak as of the date of the Original Filing and we have not updated the Original Filing to reflect events occurring subsequent to the date of the Original Filing, including but not limited to our June 8, 2012 name change from Hanger Orthopedic Group, Inc. to Hanger, Inc. Accordingly, this Amended Filing should be read in conjunction with our filings made with the SEC subsequent to the date of the Original Filing. Refer to Note B — Significant Accounting Policies - Restatement and Revision of Previously Reported Consolidated Financial Information.



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HANGER, ORTHOPEDIC GROUP, INC.

 

INDEXINDEX

 

 

 

 

Page No.

Part I.

 

Part I.

FINANCIAL INFORMATION (unaudited)

 

 

 

 

 

Item 1.

Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

Consolidated Balance Sheets — March 31, 2012June 30, 2013 and December 31, 20112012

1

 

 

 

 

 

Consolidated Statements of Income and Comprehensive Income for the Three Monthsand Six Month periods ended March 31,June 30, 2013 and 2012 and 2011

3

 

 

 

 

 

Consolidated Statements of Cash Flows for the ThreeSix Months ended March 31,Ended June 30, 2013 and 2012 and 2011

4

 

 

 

 

 

Notes to Consolidated Financial Statements

5

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

15

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures Aboutabout Market Risk

29

25

 

 

 

 

Item 4.

Controls and Procedures

30

25

Part II.

OTHER INFORMATION

 

 

 

 

Part II.Item 1.

Legal Proceedings

 

OTHER INFORMATION

26

 

 

 

 

Item 1A.

Risk Factors

31

26

 

 

 

 

Item 6.

Exhibits

33

28

 

 

 

 

SIGNATURES

34

29

 



Table of Contents

 

HANGER, ORTHOPEDIC GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

 

 

March 31,

 

December 31,

 

 

June 30,

 

December 31,

 

 

2012

 

2011

 

 

2013

 

2012

 

 

 

 

As Revised

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

32,248

 

$

42,896

 

 

$

5,766

 

$

19,211

 

Restricted cash

 

3,120

 

 

 

3,120

 

3,120

 

Accounts receivable, less allowance for doubtful accounts of $22,022 and $22,028 in 2012 and 2011, respectively

 

133,308

 

138,826

 

Accounts receivable, less allowance for doubtful accounts and disallowed sales of $25,485 and $21,379 in 2013 and 2012, respectively

 

170,601

 

165,668

 

Inventories

 

120,485

 

112,305

 

 

137,557

 

127,295

 

Prepaid expenses, other assets, and income taxes receivable

 

20,106

 

17,015

 

 

18,333

 

15,673

 

Deferred income taxes

 

20,652

 

20,648

 

 

30,920

 

27,685

 

Total current assets

 

329,919

 

331,690

 

 

366,297

 

358,652

 

 

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

 

 

 

 

 

Land

 

794

 

794

 

 

794

 

794

 

Buildings

 

7,294

 

4,400

 

 

8,896

 

8,896

 

Furniture and fixtures

 

17,464

 

17,281

 

 

19,956

 

19,582

 

Machinery and equipment

 

57,314

 

56,137

 

 

61,572

 

60,364

 

Equipment leased to third parties under operating leases

 

34,186

 

33,830

 

 

35,662

 

34,827

 

Leasehold improvements

 

66,410

 

65,245

 

 

79,491

 

74,615

 

Computer and software

 

84,216

 

81,775

 

 

106,569

 

98,186

 

Total property, plant and equipment, gross

 

267,678

 

259,462

 

 

312,940

 

297,264

 

Less accumulated depreciation

 

161,538

 

154,690

 

 

197,698

 

182,803

 

Total property, plant and equipment, net

 

106,140

 

104,772

 

 

115,242

 

114,461

 

 

 

 

 

 

 

 

 

 

 

INTANGIBLE ASSETS

 

 

 

 

 

 

 

 

 

 

Goodwill

 

611,147

 

609,484

 

 

676,190

 

674,774

 

Patents and other intangible assets, net

 

53,958

 

54,894

 

Patents and other intangible assets, less accumulated amortization of $23,974 and $20,643 in 2013 and 2012, respectively

 

61,262

 

64,281

 

Total intangible assets, net

 

665,105

 

664,378

 

 

737,452

 

739,055

 

 

 

 

 

 

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

 

 

 

 

 

Debt issuance costs, net

 

16,622

 

17,485

 

 

9,424

 

14,033

 

Other assets

 

8,661

 

8,394

 

 

11,209

 

11,126

 

Total other assets

 

25,283

 

25,879

 

 

20,633

 

25,159

 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,126,447

 

$

1,126,719

 

 

$

1,239,624

 

$

1,237,327

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

1



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HANGER, ORTHOPEDIC GROUP, INC.

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

 

 

March 31,

 

December 31,

 

 

June 30,

 

December 31,

 

 

2012

 

2011

 

 

2013

 

2012

 

 

 

 

As Revised

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

7,927

 

$

8,065

 

 

$

13,802

 

$

11,082

 

Accounts payable

 

26,105

 

26,561

 

 

34,314

 

28,923

 

Accrued expenses

 

19,325

 

17,547

 

 

24,496

 

22,357

 

Accrued interest payable

 

6,615

 

3,040

 

 

2,205

 

3,041

 

Accrued compensation related costs

 

19,031

 

35,829

 

 

24,940

 

41,784

 

Total current liabilities

 

79,003

 

91,042

 

 

99,757

 

107,187

 

 

 

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

498,168

 

499,968

 

 

490,672

 

509,564

 

Deferred income taxes

 

74,257

 

74,309

 

 

76,509

 

77,730

 

Other liabilities

 

35,183

 

32,818

 

 

39,638

 

39,752

 

Total liabilities

 

686,611

 

698,137

 

 

706,576

 

734,233

 

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note H)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

Common stock, $.01 par value; 60,000,000 shares authorized, 35,588,485 and 35,127,230 shares issued and outstanding at 2012 and 2011, respectively

 

356

 

351

 

Common stock, $.01 par value; 60,000,000 shares authorized, 36,031,041 and 35,617,884 shares issued and outstanding at 2013 and 2012, respectively

 

360

 

356

 

Additional paid-in capital

 

271,149

 

268,535

 

 

286,467

 

280,084

 

Accumulated other comprehensive loss

 

(1,185

)

(1,185

)

 

(1,919

)

(1,919

)

Retained earnings

 

170,172

 

161,537

 

 

248,796

 

225,229

 

 

440,492

 

429,238

 

 

533,704

 

503,750

 

Treasury stock at cost (141,154 shares)

 

(656

)

(656

)

Treasury stock at cost (141,154 shares at 2013 and 2012)

 

(656

)

(656

)

Total shareholders’ equity

 

439,836

 

428,582

 

 

533,048

 

503,094

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

1,126,447

 

$

1,126,719

 

 

$

1,239,624

 

$

1,237,327

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

2



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HANGER, ORTHOPEDIC GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

For the Three and Six Months Ended March 31,June 30,

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

(Unaudited)

 

Three Months Ended

 

 

Three Months Ended

 

Six Months Ended

 

 

March 31,

 

 

June 30,

 

June 30,

 

 

2012

 

2011

 

 

2013

 

2012

 

2013

 

2012

 

 

As Restated

 

As Restated

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

218,091

 

$

200,439

 

 

$

273,735

 

$

251,754

 

$

507,270

 

$

469,845

 

Material costs

 

66,697

 

59,111

 

 

79,446

 

72,899

 

147,184

 

139,597

 

Personnel costs

 

81,153

 

78,267

 

 

93,176

 

83,435

 

183,129

 

164,588

 

Other operating expenses

 

40,219

 

36,100

 

 

54,959

 

51,256

 

98,802

 

91,475

 

Relocation expenses

 

 

376

 

Depreciation and amortization

 

8,285

 

7,292

 

 

9,510

 

8,438

 

18,795

 

16,723

 

Income from operations

 

21,737

 

19,293

 

 

36,644

 

35,726

 

59,360

 

57,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

7,777

 

8,379

 

 

7,708

 

7,684

 

15,485

 

15,461

 

Extinguishment of debt

 

6,645

 

 

6,645

 

 

Income before taxes

 

13,960

 

10,914

 

 

22,291

 

28,042

 

37,230

 

42,001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

5,324

 

4,162

 

 

8,212

 

10,656

 

13,661

 

15,980

 

Net income

 

$

8,636

 

$

6,752

 

 

$

14,079

 

$

17,386

 

$

23,569

 

$

26,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

Comprehensive income

 

 

8,636

 

 

6,752

 

 

$

14,079

 

$

17,386

 

$

23,569

 

$

26,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Per Common Share Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

0.25

 

$

0.20

 

 

$

0.40

 

$

0.51

 

$

0.68

 

$

0.76

 

Shares used to compute basic per common share amounts

 

34,036,539

 

33,360,840

 

 

34,849,659

 

34,268,941

 

34,724,077

 

34,110,820

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Per Common Share Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

0.25

 

$

0.20

 

 

$

0.40

 

$

0.50

 

$

0.67

 

$

0.75

 

Shares used to compute diluted per common share amounts

 

34,639,660

 

34,134,067

 

 

35,307,697

 

34,720,489

 

35,225,871

 

34,637,769

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3



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HANGER, ORTHOPEDIC GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the ThreeSix Months Ended March 31,June 30,

(Dollars in thousands)

(Unaudited)

 

2012

 

2011

 

 

2013

 

2012

 

 

As Restated

 

As Restated

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,636

 

$

6,752

 

 

$

23,569

 

$

26,021

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Loss on disposal of assets

 

 

5

 

 

169

 

1

 

Reduction of seller notes and earnouts

 

(177

)

(257

)

 

(57

)

(870

)

Provision for bad debts

 

4,723

 

4,078

 

Provision for doubtful accounts and disallowed sales

 

14,905

 

12,925

 

Provision for deferred income taxes

 

 

(343

)

 

(2,564

)

 

Depreciation and amortization

 

8,285

 

7,292

 

 

18,795

 

16,723

 

Amortization of debt issuance costs

 

863

 

748

 

 

8,273

 

1,726

 

Compensation expense on restricted stock

 

1,971

 

1,658

 

Excess tax benefit from stock-based compensation

 

(209

)

(816

)

Compensation expense on stock options and restricted stock units

 

4,060

 

4,014

 

Changes in operating assets and liabilities, net of effects of acquired companies:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

851

 

5,483

 

 

(18,026

)

(16,190

)

Inventories

 

(7,868

)

(2,277

)

 

(7,940

)

(12,053

)

Prepaid expenses, other current assets, and income taxes

 

(2,234

)

(3,010

)

 

(2,746

)

1,467

 

Accounts payable

 

(522

)

(6,339

)

 

7,611

 

2,327

 

Accrued expenses and accrued interest payable

 

4,294

 

2,040

 

 

(202

)

1,201

 

Accrued compensation related costs

 

(17,504

)

(25,531

)

 

(18,612

)

(12,562

)

Other

 

183

 

(1,794

)

 

409

 

2,271

 

Net cash provided by (used in) operating activities

 

1,292

 

(12,311

)

Net cash provided by operating activities

 

27,644

 

27,001

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment (net of acquisitions)

 

(4,777

)

(5,437

)

 

(15,939

)

(14,907

)

Purchase of equipment leased to third parties under operating leases

 

(539

)

 

 

(2,106

)

(1,063

)

Acquisitions and contingent purchase price (net of cash acquired)

 

(2,402

)

(4,941

)

Acquisitions and contingent considerations (net of cash acquired)

 

(4,741

)

(6,395

)

Restricted cash

 

 

(3,120

)

Proceeds from sale of property, plant and equipment

 

 

3

 

 

894

 

 

Restricted cash

 

(3,120

)

 

Net cash used in investing activities

 

(10,838

)

(10,375

)

 

(21,892

)

(25,485

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

Borrowings under term loan

 

225,000

 

 

Repayment of term loan

 

(293,300

)

(2,200

)

Borrowings under revolving credit agreement

 

 

10,000

 

 

120,000

 

 

Repayment of term loan

 

(1,450

)

(750

)

Scheduled repayment of seller’s notes

 

(488

)

(406

)

Repayments under revolving credit agreement

 

(65,000

)

 

Repayment of seller’s notes and other contingent considerations

 

(4,042

)

(2,451

)

Repayment of capital lease obligations

 

(411

)

(168

)

Deferred financing costs

 

 

(4,189

)

 

(3,665

)

 

Excess tax benefit from stock-based compensation

 

209

 

816

 

 

2,159

 

448

 

Proceeds from issuance of common stock

 

627

 

573

 

 

1,628

 

1,572

 

Net cash (used in) provided by financing activities

 

(1,102

)

6,044

 

Purchase and retirement of treasury stock

 

(1,566

)

 

Net cash used in financing activities

 

(19,197

)

(2,799

)

 

 

 

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(10,648

)

(16,642

)

 

(13,445

)

(1,283

)

Cash and cash equivalents, at beginning of period

 

42,896

 

36,308

 

 

19,211

 

42,896

 

Cash and cash equivalents, at end of period

 

$

32,248

 

$

19,666

 

 

$

5,766

 

$

41,613

 

SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:

SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION:

Issuance of restricted stock units of common stock

 

10,997

 

5,478

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4



Table of Contents

 

HANGER, ORTHOPEDIC GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE A — BASIS OF PRESENTATION

 

The unaudited interim consolidated financial statements as of June 30, 2013, and for the three monthsand six month periods ended March 31,June 30, 2013 and 2012 and 2011 have been prepared by Hanger, Orthopedic Group, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair statement of the Company’s financial position, results of operations and cash flows for such periods. The year-end consolidated data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The results of operations for the three monthsand six month periods ended March 31, 2012June 30, 2013 are not necessarily indicative of the results to be expected for the full fiscal year.

 

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2011,2012, filed by the Company with the SEC.

 

NOTE B — SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying financial statements.

 

Restatement and Revision of Previously Reported Consolidated Financial Information

 

During the fourth quarter of 2012, the Company identified adjustments necessary to correct prior periods for the overstatement of the value of work-in-process inventory at December 31, 2011 and 2010. The Company assessed the materiality of the errors on previously reported periods and concluded the impact was not material to any prior annual consolidated financial statements. Management, however, deemed the impact of this error on the consolidated financial statements for the three months ended March 31, 2012 and 2011 to be material and has restated the first quarter 2012 and 2011 financial results in thisthe restated Quarterly Report on Form 10-Q/A, filed with the SEC on March 22, 2013 (the “Amended Filing”). These errors had no impact on operating cash flows for any of the periods. The impact of the error on the Consolidated Balance Sheet as of December 31, 2011 and Statements of Income and Comprehensive Income for the three monthssix month period ended March 31,June 30, 2012 and 2011 is shown in the table below (in 000’s). The impact of the errors is included in the results of the Patient-Care Services segment in Note L.K. The error did not have an impact on the Consolidated Balance Sheets as of March 31,June 30, 2012.

 

 

As of December 31, 2011

 

(in thousands)

 

As Previously
Reported

 

As Revised

 

 

 

 

 

 

 

Inventories

 

$

114,086

 

$

112,305

 

Accrued expenses

 

$

18,247

 

$

17,547

 

 

 

Three Months Ended March 31, 2012

 

Three Months Ended March 31, 2011

 

(in thousands, except per share amounts)

 

As Previously
Reported

 

As Restated

 

As Previously
Reported

 

As Restated

 

 

 

 

 

 

 

 

 

 

 

Material costs

 

$

64,098

 

$

66,697

 

$

58,108

 

$

59,111

 

Personnel costs

 

$

83,619

 

$

81,153

 

$

78,889

 

$

78,267

 

Other operating expenses

 

$

42,133

 

$

40,219

 

$

37,390

 

$

36,100

 

Income from operations

 

$

19,956

 

$

21,737

 

$

18,384

 

$

19,293

 

Income before taxes

 

$

12,179

 

$

13,960

 

$

10,005

 

$

10,914

 

Provision for income taxes

 

$

4,624

 

$

5,324

 

$

3,792

 

$

4,162

 

Net income

 

$

7,555

 

$

8,636

 

$

6,213

 

$

6,752

 

Basic earnings per share

 

$

0.22

 

$

0.25

 

$

0.19

 

$

0.20

 

Diluted earnings per share

 

$

0.22

 

$

0.25

 

$

0.18

 

$

0.20

 

Revision of Previously Reported Statement of Cash Flow Information

During the second quarter of 2011, the Company identified a misclassification within the consolidated statements of cash flows, resulting in the overstatement of the net cash provided by operating activities in prior periods. The offsetting understatement was to net cash provided by financing activities. The misclassification had no impact on total reported decrease in cash and cash equivalents for any period, and therefore had no impact on operating or net income. The Company assessed the materiality of this item on previously reported periods and concluded the misclassification was not material. Accordingly, the three month period ended March 31, 2011 has been revised.

The impact of the reclassification on the statement of cash flows for the three month period ended March 31, 2011 is shown in the table below:

 

 

As Previously

 

 

 

 

 

(in thousands)

 

Reported

 

Adjustment

 

As Revised

 

Net cash used in operating activities

 

$

(11,495

)

(816

)

$

(12,311

)

Net cash (used in) provided by financing activities

 

$

5,228

 

816

 

$

6,044

 

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Table of Contents

NOTE B — SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

 

Six Months Ended June 30, 2012

 

(in thousands, except per share amounts)

 

As Previously
Reported

 

As Revised

 

Material costs

 

$

136,998

 

$

139,597

 

Personnel costs

 

$

167,054

 

$

164,588

 

Other operating expenses

 

$

93,389

 

$

91,475

 

Income from operations

 

$

55,682

 

$

57,462

 

Income before taxes

 

$

40,221

 

$

42,001

 

Provision for income taxes

 

$

15,280

 

$

15,980

 

Net income

 

$

24,941

 

$

26,021

 

Basic earnings per share

 

$

0.73

 

$

0.76

 

Diluted earnings per share

 

$

0.72

 

$

0.75

 

 

Use of Estimates

 

The preparation of 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 financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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Table of Contents

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.  At various times throughout the year, the Company maintains cash balances in excess of Federal Deposit Insurance Corporation limits.

 

Restricted Cash

 

Restricted cash has statutory or contractual restrictions that prevent it from being used in the Company’s operations.  The Company agreed to restrict $3.1 million of cash to eliminate letters of credit obligations used as collateral under the revolving credit facility.

 

Credit Risk

The Company primarily provides O&P (orthotics and prosthetics) devices and services and products throughout the United States of America and is reimbursed by the patients’ third-party and private payors insurers, governmentally funded health insurance programs, and, for those products distributed through the Products & Services business, by independent O&P providers. The Company also provides advanced rehabilitation technology and clinical programs to skilled nursing facilities in the United States primarily through operating leases. The Company performs ongoing credit evaluations of its Products & Services segment customers. Accounts receivable are not collateralized. The ability of the Company’s debtors to meet their obligations is dependent upon their financial stability which could be affected by future legislation and regulatory actions. Additionally, the Company maintains reserves for potential losses from these receivables that historically have been within management’s expectations.

Inventories

 

Inventories in the Patient-Care ServicesPatient Care segment consisting principally of raw materials and work-in-process, which amounted to $108.2 million and $96.6 million as of June 30, 2013 and December 31, 2012, respectively, are valued based on the gross profit method which approximates lower of cost or market using the first-in first-out method. The Company applies the gross profit method on a patient care clinic basis in this segment’s inventory to determine ending inventory at the end of each interim period, except on October 31,st, which is the date of our Physicalthe Company’s annual physical inventory. The annual physical inventory for this segment values the inventory at lower of cost or market using the first-in first-out method and includes work-in-process consisting of materials, labor and overhead which is valued based on established standards for the stage of completion of each custom order. Adjustments to reconcile the physical inventory to ourthe Company’s books are treated as changes in accounting estimates and are recorded in the fourth quarter. The Company recorded fourth quarter adjustments of an increase of $2.3 million and a decrease of $1.0 million to inventory as of October 31 2011 and 2010, respectively. The October 31st inventory is subsequently adjusted during interim periods to apply the gross profit method described above.

 

Inventories in the Distribution and Therapeutic SolutionsProducts & Services segments consist principally of finished goods which are stated at the lower of cost or market using the first-in, first-out method for all reporting periods and are valued based on perpetual records.

 

Fair Value Measurements

The Company follows the authoritative guidance for financial assets and liabilities, which establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. The authoritative guidance requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy by which these assets and liabilities must be categorized, based on significant levels of inputs as follows:

Level 1   unadjusted quoted prices for identical assets or liabilities in active markets accessible by the Company

Level 2   inputs that are observable in the marketplace other than those inputs classified as Level 1

Level 3   inputs that are unobservable in the marketplace and significant to the valuation

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

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Table of Contents

Financial Instruments

 

Assets measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, are $2.5 million and $11.0 million, respectively, and are comprised of cash equivalent money market investments. The money market investments are based on Level 1 observable market prices and are equivalent to one dollar. The carrying value of the Company’s short-term financial instruments, such as receivables and payables, approximate their fair values based on the short-term maturities of these instruments.  During the quarter, the Company refinanced its credit facilities by replacing its $300.0 million Term Loan and $100.0 million Revolving Credit Facility with a $225.0 million Term Loan Facility and a $200.0 million Revolving Credit Facility.  See Note F for further information.

·The carrying valuevalues of the Company’s long-term debt, excludingoutstanding Term Loans as of June 30, 2013 and December 31, 2012, were $225.0 million and $293.0 million, respectively. The Company has determined the Senior Notes,carrying value on these loans approximates fair value based on rates currently available to the Company for debt with similar terms and remaining maturities (level 2).based on interest rates currently available and has therefore concluded these are Level 2 measurements.

·The carrying values of the Company’s outstanding Revolving Credit Facilities as of June 30, 2013 and December 31, 2012, were $55.0 million and $0 million, respectively.  The Company has determined the carrying value on these loans approximates fair value for debt with similar terms and remaining maturities based on interest rates currently available and has therefore concluded these are Level 2 measurements.

·The carrying value of the Senior Notes was $200.0 million as of June 30, 2013 and December 31, 2012.  The fair value of the Senior Notes, based on a Level 1 quoted market prices (level 1), as of March 31, 2012price, was $210.5$214.0 million as compared to the carrying value of $200.0and $211.5 million as of that date.June 30, 2013 and December 31, 2012.

·Seller Notes are recorded at contractual carrying values of $24.5 million and $27.3 million as of June 30, 2013 and December 31, 2012, respectively, and carrying value approximates fair value for similar debt in all material respects.  The Company estimates fair value of the seller notes with a discounted cash flow model using unobservable rates and has determined these represent Level 3 measurements.

 

Revenue Recognition

 

Revenues in the Company’s patient-care centerspatient care clinics are derived from the sale of O&P devices and the maintenance and repair of existing devices and are recorded net of all known contractual adjustments and discounts. The sale of O&P devices includes the design, fabrication, assembly, fitting and delivery of a wide range of braces, limbs and other devices. Revenues from the sale of these devices are recorded when (i) acceptance by and delivery to the patient has occurred; (ii) persuasive evidence of an arrangement exists and there are no further obligations to the patient; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. Revenues from maintenance and repairs are recognized when the service is provided.

Revenues on the saledistribution of O&P devices to customers by the Distribution segment are recorded upon the shipment of products, in accordance with the terms of the invoice, net of merchandise returns received and the amount established for anticipated returns.

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Table of Contents

NOTE B — SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

received. Discounted sales are recorded at net realizable value. Revenues in the Therapeutic Solutions segment are primarily derived from leasing rehabilitation technology combined with clinical therapy programs and education and training. The revenue istraining are recorded on a monthly basis according to terms of the contracts with ourthe Company’s customers.  The contracts contain negotiated pricing and service levels with terms ranging from one to five years, generally billed to the Company’s customers monthly, and revenue is recognized based upon the contractual terms of the agreements.

 

Certain accounts receivable may be uncollectible, even if properly pre-authorized and billed. Regardless of the balance, accounts receivable amounts are periodically evaluated to assess collectability. In addition to the actual bad debt expense recognized during collection activities, the Company estimates the amount of potential bad debt expense that may occur in the future. This estimate is based upon historical experience as well as a review of the receivable balances.

 

On a quarterly basis, the Company evaluates cash collections, accounts receivable balances and write-off activity to assess the adequacy of the allowance for doubtful accounts.accounts and disallowed sales. Additionally, a company-widean evaluation of collectability of receivable balances older than 180 days is performed at the Company’s O&P clinics at least semi-annually, the results of which are used in the next allowance analysis. In these detailed reviews, the account’s net realizable value is estimated after considering the customer’s payment history, past efforts to collect on the balance and the outstanding balance, and a specific reserve is recorded if needed. From time to time, the Company may outsource the collection of such accounts to outsourcedcollection agencies after internal collection efforts are exhausted. In the cases when valid accounts receivable cannot be collected, the uncollectible account is written offoff.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost less accumulated depreciation, with the exception of assets acquired through acquisitions, which are initially recorded at fair value. Equipment acquired under capital leases is recorded at the lower of fair market value or the present value of the future minimum lease payments. The cost and related accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the respective accounts, and any resulting gains or losses are included in the Consolidated Statements of Income and Comprehensive Income.

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Table of Contents

Goodwill and Other Intangible Assets

Goodwill represents the excess of purchase price over the fair value of net identifiable assets of purchased businesses. The Company assess goodwill for impairment annually during the fourth quarter, or when events or circumstances indicate that the carrying value of the reporting units may not be recoverable.  The Company has the option to bad debt expense.first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  If the Company determines that a two-step goodwill impairment test is necessary or more efficient than a qualitative approach, it will measure the fair value of the Company’s reporting units using a combination of income, market and cost approaches.  Any impairment would be recognized by a charge to operating results and a reduction in the carrying value of the intangible asset.  There were no impairment indicators since the last annual impairment test on October 1, 2012.

 

Income Taxes

 

The Company recognizes deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income tax liabilities and assets are determined based on the difference between the financial statementstatements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company recognizes a valuation allowance on the deferred tax assets if it is more likely than not that the assets will not be realized in future years. Significant accounting judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. The Company believes that its tax positions are consistent with applicable tax law, but certain positions may be challenged by taxing authorities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. In addition, the Company is subject to periodic audits and examinations by the Internal Revenue Service and other state and local taxing authorities. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates.

 

Segment Information

 

The Company applies a “management” approach to disclosure of segment information. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the basis of the Company’s operating segments. During the first quarter of 2013, the Company assessed and updated their operating segments to align with how the business is managed and determined their reportable segments are the same as their operating segments. The description of the Company’s reportable segments and the disclosure of segment information are presented in Note L.K.

 

NewRecent Accounting GuidancePronouncements

 

In May 2011,July 2012, the FASB issued Accounting Standards Update (“ASU”) 2011-04, “AmendmentsASU 2012-02, “Testing Indefinite-Lived Intangibles for Impairment”. This ASU amended guidance that simplifies how entities test indefinite-lived intangible assets other than goodwill for impairment.  After assessment of certain qualitative factors, if it is determined to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends ASC 820, “Fair Value Measurement.”be more likely than not that an indefinite-lived asset is impaired, entities must perform the quantitative impairment test.  Otherwise, the quantitative test becomes optional.  The amended guidance changeswas effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  The Company adopted this new guidance in the wording used to describe many requirements in U.S. GAAP for measuring fair valuefirst quarter of 2013, and for disclosing information about fair value measurements.the adoption did not have a material impact the Company’s condensed consolidated financial statements.

 

7



TableIn February 2013, the FASB issued ASU 2013-2, “Other Comprehensive Income.” This ASU amends ASC 220, “Comprehensive Income,” and supersedes ASU 2011-05 “Presentation of Contents

NOTE B — SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Additionally,Comprehensive Income” and ASU 2011-12 “Comprehensive Income,” to require reclassification adjustments from other comprehensive income to be presented either in the financial statements or in the notes to the financial statements. The standard does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the guidance requires an entity to provide enhanced disclosures to present separately by component reclassifications out of accumulated other comprehensive income. The amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. The guidance provided in this ASU No. 2011-04 iswere effective prospectively for interim and annualreporting periods beginning after December 15, 2011 and is applied prospectively.2012. The Company has adopted the amendments of this ASU effective January 1, 2012,guidance and the initial adoption of the amendments in this ASUits implementation did not have a material impact on our condensed consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220),” which changes the presentation of comprehensive income. The amended guidance gives companies the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance provided in ASU No. 2011-05 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company adopted the amendments of this ASU effective January 1, 2012, and the initial adoption of the amendments in this ASU did not have a material impact on our condensedits consolidated financial statements.

 

In July 2011,2013, the FASB issued ASU No. 2011-07 “Presentation and Disclosuresnew accounting guidance that requires that unrecognized tax benefits be classified as an offset to deferred tax assets to the extent of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful Accounts for Certain Health Care Entities.”  The objective of this update is to provide financial statement users with greater transparency about a health care entity’sany net patient service revenue and the related allowance for doubtful accounts. This update provides information to assist financial statement users in assessing an entity’s sources of net patient service revenue and related changes in its allowance for doubtful accounts. The amendments require health care entities that recognize significant amounts of patient service revenueoperating loss carryforwards, similar tax loss carryforwards, or tax credit carryforwards available at the time the services are rendered even though they do not assess the patient’s ability to pay to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue (net of contractual allowances and discounts) on their statement of operations. The amendments in this update require certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changesreporting date in the allowanceapplicable tax jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. An exception would apply if the tax law of the tax jurisdiction does not require the Company to use, and it does not intend to use, the deferred tax asset for doubtful accounts. Thesuch purpose. This guidance provided in ASU No. 2011-07 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company has determined that ASU No. 2011-07 has no impact on its financial statements.

In September 2011, FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350):  Testing Goodwill for Impairment”, which provides entities the option to perform a qualitative assessment in order to determine whether additional quantitative impairment testing is necessary. This amendment is effective for reporting periods beginning after December 15, 2011. This amendment2013. The Company does not impactexpect the quantitative testing methodology, should it be necessary. The Company adopted this standard on January 1, 2012 and the initial adoption of the amendments in this ASU did notthese provisions to have a material impacteffect on our condensedthe consolidated financial statements.

 

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Table of Contents

NOTE C - SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION— GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2012

 

2011

 

 

 

(Unaudited)

 

(Unaudited)

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

3,278

 

$

3,789

 

Income taxes (net of refunds)

 

1,566

 

1,030

 

 

 

 

 

 

 

Non-cash financing and investing activities:

 

 

 

 

 

Non-cash property, plant and equipment purchases

 

1,028

 

2,628

 

Earnouts payable on acquisitions

 

 

321

 

Issuance of notes in connection with acquistions

 

 

693

 

Issuance of restricted shares of common stock

 

8,419

 

11,566

 

NOTE D - GOODWILL

The Company determined that it has three reporting units with goodwill to be evaluated, which are the same as its reportable segments: (i) Patient-Care Services; (ii) Distribution; and (iii) Therapeutic Solutions. The Company completes its annual goodwill and indefinite lived intangible impairment analysis in Octoberthe fourth quarter of each year. The Company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test.  If the Company determines that a two-step goodwill impairment test is necessary or more efficient than a qualitative approach, it will measure the fair value of the Company’s reporting units is primarily determined based on theusing a combination of income, approach and considers the market and cost approach.approaches.  No triggering events have transpired since December 31, 2012.  Goodwill allocated to the Company’s operating segments for the six months ended June 30, 2013 and 2012 are as follows:

(In thousands)

 

Patient Care

 

Products &
Services

 

Total

 

Balance at December 31, 2012

 

$

538,492

 

$

136,282

 

$

674,774

 

Additions due to acquisitions

 

2,711

 

 

2,711

 

Adjustments

 

(1,295

)

 

(1,295

)

Balance at June 30, 2013

 

$

539,908

 

$

136,282

 

$

676,190

 

 

 

Patient Care

 

Products &
Services

 

Total

 

Balance at December 31, 2011

 

$

474,166

 

$

135,318

 

$

609,484

 

Additions due to acquisitions

 

4,807

 

964

 

5,771

 

Contingent considerations (1)

 

477

 

 

477

 

Balance at June 30, 2012

 

$

479,450

 

$

136,282

 

$

615,732

 


(1) Contingent consideration relates to acquisitions completed prior to the adoption of ASC 805.

 

The activitybalances related to goodwill for the three months ended Marchintangible assets as of June 30, 2013 and December 31, 2012 and 2011 is as follows:

 

 

Patient-Care Services

 

Distribution

 

Therapeutic
Solutions

 

 

 

(In thousands)

 

Goodwill

 

Accumulated
Impairment Loss

 

Net

 

Goodwill

 

Goodwill

 

Total

 

Balance at December 31, 2011

 

$

519,974

 

$

(45,808

)

$

474,166

 

$

38,388

 

$

96,930

 

$

609,484

 

Additions due to acquisitions

 

1,536

 

 

1,536

 

 

 

1,536

 

Additions due to contingent considerations

 

127

 

 

127

 

 

 

127

 

Balance at March 31, 2012 (unaudited)

 

$

521,637

 

$

(45,808

)

$

475,829

 

$

38,388

 

$

96,930

 

$

611,147

 

 

 

June 30, 2013

 

December 31, 2012

 

(In thousands)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Customer Lists

 

$

47,252

 

$

(9,760

)

$

37,492

 

$

48,044

 

$

(7,846

)

$

40,198

 

Trade Name

 

9,895

 

 

9,895

 

9,070

 

 

9,070

 

Patents and Other Intangibles

 

28,089

 

(14,214

)

13,875

 

27,810

 

(12,797

)

15,013

 

 

 

85,236

 

(23,974

)

61,262

 

84,924

 

(20,643

)

64,281

 

 

 

 

Patient-Care Services

 

Distribution

 

Therapeutic
Solutions

 

 

 

(In thousands)

 

Goodwill

 

Accumulated
Impairment Loss

 

Net

 

Goodwill

 

Goodwill

 

Total

 

Balance at December 31, 2010

 

$

502,040

 

$

(45,808

)

$

456,232

 

$

38,388

 

$

96,079

 

$

590,699

 

Additions due to acquisitions

 

3,552

 

 

3,552

 

 

423

 

3,975

 

Additions due to contingent considerations

 

341

 

 

341

 

 

 

341

 

Balance at March 31, 2011 (unaudited)

 

$

505,933

 

$

(45,808

)

$

460,125

 

$

38,388

 

$

96,502

 

$

595,015

 

Customer lists are amortized over their estimated period of benefit, generally 10 to 14 years.  Patents are amortized using the straight-line method over 5 years.  Total intangible amortization expenses were $3.3 million and $2.5 million for the six months ended June 30, 2013 and June 30, 2012, respectively.  The weighted average life of the additions to customer lists, patents and other intangibles is 7.7 years.

 

NOTE ED INVENTORIES

 

Inventories which are recorded at the lower of cost or market using the first-in, first-outgross profit method were as follows:primarily consists of raw materials and work-in-process held by the Patient Care segment.  Inventories using the perpetual method primarily consists of finished goods held by the Products and Services segment.  A description of the Company’s inventory valuation methodologies are presented in Note B.

 

March 31,

 

December 31,

 

(In thousands)

 

2012

 

2011

 

 

June 30, 2013

 

December 31, 2012

 

 

(Unaudited)

 

(Revised)

 

 

 

 

 

 

Raw materials

 

$

39,488

 

$

39,121

 

 

$

43,533

 

$

41,372

 

Work-in-process

 

52,970

 

43,954

 

Work in process

 

66,183

 

56,931

 

Finished goods

 

28,027

 

29,230

 

 

27,841

 

28,992

 

 

$

120,485

 

$

112,305

 

 

$

137,557

 

$

127,295

 

 

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Table of Contents

 

NOTE FE — ACQUISITIONS

 

During the threesix months ended March 31, 2012,June 30, 2013, the Company acquired onetwo O&P company,companies, operating a total of 2 patient-care centers.nine patient care clinics. The aggregate purchase price for thisthese O&P businessbusinesses was $2.0 million paid in cash. The Company recorded approximately $1.3 million of goodwill related to this acquisition, and the expenses incurred related to this acquisition were insignificant and are included in other operating expenses. During the three months ended March 31, 2011, the Company acquired one O&P company, operating a total of one patient care center. The aggregate purchase price for this O&P business was $5.8$6.9 million. Of this aggregate purchase price, $0.7$0.3 million consisted of promissory notes, and $0.6$1.8 million is made up of contingent consideration payable within the next two years.years and $4.8 million was paid in cash. The Company recorded approximately $2.7 million of goodwill related to these acquisitions, and the expenses incurred related to these acquisitions were insignificant and were included in other operating expenses.

During the six months ended June 30, 2012, the Company acquired five O&P companies, operating a total of eight patient care clinics. The aggregate purchase price for these O&P businesses was $8.6 million. Of this aggregate purchase price, $1.2 million consisted of promissory notes, $1.8 million was made up of contingent consideration payable within the next five years, and $5.6 million was paid in cash. Contingent consideration is reported as other liabilities on the Company’s consolidated balance sheet. The Company recorded approximately $3.6$5.5 million of goodwill related to this acquisitionthese acquisitions, and the expenses incurred related to this acquisition were insignificant and arewere included in other operating expenses.

The results of operations for these acquisitionsthis acquisition are included in the Company’s results of operations from the date of acquisition. Pro forma results would not be materially different. The Company intends to make an election to treat this acquisition as an asset acquisition for tax purposes which will result in the goodwill being amortizable for tax purposes.

 

In connection with contingent consideration agreements with acquisitions completed prior to adoption of the revised authoritative guidance effective for business combinations for which the acquisition date iswas on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, the Company made payments of $0.1$0 million and $0.4$0.5 million during the threesix months ended March 31,June 30, 2013 and 2012, and 2011, respectively. The Company has accounted for these amounts as additional purchase price, resulting in an increase in goodwill. In connection with contingent consideration agreements withFor acquisitions completed subsequent to adoption of revised authoritative guidance, the Company made payments in connection with contingent consideration agreements of $0.4$0.9 million in the first threesix months of 20122013 and $0.1$0.8 million in the same period 2011. The2012. As of June 30, 2013 the Company estimates that it may pay up tohas accrued a total of $6.6$5.7 million related to contingent consideration provisions ofrelated to acquisitions made in futureprior periods.

 

NOTE GF — LONG TERM DEBT

 

Long-term debt consists of the following:

 

 

March 31,

 

December 31,

 

 

June 30,

 

December 31,

 

(In thousands)

 

2012

 

2011

 

 

2013

 

2012

 

 

(Unaudited)

 

 

 

 

 

 

 

 

Revolving Credit Facility

 

$

 

$

 

 

$

55,000

 

$

 

Term Loan

 

295,550

 

297,000

 

 

225,000

 

293,300

 

7 1/8% Senior Notes due 2018

 

200,000

 

200,000

 

Subordinated seller notes, non-collateralized, net of unamortized discount with principal and interest payable in either monthly, quarterly or annual installments at effective interest rates ranging from 3.00% to 7.00%, maturing through November 2016

 

10,545

 

11,033

 

 

506,095

 

508,033

 

7 1/8 % Senior Notes due 2018

 

200,000

 

200,000

 

Subordinated seller notes, non-collateralized, net of unamortized discount with principal and interest payable in either monthly, quarterly or annual installments at effective interest rates ranging from 2.00% to 4.00%, maturing through November 2018

 

24,474

 

27,346

 

Total Debt

 

504,474

 

520,646

 

Less current portion

 

(7,927

)

(8,065

)

 

(13,802

)

(11,082

)

 

$

498,168

 

$

499,968

 

Long Term Debt

 

$

490,672

 

$

509,564

 

Amendment to Credit AgreementRefinancing

 

On March 11, 2011,During the second quarter of 2013, the Company entered intorefinanced its bank credit facilities through a new 5 year credit agreement that increased its senior secured facilities to an amendmentaggregate principal amount of up to its Credit Agreement dated as$425.0 million from $400.0 million previously.  The new credit agreement includes a $200.0 million revolving credit facility and a $225.0 million term loan facility. Each new facility matures on June 17, 2018 and is subject to a leveraged-based pricing grid, with initial pricing of December 1, 2010 (as amended, the “Credit Agreement”)LIBOR plus 1.75%. The amendment (i) reduced the interest rate margin applicable to the Term Loans under the Credit Agreement by 0.75% to 3.0% and (ii) reduced the LIBOR floor applicable to the Term Loans under the Credit Agreement from 1.5% to 1.0%. The Company incurred $4.1 million of fees related to this amendment, which will be amortized into interest expense over the remaining term of the debt.

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NOTE G — LONG TERM DEBT (CONTINUED)

Revolving Credit Facility

The $100.0 million Revolving Credit Facility matures on December 1, 2015 and bears interest at LIBOR plus 3.75%, or the applicable rate (as defined in the Credit Agreement). The Revolving Credit Facilitycredit agreement requires compliance with various covenants including but not limited to (i) minimum consolidated interest coverage ratio of 3.25:1.00 from October 1, 2011 to September 30, 2012, and 3.50:1.00 thereafter until maturity;and (ii) maximum total leverage ratio of 5.00:1.00 until December 31, 2011, 4.50:1.00 from January 1, 2012 to September4.00:1.00.  As of June 30, 2012, and 4.00:1.00 from October 1, 2012 thereafter until maturity; and (iii) maximum annual capital expenditures of 7.5% of consolidated net revenues2013, the Company was in compliance with the credit agreement covenants. The proceeds of the preceding fiscal yearrefinancing were used to repay the existing term loan and fund working capital requirements. In conjunction with an additional maximum rolloverthe refinancing, the Company incurred a pre-tax non-cash charge of $15.0approximately $6.6 million fromduring the prior year’s allowance if not expendedsecond quarter of 2013 related to the write-off of existing debt issuance costs associated with its previous credit agreement, however, no prepayment penalties were incurred.

Revolving Credit Facility

The $200.0 million Revolving Credit Facility matures on June 17, 2018 and bears interest at LIBOR plus 1.75%, or the applicable rate (as defined in the fiscal year for which it is permitted.Credit Agreement).  As of March 31, 2012,June 30, 2013, the Company had $99.5$144.6 million available under the Revolving Credit Facility. Availabilitythis facility. The amounts outstanding under the Revolving Credit Facility as of March 31, 2012 wasJune 30, 2013 were $55.0 million, net of standby letters of credit of approximately $0.5$0.4 million. As of March 31, 2012, the Company had no funds drawn on the Revolving Credit Facility. The obligations under the Revolving Credit Facility are senior obligations, are guaranteed by the Company’s subsidiaries, and are secured by a first priority perfected security interest in the Company’s subsidiaries’ shares, all of the Company’s assets, and all the assets of the Company’s subsidiaries and the equity interests of the Company’s subsidiaries.

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Term Loan

 

The $300.0$225.0 million Term Loan Facility matures on December 1, 2016June 17, 2018 and requires quarterlybears interest at LIBOR plus 1.75%, or the applicable rate (as defined in the Credit Agreement).  Quarterly principal payments which commenced March 31, 2011.ranging from 0.625% to 3.750% are required throughout the life of the Term Loan, commencing September 30, 2013.  From time to time, mandatory prepayments may be required as a result of excess free cash flow as defined in the Credit Agreement, certain additional debt incurrences, certain asset sales, or other events as defined in the Credit Agreement. The Term Loan Facility bears interest at LIBOR plus 3.0%, or applicable rate (as defined in the Credit Agreement), and includes a 1.0% LIBOR floor. There were noNo such mandatory prepayments were required during the first three monthssecond quarter of 2012 or 2011. As of March 31, 2012, the interest rate on the Term Loan Facility was 4.0%.2013. The obligations under the Term Loan Facility are senior obligations, are guaranteed by the Company’s subsidiaries, and are secured by a first priority perfected security interest in the Company’s subsidiaries’ shares, all of the Company’s assets, and all the assets of the Company’s subsidiaries and the equity interests of the Company’s subsidiaries.

 

71/8% Senior Notes

 

The 71/8% Senior Notes mature November 15, 2018 and are senior indebtnessindebtedness, which is guaranteed on a senior unsecured basis by all of the Company’s current and future subsidiaries. Interest is payable semi-annually on May 15 and November 15 of each year, commencing May 15, 2011.year.

 

On or prior to November 15, 2013, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 107.125% of the principal amount thereof, plus accrued and unpaid interest and additional interest to the redemption date with the proceeds of a public offering of its equity securities. On or after November 15, 2014, the Company may redeem all or from time to time a part of the notes upon not less than 30 days and not more than 60 days’ notice,with a premium, as described in further detail in the Company’s Annual Report on form 10-K for the twelve month period beginning on November 15, of the indicated years at (i) 103.563% during 2014; (ii) 101.781% during 2015; and (iii) 100.00% during 2016 and thereafter through November 15, 2018.

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Table of Contents

NOTE G — LONG TERM DEBT (CONTINUED)year ended December 31, 2012.

 

Subsidiary Guarantees

 

The Revolving andCredit Facility, Term Loan Facilities and the 71/8% Senior Notes are guaranteed by all of the Company’s subsidiaries. Separate condensed consolidating information is not included as the Companyparent company does not have independent assets or operations. The Guaranteesguarantees are full and unconditional and joint and several, and any subsidiaries of the Company other than the Guarantor Subsidiaries are minor.several. There are no restrictions on the ability of ourthe Company’s subsidiaries to transfer cash to the Company or to co-guarantors. All consolidated amounts in the Company’s financial statements are representative of the combined guarantors.

 

Debt Covenants

 

The terms of the Senior Notes, the Revolving Credit Facility, and the Term Loan Facility limit the Company’s ability to, among other things, purchase capital assets, incur additional indebtedness, create liens, pay dividends on or redeem capital stock, make certain investments, make restricted payments, make certain dispositions of assets, engage in transactions with affiliates, engage in certain business activities, and engage in mergers, consolidations and certain sales of assets. At March 31, 2012,June 30, 2013, the Company was in compliance with all covenants under these debt agreements.

 

NOTE HG COMMITMENTS AND CONTINGENT LIABILITIES

 

Contingencies

 

The Company is subject to legal proceedings and claims which arise from time to time in the ordinary course of its business, including additional payments under business purchase agreements.  In the opinion of management, the amount of ultimate liability, if any with respect to these actions, will not have a materially adverse effect on the financial position, liquidity or results of operations of the Company.

 

The Company is in a highly regulated industry and receives regulatory agency inquiries from time to time in the ordinary course of its business, including inquiries relating to the Company’s billing activities. To date these inquiries have not resulted in material liabilities, but no assurance can be given that future regulatory agencies’ inquiries will be consistent with the results to date or that any discrepancies identified during a regulatory review will not have a material adverse effect on the Company’s consolidated financial statements.

 

On May 20, 2013, the Staff of the SEC’s Division of Enforcement informed the Company that it was conducting an investigation of the Company and made a request for a voluntary production of documents and information concerning the Company’s calculations of bad debt expense and allowance for doubtful accounts.  The Company is cooperating fully with the SEC Staff.

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Table of Contents

Guarantees and Indemnifications

 

In the ordinary course of its business, the Company may enter into service agreements with service providers in which it agrees to indemnify or limit the service provider against certain losses and liabilities arising from the service provider’s performance of the agreement. The Company has reviewed its existing contracts containing indemnification or clauses of guarantees and does not believe that its liability under such agreements is material to the Company’s operations.

 

NOTE IH — NET INCOME PER COMMON SHARE

 

Basic per common share amounts are computed using the weighted average number of common shares outstanding during the year. Diluted per common share amounts are computed using the weighted average number of common shares outstanding during the year and dilutive potential common shares. Dilutive potential common shares consist of stock options and restricted sharesstock units and are calculated using the treasury stock method.

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Table of Contents

NOTE I — NET INCOME PER COMMON SHARE (CONTINUED)

 

Net income per share is computed as follows:

 

 

Three Months Ended

 

 

Three Months Ended

 

Six Months Ended

 

 

March 31,

 

 

June 30,

 

June 30,

 

(In thousands, except share and per share data)

 

2012

 

2011

 

 

2013

 

2012

 

2013

 

2012

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

(Restated)

 

(Restated)

 

Net income

 

$

8,636

 

$

6,752

 

 

$

 14,079

 

$

 17,386

 

$

 23,569

 

$

 26,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares of common stock outstanding used to compute basic per common share amounts

 

34,036,539

 

33,360,840

 

 

34,849,659

 

34,268,941

 

34,724,077

 

34,110,820

 

Effect of dilutive restricted stock and options (1)

 

603,121

 

773,227

 

Effect of dilutive restricted stock units and options (1)

 

458,038

 

451,548

 

501,794

 

526,949

 

Shares used to compute dilutive per common share amounts

 

34,639,660

 

34,134,067

 

 

35,307,697

 

34,720,489

 

35,225,871

 

34,637,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per share

 

$

0.25

 

$

0.20

 

 

$

 0.40

 

$

 0.51

 

$

 0.68

 

$

 0.76

 

Diluted income per share

 

$

0.25

 

$

0.20

 

 

$

 0.40

 

$

 0.50

 

$

 0.67

 

$

 0.75

 

 


(1) There were no anti-dilutive options for the three monthsor six month periods ended March 31, 2012June 30, 2013 and 2011.2012.

 

NOTE JI — SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

 

The Company’s unfunded noncontributory defined benefit plan (the “Plan”) covers certain senior executives, is administered by the Company and calls for annual payments upon retirement based on years of service and final average salary. Benefit costscost and liabilitiesliability 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.

 

The following assumptions were used in the calculation of the net benefit cost and obligation at March 31, 2012:June 30:

 

Discount rate

3.90

%

Average rate of increase in compensation

3.00

%

 

 

2013

 

2012

 

Discount rate

 

3.25

%

3.90

%

Average rate of increase in compensation

 

3.00

%

3.00

%

 

The Company believes the assumptions used are appropriate; however, changes in assumptions or differences in actual experience may affect ourthe Company’s benefit obligation and future expenses. The change in the Plan’s net benefit obligation for the threesix months ended March 31, 2012June 30, 2013 and 2011 is as follows:2012:

 

 

(in thousands)

 

Net benefit cost accrued at December 31, 2011

 

$

20,230

 

(In thousands)

 

 

 

Net benefit cost accrued at December 31, 2012

 

$

22,377

 

Service cost

 

230

 

 

169

 

Interest cost

 

190

 

 

173

 

Payments

 

(525

)

 

(705

)

Net benefit cost accrued at March 31, 2012 (unaudited)

 

$

20,125

 

Net benefit cost accrued at March 31, 2013

 

$

22,014

 

Service cost

 

246

 

Interest cost

 

173

 

Payments

 

$

 

Net benefit cost accrued at June 30, 2013

 

$

22,433

 

 

 

(in thousands)

 

Net benefit cost accrued at December 31, 2010

 

$

17,510

 

(In thousands)

 

 

 

Net benefit cost accrued at December 31, 2011

 

$

20,230

 

Service cost

 

247

 

 

230

 

Interest cost

 

202

 

 

190

 

Net benefit cost accrued at March 31, 2011 (unaudited)

 

$

17,959

 

Payments

 

(525

)

Net benefit cost accrued at March 31, 2012

 

$

20,125

 

Service cost

 

230

 

Interest cost

 

190

 

Payments

 

(180

)

Net benefit cost accrued at June 30, 2012

 

$

20,365

 

 

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NOTE KJ - STOCK-BASED COMPENSATION

 

The Company utilizes the authoritative guidance using the modified prospective method. Compensation expense for all awards granted is calculated according to the provisions of such guidance.

 

On May 13, 2010, the stockholdersshareholders of the Company approved the 2010 Omnibus Incentive Plan (the “2010 Plan”) and terminatedsuspended future grants under the Amended and Restated 2002 Stock Incentive and Bonus Plan (the “2002 Plan”) and the 2003 Non-Employee Directors’ Stock Incentive Plan (the “2003 Plan”). No new awards will be granted under the 2002 Plan or the 2003 Plan; however, awards granted under either the 2002 Plan or the 2003 Plan that were outstanding on May 13, 2010 remain outstanding and continue to be subject to all of the terms and conditions of the 2002 Plan or the 2003 Plan, as applicable.

 

The 2010 Plan provides that 2.5 million shares of Common Stock are reserved for issuance, subject to adjustment as set forth in the 2010 Plan; provided, however, that only 1.5 million shares may be issued pursuant to the exercise of incentive stock options. Of these 2.5 million shares, 2.0 million are shares that are newly authorized for issuance under the 2010 Plan and 0.5 million are unissued shares not subject to awards that have been carried over from the shares previously authorized for issuance under the terms of the 2002 Plan and the 2003 Plan. Unless earlier terminated by the Board of Directors, the 2010 Plan will remain in effect until the earlier of (i) the date that is ten years from the date the plan is approved by the Company’s stockholders,shareholders, which is the effective date for the 2010 plan, namely May 13, 2020, or (ii) the date all shares reserved for issuance have been issued.

 

As of March 31, 2012,June 30, 2013, of the 2.5 million shares of common stock authorized for issuance under the Company’s 2010 Plan, approximately 1,061,0001.5 million shares have been issued. During the first threesix months of 2012,2013, the Company issued approximately 448,0000.4 million shares of restricted stock units under the 2010 Plan. The total fair value of these grants is $9.0$12.1 million. Total unrecognized share-based compensation cost related to unvested restricted stock awardsunits was approximately $19.1$18.1 million as of March 31, 2012June 30, 2013 and is expected to be expensed as compensation expense over approximately four years.

 

DuringFor the threesix months ended March 31,June 30, 2013 and 2012, and 2011, no options were cancelled under either the 2002 Plan or the 2003 Plan.

For the three months ended March 31, 2012 and 2011, the Company has included approximately $2.0$4.1 million and $1.7$4.0 million, respectively, for share-based compensation cost in the accompanying condensed consolidated statements of income for the 2002, 2003 and 2010 Plans. Compensation expense relates to restricted sharestock units grants. The Company calculates the fair value of stock options using the Black-Scholes model. The total value of the stock option awards is expensed ratably over the requisite service period of the employees receiving the awards. The Company had no unrecognized expense related to its stock option grants for the periods ended March 31, 2012 and 2011.

 

NOTE LK — SEGMENT AND RELATED INFORMATION

 

The Company has identified three reportabletwo operating segments in which it operatesand both performance evaluation and resource allocation decisions are determined based on the products and services it provides. The Company evaluates segment performance and allocates resources based on the segments’each operating segment’s income from operations. The reportable segments are: (i) Patient-Care Services (ii) Distribution, and (iii) Therapeutic solutions. The reportableoperating segments are described further below:

 

Patient-Care ServicesPatient Care —This segment consists of (i) the Company’s owned and operated patient-care centers.patient care clinics and other O&P operations and (ii) its contracting and network management business.  The patient-care centerspatient care clinics provide services to design and fit O&P devices to patients.

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Table of Contents

NOTE L — SEGMENT AND RELATED INFORMATION (CONTINUED)

These centersclinics also instruct patients in the use, care and maintenance of the devices. The principal reimbursement sources for the Company’s services are:

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Table of Contents

 

·                  Commercial and other, which consist of individuals, rehabilitation providers, private insurance companies, HMOs, PPOs, hospitals, vocational rehabilitation, workers’ compensation programs and similar sources;

 

·                  Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain disabled persons, which provides reimbursement for O&P products and services based on prices set forth in fee schedules for 10 regional service areas;

 

·                  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.

 

The Company estimates that government reimbursement, comprised of Medicare, Medicaid and the U.S. Department of Veterans Affairs, in the aggregate, accounted for approximately 41.2%40.6% and 40.4%41.3%, of the Company’s net sales for the threesix months ended March 31,June 30, 2013 and 2012, and 2011, respectively.

 

The Company’s contract and network management business 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. The Company partners 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. The Company’s network now includes approximately 1,135 O&P provider locations, including over 400 independent providers. As of June 30, 2013, the Company had 57 contracts with national and regional providers.

DistributionProducts & Services—This segment consists of the Company’s distribution business, which distributes and fabricates O&P products and components to both the O&P industry and the Company’s own patient-care practices. This segment also includes the Company’s Fabrication centers which are involved in the fabrication of O&P components for both the O&P industry and the Company’s own patient-care centers.

Therapeutic Solutions—This segment consists of the leasing of rehabilitation equipment from,patient care clinics, and the provision of clinical program by, ACP as well the operations of IN, Inc. ACP is a developer of specializedCompany’s rehabilitation technologiessolutions business. Rehabilitation solutions leases rehabilitation equipment and provides evidence-based clinical programs forto post-acute rehabilitation. IN, Inc. specializes in bringingrehabilitation service providers. This segment also develops emerging neuromuscular technologies tofor the O&P market.and rehabilitation markets.

 

Other—This consists of Hanger corporate overhead and Linkia. Linkia is a national managed-care agent for O&P servicesincludes unallocated expense such as personnel costs, professional fees and a patient referral clearing house.corporate offices expenses.

 

The accounting policies of the segments are the same as those described in the summary of “Significant Accounting Policies” in Note B to the consolidated financial statements.

 

Summarized financial information concerning the Company’s reportableoperating segments is shown in the following table. Intersegment sales mainly include sales of O&P components from the DistributionProducts & Services segment to the Patient-Care ServicesPatient Care segment and were made at prices which approximate market values. The Patient-Care Services segment results below are restated as described in footnote B.

 

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Table of Contents

 

NOTE L — SEGMENT AND RELATED INFORMATION (CONTINUED)

(In thousands)

 

Patient-Care
Services

 

Distribution

 

Therapeutic
Solutions

 

Other

 

Consolidating
Adjustments

 

Total

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Customers

 

$

176,369

 

$

26,241

 

$

15,333

 

$

148

 

$

 

$

218,091

 

Intersegments

 

 

47,569

 

844

 

 

(48,413

)

 

Depreciation and amortization

 

3,417

 

324

 

2,673

 

1,871

 

 

8,285

 

Income (loss) from operations

 

26,651

 

8,542

 

268

 

(13,447

)

(277

)

21,737

 

Interest (income) expense

 

7,582

 

832

 

1,440

 

(2,077

)

 

7,777

 

Income (loss) before taxes

 

19,069

 

7,710

 

(1,172

)

(11,370

)

(277

)

13,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

 

2,541

 

90

 

624

 

2,061

 

 

5,316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Customers

 

$

160,551

 

$

23,461

 

$

16,257

 

$

170

 

$

 

$

200,439

 

Intersegments

 

 

41,627

 

745

 

 

(42,372

)

 

Depreciation and amortization

 

2,961

 

284

 

2,474

 

1,573

 

 

7,292

 

Income (loss) from operations

 

23,282

 

6,887

 

751

 

(11,728

)

101

 

19,293

 

Interest (income) expense

 

7,116

 

849

 

1,440

 

(1,026

)

 

8,379

 

Income (loss) before taxes

 

16,166

 

6,038

 

(689

)

(10,702

)

101

 

10,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures

 

3,082

 

168

 

90

 

2,047

 

 

5,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

1,292,294

 

178,481

 

134,733

 

(479,061

)

 

1,126,447

 

December 31, 2011

 

1,277,700

 

170,077

 

135,781

 

(456,839

)

 

1,126,719

 

NOTE M — CORPORATE OFFICE RELOCATION

The Company moved its corporate headquarters from Bethesda, Maryland to Austin, Texas in 2010. As of 1/1/2012 the relocation of the corporate office was complete. The following is a summary of the costs of the relocation incurred and to be paid in future periods:

(in thousands)

 

Employee
Separation

 

Other
Relocation

 

Lease
Termination

 

Total

 

Balance as of December 31, 2011

 

$

226

 

$

 

$

3,085

 

$

3,311

 

Expenses incurred

 

 

 

 

 

Amounts paid

 

(35

)

 

(104

)

(139

)

Balance as of March 31, 2012

 

$

191

 

$

 

$

2,981

 

$

3,172

 

 

 

Employee
Separation

 

Other
Relocation

 

Lease
Termination

 

Total

 

Balance as of December 31, 2010

 

$

1,895

 

$

 

$

5,206

 

$

7,101

 

Expenses incurred

 

36

 

340

 

 

376

 

Amounts paid

 

(926

)

(340

)

(641

)

(1,907

)

Balance as of March 31, 2011

 

$

1,005

 

$

 

$

4,565

 

$

5,570

 

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Table of Contents

(In thousands)

 

Patient Care

 

Products &
Services

 

Other

 

Consolidating
Adjustments

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

Customers

 

$

231,090

 

$

42,645

 

$

 

$

 

$

273,735

 

Intersegments

 

 

58,849

 

 

(58,849

)

 

Depreciation and amortization

 

4,067

 

3,343

 

2,100

 

 

9,510

 

Income (loss) from operations

 

41,620

 

11,065

 

(15,763

)

(278

)

36,644

 

Interest (income) expense

 

7,674

 

3,337

 

(3,303

)

 

7,708

 

Extinguishment of debt

 

 

 

6,645

 

 

6,645

 

Income (loss) before taxes

 

33,946

 

7,728

 

(19,105

)

(278

)

22,291

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

Customers

 

$

207,985

 

$

43,769

 

$

 

$

 

$

251,754

 

Intersegments

 

 

54,147

 

 

(54,147

)

 

Depreciation and amortization

 

3,388

 

3,036

 

2,014

 

 

8,438

 

Income (loss) from operations

 

39,054

 

10,414

 

(13,574

)

(168

)

35,726

 

Interest (income) expense

 

7,552

 

2,265

 

(2,133

)

 

7,684

 

Income (loss) before taxes

 

31,502

 

8,149

 

(11,441

)

(168

)

28,042

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

Customers

 

$

424,303

 

$

82,967

 

$

 

$

 

$

507,270

 

Intersegments

 

 

109,933

 

 

(109,933

)

 

Depreciation and amortization

 

8,133

 

6,546

 

4,116

 

 

18,795

 

Income (loss) from operations

 

67,008

 

20,540

 

(27,647

)

(541

)

59,360

 

Interest (income) expense

 

15,424

 

6,673

 

(6,612

)

 

15,485

 

Extinguishment of debt

 

 

 

6,645

 

 

6,645

 

Income (loss) before taxes

 

51,584

 

13,867

 

(27,680

)

(541

)

37,230

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

6,944

 

1,221

 

9,880

 

 

18,045

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

Customers

 

$

384,504

 

$

85,341

 

$

 

$

 

$

469,845

 

Intersegments

 

 

102,560

 

 

(102,560

)

 

Depreciation and amortization

 

6,814

 

6,034

 

3,875

 

 

16,723

 

Income (loss) from operations

 

64,331

 

19,224

 

(25,648

)

(445

)

57,462

 

Interest (income) expense

 

15,135

 

4,537

 

(4,211

)

 

15,461

 

Income (loss) before taxes

 

49,196

 

14,687

 

(21,437

)

(445

)

42,001

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

4,677

 

1,579

 

9,714

 

 

15,970

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

1,442,160

 

358,399

 

 

(560,935

)

1,239,624

 

December 31, 2012

 

1,389,223

 

336,318

 

 

(488,214

)

1,237,327

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

The following is a discussion of our results of operations and financial condition for the periods described below. This discussion should be read in conjunction with the Consolidated Financial Statementsconsolidated financial statements included in this report. Our discussion of our results of operations and financial condition includes various forward-looking statements about our markets, the demand for our products and services and our future results. These statements are based on our current expectations, which are inherently subject to risks and uncertainties. Refer to risk factors disclosed in Part II, Item 1A of this filing as well as the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 20112012 for further discussion of risks and uncertainties. Our actual results and the timing of certain events may differ materially from those indicated in the forward looking statements.

 

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Business Overview

 

General

 

The goal of Hanger, Orthopedic Group, Inc. (the “Company”) is to be the world’s premier provider of services and products that enhance human physical capabilities. Built on the legacy of James Edward Hanger, the first amputee of the American Civil War, Hanger is steeped in 150 years of clinical excellence and innovation. We provide orthotic and prosthetic patient-care(O&P) patient care services, distribute O&P devices and components, manage O&P networks, and provide therapeuticrehabilitative solutions to the broader post acutepost-acute market. For the three and six month periods ended June 30, 2013, our net sales were $273.7 million and $507.3 million, respectively, and we recorded net income of $14.1 million and $23.6 million, respectively.  For the three and six month periods ended June 30, 2012, our net sales were $251.8 million and $469.8 million, respectively, and we recorded net income of $17.4 million and $26.0 million, respectively.

We have two segments—Patient Care and Products & Services. Our Patient Care segment is comprised of our patient care clinics and our contracting network management business.  Through this segment, we (i) are the largest owner and operator of orthotic and prosthetic patient-care centerspatient care clinics in the United States and through our distribution subsidiary, Southern Prosthetic Supply, Inc. (“SPS”), the largest dedicated distributor(ii) manage an O&P provider network that coordinates all aspects of O&P products in the United States.patient care for insurance companies. We operate in excess of 700730 O&P patient-care centerspatient care clinics located in 45 states and the District of Columbia and six strategically located distribution facilities. In additionFor the three and six month periods ended June 30, 2013, net sales to providing O&P servicescustomers attributable to our Patient Care segment were $231.1 million and products we, through$424.3 million, respectively.  For the three and six month periods ended June 30, 2012, net sales to customers attributable to our subsidiary, Linkia LLC (“Linkia”), manage an O&P provider networkPatient Care segment were $208.0 million and develop programs to manage all aspects$384.5 million, respectively.

Our Products & Services segment is comprised of our distribution business, one of the largest distributors of O&P patient care for insurance companies. We also provide therapeuticproducts in the United States, and our rehabilitative solutions through our subsidiaries Innovative Neurotronics (“IN, Inc.”) and Accelerated Care Plus Corp (“ACP”). IN, Inc. introduces emerging neuromuscular technologies developed through independent research in a collaborative effort with industry suppliers worldwide. ACP is a developer ofbusiness. Our rehabilitative solutions business develops specialized rehabilitation technologies and is a leading provider of evidence-based clinical programs for post-acute rehabilitation serving more than 4,2004,600 long-term care facilities and other sub-acute rehabilitation providers throughout the U.S.

This segment also develops neuromuscular technologies through independent research. For the three monthsand six month periods ended March 31, 2012, ourJune 30, 2013, net sales to customers attributed to Products & Services segment were $218.1$42.6 million and we recorded net income of $7.6 million.$83.0 million, respectively. For the three monthsand six month periods ended March 31, 2011, our net sales were $200.4 million and we recorded net income of $6.2 million.

We have three segments—Patient-Care Services, Distribution and Therapeutic Solutions. For the three months ended March 31,June 30, 2012, net sales attributable to our Patient-Carecustomers attributed to Products & Services Distribution and Therapeutic Solutions segmentssegment were $176.5 million, $26.3$43.8 million and $15.3$85.3 million, respectively. See Note L toK for our consolidated financial statements contained herein for further information related to our segments.

 

Industry Overview

 

We provide goods and services to the O&P, post-acute, and other rehabilitation markets. We estimate that the O&P patient-care marketapproximately $4.3 billion is spent in the United States is approximately $2.6 billion,each year for orthotic and prosthetic products and services. Our Patient Care segment, currently capturing an approximate 20% share of which we account for approximately 29%,the market, provides a comprehensive portfolio of orthotic, prosthetic and the post-acute rehabilitation and other rehabilitation markets, combined, are approximately $1.3 billion, of which we account for 5%. We commissioned a studypost-operative solutions to patients in the past which identified additional opportunities to leverage our expertise beyond the traditional O&P market,acute, post-acute, and we believe these additional opportunities could potentially expand our available O&P market by an additional $1.4 billion to $4.0 billion.

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Table of Contentspatient care clinic settings.

 

The traditional O&P patient-care services marketpatient care industry is highly fragmented and is characterized by local, independent O&P businesses, with the majority of these businesses generally having a single facility with annual revenues of less than $1.0 million. We do not believe that any single competitor accounts for more than 2% of the country’s total estimated O&P patient-care services revenue.patient care clinic revenues.

 

The O&P services 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. Based on our experience,We believe, the average replacement time for orthotic devices is one to three years, while the average replacement time for prosthetic devices is three to five years. There is also an attendant need for continuing O&P patient-care services. In addition to the inherent need for periodic replacement and modification of O&P devices and continuing care, weWe expect the demand for O&P services to continue to grow as a result of several key trends, including the aging of the U.S. population, resulting in an increase in incidencethe prevalence of disease associated disability, and the demandsdemand for new and advanced replacement devices.

 

We estimate that approximately $2.1 billion is spent in the post-acuteUnited States each year, principally by care providers, for O&P products, components, devices and supplies. Our Products & Services segment distributes O&P products, components, devices and supplies to independent customers and to our patient care clinics. Our distribution sales account for approximately 5% of the market outside of the Company.

We estimate the market for rehabilitation market to include approximately 15,000technologies, integrated clinical programs and therapist training in skilled nursing facilities (“SNFs”)(SNF) to be approximately $240 million annually.  We currently provide these products and to have a market potential of approximately $200 million. We provide technologically advanced rehabilitation equipment and clinical programsservices to approximately 31%30% of the post-acute market.estimated 15,700 SNFs located in the U.S. We estimate the market for rehabilitation technologies, clinical programs and training within the broader post-acute rehabilitation markets which include independent rehabilitation providers and providers in other post-acute settings, to be approximately $1.1 billion. We currently provide$600 million. Currently, our goods and services are only provided to very few customers ina small segment of this portion of the market,larger category; however, we believe this market would benefit from our products and services.significant demand exists for future expansion.

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Table of Contents

 

Business Description

 

Patient-Care ServicesPatient Care

 

AsOur Patient Care segment, which is now comprised of March 31, 2012, we providedour patient care clinics and other O&P patient-careoperations and our contracting and network management business, provides O&P patient care services through over 700 patient-care centers730 patient care clinics and over 1,1801,275 clinicians in 45 states and the District of Columbia. Substantially all of our clinicians are certified, or are candidates for formal certification, by the O&P industry certifying boards. A clinician manages each of our patient-care centers. Our patient-care centerspatient care clinics also employ highly trained technical personnel who assist in the provision of services to patients and who fabricate various O&P devices, as well as office administrators who schedule patient visits, obtain approvals from payors and bill and collect for services rendered.

 

In our orthotics business, we design, fabricate, fit and maintain a wide range of custom-made braces and other devices (such as spinal, knee and sports-medicine braces) that provide external support to patients suffering from musculoskeletal disorders, such as ailments of the back, extremities or joints anddue to injuries from sports or other activities. In our prosthetics business, we design, fabricate, fit and maintain custom-made artificial limbs for patients who are without limbs as a result of traumatic injuries, vascular diseases, diabetes, cancer or congenital disorders. O&P devices are increasingly becoming more technologically advanced and are custom-designed to add functionality and comfort to patients’ lives, shorten the rehabilitation process and lower the cost of rehabilitation.

Patients are referred to Hangerour patient care clinics by an attending physician who determines a patient’s treatment and writes a prescription. Our clinicians then consult with both the referring physician and the patient with a view toward assisting in the design of ana custom orthotic or prosthetic device to meet the patient’s needs.

The fitting process often involves several stages in order to successfully achieve desired functional and cosmetic results.  The clinician creates a cast and takes detailed measurements, frequently using our digital imaging system (Insignia), of the patient’s residual limb to ensure an anatomically correct fit.

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Table of Contents

Prosthetic devices areThese custom fabricated and fit by skilled clinicians. The majority of the orthotic devices provided by us are custom designed, fabricated and fit; the remainder are prefabricated but custom fit.

Custom devices are fabricated by our skilled technicians using plaster castings, measurements and designs made by our clinicians and by utilization ofclinicians.  Frequently our proprietary Insignia system.system is used to measure and design devices.  The Insignia system replaces plaster casting of a patient’s residual limb with a computer generated image. Insignia providesscans the patient and produces a very accurate computer generated image of the patient which results in a faster turnaround for the patient,patient’s device and a more professional overall experience. Technicians use advanced materials and technologies to fabricate a custom device under quality assurance guidelines. Custom designed devices that cannot be fabricated at the patient-care centers are fabricated at one of several central fabrication facilities.

 

To provide timely service to our patients, we employ technical personnel and maintain laboratories at many of our patient-care centers. We have earned a strong 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. The quality of our services and the success of our technological advances have generated broad media coverage, building our brand equity among payors, patients and referring physicians.

The  A listing of our principal reimbursement sources for our services are:is described in Note K.

 

·Commercial and other, which consist of individuals, rehabilitation providers, private insurance companies, HMOs, PPOs, hospitals, vocational rehabilitation, workers’ compensation programs and similar sources;

·Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain disabled persons, which provides reimbursement for O&P products and services based on prices set forth in fee schedules for 10 regional service areas;

·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.

We estimate that governmentGovernment reimbursement, comprised of Medicare, Medicaid and the U.S. Department of Veterans Affairs, in the aggregate, accounted for approximately 41.2%40.6% and 40.4%41.3% of our net sales for the threesix months ended March 31,June 30, 2013 and 2012, and 2011, respectively. These payors have set maximum reimbursement levels for O&P services and products.products using a series of codes which designate the type of product and service being delivered. Medicare prices are adjusted each year based on the Consumer Price Index-Urban (“CPIU”) unless congressCongress acts to change or eliminate the adjustment. The Medicare price increase/(decreases)/increases for 2013, 2012, 2011, 2010, 2009, and 2008 were2011were 0.8%, 2.4%, (0.1%), 0.0%, 5.0%, and 2.7%(0.1%), respectively. There can be no assurance that future changes will not reduce reimbursements for O&P services and products from these sources.

 

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

 

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Table of Contents

Through the normal course of business, we receive patient deposits on devices not yet delivered. At March 31, 2012ur contract and 2011, we held $1.1 million and $1.3 million of deposits, respectively, from our patients.

Provider Network Management

Linkianetwork management business is the only provider network management company dedicated solely to serving the O&P market. Linkia is dedicated to managing the O&P services ofmarket for national and regional insurance companies. Linkia partnersWe 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. Linkia’sOur network now includes approximately 1,0301,135 O&P provider locations, including approximately 350over 400 independent providers. As of March 31, 2012, LinkiaJune 30, 2013, we had 5257 contracts with national and regional providers.

 

DistributionProducts & Services

 

WeOur Products & Services segment is the combination of our previously reported Distribution segment and Therapeutic Solutions segment. Through our distribution business, we distribute O&P components both to independent customers and to our own patient-care centers through our wholly-owned subsidiary, SPS, which ispatient care clinics.  We also provide rehabilitative solutions to the nation’s largest dedicated O&P distributor. We are alsomarket and the post-acute rehabilitation market while being a leading manufacturer and distributor of therapeutic footwear for diabetic patients in the podiatric market. SPSOur distribution business maintains over 26,000 individual SKUs in inventory, approximately 29,000 individual SKUswhich are manufactured by more than 300390 different companies. SPS operatesOur distribution facilities in California, Florida, Georgia, Illinois, Pennsylvania, and Texas which allowsallow us to deliver products via ground shipment anywhere in the contiguous United States typically within two business days.

 

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Table of Contents

Our Distributiondistribution business enables us to:

 

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

 

·                  reducemanage our patient-care centerpatient care clinic inventory levels and improve inventory turns;

 

·                  performimprove inventory quality control;quality;

 

·                  encourage our patient-care centerspatient care clinics to use the most clinically appropriate products that enhance our profit margins;products; and

 

·                  coordinate new product development efforts with key vendor “partners”.

 

Marketing of our Distribution services is conducted on a national basis through a dedicated sales force, print and e-commerce catalogues, and exhibits at industry and medical meetings and conventions. We direct specialized catalogues to segments of the healthcare industry, such as orthopedic surgeons, physical and occupational therapists, and podiatrists.

 

Therapeutic Solutions

We provide therapeuticOur rehabilitative solutions to the O&P market and post-acute rehabilitation market through our subsidiaries IN, Inc. and ACP. ACPbusiness is the nation’s leading provider of rehabilitation technologies and integrated clinical programs to rehabilitation providers. ACP’sOur unique value proposition is to provide itsour customers with a full-service “total solutions” approach encompassing proven medical technology,technology; evidence based clinical programs, and continuous onsite therapist education and training. ACP’sOur services support increasingly advanced treatment options for a broader patient population and more medically complex conditions. ACP has contracts toWe serve more than 4,2004,600 skilled nursing facilities nationwide, including 21 of the 25 largest national providers. ACP’s contracts contain negotiated pricing and service levels with terms ranging from one to five years.

 

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Table of Contents

ACP generally bills its customers monthly and revenue is recognized based upon the contractual terms of the agreements.

IN, Inc. specializesWe also have a product development business specializing in the product development and commercialization of emerging products in the Orthotic ProstheticO&P and Rehabilitation markets. Working with inventors under licensing and consulting agreements, IN, Inc. commercializeswe commercialize the design, obtainsobtain regulatory approvals, developsdevelop clinical protocols for the technology, and then introducesintroduce the devices to the marketplace through a variety of distribution channels. IN, Inc.We currently hashave two commercial products: the WalkAide System which benefits patients with a condition referred to as drop foot, and the V-Hold which is active vacuum technology used in lower extremity prosthetic devices. The V-Hold is primarily sold through our patient care centers. The WalkAide System is currently reimbursable for Medicare beneficiaries with foot drop due to incomplete spinal cord injuries. IN, Inc. is currently conducting clinical trials in an effort to gain additional coverage for stroke patients with foot drop, which represents the largest potential foot drop patient population. These trials are now fully enrolled with submission of data to CMS anticipated in 2013. In addition to reimbursement with Medicare, IN, Inc. has been working with commercial insurance companies and has had limited success in receiving coverage for the WalkAide. The WalkAide is sold in the United States through our patient-care centers and SPS. IN, Inc. is also marketing the WalkAide internationally through a network of distributors in Europe, the Middle East/Africa, Latin America, Canada, and Asia.

 

Critical Accounting Policies and Estimates

 

Our analysis and discussion of our financial condition and results of operations is based upon our Consolidated Financial Statementsconsolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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 accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. Our accounting policies are stated in Note B to the Consolidated Financial Statementsconsolidated financial statements included elsewhere in this report.  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.consolidated financial statements.

 

·                  Revenue Recognition:  Revenues in our Patient-Care ServicesPatient Care segment are derived from the sale of O&P devices and the maintenance and repair of existing devices and are recorded net of all known contractual adjustments and discounts. The sale of O&P devices includes the design, fabrication, assembly, fitting and delivery of a wide range of braces, limbs and other devices. Revenues from the sale of these devices are recorded when (i) acceptance by and delivery to the patient has occurred; (ii) persuasive evidence of an arrangement exists and there are no further obligations to the patient; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. Revenues from maintenance and repairs are recognized when the service is provided. RevenuesIn our Products & Services segment, revenues on the saledistribution of O&P devices to customers by the Distribution segment are recorded upon the shipment of products, in accordance with the terms of the invoice, net of merchandise returns received and the amount established for anticipated returns.received. Discounted sales are recorded at net realizable value. Revenues in our Therapeutic Solutions are primarily derivedWe also derive revenue from leasing rehabilitation technology combined with clinical therapy programs and education and training. The revenuetraining, which is recorded on a monthly basis according to terms of the contracts with our customers. Our customer contracts in the Products & Services segment contain negotiated pricing and service levels with terms ranging from one to five years, generally billed to our customers monthly, and revenue is recognized based upon the contractual terms of the agreements.

 

21·



Table of ContentsAccounts Receivable:

Certain accounts receivable may be uncollectible, even if properly pre-authorized and billed. Regardless of the balance, accountsAccounts receivable amountsbalances are periodically evaluated to assess collectability. In addition to the actual bad debt expense recognized during collection activities, we estimate the amount of potential bad debt expense that may occur in the future. This estimate is based upon our historical experience as well as a review of our receivable balances.

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Table of Contents

 

On a quarterlymonthly basis, we evaluate cash collections, accounts receivable balances and write-off activity to assess the adequacy of ourthe allowance for doubtful accounts.accounts and disallowed sales. Additionally, a company-widean evaluation of collectability of receivable balances older than 180 days is performed at our O&P clinics at least semi-annually, the results of which are used in the next allowance analysis. In these detailed reviews, the account’s net realizable value is estimated after considering the customer’s payment history, past efforts to collect on the balance and the outstanding balance, and a specific reserve is recorded if needed. From time to time, we may outsource the collection of such accounts to collection agencies after internal collection efforts are exhausted. In cases where valid accounts receivable cannot be collected, the uncollectible account is written off to bad debt expense.

 

The following represents the composition of our accounts receivable balance by type of payor:

 

March 31, 2012

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

 

 

 

 

 

 

 

(In thousands)

 

0-60 days

 

61-120 days

 

Over 120 days

 

Total

 

 

0-60 days

 

61-120 days

 

Over 120 days

 

Total

 

Patient Care Services

 

 

 

 

 

 

 

 

 

Patient Care

 

 

 

 

 

 

 

 

 

Commercial insurance

 

$

40,808

 

$

10,377

 

$

12,789

 

$

63,974

 

 

$

50,686

 

$

12,500

 

$

13,774

 

$

76,960

 

Private pay

 

4,453

 

3,513

 

9,216

 

17,182

 

 

5,468

 

4,918

 

8,568

 

18,954

 

Medicaid

 

11,262

 

3,255

 

4,411

 

18,928

 

 

13,341

 

3,747

 

4,481

 

21,569

 

Medicare

 

25,111

 

3,608

 

5,275

 

33,994

 

 

34,538

 

4,521

 

15,753

 

54,812

 

VA

 

1,974

 

370

 

263

 

2,607

 

 

2,703

 

612

 

361

 

3,676

 

Distribution & Therapeutic Solutions Trade accounts receivable

 

11,688

 

3,011

 

3,946

 

18,645

 

Products & Services

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

12,141

 

3,212

 

4,762

 

20,115

 

 

$

95,296

 

$

24,134

 

$

35,900

 

$

155,330

 

 

$

118,877

 

$

29,510

 

$

47,699

 

$

196,086

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

(In thousands)

 

0-60 days

 

61-120 days

 

Over 120 days

 

Total

 

 

0-60 days

 

61-120 days

 

Over 120 days

 

Total

 

Patient Care Services

 

 

 

 

 

 

 

 

 

Patient Care

 

 

 

 

 

 

 

 

 

Commercial insurance

 

$

50,136

 

$

9,594

 

$

11,759

 

$

71,489

 

 

$

56,326

 

$

11,413

 

$

13,355

 

$

81,094

 

Private pay

 

3,936

 

3,791

 

9,219

 

16,946

 

 

5,928

 

4,955

 

6,655

 

17,538

 

Medicaid

 

12,018

 

3,678

 

4,173

 

19,869

 

 

12,879

 

3,468

 

3,519

 

19,866

 

Medicare

 

25,438

 

3,489

 

4,433

 

33,360

 

 

29,910

 

6,118

 

9,494

 

45,522

 

VA

 

1,428

 

373

 

159

 

1,960

 

 

2,270

 

608

 

353

 

3,231

 

Distribution & Therapeutic Solutions Trade accounts receivable

 

11,367

 

2,663

 

3,200

 

17,230

 

Products & Services

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

12,556

 

3,149

 

4,091

 

19,796

 

 

$

104,323

 

$

23,588

 

$

32,943

 

$

160,854

 

 

$

119,869

 

$

29,711

 

$

37,467

 

$

187,047

 

 

·                 Inventories:  Inventories in the Patient-Care ServicesPatient Care segment consisting principally of raw materials and work-in-process respectively, are valued based on the gross profit method which approximates lower of cost or market using the first-in first-out method. We applyThe Company applies the gross profit method on a patient care clinic basis in this segment’s inventory to determine ending inventory at the end of each interim period except on October 31st, which is the date of our physical inventory. The annual physical inventory for this segment values the inventory at lower of cost or market using the first-in first-out method and includes work-in-process consisting of materials, labor and overhead which is valued based on established standards for the stage of completion of each custom order. Adjustments to reconcile the physical inventory to our books are treated as changes in accounting estimates and are recorded in the fourth quarter. We recorded fourth quarter adjustments of an increase of $2.3 million and a decrease of $1.0 million to inventory as of October 31, 2011 and 2010, respectively. The October 31stinventory is subsequently adjusted during interim periods to apply the gross profit method described above.

 

Inventories in the Distribution and Therapeutic SolutionsProducts & Services segments consist principally of finished goods which are stated at the lower of cost or market using the first-in, first-out method for all reporting periods and are valued based on perpetual records.

 

·                  Goodwill and Other Intangible Assets:  Goodwill represents the excess of purchase price over the fair value of net identifiable assets of purchased businesses. We assess goodwill for impairment annually on October 1,during the fourth quarter, or when events or circumstances indicate that the carrying value of the reporting units may not be recoverable.

22



Table  The Company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of Contents

a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  If the Company determines that a two-step goodwill impairment test is necessary or more efficient than a qualitative approach, it will measure the fair value of the Company’s reporting units using a combination of income, market and cost approaches.  Any impairment would be recognized by a charge to operating results and a reduction in the carrying value of the intangible asset. OurThere were no impairment indicators since our last annual impairment test for goodwill primarily utilizes the income approach and considers the market approach and the cost approach in determining the value of our reporting units. on October 1, 2012.

Non-compete agreements are recorded based on agreements enteredwhen we enter into by usthe agreement and are amortized, using the straight-line method, over their terms ranging from five to seven years. Other definite-lived intangible assets are recorded at cost and are amortized, using the straight-line method, over their estimated useful lives of up to 1714 years. Whenever the facts and circumstances indicate that the carrying amounts of these intangibles may not be recoverable, we review and assess the future cash flows expected to be generated from the related intangible for possible impairment.  Any impairment would be recognized as a charge to operating results and a reduction in the carrying value of the intangible asset. As

19



Table of October 1, 2011, there were no indicators of impairment as the fair value of the reporting units is substantially in excess of their carrying value.Contents

 

·                  Income taxes:  We are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Consolidated Balance Sheet. We then assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent that we believe that recovery is not likely, we establish a valuation allowance against the deferred tax asset.

 

We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine if the weight of available evidence indicates that the tax position has met the threshold for recognition; therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

 

Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on the income tax provision and net income in the period or periods for which that determination is made. We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax. We believe adequate provisions for income taxes have been made for all periods.

 

23



Table of Contents

New Accounting Guidance

In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends ASC 820, “Fair Value Measurement.” The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. The guidance provided in ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The provisions are effective for the Company’s year ended December 31, 2012. The Company adopted the amendments of this ASU effective January 1, 2012, and the initial adoption of the amendments in this ASU did not have a material impact on our condensed consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220),” which changes the presentation of comprehensive income. The amended guidance gives companies the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance provided in ASU No. 2011-05 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The provisions are effective for the Company’s year ended December 31, 2012. The Company adopted the amendments of this ASU effective January 1, 2012, and the initial adoption of the amendments in this ASU did not have a material impact on our condensed consolidated financial statements.

In July 2011, the FASB issued ASU No. 2011-07 “Presentation and Disclosures of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful Accounts for Certain Health Care Entities.”  The objective of this update is to provide financial statement users with greater transparency about a health care entity’s net patient service revenue and the related allowance for doubtful accounts. This update provides information to assist financial statement users in assessing an entity’s sources of net patient service revenue and related changes in its allowance for doubtful accounts. The amendments require health care entities that recognize significant amounts of patient service revenue at the time the services are rendered even though they do not assess the patient’s ability to pay to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue (net of contractual allowances and discounts) on their statement of operations. The amendments in this update require certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. The guidance provided in ASU No. 2011-07 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The provisions are effective for the Company’s year ended December 31, 2012. The Company has determined that ASU No. 2011-07 has no impact on its financial statements.

In September 2011,FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350):  Testing Goodwill for Impairment”, which provides entities the option to perform a qualitative assessment in order to determine whether additional quantitative impairment testing is necessary. This amendment is effective for reporting periods beginning after December 15, 2011. This amendment does not impact the quantitative testing methodology, should it be necessary. The Company adopted this standard on January 1, 2012 and the initial adoption of the amendments in this ASU did not have a material impact on our condensed consolidated financial statements.

Guidance and Outlook

 

The Company expects full year 2012We expect 2013 revenues of between $970 million$1.06 and $990 million resulting from comparable store$1.08 billion, which includes 3% to 5% same center sales growth in our Patient Care Servicessegment, and Distribution segments of 3% to 5%. We expect flat to slightly higher revenuessales in our TherapeuticProducts & Services segmentsegment. We increased our guidance for the year, with sales in the first half of the year down then trending up in the second half as the rate of new contracts accelerates. The Company anticipatesadjusted diluted earnings per share to a range of between $1.67 and $1.74, which includes approximately $0.05$2.07 to $2.13 for one-time training2013, excluding costs related to the implementation of Janus of approximately $0.03, acquisition costs and debt issuance cost associated with the June 2013 refinancing of our new patient management system.

24



Tablebank credit facilities.  This increased earnings guidance reflects lower interest expense related to the refinancing of Contents

Asour bank credit facilities in past years,June, partially offset by lower adjusted operating margin expansion for the Company’s goal isyear, which we believe will be in the range of 20 to increase operating margins by twenty to forty40 basis points. The Company anticipatesWe anticipate generating cash flow from operations of between $70$80 million and $80$100 million in 20122013 and investing a total of $40 million to $50 million in capital additions.  During 2012 the CompanyWe will continue itsour acquisition program with a goal of closing acquisitions that total approximately $20 million in annualized revenues.revenues in 2013.

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Table of Contents

 

Results of Operations

 

The following table sets forth for the periods indicated certain items from our Consolidated Statementsconsolidated statements of Operationsincome and comprehensive income as a percentage of our net sales:

 

 

Three Months Ended

 

 

Three Months Ended

 

Six Months Ended

 

 

March 31,

 

 

June 30,

 

June 30,

 

 

2012

 

2011

 

 

2013

 

2012

 

2013

 

2012

 

 

(Unaudited)

 

(Unaudited)

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

 

(Restated)

 

(Restated)

 

 

 

 

 

 

 

 

 

 

Net sales

 

100.0

%

100.0

%

 

100.0

%

100.0

%

100.0

%

100.0

%

Material costs

 

30.6

 

29.5

 

 

29.0

 

29.0

 

29.0

 

29.7

 

Personnel costs

 

37.2

 

39.0

 

 

34.0

 

33.1

 

36.1

 

35.0

 

Other operating expenses

 

18.4

 

18.0

 

 

20.1

 

20.3

 

19.5

 

19.5

 

Relocation expenses

 

 

0.2

 

Depreciation and amortization

 

3.8

 

3.6

 

 

3.5

 

3.4

 

3.7

 

3.6

 

Income from operations

 

10.0

 

9.7

 

 

13.4

 

14.2

 

11.7

 

12.2

 

Interest expense

 

3.6

 

4.2

 

Interest expense, net

 

2.8

 

3.1

 

3.1

 

3.3

 

Extinguishment of debt

 

2.4

 

 

1.3

 

 

Income before taxes

 

6.4

 

5.5

 

 

8.2

 

11.1

 

7.3

 

8.9

 

Provision for income taxes

 

2.4

 

2.1

 

 

3.1

 

4.2

 

2.7

 

3.4

 

Net income

 

4.0

%

3.4

%

 

5.1

%

6.9

%

4.6

%

5.5

%

 

Three Months Ended March 31, 2012June 30, 2013 Compared to the Three Months Ended March 31, 2011June 30, 2012

 

Net Sales.Net sales for the three monthsmonth period ended March 31, 2012June 30, 2013 increased $17.7$21.9 million, or 8.8%8.7%, to $218.1$273.7 million from $200.4compared to $251.8 million for the three months ended March 31, 2011. Thesame period of 2012.  This increase was the result ofdue to a $11.4$23.1 million, or 7.1%11.1%, increase in same-centerthe Patient Care segment, offset by a $1.1 million, or 2.6%, decrease in sales in the Patient-CareProducts & Services segment; a $4.4 million increase from acquired entities; a $2.8 million, or 11.9%,segment.  The increase in sales in the Distribution segment;Patient Care segment was a result of an increase in same store sales and the impact of 2012 O&P clinic acquisitions. The 2.6% decline in the Products & Services segment sales was a result of lower sales from our distribution business, SPS, partially offset by a mid-single-digit increase in sales from our rehabilitative solutions business, ACP. The decrease in sales in the Products & Services segment was a result of two of its larger independent O&P customers being acquired by the Patient Care segment during 2012 and a $0.9 million decreasedecline in demand for higher-priced prosthetic devices from the Therapeutic Solutions segment.independent O&P practices which may be due to pressure they are facing from CMS Recovery Audit Contractor (RAC) audits.

 

Material Costs.Material costsCosts for the three monthsmonth period ended March 31, 2012June 30, 2013 was $66.7$79.4 million, an increase of $7.6$6.5 million or 12.9%, over $59.1$72.9 million for the three monthsmonth period ended March 31, 2011. The increase was the result of growth in sales.June 30, 2012, primarily due to sales growth. Material costs as a percentage of net sales increased 110 basis points due to mix of revenue.remained consistent with the prior year.

 

Personnel Costs.  Personnel costs for the three monthsmonth period ended March 31, 2012June 30, 2013 increased by $2.9$9.8 million to $81.2$93.2 million from $78.3$83.4 million for the three monthsmonth period ended March 31, 2011. The increaseJune 30, 2012. Approximately $5.5 million of the change was due to costs from acquired entities andacquisitions of O&P facilities in 2012, $1.8 million was due to annual merit increases as well as increased employee benefit costs staffing and merit increases.the balance was due to additions to our infrastructure to support growth. As a percentage of net sales, personnel costs decreased 1.8%increased 0.9% to 37.2%34.0% in 20122013 from 39.0%33.1% in 20112012. The increase was predominantly due to leveraging existing resources over increased sales volume.increases in employee benefit costs and staffing increases related primarily to acquisitions.

 

Other Operating Expenses. Other operating expenses for the three months ended March 31, 2012are comprised primarily of professional fees, facility costs, bad debt expense, incentive compensation, and reimbursable employee expenses, increased $4.1$3.7 million to $40.2 million, from $36.1$55.0 million, for the three monthsmonth period ended March 31, 2011.June 30, 2013 compared to $51.3 million, for the three month period ended June 30, 2012.  The increase wasis primarily due to: (i) the addition ofattributable to a $1.0 million increase in operatingrent expenses from acquired entities; (ii)due in large part to acquisitions and a $1.2 million increase in increasedbad debt expenses related bad debt; (iii) $0.8 million in increased incentive compensation; and (iv) $0.6 million relateddue principally to Instride trials.the impact of RAC program audits.  Other operating expenses as a percentage of net revenues increased 0.4% to 18.4% in 2012 from 18.0%sales in the prior year.

25



Tablesecond quarter of Contents

Relocation Expenses.  As2013 remained flat compared to the same period of January 1, 2012, we had completed the relocation of our corporate office from Bethesda, Maryland to Austin, Texas.  During the three months ended March 31, 2011, we incurred $0.4 million of employee relocation costs.2012.

 

Depreciation and Amortization. Depreciation and amortization for the three monthsmonth period ended March 31, 2012June 30, 2013 increased $1.0$1.1 million, to $8.3$9.5 million, compared to $7.3$8.4 million infor the first quarter of 2011.three month period ended June 30, 2012. The increase was primarily due to operating assets purchasedleasehold improvements and additional capital expenditures over the last 12 months.

 

Income from Operations.Income from operations increased $2.4$0.9 million, to $21.7$36.6 million, for the three monthsmonth period ended March 31, 2012June 30, 2013 compared to $19.3$35.7 million for the three monthsmonth period ended March 31, 2011June 30, 2012 due primarily to increased sales volume.

 

Interest Expense.Interest expense decreased $0.6remained consistent at $7.7 million for the three monthsmonth period ended March 31, 2012, to $7.8 million,June 30, 2013, compared to $8.4$7.7 million, for the three monthsmonth period ended March 31, 2011,  primarily due to lowerJune 30, 2012. Both the amounts of our outstanding debt and the applicable interest rates resulting fromrate were comparable in the amendment totwo periods.  The refinancing of our bank credit facilities had minimal impact on interest expense for the quarter because it did not occur until the second half of June 2013.

Extinguishment of Debt. In conjunction with our bank credit facility refinancing, in Marchthe second quarter of 2011.2013, we incurred a charge of approximately $6.6 million related to the write-off existing debt issuance cost associated with our previous credit agreements.  There were no similar charges in the same period of 2012.

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Table of Contents

 

Provision for Income Taxes.  The provision for income taxes for the three monthsmonth period ended March 31, 2012June 30, 2013 was $5.3$8.2 million, or 38.1%36.8% of pre-tax income, compared to $4.2$10.7 million, or 38.1%38.0% of pre-tax income, for the three months ended March 31, 2011.June 30, 2012. The effective tax rate consists principally of the 35% federal statutory tax rate and state income taxes, less permanent tax differences.  The 2013 period has a lower effective tax rate primarily due to a higher domestic manufacturing deduction and a lower meals and entertainment exclusion.

 

Net Income.  Net income decreased $3.3 million, to $14.1 million, for three month period ended June 30, 2013, from $17.4 million for the three month period ended June 30, 2012, primarily due to the write-off of previously deferred debt issuance costs related to the extinguishment of debt.

Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

Net Sales.  Net sales for the six month period ended June 30, 2013 increased $37.5 million, or 8.0%, to $507.3 million compared to $469.8 million for the same period of 2012.  This increase was due to a $39.8 million, or 10.4%, increase in the Patient Care segment, offset by a $2.4 million, or 2.8%, decrease in sales in the Products & Services segment. The increase in sales in the Patient Care segment was a result of an increase in same store sales and the impact of 2012 O&P clinic acquisitions, including a number of former customers of the Products & Services segment. The decrease in sales in the Products & Services segment was a result of two of its larger independent O&P customers being acquired by the Patient Care segment during 2012 and a decline in demand for higher-priced prosthetic devices from independent O&P practices due to pressure they are facing from CMS Recovery Audit Contractor (RAC) audits.

Material Costs.  Material Costs for the six month period ended June 30, 2013 was $147.2 million, an increase of $7.6 million over $139.6 million for the six month period ended June 30, 2012, primarily due to sales growth. Material costs as a percentage of net sales decreased 0.7% primarily due to a change in the mix of sales favoring the Patient Care segment which has lower costs and a reduction in product cost arising from an effort to further consolidate our purchasing power.

Personnel Costs.  Personnel costs for the six month period ended June 30, 2013 increased by $18.5 million to $183.1 million from $164.6 million for the six month period ended June 30, 2012. Approximately $11.2 million of the increase was due to the impact of O&P acquisitions, $3.5 million was due to the impact of merit increases and other benefit changes and the balance was due to additions to infrastructure to support growth. As a percentage of net sales, personnel costs increased 1.1% to 36.1% in 2013 from 35.0% in 2012. The increase was predominantly due to increases in employee benefit costs and staffing increases related primarily to acquisitions.

Other Operating Expenses.  Other operating expenses are comprised primarily of professional fees, facility costs, bad debt expense, incentive compensation, and reimbursable employee expenses, increased $7.4 million to $98.8 million, for the six month period ended June 30, 2013 compared to $91.4 million, for the six month period ended June 30, 2012.  The increase is primarily attributable to a $3.2 million increase due to the impact of O&P acquisitions and a $1.8 million increase in bad debt expense due principally to the impact of RAC program audits.  Other operating expenses as a percentage of sales in the second quarter of 2013 remained flat compared to the same period of 2012.

Depreciation and Amortization. Depreciation and amortization for the six month period ended June 30, 2013 increased $2.1 million, to $18.8 million, compared to $16.7 million for the six month period ended June 30, 2012. The increase was primarily due to leasehold improvements and additional capital expenditures over the last 12 months.

Income from Operations.  Income from operations increased $1.9 million, to $8.6 million, for three months ended March 31, 2012, from $6.7$59.4 million, for the threesix months ended March 31, 2011,June 30, 2013 compared to $57.5 million for the six months ended June 30, 2012 due primarily to increased sales volume.

Interest Expense.  Interest expense remained consistent at $15.5 million for the six month period ended June 30, 2013, compared to $15.5 million, for the six month period ended June 30, 2012.  Both the amounts of our outstanding debt and the applicable interest rate were comparable in the two periods.  The refinancing of our bank credit facilities had minimal impact on interest expense for the quarter because it did not occur until the second half of June 2013.

Extinguishment of Debt. In conjunction with our bank credit facility refinancing, in the second quarter of 2013, we incurred a charge of approximately $6.6 million related to the write-off existing debt issuance cost associated with our previous credit agreements.  There were no similar charges in the same period of 2012.

Provision for Income Taxes.  The provision for income taxes for the six months ended June 30, 2013 was $13.7 million, or 36.7% of pre-tax income, compared to $16.0 million, or 38.0% of pre-tax income, for the six month period ended June 30, 2012. The effective tax rate consists principally of the 35% federal statutory tax rate and state income taxes, less permanent tax differences.  The 2013 period has a lower effective tax rate primarily due to the reinstatement of the Federal Research and Development Tax Credit, a higher domestic manufacturing deduction and a lower meals and entertainment exclusion.

Net Income.  Net income decreased $2.4 million, to $23.6 million, for six month period ended June 30, 2013, from $26.0 million for the six month period ended June 30, 2012, primarily due to the write-off of previously deferred debt issuance costs related to the extinguishment of debt.

22



Table of Contents

 

Financial Condition, Liquidity and Capital Resources

 

Cash FlowsLiquidity and Capital Resources

 

Our working capital at March 31, 2012June 30, 2013 was $250.9$266.5 million, compared to $194.1$251.5 million at MarchDecember 31, 2011.2012. The increase in working capital is primarily due to increases in cash, inventory,inventories, accounts receivable and accounts receivable.other current assets.  The increases are primarily due to the growth of the business, acquisitions completed in 2012 and the impact of RAC program audit related receivables.  Days sales outstanding (“DSO”), which is the number of days between the billing date of O&P services and the date of receipt of payment thereof, for the threesix months ended March 31, 2012June 30, 2013 increased to 5159 days from 4754 days for the same period last year. year, and excludes the impact of acquired accounts receivable. The increase in DSO is primarily related to an increase in accounts receivable under review by CMS Recovery Audit Contractor (RAC) audits.

Cash Flows

Net cash provided by operating activities was $1.3$27.6 million for the quartersix month period ended March 31, 2012June 30, 2013 compared to $12.3$27.0 million used in operating activitiesfor the same period in the prior year. The increase in cash provided by operating activities in the current year resulted primarily from increased net sales, and a decreasethe increase in incentive compensation payments in 2012.working capital described above.

 

Net cash used in investing activities was $10.8$21.9 million for the quartersix month period ended March 31, 2012,June 30, 2013, compared to $10.4$25.5 million in the prior year. In 2012,the first six months of 2013, we acquired onepurchased two O&P company operating 2 patient-care centers at an aggregate purchase pricecompanies for $4.7 million, net of $2.0 million.cash acquired. During the same period in 2011,2012, we acquired one O&P company operating one patient-care centereight patient care clinics for an aggregate purchase price$6.4 million, net of $5.8 million.cash acquired.  Additionally, in 2012,2013, we invested $5.3$18.0 million in capital assets, compared to $5.4$16.0 million for the same period in 2011. Capital assets acquired in 2012 related to the development of the Company’s new patient management system and machinery and equipment purchases. During the first quarter of 2012 we restricted $3.1 million of cash in order to eliminate letters of credit obligations.2012.

 

Net cash (used in)/provided byused in financing activities was $(1.1)$19.2 million and $6.0$2.8 million for the quarterssix month period ended March 31,June 30, 2013 and 2012, and 2011, respectively. During the second quarter of 2013 we: (i) refinanced our existing Term Loan Credit Facility resulting in term loan borrowings of $225.0 million under the new facility compared to $293.3 million under the previous facility, and (ii) refinanced our existing Revolving Credit Facility resulting in revolving loan borrowings of $55.0 million under the new facility compared to no borrowings under the previous facility.  Additionally, in the first six months of 2013, we also (i) made $4.0 million of required payments of promissory notes issued in connection with acquisitions (“Seller Notes”) and (ii) received $2.2 million of proceeds from employee stock compensation plans.  During the second quarter of 2012 we: (i) repaid $1.4$2.2 million related to term loan borrowings under our credit facilities (“Term Loans”);facilities; (ii) made $0.5$2.5 million of required repayments of promissory notes issued in connection with acquisitions (“Seller Notes”); and (iii) received $0.6$1.6 million of proceeds from issuance of stock under employee stock compensation plans. During the first quarter of 2011 we: (i) borrowed $10.0 million under our revolving credit facility; (ii) repaid $0.8 million related to Term Loans; (iii) made $0.4 million of required repayments of Seller Notes; (iv) incurred $4.2 million of financing costs related to the repricing of our debt in the first quarter of 2011; and (v) received $0.6 million of proceeds from issuance of stock under employee stock compensation plans.

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Table of Contents

 

Debt

 

Long-term debt consisted of the following:

 

 

March 31,

 

December 31,

 

 

June 30,

 

December 31,

 

(In thousands)

 

2012

 

2011

 

 

2013

 

2012

 

 

(Unaudited)

 

 

 

Revolving Credit Facility

 

$

 

$

 

 

$

55,000

 

$

 

Term Loan

 

295,550

 

297,000

 

 

225,000

 

293,300

 

7 1/8% Senior Notes due 2018

 

200,000

 

200,000

 

Subordinated seller notes, non-collateralized, net of unamortized discount with principal and interest payable in either monthly, quarterly or annual installments at effective interest rates ranging from 3.00% to 7.00%, maturing through November 2016

 

10,545

 

11,033

 

 

506,095

 

508,033

 

7 1/8 % Senior Notes due 2018

 

200,000

 

200,000

 

Subordinated seller notes, non-collateralized, net of unamortized discount with principal and interest payable in either monthly, quarterly or annual installments at effective interest rates ranging from 2.00% to 4.00%, maturing through November 2018

 

24,474

 

27,346

 

Total Debt

 

504,474

 

520,646

 

Less current portion

 

(7,927

)

(8,065

)

 

(13,802

)

(11,082

)

 

$

498,168

 

$

499,968

 

Long Term Debt

 

$

490,672

 

$

509,564

 

 

Amendment to Credit AgreementRefinancing

 

On March 11, 2011,During the second quarter of 2013, the Company entered intorefinanced its bank credit facilities through a new 5 year credit agreement that increased its senior secured facilities to an amendmentaggregate principal amount of up to its Credit Agreement dated as$425.0 million from $400.0 million previously.  The new credit agreement includes a $200.0 million revolving credit facility and a $225.0 million term loan facility.  Each new facility matures on June 17, 2018 and is subject to a leveraged-based pricing grid, with initial pricing of December 1, 2010 (as amended, the “Credit Agreement”)LIBOR plus 1.75%.   The amendment (i) reduced the interest rate margin applicable to the Term Loans under the Credit Agreement by 0.75% to 3.0% and (ii) reduced the LIBOR floor applicable to the Term Loans under the Credit Agreement from 1.5% to 1.0%. The Company incurred $4.1 million of fees related to this amendment, which will be amortized into interest expense over the remaining term of the debt.

Revolving Credit Facility

The $100.0 million Revolving Credit Facility matures on December 1, 2015 and bears interest at LIBOR plus 3.75%, or the applicable rate (as defined in the Credit Agreement). The Revolving Credit Facilitycredit agreement requires compliance with various covenants including but not limited to (i) minimum consolidated interest coverage ratio of 3.25:1.00 from October 1, 2011 to September 30, 2012, and 3.50:1.00 thereafter until maturity;and (ii) maximum total leverage ratio of 5.00:1.00 until December 31, 2011, 4.50:1.00 from January 1, 2012 to September4.00:1.00.  As of June 30, 2012, and 4.00:1.00 from October 1, 2012 thereafter until maturity; and (iii) maximum annual capital expenditures of 7.5% of consolidated net revenues2013, the Company was in compliance with the credit agreement covenants. The proceeds of the preceding fiscal yearrefinancing were used to repay the existing term loan and fund working capital requirements. In conjunction with an additional maximum rolloverthe refinancing, the Company incurred a pre-tax non-cash charge of $15.0approximately $6.6 million fromduring the prior year’s allowance if not expendedsecond quarter of 2013 related to the write-off of existing debt issuance costs associated with its previous credit agreements, however, no prepayment penalties were incurred.

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Revolving Credit Facility

The $200.0 million Revolving Credit Facility matures on June 17, 2018 and bears interest at LIBOR plus 1.75%, or the applicable rate (as defined in the fiscal year for which it is permitted.Credit Agreement).  As of March 31, 2012,June 30, 2013, the Company had $99.5$144.6 million available under this facility. As of June 30, 2013, $55.0 million was outstanding under the Revolving Credit Facility. Availability under the Revolving Credit Facility, as of March 31, 2012 was net of standby letters of credit of approximately $0.5$0.4 million. As of March 31, 2012, the Company had no funds drawn on the Revolving Credit Facility. The obligations under the Revolving Credit Facility are senior obligations, are guaranteed by the Company’s subsidiaries, and are secured by a first priority perfected security interest in the Company’s subsidiaries’ shares, all of the Company’s assets, and all the assets of the Company’s subsidiaries and the equity interests of the Company’s subsidiaries.

 

Term Loan

 

The $300.0$225.0 million Term Loan Facility matures on December 1, 2016June 17, 2018 and requires quarterlybears interest at LIBOR plus 1.75%, or the applicable rate (as defined in the Credit Agreement).  Quarterly principal payments which commenced March 31, 2011.

27



Tableranging from 0.625% to 3.750%  are required throughout the life of Contents

the Term Loan, commencing September 30, 2013.  From time to time, mandatory prepayments may be required as a result of excess free cash flow as defined in the Credit Agreement, certain additional debt incurrences, certain asset sales, or other events as defined in the Credit Agreement. The Term Loan Facility bears interest at LIBOR plus 3.0%, or applicable rate (as defined in the Credit Agreement), and includes a 1.0% LIBOR floor. There were noNo such mandatory prepayments were required during the first three monthssecond quarter of 2012 or 2011. As of March 31, 2012, the interest rate on the Term Loan Facility was 4.0%.2013. The obligations under the Term Loan Facility are senior obligations, are guaranteed by the Company’s subsidiaries, and are secured by a first priority perfected security interest in the Company’s subsidiaries’ shares, all of the Company’s assets, and all the assets of the Company’s subsidiaries and the equity interests of the Company’s subsidiaries.

 

71/8% Senior Notes

 

The 71/8% Senior Notes mature November 15, 2018 and are senior indebtnessindebtedness, which is guaranteed on a senior unsecured basis by all of the Company’s current and future subsidiaries. Interest is payable semi-annually on May 15 and November 15 of each year, commencing May 15, 2011.year.

 

On or prior to November 15, 2013, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 107.125% of the principal amount thereof, plus accrued and unpaid interest and additional interest to the redemption date with the proceeds of a public offering of its equity securities. On or after November 15, 2014, the Company may redeem all or from time to time a part of the notes upon not less than 30 days and not more than 60 days’ notice,with a premium, as described in further detail in the Company’s Annual Report on form 10-K for the twelve month period beginning on November 15, of the indicated years at (i) 103.563% during 2014; (ii) 101.781% during 2015; and (iii) 100.00% during 2016 and thereafter through November 15, 2018.year ended December 31, 2012.

 

Subsidiary Guarantees

 

The Revolving andCredit Facility, Term Loan Facilities and the 71/8% Senior Notes are guaranteed by all of the Company’s subsidiaries. Separate condensed consolidating information is not included as the Companyparent company does not have independent assets or operations. The Guaranteesguarantees are full and unconditional and joint and several, and any subsidiaries of the Company other than the Guarantor Subsidiaries are minor.several. There are no restrictions on the ability of our subsidiaries to transfer cash to the Company or to co-guarantors. All consolidated amounts in the Company’s financial statements are representative of the combined guarantors.

 

Debt Covenants

 

The terms of the Senior Notes, the Revolving Credit Facility, and the Term Loan Facility limit the Company’s ability to, among other things, purchase capital assets, incur additional indebtedness, create liens, pay dividends on or redeem capital stock, make certain investments, make restricted payments, make certain dispositions of assets, engage in transactions with affiliates, engage in certain business activities, and engage in mergers, consolidations and certain sales of assets. At March 31, 2012,June 30, 2013, the Company was in compliance with all covenants under these debt agreements.

 

General

 

As of March 31, 2012, $295.6June 30, 2013, $280.0 million, or 58.4%55.5%, of our total debt of $506.1$504.5 million was subject to variable interest rates.rates based on a LIBOR plus 1.75%. We believe that, based on current levels of operations and anticipated growth, cash generated from operations, together with other available sources of liquidity, including borrowings available under the Revolving Credit Facility, will be sufficient for at least the next twelve months to fund anticipated capital expenditures, to fund our acquisition plans and make required payments of principal and interest on our debt, including payments due on our outstanding debt.

 

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Obligations and Commercial Commitments

 

The following table sets forth our contractual obligations and commercial commitments as of March 31, 2012June 30, 2013 (unaudited):

 

 

 

Payments Due by Period

 

(In thousands)

 

Remainder of 2012

 

2013

 

2014

 

2015

 

2016

 

Thereafter

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

6,763

 

$

5,448

 

$

4,415

 

$

4,222

 

$

285,247

 

$

200,000

 

$

506,095

 

Interest payments on long-term debt

 

23,400

 

26,098

 

25,885

 

25,723

 

24,165

 

26,719

 

$

151,990

 

Operating leases

 

32,302

 

35,286

 

28,261

 

18,780

 

12,927

 

30,791

 

$

158,347

 

Capital leases and other long-term obligations (1)

 

12,960

 

14,027

 

11,347

 

8,570

 

3,369

 

12,357

 

$

62,630

 

Total contractual cash obligations

 

$

75,425

 

$

80,859

 

$

69,908

 

$

57,295

 

$

325,708

 

$

269,867

 

$

879,062

 

Payments Due by Period

(In thousands) 

 

Remainder of 2013

 

2014

 

2015

 

2016

 

2017

 

Thereafter

 

Total

 

Long-term debt

 

$

7,756

 

$

16,443

 

$

21,565

 

$

23,022

 

$

28,781

 

$

406,907

 

$

504,474

 

Interest payments on long-term debt (1)

 

16,913

 

19,124

 

18,660

 

18,143

 

17,623

 

15,006

 

105,469

 

Operating leases

 

23,624

 

40,064

 

29,627

 

22,663

 

17,074

 

32,990

 

166,042

 

Capital leases

 

 

561

 

550

 

564

 

555

 

2,199

 

4,429

 

Other long-term obligations (2)

 

18,229

 

12,223

 

9,701

 

2,870

 

2,745

 

15,384

 

61,152

 

Total contractual cash obligations

 

$

66,522

 

$

88,415

 

$

80,103

 

$

67,262

 

$

66,778

 

$

472,486

 

$

841,566

 

 


(1) Interest projections were based on the assumptions that the future interest rate for the Revolving Credit Facility and Term Loan will remain at the current rate of 1.98%.

(2) Other long-term obligations include commitments under our SERP plan.plan in addition to IT and telephone contracts. Refer to Note K of the Company’s Annual Report on Form 10-K for additional disclosure.

The carrying value of our long-term debt, excluding the Senior Notes, approximates fair value based on rates currently available to the Company for debt with similar terms and remaining maturities (level 2). The fair value of the Senior Notes, as of March 31, 2012, was $210.5 million, as compared to the carrying value of $200.0 million at that date. The fair values of the Senior Notes were baseddisclosure on the quoted market price as of March 31, 2012 (level 1).

Market Risk

We are exposed to the market risk that is associated with changes in interest rates.  As of March 31, 2012, all our outstanding debt, with the exception of the $295.6 million borrowed under the Term Loan Facility, was subject to fixed interest rates (see Item 3 below).SERP plan.

 

Forward Looking Statements

 

This report contains forward-looking statements setting forth our beliefs or expectations relating to future revenues, contracts and operations, as well as the results of an internal investigation and certain legal proceedings. Actual results may differ materially from projected or expected results due to changes in the demand for our O&P products and services, uncertainties relating to the results of operations or recently acquired O&P patient-care centers,patient care clinics, our ability to enter into and derive benefits from managed-care contracts, our ability to successfully attract and retain qualified O&P clinicians, federal laws governing the health-care industry, uncertainties inherent in incomplete investigations and legal proceedings, governmental policies affecting O&P operations and other risks and uncertainties generally affecting the health-care industry. Readers are cautioned not to put undue reliance on forward-looking statements.  Refer to risk factors disclosed in Part II, Item 1A of this filing as well as the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 20112012 for discussion of risks and uncertainties. We disclaim any intent or obligation to publicly update these forward-looking statements, whether as a result of new information, future events or otherwise.

 

ITEM 3.Quantitative and Qualitative Disclosures about Market Risk

 

We have existing obligations relating to our 71/8% Senior Notes, Term Loan Facility, Revolver and Subordinated Seller Notes. As of March 31, 2012,June 30, 2013, we had cash flow exposure to the changing interest rates on the $295.6$280.0 million borrowed under the Revolving and Term Loan Facility.Facilities. The other obligations have fixed interest rates.

 

Presented below is an analysis of our financial instruments as of March 31, 2012June 30, 2013 that are sensitive to changes in interest rates. The table demonstrates the changes in estimated annual cash flow related to the outstanding balance under the Revolving and Term Loan Facility,Facilities, calculated for an instantaneous parallel shift in interest rates, plus or minus 50 basis points (“BPS”), 100 BPS and 150 BPS. The LIBOR floor and applicable rate pursuant to the Term Loans under the Credit Agreement prevents the rate from dropping below 4.0%.

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As of March 31, 2012,June 30, 2013, the current LIBOR and applicableinterest rate is 4.0%; therefore, a 76 BPS increase or decrease in LIBOR would not reduce or increase estimated annual cash flows related to the outstanding balance on the Revolving and Term Loan Facility.facilities was 1.98% based on a LIBOR rate of 0.23% and the applicable margin of 1.75%.

Cash Flow Risk

 

Annual Interest Expense Given an Interest Rate
Decrease of X Basis Points

 

No Change in
Interest Rates

 

Annual Interest Expense Given an Interest
Rate Increase of X Basis Points

 

(In thousands)

 

(150 BPS)

 

(100 BPS)

 

(50 BPS)

 

 

 

50 BPS

 

100 BPS

 

150 BPS

 

Term Loan

 

$

11,822

 

$

11,822

 

$

11,822

 

$

11,822

 

$

11,822

 

$

12,531

 

$

14,009

 

Cash Flow Risk

 

Annual Interest Expense Given an Interest Rate
Decrease of X Basis Points

 

No Change in

 

Annual Interest Expense Given an Interest
Rate Increase of X Basis Points

 

(In thousa­nds)

 

(150 BPS)

 

(100 BPS)

 

(50 BPS)

 

Interest Rates

 

50 BPS

 

100 BPS

 

150 BPS

 

Revolving and Term Loan

 

$

4,900

 

$

4,900

 

$

4,900

 

$

5,544

 

$

6,944

 

$

8,344

 

$

9,744

 

 

ITEM 4.Controls and Procedures

Management’s Consideration of Restatement of Previously Issued Financial Statements

As discussed in Item 4.02 (a) of the Company’s Current Report on Form 8-K, dated March 18, 2013, management of the Company has restated previously issued consolidated financial statements included in the Company’s Quarterly Report on Form 10-Q for the quarters ended March 31, 2012 and 2011 in this Amended Filing. The determination to restate these consolidated financial statements was made as a result of the Company’s identification of certain accounting errors as discussed in footnote B of the consolidated financial statements included in this Amended Filing.

 

Disclosure Controls and Procedures

 

OurThe Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by usit in ourits periodic reports filed or submitted towith the Securities and Exchange Commission is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.  Atforms and to ensure that information required to be disclosed in the time that our Quarterly Reportreports filed under the Exchange Act was accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on Form 10-Q foran evaluation of the three month period ended March 31, 2012was filed on May 4, 2012, our CEO and CFO concluded that ourCompany’s disclosure controls and procedures were effective as of March 31, 2012. Subsequent to that evaluation, our management, including our CEOconducted by the Company’s Chief Executive Officer and CFO,Chief Financial Officer, such officers concluded that ourthe Company’s disclosure controls and procedures were not effective as of March 31, 2012becauseJune 30, 2013 as a result of the material weaknessin our internal controls over financial reporting relating to the valuation of work-in-process inventory. Additional details are discussed in our Annual Report on Form 10-K for the year ended December 31, 2012, under Part II, Item 9A.

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Status of Remediation of Material Weakness

As of June 30, 2013, we have implemented procedures designed to address the material weakness disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012 related to the proper valuation of work-in-process inventory. Management has implemented additional quarterly reviews, analysis and calculations surrounding the valuation of the work-in-process inventory to account for the changing sales volume from period to period. Management believes these measures will remediate the material weakness identified in the Form 10-K Annual report. As the Company continues to evaluate and work to improve its internal control over financial reporting, discussed below. Notwithstandingmanagement may determine to take additional measures to address this material weakness or determine to modify the material weaknessremediation steps described below, management, based upon the substantial work performed during the restatement process, has concluded that the Company’s consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q/A are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America for each of the periods presented herein.above.

 

Material Weakness

We did not maintain effective controls over the valuation of work-in-process inventory. Specifically, the Company did not appropriately account for the effect of sales volume changes on the determination of the valuation of the Company's work-in-process inventory resulting in misstatements of inventory, material costs, personnel costs, other operating expenses and income taxes as of and for the periods ended December 31, 2011 and 2010 and the three months ended March 31, 2012 and 2011 and resulted in an audit adjustment for the year and three month period ended December 31, 2012. This control deficiency could result in further misstatement to the aforementioned account balances or disclosures that would result in material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has concluded that this control deficiency constitutes a material weakness.

ChangeChanges in Internal Control Over Financial Reporting

 

In accordance with Rule 13a-15(d) under the Securities Exchange Act of 1934, management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, determined that there waswere no changechanges in the Company’s internal control over financial reporting, beyond those remediation processes discussed above, that occurred during the three months ended March 31, 2012,June 30, 2013, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Remediation of Material Weakness

In an effort to remediate the material weakness discussed in Management’s Annual Report on Internal Control Over Financial Reporting in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, management will implement additional annual and quarterly reviews, analyses and calculations related to the valuation of work-in-process inventory. We believe the remediation measures described above will remediate this material weakness going forward.  Management will also continue to evaluate our controls and procedures, and may implement additional measures in the future or modify certain of the remediation measures described above.

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Table of Contents

Part II.  Other Information

ITEM 1.  LEGAL PROCEEDINGS.

We are subject to legal proceedings and claims which arise from time to time in the ordinary course of our business, including additional payments under business purchase agreements. In the opinion of our management, the amount of ultimate liability, if any, with respect to these actions will not have a materially adverse effect on the financial position, liquidity or results of our operations.

We are in a highly regulated industry and receive regulatory agency inquiries from time to time in the ordinary course of our business, including inquiries relating to our billing activities. To date these inquiries have not resulted in material liabilities, but no assurance can be given that future regulatory agencies’ inquiries will be consistent with the results to date or that any discrepancies identified during a regulatory review will not have a material adverse effect on our consolidated financial statements.

On May 20, 2013, the Staff of the SEC’s Division of Enforcement informed us that it was conducting an investigation of the Company and made a request for a voluntary production of documents and information concerning our calculations of bad debt expense and allowance for doubtful accounts.  We are cooperating fully with the SEC Staff.

 

ITEM 1A.  RISK FACTORS.

 

Part I, Item 1A (“Risk Factors”) of the Company’s Annual Report on Form 10-K for the year ended December 31, 20112012 sets forth information relating to important risks and uncertainties that could materially adversely affect the Company’s business, financial condition or operating results. Those risk factors continue to be relevant to an understanding of the Company’s business, financial condition and operating results.  Certain of those risk factors have been updated in this Form 10-Q/A10-Q to provide updated information, as set forth below. References to “we,” “our” and “us” in these risk factors refer to the Company.

 

Changes in government reimbursement levels could adversely affect our net sales, cash flows and profitability.

 

We derived 41.2%40.6% and 40.4%41.3% of our net sales for the threesix months ended March 31,June 30, 2013 and 2012, and 2011, respectively, from reimbursements for O&P services and products from programs administered by Medicare, Medicaid and the U.S. Department of Veterans Affairs.  Each of these programs set maximum reimbursement levels for O&P services and products. If these agencies reduce reimbursement levels for O&P services and products in the future, our net sales could substantially decline. In addition, the percentage of our net sales derived from these sources may increase as the portion of the U.S. population over age 65 continues to grow, making us more vulnerable to maximum reimbursement level reductions by these organizations. Reduced government reimbursement levels could result in reduced private payor reimbursement levels because fee schedules of certain third-party payors are indexed to Medicare. Furthermore, the healthcare industry is experiencing a trend towards cost containment as government and other third-party payors seek to impose lower reimbursement rates and negotiate reduced contract rates with service providers. This trend could adversely affect our net sales. For example, a number of states have reduced their Medicaid reimbursement rates for O&P services and products, or have reduced Medicaid eligibility, and others are in the process of reviewing Medicaid reimbursement policies generally, including for prosthetic and orthotic devices. Additionally, Medicare provides for reimbursement for O&P products and services based on prices set forth in fee schedules for ten regional service areas. Medicare prices are adjusted each year based on the Consumer Price Index—Urban (“CPIU”) unless Congress acts to change or eliminate the adjustment. The Medicare price increases/(decreases)/increases for 2013, 2012, and 2011 2010, 2009, and 2008 were 2.4%0.8%, (0.1%), 0.0%, 5.0%2.4%, and 2.7%(0.1%) respectively. The Patient Protection and Affordable Care Act, Pub. L. No. 111-148, March 23, 2010 (“PPACA”) changed the Medicare inflation factors applicable to O&P (and other) suppliers.

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The annual updates for years subsequent to 2011 are based on the percentage increase in the CPI-U for the 12-month period ending with June of the previous year. Section 3401(m) of PPACA required that for 2011 and each subsequent year, the fee schedule update factor based on the CPI-U for the 12-month period ending with June of the previous year is to be adjusted by the annual economy-wide private nonfarm business multifactory productivity (“the MFP Adjustment”). The MFP Adjustment may result in that percentage increase being less than zero for a year and may result in payment rates for a year being less than such payment rates for the preceding year. CMS has not yet issued a final rule implementing these adjustments for years beyond 2011, but has indicated in a proposed rule that it will do so as part of the annual program instructions to the O&P fee schedule updates. See 75 Fed. Reg. 40040, 40122, et seq. (July 13, 2010). If the U.S. Congress were to legislate additional modifications to the Medicare fee schedules, our net sales from Medicare and other payors could be adversely and materially affected.

 

The Budget Control Act of 2011 required, among other things, mandatory across-the-board reductions in Federal spending, or “sequestration.” While delayed by the American Taxpayer Relief Act of 2012, President Obama issued a sequestration order on March 1, 2013. For services provided on or after April 1, 2013, Medicare fee-for-service claim payments, including those for DMEPOS (durable medical equipment (DME), prosthetics, orthotics, and supplies,) as well as claims under the DME Competitive Bidding Program, are reduced by 2 percent.  This is a claims payment adjustment only with immaterial impact to the Company; no permanent reductions in the Medicare DMEPOS fee schedule have been made as a result of sequestration, therefore reimbursements from Medicaid, the VA and commercial payers who use the Medicare fee schedule as a basis for reimbursement have not been impacted.

In addition to the risks to our Patient Care segment businesses discussed above, changes in government reimbursement levels could also adversely affect the net sales, cash flows and profitability of our Products & Services segment business. In particular, a significant majority of ACP’s sales involve devices and related services provided to skilled nursing facilities (SNFs) and similar businesses. Reductions in government reimbursement levels to SNFs could cause such SNFs to reduce or cancel their use of ACP’s devices and modalities, negatively impacting net sales, cash flows and profitability. For example in July 2011 CMS announced an across the board reduction of approximately 10% in SNF reimbursement levels, negatively impacting the demand for ACP’s devices and treatment modalities. We cannot predict whether any suchother modifications to the fee schedulesreimbursement levels will be enactedimplemented, or if implemented what the final form of any modifications might be.

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Our substantial indebtedness could impair our financial condition and our ability to fulfill our obligations under our indebtedness.

 

We have substantial debt. As of March 31, 2012,June 30, 2013, we had approximately $506.1$504.5 million of total indebtedness and $99.5$55.0 million availableborrowed under our Revolving Credit Facility.

 

The level of our indebtedness could have important consequences to us.  For example, our substantial indebtedness could:

 

·                  make it more difficult for us to satisfy our obligations;

 

·                  increase our vulnerability to adverse general economic and industry conditions;

 

·                  require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate requirements;

 

·                  limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

·                  place us at a competitive disadvantage compared to our competitors that have proportionately less debt;

 

·                  make it more difficult for us to borrow money for working capital, capital expenditures, acquisitions or other purposes;

 

·                  limit our ability to refinance indebtedness, or the associated costs may increase; and

 

·                  expose us to the risk of increased interest rates with respect to that portion of our debt that has a variable rate of interest.

 

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ITEM 6.Exhibits

(a)Exhibits.  The following exhibits are filed herewith:

ITEM 6.

Exhibits

(a)

Exhibits.  The following exhibits are filed herewith:

Exhibit No.

 

Document

 

 

 

3.14.1

 

AmendedCredit Agreement, dated June 17, 2013, among the Company and Restated By-Laws of Hanger Orthopedic Group, Inc., as amended effective February 2, 2012.the lenders and agents party thereto. (Incorporated herein by reference to Exhibit 3.14.1 to the Current Report on Form 8-K filed by the Registrant on February 2, 1012)June 19, 2013).

 

 

 

4.2

 

Third Supplemental Indenture, dated June 27,2013, by and among the Hanger, Inc., each of the Subsidiary Guarantors party thereto and Wilmington Trust Company, as trustee.

 

10.1

 

Fifth Amended and Restated Employment Agreement, effective as of JanuaryDefined Contribution Supplemental Retirement Plan, dated May 1, 2012, by and between Thomas F. Kirk and the Company.2013. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on January 26, 2012)May 13, 2013).

 

 

 

10.2

Amended and Restated Employment Agreement, effective as of January 1, 2012, by and between Vinit Asar and the Company. (Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on January 26, 2012).

10.3

Fourth Amended and Restated Employment Agreement, effective as of January 1, 2012, by and between George E. McHenry and the Company. (Incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on January 26, 2012).

10.4

Fourth Amended and Restated Employment Agreement, effective as of January 1, 2012, by and between Richmond L. Taylor and the Company. (Incorporated herein by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the Registrant on January 26, 2012).

31.1

 

Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

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.

 

 

 

101

 

The following financial information from the Company’s Quarterly Report on Form 10-Q/A,10-Q, for the period ended March 31 2012,June 30, 2013, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, (iv) Notes to Consolidated Financial Statements (1)


(1)

(1)      Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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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: March 22,August 7, 2013

/s/Vinit K. Asar

 

Vinit K. Asar

 

President and

 

Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

 

Dated: March 22,August 7, 2013

/s/George E. McHenry

 

George E. McHenry

 

Executive Vice President and

Chief Financial Officer

 

(Principal Financial Officer and Principal Accounting Officer)

 

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